SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-14162
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, 94402-1708
Suite 1100 San Mateo, California - (650) 343-9300 (Zip Code)
(Address of principal executive offices
and telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ]
State the aggregate market value of the voting stock held by non-affiliates of
the Partnership. Not applicable.
No market for the Limited Partnership Units exists and therefore, a market value
for such Units cannot be determined.
DOCUMENTS INCORPORATED BY REFERENCE:
EXHIBITS:The index of exhibits is contained in Part IV herein on page number 73.
Page 1 of 73
<PAGE>
TABLE OF CONTENTS
Page No.
PART I
Item 1 Business 3
Item 2 Properties 6
Item 3 Legal Proceedings 12
Item 4 Submission of Matters to a Vote of Security Holders 14
PART II
Item 5 Market for Partnership's Common Equity and
Related Partner Matters 15
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 8 Financial Statements and Supplementary Data 34
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 34
PART III
Item 10 Directors and Executive Officers of the Company 35
Item 11 Executive Compensation 35
Item 12 Security Ownership of Certain Beneficial Owners
and Management 35
Item 13 Certain Relationships and Related Transactions 35
PART IV
Item 14 Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 36
Page 2 of 73
<PAGE>
PART I
Item 1. Business
General Development and Description of Business
Glenborough Properties, L.P., a California Limited Partnership (the "Operating
Partnership"), is engaged primarily in the ownership, operation, management,
leasing, acquisition, expansion and development of various types of
income-producing properties. As of December 31, 1998, the Operating Partnership,
directly and through various subsidiaries, owned and operated 186
income-producing properties (the "Properties," and each a "Property"). The
Properties are comprised of 54 office Properties, 49 office/flex Properties, 30
industrial Properties, 13 retail Properties, 37 multi-family Properties and 3
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"), a self-administered and
self-managed real estate investment trust ("REIT"). 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, 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% (87.25% limited partnership interest as of
December 31, 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 continue 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 (formerly Glenborough Realty
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 ("Units")
to the Company. The contribution of 100% of the shares of non-voting preferred
stock in Glenborough Corporation 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 this transaction as if it occurred on
December 31, 1995.
As a result of this transaction, the only assets of the Company that were not
contributed to the Operating Partnership are (i) its shares of non-voting
preferred stock in Glenborough Hotel Group, (ii) its shares of common stock in
twelve qualified REIT subsidiaries, which produce dividends that are not
material to the Company and (iii) a 4.05% limited 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 1996, 90 properties in 1997 and 69
properties in 1998. In addition, the Operating Partnership has acquired
two properties subsequent to December 31, 1998. The total acquired
properties consist of an aggregate of approximately 15.7 million
rentable square feet of office, office/flex, industrial and retail
space, 9,638 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 35 properties
which were comprised of one office property, seven office/flex
properties, six industrial properties, 17 retail properties, one
multi-family
Page 3 of 73
<PAGE>
property and three hotel properties, to redeploy capital into properties
the Operating Partnership believes have characteristics more suited to
its overall growth strategy and operating goals.
-Issued $150 million of unsecured 7.625% Series A Senior Notes which
mature on March 15, 2005. Entered into 4 development alliances to which
the Operating Partnership has made advances of approximately $33 million
and a loan of $35 million as of December 31, 1998.
The Associated Company
Glenborough Corporation. Glenborough Corporation ("GC"), a California
corporation, serves as general partner of various real estate limited
partnerships (the "Managed Partnerships") for whom it provides asset and
property management services. It also provides property management services for
a limited portfolio of property owned by unaffiliated third parties.
The Operating Partnership owns 100% of the 38,000 shares (representing 95% of
total outstanding shares) of non-voting preferred stock of GC. Four individuals,
including Sandra L. Boyle and Frank E. Austin, executive officers of the
Company, own the 2,000 shares (representing 5% of total outstanding shares) of
voting common stock of GC.
The Operating Partnership, through its ownership of preferred stock of GC, is
entitled to receive cumulative, preferred annual dividends of $1.58 per share,
which GC must pay before it pays any dividends with respect to the common stock
of GC. Once GC pays the required cumulative preferred dividend, it will pay any
additional dividends in equal amounts per share on both the preferred stock and
the common stock at 95% and 5%, respectively. Through the preferred stock, the
Operating Partnership is also entitled to receive a preferred liquidation equal
to $159.24 per share plus all cumulative and unpaid dividends. The preferred
stock is subject to redemption at the option of GC after December 31, 2005, for
a redemption price of $159.24 per share. As the holder of preferred stock of GC,
the Operating Partnership has no voting power with respect to the election of
the directors of GC; all power to elect directors of GC is held by the owners of
the common stock of GC.
This structure is intended to provide the Operating Partnership with a
significant portion of the economic benefits of the operations of GC. The
Operating Partnership accounts for the financial results of GC using the equity
method.
Employees
The Operating Partnership has no employees.
Competition
For Tenants
The Operating Partnership's properties compete for tenants with similar
properties located in their markets. Management believes that characteristics
influencing the competitiveness of a real estate project include the geographic
location of the property, the professionalism of the property manager and the
maintenance and appearance of the property, in addition to external factors such
as general economic circumstances, trends, and the existence of new competing
properties in the general area in which the Operating Partnership's Properties
are located.
Additional competitive factors with respect to commercial properties include the
ease of access to the property, the adequacy of related facilities, such as
parking, and the ability to provide rent concessions and additional tenant
improvements commensurate with local market conditions. Such competition may
lead to rent concessions that could adversely affect the Operating Partnership's
cash flow. Although the Operating Partnership believes its
Page 4 of 73
<PAGE>
Properties are competitive with comparable properties as to those factors within
the Operating Partnership's control, over-building and other external factors
could adversely affect the ability of the Operating Partnership to attract and
retain tenants.
For Acquisitions of Real Estate
The Operating Partnership experiences competition when attempting to acquire
equity interests in desirable real estate, including competition from domestic
and foreign financial institutions, other REITs, life insurance companies,
pension funds, trust funds, partnerships and individual investors. In competing
for such acquisitions, the Operating Partnership and the Company have not given
value guarantees in connection with Operating Partnership units or the Company's
stock issued in such acquisitions.
For Capital
The Operating Partnership and the Company compete with other REITs and investors
and owners for debt and equity financing. The Operating Partnership and the
Company's ability to attract debt and equity capital at favorable rates is
impacted in part by their positioning in the marketplace relative to similar
investments. Factors impacting this include, among other things, the perceived
quality of the Operating Partnership's portfolio and the risk adjustment sources
of capital give to the returns they expect from their investments. In competing
for capital, the Company has not entered into any forward equity commitments or
other arrangements which would subject the Company to risks tied to changes in
the market value of its equity securities.
Working Capital
The Operating Partnership's practice is to maintain cash reserves for normal
repairs, replacements, improvements, working capital and other contingencies
while minimizing interest expense. Available cash is kept to a minimum by using
available funds to reduce the outstanding balance on the Operating Partnership's
unsecured line of credit and drawing on it when necessary.
Other Factors
The Operating Partnership's ability to achieve operational and capital targets
is impacted by economic conditions in the markets in which its Properties are
located and by broader factors such as prevailing interest rates and the general
availability of capital at favorable rates, both debt and equity, for real
estate investments. Local economic downturns may adversely effect the occupancy
and rental rates of the Operating Partnership's Properties. A lack of available
capital may hinder the Operating Partnership's acquisition and development
program or cause it to look to other types of transactions, such as asset
redeployments, to generate needed liquidity.
Compliance with laws and regulations regarding the discharge of materials into
the environment, or otherwise relating to the protection of the environment, is
not expected to have any material effect upon the capital expenditures, earnings
and competitive position of the Operating Partnership.
The Properties have each been subject to Phase I Environmental Assessments and,
where such an assessment indicated it was appropriate, Phase II Environmental
Assessments (collectively, the "Environmental Reports") have been conducted.
These reports have not indicated any significant environmental issues.
In the event that pre-existing environmental conditions not disclosed in the
Environmental Reports which require remediation are subsequently discovered, the
cost of remediation will be borne by the Operating Partnership. Additionally, no
assurances can be given that (i) future laws, ordinances, or regulations will
not impose any material environmental liability, (ii) the current environmental
condition of the Properties has not been or will not be affected by tenants and
occupants of the Properties, by the condition of properties in the vicinity of
the Properties or by third parties unrelated to the Operating Partnership or
(iii) that the Operating Partnership will not otherwise incur significant
liabilities associated with costs of remediation relating to the Properties.
Page 5 of 73
<PAGE>
Item 2. Properties
The Location and Type of the Operating Partnership's Properties
The Operating Partnership's 186 Properties are diversified by type (office,
office/flex, industrial, retail, multi-family and hotel) and are located in four
geographic regions and 24 states within the United States comprising 35 local
markets. The following table sets forth the location, type and size of the
Properties (by rentable square feet and/or units) along with average occupancy
as of December 31, 1998.
<TABLE>
<CAPTION>
Office Office/Flex Industrial Retail Multi-Family
Square Square Square Square Units Hotel Rooms No. of
Region Footage Footage Footage Footage Properties
- ------------- ------------ ------------- ------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
West 885,857 2,051,831 1,427,744 394,222 958 283 58
Midwest 1,877,099 872,596 1,067,884 377,157 670 -- 36
East 2,759,270 845,510 945,220 45,546 1,385 -- 46
South 1,478,883 790,582 657,232 422,240 6,340 132 46
------------ ------------- ------------ ------------ ------------- ------------- -------------
Total 7,001,109 4,560,519 4,098,080 1,239,165 9,353 415 186
============ ============= ============ ============ ============= ============= =============
No. of Properties
54 49 30 13 37 3
Average Occupancy
92% 90% 98% 94% 93% 57%
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, no tenant contributed 10%
or more of the total rental revenue of the Operating Partnership. The largest
tenant's annual rent was approximately 1.9% of total rental revenues for the
year ended December 31, 1998. A complete listing of Properties owned by the
Operating Partnership at December 31, 1998 is included as part of Schedule III
in Item 14.
Office Properties
The Operating Partnership owns 54 office Properties with total rentable square
footage of 7,001,109. The office Properties range in size from 14,255 square
feet to 570,151 square feet, and have lease terms ranging from one to 35 years.
The office leases generally require the tenant to reimburse the Operating
Partnership for increases in building operating costs over a base amount.
Certain of the leases provide for rent increases that are either fixed or based
on a consumer price index ("CPI"). As of December 31, 1998, the average
occupancy of the office Properties was 92%.
The following table sets forth, for the periods specified, the total rentable
area, average occupancy, average effective base rent per leased square foot and
total effective annual base rent.
<TABLE>
<CAPTION>
Office Properties
Historical Rent and Occupancy
Average Effective Total Effective
Total Rentable Average Occupancy Base Rent per Annual Base Rent
Year Area (Sq. Ft.) Leased Sq. Ft.(1)(3) ($000s)(2) (3)
- ------------------ ----------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
1998 7,001,109 92% $ 16.04 $ 103,314
1997 2,921,361 93 15.81 42,954
1996 641,923 94 13.19 7,918
1995 106,076 97 11.91 1,228
1994 105,770 88 11.44 1,065
</TABLE>
Page 6 of 73
<PAGE>
(1)Total Effective Annual Base Rent divided by Average Occupancy in square
feet. As used herein, "Effective Base Rent" represents base rent less
concessions.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the
period.
(3) In any given year, base rents are presented on an annualized basis based on
results since the acquisition for properties that were acquired during the
year.
The following table sets forth the contractual lease expirations for leases for
the office Properties as of December 31, 1998.
<TABLE>
<CAPTION>
Office Properties (5)
Lease Expirations
Percentage of Total
Number of Rentable Square Annual Base Rent Annual Base Rent
Expiration Year Expiring Leases Footage Subject to Under Expiring Represented by
Expiring Leases Leases ($000s) Expiring Leases (1)
- ------------------ ----------------- -------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
1999 (4) 234 1,114,169 $ 15,678 14.7%
2000 144 1,064,151 18,451 17.3
2001 166 960,697 16,588 15.6
2002 100 978,477 18,129 17.0
2003 81 406,689 7,825 7.4
Thereafter 113 1,695,936 29,783 28.0
================= ==================== ==================== ======================
Total 838 6,220,119 (2) $ 106,454 (3) 100.0%
================= ==================== ==================== ======================
</TABLE>
(1) Annual base rent expiring during each period, divided by total annual base
rent (both adjusted for contractual increases).
(2) This figure is based on square footage actually leased (which excludes
vacant space), which accounts for the difference between this figure and
"Total Rentable Area" in the preceding table (which includes vacant space).
(3) This figure is based on square footage actually leased and incorporates
contractual rent increases arising after 1998, and thus differs from "Total
Effective Annual Base Rent" in the preceding table, which is based on 1998
rents.
(4) Includes leases that have initial terms of less than one year. (5) Numbers
exclude the corporate headquarters building.
Office/Flex Properties
The Operating Partnership owns 49 office/flex Properties aggregating 4,560,519
square feet. The office/flex Properties are designed for a combination of office
and warehouse uses with greater than 10% of the rentable square footage
containing office finish. The office/flex Properties range in size from 27,414
square feet to 300,894 square feet, and have lease terms ranging from one to 23
years. Most of the office/flex leases are "triple net" leases whereby the
tenants are required to pay their pro rata share of the Properties' operating
costs, common area maintenance, property taxes, insurance, and non-structural
repairs. Some of the leases are "industrial gross" leases whereby the tenant
pays as additional rent its pro rata share of common area maintenance and repair
costs and its share of the increase in taxes and insurance over a specified base
year cost. Certain of these leases call for fixed or CPI-based rent increases.
As of December 31, 1998, the average occupancy of the office/flex Properties was
90%.
The following table sets forth, for the periods specified, the total rentable
area, average occupancy, average effective base rent per leased square foot and
total effective annual base rent.
Page 7 of 73
<PAGE>
<TABLE>
<CAPTION>
Office/Flex Properties
Historical Rent and Occupancy
Average Effective Total Effective
Total Rentable Average Occupancy Base Rent per Annual Base Rent
Year (4) Area (Sq. Ft.) Leased Sq. Ft. (1)(3) ($000s)(2) (3)
- ------------------ ----------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
1998 4,560,519 90% $ 7.61 $ 31,235
1997 3,523,695 91 7.17 22,991
1996 247,506 96 5.50 1,307
</TABLE>
(1) Total Effective Annual Base Rent divided by Average Occupancy in square
feet. As used herein, "Effective Base Rent" represents base rent less
concessions.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the
period.
(3) In any given year, base rents are presented on an annualized basis based on
results since the acquisition for properties that were acquired during the
year.
(4) Prior to 1996, Properties currently classified as Office/Flex Properties
were included in Industrial Properties. See Industrial Properties table
below.
The following table sets forth the contractual lease expirations for leases for
the office/flex Properties as of December 31, 1998.
<TABLE>
<CAPTION>
Office/Flex Properties
Lease Expirations
Percentage of Total
Number of Rentable Square Annual Base Rent Annual Base Rent
Expiration Year Expiring Leases Footage Subject to Under Expiring Represented by
Expiring Leases Leases ($000s) Expiring Leases (1)
- ------------------ ----------------- -------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
1999 188 915,672 $ 6,565 20.6%
2000 105 641,225 4,714 14.8
2001 102 677,313 4,928 15.5
2002 32 417,161 3,447 10.9
2003 46 480,707 4,488 14.1
Thereafter 29 833,279 7,674 24.1
================= ==================== ==================== ======================
Total 502 3,965,357 (2) $ 31,816 (3) 100.0%
================= ==================== ==================== ======================
</TABLE>
(1) Annual base rent expiring during each period, divided by total annual base
rent (both adjusted for contractual increases).
(2) This figure is based on square footage actually leased (which excludes
vacant space), which accounts for the difference between this figure and
"Total Rentable Area" in the preceding table (which includes vacant space).
(3) This figure is based on square footage actually leased and incorporates
contractual rent increases arising after 1998, and thus differs from "Total
Effective Annual Base Rent" in the preceding table, which is based on 1998
rents.
Industrial Properties
The Operating Partnership owns 30 industrial Properties aggregating 4,098,080
square feet. The industrial Properties are designed for warehouse, distribution
and light manufacturing, ranging in size from 32,500 square feet to 474,426
square feet. As of December 31, 1998, 16 of the industrial Properties were
leased to multiple tenants, 14 were leased to single tenants, and all 14 of the
single-tenant Properties are adaptable in design to multi-tenant use. As of
December 31, 1998, the average occupancy of the industrial Properties was 98%.
Four of the single-tenant Properties are leased to two tenants having five years
remaining on leases whose original terms were 20 years. The terms of these
leases include rent increases every three years based on all or a percentage
Page 8 of 73
<PAGE>
of the change in the CPI. Under these leases the tenants are required to pay for
all of the Properties' operating costs, such as common area maintenance,
property taxes, insurance, and all repairs including structural repairs. Each
lease gives the respective tenant a purchase option exercisable on March 1, 2002
for an amount equal to the greater of the appraised value or a specified minimum
price. Management believes, based on discussions with both tenants, that neither
tenant has any present intention to exercise any option to purchase.
The remaining industrial Properties have leases whose terms range from 1 to 25
years. Most of the leases are "triple net" leases whereby the tenants are
required to pay their pro rata share of the Properties' operating costs, common
area maintenance, property taxes, insurance, and non-structural repairs. Some of
the leases are "industrial gross" leases whereby the tenant pays as additional
rent its pro rata share of common area maintenance and repair costs and its
share of the increase in taxes and insurance over a specified base year cost.
Certain of these leases call for fixed or CPI-based rent increases.
The following table sets forth, for the periods specified, the total rentable
area, average occupancy, average effective base rent per leased square foot and
total effective annual base rent for the industrial Properties.
<TABLE>
<CAPTION>
Industrial Properties
Historical Rent and Occupancy
Average Effective Total Effective
Total Rentable Average Occupancy Base Rent per Annual Base Rent
Year (4) Area (Sq. Ft.) Leased Sq. Ft.(1)(3) ($000s)(2) (3)
- ------------------ ----------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
1998 4,098,080 98% $ 3.91 $ 15,703
1997 3,533,510 97 3.36 11,516
1996 1,778,862 99 2.41 4,244
1995 1,491,827 100 2.29 3,405
1994 1,491,827 100 2.29 3,401
</TABLE>
(1) Total Effective Annual Base Rent divided by Average Occupancy in square
feet. (2) Total Effective Annual Base Rent adjusted for any free rent given for
the period.
(3) In any given year, base rents are presented on an annualized basis based on
results since the acquisition for properties that were acquired during the
year.
(4) Prior to 1996, Properties currently classified as Office/Flex Properties
were included in Industrial Properties.
The following table sets forth the contractual lease expirations for leases for
the industrial Properties as of December 31, 1998.
<TABLE>
<CAPTION>
Industrial Properties
Lease Expirations
Percentage of Total
Number of Rentable Square Annual Base Rent Annual Base Rent
Expiration Year Expiring Leases Footage Subject to Under Expiring Represented by
Expiring Leases Leases ($000s) Expiring Leases (1)
- ------------------ ----------------- -------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
1999 23 411,592 $ 1,830 10.7%
2000 20 402,674 1,700 10.0
2001 19 394,519 1,708 10.0
2002 17 555,261 2,369 13.9
2003 5 214,275 1,005 5.9
Thereafter 12 1,946,599 8,428 49.5
================= ==================== ==================== ======================
Total 96 3,924,920 (2) $ 17,040 (3) 100.0%
================= ==================== ==================== ======================
</TABLE>
(1) Annual base rent expiring during each period, divided by total annual base
rent (both adjusted for contractual increases).
(2) This figure is based on square footage actually leased (which excludes
vacant space), which accounts for the difference between this figure and
"Total Rentable Area" in the preceding table (which includes vacant space).
Page 9 of 73
<PAGE>
(3) This figure is based on square footage actually leased (which excludes
vacant space) and incorporates contractual rent increases arising after
1998, and thus differs from "Total Effective Annual Base Rent" in the
preceding table, which is based on 1998 rents.
Retail Properties
The Operating Partnership owns 13 retail Properties with total rentable square
footage of 1,239,165. The leases for the retail Properties have terms ranging
from one to 40 years. Eleven of the retail Properties, representing 1,156,079
square feet or 93% of the total rentable area, are anchored community shopping
centers. The anchor tenants of these centers are national or regional
supermarkets and drug stores. As of December 31, 1998, the average occupancy of
the retail Properties was 94%.
The leases for the retail Properties generally include fixed or CPI-based rent
increases and some include provisions for the payment of additional rent based
on a percentage of the tenants' gross sales that exceed specified amounts.
Retail tenants also typically pay as additional rent their pro rata share of the
Properties' operating costs including common area maintenance, property taxes,
insurance and non-structural repairs. Some leases contain options to renew at
market rates or specified rates.
The following table sets forth, for the periods specified, the total rentable
area, average occupancy, average effective base rent per leased square foot and
total effective annual base rent for the retail Properties.
<TABLE>
<CAPTION>
Retail Properties
Historical Rent and Occupancy
Average Effective Total Effective
Total Rentable Average Occupancy Base Rent per Annual Base Rent
Year Area (Sq. Ft.) Leased Sq. Ft.(1)(3) ($000s)(2) (3)
- ------------------ ----------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
1998 1,239,165 94% $ 8.75 $ 10,192
1997 979,088 96 7.98 7,501
1996 630,700 96 7.82 (4) 4,726
1995 285,658 95 10.76 2,915
1994 285,722 94 10.76 2,890
</TABLE>
(1) Total Effective Annual Base Rent divided by Average Occupancy in square
feet. (2) Total Effective Annual Base Rent adjusted for any free rent given for
the period.
