<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission file number 1-11918
TRINET CORPORATE REALTY TRUST, INC.
(Exact name of Registrant as specified in its Charter)
Maryland 94-3175659
(State of incorporation) (I.R.S. Employer Identification No.)
Four Embarcadero Ctr., Suite 3150, San Francisco, CA 94111
(Address of principal executive offices) (Zip Code)
(415) 391-4300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
20,843,058 shares of Common Stock, $.01 par value as of November 3, 1997
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TRINET CORPORATE REALTY TRUST, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
as of September 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations
for the nine months and three months ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of
Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 20
</TABLE>
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TRINET CORPORATE REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
----------
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Real estate, at cost:
Land $ 177,165 $ 120,084
Depreciable property 848,249 577,433
----------- -----------
1,025,414 697,517
Less accumulated depreciation (48,473) (36,360)
----------- -----------
976,941 661,157
Investment in joint venture 6,981 6,812
----------- -----------
Total real estate 983,922 667,969
Cash and cash equivalents 3,038 4,984
Restricted cash and investments 4,995 4,759
Deferred rent receivable 19,009 14,268
Interest rate protection agreements and loan costs, net 14,595 13,870
Other assets, net 2,985 2,388
----------- -----------
$ 1,028,544 $ 708,238
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debt $ 402,475 $ 306,931
Dividends payable 13,131 8,799
Other liabilities 33,735 26,460
----------- -----------
Total liabilities 449,341 342,190
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized:
Series A: 2,000,000 shares issued and outstanding
at September 30, 1997 and December 31, 1996 20 20
(aggregate liquidation preference $50,000)
Series B: 1,300,000 shares issued and outstanding
at September 30, 1997 and December 31, 1996 13 13
(aggregate liquidation preference $32,500)
Common stock, $.01 par value, 40,000,000 shares authorized:
20,843,058 and 13,966,667 issued and outstanding
at September 30, 1997 and December 31, 1996, respectively 208 139
Paid-in-capital 613,981 394,852
Accumulated deficit (35,019) (28,976)
----------- -----------
Total stockholders' equity 579,203 366,048
----------- -----------
$ 1,028,544 $ 708,238
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements
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TRINET CORPORATE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except share and per share data)
--------------
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rent $ 75,825 $ 55,042 $ 28,387 $ 19,686
Joint venture income 628 238 183 223
Other 759 525 213 170
------------ ------------ ------------ ------------
Total revenues 77,212 55,805 28,783 20,079
Expenses:
Property operating costs 2,412 1,779 786 730
General and administrative 4,890 4,069 1,713 1,644
Interest 18,619 17,761 7,485 5,775
Depreciation and amortization 13,980 9,861 5,282 3,433
------------ ------------ ------------ ------------
Income before gain on sale
of real estate and extraordinary items 37,311 22,335 13,517 8,497
Gain on sale of real estate 985 660 -- 659
------------ ------------ ------------ ------------
Income before extraordinary items 38,296 22,995 13,517 9,156
Extraordinary gain from expropriation of land
by local government 98 -- -- --
Extraordinary charge from early
extinguishment of debt -- (1,165) -- (1,165)
------------ ------------ ------------ ------------
Net income 38,394 21,830 13,517 7,991
Preferred dividend requirement (5,758) (1,726) (1,919) (1,570)
------------ ------------ ------------ ------------
Earnings available to common shares $ 32,636 $ 20,104 $ 11,598 $ 6,421
============ ============ ============ ============
Per common share:
Income available before extraordinary items,
net of preferred dividend requirement $ 1.71 $ 1.53 $ 0.57 $ 0.54
Extraordinary gain from expropriation of
land by local government 0.01 -- -- --
Extraordinary charge from early
extinguishment of debt -- (0.08) -- (0.08)
------------ ------------ ------------ ------------
Earnings available $ 1.72 $ 1.45 $ 0.57 $ 0.46
============ ============ ============ ============
Dividends declared per common share $ 1.89 $ 1.86 $ 0.63 $ 0.62
============ ============ ============ ============
Weighted average number of common
shares outstanding 18,960,202 13,847,470 20,367,901 13,858,754
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements
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TRINET CORPORATE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
--------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 38,394 $ 21,830
Noncash income and expenses included in net income:
Extraordinary charge from early extinguishment
of debt -- 1,158
Extraordinary gain from expropriation of land by
local government (98) --
Depreciation and amortization 13,980 9,861
Interest (amortization of interest rate protection
agreements and loan costs) 1,875 2,224
Straight-line rent adjustments (4,741) (3,716)
Gain on sale of real estate (985) (660)
Joint venture income (628) (238)
Cash provided by (used for) operating assets and liabilities:
Other assets (746) (442)
Other liabilities 7,195 7,901
--------- ---------
Net cash provided by operating activities 54,246 37,918
--------- ---------
Cash flows from investing activities:
Real estate acquisitions (333,111) (151,493)
Proceeds from disposal of real estate 5,030 12,212
Proceeds from sale of real estate due to expropriation 122 --
Cash distributions from unconsolidated joint venture 459 --
Other capital expenditures (455) (532)
--------- ---------
Net cash used in investing activities (327,955) (139,813)
--------- ---------
Cash flows from financing activities:
Acquisition Facility borrowings 242,435 209,711
Acquisition Facility payments (246,535) (228,311)
Mortgage note principal payments -- (92,750)
Preferred dividends paid (5,758) (1,407)
Common dividends paid (34,347) (25,749)
Proceeds from issuance of common stock 219,198 1,119
Proceeds from issuance of preferred stock -- 78,766
Proceeds from senior unsecured debt offering 99,606 149,691
(Increase) decrease in restricted cash and investments (236) 8,539
Increase in interest rate protection agreements and loan costs (2,600) (1,949)
--------- ---------
Net cash provided by financing activities 271,763 97,660
--------- ---------
Decrease in cash and cash equivalents (1,946) (4,235)
Cash and cash equivalents, at beginning of period 4,984 9,376
--------- ---------
Cash and cash equivalents, at end of period $ 3,038 $ 5,141
========= =========
</TABLE>
The accompanying notes are an integral
part of these financial statements
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------
1. Financial Statements:
Principles of Consolidation and Basis of Presentation:
The accompanying consolidated financial statements include the
accounts of TriNet Corporate Realty Trust, Inc. (the "Company") and its
wholly-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation. Certain
reclassifications have been made to the prior year financial statements to
conform to the current year presentation.
