SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 1-14516
PRENTISS PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 75-2661588
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3890 West Northwest Highway, 75220
Suite 400, Dallas, Texas (Zip Code)
(Address of Registrant's Principal Executive Offices)
(214) 654-0886
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Shares of Beneficial Interest, New York Stock Exchange, Inc.
par value $.01 per share
Preferred Share Purchase Rights New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 20, 2002, was approximately $1,017,294,566.
As of March 20, 2002, the number of Common Shares of Beneficial Interest
outstanding was 37,811,019, and the number of outstanding Participating
Cumulative Redeemable Preferred Shares of Beneficial Interest, Series D, was
3,773,585.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference the Company's Definitive Proxy Statement
to be filed with respect to the Annual Meeting of Shareholders to be held on May
15, 2002.
1
PRENTISS PROPERTIES TRUST
INDEX
Form 10-K
Report
Item No. Page
-------- ----
Forward-Looking Statements....................................................................................... 3
PART I
1. Business................................................................................................ 4
2. Properties.............................................................................................. 9
3. Legal Proceedings.......................................................................................15
4. Submission of Matters to a Vote of Security Holders.....................................................15
PART II
5. Market for Registrant's Common Equity and Related Shareholder Matters...................................16
6. Selected Financial and Operating Data...................................................................17
7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................20
7A. Quantitative and Qualitative Disclosures About Market Risk..............................................45
8. Financial Statements and Supplementary Data.............................................................46
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................46
PART III
10. Trustees and Executive Officers of the Company..........................................................47
11. Executive Compensation..................................................................................47
12. Security Ownership of Certain Beneficial Owners and Management..........................................47
13. Certain Relationships and Related Transactions..........................................................47
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................47
2
FORWARD-LOOKING STATEMENTS
This Form 10-K and the documents incorporated by reference into this Form
10-K may contain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. When used in this Form 10-K, words such as "anticipate," "believe,"
"estimate," "expect," "intend," "predict," "project," and similar expressions,
as they relate to us or our management, identify forward-looking statements.
Such forward-looking statements are based on the beliefs of our management as
well as assumptions made by us and information currently available to us. These
forward-looking statements are subject to certain risks, uncertainties and
assumptions, including risks, uncertainties and assumptions related to the
following:
.. The geographic concentration of our properties;
.. Our real estate acquisition, redevelopment, development and construction
activities;
.. Factors that could result in the poor operating performance of our
properties including tenant defaults and increased costs such as insurance;
.. Competition in markets where we have properties;
.. Environmental and Americans with Disabilities Act compliance issues related
to our properties;
.. Some of our properties may be subject to uninsured losses;
.. Our properties are illiquid assets;
.. Our incurrence of debt and use of variable rate debt and derivative
financial instruments;
.. Limited ability of shareholders to effect a change of control;
.. Our failure to qualify as a REIT;
.. Conflicts of interest;
.. Changes in our investment, financing and borrowing policies without
shareholder approval;
.. Our dependence on key personnel;
.. Our third-party property management, leasing, development and construction
business and related services;
.. The effect of shares available for future sale on the price of common
shares; and
.. Changes in market conditions including market interest rates.
If one or more of these risks or uncertainties materialize, or if any
underlying assumption proves incorrect, actual results may vary materially from
those anticipated, expected or projected. Such forward-looking statements
reflect our current views with respect to future events and are subject to these
and other risks, uncertainties and assumptions relating to our operations,
results of operations, growth strategy and liquidity. All subsequent written and
oral forward-looking statements attributable to us or individuals acting on our
behalf are expressly qualified in their entirety by this paragraph. You should
refer to the section entitled "Risk Factors" beginning on page 34 of this Form
10-K for a discussion of risk factors that could cause actual results to differ
materially from those indicated by the forward-looking statements. You are
cautioned not to place undue reliance on our forward-looking statements, which
speak only as of the date of this Form 10-K or the date of any document
incorporated by reference into this Form 10-K. We do not undertake any
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
3
PART I
Item 1. Business
Overview
We are a self-administered and self-managed Maryland REIT that acquires,
owns, manages, leases, develops and builds primarily office properties
throughout the United States. We are self-administered in that we provide our
own administrative services, such as accounting, tax and legal, internally
through our own employees. We are self-managed in that we internally provide all
the management and maintenance services that our properties require through
employees, such as, property managers, leasing professionals and engineers. We
operate principally through our operating partnership, Prentiss Properties
Acquisition Partners, L.P., and its subsidiaries, and a management company,
Prentiss Properties Resources, Inc. and its subsidiaries. Our regional
management offices are located in San Diego, Oakland, Dallas, Chicago and
Washington, D.C. As of December 31, 2001, we owned interests in a diversified
portfolio of 146 primarily suburban Class A office and suburban industrial
properties as follows:
Number of Net Rentable
Buildings Square Feet
--------- ------------
(in millions)
Office Properties ........................... 108 14.4
Industrial Properties ....................... 38 3.2
--- ----
Total ................................... 146 17.6
=== ====
The above properties consist of 108 office properties containing
approximately 14.4 million net rentable square feet and 38 industrial properties
containing approximately 3.2 million net rentable square feet. Our properties
include 3 office properties containing 445,000 net rentable square feet that are
in various stages of development. As of December 31, 2001, our properties,
exclusive of the development properties, were 94% leased to approximately 1,100
tenants. In addition to managing properties that we own, we manage approximately
19.7 million net rentable square feet in office, industrial and other properties
for third parties.
Our primary business is the ownership and operation of office and
industrial properties throughout the United States. We have determined that our
reportable segments are those that are based on our method of internal
reporting, which disaggregates our business by geographic region. In April 2001,
we completed an asset exchange with Brandywine Realty Trust, which included the
sale of all of the properties comprising our Northeast Region, and as a result,
at December 31, 2001, we had no operations in the Northeast Region. In addition,
during December 2001, we changed our internal reporting dividing our West Region
into separate Northern and Southern California Regions. As of December 31, 2001,
our reportable segments include our five regions (1) Mid-Atlantic; (2) Midwest;
(3) Southwest; (4) Northern California; and (5) Southern California.
Our properties are located in 12 markets, which are included in our
reportable segments as follows:
Reportable Segment Market
------------------ ------
Mid-Atlantic Metropolitan Washington, DC, Atlanta
Midwest Chicago, Suburban Detroit
Southwest Austin, Dallas/Fort Worth, Denver, Houston
Northern California Sacramento, San Francisco Bay Area
Southern California Los Angeles, San Diego
For revenues, profit and loss, and total asset information on each of our
segments, see Note (20) to our Consolidated Financial Statements.
4
Recent Developments
Using proceeds from our revolving credit facility, in January 2002, we
contributed $3.0 million to a joint venture established to develop two
multi-story office buildings in Del Mar, California. Our contribution represents
a 70% controlling interest in the joint venture. Also using proceeds from our
revolving credit facility, we made a loan totaling $6.6 million to the joint
venture. The loan, which matures in January 2005, bears interest at 10% per
annum for the first twelve months of the loan term and 12% thereafter. The loan
requires interest only payments until maturity.
Subsequent to year end, using proceeds from our revolving credit facility,
we purchased the Burnett Plaza Associates loan in the principal amount of $47.0
million from Teachers Insurance and Annuity Association of America. The loan
bears interest at 7.5% per annum through March 2002 and 10% per annum through
its maturity in December 2002. At the time we purchased this loan, we owned a
20% non-controlling partnership interest in Burnett Plaza Associates, the
borrower under the loan, which owns a 1.1 million net rentable square foot
office building in Fort Worth, Texas which secures the debt. In March 2002, we
purchased from Burnett Plaza - VEF III, L.P., an affiliate of Lend Lease Real
Estate Investments and the owner of the remaining 80% interest of Burnett Plaza
Associates, all of its interest in the joint venture for a purchase price of
approximately $51.2 million. The Burnett transaction was funded with proceeds
from our revolving credit facility and in part by the consummation of the
private placement of 613,750 common shares of beneficial interest with Salomon
Smith Barney Inc. The private placement closed in February 2002 with net
proceeds from the sale of the common shares totaling approximately $16.5 million
after underwriting discounts and commissions and before offering expenses.
Salomon Smith Barney Inc. was granted registration rights and a thirty-day
option to purchase up to an additional 92,063 common shares at $28.35 per common
share.
In January 2002, we entered into an interest rate swap agreement with a
notional amount of $50.0 million which fixed 30-day LIBOR at 2.2775%. The new
swap, which matures January 2003, effectively fixes the interest rate at 3.6525%
on $50.0 million of variable rate borrowing.
In January 2002, Dennis J. DuBois resigned as Executive Vice President and
Managing Director of the Southwest Region. Mr. DuBois was responsible for
overall asset management, leasing, property management and development for our
5.5 million square foot office portfolio in Dallas, Austin, Denver and Houston.
Effective January 2002, Christopher M. Hipps will be the new Managing Director
of the Southwest Region. Prior to January 2002, Mr. Hipps served as the Managing
Director of the West Region. Effective January 1, 2002, the West Region was
divided into the Northern California and Southern California Regions, and
Christopher B. Mahon was appointed as Managing Director of the Southern
California Region and Daniel K. Cushing was appointed as Managing Director of
the Northern California Region.
On January 3, 2002, we repurchased all of the outstanding 9.45% Series C
Cumulative Redeemable Perpetual Preferred Units of our operating partnership for
approximately $50.6 million, including accrued and unpaid dividends. This was
funded using variable rate borrowings under our revolving credit facility.
Business and Growth Strategies
Our primary objective is to maximize shareholder value through increases in
distributable cash flow per share and appreciation in the value of our common
shares. We intend to achieve this objective through a combination of external
and internal growth, while maintaining a conservative balance sheet and pursuing
a strategy of financial flexibility.
External Growth
Development
Development is a key component of our external growth strategy. We intend
to capitalize on our development capabilities by selectively developing and
redeveloping properties in markets with favorable current and projected
long-term growth characteristics and supply-demand imbalances. We control all
aspects of the development
5
process, including site selection, project concept, design and construction,
financing, leasing and property management. We intend to develop primarily
office properties on a build-to-suit basis, but we will also consider selective
opportunities for speculative development, when we deem conditions for such
development activity appropriate.
In evaluating potential development opportunities, we rely on the
experience of our employees and on our internal research capabilities in
considering a number of factors, including:
. macro-economic issues that impact the market in which the development
is to be located;
. location and competition in the property's market;
. occupancy of and demand for properties of a similar type in the same
market; and
. the potential to generate revenue growth at or above levels of
economic growth in the property's market.
During 2001, we began development of one office property located in the San
Diego area containing 40,000 net rentable square feet. At December 31, 2001, we
had three office properties containing 445,000 square feet in various stages of
development. We completed and placed in-service four office properties
containing 592,000 net rentable square feet during 2001. The following tables
present our properties under development at December 31, 2001 and our
development properties placed in-service during 2001:
Properties Under Number of Net Rentable
Development Segment Market Buildings Square Feet/(1)/
---------------------------- ------------------- --------------------- --------- ----------------
(in thousands)
Barton Skyway IV Southwest Austin 1 223
Carlsbad Pacific Center III Southern California San Diego 1 40
Willow Oaks III Mid-Atlantic Metro. Washington, DC 1 182
- ---
Total 3 445
= ===
Developments Number of Net Rentable
Placed In-Service Segment Market Buildings Square Feet/(1)/
----------------- ------------------- --------- --------- ----------------
(in thousands)
Barton Skyway II Southwest Austin 1 196
Barton Skyway III Southwest Austin 1 173
Del Mar Gateway Southern California San Diego 1 164
Salton Midwest Chicago 1 59
- ---
Total 4 592
= ===
----------
/(1)/ Net rentable square feet defines the area of a property for which a tenant
is required to pay rent, which includes the actual rentable area plus a
portion of the common areas of the property allocated to a tenant.
See "Item 2. Properties" for additional information on our development
properties.
Acquisitions
Similar to developments, acquisitions are another key component of our
external growth strategy. We selectively pursue acquisitions in our core markets
when long-term yields make acquisitions attractive.
We invest opportunistically and pursue assets that are:
. managed by us and owned by our existing management clients which
become available for sale;
. performing at a level believed to be substantially below potential due
to identifiable management weaknesses or temporary market conditions;
. encumbered by indebtedness that is in default or is not performing;
6
. held or controlled by short-term owners (such as assets held by
insurance companies and financial institutions under regulatory
pressure to sell); or
. properties with below market leases, which may be re-leased in the
near term to improve cash flow.
We believe that we are particularly well-positioned to acquire properties
because of our:
. presence in and knowledge of our 12 markets across the United States;
. a diversified base of approximately 1,100 tenants;
. existing relationships with 43 different management clients;
. access to capital as a public company, including our revolving credit
facility;
. reputation as a buyer with the ability to execute complicated
transactions;
. fully-integrated operations which allow rapid response to
opportunities;
. UPREIT structure, which may allow sellers to defer tax consequences on
sale; and
. relationships with real estate brokers, institutional owners, and
third-party management clients, which often allow preferential access
to opportunities.
In evaluating potential acquisition opportunities, we rely on the
experience of our employees and on our internal research capabilities in
considering a number of factors, including:
. macro-economic issues that impact the market in which the property is
located;
. location and competition in the property's market;
. occupancy of and demand for properties of a similar type in the same
market;
. the construction quality and condition of the property;
. the potential for increased cash flow after benefiting from our
renovations, refurbishment and upgrades;
. purchase price relative to replacement costs; and
. the potential to generate revenue growth at or above levels of
economic growth in the property's market.
Further, we believe that our development expertise enables us to identify
the potential for improvement in an acquisition opportunity, which might not be
apparent to a buyer without similar expertise.
During the year ended December 31, 2001, we acquired seven office
properties totaling approximately 1.3 million net rentable square feet. The
following table sets forth the segment, market, month of acquisition, number of
buildings, net rentable square feet and purchase price of the properties we
acquired in 2001. See "Item 2. Properties" for additional information relating
to our properties.
Month of Number of Net Rentable Purchase
Acquired Properties Segment Market Acquisition Buildings Square Feet/(1)/ Price
-------------------- ------------ ------------------ ----------- ---------- ---------------- -------------
(in thousands) (in millions)
Campus Point Mid-Atlantic Metro. Wash., D.C. April 2001 1 172 $ 30.1
Greenwood Center Mid-Atlantic Metro. Wash., D.C. April 2001 1 150 24.8
Oakwood Center Mid-Atlantic Metro. Wash., D.C. April 2001 1 128 14.8
Plaza 1900 Mid-Atlantic Metro. Wash., D.C. April 2001 1 203 37.5
Tysons International
Partners/(2)/ Mid-Atlantic Metro. Wash., D.C. April 2001 2 452 10.7
Park West at Dulles Mid-Atlantic Metro. Wash., D.C. July 2001 1 152 17.0
- ----- ------
7 1,257 $134.9
= ===== ======
------------
/(1)/ Net rentable square feet defines the area of a property for which a tenant
is required to pay rent, which includes the actual rentable area plus a
portion of the common areas of the property allocated to a tenant.
/(2)/ We acquired a 25% non-controlling interest in Tysons International
Partners from Brandywine Realty Trust.
7
Internal Growth
We seek to maximize the profitability of our properties by renewing leases,
maintaining high occupancy rates, increasing rental revenues, and reducing
operating costs.
We strive to achieve increases in rental revenues by negotiating leases
that include increases in rent during the lease term, by replacing expiring
leases with new leases at higher rental rates and by improving occupancy rates.
We also seek to renew existing leases, which reduces the costs of lease
rollovers, reduces rental revenue fluctuations and enhances long-term
relationships with national tenants that may have space needs in our other
markets.
We strive to achieve reductions in operating costs by performing many
functions, e.g., engineering, tax and legal, in-house instead of hiring third
parties and by employing benchmarking and best practices methodologies. Our
benchmarking program compares operating costs and efficiencies of each property
with other office and industrial properties. Under the program, we conduct
periodic evaluations of key performance indicators at each building and compare
the results to a variety of benchmarks, e.g., specific buildings, portfolios,
regions and the industry. Our best practices methodology involves continuously
analyzing benchmarking data, investigating properties that perform better than
the norm and regularly disseminating and sharing information with respect to the
best practices employed at the better performing properties throughout our
management system. By employing these methodologies, we believe that we can
continue to capitalize on opportunities to reduce operating costs and operate
the properties more efficiently and effectively.
We use centralized cash management, national alliances with service
providers, a sophisticated budgeting system and state-of-the-art information
systems to improve efficiency and increase profits. Training is provided through
Prentiss Properties University, a professional training program that increases
consistency within operations and communicates new technology and procedures
throughout our organization.
Asset managers in each region develop a strategy and marketing position for
each property. Each property is evaluated using sophisticated valuation software
to determine the overall effect of property-level decisions such as lease
structures and capital expenditures on asset value. Asset managers also work
with property managers and engineers to determine where improvements, such as
lighting retrofits and energy management system upgrades, will maximize returns.
Third-Party Management
At December 31, 2001, we, through Prentiss Properties Resources, Inc.,
managed or performed property-related services for 252 office, industrial and
other properties owned by 43 third-party management clients. These properties
are located throughout the United States and contain approximately 19.7 million
net rentable square feet.
Our management business serves a broad base of clients, including major
financial institutions and pension funds, large corporate users, real estate
advisory firms and real estate investment groups. In addition to property
management and leasing, we offer our clients a full range of fee-based services,
including tenant construction, leasing, insurance, accounting, tax, acquisition,
disposition, facilities management, and corporate and asset management services.
Financing Strategy
As of December 31, 2001, we had outstanding total indebtedness, including
our pro rata share of joint venture debt, of approximately $1.01 billion, or
approximately 43.4% of total market capitalization based on a common share price
of $27.45 per common share. As of March 20, 2002, we had the approximate
capacity to borrow up to an additional $226.0 million under our debt limitation
policy. The amount of indebtedness that we may incur, and the policies with
respect thereto, are not limited by our declaration of trust and bylaws, and are
solely within the discretion of our board of trustees, limited only by various
financial covenants in our credit agreements. Although it is our general policy
to limit combined indebtedness plus our pro rata share of joint venture debt so
that, at the time such debt is incurred, it does not exceed 50% of our total
market capitalization, we view ratios such as interest coverage and fixed charge
coverage as more stable and indicative measures of our ability to meet debt
obligations.
8
For the year ended December 31, 2001, our interest coverage (earnings before
interest, taxes and depreciation and amortization over interest expense) and
fixed charge coverage (earnings before interest, taxes and depreciation and
amortization over interest expense and perpetual preferred distributions)
totaled 3.16 and 2.68 times, respectively. Our credit agreements limit total
indebtedness to 55% of total assets and require an interest coverage ratio of at
least 2 to 1.
Competition
We operate in five regions: Mid-Atlantic, Midwest, Southwest, Northern
California and Southern California and compete with many local, regional and
national competitors in the office and industrial sectors. These five regions
comprise 12 markets nationwide. The markets in which we operate are not
dominated by any one owner or by us. In each market we compete on a number of
factors including rental rates, tenant concessions, quality and location of
buildings, quality of property management, and other economic and non-economic
factors. Our major competitors in each region include the following companies:
Segment Competitors
------- -----------
Mid-Atlantic Boston Properties, CarrAmerica Realty Corp., Equity Office Properties, Vornado Realty
Trust
Midwest CarrAmerica Realty Corp., Duke-Weeks Realty Corp., Equity Office Properties, Great
Lakes REIT, John Buck Co., Prime Group
Southwest CarrAmerica Realty Corp., Crescent Real Estate Equities, Equity Office Properties,
Lincoln Property Co., Trammell Crow Co.
Northern California Boston Properties, CarrAmerica Realty Corp., Equity Office Properties, Shorenstein Co.
Southern California Arden Realty, CarrAmerica Realty Corp., Equity Office Properties, Kilroy Realty Corp.
Item 2. Properties
At December 31, 2001, we owned interests in 146 properties totaling 17.6
million net rentable square feet with no individual property representing either
10% or more of our total assets at December 31, 2001 or gross revenues for the
year ended December 31, 2001. The properties consist of 108 office properties
comprising approximately 14.4 million net rentable square feet and 38 industrial
properties comprising approximately 3.2 million net rentable square feet. As of
December 31, 2001, all of these properties are wholly-owned by us (through our
subsidiaries), except the following:
(1) the Broadmoor Austin properties, which are held pursuant to a
100% leasehold interest by Broadmoor Austin Associates, a joint
venture, in which we own a 50% non-controlling interest;
(2) the Burnett Plaza property, which is owned by Burnett Plaza
Associates, a joint venture, in which we owned a 20%
non-controlling interest as of December 31, 2001;
(3) the 1676 International and 8260 Greensboro properties, which are
owned by Tysons International Partners, a joint venture, in which
we own a 25% non-controlling interest;
(4) One Northwestern Plaza, a property in which we own a 100%
leasehold interest; and
(5) 6600 Rockledge Drive, a property, in which we own a 100%
leasehold interest.
In March 2002, we purchased the remaining 80% interest of Burnett Plaza
Associates from an affiliate of Lend Lease Real Estate Investments.
9
The following table presents specific information about our 146 properties
as of December 31, 2001:
Net Total Base Percent
Year(s) Number Rentable Rent for Leased
Building Built/ of Square Year Ended As of
Property Name Type Market Renovated Buildings Feet/(E)/ 12/31/01/(F)/ 12/31/01
----------------------------- ---------- ----------------- --------- --------- -------------- -------------- --------
(in thousands) (in thousands)
Cumberland Office Park Office Atlanta 1972-1999 9 644 $11,207 91
1676 International/(A)/ Office Metro. Wash., DC 1999 1 74 1,524 100
2411 Dulles Corner Road Office Metro. Wash., DC 1990 1 177 4,891 99
2455 Horsepen Road Office Metro. Wash., DC 1989 1 104 2,821 100
3130 Fairview Park Drive Office Metro. Wash., DC 1999 1 183 5,316 100
3141 Fairview Park Drive Office Metro. Wash., DC 1988 1 192 2,969 90
4401 Fair Lakes Court Office Metro. Wash., DC 1988 1 59 1,407 95
6600 Rockledge Drive Office Metro. Wash., DC 1981 1 156 3,921 100
7101 Wisconsin Avenue Office Metro. Wash., DC 1975 1 237 5,120 90
8260 Greensboro/(A)/ Office Metro. Wash., DC 1980 1 39 607 90
8521 Leesburg Pike Office Metro. Wash., DC 1984 1 145 3,059 100
Calverton Office Park Office Metro. Wash., DC 1981-1987 3 307 5,664 95
Campus Point Office Metro. Wash., DC 1985 1 172 2,030 100
Fairmont Building Office Metro, Wash., DC 1964/1997 1 122 2,852 95
Greenwood Center Office Metro. Wash., DC 1985 1 150 2,603 99
Oakwood Center Office Metro, Wash., DC 1982 1 128 2,010 97
Park West at Dulles Office Metro, Wash., DC 1997 1 152 182 100
Plaza 1900 Office Metro, Wash., DC 1989 1 203 3,137 100
Research Office Center I & II Office Metro. Wash., DC 1986-1990 2 291 5,689 100
Research Office Center III Office Metro. Wash., DC 2000 1 148 3,932 100
Willow Oaks I & II Office Metro. Wash., DC 1986-1989 2 387 6,843 99
Willow Oaks III Office Metro. Wash., DC --/(D)/ 1 182 0 0
Metro. Wash., DC Industrial Industrial Metro. Wash., DC 1974-1990 7 875 3,662 100
-- ----- -------
Total Mid-Atlantic
Region 41 5,127 81,446
-- ----- -------
123 North Wacker Drive Office Chicago 1986 1 537 6,714 56
1717 Deerfield Road Office Chicago 1985 1 138 2,396 100
1800 Sherman Avenue Office Chicago 1986 1 136 3,363 100
701 Warrenville Road Office Chicago 1988 1 67 875 81
Bannockburn Centre Office Chicago 1999 1 257 4,325 100
Corporetum Office Campus Office Chicago 1984-1987 5 324 6,092 99
O'Hare Plaza II Office Chicago 1986 1 234 5,959 89
One O'Hare Centre Office Chicago 1984 1 380 6,470 87
Salton Office Chicago 2001 1 59 528 100
Chicago Industrial Industrial Chicago 1987-1988 4 682 2,399 100
One Northwestern Plaza Office Sub. Detroit 1989 1 242 5,521 91
-- ----- -------
Total Midwest Region 18 3,056 44,642
-- ----- -------
Barton Skyway I Office Austin 1999 1 195 3,478 100
Barton Skyway II Office Austin 2001 1 196 3,092 100
Barton Skyway III Office Austin 2001 1 173 1,803 99
Barton Skyway IV Office Austin /(D)/ 1 223 185 93
--
Broadmoor Austin/(B)/ Office Austin 1991 7 556 9,709 100
Cielo Center Office Austin 1984 3 271 5,992 89
Spyglass Point Office Austin 1999 1 58 964 100
Bachman East Office Dallas/Fort Worth 1986 1 126 1,463 67
Bachman West Office Dallas/Fort Worth 1986 1 70 1,235 77
Burnett Plaza/(C)/ Office Dallas/Fort Worth 1983 1 205 3,392 96
Cottonwood Office Center Office Dallas/Fort Worth 1986 3 164 2,765 93
IBM Call Center Office Dallas/Fort Worth 1998 1 150 2,120 100
Lakeview Center Office Dallas/Fort Worth 2000 1 101 1,243 88
Millennium Center Office Dallas/Fort Worth 1999 1 99 1,396 100
Park West C2 Office Dallas/Fort Worth 1989 1 349 8,091 99
10
Net Total Base Percent
Year(s) Number Rentable Rent for Leased
Building Built/ of Square Year Ended As of
Property Name Type Market Renovated Buildings Feet/(E)/ 12/31/01/(F)/ 12/31/01
----------------------------- ---------- ----------------- --------- --------- -------------- -------------- --------
(in thousands) (in thousands)
Park West E1 Office Dallas/Fort Worth 1982 1 183 3,107 100
Park West E2 Office Dallas/Fort Worth 1985 1 201 2,816 93
Walnut Glen Tower Office Dallas/Fort Worth 1985 1 464 8,137 91
WestPoint Office Building Office Dallas/Fort Worth 1998 1 150 3,253 53
Carrara Place Office Denver 1982 1 234 3,170 71
Highland Court Office Denver 1986 1 93 1,426 84
Orchard Place I & II Office Denver 1980 2 105 1,762 97
PacifiCare Building Office Denver 1983 1 198 2,793 87
Panorama Point Office Denver 1983 1 79 1,474 94
International Energy Center Office Houston 1982/1990 1 156 1,828 82
One Westchase Center Office Houston 1982 1 466 7,415 81
Westheimer Central Plaza Office Houston 1982 1 183 2,767 95
--- ------ --------
Total Southwest
Region 38 5,448 86,876
--- ------ --------
Natomas Corporate Center Office Sacramento 1984-1991 6 566 11,490 98
Lake Merritt Tower I Office San Francisco 1990 1 201 5,108 99
Bay Area
The Ordway Office San Francisco 1970 1 531 13,978 97
Bay Area
World Savings Center Office San Francisco 1985 1 272 6,951 100
--- ------ --------
Bay Area
Total Northern
California Region 9 1,570 37,527
--- ------ --------
The Academy Office Los Angeles 1991 3 194 3,111 72
Los Angeles Industrial Industrial Los Angeles 1973-1983 18 1,253 6,683 100
Carlsbad Pacific
Center I & II Office San Diego 1986-1989 2 90 2,039 98
Carlsbad Pacific
Center III Office San Diego /(D)/ 1 40 0 47
--
Carlsbad Pacifica Office San Diego 1986 1 49 1,124 100
Del Mar Gateway Office San Diego 2001 1 164 4,937 100
Executive Center
Del Mar Office San Diego 1998 2 113 3,124 100
Plaza I & II Office San Diego 1988-1989 2 89 2,063 98
The Campus Office San Diego 1988 1 45 861 78
San Diego Industrial Industrial San Diego 1985-1988 9 359 2,699 94
--- ------ --------
Total Southern 40 2,396 26,641
--- ------ --------
California Region
Total Properties 146 17,597 $277,132
=== ====== ========
----------
/(A)/ We hold a 25% non-controlling interest in Tysons International
Partners. Tysons International Partners owns the 1676 International
and 8260 Greensboro properties located in the Metropolitan Washington,
D.C. area. We account for our interest using the equity method of
accounting.
/(B)/ We hold a 50% non-controlling interest in Broadmoor Austin
Associates. Broadmoor Austin Associates owns an office complex in
Austin, Texas, consisting of seven properties. We account for our
interest using the equity method of accounting.
/(C)/ As of December 31, 2001, we held a 20% non-controlling interest in
Burnett Plaza Associates. Burnett Plaza Associates owns a single 1.0
million net rentable square foot office property in downtown Fort
Worth, Texas. We account for our interest using the equity method of
accounting. See "Item 1. Business - Recent Developments" regarding our
subsequent purchase of the remaining 80% interest in Burnett Plaza
Associates.
11
/(D)/ Properties in various stages of development or properties that have
been recently developed by us and are in various stages of lease-up.
See "Item 1. Business - Business and Growth Strategies" for further
disclosure on our development properties.
/(E)/ Net rentable square feet defines the area of a property for which a
tenant is required to pay rent, which includes the actual rentable
area plus a portion of the common areas of the property allocated to a
tenant.
/(F)/ Total base rent for the year ended December 31, 2001 includes the
fixed rental amount due for the year ended December 31, 2001 under
contractual lease obligations, which excludes (1) lease termination
payments; (2) parking rent; (3) future contractual or contingent rent
escalations; and (4) additional rent payable by tenants for items such
as common area maintenance, real estate taxes and other expense
reimbursements.
At December 31, 2001, including our pro rata share of debt on our joint
venture properties, we had $814.2 million of mortgages on our properties, which
represents 80.8% of our total outstanding indebtedness. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" for a discussion of mortgage debt
related to the properties.
Our properties are leased to local, national and foreign companies engaged
in a variety of business including computer systems design, management,
insurance, broadcasting and telecommunications, legal services, and information
services. As of December 31, 2001, we had approximately 1,100 tenants, with the
following 7 tenants representing approximately 19% of our aggregate annualized
based rent and approximately 16% of our total net rentable square footage:
International Business Machines, Kaiser Foundation Health Plan, Verizon
Communications, MCI WorldCom, Northrop Grumman Corporation, Aspen Systems
Corporation and Moore North America. Leases typically contain provisions
permitting tenants to renew expiring leases at prevailing market rates.
Approximately 65% of our total leased rentable square footage is under full
service gross leases under which tenants typically pay for all real estate taxes
and operating expenses above those for an established base year or expense stop.
Our remaining square footage is under triple net and modified gross leases.
Triple net and modified gross leases are those where tenants pay not only base
rent, but also some or all real estate taxes and operating expenses of the
leased property. Tenants generally reimburse us the full direct cost, without
regard to a base year or expense stop, for use of lighting, heating and air
conditioning during non-business hours, and for on-site monthly employee and
visitor parking. We are generally responsible for structural repairs. Our
in-place leases have terms, on average, ranging from five to seven years in
length.
The following table sets forth a 10-year schedule of the operating
properties' lease expirations for leases in place as of December 31, 2001.
