SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-14162
GLENBOROUGH PROPERTIES, L.P.
(Exact name of registrant as specified in its charter)
California 94-3231041
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 South El Camino Real,
Suite 1100, San Mateo, California
(650) 343-9300 94402-1708
(Address of principal executive offices (Zip Code)
and telephone number)
Securities registered under Section 12(b) of the Act: None
Securities registered under 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___
1
<PAGE>
INDEX
GLENBOROUGH PROPERTIES, L.P.
Page No.
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
of Glenborough Properties, L.P.
(Unaudited except for the
Consolidated Balance Sheet at
December 31, 1998):
Consolidated Balance Sheets at
September 30, 1999 and
December 31, 1998 3
Consolidated Statements of
Operations for the nine months
ended September 30, 1999 and
1998 4
Consolidated Statements of
Operations for the three
months ended September 30,
1999 and 1998 5
Consolidated Statement of
Partners'Equity for the nine
months ended September 30,
1999 6
Consolidated Statements of
Cash Flows for the nine months
ended September 30, 1999 and
1998 7-8
Notes to Consolidated
Financial Statements 9-20
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 21-28
PART II OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of
Security Holders 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
EXHIBIT INDEX 31
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30, December 31,
1999 1998
(Unaudited) (Audited)
----------------- -----------------
<S> <C> <C>
ASSETS
Rental property, net of accumulated depreciation of
$100,700 and $72,951 in 1999 and 1998, respectively $ 1,637,991 $ 1,720,579
Real estate held for sale 18,507 21,860
Investments in Development 42,263 35,131
Investments in Associated Companies 9,586 8,807
Mortgage loans receivable 43,003 42,420
Cash and cash equivalents 3,182 4,019
Other assets 64,435 45,437
----------------- -----------------
TOTAL ASSETS $ 1,818,967 $ 1,878,253
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage loans $ 694,288 $ 708,578
Unsecured Series A Senior Notes 124,140 150,000
Unsecured bank line 83,207 63,519
Other liabilities 28,650 28,921
----------------- -----------------
Total liabilities 930,285 951,018
----------------- -----------------
Commitments and contingencies -- --
Partners' Equity:
General partner, 347,894 and 359,090 units issued
and outstanding at September 30, 1999 and
December 31, 1998, respectively 8,513 9,066
Limited partners, 34,441,478 and 35,549,914 units issued and
outstanding at September 30, 1999 and December 31, 1998,
respectively 880,169 918,169
----------------- -----------------
Total partners' equity 888,682 927,235
----------------- -----------------
TOTAL LIABILITIES AND PARTNERS'
EQUITY $ 1,818,967 $ 1,878,253
================= =================
See accompanying notes to consolidated financial statements
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended September 30, 1999 and 1998
(in thousands, except per unit amounts)
(Unaudited)
1999 1998
--------------- ---------------
<S> <C> <C>
REVENUE
Rental revenue $ 192,127 $ 162,903
Fees and reimbursements from affiliates 2,492 2,452
Interest and other income 5,216 1,969
Equity in earnings of Associated Companies 1,212 1,690
Net gain on sales of real estate assets 6,722 1,889
--------------- ---------------
Total revenue 207,769 170,903
--------------- ---------------
EXPENSES
Property operating expenses, including $1,347 paid to
the Company in 1998 66,006 54,382
General and administrative, including $1,815 paid to the
Company in 1998 7,040 7,835
Depreciation and amortization 43,578 35,227
Interest expense 48,678 35,916
--------------- ---------------
Total expenses 165,302 133,360
--------------- ---------------
Net income before extraordinary item 42,467 37,543
Extraordinary item:
Net gain on early extinguishment of debt 437 --
--------------- ---------------
Net income 42,904 37,543
Preferred partner interest distributions (16,710) (15,050)
--------------- ---------------
Net income available to general and limited partners $ 26,194 $ 22,493
=============== ===============
Per Partnership Unit Data:
Net income available to general and limited partners before
extraordinary item $ 0.72 $ 0.65
Extraordinary item 0.01 --
=============== ===============
Net income available to general and limited partners $ 0.73 $ 0.65
=============== ===============
Weighted average number of partnership units outstanding 35,668,179 34,651,712
=============== ===============
See accompanying notes to consolidated financial statements
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30, 1999 and 1998
(in thousands, except per unit amounts)
(Unaudited)
1999 1998
--------------- ---------------
<S> <C> <C>
REVENUE
Rental revenue $ 62,934 $ 65,321
Fees and reimbursements from affiliates 618 1,220
Interest and other income 1,779 1,416
Equity in earnings of Associated Companies 1,777 629
Net loss on sales of real estate assets (371) (250)
--------------- ---------------
Total revenue 66,737 68,336
--------------- ---------------
EXPENSES
Property operating expenses 22,145 22,446
General and administrative 2,280 3,367
Depreciation and amortization 14,266 14,309
Interest expense 15,720 17,064
--------------- ---------------
Total expenses 54,411 57,186
--------------- ---------------
Net income before extraordinary item 12,326 11,150
Extraordinary item:
Net gain on early extinguishment of debt 740 --
--------------- ---------------
Net income 13,066 11,150
Preferred partner interest distributions (5,570) (5,570)
--------------- ---------------
Net income available to general and limited partners $ 7,496 $ 5,580
=============== ===============
Per Partnership Unit Data:
Net income available to general and limited partners before
extraordinary item $ 0.19 $ 0.16
Extraordinary item 0.02 --
=============== ===============
Net income available to general and limited partners $ 0.21 $ 0.16
=============== ===============
Weighted average number of partnership units outstanding 35,188,560 35,868,546
=============== ===============
See accompanying notes to consolidated financial statements
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY
For the nine months ended September 30, 1999
(in thousands)
(Unaudited)
General Limited Partners
Partner Total
------------------- ------------------- ------------------
<S> <C> <C> <C>
Balance at December 31, 1998 $ 9,066 $ 918,169 $ 927,235
Issuance of Operating Partnership units
and additional contributions 30 3,005 3,035
Distributions (619) (61,331) (61,950)
Redemption of units (226) (22,350) (22,576)
Unrealized gain on marketable securities -- 34 34
Net income 262 42,642 42,904
------------------- ------------------- ------------------
Balance at September 30, 1999 $ 8,513 $ 880,169 $ 888,682
=================== =================== ==================
See accompanying notes to consolidated financial statements
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1999 and 1998
(in thousands)
(Unaudited)
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 42,904 $ 37,543
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 43,578 35,227
Amortization of loan fees, included in
interest expense 1,470 998
Equity in earnings of Associated Companies (1,212) (1,690)
Net gain on sales of real estate assets (6,722) (1,889)
Net gain on early extinguishment of debt (437) --
Changes in certain assets and liabilities, net (10,313) 6,753
--------------- ---------------
Net cash provided by operating activities 69,268 76,942
--------------- ---------------
Cash flows from investing activities:
Net proceeds from sales of real estate assets 111,490 39,247
Additions to rental properties (39,857) (589,480)
Investments in Development (7,132) (23,856)
Investment in Joint Ventures (3,301) --
Additions to mortgage loans receivable (583) (37,397)
Investments in marketable securities -- (24,087)
Principal receipts on mortgage loans receivable -- 507
Payments from affiliates 400 --
Distributions from Associated Companies 433 1,200
--------------- ---------------
Net cash provided by (used for) investing
activities 61,450 (633,866)
--------------- ---------------
See accompanying notes to consolidated financial statements
</TABLE>
continued
7
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS -continued
For the nine months ended September 30, 1999 and 1998
(in thousands)
(Unaudited)
1999 1998
--------------- --------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from borrowings $ 256,240 $ 425,350
Repayment of borrowings (280,116) (227,281)
Proceeds from issuance of Series A Senior Notes -- 150,000
Retirement of Series A Senior Notes (less gain on
retirement of $2,568 in 1999) (23,292) --
Draws from (payments into) lender impound accounts, net (870) (10,001)
Prepayment penalties on loan payoffs (2,026) --
Contributions 3,035 278,109
Distributions (61,950) (55,679)
Redemption of units (22,576) --
--------------- --------------
Net cash (used for) provided by financing
activities (131,555) 560,498
--------------- --------------
Net (decrease) increase in cash and cash equivalents (837) 3,574
Cash and cash equivalents at beginning of period 4,019 3,670
--------------- --------------
Cash and cash equivalents at end of period $ 3,182 $ 7,244
=============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest (net of capitalized interest of
$2,077 and $724 in 1999 and 1998, respectively) $ 48,560 $ 30,691
=============== ==============
Supplemental disclosure of Non-Cash Investing and Financing
Activities:
Acquisition of real estate through assumption of first
trust deed notes payable $ 29,275 $ 358,876
=============== ==============
Acquisition of real estate through issuance of
Operating Partnership units $ -- $ 52,621
=============== ==============
See accompanying notes to consolidated financial statements
</TABLE>
8
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1999
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% (87.04%
limited partnership interest as of September 30, 1999). 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, directly and through subsidiary entities, is engaged
primarily in the ownership, operation, management, leasing, acquisition,
expansion and development of various types of income-producing properties. As of
September 30, 1999, the Operating Partnership, directly and through the
subsidiaries in which it and the Company own 100% of the ownership interests,
controls a portfolio of 167 real estate projects, including office, office/flex,
industrial, multifamily, retail and hotel properties. The portfolio encompasses
approximately 23 million square feet in 22 states.
