<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-10150
------------------------
TRINET CORPORATE REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MARYLAND 94-3175659
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1114 AVENUE OF THE AMERICAS, 27TH FLOOR 10036
NEW YORK, NY 10036 (Zip Code)
(Address of principal executive
offices)
</TABLE>
(212) 930-9400
(Registrant's telephone number, including area code)
------------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant; (i) 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 (ii) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of November 10, 2000, there were 100 shares of common stock outstanding
("Common Stock").
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTIONS I (1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM
WITH REDUCED DISCLOSURE.
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<PAGE>
TRINET CORPORATE REALTY TRUST, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.)
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I. Consolidated Financial Information.......................... 3
Item 1. Financial Statements:
Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999........................................... 3
Consolidated Statements of Operations -- For the three- and
nine-month periods ended September 30, 2000 and 1999........ 4
Consolidated Statement of Changes in Shareholders' Equity --
For the nine-months ended September 30, 2000................ 5
Consolidated Statements of Cash Flows -- For the three- and
nine-month periods ended September 30, 2000 and 1999........ 6
Notes to Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of
Operations.................................................. 14
PART II. Other Information........................................... 19
Item 1. Legal Proceedings........................................... 19
Item 2. Changes in Securities and Use of Proceeds................... 19
Item 3. Defaults Upon Senior Securities............................. 19
Item 4. Submission of Matters to a Vote of Security Holders......... 19
Item 5. Other Information........................................... 19
Item 6. Exhibits and Reports on Form 8-K............................ 19
Signatures.................................................. 20
</TABLE>
2
<PAGE>
PART I--CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRINET CORPORATE REALTY TRUST, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate subject to operating leases, net................ $1,469,169 $1,529,804
Loans and other lending investments, net.................... 27,616 39,244
Cash and cash equivalents................................... 19,771 12,011
Restricted cash............................................. 6,477 6,697
Deferred operating lease income receivable.................. 7,986 1,147
Loan costs, net............................................. 2,564 3,022
Other assets, net........................................... 12,884 8,719
---------- ----------
Total assets.......................................... $1,546,467 $1,600,644
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities.... $ 41,004 $ 44,556
Debt obligations............................................ 602,488 691,591
---------- ----------
Total liabilities..................................... 643,492 736,147
Commitments and contingencies............................... -- --
Minority interest in consolidated entities.................. 2,565 2,565
Shareholders' equity:
Common stock, $0.01 par value, 100 shares authorized: 100
shares issued and outstanding at September 30, 2000 and
December 31, 1999......................................... -- --
Additional paid in capital.................................. 890,271 890,271
Retained earnings........................................... 50,239 11,655
Common stock of IStar Financial held in treasury (at
cost)..................................................... (40,100) (39,994)
---------- ----------
Total shareholders' equity............................ 900,410 861,932
---------- ----------
Total liabilities and shareholders' equity............ $1,546,467 $1,600,644
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
TRINET CORPORATE REALTY TRUST, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- ------------- -------- -------------
(PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Revenue:
Operating lease income......................... $41,142 $37,937 $124,571 $116,450
Interest income................................ 1,879 2,115 6,275 5,962
Joint venture income........................... 1,463 935 4,084 2,450
Other income................................... 1,791 7,120 2,175 8,236
------- ------- -------- --------
Total revenue.............................. 46,275 48,107 137,105 133,098
------- ------- -------- --------
Costs and expenses:
Interest expense............................... 13,133 10,850 39,916 33,021
Operating costs--corporate tenant lease
assets....................................... 3,284 1,505 9,569 4,102
Depreciation and amortization.................. 7,262 7,085 22,317 21,349
General and administrative..................... 1,506 2,703 7,345 9,010
Provision for asset impairment................. -- 3,400 -- 3,400
------- ------- -------- --------
Total costs and expenses................... 25,185 25,543 79,147 70,882
------- ------- -------- --------
Net income before minority interest, gain on sale
of corporate tenant lease assets, extraordinary
loss and cumulative effect..................... 21,090 22,564 57,958 62,216
Minority interest in consolidated entities....... (41) (41) (123) (122)
Gain on sale of corporate tenant lease assets.... 1,974 790 2,948 1,943
------- ------- -------- --------
Net income before extraordinary loss and
cumulative effect.............................. 23,023 23,313 60,783 64,037
Extraordinary loss on early extinguishment of
debt........................................... (388) (665) (705) (665)
Cumulative effect of a change in accounting
principle...................................... -- -- -- (1,810)
------- ------- -------- --------
Net income....................................... 22,635 22,648 60,078 61,562
Preferred dividend requirements.................. -- (3,919) -- (11,758)
------- ------- -------- --------
Net income allocable to common shareholders...... $22,635 $18,729 $ 60,078 $ 49,804
======= ======= ======== ========
Basic earnings per common share.................. N/A $ 0.75 N/A $ 1.99
======= ========
Diluted earnings per common share................ N/A $ 0.73 N/A $ 1.96
======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
TRINET CORPORATE REALTY TRUST, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON ADDITIONAL
STOCK AT PAID-IN RETAINED TREASURY
PAR CAPITAL EARNINGS STOCK TOTAL
-------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999................. $ -- $890,271 $11,655 $(39,994) $861,932
Purchase of IStar Financial shares held in
treasury................................... -- -- -- (106) (106)
Dividends paid to IStar Financial............ -- -- (25,500) -- (25,500)
Dividends received on IStar Financial shares