(3) In any given year, base rents are presented on an annualized basis based on
results since the acquisition for properties that were acquired during the
year.
(4) Average effective base rent per leased square foot declined in 1996 due to
the acquisition of properties with lower base rents.
The following table sets forth the contractual lease expirations for the retail
Properties as of December 31, 1998.
<TABLE>
<CAPTION>
Retail Properties
Lease Expirations
Percentage of Total
Number of Rentable Square Annual Base Rent Annual Base Rent
Expiration Year Expiring Leases Footage Subject to Under Expiring Represented by
Expiring Leases Leases ($000s) Expiring Leases (1)
- ------------------ ----------------- -------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
1999 69 151,979 $ 1,898 17.4%
2000 37 72,344 918 8.4
2001 63 165,263 1,792 16.5
2002 15 26,301 359 3.3
2003 23 109,795 993 9.1
Thereafter 49 632,678 4,930 45.3
================= ==================== ==================== ======================
Total 256 1,158,360 (2) $ 10,890 (3) 100.0%
================= ==================== ==================== ======================
</TABLE>
Page 10 of 73
<PAGE>
(1) Annual base rent expiring during each period, divided by total annual base
rent (both adjusted for contractual increases).
(2) This figure is based on square footage actually leased (which excludes
vacant space), which accounts for the difference between this figure and
"Total Rentable Area" in the preceding table (which includes vacant space).
(3) This figure is based on square footage actually leased (which excludes
vacant space) and incorporates contractual rent increases arising after
1998, and thus differs from "Total Effective Annual Base Rent" in the
preceding table which is based on 1998 rents.
Tenant Improvements and Leasing Commissions
The following table summarizes by year the capitalized tenant improvement and
leasing commission expenditures incurred in the renewal or re-leasing of
previously occupied space since January 1, 1994.
<TABLE>
<CAPTION>
Capitalized Tenant Improvements and Leasing Commissions
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Office Properties
Square footage renewed or re-leased 579,904 174,354 39,706 79,745 18,384
Capitalized tenant improvements and
commissions ($000s) $ 4,263 $ 850 $ 617 (1) $ 468 $ 58
Average per square foot of renewed or
re-leased space $ 7.35 $ 4.87 $ 15.54 (1) $ 5.87 $ 3.18
Office/Flex Properties
Square footage renewed or re-leased 876,490 138,658 9,000 (2) (2)
Capitalized tenant improvements and
commissions ($000s) $ 3,232 $ 418 $ 23 (2) (2)
Average per square foot of renewed or
re-leased space $ 3.69 $ 3.01 $ 2.56 (2) (2)
Industrial Properties
Square footage renewed or re-leased 307,896 198,055 60,000 141,523 89,000
Capitalized tenant improvements and
commissions ($000s) $ 370 $ 235 $ 51 $ 114 $ 60
Average per square foot of renewed or
re-leased space $ 1.20 $ 1.19 $ 0.85 $ 0.81 $ 0.67
Retail Properties
Square footage renewed or re-leased 45,894 12,080 32,998 33,294 46,833
Capitalized tenant improvements and
commissions ($000s) $ 283 $ 42 $ 83 $ 98 $ 59
Average per square foot of renewed or
re-leased space $ 6.16 (3) $ 3.51 $ 2.53 $ 2.94 $ 1.25
All Properties
Square footage renewed or re-leased 1,810,184 523,147 141,704 254,562 154,217
Capitalized tenant improvements and
commissions ($000s) $ 8,148 $ 1,545 $ 774 $ 680 $ 177
Average per square foot of renewed or
re-leased space $ 4.50 $ 2.95 $ 5.46 $ 2.67 $ 1.14
</TABLE>
(1) The significant increase in capitalized tenant improvements and commissions
in 1996 over the previous years is primarily the result of tenant
improvements provided in connection with a lease extension of space for the
principal tenant of one property. The lease was extended 10 years and
expires in 2010.
Page 11 of 73
<PAGE>
(2) Prior to 1996, Properties currently classified as Office/Flex Properties
were included in Industrial Properties.
(3) The significant increase in capitalized tenant improvements and commissions
in 1998 over the previous years is primarily the result of accrued tenant
improvements to be provided to a tenant who will not occupy until January
1999. The square footage for this tenant is not included in the square
footage renewed or re-leased as this tenant does not yet occupy the space.
Multi-Family Properties
The Operating Partnership owns 37 multi-family Properties, aggregating 9,353
units. All of the units are rented to residential tenants on either a
month-to-month basis or for terms of one year or less. As of December 31, 1998,
the multi-family Properties were approximately 93% leased.
The following table sets forth, for the periods specified, total units, average
occupancy, monthly average effective base rent per unit and total effective
annual base rent for the multi-family Properties.
<TABLE>
<CAPTION>
Multi-Family Properties
Historical Rent and Occupancy
Average Effective Total Effective
Average Occupancy Base Rent per Annual Base Rent
Year Total Units Leased Unit (1) (3) ($000s)(2) (3)
- ------------------ ----------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
1998 9,353 93% $ 618 $ 64,507
1997 2,251 95 619 15,884
1996 642 94 598 (4) 4,328
1995 104 94 630 739
1994 104 98 632 774
</TABLE>
(1) Total Effective Annual Base Rent divided by average occupied unit. (2) Total
Effective Annual Base Rent adjusted for any free rent given for the period.
(3) In any given year, base rents are presented on an annualized basis based on
results since the acquisition for properties that were acquired during the
year.
(4) Average effective monthly base rent per unit declined in 1996 due to the
acquisition of properties with lower base rents.
Hotel Properties
Through June 1998, the Operating Partnership leased the six Country Suites by
Carlson hotels that it owned to Glenborough Hotel Group ("GHG") who operated
them for its own account. In June 1998, two of the hotels were sold and the
other four hotels were leased to other operators. In December 1998, one of the
four hotels was sold to one of the operators and two other hotels are in
contract to be sold to the other operator in March 1999. The buyer has an option
to extend the closing of the sale to June 1999 and it is anticipated that the
buyer will exercise that option. These leases terminate upon the closing of the
sales of the properties.
Item 3. Legal Proceedings
Blumberg. The Company settled a class action complaint filed on February 21,
1995 in connection with the Consolidation. Certain parties objected to the
settlement, but the settlement has been approved (or review denied) by the
Superior Court of the State of California in and for San Mateo County, the
California state court of appeals, and the California Supreme Court. In August
1998 the objecting parties filed a petition for writ of certiorari in the
Supreme Court of the United States. The Company and the co-defendants filed a
brief in opposition to the petition. The Supreme Court of the United States has
not yet granted or denied the petition.
Page 12 of 73
<PAGE>
The plaintiff in the case 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. The defendants are GC,
Glenborough Realty Corporation ("GRC"), Robert Batinovich, the Partnerships and
the Company.
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 Glenborough Corporation was excessive and was done
without appraisal of Glenborough Corporation'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 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.
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 in the BEJ
Action have voluntarily stayed the action pending resolution of the Blumberg
Action.
The plaintiffs in the BEJ Action 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
Page 13 of 73
<PAGE>
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 believes 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 4. Submission of Matters to a Vote of Security Holders
None
Page 14 of 73
<PAGE>
PART II
Item 5. Market for Partnership's Common Equity and Related Partner Matters
(a) Market Information
There is no established trading market for the Units issued by the Operating
Partnership.
Holders
As of December 31, 1998, there were 100 holders of Operating Partnership Units.
Distributions
Since its organization, the Operating Partnership has paid regular quarterly
distributions to holders of its Units. During the years ended December 31, 1996,
1997 and 1998, the Operating Partnership paid the following quarterly
distributions:
Distributions Total
Quarterly Period Per Unit Distributions
- ------------------------ ---------------- --------------------
1996
First Quarter $ 0.30 $ 1,194,000
Second Quarter $ 0.30 $ 1,201,000
Third Quarter $ 0.30 $ 2,346,000
Fourth Quarter $ 0.32 $ 2,511,000
1997
First Quarter $ 0.32 $ 3,744,000
Second Quarter $ 0.32 $ 6,076,000
Third Quarter $ 0.32 $ 9,903,000
Fourth Quarter $ 0.42 $ 13,210,000
1998
First Quarter $ 0.42 $ 17,122,000
Second Quarter $ 0.42 $ 20,130,000 (1)
Third Quarter $ 0.42 $ 20,650,000 (2)
Fourth Quarter $ 0.42 $ 20,607,000 (2)
(1) Total distributions include a preferred partner interest distribution paid
to the Company of $3,910,000. (2) Total distributions include a preferred
partner interest distribution paid to the Company of $5,570,000.
The Operating Partnership intends to pay regular quarterly distributions to its
Unit holders. Future distributions by the Operating Partnership will be at the
discretion of management and will depend upon the actual operations of the
Operating Partnership, its financial condition, capital requirements, applicable
legal restrictions and such other factors as management deems relevant. The
Operating Partnership intends to continue its policy of paying quarterly
distributions, but there can be no assurance that distributions will continue or
be paid at any specific level.
(b) Recent Sales of Unregistered Securities
Sales of unregistered securities by the Operating Partnership during 1998 are
described in the Operating Partnership's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
Item 6. Selected Financial Data
Set forth below are selected financial data for:
Glenborough Properties, L.P.: Consolidated balance sheet data is
presented as of December 31, 1998, 1997, 1996 and 1995. Consolidated
operating data is presented for the years ended December 31, 1998, 1997
and 1996, and As Adjusted consolidated operating data is presented for
the years
Page 15 of 73
<PAGE>
ended December 31, 1995 and 1994. The As Adjusted data
assumes the Consolidation and related transactions occurred on January
1, 1994, in order to present the operations of the Operating
Partnership for those periods as if the Consolidation had been in
effect for those periods. As Adjusted data is presented to provide
amounts which are comparable to the consolidated results of operations
of the Operating Partnership for the years ended December 31, 1998,
1997 and 1996.
The GRT Predecessor Entities: Combined operating data is presented for
the years ended December 31, 1995 and 1994. Combined balance sheet data
is presented as of December 31, 1994.
This selected financial data should be read in conjunction with the financial
statements of Glenborough Properties, L.P., including the notes thereto,
included in Item 14.
<TABLE>
<CAPTION>
As of and for the Year Ended December 31,
---------------------------------------------------------------------------------------
Historical Historical Historical As Adjusted Historical As Adjusted Historical
1998 1997 1996 1995 1995 1994 1994
------------ ----------- ----------- ------------- ----------- ------------ ------------
(In thousands, except per share data)
Operating Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Rental Revenue......... $ 227,956 $ 61,393 $ 17,943 $ 13,495 $ 15,454 $ 12,867 $ 13,797
Fees and reimbursements 2,802 719 311 -- 16,019 -- 13,327
Interest and other income 4,557 1,627 1,070 982 2,698 1,109 3,557
Equity in earnings of
Glenborough Corporation 1,533 1,687 1,571 -- -- -- --
Total Revenues(1)...... 241,644 66,917 21,216 14,477 34,171 13,976 30,681
Property operating expenses 75,426 20,904 5,735 4,624 8,576 4,188 6,782
General and administrative 10,682 4,002 1,490 983 15,947 954 13,454
Interest expense....... 53,289 9,668 3,913 2,767 2,129 2,767 1,140
Depreciation and
amortization......... 50,169 14,829 4,583 3,654 4,762 3,442 4,041
Income (loss) from operations
before extraordinary items and
Preferred Partner Interest 47,755 17,514 (1,742) 1,586 524 (5,145) 1,580
Distributions........
Net income (loss) before
Preferred Partner Interest 46,355 16,671 (1,928) 1,586 524 (5,145) 1,580
Distributions(2)
Net income (loss) allocable to
general and limited partners 25,735 16,671 (1,928) 1,586 524 (5,145) 1,580
Per Unit (3):
Net income (loss) before
extraordinary items allocable
to general and limited partners 0.78 0.92 (0.24) 0.40 -- (1.29) --
Net income (loss) allocable to
general and limited partners 0.74 0.88 (0.27) 0.40 -- (1.29) --
Balance Sheet Data:
Net investment in real estate $1,742,439 $ 825,218 $ 161,945 -- $ 77,574 -- $ 63,994
Mortgage loans receivable, net 42,420 3,692 9,905 -- 7,216 -- 19,953
Total assets........... 1,876,246 864,450 183,335 -- 95,801 -- 117,321
Total debt............. 922,097 228,299 75,891 -- 33,685 -- 17,906
Partners' equity....... 925,228 623,884 104,128 -- 57,592 -- 80,558
Other Data:
Distributions per unit
(excluding Preferred Partner
Interest Distributions) (4) $ 1.68 $ 1.38 $ 1.22 $ 1.20 $ -- $ 1.20 $ --
Preferred Partner Interest 20,620 -- -- -- -- -- --
Distributions
EBIDA(5)............... 150,740 40,520 13,670 -- 9,291 -- 10,269
Ratios:
Ratio of Earnings to Fixed 1.86 2.81 0.55 -- 1.41 -- 2.58
Charges (6)
Ratio of Earnings to Fixed
Charges and Preferred Partner
Interest Distributions(7) 1.35 2.81 0.55 -- 1.41 -- 2.58
Annual Service Charge Coverage 2.31 4.29 3.67 -- -- -- --
(8)
Debt to Total Assets (9) 48.9% 27.0% 39.0% -- -- -- --
Secured Debt to Total Assets (10) 36.5% 16.7% 37.3% -- -- -- --
Total Unencumbered Assets to
Unsecured Debt (11) 283.0% 632.9% -- -- -- -- --
Cash flow provided by (used for):
Operating activities. $ 77,068 $ 19,570 $ 5,163 -- $(10,608) -- $ 22,426
Investing activities. (614,043) (569,373) (61,974) -- 8,656 -- (1,947)
Financing activities. 537,324 552,688 57,458 -- (17,390) -- (2,745)
</TABLE>
Page 16 of 73
<PAGE>
(1) Certain revenues which are included in the historical combined amounts for
1995 and prior are not included on an adjusted basis. These revenues are
included in the financial statements of the unconsolidated Associated
Companies, on an as adjusted basis, from which the Operating Partnership
receives lease payments and the Company and the Operating Partnership
receive dividends.
(2) Historical 1996 and as adjusted 1994 net losses reflect $7,237 of
Consolidation and litigation costs incurred in connection with the
Consolidation. As adjusted 1994 data give effect to the Consolidation and
related transactions as if such transactions had occurred on January 1,
1994, whereas historical 1996 data reflect such transactions in the periods
they were expensed. The Consolidation and litigation costs were expensed on
January 1, 1996, the Operating Partnership's first day of operations.
(3) As adjusted net income per unit is based upon as adjusted weighted average
units outstanding of 3,979,376 for 1995 and 1994.
(4) Historical distributions per unit for the years ended December 31, 1998,
1997 and 1996 consist of distributions declared for the periods then ended.
As adjusted distributions per unit for each of the years ended December 31,
1995 and 1994 are based on $0.30 per unit per quarter.
(5) EBIDA is computed as income (loss) before minority interests and
extraordinary items plus interest expense, depreciation and amortization,
gains (losses) on disposal of properties and loss provisions. In 1996,
consolidation and litigation costs were also added back to net income to
determine EBIDA. The Operating Partnership believes that in addition to net
income and cash flows, EBIDA is a useful measure of the financial
performance of an equity REIT because, together with net income and cash
flows, EBIDA provides investors with an additional basis to evaluate the
ability of a REIT to incur and service debt and to fund acquisitions,
developments and other capital expenditures. To evaluate EBIDA and the
trends it depicts, the components of EBIDA, such as rental revenues, rental
expenses, real estate taxes and general and administrative expenses, should
be considered. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Excluded from EBIDA are financing
costs such as interest as well as depreciation and amortization, each of
which can significantly affect the Operating Partnership's results of
operations and liquidity and should be considered in evaluating the
Operating Partnership's operating performance. Further, EBIDA does not
represent net income or cash flows from operating, financing and investing
activities as defined by generally accepted accounting principles and does
not necessarily indicate that cash flows will be sufficient to fund all of
the Operating Partnership's cash needs. It should not be considered as an
alternative to net income as an indicator of the Operating Partnership 's
operating performance or as an alternative to cash flows as a measure of
liquidity. Further, EBIDA as disclosed by other REITs may not be comparable
to the Operating Partnership's calculation of EBIDA. The following table
reconciles net income (loss) of the Operating Partnership to EBIDA for the
periods presented (in thousands):
<TABLE>
<CAPTION>
The Operating Partnership GRT Predecessor Entities
----------------------------------- ------------------------
For the Year Ended December 31,
---------------------------------------------------------------
Historical Historical Historical Historical Historical
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss) before
Preferred Partner $ 46,355 $ 16,671 $ (1,928) $ 524 $ 1,580
Interest Distributions
Extraordinary items..... 1,400 843 186 -- --
Interest expense........ 53,289 9,668 3,913 2,129 1,140
Depreciation and 50,169 14,829 4,583 4,762 4,041
amortization
Gains (losses) on disposal
of properties and
collection of mortage (4,796) (1,491) (321) -- --
loan receivable......
Loss on interest rate
protection agreement. 4,323 -- -- -- --
Consolidation and -- -- 7,237 -- --
litigation costs
Loss provisions......... -- -- -- 1,876 3,508
=========== =========== =========== =========== ============
EBIDA................... $ 150,740 $ 40,520 $ 13,670 $ 9,291 $ 10,269
=========== =========== =========== =========== ============
</TABLE>
(6) The ratio of earnings to fixed charges is computed as net income (loss) from
operations, before extraordinary items, plus fixed charges (excluding
capitalized interest) divided by fixed charges. Fixed charges consist of
interest costs including amortization of deferred financing costs.
(7) The ratio of earnings to fixed charges and Preferred Partner Interest
Distributions is computed as net income (loss) from operations, before
extraordinary items, plus fixed charges (excluding capitalized interest)
divided by fixed charges plus Preferred Partner Interest Distributions.
Fixed charges consist of interest costs including amortization of deferred
financing costs.
(8) The annual service charge coverage is computed as EBIDA divided by annual
service charge. Annual Service Charge for any period means the aggregate
interest expense for such period and the amortization during such period of
any original issue discount of, debt of the Operating Partnership and its
subsidiaries.
(9) Debt to total assets is computed as debt divided by total assets.
(10) Secured debt to total assets is computed as secured debt divided by total
assets.
(11) Total unencumbered assets to unsecured debt is computed as total
unencumbered assets divided by unsecured debt.
Page 17 of 73
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the financial condition and results of
operations of the Operating Partnership should be read in conjunction with the
selected financial data in Item 6 and the Consolidated Financial Statements of
Glenborough Properties, L.P., including the notes thereto, included in Item 14.
Results of Operations
Comparison of the year ended December 31, 1998 to the year ended December 31,
1997.
Following is a table of net operating income by property type, for comparative
purposes, presenting the results for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Results of Operations by Property Type
For the Years Ended December 31, 1998 and 1997
(in thousands)
Office/ Multi- Property Eliminating Total
Office Flex Industrial Retail Family Hotel Total Entry(1) Reported
1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rental Revenue $117,746 $36,987 $16,104 $12,072 $40,865 $4,182 $227,956 -- $227,956
Operating Expenses 44,775 10,898 3,609 3,840 17,235 967 81,324 ($5,898) 75,426
Net Operating Income 72,971 26,089 12,495 8,232 23,630 3,215 146,632 5,898 152,530
Percentage of
Total NOI 50% 18% 8% 6% 16% 2% 100%
1997
Rental Revenue $ 25,071 $10,354 $ 7,320 $ 7,224 $ 5,536 $5,980 $ 61,485 ($92) $ 61,393
Operating Expenses 9,986 3,062 1,459 2,183 2,309 1,894 20,893 11 20,904
Net Operating Income 15,085 7,292 5,861 5,041 3,227 4,086 40,592 (103) 40,489
Percentage of
Total NOI 37% 18% 15% 12% 8% 10% 100%
</TABLE>
(1) Eliminating entry represents internal market level property management fees
included in operating expenses to provide comparison to industry
performance.
Rental Revenue. Rental revenue increased $166,563,000, or 271%, to $227,956,000
for the year ended December 31, 1998, from $61,393,000 for the year ended
December 31, 1997. The increase included growth in revenue from the office,
office/flex, industrial, retail and multi-family Properties of $92,675,000,
$26,633,000, $8,784,000, $4,848,000 and $35,329,000, respectively. These
increases were partially offset by a $1,798,000 decrease in revenue from the
hotel Properties due to the 1998 sales of two hotels. Rental revenue for the
year ended December 31, 1998, included $17,404,000 of rental revenue generated
from the acquisition of 20 properties in 1996 (the "1996 Acquisitions"),
$96,130,000 of rental revenue generated from the acquisition of 90 properties in
1997 (the "1997 Acquisitions") and $104,254,000 of rental revenue generated from
the acquisition of 69 properties in 1998 (the "1998 Acquisitions").
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 $2,083,000, or 290%, to $2,802,000 for the year ended December
31, 1998, from $719,000 for the year ended December 31, 1997. The change
consists primarily of increased lease commissions from an affiliated entity and
fees resulting from the sale of managed properties.
