<PAGE>
- --------------------------------------------------------------------------------
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ------------ to ------------
Commission file number 000-24905
BEACON CAPITAL PARTNERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
Maryland 04-3403281
- ------------------------------------------ ------------------------------------------
<S> <C>
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
One Federal Street, 26th Floor,
Boston, Massachusetts 02110
- ------------------------------------------ ------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
617-457-0400
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
</TABLE>
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 __
Number of Common Shares outstanding at the latest practicable date, May 14,
1999: 20,973,932 shares, $.01 par value.
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BEACON CAPITAL PARTNERS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
Part I -- Financial Information
Item 1. Consolidated Financial Statements..................................................... 1
Consolidated Balance Sheets--March 31, 1999 (Unaudited) and December 31, 1998....... 1
Consolidated Statements of Operations--Three Months Ended March 31, 1999 (Unaudited)
and the period from January 21, 1998 (Inception) to March 31, 1998................ 2
Consolidated Statements of Cash Flows--Three Months Ended March 31, 1999 (Unaudited)
and the period from January 21, 1998 (Inception) to March 31, 1998................ 3
Notes to Consolidated Financial Statements.......................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 13
Part II -- Other Information
Item 1. Legal Proceedings..................................................................... 14
Item 2. Changes in Securities and Use of Proceeds............................................. 14
Item 3. Defaults Upon Senior Securities....................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders................................... 14
Item 5. Other Information..................................................................... 14
Item 6. Exhibits and Reports on Form 8-K...................................................... 14
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
BEACON CAPITAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED) (NOTE 1)
<S> <C> <C>
ASSETS
Real Estate:
Land................................................................................ $ 51,094 $ 51,094
Buildings, improvements and equipment............................................... 166,872 165,842
----------- ------------
217,966 216,936
Less accumulated depreciation....................................................... 3,256 2,168
----------- ------------
214,710 214,768
Deferred financing and leasing costs, net of accumulated amortization of $78 and $42,
respectively........................................................................ 580 414
Cash and cash equivalents............................................................. 161,010 174,647
Restricted cash....................................................................... 328 697
Accounts receivable, net.............................................................. 1,629 2,464
Accrued rent receivable............................................................... 315 233
Other assets.......................................................................... 2,867 641
Investments in joint ventures and corporations........................................ 92,409 90,136
----------- ------------
Total assets...................................................................... $ 473,848 $ 484,000
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.............................................................. $ 21,476 $ 21,570
Accounts payable and accrued expenses............................................... 5,798 18,731
----------- ------------
Total liabilities................................................................. 27,274 40,301
----------- ------------
Commitments and contingencies......................................................... -- --
Minority interest in consolidated partnership......................................... 55,317 54,983
----------- ------------
Stockholders' equity:
Preferred stock; $.01 par value, 200,000,000 shares authorized, none issued or
outstanding....................................................................... -- --
Excess stock; $.01 par value, 250,000,000 shares authorized, none issued or
outstanding....................................................................... -- --
Common stock; $.01 par value, 500,000,000 shares authorized, 20,973,932 shares
issued and outstanding............................................................ 210 210
Additional paid-in capital.......................................................... 389,520 389,520
Cumulative net income............................................................... 11,595 9,054
Cumulative dividends................................................................ (10,068) (10,068)
----------- ------------
Total stockholders' equity........................................................ 391,257 388,716
----------- ------------
Total liabilities and stockholders' equity........................................ $ 473,848 $ 484,000
----------- ------------
----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
1
<PAGE>
BEACON CAPITAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FOR THE PERIOD
MARCH 31, 1999 FROM
------------------- JANUARY 21,
1998
(UNAUDITED) (INCEPTION) TO
MARCH 31, 1998
---------------
(NOTE 1)
<S> <C> <C>
Revenues:
Rental income............................................................ $ 5,162 $ --
Reimbursement of operating expenses and real estate taxes................ 802 --
Equity in earnings of joint venture...................................... 1,254 --
Interest income.......................................................... 1,986 576
Other income............................................................. 241 8
------- -------
Total revenues......................................................... 9,445 584
------- -------
Expenses:
Property operating....................................................... 1,359 --
Real estate taxes........................................................ 1,063 --
General and administrative............................................... 2,582 968
Interest expense......................................................... 442 --
Depreciation and amortization............................................ 1,124 3
------- -------
