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 March 31, 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 pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___
1
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INDEX
GLENBOROUGH PROPERTIES, L.P.
Page No.
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements of Glenborough Properties, L.P.
(Unaudited except for the Consolidated Balance Sheet at December
31, 1998):
Consolidated Balance Sheets at March 31, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the three
months ended March 31, 1999 and 1998 4
Consolidated Statement of Partners' Equity for the
three months ended March 31, 1999 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 6-7
Notes to Consolidated Financial Statements 8-17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18-23
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24-25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
EXHIBIT INDEX 28
2
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit amounts)
March 31, December 31,
1999 1998
(Unaudited) (Audited)
---------------- -----------------
ASSETS
<S> <C> <C>
Rental property, net of accumulated depreciation of
$76,064 and $72,951 in 1999 and 1998, respectively $ 1,644,620 $ 1,720,579
Real estate held for sale 91,618 21,860
Investments in Development 36,772 35,131
Investments in Associated Companies 8,992 8,807
Mortgage loans receivable 43,413 42,420
Cash and cash equivalents 3,665 4,019
Other assets 47,656 45,437
---------------- -----------------
TOTAL ASSETS $ 1,876,736 $ 1,878,253
================ =================
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Mortgage loans $ 730,376 $ 708,578
Unsecured Series A Senior Notes 150,000 150,000
Unsecured bank line 54,307 63,519
Other liabilities 23,806 28,921
---------------- -----------------
Total liabilities 958,489 951,018
---------------- -----------------
Commitments and contingencies -- --
Partners' Equity:
General partner, 359,077 and 359,090 units issued and outstanding at March
31, 1999 and December 31, 1998, respectively 8,921 9,066
Limited partners, 35,548,654 and 35,549,914 units issued and outstanding at
March 31, 1999 and December 31,
1998, respectively 909,326 918,169
---------------- -----------------
Total partners' equity 918,247 927,235
---------------- -----------------
TOTAL LIABILITIES AND PARTNERS'
EQUITY $ 1,876,736 $ 1,878,253
================ =================
See accompanying notes to consolidated financial statements
</TABLE>
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<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 1999 and 1998
(in thousands, except per unit amounts)
(Unaudited)
1999 1998
--------------- ---------------
REVENUE
<S> <C> <C>
Rental revenue $ 64,641 $ 45,963
Fees and reimbursements from affiliates 1,131 473
Interest and other income 1,659 307
Equity in earnings of Associated Companies 309 352
Net gain on sales of real estate assets 1,351 1,446
--------------- ---------------
Total revenue 69,091 48,541
--------------- ---------------
EXPENSES
Property operating expenses, including $1,347 paid to
the Company in 1998 22,001 15,671
General and administrative, including $1,815 paid to
the Company in 1998 2,215 1,866
Depreciation and amortization 15,092 9,984
Interest expense 16,540 9,145
--------------- ---------------
Total expenses 55,848 36,666
--------------- ---------------
Net income before extraordinary item 13,243 11,875
Extraordinary item:
Loss on early extinguishment of debt (1,991) --
--------------- ---------------
Net income 11,252 11,875
Preferred partner interest distributions (5,570) (3,910)
--------------- ---------------
Net income available to general and limited partners $ 5,682 $ 7,965
=============== ===============
Per Partnership Unit Data:
Net income available to general and limited partners before
extraordinary item $ 0.21 $ 0.24
Extraordinary item (0.05) --
--------------- ---------------
Net income available to general and limited partners $ 0.16 $ 0.24
=============== ===============
Weighted average number of partnership units outstanding 35,949,321 33,703,270
=============== ===============
See accompanying notes to consolidated financial statements
</TABLE>
4
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<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY
For the three months ended March 31, 1999
(in thousands)
(Unaudited)
General Limited
Partner Partners Total
------------------- ------------------- ------------------
<S> <C> <C> <C>
Balance at December 31, 1998 $ 9,066 $ 918,169 $ 927,235
Issuance of Operating Partnership units
and additional contributions 25 2,427 2,452
Distributions (206) (20,450) (20,656)
Redemption of units (21) (2,049) (2,070)
Unrealized gain on marketable securities -- 34 34
Net income 57 11,195 11,252
------------------- ------------------- ------------------
Balance at March 31, 1999 $ 8,921 $ 909,326 $ 918,247
=================== =================== ==================
See accompanying notes to consolidated financial statements
</TABLE>
5
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<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1999 and 1998
(in thousands)
(Unaudited)
1999 1998
--------------- ---------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 11,252 $ 11,875
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 15,092 9,984
Amortization of loan fees, included in
interest expense 485 418
Equity in earnings of Associated Companies (309) (352)
Net gain on sales of real estate assets (1,351) (1,446)
Loss on early extinguishment of debt 1,991 --
Changes in certain assets and liabilities, net (5,211) (2,668)
--------------- ---------------
Net cash provided by operating activities 21,949 17,811
--------------- ---------------
Cash flows from investing activities:
Net proceeds from sales of real estate assets 17,522 28,559
Additions to real estate assets (14,176) (412,585)
Investments in Development (3,488) --
Additions to mortgage loans receivable (993) (49)
Principal receipts on mortgage loans receivable -- 1
Advances to affiliates (1,651) --
Distributions from Associated Companies 124 548
--------------- ---------------
Net cash used for investing activities (2,662) (383,526)
--------------- ---------------
Cash flows from financing activities:
Proceeds from borrowings 44,000 159,365
Repayment of borrowings (45,514) (201,005)
Draws from (payments into) lender impound accounts, net 2,147 (1,445)
Proceeds from issuance of Series A Senior Notes -- 150,000
Contributions 2,452 275,680
Distributions (20,656) (13,210)
Redemption of partnership units (2,070) --
--------------- ---------------
Net cash provided by (used for) financing
activities (19,641) 369,385
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (354) 3,670
Cash and cash equivalents at beginning of period 4,019 2,568
--------------- ---------------
Cash and cash equivalents at end of period $ 3,665 $ 6,238
=============== ===============
(continued)
See accompanying notes to consolidated financial statements
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS-continued
For the three months ended March 31, 1999 and 1998
(in thousands)
(Unaudited)
1999 1998
--------------- ---------------
Supplemental disclosure of cash flow information:
<S> <C> <C>
Cash paid for interest (net of capitalized interest of
$643 in 1999) $ 16,684 $ 7,329
=============== ===============
Supplemental disclosure of Non-Cash Investing and Financing
Activities:
Acquisition of real estate through assumption of first
trust deed notes payable $ 14,100 $ 105,756
=============== ===============
Acquisition of real estate through issuance of
Operating Partnership units $ -- $ 116
=============== ===============
See accompanying notes to consolidated financial statements
</TABLE>
7
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GLENBOROUGH PROPERTIES, L.P.
