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: 1-14307
Great Lakes REIT
(Exact name of Registrant as specified in its Charter)
Maryland 36-4238056
(State or other jurisdiction (IRS employer identification no.)
of incorporation or organization)
823 Commerce Drive, Suite 300, Oak Brook, IL 60523
(Address of principal executive offices) (Zip Code)
(630) 368 - 2900
(Registrant's telephone number, including area code)
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
Number of shares of the registrant's common shares of beneficial interest, $.01
par value, outstanding as of November 2, 1999: 16,295,098.
<PAGE>
<TABLE>
<CAPTION>
Great Lakes REIT
Index to Form 10-Q
September 30, 1999
<S> <C>
Page Number
Part I - Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets
as of September 30, 1999
and December 31, 1998 4
Consolidated Statements of Income
for the three months
ended September 30, 1999 and 1998 5
Consolidated Statements of Income
for the nine months
ended September 30, 1999 and 1998 6
Consolidated Statement of Changes
in Shareholders' Equity
for the nine months ended September 30, 1999 7
Consolidated Statements of Cash Flows
for the nine months
ended September 30, 1999 and 1998 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Part II - Other Information
Item 2. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Great Lakes REIT
Consolidated Balance Sheets (unaudited)
(Dollars in Thousands) September 30, December 31,
------------------------------
1999 1998
---- ----
<S> <C> <C>
Assets
Properties:
Land $60,345 $60,960
Buildings, improvements, and equipment 399,760 388,068
------------------------------
460,105 449,028
Less accumulated depreciation 30,596 22,166
------------------------------
429,509 426,862
Cash and cash equivalents 9,825 2,466
Real estate tax escrows 225 619
Rents receivable 4,926 5,021
Deferred financing and leasing costs, net of accumulated amortization 6,011 6,067
Goodwill, net of accumulated amortization 1,228 1,284
Other assets 2,093 1,370
------------------------------
Total assets $453,817 $443,689
==============================
Liabilities and shareholders' equity
Bank loan payable $98,000 $84,291
Mortgage loans payable 100,713 104,532
Bonds payable 4,550 4,800
Accounts payable and accrued liabilities 6,473 4,338
Accrued real estate taxes 12,137 11,149
Prepaid rent 3,411 3,220
Security deposits 1,064 1,107
Distributions/dividends payable 5,603
------------------------------
Total liabilities 231,951 213,437
------------------------------
Minority interests 951 1,165
------------------------------
Preferred shares of beneficial interest ($0.01 par value, 37,500 37,500
10,000,000 shares authorized; 1,500,000 9 3/4% Series A
Cumulative Redeemable shares, with a $25.00 per share Liquidation Preference,
issued and outstanding in 1999 and 1998)
Common shares of beneficial interest ($0.01 par value, 178 175
60,000,000 shares authorized; 17,816,883 and 17,513,578
shares issued in 1999 and 1998, respectively)
Paid-in-capital 227,907 223,414
Retained earnings (deficit) (4,946) (8,790)
Employee share purchase loans (16,339) (11,967)
Deferred compensation (27) (44)
Treasury shares, at cost (1,521,785 and 743,184 shares in (23,358) (11,201)
1999 and 1998, respectively)
------------------------------
Total shareholders' equity 220,915 229,087
------------------------------
Total liabilities and shareholders' $453,817 $443,689
equity
==============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Great Lakes REIT
Consolidated Statements of Income (unaudited)
(Dollars in Thousands, except per share data)
Three months ended September 30,
------------------------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues:
Rental $18,723 $16,685
Reimbursements 5,080 4,556
Interest and other 476 217
------------------------------------------
Total revenues 24,279 21,458
------------------------------------------
Expenses:
Real estate taxes 3,683 3,332
Other property operating 6,364 5,523
General and administrative 1,210 1,393
Interest 3,593 3,440
Depreciation and amortization 4,063 3,505
------------------------------------------
Total expenses 18,913 17,193
------------------------------------------
Income before gain on sale of properties 5,366 4,265
Gain on sale of properties, net 3,203
------------------------------------------
Income before allocation to minority interests 8,569 4,265
Minority interests 30 18
------------------------------------------
Net income 8,539 4,247
Income allocated to preferred shareholders 914
------------------------------------------
Net income applicable to common shares $7,625 $4,247
==========================================
Earnings per common share - basic $0.46 $0.25
==========================================
Weighted average common shares outstanding - basic 16,522,078 17,275,676
==========================================
Diluted earnings per common share $0.46 $0.24
==========================================
Weighted average common shares outstanding - diluted 16,602,010 17,406,102
==========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Great Lakes REIT
Consolidated Statements of Income (unaudited)
(Dollars in Thousands, except per share data)
Nine months ended September 30,
-----------------------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues:
Rental $54,864 $44,854
Reimbursements 15,081 12,404
Interest and other 996 494
-----------------------------------------
Total revenues 70,941 57,752
-----------------------------------------
Expenses:
Real estate taxes 11,828 9,072
Other property operating 18,377 14,840
General and administrative 3,424 3,643
