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 June 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 August 2, 1999: 16,635,568
<PAGE>
Great Lakes REIT
Index to Form 10-Q
June 30, 1999
Page Number
Part I - Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets
as of June 30, 1999
and December 31, 1998 4
Consolidated Statements of Income
for the three months
ended June 30, 1999 and 1998 5
Consolidated Statements of Income
for the six months
ended June 30, 1999 and 1998 6
Consolidated Statement of Changes
in Shareholders' Equity
for the six months ended June 30, 1999 7
Consolidated Statements of Cash Flows
for the six months
ended June 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 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
<TABLE>
<CAPTION>
Great Lakes REIT
Consolidated Balance Sheets (unaudited)
(Dollars in Thousands) June 30, December 31,
------------------------------
1999 1998
---- ----
<S> <C> <C>
Assets
Properties:
Land ........................................................................... $ 58,445 $ 60,960
Buildings, improvements, and equipment ......................................... 405,132 388,068
--------- ---------
463,577 449,028
Less accumulated depreciation .................................................. 28,149 22,166
--------- ---------
435,428 426,862
Cash and cash equivalents ...................................................... 13,286 2,466
Real estate tax escrows ........................................................ 209 619
Rents receivable ............................................................... 5,047 5,021
Deferred financing and leasing costs, net of accumulated amortization .......... 6,222 6,067
Goodwill, net of accumulated amortization ...................................... 1,247 1,284
Other assets ................................................................... 1,512 1,370
--------- ---------
Total assets ................................................................... $ 462,951 $ 443,689
========= =========
Liabilities and shareholders' equity
Bank loan payable .............................................................. $ 112,066 $ 84,291
Mortgage loans payable ......................................................... 101,293 104,532
Bonds payable .................................................................. 4,550 4,800
Accounts payable and accrued liabilities ....................................... 3,998 4,338
Accrued real estate taxes ...................................................... 10,338 11,149
Prepaid rent ................................................................... 3,660 3,220
Security deposits .............................................................. 1,088 1,107
--------- ---------
Total liabilities .............................................................. 236,993 213,437
--------- ---------
Minority interests ............................................................. 940 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; 17,765,053 and 17,513,578
shares issued in 1999 and 1998, respectively)
Paid-in-capital ................................................................ 227,182 223,414
Retained earnings (deficit) .................................................... (6,966) (8,790)
Employee share purchase loans .................................................. (15,658) (11,967)
Deferred compensation .......................................................... (31) (44)
Treasury shares, at cost (1,129,485 and 743,184 shares in ...................... (17,187) (11,201)
1999 and 1998, respectively)
--------- --------
Total shareholders' equity ..................................................... 225,018 229,087
--------- --------
Total liabilities and shareholders' equity ..................................... $ 462,951 $ 443,689
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Great Lakes REIT
Consolidated Statements of Income (unaudited)
(Dollars in Thousands, except per share data)
Three months ended June 30,
---------------------------
1999 1998
---- ----
Revenues:
Rental ............................................. $ 18,618 $ 15,240
Reimbursements...................................... 5,032 4,082
Interest and other ................................. 274 168
----------- -----------
Total revenues ..................................... 23,924 19,490
----------- -----------
Expenses:
Real estate taxes .................................. 4,521 3,012
Other property operating ........................... 5,890 5,088
General and administrative ......................... 1,050 1,152
Interest ........................................... 3,479 2,878
Depreciation and amortization ...................... 4,028 3,182
---------- -----------
Total expenses ..................................... 18,968 15,312
---------- -----------
Income before gain on sale of properties ........... 4,956 4,178
Gain on sale of properties, net .................... 4,858
---------- -----------
Income before allocation to minority interests ..... 9,814 4,178
Minority interests ................................. 33 17
---------- -----------
Net income ......................................... 9,781 4,161
Income allocated to preferred shareholders ......... 914
---------- -----------
Net income applicable to common shares ............. $ 8,867 $ 4,161
=========== ===========
Earnings per common share - basic .................. $ 0.54 $ 0.24
=========== ===========
Weighted average common shares outstanding - basic . 16,491,029 17,267,562
=========== ===========
Diluted earnings per common share .................. $ 0.54 $ 0.24
=========== ===========
Weighted average common shares outstanding - diluted 16,572,151 17,499,578
=========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Great Lakes REIT