Notes to Consolidated Financial Statements
March 31, 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% (87.25%
limited partnership interest as of March 31, 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, 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 March 31,
1999, the Operating Partnership, directly and through the subsidiaries in which
it and the Company own 100% of the ownership interests, controls a total of 181
real estate projects.
Effective April 1, 1998, the Company contributed to the Operating Partnership
the majority of its assets, including 100% of its shares of the non-voting
preferred stock of Glenborough Corporation ("GC"), 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 of March 31, 1999, as a result of the above transactions, the Operating
Partnership holds 100% of the non-voting preferred stock of the following two
Associated Companies (the "Associated Companies"):
Glenborough Corporation 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
Corporation, an unaffiliated corporation which has significant real estate
assets in the Inland Empire region of Southern California (the "Rancon
Partnerships").
Glenborough Hotel Group owns an approximate 36% limited partner interest
in a real estate joint venture.
8
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Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements present the consolidated financial
position of the Operating Partnership and its majority owned subsidiaries as of
March 31, 1999 and December 31, 1998, and the consolidated results of operations
and cash flows of the Operating Partnership for the three months ended March 31,
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 March 31, 1999, and for the period then ended.
Reclassification
Certain prior year balances have been reclassified to conform with 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 is effective for fiscal years beginning after June 15, 1999, and early
adoption is permitted. SFAS No. 133 provides comprehensive guidelines for the
recognition and measurement of derivatives and hedging activities and
specifically requires all derivatives to be recorded on the balance sheet at
fair value. Management is evaluating the effects, if any, that this
pronouncement will have on the Operating Partnership's consolidated financial
position, results of operations and financial statement position.
Investments in Real Estate
Investments in real estate are stated at cost unless circumstances indicate that
cost cannot be recovered, in which case, the carrying value of the property is
reduced to estimated fair value. Estimated fair value: (i) is based upon the
Operating Partnership's plans for the continued operation of each property; and
(ii) is computed using estimated sales price, as determined by prevailing market
values for comparable properties and/or the use of capitalization rates
multiplied by annualized rental income based upon the age, construction and use
of the building. The fulfillment of the Operating Partnership's plans related to
each of its properties is dependent upon, among other things, the presence of
economic conditions which will enable the Operating Partnership to continue to
hold and operate the properties prior to their eventual sale. Due to
uncertainties inherent in the valuation process and in the economy, it is
reasonably possible that the actual results of operating and disposing of the
Operating Partnership's properties could be materially different than current
expectations.
Depreciation is provided using the straight line method over the useful lives of
the respective assets.
The useful lives are as follow:
Buildings and Improvements 10 to 40 years
Tenant Improvements Term of the related lease
Furniture and Equipment 5 to 7 years
Investments in Associated Companies
The Operating Partnership's investments in the Associated Companies are
accounted for using the equity method, as discussed further in Note 4.
9
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Mortgage Loans Receivable
The Operating Partnership monitors the recoverability of its loans and notes
receivable through ongoing contact with the borrowers to ensure timely receipt
of interest and principal payments, and where appropriate, obtains financial
information concerning the operation of the properties. Interest on mortgage
loans is recognized as revenue as it accrues during the period the loan is
outstanding. Mortgage loans receivable will be evaluated for impairment if it
becomes evident that the borrower is unable to meet its debt service obligations
in a timely manner and cannot satisfy its payments using sources other than the
operations of the property securing the loan. If it is concluded that such
circumstances exist, then such loan will be considered to be impaired and its
recorded amount will be reduced to the fair value of the collateral securing it.
Interest income will also cease to accrue under such circumstances. Due to
uncertainties inherent in the valuation process, it is reasonably possible that
the amount ultimately realized from the Operating Partnership's collection on
these receivables will be different than the recorded amounts.
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 March 31, 1999, the Operating Partnership was not a party to any open
interest rate protection agreements.
Deferred Financing and Other Fees
Fees paid in connection with the financing and leasing of the Operating
Partnership's properties are amortized over the term of the related notes
payable or leases and are included in other assets.
Investments in Development Alliances
The Operating Partnership, through mezzanine loans and equity contributions,
invests in various development alliances with projects currently under
development. The interest on advances and other direct project costs incurred by
10
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the Operating Partnership are capitalized to the investment during the period in
which the projects are under development. See Note 6 for further discussion.