Interest 10,349 8,354
Depreciation and amortization 11,812 9,426
-----------------------------------------
Total expenses 55,790 45,335
-----------------------------------------
Income before gain on sale of properties 15,151 12,417
Gain on sale of properties, net 8,061
-----------------------------------------
Income before allocation to minority interests 23,212 12,417
Minority interests 79 41
-----------------------------------------
Net income 23,133 12,376
Income allocated to preferred shareholders 2,742
-----------------------------------------
Net income applicable to common shares $20,391 $12,376
=========================================
Earnings per common share - basic $1.23 $0.74
=========================================
Weighted average common shares outstanding - basic 16,529,085 16,801,186
=========================================
Diluted earnings per common share $1.23 $0.73
=========================================
Weighted average common shares outstanding - diluted 16,609,017 17,015,289
=========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Great Lakes REIT
Consolidated Statement of Changes in Shareholders' Equity (unaudited)
For the Nine Months Ended September 30, 1999
(Dollars in Thousands)
1999
- -------------------------------------------------------------------------
Preferred Shares
Balance at beginning of period $37,500
Proceeds from the sale of preferred shares
- -------------------------------------------------------------------------
Balance at end of period 37,500
Common Shares
Balance at beginning of period 175
Exercise of share options 3
- -------------------------------------------------------------------------
Balance at end of period 178
Paid-in capital
Balance at beginning of period 223,414
Exercise of share options 4,493
- -------------------------------------------------------------------------
Balance at end of period 227,907
Retained earnings (deficit)
Balance at beginning of period (8,790)
Net income 23,133
Distributions/dividends (19,289)
- -------------------------------------------------------------------------
Balance at end of period (4,946)
Employee share purchase loans
Balance at beginning of period (11,967)
Exercise of share options (4,372)
- -------------------------------------------------------------------------
Balance at end of period (16,339)
Deferred compensation
Balance at beginning of period (44)
Amortization of deferred compensation 17
- -------------------------------------------------------------------------
Balance at end of period (27)
Treasury shares
Balance at beginning of period (11,201)
Purchase of treasury shares (12,157)
- -------------------------------------------------------------------------
Balance at end of period (23,358)
- -------------------------------------------------------------------------
Total shareholders' equity $220,915
=========================================================================
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Great Lakes REIT
Consolidated Statements of Cash Flows (unaudited)
(Dollars in Thousands)
Nine Months Ended September 30,
----------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $23,133 $12,376
Adjustments to reconcile net income to cash
flows from operating activities
Depreciation and amortization 11,812 9,426
Gain on sale of properties (8,061)
Other non-cash items 96 63
Net changes in assets and liabilities:
Rents receivable 95 (1,077)
Real estate tax escrows and other assets 34 (669)
Accounts payable, accrued expenses and other liabilities 2,141 2,629
Accrued real estate taxes 988 4,068
Payment of deferred leasing costs (1,545) (2,044)
----------------------------------
Net cash provided by operating activities 28,693 24,772
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of properties (19,634) (128,793)
Additions to buildings, improvements and equipment (8,918) (8,338)
Proceeds from property sales, net 21,959
Other investing activities (362) 1,610
----------------------------------
Net cash used by investing activities (6,955) (135,521)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common and preferred shares 22,500
Payment of share offering costs (1,479)
Proceeds from exercise of share options 124 13
Proceeds from bank and mortgage loans payable 29,775 189,035
Distributions / dividends paid (13,544) (15,542)
Distributions to minority interests (37)
Purchase of minority interests (256)
Purchase of treasury shares (12,157) (6,452)
Payment of bank and mortgage loans and bonds (18,055) (75,225)
Payment of deferred financing costs (229) (1,402)
----------------------------------
Net cash provided by financing activities (14,379) 111,448
----------------------------------
Net increase (decrease) in cash and cash equivalents 7,359 699
Cash and cash equivalents, beginning of year 2,466 1,437
----------------------------------
Cash and cash equivalents, end of quarter $9,825 $2,136
==================================
Supplemental disclosure of cash flow:
Interest paid $10,335 $7,581
==================================
Non-cash financing transactions:
Employee share purchase loans $4,386 $6,515
==================================
Mortgage assumed by purchaser of property $2,079
==================================
Increase in preferred dividends payable $142
==================================
Issuance of shares and units to acquire properties $887
==================================
Mortgages assumed to acquire properties $12,435
==================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Great Lakes REIT
Notes to Consolidated Financial Statements
Dollars in thousands, except per share data