Office
Properties 2002 2003 2004 2005 2006 2007 2008 2009 2010
------------ ------ ------ ------- ------- ------- ------- ------ ------ ------
Mid-Atlantic Square Feet 296 284 831 515 714 546 97 286 47
Region Expiring (000's)
Square Feet as a 7% 7% 20% 13% 18% 13% 2% 7% 1%
% of NRA
Annualized Base $6,767 $6,256 $17,572 $13,211 $17,601 $13,319 $3,097 $7,845 $1,318
Rent in Expiring
Year (000's)
Annualized Base $22.86 $22.03 $ 21.15 $ 25.65 $ 24.65 $ 24.39 $31.93 $27.43 $28.04
Rent PSF in
Expiring Year
Number of Leases 48 44 52 28 41 18 5 8 6
Expiring
Midwest Square Feet 202 389 248 204 140 65 18 19 24
Region Expiring (000's)
Square Feet as a 9% 16% 10% 9% 6% 3% 1% 1% 1%
% of NRA
Annualized Base $4,353 $8,316 $ 6,574 $ 4,495 $ 3,539 $ 1,700 $ 437 $ 533 $ 557
Rent in Expiring
Year (000's)
Annualized Base $21.55 $21.38 $ 26.51 $ 22.03 $ 25.28 $ 26.15 $24.28 $28.05 $23.21
Rent PSF in
Expiring Year
Number of Leases 26 25 21 25 19 8 2 3 2
Expiring
Office
Properties 2011 Thereafter
------------ ------ ----------
Mid-Atlantic Square Feet 162 151
Region Expiring (000's)
Square Feet as a 4% 4%
% of NRA
Annualized Base $5,337 $4,836
Rent in Expiring
Year (000's)
Annualized Base $32.94 $32.03
Rent PSF in
Expiring Year
Number of Leases 5 4
Expiring
Midwest Square Feet 355 364
Region Expiring (000's)
Square Feet as a 15% 15%
% of NRA
Annualized Base $8,665 $9,106
Rent in Expiring
Year (000's)
Annualized Base $24.41 $25.02
Rent PSF in
Expiring Year
Number of Leases 5 14
Expiring
12
2002 2003 2004 2005 2006 2007 2008 2009 2010
------- ------- ------- ------- ------- ------- ------ ------- ------
Southwest Square Feet 243 385 739 712 564 402 243 616 191
Region Expiring (000's)
Square Feet as a 5% 7% 14% 14% 11% 8% 5% 12% 4%
% of NRA
Annualized Base $ 4,689 $ 7,476 $13,307 $13,963 $11,432 $ 7,965 $4,339 $14,405 $3,281
Rent in Expiring
Year (000's)
Annualized Base $ 19.30 $ 19.42 $ 18.01 $ 19.61 $ 20.29 $ 19.81 $17.86 $ 23.38 $17.18
Rent PSF in
Expiring Year
Number of Leases 69 73 71 52 37 18 7 15 8
Expiring
Northern Square Feet 90 256 225 169 103 194 17 115 63
California Expiring (000's)
Region Square Feet as a 6% 16% 14% 11% 7% 12% 1% 7% 4%
% of NRA
Annualized Base $ 2,305 $ 6.217 $ 5,915 $ 4,210 $ 3,020 $ 5,317 $ 564 $ 2,788 $2,247
Rent in Expiring
Year (000's)
Annualized Base $ 25.61 $ 24.29 $ 26.29 $ 24.91 $ 29.32 $ 27.41 $33.18 $ 24.24 $35.67
Rent PSF in
Expiring Year
Number of Leases 28 20 27 22 11 4 1 4 1
Expiring
Southern Square Feet 61 152 92 141 49 10 22 0 29
California Expiring (000's)
Region Square Feet as a 8% 20% 12% 19% 7% 1% 3% 0% 4%
% of NRA
Annualized Base $ 1,413 $ 4,096 $ 2,672 $ 3,666 $ 1,273 $ 258 $ 640 $ 0 $1,090
Rent in Expiring
Year (000's)
Annualized Base $ 23.16 $ 26.95 $ 29.04 $ 26.00 $ 25.98 $ 25.80 $29.09 $ 0.00 $37.59
Rent PSF in
Expiring Year
Number of Leases 23 38 28 13 5 2 2 0 1
Expiring
Total Square Feet 892 1,466 2,135 1,741 1,570 1,217 397 1,036 354
Office Expiring (000's)
Properties Square Feet as a 6% 10% 15% 12% 11% 9% 3% 7% 3%
% of NRA
Annualized Base $19,527 $32,361 $46,040 $39,545 $36,865 $28,559 $9,077 $25,571 $8,493
Rent in Expiring
Year (000's)
Annualized Base $ 21.89 $ 22.07 $ 21.56 $ 22.71 $ 23.49 $ 23.47 $22.86 $ 24.68 $23.99
Rent PSF in
Expiring Year
Number of Leases 194 200 199 140 113 50 17 30 18
Expiring
2011 Thereafter
------- ----------
Southwest Square Feet 569 68
Region Expiring (000's)
Square Feet as a 11% 1%
% of NRA
Annualized Base $12,173 $ 1,207
Rent in Expiring
Year (000's)
Annualized Base $ 21.38 $ 17.75
Rent PSF in
Expiring Year
Number of Leases 9 4
Expiring
Northern Square Feet 307 0
California Expiring (000's)
Region Square Feet as a 20% 0%
% of NRA
Annualized Base $10,090 $ 0
Rent in Expiring
Year (000's)
Annualized Base $ 32.87 $ 0.00
Rent PSF in
Expiring Year
Number of Leases 2 0
Expiring
Southern Square Feet 119 0
California Expiring (000's)
Region Square Feet as a 16% 0%
% of NRA
Annualized Base $ 3,835 $ 0
Rent in Expiring
Year (000's)
Annualized Base $ 32.23 $ 0.00
Rent PSF in
Expiring Year
Number of Leases 2 0
Expiring
Total Square Feet 1,512 583
Office Expiring (000's)
Properties Square Feet as a 11% 4%
% of NRA
Annualized Base $40,100 $15,149
Rent in Expiring
Year (000's)
Annualized Base $ 26.51 $ 25.98
Rent PSF in
Expiring Year
Number of Leases 23 22
Expiring
Industrial
Properties 2002 2003 2004 2005 006 2007 2008 2009 2010
---------- ----- ------ ----- ------ ----- ----- ----- ----- -----
Mid-Atlantic Square Feet 86 247 0 348 194 0 0 0 0
Expiring (000's)
Region Square Feet as a 10% 28% 0% 40% 22% 0% 0% 0% 0%
% of NRA
Annualized Base $ 396 $1,156 $ 0 $1,576 $ 913 $ 0 $ 0 $ 0 $ 0
Rent in Expiring
Year (000's)
Annualized Base $4.60 $ 4.68 $0.00 $ 4.53 $4.71 $0.00 $0.00 $0.00 $0.00
Rent PSF in
Expiring Year
Industrial
Properties 2011 Thereafter
---------- ----- ----------
Mid-Atlantic Square Feet 0 0
Expiring (000's)
Region Square Feet as a 0% 0%
% of NRA
Annualized Base $ 0 $ 0
Rent in Expiring
Year (000's)
Annualized Base $0.00 $0.00
Rent PSF in
Expiring Year
13
Industrial
Properties 2002 2003 2004 2005 2006 2007 2008 2009 2010
---------- ------ ------ ------ ------ ------ ------ ------ ----- -----
Number of Leases 4 3 0 4 4 0 0 0 0
Expiring
Midwest Square Feet 75 15 136 0 189 0 267 0 0
Region Expiring (000's)
Square Feet as a 11% 2% 20% 0% 28% 0% 39% 0% 0%
% of NRA
Annualized Base $ 396 $ 69 $ 534 $ 0 $ 648 $ 0 $ 988 $ 0 $ 0
Rent in Expiring
Year (000's)
Annualized Base $ 5.28 $ 4.60 $ 3.93 $ 0.00 $ 3.43 $ 0.00 $ 3.70 $0.00 $0.00
Rent PSF in
Expiring Year
Number of Leases 4 1 2 0 1 0 1 0 0
Expiring
Southern Square Feet 60 338 361 298 57 398 48 31 0
California Expiring (000's)
Region Square Feet as a 4% 21% 22% 18% 4% 25% 3% 2% 0%
% of NRA
Annualized Base $ 564 $2,261 $2,152 $2,569 $ 700 $2,770 $ 276 $ 300 $ 0
Rent in Expiring
Year (000's)
Annualized Base $ 9.40 $ 6.69 $ 5.96 $ 8.62 $12.28 $ 6.96 $ 5.75 $9.68 $0.00
Rent PSF in
Expiring Year
Number of Leases 15 12 11 7 3 2 1 1 0
Expiring
Total Square Feet 221 600 497 646 440 398 315 31 0
Industrial Expiring (000's)
Properties Square Feet as a 7% 19% 16% 20% 14% 12% 10% 1% 0%
% of NRA
Annualized Base $1,356 $3,486 $2,686 $4,145 $2,261 $2,770 $1,264 $ 300 $ 0
Rent in Expiring
Year (000's)
Annualized Base $ 6.14 $ 5.81 $ 5.40 $ 6.42 $ 5.14 $ 6.96 $ 4.01 $9.68 $0.00
Rent PSF in
Expiring Year
Number of Leases 23 16 13 11 8 2 2 1 0
Expiring
Industrial
Properties 2011 Thereafter
---------- ------ ----------
Number of Leases 0 0
Expiring
Midwest Square Feet 0 0
Region Expiring (000's)
Square Feet as a 0% 0%
% of NRA
Annualized Base $ 0 $ 0
Rent in Expiring
Year (000's)
Annualized Base $0.00 $0.00
Rent PSF in
Expiring Year
Number of Leases 0 0
Expiring
Southern Square Feet 0 0
California Expiring (000's)
Region Square Feet as a 0% 0%
% of NRA
Annualized Base $ 0 $ 0
Rent in Expiring
Year (000's)
Annualized Base $0.00 $0.00
Rent PSF in
Expiring Year
Number of Leases 0 0
Expiring
Total Square Feet 0 0
Industrial Expiring (000's)
Properties Square Feet as a 0% 0%
% of NRA
Annualized Base $ 0 $ 0
Rent in Expiring
Year (000's)
Annualized Base $0.00 $0.00
Rent PSF in
Expiring Year
Number of Leases 0 0
Expiring
We are actively engaged in and have significant experience in the
development, redevelopment and renovation of office and industrial properties.
Subject to supply and demand, we expect to have the total projected costs of our
properties under development comprise approximately 10-15% of our total market
capitalization at any point in time. Due to current market conditions, we have
scaled back our development activity, and as a result, at December 31, 2001, we
had 445,000 net rentable square feet of properties under development with an
estimated development cost of $83.7 million, or 3.6% of our total market
capitalization. In addition to developing new properties, we are involved in
substantial levels of construction activity in the normal course of owning and
operating buildings. Such activity includes building out interior space for
tenants, expansions of existing buildings, and repairs necessary to upgrade or
maintain the quality of the buildings. The table below sets forth a schedule of
the segment, market, net rentable square feet and estimated cost of each of our
development properties.
Properties Net Rentable Estimated
Under Development Segment Market Square Feet/(1)/ Cost/(2)/
--------------------------- ------------------- --------------------- ---------------- -------------
(in thousands) (in millions)
Barton Skyway IV Southwest Austin 223 $38.6
Carlsbad Pacific Center III Southern California San Diego 40 7.5
Willow Oaks III Mid-Atlantic Metro. Washington, DC 182 37.6
--- -----
Total 445 $83.7
=== =====
----------
14
/(1)/ Net rentable square feet defines the area of a property for which a tenant
is required to pay rent, which includes the actual rentable area plus a
portion of the common areas of the property allocated to a tenant.
/(2)/ As of December 31, 2001, we have incurred $64.4 million of the total
estimated cost of our development properties.
Insurance
We have and will keep in force comprehensive insurance, including
liability, fire, workers' compensation, extended coverage, rental loss and, when
available on reasonable commercial terms, flood and earthquake insurance, with
policy specifications, limits and deductibles customarily carried for similar
properties. We currently maintain insurance to cover environmental conditions
and business interruption if and when they occur. This policy covers both
governmental and third-party claims associated with the covered environmental
conditions. Our real property insurance policies exclude earthquake coverage for
properties located within California. As a result, we maintain a $100 million
blanket earthquake policy on the properties we own in Northern and Southern
California. Certain types of losses, however, generally of a catastrophic
nature, such as acts of war, are either uninsurable or the cost of obtaining
insurance is so high that it is more prudent to accept the risk of loss. Our
real property insurance policies put into effect before September 11, 2001 do
not expressly exclude coverage from hostile acts, except for acts of war.
Following the terrorist acts of September 11, 2001, however, insurance policies
purchased by us may expressly exclude hostile acts, and it may be impossible to
obtain insurance covering terrorist attacks. We may not be able to purchase
policies in the future with coverage limits and deductibles similar to those
that were available before September 11, 2001. In addition, we expect our
insurance premiums to increase in the future, which may have an adverse impact
on our cash flow. We believe that our properties are adequately insured in
accordance with industry standards.
Item 3. Legal Proceedings
Neither we nor our affiliates (other than in a representative capacity) are
presently subject to any material litigation. To our knowledge, no litigation
has been threatened against us or our affiliates other than routine actions and
administrative proceedings, substantially all of which are expected to be
covered by liability insurance and which, in the aggregate, are not expected to
have a material adverse effect on our business or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our security holders during the fourth
quarter of 2001 through the solicitation of proxies or otherwise.
15
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Market Information
Our common shares commenced trading on the NYSE on October 17, 1996 under
the symbol "PP." As of March 20, 2002, the last reported sales price per common
share on the NYSE was $29.40 per common share. The following table sets forth
the high and low sales price per common share reported on the NYSE as traded for
the periods indicated.
Period High Low
------ ----- -----
2001
Fourth Quarter ................................... 28.29 24.36
Third Quarter .................................... 29.16 25.80
Second Quarter ................................... 27.10 23.70
First Quarter .................................... 27.00 23.76
2000
Fourth Quarter ................................... 27.50 24.44
Third Quarter .................................... 26.50 23.88
Second Quarter ................................... 26.50 21.44
First Quarter .................................... 22.50 19.00
Holders
At March 20, 2002, we had approximately 480 holders of record and
approximately 7,500 beneficial owners of our common shares. As of March 20,
2002, all of our 3,773,585 Series D Preferred Shares, which are convertible into
our common shares subject to certain limitations, were held by Security Capital
Preferred Growth, Incorporated. In addition, the units of limited partnership
interest in the operating partnership, which are redeemable for common shares
subject to limitations, were held by 22 entities or persons.
In order to comply with certain requirements related to qualification as a
REIT, our organizational documents limit the number of outstanding common shares
that may be owned by any single person or affiliated group to 8.5% of the
outstanding common shares (other than Michael V. Prentiss, for whom the
ownership limitation is 15%, and Security Capital Preferred Growth,
Incorporated, for whom the ownership limitation is 11%).
Dividends
We have adopted a policy of paying regular quarterly distributions on our
common shares and cash distributions have been paid on our common shares with
respect to each such period since our inception. The following table sets forth
information regarding the declaration and payment of distributions by us in 2001
and 2000.
16
Distribution Distribution Per Share
Record Payment Distribution
Period Which Distribution Relates Date Date Amount
--------------------------------- ------------ ------------ ------------
2001
Fourth Quarter 12/28/01 1/11/02 $0.535
Third Quarter 9/28/01 10/12/01 $0.535
Second Quarter 6/29/01 7/13/01 $0.535
First Quarter 3/30/01 4/12/01 $0.485
2000
Fourth Quarter 12/29/00 1/12/01 $0.485
Third Quarter 9/29/00 10/13/00 $0.485
Second Quarter 6/30/00 7/14/00 $0.485
First Quarter 3/31/00 4/14/00 $0.440
For tax purposes, the foregoing distributions represent an approximate 8.9%
and 9.2% return of capital in 2001 and 2000, respectively. In order to maintain
our qualification as a REIT, beginning in 2001, we must make annual
distributions to our shareholders of at least 90% of our taxable income,
excluding net capital gains. During the year ended December 31, 2001, we
declared distributions totaling $2.09 per share. Prior to 2001, we were required
to make annual distributions to our shareholders of at least 95% of our taxable
income, excluding net capital gains. During the year ended December 31, 2000, we
declared distributions totaling $1.895 per share. Under certain circumstances we
may be required to make distributions in excess of cash available for
distribution in order to meet such REIT distribution requirements. In such
event, we presently would expect to borrow funds, or to sell assets for cash, to
the extent necessary to obtain cash sufficient to make the distributions
required to retain our qualification as a REIT for federal income tax purposes.
We declared a cash distribution for the first quarter of 2002 in the amount
of $.535 per share, payable on April 12, 2002 to holders of record on March 29,
2002. We currently anticipate that we will maintain at least the current
distribution rate for the immediate future, unless actual results of operations,
economic conditions or other factors differ from our current expectations.
Future distributions, if any, paid by us will be at the discretion of our board
of trustees and will depend on our cash flow, our financial condition, capital
requirements, the annual distribution requirements under the REIT provisions of
the Internal Revenue Code and such other factors as our board of trustees deems
relevant.
Item 6. Selected Financial and Operating Data
The following section sets forth our selected consolidated financial and
operating data. The following data should be read in conjunction with the
historical Consolidated Financial Statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Form 10-K.
The selected historical consolidated financial data has been derived from
our historical Consolidated Financial Statements and our notes thereto audited
by PricewaterhouseCoopers LLP, independent accountants.
17
Year Ended December 31,
--------------------------------------------------------
Operating Data: 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
Rental income ................................ $339,377 $335,853 $297,147 $235,650 $127,089
Fee and other income ......................... 5,042 4,555 3,325 5,964 4,639
-------- -------- -------- -------- --------
Total revenues ............................... 344,419 340,408 300,472 241,614 131,728
Operating expenses ........................... 89,309 87,795 78,446 65,191 37,221
Real estate taxes ............................ 38,355 38,400 34,201 25,512 13,742
Interest expense ............................. 66,079 72,727 60,472 42,681 21,955
Real estate depreciation and amortization..... 64,190 63,328 54,482 41,828 21,600
Other depreciation and amortization .......... 78 71 53 -- --
Equity in income of joint ventures
and unconsolidated subsidiaries ......... 3,131 3,843 4,294 7,398 5,208
Merger termination fee, net .................. 17,000 4,091 -- -- --
-------- -------- -------- -------- --------
Income before gain or loss, minority
interests, and extraordinary items ...... 106,539 86,021 77,112 73,800 42,418
Gain on sales ................................ 13,895 221 16,105 14,416 641
Loss on investment in securities ............. -- (1,000) -- -- --
Minority interests(1) ........................ (17,601) (15,657) (12,735) (7,796) (5,235)
-------- -------- -------- -------- --------
Income before extraordinary items ............ 102,833 69,585 80,482 80,420 37,824
Extraordinary items .......................... (367) -- -- (9,001) (878)
-------- -------- -------- -------- --------
Net income ................................... 102,466 69,585 80,482 71,419 36,946
Preferred dividends .......................... (7,887) (7,151) (6,491) (5,655) (25)
-------- -------- -------- -------- --------
Net income applicable to common
shareholders ............................ 94,579 62,434 73,991 65,764 36,921
======== ======== ======== ======== ========
Net income per common share - basic .......... $ 2.57 $ 1.72 $ 1.95 $ 1.70 $ 1.48
======== ======== ======== ======== ========
Net income per common share before
extraordinary items - basic ............. $ 2.58 $ 1.72 $ 1.95 $ 1.93 $ 1.52
======== ======== ======== ======== ========
Weighted average number of common shares
outstanding ............................. 36,736 36,273 37,875 38,742 24,930
======== ======== ======== ======== ========
Net income per common share - diluted ........ $ 2.51 $ 1.71 $ 1.93 $ 1.68 $ 1.46
======== ======== ======== ======== ========
Net income per common share before
extraordinary items - diluted ........... $ 2.52 $ 1.71 $ 1.93 $ 1.89 $ 1.49
======== ======== ======== ======== ========
Weighted average number of common shares
and common share equivalents
outstanding ............................. 40,849 36,515 41,729 42,497 25,307
======== ======== ======== ======== ========
As of or For the Year Ended December 31,
------------------------------------------------------------------
Balance Sheet Data: 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(in thousands)
Operating real estate, before accumulated
depreciation ....................... $1,807,039 $1,869,694 $1,780,386 $1,648,732 $1,110,815
Operating real estate, after accumulated
depreciation ....................... 1,660,690 1,743,064 1,688,925 1,623,941 1,074,672
Cash and cash equivalents ............... 5,845 5,452 13,313 5,523 7,075
Total assets ............................ 2,030,593 2,117,875 1,994,663 1,871,145 1,239,846
Mortgages and notes payable ............. 907,734 1,007,800 896,810 800,263 420,030
Total liabilities ....................... 1,024,607 1,132,858 983,850 880,447 470,607
Minority interests ...................... 186,186 178,753 179,320 130,120 72,607
Shareholders' equity .................... 819,800 806,264 831,493 860,578 696,632
18
Other Data:
(in thousands)
Cash flow from operations ............... $ 157,293 $ 158,118 $ 119,664 $ 101,986 $ 61,458
Cash flow from investing ................ (49,723) (169,368) (140,377) (563,851) (660,263)
Cash flow from financing ................ (107,177) 3,389 28,503 460,313 598,654
EBITDA/(2)/.............................. 231,162 227,785 201,243 166,454 95,551
Funds from operations/(3)/............... 143,946 134,311 124,665 113,620 66,047
Property Data:
(square feet in thousands)
Number of properties .................... 146 181 199 233 161
Total net rentable square feet .......... 17,597 19,497 19,848 20,963 18,082
Occupancy % ............................. 94% 96% 96% 97% 96%
----------
/(1)/ Represents the limited partners' interest in the operating partnership as
well as the limited partners' interest in certain real estate partnerships.
/(2)/ EBITDA means operating income before mortgage and other interest expense,
income taxes, depreciation and amortization. We believe that EBITDA is
useful to investors as an indication of our ability to service debt and pay
cash distributions. EBITDA, as calculated by us, is not comparable to
EBITDA reported by other REITs that do not define EBITDA exactly as we do.
EBITDA does not represent cash generated from operating activities in
accordance with generally accepted accounting principles, and should not be
considered as an alternative to operating income or net income as an
indicator of performance or as an alternative to cash flows from operating
activities as an indicator of liquidity. Our EBITDA for the respective
periods is calculated as follows:
Year Ended December 31,
-------------------------------------------------------
EBITDA 2001 2000 1999 1998 1997
-------- -------- -------- -------- -------
(in thousands)
Net income .................................. $102,466 $ 69,585 $ 80,482 $ 71,419 $36,946
Add:
Interest expense ....................... 66,079 72,727 60,472 42,681 21,995
Real estate depreciation and
amortization ....................... 64,190 63,328 54,482 41,828 21,600
Other depreciation and amortization..... 78 71 53 -- --
EBITDA of unconsolidated subsidiaries... 660 2,062 2,837 6,086 5,434
EBITDA of unconsolidated real estate
joint ventures ..................... 13,908 11,663 10,739 9,588 9,419
Extraordinary items .................... 367 -- -- 9,001 878
Minority interests/(A)/................. 17,440 15,504 12,577 7,665 5,128
Less:
Merger termination fee, net/(B)/........ (17,000) (4,091) -- -- --
Gain on sales .......................... (13,895) (221) (16,105) (14,416) (641)
Loss on investment in securities/(B)/... -- 1,000 -- -- --
Equity in income of joint ventures and
unconsolidated subsidiaries ........ (3,131) (3,843) (4,294) (7,398) (5,208)
-------- -------- -------- -------- -------
EBITDA ...................................... $231,162 $227,785 $201,243 $166,454 $95,551
======== ======== ======== ======== =======
----------
/(A)/ Represents the minority interests applicable to common and preferred
unit holders of the operating partnership.
/(B)/ Due to the non-recurring nature of these items, it is our opinion
that these items should be excluded from our EBITDA.
/(3)/ Funds from operations, as defined by the National Association of Real
Estate Investment Trusts, means net income, computed in accordance with
generally accepted accounting principles excluding extraordinary items
19
(as defined by generally accepted accounting principles) and gains (or
losses) from sales of property, plus depreciation and amortization on real
estate assets, and after adjustments for unconsolidated partnerships, joint
ventures and subsidiaries. We believe that funds from operations is helpful
to investors as a measure of the performance of an equity REIT because,
along with cash flow from operating activities, financing and investing
activities, it provides investors with an indication of our ability to
incur and service debt, to make capital expenditures and to fund other cash
needs. Our funds from operations is not comparable to funds from operations
reported by other REITs that do not define funds from operations exactly as
we do. We believe that in order to facilitate a clear understanding of our
operating results, funds from operations should be examined in conjunction
with net income as presented in our audited Consolidated Financial
Statements and notes thereto included elsewhere in this Form 10-K. Funds
from operations does not represent cash generated from operating activities
in accordance with generally accepted accounting principles and should not
be considered as an alternative to net income as an indication of our
performance or to cash flows as a measure of liquidity or ability to make
distributions. Our funds from operations for the respective periods is
calculated as follows:
Year Ended December 31,
-------------------------------------------------------
Funds from operations 2001 2000 1999 1998 1997
-------- -------- -------- -------- -------
(in thousands)
Net income ............................... $102,466 $ 69,585 $ 80,482 $ 71,419 $36,946
Add:
Real estate depreciation and
amortization ................... 64,190 63,328 54,482 41,828 21,600
Real estate depreciation and
amortization of
unconsolidated joint ventures... 3,550 2,816 2,480 2,196 2,136
Minority interests/(A)/.............. 17,440 15,504 12,577 7,665 5,128
Extraordinary items ................. 367 -- -- 9,001 878
Less:
Merger termination fee, net/(B)/..... (17,000) (4,091) -- -- --
Gain on sales ....................... (13,895) (221) (16,105) (14,416) (641)
Dividend on perpetual preferred
units .......................... (13,172) (12,610) (9,251) (4,073) --
-------- -------- -------- -------- -------
Funds from operations .................... $143,946 $134,311 $124,665 $113,620 $66,047
======== ======== ======== ======== =======
----------
/(A)/ Represents the minority interests applicable to the common and
preferred unit holders of the operating partnership.
/(B)/ Although the fee is not considered an extraordinary item in
accordance with generally accepted accounting principles, it is our
opinion that it is appropriate to exclude the fee from funds from
operations.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with our "Selected Financial and
Operating Data" and our historical Consolidated Financial Statements and related
notes thereto. Historical results set forth in our "Selected Financial and
Operating Data," and Consolidated Financial Statements should not be taken as an
indication of our future operations.
Overview
We are a real estate company organized as a Maryland REIT. We acquire, own,
manage, lease, develop and build primarily office properties throughout the
United States. We operate principally through our operating partnership,
Prentiss Properties Acquisition Partners, L.P. and its subsidiaries, and a
management company, Prentiss Properties Resources, Inc. and its subsidiaries. As
of December 31, 2001, we owned interests in a diversified portfolio of 108
office and 38 industrial properties containing in the aggregate 17.6 million net
rentable square feet.
20
The discussion and analysis which follows focuses on our reportable
segments as we believe that the segment analysis provides the most effective
means of understanding our results of operations. During 2001, we had two
significant changes to our reportable segments including (1) the disposition of
our Northeast regional office and (2) the division of our West Region into
separate Northern and Southern California Regions. For comparative purposes, the
results of operations, of prior years, attributable to our West Region have been
reclassified to separate Northern and Southern California Regions.
The table below presents a summary of our property transactions from
January 1, 1999 through December 31, 2001:
Number of Net Rentable
Buildings Square Feet
--------- --------------
(in thousands)
Properties at January 1, 1999 ........................ 233 20,963
Activity for the Year Ended December 31, 1999
Property acquisitions ........................... 6 1,088
Property dispositions ........................... (45) (2,642)
Development starts .............................. 5 439
--- ------
199 19,848
Activity for the Year Ended December 31, 2000
Property acquisitions ........................... 5 697
Property dispositions ........................... (27) (1,679)
Other activity .................................. (1) (109)
Development starts .............................. 5 740
--- ------
181 19,497
Activity for the Year Ended December 31, 2001
Property acquisitions ........................... 7 918
Property dispositions ........................... (42) (2,827)
Other activity/(1)/ ............................. (1) (31)
Development starts .............................. 1 40
--- ------
Properties at December 31, 2001 ...................... 146 17,597
=== ======
----------
/(1)/ Other activity for the year ended December 31, 2001 includes the
demolition of one 29,000 net rentable square foot office property and a
re-measurement of certain of our properties.
Critical Accounting Policies
Our discussion and analysis of financial condition and results of
operations is based upon our Consolidated Financial Statements. Our Consolidated
Financial Statements include the accounts of Prentiss Properties Trust, Prentiss
Properties Acquisition Partners, L.P. and other subsidiaries. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for the reporting period. Actual
results could differ from our estimates.
The estimates used in the preparation of our Consolidated Financial
Statements are more fully described in Note (2) to our Consolidated Financial
Statements. However, certain of our significant accounting policies are
considered critical accounting policies due to the increased level of
assumptions used or estimates made in determining their impact on our
Consolidated Financial Statements.
21
We consider our critical accounting policies to be those used in the
determination of the reported amounts and disclosure related to the following:
(1) Impairment of long-lived assets and the long-lived assets to be
disposed of;
(2) Allowance for doubtful accounts;
(3) Depreciable lives applied to real estate assets and improvements
to real estate assets; and
(4) Fair value of derivative instruments.
Impairment of long-lived assets and long-lived assets to be disposed of
Real estate and leasehold improvements are classified as long-lived assets
held for sale or long-lived assets to be held and used. In accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and the Long-Lived Assets to be Disposed of," we
record assets held for sale at the lower of the carrying amount or fair value
less cost to sell. With respect to assets classified as held and used, we
periodically review these assets to determine whether our carrying amount will
be recovered from the undiscounted future operating cash flows and we recognize
an impairment loss to the extent the carrying amount is not recoverable and
exceeds its fair value. Our determination of future operating cash flows
requires us to make assumptions related to future rental rates, tenant
concessions, operating expenditures, property taxes and capital improvements.
Allowance for doubtful accounts
Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. Our receivable balance is comprised primarily of
rents and operating cost recoveries due from tenants as well as accrued rental
rate increases to be received over the life of the in-place leases. We regularly
evaluate the adequacy of our allowance for doubtful accounts considering such
factors as credit quality of our tenants, delinquency of payment, historical
trends and current economic conditions. Actual results may differ from these
estimates under different assumptions or conditions.
Depreciable lives applied to real estate assets and improvements to real estate
assets
Depreciation on buildings and improvements is provided under the
straight-line method over an estimated useful life of 30 to 40 years for office
buildings and 25 to 30 years for industrial buildings. Significant betterments
made to our real estate assets are capitalized and depreciated over the
estimated useful life of the betterment.
Fair value of derivative instruments
In the normal course of business, we are exposed to the effect of interest
rate changes. We limit these risks by following established risk management
policies and procedures including the use of derivatives. For interest rate
exposures, derivatives are used primarily to hedge against rate movements on our
related debt. We are required to recognize all derivatives as either assets or
liabilities in the statement of financial position and to measure those
instruments at fair value. Changes in fair value will affect either
shareholders' equity or net income depending on whether the derivative
instrument qualifies as a hedge for accounting purposes.
