Exhibit Index on Page 41
As filed with the Securities and Exchange Commission on October 19, 2001
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) October 19, 2001
--------------------------------
Commission File Number: 1-11954
---------------------------------------------------------
VORNADO REALTY TRUST
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 22-1657560
---------------------------------------------- -------------------------------
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification Number)
888 Seventh Avenue, New York, New York 10019
------------------------------------------ -----------------------------------
(Address of principal executive offices) (Zip Code)
(212) 894-7000
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
--------------------------------------------------------------------------------
(Former Name, Former Address, if Changed Since Last Report)
ITEM 1-4. NOT APPLICABLE
ITEM 5. OTHER EVENTS
On October 19, 2001, Vornado Realty Trust ("Vornado"), a real estate
investment trust organized under the laws of the State of Maryland, entered into
a definitive agreement pursuant to which Charles E. Smith Commercial Realty L.P.
("CESCR") will combine its operations with Vornado. Vornado currently owns a 34%
interest in CESCR. The consideration for the remaining 66% of CESCR is
approximately $1,584 million, consisting of a fixed amount 15.7 million newly
issued Vornado Operating Partnership units (preliminarily valued at $599
million) and $985 million of debt (66% of CESCR's total debt).
CESCR owns and manages approximately 12.4 million square feet of
office properties in Washington D.C. and Northern Virginia, and manages an
additional 5.8 million square feet of office and other commercial properties in
the Washington D.C. area.
Upon closing this transaction, Vornado will expand its Board of
Trustees to nine members from seven. Robert H. Smith and Robert P. Kogod will
be added to the Board of Trustees. Mr. Smith is to have the title of Chairman
of Charles E. Smith Commercial Realty, a division of Vornado Realty Trust.
The closing, which is expected in the first quarter of 2002, is
subject to receipt of certain consents from third parties and other customary
closing conditions; accordingly, there can be no assurance that the proposed
transaction will ultimately be completed.
This transaction was arrived at through arms-length negotiations and
was consummated through subsidiaries of Vornado Realty L.P. Vornado Realty Trust
currently owns 86% of Vornado Realty L.P. and is the sole general partner.
Subsequent to the above transaction Vornado will own approximately 75% of
Vornado Realty L.P. and remain the sole general partner.
ITEM 6. NOT APPLICABLE
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
There are filed herewith:
o The consolidated financial statements of Charles E. Smith
Commercial Realty L.P. as of December 31, 2000 and for the
year then ended; and unaudited financial statements of
Charles E. Smith Commercial Realty L.P. as of and for the
six months ended June 30, 2001.
o The consolidated pro forma balance sheet of Vornado Realty
Trust as of June 30, 2001 and the consolidated pro forma
income statements of Vornado Realty Trust for the six months
ended June 30, 2001 and the year ended December 31, 2000
commencing on page 31, prepared to give pro forma effect to
the CESCR acquisition described in Item 5 above.
1
PAGE
----
CHARLES E. SMITH COMMERCIAL REALTY L.P. - CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000 AND FOR THE YEAR THEN ENDED:
Independent Auditors' Report........................................... 4
Consolidated Balance Sheet as of December 31, 2000..................... 5
Consolidated Statement of Income for the Year Ended December 31, 2000.. 6
Consolidated Statement of Changes in Partners' Deficit for the
Year Ended December 31, 2000......................................... 7
Consolidated Statement of Cash Flows for the Year Ended
December 31, 2000.................................................... 8
Notes to the Consolidated Financial Statements......................... 9
CHARLES E. SMITH COMMERCIAL REALTY L.P. - UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS THEN ENDED:
Consolidated Balance Sheet as of June 30, 2001 (Unaudited)............ 25
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 2001 and 2000 (Unaudited)............................ 26
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2001 and 2000 (Unaudited).................................. 27
Notes to the Consolidated Financial Statements (Unaudited)............ 28
CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Pro Forma Balance Sheet at June 30, 2001................. 32
Consolidated Pro Forma Income Statement for the Six Months
Ended June 30, 2001................................................. 33
Consolidated Pro Forma Income Statement for the Year Ended
December 31, 2000................................................... 34
Supplemental Pro Forma Information.................................... 35
Notes to Consolidated Pro Forma Financial Statements.................. 38
EXHIBIT NO.
23.1 Consent of Arthur Andersen LLP
ITEM 8-9. NOT APPLICABLE.
2
CHARLES E. SMITH COMMERCIAL REALTY L.P.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000
TOGETHER WITH AUDITORS' REPORT
3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Unitholders of
Charles E. Smith Commercial Realty L.P.:
We have audited the accompanying consolidated balance sheet of Charles E. Smith
Commercial Realty L.P. and its subsidiaries (the Operating Partnership, a
Delaware limited partnership) as of December 31, 2000, and the related
consolidated statements of income, changes in partners' deficit and cash flows
for the year then ended. These financial statements are the responsibility of
the Operating Partnership's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Charles E. Smith Commercial
Realty L.P. and its subsidiaries as of December 31, 2000, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Vienna, Virginia
September 21, 2001
Page 4
CHARLES E. SMITH COMMERCIAL REALTY L.P.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
ASSETS
Rental property, net of accumulated depreciation $ 1,150,992
Cash and cash equivalents 5,855
Escrows and tenants' security deposits - restricted 37,328
Tenant and other receivables, net of allowances
for doubtful accounts of $668 21,711
Accrued rental income 24,293
Other receivables 3,734
Deferred charges, net of accumulated amortization 22,907
Investment in joint venture 8,599
Other assets 4,390
-----------
Total assets $ 1,279,809
===========
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Mortgage notes payable $ 1,458,230
Line of credit 34,000
Accounts payable and accrued expenses 29,486
Accounts payable-related parties 1,955
Rents received in advance 5,497
Tenants' security deposits 3,673
Other liabilities 6,913
-----------
Total liabilities 1,539,754
-----------
Commitments and contingencies
Convertible, redeemable Class C unitholders (2.5 million units authorized,
issued and outstanding, $24 per unit carrying and redemption amount) 59,004
Partners' deficit:
Cumulative, convertible, preferred Class D unitholders (7.7 million units
authorized, issued, and outstanding) 241,900
Class A unitholders (19.8 million units authorized, issued, and outstanding) (616,115)
Accumulated earnings 55,266
-----------
Total partners' deficit (318,949)
-----------
Total liabilities and partners' deficit $ 1,279,809
===========
The accompanying notes are an integral part of this consolidated statement.
Page 5
CHARLES E. SMITH COMMERCIAL REALTY L.P.
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
REVENUES
Property rentals $ 313,982
Expense reimbursements 7,992
Property management and leasing 22,110
---------
Total revenues 344,084
---------
EXPENSES
Operating 81,225
Real estate taxes 21,783
Ground rent 2,254
Depreciation and amortization 42,998
General and administrative 24,105
---------
Total operating expenses 172,365
---------
Operating income 171,719
Income from unconsolidated joint venture 596
Interest income 2,957
Interest expense (98,565)
---------
Net income 76,707
Class D preferred unit distributions (14,412)
---------
Net income applicable to Class A and
Class C unitholders $ 62,295
=========
The accompanying notes are an integral part of this consolidated statement.
Page 6
CHARLES E. SMITH COMMERCIAL REALTY L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
Preferred
Class A Class D Accumulated Partners'
Unitholders Unitholders Earnings Deficit
----------- ----------- -------- -------
BALANCE, December 31, 1999 $(571,690) $ 241,900 $ 27,826 $(301,964)
Units exchanged for acquisitions, contributed at carryover basis (47,894) -- -- (47,894)
Amortization of unit grants 536 -- -- 536
Contributions 3,734 -- -- 3,734
Distributions -- -- (49,267) (49,267)
Repurchase of partnership units (641) -- -- (641)
Net income -- -- 76,707 76,707
Other (160) -- -- (160)
--------- --------- --------- ---------
BALANCE, December 31, 2000 $(616,115) $ 241,900 $ 55,266 $(318,949)
========= ========= ========= =========
The accompanying notes are an integral part of this consolidated statement.
Page 7
CHARLES E. SMITH COMMERCIAL REALTY L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 76,707
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 42,998
Amortization of deferred financing charges 1,780
Amortization of unit grants 536
Income from unconsolidated joint venture (596)
Lease acquisition costs (2,522)
Decrease in accrued rental income 2,812
Increase in tenant and other receivables (3,994)
Increase in other receivables (1,871)
Increase in other assets (428)
Increase in rents received in advance 1,297
Increase in accounts payable and accrued expenses 9,634
Increase in tenants' security deposits 1,453
Decrease in accounts payable - related parties (2,675)
Decrease in other liabilities (1,152)
---------
Net cash provided by operating activities 123,979
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to rental property (77,079)
Acquisitions of rental property (292,000)
Increase in escrows and tenants' security deposits (14,491)
Distributions from joint venture 875
---------
Net cash used in investing activities (382,695)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgages payable (193,675)
Proceeds from mortgages payable 429,912
Proceeds from line of credit, net 34,000
Payment of financing fees (6,853)
Repurchase of partnership units (641)
Contributions 3,734
Distributions to partners (49,193)
---------
Net cash provided by financing activities 217,284
---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (41,432)
CASH AND CASH EQUIVALENTS, beginning of year 47,287
---------
CASH AND CASH EQUIVALENTS, end of year $ 5,855
=========
The accompanying notes are an integral part of this consolidated statement.
Page 8
CHARLES E. SMITH COMMERCIAL REALTY L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000
1. ORGANIZATION AND FORMATION OF OPERATING PARTNERSHIP
Charles E. Smith Commercial Realty L.P. (the Operating Partnership), was formed
on July 25, 1997, as a Delaware limited partnership. On October 31, 1997, the
Operating Partnership completed its initial consolidation of certain property
partnerships and property service companies (the CES Group); prior to October
31, 1997, the Operating Partnership had no operations. Simultaneously, the
entities that owned the properties and the property service companies included
in the CES Group (the Predecessor Partners) contributed the properties and
service businesses to the Operating Partnership (or to entities owned by the
Operating Partnership) and received in exchange, directly or indirectly, limited
partnership units in the Operating Partnership. In addition, Vornado Realty
Trust (the Investor) contributed $60 million on October 31, 1997 in return for
2.5 million convertible redeemable Class C units. As a result of the initial
1997 consolidation, and subsequent consolidations of additional property
partnerships, the Operating Partnership issued Operating Partnership units to
the predecessor partners of the entities acquired. Because of prior common
ownership and management, contributed assets and liabilities were recorded at
their historical net book value, which also resulted in the transfer of
approximately $605.4 million of net carry-over equity deficits to the Operating
Partnership.