(Unaudited)
1. Basis of Presentation
Great Lakes REIT (the "Company") was formed in 1992 to invest in
income-producing real property. In 1998, the Company changed its form of
organization from a Maryland corporation to a Maryland real estate investment
trust. The principal business of the Company is the ownership, management,
leasing, renovation and acquisition of suburban office and office/service center
properties primarily located in the Midwest. At September 30, 1999, the Company
owned and operated 37 properties primarily located in suburban areas of Chicago,
Detroit, Milwaukee, Columbus, Minneapolis, Denver and Cincinnati. The Company
leases office and office/service center properties to over 550 tenants who are
engaged in a variety of businesses. The Company conducts substantially all of
its operations through Great Lakes REIT, L.P., of which the Company is the sole
general partner.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries and controlled partnership. Intercompany accounts
and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all information
and footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. These statements should be read in conjunction with the Company's
most recent year-end audited financial statements contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998
10-K"). In the opinion of management, the financial statements contain all
adjustments (which are normal and recurring) necessary for a fair statement of
financial results for the interim periods. For further information, refer to the
consolidated financial statements and notes thereto included in the 1998 10-K.
2. Segment Information
The Company has three reportable segments distinguished by property type. The
property types are office, office/service center, and industrial, and are
primarily located in the Midwest. As of September 30, 1999, the properties were
leased to more than 550 tenants, no single tenant accounted for more than 5% of
the aggregate annualized base rent of the Company's portfolio and 20 tenants
individually represented more than 1% of such aggregate annualized base rent.
The Company evaluates performance and allocates resources based on property
revenues (rental and reimbursement income) less property operating expenses and
real estate taxes to arrive at net operating income. Net operating income is an
industry measure of a property's performance.
The following table summarizes the Company's segment information for the three
and nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
For the nine months ended For the three months ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues
Office $64,328 $50,547 $21,839 $18,930
Office/service center 5,012 5,297 1,693 1,709
Industrial 172 255 91
Deferred rental revenues 433 1,159 271 511
Interest and other 996 494 476 217
==============================================================================
Total $70,941 $57,752 $24,279 $21,458
==============================================================================
Net operating income
Office $35,939 $28,411 $12,274 $10,658
Office/service center 3,228 3,635 1,211 1,156
Industrial 140 141 61
==============================================================================
Total $39,307 $32,187 $13,485 $11,875
==============================================================================
Depreciation
and amortization
Office $10,440 $8,020 $3,580 $3,113
Office/service center 953 815 339 277
Industrial 33 62 19
Other 386 529 144 96
==============================================================================
Total $11,812 $9,426 $4,063 $3,505
==============================================================================
Interest expense
Office $9,194 $7,334 $3,205 $3,080
Office/service center 1,085 858 388 302
Industrial 70 162 58
==============================================================================
Total $10,349 $8,354 $3,593 $3,440
==============================================================================
Additions to properties
Office $27,816 $149,820 $2,656 $34,716
Office/service center 669 536 163 67
Industrial 36 37 37
Other 41 60 1 10
==============================================================================
Total $28,562 $150,453 $2,820 $34,830
==============================================================================
</TABLE>
Income before allocation to minority interests and gains on sale of properties
<TABLE>
<CAPTION>
For the nine months ended For the three months ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Office $16,305 $13,057 $5,489 $4,465
Office/service center 1,190 1,962 484 577
Industrial 37 (83) (16)
Deferred rental revenues 433 1,159 271 511
Interest and other income 996 494 476 217
General and administrative (3,424) (3,643) (1,210) (1,393)
Other depreciation (386) (529) (144) (96)
------------------------------------------------------------------------------
Total $15,151 $12,417 $5,366 $4,265
==============================================================================
</TABLE>
Following is a summary of segment assets at September 30, 1999 and December 31,
1998:
September 30, December 31,
----------------------------------------
1999 1998
Assets
Office $401,847 $394,607
Office/service center 31,132 31,841
Industrial 3,949
Other 20,838 13,292
----------------------------------------
Total $453,817 $443,689
========================================
3. Property Acquisition
On May 11, 1999, the Company acquired Burlington Office Center located in Ann
Arbor, Michigan for a contract price of $19,650. The property contains three
multi-story office buildings totaling 178,000 square feet.
