<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-13589
PRIME GROUP REALTY TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 36-4173047
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
77 West Wacker Drive, Suite 3900, Chicago, Illinois 60601
(Address of principal executive offices) (Zip Code)
(312) 917-1300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At August 10, 2000, 15,569,924 of the registrant's Common Shares of Beneficial
Interest were outstanding.
<PAGE>
PRIME GROUP REALTY TRUST
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Part I: Financial Information
Item 1. Financial Statements (Unaudited) PAGE
<S> <C> <C>
Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 3
Consolidated Statements of Income for the Three Months
Ended June 30, 2000 and 1999 4
Consolidated Statements of Income for the Six Months
Ended June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 23
Part II: Other Information
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRIME GROUP REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(000'S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Real estate, at cost:
Land $ 178,998 $ 183,295
Building and improvements 909,881 928,567
Tenant improvements 39,437 39,232
----------------------------
1,128,316 1,151,094
Accumulated depreciation (48,922) (37,977)
----------------------------
1,079,394 1,113,117
Property under development 137,839 125,724
Property held for sale 23,850 --
----------------------------
1,241,083 1,238,841
Mortgage note receivable 89,826 82,687
Cash and cash equivalents 28,691 21,167
Tenant receivables 7,283 11,438
Restricted cash escrows 54,302 42,140
Deferred rent receivable 13,784 9,501
Deferred costs, net 27,830 26,901
Other 18,359 11,500
----------------------------
Total assets $ 1,481,158 $ 1,444,175
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage notes payable $ 781,834 $ 705,194
Credit facilities 10,812 19,527
Bonds payable 57,150 74,450
Accrued interest payable 2,843 3,508
Accrued real estate taxes 41,012 40,689
Accounts payable and accrued expenses 31,190 36,133
Liabilities for leases assumed 2,827 3,235
Dividends payable 8,152 8,122
Other 10,811 10,909
----------------------------
Total liabilities 946,631 901,767
Minority interests:
Operating Partnership 165,970 168,070
Other 1,000 1,000
Series A - Cumulative Convertible Preferred Shares, 2,000,000 shares
designated, issued and outstanding at June 30, 2000 and December 31, 1999 39,777 39,703
Shareholders' equity:
Preferred Shares, $0.01 par value; 30,000,000 shares authorized:
Series B - Cumulative Redeemable Preferred Shares, 4,000,000 shares
designated, issued and outstanding at June 30, 2000 and
December 31, 1999 40 40
Common Shares, $0.01 par value; 100,000,000 shares
authorized; 15,302,223 and 15,189,438 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively 153 152
Additional paid-in capital 322,733 321,357
Retained earnings 4,854 12,086
----------------------------
Total shareholders' equity 327,780 333,635
----------------------------
Total liabilities and shareholders' equity $ 1,481,158 $ 1,444,175
============================
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
PRIME GROUP REALTY TRUST
CONSOLIDATED STATEMENTS OF INCOME
(000'S OMITTED, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30
2000 1999
------------------------------------
<S> <C> <C>
REVENUE
Rental $ 32,954 $ 33,925
Tenant reimbursements 15,616 13,484
Other property revenues 2,429 1,822
Mortgage note interest 2,127 1,604
Other 2,274 2,077
------------------------------------
Total revenue 55,400 52,912
EXPENSES
Property operations 11,888 10,597
Real estate taxes 10,486 9,774
Depreciation and amortization 9,834 8,680
Interest 14,145 11,545
General and administrative 2,339 1,757
------------------------------------
Total expenses 48,692 42,353
------------------------------------
Income before (loss) gain on sales of real estate, minority
interests and extraordinary item 6,708 10,559
(Loss) gain on sales of real estate, net (3,781) 4,357
------------------------------------
Income before minority interests and extraordinary item 2,927 14,916
Minority interests 47 (4,861)
------------------------------------
Income before extraordinary item 2,974 10,055
Extraordinary loss on extinguishment of debt, net of minority interests
of $296 (408) -
------------------------------------
Net income 2,566 10,055
Net income allocated to preferred shareholders (3,037) (3,030)
------------------------------------
Net (loss) income available to common shareholders $ (471) $ 7,025
====================================
Basic and diluted earnings available to common shares per weighted-average
common share:
Income before (loss) gain on sales of real estate and extraordinary
items $ 0.14 $ 0.29
(Loss) gain on sales of real estate, net of minority interests (0.14) 0.17
Extraordinary loss on extinguishment of debt, net of minority interests (0.03) -
------------------------------------
Net (loss) income available per weighted-average common share of
beneficial interest $ (0.03) $ 0.46
====================================
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
PRIME GROUP REALTY TRUST
CONSOLIDATED STATEMENTS OF INCOME
(000'S OMITTED, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
2000 1999
------------------------------------
<S> <C> <C>
REVENUE
Rental $ 66,808 $ 66,746
Tenant reimbursements 32,088 26,385
Other property revenues 4,642 3,588
Mortgage note interest 4,138 3,110
Other 3,199 2,162
------------------------------------
Total revenue 110,875 101,991
EXPENSES
Property operations 24,698 21,247
Real estate taxes 20,875 19,149
Depreciation and amortization 19,066 16,638
Interest 27,131 21,923
Loss on land development option - 600
General and administrative 4,603 3,807
------------------------------------
Total expenses 96,373 83,364
------------------------------------
Income before (loss) gain on sales of real estate, minority interests and
extraordinary item 14,502 18,627
(Loss) gain on sales of real estate, net (2,585) 4,357
------------------------------------
Income before minority interests and extraordinary item
11,917 22,984
Minority interests (2,373) (6,917)
------------------------------------
Income before extraordinary item 9,544 16,067
Extraordinary loss on extinguishment of debt, net of minority interests
of $296 (408) -
------------------------------------
Net income 9,136 16,067
Net income allocated to preferred shareholders (6,074) (6,030)
------------------------------------
Net income available to common shareholders $ 3,062 $ 10,037
====================================
Basic and diluted earnings available to common shares per weighted-average
common share:
Income before (loss) gain on sales of real estate and extraordinary
items $ 0.33 $ 0.49
(Loss) gain on sales of real estate, net of minority interests (0.10) 0.17
Extraordinary loss on extinguishment of debt, net of minority interests (0.03) -
------------------------------------
Net income available per weighted-average common share of beneficial
interest $ 0.20 $ 0.66
====================================
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
PRIME GROUP REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S OMITTED)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
2000 1999
------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 9,136 $ 16,067
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of costs for leases assumed (included in rental revenue) 416 491
Interest income and development fees added to mortgage note
receivable principal (1,553) (1,788)
Net equity in loss of unconsolidated investments 899 390
Depreciation and amortization 19,066 16,638
Net gain on treasury lock terminations - (615)
Loss on land development option - 600
Loss (gain) on sales of real estate, net 2,585 (4,357)
Minority interests 2,373 6,917
Extraordinary item, net of minority interests 408 -
Changes in operating assets and liabilities:
Decrease (increase) in tenant receivables 4,147 (4,029)
Increase in deferred rent receivable (4,438) (1,208)
(Increase) decrease in other assets (2,350) 3,596
(Decrease) increase in accrued interest payable (665) 938
Increase in accrued real estate taxes 323 11,557
Decrease in accounts payable and accrued expenses (6,513) (6,213)
Decrease in liabilities for leases assumed (672) (598)
Decrease in other liabilities (288) (773)
------------------------------------
Net cash provided by operating activities 22,874 37,613
INVESTING ACTIVITIES
Expenditures for real estate and equipment (58,945) (176,801)
Proceeds from sales of real estate 44,925 13,191
Leasing costs (3,249) (2,364)
Additional advances on mortgage note receivable (5,586) (7,695)
(Increase) decrease in restricted cash escrows (12,162) 13,466
Option deposits - (10,000)
Net (loans to) repayments from services company (4,643) 1,327
------------------------------------
Net cash used in investing activities (39,660) (168,876)
FINANCING ACTIVITIES
Financing costs (2,654) (2,878)
Deposits recovered on treasury lock agreements - 15,256
Proceeds from mortgage notes payable 99,273 96,000
Net (repayments of) proceeds from credit facilities (8,715) 20,637
Repayment of mortgage notes and bonds payable (39,933) (2,839)
Distributions to minority interest - Operating Partnership (7,396) (6,971)
Series A - preferred shares transaction fee - (400)
Dividends paid to Series B-Preferred shareholders (4,500) (4,500)
Dividends paid to Series A-Preferred shareholders (1,500) (1,480)
Dividends paid to common shareholders (10,265) (10,204)
------------------------------------
Net cash provided by financing activities 24,310 102,621
------------------------------------
Net increase (decrease) in cash and cash equivalents 7,524 (28,642)
Cash and cash equivalents at beginning of period 21,167 46,500
------------------------------------
Cash and cash equivalents at end of period $ 28,691 $ 17,858
====================================
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month and six month periods ended
June 30, 2000 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in Prime Group
Realty Trust's annual report on Form 10-K for the year ended December 31, 1999
as filed with the Securities and Exchange Commission on March 24, 2000 ("Form
10-K").
