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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED June 30, 2002
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COMMISSION FILE NO. 000-22741
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CARRAMERICA REALTY, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 52-1976308
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1850 K Street, N.W., Washington, D.C. 20006
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(Address or principal executive office) (Zip code)
Registrant's telephone number, including area code (202) 729-1700
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N/A
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(Former name, former address and former fiscal year, if changed
since last report)
Number of Partnership Units outstanding of each of the registrant's
classes of Partnership Units as of June 30, 2002:
(# of shares) 14,362,972
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or such shorter period that the Registrant was
required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO ___
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Index
Part I: Financial Information Page
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Item 1. Financial Statements
Consolidated balance sheets of CarrAmerica Realty, L.P. and subsidiary
as of June 30, 2002 (unaudited) and December 31, 2001 ................................. 4
Consolidated statements of operations of CarrAmerica Realty, L.P. and
subsidiary for the three and six months ended June 30, 2002 and 2001 (unaudited) ...... 5
Consolidated statements of cash flows of CarrAmerica Realty, L.P. and
subsidiary for the six months ended June 30, 2002 and 2001 (unaudited) ................ 6
Notes to consolidated financial statements (unaudited) ................................ 7 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................................... 10 - 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................ 17
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K ...................................................... 18
2
Part I
Item 1. Financial Information
The information furnished in our accompanying consolidated balance sheets,
consolidated statements of operations and consolidated statements of cash flows
of CarrAmerica Realty, L.P. and subsidiary reflects all adjustments which are,
in our opinion, necessary for a fair presentation of the aforementioned
financial statements for the interim periods.
The financial statements should be read in conjunction with the notes to the
financial statements. The results of operations for the three and six months
ended June 30, 2002 are not necessarily indicative of the operating results to
be expected for the full year.
3
CARRAMERICA REALTY, L.P. AND SUBSIDIARY
Consolidated Balance Sheets
As of June 30, 2002 and December 31, 2001
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June 30, December 31,
2002 2001
---------------- -----------------
(In thousands) (unaudited)
Assets
Rental property:
Land $ 118,673 $ 113,583
Buildings 541,748 533,132
Tenant improvements 65,259 64,856
Furniture, fixtures, and equipment 691 591
---------------- -----------------
726,371 712,162
Less - accumulated depreciation (104,224) (92,025)
---------------- -----------------
Total rental property 622,147 620,137
Land held for development or sale 5,633 6,412
Cash and cash equivalents - 1,226
Restricted deposits 660 1,015
Accounts and notes receivable, net 10,357 12,665
Investments in unconsolidated entities 47,491 47,970
Accrued straight-line rents 13,162 12,340
Tenant leasing costs, net 11,740 11,918
Deferred financing costs, net 119 167
Prepaid expenses and other assets, net 421 1,053
---------------- -----------------
$ 711,730 $ 714,903
================ =================
Liabilities, Mandatorily Redeemable Partnership Units and Partners'
Capital Liabilities:
Mortgages and notes payable $ 135,807 $ 140,729
Accounts payable and accrued expenses 9,904 12,119
Due to affiliates 38,023 44,785
Rents received in advance and security deposits 4,311 6,277
---------------- -----------------
Total liabilities 188,045 203,910
Mandatorily redeemable partnership units 40,364 40,151
Partners' capital:
General partner 5,357 5,215
Limited partners 477,964 465,627
---------------- -----------------
Total partners' capital 483,321 470,842
Commitments and contingencies
$ 711,730 $ 714,903
================= =================
See accompanying notes to consolidated financial statements.
