Item 1. Business
THE COMPANY
General
CarrAmerica Realty Corporation (the "Company") is a publicly-traded real estate investment trust ("REIT") that focuses primarily on the acquisition, development, ownership and operation of office properties in select suburban growth markets across the United States. The Company's national office strategy is responsive to the growing number of corporate office space users that are relocating their operations from central business districts to suburban markets to reduce operating costs and improve their employees' quality of life.
As of March 15, 1997, the Company owned a greater than 50% interest in a portfolio of 170 operating office properties, and six properties currently under construction, all of which are located in strategic markets across the United States. These markets include Southern California, Northern California, Seattle, Denver, Phoenix, Austin, Dallas, Chicago, Atlanta, South Florida and metropolitan Washington, D.C. These 170 operating properties contain an aggregate of approximately 13.4 million square feet of space (including approximately 910,000 square feet under construction). The operating properties owned by the Company as of December 31, 1996 were 93.6% leased as of that date, with approximately 1,000 tenants.
The Company and its predecessor, The Oliver Carr Company ("OCCO"), have successfully developed, owned and operated office buildings in the Washington, D.C. metropolitan area for more than 30 years. In November 1995, the Company announced a strategic alliance with a wholly-owned subsidiary of Security Capital U.S. Realty (together with Security Capital U.S. Realty, "USRealty"), a European real estate operating company which owns strategic positions in selected real estate companies in the United States. USRealty initially invested approximately $250 million in the Company in April 1996 for a 39% interest in the Company on a fully-diluted basis. As of March 15, 1997, USRealty owned approximately 39.7% of the outstanding common stock of the Company (35.6% on a fully diluted basis). In April 1996, the Company changed its name to CarrAmerica Realty Corporation.
The Company's experienced staff of over 625 employees, including over 425 on-site building employees, provides a full range of real estate services. The Company's principal executive offices are located at 1700 Pennsylvania Avenue, N.W., Washington, D.C. 20006, and its telephone number is (202) 624-7500. The Company's web site can be found at www.carramerica.com. The Company was organized as a Maryland corporation on July 9, 1992.
Business Strategy
The Company's primary business objective is to achieve long-term sustainable per share cash flow growth by (i) acquiring, developing, owning and operating office properties in suburban markets throughout the United States that exhibit strong, long-term growth characteristics and (ii) developing a national operating system that satisfies and capitalizes on the financial and operational demands of corporate office space users. The Company believes that growth-oriented companies are relocating to and expanding in suburban locations that offer lower operating costs, greater convenience and a higher quality of life than traditional central business districts. The Company seeks to provide suburban office space which will meet the changing needs of corporate users of office space.
The Company's business strategy is predicated on becoming one of the major owners and operators of office space in each of its selected suburban target markets; therefore, the Company is undertaking a major acquisition initiative as the initial stage of its national office strategy. The Company focuses its acquisition efforts in regions of the United States which possess strong, long-term growth characteristics, and within those regions the Company targets, in general, markets in which operating costs for businesses are relatively low, long-term population and job growth are expected to exceed the national average, and barriers to entry exist for new supply of office space. Additionally, the
Company's market officers coordinate with local third-party brokers to ensure the identification of the best available locations. As of December 31, 1996 (on a rentable square foot basis), 32% of the Company's portfolio was located in its Pacific region, primarily in the suburban Seattle and the California markets of San Jose, Silicon Valley, Pleasanton, Orange County, and San Diego; 41% in its Southeast region, primarily in the metropolitan Washington, D.C. and suburban Atlanta markets; and 27% in its Central and Mountain regions, primarily in the southeast suburban Denver, suburban Chicago and Austin, Texas markets. Downtown Washington, D.C., which represented 100% of the Company's portfolio in 1993, accounted for approximately 19% of the Company's portfolio (on a rentable square foot basis) at the end of 1996.
The Company has established a set of general guidelines and physical characteristics to evaluate the acquisition opportunities available to the Company in each identified target market. These guidelines include (i) the purchase price of an office property typically should be at a discount to the replacement cost of a comparable office property, (ii) rents of existing customers with leases expiring in the near-term typically should be at or below the current market rents for the given target market, and (iii) an office property generally should be low-rise, with flexible floor plates that are conducive to accommodating a variety of office space user needs. In addition, the Company looks for office properties that have ample parking and that are conveniently located near amenities and major transportation arteries.
To execute its national suburban office strategy, the Company is implementing a national operating system that will provide nationally coordinated customer service, marketing and development. The Company's national operating system consists of three components: (i) a Market Officer Group; (ii) a National Development Group; and (iii) a Corporate Services Group.
Market Officer Group. The Market Officer Group currently consists of nine market officers who cover ten of the eleven target markets in which the Company currently owns properties. These market officers are responsible for maximizing the performance of the Company's properties in their markets and ensuring that the needs of the Company's customers are consistently being met. Because they meet with the Company's customers on a regular basis, they are cognizant of and responsive to customers' relocation or expansion needs. The market officers have extensive knowledge of local conditions in their respective markets and, therefore, are invaluable in identifying attractive investment opportunities in their markets. In addition, through their contact with customers, market officers are well positioned to help the Corporate Services Group identify customers with new build-to-suit and multi-market requirements.
National Development Group. The National Development Group is responsible for developing suburban office properties, build-to-suit facilities and business parks. The architects, engineers, and construction professionals who comprise the National Development Group oversee every aspect of the Company's land planning, building design, construction and development of office properties, ensuring that all projects meet the same high standards and uniform specifications in building design and systems. As the Company implements its national strategy, the National Development Group's expertise should give the Company a competitive edge in marketing its facilities and services to customers. As of March 15, 1997, the Company owned (or held options to acquire) land in six of its eleven target markets which will support the future development of up to 3.3 million square feet of office space. The Company's goal is to allocate approximately 5% of its invested capital to investments in developable land. As of March 15, 1997, the Company had six suburban office properties under construction: a 58,000 square foot building in suburban Washington, D.C.; a 128,000 square foot building in suburban Atlanta; two buildings totaling 295,000 square feet in southeast Denver; a 129,000 square foot building in suburban Austin, Texas; and a 300,000 square foot building in San Jose, California.
Corporate Services Group. The Company plans to establish the Corporate Services Group during 1997. This group will be responsible for marketing the Company's properties, build-to-suit capabilities, and the national scope of the Company's operations to a targeted list of major corporate users of office space. The Corporate Services Group will act as a primary point of contact for national customers, coordinating all the
services the Company offers and giving corporate customers the opportunity to address their national space requirements efficiently and economically.
Recent Developments
In 1996, the Company invested $1.1 billion ($855.4 million in cash, the assumption of $184.4 million of debt and the issuance of $19.5 million in common stock and partnership interests ("Units")) in 146 operating office properties, 552,000 square feet of office space under construction, and 142 acres of land and land options held for future development. From January 1, 1997 to March 15, 1997, the Company invested $140.7 million in 10 operating office properties, placed 1 development project of approximately 101,000 square feet into service and acquired land which in the aggregate will support the development of 636,000 square feet of office space, 358,000 of which is currently under construction. The 1997 acquisitions were funded through $122.6 million in cash and the assumption of $18.1 million in debt. The table below shows the operating office properties purchased or placed in service between January 1, 1996 and March 15, 1997.
The following table shows the Company's land and land options held for future development, all of which were acquired between January 1, 1996 and March 15, 1997.
Capital Transactions
During the fourth quarter of 1996, the Company raised aggregate net proceeds of $249 million through the sale of 1.7 million shares of Series A Cumulative Convertible Redeemable Preferred Stock in October, from which the Company raised net proceeds of $43 million, and the sale of 8.2 million shares of its common stock to the public and a concurrent offering to USRealty in November, from which the Company raised net proceeds of $206 million. The net proceeds of these offerings were used to acquire the suburban office properties and land described above and to pay down indebtedness under the Company's unsecured line of credit.
In January 1997, the Company consummated a public offering and a concurrent offering to USRealty of 4.9 million shares of its common stock that raised net proceeds of approximately $136 million. The net proceeds were used to acquire the suburban office properties and land described above and to pay down indebtedness under the Company's unsecured line of credit.
In January 1997, the Company entered into a short-term, revolving credit agreement with Morgan Guaranty Trust of New York to borrow up to $150 million, secured by certain properties in the Company's portfolio.
Directors of the Company
The directors of the Company are divided into three classes, with approximately one-third of the directors elected by the stockholders annually. As of March 15, 1997, the Board of Directors of the Company consisted of the following persons:
Oliver T. Carr, Jr., 71, has been the Chief Executive Officer and Chairman of the Board of Directors of the Company since it commenced operations in February 1993. Mr. Carr's term as a director of the Company expires at the 1999 Annual Meeting of Stockholders. Mr. Carr founded OCCO in 1962 and since that time has been its Chairman of the Board and a director. In addition, Mr. Carr has served as President of OCCO since February 1993. Mr. Carr is also on the Board of Directors of Carr Park, Inc., a subsidiary of OCCO. He was Chairman of the Board of Trustees of The George Washington University until May 1995. Mr. Carr is the father of Thomas A. Carr and Robert O. Carr. Mr. Carr is a member of the Investment Committee and the Executive Committee of the Board of Directors.
Thomas A. Carr, 38, has been President and a director of the Company since February 1993. Mr. Carr's term as a director of the Company expires at the 1998 Annual Meeting of Stockholders. In May 1995, Mr. Carr was also appointed the Chief Operating Officer of the Company, at which time he resigned as the Company's Chief Financial Officer, a position he had held since February 1993. Mr. Carr was President of Carr Partners, Inc., a financial services affiliate of OCCO, from 1991 until February 1993, when Carr Partners, Inc. ceased operations. Prior to becoming President of Carr Partners, Inc., Mr. Carr was Vice President of Suburban Development and Regional Development Partner for Montgomery County for OCCO, beginning in 1985. Mr. Carr is a director of OCCO. Mr. Carr holds a Masters degree in Business Administration from Harvard Business School, and a Bachelor of Arts degree from Brown University. Mr. Carr is a member of the Board of Governors of the National Association of Real Estate Investment Trusts and a director of Lafayette Square Partners, Inc. Mr. Carr is the son of Oliver T. Carr, Jr. and the brother of Robert O. Carr. Mr. Carr is a member of the Investment Committee and the Executive Committee of the Board of Directors. In addition, Mr. Carr is a member of management's Operating Committee and Investment Committee.
Robert O. Carr, 47, has been a director of the Company and President and Chairman of the Board of Directors of Carr Real Estate Services, Inc. ("Carr Services, Inc."), a subsidiary of the Company, since February 1993. Mr. Carr's term as a director of the Company expires at the 1997 Annual Meeting of Stockholders. Mr. Carr is a director of OCCO and, from 1987 until February 1993, served as its President and Chief Executive Officer. Mr. Carr joined OCCO in 1973 and has served in a number of positions which have included the supervision of all development operations since 1979 and all day-to-day company operations since 1982 as Executive Vice President. Mr. Carr is a member of the Boards of Directors for the Greater Washington Research Center, the Corcoran School of Art, and the National Cathedral School for Girls. Mr. Carr is also a member of the Greater Washington Board of Trade, the Urban Land Institute, and the D.C. Chamber of Commerce. Mr. Carr holds a Bachelor of Arts degree from Trinity College. Mr. Carr is the son of Oliver T. Carr, Jr. and the brother of Thomas A. Carr. Mr. Carr is a member of the Executive Committee of the Board of Directors.
David Bonderman, 54, has been a director of the Company since its commencement of operations. Mr. Bonderman's term expires at the 1997 Annual Meeting of Stockholders. He is the managing general partner of TPG Partners, L.P., a private investment partnership. From October 1971 through June 1983, Mr. Bonderman was an associate and then partner in the law firm of Arnold & Porter, Washington, D.C. From July 1983 through August 1992, Mr. Bonderman served as the Vice President and Chief Operating Officer of Keystone, Inc. (formerly the Robert M. Bass Group, Inc.). Mr. Bonderman also serves as a director of Bell & Howell Holdings Company, Washington Mutual, Inc., Denbury Resources, Inc., National Education Corporation and Continental Airlines, Inc. Mr. Bonderman holds a Bachelor of Arts degree from the University of Washington and an L.L.B. degree from Harvard University. Mr. Bonderman is a member of the Executive Compensation Committee of the Board of Directors.
Andrew F. Brimmer, 70, has been a director of the Company since February 1993. Dr. Brimmer's term as a director of the Company expires at the 1999 Annual Meeting of Stockholders. He has been the President of Brimmer & Company, Inc., an economic and financial consulting firm, since 1976. Since
1995, Dr. Brimmer has served as the chairman of the District of Columbia Financial Control Board. Dr. Brimmer was a member of the Board of Governors of the Federal Reserve System from 1966 through 1974. He is also the Wilmer D. Barrett Professor of Economics at the University of Massachusetts-Amherst. Dr. Brimmer serves as a director of BankAmerica Corporation and Bank of America, BlackRock Investment Income Trust, Inc. (and other funds), PHH Corporation, E.l. du Pont de Nemours & Company, Navistar International Corporation, Gannett Company, Borg-Warner Automotive, Inc. and Airborne Express. Dr. Brimmer received a Bachelor of Arts and a Masters degree in Economics from University of Washington and holds a Ph.D. in Economics from Harvard University. Dr. Brimmer is a member of the Audit Committee of the Board of Directors.
