UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-13274
Cali Realty Corporation
(Exact name of registrant as specified in its charter)
Maryland 22-3305147
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
11 Commerce Drive, Cranford, New Jersey 07016-3501
(Address of principal executive office)
(Zip Code)
(908) 272-8000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or such shorter period that the
Registrant was required to file such report) YES [ X ] NO [ ]
and (2) has been subject to such filing requirements for the past ninety (90)
days YES [ X ] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
There were 15,202,482 shares of $.01 par value common stock outstanding
at May 10, 1996.
CALI REALTY CORPORATION
Form 10-Q
INDEX
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995
Consolidated Statements of Operations for the three months
ended March 31, 1996 and 1995
Consolidated Statements of Cash Flows for the three months
ended March 31, 1996 and 1995
Consolidated Statement of Stockholders' Equity for the
three months ended March 31, 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II - Other Information and Signatures
Item 1. Exhibits
Signatures
CALI REALTY CORPORATION
Part I - Financial Information
Item 1 Financial Statements
The information furnished in the accompanying consolidated balance
sheets, statements of operations, of cash flows, and of stockholders'
equity reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the aforementioned
financial statements for the interim periods.
The aforementioned financial statements should be read in conjunction
with the notes to the aforementioned financial statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations and the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.
The results of operations for the three months ended March 31, 1996
are not necessarily indicative of the results to be expected for the
entire fiscal year or any other period.
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)
================================================================================
March 31, December 31,
1996 1995
--------- ---------
ASSETS
Rental property
Land ........................................... $ 40,758 $ 38,962
Buildings and improvements ..................... 321,520 319,028
Tenant improvements ............................ 28,989 28,588
Furniture, fixtures and equipment .............. 1,085 1,097
--------- ---------
392,352 387,675
Less - accumulated depreciation and amortization ... (58,431) (59,095)
--------- ---------
Total rental property .......................... 333,921 328,580
Cash and cash equivalents .......................... 1,494 967
Unbilled rents receivable .......................... 18,795 18,855
Deferred charges and other assets,
net of accumulated amortization .................. 11,024 10,873
Restricted cash .................................... 4,453 3,229
Accounts receivable, net of allowance for
doubtful accounts of $176 and $134 .............. 1,806 1,341
Other receivables .................................. 238 104
--------- ---------
Total assets ................................... $ 371,731 $ 363,949
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and loans payable ........................ $ 137,741 $ 135,464
Dividends and distributions payable ................ 7,608 7,606
Accounts payable and accrued expenses .............. 3,509 3,245
Rents received in advance and security deposits .... 4,775 3,114
Accrued interest payable ........................... 484 629
--------- ---------
Total liabilities .............................. 154,117 150,058
--------- ---------
Minority interest of unitholders in
Operating Partnership ........................... 27,683 28,083
--------- ---------
(Continued)
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued (in thousands, except per share amounts)
================================================================================
March 31, December 31,
1996 1995
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares,
none issued
Common stock, $.01 par value, 25,000,000 shares
authorized, 15,202,482 shares and 15,104,725
shares outstanding ............................. 152 151
Additional paid-in capital ......................... 186,741 185,657
Retained earnings .................................. 3,038 --
--------- ---------
Total stockholders' equity ..................... 189,931 185,808
--------- ---------
Total liabilities and stockholders' equity ..... $ 371,731 $ 363,949
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
====================================================================================
Three Months Ended March 31,
----------------------------
1996 1995
-------- --------
REVENUES
Base rents .............................................. $ 16,012 $ 11,240
Escalations and recoveries .............................. 3,081 2,121
Parking and other ....................................... 404 401
Interest income ......................................... 74 110
-------- --------
Total revenues ...................................... 19,571 13,872
-------- --------
EXPENSES
Real estate taxes ....................................... 1,959 1,314
Utilities ............................................... 1,882 1,365
Operating services ...................................... 2,803 1,862
General and administrative .............................. 936 933
Depreciation and amortization ........................... 3,294 2,832
Interest expense ........................................ 2,569 1,641
-------- --------
Total expenses ...................................... 13,443 9,947
-------- --------
Income before gain on sale of rental property,
minority interest and extraordinary item ............ 6,128 3,925
Gain on sale of rental property ......................... 5,658 --
-------- --------
Income before minority interest
and extraordinary item ............................ 11,786 3,925
Minority interest ....................................... 1,812 836
-------- --------
Income before extraordinary item ........................ 9,974 3,089
Extraordinary item-loss on early retirement of debt (net
of minority interest's share of $86) ............... 475 --
-------- --------
Net income .............................................. $ 9,499 $ 3,089
