<PAGE> 1
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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 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-13625
---------------------
EOP OPERATING LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 36-4156801
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO NORTH RIVERSIDE PLAZA 60606
SUITE 2100, CHICAGO, ILLINOIS (Zip Code)
(Address of principal executive offices)
</TABLE>
(312) 466-3300
(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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
On August 9, 2000, 347,337,277 of the registrant's Units were outstanding.
--------------------------------------------------------------------------------
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<PAGE> 2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EOP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) 2000 1999
------------------------------------------------------------ ----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Investment in real estate................................. $17,287,478 $12,847,389
Developments in process................................... 87,192 229,225
Land available for development............................ 94,194 125,926
Accumulated depreciation.................................. (768,527) (630,387)
----------- -----------
Investment in real estate, net of accumulated
depreciation........................................... 16,700,337 12,572,153
Cash and cash equivalents................................. 82,354 2,338
Tenant and other receivables (net of allowance for
doubtful accounts of $3,852 and $1,244, respectively)... 52,424 54,497
Deferred rent receivable.................................. 165,016 138,697
Escrow deposits and restricted cash....................... 173,002 19,754
Investment in unconsolidated joint ventures............... 946,966 865,863
Deferred financing costs (net of accumulated amortization
of $19,568 and $14,863, respectively)................... 65,012 55,196
Deferred leasing costs (net of accumulated amortization of
$31,298 and $22,461, respectively)...................... 124,314 97,743
Prepaid expenses and other assets (net of discount on note
receivable of $64,152 and $62,393 respectively)......... 350,683 239,817
----------- -----------
Total Assets....................................... $18,660,108 $14,046,058
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Mortgage debt (including a net (discount)/premium of
$(20,383) and $10,574, respectively).................... $ 2,986,676 $ 1,743,871
Unsecured notes (including a net (discount)/premium of
$(508) and $47, respectively)........................... 4,154,492 3,655,047
Lines of credit........................................... 1,452,000 453,000
Accounts payable and accrued expenses..................... 374,077 318,003
Dividend/distribution payable............................. 148,762 5,446
Other liabilities......................................... 227,055 161,164
----------- -----------
Total Liabilities.................................. 9,343,062 6,336,531
----------- -----------
Commitments and contingencies
Minority Interests-partially owned properties............. 201,324 39,027
----------- -----------
Partners' Capital:
Preferred Units:
8.98% Series A Cumulative Redeemable Preferred Units,
liquidation preference $25.00 per unit, 7,994,000 and
8,000,000 issued and outstanding, respectively....... 199,850 200,000
5.25% Series B Convertible, Cumulative Redeemable
Preferred Units, liquidation preference $50.00 per
unit, 6,000,000 issued and outstanding............... 300,000 300,000
8.625% Series C Cumulative Redeemable Preferred Units,
liquidation preference $25.00 per unit, 4,562,900 and
4,600,000 issued and outstanding, respectively....... 114,073 115,000
General Partner's Capital............................... 70,542 58,381
Limited Partners' Capital............................... 8,439,803 6,986,181
Accumulated other comprehensive income.................. (8,546) 10,938
----------- -----------
Total Partners' Capital............................ 9,115,722 7,670,500
----------- -----------
Total Liabilities and Partners' Capital............ $18,660,108 $14,046,058
=========== ===========
</TABLE>
See accompanying notes.
2
<PAGE> 3
EOP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) 2000 1999
-------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
REVENUES:
Rental................................................ $ 379,115 $ 372,171
Tenant reimbursements................................. 68,982 69,468
Parking............................................... 26,398 28,663
Other................................................. 11,233 6,886
Fee income............................................ 2,507 2,045
Interest / dividends.................................. 8,617 2,046
------------ ------------
Total revenues............................... 496,852 481,279
------------ ------------
EXPENSES:
Interest:
Expense incurred................................... 111,303 102,920
Amortization of deferred financing costs........... 1,101 1,426
Depreciation.......................................... 84,397 83,626
Amortization.......................................... 5,153 3,117
Real estate taxes..................................... 59,930 62,237
Insurance............................................. 2,711 2,359
Repairs and maintenance............................... 53,105 50,463
Property operating.................................... 49,715 48,333
Ground rent........................................... 2,438 1,548
General and administrative............................ 22,089 20,714
------------ ------------
Total expenses............................... 391,942 376,743
------------ ------------
Income before allocation to minority interests, income
from investment in unconsolidated joint ventures, net
gain on sales of real estate and extraordinary
items................................................. 104,910 104,536
Minority Interests -- partially owned properties........ (1,931) (353)
Income from investment in unconsolidated joint
ventures.............................................. 13,389 3,215
Net gain on sales of real estate........................ 36,998 8,085
------------ ------------
Income before extraordinary items....................... 153,366 115,483
Extraordinary items..................................... (264) (7,135)
------------ ------------
Net income.............................................. 153,102 108,348
Put option settlement................................... (1,031) --
Preferred distributions................................. (10,883) (10,907)
------------ ------------
Net income available for Units.......................... $ 141,188 $ 97,441
============ ============
Net income available per weighted average Unit
outstanding -- Basic.................................. $ 0.49 $ 0.34
============ ============
Weighted average Units outstanding -- Basic............. 288,805,951 288,598,492
============ ============
Net income available per weighted average Unit and unit
equivalent outstanding -- Diluted..................... $ 0.48 $ 0.33
============ ============
Weighted average Units and unit equivalents
outstanding -- Diluted................................ 291,674,501 290,946,853
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
EOP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) 2000 1999
-------------------------------------------------------- --------------- ---------------
<S> <C> <C>
REVENUES:
Rental................................................ $ 737,481 $ 741,310
Tenant reimbursements................................. 131,965 137,627
Parking............................................... 53,129 56,122
Other................................................. 24,089 12,360
Fee income............................................ 4,742 3,907
Interest / dividends.................................. 14,321 5,087
------------ ------------
Total revenues............................... 965,727 956,413
------------ ------------
EXPENSES:
Interest:
Expense incurred................................... 211,835 207,400
Amortization of deferred financing costs........... 2,478 2,172
Depreciation.......................................... 168,286 166,538
Amortization.......................................... 9,539 6,018
Real estate taxes..................................... 117,840 124,038
Insurance............................................. 5,451 4,681
Repairs and maintenance............................... 101,004 101,847
Property operating.................................... 96,503 96,541
Ground rent........................................... 4,462 3,394
General and administrative............................ 41,740 38,964
------------ ------------
Total expenses............................... 759,138 751,593
------------ ------------
Income before allocation to minority interests, income
from investment in unconsolidated joint ventures, net
gain on sales of real estate and extraordinary
items................................................. 206,589 204,820
Minority Interests -- partially owned properties........ (2,484) (898)
Income from investment in unconsolidated joint
ventures.............................................. 24,763 5,050
Net gain on sales of real estate........................ 40,860 8,085
------------ ------------
Income before extraordinary items....................... 269,728 217,057
Extraordinary items..................................... (875) (10,318)
------------ ------------
Net income.............................................. 268,853 206,739
Put option settlement................................... (2,061) --
Preferred distributions, net............................ (21,580) (21,788)
------------ ------------
Net income available for Units.......................... $ 245,212 $ 184,951
============ ============
Net income available per weighted average Unit
outstanding -- Basic.................................. $ 0.86 $ 0.64
============ ============
Weighted average Units outstanding -- Basic............. 285,093,297 288,576,797
============ ============
Net income available per weighted average Unit and unit
equivalent outstanding -- Diluted..................... $ 0.85 $ 0.64
============ ============
Weighted average Units and unit equivalents
outstanding -- Diluted................................ 287,924,827 291,190,435
============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
EOP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
--------------------- -------------------------
(DOLLARS IN THOUSANDS) 2000 1999 2000 1999
--------------------------------------------------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net income......................................... $153,102 $108,348 $268,853 $206,739
Other comprehensive income:
Unrealized holding losses arising during the
period........................................ (46,117) -- (18,577) --
Less: reclassification adjustment for the
transfer of 250,000 shares of Cornerstone
common stock to merger acquisition cost....... (907) -- (907) --
-------- -------- -------- --------
Comprehensive income............................... $106,078 $108,348 $249,369 $206,739
======== ======== ======== ========
</TABLE>
See accompanying notes
5
<PAGE> 6
EOP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------------
(DOLLARS IN THOUSANDS) 2000 1999
------------------------------------------------------------ ----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income before put option settlement and preferred
distributions, net....................................... $ 268,853 $ 206,739
Adjustments to reconcile net income before put option
settlement and preferred distributions, net, to net cash
provided by operating activities:
Depreciation and amortization............................ 180,303 174,728
Amortization of premiums/discounts on unsecured notes and
terminated interest rate protection agreements......... 1,970 1,825
Amortization of deferred revenue included in other
income................................................. (2,166) --
Compensation related to restricted shares issued to
employees by the Trust................................. 3,724 2,452
Income from unconsolidated joint ventures................ (24,763) (5,050)
Net gain on sales of real estate......................... (40,860) (8,085)
Extraordinary items...................................... 875 10,318
Provision for doubtful accounts.......................... 494 565
Allocation to minority interests......................... 2,484 898
Changes in assets and liabilities:
Decrease (increase) in rents receivable................ 9,738 (4,767)
(Increase) in deferred rent receivables................ (26,319) (30,985)
(Increase) decrease in prepaid expenses and other
assets................................................ (961) 13,422
(Decrease) in accounts payable and accrued expenses.... (4,264) (26,398)
Increase in due to affiliates.......................... -- 192
Increase in other liabilities.......................... 9,350 4,869
----------- -----------
Net cash provided by operating activities............ 378,458 340,723
----------- -----------
INVESTING ACTIVITIES:
Property acquisitions...................................... (19,508) (119,655)
Acquisition of Cornerstone Properties...................... (1,158,742) --
Property dispositions...................................... 309,049 --
Payments for capital and tenant improvements............... (113,002) (93,787)
Payments of disposition costs for sales of real estate..... -- (1,349)
Distributions from unconsolidated joint ventures........... 124,601 7,707
Investments in unconsolidated joint ventures............... (8,206) (20,286)
Payments of lease acquisition costs........................ (34,497) (17,882)
Investment in securities................................... (83,047) --
Investment in notes receivable............................. (1,000) --
(Increase) decrease in escrow deposits and restricted
cash..................................................... (8,738) 4,474
----------- -----------
Net cash (used for) investing activities............. (993,090) (240,778)
----------- -----------
FINANCING ACTIVITIES:
Repurchase of Units........................................ (119,633) --
Proceeds from exercise of share options.................... 26,615 1,796
Redemption of Units for cash............................... (3,780) --
Distributions to unitholders............................... (120,381) (108,379)
Payment of preferred distributions......................... (21,767) (22,007)
Repurchase of preferred units, including transaction
costs.................................................... (890) --
Payment of offering costs.................................. (4) (558)
Distributions to minority interest in partially owned
properties............................................... (5,696) (144)
Proceeds from mortgage debt................................ 190,000 3,374
Proceeds from unsecured notes.............................. 499,320 1,195,587
Proceeds from lines of credit.............................. 3,031,800 482,700
Principal payments on mortgage debt........................ (318,047) (507,870)
Principal payments on lines of credit...................... (2,448,341) (1,150,700)
Payments of loan costs..................................... (14,548) (11,341)
Prepayment penalties on early extinguishment of debt....... -- (13,566)
----------- -----------
Net cash provided by (used for) financing
activities........................................... 694,648 (131,108)
----------- -----------
Net increase (decrease) in cash and cash equivalents....... 80,016 (31,163)
Cash and cash equivalents at the beginning of the period... 2,338 67,080
----------- -----------
Cash and cash equivalents at the end of the period......... $ 82,354 $ 35,917
=========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid during the period, including capitalized
interest of $8,417 and $7,415, respectively.............. $ 200,054 $ 187,859
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Mortgage loans and line of credit assumed through
Cornerstone Merger....................................... $ 1,720,449 $ --
=========== ===========
Net liabilities assumed through Cornerstone Merger......... $ 34,507 $ --
=========== ===========
Minority interests in partially owned properties assumed
through Cornerstone Merger............................... $ 165,154 $ --
=========== ===========
Units and options issued through Cornerstone Merger........ $ 1,577,260 $ --
=========== ===========
Escrow deposits used for property acquisitions............. $ 8,138 $ 120,798
=========== ===========
Escrow deposits provided by property dispositions.......... $ (145,001) $ (95,956)
=========== ===========
Mortgage loan assumed through property acquisition......... $ 65,661 $ --
=========== ===========
</TABLE>
See accompanying notes.
6
<PAGE> 7
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DEFINITION OF TERMS. Capitalized terms used but not defined herein are as
defined in the Company's Annual Report on Form 10-K for the year ended December
31, 1999 (the "Form 10-K").
The consolidated financial statements of the Company have been prepared
pursuant to the Securities and Exchange Commission ("SEC") rules and
regulations. The following notes highlight significant changes to the notes to
the December 31, 1999 audited consolidated and combined financial statements of
EOP Operating Limited Partnership and should be read in conjunction with the
financial statements and notes thereto included in the Form 10-K and present
interim disclosures as required by the SEC.