Revenues
All leases are classified as operating leases. Rental revenue is recognized as
earned over the terms of the related leases.
For the three months ended March 31, 1999, no tenants represented 10% or more of
rental revenue of the Operating Partnership.
Fees and reimbursements revenue consists of property management fees, overhead
administration fees, and transaction fees from the acquisition, disposition,
refinancing, leasing and construction supervision of real estate for an
unconsolidated affiliate.
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.
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. INVESTMENTS IN REAL ESTATE
Acquisitions
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 capitalized costs of Phase I was approximately $20.8 million
comprising: (i) approximately $14.1 million in assumption of debt and (ii) the
balance in cash. In addition, the Operating Partnership acquired a 1.45-acre
parcel containing 63,220 square feet of industrial buildings in Los Angeles,
California, near the Los Angeles International Airport. The total acquisition
cost, including capitalized costs, was approximately $3.1 million, which was
paid entirely in cash. The property has been leased to a single tenant under a
15-year triple-net lease.
11
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Dispositions
In the first quarter of 1999, the Operating Partnership sold seven properties,
including five office/flex properties and two retail properties, and a small
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 three months ended March 31, 1999.
Prospective Acquisitions and Dispositions
The Operating Partnership has entered into a definitive agreement to acquire all
of the real estate assets of Prudential-Bache/Equitec Real Estate Partnership, a
California limited partnership in which the managing general partner is
Prudential-Bache Properties, Inc., and in which GC and Robert Batinovich have
served as co-general partners since March 1994, but do not hold a material
equity or economic interest (the "Pru-Bache Portfolio"). The total acquisition
cost, including capitalized costs, is expected to be approximately $49.9
million, which is to be paid entirely in cash. The Company anticipates that the
cash will be funded with proceeds from the sales of real estate assets. The
Pru-Bache Portfolio comprises four office buildings aggregating 405,825 square
feet and one office/flex property containing 121,645 square feet. This
acquisition is subject to certain contingencies, including customary closing
conditions and the resolution of litigation relating to the proposed
acquisition, to which neither the Operating Partnership nor the Company is a
party.
The Operating Partnership has entered into short-term lease agreements on the
hotel properties located in Arlington, Texas, and Ontario, California, with the
prospective purchasers of these properties. These prospective purchasers have
entered into purchase agreements for these properties, with anticipated closing
dates of June 30, 1999. The leases terminate on the closing date of the sale of
the properties. The net book value of the two hotel properties totals $7,832,000
at March 31, 1999. Net income earned by the Operating Partnership (before
depreciation) from the two hotels totaled $192,000 and $229,000 for the three
months ended March 31, 1999 and 1998, respectively.
The Operating Partnership has entered into separate definitive agreements to
sell ten properties, including three office properties, four office/flex
properties, one industrial property, one retail property and one multifamily
property. These sales are expected to close in the second quarter of 1999 for an
aggregate sales price of approximately $51 million. In addition, the Operating
Partnership is in active negotiations to sell another six properties, including
one office property, one office/flex property, one industrial property and three
retail properties. The six additional properties have an aggregate net book
value of approximately $77.3 million at March 31, 1999, and are reflected as
Real Estate Held For Sale on the accompanying consolidated balance sheet as of
March 31, 1999. See Note 10 for discussion of sales subsequent to March 31,
1999.
Note 4. INVESTMENTS IN ASSOCIATED COMPANIES
The Operating Partnership accounts for its investments in the Associated
Companies (as defined in Note 1) using the equity method as a substantial
portion of their economic benefits flow to the Operating Partnership by virtue
of its 100% non-voting preferred stock interest in each of them, which interests
constitute substantially all of their capitalization. Two of the holders of the
voting common stock of GC and one of the holders of the voting common stock of
GHG are officers of the Company; however, neither the Company nor the Operating
Partnership has any direct voting or management control of either GC or GHG. The
Operating Partnership records earnings on its investments in the Associated
Companies 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 the Associated Companies are recorded as a reduction
of the Operating Partnership's investments.
As of March 31, 1999, the Operating Partnership had the following investments in
the Associated Companies (in thousands):
12
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GC GHG Total
--------- ---------- ---------
Investment at December 31, 1998 $ 6,800 $ 2,007 $ 8,807
Distributions (124) -- (124)
Equity in earnings (loss) 318 (9) 309
--------- ---------- ---------
Investment at March 31, 1999 $ 6,994 $ 1,998 $ 8,992
========= ========= =========
Note 5. MORTGAGE LOANS RECEIVABLE
The Operating Partnership's mortgage loans receivable consist of the following
as of March 31, 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 11% and a maturity
date of November 1999. As of March 31, 1999, the
Operating Partnership is committed to additional
advances totaling $221 for tenant improvements and
other leasing costs. $ 3,629 $ 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 June
30, 1999 3,600 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) 36,184 35,336
----------- ------------
Total $ 43,413 $ 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, 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.
Note 6. INVESTMENTS IN DEVELOPMENT
The Operating Partnership has formed 4 development alliances to which it has
committed a total of approximately $43 million 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 March 31, 1999, the Operating Partnership has
advanced approximately $34 million under these commitments. Under these
development alliances, the Operating Partnership has certain rights to purchase
the properties upon completion of development over the next five years.