4. Property Dispositions
On April 21, 1999, the Company sold its Elgin, Illinois property for a contract
price of $4,700 (including the assumption of $2,079 of mortgage debt) resulting
in a net gain on sale of $658. The proceeds from this sale were reinvested in
Burlington Office Center in a tax-deferred exchange (see note 3).
On June 30, 1999, the Company sold its 2800 River Road, Des Plaines, Illinois,
and 1251 Plum Grove Road, Schaumburg, Illinois, properties for a total contract
price of $11,600 resulting in a total net gain on sale of $ 4,848. The Company
expects to sell its Markham, Illinois property in the fourth quarter of 1999 at
a disposition price ($514) that is less than the net book value of the property.
Accordingly, the Company has recorded an anticipated net loss on sale of this
property in an amount of $648 during the nine months ended September 30, 1999.
On August 25, 1999, the Company sold its 565 Lakeview Parkway, Vernon Hills,
Illinois property for $8,800 resulting in a net gain on sale of $3,203.
5. Long-term Debt
In June 1999, the Company entered into an interest rate cap agreement with a
major financial institution whereby the Company has limited the LIBOR interest
rate on $50,000 of its variable rate debt to no more than 6% per annum until
June 2001. The cost of this agreement to the Company was $209 and is being
amortized to expense over the period of the agreement (24 months).
6. Commitments
The Company has committed to acquire, upon completion, an office building under
construction in Pewaukee, Wisconsin for a maximum contract price of $11,400. The
Company expects to close this acquisition in December 1999. The Company has
obtained a $500 letter of credit as a deposit towards the purchase of this
property.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in thousands except per share data)
The following is a discussion and analysis of the consolidated financial
condition and results of operations for the three and nine months ended
September 30, 1999. The following should be read in conjunction with the
consolidated financial statements and related notes appearing elsewhere herein
and the consolidated financial statements and related notes contained in the
1998 10-K.
Overview
The principal business of the Company is the ownership, management, leasing,
renovation, and acquisition of suburban office properties primarily located in
the Midwest. At September 30, 1999, the Company owned and operated 37 properties
primarily located in suburban areas of Chicago, Detroit, Milwaukee, Columbus,
Minneapolis, Denver and Cincinnati. The Company leases space to over 550 tenants
who are engaged in a variety of businesses.
Growth in net income and funds from operations (FFO) for the three and nine
months ended September 30, 1999 as compared to September 30, 1998 was due to a
combination of improved operations of the Company's properties and the inclusion
of the operating results of properties acquired in 1999 and 1998 from the dates
of their respective acquisitions.
On May 11, 1999, the Company acquired Burlington Office Center located in Ann
Arbor, Michigan for a contract price of $19,650. The property contains three
multi-story office buildings totaling 178,000 square feet.
On April 21, 1999, the Company sold its Elgin, Illinois property for a contract
price of $4,700 (including the assumption of $2,079 of mortgage debt) resulting
in a net gain on sale of $658. The proceeds from this sale were reinvested in
Burlington Office Center in a tax-deferred exchange. On June 30, 1999 the
Company sold its 2800 River Road, Des Plaines, Illinois, and 1251 Plum Grove
Road, Schaumburg, Illinois, properties for a total contract price of $11,600
resulting in a total net gain on sale of $4,848.
