<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 March 31, 1998
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.)
One Embarcadero Ctr., 33rd Floor, 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:
24,863,258 shares of Common Stock, $.01 par value as of May 11, 1998
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TRINET CORPORATE REALTY TRUST, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
as of March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations
for the three months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and 1997 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 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
</TABLE>
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TRINET CORPORATE REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
----------
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Real estate, at cost:
Land $ 219,552 $ 200,393
Depreciable property 1,016,617 945,458
----------- -----------
1,236,169 1,145,851
Less accumulated depreciation (58,995) (52,650)
----------- -----------
1,177,174 1,093,201
Investment in joint ventures 115,185 6,661
Real estate held for sale, net -- 10,942
----------- -----------
Total real estate 1,292,359 1,110,804
Cash and cash equivalents 14,980 303
Restricted cash and investments 16,161 5,043
Deferred rent receivable 23,101 20,797
Interest rate protection agreements and loan costs, net 14,263 13,958
Other assets, net 7,348 4,999
----------- -----------
$ 1,368,212 $ 1,155,904
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debt $ 511,076 $ 434,122
Dividends payable 15,463 13,346
Other liabilities 44,477 32,448
----------- -----------
Total liabilities 571,016 479,916
----------- -----------
Commitments and contingencies
Minority interest 1,098 765
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized:
Series A: 2,000,000 shares issued and outstanding
at March 31, 1998 and December 31, 1997 20 20
(aggregate liquidation preference $50,000)
Series B: 1,300,000 shares issued and outstanding
at March 31, 1998 and December 31, 1997 13 13
(aggregate liquidation preference $32,500)
Series C: 4,000,000 shares issued and outstanding 40 40
at March 31, 1998 and December 31, 1997
(aggregate liquidation preference $100,000)
Common stock, $.01 par value, 40,000,000 shares authorized:
24,161,504 and 20,853,106 issued and outstanding
at March 31, 1998 and December 31, 1997, respectively 242 209
Paid-in-capital 831,981 710,798
Accumulated deficit (36,198) (35,857)
----------- -----------
Total stockholders' equity 796,098 675,223
----------- -----------
$ 1,368,212 $ 1,155,904
=========== ===========
</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>
Three Months Ended
March 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Rent $ 35,266 $ 21,979
Joint venture income 448 238
Management fees 265 87
Other 893 223
------------ ------------
Total revenues 36,872 22,527
Expenses:
Property operating costs 1,260 893
General and administrative 2,510 1,554
Interest 8,706 5,720
Depreciation and amortization 6,457 3,915
------------ ------------
Income before minority interest
and gain on sale of real estate 17,939 10,445
Minority Interest (12) --
Gain on sale of real estate 1,115 --
------------ ------------
Income before extraordinary item 19,042 10,445
Extraordinary gain from expropriation -- 98
------------ ------------
Net income 19,042 10,543
Preferred dividend requirement (3,919) (1,919)
------------ ------------
Earnings available to common shares $ 15,123 $ 8,624
============ ============
Earnings available per common share:
Income available before extraordinary item $ 0.65 $ 0.52
Earnings available $ 0.65 $ 0.53
Earnings available per common share, assuming dilution:
Income available before extraordinary item $ 0.65 $ 0.52
Earnings available $ 0.65 $ 0.53
Weighted average number of common shares outstanding:
Basic 23,130,525 16,191,472
Diluted 23,411,493 16,372,114
Dividends declared per common share $ 0.64 $ 0.63
</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>
Three Months Ended
March 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 19,042 $ 10,543
Noncash income and expenses included in net income:
Extraordinary gain from expropriation of land -- (98)
Depreciation and amortization 6,457 3,915
Interest (amortization of interest rate protection
agreements and loan costs) 641 616
Straight-line rent adjustments (2,304) (1,407)
Gain on sale of real estate (1,115) --
Joint venture income (448) (238)
Cash provided by (used in) operating assets and liabilities:
Other assets (2,253) (33)
Other liabilities 11,724 6,330
--------- ---------
Net cash provided by operating activities 31,744 19,628
--------- ---------
Cash flows from investing activities:
Real estate acquisitions (87,676) (149,759)
Proceeds from disposal of real estate 12,297 --
Contributions to unconsolidated joint ventures (108,507) --
Cash distributions from unconsolidated joint ventures 431 --
