-----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, KmoYBhFxYo7TNN45gMALQmTGqvN6G48mCBDxA6z5p4o7TzyfsChDaNK7BuJDKUUs VHRBd+Sv9L9XJMIjd1HDoQ== 0000950149-99-000986.txt : 19990518 0000950149-99-000986.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950149-99-000986 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: SEC FILE NUMBER: 001-11918 FILM NUMBER: 99627306 BUSINESS ADDRESS: STREET 1: ONE EMBARCADERO CENTER 33RD FLOOR 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 TRINET CORPORATE REALTY TRUST, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q ------------------------ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 COMMISSION FILE NUMBER 1-11918 ------------------------ TRINET CORPORATE REALTY TRUST, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 94-3175659 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) ONE EMBARCADERO CTR., 33RD FLOOR, SAN FRANCISCO, CA 94111 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(415) 391-4300 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 24,938,594 shares of Common Stock, $.01 par value as of May 14, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TRINET CORPORATE REALTY TRUST, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 INDEX
PAGE ---- PART I -- FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998........................................... 3 Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998............................... 4 Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998............................... 5 Notes to Consolidated Financial Statements.................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 12 PART II -- OTHER INFORMATION Item 1. Legal Proceedings........................................... 19 Item 2. Changes in Securities....................................... 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
2 3 TRINET CORPORATE REALTY TRUST, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS
MARCH 31, DECEMBER 31, 1999 1998 ----------- ------------ Real estate................................................. $1,504,065 $1,500,789 Less accumulated depreciation............................. (78,832) (71,950) ---------- ---------- 1,425,233 1,428,839 Cash and cash equivalents................................... 10,692 19,323 Restricted cash............................................. 18,518 17,768 Deferred rent receivable.................................... 28,602 27,235 Loan costs, net............................................. 11,842 12,238 Other assets, net........................................... 19,318 21,164 ---------- ---------- $1,514,205 $1,526,567 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Debt...................................................... $ 634,629 $ 647,720 Dividends payable......................................... 16,167 16,167 Other liabilities......................................... 55,947 56,655 ---------- ---------- Total liabilities................................. 706,743 720,542 ---------- ---------- Commitments and contingencies (notes 2, 5).................. -- -- Minority interest........................................... 2,565 2,565 Stockholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized: Series A: 2,000,000 shares issued and outstanding at March 31, 1999 and December 31, 1998 (aggregate liquidation preference $50,000)..................... 20 20 Series B: 1,300,000 shares issued and outstanding at March 31, 1999 and December 31, 1998 (aggregate liquidation preference $32,500)..................... 13 13 Series C: 4,000,000 shares issued and outstanding at March 31, 1999 and December 31, 1998 (aggregate liquidation preference $100,000) ................... 40 40 Common stock, $.01 par value, 40,000,000 shares authorized: 24,925,094 and 24,872,429 shares issued and outstanding at March 31, 1999 and December 31, 1998... 249 249 Paid-in-capital........................................... 857,875 855,568 Accumulated deficit....................................... (53,300) (52,430) ---------- ---------- Total stockholders' equity........................ 804,897 803,460 ---------- ---------- $1,514,205 $1,526,567 ========== ==========
The accompanying notes are an integral part of these financial statements. 3 4 TRINET CORPORATE REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, ------------------ 1999 1998 ------- ------- Revenues: Rent...................................................... $39,286 $35,266 Joint venture income...................................... 919 448 Property management fees.................................. 659 265 Interest income........................................... 1,556 120 Other income.............................................. 664 773 ------- ------- Total revenues.................................... 43,084 36,872 Expenses: Property operating costs.................................. 1,826 1,260 General and administrative................................ 3,078 2,510 Interest.................................................. 11,162 8,706 Depreciation and amortization............................. 7,104 6,457 ------- ------- Income before minority interest, gain on sale of real estate and cumulative effect of a change in accounting principle.............................................. 19,914 17,939 Minority interest......................................... (41) (12) Gain on sale of real estate............................... 1,153 1,115 ------- ------- Income before cumulative effect of a change in accounting principle.............................................. 21,026 19,042 Cumulative effect of a change in accounting principle..... (1,810) -- ------- ------- Net income............................................. 19,216 19,042 Preferred dividend requirement......................... (3,919) (3,919) ------- ------- Earnings available to common shares: Basic................................................ $15,297 $15,123 ======= ======= Diluted.............................................. $15,389 $15,123 ======= ======= Earnings available per common share, basic: Income available before cumulative effect................. $ 0.68 $ 0.65 Earnings available........................................ $ 0.61 $ 0.65 Earnings available per common share, assuming dilution: Income available before cumulative effect................. $ 0.68 $ 0.65 Earnings available........................................ $ 0.61 $ 0.65 Weighted average number of common shares outstanding: Basic..................................................... 24,876 23,131 Diluted................................................... 25,294 23,411 Dividends declared per common share......................... $ 0.65 $ 0.64
