UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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 1-13274
Cali Realty Corporation
(Exact name of registrant as specified in its charter)
Maryland 22-3305147
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
11 Commerce Drive, Cranford, New Jersey 07016-3501
(Address of principal executive office)
(Zip Code)
(908) 272-8000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or such shorter period that the
Registrant was required to file such report) YES [ X ] NO [ ]
and (2) has been subject to such filing requirements for the past ninety (90)
days YES [ X ] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
There were 18,772,337 shares of $.01 par value common stock outstanding
at October 29, 1996.
CALI REALTY CORPORATION
Form 10-Q
INDEX
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995
Consolidated Statements of Operations for the three and nine
month periods ended September 30, 1996 and 1995
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II -Other Information and Signatures
Item 1. Signatures
CALI REALTY CORPORATION
Part I - Financial Information
Item 1 Financial Statements
The information furnished in the accompanying consolidated balance
sheets, statements of operations, of cash flows, and of stockholders'
equity reflect all adjustments consisting of normal, recurring
adjustments, which are, in the opinion of management, necessary for a
fair presentation of the aforementioned financial statements for the
interim periods.
The aforementioned financial statements should be read in conjunction
with the notes to the aforementioned financial statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations and the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.
The results of operations for the three and nine month periods ended
September 30, 1996 are not necessarily indicative of the results to
be expected for the entire fiscal year or any other period.
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
1996 1995
---- ----
ASSETS
Rental property
Land ..................................................................................... $ 47,723 $ 38,962
Buildings and improvements ............................................................... 357,221 319,028
Tenant improvements ...................................................................... 34,733 28,588
Furniture, fixtures and equipment ........................................................ 1,113 1,097
--------- ---------
440,790 387,675
Less - accumulated depreciation and amortization ............................................. (64,322) (59,095)
--------- ---------
Total rental property .................................................................... 376,468 328,580
Cash and cash equivalents .................................................................... 10,351 967
Unbilled rents receivable .................................................................... 18,959 18,855
Deferred charges and other assets, net of accumulated amortization ........................... 11,935 10,873
Restricted cash .............................................................................. 2,650 3,229
Accounts receivable, net of allowance for doubtful accounts of $141 and $134 ................. 1,422 1,341
Other receivables ............................................................................ 54 104
--------- ---------
Total assets ............................................................................. $ 421,839 $ 363,949
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and loans payable .................................................................. $ 112,856 $ 135,464
Dividends and distributions payable .......................................................... 9,615 7,606
Accounts payable and accrued expenses ........................................................ 3,492 3,245
Rents received in advance and security deposits .............................................. 3,819 3,114
Accrued interest payable ..................................................................... 349 629
--------- ---------
Total liabilities ........................................................................ 130,131 150,058
--------- ---------
Minority interest of unitholders in Operating Partnership .................................... 27,375 28,083
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares, none issued
Common stock, $.01 par value, 95,000,000 shares authorized,
18,661,404 shares and 15,104,725 shares outstanding ...................................... 187 151
Additional paid-in capital ................................................................... 263,690 185,657
Retained earnings ............................................................................ 456 --
--------- ---------
Total stockholders' equity ............................................................... 264,333 185,808
--------- ---------
Total liabilities and stockholders' equity ............................................... $ 421,839 $ 363,949
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1996 1995 1996 1995
-------- -------- -------- --------
REVENUES
Base rents .................................................... $ 18,438 $ 12,999 $ 51,713 $ 36,438
Escalations and recoveries from tenants........................ 3,414 2,422 9,646 6,957
Parking and other ............................................. 538 289 1,453 1,161
Interest income ............................................... 128 67 282 243
-------- -------- -------- --------
Total revenues ............................................ 22,518 15,777 63,094 44,799
-------- -------- -------- --------
EXPENSES
Real estate taxes ............................................. 2,188 1,483 6,342 4,234
Utilities ..................................................... 2,222 1,814 5,965 4,650
Operating services ............................................ 2,625 2,084 7,952 5,908
General and administrative .................................... 1,371 856 3,427 2,790
Depreciation and amortization ................................. 3,747 3,009 10,655 8,936
Interest expense .............................................. 2,721 2,347 8,288 6,161
-------- -------- -------- --------
Total expenses ............................................ 14,874 11,593 42,629 32,679
-------- -------- -------- --------
Income before gain on sale of rental property,
minority interest and extraordinary item .................. 7,644 4,184 20,465 12,120
Gain on sale of rental property ............................... -- -- 5,658 --
-------- -------- -------- --------
Income before minority interest
and extraordinary item .................................... 7,644 4,184 26,123 12,120
Minority interest ............................................. 1,045 911 3,866 2,620
-------- -------- -------- --------
Income before extraordinary item .............................. 6,599 3,273 22,257 9,500
Extraordinary item-loss on early retirement of debt
(net of minority interest's share of $86) ................. -- -- 475 --
-------- -------- -------- --------
Net income .................................................... $ 6,599 $ 3,273 $ 21,782 $ 9,500
======== ======== ======== ========
Net income per common share:
Income before extraordinary item-
loss on early retirement of debt .......................... $ 0.39 $ 0.31 $ 1.41 $ 0.91
Extraordinary item-loss on early retirement of debt ........... -- -- (0.03) --
-------- -------- -------- --------
Net income .................................................... $ 0.39 $ 0.31 $ 1.38 $ 0.91
======== ======== ======== ========
Dividends declared per common share ........................... $ 0.45 $ 0.43 $ 1.30 $ 1.23
======== ======== ======== ========
Weighted average common shares outstanding ........................... 17,045 10,400 15,803 10,424
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
----------------------------------
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ....................................................................... $ 21,782 $ 9,500
Adjustments to reconcile net income to net cash
flows provided by operating activities
Depreciation and amortization ................................................ 10,655 8,936
Gain on sale of rental property .............................................. (5,658) --
Minority interest ............................................................ 3,866 2,620
Extraordinary item-loss on early retirement of debt .......................... 475 --
Changes in operating assets and liabilities
Increase in unbilled rents receivable ........................................ (233) (466)
Increase in deferred charges and other assets, net ........................... (3,567) (1,684)
Increase in accounts receivable, net ......................................... (81) (15)
Decrease in other receivables ................................................ 50 218
Increase (decrease) in accounts payable and accrued expenses ................. 247 (140)
Increase in rents received in advance and security deposits .................. 705 803
(Decrease) increase in accrued interest payable .............................. (280) 260
