UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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 _____________________ 1-12926_____________________
BEACON PROPERTIES CORPORATION
-----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Maryland 04-3224258
-------- ----------
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
50 Rowes Wharf, Boston, Massachusetts 02110
------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(617) 330-1400
-------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
_______________________________________________________________
(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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No________
-------
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.
56,217,874 Shares of common stock, $.01 par value as of November 12,
-----------
1997
1
BEACON PROPERTIES CORPORATION
FORM 10-Q
INDEX
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Page 2
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Part I - Financial Information
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-19
Part II - Other Information
-----------------
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
2
BEACON PROPERTIES CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
------------------ -------------------
(Unaudited)
(in thousands)
ASSETS
Real Estate:
Land $ 331,529 $ 213,858
Buildings, improvements and equipment 2,039,230 1,477,672
------------------ -------------------
2,370,759 1,691,530
Less accumulated depreciation 140,044 97,535
------------------ -------------------
2,230,715 1,593,995
Deferred financing and leasing costs, net of accumulated
amortization of $20,028 and $16,370 19,203 17,321
Cash and cash equivalents 33,405 36,086
Restricted cash 3,208 2,599
Accounts receivable 13,691 11,609
Accrued rent 26,959 13,065
Prepaid expenses and other assets 8,653 1,093
Mortgage and notes receivable 85,196 51,491
Investments in and advance to joint ventures and corporations 50,416 52,153
------------------ -------------------
Total assets $ 2,471,446 $ 1,779,412
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 586,925 $ 452,212
Note payable, Credit Facility 249,000 153,000
Accounts payable, accrued expenses and other liabilities 51,166 41,764
Investment in joint venture 24,052 24,735
------------------ -------------------
Total liabilities 911,143 671,711
------------------ -------------------
Commitments and contingencies -- ---
Minority interest in Operating Partnership 142,752 108,551
------------------ -------------------
Stockholders' equity:
Preferred stock, $.01 par value, authorized 25,000,000 shares, 80 --
8,000,000 shares of 8.98% Series A Cumulative Redeemable Preferred
Stock issued and outstanding (Aggregate liquidation preference of
$200,000)
Common stock, $.01 par value, authorized 100,000,000
shares, issued and outstanding 55,656,517 and 48,116,480 shares 557 481
Additional paid-in capital 1,442,322 1,022,110
Cumulative net income 138,168 60,047
Cumulative dividends (163,576) (83,488)
------------------ -------------------
Total stockholders' equity 1,417,551 999,150
------------------ -------------------
Total liabilities and stockholders' equity $ 2,471,446 $ 1,779,412
================== ===================
The accompanying notes are an integral part of these consolidated financial
statements.
3
BEACON PROPERTIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- -------------------- -------------- ---------------
(Unaudited and in thousands, except per share amounts and shares
outstanding)
Revenues:
Rental income $ 83,857 $ 37,257 $ 218,544 $ 97,308
Management fees 866 731 2,445 2,248
Recoveries from tenants 11,779 4,219 29,376 11,001
Mortgage interest income 2,561 1,402 5,320 3,567
Other income 4,233 2,993 10,364 7,585
--------------- --------------- -------------- ---------------
103,296 46,602 266,049 121,709
--------------- --------------- -------------- ---------------
Expenses:
Property expenses 19,853 9,837 51,169 24,607
Real estate taxes 10,480 4,660 27,960 12,491
General and administrative 10,248 4,600 27,959 11,963
Mortgage interest expense 13,650 7,077 36,313 20,739
Interest - amortization of financing costs 395 434 1,131 1,618
Depreciation and amortization 18,944 8,391 50,767 21,737
--------------- --------------- -------------- ---------------
73,570 34,999 195,299 93,155
--------------- --------------- -------------- ---------------
Income from operations 29,726 11,603 70,750 28,554
Equity in net income of joint ventures and
corporations 1,676 1,312 4,976 3,964
--------------- --------------- -------------- ---------------
Income from continuing operations 31,402 12,915 75,726 32,518
Discontinued operations - Construction Company
Loss from operations (790) (841) (2,263) (1,911)
Gain on sale of property ---- ---- 16,736 ----
--------------- --------------- -------------- ---------------
Income before minority interest 30,612 12,074 90,199 30,607
Minority interest in Operating Partnership (3,064) (1,550) (9,743) (4,231)
--------------- --------------- -------------- ---------------
Income before extraordinary items 27,548 10,524 80,456 26,376
Extraordinary items, net of minority interest ---- ---- (2,335) (3,309)
--------------- --------------- -------------- ---------------
Net income 27,548 10,524 78,121 23,067
Income allocated to preferred shareholders (4,490) ---- (5,388) ----
--------------- --------------- -------------- ---------------
Net income available to common shareholders $ 23,058 $ 10,524 $ 72,733 $ 23,067
=============== =============== ============== ===============
Net income per common share before extraordinary
items and after allocation of income to
preferred shareholders $ 0.42 $ 0.34 $ 1.42 $ 0.99
Extraordinary items ---- ---- (0.04) (0.13)
--------------- --------------- -------------- ---------------
Net income per common share $ 0.42 $ 0.34 $ 1.38 $ 0.86
=============== =============== ============== ===============
Weighted average common shares outstanding 55,468,531 30,571,657 52,612,891 26,659,577
=============== =============== ============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
4
BEACON PROPERTIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
----------------------------------
1997 1996
-------------- -------------
(Unaudited and in thousands)
Cash flows from operating activities:
Net income $ 78,121 $ 23,067
-------------- -------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Increase in accrued rent (13,894) (4,144)
Depreciation, amortization and amortization of financing costs 51,898 23,355
Equity in net income of joint ventures and corporations (2,713) (2,053)
Minority interest in Operating Partnership 9,743 4,231
Gain on sale of property (16,736) ---
Extraordinary items 2,335 3,309
Increase in accounts receivable (2,082) (1,780)
Increase in prepaid expenses and other assets (1,754) (415)
Increase in accounts payable and accrued expenses 14,114 15,484
