<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 1-11918
TRINET CORPORATE REALTY TRUST, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MARYLAND 94-3175659
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
ONE EMBARCADERO CTR., 33RD FLOOR, SAN 94111
FRANCISCO, CA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(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:
100 shares of Common Stock, $.01 par value as of November 15, 1999*
*On November 4, 1999, the registrant completed a transaction in which it
merged into a subsidiary of Starwood Financial Inc. The registrant's common
stock was exchanged for shares of Starwood Financial Inc., which became the sole
stockholder of the registrant.
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<PAGE> 2
TRINET CORPORATE REALTY TRUST, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998........................................... 3
Consolidated Statements of Operations for the nine months
ended September 30, 1999
and 1998 and for the three months ended September 30, 1999
and 1998.................................................... 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998........................... 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 26
Item 2. Changes in Securities....................................... 26
Item 3. Defaults Upon Senior Securities............................. 26
Item 4. Submission of Matters to a Vote of Security Holders......... 26
Item 5. Other Information........................................... 26
Item 6. Exhibits and Reports on Form 8-K............................ 26
Signatures........................................................... 27
</TABLE>
2
<PAGE> 3
TRINET CORPORATE REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Real estate................................................. $1,471,958 $1,500,789
Less accumulated depreciation............................... (89,718) (71,950)
---------- ----------
1,382,240 1,428,839
Cash and cash equivalents................................... 8,496 19,323
Restricted cash............................................. 8,292 17,768
Deferred rent receivable.................................... 28,747 27,235
Loan costs, net............................................. 10,687 12,238
Other assets, net........................................... 20,220 21,164
---------- ----------
$1,458,682 $1,526,567
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debt...................................................... $ 585,747 $ 647,720
Dividends payable......................................... 16,293 16,167
Other liabilities......................................... 43,660 56,655
---------- ----------
Total liabilities................................. 645,700 720,542
---------- ----------
Commitments and contingencies (notes 2, 5).................. -- --
Minority interest........................................... 2,565 2,565
Stockholders' equity:
Preferred stock, $0.01 par value, 15,000,000 shares
authorized:
Series A: 2,000,000 shares issued and outstanding at
September 30, 1999 and December 31, 1998 (aggregate
liquidation preference $50,000)...................... 20 20
Series B: 1,300,000 shares issued and outstanding at
September 30, 1999 and December 31, 1998(aggregate
liquidation preference $32,500)...................... 13 13
Series C: 4,000,000 shares issued and outstanding at
September 30, 1999 and December 31, 1998 (aggregate
liquidation preference $100,000)..................... 40 40
Common stock, $0.01 par value, 40,000,000 shares
authorized:
25,066,760 and 24,872,429 shares issued and outstanding
at September 30, 1999 and December 31, 1998.......... 251 249
Paid-in-capital........................................... 861,476 855,568
Accumulated deficit....................................... (51,383) (52,430)
---------- ----------
Total stockholders' equity........................ 810,417 803,460
---------- ----------
$1,458,682 $1,526,567
========== ==========
</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 PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Rent.............................................. $116,649 $112,303 $38,076 $40,348
Joint venture income............................ 2,450 1,828 935 318
Property management fees........................ 1,972 1,025 535 429
Interest income................................. 4,956 1,557 1,677 977
Other income.................................... 9,043 2,132 7,419 1,234
-------- -------- ------- -------
Total revenues.......................... 135,070 118,845 48,642 43,306
-------- -------- ------- -------
Expenses:
Property operating costs........................ 6,074 4,819 2,040 1,888
General and administrative...................... 9,010 9,644 2,703 4,289
Interest........................................ 33,021 28,752 10,850 11,183
Depreciation and amortization................... 21,349 20,482 7,085 7,383
Provision for asset impairment.................. 3,400 -- 3,400 --
Special charge.................................. -- 2,990 -- 2,990
-------- -------- ------- -------
Income before minority interest, gain on sale,
extraordinary item and cumulative effect..... 62,216 52,158 22,564 15,573
Minority interest............................... (122) (87) (41) (41)
Gain on sale of real estate..................... 1,943 1,115 790 --
-------- -------- ------- -------
Income before extraordinary item and cumulative
effect....................................... 64,037 53,186 23,313 15,532
Extraordinary loss from early extinguishment of
debt......................................... (665) (1,272) (665) --
Cumulative effect of a change in
accounting principle......................... (1,810) -- -- --
-------- -------- ------- -------
Net income................................... 61,562 51,914 22,648 15,532
Preferred dividend requirement............... (11,758) (11,758) (3,919) (3,919)
-------- -------- ------- -------
Earnings available to common shares:
Basic...................................... $ 49,804 $ 40,156 $18,729 $11,613
======== ======== ======= =======
Diluted.................................... $ 49,892 $ 40,156 $18,732 $11,613
======== ======== ======= =======
Earnings available per common share, basic:
Income available before extraordinary item... $ 2.09 $ 1.71 $ 0.77 $ 0.47
Earnings available........................... $ 1.99 $ 1.66 $ 0.75 $ 0.47
Earnings available per common share, assuming
dilution:
Income available before extraordinary item... $ 2.06 $ 1.70 $ 0.75 $ 0.47
Earnings available........................... $ 1.96 $ 1.65 $ 0.73 $ 0.47
Weighted average number of common shares
outstanding:
Basic........................................ 24,967 24,224 25,067 24,872
Diluted...................................... 25,417 24,395 25,768 24,955
Dividends declared per common share............. $ 1.95 $ 1.92 $ 0.65 $ 0.64
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 61,562 $ 51,914
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary loss..................................... 665 1,272
Minority interest...................................... 122 87
Depreciation and amortization.......................... 21,349 20,482
Special charge, non-cash component..................... -- 1,146
Amortization of loan costs and discounts............... 1,464 1,695
Straight-line rent adjustments......................... (3,995) (6,655)
Gain on sale of real estate............................ (1,943) (1,115)
Joint venture income................................... (2,450) (1,829)
Distributions from operations of joint ventures........ 4,100 1,095
Cumulative effect of a change in accounting
principle............................................. 1,810 --
Provision for asset impairment......................... 3,400 --
Cash provided by/(used in) operating assets and
liabilities:
Other assets........................................... 1,203 (7,951)
Other liabilities...................................... (11,850) 16,204
--------- ---------
Net cash provided by operating activities............ 75,437 76,345
--------- ---------
Cash flows from investing activities:
Real estate acquisitions.................................. (22,216) (263,675)
Net proceeds from sale of real estate..................... 53,827 12,299
Net investments in and advances to unconsolidated joint
ventures............................................... (3,253) (153,611)
Other capital expenditures and investments................ (5,801) (5,788)
--------- ---------
Net cash provided by/(used in) investing
activities.......................................... 22,557 (410,775)
--------- ---------
Cash flows from financing activities:
Net (repayments)/borrowings on Revolving Credit
Facility............................................... (50,800) 139,600
Mortgage note principal payments.......................... (11,233) (288)
Preferred dividends paid.................................. (11,758) (11,758)
Common dividends paid..................................... (48,629) (44,727)
Proceeds from issuance of common stock.................... 4,763 145,029
Proceeds from senior unsecured debt offering.............. -- 124,633
Minority interest contributions, net of distributions..... (122) 1,713
Decrease/(increase) in restricted cash and investments.... 9,476 (12,250)
Early termination fees associated with the REMIC
paydown................................................ (440) --
Increase in loan costs.................................... (78) (1,784)
--------- ---------
Net cash (used in)/provided by financing
activities.......................................... (108,821) 340,168
--------- ---------
(Decrease)/increase in cash and cash equivalents............ (10,827) 5,738
Cash and cash equivalents, at beginning of period........... 19,323 303
--------- ---------
Cash and cash equivalents, at end of period................. $ 8,496 $ 6,041
========= =========
Supplemental Schedule of Noncash Investing and Financing
Activities:
Mortgages assumed in connection with property
acquisitions........................................... $ -- $ 18,890
========= =========
</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" or "TriNet"), its
wholly-owned subsidiary corporations and partnerships, and its majority-owned
and controlled partnership. The equity interests in the consolidated partnership
not owned and controlled by the Company are reflected as minority interest in
the consolidated financial statements. All significant intercompany balances and
transactions have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of TriNet's consolidated
financial position, results of operations and cash flows for the interim period.