NOTE 1 -- BUSINESS AND FORMATION OF THE COMPANY
As used herein, "Company" means EOP Operating Limited Partnership, a
Delaware limited partnership. The Company is a subsidiary of Equity Office
Properties Trust (the "Trust") which was formed on October 9, 1996 to continue
and expand the national office property business organized by Mr. Samuel Zell,
Chairman of the Board of Trustees of the Trust, and to complete the
Consolidation. The Trust completed its IPO on July 11, 1997. The Company is a
fully integrated, self-administered and self-managed real estate company engaged
in acquiring, owning, managing, leasing and renovating office properties and
parking facilities. The Trust's assets, which include investments in joint
ventures, are owned by, and substantially all of its operations are conducted
through the Company. The Trust is the general partner of the Company. The Trust
elected to be taxed as a REIT for federal income tax purposes and generally will
not be subject to federal income tax if it distributes 100% of its taxable
income and complies with a number of organizational and operational
requirements. As of June 30, 2000, the Company owned or had an interest in 381
office properties (the "Office Properties") containing approximately 97.3
million rentable square feet of office space and owned nine stand-alone parking
facilities (the "Parking Facilities" and, together with the Office Properties,
the "Properties") containing approximately 14,244 parking spaces. The weighted
average occupancy of the Office Properties at June 30, 2000 was approximately
94.1%. The Office Properties are located in 104 submarkets in 38 markets in 24
states and the District of Columbia. The Office Properties, by rentable square
feet, are located approximately 50% in CBDs and 50% in suburban markets.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements represent the financial condition and
results of the Company and its subsidiaries.
The Cornerstone Merger (as defined in Note 3) was accounted for using the
purchase method in accordance with Accounting Principles Board Opinion No.16.
The fair value of the consideration given by the Company in the Cornerstone
Merger was used as the valuation basis for the merger. The assets acquired and
the liabilities assumed of Cornerstone were recorded at their relative fair
values as of June 19, 2000 (the "Cornerstone Closing Date"). The results of
operations of the Cornerstone properties for the period from the Cornerstone
Closing Date through June 30, 2000 are included in the Company's consolidated
statements of operations.
Use of Estimates
The preparation of the consolidated financial statements of the Company in
conformity with accounting principles generally accepted in the United States
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
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Unaudited Interim Statements
The consolidated financial statements of the Company as of and for the
three and six months ended June 30, 2000 and 1999 and related footnote
disclosures are unaudited. In the opinion of management, such financial
statements reflect all adjustments necessary for a fair presentation of the
results of the interim periods. All such adjustments are of a normal, recurring
nature.
Reclassifications
Certain reclassifications have been made to the previously reported 1999
statements in order to provide comparability with the 2000 statements reported
herein. These reclassifications have not changed the 1999 results or partners'
capital.
NOTE 3 -- CORNERSTONE MERGER
On June 19, 2000, the Trust, the Company, Cornerstone Properties Inc.
("Cornerstone") and Cornerstone Properties Limited Partnership ("Cornerstone
Partnership") consummated the merger of Cornerstone with and into the Trust and
Cornerstone Partnership with and into the Company (the "Cornerstone Merger") at
a cost of approximately $4.5 billion. The purchase price consisted of:
(i) the Trust's issuance of approximately 51.3 million Common Shares
valued at $24.68 per share and the issuance of stock options for a total of
approximately $1,271.3 million, of which the Company issued a corresponding
number of Units to the Trust on a one-for-one basis;
(ii) the Company's issuance of approximately 12.4 million Units to
third parties valued at $24.68 per Unit for a total of approximately $306.0
million;
(iii) the cash redemption of approximately 58.6 million Cornerstone
common shares valued at $18.00 per share for a total of approximately
$1,053.9 million;
(iv) the cash redemption of approximately 3.0 million Cornerstone
preferred shares valued at $18.00 per share for a total of approximately
$57.6 million, plus accrued but unpaid dividends;
(v) the assumption of approximately $1,304.9 million of secured debt
and $415.5 million of unsecured debt;
(vi) the payment of merger costs of approximately $72.1 million; and
(vii) the assumption of net liabilities of approximately $9.6 million.
The cash portion of the Cornerstone Merger of approximately $1.2 billion
was partially funded from the $1.0 Billion Credit Facility and a new revolving
credit facility. Concurrently with the Cornerstone Merger, the Company borrowed
$1.0 billion from the $1.0 Billion Credit Facility and amended the facility into
a term loan (the "Term Loan"). The Term Loan bears interest at LIBOR plus 80
basis points and matures on May 29, 2001. If the Company obtains net proceeds
from the disposition of a Property (excluding proceeds from a tax deferred
property disposition), the issuance of unsecured notes or the issuance of Units,
the net proceeds must be used to repay any amounts outstanding under the Term
Loan up to the then current unpaid balance of the Term Loan.
The remaining cash consideration in the Cornerstone Merger was funded from
a new $1.0 billion revolving credit facility obtained at the time of the merger
(the "Line of Credit"). The Line of Credit bears interest at LIBOR plus 60 basis
points and matures on June 19, 2003. There is also a facility fee of $2.0
million per annum on the Line of Credit payable quarterly. In addition, the
Company assumed interest rate protection agreements in the notional amount of
$250 million effectively converting a portion of the Line
8
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
of Credit to a fixed-blended interest rate of 4.6%. The interest rate protection
agreements terminate in December 2000 and January 2001.
As a result of the Cornerstone Merger, the Company acquired an interest in
82 Office Properties containing approximately 18.9 million square feet of office
space. In addition, in connection with the merger, the Board of Trustees of the
Trust was increased from 11 to 14 members. The new members are William Wilson
III, formerly chairman of the board of Cornerstone, John S. Moody, formerly
president and chief executive officer of Cornerstone, and Jan H.W.R. van der
Vlist, director of real estate for Stichting Pensioenfonds voor de Gezondheid,
Gaestelijke en Meatshappelljke Belangen.
NOTE 4 -- ACQUISITIONS
On April 10, 2000, the Company acquired the remaining 30% interest in
Metropoint II for approximately $8.3 million in cash. Metropoint II was a
development project which was completed in May 1999. The Office Property
consists of approximately 150,181 square feet and is located in Denver,
Colorado.
On June 30, 2000, the Company acquired the remaining 20% interest in Sunset
North Corporate Campus from Wright Runstad Associates Limited Partnership
("WRALP"), an affiliate of the Company, for approximately $14.9 million in cash.
Upon acquisition of the property, the Company assumed and immediately repaid a
$65.7 million mortgage note secured by the property. Sunset North Corporate
Campus was a development project which was completed in December 1999. The
project consists of three Office Properties containing approximately 460,629
square feet and is located in Bellevue, Washington.
Prior to the acquisition of the remaining interests in Metropoint II and
Sunset North Corporate Campus, the Company accounted for its interest in these
properties under the equity method of accounting and classified its net equity
investment as investment in unconsolidated joint ventures on the consolidated
balance sheet and its interest in the net income from investment in
unconsolidated joint ventures was reflected in the consolidated statements of
operations. Upon the acquisition of the remaining interest in the Properties,
the Company consolidated the financial condition and results of operations of
Metropoint II and Sunset North Corporate Campus.
On May 23, 2000, the Company acquired a vacant parcel of land located in
Fairfax, Virginia, for approximately $8.1 million in cash from an unaffiliated
party.
NOTE 5 -- DISPOSITIONS
On May 17, 2000, the Company disposed of 11 parking facilities containing
6,992 parking spaces for approximately $180 million in cash to an unaffiliated
party. The parking facilities disposed of were 1111 Sansom St., 15th and Sansom
St., 1602-34 Chancellor, 1616 Sansom St., Boston Harbor, Capitol Commons, Forbes
and Allies, Juniper/Locust, Milwaukee Center, and Riverfront/Stanwix. The sale
resulted in a gain of approximately $23.9 million.
On June 2, 2000, the Company entered into a joint venture agreement with an
unaffiliated party and sold a 49.9% interest in Bank of America Tower for
approximately $209.6 million resulting in a gain on sale of approximately $13.1
million. The property consists of approximately 1,537,932 square feet and is
located in Seattle, Washington. Prior to the sale, the Company consolidated the
financial condition and results of operations of the property. Upon the sale,
the Company retained a 50.1% equity interest in the property and shares equally
in the control of operations and major decisions of the property. Therefore, the
Company accounts for its interest under the equity method of accounting and
classifies its net equity investment of approximately $106.0 million as
investment in unconsolidated joint ventures on the consolidated balance sheet
and its interest in the net income is reflected in the consolidated statement of
operations as income from investment in unconsolidated joint ventures. At close,
the joint venture obtained a $195 million mortgage
9
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
secured by the property. The note bears interest at LIBOR plus 1.15% and matures
on December 14, 2004. As a condition of the mortgage, the joint venture
purchased a 7.85% LIBOR based interest rate cap, thereby capping the effective
interest rate on the mortgage at 9.0% for three years.
On June 30, 2000, the Company disposed of Park Plaza, which was acquired in
connection with the Cornerstone Merger, to an unaffiliated party for
approximately $17.5 million in cash. The 87,040 square foot office property is
located in Pleasanton, California. There was no gain or loss on the sale of the
property.
NOTE 6 -- INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The Company has several investments in unconsolidated joint ventures
consisting of Office Properties, Parking Facilities, a management company and a
company that provides fully-furnished office space to tenants. Combined
summarized financial information of the unconsolidated joint ventures is as
follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2000 1999
------------------------------------------------------------ ---------- ------------
<S> <C> <C>
Balance Sheets:
Real estate, net.......................................... $2,120,041 $1,719,417
Other assets.............................................. 124,354 106,211
---------- ----------
Total Assets...................................... $2,244,395 $1,825,628
========== ==========
Mortgage debt............................................. $ 752,792 $ 559,344
Other liabilities......................................... 61,916 58,793
Partners' and shareholders' equity........................ 1,429,687 1,207,491
---------- ----------
Total Liabilities and Partners' and Shareholders'
Equity.......................................... $2,244,395 $1,825,628
========== ==========
Company's share of equity................................... $ 796,135 $ 696,502
Net excess of cost of investments over the net book value of
underlying net assets, net of accumulated depreciation of
$14,235 and $11,679,
respectively.............................................. 150,831 169,361
---------- ----------
Carrying value of investments in unconsolidated joint
ventures.................................................. $ 946,966 $ 865,863
========== ==========
Company's share of unconsolidated mortgage debt............. $ 351,759 $ 264,751
========== ==========
</TABLE>
10
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ------------------
(DOLLARS IN THOUSANDS) 2000 1999 2000 1999
------------------------------------------------------ --------- --------- -------- -------
<S> <C> <C> <C> <C>
Statements of Operations:
Revenues............................................ $78,531 $26,593 $149,801 $51,976
------- ------- -------- -------
Expenses:
Interest expense................................. 10,622 4,456 21,363 8,903
Depreciation and amortization.................... 13,348 4,536 25,420 8,639
Operating expenses............................... 29,195 9,817 57,173 20,424
------- ------- -------- -------
Total expenses.............................. 53,165 18,809 103,956 37,966
------- ------- -------- -------
Net income.......................................... $25,366 $ 7,784 $ 45,845 $14,010
======= ======= ======== =======
Company's share of net income......................... $13,389 $ 3,215 $ 24,763 $ 5,050
======= ======= ======== =======
Company's share of interest expense................... $ 4,833 $ 2,197 $ 9,947 $ 4,397
======= ======= ======== =======
Company's share of depreciation and amortization (real
estate related)..................................... $ 8,584 $ 3,647 $ 15,843 $ 7,131
======= ======= ======== =======
</TABLE>
During the three months ended June 30, 2000, the Company acquired the
remaining interests in Metropoint II and Sunset North Corporate Campus, which
were previously accounted for under the equity method of accounting (see Note 4
for additional disclosure). In addition, the Company acquired a 50% interest in
One Post in connection with the Cornerstone Merger. The Company also sold a
49.9% interest in Bank of America Tower and accounts for its remaining
investment under the equity method of accounting (see Note 5 for additional
disclosure).
NOTE 7 -- INVESTMENTS IN SECURITIES
On April 18, 2000, the Company entered into a new agreement with Captivate
Network, Inc. ("Captivate") providing for the installation of Captivate's
electronic media display video units within the elevator cabs of certain
specified Office Properties. In return for allowing Captivate access to
approximately 60.1 million square feet of office space, Captivate issued
approximately 2.0 million stock purchase warrants to the Company (subject to
adjustment). In addition, the Company invested approximately $8.0 million in
Series C and Series D Preferred Shares of Captivate. The warrants were recorded
at fair value as deferred revenue and are amortized to other revenue over the
term of the licensing agreements. The Series C and Series D Preferred Shares
were recorded at cost.