-------------- -------------
Total adjustments 40,911 37,987
-------------- -------------
Net cash provided by operating activities 119,032 61,054
-------------- -------------
Cash flows from investing activities:
Property additions (574,487) (501,765)
Proceeds from sale of property 72,500 ---
Payment of deferred leasing costs (7,464) (4,184)
Increase in prepaid expenses and other assets (5,806) (4,000)
Notes receivable from affiliates (33,689) (16,712)
Purchase of mortgage notes receivable (16) ---
Capital distributions from joint ventures 3,732 4,655
(Decrease) increase in restricted cash (609) 360
-------------- -------------
Net cash used by investing activities (545,839) (521,646)
-------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of costs 226,586 316,543
Proceeds from issuance of preferred stock, net of costs 193,180 ---
Payment of deferred financing costs (1,606) (9,267)
Borrowings on Credit Facility 468,000 140,000
Payments on Credit Facility (372,000) (252,500)
Borrowings on mortgage notes --- 593,000
Payments on mortgage notes (1,287) (278,500)
Decrease in prepaid expenses and other assets --- 1,728
Distributions paid to minority interest in Operating Partnership (8,659) (5,271)
Dividends paid to stockholders (80,088) (35,295)
-------------- -------------
Net cash provided by financing activities 424,126 470,438
-------------- -------------
Net (decrease) increase in cash and cash equivalents (2,681) 9,846
Cash and cash equivalents, beginning of period 36,086 4,501
-------------- -------------
Cash and cash equivalents, end of period $ 33,405 $ 14,347
============== =============
Supplemental disclosures:
Cash paid during the period of interest $ 35,212 $ 18,998
============== =============
Non cash activities:
Redemption of Operating Partnership units for common stock $ --- $ 486
============== =============
Increase in minority interest as a result of acquisition of properties $ 33,417 $ 35,229
============== =============
Liabilities assumed in connection with contributions and acquisitions of
properties $ 136,000 $ 55,229
============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
5
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
1. Organization and Basis of Presentation:
--------------------------------------
Organization
------------
Beacon Properties Corporation was incorporated on March 4, 1994, as a
Maryland Corporation, and commenced operations effective with the completion
of its Initial Public Offering (the "IPO") on May 26, 1994. Beacon
Properties Corporation, together with Beacon Properties, L.P. (the
"Operating Partnership") and their subsidiaries (collectively, the
"Company") was formed to continue and expand the commercial real estate
business of The Beacon Group (the "Predecessor"). The Company qualifies as a
real estate investment trust under the Internal Revenue Code of 1986, as
amended.
The Company specializes in property ownership, management, leasing, design
and development and currently owns or has an interest in 123 properties
totaling approximately 20.7 million square feet (the "Properties").
Basis of Presentation
---------------------
The financial statements of the Company are consolidated and include all the
accounts of the Company, its majority owned Operating Partnership and
subsidiaries. All significant intercompany balances and transactions have
been eliminated.
The accompanying financial statements are unaudited; however, they have been
prepared in accordance with generally accepted accounting principles for
interim financial information and in conjunction with the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do
not include all of the disclosures required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting solely of normal recurring matters) necessary
for a fair presentation of the financial statements for these interim
periods have been included. The results for the nine months ended September
30, 1997 are not necessarily indicative of the results to be obtained for
the full fiscal year. These financial statements should be read in
conjunction with the December 31, 1996 audited financial statements and
notes thereto of the Company, included in its annual report on Form 10-K (as
amended by Form 10-K/A) for the fiscal year ended December 31, 1996. Certain
reclassifications have been made to previously reported amounts to conform
with current reporting.
6
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
2. Equity Investments in Real Estate:
---------------------------------
The Company reports its share of income and losses based on its ownership
interest in the respective equity investments. Losses in excess of
investments are not recorded where the Company has not guaranteed or does
not intend to provide any future financial support. The following summarized
information has been presented for the property joint ventures and property
corporation for which the Company has recorded its share of the earnings for
the nine months ended September 30, 1997.
ONE POST POLK & 75-101
OFFICE SQUARE TAYLOR FEDERAL STREET
------------------ ------------------ --------------------
(in thousands)
Balance sheets at September 30, 1997
Real estate, net $ 40,433 $ 89,166 $ 156,033
Cash 2,026 552 7,565
Other assets 10,495 2,497 2,978
------------------ ------------------ --------------------
$ 52,954 $ 92,215 $ 166,576
================== ================== ====================
Mortgage notes payable $ 91,821 $ --- $ 90,000
Other liabilities 1,484 354 2,362
Equity (deficiency) (40,351) 91,861 74,214
------------------ ------------------ --------------------
$ 52,954 $ 92,215 $ 166,576
================== ================== ====================
Summary of operations for the nine months ended
September 30, 1997
Revenues $ 17,857 $ 17,348 $ 21,383
Other income 364 591 1,062
Total revenues 18,221 17,939 22,445
------------------ ------------------ --------------------
Operating expenses 7,302 4,700 9,333
Mortgage interest expense 5,086 --- 5,189
Depreciation and amortization 2,691 2,573 3,630
------------------ ------------------ --------------------
Total expenses 15,079 7,273 18,152
------------------ ------------------ --------------------
Net income $ 3,142 $ 10,666 $ 4,293
================== ================== ====================
Share of properties:
Depreciation and amortization $ 999 $ 257 $ 1,829
Interest - amortization of financing costs 629 --- 44
7
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_______
3. Mortgage Notes Payable:
----------------------
On April 30, 1997, in connection with the acquisition of Centerpointe I and
II located in Fairfax County, Virginia, the Company assumed $30 million of
mortgage debt secured by the properties. The mortgage has a remaining term
of 3.9 years, bears interest at 7.32% and requires monthly installments of
interest only until December 1, 1999, and principal and interest during the
remaining term based on a 25-year amortization schedule.