Consolidated Statements of Income (unaudited)
(Dollars in Thousands, except per share data)
Six months ended June 30,
-------------------------
1999 1998
---- ----
Revenues:
Rental ............................................. $ 36,142 $ 28,169
Reimbursements ..................................... 10,001 7,847
Interest and other ................................. 519 277
----------- -----------
Total revenues ..................................... 46,662 36,293
----------- -----------
Expenses:
Real estate taxes .................................. 8,146 5,740
Other property operating ........................... 12,013 9,317
General and administrative ......................... 2,214 2,250
Interest ........................................... 6,755 4,913
Depreciation and amortization ...................... 7,749 5,921
----------- -----------
Total expenses ..................................... 36,877 28,141
----------- -----------
Income before gain on sale of properties ........... 9,785 8,152
Gain on sale of properties, net .................... 4,858
----------- -----------
Income before allocation to minority interests ..... 14,643 8,152
Minority interests ................................. 49 23
----------- -----------
Net income ......................................... 14,594 8,129
Income allocated to preferred shareholders ......... 1,828
----------- -----------
Net income applicable to common shares ............. $ 12,766 $ 8,129
=========== ===========
Earnings per common share - basic .................. $ 0.77 $ 0.49
=========== ===========
Weighted average common shares outstanding - basic . 16,532,589 16,563,941
=========== ===========
Diluted earnings per common share .................. $ 0.77 $ 0.48
=========== ===========
Weighted average common shares outstanding - diluted 16,613,711 16,820,069
=========== ===========
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 Six Months Ended June 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 ................................... 3,768
---------
Balance at end of period .................................... 227,182
Retained earnings (deficit)
Balance at beginning of period .............................. (8,790)
Net income .................................................. 14,594
Distributions/dividends ..................................... (12,770)
---------
Balance at end of period .................................... (6,966)
Employee share purchase loans
Balance at beginning of period .............................. (11,967)
Exercise of share options ................................... (3,691)
---------
Balance at end of period .................................... (15,658)
Deferred compensation
Balance at beginning of period .............................. (44)
Amortization of deferred compensation ....................... 13
---------
Balance at end of period .................................... (31)
Treasury shares
Balance at beginning of period .............................. (11,201)
Purchase of treasury shares ................................. (5,986)
---------
Balance at end of period .................................... (17,187)
---------
Total shareholders' equity .................................. $ 225,018
=========
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)
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................................ $ 14,594 $ 8,129
Adjustments to reconcile net income to cash
flows from operating activities
Depreciation and amortization ...................................................... 7,749 5,921
Gain on sale of properties ......................................................... (4,858)
Other non-cash items ............................................................... 62 37
Net changes in assets and liabilities:
Rents receivable ................................................................... (26) (636)
Real estate tax escrows and other assets ........................................... 631 287
Accounts payable, accrued expenses & other liabilities ............................. (59) 1,710
Accrued real estate taxes .......................................................... (811) 1,518
Payment of deferred leasing costs .................................................. (1,142) (1,347)
-------- ---------
Net cash provided by operating activities ............................................. 16,140 15,619
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of properties ................................................................ (19,634) (96,475)
Additions to buildings, improvements and equipment .................................... (6,110) (5,825)
Proceeds from property sales, net ..................................................... 13,458
Other investing activities ............................................................ (362) 1,210
-------- ---------
Net cash used by investing activities ................................................. (12,648) (101,090)
-------- ---------
Proceeds from sale of common and preferred shares .................................... -- 22,500
Payment of share offering costs ....................................................... -- (1,475)
Proceeds from exercise of share options ............................................... 80 12
Proceeds from bank and mortgage loans payable ......................................... 27,775 149,385
Distributions / dividends paid ........................................................ (12,628) (9,970)
Distributions to minority interests ................................................... (18) --
Purchase of minority interests ........................................................ (256) --
Purchase of treasury shares ........................................................... (5,986) --