The accompanying notes are an integral part of these financial statements. 4 5 TRINET CORPORATE REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, --------------------- 1999 1998 -------- --------- Cash flows from operating activities: Net income................................................ $ 19,216 $ 19,042 Adjustment to reconcile net income to net cash provided by operating activities: Minority interest...................................... 41 12 Depreciation and amortization.......................... 7,104 6,457 Amortization of loan costs and discounts............... 485 641 Straight-line rent adjustments......................... (1,439) (2,304) Gain on sale of real estate............................ (1,153) (1,115) Joint venture income................................... (919) (448) Distributions from operating joint ventures............ 1,372 431 Cumulative effect of a change in accounting principle............................................. 1,810 -- Cash provided by (used in) operating assets and liabilities: Other assets........................................... 4 (2,253) Other liabilities...................................... 439 11,281 -------- --------- Net cash provided by operating activities............ 26,960 31,744 -------- --------- Cash flows from investing activities: Real estate acquisitions.................................. (15,898) (87,676) Net proceeds from sale of real estate..................... 14,480 12,297 Net investments in and advances to unconsolidated joint ventures............................................... (644) (108,076) Other capital expenditures and investments................ (633) (571) -------- --------- Net cash used in investing activities................ (2,695) (184,026) -------- --------- Cash flows from financing activities: Net borrowings (repayments) on Acquisition Facilities..... (12,900) (47,600) Mortgage note principal payments.......................... (211) (94) Preferred dividends paid.................................. (3,919) (3,920) Common dividends paid..................................... (16,167) (13,346) Proceeds from issuance of common stock.................... 1,161 119,351 Proceeds from senior unsecured debt offering.............. -- 124,633 Minority interest distributions........................... (41) -- Increase in restricted cash and investments............... (750) (11,118) Increase in loan costs.................................... (69) (947) -------- --------- Net cash (used in) provided by financing activities.......................................... (32,896) 166,959 -------- --------- (Decrease)/increase in cash and cash equivalents............ (8,631) 14,677 Cash and cash equivalents, at beginning of period........... 19,323 303 -------- --------- Cash and cash equivalents, at end of period................. $ 10,692 $ 14,980 ======== ========= Supplemental Schedule of Noncash Investing and Financing Activities: Issuance of common shares in conjunction with real estate acquired............................................... $ -- $ 1,864
The accompanying notes are an integral part of these financial statements. 5 6 TRINET CORPORATE REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. FINANCIAL STATEMENTS: Principles of Consolidation and Basis of Presentation: The accompanying consolidated financial statements include the accounts of TriNet Corporate Realty Trust, Inc. (the "Company" or "TriNet"), its wholly-owned subsidiary corporations and partnerships, and its majority-owned and controlled partnership. The equity interests in the consolidated partnership not owned and controlled by the Company are reflected as minority interest in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of TriNet's consolidated financial position, results of operations and cash flows for the interim period. The results of operations for the three months ended March 31,1999, are not necessarily indicative of the results to be expected for the entire year. Change in Accounting Principle: In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs of start-up activities, including organization costs, to be charged to operations as incurred for fiscal years beginning after December 15, 1998. The initial application of SOP 98-5 requires that prior years' unamortized start-up costs be charged to income as a cumulative effect of a change in accounting principle. Accordingly, the Company reported a $1.8 million charge to net income during the first quarter as a cumulative effect of a change in accounting principle. 2. REAL ESTATE: TriNet's investments in real estate, at cost, were as follows (in thousands):
MARCH 31, DECEMBER 31, 1999 1998 ---------- ------------ Buildings and Improvements......................... $1,111,546 $1,119,425 Improved land...................................... 229,024 230,401 Real estate held for sale.......................... -- 3,500 Less accumulated depreciation.................... (78,832) (71,950) ---------- ---------- 1,261,738 1,281,376 Convertible mortgages.............................. 43,623 27,725 Investments in and advances to unconsolidated joint ventures......................................... 119,872 119,738 ---------- ---------- Net real estate............................. $1,425,233 $1,428,839 ========== ==========
