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 June 30, 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
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(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 15,206,361 shares of $.01 par value common stock outstanding
at August 6, 1996.
CALI REALTY CORPORATION
Form 10-Q
INDEX
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995
Consolidated Statements of Operations for the three and six
month periods ended June 30, 1996 and 1995
Consolidated Statement of Cash Flows for the six months
ended June 30, 1996 and 1995
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 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 (consisting of normal, recurring
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 and six month periods ended
June 30, 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)
- ----------------------------------------------------------------------------------
June 30, December 31,
1996 1995
--------- ---------
ASSETS
Rental property
Land ................................................ $ 43,797 $ 38,962
Buildings and improvements .......................... 348,013 319,028
Tenant improvements ................................. 33,366 28,588
Furniture, fixtures and equipment ................... 1,099 1,097
--------- ---------
426,275 387,675
Less - accumulated depreciation and amortization ........ (61,310) (59,095)
--------- ---------
Total rental property ............................... 364,965 328,580
Cash and cash equivalents ............................... 1,907 967
Unbilled rents receivable ............................... 18,930 18,855
Deferred charges and other assets,
net of accumulated amortization ..................... 11,297 10,873
Restricted cash ......................................... 3,785 3,229
Accounts receivable, net of allowance for
doubtful accounts of $157 and $134 .................. 1,326 1,341
Other receivables ....................................... 56 104
--------- ---------
Total assets ........................................ $ 402,266 $ 363,949
========= =========
(Continued)
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)
- ----------------------------------------------------------------------------------
(Continued)
June 30, December 31,
1996 1995
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and loans payable ............................. $ 169,147 $ 135,464
Dividends and distributions payable ..................... 7,610 7,606
Accounts payable and accrued expenses ................... 4,044 3,245
Rents received in advance and security deposits ......... 4,214 3,114
Accrued interest payable ................................ 485 629
--------- ---------
Total liabilities ................................... 185,500 150,058
--------- ---------
Minority interest of unitholders in Operating Partnership 27,545 28,083
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares,
none issued
Common stock, $.01 par value, 95,000,000 shares
authorized, 15,206,361 shares and 15,104,725
shares outstanding .................................. 152 151
Additional paid-in capital .............................. 186,808 185,657
Retained earnings ....................................... 2,261 --
--------- ---------
Total stockholders' equity .......................... 189,221 185,808
--------- ---------
Total liabilities and stockholders' equity .......... $ 402,266 $ 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
------- ------- ------- -------
REVENUES
Base rents ........................................ $17,264 $12,200 $33,276 $23,440
Escalations and recoveries ........................ 3,151 2,414 6,232 4,535
Parking and other ................................. 519 471 923 872
Interest income ................................... 79 66 153 176
------- ------- ------- -------
Total revenues ................................ 21,013 15,151 40,584 29,023
------- ------- ------- -------
EXPENSES
Real estate taxes ................................. 2,194 1,437 4,153 2,751
Utilities ......................................... 1,873 1,473 3,755 2,837
Operating services ................................ 2,512 1,962 5,315 3,824
General and administrative ........................ 1,128 1,001 2,064 1,934
Depreciation and amortization ..................... 3,614 3,095 6,908 5,927
Interest expense .................................. 2,999 2,173 5,568 3,814
------- ------- ------- -------
Total expenses ................................ 14,320 11,141 27,763 21,087
------- ------- ------- -------
Income before gain on sale of rental property,
minority interest and extraordinary item ...... 6,693 4,010 12,821 7,936
Gain on sale of rental property ................... -- -- 5,658 --
------- ------- ------- -------
Income before minority interest
and extraordinary item ........................ 6,693 4,010 18,479 7,936
Minority interest ................................. 1,009 873 2,821 1,709
------- ------- ------- -------
Income before extraordinary item .................. 5,684 3,137 15,658 6,227
Extraordinary item-loss on early retirement of debt
