| |
2000 was a great year. Our operating results were excellent, and
we ended the year stronger than ever. On the financial side, we
significantly strengthened our balance sheet through a series of
major transactions, increasing our liquidity and refocusing our
assets in anticipation of a change in economic conditions. The reaction
to these moves within the financial community has been very positive.
On the operations side, we continued to build multifaceted, long-term
relationships with our customers and to benefit from the leadership
position we’ve established in each of the markets in which
we operate. Our customer satisfaction levels have never been higher—we
have been recognized as an industry leader, as measured by independent
surveys. In 2000, we moved forward with a wide range of strategic
initiatives that were begun in 1999—innovations that will take
CarrAmerica into the future in terms of customer service and interaction.
So far in 2001, the economy has softened appreciably. I believe
we are well prepared for the change in the economy, given our strong
balance sheet, excellent long-term customer relationships, solid
base of major corporate customers and success in preleased development.
Going into a downturn, we are well positioned to take advantage
of future opportunities and to broaden the scope of our revenue
growth.
A STRONG FINANCIAL PERFORMANCE
We achieved excellent operating results in 2000. For the year, Funds
from Operations of $220.4 million, or $2.96 per diluted share, were
up 15.6% from prior year’s FFO of $192.4 million, or $2.56
per share. Overall, we achieved $558 million in revenues for 2000.
The performance of our operating properties remains strong with
an average occupancy of 96.9% for 2000. For the 12-month period
ended December 31, 2000, same store operating income grew by 9.6%
on a GAAP basis and 10.6% on a cash basis over the same period in
1999. Rental rates increased 38.9% on average on rolling leases
executed during the 12-month period ended December 31, 2000.
During the course of the year 2000, CarrAmerica and its affiliates
placed in service approximately 987,000 square feet of new office
space in wholly owned projects, with total project costs of approximately
$161.6 million and an expected year-one unleveraged return on invested
capital of approximately 11.5%. In addition, 393,200 square feet
were placed in service in partially owned projects in which CarrAmerica
owns approximately 35% on average, with total project costs of $86
million and an average yield of 10.9%.
At year-end, CarrAmerica and its affiliate, CarrAmerica Development,
Inc., had approximately 552,000 square feet of wholly owned projects
under development representing a total cost of approximately $94.7
million, of which $48.3 million had been invested as of December
31, 2000. This development pipeline is currently 95.5% leased or
committed, and the year-one unleveraged return on CarrAmerica’s
invested capital (excluding fees) is expected to be approximately
12.4%.
STRATEGIC CONTINUITY
In last year’s annual report, I outlined five key areas on
which we’re focusing our energies: 1) disciplined capital deployment,
2) market leadership, 3) development, 4) internal operating systems
and 5) innovative programs that enhance our ability to serve our
customers. Our aim is to excel—to lead—in each of these.
In 2000, we made enormous progress toward accomplishing that goal
in each of these key areas.
• Disciplined use of capital. In 2000, we executed a
capital redeployment strategy that significantly strengthened our
balance sheet. It involved three major transactions. First, we closed
on the merger and sale of our executive office suites affiliate,
HQ Global Workplaces, Inc., with Vantas Inc., the executive office
suites subsidiary of FrontLine Capital Group. As part of this transaction,
CarrAmerica received approximately $377 million in cash proceeds
including repayment of $141 million of HQ Global debt guaranteed
by CarrAmerica. In addition, we retained an approximately 16% common
equity interest in HQ Global, the value of which we believe has
been significantly enhanced by HQ Global’s outstanding performance
in 2000. We also entered into a strategic marketing alliance with
HQ Global that will benefit both entities, building business for
HQ Global and enabling us to deliver HQ Global services to our customers.
Second, we completed a $422 million development joint venture with
New York State Teachers’ Retirement System, with J.P. Morgan
Investment Management Inc. acting as advisor. The venture encompasses
five premium-quality suburban office parks located in four of our
markets. These properties were contributed or sold to the venture
at a value of approximately $70 million over net book value. Cash
proceeds to CarrAmerica and its affiliates from the joint venture
were approximately $250 million.