Payment of bank and mortgage loans and bonds .......................................... (1,410) (72,927)
Payment of deferred financing costs ................................................... (229) (875)
-------- ---------
Net cash provided by financing activities ............................................. 7,328 86,650
-------- ---------
Net increase (decrease) in cash and cash equivalents .................................. 10,820 1,179
Cash and cash equivalents, beginning of year .......................................... 2,466 1,437
-------- ---------
Cash and cash equivalents, end of quarter ............................................. $ 13,286 $ 2,616
======== =========
Supplemental disclosure of cash flow:
Interest paid ......................................................................... $ 6,718 $ 4,442
======== =========
Non-cash financing transactions:
Employee share purchase loans ......................................................... $ 3,702 $ 6,197
======== =========
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 service center
properties primarily located in the Midwest. At June 30, 1999, the Company owned
and operated 38 properties primarily located in suburban areas of Chicago,
Detroit, Milwaukee, Columbus, Minneapolis, Denver and Cincinnati. The Company
leases office and 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 June 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 only 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 six months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
For the six months ended For the three months ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues
Office $42,490 $31,617 $21,828 $17,071
Office/service center 3,318 3,587 1,699 1,775
Industrial 172 164 33 89
Deferred rental revenues 163 648 90 387
Interest and other 519 277 274 168
--- --- --- ---
Total $46,662 $36,293 $23,924 $19,490
======= ======= ======= =======
Net operating income
Office $23,663 $17,751 $12,010 $9,515
Office/service center 2,017 2,479 1,105 1,266
Industrial 141 81 34 54
--- -- -- --
Total $25,821 $20,311 $13,149 $10,835
======= ======= ======= =======
Depreciation
and amortization
Office $6,860 $4,908 $3,579 $2,709
Office/service center 614 538 316 275
Industrial 33 43 7 19
Other 242 432 126 179
--- --- --- ---
Total $7,749 $5,921 $4,028 $3,182
====== ====== ====== ======
Interest expense
Office $5,987 $4,261 $3,097 $2,516
Office/service center 698 548 367 307
Industrial 70 104 15 55
-- --- -- --
Total $6,755 $4,913 $3,479 $2,878
====== ====== ====== ======
Additions to properties
Office $25,163 $115,103 $21,743 $89,761
Office/service center 505 469 316 137
Industrial 36
Other 40 50 24 18
-- -- -- --
Total $25,744 $115,622 $22,083 $89,916
======= ======== ======= =======
</TABLE>
Income before allocation to minority interests and
gains on sale of properties
<TABLE>
<CAPTION>
For the six months ended For the three months ended
June 30, June 30,
------------------------ --------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Office $10,816 $8,582 $5,334 $4,290
Office/service center 705 1,393 422 684
Industrial 38 (66) 12 (20)
Deferred rental revenues 163 648 90 387
Interest and other income 519 277 274 168
General and administrative (2,214) (2,250) (1,050) (1,152)
Other depreciation (242) (432) (126) (179)
--- --- --- ---
Total $9,785 $8,152 $4,956 $4,178
====== ====== ====== ======
</TABLE>
Following is a summary of segment assets at June 30, 1999
and December 31, 1998:
June 30, December 31,
-------------------------------
1999 1998
Assets
Office $406,932 $394,607
Office/service center 31,317 31,841
Industrial 3,949
Other 24,702 13,292
-------------------------------
Total $462,951 $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 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 gain on sale of $ 4,848. The Company
expects to sell its Markham, Illinois property in the third or 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 loss on sale of
this property in an amount of $648 at June 30, 1999.
The Company has signed a contract to sell its 565 Lakeview Parkway, Vernon
Hills, Illinois property for $8,800 and expects to close this transaction in the
third or fourth quarter of 1999.
5. Long-term Debt
As of June 30, 1999, 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).
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 November or December of 1999. The
Company has issued 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)
The following is a discussion and analysis of the consolidated financial
condition and results of operations for the three and six months ended June 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 June 30, 1999, the Company owned and operated 38 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.
The Company expanded its real estate portfolio in 1998 through the acquisition
of suburban office and office/service center properties. The Company has
financed its growth through equity issuance and the incurrence of short- and
long-term debt. Growth in net income and funds from operations (FFO) for the
three and six months ended June 30, 1999 as compared to June 30, 1998 has been
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 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 gain on sale of $4,848.
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 June 30, 1999 compared to three months ended June 30, 1998
In analyzing the operating results for the quarter ended June 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 subsequent to June
30, 1998, (2) the addition of operating results from properties acquired in 1999
and (3) improved operations of properties during 1999 as compared to 1998.
