<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20543
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED June 30, 2000
COMMISSION FILE NO. 1-11706
CARRAMERICA REALTY CORPORATION
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1796339
--------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1850 K Street, N.W., Washington, D.C. 20006
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(Address or principal executive office) (Zip code)
Registrant's telephone number, including area code (202) 729-1000
--------------
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Number of shares outstanding of each of the registrant's
classes of common stock, as of August 14, 2000:
Common Stock, par value $.01 per share: 66,342,364 shares
-----------------------------------------------------------------------------
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 twelve (12) months (or such shorter period that the Registrant was
required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO
----------- -----------
<PAGE>
<TABLE>
<CAPTION>
Index
-----
Page
<S> <C> <C>
Part I: Financial Information
-----------------------------
Item 1. Financial Statements
Consolidated balance sheets of CarrAmerica Realty Corporation and subsidiaries as of June 30, 2000
(unaudited) and December 31, 1999................................................................. 4
Consolidated statements of operations of CarrAmerica Realty Corporation and subsidiaries for the
three months and six months ended June 30, 2000 and 1999 (unaudited)............................. 5 to 6
Consolidated statements of cash flows of CarrAmerica Realty Corporation and subsidiaries for the
six months ended June 30, 2000 and 1999 (unaudited)............................................... 7
Notes to consolidated financial statements (unaudited)............................................ 8 to 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................................ 13 to 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 19
Part II: Other Information
--------------------------
Item 1. Legal Proceedings............................................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders............................................. 20
Item 6. Exhibits and Reports on Form 8-K................................................................. 20 to 21
</TABLE>
2
<PAGE>
Part I
------
Item 1. Financial Information
---------------------
The information furnished in the accompanying consolidated balance
sheets, consolidated statements of operations and consolidated statements of
cash flows of CarrAmerica Realty Corporation and subsidiaries (the Company)
reflect all adjustments which are, in the opinion of management, necessary for a
fair presentation of the aforementioned financial statements for the interim
periods.
The aforementioned financial statements should be read in conjunction
with the notes to the financial statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations.
3
<PAGE>
CARRAMERICA REALTY CORPORATION AND
SUBSIDIARIES Consolidated Balance Sheets As Of
June 30, 2000 and December 31, 1999
-------------------------------------------------------------------------------
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------- ----------------
(Unaudited)
<S> <C> <C>
Assets
------
Rental property:
Land $ 674,900 $ 674,390
Buildings 2,082,926 2,082,533
Tenant improvements 345,437 304,983
Furniture, fixtures and equipment 6,032 5,916
--------------- ----------------
3,109,295 3,067,822
Less - accumulated depreciation (366,997) (323,455)
--------------- ----------------
Total rental property 2,742,298 2,744,367
Land held for development 96,863 104,050
Construction in progress 106,880 116,013
Cash and cash equivalents 52,799 51,886
Restricted cash and cash equivalents 12,797 12,475
Accounts and notes receivable 31,973 34,734
Investments 117,496 67,143
Accrued straight-line rents 53,712 47,764
Tenant leasing costs, net 63,644 58,848
Deferred financing costs, net 12,930 15,621
Prepaid expenses and other assets, net 26,971 18,503
Net assets of discontinued operations -- 207,668
--------------- ----------------
$ 3,318,363 $ 3,479,072
================ ================
Liabilities, Minority Interest, and Stockholders' Equity
--------------------------------------------------------
Liabilities:
Mortgages and notes payable $ 1,432,972 $ 1,603,371
Accounts payable and accrued expenses 77,065 68,643
Rent received in advance and security deposits 30,853 27,757
--------------- ----------------
Total liabilities 1,540,890 1,699,771
Minority interest 89,389 92,586
Stockholders' equity:
Preferred Stock, $.01 par value, authorized 35,000,000 shares:
Series A Cumulative Convertible Redeemable Preferred Stock, 480,000
shares issued and outstanding at June 30, 2000 and 680,000 shares
issued and outstanding at December 31, 1999 with an aggregate
liquidation preference of $12.0 million and $17.0 million,
respectively 5 7
Series B, C and D Cumulative Redeemable Preferred Stock,
8,800,000 shares issued and outstanding with an aggregate
liquidation preference of $400.0 million 88 88
Common Stock, $.01 par value, authorized 180,000,000 shares, issued and
outstanding 66,307,083 shares at June 30, 2000 and 66,826,288 shares
at December 31, 1999 663 668
Additional paid in capital 1,802,621 1,816,990
Cumulative dividends in excess of net income (115,293) (131,038)
--------------- ----------------
Total stockholders' equity 1,688,084 1,686,715
--------------- ----------------
Commitments and contingencies -- --
$ 3,318,363 $ 3,479,072
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Months Ended June 30, 2000 and 1999
-------------------------------------------------------------------------------
(Unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Revenues:
Rental income:
Minimum base rent $ 115,303 $ 101,173
Recoveries from tenants 17,505 13,838
Parking and other tenant charges 6,319 4,227
-------------- --------------
Total rental revenue 139,127 119,238
Real estate service revenue 5,312 4,947