======== ========
(Continued)
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - Continued (in thousands, except per share amounts)
==========================================================================================
Three Months Ended March 31,
----------------------------
1996 1995
-------- --------
Net income per common share:
Income before extraordinary item-
loss on early retirement of debt .................... $ .66 $ .29
Extraordinary item-loss on early retirement of debt ..... (.03) --
-------- --------
Net income .............................................. $ .63 $ .29
======== ========
Dividends declared per common share ..................... $ .43 $ .40
======== ========
Weighted average shares outstanding ..................... 15,146 10,473
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
====================================================================================
Three Months Ended March 31,
----------------------------
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................. $ 9,499 $ 3,089
Adjustments to reconcile net income to net cash
flows provided by operating activities
Depreciation and amortization ...................... 3,294 2,832
Gain on sale of rental property .................... (5,658) --
Minority interest .................................. 1,812 836
Extraordinary item-loss on early retirement of debt 475 --
Changes in operating assets and liabilities
Increase in unbilled rents receivable .............. (69) (35)
Increase in deferred charges and other assets, net . (993) (553)
Increase in accounts receivable, net ............... (465) (68)
(Increase) decrease in other receivables ........... (134) 158
Decrease (increase) in accounts payable and
accrued expenses ................................ 264 (440)
Increase in rents received in advance and
security deposits ............................... 1,661 405
(Decrease) increase in accrued interest payable .... (145) 162
-------- --------
Net cash provided by operating activities ............ 9,541 6,386
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to rental property ........................... (12,400) (2,700)
Proceeds from sale of rental property .................. 10,147 --
Increase in restricted cash ............................ (1,224) (537)
-------- --------
Net cash used in investing activities ................ (3,477) (3,237)
-------- --------
(Continued)
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued (in thousands)
====================================================================================
Three Months Ended March 31,
----------------------------
1996 1995
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and loans payable .............. 36,300 --
Repayments of mortgages and loans payable .............. (34,023) --
Debt prepayment premiums and other costs ............... (312) --
Purchase of treasury stock ............................. -- (1,595)
Proceeds from stock options exercised .................. 106 --
Payment of dividends and distributions ................. (7,608) (5,371)
-------- --------
Net cash used in financing activities ................ (5,537) (6,966)
-------- --------
Net increase (decrease) in cash and cash equivalents ... 527 (3,817)
Cash and cash equivalents, beginning of period ......... 967 6,394
-------- --------
Cash and cash equivalents, end of period ............... $ 1,494 $ 2,577
======== ========
Supplemental Cash Flow Information:
Cash paid for interest ................................. $ 2,796 $ 1,479
======== ========
Interest capitalized ................................... $ 82 $ --
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands)
=====================================================================================================
Additional Total
Common Stock Paid-In Retained Stockholders'
Shares Par Value Capital Earnings Equity
--------- --------- --------- --------- ---------
Balance at January 1, 1996 .......... 15,105 $ 151 $ 185,657 -- $ 185,808
Conversions of 92 Units to shares ... 92 1 978 -- 979
Net income .......................... -- -- -- 9,499 9,499
Dividends ........................... -- -- -- (6,461) (6,461)
Stock options exercised ............. 6 -- 106 -- 106
--------- --------- --------- --------- ---------
Balance at March 31, 1996 ........... 15,203 $ 152 $ 186,741 $ 3,038 $ 189,931
========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
CALI REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
================================================================================
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization Cali Realty Corporation (the "Company"), a Maryland
corporation, is a fully integrated, self-
administered, self-managed real estate investment
trust (REIT) providing leasing, management,
acquisition, development, construction and tenant-
related services for its properties. As of March 31,
1996, the Company owned and operated 40 Class A
office and office/flex buildings totaling
approximately 3.9 million square feet and a 327 unit
residential complex. The properties are located in
New Jersey and New York.
The Company was incorporated on May 24, 1994 and
commenced operations on August 31, 1994. On August
31, 1994, the Company completed an initial public
offering and effected a business combination with the
Cali Group (not a legal entity.) The Company raised
(net of offering costs) approximately $165,518 of
capital through an initial public offering (the
"Offering") of 10,500,000 shares of common stock, and
used the proceeds to acquire a 78.94 percent interest
in Cali Realty, L.P. (the "Operating Partnership")
and related entities, which were formed just prior to
consummation of the Offering and are the successors
to the operations of the Cali Group. Prior to the
completion of the business combination with the
Company, the Cali Group consisted principally of the
property partnerships set forth below, which were
engaged in development, ownership and operation of a
portfolio of twelve office buildings and one
multi-family residential property located in New
Jersey (the "Initial Properties"), and the real
estate leasing, management, acquisition, development
and construction business of Cali Associates.
