SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-14162
GLENBOROUGH PROPERTIES, L.P.
(Exact name of registrant as specified in its charter)
California 94-3231041
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 South El Camino Real,
Suite 1100, San Mateo, California
(650) 343-9300 94402-1708
(Address of principal executive offices (Zip Code)
and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___
1
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INDEX
GLENBOROUGH PROPERTIES, L.P.
Page No.
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements of Glenborough
Properties, L.P. (Unaudited except for the
Consolidated Balance Sheet at December 31, 1997):
Consolidated Balance Sheets at September 30,
1998 and December 31, 1997 3
Consolidated Statements of Operations for the
nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Operations for the
three months ended September 30, 1998 and 1997 5
Consolidated Statement of Partners' Equity for the
nine months ended September 30, 1998 6
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1998 and
1997 7-8
Notes to Consolidated Financial Statements 9-19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20-26
PART II OTHER INFORMATION
Item 1. Legal Proceedings 27-28
Item 2. Changes in Securities 28-29
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
EXHIBIT INDEX 32
2
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<TABLE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit amounts)
September 30, December 31,
1998 1997
(Unaudited) (Audited)
-------------- --------------
<S> <C> <C>
ASSETS
Rental property, net of accumulated
depreciation of $73,878 and $41,213 in
1998 and 1997, respectively $1,754,260 $825,218
Investment in Glenborough Corporation 9,403 8,519
Mortgage loans receivable 40,582 3,692
Cash and cash equivalents 7,244 3,670
Other assets 92,567 23,351
-------------- --------------
TOTAL ASSETS $1,904,056 $864,450
============== ==============
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Mortgage loans $ 492,394 $148,139
Unsecured Series A Redeemable Notes 150,000 --
Unsecured loan 147,710 --
Unsecured bank line 145,140 80,160
Other liabilities 31,985 12,267
-------------- --------------
Total liabilities 967,229 240,566
-------------- --------------
Partners' Equity:
General partner, 359,040 and 337,018 units
issued and outstanding at September 30, 1998
and December 31, 1997, respectively 9,217 6,239
Limited partners, 35,544,964 and 33,364,801
units issued and outstanding at September 30,
1998 and December 31, 1997, respectively 927,610 617,645
-------------- --------------
Total partners' equity 936,827 623,884
-------------- --------------
TOTAL LIABILITIES AND PARTNERS'
EQUITY $1,904,056 $864,450
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended September 30, 1998 and 1997
(in thousands, except per unit amounts)
(Unaudited)
1998 1997
----------- ----------
REVENUE
Rental revenue $ 162,903 $ 35,899
Fees and reimbursements from affiliates 2,452 572
Interest and other income 1,959 1,060
Equity in earnings of Glenborough Corporation 1,889 816
Net gain on sales of rental properties 1,901 555
Gain on collection of mortgage loan
receivable -- 652
----------- ----------
Total revenue 171,104 39,554
----------- ----------
EXPENSES
Property operating expenses, including
$2,287 and $1,904 paid to affiliates
in 1998 and 1997, respectively 54,382 12,483
General and administrative, including
$1,815 and $1,814 paid to an affiliate
in 1998 and 1997, respectively 7,842 2,126
Depreciation and amortization 35,227 8,854
Interest expense 35,916 6,416
----------- ----------
Total expenses 133,367 29,879
----------- ----------
Net income 37,737 9,675
Preferred partnership interest distribution
requirement (15,050) --
----------- ----------
Net income allocable to general and
limited partners $ 22,687 $ 9,675
=========== ==========
Net income allocable to general and
limited partners per partnership unit $ 0.65 $ 0.65
=========== ==========
Weighted average number of partnership
units outstanding 34,651,712 14,999,528
=========== ==========
See accompanying notes to consolidated financial statements
4
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GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30, 1998 and 1997
(in thousands, except per unit amounts)
(Unaudited)
1998 1997
----------- ----------
REVENUE
Rental revenue $ 65,321 $ 16,208
Fees and reimbursements from affiliates 1,220 205
Interest and other income 1,404 544
Equity in earnings of Glenborough Corporation 1,038 380
Reduction in gain on prior quarter
sales of rental properties (238) (15)
----------- ----------
Total revenue 68,745 17,322
----------- ----------
EXPENSES
Property operating expenses, including
$332 and $804 paid to affiliates in
1998 and 1997, respectively 22,446 5,773
General and administrative, including
$849 paid to an affiliate in 1997 3,367 952
Depreciation and amortization 14,309 4,811
Interest expense 17,064 2,616
----------- ----------
Total expenses 57,186 14,152
----------- ----------
Net income 11,559 3,170
Preferred partnership interest distribution
requirement (5,570) --
----------- ----------
Net income allocable to general and
limited partners $ 5,989 $ 3,170
=========== ==========
Net income allocable to general and
limited partners per partnership unit $ 0.17 $ 0.16
=========== ==========
Weighted average number of partnership
units outstanding 35,868,546 20,298,131
=========== ==========
See accompanying notes to consolidated financial statements
5
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GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY
For the nine months ended September 30, 1998
(in thousands)
(Unaudited)
General Limited
Partner Partners Total
------------- ------------- -------------
Balance at December 31, 1997 $6,239 $617,645 $623,884
Contributions 3,307 327,423 330,730
Distributions (557) (55,122) (55,679)
Unrealized gain on marketable
securities 1 154 155
Net income 227 37,510 37,737
------------- ------------- ------------
Balance at September 30, 1998 $9,217 $927,610 $936,827
============= ============= ============
See accompanying notes to consolidated financial statements
6
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GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1998 and 1997
(in thousands)
(Unaudited)
1998 1997
----------- ----------
Cash flows from operating activities:
Net income $ 37,737 $ 9,675
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 35,227 8,854
Amortization of loan fees,
included in interest expense 998 174
Equity in earnings of Glenborough
Corporation (1,889) (816)
Gain on collection of mortgage
loan receivable -- (652)
Net gain on sales of rental properties (1,901) (555)
Changes in certain assets and
liabilities, net (3,036) (267)
----------- ----------
Net cash provided by operating
activities 67,136 16,413
----------- ----------
Cash flows from investing activities:
Net proceeds from sales of rental properties 39,247 11,873
Additions to rental property (589,480) (393,534)
Additions to mortgage loans receivable (37,397) (2,420)
Principal receipts on mortgage loans
receivable 507 9,355
Distributions from Glenborough Corporation 1,005 1,620
Other investments, included in other assets (47,943) --
----------- ----------
Net cash used for investing activities (634,061) (373,106)
----------- ----------
Cash flows from financing activities:
Proceeds from borrowings 425,350 369,540
Repayment of borrowings (227,281) (212,910)
Proceeds from issuance of Series A
Redeemable Notes 150,000 --
Partner contributions 278,109 215,196
Partner distributions (55,679) (14,611)
----------- ----------
Net cash provided by financing activities 570,499 357,215
----------- ----------
continued
See accompanying notes to consolidated financial statements
7
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS-continued
For the nine months ended September 30, 1998 and 1997
(in thousands)
(Unaudited)
1998 1997
----------- -----------
Net increase in cash and cash equivalents $ 3,574 $ 522
Cash and cash equivalents at beginning
of period 3,670 785
----------- -----------
Cash and cash equivalents at end of
period $ 7,244 $ 1,307
=========== ===========
Supplemental disclosure of cash flow
information:
Cash paid for interest (net of
capitalized interest of $724 in
1998) $ 30,712 $ 5,695
=========== ===========
Supplemental disclosure of Non-Cash
Investing and Financing Activities:
Acquisition of real estate through
assumption of first trust deed
notes payable $ 358,876 $ 24,924
=========== ===========
Acquisition of real estate through
issuance of shares of common stock
and Operating Partnership units $ 52,621 $ 28,078
=========== ===========
Unrealized gain on marketable securities $ 155 $ --
=========== ===========
See accompanying notes to consolidated financial statements
8
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1998
Note 1. ORGANIZATION
Glenborough Properties, L.P., a California Limited Partnership (the
"Operating Partnership") was organized in the State of California on August
23, 1995. The Operating Partnership is the primary operating subsidiary of
Glenborough Realty Trust Incorporated (the "Company"). On December 31, 1995,
the Company completed a consolidation (the "Consolidation") in which eight
public limited partnerships (the "Partnerships," collectively with
Glenborough Corporation (defined below), the "GRT Predecessor Entities"),
merged with and into the Company. The Company (i) issued 5,753,709 shares
(the "Shares") of $.001 par value Common Stock to the Partnerships in
exchange for 3,979,376 Operating Partnership units; and (ii) merged with
Glenborough Corporation, a California Corporation ("GC"), with the Company
being the surviving entity. The Company then transferred certain real estate
and related assets to the Operating Partnership in exchange for a sole
general partner interest of 1% and a limited partnership interest of 85.37%
(88.2% total partnership interest as of September 30, 1998). The Operating
Partnership also acquired interests in certain warehouse distribution
facilities from GPA, Ltd., a California limited partnership ("GPA"). The
Operating Partnership commenced operations on January 1, 1996.
The Operating Partnership, through several subsidiaries, is engaged primarily
in the ownership, operation, management, acquisition, expansion and
development of various income-producing properties. As of September 30,
1998, the Operating Partnership, directly and through various subsidiaries in
which it owns 99% of the ownership interests, controls a total of 190 real
estate projects.
Effective April 1, 1998, the Company contributed to the Operating Partnership
the majority of its assets, including 100% of its shares of the non-voting
preferred stock of Glenborough Corporation ("GC"), as well as all of the
Company's tangible personal property including furniture and fixtures, all
cash and investments, and a property management contract. As part of that
transaction, the Company also agreed to a substantial reduction in the asset
management fees paid by the Operating Partnership to the Company. In return,
the Operating Partnership canceled certain obligations of the Company to the
Operating Partnership, and issued 2,248,869 units of partnership interest in
the Operating Partnership to the Company. The contribution of 100% of the
shares of non-voting preferred stock in GC has been accounted for as a
reorganization of entities under common control, similar to a pooling of
interests. All periods have been restated to give effect to the transaction
as if it occurred on December 31, 1995.