To determine the fair values of derivative instruments, we use a variety of
methods and assumptions that are based on market conditions and risks existing
at each balance sheet date. For the majority of financial instruments including
most derivatives, standard market conventions and techniques such as discounted
cash flow analysis, option pricing models, replacement cost, and termination
cost are used to determine fair value. All methods of assessing fair value
result in a general approximation of value, and such value may never actually be
realized.
Results of Operations
As illustrated in the table above, from January 1, 1999 through December
31, 2001, we had significant property transactions including property
acquisitions, dispositions and developments. During this three-year period our
office
22
portfolio increased from 13.8 million to 14.4 million net rentable square feet
while our industrial portfolio decreased from 7.1 million to 3.2 million net
rentable square feet. As a result of the significant property transactions, the
comparison of the years provides only limited information regarding our
operations as currently constituted. Therefore, in our comparison of operating
results for the years ended December 31, 2001, 2000 and 1999 we show changes
resulting from our total portfolio and our same-store property portfolio, i.e.,
those properties owned during the entirety of the periods being compared.
Comparison of the Year Ended December 31, 2001 to the Year Ended December 31,
2000
The table below presents the actual statement of operations for our total
portfolio and selected operating information for the 117 properties acquired or
placed in service on or prior to January 1, 2000 that remained in our portfolio
through December 31, 2001, which comprise our same-store property portfolio for
the two year period ending December 31, 2001:
Total Portfolio Year Ended December 31,
-----------------------
(in thousands) 2001 2000
--------- ---------
Revenues:
Rental income ........................................................ $ 339,377 $ 335,853
Management and other fees, net ....................................... 5,042 4,555
--------- ---------
Total revenues ................................................... 344,419 340,408
--------- ---------
Expenses:
Property operating and maintenance ................................... 78,913 78,005
Real estate taxes .................................................... 38,355 38,400
General and administrative and personnel cost ........................ 10,396 9,790
Interest expense ..................................................... 64,472 71,208
Amortization of deferred financing costs ............................. 1,607 1,519
Depreciation and amortization ........................................ 64,268 63,399
--------- ---------
Total expenses ................................................... 258,011 262,321
--------- ---------
Equity in income of joint ventures and unconsolidated subsidiaries ........ 3,131 3,843
Merger termination fee, net ............................................... 17,000 4,091
--------- ---------
Income before gain or loss, minority interests and extraordinary items .... 106,539 86,021
Gain on sale of properties ................................................ 13,895 221
Loss on investment in securities .......................................... -- (1,000)
Minority interests ........................................................ (17,601) (15,657)
--------- ---------
Net income before extraordinary items ..................................... 102,833 69,585
Extraordinary items ....................................................... (367) --
--------- ---------
Net income ................................................................ $ 102,466 $ 69,585
========= =========
Same-Store Property Portfolio /(1)/ Year Ended December 31,
-----------------------
(in thousands) 2001 2000
-------- ---------
Property revenues:
Rental income ......................................................... $266,954 $254,650
Management and other fees, net ........................................ 181 92
-------- --------
Property revenues ................................................. 267,135 254,742
-------- --------
Property expenses:
Property operating and maintenance .................................... 63,026 60,655
Real estate taxes ..................................................... 30,103 28,996
Depreciation and amortization ......................................... 50,287 48,257
-------- --------
Property expenses ................................................. 143,416 137,908
-------- --------
Property revenues less property expenses ................................... $123,719 $116,834
======== ========
23
/(1)/ The 117 properties included in our same-store property portfolio
excludes 123 North Wacker Drive, a 537,000 net rentable square foot
office property in downtown Chicago. The property was taken out of
service at the end of September 2001 to convert the building from a
single tenant building to its future intended use as a multi-tenant
building.
Rental Income. Rental income increased by $3.5 million, or 1.0%, to $339.4
million in 2001 from $335.9 million in 2000 partially as a result of properties
acquired or development properties becoming operational subsequent to January 1,
2000, offset by properties that were sold during the two years ended December
31, 2001. Rental income for the same-store property portfolio increased by $12.3
million, or 4.8%, from $254.7 million for the year ended December 31, 2000 to
$267.0 million for the year ended December 31, 2001 primarily as a result of an
increase in straight-lined rent achieved from new leases exceeding that from
expiring leases. The increase in our same-store property portfolio was
attributable to our five regions as follows:
Number of Increase/
Segment Buildings 2001 2000 (Decrease) % Change
------------------- --------- -------- -------- ---------- --------
Mid-Atlantic 32 $ 75,070 $ 71,471 $ 3,599 5.0%
Midwest 16 52,443 51,144 1,299 2.5%
Southwest 23 76,405 72,434 3,971 5.5%
Northern California 8 37,957 34,868 3,089 8.9%
Southern California 38 25,079 24,733 346 1.4%
--- -------- -------- ------- ---
117 $266,954 $254,650 $12,304 4.8%
=== ======== ======== ======= ===
Property Operating and Maintenance. Property operating and maintenance
increased by $908,000, or 1.2%, to $78.9 million in 2001 from $78.0 million in
2000 partially as a result of properties acquired or development properties
becoming operational subsequent to January 1, 2000, offset by properties that
were sold during the two years ended December 31, 2001. Property operating and
maintenance for the same-store property portfolio increased by $2.4 million, or
3.9%, from $60.6 million for the year ended December 31, 2000 to $63.0 million
for the year ended December 31, 2001 primarily as a result of an increase of
$1.3 million in utility expenses accompanied by a general increase in expenses
attributable to operating and maintenance cost of the properties. The increase
in our same-store property portfolio was attributable to our five regions as
follows:
Number of Increase/
Segment Buildings 2001 2000 (Decrease) % Change
------------------- --------- ------- ------- ---------- --------
Mid-Atlantic 32 $16,082 $16,321 $ (239) (1.5%)
Midwest 16 10,128 9,917 211 2.1%
Southwest 23 20,469 19,983 486 2.4%
Northern California 8 10,969 9,581 1,388 14.5%
Southern California 38 5,378 4,853 525 10.8%
--- ------- ------- ------ ----
117 $63,026 $60,655 $2,371 3.9%
=== ======= ======= ====== ====
Real Estate Taxes. Real estate taxes decreased by $45,000, or less than
1.0%, to $38.4 million in 2001 partially as a result of properties acquired or
development properties becoming operational subsequent to January 1, 2000,
offset by properties that were sold during the two years ended December 31,
2001. Real estate taxes for the same-store property portfolio increased by $1.1
million, or 3.8% from $29.0 million for the year ended December 31, 2000 to
$30.1 million for the year ended December 31, 2001 primarily as a result of the
reassessment of certain property values by taxing authorities in each of our
regions. The increase in our same-store property portfolio was attributable to
our five regions as follows:
24
Number of Increase/
Segment Buildings 2001 2000 (Decrease) % Change
------------------- --------- ------- ------- ---------- --------
Mid-Atlantic 32 $ 5,515 $ 5,185 $ 330 6.4%
Midwest 16 8,928 8,323 605 7.3%
Southwest 23 10,998 10,765 233 2.2%
Northern California 8 2,702 2,789 (87) (3.1%)
Southern California 38 1,960 1,934 26 1.3%
--- ------- ------- ------ ----
117 $30,103 $28,996 $1,107 3.8%
=== ======= ======= ====== ====
General and Administrative and Personnel Costs. General and administrative
and personnel costs increased by $606,000, or 6.2%, from $9.8 million in 2000 to
$10.4 million in 2001 due to (1) the amortization of restricted share grants
issued in March 2000 and 2001; (2) an increase in compensation expense resulting
from the 2000 calendar year bonus compensation, paid in March 2001, exceeding
the estimate of such cost accrued at December 31, 2000; partially offset by (3)
a decrease in general and administrative and personnel cost as a result of the
sale of our Northeast Region.
Interest Expense. Interest expense decreased by $6.7 million, or 9.5%, to
$64.5 million in 2001 from $71.2 million in 2000 primarily as a result of the
decrease in mortgages and notes payable from $1.01 billion at January 1, 2001 to
$907.7 million at December 31, 2001. The decrease in mortgages and notes payable
resulted from (1) the repayment of mortgages and notes payable with proceeds
generated from our asset disposition activity and (2) the assumption of certain
mortgages and notes payable by the purchasers of assets disposed of during the
period partially offset by proceeds used for assets acquired during the period.
Depreciation and Amortization. Depreciation and amortization increased by
$869,000, or 1.4%, to $64.3 million in 2001 from $63.4 million in 2000 partially
as a result of properties acquired or development properties becoming
operational subsequent to January 1, 2000, offset by properties that were sold
during the two years ended December 31, 2001. Depreciation and amortization for
the same-store property portfolio increased by $2.0 million, or 4.2%, from $48.3
million for the year ended December 31, 2000 to $50.3 million for the year ended
December 31, 2001 which is attributable to increases in depreciation and
amortization of leasehold improvements which results from leasing activity
incurred subsequent to the acquisition of the properties. The increase in our
same-store property portfolio was attributable to our five regions as follows:
Number of Increase/
Segment Buildings 2001 2000 (Decrease) % Change
------- --------- ------- ------- ---------- --------
Mid-Atlantic 32 $14,182 $13,734 $ 448 3.3%
Midwest 16 8,147 7,878 269 3.4%
Southwest 23 15,946 16,094 (148) (0.9%)
Northern California 8 5,846 4,901 945 19.3%
Southern California 38 6,166 5,650 516 9.1%
--- ------- ------- ------ ----
117 $50,287 $48,257 $2,030 4.2%
=== ======= ======= ====== ====
Equity in Income of Joint Ventures and Unconsolidated Subsidiaries. Equity
in income of joint ventures and unconsolidated subsidiaries decreased by
$712,000, or 18.5%, from $3.8 million for the year ended December 31, 2000 to
$3.1 million for the year ended December 31, 2001. The decrease was attributable
to a decrease of $1.4 million representing our share of the decrease in net
income of the management company, offset by an increase of $441,000 representing
our proportionate share of the increase in net income from the Burnett Plaza
property and $173,000 representing our proportionate share of net income of
Tysons International Partners, a 25% interest we acquired in April 2001 from
Brandywine Realty Trust. The decrease in net income of the management company
resulted from a decrease of management fees and other fee income earned,
partially offset by a decrease in general and administrative and personnel costs
of the management company.
Gain on Sales. Gain on sales increased by $13.7 million to $13.9 million in
2001 from $221,000 in 2000. It is our strategy to obtain the maximum value from
each of our properties, which is occasionally achieved through the
25
sale of a property. During the year ended December 31, 2001, we sold 42
properties totaling 2.8 million net rentable square feet compared to 27
properties totaling 1.7 million net rentable square feet sold during 2000.
Loss on Investment in Securities. In November 1999, we invested $1.0
million in Urban Media Communications Corporation, a provider of broad band
internet access to tenants of commercial office buildings. As a result of Urban
Media's purported inability to raise funding necessary to continue day to day
operations, in December 2000, we recognized a loss equal to 100% of our
investment in Urban Media.
Minority Interests. Minority interests increased by $1.9 million, or 12.4%,
from $15.7 million for the year ended December 31, 2000 to $17.6 million for the
year ended December 31, 2001. The increase was primarily attributable to the
minority interest holders share of the increase in net income before minority
interest of $34.8 million from 2000 to 2001 accompanied by the income allocation
from the issuance of 200,000, $50 par value, Series E Preferred Units in April
2001.
Comparison of the Year Ended December 31, 2000 to the Year Ended December 31,
1999
During 2001, we disposed of all of our assets in the suburban Philadelphia
area and as a result exited our Northeast Region. However, during the two-year
period ended December 31, 2000, we had operations in our Northeast Region and as
a result, the comparison of operating information for the two-year period ended
December 31, 2000 includes six operating segments as follows: (1) Mid-Atlantic;
(2) Midwest; (3) Northeast; (4) Southwest; (5) Northern California; and (6)
Southern California.
The table below presents the actual statement of operations for our total
portfolio and selected operating information for the 143 properties acquired or
placed in service on or prior to January 1, 1999 that remained in our portfolio
through December 31, 2000 (which comprise our same-store property portfolio for
the two year period ended December 31, 2000):
Year Ended December 31,
Total Portfolio -----------------------
(in thousands) 2000 1999
-------- --------
Revenues:
Rental income ..................................................... $335,853 $297,147
Management and other fees, net .................................... 4,555 3,325
-------- --------
Total revenues ................................................ 340,408 300,472
-------- --------
Expenses:
Property operating and maintenance ................................ 78,005 69,603
Real estate taxes ................................................. 38,400 34,201
General and administrative and personnel cost ..................... 9,790 8,843
Interest expense .................................................. 71,208 59,346
Amortization of deferred financing costs .......................... 1,519 1,126
Depreciation and amortization ..................................... 63,399 54,535
-------- --------
Total expenses ................................................ 262,321 227,654
-------- --------
Equity in income of joint ventures and unconsolidated subsidiaries ..... 3,843 4,294
Merger termination fee, net ............................................ 4,091 --
-------- --------
Income before gain or loss, minority interests and extraordinary items.. 86,021 77,112
Gain on sale of properties ............................................. 221 16,105
Loss on investment in securities ....................................... (1,000) --
Minority interests ..................................................... (15,657) (12,735)
-------- --------
Net income ............................................................. $ 69,585 $ 80,482
======== ========
26
Same-Store Property Portfolio Year Ended December 31,
(in thousands) -----------------------
2000 1999
-------- --------
Property revenues:
Rental income ..................................... $260,465 $251,591
Management and other fees, net .................... 106 126
-------- --------
Property revenues ............................. 260,571 251,717
-------- --------
Property expenses:
Property operating and maintenance ................ 62,841 59,738
Real estate taxes ................................. 28,932 29,834
Depreciation and amortization ..................... 46,712 43,280
-------- --------
Property expenses ............................. 138,485 132,852
-------- --------
Property revenues less property expenses ............... $122,086 $118,865
======== ========
Rental Income. Rental income increased by $38.7 million, or 13.0% to $335.8
million in 2000 from $297.1 million in 1999 primarily as a result of properties
acquired or development properties becoming operational subsequent to January 1,
1999, offset by properties that were sold during the two years ended December
31, 2000. Rental income for the same-store property portfolio increased by $8.9
million, or 3.5%, from $251.6 million for the year ended December 31, 1999 to
$260.5 million for the year ended December 31, 2000 primarily as a result of an
increase in straight-lined rent achieved from new leases exceeding that from
expiring leases. The increase in our same-store property portfolio was
attributable to our six regions as follows:
Number of Increase/
Segment Buildings 2000 1999 (Decrease) % Change
------- --------- -------- -------- ---------- --------
Mid-Atlantic 32 $ 62,541 $ 60,240 $2,301 3.8%
Midwest 18 50,568 47,018 3,550 7.6%
Northeast 27 25,859 25,467 392 1.5%
Southwest 18 63,292 62,528 764 1.2%
Northern California 8 34,868 33,778 1,090 3.2%
Southern California 40 23,337 22,560 777 3.4%
--- -------- -------- ------ ---
143 $260,465 $251,591 $8,874 3.5%
=== ======== ======== ====== ===
Property Operating and Maintenance. Property operating and maintenance
increased by $8.4 million, or 12.1%, to $78.0 million in 2000 from $69.6 million
in 1999 primarily as a result of properties acquired or development properties
becoming operational subsequent to January 1, 1999, offset by properties that
were sold during the two years ended December 31, 2000. Property operating and
maintenance for the same-store property portfolio increased by $3.1 million, or
5.2%, from $59.7 million for the year ended December 31, 1999 to $62.8 million
for the year ended December 31, 2000 primarily as a result of a $2.4 million
increase in operating and maintenance cost of the properties accompanied by a
$700,000 increase in utility expenses. The increase in our same-store property
portfolio was attributable to our six regions as follows:
Number of Increase/
Segment Buildings 2000 1999 (Decrease) % Change
------- --------- ------- ------- ---------- --------
Mid-Atlantic 32 $15,379 $15,278 $ 101 0.7%
Midwest 18 10,409 9,555 854 8.9%
Northeast 27 5,463 5,141 322 6.3%
Southwest 18 17,576 16,732 844 5.0%
Northern California 8 9,581 8,699 882 10.1%
Southern California 40 4,433 4,333 100 2.3%
--- ------- ------- ------ ----
143 $62,841 $59,738 $3,103 5.2%
=== ======= ======= ====== ====
Real Estate Taxes. Real estate taxes increased by $4.2 million, or 12.3%,
to $38.4 million in 2000 from $34.2 million in 1999 primarily as a result of
properties acquired or development properties becoming operational subsequent to
January 1, 1999, offset by properties that were sold during the two years ended
December 31, 2000. Real estate taxes for the same-store property portfolio
decreased by $902,000, or 3.0% from $29.8 million for the
27
year ended December 31, 1999, to $28.9 million for the year ended December 31,
2000 primarily as a result of the reassessment of certain property values by
taxing authorities in each of our regions. The decrease in our same-store
property portfolio was attributable to our six regions as follows:
Number of Increase/
Segment Buildings 2000 1999 (Decrease) % Change
------- --------- ------- ------- ---------- --------
Mid-Atlantic 32 $ 4,653 $ 4,654 $ (1) 0.0%
Midwest 18 8,333 8,695 (362) (4.2%)
Northeast 27 2,067 1,985 82 4.1%
Southwest 18 9,229 9,980 (751) (7.5%)
Northern California 8 2,789 2,804 (15) (0.5%)
Southern California 40 1,861 1,716 145 8.4%
--- ------- ------- ----- ----
143 $28,932 $29,834 $(902) (3.0%)
=== ======= ======= ===== ====
General and Administrative and Personnel Costs. General and administrative
and personnel costs increased by $947,000, or 10.7%, from $8.8 million in 1999
to $9.8 million in 2000. The increase is primarily attributable to the
amortization of restricted share grants issued during the year ended December
31, 2000. The general and administrative costs remained constant at 2.9% of our
revenues.
Interest Expense. Interest expense increased by $11.9 million, or 20.0%, to
$71.2 million from $59.3 million primarily as a result of the increase in
mortgages and notes payable from $800.3 million at January 1, 1999 to $896.8
million at December 31, 1999 to $1.0 billion at December 31, 2000. The increase
in mortgages and notes payable resulted from the increase of $204.9 million in
real estate from January 1, 1999 to December 31, 2000 and $69.3 million of
proceeds used to repurchase common shares during the two year period, offset by
proceeds received from the issuance by the operating partnership of 2,000,000,
$25 par value, Series C Perpetual Preferred Units in September 1999.
Depreciation and Amortization. Depreciation and amortization increased by
$8.9 million, or 16.3%, to $63.4 million in 2000 from $54.5 million in 1999
primarily as a result of properties acquired or development properties becoming
operational subsequent to January 1, 1999, offset by properties that were sold
during the two years ended December 31, 2000. Depreciation and amortization for
the same-store property portfolio, increased by $3.4 million, or 7.9%, from
$43.3 million for the year ended December 31, 1999 to $46.7 million for the year
ended December 31, 2000 which is attributable to increases in depreciation and
amortization of leasehold improvements which results from leasing activity
incurred subsequent to the acquisition of the properties. The increase in our
same-store property portfolio was attributable to our six regions as follows:
Number of Increase/
Segment Buildings 2000 1999 (Decrease) % Change
------- --------- ------- ------- ---------- --------
Mid-Atlantic 32 $11,673 $11,196 $ 477 4.3%
Midwest 18 7,513 7,394 119 1.6%
Northeast 27 5,051 4,528 523 11.6%
Southwest 18 12,845 11,500 1,345 11.7%
Northern California 8 4,901 4,364 537 12.3%
Southern California 40 4,728 4,297 431 10.0%
--- ------- ------- ------ ----
143 $46,711 $43,279 $3,432 7.9%
=== ======= ======= ====== ====
Equity in Income of Joint Ventures and Unconsolidated Subsidiaries. Equity
in income of joint ventures and unconsolidated subsidiaries decreased by
$451,000, or 10.5%, from $4.3 million for the year ended December 31, 1999 to
$3.8 million for the year ended December 31, 2000. The decrease was attributable
to a decrease of $1.2 million representing our share of the decrease in net
income of the management company, offset by an increase of $461,000 representing
our proportionate share of the increase in net income from the Burnett Plaza
property which was acquired in March 1999 and $327,000 representing our
proportionate share of net income of PPS Partners LLC, a 75% interest we
acquired in early 2000. The decrease in net income of the management company
resulted from a decrease of management fees and other fee income earned,
partially offset by a decrease in general and administrative and personnel costs
of the management company.
28
Gain on Sales. Gain on sales decreased by $15.9 million, to $221,000 in
2000 from $16.1 million in 1999. It is our strategy to obtain the maximum value
from each of our properties, which is occasionally achieved through the sale of
a property. During the year ended December 31, 2000, we sold 27 properties
totaling 1.7 million net rentable square feet as compared to 45 properties
totaling 2.5 million net rentable square feet and two land parcels totaling
27.06 acres sold during 1999.
Loss on Investment in Securities. In November 1999, we invested $1.0
million in Urban Media Communications Corporation, a provider of broad band
internet access to tenants of commercial office buildings. As a result of Urban
Media's purported inability to raise funding necessary to continue day to day
operations, in December 2000, we recognized a loss equal to our investment in
Urban Media.
Minority Interests. Minority interests increased by $2.9 million, or 22.9%,
from $12.7 million for the year ended December 31, 1999 to $15.6 million for the
year ended December 31, 2000. The increase was primarily attributable to the
income allocation from the issuance by the operating partnership of 2,000,000,
$25 par value, Series C Perpetual Preferred Units in September 1999, offset by
the minority interest holders share of the decrease in income before minority
interest of $8.0 million from 1999 to 2000.
Liquidity and Capital Resources
Cash and cash equivalents were $5.8 million and $5.5 million at December
31, 2001 and December 31, 2000, respectively. The increase in cash and cash
equivalents is a result of cash flows provided by operating activities exceeding
those used in investing and financing activities.
Cash Provided by Operating Activities. Net cash provided by operating
activities was $157.3 million for the year ended December 31, 2001 compared to
$158.1 million for the year ended December 31, 2000.
Cash Used in Investing Activities. Net cash used in investing activities
decreased from $169.4 million for the year ended December 31, 2000 to $49.7
million for the year ended December 31, 2001. The decrease in cash used in
investing activities is primarily due to a decrease of cash used in the purchase
and development of real estate of $25.4 million accompanied by an increase of
$90.5 million in cash generated from the sale of real estate from 2000 to 2001.
Cash (Used in) Provided by Financing Activities. During 2001, we had net
cash used in financing activities of $107.2 million as compared to $3.4 million
of cash provided by financing activities for the year ended December 31, 2000.
The change is primarily attributable to net repayments of mortgages and notes
payable of $8.3 million during 2001 compared to net borrowings of mortgages and
notes payable of $111.0 million during 2000, accompanied by an $11.8 million
increase in distributions paid, partially offset by an $18.8 million decrease in
cash used for the purchase of treasury shares.
As of December 31, 2001, we had outstanding total indebtedness, including
our pro rata share of joint venture debt of approximately $1.01 billion, or
approximately 43.4% of total market capitalization based on a common share price
of $27.45 per common share. Our policy is to limit combined indebtedness plus
our pro rata share of joint venture debt and construction loans so that at the
time such debt is incurred, it does not exceed 50% of the our total market
capitalization. As of December 31, 2001, we had the approximate capacity to
borrow up to an additional $308.8 million under the debt limitation and the
various restrictions in our credit agreements. The amount of indebtedness that
we may incur, and the policies with respect thereto, are not limited by our
declaration of trust and bylaws, and are solely within the discretion of our
board of trustees limited only by various financial covenants in our credit
agreements.
We have in place a $300 million unsecured revolving credit facility with a
group of 12 banks. The facility which was renewed in May 2000 matures in May
2003. The facility has an initial interest rate of LIBOR plus 137.5 basis
points. Additionally, we are required to pay an average unused commitment fee of
25 basis points per annum if the unused portion of the credit facility is
greater than $200 million. The fee is reduced to 20 basis points per annum if
the unused portion is less than or equal to $200 million, but greater than $100
million. The fee is further reduced to 15 basis points per annum if the unused
portion is less than or equal to $100 million. During the year, we
29
had net repayments under our credit facility of $24.0 million and an outstanding
balance of $118.5 million at December 31, 2001, resulting in an available
balance of $181.5 million.
As of December 31, 2001, we have non-controlling partnership interest in
three separate real estate joint ventures which have in the aggregate $258.7
million of non-recourse mortgage debt. The mortgage debt of each venture is
collateralized by the real estate property or properties within each venture,
the net book value of which totaled $265.9 million at December 31, 2001. Our
proportionate share of the non-recourse mortgage debt totaled $99.9 million at
December 31, 2001.
The following table sets forth our mortgages and notes payable, including
our pro rata share of joint venture debt, as of December 31, 2001:
Current
Borrower/Description Balance Amortization Interest Rate Maturity
-------------------- -------------- ------------ ------------- ------------------
(in thousands)
Broadmoor Austin Associates
Broadmoor Austin /(1)/ $ 75,212 16 yr 7.04% April 10, 2011
Burnett Plaza Associates
Burnett Plaza /(2)/ 9,400 None 7.50% February 1, 2002
PL Property Associates, L.P.
Park West C2 34,460 30 yr 6.63% November 10, 2010
Prentiss Properties Acquisition Partners,
L.P.
Revolving Credit Facility 118,500 None LIBOR + 1.375% May 23, 2003
Bachman West 2,876 25 yr 8.63% December 1, 2003
One Westchase Center 24,029 25 yr 7.84% February 1, 2004
Collaterialized Term Loan /(3)/ 72,313 25 yr LIBOR + 1.625% September 30, 2004
Walnut Glen Tower 34,384 30 yr 6.92% April 1, 2005
Unsecured Term Loan 75,000 None LIBOR + 1.375% March 15, 2006
Highland Court 4,729 25 yr 7.27% April 1, 2006
Westheimer Central Plaza 5,753 25 yr 8.38% August 1, 2006
7101 Wisconsin Avenue 20,910 30 yr 7.25% April 1, 2009
2500 Cumberland Parkway 14,400 30 yr 7.46% July 15, 2009
Ordway 48,936 30 yr 7.95% April 1, 2010
World Savings Center 29,031 30 yr 7.91% November 1, 2010
One O'Hare Centre 40,860 30 yr 6.80% January 10, 2011
3130 Fairview 22,848 30 yr 7.00% April 1, 2011
Research Office Center 44,926 28 yr 7.64% October 1, 2011
Bannockburn Center 26,658 30 yr 8.05% June 1, 2012
Del Mar 44,793 30 yr 7.41% June 1, 2013
Prentiss Properties Corporetum, L.P.
Corporetum Office Campus 25,280 30 yr 7.02% February 1, 2009
Prentiss Properties Natomas, L.P.
Natomas Corporate Center 36,948 30 yr 7.02% February 1, 2009
Prentiss Properties Real Estate Fund I, L.P.
PPREFI Portfolio Loan /(4)/ 180,100 None 7.58% February 26, 2007
Tysons International Partners
1676 International /(5)/ 11,286 28 yr 7.68% August 30, 2010
8260 Greensboro /(5)/ 4,036 28 yr 7.83% August 30, 2010
----------
Total $1,007,668
==========
----------
/(1)/ We own a 50% non-controlling interest in the entity that owns the
Broadmoor Austin properties, which interest is accounted for using the
equity method of accounting. The amount shown reflects our proportionate
share of the non-recourse mortgage indebtedness collateralized by the
properties.
/(2)/ As of December 31, 2001, we owned a 20% non-controlling interest in the
entity that owns the Burnett Plaza property, which interest is accounted
for using the equity method of accounting. The amount shown reflects our
proportionate share of the non-recourse mortgage indebtedness
collateralized by the property. In January 2002, we, through, Prentiss
Properties Acquisition Partners, L.P., purchased the Burnett Plaza
Associates loan in the
30
principal amount of $47.0 million from Teachers Insurance and Annuity
Association of America. In March 2002, we purchased the remaining 80%
interest of Burnett Plaza Associates from an affiliate of Lend Lease Real
Estate Investments.
/(3)/ The Term Loan is collateralized by the following four properties: Willow
Oaks I & II (two properties), 8521 Leesburg Pike and the IBM Call Center.
/(4)/ The PPREFI Portfolio Loan is collateralized by the following 36
properties: the Los Angeles industrial properties (18 properties), the
Chicago industrial properties (four properties), the Cottonwood Office
Center (three properties), Park West E1 and E2 (two properties), One
Northwestern Plaza, 3141 Fairview Park Drive, 2455 Horsepen Road, O'Hare
Plaza II, 1717 Deerfield Road, 2411 Dulles Corner Road, 4401 Fair Lakes
Court, the WestPoint Office Building and the PacifiCare Building.
/(5)/ We own a 25% non-controlling interest in the entity that owns the 1676
International and 8260 Greensboro properties, which interest is accounted
for using the equity method of accounting. The amount shown reflects our
proportionate share of the non-recourse mortgage indebtedness
collateralized by the properties.
The majority of our fixed rate secured debt contains prepayment provisions
based on the greater of a yield maintenance penalty or 1.0% of the outstanding
loan amount. The yield maintenance penalty essentially compensates the lender
for the difference between the fixed rate under the loan and the yield that the
lender would receive if the lender reinvested the prepaid loan balance in U.S.
Treasury Securities with a similar maturity as the loan.
Under our loan agreements, we are required to satisfy various affirmative
and negative covenants, including limitations on total indebtedness, total
collateralized indebtedness and cash distributions, as well as obligations to
maintain certain minimum tangible net worth and certain minimum interest
coverage ratios. Our credit agreements limit total indebtedness to 55% of total
assets and require a debt service coverage ratio of at least 2 to 1. Our credit
agreements provide for a 30-day period to cure a default caused by our failure
to punctually and properly perform, observe and comply with the covenants
contained therein. The agreements also provide for an additional 75-day period
if such failure is not capable of being cured within 30-days and we are
diligently pursuing the cure thereof. We were in compliance with these covenants
at December 31, 2001.
To manage interest rate risk, we may employ options, forwards, interest
rate swaps, caps and floors or a combination thereof depending on the underlying
interest rate exposure. We undertake a variety of borrowings: from revolving
credit facilities, to medium- and long-term financings. To manage overall
interest rate exposure, we use interest rate instruments, typically interest
rate swaps, to convert a portion of our variable rate debt to fixed rate debt.
Interest rate differentials that arise under these swap contracts are recognized
as interest expense over the life of the contracts.
We may employ forwards or purchased options to hedge qualifying anticipated
transactions. Gains and losses are deferred and recognized in net income in the
same period that the anticipated transaction occurs, expires or is otherwise
terminated.
The following table summarizes the notional values and fair values of our
derivative financial instruments. The notional value provides an indication of
the extent of our involvement in these instruments as of the balance sheet date,
but does not represent exposure to credit, interest rate or market risks.
