FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For quarterly period ended June 30, 1997
[ ] 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 0-10421
CORNERSTONE PROPERTIES INC.
(Exact name of registrant as specified in its charter)
Nevada 74-2170858
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
126 East 56th Street
New York, New York 10022
(Address of principal executive offices)
(212) 605-7100
(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 [ ]
Number of shares of Common Stock outstanding as of August 12, 1997: 48,856,742
Total pages = 15
Exhibit Index located on page 14
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments, at cost:
Land $ 89,835 $ 68,395
Buildings and improvements 659,323 612,567
Deferred lease costs 124,053 118,700
--------- ---------
873,211 799,662
Less: Accumulated depreciation and amortization 212,745 198,686
--------- ---------
Total investments 660,466 600,976
Cash and cash equivalents 222,574 114,803
Restricted cash (Note 3) 40,107 4,426
Other deferred costs, net of accumulated amortization of $1,449 and $1,140 3,992 3,562
Deferred tenant receivables 35,899 34,747
Tenant and other receivables 3,220 2,405
Notes receivable 2,354 2,911
Other assets 4,329 2,350
--------- ---------
Total Assets $ 972,941 $ 766,180
========= =========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Long-term debt (Note 4) $ 367,103 $ 400,142
Short-term debt (Note 3) 35,000 0
Accrued interest payable 1,590 1,082
Accrued real estate taxes payable 12,451 13,222
Common Stockholders' distribution payable 11,159 12,366
Accounts payable and accrued expenses 8,526 6,468
Unearned revenue and other liabilities 9,369 9,095
--------- ---------
Total Liabilities 445,198 442,375
--------- ---------
Minority Interest (17,510) (17,478)
---------- ----------
Redeemable Preferred Stock, $166,500,000 redemption value (Note 6) 162,515 162,743
--------- ---------
Stockholders' Investment (Note 7)
7% Cumulative Convertible Preferred Stock, $16.50 stated value 50,000 50,000
15,000,000 shares authorized; 3,030,303 shares issued and outstanding
Common stock, no par value; 100,000,000 authorized shares;
shares issued and outstanding (1997-37,198,186; 1996-20,609,754)
Paid-in capital 352,419 160,577
Accumulated deficit (17,199) (17,478)
Deferred Compensation (2,482) (1,248)
--------- ----------
Total Stockholders' Investment 382,738 178,540
--------- ---------
Total Liabilities and Stockholders' Investment $ 972,941 $ 766,180
========= =========
<FN>
The accompanying notes are an integral part of these
consolidated financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>
Item 1. Financial Statements (continued)
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Dollar amounts in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Office and parking rentals $ 35,213 $ 26,994 $ 68,691 $ 52,913
Interest and other income 3,055 1,344 4,564 2,849
--------- ---------- ---------- ---------
Total Revenues 38,268 28,338 73,255 55,762
--------- ---------- ---------- ---------
Expenses
Building operating expenses 7,658 5,781 15,033 11,448
Real estate taxes 5,957 5,425 11,620 9,316
Interest expense 7,205 8,055 14,748 15,870
Depreciation and amortization 7,317 6,123 14,097 12,114
General and administrative 1,605 1,527 3,218 2,936
--------- ---------- ---------- ---------
Total Expenses 29,742 26,911 58,716 51,684
--------- ---------- ---------- ---------
8,526 1,427 14,539 4,078
--------- ---------- ---------- ---------
Other income (expenses)
Net gain on interest rate swaps (Note 1) - 671 99 5,465
Minority Interest (518) (222) (994) (686)
--------- ---------- ---------- ---------
Income before extraordinary item 8,008 1,876 13,644 8,857
Extraordinary loss (28) - (54) -
--------- ---------- ---------- ---------
Net income $ 7,980 $ 1,876 $ 13,590 $ 8,857
========= ========== ========== =========
Net income applicable to common stock $ 3,775 $ 1,001 $ 5,180 $ 7,107
========= ========== ========== =========
Income before extraordinary
item per common share (Note 1) $ 0.12 $ 0.05 $ 0.19 $ 0.35
========= ========== ========== =========
Net income per common share (Note 1) $ 0.12 $ 0.05 $ 0.19 $ 0.35
========= ========== ========== =========
<FN>
The accompanying notes are an integral part of these
consolidated financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>
Item 1. Financial Statements (continued)
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Dollar amounts in thousands)
(Unaudited)
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,590 $ 8,857
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,097 12,114
Deferred compensation amortization 404 423
Net gain on interest rate swaps (99) (5,465)
Extraordinary loss 54 -
Unbilled rental revenue (829) (1,172)
Increase in accrued interest payable 508 347
Minority interest share of income 994 686