As a result of this transaction, the only assets of the Company that are not
attributable to its interest in the Operating Partnership are (i) its shares
of non-voting preferred stock in Glenborough Hotel Group, (ii) its shares of
common stock in seven qualified REIT subsidiaries, which produce dividends
that are not material to the Company, and (iii) a 4.05% partnership interest
in Glenborough Partners.
As of September 30, 1998, resulting from the transaction discussed above, the
Operating Partnership holds 100% of the non-voting preferred stock of GC. GC
is the general partner of several real estate limited partnerships and
provides asset and property management services for these partnerships (the
"Controlled Partnerships"). It also provides partnership administration,
asset management, property management and development services to a group of
unaffiliated partnerships which include three public partnerships sponsored
by Rancon Financial Corporation, an unaffiliated corporation which has
significant real estate assets in the Inland Empire region of Southern
California (the "Rancon Partnerships"). The services to the Rancon
Partnerships were previously provided by Glenborough Inland Realty
Corporation ("GIRC"), a California corporation, which merged with GC
effective June 30, 1997. GC also provides property management services for a
limited portfolio of property owned by other unaffiliated third parties.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements present the consolidated financial
position of the Operating Partnership and its majority owned subsidiaries as
of September 30, 1998, and December 31, 1997, and the consolidated results of
operations and cash flows of the Operating Partnership and its majority owned
subsidiaries for the nine months ended September 30, 1998 and 1997. All
intercompany transactions, receivables and payables have been eliminated in
consolidation.
9
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1998
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal accruals) necessary to
present fairly the financial position and results of operations of the
Operating Partnership as of September 30, 1998, and for the period then ended.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the results of operations during the reporting period. Actual results could
differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information," which will be effective
for financial statements issued for fiscal years beginning after December 15,
1997. SFAS 131 will require the Operating Partnership to report certain
financial and descriptive information about its reportable operating
segments, segments for which separate financial information is available that
is evaluated regularly by management in deciding how to allocate resources
and in assessing performance. For these segments, SFAS 131 will require the
Operating Partnership to report profit and loss, certain specific revenue and
expense items and assets. It also requires disclosures about each segment's
products and services, geographic areas of operation and major customers. The
Operating Partnership will adopt the disclosures required by SFAS 131 in the
financial statements for the year ended December 31, 1998.
Investments in Real Estate
Investments in real estate are stated at cost unless circumstances indicate
that cost cannot be recovered, in which case, the carrying value of the
property is reduced to estimated fair value. Estimated fair value: (i) is
based upon the Operating Partnership's plans for the continued operation of
each property; and (ii) is computed using estimated sales price, as
determined by prevailing market values for comparable properties and/or the
use of capitalization rates multiplied by annualized rental income based upon
the age, construction and use of the building. The fulfillment of the
Operating Partnership's plans related to each of its properties is dependent
upon, among other things, the presence of economic conditions which will
enable the Operating Partnership to continue to hold and operate the
properties prior to their eventual sale. Due to uncertainties inherent in
the valuation process and in the economy, it is reasonably possible that the
actual results of operating and disposing of the Operating Partnership's
properties could be materially different than current expectations.
Depreciation is provided using the straight line method over the useful lives
of the respective assets.
The useful lives are as follows:
Buildings and Improvements 10 to 40 years
Tenant Improvements Term of the related lease
Furniture and Equipment 5 to 7 years
Investment in Glenborough Corporation
The Operating Partnership's investment in Glenborough Corporation is
accounted for using the equity method, as discussed further in Note 4.
Mortgage Loans Receivable
The Operating Partnership monitors the recoverability of its loans and notes
receivable through ongoing contact with the borrowers to ensure timely
receipt of interest and principal payments, and where appropriate, obtains
10
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GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1998
financial information concerning the operation of the properties. Interest on
mortgage loans is recognized as revenue as it accrues during the period the
loan is outstanding. Mortgage loans receivable will be evaluated for
impairment if it becomes evident that the borrower is unable to meet its debt
service obligations in a timely manner and cannot satisfy its payments using
sources other than the operations of the property securing the loan. If it
is concluded that such circumstances exist, then the loan will be considered
to be impaired and its recorded amount will be reduced to the fair value of
the collateral securing it. Interest income will also cease to accrue under
such circumstances. Due to uncertainties inherent in the valuation process,
it is reasonably possible that the amount ultimately realized from the
Operating Partnership's collection on these receivables will be different
than the recorded amounts.
Cash Equivalents
The Operating Partnership considers short-term investments (including
certificates of deposit) with a maturity of three months or less at the time
of investment to be cash equivalents.
Marketable Securities
The Operating Partnership records its marketable securities at fair value.
Unrealized gains and losses on securities are reported as a separate
component of partners' equity and realized gains and losses are included in
net income. As of September 30, 1998, marketable securities with a fair value
of approximately $4,133,000 were included in other assets on the accompanying
consolidated balance sheet.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure about
fair value for all financial instruments. Based on the borrowing rates
currently available to the Operating Partnership, the carrying amount of debt
approximates fair value. Cash and cash equivalents consist of demand
deposits, certificates of deposit and short-term investments with financial
institutions. The carrying amount of cash and cash equivalents, as well as
the mortgage notes receivable described above, approximates fair value.
Deferred Financing and Other Fees
Fees paid in connection with the financing and leasing of the Operating
Partnership's properties are amortized over the term of the related notes
payable or leases and are included in other assets.
Development Alliances
The Operating Partnership, through mezzanine loans and equity contributions,
invests in various development alliances with projects currently under
development. The interest on advances and other direct project costs incurred
by the Operating Partnership are capitalized to the investment since such
funds are used for development purposes.
Revenues
All leases are classified as operating leases. Rental revenue is recognized
as earned over the terms of the leases.
For the nine months ended September 30, 1998, no tenants represented 10% or
more of rental revenue of the Operating Partnership.
Fees and reimbursement revenue consists of property management fees, overhead
administration fees and transaction fees from the acquisition, disposition,
refinancing, leasing and construction supervision of real estate (see Note 8).
Revenues are recognized only after the Operating Partnership is contractually
entitled to receive payment, after the services for which the fee is received
have been provided, and after the ability and timing of payments are
reasonably assured and predictable.
11
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GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1998
Scheduled rent increases are based primarily on the Consumer Price Index or a
similar factor. Material incentives paid, if any, by the Operating
Partnership to a tenant are amortized as a reduction of rental income over
the life of the related lease.
The Operating Partnership recognizes contingent rental income after the
related target is achieved.
Net Income Per Partnership Unit
Net income per partnership unit is calculated using the weighted average
number of partnership units outstanding during the period. No effect on per
unit amounts has been attributed to a potential conversion of the Preferred
Partner Interest (see Note 9) into limited partner units as the impact is
anti-dilutive. No other potentially dilutive securities of the Operating
Partnership exist.
Income Taxes
No provision for income taxes is included in the Consolidated Statements of
Operations for the nine months ended September 30, 1998 and 1997 as the
Operating Partnership's results of operations are allocated to the partners
for inclusion in their respective income tax returns.
Note 3. INVESTMENTS IN REAL ESTATE
In August 1998, the Operating Partnership acquired a 85,765 square foot
office building located in northern New Jersey ("Executive Place") from a
German partnership. The total acquisition cost, including capitalized costs,
was approximately $12.4 million which was paid entirely in cash. The cash
portion was financed through advances under the Acquisition Credit Facility
(as defined in Note 7).
In August 1998, the Operating Partnership sold one of three buildings
(totaling 85,548 square feet) from a 187,843 square foot office/flex property
for $1,700,000. No gain or loss was recognized upon the sale and the
Operating Partnership received net proceeds of approximately $1,687,000. The
remaining buildings totaling 102,295 square feet remain in the Operating
Partnership's office/flex portfolio.
In July 1998, the Operating Partnership acquired a portfolio of ten
properties (the "Pauls Portfolio") from The Pauls Corporation, a national
developer headquartered in Denver, Colorado. The Pauls Portfolio properties
aggregate 1,128,785 square feet located in Aurora, Colorado, and consist of
one office, four office/flex and five industrial buildings. The total
acquisition cost, including capitalized costs, was approximately $54.9
million, comprising: (i) approximately $41.3 million of net assumed debt;
(ii) approximately $11.3 million of equity in the form of 423,843 Operating
Partnership units (based on an agreed per unit value of $26.556); and (iii)
the balance in cash. The cash portion was financed through advances under the
Bridge Loan from a commercial bank as discussed in Note 7. In addition to
the acquisition of the Pauls Portfolio, the Operating Partnership has entered
into a loan agreement and a development alliance with The Pauls Corporation.
See Notes 5 and 6 for further discussion.
In June 1998, the Operating Partnership acquired a portfolio of multi-family
properties (the "Galesi Portfolio") from the Galesi Group, a privately owned
company. The Galesi Portfolio includes 21 properties with 6,536 units located
primarily in Houston, Austin, Dallas and San Antonio. Four properties are
located outside of Texas: two in Atlanta, one in Nashville and one in
Colorado Springs. The total acquisition cost, including capitalized costs,
was approximately $275.8 million, comprising: (i) approximately $169.4
million of net assumed debt (including an unamortized premium totaling
approximately $3.1 million, which results in an effective interest rate on
these instruments of 6.75%); (ii) approximately $21.2 million of equity in
the form of 806,393 Operating Partnership units (based on an agreed per unit
value of $26.2315); and (iii) the balance in cash. The cash portion was
financed through advances under a $150 million Bridge Loan from a commercial
bank as discussed in Note 7.
In June 1998, the Operating Partnership acquired a 133,090 square foot office
property and a 229,352 square foot industrial property, both located in
northern New Jersey (the "Donau/Gruppe Portfolio") from a German partnership.
The total acquisition cost, including capitalized costs, was approximately
$28.5 million, which was comprised of: (i) approximately $10.5 million of
12
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GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1998
assumed debt; and (ii) the balance in cash. The cash portion was financed
through advances under a $150 million Bridge Loan from a commercial bank.