-------------- --------------
Total operating revenues 144,439 124,185
-------------- --------------
Operating expenses:
Property expenses:
Operating expenses 31,930 30,808
Real estate taxes 12,572 11,823
Interest expense 25,115 19,843
General and administrative 12,001 8,982
Depreciation and amortization 35,170 28,455
-------------- --------------
Total operating expenses 116,788 99,911
-------------- --------------
Real estate operating income 27,651 24,274
-------------- --------------
Other operating income:
Interest Income 873 886
Equity in earnings of unconsolidated partnerships 1,267 1,136
-------------- --------------
Total other operating income 2,140 2,022
-------------- --------------
Income from continuing operations before minority interest 29,791 26,296
Minority Interest (2,353) (4,518)
-------------- --------------
Income from continuing operations 27,438 21,778
Discontinued operations - Income (loss) from Executive Suites operations (less
applicable income tax expense of $1,083 and $0, respectively) 1,836 (1,849)
Discontinued operations - Gain on sale of discontinued operations (less
applicable income tax expense of $21,131) 31,852 --
-------------- --------------
Income before gain on sale of assets 61,126 19,929
Gain on sale of assets, net of income taxes 2,387 10,477
-------------- --------------
Net income $ 63,513 $ 30,406
============== ==============
Basic net income per common share:
Income from continuing operations $ 0.31 $ 0.35
Discontinued operations 0.03 (0.03)
Gain on sale of discontinued operations 0.48 --
-------------- --------------
Net income $ 0.82 $ 0.32
============== ==============
Diluted net income per share:
Income from continuing operations $ 0.31 $ 0.35
Discontinued operations 0.03 (0.03)
Gain on sale of discontinued operations 0.43 --
-------------- --------------
Net income $ 0.77 $ 0.32
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Six Months Ended June 30, 2000 and 1999
-------------------------------------------------------------------------------
(Unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Revenues:
Rental income:
Minimum base rent $ 229,183 $ 204,313
Recoveries from tenants 34,339 27,971
Parking and other tenant charges 12,230 8,412
-------------- --------------
Total rental revenue 275,752 240,696
Real estate service revenue 10,253 8,847
-------------- --------------
Total operating revenues 286,005 249,543
-------------- --------------
Operating expenses:
Property expenses:
Operating expenses 64,212 60,112
Real estate taxes 24,518 22,864
Interest expense 52,005 41,161
General and administrative 21,773 18,291
Depreciation and amortization 67,319 54,610
-------------- --------------
Total operating expenses 229,827 197,038
-------------- --------------
Real estate operating income 56,178 52,505
-------------- --------------
Other operating income:
Interest Income 1,750 1,798
Equity in earnings of unconsolidated partnerships 2,716 2,631
Gain on settlement of treasury locks -- 4,489
-------------- --------------
Total other operating income 4,466 8,918
-------------- --------------
Income from continuing operations before minority interest 60,644 61,423
Minority Interest (5,408) (10,254)
-------------- --------------
Income from continuing operations 55,236 51,169
Discontinued operations - Income (loss) from Executive Suites operations (less
applicable income tax expense of $1,300 and $252, respectively). 456 (3,120)
Discontinued operations - Gain on sale of discontinued operations (less
applicable income tax expense of $21,131) 31,852 --
-------------- --------------
Income before gain on sale of assets 87,544 48,049
Gain on sale of assets, net of income taxes 7,741 28,532
-------------- --------------
Net income $ 95,285 $ 76,581
============== ==============
Basic net income per common share:
Income from continuing operations $ 0.68 $ 0.90
Discontinued operations 0.00 (0.05)
Gain on sale of discontinued operations 0.48 --
-------------- --------------
Net income $ 1.16 $ 0.85
============== ==============
Diluted net income per share:
Income from continuing operations $ 0.68 $ 0.89
Discontinued operations 0.00 (0.05)
Gain on sale of discontinued operations 0.44 --
-------------- --------------
Net income $ 1.12 $ 0.84
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2000 and 1999
-------------------------------------------------------------------------------
(Unaudited and in thousands)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 95,285 $ 76,581
-------------- ---------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 67,370 63,633
Minority interest in income 5,408 10,168
Equity in earnings of unconsolidated partnerships (2,716) (2,631)
Gain on sale of assets (7,741) (28,532)
Gain on sale of discontinued operations (32,308) --
Other 2,473 1,281
Change in assets and liabilities, net of acquisitions and dispositions:
Increase in accounts and notes receivable (4,001) (3,033)
Decrease in accrued straight-line rents (6,466) (1,503)
Additions to tenant leasing costs (9,059) (3,997)
Increase in prepaid expenses and other assets (5,407) (13,559)
(Decrease) increase in accounts payable and accrued expenses (1,664) 2,040
Increase (decrease) in rent received in advance and security deposits 3,095 (152)
-------------- ---------------
Total adjustments 8,984 23,715
-------------- ---------------
Net cash provided by operating activities 104,269 100,296
-------------- ---------------
Cash flows from investing activities:
Acquisition and development of rental property (46,825) (45,747)
Acquisition and development of executive suites assets (6,678) (18,888)
Additions to land held for development (11,071) (14,116)
Additions to construction in progress (33,493) (148,361)
Distributions from unconsolidated partnerships 3,568 23,220
Investments in unconsolidated partnerships (9,875) (4,864)
Acquisition of minority interest (1,478) --
(Increase) decrease in restricted cash and cash equivalents (322) 19,575
Proceeds from the sale of discontinued operations 377,310 --
