<PAGE> 1
- --------------------------------------------------------------------------------
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 June 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:
20,275,338 shares of Common Stock, $.01 par value as of August 6, 1997
- --------------------------------------------------------------------------------
Page 1
<PAGE> 2
TRINET CORPORATE REALTY TRUST, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
as of June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations
for the six months and three months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
for the six months ended June 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 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of
Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 17
</TABLE>
-2-
<PAGE> 3
TRINET CORPORATE REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
----------
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Real estate, at cost:
Land $ 161,988 $ 120,084
Depreciable property 794,999 577,433
--------- ---------
956,987 697,517
Less accumulated depreciation (43,307) (36,360)
--------- ---------
913,680 661,157
Investment in joint venture 6,798 6,812
--------- ---------
Total real estate 920,478 667,969
Cash and cash equivalents 4,030 4,984
Restricted cash and investments 4,806 4,759
Deferred rent receivable 17,428 14,268
Interest rate protection agreements and loan costs, net 12,715 13,870
Other assets, net 3,311 2,388
--------- ---------
$ 962,768 $ 708,238
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debt $ 359,655 $ 306,931
Dividends payable 12,773 8,799
Other liabilities 28,865 26,460
--------- ---------
Total liabilities 401,293 342,190
--------- ---------
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 June 30, 1997 and December 31, 1996 20 20
(aggregate liquidation preference $50,000)
Series B: 1,300,000 shares issued and outstanding
at June 30, 1997 and December 31, 1996 13 13
(aggregate liquidation preference $32,500)
Common stock, $.01 par value, 40,000,000 shares authorized:
20,275,338 and 13,966,667 issued and outstanding
at June 30, 1997 and December 31, 1996, respectively 203 139
Paid-in-capital 594,724 394,852
Accumulated deficit (33,485) (28,976)
--------- ---------
Total stockholders' equity 561,475 366,048
--------- ---------
$ 962,768 $ 708,238
========= =========
</TABLE>
The accompanying notes are an integral
part of these financial statements
-3-
<PAGE> 4
TRINET CORPORATE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except share and per share data)
--------------
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rent $ 47,438 $ 35,356 $ 25,459 $ 18,623
Joint venture income 445 15 207 15
Other 546 356 323 275
------------ ------------ ------------ ------------
Total revenues 48,429 35,727 25,989 18,913
Expenses:
Property operating costs 1,626 1,049 820 756
General and administrative 3,177 2,425 1,623 1,333
Interest 11,134 11,986 5,414 6,398
Depreciation and amortization 8,698 6,428 4,783 3,277
------------ ------------ ------------ ------------
Income before gain on sale
of real estate and extraordinary item 23,794 13,839 13,349 7,149
Gain on sale of real estate 985 -- 985 --
------------ ------------ ------------ ------------
Income before extraordinary item 24,779 13,839 14,334 7,149
Extraordinary gain from expropriation of land
by local government 98 -- -- --
------------ ------------ ------------ ------------
Net income 24,877 13,839 14,334 7,149
Preferred dividend requirement (3,839) (156) (1,920) (156)
------------ ------------ ------------ ------------
Earnings available to common shares $ 21,038 $ 13,683 $ 12,414 $ 6,993
============ ============ ============ ============
Per common share:
Income available before extraordinary item,
net of preferred dividend requirement $ 1.14 $ 0.99 $ 0.61 $ 0.51
Extraordinary gain from expropriation of
land by local government 0.01 -- -- --
------------ ------------ ------------ ------------
Earnings available $ 1.15 $ 0.99 $ 0.61 $ 0.51
============ ============ ============ ============
Dividends declared per common share $ 1.26 $ 1.24 $ 0.63 $ 0.62
============ ============ ============ ============
Weighted average number of common
shares outstanding 18,244,686 13,841,766 20,275,338 13,841,865
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements
-4-
<PAGE> 5
TRINET CORPORATE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
--------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 24,877 $ 13,839
Noncash income and expenses included in net income:
