<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 September 30, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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 November 10, 2000, 15,588,497 of the registrant's Common Shares of Beneficial
Interest were outstanding.
<PAGE>
Prime Group Realty Trust
Form 10-Q
INDEX
Part I: Financial Information
Item 1. Financial Statements (Unaudited) PAGE
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 3
Consolidated Statements of Income for the Three Months
Ended September 30, 2000 and 1999 4
Consolidated Statements of Income for the Nine Months
Ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 6-7
Notes to Consolidated Financial Statements 8-19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20-29
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 30
Part II: Other Information
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 33
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Part I.
Financial Information
ITEM 1. FINANCIAL STATEMENTS
Prime Group Realty Trust
Consolidated Balance Sheets
(000's omitted, except share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-----------------------------
<S> <C> <C>
Assets
Real estate, at cost:
Land $ 196,398 $ 183,295
Building and improvements 939,078 928,567
Tenant improvements 49,952 39,232
----------------------------
1,185,428 1,151,094
Accumulated depreciation (54,114) (37,977)
----------------------------
1,131,314 1,113,117
Property under development 152,167 125,724
----------------------------
1,283,481 1,238,841
Mortgage note receivable - 82,687
Cash and cash equivalents 28,467 21,167
Tenant receivables 6,272 11,438
Restricted cash escrows 71,142 42,140
Deferred rent receivable 14,405 9,501
Deferred costs, net 26,381 26,901
Other 16,781 11,500
----------------------------
Total assets $1,446,929 $1,444,175
============================
Liabilities and Shareholders' Equity
Mortgage notes payable $ 771,452 $ 705,194
Credit facilities - 19,527
Bonds payable 57,150 74,450
Accrued interest payable 4,810 3,508
Accrued real estate taxes 30,694 40,689
Accounts payable and accrued expenses 26,541 36,133
Liabilities for leases assumed 2,525 3,235
Dividends payable 8,244 8,122
Other 10,645 10,909
----------------------------
Total liabilities 912,061 901,767
Minority interests:
Operating Partnership 160,292 168,070
Other 1,000 1,000
Series A - Cumulative Convertible Preferred
Shares, 2,000,000 shares designated, issued
and outstanding at September 30, 2000 and
December 31, 1999 39,813 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 September 30,
2000 and December 31, 1999 40 40
Common Shares, $0.01 par value; 100,000,000
shares authorized; 15,575,878 and 15,189,438
shares issued and outstanding at September
30, 2000 and December 31, 1999, respectively 156 152
Additional paid-in capital 328,181 321,357
Retained earnings 5,386 12,086
----------------------------
Total shareholders' equity 333,763 333,635
----------------------------
Total liabilities and shareholders' equity $1,446,929 $1,444,175
============================
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
Prime Group Realty Trust
Consolidated Statements of Income
(000's omitted, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended
September 30
2000 1999
--------------------
<S> <C> <C>
Revenue
Rental $34,515 $ 32,420
Tenant reimbursements 17,386 12,686
Other property revenues 1,937 1,974
Mortgage note interest 726 1,707
Other 2,498 1,009
---------------------
Total revenue 57,062 49,796
Expenses
Property operations 14,673 11,958
Real estate taxes 8,882 7,221
Depreciation and amortization 9,721 8,744
Interest 15,327 10,899
General and administrative 2,402 1,665
---------------------
Total expenses 51,005 40,487
---------------------
Income before gain on sales of real
estate, minority interests and
extraordinary items 6,057 9,309
Gain on sales of real estate, net 8,302 48,125
---------------------
Income before minority interests and
extraordinary items 14,359 57,434
Minority interests (4,689) (22,499)
---------------------
Income before extraordinary items 9,670 34,935
Extraordinary losses on extinguishment
of debt, net of minority interests of
$604 in 2000 and $576 in 1999 (857) (829)
---------------------
Net income 8,813 34,106
Net income allocated to preferred shareholders (3,036) (3,037)
---------------------
Net income available to common shareholders $ 5,777 $ 31,069
=====================
Basic earnings available to common shares per
weighted-average common share:
Income before gain on sales of real estate and
extraordinary items $ 0.11 $ 0.24
Gain on sales of real estate, net of minority
interests 0.31 1.86
Extraordinary losses on extinguishment of debt,
net of minority interests (0.05) (0.05)
---------------------
Net income available per weighted-average common
share of beneficial interest - basic $ 0.37 $ 2.05
=====================
Diluted earnings available to common shares per
weighted-average common share:
Income before gain on sales of real estate and
extraordinary items $ 0.11 $ 0.24
Gain on sales of real estate, net of minority
interests 0.31 1.85
Extraordinary losses on extinguishment of debt,
net of minority interests (0.05) (0.05)
---------------------
Net income available per weighted-average common
share of beneficial interest - diluted $ 0.37 $ 2.04
=====================
</TABLE>
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<PAGE>
Prime Group Realty Trust
Consolidated Statements of Income
(000's omitted, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended
September 30
<S> <C> <C>
2000 1999
----------------------
Revenue
Rental $101,319 $ 99,166
Tenant reimbursements 49,475 39,071
Other property revenues 6,014 5,562
Mortgage note interest 4,864 4,817
Other 6,122 3,171
----------------------
Total revenue 167,794 151,787
Expenses
Property operations 39,371 33,205
Real estate taxes 29,756 26,370
Depreciation and amortization 28,788 25,382
Interest 42,458 32,822
Loss on land development option - 600
General and administrative 6,861 5,472
----------------------
Total expenses 147,234 123,851
Income before gain on sales of real estate,
minority interests and extraordinary items 20,560 27,936
Gain on sales of real estate, net 5,717 52,482
----------------------
Income before minority interests and extraordinary
items 26,277 80,418
Minority interests (7,062) (29,247)
----------------------
Income before extraordinary items 19,215 51,171
Extraordinary losses on extinguishment of debt,
net of minority interests of $900 in 2000 and
$576 in 1999 (1,265) (829)
----------------------
Net income 17,950 50,342
Net income allocated to preferred shareholders (9,110) (9,067)
----------------------
Net income available to common shareholders $ 8,840 $ 41,275
======================
Basic earnings available to common shares per
weighted-average common share:
Income before gain on sales of real estate and $ 0.44 $ 0.74
extraordinary items
Gain on sales of real estate, net of minority