Proceeds from sale of real estate due to expropriation -- 122
Other capital expenditures (571) (193)
--------- ---------
Net cash used in investing activities (184,026) (149,830)
--------- ---------
Cash flows from financing activities:
Acquisition Facility borrowings 254,200 55,035
Acquisition Facility payments (301,800) (113,735)
Mortgage note principal payments (94) --
Preferred dividends paid (3,920) (1,919)
Common dividends paid (13,346) (8,799)
Proceeds from issuance of common stock 119,351 199,936
Proceeds from senior unsecured debt offering 124,633 --
Increase in restricted cash and investments (11,118) (54)
Increase in interest rate protection agreements,
loan costs, and other assets (947) (41)
--------- ---------
Net cash provided by financing activities 166,959 130,423
--------- ---------
Increase in cash and cash equivalents 14,677 221
Cash and cash equivalents, at beginning of period 303 4,984
--------- ---------
Cash and cash equivalents, at end of period $ 14,980 $ 5,205
========= =========
</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"), its
wholly-owned subsidiary corporations and partnerships, and its
majority-owned and controlled partnership. The outside equity interests in
the consolidated partnerships and limited liability companies not owned
and controlled by the Company are reflected as minority interest in the
consolidated financial statements. 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 operations for the three month period ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
2. Real Estate and Depreciation:
In March 1998, a wholly-owned subsidiary of the Company sold two
industrial properties in Clay, New York, comprising 655,000 square feet.
The properties were sold for $12.8 million which resulted in a gain of
$1.1 million.
The following summarizes depreciation expense for the three months
ending (in thousands):
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Real estate $ 6,418 $ 3,826
Corporate furniture and equipment 33 42
------- -------
$ 6,451 $ 3,868
======= =======
</TABLE>
3. Investments in Real Estate Joint Ventures:
In June 1996, the Company contributed $6.1 million in cash in
exchange for a 44.7% sole general partner interest in TriNet Sunnyvale
Partners, L.P. (the "Sunnyvale Partnership"). The Sunnyvale Partnership
owns a four-building office campus in Sunnyvale, California, subject to a
$17.3 million non-recourse first mortgage. The Company accounts for its
partnership investment under the equity method as the limited partners
have certain rights which limit the Company's control. The limited
partners are entitled to a preferred return and commencing in June 1998,
the limited partners have the option to convert their interest into cash;
however, the Company may elect to deliver 258,894 shares of the Company's
common stock in lieu of cash.
On March 16, 1998, the Company, via a joint venture (the "Poydras
Joint Venture") with Whitehall Street Real Estate Limited Partnership IX
("Whitehall"), an affiliate of Goldman, Sachs & Co., acquired two office
towers, a parking facility, and a development parcel in the central
business district of New Orleans, Louisiana, for a purchase price of
approximately $114.3 million. The properties consist of a 28-story,
526,041 square foot office tower, a 24-story, 422,890 square foot office
tower, a 1,078 space parking garage, a 1.5 acre development parcel, and a
0.68 acre garage expansion site. At March 31, 1998, the Poydras Joint
Venture had no debt outstanding. The Company has a 50 percent interest in
the Poydras Joint Venture and will manage the assets on behalf of the
venture. Commencing in March 2001, subject to acceleration under certain
circumstances, Whitehall has the right to exchange its interest in the
joint venture for shares of the
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------
Company's Common Stock, with registration rights. The Company accounts for
its limited liability investment under the equity method.
On March 26, 1998, the Company entered into a joint venture with a
private real estate investment, development, and management company to
participate in the development and ownership of a multi-building office
campus, Corporate Technology Centre ("Tech Centre"), in San Jose,
California. The venture intends to construct up to seven Class A office
buildings comprising approximately 603,000 square feet and expects the
project's final cost to total approximately $126 million. The Company has
initially invested just over $50 million in the joint venture, which
acquired a 33 acre, fully-entitled land parcel. The Company has a 50
percent interest in the venture. The Tech Centre joint venture partner
will be responsible for the project's development and leasing activities.
The Company has the option to purchase the remaining ownership interest of
the venture once the project is leased and stabilized. The Company
accounts for its limited liability investment under the equity method.