In the opinion of the Company's management, all material adjustments
(consisting of only normal recurring accruals) considered necessary for a
fair presentation of results of operations for the interim periods have
been included. The results of consolidated operations for the nine and
three month periods ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1997.
Interest Rate Risk Management:
The Company has entered into various interest rate protection
agreements that, together with a swap agreement, fix the interest rate on
the Company's London Interbank Offered Rate ("LIBOR")-based borrowings.
The related cost of these agreements is amortized over the lives of the
underlying debt agreements and such amortization is recorded as interest
expense. In addition, the Company enters into off-balance sheet interest
rate hedge agreements to mitigate the effect of interest rate changes that
may occur from the date that the Company determines the need to enter into
a future debt agreement and the date that the related debt is issued. Such
interest rate hedges, which are generally indexed to U.S. government
treasury securities, pertain to probable fixed rate debt issuances for
which the Company has identified the significant characteristics and
expected terms. Any gains or losses realized upon settlement of qualifying
hedge transactions are amortized over the lives of the related debt
agreements. In the event that the Company decides not to issue such debt
or at the time the instrument no longer qualifies as a hedge, the Company
would recognize a gain or loss in current operations based on the eventual
settlement proceeds received or paid. At September 30, 1997, the Company's
loss exposure to outstanding hedge agreements was not significant. The
Company enters into interest rate risk management arrangements with
financial institutions meeting certain minimum financial criteria and the
related credit risk of non-performance by counter-parties is not deemed to
be significant.
Newly Issued Accounting Standards:
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share" and SFAS No. 129, "Disclosure of Information about
Capital Structure." SFAS No. 128 establishes standards for computing and
presenting earnings per share. SFAS No. 129 consolidates the existing
disclosure requirements regarding an entity's capital structure. SFAS No.
128 and SFAS No. 129 are effective for financial statements issued for
periods ending after December 15, 1997. The impact of the adoption of SFAS
No. 128 and SFAS No. 129 on the Company's earnings per share and financial
statements is expected to be immaterial.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. SFAS No. 131 specifies
revised guidelines for determining an entity's operating segments and the
type and level of financial information to be disclosed. SFAS No. 130 and
SFAS No. 131 are effective for financial statements issued for periods
beginning after December 15, 1997. The Company has not yet determined what
effect, if any, these new standards will have on the Company's
consolidated financial statements.
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------
2. Real Estate and Depreciation:
In March 1997, a wholly-owned subsidiary of the Company sold a 5,353
square foot parcel (the "Parcel") which was part of the Lockheed Martin
Aerospace Corporation property, located in Sunnyvale, California. The
Santa Clara County Transit District acquired the Parcel for construction
of a light rail system. The Parcel was sold for $122,000 resulting in an
extraordinary gain of $98,000.
In May 1997, a wholly-owned subsidiary of the Company sold a 148,595
square foot office/R&D property in Malvern, Pennsylvania for a sale price
of approximately $5.3 million resulting in a gain of approximately
$985,000.
The following summarizes depreciation expense for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
For the nine months For the three months
ended September 30, ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Real estate $13,668 $ 9,714 $ 5,166 $ 3,383
Corporate furniture and equipment 129 129 44 44
------- ------- ------- -------
$13,797 $ 9,843 $ 5,210 $ 3,427
======= ======= ======= =======
</TABLE>
3. Debt:
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
Balance Balance Contractual
September 30, December 31, Interest Rate as of Maturity
Loan 1997 1996 September 30, 1997 Date
- ----------------------- ------------- ------------ ------------------- -----------
<S> <C> <C> <C> <C>
Acquisition Facility $ 98,100 $ 102,200 LIBOR + .925%* 10/08/1999
7.30% Notes due 2001 100,000 100,000 7.30% 05/15/2001
1994 Mortgage Loan 55,013 55,013 LIBOR + 1.00% 12/01/2004
7.95% Notes due 2006 50,000 50,000 7.95% 05/15/2006
7.70% Notes due 2017 100,000 -- 7.70% 07/15/2017
----------- ---------
403,113 307,213
Less unamortized discount (638) (282)
----------- ---------
$ 402,475 $ 306,931
=========== =========
</TABLE>
* At 9/30/97, the weighted average interest rate on outstanding borrowings was
6.87% excluding the effects of any interest rate protection agreements. See
discussion following.