interests 0.22 2.04
Extraordinary losses on extinguishment of debt,
net of minority interests (0.08) (0.05)
----------------------
Net income available per weighted-average common
share of beneficial interest - basic $ 0.58 $ 2.73
======================
Diluted earnings available to common shares per
weighted-average common share:
Income before gain on sales of real estate and
extraordinary items $ 0.43 $ 0.73
Gain on sales of real estate, net of minority
interests 0.22 2.04
Extraordinary losses on extinguishment of debt,
net of minority interests (0.08) (0.05)
----------------------
Net income available per weighted-average common
share of beneficial interest - diluted $ 0.57 $ 2.72
======================
</TABLE>
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<PAGE>
Prime Group Realty Trust
Consolidated Statements of Cash Flows
(000's omitted)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended
September 30
2000 1999
------------------------------
Operating Activities
<S> <C> <C>
Net income $ 17,950 $ 50,342
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of costs for leases assumed (included in rental revenue) 623 736
Interest income and development fees added to mortgage note
receivable principal (1,855) (1,553)
Net equity in loss of unconsolidated investments 702 617
Depreciation and amortization 28,788 25,382
Net gain on treasury lock terminations - (615)
Loss on land development option - 600
Gain on sales of real estate, net (5,717) (52,482)
Minority interests 7,062 29,247
Extraordinary items, net of minority interests 1,265 829
Changes in operating assets and liabilities:
Decrease (increase) in tenant receivables 5,568 (6,009)
Increase in deferred rent receivable (6,876) (1,845)
(Increase) decrease in other assets (3,185) 8,316
Increase in accrued interest payable 1,302 170
(Decrease) increase in accrued real estate taxes (11,935) 16,878
Decrease in accounts payable and accrued expenses (1,448) (3,645)
Decrease in liabilities for leases assumed (974) (1,197)
Decrease in other liabilities (514) (291)
------------------------------
Net cash provided by operating activities 30,756 65,480
Investing Activities
Expenditures for real estate and equipment (104,927) (298,939)
Proceeds from sales of real estate 144,660 150,121
Leasing costs (4,901) (5,501)
Additional advances on mortgage note receivable (10,401) (12,326)
Purchase of mortgage note receivable (1,300) -
Increase in restricted cash escrows (28,879) (54,232)
Option deposits - (10,000)
Net (loans to) repayments from services company (5,558) 884
------------------------------
Net cash used in investing activities (11,306) (229,993)
Financing Activities
Financing costs (5,326) (3,793)
Deposits recovered on treasury lock agreements - 15,256
Proceeds from mortgage notes payable 155,595 168,700
Net (repayments of) proceeds from credit facilities (19,527) 15,637
Repayment of mortgage notes and bonds payable (106,637) (32,389)
Repurchase of operating partnership minority interest common units (700) -
Distributions to minority interest - Operating Partnership (11,137) (10,537)
Dividends paid to Series B-Preferred shareholders (6,750) (6,750)
Dividends paid to Series A-Preferred shareholders (2,250) (2,230)
Dividends paid to common shareholders (15,418) (15,308)
Series A - preferred shares transaction fee - (400)
------------------------------
Net cash (used in) provided by financing activities (12,150) 128,186
------------------------------
Net increase (decrease) in cash and cash equivalents 7,300 (36,327)
Cash and cash equivalents at beginning of period 21,167 46,500
------------------------------
Cash and cash equivalents at end of period $ 28,467 $ 10,173
==============================
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
Prime Group Realty Trust
Consolidated Statements of Cash Flows
(000's omitted, except share data)
(Unaudited)
During the nine months ended September 30, 2000 and 1999, the Company sold the
following assets and liabilities:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
-------------------------------
<S> <C>
Real estate, net $135,826 $ 261,754
Deferred rent receivable 1,972 32,593
Deferred costs, net 3,308 13,121
Mortgage notes payable - (205,109)
Accrued real estate taxes (1,828) (9,721)
Other assets and liabilities, net (335) 824
-------------------------------
Net assets sold 138,943 93,462
Proceeds from sales of real estate 144,660 150,121
-------------------------------
Total gain on sales of real estate 5,717 56,659
Less gain deferred - (4,177)
-------------------------------
Gain recognized on sales of real estate $ 5,717 $ 52,482
===============================
</TABLE>
See notes to consolidated financial statements.
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<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 nine month periods
ended September 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
the Company'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.
In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amends SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133 was
previously amended by SFAS 137 "Accounting For Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement 133," which
deferred the effective date of SFAS 133 to fiscal years beginning after June 15,
2000. The Company expects to adopt SFAS 138 and SFAS 133 effective January 1,
2001. SFAS 133 and SFAS 138 will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be recognized
immediately in earnings. Based on the Company's derivative positions and their
related fair values of approximately $0.4 million at September 30, 2000, the
Company estimates that upon adoption it would report a positive adjustment of
$0.6 million in other comprehensive income for an unrealized gain and a $0.2
million cumulative adjustment charge to the consolidated statement of income for
the period ended September 30, 2000 for unrealized losses.
In December 1999, the Securities and Exchange Commission (the "Commission")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the Commission's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. In June 2000, the Commission issued SAB 101B to defer the
effective date of implementation of SAB 101 to the fourth quarter 2000. Based
upon current estimates, the Company would record a charge to income of
approximately $3.3 million, representing the cumulative change as of October 1,
2000. The cumulative change primarily relates to the activity of Prime Group
Realty Services, Inc. (the "Services Company"), a company in which
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<PAGE>
the Company has an equity interest. Although the adoption of SAB 101 may impact
the period in which certain revenues are recognized by the Services Company, it
is not expected to impact the timing of the Company's cash flow from operations.
The Company has not completed its analysis of the impact of SAB 101 for periods
subsequent to September 30, 2000.