4
CARRAMERICA REALTY, L.P. AND SUBSIDIARY
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2002 and 2001
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(Unaudited and in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2002 2001 2002 2001
------------ ----------- ------------ ------------
Operating revenues:
Rental revenue:
Base rent $ 21,400 $ 22,086 $ 42,442 $ 43,377
Recoveries from tenants 3,322 2,931 7,019 5,839
Parking and other tenant charges 609 487 1,130 1,477
------------ ----------- ------------ ------------
Total rental revenue 25,331 25,504 50,591 50,693
Real estate service revenue 263 376 445 481
------------ ----------- ------------ ------------
Total operating revenues 25,594 25,880 51,036 51,174
------------ ----------- ------------ ------------
Operating expenses:
Property expenses:
Operating expenses 5,443 5,909 11,269 12,785
Real estate taxes 2,394 2,077 4,737 3,535
Interest expense 3,788 6,291 7,931 10,956
General and administrative 1,049 2,253 2,460 4,455
Depreciation and amortization 7,348 6,983 15,261 14,326
------------ ----------- ------------ ------------
Total operating expenses 20,022 23,513 41,658 46,057
------------ ----------- ------------ ------------
Real estate operating income 5,572 2,367 9,378 5,117
------------ ----------- ------------ ------------
Other income:
Interest income 202 762 410 1,027
Equity in earnings of unconsolidated entities 981 1,880 2,019 3,037
------------ ----------- ------------ ------------
Total other income 1,183 2,642 2,429 4,064
------------ ----------- ------------ ------------
Income from continuing operations before
gain (loss) on sale of assets and other
provisions, net 6,755 5,009 11,807 9,181
(Loss) gain on sale of assets and other provisions, net (149) 64 (1,009) (7,502)
------------ ----------- ------------ ------------
Income from continuing operations 6,606 5,073 10,798 1,679
Discontinued operations - Net operations of sold property (79) 119 27 221
Discontinued operations - Gain on sale of property 3,340 - 3,340 -
------------ ----------- ------------ ------------
Income from discontinued operations 3,261 119 3,367 221
------------ ----------- ------------ ------------
Net income $ 9,867 $ 5,192 $ 14,165 $ 1,900
============ =========== ============ ============
Net income attributable to general partner $ 99 $ 52 $ 142 $ 19
============ =========== ============ ============
Net income attributable to limited partners $ 9,768 $ 5,140 $ 14,023 $ 1,881
============ =========== ============ ============
See accompanying notes to consolidated financial statements.
5
CARRAMERICA REALTY, L.P. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2002 and 2001
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(Unaudited and in thousands) 2002 2001
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Cash flows from operating activities:
Net income $ 14,165 $ 1,900
Adjustments to reconcile net income to net cash provided by (used by)
operating activities:
Depreciation and amortization (including discontinued operations) 15,485 14,660
Loss on sale of assets and other provisions, net 1,009 7,502
Gain on sale of discontinued operations (3,340) -
Equity in earnings of unconsolidated entities (2,019) (3,037)
Other (145) (106)
Change in assets and liabilities:
Decrease in accounts and notes receivable 2,308 4,048
Increase in accrued straight-line rents (912) (472)
Additions to tenant leasing costs (1,728) (1,122)
Decrease in prepaid expenses and other assets 524 646
Decrease in accounts payable, accrued expenses and due to affiliates (8,977) (30,181)
(Decrease) increase in rents received in advance and security deposits (1,966) 452
--------------- --------------
Total adjustments 239 (7,610)
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Net cash provided by (used by) operating activities 14,404 (5,710)
--------------- --------------
Cash flows from investing activities:
Acquisitions and additions to rental property (22,700) (59,688)
Additions to land held for development (230) (343)
Distributions from unconsolidated entities 2,573 50,709
Contributions to unconsolidated entities (74) (5,224)
Decrease in restricted deposits 355 22,506
Proceeds from sales of properties 10,699 13,203
--------------- --------------
Net cash (used by) provided by investing activities (9,377) 21,163
--------------- --------------
Cash flows from financing activities:
Capital distributions (1,331) (1,161)
Repayments on notes and mortgages payable (4,922) (12,813)
--------------- --------------
Net cash used by financing activities (6,253) (13,974)
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(Decrease) increase in cash and cash equivalents (1,226) 1,479
Cash and cash equivalents, beginning of the period 1,226 5,819
--------------- --------------
Cash and cash equivalents, end of the period $ - $ 7,298
=============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest, net of capitalized interest of $186 and $227
for the six months ended June 30, 2002 and 2001, respectively. $ 7,951 $ 11,447
=============== ==============
See accompanying notes to consolidated financial statements.
6
CARRAMERICA REALTY, L.P. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
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(1) Description of Business and Summary of Significant Accounting Policies
(a) Business
We are a Delaware limited partnership formed in March 1996 for the
purpose of owning, acquiring, developing and operating office
buildings across the United States. At June 30, 2002, we owned 53
operating properties with no properties under development. The
properties are located in Austin, Chicago, Dallas, Denver, Orange
County/Los Angeles, San Francisco Bay Area, Salt Lake City, San Diego
and Seattle.
Our general partner is CarrAmerica Realty GP Holdings, Inc. (the
"General Partner"), a wholly-owned subsidiary of CarrAmerica Realty
Corporation ("CarrAmerica"), a self-administered and self-managed real
estate investment trust. The General Partner owned a 1% interest in us
at June 30, 2002. Our limited partners are CarrAmerica Realty LP
Holdings, Inc., a wholly-owned subsidiary of CarrAmerica, which owned
an approximate 89.9% interest in us at June 30, 2002 and various other
individuals and entities, which collectively owned an approximate 9.1%
interest in us at June 30, 2002.
(b) Basis of Presentation
Our accounts and those of our wholly-owned subsidiary are consolidated
in the accompanying financial statements. We use the equity method of
accounting for our investments in and our share of earnings and losses
of unconsolidated entities. These entities are not majority-owned or
controlled by us.