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"), formerly known as 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 to the Company.
Effective February 15, 1999, the Company contributed to the Operating
Partnership 100% of its shares of the non-voting preferred stock of Glenborough
Hotel Group ("GHG"). In return, the Operating Partnership issued 67,797 units of
partnership interest to the Company.
The contributions of 100% of the shares of non-voting preferred stock in GC and
GHG discussed above have been accounted for as a reorganization of entities
under common control, similar to a pooling of interests. All periods presented
have been restated to give effect to these transactions as if they occurred on
December 31, 1995. As a result of the above transactions, the only assets of the
Company that have not been 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 less than 5% limited
partnership interest in Glenborough Partners.
As discussed above, prior to September 30, 1999, the Operating Partnership held
100% of the non-voting preferred stock of the following associated companies
(the "Associated Companies"):
Glenborough Corporation ("GC") is the general partner of several real
estate limited partnerships and provides asset and property management and
development 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
9
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1999
Corporation, an unaffiliated corporation which has significant real estate
assets in the Inland Empire region of Southern California (the "Rancon
Partnerships").
Glenborough Hotel Group ("GHG") owns an approximate 36% limited partner
interest in a real estate joint venture.
Effective September 30, 1999, GHG merged with GC. In the merger, the Operating
Partnership received preferred stock of GC in exchange for its preferred stock
of GHG.
Following the merger, the Operating Partnership owns 100% of the 47,500 shares
(representing 95% of total outstanding shares) of non-voting preferred stock of
GC. Six individuals, including Sandra Boyle, Frank Austin and Terri Garnick,
executive officers of the Company, own the 2,500 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 $1.896 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 value
of $169.49 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 $169.49 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 will account for the financial results of GC using the
equity method.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements present the consolidated financial
position of the Operating Partnership as of September 30, 1999, and December 31,
1998, and the consolidated results of operations and cash flows of the Operating
Partnership for the nine months ended September 30, 1999 and 1998. All
intercompany transactions, receivables and payables have been eliminated in
consolidation.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal accruals) necessary to
present fairly the financial position and results of operations of the Operating
Partnership as of September 30, 1999, and for the period then ended.
Reclassification
Certain prior year balances have been reclassified to conform to the current
year presentation.
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 was originally effective for fiscal years beginning after June 15, 1999,
with early adoption permitted. In June 1999, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an amendment of FASB Statement No. 133" was issued
10
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1999
which, among other things, deferred the final implementation to fiscal years
beginning after June 15, 2000. 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.
Rental Property
Rental properties are stated at cost unless circumstances indicate that cost
cannot be recovered, in which case, the carrying value of the property is
reduced to estimated fair value. Estimated fair value: (i) is based upon the
Operating Partnership's plans for the continued operation of each property; and
(ii) is computed using estimated sales price, as determined by prevailing market
values for comparable properties and/or the use of capitalization rates
multiplied by annualized rental income based upon the age, construction and use
of the building. The fulfillment of the Operating Partnership's plans related to
each of its properties is dependent upon, among other things, the presence of
economic conditions which will enable the Operating Partnership to continue to
hold and operate the properties prior to their eventual sale. Due to
uncertainties inherent in the valuation process and in the economy, it is
reasonably possible that the actual results of operating and disposing of the
Operating Partnership's properties could be materially different than current
expectations.
Depreciation is provided using the straight line method over the useful lives of
the respective assets.
The useful lives are as follows:
Buildings and Improvements 10 to 40 years
Tenant Improvements Term of the related lease
Furniture and Equipment 5 to 7 years
Real Estate Held for Sale
Real estate held for sale consists of rental properties that are under contract
or in active negotiations to be disposed of. The fulfillment of the Operating
Partnership's plans to dispose of property is dependent upon, among other
things, the presence of economic conditions which will enable the Operating
Partnership to hold the property for eventual sale. The Operating Partnership
discontinues depreciation of rental property once it is classified as held for
sale.
Investments in Development
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 during the period in
which the projects are under development. See Note 6 for further discussion.
Investments in Associated Companies
The Operating Partnership's investments in Associated Companies are 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 the loan will be considered to be impaired and its
recorded amount will be reduced to the fair value of the collateral securing it.
Interest income will also cease to accrue under such circumstances. Due to
uncertainties inherent in the valuation process, it is reasonably possible that
the amount ultimately realized from the Operating Partnership's collection on
these receivables will be different than the recorded amounts.
11
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1999
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.
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 September 30, 1999, the Operating Partnership was not a party to any open
interest rate protection agreements other than the interest rate cap contract
entered into in August 1999 and discussed in Note 7 below.
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.
Revenues
All leases are classified as operating leases. Rental revenue is recognized as
earned over the terms of the related leases.
For the nine months ended September 30, 1999 and 1998, no tenants represented
10% or more of rental revenue of the Operating Partnership.
Fees and reimbursement revenue consists of property management fees, overhead
administration fees, and transaction fees from the acquisition, disposition,
refinancing, leasing and construction supervision of real estate for
unconsolidated affiliates.
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.
12
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1999
Income Taxes
No provision for income taxes is included in the accompanying Consolidated
Statements of Operations as the Operating Partnership's results of operations
are allocated to the partners for inclusion in their respective income tax
returns.
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 into limited partner units as the impact is anti-dilutive. No other
potentially dilutive securities of the Operating Partnership exist.
Reference to 1998 Audited Financial Statements
These unaudited financial statements should be read in conjunction with the
Notes to Consolidated Financial Statements included in the 1998 audited
financial statements.
Note 3. RENTAL PROPERTY
Acquisitions
In the third quarter of 1999, the Operating Partnership acquired all of the real
estate assets of Prudential-Bache/Equitec Real Estate Partnership, a California
limited partnership (the "Pru Bache Portfolio") in which the managing general
partner is Prudential-Bache Properties, Inc., and in which GC and Robert
Batinovich, Chief Executive Officer of the Company, have served as co-general
partners since March 1994. Neither GC nor Robert Batinovich held a material
equity or economic interest in the Pru-Bache Portfolio. The acquisition was
unanimously approved by the Company's independent directors, with Robert
Batinovich and Andrew Batinovich abstaining. The total acquisition cost,
including third party expenditures incurred for the purpose of the transaction,
was approximately $49.1 million, which consisted of (i) approximately $15.2
million of assumed debt and (ii) the balance in cash, including approximately
$21.4 million of proceeds from the sales of real estate assets and an $11.2
million advance under the Credit Facility. The Pru-Bache Portfolio consists of
four office buildings and one office/flex property, aggregating 550,592 total
square feet and located in Rockville, Maryland, Memphis, Tennessee, Sacramento,
California and Seattle, Washington.