A. James Clark, 69, has been a director of the Company since February 1993. Mr. Clark's term as a director of the Company expires at the 1998 Annual Meeting of Stockholders. He has been Chairman of the Board and President of Clark Enterprises, Inc., a Bethesda, Maryland-based company involved in real estate, communications, and commercial and residential construction, since 1972. Mr. Clark is a member of the University of Maryland Foundation, and serves on the Board of Trustees of The Johns Hopkins University. He is also a member of the PGA Tour Investments Policy Board and a director of Lockheed Martin Corporation and Potomac Electric Power Company. Mr. Clark is a graduate of the University of Maryland. Mr. Clark is a member of the Investment Committee, the Executive Compensation Committee, the Executive Committee and the Nominating Committee of the Board of Directors.
Anthony R. Manno, Jr., 44, has been a director of the Company since May 1996. Mr. Manno's term as a director of the Company expires at the 1997 Annual Meeting of Stockholders. Mr. Manno is a Managing Director of Security Capital Investment Research Incorporated, an affiliate of USRealty. Prior to joining Security Capital Investment Research Incorporated in 1993, Mr. Manno was a managing director of LaSalle Partners Limited where he served in various capacities from 1980 to 1993, including client manager for LaSalle Partners Limited's joint venture partner, Dai-ichi Mutual Life Insurance Company; manager of LaSalle Partners Limited's property finance group; and a member of LaSalle Partners Limited's investment committee. Prior thereto, Mr. Manno was a commercial real estate loan officer of The First National Bank of Chicago. Mr. Manno is a Certified Public Accountant. Mr. Manno received his Masters in Business Administration, with a concentration in Finance, from the University of Chicago School of Business and his M.A. and B.A. in Economics from Northwestern University.
Caroline S. McBride, 43, has been a director of the Company since July 1996. Mrs. McBride's term as a director of the Company expires at the 1997 Annual Meeting of Stockholders. Mrs. McBride is a Managing Director of Security Capital Investment Research Incorporated. From January 1993 to June 1996, Mrs. McBride was the director of private market investments for the IBM Retirement Fund and from January 1992 to January 1995, she was the director of real estate investments for such fund. Prior to joining the IBM Retirement Fund in 1992, Mrs. McBride was director of finance, investments and asset management for IBM's corporate real estate division. Mrs. McBride is on the Boards of Directors of the Pension Real Estate Association (PREA) and the Real Estate Research Institute. Mrs. McBride received her Masters in Business Administration from New York University and a Bachelor of Arts degree from Middlebury College. Mrs. McBride is a member of the Investment Committee and the Audit Committee of the Board of Directors.
J. Marshall Peck, 45, has been a director of the Company since June 1996. Mr. Peck was appointed to the Board in connection with the USRealty Transaction. Mr. Peck is a Managing Director of Security Capital Investment Research Incorporated. Prior to joining Security Capital Investment Research Incorporated in May 1996, Mr. Peck was a Managing Director of LaSalle Partners Limited since January 1989, where he served in various capacities over his 14-year tenure, with responsibility for operating groups within both the investment and services businesses and was a member of its management committee. Prior thereto, Mr. Peck held various marketing and management positions in the Data Processing Division of IBM. Mr. Peck is past Chairman of the Pension Real Estate Association and serves on the National Real Estate Advisory Board of the Nature Conservancy. Mr. Peck is on the Boards of
Directors of Regency Realty Corporation and Storage USA, Inc. Mr. Peck received his B.A. degree from University of North Carolina at Chapel Hill. Mr. Peck is a member of the Executive Committee and the Executive Compensation Committee of the Board of Directors.
George R. Puskar, 53, has been a director of the Company since its commencement of operations. Mr. Puskar's term expires at the 1999 Annual Meeting of Stockholders. He has served as the Chairman and Chief Executive Officer of Equitable Real Estate Investment Management, Inc. ("Equitable Real Estate") since 1989 and a vice president of The Equitable Life Assurance Society of the United States ("ELAS"). Mr. Puskar joined ELAS in 1966 in its local field office in Pittsburgh. Mr. Puskar became the President of Equitable Real Estate, a diversified real estate organization which is a subsidiary of ELAS, in 1984. Mr. Puskar serves as a director of Equitable Real Estate Capital Markets, Inc. and is a board member of the International Council of Shopping Centers, Clark Atlanta University, The Atlanta Chamber of Commerce, the Vice Chairman and a board member of the National Realty Committee, and a member of the Advisory Board of the Wharton School's Real Estate Center in Philadelphia. Mr. Puskar is a member of the Executive Committee and the Nominating Committee of the Board of Directors.
William D. Sanders, 55, has been a director of the Company since May 1996. Mr. Sanders is the Founder and Chairman of Security Capital Group, an affiliate of USRealty. Mr. Sanders retired on January 1, 1990, as chief executive officer of LaSalle Partners Limited, which he founded in 1968. Mr. Sanders is on the Boards of Directors of R. R. Donnelley & Sons Company, USRealty, Storage USA, Inc. and Regency Realty Corporation. Mr. Sanders is a former trustee and member of the executive committee of the University of Chicago and a former trustee fellow of Cornell University. Mr. Sanders received his Bachelor of Science from Cornell University. Mr. Sanders is a member of the Nominating Committee of the Board of Directors.
Wesley S. Williams, Jr., 54, has been a director of the Company since February 1993. Mr. Williams' term as a director of the Company expires at the 1998 Annual Meeting of Stockholders. Mr. Williams has been a partner of the law firm of Covington & Burling since 1975. He was adjunct professor of real estate finance law at the Georgetown University Law Center from 1971 to 1973 and is a contributing author to several texts on banking law and on real estate finance and investment. Mr. Williams is also on the Editorial Advisory Board of the District of Columbia Real Estate Reporter. Mr. Williams serves on the Boards of Directors of Blackstar Communications, Inc. and its Florida, Michigan and Oregon subsidiaries; Blackstar LLC and its Nebraska and South Dakota subsidiaries; and the Federal Reserve Bank of Richmond. Mr. Williams is Chairman of the Boards of Directors of Broadcast Capital, Inc. and Broadcast Capital Fund, Inc. and is Vice Chairman of The Lockhart Companies, Incorporated. Mr. Williams also is a member of the Executive Committee of the Board of Trustees of Penn Mutual Life Insurance Company. Mr. Williams received a B.A. and J.D. from Harvard University, an M.A. from the Fletcher School of Law and Diplomacy and an L.L.M. from Columbia University. Mr. Williams is a member of the Executive Compensation Committee of the Board of Directors.
Executive Officers and Certain Key Employees of the Company
In addition, as of March 15, 1997, the Company's executive officers and key employees were as follows:
Brian K. Fields, 37, has been the Company's Chief Financial Officer since May 1995. Prior to that time, Mr. Fields served as the Company's Vice President, Treasurer and Controller since February 1993. Mr. Fields served as Treasurer and Controller of OCCO from 1990 to February 1993. Prior to that time, Mr. Fields was a Senior Manager with KPMG Peat Marwick LLP in Washington, D.C. Mr. Fields was employed by KPMG Peat Marwick LLP for eight years. Since 1993, Mr. Fields has also been a director and Treasurer of Carr Services, Inc. and since 1996 he has served as a director and officer of several other subsidiaries of the Company. He holds a Bachelor of Science degree in Accounting from Virginia Tech and is a Certified Public Accountant. Mr. Fields is a member of management's Operating Committee and Investment Committee.
Philip L. Hawkins, 41, has been the Company's Managing Director of Asset Management since February 1996. Prior to that time, Mr. Hawkins was employed by LaSalle Partners Limited since 1982. Mr. Hawkins served as the Executive Vice President,
Eastern Division, Asset Management Group since 1995; the Senior Vice President, Northeast Region, Asset Management Group from 1990 to 1994 and in other asset management positions prior to that time. Mr. Hawkins was also a director of LaSalle Partners. He holds a Masters in Business Administration from the University of Chicago Graduate School of Business and a Bachelor of Arts degree from Hamilton College. Mr. Hawkins is a member of management's Operating Committee and Investment Committee.
Robert E. Peterson, 45, has been the Company's Regional Managing Director, Southeast Region, since November 1996. Mr. Peterson has over 23 years of real estate experience. Mr. Peterson's most recent experience includes 18 years as President of Peterson Properties, which he co-founded in 1978. Prior to forming Peterson Properties, Mr. Peterson was Vice President of Arthur Rubloff & Company, where he spent five years specializing in office and industrial leasing and investment property brokerage. Mr. Peterson is a former member of the Society of Industrial and Office Realtors and serves on the Developer Advisory council for the Georgia Chapter of the National Association of Industrial and Office Parks. He graduated from University of North Carolina at Chapel Hill, with a B.S. in Business Administration. Mr. Peterson is a member of management's Operating Committee and Investment Committee.
Robert G. Stuckey, 35, has been the Company's Managing Director of Acquisitions and Development since February 1996. Prior to that time, Mr. Stuckey was employed by Security Capital Industrial Trust, an affiliate of Security Capital Group, since January 1993, as a Senior Vice President managing the operations of the development group since November 1994, and as a Vice President supervising acquisition due diligence from May 1993 to November 1994. Prior to that time, Mr. Stuckey had seven years of experience with Trammell Crow Company. His most recent position there was as Chief Financial Officer for Trammel Crow Company NE, Inc. Mr. Stuckey holds a Masters in Business Administration from Harvard Business School and a Bachelor of Science in Finance from University of Nebraska. Mr. Stuckey is a member of management's Operating Committee and Investment Committee.
Paul R. Adkins, 38, has been the Company's Vice President, Market Officer for Washington, D.C. since August 1996. Mr. Adkins has been with the Company for over 14 years, including serving as Vice President of Acquisitions from May 1994 to August 1996. Mr. Adkins was instrumental in the Company's initial efforts to acquire suburban office properties in its suburban Atlanta and Austin, Texas target markets. Prior to that, Mr. Adkins served in a variety of other capacities with the Company, with over 12 years in commercial real estate leasing. Mr. Adkins was named "Top Producer" for the Washington metropolitan area in 1990 and 1991 by the Washington, D.C. Association of Realtors. Mr. Adkins is a member of the District of Columbia's Building Industry Association and Northern Virginia's National Association of Industrial and Office Parks. Mr. Adkins holds a Bachelor of Arts degree from Bucknell University.
Andrea F. Bradley, 36, has been the Company's Vice President, General Counsel and Corporate Secretary since August 1993. Mrs. Bradley was an attorney with the law firm of Shaw, Pittman, Potts and Trowbridge from 1991 to August 1993 and an attorney with the law firm of Paul, Hastings, Janofsky & Walker from 1985 to 1991, where she practiced primarily corporate finance and securities law. Mrs. Bradley holds a Juris Doctor from University of California at Los Angeles and an A.B. degree in American Studies from Stanford University.
Steven N. Bralower, 46, has been Senior Vice President of Carr Realty, L.P., a subsidiary of the Company, since May 1996 and prior thereto was Senior Vice President of Carr Services, Inc. from 1993 to May 1996. Mr. Bralower was Senior Vice President of OCCO from 1985 to February 1993 and was responsible for overseeing and directing one-half of OCCO's leasing activities in its portfolio of commercial office and retail space. Mr. Bralower first joined OCCO in 1978 as a commercial leasing agent. Mr. Bralower has been a member of the Georgetown University Law Center faculty. Mr. Bralower holds a Bachelor of Arts degree from Kenyon College.
Robert L. Brumm, 45, has been Vice President, Human Resources and Administration of the Company, since May 1996. From 1993 to 1996, Mr. Brumm held the same position with Carr Services, Inc. and from March 1990 to 1993 held the same
position with OCCO. He is responsible for managing the Human Resources, Risk Management, Training, and Office Management functions. He has over 20 years of experience including 8 years with Mark Controls Corporation and 5 years with the real estate division of Philip Morris, Inc. Mr. Brumm received his Bachelors degree from California State University at Long Beach.
Clete Casper, 37, has been the Company's Vice President, Market Officer for suburban Seattle since July 1996. Mr. Casper has over 10 years' experience in the real estate and marketing field. Mr. Casper's most recent experience includes 1 year as a Senior Associate with CB Commercial Real Estate Group Inc., Seattle, Washington. Prior to that, Mr. Casper was with Sabey Corporation in Seattle, Washington serving in the following capacities: 4 years as Development Manager and 5 years as a Marketing Associate. Mr. Casper is a graduate of Washington State University.