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 59.1% and 58.4%
of the common units of the Operating Partnership issued and outstanding at
September 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 September 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.):
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<PAGE>
<TABLE>
<CAPTION>
Acquisition/
Net Development Month
Rentable Square Cost/Sales Price Mortgage Debt Acquired/
Property Location Feet/Acres (In Millions) (In 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 0.8 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 (4) 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 $11.5 May
Industrial:
2000 USG Drive Libertyville, IL 242,200 8.3 4.8 April
1455 Sequoia Drive (5) Aurora, IL 257,600 8.6 4.9 August
-------------------------------------------------------
522,485 $ 19.1 $21.2
=======================================================
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
122 South Michigan Avenue (7) Chicago, IL 350,659 30.3 14.0 August
33 North Dearborn (8) Chicago, IL 302,818 35.2 18.0 September
-------------------------------------------------------
Total office sold 1,030,107 $ 85.7 $49.3
Industrial:
2160 McGaw Road (9) Obetz, OH 310,100 June
4849 Groveport Road (9) Obetz, OH 132,100 June
2400 McGaw Road (9) Obetz, OH 86,400 June
5160 Blazer Memorial Parkway (9) Dublin, OH 85,962 June
4411 Marketing Place (9) Columbus, OH 65,804 June
600 London Road (9) Delaware, OH 52,441 June
-------------------------------------------------------
732,807 $ 16.8 $ 7.6
320 Fullerton Avenue (10) Carol Stream, IL 263,208 13.0 7.2 September
2000 USG Drive (11) Libertyville, IL 252,200 11.2 5.8 September
475 Superior Avenue (13) Munster, IN 450,000 12.6 - September
-------------------------------------------------------
Total industrial sold 1,698,215 53.6 20.6
-------------------------------------------------------
2,728,322 $139.3 $69.9
=======================================================
Land:
Carol Stream Land (12) Carol Stream, IL 46.1 Acres $ 7.4 $ - March
475 Superior Avenue (13) Munster, IN 9.6 Acres 0.8 - June
-------------------------------------------------------
55.7 Acres $ 8.2 $ -
=======================================================
Retail Center:
371-385 Gary Avenue (14) Carol Stream, IL 11,276 $ 1.1 $ - March
=======================================================
</TABLE>
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<PAGE>
(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 paid in
common units (see 13 below).
(4) 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
with this purchase, the Company paid off a $0.6 million mortgage loan
funded upon acquisition of 7.5 acres in November 1999.
(5) On June 13, 2000, the Company opened a construction loan, with a total loan
commitment of $6.0 million, for this development project. As of September
30, 2000, $4.9 million had been drawn on the loan. See "Liquidity and
Capital Resources - Indebtedness" for further details and the related
terms. This development was placed in service on August 1, 2000.
(6) These properties were sold in a single transaction with a total sales price
of $20.2 million, resulting in a loss of approximately $4.5 million. A
portion of the proceeds were used to pay off $17.3 million of tax-exempt
bonds.
(7) The Company sold this property for $30.3 million, resulting in a gain of
approximately $3.2 million.
(8) The Company sold this property for $35.2 million, resulting in a gain of
approximately $1.3 million.
(9) These properties were sold in a single transaction with a total sales price
of $16.8 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.
(10) The Company sold this property for $13.0 million, resulting in a gain of
approximately $1.5 million.
(11) The Company sold this property for $11.2 million, resulting in a gain of
approximately $1.9 million.
(12) The Company sold this land for a total sales price of $7.4 million,
resulting in a gain of approximately $1.3 million.
(13) The Company sold this property for $12.6 million, resulting in no gain or
loss; and a parcel of land adjacent to the property for $0.8 million,
resulting in a gain of approximately $0.6 million.
(14) The Company sold this property for $1.1 million, resulting in a loss of
approximately $0.1 million.
On February 23, 2000, the Company borrowed $30.0 million collateralized by a
pledge of its ownership interests in 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%. See "Liquidity and Capital Resources - Indebtedness" and
"Quantitative and Qualitative Disclosures about Market Risk" for further
details and the related terms.
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 an $11.5 million mortgage loan collateralized by the
property. See "Liquidity and Capital Resources - Indebtedness" for further
details and the related terms.
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<PAGE>
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 1, 2000, the Company entered into a loan modification agreement on the
$24.0 million loan collateralized by the 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 June 30, 2000, the Company borrowed $7.4 million, collateralized by the
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
pledge of 49% of its ownership interest in the property known as National City
Center in Cleveland, Ohio. The loan may be subject to partial acceleration, if
additional collateral is not in place by November 29, 2000. The Company
anticipates pledging 49% of the ownership interests in 800 Jorie Boulevard,
Oak Brook, Illinois, and 20% of the ownership interests in 208 S. LaSalle
Street, Chicago, Illinois, as additional collateral for this loan. 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 1,525,000 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
$1.1 and $2.0 million representing its share of the leasing commissions
recognizable for financial reporting purposes in the quarter and nine months
ended September 30, 2000, respectively. Recognition for financial reporting
purposes has been limited to the amount of at risk capital of the Company's
minority partner in the partnership which owns this project. Leasing commissions
of $0.9 million have been funded as of September 30, 2000.
On July 12, 2000, the Company refinanced the $20.0 million loan collateralized
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. Restricted cash escrows at September 30, 2000 include $12.3
million related to the escrow for this loan. 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, pursuant to an option granted on December 16, 1997, as
amended, the Company acquired the existing $85.0 million second mortgage loan
encumbering the property commonly known as 180 North LaSalle Street in
Chicago, Illinois, for $1.3 million in cash. The Company also redeemed and
cancelled $0.7 million worth of common units of the Operating Partnership
(45,287 common units), which were previously issued pursuant to the option. As a
result of the Company now owning the first and second mortgage loans encumbering
180
-12-
<PAGE>
North LaSalle Street, the Company will receive all of the economic benefits from
its interest in the property and now consolidates the operations of the
property, effective August 1, 2000.
On August 8, 2000, an affiliate of a board member of the Company converted
927,100 general partner minority interest common units of the Operating
Partnership into 927,100 limited partner minority interest common units. These
limited partner minority interest common units are exchangeable, after a six-
month 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, eliminates certain financial
covenants from the documents and provides, effectively, for the acceleration of
the related maturity date from February 2002 to April 2001 and required a
mortgage of the 475 Superior Avenue property in Munster, Indiana as additional
collateral. When the 475 Superior Avenue property was sold, $10,000,000 was
placed in escrow with the letter of credit issuer as cash collateral.
On or about September 26, 2000 an affiliate of The Prime Group, Inc. ("PGI")
closed on the purchase of the 40% partnership interest held by an affiliate of
Blackstone Real Estate Advisors, L.P. ("Blackstone"), in Primestone Investment
Partners L.P. ("Primestone"). Primestone owns 7,944,893 limited partnership
units (the "Primestone Units") of the Operating Partnership and was created in
connection with the Company's initial public offering as a joint venture between
affiliates of PGI and Blackstone. PGI is a privately held company controlled by
Michael W. Reschke, the Chairman of the Board of the Company. Primestone secured
financing for the transaction from affiliates of Prudential Securities
Incorporated ("Senior Lender") and Vornado Realty Trust ("Subordinate Lender").