Investments in and Advances to Unconsolidated Joint Ventures: At March 31, 1999, TriNet had $119.9 million invested in six unconsolidated real estate joint ventures: TriNet Sunnyvale Partners, L.P. ("Sunnyvale"), W9/TriNet Poydras, LLC ("Poydras"), Corporate Technology Associates LLC ("CTC I"), Sierra Land Ventures ("Sierra"), Corporate Technology Centre Associates II LLC ("CTC II"), and TriNet Milpitas Associates, LLC ("Milpitas"), for the purpose of operating, acquiring, and, in certain cases, developing properties. At March 31, 1999, the ventures comprised 24 operating properties totaling 2.4 million square feet, 19.4 acres of land under development and 51.7 acres of land held for development. The 24 operating properties owned at March 31, 1999 had a total purchase price of 6 7 TRINET CORPORATE REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) $331.8 million. The purchase price of the land, either held or under development was approximately $66.9 million. Third party debt related to these investments totalled $250.1 million at March 31, 1999. On an aggregate book basis, the joint ventures had total assets of $434.2 million, total liabilities of $324.6 million, and net income of $1.7 million. TriNet accounts for these investments under the equity method, because TriNet's joint venture partners have certain participating rights which constitute shared control. TriNet's investments in and advances to unconsolidated joint ventures, its percentage ownership interests and their respective revenues at March 31, 1999 are presented below (in thousands):
ACCRUED JOINT THIRD UNCONSOLIDATED OWNERSHIP EQUITY NOTES INTEREST TOTAL VENTURE INTEREST TOTAL PARTY JOINT VENTURE % INVESTMENT RECEIVABLE RECEIVABLE INVESTMENT INCOME INCOME INCOME DEBT -------------- --------- ---------- ---------- ---------- ---------- ------- -------- ------ -------- Operating: Sunnyvale.......... 44.7% $ 6,232 $ -- $ -- $ 6,232 $271 $ -- $ 271 $ 16,862 Poydras............ 50.0% 12,445 14,890 404 27,739 93 404 497 78,610 CTC II............. 50.0% 1,998 28,732 1,212 31,942 (103) 896 793 16,856 Milpitas........... 50.0% 27,694 -- -- 27,694 651 -- 651 82,951 Developments: Sierra............. 50.0% 7,229 -- -- 7,229 3 -- 3 7,540 CTC I.............. 50.0% 19,036 -- -- 19,036 4 -- 4 47,232 ------- ------- ------ -------- ---- ------ ------ -------- Total....... $74,634 $43,622 $1,616 $119,872 $919 $1,300 $2,219 $250,051 ======= ======= ====== ======== ==== ====== ====== ========
At March 31, 1999, TriNet was the guarantor for 25% of Poydras's $78.6 million third party debt and 50% of CTC I's $47.2 million construction loan. Additionally, under certain circumstances, the Company had commitments to fund further development costs for CTC I, up to a maximum of $16.3 million. The Company has the right, however, to arrange financing secured by the development project to reduce this funding commitment. The limited partners of Sunnyvale have the option to convert their partnership interest into cash; however, the Company may elect to deliver 258,894 shares of the Company's common stock in lieu of cash. Additionally, commencing in March 2001 and February 2002, subject to acceleration under certain circumstances, partnership units held by certain partners of Poydras and Milpitas may be converted into 304,977 and 856,066 shares, respectively, of TriNet's common stock. 7 8 TRINET CORPORATE REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. DEBT: Debt consists of the following (in thousands):
BALANCE AS OF --------------------------- INTEREST RATE MARCH 31, DECEMBER 31, AS OF MARCH 31, MATURITY LOAN 1999 1998 1999 DATE ---- ----------- ------------ ----------------- ---------- Acquisition Facility.............. $176,000 $188,900 LIBOR + 0.750% 05/31/2001 7.30% Notes due 2001.............. 100,000 100,000 7.300% 05/15/2001 1994 Mortgage Loan................ 55,013 55,013 LIBOR + 1.000% 12/01/2004 7.95% Notes due 2006.............. 50,000 50,000 7.950% 05/15/2006 7.70% Notes due 2017.............. 100,000 100,000 7.700% 07/15/2017 6.75% Drs. due 2013 (1)........... 125,000 125,000 6.750% 03/01/2013 Other Mortgage Loans.............. 29,515 29,726 6.00% - 11.375% (2) -------- -------- 635,528 648,639 Less debt discount................ (899) (919) -------- -------- $634,629 $647,720 ======== ========
- --------------- (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 30-day LIBOR rate as of March 31, 1999 was 4.93719%. Effective October 1, 1995, the Company entered into an interest rate swap agreement which, together with certain existing interest rate cap agreements, effectively fixes the interest rate on $75.0 million of the Company's LIBOR-based borrowings at 5.58% plus the applicable margin. The actual borrowing cost to the Company with respect to indebtedness covered by the protection agreements will depend upon the applicable margin over LIBOR for such indebtedness, which will be determined by the terms of the relevant debt instruments. At March, 1999, the swap agreement, together with the Cap agreements had a fair market value totalling $402,000. The following table presents loan costs and related accumulated amortization associated with loans outstanding (in thousands):
MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ Loan origination costs............................... $ 8,633 $ 8,564 Protection agreement costs........................... 9,686 9,686 ------- ------- 18,319 18,250 Accumulated amortization............................. (6,477) (6,012) ------- ------- Loan origination costs and protection agreement costs, net......................................... $11,842 $12,238 ======= =======
The following table sets forth the components of interest expense for the periods presented (in thousands):
FOR THE THREE MONTHS ENDED MARCH 31, --------------------- 1999 1998 --------- -------- Interest incurred......................................... $11,222 $8,065 Capitalized interest...................................... (545) -- Amortization of loan origination costs, interest rate protection agreements, and loan discounts............... 485 641 ------- ------ $11,162 $8,706 ======= ======