Joel DeSpain, 45, has been the Company's Vice President, Market Officer for Austin, Texas since August 1996. Mr. DeSpain has over 18 years' experience in the real estate and marketing field. Mr. DeSpain's most recent experience includes 2 years as a Vice President of Littlefield Real Estate Company in Austin, Texas. Prior to that, Mr. DeSpain spent 2 years with Faison-Stone in Austin, Texas as Vice President, 5 years with Grubb & Ellis in Austin, Texas as President, 2 years with Paragon Properties in Austin, Texas as Executive Vice President, and 7 years with The Home Company Realtors in Houston, Texas as Marketing Director. Mr. DeSpain holds a Doctor of Jurisprudence from South Texas College of Law and a BBA in Marketing from University of Houston.
John J. Donovan, Jr., 53, has been Senior Vice President of Carr Services, Inc. since February 1993. Prior to that, Mr. Donovan was Senior Vice President of OCCO from 1988 to February 1993 and was responsible for overseeing and directing one-half of OCCO's leasing activities in its portfolio of commercial office and retail space. Mr. Donovan joined OCCO as a commercial leasing agent in 1976. He is a member of the Advisory Board for Jubilee Enterprise of Greater Washington (an affiliate of Jubilee Housing and The Enterprise Foundation). Mr. Donovan holds a Bachelor of Arts degree from Georgetown University.
Karen B. Dorigan, 32, has been the Company's Vice President -- Land Due Diligence since January 1996 and is responsible for supervising land and development due diligence. Prior to that time and for more than 9 years, Mrs. Dorigan served in a variety of capacities in OCCO's development business, including from February 1993 to January 1996 serving as a Vice President. She is a past member of Northern Virginia's Building Industry Association's Arlington Chapter Council. Mrs. Dorigan holds a Bachelor of Science degree in Economics from the University of Pennsylvania, Wharton School.
J. Thad Ellis, 36, has been the Company's Vice President, Market Officer for suburban Atlanta since November 1996. Mr. Ellis has over 12 years' experience in the real estate field. Mr. Ellis' most recent experience includes 10 years with Peterson Properties where his primary responsibility was to oversee and coordinate the leasing and property management for the management services portfolio. Prior to that, Mr. Ellis spent two years with another Atlanta development company. Mr. Ellis is a graduate of Washington & Lee University and is involved with the National Association of Industrial and Office Parks and Atlanta's Chamber of Commerce and is also on the Advisory Board of Black's Guide.
Richard W. Greninger, 45, has been Senior Vice President of Carr Services, Inc. since March 1995. Prior to that time he had been Vice President of Carr Services, Inc. since February 1993. Mr. Greninger was with OCCO as Vice President of Property Management Services from January 1992 to February 1993. Prior to that time, Mr. Greninger was with CB Commercial Real Estate Group Inc., a commercial real estate firm, where he was Senior Vice President and Regional Manager of the Mid-Atlantic Property Management Division responsible for the management of 7.5 million square feet of commercial space. During 1994, Mr. Greninger served as President of the Greater Washington Apartment and Office Building Association. Mr. Greninger has served as a director of both the Institute of Real Estate Management and the Building Owners and Managers Association. Mr. Greninger holds a Masters in Business Administration from the University of Cincinnati and a Bachelor of Science degree from Ohio State University.
John S. Herr, 41, has been the Company's Vice President, Market Officer for Northern California since September 1996. Mr. Herr has over 12 years' experience in the real estate and marketing field. Mr. Herr's most recent experience includes 21U2 years as the President and Chief Executive Officer of Simeon Commercial Properties in San Francisco, California. Prior to that, Mr. Herr spent 8 years with Trammel Crow serving in the following capacities: 2 years as Principal and Executive Vice President in San Francisco; 3 years as Partner in Richmond, Virginia; and 4 years as Marketing Representative in Washington, D.C. Mr. Herr holds a Masters in Business Administration from Stanford University and a Bachelors degree from the U.S. Naval Academy.
Austin W. Lehr, 35, has been the Company's Vice President, Market Officer for Southeast Denver since July 1996. Mr. Lehr has over 10 years' experience in the real estate and marketing field. Mr. Lehr's most recent experience includes 4 years as a Vice President with Southwest Value Partners and Affiliates in Phoenix, Arizona. Prior to that, Mr. Lehr spent 4 years with Draper and Kramer, lncorporated in Washington, D.C. as the Director of Development and Marketing, and 2 years as a Vice President at Guaranty Federal Savings and Loan in Dallas, Texas. Mr. Lehr holds a Masters of Management degree from Northwestern University and a Bachelor of Arts degree from Williams College.
Dwight L. Merriman, 36, has been the Company's Vice President, Market Officer for Southern California since August 1996. Mr. Merriman has over 12 years' experience in the real estate and marketing field. Mr. Merriman's most recent experience includes 1 year as Vice President with Security Capital Industrial Trust in Irvine, California. Prior to that, Mr. Merriman spent 11 years with Overton, Moore in Los Angeles in the following capacities: 5 years as the Director of Marketing - Asset Management (Partner), 4 years as Director of Marketing - Development (Partner) and 2 years as a Marketing Associate. Mr. Merriman holds a Masters in Business Administration from University of California at Los Angeles and a Bachelors degree from University of Southern California.
B. Thomas Miller, Jr., 35, has been the Company's Vice President - Acquisitions and Marketing since September 1996. Mr. Miller has over 10 years of experience in the real estate and marketing field. Mr. Miller's most recent experience includes 3 years as Vice President of Security Capital Investment Research Incorporated. Prior to that time, Mr. Miller spent 3 years as a Senior Manager with Arthur Andersen S.C. Real Estate Services Group and 2 years as an Associate in Management Advisory Services at Kenneth Leventhal & Company. Mr. Miller holds a Bachelor of Arts degree in Finance from University of Texas at Austin.
Gerald J. O'Malley, 53, has been the Company's Vice President, Market Officer for suburban Chicago since July 1996. Mr. O'MalIey has over 29 years' experience in the real estate and marketing field. Mr. O'Malley's most recent experience includes 10 years as founder and President of G.J. O'MaIIey & Company, a real estate office leasing company. Prior to that, Mr. O'Malley spent 6 years as a leasing agent for LaSalle Partners in Chicago, Illinois, 4 years as a leasing and sales agent for the firm of Bennett and Kahnweiler, in Chicago, Illinois, and 8 years with Whiston Group as a property and leasing manager. Mr. O'Malley holds a Bachelors degree from Loyola University.
James D. Peterson, 49, has been the Company's Vice President, Market Officer for South Florida since November 1996. Mr. Peterson has over 25 years' experience in the real estate field. Mr. Peterson's most recent experience includes 3 years (from 1993 to October 1996) as Vice President of Peterson Properties with responsibility for property operations in South Florida. From 1978 to 1981, Mr. Peterson was President of Peterson Properties, which he co-founded. Mr. Peterson also spent 4 years with the Investment Life Insurance Company of America as Chairman and Chief Executive Officer, 7 years as Chairman of Cavanaugh Development Company, a general contractor and developer of office and industrial parks in San Diego, California, which he co-founded, and 7 years with Wachovia Bank and Trust Company. Mr. Peterson is involved with the National Association of Industrial and Office Parks and is a member of Boca Raton's Chamber of Commerce. Mr. Peterson holds a Masters in Business Administration from University of Texas - Austin and a Bachelor of Science degree in Economics from University of North Carolina at Chapel Hill.
Matthew L. Richardson, 37, has been a Senior Vice President of Carr Development & Construction, Inc., a subsidiary of the Company, since April 1996, with responsibility for all build-to- suit marketing and for assisting the Market Officer Group in qualifying, structuring and negotiating development opportunities. Prior to that time and for more than 8 years, Mr. Richardson served in a variety of capacities in OCCO's development business, including from September 1991 to April 1996 serving as its President. He is on the Board of Directors of the District of Columbia's Building Industry Association. Mr. Richardson holds a Masters of Business Administration and a Bachelor of Urban Planning degree from University of Virginia.
Debra A. Volpicelli, 32, has been the Company's Treasurer and Controller since May 1995. Prior to that time, Mrs. Volpicelli was the Company's Tax Manager since February 1993. Mrs. Volpicelli was Tax Manager for OCCO from 1990 to February 1993. Prior to that time, Mrs. Volpicelli was in the tax department of Arthur Andersen & Co., SC. Mrs. Volpicelli holds a Bachelor of Science degree in Business Administration from Georgetown University and is a Certified Public Accountant.
Joseph D. Wallace, 33, has been the Company's Vice President - Building Due Diligence since January 1996 and is responsible for supervising building acquisition due diligence. Prior to that time, Mr. Wallace was the Company's Vice President of Asset Management since February 1993. Mr. Wallace was Vice President of Carr Partners, Inc. from 1990 to February 1993. Prior to that, Mr. Wallace was co-Director of Asset Management for OCCO responsible for the investment oversight of OCCO's portfolio of commercial properties in the Washington, D.C. metropolitan area. Mr. Wallace holds a Bachelor of Science degree in Commerce from University of Virginia.
James S. Williams, 40, has been a Senior Vice President of Carr Development & Construction, Inc. with responsibility for oversight of all project management, design and construction operations since October 1996. Mr. Williams rejoined the Company after 2 years as Vice President of Operations of Obadwick International. Mr. Williams' initial tenure with the Company was from 1983 to 1994, during which time he served in a variety of capacities in OCCO's development business. Prior to that, Mr. Williams was employed by Holland & Lyons where he worked in project management of commercial and residential real estate development. Mr. Williams is a guest lecturer at George Washington University. Mr. Williams holds a Bachelor of Science degree in Business Administration from West Virginia University.
Item 2.
Item 2. Properties
General. As of December 31, 1996, the Company owned interests in 165 operating office properties consisting of whole or partial ownership interests, ranging from two to sixteen stories each, located in eleven target markets across the United States. As of December 31, 1996, the Company owned fee simple title or leasehold interest in 156 operating office properties, controlling partial interests in three operating office properties, and non-controlling partial interests of 2% to 50% in six operating office properties. In addition, as of December 31, 1996, the Company owned four office properties under development and a 50% interest in one additional office property development project. Except as disclosed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources," the Company has no immediate plans to renovate its operating office properties other than for routine capital maintenance. The Company believes its properties are adequately covered by insurance. The Company believes that, as a result of its national operating system, market research capabilities, access to capital, and experience as an owner, operator and developer of real estate, it will continue to be able to identify and consummate acquisition opportunities and to operate its portfolio more effectively than competitors without such capabilities. The Company, however, competes in many of its target markets with other real estate operators, some of whom may have been active in such markets for a longer period than the Company.
The following table sets forth certain related information about each operating property owned by the Company as of December 31, 1996:
(1) Includes office and retail space but excludes storage space.
(2) Includes space for leases that have been executed and have commenced as of December 31, 1996.
(3) Total annualized base rent is based on executed and commenced leases as of December 31, 1996. Total annualized base rent equals total original base rent, including historical contractual increases and excluding (i) percentage rents, (ii) additional rent payable by tenants such as common area maintenance, real estate taxes and other expense reimbursements, (iii) future contractual or contingent rent escalations, and (iv) parking rents.
(4) Calculated as total annualized base rent divided by net rentable area leased as of December 31, 1996.
(5) Includes tenants leasing 10% or more of rentable square footage (with the percentage of rentable square footage in parentheses).
(6) The Company owns the improvements on the property and has a leasehold interest in all or a portion of the underlying land.
(7) The Company holds a general and limited partner interest in a partnership that owns the property.
(8) The Company holds a 50% joint venture interest in the joint venture that owns this property and a 50% joint venture interest in another joint venture, which holds the remaining 50% interest in the joint venture that owns the property. As a result of preferential rights to annual distributions from another venture, the Company will receive distributions of less than 75% (but in no event less than 50%) of the total amount distributed with respect to this property in each year until the preferential distribution requirements are satisfied, but will receive 100% of any subsequent distributions during the year until its aggregate distributions equal 75% of the cumulative distributions with respect to the property since inception of the partnership. Thereafter, the Company will receive 75% of the distributions made during the year with respect to the property. Upon sale of the property, the Company will receive 75% of the distributions until the Company receives its preference amount, 50% until the remaining venturer receives its preference amount, and 75% of the distributions thereafter.
(9) The Company holds an effective 24% interest in the property by virtue of a 48% general partner interest in a partnership that owns a 50% general partner interest in the property.
(10)The Company holds an effective 15% interest in the property by virtue of a 30.6% limited partner interest in a partnership that has a 49% limited partner interest in the property.
(11)The Company holds a limited partner interest in the partnership that owns the property.
(12)The Company holds an effective 5% interest in the property by virtue of a 7.85% limited partner interest in a partnership that owns a 63.7% limited partner interest in the property. The partnership in which the Company holds an interest owns the improvements on the property and has a leasehold interest in the underlying land.
(13)The Company holds a 50% joint venture interest, and is the managing partner.
Occupancy, Average Rentals and Lease Expirations. As of December 31, 1996, 93.6% of the aggregate net rentable square footage in the 159 operating office properties whose results are consolidated in the financial statements of the Company was leased. The following table sets forth the percent leased and average annualized rent per leased square foot (excluding storage space) for office and retail space combined for the past five years for the operating office properties that were consolidated for financial statement purposes in each of the years indicated:
Average Percent Annualized Rent Number of Leased at Per Leased Consolidated Year Year End Square Foot(1) Properties - --------------------------------------------------------------------------
1996 93.6% $19.37 159 1995 93.5 27.36 13 1994 95.9 32.48 11 1993 95.5 34.35 9 1992 97.5 33.68 9
(1)Calculated as total annualized building operating revenue, including tenant reimbursements for operating expenses and excluding parking and storage revenue, divided by the total square feet, excluding storage, in the building under lease at year-end.