Management has made a number of estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses in
the financial statements, and the disclosure of contingent assets and
liabilities. Estimates are required in order for us to prepare our
financial statements in conformity with accounting principles
generally accepted in the United States of America. Significant
estimates are required in a number of areas, including the evaluation
of impairment of long-lived assets and evaluation of the
collectibility of accounts and notes receivable. Actual results could
differ from these estimates.
(c) Interim Financial Statements
The financial statements reflect all adjustments, which are, in our
opinion, necessary to reflect a fair presentation of results for the
interim periods, and all adjustments are of a normal, recurring
nature.
(d) New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 2001. SFAS
No. 142 changes the accounting for goodwill and intangible assets with
indefinite lives from an amortization approach to an impairment-only
approach. Adoption of SFAS No. 142 in January 2002 did not have a
material effect on our financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assts and
for Long-Lived Assets to Be Disposed Of," and APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." The Statement does
not change the fundamental
7
CARRAMERICA REALTY, L.P. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
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provisions of SFAS No. 121; however, it resolves various
implementation issues of SFAS No. 121 and establishes a single
accounting model for long-lived assets to be disposed of by sale. It
retains the requirement of Opinion No. 30 to report separately
discontinued operations but extends that reporting to a component of
an entity that either has been disposed of (by sale, abandonment, or
in distribution to owners) or is classified as held for sale. Adoption
of SFAS No. 144 in January 2002 did not have a material effect on our
financial statements. However, we are required to present assets held
for sale and related liabilities separately in our consolidated
balance sheets, if we meet the applicable criteria of SFAS No. 144. In
addition, if we meet the applicable criteria of SFAS No. 144, we are
required to report the operating results of properties sold or
classified as held for sale and related gain (loss) on sale in
discontinued operations and to reclassify operating results of such
properties to discontinued operations for all prior periods presented.
In July 2001, the Emerging Issues Task Force (EITF) released EITF
D-98: "Classification and Measurement of Redeemable Securities," which
clarifies Rule 5-02.28 of Regulation S-X. This Rule requires
securities that are redeemable for cash or other assets to be
classified outside of permanent equity if they are redeemable (1) at a
fixed or determinable price on a fixed or determinable date; (2) at
the option of the holder; or (3) upon the occurrence of an event that
is not solely within the control of the issuer. Our ownership is
expressed in partnership units ("Units"). These Units are redeemable
at the option of the holder for, as determined by CarrAmerica, a like
number of shares of common stock of CarrAmerica or cash. Since these
Units are redeemable, at the option of the holders, they are
classified outside of partners' capital on the balance sheet as
redeemable partnership units and measured at redemption value as of
the end of the periods presented. As of June 30, 2002 and December 31,
2001 there were 1,308,411 and 1,333,920 redeemable Units outstanding,
respectively. The value of the redeemable Units is based on the
closing market price of CarrAmerica common stock, which was $30.85 per
share as of June 30, 2002 and $30.10 per share as of December 31,
2001. This pronouncement was applied retroactively beginning in the
first quarter of 2002.
(e) Reclassifications
Certain reclassifications of prior period amounts have been made to
conform to the current period's presentation.
(2) Mortgages and Notes Payable
Our mortgages and notes payable are summarized as follows:
(In thousands) June 30, December 31,
2002 2001
----------------- ------------------
Fixed rate mortgages $ 96,567 $ 101,206
Fixed rate notes payable to affiliate 39,240 39,523
----------------- ------------------
$ 135,807 $ 140,729
================= ==================
Mortgages payable are collateralized by properties and generally require
monthly principal and/or interest payments. The mortgages mature at various
dates from February 2003 through May 2017. Our fixed rate mortgages bore an
effective weighted average interest rate of 7.61% at June 30, 2002. The
weighted average term of these mortgages is 4.6 years.
In June 2001, CarrAmerica closed on a new three-year $500 million unsecured
credit facility with J.P. Morgan Chase, as agent for a group of banks. We
are an unconditional guarantor of borrowings under this facility.
CarrAmerica can extend the life of the facility for one year at its option.
The interest rate on the unsecured credit facility is 70 basis points over
30-day LIBOR.
8
CARRAMERICA REALTY, L.P. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
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We have two borrowing agreements with CarrAmerica. The first is a $12.0
million loan that bears interest at 8.5% and requires monthly interest only
payments of $85,000. This note matures on March 27, 2007. The second is a
$30.0 million loan that bears interest at 8.5% and requires monthly
principal and interest payments of $242,000. This note matures on May 31,
2011. The outstanding balance on this note was $27.2 million at June 30,
2002 and $27.5 million at December 31, 2001. Both notes are secured by
certain office properties and other assets.