4. Debt:
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
Balance as of Interest Rate Maturity
Loan March 31, 1998 December 31, 1997 as of March 31, 1998 Date
- ---------------------- ----------------- ----------------- -------------------- --------------
<S> <C> <C> <C> <C>
Acquisition Facility $ 70,700 $ 118,300 LIBOR + 0.925% 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 100,000 100,000 7.70% 07/15/2017
6.75% Drs. due 2013 125,000 - 6.75% (1) 03/01/2013 (1)
Other Mortgage Loans 11,339 11,433 7.50% - 8.81% (2)
---------- ----------
512,052 434,746
Less debt discount (976) (624)
---------- ----------
$ 511,076 $ 434,122
========== ==========
</TABLE>
(1) Subject to mandatory tender on 3/1/2003. Initial coupon of 6.75% applies
to first five year term only.
(2) Other Mortgage Loans mature at various dates through 2009.
The 30-day LIBOR as of March 31, 1998 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 $125.0 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 $125.0 million
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.
On February 24, 1998, the Company sold to the public $125 million of
6.75% Dealer remarketable securities due March 1, 2013, (the "Drs.") at a
price of 99.706% of the principal amount. Net proceeds, after issuance
costs and related settlements on treasury locks, from the Drs. were
approximately $123.7 million, of which $120.6 million was used to pay down
the balance on the Acquisition Facility. The Drs. are subject to a
mandatory tender on March 1, 2003, to J.P. Morgan Securities, Inc. (the
"Dealer"), and subject to certain terms and conditions, must be remarketed
by the Dealer. If the securities are remarketed by the Dealer in 2003,
the rate applicable to such 10 year security would be based upon the 10
year Treasury rate in effect on February 24, 1998, plus a market spread
corresponding to the Company's credit quality at the time of remarketing.
The Drs. are senior unsecured obligations of the Company and rank equally
with the Company's other senior unsecured indebtedness. The Drs. are
redeemable at any time, in whole or in part, at the option of
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------
the Company. Interest on the Drs. will be paid semi-annually in arrears on
March 1 and September 1 of each year. In conjunction with this issuance,
the Dealer paid the Company a premium for the right to require the
mandatory tender of all outstanding Drs. at March 1, 2003. Additionally,
the Company settled its interest rate hedge agreements in conjunction with
this debt issuance. The all-in effective interest rate, including the
issuance costs, the premium received from the Dealer, and the cost
associated with the settlement of the interest rate hedge agreements, is
6.86% over the initial five-year term of the Drs.
The following table indicates the costs and accumulated amortization
associated with loans outstanding (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Loan origination costs $ 11,792 $ 10,866
Protection agreement costs 9,845 9,845
-------- --------
21,637 20,711
Accumulated amortization (7,374) (6,753)
-------- --------
Loan origination costs and
protection agreement costs, net $ 14,263 $ 13,958
======== ========
</TABLE>
The following table sets forth the components of interest expense for
the three months ending (in thousands):
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Interest $ 8,065 $ 5,104
Amortization of loan origination costs 395 370
Amortization of protection agreement costs 246 246
------- -------
$ 8,706 $ 5,720
======= =======
</TABLE>
5. Stockholders' Equity:
On January 8, 1998, the Company completed a follow-on equity offering
of 2,405,000 shares of common stock at a price of $37.00 per share (the
"January 1998 Offering"). Net proceeds from the January 1998 Offering,
after issuance costs, were approximately $87.5 million and were used to
pay down the balance on the Acquisition Facility.
On February 25, 1998, the Company adopted a stockholder rights plan
(the "Stockholder Rights Plan") pursuant to a rights agreement. In
connection with the adoption of the Stockholder Rights Plan, the
Company's Board of Directors declared a dividend distribution of one
preferred stock purchase right (a "Right") for each outstanding share of
Common Stock to stockholders of record as of the close of business on
April 13, 1998. Each Right entitles the holder to purchase from the
Company 1/100 of a share of a new series of preferred stock at a price of
$200 per 1/100 of a share (the "Purchase Price"). The Rights currently are
not exercisable and are attached to and trade with the outstanding shares
of Common Stock. In the event a person becomes an "acquiring person" by
acquiring more than 15% of the Company's outstanding shares, or commencing
a tender offer for more than 15% of the Company's outstanding shares, each
holder of a Right (other than the acquiring person, whose Rights become
null and void) would be entitled to acquire such number of shares of the
Company's Common Stock having a value equal to two times the Purchase
Price of the Right. If the Company is acquired in a merger or other
business combination
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------
transaction, or if 50% or more of the Company's assets or earning power is
sold or transferred, each holder of a Right (other than holders whose
Rights have become null and void) would then be entitled to purchase
shares of the acquiring company's common stock having a value equal to
twice the Purchase Price of the Right.