The results of operations for the nine months ended September 30, 1999, are not
necessarily indicative of the results that may be expected for the entire year.
Merger Transaction:
On November 3, 1999, consistent with previously announced terms, the
stockholders of TriNet and the stockholders of Starwood Financial Inc., a
Maryland corporation together with its predecessors, ("Starwood Financial"),
approved the merger (the "Merger") of TriNet with a wholly-owned subsidiary of
Starwood Financial. As part of this transaction, Starwood Financial also changed
its name from Starwood Financial Trust (see (ii) below). The stockholders of
Starwood Financial also approved (i) the acquisition by Starwood Financial,
through a merger and contribution of interests of 100% of the ownership
interests in Starwood Financial's external advisor (the "Advisor Transaction");
and (ii) the change in form of Starwood Financial's organization into a Maryland
corporation ("Incorporation Merger"). Pursuant to the Merger, TriNet merged with
and into a subsidiary of Starwood Financial, with TriNet surviving as a
wholly-owned subsidiary of Starwood Financial. In the Merger, each issued and
outstanding share of common stock of TriNet was converted into 1.15 shares of
common stock of Starwood Financial. Each issued and outstanding share of Series
A, Series B and Series C Cumulative Redeemable Preferred Stock of TriNet was
converted into a share of Series B, Series C, and Series D (respectively)
Cumulative Redeemable Preferred Stock of Starwood Financial. The preferred stock
issued to the former TriNet preferred stockholders has substantially the same
terms as the TriNet preferred stock, except that the new Series B, C and D
preferred stock have additional voting rights not associated with the TriNet
preferred stock. The Merger has been structured as a tax-free reorganization
under federal tax law and will be accounted for as a purchase of TriNet by
Starwood Financial. The excess of the purchase price paid by Starwood Financial,
over the net book value of TriNet, will be reflected as a purchase accounting
adjustment and allocated among the assets and liabilities of TriNet in the
Company's separate financial statements as of the merger date.
These transactions were consummated as of November 4, 1999. As a result,
Starwood Financial is now self-advised and plans to continue to qualify as a
REIT for federal income tax purposes.
On November 4, 1999, shares of Starwood Financial's single class of common
stock began trading on the New York Stock Exchange under the symbol "SFI".
Recent Accounting Pronouncement:
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). On June 23, 1999, the FASB voted to defer
the effective date of SFAS 133 for one year. SFAS 133 is effective for fiscal
years beginning after June 15, 2000, but earlier application is permitted as of
the beginning of any fiscal quarter subsequent to June 15, 1998. SFAS 133
requires all derivatives to be recognized in the statement of
6
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
financial position as either assets or liabilities and measured at fair value.
The Company plans to adopt this pronouncement for its fiscal year beginning on
January 1, 2001, and will determine the impact of adoption prior to that date.
Change in Accounting Principle:
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 requires all costs of start-up activities, including
organization costs, to be charged to operations as incurred for fiscal years
beginning after December 15, 1998. The initial application of SOP 98-5 requires
that prior years' unamortized start-up costs be charged to income as a
cumulative effect of a change in accounting principle. Accordingly, the Company
reported a $1.8 million charge to net income during the first quarter as a
cumulative effect of a change in accounting principle.
2. REAL ESTATE:
The following summarizes the Company's real estate investments as of
September 30, 1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Buildings and improvements......................... $1,108,168 $1,119,425
Improved land...................................... 227,206 230,401
Real estate held for sale.......................... -- 3,500
Less accumulated depreciation.................... (89,718) (71,950)
---------- ----------
1,245,656 1,281,376
Convertible mortgage............................... 15,898 27,725
Investments in and advances to unconsolidated joint
ventures......................................... 120,686 119,738
---------- ----------
Net real estate............................... $1,382,240 $1,428,839
========== ==========
</TABLE>
Investments in and Advances to Unconsolidated Joint Ventures:
At September 30, 1999, TriNet had $120.7 million invested in six
unconsolidated real estate joint ventures: TriNet Sunnyvale Partners, L.P.
("Sunnyvale"), W9/TriNet Poydras, LLC ("Poydras"), Corporate Technology
Associates LLC ("CTC I"), Sierra Land Ventures ("Sierra"), Corporate Technology
Centre Associates II LLC ("CTC II"), and TriNet Milpitas Associates, LLC
("Milpitas"), for the purpose of acquiring, operating, and, in certain cases,
developing properties. At September 30, 1999, the ventures' assets consisted of
24 operating properties totaling 2.4 million square feet, 19.4 acres of land
under development and 41.7 acres of land held for sale and development. The 24
operating properties owned at September 30, 1999 had a total purchase price of
$331.8 million. The purchase price of the land, both under development, or held
for development, was approximately $63.0 million. In the aggregate, the joint
ventures had total assets of $446.7 million and total liabilities of $338.6
million at September 30, 1999, and net income of $3.1 million for the nine
months ended September 30, 1999. TriNet accounts for these investments under the
equity method because TriNet's joint venture partners have certain participating
rights which limit the Company's control.
7
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
TriNet's investments in and advances to unconsolidated joint ventures, its
percentage ownership interests, its respective income and aggregate third party
debt as of and for the nine months ended September 30, 1999 are presented below
(in thousands):
<TABLE>
<CAPTION>
ACCRUED JOINT THIRD PARTY
UNCONSOLIDATED OWNERSHIP EQUITY NOTES INTEREST TOTAL VENTURE INTEREST TOTAL DEBT
JOINT VENTURE % INVESTMENT RECEIVABLE RECEIVABLE INVESTMENT INCOME INCOME INCOME @ 100%
- -------------- --------- ---------- ---------- ---------- ---------- ------- -------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating:
Sunnyvale... 44.7% $ 6,100 $ -- $ -- $ 6,100 $ 825 $ -- $ 825 $ 16,729
Poydras.... 50.0% 12,318 14,890 413 27,621 (34) 1,225 1,191 78,610
CTC II..... 50.0% 1,341 28,733 2,927 33,001 (750) 2,708 1,958 16,671
Milpitas... 50.0% 27,911 -- -- 27,911 1,872 -- 1,872 82,493
Development
and land:
CTC I...... 50.0% 19,791 -- -- 19,791 10 -- 10 59,812
Sierra..... 50.0% 6,262 -- -- 6,262 (81) -- (81) 5,055
------- ------- ------ -------- ------ ------ ------ --------
Total.... $73,723 $43,623 $3,340 $120,686 $1,842 $3,933 $5,775 $259,370
======= ======= ====== ======== ====== ====== ====== ========
</TABLE>
At September 30, 1999, TriNet was the guarantor for 25% of Poydras's $78.6
million third party debt. TriNet was also the guarantor of 50% of CTC I's $59.8
million construction and land loans. Additionally, under certain circumstances
subject to TriNet's approval, the Company has commitments to fund further
development costs for the potential future development of phase two of CTC I, up
to a maximum of $13.9 million. However, the Company has the right and expects to
arrange financing secured by the development project to reduce this funding
commitment.
