SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED March 31, 2002
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COMMISSION FILE NO. 000-22741
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CARRAMERICA REALTY, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 52-1976308
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1850 K Street, N.W., Washington, D.C. 20006
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(Address or principal executive office) (Zip code)
Registrant's telephone number, including area code (202) 729-1700
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N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Number of Partnership Units outstanding of each of the registrant's
classes of Partnership Units as of March 31, 2002:
(# of shares) 14,362,972
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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) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO ______
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Index
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Page
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Part I: Financial Information
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Item 1. Financial Statements
Consolidated balance sheets of CarrAmerica Realty, L.P. and subsidiary
as of March 31, 2002 (unaudited) and December 31, 2001 ................................ 4
Consolidated statements of operations of CarrAmerica Realty, L.P. and
subsidiary for the three months ended March 31, 2002 and 2001 (unaudited) ............. 5
Consolidated statements of cash flows of CarrAmerica Realty, L.P. and
subsidiary for the three months ended March 31, 2002 and 2001 (unaudited) ............. 6
Notes to consolidated financial statements (unaudited)................................. 7 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 10 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 16
Part II: Other Information
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Item 6. Exhibits and Reports on Form 8-K....................................................... 17
2
Part I
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Item 1. Financial Information
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The information furnished in our accompanying consolidated balance sheets,
consolidated statements of operations and consolidated statements of cash flows
of CarrAmerica Realty, L.P. and subsidiary reflects all adjustments which are,
in our opinion, necessary for a fair presentation of the aforementioned
financial statements for the interim periods.
The financial statements should be read in conjunction with the notes to the
financial statements. The results of operations for the three months ended March
31, 2002 are not necessarily indicative of the operating results to be expected
for the full year.
3
CARRAMERICA REALTY, L.P. AND SUBSIDIARY
Consolidated Balance Sheets
As of March 31, 2002 and December 31, 2001
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March 31, December 31,
2002 2001
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(In thousands) (unaudited)
Assets
Rental property:
Land $ 113,557 $ 113,583
Buildings 533,497 533,132
Tenant improvements 66,084 64,856
Furniture, fixtures, and equipment 708 591
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713,846 712,162
Less - accumulated depreciation (99,138) (92,025)
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Total rental property 614,708 620,137
Land held for development or sale 5,699 6,412
Cash and cash equivalents 2,944 1,226
Restricted deposits 1,008 1,015
Accounts and notes receivable, net 11,446 12,665
Investments in unconsolidated entities 48,807 47,970
Accrued straight-line rents 12,895 12,340
Tenant leasing costs, net 11,705 11,918
Deferred financing costs, net 153 167
Prepaid expenses and other assets, net 964 1,053
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$ 710,329 $ 714,903
=========== ===========
Liabilities, Redeemable Partnership Units and Partners' Capital
Liabilities:
Mortgages and notes payable $ 138,291 $ 140,729
Accounts payable and accrued expenses 9,237 12,119
Due to affiliates 42,650 44,785
Rents received in advance and security deposits 5,584 6,277
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Total liabilities 195,762 203,910
Redeemable partnership units 41,097 40,151
Partners' capital:
General partner 5,258 5,215
Limited partners 468,212 465,627
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Total partners' capital 473,470 470,842
Commitments and contingencies
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$ 710,329 $ 714,903
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See accompanying notes to consolidated financial statements.
4
CARRAMERICA REALTY, L.P. AND SUBSIDIARY
Consolidated Statements of Operations
For the Three Months Ended March 31, 2002 and 2001
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(Unaudited and in thousands) 2002 2001
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Operating revenues:
Rental revenues:
Minimum base rent $ 21,315 $ 21,560
Recoveries from tenants 3,814 3,016
Other tenant charges 521 990
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Total rental revenues 25,650 25,566
Cost reimbursements 182 105
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Total operating revenues 25,832 25,671
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Operating expenses:
Property expenses:
Operating expenses 5,910 6,949
Real estate taxes 2,375 1,493
Interest expense 4,143 4,665
General and administrative 1,411 2,202
Depreciation and amortization 8,081 7,510
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Total operating expenses 21,920 22,819
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Real estate operating income 3,912 2,852
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Other income (loss):
Interest income 208 265
Equity in earnings of unconsolidated entities 1,038 1,157
Loss on sale of assets and other provisions, net (860) (7,566)
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Total other income (loss) 386 (6,144)
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Net income (loss) $ 4,298 $ (3,292)
======== ========
Net income (loss) attributable to general partner $ 43 $ (33)
======== ========
Net income (loss) attributable to limited partners $ 4,255 $ (3,259)
======== ========
See accompanying notes to consolidated financial statements.