Page 18 of 73
<PAGE>
Interest and Other Income. Interest and other income increased $2,930,000, or
180%, to $4,557,000 for the year ended December 31, 1998, from $1,627,000 for
the year ended December 31, 1997. This increase is primarily due to $1,749,000
of interest income on a mortgage loan receivable secured by Gateway Center which
originated on June 30, 1998. In addition, in 1998, the Operating Partnership
invested approximately $20 million in the securities of a private REIT which was
accounted for using the equity method. In 1998, the Operating Partnership
recognized approximately $990,000 as equity in the earnings of this private
REIT.
Equity in Earnings of Glenborough Corporation. Equity in earnings of Glenborough
Corporation decreased $154,000, or 9%, to $1,533,000 for the year ended December
31, 1998, from $1,687,000 for the year ended December 31, 1997. This decrease is
due to a reduction in the number of managed properties upon the sale of such
properties.
Net Gain on Sales of Real Estate Assets. The net gain on sales of real estate
assets of $4,796,000 during the year ended December 31, 1998, resulted from the
sales of one office property, two office/flex properties, four industrial
properties, one multi-family property and three hotel properties from the
Operating Partnership's portfolio. This net gain was offset by a $3.1 million
loss on the sale of the Operating Partnership's investment in the securities of
a private REIT. The net gain on sales of real estate assets of $839,000 during
the year ended December 31, 1997, resulted from the sales of 16 retail
properties from the Operating Partnership's portfolio.
Gain on Collection of Mortgage Loan Receivable. The gain on collection of
mortgage loan receivable of $652,000 during the year ended December 31, 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.
Property Operating Expenses. Property operating expenses increased $54,522,000,
or 261%, to $75,426,000 for the year ended December 31, 1998, from $20,904,000
for the year ended December 31, 1997. This increase primarily consists of
$22,750,000 attributable to the 1997 Acquisitions and $31,997,000 attributable
to the 1998 Acquisitions.
General and Administrative Expenses. General and administrative expenses
increased $6,680,000, or 167%, to $10,682,000 for the year ended December 31,
1998, from $4,002,000 for the year ended December 31, 1997. The increase is
primarily due to increased salary and overhead costs resulting from the 1997
Acquisitions and 1998 Acquisitions. As a percentage of rental revenue, general
and administrative expenses actually decreased from 6.5% for the year ended
December 31, 1997 to 4.7% for the year ended December 31, 1998.
Depreciation and Amortization. Depreciation and amortization increased
$35,340,000, or 238%, to $50,169,000 for the year ended December 31, 1998, from
$14,829,000 for the year ended December 31, 1997. The increase is primarily due
to depreciation and amortization associated with the 1997 Acquisitions and 1998
Acquisitions.
Interest Expense. Interest expense increased $43,621,000, or 451%, to
$53,289,000 for the year ended December 31, 1998, from $9,668,000 for the year
ended December 31, 1997. Substantially all of the increase was the result of
higher average borrowings during the year ended December 31, 1998, as compared
to the year ended December 31, 1997, due to new debt and the assumption of debt
related to the 1997 Acquisitions and 1998 Acquisitions.
Loss on Interest Rate Protection Agreement. During 1998, the Operating
Partnership entered into a forward interest rate agreement to lock in the
risk-free interest component of a portion of a secured mortgage to be issued in
October 1998. The 10-year Treasury rates decreased during the term of the hedge.
During the fourth quarter of 1998, the Operating Partnership recorded an expense
for its payment of $4,323,000 to terminate a portion of the forward interest
rate agreement in connection with a reduction in the amount of the mortgage to
be issued. The Operating Partnership's payment of $6,244,000 in settlement of
the remaining portion of the forward interest rate agreement will offset the
reduced financing costs of the $248.8 million mortgage issued in October 1998.
Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt of
$1,400,000 during the year ended December 31, 1998, consists of prepayment
penalties and the write-off of unamortized loan fees upon the early payoff of
debt. Various loans were paid-off early when more favorable terms were obtained
through new financing
Page 19 of 73
<PAGE>
(discussed below) and upon the sale of one of the hotels. Loss on early
extinguishment of debt of $843,000 during the year ended December 31, 1997,
resulted from the write-off of unamortized loan fees related to a $50 million
secured line of credit which was replaced with a $250 million unsecured line of
credit (the "Credit Facility") from a commercial bank.
Comparison of the year ended December 31, 1997 to the year ended December 31,
1996.
Following is a table of net operating income by property type, for comparative
purposes, presenting the results for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Results of Operations by Property Type
For the Years Ended December 31, 1997 and 1996
(in thousands)
Office/ Multi- Property Eliminating Total
Office Flex Industrial Retail Family Hotel Total Entry Reported
1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rental Revenue $25,071 $10,354 $7,320 $7,224 $5,536 $5,980 $61,485 ($92) $61,393
Operating Expenses 9,986 3,062 1,459 2,183 2,309 1,894 20,893 11 20,904
Net Operating Income 15,085 7,292 5,861 5,041 3,227 4,086 40,592 (103) 40,489
Percentage of
Total NOI 37% 18% 15% 12% 8% 10% 100%
1996
Rental Revenue $ 3,905 $ 769 $3,491 $3,746 $1,519 $4,513 $17,943 $17,943
Operating Expenses 1,697 275 469 991 601 1,698 5,731 4 5,735
Net Operating Income 2,208 494 3,022 2,755 918 2,815 12,212 (4) 12,208
Percentage of
Total NOI 18% 4% 25% 23% 7% 23% 100%
</TABLE>
Rental Revenue. Rental revenue increased $43,450,000, or 242%, to $61,393,000
for the year ended December 31, 1997, from $17,943,000 for the year ended
December 31, 1996. The increase included growth in revenue from the office,
office/flex, industrial, retail, multi-family and hotel Properties of
$21,166,000, $9,585,000, $3,829,000, $3,478,000, $4,017,000 and $1,467,000,
respectively. Of the rental revenue for the year ended December 31, 1997,
$48,030,000 represents rental revenue generated from the acquisition of 20
properties in 1996 (the "1996 Acquisitions") and the acquisition of 90
properties during the year ended December 31, 1997 (the "1997 Acquisitions").
The increase in rental revenue for the year ended December 31, 1997, was
partially offset by a decrease in revenue due to the 1996 sale of two industrial
properties and the 1997 sales of sixteen retail properties.
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 $408,000, or 131%, to $719,000 for the year ended December 31,
1997, from $311,000 for the year ended December 31, 1996. The increase primarily
consisted of increases in asset management fees of $131,000, property management
fees of $257,000 and lease commissions of $20,000. The Operating Partnership's
contract was expanded to include asset management fees in 1997.
Interest and Other Income. Interest and other income, which consists primarily
of interest on cash investments and mortgage loans receivable, increased
$557,000, or 52%, to $1,627,000 for the year ended December 31, 1997, from
$1,070,000 for the year ended December 31, 1996. The increase was primarily due
to an increase in interest income as a result of higher invested cash balances
and interest income from the Grunow mortgage loan receivable. This increase is
partially offset by a reduction in interest income due to the payoff of the
Hovpark mortgage loan receivable in January 1997.
Page 20 of 73
<PAGE>
Equity in Earnings of Glenborough Corporation. Equity in earnings of Glenborough
Corporation increased $116,000, or 7%, to $1,687,000 for the year ended December
31, 1997, from $1,571,000 for the year ended December 31, 1996, due to increased
transaction fees earned by GC.
Net Gain on Sales of Rental Properties. The net gain on sales of rental
properties of $839,000 during the year ended December 31, 1997, resulted from
the sales of sixteen retail properties. The net gain on sales of rental
properties of $321,000 during the year ended December 31, 1996, resulted from
the sale of two self-storage facilities from the Operating Partnership's
industrial portfolio.
Gain on Collection of Mortgage Loan Receivable. The gain on collection of
mortgage loan receivable of $652,000 during the year ended December 31, 1997
resulted from the collection of the Hovpark mortgage loan receivable which had a
net carrying value of $6,700,000. The payoff amount totaled $6,863,000 in cash,
plus a $500,000 note receivable, which, net of legal costs, resulted in a gain
of $652,000.
Property Operating Expenses. Property operating expenses increased $15,169,000,
or 264%, to $20,904,000 for the year ended December 31, 1997, from $5,735,000
for the year ended December 31, 1996. This increase represents property
operating expenses attributable to the 1996 Acquisitions and the 1997
Acquisitions.
General and Administrative Expenses. General and administrative expenses
increased $2,512,000, or 169%, to $4,002,000 for the year ended December 31,
1997, from $1,490,000 for the year ended December 31, 1996. The increase is
primarily due to increased salary and overhead costs resulting from the 1996
Acquisitions and the 1997 Acquisitions. As a percentage of rental revenue,
general and administrative expenses actually decreased from 8.3% for the year
ended December 31, 1996 to 6.5% for the year ended December 31, 1997.
Depreciation and Amortization. Depreciation and amortization increased
$10,246,000, or 224%, to $14,829,000 for the year ended December 31, 1997, from
$4,583,000 for the year ended December 31, 1996. The increase is primarily due
to depreciation and amortization associated with the 1996 Acquisitions and the
1997 Acquisitions.
Interest Expense. Interest expense increased $5,755,000, or 147%, to $9,668,000
for the year ended December 31, 1997, from $3,913,000 for the year ended
December 31, 1996. Substantially all of the increase was the result of higher
average borrowings during the year ended December 31, 1997, as compared to the
year ended December 31, 1996, due to new debt and the assumption of debt related
to the 1996 Acquisitions and the 1997 Acquisitions.
Consolidation Costs. Consolidation costs in 1996 consist of the costs associated
with preparing, printing and mailing the Prospectus/Consent Solicitation
Statement and other documents related to the Consolidation, and all other costs
incurred in the forwarding of the Prospectus/Consent Solicitation Statement to
investors.
Litigation Costs. Litigation costs consist of the legal fees incurred in
connection with defending two class action complaints filed by investors in
certain of the GRT Predecessor Entities as well as an accrual for the proposed
settlement in one case.
Loss on early extinguishment of debt. Loss on early extinguishment of debt of
$843,000 during the year ended December 31, 1997, resulted from the write-off of
unamortized loan fees related to a $50 million secured line of credit which was
replaced with a new $250 million unsecured line of credit (the "Credit
Facility") from a commercial bank. Loss on early extinguishment of debt of
$186,000 during the year ended December 31, 1996, resulted from the write-off of
unamortized loan fees related to a $10,000,000 line of credit from Imperial Bank
which was paid-off with proceeds from a $50 million secured line of credit from
a commercial bank.
Page 21 of 73
<PAGE>
Liquidity and Capital Resources
Cash Flows
For the year ended December 31, 1998, cash provided by operating activities
increased by $68,278 to $88,129 as compared to $19,851 in 1997. The increase is
primarily due to an increase in net income (before depreciation and amortization
and net gain on sales of real estate assets and collection of mortgage loan
receivable) of $63,061,000 due to the 1997 Acquisitions and 1998 Acquisitions.
Cash used for investing activities increased by $44,670,000 to $614,043,000 for
the year ended December 31, 1998, as compared to $569,373,000 in 1997. The
increase is primarily due to the 1998 Acquisitions, investments in development
and additions to mortgage loans receivable. This increase was partially offset
by the collection of a mortgage loan receivable in 1997 and the proceeds from
the 1998 sales of real estate assets. Cash provided by financing activities
decreased by $26,144 to $526,263 for the year ended December 31, 1998, as
compared to $552,407 in 1997. This change was primarily due to a decrease in
contributions from the Company of the net proceeds from the issuance of stock.
In 1998, the Company completed one offering of Preferred Stock (as discussed
below) as compared to three offerings of Common Stock in 1997. The majority of
this decrease is offset by an increase in proceeds from new debt.
The Operating Partnership expects to meets its short-term liquidity requirements
generally through its working capital, its Credit Facility (as defined below)
and cash generated by operations. The Operating Partnership believes that its
cash generated by operations will be adequate to meet operating requirements and
to make distributions in both the short and the long-term. In addition to cash
generated by operations, the Credit Facility provides for working capital
advances. However, there can be no assurance that the Operating Partnership's
results of operations will not fluctuate in the future and at times affect (i)
its ability to meet its operating requirements and (ii) the amount of its
distributions.
The Operating Partnership's principal sources of funding for acquisitions,
development, expansion and renovation of properties include an unsecured Credit
Facility, permanent secured debt financing, public unsecured debt financing,
contributions from the Company, privately placed financing, the issuance of
Operating Partnership units and cash flow provided by operations.
Mortgage Loans Receivable
Mortgage loans receivable increased from $3,692,000 at December 31, 1997, to
$42,420,000 at December 31, 1998. This increase was primarily due to a loan made
by the Operating Partnership under a development alliance (as discussed below)
which had an outstanding balance (including accrued interest) of $35,336,000 at
December 31, 1998, and a $3,600,000 loan made by the Operating Partnership to
the buyer of one of the hotel properties.
Secured and Unsecured Financing
Mortgage loans payable increased from $148,139,000 at December 31, 1997, to
$708,578,000 at December 31, 1998. This increase resulted from the assumption of
mortgage loans totaling approximately $358.9 million in connection with the 1998
Acquisitions and new financing of approximately $248.8 million (as discussed
below). These increases were partially offset by the payoff of approximately
$42.1 million of mortgage loans in connection with 1998 sales of properties and
refinancing of debt, and scheduled principal payments of approximately $6.5
million on other mortgage debt.
The Operating Partnership has an unsecured line of credit provided by a
commercial bank (the "Credit Facility"). Outstanding borrowings under the Credit
Facility decreased from $80,160,000 at December 31, 1997, to $63,519,000 at
December 31, 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 (discussed below). In December 1998, due in part to an
overall slowing of acquisition activity, the Operating Partnership reduced its
Credit Facility from $250 million to $100 million. As part of the modification,
certain covenants that relate to the Operating Partnership's development
activity were changed and the interest rate was modified to LIBOR plus 1.38% to
1.75%. This rate is an increase over the previous rate of LIBOR plus 1.10% to
1.30% which was a direct result of increased credit spreads in the market.
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<PAGE>
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 Senior Notes
(discussed below).
In June 1998, the Operating Partnership obtained a $150 million unsecured loan
from a commercial bank (the "Bridge Loan") which had a variable interest rate of
LIBOR plus 1.3%, and 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 $248.8 million financing discussed below.
In October 1998, the Operating Partnership obtained $248.8 million of financing
which has a term of ten years, bears interest at a fixed rate of 6.125%
(effective interest rate of 6.50%) and is secured by 35 properties. The proceeds
were used to retire the $150 million Bridge Loan which had a December 31, 1998
maturity date, to pay off four mortgage loans and to reduce the outstanding
balance of the Credit Facility.
At December 31, 1998, the Operating Partnership's total indebtedness included
fixed-rate debt of $733,348,000 (including $390,461,000 subject to
cross-collateralization) and floating-rate indebtedness of $188,749,000
(including $114,950,000 subject to cross-collateralization). Approximately 61%
of the Operating Partnership's total assets, comprising 114 properties, is
encumbered by debt at December 31, 1998.
It is the Operating Partnership's policy to manage its exposure to fluctuations
in market interest rates through the use of fixed rate debt instruments to the
extent possible. At December 31, 1998, approximately 20% of the Operating
Partnership's outstanding debt, including amounts borrowed under the Credit
Facility, were subject to variable rates. The Operating Partnership may, from
time to time, enter into interest rate protection agreements intended to hedge
the cost of new borrowings that are reasonably assured of completion. It is not
the Operating Partnership's policy to engage in hedging activities for
previously outstanding debt instruments or for speculative purposes. At December
31, 1998, the Operating Partnership was not a party to any open interest rate
protection agreements.
Equity and Debt Offerings
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" or the "January 1998 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 Credit Facility,
to fund certain subsequent property acquisitions and for general corporate
purposes.
In March 1998, the Operating Partnership issued $150 million of unsecured 7.625%
Series A Senior Notes (the "Notes") in an unregistered 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"). The form and term of the New Notes are substantially identical to the
Old Notes in all material respects, except that the New Notes are registered
under the Securities Act, and therefore are not subject to certain transfer
restrictions, registration rights and related special interest provisions
applicable to the Old Notes.
In January 1999, the Operating Partnership and the Company filed a shelf
registration statement with the SEC (the "January 1999 Shelf Registration
Statement") to register $300 million of debt securities of the Operating
Partnership and to carry forward the remaining $801.2 million in equity
securities of the Company from a previously filed shelf registration statement
of the Company. The January 1999 Shelf Registration Statement was declared
effective by the SEC on January 25, 1999. Therefore, the Operating Partnership
and the Company have the capacity pursuant to the
Page 23 of 73
<PAGE>
January 1999 Shelf Registration Statement to issue up to $300 million in debt
securities and $801.2 million in equity securities, respectively.
Development Alliances
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 December 31, 1998, the Operating Partnership has advanced
approximately $33 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 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 $35 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 office/flex, industrial and 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-K 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. 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. Some of the factors that could cause
actual results to differ materially are set forth below.
The Limited Availability of and Competition for Real Estate Acquisitions May
Restrict Our Ability to Grow Our growth depends, in part, upon acquisitions. We
cannot be sure that properties will be available for acquisition or, if
available, that we will be able to purchase those properties on favorable terms.
The unavailability of such acquisitions could limit our growth. Furthermore, we
face competition from several other businesses, individuals, fiduciary accounts
and plans and entities in the acquisition, operation and sale of properties.
Some of our competitors are larger than we are and have greater financial
resources than we do. This competition could cause the cost of properties we
wish to purchase to rise. If we are unable to continue to grow through
acquisitions, then our results of operations and financial condition could be
negatively impacted.
Competition for Tenants Could Adversely Affect Our Operations
When space becomes available at our properties, the leases may not be renewed,
the space may not be leased or re-leased, or the terms of the renewal or
re-lease (including the cost of required renovations or concessions to tenants)
may be less favorable to us than the prior lease. We have established annual
property budgets that include estimates of costs for renovation and re-leasing
expenses. We believe that these estimates are reasonable in light of each
property's situation; however, no assurance can be given that these estimates
will sufficiently cover these expenses. If we cannot lease all or substantially
all of the space at our properties promptly, if the rental rates are
significantly lower than expected, or if our reserves for these purposes prove
inadequate, then our results of operations and financial condition could be
negatively impacted.
Page 24 of 73
<PAGE>
Tenants' Defaults Could Adversely Affect Our Operations
Our ability to manage our assets is subject to federal bankruptcy laws and state
laws that limit creditors' rights and remedies available to real property owners
to collect delinquent rents. If a tenant becomes insolvent or bankrupt, we
cannot be sure that we could recover the premises from the tenant promptly or
from a trustee or debtor-in-possession in any bankruptcy proceeding relating to
that tenant. We also cannot be sure that we would receive rent in the proceeding
sufficient to cover our expenses with respect to the premises. If a tenant
becomes bankrupt, the federal bankruptcy code will apply, which in some
instances may restrict the amount and recoverability of our claims against the
tenant. A tenant's default on its obligations to us could adversely affect our
results of operations and financial condition.
Cash Flow May Be Insufficient for Debt Service Requirements
We intend to incur indebtedness in the future, including through borrowings
under our Credit Facility, to finance property acquisitions. As a result, we
expect to be subject to the following risks associated with debt financing
including:
- that interest rates may increase;
- that our cash flow may be insufficient to meet required payments on
- our debt; and that we may be unable to refinance or repay the debt as
it comes due.
Debt Restrictions May Affect Operations and Negatively Affect Our Ability to
Repay Indebtedness at Maturity Our current $100 million unsecured Credit
Facility contains provisions that restrict the amount of distributions the
Company can make. These provisions provide that distributions may not exceed the
lesser of (i) 90% of funds from operations or (ii) the minimum amount that the
Company must distribute to its stockholders in order to avoid federal tax
liability and remain qualified as a REIT. If we cannot obtain acceptable
financing to repay indebtedness at maturity, we may have to sell properties to
repay indebtedness or properties may be foreclosed upon, which could adversely
affect our results of operations, financial condition and ability to service
debt. Also, as of December 31, 1998, approximately $505.4 million of our total
indebtedness included secured mortgages with cross-collateralization provisions.
In the event of a default, the holders of this indebtedness may seek to
foreclose upon properties which are not the primary collateral for their loan.
This may, in turn, accelerate other indebtedness secured by these properties.
Foreclosure of properties would cause a loss to us of income and asset value.
Fluctuations in Interest Rates May Adversely Affect Our Operations
As of December 31, 1998, we had approximately $188.7 million of variable
interest rate indebtedness. Accordingly, an increase in interest rates will
adversely affect our net income and results of operations.
Management of Newly Acquired Properties Could Be Difficult
Since the Consolidation on December 31, 1995, and through December 31, 1998, we
acquired approximately $1.8 billion in properties. To manage these new
properties effectively, we have sought to successfully apply our experience
managing our existing portfolio to expanded markets and to an increased number
of properties. The assimilation of these properties is a continuing process
whose success cannot be assured indefinitely. Should we encounter future
difficulties in managing these newly acquired properties, this could adversely
affect our results of operations and financial condition.
Acquisitions Could Adversely Affect Operations
Consistent with our growth strategy, we are continually pursuing and evaluating
potential acquisition opportunities. From time to time we are actively
considering the possible acquisition of specific properties, which may include
properties managed by GC or owned by affiliated parties. It is possible that one
or more of such possible future acquisitions, if completed, could adversely
affect our results of operations and financial condition.
Page 25 of 73
<PAGE>
Assumption of General Partner Liabilities May Adversely Affect Operations
We and our predecessors have acquired a number of properties by acquiring
interests in partnerships that own the properties or by first acquiring general
partnership interests and acquiring properties from the partnership at a later
date. We may pursue acquisitions in this manner in the future. When we use this
acquisition technique, a subsidiary of the Company may become a general partner.