On August 25, 1999, the Company sold its 565 Lakeview Parkway, Vernon Hills,
Illinois property for $8,800 resulting in a net gain on sale of $3,203.
See the 1998 10-K for a description of 1998 acquisition activity. The Company
did not have material disposition activity in 1998.
Three months ended September 30, 1999 compared to three months ended September
30, 1998
In analyzing the operating results for the quarter ended September 30, 1999, the
changes in rental and reimbursement income, real estate taxes and property
operating expenses from the same period in 1998 are due principally to the
following factors: (1) the addition of operating results from properties
acquired subsequent to September 30, 1998, (2) the addition of operating results
from properties acquired in 1999, (3) operating results of properties sold in
1999 and (4) improved operations of properties during 1999 as compared to 1998.
The Company acquired three properties during the third quarter of 1998 and one
property subsequent to September 30, 1998. The operating results of these
properties have been included in the Company's financial statements from the
dates of their acquisitions. In addition, the Company sold four properties in
1999. A summary of these changes as they impact rental and reimbursement income,
real estate taxes, and property operating expenses follows:
<TABLE>
<CAPTION>
Rental and Real estate Property
reimbursement taxes operating
income expenses
<S> <C> <C> <C>
Increase due to inclusion of results of properties acquired $1,520 $546 $332
in 1998
Increase due to properties acquired in 1999 754 119 282
Decrease due to property dispositions in 1999 (691) (113) (149)
Improved operations in 1999 as compared to 1998 979 (201) 376
--------------------- ------------------ --------------
Total $2,562 $351 $841
===================== ================== ==============
</TABLE>
Interest expense during the quarter ended September 30, 1999 increased by $153
as the Company had greater amounts of debt outstanding in 1999 as compared to
1998.
Depreciation and amortization increased in 1999 by $558 as the Company had a
gross book value of depreciable assets of $399,760 at September 30, 1999 as
compared to $385,022 at September 30, 1998.
The Company sold one property during the three months ended September 30, 1999
for a total net gain on sale of $3,203. The Company did not have any material
dispositions during the same period of 1998.
Nine months ended September 30, 1999 as compared to the nine months ended
September 30, 1998
In analyzing the operating results for the nine months ended September 30, 1999,
the changes in rental and reimbursement income, real estate taxes and property
operating expenses, from 1998 are due principally to the following factors: (1)
the addition of operating results from properties acquired in 1998, (2) the
addition of operating results from properties acquired in 1999, (3) operating
results of properties sold in 1999 and (4) improved operations of properties
during 1999 as compared to 1998.
The Company acquired three properties during the third quarter of 1998 and one
property subsequent to September 30, 1998. The operating results of these
properties have been included in the Company's financial statements from the
dates of their acquisitions. In addition, the Company sold four properties in
1999. A summary of these changes as they impact rental and reimbursement income,
real estate taxes, and property operating expenses follows:
<TABLE>
<CAPTION>
Rental and Real estate Property
reimbursement taxes operating
income expenses
<S> <C> <C> <C>
Increase due to inclusion of results of properties acquired $9,584 $1,920 $2,147
in 1998
Increase due to properties acquired in 1999 1,249 184 351
Decrease due to property dispositions in 1999 (259) (160) (102)
Improved operations in 1999 as compared to 1998 2,113 812 1,141
--------------------- ------------------ --------------
Total $12,687 $2,756 $3,537
===================== ================== ==============
</TABLE>
Interest expense during the nine months ended September 30, 1999 increased by
$1,995 as the Company had greater amounts of debt outstanding in 1999 as
compared to 1998.
Depreciation and amortization increased in 1999 by $2,386 as the Company had a
gross book value of depreciable assets of $399,760 at September 30, 1999 as
compared to $385,022 at September 30, 1998.
The Company sold four properties and recorded an anticipated loss on sale of
$648 on its Markham, Illinois property during the nine months ended September
30, 1999 for a total net gain on sale of $8,061. The Company did not have any
material dispositions during the same period of 1998.
Liquidity and Capital Resources
The Company expects to meet its short-term liquidity requirements principally
through its working capital and net cash provided by operating activities. The
Company considers its cash provided by operating activities to be adequate to
meet operating requirements and to fund the payment of dividends in order to
comply with federal income tax requirements applicable to real estate investment
trusts ("REITs").