The 30-day LIBOR as of September 30, 1997 was 5.66%. The Company has
entered into interest rate protection agreements which, together with
certain existing interest rate cap agreements, effectively fix the
interest rate on $160.0 million of the Company's LIBOR-based borrowings at
5.58% plus the applicable margin. The notional amount of indebtedness
covered by the interest rate swap varies over time and is $160.0 million
from June 1996 through December 1997, $125.0 million from January 1998
through May 1998 and $75.0 million from June 1998 through November 2004.
The actual borrowing cost to the Company with respect to indebtedness
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------
covered by the protection agreements will depend upon the applicable
margin over LIBOR for such indebtedness, which will be determined by the
terms of the relevant debt instruments.
Effective April 22, 1997, the Company amended its $200.0 million
unsecured revolving acquisition facility (the "Acquisition Facility") to
obtain lower borrowing rates. The Acquisition Facility's new contractual
rate on LIBOR-based borrowings is 92.5 basis points over LIBOR, which
represents a 27.5 basis point reduction from the prior borrowing rate.
Additionally, the amended agreement includes a $100.0 million
competitive bid facility which allows the banks in the Acquisition
Facility's syndicate to provide financings at their option by
selectively bidding on certain borrowings at more competitive rates.
Furthermore, the 20 basis point commitment fee on the unused amount of
the Acquisition Facility has been changed to a 17.5 basis point facility
fee on the entire amount of the Acquisition Facility. The maximum
loan-to-value ratio of unsecured debt to unleveraged assets has also
been increased from 54 percent to 57 percent.
On July 14, 1997, the Company sold $100.0 million of 7.70% Notes
due 2017 (the "2017 Notes") for 99.606% of face value resulting in net
proceeds of approximately $97.1 million. Net proceeds were used to
reduce indebtedness under the Acquisition Facility. The 2017 Notes are
senior unsecured obligations of the Company and rank equally with the
Company's other unsecured and unsubordinated indebtedness. Subject to
certain conditions, the 2017 Notes are redeemable at any time, in whole
or in part, at the option of the Company. Interest on the 2017 Notes
will be paid semi-annually in arrears.
The following table indicates the costs and accumulated
amortization associated with loans outstanding (in thousands):
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Loan origination costs $ 10,865 $ 8,285
Protection agreement costs 9,845 9,845
-------- --------
20,710 18,130
Accumulated amortization (6,115) (4,260)
-------- --------
$ 14,595 $ 13,870
======== ========
</TABLE>
The following table sets forth the components of interest expense
for the periods indicated (in thousands):
<TABLE>
<CAPTION>
For the nine months For the three months
ended September 30, ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest $16,744 $15,537 $ 6,847 $ 5,024
Loan origination costs (non-cash) 1,136 1,485 392 505
Protection agreement costs (non-cash) 739 739 246 246
------- ------- ------- -------
$18,619 $17,761 $ 7,485 $ 5,775
======= ======= ======= =======
</TABLE>
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------
4. Stockholders' Equity:
On February 28, 1997, the Company completed a follow-on equity
offering of 6,250,000 shares of common stock (including 250,000 shares
issued in connection with the exercise of the underwriters' over-allotment
option) at a price of $33.625 per share (the "February Offering"). Net
proceeds from the February Offering were approximately $198.2 million, of
which $111.7 million was used to pay down the balance on the Acquisition
Facility and the remainder was used to purchase properties during March
1997.
On September 16, 1997, the Company completed an equity offering of
567,720 shares of common stock at a price of $35.875 per share (the
"September Offering"). Net proceeds from the September Offering were
approximately $19.3 million, which were used to acquire new properties.
5. Commitments and Contingencies:
From time to time, the Company is subject to routine litigation
incidental to its business. The Company believes that the results of any
pending legal proceedings will not have a materially adverse effect on the
Company's financial condition or results of operations.
The Company is also subject to option agreements with three existing
tenants which could require the Company to fund tenant improvements on
approximately 25,000 square feet and to construct approximately 174,000
square feet of additional adjacent space on which the Company would
receive additional rent under the terms of the option agreements.