31
Swap Rate Received
Notional Amount Swap Rate Paid Effective (Variable) at
(Fixed) Fixed Rate December 31, 2001 Swap Maturity Fair Value
--------------- -------------- ---------- ------------------ -------------- --------------
(in thousands)
$40 million 3.685% 5.185% 1.87375% January 2002 $ (51)
$50 million 4.836% 6.211% 1.87375% April 2002 (490)
$50 million 6.253% 7.628% 1.87375% September 2004 (3,190)
$60 million 6.248% 7.623% 1.87375% September 2004 (3,821)
$20 million 5.985% 7.610% 1.87375% March 2006 (1,172)
$30 million 5.990% 7.615% 1.87375% March 2006 (1,766)
---------
$(10,490)
=========
Our properties require periodic investments of capital for tenant-related
capital expenditures and for general capital improvements. For the year ended
December 31, 2001, our recurring non-incremental revenue-generating capital
expenditures totaled approximately $24.3 million. Our recurring non-incremental
revenue-generating capital expenditures were attributable to our six regions as
follows: (1) Mid-Atlantic-$4.4 million; (2) Midwest-$3.1 million; (3)
Northeast-$0.4 million; (4) Southwest-$5.6 million; (5) Northern California-$6.4
million; and (6) Southern California-$4.4 million.
We have considered our short-term liquidity needs and the adequacy of
adjusted estimated cash flows and other expected liquidity sources to meet these
needs. We believe that our principal short-term liquidity needs are to fund
normal recurring expenses, debt service requirements and the minimum
distributions required to maintain our REIT qualification under the Internal
Revenue Code. We expect to make distributions to our shareholders primarily
based on distributions from the operating partnership. The operating
partnership's income will be derived from operating activities which include
rental revenues and operating expense reimbursements from tenants and, to a
limited extent, from fees generated by our office and industrial real estate
management service business.
We anticipate that these needs will be fully funded from cash flows
provided by operating activities and, when necessary to fund shortfalls
resulting from the timing of collections of accounts receivable in the ordinary
course of business, from our revolving credit facility. In the event that our
cash flow needs exceed our cash flows provided by operating activities, we may
be forced to sell real estate properties to fund such cash flow needs.
We expect to meet our long-term liquidity requirements for the funding of
activities, such as development, property acquisitions, scheduled debt
maturities, major renovations, expansions and other non-recurring capital
improvements through long-term secured and unsecured indebtedness and through
the issuance of additional debt and equity securities. We also intend to use
proceeds from our revolving credit facility to fund property acquisitions,
development, redevelopment, expansions and capital improvements on an interim
basis.
We have contractual obligations and commercial commitments including
mortgages and notes payable, ground lease obligations and letters of credit. The
table below presents, as of December 31, 2001, our future scheduled principal
repayments of mortgages and notes payable and ground lease obligations,
including our pro rata share of debt and ground lease obligations of our of
joint venture properties:
Mortgages and Ground lease Total contractual
(in thousands) notes payable obligations cash obligations
------------- ------------ -----------------
2002 ........................ $ 18,471 $ 446 $ 18,917
2003 ........................ 130,978 446 131,424
2004 ........................ 102,956 451 103,407
2005 ........................ 42,374 511 42,885
2006 ........................ 94,096 530 94,626
Thereafter .................. 618,793 28,268 647,061
---------- ------- ----------
$1,007,668 $30,652 $1,038,320
========== ======= ==========
32
Our other commercial commitments include letters of credit totaling $1.4
million which expire as follows:
Letters
(in thousands) of credit
---------
2002 .............................. $ 63
2003 .............................. 1,063
2004 .............................. 63
2005 .............................. 63
2006 .............................. 126
Thereafter ........................ --
------
$1,378
======
Funds from Operations
Funds from operations, as defined by the National Association of Real
Estate Investment Trusts, means net income, computed in accordance with
generally accepted accounting principles excluding extraordinary items (as
defined by generally accepted accounting principles) and gains (or losses) from
sales of property, plus depreciation and amortization on real estate assets, and
after adjustments for unconsolidated partnerships, joint ventures and
subsidiaries. We believe that funds from operations is helpful to investors as a
measure of the performance of an equity REIT because, along with cash flow from
operating activities, financing and investing activities, it provides investors
with an indication of our ability to incur and service debt, to make capital
expenditures and to fund other cash needs. Our funds from operations is not
comparable to funds from operations reported by other REITs that do not define
funds from operations exactly as we do. We believe that in order to facilitate a
clear understanding of our operating results, funds from operations should be
examined in conjunction with net income as presented in our audited Consolidated
Financial Statements and notes thereto included elsewhere in this Form 10-K.
Funds from operations does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and
should not be considered as an alternative to net income as an indication of our
performance or to cash flows as a measure of liquidity or ability to make
distributions. Our funds from operations for the respective periods are
calculated as follows:
Year Ended December 31,
Funds from operations ---------------------------------------------------
(in thousands) 2001 2000 1999 1998 1997
-------- -------- -------- -------- -------
Net income ................................... $102,466 $ 69,585 $ 80,482 $ 71,419 $36,946
Add:
Real estate depreciation and amortization.. 64,190 63,328 54,482 41,828 21,600
Real estate depreciation and amortization
of ........................................ 3,550 2,816 2,480 2,196 2,136
unconsolidated joint ventures
Minority interests/(1)/ ................... 17,440 15,504 12,577 7,665 5,128
Extraordinary items ....................... 367 -- -- 9,001 878
Less:
Merger termination fee, net/(2)/ .......... (17,000) (4,091) -- -- --
Gain on sales ............................. (13,895) (221) (16,105) (14,416) (641)
Dividend on perpetual preferred units ..... (13,172) (12,610) (9,251) (4,073) --
-------- -------- -------- -------- -------
Funds from operations ........................ $143,946 $134,311 $124,665 $113,620 $66,047
======== ======== ======== ======== =======
----------
/(1)/ Represents the minority interests applicable to the common and preferred
unit holders of the operating partnership.
/(2)/ Although the fee is not considered an extraordinary item in accordance
with generally accepted accounting principles, it is our opinion that it is
appropriate to exclude the fee from funds from operations.
33
Funds from operations increased by $9.6 million for the year ended December
31, 2001 from the year ended December 31, 2000 and increased by $9.6 million for
the year ended December 31, 2000 from the year ended December 31, 1999 as a
result of the factors discussed in the analysis of operating results.
Recently Issued Accounting Standards
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The statement which is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years, addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. The impact from the
implementation of this statement, which we believe will not have a material
impact on our financial statements, will be dependent upon (1) which if any of
our assets qualify as held for sale at January 1, 2002 or at any point in time
thereafter; (2) whether the carrying amount of such assets determined to be held
for sale is greater than the fair value less cost of sale of the assets; and (3)
whether the carrying amount of assets determined not to be held for sale is
recoverable from the undiscounted future cash flows from operations and from the
eventual sale of the assets.
Application of and Changes in Law Regarding Ownership of Subsidiaries and
Qualifications as a REIT
For federal income tax purposes, we were organized and have operated in
conformity with the requirements for qualification as a REIT under the Internal
Revenue Code of 1986, as amended, beginning with our taxable year ending
December 31, 1996 and through the date hereof. The Internal Revenue Code sets
forth various income, asset, ownership, and distribution tests with respect to
which a REIT must comply in order to maintain its status as a REIT. Although the
Internal Revenue Service, based upon its interpretation of the relevant judicial
and administrative authorities, may take the position that a REIT has failed a
particular qualification test, the facts and circumstances upon which such a
determination would be based are controlled by the REIT. To the extent that a
REIT does not comply with a particular test, the decision to take an action that
would prevent compliance or to not take an action that would have allowed
compliance will be directly within the control of the REIT. We are unaware of
any instance in which a REIT has lost its qualification as a REIT due to the
failure of one of the statutory qualification tests under the Internal Revenue
Code. We believe that our current and proposed method of operation will enable
us to continue to qualify as a REIT.
The REIT Modernization Act effective for 2001 and later years, contains
several provisions affecting REITs. The REIT Modernization Act allows a
subsidiary to perform services for tenants without disqualifying the rents
received (as under prior law). These subsidiaries, called Taxable REIT
Subsidiaries, are subject to taxation and are limited in the amount of debt and
rental payments between the REIT and the Taxable REIT Subsidiaries. The fair
market value of all Taxable REIT Subsidiaries' securities cannot exceed 20% of
the REIT's fair market value. Existing subsidiaries could be grandfathered in a
one-time tax-free conversion. They are not subject to these limitations, unless
engaging in a new line of business or increasing assets. If either of these
events occurs, new restrictions on debt and rental payments will apply to these
entities as well. The REIT Modernization Act also reduced the REIT taxable
income distribution requirement from 95% to 90%.
Inflation
Most of the leases on our properties require tenants to pay increases in
operating expenses, including common area charges and real estate taxes, thereby
reducing the impact on us of the adverse effects of inflation. Leases also vary
in term from one month to 17 years, further reducing the impact on us of the
adverse effects of inflation.
RISK FACTORS
An investment in us involves various risks. The following describes
factors that in some cases may have affected, and in the future could affect,
our actual operating results and could cause such results to differ materially
from those in any forward-looking statements. This list is not necessarily
exhaustive, and new risk factors emerge from time to time. We cannot assure you
that the factors described below are all of the material risks to us at any
34
specific point in time. You should carefully consider the following factors
which qualify in their entirety each forward-looking statement.
Risks Related to General Business Operations
The geographic concentration of our properties in markets which are in economic
decline could have a material adverse effect on operating performance.
Properties located in the Mid-Atlantic, Midwest, Southwest, Northern
California and Southern California provided approximately 27%, 20%, 28%, 13% and
9%, respectively, of total revenues for the year ended December 31, 2001. Like
other real estate markets, these commercial real estate markets have experienced
economic downturns in the past, and future declines in any of these economies or
real estate markets could adversely affect our cash available for distribution.
Our financial performance and ability to make distributions to our shareholders
are, therefore, particularly sensitive to the economic conditions in these
markets. The local economic climate, which may be adversely impacted by business
layoffs or downsizing, industry slowdowns, changing demographics and other
factors, and local real estate conditions, such as oversupply of or reduced
demand for office, industrial and other competing commercial properties, may
affect our revenues and the value of our properties, including properties to be
acquired or developed. We cannot assure you that these local economies will
continue to grow at the current pace or at all.
Our acquisition of new properties and lack of operating history give rise to
difficulties in predicting revenue potential.
From time to time, we acquire office properties. These acquisitions
could fail to perform in accordance with expectations. If we fail to accurately
estimate occupancy levels, operating costs or costs of improvements to bring an
acquired property up to the standards established for its intended market
position, the operating performance of the property may be below our
expectations. Acquired properties may have characteristics or deficiencies
affecting their valuation or revenue potential that we have not yet discovered.
We cannot assure you that the operating performance of acquired properties will
increase or be maintained under our management.
During 2001, we acquired a total of seven properties containing 1.3
million net rentable square feet including two properties totaling 452,000 net
rentable square feet in which we acquired a 25% non-controlling interest. Our
ability to manage our growth effectively will require us to integrate
successfully our new acquisitions into our existing management structure. Some
of our properties have relatively short or no operating history under our
management. We have had limited control over the operation of these buildings.
Our redevelopment, development and construction activities may give rise to
unexpected costs and can make it difficult to predict revenue potential.
We redevelop, develop and construct primarily office buildings. The
risks associated with these activities include:
. abandonment of redevelopment or development opportunities resulting in
a loss of invested capital;
. construction costs of a property exceeding original estimates
potentially resulting in yields on invested capital lower than
expected;
. occupancy rates and rents at a newly renovated or completed property
may not be sufficient to make the property profitable;
. financing may not be available on favorable terms for redevelopment or
development of a property possibly increasing the projected cost of
the project;
35
. permanent financing may not be available on favorable terms to replace
short-term construction loans and construction and lease-up may not be
completed on schedule, resulting in increased interest expense and
construction costs;
. all necessary zoning, land-use, building, occupancy and other required
governmental permits and authorizations may not be obtained or may not
be obtained on a timely basis resulting in possible delays, decreased
profitability and increased management time and attention; and
. increased management time required for such activities may divert
their attention from other aspects of our business.
These risks and potential costs may adversely affect our results of
operations.
Cost increases or revenue decreases can adversely affect property yields and
values.
The yields available from equity investments in real estate depend in
large part on the amount of income generated and expenses incurred. If our
properties do not generate revenues sufficient to meet operating expenses,
including debt service, tenant improvements, leasing commissions and other
capital expenditures, we may have to borrow additional amounts to cover fixed
costs, and our cash flow and ability to make distributions to our shareholders
will be adversely affected.
Factors which may affect our revenues and the value of our properties
include:
. the national, state and local economic climate and real estate
conditions, such as oversupply of or reduced demand for space and
changes in market rental rates;
. the perceptions of prospective tenants of the safety, convenience and
attractiveness of our properties;
. our ability to provide adequate management, maintenance and insurance,
including coverages for earthquakes and terrorist acts;
. our ability to collect on a timely basis all rent from tenants;
. the expense of periodically renovating, repairing and reletting
spaces;
. increasing operating costs, including real estate taxes and utilities,
which may or may not be passed through to tenants; and
. our compliance with the laws, changes in the tax laws, fluctuations in
interest rates and the availability of financing.
Certain significant expenditures associated with our properties, such as
mortgage payments, real estate taxes, insurance and maintenance costs, are
generally not reduced when circumstances cause a reduction in rental revenues
from our properties.
Tenant defaults and bankruptcy could cause rent collection difficulties.
The risk that some of our tenants may declare bankruptcy is higher
because of the recent decline in the economy. A significant portion of our
income is derived from rental income on our properties. As of December 31, 2001,
we had approximately 1,100 tenants, with the following 7 tenants representing
approximately 17% of our aggregate annualized based rent and approximately 15%
of our total net rentable square footage leased: International Business
Machines, Kaiser Foundation Health Plan, Verizon Communications, MCI WorldCom,
Northrop Grumman Corporation, Aspen Systems Corporation and Moore North America.
We derived approximately 39% of our total annualized based rental revenue from
tenants in the computer systems design, broadcasting, telecommunications,
management, scientific, technical and insurance industries. As a result, our
36
distributable cash flow and ability to make expected distributions to our
shareholders could be adversely affected if any of these industries is
materially adversely affected by the economy or if a significant number of our
tenants fail to pay their rent due to bankruptcy, weakened financial condition
or otherwise. Our leases generally do not contain restrictions designed to
ensure the creditworthiness of our tenants. From time to time a tenant may
experience a downturn in its business. Such a downturn may weaken its financial
condition, and it may stop paying rent when due. In addition, at any time, a
tenant may seek the protection of the bankruptcy laws, which could result in
delays in rental payments or in the rejection and termination of such tenant
leases. These events would cause a reduction in our cash flow and the amounts
available for distributions to our shareholders. We cannot assure you that
tenants will not file for bankruptcy protection in the future or, if any tenants
file, that they will affirm their leases and continue to make rental payments in
a timely manner.
Property maintenance costs may escalate beyond our ability to recover such costs
through rents.
Our properties are subject to increases in operating expenses, such as
cleaning; electricity; heating, ventilation and air conditioning; elevator
repair and maintenance; insurance and administrative costs; and other general
costs associated with security, landscaping, and repairs and maintenance. Due to
the terrorist acts of September 11, 2001, we expect security costs and insurance
premiums to increase. While our tenants generally are obligated to pay a portion
of these escalating costs, there can be no assurance that our tenants will agree
to pay such costs upon renewal or that new tenants will agree to pay such costs.
If operating expenses increase, the local rental market may limit the extent to
which rents may be increased to meet increased expenses without decreasing
occupancy rates. Our ability to make distributions to our shareholders could be
adversely affected if operating expenses increase without a corresponding
increase in revenues.
Non-renewal of leases and non-reletting of space could adversely affect our
rental revenues.
We are subject to several risks upon expiration of leases for space
located at our properties. The leases may not be renewed, the space may not be
relet or the terms of renewal or reletting, including the costs of required
renovations, may be less favorable than current lease terms. Leases on a total
of approximately 6.3% of the total net rentable square feet in our properties
will expire during 2002. If we are unable to relet promptly or renew the leases
for a particular property or properties, if the rental rates upon such renewal
or reletting are significantly lower than expected rates or if our budgets for
these purposes prove to be inadequate, then our cash flow and ability to make
expected distributions to our shareholders may be adversely affected.
Some of our competitors in markets in which we have properties may have newer,
better-located or better-capitalized properties.
Numerous office and industrial properties compete with our properties
in attracting tenants to lease space. In each market we compete on a number of
factors including rental rates, tenant concession allowances, quality and
location of buildings, quality of property management and other economic and
non-economic factors. Our major competitors in each market include the following
companies:
Segment Competitors
------- -----------
Mid-Atlantic Boston Properties, CarrAmerica Realty Corp., Equity Office Properties, Vornado
Realty Trust
Midwest CarrAmerica Realty Corp., Duke-Weeks Realty Corp., Equity Office Properties,
Great Lakes REIT, John Buck Co., Prime Group
Southwest CarrAmerica Realty Corp., Crescent Real Estate Equities, Equity Office
Properties, Lincoln Property Co., Trammell Crow Co.
Northern California Boston Properties, CarrAmerica Realty Corp., Equity Office Properties,
Shorenstein Co.
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Southern California Arden Realty, CarrAmerica Realty Corp., Equity Office Properties, Kilroy Realty
Corp.
This competition could have an adverse effect on our operating performance
because some of these competing properties may be newer, better-located or
better-capitalized than our properties.
Properties with environmental problems could cause us to incur clean-up costs or
other liabilities.
Various federal, state and local environmental laws, ordinances, and
regulations impose liability upon a current or previous owner or operator of
real property for the costs of removal or remediation of contamination caused by
hazardous or toxic substances or other wastes at the property. These laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of the hazardous or toxic substances or other
waste. In addition, the presence of property contamination, or the failure to
remediate contamination at a property properly, may adversely affect a party's
ability to borrow using the real property as collateral. Persons who generate or
arrange for the disposal or treatment of hazardous or toxic substances or other
wastes may also be liable for the costs of removal or remediation of
contamination at a disposal or treatment facility, whether or not such facility
is or ever was owned or operated by them. Environmental laws and common law
principles also impose liability upon a party for the release of and exposure to
environmental contamination, including asbestos-containing materials into the
air, and third parties may use these laws to seek recovery from owners or
operators of property for personal injury or property damage associated with
environmental contamination, including asbestos-containing materials.
As the owner of the properties, we may be liable for these types of
costs. We obtain environmental site assessments on all of our properties prior
to their acquisition. The purpose of environmental site assessments is to
identify potential recognized environmental conditions that may be associated
with a property. For a number of our properties, the environmental site
assessments also referenced prior Phase II environmental site assessments which
involved subsurface sampling and analysis on such properties.
The previously-mentioned environmental site assessments have not
revealed any potential recognized environmental conditions that we believe could
have a material adverse effect on our business, assets or results of operations.
However, it is possible that the previously-mentioned environmental site
assessments relating to any one of our properties do not reveal all adverse
environmental conditions. In addition, there could be environmental conditions
that were created at a property after the applicable environmental site
assessment was completed.
Effective January 1, 1999, we purchased insurance to cover
environmental conditions and business interruption if and when they occur. This
policy covers both governmental and third-party claims associated with the
covered environmental conditions. Our limits for loss under the policy are $5.0
million per occurrence and $5.0 million in the aggregate. We cannot assure you
that these coverages will be sufficient to cover all costs of environmental
issues that could arise.
Americans with Disabilities Act compliance could lead to unanticipated costs.
The Americans with Disabilities Act of 1990 requires specified public
accommodations to meet federal requirements governing accessibility for persons
with disabilities related to access and use by disabled persons. Compliance with
the Americans with Disabilities Act could require modifications to our
properties. Non-compliance could result in, among other things, various
penalties including injunctive relief and monetary damages. Although we have no
basis for believing that our properties are not in compliance with the
requirements of the Americans with Disabilities Act, if we were required to make
unanticipated expenditures to comply with the Americans with Disabilities Act,
our cash flow and the amounts available for distributions to our shareholders
may be adversely affected.
Some of our properties may be subject to uninsured losses such as from
earthquakes or acts of terrorism.
We carry comprehensive liability, fire, flood and, where appropriate,
extended coverage and rental loss insurance with respect to our properties, with
policy specifications and insured limits customarily carried for similar
38
properties. There are, however, certain types of losses, such as from wars, that
may be either uninsurable or the cost of obtaining insurance would be so high
that it would be more prudent to accept the risk of loss. We currently maintain
a $100 million blanket earthquake policy on the properties we own in Northern
and Southern California. Should an uninsured loss or a loss in excess of insured
limits occur, we could lose both capital invested in a property as well as the
anticipated future revenue from the property but would continue to be obligated
on any mortgage indebtedness or other obligations related to the property. Any
such loss would adversely affect our business, financial condition and results
of operations.
Our real property insurance policies put into effect before September
11, 2001 do not expressly exclude coverage from hostile acts, except for acts of
war. Following the terrorist acts of September 11, 2001, however, insurance
policies purchased by us may expressly exclude hostile acts, and it may be
impossible to obtain insurance covering terrorist attacks. We may not be able to
purchase policies in the future with coverage limits and deductibles similar to
those that were available before September 11, 2001. In addition, we expect our
insurance premiums to increase in the future, which may have an adverse impact
on our cash flow.
Property ownership through partnerships and joint ventures could subject us to
the contrary business objectives of our partners or co-venturers.
Through Prentiss Properties Acquisition Partners, L.P., our operating
partnership, we own non-controlling interests, including: (1) a non-controlling
50% interest in the Broadmoor Austin Associates; (2) a 20% non-controlling
interest in the Burnett Plaza; and (3) 25% non-controlling interest in Tysons
International Partners, which in the aggregate represented approximately $3.2
million in net income, or 3.1% of total net income, for the year ended December
31, 2001. Our pro-rata share of mortgage debt related to these unconsolidated
interests is approximately $99.9 million, or 12.3% of our total mortgage debt
outstanding, as of December 31, 2001. Through these interests, we act as
managing venture partner and have the authority to conduct business affairs of
each joint venture, subject to approval and veto rights of the other venture
partner.
We may also participate with other entities in property ownership or
in providing property-related services through joint ventures or partnerships.
Partnership or joint venture investments may involve risks such as the
following:
. our partners or co-venturers might become bankrupt;
. our partners or co-venturers might at any time have economic or other
business interests or goals that are inconsistent with our business
interests or goals; and
. our partners or co-venturers may be in a position to take action
contrary to our instructions or make requests contrary to our policies
or objectives.
We will, however, seek to maintain sufficient control of such partnerships
or joint ventures to achieve our business objectives. Although our
organizational documents do not limit the amount of available funds that we may
invest in partnerships or joint ventures, our senior credit facility requires
lender consent for certain investments in land, development projects and joint
ventures.
In the future, we may acquire limited partnership interests in property
partnerships without partnership management responsibility or co-venturer
interests or co-general partnership interests in property partnerships with
shared responsibility for managing the affairs of the property partnership or
joint venture. In these instances, we will not be in a position to exercise sole
decision-making authority regarding the property partnership or joint venture.
Our properties are illiquid assets.
Our investments in properties are relatively illiquid. This
illiquidity will tend to limit our ability to vary our portfolio promptly in
response to changes in economic or other conditions. Some of our properties are
mortgaged to secure payment of indebtedness. If we were unable to meet our
mortgage payments, the lender could foreclose on
39
the properties and we could incur a loss. In addition, if we wished to dispose
of one or more of the mortgaged properties, we might not be able to obtain a
release of the lien on the mortgaged property. If a lender forecloses on a
mortgaged property or if a mortgage lien prevents us from selling a property,
our funds available for distribution to our security holders could decline.
Our incurrence of debt could have a material adverse effect on operating
performance.
If principal payments due at maturity cannot be refinanced, extended
or paid with proceeds of other capital transactions, such as the issuance of new
equity capital, we expect that our cash flow will not be sufficient in all years
to pay distributions at expected levels and to repay all maturing debt.
Furthermore, if prevailing interest rates or other factors at the time of
refinancing result in higher interest rates upon refinancing, the interest
expense relating to such refinanced indebtedness would increase. This increase
would adversely affect our cash flow and the amounts available for distributions
to our shareholders. If a property is mortgaged to collateralize payment of
indebtedness and we are unable to meet mortgage payments, the property could be
foreclosed upon by or otherwise transferred to the mortgagee with a consequent
loss of income and asset value.
Our use of variable rate debt and derivative financial instruments may cause an
increase in debt service.
We have incurred and may incur in the future indebtedness that bears
interest at variable rates. Variable rate debt creates higher debt service
requirements if market interest rates increase, which would adversely affect our
cash flow and the amounts available for distributions to our shareholders.
As of December 31, 2001, we had $265.8 million of floating rate debt
out of total debt, including our pro rata share of joint venture debt, of
$1,007.7 million. We enter into financial futures contracts and option contracts
in the ordinary course of our business to hedge or modify our exposures to
interest rate fluctuations. Of the floating rate debt, $250 million was swapped
to fixed rate debt through various interest rate protection contracts with
maturity dates ranging from January 2002 to March 2006. While our use of these
derivatives is intended to allow us to better manage certain risks, it is
possible that, over time, mis-matches may arise with respect to the derivatives
and the cash market instruments they are intended to hedge. Discrepancies can
also arise between the derivative and cash markets. Derivatives also have risks
that are similar in type to the risks of the cash market instrument on which
their values are based. For example, in times of market stress, sharp price
movements or reductions in liquidity in the cash markets may be related to
comparable or even greater price movements and reductions in liquidity in the
derivative markets. Further, the risks associated with derivatives are
potentially greater than those associated with the related cash market
instruments because of the additional complexity and potential for leverage. In
addition, derivatives may create credit risks, as well as legal, operational and
other risks beyond those associated with the underlying cash market instruments
on which their values are based. Credit risk involves the risk that a
counterparty on a derivative transaction will not fulfill its contractual
obligations. In an effort to limit credit risk, we have a policy that requires
the counterparty to the transaction to have a credit rating no lower that A- by
a nationally recognized rating agency at the time we enter into a derivative
transaction. There can be no assurance, however, that our hedging strategy or
techniques and policies for minimizing credit and other risks associated with
our hedging activity will be effective, that our profitability will not be
adversely affected during any period of changes in interest rates or that the
costs of hedging will not exceed the benefits.
If we are unable to replace construction loans with permanent refinancing, we
may have to sell the development properties at a loss.
If new developments are financed through construction loans or if
acquisitions are financed with short-term bridge loans in anticipation of later,
permanent financing, there is a risk that upon completion of construction or the
maturity of the bridge loans, permanent financing may not be available or may be
available only on disadvantageous terms. As of December 31, 2001, we were not a
party to any construction loan commitments. In the event that we enter into such
financing arrangements and upon maturity are unable to obtain permanent
financing for these properties on favorable terms, we could be forced to sell
such properties at a loss or the properties could be foreclosed upon by the
lender and result in loss of income and asset value.
40
We depend on our direct and indirect subsidiaries' dividends and distributions,
and these subsidiaries' creditors and preferred security holders are entitled to
payment of amounts payable to them by the subsidiaries before the subsidiaries
may pay any dividends or distributions to us.
Substantially all of our assets consist of our partnership interests
in Prentiss Properties Acquisition Partners, our operating partnership. Our
operating partnership holds substantially all of its properties and assets
through subsidiaries. Our operating partnership, therefore, depends for
substantially all of its revenue on cash distributions to it by its
subsidiaries. The creditors of each subsidiary are entitled to payment of the
subsidiary's obligations to them, when due and payable, before distributions may
be made by the subsidiary to our operating partnership. Thus, our operating
partnership's ability to make distributions to its unit holders depends on its
subsidiaries' ability to satisfy their obligations to their creditors and make
distributions to our operating partnership. In addition, the right of our
operating partnership unit holders to participate in any distribution of the
assets of any of our operating partnership's direct or indirect subsidiaries
upon the liquidation, reorganization or insolvency of the subsidiary, and any
consequent right of our operating partnership unit holders to participate in
those assets, will be subject to the claims of the creditors and preferred
security holders, if any, of the subsidiary. Furthermore, the holders of
preferred units of our operating partnership are entitled to receive preferred
distributions before payment of distributions to holders of operating
partnership common units, including us. Thus, our ability to pay dividends to
holders of our common shares depends on our operating partnership's ability
first to satisfy its obligations to its creditors and make distributions payable
to holders of preferred units and then to make distributions to us. Subsequent
to the repurchase of our Series C preferred Units in January 2002, there are two
series of preferred units of our operating partnership not held by us which have
preference over our common shares, the Series B Preferred Units and Series E
Preferred Units. The Series B Preferred Units have a total liquidation value of
approximately $95 million, and the Series E Preferred Units have a total
liquidation value of approximately $10 million. In addition, our shareholders
will have the right to participate in any distribution of the assets of any of
our direct or indirect subsidiaries upon the liquidation, reorganization or
insolvency of the subsidiary, and consequently to participate in those assets,
only after the claims of the creditors, including trade creditors, and preferred
security holders, if any, of the subsidiary are satisfied.
Risks Related to Our Company
Our shareholders' ability to effect a change of control may be limited.
We have a shareholder rights plan.
In February 1998, we adopted a shareholder rights plan and declared a
dividend of one purchase right for each common share of beneficial interest. The
purchase rights may have the effect of delaying, inhibiting or preventing a
transaction or a change in control of us that might involve a premium price for
the common shares or otherwise be in the best interest of our shareholders. The
purchase rights can cause substantial dilution to a person or group that
acquires 10% or more of our outstanding common shares unless the purchase rights
have been redeemed by our board of trustees. However, because the purchase
rights are redeemable by our board of trustees, the purchase rights should not
interfere with any merger or other business combination approved by our board of
trustees.
We have an ownership limitation.
In order to maintain our qualification as a REIT under the Internal
Revenue Code of 1986, as amended, no more than 50% in value of our outstanding
shares of beneficial interest may be owned, directly or indirectly, by five or
fewer individuals during the last half of our taxable year, other than our 1996
taxable year. To ensure that we will not fail to qualify as a REIT, our
declaration of trust authorizes our board of trustees to take such actions as
are necessary and desirable to preserve our qualification as a REIT. In
addition, our declaration of trust has an ownership limitation which provides
that no person may own, directly or indirectly, more than 8.5% of the number of
outstanding common shares, other than Michael V. Prentiss, who currently may own
up to 15% of the number of outstanding common shares, or more than 9.8% of the
number of outstanding preferred shares of beneficial interest of any series. The
board of trustees, upon receipt of a ruling from the IRS, an opinion of counsel
or other evidence satisfactory to our board of trustees, may exempt a proposed
transferee from the ownership limitation. For example, our board of trustees has
exempted Security Capital Preferred Growth Incorporated from the ownership
limitation on
41
the condition that Security Capital Preferred Growth Incorporated not own more
than 11% of the number of outstanding common shares. The board of trustees may
not grant an exemption from the ownership limitation to any proposed transferee
if such exemption would result in the termination of our status as a REIT. The
ownership limitation may have the effect of delaying, inhibiting or preventing a
transaction or a change in control that might involve a premium price for the
common shares or otherwise be in the best interests of our shareholders.
We have a staggered board.
Our board of trustees is divided into three classes, each with a three
year term, thus, only a portion of our board of trustees stand for election at
each annual meeting. The staggered terms of trustees may reduce the possibility
of a tender offer or an attempt to change control of us, even though a tender
offer or change in control might be in the best interest of our shareholders.
The board of trustees can issue additional shares.