In the second quarter of 1999, the Operating Partnership expanded its existing
holdings near Los Angeles International Airport by purchasing a 41,709 square
foot industrial building which is the second phase of the project purchased in
the first quarter (see below). This second phase has been leased on a long term
triple net basis to the tenant currently occupying phase one of the project. The
total acquisition cost, including third party expenditures incurred for the
purpose of the transaction, was approximately $5.6 million.
In the first quarter of 1999, the Operating Partnership acquired a 285 unit
multifamily 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 the year 2000. The total acquisition
cost, including third party expenditures incurred for the purpose of the
transaction, was approximately $20.8 million comprising: (i) approximately $14.1
million in assumption of debt and (ii) the balance in cash. In addition, 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. This property is the first phase of a two-phase project.
The total acquisition cost, including third party expenditures incurred for the
purpose of the transaction, was approximately $3.1 million, which was paid
entirely in cash. The property has been leased to a single tenant under a
15-year triple-net lease.
Dispositions
In the third quarter of 1999, the Operating Partnership sold five properties,
including two office, two office/flex and one hotel. The assets were sold for an
aggregate sales price of approximately $19,865,000 and generated an aggregate
net gain of approximately $1,229,000. This gain was offset by a $1,600,000
reduction in the sale price of a hotel sold in June 1998 (see Note 5 for further
discussion), resulting in an aggregate net loss for the quarter of $371,000.
13
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1999
In the second quarter of 1999, the Operating Partnership sold fourteen
properties, including five office, four office/flex, one retail, two industrial,
one multifamily and one hotel. The assets were sold for an aggregate sales price
of approximately $109,135,000 and generated an aggregate net gain of
approximately $5,742,000.
In the first quarter of 1999, the Operating Partnership sold seven properties,
including five office/flex properties and two retail properties, and a partial
interest in a REIT. These assets were sold for an aggregate sales price of
approximately $27.3 million and generated an aggregate net gain of approximately
$1,351,000.
These transactions are reflected as the net gain on sales of real estate assets
on the accompanying consolidated statement of operations for the nine months
ended September 30, 1999.
Prospective Dispositions
The Operating Partnership has entered into separate definitive agreements to
sell six properties, including two office properties, two office/flex properties
and two industrial properties. The sales are expected to close in the fourth
quarter of 1999 and the first quarter of 2000 for an aggregate sales price of
approximately $22.7 million, however, they are subject to certain contingencies,
including satisfactory completion of due diligence and customary closing
conditions. As a result, there can be no assurance that these sales will be
completed. These properties are reflected as Real Estate Held For Sale on the
accompanying consolidated balance sheet as of September 30, 1999. See Note 11
for discussion of sales subsequent to September 30, 1999.
Note 4. INVESTMENTS IN ASSOCIATED COMPANIES
The Operating Partnership accounts for its investment in GC (as defined in Note
1) using the equity method as a substantial portion of its 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. Three of the holders of the voting common stock of GC are
officers of the Company; however, the Operating Partnership has no direct voting
or management control of GC. The Operating Partnership records earnings on its
investment in GC equal to its cash flow preference, to the extent of earnings,
plus its pro rata share of remaining earnings, based on cash flow allocation
percentages. Distributions received from GC are recorded as a reduction of the
Operating Partnership's investment.
As of September 30, 1999 and 1998, the Operating Partnership had the following
investments in the Associated Companies (in thousands):
GC (1)
Investment at December 31, 1998 $ 8,807
Distributions (433)
Equity in earnings 1,212
Investment at September 30, 1999 $ 9,586
GC GHG Total
Investment at December 31, 1997 $ 8,519 $ 2,429 $ 10,948
Distributions (1,005) (195) (1,200)
Equity in earnings (loss) 1,889 (199) 1,690
Investment at September 30, 1998 $ 9,403 $ 2,035 $ 11,438
(1) All amounts presented for GC represent combined amounts for GC and GHG due
to the September 30, 1999 merger, as previously discussed in Note 1.
14
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1999
Note 5. MORTGAGE LOANS RECEIVABLE
The Operating Partnership's mortgage loans receivable consist of the following
as of September 30, 1999, and December 31, 1998 (dollars in thousands):
1999 1998
--------- ----------
Note secured by an office property in Phoenix, AZ,
with a fixed interest rate of 7% (until May 31,
2000, at which time the rate shall change to a
fixed rate of 9%) and a maturity date of May 2001 $ 3,728 $ 3,484
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 2000. The principal amount of this loan was
reduced in September 1999. See below for further
discussion. 2,000 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) 37,275 35,336
--------- ---------
Total $ 43,003 $ 42,420
========= =========
In 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 loaned approximately $34 million ($37.3 million, including
accrued interest, at September 30, 1999), secured by a First Mortgage, to
continue the build-out of Gateway Park. In this arrangement, the Operating
Partnership has rights under certain conditions and subject to certain
contingencies to purchase the properties upon completion of development and,
thus, through this arrangement, the Operating Partnership could acquire up to
2.2 million square feet of office, office/flex and industrial space and 1,600
multifamily units over the next ten years.
In June 1998, the Operating Partnership sold a hotel property in Dallas, Texas,
to a third party for a sale price of $4.2 million, of which $3.6 million was
represented by a note receivable secured by the hotel property. In September
1999, the loan agreement was modified to reduce the sale price of the hotel by
$1.6 million and, thus, the principal amount of the note receivable was also
reduced by $1.6 million. In addition, the maturity date of the note was extended
to March 2000. This reduction in the sale price of the hotel was recorded as a
loss on sale of the property and is included in the $371,000 net loss on sales
of real estate assets on the accompanying consolidated statement of operations
for the three months ended September 30, 1999.
Note 6. INVESTMENTS IN DEVELOPMENT AND OTHER ASSETS
The Operating Partnership has formed 4 development alliances for the development
of approximately 713,000 square feet of office, office/flex and distribution
properties and 1,710 multifamily units in North Carolina, Colorado, Texas, New
Jersey, Kansas and Michigan. As of September 30, 1999, the Operating Partnership
has advanced approximately $42 million. Under these development alliances, the
Operating Partnership has certain rights to purchase the properties upon
completion of development over the next five years.
In June 1999, the Operating Partnership entered into a joint venture in which it
sold a 90% interest in Rockwall I & II, a 340,252 square foot office complex
located in Rockville, Maryland. The Operating Partnership maintains a 10%
interest in the asset along with a contract for property management and asset
management services under which the Operating Partnership is entitled to receive
property management fees of 3% of cash receipts and an annual asset management
fee of $350,000. The proceeds from the sale were used to paydown the Credit
Facility (discussed below) and to reduce other secured debt. The value of this
10% interest is approximately $1.3 million and is included in Other Assets on
the accompanying consolidated balance sheet as of September 30, 1999. This
investment is accounted for using the equity method.
15
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1999
In April 1999, the Operating Partnership also purchased a 10% interest in a
joint venture holding the fee simple title to the land under Rincon Center I &
II in San Francisco, California. The land was purchased from the United States
Post Office for a purchase price of $80.5 million. The land has a triple net
ground lease with a remaining term of 51 years with minimum 30% rental increases
every six years. Occupying a full city block near the waterfront in the
Financial District, Rincon Center I & II contains 476,709 square feet of
commercial office and retail space, 320 multifamily units and 381 subterranean
parking spaces. The value of this 10% interest is approximately $2 million and
is included in Other Assets on the accompanying consolidated balance sheet as of
September 30, 1999. This investment is accounted for using the equity method. In
October 1999, the joint venture acquired Rincon Center I & II. See Note 11 for
further discussion.
Note 7. SECURED AND UNSECURED LIABILITIES
The Operating Partnership had the following mortgage loans, bank lines,
unsecured notes and notes payable outstanding as of September 30, 1999, and
December 31, 1998 (dollars in thousands):
1999 1998
Secured loans with various lenders, net of
unamortized discount of $5,671 and $6,140 at
September 30, 1999 and December 31, 1998,
respectively. All loans have a fixed interest rate
of 6.125% and a November 10, 2008 maturity date.
