SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from
_______ to _______
Commission File Number 1-11706
CARRAMERICA REALTY CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 52-1796339
(State of Incorporation) (I.R.S. Employer Identification No.)
1850 K STREET, N.W.
WASHINGTON, D.C. 20006
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (202) 729-1700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $0.01 Par Value New York Stock Exchange
Series B Cumulative Redeemable Preferred Stock, $0.01 Par Value New York Stock Exchange
Series C Depositary Cumulative Redeemable Preferred Stock, $0.001 Par Value New York Stock Exchange
Series D Depositary Cumulative Redeemable Preferred Stock, $0.001 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 1, 2002, the aggregate market value of the 51,175,125 shares
of Common Stock held by nonaffiliates of the registrant was approximately
$1,533 million, based upon the closing price of $29.96 on the New York Stock
Exchange composite tape on such date.
Number of shares of Common Stock outstanding as of March 1, 2002:
52,494,748
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the proxy statement for the
Annual Stockholders Meeting to be held in 2002 are incorporated by reference
into Part III.
PART 1
ITEM 1. BUSINESS
THE COMPANY
GENERAL
CarrAmerica Realty Corporation is a fully integrated, self-administered
and self-managed publicly traded real estate investment trust ("REIT"). We
focus on the acquisition, development, ownership and operation of office
properties, located primarily in selected markets across the United States. As
of December 31, 2001, we owned a greater than 50% interest in 254 operating
office properties and three properties under construction. The 254 operating
properties contain a total of approximately 20.3 million square feet of net
rentable area. Two of the properties under construction will contain
approximately 184,000 square feet of net rentable area. The other property
under construction is a residential property. The operating properties in which
we owned a greater than 50% interest as of December 31, 2001 were 95.3% leased.
These properties had approximately 1,000 tenants. As of December 31, 2001, we
also owned minority interests (ranging from 15% to 50%) in 36 operating office
properties and six properties under construction. The 36 operating properties
contain a total of approximately 4.7 million square feet of net rentable area.
The six properties under construction will contain approximately 1.2 million
square feet of net rentable area. The operating properties in which we owned a
minority interest as of December 31, 2001 were 95.7% leased.
We also are a leading office innovator, having made several strategic
investments or established strategic relationships with several companies that
complement our core real estate portfolio ownership. These investments and
relationships include essention, the engine behind InfoCentre, a web-based
operations and issues management platform, AgilQuest, an online resource
reservation service, and DukeSolutions, a Duke Energy subsidiary providing
comprehensive energy management programs.
We were organized as a Maryland corporation on July 9, 1992. We or our
predecessor, The Oliver Carr Company ("OCCO"), have developed, owned and
operated office buildings in the Washington, D.C. metropolitan area for more
than 39 years. Our experienced staff of approximately 800 employees, including
about 480 on-site building employees, provides a broad range of real estates
services. Our principal executive offices are located at 1850 K Street, NW,
Washington, DC 20006. Our telephone number is 202-729-1700. Our web site can be
found at www.carramerica.com.
BUSINESS STRATEGY
Our primary business objectives are to achieve long-term sustainable per
share cash flow growth and to maximize stockholder value by acquiring,
developing, owning and operating office properties primarily in markets
throughout the United States that we believe exhibit strong, long-term growth
characteristics. We believe we utilize our knowledge of our core markets to
evaluate market conditions in order to maintain strategic flexibility and
determine whether those conditions favor acquisition, development or capital
recycling. During the last five years, we have actively deployed capital
between acquisitions and development in order to create a portfolio with strong
long-term growth prospects. Our financial strategy to meet our business
objectives is primarily based on attempting to derive high returns from capital
invested in real estate by providing value-added services, including
development, leasing and management of the properties.
Our principal segment of operations is real estate property operations,
which consists primarily of commercial property ownership. Other segments
include development operations and other operations, including management
services. Approximately 94.2% of our operating revenues for the year ended
December 31, 2001 were associated with our real estate property operations. We
conduct our development operations through our subsidiary, CarrAmerica
Development, Inc. This business represented approximately 2.7% of our operating
revenues for the year ended December 31, 2001.
2
COMPETITIVE ADVANTAGES
Local Market Focus
------------------
We focus our acquisition and development activity in U.S. markets that
possess long-term growth characteristics. We target markets in which:
* Long-term population and job growth are generally expected to
exceed the national average;
* Large, well educated employment pools exist; and
* Entry barriers exist for new supplies of office space.
We have established a local presence in each of our existing core markets
by acquiring or developing a critical mass of properties. This local presence
is maintained through continuing investment activity and relationships
established by our seasoned Market Managing Directors.
Our Market Managing Director group consists of nine individuals who cover
all of the markets in which we own property. These Directors are responsible
for maximizing the performance of our properties in their respective markets
and ensuring that we are consistently meeting the needs of our customers.
Because they meet with our customers and local brokers on a regular basis, the
Market Managing Directors have extensive knowledge of local conditions in their
respective markets and are invaluable in identifying attractive investment
opportunities in them.
We are currently focusing capital in four of our core markets where we
feel we can create the most value and generate the highest returns on our
investments: San Francisco Bay area, Washington, D.C Metro area, Southern
California and Seattle/Portland. Our property net operating income by market
was as follows for the year ended December 31, 2001:
Percent of
Property Operating
Income for the
Year Ended
Market 12/31/01
-------------------------- -----------------------
San Francisco Bay 32.1
Washington, D.C. Metro 19.6
Southern California 12.3
Seattle/Portland 7.9
Dallas 7.5
Atlanta 5.7
Chicago 4.8
Phoenix 2.9
Denver 2.8
Salt Lake City 2.6
Austin 1.8
----------------------
100.0
======================
Flexible Investment Strategy
----------------------------
We have established a set of general guidelines and physical criteria to
evaluate how we allocate our capital resources among investments, including
acquisition, disposition and development opportunities. Our capital allocation
decisions are driven by real estate research, which focuses on variables such
as the economic growth rate, the composition of job growth and the office space
supply and demand fundamentals of a particular market.
3
Acquisitions
From 1996 to 1998, we were very active in acquiring office properties as
we established an operating platform for our national business strategy. During
that time, we acquired an aggregate of approximately 18.4 million square feet
of net rentable area. Our acquisition activity since 1998 has been limited. We
will selectively pursue acquisitions in our core markets where attractive
opportunities exist, particularly when pricing yields make acquisitions of
existing properties attractive in comparison to new property development.
Development
Development of office properties is an important component of our growth
strategy. We believe that long term investment returns resulting from properties
we develop should generally exceed those from properties we acquire, without
the assumption of significantly increased investment risks. We seek to control
development risks by:
* Employing extensively trained and experienced development
personnel;
* Avoiding the assumption of entitlement risk in conjunction with
land acquisitions;
* Entering into guaranteed maximum price construction contracts with
seasoned and credible contractors;
* Focusing on pre-leasing space and build-to-suit opportunities with
our customer network; and
* Analyzing the supply and demand characteristics of a market before
commencing inventory development in that market.
In the current environment, we have reduced our speculative development
activities significantly and we are now primarily focused on the development of
build-to-suit and substantially pre-leased projects. Our research-driven
development program enables us to tailor our development activities in each
core market, from inventory development, build-to-suit projects and acquiring
and holding land for future development.
Capital Recycling
We also may dispose of assets that become inconsistent with our long-term
strategic or return objectives. We then redeploy the proceeds from the
dispositions into other office properties, or use them to fund development
operations or to support other corporate needs. We also may contribute
properties that we own into joint ventures with third parties.
Stock Repurchases
In 2000, as investments in our stock became attractive relative to real
estate investment opportunities, we commenced a repurchase program for our
common stock. Through December 31, 2001, we repurchased approximately 17.9
million shares of our common stock for an aggregate purchase price of
approximately $518.5 million, including the repurchase of 9.2 million shares
from Security Capital Group Incorporated ("Security Capital") in November 2001.
Joint Ventures
Joint venture arrangements provide us with opportunities to reduce
investment risk by diversifying capital deployment and enhancing returns on
invested capital from fee arrangements. We principally utilize these
arrangements on projects characterized by large dollar-per-square foot costs
and/or when we desire to limit capital deployment in certain of our core
markets. For example, in August 2000, we consummated a joint venture with the
New York State Teachers Retirement System. The transaction allowed us to
further our business strategy of increasing returns on our invested capital and
to recycle capital into and out of markets based on market dynamics. We
received approximately $249.6 million in cash from the transaction at closing.
In June 2001, the joint venture obtained third-party financing. We received
$77.9 million of the financing proceeds.
4
Strategic Alliances and Investments
DukeSolutions. In December 1999, we entered into an alliance with
DukeSolutions, a Duke Energy subsidiary. The purpose of this alliance is to
implement a comprehensive energy management program that pioneers creative
web-based energy information and analysis strategies. This energy management
program became operational in 2000 and is intended to minimize risk due to
deregulation and to reduce the energy costs at our properties and for the third
party properties which we manage.
AgilQuest. In September 2000, we made a $2.3 million equity investment in
V Technologies International Corporation d/b/a AgilQuest ("AgilQuest").
AgilQuest created and operates an online resource reservation service that
allows individual employees to reserve office space when and where they need
it. It also enables employers to measure the use of office assets, allowing
them to position office resources more efficiently. We invested an additional
$0.5 million in 2001 in AgilQuest.
essention. In November 2000, we formed a strategic relationship with
essention, inc. ("essention") and made a cash investment. essention provides a
web-based building operation tool, InfoCentre, for use by our properties,
customers and employees. We have implemented InfoCentre at most of our
properties. It allows for real-time communications and monitoring of building
and customer-related maintenance activities via the Internet 24 hours per day,
seven days per week. In 2001, we made an additional investment in essention. At
December 31, 2001, we had invested approximately $1.7 million in essention.
HQ Global Workplaces. In 1997, we began making investments in HQ Global
Workplaces ("HQ Global"), a provider of office suites. HQ Global provides
office outsourcing to customers by offering furnished individual offices and
multi-office suites on a short-term basis that are equipped for a number of
services, including telecommunications, broadband Internet access, copying,
faxing and printing, as well as secretarial support. We own approximately 16%
of the equity of HQ Global on a fully diluted basis.
FrontLine Capital Group ("FrontLine"), the majority stockholder of HQ
Global, announced in October 2001 that HQ Global was in default with respect to
certain covenant and payment obligations under its senior and mezzanine term
indebtedness, was in a forebearance period with HQ Global lenders and was
actively negotiating with those lenders. In November 2001, FrontLine disclosed
that it had recognized an impairment in the value of intangible assets relating
to HQ Global due to HQ Global's trend of operating losses and its inability to
remain in compliance with its debt arrangements. Based on these factors, our
analysis of the financial condition and operating results of HQ Global (which
deteriorated significantly during 2001 as the economic slowdown reduced the
demand for temporary office space, particularly from technology-related
tenants) and the losses of key board members and executives by HQ Global,
particularly in the last half of 2001, we determined in the fourth quarter of
2001, that our investment in HQ Global was impaired. We recorded a $42.2
million impairment charge, reducing the carrying value of our investment in HQ
Global to zero.
National Platform
-----------------
Our national platform provides us with critical mass in order to provide
access to many different sources of capital to achieve long-term sustainable
cash flow growth. Our national platform is designed to provide corporate users
of office space with a mix of products and services to meet their workplace
needs at both the national and local levels. We believe that through our
existing portfolio of operating properties, property development opportunities
and land acquired and currently held for development, we can generate
incremental demand. This can be accomplished through the relocation and
expansion needs of many of our customers, both within a single core market and
in multiple core markets.
Our National Development Group is responsible for developing office
properties, build-to-suit facilities and business parks for us and third
parties through our subsidiary, CarrAmerica Development, Inc. This development
team consists of over 40 development and project management professionals, who
are located across the United States and have an average of over 17 years of
experience developing office properties. Our team oversees every aspect of land
planning, building design, construction and development of office properties.
This ensures that all projects meet the same high standards and uniform
specifications in building design and systems. We believe that the National
Development Group's expertise has given us a competitive edge in marketing our
facilities and services to customers.
5
2001 ACTIVITIES
Development and Acquisitions Activity
-------------------------------------
During 2001, we placed in service approximately 442,000 square feet of
office space that was previously under development. The total cost for these
projects was approximately $80.2 million. We expect that the first year
stabilized unleveraged return on this square footage will be approximately
12.7%. As of December 31, 2001, we had approximately 184,000 square feet of
office space under construction in two projects that we wholly owned. Our total
investment in these projects is expected to be $24.4 million. Through December
31, 2001, we had expended $17.9 million or 73.4% of the total expected
investment for these projects. In conjunction with an office property
development project through a joint venture, we are also developing a
residential property. Total project costs for the residential property are
expected to be $18.7 million of which $1.4 million had been expended as of
December 31, 2001. Development of properties for others has become a more
significant part of this segment of our business. This includes development of
properties for joint ventures in which we are partners and for unaffiliated
parties. As of December 31, 2001, we were managing $666.2 million in projects
for others, including $314.2 million relating to the projects in which we had a
minority interest. During 2001, we acquired land in Washington, D.C. that we
contributed to a joint venture and also exercised a purchase option to acquire
two buildings in northern California.
Joint Ventures - Development Activities
---------------------------------------
As of December 31, 2001, we also had approximately 1.2 million square feet
of office space under construction in six projects in which we own minority
interests. These projects are expected to cost approximately $314.2 million.
Our total investment in these projects is expected to be approximately $89.6
million. Through December 31, 2001, approximately 46.5% or $146.0 million of
the total project costs had been expended, of which our portion was $41.9
million.
Dispositions
------------
We disposed of seven operating properties, one property under development
and three parcels of land held for development during 2001. We recognized a
gain of $4.5 million on these transactions.
HQ Global Workplaces
--------------------
In June 2000, we sold a substantial portion of our equity interest in HQ
Global and our debt and equity interests in two European executive suites
affiliates in connection with the merger of HQ Global with VANTAS Incorporated.
We received $377.3 million in cash in connection with these transactions. In
addition, $140.5 million of debt which we had guaranteed was repaid with a
portion of the cash proceeds. Following the transaction, we owned approximately
16% of the equity of HQ Global on a diluted basis and our investment had a
carrying value of $42.2 million.
FrontLine, the majority stockholder of HQ Global, announced in October
2001 that HQ Global was in default with respect to certain covenant and payment
obligations under its senior and mezzanine term indebtedness, was in a
forebearance period with HQ Global lenders and was actively negotiating with
those lenders. In November 2001, FrontLine disclosed that it had recognized an
impairment in the value of intangible assets relating to HQ Global due to HQ
Global's trend of operating losses and its inability to remain in compliance
with its debt arrangements. Based on these factors, our analysis of the
financial condition and operating results of HQ Global (which deteriorated
significantly during 2001 as the economic slowdown reduced the demand for
temporary office space, particularly from technology-related tenants) and the
losses of key board members and executives by HQ Global, particularly in the
last half of 2001, we determined in the fourth quarter of 2001, that our
investment in HQ Global was impaired. We recorded a $42.2 million impairment
charge, reducing the carrying value of our investment in HQ Global to zero.
Financing Activity
------------------
In June 2001, we entered into a new three-year, $500 million unsecured
credit facility with J.P. Morgan Chase, as agent for a group of banks. We can
extend the life of the line an additional year at our option. The line
6
carries an interest rate of 70 basis points over 30-day LIBOR. Our unsecured
facility contains financial and other covenants with which we must comply and
availability is limited to a specified percentage of the fair value of our
unmortgaged properties.
On December 21, 2001, we entered into a $150 million short-term loan to
provide additional liquidity. Affiliates of Banc of America Securities LLC and
J.P. Morgan Securities were the lenders under this short-term loan. The loan
was to mature on April 2, 2002, but terminated in January 2002 without being
used when we issued $400 million of senior unsecured notes.
On January 11, 2002, we issued $400 million of senior unsecured notes. The
notes bear interest at 7.125% per annum, payable semi-annually beginning on
July 15, 2002. The notes mature on January 15, 2012. The notes are
unconditionally guaranteed by CarrAmerica Realty, L.P., one of our
subsidiaries. Proceeds from the notes were used to pay down our unsecured
credit facility.
During 2001, we repurchased approximately 14.7 million shares of our
common stock for approximately $428.3 million, including 9.2 million shares
that we repurchased from Security Capital.
On December 19, 2001, Security Capital consummated the public offering of
19,403,417 shares of our common stock owned by it. The shares were offered to
the public at $28.37 per share. Immediately prior to the consummation of the
offering, Security Capital owned approximately 37.4% of our outstanding common
stock. Security Capital now no longer owns any shares of our common stock. Upon
the closing of the offering, Security Capital's three designees to our board of
directors resigned.
In order to assist us in maintaining our qualification as a REIT and for
other strategic reasons, our charter previously contained certain provisions
generally limiting the ownership of shares of capital stock by any single
stockholder to 5.0% of our outstanding common stock and/or 5.0% of any class or
series of preferred stock. In accordance with the terms of our charter, our
board of directors has increased these ownership limits to 9.8% from 5.0%. The
federal tax laws include complex stock ownership and attribution rules that
apply in determining whether a stockholder exceeds the ownership limits. These
rules may cause a stockholder to be treated as owning stock that is actually
owned by others, including family members and entities in which the stockholder
has an ownership interest. Our board of directors could waive this restriction
if it were satisfied that ownership in excess of these ownership limits would
not jeopardize our status as a REIT and the board otherwise decided that a
waiver would be in our interests. Capital stock acquired or transferred in
breach of the ownership limit will be automatically transferred to a trust for
the benefit of a designated charitable beneficiary.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our, and our
affiliates, or the industry's actual results, performance, achievements or
transactions to be materially different from any future results, performance,
achievements or transactions expressed or implied by such forward-looking
statements. Such factors include, among others, the following:
* National and local economic, business and real estate conditions
that will, among other things, affect:
* Demand for office properties,
* The ability of the general economy to recover timely
from the current economic downturn,
* Availability and creditworthiness of tenants,
* The level of lease rents, and
* The availability of financing for both tenants and us;
* Adverse changes in the real estate markets, including, among other
things:
* Competition with other companies, and
* Risks of real estate acquisition and development
(including the failure of pending developments to be
completed on time and within budget);
* Actions, strategies and performance of affiliates that we may not
control or companies in which we have made investments;
* Ability to maintain our status as a REIT for federal and state
income tax purposes;
* Governmental actions and initiatives; and
* Environmental/safety requirements.
7
OUR DIRECTORS
Our directors are divided into three classes, with approximately one-third
of the directors elected by the stockholders annually. Upon the closing of
Security Capital's public offering of all of its remaining shares of our common
stock, Messrs. William D. Sanders and C. Ronald Blankenship and Ms. Caroline S.
McBride, each a Security Capital designee to our nine-member board of
directors, resigned as members of our board. The current members of our Board
of Directors are as follows:
* Thomas A. Carr, 43, has been our Chairman of the Board of Directors
since May 2000 and President and a director since 1993 and Chief
Executive Officer since 1997. Mr. Carr's term as director of the Company
expires at the 2004 Annual Meeting of Stockholders. Mr. Carr was our
Chief Operating Officer from April 1995 to May 1997 and our Chief
Financial Officer from February 1993 to April 1995. Mr. Carr holds a
Master of Business Administration degree from Harvard Business School and
a Bachelor of Arts degree from Brown University. Mr. Carr is a member of
the Board of Governors of the National Association of Real Estate
Investment Trusts, the Young Presidents Organization and Federal City
Council. He is a member of the Board of Directors of The Oliver Carr
Company and V Technologies International Corp. (d\b\a AgilQuest). Mr.
Carr is the son of Oliver T. Carr, Jr. and the brother of Robert O. Carr.
Mr. Carr is a member of the Investment Committee and the Executive
Committee of the Board of Directors. In addition, Mr. Carr is a member of
management's Operating Committee and Investment Committee.
* Oliver T. Carr, Jr., 76, was Chairman of our Board of Directors from
February 1993 until May 2000. He also served as our Chief Executive
Officer from 1993 to 1997. Mr. Carr's term as a director expires at the
2002 Annual Meeting of Stockholders. He has been renominated for election
by the stockholders at that meeting to serve another three-year term. Mr.
Carr founded The Oliver Carr Company in 1962 and since that time he has
been its Chairman of the Board and a director as well as President from
1962 to 2000. He also is Chairman Emeritus of the Board of Trustees of
The George Washington University. Mr. Carr is the father of both our
current Chairman, President and Chief Executive Officer, Thomas A. Carr,
and Robert O. Carr, the President of Carr Urban Development, L.L.C. Mr.
Carr is a member of the Investment Committee and the Executive Committee
of the Board of Directors.
* Andrew F. Brimmer, 75, has been a director since February 1993. Dr.
Brimmer's term as a director expires at the 2002 Annual Meeting of
Stockholders. He has been renominated for election by the stockholders at
that meeting to serve another three-year term. He has been President of
Brimmer & Company, Inc., an economic and financial consulting firm, since
1976. Dr. Brimmer is the Wilmer D. Barrett Professor of Economics at the
University of Massachusetts, Amherst. He also serves as a director of
BlackRock Investment Income Trust, Inc. (and other funds) and Borg-Warner
Automotive, Inc. From June 1995 through August 1998, Dr. Brimmer served
as chairman of the District of Columbia Financial Control Board. He was a
member of the Board of Governors of the Federal Reserve System from March
1966 through August 1974. Dr. Brimmer received a B.A. degree and a
master's degree in economics from the University of Washington and a
Ph.D. in economics from Harvard University. Dr. Brimmer is a member of
the Audit Committee of the Board of Directors.
* A. James Clark, 74, has been a director since February 1993. Mr.
Clark's term as a director expires at the 2003 Annual Meeting of
Stockholders. He is Chairman of the Board and CEO of Clark Enterprises,
Inc. ("CEI"), a Bethesda, Maryland-based holding company. CEI has been
involved in real estate and commercial and residential construction since
1972. CEI includes the Clark Construction Group, one of the United States
largest general contractors. Mr. Clark is on the Board of Trustees of the
University of Maryland College Park Foundation, and is a Trustee Emeritus
of the Johns Hopkins University and the Johns Hopkins Board of Medicine.
He is also a member of the PGA Tour Golf Course Properties Advisory
Board. Mr. Clark is a graduate of the University of Maryland. He is a
member of the Investment Committee, the Executive Committee, the
Executive Compensation Committee, and the Nominating Committee of the
Board of Directors.
* Timothy Howard, 53, has been a director since August 1998. Mr. Howard's
term as a director expires at the 2003 Annual Meeting of Stockholders.
Mr. Howard has been the Executive Vice President and Chief Financial
Officer of Fannie Mae since 1990 and a member of Fannie Mae's Office of
the Chairman since November 2000. From 1988 to 1990, Mr. Howard was
Executive Vice President - Asset Management of Fannie Mae. Mr. Howard has
held positions of increasing responsibility with Fannie Mae since
beginning with the company
8
in 1982. Mr. Howard received a masters degree in economic and bachelors
in economics, magna cum laude, from the University of California, Los
Angeles. Mr. Howard is a member of the Audit Committee and the Executive
Compensation Committee of the Board of Directors.
* Robert E. Torray, 64, has been a director since February 2002. Mr.
Torray's term as a director expires at the 2002 Annual Meeting of
Stockholders. He has been renominated for election by the stockholders at
the meeting to serve as part of the class of directors whose term expires
in 2003. Mr. Torray is the founder and has been Chairman of Robert E.
Torray & Co., Inc., an institutional investment firm since 1972. Mr.
Torray is also the founder and President of Torray Corporation, a mutual
fund manager and is founder and Chairman of Birmingham Capital Management
Company, an investment management company. Mr. Torray received his B.A.
from Duke University.
* Wesley S. Williams, Jr., 59, has been a director since February 1993.
Mr. Williams' term as a director expires at the 2004 Annual Meeting of
Stockholders. Mr. Williams has been a partner of the law firm of
Covington & Burling since 1975. After serving as a junior member of the
Faculty of Law of Columbia University, Mr. Williams was adjunct professor
of real estate finance law at Georgetown University Law Center from 1971
to 1973. In addition, he is an author or contributing author of several
texts on banking law and on real estate investment and finance. Mr.
Williams is on the Editorial Advisory Board of the District of Columbia
Real Estate Reporter. Mr. Williams serves as Deputy Chairman of the Board
of Directors of the Federal Reserve Bank of Richmond. Mr. Williams is
Co-Chairman of the Board of Directors and Co-CEO of The Lockhart
Companies, Inc. and of its real estate, insurance, consumer finance and
miscellaneous internet and venture subsidiaries. Mr. Williams is a member
of the Executive Committee of the Board of Trustees of Penn Mutual Life
Insurance Company, of which he is the Senior Trustee. He is also Chairman
of the Executive Committee of the Board of Regents of the Smithsonian
Institution. Mr. Williams received B.A. and J.D. degrees from Harvard
University, an M.A. degree from the Fletcher School of Law and Diplomacy
and a LL.M. from Columbia University. Mr. Williams is a member of the
Audit Committee, Executive Compensation Committee and the Nominating
Committee of the Board of Directors.
OUR EXECUTIVE OFFICERS AND CERTAIN KEY EMPLOYEES
Our executive officers and key employees (including executive officers and
key employees of CarrAmerica Development, Inc. and other affiliates) are as
follows:
* Karen B. Dorigan, 37, has been Chief Investment Officer since November
2000. Prior to that time, she was Managing Director - Capital Markets and
Investments since April 1999. Prior to that time, Ms. Dorigan served as a
Senior Vice President since May 1997. Prior to that, Ms. Dorigan served
as one of our Vice Presidents since January 1996. Prior to that, Ms.
Dorigan served for more than nine years in a variety of capacities in the
development business of The Oliver Carr Company, including from February
1993 to January 1996 as a Vice President. Ms. Dorigan holds a Bachelor of
Science degree in Economics from the University of Pennsylvania, Wharton
School. Ms. Dorigan is a member of management's Operating Committee and
Investment Committee.
* Philip L. Hawkins, 46, has been Chief Operating Officer since October
1998. From February 1996 to October 1998, Mr. Hawkins served as Managing
Director--Asset Management. Prior to that time, Mr. Hawkins was employed
by Jones Lang LaSalle, a real estate services company, since 1982. At
LaSalle, he served as Executive Vice President, Eastern Division, Asset
Management Group from 1995 to 1996, as Senior Vice President, Northeast
Region, Asset Management Group from 1990 to 1994, and in other asset
management positions prior to that time. Mr. Hawkins also was a director
of LaSalle Partners Limited. He holds a Masters in Business
Administration from the University of Chicago Graduate School of Business
and a Bachelor of Arts degree from Hamilton College. Mr. Hawkins is a
member of management's Operating Committee and Investment Committee.
* Richard F. Katchuk, 55, has been Chief Financial Officer since February
1999. From 1995 to 1999, Mr. Katchuk served as Chief Financial Officer
and Corporate Executive Vice President of Crestar Financial Corporation.
Prior to joining Crestar Financial Corporation, Mr. Katchuk was with Banc
One, serving as a Senior Vice President Corporate Finance from 1988 to
1995. Mr. Katchuk holds a Bachelor of Arts degree in Economics from
Hobart & William Smith Colleges. Mr. Katchuk is a member of management's
Operating Committee and Investment Committee.
9
* Linda A. Madrid, 42, has been Managing Director, General Counsel and
Corporate Secretary since November 1998. Prior to that time Ms. Madrid
served as Senior Vice President and General Counsel since March 1998.
Prior to that time, Ms. Madrid had been Senior Vice President, Managing
Director of Legal Affairs and Corporate Secretary of Riggs National
Corporation/Riggs Bank N.A. since February 1996 and Vice President and
Litigation Manager from September 1993 to January 1996. Before joining
Riggs, Ms. Madrid practiced law in several law firms in Washington, D.C.
and served as Assistant General Counsel for Amtrak. Ms. Madrid holds a
J.D. from Georgetown University Law Center and a Bachelor of Arts degree
from Arizona State University. Ms. Madrid is a member of management's
Operating Committee.
* Paul R. Adkins, 43, was appointed President, Carr Real Estate Services,
Inc. in 2002. From 1999 to 2002, he was Managing Director - Private
Capital. From 1996 to 1999, Mr. Adkins served as the Company's Senior
Vice President, Market Managing Director for Washington, D.C. Mr. Adkins
has been with the Company for over 17 years, including serving as Vice
President of Acquisitions from May 1994 to August 1996. Prior to that,
Mr. Adkins served in a variety of other capacities with the Company, with
over 12 years in commercial real estate leasing. Mr. Adkins is a member
of the District of Columbia's Building Industry Association and Northern
Virginia's National Association of Industrial and Office Parks. Mr.
Adkins holds a Bachelor of Arts degree in Economics from Bucknell
University. Mr. Adkins is a member of management's Operating Committee.
* Steven N. Bralower, 53, has been Executive Vice President of Carr Real
Estate Services, Inc., an affiliate that conducts management and leasing
operations, since January 1999, and Senior Vice President of Carr Realty,
L.P., a subsidiary, since May 1996. Mr. Bralower was Senior Vice
President of Carr Real Estate Services, Inc. from 1993 to May 1996. Mr.
Bralower is a member of the Greater Washington Commercial Association of
Realtors. Mr. Bralower has been a member of the Georgetown University Law
Center adjunct faculty since 1987. Mr. Bralower holds a Bachelor of Arts
degree from Kenyon College.
* Robert O. Carr, 52, has been President of CarrAmerica Urban
Development, LLC, a subsidiary of CarrAmerica Development, since June
1998, and Chairman of the Board of Directors of Carr Real Estate
Services, Inc., since February 1993. Mr. Carr served as President of Carr
Real Estate Services, Inc. from 1993 to 1998. Mr. Carr is a director of
The Oliver Carr Company. From 1987 until February 1993, he served as
President and Chief Executive Officer of The Oliver Carr Company. Mr.