5
CARRAMERICA REALTY, L.P. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2002 and 2001
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(Unaudited and in thousands) 2002 2001
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Cash flows from operating activities:
Net income (loss) $ 4,298 $ (3,292)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 8,081 7,510
Loss on sale of assets and other provisions, net 860 7,566
Equity in earnings of unconsolidated entities (1,038) (1,157)
Other (143) (301)
Change in assets and liabilities:
Decrease in accounts and notes receivable 1,219 2,346
(Increase) decrease in accrued straight-line rents (555) 101
Additions to tenant leasing costs (716) (717)
Decrease in prepaid expenses and other assets 65 131
Decrease in accounts payable, accrued expenses and due to affiliates (5,017) (4,350)
(Decrease) increase in rents received in advance and security deposits (693) 1,151
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Total adjustments 2,063 12,280
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Net cash provided by operating activities 6,361 8,988
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Cash flows from investing activities:
Acquisitions and additions to rental property (1,684) (5,958)
Additions to land held for development (147) (193)
Distributions from unconsolidated entities 241 88
Contributions to unconsolidated entities (39) (4,056)
Decrease in restricted deposits 7 1,625
Proceeds from sales of properties - 13,203
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Net cash (used by) provided by investing activities (1,622) 4,709
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Cash flows from financing activities:
Capital distributions (583) (517)
Repayments on notes and mortgages payable (2,438) (9,674)
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Net cash used by financing activities (3,021) (10,191)
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Increase in cash and cash equivalents 1,718 3,506
Cash and cash equivalents, beginning of the period 1,226 8,309
-------- --------
Cash and cash equivalents, end of the period $ 2,944 $ 11,815
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of capitalized interest of $105 and $284
for the three months ended March 31, 2002 and 2001, respectively $ 4,151 $ 4,920
======== ========
See accompanying notes to consolidated financial statements.
6
CARRAMERICA REALTY, L.P. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
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(1) Description of Business and Summary of Significant Accounting Policies
(a) Business
We are a Delaware limited partnership formed in March 1996 for the
purpose of owning, acquiring, developing and operating office
buildings across the United States. At March 31, 2002, we owned 53
operating properties with no properties under development. The
properties are located in Austin, Chicago, Dallas, Denver, Orange
County/Los Angeles, San Francisco Bay Area, Salt Lake City, San Diego
and Seattle.
Our general partner is CarrAmerica Realty GP Holdings, Inc. (the
"General Partner"), a wholly-owned subsidiary of CarrAmerica Realty
Corporation ("CarrAmerica"), a self-administered and self-managed real
estate investment trust. The General Partner owned a 1% interest in us
at March 31, 2002. Our limited partners are CarrAmerica Realty LP
Holdings, Inc., a wholly-owned subsidiary of CarrAmerica, which owned
an approximate 89.9% interest in us at March 31, 2002 and various
other individuals and entities, which collectively owned an
approximate 9.1% aggregate interest in us at March 31, 2002.
(b) Basis of Presentation
Our accounts and those of our wholly-owned subsidiary are consolidated
in the accompanying financial statements. We use the equity method of
accounting for our investments in and our share of earnings and losses
of unconsolidated entities. These entities are not majority-owned or
controlled by us.
Management has made a number of estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses in
the financial statements, and the disclosure of contingent assets and
liabilities. Estimates are required in order for us to prepare our
financial statements in conformity with accounting principles
generally accepted in the United States of America. Significant
estimates are required in a number of areas, including the evaluation
of impairment of long-lived assets and evaluation of the
collectibility of accounts and notes receivable. Actual results could
differ from these estimates.
(c) Interim Financial Statements
The financial statements reflect all adjustments, which are, in our
opinion, necessary to reflect a fair presentation of results for the
interim periods, and all adjustments are of a normal, recurring
nature.