The limited partners of the Sunnyvale partnership have the option to
convert their partnership interests into cash; however, the Company may elect to
deliver 258,894 shares of the Company's common stock in lieu of cash.
Additionally, with the Merger of TriNet into a wholly-owned subsidiary of
Starwood Financial (See Note 1, "Merger Transaction"), partnership units held by
certain partners of Poydras and Milpitas may be converted into 304,977 and
856,066 shares, respectively, of the Company's common stock. If and when the
partners of the Sunnyvale, Poydras and Milpitas joint ventures convert their
partnership units, they will be exchanged into 1.15 shares of Starwood
Financial's common stock or 297,728, 350,724, and 984,476 shares respectively.
8
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Investments in Decontrolled Stock Subsidiary:
In addition to the above joint ventures, TriNet has an investment in TriNet
Management Operating Company, Inc. ("TMOC"), a taxable decontrolled subsidiary
of the Company. TMOC was created for the purpose of investing in real estate
through G. Accion, S.A. de C.V., ("G. Accion"), a Mexican real estate company.
TMOC is capitalized by an equity and debt contribution from TriNet. These assets
are reflected in other assets on the consolidated balance sheet of TriNet.
On July 17, 1999, TMOC collected a $750,000 fee pursuant to an agreement by
TMOC to amend its Partnership Agreement dated December 4, 1998 with G. Accion.
Under the agreement, G. Accion was allowed to enter a comprehensive funding
arrangement with another party and TMOC relinquished certain governance rights
it had with G. Accion. TriNet's income from its investment in TMOC is recorded
in joint venture income on the consolidated statement of operations. For the
nine months ended September 30, 1999, TriNet has earned joint venture income of
$608,000 from its investment in TMOC.
3. DEBT:
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
BALANCE AS OF
---------------------------- INTEREST RATE
SEPTEMBER 30, DECEMBER 31, AS OF SEPTEMBER 30, MATURITY
LOAN 1999 1998 1999 DATE
---- ------------- ------------ ------------------- ----------
<S> <C> <C> <C> <C>
Revolving Credit
Facility(1)................ $138,100 $188,900 LIBOR + 0.750% 05/31/2001
7.30% Notes due 2001......... 100,000 100,000 7.300% 05/15/2001
1994 Mortgage Loan........... 44,426 55,013 LIBOR + 1.000% 12/01/2004
7.95% Notes due 2006......... 50,000 50,000 7.950% 05/15/2006
7.70% Notes due 2017......... 100,000 100,000 7.700% 07/15/2017
6.75% Drs. Due 2013(2)....... 125,000 125,000 6.750% 03/01/2013
Other Mortgage Loans......... 29,080 29,726 6.000% - 11.375% (3)
-------- --------
586,606 648,639
Less debt discount........... (859) (919)
-------- --------
$585,747 $647,720
======== ========
</TABLE>
- ---------------
(1) As of November 12, 1999, the interest rate is LIBOR+1.55%. See Note 7,
"Unsecured Revolving Credit Facility Amendment" and "Credit Ratings."
(2) Subject to mandatory tender and remarketing on 3/1/2003. Initial coupon of
6.75% applies to first five year term only. See Note 7, "Dealer Remarketable
Securities."
(3) Other Mortgage Loans mature at various dates through 2010.
The 30-day LIBOR rate as of September 30, 1999, was 5.40%. Effective
October 1, 1995, the Company entered into an interest rate swap agreement which,
together with certain existing interest rate cap agreements, effectively fixes
the interest rate on $75.0 million of the Company's LIBOR-based borrowings at
5.58% plus the applicable margin. 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. At September 30, 1999, the swap
agreement, together with the cap agreements had a fair market value totaling
$4.0 million.
9
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table sets forth the components of interest expense for the
periods presented (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Interest incurred................................. $32,999 $29,286 $10,740 $11,914
Capitalized interest.............................. (1,442) (2,229) (380) (1,165)
Amortization of loan costs, interest rate
protection agreements, and loan discounts....... 1,464 1,695 490 434
------- ------- ------- -------
$33,021 $28,752 $10,850 $11,183
======= ======= ======= =======
</TABLE>
Cash interest paid for the nine months and three months ended September 30,
1999 and 1998 was $34.2 million and $27.1 million, and $11.1 million and $11.8
million, respectively.
4. STOCKHOLDERS' EQUITY:
On September 15, June 15 and March 15, 1999, the Company paid a quarterly
dividend of $0.5859 per cumulative Series A preferred share, $0.5750 per
cumulative Series B preferred share and $0.50 per cumulative Series C preferred
share to preferred shareholders of record on August 31, June 1 and February 26,
1999, respectively.
On September 10, 1999, the Company declared a distribution of $0.65 per
common share, payable October 15, 1999, to common shareholders of record as of
September 30, 1999.
On May 27, 1999, the Company declared a distribution of $0.65 per common
share, payable July 15, 1999, to common shareholders of record as of June 30,
1999.
On February 25, 1999, the Company declared a distribution of $0.65 per
common share, payable April 15, 1999, to common shareholders of record as of
March 31, 1999.
5. COMMITMENTS AND CONTINGENCIES:
The Company is subject to option agreements with four existing tenants
which could require the Company to fund tenant improvements on approximately
25,000 square feet and to construct approximately 541,000 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.
At September 30, 1999, TriNet had an obligation to loan TN-CP Venture One
("TN-CP") up to $40.4 million. TN-CP, a Texas joint venture between TriNet and
Sierra Office Venture Three, Ltd. ("SOVT"), was formed to provide a take-out
commitment to SOVT to acquire Sierra III, a build-to-suit office building,
located in Irving, Texas, which will be 100% leased under a 10-year net lease
arrangement upon completion in January 2000. TriNet's obligation to make such
loan is conditioned upon TN-CP acquiring Sierra III from SOVT. TN-CP's
obligation to purchase Sierra III from SOVT is conditioned upon satisfaction of
certain requirements related to the completion of the project and the tenant's
occupancy of the building. TriNet is the Managing Partner of TN-CP and has an
option to acquire Sierra III from TN-CP, at its sole election, based upon a
pre-determined formula.