Carr is a member of the Boards of Directors of the Greater Washington
Research Center, the Corcoran School of Art and the National Cathedral
School for Girls. Mr. Carr is also a member of the Greater Washington
Board of Trade, the Urban Land Institute and the D.C. Chamber of
Commerce. Mr. Carr holds a Bachelor of Arts degree from Trinity College.
Mr. Carr is the son of Oliver T. Carr, Jr. and the brother of Thomas A.
Carr.
* Clete Casper, 42, has been Market Managing Director - Seattle since
July 1999. Prior to that time Mr. Casper served as the Company's Vice
President, Market Managing Director for Seattle since July 1996. Mr.
Casper has over 10 years of experience in real estate and marketing. Mr.
Casper's most recent experience includes one year as a Senior Associate
with CB Commercial Real Estate Group Inc., Seattle, Washington. Prior to
that, Mr. Casper was with Sabey Corporation in Seattle, Washington,
serving as Development Manager for four years and as a Marketing
Associate for five years. Mr. Casper is a graduate of Washington State
University. Mr. Casper is a member of management's Operating Committee.
* John J. Donovan, Jr., 58, has been a Market Managing Director since
July 1999 and President of Carr Real Estate Services, Inc., since January
1999. Prior to that time, Mr. Donovan served as Senior Vice President of
Carr Real Estate Services, Inc. from 1993 to 1998. He is a member of the
Advisory Board for Jubilee Enterprise of Greater Washington, the Economic
Club of Washington, the Greater Washington Board of Trade and the Greater
Washington Commercial Association of Realtors. Mr. Donovan holds a
Bachelor of Arts degree from Georgetown University. Mr. Donovan is a
member of management's Operating Committee.
* J. Thad Ellis, 41, has been Market Managing Director - Atlanta since
July 1999. Prior to that time Mr. Ellis served as the Company's Vice
President, Market Managing Director for Atlanta since November 1996. Mr.
Ellis has over 15 years of experience in real estate. Mr. Ellis' most
recent experience includes 10 years with Peterson Properties. At Peterson
Properties, his primary responsibility was to oversee and coordinate
leasing and property management for the management services portfolio.
Mr. Ellis is a graduate of Washington & Lee University and is a member of
the National Association of Industrial and Office Parks and Atlanta's
Chamber of
10
Commerce and is on the Advisory Board of Black's Guide. Mr. Ellis is a
member of management's Operating Committee.
* Richard W. Greninger, 50, has been Managing Director - Property
Operations since May 1999. Prior to that time Mr. Greninger served as
Senior Vice President--Operations since January 1998. Prior to that, Mr.
Greninger had been the Senior Vice President of Carr Real Estate
Services, Inc., since March 1995. Prior to that time, he had been Vice
President of Carr Real Estate Services, Inc. since February 1993. During
1994, Mr. Greninger served as President of the Greater Washington
Apartment and Office Building Association. Mr. Greninger has served as a
director of both the Institute of Real Estate Management and the Building
Owners and Managers Association and a former Chairman of its National
Advisory Council. He is also a member of the Board of Directors of
essention. Mr. Greninger holds a Masters in Business Administration from
the University of Cincinnati and a Bachelor of Science degree from Ohio
State University. Mr. Greninger is a member of management's Operating
Committee.
* Dale F. Hogg, 59, joined us from Iridium, LLC, in May 2000 as Senior
Vice President of Human Resources and Administration. Before joining
Iridium in 1994 as Vice President of Human Resources, Mr. Hogg was
Corporate Manager, Global Staffing and Corporate Manager, Compensation
for W.R. Grace & Co. from 1991. Prior to that time, he had been Regional
Director of Human Resources at Coca-Cola Enterprises. Mr. Hogg holds a
Bachelor of Science degree from Colorado State University. He is a member
of management's Operating Committee.
* William Krokowski, 39, has been Market Managing Director - Denver since
December 1999. Prior to that time Mr. Krokowski served as Vice
President/Director of Development for CarrAmerica Development, Inc., an
affiliate, since 1997. Prior to 1997, Mr. Krokowski was a member of our
investments group. Prior to joining CarrAmerica, Mr. Krokowski spent over
five years with Tishman Speyer Properties in New York and Washington,
D.C. as a development manager. Mr. Krokowski holds a Civil Engineering
degree from Bucknell University and a Masters in Business Administration
from Duke University. Mr. Krokowski is a member of management's Operating
Committee.
* Thomas Levy, 37, has been Senior Vice President - Investments since
April 2001. He joined CarrAmerica in 1996 as Associate Due Diligence
Officer after which he was promoted to Investments Director. He received
a promotion to Vice President of Special Projects in April 1999 and then
promoted to Vice President - Investments in April 2000. Prior to joining
CarrAmerica, Mr. Levy was an Associate in the Investment Advisory Group
at J.E. Roberts Companies for five years. Before joining J.E. Roberts,
Mr. Levy was a Senior Consultant with Arthur Andersen & Company. He holds
a Master of Business Administration from American University and a
Bachelor of Arts in Economics from the University of Wisconsin. Mr. Levy
is a member of management's Operating Committee.
* Joel A. Manfredo, 47, became Chief Technology Officer and Managing
Director of e-business solutions in November 2000. Prior to joining us,
Mr. Manfredo was Vice President and Director of Information Strategies
with The Rouse Company from 1988. Mr. Manfredo served as Director of
Investment Assets for a subsidiary of McCormick and Company from 1981 to
1988. Mr. Manfredo holds a Masters of Science in Finance and a Masters of
Business Administration from Loyola College, as well as, a Bachelors of
Science in Business Administration from Lehigh University. He is a member
of management's Operating Committee.
* Robert M. Milkovich, 42, was appointed Managing Director, Carr Real
Estate Services, Inc. in 2002. From 1999 to 2002, he was Market Managing
Director. Prior to that time Mr. Milkovich served as Vice President,
Market Managing Director for Phoenix, Arizona since January 1998. Mr.
Milkovich has over 14 years of experience in real estate leasing. Mr.
Milkovich's most recent experience includes five years as the Assistant
Vice President of leasing for Carr Real Estate Services, Inc. Mr.
Milkovich holds a Bachelor of Science in Business Administration from the
University of Maryland. Mr. Milkovich is a member of management's
Operating Committee.
* Malcolm O'Donnell, 48, joined us as Vice President and Managing
Director for our Southern California region in October 2000. He was
previously employed as Principal of Alpine Holding and Keller Equity
Group, Inc. overseeing development projects. From March 1997 to December
1997, Mr. O'Donnell was Vice President of Acquisitions for Beacon
Properties. Mr. O'Donnell holds a Bachelor of Science degree from the
University of Southern California. He is a member of management's
Operating Committee.
11
* Gerald J. O'Malley, 58, has been Market Managing Director - Chicago
since July 1999. Prior to that time Mr. O'Malley served as Vice
President, Market Managing Director for Chicago since July 1996. Mr.
O'Malley has over 32 years of experience in real estate marketing. Mr.
O'Malley's most recent experience includes 10 years as founder and
President of G. J. O'Malley & Company, a real estate office leasing
company. Mr. O'Malley holds a Bachelors of Business Administration degree
from Loyola University. Mr. O'Malley is a member of management's
Operating Committee.
* Jeffrey S. Pace, 39, has been Market Managing Director - Austin since
July 1999. Prior to that time Mr. Pace served as Vice President, Market
Managing Director for Austin, Texas since May 1997. Mr. Pace has over 14
years of experience in real estate marketing. Mr. Pace's most recent
experience was with Trammell Crow Company, where he served as Marketing
Director. Prior to that time, Mr. Pace held the position of Marketing
Representative in the Dallas and Austin markets for Carlisle Property
Company, Stockton, Luedmann, French & West and Trammell Crow Company from
1985 to 1997. Mr. Pace holds a Masters of Business Administration from
the University of Texas at Arlington and a Bachelor of Science from the
University of Texas at Austin. Mr. Pace is a member of management's
Operating Committee.
* Stephen E. Riffee, 44, has been Senior Vice President, Controller and
Treasurer since July 1999. Prior to that time, Mr. Riffee served as Vice
President Finance and Chief Accounting Officer of Marriott International,
Inc. for three years. Prior to joining Marriott International, Inc., Mr.
Riffee served as Assistant Vice President at Burlington Northern Railroad
after having previously worked in the National Transportation Practice of
KPMG Peat Marwick. Mr. Riffee holds a Bachelor of Science in Commerce
degree from the McIntire School of Commerce of the University of
Virginia. Mr. Riffee is a member of management's Operating Committee.
* William H. Vanderstraaten, 41, has been Market Managing Director - Dallas
since July 1999. Prior to that time Mr. Vanderstraaten served as
Vice President, Market Managing Director for Dallas since April 1997. Mr.
Vanderstraaten has over 16 years of experience in real estate development
and leasing fields. Mr. Vanderstraaten's most recent experience prior to
working for the Company includes eight years as Vice President--New
Development for Harwood Pacific Corporation in Dallas, Texas, where his
primary responsibilities were directing large scale development projects
and coordinating leasing efforts for portfolios. Mr. Vanderstraaten holds
a Bachelor of Science degree in Business Administration from Southern
Methodist University. Mr. Vanderstraaten is a member of management's
Operating Committee.
* Stephen Walsh, 44, has been Senior Vice President of Capital Markets
since April 2001. Prior to this appointment, Mr. Walsh served as Acting
Manager for Capital Markets. Before joining CarrAmerica, Mr. Walsh was
Vice President, Investor Relations for the Mills Corporation.
Additionally, he served as Vice President in the Structured Debt Group at
Bank of America. Mr. Walsh received his Master of Business Administration
from George Washington University and his Bachelor's degree from the
State University of New York. Mr. Walsh is a member of management's
Operating Committee.
* Karen L. Widmayer, 43, has served as Senior Vice President of Corporate
Communications since August 1999. Prior to that time Ms. Widmayer served
as Vice President of Corporate Communications since 1997. Ms. Widmayer is
an 18-year veteran of CarrAmerica and our predecessor company. Ms.
Widmayer is responsible for our strategic marketing and branding
including media relations, advertising, community relations, employee
communications, corporate and project marketing as well as our web site
and intranet site. Ms. Widmayer performed Masters work in Economics at
the University of Tennessee. Ms. Widmayer holds a Bachelor of Arts degree
in Business Management from Virginia Intermont College. Ms. Widmayer is a
member of management's Operating Committee.
* James S. Williams, 45, has been a Managing Director since April 1999
and President of CarrAmerica Development since May 1999. Prior to that
time Mr. Williams was Senior Vice President of CarrAmerica Development
since October 1996. Mr. Williams rejoined us after two years as Vice
President of Operations of Chadwick International. Prior to that, from
1983 to 1994, he served in a variety of capacities for The Oliver Carr
Company including Senior Vice President of Development. Mr. Williams is a
guest lecturer at George Washington University. He holds a Bachelor of
Science degree in Business Administration from West Virginia University.
Mr. Williams is a member of the Board of Directors and a member of the
Executive Committee of the District of Columbia Building Industry
Association. He is a member of the Investment Committee of CarrAmerica
Development and a member of management's Investment Committee and
Operating Committee.
12
RISK FACTORS
In addition to the other information in this document, you should consider
carefully the following risk factors in evaluating an investment in our
securities. Any of these risks or occurrence of any one or more of the
uncertainties described below could have a material adverse effect on our
financial condition and the performance of our business and operations.
OUR PERFORMANCE IS SUBJECT TO RISKS ASSOCIATED WITH REAL ESTATE INVESTMENT
We are a real estate company that derives most of its income from the
ownership and operation of office buildings. There are a number of factors that
may adversely affect the income that our properties generate, including the
following:
* Economic Downturns. Downturns in the national economy, or in
------------------
regions or localities where our properties are located, generally
will negatively impact the demand for office space.
* Oversupply of Office Space. An oversupply of space in markets
--------------------------
where we own office properties would typically cause rental rates
and occupancies to decline, making it more difficult for us to lease
space at attractive rental rates.
* Competitive Properties. If our properties are not as attractive to
----------------------
tenants (in terms of rents, services or location) as other
properties that are competitive with ours, we will lose tenants to
those properties or could have to reduce our rental rates to
compensate for that disparity.
* Renovation Costs. In order to maintain the quality of our office
----------------
buildings and successfully compete against other properties, we
periodically have to spend money to repair and renovate our
properties.
* Tenant Risk. Our performance, liquidity and financial condition
-----------
depends on our ability to collect rent from our tenants. While no
tenant in our portfolio accounted for more than 5% of our rental
revenue for the year ended December 31, 2001, our financial position
may be adversely affected by financial difficulties experienced by a
major tenant, or by a number of smaller tenants, including
bankruptcies, insolvencies or general downturns in business.
* Reletting Costs and Uncertainties. As leases expire, we try to
---------------------------------
either relet the space to an existing tenant or attract a new tenant
to occupy the space. In either case, we likely will incur
significant costs in the process. In addition, if market rents have
declined since the time the expiring lease was entered into, the
terms of any new lease signed likely will not be as favorable to us
as the terms of the expiring lease, thereby reducing the income
earned from that space.
* Regulatory Costs. There are a number of government regulations,
----------------
including zoning, tax and accessibility laws that apply to the
ownership and operation of office buildings. Compliance with
existing and newly adopted regulations may require us to spend a
significant amount of money on our properties.
* Fixed Nature of Costs. Most of the costs associated with owning
---------------------
and operating an office building are not necessarily reduced when
circumstances such as market factors and competition cause a
reduction in income from the property.
* Environmental Problems. Federal, state and local laws and
----------------------
regulations relating to the protection of the environment may
require a current or previous owner or operator of real property to
investigate and clean up hazardous or toxic substances or petroleum
product releases at the property. The clean up can be costly. The
presence of or failure to clean up contamination may adversely
affect our ability to sell or lease a property or to borrow using a
property as collateral.
* Competition. A number of other major real estate investors with
-----------
significant capital compete with us. These competitors include
publicly traded REITs, private REITs, investment banking firms and
private institutional investment funds.
13
* Insurance. Although we believe our properties are adequately
---------
covered by insurance, we cannot predict at this time if we will be
able to obtain full coverage at a reasonable cost in the future.
Prior to September 11, 2001, insurance market conditions were
gradually beginning to harden. Unlike the earlier hard market in the
mid-1980's, the events of September 11, 2001 are expected to affect
nearly all coverage lines. This, combined with the fluctuations in
insurance companies' investment income, capacity and reinsurance
treaty renewals, and a year of significant losses, is expected to
impact premiums. Our current property insurance policy, which
expires June 30, 2002, includes terrorism coverage, but we
anticipate that when we renew the policy, acts of terrorism will not
be included in coverage. We expect that some underwriters will offer
terrorism coverage, but at a high cost. Overall, we anticipate that
insurance coverage costs will be higher in the future which could
reduce our profitability.
NEW DEVELOPMENTS AND ACQUISITIONS MAY FAIL TO PERFORM AS EXPECTED
Over the last few years, we have executed on a major acquisition and
development program. In deciding whether to acquire or develop a particular
property, we made certain assumptions regarding the expected future performance
of that property. If a number of these new properties do not perform as
expected, our financial performance will be adversely affected.
We remain active in developing office properties. New office property
developments are subject to a number of risks, including construction delays,
complications in obtaining necessary zoning, occupancy and other governmental
permits, cost overruns, financing risks, and the possible inability to meet
expected occupancy and rent levels. If any of these problems occur, development
costs for a project will increase, and there may be costs incurred for projects
that are not completed.
WE DO NOT HAVE EXCLUSIVE CONTROL OVER OUR JOINT VENTURE INVESTMENTS
We have invested in projects or properties as a co-venturer or partner in
the development of new properties and the continued operations of operating
properties. These investments involve risks not present in a whollyowned
project. Risks related to these investments include:
* Absence of exclusive control over the development, financing,
leasing, management and other aspects of the project;
* Possibility that our co-venturer or partner might:
* become bankrupt;
* have interests or goals that are inconsistent with ours;
* take action contrary to our instructions, requests or
interests (including those related to our qualification as a
REIT for tax purposes); or
* otherwise impede our objectives; and
* Possibility that we, together with our partners, may be required
to fund losses of the investee which losses would not necessarily
appear in our consolidated financial statements (e.g. for cost
method investments).
In addition, most of our joint venture agreements contain buy/sell clauses that
could require us to buy or sell our interest at a time we do not deem favorable
for financial or other reasons including the availability of cash at such time
and the impact of tax consequences resulting from any sale.
OUR USE OF DEBT SUBJECTS US TO VARIOUS FINANCING RISKS
We regularly borrow money to finance our operations, particularly the
acquisition and development of properties. We generally incur unsecured debt,
although in many cases we will incur mortgage debt that is secured by one or
more of our office buildings. In the future, our financial condition could be
materially and adversely affected by our use of debt financing, in part due to
the following risks:
* No Limitation on Debt Incurrence. Our organizational documents do
--------------------------------
not limit the amount of debt we can incur. Our degree of leverage
could have important consequences, including making it more
difficult for us to obtain additional financing in the future for
business needs, as well as making us more vulnerable to an economic
downturn.
14
* Possible Inability to Meet Scheduled Debt Payments. If our
--------------------------------------------------
properties do not perform as expected, the cash flow from our
properties may not be enough to make required principal and interest
payments. If a property is mortgaged to secure payment of
indebtedness and we are unable to meet mortgage payments, the holder
of the mortgage or lender could foreclose on the property, resulting
in loss of income and asset value. An unsecured lender could also
attempt to foreclose on some of our assets in order to receive
payment.
* Inability to Refinance Debt. In almost every case, very little of
---------------------------
the principal amount that we borrow is repaid prior to the maturity
of the loan. We generally expect to refinance that debt when it
matures, although in some cases we may pay off the loan. If
principal amounts due at maturity cannot be refinanced, extended or
paid with proceeds of other capital transactions, such as new equity
capital, our cash flow could be insufficient to repay all maturing
debt. Prevailing interest rates or other factors at the time of a
refinancing (such as possible reluctance of lenders to make
commercial real estate loans) may result in higher interest rates
and increased interest expense which could cause our cash from
operations to be insufficient to service the debt.
* Financial Covenants Could Adversely Affect Our Financial
--------------------------------------------------------
Condition. Our credit facilities and the indentures under which our
---------
senior unsecured indebtedness are issued contain financial and
operating covenants, including coverage ratios and other limitations
on our ability to incur secured and unsecured indebtedness, sell all
or substantially all of our assets and engage in mergers,
consolidations and certain acquisitions. These covenants may
restrict our ability to engage in transactions that would otherwise
be in our best interests. In addition, failure to meet any of the
financial covenants could cause an event of default under and/or
accelerate some or all of our indebtness which would have a material
adverse effect on our financial condition. Failure to meet our
financial covenants could result from, among other things, changes
in our results of operations or even general economic changes.
* Variable Interest Rates Could Increase the Cost of Borrowing. A
------------------------------------------------------------
significant amount of our financing is through an unsecured line of
credit. The line of credit is subject to variable floating interest
rates. Because we have not hedged against interest fluctuations,
significant increases in interest rates could dramatically increase
our costs of borrowing on the line of credit. Additionally, interest
rates on certain types of our debt are based on the credit rating of
our debt by independent agencies, and would be increased in the
event that the credit ratings are downgraded.
OUR BUSINESS STRUCTURE HAS CERTAIN RISKS ASSOCIATED WITH IT
* Certain Officers and Directors May Have Interests that Conflict with
the Interests of Stockholders. Certain of our officers and members of our
board of directors own limited partnership units in Carr Realty, L.P., a
partnership that holds some of our properties. These individuals may have
personal interests that conflict with the interests of our stockholders
with respect to business decisions affecting us and Carr Realty, L.P.,
such as interests in the timing and pricing of property sales or
refinancings in order to obtain favorable tax treatment. We, as the sole
general partner of Carr Realty, L.P., have the exclusive authority to
determine whether and on what terms Carr Realty, L.P. will sell or
refinance an individual property, but the effect of certain transactions
on these unitholders may influence our decisions affecting these
properties.
* We May Not Be Able to Sell Properties When Appropriate.
Real estate property investments generally cannot be sold quickly.
Agreements that we have entered into with respect to certain properties
owned by CarrAmerica Realty, L.P. and Carr Realty, L.P. limit our ability
to dispose of property. Also, the tax laws applicable to REITs restrict
our ability to dispose of certain properties. Therefore, we may by unable
to vary our portfolio promptly in response to market conditions, which
may adversely affect our financial position. In addition, we will be
subject to tax on the sale of properties by our development company,
CarrAmerica Development, Inc.
* Lack of Voting Control Over Carr Real Estate Services, Inc.
While most of our income is generated from the ownership and operation of
our office buildings, we own an 8.1% voting and a 95.8% nonvoting
interest in Carr Real Estate Services, Inc. Carr Real Estate Services,
Inc. conducts management and leasing operations for third parties and for
office buildings in
15
which we own less than a 100% interest. As of December 31, 2001, we
owned approximately 95% of the economic interest in Carr Real Estate
Services, Inc. through the ownership of nonvoting common stock. The
majority of voting common stock of Carr Real Estate Services, Inc.
is owned by The Oliver Carr Company. As a result, we have no right
to elect the directors of Carr Real Estate Services, Inc., and our
ability to influence its operations is limited. Carr Real Estate
Services, Inc. may engage in business activities that are not in our
best interests.
* We Depend On External Capital.
To qualify as a REIT, we generally must distribute to our
stockholders each year at least 90% of our net taxable income
excluding net capital gain and in order to eliminate federal income
tax, we must distribute 100% of our net taxable income, including
capital gains. Because of this distribution requirement, we likely
will not be able to fund all future capital needs, including capital
for property development and acquisitions, with income from
operations. We therefore will have to rely on third-party sources of
capital, which may or may not be available on favorable terms, if at
all. Our access to third-party sources of capital depends on a
number of things, including the market's perception of our growth
potential and our current and potential future earnings.
CERTAIN FACTORS MAY INHIBIT CHANGES IN CONTROL OF THE COMPANY
* Charter and By-law Provisions. Certain provisions of our charter and
by-laws may delay or prevent a change in control of the Company or other
transactions that could provide our common stockholders with a premium
over the then-prevailing market price of our common stock or that might
otherwise be in the best interests of our stockholders. These include a
staggered board of directors and the ability of our board of directors to
authorize the issuance of preferred stock without stockholder approval.
Also, any future series of preferred stock may have voting provisions
that could delay or prevent a change in control or other transaction that
might involve a premium price or otherwise be in the best interests of
our common stockholders.
* Ownership Limit. In order to assist us in maintaining our qualification
as a REIT and for other strategic reasons, our charter previously
contained certain provisions generally limiting the ownership of shares
of capital stock by any single stockholder to 5.0% of our outstanding
common stock and/or 5.0% of any class or series of preferred stock. In
accordance with the terms of our charter, our board of directors has
increased these ownership limits to 9.8% from 5.0%. The federal tax laws
include complex stock ownership and attribution rules that apply in
determining whether a stockholder exceeds the ownership limits. These
rules may cause a stockholder to be treated as owning stock that is
actually owned by others, including family members and entities in which
the stockholder has an ownership interest. Our board of directors could
waive this restriction with respect to certain stockholders if it were
satisfied that ownership in excess of these ownership limits would not
jeopardize our status as a REIT and the board otherwise decided that a
waiver would be in our interests. Capital stock acquired or transferred
in breach of the ownership limit will be automatically transferred to a
trust for the benefit of a designated charitable beneficiary.
* Maryland Law Provisions. Certain provisions of Maryland law which are
applicable to us because we are a Maryland corporation prohibit "business
combinations" with any person that beneficially owns ten percent or more
of our outstanding voting shares (an "interested stockholder") or with an
affiliate of the interested stockholder. These prohibitions last for five
years after the most recent date on which the person became an interested
stockholder. After the five-year period, a business combination with an
interested stockholder must be approved by two super-majority stockholder
votes unless, among other conditions, our common stockholders receive a
minimum price for their shares and the consideration is received in cash
or in the same form as previously paid by the interested stockholder for
its common shares. Our board of directors has opted out of these business
combination provisions. Consequently, the five-year prohibition and the
super-majority vote requirements will not apply to a business combination
involving us. Our board of directors may, however, repeal this election
in most cases and cause us to become subject to these provisions in the
future. Being subject to the provisions could delay or prevent a change
in control or other transactions that might involve a premium price or
otherwise be in the best interests of our stockholders.
THE MARKET VALUE OF OUR SECURITIES CAN BE ADVERSELY AFFECTED BY MANY FACTORS
As with any public company, a number of factors may adversely
influence the public market price of our common stock, many of which are beyond
our control. These factors include:
16
* Level of institutional interest in us;
* Perception of REITs generally and REITs with portfolios similar
to ours, in particular, by market professionals;
* Attractiveness of securities of REITs in comparison to other
companies;
* Our financial condition and performance;
* The market's perception of our growth potential and potential
future cash dividends;
* Increases in market interest rates, which may lead investors to
demand a higher annual yield from our distributions in relation
to the price paid for our stock; and
* Relatively low trading volume of shares of REITs in general,
which tends to exacerbate a market trend with respect to our
stock.
Sales of a substantial number of shares of our stock, or the
perception that such sales could occur, also could adversely affect prevailing
market prices for our stock. In addition to the possibility that we may sell
shares of our stock in a public offering at any time, we also may issue shares
of common stock upon redemption of units of interest held by third parties in
affiliated partnerships that we control, as well as upon exercise of stock
options that we grant to our employees and others. All of these shares will be
available for sale in the public markets from time to time.
OUR STATUS AS A REIT
We believe that we qualify for taxation as a REIT for federal income
tax purposes, and we plan to operate so that we can continue to meet the
requirements for taxation as a REIT. If we qualify as a REIT, we generally will
not be subject to federal income tax on our income that we distribute currently
to our shareholders. Many of the REIT requirements, however, are highly
technical and complex. The determination that we are a REIT requires an
analysis of various factual matters and circumstances that may not be totally
within our control. For example, to qualify as a REIT, at least 95% of our
gross income must come from specific passive sources, like rent, that are
itemized in the REIT tax laws. In determining that we have satisfied this
requirement, we have concluded that certain services, such as cafeteria
services that we have provided to tenants through an independent contractor in
certain of our properties under arrangements where we bear part or all of the
expenses of such services, are considered customary in the geographic area
where such properties are located. There can be no assurance that the IRS or a
court would agree with such conclusion or other positions we have taken
interpreting the REIT requirements. We also are required to distribute to our
stockholders at least 90% of our REIT taxable income (excluding capital gains).
The fact that we hold some of our assets through partnerships and their
subsidiaries further complicates the application of the REIT requirements. Even
a technical or inadvertent mistake could jeopardize our REIT status.
Furthermore, Congress and the IRS might make changes to the tax laws and
regulations, and the courts might issue new rulings, that make it more
difficult, or impossible, for us to remain qualified as a REIT.
If we fail to qualify as a REIT for federal income tax purposes, we
would be subject to federal income tax at regular corporate rates. Also, unless
the IRS granted us relief under certain statutory provisions, we would remain
disqualified as a REIT for four years following the year we first failed to
qualify. If we failed to qualify as a REIT, we would have to pay significant
income taxes. This likely would have a significant adverse affect on the value
of our securities. In addition, we would no longer be required to pay any
dividends to stockholders.
Even if we qualify as a REIT for federal income tax purposes, we are
required to pay certain federal, state and local taxes on our income and
property. For example, if we have net income from "prohibited transactions,"
that income will be subject to a 100% tax. In general, prohibited transactions
are sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business. The determination as to whether a
particular sale is a prohibited transaction depends on the facts and
circumstances related to that sale. While we have recently undertaken a
significant number of asset sales, we do not believe that those sales should be
considered prohibited transactions, but there can be no assurance that the IRS
would not contend otherwise. In addition, any net taxable income earned
directly by some of our affiliates, including Carr Real Estate Services, Inc.
and CarrAmerica Development, Inc., is subject to federal and state corporate
income tax. In this regard, several provisions of the laws applicable to REITs
and their subsidiaries ensure that a taxable REIT subsidiary will be subject to
an appropriate level of federal income taxation. For example, a taxable REIT
subsidiary is limited in its ability to deduct interest payments made to an
affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some
payments that it receives or on some deductions taken by the taxable REIT
subsidiaries if the economic arrangements between the
17
REIT, the REIT's tenants, and the taxable REIT subsidiary are not comparable to
similar arrangements between unrelated parties. Several entities in which we
own interests, Carr Real Estate Services, Inc. and CarrAmerica Development,
have elected to be taxable REIT subsidiaries. Finally, some state and local
jurisdictions may tax some of our income even though as a REIT we are not
subject to federal income tax on that income. To the extent that we and our
affiliates are required to pay federal, state and local taxes, we will have
less cash available for distributions to our shareholders.
18
ITEM 2. PROPERTIES
GENERAL
As of December 31, 2001, we owned interests (consisting of whole or
partial ownership interests) in 290 operating properties located in 12 markets
across the United States. As of December 31, 2001, we owned fee simple title or
leasehold interest in 252 operating properties, controlling partial interests
in two operating properties and non-controlling partial interests of 15% to 50%
in 36 operating properties. In addition, as of December 31, 2001, we owned
(either directly or through CarrAmerica Development) two office properties and
one residential property under development. Except as we disclose in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources", we have no immediate plans to
renovate our operating properties other than for routine capital improvements.
