-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I9ZZiyQxMVDjAEcS6QDB+yGhOwnkaZcFXdsxOaiYLDs7HWSd6TRKmzu1sYowC9gb sCfJKco9mMOHfggbVM92Gg== 0000912057-01-539863.txt : 20020410 0000912057-01-539863.hdr.sgml : 20020410 ACCESSION NUMBER: 0000912057-01-539863 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRINET CORPORATE REALTY TRUST INC CENTRAL INDEX KEY: 0000899162 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 943175659 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11918 FILM NUMBER: 1791086 BUSINESS ADDRESS: STREET 1: ONE EMBARCADERO CENTER 33RD FLOOR STREET 2: STE 3150 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4153914300 MAIL ADDRESS: STREET 1: ONE EMBARCADERO CENTER 33RD FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94111 10-Q 1 a2062060z10-q.txt FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 1-11918 ------------------------ TRINET CORPORATE REALTY TRUST, INC. (Exact name of registrant as specified in its charter) MARYLAND 94-3175659 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 1114 AVENUE OF THE AMERICAS, 27TH FLOOR NEW YORK, NY 10036 (Address of principal executive (Zip Code) offices)
Registrant's telephone number, including area code: (212) 930-9400 ------------------------ 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 5, 2001, there were 100 shares of Common Stock outstanding. 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) INDEX TO FORM 10-Q
PAGE ---- PART I. Consolidated Financial Information.......................... 3 Item 1. Financial Statements: Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000......................................... 3 Consolidated Statements of Operations--For the three- and nine-month periods ended September 30, 2001 and 2000...... 4 Consolidated Statement of Changes in Shareholder's Equity--For the nine-month period ended September 30, 2001...................................................... 5 Consolidated Statements of Cash Flows--For the three- and nine-month periods ended September 30, 2001 and 2000...... 6 Notes to Consolidated Financial Statements.................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 16 PART II. Other Information........................................... 20 Item 1. Legal Proceedings........................................... 20 Item 2. Changes in Securities and Use of Proceeds................... 20 Item 3. Defaults Upon Senior Securities............................. 20 Item 4. Submission of Matters to a Vote of Security Holders......... 20 Item 5. Other Information........................................... 20 Item 6. Exhibits and Reports on Form 8-K............................ 20 SIGNATURES............................................................ 21
2 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 PER SHARE DATA) (UNAUDITED)
AS OF AS OF SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ ASSETS Corporate tenant lease assets, net.......................... $1,199,669 $1,486,049 Loans and other lending investments, net.................... 75,448 90,796 Cash and cash equivalents................................... 9,450 11,541 Restricted cash............................................. 149 7,032 Accrued interest receivable................................. 1,985 -- Deferred operating lease income receivable.................. 15,344 10,235 Deferred expenses and other assets.......................... 25,765 18,527 ---------- ---------- Total assets.............................................. $1,327,810 $1,624,180 ========== ========== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Accounts payable, accrued expenses and other liabilities.... $ 42,130 $ 40,647 Debt obligations............................................ 559,725 668,342 ---------- ---------- Total liabilities......................................... 601,855 708,989 ---------- ---------- Minority interest in consolidated entities.................. 2,565 2,565 Shareholder's equity: Common stock, $0.01 par value, 100 shares authorized: 100 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively........................... -- -- Additional paid in capital.................................. $ 769,570 $ 890,271 Retained earnings........................................... -- 62,651 Accumulated other comprehensive income (losses) (See Note 3)........................................................ (5,884) -- Common stock of iStar Financial held in treasury (at cost)..................................................... (40,296) (40,296) ---------- ---------- Total shareholder's equity................................ 723,390 912,626 ---------- ---------- Total liabilities and shareholder's equity................ $1,327,810 $1,624,180 ========== ==========
The accompanying notes are an integral part of the financial statements. 3 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)
FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- REVENUE: Operating lease income.............................. $41,574 $42,605 $132,805 $128,655 Interest income..................................... 2,842 1,879 5,742 6,275 Other income........................................ 127 1,791 504 2,175 ------- ------- -------- -------- Total revenue..................................... 44,543 46,275 139,051 137,105 ------- ------- -------- -------- COSTS AND EXPENSES: Interest expense.................................... 10,908 13,133 34,749 39,916 Operating costs--corporate tenant lease assets...... 3,276 3,284 9,786 9,569 Depreciation and amortization....................... 6,305 7,262 21,055 22,317 General and administrative.......................... 1,032 1,506 5,052 7,345 ------- ------- -------- -------- Total costs and expenses.......................... 21,521 25,185 70,642 79,147 ------- ------- -------- -------- Net income before minority interest, gains/(losses) on sale of corporate tenant lease assets, extraordinary loss and cumulative effect of change in accounting principle........................................... 23,022 21,090 68,409 57,958 Minority interest in consolidated entities............ (41) (41) (123) (123) Gains/(losses) on sales of corporate tenant lease assets.............................................. (1,196) 1,974 403 2,948 ------- ------- -------- -------- Net income before extraordinary loss and cumulative effect of change in accounting principle............ 21,785 23,023 68,689 60,783 Extraordinary loss on early extinguishment of debt.... (583) (388) (1,620) (705) Cumulative effect of change in accounting principle (See Note 3)........................................ -- -- (269) -- ------- ------- -------- -------- Net income............................................ $21,202 $22,635 $ 66,800 $ 60,078 ======= ======= ======== ========