PROPERTY PARTNERSHIPS PROPERTY LOCATION
--------------------- -----------------
Grove Street Associates of Jersey City Limited Partnership Jersey City, NJ
-----------------------------------------------------------------------------------------
Office Associates, Ltd. Roseland, NJ
-----------------------------------------------------------------------------------------
500 Columbia Turnpike Associates Florham Park, NJ
-----------------------------------------------------------------------------------------
C.W. Associates Clark, NJ
-----------------------------------------------------------------------------------------
Chestnut Ridge Associates Woodcliff Lake, NJ
-----------------------------------------------------------------------------------------
Roseland II Limited Partnership Roseland, NJ
-----------------------------------------------------------------------------------------
20 Commerce Drive Associates Cranford, NJ
-----------------------------------------------------------------------------------------
Century Plaza Associates Paramus, NJ
-----------------------------------------------------------------------------------------
D.B.C. Associates Clifton, NJ
-----------------------------------------------------------------------------------------
11 Commerce Drive Associates Cranford, NJ
-----------------------------------------------------------------------------------------
Cali Building V Associates Cranford, NJ
-----------------------------------------------------------------------------------------
6 Commerce Drive Associates Cranford, NJ
-----------------------------------------------------------------------------------------
Tenby Chase Apartments Delran, NJ
-----------------------------------------------------------------------------------------
Prior to and simultaneous with the consummation of the Offering, the
Company, the Operating Partnership and related entities and the Cali Group
engaged in certain formation transactions summarized as follows:
(i) The Cali Group contributed all their interests in the Initial
Properties to the Operating Partnership in exchange for units in the
Operating Partnership ("Units.") Certain non-continuing partners in
certain of the Initial Properties received cash in exchange for
their interests therein;
(ii) Concurrently with the Offering, the Cali Group transferred from the
property partnerships an aggregate of $5,175 in exchange for 300,000
Units (the "Concurrent Placement");
(iii) The Company contributed the net proceeds from the Offering to the
Operating Partnership in exchange for the Units. The Operating
Partnership used substantially all of such net proceeds, together
with the net proceeds from the Mortgage Financing (Note 5), and the
cash proceeds of the Concurrent Placement, described above, to repay
certain indebtedness on the Initial Properties, to purchase certain
land previously leased and to acquire the interests of certain
non-continuing partners;
(iv) The Operating Partnership acquired all of the non-voting preferred
stock of, and a 99 percent economic interest in, Cali Services, Inc.
("CSI"), an entity formed to engage in third party property
management services.
In 1994 and 1995, following the Company's initial public offering, the
Company acquired 28 office and office/flex properties totaling 1,723,000
square feet for approximately $157,000. The acquisition properties are all
located in New Jersey and New York.
On March 20, 1996, the Company sold its office building located at 15
Essex Road in Paramus, New Jersey ("Essex Road") and concurrently acquired
a 95,000 square foot office building at 103 Carnegie Center in Princeton,
New Jersey. The concurrent transactions qualified as a tax free exchange,
as the Company used substantially all of the proceeds from the sale of
Essex Road to acquire the Princeton property. The financial statements for
the three months ended March 31, 1996 include a gain of $5,658 relating to
this transaction.
In advance of the sale of Essex Road, on March 12, 1996, the Company
prepaid $5,492 of the Mortgage Financing (Note 5) and obtained a release
of the mortgage liens on the property. On account of prepayment penalties,
loan origination fees, legal fees and other costs incurred in the
retirement of the debt, an extraordinary loss of $475, net of minority
interest's share of the loss ($86), was recorded for the three months
ended March 31, 1996.
On May 2, 1996, the Company acquired Rose Tree Corporate Center, a
two-building suburban office complex totaling approximately 260,000 square
feet located in Media, Pennsylvania. The complex was acquired for
approximately $28 million, which was drawn on one of the Company's credit
facilities.
Basis of
Presentation The accompanying consolidated financial statements
include all accounts of the Company and its majority
owned subsidiaries which consist principally of the
Operating Partnership. The Company's investment in
CSI is accounted for under the equity method.
All significant intercompany accounts and
transactions have been eliminated.
The preparation of financial statements in conformity
with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
Rental Property Rental properties are stated at cost less accumulated
depreciation. Costs include interest, property taxes,
insurance and other project costs incurred during the
period of construction. Ordinary repairs and
maintenance are expensed as incurred; major
replacements and betterments are capitalized and
depreciated over their estimated useful lives. Fully
depreciated assets are removed from the accounts.
Depreciation is computed on a straight-line basis
over the estimated useful lives of the assets as
follows:
-----------------------------------------------------
Buildings and improvements 40 years
-----------------------------------------------------
Tenant improvements The shorter of the term
of the related lease or
useful lives
-----------------------------------------------------
Furniture, fixtures and equipment 5 to 10 years
-----------------------------------------------------
On a periodic basis, management assesses whether
there are any indicators that the value of the real
estate properties may be impaired. A property's value
is impaired only if management's estimate of the
aggregate future cash flows (undiscounted and without
interest charges) to be generated by the property are
less than the carrying value of the property.
Management does not believe that the value of any of
its real estate properties are impaired.
Deferred
Financing Costs Costs incurred in obtaining financing are capitalized
and amortized on a straight-line basis, which
approximates the effective interest method, over the
term of the related indebtedness. Amortization of
such costs were $261 and $441 for the three months
ended March 31, 1996 and 1995, respectively.
Deferred
Leasing Costs Costs incurred in connection with leases are
capitalized and amortized on a straight-line basis
over the terms of the related leases. Unamortized
deferred leasing costs are charged to amortization
expense upon early termination of the lease.
Revenue
Recognition The Company recognizes base rental revenue on a
straight-line basis over the terms of the respective
leases. Unbilled rents receivable represents the
amount by which straight-line rental revenue exceeds
rents currently billed in accordance with the lease
agreements. Parking revenue includes income from
parking spaces leased to tenants.