(net of minority interest's share of $86) ..... -- -- 475 --
------- ------- ------- -------
Net income ........................................ $ 5,684 $ 3,137 $15,183 $ 6,227
======= ======= ======= =======
Net income per common share:
Income before extraordinary item-
loss on early retirement of debt .............. $ 0.37 $ 0.30 $ 1.03 $ 0.60
Extraordinary item-loss on early retirement of debt -- -- 0.03 --
------- ------- ------- -------
Net income ........................................ $ 0.37 $ 0.30 $ 1.00 $ 0.60
======= ======= ======= =======
Dividends declared per common share ............... $ 0.43 $ 0.40 $ 0.85 $ 0.81
======= ======= ======= =======
Weighted average shares outstanding ............... 15,203 10,400 15,175 10,436
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
- ------------------------------------------------------------------------------------
Six Months Ended June 30,
-------------------------
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................. $ 15,183 $ 6,227
Adjustments to reconcile net income to net cash
flows provided by operating activities
Depreciation and amortization ...................... 6,908 5,927
Gain on sale of rental property .................... (5,658) --
Minority interest .................................. 2,821 1,709
Extraordinary item-loss on early retirement of debt 475 --
Changes in operating assets and liabilities
Increase in unbilled rents receivable .............. (204) (223)
Increase in deferred charges and other assets, net . (2,180) (983)
Decrease (increase) in accounts receivable, net .... 15 (543)
Decrease in other receivables ...................... 48 170
Increase in accounts payable and
accrued expenses ................................ 799 56
Increase (decrease) in rents received in advance and
security deposits ............................... 1,100 (24)
(Decrease) increase in accrued interest payable .... (144) 251
--------- ---------
Net cash provided by operating activities ........... 19,163 12,567
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to rental property ........................... (46,321) (17,900)
Proceeds from sale of rental property .................. 10,324 --
Increase in restricted cash ............................ (556) (536)
--------- ---------
Net cash used in investing activities ............... (36,553) (18,436)
--------- ---------
(Continued)
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
- ------------------------------------------------------------------------------------
(Continued)
Six Months Ended June 30,
-------------------------
1996 1995
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and loans payable .............. 109,500 16,000
Repayments of mortgages and loans payable .............. (75,817) (3,000)
Debt prepayment premiums and other costs ............... (312) --
Purchase of treasury stock ............................. -- (1,595)
Proceeds from stock options exercised .................. 173 --
Payment of dividends and distributions ................. (15,214) (10,715)
--------- ---------
Net cash provided by financing activities ........... 18,330 690
--------- ---------
Net increase (decrease) in cash and cash equivalents ... 940 (5,179)
Cash and cash equivalents, beginning of period ......... 967 6,394
--------- ---------
Cash and cash equivalents, end of period ............... $ 1,907 $ 1,215
========= =========
Supplemental Cash Flow Information:
Cash paid for interest ................................. $ 5,800 $ 3,563
========= =========
Interest capitalized ................................... $ 88 $ --
========= =========
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 .................................. -- -- -- $ 15,183 15,183
Dividends ................................... -- -- -- (12,922) (12,922)
Stock options exercised ..................... 9 -- 173 -- 173
--------- --------- --------- --------- ---------
Balance at June 30, 1996 .................... 15,206 $ 152 $ 186,808 $ 2,261 $ 189,221
========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
CALI REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 June 30, 1996, the Company owned and operated 43
properties, consisting of 42 office and office/flex
buildings totaling approximately 4.2 million square
feet and a 327 unit residential complex. The
properties are located in New Jersey, New York, and
Pennsylvania.
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 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 are the successors to the
operations of the Cali Group. Prior to the completion
of the business combination with the Company, the
Cali Group was engaged in development, ownership and
operation of a portfolio of twelve office buildings
and one multi-family residential property, all
located in New Jersey (the "Initial Properties").
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. These acquisitions 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 six months
ended June 30, 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 six months ended June 30, 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.