Monthly principal and interest payments range
between $296 and $458. These loans are secured by
35 properties with an aggregate net carrying value
of $402,418 and $408,439 at September 30, 1999 and
December 31, 1998, respectively. $ 233,322 $234,871
Secured loan with an investment bank with a fixed
interest rate of 7.57% and a maturity date of
January 1, 2006. This loan was paid off in March
1999 with the proceeds from a $26 million loan
discussed below. -- 13,220
Secured loans with various lenders, bearing
interest at fixed rates between 6.95% and 9.25%
(approximately $52,824 of these loans include an
unamortized premium of approximately $366 which
reduces the effective interest rate on those
instruments to 6.75%), with monthly principal and
interest payments ranging between $11 and $443 and
maturing at various dates through December 1,
2030. These loans are secured by properties with
an aggregate net carrying value of $549,627 and
$576,633 at September 30, 1999 and December 31,
1998, respectively. 324,841 335,257
Secured loans with various banks bearing interest
at variable rates ranging between 6.20% and 8.25%
at September 30, 1999, monthly principal and
interest payments ranging between $16 and $500 and
maturing at various dates through August 30, 2004.
These loans are secured by properties with an
aggregate net carrying value of $210,007 and
$179,438 at September 30, 1999 and December 31,
1998, respectively. $ 136,125 $ 125,230
16
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1999
1999 1998
Unsecured $142,500 line of credit with a bank
("Credit Facility") with a variable interest rate
of LIBOR plus 1.625% (6.960% and 7.401% at
September 30, 1999 and December 31, 1998,
respectively), monthly interest only payments and
a maturity date of December 22, 2000, with one
option to extend for 10 years. 83,207 63,519
Unsecured Series A Senior Notes with a fixed
interest rate of 7.625%, interest payable
semiannually on March 15 and September 15, and a
maturity date of March 15, 2005. Approximately
$25.9 million of the notes were retired in 1999 as
discussed below. 124,140 150,000
Total $ 901,635 $ 922,097
In March 1999, the Operating Partnership obtained a $26 million loan from a
commercial bank. The loan was non-recourse and was secured by seven properties
and had a maturity date of December 22, 1999, with an option to extend for six
months. The proceeds were used to pay off a loan which was previously secured by
these same properties and to reduce other debt. This loan was paid off in June
1999 with proceeds generated from the sales of four properties.
In June 1999, in order to increase the Operating Partnership's financial
flexibility, the Credit Facility was modified to increase the commitment from
$100 million to $142.5 million. The interest rate, monthly payments and maturity
date remain unchanged.
In August 1999, the Operating Partnership closed a $97.6 million secured
financing with Key Bank/FNMA. The proceeds from this financing, combined with
proceeds from a new $7.2 million mortgage and a draw on the Credit Facility,
were used to retire a $113.2 million mortgage which would have matured in
December of 1999. The new financing is a revolving line of credit maturing in
five years with a five-year extension option, and bears interest at a floating
rate equal to 75 basis points over the rate for 90-day mortgage backed
securities credit-enhanced by FNMA. The current interest rate on this loan is
6.2%.
In connection with the Key Bank/FNMA secured financing, the Operating
Partnership entered into an interest rate cap agreement to hedge increases in
interest rates above a specified level of 11.21%. The agreement is for a term
concurrent with the Key Bank/FNMA instrument, is indexed to a 90-day LIBOR rate,
and is for a notional amount equal to the maximum amount available on the Key
Bank/FNMA loan. As of September 30, 1999, the 90-day LIBOR rate was 6.084%. The
Operating Partnership paid a premium of approximately $434,000 at the inception
of the cap agreement, which is being amortized as additional interest expense
over the life of the agreement.
In the second and third quarters of 1999, the Operating Partnership retired
approximately $25.9 million of unsecured Series A Senior Notes at a discount. As
a result of these transactions, a gain on early extinguishment of debt of
approximately $2.6 million was recorded which is included in the net gain on
early extinguishment of debt on the accompanying consolidated statement of
operations for the nine months ended September 30, 1999, as discussed in Note 8
below.
Some of the Operating Partnership's properties are held in limited partnerships
and limited liability companies in order to facilitate financing. 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").
17
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1999
The required principal payments on the Operating Partnership's debt for the next
five years and thereafter, as of September 30, 1999, are as follows (in
thousands):
Year Ending
December 31,
1999 $ 2,377
2000 176,050
2001 22,532
2002 14,301
2003 37,891
Thereafter 648,484
Total $ 901,635
Note 8. NET GAIN ON EARLY EXTINGUISHMENT OF DEBT
In connection with the loan payoffs discussed above and the payoff of other
mortgage debt, the Operating Partnership recorded a net gain on early
extinguishment of debt of $437,000 for the nine months ended September 30, 1999.
This gain consists of $2,568,000 of gains on retirement of Series A Senior Notes
(as discussed above) offset by $2,026,000 of losses due to prepayment penalties
and $105,000 of losses due to the writeoff of unamortized loan fees upon the
early payoff of four loans. These loans were paid-off early when more favorable
terms were obtained through new financing (discussed above) and upon the sale of
the properties securing the loans.
Note 9. RELATED PARTY TRANSACTIONS
Fee and reimbursement income earned by the Operating Partnership from related
parties totaled $2,492,000 and $2,452,000 for the nine months ended September
30, 1999 and 1998, respectively, and consisted of property management fees,
asset management fees and other fee income. In addition, the Operating
Partnership paid GC property management fees and salary reimbursements totaling
$1,180,000 and $940,000 for the nine months ended September 30, 1999 and 1998,
respectively, for management of a portfolio of residential properties owned by
the Operating Partnership, which is included in property operating expenses and
general and administrative expenses on the accompanying consolidated statements
of operations.
In 1998, the Operating Partnership acquired from a Managed Partnership an option
to purchase all of its rights under a Lease with Option to Purchase Agreement,
for certain undeveloped land located in Burlingame, California. Upon expiration
of the option period, the independent members of the Company's Board of
Directors concluded that proceeding with the development of the property would
have required that the Operating Partnership incur substantial debt.
Accordingly, on February 1, 1999, the Operating Partnership elected not to
proceed with the development and not to exercise the option in return for the
Managed Partnership's agreement to reimburse the Operating Partnership for
$2,309,000 of predevelopment costs, $462,000 to be paid in cash with the balance
in a promissory note bearing interest at 10% and due on the earlier of sale,
refinance or March 31, 2002. The note also contains a participation in profits
realized by the Managed Partnership from the development and sale of the
property. The principal balance of the note is included in Other Assets on the
accompanying consolidated balance sheet as of September 30, 1999.
Note 10. SEGMENT INFORMATION
The Operating Partnership owns a diverse portfolio of properties comprising six
product types: office, office/flex, industrial, retail, multifamily 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
multifamily 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
18
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1999
Company's hotel operations are from three limited service "all-suite" properties
leased to and operated by third parties. As of September 30, 1999, two of these
hotel properties have been sold with only one remaining in the Company's
portfolio.
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 nine months ended September 30, 1999
and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Multi-
1999 Office Office/Flex Industrial Retail family Hotel Total
----------- ------------- ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rental revenue $ 89,946 $ 27,289 $ 14,229 $ 8,561 $ 50,891 $ 1,211 $ 192,127
Property operating expenses 35,310 7,875 3,328 2,853 22,353 377 72,096
=========== ============= =========== =========== ============ ============ =============
Net operating income (NOI) $ 54,636 $ 19,414 $ 10,901 $ 5,708 $ 28,538 $ 834 $ 120,031
=========== ============= =========== =========== ============ ============ =============
1998
Rental revenue $ 87,647 $ 27,063 $ 11,432 $ 8,638 $ 24,695 $ 3,428 $ 162,903
Property operating expenses 33,429 8,165 2,761 2,876 10,306 838 58,375
=========== ============= =========== =========== ============ ============ =============
Net operating income (NOI) $ 54,218 $ 18,898 $ 8,671 $ 5,762 $ 14,389 $ 2,590 $ 104,528
=========== ============= =========== =========== ============ ============ =============
</TABLE>
The following is a reconciliation of segment revenues and income to consolidated
revenues and income for the periods presented above (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Revenues
Total revenue for reportable segments $ 192,127 $ 162,903
Other revenue (1) 15,642 8,000
================ ================
Total consolidated revenues $ 207,769 $ 170,903
================ ================
Net Income
NOI for reportable segments $ 120,031 $ 104,528
Elimination of internal property management fees 6,090 3,993
Unallocated amounts:
Other revenue (1) 15,642 8,000
General and administrative expenses (7,040) (7,835)
Depreciation and amortization (43,578) (35,227)
Interest expense (48,678) (35,916)
================ ================
Income from operations before minority interest and
extraordinary items $ 42,467 $ 37,543
================ ================
</TABLE>
(1) Other revenue includes fee income, interest and other income, equity in
earnings of Associated Companies and net gain on sales of real estate assets.