Rental income on residential property under operating
leases having terms generally of one year or less is
recognized when earned.
Cash and Cash
Equivalents All highly liquid investments with a maturity of
three months or less when purchased are considered to
be cash equivalents.
Income and
Other Taxes The Company has elected to be taxed as a REIT under
Sections 856 through 860 of the Code. As a REIT, the
Company will not be subject to federal income tax to
the extent it distributes at least 95 percent of its
REIT taxable income to its shareholders. REITs are
subject to a number of organizational and operational
requirements. If the Company fails to qualify as a
REIT in any taxable year, the Company will be subject
to federal income tax (including any applicable
alternative minimum tax) on its taxable income at
regular corporate tax rates. The Company may be
subject to certain state and local taxes.
Net Income
Per Share Net income per share is computed using the weighted
average common shares outstanding during the period.
The weighted average shares outstanding during the
three months ended March 31, 1996 and 1995 were
15,146,089 and 10,473,333, respectively. The assumed
exercise of outstanding stock options using the
Treasury Stock method is not considered dilutive.
Dividends and
Distributions
Payable The dividends and distributions payable at March 31,
1996 represents dividends payable to shareholders of
record on April 3, 1996 (15,202,482 shares) and
distributions payable to minority interest
unitholders (2,699,002 Units) on that same date. The
first quarter dividends and distributions of $.425
per share and per Unit were approved by the Board of
Directors on March 20, 1996 and were paid on April
19, 1996.
3. RESTRICTED CASH
Restricted cash includes security deposits for the residential property, and
escrow and reserve funds for debt service, real estate taxes, property
insurance, capital improvements, tenant improvements, and leasing costs
established pursuant to certain mortgage financing arrangements and is
comprised of the following:
March 31, December 31,
1996 1995
------ ------
Escrow and other reserve funds ............... $4,130 $2,901
Residential security deposits ................ 323 328
------ ------
Total restricted cash ..................... $4,453 $3,229
====== ======
4. DEFERRED CHARGES AND OTHER ASSETS
March 31, December 31,
1996 1995
-------- --------
Deferred leasing costs ......................... $ 12,704 $ 13,498
Deferred financing costs ....................... 5,300 5,778
-------- --------
18,004 19,276
Accumulated amortization ....................... (7,628) (9,035)
-------- --------
Deferred charges, net .......................... 10,376 10,241
Prepaid expenses and other assets .............. 648 632
-------- --------
Total deferred charges and other assets ..... $ 11,024 $ 10,873
======== ========
5. MORTGAGES AND LOANS PAYABLE
March 31, December 31,
1996 1995
-------- --------
Mortgage Financing [a] ................... $ 64,508 $ 70,000
Fair Lawn Property Loan [b] .............. 18,733 18,764
Initial Credit Facility [c] .............. 28,500 46,700
Additional Credit Facility [d] ........... 26,000 --
-------- --------
$137,741 $135,464
======== ========
[a] Concurrent with the Company's initial public
offering, the Company's initial operating
subsidiaries, which own the Initial Properties,
issued five-year mortgage notes with an aggregate
principal balance of $144,500 secured and cross-
collateralized by the Initial Properties to an
affiliate ("PSI") of Prudential Securities Inc. PSI
then issued commercial mortgage pay-through bonds
("Bonds") collateralized by the mortgage notes. Bonds
with an aggregate principal balance of $70,000 were
purchased by unrelated third parties. Bonds with an
aggregate principal balance of $74,500 were purchased
by the Company. As a result, the Company's initial
mortgage financing was $70,000, (the "Mortgage
Financing"). Approximately $38,000 of the $70,000 is
guaranteed under certain conditions by certain
partners of the partnerships which owned the Initial
Properties. The Mortgage Financing requires monthly
payments of interest only, with all principal and any
accrued but unpaid interest due in August 1999.
$46,000 of the $70,000 Mortgage Financing bears
interest at a net cost to the Company equal to a
fixed rate of 8.02 percent per annum and the
remaining $24,000 bears interest at a net cost to the
Company equal to a floating rate of 100 basis points
over 30-day London Inter Bank Offered Rate (LIBOR)
with a lifetime interest rate cap of 11.6 percent.
In advance of the sale of Essex Road, on March 12,
1996, the Company prepaid $5,492 ($1,687-fixed rate,
$3,805-floating rate debt) of the Mortgage Financing,
resulting in outstanding balances at March 31, 1996
of $44,313 for the 8.02 percent fixed rate debt and
$20,195 for the floating rate debt.
[b] In connection with the acquisition of an office
building in Fair Lawn, New Jersey on March 3, 1995,
the Company assumed an $18,764 non-recourse mortgage
loan bearing interest at a fixed rate of 8.25 percent
per annum. The loan requires payment of interest only
through March 15, 1996 and payment of principal and
interest thereafter, on a 20 year amortization
schedule, with the remaining principal balance due
October 1, 2003.