Certain prior period amounts have been reclassified to conform with the current
financial statement presentation.
2. FORMATION AND ORGANIZATION OF THE COMPANY
Prime Group Realty Trust (the "Company") was organized in Maryland on July 21,
1997 and intends to qualify as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended, for Federal income tax purposes. The
Company is the managing general partner of Prime Group Realty, L.P. (the
"Operating Partnership") and owns all of the preferred units and 58.0% and 58.4%
of the common units of the Operating Partnership issued and outstanding at June
30, 2000 and December 31, 1999, respectively. Each common unit and preferred
unit entitles the Company to receive distributions from the Operating
Partnership. Distributions declared or paid to holders of common shares and
preferred shares are based upon such distributions the Company receives with
respect to its common units and preferred units.
3. INCOME TAXES
The Company elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally will not be subject to
federal income tax to the extent that it distributes at least 95% of its REIT
taxable income to its shareholders. REITs are subject to a number of
organizational and operational requirements. If the Company fails to qualify as
a REIT in any taxable year, the Company will be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate tax rates.
4. USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
5. RECENT DEVELOPMENTS
During the period from January 1, 2000 through June 30, 2000, the Company
acquired and sold the following office and industrial properties, parcels of
land, a parking facility and its one retail center (See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" for a description of the debt terms.):
-7-
<PAGE>
<TABLE>
<CAPTION>
NET ACQUISITION
RENTABLE COST/SALES MORTGAGE MONTH
SQUARE PRICE (IN DEBT (IN ACQUIRED/
PROPERTY LOCATION FEET MILLIONS) MILLIONS) SOLD
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ACQUIRED
Office:
Enterprise Center II (1) Westchester, IL 62,559 $ 9.1 $ 5.5 January
7100 Madison Willowbrook, IL 51,160 5.4 3.9 April
Industrial:
6700 Touhy Avenue Niles, IL 120,000 5.0 3.0 March
555 Kirk Road (2) St. Charles, IL 62,400 2.6 1.6 April
1543 Abbott Drive (2) Wheeling, IL 43,930 1.4 .8 April
--------------------------------------------
340,049 $ 23.5 $ 14.8
============================================
Land:
Libertyville Office II Libertyville, IL 7.5 Acres $ 1.2 $ - January
Carol Stream (3) Carol Stream, IL 29.6 Acres 3.8 - March
Aurora (5) Aurora, IL 6.1 Acres 0.5 - June
--------------------------------------------
43.2 Acres $ 5.5 $ -
============================================
DEVELOPMENTS PLACED IN SERVICE:
Office:
Pine Meadows Center - Bldg. C Libertyville, IL 22,685 $ 2.2 $ 1.5 May
Industrial:
2000 USG Drive Libertyville, IL 242,200 8.3 4.8 April
--------------------------------------------
264,885 $ 10.5 $ 6.3
============================================
SOLD
Office:
201 4th Avenue North (6) Nashville, TN 250,566 April
625 Gay Street (6) Knoxville, TN 91,426 April
4823 Old Kingston
Pike (6) Knoxville, TN 34,638 April
398 Unit Parking Facility (6) Knoxville, TN - April
--------------------------------------------
376,630 $ 20.2 $ 17.3
Industrial:
2160 McGaw Road (7) Obetz, OH 310,100 June
4849 Groveport Road (7) Obetz, OH 132,100 June
2400 McGaw Road (7) Obetz, OH 86,400 June
5160 Blazer Memorial
Parkway (7) Dublin, OH 85,962 June
4411 Marketing Place (7) Columbus, OH 65,804 June
600 London Road (7) Delaware, OH 52,441 June
--------------------------------------------
732,807 16.8 7.6
============================================
1,109,437 $ 37.0 $ 24.9
============================================
Land:
Carol Stream Land (4) Carol Stream, IL 46.1 Acres $ 7.4 $ - March
475 Superior Avenue (8) Munster, IN 9.6 Acres 0.8 0.7 June
--------------------------------------------
55.7 Acres $ 8.2 $ 0.7
============================================
Retail Center:
371-385 Gary Avenue (9) Carol Stream, IL 11,276 $ 1.1 $ - March
============================================
</TABLE>
(1) Acquisition cost includes cash paid at closing, the proceeds of a mortgage
note payable plus prorations and accrued real estate taxes.
(2) Both properties secure a mortgage debt in the amount of $2.4 million.
(3) This parcel was acquired from a minority interest common unit holder of the
Operating Partnership for a total purchase price of $3.8 million in common
units.
(4) The Company sold this land for a total sales price of $7.4 million,
resulting in a gain of $1.3 million.
(5) The Company has contracts that require it to purchase an additional 101.8
acres over a remaining two to four year period. Certain minimum Installment
payments are required; however, the timing of purchases is at the Company's
discretion. These purchases are a part of these contracts. In conjunction
-8-
<PAGE>
with this purchase, the Company paid off a $0.6 million mortgage loan
funded upon acquisition of 7.5 acres in November 1999.
(6) These properties were sold in a single transaction with a total sales price
of $20.2 million, resulting in a loss of approximately $4.4 million. A
portion of the proceeds were used to pay off $17.3 million of tax-exempt
bonds.
(7) These properties were sold in a single transaction with a total sales price
of $16.8 million, resulting in a gain of approximately $0.1 million. The
proceeds were used to pay off a $7.6 million line of credit and $9.2
million was deposited into an escrow as collateral for existing tax-exempt
bonds.
(8) The Company sold a parcel of land adjacent to one of its industrial
facility for $0.8 million, resulting in a gain of $0.6 million.
(9) The Company sold this property for $1.1 million, resulting in a loss of
$0.1 million.
On February 23, 2000, the Company borrowed $30.0 million collateralized by a
pledge of ownership interests of the owner of the property known as IBM Plaza in
Chicago, Illinois. See "Liquidity and Capital Resources-Indebtedness" for
further details and the related terms.
On March 20, 2000, the Company entered into an interest rate cap agreement for
the period from March 20, 2000 through November 17, 2000 for a notional amount
of $70.0 million. The interest rate under the agreement is capped at a LIBOR
index rate of 8.0%.
On June 1, 2000, the Company entered into a loan modification agreement on the
$24.0 million loan collateralized by 300 West Monroe Street property in Chicago,
Illinois, extending the maturity date to May 1, 2001 and requiring monthly
$1,000,000 escrow payments as additional security for the loan. Other loan terms
remained substantially unchanged.