Although we believe our properties are adequately covered by insurance, we
cannot predict at this time if we will be able to obtain full coverage at a
reasonable cost in the future. Prior to September 11, 2001, insurance market
conditions were gradually beginning to harden. Unlike the earlier hard market
in the mid-1980's, the events of September 11, 2001 are expected to affect
nearly all coverage lines. This, combined with the fluctuations in insurance
companies' investment income, capacity and reinsurance treaty renewals, and a
year of significant losses, is expected to impact premiums. Our current
property insurance policy, which expires June 30, 2002 includes terrorism
coverage, but we anticipate that when we renew the policy, acts of terrorism
will not be included in coverage. We expect that some underwriters will offer
terrorism coverage, but at a high cost. Overall, we anticipate that insurance
coverage costs will be higher in the future.
We believe that, as a result of our national operating system,
market research capabilities, access to capital and experience as an owner,
operator and developer of properties, we will continue to be able to identify
and consummate acquisition and development opportunities and to operate our
portfolio more effectively than competitors without such capabilities. We
compete in many of our markets with other real estate operators, some of which
may have been active in those markets for a longer period of time than we have.
The following table sets forth information about each operating
property in which we own an interest as of December 31, 2001.
19
Net Total Average
Rentable Annualized Base Rent
# of Area in Percent Base Rent/3/ /Leased
Property Buildings Sq. Feet/1/ Leased/2/ (in thousands) Sq. Feet/4/ Significant Tenants/5/
---------------------------- ----------- ------------- ------------ ---------------- ------------ -----------------------
Consolidated Properties
EASTERN REGION
--------------
Downtown Washington, D.C.:
International Square 3 1,014,556 100.0% $34,237 $33.75 International Monetary
Fund (49%)
900 19th Street 1 101,215 97.7% 3,257 32.93 America's Community Bankers
(30%), Stone & Webster
(13%), Korn/Ferry
International (12%), Lucent
Technologies, Inc. (11%)
2550 M Street 1 187,931 100.0% 8,191 43.58 Patton Boggs, L.L.P. (99%)
1730 Pennsylvania Avenue/6/ 1 229,377 100.0% 8,313 36.24 Federal Deposit Insurance
Co. (47%), King & Spalding
(39%)
1255 23rd Street/7/ 1 306,395 96.4% 8,620 29.20 Chronicle of Higher
Education (30%), William M.
Mercer, Inc. (21%),
J&H/Marsh & McLennan, Inc.
(14%)
1747 Pennsylvania Avenue 1 151,872 96.4% 4,838 33.06 Legg Mason Wood Walker,
Inc. (19%)
1775 Pennsylvania Avenue 1 143,981 98.5% 4,091 28.84 Citicorp Savings of
Washington, DC (81%)
Suburban Washington, D.C.:
One Rock Spring Plaza/6/ 1 205,721 98.1% 5,572 27.60 Caterair International
(22%), Sybase, Inc. (19%)
Sunrise Corporate Center 3 260,253 100.0% 6,333 24.33 Software AG of North
America (81%)
Reston Crossing East & West 2 327,788 100.0% 6,556 20.00 Nextel Communications,
Inc. (100%)
Atlanta, GA:
Glenridge 1 63,904 97.7% 1,243 19.90 Metropolitan Life Insurance
(13%), Brooks, McGinnis &
Chafin, LLC (12%), Spectrum
Realty Advisors (12%),
Communication Trends, Inc.
(11%)
Century Springs West 1 95,074 78.0% 1,451 19.56 No tenant occupies 10%
Holcomb Place 1 72,827 100.0% 1,326 18.21 Intercept Group, Inc.
(64%), Progeni Corp. (13%),
Key Construction Services,
Inc. (12%)
Midori 1 99,691 100.0% 1,928 19.34 National Consumer Services
(66%), United Parcel
Service (21%)
Parkwood 1 150,270 96.0% 2,905 20.14 Onesource (20%),
Corecommerce (11%)
Lakewood 1 80,483 20.2% 289 17.72 Hickson (USA) Corp. (17%)
The Summit 1 179,085 100.0% 3,299 18.42 Unisys Corp. (86%), CSC
Continuum, Inc. (14%)
Spalding Ridge 1 128,233 99.3% 2,630 20.66 IT Corporation (57%),
Federal Deposit Insurance
Co. (10%)
2400 Lake Park Drive 1 100,918 77.0% 1,359 17.48 United Healthcare Services,
Inc. (29%), GSA (17%)
680 Engineering Drive 1 62,154 83.4% 505 9.74 Enrev Corp. (33%), EMS
Technologies, Inc. (26%)
Embassy Row 3 465,359 90.8% 7,887 18.66 Ceridian Corporation (24%),
Cabot Corp. (10%)
Embassy 100, 500 2 190,470 100.0% 4,168 21.88 Art Institute of Atlanta,
Inc. (60%), Career
Education Corp. (40%)
Waterford Centre 1 82,368 75.3% 1,235 19.90 VCG, Inc. (18%), Arkwright
----- ---------- Mutual Insurance (15%)
Eastern Region Subtotal 31 4,699,925 95.4%
PACIFIC REGION
--------------
Southern California: Orange County/Los Angeles:
Scenic Business Park 4 138,076 100.0% 2,343 16.97 Miles, Wright, Finely & Zak
(19%), Talbert Medical
Group (19%), Terayon
Communications Systems
(17%), Coast Community
College (13%), So. Ca.
Blood & Tissue Service
(12%)
Harbor Corporate Park 4 151,924 96.1% 2,872 19.67 Anzdl, Inc. (33%), Clayton
Environmental (10%)
Plaza PacifiCare 1 104,377 100.0% 1,064 10.19 Pacificare Health Systems,
Inc. (100%)
Katella Corporate Center 1 80,609 97.1% 1,444 18.44 No tenant occupies 10%
Warner Center 12 343,486 98.7% 8,750 25.80 El Camino Resources, Inc.
(24%), GSA (20%)
South Coast Executive Center 2 161,692 68.4% 2,858 25.85 No tenant occupies 10%
Warner Premier 1 61,553 64.3% 1,111 28.05 Protective Life Insurance
Company (34%)
Von Karman 1 104,138 100.0% 2,636 25.32 Vision Solutions, Inc.
(40%), Fidelity National
Title Ins. (26%), Taco Bell
Corp. (18%), Dentalxchange,
Inc. (16%)
20
Net Total Average
Rentable Annualized Base Rent
# of Area in Percent Base Rent/3/ /Leased
Property Buildings Sq. Feet/1/ Leased/2/ (in thousands) Sq. Feet/4/ Significant Tenants/5/
--------------------------- ------------ ------------- ---------- -------------- ----------- -------------------------
2600 W. Olive 1 144,831 100.0% 3,704 25.57 Walt Disney Company (89%)
Bay Technology Center 2 107,481 100.0% 1,699 15.81 Amresco Residential
Mortgage (57%), Aqcess
Technologies, Inc. (43%)
Pacific Corporate Plaza
1, 2, 3 3 125,298 100.0% 2,418 19.30 Zland.com, Inc. (23%),
Gallagher Bassett Svcs.,
Inc. (20%), Covenant Care
California, Inc. (16%),
Aqueduct, Inc. (16%),
AMFM System Inc. (12%)
Alton Deere Plaza 6 182,183 79.9% 2,689 18.48 Nextlink California (23%),
XO California, Inc. (12%),
Foster Wheeler
Environmental (11%)
Westlake Spectrum 2 108,084 100.0% 2,060 19.06 Pinkerton's Inc. (67%),
Valueclick (21%), Insweb
Corp. (12%)
Southern California: San Diego:
Del Mar Corporate Plaza 2 123,142 100.0% 3,381 27.46 Stellcom Inc. (79%),
Peregrine Systems, Inc.
(21%)
Wateridge Pavilion 1 62,194 73.5% 922 20.16 Infogation Corp. (25%),
Wateridge Insurance
Service (18%), TCS
Mortgage, Inc. (14%)
Towne Center Technology
Park 1, 2, 3 3 182,120 100.0% 3,156 17.33 Gateway, Inc. (100%)
Lightspan 1 64,800 100.0% 1,229 18.97 Lightspan Partnership,
Inc. (100%)
La Jolla Spectrum 1 & 2 2 156,653 100.0% 4,799 30.64 Torrey Mesa Research
Institute (51%), Scripps
Research Institute (49%)
Palomar Oaks Technology Park 6 170,357 81.8% 1,740 12.49 Unifes, Inc. (23%), TPR
Group, Inc. (13%), Pacific
Analytical, Inc. (11%)
Jaycor 1 105,358 100.0% 1,896 18.00 Gateway, Inc. (100%)
Highlands Corporate Center 5 205,085 89.2% 5,797 31.70 Brobeck, Phleger &
Harrison (14%), Genesis
Communications Int'l (12%)
Northern California: San
Francisco Bay Area:
CarrAmerica Corporate Center 7 1,004,799 100.0% 19,273 19.18 AT&T (47%), Peoplesoft,
Inc. (32%), Pacific Bell
Mobile Services (17%)
Valley Business Park I 2 67,784 83.2% 1,161 20.60 Leybold Inficon, Inc.
(35%), Informative Inc.
(17%), Acer Labs, Inc.
(15%)
Bayshore Centre 2 1 94,874 100.0% 1,935 20.40 Redback Networks, Inc.
(100%)
Rincon Centre 3 201,178 100.0% 4,954 24.63 Propel Software Corp.
(44%), Toshiba America
Electronic (31%), Future
Electronics Corp. (19%)
Valley Centre II 4 212,082 100.0% 3,124 14.73 Boston Scientific (100%)
Valley Office Centre 2 68,881 96.4% 2,312 34.81 Bank of America (22%),
Quadrep, Inc. (13%)
Valley Centre 2 102,291 100.0% 2,002 19.58 Seagate Technology (40%),
Numerical Technologies,
Inc. (38%), Vivace
Networks (22%)
Valley Business Park II 6 166,928 100.0% 3,535 21.18 Pericom Semiconductor
Corp. (40%), Computer
Training Academy (20%)
Rio Robles 7 368,178 100.0% 6,009 16.32 Fujitsu Microelectronics
(41%), KLA Instruments
Corp. (36%), NEC Systems,
Inc. (23%)
First Street Technology
Center 1 67,582 100.0% 1,014 15.00 Comdisco, Inc. (100%)
Baytech Business Park 4 300,000 100.0% 5,366 17.89 Schlumberger Technologies,
Inc. (58%), Caspian
Networks (25%), Rapid 5
Networks, Inc. (13%)
3571 North First Street 1 116,000 100.0% 3,062 26.40 Sun Microsystems, Inc.
(100%)
San Mateo Center I 1 70,000 0.0% - - -
Oakmead West Land A-G 7 425,981 100.0% 9,712 22.80 Applied Materials, Inc.
(100%)
San Mateo II & III 2 141,731 61.5% 3,577 41.06 Women.com Networks (31%)
Hacienda West 2 208,654 93.8% 5,954 30.43 Paychex, Inc. (13%), Sun
Microsystems, Inc. (13%)
Sunnyvale Technology Center 5 165,520 100.0% 3,379 20.41 Lattice Semiconductor
Corp. (51%), BMC Software
(25%), Nokia Internet
Comm., Inc. (12%),
Metelics Corp. (12%)
Clarify Corporate Center
1, 2, 3, 4 4 258,048 100.0% 6,637 25.72 Nortel Networks, Inc.
(100%)
Valley Technology Center
1, 2, 3, 4, 5, 6 & 7 7 460,590 100.0% 11,105 24.11 Lattice Semiconductor
Corp. (29%), TSMC North
America, Inc. (24%), Fore
Systems, Inc. (18%),
Navisite, Inc. (14%)
21
Net Total Average
Rentable Annualized Base Rent
# of Area in Percent Base Rent/3/ /Leased
Property Buildings Sq. Feet/1/ Leased/2/ (in thousands) Sq. Feet/4/ Significant Tenants/5/
--------------------------- ------------ ------------- ----------- -------------- ----------- --------------------------
Golden Gateway Commons 3 273,842 95.3% 9,468 36.27 Norcal Mutual Insurance
Co. (29%), Sharper Image
Corp. (21%), ABM
Industries, Inc. (11%)
Techmart Commerce Center 1 266,050 91.3% 9,824 40.44 Network Conference Co.,
Inc. (14%)
Fremont Technology Park
1, 2, 3 3 139,304 100.0% 2,564 18.41 Applied Fiber Optics,
Inc. (39%), Flash
Electronics, Inc. (32%),
Bandwidth Unlimited,
Inc. (29%)
Mountain View Gateway
Center 2 236,400 100.0% 5,201 22.00 KPMG LLP (57%), Netscape
Communications Corp.
(43%)
Portland, OR:
Sunset Corporate Park 3 132,531 80.9% 1,488 13.88 First Insight Corp.
(34%), Volkswagen of
America, Inc. (34%)
Rock Creek Corp Center 3 142,662 100.0% 3,051 21.39 Corillian Corp. (85%),
University of Phoenix
(15%)
Seattle, WA:
Redmond East 10 396,497 91.6% 5,137 14.14 Avaya, Inc. (21%),
Cardiac Pacemakers Inc.
(20%), Genetic Systems
(14%), Riverdeep Group
PLC (12%)
Redmond Hilltop B & C 2 90,880 100.0% 1,515 16.67 Concur Technologies
(90%), Citrix Systems,
Inc. (10%)
Canyon Park 6 316,978 99.1% 5,014 15.95 Icos Corp. (28%),
Targeted Genetics Corp.
(24%), FedEx (14%)
Willow Creek 1 96,179 100.0% 981 10.20 Data I/O Corp. (100%)
Willow Creek Corp. Center
1, 2, 3, 4, 5, 6 6 329,009 100.0% 5,524 16.79 Safeco Insurance Co. of
America (52%), Metawave
Communications Co. (29%),
Nextlink Communications,
Inc. (13%)
Canyon Park Commons
1, 2, 4 3 176,846 100.0% 2,251 12.73 Washington Mutual Bank
(62%), AT&T Wireless
Services, Inc. (38%)
Canyon Park Commons 1 95,290 100.0% 1,342 14.08 Safeco Insurance Co.
(100%)
--------- --------------
Pacific Region Subtotal 173 10,077,010 95.6%
CENTRAL REGION
--------------
Austin, TX:
City View Centre 3 136,183 24.0% 531 16.22 Confiniti (21%)
City View Center 1 128,716 100.0% 2,073 16.10 Broadwing
Telecommunication (100%)
Braker Point 1 195,230 100.0% 3,353 17.17 Harcourt, Inc. (100%)
Tower of the Hills 2 166,149 100.0% 2,992 18.01 Texas Guaranteed
Student Loan (76%)
Chicago, IL:
Parkway North I 1 249,314 80.6% 3,182 15.84 Alliant Foodservice, Inc.
(53%)
Unisys 2 365,244 97.0% 5,700 16.08 Washington Mutual Home
Loan (30%), Hub Group,
Inc. (11%)
The Crossings 1 297,799 92.3% 5,165 18.80 Abercrombie & Kent
Internat'l (16%),
Allstate Insurance Co.
(11%)
Bannockburn I & II 2 209,969 93.2% 3,180 16.26 IMC Global, Inc. (38%),
Parexel (21%)
Bannockburn IV 1 105,330 96.2% 1,708 16.85 Open Text, Inc. (34%),
Onepointe Communications
(21%), Abbott
Laboratories (12%)
Dallas, TX:
Cedar Maple Plaza 3 113,343 93.1% 2,433 23.05 No tenant occupies 10%
Quorum North 1 116,178 93.3% 2,250 20.75 Digital Matrix Systems,
Inc. (20%), HQ Global
(20%)
Quorum Place 1 178,296 90.9% 3,135 19.35 VHA Southwest, Inc.
(22%), McCann-Erickson
USA, Inc. (13%)
Tollway Plaza 1, 2 2 359,903 100.0% 8,405 23.35 Sun Microsystems, Inc.
(27%), Americorp
Relocation Mgmt. (10%),
HQ Global (10%)
Two Mission Park 1 77,832 85.7% 1,178 17.66 Macromedia, Inc. (33%),
Bland, Garvey & Taylor,
Inc. (17%)
Commons @ Las Colinas
1,2,3 3 604,234 100.0% 11,763 19.47 Nokia, Inc. (100%)
5000 Quorum 1 162,165 96.5% 3,214 20.54 Case Corporation (11%)
---------- ------------
Central Region Subtotal 26 3,465,885 92.7%
MOUNTAIN REGION
---------------
Denver, CO:
Harlequin Plaza 2 329,273 94.9% 5,625 18.00 Travelers Insurance Co.
(24%), Bellco First
Federal Credit (14%),
Regis University (12%)
22
Net Total Average
Rentable Annualized Base Rent
# of Area in Percent Base Rent/3/ /Leased
Property Buildings Sq. Feet/1/ Leased/2/ (in thousands) Sq. Feet/4/ Significant Tenants/5/
---------------------------- ----------- ------------ --------- -------------- ------------ ------------------------------
Quebec Court I 1 130,000 100.0% 2,144 16.50 Time Warner Communications (100%)
Quebec Court II 1 157,294 100.0% 2,694 17.13 Tele-Communications, Inc. (100%)
Quebec Centre 3 106,865 93.5% 1,871 18.73 Eonbusiness Corp. (12%), Walberg,
Dagner & Tucker, P.C. (11%)
Dry Creek 3 1 92,356 100.0% 1,458 15.79 AT&T Broadband Management (100%)
Phoenix, AZ:
Qwest Communications 4 532,506 100.0% 9,503 17.85 Qwest Communications (100%)
Salt Lake City, UT:
Sorenson Research Park 5 282,944 97.7% 3,382 12.24 Convergys Customer Mgmt (47%), ITT
Educations Services, Inc. (15%),
Intel Corp. (15%)
Wasatch Corporate Center 3 178,231 96.0% 2,365 13.82 Advanta Bank Corp. (28%),
Achieveglobal, Inc. (23%), Fonix
Corp. (14%), Tenfold Corp. (14%),
Musician's Friend, Inc. (12%)
Wasatch Corporate Center 17, 18 2 121,654 100.0% 1,838 15.11 Ebay, Inc. (59%), Citrix Systems
(21%), Western Aggregates, Inc.
(15%)
Sorenson X 1 41,288 100.0% 780 18.90 Electronic Data Systems (73%),
Volvo
Commercial Credit Corp. (13%),
WFS Financial Lease (11%)
Creekside I & II 1 78,000 100.0% 1,032 13.23 3Com Corp. (100%)
----------- ------------ ------------
Mountain Region Subtotal 24 2,050,411 98.2%
Total Consolidated Properties 254 20,293,231 419,226
Weighted Average 95.3% 21.72
Unconsolidated Properties
Washington, D.C.:
1919 Pennsylvania Avenue/8/ 1 328,436 99.4% 8,927 37.13 A.C. Corp. (24%), Mortgage Bankers
Assoc. (22%), Cole, Raywid &
Braverman, LLP (17%), Porter
Wright Morris (13%), Jenkens &
Gilchrist, P.C. (12%)
2025 M Street/8/ 1 245,303 99.5% 4,886 27.96 Radio Free Asia (32%), Smith,
Bucklin & Assoc. (27%), Akin Gump
Strauss Hauer (11%)
1201 F Street/12/ 1 226,871 96.0% 6,636 33.62 Charles River Assoc., Inc. (20%),
Cadwalader Wickersham (18%),
Health Insurance Association
(18%), National Federation of
Independent Business (17%)
Bond Building/9/ 1 162,182 99.2% 5,425 33.72 GSA (97%)
1717 Pennsylvania Avenue/10/ 1 236,455 97.2% 6,718 37.77 MCI Telecommunications Corp. (57%)
799 9th Street/13/ 1 201,464 74.3% 6,556 43.80 U. S. Mint (74%)
Booz Allen & Hamilton Building/10/ 1 222,989 100.0% 3,706 16.62 Booz Allen & Hamilton, Inc. (100%)
Portland, OR:
GM Call Center/11/ 1 103,279 100.0% 1,250 12.11 GM Call Center (100%)
Chicago, IL:
Parkway 3, 4, 5, 6, 10/12/ 5 653,914 99.2% 11,069 17.94 Fujisawa USA, Inc. (22%),
Associates Commerce Solutions
(20%), Shand Morahan & Co. (13%),
BT Office Products (10%)
Dallas, TX:
Royal Ridge Phase II, A, B/12/ 4 503,733 88.9% 7,617 17.00 Capital One Services, Inc. (32%),
Verizon (29%), American Honda
Finance Corp. (13%)
Custer Court/8/ 1 120,050 45.0% 1,167 21.60 DGI Technologies (26%), Advanced
Fibre Communication (16%)
Austin, TX:
Riata Corporate and Riata 12 997,678 100.0% 16,717 16.96 Janus Capital Corp. (32%),
Crossing/12/ Electronic Data Systems (27%)
Denver, CO:
23
Net Total Average
Rentable Annualized Base Rent
# of Area in Percent Base Rent/3/ /Leased
Property Buildings Sq. Feet/1/ Leased/2/ (in thousands) Sq. Feet/4/ Significant Tenants/5/
---------------------------- ----------- ------------ --------- -------------- ------------ ------------------------------
Panorama I, II, III, V,
VIII, X/12/ 6 664,050 91.0% 11,718 17.65 Charles Schwab & Co., Inc. (41%),
----------- ---------- ------------ AT&T Corp. (13%)
Total Unconsolidated
Properties 36 4,666,404 92,392
=========== ========== ============
Weighted Average 95.7% 20.69
Total All Operating Properties 290 24,959,635 $511,618
=========== =========== ============
Weighted Average 95.4% $21.52
/1/ Includes office, retail and parking space but excludes storage.
/2/ Includes spaces for leases that have been executed and have commenced as of
December 31, 2001.
/3/ Total annualized base rent equals total original base rent, including
historical contractual increases and excluding (i)percentage rents, (ii)
additional rent payable by tenants such as common area maintenance, real
estate taxes and other expense reimbursements, (iii) future contractual or
contingent rent escalations and (iv) parking rents.
/4/ Calculated as total annualized base rent divided by net rentable area
leased.
/5/ Includes tenants leasing 10% or more of rentable square footage (with the
percentage of rentable square footage in parentheses).
/6/ We own the improvements on the property and have a leasehold interest in all
the underlying land.
/7/ We hold a general and limited partner interest in a partnership that owns
the property.
/8/ We own 49% through a joint venture.
/9/ We own 15% through a joint venture.
/10/We own 50% through a joint venture.
/11/We own 16% through a joint venture.
/12/We own 35% through a joint venture.
/13/We own 40% through a joint venture.
24
OCCUPANCY, AVERAGE RENTALS AND LEASE EXPIRATIONS
As of December 31, 2001, 95.3% of our aggregate net rentable square
footage in 254 consolidated operating properties was leased. The following
table summarizes percent leased and average annualized rent per leased square
foot (excluding storage space) for the past five years for the consolidated
operating properties:
Average
Percent Annualized Number of
Leased at Rent/Leased Consolidated
December 31, Year End Sq. Ft./1/ Properties
--------------------- ----------- ------------- --------------
2001 95.3% $25.02 254
2000 97.4% 23.77 252
1999 97.4% 21.66 271
1998 96.7% 20.46 292
1997 95.9% 19.38 243
/1/Calculated as total annualized building operating revenue, including tenant
reimbursements for operating expenses and excluding parking and storage
revenue, divided by the total square feet, excluding storage, in buildings
under lease at year end.
The following table is a schedule of our lease expirations for leases in place
as of December 31, 2001 for the next ten years for the 254 consolidated
operating properties, assuming no tenants exercise renewal options:
Net Rentable Annual Base Percent of Total
Year of Area Subject Rent Under Annual Base Rent
Lease to Expiring Expiring Represented by
Expiration Leases (sq. ft.) Leases (000's) Expiring Leases
----------- ---------------- --------------- ----------------
2002 2,007,000 $ 44,637 10.5%
2003 2,726,000 55,908 13.2%
2004 3,045,000 68,201 16.1%
2005 2,474,000 53,819 12.7%
2006 2,162,000 49,313 11.6%
2007 1,759,000 37,938 9.0%
2008 1,501,000 34,039 8.0%
2009 1,514,000 29,500 7.0%
2010 613,000 14,403 3.4%
2011 223,000 3,709 0.9%
2012 and
thereafter 1,323,000 31,878 7.6%
MORTGAGE FINANCING
As of December 31, 2001, some of our consolidated operating properties
were subject to fixed rate mortgage indebtedness. The total of these mortgages
was $473.4 million. Our fixed rate mortgage debt as of December 31, 2001 bore
an effective weighted average interest rate of 8.04% and a weighted average
maturity of 6.9 years (assuming loans callable before maturity are called as
early as possible). The following table details information regarding the
existing mortgage indebtedness for the consolidated operating properties as of
December 31, 2001.
25
Estimated
Balance Due
Interest Principal Maturity Annual Debt at Maturity
Property Rate Balance (000's) Date Service (000's) (000's)
------------------------------------ ---------- ---------------- -------- --------------- -------------
Sunnyvale Technology Center/Highland
Corporate Center/Hacienda West 8.90% $ 28,875 6/1/02 $2,673 $28,391
Jaycor 7.35% 10,861 2/1/03 1,520 10,114
Parkway North 6.92% 24,164 12/1/03 1,672 24,164/1/
Canyon Park Commons 9.13% 4,923 12/1/04 714 4,071
Qwest Communications 7.92% 16,613 12/1/05 4,111 -
Qwest Communications 7.92% 4,822 12/1/05 1,308 -
Qwest Communications 7.92% 7,233 12/1/05 1,962 -
Qwest Communications 7.92% 7,233 12/1/05 1,962 -
Redmond East 8.38% 26,141 1/1/06 2,648 24,022/2/
Century Springs
West/Glenridge/Midori/Lakewood/Parkwood 7.20% 18,718 1/1/06 2,126 15,209/3/
Wateridge Pavilion 8.25% 3,308 11/1/06 338 2,921
Wasatch Corporate Center 8.15% 12,016 1/2/07 1,220 10,569
2600 West Olive 6.75% 18,913 1/1/09 1,524 16,738
Palomar Oaks 8.85% 9,636 4/1/09 1,025 7,925
1255 23rd St 8.12% 37,982 4/1/09 3,584 33,062
1730 Penn/ International Square 8.12% 182,176 4/1/09 17,190 158,571
South Coast 7.13% 14,871 6/10/09 1,287 12,660
Sorenson 7.75% 2,198 7/1/11 328 -
Sorenson 8.88% 1,523 5/1/17 182 -/4/
1747 Penn 9.50% 14,042 7/10/17 1,730 -/5/
900 19th St. 8.25% 15,305 7/15/19 1,656 -
1775 Penn 7.63% 11,735 9/1/29 1,020 -
Techmart Commercial Ctr./6/ n/a 94 2/1/03 45 -
Total 8.04% $473,382 $51,825
========= ========== ===========
1. Prepayable at the rates stated in the loan documents.
2. Prepayable after 12/19/05 at the rates stated in the loan documents.
3. Prepayable at the rates stated in the loan documents.
4. Note is callable by the lender after 6/30/02. The estimated principal
balance will be $13,841,000 at that date.
5. Note is callable by the lender after 7/1/04. The estimated principal balance
will be $14,177,000 at that date.
6. Capital lease.
For additional information regarding our office properties and their operation,
see "Item 1, Business."
ITEM 3. LEGAL PROCEEDINGS
We currently involved in two separate lawsuits with two stockholders of HQ
Global. The first lawsuit involves the September 1998 conversion of an
approximately $111 million loan that we made to HQ Global into stock of HQ
Global. We, along with HQ Global, initiated this lawsuit in the United States
District Court for the District of Columbia in February 1999, asking the court
to declare that the terms of the debt conversion were fair, after two minority
stockholders threatened to challenge the terms of the conversion. These
stockholders had claimed that both the conversion price used and the methods by
which the conversion price was agreed upon between HQ Global and us were not
fair to HQ Global or these stockholders. Thereafter, these two stockholders
filed their own counterclaims against HQ Global, the board of directors of HQ
Global and us. The stockholders asked the court to declare the conversion void,
or in the alternative for compensatory and punitive damages. On September 12,
2001, the trial court granted these stockholders' motion for summary judgment,
declaring that the shares issued in connection with the conversion were null
and void. We believe that the trial court incorrectly interpreted Delaware law
in this case. We appealed this decision on October 2, 2001. We recognize that,
in light of the trial court's finding, there is a reasonable possibility that
we will be unsuccessful in overturning the court's decision. In that
26
event, there are a number of possible outcomes, including a reduction in our
equity interest in HQ Global or a cash payment by us to these stockholders. We
currently believe that the value of any loss we may incur from this decision
should not exceed $10 million, although we cannot assure you that this will be
the case.
The second lawsuit involves claims filed by these two stockholders in April
2000 arising out of the June 2000 merger transaction involving HQ Global and
VANTAS Incorporated. In this lawsuit, these two stockholders have brought
claims against HQ Global, the board of directors of HQ Global, FrontLine
Capital Group and us in Delaware Chancery Court. The two stockholders allege
that, in connection with the merger transaction, we breached our fiduciary
duties to the two stockholders and breached a contract with the stockholders.
The claim relates principally to the allocation of consideration paid to us
with respect to our interest in an affiliate of HQ Global that conducts
international executive suites operations. The stockholders asked the court to
rescind the transaction, or in the alternative for compensatory and rescissory
damages. The court recently determined that it would not rescind the merger
transaction, but held open the possibility that compensatory damages could be
awarded or that another equitable remedy might be available. We believe that
these claims are without merit and that we will ultimately prevail in this
action, although we cannot assure you that the court will not find in favor of
these stockholders. We continue to believe, however, that, even if the court
finds in favor of these stockholders, any such adverse result will not have a
material adverse effect on our financial condition or results of operations.
We party to a variety of other legal proceedings arising in the ordinary
course of business. All of these matters, taken together, are not expected to
have a material adverse impact on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY & RELATED STOCKHOLDER
MATTERS
Our common stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "CRE". As of December 31, 2001, there were 388 stockholders of
record. The following table sets forth the high and low sale prices of our
common stock as reported on the NYSE Composite Tape, and the dividends paid per
share of common stock for each quarterly period for the past two years.