The accompanying notes are an integral part of the financial statements. 4 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (IN THOUSANDS) (UNAUDITED)
ACCUMULATED ADDITIONAL OTHER PAID-IN RETAINED COMPREHENSIVE TREASURY TOTAL CAPITAL EARNINGS INCOME STOCK EQUITY ---------- -------- ------------- -------- --------- Balance at December 31, 2000.......... $ 890,271 $ 62,651 $ -- $(40,296) $ 912,626 Contribution from iStar Financial..... 97,045 -- -- -- 97,045 Transfer of corporate tenant lease assets to iStar Financial........... (217,746) (53,604) -- -- (271,350) Dividends paid to iStar Financial..... -- (80,000) -- -- (80,000) Dividends received on iStar Financial shares held in treasury............. -- 4,153 -- -- 4,153 Net income for the period............. -- 66,800 -- -- 66,800 Cumulative effect of change in accounting principle................ -- -- (1,517) -- (1,517) Change in accumulated other comprehensive income................ -- -- (4,367) -- (4,367) --------- -------- ------- -------- --------- Balance at September 30, 2001......... $ 769,570 $ -- $(5,884) $(40,296) $ 723,390 ========= ======== ======= ======== =========
The accompanying notes are an integral part of the financial statements. 5 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- --------------------- 2001 2000* 2001 2000* --------- --------- --------- --------- Cash flows from operating activities: Net income.................................................. $ 21,202 $ 22,635 $ 66,800 $ 60,078 Adjustments to reconcile net income to cash flows provided by operating activities: Minority interest......................................... 41 41 123 123 Depreciation and amortization............................. 7,326 8,325 24,142 25,432 Amortization of discounts/premiums........................ (653) (372) (1,248) (1,208) Equity in earnings of unconsolidated joint ventures....... (2,578) (1,464) (7,016) (4,084) Distributions from operating joint ventures............... 1,295 996 3,990 3,374 Deferred operating lease income receivable................ (2,320) (2,348) (7,303) (6,879) (Gains)/losses on sale of corporate tenant lease assets... 1,196 (1,974) (403) (2,948) Extraordinary loss on early extinguishment of debt........ 583 388 1,620 705 Cumulative effect of change in accounting principle....... -- -- 269 -- Changes in assets and liabilities: (Increase) decrease in accrued interest receivable...... (1,985) -- (1,985) -- (Increase) decrease in deferred expenses and other assets................................................ 52 (1,142) (3,661) (2,675) (Decrease) in accounts payable, accrued expenses and other liabilities..................................... (1,387) (2,081) (3,777) (6,657) --------- --------- --------- --------- Cash flows provided by operating activities............. 22,772 23,004 71,551 65,261 --------- --------- --------- --------- Cash flows from investing activities: New investment originations............................... (26,782) (3,612) (101,282) (85,737) Net proceeds from sale of corporate tenant lease assets... 12,452 -- 20,286 146,265 Repayments of and principal collections from loans and other lending investments............................... -- -- 91,096 -- Investments in and advances to unconsolidated joint ventures................................................ -- -- (150) (13,605) Distributions from unconsolidated joint ventures.......... -- 14,981 24,265 16,782 Capital expenditures for build-to-suit activities......... (4,098) (707) (10,517) (717) Capital improvement projects on corporate tenant lease assets.................................................. (2,146) (516) (4,229) (2,859) Other capital expenditures on corporate tenant lease assets.................................................. (987) (3,321) (2,559) (4,050) --------- --------- --------- --------- Cash flows provided by (used in) investing activities... (21,561) 6,825 16,910 56,079 --------- --------- --------- --------- Cash flows from financing activities: Net repayments under revolving credit facility............ (153,001) (14,100) (173,451) (79,100) Borrowings under term loans............................... 67,624 -- 277,664 -- Repayments under term loans............................... (282) (4,043) (114,932) (12,635) Repayments under unsecured notes.......................... -- -- (100,000) -- (Increase) decrease in restricted cash held in connection with debt obligations................................... (86) 785 6,883 220 Distributions to minority interest in consolidated entities................................................ (41) (41) (123) (123) Extraordinary loss on early extinguishment of debt........ -- -- (1,037) (317) Payments for deferred financing costs..................... (2,600) -- (6,755) (25) Purchase of iStar Financial (parent) shares held in treasury................................................ -- -- -- (106) Contributions from iStar Financial........................ 97,046 -- 97,046 -- Dividends paid to iStar Financial......................... (21,000) (12,000) (80,000) (25,500) Dividends received on iStar Financial shares held in treasury................................................ 1,394 1,359 4,153 4,006 --------- --------- --------- --------- Cash flows used in financing activities................... (10,946) (28,040) (90,552) (113,580) --------- --------- --------- --------- Increase (decrease) in cash and cash equivalents............ (9,735) 1,789 (2,091) 7,760 Cash and cash equivalents at beginning of period............ 19,185 17,982 11,541 12,011 --------- --------- --------- --------- Cash and cash equivalents at end of period.................. $ 9,450 $ 19,771 $ 9,450 $ 19,771 ========= ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for interest, net of amounts capitalized............................................. $ 12,793 $ 14,024 $ 36,524 $ 39,730 ========= ========= ========= =========