Increase in tenant and other receivables and other assets (2,763) (2,510)
Increase in accounts payable, accrued expenses and other liabilities 1,022 1,325
-------- --------
Total adjustments 13,388 5,748
-------- --------
Net cash provided by operating activities 26,978 14,605
-------- --------
Cash flows from investing activities:
Additions to investment property (72,781) (3,603)
Repayment of notes receivable 557 502
-------- --------
Net cash used in investing activities (72,224) (3,101)
-------- --------
Cash flows from financing activities:
Proceeds from common stock offering 225,400 -
Borrowings under mortgage loan 35,000 18,000
Repayment of term loan (32,500) -
Repayments under mortgage loans (539) (11)
Proceeds from dividend reinvestment plan 5,945 -
Net payments for swap terminations and prepayment costs (216) (3,125)
(Increase) decrease in restricted cash (35,681) 35
Stock/debt issue costs (18,053) (310)
Distribution to minority partners (1,026) (977)
Distribution to preferred stockholders (6,660) -
Distribution to common stockholders (18,653) -
-------- --------
Net cash provided by financing activities 153,017 13,612
-------- --------
Increase in cash and cash equivalents 107,771 25,116
Cash and cash equivalents, beginning of period 114,803 7,740
-------- --------
Cash and cash equivalents, end of period $ 222,574 $ 32,856
======== ========
<FN>
The accompanying notes are an integral part of these
consolidated financial statements
</FN>
</TABLE>
<PAGE>
Item 1. Financial Statements (continued)
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. NATURE OF COMPANY'S BUSINESS
AND SIGNIFICANT ACCOUNTING POLICIES
Nature of the Company's Business
Cornerstone Properties Inc. ("Cornerstone" or the "Company") is a
self-advised equity real estate investment trust which owns, through
subsidiaries, interests in eight Class A office properties ("Properties")
encompassing approximately 4.9 million rentable square feet. The Company was
formed in May 1981 as ARICO America Realestate Investment Company, a Nevada
corporation, to invest in major commercial real estate projects in North
America.
General
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in consolidated financial statements prepared
in accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented not
misleading. In the opinion of management of the Company, all adjustments,
consisting only of normal recurring accruals, necessary to summarize fairly
the unaudited results of operations for the three month and six month periods
presented have been included. Results for the three and six months ended
June 30, 1997 are not necessarily indicative of results which may be
expected for any other interim periods or for the year as a whole. It is
suggested that these financial statements be read in conjunction with the
audited financial statements and notes thereto included in the Company's
latest annual report on Form 10-K.
Principles of Consolidation
The accompanying financial statements include the accounts of Cornerstone,
its wholly-owned qualified REIT subsidiaries and controlled partnerships. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Interest rate swap agreements
The Company accounts for its interest rate swap agreements as hedges in
accordance with SFAS No. 80 "Accounting for Futures Contracts" if the swap is
designated as a hedge and effectively reduces the exposure to the Company of
market interest rate changes. Changes in the market value of these interest
rate swap agreements are deferred and recognized in income at the expiration
or termination of the underlying debt. Forward interest rate swap agreements
that do not meet hedge criteria are accounted for using mark-to-market
accounting, recognizing any unrealized gain or loss on the instrument in the
period in which it is outstanding. When swaps are extinguished at the same
time as the underlying debt instrument, the cost to extinguish the swap is
treated as extraordinary gain or loss. When a swap remains in place after the
underlying instrument matures, it is accounted for on a mark-to-market basis.
The swap termination is accounted for as ordinary gain or loss when it is
extinguished with no underlying debt instrument in place. Currently, the
Company is party to no interest rate swap agreements.
Income per share
Income per share is computed based on the weighted average number of common
shares outstanding of 27,237,452 for 1997 and 20,309,165 for 1996. For 1997
and 1996, dividends applicable to preferred stock of $8,410,000 and
$1,750,000 respectively, have been deducted from the net income in computing
income per share.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
The most significant estimates and assumptions are related to the
recoverability and depreciable lives of investment property and the
recoverability of deferred tenant receivables. Actual results could differ
from those estimates.