In June 1998, the Operating Partnership acquired a 263,610 square foot
office/flex property located in Indianapolis, Indiana (the "Covance
Property") from Eaton & Lauth. The total acquisition cost, including
capitalized costs, was approximately $16.5 million, comprising: (i)
approximately $4 million of equity in the form of 161,492 Operating
Partnership units (based on an agreed per unit value of $25.00); (ii)
approximately $220,000 of equity in the form of 8,802 shares of Common Stock
of the Company (based on an agreed per share value of $25.00); and (iii) the
balance in cash. The cash portion was financed through advances under the
Acquisition Credit Facility (as defined in Note 7).
In June 1998, the Operating Partnership sold two hotel properties for
$6,100,000. After accounting for closing costs, the sales generated a net
gain of approximately $73,000 and net proceeds of approximately $2,327,000.
The Operating Partnership received consideration in cash for one of the
hotels with a selling price of $1,900,000. In conjunction with the sale of
the other hotel with a selling price of $4,200,000, the Operating Partnership
agreed to loan $3,600,000 to the buyer for a term of six months at a fixed
interest rate of 9% (see Note 5). As the buyer contributed cash
(approximately $600,000) to the purchase of this hotel, the historical
operations of the hotel are sufficient to service the loan and the Operating
Partnership has no other continuing obligations or involvement with this
property, the Operating Partnership recognized the sale under the full
accrual method of accounting. The net book value of the two hotel properties
aggregated to $5,642,000 on the date of sale. Net income earned by the
Operating Partnership from the two hotels totaled $426,000 in the nine months
ended September 30, 1997 and $275,000 during the period from January 1, 1998
to the date of sale. No debt was secured by these properties prior to the
sale.
In May 1998, the Operating Partnership acquired a 125,507 square foot office
building and a 5.45-acre parcel of land located in Omaha, Nebraska ("One and
Three Pacific") from Shorenstein Company, L.P. The total acquisition cost,
including capitalized costs, was approximately $20.1 million which was paid
entirely in cash, including cash from borrowings under the Acquisition Credit
Facility and proceeds from the sales of two office/flex properties as
discussed below.
In April 1998, the Operating Partnership acquired a portfolio of three office
properties and four retail properties aggregating 417,745 square feet and
three multi-family properties containing 670 units (the "Eaton & Lauth
Portfolio") from a number of partnerships in which affiliates of Eaton &
Lauth serve as general partners. The total acquisition cost, including
capitalized costs, was approximately $68.7 million, comprising: (i)
approximately $32.0 million of net assumed debt; (ii) approximately $15.9
million of equity which consisted of (a) approximately $3.2 million in the
form of 126,764 shares of Common Stock of the Company (based on an agreed per
share value of $25.00); and (b) approximately $12.7 million in the form of
506,788 Operating Partnership units (based on an agreed per unit value of
$25.00); and (iii) the balance in cash. The cash portion was financed through
advances under the Acquisition Credit Facility. The Eaton & Lauth Portfolio
properties are located in Indiana.
In April 1998, the Operating Partnership sold an office/flex property for
$3,600,000. The sale generated a net gain of approximately $449,000 and net
proceeds after closing costs of approximately $1,571,000. The proceeds from
the sale were deposited into a deferred exchange account and were applied to
the acquisition of One and Three Pacific on a tax-deferred basis pursuant to
Section 1031 of the Internal Revenue Code.
In March 1998, the Operating Partnership acquired a portfolio of seven
properties (the "BGK Portfolio") from BGK Development. The BGK Portfolio
properties aggregate 515,445 net rentable square feet, located in Boston,
Massachusetts and Kansas City, Kansas, and consist of four office properties,
two industrial properties and one office/flex property. The total acquisition
cost, including capitalized costs, was approximately $50.2 million, comprised
of (i) approximately $13.3 million in assumption of debt; and (ii) the
balance in cash, including cash from borrowings under the Acquisition Credit
Facility.
13
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1998
In March 1998, the Operating Partnership acquired a 15-story office property
located in San Mateo, California ("400 El Camino Real"), which contains
139,109 square feet and currently houses the Company's corporate headquarters
in approximately 45,000 square feet, from Prudential Insurance Company of
America. The total acquisition cost, including capitalized costs, was
approximately $34.7 million and was paid in cash, including cash from
borrowings under the Acquisition Credit Facility.
In March 1998, the Operating Partnership sold an office/flex property for
$1,368,000. The sale generated a net gain of approximately $106,000 and net
proceeds of approximately $696,000. The proceeds from the sale were deposited
into a deferred exchange account and were applied to the acquisition of One
and Three Pacific on a tax-deferred basis pursuant to Section 1031 of the
Internal Revenue Code.
In February 1998, the Operating Partnership acquired a 161,468 square foot
office complex ("Capitol Center") located in Des Moines, Iowa. The total
acquisition cost, including capitalized costs, was approximately $12.3
million, comprising: (i) $116,000 in the form of 3,874 Operating Partnership
units (based on an agreed per unit value of $30.00) and (ii) the balance in
cash.
In February 1998, the Operating Partnership sold an industrial property for
$930,000. The sale generated a net gain of approximately $246,000 and net
proceeds of approximately $359,000. The proceeds from the sale were deposited
into a deferred exchange account and were applied to the acquisition of 400
El Camino Real on a tax-deferred basis pursuant to Section 1031 of the
Internal Revenue Code.
In 1997, the Operating Partnership provided approximately $14.1 million in
the form of 433,362 Operating Partnership units and 72,564 shares of the
Company's Common Stock (based on an agreed per unit and per share value of
$27.896, respectively, which was equal to the average closing price of the
Company's Common Stock for the ten business days preceding the closing) and
paid approximately $200,000 in cash to acquire all of the limited partnership
interests of GRC Airport Associates, a California limited partnership
("GRCAA"). GRCAA's sole asset consisted of one industrial property
("Skypark") that was subject to a binding sales agreement. By virtue of
interests held directly or indirectly in GRCAA, Robert Batinovich received
consideration of approximately $2.2 million and GC (as defined in Note 1)
received consideration of approximately $1.7 million for the GRCAA limited
partnership interests in the form of Operating Partnership units. Consistent
with the Company's Board of Directors' policy, neither Robert Batinovich nor
Andrew Batinovich voted when the Board of Directors considered and acted to
approve this transaction. In February 1998, the sale of the Skypark property
was completed for a price of $22 million. This sale generated a net gain of
approximately $83,000 and net proceeds of approximately $14.1 million. The
proceeds from the sale of the property were deposited into a deferred
exchange account and were applied to the acquisition of 400 El Camino Real on
a tax-deferred basis pursuant to Section 1031 of the Internal Revenue Code.
In January 1998, the Operating Partnership acquired a portfolio of 13
suburban office properties and one office/flex property (the "Windsor
Portfolio") located in eight states. The Operating Partnership acquired the
Windsor Portfolio from Windsor Realty Fund II, L.P., of which Windsor
Advisor, LLC is the general partner and DuPont Pension Fund Investments and
Gid/S&S Limited Partnership are limited partners, and other entities
affiliated with Windsor Realty Fund II, L.P. The Windsor Portfolio properties
aggregate 3,383,240 net rentable square feet, located in the eastern and
mid-western United States and are concentrated in suburban Washington, D.C.,
Chicago, Atlanta, Boston, Philadelphia, Tampa, Florida and Cary, North
Carolina. The total acquisition cost, including capitalized costs, was
approximately $423.2 million, comprised of (i) approximately $167.2 million
in assumption of debt; (ii) $150.0 million in borrowings under a $150 million
loan agreement with a commercial bank (the "Interim Loan" as defined in Note
7); and (iii) the balance in cash, including cash from borrowings under the
Acquisition Credit Facility. Subsequent to the acquisition, approximately $68
million of the assumed debt was paid off with proceeds from the January 1998
Convertible Preferred Stock Offering (as defined in Note 9).
In January 1998, the Operating Partnership sold a multi-family property for
$4.95 million. This sale generated a net gain of approximately $944,000 and
net proceeds of approximately $2.1 million. The proceeds from the sale were
14
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1998
deposited into a deferred exchange account and were applied to the
acquisition of 400 El Camino Real on a tax-deferred basis pursuant to Section
1031 of the Internal Revenue Code.
The Operating Partnership has entered into a definitive agreement to sell the
Shannon Crossing retail property for $9.3 million. The property is currently
undergoing a $6.2 million renovation and expansion. As of the date of this
filing, approximately $3.7 million of the project budget for the renovation
and expansion has been funded. The Operating Partnership anticipates that
the sale of Shannon Crossing will not be completed until the first quarter of
1999.
The Operating Partnership has entered into three short-term lease agreements
on the hotel properties located in Arlington, Texas, Tucson, Arizona and
Ontario, California, with two prospective purchasers of these properties.
These prospective purchasers have entered into purchase agreements for these
properties, with a closing date of December 30, 1998. These leases all
terminate on the closing date for the sale of the properties. The net book
value of the three hotel properties aggregates to $12,772,000 at September
30, 1998. The properties secure, in part, a loan to the Operating Partnership
with an outstanding principal balance of $19,203,000 at September 30, 1998.
Net income earned by the Operating Partnership from the three hotels totaled
$665,000 and $1,102,000 in the nine months ended September 30, 1998 and 1997,
respectively.
The Operating Partnership has entered into a definitive agreement to acquire
all of the real estate assets of Prudential-Bache/Equitec Real Estate
Partnership, a California limited partnership in which the managing general
partner is Prudential-Bache Properties, Inc., and in which GC and Robert
Batinovich have served as co-general partners since March 1994, but do not
hold a material equity or economic interest (the "Pru-Bache Portfolio"). The
total acquisition cost, including capitalized costs, is expected to be
approximately $49.9 million, which is to be paid entirely in cash. The
Pru-Bache Portfolio comprises four office buildings aggregating 405,825
square feet and one office/flex property containing 121,645 square feet. This
acquisition is subject to certain contingencies, including the resolution of
litigation relating to the proposed acquisition, to which neither the
Operating Partnership nor the Company is a party, and customary closing
conditions.