The following table sets forth a schedule of the lease expirations for leases in place as of December 31, 1996 for each of the ten years beginning with 1997 and thereafter for the 159 operating office properties whose results are consolidated in the financial statements of the Company, assuming that no tenants exercise renewal options:
Building and Lease Information. The following table sets forth certain lease-related information for the 159 operating office properties that were consolidated for financial statement purposes regarding leases that commenced during the year ended December 31, 1996, excluding leases for office properties that were executed prior to the date of acquisition of such properties:
Mortgage Financing. As of December 31, 1996, the 159 operating office properties that were consolidated for financial statement purposes were subject to existing mortgage indebtedness in an aggregate principal amount of $440.4 million, and unsecured indebtedness of $215.0 million, which bears a floating interest rate. The Company's fixed rate debt bears an effective weighted average interest rate of 8.1% and a weighted average maturity of 5.8 years (assuming loans callable before maturity are called as early as possible). The existing mortgage indebtedness for the consolidated operating office properties is set forth in the table below:
(1) Note is callable by the lender after July 1, 2004. The estimated principal balance at July 1, 2004 will be $14,262,000.
(2) Note is callable by the lender after June 30, 2002. The estimated principal balance at June 30, 2002 will be $13,840,000.
(3) Principal balance was repaid in full in January 1997.
(4) Prepayable after November 1, 1997 at the rates stated in the loan documents.
(5) Currently prepayable at the rates stated in the loan documents.
(6) Prepayable after December 19, 2005 at the rates stated in the loan documents.
(7) Prepayable after January 2001 at the rates stated in the loan documents.
(8) Prepayable after December 1, 1999 at the rates stated in the loan documents.
Additional Property Information. Because the aggregate book value of the three properties that constitute International Square is in excess of 10% of the Company's total assets as of December 31, 1996, additional information regarding this property is provided below.
International Square was developed in three phases that were completed in 1977, 1979 and 1982. The complex occupies three-quarters of a city block bordered by K, 18th, 19th and Eye Streets, N.W., directly above Farragut West, one of Washington, D.C.'s busiest Metro stations. The Metro level of International Square offers a 600-seat food court, with more than a dozen carry-out food establishments, serving a variety of international foods. The street level of International Square contains more than 20 retail stores, including a book store, a travel agency, clothing stores, and restaurants. A two-level underground parking garage contains approximately 725 parking spaces. The Company has no immediate plans to renovate International Square other than for routine capital maintenance and believes the property is adequately covered by insurance.
As of December 31, 1996, approximately 91.7% of the rentable square footage in the three buildings constituting International Square was leased. The following table sets forth the percent leased and average annualized rent per leased square foot (excluding storage space) for the past five years for International Square:
Average Percent Annualized Rent Leased at Per Leased Year Year End Square Foot(1) - -------------------------------------------------------------------------------- 1996 91.7% $33.73 1995 89.9 34.18 1994 96.1 33.36 1993 95.5 33.32 1992 95.9 34.08
(1) Calculated as total building operating revenue, including tenant reimbursements for operating expenses and excluding parking and storage revenue, divided by the total square feet in the building, excluding storage, under lease at year-end.
At December 31, 1996, the International Monetary Fund ("IMF"), an intergovernmental financial agency, occupied 432,310 square feet in International Square under direct leases with the Company that expire during 1998 and 2002. The IMF is currently constructing an office building in Washington, D.C. which should be completed by 1998, and the IMF may move some of its employees currently in International Square to their new building. The Company has had discussions with the IMF and they have indicated that they may reduce their office space requirements in International Square by approximately 133,000 square feet by the year 2000; however, there can be no assurances that the IMF will not vacate more space than 133,000 square feet.
Three tenants in 1850 K Street, Phase I of the project, occupy over 10% of the rentable square footage. As of December 31, 1996, the IMF occupied 94,258 square feet (25% of the rentable square footage) pursuant to a lease which expires January 15, 1998. The IMF has an option to renew the lease on 39,270 square feet for two consecutive five-year periods and an option to renew the lease on 12,456 square feet for consecutive terms of two and a half years and five years. The law firm of McDermott, Will & Emery occupies 62,975 square feet (17% of the rentable square footage) pursuant to a lease which expires on December 31, 1997. McDermott, Will & Emery has notified the Company that it plans to vacate its space on September 30, 1997. Merrill Lynch occupies 51,232 square feet (14% of the rentable square footage) pursuant to a lease that expires on December 31, 2008, with an option to renew for two five-year terms.
The IMF is the only tenant occupying more than 10% of the rentable square footage in 1825 Eye Street, Phase II of the project, occupying 63% of the rentable square footage in that building as of December 31, 1996. Its leases, which expire on various dates from January 15, 1998 to August 1, 2002, cover 234,153 square feet. The lease that expires as of January 15, 1998 contains an option to renew the lease on 74,269 square feet for two consecutive five-year terms. The lease that expires on August 1, 2002 contains an option to renew the lease on 96,013 square feet for an additional five-year term.
The IMF is the only tenant in 1875 Eye Street, Phase III of the project, occupying more than 10% of the rentable square footage. The IMF occupies 103,899 square feet (39% of the rentable square footage) pursuant to three leases which expire on July 31, 2002 and provide renewal options on the entire space for two five-year terms.
The following table sets out a schedule of the lease expirations for International Square for each of the ten years beginning with 1997 and thereafter:
The aggregate tax basis of depreciable real property of the office properties constituting International Square for Federal income tax purposes is $149,350,000 as of December 31, 1996. Depreciation and amortization are computed on the Modified Accelerated Cost Recovery System (MACRS), Accelerated Cost Recovery System (ACRS), declining balance or straight-line methods over the estimated useful lives of the real property which range from 15 to 50 years. The aggregate tax basis for depreciable personal property associated with these office properties for Federal income tax purposes is $1,010,000 as of December 31, 1996. Depreciation and amortization are computed on the double declining balance method or straight-line method over the estimated useful life of the personal property of 5 to 7 years.
The current realty tax rate for International Square is $2.15 per $100 of assessed value. The total annual tax at this rate for 1997 is $3,561,000 at an assessed value of $165,640,000.
For additional information regarding the Company's office properties and their operation, see "Item 1, Business."
Item 3.
Item 3. Legal Proceedings
The Company is a party to a variety of legal proceedings arising in the ordinary course of its business. All of these matters, taken together, are not expected to have a material adverse impact on the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity & Related Stockholder Matters
The Company's common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "CRE". The Company's common stock was listed on the NYSE beginning on February 9, 1993. As of February 28, 1997, there were 423 stockholders of record. The following table sets forth the high and low sale prices of the Company's common stock as reported in the NYSE Composite Tape, and the dividends per share of common stock paid:
1996 1Q 2Q 3Q 4Q Full Year - --------------------------------------------------------------------------------
High $ 25 25 1/4 25 7/8 29 1/2 29 1/2 Low $ 23 5/8 23 5/8 21 7/8 24 7/8 21 7/8 Dividend $.4375 .4375 .4375 .4375 1.75
- --------------------------------------------------------------------------------
High $ 18 1/4 19 3/4 19 3/4 24 5/8 24 5/8 Low $ 17 1/8 16 3/4 17 1/4 18 1/2 16 3/4 Dividend $.4375 .4375 .4375 .4375 1.75
On April 30, 1996, the Company sold 11,627,907 shares of its common stock directly to USRealty. These shares were not registered under the Securities Act of 1933, as amended (the "Securities Act") in reliance on Section 4(2) of the Securities Act based on the fact that USRealty is a single, sophisticated investor.
On July 24, 1996, the Company sold 2,785,714 shares of its common stock directly to USRealty, which shares were not registered under the Securities Act. These shares were sold in connection with a public offering by the Company of 6,500,000 shares of common stock, of which USRealty bought 400,000 shares of common stock. The 2,785,714 shares were sold at the public offering price of $22.00 per share in reliance on Section 4(2) of the Securities Act based on the fact that USRealty is a single, sophisticated investor with a previous investment relationship with the Company. No underwriting discount was applied to any shares purchased by USRealty directly from the Company or in the public offering.
The Company, in order to qualify as a REIT, is required to make distributions (other than capital gain distributions) to its stockholders in amounts at least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed without regard to the dividends paid deduction and its net capital gain) and (B) 95% of the net income (after tax), if any, from foreclosure property, minus (ii) the sum of certain items of non-cash income. The Company's distribution strategy is to distribute what it believes is a conservative percentage of its cash flow permitting the Company to retain funds for capital improvements and other investments while funding its distributions.
For Federal income tax purposes, distributions may consist of ordinary income, capital gains, nontaxable return of capital or a combination thereof. Distributions that exceed the Company's current and accumulated earnings and profits (calculated for tax purposes) constitute a return of capital rather than a dividend and reduce the stockholder's basis in his or her shares of common stock. To the extent that a distribution exceeds both current and accumulated earnings and profits and the stockholder's basis in his or her shares, it will generally be treated as gain from the sale or exchange of that stockholder's shares. The Company annually notifies stockholders of the taxability of distributions paid during the preceding year. The following table sets forth the taxability of distributions paid in 1996, 1995, and 1994:
1996 1995 1994 - --------------------------------------------------------------------------------
Ordinary income 95% 85% 75% Capital Gain -- -- -- Return of Capital 5% 15% 25%
Item 6.
Item 6. Selected Financial Data
The following table sets forth selected financial and operating information for the Company as of December 31, 1996, 1995, 1994 and 1993 and for the years ended December 31, 1996, 1995 and 1994 and the period from February 16, 1993 (commencement of operations) to December 31, 1993. The following table also sets forth selected financial and operating information for the Carr Group, the predecessor entity to the Company, as of and for the year ended December 31, 1992, and for the period from January 1, 1993 to February 15, 1993.
The following selected financial and operating information should be read in conjunction with "Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is based primarily on the Consolidated Financial Statements of CarrAmerica Realty Corporation and its subsidiaries as of December 31, 1996, 1995 and 1994.
This information should be read in conjunction with the accompanying financial statements and notes thereto. These financial statements include all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the periods presented, and all such adjustments are of a normal, recurring nature.
RESULTS OF OPERATIONS--1996 TO 1995
Real Estate Operating Revenue. Total real estate operating revenue increased $65.8 million, or 65.3%, to $166.7 million for 1996 as compared to $100.9 million for 1995. The increase in revenue was primarily attributable to a $64.6 million and a $1.2 million increase in rental revenue and real estate service revenue, respectively. The Company experienced net growth in its rental revenue as a result of its acquisitions, which contributed approximately $68.2 million of additional rental revenue in 1996. Rental revenue from properties that were fully operating throughout both years decreased by approximately $3.6 million due to increased vacancies experienced in those properties. Real estate service revenue increased by $1.2 million, or 10.6% for 1996 to $12.5 million as compared to $11.3 million for 1995. The increase was primarily as a result of development fees earned by Carr Development & Construction, Inc., which was acquired by the Company in May 1996.
Real Estate Operating Expenses. Total real estate operating expenses increased $54.4 million for 1996, or 65.8%, to $137.1 million as compared to $82.7 million for 1995. The net increase in operating expenses was attributable to a $20.3 million increase in property operating expenses, a $9.8 million increase in interest expense, a $4.5 million increase in general and administrative expenses, and a $19.8 million increase in depreciation and amortization. The increase in property operating expenses was primarily attributable to $20.2 million in operating expenses associated with property acquisitions. Exclusive of operating expenses attributable to new property acquisitions, property operating expenses increased by $.1 million for 1996. The increase in the Company's interest expense is primarily related to borrowings for acquisitions. The increase in general and administrative expenses is predominantly a result of the addition of new staff to implement the Company's new business strategy, the addition of approximately $1.8 million of expenses associated with Carr Development & Construction, Inc., and inflation. The increase in depreciation and amortization was predominately a result of additional depreciation and amortization on the Company's real estate acquisitions.
Other Operating Income (Expense). Other operating income (expense) increased $.8 million for 1996, to ($.1) million as compared to ($.9) million for 1995, primarily as a result of an increase in interest income and the addition of equity in earnings of CC-JM II Associates, a joint venture which owns the Booz-Allen & Hamilton Building. The Company is a 50% venturer in this entity, which constructed the Booz-Allen & Hamilton Building that was placed in service in January 1996. The increases in other operating income were partially offset by an additional loss recognized on the write-off of intangible assets.
Net Income. Net income of $24.3 million was earned for 1996 as compared to $12.1 million during 1995. The comparability of net income between the two periods is impacted by the acquisitions the Company made and the other changes described above.