Total expenses......................................................... 6,570 971
------- -------
Income (loss) before minority interest..................................... 2,875 (387)
Minority interest in consolidated partnership.............................. (334) --
------- -------
Net income (loss)...................................................... $ 2,541 $ (387)
------- -------
------- -------
Income (loss) per common share--basic and diluted.......................... $ 0.12 $ (0.02)
------- -------
------- -------
Weighted average number of common shares outstanding (in thousands)........ 20,974 17,361
------- -------
------- -------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
BEACON CAPITAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FOR THE PERIOD
MARCH 31, 1999 FROM
------------------- JANUARY 21,
1998
(UNAUDITED) (INCEPTION) TO
MARCH 31, 1998
---------------
(NOTE 1)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................ $ 2,541 $ (387)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation........................................................... 1,088 3
Amortization........................................................... 36 --
Equity in earnings of joint venture.................................... (1,254) --
Minority interest in consolidated partnership.......................... 334 --
Increase (decrease) in cash arising from changes in operating assets and
liabilities:
Restricted cash........................................................ 369 --
Accounts receivable.................................................... 835 --
Accrued rent receivable................................................ (82) --
Other assets........................................................... (1,128) (617)
Accounts payable and accrued expenses.................................. (1,544) 1,387
-------- ---------------
Net cash provided by operating activities............................ 1,195 386
-------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate asset acquisitions and improvements.......................... (1,030) (44)
Payment of deferred leasing costs........................................ (202) --
Acquisition deposits and deferred costs.................................. (1,098) (3,119)
Investments in joint ventures and corporations........................... (1,019) --
-------- ---------------
Net cash used in investing activities................................ (3,349) (3,163)
-------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on mortgage notes............................................. (94) --
Proceeds from loans payable--affiliate................................... -- 3,560
Sale of common stock..................................................... -- 345,800
Offering costs........................................................... -- (22,690)
Distribution payment to minority interests............................... (1,321) --
Dividend payment to stockholders......................................... (10,068) --
-------- ---------------
Net cash (used in) provided by financing activities.................. (11,483) 326,670
-------- ---------------
Net (decrease) increase in cash and cash equivalents..................... (13,637) 323,893
Cash and cash equivalents, beginning of period........................... 174,647 --
-------- ---------------
Cash and cash equivalents, end of period................................. $ 161,010 $ 323,893
-------- ---------------
-------- ---------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
BEACON CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements of Beacon Capital Partners, Inc. ("BCP") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for interim periods are not necessarily
indicative of the results that may be expected for the full year.
The balance sheet at December 31, 1998 and the statements of operations and
cash flows for the period from January 21, 1998 (inception) to March 31, 1998
have been derived from the audited financial statements at that date or for that
period but do not include all of the informtion and footnotes required by
generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in BCP's annual report on Form 10-K for the period
ended December 31, 1998.
2. ORGANIZATION
Beacon Capital Partners, Inc. was incorporated on January 21, 1998 as a
Massachusetts corporation (the "Formation"), and was initially capitalized
through loans from the two founders of BCP, Messrs. Leventhal and Fortin. The
loans were repaid in May 1998. BCP intends to qualify as a real estate
investment trust under the Internal Revenue Code of 1986, as amended. BCP was
established to conduct real estate investment and development activities and
currently operates in one segment.
On March 17, 1998, BCP was reincorporated as a Maryland corporation and on
March 20, 1998 it completed an initial private offering (the "Original
Offering") in accordance with Section 4(2) of the Securities Act. BCP initially
issued 17,360,769 common shares with proceeds, net of expenses, of $323,110. In
April, 1998, 3,613,163 additional shares were issued through the exercise of the
underwriter's over-allotment, with proceeds, net of expenses, of $66,620.
In connection with the reincorporation of BCP in Maryland, BCP established
Beacon Capital Partners, L.P. (the "Operating Partnership"). BCP and the
Operating Partnership are collectively referred to as the "Company". The
Operating Partnership is a Delaware limited partnership. BCP is the sole general
partner of, and, as of March 31, 1999, holds approximately 88% of the economic
interest in the Operating Partnership. BCP holds an approximate 1% general
partnership interest in the Operating Partnership and the balance is held as a
limited partnership interest. The limited partnership interests not held by BCP
are presented as minority interest in the accompanying consolidated financial
statements. The term of the Operating Partnership commenced on March 16, 1998
and shall continue until January 1, 2056 or until such time as a Liquidating
Event, as defined, has occurred.
3. INVESTMENTS IN JOINT VENTURES AND CORPORATIONS
The investments in joint ventures and corporations represents the Company's
interest in (i) a joint venture known as "Beacon/PW Kendall LLC", (ii) a joint
venture with Mathilda Partners LLC ("Mathilda
4
<PAGE>
BEACON CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
3. INVESTMENTS IN JOINT VENTURES AND CORPORATIONS (CONTINUED)
Research Centre"), (iii) a joint venture with HA L.L.C. ("Millennium Tower"),
and (iv) an investment in preferred stock of Cypress Communications, Inc.