Extraordinary gain from expropriation of land by
local government (98) --
Depreciation and amortization 8,698 6,428
Interest (amortization of interest rate protection
agreements and loan costs) 1,237 1,473
Straight-line rent adjustments (3,160) (2,326)
Gain on sale of real estate (985) (1)
Joint venture income (445) (15)
Cash provided by (used for) operating assets and liabilities:
Other assets (982) 203
Other liabilities 2,311 3,631
--------- ---------
Net cash provided by operating activities 31,453 23,232
--------- ---------
Cash flows from investing activities:
Real estate acquisitions (264,735) (113,918)
Proceeds from disposal of real estate 5,030 1,321
Proceeds from sale of real estate due to expropriation 122 --
Cash distributions from unconsolidated joint venture 459 --
Other capital expenditures (378) (208)
--------- ---------
Net cash used in investing activities (259,502) (112,805)
--------- ---------
Cash flows from financing activities:
Acquisition Facility borrowings 185,335 135,811
Acquisition Facility payments (132,635) (179,615)
Mortgage note principal payments -- (57,750)
Preferred dividends paid (3,839) --
Common dividends paid (21,573) (17,164)
Proceeds from issuance of common stock 199,936 148
Proceeds from issuance of preferred stock -- 47,691
Proceeds from senior unsecured debt offering -- 149,691
(Increase) decrease in restricted cash and investments (47) 8,279
Increase in interest rate protection agreements and loan costs (82) (2,051)
--------- ---------
Net cash provided by financing activities 227,095 85,040
--------- ---------
Decrease in cash and cash equivalents (954) (4,533)
Cash and cash equivalents, at beginning of period 4,984 9,376
--------- ---------
Cash and cash equivalents, at end of period $ 4,030 $ 4,843
========= =========
</TABLE>
The accompanying notes are an integral
part of these financial statements
-5-
<PAGE> 6
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 six and three month periods ended June 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 June 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.
-6-
<PAGE> 7
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 six months For the three months
ended June 30, ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Real estate $8,502 $6,331 $4,676 $3,231
Corporate furniture and equipment 84 85 42 40
------ ------ ------ ------
$8,586 $6,416 $4,718 $3,271
====== ====== ====== ======
</TABLE>
3. Debt:
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
Balance Balance Contractual Interest Rate Maturity
Loan June 30, 1997 December 31, 1996 as of June 30, 1997 Date
- --------------------------- ------------- ----------------- ------------------------- -----------
<S> <C> <C> <C> <C>
Acquisition Facility $ 154,900 $ 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
--------- ---------
359,913 307,213
Less unamortized discount (258) (282)
--------- ---------
$ 359,655 $ 306,931
========= =========
</TABLE>
* At 6/30/97, the weighted average interest rate on outstanding borrowings was
6.59% excluding the effects of any interest rate protection agreements. See
discussion following.
The 30-day LIBOR as of June 30, 1997 was 5.69%. 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
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.
-7-
<PAGE> 8
TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------
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.
The following table indicates the costs and accumulated
amortization associated with loans outstanding (in thousands):
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Loan origination costs $ 8,347 $ 8,285
Protection agreement costs 9,845 9,845
-------- --------
18,192 18,130
Accumulated amortization (5,477) (4,260)
-------- --------
$ 12,715 $ 13,870
======== ========
</TABLE>
The following table sets forth the components of interest expense
for the periods indicated (in thousands):
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest $ 9,897 $10,513 $4,792 $5,650
Loan origination costs 745 981 376 502
Protection agreement costs 492 492 246 246
------- ------- ------ ------
$11,134 $11,986 $5,414 $6,398
======= ======= ====== ======
</TABLE>
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 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.
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.
-8-
<PAGE> 9
TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------
The Company is also subject to option agreements with two existing
tenants which could require the Company to construct approximately
174,000 square feet of additional adjacent office space.