Cash Flows. Net cash provided by operating activities increased $47.0 million, or 133.3%, to $82.3 million for 1996 as compared to $35.3 million for 1995, primarily as a result of the acquisitions made by the Company. Net cash used by investing activities increased $795.3 million, to $876.9 million for 1996 as compared to $81.6 million for 1995, primarily as a result of capital deployed by the Company for acquisitions of office properties, land held for future development and construction in progress. Net cash provided by financing activities increased $776.0 million to $813.1 million provided for 1996 as compared to $37.1 million provided for 1995, primarily as a result of the sale of common stock and preferred stock by the Company and net borrowings for the Company's acquisitions.
RESULTS OF OPERATIONS--1995 TO 1994
Real Estate Operating Revenue. Total real estate operating revenue increased $9.3 million, or 10.2%, to $100.9 million in 1995 as compared to $91.6 million in 1994. The increase in revenue was primarily attributable to a $6.9 million and a $2.4 million increase in rental revenue and real estate service revenue, respectively. The Company experienced net growth in its rental revenue as a result of its acquisitions which contributed approximately $8.1 million of additional rental revenue in 1995. Rental revenue contributed by properties that were fully operating throughout both periods declined by approximately $1.2 million, or 1.5%. These properties, all of which were located in downtown Washington, D.C., experienced lower rental revenue in the aggregate during 1995 as a result of (a) lower occupancy rates, (b) the renegotiation of certain tenants' leases resulting in lower rental rates, and (c) new leases entered into by the Company at rates lower than the expiring leases' rental rates. The Company experienced growth in its real estate service income of $1.7 million as a result of its acquisition of real estate service contracts in 1995. In addition, real estate service revenues from the Company's core service contracts increased by $.7 million, or 8.2%, in 1995.
Real Estate Operating Expenses. Total real estate operating expenses increased $7.7 million, or 10.2%, to $82.7 million as compared to $75.0 million in 1994. The net increase in operating expenses was attributable to a $1.9 million increase in property operating expenses, a $.5 million increase in interest expense, a $1.2 million increase in general and administrative expenses, and a $4.1 million increase in depreciation and amortization. The increase in property operating expenses was primarily attributable to $2.4 million in operating expenses associated with property acquisitions. Exclusive of operating expenses attributable to new property acquisitions, property operating expenses decreased $.5 million, or 1.9%, in 1995 predominately as a result of lower real estate tax assessments. The increase in the Company's interest expense is primarily related to borrowings for acquisitions. The increase in general and administrative expenses is predominately a result of general and administrative expenses associated with the real estate service contracts acquired in 1995 and inflation. The increase in depreciation and amortization is predominately a result of depreciation and amortization on the Company's real estate and real estate service contract acquisitions.
Other Operating Income (Expense). In January 1996, the Company terminated an agreement to acquire the development business of The Evans Company and, as a result, recognized a $1.9 million non-recurring charge to its earnings in the fourth quarter of 1995. The Company took this action in order to focus on implementing its national growth strategy.
Net Income. Net income of $12.1 million was earned during 1995 as compared to $12.1 million during 1994. The comparability of net income between the two periods is impacted by the acquisitions the Company made and the other changes described above.
Cash Flows. Net cash provided by operating activities increased $5.4 million, or 18.0%, to $35.3 million in 1995 as compared to $29.9 million in 1994, primarily as a result of the acquisitions made by the Company. Net cash used by investing activities increased $14.6 million, or 21.8%, to $81.6 million in 1995 as compared to $67.0 million in 1994, primarily as a result of capital deployed by the Company for acquisitions of office properties and real estate service contracts. Net cash provided by financing activities increased $4.5 million, or 13.7%, to $37.1 million in 1995 as compared to $32.6 million in 1994, primarily as a result of net borrowings for the Company's acquisitions.
Liquidity and Capital Resources
The Company's total indebtedness at December 31, 1996 was $655.4 million, of which $215.0 million, or 32.8%, had a LIBOR-based floating interest rate. The Company's fixed rate indebtedness had an effective weighted average interest rate of 8.1% and had a weighted average term to maturity of 5.8 years. In addition to the indebtedness outstanding, the Company had total borrowing capacity under its unsecured line of credit of $283.0 million allowing the Company to borrow up to an additional $68.0 million at December 31, 1996. Based upon the Company's total market capitalization at December 31, 1996 of $2.147 billion (the stock price was $29.25 per share and the total shares/Units outstanding were 51,008,319), the Company's debt represented 30.52% of its total market capitalization. On January 28, 1997, the Company obtained a $150 million, short-term revolving credit facility from Morgan Guaranty Trust Company of New York, secured by certain of the Company's properties. The Company currently has $89.0 million of borrowing capacity under this facility, of which, as of March 15, 1997, the Company had drawn $86.0 million. The Company intends to use the credit facility to finance the acquisitions and development of office properties and to meet working capital needs.
The Company will require capital to invest in its existing portfolio of operating assets for major capital projects such as large-scale renovations, routine capital expenditures and deferred maintenance on certain properties recently acquired and tenant related capital expenditures, such as tenant improvements and allowances and leasing commissions. With respect to major capital projects, the Company is planning a renovation of a 327,000 square foot property in southeast Denver during 1997 which will cost $2.0 million, or approximately $5.00 per square foot. During 1997, the Company is also completing renovations of several garages in its downtown Washington, D.C. portfolio. The total remaining cost of the garage renovations will be approximately $1.7 million. With respect to routine capital expenditures and deferred maintenance on certain properties recently acquired, the Company anticipates spending approximately $5.8 million, or approximately $0.52 per square foot, during 1997 on its portfolio of operating assets owned as of December 31, 1996. The Company expects this amount to decrease in subsequent years as deferred maintenance activities are completed on recently acquired properties and as the emphasis of the Company's growth shifts from acquiring existing office properties to developing new properties. The Company's capital requirements for tenant related capital expenditures are dependent upon a number of factors including square feet of expiring leases, tenant retention ratios and whether the expiring leases are in central business district properties or suburban properties. During 1997, the Company has 256,347 square feet and 1,251,459 square feet of expiring leases in central business district properties and suburban properties, respectively. Tenant related capital expenditures (tenant improvements, cash allowances and leasing commissions) for 1996 were $19.22 per square foot and $7.56 per square foot for leases executed in 1996 for the Company's central business district properties and suburban properties, respectively. The Company intends to use cash flow from operations and its unsecured revolving credit facility to meet its working capital needs for its existing portfolio of operating assets.
The Company will also require a substantial amount of capital for development projects currently underway and planned for the future. The Company currently has six development projects underway which are expected to require a total investment by the Company of $119.4 million. The Company intends to use cash flow from operations and its unsecured, revolving credit facility to meet its working capital needs for its existing portfolio of operating assets.
Net cash flow provided by operating activities was $82.3 million for 1996, compared to $35.3 million in 1995. The increase in net cash flow provided by operating activities was primarily as a result of acquisitions made by the Company.
The Company's investing activities used approximately $876.9 million and $81.6 million in 1996 and 1995, respectively. The Company's investment activities included the investment in the acquisition of operating properties, land and real estate service contracts, as well as meeting the construction costs of its properties currently under development, of approximately $857.1 million and $71.8 million in 1996 and 1995, respectively. Additionally, the Company invested approximately $11.5 million and $8.9 million in 1996 and 1995, respectively, in its existing real estate assets.
Net of distributions to the Company's shareholders, the Company's financing activities provided net cash of $813.1 million and $37.1 million in 1996 and 1995, respectively. The Company had net borrowings of approximately $215.0 million in 1996 and borrowings of $72.0 million in 1995, to provide adequate capital for the Company's investing activities. Additionally, in 1996, the Company raised $708.5 million in net proceeds from the sales of common stock and preferred stock to provide adequate capital for the Company's investing activities and to repay certain indebtedness. In 1995, the Company did not raise any capital from equity offerings.
Rental revenue and real estate service revenue have been the principal sources of capital to fund the Company's operating expenses, debt service and capital expenditures, excluding non-recurring capital expenditures. The Company believes that rental revenue and real estate service revenue will continue to provide the necessary funds for its operating expenses and debt service. The Company expects to fund capital expenditures, including tenant concession packages, building renovations and construction costs, from (i) available funds from operations, (ii) existing capital reserves, and (iii) if necessary, credit facilities established with third party lenders. If these sources of funds are insufficient, the Company's ability to make expected distributions may be adversely impacted. At December 31, 1996, the Company had cash of $35.9 million, of which $8.2 million was restricted.
The Company's dividends are paid quarterly. Amounts accumulated for distribution are primarily invested by the Company in short-term investments that are collateralized by securities of the United States Government or any of its agencies.
Management believes that the Company will have access to the capital resources necessary to expand and develop its business. Accordingly, the Company may seek to obtain funds through additional equity offerings or debt financings in a manner consistent with its intention to operate with a conservative borrowing policy. The Company anticipates that adequate cash will be available to fund its operating and administrative expenses, continuing debt service obligations, the payment of dividends in accordance with REIT requirements in both the short-term and long-term, and future acquisitions of rental properties.
The Company believes that funds from operations is an appropriate measure of the performance of an equity REIT because industry analysts have accepted it as a performance measure of equity REITs. In accordance with the final NAREIT White Paper on Funds From Operations as approved by the Board of Governors of NAREIT on March 3, 1995, funds from operations represents net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring or sales of property, plus depreciation and amortization of assets uniquely significant to the real estate industry and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis. The Company's funds from operations in 1994 have been restated to conform to the new NAREIT definition of funds from operations. Funds from operations does not represent net income or cash flow generated from operating activities in accordance with generally accepted accounting principles and should not be considered an alternative to net income as an indication of the Company's performance or to cash flows as a measure of liquidity or the Company's ability to make distributions.
The following table sets forth the calculation of the Company's funds from operations for 1996, 1995 and 1994:
(In thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Net income before minority interest $29,534 17,284 17,821 Adjustments to derive funds from operations: Add: Depreciation and amortization 35,888 17,564 14,523 Deduct: Minority interests (non-Unitholders) share of depreciation and amortization and net income (926) (1,658) (1,704) ------- ------ ------ Funds from operations before allocation to the minority Unitholders 64,496 33,190 30,640 Less: Funds from operations allocable to the minority Unitholders (8,610) (7,876) (8,640) ------- ------ ------ Funds from operations allocable to CarrAmerica Realty Corporation $55,886 25,314 22,000 ======= ====== ======
Changes in funds from operations are largely attributable to changes in net income between the periods as previously discussed.
Acquisition and Development Activity
The following is a discussion of the Company's acquisition and development activity during 1996. A more detailed discussion can be found in "Item 1. Business -- Recent Developments."
During 1996, the Company acquired the following properties: in its Pacific region, the Company acquired an aggregate of 73 buildings containing a total of approximately 4.0 million square feet, for an aggregate purchase price of approximately $454.3 million; in its Mountain region, the Company acquired an aggregate of 13 buildings containing a total of approximately 1.3 million square feet, for an aggregate purchase price of approximately $112.7 million; in its Central region, the Company acquired an aggregate of 17 buildings containing a total of approximately 2.1 million square feet, for an aggregate purchase price of approximately $243.5 million; and in its Southeast region, the Company acquired an aggregate of 43 buildings containing a total of approximately 1.8 million square feet, for an aggregate purchase price of approximately $178.3 million.
During 1996, the Company also acquired or purchased options to acquire 142 acres of developable land in four of its target markets: suburban Seattle; southeast Denver; Austin, Texas; and suburban Chicago. In the aggregate, this land (including land subject to purchase options) will support development of up to 3.2 million square feet of office space. In addition, as of December 31, 1996, the Company had three properties under construction: 128,000 square feet in suburban Atlanta; and an aggregate of 295,000 square feet in southeast Denver (including a build-to-suit project with 189,000 rentable square feet). Land held for development was purchased for an aggregate purchase price of $32.3 million. Costs incurred during 1996 for properties under construction were $31.7 million. An additional $36.3 million will be expended for completion of projects already under construction as of December 31, 1996.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data included in this Annual Report on Form 10-K are listed in Part IV, Item 14(a).
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is hereby incorporated by reference to the material appearing in Part I of this Annual Report on Form 10-K and in the Proxy Statement for the Annual Stockholders Meeting to be held in 1997 (the "Proxy Statement").
Item 11.
Item 11. Executive Compensation
The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption "Executive Compensation."
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption "Voting Securities and Principal Holders Thereof."
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption "Certain Relationships and Transactions."
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
14(a)(1) Financial Statements
Reference is made to the Index to Financial Statements and Schedule on page.
14(a)(2) Financial Statement Schedule
Reference is made to the Index to Financial Statements and Schedule on page.
14(a)(3) Exhibits
3.1 Amendment and Restatement of Articles of Incorporation of CarrAmerica Realty Corporation, as amended on April 29, 1996 and April 30, 1996 (incorporated by reference to the same numbered exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and filed May 15, 1996).
3.2 Second Amendment and Restatement of By-laws of CarrAmerica Realty Corporation (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated and filed February 12, 1997).
3.3 Articles Supplementary of Series A Cumulative Convertible Redeemable Preferred Stock dated October 24, 1996 (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and filed on November 5, 1996).