("Cypress").
A reconciliation of the underlying net assets to the Company's carrying
value of investments in joint ventures and corporations is as follows:
<TABLE>
<CAPTION>
MATHILDA CYPRESS
BEACON/PW RESEARCH MILLENNIUM COMMUNICATIONS,
KENDALL LLC CENTRE TOWER INC. TOTAL
----------- --------- ----------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
BCP, L.P. equity interest
(including accumulated
earnings, net of
distributions)............ $ 65,045 $ 17,383 $ 4,667 $ 87,095
Investments in preferred
stock..................... $ 5,000 5,000
Other costs................. 41 61 153 59 314
----------- --------- ----------- ------ ---------
Carrying value of
investments in joint
ventures and
corporations.............. $ 65,086 $ 17,444 $ 4,820 $ 5,059 $ 92,409
----------- --------- ----------- ------ ---------
----------- --------- ----------- ------ ---------
</TABLE>
THE ATHENAEUM PORTFOLIO
Beacon/PW Kendall LLC was formed on April 16, 1998 and is jointly owned by
the Company and PW Acquisitions IX, LLC, an affiliate of PaineWebber. Initially
each member made a $5,000 contribution and the Company provided a loan to the
joint venture of approximately $117,000. The joint venture acquired The
Athenaeum Portfolio, an eleven building, 970,000 square foot mixed-use portfolio
located in Cambridge, Massachusetts. In August 1998, the Company and PW
Acquisitions IX, LLC each made equity contributions of approximately $58,500,
which were used to repay the Company's loan receivable.
MATHILDA RESEARCH CENTRE
On August 9, 1998, the Company entered into a joint venture with Mathilda
Partners LLC, an affiliate of Menlo Equities, a California based developer, to
develop two four-story Class A office/R&D buildings with surface parking, known
as Mathilda Research Centre. The Company and Mathilda Partners LLC have agreed
to fund 87.5% and 12.5% of the equity required, respectively. On November 4,
1998, the venture acquired a twelve-acre site on Mathilda Avenue in Sunnyvale,
California, on which the venture plans to construct Mathilda Research Centre.
The estimated cost of the 267,000 square foot development is approximately
$57,000. In addition to funding approximately 35% of the development costs
(including the acquisition of the land) from cash contributions, the venture
intends to finance the balance with a construction loan from an institutional
lender.
5
<PAGE>
BEACON CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
3. INVESTMENTS IN JOINT VENTURES AND CORPORATIONS (CONTINUED)
MILLENNIUM TOWER
On September 1, 1998, the Company entered into a joint venture agreement
with HA L.L.C., an affiliate of Martin Smith Real Estate Services, to develop a
high-rise building in downtown Seattle, Washington, known as Millennium Tower.
The Company and HA L.L.C. have agreed to fund 66 2/3% and 33 1/3% of the equity
required, respectively. Land has been contributed to the joint venture by HA
L.L.C. at an agreed value of $10,500, and the Company has agreed to fund the
first $19,000 of cash requirements for the venture. The venture intends to
finance the balance of development costs from a construction loan with an
institutional lender. The estimated cost of the project is $71,000, including
the value of the land.
CYPRESS COMMUNICATIONS, INC.
On September 30, 1998, the Company invested $5,000 to acquire preferred
stock in Cypress Communications, Inc., representing a 13.5% fully diluted
ownership position in such company. Dividends will be earned on the Company's
investment as and when dividends are declared on the preferred stock or any
other class of stock in Cypress Communications, Inc. The preferred stock will be
treated preferentially upon a liquidation of Cypress, should a liquidation
occur, and is held by both the Operating Partnership and Tenant Communications,
Inc., a Massachusetts corporation ("Tenant Communications"). The voting common
stock of Tenant Communications is controlled by Messrs. Leventhal and Fortin.
The Operating Partnership owns 99% of the economic interests in Tenant
Communications.
4. MORTGAGE NOTES PAYABLE
The mortgage notes payable, collateralized by certain properties and
assignment of leases total $21,476. The mortgage notes payable have fixed
interest rates ranging from 7.75% to 9.25% and maturities ranging from December
1999 to October 2022. The net book value of the mortgaged assets is $60,752 at
March 31, 1999. Cash paid for interest approximates $443 for the three months
ended March 31, 1999.
