10-Q 1 a2085211z10-q.txt FORM 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) ~~/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR ~~/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NO. 1-11918 ------------------------ TRINET CORPORATE REALTY TRUST, INC. (Exact name of registrant as specified in its charter) MARYLAND 94-3175659 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1114 AVENUE OF THE AMERICAS, 27TH FLOOR NEW YORK, NY 10036 (Address of principal executive (Zip Code) offices)

Registrant's telephone number, including area code: (212) 930-9400 ------------------------ Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant; (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (ii) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / As of August 9, 2002, there were 100 shares of Common Stock outstanding. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) INDEX TO FORM 10-Q

2 PART I. CONSOLIDATED FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)

------------------------ * RECLASSIFIED TO CONFORM TO 2002 PRESENTATION. The accompanying notes are an integral part of these financial statements. 3 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)

------------------------ * RECLASSIFIED TO CONFORM TO 2002 PRESENTATION. The accompanying notes are an integral part of these financial statements. 4 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of these financial statements. 5 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

------------------------------ * RECLASSIFIED TO CONFORM TO 2002 PRESENTATION. The accompanying notes are an integral part of these financial statements. 6 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--BUSINESS AND ORGANIZATION BUSINESS--TriNet Corporate Realty Trust, Inc., a Maryland Corporation (the "Company"), is a wholly-owned subsidiary of iStar Financial Inc., a Maryland Corporation ("iStar Financial"). iStar Financial and its subsidiaries provide structured financing to private and corporate owners of real estate nationwide, including senior and junior mortgage debt, corporate mezzanine and subordinated capital, and corporate net lease financing. The Company typically provides capital to corporations, as well as borrowers who control facilities leased to single creditworthy tenants. The Company's net leased assets are generally mission-critical headquarters or distribution facilities that are subject to long-term leases with rated corporate credit tenants, and which provide for all expenses at the property to be paid by the corporate tenant on a triple net lease basis. Corporate tenant lease transactions have terms generally ranging from ten to 20 years and typically range in size from $20 million to $150 million. As of June 30, 2002, the Company's portfolio consisted of 99 facilities principally subject to net leases to approximately 115 customers, comprising 9.8 million square feet in 22 states. Of the 99 total facilities, there are 20 facilities held in three unconsolidated joint ventures. ORGANIZATION--The Company became a wholly-owned subsidiary of iStar Financial through a merger on November 4, 1999. As a wholly-owned subsidiary of iStar Financial, a real estate investment trust ("REIT"), the Company operates as a qualified real estate investment trust subsidiary ("QRS") under the Internal Revenue Code of 1986, as amended (the "Code"). MERGER TRANSACTION--On November 3, 1999, the Company's shareholders and the shareholders of iStar Financial approved the merger of the Company with a wholly-owned subsidiary of iStar Financial. The shareholders of iStar Financial also approved: (1) the acquisition by iStar Financial, through a merger and contribution of interests, of 100.00% of the ownership interests in its former external advisor; and (2) the change in form of its organization from a business trust to a corporation ("Incorporation Merger"). Pursuant to the merger, the Company merged with and into a subsidiary of iStar Financial, with the Company surviving as a wholly-owned subsidiary of iStar Financial. In the merger, each issued and outstanding share of the Company's common stock was converted into 1.15 shares of common stock of iStar Financial. Each issued and outstanding share of Series A, Series B and Series C Cumulative Redeemable Preferred Stock of the Company was converted into a share of Series B, Series C and Series D (respectively) Cumulative Redeemable Preferred Stock of iStar Financial. The iStar Financial preferred stock issued to the Company's former preferred shareholders has substantially the same terms as the Company's preferred stock, except that the new shares of Series B, C and D preferred stock have additional voting rights not associated with the Company's preferred stock. The holders of iStar Financial's Series A Preferred Shares received Series A Preferred Shares in the Incorporation Merger with the same rights and preferences as existed prior to the merger. The merger was structured as a tax-free reorganization under federal tax law. These transactions were consummated as of November 4, 1999, at which time iStar Financial's single class of common shares began trading on the New York Stock Exchange under the symbol "SFI." NOTE 2--BASIS OF PRESENTATION The accompanying unaudited Consolidated Financial Statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles ("GAAP") for complete financial statements. The Consolidated 7 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--BASIS OF PRESENTATION (CONTINUED) Financial Statements include the accounts of the Company, its wholly-owned subsidiary corporations and partnerships, and its majority-owned and controlled partnership. In the opinion of