10
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. EARNINGS PER SHARE:
The following table presents the basic and diluted earnings per share
calculations for the nine months ended (dollars in thousands, except per share
amounts):
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
NUMERATOR
Basic:
Income before cumulative effect and extraordinary
item.................................................. $ 64,037 $ 53,186 $23,313 $15,532
Cumulative effect of a change in accounting principle... (1,810) -- -- --
Extraordinary loss from early extinguishment of debt.... (665) (1,272) (665) --
-------- -------- ------- -------
Net income.............................................. 61,562 51,914 22,648 15,532
Preferred dividend requirement.......................... (11,758) (11,758) (3,919) (3,919)
-------- -------- ------- -------
Earnings available to common shares..................... 49,804 40,156 18,729 11,613
-------- -------- ------- -------
Diluted:
Earnings available to common shares..................... 49,804 40,156 18,729 11,613
Equity earnings in joint ventures attributable to
convertible partnership units......................... 88 -- 3 --
-------- -------- ------- -------
Earnings available to common shares, as adjusted........ $ 49,892 $ 40,156 $18,732 $11,613
======== ======== ======= =======
DENOMINATOR
Basic:
Weighted average common shares outstanding.............. 24,967 24,224 25,067 24,872
======== ======== ======= =======
Diluted:
Weighted average common shares outstanding.............. 24,967 24,224 25,067 24,872
Shares issuable from assumed conversion of common stock
options............................................... 11 171 3 83
Shares issuable in exchange for land.................... 69 -- 69 --
Partnership units as if converted....................... 370 -- 629 --
-------- -------- ------- -------
Weighted average common shares outstanding, as
adjusted.............................................. 25,417 24,395 25,768 24,955
======== ======== ======= =======
EARNINGS AVAILABLE PER COMMON SHARE -- BASIC:
Income available before extraordinary items............... $ 2.09 $ 1.71 $ 0.77 $ 0.47
Extraordinary items....................................... (0.10) (0.05) (0.02) --
-------- -------- ------- -------
Earnings available........................................ $ 1.99 $ 1.66 $ 0.75 $ 0.47
======== ======== ======= =======
EARNINGS AVAILABLE PER COMMON SHARE -- DILUTED:
Income available before extraordinary items............... $ 2.06 $ 1.70 $ 0.75 $ 0.47
Extraordinary items....................................... (0.10) (0.05) (0.02) --
-------- -------- ------- -------
Earnings available........................................ $ 1.96 $ 1.65 $ 0.73 $ 0.47
======== ======== ======= =======
</TABLE>
For the nine months ended September 30, 1999 and 1998, there were 258,894
and 634,496 weighted average partnership units outstanding, on an as converted
basis, respectively, that were not assumed converted into common shares since
they were not dilutive to earnings per share. For the three months ended
September 30, 1999 and 1998, there were 856,066 and 1,029,086 weighted average
partnership units outstanding, on an as converted basis, respectively, that were
not assumed converted into common shares since they were not dilutive to
earnings per share. These securities may become dilutive to earnings per share
in subsequent periods.
11
<PAGE> 12
TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. SUBSEQUENT EVENTS:
Property Disposition:
As part of its announced property disposition plan, on October 22, 1999,
TriNet recognized a $527,000 gain on the $5.0 million sale of a King of Prussia,
Pennsylvania office property. TriNet originally acquired the 118,800 square foot
building, which is leased to Lockheed Martin Corporation, in June 1996 for $4.7
million. The net proceeds were used to pay down the Company's $350 million
unsecured revolving credit facility.
Unsecured Revolving Credit Facility Amendment:
On November 5, 1999, TriNet amended its $350 million unsecured revolving
credit facility ("Facility"). This amendment, entered into with a group of 13
banks led by Bank of America, N.A., will continue to provide the Company with
the Facility after the Merger with Starwood Financial. The Facility matures on
May 31, 2001 and is subject to a one year extension option. Borrowing rates
under the Facility are based on the Company's credit ratings. Under the
amendment, the applicable borrowing spreads were increased to reflect current
market rates.
In connection with this amendment, TriNet paid an amendment fee of 30 basis
points on the $350 million of commitments. In addition, the Company established
more restrictive dividend payout limitations, limitations on inter-company debt,
and limitations on transfer of assets from TriNet to Starwood Financial, its
parent company.
Credit Ratings:
Following its merger into Starwood Financial, TriNet's senior debt was
downgraded by Fitch IBCA ("Fitch"), Moody's Investors Service ("Moody's") and
Standard and Poors ("S&P"). Fitch reduced its rating from BBB+ to BBB-. Moody's
lowered its ratings on TriNet's senior unsecured debt to Ba2 from Baa2. S&P
lowered its ratings from BBB- to BB. The LIBOR-based borrowing cost under the
Facility that applies to TriNet based on these current credit ratings is LIBOR
plus 1.55% and the applicable facility fee is 0.20% per annum.
Dealer Remarketable Securities:
On February 24, 1998, the Company sold to the public $125 million of 6.75%
Dealer remarketable securities (the "Drs.") due March 1, 2013, at a price of
99.706% of the principal amount. Upon certain terms and conditions, the Drs. are
subject to a mandatory tender on March 1, 2003, to either J.P. Morgan
Securities, Inc. (the "Dealer") or TriNet. If tendered to the Dealer, the Drs.
must be remarketed by the Dealer.
In conjunction with this issuance, the Dealer paid the Company a premium in
the amount of $3.3 million for the right to require the mandatory tender of all
outstanding Drs. at March 1, 2003. Additionally, the Company paid $3.2 million
in settlement of its interest rate hedge agreements in conjunction with this
debt issuance. The premium paid by the Dealer and the settlement of hedge
agreements are being amortized over the fifteen year term of the Drs.
Under the terms with the Dealer, upon a merger or transfer of all or,
substantially all, of TriNet's assets to another entity, the Dealer has the
right to require a termination of the option and a settlement in the amount of
the fair market value of the option if the credit rating of TriNet materially
declines. The Dealer has expressed its intention to exercise its right under the
agreement. As a result of a termination the Dealer would no longer have the
right to tender and remarket the bonds in March 1, 2003. However, the Company is
considering entering into an agreement with another dealer to assume the option.
If settled, the Company currently estimates a payment of $3.6 million.
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<PAGE> 13
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 the fiscal year ended
December 31, 1998 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.
OVERVIEW
TriNet, a wholly-owned subsidiary of Starwood Financial, specializes in the
net leasing of corporate office and warehouse distribution facilities. TriNet
provides investment capital to major corporations and real estate owners
nationwide by structuring purchase/leaseback transactions and acquiring
properties subject to existing long-term leases to creditworthy office and
industrial tenants. TriNet uses its real estate and credit underwriting
expertise to structure transactions that seek to generate consistent,
predictable cash flow growth, income growth and substantial residual value. As
of September 30, 1999, TriNet's portfolio consisted of 143 properties, which
comprised more than 18.7 million rentable square feet in 25 states.
Recent highlights include:
Merger Transaction
As more fully described in Note 1 to the Company's Consolidated Financial
Statements, on November 3, 1999, consistent with previously announced terms, the
stockholders of TriNet and the shareholders of Starwood Financial Trust,
approved the Merger of TriNet with a wholly-owned subsidiary of Starwood
Financial Inc.
The Merger was consummated on November 4, 1999. Starwood Financial plans to
continue to qualify as a REIT for federal income tax purposes. Starwood
Financial is the largest publicly traded finance company in the United States
focused exclusively on delivering structured financing solutions to the
commercial real estate industry.
In the Merger, each issued and outstanding share of common stock of TriNet
was converted into 1.15 shares of common stock of Starwood Financial. Each
issued and outstanding share of Series A, Series B and Series C Cumulative
Redeemable Preferred Stock of TriNet was converted into a share of Series B,
Series C, and Series D (respectively) Cumulative Redeemable Preferred Stock of
Starwood Financial. The preferred stock issued to the former TriNet preferred
stockholders has substantially the same terms as the TriNet preferred stock,
except that the new Series B, C and D preferred stock have additional voting
rights not associated with the TriNet preferred stock.
As a result of the Merger and related transactions, Starwood Financial had
approximately 87 million shares of common stock outstanding, and TriNet's former
stockholders own approximately 33% of the total (before taking into account the
exercise of outstanding stock options, warrants and other outstanding securities
that are convertible into, or exchangable for, the common equity of Starwood
Financial).
The Merger has been structured as a tax-free reorganization under federal
tax law and will be accounted for as a purchase of TriNet by Starwood Financial.
The excess of the purchase price paid by Starwood Financial, over the net book
value of TriNet, will be reflected as a purchase accounting adjustment and
allocated among the assets and liabilities of TriNet in the Company's separate
financial statements as of the merger date. For additional information regarding
the Merger please read Starwood Financial's joint proxy statement and prospectus
dated September 21, 1999 and its current report on Form 8-K dated November 3,
1999.