On May 31, 2000, the Company invested approximately $75 million in Series A
Convertible Cumulative Preferred Stock of HQ Global Workplaces, Inc. ("HQ") and
obtained one seat on the Board of Directors of HQ. The Series A Convertible
Cumulative Preferred Stock has an initial dividend rate of 13.5% per annum and
increases by 50 basis points each year. The preferred stock is redeemable in
2004, matures in 2007, and may be converted to HQ common stock upon a qualifying
merger or initial public offering of HQ. In addition, the preferred stock
includes detachable warrants that are convertible into common shares.
In connection with the investment, the Company and HQ entered into a joint
venture agreement to own and develop full service business centers in the Office
Properties. The Company and HQ will contribute approximately $5 million to the
joint venture to fund the initial development of business centers. The Company's
investment in the joint venture will be accounted for under the equity method of
accounting.
11
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
In connection with the Cornerstone Merger (see Note 3), the Company
acquired common stock and warrants in various companies as follows:
<TABLE>
<CAPTION>
NUMBER OF COMMON/ NUMBER OF
COMPANY PREFERRED SHARES WARRANTS
-------------------------------------------------------- ----------------- ---------
<S> <C> <C>
Allied Riser Communications ("ARC")..................... 245,292 341,666
Broadband Office, Inc. ("BBO").......................... 110,846 --
Captivate............................................... 402,539 382,208
Cypress Communications ("Cypress")...................... 828,947 794,280
</TABLE>
The common shares and warrants of the companies were valued as of the
Cornerstone Merger date based on their respective fair values. A portion of the
fair value of the common shares and warrants were also recorded to unearned
revenue and are being amortized over the remaining term of the agreements the
Company assumed from Cornerstone in the merger.
The terms of the Company's investment in 50,000 shares of 8.25% Preferred
Securities of Capital Trust was amended as follows:
- 60% of the Company's investment, or approximately $30 million of the
preferred securities the Company owns were amended as follows:
- The coupon rate of 8.25% will remain fixed for two more years.
Thereafter, the rate will increase to the greater of:
a. 10%, increasing by 75 basis points per annum commencing October 1,
2004, or
b. a rate equal to Capital Trust's then dividend per common share
divided by $7.00;
- The conversion price will decrease from $11.70 to $7.00 per share;
- The common share equivalent will be fixed at 4,285,714 shares; and
- The call date will be extended one year to September 30, 2004.
- 40% of the Company's investment, or approximately $20 million of the
preferred securities the Company owns were amended as follows:
- The coupon rate of 8.25% will increase to 13.0% and remain fixed until
October 1, 2004 when it will increase by 75 basis points per annum;
- The conversion feature is eliminated; and
- The preferred securities may be called at any time.
- The co-investment right will be terminated.
NOTE 8 -- MORTGAGE DEBT
The Company obtained a mortgage note secured by Park Avenue Tower and 850
Third Avenue in the amount of $190.0 million. The mortgage note matures in June
2010 and has a fixed interest rate of 8.47% per annum. The Company used the
proceeds to pay down the Line of Credit.
NOTE 9 -- LINES OF CREDIT
On April 10, 2000, the Company repaid the Chase Term Loan in the amount of
$100 million with proceeds from the $1.0 Billion Credit Facility.
12
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
In connection with the Cornerstone Merger, the Company amended its existing
$1.0 Billion Credit Facility and obtained a new $1.0 billion Line of Credit. See
Note 3 -- Cornerstone Merger for additional information.
NOTE 10 -- PARTNERS' CAPITAL
Units
The following table presents the changes in the Company's issued and
outstanding Units since April 1, 2000:
<TABLE>
<S> <C>
OUTSTANDING AT MARCH 31, 2000............................... 281,492,538
Issued in Cornerstone Merger................................ 63,673,616
Issued to the Trust related to Common Shares issued for
share option exercises.................................... 1,120,155
Restricted units issued/cancelled, net...................... 16,100
-----------
OUTSTANDING AT JUNE 30, 2000................................ 346,302,409
===========
</TABLE>
Distributions
The following table summarizes the distributions paid or declared to
unitholders and preferred unitholders during the three months ended June 30,
2000:
<TABLE>
<CAPTION>
DISTRIBUTION
AMOUNT DATE PAID RECORD DATE
------------ -------------- -------------
<S> <C> <C> <C>
Units............................................. $ 0.42 July 17, 2000 June 30, 2000
Series A Preferred Units.......................... $ 0.56125 June 15, 2000 June 1, 2000
Series B Preferred Units.......................... $ 0.65625 May 15, 2000 May 1, 2000
Series C Preferred Units.......................... $0.5390625 June 15, 2000 June 1, 2000
</TABLE>
13
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 11 -- EARNINGS PER UNIT
The following table sets forth the computation of basic and diluted
earnings per Unit:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) 2000 1999 2000 1999
-------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income available for Units before net
gain on sales of real estate and
extraordinary items................ $ 105,927 $ 96,491 $ 206,700 $ 187,184
Net gain on sales of real estate
(excluding allocation to minority
interests of $1,473 for the three and
six months ended June 30, 2000).... 35,525 8,085 39,387 8,085
Extraordinary items................... (264) (7,135) (875) (10,318)
------------ ------------ ------------ ------------
Numerator for basic and diluted earnings
per unit -- net income available for
Units and unit equivalents......... $ 141,188 $ 97,441 $ 245,212 $ 184,951
============ ============ ============ ============
DENOMINATOR:
Denominator for basic earnings per
Unit -- weighted average Units..... 288,805,951 288,598,492 285,093,297 288,576,797
Effect of dilutive securities:
Units issuable upon exercise of share
options, put options and restricted
stock............................ 2,868,550 2,348,361 2,831,530 2,613,638
------------ ------------ ------------ ------------
Denominator for diluted earnings per Unit
and unit equivalent -- adjusted
weighted average Units and unit
equivalents........................ 291,674,501 290,946,853 287,924,827 291,190,435
============ ============ ============ ============
BASIC EARNINGS AVAILABLE FOR UNITS PER
WEIGHTED AVERAGE UNIT:
Net income before net gain on sales of
real estate and extraordinary items... $ 0.37 $ 0.33 $ 0.73 $ 0.65
Net gain on sales of real estate...... 0.12 0.03 0.13 0.03
Extraordinary items................... -- (0.02) -- (0.04)
------------ ------------ ------------ ------------
Net income............................ $ 0.49 $ 0.34 $ 0.86 $ 0.64
============ ============ ============ ============
DILUTED EARNINGS AVAILABLE FOR UNITS AND
UNIT EQUIVALENTS PER WEIGHTED AVERAGE
UNITS AND UNIT EQUIVALENT:
Net income before net gain on sales of
real estate and extraordinary items... $ 0.36 $ 0.33 $ 0.71 $ 0.64
Net gain on sales of real estate...... 0.12 0.03 0.14 0.03
Extraordinary items................... -- (0.03) -- (0.03)
------------ ------------ ------------ ------------
Net income............................ $ 0.48 $ 0.33 $ 0.85 $ 0.64
============ ============ ============ ============
</TABLE>
14
<PAGE> 15
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following securities were not included in the computation of diluted
earnings per unit since they would have an antidilutive effect:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
WEIGHTED AVERAGE ----------------------- -----------------------
ANTIDILUTIVE SECURITIES EXERCISE PRICE 2000 1999 2000 1999
------------------------------ ---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Share options................. $30.020 3,387,660 -- -- --
Share options................. $30.080 -- 3,440,835 -- --
Share options................. $29.920 -- -- 3,412,451 --
Share options................. $30.050 -- -- -- 3,470,835
Series B Preferred Units...... $35.700 6,000,000 6,000,000 6,000,000 6,000,000
Warrants...................... $39.375 5,000,000 5,000,000 5,000,000 5,000,000
---------- ---------- ---------- ----------
Total............... 14,387,660 14,440,835 14,412,451 14,470,835
========== ========== ========== ==========
</TABLE>
Upon exercise of the above antidilutive securities the Company would issue
a corresponding number of Units to the Trust on a one-to-one basis.
15
<PAGE> 16
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 12 -- SEGMENT INFORMATION
As discussed in Note 1, the Company's primary business is the ownership and
operation of Office Properties. The Company's long-term tenants are in a variety
of businesses and no single tenant, by itself, is material to the Company's
business. Information related to this segment for the three and six months ended
June 30, 2000 and June 30, 1999 is set forth below:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------------------------------------------------------
JUNE 30, 2000 JUNE 30, 1999
-------------------------------------- -------------------------------------
OFFICE CORPORATE OFFICE CORPORATE
(DOLLARS IN THOUSANDS) PROPERTIES AND OTHER CONSOLIDATED PROPERTIES AND OTHER CONSOLIDATED
-------------------------------- ----------- --------- ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Property Operating Revenues..... $ 478,046 $ 7,682 $ 485,728 $ 468,216 $ 8,972 $ 477,188
Property Operating Expenses..... (162,872) (2,589) (165,461) (161,337) (2,055) (163,392)
----------- -------- ----------- --------- -------- ---------
Net operating income.......... 315,174 5,093 320,267 306,879 6,917 313,796
----------- -------- ----------- --------- -------- ---------
Adjustments to arrive at net
income:
Other revenues................ 454 10,670 11,124 461 3,630 4,091
Interest expense(1)........... (30,825) (80,478) (111,303) (31,251) (71,669) (102,920)
Depreciation and
amortization................ (87,721) (2,930) (90,651) (84,680) (3,489) (88,169)
Ground rent................... (2,432) (6) (2,438) (1,536) (12) (1,548)
General and administrative.... (613) (21,476) (22,089) (289) (20,425) (20,714)
----------- -------- ----------- --------- -------- ---------
Total adjustments to arrive at
net income.................. (121,137) (94,220) (215,357) (117,295) (91,965) (209,260)
----------- -------- ----------- --------- -------- ---------
Income before allocation to
minority interests, income
from investment in
unconsolidated joint ventures,
net gain on sales of real
estate and extraordinary
items......................... 194,037 (89,127) 104,910 189,584 (85,048) 104,536
Minority interests.............. (589) (1,342) (1,931) (395) 42 (353)
Income from investment in
unconsolidated joint
ventures...................... 13,490 (101) 13,389 2,667 548 3,215
Net gain on sales of real
estate........................ 13,478 23,520 36,998 8,085 -- 8,085
Extraordinary items............. -- (264) (264) (7,135) -- (7,135)
----------- -------- ----------- --------- -------- ---------
Net income...................... $ 220,416 $(67,314) $ 153,102 $ 192,806 $(84,458) $ 108,348
=========== ======== =========== ========= ======== =========
Capital and tenant
improvements.................. $ 58,519 $ 4,458 $ 62,977 $ 46,267 $ 2,378 $ 48,645
=========== ======== =========== ========= ======== =========
Total Assets.................... $17,971,303 $688,805 $18,660,108
=========== ======== ===========
</TABLE>
16
<PAGE> 17
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------------------------------------------------------------
JUNE 30, 2000 JUNE 30, 1999
-------------------------------------- -------------------------------------
OFFICE CORPORATE OFFICE CORPORATE
(DOLLARS IN THOUSANDS) PROPERTIES AND OTHER CONSOLIDATED PROPERTIES AND OTHER CONSOLIDATED
------------------------------ ----------- --------- ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Property Operating Revenues... $ 929,038 $ 17,626 $ 946,664 $ 929,672 $ 17,747 $ 947,419
Property Operating Expenses... (315,518) (5,280) (320,798) (323,087) (4,020) (327,107)
----------- --------- ----------- --------- --------- ---------
Net operating income........ 613,520 12,346 625,866 606,585 13,727 620,312
----------- --------- ----------- --------- --------- ---------
Adjustments to arrive at net
income:
Other revenues.............. 874 18,189 19,063 1,092 7,902 8,994
Interest expense(1)......... (58,330) (153,505) (211,835) (68,852) (138,548) (207,400)
Depreciation and
amortization.............. (173,178) (7,125) (180,303) (168,465) (6,263) (174,728)
Ground rent................. (4,443) (19) (4,462) (3,369) (25) (3,394)
General and
administrative............ (725) (41,015) (41,740) (449) (38,515) (38,964)
----------- --------- ----------- --------- --------- ---------
Total adjustments to arrive
at net income............. (235,802) (183,475) (419,277) (240,043) (175,449) (415,492)
----------- --------- ----------- --------- --------- ---------
Income before allocation to
minority interests, income
from investment in
unconsolidated joint
ventures, net gain on sales
of real estate and
extraordinary items......... 377,718 (171,129) 206,589 366,542 (161,722) 204,820
Minority interests............ (1,027) (1,457) (2,484) (705) (193) (898)
Income from investment in
unconsolidated joint
ventures.................... 24,851 (88) 24,763 4,416 634 5,050
Net gain on sales of real
estate...................... 17,340 23,520 40,860 8,085 -- 8,085
Extraordinary items........... (611) (264) (875) (10,318) -- (10,318)
----------- --------- ----------- --------- --------- ---------
Net income.................... $ 418,271 $(149,418) $ 268,853 $ 368,020 $(161,281) $ 206,739
=========== ========= =========== ========= ========= =========
Capital and tenant
improvements................ $ 103,867 $ 9,135 $ 113,002 $ 88,078 $ 5,709 $ 93,787
=========== ========= =========== ========= ========= =========
Total Assets.................. $17,971,303 $ 688,805 $18,660,108
=========== ========= ===========
</TABLE>
---------------
(1) Interest expense for the Office Properties does not include an allocation of
interest expense on corporate unsecured debt.