Proceeds from sales of rental property 62,883 352,699
-------------- ---------------
Net cash provided by investing activities 334,019 163,518
-------------- ---------------
Cash flows from financing activities:
Repurchase of common stock (28,450) (109,717)
Net repayments on unsecured credit facility (317,500) (90,000)
Proceeds from refinance of existing mortgages -- 46,102
Repayment of mortgages payable (7,849) (6,910)
Dividends and distributions to minority interests (85,524) (81,801)
Contributions from minority interests 1,948 --
Additions to deferred financing costs -- (361)
-------------- ---------------
Net cash used by financing activities (437,375) (242,687)
-------------- ---------------
Foreign currency translation adjustment -- (2,726)
-------------- ---------------
Increase in unrestricted cash and cash equivalents 913 18,401
Unrestricted cash and cash equivalents, beginning of the period 51,866 36,499
-------------- ---------------
Unrestricted cash and cash equivalents, end of the period $ 52,799 $ 54,900
============== ===============
Supplemental disclosure of cash flow information:
Cash paid for interest (net of capitalized interest of $7,229 and $16,378
for the six months ended June 30, 2000 and 1999, respectively) $ 60,106 $ 49,568
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
--------------------------------------------------------------------------------
(1) Description of Business and Summary of Significant Accounting Policies
(a) Business
CarrAmerica Realty Corporation (the "Company") is a self-
administered and self-managed equity real estate investment
trust ("REIT"), organized under the laws of Maryland, which
owns, develops, acquires and operates office properties. The
Company's office properties primarily are located in 14
suburban markets across the United States.
(b) Basis of Presentation
The accounts of the Company and its majority-owned/controlled
subsidiaries and affiliates are consolidated in the
accompanying financial statements. The Company uses the equity
method of accounting for its investments in and earnings and
losses of unconsolidated partnerships not controlled by the
Company and the cost method for investments where the
Company's ownership is less than 20%. Management of the
Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, revenues
and expenses, and the disclosure of contingent assets and
liabilities to prepare these financial statements in
conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(c) Interim Financial Statements
The information furnished reflects all adjustments, which are,
in the opinion of management, necessary to reflect a fair
presentation of the results for the interim periods, and all
such adjustments are of a normal, recurring nature.
(d) New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging
Activities", which requires that an entity recognize all
derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair
value. This statement, as amended by SFAS 137 and 138, is
effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company is evaluating and has not yet
determined the impact of this pronouncement.
(e) Per Share Data and Dividends
The following is a reconciliation of the numerators and
denominators of the basic and diluted EPS computations for
income from continuing operations (including gain on sale of
assets):
<TABLE>
<CAPTION>
Three Months Three Months
Ended June 30, 2000 Ended June 30, 1999
-----------------------------------------------------------------------------
Income Per Income Per
(000's) Shares Share (000's) Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ 21,080 66,856 $0.31 $ 23,417 66,779 $0.35
Effect of Dilutive
Securities:
Stock Options -- 878 -- 362
------------ -------------- --------- ---------- -------------- --------
Diluted EPS $ 21,080 67,734 $0.31 $ 23,417 67,141 $0.35
============ =============== ======== =========== ============== ========
</TABLE>
In the calculations of EPS, income from continuing operations
including gain on sale of assets has been reduced by preferred
stock dividends of $8,745 and $8,838 for the three month
periods ended June 30, 2000 and 1999, respectively. The
effects of partnership units and Series A Preferred Stock are
not included in the computation of diluted EPS for a given
period if their effect is antidilutive. Partnership units are
issued by Carr Realty L.P. and CarrAmerica Realty L.P.
8
<PAGE>
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Six Months
Ended June 30, 2000 Ended June 30, 1999
-----------------------------------------------------------------------------
Income Per Income Per
(000's) Shares Share (000's) Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ 45,455 66,912 $0.68 $ 62,118 68,927 $0.90
Effect of Dilutive
Securities:
Stock Options -- 395 -- 295 (0.01)
------------ --------------- -------- ----------- -------------- --------
Diluted EPS $ 45,455 67,307 $0.68 $ 62,118 69,222 $0.89
============ =============== ======== =========== ============== ========
</TABLE>
In the calculation of EPS, income from continuing operations
before extraordinary item has been reduced by preferred stock
dividends of $17,522 and $17,583 for the six month periods
ended June 30, 2000 and 1999, respectively. The effects of
partnership units and Series A Preferred Stock are not
included in the computation of diluted EPS for a given period
if their effect is antidilutive.
(f) Reclassifications
Certain reclassifications of prior period amounts have been
made to conform to the current period's presentation.
(2) Hedging Transactions
In 1998, the Company entered into forward treasury agreements in order to hedge
against the impact that interest rate fluctuations would have on debt
instruments the Company planned to issue in the future. At December 31, 1998,
the Company determined that these agreements no longer represented effective
hedges and recorded a loss of $13.7 million in anticipation of terminating the
agreements. In February 1999, the Company settled these contracts for $9.2
million in cash and recorded a gain of $4.5 million.