Debt maturities at June 30, 2002 were as follows:
(In thousands)
2002 $ 5,109
2003 20,534
2004 15,663
2005 12,375
2006 2,099
2007 and thereafter 80,027
--------------
$ 135,807
==============
(3) Gain (Loss) on Sale of Assets and Other Provisions, Net and Discontinued
Operations
We dispose of assets that are inconsistent with our long-term strategic or
return objectives or where market conditions for sale are favorable. During
the three months ended June 30, 2002, we disposed of one operating
property, recognizing a gain of $3.3 million. This gain has been classified
in discontinued operations. We also recognized an impairment loss of $0.1
million on a parcel of land held for development. During the three months
ended June 30, 2001, we did not dispose of any operating properties.
During the six months ended June 30, 2002, we disposed of one operating
property, recognizing a gain of $3.3 million. This gain has been classified
in discontinued operations. We recognized impairment losses of $1.0 million
on two parcels of land held for development. During the six months ended
June 30, 2001, we disposed of one operating property in connection with the
sale of a group of properties by CarrAmerica. There was a net gain on this
transaction; however, we incurred a loss of $6.6 million on our property.
We also recognized an impairment loss of $0.9 million on a parcel of land
held for development during the six months ended June 30, 2001.
9
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The discussion that follows is based primarily on our consolidated
financial statements as of June 30, 2002 and December 31, 2001 and for the three
and six months ended June 30, 2002 and 2001 and should be read along with the
consolidated financial statements and related notes. The ability to compare one
period to another may be significantly affected by acquisitions completed,
development properties placed in service and dispositions made during those
periods.
Critical Accounting Policies
Critical accounting policies are those that are both important to the
presentation of our financial condition and results of operations and require
management's most difficult, complex or subjective judgments. Our critical
accounting policies relate to the evaluation of impairment of long-lived assets
and the evaluation of the collectibility of accounts and notes receivable.
If events or changes in circumstances indicate that the carrying value
of a rental property to be held and used or land held for development may be
impaired, we perform a recoverability analysis based on estimated undiscounted
cash flows to be generated from the property in the future. If the analysis
indicates that the carrying value is not recoverable from future cash flows, the
property is written down to estimated fair value and an impairment loss is
recognized. If we decide to sell rental properties or land held for development,
we evaluate the recoverability of the carrying amounts of the assets. If the
evaluation indicates that the carrying value is not recoverable from estimated
net sales proceeds, the property is written down to estimated fair value less
costs to sell and an impairment loss is recognized within income from continuing
operations. Our estimates of cash flows and fair values of the properties are
based on current market conditions and consider matters such as rental rates and
occupancies for comparable properties, recent sales data for comparable
properties and, where applicable, contracts or the results of negotiations with
purchasers or prospective purchasers. Our estimates are subject to revision as
market conditions and our assessments of them change.
Our allowance for doubtful accounts receivable is established based on
analysis of the risk of loss on specific accounts. The analysis places
particular emphasis on past-due accounts and considers information such as the
nature and age of the receivable, the payment history of the tenant or other
debtor, the financial condition of the tenant and our assessment of its ability
to meet its lease obligations, the basis for any disputes and the status of
related negotiations, etc. Our estimate of the required allowance, which is
reviewed on a quarterly basis, is subject to revision as these factors change
and is sensitive to the effects of economic and market conditions on our
tenants, particularly in our largest markets. For example, due to economic
conditions and analysis of our accounts receivable, we increased our provision
for uncollectible accounts by approximately $1.8 million in 2001 and by an
additional $0.5 million in the first half of 2002.
RESULTS OF OPERATIONS
Operating results are summarized as follows:
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For the three months ended Variance For the six months ended Variance
------------ -------------
June 30, 2002 vs. June 30, 2002 vs.
-------------------------- --------------------------
(in millions) 2002 2001 2001 2002 2001 2001
---- ---- ---- ---- ---- ----
Operating revenue $ 25.6 $ 25.9 $ (0.3) $ 51.0 $ 51.2 $ (0.2)
Property operating expense 7.8 8.0 (0.2) 16.0 16.3 (0.3)
General and administrative 1.0 2.3 (1.3) 2.5 4.5 (2.0)
Depreciation and amortization 7.3 7.0 0.3 15.3 14.3 1.0
Interest expense 3.8 6.3 (2.5) 7.9 11.0 (3.1)
Other operating income (loss), net 1.0 2.7 (1.7) 1.4 (3.4) 4.8
- ----------------------------------------------------------------------------------------------------------------------------
10
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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Operating revenues decreased 1.2% ($0.3 million) for the second quarter
of 2002 as compared to the same period in 2001. Same store rental revenues
decreased by approximately 5.2% (approximately $1.3 million) as overall same
store occupancy decreased from 96.4% in 2001 to 90.2% in 2002. For the six
months ended June 30, 2002, revenues decreased 0.4% ($0.2 million) as compared
to the six months ended June 30, 2001. Same store rental revenues decreased 5.7%
as overall same store average occupancy decreased from 96.4% as of June 30, 2001
to 90.7% as of June 30, 2002. These decreases in same store revenue were
partially offset by revenue from two operating properties acquired in April
2001.