(d) New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 2001. SFAS
No. 142 changes the accounting for goodwill and intangible assets with
indefinite lives from an amortization approach to an impairment-only
approach. Adoption of SFAS No. 142 in January 2002 did not have a
material effect on our financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assts and
for Long-Lived Assets to Be Disposed Of," and APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." The Statement does
not change the fundamental
7
CARRAMERICA REALTY, L.P. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
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provisions of SFAS No. 121; however, it resolves various
implementation issues of SFAS No. 121 and establishes a single
accounting model for long-lived assets to be disposed of by sale. It
retains the requirement of Opinion No. 30 to report separately
discontinued operations but extends that reporting to a component of
an entity that either has been disposed of (by sale, abandonment, or
in distribution to owners) or is classified as held for sale. Adoption
of SFAS No. 144 in January 2002 did not have a material effect on our
financial statements. However, in the event of a future asset sale, we
would be required to reclassify portions of previously reported
earnings to discontinued operations and to present assets as held for
sale and the related liabilities separately in our consolidated
balance sheets.
In July 2001, the Emerging Issues Task Force (EITF) released EITF
D-98: "Classification and Measurement of Redeemable Securities," which
clarifies Rule 5-02.28 of Regulation S-X. This Rule requires
securities that are redeemable for cash or other assets to be
classified outside of permanent equity if they are redeemable (1) at a
fixed or determinable price on a fixed or determinable date; (2) at
the option of the holder; or (3) upon the occurrence of an event that
is not solely within the control of the issuer. Our ownership is
expressed in partnership units ("Units"). These Units are redeemable
at the option of the holder for, as determined by CarrAmerica, a like
number of shares of common stock of CarrAmerica or cash. Since these
Units are redeemable, at the option of the holders, they are
classified outside of partners' capital on the balance sheet as
redeemable partnership units and measured at redemption value as of
the end of the periods presented. As of March 31, 2002 and December
31, 2001 there were 1,308,411 and 1,333,920 redeemable Units
outstanding, respectively. The value of the redeemable Units is based
on the closing market price of CarrAmerica common stock, which was
$31.41 per share as of March 31, 2002 and $30.10 per share as of
December 31, 2001. This pronouncement was applied retroactively
beginning in the first quarter of 2002.
(e) Reclassifications
Certain reclassifications of prior period amounts have been made to
conform to the current period's presentation.
(2) Mortgages and Notes Payable
Our mortgages and notes payable are summarized as follows:
(In thousands) March 31, December 31,
2002 2001
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Fixed rate mortgages $ 98,908 $ 101,206
Fixed rate notes payable to affiliate 39,383 39,523
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$ 138,291 $ 140,729
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Mortgages payable are collateralized by properties and generally require
monthly principal and/or interest payments. The mortgages mature at various
dates from February 2003 through May 2017. Our fixed rate debt bore an
effective weighted average interest rate of 7.61% at March 31, 2002. The
weighted average term of this debt is 4.9 years.
In June 2001, CarrAmerica closed on a new three-year $500 million unsecured
credit facility with J.P. Morgan Chase, as agent for a group of banks. We
are an unconditional guarantor of borrowings under this facility.
CarrAmerica can extend the life of the facility for one year at its option.
The interest rate on the unsecured credit facility is 70 basis points over
30-day LIBOR.
We have two borrowing agreements with CarrAmerica. The first is a $12.0
million loan that bears interest at 8.5% and requires monthly interest only
payments of $85,000. This note matures on
8
CARRAMERICA REALTY, L.P. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
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March 27, 2007. The second is a $30.0 million loan that bears interest at
8.5% and requires monthly principal and interest payments of $242,000. This
note matures on May 31, 2011. The outstanding balance on this note was
$27.4 million at March 31, 2002 and $27.5 million at December 31, 2001.
Both notes are secured by certain office properties and other assets.
Debt maturities at March 31, 2002 were as follows:
(In thousands)
2002 $ 7,597
2003 20,534
2004 15,664
2005 12,374
2006 2,099
2007 and thereafter 80,023
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$ 138,291
=========
(3) Loss on Sale of Assets and Other Provisions, Net
We dispose of assets that are inconsistent with our long-term strategic or
return objectives or where market conditions for sale are favorable. During
the three months ended March 31, 2002, we did not dispose of any operating
properties. We recognized an impairment loss of $0.9 million on a parcel of
land held for development. During the three months ended March 31, 2001, we
disposed of one operating property in connection with the sale of a group
of properties by CarrAmerica. There was a net gain on this transaction;
however, we incurred a loss of $6.6 million on our property. We also
recognized an impairment loss of $0.9 million on a parcel of land held for
development during the three months ended March 31, 2001.