held in treasury........................... -- -- 4,006 -- 4,006
Net income for the period.................... -- -- 60,078 -- 60,078
------ -------- ------- -------- --------
Balance at September 30, 2000................ $ -- $890,271 $50,239 $(40,100) $900,410
====== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
TRINET CORPORATE REALTY TRUST, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
2000 1999 2000 1999
-------- ------------- --------- -------------
(PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 22,635 $ 22,648 $ 60,078 $ 61,562
Adjustments to reconcile net income to cash flows
provided by operating activities:
Minority interest..................................... 41 41 123 122
Equity in earnings of unconsolidated joint ventures... (1,464) (935) (4,084) (2,450)
Depreciation and amortization......................... 8,325 7,085 25,432 21,349
Amortization of discounts/premiums and costs on
lending investments................................. (372) 490 (1,208) 1,464
Distributions from operating joint ventures........... 996 1,258 3,374 4,100
Straight-line operating lease income adjustments...... (2,348) (1,287) (6,879) (3,995)
Gain on sale of corporate tenant lease assets......... (1,974) (790) (2,948) (1,943)
Extraordinary loss on early extinguishment of debt.... 388 665 705 665
Cumulative effect of a change in accounting
principle........................................... -- -- -- 1,810
Provision for asset impairment........................ -- 3,400 -- 3,400
Changes in assets and liabilities:
(Increase) decrease in restricted cash and
investments....................................... 785 (182) 220 9,476
(Increase) decrease in other assets................. (1,142) (1,625) (2,675) 1,203
Decrease in accounts payable........................ (2,081) (2,224) (6,657) (11,850)
-------- -------- --------- ---------
Cash flows provided by operating activities......... 23,789 28,544 65,481 84,913
-------- -------- --------- ---------
Cash flows from investing activities:
New investment originations/acquisitions.............. (3,612) (5,352) (85,737) (22,216)
Proceeds from sale of corporate tenant lease assets... -- 39,347 145,948 53,827
Net investments in and advances to unconsolidated
joint ventures...................................... 14,981 (1,181) 3,177 (3,253)
Capital expenditures on real estate subject to
operating
leases.............................................. (4,544) (3,153) (7,626) (5,801)
-------- -------- --------- ---------
Cash flows provided by investing activities........... 6,825 29,661 55,762 22,557
-------- -------- --------- ---------
Cash flows from financing activities:
Net repayments under revolving credit facility........ (14,100) (25,800) (79,100) (50,800)
Repayments under term loans........................... (4,043) (10,807) (12,635) (11,233)
Common dividends paid................................. -- (16,261) -- (48,629)
Minority interest..................................... (41) (41) (123) (122)
Preferred dividends paid.............................. -- (3,919) -- (11,758)
Payment for deferred financing costs.................. -- -- (25) (78)
Early termination fees associated with REMIC
paydown............................................. -- (440) -- (440)
Proceeds from issuance of common stock................ -- -- -- 4,763
Purchase of IStar Financial shares held in treasury... -- -- (106) --
Dividends paid to IStar Financial..................... (12,000) -- (25,500) --
Dividends received on IStar Financial shares held in
treasury............................................ 1,359 -- 4,006 --
-------- -------- --------- ---------
Cash flows used in financing activities............... (28,825) (57,268) (113,483) (118,297)
-------- -------- --------- ---------
Increase (decrease) in cash and cash equivalents........ 1,789 937 7,760 (10,827)
Cash and cash equivalents, at beginning of period....... 17,982 7,559 12,011 19,323
-------- -------- --------- ---------
Cash and cash equivalents, at end of period............. $ 19,771 $ 8,496 $ 19,771 $ 8,496
======== ======== ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.............. $ 14,024 $ 11,100 $ 39,730 $ 34,250
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
TRINET CORPORATE REALTY TRUST, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS
ORGANIZATION--TriNet Corporate Realty Trust, Inc., a Maryland Corporation,
(the "Company"), became a wholly-owned subsidiary of IStar Financial Inc., a
Maryland Corporation ("IStar Financial") through a merger on November 4, 1999.
As a wholly-owned subsidiary of IStar Financial, a real estate investment trust
("REIT"), the Company intends to operate as a qualified real estate investment
trust subsidiary ("QRS") under the Internal Revenue Code of 1986, as amended
(the "Code").
BUSINESS--IStar Financial and its subsidiaries, including the Company,
provide structured mortgage, mezzanine and corporate lease financing to private
and corporate owners of real estate nationwide. The Company typically provides
capital by structuring purchase/leaseback transactions and acquiring properties
subject to existing long-term net leases to creditworthy tenants. As of
September 30, 2000, the Company's portfolio consisted of 136 facilities
principally subject to net leases to approximately 155 tenants, comprising
17.4 million square feet in 24 states. Of the 136 total facilities, there are 20
facilities, three of which are under development totaling 273,000 square feet,
held in four unconsolidated joint ventures (see Note 4).
MERGER TRANSACTION--On November 3, 1999, the Company's stockholders and the
shareholders of IStar Financial approved the merger of the Company with a
wholly-owned subsidiary of IStar Financial. The shareholders of IStar Financial
also approved: (i) the acquisition by IStar Financial, through a merger and
contribution of interests, of 100% of the ownership interests in its external
advisor; and (ii) the change in form of its organization from a business trust
to a corporation ("Incorporation Merger"). Pursuant to the merger, the Company
merged with and into a subsidiary of IStar Financial, with the Company surviving
as a wholly-owned subsidiary of IStar Financial. In the merger, each issued and
outstanding share of the Company's common stock was converted into 1.15 shares
of common stock of IStar Financial. Each issued and outstanding share of
Series A, Series B and Series C Cumulative Redeemable Preferred Stock of the
Company was converted into a share of Series B, Series C, and Series D
(respectively) Cumulative Redeemable Preferred Share of IStar Financial. The
IStar Financial preferred stock issued to the Company's former preferred
stockholders has substantially the same terms as the Company's preferred stock,
except that the new shares of Series B, C and D preferred stock have additional
voting rights not associated with the Company's preferred stock. The holders of
IStar Financial's Series A Preferred Shares received Series A Preferred Shares
in the Incorporation Merger with the same rights and preferences as existed
prior to the merger. The merger was structured as a tax-free reorganization
under federal tax law.