management, the accompanying Consolidated Financial Statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company's consolidated financial position at June 30, 2002 and December 31, 2001 and the results of its operations, changes in shareholder's equity and its cash flows for the three- and six-month periods ended June 30, 2002 and 2001, respectively. Such operating results are not necessarily indicative of the results that may be expected for any other interim periods or the entire year. NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES LOANS AND OTHER LENDING INVESTMENTS, NET--As described in Note 4, "Loans and Other Lending Investments" includes corporate/partnership loans. Management considers its loans and other lending investments to be either held-to-maturity or available-for-sale. Items classified as held-to-maturity are reflected at amortized historical cost, while items classified as available-for-sale are reported at fair values. Unrealized gains and losses on available-for-sale investments are included in other comprehensive income on the Company's Consolidated Balance Sheet, and are not included in the Company's net income. CORPORATE TENANT LEASE ASSETS AND DEPRECIATION--Corporate tenant lease assets are generally recorded at cost less accumulated depreciation. Certain improvements and replacements are capitalized when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance items are expensed as incurred. Depreciation is computed using the straight-line method of cost recovery over estimated useful lives of 40.0 years for facilities, five years for furniture and equipment, the shorter of the remaining lease term or expected life for tenant improvements and the remaining life of the facility for facility improvements. Corporate tenant lease assets to be disposed of are reported at the lower of their carrying amount or fair value less costs to sell. The Company also periodically reviews long-lived assets to be held and used for an impairment in value whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. In management's opinion, corporate tenant lease assets to be held and used are not carried at amounts in excess of their estimated recoverable amounts. CAPITALIZED INTEREST--The Company capitalizes interest costs incurred during the construction period on qualified build-to-suit projects for corporate tenants, including investments in joint ventures accounted for under the equity method. Interest capitalized was approximately $0 and $286,000 during the three-month periods ended June 30, 2002 and 2001, respectively, and was approximately $70,000 and $487,000 during the six-month periods ended June 30, 2002 and 2001, respectively. CASH AND CASH EQUIVALENTS--Cash and cash equivalents include all cash held in banks or invested in money market funds with original maturity terms of less than 90 days. RESTRICTED CASH--Restricted cash represents amounts required to be maintained in escrow under certain of the Company's debt obligations and leasing transactions. NON-CASH ACTIVITY--During the three and six months ended June 30, 2002, the Company disposed of 15 and 17 corporate tenant lease assets, respectively, and their related liabilities by transferring them 8 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) to iStar Financial at their respective carrying values. During the three and six months ended June 30, 2002, the Company disposed of one structured finance asset by transferring it to iStar Financial at its respective carrying value. The following is a summary of the effects of these transactions on the Company's consolidated financial position (in thousands):

REVENUE RECOGNITION--The Company's revenue recognition policies are as follows: LOANS AND OTHER LENDING INVESTMENTS: Management considers its loans and other lending investment to be either held to maturity or available-for-sale. The Company reflects held-to-maturity investments at amortized cost less allowance for loan losses, acquisition premiums or discounts, deferred loan fees and undisbursed loan funds. Items classified as available-for-sale are reported at fair values. Unrealized gains and losses on available-for-sale investments are included in other comprehensive income on the Company's Consolidated Balance Sheet and are not included in the Company's net income. On occasion, the Company may acquire loans at either small premiums or discounts based on the credit characteristics of such loans. These premiums or discounts are recognized as yield adjustments over the lives of the related loans. If loans that were acquired at a premium or discount are prepaid, the Company immediately recognizes the unamortized premium or discount as a decrease or increase in the prepayment gain or loss, respectively. Loan origination or exit fees, as well as direct loan origination costs, are also deferred and recognized over the lives of the related loans as a yield adjustment. Interest income is recognized using the effective interest method applied on a loan-by-loan basis. LEASING INVESTMENTS: Operating lease revenue is recognized on the straight-line method of accounting from the later of the date of the origination of the lease or the date of acquisition of the facility subject to existing leases. Accordingly, contractual lease payment increases are recognized evenly over the term of the lease. The cumulative difference between lease revenue recognized under this method and contractual lease payment terms is recorded as deferred operating lease income receivable on the balance sheet. INCOME TAXES--The Company is taxed as a QRS under the Code. As a QRS, the Company is included in the consolidated tax return of iStar Financial. Accordingly, no