As a general partner, such subsidiary would become generally liable for the
debts and obligations of the partnership, including debts and obligations that
may be contingent or unknown at the time of the acquisition. In addition, the
Company's subsidiary assumes obligations under the partnership agreements, which
may include obligations to make future contributions for the benefit of other
partners. We undertake detailed due diligence reviews to ascertain the nature
and extent of obligations that the subsidiary will assume when it becomes a
general partner, but we cannot be sure the obligations assumed may exceed our
estimates. Also, we cannot be sure that the assumed liabilities will not have an
adverse effect on our results of operations or financial condition and ability
to service debt. In addition, GC or another subsidiary may enter into management
agreements pursuant to which it assumes certain obligations as a manager of
properties. These obligations may have an adverse effect on such subsidiary's
results of operations or financial condition, which could adversely affect our
results of operations and financial conditions.
Potential Adverse Consequences of Transactions Involving Conflicts of Interest
We have acquired, and from time to time may acquire, properties from
partnerships that Robert Batinovich, our Chairman and Chief Executive Officer,
and Andrew Batinovich, our President and Chief Operating Officer, control, and
in which they and members of their families have substantial interests. These
transactions involve or will involve conflicts of interest. These transactions
also may provide substantial economic benefits to those individuals such as:
- payments or issuances of partnership units in the Operating
Partnership, relief or deferral of tax liabilities, relief of primary
or secondary liability for debt, and reduction in exposure to other
property-related liabilities.
Our policy provides that interested directors may not vote with regard to
transactions in which they have a substantial interest. These transactions may
only be completed if they are approved by a majority of the disinterested
directors, with the interested directors abstaining. Despite this policy and the
presence of appraisals or fairness opinions or review by parties who have no
interest in the transactions, the transactions will not be the product of
arm's-length negotiation. These transactions may not be as favorable to us as
transactions that we negotiate with unrelated parties and they could result in
undue benefit to Robert and Andrew Batinovich and members of their families.
None of these parties has guaranteed that any properties acquired from entities
they control or in which they have a significant interest will be as profitable
as other investments made by us or will not result in losses.
Dependence on Executive Officers
We depend on the efforts of Robert Batinovich, our Chief Executive Officer and
Andrew Batinovich, our President and Chief Operating Officer, and of our other
executive officers. The loss of the services of any of them could have an
adverse effect on our results of operations and financial condition. Both Robert
and Andrew Batinovich have entered into employment agreements with the Company.
Potential Liability Due to Environmental Matters
Under federal, state and local laws relating to protection of the environment
("Environmental Laws"), a current or previous owner or operator of real estate
may be liable for contamination resulting from the presence or discharge of
petroleum products or other hazardous or toxic substances on the property. These
owners may be required to investigate and clean-up the contamination on the
property as well as the contamination which has migrated from the property.
Environmental Laws typically impose liability and clean-up responsibility
without regard to whether the owner or operator knew of, or was responsible for,
the presence of the contamination. This liability may be joint and several
unless the harm is divisible and there is a reasonable basis for allocation of
responsibility. In addition, the owner or operator of a property may be subject
to claims by third parties based on personal injury, property
Page 26 of 73
<PAGE>
damage and/or other costs, including investigation and clean-up costs, resulting
from environmental contamination. Environmental Laws may also impose
restrictions on the manner in which a property may be used or transferred or in
which businesses may be operated. These restrictions may require expenditures.
Under the Environmental Laws, any person who arranges for the transportation,
disposal or treatment of hazardous or toxic substances may also be liable for
the costs of investigation or clean-up of those substances at the disposal or
treatment facility, whether or not the facility is or ever was owned or operated
by that person.
Tenants of our properties generally are required by their leases to operate in
compliance with all applicable Environmental Laws, and to indemnify us against
any environmental liability arising from their activities on the properties.
However, we could be subject to environmental liability relating to our
management of the properties or strict liability by virtue of our ownership
interest in the properties. Also tenants may not satisfy their indemnification
obligations under the leases. We are also subject to the risk that:
- any environmental assessments of our properties, properties being
considered for acquisition, or the properties owned by the partnerships
managed by GC may not have revealed all potential environmental
liabilities,
- any prior owner or prior or current operator of such properties may
have created an environmental condition not known to us, or
- an environmental condition may otherwise exist as to any one or more
of such properties.
Any one of these conditions could have an adverse effect on our results of
operations and financial condition or ability to service debt, either directly
(with respect to our properties), or indirectly (with respect to properties
owned by partnerships managed by GC). Any condition adversely affecting the
financial condition of GC could adversely affect us by diminishing the value of
our interest in GC. Moreover, future environmental laws, ordinances or
regulations may have an adverse effect on our results of operations, financial
condition and ability to service debt. Also, the current environmental condition
of those properties may be affected by tenants and occupants of the properties,
by the condition of land or operations in the vicinity of the properties (such
as the presence of underground storage tanks), or by third parties unrelated to
us.
Environmental Assessments and Potential Liability Due to Asbestos-Containing
Materials
Environmental Laws also govern the presence, maintenance and removal of
asbestos-containing building materials. These laws require that
asbestos-containing building materials be properly managed and maintained and
that those who may come into contact with asbestos-containing building materials
be adequately informed and trained. They also require that special precautions,
including removal or other abatement, be undertaken in the event
asbestos-containing building materials is disturbed during renovation or
demolition of a building. These laws may impose fines and penalties on building
owners or operators for failure to comply with these requirements. They also may
allow third parties to seek recovery from owners or operators for personal
injury associated with exposure to asbestos fibers.
All of the properties that we presently own have been subject to Phase I
environmental assessments by independent environmental consultants. Some of the
Phase I environmental assessments recommended further investigations in the form
of Phase II environmental assessments, including soil and groundwater sampling.
We have completed all of these investigations or are in the process of
completing them. Certain of our properties have been found to contain
asbestos-containing building materials. We believe that these materials have
been adequately contained and we have implemented an asbestos-containing
building materials operations and maintenance program for the properties found
to contain asbestos-containing building materials.
Some, but not all, of the properties owned by partnerships managed by GC have
been subject to Phase I environmental assessments by independent environmental
consultants. GC determines on a case-by-case basis whether to obtain Phase I
environmental assessments on these properties and whether to undertake further
investigation or remediation. Certain of these properties contain
asbestos-containing building materials. In each case GC believes that these
materials have been adequately contained and has implemented an
asbestos-containing
Page 27 of 73
<PAGE>
building materials operations and maintenance program has been implemented for
the properties found to contain asbestos-containing building materials.
Potential Environmental Liability Resulting From Underground Storage Tanks
Some of our properties, as well as properties that we have previously owned, are
leased or have been leased to owners or operators of businesses that use, store
or otherwise handle petroleum products or other hazardous or toxic substances.
These businesses include dry cleaners that operate on-site dry cleaning plants
and auto care centers. Some of these properties contain, or may have contained,
underground storage tanks for the storage of petroleum products and other
hazardous or toxic substances. These operations create a potential for the
release of those substances. Some of our properties are adjacent to or near
other properties that have contained or currently contain underground storage
tanks used to store petroleum products or other hazardous or toxic substances.
Several of our properties have been contaminated with these substances from
on-site operations or operations on adjacent or nearby properties. In addition,
certain of our properties are on, or are adjacent to or near other properties
upon which others, including former owners or tenants of the properties, have
engaged or may engage in activities that may release petroleum products or other
hazardous or toxic substances.
Environmental Liabilities May Adversely Affect Operating Costs and Ability to
Borrow
The obligation to pay for the cost of complying with existing Environmental Laws
as well as the cost of complying with future legislation may affect our
operating costs. In addition, the presence of petroleum products or other
hazardous or toxic substances at any of our properties, or the failure to
remediate those properties properly, may adversely affect our ability to borrow
by using those properties as collateral. The cost of defending against claims of
liability and the cost of complying with Environmental Laws, including
investigation or clean-up of contaminated property, could materially adversely
affect our results of operations and financial condition.
General Risks of Ownership of Real Estate
We are subject to risks generally incidental to the ownership of real estate.
These risks include:
- changes in general economic or local conditions;
- changes in supply of or demand for similar or competing properties in
an area
- the impact of environmental protection laws;
- changes in interest rates and availability of financing which may
render the sale or financing of a property difficult or unattractive;
- changes in tax, real estate and zoning laws; and
- the creation of mechanics' liens or similar encumbrances placed on the
property by a lessee or other parties without our knowledge and
consent.
Should any of these events occur, our results of operations and financial
condition could be adversely affected.
General Risks Associated With Management, Leasing and Brokerage Contracts
We are subject to the risks generally associated with the property management,
leasing and brokerage businesses. These risks include the risk that:
- management contracts or service agreements may be terminated;
- contracts will not be renewed upon expiration or will not be renewed
on terms consistent with current terms; and
- leasing and brokerage activity generally may decline.
In addition, our acquisition of properties from partnerships managed by GC or
another subsidiary could result in a decrease in revenues to such subsidiary and
a corresponding decrease in dividends received by us from such subsidiary. Each
of these developments could have an adverse effect on our results of operations
and financial condition.
Page 28 of 73
<PAGE>
Uninsured Losses May Adversely Affect Operations
We, or in certain instances, tenants of the properties, carry comprehensive
liability, fire and extended coverage with respect to the properties. This
coverage has policy specification and insured limits customarily carried for
similar properties. However, certain types of losses (such as from earthquakes
and floods) may be either uninsurable or not economically insurable. Further,
certain of the properties are located in areas that are subject to earthquake
activity and floods. Should a property sustain damage as a result of an
earthquake or flood, we may incur losses due to insurance deductibles,
co-payments on insured losses or uninsured losses. Should an uninsured loss
occur, we could lose some or all of our capital investment, cash flow and
anticipated profits related to one or more properties. This could have an
adverse effect on our results of operations and financial condition.
Illiquidity of Real Estate May Limit Our Ability to Vary Our Portfolio
Real estate investments are relatively illiquid and, therefore, will tend to
limit our ability to vary our portfolio promptly in response to changes in
economic or other conditions. In addition, the Internal Revenue Code of 1986, as
amended (the "Code"), and individual agreements with sellers of properties place
limits on our ability to sell properties. Eighty-five of our properties were
acquired on terms and conditions under which they can be disposed of only in a
like-kind exchange or other non-taxable transaction. The agreed upon time
periods for these restrictions on dispositions vary from transaction to
transaction.
Potential Liability Under the Americans With Disabilities Act
As of January 26, 1992, all of our properties were required to be in compliance
with the Americans With Disabilities Act. The Americans With Disabilities Act
generally requires that places of public accommodation be made accessible to
people with disabilities to the extent readily achievable. Compliance with the
Americans With Disabilities Act requirements could require removal of access
barriers. Non-compliance could result in imposition of fines by the federal
government, an award of damages to private litigants and/or a court order to
remove access barriers. Because of the limited history of the Americans With
Disabilities Act, the impact of its application to our properties, including the
extent and timing of required renovations, is uncertain. Pursuant to lease
agreements with tenants in certain of the "single-tenant" properties, the
tenants are obligated to comply with the Americans With Disabilities Act
provisions. If our costs are greater than anticipated or tenants are unable to
meet their obligations, our results of operations and financial condition could
be adversely affected.
Development Alliances May Adversely Affect Operations
We may, from time to time, enter into alliances with selected developers for the
purpose of developing new projects in which these developers have, in the
opinion of management, significant expertise or experience. These projects
generally require various governmental and other approvals, the receipt of which
cannot be assured. These development activities also may entail certain risks,
including the risk that:
- management may expend funds on and devote time to projects which may
not come to fruition;
- construction costs of a project may exceed original estimates,
possibly making the project uneconomical;
- occupancy rates and rents at a completed project may be less than
anticipated;
- and expenses at a completed development may be higher than
anticipated.
In addition, the partners in development alliances may have significant control
over the operation of the alliance project. Therefore, these investments may,
under certain circumstances, involve risks such as the possibility that the
partner might:
- become bankrupt;
- have economic or business interests or goals that are inconsistent
with our business interest or goals; or
- be in a position to take action contrary to our instructions or
requests or contrary to our policies or objectives.
Consequently, actions by a partner in a development alliance might subject
property owned by the alliance to additional risk. Although we will seek to
maintain sufficient control of any alliance to permit our objectives to be
achieved, we may be unable to take action without the approval of our
development alliance partners. Conversely,
Page 29 of 73
<PAGE>
our development alliance partners could take actions binding on the alliance
without our consent. In addition, should a partner in a development alliance
become bankrupt we could become liable for the partner's share of the project's
liabilities. These risks may result in a development project adversely affecting
our results of operations and financial condition.
Material Tax Risks
Since 1996, the Company has operated as a REIT under the Code. However, the
Company may not be able to maintain its status as a REIT. To qualify as a REIT,
the Company must satisfy numerous requirements (some on an annual and quarterly
basis) established under highly technical and complex Code provisions. Only
limited judicial or administrative interpretation exists for these provisions
and involves the determination of various factual matters and circumstances not
entirely within the Company's control. The Company receives nonqualifying
management fee income and owns nonqualifying preferred stock in certain
subsidiaries. As a result, it may approach the income and asset test limits
imposed by the Code. There is a risk that the Company may not satisfy these
tests. In order to avoid exceeding the asset test limit, for example, the
Company may have to reduce its interest in its subsidiaries. The Company is
relying on the opinion of its tax counsel regarding its ability to qualify as a
REIT. This legal opinion, however, is not binding on the Internal Revenue
Service ("IRS").
Consequences of Failure to Qualify as a REIT
If the Company fails to qualify as a REIT in any taxable year, the Company would
be subject to federal income tax on its taxable income at corporate rates. In
addition, the Company also may be disqualified from treatment as a REIT for the
four taxable years following the year in which the Company failed to qualify.
This would reduce its net earnings available for investment or distribution to
stockholders because of the additional tax liability. In addition, the Company
would no longer be required to make distributions to stockholders.
Even if the Company continues to qualify as a REIT, it will be subject to
certain federal, state and local taxes on its income and property.
Possible Changes in Tax Laws; Effect on the Market Value of Real Estate
Investments
Income tax treatment of REITs may be modified by legislative, judicial or
administrative action at any time. These changes may be applied to past as well
as future operations. Legislation, regulations, administrative interpretations
or court decisions may significantly change the tax laws with respect to (1) the
qualification as a REIT or (2) the federal income tax consequences of this
qualification. In addition, the changes might also indirectly affect the market
value of all real estate investments, and consequently, the Company's ability to
realize its investment objectives.
Additional Capital Requirements; Possible Adverse Effects on Holders of Equity
Our ability to continue our growth pattern established in 1996-1998, which was
funded largely through the raising of equity capital, depends in large part upon
our ability to raise additional capital in the future on satisfactory terms. If
we raise additional capital through the issuance of additional equity
securities, or securities convertible into or exercisable for equity securities,
the interests of holders of the Company's shares of Common Stock could be
diluted. Likewise, the Company's Board of Directors is authorized to issue
Preferred Stock and to determine the rights of the Preferred Stock. Accordingly,
the Board of Directors may authorize the issuance of Preferred Stock with rights
which may dilute or otherwise adversely affect the interests of holders of the
Company's shares of Common Stock. If we raise additional capital through debt
financing, we will be subject to the risks described below, among others.
Our Indebtedness Restrictions May Adversely Affect Our Ability to Incur
Indebtedness
The Company's organizational documents limit our ability to incur additional
debt if the total debt, including the additional debt, would exceed 50% of the
"Borrowing Base." This debt limitation in the Company's Charter can only be
amended by an affirmative vote of the majority of all outstanding stock entitled
to vote on such amendment. The term "Borrowing Base" is defined as the greater
of Fair Market Value or Total Market Capitalization. Fair Market Value is based
upon the value of our assets as determined by an independent appraiser. Total
Market Capitalization is the sum of the market value of the Company's
outstanding capital stock, including shares issuable on exercise of redemption
options by holders of Operating Partnership units, plus debt. An exception is
made for
Page 30 of 73
<PAGE>
refinancings and borrowings required to make distributions to maintain the
Company's status as a REIT. In light of these debt restrictions, it should be
noted that a change in the value of the Company's common stock could affect the
Borrowing Base, and therefore our ability to incur additional indebtedness, even
though such change in the common stock's value is unrelated to our liquidity.
Limitation on Ownership of Common Stock And Stockholder's Rights Plan May
Preclude Acquisition of Control Provisions of the Company's Charter are designed
to assist it in maintaining its qualification as a REIT under the Code by
preventing concentrated ownership of the Company which might jeopardize REIT
qualification. Among other things, these provisions provide that:
- any transfer or acquisition of the Company's common or preferred stock
that would result in its disqualification as a REIT under the Code will
be void; and
- if any person attempts to acquire shares of the Company's common or
preferred stock that after the acquisition would cause the person to
own an amount of common stock and preferred stock in excess of a
predetermined limit, such acquisitions would be void.
Ownership is determined by operation of certain attribution rules set out in the
Code. Pursuant to Board action, the limit currently is 9.9% of the value of the
outstanding shares of common stock and preferred stock (the "Ownership
Limitation"). The common stock or preferred stock the transfer of which would
cause any person to violate the Ownership Limitation, is referred to as the
"Excess Shares." A transfer that would violate the Ownership Limitation will be
void and the common stock or preferred stock subject to the transfer will
automatically be transferred to an unaffiliated trustee for the benefit of a
charitable organization designated by the Board of Directors until sold by the
trustee to a third party or purchased by the Company. This limitation on the
ownership of common stock and preferred stock may preclude the acquisition of
control of the Company by a third party without the consent of the Board of
Directors. If the Board of Directors waives the Ownership Limitation for any
person, the Ownership Limitation will be proportionally and automatically
reduced with regard to all other persons such that no five persons may own more
than 50% of the value of the common stock and preferred stock. Certain other
provisions contained in the Company's Charter and Bylaws may also have the
effect of discouraging a third party from making an acquisition proposal for the
Company and may thereby inhibit a change in control in the Company even if a
change in control would be in the best interests of the stockholders.
In addition, in July 1998, the Board of Directors adopted a stockholder rights
plan. Under the plan, the Company declared a dividend of rights on its common
stock. The rights issued under the plan will be triggered, with certain
exceptions, if and when any person or group acquires, or commences a tender
offer to acquire, 15% or more of the Company's shares. The rights plan is
intended to prevent abusive hostile takeover attempts by requiring a potential
acquirer to negotiate the terms of an acquisition with the Board of Directors.
However, it could have the effect of deterring or preventing an acquisition of
the Company, even if a majority of our stockholders would be in favor of such
acquisition, and could also have the effect of making it more difficult for a
person or group to gain control of the Company or to change existing management.
Losses Relating to Consolidation
The Company was created through the merger of eight partnerships and a
corporation (the "Consolidation"). Prior to the Consolidation, two lawsuits were
filed in 1995 contesting the fairness of the Consolidation, one in California
State court and one in federal court. The Company has been named as a defendant
in each of the suits. The complaints in both actions alleged, among other
things, breaches by the defendants of fiduciary duties and inadequate
disclosures. The California State court action was settled and, upon appeal, the
settlement was affirmed by the State Court of Appeals on February 17, 1998. The
objectors petitioned the California Supreme Court for review, which was denied
on May 21, 1998. On August 18, 1998, the objectors filed with the United States
Supreme Court a petition for writ of certiorari. On September 18, 1998, the
defendants filed a brief in opposition to the objectors' petition for writ of
certiorari, and on September 25, 1998, the objectors filed a reply in support of
their petition. The United States Supreme Court has not yet ruled on the
petition for writ of certiorari. Pursuant to the terms of the settlement in the
California State court action, pending appeal, we have paid one-third of the
Page 31 of 73
<PAGE>
$855,000 settlement amount and the remaining two-thirds are being held in
escrow. In the federal court action, the court in December of 1995 deferred all
further proceedings pending a ruling in the California State court action. The
federal court action has been voluntarily stayed pending final outcome of the
California State court action. We believe that it is very unlikely that this
litigation would result in a liability that would exceed our accrued liability
by a material amount. However, given the inherent uncertainties of litigation,
we cannot be sure that the ultimate outcomes of these actions will be favorable
to us.
From time to time, the Operating Partnership and the Company are involved in
other litigation arising out of their business activities. Certain other claims
and lawsuits have arisen against the Operating Partnership and the Company in
their normal course of business. It is possible that this litigation and the
other litigation previously described could result in significant losses in
excess of amounts reserved, which could have an adverse effect on their results
of operations and financial condition.
Uncertainty Due to the Board of Directors' Ability to Change Investment Policies
The Board of Directors may change the Company's investment policies without a
vote of the stockholders. If the Company's investment policies change, the risks
and potential rewards of an investment in its shares may also change. In
addition, the methods of implementing the Company's investment policies may vary
as new investment techniques are developed.
Effect of Market Interest Rates on Price of Common Stock
The annual yield on the price paid for shares of the Company's common stock from
distributions by the Company may influence the market price of the shares of the
Company's common stock in public markets. An increase in market interest rates
may lead prospective purchasers of the Company's common stock to seek a higher
annual yield from their investments. This may adversely affect the market price
of the Company's common stock.
Shares Available for Future Sale
The Company cannot predict the effect, if any, that future sales of shares of
its common stock or future conversions or exercises of securities for future
sales will have on the market price of the Company's common stock. Sales of
substantial amounts of the Company's common stock, or the perception that such
sales could occur, may adversely affect the prevailing market price for the
Company's common stock.