These transactions were consummated as of November 4, 1999, at which time
IStar Financial's single class of common shares began trading on the New York
Stock Exchange under the symbol "SFI".
NOTE 2--BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements have been
prepared in conformity with the instructions to Form 10-Q and Article 10,
Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles ("GAAP") for complete financial statements. The
Consolidated Financial Statements include the accounts of the Company, its
wholly-owned subsidiary corporations and partnerships, and its majority-owned
and controlled partnership. The Company has an investment in TriNet Management
Operating Company, Inc. ("TMOC"), a taxable noncontrolled subsidiary of the
Company, which is accounted for under the equity method. Further, certain other
investments in partnerships or joint ventures which the company does not control
are also accounted for under the
7
<PAGE>
TRINET CORPORATE REALTY TRUST, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--BASIS OF PRESENTATION (CONTINUED)
equity method. 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 the Company's consolidated
financial position at September 30, 2000 and December 31, 1999 and the results
of its operations, changes in shareholders' equity and its cash flows for the
three- and nine-month periods ended September 30, 2000 and 1999, respectively.
Such operating results are not necessarily indicative of the results that may be
expected for any other interim periods or the entire year.
The merger was accounted for as a purchase of the Company by IStar Financial
and the balance sheet of the Company on November 4, 1999 was adjusted to reflect
the purchase price as required by Accounting Principles Board Opinion 16 ("APB
16"), "Accounting for Business Combinations." The purchase price was
approximately $1.5 billion, which included the assumption of the outstanding
preferred stock, debt and other liabilities of the Company. This purchase price
was allocated to the net assets of the Company based on their relative fair
values and resulted in no allocation to goodwill.
The Company's consolidated results of operations for the three- and
nine-month periods ended September 30, 1999 reflect the historical operating
results prior to the merger. The Company's consolidated results of operations
for the three- and nine-month periods ended September 30, 2000 reflect the
operations of the Company after the merger and the impact of the required APB 16
purchase accounting adjustments, as previously described. In general, the
recognition of straight-line lease revenue, depreciation, interest income and
interest expense have been impacted by the new cost basis of the assets and
liabilities reflected on the balance sheet.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LOANS AND OTHER LENDING INVESTMENTS, NET--At September 30, 2000, loans and
other lending investments include a partnership loan. At December 31, 1999, also
included is a convertible mortgage, which was exercised in August 2000. In
general, management considers its investments in this category as
held-to-maturity and, accordingly, reflects such items at amortized historical
cost.
REAL ESTATE SUBJECT TO OPERATING LEASES AND DEPRECIATION--Real estate
subject to operating leases is generally recorded at cost. On November 4, 1999,
the effective date of the merger, adjustments were made to increase the book
value of corporate tenant lease assets in the aggregate to reflect IStar
Financial's purchase price and to eliminate prior period accumulated
depreciation. The September 30, 2000 balances reflect these adjustments. Certain
improvements and replacements are capitalized when they extend the useful life,
increase capacity or improve the efficiency of the asset. Repairs and
maintenance items are expensed as incurred. The Company capitalizes interest
costs incurred during the land development or construction period on qualified
development projects including investments in joint ventures accounted for under
the equity method.
Beginning on November 4, 1999, real estate depreciation expense is computed
using the straight-line method of cost recovery with an estimated remaining
useful life of 40 years. Depreciation expense for all periods prior to the
merger was computed using the straight-line method of cost recovery over
estimated useful lives of 31.5 or 40 years. Additionally, depreciation is
computed using the straight-line method of cost recovery over the estimated
useful lives of five years for furniture and
8
<PAGE>
TRINET CORPORATE REALTY TRUST, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
equipment, the remaining lease term for tenant improvements, and the remaining
life of the building for building improvements.
Real estate assets to be disposed of are reported at the lower of their
carrying amount or fair value less cost to sell. The Company also periodically
reviews long-lived assets to be held and used for an impairment in value
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. In management's opinion, real estate assets
to be held and used are not carried at amounts in excess of their estimated
recoverable amounts.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include all cash held
in banks or invested in money market funds with original maturity terms of less
than 90 days.
REVENUE RECOGNITION--Lease revenue is recognized on the straight-line method
of accounting over the term of the lease. Accordingly, increases in contractual
lease payments are recognized evenly over the lease term. The difference between
recognized lease revenue and contractual lease payments is recorded as deferred
operating lease income receivable on the balance sheet.
On November 4, 1999, the effective date of the merger, certain purchase
accounting adjustments were made to eliminate the deferred operating lease
income receivable. Additionally, for purposes of calculating the average lease
rates over the remaining lives of the leases, the term of all leases in place at
the time of the merger has been adjusted to reflect a new start date beginning
November 4, 1999.
INCOME TAXES--For the period from January 1, 1999 to November 4, 1999, the
Company elected to be taxed as a REIT under the Code. Subsequent to November 4,
1999, the Company will be taxed as a QRS under the Code. As a QRS, the Company
is included in the consolidated tax return of IStar Financial. IStar Financial
has elected to be taxed as a REIT under the Code, and believes its current
organization and method of operation will enable it to maintain its status as a
REIT. Accordingly, no provision has been made for federal income taxes in the
accompanying Consolidated Financial Statements.