On March 3, 1999, the Investor contributed to the Operating Partnership the land
previously subject to certain ground leases under: (1) eight properties,
containing approximately 2.5 million square feet, that were subject to ground
leases requiring minimum rental plus 50% of net cash flows, and (2) seven
properties, containing approximately 1.2 million square feet, that were subject
to a ground lease requiring minimum rental and 5.1% of net cash flow. The
Investor also contributed a 50% ownership in five properties (the Crystal Parks)
and the ground leases for the land underneath the Crystal Parks. In return for
these contributions, the Investor received approximately 7.7 million cumulative,
convertible, preferred Class D limited partnership units for estimated
consideration of approximately $242 million. As a result of this transaction
(the March 1999 Transaction), the Investor increased its effective ownership in
the Operating Partnership from approximately 11% at December 31, 1998, to
approximately 34%, and the size of the Board of Managers of the general partner
of the Operating Partnership was increased from two to three managers, with the
Investor appointing the additional new manager. Additionally, if the Operating
Partnership has not completed a Public REIT Transaction or Initial Public
Offering, as defined, by March 1, 2002, the Board of Managers of the general
partner of the Operating Partnership will add a fourth manager, to be designated
by the Investor. The March 1999 Transaction has been accounted for as a purchase
and the $242 million purchase price has been allocated to the land acquired.
As of December 31, 2000, the Operating Partnership had approximately 19.8
million Class A units, 2.5 million Class C units, and approximately 7.7 million
Class D units outstanding.
Page 9
CURRENT OPERATIONS
The Operating Partnership and its subsidiaries are engaged in the ownership,
operation, management, leasing, acquisition, expansion, and development of
primarily commercial office building properties. As of December 31, 2000, the
Operating Partnership owned, either through wholly owned subsidiaries or through
its non-controlling general partner interest in a joint venture, 53 office
properties (the Properties) containing approximately 12.6 million square feet of
office space and approximately 440,000 square feet of retail space as follows:
(1) a 100% fee interest in 26 properties containing approximately 7.2 million
square feet located in Crystal City, VA; (2) a 100% fee interest in seven
properties containing approximately 2.1 million square feet located in Bailey's
Crossroads, VA; (3) a 100% fee interest in four properties containing
approximately 870,000 square feet located in Washington, D.C.; (4) a 100% fee
interest in three properties containing approximately 470,000 square feet
located in Tyson's Corner, VA; (5) a 100% fee interest in six properties
containing approximately 900,000 square feet located in Reston, VA; (6) a 100%
fee interest in one property containing approximately 204,000 square feet
located in Bethesda, MD; (7) a 100% interest in two properties containing
approximately 609,000 square feet, which are subject to ground leases with a
third party, located in Clarendon, VA; (8) a 100% interest in a property
containing approximately 190,000 square feet, that is subject to a ground lease
with a third party, located in Washington, D.C. and (9) a 20% non-controlling
general partner interest in a partnership owning 3 properties containing
approximately 541,000 square feet located in Tysons Corners, VA. The Operating
Partnership is developing a property in Bailey's Crossroads, VA containing
approximately 370,000 square feet of office space, which is 93% pre-leased to a
United States government agency. The Operating Partnership also owns a 100%
ownership interest in a commercial management company that provides leasing and
management services to the Properties and to third parties.
2000 ACQUISITIONS
On January 1, 2000, the Operating Partnership issued approximately 118,000 Class
A partnership units to acquire a property containing approximately 268,000
square feet. In conjunction with this transaction, the Operating Partnership
assumed the debt on the property, which had a balance of approximately $35
million, and received approximately $4 million in cash. Because the previous
owners included individuals who are related parties to the Operating
Partnership, the building and improvements have been recorded at their
historical net book value.
On February 1, 2000, the Operating Partnership issued approximately 124,000
Class A partnership units in exchange for the ownership interest in a property
containing approximately 204,000 square feet. The owners of the partnership
included individuals who are related parties to the Operating Partnership.
Consequently, the assets and liabilities related to the interests contributed by
the partners have been recorded at their historical net book value.
During 2000, the Operating Partnership acquired six properties, containing
approximately 900,000 square feet, located in Reston, Virginia, and three
properties, containing approximately 470,000 square feet, located in Tysons
Corner, Virginia, for approximately $292 million. These acquisitions have been
accounted for as purchases, and the purchase price has been allocated among the
land, building and equipment acquired.
Page 10
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of December 31, 2000, and the
consolidated statements of income, changes in partners' deficit, and cash flows
for the year then ended, include all of the accounts of the Operating
Partnership and its majority owned subsidiaries where the Operating Partnership
exercises control. All significant intercompany balances and transactions have
been eliminated.
RENTAL PROPERTY
With the exception of the Joint Venture, the assets acquired in the March 1999
Transaction, and the nine properties acquired in 2000, which are recorded at
their actual cost, rental property is recorded at carry over basis and therefore
is at the Predecessor Partnerships' historical cost net of accumulated
depreciation at the time of contribution. The cost of buildings and improvements
excludes financing costs, interest costs, and real estate taxes incurred during
the original construction period except for properties constructed subsequent to
December 15, 1979, and December 31, 1982, the dates for which Statement of
Financial Accounting Standards (SFAS) No. 34, CAPITALIZATION OF INTEREST COST,
and No. 67, ACCOUNTING FOR COSTS AND INITIAL RENTAL OPERATIONS OF REAL ESTATE
PROJECTS, became effective. Ordinary repairs and maintenance are expensed as
incurred; major replacements and improvements are capitalized.
Depreciation is computed using the straight-line method over the following
estimated useful asset lives:
Buildings and improvements............ 20 to 40 years
Furniture, fixtures, and equipment.... 5 to 10 years
Tenant improvements................... Lesser of lease term or useful life
When assets are sold or retired, their costs and related accumulated
depreciation are removed from the accounts, with the resulting gains or losses
reflected in net income for the period.
Impairment losses on long-lived assets used in operations are recorded when
events and circumstances indicate that the assets might be impaired and the
estimated undiscounted cash flows (before interest expense) to be generated by
those assets are less than the carrying amount of those assets. Upon the
determination that impairment has occurred, those assets will be reduced to fair
value. No such impairment losses have been recognized to date.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents include
amounts invested in overnight repurchase agreements backed by U.S. government
obligations and other U.S. government obligation money funds, all with purchased
maturities of three months or less.
ESCROWS AND TENANTS' SECURITY DEPOSITS
At December 31, 2000, escrows primarily include externally restricted funds
established pursuant to agreements for tenants' security deposits and lender
agreements requiring escrowed property taxes, insurance, and tenant and capital
improvements.
Page 11
DEFERRED CHARGES
Deferred charges consist primarily of deferred financing charges and lease
acquisition costs. Fees incurred to obtain long-term financing have been
deferred and are being amortized over the terms of the respective loans using
the effective interest method. The amortization of deferred financing charges is
included in interest expense in the accompanying consolidated statements of
income. Costs incurred in the successful negotiation of leases, including
brokerage, legal, and other costs, have been deferred and are amortized on a
straight-line basis over the terms of the respective leases.
INVESTMENT IN JOINT VENTURE
In July 1999, a wholly owned subsidiary of the Operating Partnership contributed
approximately $8.9 million to acquire a twenty percent non-controlling general
partner interest in a partnership with a third party (the Joint Venture). The
Joint Venture owns and operates three properties containing approximately
401,000 square feet of office and 140,000 square feet of retail space.
Additionally, the Operating Partnership provides property management and leasing
services to the Joint Venture. The Operating Partnership accounts for this
investment under the equity method. This investment was recorded initially at
cost and is adjusted by the Operating Partnership's share of subsequent income
(loss) and cash contributions and distributions.
REVENUE RECOGNITION
Minimum rental income is recognized on a straight-line basis over the term of
the lease, regardless of when payments are due. Accrued rental income on the
accompanying consolidated balance sheet represents the cumulative minimum rental
income recognized in excess of rental payments currently due. Rent currently due
in excess of minimum rental income recognized was approximately $2.8 million for
the year ended December 31, 2000. Additionally, certain of the lease agreements
contain provisions that provide for the reimbursement of the tenants' share of
real estate taxes and increases in operating expenses in excess of specified
amounts. Expense reimbursements are recognized as they are earned.
Property management and leasing fees are generally based on a percentage of
gross monthly revenue of managed properties and are recognized as revenue as
they are earned. Leasing commissions and facilities management fees are
recognized as revenue as they are earned.
INCOME TAXES
The accompanying financial statements do not contain any provision for federal
income taxes. All federal income tax liabilities and/or tax benefits are passed
through to the partners in accordance with the Operating Partnership agreement
and the Internal Revenue Code.
The Operating Partnership calculates its provision for District of Columbia
franchise taxes in accordance with SFAS 109, ACCOUNTING FOR INCOME TAXES. As of
December 31, 2000, the Operating Partnership had deferred tax assets of
approximately $1.3 million, which are included as components of other assets in
the accompanying consolidated balance sheet. The deferred tax assets are
primarily a result of temporary differences in the timing of the recognition of
depreciation expense and rental revenue for financial reporting purposes and tax
purposes. The Operating Partnership expects to realize the deferred tax assets
over the time periods in which the related temporary differences reverse.
Page 12
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is effective
for the years beginning after June 15, 2000 as amended by SFAS No. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133- AN AMENDMENT OF FASB STATEMENT NO.
133. The Operating Partnership adopted SFAS No. 133 in the first quarter of
2001, and it did not have a significant impact on the Operating Partnership's
financial statements.
3. RENTAL PROPERTY
Rental property as of December 31, 2000, consists of the following (in
thousands):
Land $ 301,176
Buildings, improvements and tenant improvements 1,264,314
Construction in process 40,794
------------
Subtotal 1,606,284
Less - Accumulated depreciation (455,292)
------------
Total $ 1,150,992
============
Depreciation expense related to rental property was approximately $40.5 million
for the year ended December 31, 2000. Repairs and maintenance expense of the
Operating Partnership was approximately $14.7 million for the year ended
December 31, 2000.
4. DEFERRED CHARGES
Deferred charges as of December 31, 2000, consist of the following (in
thousands):
Lease acquisition costs $ 35,536
Deferred financing charges 20,702
------------
Subtotal 56,238
Less - Accumulated amortization (33,331)
------------
Total $ 22,907
============
Amortization expense of lease acquisition costs was approximately $2.5 million
for the year ended December 31, 2000. Amortization expense of deferred financing
charges was approximately $1.8 million for the year ended December 31, 2000, and
is included in interest expense on the accompanying consolidated statement of
income.