As of June 30, 1997, the Company had entered into an aggregate of
approximately $76.4 million of contracts with third party developers to
acquire three 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
third and fourth quarters 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 (1) construction delays that might enable a tenant to
refuse to occupy the property and allow the Company to refuse to acquire
the property, and/or (2) other factors, such as financial difficulties,
which might prevent the other parties in these transactions from
performing their contractual obligations.
6. Subsequent Event:
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
proceeds, before issuance costs, of approximately $98.7 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 is paid semi-annually in arrears. In
February and March 1997, in anticipation of the issuance of the 2017
Notes, the Company entered into certain interest rate hedge agreements
for a portion of the principal amount to mitigate the effect of interest
rate market changes. The loss on settlement of the interest rate hedge
agreements of approximately $1.2 million and the original issue discount
are being amortized over the life of the 2017 Notes using the effective
interest method.
-9-
<PAGE> 10
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
SIX MONTHS ENDED JUNE 30, 1997 VS. SIX MONTHS ENDED JUNE 30, 1996
Rental revenues for the first six months of 1997 increased by $12.1
million or 34% compared to the first six months of 1996. The significant
increase in rental revenue is primarily a result of the Company's acquisitions
subsequent to June 30, 1996, which accounted for $11.5 million of rental revenue
during the first six months of 1997. Additionally, the properties acquired in
the first six months of 1996 contributed an additional $3.9 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 $3.1 million
due to properties sold subsequent to June 30, 1996. On a cash basis, "same
store" rents increased 3%.
In the second quarter of 1996, the Company acquired an interest in the
Sunnyvale Partnership which contributed $445,000 to revenues during the six
months ended June 30, 1997. Other revenue increased by $190,000 to $546,000 for
the six months ended June 30, 1997. This increase is due to the recognition of
approximately $198,000 of income from the Company's advisory services provided
in connection with certain build-to-suit acquisitions currently in progress.
For the six months ended June 30, 1997, property operating costs
increased to $1.6 million from $1.0 million for the first six months of 1996.
The majority of the increase 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.
For the six months ended June 30, 1997, general and administrative
expenses increased 31% to $3.2 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 6.6% for the first six months of 1997 relative to
6.9% for the first six months of 1996.
While the Company's gross real estate asset base has experienced a net
increase of 48% since June 30, 1996, interest expense has actually decreased 7%
to $11.1 million for the six months ended June 30, 1997 as compared to $12.0
million for the corresponding period of 1996. This decrease is due to reduced
weighted average debt outstanding from $284.5 million for the six months ended
June 30, 1996 to $271.1 million for the corresponding period of 1997 and a
reduction in the average interest rate on outstanding borrowings from 7.36% for
the first six months of 1996 to 7.22% during the same period in 1997. In April
1997, the Acquisition Facility was amended to include a $100.0 million
competitive bid facility. Through June 30, 1997, borrowings under the bid option
were at a weighted average spread over LIBOR of 62.2 basis points, a 30.3 basis
point reduction from the contractual interest rate of 92.5 basis points over
LIBOR. The reduction in interest expense is also attributable to 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 partially offset by additional amortization relating
to the 2001 Notes and the 2006 Notes which were issued in May 1996.
-10-
<PAGE> 11
Depreciation and amortization increased by 35% for the six months ended
June 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 June 30, 1996.
During the six months ended June 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 JUNE 30, 1997 VS. THREE MONTHS ENDED JUNE 30, 1996
Rental revenues for the three months ended June 30, 1997 increased by
$6.8 million or 37% compared to the same period of 1996. The significant
increase in rental revenue is primarily a result of the Company's acquisitions
subsequent to June 30, 1996, which accounted for $7.5 million of rental revenue
during the second quarter of 1997. Additionally, the properties acquired in the
second quarter of 1996 contributed an additional $1.1 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 $1.6 million due to
properties sold subsequent to June 30, 1996. On a cash basis, "same store" rents
increased 3%.