TriNet and Starwood Financial are working on the integration of the two
organizations. In this regard, both companies have: (i) established integration
task forces comprised of senior executives from TriNet and Starwood Financial in
each of six key disciplines; (ii) created a unified organizational chart and
preliminary roles and responsibilities for key management personnel; and (iii)
begun coordinating their investment, financing and asset management activities.
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<PAGE> 14
Acquisitions and Dispositions
- During September 1999, TriNet acquired a 44,600 square foot property in
Concord, Massachusetts for a purchase price of $5.4 million. TriNet
purchased the property and simultaneously leased it back to the tenant
under a seven year lease.
- During the first quarter of 1999, TriNet structured a $15.9 million
convertible mortgage on a 109,043 square foot office building in
Richardson, Texas. TriNet is earning an 11% initial yield on the mortgage
and has the option to acquire the building by funding an additional $0.5
million.
- As part of its asset disposition program, announced in October 1998,
TriNet has completed the sale of 13 properties from December 18, 1998
through October 22, 1999, with gross proceeds totaling $97.3 million.
Leasing Activity
During the third quarter of 1999, TriNet executed 11 new leases, lease
extensions and/or early lease renewals on 924,851 square feet of office and
industrial space. The larger leasing transactions included:
- A five-year lease signed by a new tenant, Shaw's Supermarkets, on a
104,723 square foot Lakeville, Massachusetts, warehouse/distribution
facility. The new lease became effective August 1, 1999.
- A three and a half-year lease extension signed by Sears Logistics on a
398,471 square foot Columbus, Ohio, warehouse/distribution property. The
new lease became effective September 1, 1999.
- The execution of five-year lease extensions by Sybase, Inc. on two
Concord, Massachusetts, office buildings comprising 122,312 square feet.
The two extended leases now expire in June 2006, at the same time as a
third property leased to Sybase, which TriNet recently acquired through a
purchase/leaseback transaction.
Development Lease-Up
Subsequent to the third quarter, CTCI, TriNet's development joint venture
with Menlo Equities, L.L.C., executed leases or signed letters of intent on the
five office buildings in phase one of its Corporate Technology Centre office
park in San Jose, California. The five, Class A office buildings, comprising
331,950 square feet, will each be 100% leased to a single tenant under a
long-term lease. Tenants include Enterprise Network Systems, Inc., Redback
Network Inc., Digital Island, Inc., and the California Department of
Transportation.
Lease Termination
TriNet received a $7.2 million lease termination fee from Hitachi PC
Corporation, the sole tenant of a 102,240 square foot research and development
property located in Milpitas, California, in exchange for granting the tenant's
request to terminate its lease effective September 1, 1999. TriNet recorded the
fee, net of a $431,000 deferred rent receivable which had been accrued in
accordance with Statement of Financial Accounting Standards No. 13, into other
income during the third quarter. The fee negotiated by TriNet represents
approximately 91% of the tenant's contractual lease obligations through 2002.
The property is now vacant, but TriNet has recently received a signed
letter of intent from a potential new tenant. As required by Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long Lived
Assets and for Long Lived Assets to Be Disposed Of," TriNet recognized an
impairment on the property based on estimated down-time between leases,
estimated costs of re-tenanting and anticipated future rents. This $3.4 million
impairment reserve is a non-cash charge to earnings in the third quarter.
14
<PAGE> 15
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED SEPTEMBER 30, 1998
Rent Revenues
Rental revenues for the first nine months of 1999 increased by $4.3
million, or 3.8%, to $116.6 million, as compared to $112.3 million for the same
period in 1998. The increase was primarily attributable to 1998 and 1999
acquisitions, which generated an increase in revenues of $11.3 million, offset
by a decrease in revenues of approximately $6.4 million from property
dispositions during 1998 and 1999.
Joint Venture Income
For the nine months ended September 30, 1999 joint venture income was $2.4
million, an increase of $600,000 over the 1998 amount of $1.8 million. The
Milpitas joint venture, formed in the second half of 1998, increased joint
venture income by $1.6 million during the first nine months of 1999 as compared
to the same period of 1998. Additionally, TriNet recognized $608,000 of joint
venture income from TMOC, a taxable decontrolled subsidiary of TriNet. The
$608,000 of joint venture income is primarily attributable to a one-time fee
earned in connection with amending the Partnership Agreement with TMOC's
partner, G. Accion, a Mexican real estate company.
These increases were offset by a decrease in joint venture income of
approximately $1.1 million from Poydras and a $534,000 loss from the CTC II
joint venture, which was not acquired until the third quarter of 1998. The
decrease in Poydras joint venture income is from interest expense on the debt of
the venture which was outstanding for a full nine month period during 1999,
compared to one quarter during 1998. TriNet earns interest income, advisory fees
and management fees from certain joint ventures in addition to its income from
equity investments in joint ventures (see "Interest Income," "Management Fees"
and "Other Income" below).
Property Management Fees
Management fees increased by $1.0 million for the nine months ended
September 30, 1999 to $2.0 million from $1.0 million for the same period in
1998. The increase relates primarily to the recognition of fees from the
management of the additional 24 properties acquired during 1998, 15 of which
were acquired through joint ventures.
Interest Income
Interest income increased to $5.0 million for the nine months ended
September 30, 1999 from $1.6 million for the same period in 1998. Interest
income consists of $4.0 million of interest income earned on mezzanine loan
investments made to the CTC II and Poydras joint ventures, $171,000 of interest
earned on the Company's investment in G. Accion, a Mexican real estate company,
and $735,000 of interest earned on cash balances during 1999.
Other Income
Other income for the nine months ended September 30, 1999 totaled $9.0
million and consisted primarily of a $6.8 million fee from the termination of a
lease from Hitachi PC Corporation, the sole tenant of a property in Milpitas,
California, a $250,000 non-compete fee on a property sold in 1998, amortization
of $807,000 in connection with the Newcourt lease restructuring, a $295,000
credit enhancement fee and $385,000 of dividend income.
Other income also includes $385,000 received in connection with the default
and bankruptcy of one of its tenants, MJ Designs. TriNet received approximately
$3.0 million of collateral, which was primarily applied to uncollected rent and
operating expenses for the period of January 1, 1999 through the lease
termination. The $385,000 represents the remaining excess collateral after the
payment of rent and operating expenses for the period. As of June 18, 1999, the
tenant no longer occupied the property. TriNet is currently marketing the
15
<PAGE> 16
property for lease. Additionally the company currently has claims pending within
the bankruptcy court representing back rent, operating expenses and other
damages arising from the tenant's default.
Other income of $2.1 million for the nine months ended September 30, 1998,
consisted primarily of fees from the Company's advisory services provided in
connection with the formation of the Poydras and CTC I joint ventures.
Property Operating Costs
For the nine months ended September 30, 1999, property-operating costs
increased $1.3 million, or 27.1%, to $6.1 million from $4.8 million for the same
period of 1998. The increase in property operating costs is due to the costs
associated with the net growth in the Company's real estate portfolio during
1998.
General and Administrative
For the nine months ended September 30, 1999, general and administrative
expenses decreased by $634,000, or 6.3%, to $9.0 million compared to $9.6
million for the same period in 1998. This decrease is primarily from slower
growth in the Company's portfolio during 1999, when compared to 1998, and as a
result of savings from the Company's restructuring efforts during the third
quarter of 1998. General and administrative expenses as a percentage of average
joint venture investments and undepreciated real estate were 0.69% for the first
nine months of 1999 and 0.60% for the same period in 1998.