<TABLE>
2. PROPERTIES
The following schedule summarizes Cornerstone's interest in real estate
investments at June 30, 1997:
<CAPTION>
Net
Completed/ Rentable Ownership
Property Location Acquired square feet %Leased Interest Notes
- ---------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
One Norwest Center Denver, CO 1983 1,188,000 98% 100%
Norwest Center Minneapolis, MN 1988 1,118,000 100% 50%
Washington Mutual Tower Seattle, WA 1988 1,155,000 98% 50%
125 Summer Street Boston, MA 1989/1995 464,000 90% 100%
Tower 56 New York, NY 1983/1996 162,000 95% 100%
One Lincoln Centre Oakbrook Terrace, IL 1986/1996 297,000 94% 100%
The Frick Building Pittsburgh, PA 1902/1996 341,000 87% 100%
527 Madison Avenue New York, NY 1986/1997 216,000 96% 100% A
<FN>
(A)Effective February 14, 1997, Cornerstone, through its wholly-owned
qualified REIT subsidiary, CStone-527 Madison, Inc., purchased 527 Madison
Avenue in Midtown Manhattan, New York for approximately $67 million. 527
Madison Avenue is a twenty-six story, 96% leased, Class A office building
with approximately 211,000 square feet of office space, 5,000 square feet
of first floor retail space and an underground parking facility for
approximately 50 vehicles. The acquisition was financed with the proceeds
from the Company's offering of Preferred Stock, completed in November
1996. Louis Dreyfus Property Group manages the building under a management
agreement that expires December 31, 1998.
</FN>
</TABLE>
3. RESTRICTED CASH
The existing $35,000,000 mortgage on 527 Madison Avenue was kept in place and
assigned to Bankers Trust Company as part of the purchase of the property.
The mortgage has a maturity of September 30, 1997. Restricted cash is being
held by escrow agents for interest and 105% of the principal on the 527
Madison loan and for real estate taxes and insurance on the One Norwest
Center and Washington Mutual Tower loans.
<TABLE>
4. LONG-TERM DEBT
<CAPTION>
Principal Balance
6/30/97 12/31/96 Collateral Interest Rate Maturity Amortization Notes
- ---------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$ 12,926,000 $ 12,926,000 Rent Notes Lesser of 8.11% 01/01/01 None A
or LIBOR + 50 bp
97,252,000 97,706,000 One Norwest Center 7.50% 08/01/01 30 years
110,000,000 110,000,000 Norwest Center 8.74% 12/31/05 None
79,100,000 79,100,000 Washington Mutual Tower 7.53% 11/01/05 None
50,000,000 50,000,000 125 Summer Street 7.20% 01/01/03 25 years beginning
02/01/01
17,825,000 17,910,000 Tower 56 7.67% 04/24/03 30 years
- 32,500,000 Cornerstone Properties Inc. 5.0% B
- ------------------------------
$ 367,103,000 $ 400,142,000
<FN>
(A)At maturity of the debt, Cornerstone has the right to redeem the note in
exchange for common shares of the Company at the lower of market price or
$14.30 per share.
(B)On March 19, 1997, the $32,500,000 term loan was repaid to Deutsche Bank
AG.
</FN>
</TABLE>
<PAGE>
5. LINE OF CREDIT
Bankers Trust Company has provided Cornerstone with a $10,000,000 revolving
credit line which is available for general corporate and acquisition purposes
at a rate equivalent to an Adjusted Eurodollar Rate (as defined), as well as
for the issuance of standby letters of credit at a rate of 0.15 percent. At
June 30, 1997, none of the credit line had been drawn. The line of credit
expires on November 7, 1997.
The Company has received a commitment from Bankers Trust Company and The
Chase Manhattan Bank for a $200 million line of credit for future
acquisitions. The interest rate on the line of credit will be at a spread of
1.25% to 1.625% over the Adjusted Eurodollar Rate (as defined) depending on
the Company's leverage ratio.
<TABLE>
6. REDEEMABLE PREFERRED STOCK
<CAPTION>
Redemption/ Shares Shares Carrying Value Common Stock
Title Stated Value Authorized Outstanding Net of Issue Costs Conversion Price
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
8% Cum. Convertible $145.00/Share 1,034,483 689,655 $97,609,000 $14.50
8% Cum. Convertible, Series A $145.00/Share 458,621 458,621 $64,906,000 $14.50
--------------
$162,515,000
<FN>
Each holder of the 8% Cumulative Convertible and 8% Cumulative Convertible,
Series A, Preferred Stock, has the right to require the redemption of its
stock by the Company at the stated value upon the occurrence of a "Change in
Control"(as defined).
On July 25, 1997, the Redeemable Preferred shares were converted into
11,482,760 common shares. The contractual conversion was based upon meeting a
$16.00 twenty day average common share price.