- ------------------------------ * RECLASSIFIED TO CONFORM TO 2001 PRESENTATION. The accompanying notes are an integral part of the financial statements. 6 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--BUSINESS AND ORGANIZATION BUSINESS--TriNet Corporate Realty Trust, Inc., a Maryland Corporation (the "Company"), is a wholly-owned subsidiary of iStar Financial Inc., a Maryland Corporation ("iStar Financial"). iStar Financial and its subsidiaries provide structured financing to private and corporate owners of real estate nationwide, including senior and junior mortgage debt, corporate mezzanine and subordinated capital, and corporate net lease financing. The Company typically provides capital by structuring purchase/leaseback transactions and acquiring corporate tenant lease assets subject to existing long-term net leases to creditworthy customers occupying office and industrial facilities. As of September 30, 2001, the Company's portfolio consisted of 119 facilities principally subject to net leases to approximately 138 customers, comprising 14.6 million square feet in 23 states. Of the 119 total facilities, there are 20 facilities held in three unconsolidated joint ventures. In addition, there are two "build-to-suit" facilities under development which are pre-leased to single-user corporate tenants. ORGANIZATION--The Company became a wholly-owned subsidiary of 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 operates as a qualified real estate investment trust subsidiary ("QRS") under the Internal Revenue Code of 1986, as amended (the "Code"). 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: (1) the acquisition by iStar Financial, through a merger and contribution of interests, of 100% of the ownership interests in its external advisor; and (2) 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 Stock 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"). 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 7 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) method. Further, certain other investments in partnerships or joint ventures which the Company does not control are also accounted for under the equity method. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying 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, 2001 and December 31, 2000 and the results of its operations, changes in shareholder's equity and its cash flows for the three- and nine-month periods ended September 30, 2001 and 2000, 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. In general, the recognition of straight-line operating lease revenue, depreciation, interest income and interest expense have been impacted by the new cost basis of the assets and liabilities on the balance sheet. NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES LOANS AND OTHER LENDING INVESTMENTS, NET--Loans and Other Lending Investments includes corporate/ partnership loans. In general, management considers its investments in this category as held-to-maturity and, accordingly, reflects such items at amortized historical cost. CORPORATE TENANT LEASE ASSETS AND DEPRECIATION--Corporate tenant lease assets are 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. 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. Depreciation is computed using the straight line method of cost recovery over estimated useful lives of 40.0 years for buildings, five years for furniture and equipment, the shorter of the remaining lease term or expected life for tenant improvements and the remaining life of the building for building improvements. Corporate tenant lease 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, corporate tenant lease assets to be held and used are not carried at amounts in excess of their estimated recoverable amounts. CAPITALIZED INTEREST--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. Interest capitalized was approximately $852,000 and $338,000 during the 8 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) nine-month periods ended September 30, 2001 and 2000, respectively and was approximately $365,000 and $0 during the three-month periods ended September 30, 2001 and 2000, respectively. 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. RESTRICTED CASH--Restricted cash represents amounts required to be maintained in escrow under certain of the Company's debt obligations. REVENUE RECOGNITION--Operating lease revenue is recognized on the straight-line method of accounting from the later of the date of the origination of the lease or the date of acquisition of the facility subject to existing leases. Accordingly, contractual lease payment increases are recognized evenly over the term of the lease. The cumulative difference between lease revenue recognized under this method and contractual lease payment terms is recorded as deferred operating lease income receivable on the balance sheet. 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 was adjusted to reflect a new start date beginning November 4, 1999, the effective date of the merger. INCOME TAXES--The Company is taxed as a QRS under the Code. As a QRS, the Company is included in the consolidated tax return of iStar Financial. Accordingly, no provision has been made for federal income taxes in the accompanying Consolidated Financial Statements. Prior to the merger, the Company was taxed as a REIT under the Code. 