provision has been made for federal income taxes in the accompanying Consolidated Financial Statements. Prior to the merger, the Company was taxed as a REIT under the Code. 9 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTEREST RATE RISK MANAGEMENT--The Company has entered into various interest rate protection agreements that, together with a swap agreement, fix the interest rate on a portion of the Company's LIBOR-based borrowings. The related cost of these agreements is amortized over their respective lives and such amortization is recorded as interest expense. The Company enters into interest rate risk management arrangements with financial institutions meeting certain minimum financial criteria, and the related credit risk of non-performance by counterparties is not considered to be significant. CREDIT RISK CONCENTRATION--The Company underwrites the credit of prospective customers and may require them to provide some form of additional credit support such as corporate guarantees, letters of credit and/or cash security deposits. Although the Company's assets are geographically diverse and its customers operate in a variety of industries, to the extent the Company has a significant concentration of operating lease revenue from any single customer, the inability of that customer to make its payments could have an adverse effect on the Company. RECLASSIFICATIONS--Certain prior year amounts have been reclassified in the Consolidated Financial Statements and the related notes to conform to the 2002 presentation. USE OF ESTIMATES--The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. CHANGE IN ACCOUNTING PRINCIPLE--In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative financial instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as: (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment; (2) a hedge of the exposure to variable cash flows of a forecasted transaction; or (3) in certain circumstances, a hedge of a foreign currency exposure. On January 1, 2001, the Company adopted this pronouncement, as amended by Statement of Financial Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133" and Statement of Financial Accounting Standards No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities--an Amendment of FASB Statement No. 133." Because the Company has primarily used derivatives as cash flow hedges of interest rate risk only, the adoption of SFAS No. 133 did not have a material financial impact on the financial position and results of operations of the Company. However, should the Company change its current use of such derivatives, the adoption and continued application of SFAS No. 133 could have a more significant effect on the Company prospectively. Upon adoption, the Company recognized a charge to net income of approximately $269,000 and an additional charge of $1.5 million to other comprehensive income, representing the cumulative effect of change in accounting principle. 10 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) OTHER NEW ACCOUNTING STANDARDS--In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140 ("SFAS No. 140"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement is applicable for transfers of assets and extinguishments of liabilities occurring after June 30, 2001. The Company adopted the provisions of this statement as required for all transactions entered into on or after April 1, 2001. The adoption of SFAS No. 140 did not have a significant impact on the Company. In July 2001, the SEC released Staff Accounting Bulletin No. 102. ("SAB 102"), "Selected Loan Loss Allowance and Documentation Issues." SAB 102 summarizes certain of the SEC's views on the development, documentation and application of a systematic methodology for determining allowances for loan and lease losses. Adoption of SAB 102 by the Company did not have a significant impact on the Company. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations" and Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." SFAS No. 141 requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also addresses the initial recognition and measurement of goodwill and other intangible assets acquired in business combinations and requires intangible assets to be recognized apart from goodwill if certain tests are met. SFAS No. 142 requires that goodwill not be amortized but instead be measured for impairment at least annually, or when events indicate that there may be an impairment. The Company adopted the provisions of both statements on January 1, 2002, as required, and the adoption did not have a significant impact on the Company. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of, and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. SFAS No. 144 requires that current operations prior to the disposition of corporate tenant lease assets and prior period results of such operations be presented in discontinued operations in the Company's Consolidated Statements of Operations. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and must be applied at the beginning of a fiscal year. The Company adopted the provisions of this statement on January 1, 2002, as required, and it did not have a significant financial impact on the Company. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds both FASB Statements No. 4 ("SFAS No. 4"), "Reporting Gains and Losses from Extinguishment of Debt," and the amendment to SFAS No. 4, FASB Statement No. 64 ("SFAS No. 64"), "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." Through this rescission, SFAS No. 145 eliminates the requirement (in both SFAS No. 4 and SFAS No. 64) that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. An entity is not prohibited from classifying such gains and losses as extraordinary items, so long as they meet the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30 ("APB 30"), "Reporting the Results of 11 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions"; however, due to the nature of the Company's operations, such treatment may not be available to the Company. Any gains or losses on extinguishments of debt that were previously classified as extraordinary items in prior periods presented that do not meet the criteria in APB 30 for classification as an extraordinary item will be reclassified to income from continuing operations. The provisions of SFAS No. 145 are effective for financial statements issued for fiscal years beginning after May 15, 2002. The Company will adopt the provisions of this statement, as required, on January 1, 2003. NOTE 4--LOANS AND OTHER LENDING INVESTMENTS On July 6, 2001, the Company financed a $75.0 million term preferred investment in a publicly-traded real estate customer with a $50.0 million term loan bearing interest at LIBOR + 2.50%. The investment had a maturity of July 2006, including a one-year extension at the Company's option. The Company's investment carried an initial current yield of 10.50%, with annual increases of 0.50% in each of the next two years. In addition, the Company's investment was convertible into the customer's common stock at a strike price of $25.00 per share. During the second quarter of 2002, the asset was transferred to iStar Financial. NOTE 5--CORPORATE TENANT LEASE ASSETS The Company's investments in corporate tenant lease assets, at cost, were as follows (in thousands):

In addition, the Company receives reimbursements from customers for certain facility operating expenses including common area costs, insurance and real estate taxes. Customer expense reimbursements for the three months ended June 30, 2002 and 2001 were approximately $5.1 million and $5.0 million, respectively, and $9.6 million and $9.9 million for the six months ended June 30, 2002 and 2001, respectively, and are included as a reduction of "Operating costs--corporate tenant lease assets" on the Company's Consolidated Statements of Operations. On May 30, 2002, the Company sold one corporate tenant lease asset for net proceeds of $3.7 million, and a realized gain of approximately $595,000. During the three months ended June 30, 2002, the Company disposed of 15 corporate tenant lease assets at their respective carrying values of $229.6 million by transferring them to iStar Financial. During the six months ended June 30, 2002, the Company disposed of 17 corporate tenant lease assets at their respective carrying values of $258.6 million by transferring them to iStar Financial. No gain or loss resulted from these transfers. The results of operations from corporate tenant lease assets sold in 12 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5--CORPORATE TENANT LEASE ASSETS (CONTINUED) the current period are classified as discontinued operations even though such income was actually received by the Company prior to the asset sale. Gains on sale from corporate tenant lease assets are also classified as discontinued operations. NOTE 6--JOINT VENTURES AND UNCONSOLIDATED SUBSIDIARIES The Company's ownership percentages, its investments in and advances to unconsolidated joint ventures and subsidiaries, its respective income and the Company's pro rata share of its ventures' third-party, non-recourse debt as of June 30, 2002 are presented below (in thousands):

EXPLANATORY NOTES: ------------------------------ (1) The Company reflects its pro rata share of third-party, non-recourse debt, rather than the total amount of the joint venture debt, because the third-party, non-recourse debt held by the joint ventures is not guaranteed by the Company nor does the Company have any additional commitment to fund the debt. (2) Maturity date reflects a one-year extension at the venture's option. (3) As of July 2, 2002, the Company owns 100.00% of Milpitas, which will be consolidated for accounting purposes in future periods. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES: At June 30, 2002, the Company had investments in three joint ventures: (1) TriNet Sunnyvale Partners, L.P. ("Sunnyvale"), whose external partners are John D. O'Donnell, Trustee, John W. Hopkins, and Donald S. Grant; (2) Corporate Technology Centre Associates LLC ("CTC I"), whose external member is Corporate Technology Centre Partners LLC; and (3) TriNet Milpitas Associates, LLC ("Milpitas"), whose external member is The Prudential Insurance Company of America. These ventures were formed for the purpose of operating, acquiring and, in certain cases, developing corporate tenant lease facilities. At June 30, 2002, the ventures comprised 20 net leased facilities. The Company's combined investment in these joint ventures at June 30, 2002 was $48.6 million. The joint ventures' carrying value for the 20 facilities owned at June 30, 2002 was $290.5 million. In the aggregate, the joint ventures had total assets of $329.7 million and total liabilities of $234.3 million as of June 30, 2002, and net income of $2.7 million and $6.3 million for the three and six months ended June 30, 2002. The Company accounts for these investments under the equity method because the Company's joint venture partners have certain participating rights which limit the Company's control. 