</FN>
</TABLE>
7. STOCKHOLDERS' INVESTMENT
On April 16, 1997, Cornerstone Properties Inc. announced its initial U.S.
public offering of 16.1 million shares of common stock at a price of $14 per
share for gross proceeds of $225.4 million. Cornerstone's stock began trading
on the New York Stock Exchange under the symbol CPP.
The offering was underwritten by Merrill Lynch & Co. and included Lazard
Freres & Co. LLC, Lehman Brothers, Morgan Stanley & Co., Inc., Smith Barney
Inc., and BT Securities Corporation as co-managers. The Company intends to
use the net proceeds of this offering for potential acquisitions, working
capital and other general corporate purposes.
The 7% Cumulative Convertible Preferred Stock is convertible into common
stock at $16.50 per share at any time after August 4, 2000.
<PAGE>
The following tables summarize the long-term incentive plans for certain
officers of the Company as of June 30, 1997:
Stock Options
Options Exercise
Date of Granted (No. Price Options Options
Grant of shares) (per share) Vesting Exercisable Exercised
- --------------------------------------------------------------------------------
June, 1995 787,500 $14.30 20%/yr, 315,000 0
10yr term
March, 1997 880,000 $14.50 20%/yr, 0 0
10 yr term
Restricted Stock Grants
Shares Value at
Date of Granted (No. Grant Date
Grant of shares) (per share) Vesting (A)
- --------------------------------------------------------------------------------
August, 1995 167,622 $14.30 The grant will fully vest with
respect to 13.333% on June 30, 1996,
1997, 1998, 1999 and with respect to
46.668% on June 30, 2000.
March, 1997 100,000 $16.40 The grant will fully vest with
respect to 13.333% on June 30, 1998,
1999, 2000, 2001 and with respect to
46.668% on June 30, 2002.
(A)Deferred compensation of approximately $4,037,000 is being amortized
according to the respective amortization schedule for each vesting period
noted above, with the unamortized balance shown as a deduction from
stockholders' investment. Regular dividends are paid on restricted stock.
Stockholders' Distributions
Dividends of $0.30 per share were declared for the first quarter of 1997,
paid on April 30, 1997, to Common Stockholders of record as of March 21,
1997. Dividends of $0.30 per share were declared for the second quarter of
1997, paid on July 31, 1997, to Common Stockholders of record as of June 20,
1997.
8. NEW PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"), No.
129 "Disclosure of Information About Capital Structure" ("SFAS 129"), No. 130
"Reporting Comprehensive Income" ("SFAS 130"), and No. 131 "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131"). All of these
statements are effective for fiscal years beginning after December 15, 1997.
SFAS 128 specifies the computation, representation and disclosure
requirements for earnings per share. SFAS 129 established standards for
disclosing information about an entity's capital structure such as
information about securities, liquidation preference of preferred stock and
redeemable stock. SFAS 130 specifies the presentation and disclosure
requirement for reporting comprehensive income which includes those items
which have been formerly reported as a component of shareholders' equity.
SFAS 131 establishes the disclosure requirements for reporting segment
information.
Management believes that, when adopted, SFAS 128, 129, 130 and 131 will not
have a significant impact on the Company's financial statements.
<PAGE>
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997
RESULTS OF OPERATIONS
Consolidation
Cornerstone's principal source of income is rental revenues received through its
investment in six fee simple investments and two real estate partnerships held
by nine wholly-owned subsidiaries: 1700 Lincoln Limited owned 90 percent by
ARICO-Denver, Inc. and 10 percent by 1700 Lincoln Inc., NWC Limited Partnership
owned by ARICO-Minneapolis, Inc., Third and University Limited Partnership owned
by ARICO-Seattle, Inc., 125 Summer Street owned by CStone-Boston Inc., Tower 56
owned by CStone-New York Inc., One Lincoln Centre owned by CStone-Oakbrook,
Inc., 527 Madison Avenue owned by CStone-527 Madison, Inc. and the Frick
Building owned by CStone-Pittsburgh Trust, respectively. NWC Limited Partnership
and Third and University Limited Partnership have been consolidated since
Cornerstone has a majority interest in the economic benefits and has the right
to become managing general partner at its sole discretion.