9
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion that follows is based primarily on our consolidated
financial statements as of March 31, 2002 and December 31, 2001 and for the
three months ended March 31, 2002 and 2001 and should be read along with the
consolidated financial statements and related notes. The ability to compare one
period to another may be significantly affected by acquisitions completed,
development properties placed in service and dispositions made during those
periods.
Critical Accounting Policies
Critical accounting policies are those that are both important to the
presentation of our financial condition and results of operations and require
management's most difficult, complex or subjective judgments. Our critical
accounting policies relate to the evaluation of impairment of long-lived assets
and the evaluation of the collectibility of accounts and notes receivable.
If events or changes in circumstances indicate that the carrying value
of a rental property to be held and used or land held for development may be
impaired, we perform a recoverability analysis based on estimated undiscounted
cash flows to be generated from the property in the future. If the analysis
indicates that the carrying value is not recoverable from future cash flows, the
property is written down to estimated fair value and an impairment loss is
recognized. If we decide to sell rental properties or land held for development,
we evaluate the recoverability of the carrying amounts of the assets. If the
evaluation indicates that the carrying value is not recoverable from estimated
net sales proceeds, the property is written down to estimated fair value less
costs to sell and an impairment loss is recognized within income from continuing
operations. Our estimates of cash flows and fair values of the properties are
based on current market conditions and consider matters such as rental rates and
occupancies for comparable properties, recent sales data for comparable
properties and, where applicable, contracts or the results of negotiations with
purchasers or prospective purchasers. Our estimates are subject to revision as
market conditions and our assessments of them change.
Our allowance for doubtful accounts receivable is established based on
analysis of the risk of loss on specific accounts. The analysis places
particular emphasis on past-due accounts and considers information such as the
nature and age of the receivable, the payment history of the tenant or other
debtor, the financial condition of the tenant and our assessment of its ability
to meet its lease obligations, the basis for any disputes and the status of
related negotiations, etc. Our estimate of the required allowance, which is
reviewed on a quarterly basis, is subject to revision as these factors change
and is sensitive to the effects of economic and market conditions on our
tenants, particularly in our largest markets. For example, due to economic
conditions and analysis of our accounts receivable, we increased our provision
for uncollectible accounts by approximately $1.8 million in 2001 and by an
additional $0.4 million in the first quarter of 2002.
RESULTS OF OPERATIONS
Operating results are summarized as follows:
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For the three months ended Variance
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March 31, 2002 vs.
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(in millions) 2002 2001 2001
---- ---- ----
Operating revenue $ 25.8 $ 25.7 $ 0.1
Property operating expense 8.3 8.4 (0.1)
General and administrative 1.4 2.2 (0.8)
Depreciation and amortization 8.1 7.5 0.6
Interest expense 4.1 4.7 (0.6)
Other income (loss), net 0.4 (6.1) 6.5
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10
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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Operating revenues increased slightly for the first quarter of 2002 as
compared to the same period in 2001. Same store rental revenues decreased by
approximately 6.2% (approximately $1.6 million) as overall same store occupancy
decreased from 96.2% in 2001 to 90.8% in 2002. This decrease in same store
revenue was offset by revenue from two operating properties acquired in April
2001.
Property operating expenses decreased slightly for the first quarter of
2002 as compared to the same period in 2001. A lower provision for uncollectible
accounts receivable ($1.2 million) was offset by higher real estate taxes ($0.9
million) and the addition of property expenses ($0.4 million) from two operating
properties acquired in April 2001. Excluding the properties acquired in April
2001, same store property operating expenses decreased by approximately 7.7%
(approximately $0.6 million) for the reasons explained above.
For the first quarter, general and administrative expenses decreased
$0.8 million (36.4%) in 2002 as compared to 2001. This decrease resulted
primarily from a reduction in allocated costs from CarrAmerica due to the
completion of portions of its internal process improvement efforts.
Depreciation and amortization increased $0.6 million (8.0%) in the first
three months of 2002 compared to the same period in 2001. The increase was due
primarily to the acquisition of two properties in April of 2001.
Interest expense decreased $0.6 million (12.8%) in the first quarter of
2002 as compared to the same period in 2001. This decrease was principally the
result of the repayment of a mortgage in connection with the sale of a property
in 2001.
For the three months ended March 31, other income (loss) increased $6.5
million in 2002 as compared to 2001 due primarily to a $6.6 million loss
incurred on the sale of a property in 2001.
Consolidated Cash Flows
Consolidated cash flow information is summarized as follows:
March 31, 2002 vs.