Interest Expense
Interest expense increased by $4.3 million, or 15.0%, to $33.0 million for
the nine months ended September 30, 1999, from $28.7 million for the same period
in 1998. This increase is due to a greater weighted average debt balance of
$621.6 million for the nine months ended September 30, 1999, compared to $540.4
million for the same period of 1998. The increase in the debt balance is
primarily attributable to the higher average balance outstanding on the
Company's $350 million revolving unsecured credit facility during 1999. Interest
expense was reduced by $1.4 million of capitalized interest costs associated
with investments in certain development projects held in joint venture
partnerships for the nine months ended September 30, 1999. The Company's
weighted average interest rate decreased from 7.12% for the first nine months of
1998 to 6.99% for the first nine months of 1999.
Depreciation and Amortization
Depreciation and amortization increased by 4.2% for the nine months ended
September 30, 1999, when compared to the first nine months of 1998, as result of
a full nine months of depreciation in 1999 on 1998 acquisitions, offset by the
1998 and 1999 property dispositions.
Provision for Asset Impairment
In connection with the termination of a lease from Hitachi PC Corporation,
the sole tenant of a property located in Milpitas, California, the Company
recognized a $3.4 million provision for asset impairment in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for Impairment
of Long Lived Assets and for Long Lived Assets to Be Disposed Of" ("SFAS 121").
SFAS 121 requires assets to be recorded at the lower of their carrying value or
fair value when circumstances indicate that the carrying value of an asset may
not be recoverable.
Minority Interest
Minority interest expense of $122,000 for the first nine months of 1999
represents the limited partners' share of net income from TriNet Property
Partners, L.P. ("TriNet Property Partners"), a partnership formed in December
1997. TriNet has a 96.5% interest in TriNet Property Partners and is the sole
general partner. TriNet Property Partners purchased nine office/R&D properties
in December 1997 and five additional office/ R&D properties in the first nine
months of 1998 from a group of private partnerships.
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<PAGE> 17
Gain on Sale of Real Estate
On March 12, 1999, TriNet sold an 82,600 square foot office building
located in Allen, Texas for $11.2 million and recognized a gain of $1.2 million
on the transaction. TriNet also disposed of its last retail property in the
first quarter of 1999 for $3.5 million. The retail property was classified as
held for sale at December 31, 1998, and a provision for asset held for sale of
$5.7 million was recognized in 1998. During the third quarter three properties
were sold. A $1.3 million gain was recognized on the $31.5 million sale of a
270,000 square foot office building, leased to Olympus America, located in Long
Island, New York. A $462,000 loss was realized on the $8.8 million sale of two
industrial properties, leased to GATX Logistics, Inc., located in the greater
Syracuse, New York area.
Extraordinary Loss from Early Extinguishment of Debt
The proceeds from the disposition of the two industrial properties, leased
to GATX Logistics, Inc., along with additional cash reserves were used to
partially repay $10.6 million of the 1994 mortgage loan. In connection with this
partial paydown, the Company incurred certain prepayment penalties and wrote off
a proportionate amount of unamortized loan costs which resulted in an
extraordinary charge of $665,000.
Cumulative Effect of a Change in Accounting Principle
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 requires all costs of start-up activities, including
organization costs, to be charged to operations as incurred for fiscal years
beginning after December 15, 1998. The initial application of SOP 98-5 requires
that prior years' unamortized start-up costs be charged to income as a
cumulative effect of a change in accounting principle. Accordingly, the Company
reported a $1.8 million charge to net income during the first quarter of 1999 as
a cumulative effect of a change in accounting principle.
THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE MONTHS ENDED SEPTEMBER 30, 1998
Rental Revenues
Rental revenues for the three months ended September 30, 1999 decreased by
$2.3 million or 5.6% compared to the same period of 1998. The decrease in rental
revenue is primarily the result of the Company's dispositions subsequent to
September 30, 1998, which accounted for a $2.8 million decrease in rental
revenue during the third quarter of 1999. Additionally rental revenue decreased
$700,000 from the vacancy of the building previously occupied by MJ Designs.
This decrease in rental revenue is offset by an increase of approximately $1.2
million from properties acquired during 1998 and 1999.
Joint Venture Income
For the three months ended September 30, 1999, joint venture income was
$935,000 as compared to $318,000 for the same period in 1998. The Milpitas joint
venture, formed in the second half of 1998, increased joint venture income by
$423,000 during the three months ended September 30, 1999 as compared to the
same period of 1998. Joint venture income attributable to the Sunnyvale joint
venture increased $12,000 in 1999 compared to the same period in 1998.
Additionally, TriNet recognized $608,000 of joint venture income from TMOC, a
taxable decontrolled subsidiary of TriNet. The $608,000 of joint venture income
is primarily attributable to a one time fee earned in connection with amending
the Partnership Agreement with TMOC's partner, G. Accion, a Mexican real estate
company.
These increases were offset by a decrease in joint venture income of
approximately $218,000 from Poydras and a $132,000 loss from the CTC II joint
venture, which was not acquired until the third quarter of 1998. TriNet earns
interest income, advisory fees and management fees from certain joint ventures
in addition to its income from equity investments in joint ventures (see
"Interest Income," "Management Fees" and "Other Income" below).
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<PAGE> 18
Property Management Fees
Management fee income increased by $106,000 from $429,000 in the third
quarter of 1998 to $535,000 in the same period this year. TriNet Property
Management, Inc., a subsidiary of the Company, realized an increase in
management fee income as a result of an increase in property management
contracts from the 1998 acquisitions.
Interest Income
Interest income increased from $977,000 for the quarter ended September 30,
1998 to $1.7 million for the quarter ended September 30, 1999. For the quarter
ended September 30, 1999 interest income consists primarily of the $1.3 million
of interest income earned from the mezzanine loan investments on Poydras and CTC
II made by TriNet, $57,000 of interest earned on the Company's investment in G.
Accion, a Mexican real estate company, and $314,000 of interest earned on cash
balances during the third quarter of 1999.
Other Income
Other income increased $6.2 million, from $1.2 million for the three months
ended September 30, 1998, to $7.4 million for the three months ended September
30, 1999. This increase is the result of a $6.8 million fee from the termination
of a lease from Hitachi PC Corporation, the sole tenant of a property in
Milpitas, California, $125,000 of dividend income, amortization of $299,000 in
connection with the Newcourt lease restructuring (see "Overview -- Leasing
Activity"), and a $98,000 credit enhancement fee.
Property Operating Costs
Property operating costs increased to $2.0 million for the three months
ended September 30, 1999 from $1.9 million for the three months ended September
30, 1998. The increase in property operating costs is primarily from the
incremental costs associated with the growth of the Company's real estate
portfolio during 1998, offset by the property dispositions.
General and Administrative
For the third quarter of 1999, general and administrative expenses
decreased 37.0% to $2.7 million, as compared to the same period in 1998. This
decrease is primarily from slower growth in the Company's portfolio during 1999,
when compared to 1998, and as a result of savings from the Company's
restructuring efforts during the third quarter of 1998.
Interest Expense
Interest expense decreased 2.7% to $10.9 million for the three months ended
September 30, 1999 as compared to $11.2 million for the corresponding period of
1998. This decrease is attributable to the weighted average debt balance
decreasing from $656.6 million for the three months ended September 30, 1998 to
$590.8 million for the corresponding period of 1999. The decrease in the debt
balance is primarily attributable to the decrease in the outstanding balance on
the Company's $350 million revolving unsecured credit facility from $257.9
million at September 30, 1998 to $138.1 million at September 30, 1999. Interest
expense for the three months ending September 30, 1999 was reduced by $381,000
of capitalized interest costs associated with investments in certain development
projects held in joint venture partnerships.