Page 13
5. LEASING ACTIVITIES
Future minimum lease payments to be received under noncancellable operating
leases at December 31, 2000, expiring on various dates through December 2025 are
as follows (in thousands):
AMOUNT
------
2001 $ 269,066
2002 237,170
2003 185,703
2004 124,158
2005 68,519
Thereafter 1,401,204
The above does not include expense reimbursements from tenants that may be
required by the leases. Contingent rentals received from office tenants were
approximately $6.7 million for the year ended December 31, 2000.
As of December 31, 2000, one major tenant, the General Services Administration
(GSA), occupied approximately 43 percent of the Operating Partnership's total
square feet. Included within the GSA amounts is the United States Patent and
Trademark Office (PTO), which occupies approximately 16 percent of the Operating
Partnership's total square feet in nineteen of the Properties. The majority of
the PTO space is under leases that expire between 2003 and 2005.
GSA has conducted a competition for the consolidation of the PTO in up to eight
buildings in Northern Virginia pursuant to a new twenty-year lease. The
Operating Partnership was one of three finalists for this long-term housing
solution for the PTO. On June 1, 2000, GSA awarded a lease to the offeror of a
site in Alexandria, Virginia, and not the Operating Partnership. Pursuant to the
new lease, PTO is expected to occupy the new site beginning in late 2003 and
continuing through early fall 2004.
6. MORTGAGE NOTES PAYABLE
The Operating Partnership has mortgage loans as follows as of December 31, 2000
(in thousands):
INTEREST
PROPERTY BALANCE RATE MATURITY
--------------------------------------------------------------------------------------------------
FIXED RATE DEBT
Second Crystal Park Associates L.P. $ 60,065 10.00% 01/01/02
CESC 1750 Pennsylvania Avenue L.L.C. 34,777 10.21% 05/15/02
CESC Plaza L.P. & CESC Plaza Five L.P. 73,256 6.70% 10/01/04
CESC One Democracy Plaza L.P. 27,732 8.77% 02/01/05
CESC Reston Executive Center L.L.C. 72,500 7.83% 01/01/06
Fifth Crystal Park Associates L.P., Tranche A 40,500 6.80% 07/01/06
Fifth Crystal Park Associates L.P., Tranche B 3,920 8.39% 07/01/06
CESC One Skyline Place, L.L.C. 14,639 8.30% 08/01/06
CESC Two Skyline Place, L.L.C. 14,639 8.30% 08/01/06
CESC Six Skyline Place, L.L.C. 34,953 8.05% 11/01/07
CESC Two Courthouse Plaza L.P. 34,378 7.19% 01/01/08
CESC One Skyline Tower L.L.C. 67,416 7.05% 06/11/08
CESC Three Skyline Place L.L.C. 18,023 7.05% 06/11/08
First Crystal Park Associates L.P. 55,462 8.11% 10/01/09
CESC Square Four L.L.C. 49,945 8.07% 10/01/10
CESC Mall L.L.C. 64,567 9.89% 12/15/11
Page 14
INTEREST
PROPERTY BALANCE RATE MATURITY
--------------------------------------------------------------------------------------------------
CESC Gateway Two L.P. 37,547 7.03% 08/01/13
Third Crystal Park Associates, L.P. 62,770 7.03% 08/01/13
CESC Square L.L.C. 93,935 7.81% 11/01/14
CESC Gateway/Square L.L.C. 117,100 7.94% 10/01/24
CESC Crystal/Rosslyn L.L.C. 74,356 6.90% 11/11/27
CESC One Courthouse Plaza L.L.C. 47,354 7.19% 01/01/28
CESC Four (and Five) Skyline Place L.L.C. 48,999 6.86% 01/01/28
Fourth Crystal Park Associates L.P. 65,441 6.51% 09/01/28
CESC 1101, 1730, 1140, & 1150 Streets, L.L.C. 94,431 7.99% 08/01/30
VARIABLE RATE DEBT
CESC Tyson's Dulles Plaza, L.L.C. 70,000 8.121% 06/30/03
CESC Commerce Executive Park, L.L.C. 54,758 7.454% 07/31/03
SECURED CONSTRUCTION LOAN
$52.5 million construction loan 24,767 7.969% 04/14/02
------------
$ 1,458,230
============
During 2000, the Operating Partnership refinanced approximately $207.6 million
of its maturing mortgage notes and borrowed an additional $197.5 million in
mortgage notes related to the acquisition of new properties. No extraordinary
losses were incurred in conjunction with the refinancings.
Borrowings on the construction loan bear interest at a rate which is the higher
of the Prime Rate on the day of the draw or the Federal Funds Rate on that day
plus 50 basis points, or at a rate of the London Interbank Offer Rate (LIBOR)
plus 135 basis points. The construction loan was obtained to finance the
development of an approximately 370,000 square foot office building on a
property located in Bailey's Crossroads, VA. The construction loan is
collateralized by the land and improvements and is partially guaranteed by the
Operating Partnership. The balance is included in mortgage notes payable on the
accompanying consolidated balance sheet.
As of December 31, 2000, mortgage notes payable consists of 27 loans
collateralized by the land owned by the Operating Partnership, the land owned by
the ground lessors, and substantially all of the buildings and improvements. The
mortgage notes payable are generally due in monthly installments of principal
and interest and mature at various dates through August 1, 2030. The CESC
Tyson's Dulles Plaza, L.L.C. mortgage note has a variable rate of 150 basis
points over the one year LIBOR and is adjusted annually. The CESC Commerce
Executive Park L.L.C. mortgage note has a variable rate of 130 basis points over
the LIBOR. The loan is currently segregated into 2 tranches with one tranche
being adjusted annually and the other every six months.
The scheduled principal payments of mortgage notes payable at December 31, 2000,
are as follows (in thousands):
AMOUNT
------
2001 $ 76,489
2002 77,227
2003 141,376
2004 87,001
2005 19,859
Thereafter 1,056,278
-----------
$ 1,458,230
===========
Page 15
Certain mortgage notes payable are subject to prepayment penalties or
defeasance, typically calculated based on yield maintenance, in the event of an
early principal repayment.
In connection with certain loans, lenders have required certain of the entities
to establish escrows for real estate taxes, insurance, capital and tenant
improvements, leasing costs, and capital reserves. The escrows are held by the
lenders in money market accounts and had an aggregate carrying value at December
31, 2000, of approximately $36.7 million.
At December 31, 2000 the Operating Partnership was in compliance with all loan
covenants on its outstanding mortgages.
7. LINE OF CREDIT
The Operating Partnership had a $50 million revolving line of credit of which $0
was outstanding when the facility expired on October 31, 2000. Borrowings under
the line of credit bore interest at the lender's prime rate or the Eurodollar
rate plus 180 basis points. The Operating Partnership paid an annual fee of
0.15% on any unused portion of the line of credit.
On October 26, 2000, the Operating Partnership obtained a $200 million revolving
line of credit (the New Line) of which $34 million was outstanding as of
December 31, 2000. The New Line expires on October 26, 2003. The Operating
Partnership has two one-year options to extend the expiration date of the New
Line. Borrowings under the New Line bear interest at a base rate (the greater of
the Federal Funds Rate plus 50 basis points or the lender's Prime Rate) plus a
range of 50 to 125 basis points depending on the leverage ratio of the Operating
Partnership, or a rate of LIBOR plus a range of 225 to 300 basis points
depending on the leverage ratio of the Operating Partnership. The Operating
Partnership pays an annual fee ranging from 15 to 25 basis points of the unused
portion of the New Line depending on the leverage ratio of the Operating
Partnership. The New Line contains certain financial covenants, including
maintenance of minimum net worth and debt service coverage ratios, maximum
leverage ratio, and minimum cash reserves.
At December 31, 2000, the Operating Partnership was in compliance with all loan
covenants on its line of credit.
8. RELATED-PARTY TRANSACTIONS
Commercial management and leasing revenues from entities in which certain
partners of the Operating Partnership exercise control amounted to approximately
$2.8 million for the year ended December 31, 2000.
In 1994, Charles E. Smith Management, Inc. (CESMI), and Facilities Management
Corporation (FMC), the predecessor entities to Charles E. Smith Real Estate
Services L.P. (CESRES), a wholly owned subsidiary of the Operating Partnership,
entered into a cost-sharing agreement with Charles E. Smith Residential Realty,
Inc. (SRW), a related entity, under which CESRES is required to reimburse SRW
for legal, systems, human resources, payroll, accounts payable, and other
administrative functions. The agreement is for one year and automatically renews
on an annual basis until such time as either party gives notice of nonrenewal.
CESRES is allocated expenses based on formulas determined by the Operating
Partnership's and SRW's management. Human resources, payroll department
expenses, and office support are allocated primarily based on employee head
count. Legal and systems costs are allocated based on actual usage. Accounts
payable department costs are allocated based on the estimated nonpayroll
expenditures. Included in expenses for the Operating Partnership for the year
ended December 31, 2000, were allocated expenses of approximately $2.7 million.
Although these agreements were not negotiated at arms length, the Operating
Partnership believes based upon comparable fees charged by other service
providers, that their terms are fair to the Operating Partnership.
Page 16
o Substantially all of the Properties' tenant construction management
services, engineering, repair, and maintenance services and
insurance placement services are provided by operating subsidiaries
of SRW. Certain partners of the Operating Partnership are also
officers, directors, and shareholders of SRW. These agreements
expire in 2005. Fees for these services are computed as follows:
- Tenant Construction Management - The Properties pay SRW fees
equal to 15% of the total cost of a project for construction
management services related to tenant renovations and certain
building improvements and repairs.
- Engineering, Repair, and Maintenance - The Properties pay SRW
fees for engineering, repair, and maintenance services based
on time incurred and in lieu of engineering and maintenance
wages and benefits to employees and payments to third-party
contractors. Such amounts are based on costs incurred by SRW,
including an overhead charge.
- Insurance - The Properties pay SRW fees for insurance
placement services based on a percentage of the insurance
premiums.
Total payments to SRW for the year ended December 31, 2000, were as
follows (in thousands):
Tenant construction management $ 28,078
Engineering, repair and maintenance 15,723
Insurance 954
--------
Total $ 44,755
========
o For the year ended December 31, 2000, the Properties incurred
environmental services fees of approximately $1,353,000, to
Environmental Control Associates (ECA), a joint venture in which the
Operating Partnership has a 74.61% interest. ECA owns and operates a
central environmental control system that controls various
energy-consuming devices, equipment, and machinery located in
buildings purchasing its services. A subsidiary of SRW manages ECA
for a fee.
o Prior to January 31, 2000, one of the Properties had a lease with a
health club facility owned by certain partners of the Operating
Partnership. For the one month ended January 31, 2000, rental income
earned under this lease approximated $29,000. The health club
facility was sold to a third party on January 31, 2000.
o Two of the Properties lease approximately 87,000 square feet of
office space to SRW under noncancellable operating lease agreements.