Future minimum principal payments due during the next five years and
thereafter are as follows:
<TABLE>
<S> <C>
1999............................................... $ 1,809
2000............................................... 392
2001............................................... 426
2002............................................... 1,839
2003............................................... 440
Thereafter......................................... 16,570
---------
Total.............................................. $ 21,476
---------
---------
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The words "believe", "expect", "anticipate", "intend",
"estimate" and other expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters identify
forward-looking statements. Our actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include the following: real estate investment
considerations, such as the effect of economic and other conditions in the
market area on cash flows and values; the ability to obtain third party
shareholder approval for investment transactions; the need to renew leases or
relet space upon the expiration of current leases, and the ability of a property
to generate revenue sufficient to meet debt service payments and other operating
expenses; risks associated with borrowing, such as the possibility that we will
not have sufficient funds available to make principal payments on outstanding
debt and outstanding debt may be refinanced at higher interest rates or
otherwise on terms less favorable to the Company; the impact of pending or
future litigation; variations in quarterly operating results; the risk that we
and our third party property managers, tenants or vendors may experience
unanticipated delays or expenses in achieving Year 2000 compliance; securities
held for investment are subject to fluctuations in valuation based upon the
performance of the underlying business and those risks and uncertainties
contained elsewhere in this report and under the heading "Risk Factors" of our
Registration Statement on Form S-11 as filed with the Securities and Exchange
Commission on June 16, 1998, as subsequently amended.
The following discussion and analysis of the financial condition and results
of operations should be read in conjunction with the accompanying financial
statements and notes thereto.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 AND THE PERIOD FROM
JANUARY 21, 1998 (INCEPTION) TO MARCH 31, 1998.
Our total revenues increased $8.8 million to $9.4 million for the three
months ended March 31, 1999 as compared to $.6 million for the period January
21, 1998 (Inception) to March 31, 1998. The increase was due to Technology
Square, The Draper Building and the Dallas Office and Industrial Portfolio
acquisitions rental income and reimbursement of operating expenses and real
estate taxes of $5.2 million and $.8 million, respectively, The Athenaeum
Portfolio equity earnings of $1.2 million, interest income of $1.4 million and
other income of $.2 million. Revenues for The Athenaeum Portfolio were $7.7
million and expenses were $5.2 million for the quarter ended March 31, 1999. We
recognize 50% of its net earnings. Interest income for the quarter ended March
31, 1999 increased $1.4 million over the period ending March 31, 1998, primarily
the result of cash on hand being held for the full quarter in 1999 versus only a
portion of the same period in 1998, due to the receipt of offering proceeds in
March 1998.
Our total expenses increased $5.6 million to $6.6 million for the three
months ended March 31, 1999 as compared to $1 million for the period January 21,
1998 (Inception) to March 31, 1998. The increase was due to Technology Square,
The Draper Building and the Dallas Office and Industrial Portfolio acquisitions
property operating expenses, real estate taxes and interest expense of $1.4
million, $1.1 million and $.4 million, respectively, additional general and
administrative expenses of $1.6 million and depreciation and amortization
expenses of $1.1 million.
The minority interest in consolidated partnership represents the portion of
the Operating Partnership that is not owned by the Company.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $161 million at March 31, 1999 as compared to
$174.6 million at December 31, 1998. The decrease of $13.6 million was primarily
the result of the payment of (i) the January 1999 dividend to stockholders and
distribution to minority partners, (ii) Fort Point Place (a property currently
under agreement, see "Investing Activities") deposit and acquisition costs,
(iii) Technology Square redevelopment costs and (iv) investments in Mathilda
Research Centre and Millennium Tower, all offset by cash flow from operations.
SHORT AND LONG-TERM LIQUIDITY
We have considered our short-term (up to 12 months) liquidity needs and the
adequacy of expected liquidity sources to meet these needs. We believe that our
principal short-term operating liquidity needs are to fund normal recurring
expenses, debt service requirements and the minimum distribution required to
maintain the Company's REIT qualification under the Internal Revenue Code of
1986, as amended. We believe that these needs will be funded from cash flows
provided by operating activities. We believe our short-term investment liquidity
needs are to fund current real estate investments, developments and
redevelopments, as well as securities held for investment. We expect to fund
these needs from cash on hand and through mortgages and other debt instruments.
We expect to meet long-term (greater than 12 months) liquidity requirements
for the costs of additional development, real estate and real estate related
investments, scheduled debt maturities, major renovations, expansions and other
non-recurring capital improvements through secured and unsecured indebtedness,
joint ventures, the issuance of additional Operating Partnership units and
equity securities and from current cash balances.
FINANCING ACTIVITIES
Millennium Tower, L.L.C., the joint venture formed to develop Millennium
Tower, has secured a construction loan commitment in the amount of $45 million
for the project development.