2001 1Q 2Q 3Q 4Q Full Year
-------------------------------------------------------------------
High $ 30.88 30.69 33.29 30.30 33.29
Low 27.83 27.00 27.78 27.90 27.00
Dividend 0.4625 0.4625 0.4625 0.4625 1.85
2000 1Q 2Q 3Q 4Q Full Year
-------------------------------------------------------------------
High $ 20.77 27.44 30.27 31.50 31.50
Low 18.56 20.34 26.60 28.80 18.56
Dividend 0.4625 0.4625 0.4625 0.4625 1.85
In order to qualify as a REIT, we are required to make ordinary dividend
distributions to our stockholders. The amount of these distributions must equal
at least:
i. the sum of (A) 90% of our "REIT taxable income" (computed without
regard to the dividends paid deduction and our net capital gain) and (B)
90% of the net income (after tax), if any, from foreclosure property,
minus
27
ii. the sum of certain non-cash income items.
Our strategy is to distribute what we believe is a conservative percentage of
our cash flow. This permits us to retain funds for capital improvements and
other investments while funding our distributions.
For federal income tax purposes, distributions may consist of ordinary
income, capital gains, nontaxable return of capital or a combination of those
items. Distributions that exceed our current and accumulated earnings and
profits (calculated for tax purposes) constitute a return of capital rather
than a dividend, which reduces a stockholder's basis in the shares of common
stock and will not be taxable to the extent that the distribution equals or is
less than the stockholder's basis in the stock. To the extent a distribution
exceeds both current and accumulated earnings and profits and the stockholder's
basis in the stock, that distribution will be treated as a gain from the sale
or exchange of that stockholder's shares. Every year, we notify stockholders
of the taxability of distributions paid during the preceding year.
The following table sets forth the approximate taxability of common stock
distributions paid in 2001, 2000 and 1999:
2001 2000 1999
------- ------- -------
Ordinary income 92% 84% 78%
Capital gain 8% 16% 22%
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating
information. The financial and operating data have been extracted from our
consolidated financial statements for each of the periods presented.
The following selected financial and operating information should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the financial statements and related
notes included elsewhere in this Annual Report on Form 10K:
(In thousands, except per share data) Year Ended December 31,
---------------------------------------------------------------
2001 2000 1999 1998 1997
---------------------------------------------------------------
Operating Data:
Real Estate Operating Revenue (from continuing
operations):
Rental revenue $ 507,609 $ 531,859 $ 498,849 $ 440,455 $325,502
Real estates service revenue 31,037 26,172 17,054 16,167 15,998
Consolidated Data:
Income from continuing operations 79,061 147,159 151,079 /1/ 119,979 /1/ 77,800
Income (loss) from discontinued operations - 456 (7,862) 6,518 940
Gain on sale of discontinued operations, net of tax - 31,852 - - -
Dividends paid to common stockholders 114,106 123,245 125,876 127,188 97,195
Per Share Data:
Basic income from continuing operations 0.73 1.69 1.71 1.23 1.21
Diluted income from continuing operations 0.71 1.65 1.71 1.23 1.21
Income (loss) from discontinued operations - diluted - 0.01 (0.12) 0.09 0.02
Gain on sale of discontinued operations- diluted - 0.47 - - -
Dividends paid to common shareholders 1.85 1.85 1.85 1.85 1.75
Weighted average shares outstanding - basic 61,010 66,221 67,858 68,577 54,873
Weighted average shares outstanding - diluted 62,442 67,649 67,982 68,778 59,597
28
(In thousands) As of or for the Year Ended December 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------------------------------------------------------------
Balance Sheet Data:
Real estate, before accumulated depreciation $ 2,872,047 $ 2,813,320 $ 3,067,822 $ 2,934,653 $ 2,384,668
Total assets 2,775,600 3,072,841 3,479,072 3,627,260 2,730,556
Mortgages and notes payable 1,405,382 1,211,158 1,603,371 1,610,859 1,025,145
Minority interest 83,393 89,687 92,586 88,815 73,955
Total stockholders' equity 1,177,807 1,646,706 1,686,715 1,813,939 1,552,697
Total common shares outstanding 51,965 65,018 66,826 71,760 59,994
Other Data:
Net cash provided by operating activities $ 217,714 $ 179,054 $ 175,069 $ 239,752 $ 133,077
Net cash provided by (used by) investing activities 101,204 567,477 83,647 (985,321) (998,733)
Net cash (used by) provided by financing activities (338,581) (773,713) (238,366) 757,760 861,864
Funds from continuing operations before
allocation to the unitholders/2/ 216,682 254,714 226,587 211,094 151,900
/1/ Net income from continuing operations includes a non-recurring gain
(loss) of $4.5 million and ($13.7) million related to a treasury lock
agreement in 1999 and 1998, respectively.
/2/ We believe that funds from operations is helpful to investors as a
measure of the performance of an equity REIT. Along with cash flows from
operating activities, financing activities and investing activities, funds
from operations provides investors with an indication of our ability to
incur and service debt, to make capital expenditures and to fund other
cash needs. Funds from operations is defined by the National Association
of Real Estate Investment Trusts (NAREIT) as net income (loss) computed in
accordance with accounting principles generally accepted in the United
States of America (GAAP), excluding gains or losses from sales of
depreciable operating properties and items that are classified as
extraordinary items under GAAP, plus depreciation and amortization of
assets uniquely significant to the real estate industry and after
adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures are
calculated to reflect funds from operations on the same basis. Our funds
from operations may not be comparable to funds from operations reported by
other REITs that do not define the term in accordance with the current
NAREIT definition or that interpret the current NAREIT definition
differently from us. Funds from operations does not represent net income
or cash flow generated from operating activities in accordance with GAAP
and, as such, should not be considered an alternative to net income as an
indication of our performance or to cash flow as a measure of liquidity or
our ability to make distributions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion that follows is based primarily on our consolidated
financial statements as of December 31, 2001 and 2000, and for the years ended
December 31, 2001, 2000 and 1999 and should be read along with the consolidated
financial statements and related notes. The ability to compare one period to
another may be significantly affected by acquisitions completed, development
properties placed in service and dispositions made during those years. The
number of properties that we owned and were consolidated in the financial
statements were 254 in 2001, 252 in 2000 and 271 in 1999. Comparison of the
periods is also affected by development operations.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are both important to the
presentation of our financial condition and results of operations and require
management's most difficult, complex or subjective judgments. Our critical
accounting policies relate to the evaluation of impairment of long-lived assets
and of our investment in HQ Global and the evaluation of the collectibility of
accounts and notes receivable.
If events or changes in circumstances indicate that the carrying value of
a rental property to be held and used or land held for development may be
impaired, we perform a recoverability analysis based on estimated undiscounted
cash flows to be generated from the property in the future. If the analysis
indicates that the carrying value is not recoverable from future cash flows,
the property is written down to estimated fair value and an impairment loss is
recognized. If we decide to sell rental properties or land held for
development, we evaluate the recoverability of the carrying amounts of the
assets. If the evaluation indicates that the carrying value is not recoverable
from estimated net sales proceeds, the property is written down to estimated
fair value less costs to sell and an impairment loss is recognized within
income from continuing operations. Our estimates of cash flows and fair values
of the properties are based on current market conditions and consider matters
such as rental rates and
29
occupancies for comparable properties, recent sales data for comparable
properties and, where applicable, contracts or the results of negotiations with
purchasers or prospective purchasers. Our estimates are subject to revision as
market conditions and our assessments of them change.
If events or circumstances indicate that the fair value of an investment
accounted for using the equity or cost method (such as our investment in HQ
Global) has declined below its carrying value and we consider the decline to be
"other than temporary," the investment is written down to fair value and an
impairment loss is recognized. For example, our evaluation of impairment of our
investment in HQ Global in 2001 was based on a number of factors. These factors
included: analysis of the financial condition and operating results of HQ
Global, which deteriorated significantly during 2001 as the economic slowdown
reduced the demand for temporary office space, particularly from
technology-related tenants; the inability of HQ Global to remain in compliance
with provisions of its debt agreements and its failure to reach an agreement
with lenders on a restructuring of its debt prior to the expiration of a
forbearance period in December 2001; the losses of key board members and
executives by HQ Global, particularly in the last half of 2001;and the
announcement by FrontLine Capital Group, HQ Global's controlling shareholder,
in November 2001 that it had recognized an impairment in the value of
intangible assets relating to HQ Global. Based on our evaluation, we determined
in the fourth quarter of 2001 that our investment in HQ Global was impaired on
an "other than temporary" basis and that our investment in HQ Global had no
value. Accordingly, we wrote down our carrying value of the investment to zero
and recognized the loss in continuing operations. We would not expect this
conclusion to change unless there is a significant improvement in HQ Global's
business and a restructuring of its debt on terms that are favorable to its
equity investors.
Our allowance for doubtful accounts and notes receivable is established
based on analysis of the risk of loss on specific accounts. The analysis places
particular emphasis on past-due accounts and considers information such as the
nature and age of the receivable, the payment history of the tenant or other
debtor, the financial condition of the tenant and our assessment of its ability
to meet its lease obligations, the basis for any disputes and the status of
related negotiations, etc. Our estimate of the required allowance, which is
reviewed on a quarterly basis, is subject to revision as these factors change
and is sensitive to the effects of economic and market conditions on our
tenants, particularly in our largest markets (i.e., the San Francisco Bay and
Washington, D.C. areas). For example, in 2001, due to economic conditions and
analysis of our accounts receivable, we increased our provision for
uncollectible accounts by approximately $5.5 million.
RESULTS OF OPERATIONS
The discussion and analysis of operating results focuses on our segments
as management believes that segment analysis provides the most effective means
of understanding the business. Our reportable operating segments are real
estate property operations and development operations. Other business
activities and operations, which are not reported separately, are included in
other operations. Executive office suites are presented as discontinued
operations in our financial statements.
Our operating segments' performance is measured using funds from
operations. Funds from operations is defined by the National Association of
Real Estate Investment Trusts (NAREIT) as follows:
* Net income (loss) - computed in accordance with accounting principles
generally accepted in the United States of America (GAAP);
* Less gains (or plus losses) from sales of depreciable operating properties
and items that are classified as extraordinary items under GAAP;
* Plus depreciation and amortization of assets uniquely significant to the
real estate industry;
* Plus or minus adjustments for unconsolidated partnerships and joint
ventures (to reflect funds from operations on the same basis).
Funds from operations does not represent net income or cash flow generated from
operating activities in accordance with GAAP. As such, it should not be
considered an alternative to net income as an indication of our performance or
to cash flows as a measure of our liquidity or our ability to make
distributions.
30
REAL ESTATE PROPERTY OPERATIONS
Operating results and assets of real estate property operations are
summarized as follows:
=============================================================================
For the year ended Variance
----------------------
Real Estate Operations December 31, 2001 vs. 2000 vs.
---------------------- ------------------------------
(in millions) 2001 2000 1999 2000 1999
---- ---- ---- ---- ----
Operating revenue $ 507.6 $ 531.9 $ 498.9 $ (24.3) $ 33.0
Segment expense 162.8 170.0 167.2 (7.2) 2.8
Interest expense 44.0 49.2 50.5 (5.2) (1.3)
Other income, net 19.7 14.5 8.9 5.2 5.6
As of December 31,
------------------------------
2001 2000 1999
---- ---- ----
Total assets $ 2,682.7 $ 2,711.9 $ 2,991.8 $ (29.2) $ (279.9)
==============================================================================
Real estate operating revenues decreased $24.3 million (4.6%) in 2001 as
compared to 2000. This decrease resulted from the dispositions of interests in
properties, including the properties contributed to Carr Office Park, L.L.C., a
joint venture in which we have a 35% interest, in August 2000. The decrease in
revenues was partially offset by development properties being placed in service
and "same store" rental growth. Same store rental revenues grew by
approximately 4.3% (approximately $18.1 million). This increase was due
primarily to an increase in average rental rates in properties in the Northern
California market.
Real estate operating revenues increased $33.0 million (6.6%) in 2000 as
compared to 1999. This increase resulted from development properties being
placed in service, "same store" rental growth and higher occupancies. Same
store rental revenues grew by approximately 7.2% (approximately $25.6 million).
This increase was due primarily to an increase in average rental rates in
properties in the San Francisco Bay area due to strong demand for office space.
The average occupancy rate, when compared on a same store basis, was 97.2% in
2000 and 96.8% in 1999. These increases were partially offset by dispositions
of interests in properties, including the properties contributed to Carr Office
Park, L.L.C. in August 2000.
Real estate operating expenses decreased $7.2 million (4.2%) in 2001 as
compared to 2000. This decrease was due primarily to the dispositions of
interests in properties, including the properties contributed to Carr Office
Park, L.L.C., partially offset by an increase in same store expenses of
approximately $13.6 million (10.3%). The increase in expenses includes an
increase in the provision for uncollectible accounts of approximately $5.5
million due to collection issues and tenant bankruptcies.
Real estate operating expenses increased $2.8 million (1.7%) in 2000 as
compared to 1999. This increase was due to development properties being placed
in service and a slight increase in same store expenses. These increases were
partially offset by dispositions of interests in properties, including the
properties contributed to Carr Office Park, L.L.C. in August 2000.
Real estate interest expense decreased $5.2 million (10.6%) in 2001 as
compared to 2000 and $1.3 million (2.6%) in 2000 as compared to 1999. These
decreases were principally the result of the retirement of certain mortgages
due to maturities or dispositions of the related properties.
Real estate other income increased $5.2 million (35.9%) in 2001 as
compared to 2000 and $5.6 million (62.9%) in 2000 as compared to 1999. These
increases were primarily the result of equity in earnings of unconsolidated
entities (excluding depreciation and amortization), primarily from the
investment in Carr Office Park, L.L.C.
Real estate assets declined $29.2 million from 2000 to 2001 due
principally to the sale of properties in the Phoenix market. The primary cause
of the decrease in real estate assets from 1999 to 2000 was the contribution of
$332.1 million of property to Carr Office Park, L.L.C. These assets are not
included in our consolidated financial statements but we retain a 35% interest
in them.
31
In response to a deteriorating economic climate, the real estate markets
have materially softened in 2001. Demand for office space has declined
significantly and vacancy rates have increased in each of our core markets. As
a result, occupancy in our portfolio of operating properties decreased to 95.3%
at December 31, 2001, as compared to 97.4% at December 31, 2000. While market
rental rates have declined somewhat in most markets from peak levels, rental
rates on space that was re-leased in 2001 increased an average of 18.6% over
rates that were in effect under expiring leases. However, in the fourth quarter
of 2001, rental rates on space that was re-leased declined 2.7% from rates that
were in effect under expiring leases. We expect that the softening of the real
estate markets we experienced in the latter half of 2001 will continue
throughout 2002. As a result of the soft market, we anticipate that occupancy
levels will be lower in 2002. We expect average occupancy to decline to
approximately 93.5% for 2002.
DEVELOPMENT OPERATIONS
Operating results and assets of development operations are summarized as
follows:
==========================================================================
For the year ended Variance
------------------
Development Operations December 31, 2001 vs. 2000 vs.
---------------------- ----------------------------
(in millions) 2001 2000 1999 2000 1999
---- ---- ---- ---- ----
Operating revenue $ 14.2 $ 10.6 $ 6.6 $ 3.6 $ 4.0
Segment expense 6.6 4.5 4.6 2.1 (0.1)
Interest expense - - - - -
Other income, net 0.4 0.2 0.2 0.2 -
As of December 31,
-----------------------------
2001 2000 1999
---- ---- ----
Total assets $ 49.8 $ 96.3 $ 220.1 $ (46.5) $ (123.8)
==========================================================================
Revenue from our development operations increased $3.6 million (34.0%) in
2001 as compared to 2000 and $4.0 million (60.6%) in 2000 as compared to 1999.
These increases resulted primarily from our growth in fee development business.
In particular, in August 2000, we began providing services to Carr Office
Park, L.L.C. and other joint ventures in connection with their development of
new properties. The increase for 2001 also includes incentive fees of $5.2
million earned as a result of achieving cost and completion date targets on
development of certain properties. Incentive fees for 2000 were $0.8 million.
The expenses for our development operations increased $2.1 million in 2001
as compared to 2000 and decreased $0.1 million in 2000 as compared to 1999. The
increase in 2001 was due principally to increased activity in development for
third parties. The decrease in expenses in 2000 was due primarily to lower
salary expense from a temporary reduction in headcount.
In 2001, development assets decreased $46.5 million from 2000 due
primarily to properties being placed in service and a lower level of internal
development activity. Total development assets decreased $123.8 million in 2000
from $220.1 million in 1999. This decrease includes $76.9 million due to our
contribution of assets to Carr Office Park, L.L.C. The remaining decrease was
due primarily to properties being placed in service.
OTHER OPERATIONS
Operating results and assets of other operations are summarized as
follows:
32
============================================================================================
For the year ended Variance
------------------------------
Other Operations December 31, 2001 vs. 2000 vs.
---------------- ----------------------------------
(in millions) 2001 2000 1999 2000 1999
---- ---- ---- ---- ----
Operating revenue $ 16.9 $ 15.5 $ 10.4 $ 1.4 $ 5.1
Segment expense 42.9 41.6 34.3 1.3 7.3
Interest expense 38.5 49.1 38.6 (10.6) 10.5
Other expense, net (47.3) (3.6) (3.2) (43.7) (0.4)
As of December 31,
----------------------------------
2001 2000 1999
---- ---- ----
Total assets $ 43.1 $ 264.6 $ 59.5 $ (221.5) $ 205.1
============================================================================================
Revenues from our other operations increased $1.4 million (9.0%) in 2001
as compared to 2000 and increased $5.1 million (49.0%) in 2000 as compared to
1999. These increases resulted primarily from expansion of our operations in
the area of managing rental properties for affiliates and others. In
particular, in August 2000, we began providing leasing and management services
to Carr Office Park, L.L.C.
Expenses of our other operations increased $1.3 million (3.1%) in 2001 as
compared to 2000 and $7.3 million (21.3%) in 2000 as compared to 1999. The
increase in 2001 was due primarily to our expanded property management
operations discussed above and professional fees associated with internal
process improvement efforts and other initiatives. The increase in 2000 was due
primarily to the same factors.
Interest expense for other operations is net of interest allocated to other
segments, consisting primarily of interest capitalized on development projects
at our average effective borrowing rate. Interest expense for our other
operations decreased $10.6 million (21.6%) in 2001 as compared to 2000 and
increased $10.5 million (27.2%) in 2000 as compared to 1999. The decrease in
2001 is due to the repayment of debt and lower interest rates on our floating
rate debt. The increase in 2000 was due to a decrease in capitalized interest
due primarily to a lower level of development activity.
Other expenses, net, of our other operations increased $43.7 million in
2001 as compared to 2000 due primarily to the impairment loss recognized on our
investment in HQ Global. FrontLine Capital Group ("FrontLine"), the majority
stockholder of HQ Global, announced in October 2001 that HQ Global was in
default with respect to certain covenant and payment obligations under its
senior and mezzanine term indebtedness, was in a forebearance period with HQ
Global lenders and was actively negotiating with those lenders. In November
2001, FrontLine disclosed that it had recognized an impairment in the value of
intangible assets relating to HQ Global due to HQ Global's trend of operating
losses and its inability to remain in compliance with its debt arrangements.
Based on these factors, our analysis of the financial condition and operating
results of HQ Global (which deteriorated significantly during 2001 as the
economic slowdown reduced the demand for temporary office space, particularly
from technology-related tenants) and the losses of key board members and
executives by HQ Global, particularly in the last half of 2001, we determined
in the fourth quarter of 2001, that our investment in HQ Global was impaired.
We recorded a $42.2 million impairment charge, reducing the carrying value of
our investment in HQ Global to zero.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased $1.5 million (1.2%) in 2001
compared to 2000 and increased $8.8 million (7.4%) in 2000 compared to 1999.
The decrease in 2001 was due to the disposition of the Phoenix properties and
the contribution of properties to Carr Office Park, L.L.C., partially offset by
properties placed in service. The increase in 2000 was due primarily to
acquisitions of property and transitions of property from construction in
progress to operations, partially offset by property dispositions and joint
venture activity.
GAIN ON SALE OF ASSETS AND OTHER PROVISIONS, NET
We dispose of assets (sometimes using tax-deferred exchanges) that are
inconsistent with our long-term strategic or return objectives or where market
conditions for sale are favorable. The proceeds from the sales are redeployed
into other properties or used to fund development operations or to support
other corporate needs.
33
During 2001, we disposed of seven operating properties, one property under
development and three parcels of land held for development. We recognized a
gain of $4.5 million on these transactions. We also recognized an impairment
loss of $1.5 million on certain parcels of land held for development or sale
due to a decline in fair market value of the land.
During 2000, we disposed of 16 operating properties (including one
property in which we held an interest through an unconsolidated entity) and
four parcels of land held for development. We recognized a gain of $24.1
million on these transactions, net of taxes of $5.6 million, including a gain
of $8.8 million relating to our share of gain on a sale of property in which we
held an interest through an unconsolidated entity.
On August 17, 2000, we closed on a joint venture transaction with New York
State Teachers' Retirement System ("NYSTRS"). At closing, we and some
affiliates contributed properties to the joint venture, Carr Office Park,
L.L.C., and NYSTRS contributed cash of approximately $255.1 million. The joint
venture encompasses five suburban office parks (including 26 rental properties
and land held for development of additional properties) in four markets. We
received approximately $249.6 million and a 35% interest in the joint venture
in exchange for the properties contributed and recognized a gain on the partial
sale of $20.1 million, net of taxes of $13.1 million.
Other provisions for 2000 includes an impairment loss of $7.9 million for
land held for development that we decided to sell. For various reasons, we
determined that we would not proceed with planned development of rental
properties on certain of our land holdings and decided to market the land for
sale. As a result, we evaluated the recoverability of the carrying amounts of
the land. We determined that the carrying amounts would not be recovered from
estimated net sale proceeds in certain cases and, in those cases, we recognized
impairment losses.
During 1999, we disposed of 63 properties and two parcels of land being
held for development. We recognized a gain of $54.8 million, net of District of
Columbia franchise tax of $0.6 million.
DISCONTINUED OPERATIONS
Our income from discontinued operations of the executive suites business
was $0.5 million in 2000 versus a loss of $7.9 million in 1999. Income
increased primarily due to the lease-up of development properties placed into
operations.
On January 20, 2000, we, along with HQ Global Workplaces, Inc. (HQ
Global), VANTAS Incorporated (VANTAS) and FrontLine, entered into several
agreements that contemplated several transactions including (i) the merger of
VANTAS with and into HQ Global, (ii) the acquisition by FrontLine of shares of
HQ Global common stock from us and other stockholders of HQ Global, and (iii)
the acquisition by VANTAS of our debt and equity interests in OmniOffices (UK)
Limited and OmniOffices LUX 1929 Holding Company S.A. On June 1, 2000, we
consummated the transactions. We recognized an after tax gain of $31.9 million.
Following the transactions, we owned approximately 16% of the equity of HQ
Global on a fully diluted basis and our investment had a carrying value of
$42.2 million.
FrontLine, the majority stockholder of HQ Global, announced in October
2001 that HQ Global was in default with respect to certain covenant and payment
obligations under its senior and mezzanine term indebtedness, was in a
forebearance period with HQ Global lenders and was actively negotiating with
those lenders. In November 2001, FrontLine disclosed that it had recognized an
impairment in the value of intangible assets relating to HQ Global due to HQ
Global's trend of operating losses and its inability to remain in compliance
with its debt arrangements. Based on these factors, our analysis of the
financial condition and operating results of HQ Global (which deteriorated
significantly during 2001 as the economic slowdown reduced the demand for
temporary office space, particularly from technology-related tenants) and the
losses of key board members and executives by HQ Global, particularly in the
last half of 2001, we determined in the fourth quarter of 2001, that our
investment in HQ Global was impaired. We recorded a $42.2 million impairment
charge, reducing the carrying value of our investment in HQ Global to zero.
34
CONSOLIDATED CASH FLOWS
Consolidated cash flow information is summarized as follows:
============================================================================================
For the year ended Variance
--------------------
December 31, 2001 vs. 2000 vs.
---------------------------
(in millions) 2001 2000 1999 2000 1999
---- ---- ---- ---- ----
Cash provided by operating activities $ 217.7 $ 179.1 $ 175.1 $ 38.6 $ 4.0
Cash provided by investing activities 101.2 567.5 83.6 (466.3) 483.9
Cash used by financing activities (338.6) (773.7) (238.4) 435.1 (535.3)
============================================================================================
Operations generated $217.7 million of net cash in 2001 compared to $179.1
million in 2000 and $175.1 million in 1999. The changes in cash flow from
operating activities were primarily the result of factors discussed above in
the analysis of operating results. The level of net cash provided by operating
activities is also affected by the timing of receipt of revenues and payment of
expenses, including in 2001 income taxes relating to sales of properties and
discontinued operations completed in 2000.
Our investing activities provided net cash of $101.2 million in 2001,
$567.5 million in 2000 and $83.6 million in 1999. The decrease in net cash
provided by investing activities in 2001 is due primarily to the fact that in
2000, we sold our investment in HQ Global, generating $377.3 million of cash.
Proceeds from sales of properties were also higher in 2000 ($474.0 million) due
primarily to the Carr Office Park, L.L.C. transaction. The effect of these
decreases on net cash provided by investing activities was partially offset by
a reduction in development activities ($32.4 million), receipt of a
distribution from Carr Office Park, L.L.C. from proceeds of a third party
financing of properties ($77.9 million) and a release of restricted deposits
($34.9 million) in connection with the acquisition of a property. The increase
in net cash provided by investing activities in 2000 is due to proceeds from
the sale of discontinued operations and reduced property acquisitions and
development activity.
Our financing activities used net cash of $338.6 million in 2001, $773.7
million in 2000 and $238.4 million in 1999. During 2001, we repurchased $428.3
million of our common stock generally using our credit line to finance the
purchases. In 2001, we had net borrowings on our credit line of $281.0 million.
In 2000, we decreased our debt significantly. Net debt repayments during 2000
totaled $546.3 million including net repayment of credit facility borrowings of
$307.5 million and retirement of $150.0 million of senior unsecured notes. We
also repurchased $90.2 million of our common stock in 2000. In 1999, we
repurchased $109.8 million of our common stock and our net borrowings were
$37.5 million.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, we had approximately $5.0 million in available
cash, cash equivalents and marketable securities. As a REIT, we are required to
distribute at least 90% of our taxable income to our stockholders on an annual
basis. In addition, we and our affiliates require capital to invest in our
existing portfolio of operating assets for capital projects. These capital
projects can include such things as large-scale renovations, routine capital
improvements, deferred maintenance on properties we have recently acquired and
tenant related matters, including tenant improvements, allowances and leasing
commissions. Therefore, as a general matter, it is unlikely our cash balances
would satisfy our liquidity needs. Instead, these needs must be met from cash
generated from rental and real estate service revenue and external sources of
capital.
We derive substantially all of our revenue from tenants under existing
leases at our properties. Our operating cash flow therefore depends materially
on the rents that we are able to charge to our tenants, and the ability of
these tenants to make their rental payments. We believe that the diversity of
our tenant base (no tenant accounted for more than 5% of revenue in 2001) helps
insulate us from the negative impact of tenant defaults and bankruptcies.
However, general economic downturns, or economic downturns in one or more of
our core markets, still may adversely impact the ability of our tenants to make
lease payments and our ability to re-lease space on favorable terms as leases
expire. In either of these cases, our cash flow and therefore our ability to
meet our capital needs would be adversely affected.
35
As a result of the recent economic downturn, the real estate markets
materially softened during 2001. Demand for office space has declined
significantly and vacancy rates have increased in each of our core markets
except for downtown Washington, D.C. As a result, occupancy in our portfolio of
operating properties decreased to 95.3% at December 31, 2001, as compared to
97.4% at December 31, 2000. While market rental rates have declined somewhat in
most markets from peak levels, rental rates on space that was re-leased in 2001
increased an average of 18.6% over rates that were in effect under expiring
leases. However, in the fourth quarter of 2001, rental rates on space that was
re-leased declined 2.7% from rates that were in effect under expiring leases.
We expect that real estate markets will remain soft throughout 2002. As a
result of the soft market, we anticipate that occupancy levels will be lower in
2002. We expect average occupancy to decline to approximately 93.5% for 2002.
Our primary external source of liquidity is our credit facility. In June
2001, we closed on a new three-year $500.0 million unsecured credit facility
with J.P. Morgan Chase, as agent for a group of banks. We can extend the life
of the line an additional year at our option. The line carries an interest rate
of 70 basis points over 30-day LIBOR. Our unsecured facility contains financial
and other covenants with which we must comply and availability is limited to a
specified percentage of the fair value of our unmortgaged properties. As of
December 31, 2001, $457.0 million was drawn on the credit facility, $2.2
million in letters of credit were outstanding and we had $40.8 million
available for borrowing. As of February 28, 2002, $70.0 million was drawn on
the credit facility, $2.2 million in letters of credit were outstanding and we
had $427.8 million available for borrowing.
On December 21, 2001, we entered into a $150 million short-term loan to
provide additional liquidity. Affiliates of Banc of America Securities LLC and
J.P. Morgan Securities were the lenders under this short-term loan. The loan
was to mature on April 2, 2002, but was terminated without being used in
January 2002 when we issued $400 million of senior unsecured notes.