As of September 30, 1997, the Company had entered into an aggregate
of approximately $65.3 million of contracts with third party developers to
acquire two separate properties currently under construction. The
acquisition of these properties is subject to the completion of
construction, occupancy of the premises by the tenants (pursuant to leases
that have already been executed by the parties) and satisfaction of
certain conditions. Completion of construction is expected during the
fourth quarter of 1997 and the second quarter of 1998. In connection with
one of these potential acquisitions, the Company has issued a letter of
credit as earnest money for $1.2 million. The foregoing discussion
contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that could cause such a difference include construction
delays that might enable a tenant to refuse to occupy the property and
allow the Company to refuse to acquire the property, other factors, such
as financial difficulties, which might prevent the other parties in these
transactions from performing their contractual obligations, and other risk
factors described from time to time in the Company's reports and documents
filed with the Securities and Exchange Commission.
6. Subsequent Events:
On October 8, 1997, the Company completed a public offering of
4,000,000 shares of 8.00% Series C Cumulative Preferred Stock (the "Series
C Preferred Stock") which generated proceeds of approximately $96.9
million (before issuance costs). Dividends on the Series C Preferred Stock
will be paid quarterly in arrears at the rate of 8.00% per annum of the
$25 per share liquidation preference (equivalent to a fixed annual rate of
$2.00 per share) in March, June, September, and December. The Series C
Preferred Stock is redeemable at par, in whole or in part, at the option
of the Company subsequent to October 7, 2002. The Series C Preferred Stock
has no stated maturity and is not subject to any sinking fund or mandatory
redemption.
On October 10, 1997, the Company purchased an office building
comprising 102,240 square feet located in Milpitas, California (the
"Hitachi Property"), for a purchase price of approximately $16.9 million.
The
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------
property is 100% net leased to Hitachi PC Corporation (USA) pursuant to
a lease which expires in September 2004. There was no material
relationship between the seller of the Hitachi Property and the Company
or any of its affiliates, any director or officer of the Company or any
associate of any director or officer. Robert Morris, a director of the
Company, and Mark Whiting, President and a director of the Company, were
the beneficial owners of limited partnership interests in the limited
partnership which was the seller of the Hitachi Property (approximately
5.8% and 2.9% interests, respectively). Mr. Morris and Mr. Whiting were
not involved in the management of the seller generally, did not
participate in the decision by the seller to sell the Hitachi Property,
and abstained from participating in the decision by the Company to buy
the Hitachi Property. The purchase price was determined by arm's length
negotiations, supported by an independent appraisal of the property
conducted on behalf of the Company, and back-up offers for the property.
On October 31, 1997, the Company purchased an office building
comprising 61,750 square feet located in Dallas, Texas, for a purchase
price of approximately $6.5 million. The property is 100% net leased to
ADS Alliance Data Systems, Inc. pursuant to a lease which expires in
July 2007.
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<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
report. Unless otherwise defined in this report, or unless the context otherwise
requires, the capitalized words or phrases referred to in this section have the
meaning ascribed to them in such financial statements and the notes thereto.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. NINE MONTHS ENDED SEPTEMBER 30, 1996
Rental revenues for the first nine months of 1997 increased by $20.8
million or 38% compared to the first nine months of 1996. The significant
increase in rental revenue is primarily a result of the Company's acquisitions
subsequent to September 30, 1996, which accounted for $18.8 million of rental
revenue during the first nine months of 1997. Additionally, the properties
acquired in the first nine months of 1996 contributed an additional $6.6 million
to rental revenue in 1997 over that of the same period in 1996. The overall
increase in rental revenue was partially offset by a decrease of approximately
$5.0 million due to properties sold since January 1, 1996. On a cash basis,
"same store" rents increased 2.76%.
In the second quarter of 1996, the Company acquired an interest in the
Sunnyvale Partnership which contributed $628,000 to revenues during the nine
months ended September 30, 1997. Other revenue increased by $234,000 to $759,000
for the nine months ended September 30, 1997. This increase is due to the
recognition of approximately $276,000 of income from the Company's advisory
services provided in connection with certain build-to-suit acquisitions offset
by lower interest income due to lower average cash balances from improved debt
management.
For the nine months ended September 30, 1997, property operating costs
increased $600,000 to $2.4 million from $1.8 million for the first nine months
of 1996. Of this increase, approximately $220,000 is due to operating costs from
the Federal Express property which the Company acquired in March 1996. The
Company has a maximum annual obligation under the Federal Express lease for
operating expenses and taxes of approximately $1.4 million. The remaining
increase in property operating costs is due primarily to continued growth in the
Company's real estate portfolio offset by income recognized for property
management services provided to the Company's tenants, which increased from
$144,000 for the first nine months of 1996 to $428,000 for the same period of
1997.
For the nine months ended September 30, 1997, general and administrative
expenses increased 20% to $4.9 million, the result of increased personnel and
related overhead from the Company's continued growth. As a percentage of
combined rental revenue and joint venture income, general and administrative
expenses have decreased to 6.4% for the first nine months of 1997 compared to
7.4% for the first nine months of 1996.