Note 7. SECURED AND UNSECURED LIABILITIES
The Operating Partnership had the following mortgage loans, bank lines,
unsecured notes and notes payable outstanding as of March 31, 1999, and December
31, 1998 (dollars in thousands):
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1999 1998
--------- ----------
Secured loans with various lenders, net of
unamortized discount of $5,984 and $6,140 at March
31, 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 $405,796 and
$408,439 at March 31, 1999 and December 31, 1998,
respectively. $ 234,383 $ 234,871
Secured loan with a bank with a fixed interest
rate of 7.50%, monthly principal and interest
payments of $443 and a maturity date of October 1,
2022. The loan is secured by ten properties with
an aggregate net carrying value of $109,226 and
$110,129 at March 31, 1999 and December 31, 1998,
respectively. 58,767 58,942
Secured loan with an investment bank with a fixed
interest rate of 7.57%, monthly principal and
interest payments (based upon a 25-year
amortization) of $103 and a maturity date of
January 1, 2006. This loan was paid off in March
1999 with the proceeds from a new $26 million loan
discussed below. -- 13,220
Secured loans with various lenders, bearing
interest at fixed rates between 6.95% and 9.25%
(approximately $53,257 of these loans include an
unamortized premium of approximately $524 which
reduces the effective interest rate on those
instruments to 6.75%), with monthly principal and
interest payments ranging between $8 and $371 and
maturing at various dates through July 1, 2008.
These loans are secured by properties with an
aggregate net carrying value of $439,832 and
$447,444 at March 31, 1999 and December 31, 1998,
respectively. 258,545 261,938
Secured loans with various banks bearing interest
at variable rates ranging between 7.25% and 8.18%
at March 31, 1999 (approximately $114,692 of these
loans include an unamortized premium of
approximately $1,492 which reduces the effective
interest rate on those instruments to 6.75%),
monthly principal and interest payments ranging
between $16 and $800 and maturing at various dates
through December 22, 2000. These loans are secured
by properties with an aggregate net carrying value
of $227,756 and $179,438 at March 31, 1999 and
December 31, 1998, respectively. 164,332 125,230
Secured loans with a lender, bearing interest at
fixed rates between 7.60% and 7.85%, with monthly
principal and interest payments ranging between
$11 and $22. All of these loans have a maturity
date of December 1, 2030. These loans are secured
by multifamily properties with an aggregate net
carrying value of $18,062 and $19,060 at March 31,
1999 and December 31, 1998, respectively. 14,349 14,377
14
<PAGE>
1999 1998
--------- ----------
Unsecured $100,000 line of credit with a bank
("Credit Facility") with a variable interest rate
of LIBOR plus 1.625% (6.630% and 7.401% at March
31, 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. $ 54,307 $ 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. 150,000 150,000
--------- ----------
Total $ 934,683 $ 922,097
========= ==========
In March 1999, the Operating Partnership obtained a $26 million loan from a
commercial bank which bears interest at a variable rate of LIBOR plus 2.25%
(7.25% at March 31, 1999). The loan is non-recourse and is secured by seven
properties and has 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. Five of
the seven secured properties are currently being sold and the new loan provides
flexibility for partial releases of collateral upon the sale of a property.
In connection with the loan payoff discussed above and the payoff of another
loan upon the sale of an office/flex property, the Operating Partnership
incurred a loss on early extinguishment of debt of approximately $1,991,000,
which consisted of prepayment penalties and the write-off of unamortized loan
fees.
Some of the Operating Partnership's properties are held in limited partnerships
and limited liability companies in order to provide bankruptcy remote borrowers
for certain lenders. Such limited partnerships and limited liability companies
are included in the consolidated financial statements of the Operating
Partnership in accordance with Generally Accepted Accounting Principles
("GAAP").
The required principal payments on the Operating Partnership's debt for the next
five years and thereafter, as of March 31, 1999, are as follows (in thousands):
Year Ending
December 31,
1999 $ 122,966
2000 166,737
2001 15,528
2002 14,393
2003 37,981
Thereafter 577,078
---------
Total $ 934,683
=========
Note 8. RELATED PARTY TRANSACTIONS
Fee and reimbursement income earned by the Operating Partnership from related
parties totaled $1,131,000 and $473,000 for the three months ended March 31,
1999 and 1998, respectively, and consisted of property management fees, asset
management fees and other fee income.
For the three months ended March 31, 1998, the Operating Partnership paid the
Company property and asset management fees of $1,347,000 and $1,815,000,
respectively, which are included in property operating expenses and general and
administrative expenses on the accompanying consolidated statement of operations
for the three months ended March 31, 1998. In addition, the Operating
15
<PAGE>
Partnership paid GC property management fees and salary reimbursements totaling
$362,000 and $295,000 for the three months ended March 31, 1999 and 1998,
respectively, for management of a portfolio of residential properties owned by
the Operating Partnership, which is included in property operating expenses on
the accompanying consolidated statements of operations.
The Operating Partnership acquired from a Managed Partnership an option to
acquire all of its rights under a Lease with Option to Purchase Agreement, to
acquire 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 Company for $2,130,000 of
predevelopment costs, $283,000 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 March 31, 1999.
Note 9. 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
Operating Partnership's hotel operations are limited service "all-suite"
properties leased to and operated by third parties. Two of the Operating
Partnership's hotels are in contract to be sold.