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 a portion of 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. CREDIT RISK CONCENTRATION--The Company underwrites the credit of prospective customers and may require them to provide some form of credit support such as corporate guarantees, letters of credit and/or cash security deposits. Although the Company's assets are geographically diverse and its customers operate in a variety of industries, to the extent the Company has a significant concentration of operating lease revenue from any single customer, the inability of that customer to make its payments could have an adverse effect on the Company. RECLASSIFICATIONS--Certain prior year amounts have been reclassified in the Consolidated Financial Statements and the related notes to conform to the 2001 presentation. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles 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. 9 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) CHANGE IN ACCOUNTING PRINCIPLE--In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities." On June 23, 1999, the FASB voted to defer the effectiveness of SFAS No. 133 for one year. SFAS No. 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 No. 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: (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment; (2) a hedge of the exposure to variable cash flows of a forecasted transaction; or (3) in certain circumstances, a hedge of a foreign currency exposure. The Company adopted 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," on January 1, 2001. Because the Company has primarily used derivatives as cash flow hedges of interest rate risk only, the adoption of SFAS No. 133 did not have a material financial impact on the financial position and results of operations of the Company. However, should the Company change its current use of such derivatives, the adoption and continued application of SFAS No. 133 could have a more significant effect on the Company prospectively. Upon adoption, the Company recognized a charge to net income of approximately $269,000 and an additional charge to other comprehensive income of approximately $1.5 million, representing the cumulative effect of change in accounting principle. For the three and nine months ended September 30, 2001, the change in fair market value of the Company's interest rate swaps was $(3.1) million and $(4.4) million and was recorded as a reduction to other comprehensive income. The reconciliation to other comprehensive income is as follows (in thousands) (unaudited):
FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Net income.............................................. $21,202 $22,635 $66,800 $60,078 Other comprehensive income (loss): Unrealized gains (losses) on securities for the period................................................ -- -- -- -- Cumulative effect of change in accounting principle (SFAS No. 133) on other comprehensive income.......... -- -- (1,517) -- Unrealized derivative gains (losses) on cash flow hedges................................................ (3,108) -- (4,367) -- ------- ------- ------- ------- Comprehensive income.................................... $18,094 $22,635 $60,916 $60,078 ======= ======= ======= =======
OTHER NEW ACCOUNTING STANDARDS--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 has adopted SAB 101 in the fourth quarter of fiscal 2000. The 10 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) adoption of SAB 101 did not have a material financial impact on the financial position or results of operations of the Company. In July 2001, the SEC released Staff Accounting Bulletin No. 102. ("SAB 102"), "Selected Loan Loss Allowance and Documentation Issues." SAB 102 summarizes certain of the SEC's views on the development, documentation and application of a systematic methodology for determining allowances for loan and lease losses. Adoption of SAB 102 by the Company is not expected to have a material impact on the Company's Consolidated Financial Statements. In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140 ("SFAS No. 140"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement is applicable for transfers of assets and extinguishments of liabilities occurring after March 31, 2001. The Company adopted the provisions of this statement as required for all transactions entered into on or after April 1, 2001. The adoption of SFAS No. 140 did not have a significant impact on the Company. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations" and Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." SFAS No. 141 requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also addresses the initial recognition and measurement of goodwill and other intangible assets acquired in business combinations and requires intangible assets to be recognized apart from goodwill if certain tests are met. The Company does not believe the adoption of SFAS No. 141 will have a significant effect on the Company's financial position or results of operations. SFAS No. 142 requires that goodwill not be amortized but instead be measured for impairment at least annually, or when events indicate that there may be an impairment. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Early application is permitted for companies with fiscal years beginning after March 15, 2001. The Company is currently evaluating the effect, if any, the adoption of SFAS No. 142 will have on the Company's financial position or results of operations. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. The Company is currently evaluating this statement to assess its impact on the financial statements. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and must be applied at the beginning of a fiscal year. The Company will adopt the provisions of this statement on January 1, 2002. The Company does not believe the adoption of SFAS No. 144 will have a significant impact on the Company. 11 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--CORPORATE TENANT LEASE ASSETS The Company's investments in corporate tenant lease assets, at cost, were as follows (in thousands) (unaudited):