19
<PAGE>
GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1999
Note 11. SUBSEQUENT EVENTS
Acquisitions
In October 1999, through one of its development alliances, the Operating
Partnership acquired the recently completed Phase II (96 units) of the Chase
Monroe Apartments in Monroe, North Carolina. Phase I (120 units) was acquired as
part of the Marion Bass Portfolio acquisition in December 1997.
In October 1999, a joint venture in which the Operating Partnership holds a 10%
interest purchased the leasehold improvements comprising Rincon Center I & II in
San Francisco, California, after having previously acquired the fee simple title
to the land. In connection with this acquisition, the Operating Partnership
invested an additional $6,425,000 in the joint venture. The Operating
Partnership took over management and leasing of the project on November 1, 1999
and is now entitled to receive property management fees of 1.75% of cash
receipts. See Note 6 for further discussion of this joint venture.
Dispositions
Subsequent to September 30, 1999, and through the date of this filing, the
Operating Partnership sold two office/flex properties and a 22,314 square foot
building from a 300,894 square foot office/flex property. These properties were
sold for an aggregate sales price of $7.4 million and generated an aggregate net
gain of approximately $1.1 million.
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Background
Glenborough Properties, L.P., a California Limited Partnership (the "Operating
Partnership"), is engaged primarily in the ownership, operation, management,
leasing, acquisition, expansion and development of various types of
income-producing properties. As of September 30, 1999, the Operating
Partnership, directly and through various subsidiaries, owned and operated 167
income-producing properties (the "Properties," and each a "Property"). The
Properties are comprised of 51 office Properties, 39 office/flex Properties, 29
industrial Properties, 10 retail Properties, 37 multifamily Properties and 1
hotel Property, located in 22 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% (87.04% limited partnership interest as of
September 30, 1999). 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 ("GC"), formerly known as 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 to the Company.
Effective February 15, 1999, the Company contributed to the Operating
Partnership 100% of its shares of the non-voting preferred stock of Glenborough
Hotel Group ("GHG"). In return, the Operating Partnership issued 67,797 units of
partnership interest to the Company.
The contributions of 100% of the shares of non-voting preferred stock in GC and
GHG discussed above have been accounted for as a reorganization of entities
under common control, similar to a pooling of interests. All periods presented
have been restated to give effect to these transactions as if they occurred on
December 31, 1995. As a result of the above transactions, the only assets of the
Company that have not been 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 less than 5% limited
partnership interest in Glenborough Partners.
Effective September 30, 1999, GHG merged with GC. In the merger, the Operating
Partnership received preferred stock of GC in exchange for its preferred stock
of GHG.
Following the merger, the Operating Partnership owns 100% of the 47,500 shares
(representing 95% of total outstanding shares) of non-voting preferred stock of
GC. Six individuals, including Sandra Boyle, Frank Austin and Terri Garnick,
executive officers of the Company, own the 2,500 shares (representing 5% of
total outstanding shares) of voting common stock of GC.
21
<PAGE>
The Operating Partnership, through its ownership of preferred stock of GC, is
entitled to receive cumulative, preferred annual dividends of $1.896 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 value
of $169.49 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 $169.49 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 will account for the financial results of GC using the
equity method.
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, 69 properties in
1998 and 8 properties in 1999. The total acquired Properties consist of an
aggregate of approximately 16.4 million rentable square feet of office,
office/flex, industrial and retail space, 9,734 multifamily units and 227
hotel suites and had aggregate acquisition costs, including third party
expenditures incurred for the purpose of these transactions, of
approximately $1.84 billion.
From January 1, 1996 to the date of this filing, sold 57 properties which
were comprised of eight office properties, 15 office/flex properties, eight
industrial properties, 19 retail properties, two multifamily properties and
five 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. In the second and third quarters of 1999, $25.9 million
of the Senior Notes were retired at a discount which resulted in a gain on
early extinguishment of debt of approximately $2.6 million.
Entered into 4 development alliances to which the Operating Partnership has
made advances of approximately $42 million and a loan (including accrued
interest) of $37.3 million as of September 30, 1999.
Results of Operations
Comparison of the nine months ended September 30, 1999 to the nine months ended
September 30, 1998.
Rental Revenue. Rental revenue increased $29,224,000, or 18%, to $192,127,000
for the nine months ended September 30, 1999, from $162,903,000 for the nine
months ended September 30, 1998. The increase included growth in revenue from
the office, office/flex, industrial and multifamily Properties of $2,299,000,
$226,000, $2,797,000 and $26,196,000, respectively, due primarily to 1998 and
1999 acquisitions. These increases were partially offset by decreases in revenue
from the retail and hotel Properties of $77,000 and $2,217,000, respectively,
due to the 1998 and 1999 sales of three retail properties and five hotel
properties. Excluding properties that have been sold, rental revenue for the
nine months ended September 30, 1999, included $13,329,000 generated from the
1996 Acquisitions, $67,313,000 generated from the 1997 Acquisitions, $98,740,000
generated from the 1998 Acquisitions and $3,615,000 generated from the 1999
Acquisitions. In addition, $9,130,000 of rental revenue was generated from 26
properties that were sold during the nine months ended September 30, 1999.
Fees and Reimbursements from Affiliates. Fees and reimbursements from affiliates
consist primarily of property management fees, asset management fees and lease
commissions paid to the Operating Partnership under property and asset
management agreements with the Managed Partnerships. This revenue did not change
significantly, with an increase of $40,000, or 2%, to $2,492,000 for the nine
months ended September 30, 1999, from $2,452,000 for the nine months ended
September 30, 1998.
22
<PAGE>
Interest and Other Income. Interest and other income increased $3,247,000, or
165%, to $5,216,000 for the nine months ended September 30, 1999, from
$1,969,000 for the nine months ended September 30, 1998. The increase primarily
consisted of interest income on a mortgage loan receivable secured by land
located in Aurora, Colorado which originated on June 30, 1998, and interest
earned on lender impound accounts, invested cash balances and notes receivable
for tenant improvements.
Equity in Earnings of Associated Companies. Equity in earnings of Associated
Companies decreased $478,000 or 28%, to $1,212,000 for the nine months ended
September 30, 1999, from $1,690,000 for the nine months ended September 30,
1998. The decrease is primarily due to a decrease in earnings from GC resulting
from a provision to reduce the carrying value of management contracts with
certain of the Managed Partnerships. This decrease is also due to a decrease in
earnings from GHG resulting from the cancellation of GHG's hotel leases with the
Operating Partnership.
Net Gain on Sales of Real Estate Assets. A net gain on sales of real estate
assets of $6,722,000 during the nine months ended September 30, 1999, resulted
from the sale of seven office properties, eleven office/flex properties, two
industrial properties, three retail properties, one multifamily property, two
hotel properties and a small interest in real estate securities from the
Operating Partnership's portfolio. The net gain on sales of real estate assets
of $1,889,000 during the nine months ended September 30, 1998, resulted from the
sale of one multifamily property, two industrial properties, two office/flex
properties and two hotel properties from the Operating Partnership's portfolio.
Property Operating Expenses. Property operating expenses increased
$11,624,971,000, or 21%, to $66,006,000 for the nine months ended September 30,
1999, from $54,382,000 for the nine months ended September 30, 1998. This
increase represents increases in property operating expenses attributable to the
1998 Acquisitions and the 1999 Acquisitions offset by decreases in property
operating expenses due to the 1998 and 1999 sales of properties and a $1,347,000
decrease in property management fees from 1998 to 1999.