On May 23, 1997, in connection with the acquisition of Westbrook Corporate
Center located in suburban Chicago, the Company assumed approximately $82
million of million of mortgage debt and borrowed $24 million of additional
mortgage debt secured by the properties. The mortgage has a term of ten
years, bears interest at 8.00% and requires monthly installments of
principal and interest based on a 26-year amortization schedule.
4. Note Payable, Credit Facility:
-----------------------------
On April 8, 1997, the Company replaced its $300 million secured floating-
rate credit facility (the "Credit Facility") with an unsecured facility and
decreased the interest rate on the Credit Facility from the Eurodollar rate
plus 175 basis points (1.75%) to the Eurodollar rate plus 120 basis points
(1.20%). Additionally, on April 30, 1997, the maximum loan amount available
under the Credit Facility was increased to $350 million.
On August 8, 1997, the Company amended the Credit Facility to provide for a
competitive bid option and a decrease in the interest rate on the Credit
Facility from the Eurodollar rate plus 120 basis points (1.20%) to the
Eurodollar rate plus 90 basis points (.90%).
As a result of the new unsecured Credit Facility, the Company recorded an
extraordinary item of $2.3 million, net of minority interest, in connection
with the write-off of fees and costs to acquire the prior secured Credit
Facility.
5. Commitments and Contingencies:
------------------------------
In connection with the acquisition of the Westbrook Corporate Center, the
Company has agreed to maintain non-recourse financing assumed from the
sellers for a 10 year period and not to sell or otherwise transfer any
portion of the property prior to the tenth anniversary of the closing date.
If the Company should choose not to maintain the non-recourse provisions of
the existing or new debt, or should choose to sell the property, within the
10 year period it shall be required to make payments to the sellers.
8
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_______
6. Environmental issue:
-------------------
Site assessments at 175 Wyman Street have identified the presence of
trichloroethylene and tetrachloroethylene in the groundwater (the "Existing
Groundwater Condition"). The chemicals in the groundwater are believed to
be associated with former manufacturing use of the Property. Prior to the
acquisition of the Property by the Company, the former owner of the
Property, Hewlett-Packard Company, reported the Existing Groundwater
Condition to the Massachusetts Department of Environmental Protection (the
"DEP"). Hewlett-Packard Company sought and obtained approval from DEP of an
Immediate Response Action which involves installation of a system to extract
and treat contaminated groundwater (the "System"). According to its
submissions to DEP, Hewlett-Packard Company is in the process of installing
the System. In its purchase and sale agreement with the Company, Hewlett-
Packard Company agreed to indemnify the Company against costs of remediating
the Existing Groundwater Condition and claims by off-site parties for
property damage, personal injury, and natural resource damages related to
the Existing Groundwater Condition (the "Indemnity"). Any claim under the
Indemnity is subject to the risk that the indemnifying party will lack
sufficient assets to satisfy the claim. Moreover, any claim under the
Indemnity may be subject to substantial defenses, including but not limited
to the defense that the claim was exacerbated by the Company's development
or redevelopment of the Property, as to which matters the Company has
indemnified Hewlett-Packard Company. However, the Company does not believe
that any such liability would have a material adverse effect on its
financial condition, results of operations and liquidity.
7. Pro Forma Results (unaudited):
------------------------------
The following unaudited pro forma operating results for the Company have
been prepared as if the 1996 and 1997 stock offerings and the 1996 and 1997
property acquisitions and dispositions had occurred on January 1, 1996.
Unaudited pro forma financial information is presented for informational
purposes only and may not be indicative of what the actual results of
operations of the Company would have been had the events occurred as of
January 1, 1996, nor does it purport to represent the results of operations
for future periods.
Nine Months ended September 30, 1997 and 1996 1997 1996
- --------------------------------------------- -------- --------
Revenue $298,085 $274,809
Income before extraordinary item 62,639 56,239
Net income per common share
before extraordinary item and gain on sale $ 1.13 $ 1.01
9
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_______
8. Agreement and Plan of Merger:
----------------------------
On September 15, 1997, Equity Office Properties Trust ("EOP"), EOP Operating
Limited Partnership, a Delaware limited partnership of which EOP is the
managing general partner ("EOP Partnership") and the Company entered into an
Agreement and Plan of Merger (the "Merger Agreement"). The Merger Agreement
provides for a merger of the Company with and into EOP (the "Merger") and a
merger of the Operating Partnership with and into EOP Partnership or a
limited liability EOP or limited partnership wholly owned directly or
indirectly by EOP Partnership (the "Partnership Merger" and, together with
the Merger, the "Mergers").
At the effective time of the Mergers, (1) each outstanding share of common
stock, $0.01 par value per share, of the Company ("Company Common Shares")
will be converted into 1.4063 common shares of beneficial interest, $0.01
par value per share, of EOP ("EOP Common Shares"), with cash in lieu of
the issuance of any fractional interests, (ii) each share of 8.98% Series A
Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per
share, of the Company ("Company Preferred Shares") will be converted into
a 8.98% Series A Cumulative Redeemable Preferred Share, liquidation
preference $25.00 per share, of EOP ("EOP Preferred Shares"), and (iii)
each common partnership unit of the Operating Partnership (a "Operating
Partnership Unit") will be converted into 1.4063 Class A Units of EOP
Partnership ("EOP OP Units").