13 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6--JOINT VENTURES AND UNCONSOLIDATED SUBSIDIARIES (CONTINUED) Effective September 29, 2000, iStar Sunnyvale Partners, LP (the entity which is controlled by Sunnyvale) entered into an interest rate cap agreement limiting the venture's exposure to interest rate movements on its $24.0 million LIBOR-based mortgage loan to an interest rate of 9.00% through November 9, 2003. Currently, the limited partners of Sunnyvale have the option to convert their partnership interest into cash; however, the Company may elect to deliver 297,728 shares of common stock of iStar Financial in lieu of cash. On April 1, 2002, the former Sierra Land Ventures ("Sierra") joint venture partner assigned its 50.00% ownership interest in Sierra to the Company. There were no cash or shares exchanged in this transaction. As of April 1, 2002, the Company owns 100.00% of the corporate tenant lease asset previously held by Sierra and therefore consolidates this asset for accounting purposes. On July 2, 2002, the Company paid approximately $30.5 million in cash to the former member of the Milpitas joint venture in exchange for its 50.00% ownership interest. Pursuant to the terms of the joint venture agreement, the former external member had the right to convert its interest into 984,476 shares of common stock of iStar Financial at any time during the period February 1, 2002 through January 31, 2003. On May 2, 2002, the former Milpitas external member exercised this right. Upon the external member's exercise of its conversion right, the Company had the option to acquire the partner's interest for cash, instead of shares, for a payment equal to the value of 984,476 shares of common stock of iStar Financial multiplied by the ten-day average closing stock price as of the transaction date. The Company made such election and, as of July 2, 2002, owns 100.00% of Milpitas, which will be consolidated for accounting purposes in future periods. Income generated from the Company's joint venture investments and unconsolidated subsidiaries is included in "Equity in earnings from joint ventures and unconsolidated subsidiaries" on the Consolidated Statements of Operations. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES: The Company has an investment in TriNet Management Operating Company, Inc. ("TMOC"), a taxable noncontrolled subsidiary that has a $2.0 million investment in a real estate company based in Mexico. The Company owns 95.00% of the outstanding voting and non-voting common stock (representing 1.00% voting power and 95.00% of the economic interest) in TMOC. The other two owners of TMOC stock are executives of the Company, who own a combined 5.00% of the outstanding voting and non-voting common stock (representing 99.00% voting power and 5.00% economic interest) in TMOC. As of June 30, 2002, there have never been any distributions to the common shareholders, nor does the Company expect to make any in the future. At any time, the Company has the right to acquire all of the common stock of TMOC at fair market value, which the Company believes to be nominal. TMOC was formed as a taxable corporation for the purpose of maintaining compliance with the REIT provisions of the Code and is accounted for under the equity method for financial statement reporting purposes and is presented in "Investments in joint ventures and unconsolidated subsidiaries" on the Company's Consolidated Balance Sheet. If TMOC was consolidated with the Company for financial statement purposes, it would not have a material impact on the Company's operations. As of June 30, 2002, this corporation had no debt obligations. 14 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--DEBT OBLIGATIONS As of June 30, 2002 and December 31, 2001, the Company has debt obligations under various arrangements with financial institutions as follows (in thousands):

EXPLANATORY NOTES: -------------------------- (1) Maturity date reflects two one-year extensions at the Company's option. (2) During the six months ended June 30, 2002, debt obligations of $46.9 million were transferred to iStar Financial along with their underlying collateral. (3) On May 1, 2002, this debt obligation was transferred to iStar Financial along with its underlying collateral. (4) The notes are callable by the Company at any time for an amount equal to the total of principal outstanding, accrued interest and the applicable make-whole prepayment premium. (5) Subject to mandatory tender on March 1, 2003 to either the dealer or the Company. The initial coupon of 6.75% applies to the first five-year term through the mandatory tender date. If tendered to the dealer, the notes must be remarketed. The rates reset to then-prevailing market rates upon remarketing. (6) As part of the accounting for the merger these fixed-rate obligations were considered to have stated interest rates which were below the then-prevailing market rates at which the Company could issue new debt obligations and, accordingly, the Company ascribed a market discount to each obligation. Such discounts are amortized as an adjustment to interest expense using the effective interest method over the related term of the obligations. As adjusted, the effective annual interest rates on these obligations were 8.81%, 9.51% and 9.04% for the 6.75% Dealer Remarketable Securities, 7.70% Notes and 7.95% Notes, respectively. 