(3) Discontinued Operations
On January 20, 2000, the Company, HQ Global, VANTAS and FrontLine
Capital Group entered into several agreements that contemplated a
series of transactions, including (i) the merger of VANTAS with and
into HQ Global, (ii) the acquisition by FrontLine Capital Group of
certain shares of common stock of HQ Global from the Company and other
stockholders of HQ Global, and (iii) the acquisition by VANTAS of the
Company's debt and equity interests in OmniOffices (UK) Limited and
OmniOffices (Lux) 1929 Holding Company S.A. On June 1, 2000, the merger
was completed. The Company recognized an after-tax gain of $31.9
million as a result of the merger. The Company's investment in the
merged entity at June 30, 2000 was approximately $41.6 million. The
Company owns approximately 16% of the equity of the merged entity on a
fully diluted basis .
In connection with the HQ Global merger a $200.0 million credit
facility that HQ Global had with Morgan Guaranty Trust Company
("Morgan"), as lead agent, was retired with proceeds from the merger.
Approximately $141 million of HQ Global debt (which was guaranteed by
CarrAmerica) was repaid at that time.
(4) Gain on Sale of Assets
The Company has disposed of certain assets that are inconsistent with
its long-term strategic or return objectives or where market conditions
for sale are favorable. During the six months ended June 30, 2000, the
Company disposed of 5 operating office properties recognizing gains
totaling $7.7 million, net of $1.3 million in income taxes. During the
six months ended June 30, 1999, the Company disposed of 51 operating
office properties recognizing gains totaling $28.5 million, net of
$13.7 million in income taxes.
9
<PAGE>
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
--------------------------------------------------------------------------------
(5) Segment Information
The Company's reportable operating segments are real estate property
operations and development operations. Other business activities and
operating segments that are not reportable are included in other
operations.
The Company's operating segments' performances are measured using funds
from operations. Funds from operations represent net operating income
before minority interest and extraordinary items, excluding
depreciation and amortization on real estate assets, discontinued
operations, gains on treasury locks and gain on sale of assets.
<TABLE>
<CAPTION>
(In millions) For the three months ended
June 30, 2000
--------------------------------------------------------------
Real Estate
Property Development Other
Operations Operations Operations Total
---------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Operating revenue $ 139.1 2.1 3.2 $ 144.4
Segment expense 44.5 1.4 10.6 56.5
----------- ------------ -------------- -----------
Net segment revenue (expense) 94.6 0.7 (7.4) 87.9
Interest expense 12.1 -- 13.0 25.1
Other income (expense), net 3.9 -- (2.7) 1.2
----------- ------------ -------------- -----------
Funds from operations $ 86.4 0.7 (23.1) 64.0
=========== ============ ============== ===========
Adjustments:
Depreciation and amortization (34.3)
-----------
Income from continuing operations
before gain on sale of assets and
minority interest 29.7
Minority interest and gain on sale
of assets --
Discontinued operations, net of
income tax 1.9
Gain on sale of discontinued
operations, net of taxes 31.9
-----------
Net income $ 63.5
===========
</TABLE>
10
<PAGE>
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In millions) For the three months ended
June 30, 1999
------------------------------------------------------------
Real Estate
Property Development Other
Operations Operations Operations Total
---------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Operating revenue $ 119.2 1.7 3.2 $ 124.1
Segment expense 42.6 0.8 8.1 51.5
------------- ------------ ------------ -------------
Net segment revenue (expense) 76.6 0.9 (4.9) 72.6
Interest expense 12.6 -- 7.3 19.9
Other income (expense), net 3.3 -- (1.5) 1.8
------------- ------------ ------------ -------------
Funds from operations $ 67.3 0.9 (13.7) 54.5
============= ============ ============ =============
Adjustments:
Depreciation and amortization (28.3)
-------------
Income from continuing operations
before gain on sale of assets and
minority interest 26.2
Minority interest and gain on sale
of assets 6.0
Discontinued operations - loss, net
of income tax (1.8)
-------------
Net income $ 30.4
=============
</TABLE>
<TABLE>
<CAPTION>
For the six months ended
June 30, 2000
------------------------------------------------------------
Real Estate
Property Development Other
Operations Operations Operations Total
---------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Operating revenue $ 275.7 4.0 6.3 $ 286.0
Segment expense 88.7 2.4 19.4 110.5
------------- ------------ ----------- --------------
Net segment revenue (expense) 187.0 1.6 (13.1) 175.5
Interest expense 24.9 -- 27.1 52.0
Other income (expense), net 5.1 -- (2.6) 2.5
------------- ------------ ----------- --------------
Funds from operations $ 167.2 1.6 (42.8) 126.0
============= ============ =========== ==============
Adjustments:
Depreciation and amortization (65.4)
--------------
Income from continuing operations
before gain on sale of assets and
minority interest 60.6
Minority interest and gain on sale
of assets 2.3
Discontinued operations, net of
income tax 0.5
Gain on sale of discontinued
operations 31.9
--------------
Net income $ 95.3
==============
</TABLE>
11
<PAGE>
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the six months ended
June 30, 1999
------------------------------------------------------------
Real Estate
Property Development Other
Operations Operations Operations Total
------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Operating revenue $ 240.7 3.1 5.7 $ 249.5
Segment expense 83.0 1.7 16.5 101.2
------------ ------------ ----------- -------------
Net segment revenue (expense) 157.7 1.4 (10.8) 148.3
Interest expense 24.8 -- 16.4 41.2
Other income (expense), net 4.6 -- (1.3) 3.3
------------ ------------ ----------- -------------
Funds from operations $ 137.5 1.4 (28.5) 110.4
============ ============ ==========
Adjustments:
Depreciation and amortization (53.5)
Gain on treasury locks 4.5
-------------
Income from continuing operations
before gain on sale of assets and
minority interest 61.4
Minority interest and gain on sale
of assets 18.3
Discontinued operations - loss, net
of income tax (3.1)
-------------
Net income $ 76.6
=============
</TABLE>
12
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion is primarily based on the Consolidated
Financial Statements of CarrAmerica Realty Corporation and its subsidiaries (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 comparability of the periods is
impacted by acquisitions completed, development properties placed in service and
dispositions made during 2000 and 1999. As of June 30, 1999, the Company had 258
operating properties. This number increased to 276 at June 30, 2000.