Impact of Year 2000 Compliance Costs on Operations
State of Readiness. We use 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 that we believe are 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.
- 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 that
we believe are called for under the circumstances, based on available
information and a reasonable level of inquiry and
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<PAGE>
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. We
expect such contingency plans to be completed during 1999.
Item 7A. Qualitative and Quantitative Information About Market Risk
Interest Rates
The Operating Partnership's primary market risk exposure is to changes in
interest rates obtainable on its mortgage loans receivable and its secured and
unsecured borrowings. The Operating Partnership does not believe that changes in
market interest rates will have a material impact on the performance or fair
value of its portfolio of mortgage loans receivable.
It is the Operating Partnership's policy to manage its exposure to fluctuations
in market interest rates for its borrowings through the use of fixed rate debt
instruments to the extent that reasonably favorable rates are obtainable with
such arrangements. Approximately 20% and 38% of the Operating Partnership's
outstanding debt, including amounts borrowed under the Credit Facility, were
subject to variable rates at December 31, 1998 and 1997, respectively. In
addition, the average interest rate on the Operating Partnership's debt
decreased from 7.49% at December 31, 1997 to 7.08% at December 31, 1998. The
Operating Partnership reviews interest rate exposure in the portfolio quarterly
in an effort to minimize the risk of interest rate fluctuations. The Operating
Partnership does not have any other material market-sensitive financial
instruments. It is not the Operating Partnership's policy to engage in hedging
activities for previously outstanding debt instruments or for speculative or
trading purposes.
The Operating Partnership may enter into forward interest rate, or similar,
agreements to hedge specific anticipated debt issuances where managements
believes the risk of adverse changes in market rates is significant. Under a
forward interest rate agreement, if the referenced interest rate increases, the
Operating Partnership is entitled to a receipt in settlement of the agreement
that economically would offset the higher financing cost of the debt issued. If
the referenced interest rate decreases, the Operating Partnership makes payment
in settlement of the agreement, creating an expense that economically would
offset the reduced financing cost of the debt issued. At December 31, 1998, the
Operating Partnership was not a party to any forward interest rate or similar
agreements.
The table below provides information about the Operating Partnership's financial
instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. Weighted average variable
rates are based on rates in effect at the reporting date.
Page 33 of 73
<PAGE>
<TABLE>
<CAPTION>
Expected Maturity Date
-------------------------------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Secured Fixed $ 11,775 $ 63,174 $ 15,857 $ 14,748 $ 38,365 $ 439,429 $ 583,348 $ 583,348
Average interest rate 7.33% 6.89% 7.92% 7.47% 7.64% 6.86% 6.97%
Secured Variable $ 115,074 $ 9,484 $ 24 $ 26 $ 28 $ 594 $ 125,230 $ 125,230
Average interest rate 6.75% 7.45% 7.26% 7.26% 7.26% 7.26% 6.81%
Unsecured Fixed $ -- $ -- $ -- $ -- $ -- $ 150,000 $ 150,000 $ 150,000
Average interest rate -- -- -- -- -- 7.63% 7.63%
Unsecured Variable $ -- $ 63,519 $ -- $ -- $ -- $ -- $ 63,519 $ 63,519
Average interest rate -- 7.40% -- -- -- -- 7.40%
</TABLE>
The Operating Partnership believes that the interest rates given in the table
for fixed rate borrowings approximate the rates the Operating Partnership could
currently obtain for instruments of similar terms and maturities and that the
fair values of such instruments approximate carrying value at December 31, 1998.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this Form 10-K.
See Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company
The information required by Item 10 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 7, 1999.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 7, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 7, 1999.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 7, 1999.
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PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
Page No.
(a) (1) Financial Statements
Report of Independent Public Accountants 37
Consolidated Balance Sheets at December 31, 1998 and 1997 38
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 39
Consolidated Statements of Partners' Equity for the years
ended December 31, 1998, 1997 and 1996 40
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 41
Notes to Consolidated Financial Statements 43
(2) Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation 59
Schedule IV - Mortgage Loans Receivable, Secured by Real Estate 69
(3) Exhibits to Financial Statements
The Exhibit Index attached hereto is hereby incorporated
by reference to this Item. 73
(b) Reports on Form 8-K (incorporated herein by reference)
On October 27, 1998, the Company filed a report on Form 8-K
with respect to Supplemental Information for the quarter ended
September 30, 1998.
On January 27, 1999, the Company filed a report on Form 8-K
with respect to Supplemental Information for the quarter ended
December 31, 1998.
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of GLENBOROUGH PROPERTIES, L.P.:
We have audited the accompanying consolidated balance sheets GLENBOROUGH
PROPERTIES, L.P., as of December 31, 1998 and 1997, and the related consolidated
statements of operations, partners' equity and cash flows for the years ended
December 31, 1998, 1997 and 1996. These consolidated financial statements and
the schedules referred to below are the responsibility of the Operating
Partnership's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of GLENBOROUGH
PROPERTIES, L.P., as of December 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for the years ended December 31, 1998, 1997
and 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying schedules
listed in the index to financial statements and schedules are presented for the
purpose of complying with the Securities and Exchange Commission's rules and are
not a required part of the basic consolidated financial statements. These
schedules have been subjected to the auditing procedures applied in our audits
of the basic consolidated financial statements and, in our opinion, are fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California
March 15, 1999
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<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1997
(in thousands, except unit amounts)
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Rental property, net of accumulated depreciation of
$72,951 and $40,349 in 1998 and 1997, respectively $ 1,720,579 $ 799,501
Real estate held for sale, net of accumulated depreciation
of $9,918 and $864 in 1998 and 1997, respectively 21,860 25,717
Investments in Development 35,131 7,251
Investment in Glenborough Corporation 6,800 8,519
Mortgage loans receivable 42,420 3,692
Cash and cash equivalents 4,019 3,670
Other assets 45,437 16,100
--------------- ---------------
TOTAL ASSETS $ 1,876,246 $ 864,450
=============== ===============
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Mortgage loans $ 708,578 $ 148,139
Unsecured Series A Senior Notes 150,000 --
Unsecured bank line 63,519 80,160
Other liabilities 28,921 12,267
--------------- ---------------
Total liabilities 951,018 240,566
--------------- ---------------
Commitments and contingencies -- --
Partners' Equity:
General partner, 359,090 and 337,018 units issued and
outstanding at December 31, 1998 and 1997, respectively 9,046 6,239
Limited partners, 35,549,914 and 33,364,801 units issued
and outstanding at December 31, 1998 and 1997, respectively
916,182 617,645
--------------- ---------------
Total partners' equity 925,228 623,884
--------------- ---------------
TOTAL LIABILITIES AND PARTNERS'
EQUITY $ 1,876,246 $ 864,450
=============== ===============
See accompanying notes to consolidated financial statements
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
(in thousands, except per share amounts)
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
REVENUE
Rental revenue $ 227,956 $ 61,393 $ 17,943
Fees and reimbursements from affiliates 2,802 719 311
Interest and other income 4,557 1,627 1,070
Equity in earnings of Glenborough Corporation 1,533 1,687 1,571
Net gain on sales of real estate assets 4,796 839 321
Gain on collection of mortgage loan receivable -- 652 --
---------------- ---------------- ----------------
Total revenue 241,644 66,917 21,216
---------------- ---------------- ----------------
EXPENSES
Property operating expenses, including $1,347, $3,028
and $769 paid to the Company in 1998, 1997 and
1996, respectively 75,426 20,904 5,735
General and administrative, including $1,815, $3,382
and $1,120 paid to an affiliate in 1998, 1997 and
1996, respectively 10,682 4,002 1,490
Depreciation and amortization 50,169 14,829 4,583
Interest expense 53,289 9,668 3,913
Loss on interest rate protection agreement 4,323 -- --
Consolidation costs -- -- 6,082
Litigation costs -- -- 1,155
---------------- ---------------- ----------------
Total expenses 193,889 49,403 22,958
---------------- ---------------- ----------------
Income (loss) from operations before extraordinary item 47,755 17,514 (1,742)
Extraordinary item:
Loss on early extinguishment of debt (1,400) (843) (186)
---------------- ---------------- ----------------
Net income (loss) 46,355 16,671 (1,928)
Preferred partner interest distributions (20,620) -- --
================ ================ ================
Net income (loss) available to general and limited partners
$ 25,735 $ 16,671 $ (1,928)
================ ================ ================
Per Partnership Unit Data:
Net income (loss) available to general and limited partners
before extraordinary item $ 0.78 $ 0.92 $ (0.24)
Extraordinary item (0.04) (0.04) (0.03)
---------------- ---------------- ----------------
Net income (loss) available to general and limited partners
$ 0.74 $ 0.88 $ (0.27)
================ ================ ================
Weighted average number of partnership units outstanding
34,968,596 19,025,314 7,104,648
================ ================ ================
See accompanying notes to consolidated financial statements
</TABLE>
Page 39 of 73
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
(in thousands)
General Limited Partners
Partner Total
------------------- ------------------- ------------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ 618 $ 61,237 $ 61,855
Contributions 511 50,594 51,105
Distributions (69) (6,835) (6,904)
Net loss (19) (1,909) (1,928)
------------------- ------------------- ------------------
Balance at December 31, 1996 1,041 103,087 104,128
Contributions 5,283 523,010 528,293
Distributions (252) (24,956) (25,208)
Net income 167 16,504 16,671
------------------- ------------------- ------------------
Balance at December 31, 1997 6,239 617,645 623,884
Contributions 3,316 328,241 331,557
Distributions (765) (75,769) (76,534)
Unrealized loss on marketable securities (1) (33) (34)
Net income 257 46,098 46,355
------------------- ------------------- ------------------
Balance at December 31, 1998 $ 9,046 $ 916,182 $ 925,228
=================== =================== ==================
See accompanying notes to consolidated financial statements
</TABLE>
Page 40 of 73
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 46,355 $ 16,671 $ (1,928)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 50,169 14,829 4,583
Amortization of loan fees, included in
interest expense 1,563 221 193
Equity in earnings of Glenborough Corporation
(1,533) (1,687) (1,571)
Net gain on sales of real estate assets (4,796) (839) (321)
Gain on collection of mortgage loan receivable
-- (652) --
Loss on early extinguishment of debt 1,400 843 186
Consolidation costs -- -- 6,082
Litigation costs -- -- 1,155
Changes in certain assets and liabilities, net ( 5,029) (9,535) (2,652)
--------------- --------------- --------------
Net cash provided by operating activities 88,129 19,851 5,727
--------------- --------------- --------------
Cash flows from investing activities:
Net proceeds from sales of real estate assets 73,339 12,950 2,882
Additions to real estate assets (626,161) (586,965) (62,286)
Investments in Development (25,745) -- --
Additions to mortgage loans receivable (39,613) (1,855) (2,694)
Principal receipts on mortgage loans receivable 885 8,068 4
Investments in Glenborough Corporation -- (3,700) (1,690)
Distributions from Glenborough Corporation 3,252 2,129 1,810
--------------- --------------- --------------
Net cash used for investing activities (614,043) (569,373) (61,974)
--------------- --------------- --------------
Cash flows from financing activities:
Proceeds from borrowings 696,618 467,689 52,599
Payments into lender impound accounts, net (11,061) (281) (564)
Repayment of borrowings (511,696) (375,909) (35,593)
Proceeds from issuance of Series A Senior Notes 150,000 -- --
Partner contributions 278,936 486,116 47,356
Partner distributions (76,534) (25,208) (6,904)
--------------- --------------- --------------
Net cash provided by financing activities 526,263 552,407 56,894
--------------- --------------- --------------
continued
See accompanying notes to consolidated financial statements
</TABLE>
Page 41 of 73
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS-continued
For the years ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Net increase in cash and cash equivalents $ 349 $ 2,885 $ 647
Cash and cash equivalents at beginning of period 3,670 785 138
--------------- --------------- --------------
Cash and cash equivalents at end of period $ 4,019 $ 3,670 $ 785
=============== =============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest (net of capitalized interest of
$1,108 in 1998) $ 46,608 $ 9,373 $ 3,270
=============== =============== ==============
Supplemental disclosure of Non-Cash Investing and Financing
Activities:
Acquisition of real estate through assumption of first
trust deed notes payable $ 358,876 $ 60,628 $ 25,200
=============== =============== ==============
Acquisition of real estate through issuance of shares
of common stock and Operating Partnership units
$ 52,621 $ 42,177 $ 3,749
=============== =============== ==============
Unrealized loss on marketable securities $ (34) $ -- $ --
=============== =============== ==============
See accompanying notes to consolidated financial statements
</TABLE>
Page 42 of 73
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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"), a self-administered and self-managed real
estate investment trust ("REIT"). 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, 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% (87.25%
limited partnership interest as of December 31, 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, leasing, acquisition, expansion and
development of various types of income-producing properties. As of December 31,
1998, the Operating Partnership, directly and through various subsidiaries in
which it owns 99% of the ownership interests, controls a total of 186 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 were not
contributed to the Operating Partnership are (i) its shares of non-voting
preferred stock in Glenborough Hotel Group, (ii) its shares of common stock in
twelve qualified REIT subsidiaries, which produce dividends that are not
material to the Company, and (iii) a 4.05% limited partnership interest in
Glenborough Partners.
As of December 31, 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 "Managed
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").
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
December 31, 1998 and 1997, and the consolidated results of operations and cash
flows of the Operating Partnership for the years ended December 31, 1998, 1997
and 1996. All intercompany transactions, receivables and payables have been
eliminated in consolidation.
Reclassification
Certain prior year balances have been reclassified to conform with the current
year presentation.
Page 43 of 73
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999, and early
adoption is permitted. SFAS No. 133 provides comprehensive guidelines for the
recognition and measurement of derivatives and hedging activities and
specifically requires all derivatives to be recorded on the balance sheet at
fair value. Management is evaluating the effects, if any, that this
pronouncement will have on the Operating Partnership's consolidated financial
position, results of operations and financial statement position.
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 follow:
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 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 such 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.
Page 44 of 73
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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 stockholders' equity and realized gains and losses are included in net
income. As of December 31, 1998, marketable securities with a fair value of
approximately $2,639,000 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. Certain assumed debt instruments have been recorded at a premium
based upon the stated rate on the instrument and the then available borrowing
rates for the Operating Partnership. Cash and cash equivalents consist of demand
deposits and certificates of deposit with financial institutions. The carrying
amount of cash and cash equivalents as well as the mortgage loans receivable
described above, approximates fair value.
Derivative Financial Instruments
The Operating Partnership may use derivative financial instruments in the event
that it believes such instruments will be an effective hedge against
fluctuations in interest rates on a specific anticipated borrowing. Derivative
financial instruments such as forward rate agreements or interest rate swaps may
be used in this capacity. To the extent such instruments do not qualify as
hedges, they will be accounted for on a mark-to-market basis and recorded in
earnings each period as appropriate. The cost of terminated instruments not
qualifying as hedges will be recorded in earnings in the period they are
terminated. Instruments which qualify as hedges upon obtaining the related debt
will be recorded as a premium or discount on the related debt principal and
amortized into earnings over the life of the debt instrument. If the hedged
instrument is retired early, the unamortized discount or premium will be
included as a component of the calculation of gain or loss on retirement.
At December 31, 1998, the Operating Partnership was not a party to any open
interest rate protection agreements.
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.
Investments in 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. See Note 6 for further discussion.
Revenues
All leases are classified as operating leases. Rental revenue is recognized as
earned over the terms of the related leases.
For the years ended December 31, 1998, 1997 and 1996, no tenants represented 10%
or more of rental revenue of the Operating Partnership.
Fees and reimbursements revenue consists of property management fees, overhead
administration fees, and transaction fees from the acquisition, disposition,
refinancing, leasing and construction supervision of real estate for an
unconsolidated affiliate.
Page 45 of 73
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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.
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.
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 12) 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 years ended December 31, 1998, 1997 and 1996 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
The cost and accumulated depreciation of real estate investments as of December
31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Buildings
and Net Recorded
Improvements Accumulated Value
1998: Land Total Cost Depreciation
------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Office properties $ 92,166 $ 773,018 $ 865,184 $ (35,318) $ 829,866
Office/Flex properties 54,167 251,714 305,881 (11,443) 294,438
Industrial properties 21,329 115,451 136,780 (10,217) 126,563
Retail properties 20,524 72,654 93,178 (8,369) 84,809
Multi-family properties 46,590 350,011 396,601 (8,796) 387,805
Hotel properties 2,756 24,928 27,684 (8,726) 18,958
============= =============== =============== =============== ===============
Total $ 237,532 $ 1,587,776 $ 1,825,308 $ (82,869) $ 1,742,439
============= =============== =============== =============== ===============
1997:
Office properties $ 62,442 $ 282,129 $ 344,571 $ (9,310) $ 335,261
Office/Flex properties 46,496 163,606 210,102 (3,274) 206,828
Industrial properties 20,903 88,802 109,705 (7,503) 102,202
Retail properties 16,687 50,447 67,134 (5,845) 61,289
Multi-family properties 19,512 71,288 90,800 (1,780) 89,020
Hotel properties 5,587 38,532 44,119 (13,501) 30,618
============= =============== =============== =============== ===============
Total $ 171,627 $ 694,804 $ 866,431 $ (41,213) $ 825,218
============= =============== =============== =============== ===============
</TABLE>
In the first quarter of 1998, the Operating Partnership acquired 22 properties
which consisted of approximately 4.2 million rentable square feet of office,
office/flex and industrial space and had aggregate acquisition costs, including
capitalized costs, of approximately $520.4 million. In addition, the Operating
Partnership sold four properties to redeploy capital into properties the
Operating Partnership believes have characteristics more suited to its overall
growth strategy and operating goals. The sold properties included one
office/flex property, two industrial properties and one multi-family property.
These properties were sold for an aggregate sales price of $29,248,000 and
generated an aggregate net gain of approximately $1,374,000.
Page 46 of 73
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
In the second quarter of 1998, the Operating Partnership acquired 35 properties
which consisted of approximately 1.2 million rentable square feet of office,
office/flex, industrial and retail space and 7,206 multi-family units and had
aggregate acquisition costs, including capitalized costs, of approximately
$410.9 million. In addition, the Operating Partnership sold three properties,
including one office/flex property and two hotel properties. These properties
were sold for an aggregate sales price of $9.7 million and generated an
aggregate net gain of approximately $552,000.
In the third quarter of 1998, the Operating Partnership acquired eleven
properties which consisted of approximately 1.2 million rentable square feet of
office, office/flex and industrial space and had aggregate acquisition costs,
including capitalized costs, of approximately $67.3 million. In addition, the
Operating Partnership sold one of three buildings from an office/flex property.
This building was sold for $1.7 million and no gain or loss was recognized upon
the sale.
In the fourth quarter of 1998, the Operating Partnership sold four properties,
including one office property, two industrial properties and one hotel property.
These properties were sold for an aggregate sales price of $16.7 million and
generated an aggregate net gain of approximately $6.4 million.
The Operating Partnership has entered into short-term lease agreements on the
hotel properties located in Arlington, Texas, and Ontario, California, with two
prospective purchasers of these properties. These prospective purchasers have
entered into purchase agreements for these properties, with anticipated closing
dates of March 30, 1999. These leases terminate on the closing date for the sale
of the properties. The net book value of the two hotel properties aggregates to
$7,956,000 at December 31, 1998. The properties secure, in part, a loan to the
Operating Partnership with an outstanding principal balance of $13,220,000 at
December 31, 1998. Net income earned by the Operating Partnership from the two
hotels totaled $429,000, $598,000 and $485,000 in the years ended December 31,
1998, 1997 and 1996, 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 customary closing conditions and the resolution of
litigation relating to the proposed acquisition, to which neither the Operating
Partnership nor the Company is a party.
The Operating Partnership leases its commercial and industrial property under
non-cancelable operating lease agreements. Future minimum rents to be received
as of December 31, 1998 are as follows (in thousands):
Year Ending
December 31,
------------
1999 $ 144,106
2000 120,681
2001 99,952
2002 76,651
2003 56,473
Thereafter 140,058
----------
$ 637,921
==========
Note 4. INVESTMENT IN GLENBOROUGH CORPORATION
The Operating Partnership accounts for its investment in 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
Page 47 of 73
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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 December 31, 1998 and 1997, the Operating Partnership had the following
investment in GC (in thousands):
Investment at December 31, 1996 $ 5,261
Contributions 3,700
Distributions (2,129)
Equity in earnings 1,687
---------
Investment at December 31, 1997 8,519
Distributions (3,252)
Equity in earnings 1,533
---------
Investment at December 31, 1998 $ 6,800
=========
GC's summary condensed balance sheet information as of December 31, 1998 and
1997, and the condensed statements of operations for the years then ended are as
follows (in thousands):
Balance Sheets
As of December 31,
1998 1997
----------- -----------
Investments in management contracts, net $ 6,332 $ 8,108
Investment in real estate joint venture 2,025 --
Other assets 2,329 3,631
=========== ===========
Total assets $ 10,686 $ 11,739
=========== ===========
Notes payable $ 3,525 $ 1,483
Other liabilities 368 1,764
----------- -----------
Total liabilities 3,893 3,247
Stockholders' equity 6,793 8,492
=========== ===========
Total liabilities and stockholders' equity $ 10,686 $ 11,739
=========== ===========
Statements of Operations
For the year ended
December 31,
1998 1997 (1)
----------- -----------
Revenue $ 12,549 $ 15,105
Expenses 10,939 13,331
=========== ===========
Net income (loss) $ 1,610 $ 1,774
=========== ===========
(1)Included in revenues for the year ended December 31, 1997 is a fee of
approximately $1.7 million earned in connection with the disposition of a
managed property owned by a related party.