INTEREST RATE RISK MANAGEMENT--The Company has entered into various interest
rate protection agreements that, together with a swap agreement, fix the
interest rate on the Company's LIBOR based borrowings. The related cost of these
agreements is amortized over their respective lives and such amortization is
recorded as interest expense. The Company enters into interest rate risk
management arrangements with financial institutions meeting certain minimum
financial criteria, and the related credit risk of non-performance by
counterparties is not considered to be significant.
CONCENTRATION OF CREDIT RISK--The Company underwrites the credit of
prospective tenants and may require them to provide some form of credit support
such as corporate guarantees or letters of credit. Although the Company's assets
are geographically diverse and its tenants operate in a variety of industries,
to the extent the Company has a significant concentration of lease revenues from
any single tenant, the inability of that tenant to make its lease payments could
have an adverse effect on the Company. As of September 30, 2000, the Company's
five largest tenants collectively accounted for approximately 16.9% of the
Company's annualized lease revenue. The Company's largest single tenant
accounted for approximately 5.2% of the Company's annualized lease revenue.
RECLASSIFICATIONS--Certain prior year amounts have been reclassified in the
Consolidated Financial Statements and the related notes to conform to the 2000
presentation.
9
<PAGE>
TRINET CORPORATE REALTY TRUST, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
RECENT ACCOUNTING STANDARDS--In June 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 effectiveness of SFAS 133 for one
year. SFAS 133 is now 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 establishes accounting and reporting
standards for derivative financial instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as: (i) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment; (ii) a hedge
of the exposure to variable cash flows of a forecasted transaction; or (iii) in
certain circumstances a hedge of a foreign currency exposure. The Company
currently plans to adopt this pronouncement, as amended by Statement of
Financial Accounting Standards No. 137 "Accounting for Derivative Instruments
and Hedging Activities--deferral of the Effective Date of FASB Statement
No. 133" and Statement of Financial Accounting Standards No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities--an Amendment of
FASB Statement No. 133," as required effective January 1, 2001. The adoption of
SFAS 133 is not expected to have a material impact on the financial position or
results of operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." In June 2000, the SEC staff amended SAB 101 to provide registrants
with additional time to implement SAB 101. The Company will be required to adopt
SAB 101 by the fourth quarter of fiscal 2000. The adoption of SAB 101 is not
expected to have a material financial impact on the financial position or
results of operations of the Company.
NOTE 4--REAL ESTATE SUBJECT TO OPERATING LEASES
The Company's investments in real estate subject to operating leases, at
cost, were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
Buildings and improvements.................................. $1,110,541 $1,223,015
Land and land improvements.................................. 320,960 251,794
Less accumulated depreciation............................... (25,495) (5,111)
---------- ----------
1,406,006 1,469,698
Investments in unconsolidated joint ventures................ 63,163 60,106
---------- ----------
Real estate subject to operating leases, net................ $1,469,169 $1,529,804
========== ==========
</TABLE>
10
<PAGE>
TRINET CORPORATE REALTY TRUST, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--REAL ESTATE SUBJECT TO OPERATING LEASES (CONTINUED)
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES--At
September 30, 2000, the Company had investments in six joint ventures:
(i) TriNet Sunnyvale Partners, L.P. ("Sunnyvale"), whose external partners are
John D. O'Donnell, Trustee, John W. Hopkins, and Donald S. Grant;
(ii) Corporate Technology Centre Associates LLC ("CTC I"), whose external member
is Corporate Technology Centre Partners LLC; (iii) Sierra Land Ventures
("Sierra"), whose external joint venture partner is Sierra-LC Land, Ltd.;
(iv) Corporate Technology Centre Associates II LLC ("CTC II"), whose external
joint venture member is Corporate Technology Centre Partners II LLC; (v) TriNet
Milpitas Associates, LLC ("Milpitas"), whose external member is The Prudential
Insurance Company of America; and (vi) TN-CP Venture One ("TN-CP"), whose
external partner is Sierra Office Venture Three, Ltd. These ventures were formed
for the purpose of operating, acquiring and, in certain cases, developing
corporate tenant lease facilities. At September 30, 2000, all the facilities
held by CTC II and TN-CP had been sold.