Property operating expenses decreased slightly for the second quarter
of 2002 as compared to the same period in 2001. Lower building operating
expenses were partially offset by higher real estate taxes. For the six months
ended June 30, 2002, property operating expenses decreased 1.8% ($0.3 million)
compared to the six months ended June 30, 2001. A lower provision for
uncollectible accounts receivable ($1.3 million) was offset by higher real
estate taxes ($1.2 million) and the addition of property expenses from two
operating properties acquired in April 2001. Same store property operating
expenses decreased by approximately 4.7% (approximately $0.7 million).
For the second quarter, general and administrative expenses decreased
$1.3 million (56.5%) in 2002 as compared to 2001. This decrease resulted
primarily from a reduction in allocated costs from CarrAmerica due to the
completion of portions of its internal process improvement efforts. For the six
months ended June 30, 2002, general and administrative expenses decreased $2.0
million (44.4%) compared to the six months ended June 30, 2001 for the same
reason.
Depreciation and amortization increased $0.3 million (4.3%) in the
second quarter of 2002 compared to the same period in 2001. For the six months
ended June 30, 2002, depreciation and amortization increased $1.0 million (7.0%)
compared to the six months ended June 30, 2001. These increases were due
primarily to the acquisition of two properties in April of 2001.
Interest expense decreased $2.5 million (39.7%) in the second quarter
of 2002 as compared to the same period in 2001. This decrease was principally
the result of the retirement of certain mortgages due to maturities. Interest
expense decreased $3.1 million for the six months ended June 30, 2002 compared
to the six months ended June 30, 2001. This decrease was principally the result
of the repayment of mortgages due to maturities or the disposition of properties
in 2001.
For the three months ended June 30, 2002 other operating income (loss)
decreased $1.7 million as compared to the same period in 2001 due primarily to
lower equity in earnings of unconsolidated entities. In June 2001, Carr Office
Park, L.L.C., a significant investee, obtained third party financing on its
properties which increased its interest expense and reduced its net earnings.
For the six months ended June 30, 2002, other operating income (loss) increased
$4.8 million from the six months ended June 30, 2001. In 2001, we recognized a
loss of $6.6 million on a sale of a property in connection with the sale of a
group of properties by CarrAmerica.
Discontinued Operations
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we
have classified the operating results of a property we sold in the second
quarter of 2002 as discontinued operations for all periods presented in the
consolidated statements of operations. The operating results of the property
decreased $0.2 million for the three and six months ended June 30, 2002 in
comparison to the corresponding periods in 2001 due to the sale of the property
early in the second quarter of 2002. We recognized a gain of $3.3 million on
this sale.
11
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Consolidated Cash Flows
Consolidated cash flow information is summarized as follows:
--------------------------------------------------------------------------------------------
For the six months ended Variance
June 30, 2002 vs.
-----------------------------
(in millions) 2002 2001 2001
---- ---- ----
Cash provided by (used by) operating activities $ 14.4 $ (5.7) $ 20.1
Cash (used by) provided by investing activities (9.4) 21.2 (30.6)
Cash used by financing activities (6.3) (14.0) 7.7
--------------------------------------------------------------------------------------------
Operations generated net cash of $14.4 million in 2002 compared to
using $5.7 million in 2001. The changes in cash flow from operating activities
were primarily the result of factors discussed above in the analysis of
operating results and in 2001, payment of accounts payable to affiliates from
proceeds of a distribution received from Carr Office Park, L.L.C. The level of
net cash provided by operating activities is also affected by the timing of
receipt of revenues and payment of expenses.
Our investing activities used net cash of $9.4 million in 2002 compared
to providing net cash of $21.2 million in 2001. The change in net cash provided
by investing activities in 2002 is due primarily to the fact that 2001 included
higher proceeds from sales of properties ($2.5 million), a distribution from
Carr Office Park, L.L.C. of proceeds from a third party financing of its
properties ($47.2 million) and the release of a restricted deposit in connection
with a property transaction ($22.1 million). The effects of these changes was
partially offset by a reduction in acquisitions and additions to rental property
($37.0 million) and a reduction in investments in unconsolidated entities ($5.2
million).
Financing activities used net cash of $6.3 million in 2002 compared to
$14.0 million 2001. This decrease is due primarily to a repayment of a $7.4
million mortgage balance in connection with the sale of a property in 2001.