The Company expects to meet its liquidity requirements for property acquisitions
and significant capital improvements through additional borrowings under its
existing $150,000 unsecured bank credit facility, which matures in April 2001,
and with proceeds from the sale of properties. The Company had $98,000
outstanding under its unsecured bank credit facility at September 30, 1999.
The Company expects to meet its long-term liquidity requirements (such as
scheduled mortgage debt maturities, property acquisitions and significant
capital improvements) through long-term collateralized and uncollateralized
borrowings, the issuance of debt or additional equity securities in the Company,
and targeted property dispositions.
In September 1998, the Company announced a 1,000,000 common share repurchase
plan. During the nine months ended September 30, 1999, the Company purchased
278,601 common shares and completed the purchase of 1,000,000 common shares
under this plan at an average cost to the Company of $15.34 per share. In March
1999, the Company announced that its board of trustees approved the repurchase
of up to 500,000 common shares under a separate repurchase plan. As of September
30, 1999, the Company had repurchased 500,000 common shares as part of the new
plan at an average cost to the Company of $15.50 per share. Common share
repurchases totaled $12,157 for the nine months ended September 30, 1999 under
the two plans. These common share repurchases were funded through borrowings
under the Company's unsecured bank credit facility, proceeds from property
dispositions and working capital.
During the nine months ended September 30, 1999, the Company generated
approximately $22,000 of net proceeds from property dispositions. These
dispositions are consistent with the Company's strategy to seek to enhance
shareholder value in part through strategic dispositions. The net proceeds from
the sales were or will be used to repay borrowings under its unsecured bank
credit facility, to repurchase common shares, to acquire additional investment
properties and for working capital.
The Company has signed a contract to sell its Markham, Illinois, property for
$514. The Company anticipates closing this transaction in the fourth quarter of
1999.
The Company has committed to acquire, upon completion, an office building under
construction in Pewaukee, Wisconsin for a maximum contract price of $11,400. The
Company expects to close this acquisition in December 1999. The Company has
obtained a $500 letter of credit under its unsecured bank credit facility as a
deposit towards the purchase of this property.
Funds from Operations (FFO)
The White Paper on Funds From Operations approved by the Board of Governors of
the National Association of Real Estate Investment Trusts in March 1995 (the
"White Paper") defines FFO as net income (loss) (computed in accordance with
generally accepted accounting principles), excluding gains or losses from debt
restructuring and sales of property, plus real estate depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. Management considers FFO to be an appropriate measure of performance
of an equity REIT because it is predicated on cash flow analyses. The Company
computes FFO in accordance with standards established by the White Paper (except
for the amortization of deferred compensation related to restricted stock
awards). The Company's method of computing FFO may differ from the methodology
for calculating FFO utilized by other equity REITs and, accordingly, may not be
comparable to other equity REITs. FFO should not be considered as an alternative
to net income (determined in accordance with generally accepted accounting
principles) as an indicator of the Company's financial performance or to cash
flow from operating activities (determined in accordance with generally accepted
accounting principles) as a measure of the Company's liquidity. FFO is not
indicative of funds available to fund the Company's working capital and other
cash needs, including distributions to shareholders. FFO for the three and nine
months ended September 30, 1999 and 1998 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income applicable to common shares $20,391 $12,376 $7,625 $4,247
Gain on sale of properties, net (8,061) (3,203)
Depreciation and amortization 11,307 8,827 3,917 3,384
Minority interests 79 41 30 18
----------------- ----------------- ---------------- ---------------
FFO $23,716 $21,244 $8,369 $7,649
================= ================= ================ ===============
</TABLE>
Forward-Looking Statements
Certain statements in this document constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Acts of 1934, and the Company intends that such
"forward-looking statements" be subject to the safe harbors created thereby. The
words "believe", "expect" and "anticipate" and similar expressions identify
forward-looking statements. In addition, statements regarding the Company's
expectations with respect to its short-term and long-term liquidity requirements
and related sources, statements regarding the anticipated timing and proceeds
related to planned property dispositions and expenditures regarding the timing
of property acquisitions are forward-looking statements. These forward-looking
statements reflect the Company's current views with respect to future events and
financial performance, but are subject to many uncertainties and factors
relating to the Company's operations and business environment that may cause the
actual results of the Company to be materially different from any future results
expressed or implied by such forward-looking statements. Examples of such
uncertainties include, but are not limited to, changes in interest rates,
changes in the market value of the Company's equity securities, increased
competition for acquisition of new properties, availability of alternative
financing sources, changes in the timing of property sales and acquisitions,
changes in the market value of properties expected to be sold, unanticipated
expenses related to sale or acquisition transactions, or changes in occupancy
rates and economic and business conditions in the markets in which the Company
owns and operates properties. In addition, many of the statements below with
respect to Year 2000 issues and status are forward-looking statements and are
subject to the uncertainties expressed below.