We have significant capital requirements for development projects
currently underway and in the future. As of December 31, 2001, we had
approximately 184,000 square feet of office space in two development projects
in progress. In conjunction with an office property development project through
a joint venture, we are developing a residential property. Our total expected
investment on these projects is $43.1 million. Through December 31, 2001 we had
invested $19.3 million or 44.7% of the total expected investment for these
projects. As of December 31, 2001, we also had 1.2 million square feet of
office space under construction in six projects in which we own minority
interests. These projects are expected to cost $314.2 million of which, our
total investment is expected to be approximately $89.6 million. Through
December 31, 2001, approximately $146.0 million or 46.5% of the total project
costs had been expended. We have financed our investment in projects under
construction at December 31, 2001, primarily from the proceeds of asset
dispositions and borrowings under our credit facility. We expect that these
sources and project-specific financing of selected assets will provide
additional funds required to complete the development and to finance the costs
of additional projects.
We also regularly incur significant expenditures in connection with the
re-leasing of office space, principally in the form of tenant improvements and
leasing commissions. The amounts of these expenditures can vary significantly,
depending on negotiations with tenants and the willingness of tenants to pay
higher base rents over the life of the leases. We expect to pay for these
capital expenditures out of excess cash from operations or, to the extent
necessary, draws on our line of credit. We believe that a significant portion
of these expenditures is recouped in the form of continuing lease payments.
Our Board of Directors has authorized us to spend up to $325 million to
repurchase our common shares, preferred shares and debt securities excluding
the 9.2 million shares repurchased from Security Capital in November 2001 which
were separately approved. Since the start of this program in mid-2000 through
December 31, 2001, we have acquired approximately 8.7 million of our common
shares for an aggregate purchase price of approximately $253.4 million. We do
not currently anticipate repurchasing any common stock in 2002, although market
conditions could cause us to reevaluate this determination at any time.
We pay dividends quarterly. The maintenance of these dividends is subject
to various factors, including the discretion of the Board of Directors, the
ability to pay dividends under Maryland law, the availability of cash to make
the necessary dividend payments and the effect of REIT distribution
requirements, which require at least 90% of our taxable income to be
distributed to stockholders. In addition, under our line of credit, we
generally are restricted from paying dividends that would exceed 90% of our
funds from operations during any four-quarter period.
36
Funds, which we accumulate for the distribution, are invested primarily in
short-term investments collateralized by securities of the United States
Government or one of its agencies.
Our long-term liquidity requirements consist primarily of funds necessary
to pay for the principal amount of our long-term debt as it matures,
significant non-recurring capital expenditures that need to be made
periodically at our properties, development projects that we undertake and the
costs associated with acquisitions of properties.
We seek to create and maintain a capital structure that will enable us to
diversify our capital resources. This typically allows us to obtain additional
capital from a number of different sources. These sources include additional
equity offerings of common stock and/or preferred stock, public and private
debt financings and possible asset dispositions. Our management believes that
we will continue to have access to the capital resources necessary to expand
and develop our business, to fund our operating and administrative expenses, to
continue to meet our debt service obligations, to pay dividends in accordance
with REIT requirements, to acquire additional properties and land and to pay
for construction in progress.
Our total debt at December 31, 2001 was $1.4 billion of which $457.0
million (32.5%) bore a LIBOR-based floating rate. The interest rate on
borrowings on our unsecured credit facility at December 31, 2001 was 2.6%. Our
fixed rate mortgage payable debt bore an effective weighted average interest
rate of 8.04% at December 31, 2001. The weighted average term of this debt is
6.9 years. At December 31, 2001, our debt represented 39.6% of our total market
capitalization of $3.6 billion. At February 28, 2002, we had $70.0 million
outstanding under our unsecured credit facility.
Our unsecured credit facility contains financial and other covenants with
which we must comply. Some of these covenants include:
* A minimum ratio of annual EBITDA (earnings before interest, taxes,
depreciation and amortization) to interest expense;
* A minimum ratio of annual EBITDA to fixed charges;
* A maximum ratio of total debt to tangible fair market value of our
assets; and
* Restrictions on our ability to make dividend distributions in excess
of 90% of funds from operations.
Availability under the unsecured credit facility is also limited to a specified
percentage of the fair value of our unmortgaged properties.
Our senior unsecured notes also contain covenants with which we must
comply. These include:
* Limits on our total indebtedness on a consolidated basis;
* Limits on our secured indebtedness on a consolidated basis; and
* Limits on our required debt service payments.
We have three investment grade ratings. As of December 31, 2001, Fitch
Rating Services and Standard & Poors have assigned a stable outlook and a BBB
rating to our prospective senior unsecured debt offerings and their BBB- rating
to our prospective cumulative preferred stock offerings. Moody's Investor
Service has assigned a negative outlook and its Baa2 rating to our prospective
senior unsecured debt offerings and its Ba2 rating to our prospective
cumulative preferred stock offerings. A downgrade in outlook or rating by any
one of these rating agencies could result from, among other things, a change in
our financial position or a downturn in general economic conditions. Any such
downturn could adversely affect our ability to obtain future financing or
increase costs of existing debt.
In the future, if, as a result of general economic downturns, a rating
downgrade or otherwise, our properties do not perform as expected, or we cannot
raise the expected funds from the sale of properties and/or if we are unable to
obtain capital from other sources, we may not be able to make required
principal and interest payments or make necessary routine capital improvements
with respect to our existing portfolio of operating assets. While we believe
that we would continue to have sufficient funds to pay our operating and debt
service expenses and our regular quarterly dividends, our ability to expand our
development activity or to fund additional development in our joint ventures
could be adversely affected. In addition, if a property is mortgaged to secure
payment of indebtedness and we are unable to meet mortgage payments, the holder
of the mortgage or lender could foreclose on the property, resulting in loss of
income and asset value. An unsecured lender could also attempt to foreclose on
some of our
37
assets in order to receive payment. In many cases, very little of the principal
amount that we borrow is repaid prior to the maturity of the loan. We generally
expect to refinance that debt when it matures, although in some cases we may
pay off the loan. If principal amounts due at maturity cannot be refinanced,
extended or paid with proceeds of other capital transactions, such as new
equity capital, our cash flow may be insufficient to repay all maturing debt.
Prevailing interest rates or other factors at the time of a refinancing (such
as possible reluctance of lenders to make commercial real estate loans) may
result in higher interest rates and increased interest expense.
Our ability to raise funds through sales of debt and equity securities is
dependent on, among other things, general market conditions for REITs, market
perceptions about us, our debt rating and the current trading price of our
stock. During 1999, 2000 and the early part of 2001, we did not issue
significant amounts of debt or equity securities. In the second half of 2001,
market conditions improved, and in January 2002 we issued $400 million of
senior unsecured notes. The notes bear interest at 7.125% per annum payable
semi-annually beginning on July 15, 2002. The notes mature on January 15, 2012.
The notes are unconditionally guaranteed by CarrAmerica Realty, L.P., one of
our subsidiaries. Proceeds from the notes were used to pay down our unsecured
credit facility. We will continue to analyze which source of capital is most
advantageous to us at any particular point in time, but the capital markets may
not consistently be available on terms that are attractive.
Below is a summary of certain obligations that will require the use of
significant capital:
(in thousands) Payments due by Period
-----------------------------------------------------------------------
Less
Contractual than 1 1-3 4-5 After 5
Obligations Total Year Years Years Years
------------------------------- ------------- ------------- ------------ ---------- -----------
Long-term debt $ 1,405,382 $ 43,944 $ 796,817 $ 197,701 $ 366,920
Operating leases - land/1/ 193,511 3,328 9,984 6,656 173,543
Operating lease - building 6,860 2,204 2,328 1,552 776
Est. development commitments 38,536 35,667 2,869 - -
/1/Ground rents with remaining lease terms up to 85 years
Although we believe our properties are adequately covered by insurance, we
cannot predict at this time if we will be able to obtain full coverage at a
reasonable cost in the future. Prior to September 11, 2001, insurance market
conditions were gradually beginning to harden. Unlike the earlier hard market
in the mid-1980's, the events of September 11, 2001 are expected to affect
nearly all coverage lines. This, combined with the fluctuations in insurance
companies' investment income, capacity and reinsurance treaty renewals, and a
year of significant losses, is expected to impact premiums. Our current
property insurance policy, which expires June 30, 2002 includes terrorism
coverage, but we anticipate that when we renew the policy, acts of terrorism
will not be included in coverage. We expect that some underwriters will offer
terrorism coverage, but at a high cost. Overall, we anticipate that insurance
coverage costs will be higher in the future.
On March 13, 2002, HQ Global Workplaces, Inc. ("HQ Global") filed for
bankruptcy protection under Chapter 11 of the federal bankruptcy laws. As
described above, we previously owned a substantial economic interest in HQ
Global. During 1997 and 1998, to assist HQ Global as it grew its business, we
provided guarantees of HQ Global's performance under four office leases that it
signed. In connection with the HQ Global/VANTAS merger transaction, FrontLine
agreed to indemnify us against any losses incurred with respect to these
guarantees. However, at this time, FrontLine's principal asset is its interest
in HQ Global, and therefore our ability to recover any resulting losses from
FrontLine under this indemnity likely will be limited. To our knowledge, all
monthly rent payments were made by HQ Global under two of these leases through
January 2002, and rental payments under the other two leases were made through
February 2002. As a result, we may be liable to the lessors with respect to
payments due under two of these leases from and after February 2002 and under
the other two leases from and after March 2002.
As part of the initial filings made in connection with the bankruptcy
proceedings, HQ Global filed a motion to reject one of these four leases. That
lease is for space in San Jose, California. This lease is for approximately
22,000 square feet of space at two adjacent buildings and runs through October
2008, with total aggregate remaining lease payments as of February 1, 2002 of
approximately $6.2 million (approximately $706,000 of which is payable in 2002).
Our liability under this guarantee is limited to approximately $2 million.
HQ Global has not filed a motion seeking to reject the remaining three
leases that we have guaranteed, although it could do so in the future. Even if
the leases are not rejected, we may ultimately be liable to the lessors for
payments due under the leases. In one case, the lease is for approximately
25,000 square feet of space in midtown Manhattan, and our liability is currently
capped at approximately $630,000, which liability reduces over the life of the
lease until its expiration in September 2007. The second lease is a sublease for
space in downtown Manhattan. This lease is for approximately 26,000 square feet
of space and runs through March 2008, with total aggregate remaining lease
payments as of February 1, 2002 of approximately $5.4 million (approximately
$755,000 of which is payable in 2002). The third lease is for space in San
Mateo, California. This lease is for approximately 19,000 square feet of space
and runs through January 2013, with total aggregate remaining lease payments as
of March 1, 2002 of approximately $10.4 million (approximately $612,000 of which
is payable in 2002).
We currently are evaluating a number of options with respect to these
leases in an attempt to reduce or eliminate our possible exposure under these
lease guarantees. These options include, among other things, seeking to sublease
certain of these lease locations to third parties or assuming the lease as a
primary tenant and conducting executive suites or other business activities at
these locations. It also is possible that claims by the lessors under the
guarantees may be mitigated through re-leasing by them of the space or by
retaining the security (generally in the form of cash or letters of credit)
granted to them by HQ Global under the leases, but there can be no assurance
that this will be the case.
We have investments in real estate joint ventures in which we hold 15%-50%
interests. These investments are accounted for using the equity or cost method,
as appropriate, and therefore, the assets and liabilities of the joint ventures
are not included in our consolidated financial statements. Summarized
information relating to the financial condition and results of operations of
these joint ventures is presented in note 5 of the notes to consolidated
financial statements. Most of these joint ventures own and operate office
buildings financed by non-recourse debt obligations. These obligations
aggregated $497.5 million at December 31, 2001, and are secured only by the
real estate and other assets of the joint ventures. We have no obligation to
repay this debt and the lenders have no recourse to our other assets. We expect
that cash flows from operations of the joint ventures and/or proceeds from
sales of their assets will satisfy their obligations under those debt
agreements. As of December 31, 2001, we guaranteed $8.0 million of debt related
to a joint venture and $5.2 million of debt related to a development project we
have undertaken with a third party. However, our investments in these joint
ventures are subject to risks not inherent in our majority owned properties,
including:
* Absence of exclusive control over the development, financing,
leasing, management and other aspects of the project;
38
* Possibility that our co-venturer or partner might:
* become bankrupt;
* have interests or goals that are inconsistent with ours;
* take action contrary to our instructions, requests or interests
(including those related to our qualification as a REIT for tax
purposes); or
* otherwise impede our objectives; and
* Possibility that we, together with our partners, may be required
to fund losses of the investee which losses would not necessarily
appear on our consolidated financial statements (e.g. for cost
method investments).
In addition to making investments in these ventures, we provide
construction management, leasing, development and architectural and other
services to them. We earned fees for these services of $6.2 million in 2001,
$8.9 million in 2000 and $7.9 million in 1999. Accounts receivable from joint
ventures and other affiliates were $4.2 million at December 31, 2001 and $4.8
million at December 31, 2000.
Other material related party transactions include general contracting and
other services from Clark Enterprises, Inc., an entity in which one of our
directors is the majority stockholder. We, including our unconsolidated
affiliates, paid $25.8 million in 2001, $10.0 million in 2000 and $20.1 million
in 1999 to Clark Enterprises, Inc. for these services. Substantially all of the
payments are related to our unconsolidated affiliates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 2001. SFAS No. 142 changes the
accounting for goodwill and intangible assets with indefinite lives from an
amortization approach to an impairment-only approach. Adoption of SFAS No. 142
on January 1, 2002 will not have an effect on our financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assts and for Long-Lived
Assets to Be Disposed Of," and APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
Statement does not change the fundamental provisions of SFAS No. 121; however,
it resolves various implementation issues of SFAS No. 121 and establishes a
single accounting model for long-lived assets to be disposed of by sale. It
retains the requirement of Opinion No. 30 to report separately discontinued
operations but extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in distribution to owners) or is
classified as held for sale. We do not believe that adoption of SFAS No. 144 in
2002 will have a material effect on our financial statements.
FUNDS FROM OPERATIONS
We believe that funds from operations is helpful to investors as a
measure of the performance of an equity REIT. Based on our experience, funds
from operations, along with information about cash flows from operating
activities, investing activities and financing activities, provides investors
with an indication of our ability to incur and service debt, to make capital
expenditures and to fund other cash needs. Funds from operations is defined by
the National Association of Real Estate Investment Trusts (NAREIT) as follows:
* Net income (loss) - computed in accordance with accounting principles
generally accepted in the United States of America (GAAP);
* Less gains (or plus losses) from sales of depreciable operating
properties and items that are classified as extraordinary items
under GAAP;
* Plus depreciation and amortization of assets uniquely significant
to the real estate industry;
* Plus or minus adjustments for unconsolidated partnerships and
joint ventures (to reflect funds from operations on the same basis).
Our funds from operations may not be comparable to funds from operations
reported by other REITs. These other REITs may not define the term in
accordance with the current NAREIT definition or may interpret the
39
current NAREIT definition differently than us. We continue to exclude the gain
(loss) on settlement of treasury locks for funds from operations. Funds from
operations does not represent net income or cash flow generated from operating
activities in accordance with GAAP. As such, it should not be considered an
alternative to net income as an indication of our performance or to cash flows
as a measure of our liquidity or our ability to make distributions.
The following table provides the calculation of our funds from operations
for the years presented:
(In thousands) 2001 2000 1999
------------ ------------ ------------
Income from continuing operations before minority
interest $ 88,492 $ 163,308 $ 168,678
Adjustments to derive funds from operations:
Add:
Depreciation and amortization 131,909 128,861 117,829
Gain on settlement of treasury locks - - (4,489)
Deduct:
Minority interests (non-Unitholders share of
depreciation, amortization and net income) (755) (1,084) (609)
Gain on sale of assets and other provisions, net (2,964) (36,371) (54,822)
------------ ------------ ------------
Funds from operations before allocation to the minority
Unitholders 216,682 254,714 226,587
Less funds from operations allocable to the minority
Unitholders (16,901) (16,342) (16,545)
------------ ------------ ------------
Funds from operations allocable to CarrAmerica Realty
Corporation 199,781 238,372 210,042
Less preferred stock dividends (34,719) (35,206) (35,448)
------------ ------------ ------------
Funds from operations allocable to common
shareholders $ 165,062 $ 203,166 $ 174,594
=============== ============== ===============
Changes in funds from operations are largely attributable to the effects
of property acquisitions and dispositions and new developments as discussed
above.
40
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Increases in interest rates would increase our interest expense and
adversely affect our cash flow. As of December 31, 2001, we had $457.0 million
outstanding under our line of credit that bears a floating interest rate. In
addition, we had $473.4 million of fixed rate mortgage debt. Our unsecured
credit facility matures in June 2004. The mortgage loans mature at various
dates through 2029. We also have $475.0 million senior unsecured notes, which
mature between 2004 and 2008. As of February 28, 2002, we had $70.0 million
outstanding under our line of credit, $470.5 million of fixed rate mortgage
debt and $875.0 million of senior unsecured notes.
Our future earnings and cash flow and the fair values of our financial
instruments are dependent upon prevailing market rates. Market risk associated
with financial instruments and derivative and commodity instruments is the risk
of loss from adverse changes in market prices or rates. We manage our risk by
matching projected cash inflows from operating activities, financing activities
and investing activities with projected cash outflows to fund debt payments,
acquisitions, capital expenditures, distributions and other cash requirements.
We may also use derivative financial instruments at times to limit market risk.
Interest rate protection agreements may be used to convert floating rate debt
to a fixed rate basis, to convert fixed rate debt to a floating rate basis or
to hedge anticipated financing transactions. We use derivative financial
instruments only for hedging purposes, and not for speculation or trading
purposes.
If the market rates of interest on our variable rate debt change by 10%
(or approximately 26 basis points), our interest expense would change by
approximately $1.2 million. This assumes the amount outstanding under our
variable rate credit facility remains at $457.0 million, our balance at
December 31, 2001. The book value of our variable interest credit facility
approximates market value at December 31, 2001. As of February 28, 2002, a 10%
change in the interest rate on our variable rate debt would change our interest
expense by approximately $0.2 million.
A change in interest rates generally does not impact future earnings and
cash flows for fixed rate debt instruments. As fixed rate debt matures, and
additional debt is incurred to fund the repayments of maturing loans, future
earnings and cash flows may be impacted by changes in interest rates. This
impact would be realized in the periods subsequent to debt maturities. The
following is a summary of the fixed rate mortgages and senior unsecured debt
maturities at December 31, 2001 (in thousands):
2002 $ 43,944
2003 50,129
2004 171,480
2005 118,208
2006 51,935
2007 & thereafter 512,686
------------
$ 948,382
============
If we assume the repayments of fixed rate borrowings are made in
accordance with the terms and conditions of the respective credit arrangements,
a 10 percent change in the market interest rate for the respective fixed rate
debt instruments would change the fair market value of our fixed rate debt by
approximately $15.1 million. The estimated fair market value of the fixed rate
debt instruments and the senior unsecured notes at December 31, 2001 was $494.5
million and $489.8 million, respectively. The estimated fair market value of
the fixed rate debt instruments and the senior unsecured notes at February 28,
2001 was $492.4 million and $893.7 million, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data included in this Annual
Report on Form 10-K are listed in Part IV, Item 14(a).
41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is hereby incorporated by reference to the material
appearing in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
This information is hereby incorporated by reference to the material
appearing in the Notice of Annual Meeting of Stockholders ("Proxy Statement")
to be held on May 2, 2002 under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is hereby incorporated by reference to the material
appearing in the Proxy Statement under the caption "Voting Securities and
Principal Holders Thereof."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is hereby incorporated by reference to the material
appearing in the Proxy Statement under the caption "Certain Relationships and
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
14(a)(1) Financial Statements
Reference is made to the Index to Financial Statements and Schedule on
page 50.
14(a)(2) Financial Statement Schedule
Reference is made to the Index to Financial Statements and Schedule on
page 50.
14(a)(3) Exhibits
1.1 Underwriting Agreement, dated as of December 13, 2001, by and among
CarrAmerica Realty Corporation, Security Capital and Goldman, Sachs &
Co., Salomon Smith Barney Inc., First Union Securities, Inc., Legg
Mason Wood Walker, Incorporated, Banc of America Securities LLC,
Deutsche Banc Alex. Brown Inc. and A.G. Edwards & Sons, Inc., as
representative of several underwriters (incorporated by reference to
Exhibit 1.1 to the Company's Current Report on Form 8-K dated December
13, 2001 and filed December 18, 2001).
1.2 Underwriting Agreement, dated as of January 8, 2002 between
CarrAmerica Realty Corporation and J.P. Morgan Securities Inc.
(incorporated by reference to Exhibit 1.1 to the Company's Current
Report on Form 8-K filed on January 11, 2002).
1.3 Terms Agreement, dated as of January 8, 2002, by and among
CarrAmerica Realty Corporation, CarrAmerica Realty, L.P., J.P. Morgan
Securities Inc., Banc of America Securities LLC, First Union
Securities, Inc., Lehman Brothers Inc., Salomon Smith Barney Inc.,
Commerzbank Capital Markets Corporation, Goldman, Sachs & Co., Legg
Mason Wood Walker, Incorporated, PNC Capital Markets, Inc. and Wells
Fargo Brokerage Services, LLC (incorporated by reference to Exhibit
1.2 to the Company's Current Report on Form 8-K filed on January 11,
2002).
43
3.1 Amendment and Restatement of Articles of Incorporation of CarrAmerica
Realty Corporation, as amended on April 29, 1996 and April 30, 1996
(incorporated by reference to the same numbered exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996).
3.2 Articles Supplementary Relating to Series A Cumulative Convertible
Redeemable Preferred Stock dated October 24, 1996 (incorporated by
reference to Exhibit 4.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996).
3.3 Articles Supplementary Relating to Series B Cumulative Redeemable
Preferred Stock dated August 8, 1997 (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
3.4 Articles Supplementary Relating to Series C Cumulative Redeemable
Preferred Stock dated October 30, 1997 (incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated and
filed on November 6, 1997).
3.5 Articles Supplementary Relating to Series D Cumulative Redeemable
Preferred Stock dated December 17, 1997 (incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated December
16, 1997 and filed on December 17, 1997).
3.6 Articles of Amendment of Amendment and Restatement of Articles of
Incorporation of CarrAmerica Realty Corporation (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998).
3.7 Second Amendment and Restatement of By-laws of CarrAmerica Realty
Corporation (incorporated by references to Exhibit 3.1 to the
Company's Current Report on Form 8-K filed on February 12, 1997).
3.8 Amendment to the Second Amendment and Restatement of By-Laws of
CarrAmerica Realty Corporation (incorporated by reference to Exhibit
3.2 to the Company's Quarterly Report on Form 10-Q for the Quarter
ended June 30, 1998).
3.9 Amendment to the Second Amendment and Restatement of By-laws of
CarrAmerica Realty Corporation (incorporated by reference to Exhibit
3.3 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998).
4.1 Indenture, dated as of July 1, 1997, by and among the Company, as
Issuer, CarrAmerica Realty, L.P., as Guarantor, and Bankers Trust
Company, as Trustee, Relating to the Company's 7.20% Notes due 2004
and 7.375% Notes due 2007 (incorporated by reference to Exhibit 4.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997).
4.2 Indenture, dated as of February 23, 1998, by and among the Company, as
Issuer, CarrAmerica Realty, L.P., as Guarantor, and Bankers Trust
Company, as Trustee, Relating to the Company's 6.625% Notes due 2005
and 6.875% Notes due 2008, (incorporated by reference to Exhibit 4.2
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
4.3 Indenture, dated as of October 1, 1998 by and among the Company, as
Issuer, CarrAmerica Realty, L.P., as Guarantor, and Bankers Trust
Company, as Trustee, (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed on October 2, 1998).
4.4 Indenture, dated as of January 11, 2002, by and among CarrAmerica
Realty Corporation, CarrAmerica Realty, L.P., as Guarantor, and U.S.
National Association as Trustee (incorporated by reference to Exhibit
4.1 to the Company's Current Report on Form 8-K filed on January 11,
2002).
10.1 Second Amended and Restated Agreement of Limited Partnership of
CarrAmerica Realty, L.P., dated May 9, 1997 (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).
44
10.2 First Amendment to Second Amended and Restated Agreement of Limited
Partnership of CarrAmerica Realty, L.P., dated October 6, 1997
(incorporated by reference to Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.3 Second Amendment to Second Amended and Restated Agreement of Limited
Partnership of CarrAmerica Realty, L.P., dated December 12, 1997
(incorporated by reference to Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.4 Third Amendment to Second Amended and Restated Agreement of Limited
Partnership of CarrAmerica Realty, L.P., dated December 31, 1997
(incorporated by reference to Exhibit 10.4 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.5 Fourth Amendment to Second Amended and Restated Agreement of Limited
Partnership of CarrAmerica Realty, L.P., dated as of December 31, 1998
(incorporated by reference to Exhibit 10.5 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998).
10.6 Third Amended and Restated Agreement of Limited Partnership of Carr
Realty, L.P., dated March 5, 1996, as amended (incorporated by
reference to Exhibit 3.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996).
10.7 First Amendment to Third Amended and Restated Agreement of Limited
Partnership of Carr Realty, L.P., dated as of January 22, 1998
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998).
10.8 Second Amendment to Third Amended and Restated Agreement of Limited
Partnership of CarrAmerica Realty, L.P., dated as of February 17, 1998
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998).
10.9 Third Amendment to Third Amended and Restated Agreement of Limited
Partnership of CarrAmerica Realty, L.P., dated as of May 8, 1998
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
10.10 1993 Carr Realty Option Plan (incorporated by reference to Exhibit
10.3 of the Company's Registration Statement on Form S-11, No.
33-53626).
10.11 Non-Employee Director Stock Option Plan (incorporated by reference to
the Company's Registration Statement on Form S-8, No. 33-92136).
10.12 First Amendment to CarrAmerica Realty Corporation 1995 Non-Employee
Director Stock Option Plan (incorporated by reference to Exhibit 10.12
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.13 Second Amendment to CarrAmerica Realty Corporation 1995 Non-Employee
Director Stock Option Plan (incorporated by reference to Exhibit 10.1
of the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
10.14 1997 Stock Option and Incentive Plan (incorporated by reference to
Exhibit 10.5 to the Company's annual report on Form 10-K for the year
ended December 31, 1996).
10.15 First Amendment to CarrAmerica Realty Corporation 1997 Stock Option
and Incentive Plan (incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998).
10.16 Second Amendment to CarrAmerica Realty Corporation 1997 Stock Option
and Incentive Plan (incorporated by reference to Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998).
45
10.17 Third Amendment to CarrAmerica Realty Corporation 1997 Stock Option
and Incentive Plan (incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998).
10.18 Fourth Amendment to CarrAmerica Realty Corporation 1997 Stock Option
and Incentive Plan (incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999).
10.19 Fifth Amendment to CarrAmerica Realty Corporation 1997 Stock Option
and Incentive Plan (incorporated by reference to Exhibit 10.19 of the
Company's 1999 Annual Report on Form 10-K).
10.20 Noncompetition and Restriction Agreement by and among The Oliver Carr
Company, Oliver T. Carr, Jr., Carr Realty Corporation and Carr Realty,
L.P. (incorporated by reference to Exhibit 10.7 of the Company's
Registration Statement on Form S-11, No. 33-53626).
10.21 Consolidated, Amended and Restated Promissory Note dated March 19,
1999 from Carr Realty, L.P. to the Northwestern Mutual Life Insurance
Company (incorporated by reference to Exhibit 10.21 of the Company's
1999 Annual Report on Form 10-K).
10.22 Consolidated, Amended and Restated Deed of Trust and Security
Agreement dated March 19, 1999 by and among Carr Realty, L.P., William
H. Norton, and the Northwestern Mutual Life Insurance Company
(incorporated by reference to Exhibit 10.22 of the Company's 1999
Annual Report on Form 10-K).
10.23 Registration Rights Agreement, dated April 30, 1996 by and among Carr
Realty Corporation, Security Capital Holdings, S.A. and Security
Capital U.S. Realty (incorporated by reference to Exhibit 2.3 of
Security Capital U.S. Realty's Schedule 13D dated April 30, 1996).
10.24 Fourth Amended and Restated Credit Agreement, dated August 27, 1998 by
and among CarrAmerica Realty Corporation, Carr Realty, L.P.,
CarrAmerica Realty, L.P., Morgan Guaranty Trust Company of New York,
Commerzbank Aktiengesellschaft, New York Branch, NationsBank, N.A.,
Wells Fargo Bank, National Association, Bank of America National Trust
and Savings Association, and the other banks listed therein
(incorporated by reference to Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998).
10.25 Agreement and Plan of Merger by and among HQ Global Workplaces, Inc.,
CarrAmerica Realty Corporation, VANTAS Incorporated and Reckson
Service Industries, Inc., dated as of January 20, 2000 (incorporated
by reference to Exhibit 10.1 to the Company's Current Report filed on
Form 8-K filed February 3, 2000).
10.26 First Amendment to Agreement and Plan of Merger by and among HQ Global
Workplaces, Inc., the Company, VANTAS Incorporated and Reckson
Services Industries, Inc., dated as of April 29, 2000 (incorporated by
reference to Exhibit 10.6 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2000).
10.27 Second Amendment to Agreement and Plan of Merger by and among VANTAS
Incorporated, FrontLine Capital Group, CarrAmerica Realty Corporation
and HQ Global Workplaces, Inc. dated as of May 31, 2000 (incorporated
by reference to Exhibit 10.1 to the Company's Current Report filed on
Form 8-K filed June 16, 2000).
10.28 Stock Purchase Agreement between CarrAmerica Realty Corporation and
Reckson Service Industries, Inc., dated as of January 20, 2000
(incorporated by reference to Exhibit 10.3 to the Company's Current
Report filed on Form 8-K filed February 3, 2000).
10.29 First Amendment to Stock Purchase Agreement between the Company and
Reckson Service Industries, Inc., dated as of April 20, 2000
(incorporated by reference to Exhibit 10.7 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000).