On April 21, 2000, the Company paid off the $7.1 million construction loan
collateralized by Pine Meadows Center - Building D, in Libertyville, Illinois,
with the proceeds of a $11.5 million mortgage loan collateralized by the
property. See "Liquidity and Capital Resources-Indebtedness" for further details
and the related terms.
On May 17, 2000, the Company borrowed $7.6 million collateralized by the
property known as Enterprise Office I in Westchester, Illinois. See "Liquidity
and Capital Resources-Indebtedness" for further details and the related terms.
On June 12, 2000, the Company entered into a contract to sell an office property
located at 122 South Michigan Avenue in Chicago, Illinois. This transaction is
anticipated to close in the third quarter of 2000. This property has been
classified as held for sale.
On June 13, 2000, the Company opened a construction loan, with a total loan
commitment of $6.0 million, for a development project located at 1455 Seqouia
Drive in Aurora, Illinois. As of June 30, 2000, $2.0 million had been drawn on
the loan. See "Liquidity and Capital Resources-Indebtedness" for further details
and the related terms.
On June 30, 2000, the Company borrowed $7.4 million, collateralized by
properties known as 1990/2010 Algonquin Road in Schaumburg, Illinois. See
"Liquidity and Capital Resources-Indebtedness" for further details and the
related terms.
On June 30, 2000, the Company borrowed $20.0 million collateralized by a 49%
pledge of ownership interest in the entity which owns a property known as
National City Center in Chicago, Illinois. The loan may be subject to partial
acceleration, if additional collateral is not in place by August 29, 2000. See
"Liquidity and Capital Resources-Indebtedness" for further details and the
related terms.
The Company has received $290.0 million in construction financing commitments
for a 1,515,000 square foot office building development project in Chicago,
Illinois known as Dearborn Center. Zoning approval for the development was
received on June 7, 2000. Dearborn Center is approximately 50 percent leased
with an anticipated completion date in the third quarter of 2002. As a result of
obtaining the financing commitment and zoning approval, the Company recorded
-9-
<PAGE>
$0.9 million representing its share of the leasing commission earned in the
quarter ended June 30, 2000 related to a lease signed in the quarter ended March
31, 2000. This leasing commission was funded on August 1, 2000.
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net income
available per weighted-average common share of beneficial interest for the three
months and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Income before (loss) gain on sales of real estate,
minority interests, extraordinary items and
preferred distributions $ 6,708 $ 10,559 $ 14,502 $ 18,627
Minority interests (1,535) (3,083) (3,428) (5,139)
Net income allocated to preferred distributions (3,037) (3,030) (6,074) (6,030)
---------------------------------------------------------------
Income before (loss) gain on sales of real
estate and extraordinary items 2,136 4,446 5,000 7,458
(Loss) gain on sales of real estate, net of
minority interests (2,199) 2,579 (1,530) 2,579
Extraordinary loss on extinguishment of
debt, net of minority interests (408) - (408) -
---------------------------------------------------------------
Numerator for earnings per share - (loss)
income available to common shares $ (471) $ 7,025 $ 3,062 $ 10,037
================================================================
Denominator:
Denominator for basic earnings per
share-weighted-average common shares 15,286,478 15,135,727 15,250,995 15,133,788
Effect of dilutive securities:
Employee stock options 143,889 73,237 86,802 37,749
Employee stock grants - - 19,981 -
---------------------------------------------------------------
Denominator for diluted earnings per share
- adjusted weighted-average common
shares and assumed conversions 15,430,367 15,208,964 15,357,778 15,171,537
================================================================
BASIC AND DILUTED EARNINGS AVAILABLE TO COMMON
SHARES PER WEIGHTED-AVERAGE COMMON SHARE
Income before (loss) gain on sales of real estate
and extraordinary items $ 0.14 $ 0.29 $ 0.33 $ 0.49
(Loss) gain on sales of real estate, net of
minority interests (0.14) 0.17 (0.10) 0.17
Extraordinary loss on extinguishment of
debt, net of minority interest (0.03) - (0.03) -
---------------------------------------------------------------
Net (loss) income available per
weighted-average common share of
beneficial interest $ (0.03) $ 0.46 $ 0.20 $ 0.66
================================================================
</TABLE>
Options to purchase 1,216,166 and 1,218,666 of the Company's common shares were
excluded in the computation of diluted earnings available to common shares for
the three months and six months ended June 30, 2000, respectively, because the
effect would be antidilutive.
The Company had 11,086,705 and 10,529,839 weighted-average common units
outstanding during the three months ended June 30, 2000 and 1999, respectively,
of which 9,503,155 and 9,395,090, respectively, may be exchanged (on a one for
one basis) for common shares or, at the option of the Company, for cash
equivalent to the value of such common shares. The Company had 10,967,508 and
10,428,678 weighted average common units outstanding during the six months ended
June 30, 2000 and 1999, respectively, of which 9,422,575 and 9,391,480,
respectively, may be exchanged (on a one for one basis) for common shares or,
-10-
<PAGE>
at the option of the Company, for cash equivalent to the value of such common
shares. The convertible common units were not included in the computation of
diluted earnings per share because the conversion would be antidilutive.
The Company had 2,000,000 Series A preferred shares issued and outstanding
during the three months and six months ended June 30, 2000 and 1999 which were
not included in the computation of diluted earnings per share because the
conversion would have been antidilutive.