Liquidity and Capital Resources
Our liquidity and capital resources are dependent upon CarrAmerica and
its affiliates. CarrAmerica, as a REIT, is required to distribute at least 90%
of its taxable income to its stockholders on an annual basis. We and CarrAmerica
require capital to invest in our existing portfolio of operating assets for
capital projects. These capital projects can include such things as large-scale
renovations, routine capital improvements, deferred maintenance on properties we
have recently acquired and tenant related matters, including tenant
improvements, allowances and leasing commissions. Therefore, as a general
matter, it is unlikely our cash balances would satisfy our liquidity needs.
Instead, these needs must be met from cash generated from rental revenue and
external sources of capital.
We derive substantially all of our revenue from tenants under existing
leases at our properties. Our operating cash flow therefore depends materially
on the rents that we are able to charge to our tenants, and the ability of these
tenants to make their rental payments. We believe that the diversity of our
tenant base helps insulate us from the negative impact of tenant defaults and
bankruptcies. However, general economic downturns, or economic downturns in one
or more of our markets, still may adversely impact the ability of our tenants to
make lease payments and our ability to re-lease space on favorable terms as
leases expire. In either of these cases, our cash flow and therefore our ability
to meet our capital needs would be adversely affected.
As a result of the economic climate in 2001, the real estate markets
materially softened. Demand for office space declined significantly and vacancy
rates increased in most of our markets. During the first half of 2002, our core
markets continued to weaken and we expect them to remain weak through the
balance of the year. As a result, occupancy in our portfolio of operating
properties decreased to 90.9% at June 30, 2002, as compared to 92.2% at December
31, 2001 and 96.9% at June 30, 2001. Market rental rates have declined in most
markets from peak levels.
12
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
CarrAmerica is our principal source of liquidity. CarrAmerica's primary
external source of liquidity is its credit facility. It has a three-year $500
million unsecured credit facility expiring in June 2004 with J.P. Morgan Chase,
as agent for a group of banks. CarrAmerica can extend the life of the line an
additional year at its option. The line carries an interest rate of 70 basis
points over 30-day LIBOR. The unsecured facility contains financial and other
covenants with which CarrAmerica must comply and availability is limited to a
specified percentage of the fair value of unmortgaged properties. We
unconditionally guarantee this credit facility. As of June 30, 2002, $88.0
million was drawn on the credit facility, $2.3 million in letters of credit were
outstanding and $409.7 million was available for borrowing.
We will require capital for development projects currently underway and
in the future. As of June 30, 2002, we had 195,000 square feet of office space
under construction in two projects in which we own minority interests. These
projects are expected to cost $32.7 million, of which our total investment is
expected to be approximately $9.3 million. Through June 30, 2002, approximately
$22.9 million or 70.0% of the total project costs had been expended on these
projects. We have funded our investment in projects under construction at June
30, 2002, primarily from the proceeds of asset dispositions and loans from
CarrAmerica. We expect that these sources and project-specific financing of
selected assets will provide additional funds required to complete the
development and to finance the costs of additional projects we may undertake. As
a result of market conditions, we believe we will be limiting our development
activities in the near future and expect to concentrate our growth efforts on
the acquisition of properties.
We also regularly incur expenditures in connection with the re-leasing
of office space, principally in the form of tenant improvements and leasing
commissions. The amounts of these expenditures can vary significantly, depending
on negotiations with tenants and the willingness of tenants to pay higher base
rents over the life of the leases. We expect to pay for these capital
expenditures out of cash from operations or, to the extent necessary, borrowings
from CarrAmerica. We believe that these expenditures are recouped in the form of
continuing lease payments.
Our long-term liquidity requirements consist primarily of funds
necessary to pay for the principal amount of our long-term debt as it matures,
significant non-recurring capital expenditures that need to be made periodically
at our properties, development projects that we undertake and the costs
associated with acquisitions of properties.
In the future, if, as a result of general economic downturns, our or
CarrAmerica's properties do not perform as expected, or we cannot raise the
expected funds from the sale of properties and/or if we are unable to obtain
capital from other sources, such as CarrAmerica, we may not be able to make
required principal and interest payments or make necessary routine capital
improvements with respect to our existing portfolio of operating assets. While
we believe that we would continue to have sufficient funds to pay our operating
expenses and debt service and our regular quarterly distributions, our ability
to perform development activity or to fund additional development in our joint
ventures could be adversely affected. In addition, if a property is mortgaged to
secure payment of indebtedness and we are unable to meet mortgage payments, the
holder of the mortgage or lender could foreclose on the property, resulting in
loss of income and asset value. An unsecured lender could also attempt to
foreclose on some of our assets in order to receive payment. In many cases, very
little of the principal amount that we borrow is repaid prior to the maturity of
the loan. We generally expect to refinance that debt when it matures, although
in some cases we may pay off the loan. If principal amounts due at maturity
cannot be refinanced, extended or paid with proceeds of other capital
transactions, such as new equity capital, our cash flow may be insufficient to
repay all maturing debt. Prevailing interest rates or other factors at the time
of a refinancing (such as possible reluctance of lenders to make commercial real
estate loans) may result in higher interest rates and increased interest
expense.