--------- ---------
Net cash provided by operating activities ..................................... 27,961 20,032
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to rental property ..................................................... (60,836) (29,114)
Proceeds from sale of rental property ............................................ 10,324 --
Decrease (increase) in restricted cash ........................................... 579 (962)
--------- ---------
Net cash used in investing activities ......................................... (49,933) (30,076)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and loans payable ........................................ 125,900 28,700
Repayments of mortgages and loans payable ........................................ (148,508) (6,700)
Debt prepayment premiums and other costs ......................................... (312) --
Purchase of treasury stock ....................................................... -- (1,595)
Proceeds from common stock offering .............................................. 76,830 --
Proceeds from stock options exercised ............................................ 260 --
Payment of dividends and distributions ........................................... (22,814) (16,084)
--------- ---------
Net cash provided by financing activities ..................................... 31,356 4,321
--------- ---------
Net increase (decrease) in cash and cash equivalents ............................. 9,384 (5,723)
Cash and cash equivalents, beginning of period ................................... 967 6,394
--------- ---------
Cash and cash equivalents, end of period ......................................... $ 10,351 $ 671
========= =========
Supplemental Cash Flow Information:
Cash paid for interest ........................................................... $ 8,665 $ 5,901
--------- ---------
Interest capitalized ............................................................. $ 97 $ --
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Total
Common Stock Paid-In Retained Stockholders'
Shares Par Value Capital Earnings Equity
--------- --------- --------- --------- ---------
Balance at January 1, 1996 .................. 15,105 $ 151 $ 185,657 -- $ 185,808
Conversions of 92 Units to shares ........... 92 1 978 -- 979
Net income .................................. -- -- -- 21,782 21,782
Dividends ................................... -- -- -- (21,326) (21,326)
Common stock offering ....................... 3,450 35 76,795 -- 76,830
Stock options exercised ..................... 14 -- 260 -- 260
--------- --------- --------- --------- ---------
Balance at September 30, 1996 ............... 18,661 $ 187 $ 263,690 $ 456 $ 264,333
========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
CALI REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Cali Realty Corporation and subsidiaries (the "Company"), a Maryland
corporation, is a fully integrated, self-administered, self-managed real estate
investment trust (REIT) providing leasing, management, acquisition, development,
construction and tenant- related services for its properties. As of September
30, 1996, the Company owned and operated 45 properties, consisting of 44 office
and office/flex buildings totaling approximately 4.3 million square feet and a
327-unit residential complex (the "Properties"). The Properties are located in
New Jersey, New York, and Pennsylvania.
The Company was incorporated on May 24, 1994 and commenced operations on August
31, 1994. On August 31, 1994, the Company completed an initial public offering
and effected a business combination with the Cali Group (not a legal entity).
The Company raised (net of offering costs) approximately $165,518 of capital
through an initial public offering of 10,500,000 shares of common stock, and
used the proceeds to acquire a 78.94 percent interest in Cali Realty, L.P. (the
"Operating Partnership") and related entities, which are the successors to the
operations of the Cali Group. Prior to the completion of the business
combination with the Company, the Cali Group was engaged in development,
ownership and operation of a portfolio of twelve office buildings and one
multi-family residential property, all located in New Jersey (the "Initial
Properties").
In 1994 and 1995, following the Company's initial public offering, the Company
acquired 28 office and office/flex properties totaling 1,723,000 square feet for
approximately $157,000. These properties are all located in New Jersey and New
York.
On March 20, 1996, the Company sold its office building located at 15 Essex Road
in Paramus, New Jersey ("Essex Road") and concurrently acquired a 95,000 square
foot office building at 103 Carnegie Center in Princeton, New Jersey. The
concurrent transactions qualified as a tax-free exchange, as the Company used
substantially all of the proceeds from the sale of Essex Road to acquire the
Princeton property. The financial statements for the nine months ended September
30, 1996 include a gain of $5,658 relating to this transaction.
In advance of the sale of Essex Road, on March 12, 1996, the Company prepaid
$5,492 of the Mortgage Financing (Note 5) and obtained a release of the mortgage
liens on the property. On account of prepayment penalties, loan origination
fees, legal fees and other costs incurred in the retirement of the debt, an
extraordinary loss of $475, net of minority interest's share of the loss ($86),
was recorded for the nine months ended September 30, 1996.
On May 2, 1996, the Company acquired Rose Tree Corporate Center, a two-building
suburban office complex totaling approximately 260,000 square feet, located in
Media, Pennsylvania, for approximately $28,100, which was drawn on one of the
Company's credit facilities.
On July 23, 1996, the Company acquired 222 and 233 Mount Airy Road, two suburban
office buildings totaling approximately 115,000 square feet, located in Basking
Ridge, New Jersey, for approximately $10,500 which was drawn on one of the
Company's credit facilities.
On November 4, 1996, the Company acquired the Harborside Financial Center, a
three-building office complex totaling approximately 1,887,000 square feet of
office and retail space, located on the Hudson River waterfront in Jersey City,
New Jersey ("Harborside"). As part of the purchase, the Company acquired 11.3
acres of land fully-zoned and permitted for an additional 4.1 million square
feet of development and the water rights associated with 27.4 acres of land
extending into the Hudson River immediately east of the existing property,
including two piers with an area of 5.8 acres. The acquisition cost for
Harborside of approximately $287,400 was financed with mortgage debt of $150,000
and with cash of $137,400 which was made available substantially through the
Company's revolving credit facilities (including a new credit facility described
below). The $150,000 debt is comprised of the following: (1) assumption of the
existing mortgage financing on the property of $107,912, which has a fixed
annual interest rate of 7.32 percent and a term of nine years, and (2) a $42,088
mortgage provided by the seller with an annual interest rate comparable with the
current three-year treasury rate and a spread of 90 basis point, which is 6.99
percent, (the rate being adjusted at the end of the third and sixth years based
on the comparable treasury rates at those times, with spreads of 110 basis
points in years four through six, and 130 basis points in years seven through
maturity). In connection with the acquisition of Harborside, the Company
obtained an additional revolving credit facility from Prudential Securities
Credit Corp. ("PSC") totaling $80,000, which bears interest at the one-month
London Inter-Bank Transfer Rate (LIBOR) plus 125 basis points, and matures on
January 15, 1998, unless the Company or the lender elects to extend the maturity
date to not earlier than June 30, 1998, or the facility is refinanced prior to
such date, at the election of either the Company or the lender. The Company drew
on this credit facility and on a previously existing facility to fund a
substantial amount of the cash portion of the Harborside acquisition cost. The
terms of the acquisition of the vacant parcels at Harborside provide for
additional payments (with an estimated net present value of approximately
$5,252) to be made to the seller for development rights if and when the Company
commences construction on the site during the next several years. However, the
agreement provides, among other things, that even if the Company does not
commence construction, the seller may nevertheless require the Company to
acquire these rights during the six-month period after the end of the sixth
year. After such period, the seller's option lapses, but any development in
years 7 through 30 will require a payment, on an increasing scale, for the
development rights.
The Company also intends to acquire through three individual transactions with
separate, unrelated sellers, a three-building office complex, a two-building
office complex and an individual office building (the "Proposed Acquisitions").