17
<PAGE> 18
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 13 -- PRO FORMA STATEMENTS OF OPERATIONS (UNAUDITED)
The pro forma data presented below are included to illustrate the effect on
the Company's operations as a result of the Cornerstone Merger as if it had
happened on January 1, 1999. The pro forma condensed combined statements of
operations have been prepared by management of the Company and do not purport to
be indicative of the results which would actually have been obtained had the
Cornerstone Merger been completed on January 1, 1999, or which may be obtained
in the future.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) 2000 1999
------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Total revenues.............................................. $ 1,246,019 $ 1,263,774
----------- -----------
Net income available for Units.............................. $ 310,613 $ 204,073
----------- -----------
Net income per Unit -- Basic................................ $ .90 $ .58
----------- -----------
Units outstanding -- Basic.................................. 344,568,652 351,832,225
----------- -----------
Net income per Units -- Diluted............................. $ .89 $ .58
----------- -----------
Units outstanding -- Diluted................................ 347,773,181 354,800,870
----------- -----------
</TABLE>
NOTE 14 -- COMMITMENTS AND CONTINGENCIES
Concentration of Credit Risk
The Company maintains its cash and cash equivalents at financial
institutions. The combined account balances at each institution typically exceed
FDIC insurance coverage and, as a result, there is a concentration of credit
risk related to amounts on deposit in excess of FDIC insurance coverage.
Management of the Company believes that the risk is not significant.
Environmental
The Company, as an owner of real estate, is subject to various
environmental laws of federal and local governments. Compliance by the Company
with existing laws has not had a material adverse effect on the Company's
financial condition and results of operations, and management does not believe
it will have such an impact in the future. However, the Company cannot predict
the impact of new or changed laws or regulations on its current Properties or on
properties that it may acquire in the future.
Litigation
The Company has become a party to various legal actions resulting from the
operational activities transferred to the Operating Partnership in connection
with the Consolidation and the Cornerstone Merger. These actions are incidental
to the transferred business and management does not believe that these actions
will have a material adverse effect on the Company.
Neither the Company nor any of the Properties is presently subject to any
material litigation nor, to the Company's knowledge, is any litigation
threatened against the Company or any of the Properties, other than actions
which the Company does not believe to be material, or routine actions for
negligence and other claims and administrative proceedings arising in the
ordinary course of business, some of which are expected to be covered by
liability insurance and all of which collectively are not expected to have a
material adverse effect on the liquidity, business, results of operations or
financial condition of the Company.
18
<PAGE> 19
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Commitments
In July 1998, the Company entered into an agreement to purchase the World
Trade Center project in Seattle, Washington. The property consists of
approximately 186,787 square feet of office space and is 100% preleased to a
single tenant. The Company expects to acquire the property in late August 2000
for approximately $39.0 million. This transaction is contingent upon certain
terms and conditions as set forth in the purchase agreement. There can be no
assurance that this transaction will be consummated as described above.
In accordance with the agreement governing the Company's investment in
WRALP, the Company agreed to make available to WRALP up to $20.0 million in
additional financing or credit support for future development. As of June 30,
2000, no amounts have been funded pursuant to this agreement. However, the
Company has guaranteed WRALP's line of credit, which has an outstanding balance
of approximately $12.9 million as of June 30, 2000.
The Company and Wilson/Equity Office, LLC, entered into an agreement to
purchase a 12.9 acre vacant land parcel in San Raphael, California for
approximately $30.3 million from an unaffiliated party. The Company's interest
in this joint venture is 60%. The Company also has an interest in Wilson/Equity
Office, LLC which was formed in June 2000 and operated under an interim
operating agreement. This agreement was subsequently finalized on August 1,
2000. The transaction is contingent upon certain terms and conditions as set
forth in the purchase agreement. There can be no assurance that this transaction
will be consummated as described above.
Contingencies
On August 13, 2000 (or August 13, 2001 at the option of the WR Holders),
the WR Holders can require the Trust to purchase all or a portion of the
remaining 1,717,844 Common Shares issued to them at a price equal to $31.50 per
Common Share. Prior to such date, if the WR Holders sell all or a portion of
their Common Shares to a third party for a price less than $29.10625, then the
Trust is obligated to pay to the WR Holders for each Common Share sold at such
lower price an amount equal to the difference between $29.10625 and such lower
price, not to exceed $3.00 per Common Share. Any amounts paid by the Trust as a
result of such sales will result in the Company making an equal payment to the
Trust and will be recorded as a reduction in partners' capital. For put options
exercised on August 13, 2000, any amounts paid up to $29.10625 per Common Share
would be reflected as a reduction in partners' capital and the portion of any
amounts paid in excess of $29.10625 per Common Share (not to exceed $2.39375 per
Common Share up to an aggregate of approximately $4.1 million) will be reflected
as a preferred distribution. The $4.1 million portion of the total potential
payment is being amortized by the Company on a straight-line basis over the
period between August 13, 1999 and August 13, 2000. The Company will not incur
any loss on this transaction if the put option is not exercised.
In connection with the acquisition of Worldwide Plaza on October 1, 1998,
the Company issued a transferable put option on the 6,861,166 Units which is
exercisable only on the third anniversary of closing with an estimated fair
value of approximately $27.4 million. This option entitles its holder to
additional Common Shares, the number of which shall be determined using a
formula based on the extent, if any, that the Common Shares are then trading at
less than $29.05 per share.
NOTE 15 -- SUBSEQUENT EVENTS
1. In July, 2000, the Board of Trustees of the Trust declared a third quarter
distribution on the Series B Preferred Shares of $0.65625 per share. The
distribution will be paid on August 15, 2000 to holders of record as of
August 1, 2000.
19
<PAGE> 20
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
2. On July 11, 2000, the Company acquired Two Lafayette Center, a 130,704 square
foot office building in Washington, D.C., for approximately $29.0 million in
cash from an unaffiliated party.
3. In July 2000, the Company invested approximately $3.5 million in Series C
Preferred Stock of Broadband which are convertible into Broadband common
shares. The annual dividend of 8.0% per share is payable only if declared and
is not cumulative.
4. As of August 1, 2000, the Company finalized an agreement with Wilson
Investors, LLC, an entity affiliated with William Wilson and certain former
officers and employees of Cornerstone Properties, to form Wilson/ Equity
Office, LLC for the purpose of providing (directly or indirectly) development
management services and acquiring, owning, operating and holding various
projects. The Company has a 49.9% interest in this limited liability company.
5. On August 3, 2000, the Company and an unaffiliated party acquired a 45%
equity interest and a debt interest in an entity that owns 1301 Avenue of the
Americas, a 1.77 million square foot office building located in Midtown
Manhattan in New York. The Company's share of the total investment is
approximately $163.0 million. In addition, the Company and its joint venture
partner purchased options to acquire the remaining 55% equity interest over a
period of three and one-half to eight years at a value as described in the
option agreements.
6. On August 7, 2000, the Company issued $360 million of unsecured notes due
2010 (the "$360 Million Notes") in an offering to institutional investors
(the "$360 Million Notes Offering"). The net proceeds after discount and
offering expenses were approximately $356.2 million and will be used to repay
amounts outstanding on the Term Loan. The $360 Million Notes bear interest at
a stated rate of 8.1% per annum and have an effective annual rate of 8.2% per
annum.
7. In August 2000, the joint venture owner of One Post Office Square refinanced
the mortgage note secured by the property which matured on July 1, 2000. The
principal amount of the new debt is $110 million due July 2005 and bears
interest at LIBOR plus 45 basis points. The Company purchased a 9.05% LIBOR
based interest rate cap, thereby capping the effective interest rate on the
mortgage note at 9.50% for three years. The Company assigned the cap to the
joint venture, of which the Company owns 50%, effectively capping the
Company's share of the interest expense.
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion and analysis of the consolidated financial
condition and results of operations should be read in conjunction with the
Consolidated Financial Statements of the Company and Notes thereto contained
herein. Terms employed herein as defined terms, but without definition, shall
have the meaning set forth in the financial statements. Statements contained in
this "Management's Discussion and Analysis of Financial Condition and Results of
Operations" including without limitation, the "Developments" and "Market Risks"
disclosures, which are not historical facts may be forward-looking statements.
Such statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected or anticipated. Readers
are cautioned not to place undue reliance on these forward-looking statements
which speak only as of June 30, 2000. Among the factors about which the Company
has made assumptions are the following:
- The Company's ability to successfully integrate Cornerstone's operations
into those of the Company;
- Future economic conditions which may impact upon the demand for office
space and tenant ability to pay rent, either at current or increased
levels;
- Prevailing interest rates;
- The extent of any inflation on operating expenses;
- The Company's ability to reduce various expenses as a percentage of
revenues;
- The Company's continuing ability to pay amounts due to its noteholders
and preferred unitholders prior to any distribution to holders of its
Units;
- The cost to complete and lease-up pending developments;
- The Company's continued access to adequate credit facilities or other
debt financing on acceptable terms; and
- The demand from the Company's customers for office-related services.
During the six months ended June 30, 2000, the Company completed the
following key transactions:
- Acquired Cornerstone Properties Inc. (see Cornerstone Merger section in
this MD&A for additional information);
- Converted its existing $1.0 billion revolving credit facility into a Term
Loan and obtained a new Line of Credit in connection with the Cornerstone
Merger;
- Sold 11 parking facilities for approximately $180.0 million;
- Sold two office properties and a development parcel for approximately
$65.2 million;
- Sold a 49.9% interest in an Office Property for approximately $209.6
million;
- Issued $500 million of unsecured notes due March 2006 with an effective
interest rate of 8.6% per annum;
- Obtained a $190 million mortgage note on Park Avenue Tower and 850 Third
Avenue;
- Invested approximately $75.0 million in convertible preferred stock of HQ
Global Workplaces, Inc., a provider of temporary office suites; and
- Invested approximately $8.0 million in preferred stock of Captivate, a
provider of video screens in elevator cabs.
21
<PAGE> 22
RESULTS OF OPERATIONS
GENERAL
The following discussion is based primarily on the Consolidated Financial
Statements of the Company as of June 30, 2000 and December 31, 1999 and for the
three and six months ended June 30, 2000 and 1999.
The Company receives income primarily from rental revenue from the Office
Properties, including reimbursements from tenants for certain operating costs,
and from parking revenue from Office Properties and Parking Facilities.
Below is a summary of the Company's acquisition and disposition activity
since January 1, 1999. The buildings and total square feet shown include
Properties the Company owns in joint ventures with other partners and reflects
the total square footage of the Properties. Excluding the joint venture
partner's share of the square feet of these Properties, the Company effectively
owned approximately 91.4 million square feet of office space as of June 30,
2000.
<TABLE>
<CAPTION>
OFFICE PROPERTIES PARKING FACILITIES
------------------------ ------------------
TOTAL SQUARE
BUILDINGS FEET GARAGES SPACES
--------- ------------ -------- -------
<S> <C> <C> <C> <C>
Properties owned as of:
January 1, 1999....................................... 284 75,100,727 19 18,059
Acquisitions........................................ 10 1,947,639 1 2,575
Developments placed in service...................... 4 610,810 1 589
Dispositions........................................ (4) (668,796) -- --
Remeasurements...................................... -- 25,230 -- 42
Reclassifications(1)................................ -- -- (1) (759)
--- ---------- --- ------
December 31, 1999..................................... 294 77,015,610 20 20,506
Developments placed in service...................... 1 180,000 -- --
Dispositions........................................ (1) (247,891) -- --
Remeasurements...................................... -- 20,100 -- --
--- ---------- --- ------
March 31, 2000........................................ 294 76,967,819 20 20,506
Acquisitions........................................ 82 18,896,980 -- --
Dispositions........................................ (1) (87,040) (11) (6,992)
Developments placed in service...................... 6 1,504,303 -- --
Remeasurements...................................... -- -- -- 730
--- ---------- --- ------
June 30, 2000 ("Total Portfolio")..................... 381 97,282,062 9 14,244
=== ========== === ======
</TABLE>
---------------
(1) The 601 Tchoupitoulas garage previously was considered a stand-alone garage
and included in the number of parking facilities owned by the Company.
Effective with the second quarter of 1999, this garage is no longer
considered a stand-alone parking facility.
As a result of the acquisition and disposition of properties, the financial
data presented shows changes in revenues and expenses from period-to-period.
Therefore, the Company does not believe its period to period financial data
necessarily are comparable. The following analysis shows changes resulting from
Properties that were held during the entire period for the periods being
compared (the "Core Portfolio") and the changes in the Total Portfolio.