Depreciation and Amortization
Depreciation and amortization decreased by 4.0% for the three months ended
September 30, 1999 when compared to the same period in 1998 as a result of a
decrease in the Company's asset base.
Provision for Asset Impairment
In connection with the termination of a lease from Hitachi PC Corporation,
the sole tenant of a property located in Milpitas, California, the Company
recognized a $3.4 million provision for asset impairment in
18
<PAGE> 19
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for Impairment of Long Lived Assets and for Long Lived Assets to Be Disposed Of"
("SFAS 121"). SFAS 121 requires assets to be recorded at the lower of their
carrying value or fair value when circumstances indicate that the carrying value
of an asset may not be recoverable.
Gain on Sale of Real Estate
As part of its announced property disposition plan, during the third
quarter a $1.3 million gain was recognized on the $31.5 million sale of a
270,000 square foot office building, leased to Olympus America, located in Long
Island, New York and a $462,000 loss was realized on the $8.8 million sale of
two industrial properties, leased to GATX Logistics, Inc., located in the
greater Syracuse, New York area.
Extraordinary Loss from Early Extinguishment of Debt
The proceeds from the disposition of the two industrial properties, leased
to GATX Logistics, Inc., along with additional cash reserves were used to
partially repay $10.6 million of the 1994 mortgage loan. In connection with this
partial paydown, the Company incurred certain prepayment penalties and wrote off
a proportionate amount of unamortized loan costs which resulted in an
extraordinary charge of $665,000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities decreased by $900,000 to $75.4
million for the nine months ended September 30, 1999, compared to $76.3 million
for the same period in 1998. The decrease was primarily a combination of higher
net income, from increased rents and the Hitachi PC Corporation lease
termination fee, and increased distributions from joint ventures offset by a
decrease in other liabilities, during the first nine months of 1999 as compared
to the first nine months of 1998.
Net cash provided by investing activities was $22.6 million for the nine
months ended September 30, 1999, compared to net cash used in investing
activities of $410.8 million in the first nine months of 1998. The change was
from a reduction in investments in acquisitions and joint ventures together with
an increase in dispositions during the first nine months of 1999 compared to the
same period in 1998. The Company incurred $5.8 million of capital expenditures
in the first nine months of 1999, primarily for improvements on existing
properties.
Net cash used in financing activities was $108.8 million for the nine
months ended September 30, 1999, which consisted primarily of a net decrease in
the revolving unsecured credit facility of $50.8 million and dividends on common
and preferred stock totaling $60.4 million. For the nine months ended September
30, 1998, net cash provided by financing activities was $340.2 million,
primarily the result of proceeds from an $89.0 million common stock offering in
January, 1998, a $30.0 million common stock offering in March, 1998, a $24.0
million common stock offering in April, 1998, the issuance of $125.0 million of
Dealer remarketable securities in February 1998 and an increase in the revolving
unsecured credit facility of $139.6 million.
On November 5, 1999, TriNet amended its current $350 million unsecured
revolving credit facility ("Facility"). This amendment, entered into with a
group of 13 banks led by Bank of America, N.A., will continue to provide the
Company with the Facility after the Merger with Starwood Financial. The Facility
matures on May 1, 2001 and is subject to a one year extension option. Borrowing
rates under the Facility are based on the Company's credit ratings. Under the
amendment, the applicable borrowing spreads were increased to reflect current
market rates.
In connection with this amendment, TriNet paid an amendment fee of 30 basis
points on the $350 million of commitments. In addition, the Company established
more restrictive dividend payout limitations, limitations on inter-company debt,
and limitations on transfer of assets from TriNet to Starwood Financial, its
parent company.
The Facility has a $225 million competitive bid features, which allows
banks in the syndicate group to bid on certain borrowings at more competitive
rates. All of the available commitment under the facility may be borrowed for
general corporate and working capital needs, as well as for the acquisition of
real estate. The
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<PAGE> 20
Facility requires interest only payments until maturity, at which time
outstanding borrowings are due and payable. At September 30, 1999, the Company
had $211.9 million available under the Facility.
Following its merger into Starwood Financial Inc., TriNet's senior
unsecured debt was downgraded by Fitch IBCA ("Fitch"), Moody's Investors Service
("Moody's") and Standard and Poors ("S&P"). Fitch reduced its rating from BBB+
to BBB-, Moody's lowered its ratings on TriNet's senior unsecured debt to Ba2
from Baa2. S&P lowered its ratings from BBB- to BB. The LIBOR-based borrowing
cost under the Facility that applies to TriNet based on these current credit
ratings is LIBOR plus 1.55% and the applicable facility fee is 0.20% per annum.
Outstanding debt as of September 30, 1999 consisted of mortgage notes
totaling $73.5 million, unsecured long-term notes of $375.0 million and an
outstanding balance on the revolving unsecured credit facility of $138.1
million. Future maturities of long-term debt and mortgages from September 30,
1999 through 2003 and thereafter are presented below (in thousands):
<TABLE>
<S> <C>
Remainder of
1999...................................................... $ 224
2000...................................................... 4,683
2001...................................................... 238,954
2002...................................................... 15,135
2003...................................................... 568
Thereafter(1)............................................... 327,042
---------
Total....................................................... 586,606
=========
Short term.................................................. (138,100)
=========
Long term................................................... $ 448,506
=========
</TABLE>
- ---------------
(1) On February 24, 1998, the Company sold to the public $125 million of 6.75%
Drs. Notes. Upon certain terms and conditions, the Drs. are subject to
mandatory tender on March 1, 2003, to either the Dealer or TriNet. If
tendered to the Dealer, the Drs. must be remarketed by the Dealer. See Note
7 "Dealer Remarketable Securities."
TriNet considers its liquidity and ability to generate cash from operations
and financings to be adequate and expects its liquidity and capital raising
ability to continue to be adequate to meet the Company's acquisition,
development, operating and debt service requirements.
The Company has on file with the Securities and Exchange Commission two
Form S-3 Registration Statements. One registration statement authorizes the
issuance of debt securities of the Company with a remaining availability of
$232.3 million. A second 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 issued will depend on acquisitions, asset
sales, the Company's senior unsecured debt and the general interest rate
environment.
In managing the Company's long-term liquidity, consideration is given to
the weighted average maturity of the Company's fixed-rate debt instruments and
the ratio of debt to book capitalization. As of September 30, 1999 and 1998, the
Company's weighted average fixed-rate debt maturity was 6.9 years and 7.7 years,
respectively, the ratio of total debt to total market capitalization was 39.9%
and 41.8%, respectively and the ratio of debt to book capitalization was 42.0%
and 46.9% respectively.
IMPACT OF YEAR 2000
Forward Looking Information
The statements in the following section include Year 2000 readiness
disclosure within the meaning of the Year 2000 Information and Readiness
Disclosure Act. The Company intends such 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-
20
<PAGE> 21
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.
Although the Company believes that the expectations reflected in such
forward-looking statements are based on reasonable assumptions, the Company's
actual costs, progress and expenses with respect to its plan to address Year
2000 issues could differ materially from those set forth in the forward-looking
statements. Factors which could have a material adverse effect on the Company's
results and progress include, but are not limited to, changes in the expenses of
or delays in: the identification and upgrade or replacement by the Company of
computer systems that do not relate to information technology but include
embedded technology; and the Year 2000 compliance of vendors (including vendors
of the Company's computer information systems) or third-party service providers
(including the Company's primary bank and payroll processor). These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements.
Introduction
The term "Year 2000 issue" is a general term used to describe various
problems that may result from the improper processing by computer systems of
dates after 1999. These problems could result in a system failure or
miscalculations causing disruptions of operations. The term "Year 2000
compliant" is used in this discussion to mean that the system or device in
question will perform its essential functions in the Year 2000 without
significant operational problems.