7. SEGMENT REPORTING
The following summarizes the Company's historical segment operating results for
the three and six months ended June 30, 2000 and 1999 (Amounts in thousands):
<TABLE>
<CAPTION>
Three months ended June 30, 2000
------------------------------------------------------------------
Corporate/
Operating
Office Industrial Partnership Total
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 47,441 $ 5,912 $ 2,047 $ 55,400
Total expenses (27,525) (4,683) (16,484) (48,692)
(Loss) gain on sales of real estate,
net (4,448) 719 (52) (3,781)
------------------------------------------------------------------
Income (loss) before minority
interests and extraordinary items 15,468 1,948 (14,489) 2,927
FFO adjustments:
Real estate depreciation and
amortization 6,661 1,834 - 8,495
Straight-line rental revenue (2,160) (172) - (2,332)
Straight-line rental revenue from
joint venture (158) - - (158)
Amortization of costs for leases
assumed 255 - - 255
Joint venture adjustments 862 - - 862
Adjustments for sale of operating
property 4,448 (110) - 4,338
Net income allocated to preferred
shareholders - - (3,037) (3,037)
------------------------------------------------------------------
Funds from operations excluding
straight-line rental revenue 25,376 3,500 (17,526) 11,350
Straight-line rental revenue 2,160 172 - 2,332
Straight-line rental revenue from
joint venture 158 - - 158
------------------------------------------------------------------
Funds from operations including
straight-line rental revenue $ 27,694 $ 3,672 $ (17,526) $ 13,840
==================================================================
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 30, 1999
------------------------------------------------------------------
Corporate/
Operating
Office Industrial Partnership Total
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 42,932 $ 7,946 $ 2,034 $ 52,912
Total expenses (24,640) (4,783) (12,930) (42,353)
Gain on sales of real estate, net 4,357 - - 4,357
------------------------------------------------------------------
Income (loss) before minority interests 22,649 3,163 (10,896) 14,916
FFO adjustments:
Real estate depreciation and amortization 6,225 1,863 - 8,088
Straight-line rental revenue (559) (55) - (614)
Amortization of costs for leases assumed 246 - - 246
Adjustment for sale of operating property (4,357) - - (4,357)
Net income allocated to preferred
shareholders - - (3,030) (3,030)
------------------------------------------------------------------
Funds from operations excluding
straight-line rental revenue 24,204 4,971 (13,926) 15,249
Straight-line rental revenue 559 55 - 614
==================================================================
Funds from operations, including
straight-line rental revenue (1) $ 24,763 $ 5,026 $(13,926) $ 15,863
==================================================================
</TABLE>
-11-
<PAGE>
7. SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
Six months ended June 30, 2000
------------------------------------------------------------------
Corporate/
Operating
Office Industrial Partnership Total
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 96,184 $ 11,616 $ 3,075 $ 110,875
Total expenses (55,979) (8,660) (31,734) (96,373)
(Loss) gain on sales of real estate,
net (4,578) 719 1,274 (2,585)
------------------------------------------------------------------
Income (loss) before minority
interests and extraordinary items 35,627 3,675 (27,385) 11,917
FFO adjustments:
Real estate depreciation and
amortization 13,390 3,311 - 16,701
Straight-line rental revenue (4,139) (447) - (4,586)
Straight-line rental revenue from
joint venture (316) - - (316)
Amortization of costs for leases
assumed 417 - - 417
Joint venture adjustments 1,725 - - 1,725
Adjustments for sale of operating
property 4,578 (110) - 4,468
Net income allocated to preferred
shareholders - - (6,074) (6,074)
------------------------------------------------------------------
Funds from operations excluding
straight-line rental revenue 51,282 6,429 (33,459) 24,252
Straight-line rental revenue 4,139 447 - 4,586
Straight-line rental revenue from
joint venture 316 - - 316
------------------------------------------------------------------
Funds from operations including
straight-line rental revenue $ 55,737 $ 6,876 $(33,459) $ 29,154
==================================================================
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1999
------------------------------------------------------------------
Corporate/
Operating
Office Industrial Partnership Total
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 85,237 $ 14,622 $ 2,132 $ 101,991
Total expenses (48,372) (8,662) (26,330) (83,364)
Gain on sales of real estate, net 4,357 - - 4,357
------------------------------------------------------------------
Income (loss) before minority interests 41,222 5,960 (24,198) 22,984
FFO adjustments:
Real estate depreciation and amortization 11,998 3,423 - 15,421
Straight-line rental revenue (1,074) (134) - (1,208)
Amortization of costs for leases assumed 491 - - 491
Adjustments for sale of operating
properties (4,357) - - (4,357)
Net income allocated to preferred
shareholders - - (6,030) (6,030)
------------------------------------------------------------------
Funds from operations excluding
straight-line rental revenue 48,280 9,249 (30,228) 27,301
Straight-line rental revenue 1,074 134 - 1,208
------------------------------------------------------------------
Funds from operations, including
straight-line rental revenue (1) $ 49,354 $ 9,383 $(30,228) $ 28,509
==================================================================
</TABLE>
-12-
<PAGE>
7. SEGMENT REPORTING (CONTINUED)
(1) The Company has restated funds from operations for the three and six months
ended June 30, 1999 to be in compliance with the National Association of
Real Estate Investment Trusts' ("NAREIT") revised October, 1999 standard
funds from operations, which became effective January 1, 2000 (See "Funds
from Operations"). Accordingly, for the three months ended June 30, 1999,
the Company has excluded the previously included adjustment for gain on
treasury lock termination of $1,172. For the six months ended June 30,
1999, the Company has excluded the following previously included
adjustments: (i) net gain on treasury lock termination of $615 and (ii)
loss on land development option of $600.
The following summarizes the Company's segment assets and activity as of June
30, 2000 and December 31, 1999 and for the six months ended June 30, 2000 and
1999:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-----------------------------------
<S> <C> <C>
Segment assets:
Office $1,210,684 $1,225,270
Industrial 156,144 149,158
Corporate/operating partnership 114,330 69,747
-----------------------------------
Total consolidated assets $1,481,158 $1,444,175
===================================
</TABLE>
<TABLE>
<CAPTION>
Six months
ended June 30,
2000 1999
-----------------------------------
<S> <C> <C>
Expenditures for real estate:
Office $27,540 $ 161,965
Industrial 22,899 10,133
Corporate/operating partnership (includes
property under development) 8,506 4,703
-----------------------------------
Total expenditures for real estate $58,945 $ 176,801
===================================
</TABLE>
8. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
The accompanying unaudited Pro Forma Condensed Consolidated Statements of Income
of the Company are presented as if, at January 1, 1999, the Operating
Partnership acquired various office and industrial properties (eight properties
acquired in 1999 and five properties acquired in the first six months of 2000)
with cash and debt proceeds, and sold 11 properties and a 50% interest in a
property in 1999 and sold 11 properties in the first six months of 2000. The
unaudited Pro Forma Condensed Consolidated Statements of Income should be read
in conjunction with the historical financial statements contained in the
Company's Form 10-K for the year ended December 31, 1999. In management's
opinion, all adjustments necessary to reflect the effects of the transactions
described above have been made.
The unaudited Pro Forma Condensed Consolidated Statements of Income of the
Company are not necessarily indicative of what the actual results of operations
would have been assuming the transactions described above had occurred at the
dates indicated above, nor do they purport to present the future results of
operations of the Company.
<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
--------------------------------
<S> <C> <C>
Total revenue (in thousands) $108,037 $105,918
================================
Net income available to common shareholders (in thousands) $ 5,142 $ 7,870
================================
Earnings per diluted common share $ 0.33 $ 0.52
================================
</TABLE>
-13-
<PAGE>
9. SUBSEQUENT EVENTS
On July 12, 2000, the Company refinanced the $20.0 million loan collaterized by
a pledge of the first mortgage loan held by the Company and secured by the
property known as 180 North LaSalle Street in Chicago, Illinois. The loan
commitment totaled $64.0 million, of which $52.0 million was initially
disbursed. A portion of the proceeds was used to repay the original $20.0
million loan, and $20.3 million was deposited into various escrow accounts to
pay for future capital expenditures, tenant improvements and lease commissions.
Also, on July 12, 2000, the Company entered into an interest rate cap agreement
for the full term of the loan based upon a LIBOR rate of 7.25%.
On July 19, 2000, the Company paid off its remaining credit facility of $10.8
million.
On August 1, 2000, the Company placed an industrial property previously under
development in service. This property contains 161,000 net rentable square feet
and is located at 1455 Sequoia Drive in Aurora, Illinois.
On August 1, 2000, pursuant to an option granted on December 16, 1997, as
amended, the Company acquired the existing $85,000,000 second mortgage loan
encumbering the property commonly known as 180 North LaSalle Street in Chicago,
Illinois, for $2,000,000 in cash. The Company also received back and cancelled
$700,000 worth of common units of the Operating Partnership (45,287 common
units), which were previously issued pursuant to the option resulting in a net
consideration of $1,300,000 paid for the second mortgage loan.
On August 8, 2000, an affiliate of a board member exchanged 927,100 general
partner minority interest common units of the Operating Partnership for 927,100
limited partner minority interest common units. These limited partner minority
interest common units are exchangeable, after a one-year lock-up period, on a
one-for-one basis, for common shares in the Company. In connection with the
modification, the tax indemnification agreement with the affiliate was amended
to provide that the tax indemnification by the Operating Partnership is reduced
by 10% per year over the 10 year term of the tax indemnification agreement,
effective retroactively from the Company's initial public offering. In addition,
the affiliate's Put Option Agreement allowing the affiliate to put portions of
the general partner common units to the Operating Partnership was terminated.
On August 10, 2000, the Company entered into a modification agreement related to
the letters of credit, which credit enhance the Industrial Development Revenue
Bonds. Such modification, among other things, provides, effectively, for the
acceleration of the related maturity date from February 2002 to April 2001 and
requires a mortgage of the 475 Superior Avenue property as additional
collateral.