The total aggregate initial acquisition cost of the Proposed Acquisitions is
estimated to be approximately $90,600.
The Proposed Acquisitions consist of the following:
(1) The International Court at Airport Business Center is a three-building
office complex comprised of approximately 370,000 square feet located in
Lester, Delaware County, Pennsylvania, to be acquired for approximately
$43,000.
(2) Whiteweld Centre is a three-story, approximately 230,000 net rentable
square foot office building located in Woodcliff Lake, Bergen County, New
Jersey, to be acquired for approximately $35,200.
(3) Five Sentry Parkway East & West is a two-building office complex comprised
of approximately 131,000 net rentable square feet located in Plymouth
Meeting, Montgomery County, Pennsylvania, to be acquired for approximately
$12,400.
Basis of Presentation
The accompanying consolidated financial statements include all accounts of the
Company and its majority-owned subsidiaries, which consist principally of the
Operating Partnership. The Company's investment in Cali Services, Inc. (an
entity formed to provide third party management services in which the Operating
Partnership has a 99 percent interest) is accounted for under the equity method.
All significant intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
Rental Property
Rental properties are stated at cost less accumulated depreciation. Costs
include interest, property taxes, insurance and other project costs incurred
during the period of construction. Ordinary repairs and maintenance are expensed
as incurred; major replacements and betterments are capitalized and depreciated
over their estimated useful lives. Fully depreciated assets are removed from the
accounts. Depreciation is computed on a straight-line basis over the estimated
useful lives of the assets as follows:
Buildings and improvements 39 to 40 years
- --------------------------------------------------------------------------------
Tenant improvements The shorter of the term of the
related lease or useful lives
- --------------------------------------------------------------------------------
Furniture, fixtures and equipment 5 to 10 years
- --------------------------------------------------------------------------------
On a periodic basis, management assesses whether there are any indicators that
the value of the real estate properties may be impaired. A property's value is
impaired only if management's estimate of the aggregate future cash flows
(undiscounted and without interest charges) to be generated by the property are
less than the carrying value of the property. Management does not believe that
the value of any of its real estate properties are impaired.
Deferred Financing Costs
Costs incurred in obtaining financing are capitalized and amortized on a
straight-line basis, which approximates the effective interest method, over the
term of the related indebtedness. Amortization of such costs were $278 and $362
for the three month periods ended September 30, 1996 and 1995, respectively, and
$805 and $1,239 for the nine month periods ended September 30, 1996 and 1995,
respectively.
Deferred Leasing Costs
Costs incurred in connection with leases are capitalized and amortized on a
straight-line basis over the terms of the related leases. Unamortized deferred
leasing costs are charged to amortization expense upon early termination of the
lease.
Revenue Recognition
The Company recognizes base rental revenue on a straight-line basis over the
terms of the respective leases. Unbilled rents receivable represents the amount
by which straight-line rental revenue exceeds rents currently billed in
accordance with the lease agreements. Parking revenue includes income from
parking spaces leased to tenants.
Rental income on residential property under operating leases having terms
generally of one year or less is recognized when earned.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Income and Other Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of
the Code. As a REIT, the Company will not be subject to federal income tax to
the extent it distributes at least 95 percent of its REIT taxable income to its
shareholders. REITs are subject to a number of organizational and operational
requirements. If the Company fails to qualify as a REIT in any taxable year, the
Company will be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate tax rates.
The Company may be subject to certain state and local taxes.
Net Income Per Share
Net income per share is computed using the weighted average common shares
outstanding during the period. The weighted average shares outstanding during
the three month periods ended September 30, 1996 and 1995 were 17,045,063 and
10,400,000 respectively, and the nine month periods ended September 30, 1996 and
1995 were 15,802,573 and 10,424,000, respectively. The assumed exercise of
outstanding stock options using the Treasury Stock method is not considered
dilutive in any period.
Dividends and Distributions Payable
The dividends and distributions payable at September 30, 1996 represent
dividends payable to shareholders of record on October 3, 1996 (18,667,737
shares) and distributions payable to minority interest unitholders (2,699,002
Units) on that same date. The third quarter dividends and distributions of $0.45
per share and per Unit were approved by the Board of Directors on September 20,
1996 and were paid on October 18, 1996.
3. RESTRICTED CASH
Restricted cash includes security deposits for the residential property, and
escrow and reserve funds for debt service, real estate taxes, property
insurance, capital improvements, tenant improvements, and leasing costs
established pursuant to certain mortgage financing arrangements and is comprised
of the following:
September 30, December 31,
1996 1995
------ ------
Escrow and other reserve funds ................... $2,304 $2,901
Residential security deposits .................... 346 328
------ ------
Total restricted cash ......................... $2,650 $3,229
====== ======
4. DEFERRED CHARGES AND OTHER ASSETS
September 30, December 31,
1996 1995
-------- --------
Deferred leasing costs ............................. $ 14,250 $ 13,498
Deferred financing costs ........................... 5,347 5,778
-------- --------
19,597 19,276
Accumulated amortization ........................... (9,075) (9,035)
-------- --------
Deferred charges, net .............................. 10,522 10,241
Prepaid expenses and other assets .................. 1,413 632
-------- --------
Total deferred charges and other assets ......... $ 11,935 $ 10,873
======== ========
5. MORTGAGES AND LOANS PAYABLE
September 30, December 31,
1996 1995
-------- --------
Mortgage Financing [a] ........................... $ 64,508 $ 70,000
Fair Lawn Property Loan [b] ...................... 18,543 18,764
Initial Credit Facility [c] ...................... 6,000 46,700
Additional Credit Facility [d] ................... 23,805 --
-------- --------
Total mortgages and loans payable .......... $112,856 $135,464
======== ========
[a] Concurrent with the Company's initial public offering, the Company's
initial operating subsidiaries, which own the Initial Properties, issued
five-year mortgage notes with an aggregate principal balance of $144,500
secured and cross-collateralized by the Initial Properties to an affiliate
("PSI") of Prudential Securities Inc. PSI then issued commercial mortgage
pay-through bonds ("Bonds") collateralized by the mortgage notes. Bonds
with an aggregate principal balance of $70,000 were purchased by unrelated
third parties. Bonds with an aggregate principal balance of $74,500 were
purchased by the Company. As a result, the Company's initial mortgage
financing was $70,000 (the "Mortgage Financing"). Approximately $38,000 of
the $70,000 is guaranteed under certain conditions by certain partners of
the partnerships which owned the Initial Properties. The Mortgage
Financing requires monthly payments of interest only, with all principal
and any accrued but unpaid interest due in August 1999. $46,000 of the
$70,000 Mortgage Financing bears interest at a net cost to the Company
equal to a fixed rate of 8.02 percent per annum and the remaining $24,000
bears interest at a net cost to the Company equal to a floating rate of
100 basis points over one-month LIBOR with a lifetime interest rate cap of
11.6 percent.