In the second quarter of 1996, the Company acquired an interest in the
Sunnyvale Partnership which contributed $207,000 to revenues during the three
months ended June 30, 1997. Other revenue increased by $48,000 to $323,000 for
the three months ended June 30, 1997. This increase is due to a combination of
approximately $198,000 of income recognized from the Company's advisory services
provided in connection with certain build-to-suit acquisitions currently in
progress and lower interest income during the second quarter of 1997 compared to
the same period of 1996 due to lower average cash balances from improved debt
management. Additionally, other revenue for the second quarter of 1996 includes
$96,000 of interest income earned on funds in trust related to a mortgage loan
which was defeased in the fourth quarter of 1995 and retired in June 1996.
For the three months ended June 30, 1997, property operating costs
increased $64,000 from $756,000 for the three months ended June 30, 1996. The
increase is due to costs from properties acquired subsequent to June 30, 1996.
For the second quarter of 1997, general and administrative expenses
increased 22% to $1.6 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 6.3% for the second quarter of 1997 relative to 7.2% for the second
quarter of 1996.
While the Company's gross real estate asset base has experienced a net
increase of 48% since June 30, 1996, interest expense has actually decreased 15%
to $5.4 million for the three months ended June 30, 1997 as compared to $6.4
million for the corresponding period of 1996. This decrease is attributable to
reduced weighted average debt outstanding from $307.6 million for the three
months ended June 30, 1996 to $264.0 million for the corresponding period of
1997 and a reduction in the average interest rate on outstanding borrowings from
7.23% for the second quarter of 1996 to 7.14% during the same period in 1997. In
April 1997, the Acquisition Facility was amended to include a $100.0 million
competitive bid facility. Through June 30, 1997, borrowings under the bid option
were at a weighted average spread over LIBOR of 62.2 basis points, a 30.3 basis
point reduction from the contractual interest rate of 92.5 basis points over
LIBOR. The reduction in interest expense is also attributable to 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 deferred loan costs.
These savings were partially offset by additional amortization relating to the
2001 Notes and the 2006 Notes which were issued in May 1996.
-11-
<PAGE> 12
Depreciation and amortization increased by 46% for the three months
ended June 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 June 30, 1996.
In May 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased by $8.2 million, or
35%, to $31.4 million for the six months ended June 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 $259.5 million for the six months ended June 30, 1997.
These funds were expended to acquire properties.
The following quantifies the Company's capital expenditures (in
thousands) for the indicated six month periods ended June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Real estate acquisitions $264,735 $113,918
Building improvements 143 43
Corporate furniture, equipment,
and leasehold improvements 235 165
-------- --------
$265,113 $114,126
======== ========
</TABLE>
The Company incurred $235,000 of corporate furniture, equipment, and
leasehold improvement expenditures in the first six months of 1997 and
anticipates incurring $150,000 of additional expenditures in the remainder of
1997. The Company did not incur any tenant improvement expenditures in the first
six months of 1997 and does not expect to incur any of these costs for the
remainder of 1997. The Company incurred $143,000 of capital expenditures on
existing properties during the first six months of 1997, and expects to incur an
additional $1.4 million in such expenditures for the remainder of 1997.
Net cash provided by financing activities for the first six months of
1997 was $227.1 million, primarily a result of the proceeds from the February
Offering. Such proceeds 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 cash provided
by financing activities was offset by common dividends paid of $21.6 million and
preferred dividends paid of $3.8 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 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.
Outstanding debt as of June 30, 1997 consists of mortgage notes and notes
payable totaling $359.7 million. There are no scheduled principal amortization
payments for the next twelve months.