On March 18, 1998, the Company completed a direct placement of
800,000 shares of common stock priced at $37.50 per share (the "March 1998
Offering"). The $30.0 million of proceeds were used to pay down the
balance on the Acquisition Facility.
6. 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 five existing
tenants which could require the Company to fund tenant improvements on
approximately 25,000 square feet and to construct approximately 497,000
square feet of additional adjacent space on which the Company would
receive additional rent under the terms of the option agreements. The
option agreements commence and expire at various dates through 2012.
As of March 31, 1998, the Company had entered into an aggregate of
approximately $99.4 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 at various
dates through 1998 and 1999.
7. Subsequent Events:
On April 29, 1998, the Company completed a public offering (the
"April 1998 Offering") of 701,754 shares of common stock in an
underwritten offering with Merrill Lynch & Co. Merrill Lynch deposited
these common shares with the trustee of the Equity Investor Funds Cohen &
Steers Realty Majors Portfolio, a unit investment trust. Net proceeds from
the offering were approximately $23.7 million and were used to pay down
the balance on the Acquisition Facility and for working capital.
On May 1, 1998, Trinity Property Partners, L.P. ("TPP") acquired two
properties for total consideration of approximately $8.0 million, which
consisted of cash, partnership units and the assumption of approximately
$5.3 million of debt. One of these buildings, a 35,500 square foot,
single-story office/R&D/distribution facility, is located on 7.5 acres in
Assinippi Park, Massachusetts, and is 100 percent leased to Mentor O&O,
Inc. The other property is 7,586 square foot, two-story R&D facility which
is situated on 3.5 acres in Randolph, Massachusetts and is 100 percent
leased to Serono Laboratories, Inc.
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<PAGE> 10
TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------
8. Earnings per Share:
The following table presents the basic and diluted earnings per share
calculations for the three months ending (dollars in thousands, except per
share amounts):
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
NUMERATOR
Income before extraordinary items $ 19,042 $ 10,445
Extraordinary items -- 98
------------ ------------
Net income 19,042 10,543
Preferred dividend requirement (3,919) (1,919)
------------ ------------
Earnings available to common shares $ 15,123 $ 8,624
============ ============
DENOMINATOR
Basic:
Weighted average common shares outstanding 23,130,525 16,191,472
============ ============
Diluted:
Weighted average common shares outstanding 23,130,525 16,191,472
Shares issuable from assumed conversion of
common stock options 280,968 180,642
------------ ------------
Weighted average common shares outstanding,
as adjusted 23,411,493 16,372,114
============ ============
EARNINGS AVAILABLE PER COMMON SHARE - BASIC:
Income available before extraordinary items $ 0.65 $ 0.52
Extraordinary items -- 0.01
------------ ------------
Earnings available $ 0.65 $ 0.53
============ ============
EARNINGS AVAILABLE PER COMMON SHARE - DILUTED:
Income available before extraordinary items $ 0.65 $ 0.52
Extraordinary items -- 0.01
------------ ------------
Earnings available $ 0.65 $ 0.53
============ ============
</TABLE>
Commencing in June 1998, the limited partners of the Sunnyvale
Partnership have the option to convert their interest into cash; however,
the Company may elect to deliver 258,894 shares of the Company's common
stock in lieu of cash. Similarly, commencing in July, 1999 the limited
partners of TPP have the option of convert their interests into cash and
the Company may elect to deliver 19,784 shares of common stock in lieu of
cash should the limited partners redeem their interests. Commencing in
March 2001, Whitehall has the option to convert its limited liability
interest into 1,521,808 shares of common stock. When the Poydras Joint
Venture obtains project financing, the number of shares of common stock
that Whitehall could obtain through conversion will be reduced. The
assumed conversions by the limited partners and members of the Sunnyvale
Partnership, TPP, and the Poydras Joint Venture were not included in the
calculation of diluted earnings per share as they were antidilutive for
the periods presented.
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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 and also with the Company's Annual Report for 1997 filed on Form 10-K.