10.1 First Amended and Restated Agreement of Limited Partnership of CarrAmerica Realty, L.P., dated May 24, 1996, as amended (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and filed on August 14, 1996).
10.2 Third Amended and Restated Agreement of Limited Partnership of Carr Realty, L.P., dated March 5, 1996, as amended (incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and filed on May 15, 1996).
10.3 1993 Carr Realty Option Plan (incorporated by reference to Exhibit 10.3 of the Company's Registration Statement on Form S-11, No. 33-53626).
10.4 Non-Employee Director Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8, No. 33-92136).
10.5 1997 Stock Option and Incentive Plan.
10.6 Noncompetition and Restriction Agreement by and among The Oliver Carr Company, Oliver T. Carr, Jr., Carr Realty Corporation and Carr Realty, L.P. (incorporated by reference to Exhibit 10.7 of the Company's Registration Statement on Form S-11, No. 33-53626).
10.7 Promissory Note from Carr Real Estate Services, Inc. to Carr Realty, L.P. (incorporated by reference to the same titled exhibit to the Company's Registration Statement on Form S-11, No. 33-72974).
10.8 Security Agreement granted by Carr Real Estate Services, Inc. to Carr Realty, L.P. (incorporated by reference to the same titled exhibit to the Company's Registration Statement on Form S-11, No. 33-72974).
10.9 Promissory Note from Carr Realty, L.P. to the Northwestern Mutual Life Insurance Company (incorporated by reference to Exhibit 10.27 of the Company's Registration Statement on Form S-11, No. 33-72974).
10.10 Deed of Trust and Security Agreement by and among Carr Realty, L.P., Patrick H. McGuire, III, and the Northwestern Mutual Life Insurance Company (incorporated by reference to Exhibit 10.28 of the Company's Registration Statement on Form S-11, No. 33-72974).
10.11 Stock Purchase Agreement, dated November 5, 1995 by and among Carr Realty Corporation, Security Capital Holdings, S.A. and Security Capital U.S. Realty (incorporated by reference to Exhibit 5.1 to the Company's Current Report on Form 8-K dated November 6, 1995).
10.12 Amendment No. 1 to Stock Purchase Agreement, dated April 29, 1996 by and among Carr Realty Corporation, Security Capital Holdings, S.A. and Security Capital U.S. Realty (incorporated by reference to Exhibit 2.1 of Security Capital U.S. Realty's Schedule 13D dated April 30, 1996).
10.13 Stockholders Agreement, dated April 30, 1996 by and among Carr Realty Corporation, Carr Realty, L.P., Security Capital Holdings, S.A. and Security Capital U.S. Realty (incorporated by reference to Exhibit 2.2 of Security Capital U.S. Realty's Schedule 13D dated April 30, 1996).
10.14 Registration Rights Agreement, dated April 30, 1996 by and among Carr Realty Corporation, Security Capital Holdings, S.A. and Security Capital U.S. Realty (incorporated by reference to Exhibit 2.3 of Security Capital U.S. Realty's Schedule 13D dated April 30, 1996).
10.15 Amended and Restated Credit Agreement, dated August 23, 1996 by and among CarrAmerica Realty Corporation, Carr Realty, L.P. and Morgan Guaranty Trust Company of New York.
10.16 First Amendment to Amended and Restated Revolving Credit Agreement, dated October 18, 1996 by and among CarrAmerica Realty Corporation, Carr Realty, L.P., Morgan Guaranty Trust Company of New York, Commerzbank Aktiengesellschaft, New York Branch, NationsBank, N.A., Wells Fargo Realty Advisors Funding, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated and filed October 24, 1996).
10.17 Employment Agreement dated November 1, 1996 by and among Robert E. Peterson and CarrAmerica Realty Corporation.
21.1 List of Subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP, dated March 26, 1997.
27 Financial Data Schedule.
14(b) Reports on Form 8-K
Form 8-K dated and filed October 16, 1996, regarding Pro Forma Balance Sheet for six months ended June 30, 1996 and Pro Forma Statements of Operations for six months ended June 30, 1996 and the year ended December 31, 1995 for Littlefield Portfolio.
Form 8-K dated and filed October 24, 1996, regarding (i) new acquisitions of Sunnyvale Research Plaza, Quebec Centre, Greenwood Center, Panorama Corporate Center, Warner Center Business Park, Katella Corporate Center, Littlefield Portfolio and Riata Land, (ii) probable acquisitions of Peterson Portfolio, NELO/Orchard Portfolio, Greyhound Building, Cedar Maple Plaza, Camelback Lakes, and Pointe Corridor Centre IV and (iii) Historical Financials for the six months ended June 30, 1996 and the year ended December 31, 1995 for Sunnyvale Research Plaza, NELO/Orchard Portfolio, Peterson Portfolio and Camelback Lakes.
Form 8-K dated October 24, 1996 and filed October 25, 1996, regarding Hogan & Hartson L.L.P. opinion for offering of 1,740,000 shares of the Company's preferred stock.
Form 8-K dated and filed November 4, 1996, regarding Historical Financial Statements for the nine months ended September 30, 1996 and the year ended December 31, 1995 for Search Plaza/Quorum North, Rio Robles Technology Center and South Coast Executive Center.
Form 8-K dated November 6, 1996 and filed November 15, 1996, regarding NELO/Orchard Portfolio acquisition.
Form 8-K/A dated and filed November 22, 1996, amending Form 8-K filed October 24, 1996, regarding reliance on Historical Financials for the three months ended March 31, 1996 and the year ended December 31, 1995 for Warner Center Business Park acquisition.
Form 8-K/A dated and filed November 22, 1996, amending Form 8-K filed November 4, 1996, regarding reliance on Historical Financials for the nine months ended September 30, 1996 and the year ended December 31, 1995 for Search Plaza/Quorum North.
Form 8-K dated and filed November 26, 1996, regarding Hogan & Hartson L.L.P. opinion for offering of 5,750,000 shares of Company's common stock.
Form 8-K dated and filed November 26, 1996, regarding Hogan & Hartson L.L.P. opinion for offering of 2,142,857 shares of Company's common stock to USRealty.
Form 8-K dated and filed December 18, 1996, regarding Unisys Center Historical Financial Statements for the nine months ended September 30, 1996 and the year ended December 31, 1995, Pro Forma Balance Sheet for the nine months ended September 30, 1996 and Pro Forma Statements of Operations for the nine months ended September 30, 1996 and the year ended December 31, 1995.
Form 8-K dated and filed December 19, 1996, regarding Peterson Portfolio Pro Forma Balance Sheet for the nine months ended September 30, 1996 and Pro Forma Statements of Operations for the nine months ended September 30, 1996 and the year ended December 31, 1995.
Form 8-K/A dated and filed December 19, 1996, amending Form 8-K filed November 15, 1996, regarding NELO/Orchard Portfolio Pro Forma Balance Sheet for the nine months ended September 30, 1996 and Pro Forma Statements of Operations for the nine months ended September 30, 1996 and the year ended December 31, 1995.
Form 8-K dated and filed December 20, 1996, regarding Hogan & Hartson L.L.P. opinion for offering of 321,429 shares of Company's common stock to Security Capital U.S. Realty.
14(c) Exhibits
The list of exhibits filed with this report is set forth in response to Item 14(a)(3). The required exhibit index has been filed with the exhibits.
14(d) Financial Statements
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registration has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the District of Columbia on March 26, 1997.
CARRAMERICA REALTY CORPORATION a Maryland corporation
By: /s/ THOMAS A. CARR -------------------------------------- Thomas A. Carr President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following person on behalf of the registrant and in the capacities indicated on March 26, 1997.
Signature Title - -------- ----- /s/ OLIVER T. CARR, JR. - ---------------------------------- Chairman of the Board, Oliver T. Carr, Jr. Chief Executive Officer and Director
/s/ THOMAS A. CARR - ---------------------------------- President, Chief Operating Officer and Thomas A. Carr Director
/s/ BRIAN K. FIELDS - ---------------------------------- Chief Financial Officer Brian K. Fields
/s/ ROBERT O. CARR - ---------------------------------- Director Robert O. Carr
/s/ DAVID BONDERMAN - ---------------------------------- Director David Bonderman
/s/ ANDREW F. BRIMMER - ---------------------------------- Director Andrew F. Brimmer
/s/ A. JAMES CLARK - ---------------------------------- Director A. James Clark
/s/ ANTHONY R. MANNO, JR. - ---------------------------------- Director Anthony R. Manno, Jr.
/s/ CAROLINE S. MCBRIDE - ---------------------------------- Director Caroline S. McBride
/s/ J. MARSHALL PECK - ---------------------------------- Director J. Marshall Peck
/s/ GEORGE R. PUSKAR - ---------------------------------- Director George R. Puskar
/s/ WILLIAM D. SANDERS - ---------------------------------- Director William D. Sanders
/s/ WESLEY S. WILLIAMS, JR. - ---------------------------------- Director Wesley S. Williams, Jr.
CARRAMERICA REALTY CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
The following Consolidated Financial Statements and Schedule of CarrAmerica Realty Corporation and Subsidiaries and the Independent Auditors' Reports thereon are attached hereto:
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Independent Auditors' Report
FINANCIAL STATEMENT SCHEDULE
Independent Auditors' Report
Schedule III: Consolidated Real Estate and Accumulated Depreciation as of December 31, 1996 for CarrAmerica Realty Corporation and Subsidiaries
All other schedules are omitted because they are not applicable, or because the required information is included in the financial statements or notes thereto.
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS as of December 31, 1996 and 1995
(In thousands, except share amounts) 1996 1995 - ------------------------------------------------------------------------------- Assets Rental property (notes 2 and 13): Land $ 356,797 115,565 Buildings 1,017,313 301,537 Tenant improvements 99,760 60,060 Furniture, fixtures, and equipment 2,128 3,427 ----------- -------- 1,475,998 480,589 Less-- accumulated depreciation (119,657) (98,873) ----------- -------- Total rental property 1,356,341 381,716
Land held for development 32,277 -- Construction in progress 31,723 -- Cash and cash equivalents 27,637 9,217 Restricted cash and cash equivalents (note 2) 8,229 2,249 Accounts and notes receivable (note 10) 11,899 8,728 Investments (note 4) 13,524 10,745 Accrued straight-line rents 23,810 22,437 Tenant leasing costs, net of accumulated amortization of $11,986 in 1996 and $11,579 in 1995 13,499 10,746 Deferred financing costs, net of accumulated amortization of $1,979 in 1996 and $1,200 in 1995 3,800 2,267 Prepaid expenses and other assets, net of accumulated depreciation of $3,506 in 1996 and $1,894 in 1995 13,825 10,755 ----------- -------- $1,536,564 458,860 =========== ========
Liabilities, Minority Interest, and Stockholders' Equity Liabilities: Mortgages and notes payable (notes 2 and 13) $ 655,449 317,374 Accounts payable and accrued expenses 32,657 9,357 Rent received in advance and security deposits 10,383 1,736 ----------- -------- Total liabilities 698,489 328,467
Minority interest (note 3) 50,597 34,850
Stockholders' equity (notes 7 and 8): Preferred stock, $.01 par value, authorized 30,000,000 shares, issued and outstanding 1,740,000 shares of Series A Cumulative Convertible Redeemable Preferred stock with an aggregate liquidation preference of $43.5 million 17 -- Common stock, $.01 par value, authorized 90,000,000 shares, issued and outstanding 43,789,073 shares at December 31, 1996 and 13,409,177 shares at December 31, 1995 438 134 Additional paid in capital 837,355 126,835 Cumulative dividends in excess of net income (50,332) (31,426) ----------- -------- Total stockholders' equity 787,478 95,543 ----------- -------- Commitments (notes 5, 6 and 10) $1,536,564 458,860 =========== ======== See accompanying notes to consolidated financial statements
See accompanying notes to consolidated financial statements
See accompanying notes to consolidated financial statements
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) for the Years Ended December 31, 1996, 1995 and 1994
Supplemental disclosure of noncash investing and financing activities:
(a) During 1996, the Company funded a portion of the aggregate purchase price of its property acquisitions by assuming $184.4 million of debt and liabilities and by issuing $1.5 million of common stock and $18.0 million of Units. The Company also repaid $1.0 million of liabilities by issuing $1.0 million of Units.
(b) On July 6, 1995, the Company formed a limited liability company (the "LLC") with a commingled pension trust fund. The Company contributed its ownership in 1717 Pennsylvania Avenue to the LLC for a 50 percent ownership interest. The Company was credited with a contribution of $20.0 million, reduced by $7.0 million of indebtedness secured by the property. Subsequent to the Company's contribution to the LLC, the Company received a distribution from the LLC of $2.9 million.
(c) During 1994, the Company funded a portion of the purchase prices of its property acquisitions by assuming $20.4 million of debt and liabilities and by issuing $14.1 million of Units.
(d) On February 17, 1994, the Company acquired an additional 21.4% interest in Square 24 Associates, the partnership that owns the property located at 2445 M Street, in exchange for $4.3 million of Units.