The Company's efforts to address its Year 2000 issues are focused in the
following three areas: (i) reviewing and taking any necessary steps to attempt
to correct the Company's computer information systems (i.e., software
applications and hardware platforms), (ii) evaluating and making any necessary
modifications to other computer systems that do not relate to information
technology but include embedded technology at its properties, such as security,
heating, ventilation, and air conditioning, elevator, fire and safety systems,
and (iii) communicating with certain significant third-party service providers
to determine whether there will be any interruption in their systems that could
affect the Company.
The Company's Year 2000 compliance program is substantially complete. While
the Company anticipates that the program will be successful in all material
respects, the Company intends to closely monitor its Year 2000 compliance and is
developing the contingency plans described under "Risks Presented by Year 2000
Issues and the Company's Contingency Plan."
The Company's State of Readiness
Information Technology Systems. The Company has completed an inventory of
all information technology systems and has contacted vendors to determine
whether such systems are Year 2000 compliant. Based on manufacturers'
representations, the Company has determined that its primary network operating
system, Novell Netware 5, its newly acquired property management and accounting
software and all of its desktop personal computers are Year 2000 compliant.
Embedded Systems. The Company has reviewed all of its properties' operating
leases to determine whether the tenant or the Company has the responsibility to
address Year 2000 issues. For those properties with respect to which the Company
is responsible for Year 2000 compliance, independent consultants have performed
on-site inventories of the embedded systems (e.g., security, heating,
ventilation and air conditioning, fire and elevator systems) and have contacted
the various manufacturers to determine whether the embedded systems are Year
2000 compliant. Based on the inventory and responses from manufacturers, the
Company identified embedded systems that were not Year 2000 compliant, and were
in need of replacement or repair. For these non-compliant systems, all
remediation and testing has been completed. With respect to those properties for
which the Company is not responsible for Year 2000 compliance, written notices
have been sent to tenants informing them of their obligations under the leases.
21
<PAGE> 22
Third Party Relationships. The Company's has requested year 2000 compliance
certificates from all third party relationships that have a significant impact
on the Company's operations (e.g., transfer agent, financial institutions,
utility companies and landlords). To date all of these critical third party
relationships have responded with compliance certificates or written plans of
action that anticipate compliance by December 31, 1999. No assurance can be
given that such certifications will prove to be accurate.
Costs to Address the Company's Year 2000 Issues
As of September 30, 1999, the Company has paid $585,000 and has accrued an
additional $330,000 for Year 2000 costs since the inception of the program. The
Company expects that a substantial portion of these costs will be passed back to
tenants through recoveries of operating expense and that the remaining costs of
addressing the Year 2000 issues will be funded through operating cash flows.
Because the Company's Year 2000 assessment is ongoing and additional funds
may be required as a result of future findings, the Company's current accrual
amounts may increase as a result of unanticipated delays or preparedness issues.
While the Company's efforts to address its Year 2000 issues may involve
additional costs, the Company believes, based on available information, that
these costs will not have a material adverse effect on its business, financial
condition or results of operations.
Although the Company has concluded that many of its tenants are responsible
for certain Year 2000 compliance costs, there is a possibility that certain
tenants will not agree with such conclusions.
Risks Presented by Year 2000 Issues and the Company's Contingency Plan
At this time, the Company has not identified any specific business
functions that are likely to suffer material disruption as a result of Year
2000-related events. Due to the unique and pervasive nature of the Year 2000
issue, it is not possible to anticipate each of the wide variety of Year 2000
events, particularly outside of the Company, that might arise in a worst case
scenario which might have a material adverse impact on the Company's business,
financial condition and results of operations.
A reasonably likely worst case scenario is the failure of an energy
management system in a building owned or managed by TriNet. Such a failure could
adversely affect the environmental conditions of the occupied space, thus
creating discomfort and inconvenience to the tenants until the condition could
be manually corrected. Persistence of this problem for a long period of time
could result in an increase in operating costs for the building until the energy
management system is restored to proper operations.
The Company's contingency plan for dealing with disruptions as a result of
Year 2000 related events includes establishment of special rapid response
technology teams, scheduling availability of key personnel, establishing rapid
decision processes, and the deployment of teams consisting of regional facility
managers, building engineers and customer service personnel to deal with
problems at affected properties.
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 FFO 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
22
<PAGE> 23
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. The following summarizes FFO as of September 30,
1999 and 1998 (unaudited and in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Funds From Operations:
Income before gain on sale of real
estate, extraordinary item and
cumulative effect....................... $ 62,094 $ 52,071 $22,523 $15,532
Real estate depreciation.............. 20,911 20,260 6,925 7,239
Joint venture depreciation............ 2,534 1,292 851 585
Provision for asset impairment........ 3,400 -- 3,400 --
Special charge........................ -- 2,990 -- 2,990
Preferred dividend requirement........ (11,758) (11,758) (3,919) (3,919)
-------- -------- ------- -------
Total Funds From Operations:
Basic.............................. $ 77,181 $ 64,855 $29,780 $22,427
======== ======== ======= =======
Diluted............................ $ 80,424 $ 64,855 $31,045 $22,427
======== ======== ======= =======
</TABLE>
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, the performance and financial condition of borrowers and tenants,
the actions of the Company's competitors and the Company's ability to respond to
those actions, the cost of Company's capital (which depends in part upon the
Company's portfolio quality, ratings, prospects, outlook and general market
conditions), 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.
23
<PAGE> 24
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
Pursuant to the Merger, the Company's stockholders exchanged all of the
Company's capital stock in exchange for shares of Starwood Financial. All shares
of the Company's capital stock were subsequently cancelled and the Company
issued 100 shares of Common Stock to Starwood Financial, the Company's sole
shareholder.
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
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 First Amendment to the Agreement and Plan of Merger, dated
as of September 15, 1999, by and between Starwood Financial
Trust, ST Merger Sub, Inc. and TriNet Corporate Realty
Trust, Inc. (incorporated by reference to exhibit 2.4 of
Starwood Financial Inc.'s Form 8-K, dated November 3, 1999).
2.2 Second Amendment to the Agreement and Plan of Merger, dated
as of October , 1999, by and between Starwood Financial
Trust, ST Merger Sub, Inc. and TriNet Corporate Realty
Trust, Inc. (incorporated by reference to exhibit 2.5 of
Starwood Financial Inc.'s Form 8-K, dated November 3, 1999).
27.1 Financial Data Schedule.
</TABLE>
Reports on Form 8-K
None.
24
<PAGE> 25
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/ ELISA F. DiTOMMASO
------------------------------------
Elisa F. DiTommaso
Senior Vice President, Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: November 15, 1999
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,496
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,471,958
<DEPRECIATION> 89,718
<TOTAL-ASSETS> 1,458,682
<CURRENT-LIABILITIES> 0
<BONDS> 585,747
0
73
<COMMON> 251
<OTHER-SE> 861,476
<TOTAL-LIABILITY-AND-EQUITY> 1,458,682
<SALES> 116,649
<TOTAL-REVENUES> 135,070
<CGS> 0
<TOTAL-COSTS> 6,074
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,021
<INCOME-PRETAX> 52,279
<INCOME-TAX> 0
<INCOME-CONTINUING> 52,279
<DISCONTINUED> 0
<EXTRAORDINARY> (665)
<CHANGES> (1,810)
<NET-INCOME> 49,804
<EPS-BASIC> 1.99
<EPS-DILUTED> 1.96
</TABLE>