INVESTING ACTIVITIES
On August 9, 1998, we entered into a joint venture agreement with Mathilda
Partners LLC, an affiliate of Menlo Equities (a California based developer). The
venture plans to develop Mathilda Research Centre, two four-story Class A
office/R&D buildings with surface parking in Sunnyvale, California. We agreed to
fund $19.8 million of the development and, as of March 31, 1999, we invested
approximately $17.4 million using proceeds from the Original Offering.
On September 1, 1998 we entered into a joint venture agreement with HA
L.L.C., an affiliate of Martin Smith Real Estate Services (a Seattle based real
estate developer). The joint venture plans to develop Millennium Tower, a
19-story office and residential tower, in downtown Seattle, Washington. We
agreed to fund $19 million of the development and, as of March 31, 1999, we
invested approximately $4.8 million in the project using proceeds from the
Original Offering.
Effective as of February 28, 1999, the Company, along with Apollo Real
Estate Advisors, L.P., Apollo Management, L.P., Thomas H. Lee Company and
Strategic Real Estate Investments I, LLC (collectively, the "Investor Group"),
entered into a Securities Purchase Agreement with Patriot American Hospitality,
Inc. and Wyndham International, Inc. (collectively, "Wyndham") whereby the
Investor Group agreed to invest up to $1 billion in Wyndham in exchange for
preferred stock. Our commitment represents approximately 15% of the total
commitment or a maximum of $150 million, which amount may be reduced to
approximately $100 million following a rights offering to current Wyndham
shareholders. The transaction, which requires the approval of Wyndham's
shareholders, is expected to close in June, 1999. Wyndham may also accept an
offer from a competing bidder and, if so, will be obligated to pay the Investor
Group a
8
<PAGE>
"break-up fee" ranging from $30 million to $50 million. In addition, the
Investor Group is to be paid a commitment fee in the amount of $21 million, our
portion of which may be taken by us as a reduction in our investment.
On March 8, 1999, we entered into an agreement to purchase Fort Point Place,
a four-building, 335,000 square foot office and warehouse property located in
the Boston, Massachusetts Seaport District for $24.3 million. Title to the
property will be held by us or one of our affiliates.
CAPITALIZATION
As of March 31, 1999, our total consolidated mortgage debt was approximately
$21.5 million, and our total consolidated mortgage debt plus our proportionate
share of total unconsolidated mortgage debt was approximately $55.8 million. Our
current consolidated mortgage indebtedness has a weighted average rate of 8.2%,
with maturities ranging from 1999 through 2022, and is secured by some of our
properties. Our proportionate share of the current total unconsolidated mortgage
debt on The Athenaeum Portfolio (in which we hold a 50% interest in the limited
liability company that controls the two limited liability companies that hold
title to this portfolio) is approximately $34.3 million with a rate of 8.485%.
It has a stated maturity of 2027 and may be prepaid any time after January 2007.
Prior to January, 2007 but after April, 1999, all or a portion of the loan may
be defeased. In the event the loan is not paid in full in 2007, the interest
rate changes to the greater of 13.485% or 5% over the applicable 20-year
Treasury Rate. Assuming The Anthenaeum Portfolio loan has a 2007 maturity, our
total consolidated and unconsolidated fixed rate mortgage debt has a weighted
average rate of 8.4%.
The following table, which includes both consolidated and unconsolidated
mortgage debt, summarizes the scheduled amortization of principal and maturities
of mortgage loans outstanding.