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-
THREE MONTHS ENDED MARCH 31, 1998 VS. THREE MONTHS ENDED MARCH 31, 1997
Rent revenues for the first quarter of 1998 increased by $13.3 million or
60% compared to the first quarter of 1997. The significant increase in rent
revenue is primarily the result of the Company's acquisitions subsequent to
March 31, 1997, which accounted for $10.2 million of rent revenue during the
first quarter of 1998. Additionally, the properties acquired in the first
quarter of 1997 contributed an additional $3.1 million to rent revenue in 1998,
the increase due to owning the properties for a full quarter in 1998. The
overall increase in rent revenue was partially offset by a decrease of
approximately $155,000 due to properties sold since January 1, 1997. On a cash
basis, "same store" rents increased 2.3%.
On March 16, 1998, the Company, via a joint venture (the "Poydras Joint
Venture") with Whitehall Street Real Estate Limited Partnership IX
("Whitehall"), an affiliate of Goldman, Sachs & Co., acquired two office towers,
a parking facility, and a development parcel in the central business district of
New Orleans, Louisiana, for a purchase price of approximately $114.3 million.
The Company has a 50 percent interest in the Poydras Joint Venture, which
contributed $229,000 to joint venture income during the three months ended March
31, 1998. The Company's joint venture investment in the Sunnyvale Partnership
contributed $219,000 to revenues for the three months ended March 31, 1998, a
decrease from the $238,000 for the same period in 1997.
TriNet Property Management, Inc., a newly formed subsidiary of the
Company, realized increased management fee income as a result of opening on-site
property management offices at two of the Company's properties. One such office
was opened at the RiverEdge property in Atlanta, Georgia, in July 1997, and the
other was opened at the Microsoft property in Irving, Texas, in September 1997.
In prior years, management fees were presented as an offset to property
operating costs and have been reclassified to conform to the current year
presentation.
Other revenue increased by $670,000 to $893,000 for the first quarter of
1998, primarily the result of the recognition of approximately $713,000 of
income from the Company's advisory services provided in connection with the
Poydras Joint Venture and the Tech Centre investment, offset by lower interest
income due to lower average cash balances. Average cash balances were higher in
the first quarter of 1997 due to proceeds from the February 1997 equity offering
of 6,250,000 shares of common stock.
For the quarter ended March 31, 1998, property operating costs increased
to $1.3 million from $893,000 for the first quarter of 1997. The increase in
property operating costs is due to the acquisition of certain properties since
the first quarter of 1997 in which the Company has lease obligations for
operating expenses as well as incremental costs associated with the continued
growth in the Company's real estate portfolio.
For the quarter ended March 31, 1998, general and administrative expenses
increased 62% to $2.5 million, the result of increased personnel and related
overhead from the Company's continued growth. As a percentage of combined rent
revenue and joint venture income, general and administrative expenses have
remained at 7.0% for the first quarter of 1998 as compared to the first quarter
of 1997. Also, general and administrative expenses as a percentage of weighted
average joint venture investments and undepreciated real estate was .20% for the
first quarter of 1998 and 1997.
Interest expense has increased 52% to $8.7 million for the quarter ended
March 31, 1998 as compared to $5.7 million for the corresponding period of 1997.
This increase is due to a greater
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<PAGE> 12
weighted average debt balance of $437.2 million for the three months ended March
31, 1998, as compared to $278.3 million for the corresponding period of 1997.
The increase in the debt balance is primarily attributable to the issuance of
the 2017 Notes in July 1997 and the issuance of the Drs. in February 1998.
Additionally, the Company's weighted average interest rate on outstanding
borrowings increased from 7.30% for the first three months of 1997 to 7.36%
during the same period in 1998 as a result of the longer weighted average debt
maturity achieved through the issuance of the 2017 Notes. Also impacting
interest expense is the amortization of the loan costs which increased by 4% to
$641,000 in the first quarter of 1998 compared to $616,000 in the first quarter
of 1997. This increase is attributable to the amortization associated with the
issuance of the 2017 Notes in July 1997 and the Drs. in February 1998.
Depreciation and amortization increased by 65% for the three months ended
March 31, 1998 when compared to the first three months of 1997, a result of the
Company's larger asset base.
The $12,000 minority interest for the first quarter of 1998 represents the
limited partners' interest in TriNet Property Partners, L.P. ("TPP"), a
partnership formed in December 1997. TPP, in which a wholly-owned subsidiary of
the Company is the sole general partner, purchased nine office/R&D properties in
December 1997 and three additional office/R&D properties in the first quarter of
1998 from a group of private partnerships.