-14-
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a fully-integrated real estate company providing property management,
leasing, marketing, acquisition, development, redevelopment, construction,
finance and other related services. We intend to qualify as a REIT for federal
income tax purposes. Through the Operating Partnership, we own 28 office
properties containing an aggregate of approximately 8.6 million net rentable
square feet and 37 industrial properties containing an aggregate of
approximately 3.1 million net rentable square feet. In addition, we own a 50%
common interest in a joint venture which owns an office property containing
944,556 net rentable square feet. The above properties are located primarily in
the Chicago metropolitan area. We also own approximately 218.9 acres of
developable land and rights to acquire more than 159.3 additional acres of
developable land which management believes could be developed with approximately
4.3 million rentable square feet of additional office space and 6.0 million
square feet of additional industrial space.
In terms of net rentable square feet, approximately 89% of our office properties
and all of our industrial properties are located in the Chicago metropolitan
area in prime business locations within established business communities. The
properties located in the Chicago metropolitan area account for approximately
88.9% of our total rental and tenant reimbursement revenue for the six months
ended June 30, 2000. Our remaining office properties are located in Cleveland,
Ohio; Knoxville, Tennessee; and the Milwaukee, Wisconsin metropolitan areas. We
intend to continue to invest in the acquisition, development and redevelopment
of office and industrial properties primarily located in the Chicago
metropolitan area.
We intend to access multiple sources of capital to fund future acquisition and
development activities. These capital sources may include undistributed cash
flow, borrowings under credit facilities, proceeds from the issuance of
long-term, tax-exempt bonds, joint venture arrangements, property sales, the
issuance and sale of debt or equity securities and other bank and/or
institutional borrowings. There can be no assurance that any such financing will
be obtained.
CAUTIONARY STATEMENTS
The following discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
reflect management's current view with respect to future events and financial
performance. Such forward-looking statements are subject to certain risks and
uncertainties; including, but not limited to, the effects of future events on
our financial performance; the risk that we may be unable to finance our planned
acquisition and development activities; risks related to the industrial and
office industry in which our properties compete, including the potential adverse
impact of external factors such as inflation, consumer confidence, unemployment
rates and consumer tastes and preferences; risks associated with our development
activities, such as the potential for cost overruns, delays and lack of
predictability with respect to the financial returns associated with these
development activities; the risk of a potential increase in market interest
rates from current rates; and risks associated with real estate ownership, such
as the potential adverse impact of changes in the local economic climate on the
revenues and the value of our properties.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of June 30, 2000.
Among the facts about which we have made assumptions are the following:
-15-
<PAGE>
- future economic conditions which may impact the demand for office space
and tenant ability to pay rent, either at current or increased levels;
- prevailing interest rates;
- the effect of any inflation on operating expenses;
- our ability to reduce various expenses; and
- our continuing ability to pay amounts due to our preferred shareholders
prior to any distribution to our common shareholders.
In addition, historical results and percentage relationships set forth herein
are not necessarily indicative of future operations.
RESULTS OF OPERATIONS: COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 TO THE
THREE MONTHS ENDED JUNE 30, 1999
In analyzing the operating results for the quarter ended June 30, 2000, the
changes in rental and tenant reimbursements income, property operating expenses,
real estate taxes, and depreciation and amortization from 1999 are due
principally to the addition of a full three months of operating results for five
properties acquired and two properties placed in service in 1999 after the
second quarter, two properties acquired in the first quarter of 2000, and the
additions of a partial quarter's worth of operating results for the three
properties acquired and two properties placed in service in the second quarter
of 2000 (collectively, the "Additional Properties for Three Months"). These
additions are offset by decreases principally due to the sale of eleven
properties in 1999 after the second quarter, the sale of a 50% interest in one
property in the third quarter of 1999 (the property was included in operating
results for the quarter ended June 30, 1999, but is accounted for on the equity
method of accounting in 2000), the sale of one property in the first quarter of
2000, and only a partial quarter's worth of operating results for ten properties
that were sold in the second quarter of 2000 (collectively, the "Sold Properties
for Three Months").
For the three months ended June 30, 2000, rental revenue decreased $1.0 million,
or 2.9%, to $33.0 million, tenant reimbursement income increased $2.1 million,
or 15.8%, to $15.6 million, other property revenues increased $0.6 million, or
33.3%, to $2.4 million, other income increased $0.2 million or 9.5%, to $2.3
million, property operating expenses increased $1.3 million or 12.2% to $11.9
million, real estate tax expense increased $0.7 million or 7.3% to $10.5 million
and depreciation and amortization increased $1.2 million, or 13.3%, to $9.8
million as compared to the three months ended June 30, 1999. The Additional
Properties for Three Months resulted in increased rental income of $8.4 million,
tenant reimbursements income of $5.1 million, other property revenue of $0.9
million, property operating expenses of $2.8 million, real estate tax expense of
$3.1 million, and depreciation and amortization of $2.7 million for the three
months ended June 30, 2000. The Sold Properties for Three Months resulted in
decreased rental income of $8.6 million, tenant reimbursements income of $4.0
million, property operating expenses of $1.8 million, real estate tax expense of
$2.6 million, and depreciation and amortization of $2.1 million for the three
months ended June 30, 2000. For properties held for the full second quarter in
both 2000 and 1999, rental revenue decreased $0.8 million, primarily due to less
revenue from lease terminations in the three months ended June 30, 2000 as
compared to the three months ended June 30, 1999. Tenant reimbursements income
increased $1.0 million, other property revenues decreased $0.3 million, property
operating expenses increased $0.3 million, real estate taxes increased $0.2
million, and depreciation and amortization increased $0.6 million, primarily as
a result of increased occupancy at these properties.
Mortgage note interest income increased $0.5 million, or 32.6%, to $2.1 million
for the three months ended June 30, 2000, as compared to the same period in
1999, due to the additional advances on the first mortgage note held encumbering
the office property known as 180 North LaSalle in Chicago, Illinois.
Interest expense increased $2.6 million, or 22.5%, to $14.1 million during the
three months ended June 30, 2000. The increase was principally due to new
mortgages obtained on certain of the properties which were acquired in 2000 and
-16-
<PAGE>
1999 and the impact of increases in market interest rates on our variable rate
debt.
General and administrative expense increased $0.6 million, or 33.1%, to $2.3
million during the three months ended June 30, 2000, representing the expenses
associated with the growth of the Company.
For the three months ended June 30, 2000, the net loss on sales of certain real
estate was $3.8 million, as described in "Recent Developments." For the three
months ended June 30, 1999, the gain on sales of real estate was $4.4 million.
Income allocated to minority interests decreased $4.9 million, or 101.0%, to a
loss of $47,000 for the three months ended June 30, 2000 due to a decrease in
income before minority interests and extraordinary item of $12.0 million, or
80.4%, to $2.9 million. The decrease in income before minority interests and
extraordinary item is due to the results of sales of real estate and to the
Additional Properties for three months and Sold Properties for three months and
the effects they had on revenue and expenses, as described above.
The extraordinary loss on extinguishment of debt, net minority interest,
increased $0.4 million for the three months ended June 30, 2000, due to the
write-off of unamortized deferred financing fees related to mortgage debt repaid
upon the sale of certain properties.
Net income decreased $7.5 million, or 74.5%, to $2.6 million for the three
months ended June 30, 2000 due to the changes in revenue, expenses, gain (loss)
on sales of real estate, minority interests, and extraordinary loss on
extinguishment of debt described above associated with acquisitions,
dispositions, and new leasing and releasing of tenant space.