The Company acquired three properties during the second quarter of 1998 and
three properties subsequent to June 30, 1998. The operating results of these
properties have been included in the Company's financial statements from the
dates of their acquisitions. A summary of these changes as they impact rental
and reimbursement income, real estate taxes, and property operating expenses
follows:
Rental and Real estate Property
reimbursement taxes operating
income expenses
Increase due to inclusion of results of $2,970 $608 $901
properties acquired in 1998
Increase due to properties acquired in 1999 495 65 69
Improved operations in 1999 as compared to 1998 863 836 (168)
---------------------------------
Total $4,328 $1,509 $802
=================================
Interest expense during the quarter ended June 30, 1999 increased by $601 as the
Company had greater amounts of debt outstanding in 1999.
Depreciation and amortization increased in 1999 by $846 as the Company incurred
these expenses on 38 properties as of June 30, 1999 as compared to 37 properties
as of June 30, 1998.
The Company sold three properties and recorded an anticipated loss on sale of
$648 on its Markham, Illinois property during the three months ended June 30,
1999 for a total net gain on sale of $4,858. The Company did not have any
material dispositions during the same period of 1998.
Six months ended June 30, 1999 as compared to the six months ended June 30, 1998
In analyzing the operating results for the six months ended June 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 and (3) improved
operations of properties during 1999 as compared to 1998.
The Company acquired three properties during the second quarter of 1998 and
three properties subsequent to June 30, 1998. The operating results of these
properties have been included in the Company's financial statements from the
dates of their acquisitions. A summary of these changes as they impact rental
and reimbursement income, real estate taxes, and property operating expenses
follows:
Rental and Real estate Property
reimbursement taxes operating
income expenses
Increase due to inclusion of results of $8,194 $1,389 $2,479
properties acquired in 1998
Increase due to properties acquired in 1999 495 65 69
Improved operations in 1999 as compared to 1998 1,438 952 148
---------------------------------
Total $10,127 $2,406 $2,696
=================================
Interest expense during the quarter ended June 30, 1999 increased by $1,842 as
the Company had greater amounts of debt outstanding in 1999.
Depreciation and amortization increased in 1999 by $1,828 as the Company
incurred these expenses on 38 properties as of June 30, 1999 as compared to 37
properties as of June 30, 1998.
The Company sold three properties and recorded an anticipated loss on sale of
$648 on its Markham, Illinois property during the six months ended June 30, 1999
for a total net gain on sale of $4,858. 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 on its
existing $150,000 unsecured credit facility, which matures in April 2001, and
with proceeds from the sale of properties. The Company had $112,066 outstanding
on its unsecured credit facility at June 30, 1999.
In 1998, the Company completed approximately $142,000 of property acquisitions.
The ability of the Company to continue to make acquisitions at this pace is
predicated upon the Company's ability to access the public and private equity
and debt markets at acceptable prices and rates.
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 six months ended June 30, 1999, the Company purchased 278,600
common shares and completed this plan. 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. During the six months ended June 30, 1999, the
Company repurchased 107,701 common shares as part of the new plan. Common share
repurchases totaled $5,986 for the six months ended June 30, 1999 under the two
plans. These common share repurchases were funded through borrowings under the
Company's unsecured credit facility and working capital.
During the six months ended June 30, June 30, 1999, the Company has generated
approximately $14,000 of proceeds from property dispositions. These proposed
dispositions are consistent with the Company's strategy to seek to enhance
shareholder value in part through strategic dispositions. The Company currently
plans to use the proceeds from the sales to reduce the outstanding balance on
its unsecured credit facility, to acquire additional investment properties and
for working capital.
The Company has signed contracts to sell its 565 Lakeview Parkway, Vernon Hills,
Illinois, and Markham, Illinois, properties for $9,314. The Company anticipates
closing these transactions in the third or 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 November or December of 1999. The
Company has issued a $500 letter of credit under its unsecured 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) which 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 six months ended June 30, 1999 and 1998
is as follows (Dollars in Thousands):
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
---------------- ----------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income applicable to common shares $12,766 $8,129 $8,867 $4,161
Gain on sale of properties, net (4,858) (4,858)
Depreciation and amortization 7,390 5,443 3,809 2,981
Minority interests 49 23 33 17
--------- --------- --------- ---------
FFO $15,347 $13,595 $7,851 $7,159
========= ========= ========= =========
</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 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,
unanticipated delays in property sales, adverse changes in the market value of
properties selected for sale, unanticipated expenses and delays in acquiring
properties or increasing 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 to date for evaluation, remediation and testing costs have not
been material. 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 has not yet tested
whether the financial items are in fact Year 2000 compliant, but expects to
conduct and complete such testing in the third quarter of 1999. Costs associated
with the testing phase are not expected to be material.