In advance of the sale of Essex Road, on March 12, 1996, the Company
prepaid $5,492 ($1,687-fixed rate, $3,805-floating rate debt) of the
Mortgage Financing, resulting in outstanding balances of $44,313 for the
8.02 percent fixed rate debt and $20,195 for the floating rate debt.
[b] In connection with the acquisition of an office building in Fair Lawn, New
Jersey on March 3, 1995, the Company assumed an $18,764 non-recourse
mortgage loan ("Fair Lawn Property Loan") bearing interest at a fixed rate
of 8.25 percent per annum. The loan requires payment of interest only
through March 15, 1996 and payment of principal and interest thereafter,
on a 20-year amortization schedule, with the remaining principal balance
due October 1, 2003. For the nine months ended September 30, 1996, the
Company has paid $221 for amortization of the principal on the Fair Lawn
Property Loan.
[c] The Company has a $70,000 revolving credit facility (the "Initial Credit
Facility"), which may be used to fund acquisitions and new development
projects and for general working capital purposes, including capital
expenditures and tenant improvements. In connection with the Mortgage
Financing, the Company obtained a $6,005 letter of credit, secured by the
Initial Credit Facility, to meet certain tenant improvement and capital
expenditure reserve requirements. The Initial Credit Facility bore
interest at a floating rate equal to 150 basis points over one-month LIBOR
for January 1, 1996 through August 31, 1996. Effective September 1, 1996,
the interest rate was reduced to a floating rate equal to 125 basis points
over one-month LIBOR. The Initial Credit Facility is a recourse liability
of the Operating Partnership and is secured by a pledge of the $74,500
Bonds held by the Company. The Initial Credit Facility requires monthly
payments of interest only, with outstanding advances and any accrued but
unpaid interest due August 31, 1997 and is subject to renewal at the
lender's sole discretion. The Initial Credit Facility also requires a fee
equal to one quarter of one percent of the unused balance payable
quarterly in arrears. On November 4, 1996, the Company drew an additional
$51,513 on the Initial Credit Facility in connection with the acquisition
of Harborside.
[d] On February 1, 1996, the Company obtained an additional credit facility
(the "Additional Credit Facility") secured by certain of its properties in
the amount of $75,000 from two participating banks. The Additional Credit
Facility has a three-year term and bears interest at 150 basis points over
one-month LIBOR. The terms of the Additional Credit Facility include
certain restrictions and covenants which limit, among other things,
dividend payments and additional indebtedness and which require compliance
with specified financial ratios and other financial measurements. The
Additional Credit Facility also requires a fee equal to one quarter of one
percent of the unused balance payable quarterly in arrears.
In connection with the acquisition of Harborside, the Company obtained a
new revolving credit facility ("New Credit Facility") from PSC totaling
$80,000, which bears interest at 125 basis points over one-month LIBOR and
matures on January 15, 1998, unless the Company or PSC elects to extend
the maturity date to not earlier than June 30, 1998, or the facility is
refinanced prior to such date at the election of either the Company or
PSC. PSC has full recourse to the assets of the Company with respect to
outstanding borrowings under the New Credit Facility. In addition, the New
Credit Facility is secured by the Company's equity interest in Harborside.
The terms of the New Credit Facility include certain restrictions and
covenants that limit, among other things, dividend payments and additional
indebtedness and that require compliance with specified financial ratios
and other financial measurements. The Company drew $80,000 from the New
Credit Facility on November 4, 1996, in connection with the acquisition of
Harborside.
In addition, on November 4, 1996, the Company assumed existing debt and
provided seller-mortgage debt aggregating $150 million (as more fully
described in the Harborside discussion in Note 1.)
Interest Rate Swap Agreements:
On May 24, 1995, the Company entered into an interest rate swap agreement
with a commercial bank. The swap agreement fixes the Company's one-month
LIBOR base to a fixed 6.285 percent per annum on a notional amount of
$24,000 through August 1999.
On January 23, 1996, the Company entered into an interest rate swap
agreement with one of the participating banks in its Additional Credit
Facility. The swap agreement has a three-year term and a notional amount
of $26,000, which fixes the Company's one-month LIBOR base to 5.265
percent on its floating rate credit facilities.
The Company is exposed to credit loss in the event of non-performance by
the other parties to the interest rate swap agreements. However, the
Company does not anticipate non-performance by either counterparty.
6. MINORITY INTEREST
In conjunction with the Company's initial public offering, individuals
contributing interests to the Operating Partnership had the right to elect
either to receive common stock of the Company or Units. A Unit and a share of
common stock of the Company have substantially the same economic characteristics
in as much as they effectively share equally in the net income or loss of the
Operating Partnership. Minority interest in the accompanying consolidated
financial statements relates to Units held by parties other than the Company.
Beginning one year after the closing of the Company's initial public stock
offering (which occurred on August 31, 1994), certain Units are able to be
redeemed by the unitholders at their option on the basis of one Unit for either
one share of common stock or cash equal to the fair market value of a share at
the time of the redemption. The Company has the option to deliver shares of
common stock in exchange for all or any portion of the cash requested. When a
unitholder redeems a Unit, minority interest is reduced and the Company's
investment in the Operating Partnership is increased. During the nine months
ended September 30, 1996, 91,614 Units were redeemed for common stock of the
Company.
7. RELATED PARTY TRANSACTIONS
Certain employees of the Operating Partnership provide leasing services to the
Properties and receive fees as compensation ranging from 0.667 to 2.667 percent
of adjusted rents. For the three and nine month periods ended September 30,
1996, such fees, which are capitalized and amortized, approximated $225 and
$417, respectively.
8. SIGNIFICANT TENANT
At December 31, 1995, Donaldson, Lufkin, and Jenrette Securities Corporation
("DLJ") leased approximately 55 percent of the space in the Company's 95
Christopher Columbus Drive, Jersey City, New Jersey property. On April 9, 1996,
DLJ signed a lease with the Company for an additional 73,200 square feet of
space ("DLJ Expansion"), increasing its occupancy to approximately 66 percent of
the property.
Total rental income from DLJ, including escalations and recoveries, for the
three and nine month periods ending September 30, 1996 and 1995 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------
1996 1995 1996 1995
--------- -------- -------- ------
$2,982 $2,489 $7,965 $7,329
====== ====== ====== ======
At September 30, 1996 and December 31, 1995, unbilled rents receivable included
$12,692 and $12,164, respectively, from DLJ.