At September 30, 2000, the ventures comprised 20 facilities, three of which
are under development. Additionally, 17.7 acres of land are held for sale. The
Company's combined investment in these joint ventures at September 30, 2000 was
$63.2 million. The joint ventures' purchase price for the 20 facilities owned at
September 30, 2000 was $260.9 million. The purchase price of the land held for
sale was $6.8 million. In the aggregate, the joint ventures had total assets of
$302.0 million and total liabilities of $218.0 million as of September 30, 2000
and net income of $5.9 million for the nine months ended September 30, 2000. The
Company accounts for these investments under the equity method because its joint
venture partners have certain participating rights which limit the Company's
control. The Company's investments in and advances to unconsolidated joint
ventures, its percentage ownership interests, its respective income and pro rata
share of third-party debt as of September 30, 2000 are presented below (in
thousands):
<TABLE>
<CAPTION>
ACCRUED JOINT
OWNERSHIP EQUITY NOTES INTEREST TOTAL VENTURE INTEREST TOTAL
UNCONSOLIDATED JOINT VENTURE % INVESTMENT RECEIVABLE RECEIVABLE INVESTMENT INCOME INCOME INCOME
---------------------------- ---------- ---------- ---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating:
Sunnyvale..................... 44.7% $13,776 $ -- $ -- $13,776 $1,142 $ -- $1,142
CTC I......................... 50.0% 22,349 -- -- 22,349 936 -- 936
CTC II........................ 50.0% -- 21,932 5,684 27,616 (755) 4,030 3,275
Milpitas...................... 50.0% 21,052 -- -- 21,052 2,140 -- 2,140
TN-CP......................... 50.0% 34 -- -- 34 393 -- 393
Development:
Sierra........................ 50.0% 5,952 -- -- 5,952 228 -- 228
------- ------- ------- ------- ------ ------ ------
Total......................... $63,163 $21,932 $ 5,684 $90,779 $4,084 $4,030 $8,114
======= ======= ======= ======= ====== ====== ======
<CAPTION>
SHARE
OF
THIRD-
PARTY
UNCONSOLIDATED JOINT VENTURE DEBT
---------------------------- --------
<S> <C>
Operating:
Sunnyvale..................... $10,728
CTC I......................... 38,099
CTC II........................ --
Milpitas...................... 40,766
TN-CP......................... --
Development:
Sierra........................ 724
-------
Total......................... $90,317
=======
</TABLE>
At September 30, 2000, the Company was the guarantor for 50% of CTC I's
$76.2 million construction loan.
Currently, the limited partners of the Sunnyvale partnership have the option
to convert their partnership interest into cash; however, the Company may elect
to deliver 297,728 shares of common stock of IStar Financial in lieu of cash.
Additionally, commencing in February 2002, subject to acceleration under certain
circumstances, partnership units held by certain partners of Milpitas may be
converted into 984,476 shares of common stock of IStar Financial.
11
<PAGE>
TRINET CORPORATE REALTY TRUST, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--DEBT OBLIGATIONS
As of September 30, 2000 and December 31, 1999, the Company had debt
obligations under various arrangements with financial institutions as follows
(in thousands):
<TABLE>
<CAPTION>
CARRYING VALUE AS OF
MAXIMUM ---------------------------- SCHEDULED
AMOUNT SEPTEMBER 30, DECEMBER 31, MATURITY
AVAILABLE 2000 1999 STATED INTEREST RATES DATE
--------- ------------- ------------ --------------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
UNSECURED REVOLVING CREDIT
FACILITY:
Line of credit........... $350,000 $107,600 $186,700 LIBOR + 1.55% 05/31/2001
========
UNSECURED NOTES:
6.75% Dealer remarketable
securities(1)...................... 125,000 125,000 6.75% 03/01/2013
7.30% Notes.......................... 100,000 100,000 7.30% 05/15/2001
7.70% Notes.......................... 100,000 100,000 7.70% 07/15/2017
7.95% Notes.......................... 50,000 50,000 7.95% 05/15/2006
-------- --------
375,000 375,000
Less debt discount................... (19,262) (21,481)
-------- --------
Total unsecured notes................ 355,738 353,519
SECURED TERM LOANS:
Poydras mortgage loan................ 78,610 78,610 LIBOR + 1.375% 06/18/2001
1994 mortgage loan................... 36,296 44,426 LIBOR + 1.000% 12/01/2004
Other mortgage loans................. 24,349 28,856 6.00% - 11.375% (2)
-------- --------
139,255 151,892
Less debt discount................... (105) (520)
-------- --------
Total secured term loans............. 139,150 151,372
-------- --------
TOTAL DEBT OBLIGATIONS............... $602,488 $691,591
======== ========
</TABLE>
EXPLANATORY NOTES:
------------------------
(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 2010.
The Company has entered into interest rate swap agreements 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. In addition, $75.0 million of the
outstanding balance of the Poydras mortgage loan is subject to an interest rate
cap which effectively limits LIBOR to 7.50%.
12
<PAGE>
TRINET CORPORATE REALTY TRUST, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--DEBT OBLIGATIONS (CONTINUED)
The Company has also entered into LIBOR interest rate caps struck at 7.75%,
7.75% and 7.50% in notional amounts of $75.0 million, $35.0 million and
$75.0 million, respectively, which expire in December 2004, December 2004 and
August 2001, respectively.
The following table sets forth the components of interest expense for the
periods presented (in thousands):
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Interest incurred........................................... $37,132 $32,999
Capitalized interest........................................ (338) (1,442)
Amortization of loan costs, interest rate protection
agreements,
and loan discounts........................................ 3,122 1,464
------- -------
$39,916 $33,021
======= =======
</TABLE>
NOTE 6--COMMITMENTS AND CONTINGENCIES
The Company is subject to option agreements with two existing tenants which
could require the Company to construct approximately 299,000 square feet of
additional adjacent space on which the Company would receive additional
operating lease payments under the terms of the option agreements. These option
agreements expire in 2006 and 2012.
NOTE 7--EARNINGS PER SHARE
The following table presents the basic and diluted weighted average shares
outstanding for the three- and nine-month periods ended September 30, 1999 (in
thousands). Effective November 4, 1999, the Company became a wholly-owned
subsidiary of IStar Financial. IStar Financial is the sole shareholder of the
Company; therefore, the basic and diluted calculations for the three- and
nine-month periods ended September 30, 2000 have been omitted.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
Weighted average common shares outstanding for basic
earnings per common share................................. 25,067 24,967
Add effect of shares issuable from assumed conversion of
common stock options...................................... 3 11
Add effect of shares issuable in exchange for land.......... 69 69
Add effect of partnership units as if converted............. 629 370
------ ------
Weighted average common shares outstanding for diluted
earnings per common share................................. 25,768 25,417
====== ======
</TABLE>
For the three- and nine-month periods ended September 30, 1999, there were
856,066 and 258,894 weighted average partnership units outstanding, on an as
converted basis, respectively, that were not assumed converted into common
shares because they were antidilutive to earnings per share.