8 9 TRINET CORPORATE REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Cash interest paid for the three months ended March 31, 1999 and 1998 was $12.5 million and $6.5 million, respectively. 4. STOCKHOLDERS' EQUITY: On March 15, 1999, the Company paid a quarterly dividend of $0.5859 per Series A perpetual preferred share, $0.5750 per Series B perpetual preferred share and $0.5000 per Series C perpetual preferred share to preferred shareholders of record on February 26, 1999. On February 25, 1999, the Company declared a distribution of $0.65 per common share, payable April 15, 1999, to common shareholders of record as of March 31, 1999. 5. COMMITMENTS AND CONTINGENCIES: The Company is subject to option agreements with four existing tenants which could require the Company to fund tenant improvements on approximately 25,000 square feet and to construct approximately 541,000 square feet of additional adjacent space on which the Company would receive additional rent under the terms of the option agreements. The option agreements commence and expire at various dates through 2012. At March 31, 1999, TriNet had an obligation to loan TN-CP Venture One ("TN-CP") up to $40.4 million . TN-CP, a Texas joint venture between TriNet and Sierra Office Venture Three, Ltd. ("SOVT"), was formed to provide a take-out commitment to SOVT to acquire Sierra III, a build-to-suit office building, located in Irving, Texas, which will be 100% occupied upon completion in January 2000. TriNet's obligation to make such loan is conditioned upon TN-CP acquiring Sierra III from SOVT. TN-CP's obligation to purchase Sierra III from SOVT is conditioned upon satisfaction of certain requirements related to the completion of the project and the tenant's occupancy of the building. TriNet is the Managing Partner of TN-CP and has an option to acquire Sierra III from TN-CP, at its sole election, based upon a pre-determined formula. 9 10 TRINET CORPORATE REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 6. EARNINGS PER SHARE: The following table presents the basic and diluted earnings per share calculations for the periods presented (dollars in thousands, except per share amounts):
MARCH 31, ------------------ 1999 1998 ------- ------- NUMERATOR Basic: Income before cumulative effect of a change in accounting principle.............................. $21,026 $19,042 Cumulative effect of a change in accounting principle......................................... (1,810) -- ------- ------- Net income.......................................... 19,216 19,042 Preferred dividend requirement...................... (3,919) (3,919) ------- ------- Earnings available to common shares................. 15,297 15,123 ------- ------- Diluted: Earnings available to common shares................. 15,297 15,123 Equity earnings in joint ventures attributable to convertible partnership units..................... 92 -- ------- ------- Earnings available to common shares, as adjusted.... $15,389 $15,123 ======= ======= DENOMINATOR Basic: Weighted average common shares outstanding.......... $24,876 $23,131 Diluted: Weighted average common shares outstanding.......... 24,876 23,131 Shares issuable from assumed conversion of common stock options..................................... 10 280 Shares issuable in exchange for land................ 103 Partnership units as if converted................... 305 -- ------- ------- Weighted average common shares outstanding, as adjusted.......................................... 25,294 23,411 ======= ======= EARNINGS AVAILABLE PER COMMON SHARE -- BASIC: Income available before cumulative effect of a change in accounting principle.................... $ 0.68 $ 0.65 Cumulative effect of a change in accounting principle......................................... (0.07) -- ------- ------- Earnings available per common share................. $ 0.61 $ 0.65 ======= ======= EARNINGS AVAILABLE PER COMMON SHARE -- DILUTED: Income available before cumulative effect of a change in accounting principle.................... $ 0.68 $ 0.65 Cumulative effect of a change in accounting principle......................................... (0.07) -- ------- ------- Earnings available per common share, as adjusted.... $ 0.61 $ 0.65 ======= =======
For the quarter ended March 31, 1999 and 1998, there were 1,180,037 and 258,894 weighted average partnership units outstanding, on an as converted basis, respectively, that were not assumed converted into 10 11 TRINET CORPORATE REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) common shares since they were antidilutive to earnings per share. These securities may become dilutive to earnings per share in subsequent periods. 7. SUBSEQUENT EVENTS MJDesigns, Inc., a tenant of TriNet occupying a 510,000 square foot industrial building in Coppell, Texas, is in default under its lease. On February 2, 1999, the tenant filed for protection under Chapter 11 of the federal bankruptcy laws. On April 30, 1999, MJ Designs rejected its lease with TriNet, but will remain in the building until May 31, 1999. Effective May 1, 1999, MJ Designs is paying TriNet $7,742 per day to continue occupying the premises. The Company has collected $2.5 million on a standby letter of credit it held as collateral under the lease and $524,000 of cash previously held in escrow. The Company applied a majority of the collateral proceeds to $466,000 of delinquent property taxes paid by TriNet on behalf of the tenant, $633,000 to rents and late fees due in the first quarter of 1999 and $1.2 million towards the write-off of straight line rents receivable. The annual rents under this lease totalled approximately $2.3 million in cash rents plus approximately $300,000 in straight-line rents, which represented less than 1.6% of the Company's total revenues at December 31, 1998. Currently, the company is actively marketing the property for sale or lease. 