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 three months ended March 31, 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 $ 29,836 $ 9,532 $ 4,764 $ 3,241 $ 16,670 $ 598 $ 64,641
Property operating expenses 11,512 2,849 1,115 1,176 7,255 97 24,004
=========== ============= =========== =========== ============ ============ =============
Net operating income (NOI) $ 18,324 $ 6,683 $ 3,649 $ 2,065 $ 9,415 $ 501 $ 40,637
=========== ============= =========== =========== ============ ============ =============
1998
- ----
Rental revenue $ 26,058 $ 8,579 $ 3,293 $ 2,388 $ 3,762 $ 1,883 $ 45,963
Property operating expenses 9,483 2,569 800 865 1,466 480 15,663
=========== ============= =========== =========== ============ ============ =============
Net operating income (NOI) $ 16,575 $ 6,010 $ 2,493 $ 1,523 $ 2,296 $ 1,403 $ 30,300
=========== ============= =========== =========== ============ ============ =============
</TABLE>
16
<PAGE>
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
---------------- ----------------
Revenues
<S> <C> <C>
Total revenue for reportable segments $ 64,641 $ 45,963
Other revenue (1) 4,450 2,628
================ ================
Total consolidated revenues $ 69,091 $ 48,591
================ ================
Net Income
NOI for reportable segments $ 40,637 $ 30,300
Elimination of internal property management fees 2,003 1,339
Unallocated amounts:
Other revenue (1) 4,450 2,628
General and administrative expenses (2,222) (2,222)
Depreciation and amortization (15,092) (10,009)
Interest expense (16,540) (9,145)
================ ================
Income from operations before minority interest and
extraordinary items $ 13,236 $ 12,891
================ ================
</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.
Note 10. SUBSEQUENT EVENTS
Subsequent to March 31, 1999, and through the date of this filing, the Operating
Partnership sold three properties, including one office property, one
office/flex property and one retail property. These properties were sold for an
aggregate sales price of $11,370,000 and generated an aggregate net gain of
approximately $400,000.
17
<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 March 31, 1999, the Operating Partnership,
directly and through various subsidiaries, owned and operated 181
income-producing properties (the "Properties," and each a "Property"). The
Properties are comprised of 54 office Properties, 44 office/flex Properties, 31
industrial Properties, 11 retail Properties, 38 multifamily Properties and 3
hotel Properties, located in 24 states.
The Operating Partnership was organized in the State of California on August 23,
1995. The Operating Partnership is the primary operating subsidiary of
Glenborough Realty Trust Incorporated (the "Company"), a self-administered and
self-managed real estate investment trust ("REIT"). On December 31, 1995, the
Company completed a consolidation (the "Consolidation") in which eight public
limited partnerships (the "Partnerships," collectively with Glenborough
Corporation (defined below), the "GRT Predecessor Entities"), merged with and
into the Company. The Company (i) issued 5,753,709 shares (the "Shares") of
$.001 par value Common Stock to the Partnerships in exchange for 3,979,376
Operating Partnership units; and (ii) merged with Glenborough Corporation, a
California Corporation, with the Company being the surviving entity. The Company
then transferred certain real estate and related assets to the Operating
Partnership in exchange for a sole general partner interest of 1% and a limited
partnership interest of 85.37% (87.25% limited partnership interest as of March
31, 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.
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 2 properties in 1999. The total acquired Properties consist of an
aggregate of approximately 15.7 million rentable square feet of office,
office/flex, industrial and retail space, 9,638 multifamily units and 227
hotel suites and had aggregate acquisition costs, including capitalized
costs, of approximately $1.8 billion.
From January 1, 1996 to the date of this filing, sold 39 properties which
were comprised of two office properties, eight office/flex properties, six
industrial properties, 19 retail properties, one multifamily property and
18
<PAGE>
three hotel properties, to redeploy capital into properties the Operating
Partnership believes have characteristics more suited to its overall growth
strategy and operating goals.
Issued $150 million of unsecured 7.625% Series A Senior Notes which mature
on March 15, 2005.
Entered into 4 development alliances to which the Operating Partnership
has made advances of approximately $34 million and a loan (including
accrued interest) of $36 million as of March 31, 1999.
Results of Operations
Comparison of the three months ended March 31, 1999 to the three months ended
March 31, 1998.
Rental Revenue. Rental revenue increased $18,678,000, or 41%, to $64,641,000 for
the three months ended March 31, 1999, from $45,963,000 for the three months
ended March 31, 1998. The increase included growth in revenue from the office,
industrial, office/flex, retail and multifamily Properties of $3,778,000,
$1,471,000, $953,000, $853,000 and $12,908,000, respectively. These increases
were partially offset by a $1,285,000 decrease in revenue from the hotel
Properties due to the 1998 sales of three hotels. Rental revenue generated from
the 1996 Acquisitions and the 1997 Acquisitions (excluding properties that have
been sold) increased $247,000 for the three months ended March 31, 1999, as
compared to the three months ended March 31, 1998. Rental revenue generated from
the first quarter 1998 Acquisitions (excluding properties that have been sold)
increased $2,155,000 for the three months ended March 31, 1999, as compared to
the three months ended March 31, 1998. Rental revenue for the three months ended
March 31, 1999, also included $17,657,000 from the 1998 Acquisitions acquired
subsequent to March 31, 1998. In addition, rental revenue of $456,000 was
generated from the acquisition of two properties in 1999 (the "1999
Acquisitions"). These increases were offset by a $1,837,000 decrease in rental
revenue due to the sales of 18 properties in 1998 and 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 increased
$658,000, or 139%, to $1,131,000 for the three months ended March 31, 1999, from
$473,000 for the three months ended March 31, 1998. The increase was primarily
due to transaction fees from GC.