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 proceeds, before
issuance costs, of approximately $98.7 million. Net proceeds were used to reduce
indebtedness under the Acquisition Facility. The 2017 Notes are
-12-
<PAGE> 13
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 is paid semi-annually in arrears. In
February and March 1997, in anticipation of the issuance of the 2017 Notes, the
Company entered into certain interest rate hedge agreements for a portion of the
principal amount to mitigate the effect of interest rate market changes. The
loss on settlement of the interest rate hedge agreements of approximately $1.2
million and the original issue discount are being amortized over the life of the
2017 Notes using the effective interest method.
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. As of June 30, 1997, 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 $189.8 million. The other
registration statement authorized the issuance of $250.0 million of debt
securities and has a remaining availability of $150.0 million after the July
issuance of the 2017 Notes. 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 June 30, 1997, the Company owned three properties leased to
Schwegmann Giant Super Markets ("Schwegmann"), which represented approximately
2.8% 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 has 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.
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.
-13-
<PAGE> 14
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 six months For the three months
ended June 30 ended June 30
(in thousands), (in thousands),
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income before extraordinary item $ 24,779 $ 13,839 $ 14,334 $ 7,149
Real estate depreciation 8,502 6,331 4,676 3,231
Joint venture income (445) (15) (207) (15)
Joint venture FFO 695 22 332 22
Gain on sale of real estate (985) (1) (985) (1)
Preferred dividend requirement (3,839) (156) (1,920) (156)
-------- -------- -------- --------
Total Funds From Operations $ 28,707 $ 20,020 $ 16,230 $ 10,230
======== ======== ======== ========
</TABLE>
-14-
<PAGE> 15
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
The Company held its annual meeting of stockholders on May 28, 1997.
The stockholders voted to elect Mark S. Whiting and Robert D. Morris as
Class I Directors of the Company until 2000. 18,225,248 votes were cast
for the election of Mr. Whiting and 79,628 votes were withheld.
18,223,753 votes were cast for the election of Mr. Morris and 81,123
votes were withheld. Robert W. Holman, Jr. and John G. McDonald will
continue to serve as Class II Directors until their present terms
expire in 1998 and their successors are duly elected. Willis Andersen,
Jr., Jay H. Shidler and Stephen B. Oresman will continue to serve as
Class III Directors until their present terms expire in 1999 and their
successors are duly elected.
The stockholders also voted to approve the TriNet Corporate Realty
Trust, Inc. 1997 Stock Incentive Plan. 11,378,854 votes were cast for,
6,769,117 votes were cast against, and 156,906 votes abstained from
approval of this proposal.
The stockholders further voted to ratify the Board of Directors'
selection of Coopers & Lybrand L.L.P. as the Company's independent
auditors for the fiscal year ending December 31, 1997. 18,219,317 votes
were cast for, 30,713 votes were cast against, and 54,846 votes
abstained from this proposal.
Item 5. Other Information
None.
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.)
4.1 Definitive Indenture, dated as of May 22, 1996. (Incorporated
by reference to Exhibit 4.2 of the Current Report on Form 8-K
of TriNet Corporate Realty Trust, Inc., dated June 14, 1996
and filed with the Securities and Exchange Commission on July
1, 1996.)
4.2 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.)
-15-
<PAGE> 16
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.
-16-
<PAGE> 17
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: August 6, 1997
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE CONSOLIDATED BALANCE SHEET AT JUNE 30, 1997 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,836
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 956,987
<DEPRECIATION> 43,307
<TOTAL-ASSETS> 962,768
<CURRENT-LIABILITIES> 0
<BONDS> 359,655
0
33
<COMMON> 203
<OTHER-SE> 561,239
<TOTAL-LIABILITY-AND-EQUITY> 962,768
<SALES> 47,438
<TOTAL-REVENUES> 48,429
<CGS> 0
<TOTAL-COSTS> 1,626
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,134
<INCOME-PRETAX> 24,779
<INCOME-TAX> 0
<INCOME-CONTINUING> 24,779
<DISCONTINUED> 0
<EXTRAORDINARY> 98
<CHANGES> 0
<NET-INCOME> 24,877
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 0
</TABLE>