13
<PAGE>
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 1999 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.
GENERAL
As a wholly-owned subsidiary of IStar Financial, the Company provides
corporate lease financing to corporate owners of real estate nationwide by
structuring purchase/leaseback transactions and acquiring properties subject to
existing long-term leases to creditworthy tenants. As of September 30, 2000, the
Company's portfolio consisted of 136 facilities principally subject to net
leases to approximately 155 tenants, comprising 17.4 million square feet in 24
states. Of the 136 total facilities, there are 20 facilities, three of which are
under development totaling 273,000 square feet, held in four unconsolidated
joint ventures (see Note 4).
On November 3, 1999, the Company's stockholders and the shareholders of
IStar Financial approved the merger of the Company with a wholly-owned
subsidiary of IStar Financial. The shareholders of IStar Financial also
approved: (i) the acquisition by IStar Financial, through a merger and
contribution of interests, of 100% of the ownership interests in its external
advisor; and (ii) the change in form of its organization from a business trust
to a corporation ("Incorporation Merger"). Pursuant to the merger, the Company
merged with and into a subsidiary of IStar Financial, with the Company surviving
as a wholly-owned subsidiary of IStar Financial. In the merger, each issued and
outstanding share of the Company's common stock was converted into 1.15 shares
of common stock of IStar Financial. Each issued and outstanding share of
Series A, Series B and Series C Cumulative Redeemable Preferred Stock of the
Company was converted into a share of Series B, Series C, and Series D
(respectively) Cumulative Redeemable Preferred Share of IStar Financial. The
IStar Financial preferred stock issued to the Company's former preferred
stockholders has substantially the same terms as the Company's preferred stock,
except that the new shares of Series B, C and D preferred stock have additional
voting rights not associated with the Company's preferred stock. The holders of
IStar Financial's Series A Preferred Shares received Series A Preferred Shares
in the Incorporation Merger with the same rights and preferences as existed
prior to the merger. The merger was structured as a tax-free reorganization
under federal tax law.
These transactions were consummated as of November 4, 1999, at which time
IStar Financial's single class of common shares began trading on the New York
Stock Exchange under the symbol "SFI."
The merger was accounted for as a purchase of the Company by IStar Financial
and the balance sheet of the Company on November 4, 1999 was adjusted to reflect
the purchase price as required by Accounting Principles Board Opinion 16 ("APB
16"), "Accounting for Business Combinations." The purchase price was
approximately $1.5 billion, which included the assumption of the outstanding
preferred stock, debt and other liabilities of the Company. This purchase price
was allocated to the net assets of the Company based on their relative fair
values and resulted in no allocation to goodwill.
Effective November 22, 1999, the joint venture partners of W9/TriNet
Poydras, LLC ("Poydras") elected to exercise their right under the partnership
agreement, which was accelerated as a result of the merger, to exchange all of
their membership units for 350,746 shares of Common Stock of IStar Financial and
$767,000 of cash. These membership units were valued at $33.32, after
consideration for the 1.15 exchange ratio (see above), and converted into shares
of Common Stock of IStar Financial on a one-for-one basis.
14
<PAGE>
The three and nine months ended September 30, 1999 represent the historical
basis of the Company's operations prior to the date of the merger. The three and
nine months ended September 30, 2000 reflect the operations of the Company after
the merger and includes the consolidated results of Poydras as a wholly-owned
subsidiary. Additionally, the 2000 periods reflect the operating impact of the
purchase accounting adjustments made to the assets and liabilities as previously
described. In general, the recognition of straight-line lease revenue,
depreciation, interest income and interest expense have been impacted by the new
cost basis of the corresponding assets and liabilities on the balance sheet.
The following discussion of the results of operations focuses on comparisons
between the pre-merger period in 1999 and the post-merger period for 2000.
Material fluctuations in operations resulting from the effect of purchase
accounting and the consolidation of Poydras are highlighted.
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE-MONTH PERIOD
ENDED
SEPTEMBER 30, 1999
OPERATING LEASE INCOME--Operating lease income increased to $41.1 million
for the three months ended September 30, 2000 from $37.9 million for the same
period in 1999. Of this increase, $3.6 million was attributable to the
consolidation of Poydras in the Company's financial statements, $2.5 million was
attributable to new assets acquired since September 30, 1999 and $704,000 was
attributable to additional operating lease income from assets owned in both
quarters. These increases in operating lease income from assets owned were
partially offset by a $4.1 million decrease in operating lease income resulting
from asset dispositions during 1999 and 2000.
INTEREST INCOME--Interest income decreased to $1.9 million for the three
months ended September 30, 2000 from $2.1 million for the same period in 1999.
The net decrease is primarily due to a decrease of $412,000 in interest income
on the Poydras mezzanine loan made by the Company to a previously unconsolidated
partnership. This inter-entity loan was eliminated in consolidation subsequent
to the merger because the joint venture partner converted its interest into
shares of common stock of IStar Financial and the venture became wholly-owned by
the Company. Additionally, the Company exercised its convertible mortgage option
on one facility during the third quarter of 2000 and converted it to an owned
facility. This transaction resulted in a decrease of $292,000 in interest
income. These decreases were offset by the amortization of a purchase accounting
discount on one loan.