As reflected in the tables below, property revenues include rental
revenues, reimbursements from tenants for certain expenses, parking revenue and
other property operating revenues. Property operating expenses include real
estate taxes, insurance, repairs and maintenance and other property operating
expenses.
22
<PAGE> 23
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 TO JUNE 30, 1999
The table below represents selected operating information for the Total
Portfolio and for the Core Portfolio consisting of 270 Office Properties and
seven Parking Facilities acquired or placed in service on or prior to April 1,
1999.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CORE PORTFOLIO
----------------------------------------- -----------------------------------------
INCREASE/ % INCREASE/ %
(DOLLARS IN THOUSANDS) 2000 1999 (DECREASE) CHANGE 2000 1999 (DECREASE) CHANGE
----------------------------- -------- -------- ---------- ------ -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property revenues............ $485,728 $477,188 $ 8,540 1.8% $443,726 $413,024 $30,702 7.4%
Fee income................... 2,507 2,045 462 22.6 -- -- -- --
Interest/dividend income..... 8,617 2,046 6,571 321.2 385 477 (92) (19.3)
-------- -------- ------- ----- -------- -------- ------- ------
Total revenues....... 496,852 481,279 15,573 3.2 444,111 413,501 30,610 7.4
-------- -------- ------- ----- -------- -------- ------- ------
Interest expense............. 111,303 102,920 8,383 8.1 29,870 31,311 (1,441) (4.6)
Depreciation and
amortization............... 90,651 88,169 2,482 2.8 80,507 75,753 4,754 6.3
Property operating
expenses................... 165,461 163,392 2,069 1.3 152,312 140,542 11,770 8.4
Ground rent.................. 2,438 1,548 890 57.5 2,302 1,535 767 50.0
General and administrative... 22,089 20,714 1,375 6.6 254 245 9 3.7
-------- -------- ------- ----- -------- -------- ------- ------
Total expenses....... 391,942 376,743 15,199 4.0 265,245 249,386 15,859 6.4
-------- -------- ------- ----- -------- -------- ------- ------
Income before allocation to
minority interests, income
from investment in
unconsolidated joint
ventures, net gain on sales
of real estate and
extraordinary items........ 104,910 104,536 374 0.4 178,866 164,115 14,751 9.0
Minority interests........... (1,931) (353) (1,578) 447.0 (418) (391) (27) 6.9
Income from investment in
unconsolidated joint
ventures................... 13,389 3,215 10,174 316.5 3,647 2,945 702 23.8
Net gain on sales of real
estate..................... 36,998 8,085 28,913 357.6 -- -- -- --
Extraordinary items.......... (264) (7,135) 6,871 (96.3) -- (7,135) 7,135 (100.0)
-------- -------- ------- ----- -------- -------- ------- ------
Net income................... $153,102 $108,348 $44,754 41.3% $182,095 $159,534 $22,561 14.1%
======== ======== ======= ===== ======== ======== ======= ======
Property revenues less
property operating expenses
before depreciation and
amortization, general and
administrative, ground rent
and interest expense....... $320,267 $313,796 $ 6,471 2.1% $291,414 $272,482 $18,932 6.9%
======== ======== ======= ===== ======== ======== ======= ======
Straight-line rent
adjustment................. $ 15,525 $ 15,233 $ 292 1.9% $ 13,594 $ 14,142 $ (548) (3.9)%
======== ======== ======= ===== ======== ======== ======= ======
Lease termination fees....... $ 5,045 $ 3,126 $ 1,919 61.4% $ 4,596 $ 1,149 $ 3,447 300.0%
======== ======== ======= ===== ======== ======== ======= ======
</TABLE>
Property Revenues
The increase in property revenues in the Core Portfolio resulted from an
increase in rental rates and an increase in occupancy. The weighted average
occupancy of the Core Portfolio increased from 94.2% at April 1, 1999 to 94.8%
at June 30, 2000. This increase represents approximately 0.7 million square feet
in the Core Portfolio between April 1, 1999 and June 30, 2000. Included in
Property Revenues are lease termination fees. These fees relate to specific
tenants who have paid a fee to terminate their lease obligations before the end
of the contractual term of their lease. Although the Company has received these
fees in the past, a prediction of the timing or amounts of future fees cannot be
made.
Interest/Dividend Income
Total Portfolio interest/dividend income increased as a result of the
Company's $73.9 million investment in a Tranche B note as part of the Sun
America Center debt restructuring in September 1999. The Company's share of the
face amount of the Tranche B note is approximately $136.0 million and the note
matures on August 31, 2014. The note accrues interest at a stated rate of 7.25%
per annum. The Company also earned dividend revenue from its $75 million
investment in Series A Convertible Preferred Stock of HG Global
23
<PAGE> 24
Workplaces, Inc. in May 2000 which has an initial dividend rate of 13.5% per
annum and increases by 50 basis points each year through maturity in 2007. The
Company also earned interest income from property disposition proceeds held in
escrow accounts. The amounts in escrow will be utilized for property
acquisitions or returned to the Company.
Interest Expense
Total Portfolio interest expense increased from the prior period as a
result of having a higher average outstanding debt balance as compared to the
prior period and an increase in the weighted average interest rate. In addition,
the following statistics for each period for the Total Portfolio are as follows:
- Total debt to total assets increased to 46.1% from 42.2%;
- Interest coverage ratio remained stable at 2.9 times; and
- Weighted average interest rate increased to 7.5% from 7.0%.
Core Portfolio interest expense decreased from the prior period due to the
paydown of mortgage debt on certain Properties. Interest expense on the
unsecured notes and the lines of credit is not reflected in the Core Portfolio.
Depreciation and Amortization
Total Portfolio depreciation and amortization expense increased from the
prior period as a result of Properties acquired and capital and tenant
improvements made during the periods. Core Portfolio depreciation and
amortization expense increased as a result of capital and tenant improvements.
Property Operating Expenses
Core Portfolio property operating expenses increased mainly as a result of
real estate taxes and other operating expenses. Real estate taxes increased
approximately $3.7 million due to higher property tax assessments and other
operating expenses increased approximately $8.1 million primarily due to higher
repairs and maintenance costs and general property operating expenses.
General and Administrative Expenses
General and administrative expenses increased due to an increase in the
number of employees at the corporate office as a result of the establishment of
new revenue-producing business groups such as Access and the hiring of
additional personnel in other corporate groups, primarily the information
technology group. Although general and administrative expenses are expected to
increase along with any increase in the size of the Company's portfolio, it is
also anticipated that the Company will realize economies of scale with future
growth, should it occur.
Income from Investment in Unconsolidated Joint Ventures
Income from investment in unconsolidated joint ventures increased for the
Total Portfolio due to the partial sale of twelve Office Properties in December
1999 and one Office Property in June 2000. The Company retained an equity
interest in these Office Properties and accounts for its remaining interest
under the equity method of accounting. Prior to the sale, the Company
consolidated the results of operations of such Office Properties.
24
<PAGE> 25
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 TO JUNE 30, 1999
The table below represents selected operating information for the Total
Portfolio and for the Core Portfolio consisting of 267 Office Properties and
seven Parking Facilities acquired or placed in service on or prior to January 1,
1999.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CORE PORTFOLIO
----------------------------------------- -----------------------------------------
INCREASE/ % INCREASE/ %
(DOLLARS IN THOUSANDS) 2000 1999 (DECREASE) CHANGE 2000 1999 (DECREASE) CHANGE
----------------------------------- -------- -------- ---------- ------ -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property revenues.................. $946,664 $947,419 $ (755) (.1)% $863,949 $808,441 $55,508 6.9%
Fee income......................... 4,742 3,907 835 21.4 -- -- -- --
Interest/dividend income........... 14,321 5,087 9,234 181.5 803 1,043 (240) (23.0)
-------- -------- ------- ----- -------- -------- ------- -----
Total revenues............. 965,727 956,413 9,314 1.0 864,752 809,484 55,268 6.8
-------- -------- ------- ----- -------- -------- ------- -----
Interest expense................... 211,835 207,400 4,435 2.1 60,284 68,395 (8,111) (11.9)
Depreciation and amortization...... 180,303 174,728 5,575 3.2 160,893 148,514 12,379 8.3
Property operating expenses........ 320,798 327,107 (6,309) (1.9) 294,894 277,188 17,706 6.4
Ground rent........................ 4,462 3,394 1,068 31.5 4,326 3,369 957 28.4
General and administrative......... 41,740 38,964 2,776 7.1 235 405 (170) (42.0)
-------- -------- ------- ----- -------- -------- ------- -----
Total expenses............. 759,138 751,593 7,545 1.0 520,632 497,871 22,761 4.6
-------- -------- ------- ----- -------- -------- ------- -----
Income before allocation to
minority interests, income from
investment in unconsolidated
joint ventures, net gains of
sales of real estate and
extraordinary items.............. 206,589 204,820 1,769 0.9 344,120 311,613 32,507 10.4
Minority interests................. (2,484) (898) (1,586) 176.6 (855) (696) (159) 22.8
Income from investment in
unconsolidated joint ventures.... 24,763 5,050 19,713 390.4 6,210 5,104 1,106 21.7
Net gain on sales of real estate... 40,860 8,085 32,775 405.4 -- -- -- --
Extraordinary items................ (875) (10,318) 9,443 (91.5) (611) (9,527) 8,916 (93.6)
-------- -------- ------- ----- -------- -------- ------- -----
Net income......................... $268,853 $206,739 $62,114 30.4% $348,864 $306,494 $42,370 13.8%
======== ======== ======= ===== ======== ======== ======= =====
Property revenues less property
operating expenses before
depreciation and amortization,
general and administrative,
ground rent and interest
expense.......................... $625,866 $620,312 $ 5,554 0.9% $569,055 $531,253 $37,802 7.1%
======== ======== ======= ===== ======== ======== ======= =====
Straight-line rent adjustment...... $ 28,232 $ 31,773 $(3,541) (11.1)% $ 25,507 $ 29,542 $(4,035) (13.7)%
======== ======== ======= ===== ======== ======== ======= =====
Lease termination fees............. $ 12,273 $ 5,256 $ 7,017 133.5% $ 11,719 $ 2,342 $ 9,377 400.4%
======== ======== ======= ===== ======== ======== ======= =====
</TABLE>
Property Revenues
The increase in property revenues in the Core Portfolio resulted from an
increase in rental rates partially offset by a decrease in occupancy. The
weighted average occupancy of the Core Portfolio decreased from 95.3% at January
1, 1999 to 94.8% at June 30, 2000. Included in Property Revenues are lease
termination fees. These fees relate to specific tenants who have paid a fee to
terminate their lease obligations before the end of the contractual term of
their lease. Although the Company has received these fees in the past, a
prediction of the timing or amounts of future fees cannot be made.
Interest/Dividend Income
Total Portfolio interest/dividend income increased as a result of the
Company's $73.9 million investment in a Tranche B note as part of the Sun
America Center debt restructuring in September 1999. The Company's share of the
face amount of the Tranche B note is approximately $136.0 million and the note
matures on August 31, 2014. The note accrues interest at a stated rate of 7.25%
per annum. The Company also earned dividend revenue from its $75 million
investment in Series A Convertible Preferred Stock of HG Global Workplaces, Inc.
in May 2000 which has an initial dividend rate of 13.5% per annum and increases
by 50 basis points each year through maturity in 2007. The Company also earned
interest income from property disposition proceeds held in escrow accounts. The
amounts in escrow will be utilized for property acquisitions or returned to the
Company.
25
<PAGE> 26
Interest Expense
Total Portfolio interest expense increased from the prior period as a
result of having a higher average outstanding debt balance as compared to the
prior period and an increase in the weighted average interest rate. In addition,
the following statistics for each period for the Total Portfolio are as follows:
- Total debt to total assets increased to 46.1% from 42.2%;
- Interest coverage ratio remained stable at 2.9 times; and
- Weighted average interest rate increased to 7.5% from 7.0%.
Core Portfolio interest expense decreased from the prior period due to the
paydown of mortgage debt on certain Properties. Interest expense on the
unsecured notes and the lines of credit is not reflected in the Core Portfolio.
Depreciation and Amortization
Total Portfolio depreciation and amortization expense increased from the
prior period as a result of Properties acquired and capital and tenant
improvements made during the periods. Core portfolio depreciation and
amortization expense increased as a result of capital and tenant improvements.
Property Operating Expenses
Core Portfolio property operating expenses increased mainly as a result of
real estate taxes and other operating expenses. Real estate taxes increased
approximately $7.3 million due to higher property tax assessments, repairs and
maintenance expense increased approximately $5.1 million and other operating
expenses increased $5.3 million including a one time charge related to a change
in the employee benefit program.
General and Administrative Expenses
General and administrative expenses increased due to an increase in the
number of employees at the corporate office as a result of the establishment of
new revenue-producing business groups such as Access and the hiring of
additional personnel in other corporate groups, primarily the information
technology group. Although general and administrative expenses are expected to
increase along with any increase in the size of the Company's portfolio, it is
also anticipated that the Company will realize economies of scale with future
growth, should it occur.