11 12 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 1998 filed on Form 10-K. Unless otherwise defined in this report, or unless the context otherwise requires, the capitalized words or phrases referred to in this section have the meaning ascribed to them in such financial statements and the notes thereto. OVERVIEW TriNet is a real estate investment trust ("REIT") which owns predominately strategic corporate office and industrial properties net leased to large, well know companies. The Company believes that operating a national portfolio of real estate reduces the risk of exposure to economic downturns in any one market. As of March 31, 1999, TriNet's portfolio consisted of 145 properties, which comprised more than 19.4 million rentable square feet in 25 states. First quarter highlights consist of: Acquisitions and Dispositions - During the first quarter of 1999, TriNet structured a $15.9 million convertible mortgage on a 109,043 square foot office building in Richardson, Texas. TriNet is earning an 11% initial yield on the mortgage and has the option to acquire the building after seven months by funding an additional $0.5 million. - TriNet raised approximately $14.7 million in proceeds from the sale of two buildings during the first quarter of 1999, including its last remaining retail property in the Louisiana Retail Portfolio. Leasing Activity TriNet executed eight new leases and/or lease extensions on 705,325 square feet of office and industrial space during the first three months of 1999, generating approximately a 10% increase in annual rent on those leases. The larger leasing transactions included: - An agreement with AT&T Capital/Newcourt Credit Group ("Newcourt") which permits Newcourt to remain in the 420,000 square foot Gatehall Corporate Center office property in Parsippany, N.J., for approximately seven months following the July 2000 expiration of its current lease. This arrangement gives TriNet two full years of lead time to re-tenant the property. Newcourt continues to pay rent at its current contractual rate during the extension period and has paid TriNet $2.5 million as consideration for the right to occupy the property past the lease expiration date. The $2.5 million is being amortized over the remaining lease term. - A new, five-year lease on 41,068 square feet of R&D space in suburban Boston effective June 15, 1999. Stream International Services Corporation, the new tenant, will occupy more than half the space of an 80,000 square foot building that was vacant when TriNet acquired it as part of a portfolio of 14 properties. - A five-year extension option exercised by Lockheed Martin on a 174,600 square foot Silicon Valley office property. The extension begins July 1, 1999, at a rent that will be calculated based on CPI increases over the five-year period immediately preceding the beginning of the lease extension. - An early lease renewal by CitiCorp Universal Card on a 46,002 square foot office building in Jacksonville, Florida. The rent on the five-year lease renewal represents an 18% increase in base rent over the original lease. 12 13 RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1999 VS. THREE MONTHS ENDED MARCH 31, 1998 Earnings Available to Common Shares Earnings available to common shares increased by $174,000 to $15.3 million for the three months ended March 31, 1999, from $15.1 million for the same period in 1998. The increase is net of a $1.8 million charge to earnings for a cumulative effect of a change in accounting principle in the first quarter of 1999. Rent Revenues Rental revenues for the first three months of 1999 increased by $4.0 million or 11.3% to $39.3 million, as compared to $35.3 million for the same period in 1998. The increase was primarily attributable to 1998 and 1999 acquisitions, which generated an increase in revenues of $6.1 million, offset by a decrease in revenues of approximately $2.1 million for properties sold in 1998 and 1999. Joint Venture Income For the three months ended March 31, 1999, joint venture income increased by $471,000, from $448,000 in 1998 to $919,000 in 1999. The substantial increase was primarily attributable to the Milpitas joint venture formed in 1998, which generated revenues of $651,000 in the first quarter of 1999. Additionally, joint venture income attributable to the Sunnyvale joint venture increased $52,000 in the first quarter of 1999 compared to the same period in 1998. These increases were offset by a decrease in net income of approximately $137,000 from the Poydras joint venture when compared to the same period in 1998, and a loss of $103,000 attributable to CTC II in the first quarter of 1999. TriNet earns interest income and other fees from the Poydras and CTC II joint ventures in addition to income (losses) from its equity interest (see "Interest Income" and "Other Income" below). Management Fees Management fees increased by $394,000 for the three months ended March 31, 1999 to $659,000 from $265,000 for the same period in 1998. The increase relates primarily to fees earned on the management of 24 properties acquired during 1998, 15 of which were acquired through joint ventures. Interest Income Interest income increased to $1.6 million for the three months ended March 31, 1999 from $120,000 for the same period in 1998. The increase consists of $1.3 million of interest income earned on loans made to its CTC II and Poydras joint ventures, $57,000 of interest earned on the Company's investment in G. Accion, a real estate company in Mexico with which the company has a strategic alliance, and an increase of $79,000 of interest on cash balances over the 1998 amount. Other Income Other income for the three months ended March 31, 1999 consisted of a $250,000 non-compete fee, amortization of $209,000 of the $2.5 million received from Newcourt (see "Overview: Leasing Activity"), a $98,000 credit enhancement fee, and $107,000 of dividend income. Other income of $773,000 for the three months ended March 31, 1998, consisted primarily of fees from the Company's advisory services provided in connection with the formation of the Poydras joint venture. Property Operating Costs For the three months ended March 31, 1999, property-operating costs increased $566,000, or 45%, to $1.8 million from $1.3 million for the same period of 1998. The increase in property operating costs is due to the costs associated with the net growth in the Company's real estate portfolio during 1998. 