Year 2000 Issues and Status
The Company recognizes the importance of Year 2000 issues and in 1998 initiated
a program of evaluation, remediation and testing of the systems and equipment
serving its business and properties for Year 2000 readiness. The Company is also
assessing the readiness of external parties, including its suppliers, vendors,
bankers, insurers and other service providers, as well as its tenants. The
evaluation phase is intended to determine the readiness of internal systems and
equipment as well as the readiness of third parties. The remediation phase
includes computer software, hardware and operating equipment as well as
identifying solutions to possible third party noncompliance. The testing phase
includes integrated testing of all systems, including those that have been
modified.
Amounts incurred through September 30, 1999 for evaluation, remediation and
testing costs were $178. The Company expects to incur an additional $180 of
costs by December 31, 1999. The current status of the Company's state of
readiness and expected completion dates for evaluation, remediation and testing
related to Year 2000 issues are summarized below:
Financial software: The evaluation of the Company's financial software is 100%
complete. Because the Company believes this software is Year 2000 compliant, the
Company believes that no remediation is required. The Company is testing whether
the financial items are in fact Year 2000 compliant and expects to complete such
testing in November 1999.
Networking software: In the first quarter of 1999 the Company completed the
upgrade of its internal computer networking software and hardware to a system
that the Company believes is Year 2000 compliant.
Building systems: Building systems include heating and air-conditioning control
systems, elevator operating software, building security systems, telephone
systems and alarm monitoring systems. The Company has contacted its significant
vendors related to these systems in order to evaluate Year 2000 issues with
respect to embedded technology related to these building systems. During the
evaluation process the Company identified several building systems in certain of
its properties that needed modification or replacement to be Year 2000
compliant. Based upon information the Company has received from its vendors and
its own remediation and testing program, the Company believes that the impact of
any system failure is not likely to be material.
Tenants: The Company has contacted its tenants regarding their Year 2000
readiness, including whether the respective tenant's accounts payable systems
will be able to make required payments on a timely basis which are due after
December 31, 1999. Based upon the responses received to date the Company does
not anticipate rent collections will be materially affected by Year 2000
compliance issues. The Company has received responses from 33 % (based on square
feet occupied) of its tenants. These responses indicate that the tenants expect
to make payments after December 31, 1999 on a timely basis.
The Company believes that internal remediation and testing of financial and
networking technology systems and building systems will be completed as
indicated above and will not adversely affect the results of operations or
financial condition of the Company. If any or all of these efforts are delayed,
however, there could be disruption of the Company's financial, networking and
building systems. Critical third party vendors, suppliers and service providers
have been contacted to evaluate their Year 2000 readiness. However, not all
external parties providing equipment, materials and services to the Company,
including regional utilities, have assured the Company that their systems or
products are fully Year 2000 compliant. There may be vendors, suppliers and
tenants who will not be compliant on a timely basis or who will fail to become
compliant with Year 2000 issues. Accordingly, there can be no assurance that the
Company's operations will not be disrupted as a result of Year 2000 issues.
The Company is in the process of developing contingency plans, as part of the
remediation phases indicated above, in an effort to provide a continued supply
of building services or to mitigate the effect of any service disruptions or
equipment failures that may occur. These contingency plans are expected to be
completed and implemented during the fourth quarter of 1999.
The Company believes that, even in the most likely, worst case scenario, Year
2000 issues are not likely to have a material adverse effect on the Company's
business, results of operations and financial condition. However, the economic
consequences of real or anticipated disruptions related to Year 2000 issues,
including a global economic slowdown, could have a material adverse effect on
the Company's business, results of operations or financial condition.