Additionally, on July 23, 1996, the Company acquired
222 and 233 Mount Airy Road, two suburban office
buildings totaling approximately 115,000 square feet,
located in Basking Ridge, New Jersey. The buildings
were acquired for approximately $10.5 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
Cali Services, Inc. (an entity formed to provide
third party property management services, in which
the Operating Partnership has a 99 percent interest)
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 39 to 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 incurred in obtaining financing are capitalized
Costs 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 $267 and $435 for the three month
periods ended June 30, 1996 and 1995, respectively,
and $527 and $877 for the six month periods ended
June 30, 1996 and 1995, respectively.
Deferred
Leasing Costs incurred in connection with leases are
Costs 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 month periods ended June 30, 1996 and 1995 were
15,202,912 and 10,400,000 respectively, and six month
periods ended June 30, 1996 and 1995 were 15,174,500
and 10,436,464, respectively. The assumed exercise of
outstanding stock options using the Treasury Stock
method is not considered dilutive in any period.
Dividends and
Distributions
Payable The dividends and distributions payable at June 30,
1996 represent dividends payable to shareholders of
record on July 3, 1996 (15,206,361 shares) and
distributions payable to minority interest
unitholders (2,699,002 Units) on that same date. The
second quarter dividends and distributions of $0.425
per share and per Unit were approved by the Board of
Directors on June 20, 1996 and were paid on July 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:
June 30, December 31,
1996 1995
-------- --------
Escrow and other reserve funds ................... $ 3,453 $ 2,901
Residential security deposits .................... 332 328
-------- --------
Total restricted cash ......................... $ 3,785 $ 3,229
======== ========
4. DEFERRED CHARGES AND OTHER ASSETS
June 30, December 31,
1996 1995
-------- --------
Deferred leasing costs ........................... $ 13,630 $ 13,498
Deferred financing costs ......................... 5,347 5,778
-------- --------
18,977 19,276
Accumulated amortization ......................... (8,350) (9,035)
-------- --------
Deferred charges, net ............................ 10,627 10,241
Prepaid expenses and other assets ................ 670 632
-------- --------
Total deferred charges and other assets ....... $ 11,297 $ 10,873
======== ========
5. MORTGAGES AND LOANS PAYABLE
June 30, December 31,
1996 1995
-------- --------
Mortgage Financing [a] ........................... $ 64,508 $ 70,000
Fair Lawn Property Loan [b] ...................... 18,639 18,764
Initial Credit Facility [c] ...................... 15,000 46,700
Additional Credit Facility [d] ................... 71,000 --
-------- --------
Total mortgages and loans payable .......... $169,147 $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 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 ("Fair Lawn Property 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.
For the six months ended June 30, 1996, the Company
has paid $125 for amortization of the principal on
the Fair Lawn Property Loan.
[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 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 May
31, 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 June 30, 1996, the Company has drawn an
additional $16,400 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 June 30, 1996, the Company has repaid $2,000 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 at their option 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. The Company has the option to
deliver shares of common stock in exchange for all or any portion of the
cash requested. When a unitholder redeems a Unit, minority interest is
reduced and the Company's investment in the Operating Partnership is
increased. During the six months ended June 30, 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 0.667 to
2.667 percent of adjusted rents. For the three and six month periods ended
June 30, 1996, such fees, which are capitalized and amortized,
approximated $112 and $192, respectively.
8. SIGNIFICANT TENANT
At December 31, 1995, Donaldson, Lufkin, and Jenrette Securities
Corporation ("DLJ") leased approximately 55 percent of the space in the
Company's 95 Christopher Columbus Drive, Jersey City, New Jersey property.
On April 9, 1996, DLJ signed a lease with the Company for an additional
73,200 square feet of space ("DLJ Expansion"), increasing its occupancy to
approximately 66 percent of the property.
Total rental income from DLJ, including escalations and recoveries, for
the three and six month periods ending June 30, 1996 and 1995 were as
follows:
Three Months Ended: Six Months Ended:
------------------------ ------------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
$2,559 $2,409 $4,983 $4,840
====== ====== ====== ======
At June 30, 1996 and December 31, 1995, unbilled rents receivable included
$12,521 and $12,164, respectively, from DLJ.