The Mergers are subject to customary closing conditions, including the
approval of the Merger by the shareholders of EOP and the Company and the
approval of the Partnership Merger, to the extent necessary, by the partners
of EOP Partnership and the Operating Partnership. The Company may terminate
the Merger Agreement if the average of the closing prices of EOP Common
Shares on the New York Stock Exchange for all trading days during the period
of twenty (20) consecutive trading days ending on the seventh (7/th/)
trading day prior to the date of the special meeting of the shareholders of
the Company called to vote upon the Merger is less than $27.39. Subject to
certain conditions and limitations, either party may terminate the Merger
Agreement if the Merger has not occurred by April 15, 1998.
9. Subsequent Events:
-----------------
On October 1, 1997, the Company signed an additional $200 million term loan
agreement with BankBoston which matures in April 1998.
On October 1, 1997, the Company acquired the Civic Opera Building located in
Chicago, Illinois for aggregate consideration of approximately $59.6
million, consisting of assumption of $31.8 million of mortgage debt,
approximately $21.1 million in cash and the issuance of $6.7 million of
units of limited partnership interest in the Operating Partnership
("Units").
On October 8, 1997, the Company acquired 200 West Adams located in Chicago,
Illinois for aggregate consideration of approximately $72.2 million.
On October 20, 1997, the Company acquired Lakeside located in Atlanta,
Georgia for aggregate consideration of approximately $38.0 million.
On October 30, 1997, the Company declared a dividend of $.50 per common
share payable on November 21, 1997 to stockholders of record on November 7,
1997.
10
BEACON PROPERTIES CORPORATION
PART I - ITEM 2
_______
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This Form 10-Q contains 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. The words "believe", "expect", "anticipate", "intend", "estimate" and
other expressions which are predictions of or indicate future events and trends
and which do not relate to historical matters identify forward-looking
statements. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Certain factors that might cause such a
difference include the following: Real estate investment considerations, such as
the effect of economic and other conditions in the market area on cash flows and
values; the need to renew leases or relet space upon the expiration of current
leases, and the ability of a property to generate revenues sufficient to meet
debt service payments and other operating expenses; and risks associated with
borrowing, such as the possibility that the Company will not have sufficient
funds available to make principal payments on outstanding debt, outstanding debt
may be refinanced at higher interest rates or otherwise on terms less favorable
to the Company and interest rates under the Credit Facility may increase.
The following discussion and analysis of the financial condition and results of
operations should be read in conjunction with the accompanying financial
statements and notes thereto.
RESULTS OF OPERATIONS
COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30,
1996
The Company's gross revenues increased by 119% for the nine months ended
September 30, 1997 compared to the corresponding period in 1996. The growth in
gross revenues was primarily the result of the acquisition of 89 Properties (the
"Acquisition Properties") comprising 12.6 million square feet during 1996 and
1997 offset by the sale of the Westlakes Office Park Property in May 1997. The
Company's proportionate share of weighted average square feet of office
properties increased by 96% to 15.5 million square feet for the nine months
ended September 30, 1997, compared to 7.9 million square feet for the
corresponding period in 1996.
The Acquisition Properties increased revenues from rental operations, which
includes rental income, recoveries from tenants and other income, by $54.9 and
$140.6 million for the three and nine months ended September 30, 1997,
respectively, compared to the corresponding periods in 1996. The remaining
balance of the increase was primarily due to increases in occupancy and rental
rates and completion of the redevelopment and achievement of 88% occupancy at
the Crosby Corporate Center in 1996 offset by the decrease in revenues as a
result of the sale of Westlakes Office Park.
The impact of the straight-line rent adjustment increased consolidated revenues
for the Company by $14.3 million for the nine months ended September 30, 1997
and $4.1 million for the corresponding period in 1996. The impact of the
straight-line rent adjustment increased the Company's equity in net income of
property joint ventures and corporations by $0.1 million for the nine months
ended September 30, 1997 and $0.1 million for the corresponding period in 1996.
The impact of the straight-line rent adjustment increased consolidated revenues
for the Company by $6.2 million for the three months ended September 30, 1997
and $1.6 million for the corresponding period in 1996. The impact of the
straight-line rent adjustment increased the Company's equity in net income of
property joint ventures and corporations by $0.1 million for the three months
ended September 30, 1997 and $0.1 million for the corresponding period in 1996.
11
BEACON PROPERTIES CORPORATION
PART I - ITEM 2
_______
Mortgage interest income for the three and nine months ended September 30, 1997
was $2.6 and $5.3 million, respectively, compared to $1.4 and $3.6 million for
corresponding periods in 1996. The increase is the result of the Company's
acquisition of the remaining portions of the outstanding first mortgage
indebtedness on the Rowes Wharf Property in April and June 1996, recognition of
$0.9 million of accretion in the carrying value of the Rowes Wharf debt and
interest on the Company's loans to certain affiliates of the Company used to
acquire a parcel of land located in Newton, Massachusetts.
The Acquisition Properties increased property expenses, real estate taxes and
depreciation and amortization by $26.7 and $68.6 million for the three and nine
months ended September 30, 1997, respectively, compared to the corresponding
periods in 1996. The remaining balance of the increase was primarily due to
additional operating expenses as a result of an increase in occupancy and the
completion of the redevelopment and achievement of 88% occupancy at the Crosby
Corporate Center in 1996 offset by the decrease in expenses as a result of the
sale of the Westlakes Office Park.