The Company's reportable operating segments are real estate property
operations and development operations. Development operations primarily
consisted of third-party development fee income and associated expenses. Other
business activities and operating segments that are not reportable are included
in other operations. Executive office suites are presented as discontinued
operations.
This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto. These consolidated
financial statements include all adjustments, which are, in the opinion of
management, necessary to reflect a fair statement of the periods presented, and
all such adjustments are of a normal, recurring nature.
RESULTS OF OPERATIONS - Three Months Ended June 30, 2000 and 1999
Real Estate Property Operations
Total real estate property operating revenue increased $19.9 million,
or 16.7%, to $139.1 million for the three months ended June 30, 2000, compared
to $119.2 million for the three months ended June 30, 1999. This increase
resulted from development properties being placed in service and same store
rental growth which exceeded the loss of rental revenue due to dispositions.
Same store net operating income in 2000 grew by 11.2% or $7.2 million over the
same period in 1999, as a result of a 7.9% increase in rental revenue. This
increase was driven by an increase in average rental rates primarily in San
Francisco Bay area properties. The occupancy rate for same store properties
increased to 97.4% for the second quarter of 2000 from 96.5% for the second
quarter of 1999.
Real estate property operating expenses increased $1.9 million
primarily as a result of development properties placed in service. Same store
operating expenses in 2000 increased by $0.5 million or 1.5% over the second
quarter of 1999.
Development Operations
Development fee revenue increased $0.4 million to $2.1 million
and development operating expenses increased $0.6 million to $1.4 million for
the second quarter of 2000. These increases are the result of an increase in the
number of development fee projects the Company manages.
Other Operations
Operating revenues were flat for the three months ended June 30, 2000
compared to the same period in 1999.
Other operations expenses increased $2.5 million primarily as a result
of professional fees associated with the Company's Project Excellence program
and other initiatives. The project's mission is primarily to examine the
Company's current finance, technology and business processes in order to
identify and implement changes needed to improve these processes to the level of
best practice. Another factor contributing to higher expenses was increased
compensation expenses related to bonuses and other incentives.
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company
--------------------------------------------------------------------------------
Interest expense increased $5.7 million or 78.1% to $13.0 million
compared to $7.3 million in 1999. This was primarily due to a $4.8 million
decrease in capitalizable interest for the three months ended June 30, 2000 as
compared to 1999 based on reduced construction in progress activity between the
periods.
Discontinued Operations
Income from operations of discontinued executive suites businesses was $1.8
million for 2000 versus a loss of $1.8 million reported for the three months
ended June 30, 1999. The increase in income is primarily due to the lease up of
development properties placed into operations. On June 1, 2000, the merger
between HQ Global Workplaces and Vantas was completed. The Company recognized an
after tax gain of $31.9 million.
RESULTS OF OPERATIONS - Six Months Ended June 30, 2000 and 1999
Real Estate Property Operations
Total real estate property operating revenue increased $35.0 million,
or 14.5%, to $275.7 million for the six months ended June 30, 2000, compared to
$240.7 million for the six months ended June 30, 1999. This increase resulted
from development properties being placed in service and same store rental growth
which exceeded the loss of rental revenue due to dispositions. Same store net
operating income in 2000 grew by 11.6% or $14.6 million over the same period in
1999, as a result of an 8.3% increase in rental revenue. This increase was
driven by an increase in average rental rates primarily in San Francisco Bay
area properties. The occupancy rate for same store properties increased to 97.3%
for the first six months of 2000 from 96.5% for the first six months of 1999.
Real estate property operating expenses increased $5.7 million
primarily as a result of development properties placed in service. Same store
operating expenses in 2000 increased by $1.0 million or 1.5% over the second
quarter of 1999. Interest expense increased $0.1 million over the six months
ended June 30, 1999 primarily as a result of an increase in borrowings and
slightly lower interest rates.