RESULTS OF OPERATIONS: COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 TO THE
SIX MONTHS ENDED JUNE 30, 1999
In analyzing the operating results for the quarter ended June 30, 2000, the
changes in rental and tenant reimbursements income, property operating expenses,
real estate taxes, and depreciation and amortization from 1999 are due
principally to the addition of a full six months of operating results for three
properties acquired in the first quarter of 1999, five properties acquired and
two properties placed in service in 1999 after the second quarter, and the
addition of a partial six-month's worth of operating results for two properties
acquired in the first quarter of 2000 and three properties acquired and two
properties placed in service in the second quarter of 2000 (collectively, the
"Additional Properties for Six Months"). These additions are offset by decreases
principally due to the sale of eleven properties in 1999 after the second
quarter, the sale of a 50% interest in one property in the third quarter of 1999
(the property was included in operating results for the six months ended June
30, 1999, but is accounted for on the equity method of accounting in 2000), and
only a partial six-month's worth of operating results for one property sold in
the first quarter of 2000 and ten properties sold in the second quarter of 2000
(collectively, the "Sold Properties for Six Months").
For the six months ended June 30, 2000, rental revenue increased $0.1 million,
or 0.1%, to $66.8 million, tenant reimbursement income increased $5.7 million,
or 21.6%, to $32.1 million, other property revenue increased $1.1 million, or
29.4%, to $4.6 million, other income increased $1.0 million or 48.0%, to $3.2
million, property operating expenses increased $3.5 million or 16.2% to $24.7
million, real estate tax expense increased $1.7 million or 9.0% to $20.9 million
and depreciation and amortization increased $2.4 million, or 14.6%, to $19.1
million as compared to the six months ended June 30, 1999. The Additional
Properties for Six Months resulted in increased rental income of $19.6 million,
tenant reimbursements income of $11.6 million, other property revenue of $1.3
million, property operating expenses of $6.9 million, real estate tax expense of
$6.9 million, and depreciation and amortization of $6.0 million for the six
months ended June 30, 2000. The Sold Properties for Six Months resulted in
decreased rental income of $15.8 million, tenant reimbursements income of $7.4
million, other property revenue of $0.2 million, property operating expenses of
$3.4 million, real estate tax expense of $5.0
-17-
<PAGE>
million, and depreciation and amortization of $4.7 million for the six months
ended June 30, 2000. For properties held for a full six months in both 2000 and
1999, rental revenue decreased $3.7 million, primarily due to less revenue from
lease terminations in the first six months of 2000 as compared to the first six
months of 1999. Tenant reimbursements income increased $1.5 million, real estate
taxes decreased $0.2 million, and depreciation and amortization increased $1.1
million, primarily as a result of increased occupancy at these properties and
new leasing and releasing of tenant space.
Mortgage note interest income increased $1.0 million, or 33.1%, to $4.1 million
for the six months ended June 30, 2000, as compared to the same period in 1999,
due to the additional advances on the first mortgage note held encumbering the
office property known as 180 North LaSalle in Chicago, Illinois.
Interest expense increased $5.2 million, or 23.8%, to $27.1 million during the
six months ended June 30, 2000. The increase was principally due to new
mortgages obtained on certain of the properties which were acquired in 2000 and
1999 and the impact of increases in market interest rates on our variable rate
debt.
General and administrative expense increased $0.8 million, or 20.9%, to $4.6
million during the six months ended June 30, 2000, representing the expenses
associated with the growth of the Company.
For the six months ended June 30, 2000, the net loss on sales of certain real
estate was $2.6 million, as described in "Recent Developments." For the six
months ended June 30, 1999, the gain on sales of real estate was $4.4 million.
Income allocated to minority interests decreased $4.5 million, or 65.7%, to $2.4
million for the six months ended June 30, 2000 due to a decrease in income
before minority interests and extraordinary item of $11.1 million, or 48.2%, to
$11.9 million. The decrease in income before minority interests and
extraordinary item is due to the results of sales of real estate and to the
Additional Properties for Six Months and Sold Properties for Six Months and the
effects they had on revenue and expenses, as described above.
The extraordinary loss on extinguishment of debt, net of minority interest,
increased $0.4 million for the six months ended June 30, 2000, due to the
write-off of unamortized deferred financing fees related to the mortgage debt
repaid upon the sale of certain properties.
Net income decreased $6.9 million, or 43.1%, to $9.1 million for the six months
ended June 30, 2000 due to the changes in revenue, expenses, gain (loss) on
sales of real estate, minority interests, and extraordinary loss on the
extinguishment of debt described above associated with acquisitions,
dispositions, and new leasing and releasing of tenant space.
HISTORICAL CASH FLOWS
We had net cash provided by operating activities of $22.9 million and $37.6
million for the six months ended June 30, 2000 and 1999, respectively. The
$14.7 million decrease is primarily due to a $6.9 million decrease in net
income, a $2.4 million increase in depreciation and amortization expense, a
$6.9 million decrease in gain on sales of real estate, a $0.5 million
increase in net equity in loss of unconsolidated investments, a $8.2 million
decrease in tenant receivables, a $0.3 million increase in accounts payable
and accrued expenses, a $0.2 million decrease in interest income and
development fees added to the mortgage note receivable principal and a $0.4
million extraordinary item offset by a $4.5 million decrease in income
allocated to minority interests, a $0.6 million decrease in loss on treasury
lock termination, a $0.6 million decrease in loss on land development option,
a $3.2 million increase in deferred rent receivable, $6.1 million increase in
other assets, a $1.6 million decrease in accrued interest, a $11.2 million
decrease in accrued real estate taxes, and a $0.5 million decrease in other
liabilities.
We had net cash used in investing activities of $39.7 million and $168.9
million for the six months ended June 30, 2000 and 1999, respectively. The
$129.2 million decrease in net cash used in investing activities from the six
months ended June 30, 1999 through the six months ended June 30, 2000 was
primarily due to a
-18-
<PAGE>
a $10.0 million decrease in option deposits, a $2.1 million decrease in
advances on the mortgage note receivable and a $117.9 million decrease in
expenditures for real estate and equipment, principally related to property
acquisitions and development, offset by a $31.7 million increase in proceeds
from the sales of real estate, a $25.6 million increase in restricted cash
escrows, a $6.0 million increase in loans to the services company and a $0.9
increase in leasing costs.
We had net cash provided by financing activities of $24.3 million and $102.6
million for the six months ended June 30, 2000 and 1999, respectively. The
$78.3 million decrease in net cash provided by financing activities was due
to a $0.2 million increase in financing costs, a $15.3 million decrease in
deposits recovered on treasury lock agreements, a $37.1 million increase in
the repayment of mortgage notes payable, $3.3 million increase in
proceeds from mortgage notes payable, offset by a $29.4 million decrease in
net proceeds from the credit facilities, and a $0.1 million increase in
distributions to preferred shareholders, common shareholders and minority
interests.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Net cash provided from operations represents our primary source
of liquidity to fund distributions, debt service and recurring capital costs. In
order to qualify as a REIT for federal income tax purposes, we must distribute
95% of our taxable income (excluding capital gains) annually. Accordingly, we
currently intend to continue to make, but are not contractually bound to make,
regular quarterly distributions to holders of our common shares/units and our
preferred shares. We have established annual distribution rates as follows:
$1.35 per annum per common share/unit, 7.5% per annum ($1.50 per share) for each
Series A Preferred Share and 9% per annum ($2.25 per share) for each Series B
Preferred Share.
CREDIT FACILITIES. Our credit facilities were provided by various financial
institutions, and were collateralized by first mortgages on certain properties
owned by the operating partnership. On June 27, 2000, the Company paid off one
credit facility totaling $7.6 million and replaced the collateral for the
remaining tax-exempt bond issue with a cash escrow deposit of $9.2 million. At
June 30, 2000, $10.8 million was drawn on the remaining credit facility, which
was paid off on July 19, 2000. We currently have no credit facilities
outstanding.