General and Administrative Expenses. General and administrative expenses
decreased $795,000, or 10%, to $7,040,000 for the nine months ended September
30, 1999, from $7,835,000 for the nine months ended September 30, 1998. This
decrease is primarily due to a reduction in staff and overhead expenses in
response to a decrease in acquisition and marketing activities since mid-1998
and a reduction in the number of properties owned. As a percentage of rental
revenue, general and administrative expenses decreased from 4.8% for the nine
months ended September 30, 1998, to 3.7% for the nine months ended September 30,
1999.
Depreciation and Amortization. Depreciation and amortization increased
$8,351,000, or 24%, to $43,578,000 for the nine months ended September 30, 1999,
from $35,227,000 for the nine months ended September 30, 1998. The increase is
primarily due to depreciation and amortization associated with the 1998
Acquisitions and 1999 Acquisitions.
Interest Expense. Interest expense increased $12,762,000 or 36%, to $48,678,000
for the nine months ended September 30, 1999, from $35,916,000 for the nine
months ended September 30, 1998. Substantially all of the increase was the
result of higher average borrowings during the nine months ended September 30,
1999, as compared to the nine months ended September 30, 1998, due to new debt
and the assumption of debt related to the 1998 Acquisitions and 1999
Acquisitions.
Net Gain on Early Extinguishment of Debt. Net gain on early extinguishment of
debt of $437,000 during the nine months ended September 30, 1999, consists of a
$2,568,000 gain on the retirement of Senior Notes at a discount, offset by
$2,026,000 of prepayment penalties and $105,000 for the write-off of unamortized
loan fees upon the early payoff of four loans. These loans were paid-off early
when more favorable terms were obtained through new financing (discussed below)
and upon the sale of the properties securing the loans.
Comparison of the three months ended September 30, 1999 to the three months
ended September 30, 1998.
Rental Revenues. Rental revenues decreased $2,387,000, or 4%, to $62,934,000 for
the three months ended September 30, 1999, from $65,321,000 for the three months
ended September 30, 1998. The decrease included decreases in revenues from the
office, office/flex, retail and hotel Properties of $1,319,000, $896,000,
23
<PAGE>
$690,000 and $211,000, respectively. These decreases are primarily due to the
sale of eight office properties, eleven office/flex properties, three retail
properties and three hotels since September 30, 1998. These decreases are
partially offset by increases in revenue from the industrial and multifamily
Properties of $64,000 and $665,000, respectively. The increase in multifamily
revenue is primarily due to the acquisition of a 285-unit property in the first
quarter of 1999.
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 decreased $602,000, or 49%, to $618,000 for the three months ended
September 30, 1999, from $1,220,000 for the three months ended September 30,
1998, primarily due to transaction fees received from GC in 1998.
Interest and Other Income. Interest and other income increased $363,000, or 26%,
to $1,779,000 for the three months ended September 30, 1999, from $1,416,000 for
the three months ended September 30, 1998. The increase primarily consisted of
an increase in interest income from a mortgage loan receivable secured by land
located in Aurora, Colorado, which originated on June 30, 1998. Interest on this
loan is compounded annually on June 30 which resulted in an increase of
approximately $100,000 during the three months ended September 30, 1999 as
compared to the three months ended September 30, 1998. In addition, interest
from other notes receivable which originated in 1999 in connection with property
sales was approximately $133,000 during the three months ended September 30,
1999. These other notes receivable have a book value of approximately $6,400,000
at September 30, 1999, and are included in other assets on the Operating
Partnership's consolidated balance sheet as of September 30, 1999.
Equity in Earnings of Associated Companies. Equity in earnings of Associated
Companies increased $1,148,000, or 183%, to $1,777,000 for the three months
ended September 30, 1999, from $629,000 for the three months ended September 30,
1998. The increase is primarily due to an increase in earnings from GC arising
from a benefit for income taxes generated by the write-off of certain tax basis
assets which had no book basis for financial reporting purposes.
Net Loss on Sales of Real Estate Assets. The net loss on sales of real estate
assets of $371,000 during the three months ended September 30, 1999, resulted
from the $1,229,000 gain on sales of two office properties, two office/flex
properties and one hotel property from the Operating Partnership's portfolio,
offset by a $1,600,000 loss on the 1998 sale of a hotel property. In June 1998,
the Operating Partnership sold a hotel property in Dallas, Texas, to a third
party for a sale price of $4.2 million, of which $3.6 million was represented by
a note receivable secured by the hotel property. In September 1999, the loan
agreement was modified to reduce the sale price of the hotel by $1.6 million
and, thus, the principal amount of the note receivable was also reduced by $1.6
million. This reduction in the sale price of the hotel was recorded as a loss on
sale of the property. The net loss on sales of real estate assets of $250,000
during the three months ended September 30, 1998, resulted from additional costs
to sell one office/flex property, one industrial property, one multifamily
property and two hotel properties from the Operating Partnership's portfolio in
the first and second quarters of 1998.
Property Operating Expenses. Property operating expenses did not change
significantly with a decrease of $301,000, or 1%, to $22,145,000 for the three
months ended September 30, 1999, from $22,446,000 for the three months ended
September 30, 1998.
General and Administrative Expenses. General and administrative expenses
decreased $1,087,000, or 32%, to $2,280,000 for the three months ended September
30, 1999, from $3,367,000 for the three months ended September 30, 1998. This
decrease is primarily due to a reduction in staff and overhead expenses in
response to a decrease in acquisition and marketing activities since mid-1998
and a reduction in the number of properties owned. As a percentage of rental
revenue, general and administrative expenses decreased from 5.2% for the three
months ended September 30, 1998, to 3.6% for the three months ended September
30, 1999.
Depreciation and Amortization. Depreciation and amortization did not change
significantly with a decrease of $43,000, or 0.30%, to $14,266,000 for the three
months ended September 30, 1999, from $14,309,000 for the three months ended
September 30, 1998.
24
<PAGE>
Interest Expense. Interest expense decreased $1,344,000, or 8%, to $15,720,000
for the three months ended September 30, 1999, from $17,064,000 for the three
months ended September 30, 1998. Substantially all of the decrease was the
result of higher average borrowings during the three months ended September 30,
1998, as compared to the three months ended September 30, 1999, due to pay downs
of debt in connection with sales of properties in 1999.
Net Gain on Early Extinguishment of Debt. Net gain on early extinguishment of
debt of $740,000 during the three months ended September 30, 1999, represents a
gain on the retirement of $8,750,000 of Senior Notes at a discount.
Liquidity and Capital Resources
Cash Flows
For the nine months ended September 30, 1999, cash provided by operating
activities decreased by $7,674,000 to $69,268,000 as compared to $76,942,000 for
the same period in 1998. The decrease is primarily due to an increase in cash
used for other assets and liabilities offset by an increase in net income
(before depreciation and amortization, net gain on sales of real estate assets
and net gain on early extinguishment of debt) of $8,914,000 due to the 1998
Acquisitions and 1999 Acquisitions. Cash from investing activities increased by
$695,316,000 to $61,450,000 of cash provided by investing activities for the
nine months ended September 30, 1999, as compared to $633,866,000 of cash used
for investing activities for the same period in 1998. The increase is primarily
due to a decrease in property acquisitions in 1999 as compared to the same
period in 1998. During the nine months ended September 30, 1998, the Operating
Partnership acquired 69 properties as compared to seven properties during the
nine months ended September 30, 1999. In addition, cash used for investments in
development, marketable securities and mortgage loans receivable decreased
significantly during the nine months ended September 30, 1999 as compared to the
same period in 1998. These decreases are partially offset by an increase in
proceeds from sales of properties during 1999. Cash from financing activities
decreased by $692,053,000 to $131,555,000 of cash used for financing activities
for the nine months ended September 30, 1999, as compared to $560,498,000 of
cash provided by financing activities for the same period in 1998. This change
was primarily due to a decrease in proceeds from new debt and a decrease in
contributions from the Company of net proceeds from the issuance of stock. In
1998, the Company completed an offering of Preferred Stock and contributed the
proceeds to the Operating Partnership; there have been no offerings in 1999. In
addition, in 1998, the Operating Partnership issued $150,000,000 of unsecured
Series A Senior Notes.