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ Buildings and improvements.......................... $ 928,204 $1,126,418 Land and land improvements.......................... 261,203 318,412 Less: accumulated depreciation...................... (41,632) (31,764) ---------- ---------- 1,147,775 1,413,066 Investments in unconsolidated joint ventures........ 51,894 72,983 ---------- ---------- Corporate tenant lease assets, net................ $1,199,669 $1,486,049 ========== ==========
The Company receives reimbursements from customers for certain operating expenses including common area costs, insurance and real estate taxes. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES--At September 30, 2001, the Company had investments in four joint ventures: (1) TriNet Sunnyvale Partners, L.P. ("Sunnyvale"), whose external partners are John D. O'Donnell, Trustee, John W. Hopkins, and Donald S. Grant; (2) Corporate Technology Centre Associates LLC ("CTC I"), whose external member is Corporate Technology Centre Partners LLC; (3) Sierra Land Ventures ("Sierra"), whose external joint venture partner is Sierra-LC Land, Ltd.; and (4) TriNet Milpitas Associates, LLC ("Milpitas"), whose external member is The Prudential Insurance Company of America. These ventures were formed for the purpose of operating, acquiring and, in certain cases, developing corporate tenant lease facilities. At September 30, 2001, all the facilities held by CTC II and TN-CP had been sold. In connection with the CTC II sale, the note receivable from the venture was modified to mature on December 31, 2001 and subsequently, in January 2001, was sold to iStar Financial for a cash payment of $30.1 million, equal to the outstanding principal balance and accrued interest on the note. At September 30, 2001, the ventures comprised 20 net leased facilities. Additionally, 17.7 acres of land are held for sale. The Company's combined investment in these joint ventures at September 30, 2001 was $51.9 million. The joint ventures' purchase price for the 20 facilities owned at September 30, 2001 was $301.9 million. The purchase price of the land held for sale was $6.8 million. In the aggregate, the joint ventures had total assets of $340.8 million and total liabilities of $247.4 million as of September 30, 2001, and net income of $4.3 million and $11.9 million for the three and nine months ended September 30, 2001. 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 ownership percentages, its investments in and advances to unconsolidated joint ventures, its respective income and 12 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--CORPORATE TENANT LEASE ASSETS (CONTINUED) pro rata share of its ventures' third-party debt as of September 30, 2001 are presented below (in thousands) (unaudited):
PRO RATA JOINT SHARE OF OWNERSHIP EQUITY VENTURE THIRD PARTY UNCONSOLIDATED JOINT VENTURE % INVESTMENT INCOME DEBT - ---------------------------- --------- ---------- -------- ----------- Operating: Sunnyvale.......................................... 44.7% $12,657 $ 667 $ 10,728 CTC I.............................................. 50.0% 11,416 3,241 60,732 Milpitas........................................... 50.0% 24,089 3,007 40,253 Development: Sierra............................................. 50.0% 3,732 101 724 ------- ------ -------- Total.............................................. $51,894 $7,016 $112,437 ======= ====== ========
Effective September 29, 2000, iStar Sunnyvale Partners, LP (the entity which is controlled by Sunnyvale) entered into an interest rate cap agreement limiting the venture's exposure to interest rate movements on its $24.0 million LIBOR-based mortgage loan to an interest rate of 9.0% through November 9, 2003. 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, the venture interest held by the external member of Milpitas may be converted into 984,476 shares of common stock of iStar Financial. Income generated from the above joint venture investments is included in Operating Lease Income in the Consolidated Statements of Operations. 13 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5--DEBT OBLIGATIONS As of September 30, 2001 and December 31, 2000, the Company has debt obligations under various arrangements with financial institutions as follows (in thousands) (unaudited):
CARRYING VALUE AS OF -------------------------------- STATED SCHEDULED SEPTEMBER 30, DECEMBER 31, INTEREST MATURITY 2001 2000 RATES DATE --------------- -------------- ----------------- -------------------- UNSECURED REVOLVING CREDIT FACILITY: Line of credit.................................... $ -- $173,450 LIBOR + 1.55% N/A (1) SECURED TERM LOANS: Secured by corporate tenant lease assets.......... -- 77,860 LIBOR + 1.38% June 2001 Secured by corporate tenant lease assets.......... -- 36,296 LIBOR + 1.00% December 2004 Secured by corporate tenant lease assets.......... 193,000 -- LIBOR + 1.85% July 2006 (2) Secured by corporate tenant lease assets.......... 58,062 24,175 6.00% - 11.38% Various through 2011 Secured by corporate lending investment........... 50,000 -- LIBOR + 2.50% July 2006 (3) -------- -------- 301,062 138,331 Plus: debt premium................................ 327 51 -------- -------- Total secured term loans............................ 301,389 138,382 UNSECURED NOTES (4): 6.75% Dealer Remarketable Securities (5).......... 125,000 125,000 6.75% March 2013 7.30% Notes....................................... -- 100,000 7.30% May 2001 7.70% Notes....................................... 100,000 100,000 7.70% July 2017 7.95% Notes....................................... 50,000 50,000 7.95% May 2006 -------- -------- Total unsecured notes............................... 275,000 375,000 Less: debt discount (6)........................... (16,664) (18,490) -------- -------- TOTAL UNSECURED NOTES............................... 258,336 356,510 -------- -------- TOTAL DEBT OBLIGATIONS.............................. $559,725 $668,342 ======== ========