JOINT VENTURE INCOME--For the three months ended September 30, 2000, joint
venture income increased by $528,000, from $935,000 in 1999 to $1.5 million in
2000. The first phase of the CTC I development was completed and four of the
first five buildings were occupied the entire third quarter of 2000, while the
fifth building became occupied during the third quarter of 2000. These new
leases resulted in an increase in joint venture income of $438,000. Joint
venture income at the other five joint ventures during the quarter added
$587,000 of income over that of 1999. These increases resulted from new leases
and lease modifications at the underlying facilities. Offsetting all these
increases was a decrease of $716,000 at TMOC. In the 1999 period, TMOC realized
income from surrendering certain rights it had in connection with its
investments.
OTHER INCOME--Other income decreased $5.3 million in the third quarter of
2000 compared to that of 1999. This decrease was due to recognition in 1999 of a
$6.8 million termination fee the Company received from a tenant's early lease
termination.
INTEREST EXPENSE--For the three months ended September 30, 2000, interest
expense increased by $2.3 million, or 21.0%, to $13.1 million from
$10.9 million for the same period in 1999. This increase is primarily due to the
consolidation of the $78.6 million Poydras mortgage, which added $1.6 million to
interest expense for the quarter. Additionally, non-cash interest expense in the
amount of $900,000 was recognized through amortization of the notes payable
discounts recorded as a result of the merger. The
15
<PAGE>
increase was also in part due to higher weighted average interest rates for the
quarter. This increase was partially offset by a lower average outstanding
balance and by the write-off of previously amortizing loan fees in connection
with the merger, which represented $325,000 in the third quarter of 1999.
OPERATING COSTS--CORPORATE TENANT LEASE ASSETS--For the three months ended
September 30, 2000, operating costs associated with corporate tenant lease
assets, increased to $3.3 million from $1.5 million for the same period in 1999.
The increase is primarily due to the consolidation of Poydras, which contributed
an additional $1.5 million to property operating costs in 2000 compared to 1999.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased by
$177,000, or 2.5%, for the three months ended September 30, 2000, when compared
to the same period of 1999. Depreciation and amortization were impacted by the
purchase accounting adjustments recorded during the fourth quarter of 1999.
Accordingly, the cost basis of the depreciable assets increased from the 1999
amount, resulting in greater depreciation expense. This increase was partially
offset by reduced depreciation as a result of corporate tenant lease
dispositions since September 30, 1999.
GENERAL AND ADMINISTRATIVE--For the three months ended September 30, 2000,
general and administrative expenses decreased by $1.2 million to $1.5 million
compared to $2.7 million for the same period in 1999. This decrease is primarily
a result of a reduction in personnel and related overhead costs in 2000 as
compared to 1999.
GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS--On September 6, 2000, the
TN-CP joint venture sold its only facility, a 247,254 square foot office
facility located in Irving, Texas, for $41.9 million. The Company recognized a
gain of $1.7 million on this transaction, which was 50% of the gain recorded by
the joint venture. On September 28, 2000, the CTC II joint venture sold all five
facilities in its portfolio for $66.0 million. These facilities comprised
308,929 square feet of office space located in San Jose, California. The Company
recognized a gain of $222,000 on this sale.
During the third quarter of 1999, the Company completed two asset sales and
recognized a net gain of $790,000.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--Certain of the proceeds
from the CTC II portfolio disposition were used to repay the third-party debt of
the joint venture of $16.4 million. In connection with this paydown, CTC II
incurred certain prepayment penalties, which resulted in an extraordinary loss
to the Company of $388,000 during the third quarter of 2000.
For 1999, proceeds from certain asset sales 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 loss $665,000.
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE-MONTH PERIOD
ENDED
SEPTEMBER 30, 1999
OPERATING LEASE INCOME--Operating lease income increased to $124.6 million
for the nine months ended September 30, 2000 from $116.5 million for the same
period in 1999. Of this increase, $11.0 million was attributable to the
consolidation of Poydras in the Company's financial statements, $3.0 million was
due to new assets acquired after September 30, 1999 and $1.7 million was
attributable to additional operating lease income from assets owned in both
quarters. These increases were partially offset by an $8.3 million decrease
resulting from asset dispositions during 1999 and 2000.
INTEREST INCOME--Interest income increased to $6.3 million for the nine
months ended September 30, 2000 from $6.0 million for the same period in 1999.
Interest earned on cash balances increased $246,000 over the 1999 amount while
interest income on the CTC II loan investment increased $267,000 due to a larger
amount outstanding. Additionally, $1.2 million of interest income was recognized
from amortization of purchase accounting discounts on loan investments during
2000.
16
<PAGE>
These discounts were recorded as a result of the merger in November 1999. These
increases were offset by a decrease of $1.2 million in interest income on the
Poydras mezzanine loan made by the Company to a previously unconsolidated
partnership. This inter-entity loan was eliminated in consolidation subsequent
to the merger because the joint venture partner converted its interest into
shares of common stock of iStar Financial and the venture became wholly-owned by
the Company.
JOINT VENTURE INCOME--For the nine months ended September 30, 2000, joint
venture income increased to $4.1 million from $2.5 million for the same period
in 1999. The first phase of the CTC I development was completed and four of the
first five buildings were occupied the entire third quarter of 2000, while the
fifth building became occupied during the third quarter of 2000. These new
leases resulted in an increase in joint venture income of $926,000. Joint
venture income at Milpitas and Sunnyvale increased by $369,000 and $317,000,
respectively. These increases resulted from new leases and lease modifications
at the underlying facilities. Sierra's joint venture income increased by
$309,000 primarily due to the sale of land in the second quarter, and TN-CP
purchased assets in the second quarter which contributed an additional $393,000
of joint venture income. Offsetting these increases was a decrease of $708,000
at TMOC. In the 1999 period, TMOC realized income from surrendering certain
rights it had in connection with its investments.