Development Operations
Development fee revenue increased $0.9 million to $4.0 million and
development operating expenses increased $0.7 million to $2.4 million for the
first six months of 2000. These increases are the result of an increase in the
number of development fee projects the Company manages.
Other Operations
Operating revenues increased $0.6 million for the six months ended June
30, 2000 compared to the same period in 1999 primarily from increases in leasing
fees and other service income.
Other operations expenses increased $2.9 million primarily as a result
of professional fees associated with the Company's Project Excellence program
and other initiatives. The project's mission is primarily to examine the
Company's current finance, technology and business processes in order to
identify and implement changes needed to improve these processes to the level of
best practice.
Interest expense increased $10.7 million or 65.2% to $27.1 million
compared to $16.4 million in 1999. This was primarily due to a $9.1 million
decrease in capitalizable interest for the six months ended June 30, 2000 as
compared to 1999 based on reduced construction in progress activity between the
periods.
Discontinued Operations
Income from operations of discontinued executive suites businesses was
$0.5 million for 2000 versus a loss of $3.1 million reported for the six months
ended June 30, 1999. The increase in income is primarily due to the lease up of
development properties placed into operations. On June 1, 2000, the merger
between HQ Global Workplaces and Vantas was completed. The Company recognized an
after tax gain of $31.9 million.
14
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company seeks to create and maintain a capital structure that will
enable it to diversify its capital sources and thereby allow the Company to
obtain additional capital from a number of different sources, including
additional equity offerings of common and/or preferred stock, public and private
debt financings, and, where appropriate, asset dispositions. Management believes
that the Company will have access to the capital resources necessary to expand
and develop its business, to fund its operating and administrative expenses, to
continue debt service obligations, to pay dividends in accordance with REIT
requirements, to acquire additional properties and land as market conditions
permit, and to pay for construction in progress in both the short and long term.
The Company's debt and preferred stock offerings have been rated by
three rating agencies. Duff & Phelps Credit Rating Co. (DCR) and Standard &
Poors (S&P) have each assigned their BBB rating to senior unsecured debt
offerings of the Company and their BBB- rating to cumulative preferred stock
offerings of the Company. Moody's Investor Service (Moody's) has assigned its
Baa3 rating to senior unsecured debt offerings of the Company and its Ba2 rating
to cumulative preferred stock offerings of the Company.
The Company's total indebtedness at June 30, 2000 was approximately
$1.4 billion, of which $166 million, or 12%, bore a LIBOR-based floating
interest rate. The Company's mortgages payable fixed rate indebtedness bore an
effective weighted average interest rate of 7.8% at June 30, 2000 and had a
weighted average term to maturity at 6.3 years. Based upon the Company's total
market capitalization at June 30, 2000 of $3.7 billion (the common stock price
was $26.52 per share; the total shares of common stock, convertible preferred
stock and Units outstanding were approximately 73,151,000 and the aggregate
liquidation value of the cumulative redeemable preferred stock was $400
million), the Company's debt represented 38% of its total market capitalization.
The Company has a $450.0 million unsecured debt facility, of which $166.0
million had been advanced, letters of credit totaling $3.7 million were issued,
and $280.3 million was available for draw.
Rental revenue and real estate service revenue have been the principal
sources of cash to fund the Company's operating expenses, debt service and
routine capital expenditures. The Company and its affiliates also require
capital to invest in their existing portfolio of operating assets for major
capital projects such as large-scale renovations and tenant related capital
expenditures, such as tenant improvements and allowances and leasing
commissions. The Company believes that these sources of revenue will continue to
provide the funds necessary for these expenditures.
Additionally, the Company and its affiliates (including CarrAmerica
Development, Inc.) will require a substantial amount of capital for development
projects currently underway and planned for the future. As of June 30, 2000, the
Company had approximately 1.5 million square feet of office space in 19
development projects under construction which are expected to require a total
investment by the Company of approximately $244 million. As of June 30, 2000,
the Company had expended $107 million, or 44% of the total expected
investment. In addition, CarrAmerica Development has made commitments of $36
million for new development projects that will commence construction in the
later half of 2000.
Prior to the second quarter of 1998, the Company met its capital
requirements primarily by accessing the public equity markets. As a general
matter, conditions in the public equity markets for most REITs have not been
favorable since that time. In response to these unfavorable conditions, the
Company has curtailed its acquisition program and satisfied its cash needs
through the disposition of selected assets, the refinancing of selected assets,
prudent use of joint ventures that reduce the Company's investment requirement
and utilization of the Company's existing credit facilities.
During the second quarter of 2000, the Company disposed of 3 operating
properties, generating net proceeds of $28.7 million. As of July 31, 2000, the
Company has two projects under contract for sale which are projected to produce
net proceeds of approximately $111 million. Due to uncertainties in the
disposition process, there can be no assurance that these sales will close or
that they will achieve the expected net proceeds.
The Company is party to several joint ventures requiring ongoing
capital commitments. At the end of the second quarter of 2000, there were three
buildings under construction in which the Company had a partial interest. Costs
incurred through June 30, 2000 on these projects were approximately $74.8
million with costs to complete
15
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company
--------------------------------------------------------------------------------
of approximately $156.1 million. The Company's responsibility with regard to
these construction projects is based upon its interest in the joint venture.