We have unconditionally guaranteed unsecured notes issued by
CarrAmerica to institutional and other investors. The aggregate principal amount
of the unsecured notes was $875.0 million as of June 30, 2002. These notes are
in the form of $150 million of 7.20% notes due in 2004, $100 million of 6.625%
notes due in 2005, $125 million of 7.375% notes due in 2007, $100 million of
6.875% notes due in 2008 and $400 million of 7.125% notes due in 2012.
CarrAmerica's senior unsecured notes contain various covenants with which
CarrAmerica must comply. The covenants include:
13
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
* Limits on CarrAmerica's total indebtedness on a consolidated
basis;
* Limits on CarrAmerica's secured indebtedness on a consolidated
basis; and
* Limits on CarrAmerica's required debt service payments.
A default by CarrAmerica on its line of credit could cause us to be
required by lenders to make payments under the guarantee of the facility.
Although we believe our properties are adequately covered by insurance,
we cannot predict at this time if we will be able to obtain full coverage at a
reasonable cost in the future. The costs associated with our June 30, 2002
property and casualty insurance renewals were higher than anticipated. Although
we have an excellent claims history and safety record, all lines of coverage
were affected by higher premiums, in part because insurance companies have
experienced a loss of income on their investments, underwriting results have
been poor and also as a result of the events of September 11, 2001.
Our insurance renewal on June 30, 2002 increased premiums from last
year approximately 155%. The property insurance deductible increased from $5,000
to $10,000 per claim. Since reinsurance treaties renew twice each year (January
and July), our property and casualty insurance renewal date has been changed
from June 30 to May 15 to enable underwriters to concentrate on the insurance
proposals well ahead of treaty renewal.
Early this year, all risk property insurers began attaching terrorism
exclusions to insurance policies. Terrorism insurance must now be purchased
separately. Unlike earthquake exposure, insurers do not yet have a means of
modeling the terrorism risk. A limited number of companies are currently
underwriting terrorism insurance, with limited capacity and at an extremely high
cost.
We have completed an in-depth asset evaluation of our terrorism
exposure as well as our lender requirements. Upon our renewal date for insurance
of June 30, 2002, we, in conjunction with CarrAmerica, purchased terrorism
limits of $200 million per occurrence and in the aggregate with a deductible of
$1.0 million per claim at a cost of approximately $2.2 million. The policy only
covers physical damage. Coverage does not include biological, chemical or
radioactive contamination.
We have investments in real estate joint ventures in which we hold
21.2% to 49.0% interests. These investments are accounted for using the equity
method, and therefore, the assets and liabilities of the joint ventures are not
included in our financial statements. Most of these joint ventures own and
operate office buildings financed by non-recourse debt obligations that are
secured only by the real estate and other assets of the joint ventures. We have
no obligation to repay this debt and the lenders have no recourse to our other
assets.
Our investments in these joint ventures are subject to risks not
inherent in our majority owned properties, including:
* Absence of exclusive control over the development, financing,
leasing, management and other aspects of the project;
* Possibility that our co-venturer or partner might:
* become bankrupt;
* have interests or goals that are inconsistent with ours;
* take action contrary to our instructions, requests or
interests (including those related to CarrAmerica's
qualification as a REIT for tax purposes); or
* otherwise impede our objectives.
14
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Building and Lease Information
The following table sets forth certain information about each wholly-owned
operating property as of June 30, 2002:
Net Rentable
Area Percent Number
Consolidated Properties (square feet)(1) Leased(2) of Buildings
------------------------------------------------ ------------------ -------------- -----------------
Southern California, Orange County/Los Angeles
South Coast Executive Center 161,787 63.1 % 2
2600 W. Olive 144,831 100.0 1
Bay Technology Center 107,481 56.6 2
Southern California, San Diego
Jaycor 105,358 100.0 1
11119 Torrey Pines Road 76,701 100.0 1
Northern California, San Francisco Bay Area
San Mateo I 70,000 0.0 1
San Mateo II and III 141,731 85.1 2
Mountain View Gateway Center 236,400 100.0 2
Seattle:
Canyon Park Commons 95,290 100.0 1
Austin, Texas:
City View Centre 137,218 55.0 3
Tower of the Hills 166,149 99.0 2
City View Center 128,716 100.0 1
Chicago:
Bannockburn I & II 209,969 92.7 2
Bannockburn IV 110,319 94.5 1
Dallas, Texas:
Quorum North 116,194 94.3 1
Quorum Place 178,399 74.0 1
Cedar Maple Plaza 112,972 88.8 3
Commons @ Las Colinas 1, 2, 3 604,234 100.0 3
Two Mission Park 77,852 80.7 1
5000 Quorum 162,186 85.6 1
Denver:
Harlequin Plaza 328,623 94.6 2
Quebec Court I & II 287,294 100.0 2
Quebec Center 106,865 91.6 3
Phoenix, Arizona:
Qwest Communications 532,506 100.0 4
Salt Lake City, Utah:
Sorenson Research Park 282,944 97.7 5
Wasatch Corporate Center 18 49,566 100.0 1
Wasatch Corporate Center 178,231 81.7 3
Sorensen X 41,288 100.0 1
TOTAL CONSOLIDATED PROPERTIES: 4,951,104 53
WEIGHTED AVERAGE 90.9 %
(1) Includes office and retail space but excludes storage space.