<TABLE>
<CAPTION>
SCHEDULED
AMORTIZATION MATURITIES TOTAL
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
April 1, 1999 -- December 31, 1999................................... $ 482 $ 1,516 $ 1,998
2000................................................................. 669 -- 669
2001................................................................. 736 -- 736
2002................................................................. 751 1,426 2,177
2003................................................................. 808 -- 808
Thereafter........................................................... 6,261 43,155 49,416
------------- ------------- -------------
Total............................................................ $ 9,707 $ 46,097 $ 55,804
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
FUNDS FROM OPERATIONS
We believe that to facilitate a clear understanding of the operating results
of the Company, Funds from Operations ("FFO") should be examined in conjunction
with net income. The definition of FFO was clarified in the National Association
of Real Estate Investment Trusts, Inc. ("NAREIT") White Paper, adopted by the
NAREIT Board of Governors in March 1995, as net income (loss) (computed in
accordance with generally accepted accounting principles), excluding gains
(losses) from debt restructuring and sales of properties, plus real estate
related depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated partnerships and
joint ventures will be calculated to reflect FFO on the same basis. FFO should
not be considered as a substitute
9
<PAGE>
for net income, as an indication of the Company's performance, as a substitute
for cash flow or as a measure of our liquidity. The following table presents the
calculations of FFO:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
THREE JANUARY 21, 1998
MONTHS ENDED (INCEPTION)
MARCH 31, 1999 TO MARCH 31, 1998
-------------- -------------------
(UNAUDITED, DOLLARS IN THOUSANDS)
<S> <C> <C>
Income (loss) before extraordinary items and before minority interest in
consolidated partnership................................................... $ 2,875 $ (387)
Add real estate related depreciation and amortization:
Consolidated entities...................................................... 1,087 --
Joint venture entities..................................................... 512 --
------- -------
Funds from operations before minority interest............................... 4,474 (387)
Company share of consolidated partnership.................................... 88.40% 100%
------- -------
Company funds from operations................................................ $ 3,955 $ (387)
------- -------
------- -------
Weighted average number of common shares outstanding (in thousands).......... 20,974 17,361
------- -------
------- -------
</TABLE>
10
<PAGE>
PROPERTY INFORMATION
The following chart sets forth the occupancy rate, expressed as a
percentage, the average annual Base Rent (as defined below) and the average Net
Effective Rent (as defined below) per square foot for each of our properties as
of March 31, 1999. Base Rent is gross rent excluding payments by tenants on
account of real estate tax and operating expense escalation charges. Net
Effective Rent is Base Rent adjusted on a straight-line basis for contractual
rent step-ups and free rent periods, plus tenant payments on account of real
estate tax and operating expense escalation charges, less total operating
expenses and real estate taxes.
<TABLE>
<CAPTION>
AVERAGE AVERAGE
% BASE NET EFF
PROPERTY TOTAL AREA LEASED RENT RENT
- ------------------------------------------------------------------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
CAMBRIDGE, MA:
215 First Street(1)................................................ 306,084 99% $ 20.11 $ 15.02
One Kendall Square Cinema(1)....................................... 31,641 100% 18.29 13.48
Buildings 100--500(1).............................................. 222,372 100% 25.94 19.50
Buildings 600/650/700(1)........................................... 236,661 97% 33.90 24.95
Buildings 1500 & 1700(1)........................................... 39,707 90% 16.07 11.56
Building 1400(1)................................................... 133,211 100% 27.23 19.68
---------- --- --------- ---------
Subtotal / Weighted Average.................................... 969,676 99% 25.57 18.93
---------- --- --------- ---------
545 Technology Square (NNN)........................................ 144,123 100% 13.35 13.35
549 Technology Square.............................................. 40,377 35% 14.29 14.29
565 Technology Square.............................................. 201,816 30% 6.30 3.95
575 Technology Square.............................................. 165,208 69% 7.23 4.14
The Draper Building (NNN)(1)....................................... 474,817 100% 6.16 6.16
---------- --- --------- ---------
Subtotal / Weighted Average.................................... 1,026,341 79% 7.74 7.13
---------- --- --------- ---------
Subtotal / Weighted Average Cambridge, MA...................... 1,996,017 88% 17.40 13.52
---------- --- --------- ---------
SUBURBAN DALLAS, TX:
OFFICE
Bank One LBJ....................................................... 42,000 73% 13.53 7.53
Brandywine Place................................................... 66,237 99% 11.46 9.62
Crosspoint Atrium.................................................. 220,212 96% 13.03 7.17
Forest Abrams Place................................................ 68,827 89% 12.39 6.86
6500 Greenville Avenue............................................. 114,600 91% 13.15 7.30
Northcreek Place II................................................ 163,303 93% 14.73 8.58
One Glen Lakes..................................................... 166,272 93% 15.89 10.05
---------- --- --------- ---------
Subtotal / Weighted Average.................................... 841,451 92% 13.78 8.23
---------- --- --------- ---------
R&D / INDUSTRIAL
Park North Business Center......................................... 36,885 88% 5.72 4.81
Plaza at Walnut Hill............................................... 88,280 95% 7.34 4.63
Richardson Business Center......................................... 66,300 100% 4.42 4.27
Richardson Commerce Centre......................................... 60,517 100% 6.90 5.57
Sherman Tech....................................................... 16,176 100% 7.05 4.96
T I Business Park.................................................. 96,902 85% 6.16 5.17
Venture Drive Tech Center.......................................... 128,322 100% 4.80 3.62
---------- --- --------- ---------
Subtotal / Weighted Average.................................... 493,382 95% 5.85 4.54
---------- --- --------- ---------
Subtotal / Weighted Average Suburban Dallas, TX................ 1,334,833 93% 10.80 6.84
---------- --- --------- ---------
Total / Weighted Average Properties............................ 3,330,850 90% $ 14.67 $ 10.76
---------- --- --------- ---------
---------- --- --------- ---------
</TABLE>
(1) Currently being offered for sale, see "Recent Developments."