Note 5. MORTGAGE LOANS RECEIVABLE
The Operating Partnership's mortgage loans receivable consist of the following
as of December 31, 1998 and 1997 (dollars in thousands):
Page 48 of 73
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
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 December 31, 1998, the
Partnership is committed to additional advances totaling $366 for tenant
improvements and other leasing costs. 3,484 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 March 31, 1999,
with an option to extend for 3 months. 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). 35,336 --
--------------- ---------------
Total $ 42,420 $ 3,692
=============== ===============
</TABLE>
In July 1998, 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 $35 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.
Contractually due principal payments of the mortgage loans receivable are as
follows (in thousands):
Year Ending
December 31,
------------
1999 $ 7,084
2000 --
2001 --
2002 --
2003 --
Thereafter 35,336
----------
Total $ 42,420
==========
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 December 31, 1998, the Operating Partnership
has advanced approximately $33 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.
In December 1998, the Operating Partnership sold its investment in a private
REIT for $17.4 million. At the time of sale, the Operating Partnership had a
book value in this investment of $20.5 million which resulted in a net loss of
$3.1 million. In addition, in 1998, the Operating Partnership sold marketable
securities which resulted in total
Page 49 of 73
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
realized losses of approximately $325,000. These losses are included in the net
gain on sales of real estate assets on the accompanying consolidated statement
of operations for the year ended December 31, 1998.
Note 7. SECURED AND UNSECURED LIABILITIES
The Operating Partnership had the following mortgage loans, bank lines, and
notes payable outstanding as of December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Secured loans with various lenders, net of unamortized discount of $6,140, with
a fixed interest rate of 6.125%, monthly principal and interest payments ranging
between $296 and $458, and a maturity date of November 10, 2008. These loans are
secured by 35 properties with an aggregate net carrying value of $408,439 at
December 31, 1998. See below for further discussion. $ 234,871 $ --
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 $110,129
and $111,372 at December 31, 1998 and 1997, respectively. 58,942 59,724
Secured loan with an investment bank with a fixed interest rate of 7.57%,
monthly principal (based upon a 25-year amortization) and interest payments of
$103 and a maturity date of January 1, 2006. The loan is secured by properties
with an aggregate net carrying value of $33,506 and $37,711 at December 31, 1998
and 1997, respectively. In December 1998, a portion of this loan was paid off in
connection with the sales of two properties which secured the loan. 13,220
19,444
Secured loans with various lenders, bearing interest at fixed rates between
6.95% and 9.25% (approximately $53,469 of these loans include an unamortized
premium of approximately $602 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
$447,444 and $66,353 at December 31, 1998 and 1997, respectively. 261,938 30,519
Secured loans with various banks bearing interest at variable rates ranging
between 7.25% and 8.18% at December 31, 1998 (approximately $114,950 of these
loans include an unamortized premium of approximately $1,750 which reduces the
effective interest rate on those instruments to 6.75%), monthly principal and
interest payments ranging between $4 and $790 and maturing at various dates
through May 1, 2017. These loans are secured by properties with an aggregate net
carrying value of $179,438 and $17,246 at December 31, 1998 and
1997, respectively. 125,230 7,806
</TABLE>
Page 50 of 73
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Secured loans with an investment bank, bearing interest at fixed rates between
7.60% and 7.85%, with monthly principal and interest payments ranging between
$11 and $22 and a maturity date of December 1, 2030. These loans are secured by
multi-family properties with an aggregate net carrying value of $19,060 and
$41,862 at December 31, 1998 and 1997, respectively. In 1998, three of these
loans which had outstanding balances totaling $16,136 at December 31, 1997 were
paid off with proceeds from the new $248.8 million loan discussed below. $ 14,377 $ 30,646
Unsecured $100,000 line of credit with a bank ("Credit Facility") with a
variable interest rate of LIBOR plus 1.625% (7.401% at December 31, 1998),
monthly interest only payments and a maturity date of December 22, 2000, with
one option to extend for 10 years. See below for further discussion. 63,519 80,160
Unsecured Series A Senior 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 $ 922,097 $228,299
========= =========
</TABLE>
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 properties as discussed in Note 3. The Interim
Loan was paid off in March 1998 with proceeds from the $150 million of unsecured
Series A Senior Notes as discussed below.
In March 1998, the Operating Partnership issued $150 million of unsecured 7.625%
Series A Senior Notes (the "Notes") in an unregistered 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 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 are 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 December 31, 1998, such secured
arrangements and mortgages aggregated approximately $708.6 million.
In May 1998 (declared effective in November 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"). The form and
term of the New Notes are substantially identical to the Old Notes in all
material respects, except that the New Notes are registered under the Securities
Act, and therefore are not 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 had a variable interest rate of
LIBOR plus 1.3%, and a maturity date of December 31, 1998. Approximately $147.7
million was drawn under the Bridge Loan to fund acquisitions (as discussed in
Note 3), and
Page 51 of 73
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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
below.
In October 1998, the Operating Partnership obtained $248.8 million of financing
which has a term of ten years, bears interest at a fixed rate of 6.125% and was
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 reduce the outstanding balance of the Credit
Facility. In December 1998, approximately $7.4 million of this financing was
paid off and one multi-family property was released as security. This
multi-family property was then used as security for the new $7.5 million loan
discussed below.
In connection with obtaining the $248.8 million of financing discussed above,
the Operating Partnership entered into an interest rate protection agreement
intended to hedge against potential increases in the risk-free interest rate
prior to closing the loan. The Operating Partnership elected to reduce the final
loan amount and the risk-free interest rate that the interest rate protection
agreement was intended to hedge declined during the period of the agreement. As
a result of these factors, the Operating Partnership was required to terminate a
portion of the protection agreement at a loss of $4,323,000, which was recorded
as an operating expense in the fourth quarter of 1998. The $6,244,000 cost of
the remaining portion of the protection agreement, which was terminated upon
closing of the loan, has been recorded as a discount on the outstanding
principal amount of the loan and will be amortized as additional interest
expense over the remaining life.
In December 1998, the Operating Partnership obtained a $7.5 million loan from a
bank which is secured by a multi-family property, bears interest at a variable
rate of prime minus 0.50% (7.25% at December 31, 1998) and has a maturity date
of December 22,2000.
In December 1998, due in part to an overall slowing of acquisition activity, the
Operating Partnership reduced its Credit Facility from $250 million to $100
million. As part of the modification, certain covenants that relate to the
Operating Partnership's development activity were changed and the interest rate
was modified to LIBOR plus 1.38% to 1.75%. This rate is an increase over the
previous rate of LIBOR plus 1.10% to 1.30% which was a direct result of rates
obtainable in the market.
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 December 31, 1998, are as follows (in
thousands):
Year Ending
December 31,
------------
1999 $ 126,849
2000 136,177
2001 15,881
2002 14,774
2003 38,393
Thereafter 590,023
---------
Total $ 922,097
=========
Note 8. RELATED PARTY TRANSACTIONS
Fee and reimbursement income earned by the Operating Partnership from related
entities totaled $2,802,000, $719,000 and $311,000 for the years ended December
31, 1998, 1997 and 1996, respectively, and consisted of property management
fees, asset management fees and other fee income.
Page 52 of 73
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
For the year ended December 31, 1998, the Operating Partnership paid the Company
property and asset management fees of $1,347,000 and $1,815,000, respectively,
which are included in property operating expenses and general and administrative
expenses on the accompanying consolidated statement of operations. In addition,
for the year ended December 31, 1998, the Operating Partnership paid GC property
management fees and salary reimbursements totaling $1,273,000 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. For the years ended December 31, 1997 and 1996, the
Operating Partnership paid the Company property management fees and asset
management fees totaling $6,410,000 and $1,889,000, respectively, which are
included in property operating expenses and general and administrative expenses
on the accompanying consolidated statements of operations.
Note 9. CONSOLIDATION AND LITIGATION COSTS
The consolidation costs included in the Operating Partnership's December 31,
1996 consolidated statement of operations included accounting fees as well as
the costs of mailing and printing the Prospectus/Consent Solicitation Statement,
any supplements thereto or other documents related to the Consolidation, the
costs of the Information Agent, investor brochure, telephone calls,
broker-dealer fact sheets, printing, postage, travel, meetings, legal and other
fees related to the solicitation of consents, as well as reimbursement of costs
incurred by brokers and banks in forwarding the Prospectus/Consent Solicitation
Statement to Investors.
The litigation costs included in the Operating Partnership's December 31, 1996
consolidated statement of operations included the legal fees incurred in
connection with defending two class action complaints filed by investors in
certain of the GRT Predecessor Entities as well as an accrual for the amount of
the settlement that the plaintiff's counsel in one case was requesting be
awarded by the court (see Note 10).
Note 10. COMMITMENTS AND CONTINGENCIES
Environmental Matters. The Operating Partnership follows a policy of monitoring
its properties for the presence of hazardous or toxic substances. The Operating
Partnership is not aware of any environmental liability with respect to the
properties that would have a material adverse effect on the Operating
Partnership's business, assets or results of operations. There can be no
assurance that such a material environmental liability does not exist. The
existence of any such material environmental liability could have an adverse
effect on the Operating Partnership's results of operations and cash flow.
General Uninsured Losses. The Operating Partnership carries comprehensive
liability, fire, flood, extended coverage and rental loss insurance with policy
specifications, limits and deductibles customarily carried for similar
properties. There are, however, certain types of extraordinary losses which may
be either uninsurable, or not economically insurable. Further, certain of the
properties are located in areas that are subject to earthquake activity. Should
a property sustain damage as a result of an earthquake, the Operating
Partnership may incur losses due to insurance deductibles, co-payments on
insured losses or uninsured losses. Should an uninsured loss occur, the
Operating Partnership could lose its investment in, and anticipated profits and
cash flows from, a property.
Litigation. Prior to the completion of the Consolidation, two lawsuits were
filed in 1995 contesting the fairness of the Consolidation, one in California
State court and one in federal court. The complaints in both actions alleged,
among other things, breaches by the defendants of fiduciary duties and
inadequate disclosures. The State court action was settled and, upon appeal, the
settlement was affirmed by the State court on February 17, 1998. 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. Pursuant to the terms
of the settlement in the State court action, pending appeal, the Company has
paid one-third of the $855,000 settlement amount and the remaining two-thirds is
being held in escrow. In the federal action, the court in December of 1995
deferred all further proceedings pending a ruling in the State court action.
Following the State court decision approving the settlement, the defendants
filed a motion to dismiss the federal court action. The Operating Partnership
and the Company believe that it is very unlikely that this
Page 53 of 73
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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 outcomes of these actions will be
favorable to the Operating Partnership and the Company.
Note 11. SEGMENT INFORMATION
The Operating Partnership owns a diverse portfolio of properties comprising six
product types: office, office/flex, industrial, retail, multi-family and hotels.
Each of these product types represents a reportable segment with distinct uses
and tenant types which require the Operating Partnership to employ different
management strategies. Each segment contains properties located in various
regions and markets within the United States. The office portfolio consists
primarily of suburban office buildings. The office/flex portfolio consists of
properties designed for a combination of office and warehouse uses. The
industrial portfolio consists of properties designed for warehouse, distribution
and light manufacturing for single-tenant or multi-tenant use. The retail
portfolio consists primarily of community shopping centers anchored with
national or regional supermarkets or drug stores. The properties in the
multi-family portfolio are apartment buildings with units rented to residential
tenants on either a month-by-month basis or for terms of one year or less. The
Operating Partnership's hotel operations are limited service "all-suite"
properties leased to and operated by third parties.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Operating Partnership evaluates
performance of its property types based on net operating income derived by
subtracting rental expenses and real estate taxes (operating expenses) from
rental revenues. Significant information used by the Operating Partnership for
its reportable segments as of and for the years ended December 31, 1998 and 1997
is as follows (in thousands):
<TABLE>
<CAPTION>
1998 Office Office/Flex Industrial Retail Multi-family Hotel Total
- ----
----------- ------------- ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rental revenue $ 117,746 $ 36,987 $ 16,104 $ 12,072 $ 40,865 $ 4,182 $ 227,956
Property operating expenses 44,775 10,898 3,609 3,840 17,235 967 81,324
=========== ============= =========== =========== ============ ============ =============
Net operating income (NOI) $ 72,971 $ 26,089 $ 12,495 $ 8,232 $ 23,630 $ 3,215 $ 146,632
=========== ============= =========== =========== ============ ============ =============
Real estate assets, net $ 829,866 $ 294,438 $ 126,563 $ 84,809 $ 387,805 $ 18,958 $ 1,742,439
=========== ============= =========== =========== ============ ============ =============
1997
Rental revenue $ 25,071 $ 10,354 $ 7,320 $ 7,224 $ 5,536 $ 5,980 $ 61,485
Property operating expenses 9,986 3,062 1,459 2,183 2,309 1,894 20,893
=========== ============= =========== =========== ============ ============ =============
Net operating income (NOI) $ 15,085 $ 7,292 $ 5,861 $ 5,041 $ 3,227 $ 4,086 $ 40,592
=========== ============= =========== =========== ============ ============ =============
Real estate assets, net $ 335,261 $ 206,828 $ 102,202 $ 61,289 $ 89,020 $ 30,618 $ 825,218
=========== ============= =========== =========== ============ ============ =============
</TABLE>
The following is a reconciliation of segment revenues, income and assets to
consolidated revenues, income and assets for the periods presented above (in
thousands):
1998 1997
---------------- ----------------
Revenues
Total revenue for reportable segments $ 227,956 $ 61,485
Elimination of internal property
management fees -- (92)
Other revenue (1) 13,688 5,524
================ ================
Total consolidated revenues $ 241,644 $ 66,917
================ ================
Page 54 of 73
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
1998 1997
--------------- ---------------
Net Income
NOI for reportable segments $ 146,632 $ 40,592
Elimination of internal property
management fees 5,898 (103)
Unallocated amounts:
Other revenue (1) 13,688 5,524
General and administrative expenses (10,682) (4,002)
Depreciation and amortization (50,169) (14,829)
Interest expense (53,289) (9,668)
Loss on interest rate protection
agreement (4,323) --
================ ===============
Income from operations before
extraordinary item $ 47,755 $ 17,514
================ ===============
Assets
Total assets for reportable segments $ 1,742,439 $ 825,218
Investments in Development 35,131 7,251
Investment in Glenborough Corporation 6,800 8,519
Mortgage loans receivable 42,420 3,692
Cash and cash equivalents 4,019 3,670
Other assets 45,437 16,100
================ ===============
Total consolidated assets $ 1,876,246 $ 864,450
================ ===============
(1) Other revenue includes fee income, interest and other income, equity in
earnings of Glenborough Corporation, net gains on sales of real estate assets
and a gain on collection of mortgage loan receivable.
Note 12. 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 Credit Facility. The remaining proceeds were
used to fund the acquisitions discussed in Note 3 and for working capital.
Following are unaudited pro forma statements of operations of the Operating
Partnership for each of the years ended December 31, 1998 and 1997 giving effect
to the equity and debt offerings, property acquisitions and property
dispositions (including those discussed in Note 3) completed in 1997 and 1998 as
if they had been completed on January 1, 1997 (in thousands except for weighted
average units and per unit amounts):
Page 55 of 73
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
(Unaudited) (Unaudited)
---------------- ----------------
<S> <C> <C>
REVENUE
Rental revenue $ 257,927 $ 233,352
Equity in earnings of Glenborough Corporation 1,428 966
Fees, interest and other income 9,187 5,979
---------------- ----------------
Total Revenue 268,542 240,297
---------------- ----------------
OPERATING EXPENSES
Property operating expenses 86,231 83,138
General and administrative 11,266 7,373
Depreciation and amortization 52,499 48,293
Interest expense 63,935 62,298
Loss on interest rate protection agreement 4,323 -
---------------- ----------------
Total Operating Expenses 218,254 201,102
---------------- ----------------
Net income before preferred partner interest
distributions 50,288 39,195
Preferred partner interest distributions (22,281) (22,281)
---------------- ----------------
Net income available to general and limited
partners $ 28,007 $ 16,914
================ ================
Net income per unit $ 0.78 $ 0.47
================ ================
Weighted average number of partnership units
outstanding 35,909,004 35,909,004
================ ================
</TABLE>
Note 13. SUBSEQUENT EVENTS
In February 1999, the Operating Partnership acquired a 285 unit multi-family
property ("Springs of Indian Creek") located in Carrolton, Texas. The property
is the first phase of a two phase project comprising a total of 519 units. The
234 unit second phase of the project is currently under construction through one
of the Operating Partnership's development alliances and is expected to be
completed in the first quarter of next year. The total acquisition cost,
including capitalized costs of Phase I was approximately $20.8 million
comprising: (i) approximately $14.1 million in assumption of debt and (ii) the
balance in cash.
In February 1999, the Operating Partnership acquired a 1.45-acre parcel
containing 34,500 square feet of industrial buildings in Los Angeles,
California, near the Los Angeles International Airport. The total acquisition
cost, including capitalized costs, was approximately $3.1 million, which was
paid entirely in cash. The property was part of a tax-deferred Section 1031
exchange involving the sale of an office/flex property as discussed below. The
property has been leased to Dollar Rent-a-Car under a 15-year triple-net lease.
In January and February 1999, the Operating Partnership sold six properties,
including five office/flex properties and one retail property. These properties
were sold for an aggregate sales price of approximately $15.9 million and
generated an aggregate net gain of approximately $364,000. Approximately $2.4
million of the net proceeds were deposited into a deferred exchange account and
were applied to the acquisition of land discussed above on a tax-deferred basis
pursuant to Section 1031 of the Internal Revenue Code.
In February 1999, the Company contributed to the Operating Partnership 100% of
its shares of the non-voting preferred stock of Glenborough Hotel Group. In
return, the Operating Partnership issued 67,797 units of partnership interest to
the Company. As a result of this transaction, the only assets of the Company
that were not contributed to the Operating Partnership are (i) its shares of
common stock in twelve qualified REIT subsidiaries, which produce dividends that
are not material to the Company and (ii) a 4.05% limited partnership interest in
Glenborough
Page 56 of 73
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Partners. This transaction will be accounted for as a reorganization of entities
under common control, similar to a pooling of interests. Beginning in 1999, all
periods presented will be restated to give effect to this transaction as if it
occurred on December 31, 1995. The effect of this restatement on the
consolidated financial statements of the Operating Partnership would be (i)
Investment in Glenborough Hotel Group for the years ended December 31, 1998 and
1997 of $2,007,000 and $2,429,000, respectively, and (ii) Equity in earnings
(loss) of Glenborough Hotel Group for the years ended December 31, 1998, 1997
and 1996 of $(219,000), $1,056,000 and $528,000, respectively.
Note 14. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following represents an unaudited summary of quarterly results of operations
for the year ended December 31, 1998 (in thousands, except for weighted average
units and per unit amounts):
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------
March 31, June 30, Sept 30, Dec 31,
1998 1998 1998 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUE
Rental revenue $ 45,963 $ 51,619 $ 65,321 $ 65,053
Fees and reimbursements from affiliates 473 759 1,220 350
Interest and other income 307 246 1,416 2,588
Equity in earnings (loss) of Glenborough
Corporation 111 740 1,038 (356)
Net gain (reduction in prior quarter gain) on
sales of real estate assets 1,446 693 (250) 2,907
-------------- -------------- -------------- --------------
Total revenue 48,300 54,057 68,745 70,542
-------------- -------------- -------------- --------------
EXPENSES
Property operating expenses 15,671 16,265 22,446 21,044
General and administrative 1,866 2,603 3,372 2,841
Depreciation and amortization 9,984 10,934 14,309 14,942
Interest expense 9,145 9,707 17,064 17,373
Loss on interest rate protection agreement -- -- -- 4,323
-------------- -------------- -------------- --------------
Total expenses 36,666 39,509 57,191 60,523
-------------- -------------- -------------- --------------
Income from operations before extraordinary item 11,634 14,548 11,554 10,019
Extraordinary item:
Loss on early extinguishment of debt -- -- -- (1,400)
-------------- -------------- -------------- --------------
Net income 11,634 14,548 11,554 8,619
Preferred partner interest distributions (3,910) (5,570) (5,570) (5,570)
-------------- -------------- -------------- ---------------
Net income after preferred partner interest
distributions $ 7,724 $ 8,978 $ 5,984 $ 3,049
============== ============== ============== ==============
Per Partnership Unit Data:
Net income after preferred partner interest
distributions and before extraordinary item $ 0.23 $ 0.26 $ 0.17 $ 0.12
Extraordinary item -- -- -- (0.04)
--------------- ------------- -------------- --------------
Net income after preferred partner interest
distributions $ 0.23 $ 0.26 $ 0.17 $ 0.08
=============== ============= ============== ==============
Weighted average number of partnership units
outstanding 33,703,270 34,365,125 35,864,869 35,907,054
=============== ============= ============== ==============
</TABLE>
Per unit amounts do not necessarily sum to per unit amounts for the year as
weighted average units outstanding are measured for each period presented,
rather than solely for the entire year.