In March 1998, the Company sold two properties comprising approximately
655,500 square feet located in Clay, New York, which are currently leased to
GATX/Logistics Corporation. The sale price was approximately $12.8 million which
resulted in a gain of approximately $1.1 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased by $12.1 million, or
62%, to $31.7 million for the three months ended March 31, 1998, when compared
to the same period in 1997. The increase was primarily due to increased rental
revenue attributable to the increase in the portfolio size. Net cash used in
investing activities was $185.9 million for the three months ended March 31,
1998. These funds were expended to acquire properties.
The following quantifies the Company's capital expenditures (in thousands)
for the indicated three month periods ended March 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Real estate acquisitions $ 87,676 $149,759
Investment in joint ventures 108,507 --
Building improvements 446 13
Corporate furniture, equipment,
and leasehold improvements 125 180
-------- --------
$196,754 $149,952
======== ========
</TABLE>
The Company incurred $125,000 of leasehold improvement expenditures in the
first three months of 1998 but does not anticipate incurring any additional
expenditures during the remainder of 1998. The Company did not incur any tenant
improvement expenditures in the first three months of 1998 and does not expect
to incur any of these costs for the remainder of 1998. The Company incurred
$446,000 of capital expenditures on existing properties during the first three
months of 1998, and expects to incur an additional $2.8 million of such
expenditures for the remainder of 1998.
Net cash provided by financing activities for the first three months of
1998 was $168.8 million, primarily a result of the proceeds from the January
1998 Offering, the March 1998 Offering and the issuance of the Drs. Net proceeds
from the January 1998 Offering were approximately $87.5 million which were used
to pay down the balance on the Acquisition Facility. Proceeds costs from the
March 1998 Offering were approximately $30.0 million and were also used to pay
down the balance on the Acquisition Facility. Net proceeds after issuance costs
from the Drs. were approximately $123.7 million, of which $120.6 million was
used to pay down the balance on the Acquisition Facility. Net cash provided by
financing activities was offset by common dividends paid of $13.3 million and
preferred dividends paid of $3.9 million for the quarter ending March 31, 1998.
-12-
<PAGE> 13
Outstanding debt as of March 31, 1998, consisted of mortgage notes and
notes payable totaling $511.1 million. There are $397,000 of scheduled principal
amortization payments for the next twelve months which are related to the Other
Mortgage Loans. As of March 31, 1998, the available amount of credit under the
Acquisition Facility was $129.3 million.
On January 8, 1998, the Company completed a follow-on equity offering of
2,405,000 shares of common stock at a price of $37.00 per share (the "January
1998 Offering"). Proceeds from the January 1998 Offering, net of issuance costs,
were approximately $87.5 million which were used to pay down the balance on the
Acquisition Facility.
On February 24, 1998, the Company sold to the public $125 million of 6.75%
Dealer remarketable securities due March 1, 2013, (the "Drs.") at a price of
99.706% of the principal amount. Net proceeds after issuance costs from the Drs.
were approximately $123.7 million, of which $120.6 million was used to pay down
the balance on the Acquisition Facility. The Drs. are subject to a mandatory
tender on March 1, 2003, to J.P. Morgan Securities, Inc. (the "Dealer"), and
subject to certain terms and conditions, must be remarketed by the Dealer. The
Drs. are senior unsecured obligations of the Company and rank equally with the
Company's other senior unsecured indebtedness. The Drs. are redeemable at any
time, in whole or in part, at the option of the Company. Interest on the Drs.
will be paid semi-annually in arrears on March 1 and September 1 of each year.
In conjunction with this issuance, the Dealer paid the Company a premium for the
right to require the mandatory tender of all outstanding Drs. at March 1, 2003.
Additionally, the Company settled its interest rate hedge agreements in
conjunction with this debt issuance. The all-in effective interest rate,
including the estimated issuance costs, the premium received from the Dealer,
and the cost associated with the settlement of the interest rate hedge
agreements, is 6.86% over the initial five-year term of the Drs.
On March 18, 1998, the Company completed a direct placement of 800,000
shares of common stock priced at $37.50 per share (the "March 1998 Offering").
The $30.0 million of proceeds were used to pay down the balance on the
Acquisition Facility.