General and administrative expenses were $10.2 and $28.0 million for the three
and nine months ended September 30, 1997, respectively, compared to $4.6 and
$12.0 million for the corresponding periods in 1996. The Acquisition Properties
increased general and administrative expenses by $1.7 and $4.4 million for the
three and nine month periods, respectively. The remaining balance of the
increase was primarily due to an increase in corporate management and
administrative costs. In 1996, the Company established its first regional
offices in the Southeast and Mid-Atlantic and in the first quarter of 1997
regional offices in the Midwest and West were established. As a result, payroll
expense increased by $5.8 million for the nine months ended September 30, 1997,
along with an increase in other corporate and regional general and
administrative expenses. In addition, legal expense increased by $1.3 million
primarily due to legal costs incurred in connection with the defense of a
lawsuit by a limited partner of the Operating Partnership which was settled in
August 1997. The Company did not pay any of the settlement amount. General and
administrative expenses as a percentage of total revenue were 10.5% for the nine
months ended September 30, 1997 compared to 9.8% for the corresponding period in
1996.
Net operating income (excluding the effect of straight-line rents) for
properties owned for at least a full year (consisting of 55 properties with 9.2
million square feet for the nine months ended and 20 properties with 5.9 million
square feet for the three months ended) increased 7.6% and 6.4% for the three
and nine months ended September 30, 1997, respectively, compared to the
corresponding periods in 1996.
Mortgage interest expense was $13.7 and $36.3 million for the three and nine
months ended September 30, 1997, respectively, compared to $7.1 and $20.7
million for the corresponding periods in 1996. The increase in both periods was
primarily the result of debt incurred or assumed in connection with several of
the Acquisition Properties and an increase in the weighted average outstanding
balance of the Credit Facility.
Interest-amortization of financing costs was $0.4 and $1.1 million for the three
and nine months ended September 30, 1997, respectively, compared to $0.4 and
$1.6 million for the corresponding periods in 1996. The decrease was primarily
the result of the reduction in amortization of financing costs of the Credit
Facility as a result of the write-off of fees and costs of the Credit Facility
which was substantially modified in both September 1996 and April 1997.
Equity in net income of joint ventures and corporations was $1.7 and $5.0
million for the three and nine months ended September 30, 1997, respectively,
compared to $1.3 and $4.0 million for the corresponding periods in 1996. The
increase was primarily the result of a lease termination fee recognized in 1997
by 75-101 Federal Street as well as increases in rental income at Polk and
Taylor and One Post Office Square properties.
12
BEACON PROPERTIES CORPORATION
PART I - ITEM 2
_______
Loss from discontinued operations from the Construction Company was $0.8 and
$2.3 million for the three and nine months ended September 30, 1997,
respectively, compared to $0.8 and $1.9 million for the corresponding periods in
1996. In December 1996, substantially all of the assets of the Construction
Company were sold to Skanska AB, a Swedish construction firm. The Construction
Company's new business plan involves the completion of certain contracts not
transferred to the purchaser and the liquidation of its remaining assets.
In May 1997, the Company sold the Westlakes Office Park property, its sole
property located in Berwyn (suburban Philadelphia), Pennsylvania for
approximately $72.5 million and recorded a gain on the sale of the property of
$16.7 million.
Extraordinary items, net of minority interest, were $2.3 million for the nine
months ended September 30, 1997, compared to $3.3 million for the corresponding
period in 1996. In 1997, the Company recorded an extraordinary item in
connection with the write-off of fees and costs of the secured Credit Facility
which was replaced with an unsecured facility in April 1997. In March 1996, the
Company recorded an extraordinary item of $1.8 million, net of minority
interest, in connection with the write-off of fees and costs to acquire a $260
million mortgage loan provided by Paine Webber Real Estate Securities, Inc. used
to acquire the Perimeter Center Portfolio (the "Paine Webber Acquisition Loan").
The Paine Webber Acquisition Loan was repaid in March 1996, approximately three
years prior to its maturity. Also in 1996, an extraordinary item of $1.5
million, net of minority interest, was recorded in connection the write-off of
fees and costs of the Credit Facility which was substantially modified in
September 1996.
The minority interest in the Operating Partnership represents the portion of the
Operating Partnership which is not owned by the Company.
13
BEACON PROPERTIES CORPORATION
PART I - ITEM 2
_______
As of September 30, 1997, the Company owned or had an interest in 116 income
producing commercial properties. The percent leased calculation includes all
leases executed as of September 30, 1997.