PROPERTY SALES. During the period from January 1, 2000 through August 10,
2000 we sold various office, and industrial properties and vacant land parcels
and used a portion of the net proceeds to acquire other office and industrial
properties and land parcels, retire debt, and fund development activities. We
may use the remaining proceeds and the sale of other properties to fund future
acquisitions, property capital needs and development activities.
INDEBTEDNESS. We have financed a portion of our acquisitions with proceeds
from mortgage notes payable from various financial institutions, with fixed and
variable interest rates and maturities ranging from 2000 through 2013. We
believe that certain of our properties may have excess value that may be
utilized for additional mortgage borrowing or debt securitizations.
Our variable rate debt includes $160.0 million subject to an interest rate swap
agreement which effectively results in a fixed rate of 8.0%, $70.0 million
subject to an interest rate cap at the LIBOR index rate at 8.0%, and $65.0
million subject to an interest rate collar agreement, which effectively results
in a cap at 9.65% and a floor at 5.88%. Inflation, and its impact on floating
interest rates, could affect the amount of interest payments due on such
indebtedness.
-19-
<PAGE>
We obtained the following new indebtedness during the six months ended June 30,
2000:
<TABLE>
<CAPTION>
Original
Principal
Balance Maturity
Collateral (1) (In Millions) Interest Rate Date
----------------------------------------------------------------------------------
<S> <C> <C> <C>
IBM Plaza $ 30.0 (2) 2/02
Enterprise Center II (3) 5.5 LIBOR + 2.75% 3/01
6700 Touhy Avenue (4) 3.0 LIBOR + 2.25% 3/01
7100 Madison (4) 3.9 8.44% 5/10
555 Kirk Rd/1543 Abbott Dr(4) 2.4 LIBOR + 2.25% 4/01
Pine Meadows Center - Bldg. D(4) 11.5 LIBOR + 2.25% 4/01
Enterprise Office I (4) 7.6 LIBOR + 2.30% 5/01
1455 Sequoia Dr (3)(6) 2.0 LIBOR + 2.25% 6/02
2010 Algonquin Rd/1990 Algonquin Rd (4) 7.4 LIBOR + 2.32% 6/01
National City Center (5) 20.0 LIBOR + 6.0% 6/03
</TABLE>
(1) All of the loans are subject to various financial and other operating
covenants and are collateralized by mortgages on the properties, unless
otherwise indicated.
(2) Interest is payable monthly at LIBOR + 4.25%, not to exceed 11%. Beginning
September 2001, monthly principal payments of $150,000 are also payable. At
maturity, a payment is required which will ensure that the lender achieves
an 11.75% return.
(3) Interest payable monthly, with principal due at maturity.
(4) Principal and interest payable monthly, with remaining principal due at
maturity.
(5) Collateralized by a 49% pledge of ownership interest in the entity which
owns National City Center. The loan may be subject to partial acceleration,
if additional collateral is not in place by August 29, 2000. See "Liquidity
and Capital Resources-Indebtedness" for further details and the related
terms.
(6) This is a construction loan with a $6.0 million commitment.
FUTURE OFFERINGS. We filed a shelf registration statement on Form S-3 with
the Securities and Exchange Commission, which was declared effective on June 8,
1999, to register up to $500.0 million of our equity and debt securities for
future sale at price and on terms to be determined at the time of offering.
CAPITAL IMPROVEMENTS. Our properties require periodic investments of
capital for tenant-related capital improvements. During 1999, our tenant
improvements and leasing commissions averaged $24.54 per square foot of newly
leased office space, $8.19 per square foot of renewal leased office space, and
$2.12 per square foot of newly leased industrial space. Our estimated annual
cost of recurring tenant improvements and leasing commissions is approximately
$7.4 million based upon average annual square feet for leases expiring during
the year ending December 31, 2000. Our cost of general capital improvements to
our properties averages approximately $3.5 million annually based upon an
estimate of $0.19 per square foot.
LIQUIDITY REQUIREMENTS. We expect to meet our long-term liquidity
requirements for the funding of property development, property acquisitions and
other nonrecurring capital improvements through a combination of net cash from
operations, long-term secured and unsecured indebtedness, joint ventures,
property sales or the issuance of additional equity or debt securities. There
can be no assurance that we will be successful in obtaining the required amount
of funds for these items or that the terms of capital raising activities, if
any, will be as favorable as we have experienced in prior periods. The terms of
our preferred shares impose restrictions on our ability to incur indebtedness
and issue additional preferred shares.
FUNDS FROM OPERATIONS
Industry analysts generally consider Funds from Operations, as defined by the
National Association of Real Estate Investment Trusts ("NAREIT"), an
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<PAGE>
alternative measure of performance of an equity REIT. In October 1999, NAREIT
issued a new white paper statement and redefined how funds from operations is
calculated, effective January 1, 2000. Funds from Operations is now defined by
NAREIT as net income (loss) determined in accordance with GAAP, excluding gains
(or losses) from sales of depreciable operating property, plus depreciation and
amortization (other than amortization of deferred financing costs and
depreciation of non-real estate assets) and after adjustment for unconsolidated
partnerships and joint ventures. Non-recurring items, other than those
considered "extraordinary" under GAAP, are no longer adjustments to funds from
operations. We believe that in order to facilitate a clear understanding of the
combined historical operating results of the Company, Funds from Operations
should be examined in conjunction with net income (loss) as presented in the
unaudited financial statements included elsewhere in this Form 10-Q. The
following table represents the unaudited calculation of our Funds from
Operations for the three months and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
--------------------------------------------------------------------
(IN THOUSANDS) 2000 1999 2000 1999
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net (loss) income available to common shareholders $ (471) $ 7,025 $ 3,062 $ 10,037
Adjustments to reconcile to Funds from Operations:
Real estate depreciation and amortization 8,495 8,088 16,701 15,421
Straight-line rental revenue (2,332) (614) (4,586) (1,208)
Straight-line rental revenue from joint venture (158) - (316) -
Amortization of costs for leases assumed 255 246 417 491
Joint venture adjustments 862 - 1,725 -
Adjustment for sale of operating property 4,338 (4,357) 4,468 (4,357)
Extraordinary loss on extinguishment of debt 408 - 408 -
Minority interests (47) 4,861 2,373 6,917
--------------------------------------------------------------------
Funds from operations excluding straight-line rental
revenue 11,350 15,249 24,252 27,301
Straight-line rental revenue 2,332 614 4,586 1,208
Straight-line rental revenue from joint venture 158 - 316 -
====================================================================
Funds from Operations (1) $ 13,840 $ 15,863 $ 29,154 $ 28,509
====================================================================
</TABLE>
(1) We compute Funds from Operations in accordance with standards established
by the Board of Governors of NAREIT in its October 1999 White Paper. In
addition to this presentation, we also present funds from operations
excluding straight-line rental revenue (e.g., rental revenues based on
contractual lease terms), which we believe results in a more accurate
presentation of the Company's actual operating activities. Funds from
Operations does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
repayment obligations, or other commitments and uncertainties. Funds from
Operations should not be considered as an alternative to net income (loss),
as an indication of our performance or to cash flows as a measure of
liquidity or the ability to pay dividends or make distributions.
We have restated Funds from Operations for the three and six months
ended June 30, 1999 to be in accordance with the new October, 1999 white
paper standard for the three months ended June 30, 1999, we have excluded
the previously included adjustments for gain on treasury lock termination
of $1,172. For the six months ended June 30, 1999, we have excluded the
following previously included adjustments: (i) net gain on treasury lock
termination of $615 and (ii) loss on land development option of $600.