STOCK OPTION PLAN
In 1994, and as amended on May 13, 1996, the Company established the Employee
Stock Option Plan ("Employee Plan") and the Director Stock Option Plan
("Directors Plan") under which a total of 1,880,188 (subject to adjustment) of
the Company's shares of common stock have been reserved for issuance (1,780,188
shares under the Employee Plan and 100,000 under the Director Plan). Options
granted under the Employee Plan generally become exercisable over a three to
five year period, while options under the Directors Plan become exercisable in
one year. All options were granted at not less than fair market value at the
dates of grant and have a term of ten years.
Information regarding the Company's stock option plans is summarized below:
Employee Director
Stock Option Stock Option
Shares under option: Plan Plan
-------------------- -------------- --------------
Granted on August 31, 1994 at $17.25 per share 600,000 25,000
--------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1994 600,000 25,000
Granted at $15.25-$19.875 per share 220,200 10,000
Less--
Lapsed or canceled (3,588) --
--------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995 816,612 35,000
$15.25 - $19.875 per share
Granted at $21.50 per share 361,750 --
Less--
Lapsed or canceled (4,447) --
Exercised at $17.25 per share (1,143) (5,000)
--------------------------------------------------------------------------------------------------------
Outstanding at March 31, 1996 1,172,772 30,000
$15.25 - $21.50 per share
Granted at $21.50 per share -- 14,000
Less--
Lapsed or canceled (380) --
Exercised at $17.25 per share (3,879) --
--------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1996 1,168,513 44,000
$15.25-$21.50 per share
Granted at $25.25 per share 58,950 --
Less--
Lapsed or canceled (500) --
Exercised at $17.25 per share (43) (5,000)
--------------------------------------------------------------------------------------------------------
Outstanding at September 30, 1996 1,226,920 39,000
$15.25-$25.25 per share
Exercisable at September 30, 1996 467,203 25,000
--------------------------------------------------------------------------------------------------------
Available for grant at December 31, 1995 463,576 15,000
--------------------------------------------------------------------------------------------------------
Available for grant at September 30, 1996 548,203 51,000
--------------------------------------------------------------------------------------------------------
On October 24, 1996 the Company granted 125,000 stock options each to Thomas A.
Rizk, Chief Executive Office, John R. Cali, Chief Administrative Officer, and
Brant Cali, Chief Operating Officer at $26.25 per share, under the Company's
Employee Stock Option Plan. The options become exercisable over five years
beginning December 31, 1996 and have a term of ten years.
10. EMPLOYEE BENEFIT PLAN
All employees of the Company who meet certain minimum age and period of service
requirements are eligible to participate in a Section 401(k) plan (the "Plan")
as defined by the Internal Revenue Code. The Plan allows eligible employees to
defer up to 15 percent of their annual compensation. The amounts contributed by
employees are immediately vested and non-forfeitable. The Company, at
management's discretion, may match employee contributions. No employer
contributions have been made to date.
11. COMMITMENTS AND CONTINGENCIES
Pursuant to the terms of the Mortgage Financing, the Company is required to
escrow $143 per month for tenant improvements and leasing commissions and $53
per month for capital improvements.
Pursuant to an agreement with the City of Jersey City, New Jersey expiring in
2009, the Company is required to make payments in lieu of property taxes
("PILOT") on its property in Jersey City. Such PILOT is determined based on the
greater of two percent of the property cost, as defined, or $1,131 per annum,
through 1999 and 2.5 percent, or $1,414 per annum, through 2004.
12. TENANT LEASES
The Properties are leased to tenants under operating leases with various
expiration dates through 2011. Substantially all of the leases provide for
annual base rents plus recoveries and escalation charges based upon the tenant's
proportionate share of and/or increases in real estate taxes and certain
operating costs as defined and the pass through of charges for electrical usage.
13. STOCKHOLDERS' EQUITY
To maintain its qualification as a REIT, not more than 50 percent in value of
the outstanding shares of the Company may be owned, directly or indirectly, by
five or fewer individuals (defined to include certain entities), applying
certain constructive ownership rules. To help ensure that the Company will not
fail this test, the Company's Articles of Incorporation provide for, among other
things, certain restrictions on the transfer of the common stock to prevent
further concentration of stock ownership. Moreover, to evidence compliance with
these requirements, the Company must maintain records that disclose the actual
ownership of its outstanding common stock and will demand written statements
each year from the holders of record of designated percentages of its common
stock requesting the disclosure of the beneficial owners of such common stock.
On March 7, 1995, the Board of Directors authorized the Company to purchase up
to 100,000 shares of its outstanding common stock so that the total number of
shares and Units may be reduced to approximately 13,300,000. On March 8, 1995,
the Company purchased, for constructive retirement, 100,000 shares of its
outstanding common stock for $1,595. The excess of the purchase price over par
value was recorded as a reduction to additional paid-in capital. Concurrent with
this purchase, the Company sold to the Operating Partnership 100,000 Units for
$1,595.
On November 6, 1995, the Company completed a second public offering of 4,000,000
shares of its common stock at $19.50 per share (the "Second Offering"). Net
proceeds to the Company after the underwriting discounts and other offering
costs were approximately $72,512 which was used along with funds drawn on the
Initial Credit Facility to acquire certain properties. Additionally, on November
17, 1995, pursuant to an over-allotment option granted to the underwriters of
the Second Offering, the Company issued an additional 600,000 shares of its
common stock at $19.50 per share. Net proceeds to the Company after underwriting
discounts totaled approximately $11,082, which was used to repay an equal amount
of indebtedness on the Initial Credit Facility. The $89,700 in total proceeds
from the Second Offering and over-allotment option were obtained from shares
issued off of the Company's $250,000 shelf registration statement ( File No.
33-96538).
On May 13, 1996, the stockholders approved an increase in the authorized shares
of common stock in the Company from 25,000,000 to 95,000,000.
On July 29, 1996, the Company filed a shelf registration statement (File No.
333-09081) with the Securities and Exchanges Commission ("SEC") for an aggregate
amount of $500,000 in equity securities of the Company. The registration
statement was declared effective by the SEC on August 2, 1996.
On August 13, 1996, the Company sold 3,450,000 shares of its common stock
through a public stock offering (the "Offering"), which included an exercise of
the underwriter's over-allotment option of 450,000 shares. Net proceeds from the
Offering (after offering costs) was approximately $76,830. The Offering was
conducted using one underwriter and the shares were issued off of the Company's
$250,000 shelf registration statement (File No. 33-96538).
Pursuant to the Company's Registration Statement on Form S-3 (File No.
333-09081), on October 30, 1996 the Company commenced an underwritten public
offering and sale of 10,000,000 shares of its common stock using several
different underwriters to underwrite such public offer and sale. The Company
expects to receive approximately $251,500 in net proceeds from the offering, and
plans to use such funds to acquire the Proposed Acquisitions mentioned earlier
as well as pay down outstanding borrowings on its revolving credit facilities.