-------------------
(in millions) 2002 2001 2001
---- ---- ----
Cash provided by operating activities $ 6.4 $ 9.0 $ (2.6)
Cash (used by) provided by investing activities (1.6) 4.7 (6.3)
Cash used by financing activities (3.0) (10.2) 7.2
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Operations generated net cash of $6.4 million in 2002 compared to $9.0
million in 2001. The changes in cash flow from operating activities were
primarily the result of factors discussed above in the analysis of operating
results. The level of net cash provided by operating activities is also affected
by the timing of receipt of revenues and payment of expenses.
Our investing activities used net cash of $1.6 million in 2002 compared
to providing net cash of $4.7 million in 2001. The decrease in net cash from
investing activities in 2002 compared to 2001 was due primarily to the decrease
in proceeds from sales of properties ($13.2 million), partly offset by lower
cost for acquisitions and additions to rental property ($4.3 million) and lower
contributions to unconsolidated entities ($4.0 million).
Financing activities used net cash of $3.0 million in 2002 compared to
$10.2 million 2001. This decrease is due primarily to a repayment of a $7.4
million mortgage balance in connection with the sale of a property in 2001.
11
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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Liquidity and Capital Resources
Our liquidity and capital resources are dependent upon CarrAmerica and its
affiliates. CarrAmerica, as a REIT, is required to distribute at least 90% of
its taxable income to its stockholders on an annual basis. We and CarrAmerica
require capital to invest in our existing portfolio of operating assets for
capital projects. These capital projects can include such things as large-scale
renovations, routine capital improvements, deferred maintenance on properties we
have recently acquired and tenant related matters, including tenant
improvements, allowances and leasing commissions. Therefore, as a general
matter, it is unlikely our cash balances would satisfy our liquidity needs.
Instead, these needs must be met from cash generated from rental revenue and
external sources of capital.
We derive substantially all of our revenue from tenants under existing
leases at our properties. Our operating cash flow therefore depends materially
on the rents that we are able to charge to our tenants, and the ability of these
tenants to make their rental payments. We believe that the diversity of our
tenant base helps insulate us from the negative impact of tenant defaults and
bankruptcies. However, general economic downturns, or economic downturns in one
or more of our markets, still may adversely impact the ability of our tenants to
make lease payments and our ability to re-lease space on favorable terms as
leases expire. In either of these cases, our cash flow and therefore our ability
to meet our capital needs would be adversely affected.
As a result of the economic climate in 2001, the real estate markets
materially softened. Demand for office space declined significantly and vacancy
rates increased in most of our markets. During the first quarter of 2002, our
core markets continued to be weak. As a result, occupancy in our portfolio of
operating properties decreased to 91.3% at March 31, 2002, as compared to 92.2%
at December 31, 2001 and 96.2% at March 31, 2001. We expect vacancy rates to
continue to increase in most of our markets although the rate of deterioration
will slow in the latter half of the year.
CarrAmerica's primary external source of liquidity is its credit facility.
It has a three-year $500 million unsecured credit facility expiring in June 2004
with J.P. Morgan Chase, as agent for a group of banks. CarrAmerica can extend
the life of the line an additional year at its option. The line carries an
interest rate of 70 basis points over 30-day LIBOR. The unsecured facility
contains financial and other covenants with which CarrAmerica must comply and
availability is limited to a specified percentage of the fair value of
unmortgaged properties. We unconditionally guarantee this credit facility. As of
March 31, 2002, $74.0 million was drawn on the credit facility, $2.2 million in
letters of credit were outstanding and $423.8 million available for borrowing.
We will require capital for development projects currently underway and in
the future. As of March 31, 2002, we had 195,000 square feet of office space
under construction in two projects in which we own minority interests. These
projects are expected to cost $32.6 million, of which our total investment is
expected to be approximately $9.3 million. Through March 31, 2002, approximately
$22.6 million or 69.3% of the total project costs had been expended on these
projects. We have funded our investment in projects under construction at March
31, 2002, primarily from the proceeds of asset dispositions and loans from
CarrAmerica. We expect that these sources and project-specific financing of
selected assets will provide additional funds required to complete the
development and to finance the costs of additional projects.