Page 57 of 73
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Costs Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (4)
Buildings
and
Description Encumbrances Land Improvements Improvements
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tradewinds Financial, AZ $ - $ 304 $ 1,214 $ 47
Vintage Pointe, AZ 2,067 738 2,950 213
400 South El Camino Real, CA (8) 4,000 30,549 3,355
Academy Prof. Center, CA - 481 1,866 100
Centerstone Plaza, CA (6) 6,077 24,265 214
Dallidet Prof. Center, CA - 677 2,703 51
University Tech Center, CA (2) - 2,086 8,046 469
Warner Village Medical, CA - 558 2,232 207
One Gateway Center, CO (9) 470 9,498 195
Buschwood III, FL (8) 1,479 5,890 184
Park Place, FL (8) 1,895 12,982 266
Temple Terrace Bus. Center, FL - 1,788 6,949 24
Ashford Perimeter, GA 21,369 1,174 42,227 158
Powers Ferry Landing East, GA 18,896 2,744 40,600 92
Capitol Center, IA (8) - 11,981 72
Columbia Center II, IL - 208 20,329 237
Embassy Plaza, IL - 436 15,680 457
Oak Brook International, IL (8) 757 11,126 315
Oakbrook Terrace, IL 19,420 552 37,635 154
Crosspoint Four, IN - 394 2,847 56
Meridian Park, IN - 1,296 5,906 117
The Osram Building, IN - 264 4,515 12
Leawood Office Building, KS 4,299 1,124 10,300 59
Blue Ridge Office Building, MA 2,996 734 5,877 164
Bronx Park I, MA - 916 9,104 275
Marlborough Corporate Place, MA - 5,655 55,908 368
The Hartwood Building, MA 2,557 527 5,426 94
Westford Corporate Center, MA (6) 2,091 8,310 55
Montgomery Exec. Center, MD (8) 1,928 7,676 422
(continued)
</TABLE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1998
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Office Properties:
Tradewinds Financial, AZ $ 304 $ 1,261 $ 1,565 $ 110 11/96 1-30 yrs.
Vintage Pointe, AZ 738 3,163 3,901 301 11/96 1-30 yrs.
400 South El Camino Real, CA 4,000 33,904 37,904 1,536 3/98 1-30 yrs.
Academy Prof. Center, CA 481 1,966 2,447 115 4/97 1-30 yrs.
Centerstone Plaza, CA 6,077 24,479 30,556 1,242 7/97 1-30 yrs.
Dallidet Prof. Center, CA 677 2,754 3,431 237 11/96 1-30 yrs.
University Tech Center, CA (2) 2,086 8,515 10,601 444 6/97 1-30 yrs.
Warner Village Medical, CA 558 2,439 2,997 202 10/96 1-30 yrs.
One Gateway Center, CO 470 9,693 10,163 162 7/98 1-30 yrs.
Buschwood III, FL 1,479 6,074 7,553 302 9/97 1-30 yrs.
Park Place, FL 1,895 13,248 15,143 451 1/98 1-30 yrs.
Temple Terrace Bus. Center, FL 1,788 6,973 8,761 290 12/97 1-30 yrs.
Ashford Perimeter, GA 1,174 42,385 43,559 1,416 1/98 1-30 yrs.
Powers Ferry Landing East, GA 2,744 40,692 43,436 1,367 1/98 1-30 yrs.
Capitol Center, IA - 12,053 12,053 401 2/98 1-30 yrs.
Columbia Center II, IL 208 20,566 20,774 707 1/98 1-30 yrs.
Embassy Plaza, IL 436 16,137 16,573 532 1/98 1-30 yrs.
Oak Brook International, IL 757 11,441 12,198 399 1/98 1-30 yrs.
Oakbrook Terrace, IL 552 37,789 38,341 1,246 1/98 1-30 yrs.
Crosspoint Four, IN 394 2,903 3,297 71 4/98 1-30 yrs.
Meridian Park, IN 1,296 6,023 7,319 145 4/98 1-30 yrs.
The Osram Building, IN 264 4,527 4,791 113 4/98 1-30 yrs.
Leawood Office Building, KS 1,124 10,359 11,483 318 3/98 1-30 yrs.
Blue Ridge Office Building, MA 734 6,041 6,775 222 3/98 1-30 yrs.
Bronx Park I, MA 916 9,379 10,295 299 3/98 1-30 yrs.
Marlborough Corporate Place, MA 5,655 56,276 61,931 1,884 1/98 1-30 yrs.
The Hartwood Building, MA 527 5,520 6,047 184 3/98 1-30 yrs.
Westford Corporate Center, MA 2,091 8,365 10,456 488 4/97 1-30 yrs.
Montgomery Exec. Center, MD 1,928 8,098 10,026 428 9/97 1-30 yrs.
(continued)
</TABLE>
Page 58 of 73
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (4)
Buildings
and
Description Encumbrances Land Improvements Improvements
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Office Properties continued:
Rockwall I & II, MD $ - $ 807 $ 47,259 $ 263
Bond Street Building, MI - 716 2,147 311
Riverview Office Tower, MN (6) 4,095 16,333 1,254
University Club Tower, MO - 4,087 14,519 2,535
Woodlands Plaza, MO (6) 1,114 4,426 448
Edinburgh Center, NC (8) 984 14,232 167
One & Three Pacific Place, NE (8) 1,985 18,014 65
One Professional Square, NE - 285 1,142 230
Regency Westpointe, NE (5) (7) 530 3,147 864
25 Independence Blvd., NJ (8) 4,547 18,141 51
Bridgewater Exec. Quarters, NJ 4,433 2,075 7,337 20
Executive Place, NJ - 944 11,347 27
Frontier Exec. Quarters I, NJ (8) 4,200 33,892 242
Frontier Exec. Quarters II, NJ (8) 631 5,091 65
Gatehall, NJ - 1,865 7,427 495
Morristown Medical Offices, NJ - 518 1,832 6
Vreeland Business Ctr., NJ - 1,863 8,714 39
Citibank Park, NV (8) 4,628 18,442 865
Thousand Oaks, TN - 9,741 40,355 962
Post Oak Place, TX - 396 1,579 85
4500 Plaza, UT (5) 788 1,123 4,606 838
2000 Corporate Ridge, VA 20,994 909 41,096 229
700 South Washington, VA (6) 1,981 7,894 53
Cameron Run, VA 10,194 414 18,964 231
Globe Building, WA - 375 1,501 213
- -----------------------------------------------------------------------------------------------------
Office Total 92,166 754,028 18,990
- -----------------------------------------------------------------------------------------------------
(continued)
</TABLE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1998
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Office Properties continued:
Rockwall I & II, MD $ 807 $ 47,522 $ 48,329 $ 1,610 1/98 1-30 yrs.
Bond Street Building, MI 716 2,458 3,174 198 9/96 1-40 yrs.
Riverview Office Tower, MN 4,095 17,587 21,682 1,059 4/97 1-30 yrs.
University Club Tower, MO 4,087 17,054 21,141 1,492 7/96 1-40 yrs.
Woodlands Plaza, MO 1,114 4,874 5,988 353 4/97 1-30 yrs.
Edinburgh Center, NC 984 14,399 15,383 486 1/98 1-30 yrs.
One & Three Pacific Place, NE 1,985 18,079 20,064 452 5/98 1-30 yrs.
One Professional Square, NE 285 1,372 1,657 126 10/96 1-30 yrs.
Regency Westpointe, NE (5) 530 4,011 4,541 1,679 6/87 1-30 yrs.
25 Independence Blvd., NJ 4,547 18,192 22,739 909 9/97 1-30 yrs.
Bridgewater Exec. Quarters, NJ 2,075 7,357 9,432 368 9/97 1-30 yrs.
Executive Place, NJ 944 11,374 12,318 190 8/98 1-30 yrs.
Frontier Exec. Quarters I, NJ 4,200 34,134 38,334 1,702 9/97 1-30 yrs.
Frontier Exec. Quarters II, NJ 631 5,156 5,787 256 9/97 1-30 yrs.
Gatehall, NJ 1,865 7,922 9,787 388 9/97 1-30 yrs.
Morristown Medical Offices, NJ 518 1,838 2,356 92 9/97 1-30 yrs.
Vreeland Business Ctr., NJ 1,863 8,753 10,616 218 6/98 1-30 yrs.
Citibank Park, NV 4,628 19,307 23,935 824 9/97 1-30 yrs.
Thousand Oaks, TN 9,741 41,317 51,058 1,746 12/97 1-30 yrs.
Post Oak Place, TX 396 1,664 2,060 89 9/97 1-30 yrs.
4500 Plaza, UT (5) 1,123 5,444 6,567 2,817 3/86 1-30 yrs.
2000 Corporate Ridge, VA 909 41,325 42,234 1,377 1/98 1-30 yrs.
700 South Washington, VA 1,981 7,947 9,928 465 4/97 1-30 yrs.
Cameron Run, VA 414 19,195 19,609 648 1/98 1-30 yrs.
Globe Building, WA 375 1,714 2,089 162 10/96 1-30 yrs.
- -----------------------------------------------------------------------------------------------------------------------
Office Total 92,166 773,018 865,184 35,318
- -----------------------------------------------------------------------------------------------------------------------
(continued)
</TABLE>
Page 59 of 73
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (4)
Buildings
and
Description Encumbrances Land Improvements Improvements
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Office/Flex Properties:
Baseline Business Park, AZ $ - $ 886 $ 3,527 $ 190
Hoover Industrial, AZ - 322 1,290 80
Magnolia Industrial, AZ - 322 1,241 151
Chatsworth Ind. Park, CA 795 264 1,014 62
Dominguez Industrial, CA - 697 2,662 137
Dunn Way Industrial, CA - 427 1,601 227
Glassell Industrial Center, CA 1,278 704 2,630 228
Kraemer Industrial Park, CA 1,442 401 1,537 106
Monroe Industrial, CA 713 282 1,101 105
Rancho Bernardo, CA - 518 2,072 55
Scripps Terrace, CA - 678 2,685 73
Tierrasanta Research Park, CA (8) 1,303 5,189 727
Upland Industrial, CA - 155 576 81
Gateway Eight, CO (9) 442 3,870 30
Gateway Four, CO (10) 523 3,517 28
Gateway One, CO 2,416 402 3,608 27
Gateway Six, CO (10) 568 5,040 129
Northglenn Bus. Center, CO - 1,335 3,354 37
Valley Business Park, CO - 1,764 7,027 134
Cypress Creek Bus. Center, FL - 876 3,490 525
Fingerhut Business Center, FL - 1,188 3,282 10
Grand Regency Business Ctr., FL - 1,120 4,302 1,082
Lake Point Business Park, FL (6) 1,344 5,343 244
Newport Business Center, FL - 654 2,604 171
Primeco Business Center, FL - 950 3,418 12
Oakbrook Corners, GA (8) 1,057 4,209 98
The Business Park, GA (8) 1,485 5,912 375
Covance Business Center, IN - 1,405 15,109 -
Park 100 - Building 42, IN (5) - 712 3,286 (522)
(continued)
</TABLE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1998
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Baseline Business Park, AZ $ 886 $ 3,717 $ 4,603 $ 193 9/97 1-30 yrs.
Hoover Industrial, AZ 322 1,370 1,692 114 10/96 1-30 yrs.
Magnolia Industrial, AZ 322 1,392 1,714 82 6/97 1-30 yrs.
Chatsworth Ind. Park, CA 264 1,076 1,340 62 4/97 1-30 yrs.
Dominguez Industrial, CA 697 2,799 3,496 166 4/97 1-30 yrs.
Dunn Way Industrial, CA 427 1,828 2,255 112 4/97 1-30 yrs.
Glassell Industrial Center, CA 704 2,858 3,562 166 4/97 1-30 yrs.
Kraemer Industrial Park, CA 401 1,643 2,044 99 4/97 1-30 yrs.
Monroe Industrial, CA 282 1,206 1,488 72 4/97 1-30 yrs.
Rancho Bernardo, CA 518 2,127 2,645 189 10/96 1-30 yrs.
Scripps Terrace, CA 678 2,758 3,436 137 9/97 1-30 yrs.
Tierrasanta Research Park, CA 1,303 5,916 7,219 342 9/97 1-30 yrs.
Upland Industrial, CA 155 657 812 41 4/97 1-30 yrs.
Gateway Eight, CO 442 3,900 4,342 65 7/98 1-30 yrs.
Gateway Four, CO 523 3,545 4,068 59 7/98 1-30 yrs.
Gateway One, CO 402 3,635 4,037 60 7/98 1-30 yrs.
Gateway Six, CO 568 5,169 5,737 97 7/98 1-30 yrs.
Northglenn Bus. Center, CO 1,335 3,391 4,726 141 12/97 1-30 yrs.
Valley Business Park, CO 1,764 7,161 8,925 357 9/97 1-30 yrs.
Cypress Creek Bus. Center, FL 876 4,015 4,891 210 9/97 1-30 yrs.
Fingerhut Business Center, FL 1,188 3,292 4,480 137 12/97 1-30 yrs.
Grand Regency Business Ctr., FL 1,120 5,384 6,504 286 12/97 1-30 yrs.
Lake Point Business Park, FL 1,344 5,587 6,931 345 4/97 1-30 yrs.
Newport Business Center, FL 654 2,775 3,429 142 9/97 1-30 yrs.
Primeco Business Center, FL 950 3,430 4,380 143 12/97 1-30 yrs.
Oakbrook Corners, GA 1,057 4,307 5,364 219 9/97 1-30 yrs.
The Business Park, GA 1,485 6,287 7,772 323 9/97 1-30 yrs.
Covance Business Center, IN 1,405 15,109 16,514 294 7/98 1-30 yrs.
Park 100 - Building 42, IN (5) 712 2,764 3,476 773 10/86 5-25 yrs.
(continued)
</TABLE>
Page 60 of 73
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (4)
Buildings
and
Description Encumbrances Land Improvements Improvements
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Office/Flex Properties continued:
Canton Business Center, MA $ 3,318 $ 796 $ 6,758 $ 29
Fisher-Pierce, MA (6) 718 2,860 115
Columbia Warehouse, MD - 393 1,565 9
Germantown Business Center, MD (8) 1,442 5,753 17
Bryant Lake Business Center, MN (8) 1,907 7,531 751
Riverview Industrial Park, MN - 841 3,348 213
Winnetka Industrial Center, MN - 1,189 4,737 87
Woodlands Tech Center, MO (6) 949 3,773 431
Fairfield Business Quarters, NJ 2,794 817 3,479 67
Fox Hollow Bus. Quarters, NJ - 1,576 2,358 119
Palms Business Center III, NV (8) 3,984 10,207 73
Palms Business Center IV, NV (8) 627 3,272 15
Palms Business Center North, NV (8) 2,492 7,067 43
Palms Business Center South, NV (8) 4,134 9,610 133
Post Palms Business Center, NV - 2,522 9,453 65
Clark Avenue, PA - 649 2,584 20
Lehigh Valley Exec. Campus, PA - 1,748 12,826 210
Valley Forge Corporate Center, PA - 2,614 34,805 126
Walnut Creek Bus. Center, TX 1,371 774 3,093 140
Kent Business Park, WA (8) 1,211 4,822 52
- -------------------------------------------------------------------------------------------------------
Office/Flex Total 54,167 244,397 7,317
- -------------------------------------------------------------------------------------------------------
Industrial Properties:
Fairmont Commerce Center, AZ - 735 2,928 21
Fifth Street Industrial, AZ - 654 2,522 86
Benicia Industrial Park, CA (5) (7) 978 4,787 203
Coronado Industrial, CA (8) 711 2,831 41
East Anaheim Industrial, CA (8) 1,480 3,282 23
(continued)
</TABLE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1998
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Office/Flex Properties continued:
Canton Business Center, MA $ 796 $ 6,787 $ 7,583 $ 233 3/98 1-30 yrs.
Fisher-Pierce, MA 718 2,975 3,693 168 4/97 1-30 yrs.
Columbia Warehouse, MD 393 1,574 1,967 65 10/97 1-30 yrs.
Germantown Business Center, MD 1,442 5,770 7,212 288 9/97 1-30 yrs.
Bryant Lake Business Center, MN 1,907 8,282 10,189 344 11/97 1-30 yrs.
Riverview Industrial Park, MN 841 3,561 4,402 171 9/97 1-30 yrs.
Winnetka Industrial Center, MN 1,189 4,824 6,013 238 9/97 1-30 yrs.
Woodlands Tech Center, MO 949 4,204 5,153 289 4/97 1-30 yrs.
Fairfield Business Quarters, NJ 817 3,546 4,363 174 9/97 1-30 yrs.
Fox Hollow Bus. Quarters, NJ 1,576 2,477 4,053 127 9/97 1-30 yrs.
Palms Business Center III, NV 3,984 10,280 14,264 429 10/97 1-30 yrs.
Palms Business Center IV, NV 627 3,287 3,914 137 10/97 1-30 yrs.
Palms Business Center North, NV 2,492 7,110 9,602 297 10/97 1-30 yrs.
Palms Business Center South, NV 4,134 9,743 13,877 410 10/97 1-30 yrs.
Post Palms Business Center, NV 2,522 9,518 12,040 399 10/97 1-30 yrs.
Clark Avenue, PA 649 2,604 3,253 130 9/97 1-30 yrs.
Lehigh Valley Exec. Campus, PA 1,748 13,036 14,784 436 1/98 1-30 yrs.
Valley Forge Corporate Center, PA 2,614 34,931 37,545 1,173 1/98 1-30 yrs.
Walnut Creek Bus. Center, TX 774 3,233 4,007 262 10/96 1-30 yrs.
Kent Business Park, WA 1,211 4,874 6,085 247 9/97 1-30 yrs.
- ----------------------------------------------------------------------------------------------------------------------
Office/Flex Total 54,167 251,714 305,881 11,443
- ----------------------------------------------------------------------------------------------------------------------
Industrial Properties:
Fairmont Commerce Center, AZ 735 2,949 3,684 123 10/97 1-30 yrs.
Fifth Street Industrial, AZ 654 2,608 3,262 153 6/97 1-30 yrs.
Benicia Industrial Park, CA (5) 978 4,990 5,968 2,034 7/86 1-30 yrs.
Coronado Industrial, CA 711 2,872 3,583 143 9/97 1-30 yrs.
East Anaheim Industrial, CA 1,480 3,305 4,785 138 10/97 1-30 yrs.
(continued)
</TABLE>
Page 61 of 73
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (4)
Buildings
and
Description Encumbrances Land Improvements Improvements
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industrial Properties continued:
Springdale Commerce Center, CA (8) $ 1,030 $ 4,101 $ 74
Gateway Nine, CO $4,764612 4,941 214 612
Gateway Seven, CO (10) 638 5,143 183
Gateway Ten, CO (9) 524 4,762 36
Gateway Three, CO (10) 508 4,704 38
Gateway Two, CO 3,890 561 4,425 35
Burnham Industrial Warehouse, FL - 594 2,366 10
Atlantic Industrial, GA - 634 3,866 (1,278)
Bonnie Lane Business Center, IL - 738 2,938 20
Glenn Avenue Business Center, IL - 565 2,250 10
Navistar International, IL (5) (7) 793 10,941 (4,122)
Wood Dale Business Center, IL - 603 2,403 38
Park 100 - Building 46, IN (5) - - - 211
J.I. Case Equip. Corp., KS (5) - 236 3,264 (1,250)
Flanders Industrial Park, MA - 738 5,634 193
Forest Street Business Center, MA - 227 1,801 27
Southworth-Milton, MA (6) 1,922 7,652 78
Navistar International, MD (5) (7) 356 4,911 (1,879)
Cottontail Distribution Center, NJ9,782 1,616 16,278 68
Eatontown Industrial, NJ - 765 1,963 19
Jencraft Industrial, NJ (8) 1,326 4,975 14
J.I. Case Equip. Corp., TN (5) - 187 2,583 (988)
Mercantile I, TX - 783 3,133 192
Quaker Industrial, TX - 103 412 42
Sea Tac II, WA (5) - 712 1,474 (178)
- -----------------------------------------------------------------------------------------------------
Industrial Total 21,329 123,270 (7,819)
- -----------------------------------------------------------------------------------------------------
(continued)
</TABLE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1998
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Enc Land Improvements Total Depreciation Acquired Over
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Industrial Properties continued:
Springdale Commerce Center, CA $ 1,030 $ 4,175 $ 5,205 $ 206 9/97 1-30 yrs.
Gateway Nine, CO 612 5,155 5,767 103 7/98 1-30 yrs.
Gateway Seven, CO 638 5,326 5,964 88 7/98 1-30 yrs.
Gateway Ten, CO 524 4,798 5,322 80 7/98 1-30 yrs.
Gateway Three, CO 508 4,742 5,250 79 7/98 1-30 yrs.
Gateway Two, CO 561 4,460 5,021 74 7/98 1-30 yrs.
Burnham Industrial Warehouse, FL 594 2,376 2,970 119 9/97 1-30 yrs.
Atlantic Industrial, GA 634 2,588 3,222 120 9/97 1-30 yrs.
Bonnie Lane Business Center, IL 738 2,958 3,696 148 9/97 1-30 yrs.
Glenn Avenue Business Center, IL 565 2,260 2,825 113 9/97 1-30 yrs.
Navistar International, IL (5) 793 6,819 7,612 2,040 3/84 50 yrs.
Wood Dale Business Center, IL 603 2,441 3,044 121 9/97 1-30 yrs.
Park 100 - Building 46, IN (5) - 211 211 135 10/86 5-25 yrs.
J.I. Case Equip. Corp., KS (5) 236 2,014 2,250 598 3/84 50 yrs.
Flanders Industrial Park, MA 738 5,827 6,565 204 3/98 1-30 yrs.
Forest Street Business Center, MA 227 1,828 2,055 56 3/98 1-30 yrs.
Southworth-Milton, MA 1,922 7,730 9,652 449 4/97 1-30 yrs.