See accompanying notes to consolidated financial statements
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business and Summary of Significant Accounting Policies
(a) Business
CarrAmerica Realty Corporation (the "Company"), formerly Carr Realty Corporation, is a self-administered and self-managed equity real estate investment trust ("REIT"), organized under the laws of Maryland, which owns, develops, acquires and operates office buildings. The Company's office properties are located in eleven suburban markets across the United States.
(b) Basis of Presentation
The accounts of the Company and its majority-owned subsidiaries are consolidated in the accompanying financial statements. The Company uses the equity method of accounting for its investments in and earnings and losses of unconsolidated partnerships not controlled by the Company. Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Certain amounts for prior years have been reclassified to conform with the presentation for 1996.
(c) Rental Property
Rental property is recorded at cost less accumulated depreciation (which is less than the net realizable value of the rental property). Depreciation is computed on the straight-line basis over the estimated useful lives of the assets, as follows:
- -------------------------------------------------------------------------------- Base Building 30 to 50 years Building components 7 to 20 years Tenant improvements Terms of the leases or useful lives, whichever is shorter Furniture, fixtures and equipment 5 to 15 years
Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations are capitalized.
The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement requires that long-lived assets, such as the Company's rental property, and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Adoption of this Statement had no effect on the Company's financial position, results of operations, or liquidity.
(d) Development Property
Land held for development and construction in progress are carried at cost. Specifically identifiable direct and indirect acquisition, development and construction costs are capitalized including, where applicable, salaries and related costs, real estate taxes, interest and certain pre-construction costs essential to the development of the property.
(e) Tenant Leasing Costs
Fees and costs incurred in the successful negotiation of leases have been deferred and are being amortized on a straight-line basis over the terms of the respective leases.
(f) Deferred Financing Costs
Deferred financing costs include fees and costs incurred to obtain financing and are being amortized over the terms of the respective loans on a basis which approximates the interest method.
(g) Fair Value of Financial Instruments
The carrying amount of the following financial instruments approximates fair value because of their short-term maturity: cash and cash equivalents; accounts and notes receivable; accounts payable, accrued expenses and other liabilities.
(h) Revenue Recognition
The Company reports base rental revenue for financial statement purposes straight-line over the terms of the respective leases. Accrued straight-line rents represent the amount that straight-line rental revenue exceeds rents collected in accordance with the lease agreements. Management, considering current information and events regarding the tenants' ability to fulfill their lease obligations, considers accrued straight-line rents to be impaired if it is probable that the Company will be unable to collect all rents due according to the contractual lease terms. If accrued straight-line rents associated with a tenant are considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows. Impairment losses, if any, are recorded through a loss on the write-off of assets. Cash receipts on impaired accrued straight-line rents are applied to reduce the remaining outstanding balance and as rental revenue, thereafter.
The Company receives real estate service revenue for certain properties it manages, leases and develops for third parties. Such revenue is recognized as revenue as earned.
(i) Income and Other Taxes
The Company qualifies as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. A REIT will generally not be subject to federal income taxation on that portion of its income that qualifies as REIT taxable income to the extent that it distributes at least 95 percent of its taxable income to its shareholders and complies with certain other requirements. Accordingly, no provision has been made for federal income taxes for the Company and certain of its subsidiaries in the accompanying consolidated financial statements. At December 31, 1996 and 1995, the Company's income tax basis in its assets was approximately $1.5 billion and $474.5 million, respectively.
Certain subsidiaries, organized as partnerships, of the Company are subject to District of Columbia franchise taxes. Franchise taxes are recorded as general and administrative expenses in the accompanying consolidated financial statements.
Carr Development & Construction, Inc. ("CDC"), the Company's development subsidiary, and Carr Real Estate Services, Inc. ("CRESI"), the Company's real estate service subsidiary, file separate tax returns and are subject to federal, state and local income taxes. The Company has adopted the asset and liability method of accounting for CDC's and CRESI's income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of the enactment date. The effect of the asset and liability method on the Company's financial statements is insignificant. The Company's subsidiaries did not incur any income tax expense in 1996, 1995 or 1994.
(j) Real Estate Service Contracts and Other Intangible Assets
Real estate service contracts and other intangible assets represent the purchase price of net assets of real estate service operations acquired and are amortized on the straight-line basis over the expected lives of the respective real estate service contracts. The Company assesses the recoverability of these intangible assets by determining whether the amortization of the balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of impairment loss, if any, is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. The assessment of the recoverability of these intangible assets will be impacted if estimated future operating cash flows are not achieved.
(k) Per Share Data and Dividends
Net income per share of common stock is based upon the weighted average number of common shares and share equivalents outstanding during the year. When dilutive, stock options and Units are included as share equivalents. The weighted average number of shares used in the computations was 31,999,580 for 1996, 13,338,080 for 1995 and 11,387,030 for 1994.
Net income for 1996 used in the computations was reduced by cumulative preferred stock dividends of $572 thousand.
Following is the income tax status of dividends paid during the years ended December 31:
1996 1995 1994 - -------------------------------------------------------------------------------- Ordinary income 95% 85% 75% Capital Gain -- -- -- Return of Capital 5% 15% 25%
(l) Cash Equivalents
For the purposes of reporting cash flows, the Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.
(m) Stock/Unit Option Plans
Prior to January 1, 1996, the Company accounted for its option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expenses would be recorded only if the current market price of the underlying unit or stock on the date of grant exceeded the exercise price. As of January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense, over the vesting period, the fair value of all unit-based and stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(2) Mortgages And Notes Payable
Mortgages payable are collateralized by certain rental properties and generally require monthly principal and/or interest payments. Following is a summary of the Company's mortgages and notes payable as of December 31, 1996 and 1995:
As of December 31, 1996, the scheduled maturity of all mortgages and notes payable are as follows:
(In thousands) - -------------------------------------------------------------------------------- 1997 $ 17,281 1998 220,588 1999 31,790 2000 32,809 2001 46,783 Thereafter 306,198 -------- $655,449 ========
Restricted cash and cash equivalents primarily consist of escrow deposits required by lenders to be used for future building renovations, tenant improvements or as collateral for letters of credit.
Based on the borrowing rates available to the Company for mortgages and notes payable with similar terms and average maturities, the estimated fair value of the Company's mortgages and notes at December 31, 1996 and 1995 was approximately $644.5 million and $309.1 million, respectively.
(3) Minority Interest
In conjunction with the formation of the Company and its majority-owned subsidiary, Carr Realty, L.P., persons contributing interests in properties to Carr Realty, L.P. had the right to elect to receive either common stock of the Company or Units in Carr Realty, L.P. In addition, the Company has acquired certain assets since its formation by issuing dividend paying Units and non-dividend paying Units of Carr Realty, L.P. and CarrAmerica Realty, L.P. The non-dividend paying Units are not entitled to any distributions until they automatically convert into dividend paying Units at various dates in the future. Each dividend paying Unit, subject to certain restrictions, may be redeemed for either one share of common stock or, at the option of the Company, cash equal to the fair market value of a share of common stock at the time of the redemption. When a Unitholder redeems a dividend paying Unit for a share of common stock or cash, minority interest is reduced and the Company's investment in Carr Realty, L.P. or CarrAmerica Realty, L.P., as the case may be, is increased. During the years ended December 31, 1996 and 1995, 212,293 and 161,166 dividend paying Units, respectively, of Carr Realty, L.P. or CarrAmerica Realty, L.P., were redeemed for common stock of the Company.
The following table sets forth the common stock and preferred stock of the Company and Units of Carr Realty, L.P. and CarrAmerica Realty, L.P.:
CarrAmerica CarrAmerica Realty Realty Corporation's Corporation's Preferred Dividend Non-Dividend Common Stock Stock Paying Units Paying Units (In thousands) Outstanding Outstanding Outstanding Outstanding - --------------------------------------------------------------------------------
As of December 31: 1996 43,789 1,740 4,940 540 1995 13,409 -- 4,080 668 1994 13,248 -- 4,241 668 ====== ====== ====== ====== Weighted average for: 1996 26,932 328 4,131 872 1995 13,338 -- 4,151 668 1994 11,387 -- 4,473 18 ====== ====== ====== ======
Minority interest in the accompanying consolidated financial statements relates primarily to holders of Units.
(4) Investments in Unconsolidated Partnerships
Through seven unconsolidated partnerships, the Company owns interests ranging from 2% to 50% in office properties. The combined condensed financial information for the unconsolidated partnerships is as follows:
Balance Sheets December 31, (In thousands) 1996 1995 - --------------------------------------------------------------------------------
Assets - ------ Rental property, net $310,100 305,870 Cash and cash equivalents 15,577 15,998 Other assets 38,073 35,274 -------- ------- $363,750 357,142 ======== =======
Liabilities and Accumulated Deficit - ----------------------------------- Liabilities: Notes payable $362,849 357,911 Other liabilities 17,233 21,091 -------- ------- Total liabilities 380,082 379,002 Accumulated deficit (16,332) (21,860) -------- ------- $363,750 357,142 ======== =======
Statements of Operations 1996 1995 1994 - --------------------------------------------------------------------------------
Revenue $ 85,702 81,182 80,815 Depreciation and amortization expense 6,266 3,608 11,355 Interest expense 24,470 22,998 32,316 Other expenses 41,787 41,304 37,112 -------- ------- ------ Net income $ 13,179 13,272 32 ======== ======= ======
(5) Lease Agreements
The following table summarizes future minimum base rent to be received under noncancelable tenant leases and the percentage of total rentable space expiring each year, as of December 31, 1996:
Future Percentage of Minimum Total Space (In thousands) Rent Expiring - -------------------------------------------------------------------------------- 1997 $ 199,669 13.0% 1998 164,848 18.7 1999 140,622 11.3 2000 122,360 13.3 2001 98,644 11.2 Thereafter 324,732 32.5 ---------- $1,050,875 ==========
The leases also provide for additional rent based on increases in the Consumer Price Index (CPI) and increases in operating expenses. These increases are generally payable in equal installments throughout the year, based on estimated increases, with any differences being adjusted in the succeeding year.
The Company's largest tenant is AT&T with a master lease of approximately .9 million square feet of office space at AT&T Center which represents 7.6% of net rentable space in the Company's consolidated office properties at December 31, 1996. No other single tenant occupies more than 5% of the net rentable space.
(6) Land Leases
The Company leases land beneath three office properties located in metropolitan Washington, D.C. and Austin, Texas. The Company also leases land adjacent to an office property in suburban Chicago. The terms of these leases range from 5 years to 99 years, with the last lease maturing in the year 2086. The minimum base annual rental payment associated with these leases is $1.2 million.
(7) Series A Cumulative Convertible Redeemable Preferred Stock
The Company is authorized to issue 30,000,000 shares of Preferred Stock. On October 25, 1996, the Company issued 1,740,000 shares of Series A Cumulative Convertible Redeemable Preferred Stock ("Series A Preferred Stock") at $25 per share. Dividends for the Series A Preferred Stock are cumulative from the date of issuance and are payable quarterly in arrears in an amount per share equal to the greater of (1) $1.75 per share per annum, or (2) the cash dividend paid on the number of shares, or portion thereof, of the Company's common stock into which a share of Series A Preferred Stock is convertible. The Series A Preferred Stock has a liquidation preference of $25 per share. After April 25, 1997, each share of Series A Preferred Stock is convertible, at the option of the holder, into one share of the Company's common stock, subject to certain conversion adjustments. After October 25, 1999, each share of Series A Preferred Stock is redeemable at the Company's option, at $25 per share, plus accrued and unpaid dividends.
(8) Stock/Unit Option Plans
As of December 31, 1996, the Company had two option plans: one plan for the purpose of attracting and retaining executive officers and other key employees (Employee Unit Option Plan); and the other plan for the purpose of attracting and retaining directors who are not employees of the Company (Non-Employee Director Stock Option Plan).
The Employee Unit Option Plan allows for the grant of options to purchase Units of Carr Realty, L.P. (Unit options) that are exerciseable at the fair market value of the Units at the date of grant, which is deemed to be equivalent to the fair market value of the Company's common stock at such date. Units (following exercise of Unit options) are redeemable for cash or common stock of the Company, at the option of the Company. The Unit options have a 10-year term from the date of grant and vest over a five-year period, 20% per year. At December 31, 1996, the Company had 1,266,900 Units reserved for issuance under the Employee Unit Option Plan, of which 941,348 were outstanding.
The Non-Employee Director Stock Option Plan provides for the grant of options to purchase the Company's common stock at an exercise price which is equal to the fair market value of the common stock at the date of grant. The Non-Employee Director Stock Option Plan was approved by the Company's stockholders at its Annual Meeting of Stockholders on April 28, 1995, following which each then-serving non-employee director was granted options to purchase 3,000 shares of the Company's common stock. Immediately following each annual election of directors, each then-serving non-employee director will receive options to purchase 5,000 shares of the Company's common stock. The stock options have a 10-year term from the date of grant and vest over a three-year period, 33 1/3% per year. At December 31, 1996, the Company had 150,000 shares of common stock reserved for issuance under the Non-Employee Director Stock Option Plan, of which 61,000 were outstanding.