* * * *
CALI REALTY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of Cali Realty Corporation and the notes thereto.
The following comparisons for the three and nine month periods ended September
30, 1996 ("1996"), as compared to the three and nine month periods ended
September 30, 1995 ("1995") make reference to the following: (i) the effect of
the "Pre-Acquisition Properties," which represents all properties owned by the
Company at June 30, 1995 (for the three-month periods comparisons), and which
represents all properties owned by the Company at December 31, 1994 (for the
nine-month periods comparisons), (ii) the effect of the "Acquired Properties,"
which represents all properties acquired by the Company since July 1, 1995 (for
the three-month periods comparisons), and which represents all properties
acquired since January 1, 1995 (for the nine-month period comparisons), and
(iii) the effect of the "Disposition," which refers to the Company's sale of
Essex Road on March 20, 1996 (for both the three and nine month periods
comparisons).
Three Months Ended September 30, 1996 Compared to
Three Months Ended September 30, 1995
Total revenues increased $6.7 million, or 42.7 percent, for the three months
ended September 30, 1996 over 1995. Base rents increased $5.4 million, or 41.8
percent, of which an increase of $5.6 million, or 42.9 percent, was attributable
to the Acquired Properties, and an increase of $0.1 million, or 1.3 percent, to
occupancy changes at the Pre- Acquisition Properties, offset by a decrease of
$0.3 million, or 2.4 percent, as a result of the Disposition. Escalations and
recoveries increased $1.0 million, or 41.0 percent, of which an increase of $0.9
million, or 36.2 percent, was attributable to the Acquired Properties, and an
increase of $0.2 million, or 6.1 percent, due to occupancy changes at the
Pre-Acquisition Properties, offset by a decrease of $0.1 million, or 1.3
percent, as a result of the Disposition.
Total expenses for the three months ended September 30, 1996 increased $3.3
million, or 28.3 percent, as compared to the same period in 1995. Real estate
taxes increased $0.7 million, or 47.5 percent, for 1996 over 1995 substantially
attributable to the Acquired Properties. Additionally, operating services
increased $0.5 million, or 26.0 percent, and utilities increased $0.4 million,
or 22.5 percent for 1996 over 1995. The aggregate increase in operating services
and utilities of $0.9 million, or 24.3 percent, consists of $1.2 million, or
30.8 percent, attributable to the Acquired Properties, offset by a decrease of
$0.2 million, or 3.6 percent, as a result of the Disposition, and a decrease of
$0.1 million, or 2.9 percent, attributable to the Pre-Acquisition Properties.
General and administrative expenses increased $0.5 million, or 60.2 percent, of
which $0.2 million or 22.5 percent, is attributable to additional costs relating
to the Acquired Properties and $0.3 million, or 37.7 percent, due primarily to
an increase in payroll and related costs as a result of the Company's expansion
in 1996. Depreciation and amortization increased $0.7 million, or 24.5 percent,
for 1996 over 1995, of which $0.9 million, or 30.6 percent, relates to
depreciation on the Acquired Properties, offset by decreases of $0.1 million, or
3.4 percent, for amortization of deferred financing costs due to a reduction in
debt outstanding on the Pre-Acquisition Properties, and $0.1 million, or 2.7
percent, of a reduction in depreciation as a result of the Disposition. Interest
expense increased by $0.4 million, or 15.9 percent, primarily due to an increase
in indebtedness resulting from drawings on the Company's credit facilities in
connection with property acquisitions.
Income before minority interest and extraordinary item increased to $7.6 million
in 1996 from $4.2 million in 1995. The increase of $3.4 million was due to the
factors discussed above.
Net income increased $3.3 million for the three months ended September 30, 1996
from $3.3 million in 1995 to $6.6 million in 1996, as a result of the increase
in income before minority interest and extraordinary item of $3.4 million and
offset by the decrease in minority interest of $0.1 million.
Nine Months Ended September 30, 1996 Compared to
Nine Months Ended September 30, 1995
Total revenues increased $18.3 million, or 40.8 percent, for the nine months
ended September 30, 1996 over 1995. Base rents increased $15.3 million, or 41.9
percent, of which an increase of $13.5 million, or 36.9 percent, was
attributable to the Acquired Properties, and an increase of $2.7 million, or 7.5
percent, as a result of occupancy changes at the Pre-Acquisition Properties,
offset by a decrease of $0.9 million, or 2.5 percent, as a result of the
Disposition. Escalations and recoveries increased $2.7 million, or 38.7 percent,
of which an increase of $2.3 million, or 32.3 percent, was attributable to the
Acquired Properties, and $0.5 million, or 7.6 percent, as a result of the
occupancy changes at the Pre-Acquisition Properties, offset by a decrease of
$0.1 million, or 1.2 percent, due to the Disposition.
Total expenses for the nine months ended September 30, 1996 increased $9.9
million, or 30.4 percent, as compared to the same period in 1995. Real estate
taxes increased $2.1 million, or 49.8 percent, for 1996 over 1995 of which $1.8
million, or 42.4 percent, was as a result of the Acquired Properties, and $0.4
million, or 10.3 percent, related to the Pre-Acquisition Properties, offset by a
decrease $0.1 million, or 2.9 percent, due to the Disposition. Additionally,
operating services increased $2.0 million, or 34.6 percent, and utilities
increased $1.3 million, or 28.3 percent. The aggregate increase in operating
services and utilities of $3.4 million, or 31.8 percent, consists of $2.9
million, or 27.1 percent, attributable to the Acquired Properties, $0.7 million,
or 7.1 percent, at the Pre-Acquisition Properties which was due primarily to a
harsher winter in 1996, offset by a decrease of $0.2 million, or 2.4 percent, as
a result of the Disposition. General and administrative expenses increased $0.6
million, or 22.9 percent, of which $0.2 million, or 8.7 percent, is additional
costs relating to the Acquired Properties and $0.4 million, or 14.2 percent, due
primarily to an increase in payroll and related costs as a result of the
Company's expansion in 1996. Depreciation and amortization increased $1.7
million, or 19.2 percent, for 1996 over 1995, of which $2.3 million, or 25.5
percent, related to depreciation on the Acquired Properties, offset by decreases
of $0.4 million, or 4.4 percent, for amortization of deferred financing costs
due to reduction in debt outstanding on the Pre-Acquisition Properties, and $0.2
million, or 1.9 percent, as a result of the Disposition. Interest expense
increased by $2.1 million, or 34.5 percent, primarily due to an increase in
indebtedness resulting from drawings on the Company's credit facilities in
connection with property acquisitions.
Income before minority interest and extraordinary item increased to $26.1
million in 1996 from $12.1 million in 1995. The increase of $14.0 million was
due to the gain on sale of rental property (the Disposition) of $5.7 million in
1996, as well as due to the factors discussed above.