While the Company's gross real estate asset base has experienced a net
increase of 54% since September 30, 1996, interest expense has increased only 5%
to $18.6 million for the nine months ended September 30, 1997 as compared to
$17.8 million for the corresponding period of 1996. This increase is due to a
greater weighted average debt outstanding of $306.5 million for the nine months
ended September 30, 1997 from $278.7 million for the corresponding period of
1996, partially offset by a reduction in the weighted average interest rate on
outstanding borrowings from 7.29% for the first nine months of 1996 to 7.17%
during the same period in 1997. In April 1997, the Acquisition Facility was
amended to include a $100.0 million competitive bid facility. Through September
30, 1997, borrowings under the bid option were at a weighted average spread over
LIBOR of 61.2 basis points, a 31.3 basis point reduction from the contractual
interest rate of 92.5 basis points over LIBOR. The increased interest expense
was further offset by a decrease in amortization resulting from both the October
1996 amendment of the Acquisition Facility, which extended the maturity and
therefore increased the amortization period of the loan costs, and the partial
repayment on the 1994 Mortgage Loan during 1996, which resulted in the write-off
of a portion of the deferred loan costs. These savings were countered by
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<PAGE> 12
additional amortization relating to the 2001 Notes and the 2006 Notes issued in
May 1996, and the 2017 Notes issued in July 1997.
Depreciation and amortization increased by 42% for the nine months ended
September 30, 1997 when compared to the same period in 1996 as a result of the
Company's larger asset base. The increase was partially offset by the sale of
properties subsequent to January 1, 1996.
During the nine months ended September 30, 1997, the Company had two
property sales. The first, occurring in March 1997, was a 5,353 square foot
parcel (the "Parcel") which was part of the Lockheed Martin Aerospace
Corporation property, located in Sunnyvale, California. The Santa Clara County
Transit District acquired the Parcel for construction of a light rail system.
The Company received proceeds of $122,000 resulting in an extraordinary gain of
$98,000. The second, occurring in May 1997, was a 148,595 square foot property
located in Malvern, Pennsylvania formerly leased to Unisys Corporation. The sale
price was approximately $5.3 million and resulted in a gain of approximately
$985,000.
THREE MONTHS ENDED SEPTEMBER 30, 1997 VS. THREE MONTHS ENDED SEPTEMBER 30, 1996
Rental revenues for the three months ended September 30, 1997 increased by
$8.7 million or 44% compared to the same period of 1996. The significant
increase in rental revenue is primarily a result of the Company's acquisitions
subsequent to September 30, 1996, which accounted for $9.4 million of rental
revenue during the third quarter of 1997. Additionally, the properties acquired
in the third quarter of 1996 contributed an additional $0.5 million to rental
revenue in 1997 over that of the same period in 1996. The overall increase in
rental revenue was partially offset by a decrease of approximately $1.5 million
due to properties sold subsequent to January 1, 1996. On a cash basis, "same
store" rents increased 3.06%.
Other revenue increased by $43,000 to $213,000 for the three months ended
September 30, 1997. This increase is due to a combination of approximately
$78,000 of income recognized from the Company's advisory services provided in
connection with certain build-to-suit acquisitions and lower interest income.
For the three months ended September 30, 1997, property operating costs
increased $56,000 to $786,000 for the three months ended September 30, 1997. The
increase is due to costs from properties acquired subsequent to September 30,
1996 offset by income recognized for property management services provided to
the Company's tenants, which increased from $75,000 for the three months ended
September 30, 1996 to $216,000 for the same period of 1997.
For the third quarter of 1997, general and administrative expenses
increased 4% to $1.7 million, the result of increased personnel and related
overhead from the Company's continued growth. As a percentage of combined rental
revenue and joint venture income, general and administrative expenses have
decreased to 6.0% for the third quarter of 1997 compared to 8.2% for the third
quarter of 1996.
While the Company's gross real estate asset base has experienced a net
increase of 54% since September 30, 1996, interest expense has increased only
30% to $7.5 million for the three months ended September 30, 1997 as compared to
$5.8 million for the corresponding period of 1996. This increase is attributable
to a greater weighted average debt outstanding from $265.7 million for the three
months ended September 30, 1996 to $376.3 million for the corresponding period
of 1997. This increase is primarily a result of the Company's issuance of the
2017 Notes in July 1997. Offsetting the effect of the greater weighted average
debt balance was a reduction in the weighted average interest rate on
outstanding borrowings from 7.36% for the third quarter of 1996 to 7.10% during
the same period in 1997. In April 1997, the Acquisition Facility was amended to
include a $100.0 million competitive bid facility. For the third quarter of
1997, borrowings under the bid option were at a weighted average spread over
LIBOR of 60.4 basis points, a 32.1 basis point reduction from the contractual
interest rate of 92.5 basis points over LIBOR. The increased interest expense is
further offset by a decrease in amortization resulting from both the October
1996 amendment of the Acquisition Facility, which extended the maturity and
therefore increased the amortization period of the loan costs, and partial
repayment on the 1994 Mortgage Loan during 1996, which resulted in the write-off
of a portion of the
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<PAGE> 13
deferred loan costs. These savings were partially offset by additional
amortization relating to the 2017 Notes issued in July 1997.
Depreciation and amortization increased by 54% for the three months ended
September 30, 1997 when compared to the same period in 1996 as a result of the
Company's larger asset base. The increase was partially offset by the sale of
properties subsequent to January 1, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased by $16.3 million, or
43%, to $54.2 million for the nine months ended September 30, 1997, when
compared to the same period in 1996. The increase was primarily due to increased
rental revenue resulting from the net increase in the portfolio size. Net cash
used in investing activities was $328.0 million for the nine months ended
September 30, 1997. These funds were expended to acquire properties.