The Company has committed $100 million to the repurchase of its common
stock. During the second quarter of 2000, the Company repurchased approximately
1.3 million shares for approximately $33.9 million. The Company intends to
continue to repurchase stock as market conditions and cash availability permit.
On June 1, 2000, the merger of HQ Global Workplaces with Vantas was
completed. The Company received approximately $377 million in cash. HQ Global
Workplace also repaid $141 million of debt which was guaranteed by the Company.
The remaining cash was used to repurchase stock and repay the Company's credit
line.
On October 1, 2000, $150 million of senior unsecured credit notes are
maturing. The Company anticipates using proceeds from a proposed joint
venture. The joint venture is expected to close in the next 30 days. If the
joint venture does not close, the Company believes that the notes can be retired
through either draws on the Company's line of credit or through issuance of
additional indebtedness.
As a result of the Company's disposition and refinancing efforts, the
Company believes that funding is available for all capital requirements through
the end of 2000, including firm commitments for development projects. The
Company expects to continue to rely on cash flow from operations, asset
dispositions, asset refinancings, joint ventures and access to its credit
facilities to fund capital requirements for the foreseeable future.
Net cash provided by operating activities was $104.3 million for the
six months ended June 30, 2000, compared to $100.3 million for the six months
ended June 30, 1999. The increase of $4.0 million in net cash provided by
operating activities resulted primarily from the timing of payments for accounts
payable and rents received in advance. The Company's investing activities
provided $334.0 million for the six months ended June 30, 2000 compared to the
Company's investing activities providing $163.5 million for the six months ended
June 30, 1999. The Company's investment activities included sales of office
buildings and land acquired for future development and additions to construction
in progress. Net proceeds from the sales of rental property was $62.9 million
for the six months ended June 30, 2000, compared to $352.7 million for the six
months ended June 30, 1999. The Company invested approximately $98.1 million in
acquisitions and improvements to existing real estate assets, acquisition and
development of executive suites assets and additions to land held for
development and construction in progress for the six months ended June 30, 2000
compared to $227.1 million for the comparable period of 1999.
Net of dividends paid and distributions to minority interests, the
Company's financing activities used net cash of $351.9 million for the six
months ended June 30, 2000 compared to net cash used of $160.9 million for the
six months ended June 30, 1999. During the three months ended June 30, 1999, the
Company repurchased 5,000,000 common shares issued in its forward equity sale
transaction for $109.7 million. Proceeds from the sale of rental properties were
used to fund this transaction and to repay amounts on the unsecured credit
facility. For the six months ended June 30, 2000, the Company's net repayments
on its unsecured credit facility were $317.5 million as compared to net
repayments of $90.0 million for the comparable period of 1999.
The Company's dividends are paid quarterly. Amounts accumulated for
distribution are primarily invested by the Company in short-term investments
that are collateralized by securities of the United States Government or certain
of its agencies.
16
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company
--------------------------------------------------------------------------------
Funds From Operations
The Company believes that funds from operations (FFO) 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. In accordance with the National Association of Real Estate
Investment Trusts (NAREIT) White Paper on funds from operations as approved by
the Board of Governors of NAREIT, funds from operations represents net income
(loss) (computed in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring or sales of property, plus
depreciation and amortization of assets uniquely significant to the real estate
industry and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures are
calculated to reflect funds from operations on the same basis. The Company's
funds from operations 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. The Company continues to exclude the gain on settlement of treasury
locks for the restated 1999 FFO. Funds from operations does not represent net
income or cash flow generated from operating activities in accordance with
generally accepted accounting principles and, as such, should not be considered
an alternative to net income as an indication of the Company's performance or to
cash flow as a measure of liquidity or the Company's ability to make
distributions.
The following table provides the calculation of the Company's funds from
operations for the period presented:
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income from continuing operations before minority interest $ 32,178 $ 36,773 $68,385 $89,955
Adjustments to derive funds from continuing operations:
Add depreciation and amortization 34,381 28,409 65,823 53,776
Deduct:
Minority interests' (non Unitholders) share of depreciation,
Amortization and net income (218) (232) (473) (283)
Gain on settlement of treasury locks - - - (4,489)
Gain on sale of assets (2,387) (10,477) (7,741) (28,532)
------------- ---------- ----------- -----------
Funds from continuing operations before allocations to the minority
Unitholders 63,954 54,473 125,994 110,427
Less funds from continuing operations allocable to the minority
Unitholders (3,794) (4,372) (8,231) (8,538)
------------- ---------- ----------- -----------
Funds from continuing operations allocable to CarrAmerica Realty
Corporation 60,160 50,101 117,763 101,889
Less preferred stock dividends (8,745) (8,838) (17,522) (17,583)
------------- ---------- ----------- -----------
Funds from continuing operations attributable to common shareholders $51,415 $41,263 $100,241 $84,306
============= ========== =========== ===========
</TABLE>
17
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company
--------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company and its affiliates or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: national and local economic,
business and real estate conditions that will, among other things, affect demand
for office properties, availability and creditworthiness of tenants, the level
of lease rents and the availability of financing for both tenants and the
Company, adverse changes in the real estate markets, including, among other
things, competition with other companies, risks of real estate acquisition and
development (including the failure of pending acquisitions to close and pending
developments to be completed on time and within budget), actions, strategies and
performance of affiliates that the Company may not control, governmental actions
and initiatives, and environmental/safety requirements.