15 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--DEBT OBLIGATIONS (CONTINUED) Certain of the Company's debt obligations contain covenants. These covenants are both financial and non-financial in nature. Significant financial covenants include limitations on the Company's ability to incur indebtedness beyond specified levels and restrictions on the Company's ability to incur liens on assets. Significant non-financial covenants include requirements regarding corporate existence, maintenance of corporate tenant lease assets, insurance and payment of taxes. On May 15, 2001, the Company repaid its $100.0 million 7.30% unsecured notes. These notes were senior unsecured obligations of the Company and ranked equally with the Company's other senior unsecured and unsubordinated indebtedness. On June 14, 2001, the Company closed $193.0 million of term loan financing secured by 15 corporate tenant lease assets. The floating-rate loan bears interest at LIBOR + 1.85% (not to exceed 10.00% in aggregate) and has two one-year extensions at the Company's option. The Company used these proceeds to repay a $77.8 million secured term loan maturing in June 2001 and to pay down a portion of its revolving credit facilities. On July 6, 2001, the Company financed a $75.0 million term preferred investment in a publicly-traded real estate customer with a $50.0 million term loan bearing interest at LIBOR + 2.50%. The investment had a maturity of July 2006, including a one-year extension at the Company's option. The Company's investment carried an initial current yield of 10.50%, with annual increases of 0.50% in each of the next two years. In addition, the Company's investment was convertible into the customer's common stock at a strike price of $25.00 per share. During the second quarter of 2002, the asset was transferred to iStar Financial. On July 27, 2001, the Company repaid the unsecured revolving credit facility. iStar Financial replaced this subsidiary facility with a $300.0 million unsecured revolving credit facility with a group of leading financial institutions. The 30-day LIBOR rate as of June 30, 2002 was 1.84%. The Company has entered into an interest rate swap agreement which, together with an existing LIBOR interest rate cap agreement struck at 7.75%, effectively fixes the interest rate on $75.0 million of the Company's LIBOR-based borrowings at 5.58% plus the applicable margin through December 1, 2004. The actual borrowing cost to the Company with respect to indebtedness covered by the protection agreements will depend upon the applicable margin over LIBOR for such indebtedness, which will be determined by the terms of the relevant debt instruments. The Company has also entered into a LIBOR interest rate cap struck at 7.75% in the notional amount of $35.0 million, which expires in December 2004. 16 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--DEBT OBLIGATIONS (CONTINUED) As of June 30, 2002, future expected/scheduled maturities of outstanding long-term debt obligations are as follows (in thousands)(1): 2002 (remaining six months)................................. $ -- 2003........................................................ -- 2004........................................................ -- 2005........................................................ 3,382 2006........................................................ 243,000 Thereafter.................................................. 230,067 -------- Total principal maturities.................................. 476,449 Net unamortized debt discounts.............................. (13,445) -------- Total debt obligations...................................... $463,004 ========

EXPLANATORY NOTE: ------------------------ (1) Assumes exercise of extensions to the extent such extensions are at the Company's option. NOTE 8--COMPREHENSIVE INCOME In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income" effective for fiscal years beginning after December 15, 1997. The statement changes the reporting of certain items currently reported as changes in the shareholder's equity section of the balance sheet and establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 130 requires that all components of comprehensive income shall be reported in the financial statements in the period in which they are recognized. Furthermore, a total amount for comprehensive income shall be displayed in the financial statements. The Company has adopted this standard effective January 1, 1998. Total comprehensive income was $9.3 million and $25.3 million for the three-month periods ended June 30, 2002 and 2001, respectively, and $30.5 million and $42.8 million for the six-month periods ended June 30, 2002 and 2001, respectively. The primary components of comprehensive income other than net income consist of amounts attributable to the adoption and continued application of SFAS No. 133 to the Company's cash flow hedges and changes in the fair value of the Company's available-for-sale investment, which was transferred to iStar Financial in the second quarter of 2002. 17 TRINET CORPORATE REALTY TRUST, INC. (A WHOLLY-OWNED SUBSIDIARY OF ISTAR FINANCIAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8--COMPREHENSIVE INCOME (CONTINUED) For the three and six months ended June 30, 2002, the change in the fair market value of the Company's cash flow hedges was a decrease of $1.3 million and $574,000, respectively, and was recorded as adjustments to other comprehensive income. The reconciliation to other comprehensive income is as follows (in thousands):

As of June 30, 2002 and December 31, 2001, accumulated other comprehensive income reflected in the Company's equity on the balance sheet is comprised of the following (in thousands):