Income from Investment in Unconsolidated Joint Ventures
Income from investment in unconsolidated joint ventures increased for the
Total Portfolio due to the partial sale of twelve Office Properties in December
1999 and one Office Property in June 2000. The Company retained an equity
interest in these Office Properties and accounts for its remaining interest
under the equity method of accounting. Prior to the sale, the Company
consolidated the results of operations of such Office Properties.
26
<PAGE> 27
PARKING OPERATIONS
The Total Portfolio and Core Portfolio selected operating information for
the three and six months ended June 30, 2000 and 1999 presented above includes
results of operations from the Parking Facilities. Summarized information for
the Parking Facilities is presented below.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 TO JUNE 30, 1999
The table below represents selected operating information for the Parking
Facilities included in the Total Portfolio and the Core Portfolio consisting of
seven Parking Facilities acquired prior to April 1, 1999.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CORE PORTFOLIO
---------------------------------------- -------------------------------------
INCREASE/ % INCREASE/ %
(DOLLARS IN THOUSANDS) 2000 1999 (DECREASE) CHANGE 2000 1999 (DECREASE) CHANGE
------------------------------------ ------- ------ ---------- -------- ------ ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property revenues................... $ 7,682 $8,972 $(1,290) (14.4)% $4,151 $3,505 $646 18.4%
Interest/dividend income............ 1,227 93 1,134 1,219.4 -- 38 (38) (100.0)
------- ------ ------- -------- ------ ------ ---- ------
Total revenues.............. 8,909 9,065 (156) (1.7) $4,151 3,543 608 17.2
------- ------ ------- -------- ------ ------ ---- ------
Interest expense.................... 675 748 (73) (9.8) 611 619 (8) (1.3)
Depreciation and amortization....... 738 1,910 (1,172) (61.3) 643 605 38 6.3
Property operating expenses......... 2,589 2,055 534 26.0 1,087 999 88 8.8
Ground rent......................... 6 12 (6) (50.0) -- -- -- --
General and administrative.......... 23 149 (126) (84.6) -- -- -- --
------- ------ ------- -------- ------ ------ ---- ------
Total expenses.............. 4,031 4,874 (843) (17.3) 2,341 2,223 118 5.3
------- ------ ------- -------- ------ ------ ---- ------
Income before allocation to
minority interests, income from
investment in unconsolidated joint
ventures and net gain from sales
of real estate and extraordinary
items............................. 4,878 4,191 687 16.4 1,810 1,320 490 37.1
Minority interests.................. (1,342) 42 (1,384) (3,295.2) -- -- -- --
Income from investment in
unconsolidated joint ventures..... 440 359 81 22.6 440 359 81 22.6
Net gain on sales of real estate and
extraordinary items............... 23,257 -- 23,257 -- -- -- -- --
------- ------ ------- -------- ------ ------ ---- ------
Net income.......................... $27,233 $4,592 $22,641 493.1% $2,250 $1,679 $571 34.0%
======= ====== ======= ======== ====== ====== ==== ======
Property revenues less property
operating expenses before
depreciation and amortization,
general and administrative, ground
rent and interest expense......... $ 5,093 $6,917 $(1,824) (26.4)% $3,064 $2,506 $558 22.3%
======= ====== ======= ======== ====== ====== ==== ======
</TABLE>
27
<PAGE> 28
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 TO JUNE 30, 1999
The table below represents selected operating information for the Parking
Facilities included in the Total Portfolio and the Core Portfolio consisting of
seven Parking Facilities acquired prior to January 1, 1999.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CORE PORTFOLIO
---------------------------------------- -------------------------------------
INCREASE/ % INCREASE/ %
(DOLLARS IN THOUSANDS) 2000 1999 (DECREASE) CHANGE 2000 1999 (DECREASE) CHANGE
---------------------------------- ------- ------- ---------- ------- ------ ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property revenues................. $17,626 $17,747 $ (121) (0.7)% $8,147 $7,277 $ 870 12.0%
Interest/dividend income.......... 1,335 96 1,239 1,290.6 -- 38 (38) (100.0)
------- ------- ------- ------- ------ ------ ------ ------
Total revenues............ 18,961 17,843 1,118 6.3 8,147 7,315 832 11.4
------- ------- ------- ------- ------ ------ ------ ------
Interest expense.................. 1,415 1,676 (261) (15.6) 1,224 1,233 (9) (0.7)
Depreciation and amortization..... 2,489 3,293 (804) (24.4) 1,287 1,210 77 6.4
Property operating expenses....... 5,280 4,020 1,260 31.3 2,184 1,941 243 12.5
Ground rent....................... 19 25 (6) (24.0) -- -- -- --
General and administrative........ 24 125 (101) (80.8) -- -- -- --
------- ------- ------- ------- ------ ------ ------ ------
Total expenses............ 9,227 9,139 88 1.0 4,695 4,384 311 7.1
------- ------- ------- ------- ------ ------ ------ ------
Income before allocation to
minority interests, income from
investment in unconsolidated
joint ventures and net gain on
sales of real estate and
extraordinary items............. 9,734 8,704 1,030 11.8 3,452 2,931 521 17.8
Minority interests................ (1,457) (193) (1,264) 654.9 -- -- -- --
Income from investment in
unconsolidated joint ventures... 794 768 26 3.4 794 768 26 3.4
Net gain from sales of real estate
and extraordinary items......... 23,257 -- 23,257 -- -- -- -- --
------- ------- ------- ------- ------ ------ ------ ------
Net income........................ $32,328 $ 9,279 $23,049 248.4% $4,246 $3,699 $ 547 14.8%
======= ======= ======= ======= ====== ====== ====== ======
Property revenues less property
operating expenses before
depreciation and amortization,
general and administrative,
ground rent and interest
expense......................... $12,346 $13,727 $(1,381) (10.1)% $5,963 $5,336 $ 627 11.8%
======= ======= ======= ======= ====== ====== ====== ======
</TABLE>
PROPERTY DISPOSITIONS
The Company has disposed or partially disposed of the following properties
since January 1, 1999:
<TABLE>
<CAPTION>
YEAR PROPERTY
---- -----------------------------------------------
<S> <C> <C>
2000........................... Sarasota City Center Boston Harbor
Media Center Capital Commons
1111 Sansom St. Forbes and Allies
15th & Sansom St. Juniper/Locust
1602-34 Chancellor Milwaukee Center
1616 Sansom St. Riverfront/Stanwix
Bank of America(1) Park Plaza
1999........................... Atrium Towers SunTrust Center(1)
5100 Brookline Promenade II(1)
215 Fremont Street Pasadena Towers(1)
One Columbus Preston Commons(1)
10&30 South Wacker(1) Sterling Plaza(1)
Bank One Center(1)
</TABLE>
28
<PAGE> 29
After the Company sold the above properties, the Company continued as the
property manager for several of the properties. Below is a summary of the
results of operations of these properties through their respective disposition
dates:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ------------------
(DOLLARS IN THOUSANDS) 2000 1999 2000 1999
------------------------------------------------------ --------- --------- ------- --------
<S> <C> <C> <C> <C>
Property revenue...................................... $11,720 $63,857 $29,070 $123,989
Interest income....................................... 6 22 17 90
------- ------- ------- --------
Total revenues.............................. 11,726 63,879 29,087 124,079
------- ------- ------- --------
Interest expense...................................... 65 2,922 192 6,194
Depreciation and amortization......................... 1,737 10,591 5,347 20,941
Property operating expenses........................... 3,133 20,777 7,840 41,986
General and administrative............................ 25 192 152 169
------- ------- ------- --------
Total expenses.............................. 4,960 34,482 13,531 69,290
------- ------- ------- --------
Income before allocation to minority interests, net
gain on sales of real estate and extraordinary
items............................................... 6,766 29,397 15,556 54,789
Minority interest -- partially owned properties....... (1,342) 39 (1,457) (202)
Gain on sales of real estate and extraordinary
items............................................... 36,735 8,085 40,596 7,294
------- ------- ------- --------
Net income............................................ $42,159 $37,521 $54,695 $ 61,881
======= ======= ======= ========
Property revenues less property operating expenses
before depreciation and amortization, general and
administrative and interest expense................. $ 8,587 $43,080 $21,230 $ 82,003
======= ======= ======= ========
</TABLE>
(1) These Office Properties were partially sold. The Company accounts for its
remaining interest in these Office Properties under the equity method of
accounting.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Net cash provided from operations represents the primary source of
liquidity to fund distributions, debt service, recurring capital costs and
non-revenue enhancing tenant improvements. The Company currently intends to
continue to make, but has not contractually bound itself to make, regular
quarterly distributions to holders of Units and preferred units. Subject to the
foregoing, the Company has established annual distribution rates as follows:
- $1.68 per annum per Unit;
- 8.98% per annum ($2.245 per unit) for each Series A Preferred Unit;
- 5.25% per annum ($2.625 per unit) for each Series B Preferred Unit; and
- 8.625% per annum ($2.15625 per unit) for each Series C Preferred Unit
The Company intends to continue to fund distributions, debt service,
recurring capital costs and non-revenue enhancing tenant improvements from cash
from operations and borrowings under its credit facilities. The Company also
expects that its unsecured credit facilities will provide for temporary working
capital, the funding of capital improvements and revenue enhancing tenant
improvements, unanticipated cash needs and funding of acquisitions and
development costs.
Since the anticipated size of the Company's distributions will not allow
the Company, using only cash from operations, to retire all of its debt as it
comes due, the Company will be required to repay maturing debt with funds from
debt and/or equity financing. There can be no assurance that such financing will
be available on acceptable terms.
29
<PAGE> 30
DEBT FINANCING
The table below summarizes the mortgage debt, unsecured notes and lines of
credit indebtedness outstanding at June 30, 2000 and December 31, 1999,
including a net unamortized (discount)/premium on mortgage debt of $(20,383) and
$10,574, respectively, and a net unamortized (discount)/premium on unsecured
notes of $(508) and $47, respectively, recorded in connection with property
acquisitions, mergers and the issuance of unsecured notes.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2000 1999
------------------------------------------------------------ ------------- ------------
<S> <C> <C>
DEBT SUMMARY:
BALANCE
Fixed rate................................................ $7,006,020 $5,272,608
Variable rate............................................. 1,587,148 579,310
---------- ----------
Total............................................. $8,593,168 $5,851,918
========== ==========
PERCENT OF TOTAL DEBT:
Fixed rate................................................ 81.5% 90.1%
Variable rate............................................. 18.5% 9.9%
---------- ----------
Total............................................. 100.0% 100.0%
========== ==========
EFFECTIVE INTEREST RATE AT END OF PERIOD:
Fixed rate................................................ 7.4% 7.1%
Variable rate............................................. 7.7% 7.4%
---------- ----------
Effective interest rate........................... 7.5% 7.2%
========== ==========
</TABLE>
A majority of the variable rate debt shown above bears interest at an
interest rate based on various spreads over LIBOR.
MORTGAGE FINANCING
As of June 30, 2000, the Company's total mortgage debt (excluding the
Company's share of unconsolidated debt of approximately $351.8 million)
consisted of approximately $2.9 billion of fixed-rate debt with a weighted
average interest rate of approximately 7.8% and $135.1 million of variable rate
debt based on various spreads over LIBOR or the prime rate. The Company's
mortgage debt at June 30, 2000 will mature as follows:
<TABLE>
<CAPTION>
Dollars in thousands
-------------------------------------------------------------------------
<S> <C>
2000........................................................ $ 85,055
2001........................................................ 262,729
2002........................................................ 130,485
2003........................................................ 200,001
2004........................................................ 325,493
Thereafter.................................................. 2,003,296
----------
Subtotal.................................................... 3,007,059
Net discount (net of accumulated amortization of $2.0
million).................................................. (20,383)
----------
Total............................................. $2,986,676
==========
</TABLE>
The instruments encumbering the Properties restrict transfer of the
respective Properties subject to the terms of the mortgage, prohibit additional
liens and require payment of real estate taxes on the Properties, maintenance of
the Properties in good condition, maintenance of insurance on the Properties and
obtaining lender consent to material tenant leases.
30
<PAGE> 31
CREDIT FACILITIES
The cash portion of the Cornerstone Merger of approximately $1.2 billion
was partially funded from the $1.0 Billion Credit Facility and a new revolving
credit facility. Concurrently with the merger, the Company fully borrowed $1.0
billion under the $1.0 Billion Credit Facility and amended the facility into a
term loan (the "Term Loan"). The Term Loan bears interest at LIBOR plus 80 basis
points and matures on May 29, 2001. If the Company obtains net proceeds from the
disposition of a Property (excluding proceeds from a tax deferred property
disposition), the issuance of unsecured notes or the issuance of Common
Shares/Units the net proceeds must be used to repay any amounts outstanding
under the Term Loan up to the then current unpaid balance of the Term Loan.