AVERAGE BASE
RENTABLE PERCENT RENT(1) NET EFFECTIVE
SQUARE FEET LEASED RENT(2)
-------------- -------------- -------------- --------------
DOWNTOWN DOWNTOWN BOSTON OFFICE MARKET:
Center Plaza 649,000 97% $22.64 $12.87
75-101 Federal Street 813,000 91% 30.19 19.62
225 Franklin Street 930,000 100% 36.94 32.73
One Post Office Square 764,000 99% 25.18 15.69
150 Federal Street 530,000 100% 26.02 21.25
Russia Wharf 311,000 98% 15.07 8.44
Rowes Wharf 344,000 100% 31.35 18.91
Two Oliver-147 Milk Street 270,000 99% 18.62 11.94
175 Federal Street 203,000 99% 25.69 15.83
South Station 149,000 100% 30.94 21.00
- ---------------------------------------------------------------------------------------------------------------
SUBTOTAL 4,963,000 98% 27.59 19.48
- ---------------------------------------------------------------------------------------------------------------
NORTH CENTRAL ATLANTA OFFICE MARKET:
Perimeter Center Portfolio 3,302,000 98% 17.00 11.72
- ---------------------------------------------------------------------------------------------------------------
GREATER BOSTON SUBURBAN OFFICE MARKET:
Wellesley Office Park Buildings 1-8 633,000 99% 24.73 17.36
Crosby Corporate Center 336,000 98% 14.02 10.02
Westwood Business Centre 160,000 96% 19.81 11.28
New England Executive Park 817,000 93% 19.56 12.57
- ---------------------------------------------------------------------------------------------------------------
SUBTOTAL 1,946,000 96% 20.31 13.58
- ---------------------------------------------------------------------------------------------------------------
CAMBRIDGE OFFICE MARKET:
One Canal Park 100,000 100% 22.05 13.99
Ten Canal Park 111,000 100% 19.00 12.16
The Riverview Building 263,000 100% 22.55 17.46
- ---------------------------------------------------------------------------------------------------------------
SUBTOTAL 474,000 100% 21.61 15.49
- ---------------------------------------------------------------------------------------------------------------
ARLINGTON COUNTY, VIRGINIA OFFICE MARKET:
Polk and Taylor Buildings 890,000 100% 23.82 19.28
1300 North 17th Street 373,000 100% 24.20 17.09
1616 North Fort Myer Drive 293,000 100% 23.23 15.44
- ---------------------------------------------------------------------------------------------------------------
SUBTOTAL 1,556,000 100% 23.80 18.03
- ---------------------------------------------------------------------------------------------------------------
FAIRFAX COUNTY, VIRGINIA OFFICE MARKET:
E.J. Randolph 165,000 99% 21.21 15.26
John Marshall I 261,000 100% 18.26 15.85
Northridge I 124,000 100% 25.96 19.34
Centerpointe I & II 408,000 100% 16.74 12.92
- ---------------------------------------------------------------------------------------------------------------
SUBTOTAL 958,000 100% 19.12 14.95
- ---------------------------------------------------------------------------------------------------------------
WASHINGTON, D.C. OFFICE MARKET:
- ---------------------------------------------------------------------------------------------------------------
1333 H Street 239,000 91% 27.42 20.18
- ---------------------------------------------------------------------------------------------------------------
14
BEACON PROPERTIES CORPORATION
PART I - ITEM 2
AVERAGE
RENTABLE PERCENT BASE NET EFFECTIVE
SQUARE FEET LEASED RENT(1) RENT(2)
------------- ---------- -------------- ----------------
SUBURBAN CHICAGO OFFICE MARKET:
AT&T Plaza 225,000 100% 21.23 14.26
Tri-State International 548,000 84% 22.64 15.92
Presidents Plaza 791,000 95% 19.94 13.92
Westbrook Corporate Center 1,106,000 91% 24.47 19.23
- ---------------------------------------------------------------------------------------------------------------------
SUBTOTAL 2,670,000 92% 22.48 16.56
- ---------------------------------------------------------------------------------------------------------------------
WEST LOS ANGELES OFFICE MARKET:
10960 Wilshire Boulevard 544,000 89% 21.56 18.53
10880 Wilshire Boulevard 531,000 85% 20.08 16.32
- ---------------------------------------------------------------------------------------------------------------------
SUBTOTAL 1,075,000 87% 20.83 17.44
- ---------------------------------------------------------------------------------------------------------------------
SILICON VALLEY OFFICE MARKET: (NNN)
Sunnyvale Business Park 175,000 100% 18.44 18.76
Shoreline Technology Park 727,000 100% 17.88 18.77
Lake Marriott Business Park 400,000 100% 10.29 10.78
- ---------------------------------------------------------------------------------------------------------------------
SUBTOTAL 1,302,000 100% 15.62 16.32
- ---------------------------------------------------------------------------------------------------------------------
TOTAL WEIGHTED AVERAGE PROPERTIES 18,485,000 97% $22.04 $16.26
- ---------------------------------------------------------------------------------------------------------------------
(1) Base rent is gross rent excluding payments by tenants on account of
real estate tax and operating expense escalation.
(2) Net Effective Rent is Base Rent adjusted on a straight-line basis for
contractual rent step-ups and free rent periods, plus tenant payments on
account of real estate tax and expenses and real estate taxes. operating
expense escalation, less total operating expenses and real estate taxes.
The following table reflects the lease expiration schedule of the 116 income
producing commercial properties the Company owned or had an interest in as of
September 30, 1997.
YEAR OR PERIOD OF SQUARE % OF ANNUAL ANNUAL RENT
EXPIRATION FEET SQUARE FEET RENT (1) PER SQUARE FOOT # OF TENANTS
- -------------------------------------------------------------------------------------------------
10/1-12/31/97 1,556,078 9% $ 34,737,300 $22.32 102
1998 1,140,891 6% 27,260,937 23.89 197
1999 1,623,928 9% 35,859,833 22.08 208
2000 2,465,213 13% 58,902,291 23.89 239
2001 3,203,635 17% 79,242,932 24.74 210
2002 1,909,767 10% 53,251,537 27.88 154
2003 697,752 4% 18,923,064 27.12 46
2004 932,805 5% 20,567,823 22.05 41
2005 & beyond 4,341,157 24% 134,784,314 31.05 83
-----------------------------------------------------------------------------
Total leased 17,871,226 97% $463,530,031 $25.94 1,280
-----------------------------------------------------------------------------
(1) Annualized expiring base rental income represented by such leases plus 1996
tenant payments on account of real estate tax and operating expense escalations.
15
BEACON PROPERTIES CORPORATION
PART I - ITEM 2
_______
The following schedule summarizes the scheduled amortization of principal and
maturities of mortgage loans outstanding and the related weighted average
interest rate. The schedule includes the company's share of unconsolidated debt
of joint ventures.