Interest and Other Income. Interest and other income increased $1,352,000, or
440%, to $1,659,000 for the three months ended March 31, 1999, from $307,000 for
the three months ended March 31, 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 from Associated
Companies decreased $43,000, or 12%, to $309,000 for the three months ended
March 31, 1999, from $352,000 for the three months ended March 31, 1998. The
decrease is primarily due to a decrease in earnings from GHG resulting from the
sales and pending sales of the Operating Partnership's hotel properties which
resulted in the June 30, 1998, cancellation of GHG's hotel leases with the
Operating Partnership. This decrease is partially offset by a transaction fee
earned by GC from a Managed Partnership.
Net Gain on Sales of Real Estate Assets. A net gain on sales of real estate
assets of $1,351,000 during the three months ended March 31, 1999, resulted from
the sale of five office/flex properties, two retail properties and a small
partial interest in a REIT from the Operating Partnership's portfolio. The net
gain on sales of real estate assets of $1,446,000 during the three months ended
March 31, 1998, resulted from the sale of one multifamily property, two
industrial properties and one office/flex property from the Operating
Partnership's portfolio.
Property Operating Expenses. Property operating expenses increased $6,330,000,
or 40%, to $22,001,000 for the three months ended March 31, 1999, from
$15,671,000 for the three months ended March 31, 1998. Of this increase,
$7,960,000 represents increases in property operating expenses attributable to
the 1998 Acquisitions and the 1999 Acquisitions. This increase is offset by a
$1,347,000 decrease in property management fees from 1998 to 1999 and decreases
in property operating expenses due to the 1998 and 1999 sales of properties.
19
<PAGE>
General and Administrative Expenses. General and administrative expenses
increased $349,000, or 19%, to $2,215,000 for the three months ended March 31,
1999, from $1,866,000 for the three months ended March 31, 1998. The increase is
due to salary and overhead costs incurred by the Operating Partnership beginning
April 1, 1998, which were previously paid by the Company, offset by the
elimination of an asset management fee which totaled $1,815,000 for the three
months ended March 31, 1998 and $0 for the three months ended March 31, 1999.
Depreciation and Amortization. Depreciation and amortization increased
$5,108,000, or 51%, to $15,092,000 for the three months ended March 31, 1999,
from $9,984,000 for the three months ended March 31, 1998. The increase is
primarily due to depreciation and amortization associated with the 1998
Acquisitions and 1999 Acquisitions.
Interest Expense. Interest expense increased $7,395,000, or 81%, to $16,540,000
for the three months ended March 31, 1999, from $9,145,000 for the three months
ended March 31, 1998. Substantially all of the increase was the result of higher
average borrowings during the three months ended March 31, 1999, as compared to
the three months ended March 31, 1998, due to new debt and the assumption of
debt related to the 1998 Acquisitions and 1999 Acquisitions.
Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt of
$1,991,000 during the three months ended March 31, 1999, consists of prepayment
penalties and the write-off of unamortized loan fees upon the early payoff of
debt. Two loans were paid-off early when more favorable terms were obtained
through new financing (discussed below) and upon the sale of an office/flex
property.
Liquidity and Capital Resources
Cash Flows
For the three months ended March 31, 1999, cash provided by operating activities
increased by $4,138,000 to $21,949,000 as compared to $17,811,000 for the same
period in 1998. The increase is primarily due to an increase in net income
(before depreciation and amortization, net gain on sales of real estate assets
and loss on early extinguishment of debt) of $6,638,000 due to the 1998
Acquisitions and 1999 Acquisitions. Cash used for investing activities decreased
by $380,864,000 to $2,662,000 for the three months ended March 31, 1999, as
compared to $383,526,000 for the same period in 1998. The decrease is primarily
due to a decrease in property acquisitions in 1999 as compared to the same
period in 1998. During the three months ended March 31, 1998, the Operating
Partnership acquired 23 properties as compared to 2 properties during the three
months ended March 31, 1999. Cash from financing activities decreased by
$389,026,000 to $19,641,000 of cash used for financing activities for the three
months ended March 31, 1999, as compared to $369,385,000 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 net 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 meets its short-term liquidity requirements
generally through its working capital, its Credit Facility (as defined below)
and cash generated by operations. The Operating Partnership believes that its
cash generated by operations will be adequate to meet operating requirements and
to make distributions in both the short and the long-term. In addition to cash
generated by operations, the Credit Facility provides for working capital
advances. However, there can be no assurance that the Operating Partnership's
results of operations will not fluctuate in the future and at times affect (i)
its ability to meet its operating requirements and (ii) the amount of its
distributions.
The Operating Partnership's principal sources of funding for acquisitions,
development, expansion and renovation of properties include 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.
20
<PAGE>
Mortgage Loans Receivable
Mortgage loans receivable increased from $42,420,000 at December 31, 1998, to
$43,413,000 at March 31, 1999. This increase was primarily due to accrued
interest on a loan made by the Operating Partnership under a development
alliance.
Secured and Unsecured Financing
Mortgage loans payable increased from $708,578,000 at December 31, 1998, to
$730,376,000 at March 31, 1999. This increase resulted from the assumption of a
$14.1 million mortgage loan in connection with a 1999 Acquisition and new
financing of $26 million (as discussed below). These increases were partially
offset by the payoff of approximately $16.1 million of mortgage loans in
connection with 1999 sales of properties, refinancing of debt and scheduled
principal payments of approximately $2.2 million.
In March 1999, the Operating Partnership obtained a $26 million loan from a
commercial bank which bears interest at a variable rate of LIBOR plus 2.25%
(7.25% at March 31, 1999). The loan is non-recourse and is secured by seven
properties and has 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. Five of
the seven secured properties are currently being sold and the new loan provides
flexibility for partial releases of collateral upon the sale of a property.