Third, consistent with our strategy of being number one or two in
our markets, as well as focusing on those assets with the greatest
growth potential, we closed on sales of $235 million of existing
land and properties in 2000. That includes the sale of our Florida
operating portfolio. In addition, in February 2001, we sold the
bulk of our Phoenix portfolio for $98 million and freed up capital
for investment in those markets where we have established a clear
leadership position.
As a result of these transactions, the company’s leverage
against its total market capitalization has declined from about
45% at year-end 1999 to 31% at year-end 2000, which makes us one
of the most conservatively capitalized REITs and dramatically improves
the company’s liquidity.
• Market leadership. CarrAmerica is now recognized within
the brokerage and tenant communities as one of the top competitors
in each of the 12 markets in which we operate. That leadership derives
from our expertise—in development, in property management and
leasing and in tenant construction. I am very proud of the teams
we have in place in each of these markets and their ability to leverage
their expertise to produce greater opportunities through our affiliates.
These are people who are passionately involved in the real estate
community, well recognized and well respected for their expertise
and integrity. As an example, our development people have, on average,
more than 17 years of experience in the business and more than seven
years of experience with CarrAmerica. Through the efforts of these
teams, we have built significant repeat business in each of our
markets. We have provided the kind of service that builds loyalty
and brings major corporate customers back to CarrAmerica for services
in other markets. And, we have consistently built third-party business
in the areas of development and property management services, clear
evidence of our growing reputation. This leadership reputation is
built on proven, consistent performance in each of the markets in
which we operate, providing the highest level of customer service
and demonstrating the ability to solve challenging problems for
our customers.
Within each of our markets, we continue to balance our portfolio,
to prune and focus our assets to achieve the best possible mix.
We have shifted the balance between urban and suburban properties,
with about 15% of our properties now in major urban markets. In
addition, about two-thirds of our assets are concentrated in strong,
high-growth markets on the West Coast, where we are seeing dramatic
rental rate growth and outstanding occupancies, and in the Washington,
D.C. market, an area with tremendous strength and stability. Increases
in rents on new leases signed over expiring leases were 39% across
the portfolio, driven in part by an overall increase of 86% in our
San Francisco Bay portfolio—a key measure of our success in
the year 2000.
• Development. Development remains one of our greatest
strengths. In 2000, CarrAmerica started new development valued at
approximately $350 million and committed to another $200 million
in construction starts for 2001—making it one of the most active
years in the company’s history. Our development team has demonstrated
an ability to be highly selective in determining which projects
to pursue. The projects we are building continue to be substantially
preleased. In fact, at year-end, among all the properties in which
CarrAmerica is wholly or partially invested, they are on average
73% preleased or committed. The strong mix of urban and suburban
properties, variety of prototypes offered, continued emphasis on
high levels of preleasing and our ability to target the top sites
in top markets speak to our development capabilities. Evidence of
our expertise is the growing demand for CarrAmerica’s development
services among third parties—we have done tremendous repeat
business in the development area. We are adding impressive new customers
who are attracted by our expertise, such as the International Monetary
Fund, and continue to enjoy long-term relationships with such customers
as The World Bank, KPMG Consulting and Concert Communications. In
2001, given changing economic conditions, we are focusing more of
our development activity in the areas of build-to-suit and preleased
development.
• Better operating systems. Project Excellence, which
began in 1999, is now well under way. In late 2000, we expanded
and deepened our commitment to improving our operating systems,
and Project Excellence has evolved into an enterprisewide program.
In Phase 1, we dramatically improved the efficiencies of our accounting
and cash management functions. Going forward, through significant
upgrades of our IT infrastructure and the reorganization of our
finance and accounting group, we will save money, improve service
to our customers and improve the quality of information we use as
a basis for decision making throughout the company. We are creating
an information platform that is on par with the top companies not
just in the real estate industry, but across all industries. This
is an essential step toward preparing us for future changes in the
real estate industry and serving a sophisticated customer base.