Note 4.INVESTMENT IN GLENBOROUGH CORPORATION
The Operating Partnership accounts for its investment in Glenborough
Corporation ("GC") using the equity method as a substantial portion of GC's
economic benefits flow to the Operating Partnership by virtue of its 100%
non-voting preferred stock interest in GC, which interest constitutes
substantially all of GC's capitalization. Two of the holders of the voting
common stock of GC are officers of the Company; however, the Operating
Partnership has no direct voting or management control of GC. The Operating
Partnership records earnings on its investment in GC equal to its cash flow
preference, to the extent of earnings, plus its pro rata share of remaining
earnings, based on cash flow allocation percentages. Distributions received
from GC are recorded as a reduction of the Operating Partnership's investment.
As of September 30, 1998, the Operating Partnership had the following
investment in GC (in thousands):
Investment at December $8,519
31, 1997
Distributions (1,005)
Equity in earnings 1,889
============
Investment at September $9,403
30, 1998
============
Note 5.MORTGAGE LOANS RECEIVABLE
The Operating Partnership's mortgage loans receivable consist of the
following as of September 30, 1998, and December 31, 1997 (dollars in
thousands):
15
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1998
1998 1997
---------- ----------
Note secured by an industrial property in Los
Angeles, CA, with a fixed interest rate of 9% and a
maturity date of June 2001. This note was paid off in
June 1998. $ -- $ 507
Note secured by an office property in Phoenix, AZ,
with a fixed interest rate of 11% and a maturity date
of November 1999. As of September 30, 1998, the
Operating Partnership is committed to additional
advances totaling $454 for tenant improvements and
other leasing costs. 3,398 3,185
Note secured by a hotel property in Dallas, TX, with
a fixed interest rate of 9%, monthly interest-only
payments and a maturity date of December 1998 3,600 --
Note secured by Gateway Park land located in Aurora,
CO, with a stated fixed interest rate of 13%,
quarterly interest-only payments and a maturity date
of July 2005 (see below for further discussion) 33,586 --
---------- ----------
Total $40,582 $ 3,692
========== ==========
In July 1998, concurrent with the acquisition of the Pauls Portfolio (as
defined in Note 3), the Operating Partnership entered into a development
alliance with The Pauls Corporation (see Note 6). In addition to this
development alliance, the Operating Partnership has loaned approximately $34
million to continue the build-out of Gateway Park. These advances were made
in the form of a secured loan and accordingly, are recorded as a mortgage
loan receivable. In this arrangement, the Operating Partnership has certain
rights under certain conditions and subject to certain contingencies to
purchase the properties upon completion of development and, thus, through
this arrangement, the Operating Partnership could acquire up to 2.9 million
square feet of office, office/flex, industrial and multi-family properties
over the next five years.
Note 6. DEVELOPMENT ALLIANCES AND OTHER ASSETS
The Operating Partnership has formed 4 development alliances to which it has
committed a total of approximately $42 million for the development of
approximately 1.4 million square feet of office, office/flex and distribution
properties and 2,050 multi-family units in North Carolina, Colorado, Texas,
New Jersey, Kansas and Michigan. As of September 30, 1998, the Operating
Partnership has advanced approximately $29 million under these commitments.
Under these development alliances, the Operating Partnership has certain
rights to purchase the properties upon completion of development and, thus,
through these alliances, the Operating Partnership could acquire an
additional 1.4 million square feet of commercial properties and 2,050
multi-family units over the next five years.
As of September 30, 1998, the Operating Partnership had investments of
approximately $20,100,000 in securities of a private REIT. As of September
30, 1998, the Operating Partnership's ownership interest was 24.47%. The
Operating Partnership accounts for this investment using the equity method.
Also, as of September 30, 1998 the Operating Partnership had investments in
marketable securities with a fair value of approximately $4,133,000.
Note 7. SECURED AND UNSECURED LIABILITIES
The Operating Partnership had the following mortgage loans, bank lines,
unsecured notes and notes payable outstanding as of September 30, 1998, and
December 31, 1997 (dollars in thousands):
16
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1998
1998 1997
Unsecured $250,000 line of credit with a bank
("Acquisition Credit Facility") with a variable
interest rate ranging between LIBOR plus 1.10%
and LIBOR plus 1.30% (6.84% and 7.07% at
September 30, 1998 and December 31, 1997,
respectively), monthly interest only payments
and a maturity date of December 22, 2000, with
one option to extend for 10 years. $ 145,140 $ 80,160
Unsecured loan with a bank ("$150 Million
Bridge Loan") with a variable interest rate of
LIBOR plus 1.3% (6.93% at September 30, 1998),
monthly interest only payments and a maturity
date of December 31, 1998. See below for
further discussion. 147,710 --
Secured loan with a bank with a fixed interest
rate of 7.50%, monthly principal and interest
payments of $443 and a maturity date of
October 1, 2022. The loan is secured by ten
properties with an aggregate net carrying
value of $110,433 and $111,372 at September
30, 1998 and December 31, 1997, respectively. 59,128 59,724
Secured loan with an investment bank with a
fixed interest rate of 7.57%, monthly
principal and interest payments of $149 (based
upon a 25-year amortization) and a maturity
date of January 1, 2006. The loan is secured
by nine properties with an aggregate net
carrying value of $38,549 and $37,711 at
September 30, 1998 and December 31, 1997,
respectively. 19,203 19,444
Secured loans with various lenders, bearing
interest at fixed rates between 6.95% and
9.25% (approximately $168,962 of these loans
include an unamortized premium of
approximately $2,764 which reduces the
effective interest rate on those instruments
to 6.75%), with monthly principal and interest
payments ranging between $8 and $371 and
maturing at various dates through October 1,
2010. These loans are secured by properties
with an aggregate net carrying value of
$449,810 and $66,353 at September 30, 1998 and
December 31, 1997, respectively. 263,613 30,519
Secured loans with various banks bearing
interest at variable rates (ranging between
6.75% and 8.50% at September 30, 1998),
monthly principal and interest payments
ranging between $4 and $773 and maturing at
various dates through May 1, 2017. These
loans are secured by properties with an
aggregate net carrying value of $189,185 and
$17,246 at September 30, 1998 and December 31,
1997, respectively. 120,076 7,806
Secured loans with various lenders, bearing
interest at fixed rates between 7.25% and
7.85%, with monthly principal and interest
payments ranging between $5 and $55 and
maturing at various dates through December 1,
2030. These loans are secured by multi-family
properties with an aggregate net carrying
value of $41,673 and $41,862 at September 30,
1998 and December 31, 1997, respectively. 30,374 30,646
17
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1998
1998 1997
Unsecured Series A Redeemable Notes with a
fixed interest rate of 7.625%, interest
payable semiannually on March 15 and September
15, commencing September 15, 1998, and a
maturity date of March 15, 2005. See below for
further discussion. $ 150,000 $ --
Total $ 935,244 $ 228,299
In January 1998, the Operating Partnership closed a $150 million loan
agreement with a commercial bank (the "Interim Loan"). The Interim Loan had a
term of three months with interest at LIBOR plus 1.75%. The purpose of the
Interim Loan was to fund the acquisition of the Windsor Portfolio as
discussed in Note 3. The Interim Loan was paid off in March 1998 with
proceeds from the $150 million of unsecured Series A Redeemable Notes as
discussed below.
In March 1998, the Operating Partnership issued $150 million of unsecured 7
5/8% Series A Redeemable Notes (the "Notes") in an unregistered Rule 144A
offering. The Notes mature on March 15, 2005, unless previously redeemed.
Interest on the Notes will be payable semiannually on March 15 and September
15, commencing September 15, 1998. The Notes may be redeemed at any time at
the option of the Operating Partnership, in whole or in part, at a redemption
price equal to the sum of (i) the principal amount of the Notes being
redeemed plus accrued interest to the redemption date and (ii) the Make-Whole
Amount, as defined, if any. The Notes are general unsecured and
unsubordinated obligations of the Operating Partnership, and rank pari passu
with all other unsecured and unsubordinated indebtedness of the Operating
Partnership. However, the Notes will be effectively subordinated to secured
borrowing arrangements that the Operating Partnership has and from time to
time may enter into with various banks and other lenders, and to the prior
claims of each secured mortgage lender to any specific property which secures
any lender's mortgage. As of September 30, 1998, such secured arrangements
and mortgages aggregated approximately $492.4 million.
In May 1998, the Operating Partnership filed a registration statement with
the Securities and Exchange Commission (the "SEC") to exchange all
outstanding Notes (the "Old Notes") for Notes which have been registered
under the Securities Act of 1933 (the "New Notes"). This registration
statement has been declared effective, and the Operating Partnership has
commenced this exchange. The form and term of the New Notes are substantially
identical to the Old Notes in all material respects, except that the New
Notes have been registered under the Securities Act, and therefore, will not
be subject to certain transfer restrictions, registration rights and related
special interest provisions applicable to the Old Notes.
In June 1998, the Operating Partnership obtained a $150 million unsecured
loan from a commercial bank (the "Bridge Loan") which bears interest at a
variable rate of LIBOR plus 1.3%, and has a maturity date of December 31,
1998. As of the date of this filing, approximately $147.7 million had been
drawn under the Bridge Loan to fund acquisitions, including the Galesi
Portfolio, the Donau/Gruppe Portfolio and the Pauls Portfolio (as discussed
in Note 3), and to fund development advances. The Operating Partnership paid
off the loan on October 30, 1998, with proceeds from the new $248.8 million
loan discussed in Note 10.
Some of the Operating Partnership's properties are held in limited
partnerships and limited liability companies in order to provide bankruptcy
remote borrowers for certain lenders. Such limited partnerships and limited
liability companies are included in the consolidated financial statements of
the Operating Partnership in accordance with Generally Accepted Accounting
Principles ("GAAP").