13 14 General and Administrative For the three months ended March 31, 1999, general and administrative expenses increased by $568,000, or 23%, to $3.1 million compared to $2.5 for the same period in 1998. This increase is primarily a result of increased personnel and related overhead from the Company's net growth during 1998. General and administrative expenses as a percentage of weighted average joint venture investments and undepreciated real estate was .20% for the first quarter of 1999 and 1998. Interest Expense Interest expense increased by $2.5 million, or 29% to $11.2 million for the three months ended March 31, 1999, from $8.7 million for the same period in 1998. This increase is due to a greater weighted average debt balance of $636.3 million for the three months ended March 31, 1999, compared to $437.2 million for the same period of 1998. The increase in the debt balance is primarily attributable to the issuance of $125.0 million of Dealer remarketable securities (the "Drs.") in February 1998 and a higher average balance outstanding on the the Company's $350 million unsecured revolving credit facility (the "Acquisitions Facility"). Interest expense was reduced by $545,000 of capitalized interest costs associated with development projects in certain joint venture partnerships for the three months ended March 31, 1999. The Company's weighted average interest rate decreased from the first three months of 1998 from 7.36% to 7.05% for the first three months of 1999. Depreciation and Amortization Depreciation and amortization increased by 10% for the three months ended March 31, 1999, when compared to the first three months of 1998, a result of the Company's larger asset base. Minority Interest Minority interest of $41,000 for the first three months of 1999 represents the limited partners' share of net income from TriNet Property Partners, L.P. ("TriNet Property Partners"), a partnership formed in December 1997. TriNet has a 96.5% interest in TriNet Property Partners and is the sole general partner. TriNet Property Partners purchased nine office/R&D properties in December 1997 and five additional office/R&D properties in the first six months of 1998 from a group of private partnerships. Gain on Sale of Real Estate On March 12, 1999, TriNet sold an 82,600 square foot office building located in Allen, Texas for $11.2 million and recognized a gain of $1.2 million on the transaction. TriNet also disposed of its last retail property in the first quarter of 1999 for $3.5 million. The retail property was classified as held for sale at December 31, 1998, and a provision for asset held for sale of $5.7 million was recognized in 1998. 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 as a cumulative effect of a change in accounting principle. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities decreased by $4.8 million to $26.9 million for the three months ended March 31, 1999, compared to $31.7 million the same period in 1998. The decrease was primarily due to timing differences in the payment of accounts payable and the receipt of $10.0 million for tenant security 14 15 deposits in the first quarter of 1998. Net cash used in investing activities decreased $181.3 million to $2.7 million for the three months ended March 31, 1999, compared to $184.0 million in the first three months of 1998. The decrease was the result of a reduction in acquisitions in the first quarter of 1999 compared to the same period in 1998. The Company incurred $633,000 of capital expenditures in the first quarter of 1999, primarily for improvements relating to existing properties. Net cash used by financing activities was $32.9 million for the three months ended March 31, 1999, which consisted primarily of a net decrease in borrowings on the Acquisitions Facility of $12.9 million and dividends on common and preferred stock totalling $20.1 million. For the three months ended March 31, 1998, net cash provided by financing activities was $166.9 million, primarily the result of proceeds from an $89.0 million common stock offering in January 1998, a $30.0 million common stock offering in March 1998 and the issuance of $125.0 million of Drs. in February 1998. The Company has an agreement with a group of 15 banks led by Morgan Guaranty Trust Company of New York which provides the Company with a $350 million unsecured revolving credit facility. The Acquisition Facility matures on May 31, 2001 and has an automatic one-year extension option. The Company can extend the facility for a second one-year term and increase the facility size up to $500 million with approval of the bank group. LIBOR-based borrowings under the facility are based on the Company's credit ratings. The Facility bears interest at LIBOR plus 0.75% and requires an annual facility fee of $ 0.15%. The Facility also has a $225 million competitive bid feature, which allows banks in the syndicate group to bid on certain borrowings at more competitive rates. All of the available commitment under the facility may be borrowed for general corporate and working capital needs, as well as for the acquisition of real estate. The facility requires interest only payments until maturity, at which time outstanding borrowings are due and payable. At March 31, 1998, the Company had $174.0 million available under the Acquisition Facility. Outstanding debt as of March 31, 1999 consisted of mortgage notes totalling $84.5 million, unsecured long-term notes of $375.0 million and an outstanding balance on the Acquisitions Facility of $176.0 million. Future maturities of long-term debt and mortgages from March 31, 1999 through 2003 and thereafter are presented below (in thousands): Remainder of 1999......................................... $ 659 2000....................................... 4,683 2001....................................... 100,854 2002....................................... 15,135 2003....................................... 568 Thereafter(1)............................................. 337,629 -------- $459,528 ========