We also regularly incur expenditures in connection with the re-leasing of
office space, principally in the form of tenant improvements and leasing
commissions. The amounts of these expenditures can vary significantly, depending
on negotiations with tenants and the willingness of tenants to pay higher base
rents over the life of the leases. We expect to pay for these capital
expenditures out of excess cash from operations or, to the extent necessary,
borrowings from CarrAmerica. We believe that a significant portion of these
expenditures is recouped in the form of continuing lease payments.
Our long-term liquidity requirements consist primarily of funds necessary
to pay for the principal amount of our long-term debt as it matures, significant
non-recurring capital expenditures that need to be made periodically at our
properties, development projects that we undertake and the costs associated with
acquisitions of properties.
12
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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In the future, if, as a result of general economic downturns, our or
CarrAmerica's properties do not perform as expected, or we cannot raise the
expected funds from the sale of properties and/or if we are unable to obtain
capital from other sources, such as CarrAmerica, we may not be able to make
required principal and interest payments or make necessary routine capital
improvements with respect to our existing portfolio of operating assets. While
we believe that we would continue to have sufficient funds to pay our operating
expenses and debt service and our regular quarterly distributions, our ability
to perform development activity or to fund additional development in our joint
ventures could be adversely affected. In addition, if a property is mortgaged to
secure payment of indebtedness and we are unable to meet mortgage payments, the
holder of the mortgage or lender could foreclose on the property, resulting in
loss of income and asset value. An unsecured lender could also attempt to
foreclose on some of our assets in order to receive payment. In many cases, very
little of the principal amount that we borrow is repaid prior to the maturity of
the loan. We generally expect to refinance that debt when it matures, although
in some cases we may pay off the loan. If principal amounts due at maturity
cannot be refinanced, extended or paid with proceeds of other capital
transactions, such as new equity capital, our cash flow may be insufficient to
repay all maturing debt. Prevailing interest rates or other factors at the time
of a refinancing (such as possible reluctance of lenders to make commercial real
estate loans) may result in higher interest rates and increased interest
expense.
We have unconditionally guaranteed unsecured notes issued by CarrAmerica to
institutional investors. The aggregate principal amount of the unsecured notes
was $875.0 million as of March 31, 2002. These notes are in the form of $150
million of 7.20% notes due in 2004, $100 million of 6.625% notes due in 2005,
$125 million of 7.375% notes due in 2007, $100 million of 6.875% notes due in
2008 and $400 million of 7.125% notes due in 2012. CarrAmerica's senior
unsecured notes contain various covenants with which CarrAmerica must comply.
The covenants include:
* Limits on CarrAmerica's total indebtedness on a consolidated basis;
* Limits on CarrAmerica's secured indebtedness on a consolidated basis; and
* Limits on CarrAmerica's required debt service payments.
Although we believe our properties are adequately covered by insurance, we
cannot predict at this time if we will be able to obtain full coverage at a
reasonable cost in the future. After the events of September 11, 2001, property
and casualty insurance markets began to exclude terrorist acts as an insured
peril for renewing policies. Although separate terrorist coverage for real
estate is now available from a limited number of insurers, available limits,
cost, and higher deductibles are a concern not only to us but also to our
lenders. Trophy and high-rise properties are expected to be difficult to insure.
Through our insurance broker, we are exploring various options for addressing
the terrorism risk and will decide upon a method of risk management before our
June 30, 2002 renewal date.
We have investments in real estate joint ventures in which we hold 21.2% to
49.0% interests. These investments are accounted for using the equity method,
and therefore, the assets and liabilities of the joint ventures are not included
in our financial statements. Most of these joint ventures own and operate office
buildings financed by non-recourse debt obligations that are secured only by the
real estate and other assets of the joint ventures. We have no obligation to
repay this debt and the lenders have no recourse to our other assets.
Our investments in these joint ventures are subject to risks not inherent
in our majority owned properties, including:
* Absence of exclusive control over the development, financing, leasing,
management and other aspects of the project;
* Possibility that our co-venturer or partner might:
* become bankrupt;
* have interests or goals that are inconsistent with ours;
* take action contrary to our instructions, requests or interests
(including those related to CarrAmerica's qualification as a REIT for tax
purposes); or
* otherwise impede our objectives.