The Operating Partnership expects to meet 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 the unsecured Credit
Facility, permanent secured debt financing, public unsecured debt financing,
contributions from the Company, privately placed financing, the issuance of
Operating Partnership units, proceeds from property sales and cash flow provided
by operations.
Mortgage Loans Receivable
Mortgage loans receivable increased from $42,420,000 at December 31, 1998, to
$43,003,000 at September 30, 1999. This increase was primarily due to accrued
interest on a loan made by the Operating Partnership under a development
alliance, offset by a $1.6 million decrease in a loan secured by a hotel
property as discussed above.
Secured and Unsecured Financing
Mortgage loans payable decreased from $708,578,000 at December 31, 1998, to
$694,288,000 at September 30, 1999. This decrease resulted from the payoff of
approximately $167,438,000 of mortgage loans in connection with 1999 sales of
properties and refinancing of debt, and scheduled principal payments of
approximately $6,927,000. This decrease is partially offset by $29,275,000 of
new mortgage loans in connection with 1999 Acquisitions and new financing of
$130,800,000 (as discussed below).
25
<PAGE>
In March 1999, the Operating Partnership obtained a $26 million loan from a
commercial bank. The loan was non-recourse and was secured by seven properties
and had a maturity date of December 22, 1999, with an option to extend for six
months. The proceeds were used to pay off a loan which was previously secured by
these same properties and to reduce other debt. This loan was paid off in June
1999 with proceeds from the sales of four properties.
In August 1999, the Operating Partnership closed a $97.6 million secured
financing with Key Bank/FNMA. The proceeds from this financing, combined with
proceeds from a new $7.2 million mortgage and a draw on the Credit Facility (as
defined below), were used to retire a $113.2 million mortgage which would have
matured in December of 1999. The new financing is a revolving line of credit
maturing in five years with a five-year extension option, and bears interest at
a floating rate equal to 75 basis points over the rate for 90-day mortgage
backed securities credit-enhanced by FNMA. The current interest rate on this
loan is 6.2%.
In connection with the Key Bank/FNMA secured financing, the Operating
Partnership entered into an interest rate cap agreement to hedge increases in
interest rates above a specified level of 11.21%. The agreement is for a term
concurrent with the Key Bank/FNMA instrument, is indexed to a 90-day LIBOR rate,
and is for a notional amount equal to the maximum amount available on the Key
Bank/FNMA loan. As of September 30, 1999, the 90-day LIBOR rate was 6.084%. The
Operating Partnership paid a premium of approximately $434,000 at the inception
of the cap agreement, which is being amortized as additional interest expense
over the life of the agreement.
In the second and third quarters of 1999, the Operating Partnership retired
approximately $25.9 million of unsecured Series A Senior Notes at a discount. As
a result of these transactions, a gain on early extinguishment of debt of
approximately $2.6 million was recorded which is included in the net gain on
early extinguishment of debt on the Operating Partnership's consolidated
statement of operations for the nine months ended September 30, 1999, as
discussed below.
In connection with the loan payoffs discussed above and the payoff of other
mortgage debt, the Operating Partnership recorded a net gain on early
extinguishment of debt of $437,000 for the nine months ended September 30, 1999.
This gain consists of $2,568,000 of gains on retirement of Series A Senior Notes
(as discussed above) offset by $2,026,000 of losses due to prepayment penalties
and $105,000 of losses due to the writeoff of unamortized loan fees upon the
early payoff of four loans. These loans were paid-off early when more favorable
terms were obtained through new financing (discussed above) and upon the sale of
the properties securing the loans.
The Operating Partnership has an unsecured line of credit provided by a
commercial bank (the "Credit Facility"). Outstanding borrowings under the Credit
Facility increased from $63,519,000 at December 31, 1998, to $83,207,000 at
September 30, 1999, due to draws for acquisitions, stock repurchases, purchases
of the Operating Partnership's Series A Senior Notes, and debt refinancing,
offset by pay downs from proceeds from the sales of properties and cash from
operations. In June 1999, in order to increase the Operating Partnership's
financial flexibility, the Credit Facility was modified to increase the
commitment from $100 million to $142.5 million. The interest rate, monthly
payments and maturity date remain unchanged.
At September 30, 1999, the Operating Partnership's total indebtedness included
fixed-rate debt of $682,303,000 and floating-rate indebtedness of $219,332,000.
Approximately 64% of the Operating Partnership's total assets, comprising 101
properties, is encumbered by debt at September 30, 1999.
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 September 30, 1999, approximately 24% 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
September 30, 1999, the Operating Partnership was not a party to any open
interest rate protection agreements other than the interest rate cap contract
associated with the Key Bank/FNMA loan discussed above.
26
<PAGE>
Equity and Debt Offerings
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 November 1997 shelf registration statement
(declared effective by the SEC on December 18, 1997). 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 January 1999 Shelf Registration Statement to issue up to $300 million in
debt securities and $801.2 million in equity securities, respectively. The
Operating Partnership and the Company currently have no plans to issue equity or
debt under these shelf registrations.
Development Alliances
The Operating Partnership has formed 4 development alliances for the development
of approximately 713,000 square feet of office, office/flex and distribution
properties and 1,710 multifamily units in North Carolina, Colorado, Texas, New
Jersey, Kansas and Michigan. As of September 30, 1999, the Operating Partnership
has advanced approximately $42 million. Under these development alliances, the
Operating Partnership has certain rights to purchase the properties upon
completion of development over the next five years. In addition, the Operating
Partnership has loaned approximately $37.3 million (including accrued interest)
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 multifamily properties generally provide for an initial term of
one month or one year and allow for rent adjustments at the time of renewal.
Leases at the office Properties typically provide for rent adjustment and
pass-through of certain operating expenses during the term of the lease. All of
these provisions may permit the Operating Partnership to increase rental rates
or other charges to tenants in response to rising prices and therefore, serve to
reduce the Operating Partnership's exposure to the adverse effects of inflation.
Forward Looking Statements; Factors That May Affect Operating Results
This Report on Form 10-Q contains forward looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934, including statements regarding the Operating
Partnership's expectations, hopes, intentions, beliefs and strategies regarding
the future including the Operating Partnership's belief that cash generated by
operations will be adequate to meet operating requirements and to make
distributions, the Operating Partnership's expectations as to the timing of the
completion of the development projects through its development alliances and the
acquisition by the Operating Partnership of properties developed through its
development alliances. There can be no assurance that the actual outcomes or
results will be consistent with such expectations, hopes, intentions, beliefs
and strategies. Forward looking statements include statements regarding
potential acquisitions, the anticipated performance of future acquisitions,
recently completed acquisitions and existing properties, and statements
regarding the Operating Partnership's financing activities. All forward looking
statements included in this document are based on information available to the
Operating Partnership on the date hereof. It is important to note that the
Operating Partnership's actual results could differ materially from those stated
or implied in such forward-looking statements.
Factors which may cause the Operating Partnership's results to differ include
the inability to complete anticipated future acquisitions, defaults or
non-renewal of leases, increased interest rates and operational costs, failure
to obtain necessary outside financing, difficulties in identifying properties to
acquire and in effecting acquisitions, the Company's failure to qualify as a
real estate investment trust under the Internal Revenue Code of 1986,
environmental uncertainties, risks related to natural disasters, financial
market fluctuations, changes in real estate and zoning laws, increases in real
property tax rates and other factors discussed under the caption "Forward
Looking Statements; Factors That May Affect Operating Results" in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of the Operating Partnership's Annual Report on Form 10-K
for the year ended December 31, 1998, and other risk factors set forth in the
Operating Partnership's other Securities and Exchange Commission filings.