As a result of the transaction, PGI is now the 100% owner of Primestone, making
PGI the largest equity holder in the Company through the Primestone Units, which
are convertible into common shares of the Company, on a one-for-one basis.
As part of the financing for the transaction, PGI's lenders requested certain
consents and other agreements relating to the Company, including: (i) a waiver
of the 9.9% common share ownership limitation and certain Maryland anti-takeover
statues in the event the Subordinate Lender obtains ownership of the Primestone
Units after a foreclosure or similar action, (ii) a right of the Subordinate
Lender to receive a position on the Board of Trustees of the Company (which
position shall be subject to re-election by the Company's shareholders in the
same manner as all other Trustees) in the event that (a) the Company's Board of
Trustees concludes, no earlier than six months after closing of the financing,
that the Company is not likely to execute a strategic transaction within twelve
(12) months after the closing of the financing pursuant to its previously
announced review of strategic alternatives, or (b) such a strategic transaction
is not consummated within such twelve (12) month period, (iii) the shortening of
certain time periods of notice under the Operating Partnership's Partnership
Agreement in the event either lender forecloses on the Primestone units and
elects to exchange such units for common shares of the Company, and, (iv) in the
event of a bankruptcy of Primestone, the Company, or PGI or certain of its
-13-
<PAGE>
affiliates, or in the event the Subordinate Lender becomes the owner of the
Primestone Units after a successful foreclosure action, that Mr. Reschke and Mr.
Curto tender their resignations to the Board of Trustees of the Company, which
resignations may be rejected at the election of a majority of the Board, in
their sole and absolute discretion.
To address the Subordinate Lender's request, the independent trustees of the
Company retained Merrill Lynch & Co. and independent legal counsel to advise the
independent trustees as to the reasonableness and fairness of such requests. The
independent trustees consented to such requests provided the Subordinate Lender
agreed to certain conditions to protect the Company. These conditions included a
standstill agreement, which does not allow the Subordinate Lender or any of its
affiliates to own common shares of the Company, or partnership units in the
Operating Partnership, except for the Primestone Units, in the event of a change
of ownership following a successful foreclosure.
On September 29, 2000, the Company extended the $13.5 million Dearborn Center
land loans until October 31, 2000. This loan was subsequently extended until
November 16, 2000.
On September 29, 2000, the Company extended the $12.5 million mezzanine loan
collateralized by 33 W. Monroe until October 17, 2000. This loan was
subsequently extended until September 30, 2001.
-14-
<PAGE>
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 nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30 September 30
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
-------------------------------------------------------------------------------
Numerator
Income before gain on sales of real estate,
minority interests, extraordinary items and
preferred distributions $ 6,057 $ 9,309 $ 20,560 $ 27,936
Minority interests (1,251) (2,595) (4,710) (7,734)
Net income allocated to preferred distributions (3,036) (3,037) (9,110) (9,067)
-------------------------------------------------------------------------------
Income before gain on sales of real estate and
extraordinary items 1,770 3,677 6,740 11,135
Gain on sales of real estate, net of minority
interests 4,864 28,221 3,365 30,969
Extraordinary losses on extinguishment of debt,
net of minority interests (857) (829) (1,265) (829)
-------------------------------------------------------------------------------
Numerator for earnings per share -income
available to common shares $ 5,777 $ 31,069 $ 8,840 $ 41,275
===============================================================================
Denominator:
Denominator for basic earnings per
share-weighted-average common shares 15,542,616 15,135,727 15,348,202 15,134,434
Effect of dilutive securities:
Employee stock options 199,269 118,089 125,896 64,529
Employee stock grants - - 13,321 -
-------------------------------------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted-average common shares and
assumed conversions 15,741,885 15,253,816 15,487,419 15,198,963
===============================================================================
Basic earnings available to common shares per
weighted-average common share
Income before gain on sales of real estate and
extraordinary items $ 0.11 $ 0.24 $ 0.44 $ 0.74
Gain on sales of real estate, net of minority
interests 0.31 1.86 0.22 2.04
Extraordinary losses on extinguishment of debt,
net of minority interest (0.05) (0.05) (0.08) (0.05)
-------------------------------------------------------------------------------
Net income available per weighted-average common
share of beneficial interest $ 0.37 $ 2.05 $ 0.58 $ 2.73
===============================================================================
Diluted earnings available to common shares per
weighted average common share:
Income before gain on sales of real estate and
extraordinary items $ 0.11 $ 0.24 $ 0.43 $ 0.73
Gain on sales of real estate, net of minority
interests 0.31 1.85 0.22 2.04
Extraordinary loss on extinguishment of debt,
net of minority interests (0.05) (0.05) (0.08) (0.05)
-------------------------------------------------------------------------------
Net income available per weighted-average
common share of beneficial interest - diluted $ 0.37 $ 2.04 $ 0.57 $ 2.72
===============================================================================
</TABLE>
-15-
<PAGE>
Options to purchase 1,216,166 and 1,120,333 of the Company's common shares were
excluded in the computation of diluted earnings available to common shares for
the three months and nine months ended September 30, 2000 and 1999,
respectively, because the effect would be antidilutive.