46
10.30 Stock Purchase agreement among CarrAmerica Realty Corporation,
OmniOffices (UK) Limited, OmniOffices (Lux) 1929 Holding Company S.A.,
VANTAS Incorporated and Reckson Service Industries, Inc., dated as of
January 20, 2000 (incorporated by reference to Exhibit 10.4 to the
Company's Current Report filed on Form 8-K filed February 3, 2000).
10.31 First Amendment to Stock Purchase Agreement among the Company,
OmniOffices (UK) Limited, OmniOffices (Lux) 1929 Holding Company
S.A., VANTAS Incorporated and Reckson Service Industries, Inc., dated
as of April 29, 2000 (incorporated by reference to Exhibit 10.8 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 2000).
10.32 Indemnification and Escrow Agreement by and among FrontLine Capital
Group, CarrAmerica Realty Corporation and the other parties named
therein dated as of June 1, 2000 (incorporated by reference to Exhibit
10.2 to the Company's Current Report filed on Form 8-K filed June 16,
2000).
10.33 Registration Rights Agreement, by and between FrontLine Capital Group
and CarrAmerica Realty Corporation dated as of June 1, 2000
(incorporated by reference to Exhibit 10.3 to the Company's Current
Report filed on Form 8-K filed June 16, 2000).
10.34 Registration Rights Agreement by and between HQ Global Holdings, Inc.
and CarrAmerica Realty Corporation dated as of June 1, 2000
(incorporated by reference to Exhibit 10.4 to the Company's Current
Report filed on Form 8-K filed June 16, 2000).
10.35 Stockholders Agreement among FrontLine Capital Group, HQ Global
Workplaces, Inc. and CarrAmerica Realty Corporation dated as of June
1, 2000 (incorporated by reference to Exhibit 10.5 to the Company's
Current Report filed on Form 8-K filed June 16, 2000).
10.36 Amended and Restated Limited Liability Company Agreement Carr Office
Park, L.L.C., dated as of August 15, 2000 (incorporated by reference
to Exhibit 10.1 to the Company's Current Report filed on Form 8-K
filed September 1, 2000).
10.37 Contribution and Purchase/Sale Agreement, dated as of August 15, 2000,
among CarrAmerica Realty Corporation, CarrAmerica Realty L.P.,
CarrAmerica Development, Inc., Carr Development & Construction, L.P.,
Carr Parkway North I Corporation and New York State Teachers'
Retirement System (incorporated by reference to Exhibit 10.2 to the
Company's Current Report filed on Form 8-K filed September 1, 2000).
10.38 Supplemental Agreement (Amending and Supplementing the Contribution
Agreement and the LLC Agreement), dated as of August 15, 2000, among
CarrAmerica Realty Corporation, CarrAmerica Realty L.P., CarrAmerica
Development, Inc., Carr Development & Construction, L.P., Carr Parkway
North I Corporation and New York State Teachers' Retirement System
(incorporated by reference to Exhibit 10.3 to the Company's Current
Report filed on Form 8-K filed September 1, 2000).
10.39 Loan Agreement, dated as of April 18, 2000, by and among the Company,
CarrAmerica Realty, L.P. and The Chase Manhattan Bank (incorporated by
reference to Exhibit 10.6 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000).
10.40 Change in Control Employment Agreement by and between CarrAmerica
Realty Corporation and Philip L. Hawkins, dated May 6, 1999
(incorporated by reference to Exhibit 10.41 to the Company's 2000
Annual Report on Form 10- K).
10.41 Change in Control Employment Agreement by and between CarrAmerica
Realty Corporation and Richard F. Katchuk, dated May 6, 1999
(incorporated by reference to Exhibit 10.42 to the Company's 2000
Annual Report on Form 10-K).
10.42 Change in Control Employment Agreement by and between CarrAmerica
Realty Corporation and Thomas A. Carr, dated May 6, 1999 (incorporated
by reference to Exhibit 10.43 to the Company's 2000 Annual Report on
Form 10-K).
47
10.43 Change in Control Employment Agreement by and between CarrAmerica
Realty Corporation and Karen B. Dorigan, dated February 6, 2001
(incorporated by reference to Exhibit 10.44 to the Company's 2000
Annual Report on Form 10-K).
10.44 Revolving Credit Agreement dated June 28, 2001 among CarrAmerica
Realty Corporation, as Borrower, The Chase Manhattan Bank, as Bank and
Administrative Agent for the Banks, J.P. Morgan Securities Inc., as
Lead Arranger, Exclusive Advisor and Sole Bookrunner, Bank of America,
N.A. as Syndication Agent, PNC Bank, National Association, as
Documentation Agent, Commerzbank AG, New York Branch, as Documentation
Agent, First Union National Bank, as Documentation Agent, and the
Banks Listed in the Revolving Credit Agreement (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2001).
10.45 Guaranty of Payment dated June 28, 2001 by CarrAmerica Realty L.P. in
favor of Chase Manhattan Bank (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001).
10.46 Stock Purchase Agreement, dated as of Novemeber 15, 2001, by and among
the Company, Security Capital Group Incorporated and Security Capital
Office Business Trust (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K dated November 15, 2001 and
filed November 16, 2001).
10.47 Termination Agreement, dated as of December 13, 2001, between the
Company and Security Capital Group Incorporated (filed herewith).
11.1 Statement regarding computation of per share earnings; reference is
made to Notes to Financial Statements, Footnote 1(k).
12.1 Statement re: Computation of ratios
21.1 List of Subsidiaries.
23.1 Consent of KPMG LLP, dated March 18, 2002.
24.1 Power of Attorney of Oliver T. Carr, Jr.
24.2 Power of Attorney of Andrew F. Brimmer.
24.3 Power of Attorney of A. James Clark.
24.4 Power of Attorney of Timothy Howard.
24.5 Power of Attorney of Wesley S. Williams, Jr.
24.6 Power of Attorney of Robert E. Torray
14(B) REPORTS ON FORM 8-K
Form 8-K filed November 2, 2001, regarding Supplemental Financial and
Operating Information of the Company as of November 2, 2001 and Press Release
of the Company dated November 2, 2001.
Form 8-K filed on November 16, 2001, regarding Stock Purchase
Agreement with Security Capital Group Incorporated.
Form 8-K filed on December 3, 2001, regarding the possible write-down
of investment in HQ Global Holdings, Inc.
Form 8-K filed on December 12, 2001, regarding Amendment to Article 5
of the Articles of Incorporation.
48
Form 8-K filed on December 18, 2001, regarding Underwriting Agreement
with Security Capital Group Incorporated and Goldman Sachs & Co.
Form 8-K filed on December 21, 2001, regarding Security Capital Group
Incorporated consummation of public offering of 19,403,417 share of the
Company's common stock.
14(C) EXHIBITS
The list of exhibits filed with this report is set forth in response
to Item 14(a)(3). The required exhibit index has been filed with the exhibits.
14(D) FINANCIAL STATEMENTS
The financial statements required by this item are included in the
list set forth in response to Item 14(a)(2).
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registration has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the District of Columbia on March 18, 2002.
CARRAMERICA REALTY CORPORATION
a Maryland corporation
By: /s/ THOMAS A. CARR
------------------------------------------
Thomas A. Carr
Chairman of the Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the registrant and in the capacities indicated on March 18, 2002.
SIGNATURE TITLE
--------- -----
/s/ THOMAS A. CARR Chairman of the Board, President, Chief Executive
----------------------------
Thomas A. Carr Officer and Director
/s/ RICHARD F. KATCHUK Chief Financial Officer
----------------------------
Richard F. Katchuk
/s/ STEPHEN E. RIFFEE Senior Vice President, Controller and Treasurer
----------------------------
Stephen E. Riffee
* Director
-------------------------
Andrew F. Brimmer
* Director
-------------------------
Oliver T. Carr, Jr.
* Director
-------------------------
A. James Clark
* Director
-------------------------
Timothy Howard
* Director
-------------------------
Robert E. Torray
* Director
-------------------------
Wesley S. Williams, Jr.
*By: /s/RICHARD F. KATCHUK
-----------------------
Richard F. Katchuk
Attorney-in-fact
50
CARRAMERICA REALTY CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
The following Consolidated Financial Statements and Schedule of
CarrAmerica Realty Corporation and Subsidiaries and the Independent Auditors'
Report thereon are attached hereto:
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Independent Auditors' Report .....................................52
Consolidated Balance Sheets as of December 31, 2001 and 2000......53
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999.............................54
Consolidated Statements of Stockholders' Equity for the Years
Ended
December 31, 2001, 2000 and 1999................................55
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999.............................56
Notes to Consolidated Financial Statements.....................57-74
FINANCIAL STATEMENT SCHEDULE
Schedule III: Real Estate and Accumulated Depreciation as of
December 31, 2001 for CarrAmerica Realty
Corporation and Subsidiaries..........................75-78
All other schedules are omitted because they are not applicable, or because the
required information is included in the financial statements or notes thereto.
51
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CarrAmerica Realty Corporation:
We have audited the consolidated financial statements of CarrAmerica
Realty Corporation and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CarrAmerica
Realty Corporation and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/KPMG LLP
Washington, D.C.
January 31, 2002, except as to note 3 which is
as of March 13, 2002
52
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets as of December 31, 2001 and 2000
-----------------------------------------------------------------------------------------
(In thousands, except for per share and share amounts)
2001 2000
-------------- ---------------
Assets
------
Rental property:
Land $ 647,747 $ 644,326
Buildings 1,857,775 1,836,214
Tenant improvements 362,736 325,936
Furniture, fixtures and equipment 3,789 6,844
-------------- ---------------
2,872,047 2,813,320
Less: Accumulated depreciation (477,694) (381,260)
-------------- ---------------
Total rental property 2,394,353 2,432,060
Land held for development or sale 45,195 47,984
Construction in progress 19,324 48,300
Cash and cash equivalents 5,041 24,704
Restricted deposits 4,596 39,482
Accounts and notes receivable, net of allowance for
doubtful accounts of $9,385 and $3,934, respectively 28,551 70,693
Investments in unconsolidated entities 118,479 269,193
Accrued straight-line rents 66,781 54,960
Tenant leasing costs, net of accumulated amortization
of $53,704 and $39,899, respectively 53,894 54,522
Deferred financing costs, net of accumulated amortization
of $16,771 and $14,031, respectively 8,698 11,311
Prepaid expenses and other assets, net of accumulated amortization
of $17,574 and $13,665, respectively 30,688 19,632
-------------- ---------------
$ 2,775,600 $ 3,072,841
============== ===============
Liabilities, Minority Interest and Stockholders' Equity
-------------------------------------------------------
Liabilities:
Mortgages and notes payable $ 1,405,382 $ 1,211,158
Accounts payable and accrued expenses 76,692 96,147
Rent received in advance and security deposits 32,326 29,143
-------------- ---------------
Total liabilities 1,514,400 1,336,448
Minority interest 83,393 89,687
Stockholders' equity:
Preferred Stock, $0.01 par value, authorized 35,000,000 shares:
Series A Cumulative Convertible Redeemable Preferred Stock,
80,000 and 480,000 shares issued and
outstanding, respectively, with an aggregate liquidation
preference of $2.0 million and $12.0 million, respectively 1 5
Series B, C and D Cumulative Redeemable Preferred Stock,
8,800,000 shares issued and outstanding with an
aggregate liquidation preference of $400.0 million 88 88
Common Stock, $0.01 par value, authorized 180,000,000
shares, issued and outstanding 51,965,066 and
65,017,623 shares, respectively 520 650
Additional paid-in capital 1,356,912 1,755,985
Cumulative dividends in excess of net income (179,714) (110,022)
-------------- ---------------
Total stockholders' equity 1,177,807 1,646,706
Commitments and contingencies
-------------- ---------------
$ 2,775,600 $ 3,072,841
============== ===============
See accompanying notes to consolidated financial statements.
53
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999
---------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
2001 2000 1999
----------- ----------- -----------
Operating revenues:
Rental revenue:
Minimum base rent $ 431,817 $ 448,068 $ 422,440
Recoveries from tenants 63,906 64,344 58,426
Parking and other tenant charges 11,886 19,447 17,983
----------- ----------- -----------
Total rental revenue 507,609 531,859 498,849
Real estate service revenue 31,037 26,172 17,054
----------- ----------- -----------
Total operating revenues 538,646 558,031 515,903
----------- ----------- -----------
Operating expenses:
Property expenses:
Operating expenses 123,488 124,119 122,676
Real estate taxes 39,329 45,864 44,529
Interest expense 82,547 98,348 89,057
General and administrative 49,457 42,796 38,894
Depreciation and amortization 127,084 128,542 119,700
----------- ----------- -----------
Total operating expenses 421,905 439,669 414,856
----------- ----------- -----------
Real estate operating income 116,741 118,362 101,047
----------- ----------- -----------
Other (expense) income:
Interest income 3,052 4,372 3,936
Equity in earnings of unconsolidated entities 9,322 7,596 5,167
Impairment loss on investment (42,249) - -
Gain on treasury locks - - 4,489
----------- ----------- -----------
Total other (expense) income (29,875) 11,968 13,592
----------- ----------- -----------
Income from continuing operations before income
taxes, minority interest, and gain on sale of assets
and other provisions, net 86,866 130,330 114,639
Income taxes (1,338) (3,393) (783)
Minority interest (9,431) (16,149) (17,599)
Gain on sale of assets and other provisions, net 2,964 36,371 54,822
----------- ----------- -----------
Income from continuing operations 79,061 147,159 151,079
Discontinued operations - Income (loss) from executive suite
operations (net of applicable income tax expense (benefit)
of $1,300 in 2000 and ($816) in 1999) - 456 (7,862)
Discontinued operations - Gain on sale of discontinued
operations (less applicable income tax expense of $21,131) - 31,852 -
----------- ----------- -----------
Net income $ 79,061 $ 179,467 $ 143,217
=========== =========== ===========
Basic net income per common share:
Income from continuing operations $ 0.73 $ 1.69 $ 1.71
Discontinued operations - 0.01 (0.12)
Gain on sale of discontinued operations - 0.48 -
----------- ----------- -----------
Net income $ 0.73 $ 2.18 $ 1.59
=========== =========== ===========
Diluted net income per common share:
Income from continuing operations $ 0.71 $ 1.65 $ 1.71
Discontinued operations - 0.01 (0.12)
Gain on sale of discontinued operations - 0.47 -
----------- ----------- -----------
Net income $ 0.71 $ 2.13 $ 1.59
=========== =========== ===========
See accompanying notes to consolidated financial statements.
54
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity as of December 31, 2001, 2000 and 1999
------------------------------------------------------------------------------------------------------------------------------------
Cumulative
Additional Dividends in
Preferred Common Preferred Common Paid-In Excess of
(In thousands, except share amounts) Shares Shares Stock Stock Capital Net Income Total
----------- ----------- ---------- ---------- ----------- ------------ --------------
Balance at December 31, 1998 9,480,000 71,760,172 $ 95 $ 718 $ 1,926,057 $ (112,931) $ 1,813,939
Repurchase of common stock - (5,000,000) - (50) (109,752) - (109,802)
Shares issued in exchange for Unit
redemptions - 38,430 - - 551 - 551
Exercise of stock options - 27,686 - - 134 - 134
Net income - - - - - 143,217 143,217
Dividends paid - - - - - (161,324) (161,324)
----------- ----------- ---------- ---------- ----------- ------------ --------------
Balance at December 31, 1999 9,480,000 66,826,288 95 668 1,816,990 (131,038) 1,686,715
Repurchase of common stock - (3,174,100) - (31) (90,192) - (90,223)
Shares issued in exchange for Unit
redemptions - 593,800 - - 14,999 - 14,999
Management incentive plan cancellation - (88,659) - - (2,325) - (2,325)
Exercise of stock options - 660,294 - 11 16,513 - 16,524
Conversion of Series A Cumulative
Preferred Stock to common stock (200,000) 200,000 (2) 2 - - -
Net income - - - - - 179,467 179,467
Dividends paid - - - - - (158,451) (158,451)
----------- ----------- ---------- ---------- ----------- ------------ --------------
Balance at December 31, 2000 9,280,000 65,017,623 93 650 1,755,985 (110,022) 1,646,706
Repurchase of common stock - (14,744,102) - (147) (428,135) - (428,282)
Shares issued in exchange for Unit
redemptions - 79,100 - 1 1,814 - 1,815
Exercise of stock options - 1,212,445 - 12 27,248 - 27,260
Conversion of Series A Cumulative
Preferred Stock to common stock (400,000) 400,000 (4) 4 - - -
Net income - - - - - 79,061 79,061
Dividends paid - - - - - (148,753) (148,753)
----------- ----------- ---------- ---------- ----------- ------------ --------------
Balance at December 31, 2001 8,880,000 51,965,066 $ 89 $ 520 $ 1,356,912 $ (179,714) $ 1,177,807
=========== =========== ========== ========= =========== ============= =============
See accompanying notes to consolidated financial statements.
55
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999
---------------------------------------------------------------------------------------------------------------
(In thousands)
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 79,061 $ 179,467 $ 143,217
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 127,084 128,542 140,349
Minority interest 9,431 16,149 17,415
Gain on sale of assets and other provisions, net (2,964) (36,371) (54,822)
Impairment loss on investment 42,249 - -
Equity in earnings of unconsolidated entities (9,322) (7,596) (5,167)
Income and gain on sale of discontinued operations - (32,308) -
Provision for uncollectible accounts 5,498 (2,879) 1,891
Stock-based compensation 2,630 2,890 2,356
Other 330 (2,686) 1,825
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 19,737 (22,215) (12,560)
Increase in accrued straight-line rents (13,009) (9,187) (14,331)
Additions to tenant leasing costs (13,418) (17,050) (13,049)
Increase in prepaid expenses and other assets (14,798) (4,332) (23,728)
Decrease in accounts payable and accrued expenses (18,508) (15,796) (16,027)
Increase in rent received in advance and security deposits 3,713 2,426 7,700
----------- ----------- -----------
Total adjustments 138,653 (413) 31,852
----------- ----------- -----------
Net cash provided by operating activities 217,714 179,054 175,069
----------- ----------- -----------
Cash flows from investing activities:
Acquisition and development of rental property (49,829) (90,475) (78,957)
Additions to land held for development or sale (37,661) (26,157) (3,149)
Additions to construction in progress (32,443) (97,025) (275,942)
Acquisition and development of executive suite assets - (6,678) (83,709)
Payments on notes receivable 16,542 - -
Issuance of notes receivable (582) (5,518) (67)
Distributions from unconsolidated entities 91,167 7,392 19,424
Contributions to unconsolidated entities (17,194) (29,942) (5,191)
Acquisition of minority interest (5,033) (8,438) (2,231)
Decrease (increase) in restricted deposits 34,886 (27,007) 25,586
Proceeds from sales of properties 101,351 474,015 487,883
Proceeds from sale of discontinued operations - 377,310 -
----------- ----------- -----------
Net cash provided by investing activities 101,204 567,477 83,647
----------- ----------- -----------
Cash flows from financing activities:
Repurchase of common stock (428,275) (90,223) (109,802)
Exercises of stock options 28,477 29,730 -
Net borrowings (repayments) on unsecured credit facility (including
$140,500 related to discontinued operations in 2000) 281,000 (307,500) 1,000
Payment of senior unsecured notes - (150,000) -
Repayments of mortgages payable (including $14,449
related to discontinued operations in 2000) (86,770) (88,811) (13,468)
Proceeds from refinancing of existing mortgages - - 51,980
Proceeds from mortgages 26,628 - -
Dividends and distributions to minority interests (159,641) (169,320) (172,626)
Deferred financing costs - - (1,516)
Contributions from minority interests - 2,411 6,066
----------- ----------- -----------
Net cash used by financing activities (338,581) (773,713) (238,366)
----------- ----------- -----------
Foreign currency translation adjustment - - (1,517)
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (19,663) (27,182) 18,833
Cash and cash equivalents, beginning of the period 24,704 51,886 36,499
----------- ----------- -----------
Cash and cash equivalents, end of the period $ 5,041 $ 24,704 $ 55,332
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest (net of capitalized interest of $6,221,
$12,367 and $26,485, respectively) $ 74,996 $ 99,628 $ 95,221
=========== =========== ===========
Cash paid for income taxes $ 27,361 $ 8,893 $ 1,659
=========== =========== ===========
See accompanying notes to consolidated financial statements.
56
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-------------------------------------------------------------------------------
(1) Description of Business and Summary of Significant Accounting Policies
(a) Business
We are a fully integrated, self-administered and self-managed publicly
traded real estate investment trust ("REIT"). We focus on the acquisition,
development, ownership and operation of office properties, located primarily in
selected suburban markets across the United States. Based on property net
operating income, our most significant markets include the San Francisco Bay
area, the Washington, D.C. Metro area, Southern California and
Seattle/Portland. Until June 2000, we also operated an executive suites
business. As discussed in note 3, we disposed of a substantial portion of our
interest in this business on June 1, 2000, and we present the executive suites
business as a discontinued operation. For the last several years, our principal
shareholder was Security Capital Group Incorporated and/or affiliates
("Security Capital"). In November 2001, we repurchased 9.2 million shares of
our common stock from Security Capital and in December 2001, Security Capital
sold its remaining shares of our common stock to the public in an underwritten
offering.
(b) Basis of Presentation
Our accounts and those of our majority-owned/controlled subsidiaries and
affiliates are consolidated in the financial statements. We use the equity or
cost methods, as appropriate in the circumstances, to account for our
investments in and our share of the earnings or losses of unconsolidated
entities. These entities are not majority-owned or controlled by us. If events
or changes in circumstances indicate that the fair value of an investment
accounted for using the equity method or cost method has declined below its
carrying value and we consider the decline to be "other than temporary," the
investment is written down to fair value and an impairment loss is recognized.
Management has made a number of estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses in the financial
statements, and the disclosure of contingent assets and liabilities. Estimates
are required in order for us to prepare our financial statements in conformity
with accounting principles generally accepted in the United States of America.
Significant estimates are required in a number of areas, including the
evaluation of impairment of long-lived assets and equity and cost method
investments and evaluation of the collectibility of accounts and notes
receivable. Actual results could differ from these estimates.
(c) Rental Property
Properties to be developed or held and used in rental operations are
carried at cost less accumulated depreciation and impairment losses, where
appropriate.Properties held for sale are carried at the lower of their carrying
values (i.e., cost less accumulated depreciation and impairment losses, where
appropriate) or estimated fair value less costs to sell. Properties are
considered held for sale when they are subject to a contract of sale meeting
criteria specified by senior management (e.g., contingencies are met or waived,
a nonrefundable deposit is paid, etc.). Depreciation on these properties is
discontinued at that time, but operating revenues, other operating expenses and
interest continue to be recognized until the date of sale. As of December 31,
2001 and 2000, land with a carrying value of $6.9 million and $12.0 million,
respectively, was held for sale. As of December 31, 2000, $203.0 million of
rental properties were held for sale.
Depreciation of rental properties is computed on a straight-line basis
over the estimated useful lives of the assets. The estimated lives of our
assets by class are as follows:
Base building....................... 30 to 50 years
Building components................. 7 to 20 years
Tenant improvements................. Lesser of the terms of the leases
or useful lives of the assets
Furniture, fixtures and equipment... 5 to 15 years
Specifically identifiable costs associated with properties and land in
development are capitalized. Capitalized costs may include salaries and related
costs, real estate taxes, interest, pre-construction costs essential to the
development of a property, development costs, construction costs and external
acquisition costs. Costs of significant
57
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-------------------------------------------------------------------------------
improvements, renovations and replacements to rental properties are
capitalized. Expenditures for maintenance and repairs are charged to operations
as they are incurred.
If events or changes in circumstances indicate that the carrying value of
a rental property to be held and used or land held for development may be
impaired, we perform a recoverability analysis based on estimated undiscounted
cash flows to be generated from the property in the future. If the analysis
indicates that the carrying value is not recoverable from future cash flows,
the property is written down to estimated fair value and an impairment loss is
recognized.
We recognize gains from sales of rental properties and land at the time of
sale using the full accrual method, provided that various criteria related to
the terms of the transactions and any subsequent involvement by us with the
properties sold are met. If the criteria are not met, we defer the gains and
recognize them when the criteria are met or using the installment or cost
recovery methods, as appropriate in the circumstances.
(d) Tenant Leasing Costs
We defer fees and initial direct costs incurred in the negotiation of
completed leases. They are amortized on a straight-line basis over the term of
the lease to which they apply.
(e) Deferred Financing Costs
We defer fees and costs incurred to obtain financing. They are amortized
using the interest method over the term of the loan to which they apply.
(f) Fair Values of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts and notes
receivable and accounts payable and accrued expenses approximate their fair
values because of their short-term maturities. Fair value information relating
to mortgages and notes payable is provided in note 2.
(g) Revenue Recognition
We recognize minimum base rental revenue under tenant leases on a
straight-line basis over the terms of the related leases. Accrued straight-line
rents represent the rental revenue recognized in excess of rents due under the
lease agreements at the balance sheet date. We recognize revenues for
recoveries from tenants of real estate taxes, insurance and other costs in the
period in which the related expenses are incurred. We recognized revenues for
rents that are based on a percentage of a tenant's sales in excess of levels
specified in the lease agreement when the tenant's sales actually exceed the
specified minimum level.
We recognize revenue for services on properties we manage, lease or
develop for unconsolidated entities or third parties when the services are
performed. Revenue for development and leasing services to affiliates is
reduced to eliminate profit to the extent of our ownership interest.
We provide for potentially uncollectible accounts and notes receivable and
accrued straight-line rents based on analysis of the risk of loss specific
accounts. The analysis places particular emphasis on past-due accounts and
considers information such as the nature and age of the receivable, the payment
history of the tenant or other debtor, the financial condition of the tenant
and our assessment of its ability to meet its lease obligations, the basis for
any disputes and the status of related negotiations, etc.
(h) Income and Other Taxes
In general, a REIT that meets certain organizational and operational
requirements and distributes at least 90 percent of its REIT taxable income to
its shareholders in a taxable year will not be subject to income tax to the
extent of the income it distributes. We qualify and intend to continue to
qualify as a REIT under the Internal Revenue Code of 1986, as amended. As a
result, no provision for federal income taxes on income from continuing
operations is required, except for taxes on certain property sales and on
taxable income, if any, of our taxable REIT subsidiaries ("TRS"). If we fail to
qualify as a REIT in any taxable year, we will be subject to federal income tax
58
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-------------------------------------------------------------------------------
(including any applicable alternative minimum tax) on our taxable income at
regular corporate tax rates. Even if we qualify for taxation as a REIT, we may
be subject to state and local income and franchise taxes and to federal income
tax and excise tax on any undistributed income.
We incurred federal and state income and franchise taxes of approximately
$1.6 million, $34.6 million and $1.7 million for the years ended December 31,
2001, 2000 and 1999, respectively. At December 31, 2001, we recorded a
valuation allowance for the full amount ($16.3 million) of the deferred tax
assets of our TRS, primarily net operating loss carryforwards, since we do not
believe that it is more likely than not that these deferred tax assets will be
realized.
Reconciliation of Net Income to Estimated Taxable Income (Unaudited)
Earnings and profits, which determine the taxability of distributions to
stockholders, differ from net income reported for financial reporting purposes
due primarily to differences in the estimated useful lives and methods used to
compute depreciation of property, in the carrying value (basis) of investments
in properties and unconsolidated entities and timing of recognition of certain
revenues and expenses for tax and financial reporting purposes. The following
table reconciles our net income to estimated taxable income for the year ended
December 31, 2001:
(in thousands)
Net income $ 79,061
Depreciation/amortization timing differences on real estate 31,294
Straight-line rent adjustments (8,873)
Earnings adjustment on consolidated and unconsolidated entities (1,255)
Rents in received in advance 1,685
Tax gain on sale of real estate in excess of book gain 7,544
Book loss on securities in excess of tax 42,249
Transaction and project costs deductible for tax (3,936)
Other (757)
------------
Estimated taxable net income $ 147,012
============
Reconciliation Between Dividends Paid and Dividends Paid Deductions (Unaudited)
The following table reconciles cash dividends paid and the dividends paid
deduction for income tax purposes for the years ended December 31, 2001, 2000
and 1999:
(in thousands) 2001 2000 1999
---------- ---------- ---------
Cash dividends paid $148,825 $158,453 $161,326
Dividends carried back to the prior year (1,395) (14,099) -
Dividends designated from following year - 1,395 14,099
---------- ---------- ---------
Dividends paid deduction $147,430 $145,749 $175,425
========== ========== =========
Characterization of distributions (Unaudited)
The following table characterizes distributions paid per common share for
the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
---------- ---------- ----------
Ordinary income 92% 84% 78%
Capital gain 8% 16% 22%
59
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-------------------------------------------------------------------------------
(i) EARNINGS PER SHARE AND DIVIDENDS
Our basic earnings per share (EPS) is computed by dividing earnings
available to common shareholders by the weighted average number of common
shares outstanding. Our diluted EPS is computed after adjusting the numerator
and denominator of the basic EPS computation for the effects of all dilutive
potential common shares outstanding during the period. The dilutive effects of
convertible securities are computed using the "if-converted" method. The
dilutive effects of options, warrants and their equivalents are computed using
the "treasury stock" method.
The following table sets forth information relating to the computations
of our basic and diluted EPS for income from continuing operations:
(In thousands except per share amounts)
Year Ended December 31,2001
-------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------------------------------------------------------
Basic EPS $ 44,356 61,010 $ 0.73
Effect of Dilutive Securities -
Stock Options - 1,432 (0.02)
-------------------------------------------------------------------
Diluted EPS $ 44,356 62,442 $ 0.71
===================================================================
Year Ended December 31.2000
-------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------------------------------------------------------
Basic EPS $ 111,953 66,221 $ 1.69
Effect of Dilutive Securities -
Stock Options - 1,428 (0.04)
-------------------------------------------------------------------
Diluted EPS $ 111,953 67,649 $ 1.65
===================================================================
Year Ended December 31,1999
-------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------------------------------------------------------
Basic EPS $ 115,631 67,858 $ 1.71
Effect of Dilutive Securities -
Stock Options - 124 -
-------------------------------------------------------------------
Diluted EPS $ 115,631 67,982 $ 1.71
===================================================================
Income from continuing operations has been reduced by preferred stock
dividends of $34,705, $35,206 and $35,448 for 2001, 2000 and 1999, respectively.