[c] The Company has a $70,000 revolving credit facility
("Initial Credit Facility"), which may be used to
fund acquisitions and new development projects and
for general working capital purposes, including
capital expenditures and tenant improvements. In
connection with the Initial Mortgage Financing, the
Company obtained a $6,005 letter of credit, secured
by the Initial Credit Facility, to meet certain
tenant improvement and capital expenditure reserve
requirements. The Initial Credit Facility currently
bears interest at a floating rate equal to 150 basis
points over LIBOR. The Initial Credit Facility is a
recourse liability of the Operating Partnership and
is secured by a pledge of the $74,500 Bonds held by
the Company. The Initial Credit Facility requires
monthly payments of interest only, with outstanding
advances and any accrued but unpaid interest due
February 28, 1997 and is subject to renewal at the
lender's sole discretion. The Initial Credit Facility
also requires a fee equal to one quarter of one
percent of the unused balance payable quarterly in
arrears. Since March 31, 1996, the Company has repaid
$23,200 and drawn $30,700 on the Initial Credit
Facility.
[d] On February 1, 1996, the Company obtained an
additional credit facility (the "Additional Credit
Facility") secured by certain of its properties in
the amount of $75,000 from two participating banks.
The Additional Credit Facility has a three- year term
and bears interest at 150 basis points over 30-day
LIBOR. The terms of the Additional Credit Facility
include certain restrictions and covenants which
limit, among other things, dividend payments and
additional indebtedness and which require compliance
with specified financial ratios and other financial
measurements. The Additional Credit Facility also
requires a fee equal to one quarter of one percent of
the unused balance payable quarterly in arrears.
Since March 31, 1996, the Company has drawn $24,000
on the Additional Credit Facility.
Interest Rate Swap Agreements:
On May 24, 1995, the Company entered into an interest rate swap agreement
with a commercial bank. The swap agreement fixes the Company's one-month
LIBOR base to a fixed 6.285 percent per annum on a notional amount of
$24,000 through August 1999.
On January 23, 1996, the Company entered into an interest rate swap
agreement with one of the participating banks in its Additional Credit
Facility. The swap agreement has a three-year term and a notional amount
of $26,000 which fixes the Company's one-month LIBOR base to 5.265 percent
(with a 150 basis point spread, an interest rate of 6.765 percent) on its
floating rate credit facilities.
The Company is exposed to credit loss in the event of non-performance by
the other parties to the interest rate swap agreements. However, the
Company does not anticipate non-performance by either counterparty.
6. MINORITY INTEREST
In conjunction with the Company's initial public offering, individuals
contributing interests to the Operating Partnership had the right to elect
either to receive common stock of the Company or Units. A Unit and a share
of common stock of the Company have substantially the same economic
characteristics in as much as they effectively share equally in the net
income or loss of the Operating Partnership. Minority interest in the
accompanying consolidated financial statements relates to Units held by
parties other than the Company.
Beginning one year after the closing of the Company's initial public stock
offering (which occurred on August 31, 1994), certain Units are able to be
redeemed by the unitholders on the basis of one Unit for either one share
of common stock or cash equal to the fair market value of a share at the
time of the redemption. When a Unit is redeemed for common stock, minority
interest is reduced and the Company's investment in the Operating
Partnership is increased. During the three months ended March 31, 1996,
91,614 Units were redeemed for common stock of the Company.
7. RELATED PARTY TRANSACTIONS
Certain employees of the Operating Partnership provide leasing services to
the Properties and receive fees as compensation ranging from .667 percent
to 2.667 percent of adjusted rents. For the three months ended March 31,
1996 and 1995, such fees, which are capitalized and amortized,
approximated $80 and $132, respectively.
8. SIGNIFICANT TENANT
At March 31, 1996, Donaldson, Lufkin and Jenrette Securities Corporation
("DLJ") leased approximately 55 percent of the space in the 95 Christopher
Columbus Drive, Jersey City property. Total rental income from DLJ,
including escalations and recoveries, was $2,424 and $2,431 for the three
months ended March 31, 1996 and 1995, respectively. At March 31, 1996 and
December 31, 1995, respectively, unbilled rents receivable included
$12,351 and $12,164 from DLJ.
On April 9, 1996, the Company signed a lease with DLJ for an additional
73,200 square feet of space at its Jersey City property. The 13-year lease
is scheduled to commence on June 1, 1996, and will increase the tenant's
occupancy in the building to approximately 66 percent.
9. STOCK OPTION PLAN
In 1994, the Company established the Cali Employee Stock Option Plan
("Employee Plan") and the Cali Director Stock Option Plan ("Directors
Plan") under which a total of 1,330,188 (subject to adjustment) of the
Company's shares of common stock have been reserved for issuance. Options
granted under the Employee Plan generally become exercisable over a three
to five year period, while options under the Directors Plan become
exercisable in one year. All options were granted at not less than fair
market value at dates of grant and have a term of ten years.