EXPLANATORY NOTES: - ------------------------------ (1) On July 27, 2001, the Company replaced this facility with a new $300.0 million revolving credit facility at iStar Financial. (2) Maturity date reflects two one-year extensions at the Company's option. (3) On July 6, 2001, the Company financed a $75.0 million structured finance asset with a $50.0 million term loan bearing interest at LIBOR + 2.50%. The loan has an initial maturity of July 2005 with a one-year extension at the Company's option. (4) The notes are callable by the Company at any time for an amount equal to the total of principal outstanding, accrued interest and the applicable make-whole prepayment premium. (5) Subject to mandatory tender on March 1, 2003 to either the dealer or the Company. The initial coupon of 6.75% applies to first five-year term through the mandatory tender date. If tendered to the dealer, the notes must be remarketed. The rates reset to market rates upon remarketing. (6) As part of the accounting for the merger these fixed-rate obligations were considered to have stated interest rates which were below the then-prevailing market rates at which the Company could issue new debt obligations and, accordingly, the Company ascribed a market discount to each obligation. Such discounts are amortized as an adjustment to interest expense using the effective interest method over the related term of the obligations. As adjusted, the effective annual interest rates on these obligations were 8.81%, 8.75%, 9.51% and 9.04% for the 6.75% Dealer Remarketable Securities, 7.30% Notes, 7.70% Notes and 7.95% Notes, respectively. 14 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5--DEBT OBLIGATIONS (CONTINUED) On May 15, 2001, the Company repaid its $100.0 million 7.30% unsecured notes. These notes were senior unsecured obligations of the Company and ranked equally with the Company's other senior unsecured and unsubordinated indebtedness. On June 14, 2001, the Company closed $193.0 million of financing secured by 15 corporate tenant lease assets. The floating-rate loan bears interest at LIBOR plus 1.85% (not to exceed 10.00%) and has two one-year extensions at the Company's option. The Company used these proceeds to repay a $77.8 million secured term loan maturing in June 2001 and to pay down a portion of its revolving credit facilities. On July 6, 2001, the Company financed a $75.0 million structured finance asset with a $50.0 million term loan bearing interest at LIBOR + 2.50%. The loan has a maturity of July 2006, including a one-year extension at the Company's option. On July 27, 2001, the Company repaid the unsecured revolving credit facility. iStar Financial replaced this subsidiary facility with a $300.0 million revolving credit facility with a group of leading financial institutions. The new facility has an initial maturity of July 2003, with a one-year extension at iStar Financial's option and another one-year extension at the lenders' option. The facility bears interest at LIBOR + 2.125%. The 30-day LIBOR rate as of September 30, 2001 was 2.63%. The Company has entered into an interest rate swap agreement which, together with an existing LIBOR interest rate cap agreement struck at 7.75%, effectively fixes the interest rate on $75.0 million of the Company's LIBOR-based borrowings at 5.58% plus the applicable margin through December 1, 2004. The actual borrowing cost to the Company with respect to indebtedness covered by the protection agreements will depend upon the applicable margin over LIBOR for such indebtedness, which will be determined by the terms of the relevant debt instruments. The Company has also entered into a LIBOR interest rate cap struck at 7.75% in the notional amount of $35.0 million, which expires in December 2004. As of September 30, 2001, future expected/scheduled maturities of outstanding long-term debt stated in terms of the contractual obligation are as follows (in thousands) (unaudited)(1): 2001 (remaining three months)............................... $ -- 2002........................................................ 14,711 2003........................................................ -- 2004........................................................ -- 2005........................................................ 3,566 Thereafter.................................................. 557,785 -------- Total principal maturities.................................. 576,062 Net unamortized debt discounts.............................. (16,337) -------- Total debt obligations...................................... $559,725 ========
EXPLANATORY NOTE: - ------------------------------ (1) Assumes exercise of extension to the extent such extensions are at the Company's option. NOTE 6--COMMITMENTS AND CONTINGENCIES The Company is subject to expansion option agreements with three existing customers which could require the Company to fund and to construct up to 166,000 square feet of additional adjacent space on which the Company would receive additional operating lease income under the terms of the option agreements. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL As a wholly-owned subsidiary of iStar Financial, the Company specializes in providing investment capital to major corporations and real estate owners nationwide by structuring purchase/leaseback transactions and acquiring corporate tenant lease assets subject to existing long-term leases to creditworthy customers occupying office and industrial facilities. The Company uses its corporate credit and real estate underwriting expertise to structure investments that it believes will generate attractive risk-adjusted returns. As of September 30, 2001, the Company's portfolio consisted of 119 facilities principally subject to net leases to approximately 138 customers, comprising 14.6 million square feet in 23 states. Of the 119 total facilities, there are 20 facilities held in three joint venture partnerships. In addition, there are two "build-to-suit" facilities under development which are pre-leased to single-user corporate tenants. On