<TABLE>
Property Results
For the three and six months ended June 30, 1997 and 1996 property results can
be summarized as follows (000's):
<CAPTION>
For the For the For the six For the
three months three months six months six months
ended ended ended ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
- ------------------------------------------------------------------------------- --------------------
<S> <C> <C> <C> <C>
Office and Parking Rentals $ 35,213 $ 26,994 $ 68,691 $ 52,913
Less:
Building Operating Expenses 7,658 5,781 15,033 11,448
Real Estate Taxes 5,957 5,425 11,620 9,316
Depreciation and Amortization 7,146 5,972 13,808 11,801
------- ------- ------- -------
Total Operating Expenses 20,761 17,178 40,461 32,565
------- ------- ------- -------
Total Property Income $ 14,452 $ 9,816 $ 28,230 $ 20,348
======= ======= ======= =======
</TABLE>
The increase in property income for the three months ended June 30, 1997 as
compared to the same period in 1996 of $4.6 million was due to the acquisition
of Tower 56 ($0.2 million), One Lincoln Centre ($0.9 million), and the Frick
Building ($0.4 million) during 1996 and 527 Madison Avenue ($1.7 million) in
early 1997. At the existing properties, property income at One Norwest Center
increased $0.7 million due to a lease buyout of a portion of the Norwest Bank
space in order to allow for Gulf Canada expansion. Norwest Center increased $1.1
million due to the recovery of the increased real estate taxes which were
incurred in 1996. Washington Mutual Tower increased $0.3 million due to
increased rental rates and higher parking revenues. The decrease of $0.7 million
at 125 Summer Street was due to the vacancy caused by the expiration of Gadsby
and Hannah and the reduction of rent in the BTM Capital Corporation lease.
The increase in property income for the six months ended June 30, 1997 as
compared to the same period in 1996 of $7.9 million was due to the acquisition
of Tower 56 ($0.6 million), One Lincoln Centre ($1.9 million), and the Frick
Building ($1.0 million) during 1996 and 527 Madison Avenue ($2.5 million) in
early 1997. At the existing properties, property income at One Norwest Center
increased $0.9 million due to a lease buyout of a portion of the Norwest Bank
space in order to allow for Gulf Canada expansion. Norwest Center increased $1.5
million due to the recovery of the increased real estate taxes which were
incurred in 1996. Washington Mutual Tower increased $0.7 million due to
increased rental rates and higher parking revenues. The decrease of $1.2 million
at 125 Summer Street was due to the vacancy caused by the expiration of Gadsby
and Hannah and the reduction of rent in the BTM Capital Corporation lease.
Interest and Other Income
Interest and other income was $3,055,000 and $1,344,000 for the three months
ended June 30, 1997 and 1996. These amounts primarily consist of interest earned
from short-term investments, interest earned on the Tower 56 mortgage notes
receivable in 1996, notes receivable from partners, and income from the advisory
contracts in 1997 and 1996. The increase was due to the additional cash
available for short-term investment as a result of the initial public offering.
Year to date interest and other income was $4,564,000 in 1997 and $2,849,000 in
1996. These amounts primarily consist of interest earned from short-term
investments, interest earned on the Tower 56 mortgage notes receivable in 1996,
notes receivable from partners, and income from the advisory contracts in 1997
and 1996. The increase was due to the additional cash available for short-term
investment as a result of the initial public offering.
Interest Expense
Interest expense incurred by Cornerstone relating to its financing activities
was $7,205,000 and $8,055,000 for the three months ended June 30, 1997 and 1996,
respectively. The decrease was mainly due to the refinancing of the One Norwest
Center debt resulting in savings of $551,000, which is offset by the $90,000 of
interest expense on Tower 56 which was financed in the second quarter of 1996.
Additionally, the Company had approximately $406,000 of savings resulting from
the repayment of the $32.5 million term loan.
Interest expense incurred by Cornerstone relating to its financing activities
was $14,748,000 and $15,870,000 for the six months ended June 30, 1997 and 1996,
respectively. The decrease was mainly due to the refinancing of the One Norwest
Center debt resulting in savings of $1,103,000, which is offset by the $427,000
of interest expense on Tower 56 which was financed in the second quarter of
1996. Additionally, the Company had approximately $428,000 of savings resulting
from the repayment of the $32.5 million term loan.
Interest Rate Swaps
During the period analyzed the Company had the following interest rate swaps
outstanding:
The $107 million interest rate swap agreement with a maturity date of July 30,
1998, was accounted for as a hedge since it was comprised of two offsetting
swaps, resulting in a fixed payment from Cornerstone to its counterparties
through the term of the swaps. Upon the refinancing of the One Norwest Center
debt in August 1996, the swap was terminated and the cost to terminate the swap
was recorded as an extraordinary loss.
For the six month period June 30, 1996, interest expense of the Company included
approximately $402,000 of expense related to interest rate swap agreements.
Since the $98 million swap was a forward swap and accounted for on a mark to
market basis, it had no effect on the reported interest expense of the Company.