Leases for approximately 2,000 and 85,000 square feet of the office
space expire in December 2001, and April 2004, respectively. The
leases contain provisions for escalations in the event of increased
real estate taxes and operating expenses. SRW is allocated its
portion of certain rents for space shared with affiliated entities.
Rent is allocated ratably based on the amount of square footage
occupied by each entity. For the year ended December 31, 2000,
revenues under these leases were approximately $2.6 million.
Page 17
o In August 1999 and December 1999, the Operating Partnership acquired
a total of four development contracts (one third party development
contract, one related party development contract, and two
development contracts with Operating Partnership properties) from
Charles E. Smith Construction, Inc. for approximately $1.3 million.
The cost of approximately $600,000 for the two development contracts
with properties not owned by the Operating Partnership but owned by
related parties is included as a component of other assets on the
accompanying consolidated balance sheet and will be amortized on a
straight-line basis over the terms of the respective development
contracts. The cost of approximately $700,000 for the two
development contracts with Operating Partnership properties is
recorded as a component of rental property in the accompanying
consolidated balance sheets. Revenue earned by the Operating
Partnership in 2000 from the two development contracts with
properties not owned by the Operating Partnership but owned by
related parties was approximately $341,000.
o CESRES leases approximately 5,200 feet from a related party under an
operating lease agreement on a month to month basis. The lease
contains a provision for escalations in the event of increased real
estate taxes and operating expenses. In addition CESRES is allocated
its portion of certain rents for space shared with affiliated
entities. Rent is allocated ratably based on the amount of square
footage occupied by each entity. For the year ended December 31,
2000, rental payments under these leases approximated $75,000.
o During 1992, one of the Properties bought out the lease of Crystal
Food Services of Virginia, Inc. (CFS), a related entity, as part of
management's decision to increase the number of nationally known
retail tenants. Under the terms of the buyout, the property is
required to pay CFS 100% of the increased cash flow for ten years.
For the year ended December 31, 2000, payments to this entity were
approximately $78,000.
9. COMMITMENTS AND CONTINGENCIES
GROUND LEASES
Two of the Properties have ground leases that provide for an annual basic rental
of the greater of $50,000 or 50% of the properties' net cash flows after certain
debt service and certain operating expenses; these ground leases expire in 2062.
One of the Properties has a ground lease with certain Class A unit holders of
the Operating Partnership that provides for an annual rent based upon 6 percent
of the appraised value of the land, adjusted every ten years. However if the
value of the land decreases, the annual rent would remain the same. This ground
lease is subordinated to the mortgage debt on the property and expires in 2061.
The annual rent is $548,808 for the ten-year period ending April 30, 2002.
Another one of the Properties has a ground lease that expires in 2084 and
provides for a fixed rent payment that increases 5.5 percent annually. The
minimum ground rent expense for 2000 was $295,104.
Page 18
At the expiration of the ground leases, the land and all of the improvements
thereon will revert to the ground lessor. The future minimum annual rentals as
of December 31, 2000, for the ground leases are as follows (in thousands):
AMOUNT
------
2001 $ 988
2002 1,007
2003 1,027
2004 1,047
2005 1,069
Thereafter 581,993
---------
$ 587,131
=========
Ground rent expense for the years ended December 31, 2000, was approximately
$2.3 million.
BENEFIT PLANS
Substantially all employees of the Operating Partnership are eligible to
participate in the Charles E. Smith Companies Employees' Retirement Plan, a
profit-sharing plan (the Plan). Contributions to the Plan consist of
discretionary and matching contributions determined annually by the Board of
Managers. For discretionary and matching contributions related to periods prior
to December 31, 1999, and for matching contributions related to periods
subsequent to December 31, 1999, vesting is based on years of continuous
service. A participant is 100 percent vested in discretionary and matching
contributions related to periods prior to December 31, 1999, and in matching
contributions related to periods subsequent to December 31, 1999, plus earnings
thereon after five years of service. Participants are immediately 100 percent
vested in discretionary contributions plus earnings thereon related to periods
subsequent to December 31, 1999. For the year ended December 31, 2000,
contributions to the Plan included in operating expenses were approximately
$535,000, of which approximately $427,000, was discretionary.
LITIGATION
CESRES and the Properties are defendants in a number of actions generally
resulting from their roles as management agent or as property owners. These
actions are generally insured cases and are being defended by the Properties'
insurance carriers. In the opinion of management, based on the advice of legal
counsel, the resolution of such litigation will not have an adverse material
effect on the financial position or results of operations.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires
disclosure about the fair value for all financial instruments. The carrying
values of cash and cash equivalents, escrows and tenants' security deposits,
receivables, accounts payable and accrued expenses, and other assets and
liabilities are reasonable estimates of their fair values because of the short
maturities of these instruments. As of December 31, 2000, the fair value of the
line of credit approximates the carrying value. Mortgage notes payable have an
aggregate fair value of approximately $1.52 billion as of December 31, 2000,
based on the remaining maturities of the debt and interest rates currently
available to the Properties for debt with similar terms and remaining
maturities.
Page 19
11. INCENTIVE PLANS
The Operating Partnership applies Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans other than for the restricted
unit plan. Had compensation cost for the Operating Partnership employee unit
option plan been determined based on the fair value at the grant date consistent
with the methodology prescribed under SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, the Operating Partnership's net income would have been reduced by
approximately $1.8 million for the year ended December 31, 2000. The fair value
of the options issued in 2000 is estimated at approximately $3.6 million based
on the date of grant using the Black-Scholes option-pricing model. The following
assumptions were used: dividend yield of 4.6%, volatility of 21.7%, average
risk-free interest rate of 5.9%, and expected life of 10 years.
OPTION PLAN
The Operating Partnership maintains an employee stock and unit option plan (the
Option Plan) designed for executive officers and other key employees of the
Operating Partnership. The Option Plan authorizes the issuance of up to
1,836,000 Class A partnership units pursuant to options granted.
Options outstanding under the Option Plans are as follows:
WEIGHTED AVERAGE OPTIONS
NUMBER EXERCISE PRICE EXERCISABLE
------ -------------- -----------
Options Outstanding,
December 31, 1999 682,000 $ 26
Options Granted 688,900 34
Options Cancelled (36,500) 29
Options Exercised (1,000) 24
----------
Options Outstanding
December 31, 2000 1,333,400 30 430,844
==========
The exercise price of options granted under the Option Plan may not be less than
the fair market value of the limited partnership units on the date of grant.
Payments for units granted under the plan must be made in cash. The weighted
average remaining contractual life of options outstanding as of December 31,
2000, was 8.2 years.
Options granted under the Option Plan have a maximum term of ten years and vest
generally in three to five equal installments beginning on the first anniversary
of the date of grant. Generally, options terminate three months after the
optionee's termination of employment with the Operating Partnership. The
Executive Compensation Committee of the Board of Managers may provide, however,
that an option may be exercised over a longer period following termination of
employment, but in no event beyond the expiration date of the option.
Page 20
RESTRICTED UNIT PLAN
The Operating Partnership adopted a restricted unit plan (the Restricted Plan)
for executive officers and other key employees of the Operating Partnership. A
maximum of 125,000 Class A limited partnership units may be issued under the
Restricted Plan. Restricted units that have not vested at the time of an
employee's termination of employment with the Operating Partnership will be
forfeited except where such termination occurs by reason of death or disability.
Any restricted units forfeited pursuant to the vesting provisions of the
Restricted Plan will again be available for award under the Restricted Plan. As
of December 31, 2000, 82,994 Class A limited partnership restricted units had
been awarded to certain executive officers and key employees. These grants vest
in two to four equal annual installments beginning on the first anniversary of
the date of grant, subject to acceleration of vesting upon a change of control
of the Operating Partnership. As of December 31, 2000, 52,436 Class A limited
partnership restricted units are vested. During the year ended December 31,
2000, compensation expense related to the unit grants was approximately $536,000
based on the estimated fair market value of the Operating Partnership units at
the date of grant.
12. CONVERTIBLE, REDEEMABLE CLASS C UNITS
As discussed in Note 1, the Operating Partnership has issued 2.5 million Class C
limited partnership units. The Class C unitholder has the right to cause the
Operating Partnership to redeem all of its Class C units on or after October 31,
2007. The redemption price will be $24 per Class C unit, payable in cash or by a
five-year note at the Operating Partnership's discretion. The Class C unitholder
has the same rights in liquidation as the Class A unitholders. The Class C units
are convertible into Class A units at any time at the option of the holder and
will automatically convert into Class A units upon consummation of an Initial
Public Offering or Public REIT Transaction, as defined. The Investor also has a
contractual right to cause the Operating Partnership to redeem its Class C units
in the event of a merger or similar transaction involving the Operating
Partnership, for a redemption price equal to the value received in such
transaction for the number of Class A units into which such Class C units are
then convertible. The Class C units vote along with the Class A and Class D
units as a single class on all matters, except any amendments to the terms of
the Class C units, as to which they vote as a separate class. The accompanying
consolidated statement of income includes net income applicable to Class A and
Class C units as Class C preferential distributions do not accrue until November
1, 2007.
13. CUMULATIVE, CONVERTIBLE, PREFERRED CLASS D UNITS
As discussed in Note 1, in March 1999, the Investor contributed to the Operating
Partnership certain assets in return for approximately 7.7 million cumulative,
convertible, preferred Class D limited partnership units. Each Class D preferred
unit is entitled to receive a cumulative preferential cash distribution on an
annual basis of $1.81 in the first year following issuance, $1.89 in the second
year following issuance, $1.97 in the third year following issuance, and $2.05
in the fourth year following issuance and thereafter until February 2024.
Accrued Class D preferred distribution amounts that are not paid on the
applicable distribution payment dates accumulate, compounded quarterly until the
arrearage is fully paid, at interest rates ranging from 7.75% during the first
year following issuance to 8.50% during the fourth year following issuance and
thereafter (subject to a 2% reduction in rate after a Public REIT Transaction or
an Initial Public Offering). So long as any Class D preferred units are
outstanding, no distributions on Class A units, Class C units, or any other
class or series of units of the Operating Partnership over which the Class D
preferred units have priority in the payment of distributions (Junior Units) can
be declared or paid unless all accrued Class D preferred distribution amounts
are declared and paid. Aggregate distributions on each Class A unit for each
applicable year to date or annual period may not exceed the aggregate
distributions for such period on each Class D preferred unit (subject to
customary antidilution adjustments for splits, combinations and
recapitalizations).