ITEM 3. MARKET RISK (Dollars in thousands)
The Company's interest income is sensitive to changes in the general levels of
U.S. short-term interest rates.
The Company's interest expense is sensitive to changes in the general level of
U.S. short-term and long-term interest rates as the Company has indebtedness
outstanding at fixed and variable rates.
The Company's variable rate debt bears interest at LIBOR plus 1% to 1.3% per
annum depending on overall Company leverage. Increases in LIBOR rates would
increase the Company's interest expense and reduce its cash flow. Conversely,
declines in LIBOR rates would decrease its interest expense and increase its
cash flow. The Company has entered into an interest rate cap agreement with a
major financial institution whereby the Company limited the LIBOR interest rate
on $50,000 of its variable rate debt to no more than 6% per annum until June
2001. The cost of this agreement to the Company was $209 and is being amortized
to expense over the period of the agreement (24 months). The Company may, in the
future, enter into additional interest rate swaps, interest rate caps or other
derivative financial instruments to fix interest rates on its variable rate
debt. The Company generally operates with variable rate debt representing less
than 50% of total long-term debt.
At September 30, 1999, the Company had $100,713 of fixed rate debt outstanding
at an average rate of 6.96 %. If the general level of interest rates in the
United States were to fall, the Company would not likely have the opportunity to
refinance this fixed rate debt at lower interest rates due to prepayment
restrictions and penalties on its fixed rate debt.
In general, the Company believes long-term fixed rate debt is preferable as a
financing vehicle for its operations due to the long-term fixed contractual
rental income the Company receives from its tenants. As a result, 74% of the
Company's long-term debt outstanding (including the interest rate cap agreement
described above) at September 30, 1999, bears interest at fixed rates. The
Company may, as market conditions warrant, incur additional long-term debt at
fixed rates on either a secured or unsecured basis.
A tabular presentation of interest rate sensitivity is as follows:
<TABLE>
<CAPTION>
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
1999(1) 2000 2001 2002 2003 Thereafter
<S> <C> <C> <C> <C> <C> <C>
Liabilities:
Fixed Rate
Mortgage loans payable $758 $2,484 $2,660 $2,851 $13,860 $78,100
Average interest rate 6.97% 6.97% 6.97% 6.97% 7.06% 6.94%
Variable Rate
Bank loan payable $98,000
Average interest rate(2)
Bonds payable $280 $310 $340 $375 $3,245
Average interest rate (3) (3) (3) (3) (3) (3)
</TABLE>
(1) For the period October 1, 1999 to December 31, 1999.
(2) The current interest rate on this debt is LIBOR + 1.3%.
(3) The interest rate on the bonds payable is reset weekly. After factoring in
credit enhancement costs for the bonds, the average interest rate for the nine
months ended September 30, 1999 was 5.1%.
<PAGE>
Part II Other Information
Item 2. Changes in Securities (Dollars in thousands)
During the quarter ended September 30, 1999, the Company issued 3,518
unregistered common shares pursuant to the exercise of outstanding share options
with an aggregate exercise price of $42. These shares were issued to the
optionholders pursuant to the exemption from the registration requirements of
the Securities Act of 1933, as amended (the "Act"), provided by Section 4(2) of
the Act, including Rule 701 thereunder.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed with this report:
Exhibit
Number Description of Document
- ------ -----------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Great Lakes REIT
(Registrant)
Date: November 12, 1999 /s/ James Hicks
Chief Financial Officer
and
Treasurer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,825
<SECURITIES> 0
<RECEIVABLES> 4,926
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,976
<PP&E> 460,105
<DEPRECIATION> 30,596
<TOTAL-ASSETS> 453,817
<CURRENT-LIABILITIES> 126,688
<BONDS> 105,263
0
37,500
<COMMON> 178
<OTHER-SE> 183,237
<TOTAL-LIABILITY-AND-EQUITY> 453,817
<SALES> 69,945
<TOTAL-REVENUES> 70,941
<CGS> 0
<TOTAL-COSTS> 45,441
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,349
<INCOME-PRETAX> 23,212
<INCOME-TAX> 0
<INCOME-CONTINUING> 23,212
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,391
<EPS-BASIC> 1.23
<EPS-DILUTED> 1.23
</TABLE>