11
<PAGE>
The following table sets forth Lease Expirations (in square feet) for the
portfolio of properties that we owned or had an interest in as of March 31,
1999.
<TABLE>
<CAPTION>
SQUARE % OF SQUARE ANNUAL % ANNUAL # OF
FEET (1) FEET (2) RENT (3) RENT (4) TENANTS (5)
---------- --------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN
THOUSANDS)
April 1, 1999 -- December 31, 1999............... 593,778 17.8% $ 8,726 17.7% 90
2000............................................. 448,275 13.5% 6,608 13.4% 92
2001............................................. 314,131 9.4% 4,767 9.6% 76
2002............................................. 312,020 9.4% 5,944 12.0% 59
2003............................................. 439,663 13.2% 7,838 15.9% 51
Thereafter....................................... 906,470 27.2% 15,481 31.4% 44
---------- --- ----------- ---------- ---
Total........................................ 3,014,337 90.5% $ 49,364 100.0% 412
---------- --- ----------- ---------- ---
---------- --- ----------- ---------- ---
</TABLE>
- ------------------------
(1) Total area in square feet covered by such leases.
(2) Percentage of total square feet of company portfolio.
(3) Annualized expiring base rental income represented by such leases in the
year of expiration plus the current tenant payments on account of operating
expense and real estate tax escalation charges.
(4) Calculated as annual rent divided by the total annual rent.
(5) The number of tenants whose leases will expire.
RECENT DEVELOPMENTS
We are planning to establish a new investment fund and raise $250 million
under the name Beacon Capital Strategic Partners, L.P. Beacon Capital Partners,
L.P. plans to invest $50 million in the fund.
In April of 1999, we announced that we have offered for sale a portfolio of
properties located in Cambridge, Massachusetts. See "Property Information." The
portfolio, known as The Cambridge Technology Portfolio, consists of the entire
Athenaeum Portfolio and The Draper Building. The offering price is approximately
$286 million.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 compliance issue concerns the inability of computer systems to
accurately calculate, store or use a date after 1999. The inability of a
computer to properly process dates after 1999 could result in system failures or
miscalculations. Such failures in our computers could lead to disruptions in our
activities and operations. If we fail, or our significant tenants or vendors
fail, to make necessary modifications and conversions on a timely basis to
remedy these problems, the Year 2000 issue could have a material adverse effect
on the Company and its results of operations or financial position. We believe
that our competitors face similar risks in regard to Year 2000.
We are managing our Year 2000 initiative to minimize any adverse effect on
our business operations. We have established a Year 2000 committee to address
Year 2000 concerns. The Year 2000 committee has implemented a Year 2000
initiative with the following phases: (i) introducing Year 2000 awareness; (ii)
identifying our systems with potential Year 2000 issues; (iii) assessing and
budgeting Year 2000 compliance costs; (iv) remediation; (v) testing; (vi)
contacting material third parties to assess their Year 2000 compliance; and
(vii) developing a contingency plan in case our Year 2000 initiative is not
successful.
We have completed phases (i), (ii) and (iii) of our Year 2000 initiative. We
have reviewed our corporate computer operations that consist of recent releases
of network systems, accounting, property management and desktop applications.
All such systems were installed in 1998. We have contacted the
12
<PAGE>
vendors for these systems for assurance that the systems are Year 2000
compliant. We have begun working on phase (iv) and have identified some minor
Year 2000 issues that require remediation. Currently, we are awaiting the
software updates from application vendors. All corporate and property financial
records are maintained on our corporate accounting system which is Year 2000
compliant. We anticipate that all of our corporate software and hardware systems
will be Year 2000 compliant by the end of June, 1999 and will be ready for the
testing phase (v).
We have not incurred any material costs to address our Year 2000 compliance
issue. We do not currently expect that the costs incurred in connection with the
initiative will have a material adverse impact on our results of operations or
financial position.
We have also been working extensively on phase (vi) of our Year 2000
initiative. Included in the contractual obligations of the third party managers
who operate our properties is an undertaking to work with us on our Year 2000
initiative. Our Year 2000 committee has regular communications with our third
party managers to determine their Year 2000 compliance status. From this ongoing
process, based upon information received to date, we currently believe that our
third party managers have taken appropriate steps in regards to Year 2000
compliance with respect to the building systems and the systems of the
properties' tenants and vendors.