Information regarding the Company's stock option plans is summarized
below:
Cali Employee Cali Director
Stock Option Stock Option
Shares under option: Plan Plan
-------------------- ------------- -------------
Granted on August 31, 1994 at $17.25 per share 600,000 25,000
----------------------------------------------------------------------------------------------
Outstanding at December 31, 1994 600,000 25,000
Granted at $17.25-$19.875 per share 220,200 10,000
Less--
Lapsed or canceled (3,588) --
----------------------------------------------------------------------------------------------
Outstanding at December 31, 1995 816,612 35,000
Granted at $21.50 per share 361,750 --
Less--
Lapsed or canceled (4,447) --
Exercised at $17.25 per share (1,143) (5,000)
----------------------------------------------------------------------------------------------
Outstanding at March 31, 1996 1,172,772 30,000
$17.25-$21.50 per share
----------------------------------------------------------------------------------------------
Exercisable at March 31, 1996 271,124 30,000
----------------------------------------------------------------------------------------------
Available for grant at December 31, 1995 463,576 15,000
----------------------------------------------------------------------------------------------
Available for grant at March 31, 1996 106,273 15,000
----------------------------------------------------------------------------------------------
10. EMPLOYEE BENEFIT PLAN
All employees of the Company who meet certain minimum age and period of
service requirements are eligible to participate in a Section 401(k) plan
(the "Plan") as defined by the Internal Revenue Code. The Plan allows
eligible employees to defer up to 15 percent of their annual compensation.
The amounts contributed by employees are immediately vested and
non-forfeitable. The Company, at management's discretion, may match
employee contributions. No employer contributions have been made to date.
11. COMMITMENTS AND CONTINGENCIES
Pursuant to the terms of the Mortgage Financing, the Company is required
to escrow $143 per month for tenant improvements and leasing commissions
and $53 per month for capital improvements.
Pursuant to an agreement with the City of Jersey City, New Jersey expiring
in 2009, the Company is required to make payments in lieu of property
taxes ("PILOT") on its property in Jersey City. Such PILOT is determined
based on the greater of 2 percent of the property cost, as defined, or
$1,131 per annum, through 1999 and 2.5 percent, or $1,414 per annum,
through 2004.
12. TENANT LEASES
The Properties are leased to tenants under operating leases with various
expiration dates through 2009. Substantially all of the leases provide for
annual base rents plus recoveries and escalation charges based upon the
tenant's proportionate share of and/or increases in real estate taxes and
certain operating costs as defined and the pass through of charges for
electrical usage.
13. STOCKHOLDERS' EQUITY
To maintain its qualification as a REIT, not more than 50 percent in value
of the outstanding shares of the Company may be owned, directly or
indirectly, by five or fewer individuals (defined to include certain
entities), applying certain constructive ownership rules. To help ensure
that the Company will not fail this test, the Company's Articles of
Incorporation provides for, among other things, certain restrictions on
the transfer of the common stock to prevent further concentration of stock
ownership. Moreover, to evidence compliance with these requirements, the
Company must maintain records that disclose the actual ownership of its
outstanding common stock and will demand written statements each year from
the holders of record of designated percentages of its common stock
requesting the disclosure of the beneficial owners of such common stock.
On March 7, 1995, the Board of Directors authorized the Company to
purchase up to 100,000 shares of its outstanding common stock so that the
total number of shares and Units may be reduced to approximately
13,300,000. On March 8, 1995, the Company purchased, for constructive
retirement, 100,000 shares of its outstanding common stock for $1,595. The
excess of the purchase price over par value was recorded as a reduction to
additional paid-in capital. Concurrent with this purchase, the Company
sold to the Operating Partnership 100,000 Units for $1,595.
On November 6, 1995, the Company completed a second public offering of
4,000,000 shares of its common stock at $19.50 per share (the "Second
Offering"). Net proceeds to the Company after the underwriting discounts
and other offering costs were approximately $72,512 which was used along
with funds drawn on the Initial Credit Facility to acquire certain
properties.
On November 17, 1995, pursuant to an over-allotment option granted to the
underwriters of the Second Offering, the Company issued an additional
600,000 shares of its common stock at $19.50 per share. Net proceeds to
the Company after underwriting discounts totaled approximately $11,082,
which was used to repay an equal amount of indebtedness on the Initial
Credit Facility.
* * * *
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of Cali Realty Corporation and the notes
thereto.
The following comparisons are for the three months ended March 31, 1996
("1996,") as compared to the three months ended March 31, 1995 ("1995.")
References are made to the "Pre-Acquisition Properties," which is
comprised of all properties owned by the Company at December 31, 1994, as
well as "Acquired Properties," which refers to all properties acquired by
the Company since January 1, 1995.
Three Months Ended March 31, 1996 Compared to Three Months Ended
March 31, 1995
Total revenues increased $5.7 million, or 41.1 percent, for the three
months ended March 31, 1996 over 1995. Base rents increased $4.8 million,
or 42.5 percent, of which $5.2 million, or 46 percent, was attributable to
the Acquired Properties, offset by a decrease of $0.4 million, or 3.6
percent, primarily as a result of occupancy changes at the Pre-Acquisition
Properties. Escalations and recoveries increased $1.0 million, or 45.3
percent, substantially all of which was attributable to the Acquired
Properties.