13
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Building and Lease Information
The following table sets forth certain information about each wholly-owned
operating property as of March 31, 2002:
Net Rentable
Area Percent Number
Consolidated Properties (square feet)(1) Leased(2) of Buildings
---------------------------------------------- ------------------- -------------- -----------------
Southern California, Orange County/Los Angeles
South Coast Executive Center 161,692 63.2% 2
2600 W. Olive 144,831 100.0 1
Bay Technology Center 107,481 56.6 2
Southern California, San Diego
Jaycor 105,358 100.0 1
Northern California, San Francisco Bay Area
San Mateo I 70,000 0.0 1
San Mateo II and III 141,731 74.0 2
Mountain View Gateway Center 236,400 100.0 2
Seattle:
Canyon Park Commons 95,290 100.0 1
Austin, Texas:
City View Centre 137,218 57.1 3
Tower of the Hills 166,149 100.0 2
City View Center 128,716 100.0 1
Chicago:
Bannockburn I & II 209,969 93.2 2
Bannockburn IV 104,993 100.0 1
Dallas, Texas:
Quorum North 116,178 92.0 1
Quorum Place 178,399 81.4 1
Cedar Maple Plaza 113,225 89.8 3
Commons @ Las Colinas 1, 2, 3 604,234 100.0 3
Two Mission Park 77,832 77.6 1
5000 Quorum 162,186 87.2 1
Denver:
Harlequin Plaza 328,623 92.9 2
Quebec Court I & II 287,294 100.0 2
Quebec Center 106,805 89.2 3
Phoenix, Arizona:
Qwest Communications 532,506 100.0 4
Salt Lake City, Utah:
Sorenson Research Park 282,944 97.7 5
Wasatch Corporate Center 299,885 96.1 5
Sorensen X 41,288 100.0 1
TOTAL CONSOLIDATED PROPERTIES: 4,941,227 53
WEIGHTED AVERAGE 91.3%
(1) Includes office and retail space but excludes storage space.
(2) Includes space for leases that have been executed and have commenced
as of March 31, 2002.
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Management's Discussion and Analysis
- --------------------------------------------------------------------------------
The following table sets outs a schedule of the lease expirations as of
March 31, 2002:
Year of Lease Expiration (square feet) (1) Expiring Leases
------------------------ ------------------------ ------------------
2002 355,839 7.9%
2003 504,171 11.2%
2004 869,528 19.3%
2005 377,757 8.4%
2006 224,750 5.0%
2007 792,415 17.6%
2008 225,419 5.0%
2009 507,050 11.2%
2010 223,470 5.0%
2011 87,302 1.9%
2012 and thereafter 341,758 7.5%
4,509,459 100%
(1) Excludes 431,768 square feet of vacant space.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our and our affiliates, or the
industry's actual results, performance, achievements or transactions to be
materially different from any future results, performance, achievements or
transactions expressed or implied by such forward-looking statements. Such
factors include, among others, the following:
* National and local economic, business and real estate conditions that
will, among other things affect:
* Demand for office properties
* The ability of the general economy to recover timely from the
current economic downturn
* The availability and creditworthiness of tenants
* Level of lease rents
* The availability of financing for both tenants and us;
* Adverse changes in the real estate markets, including, among other
things:
* Competition with other companies, and
* Risks of real estate acquisition and development (including the
failure of pending developments to be completed on time and
within budget);
* Actions, strategies and performance of affiliates that we may not
control or companies in which we have made investments;
* The ability of CarrAmerica to maintain its status as a REIT for federal
income tax purposes;
* Governmental actions and initiatives; and
* Environmental/safety requirements.
For further discussion of these and other factors that could impact our or
CarrAmerica's future results, performance, achievements or transactions, see the
documents that we and CarrAmerica file from time to time with the Securities and
Exchange Commission, and in particular, the section titled "The Company - Risk
Factors" in CarrAmerica's Annual Report on Form 10-K.
15
Quantitative and Qualitative Disclosure About Market Risk
- --------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Any significant changes in our market risk that have occurred since the
filing of our Annual Report on Form 10-K for the year ended December 31, 2001
are summarized in the Liquidity and Capital Resources section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
16
Part II
OTHER INFORMATION
- -----------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
-------------------
Current Report on Form 8-K filed on January 11, 2002 regarding
underwriting agreement between CarrAmerica Realty Corporation and J.P.
Morgan Securities Inc. in connection with a proposed public offering
of $400,000,000 of 7.125% Senior Notes due 2012.
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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.
CARRAMERICA REALTY, L.P.
a Delaware Limited Partnership
By: CarrAmerica Realty GP Holdings, Inc.,
its general partner
/s/ Stephen E. Riffee
- -----------------------------------
Stephen E. Riffee, Treasurer
Date: May 13, 2002
18