SCHEDULED WEIGHTED AVERAGE
YEAR AMORTIZATION MATURITIES TOTAL INTEREST RATE
- ---------------------------------------------------------------------------------------------------------
10/1-12/31/97 $ 821,000 $ 821,000 7.77%
1998 5,514,000 $ 68,683,000 74,197,000 6.96%
1999 9,036,000 9,036,000 7.46%
2000 9,663,000 42,746,000 52,409,000 7.35%
2001 8,986,000 29,012,000 37,998,000 7.35%
2002 9,414,000 44,002,000 53,416,000 7.58%
2003 7,920,000 108,517,000 116,437,000 7.25%
2004 7,869,000 16,744,000 24,613,000 8.25%
2005 8,170,000 8,170,000 7.42%
2006 4,514,000 184,282,000 188,796,000 7.10%
2007 876,000 112,507,000 113,383,000 8.04%
------------------------------------------------------------
Total $72,783,000 $606,493,000 $679,276,000 7.39%
------------------------------------------------------------
16
BEACON PROPERTIES CORPORATION
PART I - ITEM 2
_______
LIQUIDITY AND CAPITAL RESOURCES
INVESTING ACTIVITIES
On April 23, 1997, the Company acquired 10880 Wilshire Boulevard located in
Westwood, California for aggregate consideration of approximately $99 million.
The Company used proceeds from the April 1997 Offering to purchase the property.
On April 30, 1997, the Company acquired Centerpointe I and II, located in
Fairfax County, Virginia, for aggregate consideration of approximately $55
million consisting of approximately $25 million in cash and assumption of $30
million of mortgage debt. The Company used proceeds from the April 1997 Offering
for the cash portion of the acquisition.
On May 8, 1997, the Company sold the Westlakes Office Park property, its sole
property located in Berwyn (suburban Philadelphia), Pennsylvania for
approximately $72.5 million. The transaction was structured as a like-kind
exchange, with the proceeds from the sale used in connection with the
acquisition of 255 Franklin Street located in Boston, Massachusetts.
On May 13 1997, the Company acquired 26.7 acres of land and a 335,000 square
foot building located at 175 Wyman Street, Waltham, Massachusetts for
approximately $24.0 million. The Company plans to begin construction on a
500,000 square foot office property in late 1997 or early 1998. The Company used
proceeds from the April 1997 Offering to purchase the property.
On May 23, 1997, the Company acquired Westbrook Corporate Center located in
suburban Chicago, for aggregate consideration of approximately $182.1 million
consisting of assumption of $82 million of mortgage debt, the borrowing of
approximately $24 million of additional mortgage debt, approximately $42.7
million in cash and the issuance of $33.4 million of units of limited
partnership interest in the Operating Partnership ("Units"). The Company used
proceeds from the April 1997 Offering for the cash portion of the acquisition.
On June 4, 1997, the Company acquired 225 Franklin Street located in Boston,
Massachusetts, for approximately $280 million. The Company used proceeds from
the Preferred Offering and proceeds from the sale of the Westlakes Office park
property to purchase the property.
On July 1, 1997, the Company acquired Sunnyvale Business Center located in
Sunnyvale, California for aggregate consideration of approximately $33.8
million. The Company used proceeds from a draw on the Credit Facility to
purchase the property.
On August 21, 1997, the Company loaned approximately $32.5 million to certain
affiliates of the Company to acquire a parcel of land located in Newton,
Massachusetts. The Company used proceeds from a draw on the Credit Facility to
loan the funds to the affiliates.
On September 25, 1997, the Company acquired a parcel of land located at 150
California Street in San Francisco, California for aggregate consideration of
approximately $10.6 million. The Company used proceeds from a draw on the Credit
Facility to acquire the parcel of land.
On September 29, 1997, the Company acquired a parcel of land located at Media
Center in Burbank, California for aggregate consideration of approximately $18.9
million. The Company used proceeds from a draw on the Credit Facility to acquire
the parcel of land.
17
BEACON PROPERTIES CORPORATION
PART I - ITEM 2
_______
FINANCING ACTIVITIES
On April 16, 1997, the Company sold 7,000,000 shares of common stock, $.01 par
value, to the public at $32.125 per share. The proceeds of the April 1997
Offering, net of offering costs, were approximately $212.7 million. The net
proceeds of the April 1997 Offering were used to purchase 10880 Wilshire
Boulevard, the cash portions of the acquisition of Centerpointe I and II and
Westbrook Corporate Center properties and 175 Wyman Street with the remaining
balance used to pay down the Credit Facility.
On June 13, 1997, the Company sold 8,000,000 shares of cumulative redeemable
preferred stock, $.01 par value, to the public at $25.00 per share at a yield of
8.98%(the "Preferred Offering"). The proceeds of the Preferred Offering, $193.2
million net of offering costs, were used to acquire the 225 Franklin Street
property.
On October 30, 1997, the Company declared a dividend of $.50 per common share
payable on November 21, 1997 to stockholders of record on November 7, 1997.
CAPITALIZATION
At September 30, 1997, the Company's total consolidated debt was approximately
$835.9 million, and its total consolidated debt plus its proportionate share of
total unconsolidated debt (other than the Rowes Wharf Property debt) was
approximately $928.3 million. At September 30, 1997, the Company's outstanding
consolidated debt consisted of approximately $249.0 million under its floating-
rate Credit Facility and approximately $586.9 million of fixed rate mortgage
indebtedness with an weighted average rate of 7.38%, collateralized by
properties owned 100% by the Company. The Company's proportionate share of its
current total unconsolidated debt (excluding the Rowes Wharf Property debt)
consists of approximately $45.9 million on the One Post Office Square Property
(in which the Company has a 50% general partner interest) and approximately
$46.4 million on the 75-101 Federal Street Property (in which the Company owns
approximately 52% of the common stock of a private REIT that owns the
property).The weighted average rate of the Company's unconsolidated fixed rate
mortgage indebtedness is 7.47%. The weighted average rate of the Company's
consolidated and unconsolidated fixed rate mortgage indebtedness is 7.39% and
the weighted average maturity is approximately 6.5 years.