The required principal payments on the Operating Partnership's debt for the
next five years and thereafter, as of September 30, 1998, are as follows (in
thousands):
18
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1998
Year Ending
December 31,
1998 $152,521
1999 124,531
2000 208,375
2001 13,677
2002 12,402
Thereafter 423,738
Total $935,244
Note 8. RELATED PARTY TRANSACTIONS
Fee and reimbursement income earned by the Operating Partnership from related
parties totaled $2,452,000 and $572,000 for the nine months ended September
30, 1998 and 1997, respectively, and consisted of property management fees,
asset management fees and other fee income.
For the nine months ended September 30, 1998 and 1997, the Operating
Partnership paid the Company property management fees and asset management
fees totaling $3,162,000 and $3,718,000, respectively, which are included in
property operating expenses and general and administrative expenses on the
accompanying consolidated statements of operations. In addition, for the nine
months ended September 30, 1998, the Operating Partnership paid GC property
management fees and salary reimbursements totaling $940,000 for management of
a portfolio of residential properties owned by the Operating Partnership
which is included in property operating expenses on the accompanying
consolidated statement of operations.
Note 9. PUBLIC STOCK OFFERING
In January 1998, the Company completed a public offering of 11,500,000 shares
of 7 3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible
Preferred Stock Offering"). The 11,500,000 shares were sold at a per share
price of $25.00 for net proceeds of approximately $276 million. The proceeds
from the January 1998 Convertible Preferred Stock Offering were contributed
to the Operating Partnership for which the Company received a Preferred
Partnership Interest, which is entitled to a priority distribution sufficient
to pay dividends to the holders of the Company's Series A Convertible
Preferred Stock. A portion of this additional capital was used to repay the
outstanding balance under the Operating Partnership's Acquisition Credit
Facility. The remaining proceeds were used to fund the acquisitions discussed
in Note 3 and for general corporate purposes.
Note 10. SUBSEQUENT EVENTS
In October 1998, the Operating Partnership obtained a $248.8 million loan
from Goldman Sachs Mortgage Corporation which has a term of ten years, bears
interest at a fixed rate of 6.125% and is secured by 36 properties. The
proceeds were used to retire the Operating Partnership's $150 million Bridge
Loan maturing December 31, 1998, to pay off four mortgage loans and to pay
down the Acquisition Credit Facility.
In November 1998, the Operating Partnership sold two industrial properties to
two unaffiliated buyers. One of the properties was sold for $4.7 million
which generated a net gain of approximately $2.2 million and net proceeds of
approximately $4.6 million. The other industrial property was sold for $1.2
million which generated a net gain of approximately $391,000 and net proceeds
of approximately $1.1 million.
In December 1998, the Operating Partnership sold its investment in a private
REIT (as discussed in Note 6) for $17.4 million. At the time of sale, the
Operating Partnership had a book value in this investment of $20.1 million
which resulted in a net loss of $2.7 million.
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Background
Glenborough Properties, L.P., a California Limited Partnership (the
"Operating Partnership") is engaged primarily in the ownership, operation and
acquisition of various types of income-producing properties. As of September
30, 1998, the Operating Partnership owned and operated 190 income-producing
properties (the "Properties," and each a "Property"). The Properties are
comprised of 55 office Properties, 49 office/flex Properties, 32 industrial
Properties, 13 retail Properties, 37 multi-family Properties and 4 hotel
Properties, located in 24 states.
The Operating Partnership was organized in the State of California on August
23, 1995. The Operating Partnership is the primary operating subsidiary of
Glenborough Realty Trust Incorporated (the "Company"). On December 31, 1995,
the Company completed a consolidation (the "Consolidation") in which eight
public limited partnerships (the "Partnerships," collectively with
Glenborough Corporation (defined below), the "GRT Predecessor Entities"),
merged with and into the Company. The Company (i) issued 5,753,709 shares
(the "Shares") of $.001 par value Common Stock to the Partnerships in
exchange for 3,979,376 Operating Partnership units; and (ii) merged with
Glenborough Corporation, a California Corporation ("GC"), with the Company
being the surviving entity. The Company then transferred certain real estate
and related assets to the Operating Partnership in exchange for a sole
general partner interest of 1% and a limited partnership interest of 85.37%
(88.2% total partnership interest as of September 30, 1998). The Operating
Partnership also acquired interests in certain warehouse distribution
facilities from GPA, Ltd., a California limited partnership ("GPA"). The
Operating Partnership commenced operations on January 1, 1996. The Operating
Partnership operates the assets acquired in the Consolidation and in
subsequent acquisitions and intends to invest in income-producing property
directly and through joint ventures.
Effective April 1, 1998, the Company contributed to the Operating Partnership
the majority of its assets, including 100% of its shares of the non-voting
preferred stock of Glenborough Corporation, as well as all of the Company's
tangible personal property including furniture and fixtures, all cash and
investments, and a property management contract. As part of that
transaction, the Company also agreed to a substantial reduction in the asset
management fees paid by the Operating Partnership to the Company. In return,
the Operating Partnership canceled certain obligations of the Company to the
Operating Partnership, and issued 2,248,869 units of partnership interest in
the Operating Partnership to the Company. The contribution of 100% of the
shares of non-voting preferred stock in GC has been accounted for as a
reorganization of entities under common control, similar to a pooling of
interests. All periods have been restated to give effect to the transaction
as if it occurred on December 31, 1995.
As a result of this transaction, the only assets of the Company that are not
attributable to its interest in the Operating Partnership are (i) its shares
of non-voting preferred stock in Glenborough Hotel Group, (ii) its shares of
common stock in seven qualified REIT subsidiaries, which produce dividends
that are not material to the Company and (iii) a 4.05% partnership interest
in Glenborough Partners.
Since the Consolidation, and consistent with its strategy for growth, the
Operating Partnership has completed the following transactions:
-Acquired 20 properties in the third and fourth quarters of 1996, 90
properties in 1997 and 69 properties in 1998. The total acquired
Properties consist of an aggregate of approximately 15.7 million
rentable square feet, 9,353 multi-family units and 227 hotel suites and
had aggregate acquisition costs, including capitalized costs, of
approximately $1.8 billion.
-From January 1, 1996 to the date of this filing, sold six industrial
properties, 16 retail properties, three office/flex properties, one
multi-family property and two hotel properties to redeploy capital into
properties the Company believes have characteristics more suited to its
overall growth strategy and operating goals.
20
<PAGE>
-Entered into a $250 million unsecured line of credit (the "Acquisition
Credit Facility") with a commercial bank which replaced its $50 million
secured line of credit and closed a $150 million unsecured loan
agreement (the "Interim Loan") with a commercial bank.
-Issued $150 million of unsecured 7 5/8% Series A Redeemable Notes
which are due on March 15, 2005.
-Paid off the Interim Loan with proceeds from the issuance of $150
million of 7 5/8% unsecured Series A Redeemable Notes.
-Closed a $150 million unsecured loan agreement (the "Bridge Loan")
with a commercial bank.
-Entered into 4 development alliances to which the Company has made
advances to date of approximately $29 million and a loan of $34 million.
-Paid off the Bridge Loan and four mortgage loans, and paid down the
balance of the Acquisition Credit Facility with proceeds from a $248.8
million secured loan from Goldman Sachs Mortgage Corporation.
Results of Operations
Comparison of the nine months ended September 30, 1998 to the nine months
ended September 30, 1997.
Rental Revenue. Rental revenue increased $127,004,000, or 354%, to
$162,903,000 for the nine months ended September 30, 1998, from $35,899,000
for the nine months ended September 30, 1997. The increase included growth
in revenue from the office, industrial, office/flex, retail and multi-family
Properties of $73,438,000, $7,200,000, $22,830,000, $3,955,000 and
$20,675,000, respectively. Rental revenue for the nine months ended September
30, 1998, included $13,063,000 of rental revenue generated from the
acquisition of 20 properties in the third and fourth quarters of 1996 (the
"1996 Acquisitions"), $72,261,000 of rental revenue generated from the
acquisition of 90 properties in 1997 (the "1997 Acquisitions") and
$69,882,000 of rental revenue generated from the acquisition of 69 properties
during the nine months ended September 30, 1998 (the "1998 Acquisitions").
These increases were partially offset by a $1,083,000 decrease in revenue
from the hotel Properties due to the 1998 sales of two hotels.
Fees and Reimbursements. Fees and reimbursements revenue consists primarily
of property management fees, asset management fees and lease commissions paid
to the Operating Partnership under property and asset management agreements.
This revenue increased $1,880,000, or 329%, to $2,452,000 for the nine months
ended September 30, 1998, from $572,000 for the nine months ended September
30, 1997. The change consisted primarily of increased lease commissions from
an affiliated entity and a one-time asset management fee resulting from the
sale of properties and the liquidation of a partnership managed by GC.
Interest and Other Income. Interest and other income increased $899,000, or
85%, to $1,959,000 for the nine months ended September 30, 1998, from
$1,060,000 for the nine months ended September 30, 1997. The increase
primarily consisted of interest income on a mortgage loan receivable secured
by land located in Aurora, Colorado which originated on June 30, 1998.
Equity in Earnings of Glenborough Corporation. Equity in earnings of
Glenborough Corporation increased $1,073,000, or 131%, to $1,889,000 for the
nine months ended September 30, 1998, from $816,000 for the nine months ended
September 30, 1997. The increase is primarily due to transaction fees earned
by GC related to the disposition of several managed properties and the
liquidation of one of the managed partnerships.
Net Gain on Sales of Rental Properties. The net gain on sales of rental
properties of $1,901,000 during the nine months ended September 30, 1998,
resulted from the sales of one multi-family property, two industrial
properties, two office/flex properties and two hotel properties. The net gain
on sales of rental properties of $555,000 during the nine months ended
September 30, 1997, resulted from the sales of 15 retail properties.
Gain on Collection of Mortgage Loan Receivable. The gain on collection of
mortgage loan receivable of $652,000 during the nine months ended September
30, 1997 resulted from the collection of a mortgage loan receivable which had
a net carrying value of $6,700,000. The payoff amount totaled $6,863,000,
plus a $500,000 note receivable, which, net of legal costs, resulted in a
gain of $652,000.