The following quantifies the Company's capital expenditures (in thousands)
for the indicated nine month periods ended September 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Real estate acquisitions $333,111 $151,493
Building improvements 194 334
Corporate furniture, equipment,
and leasehold improvements 261 198
-------- --------
$333,566 $152,025
======== ========
</TABLE>
The Company incurred $261,000 of corporate furniture, equipment, and
leasehold improvement expenditures in the first nine months of 1997 and
anticipates incurring $50,000 of additional expenditures in the remainder of
1997. The Company did not incur any tenant improvement expenditures in the first
nine months of 1997 and does not expect to incur any of these costs for the
remainder of 1997. The Company incurred $194,000 of capital expenditures on
existing properties during the first nine months of 1997, and expects to incur
an additional $900,000 of such expenditures for the remainder of 1997.
Net cash provided by financing activities for the first nine months of 1997
was $271.8 million, primarily a result of the proceeds from the February
Offering and the issuance of the 2017 Notes. Net proceeds from the February
Offering were approximately $198.2 million, of which $111.7 million was used to
pay down the balance on the Acquisition Facility and the remainder was used to
purchase properties during March 1997. Net proceeds from issuance of the 2017
Notes were approximately $97.1 million. These proceeds were used to reduce the
balance on the Acquisition Facility. Net cash provided by financing activities
was offset by common dividends paid of $34.3 million and preferred dividends
paid of $5.8 million.
Outstanding debt as of September 30, 1997 consisted of mortgage notes and
notes payable totaling $402.5 million. There are no scheduled principal
amortization payments for the next twelve months. Additionally, as of September
30, 1997, the available amount of credit under the Acquisition Facility was
$100.7 million.
Effective April 22, 1997, the Company amended its Acquisition Facility to
obtain lower borrowing rates. The Acquisition Facility's new contractual rate on
LIBOR-based borrowings is 92.5 basis points over LIBOR, which represents a 27.5
basis point reduction from the prior borrowing rate. Additionally, the amended
agreement includes a $100.0 million competitive bid facility, which allows the
banks in the Acquisition Facility's syndicate to provide financings at their
option by selectively bidding on certain borrowings at more competitive rates.
Furthermore, the 20 basis point commitment fee on the unused amount of the
Acquisition Facility has been changed to a 17.5 basis point facility fee on the
entire
-13-
<PAGE> 14
amount of the Acquisition Facility. The maximum loan-to-value ratio of unsecured
debt to unencumbered assets has also been increased from 54 percent to 57
percent.
On July 14, 1997, the Company sold $100.0 million of 7.70% Notes due 2017
(the "2017 Notes") for 99.606% of the face value resulting in net proceeds of
approximately $97.1 million. Net proceeds were used to reduce indebtedness under
the Acquisition Facility. The 2017 Notes are senior unsecured obligations of the
Company and rank equally with the Company's other unsecured and unsubordinated
indebtedness. Subject to certain conditions, the 2017 Notes are redeemable at
any time, in whole or in part, at the option of the Company. Interest on the
2017 Notes will be paid semi-annually in arrears.
On September 16, 1997, the Company completed an equity offering of 567,720
shares of common stock at a price of $35.875 per share. Net proceeds from the
September Offering were approximately $19.3 million, which were used to acquire
new properties.
On October 8, 1997, the Company completed a public offering of 4,000,000
shares of 8.00% Series C Cumulative Preferred Stock (the "Series C Preferred
Stock") which generated proceeds of approximately $96.9 million (before issuance
costs). Dividends on the Series C Preferred Stock will be paid quarterly in
arrears at the rate of 8.00% per annum of the $25 per share liquidation
preference (equivalent to a fixed annual rate of $2.00 per share) in March,
June, September, and December. The Series C Preferred Stock is redeemable at
par, in whole or in part, at the option of the Company subsequent to October 7,
2002. The Series C Preferred Stock has no stated maturity and is not subject to
any sinking fund or mandatory redemption.
The Company expects to meet certain long-term liquidity requirements, such
as property acquisitions and scheduled debt maturities, using long-term
unsecured and secured borrowings and the issuance of debt securities or
preferred and common stock of the Company. Subsequent to the issuance of the
Series C Preferred Stock, the Company had on file with the Securities and
Exchange Commission two Form S-3 Registration Statements. One registration
statement is for a universal shelf filing authorizing the issuance of debt
securities, preferred stock or common stock of the Company with a remaining
availability of $69.5 million. The other registration statement authorized the
issuance of $250.0 million of debt securities and has a remaining availability
of $150.4 million. The exact amount of debt, preferred stock and common stock
issued will depend on acquisitions, asset sales, the Company's senior unsecured
debt and preferred stock ratings and the general interest rate environment.
On May 15, 1997, the Company sold a 148,595 square foot property located in
Malvern, Pennsylvania formerly leased to Unisys Corporation. The sale price was
approximately $5.3 million and resulted in a gain of approximately $985,000.