As approved by the Board of Directors (subject to shareholder approval), the Company granted options to purchase an aggregate of 25,000 shares of the Company's common stock to two key employees in 1996. The stock options have a 10-year term from the date of grant and vest over a five-year period, 20% per year. All 25,000 options were outstanding at December 31, 1996.
The per share weighted-average fair value of Unit options and stock options granted during 1996 and 1995 was $2.15 and $1.92, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighed-average assumptions: 1996 - expected dividend yield of 7.893%, risk free interest rate of 6.08%, stock volatility of 19.45%, and expected option life of 4.02 years; 1995 - expected dividend yield of 7.893%, risk free interest rate of 7.06%, stock volatility of 19.45%, and expected option life of 5.38 years.
The Company applies APB Opinion No. 25 in accounting for its Unit options and stock options and, accordingly, no compensation cost has been recognized for its Unit options and stock options in the financial statements. The pro forma effect of compensation costs, based on the fair value at the date of grant, of the Unit options and stock options is immaterial to the Company's consolidated financial statements and therefore is not presented. Unit option and stock option activity during 1996 and 1995 is as follows:
Number Weighted- of Units/ Average Shares Exercise Price - --------------------------------------------------------------------------------
Balance at December 31, 1994 911,348 $22.97 Granted 29,000 18.78 Exercised -- -- Forfeited 3,000 17.75 Expired -- -- --------- Balance at December 31, 1995 937,348 22.86 Granted 112,000 24.70 Exercised 4,000 20.75 Forfeited 18,000 22.66 Expired -- -- --------- Balance at December 31, 1996 1,027,348 $23.07 ========= ======
At December 31, 1996, the range of exercise prices was between $17.75 and $25.13 per Unit/share and the weighted-average remaining contractual life of outstanding options was 7.29 years.
At December 31, 1996 and 1995, the number of options exercisable was 526,420 and 345,921, respectively, and the weighted average exercise price of those options was $22.72 and $22.67 per Unit/share, respectively.
(9) Employee Benefits
The Company has a 401(k) plan for employees that will match 50% of employee contributions up to the first 4% of an employee's pay and will make a base contribution of 3% of pay for participants who remain employed on December 31, the end of the plan year. The Company contributions are subject to a five-year graduated vesting schedule. Company contributions to the plan amounted to $.3 million in 1996, $.3 million in 1995, and $.3 million in 1994.
(10) Transactions With Affiliates
CarrPark, Inc., a subsidiary of The Oliver Carr Company, a stockholder of the Company, manages certain of the parking garages in the Company's properties, for fees ranging from 24 to 62 percent of gross receipts from garage operations. CarrPark, Inc. is responsible for payment of all garage operating expenses. Parking revenue recognized is net of fees paid to CarrPark, Inc. of $1.9 million in 1996, $1.8 million in 1995, and $1.8 million in 1994. Accounts receivable includes $.3 million at December 31, 1996 and 1995 due from CarrPark, Inc.
Accounts receivable includes management and leasing fees, development and architectural fees and payroll reimbursements receivable from affiliates of $4.0 million at December 31, 1996 and $3.9 million at December 31, 1995. This amount includes a leasing commission receivable of $2.7 million at December 31, 1996 and $2.9 million at December 31, 1995, respectively, that is collectible in quarterly installments of approximately $47 thousand through September 2011. The fair market value of this receivable is $1.6 million at December 31, 1996 and 1995. The leasing commission is due from an unconsolidated investee partnership.
The Company earned management, leasing, development and architectural fees in 1996 from affiliated partnerships of $6.9 million in 1996, $6.7 million in 1995, and $6.4 million in 1994.
A wholly-owned subsidiary of Clark Enterprises, Inc., a Unitholder, has provided construction management services to the Company. In connection with these services, the Company paid $1.3 million in 1996, $.7 million in 1995, and $1.0 million in 1994. Additionally, a wholly-owned subsidiary of Clark Enterprises, Inc. received a total of $19.6 million during the years of 1996, 1995 and 1994 under a construction contract for the Booz-Allen & Hamilton Building (in which the Company is a 50% joint venturer).
The Equitable Life Assurance Society of the United States, an affiliate of an entity of which one of the Company's directors serves as an officer and director, leases approximately 10,000 square feet of office space from the Company. Rents of $.3 million in each of 1996, 1995, and 1994 are included in rental revenue.
The Company leases office space from a partnership affiliated with The Oliver Carr Company. Rent expense amounted to $1.1 million in 1996, $.9 million in 1995, and $.9 million in 1994 under the lease. Future minimum payments under the lease are $.9 million in 1997 and $.4 million in 1998.
Carr Development and Construction was a division of The Oliver Carr Company ("OCCO") until April 30, 1996 when the Company acquired it for $1.75 million. Carr Development and Construction was the development manager of 1717 Pennsylvania Avenue during 1995 and a portion of 1996. OCCO earned fees of $.2 million and $.5 million in 1996 and 1995, respectively.
The Company paid Security Capital Markets Group, Inc., an affiliate of USRealty, a placement fee of $.4 million in 1996 for services rendered in connection with the sale of 1,740,000 shares of Series A Preferred Stock issued in October 1996.
During 1996, payments of $1.1 million were made to Security Capital Investment Research Incorporated, an affiliate of USRealty, for services rendered in connection with the acquisition of operating and development properties.
(11) Loss on Write-off of Investment and Intangible Assets
On January 31, 1996, the Company terminated an agreement to acquire the development business of The Evans Company ("Evans") and, as a result, in 1995 the Company recognized a $1.9 million loss on its investment. Furthermore, in 1996, the Company wrote off approximately $2.3 million of the unamortized purchase price of certain third-party real estate service contracts that were terminated during the year. These contracts were acquired from Evans in 1995 and were terminated early as a result of the sale of the properties by third-party owners.
(12) Segment Operations
The Company is engaged in the ownership and rental of commercial office buildings and provides real estate services on a contractual basis to both related and unrelated parties. Revenue from real estate services provided to properties wholly-owned by the Company and to properties that are owned by partnerships that are consolidated in the Company's consolidated financial statements is eliminated in consolidation. During 1996, the Company's real estate service operations did not account for more than 10% of the Company's revenue and are not anticipated to exceed 10% in future years. As a result, information regarding segment operations is not provided for 1996.
The following tables present operating and other information for the Company's lines of business for 1995 and 1994:
(13) Acquisition and Development Activities
During 1996, the Company made the following acquisitions: in its Pacific region, the Company acquired an aggregate of 73 buildings containing a total of approximately 4.0 million square feet, for an aggregate purchase price of approximately $454.3 million; in its Mountain region, the Company acquired an aggregate of 13 buildings containing a total of approximately 1.3 million square feet, for an aggregate purchase price of approximately $112.7 million; in its Central region, the Company acquired an aggregate of 17 buildings containing a total of approximately 2.1 million square feet, for an aggregate purchase price of approximately $243.5 million; and in its Southeast region, the Company acquired an aggregate of 43 buildings containing a total of approximately 1.8 million square feet, for an aggregate purchase price of approximately $178.3 million.
During 1996, the Company acquired or purchased options to acquire 142 acres of developable land in four of its target markets: suburban Seattle; southeast Denver; Austin, Texas; and suburban Chicago. In the aggregate, this land (including land subject to purchase options) will support development of up to 3.2 million square feet (unaudited) of office space. In addition, as of December 31, 1996, the Company had three properties under construction: 128,000 square feet (unaudited) in suburban Atlanta; and an aggregate of 295,000 square feet (unaudited) in southeast Denver (including a build-to-suit project with 189,000 rentable square feet). Land held for development was purchased for an aggregate purchase price of $32.3 million. Costs incurred during 1996 for properties under construction were $31.7 million. An additional $36.3 million (unaudited) will be expended for completion of projects already under construction as of December 31, 1996.
In 1995, the Company acquired two properties in suburban Washington, D.C. containing .6 million square feet for an aggregate purchase price of $64.0 million.
All acquisitions have been accounted for as purchases. Operations of the properties acquired have been included in the accompanying consolidated financial statements from their respective dates of acquisition.
The following unaudited pro forma summary presents information as if the Company's acquisitions and sales of common and preferred stock through December 31, 1996 had occurred at the beginning of each year. The pro forma information is provided for informational purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the Company.
Pro forma Information (unaudited)
(In thousands, except per share amounts) 1996 1995 - -------------------------------------------------------------------------------
Total revenue $247,203 238,515 Net income before extraordinary item $ 42,985 45,330 Net income $ 42,501 45,330 Net income per common share $ 0.90 0.96
(14) Subsequent Events
In January 1997, the Company entered into a revolving credit agreement to borrow up to $150.0 million secured by certain properties in the Company's portfolio. The facility bears interest at 162.5 basis points over LIBOR. The agreement is for an initial six-month period with two six-month options to extend.
In January 1997, the Company consummated a public offering and a concurrent offering to a wholly-owned subsidiary of USRealty of 4,928,570 shares of common stock that raised net proceeds of approximately $136 million. The net proceeds were used to acquire the suburban office properties and land discussed below, and to pay down indebtedness under the Company's unsecured line of credit.
Since January 1, 1997, the Company has acquired or placed into service 11 operating office properties, totaling approximately 1.0 million square feet. In addition, since January 1, 1997, the Company has acquired 26 acres of land which will support the future development of 636,000 square feet of office space. The purchase of these properties was financed by the assumption of $18.1 million in debt and the payment of $102.4 million in cash. These acquisitions added to the Company's holdings as follows (unaudited):
In February 1997, the Company sold its 2% limited partnership interest in the partnership that owns 1575 Eye Street in Washington, D.C. for $40 thousand. As part of this transaction, CRESI also received $400 thousand in consideration for the early termination of its management and leasing agreement (which was otherwise non-cancelable) and a $120 thousand financing fee from the partnership for facilitating the transaction.
In March 1997, the Company sold its 5% limited partnership interest in the partnership that owns 1776 Eye Street in Washington, D.C. for approximately $310 thousand. As part of this transaction, CRESI also received $326 thousand in consideration for the early termination of its management and leasing agreement (which was cancelable on 30 days notice).
In March 1997, the Company established its 1997 Stock Option and Incentive Plan, subject to the approval of its shareholders at the 1997 Annual Meeting of Stockholders, for the purpose of attracting and retaining executive officers and other key employees. The Company has 3,000,000 shares of common stock reserved for issuance under the stock option plan. As of March 15, 1997, an aggregate of 861,500 options had been granted under the stock option plan to 43 employees, subject to shareholder approval.
(15) Quarterly Financial Information (unaudited) The following is a summary of quarterly results of operations for 1996 and 1995:
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES INDEPENDENT AUDITORS' REPORTS
The Board of Directors and Stockholders CarrAmerica Realty Corporation:
We have audited the accompanying consolidated balance sheets of CarrAmerica Realty Corporation and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CarrAmerica Realty Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP Washington, D.C.
February 6, 1997, except for Note 14 which is as of March 26, 1997.
The Board of Directors and Stockholders CarrAmerica Realty Corporation:
Under date of February 6, 1997, we reported on the consolidated balance sheets of CarrAmerica Realty Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which are included in this Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule in this Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, this financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP Washington, D.C.
February 6, 1997
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION (continued) December 31, 1996
Depreciation and amortization of the investment in building and improvements reflected in the statements of operations are calculated over the estimated lives of the assets as follows:
- --------------------------------------------------------------------------------
Base Building 30 to 50 years Building components 7 to 20 years Tenant improvements Terms of leases or useful lives, whichever is shorter Furniture, fixtures and equipment 5 to 15 years
The aggregate cost for federal income tax purposes was approximately $1,375,987 at December 31, 1996.
The changes in total real estate assets and accumulated depreciation and amortization for the three years ended December 31, 1996, 1995, and 1994 are as follows:
1996 1995 1994 - --------------------------------------------------------------------------------
Total Real Estate Assets Balance, beginning of period $ 480,589 429,537 286,764 Acquisitions 1,050,227 65,783 132,414(6) Improvements 20,536 3,029 11,715 Retirements and write-offs (11,354) (17,760) (1,356) ---------- ------- ------- $1,539,998 480,589 429,537 ========== ======= =======
Accumulated Depreciation Balance, beginning of period $ 98,873 88,408 71,194 Depreciation for the period 32,078 10,465 18,502(6) Retirements and write-offs (11,294) -- (1,288) ---------- ------- ------- $ 119,657 98,873 88,408 ========== ======= =======
- ------------------------------------------------------------------------------- Notes: (1) Represents 3 properties: 1850 K Street, N.W., 1875 Eye Street, N.W., and 1825 Eye Street, N.W. (2) Consists of four loans secured by International Square, 1730 Pennsylvania Avenue & 1255 23rd Street. (3) Secured by San Jose Orchard Business Park-A, Orchard Office Center, Orchard Center II, Orchard Rincon Center & Orchard Bayshore Center. (4) Costs capitalized are offset by retirements and write-offs. (5) Secured by Century Springs West, Glenridge, Crestwood, Lakewood and Parkwood. (6) Includes the effect of consolidating 2445 M Street, NW, effective January 1, 1994. (7) Represents cost of options to acquire land for future development. (8) Under construction as of December 31, 1996.