November 3, 1999, consistent with previously announced terms, the Company's stockholders and the shareholders of iStar Financial approved the merger of the Company with 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 Stock of iStar Financial. The iStar Financial preferred stock issued to the Company's former preferred stockholders have 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 Stock received Series A Preferred Stock 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 assets and liabilities of the Company based on their relative fair values and resulted in no allocation to goodwill. In July 2001, the Company disposed of 18 corporate tenant lease assets by transferring them to iStar Financial at their respective carrying amounts. Additionally, in July 2001, iStar Financial contributed cash of $97.0 million to the Company, which was used to pay off the Company's unsecured revolving credit facility. The following discussion of the results of operation will focus on comparisons between the three- and nine-month periods ended September 30, 2001 compared to the three- and nine-month periods ended September 30, 2000. RESULTS OF OPERATIONS THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 OPERATING LEASE INCOME--Operating lease income decreased to $41.6 million for the three months ended September 30, 2001 from $42.6 million for the same period in 2000. Of this decrease, $4.6 million resulted from the corporate tenant lease assets transferred to iStar Financial in July 2001, as discussed 16 above. This decrease was partially offset by approximately $826,000 from new corporate tenant lease investments and $1.7 million in additional operating lease income attributable to existing corporate tenant lease investments owned in both quarters. The decrease was also offset by joint venture income which contributed an additional $1.1 million. INTEREST INCOME--Interest income increased to $2.8 million for the three months ended September 30, 2001 from $1.9 million for the same period in 2000. The increase is primarily due to interest income earned on newly-originated loan investments of $2.7 million, partially offset by the reduction of interest income and discount amortization from a loan transferred to the parent for cash in the first quarter of 2001. Additionally, interest income decreased due to the exercise of a convertible mortgage option in the third quarter 2000. These transactions resulted in a decrease of approximately $1.6 million in interest income. OTHER INCOME--Other income for the three months ended September 30, 2001 includes dividends on an investment. For the three months ended September 30, 2000, other income included amounts related to the conversion of a loan to a corporate tenant lease asset and a forfeited purchase deposit. INTEREST EXPENSE--For the three months ended September 30, 2001, interest expense decreased by $2.2 million to $10.9 million, from $13.1 million for the same period in 2000. This decrease is primarily the result of the repayment of revolving debt, together with refinancing term debt in a declining interest rate environment. OPERATING COSTS-CORPORATE TENANT LEASE ASSETS--Operating costs did not significantly change for the three months ended September 30, 2001 compared to the comparable period in 2000. DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased approximately $1.0 to $6.3 million for the three months ended September 30, 2001 over the same period in the prior year. This decrease is primarily the result of corporate tenant lease dispositions in 2000 and 2001 and the transfer of corporate tenant lease assets to iStar Financial in July 2001. These decreases were partially offset by additional depreciation on investments. GENERAL AND ADMINISTRATIVE--For the three months ended September 30, 2001, general and administrative expenses decreased by approximately $474,000 to $1.0 million, compared to $1.5 million for the same period in 2000. GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS--On August 30, 2001, the Company disposed of one corporate tenant lease asset for total proceeds of $13.0 million, and recognized a loss of approximately $1.2 million. During the third quarter of 2000, one of the Company's joint ventures sold its facility for total proceeds of $41.9 million, and the Company recognized a gain of approximately $1.7 million. In addition, another of the Company's joint ventures sold all five of its facilities for total proceeds of $66.0 million, and the Company recognized a gain of approximately $222,000. EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--During the three months ended September 30, 2001, the Company prepaid the unsecured revolving credit facility, which had a maturity date of May 2002, with cash contributed by iStar Financial. In connection with this prepayment, the Company expensed the remaining unamortized deferred financing costs, which resulted in an extraordinary loss on early extinguishment of debt of approximately $583,000. In the third quarter of 2000, certain of the proceeds from an asset disposition in one of the Company's joint ventures were used to repay $16.4 million of a third-party debt at the joint venture. In connection with this pay down, the joint venture incurred certain prepayment penalties, which resulted in an extraordinary loss on early extinguishment of debt to the Company of approximately $388,000. 