The Company had 10,817,911 and 10,679,616 weighted-average common units
outstanding during the three months ended September 30, 2000 and 1999, of which
9,405,429 and 9,441,368, 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
fair market value of such common shares at the time of exchange. The Company had
10,917,279 and 10,513,243 weighted-average common units outstanding during the
nine months ended September 30, 2000 and 1999, respectively, of which 9,317,669
and 9,421,964, 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 fair
market value of such common shares at the time of exchange. 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 nine months ended September 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 nine months ended September 30, 2000 and 1999 (Amounts in
thousands):
<TABLE>
<CAPTION>
Three months ended September 30, 2000
-------------------------------------------------
Corporate/
Operating
Office Industrial Partnership Total
-------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 49,857 $ 5,141 $ 2,064 $ 57,062
Total expenses (29,304) (3,971) (17,730) (51,005)
Gain on sales of real estate, net 5,074 3,228 - 8,302
-------------------------------------------------
Income (loss) before minority interests and
extraordinary items 25,627 4,398 (15,666) 14,359
FFO adjustments:
Real estate depreciation and amortization 6,977 1,325 - 8,302
Straight-line rental revenue (2,202) (87) - (2,289)
Straight-line rental revenue from joint venture (158) - - (158)
Amortization of costs for leases assumed 206 - - 206
Joint venture adjustments 865 - - 865
Adjustments for sales of operating properties (5,074) (3,228) - (8,302)
Net income allocated to preferred shareholders - - (3,036) (3,036)
-------------------------------------------------
Funds from operations excluding straight-line
rental revenue 26,241 2,408 (18,702) 9,947
Straight-line rental revenue 2,202 87 - 2,289
Straight-line rental revenue from joint venture 158 - - 158
-------------------------------------------------
Funds from operations including straight-line
rental revenue $ 28,601 $ 2,495 $(18,702) $ 12,394
=================================================
</TABLE>
-16-
<PAGE>
7. Segment Reporting (continued)
<TABLE>
<CAPTION>
Three months ended September 30, 1999
--------------------------------------------------
Corporate/
Operating
Office Industrial Partnership Total
--------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 43,316 $ 6,159 $ 321 $ 49,796
Total expenses (24,369) (3,553) (12,565) (40,487)
Gain on sales of real estate, net 48,125 - - 48,125
--------------------------------------------------
Income (loss) before minority interests and
extraordinary items 67,072 2,606 (12,244) 57,434
FFO adjustments:
Real estate depreciation and amortization 6,547 1,475 - 8,022
Straight-line rental revenue (513) (122) - (635)
Amortization of costs for leases assumed 245 - - 245
Adjustment for sale of operating property (48,125) - - (48,125)
Net income allocated to preferred shareholders - - (3,037) (3,037)
--------------------------------------------------
Funds from operations excluding straight-line
rental revenue 25,226 3,959 (15,281) 13,904
Straight-line rental revenue 513 122 - 635
Funds from operations, including straight-line
rental revenue (1) $ 25,739 $ 4,081 $(15,281) $ 14,539
==================================================
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 2000
--------------------------------------------------
Corporate/
Operating
Office Industrial Partnership Total
--------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $146,041 $ 16,757 $ 4,996 $ 167,794
Total expenses (85,283) (12,631) (49,320) (147,234)
Gain on sales of real estate, net 496 3,947 1,274 5,717
--------------------------------------------------
Income (loss) before minority interests and
extraordinary items 61,254 8,073 (43,050) 26,277
FFO adjustments:
Real estate depreciation and amortization 20,367 4,636 - 25,003
Straight-line rental revenue (6,341) (534) - (6,875)
Straight-line rental revenue from joint
venture (474) - - (474)
Amortization of costs for leases assumed 623 - - 623
Joint venture adjustments 2,590 - - 2,590
Adjustments for sales of operating properties (496) (3,338) - (3,834)
Net income allocated to preferred shareholders - - (9,110) (9,110)
--------------------------------------------------
Funds from operations excluding straight-line
rental revenue 77,523 8,837 (52,160) 34,200
Straight-line rental revenue 6,341 534 - 6,875
Straight-line rental revenue from joint venture 474 - - 474
Funds from operations including straight-line
rental revenue $ 84,338 $ 9,371 $(52,160) $ 41,549
==================================================
</TABLE>
-17-
<PAGE>
7. Segment Reporting (continued)
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
--------------------------------------------------------------------------
Corporate/
Operating
Office Industrial Partnership Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $128,554 $ 20,781 $ 2,452 $ 151,787
Total expenses (72,741) (12,215) (38,895) (123,851)
Gain on sales of real estate, net 52,482 - - 52,482
--------------------------------------------------------------------------
Income (loss) before minority interests and
extraordinary items 108,295 8,566 (36,443) 80,418
FFO adjustments:
Real estate depreciation and amortization 18,545 4,898 - 23,443
Straight-line rental revenue (1,589) (256) - (1,845)
Amortization of costs for leases assumed 736 - - 736
Adjustments for sales of operating properties (52,482) - - (52,482)
Net income allocated to preferred shareholders - - (9,067) (9,067)
--------------------------------------------------------------------------
Funds from operations excluding straight-line
rental revenue 73,505 13,208 (45,510) 41,203
Straight-line rental revenue 1,589 256 - 1,845
--------------------------------------------------------------------------
Funds from operations, including straight-line
rental revenue (1) $ 75,094 $ 13,464 $(45,510) $ 43,048
==========================================================================
</TABLE>
(1) The Company has restated funds from operations for the three and nine
months ended September 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 nine months ended
September 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
September 30, 2000 and December 31, 1999 and for the nine months ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------------------
<S> <C> <C>
Segment assets:
Office $1,169,664 $1,225,270
Industrial 133,644 149,158
Corporate/operating partnership 143,621 69,747
----------------------------
Total consolidated assets $1,446,929 $1,444,175
==============================
</TABLE>
<TABLE>
<CAPTION>
Nine months
ended September 30,
2000 1999
------------------------------
<S> <C> <C>
Expenditures for real estate:
Office $ 40,561 $ 267,366
Industrial 33,366 23,358
Corporate/operating partnership
(includes property under development) 30,710 8,215
------------------------------
Total expenditures for real estate $ 104,637 $ 298,939
==============================
</TABLE>
-18-
<PAGE>
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 nine 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 nine 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.
Nine months ended
September 30,
2000 1999
----------------------
Total revenue (in thousands) $152,792 $174,066
======================
Net income available to common
shareholders (in thousands) $ 5,784 $ 9,042
======================
Earnings per diluted common share $ 0.37 $ 0.59
======================
9. Subsequent Events
On October 25, 2000, the Company announced that it has formed a joint venture
with a partnership comprised of several union pension funds. The venture was
created to develop the remaining two, three-story office buildings at the
Company's Pine Meadow Corporate Center in Libertyville, Illinois. The pension
funds provided 90% of the equity capital for the joint venture and the Company
has invested 10% and will be the joint venture's managing member. The two
buildings to be constructed will contain 202,000 rentable square feet, and in
total have a projected development cost of approximately $26 million. Once
completed, the Company will receive ongoing management fees and a proportionate
share of the earnings of the joint venture.
On November 10, 2000, the Company extended the $13.5 million Dearborn Center
land loan until November 16, 2000.