- --------------- (1) On February 24, 1998, the Company sold to the public $125 million of 6.75% Drs. notes. Upon certain terms and conditions, the Drs. are subject to a mandatory tender on March 1, 2003, to either the Dealer or TriNet. If tendered to the Dealer, the Drs. must be remarketed by the dealer. TriNet considers its liquidity and ability to generate cash from operations and financings to be adequate and expects them to continue to be adequate to meet the Company's acquisition, development, operating, debt service and shareholder distribution requirements. The Company has on file with the Securities and Exchange Commission two Form S-3 Registration Statements. One registration statement is a universal shelf registration statement authorizing the issuance of debt securities, common stock, preferred stock or depository shares representing preferred stock of the Company with a remaining availability of $232.3 million. A second registration statement authorized the issuance of $250.0 million of debt securities and has a remaining availability of $150.4 million. The exact amount of debt, common stock, preferred stock, and depository shares representing preferred stock issued will depend on acquisitions, asset sales, the Company's senior unsecured debt and preferred stock ratings, and the general interest rate environment. 15 16 In managing the Company's long-term liquidity, consideration is given to both the weighted average maturity of the Company's fixed-rate debt instruments and to the ratio of total debt to total market capitalization. As of March 31, 1999 and 1998, the Company's weighted average fixed-rate debt maturity was 7.3 years and 8.6 years, respectively, and the ratio of total debt to total market capitalization was 42.3% and 31.6%, respectively. IMPACT OF YEAR 2000 Forward Looking Information. The statements in the following section include Year 2000 readiness disclosure within the meaning of the Year 2000 Information and Readiness Disclosure Act. The Company intends such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, the Company's actual costs, progress and expenses with respect to its plan to address Year 2000 issues could differ materially from those set forth in the forward-looking statements. Factors which could have a material adverse effect on the Company's results and progress include, but are not limited to, changes in the expenses of or delays in: the identification and upgrade or replacement by the Company of computer systems that do not relate to information technology but include embedded technology; and the Year 2000 compliance of vendors (including vendors of the Company's computer information systems) or third-party service providers (including the Company's primary bank and payroll processor). These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Introduction The term "Year 2000 issue" is a general term used to describe various problems that may result from the improper processing by computer systems of dates after 1999. These problems could result in a system failure or miscalculations causing disruptions of operations. The Company's efforts to address its Year 2000 issues are focused in the following three areas: (i) reviewing and taking any necessary steps to attempt to correct the Company's computer information systems (i.e., software applications and hardware platforms), (ii) evaluating and making any necessary modifications to other computer systems that do not relate to information technology but include embedded technology at its properties, such as security, heating, ventilation, and air conditioning, elevator, fire and safety systems, and (iii) communicating with certain significant third-party service providers to determine whether there will be any interruption in their systems that could affect the Company. The Company currently expects to complete its Year 2000 compliance program before the end of 1999. While the Company anticipates that the program will be successful in all material respects, the Company intends to closely monitor its Year 2000 compliance and is developing the contingency plans described under "Risks Presented by Year 2000 Issues and the Company's Contingency Plan." The Company's State of Readiness Information Technology Systems. The Company has completed an inventory of all information technology systems and has contacted vendors to determine whether such systems are Year 2000 compliant. Based on manufacturers' representations, the Company has determined that its primary network operating system, Novell Netware 5, its newly acquired property management and accounting software and all of its desktop personal computers are Year 2000 compliant. The Company's telephone system requires minimal upgrades. 16 17 Embedded Systems. The Company has reviewed all of its properties' operating leases to determine whether the tenant or the Company has the responsibility to address Year 2000 issues. For those properties with respect to which the Company is responsible for Year 2000 compliance, independent consultants have performed on-site inventories of the embedded systems (e.g. security, heating, ventilation and air conditioning, fire and elevator systems) and have contacted the various manufacturers to determine whether the embedded systems are Year 2000 compliant. Based on the inventory and responses from manufacturers to date, the Company has identified 21 embedded systems that are not Year 2000 compliant, and may need to be replaced or repaired. There are an additional 41 systems where further testing is necessary to determine compliance. For those 21 systems that have been identified as non-compliant a program has been initiated to repair, replace and test. With respect to those properties for which the Company is not responsible for Year 2000 compliance, written notices have been sent to tenants informing them of their obligations under the leases. A program is in place to follow up with these tenants to ensure that they are taking action and meeting their responsibilities under their leases. Third Party Relationships. With respect to the Company's relationships with third parties (e.g., transfer agent, financial institutions, utility companies and landlords), the Company is concurrently requesting compliance certificates from all third parties that have an impact on the Company's operations, but no assurance can be given that such certifications will be received by the Company or that they will prove to be accurate. The Company is