(2) Includes space for leases that have been executed and have
commenced as of June 30, 2002.
15
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
The following table sets outs a schedule of the lease expirations as of
June 30, 2002:
Approximate Net Percent of Leased
Rentable Area Subject Square Footage
to Expiring Lease Represented by
Year of Lease Expiration (square feet) (1) Expiring Leases
------------------------ --------------------- ------------------
2002 238,140 5.3%
2003 384,924 8.6%
2004 848,648 18.9%
2005 433,789 9.6%
2006 229,077 5.1%
2007 843,932 18.8%
2008 360,613 8.0%
2009 507,050 11.3%
2010 223,470 5.0%
2011 87,302 1.9%
2012 and thereafter 341,755 7.5%
4,498,700 100.0%
(1) Excludes 452,404 square feet of vacant space.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our and our affiliates, or the
industry's actual results, performance, achievements or transactions to be
materially different from any future results, performance, achievements or
transactions expressed or implied by such forward-looking statements. Such
factors include, among others, the following:
* National and local economic, business and real estate conditions that
will, among other things affect:
* Demand for office properties
* The ability of the general economy to recover timely from the
current economic downturn
* The availability and creditworthiness of tenants
* Level of lease rents
* The availability of financing for both tenants and us;
* Adverse changes in the real estate markets, including, among other
things:
* Competition with other companies, and
* Risks of real estate acquisition and development (including the
failure of pending developments to be completed on time and
within budget);
* Actions, strategies and performance of affiliates that we may not
control or companies in which we have made investments;
* The ability of CarrAmerica to maintain its status as a REIT for
federal income tax purposes;
* The ability to obtain insurance at a reasonable cost;
* Governmental actions and initiatives; and
* Environmental/safety requirements.
For further discussion of these and other factors that could impact our or
CarrAmerica's future results, performance, achievements or transactions, see the
documents that we and CarrAmerica file from time to time with the Securities and
Exchange Commission, and in particular, the section titled "The Company - Risk
Factors" in CarrAmerica's Annual Report on Form 10-K.
16
Quantitative and Qualitative Disclosure About Market Risk
Item 3. Quantitative and Qualitative Disclosures About Market Risk
CarrAmerica uses derivative financial instruments from time to time to
limit market risk. Interest rate protection agreements may be used to convert
floating rate debt to a fixed rate basis, to convert fixed rate debt to a
floating rate basis or to hedge anticipated financing transactions. CarrAmerica
uses derivative financial instruments only for hedging purposes, and not for
speculation or trading purposes. On May 8, 2002, CarrAmerica entered into an
interest rate swap, which we guarantee, with JP Morgan Chase and Bank of
America, hedging $150.0 million of senior unsecured notes due July 2004. The
interest rate swap matures at the same time the notes are due. The swap
qualifies as a fair value hedge. Net quarterly settlement payments are
recognized as an increase or decrease to CarrAmerica's interest expense. The
fair value of the interest rate swap is recognized on CarrAmerica's balance
sheet and the carrying value of the senior unsecured notes are increased or
decreased by an offsetting amount. As of June 30, 2002, the fair value of the
interest rate swap was approximately $1.7 million. CarrAmerica recognized a
credit to interest expense for the three months ended June 30, 2002 of
approximately $507,000 related to the swap.
Any other significant changes in our market risk that have occurred
since the filing of our Annual Report on Form 10-K for the year ended December
31, 2001 are summarized in the Liquidity and Capital Resources section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
17
Part II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARRAMERICA REALTY, L.P.
a Delaware Limited Partnership
By: CarrAmerica Realty GP Holdings, Inc.,
its general partner
/s/ Stephen E. Riffee
- -----------------------------------------------------
Stephen E. Riffee, Chief Financial Officer
(on behalf of the registrant and as the registrant's
principal financial officer)
Date: August 14, 2002