This swap was terminated during the first quarter of 1997 at a gain of $99,000
compared to the mark to market gain in the first two quarters of 1996 of $5.5
million. The Company currently is party to no interest rate swap agreements.
General and Administrative Expenses
The aggregate amount of Cornerstone's general and administrative expenses have
increased to $1,605,000 for the three months ended June 30, 1997 from $1,527,000
for the same period in 1996. The increase in 1997 from 1996 of $78,000 was due
to the payment of public relations and shareholder costs related to the IPO.
The aggregate amount of Cornerstone's general and administrative expenses have
increased to $3,218,000 for the six months ended June 30, 1997 from $2,936,000
for the same period in 1996. The increase in 1997 from 1996 of $282,000 was due
to the write off of certain expenses related to the State Street Bank Building
of $115,000, and increased salaries and benefits due to the hiring of additional
staff of $71,000 and the hiring of public relations consultants of $61,000.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash Flow provided by For the six months For the six months
(used in): ended June 30, 1997 ended June 30, 1996
- --------------------------------------------------------------------------------
Operating activities $26,978 $14,605
Investing activities (72,224) (3,101)
Financing activities 153,017 13,612
Earnings to fixed charges ratio 1.22 1.40
Cash provided by operating activities increased from $14.6 million for the six
months ended June 30, 1996 to $27.0 million for the six months ended June 30,
1997. This increase was mainly due to the increase in net rental revenues
(before depreciation and amortization) from the properties of $9.9 million,
interest expense savings of $1.2 million and increased interest income from
higher cash reserves of $1.7 million; these amounts are offset by approximately
$300,000 of general and administrative expenses.
Cash used in investing activities increased to $72.2 million for the six months
ended June 30, 1997 from $3.1 million for the six months ended June 30, 1996
due to the acquisition of 527 Madison Avenue during 1997 for a total cost of $67
million and approximately $2 million increase in tenant leasing costs.
Cash providing by financing activities increased to $153.0 million for the six
months ended June 30, 1997 as compared to $13.6 million as of June 30, 1996. The
increase was mainly due to the placement proceeds from the initial public
offering which is offset by common and preferred stockholder distributions and
the repayment of the $32.5 million term loan.
Earnings to fixed charges decreased to 1.22 times at June 30, 1997 from 1.40
times at June 30, 1996 due to the recognition of a large unrealized gain on the
forward swap during the first quarter of 1996, and the large fixed payment
relating to the preferred dividend on the 8% Preferred Stock.
Funds From Operations
The Company calculates Funds from Operations (FFO) based upon guidance from the
National Association of Real Estate Investment Trusts (NAREIT). FFO is defined
as net income, excluding gains or losses from debt restructuring and sales of
property, plus depreciation and amortization, and after adjustments for
unconsolidated joint ventures. The Company has adjusted FFO by the net gain on
interest rate swap previously discussed due to the non-cash nature of this item.
Since the Company is no longer a party to any interest rate swap agreements, the
adjustment in the first quarter of 1997 will be the final adjustment for this
item.
Industry analysts generally consider FFO to be an appropriate measure of
performance of an equity Real Estate Investment Trust (REIT) such as
Cornerstone. FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and, therefore, should
not be considered a substitute for net income as a measure of performance or for
cash flow from operations as a measure of liquidity calculated in accordance
with generally accepted accounting principles.
The Company believes that FFO is helpful to investors as a measure of the
performance of an equity REIT because, along with cash flows from operating
activities, financing activities and investing activities, it provides investors
an understanding of the ability of the Company to incur and service debt and to
make capital expenditures. For cash flows from operating, financing and
investing activities, see the Consolidated Statements of Cash Flows included in
the Consolidated Financial Statements which are part of this report.
The Company no longer reports free and deferred rents as an adjustment to FFO
since this is not part of the industry standard. Therefore, included in FFO for
the three months ended June 30, 1997 and 1996, is approximately $378,000 and
$351,000, respectively, of free and deferred rents (after adjustment for
minority interest). Included in FFO for the six months ended June 30, 1997 and
1996, is approximately $659,000 and $666,000, respectively, of free and deferred
rents (after adjustment for minority interest). The table below sets forth the
adjustments which were made to the net income of the Company in the calculation
of FFO for the three and six month periods ended June 30, 1997 and 1996,
respectively (in thousands):
<PAGE>
<TABLE>
Funds From Operations (A)
---------------------
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 7,980 $ 1,876 $13,590 $ 8,857
NAREIT Adjustments:
Depreciation and amortization (B) 7,146 5,972 13,808 11,801
Realized/Unrealized gain 0 (671) (99) (5,465)
Minority adjustments (366) (652) (737) (1,021)
Extraordinary Losses/Swap Losses 28 0 54 0
Other Adjustments:
Amortization on rent notes 337 304 557 502
Real estate tax adjustment 0 1,350 0 1,412
--------- --------- --------- --------
Funds From Operations 15,125 8,179 27,173 16,086
--------- --------- --------- --------
Accrued Preferred Dividend (4,205) (875) (8,410) (1,750)
--------- -------- --------- ---------
Funds From Operations
Available For Common Shares $10,920 $ 7,304 $18,763 $14,336
========= ========= ========== =========
<FN>
(A) Although the Company believes that this table is a full and fair
presentation of the Company's FFO, similarly captioned items may be defined
differently by other REITs, in which case direct comparisons may not be
possible.