The Operating Partnership has an unsecured line of credit provided by a
commercial bank (the "Credit Facility"). Outstanding borrowings under the Credit
Facility decreased from $63,519,000 at December 31, 1998, to $54,307,000 at
March 31, 1999, due to pay downs from proceeds from the sales of properties and
refinancing of a mortgage loan.
At March 31, 1999, the Operating Partnership's total indebtedness included
fixed-rate debt of $716,043,000 and floating-rate indebtedness of $218,640,000.
Approximately 64% of the Operating Partnership's total assets, comprising 110
properties, is encumbered by debt at March 31, 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 March 31, 1999, approximately 23% 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 March
31, 1999, the Operating Partnership was not a party to any open interest rate
protection agreements.
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 debt or
equity under these shelf registrations.
Development Alliances
The Operating Partnership has formed 4 development alliances to which it has
committed a total of approximately $43 million 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 March 31, 1999, the Operating Partnership has
advanced approximately $34 million under these commitments. 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 $36 million
21
<PAGE>
(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.
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
22
<PAGE>
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.
23
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Blumberg. The Company settled a class action complaint filed on February 21,
1995 in connection with the Consolidation. Certain parties objected to the
settlement, but the settlement has been approved (or review denied) by the
Superior Court of the State of California in and for San Mateo County, the
California state court of appeals, and the California Supreme Court. In August
1998 the objecting parties filed a petition for writ of certiorari in the
Supreme Court of the United States. The Company and the co-defendants filed a
brief in opposition to the petition. The Supreme Court of the United States has
not yet granted or denied the petition.
The plaintiff in the case is Anthony E. Blumberg, an investor in Equitec B, one
of the Partnerships included in the Consolidation, on behalf of himself and all
others (the "Blumberg Action") similarly situated. The defendants are GC,
Glenborough Realty Corporation ("GRC"), Robert Batinovich, the Partnerships and
the Company.
The complaint alleged breaches by the defendants of their fiduciary duty and
duty of good faith and fair dealing to investors in the Partnerships. The
complaint sought injunctive relief and compensatory damages. The complaint
alleged that the valuation of Glenborough Corporation was excessive and was done
without appraisal of Glenborough Corporation's business or assets. The complaint
further alleged that the interest rate for the Notes to be issued to investors
in lieu of shares of Common Stock, if they so elected was too low for the risk
involved and that the Notes would likely sell, if at all, at a substantial
discount from their face value (as a matter entirely distinct from the
litigation and subsequent settlement, the Company, as it had the option to, paid
in full the amounts due plus interest in lieu of issuing Notes).
On October 9, 1995 the parties entered into an agreement to settle the action.
The defendants, in entering into the settlement agreement, did not acknowledge
any fault, liability or wrongdoing of any kind and continue to deny all material
allegations asserted in the litigation. Pursuant to the settlement agreement,
the defendants will be released from all claims, known or unknown, that have
been, could have been, or in the future might be asserted, relating to, among
other things, the Consolidation, the acquisition of the Company's shares
pursuant to the Consolidation, any misrepresentation or omission in the
Registration Statement on Form S-4, filed by the Company on September 1, 1994,
as amended, or the prospectus contained therein ("Prospectus/Consent
Solicitation Statement"), or the subject matter of the lawsuit. In return, the
defendants agreed to the following: (a) the inclusion of additional or expanded
disclosure in the Prospectus Consent Solicitation Statement, and (b) the
placement of certain restrictions on the sale of the stock by certain insiders
and the granting of stock options to certain insiders following consummation of
the Consolidation. Plaintiff's counsel indicated that it would request that the
court award it $850,000 in attorneys' fees, costs and expenses. In addition,
plaintiffs' counsel indicated it would request the court for an award of $5,000
payable to Anthony E. Blumberg as the class representative. The defendants
agreed not to oppose such requests.
On October 11, 1995, the court certified the class for purposes of settlement,
and scheduled a hearing to determine whether it should approve the settlement
and class counsel's application for fees. A notice of the proposed settlement
was distributed to the members of the class on November 15, 1995. The notice
specified that, in order to be heard at the hearing, any class member objecting
to the proposed settlement must, by December 15, 1995, file a notice of intent
to appear, and a detailed statement of the grounds for their objection.
Objections were received from a small number of class members. The objections
reiterated the claims in the original Blumberg complaint, and asserted that the
settlement agreement did not adequately compensate the class for releasing those
claims. One of the objections was filed by the same law firm that brought the
BEJ Action described below.
At a hearing on January 17, 1996, the court heard the arguments of the objectors
seeking to overturn the settlement, as well as the arguments of the plaintiffs
and the defendants in defense of the settlement. The court granted all parties a
period of time in which to file additional pleadings. On June 4, 1996, the court
granted approval of the settlement, finding it fundamentally fair, adequate and
reasonable to the respective parties to the settlement. However, the objectors
gave notice of their intent to appeal the June 4 decision. All parties filed
their briefs and a hearing was held on February 3, 1998. On February 17, 1998,
the Court of Appeals rejected the objectors' contentions and upheld the
24
<PAGE>
settlement. The objectors filed with the California Supreme Court a petition for
review, which was denied on May 21, 1998. On August 18, 1998, the objectors
filed a petition for writ of certiorari in the Supreme Court of the United
States. On September 18, 1998, the Company and the co-defendants filed a brief
in opposition to the petition. The Supreme Court has not yet granted or denied
the petition.
BEJ Equity Partners. On December 1, 1995, a second class action complaint
relating to the Consolidation was filed in Federal District Court for the
Northern District of California (the "BEJ Action"). The plaintiffs in the BEJ
Action have voluntarily stayed the action pending resolution of the Blumberg
Action.