21
<PAGE>
Property Operating Expenses. Property operating expenses increased
$41,899,000, or 336%, to $54,382,000 for the nine months ended September 30,
1998, from $12,483,000 for the nine months ended September 30, 1997. Of this
increase, $42,528,000 represents increases in property operating expenses
attributable to the 1997 Acquisitions and the 1998 Acquisitions. This
increase is partially offset by decreases in property operating expenses due
to the 1997 and 1998 sales of properties.
General and Administrative Expenses. General and administrative expenses
increased $5,716,000, or 269%, to $7,842,000 for the nine months ended
September 30, 1998, from $2,126,000 for the nine months ended September 30,
1997. The increase is primarily due to increased salary and overhead costs
resulting from the 1997 Acquisitions and 1998 Acquisitions.
Depreciation and Amortization. Depreciation and amortization increased
$26,373,000, or 298%, to $35,227,000 for the nine months ended September 30,
1998, from $8,854,000 for the nine months ended September 30, 1997. The
increase is primarily due to depreciation and amortization associated with
the 1997 Acquisitions and 1998 Acquisitions.
Interest Expense. Interest expense increased $29,500,000, or 460%, to
$35,916,000 for the nine months ended September 30, 1998, from $6,416,000 for
the nine months ended September 30, 1997. Substantially all of the increase
was the result of higher average borrowings during the nine months ended
September 30, 1998, as compared to the nine months ended September 30, 1997,
due to new debt and the assumption of debt related to the 1997 Acquisitions
and 1998 Acquisitions.
Comparison of the three months ended September 30, 1998 to the three months
ended September 30, 1997.
Rental Revenue. Rental revenue increased $49,113,000, or 303%, to
$65,321,000 for the three months ended September 30, 1998, from $16,208,000
for the three months ended September 30, 1997. The increase included growth
in revenue from the office, industrial, office/flex, retail and multi-family
Properties of $23,710,000, $2,868,000, $7,052,000, $1,570,000 and
$14,779,000, respectively. Rental revenue for the three months ended
September 30, 1998, included $4,294,000 of rental revenue generated from the
1996 Acquisitions, $23,546,000 of rental revenue generated from the 1997
Acquisitions and $35,286,000 of rental revenue generated from the 1998
Acquisitions. These increases were partially offset by an $856,000 decrease
in revenue from the hotel Properties due to the 1998 sales of two hotels.
Fees and Reimbursements. Fees and reimbursements revenue consists primarily
of property management fees, asset management fees and lease commissions paid
to the Operating Partnership under property and asset management agreements.
This revenue increased $1,015,000, or 495%, to $1,220,000 for the three
months ended September 30, 1998, from $205,000 for the three months ended
September 30, 1997. The increase was primarily due to a fee from GC related
to the liquidation of one of its managed partnerships.
Interest and Other Income. Interest and other income increased $860,000, or
158%, to $1,404,000 for the three months ended September 30, 1998, from
$544,000 for the three months ended September 30, 1997. The increase
primarily consisted of interest income on a mortgage loan receivable secured
by land located in Aurora, Colorado which originated on June 30, 1998.
Equity in Earnings of Glenborough Corporation. Equity in earnings of
Glenborough Corporation increased $658,000, or 173%, to $1,038,000 for the
three months ended September 30, 1998, from $380,000 for the three months
ended September 30, 1997. The increase is primarily due to transaction fees
earned by GC related to the disposition of several managed properties and the
liquidation of one managed partnership.
Reduction in Gain on Prior Quarter Sales of Rental Properties. The reduction
in gain on prior quarter sales of rental properties of $238,000 during the
three months ended September 30, 1998, consists of additional costs from the
sales of one multi-family property, two industrial properties, two
office/flex properties and two hotel properties from the Operating
22
<PAGE>
Partnership's portfolio. The reduction in gain on prior quarter sales of
rental properties of $15,000 during the three months ended September 30,
1997, consists of additional costs from the sales of 15 retail properties
from the Operating Partnership's portfolio.
Property Operating Expenses. Property operating expenses increased
$16,673,000, or 289%, to $22,446,000 for the three months ended September 30,
1998, from $5,773,000 for the three months ended September 30, 1997. Of this
increase, $17,643,000 represents increases in property operating expenses
attributable to the 1997 Acquisitions and the 1998 Acquisitions. This
increase is partially offset by decreases in property operating expenses due
to the 1997 and 1998 sales of properties.
General and Administrative Expenses. General and administrative expenses
increased $2,415,000, or 254%, to $3,367,000 for the three months ended
September 30, 1998, from $952,000 for the three months ended September 30,
1997. The increase is primarily due to increased salary and overhead costs
resulting from the 1997 Acquisitions and 1998 Acquisitions.
Depreciation and Amortization. Depreciation and amortization increased
$9,498,000, or 197%, to $14,309,000 for the three months ended September 30,
1998, from $4,811,000 for the three months ended September 30, 1997. The
increase is primarily due to depreciation and amortization associated with
the 1997 Acquisitions and 1998 Acquisitions.
Interest Expense. Interest expense increased $14,448,000, or 552%, to
$17,064,000 for the three months ended September 30, 1998, from $2,616,000
for the three months ended September 30, 1997. Substantially all of the
increase was the result of higher average borrowings during the three months
ended September 30, 1998, as compared to the three months ended September 30,
1997, due to new debt and the assumption of debt related to the 1997
Acquisitions and 1998 Acquisitions.
Liquidity and Capital Resources
For the nine months ended September 30, 1998, cash provided by operating
activities increased by $50,723,000 to $67,136,000 as compared to $16,413,000
for the same period in 1997. The increase is primarily due to an increase in
net income of $54,565,000 (before depreciation and amortization and net gain
on sales of rental properties and collection of mortgage loan receivable) due
to the 1997 Acquisitions and 1998 Acquisitions. Cash used for investing
activities increased by $260,955,000 to $634,061,000 for the nine months
ended September 30, 1998, as compared to $373,106,000 for the same period in
1997. The increase is primarily due to the 1998 Acquisitions, additions to
mortgage loans receivable and other investments. This increase was partially
offset by the collection of a mortgage loan receivable in 1997 and the
proceeds from the 1998 sales of properties. Cash provided by financing
activities increased by $213,284,000 to $570,499,000 for the nine months
ended September 30, 1998, as compared to $357,215,000 for the same period in
1997. This increase was primarily due to partner contributions related to
acquisitions, the net proceeds from an issuance of Notes (as defined below)
and the proceeds from new debt.
The Operating Partnership expects to meet its short-term liquidity
requirements generally through its working capital, its Acquisition Credit
Facility (as defined below) and cash generated by operations.
The Operating Partnership's principal sources of funding for acquisitions,
development, expansion and renovation of properties include an unsecured
Acquisition Credit Facility, permanent secured debt financing, public
unsecured debt financing, contributions from the Company, privately placed
financing, issuance of Operating Partnership units and cash flow provided by
operations.
Mortgage loans payable increased from $148,139,000 at December 31, 1997, to
$492,394,000 at September 30, 1998. This increase primarily resulted from
the assumption of mortgage loans totaling $358,876,000 in connection with the
1998 Acquisitions and new debt of $2,000,000. These increases were partially
offset by the payoff of $12,854,000 of mortgage loans in connection with 1998
sales of properties and scheduled principal payments of $3,767,000 on other
mortgage debt.
23
<PAGE>
The Operating Partnership has a $250,000,000 unsecured line of credit
provided by a commercial bank (the "Acquisition Credit Facility").
Outstanding borrowings under the Acquisition Credit Facility increased from
$80,160,000 at December 31, 1997, to $145,140,000 at September 30, 1998. The
$80,160,000 balance outstanding at December 31, 1997, was paid off in January
1998 with proceeds from the January 1998 Convertible Preferred Stock
Offering. The $145,140,000 balance outstanding at September 30, 1998 consists
of draws for 1998 Acquisitions and working capital. As of September 30,
1998, borrowings under the Acquisition Credit Facility bear interest at an
annual rate of LIBOR plus 1.25%.
In January 1998, the Operating Partnership closed a $150 million loan with a
commercial bank (the "Interim Loan"). The Interim Loan had a term of three
months with interest at LIBOR plus 1.75%. The purpose of the Interim Loan was
to fund acquisitions. The Interim Loan was paid off in March 1998 with
proceeds from the issuance of $150 million of unsecured Series A Redeemable
Notes (discussed below).
In March 1998, the Operating Partnership issued $150 million of unsecured 7
5/8% Series A Redeemable Notes (the "Notes") in an unregistered Rule 144A
offering. The Notes mature on March 15, 2005, unless previously redeemed.
Interest on the Notes is payable semiannually on March 15 and September 15,
commencing September 15, 1998. The Operating Partnership used the net
proceeds of the offering to repay the outstanding balance under the Interim
Loan. In May 1998, the Operating Partnership filed a registration statement
with the Securities and Exchange Commission (the "SEC") to exchange all
outstanding Notes (the "Old Notes") for Notes which have been registered
under the Securities Act of 1933 (the "New Notes"). This registration
statement has been declared effective, and the Operating Partnership has
commenced this exchange. The form and term of the New Notes are substantially
identical to the Old Notes in all material respects, except that the New
Notes will be registered under the Securities Act, and therefore will not be
subject to certain transfer restrictions, registration rights and related
special interest provisions applicable to the Old Notes.
In June 1998, the Operating Partnership obtained a $150 million unsecured
loan from a commercial bank (the "Bridge Loan") which bears interest at a
variable rate of LIBOR plus 1.3%, and has a maturity date of December 31,
1998. Approximately $147.7 million was drawn under the Bridge Loan to fund
acquisitions and development activities. The Operating Partnership paid off
this loan on October 30, 1998 with proceeds from the Goldman Sachs loan
discussed below.
In October 1998, the Operating Partnership obtained a $248.8 million loan
from Goldman Sachs Mortgage Corporation which has a term of ten years, bears
interest at a fixed rate of 6.125% and is secured by 36 properties. The
proceeds were used to retire the Operating Partnership's $150 million Bridge
Loan, which had a December 31, 1998 maturity date, to pay off four mortgage
loans and to pay down the Acquisition Credit Facility.