(B) The depreciation and amortization adjustment does not include amortization
of deferred financing costs and depreciation of non-real estate assets in
accordance with guidance from NAREIT.
</FN>
</TABLE>
The increase in FFO available for common shares for the six months ended June
30, 1997 as compared to the same period in 1996 is due to the items described in
cash provided by operating activities offset by the real estate tax adjustment
of $1.4 million in 1996 and the $6.7 million increase in preferred dividends.
The increase in FFO for the three months ended June 30, 1997 as compared to the
same period in 1996 is due to a $5.8 million increase in property NOI, a $1.7
million increase in interest/ other income, an $800,000 decrease in interest
expense, which is offset by the $1.4 million real estate tax adjustment in 1996
and a $3.7 million increase in preferred dividends.
The Company will seek to continue increasing FFO and the value of its property
portfolio by acquiring additional properties that the Company believes will
produce favorable returns. As part of its ongoing business, the Company
periodically engages in discussions with public and private real estate entities
regarding possible portfolio or asset acquisitions or business combinations.
Capital Stock Transactions
On April 22, 1997, the Company completed its initial public offering in the U.S.
of 16.1 million shares at a price of $14.00 per share. The proceeds from the
offering will be used to acquire new assets and for general corporate purposes.
The Company is listed on the New York Stock Exchange under the symbol CPP.
Long Term Debt
The Company was required under the terms of its $32.5 million term loan with
Deutsche Bank AG to repay the loan upon the completion of its Initial Public
Offering (IPO) in the United States. In anticipation of the IPO and listing on
the New York Stock Exchange, the Company repaid this loan on March 19, 1997. The
Company has no long-term debt maturing until 2001 when the debt on One Norwest
Center and the note from Hines matures.
Other Matters
The Company is not aware of any environmental issues at any of its properties.
The Company believes it has sufficient insurance coverage at each of its
properties. The Company's leases with the majority of its tenants require the
tenants to pay most operating expenses and increase in common area maintenance
expenses, which reduces the Company's exposure to increases in costs and
operating expenses resulting from inflation.
Stockholders' Distributions
Cornerstone intends to distribute at least 95 percent of its taxable income to
maintain its qualification as a Real Estate Investment Trust. Currently,
Cornerstone anticipates that FFO will exceed taxable income for the foreseeable
future. Cornerstone's distribution policy is to pay distributions based upon
FFO, less prudent reserves. The Company declared a dividend of $0.30 per common
share, payable to all stockholders of record as of June 20, 1997 on July 31,
1997.
At the present time the Company is current in the payment of all preferred
stockholder dividends.
Liquidity
At June 30, 1997, the Company had $222,574,000 in cash and cash equivalents and
$40,107,000 in restricted cash. Restricted cash is being held by escrow agents
for the One Norwest Center, 527 Madison Avenue and Washington Mutual Tower
loans. Cornerstone also had available $10 million under its working capital line
of credit for general corporate purposes. In addition, Cornerstone anticipates
it will receive distributions from its real estate partnerships and rental
income from its fee owned properties on a monthly basis which will be used to
cover normal operating expenses and pay distributions to its stockholders. Based
upon its cash reserves and other sources of funds, Cornerstone has sufficient
liquidity to meet its cash requirements for the foreseeable future.
New Pronouncements
During 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"), No.
129 "Disclosure of Information About Capital Structure" ("SFAS 129"), No. 130
"Reporting Comprehensive Income" ("SFAS 130"), and No. 131 "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131"). All of these
statements are effective for fiscal years beginning after December 15, 1997.