Page 21
In the event of a liquidation, dissolution, or winding up of the Operating
Partnership, the holders of the Class D preferred units are entitled to receive
a distribution equal to the full amount of all accrued and unpaid cumulative
Class D preferred distribution amounts before any distribution of assets of the
Operating Partnership is made to the holders of Junior Units. Additionally,
after payment of any other preferential distributions or liquidation preferences
in respect of interests in the Operating Partnership, upon a liquidation,
dissolution, or winding up, the holders of the Class D preferred units are also
entitled to participate in the distribution of the assets of the Operating
Partnership ratably with the holders of the Class A units, Class C units, and
any other common units of the Operating Partnership then outstanding, in
accordance with the holders' respective capital accounts.
Class D preferred units are convertible into Class A units at any time at the
option of the holder on a one-for-one basis (subject to customary antidilution
adjustments for splits, combinations and recapitalizations). Any accrued but
unpaid Class D preferred distribution amounts outstanding at the time of such
optional conversion will also be converted into Class A units at the rate of
$31.50 per Class A unit (subject to similar adjustments). On February 15, 2024,
all Class D preferred units will automatically convert into Class A units on a
one-for-one basis (subject to similar adjustments), or if all Class D preferred
distribution amounts accrued on or prior to such date have not been paid in
full, then on the first date thereafter on which such payment is made in full.
The Class D preferred units vote along with the Class A and Class C units as a
single class on all matters except any amendments to the terms of the Class D
preferred units, as to which they vote as a separate class. The Class D
preferred units are not redeemable except following conversion into Class A
units, and then to the same extent as other Class A units are redeemable
following a Public REIT Transaction or Initial Public Offering.
The Investor has a right of first opportunity, subject to certain terms and
conditions, to purchase common equity and convertible and hybrid debt securities
to be issued by the Operating Partnership at a price below $31.50 per unit and
to maintain its percentage equity ownership in the event that the Operating
Partnership issues common equity or convertible or hybrid debt securities at a
price equal to or greater than $31.50 or if the Operating Partnership issues
nonconvertible preferred equity securities at any price.
The Operating Partnership granted certain indemnification rights, including the
right for the Investor to be indemnified through September 3, 2000, against the
Investor's ratable share (as defined) of any loss, liability, or expense
incurred by the Operating Partnership in excess of $100,000 by reason of any
breach or inaccuracy of the representations or warranties given by the Operating
Partnership to the Investor in connection with the March 1999 Transaction, and
to be indemnified through October 31, 2000, for any loss in excess of $100,000
accruing from or resulting by reason of claims of Predecessor Partners relating
to the consolidation. The Operating Partnership is liable under the above
indemnifications if the cumulative amount of the losses exceeds $3 million, up
to a maximum liability not to exceed $10 million. The Operating Partnership has
not incurred any losses by reason of any breach or inaccuracy of the
representations or warranties given by the Operating Partnership to the Investor
in connection with the March 1999 Transaction through October 31, 2000.
14. SUPPLEMENTAL CASH FLOW DATA
Information on non-cash investing and cash paid for interest for the year ended
December 31, 2000, is as follows (in thousands):
Cash paid for interest, net $ 91,472
Capitalized interest 2,730
Acquisition of rental property for
Operating Partnership units 21,268
Assumption of debt on acquisitions 69,809
Accrued Class D preferred unit distributions 1,794
Page 22
15. SUBSEQUENT EVENTS
On January 26, 2001, the Operating Partnership implemented a new incentive
compensation program whereby certain eligible employees were awarded phantom
units in the Operating Partnership. These phantom units allow the holder to
receive quarterly cash distributions equivalent to those received by partners of
the Operating Partnership, assuming the holder is employed by the Operating
Partnership at the time the distributions are paid. The phantom units are
considered 50% vested two years from the grant date. At that time, the holders
of the phantom units can elect to either exchange the vested phantom units for
the value of the units, as determined by the Operating Partnership, or retain
the phantom units and continue to receive quarterly cash distributions. If the
holder elects to receive cash for the vested units, the holder will no longer
receive cash distributions on those units. The phantom units are considered 100%
vested four years from the grant date. Once fully vested, the holder of the
phantom units will receive either the cash value for 100% of the phantom units
or the remaining 50% of the phantom units depending on the holder's election
made initially after two years. The holder does not have the option to continue
holding the phantom units once they become fully vested. The value of the
phantom units is determined solely by the Operating Partnership at the time of
payment. If at any time subsequent to the grant date the employee is terminated,
the phantom units cease to exist as do all benefits associated with them. The
holders of the phantom units are not partners in the Operating Partnership. The
Operating Partnership accrues a liability over the vesting period of the phantom
units based on its estimate of the value it will pay out and records all cash
distributions as expense when paid. The Operating Partnership granted 43,050
phantom units on January 26, 2001.
On May 4, 2001, SRW announced its intention to merge with Archstone Communities.
The merger is expected to be consummated by October 31, 2001. Beginning in the
fourth quarter of 2001 and extending through the second quarter of 2002, the
Operating Partnership will establish internal personnel and resources to perform
the functions previously provided by SRW including: legal, systems, human
resources, payroll, accounts payable, and other administrative activities.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
BUSINESS COMBINATIONS (effective July 1, 2001) and SFAS No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS (effective January 1, 2002). SFAS No. 141 prohibits
pooling-of interests accounting for acquisitions. SFAS No. 142 specifies that
goodwill and some intangible assets will no longer be amortized but instead be
subject to periodic impairment testing. The Operating Partnership does not
believe either standard will materially impact its financial statements.
On July 5, 2001, the Operating Partnership completed a $52.5 million refinancing
of Second Crystal Park Associates L.P.'s mortgage loan. The new loan bears
interest at a fixed rate of 7.05% and matures on August 1, 2007. All of the
proceeds from the new loan plus approximately $7.2 million in cash were used to
repay the existing mortgage loan of approximately $59.7 million.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which supersedes
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. SFAS No. 144 is effective for the Operating
Partnership in first quarter of 2002. The Operating Partnership does not believe
the standard will materially impact its financial statements.
Unaudited
---------
On October 19, 2001, the Investor and the Operating Partnership entered into
an agreement and plan of merger pursuant to which the Investor will purchase
the remaining 66% of the Operating Partnership units it does not own. The
Investor will offer to exchange .7879 of a Class A unit of the Investor for
each Class A unit of the Operating Partnership. Based on an Investor unit
value of $38.14, on October 18, 2001, each Operating Partnership Class A
unitholder would get the equivalent of $30.05 for each Class A unit in the
Operating Partnership. The estimated consideration for the remaining 66% of
the Operating Partnership's Class A units is approximately $599 million of
newly issued Investor Operating Partnership Units (which equates to 19.9
million Operating Partnership Class A units converted into 15.7 million
Investor Operating Partnership Class A units at $38.14 per unit). This
transaction, which is expected to be completed by the end of the first
quarter of 2002, is subject to customary closing conditions.
Page 23
CHARLES E. SMITH COMMERCIAL REALTY L.P.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001 AND 2000
UNAUDITED
Page 24
CHARLES E. SMITH COMMERCIAL REALTY L.P.
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
Rental property, net of accumulated depreciation $ 1,167,330
Cash and cash equivalents 3,310
Escrows and tenants' security deposits - restricted 36,829
Tenant and other receivables, net of allowances
for doubtful accounts of $615 22,767
Accrued rental income 23,805
Other receivables 1,552
Deferred charges, net of accumulated amortization 22,079
Investment in joint venture 8,515
Other assets 6,067
-----------
Total assets $ 1,292,254
===========
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Mortgage notes payable $ 1,464,947
Line of credit 28,500
Accounts payable and accrued expenses 29,799
Accounts payable - related parties 4,214
Rents received in advance 5,173
Tenants' security deposits 3,826
Other liabilities 7,544
-----------
Total liabilities 1,544,003
-----------
Commitments and contingencies
Convertible, redeemable Class C unitholders (2.5 million units authorized,
issued, and outstanding, $24 per unit carrying and redemption
amount) 59,004
Partners' deficit:
Cumulative, convertible, preferred Class D unitholders (7.7 million units
authorized, issued, and outstanding) 241,900
Class A unitholders (19.7 million units authorized, issued, and outstanding) (618,367)
Accumulated earnings 65,714
-----------
Total partners' deficit (310,753)
-----------
Total liabilities and partners' deficit $ 1,292,254
===========
The accompanying notes are an integral part of this consolidated statement.
Page 25
CHARLES E. SMITH COMMERCIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
------------- ------------- ------------- -------------
REVENUES
Property rentals $ 88,100 $ 75,024 $ 175,535 $ 149,981
Expense reimbursements 2,588 1,205 5,188 2,816
Property management and leasing 4,067 6,149 7,969 10,871
--------- --------- --------- ---------
Total revenues 94,755 82,378 188,692 163,668
--------- --------- --------- ---------
EXPENSES
Operating 20,098 19,106 39,732 37,152
Real estate taxes 6,221 5,243 12,448 10,339
Ground rent 474 782 1,275 1,506
Depreciation and amortization 13,168 10,284 25,292 20,150
General and administrative 5,280 5,850 10,100 11,116
Other 223 47 394 80
--------- --------- --------- ---------
Total operating expenses 45,464 41,312 89,241 80,343
--------- --------- --------- ---------
Operating income 49,291 41,066 99,451 83,325
Income from unconsolidated joint venture 170 162 267 284
Interest income 390 674 860 1,566
Interest expense (28,417) (22,522) (56,822) (45,963)
Other non-operating expense, net (989) -- (989) --
--------- --------- --------- ---------
Net income 20,445 19,380 42,767 39,212
Class D preferred unit distributions (3,767) (3,720) (7,459) (7,156)
Net income applicable to Class A and
--------- --------- --------- ---------
Class C unitholders $ 16,678 $ 15,660 $ 35,308 $ 32,056
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
Page 26
CHARLES E. SMITH COMMERCIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 42,767 $ 39,212
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 25,292 20,150
Amortization of deferred financing charges 1,222 898
Amortization of unit grants 267 262
Provision for loss on marketable securities 1,369 --
Income from investment in joint venture (267) (284)
Loss on disposal of fixed assets 21 --
Lease acquisition costs (1,630) (714)
Increase in tenant receivables (1,056) (2,346)
Decrease in accrued rental income 488 1,788
Decrease (increase) in other receivables 2,182 (742)
Increase in other assets (3,250) (2,810)
Increase in accounts payable and accrued expenses 313 774
Increase (decrease) in accounts payable-related parties 2,259 (3,709)
Decrease (increase) in rents received in advance (324) 638
Increase in tenants' security deposits 153 670
Increase in other liabilities 631 2,012
--------- ---------
Net cash provided by operating activities 70,437 55,799
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to rental property (40,247) (27,600)
Acquisitions of rental property -- (103,400)
Proceeds from disposal of fixed assets 45 --
Decrease (increase) in escrows and tenants' security deposits 499 (15,141)
Distribution from joint venture 351 276
--------- ---------
Net cash used in investing activities (39,352) (145,865)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgages payable (8,667) (27,174)
Proceeds from mortgages payable 15,384 70,000
(Paydown of) proceeds from line of credit, net (5,500) 29,500
Payment of financing fees (11) (563)
Repurchase of partnership units (2,517) (200)
Contributions -- 4,036
Distributions to partners (32,319) (24,138)
--------- ---------
Net cash (used in) provided by financing activities (33,630) 51,461
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,545) (38,605)
CASH AND CASH EQUIVALENTS, beginning of period 5,855 47,287
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 3,310 $ 8,682
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized $ 56,504 $ 44,656
Capitalized interest 2,124 895
NON-CASH TRANSACTIONS:
Acquisition of rental property for Operating Partnerships units $ -- $ 21,268
Assumption of debt on acquisitions -- 69,809
The accompanying notes are an integral part of these consolidated statements.