On October 17, 2000, the Company extended the $12.5 million mezzanine loan
collateralized by 33 W. Monroe until September 30, 2001.
19
<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 26
office properties containing an aggregate of approximately 8.0 million net
rentable square feet and 31 industrial properties containing an aggregate of
approximately 4.2 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 217.9 acres of
developable land and rights to acquire more than 176.80 additional acres of
developable land which management believes could be developed with
approximately 4.2 million rentable square feet of additional office space and
6.1 million square feet of additional industrial space.
In terms of net rentable square feet, approximately 89.1% 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 89.7% of our total rental and tenant reimbursement revenue
for the nine months ended September 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.
In response to several inquiries from companies interested in a potential
strategic transaction with us, our Board of Trustees engaged a team of
financial advisors to assist us in studying all of its strategic alternatives.
The alternatives being studied will include, but are not necessarily limited
to, a merger or other business combination involving the Company, a sale of
all the assets of the Company, or the completion of the Company's previously
announced asset sale and stock repurchase program.
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
20
<PAGE>
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 September 30, 2000.
Among the facts about which we have made assumptions are the following:
. 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 September 30, 2000
to the Three Months Ended September 30, 1999
In analyzing the operating results for the three months ended September 30,
2000, rental and tenant reimbursement income, property operating expenses,
real estate taxes, and depreciation and amortization increased from 1999
primarily due to a full three months of operating results in 2000 for five
properties acquired and two properties placed in service in 1999 after the
second quarter and five properties acquired and two properties placed in
service in the first two quarters of 2000; the addition of a partial quarter's
worth of operating results for one property placed in service in the third
quarter of 2000; and the consolidation of the office property known as 180 N.
LaSalle in Chicago, Illinois, commencing August 1, 2000 (collectively, the
"Additional Properties for Three Months"). These increases are offset by
decreases principally due to the sale of eleven properties in 1999 after the
second quarter and the sale of ten properties and one parking facility in the
first two quarters of 2000; only a partial quarter's worth of operating results
for five properties sold in the third quarter of 2000; and the sale of a 50%
interest in the third quarter of 1999 for one property that was included in
operating results for the quarter ended September 30, 1999, but is accounted for
on the equity method of accounting in 2000 (collectively, the "Sold Properties
for Three Months").
For the three months ended September 30, 2000, rental revenue increased $2.1
million, or 6.5%, to $34.5 million, tenant reimbursement income increased $4.7
million, or 37.0%, to $17.4 million, other property revenues decreased 1.9%,
to $1.9 million, property operating expenses increased $2.7 million, or 22.7%,
to $14.7 million, real estate tax expense increased $1.7 million, or 23.0%, to
$8.9 million and depreciation and amortization increased $1.0 million, or
11.2%, to $9.7 million as compared to the three months ended September 30,
1999. The Additional Properties for Three Months resulted in increased rental
income of $9.8 million, tenant reimbursement income of $6.2
21
<PAGE>
million, other property revenue of $0.7 million, property operating expenses of
$4.3 million, real estate tax expense of $2.9 million, and depreciation and
amortization of $3.0 million for the three months ended September 30, 2000. The
Sold Properties for Three Months resulted in decreased rental income of $8.3
million, tenant reimbursements income of $3.7 million, other property revenues
of $0.3 million, property operating expenses of $2.0 million, real estate tax
expense of $2.4 million, and depreciation and amortization of $2.5 million for
the three months ended September 30, 2000. For properties held for the full
third quarter in both 2000 and 1999, rental revenue increased $0.6 million,
tenant reimbursement income increased $2.2 million, other property revenues
decreased $0.5 million, property operating expenses increased $0.4 million, real
estate taxes increased $1.2 million, and depreciation and amortization increased
$0.5 million, primarily as a result of increased occupancy at these properties.
Mortgage note interest income decreased $1.0 million, or 57.5%, to $0.7
million for the three months ended September 30, 2000, as compared to the same
period in 1999, due to the acquisition of the second mortgage note encumbering
the office property known as 180 North LaSalle in Chicago, Illinois on August
1, 2000, and the property's operations being consolidated as of that date.
Other revenue increased $1.5 million, or 147.6%, to $2.5 million for the
quarter ended September 30, 2000, as compared to the same period in 1999,
primarily due to increases in interest income earned on restricted cash escrow
balances and leasing commissions earned with respect to Dearborn Center.
Interest expense increased $4.4 million, or 40.6%, to $15.3 million during the
three months ended September 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 $0.7 million, or 44.3%, to $2.4
million during the three months ended September 30, 2000. The increase was due
to the capitalization of 1999 salaries and benefits related to the Company's
computer systems conversion.
For the three months ended September 30, 2000, the net gain on sales of
certain real estate was $8.3 million, as described in "Recent Developments."
For the three months ended September 30, 1999, the gain on sales of real
estate was $48.1 million.
Income allocated to minority interests decreased $17.8 million, or 79.2%, to
$4.7 million for the three months ended September 30, 2000 due to a decrease in
income before minority interests and extraordinary items of $43.0 million, or
75.0%, to $14.4 million. The decrease in income before minority interests and
extraordinary items 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 losses on extinguishment of debt, net of minority interests,
was $0.9 million for the three months ended September 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 $25.3 million, or 74.2%, to $8.8 million for the three
months ended September 30, 2000 due to the changes in revenue, expenses, net
gain on sales of real estate, minority interests, and extraordinary losses on
extinguishment of debt described above associated with acquisitions,
22
<PAGE>
dispositions, and new leasing and releasing of tenant space.
Results of Operations: Comparison of the Nine Months Ended September 30, 2000
to the Nine Months Ended September 30, 1999
In analyzing the operating results for the nine months ended September 30, 2000,
rental and tenant reimbursement income, property operating expenses, real estate
taxes, and depreciation and amortization increased from 1999 primarily due to a
full nine months of operating results in 2000 for eight properties acquired and
two properties placed in service in 1999; the addition of a partial nine-month's
worth of operating results for five properties acquired and three properties
placed in service in the first nine months of 2000; and the consolidation of the
office property known as 180 N. LaSalle in Chicago, Illinois, commencing August
1, 2000 (collectively, the "Additional Properties for Nine Months"). These
increases are offset by decreases principally due to the sale of eleven
properties in 1999; only a partial nine-month's worth of operating results for
fifteen properties and one parking facility sold in the first nine months of
2000; and the sale of 50% interest in the third quarter of 1999 for one property
that was included in operating results for the nine months ended September 30,
1999, but is accounted for on the equity method of accounting in 2000
(collectively, the "Sold Properties for Nine Months").