Our declaration of trust authorizes our board of trustees to:
. amend our declaration of trust, without shareholder approval, to
increase or decrease the aggregate number of shares of beneficial
interest or the number of shares of beneficial interest of any class
that we have the authority to issue;
. issue additional authorized but unissued preferred or common shares;
and
. classify or reclassify any unissued common shares or preferred shares
and to set the preferences, rights and other terms of such classified
or unclassified shares.
These provisions may have the effect of delaying, deferring or preventing a
transaction or a change in control that might involve a premium price for the
common shares or otherwise be in the best interest of our shareholders.
Our status as a REIT is dependent on compliance with federal income tax
requirements.
We have operated and intend to continue to operate as a REIT for
federal income tax purposes. We have not requested, and do not expect to
request, a ruling from the IRS (1) that the operating partnership and each of
its non-corporate subsidiaries have been and will be classified as partnerships
for federal income tax purposes or (2) that we qualify as a REIT. Qualification
as a REIT involves the application of highly technical and complex provisions of
the Internal Revenue Code, with limited judicial and administrative guidance
available, to facts and circumstances that may be subject to differing
interpretations for federal income tax purposes.
While we have operated and intend to continue to operate as a REIT for
federal income tax purposes, if the IRS were to successfully challenge the tax
status of the operating partnership or a non-corporate subsidiary as a
partnership, or if we fail to qualify as a REIT for any taxable year, we would
be subject to federal income tax at regular corporate rates. Unless entitled to
relief under the Internal Revenue Code, we also would be disqualified from
treatment as a REIT for the four taxable years following the disqualification
year. As a result, cash available for distribution would be reduced for each of
the years involved.
Although we intend to continue to operate as a REIT, future economic,
market, legal, tax or other considerations may cause our board of trustees, with
the consent of our shareholders holding at least a majority of all the
outstanding common shares, to revoke the REIT election.
We have minimum distribution requirements that could require us to incur
additional debt.
To qualify as a REIT prior to 2001, we were required to distribute at
least 95% of our net taxable income to our shareholders, excluding any net
capital gain. As a result of the REIT Modernization Act, the distribution
requirement was reduced to 90% for 2001 and future years. In addition, to avoid
a 4% non-deductible excise tax, we must also distribute annually at least the
sum of the following:
42
. 85% of our ordinary income for that year,
. 95% of our capital gain net income for that year, and
. 100% of our undistributed taxable income from prior years.
We have exceeded the distribution requirements in every year and we expect
to comply with the distribution requirements. If unfavorable market conditions
exist, we may have to borrow funds on a short-term basis to meet the REIT
distribution requirements. If such unfavorable conditions occurred, we might not
be able to fund all future capital needs with income from operations, and might
have to rely on third-party sources of capital, which may or may not be
available on favorable terms.
Changes in tax laws could affect our REIT status.
At any time, future legislation or administrative or judicial
decisions or actions could affect our tax treatment or qualification as a REIT,
possibly with retroactive effect. While we do not anticipate any such decisions
or actions, the rules dealing with federal income taxation are constantly under
review by persons involved in the legislative process and by the IRS and the
U.S. Treasury Department. We cannot predict whether, when, in what forms, or
with what effective dates, the tax laws applicable to us or an investment in us
might be changed.
Conflicts of interests in our business could result in decisions not in your
best interest.
Prentiss principals could have differing objectives from other shareholders upon
the sale, refinancing or prepayment of indebtedness of properties.
Messrs. Prentiss and August, our senior executive officers, and their
affiliates may have unrealized taxable gain associated with their units of
limited partnership interest in the operating partnership. Messrs. Prentiss and
August may suffer different and more adverse tax consequences than our other
shareholders upon the sale or refinancing of properties that were contributed to
the operating partnership by Messrs. Prentiss and August. Therefore, Messrs.
Prentiss and August and our other shareholders may have different objectives
regarding the appropriate pricing and timing of any sale or refinancing of
properties. While we, through Prentiss Properties I, Inc., the general partner
of the operating partnership, have the exclusive authority as to whether and on
what terms to sell or refinance an individual property, Messrs. Prentiss and
August may influence us not to sell, or refinance or prepay the indebtedness
associated with properties even though such a transaction might otherwise be to
our financial advantage, or may influence us to refinance properties with a high
level of debt.
Our policies with respect to conflicts of interests may not eliminate the
influence of conflicts.
We have adopted policies intended to minimize conflicts of interest.
For example, our bylaws provide that all transactions in which executive
officers or trustees have a conflicting interest with us may be subject to
approval by a majority of our trustees that are not affiliated with any of our
affiliates or by the holders of a majority of the common shares held by
disinterested shareholders. We have implemented a code of business conduct
governing the conduct of all employees which further reduces the potential for
conflicts of interest. There can be no assurance that our policies will be
successful in eliminating the influence of conflicts. Decisions could be made
that might fail to reflect fully the interests of all our shareholders. Our
declaration of trust includes a provision permitting each individual trustee to
engage in the type of business activities conducted by us without first
presenting any investment opportunities to us, even though such investment
opportunities may be within the scope of our investment policies.
Our board of trustees may change policies and incur debt without shareholder
approval.
Our board of trustees determines our investment, financing, borrowing
and distribution policies, and our policies with respect to all other
activities, including growth, capitalization and operations. Our board of
trustees has adopted a policy limiting our total combined indebtedness plus our
pro rata share of joint venture debt to 50% or less of our total market
capitalization, but our organizational documents do not contain any limitation
on the amount of indebtedness we may incur. Although our board of trustees has
no present intention to do so, these policies may
43
be amended or revised at any time and from time to time at the discretion of our
board of trustees, limited only by various restrictions in our credit agreement,
without a vote of our shareholders. Our credit agreements limit total
indebtedness to 55% of total assets and require a debt service coverage ratio of
at least 2 to 1. A change in our investment, financing, borrowing and
distribution policies could adversely affect our financial condition, results of
operations or the market price of our common shares.
We are dependent on the services of Michael V. Prentiss and Thomas F. August.
We are dependent on the efforts of our chairman and chief executive
officer, Messrs. Prentiss and August. The loss of their services could have an
adverse effect on our operations. Each of Messrs. Prentiss and August has
entered into an employment agreement which will expire in February 2006 and May
2003, respectively. Messrs. Prentiss and August have agreed in their employment
agreements that for a period of two years after they are no longer employed by
us they will not enter into employment with any company which is in a business
that is competitive to our business. If this provision, or if similar provisions
in other employment agreements with our other employees, is determined to not be
binding on Messrs. Prentiss or August, or any other employee, those persons
would be able to enter into employment with companies which compete with us
immediately after those persons ceased to be employed by us.
Our third-party property management, leasing, development and construction
business and related services involve relationships which may be subject to
early termination or a lack of control.
Through our operating partnership and Prentiss Properties Resources,
the manager, we engage in the business of management, leasing, development and
construction of properties owned by third parties. Risks associated with these
activities include the following:
. related contracts, which are typically cancelable upon 30-days notice
or upon specific events, including sale of the property, may be
terminated by the property owner or may be lost in connection with a
sale of such property;
. contracts may not be renewed upon expiration or may not be renewed on
terms consistent with current terms; and
. rental revenues upon which management, leasing and development fees
are based may decline as a result of general real estate market
conditions or specific market factors affecting properties that we
manage, lease or develop, resulting in decreased management, leasing
or development fee income.
The capital stock of the manager is divided into two classes: voting common
stock, all of which is owned by Mr. Prentiss; and non-voting common stock, all
of which we hold through the operating partnership. The voting common stock
represents 2% of the ownership interests in the manager and the non-voting
common stock represents 98% of the ownership interests in the manager. Mr.
Prentiss, as the holder of all of the manager's voting common stock, has the
ability to elect the directors of the manager. We are not able to elect
directors and, therefore, are not able to influence the day-to-day management
decisions of the manager. As a result, the board of directors and management of
the manager may implement business policies or decisions that we would not have
implemented and that are adverse to our interests and which could adversely
impact our net operating income and cash flow.
We have shares available for future sale that could adversely affect the price
of our common shares.
Under our declaration of trust, our board of trustees has the authority to do
the following:
. amend our declaration of trust, without shareholder approval, to
increase or decrease the aggregate number of shares of beneficial
interest or the number of shares of beneficial interest of any class,
including common shares, that we have the authority to issue; and
. issue additional authorized but unissued common shares or preferred
shares.
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As of December 31, 2001, we have authorized 100,000,000 common shares, of
which 62,984,113 common shares are unissued. In addition, we have granted
options to purchase 3,686,566 common shares to executives officers, employees
and trustees, of which options to purchase 2,179,175 common shares remain
outstanding. We have reserved a total of 3,773,585 common shares for issuance
upon conversion of the Series D Preferred Shares. Sales or issuances of a
substantial number of common shares, or the perception that such sales could
occur could adversely affect prevailing market prices of the common shares and
dilute the percentage ownership held by our shareholders.
Limited partners of our operating partnership have the right to receive, in
our or the general partner's discretion, either cash or one common share, in
exchange for each limited partnership unit they now hold, if and to the extent
they tender such units for redemption. As of December 31, 2001, there were
1,522,036 common units of our operating partnership outstanding and held by
partners other than Prentiss Properties Trust, and, if we or the general partner
elect to redeem such units for common shares, these common units are
exchangeable for 1,522,036 common shares. We are party to registration rights
agreements under which we are required to register the issuance of common shares
which we may issue upon the redemption by the holders of units of limited
partnership interest in our operating partnership. We can make no prediction
concerning the effect that such issuance or future sales of any such common
shares will have on market prices.
Changes in market conditions could hurt the market price of our shares.
The value of our common shares depends on various market conditions,
which may change from time to time. Among the market conditions that may affect
the value of our common shares are the extent of institutional investor interest
in us; the reputation of REITs generally and the attractiveness of their equity
securities in comparison to other equity securities, including securities issued
by other real estate companies, and fixed income securities; our financial
condition and performance; and general financial market conditions. In addition,
the stock market in recent years has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of companies.
Increased market rates may hurt the value of our shares.
We believe that investors consider the distribution rate on REIT shares,
expressed as a percentage of the price of the shares, relative to market
interest rates as an important factor in deciding whether to buy or sell the
shares. If market interest rates go up, prospective purchasers of REIT shares
may expect a higher distribution rate. Higher interest rates would not, however,
result in more funds for us to distribute and in fact, would likely increase our
borrowing costs and might decrease our funds available for distribution. Thus,
higher market interest rates could cause the market price of our common shares
to decline.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk exposure is to changes in interest rates as a
result of our revolving credit facility and long-term debt. At December 31,
2001, we had outstanding total indebtedness, including our pro rata share of
joint venture debt, of approximately $1.01 billion, or approximately 43.4% of
total market capitalization based on a common share price of $27.45 per common
share. Our interest rate risk objective is to limit the impact of interest rate
fluctuations on earnings and cash flows and to lower our overall borrowing
costs. To achieve this objective, we manage our exposure to fluctuations in
market interest rates for our borrowings through the use of fixed rate debt
instruments to the extent that reasonably favorable rates are obtainable with
such arrangement. In addition, we may enter into derivative financial
instruments such as options, forwards, interest rate swaps, caps and floors to
mitigate our interest rate risk on a related financial instrument or to
effectively lock the interest rate on a portion of our variable rate debt. We do
not enter into derivative or interest rate transactions for speculative
purposes. Approximately 73.6% of our outstanding debt was subject to fixed rates
with a weighted average interest rate of 7.45% at December 31, 2001. Of the
remaining $265.8 million, or 26.4%, representing our variable rate debt, $250.0
million was effectively locked at an interest rate before the spread over LIBOR,
of 5.50% through our interest rate swap agreements. We regularly review interest
rate exposure on our outstanding borrowings in an effort to minimize the risk of
interest rate fluctuations.
45
The following table provides information about our financial instruments
that are sensitive to changes in interest rates, including interest rate swaps
and debt obligations. For debt obligations outstanding at December 31, 2001, the
table presents principal cash flows and related weighted average interest rates
for the debt outstanding during the periods. The debt outstanding as presented
in the table includes our pro rata share of joint venture debt. For interest
rate swaps, the table presents notional amounts and weighted average interest
rates for in-place swaps during the period. Notional amounts are used to
calculate the contractual payments to be exchanged under the contract. Weighted
average variable rates are based on 30-day LIBOR as of December 31, 2001. The
fair value of our fixed rate debt indicates the estimated principal amount of
debt having similar debt service requirements, which could have been borrowed by
us at December 31, 2001. The rate assumed in the fair value calculation of fixed
rate debt is equal to 7.09%, which consists of the 7-year treasury of 4.84% at
December 31, 2001 plus 225 basis points. The fair value of our variable to fixed
interest rate swaps indicates the estimated amount that would have been paid by
us had they been terminated at December 31, 2001.
Expected Maturity Date
(in thousands)
--------------------------------------------------------------
Fair
2002 2003 2004 2005 2006 Thereafter Total Value
------- -------- -------- ------- ------- ---------- -------- --------
Liabilities
Long-Term Debt:
Fixed Rate $17,721 $ 11,728 $ 32,143 $42,374 $19,096 $618,793 $741,855 $755,442
Average Interest Rate 7.45% 7.45% 7.43% 7.46% 7.46% 7.40% -- --
Variable Rate $ 750 $119,250 $ 70,813 -- $75,000 -- $265,813 $265,813
Average Interest Rate 3.36% 3.39% 3.40% 3.29% 3.29% -- -- --
Interest Rate Derivatives
Interest Rate Swaps:
Variable to Fixed $90,000 -- $110,000 -- $50,000 -- -- $(10,490)
Avg. Pay Rate 6.07% 6.17% 6.15% 5.99% 5.99% -- -- --
Avg. Receive Rate 1.87% 1.87% 1.87% 1.87% 1.87% -- -- --
The table incorporates only those exposures that exist as of December 31,
2001 and does not consider exposures or positions which could arise after that
date. In addition, because firm commitments are not represented in the table
above, the information presented therein has limited predictive value. As a
result, our ultimate realized gain or loss with respect to interest rate
fluctuations will depend on the exposures that arise during future periods,
prevailing interest rates, and our hedging strategies at that time. There is
inherent rollover risk for borrowings as they mature and are renewed at current
market rates. The extent of this risk is not quantifiable or predictable because
of the variability of future interest rates and our financing requirements.
Item 8. Financial Statements and Supplementary Data
Financial Statements and the Financial Statement Schedule appear at page
F-1 to page F-29 of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
46
PART III
Item 10. Trustees and Executive Officers of the Company
The information required by this item is incorporated by reference from our
definitive proxy statement for our annual meeting of shareholders to be held on
May 15, 2002.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from our
definitive proxy statement for our annual meeting of shareholders to be held on
May 15, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from our
definitive proxy statement for our annual meeting of shareholders to be held on
May 15, 2002.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from our
definitive proxy statement for our annual meeting of shareholders to be held on
May 15, 2002.
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedule and Exhibits
(1) Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets of Prentiss Properties Trust as of
December 31, 2001 and December 31, 2000
Consolidated Statements of Income of Prentiss Properties Trust for the
years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity of Prentiss
Properties Trust for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Comprehensive Income of Prentiss Properties
Trust for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows of Prentiss Properties Trust for
the years ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
Report of Independent Accountants
Schedule III: Real Estate and Accumulated Depreciation
47
(3) Exhibits
EXHIBIT NO. DESCRIPTION
---------- -----------
3.1 Amended and Restated Declaration of Trust of the Registrant
(filed as Exhibit 3.1 to our Registration Statement on
Amendment No. 1 of Form S-11, File No. 333-09863, and
incorporated by reference herein).
*3.2 Amended and Restated Bylaws of the Registrant.
3.3 Articles Supplementary, dated February 17, 1998,
Classifying and Designating a Series of Preferred Shares
of Beneficial Interest as Junior Participating Cumulative
Convertible Redeemable Preferred Shares of Beneficial
Interest, Series B, and Fixing Distribution and Other
Preferences and Rights of Such Shares (filed as an Exhibit
to our Registration Statement on Form 8-A, filed on
February 17, 1998, File No. 000-23813 and incorporated by
reference herein).
3.4 Articles Supplementary, dated June 25, 1998, Classifying
and Designating a Series of Preferred Shares of Beneficial
Interest as Series B Cumulative Redeemable Perpetual
Preferred Shares of Beneficial Interest and Fixing
Distribution and Other Preferences and Rights of Such
Shares (included as Exhibit 3.5 to our Form 10-Q, filed on
August 12, 1998, File No. 001-14516).
3.5 Articles Supplementary, dated March 20, 2001 (filed as
Exhibit 3.6 to our Report on Form 10-K, filed March 27,
2001, File No. 001-14516, and incorporated by reference
herein).
3.6 Articles Supplementary Classifying and Designating a
Series of Preferred Shares of Beneficial Interest as
Series D Cumulative Convertible Redeemable Preferred
Shares of Beneficial Interest and Fixing Distribution and
Other Preferences and Rights of such Shares, dated March
20, 2001 (filed as Exhibit 3.7 to our Report on Form 10-K,
filed March 27, 2001, File No. 001-14516, and incorporated
by reference herein).
*3.7 Articles Supplementary, dated January 4, 2002.
4.1 Form of Common Share Certificate (filed as Exhibit 4.1 to
our Registration Statement on Amendment No. 1 of Form S-11,
File No. 333-09863, and incorporated by reference herein).
4.2 Amended and Restated Rights Agreement, dated January 22,
2002, between Prentiss Properties Trust and EquiServe Trust
Company, N.A., as Rights Agent (filed as Exhibit 1 to
Amendment No. 2 to our Registration Statement on Form 8-A,
filed on February 6, 2002, File No. 000-014516).
4.3 Form of Rights Certificate (included as Exhibit A to the
Rights Agreement (Exhibit 4.2)).
4.4 Form of Series D Preferred Share Certificate (filed as
Exhibit 4.4 to our Report on Form 10-K, filed March 27,
2001, File No. 001-14516, and incorporated by reference
herein).
10.1 1996 Share Incentive Plan (filed as Exhibit 10.25 to
Amendment No. 1 to our Registration Statement on Form S-11,
File No. 333-09863, and incorporated by reference herein).
10.2 First Amendment, effective as of May 6, 1997, to the 1996
Share Incentive Plan (filed as Exhibit 4.6 to our
Registration Statement on Form S-8, File No. 333-79623,
filed on May 28, 1999, and incorporated by reference
herein).
48
10.3 Second Amendment, effective as of May 5, 1998, to the 1996
Share Incentive Plan (filed as Exhibit 4.7 to our
Registration Statement on Form S-8, File No. 333-79623,
filed on May 28, 1999, and incorporated by reference
herein).
10.4 Third Amendment, effective as of May 9, 2001, to the 1996
Share Incentive Plan (filed as Exhibit 4.5 to our
Registration Statement on Form S-8, File No. 333-68520,
filed on August 28, 2001, and incorporated by reference
herein).
10.5 Trustees Share Incentive Plan (filed as Exhibit 4.8 to our
Registration Statement on Form S-8, File No. 333-79623,
filed on May 28, 1999, and incorporated by reference
herein).
10.6 First Amendment, effective as of May 5, 1998, to the
Trustees' Share Incentive Plan (filed as Exhibit 4.9 to our
Registration Statement on Form S-8, File No. 333-79623,
filed on May 28, 1999, and incorporated by reference
herein).
10.7 Second Amendment, effective as of March 1, 1999, to the
Trustees' Share Incentive Plan (filed as Exhibit 4.10 to our
Registration Statement on Form S-8, File No. 333-79623,
filed on May 28, 1999, and incorporated by reference
herein).
*10.8 Third Amendment, effective as of May 10, 2000, to the
Trustees' Share Incentive Plan.
*10.9 Form of Stock Option Agreement.
*10.10 Amended and Restated Share Purchase Plan, dated as of July
1, 2000.
*10.11 Key Employee Share Option Plan.
*10.12 Prentiss Properties Employee Savings Plan.
10.13 Second Amended and Restated Employment Agreement, dated
February 14, 2001 by and between Michael V. Prentiss and
Prentiss Properties Trust (filed as Exhibit 10.20 to our
Report on Form 10-K, filed on March 27, 2001, and
incorporated herein by reference).
10.14 Amended and Restated Employment Agreement, dated May 10,
2000, by and between Thomas F. August and Prentiss
Properties Trust (filed as Exhibit 10.21 to our Report on
Form 10-K, filed on March 27, 2001, and incorporated herein
by reference).
*10.15 Third Amended and Restated Agreement of Limited Partnership
of Prentiss Properties Acquisition Partners, L.P., dated as
of October 1, 2001.
*10.16 First Amendment, dated as of December 18, 2001, to the Third
Amended and Restated Agreement of Limited Partnership of
Prentiss Properties Acquisition Partners, L.P., dated as of
December 18, 2001.
*10.17 Second Amendment, dated as of January 3, 2002, to the Third
Amended and Restated Agreement of Limited Partnership of
Prentiss Properties Acquisition Partners, L.P., dated as of
October 1, 2001.
10.18 Exchange Agreement, dated as of March 20, 2001, by and among
Prentiss Properties Trust, Prentiss Properties Acquisition
Partners, L.P. and Security Capital Preferred Growth
Incorporated (filed as Exhibit 10.14 to our Report on Form
10-K, filed on March 27, 2001, and incorporated herein by
reference).
49
10.19 Registration Rights Agreement, dated as of March 20, 2001,
by and among Prentiss Properties Trust and Security Capital
Preferred Growth Incorporated (filed as Exhibit 10.15 to our
Report on Form 10-K, filed on March 27, 2001, and
incorporated by reference herein).
10.20 Credit Agreement, dated May 23, 2000, among Prentiss
Properties Acquisition Partners, L.P., as Borrower, Bank
One, N.A., as Administrator, Bank of America, N.A., as
Syndication Agent, Dresdner Bank, AG as Documentation Agent
and each of the Lenders that are signatory therein (filed as
Exhibit 10.22 to our Report on Form 10-K, filed on March 27,
2001, and incorporated by reference herein).
*10.21 Credit Agreement, dated March 16, 2001, among Prentiss
Properties Acquisition Partners, L.P., as Borrower,
Commerzbank AG, New York Branch, as Administrative Agent,
Sole Arranger and Sole Book Runner, Fleet National Bank, as
Syndication Agent, LaSalle Bank National Association, as
Documentation Agent and each of the Lenders named therein.
10.22 Credit Agreement, dated September 30, 1999, among Prentiss
Properties Acquisition Partners, L.P., as Borrower, Bank
One, NA, as Administrative Agent, Mellon Bank and Union Bank
of California as co-documentation agents.
*10.23 First Amendment, dated as of November 28, 2000, to the
Credit Agreement, dated September 30, 1999, among Prentiss
Properties Acquisition Partners, L.P., as Borrower, Bank
One, N.A., as Administrative Agent, Mellon bank and Union
Bank of California as co-documentation agents.
10.24 Exchange Agreement, dated March 14, 2001, by and among
Prentiss Properties Trust, Prentiss Properties Acquisition
Partners, L.P. and FFI Tysons Partners, L.P. (filed as
Exhibit 10.1 to our Current Report on Form 8-K, filed March
22, 2001, File No. 001-14516, and incorporated by reference
herein).
10.25 Exchange Agreement, dated March 14, 2001, by and between
Prentiss Properties Acquisition Partners, L.P. and
Brandywine Grande B, L.P. (filed as Exhibit 10.2 to our
Current Report on Form 8-K, filed March 22, 2001, File No.
001-14516, and incorporated by reference herein).
10.26 Agreement of Purchase and Sale, dated March 14, 2001, by and
among Prentiss Properties Acquisition Partners, L.P.,
Brandywine Operating Partnership, L.P. and Brandywine Grande
B, L.P. (filed as Exhibit 10.3 to our Current Report on Form
8-K, filed March 22, 2001, File No. 001-14516, and
incorporated by reference herein).
10.27 Agreement of Purchase and Sale, dated March 14, 2001, by and
among Prentiss Properties Acquisition Partners, L.P.,
Prentiss Properties Limited, Inc. and Brandywine Operating
Partnership, L.P. (filed as Exhibit 10.4 to our Current
Report on Form 8-K, filed March 22, 2001, File No.
001-14516, and incorporated by reference herein).
10.28 Contribution Agreement, dated March 14, 2001, by and between
Prentiss Properties Acquisition Partners, L.P. and
Brandywine Operating Partnership, L.P. (filed as Exhibit
10.5 to our Current Report on Form 8-K, filed March 22,
2001, File No. 001-14516, and incorporated by reference
herein).
10.29 Agreement of Purchase and Sale, dated March 14, 2001, by and
among 935 First Avenue Associates and Brandywine Operating
Partnership, L.P. (filed as Exhibit 10.6 to our Current
Report on Form 8-K, filed March 22, 2001, File No.
001-14516, and incorporated by reference herein).
*10.30 Loan Agreement, dated as of June 30, 1999, by and between
Prentiss Properties Acquisition Partners, L.P. and Robert K.
Wiberg.
50
*10.31 Loan Agreement, dated as of June 30, 1999, by and between
Prentiss Properties Acquisition Partners, L.P. and Lawrence
Krueger.
*10.32 Loan Agreement, dated as of June 30, 1999, by and between
Prentiss Properties Acquisition Partners, L.P. and Michael
A. Ernst.
*10.33 Loan Agreement, dated as of June 30, 1999, by and between
Prentiss Properties Acquisition Partners, L.P. and
Christopher M. Hipps.
*10.34 Loan Agreement, dated as of June 30, 1999, by and between
Prentiss Properties Acquisition Partners, L.P. and Daniel
Cushing.
*10.35 Promissory Note, dated as of June 1, 1999, by and between
Prentiss Properties Limited, Inc. and Christopher M. Hipps.
*10.36 Promissory Note, dated as of January 1, 2002, by and between
Prentiss Properties Limited, Inc. and Daniel Cushing.
*10.37 Promissory Note, dated as of June 28, 1999, by and between
Christopher M. Hipps and Prentiss Properties Limited, Inc.
*10.38 Purchase Agreement, dated February 25, 2002, by and among
Prentiss Properties Trust, Prentiss Properties Acquisition
Partners, L.P., Prentiss Properties I, Inc. and Salomon
Smith Barney Inc.
*10.39 Registration Rights Agreement, dated February 25, 2002, by
and among Prentiss Properties Trust and Salomon Smith Barney
Inc.
*10.40 Third Amendment to the Third Amended and Restated Agreement
of Limited Partnership of Prentiss Properties Acquisition
Partners, L.P.
*21.1 List of Subsidiaries
*23.1 Consent of PricewaterhouseCoopers LLP.
----------
* Filed herewith.
(b) Reports on Form 8-K
We did not file any Reports on Form 8-K for or during the period October 1,
2001 through December 31, 2001.
51
PRENTISS PROPERTIES TRUST
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS PAGE
-------------------- ----
Report of Independent Accountants.................................................... F-2
Consolidated Balance Sheets of Prentiss Properties Trust as of
December 31, 2001 and December 31, 2000.............................................. F-3
Consolidated Statements of Income of Prentiss Properties Trust for the
years ended December 31, 2001, 2000 and 1999......................................... F-4
Consolidated Statements of Changes in Shareholders' Equity of Prentiss
Properties Trust for the years ended December 31, 2001, 2000 and 1999................ F-5
Consolidated Statements of Comprehensive Income of Prentiss Properties
Trust for the years ended December 31, 2001, 2000 and 1999........................... F-6
Consolidated Statements of Cash Flows of Prentiss Properties Trust
for the years ended December 31, 2001, 2000 and 1999................................. F-7
Notes to Consolidated Financial Statements........................................... F-8
FINANCIAL STATEMENT SCHEDULE
----------------------------
Report of Independent Accountants.................................................... F-29
Schedule III: Real Estate and Accumulated Depreciation.............................. F-30
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders
Of Prentiss Properties Trust:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity, comprehensive income
and cash flows present fairly, in all material respects, the financial position
of Prentiss Properties Trust (the "Company") at December 31, 2001 and 2000, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note (2) to the consolidated financial statements, effective
January 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 6, 2002, except as to
Note (23) for which the date is
March 7, 2002
F-2
PRENTISS PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31,
-----------------------
2001 2000
---------- ----------
ASSETS
Operating real estate:
Land................................................................. $ 296,105 $ 304,417
Buildings and improvements........................................... 1,510,934 1,565,277
Less: accumulated depreciation....................................... (146,349) (126,630)
---------- ----------
1,660,690 1,743,064
Construction in progress................................................ 64,410 112,090
Land held for development............................................... 53,504 49,784
Deferred charges and other assets, net.................................. 144,329 127,635
Notes receivable........................................................ 13,354 --
Receivables, net........................................................ 39,936 34,093
Cash and cash equivalents............................................... 5,845 5,452
Escrowed cash........................................................... 13,674 24,672
Investments in securities............................................... 3,398 1,495
Investments in joint ventures and unconsolidated subsidiaries........... 31,453 19,590
---------- ----------
Total assets......................................................... $2,030,593 $2,117,875
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages and notes payable............................................. $ 907,734 $1,007,800
Interest rate hedges.................................................... 10,490 --
Accounts payable and other liabilities.................................. 76,022 80,945
Deferred merger termination fee......................................... -- 17,000
Other payables (affiliates)............................................. 4,384 3,575
Distributions payable................................................... 25,977 23,538
---------- ----------
Total liabilities.................................................... 1,024,607 1,132,858
---------- ----------
Minority interest in operating partnership.............................. 184,597 177,325
---------- ----------
Minority interest in real estate partnerships........................... 1,589 1,428
---------- ----------
Commitments and contingencies
Preferred shares $.01 par value, 20,000,000 shares authorized, 3,773,585
shares issued and outstanding........................................ 100,000 100,000
Common shares $.01 par value, 100,000,000 shares authorized, 42,106,896
and 40,687,813 (includes 5,091,009 and 4,104,371 shares held in treasury)
shares issued and outstanding at December 31, 2001 and 2000,
respectively......................................................... 421 407
Additional paid-in capital.............................................. 833,314 802,818
Common shares in treasury at cost, 5,091,009 and 4,104,371 shares at
December 31, 2001 and 2000, respectively ............................ (118,228) (92,636)
Unearned compensation................................................... (2,556) (3,186)
Accumulated other comprehensive income.................................. (9,655) --
Retained earnings (distributions in excess of earnings)................. 16,504 (1,139)
---------- ----------
Total shareholders' equity.............................................. 819,800 806,264
---------- ----------
Total liabilities and shareholders' equity.............................. $2,030,593 $2,117,875
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Year Ended December 31,
------------------------------
2001 2000 1999
-------- -------- --------
Revenues:
Rental income......................................................... $339,377 $335,853 $297,147
Management and other fees, net........................................ 5,042 4,555 3,325
-------- -------- --------
Total revenues.................................................... 344,419 340,408 300,472
-------- -------- --------
Expenses:
Property operating and maintenance.................................... 78,913 78,005 69,603
Real estate taxes..................................................... 38,355 38,400 34,201
General and administrative and personnel cost......................... 10,396 9,790 8,843
Interest expense...................................................... 64,472 71,208 59,346
Amortization of deferred financing costs.............................. 1,607 1,519 1,126
Depreciation and amortization......................................... 64,268 63,399 54,535
-------- -------- --------
Total expenses.................................................... 258,011 262,321 227,654
-------- -------- --------
Equity in income of joint ventures and unconsolidated subsidiaries...... 3,131 3,843 4,294
Merger termination fee, net............................................. 17,000 4,091 --
-------- -------- --------
Income before gain or loss, minority interests and extraordinary items.. 106,539 86,021 77,112
Gain on sale of properties.............................................. 13,895 221 16,105
Loss on investment in securities........................................ -- (1,000) --
Minority interests...................................................... (17,601) (15,657) (12,735)
-------- -------- --------
Income before extraordinary items....................................... 102,833 69,585 80,482
Extraordinary items..................................................... (367) -- --
-------- -------- --------
Net income.............................................................. 102,466 69,585 80,482
Preferred dividends..................................................... (7,887) (7,151) (6,491)
-------- -------- --------
Net income applicable to common shareholders............................ $ 94,579 $ 62,434 $ 73,991
======== ======== ========
Net income per common share before extraordinary items - basic.......... $ 2.58 $ 1.72 $ 1.95
Extraordinary items..................................................... (0.01) -- --
-------- -------- --------
Net income per common share - basic..................................... $ 2.57 $ 1.72 $ 1.95
======== ======== ========
Weighted average number of common shares outstanding - basic............ 36,736 36,273 37,875
======== ======== ========
Net income per common share before extraordinary items - diluted........ $ 2.52 $ 1.71 $ 1.93
Extraordinary items..................................................... (0.01) -- --
-------- -------- --------
Net income per common share - diluted................................... $ 2.51 $ 1.71 $ 1.93
======== ======== ========
Weighted average number of common shares and common share equivalents
outstanding - diluted................................................. 40,849 36,515 41,729
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
For the Three Years Ending December 31, 2001
(dollars in thousands, except per share data)
Additional Common
Preferred Common paid-in shares in
Total shares shares capital treasury
-------- --------- ------ ---------- ---------
Balance at December 31, 1998........... $860,578 $100,000 $399 $787,193 $ (23,314)
Net proceeds from issuance of
common shares (148,355 common
shares)........................... 2,363 2 2,361
Proceeds used to purchase treasury
shares (1,593,100 treasury
shares)........................... (40,477) (40,477)
Distributions declared ($1.72 per
common share)..................... (64,962)
Preferred distributions declared
($1.72 per preferred share)....... (6,491)
Net income........................... 80,482
-------- -------- ---- -------- ---------
Balance at December 31, 1999........... 831,493 100,000 401 789,554 (63,791)
Net proceeds from issuance of
common shares (417,670 common
shares)........................... 8,989 4 8,985
Restricted share grants (191,500
common shares).................... -- 2 4,279
Amortization of share grants......... 1,095
Proceeds used to purchase treasury
shares (1,512,471 treasury
shares)........................... (28,845) (28,845)
Distributions declared ($1.895 per
common share)..................... (68,902)
Preferred distributions declared
($1.895 per preferred share)...... (7,151)
Net income........................... 69,585
-------- -------- ---- -------- ---------
Balance at December 31, 2000........... 806,264 100,000 407 802,818 (92,636)
Net proceeds from issuance of
common shares (1,329,383 common
shares)........................... 28,294 13 28,281
Restricted share grants (89,700
common shares).................... 784 1 2,215
Amortization of share grants......... 2,062
Proceeds used to purchase treasury
shares (986,638 treasury shares).. (25,592) (25,592)
Distributions declared ($2.09 per
common share)..................... (76,936)
Preferred distributions declared
($2.09 per preferred share)....... (7,887)
Unrealized gain on investments in
securities........................ 366
Unrealized loss on interest rate
hedges............................ (10,021)
Net income........................... 102,466
-------- -------- ---- -------- ---------
Balance at December 31, 2001........... $819,800 $100,000 $421 $833,314 $(118,228)
======== ======== ==== ======== =========
Retained
Accumulated earnings
other (distributions
Unearned comprehensive in excess of
compensation income earnings)
------------ ------------- --------------
Balance at December 31, 1998........... $ (3,700)
Net proceeds from issuance of
common shares (148,355 common
shares)...........................