As of September 30, 1997, the Company owned three properties leased to
Schwegmann Giant Super Markets ("Schwegmann"), which represented approximately
2.6% of annualized rental revenues as of such date. Schwegmann's has been
experiencing financial difficulties due to an increasingly competitive grocery
retailing environment. On February 14, 1997, an entity formed by Kohlberg & Co.,
L.L.C. (the "Kohlberg Entity"), a privately owned investment firm, acquired the
retail grocery operations of Schwegmann and, in connection therewith, subleased
these three properties for one year. The agreement also provides that TriNet
will receive a $100,000 transaction structuring fee over two years.
Additionally, Schwegmann paid for all of the Company's legal costs related to
this transaction. While to date, Schwegmann has met its lease obligations, there
can be no assurance that timely lease and sublease payments from Schwegmann and
the Kohlberg Entity will be made in the future.
In May, the Company formed a wholly-owned property management subsidiary,
TriNet Property Management, Inc. The subsidiary was formed to expand the
Company's capability to provide property management services on a fee basis for
tenants in regions of the country where the Company has significant holdings.
The first office was opened in July 1997 at the RiverEdge property in Atlanta,
Georgia. A second office was opened in September 1997 at the Microsoft property
in Irving, Texas.
-14-
<PAGE> 15
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" and SFAS No. 129, "Disclosure of Information about Capital Structure."
SFAS No. 128 establishes standards for computing and presenting earnings per
share. SFAS No. 129 consolidates the existing disclosure requirements regarding
an entity's capital structure. SFAS No. 128 and SFAS No. 129 are effective for
financial statements issued for periods ending after December 15, 1997. The
impact of the adoption of SFAS No. 128 and SFAS No. 129 on the Company's
earnings per share and financial statements is expected to be immaterial.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. SFAS No. 131 specifies
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be disclosed. SFAS No. 130 and SFAS No.
131 are effective for financial statements issued for periods beginning after
December 15, 1997. The Company has not yet determined what effect, if any, these
new standards will have on the Company's consolidated financial statements.
-15-
<PAGE> 16
FUNDS FROM OPERATIONS
The definition of Funds From Operations ("FFO") was clarified in the
National Association of Real Estate Investment Trusts, Inc. ("NAREIT") White
Paper, adopted by the NAREIT Board of Governors on March 3, 1995, as net income
(computed in accordance with generally accepted accounting principles ("GAAP")),
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization (in each case only on real estate related assets),
less preferred dividends, and after adjustments for unconsolidated partnerships
and joint ventures. Adjustments for unconsolidated partnerships and joint
ventures will be calculated to reflect funds from operations on the same basis.
The Company's FFO is not comparable to FFO reported by other real estate
investment trusts (REITs) that do not define FFO using the current NAREIT
definition or that interpret the current NAREIT definition differently than the
Company. The Company believes that to facilitate a clear understanding of the
historical operating results of the Company, FFO should be examined in
conjunction with income as presented in the Consolidated Statements of
Operations. FFO should not be considered as an alternative to net income
(determined in accordance with GAAP) as an indicator of the Company's financial
performance, or cash flows from operating activity (determined in accordance
with GAAP) as a measure of the Company's liquidity, nor is it indicative of
funds available to fund the Company's cash needs, including its ability to make
distributions.
<TABLE>
<CAPTION>
For the nine months For the three months
ended September 30 ended September 30
(in thousands) (in thousands)
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income before gain and extraordinary items $ 37,311 $ 22,335 $ 13,517 $ 8,497
Real estate depreciation 13,668 9,714 5,166 3,383
Joint venture income (628) (238) (183) (223)
Joint venture FFO 1,003 375 308 353
Preferred dividend requirement (5,758) (1,726) (1,919) (1,570)
-------- -------- -------- --------
Total Funds From Operations $ 45,596 $ 30,460 $ 16,889 $ 10,440
======== ======== ======== ========
</TABLE>
-16-
<PAGE> 17
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Amendment of Caterair Leases.
The Company entered into amendments, dated as of August 22, 1997 (the
"Lease Amendments"), of the twelve separate Lease Agreements, each dated
as of May 15, 1993, as amended (the "Leases"), between the Company, as
landlord, and Caterair International Corporation ("Caterair"), as
tenant. Prior to these Lease Amendments, the Leases provided (a) for
reduction in lease payments of up to $30.3 million over the remaining
primary term of the Leases (expiring in 2018) in the event Caterair met
certain credit rating criteria during the period commencing on April 1,
1998 up to and including April 1, 2001, and (b) that in the event of
such lease payment reduction, the landlord had the right to give the
tenant the option to purchase the property at a fixed price and, if the
tenant did not exercise such option, the lease payment reduction would
not go into effect. Pursuant to the Lease Amendments, these provisions
for reduction in lease payments and option to purchase the property have
been deleted.