For the nine months ended September 30, 2000, rental revenue increased
$2.2 million, or 2.2%, to $101.3 million, tenant reimbursement income
increased $10.4 million, or 26.6%, to $49.5 million, other property revenue
increased $0.5 million, or 8.1%, to $6.0 million, property operating expenses
increased $6.2 million, or 18.6%, to $39.4 million, real estate tax expense
increased $3.4 million, or 12.8%, to $29.8 million and depreciation and
amortization increased $3.4 million, or 13.4%, to $28.8 million as compared to
the nine months ended September 30, 1999. The Additional Properties for Nine
Months resulted in increased rental income of $29.4 million, tenant
reimbursement income of $18.2 million, other property revenue of $1.9 million,
property operating expenses of $10.2 million, real estate tax expense of $9.0
million, and depreciation and amortization of $9.0 million for the nine months
ended September 30, 2000. The Sold Properties for Nine Months resulted in
decreased rental income of $24.0 million, tenant reimbursement income of $10.2
million, other property revenue of $0.7 million, property operating expenses
of $4.4 million, real estate tax expense of $7.6 million, and depreciation and
amortization of $7.1 million for the nine months ended September 30, 2000.
For properties held for a full nine months in both 2000 and 1999, rental
revenue decreased $3.2 million, primarily due to less revenue from lease
terminations in the first nine months of 2000 as compared to the first nine
months of 1999. Tenant reimbursement income increased $2.4 million, other
property revenue decreased $0.7 million, property operating expenses increased
$0.4 million, real estate taxes increased $2.0 million, and depreciation and
amortization increased $1.5 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%, to $4.9 million for the nine
months ended September 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, offset by the
acquisition of the second mortgage on the property and the property being
consolidated as of August 1, 2000.
Other revenue increased $2.9 million, or 93.1%, to $6.1 million for the nine
months ended September 30, 2000, as compared to the same period in 1999,
primarily due to increases in interest income earned on restricted cash escrow
23
<PAGE>
balances and leasing commissions earned with respect to Dearborn Center.
Interest expense increased $9.6 million, or 29.4%, to $42.5 million during the
nine months ended September 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 $1.4 million, or 25.4%, to
$6.9 million during the nine months ended September 30, 2000. The increase was
due to the capitalization of 1999 salaries and benefits related to the Company's
computer system conversion project.
For the nine months ended September 30, 2000, the net gain on sales of certain
real estate was $5.7 million, as described in "Recent Developments." For the
nine months ended September 30, 1999, the gain on sales of real estate was
$52.5 million.
Income allocated to minority interests decreased $22.2 million, or 75.9%, to
$7.1 million for the nine months ended September 30, 2000 due to a decrease in
income before minority interests and extraordinary items of $54.1 million, or
67.3%, to $26.3 million. The decrease in income before minority interests and
extraordinary items is due to the results of sales of real estate and to the
Additional Properties for Nine Months and Sold Properties for Nine Months and
the effects they had on revenue and expenses, as described above.
The extraordinary losses on extinguishment of debt, net of minority interests,
was $1.3 million for the nine months ended September 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 $32.4 million, or 64.3%, to $18.0 million for the nine
months ended September 30, 2000 due to the changes in revenue, expenses, net
gain 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 $30.8 million and $65.5
million for the nine months ended September 30, 2000 and 1999, respectively. The
$34.7 million decrease in net cash provided by operating activities was
primarily due to a $32.4 million decrease in net income, a $0.3 million increase
in interest income and development fees added to the mortgage note receivable
principal, a $0.6 million decrease in loss on land development option, a $22.2
million decrease in income allocated to minority interests, a $11.5 million
increase in other assets, a $5.0 million increase in deferred rent receivable,
and a $28.8 million decrease in accrued real estate taxes. These decreases were
offset by a $0.1 million increase in net equity in loss of unconsolidated
investments, a $3.4 million increase in depreciation and amortization expense, a
$0.6 million decrease in net gain on treasury lock terminations, a $46.8 million
decrease in net gain on sales of real estate, a $0.4 million increase in
extraordinary losses, a $11.5 million decrease in tenant receivables, a $1.1
million increase in accrued interest payable, and a $2.2 million increase in
accounts payable and accrued expenses.
We had net cash used in investing activities of $11.3 million and $230.0
million for the nine months ended September 30, 2000 and 1999, respectively.
The $218.7 million decrease in net cash used in investing activities was
24
<PAGE>
primarily due to a $194.0 million decrease in expenditures for real estate and
equipment, principally related to property acquisitions and development, a
$0.6 million decrease in leasing costs, a $1.9 million decrease in advances on
the mortgage note receivable, a $25.4 million decrease in restricted cash
escrows, and a $10.0 million decrease in option deposits. These decreases
were offset by a $5.5 million decrease in proceeds from the sales of real
estate, a $2.0 million increase for the purchase of a mortgage note
receivable, and a $6.4 million increase in loans to the service company.
We had net cash used in financing activities of $12.1 million and net cash
provided by financing activities of $128.2 million for the nine months ended
September 30, 2000 and 1999, respectively. The $140.3 million decrease in net
cash provided by financing activities was due to a $1.5 million increase in
financing costs, a $15.3 million decrease in deposits recovered on treasury lock
agreements, a $13.1 million decrease in proceeds from mortgage notes payable, a
$35.2 million decrease in net proceeds from credit facilities, a $74.2 million
increase in the repayment of mortgage notes and bonds payable, and a $0.7
million increase in distributions to preferred shareholders, common shareholders
and minority interests. These decreases were offset by a $0.4 million decrease
in Series A preferred shares transaction fees.
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. We and
our Operating Partnership, as applicable, have established an annual
distribution rate of $1.35 per annum per common share/unit. In addition, in
accordance with their terms, we pay an annual dividend of 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, we 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.
On July 19, 2000 the remaining credit facility was paid off. We currently
have no credit facilities outstanding.
Property Sales. During the period from January 1, 2000 through November 13,
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, current operations, 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.