18
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company
--------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes in the Company's market risk have occurred since the
filing of the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
19
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company
--------------------------------------------------------------------------------
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
In April 2000, an action was brought against the Company, HQ
Global and the then directors of HQ Global in Delaware chancery
court by two stockholders of HQ Global who are currently involved
in other litigation with the Company, HQ Global and such
directors. The two stockholders allege various deficiencies
associated with the HQ Global/VANTAS merger transaction,
including an improper allocation of the consideration payable in
the transaction among the various components of the transaction
and a breach by the Company and the HQ Global directors of their
fiduciary and contractual duties to these stockholders in
connection with the merger transactions. The stockholders seek
rescission of the merger transactions or damages. The Company
believes that the two stockholders' claims are without merit and
that, even if the two stockholders were successful in their
claims, such a result would not have a material adverse effect on
the financial condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The 2000 annual meeting of stockholders was held on May 4, 2000.
Proxies for the meeting were solicited by the Company pursuant to
Regulation 14 under the Securities Exchange Act of 1934, as
amended; there was no solicitation in opposition to management's
nominees as listed in the proxy statement and all of such
nominees were elected.
Proposal One: Election of Directors
(a) 57,890,463 votes were cast for the election of C. Ronald
Blankenship as a Director; 748,693 votes were withheld.
(b) 57,884,731 votes were cast for the election of A. James
Clark as a Director; 754,425 votes were withheld.
(c) 57.891,880 votes were cast for the election of Timothy
Howard as a Director; 747,276 votes were withheld.
There were no abstentions or broker non-votes in
connection with this proposal.
Proposal Two: To instate the election of directors annually.
FOR AGAINST ABSTAIN
----- --------- ---------
15,292,274 39,423,125 325,603
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
10.1 Second Amendment to Agreement and Plan of Merger by
and among VANTAS Incorporated, FrontLine Capital
Group, the Company and HQ Global Workplaces, Inc.
dated as of May 31, 2000 (incorporated by references
to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on June 16, 2000).
10.2 Indemnification and Escrow Agreement by and among
FrontLine Capital Group, the Company and the other
parties named therein dated as of June 1, 2000
(incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K filed on June 16,
2000).
10.3 Registration Rights Agreement, by and between
FrontLine Capital Group and the Company dated as of
June 1, 2000 (incorporated by reference to Exhibit
10.3 to the Company's Current Report on Form 8-K filed
on June 16, 2000).
10.4 Registration Rights Agreement by and between HQ Global
Holdings, Inc. and the Company dated as of June 1,
2000 (incorporated by reference to Exhibit 10.4 to the
Company's Current Report on Form 8-K filed on June 16,
2000).
10.5 Stockholders Agreement among FrontLine Capital Group,
HQ Global Workplaces, Inc. and the Company dated as of
June 1, 2000 (incorporated by reference to Exhibit
10.5 to the Company's Current Report on Form 8-K filed
on June 16, 2000).
10.6 Loan Agreement, dated as of April 18, 2000, by and
among the Company, CarrAmerica Realty, L.P. and The
Chase Manhattan Bank.
10.7 Letter Agreement, dated July 28, 2000, by and among
the Company, Carr Realty, L.P., Security Capital Group
Incorporated, Security Capital Holdings S.A. and
Security Capital U.S. Realty.
27/(1)/ Financial Data Schedule
(b.) Reports on Form 8-K
a. Current Report on Form 8-K filed on June 16, 2000,
regarding the merger of VANTAS Incorporated with and
into HQ Global Workplaces, Inc.
b. Current Report on Form 8-K filed on May 5, 2000,
regarding certain supplemental data included in the
Company's press release dated May 5, 2000.
________________
/(1)/ Filed as an exhibit to the electronic filing only.
20
<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.
CARRAMERICA REALTY CORPORATION
/s/ Thomas A. Carr
-----------------------------------------------------
Thomas A. Carr, President and Chief Executive Officer
/s/ Richard F. Katchuk
-------------------------------------------
Richard F. Katchuk, Chief Financial Officer
/s/ Stephen E. Riffee
------------------------------------------------------------------
Stephen E. Riffee, Senior Vice President, Controller and Treasurer
(Principal Accounting Officer)
Date: August 14, 2000
21
<PAGE>
Exhibit Index
--------------------------------------------------------------------------------
Exhibit Description Page
------- ----------- ----
10.6 Loan Agreement, dated as of April 18, 2000, by and
among the Company, CarrAmerica Realty, L.P. and The
Chase Manhattan Bank.
10.7 Letter Agreement, dated July 28, 2000 by and among
the Company, Carr Realty, L.P., Security Capital
Group Incorporated, Security Capital Holdings S.A.
and Security Capital U.S. Realty.
27 Financial Data Schedule - Six Months 21
Ended June 30, 2000.
22