Navistar International, MD (5) 356 3,032 3,388 899 3/84 50 yrs.
Cottontail Distribution Center, NJ 1,616 16,346 17,962 409 6/98 1-30 yrs.
Eatontown Industrial, NJ 765 1,982 2,747 98 9/97 1-30 yrs.
Jencraft Industrial, NJ 1,326 4,989 6,315 249 9/97 1-30 yrs.
J.I. Case Equip. Corp., TN (5) 187 1,595 1,782 474 3/84 50 yrs.
Mercantile I, TX 783 3,325 4,108 328 10/96 1-30 yrs.
Quaker Industrial, TX 103 454 557 45 10/96 1-30 yrs.
Sea Tac II, WA (5) 712 1,296 2,008 391 2/86 5-25 yrs.
- -----------------------------------------------------------------------------------------------------------------------
Industrial Total 21,329 115,451 136,780 10,217
- -----------------------------------------------------------------------------------------------------------------------
(continued)
</TABLE>
Page 62 of 73
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (4)
Buildings
and
Description Encumbrances Land Improvements Improvements
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retail Properties:
Park Center, CA (5) $ - $ 1,748 $ 3,296 $ (502)
Sonora Plaza, CA 4,891 1,948 7,781 68
Piedmont Plaza, FL - 1,317 5,233 70
River Run Shopping Ctr., FL - 1,428 5,687 53
Westwood Plaza, FL (5) (7) 2,599 5,110 2,745
Shannon Crossing, GA (5) (7) 2,487 2,075 360
Westbrook Commons, IL (8) 3,067 12,213 495
Broad Ripple Retail Center, IN - 542 3,876 123
Cross Creek Retail Center, IN 5,019 1,516 4,351 144
Geist Retail Centre, IN 4,366 1,012 4,828 182
Woodfield Centre, IN - 765 4,685 187
Goshen Plaza, MD - 994 3,958 26
Auburn North, WA - 1,100 4,397 1,213
- ------------------------------------------------------------------------------------------------------
Retail Total 20,523 67,490 5,164
- ------------------------------------------------------------------------------------------------------
Multi-Family Properties:
Overlook Apartments, AZ (6) 2,274 9,036 181
Aspen Ridge, CO 7,500 983 8,853 55
Stone Ridge at Vinings, GA (11) 1,881 16,942 55
Woodmere Trace, GA (11) 1,002 9,029 25
Crosscreek Apartments, IN 6,287 701 9,042 41
Harcourt Club Apartments, IN 3,800 437 5,389 62
Island Club Apartments, IN 12,097 713 15,596 81
Arrowood Crossing I & II, NC (8) 1,837 7,222 430
The Chase (Commonwealth), NC 3,167 784 3,083 163
The Chase (Monroe), NC (8) 1,033 4,062 117
Sabal Point I, II & III, NC (8) 3,714 14,602 583
Sharonridge I & II, NC 1,744 527 2,071 57
The Courtyard, NC 1,584 438 1,723 85
(continued)
</TABLE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1998
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Retail Properties:
Park Center, CA (5) $ 1,748 $ 2,794 $ 4,542 $ 750 9/86 5-25 yrs.
Sonora Plaza, CA 1,948 7,849 9,797 652 11/96 1-30 yrs.
Piedmont Plaza, FL 1,317 5,303 6,620 311 4/97 1-30 yrs.
River Run Shopping Ctr., FL 1,428 5,740 7,168 289 9/97 1-30 yrs.
Westwood Plaza, FL (5) 2,599 7,855 10,454 2,918 1/88 1-30 yrs.
Shannon Crossing, GA (5) 2,487 2,435 4,922 1,766 10/88 1-30 yrs.
Westbrook Commons, IL 3,067 12,708 15,775 621 9/97 1-30 yrs.
Broad Ripple Retail Center, IN 542 3,999 4,541 97 4/98 1-30 yrs.
Cross Creek Retail Center, IN 1,516 4,495 6,011 111 4/98 1-30 yrs.
Geist Retail Centre, IN 1,012 5,010 6,022 124 4/98 1-30 yrs.
Woodfield Centre, IN 765 4,872 5,637 118 4/98 1-30 yrs.
Goshen Plaza, MD 994 3,984 4,978 199 9/97 1-30 yrs.
Auburn North, WA 1,100 5,610 6,710 413 10/96 1-30 yrs.
- ----------------------------------------------------------------------------------------------------------------------
Retail Total 20,523 72,654 93,177 8,369
- ----------------------------------------------------------------------------------------------------------------------
Multi-Family Properties:
Overlook Apartments, AZ 2,274 9,217 11,491 544 4/97 1-30 yrs.
Aspen Ridge, CO 983 8,908 9,891 152 6/98 1-30 yrs.
Stone Ridge at Vinings, GA 1,881 16,997 18,878 288 6/98 1-30 yrs.
Woodmere Trace, GA 1,002 9,054 10,056 154 6/98 1-30 yrs.
Crosscreek Apartments, IN 701 9,083 9,784 228 4/98 1-30 yrs.
Harcourt Club Apartments, IN 437 5,451 5,888 136 4/98 1-30 yrs.
Island Club Apartments, IN 713 15,677 16,390 393 4/98 1-30 yrs.
Arrowood Crossing I & II, NC 1,837 7,652 9,489 316 12/97 1-30 yrs.
The Chase (Commonwealth), NC 784 3,246 4,030 136 12/97 1-30 yrs.
The Chase (Monroe), NC 1,033 4,179 5,212 177 12/97 1-30 yrs.
Sabal Point I, II & III, NC 3,714 15,185 18,899 634 12/97 1-30 yrs.
Sharonridge I & II, NC 527 2,128 2,655 90 12/97 1-30 yrs.
The Courtyard, NC 438 1,808 2,246 76 12/97 1-30 yrs.
(continued)
</TABLE>
Page 63 of 73
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (4)
Buildings
and
Description Encumbrances Land Improvements Improvements
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Multi-Family Properties continued:
The Landing on Farmhurst, NC $ 3,109 $ 841 $ 3,306 $ 105
The Oaks, NC 2,292 644 2,649 123
Wendover Glen, NC 2,480 597 2,346 186
Willow Glen, NC (8) 823 3,236 150
Sahara Gardens, NV (8) 1,872 7,500 580
Villas De Mission, NV (8) 1,924 7,695 282
Player's Club of Brentwood, TN (8) 800 7,205 52
Bandera Crossing, TX (11) 675 6,077 12
Bear Creek Crossing, TX (11) 627 5,650 17
Cypress Creek Apartments, TX (11) 732 6,591 214
The Hollows, TX (11) 1,390 12,518 35
Hunterwood, TX (11) 563 5,067 27
Hunter's Chase, TX (11) 2,094 18,857 46
Jefferson Creek, TX (12) 1,889 17,017 35
Jefferson Place, TX (12) 2,620 23,598 46
La Costa, TX (12) 2,826 25,453 56
Longspur, TX (11) 1,240 11,165 46
North Park Crossing, TX (11) 1,147 10,332 25
Silver Vale Crossing, TX (11) 1,111 10,006 33
The Park at Woodlake, TX (8) 1,676 15,100 138
Vista Crossing, TX (11) 737 6,643 16
Walnut Creek Crossing, TX (11) 1,286 11,586 20
Willow Brook Crossing, TX (11) 716 6,448 126
Wind River Crossing, TX (11) 1,437 12,939 72
- ------------------------------------------------------------------------------------------------------
Multi-family Total 46,591 345,634 4,377
- ------------------------------------------------------------------------------------------------------
(continued)
</TABLE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1998
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Multi-Family Properties continued:
The Landing on Farmhurst, NC $ 841 $ 3,411 $ 4,252 $ 142 12/97 1-30 yrs.
The Oaks, NC 644 2,772 3,416 115 12/97 1-30 yrs.
Wendover Glen, NC 597 2,532 3,129 108 12/97 1-30 yrs.
Willow Glen, NC 823 3,386 4,209 142 12/97 1-30 yrs.
Sahara Gardens, NV 1,872 8,080 9,952 654 10/96 1-30 yrs.
Villas De Mission, NV 1,924 7,977 9,901 674 10/96 1-30 yrs.
Player's Club of Brentwood, TN 800 7,257 8,057 122 6/98 1-30 yrs.
Bandera Crossing, TX 675 6,089 6,764 104 6/98 1-30 yrs.
Bear Creek Crossing, TX 627 5,667 6,294 98 6/98 1-30 yrs.
Cypress Creek Apartments, TX 732 6,805 7,537 116 6/98 1-30 yrs.
The Hollows, TX 1,390 12,553 13,943 216 6/98 1-30 yrs.
Hunterwood, TX 563 5,094 5,657 87 6/98 1-30 yrs.
Hunter's Chase, TX 2,094 18,903 20,997 322 6/98 1-30 yrs.
Jefferson Creek, TX 1,889 17,052 18,941 288 6/98 1-30 yrs.
Jefferson Place, TX 2,620 23,644 26,264 401 6/98 1-30 yrs.
La Costa, TX 2,826 25,509 28,335 432 6/98 1-30 yrs.
Longspur, TX 1,240 11,211 12,451 192 6/98 1-30 yrs.
North Park Crossing, TX 1,147 10,357 11,504 178 6/98 1-30 yrs.
Silver Vale Crossing, TX 1,111 10,039 11,150 172 6/98 1-30 yrs.
The Park at Woodlake, TX 1,676 15,238 16,914 262 6/98 1-30 yrs.
Vista Crossing, TX 737 6,659 7,396 114 6/98 1-30 yrs.
Walnut Creek Crossing, TX 1,286 11,606 12,892 198 6/98 1-30 yrs.
Willow Brook Crossing, TX 716 6,574 7,290 112 6/98 1-30 yrs.
Wind River Crossing, TX 1,437 13,011 14,448 223 6/98 1-30 yrs.
- ----------------------------------------------------------------------------------------------------------------------
Multi-family Total 46,591 350,011 396,602 8,796
- ----------------------------------------------------------------------------------------------------------------------
(continued)
</TABLE>
Page 64 of 73
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (4)
Buildings
and
Description Encumbrances Land Improvements Improvements
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hotel Properties:
Country Inn & Suites by Carlson:
Scottsdale, AZ $ 4,255 $ - $ 12,117 $ 82
Country Suites by Carlson:
Ontario, CA (5) (7) 1,145 5,576 518
Arlington, TX (5) (7) 1,611 5,346 1,289
- ---------------------------------------------------------------------------------------------------
Hotel Total 2,756 23,039 1,889
- ---------------------------------------------------------------------------------------------------
Combined Total $ 228,299 $ 237,532 $ 1,557,858 $ 29,918
===================================================================================================
(1) Initial cost and date acquired by GRT Predecessor Entities, where applicable.
(2) The Company holds a participating first mortgage interest in the property.
In accordance with GAAP, the Company is accounting for the property as
though it holds fee title.
(3) The aggregate cost for Federal income tax purposes is $1,704,942.
(4) Bracketed amounts represent reductions to carrying value in prior years.
(5) Initial Cost represents original book value carried forward from the
financial statements of the GRT Predecessor Entities.
(6) Cross collateralized loan secured by ten properties - $58,942.
(7) Cross collateralized loan secured by eight properties - $13,220.
(8) Cross collateralized loans secured by 35 properties - $234,871.
(9) Cross collateralized loan secured by three properties - $15,650.
(10) Cross collateralized loan secured by four properties - $14,309.
(11) Cross collateralized loan secured by 15 properties - $114,950.
(12) Cross collateralized loan secured by three properties - $53,469.
</TABLE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1998
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hotel Properties:
Country Inn & Suites by Carlson:
Scottsdale, AZ $ - $ 12,199 $ 12,199 $ 1,197 2/97 3-30 yrs.
Country Suites by Carlson:
Ontario, CA (5) 1,145 6,094 7,239 3,470 11/86 5-30 yrs.
Arlington, TX (5) 1,611 6,635 8,246 4,059 12/86 5-30 yrs.
- --------------------------------------------------------------------------------------------------------------------
Hotel Total 2,756 24,928 27,684 8,726
- --------------------------------------------------------------------------------------------------------------------
Combined Total $ 237,532 $ 1,587,776 $ 1,825,308 $ 82,869
====================================================================================================================
(1) Initial cost and date acquired by GRT Predecessor Entities, where applicable.
(2) The Company holds a participating first mortgage interest in the property.
In accordance with GAAP, the Company is accounting for the property as
though it holds fee title.
(3) The aggregate cost for Federal income tax purposes is $1,704,942.
(4) Bracketed amounts represent reductions to carrying value in prior years.
(5) Initial Cost represents original book value carried forward from the
financial statements of the GRT Predecessor Entities.
(6) Cross collateralized loan secured by ten properties - $58,942.
(7) Cross collateralized loan secured by eight properties - $13,220.
(8) Cross collateralized loans secured by 35 properties - $234,871.
(9) Cross collateralized loan secured by three properties - $15,650.
(10) Cross collateralized loan secured by four properties - $14,309.
(11) Cross collateralized loan secured by 15 properties - $114,950.
(12) Cross collateralized loan secured by three properties - $53,469.
</TABLE>
Page 65 of 73
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
Reconciliation of gross amount at which real estate was carried for the years
ended December 31:
1998 1997 1996
----------- ---------- ----------
Investments in real estate:
Balance at beginning of year $ 866,431 $ 190,729 $ 102,451
Additions during year:
Property acquisitions 999,091 687,523 89,653
Improvements 14,079 2,691 1,572
Retirements/sales (54,293) (14,512) (2,947)
----------- ---------- ----------
Balance at end of year $ 1,825,308 $ 866,431 $ 190,729
=========== =========== ==========
Accumulated Depreciation:
Balance at beginning of year $ 41,213 $ 28,784 $ 24,877
Additions during year:
Depreciation 49,450 14,496 4,305
Acquisitions -- 443 --
Retirements/sales (7,794) (2,510) (398)
----------- ---------- ----------
Balance at end of year $ 82,869 $ 41,213 $ 28,784
=========== ========== ==========
Page 66 of 73
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
Principal Amount of
Current Loans Subject to
Description of Loan Interest Maturity Periodic Face Carrying Delinquent
and Securing Property Rate Date Payment Terms Prior Liens Amount Amount Principal or Interest
-------------------- -------- -------- ------------- ---------- ------ --------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
First Mortgage Loan Quarterly
Secured by land located interest-only
in Aurora, Colorado 13% 7/1/05 payments None $ 34,349 $ 35,336 None
First Mortgage Loan
Secured by a hotel Monthly
property located in interest-only
Dallas, Texas 9% 3/31/99 payments None 3,600 3,600 None
First Mortgage Loan
Secured by a medical Monthly
building in Phoenix, interest-only
Arizona 11% 11/19/99 payments None 3,850 3,484 (1) None
-------- ---------
Total $ 41,799 $ 42,420
======== =========
</TABLE>
(1) The loan amount is $3,850,000, of which $2,694,000 was initially disbursed
to the borrower and $1,156,000 was held by the Operating Partnership as
leasing and interest reserves. As of December 31, 1998, $790,000 of the
leasing and interest reserves have been drawn by the borrower.
Page 67 of 73
<PAGE>
72
GLENBOROUGH PROPERTIES, L.P.
SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE
December 31, 1998
(in thousands)
The following is a summary of changes in the carrying amount of mortgage loans
for the years ended December 31, 1998, 1997 and 1996 (in thousands):
1998 1997 1996
--------- -------- --------
Balance at beginning of year $ 3,692 $ 9,905 $ 7,465
Additions during year:
New mortgage loans 39,613 1,855 2,694
Deductions during year:
Collections of principal (885) (8,068) (254)
--------- -------- --------
Balance at end of year $ 42,420 $ 3,692 $ 9,905
========= ========= ========
Page 68 of 73
<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: March 16, 1999 ____________________________
Andrew Batinovich
Director, President and
Chief Operating Officer
Date: March 16, 1999 _____________________________
Stephen Saul
Chief Financial Officer
(Principal Financial Officer)
Date: March 16, 1999 _____________________________
Terri Garnick
Senior Vice President,
Chief Accounting Officer,
Treasurer
(Principal Accounting Officer)
Page 69 of 73
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Title
3.01 Articles of Amendment and Restatement of Articles of Incorporation
of the Company are incorporated herein by reference to Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
3.02 Amended Bylaws of the Company are incorporated herein by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
3.03 The Company's Form of Articles Supplementary relating to the 7 3/4%
Series A Convertible Preferred Stock is incorporated herein by
reference to Exhibit 3.03 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
3.04 Articles Supplementary of the Series B Preferred Stock (relating to
the Rights Plan) are incorporated herein by reference to Exhibit 3.2
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998.
4.01 Form of Common Stock Certificate of the Company is incorporated herein
by reference to Exhibit 4.02 to the Company's Registration Statement
on Form S-4 (Registration No. 33-83506), which became effective October
26, 1995.
4.02 Form of 73/4% Series A Convertible Preferred Stock Certificate of the
Company is incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8-A which was filed on January
22, 1998.
10.01 Form of Indemnification Agreement for existing Officers and Directors
of the Company is incorporated herein by reference to Exhibit 10.02 to
the Company's Registration Statement on Form S-4 (Registration No.
33-83506), which became effective October 26, 1995.
10.02* Stock Incentive Plan of the Company (amended and restated as of March
20, 1997) is incorporated herein by reference to Exhibit 4.0 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
10.03* Employment Agreement between the Company and Robert Batinovich is
incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
10.04* Employment Agreement between the Company and Andrew Batinovich is
incorporated herein by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
10.05 Rights Agreement, dated as of July 20, 1998, between the Company and
the Registrar and Transfer Company, together with Exhibit A Form of
Rights Certificate; Exhibit B Summary of Rights to Purchase Preferred
Stock; and Exhibit C Form of Articles Supplementary of the Series B
Preferred Stock are incorporated herein by reference to Exhibit 1 to
the Company's Form 8-A, filed on July 16, 1998.
10.06 Registration Agreement between the Company and GPA, Ltd.is incorporated
herein by reference to Exhibit 10.27 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
10.07 Indemnification Agreement for Glenborough Realty Corporation and the
Company, with Robert Batinovich as indemnitor is incorporated herein by
reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
Page 70 of 73
<PAGE>
EXHIBIT INDEX - continued
Exhibit
Number Exhibit Title
12.01 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings
to Fixed Charges and Preferred Partner Interest Distributions
23.01 Consent of Arthur Andersen LLP, independent public accountants
27.01 Financial Data Schedule
* Indicates management contract or compensatory plan or arrangement.
Page 71 of 73
<PAGE>
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, 1998
<TABLE>
<CAPTION>
GRT Predecessor
Entities,
Combined The Operating Partnership
------------------------- ------------------------------------------
Twelve Months Ended December 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
EARNINGS, AS DEFINED
Net Income (Loss) before Preferred Partner
Interest Distributions $ 1,580 $ 524 $ (1,928) $ 16,671 $ 46,355
Extraordinary items -- -- 186 843 1,400
Federal & State income taxes 176 357 -- -- --
Minority Interest 43 -- -- -- --
Fixed Charges 1,140 2,129 3,913 9,668 53,289
----------- ------------ ------------ ------------ -----------
$ 2,939 $ 3,010 $ 2,171 $ 27,182 $ 101,044
----------- ------------ ------------ ------------ -----------
FIXED CHARGES AND PREFERRED PARTNER INTEREST
DISTRIBUTIONS, AS DEFINED
Interest Expense $ 1,140 $ 2,129 $ 3,913 $ 9,668 $ 53,289
Capitalized Interest -- -- -- -- 1,108
Preferred Partner Interest Distributions -- -- -- -- 20,620
----------- ------------ ------------ ------------ -----------
$ 1,140 $ 2,129 $ 3,913 $ 9,668 $ 75,017
RATIO OF EARNINGS TO FIXED CHARGES 2.58 1.41 0.55 (1) 2.81 1.86
----------- ------------ ------------ ------------ -----------
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED
PARTNER INTEREST DISTRIBUTIONS
2.58 1.41 0.55 (1) 2.81 1.35
----------- ------------ ------------ ------------ -----------
</TABLE>
(1) For the twelve months ended December 31, 1996, earnings were insufficient to
cover fixed charges by $1,742.
Page 72 of 73
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated March 15, 1999 on the financial statements of Glenborough
Properties, L.P. included in this Form 10-K, into the Operating Partnership's
previously filed Registration Statement File No. 333-70463.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Francisco, California
March 15, 1999
Page 73 of 73
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001039223
<NAME> GLENBOROUGH PROPERTIES, L.P.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 4,019
<SECURITIES> 4,019
<RECEIVABLES> 44,388
<ALLOWANCES> 412
<INVENTORY> 0
<CURRENT-ASSETS> 16,782
<PP&E> 1,825,308
<DEPRECIATION> 82,862
<TOTAL-ASSETS> 1,876,246
<CURRENT-LIABILITIES> 21,043
<BONDS> 708,578
0
0
<COMMON> 0
<OTHER-SE> 925,228
<TOTAL-LIABILITY-AND-EQUITY> 1,876,246
<SALES> 0
<TOTAL-REVENUES> 241,644
<CGS> 0
<TOTAL-COSTS> 75,426
<OTHER-EXPENSES> 64,762
<LOSS-PROVISION> 412
<INTEREST-EXPENSE> 53,289
<INCOME-PRETAX> 47,755
<INCOME-TAX> 0
<INCOME-CONTINUING> 47,755
<DISCONTINUED> 0
<EXTRAORDINARY> (412)
<CHANGES> 0
<NET-INCOME> 46,355
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.74
</TABLE>