Total expenses for the three months ended March 31, 1996 increased $3.5
million, or 35.1 percent, as compared to the same period in 1995. Interest
expense increased by $0.9 million, or 56.5 percent, primarily due to an
increase in indebtedness resulting from drawings on the Company's credit
facilities in connection with property acquisitions. Real estate taxes
increased $0.6 million, or 49.1 percent, for 1996 over 1995 due to the
Acquired Properties. Additionally, operating services increased $0.9
million, or 50.6 percent, and utilities increased $0.5 million, or 38
percent. The aggregate increase in operating services and utilities of
$1.4 million, or 45.3 percent, consists of $1.2 million, or 38.8 percent,
attributable to the Acquired Properties, and $0.2 million, or 6.5 percent,
for the Pre-Acquisition Properties due primarily to a harsher winter in
1996. Depreciation and amortization increased $0.5 million, or 16.3
percent, for 1996 over 1995, of which $0.8 million relates to depreciation
on the Acquired Properties, offset by decreases of $0.1 million for
depreciation on the Pre-Acquisition Properties and $0.2 million for
amortization of deferred financing costs.
Income before minority interest and extraordinary item increased to $11.8
million in 1996 from $3.9 million in 1995. The increase of $7.9 million
was due to the gain on sale of a rental property of $5.7 million in 1996,
as well as to the factors discussed above.
Net income increased $6.4 million for the three months ended March 31,
1996 from $3.1 million (net of minority interest of $0.8 million) in 1995
to $9.5 million (net of minority interest of $1.8 million) in 1996, as a
result of an increase in income before minority interest and extraordinary
item of $7.9 million partially offset by recognition in 1996 of a $0.5
million (net of minority interest's share of $0.1 million) extraordinary
item - loss on early retirement of debt.
Liquidity and Capital Resources
Statement of Cash Flows
During the three months ended March 31, 1996, the Company generated $9.5
million in cash flow from operating activities, and, along with $10.1
million of proceeds from the sale of a rental property, $7.8 million in
net borrowings on its credit facilities and $0.1 million of proceeds from
stock options exercised, used an aggregate $27.5 million to (i) purchase a
rental property for $10.4 million, (ii) acquire tenant improvements and
building improvements for $2.0 million, (iii) pay quarterly dividends and
distributions of $7.6 million, (iv) prepay a portion of its mortgage notes
in the amount of $5.5 million, (v) increase the escrow cash balances
relating to the Mortgage Financing by $1.2 million, (vi) pay debt
prepayment penalties and other related costs of $0.3 million, and (vii)
increase its cash and cash equivalents balance by $0.5 million.
Capitalization
On November 6, 1995, the Company completed its Second Offering of
4,000,000 shares of common stock, $.01 par value, at $19.50 per share. The
proceeds of the Second Offering, net of offering costs, were approximately
$72.5 million. The Company used these funds along with funds drawn on the
Initial Credit Facility to acquire certain properties, as fully described
in the Company's Form 10-K for the year ended December 31, 1995.
On November 17, 1995, pursuant to an over-allotment option granted to the
underwriters of the Second Offering, the Company issued an additional
600,000 shares of its common stock, $.01 par value, at $19.50 per share.
Net proceeds to the Company after underwriting discounts were
approximately $11.1 million which were used to repay an equal amount of
indebtedness under the Initial Credit Facility.
On February 1, 1996, the Company obtained from two participating banks the
$75 million Additional Credit Facility. The Additional Credit Facility
bears interest at a floating rate equal to 150 basis points over LIBOR.
The Additional Credit Facility is also subject to certain financial
covenants, including the ratio of earnings before interest, taxes,
depreciation and amortization to debt service, minimum net worth and
debt-to-market capitalization. In addition, the Additional Credit Facility
restricts distributions by the Company in excess of 100 percent of Funds
from Operations for three successive quarters, provided that the Company
retains the right to make distributions necessary to maintain its status
as a REIT. The Additional Credit Facility is secured by a first lien
mortgage on certain of the Company's properties. Additional Credit
Facility borrowings are recourse to the Operating Partnership and
guaranteed by the Company.
On May 24, 1995, the Company entered into an interest rate swap agreement
with a commercial bank. The swap agreement fixes the Company's one-month
LIBOR base to a fixed 6.285 percent per annum on a notional amount of
$24,000 through August 1999.
In addition, on January 23, 1996, the Company entered into a second
interest rate swap agreement with one of the participating banks in its
Additional Credit Facility. This swap agreement has a three-year term and
a notional amount of $26,000 which fixes the Company's one-month LIBOR
base at 5.265 percent on its floating rate credit facilities.
On March 20, 1996, the Company sold its office building located at 15
Essex Road in Paramus, New Jersey ("Essex Road") and concurrently acquired
a 95,000 square foot office building at 103 Carnegie Center in Princeton,
New Jersey. The concurrent transactions qualified as a tax free exchange,
as the Company used substantially all of the proceeds from the sale of
Essex Road to acquire the Princeton property. The financial statements for
the three months ended March 31, 1996 include a gain of $5,658 relating to
this transaction.