17 NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 OPERATING LEASE INCOME--Operating lease income increased to $132.8 million for the nine months ended September 30, 2001 from $128.7 million for the same period in 2000. Of this increase, $8.2 million was attributable to new corporate tenant lease investments and $4.4 million to additional operating lease income from existing corporate tenant lease investments owned in both quarters. In addition, joint venture income contributed $2.9 million to the increase. These increases in operating lease income from assets owned were partially offset by a $6.9 million decrease in operating lease income resulting from asset dispositions made in 2000 and 2001 and a $4.6 million decrease from the assets transferred to iStar Financial in July 2001. INTEREST INCOME--Interest income decreased to $5.7 million for the nine months ended September 30, 2001 from $6.3 million for the same period in 2000. The decrease is primarily due to the reduction of interest income and discount amortization from a loan transferred to the parent for cash in the first quarter of 2001. Additionally, interest income decreased due to the exercise of a convertible mortgage option in the third quarter 2000. These transactions resulted in a decrease of $5.2 million in interest income. This decrease was partially offset by $4.8 million of interest income earned in the second and third quarter 2001 on newly-originated loan investments. OTHER INCOME--Other income for the nine months ended September 30, 2001 includes quarterly dividends on an investment. For the nine months ended September 30, 2000, other income included amounts related to the conversion of a loan to a corporate tenant lease asset, a forfeited purchase deposit and an early termination fee. INTEREST EXPENSE--For the nine months ended September 30, 2001, interest expense decreased by $5.2 million to $34.7 million from $39.9 million for the same period in 2000. This decrease is primarily the result of the repayment of revolving debt, together with refinancing term debt in a declining interest rate environment. OPERATING COSTS-CORPORATE TENANT LEASE ASSETS--For the nine months ended September 30, 2001, operating costs increased by approximately $200,000 to $9.8 million, from $9.6 million for the same period in 2000. DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased approximately $1.3 million to $21.1 million for the nine months ended September 30, 2001 over the same period in the prior year. This decrease is primarily the result of corporate tenant lease dispositions in 2000 and 2001 and the transfer of corporate tenant lease assets to iStar Financial in July 2001. These decreases were partially offset by additional depreciation on investments. GENERAL AND ADMINISTRATIVE--For the nine months ended September 30, 2001, general and administrative expenses decreased by $2.3 million to $5.1 million, compared to $7.3 million for the same period in 2000. This decrease is primarily a result of a reduction in personnel and related overhead costs in 2001 as compared to 2000. GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS--During the nine months ended September 30, 2001, the Company disposed of three corporate tenant lease assets for total proceeds of $21.4 million, and recognized a net gain of approximately $403,000. During the first nine months of 2000, the Company disposed of seven assets for total proceeds of $256.2 million, and recognized gains of approximately $2.9 million. 18 EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--During the nine months ended September 30, 2001, the Company repaid a secured term loan, which had an original maturity date of December 2004. In connection with this early repayment, the Company incurred certain prepayment penalties, which resulted in an extraordinary loss on early extinguishment of debt of approximately $1.0 million during the first quarter of 2001. In the third quarter of 2001, the Company prepaid its unsecured revolving credit facility, which had an original maturity date of May 2002, with cash contributed by iStar Financial. In connection with this prepayment, the Company expensed the remaining unamortized deferred financing costs, which resulted in an extraordinary loss on early extinguishment of debt of approximately $583,000. During the first quarter of 2000, certain of the proceeds from an asset disposition were used to partially repay $8.1 million of a secured term loan. In connection with this partial pay down, the Company incurred certain prepayment penalties, which resulted in an extraordinary loss on early extinguishment of debt of $317,000. In addition, during the third quarter of 2000, certain of the proceeds from an asset disposition in one of the Company's joint ventures were used to repay $16.4 million of a third-party debt at the joint venture. In connection with this pay down, the joint venture incurred certain prepayment penalties, which resulted in an extraordinary loss on early extinguishment of debt to the Company of $388,000. 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 regional and national economic conditions, changes in levels of market interest rates, credit and other risks of lending and investment activities, 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. 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Omitted pursuant to General Instruction H (2) of Form 10-Q. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Omitted pursuant to General Instruction H (2) of Form 10-Q. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted pursuant to General Instruction H (2) of Form 10-Q. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS None. B. REPORTS ON FORM 8-K On August 10, 2001, a Current Report on Form 8-K was filed in connection with the repayment and termination of the Company's $350 million unsecured revolving credit facility and the transfer of corporate tenant lease assets to another subsidiary of the Company's parent company. On October 10, 2001, an Amendment No. 1 to Current Report on Form 8-K/A was filed to provide the pro forma consolidated financial statements relating to the transaction presented in the Current Report on Form 8-K filed on August 10, 2001. 20 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRINET CORPORATE REALTY TRUST, INC. REGISTRANT Date: November 14, 2001 /s/ JAY SUGARMAN --------------------------------------------- CHAIRMAN OF THE BOARD DIRECTORS AND CHIEF EXECUTIVE OFFICER Date: November 14, 2001 /s/ SPENCER B. HABER --------------------------------------------- PRESIDENT, CHIEF FINANCIAL OFFICER, DIRECTOR AND SECRETARY
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