Page 27
CHARLES E. SMITH COMMERCIAL REALTY L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001
(UNAUDITED)
1. ORGANIZATION AND FORMATION OF OPERATING PARTNERSHIP
Charles E. Smith Commercial Realty L.P. (the Operating Partnership) was formed
on July 25, 1997, as a Delaware limited partnership. As of June 30, 2001, the
Operating Partnership had approximately 19.7 million Class A units, 2.5 million
Class C units, and approximately 7.7 million Class D units outstanding. The
Operating Partnership and its subsidiaries are engaged in the ownership,
operation, management, leasing, acquisition, expansion, and development of
primarily commercial office building properties (the Properties). The Operating
Partnership also owns a 100% ownership interest in a commercial management
company that provides leasing and management services to the Properties and to
third parties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of June 30, 2001, the
consolidated statements of income for the three and six months ended June 30,
2001 and 2000, and the consolidated statements of changes in cash flows for the
six months ended June 30, 2001 and 2000, are unaudited. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
changes in cash flows have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting standards generally accepted in the United States have been
condensed or omitted. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of the
Operating Partnership for the year ended December 31, 2000. The results of
operations for the three and six months ended June 30, 2001 are not necessarily
indicative of the operating results for the full year.
The accompanying consolidated financial statements include all of the accounts
of the Operating Partnership and its majority owned subsidiaries which it
controls. All significant intercompany balances and transactions have been
eliminated. The Operating Partnership's investment in an unconsolidated entity,
which represents an ownership interest of twenty percent, is accounted for under
the equity method.
Management has made estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, as amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO. 133- AN AMENDMENT OF FASB STATEMENT NO. 133, which establishes
accounting and reporting standards requiring every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability measured at
Page 28
its fair value. The Statement requires that changes in the derivative
instrument's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met.
The accompanying consolidated balance sheet includes approximately $0.1 million
of stock purchase warrants in other assets and approximately $1.1 million of
deferred revenue in other liabilities. The stock purchase warrants were received
from companies that provide fiber-optic network and broadband services to
customers in exchange for access to the properties owned by the Operating
Partnership. SFAS No. 133 requires the warrants to be recorded at fair value
with changes in fair value recognized currently in earnings. Through June 30,
2001, the Operating Partnership recognized other non-operating expense of
approximately $1.4 million related to recording the warrants to fair value.
Through June 30, 2001, approximately $0.4 million of deferred revenue has been
amortized and is included in other non-operating expense, net.
On April 27, 2001 and May 16, 2001, the Operating Partnership entered into two
interest rate swap agreements to manage a portion of the cash flow risk
associated with one of its floating rate mortgage loans. Each swap has a
notional amount of $25 million and both mature on July 2, 2002. The swaps are
being accounted for as hedges in accordance with SFAS No. 133. The accompanying
consolidated balance sheet includes approximately $0.04 million in other
liabilities related to the fair value of the interest rate swap contracts at
June 30, 2001.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
BUSINESS COMBINATIONS (effective July 1, 2001) and SFAS No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS (effective January 1, 2002). SFAS No. 141 prohibits
pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that
goodwill and some intangible assets will no longer be amortized but instead be
subject to periodic impairment testing. The Operating Partnership does not
believe either standard will materially impact its financial statements.
4. FINANCINGS AND DISPOSITIONS
On July 5, 2001, the Operating Partnership completed a $52.5 million refinancing
of Second Crystal Park Associates L.P.'s mortgage loan. The new loan bears
interest at a fixed rate of 7.05% and matures on August 1, 2007. All of the
proceeds from the new loan plus $7.2 million in cash were used to repay the
existing mortgage loan of $59.7 million.
5. RELATED-PARTY TRANSACTIONS
On May 4, 2001, Charles E. Smith Residential Realty, Inc. (SRW), a related
party, announced its intention to merge with Archstone Communities. The merger
is expected to be consummated by October 31, 2001. Beginning in the fourth
quarter of 2001 and extending through the second quarter of 2002, the Operating
Partnership will establish internal personnel and resources to perform the
functions previously provided by SRW including: legal, systems, human resources,
payroll, accounts payable, and other administrative activities.
6. PHANTOM UNIT PLAN
On January 26, 2001, the Operating Partnership implemented a new incentive
compensation program whereby certain eligible employees were awarded phantom
units in the Operating Partnership. These phantom units allow the holder to
receive quarterly cash distributions equivalent to those received by partners of
the Operating Partnership, assuming the holder is employed by the Operating
Partnership at the time the distributions are paid. The phantom units are
considered 50% vested two years from the grant date. At that time, the holders
of the phantom units can elect to either exchange the vested phantom
Page 29
units for the value of the units, as determined by the Operating Partnership, or
retain the phantom units and continue to receive quarterly cash distributions.
If the holder elects to receive cash for the vested units, the holder will no
longer receive cash distributions on those units. The phantom units are
considered 100% vested four years from the grant date. Once fully vested, the
holder of the phantom units will receive either the cash value for 100% of the
phantom units or the remaining 50% of the phantom units depending on the
holder's election made initially after two years. The holder does not have the
option to continue holding the phantom units once they become fully vested. The
value of the phantom units is determined solely by the Operating Partnership at
the time of payment. If at any time subsequent to the grant date the employee is
terminated, the phantom units cease to exist as do all benefits associated with
them. The holders of the phantom units are not partners in the Operating
Partnership. The Operating Partnership accrues a liability over the vesting
period of the phantom units based on its estimate of the value it will pay out
and records all cash distributions as expense when paid. The Operating
Partnership initially granted 43,050 phantom units on January 26, 2001. As of
June 30, 2001, 42,850 phantom units were issued and outstanding.
7. SUBSEQUENT EVENTS
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. SFAS No. 144 is effective for the Operating
Partnership in the first quarter of 2002. The Operating Partnership does not
believe the standard will materially impact its financial statements.
On October 19, 2001, Vornado Realty Trust (the Investor) and the Operating
Partnership entered into an agreement and plan of merger pursuant to which
the Investor will purchase the remaining 66% of the Operating Partnership
units it does not own. The Investor will offer to exchange .7879 of a Class A
unit of the Investor for each Class A unit of the Operating Partnership.
Based on an Investor unit value of $38.14, on October 18, 2001, each
Operating Partnership Class A unitholder would get the equivalent of $30.05
for each Class A unit in the Operating Partnership. The estimated
consideration for the remaining 66% of the Operating Partnership's Class A
units is approximately $599 million of newly issued Investor Operating
Partnership Units (which equates to 19.9 million Operating Partnership Class
A units converted into 15.7 million Investor Operating Partnership Class A
units at $38.14, per unit). This transaction, which is expected to be
completed by the end of the first quarter of 2002, is subject to customary
closing conditions.
Page 30
VORNADO REALTY TRUST
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
On October 19, 2001, Vornado Realty Trust ("Vornado"), a real estate
investment trust organized under the laws of the State of Maryland, entered into
a definitive agreement pursuant to which Charles E. Smith Commercial Realty L.P.
("CESCR") will combine its operations with Vornado. Vornado currently owns a 34%
interest in CESCR. The consideration for the remaining 66% of CESCR is
approximately $1,584 million, consisting of a fixed amount 15.7 million newly
issued Vornado Operating Partnership units (preliminarily valued at $599
million) and $985 million of debt (66% of CESCR's total debt). Below is a
summary:
Total To be Acquired Currently Owned
-------- -------------- ---------------
Vornado OP units $ 928 $ 599 $ 329
CESCR debt 1,493 985 508
-------- -------- --------
Total $ 2,421 $ 1,584 $ 837
======== ======== ========
The above does not include $30 million of estimated transaction
costs which will be funded from Vornado's working capital.
CESCR owns and manages approximately 12.4 million square feet of
office properties in Washington D.C. and Northern Virginia, and manages an
additional 5.8 million square feet of office and other commercial properties in
the Washington D.C. area.
BASIS OF PRO FORMA PRESENTATION
The unaudited consolidated pro forma financial information presents,
(i) the consolidated pro forma balance sheet of Vornado Realty Trust as of June
30, 2001, as if the purchase of the remaining 66% partnership interest in CESCR
occurred on June 30, 2001, and (ii) the consolidated pro forma income statements
of Vornado Realty Trust for the year ended December 31, 2000 and for the six
months ended June 30, 2001, as if the above transaction occurred on January 1,
2000.
The unaudited consolidated pro forma financial information is not
necessarily indicative of what Vornado's actual results of operations or
financial position would have been had these transactions been consummated on
the dates indicated, nor does it purport to represent Vornado's results of
operations or financial position for any future period. The results of
operations for the period ended June 30, 2001 are not necessarily indicative of
the operating results for the full year.
The unaudited consolidated pro forma financial information should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Vornado's Annual Report on Form 10-K for the year ended December
31, 2000, and Quarterly Report on Form 10-Q for the period ended June 30, 2001,
and the consolidated financial statements and notes thereto of Charles E. Smith
Commercial Realty L.P. for the year ended December 31, 2000, and the six months
and three months ended June 30, 2001 and 2000 filed herewith. In management's
opinion, all adjustments necessary to reflect these transactions have been made.