SFAS 128 specifies the computation, representation and disclosure requirements
for earnings per share. SFAS 129 established standards for disclosing
information about an entity's capital structure such as information about
securities, liquidation preference of preferred stock and redeemable stock. SFAS
130 specifies the presentation and disclosure requirement for reporting
comprehensive income which includes those items which have been formerly
reported as a component of shareholders' equity. SFAS 131 establishes the
disclosure requirements for reporting segment information.
Management believes that, when adopted, SFAS 128, 129, 130 and 131 will not have
a significant impact on the Company's financial statements.
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
1) Exhibit 11.1: Statement of Computation of Earnings Per Share
2) For EDGAR filing purposes only, this report contains Exhibit 27,
Financial Data Schedule.
(b) Reports on Form 8-K:
1) Form 8-K/A dated January 22, 1997
Item 7 - Financial Statements and Exhibits: Financial statements
reflecting the acquisition of Tower 56 and One Lincoln Centre
2) Form 8-K dated January 29, 1997
Item 5 - Other Events: Board of Directors approval to acquire 527
Madison for approximately $67 million
Item 7 - Financial Statements and Exhibits: Agreement of Sale and
Purchase of 527 Madison
3) Form 8-K/A dated February 21, 1997
Item 2 - Acquisition or Disposition of Assets: Clarification on the
Frick Building acquisition.
Item 7 - Financial Statements and Exhibits: Clarification on the
pro forma financial statements of One Lincoln Centre and Tower 56.
4) Form 8-K/A dated February 24, 1997
Item 7 - Financial Statements and Exhibits: Financial statements
reflecting the acquisition of 527 Madison
5) Form 8-K dated July 28, 1997
Item 5 - Other Events: Conversion of NYSTERS and RODAMCO preferred
stock.
Item 7 - Financial Statements and Exhibits: Press release
announcing conversion of NYSTERS and RODAMCO preferred stock.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CORNERSTONE PROPERTIES INC.
(Registrant)
By: /s/ John S. Moody.
John S. Moody, President and CEO
Date: August 12, 1997
By: /s/ Thomas P. Loftus.
Thomas P. Loftus, Vice President
and Controller
(Principal Financial Officer)
Date: August 12, 1997
<TABLE>
Exhibit 11.1
Statement of Computation of Earnings Per Share
for the six months ended June 30, 1997
<CAPTION>
Earnings Per Share
<S> <C> <C>
Primary Fully Diluted
------------- ---------------
1. Proceeds upon exercise of options $ 11,261,250 $ 11,261,250
2. Market price of shares
Closing: 6/30/97 $ - $ 15.25
Average: 4/01/97-6/30/97 $ 14.89 $ -
3. Treasury shares that could be repurchased (Options) 756,296 738,443
4. Option shares outstanding 787,500 787,500
5. Common stock equivalent shares (Excess 31,204 49,057
shares under option over Treasury
shares that could be repurchased)
6. Weighted average number of shares outstanding 27,237,452 27,311,855
7. Net income for the period $ 13,590,000 $ 13,590,000
8. Less: Dividends applicable to
the preferred stock $ (8,410,000) $(8,410,000)
Plus: Interest expense on convertible note $ - $ -
9. Net income applicable to common shares $ 5,180,000 $ 5,180,000
10.Income per share $ 0.19 $ 0.19
11.Reported income per share $ 0.19 $ 0.19
</TABLE>
Exhibit 12.1
Statement of Computation of Earnings to Fixed Charges for the
six month periods ended June 30, 1997 and June 30, 1996
For the six months ended
June 30, 1997 June 30, 1996
----------------- -----------------
Net income $ 13,590 $ 8,857
Interest expense 14,748 15,870
----------------- -----------------
Earnings before interest 28,338 24,727
Interest expense 14,748 15,870
Preferred dividends 8,410 1,750
----------------- -----------------
Fixed charges 23,158 17,620
Earnings to fixed charges 1.22 1.40
================= =================
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 222,574
<SECURITIES> 0
<RECEIVABLES> 41,473
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 265,901
<PP&E> 749,158
<DEPRECIATION> 212,745
<TOTAL-ASSETS> 972,941
<CURRENT-LIABILITIES> 68,726
<BONDS> 0
162,515
50,000
<COMMON> 352,419
<OTHER-SE> (19,681)
<TOTAL-LIABILITY-AND-EQUITY> 972,941
<SALES> 0
<TOTAL-REVENUES> 73,255
<CGS> 0
<TOTAL-COSTS> 58,716
<OTHER-EXPENSES> 895
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,748
<INCOME-PRETAX> 13,590
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,590
<DISCONTINUED> 0
<EXTRAORDINARY> 54
<CHANGES> 0
<NET-INCOME> 13,590
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