9. STOCK OPTION PLAN
In 1994, and as amended on May 13, 1996, 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 1,880,188 (subject
to adjustment) of the Company's shares of common stock have been reserved
for issuance (1,780,188 shares under the Employee Plan and 100,000 under
the Directors Plan). 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
$17.25 - $19.875 per share
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
Granted at $21.50 per share -- 14,000
Less--
Lapsed or canceled (380) --
Exercised at $17.25 per share (3,879) --
------------------------------------------------------------------------------------------------
Outstanding at June 30, 1996 1,168,513 44,000
$17.25-$21.50 per share
-----------------------------------------------------------------------------------------------
Exercisable at June 30, 1996 267,245 30,000
-----------------------------------------------------------------------------------------------
Available for grant at December 31, 1995 463,576 15,000
-----------------------------------------------------------------------------------------------
Available for grant at June 30, 1996 606,653 51,000
-----------------------------------------------------------------------------------------------
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 2011. 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. Additionally, 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. The $89.7 million in total
proceeds from the Second Offering and over-allotment option were obtained
off of the Company's $250 million shelf registration, leaving $160.3
million of available funds under the shelf.
On May 13, 1996, the Company's stockholders approved an increase in the
authorized shares of common stock in the Company from 25,000,000 to
95,000,000.
On July 29, 1996, the Company filed an additional shelf registration
statement with the Securities and Exchanges Commission ("SEC") for an
aggregate amount of $500 million in securities of the Company. The
registration statement was declared effective by the SEC on August 2,
1996.
* * * *
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 for the three and six month periods ended June
30, 1996 ("1996"), as compared to the three and six month periods ended
June 30, 1995 ("1995") make reference to the following: (i) the effect of
the "Pre-Acquisition Properties," which represents all properties owned by
the Company at March 31, 1995 (for the three-month periods comparisons),
and which represents all properties owned by the Company at December 31,
1994 (for the six-month periods comparisons), (ii) the effect of the
"Acquired Properties," which represents all properties acquired by the
Company since April 1, 1995 (for the three-month periods comparisons), and
which represents all properties acquired since January 1, 1995 (for the
six-month period comparisons), and (iii) the effect of the "Disposition,"
which refers to the Company's sale of Essex Road on March 20, 1996 (for
both the three and six month periods comparisons).
Three Months Ended June 30, 1996 Compared to
Three Months Ended June 30, 1995
Total revenues increased $5.9 million, or 38.7 percent, for the three
months ended June 30, 1996 over 1995. Base rents increased $5.1 million,
or 41.5 percent, of which $5.3 million, or 43.8 percent, was attributable
to the Acquired Properties, $0.1 million, or 0.8 percent, to occupancy
changes at the Pre- Acquisition Properties, offset by a decrease of $0.4
million, or 3.1 percent, as a result of the Disposition. Escalations and
recoveries increased $0.7 million, or 30.5 percent, of which $0.8 million,
or 34.4 percent, was attributable to the Acquired Properties, offset by a
decrease of $0.1 million, or 2.9 percent, due to the Pre-Acquisition
Properties.
Total expenses for the three months ended March 31, 1996 increased $3.2
million, or 28.5 percent, as compared to the same period in 1995. Real
estate taxes increased $0.8 million, or 52.7 percent, for 1996 over 1995
substantially attributable to the Acquired Properties. Additionally,
operating services increased $0.6 million, or 28.0 percent, and utilities
increased $0.4 million, or 27.2 percent for 1996 over 1995. The aggregate
increase in operating services and utilities of $1.0 million, or 27.7
percent, consists of $1.1 million, or 31.6 percent, attributable to the
Acquired Properties, offset by a decrease of $0.1 million, or 4.6 percent,
as a result of the Disposition. General and administrative expenses
increased $0.1 million, or 12.7 percent, primarily due to the additional
costs associated with the Acquired Properties. Depreciation and
amortization increased $0.5 million, or 16.8 percent, for 1996 over 1995,
of which $0.9 million, or 29.2 percent, relates to depreciation on the
Acquired Properties, offset by decreases of $0.1 million, or 3.1 percent,
for depreciation and $0.2 million, or 6.2 percent, for amortization of
deferred financing costs due to a reduction in debt outstanding on the
Pre-Acquisition Properties, and $0.1 million, or 3.0 percent, of a
reduction in depreciation as a result of the Disposition. Interest expense
increased by $0.8 million, or 38.0 percent, primarily due to an increase
in indebtedness resulting from drawings on the Company's credit facilities
in connection with property acquisitions.