Based on the Company's total market capitalization of $4,014.5 million at
September 30, 1997 (at the September 30, 1997 closing stock price of $45.813 per
share and including the 7,343,451 Units of minority interest in the Operating
Partnership and the Preferred Stock at liquidation preference of $200.0
million), the Company's consolidated debt plus its proportionate share of total
unconsolidated debt (other than the Rowes Wharf property debt) represented
approximately 23% of its total market capitalization.
18
BEACON PROPERTIES CORPORATION
PART I - ITEM 2
_______
FUNDS FROM OPERATIONS
The Company believes that to facilitate a clear understanding of the operating
results of the Company, Funds from Operations ("FFO") should be examined in
conjunction with net income. The definition of FFO was clarified in the
National Association of Real Estate Investment Trusts, Inc. ("NAREIT") White
Paper, adopted by the NAREIT Board of Governors on March 3, 1995, as net income
(computed in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization (in each case only real estate related assets),
and after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures will be
calculated to reflect FFO on the same basis. FFO should not be considered as a
substitute for net income as an indication of the Company's performance or as a
substitute for cash flow as a measure of its liquidity. The following table
presents the calculations for FFO for the periods ended September 30, 1997 and
September 30, 1996.
For the three months ended For nine months ended
September 30, September 30,
------------------------------------------------------------------
1997 1996 1997 1996
------ ------ ------- ------
(in thousands)
Income before minority interest $ 30,612 $ 12,074 $ 90,199 $ 30,607
Add consolidated properties:
Depreciation and amortization 18,944 8,391 50,767 21,737
Add joint venture properties:
Depreciation and amortization 1,010 1,005 3,086 2,999
Less gain on sale of property ----- ----- (16,736) -----
---------------- --------------- ---------- ---------
Funds from operations 50,566 21,470 127,316 55,343
Less Series A Preferred Dividends (4,490) ----- (5,388) -----
---------------- --------------- ---------- ---------
Available for allocation 46,076 21,470 121,928 55,343
Company share of Operating Partnership 88.31% 87.16% 88.51% 86.12%
---------------- ---------------- ---------- ---------
Company funds from operations $ 40,689 $ 18,713 $ 107,917 $ 47,661
================ =============== ========== =========
Weighted average common shares outstanding 55,469 30,572 52,613 26,660
================ =============== ========== =========
SHORT AND LONG TERM LIQUIDITY
The Company has considered its short-term (up to 12 months) liquidity needs and
the adequacy of expected liquidity sources to meet these needs. The Company
believes that its principal short-term liquidity needs are to fund normal
recurring expenses, debt service requirements and the minimum distribution
required to maintain the Company's REIT qualifications under the Internal
Revenue Code of 1986, as amended. The Company believes that these needs will be
fully funded from cash flows provided by operating activities.
The Company expects to meet long-term (greater than 12 months) liquidity
requirements for the costs of development, property acquisitions, scheduled debt
maturities, major renovations, expansions and other non-recurring capital
improvements through long-term secured and unsecured indebtedness and the
issuance of additional Operating Partnership Units and equity securities. The
Company may finance the redevelopment or acquisition of additional properties by
using its Credit Facility.
19
BEACON PROPERTIES CORPORATION
PART II
OTHER INFORMATION
- -----------------
ITEM 1. LEGAL PROCEEDINGS
On April 20, 1994, Lawrence D. Selkovits, a partner in the property
partnership which owned One Post Office Square, Wellesley Office Park
Building Five and Wellesley Office Park Building Six filed suit against
certain Beacon affiliates, individually and in their capacity as general
partners of these property partnerships, and the Company for breach of
fiduciary duty, seeking damages and recission of the property partnerships'
agreements to transfer their interest in these properties. Selkovits
brought his claims in an individual capacity as well as in a derivative
capacity on behalf of the partnerships. In August, 1997, the Company and
the individual defendants entered into a settlement, Selkovits agreed to
withdraw as derivative plaintiff in the lawsuit. The Company did not pay
any of the settlement amount. After the settlement, Selkovits' individual
claims, the Norfolk Superior Court established a procedure by which other
similarly situated limited partners could make a motion to be substituted
as plaintiff for the derivative claims and continue the lawsuit. In
accordance with the procedure established by the Court, on September 26,
1997, three former limited partners of the Wellesley Six Company and one
person claiming the have had a limited partnership interest in Post Office
Square Company filed motions to be substituted as derivative plaintiffs.
The Company and the other defendants opposed three motions and the parties
are awaiting a decision by the Court. If either or both of the motions is
allowed, in whole or in part, the Company and the other defendants
anticipate that they will proceed with discovery and that a trial of the
remaining claims will be held in 1998.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Amended and Restated Revolving Credit Agreement between Beacon
Properties, L.P. and BankBoston, as agent, dated August 8, 1997.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K dated September 15, 1997, was filed which included
information under Item 5 on the Form 8-K. The report was filed in connection
with the Company and Equity Office Properties Trust entering into a definitive
agreement and plan of merger.
20
BEACON PROPERTIES CORPORATION
SIGNATURE
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.
BEACON PROPERTIES CORPORATION
/s/ Robert J. Perriello
-------------------------------
Robert J. Perriello,
Senior Vice President,
and Chief Financial Officer
Date: November 14, 1997
21