OTHER INCOME--Other income decreased $6.1 million in the third quarter of
2000 compared to that of 1999. This decrease was due to recognition in 1999 of a
$6.8 million termination fee the Company received from a tenant's early lease
termination.
INTEREST EXPENSE--The Company's interest expense increased by $6.9 million,
or 21% for the nine-month period ended September 30, 2000 over the same period
in 1999. This increase is primarily the result of the consolidation of the
$78.6 million Poydras mortgage, which added $4.6 million to interest expense in
2000. Additionally, non-cash interest expense in the amount of $2.6 million was
recognized through amortization of the net premiums and discounts recorded as a
result of the merger. Interest expense increased by $1.1 million as a result of
completing construction projects and a reduction in capitalized interest.
Interest expense was reduced from the write-off of previously amortizing loan
fees and interest rate protection agreement costs in connection with the merger,
which represented $1.0 million during the nine months ended September 30, 1999.
OPERATING COSTS--CORPORATE TENANT LEASE ASSETS--For the nine months ended
September 30, 2000, operating costs associated with corporate tenant lease
assets, increased $5.5 million, from $4.1 million in 1999 to $9.6 million in
2000. The increase is primarily due to the consolidation of Poydras, which
contributed $4.7 million to property operating costs in 2000 compared to 1999.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased
approximately $968,000 for the nine-month period ended September 30, 2000 over
the same period in 1999. Depreciation and amortization were impacted by the
purchase accounting adjustments recorded during the fourth quarter of 1999.
Accordingly, the cost basis of the depreciable assets increased from the 1999
amount, resulting in greater depreciation expense. This increase was partially
offset by reduced depreciation as a result of corporate tenant lease
dispositions since September 30, 1999.
GENERAL AND ADMINISTRATIVE--For the nine months ended September 30, 2000,
general and administrative expenses decreased by $1.7 million to $7.3 million
compared to $9.0 million for the same period in 1999. This decrease is primarily
a result of a reduction in personnel and related overhead costs in 2000 as
compared in 1999.
GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS--During the first nine months
of 2000, the Company disposed of seven corporate tenant lease assets. On
March 1, 2000, the Company sold a 174,600 square foot industrial facility
located in Sunnyvale, California for $13.4 million and recognized a gain of
$238,000. On March 2, 2000, the Company sold a 370,562 square foot office
facility located in Paoli, Pennsylvania for $32.6 million and recognized a gain
of $295,000. On April 25, 2000, the Company sold a 251,850 square foot
industrial facility located in Conroe, Texas for $5.5 million and recognized a
gain
17
<PAGE>
of $11,000. On May 22, 2000, the Company sold a 442,000 square foot industrial
facility located in North Reading, Massachusetts for $47.0 million and
recognized a gain of $222,000. On June 1, 2000, the Company sold a 420,000
square foot office facility located in Parsippany, New Jersey for $49.8 million
and recognized a gain of $207,000. On September 6, 2000, the TN-CP joint venture
sold its only facility, a 247,254 square foot office facility located in Irving,
Texas, for $41.9 million. The Company recognized a gain of $1.7 million on this
transaction, which was 50% of the gain recorded by the joint venture. On
September 28, 2000, the CTC II joint venture sold all five facilities in its
portfolio for $66.0 million. These facilities comprised 308,929 square feet of
office space located in San Jose, California. The Company recognized a gain of
$222,000 on this sale.
During the nine months ended September 30, 2000, the Company completed five
asset sales and recognized a net gain of $1.9 million.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--During the nine months
ended September 30, 2000, proceeds from sales of certain assets were used to
partially repay $8.1 million of the 1994 mortgage loan. In connection with this
partial paydown, the Company incurred certain prepayment penalties, which
resulted in an extraordinary loss of $317,000 during the first quarter of 2000.
Additionally, proceeds from the CTC II portfolio disposition were used to repay
the third-party debt of the joint venture of $16.4 million. In connection with
this paydown, CTC II incurred certain prepayment penalties, which resulted in an
extraordinary loss to the Company of $388,000 during the third quarter of 2000.
For 1999, proceeds from certain asset sales 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 loss $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.
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q, in future SEC filings or in press releases or
other written or oral communications, the words or phrases "will likely result",
"are expected to", "will continue", "is anticipated", "estimate", "project" or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The Company
cautions that such forward looking statements speak only as of the date made and
that various factors including the completion of pending investments and our
ability to originate new investments, the availability and cost of capital for
future investments, regional and national economic conditions generally and in
the commercial real estate and finance markets specifically, changes in levels
of market interest rates, credit and other risks of lending and investment
activities, the performance and financial condition of borrowers and tenants and
competitive and regulatory factors could affect the Company's financial
performance and could cause actual results for future periods to differ
materially from those anticipated or projected.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect events or circumstances after
the date of such statements except as required by law.
18
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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
a. EXHIBITS
27.1 Financial Data Schedule.
b. REPORTS ON FORM 8-K
None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
<TABLE>
<S> <C>
TriNet Corporate Realty Trust, Inc.
REGISTRANT
Date: November 14, 2000 /s/ JAY SUGARMAN
--------------------------------------------
CHAIRMAN OF THE BOARD OF DIRECTORS,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Date: November 14, 2000 /s/ SPENCER B. HABER
--------------------------------------------
EXECUTIVE VICE PRESIDENT - FINANCE
CHIEF FINANCIAL OFFICER, DIRECTOR AND
SECRETARY
</TABLE>
20