During the second quarter of 2002, the Company disposed of one structured finance asset by transferring it to iStar Financial. As a result of this transfer, $9.4 million of other comprehensive income was also transferred to iStar Financial. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL As a wholly-owned subsidiary of iStar Financial, the Company specializes in providing investment capital to major corporations and real estate owners nationwide by structuring purchase/leaseback transactions and acquiring corporate tenant lease assets subject to existing long-term leases to creditworthy customers occupying office and industrial facilities. The Company uses its corporate credit and real estate underwriting expertise to structure investments that it believes will generate attractive risk-adjusted returns. As of June 30, 2002, the Company's portfolio consisted of 99 facilities principally subject to net leases to approximately 115 customers, comprising 9.8 million square feet in 22 states. Of the 99 total facilities, there are 20 facilities held in three joint venture partnerships. In the second half of 2001, the Company disposed of 19 corporate tenant lease assets by transferring them to iStar Financial at their respective carrying amounts. Additionally, in July 2001, iStar Financial contributed cash of $97.0 million to the Company, which was used to pay off the Company's unsecured revolving credit facility. In the first quarter of 2002, the Company disposed of two corporate tenant lease assets by transferring them to iStar Financial at their respective carrying amounts. In the second quarter of 2002, the Company disposed of 15 corporate tenant lease assets and one structured finance asset by transferring them to iStar Financial at their respective carrying amounts. RESULTS OF OPERATIONS THREE-MONTH PERIOD ENDED JUNE 30, 2002 COMPARED TO THE THREE-MONTH PERIOD ENDED JUNE 30, 2001 INTEREST INCOME--Interest income decreased $875,000 to $972,000 for the three months ended June 30, 2002 from $1.8 million for the same period in 2001. This decrease was primarily due to the transfer of a corporate/partnership loan to iStar Financial in the second quarter of 2002, which accounted for $622,000 of the decrease. In addition, interest income deceased by $156,000 due to lower average cash balances and interest rates in the second quarter of 2002 as compared to the same period in 2001. OPERATING LEASE INCOME--Operating lease income decreased $9.0 million to $27.6 million for the three months ended June 30, 2002 from $36.6 million for the same period in 2001. Of this decrease, $7.9 million was due to the transfer of corporate tenant lease assets to iStar Financial in 2001. In addition, operating lease income decreased by $1.1 million due to lower operating lease income on corporate tenant lease assets. OTHER INCOME--Other income generally consists of lease termination fees, project management fees, dividend income, unamortized loan discounts, financial advisory fees, earnest deposit forfeitures and credit enhancement fees. During the three-months ended June 30, 2002, other income consisted of dividend income of $150,000. During the three months ended June 30, 2001, other income consisted of dividend income of $125,000. INTEREST EXPENSE--For the three-months ended June 30, 2002, interest expense decreased by $1.1 million to $9.7 million from $10.8 million for the same period in 2001. Of this decrease, $2.0 million resulted from the repayment of debt in 2001. The decrease was partially offset by a $497,000 increase in interest expense related to certain interest rate protection agreements and a $347,000 increase in amortization of loan costs. OPERATING COSTS-CORPORATE TENANT LEASE ASSETS--For the three months ended June 30, 2002, operating costs decreased by $429,000 to $2.7 million from $3.1 million for the same period in 2001. 19 This decrease is due to corporate tenant lease asset dispositions in 2001 and collection of prior years' tax refunds related to certain corporate tenant lease assets. DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased by $1.5 million to $4.4 million for the three months ended June 30, 2002 from $5.9 million for the same period in 2001. This decrease is primarily the result of the transfer of corporate tenant lease assets to iStar Financial in 2001. GENERAL AND ADMINISTRATIVE--For the three months ended June 30, 2002, general and administrative expenses were comparable to the same period in 2001. EQUITY IN EARNINGS FROM JOINT VENTURES AND UNCONSOLIDATED SUBSIDIARIES--During the three months ended June 30, 2002, equity in earnings from joint ventures and unconsolidated subsidiaries decreased by $689,000 to $1.4 million from $2.1 million for the same period in 2001. This decrease was primarily due to lower operating lease income on certain joint ventures. INCOME FROM DISCONTINUED OPERATIONS--For the six-month period ended June 30, 2002, the Company disposed of 15 corporate tenant lease assets by transferring them to iStar Financial at their respective carrying values of $229.6 million, resulting in no gain or loss. Additionally, during the three- month period ended June 30, 2002, the Company sold one corporate tenant lease asset, resulting in a gain of $595,000. Operating income received by the Company for the three-month periods ending June 30, 2002 and June 30, 2001, of approximately $4.0 million and $4.5 million respectively, prior to the disposition of corporate tenant lease assets, is shown as "discontinued operations" even though such income was received by the Company prior to the asset disposition. GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS--During the three months ended June 30, 2002, the Company disposed of one corporate tenant lease asset for net proceeds of $3.7 million, and recognized a gain of approximately $595,000. During the second quarter of 2001, the Company disposed of one corporate tenant lease asset for net proceeds of $4.1 million, and recognized a gain of approximately $1.0 million. EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--During the three months ended June 30, 2002 and 2001, the Company did not incur any losses on the early