Proceeds used to purchase treasury
shares (1,593,100 treasury
shares)...........................
Distributions declared ($1.72 per
common share)..................... (64,962)
Preferred distributions declared
($1.72 per preferred share)....... (6,491)
Net income........................... 80,482
------- -------- --------
Balance at December 31, 1999........... 5,329
Net proceeds from issuance of
common shares (417,670 common
shares)...........................
Restricted share grants (191,500
common shares).................... $(4,281)
Amortization of share grants......... 1,095
Proceeds used to purchase treasury
shares (1,512,471 treasury
shares)...........................
Distributions declared ($1.895 per
common share)..................... (68,902)
Preferred distributions declared
($1.895 per preferred share)...... (7,151)
Net income........................... 69,585
------- -------- --------
Balance at December 31, 2000........... (3,186) (1,139)
Net proceeds from issuance of
common shares (1,329,383 common
shares)...........................
Restricted share grants (89,700
common shares).................... (1,432)
Amortization of share grants......... 2,062
Proceeds used to purchase treasury
shares (986,638 treasury shares)..
Distributions declared ($2.09 per
common share)..................... (76,936)
Preferred distributions declared
($2.09 per preferred share)....... (7,887)
Unrealized gain on investments in
securities........................ $ 366
Unrealized loss on interest rate
hedges............................ (10,021)
Net income........................... 102,466
------- -------- --------
Balance at December 31, 2001........... $(2,556) $ (9,655) $ 16,504
======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Year Ended December 31,
----------------------------
2001 2000 1999
-------- ------- -------
Net income .................................... $102,466 $69,585 $80,482
-------- ------- -------
Unrealized gain on securities:
Unrealized holding gains arising
during the period ........................ 366 -- --
Unrealized loss on interest rate hedges:
Cumulative transition adjustment ........... (2,513) -- --
Unrealized losses arising during the
period ................................... (7,977) -- --
Less: reclassification adjustment for
losses included in earnings .............. 469 -- --
-------- ------- -------
Other comprehensive income .................... (9,655) -- --
-------- ------- -------
Comprehensive income .......................... $ 92,811 $69,585 $80,482
======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year Ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
Cash Flows from Operating Activities:
Net income ............................................................... $ 102,466 $ 69,585 $ 80,482
Adjustments to reconcile net income to net cash provided by operating
activities:
Minority interests .................................................... 17,601 15,657 12,735
Extraordinary items ................................................... 367 -- --
Gain on sales ......................................................... (13,895) (221) (16,105)
Loss on investment in securities ...................................... -- 1,000 --
Provision for doubtful accounts ....................................... (418) 614 1,225
Depreciation and amortization ......................................... 64,268 63,399 54,535
Amortization of deferred financing costs .............................. 1,607 1,519 1,126
Equity in income of joint ventures and unconsolidated subsidiaries .... (3,131) (3,843) (4,294)
Non-cash compensation ................................................. 1,934 1,205 100
Reclassification of accumulated other comprehensive income ............ 469 -- --
Changes in assets and liabilities:
Deferred charges and other assets ..................................... 2,547 (3,455) (2,316)
Receivables ........................................................... (6,657) (7,377) (9,846)
Escrowed cash ......................................................... 10,512 (1,191) (1,973)
Other payables/receivables (affiliates) ............................... (821) 7,192 (1,372)
Accounts payable and other liabilities ................................ (19,556) 14,034 5,367
--------- --------- ---------
Net cash provided by operating activities ............................. 157,293 158,118 119,664
--------- --------- ---------
Cash Flows from Investing Activities:
Purchase and development of real estate ............................... (201,422) (226,946) (204,346)
Investment in real estate ............................................. (47,497) (51,009) (56,754)
Investment in joint ventures and unconsolidated subsidiaries .......... (1,438) (694) (11,032)
Investments in securities ............................................. (1,960) (1,495) --
Proceeds from sales of real estate .................................... 196,854 106,380 126,729
Distributions received from joint ventures and unconsolidated
subsidiaries ......................................................... 5,740 4,396 5,026
--------- --------- ---------
Net cash used in investing activities ................................. (49,723) (169,368) (140,377)
--------- --------- ---------
Cash Flows from Financing Activities:
Net proceeds from sale of common shares ............................... 10,150 8,677 1,273
Net proceeds from sale of preferred units ............................. -- -- 50,000
Purchase of treasury shares ........................................... (10,007) (28,845) (36,813)
Distributions paid to limited partners ................................ (3,400) (3,114) (2,869)
Distributions paid to common shareholders ............................. (74,873) (67,652) (64,045)
Distributions paid to preferred shareholders .......................... (7,699) (6,982) (6,339)
Distributions paid to preferred unitholders ........................... (12,985) (9,457) (9,251)
Payment for early extinguishment of debt .............................. (50) -- --
Distributions paid for minority interest in real estate partnerships .. -- (228) --
Proceeds from mortgages and notes payable ............................. 480,125 354,901 536,113
Repayments of mortgages and notes payable ............................. (488,438) (243,911) (439,566)
--------- --------- ---------
Net cash (used in) provided by financing activities ................... (107,177) 3,389 28,503
--------- --------- ---------
Net change in cash and cash equivalents ............................... 393 (7,861) 7,790
Cash and cash equivalents, beginning of year .......................... 5,452 13,313 5,523
--------- --------- ---------
Cash and cash equivalents, end of year ................................ $ 5,845 $ 5,452 $ 13,313
========= ========= =========
Supplemental Cash Flow Information:
Cash paid for interest ................................................ $ 68,822 $ 70,376 $ 63,825
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(1) The Organization and Significant Transactions
We are a self-administered and self-managed Maryland REIT that acquires,
owns, manages, leases, develops and builds primarily office properties
throughout the United States. We are self-administered in that we provide our
own administrative services, such as accounting, tax and legal, internally
through our own employees. We are self-managed in that we internally provide all
the management and maintenance services that our properties require through
employees, such as, property managers, leasing professionals and engineers. We
operate principally through our operating partnership, Prentiss Properties
Acquisition Partners, L.P. and its subsidiaries, and a management company,
Prentiss Properties Resources, Inc. and its subsidiaries. As of December 31,
2001, we owned interests in a diversified portfolio of 146 primarily suburban
Class A office and suburban industrial properties containing approximately 17.6
million net rentable square feet. Our properties consist of 108 office
properties containing approximately 14.4 million net rentable square feet and 38
industrial properties containing approximately 3.2 million net rentable square
feet. The properties include 3 development properties containing 445,000 square
feet of office space that are in various stages of development. As of December
31, 2001, our properties, exclusive of the development properties, were 94%
leased to approximately 1,100 tenants. In addition to managing the properties
that we own, we manage approximately 19.7 million net rentable square feet in
office, industrial and other properties for third parties.
Real Estate Transactions
During the year, we completed several real estate transactions with
Brandywine Realty Trust. In April 2001, we completed an asset exchange whereby
we conveyed our interests in 30 properties and approximately 6.9 acres of
developable land located in Pennsylvania, New Jersey and Delaware with a
carrying amount of $207.5 million in exchange for four wholly-owned office
properties in Northern Virginia valued at $107.2 million.
In addition to the asset exchange, we issued to Brandywine 200,000, $50 par
value, preferred units and 26,768 common units, collectively valued at $10.7
million, as consideration for a 25% non-controlling interest in a joint venture
that owns two office properties containing 452,000 net rentable square feet in
the Northern Virginia area.
In June 2001, we completed our transactions with Brandywine with the sale
of a 103,000 net rentable square foot development project in the suburban
Philadelphia area. As a result of these transactions, we disposed of all of our
holdings in the suburban Philadelphia market and closed our Northeast regional
office.
Inclusive of the transactions described above, during the year ended
December 31, 2001, we (1) disposed of 42 properties containing 2.8 million net
rentable square feet, resulting in a gain on sale of $13.9 million; (2) acquired
seven properties containing 1.3 million net rentable square feet for an
aggregate purchase price of $134.9 million; (3) demolished one property which
contained 29,000 net rentable square feet, the land parcel under which will be
held for future development; and (4) transitioned four office properties
containing 592,000 net rentable square feet from development into operations.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
We consolidate all subsidiaries that we control and we define control as
the ownership of a majority of the voting interest of a subsidiary. Our
consolidated financial statements include the accounts of Prentiss Properties
Trust, Prentiss Properties Acquisition Partners, L.P. and other subsidiaries
under our control. All significant inter-company balances and transactions have
been eliminated. Certain prior year amounts have been reclassified to conform to
current year presentation with no impact on previously reported net income or
shareholders' equity.
Real Estate
Real estate and leasehold improvements are classified as long-lived assets
held for sale or long-lived assets to be held and used. In accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," we
record assets held for sale at the lower of the carrying amount or fair value
less cost to sell. With respect to assets classified as held and used, we
periodically review these assets to determine whether our carrying amount will
be recovered from the undiscounted
F-8
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
future operating cash flows and we recognize an impairment loss to the extent
the carrying amount is not recoverable and exceeds its fair value. No such
impairment losses on assets held for use have been recognized to date.
Depreciation on buildings and improvements is provided under the
straight-line method over an estimated useful life of 30 to 40 years for office
buildings and 25 to 30 years for industrial buildings. Interest expense and
other directly related expenses incurred during construction periods are
capitalized and depreciated commencing with the date the building is placed in
service, on the same basis as the related asset. For the years ended December
31, 2001, 2000 and 1999, capitalized interest costs totaled $5.2 million, $3.4
million and $5.2 million, respectively.
Expenditures for repairs and maintenance are charged to operations as
incurred. Significant betterments are capitalized. When assets are sold or
retired, their costs and related accumulated depreciation are removed from the
accounts with the resulting gains or losses reflected in net income for the
period.
Deferred Charges
Leasing commissions and leasehold improvements are deferred and amortized
on a straight-line basis over the terms of the related lease. Deferred financing
costs are recorded at cost and are amortized using the effective interest method
over the life of the related debt. Other deferred charges are amortized over
terms applicable to the expenditure.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and investments with
maturities of three months or less from the date of purchase.
Escrowed Cash
Escrowed cash includes real estate tax, insurance and capital reserve
deposits required pursuant to certain of our mortgage loan agreements.
Investments in Securities
Investments in securities consist of investments in marketable securities
held pursuant to a key employee share option plan. We account for our
investments in securities as "available for sale" in accordance with Statement
of Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities." Any decline in market value that is deemed to be
other than temporary is recognized as a realized loss in the determination of
net income for the period. No such realized loss has been recognized to date.
Any change in the market value of the investments which is deemed temporary is
included as an unrealized gain or loss in accumulated other comprehensive income
on our consolidated balance sheet. At December 31, 2001, we have an accumulated
unrealized gain of $366,000 from our investments in securities. The unrealized
gain is presented in accumulated other comprehensive income on our consolidated
balance sheet.
Investments in Joint Ventures and Unconsolidated Subsidiaries
As of December 31, 2001, we have investments in joint ventures and
unconsolidated subsidiaries which we account for using the equity method of
accounting including (i) our 50% interest in Broadmoor Austin Associates; (ii)
our 20% interest in Burnett Plaza Associates; (iii) our 25% interest in Tysons
International Partners, (iv) our 98% interest in Prentiss Properties Resources,
Inc.; and (v) our 75% interest in PPS Partners LLC.
We have a non-controlling interest in these investments and account for our
interest using the equity method of accounting, thus, we report our share of
income and losses based on our ownership interest in the respective entities. We
classify our interest in subsidiaries as non-controlling when we hold less than
a majority of the entities' outstanding voting stock. Any difference between the
carrying amount of our non-controlling interests and the book value of the
underlying equity is amortized over 40 years from the date of purchase. For each
of the years ended December 31, 2001, 2000 and 1999, the amortization totaled
approximately $254,000.
In January 2002, we will implement Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets." Upon initial
application of this statement, the portion of the excess of cost over the
F-9
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
underlying equity in net assets of an investee accounted for using the equity
method that had been recognized as goodwill shall cease being amortized.
Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended. If we qualify for taxation as a REIT,
we generally will not be subject to federal corporate income tax on our taxable
income that is distributed to our shareholders. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 90% of its annual taxable income.
Leases
We, as lessor, have retained substantially all the risks and benefits of
ownership and account for our leases as operating leases.
Revenue Recognition
In accordance with Statement of Financial Accounting Standards No. 13
"Accounting for Leases," income on leases which includes scheduled rental rate
increases over the lease term is recognized on a straight-line basis. Income
received from tenants for early lease terminations is recognized as earned.
Management fees, leasing and other fee income items received are recognized
as earned. Leasing fees are generally recognized upon tenant occupancy of the
leased premises unless such fees are irrevocably due and payable upon lease
execution, in which case recognition occurs on the lease execution date.
Distributions
We pay regular quarterly distributions to the holders of our outstanding
common shares. These distributions are dependent on distributions from our
operating partnership. The holders of our Series D Convertible Preferred Shares
receive a quarterly dividend per share equal to the per share distribution paid
on our common shares.
Earnings and profits, which will determine the taxability of distributions
to shareholders, will differ from income reported for financial reporting
purposes due to the differences for federal tax purposes, primarily in the
estimated useful lives used to compute depreciation.
Minority Interest
Minority interest in the operating partnership represents the limited
partners' proportionate share of the equity in the operating partnership. The
operating partnership pays a regular quarterly distribution to the holders of
common and preferred units. Income is allocated to minority interest based on
the weighted average percentage ownership during the year.
Minority interest in real estate partnerships represents the other
partners' proportionate share of the equity in certain real estate partnerships.
The operating partnership holds a majority controlling interest in the real
estate partnerships and thus, consolidates the accounts into the operating
partnership. Income is allocated to minority interest based on the weighted
average percentage ownership during the year.
Concentration of Credit Risk
We place cash deposits at major banks. We believe that through our cash
investment policy, the credit risk related to these deposits is minimal.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported
F-10
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
amounts of revenues and expenses during the reporting period. These estimates
include such items as depreciation, allowance for doubtful accounts and
accruable rental income. Actual results could differ from our estimates.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" requires disclosures about the fair value
of financial instruments whether or not such instruments are recognizable in the
balance sheet. Our financial instruments include receivables, cash and cash
equivalents, escrowed cash, investments in securities, accounts payable, other
accrued expenses, mortgages and notes payable and interest rate hedge
agreements. The fair values of these financial instruments, other than the fixed
rate mortgages and notes payable, are not materially different from their
carrying or contract amounts. We estimate the fair value of our consolidated
fixed rate mortgages and notes payable to exceed the carrying amount by $12.8
million at December 31, 2001.
Fair Value of Derivative Instruments
On January 1, 2001, we adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by Statement of Financial Accounting Standards No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." The statement as
amended, establishes accounting and reporting standards for derivative
instruments. Specifically it requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and to
measure those instruments at fair value. Changes in fair value will affect
either shareholders' equity or net income depending on whether the derivative
instrument qualifies as a hedge for accounting purposes.
The adoption, on January 1, 2001, of Statement of Financial Accounting
Standards No. 133, as amended, resulted in a charge of $2.5 million to other
comprehensive income in the first quarter of 2001. In addition to the initial
charge, during 2001, we recorded the reduction in fair value of our derivatives
of $8.0 million as a loss of $469,000 recognized in our statement of income as
interest expense and a charge of $7.5 million to other comprehensive income.
On December 31, 2001, our derivative financial instruments were reported at
their fair value as a liability of $10.5 million. Of the liability, $10.0
million represents an unrealized loss and is presented in accumulated other
comprehensive income in our consolidated statement of changes in shareholders'
equity.
(3) Deferred Charges and Other Assets, Net
Deferred charges and other assets consisted of the following at December
31, 2001 and 2000:
(in thousands)
2001 2000
-------- --------
Deferred leasing and tenant charges ........ $179,664 $143,584
Deferred financing costs ................... 14,440 14,956
Prepaids and other assets .................. 5,475 9,892
-------- --------
199,579 168,432
Less: accumulated amortization ............. (55,250) (40,797)
-------- --------
$144,329 $127,635
======== ========
(4) Notes Receivable
Our notes receivable balance of $13.4 million at December 31, 2001 results
from the consummation of two separate real estate transactions during the
period.
Pursuant to the asset exchange with Brandywine Realty Trust, we received a
promissory note totaling $9.0 million from Brandywine Realty Trust. The note
which matures on April 2, 2004, bears interest at 9.22% per annum and requires
interest only payments until maturity.
In connection with the sale of a 243,000 net rentable square foot office
property in the Atlanta area, we received a promissory note totaling $4.4
million from the purchaser. The note which matures March 1, 2005, bears interest
at 7.95% per annum and requires interest only payments until maturity.
F-11
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
In connection with the sale of a 243,000 net rentable square foot office
property in the Atlanta area, we received a promissory note totaling $4.4
million from the purchaser. The note which matures March 1, 2005, bears interest
at 7.95% per annum and requires interest only payments until maturity.
(5) Receivables, Net
Receivables consisted of the following at December 31, 2001 and 2000:
(in thousands)
2001 2000
------- -------
Rents and services ........................... $10,218 $ 7,199
Accruable rental income ...................... 26,940 22,563
Other ........................................ 5,864 7,835
------- -------
43,022 37,597
Less: allowance for doubtful accounts ........ (3,086) (3,504)
------- -------
$39,936 $34,093
======= =======
Accruable rental income represents rental income recognized on a
straight-line basis in excess of rental revenue accrued in accordance with
individual lease agreements.
Effective June 30, 1999, we loaned $4.2 million to various key employees as
part of our long-term incentive plan to retain such employees. The funds were
used to purchase common shares of the company in the open market. The loans are
full recourse notes, which accrue interest quarterly at a fixed rate of 7% and
have a term of five years. Interest payments are due quarterly. The loan
balances are to be forgiven, contingent upon each key employees' continued
employment with us, in the following manner: one-third of the principal balance
will be forgiven at the end of the third year of the loan term, one-third will
be forgiven at the end of the fourth year of the loan term, and the remaining
principal balance will be forgiven at the end of the fifth year of the loan
term. The outstanding loan balance totaled $2.4 million and $2.9 million at
December 31, 2001 and 2000, respectively and is reflected in the other
receivable balance presented in the table above.
(6) Investments in Joint Ventures and Unconsolidated Subsidiaries
The following information summarizes the financial position at December 31,
2001 and 2000 and the results of operations for the years ended December 31,
2001, 2000 and 1999 for the investments in which we held an interest during the
periods presented:
Summary of Financial Company's
Position: Total Assets Total Debt/(8)/ Total Equity Investment
------------------- ------------------- ------------------- -----------------
(in thousands) 2001 2000 2001 2000 2001 2000 2001 2000
-------- -------- -------- ------- -------- -------- ------- -------
Broadmoor Austin Associates/(1)/ $114,101 $118,522 $150,423 $154,000 $(37,009) $(36,276) $ 3,882 $ 4,517
Burnett Plaza Associates/(2)/ 102,484 98,735 47,000 47,000 51,526 48,746 10,347 9,783
Lot 21 Associates, L.P./(3)/ -- 4,116 -- 2,591 -- 1,453 -- 872
PPS Partners LLC/(4)/ 126 172 -- -- 92 128 79 97
Prentiss Properties Limited, Inc./(5)/ -- 9,600 -- -- -- 4,192 -- 3,951
Prentiss Properties Resources,Inc./(5)/ 11,710 -- -- -- 5,799 -- 5,649 --
Project 127 Partners, L.P./(3)/ -- 2,088 -- 1,434 -- 617 -- 370
Tysons International Partners/(6)/ 99,059 -- 61,290 -- 36,158 -- 10,389 --
Other Investments/(7)/ -- -- -- -- -- -- 1,107 --
------- -------
$31,453 $19,590
======= =======
F-12
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Company's
Summary of Operations: Total Revenue Net Income Share of Net Income/(Loss)
--------------------------- ------------------------ --------------------------
(in thousands) 2001 2000 1999 2001 2000 1999 2001 2000 1999
------- ------- ------- ------ ------ ------ ------ ------ ------
Broadmoor Austin Associates $19,849 $19,689 $19,845 $3,941 $3,731 $3,921 $1,971 $1,866 $1,961
Burnett Plaza Associates 21,483 17,300 10,763 5,304 3,097 793 1,061 620 159
Lot 21 Associates, L.P. 130 325 -- -- 12 -- -- 7 --
PPS Partners LLC 581 675 -- 361 435 -- 271 327 --
Prentiss Properties Limited, Inc. 4,939 18,983 22,583 558 1,017 2,174 558 1,017 2,174
Prentiss Properties Resources, Inc. 11,667 -- -- (915) -- -- (897) -- --
Project 127 Partners, L.P. 76 235 -- (11) 9 -- (6) 6 --
Tysons International Partners 10,094 -- -- 694 -- -- 173 -- --
------ ------ ------
$3,131 $3,843 $4,294
====== ====== ======
/(1)/We own a 50% non-controlling interest in Broadmoor Austin Associates, an
entity, which owns a seven-building, 1.1 million net rentable square foot
office complex in Austin. The difference between the carrying amount of our
non-controlling interest and the book value of the underlying equity is
being amortized over 40 years.
/(2)/At December 31, 2001, we owned a 20% non-controlling interest in Burnett
Plaza Associates, an entity, which owns a 1.0 million net rentable square
foot office building in downtown Fort Worth. See Note (23) - "Subsequent
Events," regarding our purchase of the remaining 80% interest in Burnett
Plaza Associates.
/(3)/Prior to April 10, 2001, we owned a 60% non-controlling interest in two
entities, each owning a separate office development project in the suburban
Philadelphia area. The office projects were sold to Brandywine Realty Trust
on April 10, 2001.
/(4)/PPS Partners LLC is a joint venture between Prentiss Properties
Acquisition Partners, L.P. and a third-party property owner. The
third-party property owner contributed property management contracts to PPS
Partners LLC. Prentiss Properties Acquisition Partners, L.P. through a
sub-management contract managed the properties and participated in the net
income of the joint venture. Effective October 2001, Prentiss Properties
Acquisition Partners, L.P. resigned the management duties of the properties
which will result in a near-term dissolution of the joint venture. We
expect to recover our $79,000 investment upon dissolution.
/(5)/On March 28, 2001, Prentiss Properties Resources, Inc. was incorporated
under the General Corporation Law of the State of Delaware to serve as a
Taxable REIT Subsidiary and provide services to Prentiss Properties
Acquisition Partners, L.P. On March 29, 2001, Prentiss Properties
Resources, Inc. acquired our interest in Prentiss Properties Limited, Inc.,
valued at $3.9 million, along with certain other assets with a carrying
amount of approximately $2.5 million. As a result, Prentiss Properties
Acquisition Partners, L.P. holds a 98% economic interest and 0% voting
interest in Prentiss Properties Resources, Inc.
/(6)/In April 2001, we acquired from Brandywine Realty Trust a 25%
non-controlling interest in Tysons International Partners, an entity, which
owns two office properties containing 452,000 net rentable square feet in
the Northern Virginia area.
/(7)/Represents a 1% investment in certain real estate entities that we account
for using the cost method of accounting.
/(8)/The mortgage debt, all of which is non-recourse, is collateralized by the
individual real estate property or properties within each venture.
(7) Mortgages and Notes Payable
In March 2001, we repaid the $100.0 million outstanding balance under an
unsecured term loan with Dresdner Bank. The loan had an interest rate of LIBOR
plus 137.5 basis points and a maturity date of October 13, 2002. The loan was
repaid with proceeds from our revolving credit facility and a $75.0 million
unsecured term loan completed with Commerzbank.
On May 10, 2001, we completed a $45.0 million, 12-year non-recourse,
mortgage with United of Omaha Life Insurance Company and Equitable Life
Assurance Society of the United States. The loan bears interest at a fixed rate
of 7.41% and is collateralized by three office properties comprising 277,000 net
rentable square feet in the San Diego area. The proceeds from the loan were used
to re-pay (1) the $25.3 million of outstanding borrowings under the construction
loan which was collateralized by the Del Mar Gateway property and (2) a portion
of outstanding borrowings under our revolving credit facility.
On September 28, 2001, we completed a $45.0 million, 10-year non-recourse,
mortgage with Teachers Insurance and Annuity Association. The loan bears
interest at a fixed rate of 7.64% and is collateralized by three office
F-13
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
properties comprising 439,000 net rentable square feet in the Metropolitan
Washington, D.C. area. The proceeds from the loan were used to re-pay a portion
of outstanding borrowings under our revolving credit facility.
During the year, a total of $91.7 million of outstanding mortgage loans
collateralized by certain disposition properties was assumed by the purchasers
of the properties.
The following table sets forth our mortgages and notes payable as of
December 31, 2001 and 2000:
(in thousands)
Description 2001 2000 Amortization Interest Rate Maturity
----------- -------- ---------- ------------ ------------- ------------------
Revolving credit facility/(1)/ $118,500 $ 142,500 None LIBOR + 1.375% May 23, 2003
Collateralized term loan/(2)/ 72,313 72,500 25 yr LIBOR + 1.625% September 30, 2004
Unsecured term loan 75,000 100,000 None LIBOR + 1.375% March 15, 2006
PPREFI portfolio loan/(3)/ 180,100 180,100 None 7.58% February 26, 2007
Mortgage notes payable/(4)/ 461,821 468,549 25 yr-30 yr /(5)/ /(5)/
Construction loans -- 38,824 -- -- --
Other corporate debt -- 5,327 -- -- --
-------- ----------
$907,734 $1,007,800
======== ==========
/(1)/We have in place a $300 million unsecured revolving credit facility with a
group of 12 banks. The facility which was renewed in May 2000 matures in
May 2003. The facility has an initial interest rate of LIBOR plus 137.5
basis points. Additionally, we are required to pay an average daily unused
commitment fee ranging from 15-25 basis points per annum.
/(2)/The term loan is collateralized by four properties with an aggregate net
book value of real estate of $85.3 million.
/(3)/The PPREFI portfolio loan is collateralized by 36 properties with an
aggregate net book value of real estate of $255.0 million.
/(4)/The mortgage loans are collateralized by 30 properties with an aggregate
net book value of real estate of $630.4 million.
/(5)/Interest rates, all of which are fixed, range from 6.63% to 8.63% with a
weighted average interest rate of 7.39% at December 31, 2001. Maturity
dates range from December 2003 through June 2013 with a weighted average
maturity of 7.5 years from December 31, 2001.
Our future scheduled principal repayments on our mortgages and notes
payable are as follows:
(in thousands)
Years ending December 31:
2002.................................. $ 6,048
2003.................................. 127,722
2004.................................. 99,449
2005.................................. 38,618
2006.................................. 90,062
Thereafter............................ 545,835
--------
$907,734
========
Under our loan agreements, we are required to satisfy various affirmative
and negative covenants, including limitations on total indebtedness, total
collateralized indebtedness and cash distributions, as well as obligations to
maintain certain minimum tangible net worth and certain minimum interest
coverage ratios. We were in compliance with these covenants at December 31,
2001.
(8) Interest Rate Hedges
In the normal course of business, we are exposed to the effect of interest
rate changes. We limit these risks by following established risk management
policies and procedures including the use of derivatives. For interest rate
exposures, derivatives are used primarily to hedge against rate movements on our
related debt.
F-14
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
To manage interest rate risk, we may employ options, forwards, interest
rate swaps, caps and floors or a combination thereof depending on the underlying
exposure. We undertake a variety of borrowings from credit facilities, to
medium- and long-term financings. To hedge against increases in interest cost,
we use interest rate instruments, typically interest rate swaps, to convert a
portion of our variable rate debt to fixed rate debt.