INFLATION
Substantially all of our office and industrial leases require tenants to pay, as
additional rent, a portion of any increases in real estate taxes and operating
expenses over a base amount. In addition, many of the office and industrial
leases provide for fixed increases in base rent or indexed escalations (based on
the Consumer Price Index or other measures).
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<PAGE>
As of June 30, 2000, approximately $489.8 million of our outstanding
indebtedness (including our credit facility) was subject to interest at floating
rates. Future indebtedness may also be subject to floating rate interest. The
floating rate debt includes $158.0 million subject to an interest rate swap
agreement, which effectively results in a fixed rate of 8.0%, $70.0 million
subject to an interest rate cap of the LIBOR index rate at 8.0%, and $65.0
million subject to an interest rate collar agreement, which effectively results
in a cap at 9.65% and a floor at 5.88%. Inflation, and its impact on floating
interest rates, could affect the amount of interest payments due on such
indebtedness.
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<PAGE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table provides information about our derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates. For our mortgage note receivable, mortgage notes payable, credit
facility and bonds payable, the table presents principal cash flows, including
principal amortization, and related weighted-average interest rates by expected
maturity dates as of June 30, 2000. For interest rate swaps and collars, the
table represents notional amounts and weighted-average interest rates by
expected (contractual) maturity dates. Notional amounts are used to calculate
the contractual payments to be exchanged under the contract.
Interest Rate Sensitivity
Principal (Notional) amount by Expected Maturity
Average Interest Rate
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total
--------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Mortgage notes
receivable (1) - - - - $89.8 - $ 89.8
Fixed interest rate - - - - 9.64% -
Liabilities:
Mortgage notes
payable (2):
Fixed rate $15.5 $ 63.0 $ 33.3 $ 4.2 $ 4.4 $239.6 $360.0
Average interest rate 10.42% 6.83% 11.23% 7.33% 7.33% 7.40%
Variable rate $15.7 $126.1 $246.0 $20.0 $14.0 - $421.8
Average interest rate (3) 8.79% 8.62% 8.53% 12.64% 9.69% -
Credit facilities (2):
Variable rate amount $10.8 - - - - - $ 10.8
Weighted-average interest
rate (3) 8.59% - - - - -
Bonds payable (2):
Variable rate - - $ 48.2 - - $ 9.0 $ 57.2
Average interest
rate (3) - - 4.82% - - 4.75%
Interest rate swap
agreement (2)(3):
Notional amount $ 1.6 $ 3.2 $153.2 - - - $158.0
Pay rate 6.64% 6.64% 6.64% - - -
Fixed swap rate 6.30% 6.30% 6.30% - - - -
Interest rate collar
agreement (2)(3):
Notional amount - - $ 65.0 - - - $ 65.0
Pay rate - - 6.80% - - -
Cap rate - - 7.50% - - -
Floor rate - - 3.73% - - -
Interest rate cap
agreements (2)(3):
Notional amount $ 70.0 - - - - - $ 70.0
Cap rate 8.00% - - - - - -
-------------
</TABLE>
(1) See Note 2 to our consolidated financial statements in our Form 10-K for
the year ended December 31, 1999 for additional information.
(2) See Note 4 to our consolidated financial statements in our Form 10-K for
the year ended December 31, 1999 for additional information.
(3) Based upon the rates in effect at June 30, 2000. The weighted-average
interest rate, including the interest rate swap and collar agreements, on
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<PAGE>
our mortgage notes payable, credit facilities, and bonds payable at June
30, 2000 were 8.31%, 8.59%, and 4.81%, respectively. If interest rates on
our variable rate debt increased by one percentage point, our annual
interest incurred would increase by approximately $3.2 million.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Neither we nor any of our properties are presently subject to any
material litigation nor, to the our knowledge, is any material
litigation threatened against us, other than routine litigation arising
in the ordinary course of business, some of which is expected to be
covered by liability insurance and all of which collectively is not
expected to have a material adverse effect on our consolidated
financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On July 11, 2000, pursuant to a consulting agreement dated
11/17/97, 5000 common shares were issued to a board member.
During the second quarter 2000, 27,596 common units of the Operating
Partnership were converted to common shares on a one-for-one basis.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Shareholders was held on May 17, 2000.
At the meeting, shareholders voted on (i)the re-election of three
trustees; (ii) approval of the Second Amendment to the Company's Share
Incentive Plan which increased the number of common shares available
for issuance under the plan from 2,540,000 to 2,860,774, (iii) the
authorization to reserve and subsequently issue up to 927,100
authorized but unissued common shares (subject to increase to give
effect to certain anti-dilution adjustments) which are issuable upon
exchange of up to 927,100 common units of limited partner interest in
the Operating Partnership and (iv) ratification of the appointment of
Ernst & Young LLP as the Company's independent auditors for 2000.
Voting on each such matter was as follows:
<TABLE>
<CAPTION>
Votes Votes Withheld/ Broker
For Against Abstentions None-Votes
<S> <C> <C> <C> <C>
(1) Re-election of Trustees:
- Stephen J. Nardi 13,037,291 228,314 0 0
- Thomas J. Saylak1
- Gov. James R. Thompson 13,039,769 225,836 0 0
(2) Authorization of Second Amendment to
Share Incentive Plan. 11,227,234 1,998,478 39,893 0
(3) Authorization to reserve and
subsequently issue up to 927,100 common
shares (subject to increase to give
effect to certain anti-dilution
adjustments) upon exchange of up to
927,100 common units of limited partner
interest in the Operating Partnership. 9,977,965 372,107 46,273 2,869,260
(4) Ratification of Auditors. 13,181,428 77,634 6,543 0
</TABLE>
The term of office of each of Michael W. Reschke, Jacque M. Ducharme, Richard S.
Curto and Christopher J. Nassetta continued after the meeting and will
------------
1 Mr. Saylak resigned from the Company's Board of Trustees on May 16, 2000 and
withdrew from the election. His position on the Board of Trustees will remain
vacant until the Board elects a successor.
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<PAGE>
expire at the Annual Meeting of Shareholders to be held in 2001, 2001, 2002 and
2002, respectively.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
3.1 Amendment No. 38 to the Amended and Restated Agreement of Limited
Partnership of Prime Group Realty, L.P. dated as of April 17, 2000
3.2 Amendment No. 39 to the Amended and Restated Agreement of Limited
Partnership of Prime Group Realty, L.P. dated as of May 15, 2000
3.3. Amendment No. 40 to the Amended and Restated Agreement of Limited
Partnership of Prime Group Realty, L.P. dated as of June 15, 2000
10.1 First Amendment to Tax Indemnification Agreement dated as of
March 15, 2000, effective as of May 17, 2000, among Stephen J.
Nardi, Narco Enterprises, Inc., Nardi Group Limited and Prime Group
Realty, L.P.
10.2 Put Option Termination Agreement dated as of March 15, 2000,
effective as of May 17, 2000, among The Nardi Group, L.L.C., Prime
Group Realty Trust and Prime Group Realty, L.P.
12.1 Computation of ratios of earnings to combined fixed charges and
preferred share distributions
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
We filed the following reports on Form 8-K:
Form 8-K dated May 19, 2000 (filed on May 26, 2000; File No. 001-13589)
relating to results of the Annual Meeting of Shareholders held on May
17, 2000.
Form 8-K dated June 21, 2000 (filed on July 17, 2000; File No.
001-13589) announcing the creation of the Office of the President and
the resignation of the Chief Financial Officer.
</TABLE>
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIME GROUP REALTY TRUST
-----------------
Registrant
Date: August 14, 2000 /s/ Richard S. Curto
-----------------
Richard S. Curto
Chief Executive Officer
Date: August 14, 2000 /s/ Louis G. Conforti
-----------------
Louis G. Conforti
Office of the President and
Acting Chief Financial Officer
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