27
<PAGE>
Impact of Year 2000 Compliance Costs on Operations
State of Readiness. The Operating Partnership uses a number of computer software
programs and operating systems across the entire organization. These programs
and systems primarily comprise (i) information technology systems ("IT Systems")
(i.e., software programs and computer operating systems) that serve 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 the Operating Partnership's properties ("Property
Systems"). To the extent that the Operating Partnership's 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, the Operating Partnership has completed its
identification of IT Systems, including hardware components, that are
not yet Year 2000 compliant. To the best of the Operating
Partnership's knowledge, based on available information and a
reasonable level of inquiry and investigation, the Operating
Partnership has completed such upgrading of such systems that it
believes are called for under the circumstances, and in accordance
with prevailing industry practice. The Operating Partnership has
commenced a testing program which it anticipates will be completed
during 1999. In addition, the Operating Partnership is currently
communicating with third parties with whom it does 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, the Operating Partnership has also completed
its identification of Property Systems, including hardware components,
that are not yet Year 2000 compliant. The Operating Partnership has
commenced such upgrading of such systems that it believes are called
for under the circumstances, based on available information and a
reasonable level of inquiry and investigation, and in accordance with
prevailing industry practice. Upon completion of such upgrading, the
Operating Partnership will initiate a testing program which it
anticipates will be completed during 1999. To the best of the
Operating Partnership's knowledge, there are no Property Systems, the
failure of which would have a material effect on operations.
Costs of Addressing the Operating Partnership's Year 2000 Issues. Given the
information known at this time about the Operating Partnership's systems that
are non-compliant, coupled with its ongoing, normal course-of-business efforts
to upgrade or replace critical systems, as necessary, the Operating Partnership
does not expect Year 2000 compliance costs to have any material adverse impact
on liquidity or ongoing results of operations. The costs of such assessment and
remediation will be paid as an operating expense.
Risks of the Operating Partnership's Year 2000 Issues. In light of the Operating
Partnership's assessment and upgrading efforts to date, and assuming completion
of the planned, normal course-of-business upgrades and subsequent testing, the
Operating Partnership believes 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 overall operations. The Operating Partnership believes that all
of its systems will be Year 2000 compliant and that compliance will not
materially adversely affect its future liquidity or results of operations or
ability to service debt, but the Operating Partnership cannot give absolute
assurance that this is the case.
The Operating Partnership's Contingency Plans. The Operating Partnership is
currently developing its 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 the Operating
Partnership's ability to plan for major regional or industrial failures such as
regional power outages or regional or industrial communications breakdowns. The
Operating Partnership expects such contingency plans to be completed during
1999.
28
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Blumberg. On July 24, 1999, the Supreme Court of the United States denied a
petition for a writ of certiorari to review the Company's settlement of a class
action complaint originally filed on February 21, 1995 in connection with the
Consolidation. No further appeals are possible in this case, and the settlement
amount has been paid in full. Under the settlement, the Company agreed to pay
$855,000 to settle certain claims by Anthony E. Blumberg, and others (the
"Blumberg Action"), that the Company and others had, among other things,
breached their fiduciary duty and duty of good faith and fair dealing to
investors in the Partnerships involved in the Consolidation. Certain parties
objected to the settlement, but the settlement was 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, the California Supreme Court and the
Supreme Court of the United States.
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 voluntarily stayed the action pending resolution of the Blumberg Action.
The plaintiffs in the BEJ Action are BEJ Equity Partners and others, who as a
group held limited partner interests in certain of the Partnerships included in
the Consolidation, on behalf of themselves and all others similarly situated.
The defendants are the Company and other Glenborough entities involved in the
Consolidation, as well as Robert Batinovich and Andrew Batinovich. The
Partnerships are named as nominal defendants.
This action alleges certain disclosure violations and substantially the same
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 is without merit, and management
intends to pursue a vigorous defense. However, given the inherent uncertainties
of litigation, there can be no assurance that the ultimate outcome in the BEJ
Action 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 their financial position, cash flow or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the quarter
ended September 30, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The Exhibit Index attached hereto is hereby incorporated by
reference to this item.
(b) Reports on Form 8-K:
On July 28, 1999, the Company filed a report on Form 8-K
with respect to Supplemental Information for the quarter
ended June 30, 1999.
On October 26, 1999, the Company filed a report on Form 8-K
with respect to Supplemental Information for the quarter
ended September 30, 1999.
29
<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: November 15, 1999 /s/ Andrew Batinovich
Andrew Batinovich
Director, President
and Chief Operating Officer
(Principal Operating Officer)
Date: November 15, 1999 /s/ Stephen Saul
Stephen Saul
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: November 15, 1999 /s/ Terri Garnick
Terri Garnick
Senior Vice President,
Chief Accounting Officer,
Treasurer
(Principal Accounting Officer)
30
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Title
12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Fixed Charges and Preferred Partner Interest
Distributions.
27.1 Financial Data Schedule.
31
<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, and the three months
ended March 31, June 30, and September 30, 1999 (in thousands)
<TABLE>
<CAPTION>
GRT Predecessor
Entities,
Combined The Operating Partnership
---------------------- ------------------------------------------------------------------
Three Three Three
Months Months Months
Ended Ended Ended Year To
Year Ended December 31, March 31, June 30, Sept. 30, Date
------------------------------------------------- --------- -------- ----------- --------
1994 1995 1996 1997 1998 1999 1999 1999 1999
---------- -------- -------- -------- -------- --------- --------- ---------- -------
EARNINGS, AS DEFINED
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income (Loss) before Preferred
Partner Interest Distributions (2) $ 1,580 $ 524 $(1,901) $17,727 $ 46,136 $11,252 $18,586 $13,066 $42,904
Extraordinary items -- -- 186 843 1,400 1,991 (1,688) (740) (437)
Federal & State income taxes 176 357 -- -- -- -- -- -- --
Minority Interest 43 -- -- -- -- -- -- -- --
Fixed Charges 1,140 2,129 3,913 9,668 53,289 16,540 16,418 15,720 48,678
---------- -------- --------- -------- -------- -------- -------- --------- -------
$ 2,939 $3,010 $ 2,198 28,238 $100,825 $29,783 $33,316 $28,046 $91,145
---------- -------- --------- -------- -------- -------- -------- --------- -------
FIXED CHARGES AND PREFERRED
PARTNER INTEREST DISTRIBUTIONS,
AS DEFINED
Interest Expense $ 1,140 $2,129 $ 3,913 $ 9,668 $ 53,289 $16,540 $16,418 $15,720 $48,678
Capitalized Interest -- -- -- -- 1,108 643 687 747 2,077
Preferred Partner Interest
Distributions -- -- -- -- 20,620 5,570 5,570 5,570 16,710
---------- -------- --------- -------- -------- -------- -------- ---------- -------
$ 1,140 $2,129 $ 3,913 $ 9,668 $ 75,017 $22,753 $22,675 $22,037 $67,465
RATIO OF EARNINGS TO FIXED CHARGES (3) 2.58 1.41 0.56 (1) 2.92 1.85 1.73 1.95 1.70 1.80
---------- -------- --------- -------- -------- -------- -------- ---------- -------
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED PARTNER INTEREST
DISTRIBUTIONS(3) 2.58 1.41 0.56 (1) 2.92 1.34 1.31 1.47 1.27 1.35
---------- -------- --------- -------- -------- -------- -------- ---------- -------
</TABLE>
(1) For the twelve months ended December 31, 1996, earnings were insufficient
to cover fixed charges by $1,715.
(2) Net Income (Loss) before Preferred Partner Interest Distributions includes
depreciation and amortization expense as a deduction.
(3) Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges
and Preferred Partner Interest Distributions includes depreciation and
amortization expense as a deduction from earnings.
32
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S dollars
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 3,182
<SECURITIES> 0
<RECEIVABLES> 3,396
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,578
<PP&E> 1,757,198
<DEPRECIATION> 100,700
<TOTAL-ASSETS> 1,818,967
<CURRENT-LIABILITIES> 21,108
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 888,682
<TOTAL-LIABILITY-AND-EQUITY> 1,818,967
<SALES> 192,127
<TOTAL-REVENUES> 207,769
<CGS> 0
<TOTAL-COSTS> 109,584
<OTHER-EXPENSES> 7,040
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,678
<INCOME-PRETAX> 42,467
<INCOME-TAX> 0
<INCOME-CONTINUING> 42,467
<DISCONTINUED> 0
<EXTRAORDINARY> 437
<CHANGES> 0
<NET-INCOME> 42,904
<EPS-BASIC> 0.73
<EPS-DILUTED> 0.73
</TABLE>