On the date we enter into a derivative contract, we designate the
derivative as a hedge of (a) a forecasted transaction or (b) the variability of
cash flows that are to be received or paid in connection with a recognized asset
or liability (cash flow hedge). Currently, we have only entered into derivative
contracts designated as cash flow hedges. These agreements involve the exchange
of amounts based on a variable interest rate for amounts based on fixed interest
rates over the life of the agreement based upon a notional amount. The
difference to be paid or received as the interest rates change is recognized as
an adjustment to interest expense. The related amount payable to or receivable
from counterparties is included in accounts payable and other liabilities.
Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a cash flow hedge, to the extent that the hedge is
effective, are recorded in other comprehensive income, until earnings are
affected by the variability of cash flows of the hedged transaction (e.g. until
periodic settlements of a variable-rate asset or liability are recorded in
earnings). Any hedge ineffectiveness (which represents the amount by which the
changes in the fair value of the derivative exceed the variability in the cash
flows of the forecasted transaction) is recorded in current-period earnings.
Changes in the fair value of non-hedging instruments are reported in
current-period earnings.
We formally document all relationships between hedging instruments and
hedged items, as well as our risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as cash flow hedges to (1) specific assets and
liabilities on the balance sheet or (2) specific firm commitments or forecasted
transactions. We also formally assess (both at the hedge's inception and on an
ongoing basis) whether the derivatives that are used in hedging transactions
have been highly effective in offsetting changes in the cash flows of hedged
items and whether those derivatives may be expected to remain highly effective
in future periods. When it is determined that a derivative is not (or has ceased
to be) highly effective as a hedge, we discontinue hedge accounting
prospectively, as discussed below.
We discontinue hedge accounting prospectively when (1) we determine that
the derivative is no longer effective in offsetting changes in the cash flows of
a hedged item (including hedged items such as firm commitments or forecasted
transactions); (2) the derivative expires or is sold, terminated, or exercised;
(3) it is no longer probable that the forecasted transaction will occur; (4) a
hedged firm commitment no longer meets the definition of a firm commitment; or
(5) management determines that designating the derivative as a hedging
instrument is no longer appropriate.
When we discontinue hedge accounting because it is no longer probable that
the forecasted transaction will occur in the originally expected period, the
gain or loss on the derivative remains in accumulated other comprehensive income
and is reclassified into earnings when the forecasted transaction affects
earnings. However, if it is probable that a forecasted transaction will not
occur by the end of the originally specified time period or within an additional
two-month period of time thereafter, the gains and losses that were accumulated
in other comprehensive income will be recognized immediately in earnings. In all
situations in which hedge accounting is discontinued and the derivative remains
outstanding, we will carry the derivative at its fair value on the balance
sheet, recognizing changes in the fair value in current-period earnings.
To determine the fair value of derivative instruments, we use a variety of
methods and assumptions that are based on market conditions and risks existing
at each balance sheet date. For our derivatives, standard market conventions and
techniques such as discounted cash flow analysis, option pricing models,
replacement cost, and termination cost are used to determine fair value. All
methods of assessing fair value result in a general approximation of value, and
such value may never actually be realized.
Over time, the unrealized gains and losses held in accumulated other
comprehensive income will be reclassified to earnings. This reclassification is
consistent with when the hedged items are recognized in earnings. Within the
next twelve months, we expect to reclassify to earnings approximately $3.7
million of the current balance held in accumulated other comprehensive income.
F-15
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The following table summarizes the notional values and fair values of our
derivative financial instruments. The notional value provides an indication of
the extent of our involvement in these instruments as of the balance sheet date,
but does not represent exposure to credit, interest rate or market risks.
Swap Rate Received
Notional Swap Rate Paid Effective (Variable) at
Amount (Fixed) Fixed Rate December 31, 2001 Swap Maturity Fair Value
----------- -------------- ---------- ------------------ -------------- --------------
(in thousands)
$40 million 3.685% 5.185% 1.87375% January 2002 $ (51)
$50 million 4.836% 6.211% 1.87375% April 2002 (490)
$50 million 6.253% 7.628% 1.87375% September 2004 (3,190)
$60 million 6.248% 7.623% 1.87375% September 2004 (3,821)
$20 million 5.985% 7.610% 1.87375% March 2006 (1,172)
$30 million 5.990% 7.615% 1.87375% March 2006 (1,766)
--------
$(10,490)
========
Cash payments made under the interest rate hedges exceeded cash receipts
from the interest rate hedges by $3.2 million and $1.4 million for the years
ended December 31, 2001 and 1999, respectively. Cash received exceeded cash paid
by approximately $215,000 for the year ended December 31, 2000.
(9) Accounts Payable and Other Liabilities
Accounts payable and other liabilities consisted of the following at
December 31, 2001 and 2000:
(in thousands)
2001 2000
------- -------
Accounts payable and other liabilities.. $30,676 $38,563
Accrued real estate taxes .............. 26,760 25,938
Advance rent and deposits .............. 18,586 16,444
------- -------
$76,022 $80,945
======= =======
(10) Distributions
In December 2001, we declared a cash distribution for the fourth quarter of
2001 in the amount of $.535 per share, payable on January 11, 2002, to common
shareholders of record on December 28, 2001. Additionally, it was determined
that a distribution of $.535 per unit would be made to the partners of the
operating partnership and the holders of our Series D Convertible Preferred
Shares. The distributions totaled $22.6 million and were paid January 11, 2002.
In addition, quarterly distributions totaling $3.3 million were declared in
December 2001 payable to the holders of our Series B and Series C Perpetual
Preferred Units and our Series E Preferred Units. The distributions which equate
to an annualized 8.3% and 9.45% distribution on our Series B and Series C
Perpetual Preferred Units and an annualized 7.5% on the Series E Preferred Units
were paid January 3, 2002 and January 16, 2002, respectively.
(11) Leasing Activities
Our future minimum lease payments to be received, under non-cancelable
operating leases in place at December 31, 2001, which expire on various dates
through 2019, are as follows:
F-16
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands)
Years ending December 31:
2002............................. 267,990
2003............................. 249,026
2004............................. 217,697
2005............................. 166,704
2006............................. 131,066
Thereafter....................... 342,777
----------
$1,375,260
==========
The geographic concentration of the future minimum lease payments to be
received is detailed as follows:
(in thousands)
Market
------
Metro. Washington, DC............ $ 349,772
Dallas/Fort Worth................ 190,596
Chicago.......................... 238,162
San Diego........................ 88,909
San Francisco Bay Area........... 166,558
Atlanta.......................... 33,217
Austin........................... 135,301
Sacramento....................... 49,898
Suburban Detroit................. 16,126
Denver........................... 32,079
Houston.......................... 38,646
Los Angeles....................... 35,996
----------
$1,375,260
==========
For the years ended December 31, 2001 and December 31, 2000, no individual
tenant accounted for more than 10% of our total rental income.
(12) Supplemental Disclosure of Non-Cash Investing and Financing Activities
On December 28, 2001, we declared cash distributions totaling $22.6 million
payable to holders of common shares, operating partnership units and Series D
Convertible Preferred Shares. The distributions were paid January 11, 2002. In
addition, distributions totaling $3.2 million and $187,500 were declared on
December 28, 2001, payable to holders of our Series B and C Perpetual Preferred
Units and Series E Preferred Units, respectively. The distributions were paid on
January 3, 2002 and January 16, 2002 to our Series B and C Perpetual Preferred
Unit holders and Series E Preferred Unit holders, respectively.
Pursuant to our long-term incentive plan, during the year ended December
31, 2001, we issued 89,700 restricted shares of stock to various key employees.
The shares which had a market value of $2.2 million based upon the per share
price on the date of grant were classified as either (1) compensation for past
performance or (2) unearned future compensation. An amount totaling $784,000
represents compensation for past performance and was recognized in earnings
during the year ended December 31, 2000. An amount equal to $1.4 million
represents unearned future compensation and was recorded as unearned
compensation in the shareholders' equity section the consolidated balance sheet.
The unearned compensation is amortized quarterly as compensation expense over
the three-year vesting period.
During 2001, 182,214 operating partnership units were converted to common
shares. The fair value of the units, which were converted at various points in
time throughout the period, totaled $5.0 million based upon the closing price of
our common shares on the date of the respective conversion. In connection with
the Brandywine transaction, we issued common and preferred operating partnership
units with a value of $10.7 million in exchange for a non-controlling 25%
interest in Tysons International Partners.
F-17
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
During 2001, we removed accumulated depreciation and amortization of $19.4
million and $5.6 million, related to real estate and deferred charges disposed
of during the period. In addition, as a result of our disposition of certain
real estate properties, we removed receivables of $1.2 million, escrowed cash of
$486,000, other assets of $735,000, liabilities of $2.3 million and mortgages
and notes payable of $91.7 million. In addition, we moved from real estate to
investments in joint ventures and unconsolidated subsidiaries, $1.1 million
representing our non-controlling retained interest in certain properties
disposed of during the period. In relation to the properties acquired during the
period, we assumed liabilities totaling approximately $708,000.
In March 2001, we contributed (1) our interest in Prentiss Properties
Limited, Inc.; (2) 4.2 acres of developable land with a carrying value of $1.1
million; and (3) our investment in Narrowcast Communications Corporation with a
carrying value of $423,000 in exchange for class B non-voting common stock of
Prentiss Properties Resources, Inc.
During 2001, common shares in treasury increased by $25.6 million of which
$15.6 million represented non-cash activities including (1) $15.3 million
attributable to 563,494 common shares surrendered as payment of the exercise
price and statutory tax withholdings for certain share options exercised during
the period and (2) $252,000 representing 12,244 restricted share grants
forfeited as a result of certain employee terminations during the period.
(13) Related Party Transactions
On March 28, 2001, Prentiss Properties Resources, Inc. was incorporated
under the General Corporation Law of the State of Delaware to serve as a Taxable
REIT Subsidiary and provide management services to the operating partnership. On
March 29, 2001, Prentiss Properties Resources, Inc. acquired our interest in the
existing management service company, Prentiss Properties Limited, Inc., valued
at $3.9 million, along with certain other assets with a carrying amount of
approximately $2.5 million. As a result, the operating partnership holds a 98%
economic interest and 0% voting interest in Prentiss Properties Resources, Inc.
We account for our non-controlling interest in the management service company
and its subsidiaries using the equity method of accounting.
The management service company and its subsidiaries incur certain personnel
and other overhead-related expenses on behalf of the operating partnership,
which are subsequently reimbursed. Such expenses totaled $4.0 million and $3.7
million for the years ended December 31, 2001 and December 31, 2000,
respectively. In addition, the operating partnership funds short-term capital
needs of the management service company, which are subsequently reimbursed. We
had outstanding short-term borrowings due to the management service company of
$4.4 million at December 31, 2001 and $3.6 million at December 31, 2000. The
short-term borrowings were classified as other payables (affiliates) in our
consolidated balance sheets at December 31, 2001 and December 31, 2000.
(14) Employee Benefit Plans
We have a 401(k) savings plan for our employees. Under the plan, as
amended, employees, age 21 and older, are eligible to participate in the plan
after they have completed one year and 1,000 hours of service. Participants are
immediately vested in their contributions, matching contributions and earnings
thereon.
We initially match 25% of an employees' contribution, not to exceed 25% of
6% of each employee's wages. Our cost of the initial match totaled approximately
$333,000 and $325,000 for the years ended December 31, 2001 and 2000,
respectively. We may also elect, in any calendar year, to make a discretionary
match to the plan. The amount paid pursuant to the discretionary match totaled
$300,000 and $0 during the years ended December 31, 2001 and 2000, respectively.
We have registered 500,000 common shares in connection with a share
purchase plan. The share purchase plan enables eligible employees to purchase
shares, subject to certain restrictions, of the company at a 15% discount to
fair market value. A total of 65,340 and 45,864 common shares were issued, in
accordance with the share purchase plan, during the years ended December 31,
2001 and 2000, respectively.
We have adopted a deferred compensation plan. Pursuant to the plan,
officers and other selected key employees of the operating partnership or
management service company who earn bonuses have the option of deferring the
payment of such bonuses. Such deferred compensation may be used to purchase
various mutual funds and/or our
F-18
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
common shares. Pursuant to the participant's election, we purchase shares on the
open market and place them in a trust for the benefit of such participant. The
trust may deliver to the participant shares or the fair market value of such
shares beginning 6 months from the date they were placed in the trust. The
purpose of the deferred compensation plan is to provide a vehicle for the
payment of compensation otherwise payable to the participants, in a form that
will provide incentives and rewards for meritorious performance and encourage
the recipients' continuance as our employees. During the 2000 and 2001 plan
years we provided a discount of 15% on the purchase price of our common shares
purchased by participants in the plan. For the 2002 plan year, the deferred
compensation plan will not provide for a discount on our common shares. The
investments (including 97,600 of our common share purchased in the open market)
are carried at their market value of $3.4 million and included in investments in
securities. The corresponding deferred compensation liability of approximately
$3.4 million is included in accounts payable and other liabilities.
(15) Share Incentive Plans
We have two separate stock-based incentive compensation plans including (1)
a trustees' share incentive plan and (2) an employees' share incentive plan. We
apply APB Opinion 25 and related Interpretations in accounting for each plan. In
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" which, if
fully adopted, would change the methods we use in recognizing the cost of our
plans. Adoption of the cost recognition provisions of the statement is optional
and we have decided not to elect these provisions. However, pro forma
disclosures as if we had adopted the cost recognition provisions are required
and are presented herein.
Under the plans, we are authorized to issue common shares or cash pursuant
to awards granted in the form of (1) non-qualified stock options not intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended; (2)
restricted or non-restricted shares; (3) stock appreciation rights; and (4)
performance shares. Awards may be granted to selected employees and trustees of
our company or an affiliate of our company.
The Trustees' Plan
Under the trustees' plan, annually on the first business day of July we
grant to each independent trustee non-qualified stock options to purchase 7,500
of our common shares. The options are 100% vested at grant. In 2001, we issued
to the independent trustees, a total of 37,500 non-qualified stock options.
On the first business day of each fiscal quarter, we issue to each
independent trustee common shares having an aggregate value of $6,250, based on
the per share value of the common shares on the date of grant. The common shares
are 100% vested at grant and, therefore, expensed upon issuance. A total of
4,750 and 5,100 common shares were granted pursuant to the plan for the years
ended December 31, 2001 and 2000, respectively.
The Employees' Plan
Under the employees' plan, we are authorized to issue awards with respect
to a maximum of 5,000,000 common shares. Awards may be granted to employees of
the operating partnership or management service company. No participant may be
granted, in any calendar year, awards in the form of stock options or stock
appreciation rights with respect to more than 390,000 common shares or
restricted share awards for more than 50,000 common shares. We have broad
discretion in determining the vesting terms and other terms applicable to awards
granted under the plan.
The exercise price of each option granted during 2001 was equal to the per
share fair market value of our common shares on the date of grant. Under the
employees' plan, during 2001, we granted 459,000 options which vest 33-1/3% per
year on each anniversary of the date of grant, commencing with the first
anniversary of the date of grant. In addition, we issued 89,700 restricted
shares which vest 100% on the third anniversary of the date of grant.
A summary of the status of our options as of December 31, 2001, December
31, 2000 and December 31, 1999 and the changes during the year ended on those
dates is presented below:
F-19
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
2001 2000 1999
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
# Shares of average # Shares of average # Shares of average
underlying exercise underlying exercise underlying exercise
options price options price options price
----------- -------- ----------- -------- ----------- --------
Outstanding at beginning of the year .. 2,778,536 $22.59 2,365,691 $22.48 2,358,359 $22.47
Granted ............................... 496,500 $24.88 783,375 $22.81 101,000 $22.01
Exercised ............................. 1,073,859 $20.78 357,864 $21.00 25,500 $20.02
Forfeited ............................. 22,002 $21.60 12,666 $23.80 68,168 $22.75
Expired ............................... -- $ -- -- $ -- -- $ --
--------- --------- ---------
Outstanding at end of year ............ 2,179,175 $24.02 2,778,536 $22.59 2,365,691 $22.48
========= ========= =========
Exercisable at end of year ............ 1,104,408 $24.14 1,692,324 $22.36 1,639,722 $22.23
========= ========= =========
Weighted-average fair value ......... $1.01 $1.48 $1.44
===== ===== =====
The fair value of each stock option granted is e stima ted on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2001 2000 1999
----- ----- -----
Expected term 5.00 5.00 5.00
Expected dividend yield 8.20% 8.21% 7.86%
Expected volatility 13.36% 14.53% 18.56%
Risk-free interest rate 4.79% 6.20% 6.50%
The following table summarizes information about stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------ ----------------------------
Weighted
Number Weighted average Number Weighted
Range of outstanding average remaining exercisable average
exercise price at 12/31/01 exercise price contr. life at 12/31/01 exercise price
---------------- ----------- -------------- ----------- ----------- --------------
$15.00 to $20.00 431,009 $19.94 7.6 195,972 $19.95
$20.01 to $25.00 1,092,167 $24.01 7.3 507,941 $23.56
$25.01 to $30.00 655,999 $26.73 7.4 400,495 $26.94
---------------- --------- ------ --- --------- ------
$15.00 to $30.00 2,179,175 $24.02 7.4 1,104,408 $24.14
================ ========= ====== === ========= ======
Had the compensation cost for our stock-based compensation plans been
determined consistent with Statement of Financial Accounting Standards No. 123,
our net income and net income per common share for 2001, 2000 and 1999 would
approximate the pro forma amounts below:
(amounts in thousands, except per share data)
As reported Pro forma As reported Pro forma As reported Pro forma
12/31/01 12/31/01 12/31/00 12/31/00 12/31/99 12/31/99
----------- --------- ----------- --------- ----------- ---------
SFAS No. 123 charge........................... $ -- $ 2,446 $ -- $ 1,700 $ -- $ 944
APB25 charge.................................. $ 1,810 $ -- $ 937 $ -- $ -- $ --
Net income applicable to common shareholders.. $94,579 $93,943 $62,434 $61,671 $73,991 $73,047
Net income per common share-basic............. $ 2.57 $ 2.56 $ 1.72 $ 1.70 $ 1.95 $ 1.93
Net income per common share-diluted........... $ 2.51 $ 2.49 $ 1.71 $ 1.69 $ 1.93 $ 1.91
The effects of applying Statement of Financial Accounting Standards No. 123
in this pro forma disclosure are not indicative of future amounts.
F-20
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(16) Capital Shares
Our board of trustees is authorized to provide for the issuance of
100,000,000 common shares and 20,000,000 preferred shares in one or more series,
to establish the number of shares in each series and to fix the designation,
powers, preferences and rights of each such series and the qualifications,
limitations or restrictions thereof. As of December 31, 2001, 37,015,887 and
3,773,585 common shares and Series D Convertible Preferred Shares were issued
and outstanding, respectively. The Series D Convertible Preferred Shares are
convertible at the holder's option on a one-for-one basis into our common
shares, subject to certain adjustments, and may not be redeemed by us before
December 29, 2004. In addition to the 37,015,887 common units outstanding which
were held by Prentiss Properties Trust at December 31, 2001, the operating
partnership had 1,522,036 common units outstanding, all of which are redeemable
at the option of the holder for a like number of common shares, or at our
option, the cash equivalent thereof.
In June 1998, we privately placed 1,900,000 8.30% Series B Cumulative
Redeemable Perpetual Preferred Units of our operating partnership with Belair
Capital Fund. In connection with the private placement, on June 25, 1998, we
designated 1,900,000 Series B Preferred Shares. We may redeem the Series B
Preferred Units at any time after June 25, 2003 for cash in an amount equal to
the capital account balance subject to certain limitations. The holders of the
Series B Preferred Units may exchange the Series B Preferred Units at any time
on or after June 25, 2008 for Series B Preferred Shares at an exchange rate of
one Series B Preferred Share for one Series B Preferred Unit, subject to
adjustments. As of December 31, 2001, no Series B Preferred Shares were issued
or outstanding.
In September 1999, we privately placed 2,000,000 9.45% Series C Cumulative
Redeemable Perpetual Preferred Units of our operating partnership with Belair
Real Estate Corporation and Belcrest Realty Corporation. In connection with the
private placement, on September 17, 1999, we designated 2,000,000 Series C
Preferred Shares. We may redeem the Series C Preferred Units at any time after
September 17, 2004 for cash in an amount equal to the capital account balance
subject to certain limitations. The holders of the Series C Preferred Units may
exchange the Series C Preferred Units at any time on or after September 17, 2009
for Series C Preferred Shares at an exchange rate of one Series C Preferred
Share for one Series C Preferred Unit, subject to adjustments. As of December
31, 2001, no Series C Preferred Shares were issued or outstanding. See Note (23)
- "Subsequent Events," regarding the repurchase of all of our outstanding Series
C Cumulative Redeemable Perpetual Preferred Units.
In April 2001, we completed an asset exchange with Brandywine Realty Trust.
As part of that exchange, we acquired Brandywine's Northern Virginia assets
which includes a 25% non-controlling interest in the Tysons International
Partners joint venture that owns two office properties. In exchange for the
joint venture interest, we issued to Brandywine a combination of 200,000 7.50%
Series E Cumulative Preferred Units of our operating partnership and 26,768
common units of our operating partnership. The holders of the Series E Preferred
Units may choose to have the Series E Preferred Units redeemed at any time on or
after April 10, 2004. The Series E Preferred Units are redeemable for either
$10.0 million plus accrued but unpaid distributions or, at our option, common
shares having a market value equal to the redemption price. In addition, each
common unit held by Brandywine is exchangeable after April 10, 2003, for either
cash equal to the trading price of one common share at the time of the exchange
or, at our option, one common share.
The Series B and C Perpetual Preferred Units and Series E Preferred Units
are accounted for at their redemption value in the line item minority interest
in operating partnership on our consolidated balance sheet.
During 1998, our board of trustees authorized the repurchase of up to 2.0
million common shares in the open market or negotiated private transactions.
Through December 31, 1999, we purchased 1.5 million common shares at an average
purchase price of $22.70 per share. On January 4, 2000, the board of trustees
authorized a 1.5 million-share increase in the share repurchase program bringing
the total authorization to 3.5 million common shares. Immediately following such
authorization, we repurchased 1.5 million shares from an institutional owner at
$19.00 per share. On May 9, 2001, the board of trustees authorized an additional
1.0 million-share increase in the share repurchase program bringing the total
authorization to 4.5 million shares. During the year ended December 31, 2001,
pursuant to the share repurchase program, we purchased, in the open market,
410,900 shares at an average purchase price of $24.32 per share. At December 31,
2001, we have the ability to purchase an additional 1.1 million shares under the
share repurchase program.
F-21
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(17) Earnings per Share
We calculate earnings per share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share" which requires a dual
presentation of basic and diluted earnings per share on the face of the income
statement. Additionally, the statement requires a reconciliation of the
numerator and denominator used in computing basic and diluted earnings per
share. The table below presents a reconciliation of the numerator and
denominator used to calculate basic and diluted earnings per share for the years
ended December 31, 2001 and 2000:
(in thousands, except per share data)
Reconciliation of the numerator used for basic earnings per share 2001 2000
-------- -------
Net income................................................................ $102,466 $69,585
Preferred dividends....................................................... (7,887) (7,151)
-------- -------
Net income available to common shareholders............................... $ 94,579 $62,434
======== =======
Reconciliation of the denominator used for basic earnings per share
Weighted average common shares outstanding................................ 36,736 36,273
======== =======
Basic earnings per share.................................................. $ 2.57 $ 1.72
======== =======
Reconciliation of the numerator used for dilutive earnings per share
Net income................................................................ $102,466 $69,585
Preferred dividends....................................................... -- (7,151)
-------- -------
$102,466 $62,434
======== =======
Reconciliation of the denominator used for dilutive earnings per share
Weighted average common shares outstanding................................ 36,736 36,273
Preferred shares /(1)/.................................................... 3,774 --
Options................................................................... 339 242
-------- -------
Weighted average common shares and common share equivalents............... 40,849 36,515
======== =======
Diluted earnings per share................................................ $ 2.51 $ 1.71
======== =======
/(1)/Preferred shares for the year ended December 31, 2000 are excluded from
the denominator in calculating dilutive earnings per share as such shares
were anti-dilutive for the period; therefore, the numerator used in the
calculation of dilutive earnings per share is income available to common
shareholders for the year ended December 31, 2000 as compared to the year
ended December 31, 2001, for which the numerator is net income.
(18) Commitments and Contingencies
Legal Matters
We are subject to various legal proceedings and claims that arise in the
ordinary course of business. These matters are generally covered by insurance.
We believe that the final outcome of such matters will not have a material
adverse effect on our financial position, results of operations or liquidity.
Environmental Matters
We obtain environmental site assessments for all acquired properties prior
to acquisition. The environmental site assessments have not revealed any
environmental condition, liability or compliance concern that we believe may
have a material adverse effect on our business, assets or results or operations,
nor are we aware of any such condition, liability or concern. It is possible
that the environmental site assessments relating to any one of the properties or
F-22
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
properties to be acquired in the future do not reveal all environmental
conditions, liabilities or compliance concerns or that there are material
environmental conditions, liabilities or compliance concerns that arose after
the related environmental site assessment report was completed, of which we are
otherwise unaware.
Development Activity
We are party to several construction contracts as part of our development
activities. The following office properties are currently under development:
Development Net rentable Estimated Estimated shell
Properties Segment Market square feet/(1)/ cost/(2)/ completion date/(3)/
--------------------------- ------------------- ------------ ---------------- ------------- ---------------------
(in thousands) (in millions)
Barton Skyway IV Southwest Austin 223 $38.6 November 2001
Carlsbad Pacific Center III Southern California San Diego 40 7.5 October 2001
Willow Oaks III Mid-Atlantic Metro. Washington, DC 182 37.6 January 2002
--- -----
445 $83.7
=== =====
/(1)/Net rentable square feet defines the area of a property for which a tenant
is required to pay rent, which includes the actual rentable area plus a
portion of the common area of the property allocated to the tenant.
/(2)/As of December 31, 2001, we have incurred $64.4 million of the total
estimated cost of our development properties.
/(3)/We classify our construction projects as development properties until the
projects are substantially complete and ready for their intended use.
Typically, this includes shell completion and improvements made to the net
rentable area within the building.
Insurance
We have and will keep in force comprehensive insurance, including
liability, fire, workers' compensation, extended coverage, rental loss and, when
available on reasonable commercial terms, flood and earthquake insurance, with
policy specifications, limits and deductibles customarily carried for similar
properties. We currently maintain insurance to cover environmental conditions
and business interruption if and when they occur. This policy covers both
governmental and third-party claims associated with the covered environmental
conditions. Our real property insurance policies exclude earthquake coverage for
properties located within California. As a result, we maintain a $100 million
blanket earthquake policy on the properties we own in Northern and Southern
California. Certain types of losses, however, generally of a catastrophic
nature, such as acts of war, are either uninsurable or the cost of obtaining
insurance is so high that it is more prudent to accept the risk of loss. Our
real property insurance policies put into effect before September 11, 2001 do
not expressly exclude coverage from hostile acts, except for acts of war.
Following the terrorist acts of September 11, 2001, however, insurance policies
purchased by us may expressly exclude hostile acts, and it may be impossible to
obtain insurance covering terrorist attacks. We may not be able to purchase
policies in the future with coverage limits and deductibles similar to those
that were available before September 11, 2001. In addition, we expect our
insurance premiums to increase in the future, which may have an adverse impact
on our cash flow. We believe that our properties are adequately insured in
accordance with industry standards.
(19) Recently Issued Accounting Standards
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The statement which is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years, addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. The impact from the
implementation of this statement, which we believe will not have a material
impact on our financial statements, will be dependent upon (1) which if any of
our assets qualify as held for sale at January 1, 2002 or at any point in time
thereafter; (2) whether the carrying amount of such assets determined to be held
for sale is greater than the fair value less cost of sale of the assets; and (3)
whether the carrying amount of assets determined not to be held for sale is
recoverable from the undiscounted future cash flow from operations and from the
eventual sale of the assets.
F-23
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(20) Segment Information
Our primary business is the ownership and operation of office and
industrial properties throughout the United States. We have determined that our
reportable segments are those that are based on our method of internal
reporting, which disaggregates our business by geographic region. Our
transactions with Brandywine Realty Trust, which were completed during 2001,
included the sale of all of our properties in our Northeast Region and as a
result, at December 31, 2001, we no longer have operations in the Northeast
Region. In addition, during December 2001, we changed our internal reporting
dividing our West Region into separate Northern and Southern California Regions.
As of December 31, 2001, our reportable segments include our five regions (1)
Mid-Atlantic; (2) Midwest; (3) Southwest; (4) Northern California; and (5)
Southern California. For comparative purposes, the results of operations, of
prior years, attributable to our West Region have been reclassified into
separate Northern and Southern California Regions.