In addition, prior to these Lease Amendments, the Leases provided that
an event of default shall exist if the consolidated net worth of the
parent corporation of Caterair is less than $35.0 million. Pursuant to
the Lease Amendments, these provisions have been deleted and replaced by
new provisions which provide that an event of default shall exist if
both (1) none of Caterair or its affiliated entities has a BBB- or
better investment grade rating from Standard & Poors Corporation and a
Baa3 or better investment grade rating from Moody's Investors Service,
Inc. for its senior debt obligations, and (2) the combined leverage
ratio limitations under Caterair's revolving credit agreement are
breached. In consideration of the Lease Amendments, the Company made
payments to Caterair in the aggregate amount of $750,000.
1997 Stock Incentive Plan.
The Company has filed with the Securities and Exchange Commission a
registration statement on Form S-8 under the Securities Act of 1933, as
amended, with respect to 800,000 shares of Common Stock, par value $.01
per share, reserved for issuance upon the exercise of stock options or
the grant of other stock awards under the Company's 1997 Stock Incentive
Plan (the "Plan"). The Plan was adopted by the Company's Board of
Directors on February 24, 1997 and was approved by the stockholders at
the Company's Annual Meeting of Stockholders on May 28, 1997. The Plan
permits the granting of a variety of stock incentive awards to
Directors, officers and other key employees of the Company or its
subsidiaries. Awards under the Plan include dividend
-17-
<PAGE> 18
equivalent rights, stock options (both incentive options and
non-qualified options), restricted and unrestricted shares and
performance shares.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
1.1 Definitive Underwriting Agreement, dated July 9, 1997, relating
to the 7.70% Notes due 2017. (Incorporated by reference to
Exhibit 1.1 to the Current Report on Form 8-K, dated July 9, 1997
of TriNet Corporate Realty Trust, Inc.)
1.2 Definitive Underwriting Agreement, dated September 11, 1997,
relating to the sale of 567,720 shares of the registrant's common
stock, par value $.01 per share. (Incorporated by reference to
Exhibit 1.1 to the Current Report on Form 8-K, dated September
11, 1997 of TriNet Corporate Realty Trust, Inc.)
1.3 Definitive Underwriting Agreement, dated October 3, 1997,
relating to the sale of 4,000,000 shares of 8% Series C
Cumulative Preferred Stock, par value $.01 per share.
(Incorporated by reference to Exhibit 1.1 of the Current Report
on Form 8-K, dated October 3, 1997 of TriNet Corporate Realty
Trust, Inc.)
3.1 Definitive Articles Supplementary Establishing and Fixing the
Rights and Preferences of a Series of Shares of Preferred Stock
(Series C Preferred Stock). (Incorporated by reference to Exhibit
1 of Form 8-A of TriNet Corporate Realty Trust, Inc., dated
October 3, 1997, filed with the Securities and Exchange
Commission on October 14, 1997.)
4.1 Definitive Supplemental Indenture No. 2, dated as of July 14,
1997, relating to the 7.70% Notes due 2017 and including the form
of the 7.70% Note due 2017. (Incorporated by reference to Exhibit
4.2 of the Current Report on Form 8-K, dated July 9, 1997 of
TriNet Corporate Realty Trust, Inc.)
27.1 Financial Data Schedule.
Reports on Form 8-K
1. On July 8, 1997, the Company filed a report on Form 8-K with the
Securities and Exchange Commission to report the acquisition of
ten properties and the disposition of one property during the
second quarter of 1997.
2. On July 23, 1997, the Company filed a report on Form 8-K with the
Securities and Exchange Commission to provide the underwriting
agreement and supplemental indenture related to the debt offering
completed in July 1997.
3. On September 25, 1997, the Company filed a report on Form 8-K
with the Securities and Exchange Commission to provide the
underwriting agreement related to the common stock offering
completed in September 1997.
4. On October 3, 1997, the Company filed a report on Form 8-K with
the Securities and Exchange Commission to report the acquisition
of six properties during the third quarter of 1997.
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<PAGE> 19
5. On October 6, 1997, the Company filed a report on Form 8-K/A with
the Securities and Exchange Commission amending the Form 8-K
which was filed on October 3, 1997.
6. On October 21, 1997, the Company filed a report on Form 8-K with
the Securities and Exchange Commission to provide the
underwriting agreement and the articles supplementary related to
the preferred stock offering completed in October 1997.
-19-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRINET CORPORATE REALTY TRUST, INC.
(Registrant)
BY: /s/ A. William Stein
--------------------------------------------
A. William Stein
Executive Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
DATE: November 3, 1997
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,033
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,025,414
<DEPRECIATION> 48,473
<TOTAL-ASSETS> 1,028,544
<CURRENT-LIABILITIES> 0
<BONDS> 402,475
0
33
<COMMON> 208
<OTHER-SE> 578,962
<TOTAL-LIABILITY-AND-EQUITY> 1,028,544
<SALES> 75,825
<TOTAL-REVENUES> 77,212
<CGS> 0
<TOTAL-COSTS> 2,412
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,619
<INCOME-PRETAX> 38,296
<INCOME-TAX> 0
<INCOME-CONTINUING> 38,296
<DISCONTINUED> 0
<EXTRAORDINARY> 98
<CHANGES> 0
<NET-INCOME> 38,394
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 0
</TABLE>