On May 2, 1996, the Company acquired Rose Tree Corporate Center, a
two-building suburban office complex totaling approximately 260,000 square
feet, located in Media, Pennsylvania. The complex was acquired for
approximately $28 million which was drawn on the Initial Credit Facility.
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and capital expenditures, excluding
non-recurring capital expenditures. Management believes that the Company
will have access to the capital resources necessary to expand and develop
its business. To the extent that the Company's cash flow from operating
activities is insufficient to finance its non-recurring capital
expenditures such as property acquisition costs and other capital
expenditures, the Company expects to finance such activities through the
credit facilities and other debt and equity financing.
The Company presently has no plans for major capital improvements to the
existing properties, other than normal recurring expenditures. The Company
expects to meet its short-term liquidity requirements generally through
its working capital and net cash provided by operating activities along
with the Initial Credit Facility and Additional Credit Facility. The
Company expects to meet certain of its financing requirements through
long-term borrowings and the issuance of debt securities or additional
equity securities. In addition, the Company anticipates utilizing the
Initial Credit Facility and Additional Credit Facility primarily to fund
property acquisition activities.
The Company does not intend to reserve funds to retire the existing
Mortgage Financing, indebtedness under the credit facilities or other
mortgages and loans payable upon maturity. Instead, the Company will seek
to refinance such debt at maturity or retire such debt through the
issuance of additional equity securities. The Company anticipates that its
available cash and cash equivalents and cash flows from operating
activities, together with cash available from borrowings and other
sources, will be adequate to meet the Company's capital and liquidity
needs both in the short and long-term. However, if these sources of funds
are insufficient or unavailable, the Company's ability to make the
expected distributions discussed below may be adversely affected.
To maintain its qualification as a real estate investment trust, the
Company must make annual distributions to its stockholders of at least 95
percent of its REIT taxable income, excluding the dividends paid deduction
and net capital gains. Moreover, the Company intends to make regular
quarterly distributions to its stockholders which, based upon current
policy, in the aggregate would equal approximately $25.8 million on an
annual basis. However, any such distribution, whether for federal income
tax purposes or otherwise, would only be paid out of available cash after
meeting both operating requirements and scheduled debt service on
mortgages and loans payable and required annual capital expenditure
reserves pursuant to its mortgage indenture.
Funds From Operations
The Company considers Funds from Operations after adjustment for the
straight-lining of rents one measure of REIT performance. Funds from
Operations is defined as net income (loss) before minority interest of
unitholders, computed in accordance with Generally Accepted Accounting
Principles, excluding gains (or losses) from debt restructuring and sales
of property, plus real estate-related depreciation and amortization. Funds
from Operations should not be considered as an alternative to net income
as an indication of the Company's performance or to cash flows as a
measure of liquidity.
Funds from Operations for the three months ended March 31, 1996 and 1995,
as calculated in accordance with the National Association of Real Estate
Investment Trusts definition published in March 1995, are summarized in
the following table (in thousands):
Three Months Ended:
--------------------
March 31, March 31,
1996 1995
-------- --------
Income before minority interest, gain on sale of property $ 6,128 $ 3,925
and extraordinary item
Add: Real estate-related depreciation and amortization 3,020 2,370
-------- --------
Funds from Operations .................................... 9,148 6,295
Deduct: Rental income adjustment for straight-lining
of rents ........................................... (69) (34)
-------- --------
Funds from Operations after adjustments for
straight-lining of rents ............................... $ 9,079 $ 6,261
======== ========
Weighted average shares outstanding (1) .................. 17,897 13,307
======== ========
(1) Assumes redemption of all Units, calculated on a weighted average basis,
for shares of common stock in the Company.
Inflation
The Company's leases with the majority of its tenants provide for
recoveries and escalation charges based upon the tenant's proportionate
share of and/or increases in real estate taxes and certain operating
costs, which reduce the Company's exposure to increases in operating costs
resulting from inflation.
CALI REALTY CORPORATION
Part II -- Other Information and Signatures
Item 6. Exhibits
The following exhibits are filed herewith:
10.35 Agreement of Sale and Purchase, dated February 28, 1996,
between Adwin Realty Company and LBA Associates, collectively
as Seller, and J. Brian O'Neill, or his Nominees or Assignees,
as Buyer.
10.36 Purchase Agreement, dated March 11, 1996 between Keller
Carnegie Associates, as Seller, and Century Plaza Associates,
as Purchaser.
10.37 Agreement of Assignment of Real Estate Sale Agreement, dated
April 26, 1996, between J. Brian O'Neill, as Contract Vendee,
and Cal-Tree Realty Associates L.P., as Assignee.
10.38 Agreement of Assignment, dated May 1, 1996, between J. Brian
O'Neill, as Assignor, and Bryemere L.P., as Assignee.
10.39 Amendment to Agreement of Assignment of Real Estate Agreement,
dated May 2, 1996, between Bryemere L.P., as Assignor, and
Cal-Tree Realty Associates L.P., as Assignee.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cali Realty Corporation
-----------------------
(Registrant)
/s/ Barry Lefkowitz
-------------------------------------
Date: May 14, 1996 Barry Lefkowitz
Chief Financial Officer
(signing on behalf of the Registrant)