Net income increased $12.3 million for the nine months ended September 30,
1996 from $9.5 million in 1995, to $21.8 million in 1996, as a result of an
increase in income before minority interest and extraordinary item of $14.0
million, offset by the increase in minority interest of $1.2 million and
recognition in 1996 of an extraordinary loss for the early retirement of
debt of $0.5 million (net of minority interest's share of $0.1 million).
Liquidity and Capital Resources
Statement of Cash Flows
During the nine months ended September 30, 1996, the Company generated
$19.2 million in cash flow from operating activities, and, together with
$76.8 million from the Offering, $10.3 million of proceeds from the sale of
a rental property, and $0.3 million of proceeds from stock options
exercised, and funds from escrow cash balances relating to the Mortgage
Financing of $0.6 million, used an aggregate $116.0 million to (i) purchase
three rental properties for $49.0 million, (ii) acquire land, tenant
improvements and building improvements for $11.8 million (includes $2.9
million for tenant improvement costs incurred in connection with the DLJ
Expansion and $1.8 million of tenant improvement costs incurred in
connection with the leasing of 62,275 square feet to Berlitz International
at the Company's 400 Alexander Park, Princeton, New Jersey office
property), (iii) pay quarterly dividends and distributions of $22.8
million, (iv) prepay a portion of its mortgage notes in the amount of $5.5
million, (v) pay debt prepayment penalties and other related costs of $0.3
million, (vi) pay the amortization on mortgage principal of $0.3 million,
(vii) pay down its outstanding borrowings on its credit facilities by a net
amount of $16.9 million, and (viii) increase its cash and cash equivalents
balance by $9.4 million.
Capitalization
On November 6, 1995, the Company completed a second public offering of 4,000,000
shares of its common stock at $19.50 per share (the "Second Offering"). Net
proceeds to the Company after the underwriting discounts and other offering
costs were approximately $72.5 million which was used along with funds drawn on
the Initial Credit Facility to acquire certain properties. Additionally, on
November 17, 1995, pursuant to an over-allotment option granted to the
underwriters of the Second Offering, the Company issued an additional 600,000
shares of its common stock at $19.50 per share. Net proceeds to the Company
after underwriting discounts totaled approximately $11.1 million, which was used
to repay an equal amount of indebtedness on the Initial Credit Facility. The
$89.7 million in total proceeds from the Second Offering and over-allotment
option were obtained off of the Company's $250 million shelf registration
statement (File No. 33-96538).
On February 1, 1996, the Company obtained from two participating banks the $75
million Additional Credit Facility. The Additional Credit Facility bears
interest at a floating rate equal to 150 basis points over LIBOR. The Additional
Credit Facility is also subject to certain financial covenants, including the
ratio of earnings before interest, taxes, depreciation and amortization to debt
service, minimum net worth and debt-to-market capitalization. In addition, the
Additional Credit Facility restricts distributions by the Company in excess of
100 percent of Funds from Operations for three successive quarters, provided
that the Company retains the right to make distributions necessary to maintain
its status as a REIT. The Additional Credit Facility is secured by a first
mortgage lien on certain of the Company's properties. Additional Credit Facility
borrowings are recourse to the Operating Partnership and guaranteed by the
Company.
On May 24, 1995, the Company entered into an interest rate swap agreement with a
commercial bank. The swap agreement fixes the Company's one-month LIBOR base to
a fixed 6.285 percent per annum on a notional amount of $24,000 through August
1999.
In addition, on January 23, 1996, the Company entered into a second interest
rate swap agreement with one of the participating banks in its Additional Credit
Facility. This swap agreement has a three-year term and a notional amount of
$26,000 which fixes the Company's one-month LIBOR base at 5.265 percent on its
floating rate credit facilities.
On March 20, 1996, the Company sold its office building located at 15 Essex Road
in Paramus, New Jersey ("Essex Road") and concurrently acquired a 95,000 square
foot office building at 103 Carnegie Center in Princeton, New Jersey. The
concurrent transactions qualified as a tax free exchange, as the Company used
substantially all of the proceeds from the sale of Essex Road to acquire the
Princeton property. The financial statements for the nine months ended September
30, 1996 include a gain of $5,658 relating to this transaction.
On May 2, 1996, the Company acquired Rose Tree Corporate Center, a two-building
suburban office complex totaling approximately 260,000 square feet, located in
Media, Pennsylvania. The complex was acquired for approximately $28.1 million,
which was drawn on the Initial Credit Facility.
Additionally, on July 23, 1996, the Company acquired 222 and 233 Mount Airy
Road, two suburban office buildings totaling approximately 115,000 square feet
located in Basking Ridge, New Jersey. The buildings were acquired for
approximately $10.5 million, which was drawn on one of the Company's credit
facilities.
On July 29, 1996, the Company filed a shelf registration statement (File No.
333-09081) with the Securities and Exchanges Commission ("SEC") for an aggregate
amount of $500 million in equity securities of the Company. The registration
statement was declared effective by the SEC on August 2, 1996.
On August 13, 1996, the Company sold 3,450,000 shares of its common stock
through a public stock offering (the "Offering"), which included an exercise of
the underwriter's over-allotment option of 450,000 shares. Net proceeds from the
Offering (after offering costs) was approximately $76,830,000. The Offering was
conducted using one underwriter and the shares were issued from the Company's
Registration Statement on S-3 (File No. 33-96538).
On November 4, 1996, the Company acquired the Harborside Financial Center, a
three- building office complex totaling approximately 1,887,000 square feet of
office and retail space, located on the Hudson River waterfront in Jersey City,
New Jersey (the "Harborside"). As part of the purchase, the Company acquired
11.3 acres of land fully-zoned and permittted for an additional 4.1 million
square feet of development and the water rights associated with 27.4 acres of
land extending into the Hudson River immediately east of the existing property,
including two piers with an area of 5.8 acres. The acquisition cost for
Harborside of approximately $287.4 million was financed with mortgage debt of
$150 million and with cash of $137.4 million, which was made available through
the Company's revolving credit facilities (including a new credit facility
described below). The terms of the acquisition of the vacant parcels at
Harborside provided for additional payments (with an estimated net present value
of approximately $5.3 million) to be made to the seller for development rights
if and when the Company commences construction on the site during the next
several years. However, the agreement provides, among other things, that even if
the Company does not commence construction, the seller may nevertheless require
the Company to acquire these rights during the six-month period after the end of
the sixth year. After such period, the seller's option lapses, but any
development in years 7 through 30 will require a payment, on an increasing
scale, for the development rights.