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. Total costs incurred were $16.
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. The Company
has requested that the vendors for these systems indicate their compliance with
Year 2000 issues.
During the evaluation process the Company has identified several building
systems in certain of its properties that will need modification or replacement
to be Year 2000 compliant. Total costs for these upgrades, which are expected to
be incurred prior to the fourth quarter of 1999, are expected to be $250. Costs
incurred for the six months ended June 30, 1999 were $42.
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 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 and
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 by the fourth quarter of 1999.
The Company believes that, even in the in the most likely, worst case scenario,
Year 2000 issues are not likely to have a material adverse effect on the
Company's business, consolidated results of operations and consolidated
financial position. However, the economic consequences of potential disruptions
related to Year 2000 issues, including a global economic slowdown, could have a
material adverse effect on the Company's business, consolidated results of
operations and consolidated financial position.
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. As of June 30, 1999, 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 June 30, 1999, the Company had $101,293 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, 69% of the
Company's long-term debt outstanding (including the interest rate cap agreement
described above) at June 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 $1,183 $2,484 $2,660 $2,851 $13,860 $78,255
Average interest rate 6.97% 6.97% 6.97% 6.97% 7.06% 6.94%
Variable Rate
Bank loan payable $112,066
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 July 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 six
months ended June 30, 1999 was 4.95%.
<PAGE>
Part II Other Information
Item 2. Changes in Securities (Dollars in thousands)
During the quarter ended June 30, 1999, the Company issued 28,097 common shares
pursuant to the exercise of outstanding share options with an aggregate exercise
price of $343. These shares were issued to the optionholders pursuant to
exemptions from the registration requirements of the Securities Act of 1933, as
amended (the "Act") provided by Section 4(2) of the Act or Rule 701 thereunder.
Item 4. Submission of Matters to a Vote of Security Holders
On May 19, 1999, the Company held its 1999 Annual Shareholders' Meeting. Seven
members of the Company's Board of Trustees were nominated and were reelected to
serve another term at the annual meeting. No other matters were submitted to a
vote of shareholders at the annual meeting. The following is a list of
individuals who were elected to the Board of Trustees at the annual meeting: Mr.
James J. Brinkerhoff, Mr. Patrick R. Hunt, Mr. Daniel E. Josephs, Mr. Daniel P.
Kearney, Mr. Edward Lowenthal, Mr. Richard A. May, and Mr. Donald E. Phillips.
The following table describes the voting results for each of the nominees.
<TABLE>
<S> <C> <C> <C> <C>
Name of Nominee For Against Abstain Total
James J. Brinkerhoff 13,414,848 17,589 3,094,024 16,526,461
Patrick R. Hunt 13,416,148 16,289 3,094,024 16,526,461
Daniel E. Josephs 13,413,441 18,996 3,094,024 16,526,461
Daniel P. Kearney 13,414,841 17,596 3,094,024 16,526,461
Edward Lowenthal 13,416,148 16,289 3,094,024 16,526,461
Richard A. May 13,411,844 20,593 3,094,024 16,526,461
Donald E. Phillips 13,414,314 18,096 3,094,501 16,526,461
</TABLE>
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:
None
<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: August 10, 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> JUN-30-1999
<CASH> 13,286
<SECURITIES> 0
<RECEIVABLES> 5,047
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,542
<PP&E> 463,577
<DEPRECIATION> 28,149
<TOTAL-ASSETS> 462,951
<CURRENT-LIABILITIES> 131,150
<BONDS> 105,843
0
37,500
<COMMON> 178
<OTHER-SE> 187,340
<TOTAL-LIABILITY-AND-EQUITY> 462,951
<SALES> 46,143
<TOTAL-REVENUES> 46,662
<CGS> 0
<TOTAL-COSTS> 30,122
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,755
<INCOME-PRETAX> 14,643
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,643
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,766
<EPS-BASIC> .77
<EPS-DILUTED> .77
</TABLE>