The table below presents information about net income and segment assets
used by our chief operating decision maker as of and for the years ended
December 31, 2001, 2000, and 1999, respectively:
For the Year Ended and As of December 31, 2001
(in thousands) Corporate not
Mid- Northern Southern Total allocable
Atlantic Midwest Northeast Southwest California California segments to segments
-------- -------- --------- --------- ---------- ---------- ---------- -------------
Revenues:
Rental income $ 93,099 $ 68,918 $8,166 $ 93,314 $ 44,160 $ 31,720 $ 339,377 $ --
Management and other
fees, net 726 79 748 1,596 280 120 3,549 1,493
-------- -------- ------ -------- -------- -------- ---------- --------
Total revenues 93,825 68,997 8,914 94,910 44,440 31,840 342,926 1,493
-------- -------- ------ -------- -------- -------- ---------- --------
Expenses:
Property operating and
maintenance 19,942 13,757 1,631 24,228 12,646 6,709 78,913 --
Real estate taxes 6,995 11,911 558 13,156 3,343 2,392 38,355 --
General & administrative
and personnel costs 560 308 192 541 25 579 2,205 8,191
Interest expense -- -- -- -- -- -- -- 64,472
Amortization of deferred
financing costs -- -- -- -- -- -- -- 1,607
Depreciation and
amortization 17,489 10,289 1,587 20,068 6,898 7,864 64,195 73
-------- -------- ------ -------- -------- -------- ---------- --------
Total expenses 44,986 36,265 3,968 57,993 22,912 17,544 183,668 74,343
-------- -------- ------ -------- -------- -------- ---------- --------
Equity in income of joint
ventures and
unconsolidated
subsidiaries 935 1,070 (291) 4,305 (51) 370 6,338 (3,207)
Merger termination fee, net -- -- -- -- -- -- -- 17,000
-------- -------- ------ -------- -------- -------- ---------- --------
Income before gain or
loss, minority
interests, and
extraordinary items 49,774 33,802 4,655 41,222 21,477 14,666 165,596 (59,057)
Gain on sales (4,949) 10,147 1,472 -- -- 7,225 13,895 --
Loss on investment in
securities -- -- -- -- -- -- -- --
Minority interests -- -- -- -- -- -- -- (17,601)
-------- -------- ------ -------- -------- -------- ---------- --------
Income before
extraordinary items $ 44,825 $ 43,949 $6,127 $ 41,222 $ 21,477 $ 21,891 $ 179,491 $(76,658)
======== ======== ====== ======== ======== ======== ========== ========
Total assets $592,023 $383,018 $ -- $550,069 $270,216 $196,132 $1,991,458 $ 39,135
======== ======== ====== ======== ======== ======== ========== ========
Consolidated
total
------------
Revenues:
Rental income $ 339,377
Management and other
fees, net 5,042
----------
Total revenues 344,419
----------
Expenses:
Property operating and
maintenance 78,913
Real estate taxes 38,355
General & administrative
and personnel costs 10,396
Interest expense 64,472
Amortization of deferred
financing costs 1,607
Depreciation and
amortization 64,268
----------
Total expenses 258,011
----------
Equity in income of joint
ventures and
unconsolidated
subsidiaries 3,131
Merger termination fee, net 17,000
----------
Income before gain or
loss, minority
interests, and
extraordinary items 106,539
Gain on sales 13,895
Loss on investment in
securities --
Minority interests (17,601)
----------
Income before
extraordinary items $ 102,833
==========
Total assets $2,030,593
==========
F-24
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
For the Year Ended and As of December 31, 2000
(in thousands) Corporate not
Mid- Northern Southern Total allocable
Atlantic Midwest Northeast Southwest California California segments to segments
-------- -------- --------- --------- ---------- ---------- ---------- -------------
Revenues:
Rental income $ 78,868 $ 80,445 $ 29,037 $ 80,089 $ 36,737 $ 30,677 $ 335,853 $ --
Management and other
fees, net 447 43 517 2,590 208 229 4,034 521
-------- -------- -------- -------- -------- -------- ---------- --------
Total revenues 79,315 80,488 29,554 82,679 36,945 30,906 339,887 521
-------- -------- -------- -------- -------- -------- ---------- --------
Expenses:
Property operating and
maintenance 18,373 15,769 5,919 22,178 10,056 5,710 78,005 --
Real estate taxes 5,763 13,295 2,204 11,639 3,008 2,491 38,400 --
General & administrative
and personnel costs 510 311 544 408 95 690 2,558 7,232
Interest expense -- -- -- -- -- -- -- 71,208
Amortization of deferred
financing costs -- -- -- -- -- -- -- 1,519
Depreciation and
amortization 15,387 11,640 5,922 18,182 5,238 6,959 63,328 71
-------- -------- -------- -------- -------- -------- ---------- --------
Total expenses 40,033 41,015 14,589 52,407 18,397 15,850 182,291 80,030
-------- -------- -------- -------- -------- -------- ---------- --------
Equity in income of joint
ventures and
unconsolidated subsidiaries 252 429 (469) 4,189 999 638 6,038 (2,195)
Merger termination fee, net -- -- -- -- -- -- -- 4,091
-------- -------- -------- -------- -------- -------- ---------- --------
Income before gain or loss,
minority interests, and
extraordinary items 39,534 39,902 14,496 34,461 19,547 15,694 163,634 (77,613)
Gain on sales 14 1,288 352 (1,911) 478 -- 221 --
Loss on investment in
securities -- -- -- -- -- -- -- (1,000)
Minority interests -- -- -- -- -- -- -- (15,657)
-------- -------- -------- -------- -------- -------- ---------- --------
Income before extraordinary
items $ 39,548 $ 41,190 $ 14,848 $ 32,550 $ 20,025 $ 15,694 $ 163,855 $(94,270)
======== ======== ======== ======== ======== ======== ========== ========
Total assets $457,762 $413,338 $214,258 $516,723 $267,173 $206,172 $2,075,426 $ 42,449
======== ======== ======== ======== ======== ======== ========== ========
Consolidated
total
------------
Revenues:
Rental income $ 335,853
Management and other
fees, net 4,555
----------
Total revenues 340,408
----------
Expenses:
Property operating and
maintenance 78,005
Real estate taxes 38,400
General & administrative
and personnel costs 9,790
Interest expense 71,208
Amortization of deferred
financing costs 1,519
Depreciation and
amortization 63,399
----------
Total expenses 262,321
----------
Equity in income of joint
ventures and
unconsolidated subsidiaries 3,843
Merger termination fee, net 4,091
----------
Income before gain or loss,
minority interests, and
extraordinary items 86,021
Gain on sales 221
Loss on investment in
securities (1,000)
Minority interests (15,657)
----------
Income before extraordinary
items $ 69,585
==========
Total assets $2,117,875
==========
For the Year Ended and As of December 31, 1999
(in thousands) Corporate not
Mid- Northern Southern Total allocable
Atlantic Midwest Northeast Southwest California California segments to segments
-------- ------- --------- --------- ---------- ---------- -------- -------------
Revenues:
Rental income $71,524 $58,976 $26,968 $72,687 $33,679 $33,313 $297,147 $ --
Management and other
fees, net 30 18 294 2,048 26 145 2,561 764
------- ------- ------- ------- ------- ------- -------- -------
Total revenues 71,554 58,994 27,262 74,735 33,705 33,458 299,708 764
------- ------- ------- ------- ------- ------- -------- -------
Expenses:
Property operating and
maintenance 17,874 12,210 5,327 19,071 8,731 6,390 69,603 --
Real estate taxes 5,278 10,277 2,037 11,100 2,804 2,705 34,201 --
General & administrative
and personnel costs 428 446 384 409 57 626 2,350 6,493
Interest expense -- -- -- -- -- -- -- 59,346
Amortization of deferred
financing costs -- -- -- -- -- -- -- 1,126
Depreciation and
amortization 13,971 10,020 4,969 14,028 4,362 7,132 54,482 53
------- ------- ------- ------- ------- ------- -------- -------
Total expenses 37,551 32,953 12,717 44,608 15,954 16,853 160,636 67,018
------- ------- ------- ------- ------- ------- -------- -------
Consolidated
total
------------
Revenues:
Rental income $297,147
Management and other
fees, net 3,325
--------
Total revenues 300,472
--------
Expenses:
Property operating and
maintenance 69,603
Real estate taxes 34,201
General & administrative
and personnel costs 8,843
Interest expense 59,346
Amortization of deferred
financing costs 1,126
Depreciation and
amortization 54,535
--------
Total expenses 227,654
--------
F-25
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
For the Year Ended and As of December 31, 1999
(in thousands) Corporate not
Mid- Northern Southern Total allocable
Atlantic Midwest Northeast Southwest California California segments to segments
-------- -------- --------- --------- ---------- ---------- ---------- -------------
Equity in income of joint
ventures and unconsolidated
subsidiaries 1,631 2,411 (169) 2,600 691 (160) 7,004 (2,710)
-------- -------- -------- -------- -------- -------- ---------- --------
Income before gain or
loss, minority
interests, and
extraordinary items 35,634 28,452 14,376 32,727 18,442 16,445 146,076 (68,964)
Gain on sales 2,732 10,587 -- 23 -- 2,763 16,105 --
Minority interests -- -- -- -- -- -- -- (12,735)
-------- -------- -------- -------- -------- -------- ---------- --------
Income before
extraordinary items $ 38,366 $ 39,039 $ 14,376 $ 32,750 $ 18,442 $ 19,208 $ 162,181 $(81,699)
======== ======== ======== ======== ======== ======== ========== ========
Total assets $448,106 $412,712 $214,959 $463,446 $201,741 $218,859 $1,959,823 $ 34,840
======== ======== ======== ======== ======== ======== ========== ========
Consolidated
total
------------
Equity in income of joint
ventures and unconsolidated
subsidiaries 4,294
----------
Income before gain or
loss, minority
interests, and
extraordinary items 77,112
Gain on sales 16,105
Minority interests (12,735)
----------
Income before
extraordinary items $ 80,482
==========
Total assets $1,994,663
==========
(21) Selected Quarterly Financial Data (Unaudited)
The following schedule is a summary of the quarterly results of operations
for the years ended December 31, 2001, 2000 and 1999:
(amounts in thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- --------
Year ended December 31, 2001
Revenue....................................... $88,398 $85,587 $87,143 $83,291 $344,419
Income before gain or loss, minority interests
and extraordinary items...................... 28,707 32,745 22,049 23,038 106,539
Net income.................................... 29,323 36,472 17,848 18,823 102,466
Net income per common share-basic............. $ 0.75 $ 0.94 $ 0.43 $ 0.45 $ 2.57
Net income per common share-diluted........... $ 0.72 $ 0.90 $ 0.43 $ 0.45 $ 2.51
Year ended December 31, 2000
Revenue....................................... $81,113 $85,284 $84,412 $89,599 $340,408
Income before gain or loss, minority interests
and extraordinary items...................... 19,805 20,572 24,245 21,399 86,021
Net income.................................... 16,947 17,835 18,258 16,545 69,585
Net income per common share-basic............. $ 0.42 $ 0.44 $ 0.45 $ 0.40 $ 1.72
Net income per common share-diluted........... $ 0.42 $ 0.44 $ 0.45 $ 0.40 $ 1.71
Year ended December 31, 1999
Revenue....................................... $71,362 $73,893 $76,728 $78,489 $300,472
Income before gain or loss, minority interests
and extraordinary items...................... 19,880 18,882 18,728 19,622 77,112
Net income.................................... 17,255 16,401 17,196 29,630 80,482
Net income per common share-basic............. $ 0.41 $ 0.39 $ 0.41 $ 0.74 $ 1.95
Net income per common share-diluted........... $ 0.41 $ 0.39 $ 0.41 $ 0.72 $ 1.93
(22) Income Taxes
We have elected to be taxed as a REIT under sections 856 through 860 of the
Internal Revenue Code of 1986, commencing with our taxable year ended December
31, 1996. To qualify as a REIT, we must meet a number of organizational and
operational requirements, including a requirement that we currently distribute
at least 90% of our adjusted taxable income to our shareholders. It is our
current intention to adhere to these requirements and maintain our REIT status.
As a REIT, we generally will not be subject to corporate level federal income
tax on taxable income we distribute currently to our shareholders. If we fail to
qualify as a REIT in any taxable year, we will be subject to federal income
taxes at regular corporate rates (including any applicable alternative minimum
tax) and may not be able to qualify as a REIT for four subsequent taxable years.
Even if we qualify for taxation as a REIT, we may be
F-26
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
subject to certain state and local taxes on our income and property, and to
federal income and excise taxes on our undistributed taxable income. In
addition, taxable income from non-REIT activities managed through taxable REIT
subsidiaries is subject to federal, state and local income taxes.
Reconciliation between GAAP Net Income and Taxable Income
The following is a reconciliation of GAAP net income to taxable income for
the years ended December 31, 2001, 2000 and 1999:
(in thousands) 2001 2000 1999
--------- -------- --------
GAAP net income $102,466 $69,585 $ 80,482
GAAP loss (net income) of taxable
subsidiaries included above 339 (1,017) (2,174)
-------- ------- --------
GAAP net income from REIT operations 102,805 68,568 78,308
-------- ------- --------
GAAP to tax adjustments:/(1)/
Depreciation and amortization 5,551 7,093 5,690
Gains and losses from capital transactions/(2)/ (17,645) 842 (14,831)
Straight-line rent adjustment, net of rents
received in advance (8,231) (8,595) (3,167)
Capitalized operating expenses and interest cost
related to development projects (4,955) (2,392) (6,214)
Interest income 1,439 3,992 4,340
Compensation expense (3,199) 565 36
Other differences, net (467) (407) (452)
-------- ------- --------
Total GAAP to tax adjustments (27,507) 1,098 (14,598)
-------- ------- --------
Adjusted taxable income subject to distribution
requirement/(3)/ $ 75,298 $69,666 $ 63,710
======== ======= ========
/(1)/All adjustments to GAAP net income from REIT operations are net of amounts
attributable to minority interest.
/(2)/Represents the GAAP to tax difference for gains and losses including
tax-deferred gain on transactions qualifying under Section 1031 of the
Internal Revenue Code.
/(3)/The distribution requirement was 90% in 2001 and 95% in 1999 and 2000,
respectively.
Characterization of Distributions
The classification of distributions presented below is determined out of
our earnings and profits as defined by Section 316 of the Internal Revenue Code,
which differs from federal taxable income.
The following table characterizes distributions paid per common share for
the years ended December 31, 2001, 2000, and 1999:
(in thousands) 2001 2000 1999
-------------- -------------- --------------
Ordinary income $1.801 86.14% $1.629 85.97% $1.529 88.90%
Return of capital $0.185 8.90% $0.174 9.18% $0.174 10.11%
Capital gains $0.104 4.96% $0.092 4.85% $0.017 0.99%
------ ------ ------
$2.090 $1.895 $1.720
====== ====== ======
(23) Subsequent Events
Using proceeds from our revolving credit facility, in January 2002, we
contributed $3.0 million to a joint venture established to develop two
multi-story office buildings in Del Mar, California. Our contribution represents
a 70% controlling interest in the joint venture. Also using proceeds from our
revolving credit facility, we made a loan totaling $6.6 million to the joint
venture. The loan, which matures in January 2005, bears interest at 10% per
annum for the first twelve months of the loan term and 12% thereafter. The loan
requires interest only payments until maturity.
F-27
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
On January 31, 2002, using proceeds from our revolving credit facility, we
acquired from Teachers Insurance and Annuity Association of America, the $47.0
million mortgage loan on the Burnett Plaza property. The loan was originally
scheduled to mature February 1, 2002. The loan bears interest at 7.50% through
March 2002 and 10% through its maturity on December 31, 2002. At December 31,
2001, the Burnett Plaza property, a 1.0 million net rentable square foot office
building in Downtown Fort Worth was owned pursuant to a joint venture agreement
between us and an affiliate of Lend Lease Real Estate Investments as 20% and 80%
owners, respectively. On March 7, 2002, we purchased from Burnett Plaza - VEF
III, L.P., an affiliate of Lend Lease Real Estate Investments, its 80% interest
in the joint venture for a purchase price of approximately $51.2 million. The
Burnett transaction was funded with proceeds from our revolving credit facility
and in part by the consummation of the private placement of 613,750 common
shares of beneficial interest with Salomon Smith Barney Inc. The private
placement closed in February 2002 with net proceeds from the sale of the common
shares totaling approximately $16.5 million after underwriting discounts and
commissions and before offering expenses. Salomon Smith Barney Inc. was granted
registration rights and a thirty-day option to purchase up to an additional
92,063 common shares at $28.35 per common share.
In January 2002, we entered into an interest rate swap agreement with a
notional amount of $50.0 million which fixed 30-day LIBOR at 2.2775%. The swap,
which matures in January 2003, effectively fixes the interest rate at 3.6525% on
$50.0 million of variable rate borrowings.
Using proceeds from our revolving credit facility, on January 3, 2002, we
repurchased all of our outstanding units of 9.45% Series C Cumulative Redeemable
Perpetual Preferred Units of our operating partnership for approximately $50.6
million, including accrued and unpaid dividends.
F-28
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Trustees and Shareholders
Of Prentiss Properties Trust:
Our audits of the consolidated financial statements referred to in our report
dated February 6, 2002, except as to Note (23) for which the date is March 7,
2002, appearing on page F-2 of this Annual Report on Form 10-K also included an
audit of the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 6, 2002
F-29
Schedule III
PRENTISS PROPERTIES TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(dollars in thousands)
Initial cost Costs
----------------------- capitalized
Buildings and subsequent
Property name Market Encumbrances Land improvements to acquisition
--------------------------- ----------------- ------------ ------- ------------- --------------
Operating Properties
Barton Skyway I Austin $ 3,445 $21,578 $ 35
Barton Skyway II Austin 3,285 21,747 --
Barton Skyway III Austin 3,044 20,856 --
Cielo Center Austin 7,083 40,334 15
Spyglass Point Austin 1,612 6,465 1
Cumberland Office Park Atlanta $14,400 10,550 28,773 4,822
123 North Wacker Drive Chicago 13,163 74,599 3,385
1717 Deerfield Road Chicago 14,200 3,237 18,481 --
1800 Sherman Avenue Chicago 2,278 13,099 61
Salton Chicago 2,180 5,351 --
701 Warrenville Road Chicago 1,564 8,863 6
Bannockburn Centre Chicago 26,658 7,927 23,835 --
Chicago Industrial Chicago 11,630 2,871 17,615 10
Corporetum Office Campus Chicago 25,280 7,607 43,104 469
O'Hare Plaza II Chicago 11,400 3,854 22,017 323
One O'Hare Centre Chicago 40,860 10,160 57,514 369
Bachman East Dallas/Fort Worth 1,305 8,773 51
Bachman West Dallas/Fort Worth 2,876 828 4,688 85
Cottonwood Office Center Dallas/Fort Worth 8,348 1,735 9,865 --
IBM Call Center Dallas/Fort Worth 13,530 1,418 6,063 3
Lakeview Center Dallas/Fort Worth 753 5,020 10
Millennium Center Dallas/Fort Worth 989 6,392 614
Park West C2 Dallas/Fort Worth 34,460 8,360 29,640 6,238
Park West E1 Dallas/Fort Worth 12,100 2,857 16,499 --
Park West E2 Dallas/Fort Worth 7,900 2,079 11,863 --
Walnut Glen Tower Dallas/Fort Worth 34,384 4,300 32,669 3,496
WestPoint Office Building Dallas/Fort Worth 12,610 2,844 12,165 28
Carrara Place Denver 4,687 26,561 39
Highland Court Denver 4,729 1,588 9,010 56
Orchard Place I & II Denver 1,531 8,653 42
PacifiCare Building Denver 12,060 3,045 17,392 325
Panorama Point Denver 1,241 7,043 57
International Energy Center Houston 854 4,871 152
One Westchase Center Houston 24,029 7,864 44,564 309
Westheimer Central Plaza Houston 5,753 2,266 12,845 142
Los Angeles Industrial Los Angeles 31,300 6,429 36,431 1,143
The Academy Los Angeles 4,639 18,557 160
2411 Dulles Corner Road Metro. Wash., DC 16,700 3,973 22,682 56
2455 Horsepen Road Metro. Wash., DC 8,052 2,099 11,983 93
3130 Fairview Park Drive Metro. Wash., DC 22,848 3,141 21,314 --
3141 Fairview Park Drive Metro. Wash., DC 12,800 4,000 15,980 422
4401 Fair Lakes Court Metro. Wash., DC 3,200 933 5,232 254
6600 Rockledge Drive Metro. Wash., DC 22,428 --
7101 Wisconsin Avenue Metro. Wash., DC 20,910 5,170 29,298 1,096
Gross amount
carried at close of period
------------------------------------- Depreciable
Land and Building and Accumulated Year of Date live
Property name improvements improvements Total depreciation construction acquired (years)
--------------------------- ------------ ------------ ------- ------------ ------------ ---------- -----------
Operating Properties
Barton Skyway I $ 3,445 $21,613 $25,058 $1,299 1999 (2) (3)
Barton Skyway II 3,285 21,747 25,032 642 2000-2001 (2) (3)
Barton Skyway III 3,044 20,856 23,900 273 2000-2001 (2) (3)
Cielo Center 7,083 40,349 47,432 1,291 1984 9/21/00 (3)
Spyglass Point 1,612 6,466 8,078 393 1998-1999 (2) (3)
Cumberland Office Park 10,550 33,595 44,145 7,412 1972-1999(1) 1/16/91 (3)
123 North Wacker Drive 13,163 77,984 91,147 3,653 1986 11/18/99 (3)
1717 Deerfield Road 3,237 18,481 21,718 2,337 1985 12/11/96 (3)
1800 Sherman Avenue 2,278 13,160 15,438 1,120 1986 8/5/98 (3)
Salton 2,180 5,351 7,531 111 2000-2001 (2) (3)
701 Warrenville Road 1,564 8,869 10,433 759 1988 8/10/98 (3)
Bannockburn Centre 7,927 23,835 31,762 1,391 1999 (2) (3)
Chicago Industrial 2,871 17,625 20,496 2,803 1987-1999 Various (3)
Corporetum Office Campus 7,607 43,573 51,180 5,043 1984-1987 5/6/97 (3)
O'Hare Plaza II 3,854 22,340 26,194 2,814 1986 12/13/96 (3)
One O'Hare Centre 10,160 57,883 68,043 4,806 1984 8/27/98 (3)
Bachman East 1,305 8,824 10,129 1,180 1986 8/20/96 (3)
Bachman West 828 4,773 5,601 558 1986 6/4/97 (3)
Cottonwood Office Center 1,735 9,865 11,600 1,259 1986 10/24/96 (3)
IBM Call Center 1,418 6,066 7,484 494 1998 (2) (3)
Lakeview Center 753 5,030 5,783 294 1999 (2) (3)
Millennium Center 989 7,006 7,995 396 1999 (2) (3)
Park West C2 9,696 34,542 44,238 5,293 1989 9/5/95 (3)
Park West E1 2,857 16,499 19,356 2,141 1982 10/23/96 (3)
Park West E2 2,079 11,863 13,942 1,540 1985 10/23/96 (3)
Walnut Glen Tower 5,612 34,853 40,465 9,144 1985 1/1/94 (3)
WestPoint Office Building 2,844 12,193 15,037 1,012 1998 (2) (3)
Carrara Place 4,687 26,600 31,287 2,606 1982 1/30/98 (3)
Highland Court 1,588 9,066 10,654 919 1986 12/12/97 (3)
Orchard Place I & II 1,531 8,695 10,226 534 1980 7/20/99 (3)
PacifiCare Building 3,045 17,717 20,762 2,226 1983 12/20/96 (3)
Panorama Point 1,241 7,100 8,341 710 1983 12/30/97 (3)
International Energy Center 854 5,023 5,877 471 1982 6/12/98 (3)
One Westchase Center 7,864 44,873 52,737 4,002 1982 6/12/98 (3)
Westheimer Central Plaza 2,266 12,987 15,253 1,173 1982 6/12/98 (3)
Los Angeles Industrial 6,429 37,574 44,003 6,453 1973-1992 Various (3)
The Academy 4,639 18,717 23,356 2,069 1991 7/31/97 (3)
2411 Dulles Corner Road 3,973 22,738 26,711 2,830 1990 12/31/96 (3)
2455 Horsepen Road 2,099 12,076 14,175 1,538 1989 12/31/96 (3)
3130 Fairview Park Drive 3,141 21,314 24,455 1,511 1997-1999 (2) (3)
3141 Fairview Park Drive 4,007 16,395 20,402 2,553 1988 2/22/96 (3)
4401 Fair Lakes Court 933 5,486 6,419 723 1988 1/14/97 (3)
6600 Rockledge Drive 22,428 22,428 1,608 1981 6/30/98 (3)
7101 Wisconsin Avenue 5,170 30,394 35,564 3,267 1975 12/30/97 (3)
F-30
Initial cost Costs
--------------------------------------- capitalized
Buildings and subsequent
Property name Market Encumbrances Land improvements to acquisition
------------- ---------------- ------------ -------- ------------- --------------
8521 Leesburg Pike Metro. Wash., DC 15,435 2,130 5,955 5,339
Calverton Office Park Metro. Wash., DC 2,885 25,965 966
Campus Point Metro. Wash., DC 5,730 24,469 37
Fairmont Building Metro. Wash., DC 3,750 17,656 333
Greenwood Center Metro. Wash., DC 3,092 21,818 --
Metro. Wash., D.C. Industrial Metro. Wash., DC 5,008 23,753 2,183
Oakwood Center Metro. Wash., DC 2,660 12,224 18
Park West at Dulles Corner Metro. Wash., DC 3,000 16,215 15
Plaza 1900 Metro. Wash., DC 6,274 31,323 206
Research Office Center I, II & III Metro. Wash., DC 44,926 9,124 47,761 81
Willow Oaks I & II Metro. Wash., DC 43,348 10,857 61,526 26
Natomas Corporate Center Sacramento 36,948 11,208 63,466 362
Carlsbad Pacific Center I & II San Diego 4,204 9,811 301
Carlsbad Pacifica San Diego 1,532 6,129 150
Del Mar Gateway San Diego 26,876 5,260 23,419 -
Executive Center Del Mar San Diego 17,917 3,952 12,063 172
Plaza I & II San Diego 2,811 11,246 247
San Diego Industrial San Diego 6,282 25,128 926
The Campus San Diego 1,195 4,779 149
Lake Merritt Tower I San Francisco Bay Area 6,504 36,853 35
The Ordway San Francisco Bay Area 48,936 23,316 54,402 460
World Savings Center San Francisco Bay Area 29,031 7,714 30,856 129
One Northwestern Plaza Sub. Detroit 17,800 27,448 284
-------- -------- ---------- -------
Total Operating Properties 714,234 293,276 1,476,977 36,786
Construction in Progress (4)
Barton Skyway IV Austin 3,865 25,219
Willow Oaks III Metro. Wash., DC 3,611 22,448
Carlsbad Pacific Center III San Diego 2,066 4,255
-------- -------- ---------- -------
Total Construction in Progress -- 9,542 51,922
Land Held for Future Development 45,694 7,622
-------- -------- ---------- -------
Total Real Estate $714,234 $348,512 $1,536,521 $36,786
======== ======== ========== =======
Gross amount
carried at close of period
-------------------------------------
Land and Building and Accumulated Year of Date
Property name improvements improvements Total depreciation construction acquired
------------- ------------ ------------ ---------- ------------ ----------------- --------
8521 Leesburg Pike 2,259 11,165 13,424 2,342 1984 8/17/94
Calverton Office Park 2,885 26,931 29,816 3,015 1981-1987 8/27/97
Campus Point 5,730 24,506 30,236 461 1985 4/1/01
Fairmont Building 3,750 17,989 21,739 980 1964, 1997 11/4/99
Greenwood Center 3,092 21,818 24,910 411 1985 4/1/01
Metro. Wash., D.C. Industrial 5,071 25,873 30,944 6,444 1974-1990 Various
Oakwood Center 2,660 12,242 14,902 230 1982 4/1/01
Park West at Dulles Corner 3,000 16,230 19,230 18 1997 7/2/01
Plaza 1900 6,274 31,529 37,803 590 1989 4/1/01
Research Office Center I, II & III 9,106 47,860 56,966 4,184 1986-1990, 2000(1) 9/9/97
Willow Oaks I & II 10,857 61,552 72,409 5,214 1986-1989 8/18/98
Natomas Corporate Center 11,208 63,828 75,036 7,627 1984-1991 4/2/97
Carlsbad Pacific Center I & II 4,204 10,112 14,316 1,038 1986, 1989 11/13/97
Carlsbad Pacifica 1,532 6,279 7,811 611 1986 2/4/98
Del Mar Gateway 5,260 23,419 28,679 731 2000-2001 (2)
Executive Center Del Mar 3,952 12,235 16,187 1,018 1998 (2)
Plaza I & II 2,811 11,493 14,304 1,115 1988-1989 2/4/98
San Diego Industrial 6,282 26,054 32,336 3,319 1985-1988 Various
The Campus 1,195 4,928 6,123 478 1988 2/4/98
Lake Merritt Tower I 6,504 36,888 43,392 1,230 1990 8/31/00
The Ordway 23,316 54,862 78,178 4,942 1970 5/21/98
World Savings Center 7,714 30,985 38,699 2,317 1985 7/29/97
One Northwestern Plaza 27,732 27,732 3,358 1989 10/23/96
-------- ---------- ---------- --------
Total Operating Properties 296,105 1,510,934 1,807,039 146,324
Construction in Progress (4)
Barton Skyway IV 3,865 25,219 29,084 25 2001 (2)
Willow Oaks III 3,611 22,448 26,059 2001 (2)
Carlsbad Pacific Center III 2,066 4,255 6,321 2001 (2)
-------- -------- ---------- --------
Total Construction in Progress 9,542 51,922 61,464 25
Land Held for Future Development 45,694 7,810 53,504
-------- ---------- ---------- --------
Total Real Estate $351,341 $1,570,666 $1,922,007 $146,349
======== ========== ========== ========
Depreciable
live
Property name (years)
------------- -----------
8521 Leesburg Pike (3)
Calverton Office Park (3)
Campus Point (3)
Fairmont Building (3)
Greenwood Center (3)
Metro. Wash., D.C. Industrial (3)
Oakwood Center (3)
Park West at Dulles Corner (3)
Plaza 1900 (3)
Research Office Center I, II & III (3)
Willow Oaks I & II (3)
Natomas Corporate Center (3)
Carlsbad Pacific Center I & II (3)
Carlsbad Pacifica (3)
Del Mar Gateway (3)
Executive Center Del Mar (3)
Plaza I & II (3)
San Diego Industrial (3)
The Campus (3)
Lake Merritt Tower I (3)
The Ordway (3)
World Savings Center (3)
One Northwestern Plaza (3)
Total Operating Properties
Construction in Progress (4)
Barton Skyway IV (3)
Willow Oaks III (3)
Carlsbad Pacific Center III (3)
Total Construction in Progress
Land Held for Future Development
Total Real Estate
----------
(1) A portion of the real estate project was developed by the company.
(2) The real estate project was developed by the company.
(3) Buildings & improvements - 25 to 40 years.
(4) Construction in progress, as presented above, includes the land and
building cost. It does not include tenant concessions or leasing commission
capitalized to the project.
(5) The aggregate cost for federal income tax purposes was approximately
$1,974,821.
F-31
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Operating Real Estate and Accumulated Depreciation
A summary of activity for real estate and accumulated depreciation for the years
ended December 31, 2001, 2000 and 1999 is as follows:
(in thousands) 2001 2000 1999
---------- ---------- ----------
Operating real estate:
Balance at beginning of the period ............ $1,869,694 $1,780,386 $1,648,732
Beginning construction in progress moved to
operating real estate during the period ... 78,389 68,378 90,282
Additions to and improvement of real estate.. 143,008 116,453 144,855
Cost of operating real estate sold .......... (284,052) (95,523) (103,483)
---------- ---------- ----------
Balance at end of the period .................. $1,807,039 $1,869,694 $1,780,386
========== ========== ==========
Accumulated depreciation:
Balance at beginning of the period ............ $ 126,630 $ 91,461 $ 61,232
Depreciation expense ........................ 39,250 41,032 39,197
Accumulated depreciation of real estate
sold or retired ........................... (19,531) (5,863) (8,968)
---------- ---------- ----------
Balance at end of the period .................. $ 146,349 $ 126,630 $ 91,461
========== ========== ==========
F-32
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRENTISS PROPERTIES TRUST
By: /s/ Thomas P. Simon
------------------------------------------------
Thomas P. Simon
Senior Vice President and Chief Accounting Officer
Date: March 20, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date Signature
---- ---------
March 20, 2002 /s/ Michael V. Prentiss
--------------------------------------------
Michael V. Prentiss
Chairman of the Board and Trustee
March 20, 2002 /s/ Thomas F. August
--------------------------------------------
Thomas F. August
President and Chief Executive Officer
Trustee
March 20, 2002 /s/ Michael A. Ernst
--------------------------------------------
Michael A. Ernst
Executive Vice President and Chief Financial Officer
March 20, 2002 /s/ Thomas P. Simon
--------------------------------------------
Thomas P. Simon
Senior Vice President and Chief Accounting Officer
March 20, 2002 /s/ Thomas J. Hynes, Jr.
--------------------------------------------
Thomas J. Hynes, Jr.
Trustee
March 20, 2002 /s/ Barry J.C. Parker
--------------------------------------------
Barry J.C. Parker
Trustee
March 20, 2002 /s/ Dr. Leonard M. Riggs, Jr.
--------------------------------------------
Dr. Leonard M. Riggs, Jr.
Trustee
March 20, 2002 /s/ Ronald G. Steinhart
--------------------------------------------
Ronald G. Steinhart
Trustee
March 20, 2002 /s/ Lawrence A. Wilson
--------------------------------------------
Lawrence A. Wilson
Trustee