contacting those third parties that have not responded to the initial request to determine their readiness for Year 2000. Costs to Address the Company's Year 2000 Issues As of March 31, 1999, the Company has paid $130,000 and accrued $330,000 for Year 2000 costs since the inception of the program. The Company has a remaining budget of $187,500 for 1999. The Company expects that a substantial portion of these costs will be passed back to the tenant through recoveries of operating expenses and that the remaining costs of addressing the Year 2000 issues will be funded through operating cash flows. Because the Company's Year 2000 assessment is ongoing and additional funds may be required as a result of future findings, the Company's current accrual amounts may increase as a result of unanticipated delays or preparedness issues. While the Company's efforts to address its Year 2000 issues may involve additional costs, the Company believes, based on available information, that these costs will not have a material adverse effect on its business, financial condition or results of operations. Although the Company has concluded that many of its tenants are responsible for certain Year 2000 compliance costs, there is a possibility that certain tenants will not agree with such conclusions. Risks Presented by Year 2000 Issues and the Company's Contingency Plan At this time, the Company has not identified any specific business functions that are likely to suffer material disruption as a result of Year 2000-related events. Due to the unique and pervasive nature of the Year 2000 issue, it is not possible to anticipate each of the wide variety of Year 2000 events, particularly outside of the Company, that might arise in a worst case scenario which might have a material adverse impact on the Company's business, financial condition and results of operations. A reasonably likely worst case scenario might be the failure of an energy management system in a building. Such a failure could adversely affect the environmental conditions of the occupied space, thus creating discomfort and inconvenience to the tenants until the condition could be manually corrected. Persistence of this problem for a long period of time could result in an increase in operating costs for the building until the energy management system is restored to proper operations. In the event of an unforeseen failure of any energy management system due to a Year 2000 issue that cannot be readily cured, the Company's contingency plan includes the deployment of teams consisting of regional facility managers, building engineers and customer service personnel, which would manually override any such energy management system in a timely manner. 17 18 FUNDS FROM OPERATIONS The definition of Funds From Operations ("FFO") was clarified in the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") White Paper, adopted by the NAREIT Board of Governors on March 3, 1995, as net income (computed in accordance with generally accepted accounting principles ("GAAP")), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization (in each case only on real estate related assets), less preferred dividends, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis. The Company's FFO is not comparable to FFO reported by other real estate investment trusts (REITs) that do not define FFO using the current NAREIT definition or that interpret the current NAREIT definition differently than the Company. The Company believes that to facilitate a clear understanding of the historical operating results of the Company, FFO should be examined in conjunction with income as presented in the Consolidated Statements of Operations. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company's financial performance, or cash flows from operating activity (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make distributions.
FOR THE THREE MONTHS ENDED MARCH 31, ------------------ (IN THOUSANDS) 1999 1998 ------- ------- Funds From Operations: Income before gain on sale of real estate, and cumulative effect of a change in accounting principle........................................... $19,873 $17,927 Real estate depreciation............................... 6,971 6,418 Joint venture depreciation............................. 831 204 Preferred dividend requirement......................... (3,919) (3,919) ------- ------- Total Funds From Operations.................... $23,756 $20,630 ======= =======
FORWARD LOOKING INFORMATION This quarterly report contains forward-looking statements within the meaning of the federal securities laws. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, changes in: economic conditions generally and the real estate market specifically, legislative or regulatory provisions affecting the Company (including changes to laws governing the taxation of REITs), availability of capital, interest rates, competition, supply of and demand for office and industrial properties in the Company's current and proposed market areas, and general accounting principles, policies and guidelines applicable to REITs. These risks and uncertainties, together with the other risks described from time to time in the Company's reports and documents filed with the Securities and Exchange Commission, should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. 18 19 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS -------- 27.1 Financial Data Schedule.
Reports on Form 8-K
FINANCIAL DATE ITEMS REPORTED STATEMENTS ---- -------------- ---------- February 3, 1999........................ 5 No
19 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) BY: /s/ ELISA F. DITOMMASO ----------------------------------- Elisa F. DiTommaso Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) DATE: May 17, 1999 20 21 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT ------- ------- 27.1 Financial Data Schedule
EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 29,210 0 0 0 0 0 1,504,065 78,832 1,514,205 0 634,629 0 73 249 857,875 1,514,205 40,864 43,084 0 1,826 0 0 11,162 17,107 0 17,107 0 0 (1,810) 15,297 0.61 0.61
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