extinguishment of debt. SIX-MONTH PERIOD ENDED JUNE 30, 2002 COMPARED TO THE SIX-MONTH PERIOD ENDED JUNE 30, 2001 INTEREST INCOME--Interest income increased $793,000 to $3.7 million for the six months ended June 30, 2002 from $2.9 million for the same period in 2001. This increase was primarily due to a loan origination in May of 2001 which accounted for $2.0 million of the increase. Interest income decreased by $531,000 due to lower average cash balances and interest rates in the second quarter of 2002 as compared to the same period in 2001. OPERATING LEASE INCOME--Operating lease income decreased $17.1 million to $56.0 million for the six months ended June 30, 2002 from $73.1 million for the same period in 2001. Of this decrease, $15.8 million was due to the transfer of corporate tenant lease assets to iStar Financial in 2001. In addition, operating lease income decreased by $1.5 million due to lower operating lease income on certain corporate tenant lease assets. OTHER INCOME--Other income generally consists of lease termination fees, project management fees, dividend income, unamortized loan discounts, financial advisory fees, earnest deposit forfeitures and credit enhancement fees. During the six-months ended June 30, 2002, other income consisted of financial advisory fees of $1.0 million and dividend income of $300,000. During the six months ended June 30, 2001, other income consisted of dividend income of $375,000. 20 INTEREST EXPENSE--For the six-months ended June 30, 2002, interest expense decreased by $2.8 million to $19.9 million from $22.7 million for the same period in 2001. Of this decrease, $5.3 million resulted from the repayment of debt in 2001 and 2002. The decrease was partially offset by a $1.3 million increase in interest expense related to certain interest rate protection agreements and a $739,000 increase in amortization of loan costs. OPERATING COSTS-CORPORATE TENANT LEASE ASSETS--For the six months ended June 30, 2002, operating costs decreased by $912,000 to $5.5 million from $6.4 million for the same period in 2001. This decrease is due to corporate tenant lease asset dispositions in 2001 and collection of prior years' tax refunds related to certain corporate tenant lease assets. DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased by $3.2 million to $8.7 million for the six months ended June 30, 2002 from $11.9 million for the same period in 2001. This decrease is primarily the result of the transfer of corporate tenant lease assets to iStar Financial in 2001. GENERAL AND ADMINISTRATIVE--For the six months ended June 30, 2002, general and administrative expenses were comparable to the same period in 2001. EQUITY IN EARNINGS FROM JOINT VENTURES AND UNCONSOLIDATED SUBSIDIARIES--During the six months ended June 30, 2002, equity in earnings from joint ventures and unconsolidated subsidiaries decreased by $1.2 million to $3.2 million from $4.4 million for the same period in 2001. This decrease was primarily due to lower operating lease income on certain joint ventures. INCOME FROM DISCONTINUED OPERATIONS--For the three-month period ended June 30, 2002, the Company disposed of 17 corporate tenant lease assets by transferring them to iStar Financial at their respective carrying values of $258.6 million, resulting in no gain or loss. Additionally, during the six-month period ended June 30, 2002, the Company sold one corporate tenant lease asset, resulting in a gain of $595,000. Operating income received by the Company for the six-month periods ended June 30, 2002 and 2001, of approximately $9.9 million and $9.5 million respectively, prior to the disposition of corporate tenant lease assets, is shown as "discontinued operations" even though such income was received by the Company prior to the asset disposition. GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS--During the six months ended June 30, 2002, the Company disposed of one corporate tenant lease asset for net proceeds of $3.7 million, and recognized gains of approximately $595,000. During the six months ended June 30, 2001, the Company disposed of two corporate tenant lease assets for net proceeds of $7.8 million, and recognized gains of approximately $1.6 million. EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--During the six months ended June 30, 2002, the Company did not incur any losses on the early extinguishment of debt. During the six months ended June 30, 2001, the Company repaid a mortgage loan that had an original maturity date of December 2004. This prepayment resulted in an extraordinary loss of $1.0 million. LIQUIDITY AND CAPITAL RESOURCES Omitted pursuant to General Instruction H(2) of Form 10-Q. 21 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Omitted pursuant to General Instruction H (2) of Form 10-Q. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Omitted pursuant to General Instruction H (2) of Form 10-Q. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted pursuant to General Instruction H (2) of Form 10-Q. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS None. B. REPORTS ON FORM 8-K On June 12, 2002, a Current Report on Form 8-K was filed in connection with the transfer of corporate tenant lease assets to another subsidiary of the Company's parent company. 22 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRINET CORPORATE REALTY TRUST, INC. REGISTRANT Date: August 14, 2002 ------------------------------------------------ Jay Sugarman CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER Date: August 14, 2002 ------------------------------------------------ Spencer B. Haber PRESIDENT, CHIEF FINANCIAL OFFICER, DIRECTOR AND SECRETARY

TRINET CORPORATE REALTY TRUST INC 10-Q