We have the right to approve all lease agreements and have reviewed our
standard lease form to address Year 2000 compliance issues.
The inability of the Company, or our tenants or vendors, to be Year 2000
compliant could lead to declining occupancy rates, higher operating expenses and
other adverse effects which are not quantifiable at this time. The failure of
any of these parties to be Year 2000 compliant could have a material adverse
effect on our results of operations or financial position.
We are currently evaluating the need to have a contingency plan in place in
the event we, or our third party property managers, tenants or vendors, do not
successfully address Year 2000 compliance issues. We expect to complete our Year
2000 initiative by the end of the third quarter of 1999, including the
development of a contingency plan, if needed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to certain financial market risks, the most predominant being
fluctuations in interest rates. Interest rate fluctuations are monitored by
management as an integral part of our overall risk management program, which
recognizes the unpredictability of financial markets and seeks to reduce the
potentially adverse effect on our results of operations. The effect of interest
rate fluctuations historically has been small relative to other factors
affecting operating results, such as rental rates and occupancy.
The following table summarizes our debt obligations outstanding as of March
31, 1999. This information should be read in conjunction with Note 4 to the
consolidated financial statements.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
4/1/99-
12/31/99 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
----------- --------- --------- --------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Long-Term Debt:
Fixed Rate........................ $ 1,809 $ 392 $ 426 $ 1,839 $ 440 $ 16,570 $ 21,476 $ 21,476
Weighted Average Interest Rate.... 8.2% 8.2% 8.2% 8.1% 8.1% 8.6% 8.2%
</TABLE>
13
<PAGE>
BEACON CAPITAL PARTNERS, INC.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<S> <C> <C>
(a) 3.1 Articles of Incorporation.(1)
3.2 Certificate of Correction to Articles of Incorporation.(1)
3.3 Amended and Restated By-laws.(1)
3.4 Agreement of Limited Partnership of Beacon Capital Partners, L.P.(2)
3.5 First Amendment to Agreement of Limited Partnership.(2)
10.1 Employment and Non-Competition Agreement for Alan M. Leventhal.(1)
10.2 Employment and Non-Competition Agreement for Lionel P. Fortin.(1)
10.3 Beacon Capital Partners 1998 Stock Option and Incentive Plan.(1)
10.4 Form of Indemnification Agreement between the Registrant and its
directors and executive officers.(1)
10.5 Purchase and Sale Contract between Eastern Properties Master LLC and
the Registrant.(1)
10.6 Contract of Sale for Bank One Building.(2)
10.7 Contract of Sale for 6500 Greenville Building.(2)
10.8 Contract of Sale for North Creek II Building.(2)
10.9 Contract of Sale for One Glen Lakes Building.(2)
10.10 Contract of Sale for Crosspoint Atrium Building.(2)
10.11 Contract of Sale for Brandywine Place Building.(2)
10.12 Contract of Sale for Forest Abrams Building.(2)
10.13 Contract of Sale for Sherman Tech Building.(2)
10.14 Contract of Sale for Venture Tech Building.(2)
10.15 Contract of Sale for Plaza at Walnut Building.(2)
10.16 Contract of Sale for Richardson BC Building.(2)
10.17 Contract of Sale for Park North SC Building.(2)
10.18 Contract of Sale for TI Business Center.(2)
10.19 Contract of Sale for Richardson CC Building.(2)
10.20 Contribution Agreement by and between Luddite Associates and Beacon
Capital Partners, L.P.
27. Financial Data Schedule.
</TABLE>
<TABLE>
<S> <C> <C>
(b) None.
</TABLE>
14
<PAGE>
- ------------------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-11 (SEC File No. 333-56937) filed with the Commission on June 16,
1998.
(2) Previously filed as an exhibit to Pre-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-11 (SEC File No. 333-56937) filed
with the Commission on August 21, 1998.
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.
<TABLE>
<S> <C>
BEACON CAPITAL PARTNERS, INC.
/s/ RANDY J. PARKER
------------------------------------------
Randy J. Parker
Chief Financial Officer (Authorized
Officer and
May 14, 1999 Principal Accounting Officer)
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 161,338<F1>
<SECURITIES> 0
<RECEIVABLES> 1,944<F2>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 473,848
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 210
<OTHER-SE> 446,364
<TOTAL-LIABILITY-AND-EQUITY> 473,848
<SALES> 0
<TOTAL-REVENUES> 9,445
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,128
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 442
<INCOME-PRETAX> 2,541
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,541
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,541
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
<FN>
<F1>Includes restricted cash of $328
<F2>Includes accrued rent receivable of $315
</FN>
</TABLE>