In connection with the acquistion of Harborside, the Company obtained a new
revolving credit facility ("New Credit Facility") from Prudential Securities
Credit Corp. ("PSC") totaling $80 million which bears interest at 125 basis
points over one-month LIBOR, and matures on January 15, 1998, unless the Company
or PSC elect to extend the maturity date to not earlier than June 30, 1998, or
the facility is refinanced prior to such date at the election of either the
Company or PSC. PSC has full recourse to the assets of the Company with respect
to outstanding borrowings under the New Credit Facility. In addition, the New
Credit Facility is secured by the Company's equity interest in Harborside. The
terms of the New Credit Facility include certain restrictions and covenants that
limit, among other things, dividend payments and additional indebtedness and
that require compliance with specified financial ratios and other financial
measurements. On November 4, 1996, the Company drew all $80 million from the New
Credit Facility in connection with the acquisition of Harborside.
In addition, on November 4, 1996, the Company assumed existing debt and was
provided seller-mortgage debt aggregating $150,000 (as more fully described in
the Harborside discussion in Note 1).
The Company also intends to acquire through three individual transactions with
separate, unrelated sellers a three-building office complex, a two-building
office complex and an individual building (the "Proposed Acquisitions"). The
total aggregate acquisition cost of the Proposed Acquisitions is estimated to be
approximately $90.6 million.
Pursuant to the Company's Registration Statement on Form S-3 (File No.
333-09081), the Company has commenced an underwritten public offering and sale
of 10,000,000 shares of its common stock using several different underwriters to
underwrite such public offer and sale. The Company expects to receive
approximately $251.5 million in net proceeds from the Proposed Offering, and
plans to use such funds to acquire the properties mentioned earlier as well as
pay down outstanding borrowings on its revolving credit facilities.
If the Proposed Offering does not occur, the Company intends to fund any
projected shortfall in funds available to acquire the Proposed Acquisition by
accessing one of a number of lending sources with which the Company currently
has relationships. Such lending may be secured by liens on one or more of the
Company's currently unencumbered properties. While there can be no assurance
that the Company will be able to obtain such additional financing, the Company
is reasonably confident that it will be able to do so. If it were not
successful, the Company would likely elect not to acquire one or more of the
Proposed Acquistions.
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and capital expenditures, excluding
non-recurring capital expenditures. Management believes that the Company will
have access to the capital resources necessary to expand and develop its
business. To the extent that the Company's cash flow from operating activities
is insufficient to finance its non-recurring capital expenditures such as
property acquisition costs and other capital expenditures, the Company expects
to finance such activities through the credit facilities and other debt and
equity financing.
The Company presently has no plans for major capital improvements to the
existing properties, other than normal recurring expenditures. The Company is
currently constructing two office/flex buildings aggregating approximately
47,000 square feet of space at its Commercenter complex, located in Totowa, New
Jersey. As of September 30, 1996, the Company has incurred $1.9 million of costs
out of a total of $3.1 million anticipated to be incurred in connection with the
construction project.
The Company expects to meet its short-term liquidity requirements generally
through its working capital and net cash provided by operating activities along
with the Initial Credit Facility and Additional Credit Facility. The Company is
frequently examining potential property acquisitions and, at any one given time,
one or more of such acquisitions may be under consideration. Accordingly, being
able to fund property acquisitions is a major part of the Company's financing
requirements. The Company expects to meet its financing requirements through
funds generated from operating activities, long-term or short-term borrowings
(including draws on the Company's credit facilities), and the issuance of debt
securities or additional equity securities. In addition, the Company anticipates
utilizing the Initial Credit Facility and Additional Credit Facility primarily
to fund property acquisition activities.
The Company does not intend to reserve funds to retire the existing Mortgage
Financing, indebtedness under the credit facilities or other mortgages and loans
payable upon maturity. Instead, the Company will seek to refinance such debt at
maturity or retire such debt through the issuance of additional equity
securities. The Company anticipates that its available cash and cash equivalents
and cash flows from operating activities, together with cash available from
borrowings and other sources, will be adequate to meet the Company's capital and
liquidity needs both in the short and long-term. However, if these sources of
funds are insufficient or unavailable, the Company's ability to make the
expected distributions discussed below may be adversely affected.
To maintain its qualification as a real estate investment trust, the Company
must make annual distributions to its stockholders of at least 95 percent of its
REIT taxable income, excluding the dividends paid deduction and net capital
gains. Moreover, the Company intends to continue to make regular quarterly
distributions to its stockholders which, based upon current policy, in the
aggregate would equal approximately $33.8 million on an annual basis. However,
any such distribution, whether for federal income tax purposes or otherwise,
would only be paid out of available cash after meeting both operating
requirements and scheduled debt service on mortgages and loans payable and
required annual capital expenditure reserves pursuant to its mortgage indenture.
Funds from Operations
The Company considers Funds from Operations after adjustment for the
straight-lining of rents one measure of REIT performance. Funds from Operations
is defined as net income (loss) before minority interest of unitholders,
computed in accordance with generally accepted accounting principles, excluding
gains (or losses) from debt restructuring and sales of property, plus real
estate-related depreciation and amortization. Funds from Operations should not
be considered as an alternative to net income as an indication of the Company's
performance or to cash flows as a measure of liquidity.
Funds from Operations for the three and nine month periods ended September 30,
1996 and 1995, as calculated in accordance with the National Association of Real
Estate Investment Trusts definition published in March 1995, are summarized in
the following table (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1996 1995 1996 1995
-------- -------- -------- --------
Income before gain on sale of property, minority
interest, and extraordinary item ........................... $ 7,644 $ 4,184 $ 20,465 $ 12,120
Add: Real estate related depreciation and
amortization ............................................... 3,456 2,632 9,811 7,652
-------- -------- -------- --------
11,100 6,816 30,276 19,772
Funds from Operations
Deduct: Rental income adjustment for
straight-lining of rents ................................ (29) (243) (233) (465)
-------- -------- -------- --------
Funds from Operations after adjustment for
straight-line rents .......................................... $ 11,071 $ 6,573 $ 30,043 $ 19,307
======== ======== ======== ========
Weighted average shares outstanding (1) ........................ 19,744 13,295 18,519 13,299
======== ======== ======== ========
(1) Assumes redemption of all Units, calculated on a weighted average basis, for
shares of common stock in the Company.
Inflation
The Company's leases with the majority of its tenants provide for recoveries and
escalation charges based upon the tenant's proportionate share of and/or
increases in real estate taxes and certain operating costs, which reduce the
Company's exposure to increases in operating costs resulting from inflation.
PART II
ITEM 1:
Signatures
Pursuant to the requirements 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.
Cali Realty Corporation
-------------------------------
(Registrant)
Date: November 6, 1996 /s/ Thomas A. Rizk
-------------------------------
Thomas A. Rizk
President and
Chief Executive Officer
(signing on behalf of the
Registrant)
/s/ Barry Lefkowitz
-------------------------------
Date: November 6, 1996 Barry Lefkowitz
Vice President - Finance and
Chief Financial Officer