Income before minority interest and extraordinary item increased to $6.7
million in 1996 from $4.0 million in 1995. The increase of $2.7 million
was due to the factors discussed above.
Net income increased $2.5 million for the three months ended June 30, 1996
from $3.2 million (net of minority interest of $0.9 million) in 1995 to
$5.7 million (net of minority interest of $1.0 million) in 1996, as a
result of the increase in income before minority interest and
extraordinary item of $2.7 million.
Six Months Ended June 30, 1996 to Six Months Ended June 30, 1995
Total revenues increased $11.6 million, or 39.8 percent, for the six
months ended June 30, 1996 over 1995. Base rents increased $9.8 million,
or 42.0 percent, of which $10.5 million, or 44.8 percent, was attributable
to the Acquired Properties, offset by decreases of $0.1 million, or 0.3
percent, as a result of occupancy changes at the Pre-Acquisition
Properties and $0.6 million, or 2.5 percent, as a result of the
Disposition. Escalations and recoveries increased $1.7 million, or 37.4
percent, of which $1.8 million, or 39.1 percent, was attributable to the
Acquired Properties, offset by a decrease of $0.1 million, or 1.1 percent,
as a result of the combined effect of both the Disposition and occupancy
changes at the Pre-Acquisition Properties.
Total expenses for the six months ended June 30, 1996 increased $6.7
million, or 31.7 percent, as compared to the same period in 1995. Real
estate taxes increased $1.4 million, or 51.0 percent, for 1996 over 1995
of which $1.5 million, or 53.5 percent, was as a result of the Acquired
Properties, offset by a decrease $0.1 million, or 2.4 percent, due to the
Disposition. Additionally, operating services increased $1.5 million, or
39.0 percent, and utilities increased $0.9 million, or 32.4 percent. The
aggregate increase in operating services and utilities of $2.4 million, or
36.2 percent, consists of $2.3 million, or 34.7 percent, attributable to
the Acquired Properties, $0.2 million, or 3.2 percent, at the Pre-
Acquisition Properties which was due primarily to a harsher winter in
1996, offset by a decrease of $0.1 million, or 1.3 percent, as a result of
the Disposition. General and administrative expenses increased $0.1
million, or 6.7 percent, primarily due to the additional costs associated
with the Acquired Properties. Depreciation and amortization increased $1.0
million, or 16.6 percent, for 1996 over 1995, of which $1.7 million, or
28.7 percent, related to depreciation on the Acquired Properties, offset
by decreases of $0.2 million, or 3.5 percent, for depreciation and $0.4
million, or 7.1 percent, for amortization of deferred leasing and
financing costs due to a reduction of debt on the Pre-Acquisition
Properties, and $0.1 million as a result of the Disposition. Interest
expense increased by $1.8 million, or 46.0 percent, primarily due to an
increase in indebtedness resulting from drawings on the Company's credit
facilities in connection with property acquisitions.
Income before minority interest and extraordinary item increased to $18.5
million in 1996 from $7.9 million in 1995. The increase of $10.5 million
was due to the gain on sale of rental property (the Disposition) of $5.7
million in 1996, as well as due to the factors discussed above.
Net income increased $9.0 million for the six months ended June 30, 1996
from $6.2 million (net of minority interest of $1.7 million) in 1995 to
$15.2 million (net of minority interest of $2.8 million) in 1996, as a
result of an increase in income before minority interest and extraordinary
item of $10.5 million, partially offset by the recognition in 1996 of an
extraordinary loss for the early retirement of debt of $0.5 million (net
of minority interest's share of $0.1 million).