The effects of convertible units in CarrAmerica Realty, L.P. and Carr
Realty, L.P. and Series A Convertible Preferred Stock are not included in the
calculation of diluted EPS for any year in which their effect is antidilutive.
(j) CASH EQUIVALENTS
We consider all highly liquid investments with maturities at date of
purchase of three months or less to be cash equivalents except that any such
investments purchased with funds on deposit in escrow or similar accounts are
classified as restricted deposits.
(k) ACCUMULATED OTHER COMPREHENSIVE INCOME
We currently do not have any items of other comprehensive income. Prior to
the merger of HQ Global with VANTAS (see note 3), we had foreign currency
translation adjustments relating to HQ Global's foreign affiliates.
60
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-------------------------------------------------------------------------------
Our comprehensive income, consisting of net income and translation adjustments,
was $179.5 million in 2000 and $141.7 million in 1999.
(l) SEGMENT INFORMATION
We have two reportable business segments: real estate property operations
and development operations. Business activities and operating segments that are
not reportable are included in other operations.
(m) STOCK/UNIT COMPENSATION PLANS
We apply the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations to account for our stock/unit
compensation plans. Under this method, we record compensation expense for
awards of stock, options or units to employees only if the market price of the
unit or stock on the grant date exceeds the amount the employee is required to
pay to acquire the unit or stock. Information concerning the pro forma effects
on net earnings and earnings per share of using an optional fair value-method
(rather than the intrinsic value method) to account for stock/unit compensation
plans is presented in note 8.
(n) NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 2001. SFAS No. 142 changes the
accounting for goodwill and intangible assets with indefinite lives from an
amortization approach to an impairment-only approach. Adoption of SFAS No. 142
on January 1, 2002 will not have an effect on our financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
Statement does not change the fundamental provisions of SFAS No. 121; however,
it resolves various implementation issues of SFAS No. 121 and establishes a
single accounting model for long-lived assets to be disposed of by sale. It
retains the requirement of Opinion No. 30 to report separately discontinued
operations but extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in distribution to owners) or is
classified as held for sale. We do not believe that adoption of SFAS No. 144 in
2002 will have a material effect on our financial statements.
(o) RECLASSIFICATIONS
Some prior years' amounts have been reclassified to conform to the current
year's presentation.
61
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-------------------------------------------------------------------------------
(2) MORTGAGES AND NOTES PAYABLE
Our mortgages and notes payable are summarized as follows:
(In thousands) December 31, 2001 December 31, 2000
--------------------- ----------------------
Fixed rate mortgages $ 473,382 $ 560,158
Unsecured credit facility 457,000 176,000
Senior unsecured notes 475,000 475,000
--------------------- ---------------------
$ 1,405,382 $ 1,211,158
===================== =====================
Mortgages payable are collateralized by properties and generally require
monthly principal and/or interest payments. Mortgages payable mature at various
dates from June 2002 through July 2029. The weighted average interest rate of
mortgages payable was 8.04% at December 31, 2001 and 8.09% at December 31, 2000.
In June 2001, we closed on a new three-year $500.0 million unsecured
credit facility with J.P. Morgan Chase, as agent for a group of banks. We can
extend the life of the line an additional year at our option. The line carries
an interest rate of 70 basis points over 30-day London Interbank Offered Rate
(LIBOR). The new credit facility has substantially similar terms as our
previous facility. As of December 31, 2001, $457.0 million was drawn on the
credit facility, $2.2 million in letters of credit were outstanding and we had
$40.8 million available for borrowing.
On December 21, 2001, we entered into a $150 million short-term loan to
provide additional liquidity. Affiliates of Banc of America Securities LLC and
J.P. Morgan Securities were the lenders under this short-term loan. The loan
was to mature on April 2, 2002, but was terminated without being used in
January 2002 when we issued $400 million of senior unsecured notes.
On January 11, 2002, we issued $400 million of senior unsecured notes. The
notes bear interest at 7.125% per annum, payable semi-annually beginning on
July 15, 2002. The notes mature on January 15, 2012. The notes are
unconditionally guaranteed by CarrAmerica Realty, L.P., one of our
subsidiaries. Proceeds from the notes were used to pay down our unsecured
credit facility.
Our unsecured credit facility contains financial and other covenants with
which we must comply. Some of these covenants include:
* A minimum ratio of annual EBITDA (earnings before interest,
taxes, depreciation and amortization) to interest expense;
* A minimum ratio of annual EBITDA to fixed charges;
* A maximum ratio of total debt to tangible fair market value of
our assets; and
* Restrictions on our ability to make dividend distributions in
excess of 90% of funds from operations.
Availability under the unsecured credit facility is also limited to a specified
percentage of the fair value of our unmortgaged properties.
We had senior unsecured notes outstanding of $475.0 million at December
31, 2001. These notes are as follows:
* $150 million of 7.20% notes due in 2004;
* $100 million of 6.625% notes due in 2005;
* $125 million of 7.375% notes due in 2007; and
* $100 million of 6.875% notes due in 2008.
Our senior unsecured notes also contain covenants with which we must comply.
These include:
* Limits on our total indebtedness on a consolidated basis;
62
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
-------------------------------------------------------------------------------
* Limits on our secured indebtedness on a consolidated basis; and
* Limits on our required debt service payments.
CarrAmerica Realty, L.P. unconditionally guarantees the senior unsecured notes.
Debt maturities at December 31, 2001 are as follows:
(In thousands)
2002 $ 43,944
2003 50,129
2004 628,480
2005 118,208
2006 51,935
2007 and thereafter 512,686
-----------------
$ 1,405,382
=================
Restricted deposits consist primarily of escrow deposits. These deposits
are required by lenders to be used for future building renovations or tenant
improvements or as collateral for letters of credit.
The estimated fair value of our mortgages payable at December 31, 2001 and
2000 was approximately $494.5 million and $582.3 million, respectively. The
estimated fair value is based on the borrowing rates available to us for fixed
rate mortgages payable with similar terms and average maturities. The fair
value of the unsecured credit facility at December 31, 2001 and 2000
approximates book value. The estimated fair value of our senior unsecured notes
at December 31, 2001 and 2000 was approximately $489.8 million and $468.7
million, respectively. The estimated fair value is based on the borrowing rates
available to us for debt with similar terms and maturities.
(3) DISCONTINUED OPERATIONS
On January 20, 2000, we, along with HQ Global Workplaces, Inc. (HQ
Global), VANTAS Incorporated (VANTAS) and FrontLine Capital Group (FrontLine),
entered into several agreements that contemplated several transactions
including (i) the merger of VANTAS with and into HQ Global, (ii) the
acquisition by FrontLine of shares of HQ Global common stock from us and other
stockholders of HQ Global, and (iii) the acquisition by VANTAS of our debt and
equity interests in OmniOffices (UK) Limited and OmniOffices LUX 1929 Holding
Company S.A. On June 1, 2000, we consummated the transactions. We recognized an
after tax gain of $31.9 million. Following the transactions, we owned
approximately 16% of the equity of HQ Global on a fully diluted basis and our
investment had a carrying value of $42.2 million.
FrontLine, the majority stockholder of HQ Global, announced in October
2001 that HQ Global was in default with respect to certain covenant and payment
obligations under its senior and mezzanine term indebtedness, was in a
forebearance period with HQ Global lenders and was actively negotiating with
those lenders. In November 2001, FrontLine disclosed that it had recognized an
impairment in the value of intangible assets relating to HQ Global due to HQ
Global's trend of operating losses and its inability to remain in compliance
with its debt arrangements. Based on these factors, our analysis of the
financial condition and operating results of HQ Global (which deteriorated
significantly during 2001 as the economic slowdown reduced the demand for
temporary office space, particularly from technology-related tenants) and the
losses of key board members and executives by HQ Global, particularly in the
last half of 2001, we determined in the fourth quarter of 2001, that our
investment in HQ Global was impaired. We recorded a $42.2 million impairment
charge, reducing the carrying value of our investment in HQ Global to zero.
On January 30, 2002, FrontLine reiterated that HQ Global was in active
negotiations with its lenders and certain other investors in HQ Global with
respect to the restructuring of its long-term indebtedness with an objective of
reaching an agreement on terms that would provide HQ Global with sufficient
liquidity to operate its business through the current economic downturn.
Unsuccessful in these attempts, on March 13, 2002, HQ Global filed for
bankruptcy protection under Chapter 11 of the federal bankruptcy laws.
During 1997 and 1998, we provided guarantees of HQ Global's performance
under four office leases. In connection with the HQ Global/VANTAS merger
transaction, FrontLine agreed to indemnify us against any losses incurred with
respect to these guarantees. However, at this time, FrontLine's principal asset
is its interest in HQ Global, and therefore our ability to recover any resulting
losses from FontLine under this indemnity likely will be limited.
As part of the initial filings made in the bankruptcy proceedings, HQ
Global filed a motion to reject one of these four leases. As a result, we may be
liable to the lessor with respect to payments due under this lease from and
after February 2002. This lease is for space in San Jose, California. The lease
term extends to October 2008, with total aggregate remaining lease payments as
of February 1, 2002 of approximately $6.2 million (approximately $706,000 of
which is payable in 2002). Our liability under the guarantee relating to this
lease is limited to approximately $2 million.
HQ Global has not filed a motion to reject the remaining three leases that
we have guaranteed, although it could do so in the future or otherwise fail to
make timely payments due under the leases. One of the leases is for space in
midtown Manhattan, and our liability under the guarantee is currently limited to
approximately $630,000; the limit decreases over the life of the lease until its
expiration in September 2007. The second lease is a sublease for space in
downtown Manhattan. The lease term extends to March 2008, with total aggregate
remaining lease payments as of February 1, 2002 of approximately $5.4 million
(approximately $755,000 of which is payable in 2002). The third lease is for
space in San Mateo, California. The lease term extends to January 2013, with
total aggregate remaining lease payments as of March 1, 2002 of approximately
$10.4 million (approximately $612,000 of which is payable in 2002).
We currently are evaluating a number of options with respect to these
leases in an attempt to reduce or eliminate our possible exposure under these
lease guarantees. These options include, among other things, seeking to sublease
certain of these lease locations to third parties or assuming the lease as a
primary tenant and conducting executive suites or other business activities at
these locations.
(4) MINORITY INTEREST
At the time we were incorporated and our majority-owned subsidiary, Carr
Realty, L.P. was formed, those who contributed interests in properties to Carr
Realty, L.P. had the right to elect to receive either our common stock or units
of limited partnership interest in Carr Realty, L.P. In addition, we have
acquired assets since our formation by issuing distribution paying units and
non-distribution paying units of Carr Realty, L.P. and CarrAmerica Realty, L.P.
63
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Notes to Consolidated Financial Statements
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The non-distribution paying units cannot receive any distributions until they
automatically convert into distribution paying units in the future. During the
years ended December 31, 2001 and 2000, 89,357 and 163,598 non-distribution
paying units were converted to distribution paying units, respectively. A
distribution paying unit, subject to restrictions, may be redeemed at any time
for either one share of our common stock, or, cash equal to the fair market
value of a share of our common stock at our option at the redemption date.
When a Unitholder redeems a distribution paying unit for a share of common
stock or cash, minority interest is reduced and our investment in Carr Realty,
L.P. or CarrAmerica Realty, L.P., as appropriate, is increased. During the
years ended December 31, 2001, 2000 and 1999, 61,432, 292,739 and 38,430
distribution paying units, respectively, of Carr Realty, L.P. were redeemed for
our common stock. During the years ended December 31, 2001, 2000 and 1999,
52,782, 146,151 and no units, respectively, of CarrAmerica Realty, L.P. were
redeemed for cash or our common stock. Minority interest in the financial
statements relates primarily to Unitholders.
The following table summarizes the outstanding shares of our common stock,
preferred stock which is convertible into our common stock and outstanding
units of Carr Realty, L.P. and CarrAmerica Realty, L.P.:
(In thousands)
Convertible Distribution Non-Distribution
Common Preferred Paying Paying
Stock Stock Units Units
As of December 31, Outstanding Outstanding Outstanding Outstanding
----------------- ---------------- ------------------ --------------- -------------------
2001 51,965 80 5,794 179
2000 65,018 480 5,656 268
1999 66,826 680 6,048 432
Weighted average for:
---------------------
2001 61,010 256 5,809 231
2000 66,221 495 5,916 405
1999 67,858 680 6,003 495
(5) OTHER INVESTMENTS IN UNCONSOLIDATED ENTITIES AND AFFILIATE TRANSACTIONS
We utilize joint venture arrangements on projects characterized by large
dollar-per-square foot costs and/or when we desire to limit capital deployment
in certain of our core markets. We own interests ranging from 15% to 50% in
real estate property operations and development operations through
unconsolidated entities. We had eleven investments at December 31, 2001 and
2000 and six investments at December 31, 1999 in these entities. Adjustments
are made to equity in earnings of unconsolidated entities to account for
differences in the amount at which the investment is carried and the amount of
underlying equity in the net assets.
The combined condensed financial information for the unconsolidated entities
accounted for under the equity method is as follows:
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Notes to Consolidated Financial Statements
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(In thousands)
December 31,
Balance Sheets 2001 2000
----------- ------------
Assets
------
Rental property, net $ 647,294 $ 569,500
Land and construction in progress 161,959 123,540
Cash and cash equivalents 17,607 20,140
Other assets 54,493 37,201
----------- -----------
$ 881,353 $ 750,381
=========== ===========
Liabilities and Partners' Capital
Liabilities:
Notes payable $ 497,493 $ 184,991
Other liabilities 36,582 15,697
----------- -----------
Total liabilities 534,075 200,688
Partners' capital 347,278 549,693
----------- -----------
$ 881,353 $ 750,381
=========== ===========
Year Ended December 31,
Statements of Operations 2001 2000 1999
----------- ----------- -----------
Revenue $ 109,441 $ 64,423 $ 39,825
Depreciation and amortization expense 27,890 14,733 7,370
Interest expense 22,034 19,529 19,464
Other expenses 37,627 21,302 11,371
Gain on sale of assets -- 63,984 --
----------- ----------- ----------
Net income $ 21,890 $ 72,843 $ 1,620
=========== =========== ==========
In addition to making investments in these ventures, we provide
construction management, leasing, development and architectural and other
services to them. We earned fees for these services of $6.2 million in 2001,
$8.9 million in 2000 and $7.9 million in 1999. Accounts receivable from joint
ventures and other affiliates were $4.2 million at December 31, 2001 and $4.8
million at December 31, 2000.
Other material related party transactions include general contracting and
other services from Clark Enterprises, Inc., an entity in which one of our
directors is the majority stockholder. We, including our unconsolidated
affiliates, paid $25.8 million in 2001, $10.0 million in 2000 and $20.1 million
in 1999 to Clark Enterprises, Inc. for these services. Substantially all of
the payments related to our unconsolidated affiliates.
As of December 31, 2001, we guaranteed $8.0 million of debt related to a
joint venture and $5.2 million of debt related to a development project we have
undertaken with a third party.
In November 2001, we repurchased 9.2 million shares of our common stock
from Security Capital for a total of $265.4 million or $28.85 per share.
(6) LEASE AGREEMENTS
Space in our rental properties is leased to approximately 1,000 tenants. In
addition to minimum rents, the leases typically provide for other rents which
reimburse us for specific property operating expenses. The future minimum base
rent to be received under noncancellable tenant leases and the percentage of
total rentable space under leases expiring each year, as of December 31, 2001
are summarized as follows:
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Notes to Consolidated Financial Statements
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(Dollars in thousands) Percentage of
Future Total Space
Minimum Under Lease
Rent Expiring
-------------- -----------------
2002 $ 413,681 10.4
2003 374,390 14.1
2004 313,732 15.7
2005 262,005 12.8
2006 202,502 11.2
2007 & thereafter 544,693 35.8
--------------
$ 2,111,003
==============
Leases also provide for additional rent based on increases in the Consumer
Price Index (CPI) and increases in operating expenses. Increases are generally
payable in equal installments throughout the year.
We lease land for two office properties located in metropolitan Washington,
D.C. and one office property located in Santa Clara, California. We also lease
land adjacent to an office property in Chicago, Illinois and office space in
metropolitan Washington, D.C. for our own use, with part of this space being
subleased to tenants. The initial terms of these leases range from 5 years to
99 years. The longest lease matures in 2086. The minimum base annual rental
payment for these leases is $5.5 million.
(7) COMMON AND PREFERRED STOCK
In 2000 and 2001, our Board of Directors authorized us to spend up to $325
million to repurchase our common shares. During these years, we acquired
approximately 8.7 million shares for $253.1 million, an average price of $29.03
per share, exclusive of 9.2 million shares repurchased from Security Capital at
$28.85 per share under a separate authorization in November 2001.
We are authorized to issue 35 million shares of preferred stock. On October
25, 1996, we issued 1,740,000 shares of Series A Cumulative Convertible
Redeemable Preferred Stock ("Series A Preferred Stock") at $25 per share.
Dividends for the Series A Preferred Stock are cumulative and payable quarterly
in arrears in an amount per share equal to the greater of $1.75 per share per
year or the cash dividend paid on the number of shares of our common stock into
which a share of Series A Preferred Stock is convertible. Series A Preferred
Stock has a liquidation preference of $25 per share. Each share of Series A
Preferred Stock is convertible into one share of common stock (subject to
conversion adjustments), at the option of the holder. As of December 31, 2001,
1,660,000 shares of Series A Preferred Stock had been converted into common
stock. After October 25, 1999, each outstanding share of Series A Preferred
Stock became redeemable at our option. The redemption price is $25 per share
plus accrued and unpaid dividends.
As of December 31, 2001, we had the following additional preferred stock
issued and outstanding:
Liquidation
Shares Issue Date Preference Dividend Rate
-------------- ---------------- -------------- -----------------
Series B 8,000,000 August 1997 $25.00 8.57%
Series C 6,000,000 November 1997 $25.00 8.55%
Series D 2,000,000 December 1997 $25.00 8.45%
The Series C and D shares are Depositary Shares. They each represent a
1/10 fractional interest in a share of preferred stock. Dividends for the
Series B, C and D shares are cumulative from the date of issuance and are
payable quarterly in arrears on the last day of February, May, August and
November. These preferred shares are redeemable at our option after the
following dates:
Series B - August 12, 2002
Series C - November 6, 2002
Series D - December 19, 2002
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Notes to Consolidated Financial Statements
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(8) STOCK/UNIT COMPENSATION PLANS
As of December 31, 2001, we had three option plans. Two plans are for the
purpose of attracting and retaining executive officers and other key employees
(1997 Employee Stock Option and Incentive Plan and the 1993 Carr Realty Option
Plan). The other plan is for the purpose of attracting and retaining directors
who are not employees (1995 Non-Employee Director Stock Option Plan).
The 1997 Employee Stock Option and Incentive Plan ("Stock Option Plan")
allows for the grant of options to purchase our common stock at an exercise
price equal to the fair market value of the common stock at the date of grant.
At December 31, 2001, we had options and units to purchase 10,000,000 shares of
common stock and units reserved so we could issue them under the Stock Option
Plan. At December 31, 2001, 6,173,225 options were outstanding. All of the
outstanding options have a 10-year term from the date of grant. 3,771,096
options vest over a four-year period, 25% per year, 450,000 options vest at the
end of five years, 92,500 options vest over a three-year period, 33.3% per year
and 29,364 vest within the first year after grant. The balance of the options
vests over a five-year period, 20% per year.
The 1993 Carr Realty Option Plan allows for the grant of options to
purchase units of Carr Realty, L.P. (unit options). These options are
exercisable at the fair market value of the units at the date of grant, which
is equivalent to the fair market value of our common stock on that date. Units
(following exercise of unit options) are redeemable for cash or common stock,
at our option. At December 31, 2001, we had options to purchase 1,266,900 units
authorized for grant under this plan, of which 159,422 were outstanding. All of
the outstanding options have a 10-year term from the date of grant and vest
over five years, 20% per year.
The 1995 Non-Employee Director Stock Option Plan provides for the grant of
options to purchase our common stock at an exercise price equal to the fair
market value of the common stock at the date of grant. Under this plan, newly
elected non-employee directors are granted options to purchase 3,000 shares of
common stock when they start serving as a director. In connection with each
annual election of directors, a continuing non-employee director will receive
options to purchase 7,500 shares of common stock. The stock options have a
10-year term from the date of grant and vest over three years, 33 1/3% per
year. At December 31, 2001, we had 270,000 options on shares of common stock
authorized for grant under this plan with 137,193 outstanding.
The per share weighted-average fair values of Unit options and stock
options granted during 2001, 2000 and 1999 were $3.07, $2.24 and $2.25,
respectively, on the date of grant. This value is determined using the
Black-Scholes option-pricing model. The following assumptions were used:
Expected Risk Free Expected Expected
Dividend Interest Stock Option
Yield Rate Volatility Life
-------- ---------- ------------ -----------
2001 7.94% 5.12% 23.97% 5.22
2000 8.64% 6.77% 22.47% 5.00
1999 7.54% 5.16% 22.78% 3.95
If we had applied a fair-value based method (rather than the intrinsic
value method) to recognize compensation cost for our unit and stock options,
our net income and earnings per share of common stock would have been adjusted
as indicated below:
(In thousands, except per share data) 2001 2000 1999
----------- ----------- -----------
Pro forma net income $ 74,811 $ 176,364 $ 140,507
Pro forma basic EPS $ 0.66 $ 2.13 $ 1.55
Pro forma diluted EPS $ 0.64 $ 2.09 $ 1.55
Unit and stock option activity during 2001, 2000 and 1999 is summarized as
follows:
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Notes to Consolidated Financial Statements
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1993 Plan 1995 Plan 1997 Plan
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
------------- ------------- ------------- ------------- ------------- -------------
Outstanding at
December 31, 1998 894,622 $ 23.242 190,892 $ 24.995 5,035,944 $ 26.629
Granted - - 52,500 24.250 456,500 23.008
Exercised 16,200 23.480 - - - -
Forfeited 30,800 24.643 42,999 24.882 791,941 26.493
------------- ------------- ------------- ------------- ------------- -------------
Outstanding at
December 31, 1999 847,622 23.186 200,393 24.824 4,700,503 26.301
Granted - - 7,500 24.688 2,867,857 21.195
Exercised 593,600 22.932 - - 632,611 25.103
Forfeited 15,500 23.831 - - 773,337 24.480
------------- ------------- ------------- ------------- ------------- -------------
Outstanding at
December 31, 2000 238,522 23.778 207,893 24.819 6,162,412 24.275
Granted - - - - 1,171,139 28.644
Exercised 79,100 22.939 70,700 23.626 1,061,213 23.329
Forfeited - - - - 99,113 23.678
------------- ------------- ------------- ------------- ------------- -------------
Outstanding at
December 31, 2001 159,422 $ 24.194 137,193 $ 25.435 6,173,225 $ 25.277
============= ============= ============= ============= ============= =============
Options exercisable at:
December 31, 1999 803,188 $ 22.998 91,533 $ 24.601 1,198,708 $ 27.388
December 31, 2000 218,766 23.400 141,378 24.884 1,293,024 27.469
December 31, 2001 151,544 23.947 114,693 25.648 1,619,437 27.105
The following table summarizes information about our stock options
outstanding at December 31, 2001:
Options Outstandng Options Exercisable
-------------------------------------------------------------------------- -------------------------------------
Outstanding Weighted-Average Exercisable
Range of Exercise as of Remaining Weighted-Average as of Weighted-Average
Prices 12/31/01 Contractual Life Exercise Price 12/31/01 Exercise Price
---------------- ------------- ----------------- ---------------- --------------- ------------------
$17.00-$20.00 21,750 7.3 $ 18.8276 9,250 $ 18.5946
$20.01-$23.00 2,051,685 7.7 20.8972 282,247 21.7467
$23.01-$26.00 1,490,150 7.0 23.7521 469,900 23.6053
$26.01-$29.00 1,355,087 8.7 28.5947 158,659 28.4475
$29.01-$32.00 1,551,168 6.0 29.6279 965,618 29.5673
------------- ----------------- ---------------- --------------- ------------------
6,469,840 7.3 $ 25.2533 1,885,674 $ 26.7629
============= ===============
We have also granted to key executives 726,294 restricted stock units under the
1997 Stock Option Plan. The stock units were granted at a zero exercise price
and are convertible to common stock as they vest at the option of the
executive. The fair market values of the units at the dates of grant range from
$20.69 to $28.94 per unit. The units vest over five years, at 20% per year. We
recognize the fair value of the units awarded at dates of grant as compensation
cost on a straight-line basis over the terms of the awards. Compensation
expense related to these awards was $2.6 million in 2001, $2.9 million in 2000
and $2.0 million in 1999.
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Notes to Consolidated Financial Statements
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(9) GAIN ON SALE OF ASSETS AND OTHER PROVISIONS, NET
The following table summarizes our gain on sale of assets and other
provisions, net:
(in thousands) 2001 2000 1999
-------- --------- ---------
Sales of land/development properties $ (473) $ (3,655) $ 662
Sales of rental properties 4,937 33,399 54,791
Sale of properties to Carr Office Park, L.L.C. - 33,197 -
Impairment loss (1,500) (7,894) -
Income taxes - (18,676) (631)
------- --------- --------
Total $ 2,964 $ 36,371 $ 54,822
======= ========= ========
We dispose of assets (sometimes using tax-deferred exchanges) that are
inconsistent with our long-term strategic or return objectives or where market
conditions for sale are favorable. The proceeds from the sales are redeployed
into other properties or used to fund development operations or to support
other corporate needs. During 2001, we disposed of seven operating properties,
one property under development and three parcels of land held for development.
We recognized a gain of $4.5 million on these transactions. We also recognized
an impairment loss of $1.5 million on certain parcels of land held for
development.
During 2000, we disposed of 16 operating properties (including one
property in which we held an interest through an unconsolidated entity) and
four parcels of land that were being held for development. We recognized a gain
of $24.1 million on these transactions, net of taxes of $5.6 million, including
a net gain of $8.8 million relating to our share of gain on a sale of property
in which we held an interest through an unconsolidated entity.
On August 17, 2000, we closed on a joint venture transaction with New York
State Teachers' Retirement System ("NYSTRS"). At closing, we and some
affiliates contributed properties to the joint venture, Carr Office Park,
L.L.C., and NYSTRS contributed cash of approximately $255.1 million. The joint
venture encompasses five suburban office parks (including 26 rental properties
and land held for development of additional properties) in four markets. We
received approximately $249.6 million and a 35% interest in the joint venture
in exchange for the properties contributed and recognized a gain on the partial
sale of $20.1 million, net of taxes of $13.1 million.
In 2000 we recognized an impairment loss of $7.9 million on land. For
various reasons, we determined that we would not proceed with planned
development of rental properties on certain of our land holdings and decided to
market the land for sale. As a result, we evaluated the recoverability of the
carrying amounts of the land. We determined that the carrying amounts would not
be recovered from estimated net sale proceeds in certain cases and, in those
cases, we recognized impairment losses.
During 1999, we disposed of 63 properties and two parcels of land being
held for development. We recognized a gain of $54.8 million, net of District of
Columbia franchise tax of $0.6 million.
(10) COMMITMENTS AND CONTINGENCIES
At December 31, 2001, we were liable on $2.2 million in letters of credit.
We were contingently liable for letters of credit related to various completion
escrows and on performance bonds amounting to approximately $1.4 million to
ensure completion of required public improvements on our construction projects.
In 1998, we entered into forward treasury agreements (treasury locks) in
order to hedge against the impact of interest rate fluctuations on planned
future debt issuances. At December 31, 1998, we determined that these positions
no longer represented effective hedges. At that time, we recognized a loss of
$13.7 million in anticipation of terminating the agreements. These contracts
were settled in February 1999 for $9.2 million in cash, resulting in a gain of
$4.5 million in 1999.
We have a 401(k) plan for employees under which we match 75% of employee
contributions up to the first 6% of pay. We also make a base contribution of 3%
of pay for participants who remain employed on December 31 (end of the plan
year). Our contributions to the plan are subject to four-year vesting, 25% per
year. Prior to 2001, the
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Notes to Consolidated Financial Statements
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vesting schedule was a five-year graduated vesting schedule, and our
contribution was 50% of employee contributions up to the first 4% of pay. Our
contributions to the plan were $3.0 million in 2001, $1.6 million in 2000 and
$1.1 million in 1999.
We are currently involved in two separate lawsuits with two stockholders
of HQ Global. The first lawsuit involves the September 1998 conversion of an
approximately $111 million loan that we made to HQ Global into stock of HQ
Global. We, along with HQ Global, initiated this lawsuit in the United States
District Court for the District of Columbia in February 1999, asking the court
to declare that the terms of the debt conversion were fair, after two minority
stockholders threatened to challenge the terms of the conversion. These
stockholders had claimed that both the conversion price used and the methods by
which the conversion price was agreed upon between HQ Global and us were not
fair to HQ Global or these stockholders. Thereafter, these two stockholders
filed their own counterclaims against HQ Global, the board of directors of HQ
Global and us. The stockholders asked the court to declare the conversion void,
or in the alternative for compensatory and punitive damages. On September 12,
2001, the trial court granted these stockholders' motion for summary judgment,
declaring that the shares issued in connection with the conversion were null
and void. We believe that the trial court incorrectly interpreted Delaware law
in this case. We appealed this decision on October 2, 2001. We recognize that,
in light of the trial court's finding, there is a reasonable possibility that
we will be unsuccessful in overturning the court's decision. In that event,
there are a number of possible outcomes, including a reduction in our equity
interest in HQ Global or a cash payment by us to these stockholders. We
currently believe that the value of any loss we may incur from this decision
should not exceed $10 million, although we cannot assure you that this will be
the case.