The remaining cash consideration of the Cornerstone Merger was funded from
a new $1.0 billion revolving credit facility obtained at the time of the merger
(the "Line of Credit"). The Line of Credit bears interest at LIBOR plus 60 basis
points and matures on June 19, 2003. There is also a facility fee of $2.0
million per annum on the Line of Credit payable quarterly. In addition, the
Company assumed interest rate protection agreements in the notional amount of
$250 million effectively converting a portion of the Line of Credit to a
fixed-blended interest rate of 4.6%. The interest rate protection agreements
terminate in December 2000 and January 2001.
On April 10, 2000, the Company repaid the Chase Term Loan in the amount of
$100 million with proceeds from the $1.0 Billion Credit Facility.
UNSECURED NOTES
The table below summarizes the Company's unsecured notes as of August 7,
2000:
<TABLE>
<CAPTION>
TRANCHE AMOUNT STATED RATE EFFECTIVE RATE(1)
------- ----------- ----------- -----------------
(Dollars in
thousands)
<S> <C> <C> <C>
3 Year Notes due 2002.......................... $ 200,000 6.4% 6.6%
4 Year MOPPRS due 2002(2)...................... 250,000 6.4% 6.3%
5 Year Notes due 2003.......................... 300,000 6.4% 6.8%
5 Year Notes due 2004.......................... 300,000 6.5% 6.7%
6 Year Notes due 2004.......................... 250,000 6.5% 6.7%
7 Year Notes due 2004.......................... 30,000 7.2% 7.3%
7 Year Notes due 2005.......................... 400,000 6.6% 7.0%
8 Year Notes due 2005.......................... 50,000 7.4% 7.7%
6 Year Notes due 2006(3)....................... 500,000 8.4% 8.6%
9 Year Notes due 2006.......................... 50,000 7.4% 7.7%
9 Year Notes due 2007.......................... 300,000 6.8% 6.8%
10 Year Notes due 2007......................... 50,000 7.4% 7.7%
10 Year Notes due 2008......................... 300,000 6.8% 7.0%
10 Year Notes due 2009......................... 500,000 6.8% 6.9%
10 Year Notes due 2010(4)...................... 360,000 8.1% 8.2%
20 Year Notes due 2018......................... 250,000 7.3% 7.6%
30 Year Notes due 2028......................... 225,000 7.3% 7.3%
30 Year Notes due 2029......................... 200,000 7.5% 7.6%
---------- --- ---
Subtotal............................. $4,515,000 7.1% 7.2%
=== ===
Net discount (net of accumulated
amortization)...................... (1,275)
----------
Total................................ $4,513,725
==========
</TABLE>
---------------
(1) Includes the cost of terminated interest rate protection agreements,
offering and transaction costs and premiums and discounts on certain
unsecured notes.
31
<PAGE> 32
(2) The MOPPRS are subject to mandatory redemption in 2002 but do not mature
until 2012.
(3) On March 21, 2000 the Company issued the $500 Million Notes due March 15,
2006. The net proceeds after discount, offering expenses and a terminated
treasury lock agreement were approximately $493.5 million and were used to
repay amounts outstanding on the $1.0 Billion Credit Facility.
(4) On August 7, 2000, the Company issued $360 Million Notes due August 1, 2010.
The net proceeds after discount and offering expenses were approximately
$356.2 million will be used to repay amounts outstanding on the Term Loan.
The Company previously filed a shelf registration statement, which was
declared effective on July 22, 1998, relating to the issuance from time to time
of up to $2.0 billion of unsecured debt securities and warrants exercisable for
debt securities in amounts, at initial prices and on terms to be determined at
the time of offering. The Company issued $2.0 billion of unsecured notes under
this registration statement. In August 2000, the Company registered an
additional $60 million of unsecured debt securities in connection with the $360
Million Notes Offering.
Restrictions and Covenants
Agreements or instruments relating to the unsecured notes and lines of
credit contain certain restrictions and requirements regarding total
debt-to-assets ratios, secured debt-to-total assets ratios, debt service
coverage ratios, minimum ratio of unencumbered assets to unsecured debt and
other limitations.
EQUITY SECURITIES
A summary of the activity of the Trust's Common Shares and the Company's
Units during the three months ended June 30, 2000, is as follows:
<TABLE>
<CAPTION>
COMMON SHARES UNITS TOTAL
------------- ---------- -----------
<S> <C> <C> <C>
Balance at March 31, 2000.................... 248,329,132 33,163,406 281,492,538
Issued in the Cornerstone Merger........... 51,274,811 12,398,805 63,673,616
Units redeemed for Common Shares........... 392,083 (392,083) --
Restricted Shares issued/cancelled, net.... 16,100 -- 16,100
Share options exercised.................... 1,120,155 -- 1,120,155
----------- ---------- -----------
Balance at June 30, 2000..................... 301,132,281 45,170,128 346,302,409
=========== ========== ===========
</TABLE>
INVESTMENTS IN SECURITIES
The Company owns equity interests in several companies that provide
communication and other services to tenants or amenities. The equity interests
are in the form of common stock and vested and unvested warrants to acquire
common stock. Below is a summary of these investments as of June 30, 2000:
<TABLE>
<CAPTION>
SQUARE FEET CAPITAL SHARES WARRANTS MARKET
COMPANY (IN MILLIONS) SYMBOL INVESTMENT RECEIVED RECEIVED VALUE
------- ------------- -------------- ----------- --------- --------- -----------
(Dollars in (Dollars in
thousands) thousands)
<S> <C> <C> <C> <C> <C> <C>
Allied Riser
Corporation......... 97 ARCC $ 3,438 861,720 1,731,875 $36,683
Broadband Office...... 59 Privately Held -- 2,437,885 -- 1,460
Captivate............. 73 Privately Held 9,705 2,253,835 2,373,798 19,974
OnSite(a)............. 22 Privately Held -- -- -- --
Cypress............... 17 CYCO 7,858 828,947 794,280 8,417
------- --------- --------- -------
Total....... $21,001 6,382,387 4,899,953 $66,534
======= ========= ========= =======
</TABLE>
---------------
(a) The Company entered into an agreement with OnSite Access, Inc. ("OnSite"),
a facilities based provider of broadband data, video and voice
communications services, delivered over fiber optic networks
32
<PAGE> 33
designed, constructed and owned by OnSite in large- and medium-sized office
buildings. OnSite will provide its services to tenants in certain Office
Properties. In return for access to the Office Properties, OnSite is
obligated to grant the Company warrants to acquire common shares of OnSite
for $2.36 per share.
CORNERSTONE MERGER
On June 19, 2000, the Trust, the Company, Cornerstone Properties Inc.
("Cornerstone") and Cornerstone Properties Limited Partnership ("Cornerstone
Partnership") consummated the merger of Cornerstone with and into the Trust and
Cornerstone Partnership with and into the Company (the "Cornerstone Merger") at
a cost of approximately $4.5 billion. The purchase price consisted of:
(i) the Trust's issuance of approximately 51.3 million Common Shares
valued at $24.68 per share and the Trust's issuance of stock options for a
total of approximately $1,271.3 million, of which the Company issued a
corresponding number of Units to the Trust on a one-for-one basis;
(ii) the Company's issuance of approximately 12.4 million Units to
third parties valued at $24.68 per Unit for a total of approximately $306.0
million;
(iii) the cash redemption of approximately 58.6 million Cornerstone
common shares valued at $18.00 per share for a total of approximately
$1,053.9 million;
(iv) the cash redemption of approximately 3.0 million Cornerstone
preferred shares valued at $18.00 per share for a total of approximately
$57.6 million, plus accrued but unpaid dividends;
(v) the assumption of approximately $1,304.9 million of secured debt
and $415.5 million of unsecured debt;
(vi) the payment of merger costs of approximately $72.1 million; and
(vii) the assumption of net liabilities of approximately $9.6 million.
The cash portion of the Cornerstone Merger of approximately $1.2 billion
was partially funded from the $1.0 Billion Credit Facility and a new revolving
credit facility. See Credit Facilities above for further disclosure.
MARKET RISK
Since December 31, 1999, there have been no material changes in the
information regarding market risk that was provided in the Company's Form 10-K
for the year ended December 31, 1999.
CAPITAL IMPROVEMENTS
The following capital improvements, tenant improvements and leasing
commission information excludes the properties acquired in the Cornerstone
Merger since the merger date was June 19, 2000.
The Company considers capital improvements and revenue enhancing tenant
improvements when a property is acquired in determining the amount of equity and
debt financing required to purchase the property and fund the improvements.
Therefore, capital improvements made in the year of acquisition and the
following two years, are treated separately from typical recurring capital
expenditures, non-revenue enhancing tenant improvements and leasing commissions
required once these properties have reached stabilized occupancy, and deferred
maintenance and renovations planned at the time of acquisition have been
completed. Capital improvements (including tenant improvements and leasing
commissions for shell space) for the six months ended June 30, 2000 were
approximately $17.8 million or $0.23 per square foot. These amounts exclude
capital and tenant improvements of approximately $48.7 million for developments.
The Company considers capital expenditures to be recurring expenditures
relating to the ongoing maintenance of the Office Properties. The table below
summarizes capital expenditures for the six months
33
<PAGE> 34
ended June 30, 2000. The capital expenditures set forth below are not
necessarily indicative of future capital expenditures.
<TABLE>
<S> <C>
Number of Office Properties................................. 300
Rentable square feet (in millions).......................... 78.5
Capital expenditures per square foot........................ $0.10
</TABLE>
TENANT IMPROVEMENTS AND LEASING COMMISSION COSTS
The Company distinguishes its tenant improvements and leasing commissions
between those that are revenue enhancing (i.e., required for space which is
vacant at the time of acquisition or that has been vacant for nine months or
more) and non-revenue enhancing (i.e. required to maintain the revenue being
generated from currently leased space). The table below summarizes the revenue
enhancing and non-revenue enhancing tenant improvements and leasing commissions
for the six months ended June 30, 2000. The tenant improvement and leasing
commission costs set forth below are presented on an aggregate basis and do not
reflect significant regional variations and, in any event, are not necessarily
indicative of future tenant improvements and leasing commission costs:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
(DOLLARS IN THOUSANDS) JUNE 30, 2000(1)
------------------------------------------------------------ ------------------------
<S> <C>
Number of Office Properties................................. 300
Rentable square feet (in millions).......................... 78.5
Revenue enhancing tenant improvements and leasing
commissions:
Amounts (in thousands).................................... $34,529
Per square foot improved.................................. $ 34.91
Per total square foot (annualized)........................ $ 0.88
Non-revenue enhancing tenant improvements and leasing
commissions:
Renewal space:
Amounts (in thousands).................................... $19,296
Per square foot improved.................................. $ 6.18
Per total square foot (annualized)........................ $ 0.49
Retenanted space:
Amounts (in thousands).................................... $42,410
Per square foot improved.................................. $ 13.32
Per total square foot (annualized)........................ $ 1.08
-------
Total non-revenue enhancing (in thousands).................. $61,706
Per square foot improved.................................... $ 9.78
Per total square foot (annualized).......................... $ 1.57
</TABLE>
---------------
(1) The per square foot calculations as of June 30, 2000 are calculated taking
the total dollars anticipated to be incurred on tenant improvements for
tenants taking occupancy during the six months ended June 30, 2000, divided
by the total square footage being improved or total building square footage.
The actual amounts incurred as of June 30, 2000 for revenue enhancing,
non-revenue enhancing renewal and retenanted space are summarized below:
<TABLE>
<CAPTION>
(Dollars in millions)
---------------------
<S> <C>
Revenue enhancing........................................... $16.9
Non-revenue enhancing renewal............................... $ 7.1
Non-revenue enhancing retenanted............................ $36.8
</TABLE>
34
<PAGE> 35
DEVELOPMENTS
The Company currently owns several Properties in various stages of
development or pre-development. The Company funds these developments with
proceeds from working capital and the line of credit. Specifically identifiable
direct acquisition, development and construction costs are capitalized
including, where applicable, salaries and related costs, real estate taxes,
interest and certain pre-construction costs essential to the development of a
property. The Properties under development as of June 30, 2000 are as follows:
<TABLE>
<CAPTION>
TOTAL
ESTIMATED PLACED IN PERCENT ESTIMATED
PROPERTY LOCATION SERVICE DATE(A) LEASED SQUARE FEET COSTS INCURRED COSTS(A)
-------- ----------------- ------------------- ------- ----------- -------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
WHOLLY-OWNED
Seaport Plaza Redwood City, CA 4Q/2000 100% 160,000 $26,957 $ 41,300
Parkside Towers Foster City, CA 4Q/2001 96% 398,000 44,406 131,400
---- --------- ------- --------
97% 558,000 71,363 172,700
---- --------- ------- --------
TAKE-OUT PROJECT
World Trade Center(b) Seattle, WA 3Q/2000 100% 186,787 171 39,000
---- --------- ------- --------
OTHER DEVELOPMENTS(C)
First and Howard San Francisco, CA 1Q/02 -- 1Q/03 0% 1,260,000 6,334 424,000
Concar San Mateo, CA 3Q/2002 0% 200,000 4,089 69,000
Ferry Building San Francisco, CA 3Q/2002 0% 225,000 4,645 84,000
Larkspur Landing Larkspur, CA 3Q/2003 0% 168,000 590 45,000
---- --------- ------- --------
0% 1,853,000 15,658 622,000
---- --------- ------- --------
Grand Total/Weighted Average 28% 2,597,787 $87,192 $833,700
==== ========= ======= ========
</TABLE>
---------------
(a) The Estimated Placed in Service Date represents the date the certificate of
occupancy has been or is anticipated to be obtained. Subsequent to
obtaining the certificate of occupancy, the property will undergo a
lease-up period. The Total Estimated Costs include amounts attributable to
tenanting the Property. These numbers are estimates and may be subject to
change upon completion of the development.