Liquidity and Capital Resources
Statement of Cash Flows
During the six months ended June 30, 1996, the Company generated $19.2
million in cash flow from operating activities, and, together with $10.3
million of proceeds from the sale of a rental property, $39.2 million in
net borrowings on its credit facilities and $0.2 million of proceeds from
stock options exercised, used an aggregate $68.9 million to (i) purchase
two rental properties for $38.5 million, (ii) acquire tenant improvements
and building improvements for $7.8 million (includes $2.9 million from
tenant improvements costs in connection with the DLJ Expansion and $1.8
million in tenant improvement costs in connection with the leasing of
62,275 square feet to Berlitz International at the Company's 400 Alexander
Park, Princeton, New Jersey office property), (iii) pay quarterly
dividends and distributions of $15.2 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 $0.6 million, (vi) pay debt
prepayment penalties and other related costs of $0.3 million, (vii) pay
the amortization on mortgage principal of $0.1 million, and (viii)
increase its cash and cash equivalents balance by $0.9 million.
Capitalization
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, as fully described in the Company's Form 10-K for the year
ended December 31, 1995. Additionally, 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. The $89.7 million
in total proceeds from the Second Offering and over-allotment option were
obtained off of the Company's $250 million shelf registration, leaving
$160.3 million of available funds under the shelf.
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 six months ended June 30, 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.
Additionally, on July 23, 1996, the Company acquired 222 and 233 Mount
Airy Road, two suburban office buildings totaling approximately 115,000
square feet located in Basking Ridge, New Jersey. The buildings were
acquired for approximately $10.5 million, which was drawn on one of the
Company's credit facilities.
On July 29, 1996, the Company filed an additional shelf registration
statement with the Securities and Exchanges Commission ("SEC") for an
aggregate amount of $500 million in securities of the Company. The
registration statement was declared effective by the SEC on August 2,
1996.
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
is currently constructing two office/flex buildings aggregating
approximately 47,000 square feet of space at its Commercenter complex,
located in Totowa, New Jersey. As of June 30, 1996, the Company has
incurred $0.6 million of costs out of a total of $3.1 million anticipated
to be incurred in connection with the construction project.
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 is frequently examining potential property
acquisitions and, at any one given time, one or more of such acquisitions
may be under consideration. Accordingly, being able to fund property
acquisitions is a major part of the Company's financing requirements. The
Company expects to meet its financing requirements through funds generated
from operations, long-term or short-term borrowings (including draws on
the Company's credit facilities) and the issuance of debt securities or
additional equity securities.
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 $25.9 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 and six month periods ended June 30,
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 June 30, Six Months Ended June 30,
--------------------------- --------------------------
1996 1995 1996 1995
-------- -------- -------- --------
Income before gain on sale of property, minority
interest, and extraordinary item ........................... $ 6,693 $ 4,010 $ 12,821 $ 7,936
Add: Real estate related depreciation and
amortization ............................................... 3,334 2,651 6,355 5,020
-------- -------- -------- --------
10,027 6,661 19,176 12,956
Funds from Operations
Deduct: Rental income adjustment for
straight-lining of rents ................................ (135) (188) (204) (223)
-------- -------- -------- --------
Funds from Operations after adjustment for
straight-line rents .......................................... $ 9,892 $ 6,473 $ 18,972 $ 12,733
======== ======== ======== ========
Weighted average shares outstanding (1) ........................ 17,902 13,295 17,900 13,301
======== ======== ======== ========
- --------------
(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:
Exhibit 10.40 Purchase Agreement between Metfer - I and Mounty Airy
Realty Associates L.P., dated July 23, 1996
Exhibit 10.41 Purchase Agreement between Metfer - II and Mount Airy
Realty Associates L.P., dated July 23, 1996.
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: August 7, 1996 -------------------------------
Barry Lefkowitz
Vice President - Finance and
Chief Financial Officer
(signing on behalf of the
Registrant)