At September 30, 1998, the Operating Partnership's total indebtedness
included fixed-rate debt of $522,318,000 (including $168,578,000 subject to
cross-collateralization) and floating-rate indebtedness of $412,926,000
(including $115,286,000 subject to cross-collateralization). Approximately
43.6% of the Operating Partnership's total assets, comprising 84 properties,
is encumbered by debt at September 30, 1998.
In January 1998, the Company completed a public offering of 11,500,000 shares
of 7 3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible
Preferred Stock Offering"). The 11,500,000 shares were sold at a per share
price of $25.00 for net proceeds of approximately $276 million, which were
contributed to the Operating Partnership and then used to repay the
outstanding balance under the Operating Partnership's Acquisition Credit
Facility, to fund certain subsequent property acquisitions and for general
corporate purposes.
The Operating Partnership has formed 4 development alliances to which it has
committed approximately $42 million for the development of approximately 1.4
million square feet of office, office/flex and distribution properties and
2,050 multi-family units in North Carolina, Colorado, Texas, New Jersey,
Kansas and Michigan. As of September 30, 1998, the Operating Partnership has
advanced approximately $29 million. Under these development alliances, the
Operating Partnership has certain rights to purchase the properties upon
completion of development and, thus, through these alliances, the Operating
24
<PAGE>
Partnership could acquire an additional 1.4 million square feet of commercial
properties and 2,050 multi-family units over the next five years. In
addition, the Operating Partnership has loaned approximately $34 million
under another development alliance to continue the build-out of a 1,200 acre
master-planned development in Denver, Colorado.
Inflation
Substantially all of the leases at the retail Properties provide for
pass-through to tenants of certain operating costs, including real estate
taxes, common area maintenance expenses, and insurance. Leases at the
multi-family Properties generally provide for an initial term of one month or
one year and allow for rent adjustments at the time of renewal. Leases at the
office Properties typically provide for rent adjustment and pass-through of
certain operating expenses during the term of the lease. All of these
provisions may permit the Operating Partnership to increase rental rates or
other charges to tenants in response to rising prices and therefore, serve to
reduce the Operating Partnership's exposure to the adverse effects of
inflation.
Forward Looking Statements; Factors That May Affect Operating Results
This Report on Form 10-Q contains forward looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934, including statements regarding the
Operating Partnership's expectations, hopes, intentions, beliefs and
strategies regarding the future including the Operating Partnership's
anticipated timing of the sale of Shannon Crossing, the Operating
Partnership's belief that cash generated by operations will be adequate to
meet operating requirements and to make distributions, the Operating
Partnership's expectations as to the timing of the completion of the
development projects through its development alliances and the acquisition by
the Operating Partnership of properties developed through its development
alliances. There can be no assurance that the actual outcomes or results will
be consistent with such expectations, hopes, intentions, beliefs and
strategies. Forward looking statements include statements regarding potential
acquisitions, the anticipated performance of future acquisitions, recently
completed acquisitions and existing properties, and statements regarding the
Operating Partnership's financing activities. All forward looking statements
included in this document are based on information available to the Operating
Partnership on the date hereof. It is important to note that the Operating
Partnership's actual results could differ materially from those stated or
implied in such forward-looking statements.
Factors which may cause the Operating Partnership's results to differ include
the inability to complete anticipated future acquisitions, defaults or
non-renewal of leases, increased interest rates and operational costs,
failure to obtain necessary outside financing, difficulties in identifying
properties to acquire and in effecting acquisitions, environmental
uncertainties, risks related to natural disasters, financial market
fluctuations, changes in real estate and zoning laws and increases in real
property tax rates.
Impact of Year 2000 Compliance Costs on Operations
State of Readiness. We utilize a number of computer software programs and
operating systems across our entire organization. These programs and systems
primarily comprise (i) information technology systems ("IT Systems") (i.e.,
software programs and computer operating systems) that serve our management
operations, and (ii) embedded systems such as devices used to control,
monitor or assist the operation of equipment and machinery systems (e.g.,
HVAC, fire safety and security) at our properties ("Property Systems"). To
the extent that our software applications contain source code that is unable
to appropriately interpret the upcoming calendar year "2000" and beyond, some
level of modification or replacement of these applications will be necessary.
IT Systems. Employing a team made up of internal personnel and third-party
consultants, we have completed our identification of IT Systems, including
hardware components, that are not yet Year 2000 compliant. To the best of our
knowledge based on available information and a reasonable level of inquiry
and investigation, we have completed such upgrading of such systems as
appears to be called for under the circumstances, and in accordance with
prevailing industry practice. We have commenced a testing program which we
anticipate will be completed during 1999. In addition, we are currently
communicating with third parties with whom we do significant business, such
as financial institutions, tenants and vendors, to determine their readiness
for Year 2000 compliance.
25
<PAGE>
Property Systems. Employing a team made up of internal personnel and
third-party consultants, we have also completed our identification of
Property Systems, including hardware components, that are not yet Year 2000
compliant. We have commenced such upgrading of such systems as appears to be
called for under the circumstances, based on available information and a
reasonable level of inquiry and investigation, and in accordance with
prevailing industry practice. Upon completion of such upgrading, we will
initiate a testing program which we anticipate will be completed during 1999.
To the best of our knowledge, there are no Property Systems, the failure of
which would have a material effect on our operations.
Costs of Addressing Our Year 2000 issues. Given the information known at this
time about our systems that are non-compliant, coupled with our ongoing,
normal course-of-business efforts to upgrade or replace critical systems, as
necessary, we do not expect Year 2000 compliance costs to have any material
adverse impact on our liquidity or ongoing results of operations. The costs
of such assessment and remediation will be paid as an operating expense.
Risks of Our Year 2000 issues. In light of our assessment and upgrading
efforts to date, and assuming completion of the planned, normal
course-of-business upgrades and subsequent testing, we believe that any
residual Year 2000 risk will be limited to non-critical business applications
and support hardware, and to short-term interruptions affecting Property
Systems which, if they occur at all, will not be material to our overall
operations. We believe that all of our systems will be Year 2000 compliant
and that compliance will not materially adversely affect our future liquidity
or results of operations or ability to service debt, but we cannot give
absolute assurance that this is the case.
Our Contingency Plans. We are currently developing our contingency plans for
all operations to address the most reasonably likely worst case scenarios
regarding Year 2000 compliance. Such plans, however, will recognize material
limitations on our ability to plan for major regional or industrial failures
such as regional power outages or regional or industrial communications
breakdowns. Management expects such contingency plans to be completed during
1999.
26
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Blumberg. On February 17, 1998, the California state court of appeals
affirmed the Company's settlement of a class action complaint filed on
February 21, 1995 in the Superior Court of the State of California in and for
San Mateo County in connection with the Consolidation. The plaintiff is
Anthony E. Blumberg, an investor in Equitec B, one of the Partnerships
included in the Consolidation, on behalf of himself and all others (the
"Blumberg Action") similarly situated. Although the Operating Partnership is
not a defendant in this lawsuit, its general partner, the Company, is a
defendant. The other defendants are GC (formerly known as Glenborough Realty
Corporation), Glenborough Realty Corporation ("GRC"), Robert Batinovich and
the Partnerships (as defined in the "Background" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The complaint alleged breaches by the defendants of their fiduciary duty and
duty of good faith and fair dealing to investors in the Partnerships. The
complaint sought injunctive relief and compensatory damages. The complaint
alleged that the valuation of GC was excessive and was done without appraisal
of GC's business or assets. The complaint further alleged that the interest
rate for the Notes to be issued to investors in lieu of shares of the
Company's Common Stock, if they so elected, was too low for the risk involved
and that the Notes would likely sell, if at all, at a substantial discount
from their face value (as a matter entirely distinct from the litigation and
subsequent settlement, the Company, as it had the option to, paid in full the
amounts due plus interest in lieu of issuing Notes).
On October 9, 1995 the parties entered into an agreement to settle the
action. The defendants, in entering into the settlement agreement, did not
acknowledge any fault, liability or wrongdoing of any kind and continue to
deny all material allegations asserted in the litigation. Pursuant to the
settlement agreement, the defendants will be released from all claims, known
or unknown, that have been, could have been, or in the future might be
asserted, relating to, among other things, the Consolidation, the acquisition
of the Company's shares pursuant to the Consolidation, any misrepresentation
or omission in the Registration Statement on Form S-4, filed by the Company
on September 1, 1994, as amended, or the prospectus contained therein
("Prospectus/Consent Solicitation Statement"), or the subject matter of the
lawsuit. In return, the defendants agreed to the following: (a) the
inclusion of additional or expanded disclosure in the Prospectus Consent
Solicitation Statement, and (b) the placement of certain restrictions on the
sale of the stock by certain insiders and the granting of stock options to
certain insiders following consummation of the Consolidation. Plaintiff's
counsel indicated that it would request that the court award it $850,000 in
attorneys' fees, costs and expenses. In addition, plaintiffs' counsel
indicated it would request the court for an award of $5,000 payable to
Anthony E. Blumberg as the class representative. The defendants agreed not
to oppose such requests.
On October 11, 1995, the court certified the class for purposes of
settlement, and scheduled a hearing to determine whether it should approve
the settlement and class counsel's application for fees. A notice of the
proposed settlement was distributed to the members of the class on November
15, 1995. The notice specified that, in order to be heard at the hearing,
any class member objecting to the proposed settlement must, by December 15,
1995, file a notice of intent to appear, and a detailed statement of the
grounds for their objection.
Objections were received from a small number of class members. The
objections reiterated the claims in the original Blumberg complaint, and
asserted that the settlement agreement did not adequately compensate the
class for releasing those claims. One of the objections was filed by the
same law firm that brought the BEJ Action described below.