On April 29, 1998, the Company completed a public offering (the "April
1998 Offering") of 701,754 shares of common stock in an underwritten offering
with Merrill Lynch & Co. Merrill Lynch deposited these common shares with the
trustee of the Equity Investor Funds Cohen & Steers Realty Majors Portfolio, a
unit investment trust. Net proceeds from the offering were approximately $23.7
million, before issuance costs, and were used to pay down the balance on the
Acquisition Facility and for working capital.
On February 5, 1998, Schwegmann Giant Supermarkets ("Schwegmann") failed
to meet its lease obligations on two Schwegmann properties in Baton Rouge and
Metairie, Louisiana and was in default of these lease agreements with the
Company. Obligations with respect to the Schwegmann properties were secured by
a first mortgage and assignment of rents on a separate property that was owned
by an affiliate of Schwegmann and leased to SGSM Acquisition Company, LLC
("SGSM") (the "Collateral Property"). On May 4, 1998, the Company accepted a
deed on the Collateral Property as consideration for the future release of
Schwegmann's obligations under both defaulted leases and various guarantees.
The 108,424 square foot Collateral Property is located in Metairie, Louisiana
and is 100% leased to SGSM through 2017. The Collateral Property has annual net
operating income of approximately $500,000. The Company does not expect a
material impact on its financial condition or results of operations as a result
of this transaction.
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. The Company has on file with the
Securities and Exchange Commission two Form S-3 Registration Statements. One
registration statement is a universal shelf registration statement authorizing
the issuance of debt securities, common stock, preferred stock or depository
shares representing preferred stock of the Company with a remaining availability
of $231.0 million after the April 1998 Offering. 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, common
stock, preferred stock, and depository shares representing preferred stock
issued will depend on acquisitions, asset sales, the Company's senior unsecured
debt and preferred stock ratings, and the general interest rate environment.
In managing the Company's long-term liquidity, consideration is given to
both the weighted average maturity of the Company's fixed term debt instruments
and to the ratio of total debt to total market capitalization. As of March 31,
1998 and 1997, the Company's weighted average fixed term debt maturity was 8.6
years (assuming the Drs. mandatory tender occurs in 2003) and 6.4 years,
respectively, and the ratio of total debt to total market capitalization was
31.6% and 25.5%, respectively. The lengthening of the weighted average fixed
term debt maturity is primarily the result of the issuance of the 2017 Notes in
July 1997.
-13-
<PAGE> 14
As of March 31, 1998, the Company had entered into an aggregate of
approximately $99.4 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 at various dates through 1998 and 1999.
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 three months ended
March 31, (in thousands)
1998 1997
-------- --------
<S> <C> <C>
Funds From Operations:
Income before gains and extraordinary items $ 17,927 $ 10,445
Real estate depreciation 6,418 3,826
Joint venture FFO effect 204 125
Preferred dividend requirement (3,919) (1,919)
-------- --------
Total Funds From Operations $ 20,630 $ 12,477
======== ========
Common dividends declared: $ 15,463 $ 12,773
======== ========
</TABLE>
YEAR 2000
The Company's primary uses of software systems are for corporate and
property accounting. The Company's current system is widely used by the real
estate industry and is Year 2000 compliant. The Company is replacing its current
corporate and property accounting system with one which is also designed to be
Year 2000 compliant. Therefore, the Company believes that the risk of Year 2000
compliance is not significant as it relates to its computer software systems.
At this time, no estimates can be made as to any potential adverse impact
resulting from the failure of tenants and third-party service providers and
vendors to prepare for the Year 2000. Also, at this time, no estimate can be
made for the potential cost related to evaluating and correcting the embedded
systems of the Company's properties. The Company is attempting to identify those
risks as well as to receive compliance certificates from all third parties that
have a material impact on the Company's operations, but the cost and timing of
third party Year 2000 compliance is not within the Company's control and no
assurances can be given with respect to the cost or timing of such efforts or
the potential effects of any failure to comply.
-14-
<PAGE> 15
FORWARD LOOKING INFORMATION
This quarterly report contains forward-looking statements within the
meaning of the federal securities laws. The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of 1995, and is
including this statement for purposes of complying with these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Company include, but are not limited to,
changes in: economic conditions generally and the real estate market
specifically, legislative or regulatory provisions affecting the Company
(including changes to laws governing the taxation of REITs), availability of
capital, interest rates, competition, supply of and demand for office and
industrial properties in the Company's current and proposed market areas, and
general accounting principles, policies and guidelines applicable to REITs.