Our variable rate debt includes $158.0 million subject to an interest rate
swap agreement which effectively results in a fixed LIBOR index rate of 6.3%,
$70.0
25
<PAGE>
million subject to an interest rate cap at the LIBOR index rate at 8.0%, $52.0
million subject to an interest rate cap at the LIBOR index rate of 7.25%, 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.
We obtained the following new indebtedness during the nine months ended
September 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) 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
180 North LaSalle Street (6) 52.0 LIBOR + 3.25% 1/04
</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. The Company has guaranteed 25% of the loan amount.
(5) Collateralized by a pledge of a 49% 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 November 29, 2000. The Company
anticipates pledging 49% of the ownership interests in 800 Jorie Boulevard,
Oak Brook, Illinois, and 20% of the ownership interests in 208 S. LaSalle
Street, Chicago, Illinois, as additional collateral for this loan. See
"Liquidity and Capital Resources-Indebtedness" for further details and the
related terms.
(6) The loan commitment totaled $64.0 million, of which $52.0 million was
initially disbursed. A portion of the proceeds was used to repay an
existing $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. We entered into an interest rate cap agreement for
the full term of the loan based upon a LIBOR rate of 7.25%.
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 prices 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
26
<PAGE>
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
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 nine months ended September
30, 2000 and 1999:
27
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
(IN THOUSANDS) 2000 1999 2000 1999
------------------ ------------------
<S> <C> <C> <C> <C>
Net (loss) income available to common shareholders $ 5,777 $ 31,069 $ 8,840 $ 41,275
Adjustments to reconcile to Funds from Operations:
Real estate depreciation and amortization 8,302 8,022 25,003 23,443
Straight-line rental revenue (2,289) (635) (6,875) (1,845)
Straight-line rental revenue from joint venture (158) - (474) -
Amortization of costs for leases assumed 206 245 623 736
Joint venture adjustments 865 - 2,590 -
Adjustments for sales of operating properties (8,302) (48,125) (3,834) (52,482)
Extraordinary losses on extinguishment of debt 857 829 1,265 829
Minority interests 4,689 22,499 7,062 29,247
------------------ ------------------
Funds from operations excluding straight-line rental
revenue 9,947 13,904 34,200 41,203
Straight-line rental revenue 2,289 635 6,875 1,845
Straight-line rental revenue from joint venture 158 - 474 -
------------------ ------------------
Funds from Operations (1) $12,394 $ 14,539 $41,549 $ 43,048
================== ==================
</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 nine months ended
September 30, 1999 to be in accordance with the new October, 1999 white
paper standard and have excluded the following previously included
adjustments (in thousands): (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).
As of September 30, 2000, approximately $470.0 million of our outstanding
indebtedness 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
28
<PAGE>
results in a fixed rate of 8.0%, $70.0 million subject to an interest rate cap
of the LIBOR index rate of 8.0%, $52.0 million subject to an interest rate cap
at the LIBOR index rate of 7.25%, 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.
29
<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, and
bonds payable, the table presents principal cash flows, including principal
amortization, and related weighted-average interest rates by expected maturity
dates as of September 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:
Liabilities:
Mortgage notes payable (1):
Fixed rate $ 14.0 $ 63.0 $ 33.3 $ 4.2 $ 4.5 $239.6 $358.6
Average interest rate 14.13% 6.83% 11.23% 7.33% 7.33% 7.40%
Variable rate $ 15.4 $ 76.5 $ 248.9 $ 20.0 $52.0 - $412.8
Average interest rate (2)
8.79% 8.68% 8.50% 12.69% 9.94% -
Bonds payable (1):
Variable rate - $ 48.2 - - $ 9.0 $ 57.2
Average interest rate (2)
- 4.82 - - 6.60%
Interest rate swap agreement (1)(2):
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 (1)(2):
Notional amount - - $ 65.0 - - - $ 65.0
Pay rate - - 6.63% - - -
Cap rate - - 7.50% - - -
Floor rate - - 3.73% - - -
Interest rate cap agreements (1)(2):
Notional amount $ 70.0 - - - $52.0 - $122.0
Cap rate 8.00% - - - 7.25% - -
</TABLE>
----------------
(1) See Note 4 to our consolidated financial statements in our Form 10-K for
the year ended December 31, 1999 for additional information.
(2) Based upon the rates in effect at September 30, 2000 the weighted-average
interest rate, including the interest rate swap and collar agreements, on
our mortgage notes payable, and bonds payable at September 30, 2000 were
8.46% and 5.10%, respectively. If interest rates on our variable rate debt
increased by one percentage point, our annual interest incurred would
increase by approximately $2.8 million.
-30-
<PAGE>
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.
During the third quarter 2000, 268,655 common units of the Operating
Partnership were exchanged for an equal number of our common shares.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
3.1 Amended and Restated Bylaws of Prime Group Realty Trust, containing
revisions in Sections 5.1 and 5.8 of the Bylaws in order to allow the
Office of the President of the Trust to be held by more than one
person.
10.1 Amended and Restated Employment Agreement dated as of September 1, 2000
among Prime Group Realty Trust (the "Company"), Prime Group Realty,
L.P. (the "Operating Partnership") and Michael W. Reschke.
10.2 Amended and Restated Employment Agreement dated as of September 1, 2000
among the Company, the Operating Partnership and Richard S. Curto.
10.3 Amended and Restated Employment Agreement dated as of September 1, 2000
among the Company, the Operating Partnership and Jeffrey A. Patterson.
10.4 Amended and Restated Employment Agreement dated as of September 1, 2000
among the Company, the Operating Partnership and Louis G. Conforti.
10.5 Consent and Agreement of Prime Group Realty Trust and Prime Group
Realty, L.P. dated as of September 26, 2000 among the Company, the
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<PAGE>
Operating Partnership and Vornado PS, L.L.C.
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 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.
Form 8-K dated August 14, 2000 (filed on August 15, 2000;
File No. 001-13589) announcing the engagement of financial advisors to
study strategic alternatives concerning the Company.
Form 8-K dated November 3, 2000 (filed on November 6, 2000; File No.
1.001-13589) announcing the availability of a supplemental package
containing operational and financial information concerning the Company
and the properties owned by it or its' subsidiaries as of June 30,
2000.
-32-
<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: November 13, 2000 /s/ Richard S. Curto
------------------------------
Richard S. Curto
Chief Executive Officer
Date: November 13, 2000 /s/ Louis G. Conforti
------------------------------
Louis G. Conforti
Office of the President and
Acting Chief Financial Officer
-33-