The second lawsuit involves claims filed by these two stockholders in
April 2000 arising out of the June 2000 merger transaction involving HQ Global
and VANTAS Incorporated. In this lawsuit, these two stockholders have brought
claims against HQ Global, the board of directors of HQ Global, FrontLine
Capital Group and us in Delaware Chancery Court. The two stockholders allege
that, in connection with the merger transaction, we breached our fiduciary
duties to the two stockholders and breached a contract with the stockholders.
The claim relates principally to the allocation of consideration paid to us
with respect to our interest in an affiliate of HQ Global that conducts
international executive suites operations. The stockholders asked the court to
rescind the transaction, or in the alternative for compensatory and rescissory
damages. The court recently determined that it would not rescind the merger
transaction, but held open the possibility that compensatory damages could be
awarded or that another equitable remedy might be available. We believe that
these claims are without merit and that we will ultimately prevail in this
action, although we cannot assure you that the court will not find in favor of
these stockholders. We believe, however, that, even if the court finds in favor
of these stockholders, any such adverse result will not have a material adverse
effect on our financial condition or results of operations.
In the course of our normal business activities, various lawsuits, claims
and proceedings have been or may be instituted or asserted against us. Based on
currently available facts, we believe that the disposition of matters that are
pending or asserted will not have a material adverse effect on our consolidated
financial position, results of operations or liquidity.
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(11) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the quarterly results of operations for 2001
and 2000:
(In thousands, except per share data)
First Second Third Fourth
2001 Quarter Quarter Quarter Quarter
---- ------------- ------------- ------------- -------------
Rental revenue $ 123,789 $ 123,823 $ 126,762 $ 133,235
Real estate service revenue 10,137 9,703 6,682 4,515
Real estate operating income 26,232 31,148 30,514 28,847
Net income (loss) 30,266 32,560 28,944 (12,709)
Basic net income (loss) per common share 0.34 0.39 0.33 (0.38)
Diluted net income (loss) per common share 0.32 0.38 0.32 (0.38)
2000
----
Rental revenue $ 136,625 $ 139,127 $ 131,690 $ 124,417
Real estate service revenue 4,941 5,312 7,667 8,252
Real estate operating income 28,527 27,651 30,678 28,113
Income from continuing operations 33,152 29,825 49,910 34,272
(Loss) income from discontinued operations (1,380) 1,836 - -
Gain on sale of discontinued operations - 31,852 - -
Net income 31,772 63,513 49,910 34,272
Basic net income per common share:
Income from continuing operations 0.36 0.31 0.62 0.39
(Loss) income from discontinued operations (0.02) 0.03 - -
Gain on sale of discontinued operations - 0.48 - -
Net income 0.34 0.82 0.62 0.39
Diluted net income per common share:
Income from continuing operations 0.36 0.31 0.60 0.38
(Loss) income from discontinued operations (0.02) 0.03 - -
Gain on sale of discontinued operations - 0.43 - -
Net income 0.34 0.77 0.60 0.38
Note: Net loss for the fourth quarter of 2001 includes an impairment loss of
$42.2 million ($0.74 per share, basic and diluted) on our investment in HQ
Global.
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(12) SEGMENT INFORMATION
Our reportable operating segments are real estate property operations and
development operations. Other business activities and operating segments that
are not reportable are included in other operations. The real estate property
operations segment includes the operation and management of rental properties.
The development operations segment includes the development of new rental
properties for us and for unaffiliated companies. Our reportable segments offer
different products and services and are managed separately because each
requires different business strategies and management expertise.
Our operating segments' performance is measured using funds from
operations. Funds from operations is defined by the National Association of
Real Estate Investment Trusts (NAREIT) as follows:
* Net income (loss) - computed in accordance with accounting principles
generally accepted in the United States of America (GAAP);
* Less gains (or plus losses) from sales of depreciable operating
properties and items that are classified as extraordinary items under
GAAP;
* Plus depreciation and amortization of assets uniquely significant to
the real estate industry;
* Plus or minus adjustments for unconsolidated partnerships and joint
ventures (to reflect funds from operations on the same basis).
Funds from operations does not represent net income or cash flow generated from
operating activities in accordance with GAAP. As such, it should not be
considered an alternative to net income as an indication of our performance or
to cash flows as a measure of our liquidity or our ability to make
distributions.
Operating results of our reportable segments and our other operations
are summarized as follows:
As of and for the year ended December 31, 2001
----------------------------------------------------
Real Estate
Property Development Other
(In millions) Operations Operations Operations Total
---------- ------------ ----------- ---------
Operating revenue $ 507.6 $ 14.2 $ 16.8 $ 538.6
Segment expense 162.8 6.6 42.9 212.3
---------- ------------ ----------- ---------
Net segment revenue (expense) 344.8 7.6 (26.1) 326.3
Interest expense 44.0 - 38.5 82.5
Other income (expense), net 19.8 0.4 (47.3) (27.1)
---------- ------------ ----------- ---------
Funds from operations $ 320.6 $ 8.0 $(111.9) 216.7
========== ============ ===========
Adjustments:
Depreciation and amortization (131.1)
----------
Income from continuing operations before
gain on sale of assets and minority interest 85.6
Minority interest and gain on sale of assets (6.5)
----------
Net income $ 79.1
=========
Total assets $ 2,682.7 $ 49.8 $ 43.1 $2,775.6
=======================================================
Expenditures for long-lived assets $ 63.2 $ 70.1 $ - $ 133.3
=======================================================
72
CARRAMERICA REALITY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
As of and for the year ended December 31, 2000
------------------------------------------------
Real Estate
Property Development Other
(In millions) Operations Operations Operations Total
---------- ------------ ------------ -------
Operating revenue $ 531.9 $ 10.6 $ 15.5 $ 558.0
Segment expense 170.0 4.5 41.6 216.1
---------- ------------ ------------ --------
Net segment revenue (expense) 361.9 6.1 (26.1) 341.9
Interest expense 49.2 - 49.1 98.3
Other income (expense), net 14.5 0.2 (3.6) 11.1
---------- ------------ ------------ --------
Funds from operations $ 327.2 $ 6.3 $(78.8) 254.7
========== ============ ============
Adjustments:
Depreciation and amortization (128.4)
Other, net 0.5
---------
Income from continuing operations before
gain on sale of assets and minority interest 126.8
Minority interest and gain on sale of assets 20.3
Discontinued operations, net of income tax 0.5
Gain on sale of discontinued operations, net of tax 31.9
---------
Net income $ 179.5
=========
Total assets $2,711.9 $ 96.3 $264.6 $3,072.8
==============================================
Expenditures for long-lived assets $ 107.5 $123.2 $ - $ 230.7
==============================================
73
CARRAMERTCA REALTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
---------------------------------------------------------------------------------------------------------------------
As of and for the year ended December 31, 1999
---------------------------------------------------------------------
Real Estate
Property Development Other
(In millions) Operations Operations Operations Total
------------- ------------- ------------- -------------
Operating revenue $ 498.9 $ 6.6 $ 10.4 $ 515.9
Segment expense 167.2 4.6 34.3 206.1
------------- ------------- ------------- -------------
Net segment revenue (expense) 331.7 2.0 (23.9) 309.8
Interest expense 50.5 - 38.6 89.1
Other income (expense), net 8.9 0.2 (3.2) 5.9
------------- ------------- ------------- -------------
Funds from operations $ 290.1 $ 2.2 $ (65.7) 226.6
============= ============= =============
Adjustments:
Depreciation and amortization (117.3)
Gain on settlement of treasury locks 4.5
Other, net 0.8
-------------
Income from continuing operations before
gain on sale of assets and minority interest 114.6
Minority interest and gain on sale of assets 36.4
Discontinued operations, net of income tax (7.8)
-------------
Net income $ 143.2
=============
Total assets of continuing operations $ 2,991.8 $ 220.1 $ 59.5 $ 3,271.4
====================================================
Net asscts of discontinued operations 207.7
------------
Total assets $ 3,479.1
============
Expenditures for lon&-lived assets $ 92.0 $ 279.1 $ - $ 371.1
=======================================================================
(13) SUPPLEMENTAL CASH FLOW INFORMATION
In April 2001, we exercised an option under a loan agreement to acquire
two office buildings and related land located in the San Francisco Bay area.
For financial reporting purposes, we had classified the loan as an investment
in an unconsolidated entity and accounted for it using the equity method. The
investment, which had a carrying value of approximately $50.3 million at the
date the option was exercised, was reclassified to rental property in
connection with this transaction.
On June 29, 2001, we contributed land subject to a note payable of
approximately $26.0 million to a joint venture in exchange for a 30% ownership
interest. Our initial investment in the joint venture amounted to $7.3 million,
the net book value of the asset and liability contributed.
In the second quarter of 2001, 400,000 shares of our Series A Cumulative
Convertible Redeemable Preferred Stock were converted to shares of common stock.
In August 2000, we contributed $332.1 million of assets to an
unconsolidated joint venture, Carr Office Park, L.L.C.
74
CarrAmerica Realty Corporation and Subsidiaries
Schedule III: Real Estate and Accumulated Depreciation as of December 31, 2001
(In thousands) Costs Gross Amount at Which
Initial Costs Capitalized Carried at Close of Period
----------------------- -------------------------------
Buildings and Subsequent to Buildings and
Properties Encumbrances Land Improvements Acquisition/3/ Land Improvements
------------------------------- ---------------- ------- -------------- ---------------- ------------ -----------------
Downtown Washington, D.C.:
International Square/2/ 182,176/6/ 69,651 100,921 19,010 69,651 119,931
900 19th Street 15,305 1,985 13,358 3,239 1,985 16,597
2550 M Street -- 2,340 11,348 14,353 2,340 25,701
1730 Pennsylvania Avenue -- 2,196 11,013 13,768 2,196 24,781
1255 23rd Street 37,982 10,793 40,214 4,154 10,793 44,368
1747 Pennsylvania Avenue 14,042 1,636 8,157 7,144 1,636 15,301
1775 Pennsylvania Avenue 11,735 -- 19,000 2,463 -- 21,463
675 E Street/1/ -- -- -- 1,372 -- 1,372
Suburban Washington, D.C.:
One Rock Spring Plaza -- -- 18,409 2,068 -- 20,477
Reston Town Center -- -- 2,150 -- -- 2,150
Sunrise Corporate Center -- 8,250 34,322 7,743 11,566 38,749
Reston Crossing East & West -- 8,379 -- 59,165 13,315 54,229
Orange County/Los Angeles:
Scenic Business Park -- 2,469 4,503 1,900 2,469 6,403
Harbor Corporate Park -- 2,191 5,784 2,774 2,191 8,558
Plaza PacifiCare -- 3,493 6,392 78 3,493 6,470
Katella Corporate Center -- 2,671 4,314 1,254 2,681 5,558
Warner Center -- 16,490 33,698 5,643 16,574 39,257
South Coast Executive Center 14,871 3,324 17,212 3,746 3,388 20,894
Warner Premier -- 3,252 6,040 1,375 3,285 7,382
Von Karman -- 3,731 12,493 1,234 3,744 13,714
2600 W. Olive 18,913 3,855 25,054 3,092 3,904 28,097
Bay Technology Center -- 2,442 11,164 753 2,462 11,897
Pacific Corporate Plaza 1, 2, 3 -- 5,756 -- 12,738 5,928 12,566
Alton Deere Plaza -- 5,666 17,967 1,441 5,676 19,398
Westlake Spectrum -- 4,371 13,105 97 4,369 13,204
San Diego:
Del Mar Corporate Plaza -- 2,860 13,252 1,407 2,869 14,650
Wateridge Pavilion 3,308 881 5,509 447 895 5,942
Towne Center Technology Park 1, 2, 3 -- 4,929 -- 21,852 5,073 21,708
Lightspan -- 1,438 5,710 847 1,440 6,555
La Jolla Spectrum 1 & 2 -- 6,447 -- 26,666 6,524 26,589
Palomar Oaks Technology Park 9,636 4,698 12,495 614 4,714 13,093
Jaycor 10,861 5,123 11,754 4,416 5,154 16,139
Highlands Corporate Center -- 10,156 30,369 1,365 10,156 31,734
San Francisco Bay Area:
CarrAmerica Corporate Center -- 33,035 75,720 8,950 32,946 84,759
Valley Business Park I -- 3,859 3,155 442 3,865 3,591
Bayshore Centre 2 -- 8,525 6,969 1,401 8,960 7,935
Rincon Centre -- 12,464 10,188 1,702 12,480 11,874
(In thousands)
Properties Accumulated Date of Year of
Total Depreciation Construction Acquisition
------- ------------ ------------ -----------
Downtown Washington, D.C.:
International Square/2/ 189,582 69,633 1977, 1979, 1982 1993
900 19th Street 18,582 8,061 1986 1993
2550 M Street 28,041 11,956 1978 1993
1730 Pennsylvania Avenue 26,977 14,242 1972 1993
1255 23rd Street 55,161 19,194 1983 1993
1747 Pennsylvania Avenue 16,937 8,846 1970 1993
1775 Pennsylvania Avenue 21,463 4,694 1975 1994
675 E Street/1/ 1,372 -- N/A 2001
Suburban Washington, D.C.:
One Rock Spring Plaza 20,477 8,047 1989 1995
Reston Town Center 2,150 518 N/A 1996
Sunrise Corporate Center 50,315 2,497 1987-1989 1996
Reston Crossing East & West 67,544 4,986 1987-1989 1996
Orange County/Los Angeles:
Scenic Business Park 8,872 2,255 1985 1996
Harbor Corporate Park 10,749 2,597 1987 1996
Plaza PacifiCare 9,963 1,527 1986 1996
Katella Corporate Center 8,239 1,493 1982 1996
Warner Center 55,831 9,503 1981-1985 1996
South Coast Executive Center 24,282 4,097 1987 1996
Warner Premier 10,667 1,344 1990 1997
Von Karman 17,458 2,128 1981 1997
2600 W. Olive 32,001 5,046 1986 1997
Bay Technology Center 14,359 1,679 1985 1997
Pacific Corporate Plaza 1, 2, 3 18,494 2,032 1998 1997
Alton Deere Plaza 25,074 2,506 1989 1998
Westlake Spectrum 17,573 820 1988-1989 2000
San Diego:
Del Mar Corporate Plaza 17,519 3,575 1986 1996
Wateridge Pavilion 6,837 1,055 1987 1997
Towne Center Technology Park 1, 2, 3 26,781 5,882 1998 1997
Lightspan 7,995 1,348 1985 1997
La Jolla Spectrum 1 & 2 33,113 2,812 1999-2001 1998
Palomar Oaks Technology Park 17,807 1,526 1989 1998
Jaycor 21,293 1,645 1989 1998
Highlands Corporate Center 41,890 2,450 N/A 1999
San Francisco Bay Area:
CarrAmerica Corporate Center 117,705 30,211 1988 1996
Valley Business Park I 7,456 756 1981 1996
Bayshore Centre 2 16,895 1,405 1984 1996
Rincon Centre 24,354 2,518 1984 1996
75
CarrAmerica Realty Corporation and Subsidiaries
Schedule III: Real Estate and Accumulated Depreciation as of December 31, 2001
Costs Gross Amount at Which
(In thousands) Initial Costs Capitalized Carried at Close of Period
----------------------- ---------------------------
Buildings and Subsequent to Building and
Properties Encumbrances Land Improvements Acquisition/3/ Land Improvements
------------------------------ ------------ ------- ------------- ------------ ----- -------------
Valley Centre II - 13,658 11,164 (148) 13,676 10,998
Valley Office Centre - 6,134 5,014 568 6,142 5,574
Valley Centre - 6,051 4,945 822 6,059 5,759
Valley Business Park II - 8,753 7,155 1,484 8,765 8,627
Rio Robles - 16,655 29,598 1,036 16,669 30,620
First Street Technology Center - 3,388 4,884 420 3,411 5,281
Baytech Business Park - 14,958 - 23,130 14,568 23,520
3571 North First Street - 6,297 8,862 418 6,326 9,251
San Mateo Center I - 5,703 9,126 899 5,710 10,018
Oakmead West Land A-G - 22,842 - 41,583 20,526 43,899
San Mateo II & III - 9,723 15,556 1,922 9,817 17,384
Hacienda West - 6,468 24,062 2,246 6,492 26,284
Sunnyvale Technology Center 28,875/4/ 12,098 16,131 149 12,106 16,272
Clarify Corporate Center 1, 2, 3, 4 - 17,574 - 31,042 17,470 31,146
Valley Technology Center 1, 2, 3,
4, 5, 6, 7 - 32,910 - 45,179 32,752 45,337
Golden Gateway Commons - 21,112 51,689 3,443 21,166 55,078
Techmart Commerce Center - - 36,594 2,119 - 38,713
Fremont Technology Park 1, 2, 3 - 10,122 10,797 (557) 8,433 11,929
Mountain View Gateway Center - 13,637 37,946 - 13,637 37,946
Denver, CO:
Harlequin Plaza - 4,746 21,344 8,742 4,747 30,085
Quebec Court I & II - 2,368 19,819 10,414 2,371 30,230
Quebec Centre - 1,423 5,659 1,489 1,423 7,148
Dry Creek Corporate Center/1/ - 10,575 - 19,256 12,896 16,935
Seattle, WA:
Redmond East 26,141 6,957 32,390 3,085 6,939 35,493
Redmond Hilltop B & C - 2,511 - 7,952 2,489 7,974
Canyon Park - 7,643 23,624 3,391 5,782 28,876
Willow Creek - 1,709 6,972 79 1,724 7,036
Willow Creek Corp. Center 1, 2, 3,
4, 5, 6 - 6,485 - 39,966 5,778 40,673
Canyon Park Commons 1, 2, 4 4,923 5,592 9,958 20,613 6,749 29,414
Canyon Point - 6,225 - 3,075 9,300 -
Salt Lake City, UT:
Sorenson Research Park 3,721 4,389 25,304 3,553 5,017 28,229
Sorenson XI - 1,490 - 4,884 2,312 4,062
Wasatch Corporate Center 12,016 3,318 15,495 509 3,587 15,735
Wasatch Corporate Center 17, 18 - 2,636 - 11,611 2,537 11,710
Wasatch Corporate Center 16 - 1,172 - 1,213 2,385 -
Creekside/1/ - - 3,150 8,488 3,211 8,427
Chicago, IL:
Parkway North I 24,164 3,727 29,146 2,674 3,733 31,814
Unisys - 6,387 45,111 5,475 6,346 50,627
(In thousands)
Accumulated Date of Year of
Properties Total Depreciation Construction Acquisition
------ ------------ ----------- -----------
Valley Centre II 24,674 2,375 1980 1996
Valley Office Centre 11,716 1,033 1981 1996
Valley Centre 11,818 1,264 1980 1996
Valley Business Park II 17,392 1,770 1979 1996
Rio Robles 47,289 5,252 1985 1996
First Street Technology Center 8,692 981 1984 1997
Baytech Business Park 38,088 3,975 1998 1997
3571 North First Street 15,577 1,346 1985 1997
San Mateo Center I 15,728 1,341 1986 1997
Oakmead West Land A-G 64,425 8,381 1998 1997
San Mateo II & III 27,201 2,725 1985 1997
Hacienda West 32,776 3,852 1987 1998
Sunnyvale Technology Center 28,378 2,148 1971-1975 1998
Clarify Corporate Center 1, 2, 3, 4 48,616 5,204 1999 1998
Valley Technology Center 1, 2, 3,
4, 5, 6, 7 78,089 5,270 1998 1998
Golden Gateway Commons 76,244 7,436 1980-1984 1998
Techmart Commerce Center 38,713 5,232 1987 1998
Fremont Technology Park 1, 2, 3 20,362 2,189 1999 1998
Mountain View Gateway Center 51,583 895 1998 2001
Denver, CO:
Harlequin Plaza 34,832 7,026 1981 1996
Quebec Court I & II 32,601 6,845 1979-1980 1996
Quebec Centre 8,571 1,832 1985 1996
Dry Creek Corporate Center/1/ 29,831 634 1999-2001 1998
Seattle, WA:
Redmond East 42,432 8,448 1988-1992 1996
Redmond Hilltop B & C 10,463 2,548 1998 1996
Canyon Park 34,658 6,350 1989 1997
Willow Creek 8,760 1,088 1981 1997
Willow Creek Corp. Center 1, 2, 3,
4, 5, 6 46,451 9,315 1998 1997
Canyon Park Commons 1, 2, 4 36,163 3,651 1988,2000 1997
Canyon Point 9,300 - N/A 2000
Salt Lake City, UT:
Sorenson Research Park 33,246 4,795 1988-1997 1997
Sorenson XI 6,374 710 1999 1997
Wasatch Corporate Center 19,322 2,362 1996 1997
Wasatch Corporate Center 17, 18 14,247 2,228 1998-1999 1997
Wasatch Corporate Center 16 2,385 - N/A 1999
Creekside/1/ 11,638 530 2001 2000
Chicago, IL:
Parkway North I 35,547 6,511 1986-1989 1996
Unisys 56,973 10,011 1984-1985 1996
76
CarrAmerica Realty Corporation and Subsidiaries
Schedule III: Real Estate and Accumulated Depreciation as of December 31, 2001
Gross Amount at Which
(In thousands) Initial Costs Costs Carried at Close of Period
---------------------------- Capitalized --------------------------
Buildings and Subsequent to Building and
Properties Encumbrances Land Improvements Acquisition/3/ Land Improvements
--------------------------- ---------------- ----------- -------------- ---------------- --------- --------------
The Crossings - 5,268 34,215 3,900 5,289 38,094
Bannockburn I & II - 3,448 22,928 4,764 3,472 27,668
Bannockburn IV - 1,914 12,729 701 1,924 13,420
Austin, TX:
City View Centre - 1,718 13,854 1,706 1,720 15,558
City View Center - 1,890 - 13,713 2,106 13,497
Braker Pointe/1/ - 6,602 - 21,763 2,576 25,789
Tower of the Hills - 1,633 13,625 1,355 1,634 14,979
Dallas, TX:
Cedar Maple Plaza - 1,220 10,982 1,856 1,225 12,833
Quorum North - 1,357 9,078 1,699 1,368 10,766
Quorum Place - 1,941 14,234 1,937 1,954 16,158
Tollway Plaza 1, 2 - 2,960 - 47,739 3,959 46,740
Tollway Plaza 3 - 2,522 - 178 2,700 -
Royal Ridge IV & V - 6,586 - 1,015 7,601 -
Two Mission Park - 823 4,326 1,120 831 5,438
Commons @ Las Colinas 1, 3 - 9,990 - 95,402 10,033 95,359
5000 Quorum - 1,774 15,616 1,507 1,782 17,115
Phoenix, AZ:
Qwest Communications 35,901 18,517 74,069 786 18,641 74,731
Portland, OR:
Sunset Corporate Park - 4,932 - 13,566 4,507 13,991
Rock Creek Corp Center - 2,614 - 15,980 2,575 16,019
Atlanta, GA:
Glenridge - 1,423 4,871 478 1,292 5,480
Century Springs West 18,718 /5/ 1,642 7,646 (1,023) 1,280 6,985
Holcomb Place - 1,419 4,574 347 1,421 4,919
Midori - 1,802 6,715 3,007 2,320 9,204
Parkwood - 2,080 12,678 4,280 2,362 16,676
Lakewood - 1,040 6,789 653 1,055 7,427
The Summit - 2,237 15,027 1,238 2,241 16,261
Spalding Ridge - 1,550 4,950 8,045 1,678 12,867
2400 Lake Park Drive - 805 6,539 1,311 812 7,843
680 Engineering Drive - 559 3,420 543 563 3,959
Embassy Row - 7,916 36,907 6,223 7,959 43,087
Embassy 100, 500 - 4,328 - 28,843 4,351 28,820
Waterford Centre - 1,110 7,737 694 1,115 8,426
Forum/1/ - 1,732 - 9,915 - 11,647
Boca Raton, FL:
Peninsula Corporate Center - 2,933 - 3,936 6,869 -
------- ------- ------- ------- ------- -------
(In thousands)
Accumulated Date of Year of
Properties Total Depreciation Construction Acquisition
-------------------------- --------- -------------- ------------- -------------
The Crossings 43,383 7,479 1985 1997
Bannockburn I & II 31,140 5,265 1980 1997
Bannockburn IV 15,344 2,177 1988 1997
Austin, TX:
City View Centre 17,278 3,848 1985 1996
City View Center 15,603 2,980 1998 1996
Braker Pointe/1/ 28,365 772 2001 1997
Tower of the Hills 16,613 2,161 1986 1997
Dallas, TX:
Cedar Maple Plaza 14,058 2,215 1985 1997
Quorum North 12,134 2,059 1983 1997
Quorum Place 18,112 3,270 1981 1997
Tollway Plaza 1, 2 50,699 7,031 1998 1997
Tollway Plaza 3 2,700 - N/A 1997
Royal Ridge IV & V 7,601 - N/A 2000
Two Mission Park 6,269 1,120 1983 1997
Commons @ Las Colinas 1, 3 105,392 9,514 1999 1998
5000 Quorum 18,897 2,476 1984 1998
Phoenix, AZ:
Qwest Communications 93,372 10,068 1988 1997
Portland, OR:
Sunset Corporate Park 18,498 1,768 1999 1998
Rock Creek Corp Center 18,594 1,762 1999 1998
Atlanta, GA:
Glenridge 6,772 1,171 1986 1996
Century Springs West 8,265 1,427 1982 1996
Holcomb Place 6,340 914 1982 1996
Midori 11,524 1,600 1989 1996
Parkwood 19,038 3,496 1985 1996
Lakewood 8,482 1,411 1985 1996
The Summit 18,502 3,219 1986 1996
Spalding Ridge 14,545 3,029 1998 1996
2400 Lake Park Drive 8,655 1,521 1982 1997
680 Engineering Drive 4,522 814 1985 1997
Embassy Row 51,046 8,163 1983 1997
Embassy 100, 500 33,171 3,398 1998-1999 1997
Waterford Centre 9,541 1,216 1985 1998
Forum/1/ 11,647 - N/A 2000
Boca Raton, FL:
Peninsula Corporate Center 6,869 - N/A 1997
------- -------
77
CarrAmerica Realty Corporation and Subsidiaries
Schedule III: Real Estate and Accumulated Depreciation as of
December 31, 2001
Costs
(In thousands) Initial Costs Capitalized
---------------------------------
Buildings and Subsequent to
Properties Encumbrances Land Improvements Acquisition/3/
------------------------ --------------- --------------- --------------- ---------------
PROPERTY TOTALS 473,288 677,077 1,446,743 852,114
Intercompany elimination - - - (39,368)
--------------- --------------- --------------- ---------------
TOTAL $ 473,288 $ 677,077 $ 1,446,743 $ 812,746
=============== =============== =============== ===============
Gross Amount at Which
(In thousands) Carried at Close of Period
----------------------------------
Building and Accumulated Date of Year of
Properties Land Improvements Total Depreciation Construction Acquisition
--------------------- -------------- ------------------ ------------ ----------------- -------------- --------------
PROPERTY TOTALS 692,988 2,282,946 2,975,934 479,801
Intercompany elimination (46) (39,322) (39,368) (2,107)
-------------- ------------------ ------------ -----------------
TOTAL $ 692,942 $ 2,243,624 $2,936,566 $ 477,694
============== ================== ============ =================
Depreciation of rental properties is computed on a straight-line basis over the
estimated useful lives of the assets. The estimated lives of our assets by class
are as follows:
Base building 30 to 50 years
Building components 7 to 20 years
Tenant improvements Lesser of the terms of the leases or useful lives of the assets
Leasehold improvements, furniture, fixtures and equipment 5 to 15 years
The aggregate cost for federal income tax purposes was approximately
$2,483,444,000 at December 31, 2001.
The changes in total real estate assets and accumulated depreciation for the
three years ended December 31, 2001, 2000 and 1999 are as follows:
Real Estate Assets
----------------------------------------------
(In thousands) 2001 2000 1999
------------------------------------------ ------------ ------------- ------------
Balance, beginning of period $2,909,604 $ 3,287,885 $3,401,088
Discontinued operations - - (56,471)
Acquisitions 51,583 36,791 40,525
Improvements 86,821 176,866 345,716
Sales, retirements and write-offs (111,442) (591,938) (442,973)
----------- ------------- ------------
Balance, end of period $2,936,566 $ 2,909,604 $3,287,885
=========== ============= ============
Accumulated Depreciation
----------------------------------------------
(In thousands) 2001 2000 1999
------------------------------------------ ----------- ------------- ------------
Balance, beginning of period $ 381,260 $ 323,455 $ 257,215
Discontinued operations - - (11,264)
Depreciation for the period 107,557 110,052 114,388
Sales, retirements and
write-offs (11,123) (52,247) (36,884)
----------- ------------- ------------
Balance, end of period $ 477,694 $ 381,260 $ 323,455
=========== ============= ============
/1/ Under construction as of December 31, 2001. Construction costs are shown
under building and improvements until completion. At completion, costs will
be allocated between land and building and improvements.
/2/ We lease approximately 63,000 square feet of office space for our
headquarters.
/3/ Costs capitalized are offset by retirements and writeoffs.
/4/ Secured by Sunnyvale Technology Center, Highland Corporate Center and
Hacienda West.
/5/ Secured by Century Springs West, Glenridge, Midori, Lakewood and Parkwood.
/6/ Secured by International Square, 1730 Pennsylvania Avenue and 1255 23rd
Street.
78