The plaintiffs in the BEJ Action are BEJ Equity Partners, J/B Investment
Partners, Jesse B. Small and Sean O'Reilly as custodian f/b/o Jordan K.
O'Reilly, who as a group held limited partner interests in certain of the
Partnerships included in the Consolidation known as Outlook Properties Fund IV,
Glenborough All Suites Hotels, L.P., Glenborough Pension Investors, Equitec
Income Real Estate Investors-Equity Fund 4, Equitec Income Real Estate Investors
C and Equitec Mortgage Investors Fund IV, on behalf of themselves and all others
similarly situated. The defendants are GRC, GC, the Company, GPA, Ltd., Robert
Batinovich and Andrew Batinovich. The Partnerships are named as nominal
defendants.
This action alleges the same disclosure violations and breaches of fiduciary
duty as were alleged in the Blumberg Action. The complaint sought injunctive
relief, which was denied at a hearing on December 22, 1995. At that hearing, the
court also deferred all further proceedings in this case until after the
scheduled January 17, 1996 hearing in the Blumberg Action. Following several
stipulated extensions of time for the Company to respond to the complaint, the
Company filed a motion to dismiss the case. Plaintiffs in the BEJ Action
voluntarily stayed the action pending resolution of the Blumberg Action; such
plaintiffs can revive their lawsuit.
It is management's position that the BEJ Action, and the objections to the
settlement of the Blumberg Action, are without merit, and management intends to
pursue a vigorous defense in both matters. In view of the denial of the
objector's petition for review in the Blumberg Action, among other things, the
Company believes that it is very unlikely that this litigation would result in a
liability that would exceed the accrued liability by a material amount. However,
given the inherent uncertainties of litigation, there can be no assurance that
the ultimate outcome in these two legal proceedings will be in the Company's
favor.
Certain other claims and lawsuits have arisen against the Operating Partnership
and the Company in their normal course of business. The Operating Partnership
and the Company believe that such other claims and lawsuits will not have a
material adverse effect on the Operating Partnership's or the Company's
financial position, cash flow or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the quarter
ended March 31, 1999.
25
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The Exhibit Index attached hereto is hereby incorporated by
reference to this item.
(b) Reports on Form 8-K:
On January 27, 1999, the Company filed a report on Form 8-K
with respect to Supplemental Information for the quarter ended
December 31, 1998.
On April 22, 1999, the Company filed a report on Form 8-K with
respect to Supplemental Information for the quarter ended
March 31, 1999.
26
<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: May 14, 1999 /s/ Andrew Batinovich
---------------------
Andrew Batinovich
Director, President
and Chief Operating Officer
(Principal Operating Officer)
Date: May 14, 1999 /s/ Stephen Saul
----------------
Stephen Saul
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: May 14, 1999 /s/ Terri Garnick
-----------------
Terri Garnick
Senior Vice President,
Chief Accounting Officer,
Treasurer
(Principal Accounting Officer)
27
<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.
28
<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, 1999
<TABLE>
<CAPTION>
GRT Predecessor
Entities,
Combined The Operating Partnership
----------------------- ------------------------------------------------------
Three
Months
Ended
Year Ended December 31, March 31
----------------------------------------------------------------- ------------
1994 1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ------------ ------------
EARNINGS, AS DEFINED
<S> <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
Extraordinary items -- -- 186 843 1,400 1,991
Federal & State income taxes 176 357 -- -- -- --
Minority Interest 43 -- -- -- -- --
Fixed Charges 1,140 2,129 3,913 9,668 53,289 16,540
---------- ---------- ---------- ---------- ------------ ------------
$ 2,939 $ 3,010 $ 2,198 $ 28,238 $ 100,825 $ 29,783
---------- ---------- ---------- ---------- ------------ ------------
FIXED CHARGES AND PREFERRED PARTNER
INTEREST DISTRIBUTIONS, AS DEFINED
Interest Expense $ 1,140 $ 2,129 $ 3,913 $ 9,668 $ 53,289 $ 16,540
Capitalized Interest -- -- -- -- 1,108 643
Preferred Partner Interest Distributions -- -- -- -- 20,620 5,570
---------- ---------- ---------- ---------- ------------ ------------
$ 1,140 $ 2,129 $ 3,913 $ 9,668 $ 75,017 $ 22,753
RATIO OF EARNINGS TO FIXED CHARGES 2.58 1.41 0.56 (1) 2.92 1.85 1.73
---------- ---------- ---------- ---------- ------------ ------------
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED PARTNER INTEREST DISTRIBUTIONS 2.58 1.41 0.56 (1) 2.92 1.34 1.31
---------- ---------- ---------- ---------- ------------ ------------
(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.
</TABLE>
29
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 3,665
<SECURITIES> 0
<RECEIVABLES> 43,413
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,665
<PP&E> 1,812,302
<DEPRECIATION> 76,064
<TOTAL-ASSETS> 1,876,736
<CURRENT-LIABILITIES> 2,923
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 918,247
<TOTAL-LIABILITY-AND-EQUITY> 1,876,736
<SALES> 0
<TOTAL-REVENUES> 69,091
<CGS> 0
<TOTAL-COSTS> 22,001
<OTHER-EXPENSES> 17,307
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,540
<INCOME-PRETAX> 13,243
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,243
<DISCONTINUED> 0
<EXTRAORDINARY> (1,991)
<CHANGES> 0
<NET-INCOME> 11,252
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