These risks and uncertainties, together with the other risks described from time
to time in the Company's reports and documents filed with the Securities and
Exchange Commission, should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
-15-
<PAGE> 16
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
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
27.1 Financial Data Schedule.
Exhibits
1.1 Definitive Underwriting Agreement, dated January 8, 1998,
relating to the issuance and sale of 2,405,000 shares of Common
Stock of TriNet Corporate Realty Trust, Inc. (Incorporated by
reference to Exhibit 1.1 to the Current Report on Form 8-K, dated
January 8, 1998 of TriNet Corporate Realty Trust, Inc.)
1.2 Form T-1 Statement of Eligibility, dated February 19, 1998
(Incorporated by reference to Exhibit 25 to the Current Report of
Form 8-K, dated February 20, 1998 of TriNet Corporate Realty
Trust, Inc.)
1.3 Underwriting Agreement, dated February 24, 1998, relating to
6.75% Dealer remarketable securities due 2013 (Incorporated by
reference to Exhibit 1.1 to the Current Report on Form 8-K, dated
March 4, 1998 of TriNet Corporate Realty Trust, Inc.)
1.4 Remarketing Agreement, dated February 27, 1998, relating to the
Drs. (Incorporated by reference to Exhibit 1.2 to the Current
Report on Form 8-K, dated March 4, 1998 of TriNet Corporate
Realty Trust, Inc.)
1.5 Senior Debt Securities Indenture, dated as of February 27, 1998,
(Incorporated by reference to Exhibit 1.3 to the Current Report
on Form 8-K, dated March 4, 1998 of TriNet Corporate Realty
Trust, Inc.)
1.6 Supplemental Indenture No. 1, dated as of February 27, 1998
(Incorporated by reference to Exhibit 1.4 to the Current Report
on Form 8-K, dated March 4, 1998 of TriNet Corporate Realty
Trust, Inc.)
-16-
<PAGE> 17
1.7 Rights Agreement, dated as of February 25, 1998 (Incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K, dated
February 25, 1998, 1998 of TriNet Corporate Realty Trust, Inc.)
Reports on Form 8-K
1. On January 16, 1998, 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 January 1998.
2. On January 21, 1998, the Company filed a report on Form 8-K with
the Securities and Exchange Commission to report the acquisition
of ten properties during the fourth quarter of 1997 and the first
quarter of 1998.
3. On February 20, 1998, the Company filed a report on Form 8-K with
the Securities and Exchange Commission to provide a Form T-1
Statement of Eligibility.
4. On February 20, 1998, the Company filed a report on Form 8-K with
the Securities and Exchange Commission to provide the Company's
press release dated February 4, 1998, announcing the Company's
earnings for the quarter ended December 31, 1997.
5. On February 24, 1998, the Company filed a report on Form 8-K/A
with the Securities and Exchange Commission to amend the Form 8-K
filed on February 20, 1998.
6. On March 4, 1998, the Company filed a report on Form 8-K with the
Securities and Exchange Commission to provide the underwriting
agreement related to 6.75% Dealer remarketable securities due
2013, and the related Remarketing Agreement, Senior Debt
Securities Indenture, and Supplemental Indenture No. 1.
7. On March 13, 1998, the Company filed a report on Form 8-K with
the Securities and Exchange Commission to announce the
Shareholders Rights Plan and provide the Rights Agreement, dated
as of February 25, 1998.
8. On April 21, 1998, the Company filed a report on Form 8-K with
the Securities and Exchange Commission to report the acquisition
of six properties and two land parcels as well as the investment
in two ventures during the first quarter of 1998.
-17-
<PAGE> 18
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: May 12, 1998
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1998 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH
31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 31,141
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,236,169
<DEPRECIATION> 58,995
<TOTAL-ASSETS> 1,368,212
<CURRENT-LIABILITIES> 0
<BONDS> 511,076
0
73
<COMMON> 242
<OTHER-SE> 795,783
<TOTAL-LIABILITY-AND-EQUITY> 1,368,212
<SALES> 35,266
<TOTAL-REVENUES> 36,872
<CGS> 0
<TOTAL-COSTS> 1,260
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,706
<INCOME-PRETAX> 19,042
<INCOME-TAX> 0
<INCOME-CONTINUING> 19,042
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,042
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.65
</TABLE>