At a hearing on January 17, 1996, the court heard the arguments of the
objectors seeking to overturn the settlement, as well as the arguments of the
plaintiffs and the defendants in defense of the settlement. The court granted
all parties a period of time in which to file additional pleadings. On June
4, 1996, the court granted approval of the settlement, finding it
fundamentally fair, adequate and reasonable to the respective parties to the
settlement. However, the objectors gave notice of their intent to appeal the
June 4 decision. All parties filed their briefs and a hearing was held on
February 3, 1998. On February 17, 1998, the Court of Appeals rejected the
objectors' contentions and upheld the settlement. The objectors filed with
the California Supreme Court a petition for review, which was denied on May
21, 1998. On August 18, 1998, the objectors filed a petition for writ of
certiorari in the Supreme Court of the United States. On September 18, 1998,
the Company and the co-defendants filed a brief in opposition to the
petition. The Supreme Court has not yet granted or denied the petition.
27
<PAGE>
BEJ Equity Partners. On December 1, 1995, a second class action complaint
relating to the Consolidation was filed in Federal District Court for the
Northern District of California (the "BEJ Action"). The plaintiffs are BEJ
Equity Partners, J/B Investment Partners, Jesse B. Small and Sean O'Reilly as
custodian f/b/o Jordan K. O'Reilly, who as a group held limited partner
interests in certain of the Partnerships included in the Consolidation known
as Outlook Properties Fund IV, Glenborough All Suites Hotels, L.P.,
Glenborough Pension Investors, Equitec Income Real Estate Investors-Equity
Fund 4, Equitec Income Real Estate Investors C and Equitec Mortgage Investors
Fund IV, on behalf of themselves and all others similarly situated. The
defendants are GRC, GC, the Company, GPA, Ltd., Robert Batinovich and Andrew
Batinovich. The Partnerships are named as nominal defendants.
This action alleges the same disclosure violations and breaches of fiduciary
duty as were alleged in the Blumberg Action. The complaint sought injunctive
relief, which was denied at a hearing on December 22, 1995. At that hearing,
the court also deferred all further proceedings in this case until after the
scheduled January 17, 1996 hearing in the Blumberg Action. Following several
stipulated extensions of time for the Company to respond to the complaint,
the Company filed a motion to dismiss the case. Plaintiffs in the BEJ Action
voluntarily stayed the action pending resolution of the Blumberg Action; such
plaintiffs can revive their lawsuit.
It is management's position that the BEJ Action, and the objections to the
settlement of the Blumberg Action, are without merit, and management intends
to pursue a vigorous defense in both matters. In view of the denial of the
objector's petition for review in the Blumberg Action, among other things,
the Company and the Operating Partnership believe that it is very unlikely
that this litigation would result in a liability that would exceed the
accrued liability by a material amount. However, given the inherent
uncertainties of litigation, there can be no assurance that the ultimate
outcome in these two legal proceedings will be in the Company's favor.
Certain other claims and lawsuits have arisen against the Operating
Partnership and the Company in their normal course of business. The Operating
Partnership and the Company believe that such other claims and lawsuits will
not have a material adverse effect on the Operating Partnership's or the
Company's financial position, cash flow or results of operations.
Item 2. Changes in Securities
(c) Sales of Unregistered Securities
In February 1998, the Operating Partnership acquired the Capitol Center
property in Des Moines, Iowa, for a total acquisition cost, including
capitalized costs, of approximately $12.3 million. In connection with this
acquisition, the Operating Partnership issued to Hubbell Realty Corporation,
the seller of the Capitol Center Property, 3,874 Operating Partnership units
(with an agreed upon per unit value of $30.00, or an aggregate value of
$116,000) as partial payment for the Capitol Center Property. The units are
redeemable for cash, or, at the election of the Company, for shares of Common
Stock of the Company on a one-for-one basis. The units were issued by the
Operating Partnership in reliance on the exemption provided by Section 4(2)
of the Securities Act of 1933, as amended.
In April 1998, the Operating Partnership acquired the Eaton & Lauth portfolio
of properties for a total acquisition cost, including capitalized costs, of
approximately $68.7 million. In connection with this acquisition, the
Operating Partnership and the Company issued approximately $15.9 million in
the form of 506,788 Operating Partnership units and 126,764 unregistered
shares of Common Stock of the Company (based on an agreed per unit and per
share value of $25.00) as partial payment for the Eaton & Lauth portfolio.
The units are redeemable for cash, or, at the election of the Company, for
shares of Common Stock of the Company on a one-for-one basis. The units and
shares were issued by the Operating Partnership and the Company in reliance
on the exemption provided by Section 4(2) of the Securities Act of 1933, as
amended.
28
<PAGE>
In June 1998, the Operating Partnership acquired the Covance Property for a
total acquisition cost, including capitalized costs, of approximately $16.5
million. In connection with this acquisition, the Operating Partnership and
the Company issued approximately $4 million in the form of 161,492 Operating
Partnership units and 8,802 unregistered shares of Common Stock of the
Company (based on an agreed per unit and per share value of $25.00) as
partial payment for the Covance Property. The units are redeemable for cash,
or, at the election of the Company, for shares of Common Stock of the Company
on a one-for-one basis. The units and shares were issued by the Operating
Partnership and the Company in reliance on the exemption provided by Section
4(2) of the Securities Act of 1933, as amended.
In June 1998, the Operating Partnership acquired the Galesi Portfolio for a
total acquisition cost, including capitalized costs, of approximately $275.8
million. In connection with this acquisition, the Operating Partnership
issued approximately $21.2 million in the form of 806,393 Operating
Partnership units (based on an agreed per unit value of $26.2315) as partial
payment for the Galesi Portfolio. The units are redeemable for cash, or, at
the election of the Company, for shares of Common Stock of the Company on a
one-for-one basis. The units were issued by the Operating Partnership in
reliance on the exemption provided by Section 4(2) of the Securities Act of
1933, as amended.
In July 1998, the Operating Partnership acquired the Pauls Portfolio for a
total acquisition cost, including capitalized costs, of approximately $54.9
million. In connection with this acquisition, the Operating Partnership
issued approximately $11.3 million in the form of 423,843 Operating
Partnership units (based on an agreed per unit value of $26.556) as partial
payment for the Pauls Portfolio. The units are redeemable for cash, or, at
the election of the Company, for shares of Common Stock of the Company on a
one-for-one basis. The units were issued by the Operating Partnership in
reliance on the exemption provided by Section 4(2) of the Securities Act of
1933, as amended.
29
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The Exhibit Index attached hereto is hereby incorporated by
reference to this item.
(b) Reports on Form 8-K:
On July 10, 1998, the Company filed a report on Form 8-K with
respect to its adoption of a stockholder rights plan.
On July 15, 1998, the Company filed a report on Form 8-K with
respect to the acquisition of the Galesi Portfolio, the
Donau/Gruppe Portfolio, the Pauls Portfolio and One and Three
Pacific and the Bridge Loan.
On July 22, 1998, the Company filed a report on Form 8-K with
respect to Supplemental Information as of June 30, 1998.
On August 13, 1998, the Company filed a report on Form 8-K/A
amending the Form 8-K filed on July 15, 1998.
On September 10, 1998, the Company filed two reports on Form
8-K/A amending reports on Form 8-K filed on April 29, 1998 and
May 15, 1998, respectively.
On October 27, 1998, the Company filed a report on Form 8-K with
respect to Supplemental Information as of September 30, 1998.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities
Exchange Act of l934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GLENBOROUGH PROPERTIES, L.P.,
a California Limited Partnership
By: Glenborough Realty Trust Incorporated,
its' General Partner
Date: December 23, 1998 /s/ Andrew Batinovich
Andrew Batinovich
Director, President
and Chief Operating Officer
(Principal Operating Officer)
Date: December 23, 1998 /s/ Stephen Saul
Stephen Saul
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: December 23, 1998 /s/ Terri Garnick
Terri Garnick
Senior Vice President,
Chief Accounting Officer,
Treasurer
(Principal Accounting Officer)
31
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Title
12.1 Computation of Ratios
27.1 Financial Data Schedule
32
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12.1
GLENBOROUGH PROPERTIES, L.P.
Computation of Ratio of Earnings to Fixed Charges
and Ratio of Earnings to Fixed Charges and Preferred Partner Interest Distributions
For the five years ended December 31, 1997, and the nine months ended September 30, 1998
(in thousands, except ratios)
GRT Predecessor
Entities, Combined The Operating Partnership
------------------------- ---------------------------
Nine
Twelve Months ended Months
1993 1994 1995 1996 1997 9/30/98
------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Income (Loss) $4,418 $1,580 $ 524 $(1,928) $16,671 $37,737
Extraordinary items (2,274) -- -- 186 843 --
Federal & State income taxes 24 176 357 -- -- --
Minority Interest 5 43 -- -- -- --
Fixed Charges 1,301 1,140 2,129 3,913 9,668 35,916
------- ------- ------- ------- -------- --------
EARNINGS, AS DEFINED $3,474 $2,939 $3,010 $2,171 $27,182 $73,653
======= ======= ======= ======= ======== ========
Interest Expense $1,301 $1,140 $2,129 $3,913 $9,668 $35,916
Capitalized Interest -- -- -- -- -- 724
------- ------- ------- ------- -------- --------
FIXED CHARGES, AS DEFINED $1,301 $1,140 $2,129 $3,913 $9,668 $36,640
======= ======= ======= ======= ======== ========
RATIO OF EARNINGS TO FIXED CHARGES 2.67 2.58 1.41 0.55 (1) 2.81 2.01
======= ======= ======= ======= ======== ========
Preferred Partner Interest
Distributions -- -- -- -- -- 15,050
------- ------- ------- ------- -------- --------
FIXED CHARGES AND PREFERRED PARTNER
INTEREST DISTRIBUTIONS, AS DEFINED $1,301 $1,140 $2,129 $3,913 $9,668 $51,690
======= ======= ======= ======= ======== ========
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED PARTNER INTEREST
DISTRIBUTIONS 2.67 2.58 1.41 0.55 (1) 2.81 1.42
======= ======= ======= ======= ======== ========
(1)For the twelve months ended December 31, 1996, earnings were insufficient to
cover fixed charges and fixed charges plus preferred partner interest
distributions by $1,742.
</TABLE>
33
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001039223
<NAME> GLENBOROUGH PROPERTIES, L.P.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 7,244
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0
0
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</TABLE>