(b) The Company expects to acquire this property in August 2000. This
transaction is contingent upon certain terms and conditions as set forth in
its purchase agreement. There can be no assurance that this transaction
will be consummated.
(c) These joint ventures were acquired in the Cornerstone Merger and are in
various stages of development or pre-development. The Company is currently
evaluating these developments including the participation of additional
joint venture partners and potential construction financing. With the
exception of First and Howard (which is subject to certain third party
conditions not under the control of the Company), the Company's Board of
Trustees has not yet approved these developments. The Total Estimated Costs
(which represent 100% of the total development cost) shown are preliminary
and, along with the Estimated Placed in Service Date, are subject to
numerous factors over which the Company may have little or no control.
There can be no assurance that these developments will be commenced or
completed.
In addition to the properties described above, the Company owns various
land parcels available for development. However, no significant development
activity is taking place on these sites at this time.
35
<PAGE> 36
INFLATION
Substantially all of the office leases require the tenant to pay, as
additional rent, a portion of any increases in real estate taxes (except, in the
case of certain California leases, which limit the ability of the landlord to
pass through to the tenants the effect of increased real estate taxes
attributable to a sale of real property interests) and operating expenses over a
base amount. In addition, many of the office leases provide for fixed increases
in base rent or indexed escalations (based on the Consumer Price Index or other
measures). The Company believes that inflationary increases in expenses will be
offset, in part, by the expense reimbursements and contractual rent increases
described above.
FUNDS FROM OPERATIONS
Management of the Company believes Funds from Operations, as defined by the
National Association of Real Estate Investment Trusts, Inc. ("NAREIT"), to be an
appropriate measure of performance for an equity REIT. While Funds from
Operations is a relevant and widely used measure of operating performance of
equity REITs, it does not represent cash flow from operations or net income as
defined by generally accepted accounting principles ("GAAP"), and it should not
be considered as an alternative to these indicators in evaluating liquidity or
operating performance of the Company.
The following table reflects the calculation of the Company's Funds from
Operations for the three and six months ended June 30, 2000 and 1999 on an
historical basis:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------
(DOLLARS IN THOUSANDS) 2000 1999
------------------------------------------------------------ --------- ---------
<S> <C> <C>
Income before allocation to minority interests, income from
investment in unconsolidated joint ventures, net gain on
sales of real estate and extraordinary items.............. $ 104,910 $ 104,536
Add back (deduct):
(Income) allocated to minority interests for partially
owned properties (excluding allocation of gain on sale
of real estate)........................................ (458) (353)
Income from investments in unconsolidated joint
ventures............................................... 13,389 3,215
Depreciation and amortization (real estate related)....... 97,298 90,143
Put option settlement..................................... (1,031) --
Preferred distributions................................... (10,883) (10,907)
--------- ---------
Funds from Operations(1).................................... 203,225 186,634
Less deferred rental revenue.............................. (15,525) (15,233)
Plus deferred rental expense.............................. 615 463
--------- ---------
Adjusted Funds from Operations.............................. $ 188,315 $ 171,864
========= =========
Cash Flow Provided By (Used For):
Operating Activities...................................... $ 268,969 $ 237,811
Investing Activities...................................... $(927,161) $ (86,845)
Financing Activities...................................... $ 724,170 $(157,015)
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
(DOLLARS IN THOUSANDS) 2000 1999
------------------------------------------------------------ ------------ ----------
<S> <C> <C>
Income before allocation to minority interests, income from
investment in unconsolidated joint ventures, net gain on
sales of real estate and extraordinary items.............. $ 206,589 $ 204,820
Add back (deduct):
(Income) allocated to minority interests for partially
owned properties (excluding allocation of gain on sale
of real estate)........................................ (1,011) (898)
Income from investments in unconsolidated joint
ventures............................................... 24,763 5,050
Depreciation and amortization (real estate related)....... 192,084 179,231
Put option settlement..................................... (2,061) --
Preferred distributions................................... (21,580) (21,788)
----------- ---------
Funds from Operations(1).................................... 398,784 366,415
Less deferred rental revenue.............................. (28,232) (31,773)
Plus deferred rental expense.............................. 1,116 1,116
----------- ---------
Adjusted Funds from Operations.............................. $ 371,668 $ 335,758
=========== =========
Cash Flow Provided By (Used For):
Operating Activities...................................... $ 378,458 $ 340,723
Investing Activities...................................... $ (993,090) $(240,778)
Financing Activities...................................... $ 694,648 $(131,108)
</TABLE>
---------------
(1) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 defines Funds from Operations as net income (loss) (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring
and sales of properties, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. In November 1999, NAREIT issued a National Policy Bulletin
effective January 1, 2000 clarifying the definition of FFO to include all
operating results, both recurring and non-recurring, except those defined as
extraordinary under GAAP. In accordance with this NAREIT Bulletin, the
Company will no longer adjust for the amortization of discounts and premiums
on mortgages when calculating FFO. Accordingly, the Company restated the
prior period data for comparative purposes. The Company believes that Funds
from Operations is helpful to investors as a measure of the performance of
an equity REIT because, along with cash flow from operating activities,
financing activities and investing activities, it provides investors with an
indication of the ability of the Company to incur and service debt, to make
capital expenditures and to fund other cash needs. The Company computes
Funds from Operations in accordance with standards established by NAREIT
which may not be comparable to Funds from Operations reported by other REITs
that do not define the term in accordance with the current NAREIT definition
or that interpret the current NAREIT definition differently than the
Company. Funds from Operations does not represent cash generated from
operating activities in accordance with GAAP, nor does it represent cash
available to pay distributions and should not be considered as an
alternative to net income (determined in accordance with GAAP) as an
indication of the Company's financial performance or to cash flow from
operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make cash distributions.
37
<PAGE> 38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about quantitative and qualitative disclosures about market
risk is incorporated herein by reference from the "Market Risk" discussion under
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
<PAGE> 39
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT NAME
------- ------------
<C> <S>
2.1 Agreement and Plan of Merger, dated February 11, 2000, among
the Trust, the Company, Cornerstone and Cornerstone
Partnership (incorporated herein by reference to Exhibit 2.1
to the Company's Current Report on Form 8-K dated February
11, 2000)
2.2 First Amendment to Agreement and Plan of Merger, dated May
11, 2000 by and among the Trust, the Company, Cornerstone
and Cornerstone Partnership (incorporated herein by
reference to Exhibit 2.1 to the Trust's Current Report on
Form 8-K dated May 2, 2000)
3.1 Eleventh Amendment to Agreement of the Limited Partnership
of the Company (incorporated herein by reference to Exhibit
10.1 to the Trust's Current Report on Form 8-K dated May 2,
2000)
3.2 First Amended and Restated Agreement of Limited Partnership
of the Company (incorporated herein by reference to Exhibit
10.2 to the Trust's Current Report on Form 8-K dated May 2,
2000)
3.3 Second Amended and Restated Agreement of Limited Partnership
of the Company (incorporated herein by reference to Exhibit
99.2 of the Company's Current Report on Form 8-K dated June
19, 2000)
10.1 Revolving Credit Agreement for $1,000,000,000 Revolving
Credit Facility dated as of May 12, 2000 among the Company
and the Banks listed therein (incorporated herein by
reference to Exhibit 99.3.1 of the Company's Current Report
on Form 8-K dated June 19, 2000)
10.2 Guaranty of Payment -- No. 1, made as of May 12, 2000,
between the Company and Bank of America, N.A. (incorporated
herein by reference to Exhibit 99.3.2 to the Company's
Current Report on Form 8-K dated June 19, 2000)
10.3 Guaranty of Payment -- No. 2, made as of May 12, 2000
between the Company and Bank of America, N.A. (incorporated
herein by reference to Exhibit 99.3.3 to the Company's
Current Report on Form 8-K dated June 19, 2000)
10.4 Third Amendment and Restated Credit Agreement for
$1,000,000,000 Credit Facility dated as of May 12, 2000
among the Operating Partnership and the Banks listed therein
(incorporated herein by reference to Exhibit 99.4.1 to the
Company's Current Report on Form 8-K dated June 19, 2000)
10.5 Second Amended and Restated Guaranty of Payment, made as of
May 12, 2000, between the Company and Bank of America, N.A.
(incorporated herein by reference to Exhibit 99.4.2 to the
Company's Current Report on Form 8-K dated June 19, 2000)
10.6 Form of $360,000,000 8.10% Note due August 1, 2010 of the
Company (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated August 2, 2000)
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
<PAGE> 40
The Company filed a Current Report on Form 8-K dated May 2, 2000 announcing
that (a) the Trust, as general partner of the Company, had approved the Eleventh
Amendment to the Agreement of Limited Partnership of the Company, which amended
Sections 7.4, 8.5.C and 14.1B thereof, and the First Amended and Restated
Agreement of Limited Partnership of the Company, which integrated the
partnership agreement and the prior amendments thereto into one document and
incorporated into the partnership agreement certain changes in applicable
federal income tax laws, and (b) the Company, the Trust, Cornerstone and
Cornerstone Partnership had entered into the First Amendment to the Agreement
and Plan of Merger.
The Company filed a Current Report on Form 8-K dated June 19, 2000
announcing completion of the merger of Cornerstone Partnership with and into the
Company and furnishing the required historical financial statements of
Cornerstone Partnership and the required pro forma financial information
relating to that transaction.
<PAGE> 41
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.
EOP OPERATING LIMITED PARTNERSHIP
By: EQUITY OFFICE PROPERTIES TRUST
its general partner
Date: August 14, 2000 By: /s/ STANLEY M. STEVENS
-------------------------------------
Stanley M. Stevens
Executive Vice President,
Chief Legal Counsel and Secretary
Date: August 14, 2000 By: /s/ RICHARD D. KINCAID
-------------------------------------
Richard D. Kincaid
Executive Vice President,
Chief Financial Officer
<PAGE> 42
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT NAME PAGE NO.
------- ------------ --------
<C> <S> <C>
2.1 Agreement and Plan of Merger, dated February 11, 2000, among
the Trust, the Company, Cornerstone and Cornerstone
Partnership (incorporated herein by reference to Exhibit 2.1
to the Company's Current Report on Form 8-K dated February
11, 2000)
2.2 First Amendment to Agreement and Plan of Merger, dated May
11, 2000 by and among the Trust, the Company, Cornerstone
and Cornerstone Partnership (incorporated herein by
reference to Exhibit 2.1 to the Trust's Current Report on
Form 8-K dated May 2, 2000)
3.1 Eleventh Amendment to Agreement of the Limited Partnership
of the Company (incorporated herein by reference to Exhibit
10.1 to the Trust's Current Report on Form 8-K dated May 2,
2000)
3.2 First Amended and Restated Agreement of Limited Partnership
of the Company (incorporated herein by reference to Exhibit
10.2 to the Trust's Current Report on Form 8-K dated May 2,
2000)
3.3 Second Amended and Restated Agreement of Limited Partnership
of the Company (incorporated herein by reference to Exhibit
99.2 of the Company's Current Report on Form 8-K dated June
19, 2000)
10.1 Revolving Credit Agreement for $1,000,000,000 Revolving
Credit Facility dated as of May 12, 2000 among the Company
and the Banks listed therein (incorporated herein by
reference to Exhibit 99.3.1 of the Company's Current Report
on Form 8-K dated June 19, 2000)
10.2 Guaranty of Payment -- No. 1, made as of May 12, 2000,
between the Company and Bank of America, N.A. (incorporated
herein by reference to Exhibit 99.3.2 to the Company's
Current Report on Form 8-K dated June 19, 2000)
10.3 Guaranty of Payment -- No. 2, made as of May 12, 2000
between the Company and Bank of America, N.A. (incorporated
herein by reference to Exhibit 99.3.3 to the Company's
Current Report on Form 8-K dated June 19, 2000)
10.4 Third Amendment and Restated Credit Agreement for
$1,000,000,000 Credit Facility dated as of May 12, 2000
among the Operating Partnership and the Banks listed therein
(incorporated herein by reference to Exhibit 99.4.1 to the
Company's Current Report on Form 8-K dated June 19, 2000)
10.5 Second Amended and Restated Guaranty of Payment, made as of
May 12, 2000, between the Company and Bank of America, N.A.
(incorporated herein by reference to Exhibit 99.4.2 to the
Company's Current Report on Form 8-K dated June 19, 2000)
10.6 Form of $360,000,000 8.10% Note due August 1, 2010 of the
Company (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated August 2, 2000)
27.1 Financial Data Schedule
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