Page 31
VORNADO REALTY TRUST
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2001
(amounts in thousands)
VORNADO CESCR PRO FORMA TOTAL
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
ASSETS
Real Estate, Net $ 4,134,190 $ 1,167,330 $ 1,299,338 $ 6,591,477
(3,693)(C)
(5,688)(D)
Investments and Advances
to Partially-Owned Entities 1,279,468 -- (329,251)(B) 950,217
Notes and Mortgages Receivable 213,432 1,552 -- 214,984
Cash and Cash Equivalents 119,920 3,310 (30,000)(F) 93,230
Receivable Arising from the
Straight-lining of Rents 126,592 23,805 (23,805)(A) 130,285
3,693 (C)
Other Assets 629,049 96,257 (22,079)(A) 722,945
14,030 (A)
5,688 (D)
------------ ------------- -------------- -----------
TOTAL ASSETS $ 6,502,651 $ 1,292,254 $ 908,233 $ 8,703,138
============ ============= ============== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes and Mortgages Payable $ 2,284,009 $ 1,464,947 $ 57,800 (E) $ 3,806,756
Revolving Credit Facility 450,000 28,500 -- 478,500
Other Liabilities 191,739 50,556 -- 242,295
------------ ------------- -------------- -----------
Total Liabilities 2,925,748 1,544,003 57,800 4,527,551
Minority Interest of Unitholders
in the Operating Partnership 1,464,544 -- 598,684 (A) 2,063,228
Convertible Redeemable Class C units -- 59,004 (59,004)(G) --
Shareholders' Equity 2,112,359 (310,753) 310,753 (G) 2,112,359
------------ ------------- -------------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,502,651 $ 1,292,254 $ 908,233 $ 8,703,138
============ ============= ============== ===========
See accompanying notes to pro forma consolidated financial statements
Page 32
VORNADO REALTY TRUST
PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(amounts in thousands,
except share and per share amounts)
HISTORICAL
------------------------ PRO FORMA TOTAL
VORNADO CESCR ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ---------
REVENUES:
Rentals $ 416,970 $ 175,535 $ 2,195 (H) $ 594,700
Expense Reimbursements 66,635 5,188 -- 71,823
Property Management, Leasing and Other 5,080 7,969 -- 13,049
---------- ----------- ---------- ---------
Total Revenues 488,685 188,692 2,195 679,572
---------- ----------- ---------- ---------
EXPENSES:
Operating 197,214 53,849 -- 251,063
Depreciation and Amortization 61,951 25,292 12,883 (I) 100,126
General and Administrative 36,663 10,100 -- (J) 46,763
Costs of Acquisitions not Consummated 5,000 -- -- 5,000
---------- ----------- ---------- ---------
Total Expenses 300,828 89,241 12,883 402,952
---------- ----------- ---------- ---------
Operating Income 187,857 99,451 (10,688) 276,620
Income applicable to Alexander's 16,980 -- -- 16,980
Income from Partially-Owned Investments 43,218 267 (14,195)(K) 29,290
Interest and Other Investment Income 29,347 860 -- 30,207
Write-off of Investments in Technology Companies (18,284) -- -- (18,284)
Interest and Debt Expense (93,389) (57,811) 3,220 (L) (147,980)
Net Gain on Sale of Real Estate 12,445 -- -- 12,445
Net Gain From Condemnation Proceeding 3,050 -- -- 3,050
Minority Interest:
Perpetual preferred unit distributions (34,652) -- -- (34,652)
Minority limited partnership earnings (20,243) -- (18,929)(M) (39,172)
Partially-owned entities (768) -- -- (768)
---------- ----------- ---------- ---------
Income before Cumulative Effect of Change in Accounting Principle and
Extraordinary Item
125,561 42,767 (40,592) 127,736
Cumulative Effect of Change in Accounting Principle (4,110) -- -- (4,110)
Extraordinary Item 1,170 -- -- 1,170
---------- ----------- ---------- ---------
Net Income 122,621 42,767 (40,592) 124,796
Preferred Stock Dividends (18,865) (7,459) 7,459 (N) (18,865)
---------- ----------- ---------- ---------
Net Income Applicable to Common Shares $ 103,756 $ 35,308 $ (33,133) $ 105,931
========== =========== ========== =========
Net Income per Common Share, based on
89,501,001 weighted average shares
$ 1.16 $ 1.18
========== =========
See accompanying notes to pro forma consolidated financial statements
Page 33
VORNADO REALTY TRUST
PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2000
(amounts in thousands,
except share and per share amounts)
HISTORICAL
------------------------- PRO FORMA TOTAL
VORNADO CESCR ADJUSTMENTS PRO FORMA
----------- ---------- ----------- ---------
REVENUES:
Rentals $ 695,078 $ 313,982 $ 6,355 (H) $1,015,415
Expense Reimbursements 120,056 7,992 -- 128,048
Property Management, Leasing and Other 11,398 22,110 -- 33,508
----------- ---------- --------- ----------
Total Revenues 826,532 344,084 6,355 1,176,971
----------- ---------- --------- ----------
EXPENSES:
Operating 318,360 105,262 -- 423,622
Depreciation and Amortization 99,846 42,998 25,766 (I) 168,610
General and Administrative 47,911 24,105 -- (J) 72,016
----------- ---------- --------- ----------
Total Expenses 466,117 172,365 25,766 664,248
----------- ---------- --------- ----------
Operating Income 360,415 171,719 (19,411) 512,723
Income applicable to Alexander's 13,053 -- -- 13,053
Income from Partially-Owned Investments 90,404 596 (25,724)(K) 65,276
Interest and Other Investment Income 32,926 2,957 -- 35,883
Interest and Debt Expense (170,273) (98,565) 6,440 (L) (262,398)
Net Gain on Sale of Real Estate 10,965 -- -- 10,965
Minority Interest:
Perpetual preferred unit distributions (62,089) -- -- (62,089)
Minority limited partnership earnings (38,320) -- (41,442)(M) (79,762)
Partially-owned entities (1,965) -- -- (1,965)
----------- ---------- --------- ----------
Income before Extraordinary Item 235,116 76,707 (80,137) 231,686
Extraordinary Item (1,125) -- -- (1,125)
----------- ---------- --------- ----------
Net Income 233,991 76,707 (80,137) 230,561
Preferred Stock Dividends (38,690) (14,412) 14,412 (N) (38,690)
----------- ---------- --------- ----------
Net Income Applicable to Common Shares $ 195,301 $ 62,295 $ (65,725) $ 191,871
=========== ========== ========= ==========
Net Income per Common Share, based on
88,692,089 weighted average shares
$ 2.20 $ 2.16
=========== ==========
See accompanying notes to pro forma consolidated financial statements
Page 34
VORNADO REALTY TRUST
SUPPLEMENTAL INFORMATION
(IN 000S)
Funds from operations for the six months ended June 30, 2001,
includes (i) a charge of $5,000 for the write off of costs associated with two
acquisitions not consummated and (ii) a charge of $18,284 resulting from the
write-off of all of Vornado's investments in technology companies. The
following table reconciles net income and funds from operations for the six
months ended June 30, 2001:
FOR THE SIX MONTHS ENDED JUNE 30, 2001
------------------------------------------------
HISTORICAL
---------------------- PRO FORMA TOTAL
VORNADO CESCR ADJUSTMENTS PRO FORMA
--------- --------- ----------- ---------
FUNDS FROM OPERATIONS ("FFO") (1)
Net Income $ 103,756 $ 42,767 $ (40,592) $ 105,931
Cumulative Effect of Change in Accounting Principle 4,110 -- -- 4,110
Extraordinary Item (1,170) -- -- (1,170)
Depreciation and Amortization of Real Property 60,081 25,168 12,181 97,430
Straight-lining of property rentals for rent escalations (13,074) 510 (2,195) (14,759)
Leasing fees in excess of income recognized (248) -- -- (248)
Appreciation of Securities Held in Officer's Deferred
Compensation Trust 669 -- -- 669
Net Gain on Sale of Real Estate (12,445) -- -- (12,445)
Net Gain on Condemnation Proceeding (3,050) -- -- (3,050)
Proportionate share of adjustments to equity in
income of partially-owned entities to arrive at FFO 24,558 -- (8,730) 15,828
Minority Interest in Excess of Preferential Distributions (7,716) -- (12,709) (20,425)
--------- --------- --------- ---------
155,471 68,445 (52,045) 171,871
Series A Preferred Stock Dividends 10,366 -- -- 10,366
--------- --------- --------- ---------
FFO (1) 165,837 68,445 (52,045) 182,237
Adjustments to arrive at Operating Partnership FFO:
Addback of minority interest reflected as equity
in the Operating Partnership 25,951 -- 31,999 57,950
--------- --------- --------- ---------
Operating Partnership FFO (2) $ 191,788 $ 68,445 $ (20,046) $ 240,187
========= ========= ========= =========
CASH FLOW PROVIDED BY (USED IN):
Operating Activities $ 192,866 $ 70,437 $ (10,975) $ 252,328
Investing Activities (59,966) (39,352) (678,700) (778,018)
Financing Activities 149,969 (33,630) 678,700 795,039
Expenditures to Maintain the Assets, including
Tenant Improvements $ 26,490 $ 5,333 $ -- $ 31,823
Leasing Commissions 6,090 1,342 -- 7,432
--------- --------- --------- ---------
TOTAL RECURRING CAPITAL EXPENDITURES $ 32,580 $ 6,675 $ -- $ 39,255
========= ========= ========= =========
----------
(1) Funds from operations does not represent cash generated from operating
activities in accordance with accounting principles generally accepted in
the United States of America and is not necessarily indicative of cash
available to fund cash needs which is disclosed in the consolidated
statements of cash flows in the Company's Form 10-Q and CESCR's
consolidated statements of cash flows included earlier herein. There are
no material legal or functional restrictions on the use of funds from
operations. Funds from operations should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flows as a measure of liquidity.
Management considers funds from operations a supplemental measure of
operating performance and along with cash flow from operating activities,
financing activities and investing activities, it provides investors with
an indication of the ability of the Company to incur and service debt, to
make capital expenditures and to fund other cash needs. Funds from
operations may not be comparable to similarly titled measures reported by
other REITs since a number of REITs, including the Company, calculate
funds from operations in a manner different from that used by NAREIT.
Funds from operations, as defined by NAREIT, represents net income
applicable to common shares before depreciation and amortization,
extraordinary items and gains and losses on sales of real estate. Funds
from operations as disclosed above has been modified from this definition
to adjust primarily for the effect of straight-lining of property rentals
for rent escalations and leasing fee income.