• Innovation. In 2000, we launched a series of initiatives
that put our company on the leading edge among office REITs and
significantly enhanced the services we offer to our core customers.
We have invested in the development of InfoCentre, a web-based application
that gives our customers multiple channels of access anytime to
property information and issue resolution, provides exceptional
responsiveness from our 24x7 service desks and creates a gateway
to preferred vendor arrangements and discounts. Through our Brand
Partners program, we are forging exciting partnerships that give
our customers distinct operating advantages—enabling the selection
of the telecom and data technology they need to remain competitive
and facilitating strategies that not only reduce energy costs, but
also expand the amenities available to them. These initiatives include
the formation of BroadBand Office, which enables the delivery of
mission-critical communications services to tenants in office buildings,
and our energy-saving alliance with DukeSolutions.
These initiatives not only cement our relationships by building
brand loyalty and enhancing the services we offer our customers,
but they provide a variety of significant benefits. For example,
through our relationship with DukeSolutions, we successfully managed
the risk associated with the recent energy crisis in California.
That relationship created a buffer from the price fluctuations for
our customers and resulted in energy cost savings in the neighborhood
of $1.2 million. We continued to build on these initiatives in 2000,
and in the year ahead, we will continue to explore new opportunities
to enhance the range of services to our customers in 2001.
Even as we continue in our business and focus on our customers,
we never forget a key part of our mission, which is serving the
communities in which we operate. CarrAmerica is a National Sponsor
of Christmas in April, a volunteer organization that undertakes
construction and repair projects for families that can’t afford
these services. In April 2001, hundreds of CarrAmerica employees,
along with their friends and families, will participate again in
this national effort to rebuild communities in markets in which
we operate—Atlanta, Chicago, Denver, Northern California, Orange
County, San Diego, Seattle and Washington, DC. I want to applaud
these volunteers for their efforts, their energy and their enthusiasm.
LOOKING AHEAD
Buoyed by a vibrant economy, we have enjoyed remarkably favorable
conditions in the office market over the past few years. As we enter
2001, we are already seeing the signs of a slowdown and fully expect
business conditions to become more challenging over the upcoming
year. Simultaneously, we expect the pace of change in our industry
to pick up as we begin to experience the effects of the changing
workplace and the impact of technology on our customers.
We have aggressively prepared for the softening economy. We have
put ourselves in a position where we can be opportunistic, if the
environment begins to create new opportunities, by strengthening
our cash position. In addition, we’ve continued to repurchase
our stock, because we believe it is undervalued in relation to the
tremendous value created by such high performers as our west coast
portfolio and HQ Global Workplaces, Inc.
The strength of our portfolio is itself a buffer against difficult
economic conditions. Fully 45% of our tenant base consists of Fortune
1000 and Fortune Global 500 companies, and government or quasi-governmental
agencies. Our average lease term is more than seven years. We will
continue our current development strategy—moving forward on
a project by project basis as long as the economics make sense and
as long as we can secure the kind of preleasing that we have traditionally
achieved.
In terms of the impact of technology on our customers, we think
we’ve taken the necessary first steps to be an aggressive player
in the new economy. That is, we are putting the IT platform and
the processes in place that will dramatically affect the way our
customers interact with our company. We will continue to seek ways
to use technology to enhance our core business and add value to
our customer relationships.
I believe the opportunities in the office market are enormous. We
are in an excellent position to continue to look for new opportunities,
to benefit from the changes in the office market and provide new
solutions to our customers. Many of the processes at work in our
industry—whether it’s how buildings are built, how space
is leased, how bills are paid—are done the same way that they’ve
been done for the last century. That is going to change as our industry
begins to rethink these processes—to rethink what an office
is and should be—and we expect to be at the forefront of those
changes.
In closing, CarrAmerica has never been stronger. I’m proud
of what we achieved in 2000 and excited about the opportunities
ahead. I look forward to keeping you apprised of our progress.
Sincerely,
Thomas A. Carr
Chairman, President and Chief Executive Officer
|