(2) The number of shares that should be used for determining diluted funds
from operations per share and Operating Partnership ("OP") funds from
operations per share is as follows:
FOR THE SIX MONTHS ENDED JUNE 30, 2001
------------------------------------------------
HISTORICAL
---------------------- PRO FORMA TOTAL
(IN 000s) VORNADO CESCR ADJUSTMENTS PRO FORMA
--------- --------- ----------- ---------
Shares used for determining diluted FFO per share 97,519 -- -- 97,519
Convertible OP units:
Non-Vornado owned Class A Units 6,628 -- 15,750 22,378
Class D Units 864 -- -- 864
B-1 822 -- -- 822
B-2 411 -- -- 411
C-1 855 -- -- 855
E-1 5,680 -- -- 5,680
------- ----- ------- -------
Shares used for determining OP diluted FFO per share 112,779 -- 15,750 128,529
======= ===== ======= =======
Page 35
VORNADO REALTY TRUST
SUPPLEMENTAL INFORMATION
(IN 000S)
The following table reconciles net income and funds from operations
for the year ended December 31, 2000:
FOR THE YEAR ENDED DECEMBER 31, 2000
------------------------------------------------
HISTORICAL
---------------------- PRO FORMA TOTAL
VORNADO CESCR ADJUSTMENTS PRO FORMA
--------- --------- ----------- ---------
FUNDS FROM OPERATIONS ("FFO") (1)
Net Income $ 195,301 $ 76,707 $ (80,137) $ 191,871
Extraordinary Item 1,125 -- -- 1,125
Depreciation and Amortization of Real Property 97,744 42,750 24,363 164,857
Straight-lining of property rentals for rent escalations (28,893) 3,626 (6,355) (31,622)
Leasing fees in excess of income recognized 1,259 -- -- 1,259
Appreciation of Securities Held in Officer's Deferred
Compensation Trust 4,765 -- -- 4,765
Net Gain on Sale of Real Estate (10,965) -- -- (10,965)
Proportionate share of adjustments to equity in
income of partially-owned entities to arrive at FFO 69,578 -- (15,768) 53,810
Minority Interest in Excess of Preferential Distributions (16,445) -- (26,641) (43,086)
----------- ---------- ---------- -----------
313,469 123,083 (104,538) 332,014
Series A Preferred Stock Dividends 21,689 -- -- 21,689
----------- ---------- ---------- -----------
FFO (1) 335,158 123,083 (104,538) 353,703
Adjustments to arrive at Operating Partnership FFO:
Addback of minority interest reflected as equity
in the Operating Partnership 52,310 -- 60,497 112,807
----------- ---------- ---------- -----------
Operating Partnership FFO (2) $ 387,468 $ 123,083 $ (44,041) $ 466,510
=========== ========== ========== ===========
CASH FLOW PROVIDED BY (USED IN):
Operating Activities $ 249,921 $ 123,979 $ (19,284) $ 354,616
Investing Activities (699,375) (382,695) (678,700) (1,760,770)
Financing Activities 473,813 217,284 678,700 1,369,797
Expenditures to Maintain the Assets, including
Tenant Improvements $ 45,497 $ 19,819 $ -- $ 65,316
Leasing Commissions 11,571 1,986 -- 13,557
----------- ---------- ---------- -----------
TOTAL RECURRING CAPITAL EXPENDITURES $ 57,068 $ 21,805 $ -- $ 78,873
=========== ========== ========== ===========
----------
(1) Funds from operations does not represent cash generated from operating
activities in accordance with accounting principles generally accepted in
the United States of America and is not necessarily indicative of cash
available to fund cash needs which is disclosed in the consolidated
statements of cash flows in the Company's Form 10-K and CESCR's
consolidated statements of cash flows included earlier herein. There are
no material legal or functional restrictions on the use of funds from
operations. Funds from operations should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flows as a measure of liquidity.
Management considers funds from operations a supplemental measure of
operating performance and along with cash flow from operating activities,
financing activities and investing activities, it provides investors with
an indication of the ability of the Company to incur and service debt, to
make capital expenditures and to fund other cash needs. Funds from
operations may not be comparable to similarly titled measures reported by
other REITs since a number of REITs, including the Company, calculate
funds from operations in a manner different from that used by NAREIT.
Funds from operations, as defined by NAREIT, represents net income
applicable to common shares before depreciation and amortization,
extraordinary items and gains and losses on sales of real estate. Funds
from operations as disclosed above has been modified from this definition
to adjust primarily for (i) the effect of straight-lining of property
rentals for rent escalations and leasing fee income, and (ii) the reversal
of income taxes (benefit) which are considered non-recurring because of
the conversion of Temperature Controlled Logistics companies to REITs in
2000.
(2) The number of shares that should be used for determining diluted funds
from operations per share and Operating Partnership ("OP") funds from
operations per share is as follows:
FOR THE YEAR ENDED DECEMBER 31, 2000
------------------------------------------------
HISTORICAL
---------------------- PRO FORMA TOTAL
(IN 000s) VORNADO CESCR ADJUSTMENTS PRO FORMA
--------- --------- ----------- ---------
Shares used for determining diluted FFO per share 96,710 -- -- 96,710
Convertible OP units:
Non-Vornado Owned Class A Units 6,457 -- 15,750 22,207
Class D Units 869 -- -- 869
B-1 822 -- -- 822
B-2 411 -- -- 411
C-1 855 -- -- 855
E-1 5,680 -- -- 5,680
--------- ------ --------- --------
Shares used for determining OP diluted FFO per share 111,804 -- 15,750 127,554
========= ====== ========= ========
Page 36
VORNADO REALTY TRUST
SUPPLEMENTAL INFORMATION
EBITDA BY SEGMENT: FOR THE SIX MONTHS ENDED JUNE 30, 2001
-------------------------------------------------
HISTORICAL PRO FORMA
VORNADO % VORNADO %
--------- --------- --------- ---------
NYC Office $ 147,553 39% $ 147,553 32%
CESCR 42,475 11% 126,380 27%
--------- --------- --------- ---------
Total Office 190,028 50% 273,933 59%
Retail 58,417 15% 58,417 13%
Merchandise Mart 53,550 14% 53,550 11%
Temperature Controlled Logistics 40,147 11% 40,147 9%
Other (2) 36,192 10% 36,192 8%
--------- --------- --------- ---------
Total EBITDA (1) (2) $ 378,334 100% $ 462,239 100%
========= ========= ========= =========
FOR THE YEAR ENDED DECEMBER 31, 2000
------------------------------------------------
HISTORICAL PRO FORMA
VORNADO % VORNADO %
--------- -------- --------- --------
NYC Office $ 255,369 35% $ 255,369 29%
CESCR 75,656 10% 221,896 25%
--------- -------- --------- --------
Total Office 331,025 45% 477,265 54%
Retail 121,786 16% 121,786 14%
Merchandise Mart 91,858 12% 91,858 10%
Temperature Controlled Logistics 93,160 13% 93,160 11%
Other 101,046 14% 101,046 11%
--------- -------- --------- --------
Total EBITDA (1) $ 738,875 100% $ 885,115 100%
========= ======== ========= ========
----------
(1) EBITDA represents income before interest, taxes, depreciation and
amortization, extraordinary or non-recurring items, gains or losses on
sales of real estate, the effect of straight-lining of property rentals
for rent escalations and minority interest. Management considers EBITDA a
supplemental measure for making decisions and assessing the performance of
its segments. EBITDA may not be comparable to similarly titled measures
employed by other companies.
(2) EBITDA for the six months ended June 30, 2001 includes $5,000 for costs of
acquisitions not consummated and $18,284 for the write off of Vornado's
investments in technology companies.
Page 37
VORNADO REALTY TRUST
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(A) Excess of fair value over net assets acquired:
Vornado's existing ownership interest........................................ $ 329,251
Cost of 66% interest to be acquired:
Value of Vornado Realty L.P. units issued................. $ 598,684
CESCR phantom units acquired for cash..................... 1,200
Estimated transactions costs.............................. 28,800
----------
628,684
-------------
957,935
CESCR historical net deficit acquired........................................ 251,749
-------------
1,209,684
Elimination of deferred rent receivable arising from straight lining of
rent escalations.......................................................... 23,805
Elimination of deferred charges.............................................. 22,079
-------------
Excess of fair value over net assets acquired................................ $ 1,255,568
=============
Balance Sheet Allocation:
Adjustment to real estate.................................................... $ 1,299,338
Fair value of management company............................................. 14,030
-------------
Total Assets................................................................. 1,313,368
Adjustment to fair value CESCR outstanding debt.............................. (57,800)
-------------
Excess of fair value over net assets acquired................................ $ 1,255,568
=============
(B) Elimination of Vornado's existing ownership interest in CESCR which was
accounted for on the equity method.
(C) Carryover basis of CESCR receivable arising from the straight lining of
rents related to portion of the business already owned by Vornado.
(D) Carryover basis of CESCR deferred charges related to the portion of the
business already owned by Vornado.
(E) Adjustment to fair value CESCR outstanding debt at June 30, 2001.
(F) To record estimated transaction costs funded from Vornado's working
capital.
(G) To eliminate CESCR preferred redeemable and common equity.
Page 38
VORNADO REALTY TRUST
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(H) To adjust rental income arising from straight-line rent to reflect the
straight-lining of leases containing rent step-ups over the lease terms
from January 1, 2000.
(I) To adjust depreciation and amortization for the acquisition of CESCR,
assuming a depreciable life of 40 years on the real estate and 10 years on
the intangible asset - management company.
(J) Management estimates that there will be a reduction of general and
administrative expenses as a result of the acquisition of approximately $4
million annually. This reduction has not been reflected in the pro forma
financial statements as there can be no assurance that the Company will be
successful in the realization of these savings.
(K) To eliminate Vornado's equity in income of CESCR.
(L) To adjust interest expense for the amortization of the mark-to-market
adjustment on CESCR outstanding debt using the effective interest rate
method.
(M) To adjust minority interest for units issued to CESCR partners. Vornado
Realty Trust currently owns 86% of Vornado Realty L.P. and is the sole
general partner. Subsequent to the above transaction Vornado will own
approximately 75% of Vornado Realty L.P. and remain the sole general
partner.
(N) To eliminate the CESCR preferred dividend paid to Vornado prior to the
acquisition.
Page 39
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 hereunto duly authorized.
VORNADO REALTY TRUST
--------------------------------
(Registrant)
Date: October 19, 2001 By: /s/ Joseph Macnow
------------------------------------
JOSEPH MACNOW
Executive Vice President--Finance and
Administration and
Chief Financial Officer
Page 40
INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT
----------- -------
23.1 Consent of Arthur Andersen LLP
Page 41
EXHIBIT 23.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 8-K, into Vornado Realty
Trust's previously filed Registration Statements File Nos. 333-36080,
333-64015, 333-50095, 333-52573, 333-29011, 333-09159, 333-76327, 333-89667,
333-81497, 333-40787, 333-29013 and 333-68462.
ARTHUR ANDERSEN LLP
Vienna, Virginia
October 17, 2001
