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, 2000
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 3, 2000: 16,645,134.
<PAGE>
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<CAPTION>
Great Lakes REIT
Index to Form 10-Q
September 30, 2000
<S> <C>
Page Number
Part I - Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets
as of September 30, 2000
and December 31, 1999 4
Consolidated Statements of Income
for the three months
ended September 30, 2000 and 1999 5
Consolidated Statements of Income
for the nine months
ended September 30, 2000 and 1999 6
Consolidated Statement of Changes
in Shareholders' Equity
for the nine months ended September 30, 2000 7
Consolidated Statements of Cash Flows
for the nine months
ended September 30, 2000 and 1999 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 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Great Lakes REIT
Consolidated Balance Sheets (unaudited)
(Dollars in Thousands, except per share data) September 30, December 31,
-----------------------------------
2000 1999
---- ----
<S> <C> <C>
Assets
Properties:
Land $61,636 $60,983
Buildings, improvements, and equipment 416,672 410,478
-----------------------------------
478,308 471,461
Less accumulated depreciation 42,127 33,074
-----------------------------------
436,181 438,387
Cash and cash equivalents 7,655 1,518
Real estate tax escrows 252 277
Rents receivable 5,829 6,274
Deferred financing and leasing costs, net of accumulated amortization 5,983 6,069
Goodwill, net of accumulated amortization 1,154 1,210
Other assets 1,850 1,467
-----------------------------------
Total assets $458,904 $455,202
===================================
Liabilities and shareholders' equity
Bank loan payable $107,500 $107,000
Mortgage loans payable 98,276 100,113
Bonds payable 4,270 4,550
Accounts payable and accrued liabilities 8,172 5,947
Accrued real estate taxes 9,191 11,687
Dividends payable 5,990 -
Prepaid rent 3,537 3,936
Security deposits 1,347 1,084
-----------------------------------
Total liabilities 238,283 234,317
-----------------------------------
Minority interests 693 951
-----------------------------------
Preferred shares of beneficial interest ($0.01 par value, 37,500 37,500
10,000,000 shares authorized; 1,500,000 93/4% Series A
Cumulative Redeemable shares, with a $25.00 per share
Liquidation Preference, issued and outstanding in 2000 and 1999)
Common shares of beneficial interest ($0.01 par value, 182 178
60,000,000 shares authorized; 18,188,519 and 17,816,883
shares issued in 2000 and 1999, respectively)
Paid-in-capital 233,610 227,907
Retained earnings (deficit) (6,043) (5,936)
Employee share loans (18,847) (16,335)
Deferred compensation (2,800) (22)
Treasury shares, at cost (1,543,385 and 1,521,785 shares in (23,674) (23,358)
2000 and 1999, respectively)
-----------------------------------
Total shareholders' equity 219,928 219,934
-----------------------------------
Total liabilities and shareholders' equity $458,904 $455,202
===================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Great Lakes REIT
Consolidated Statements of Income (unaudited)
(In Thousands, except per share data)
Three months ended September 30,
-------------------------------------
2000 1999
---- ----
<S> <C> <C>
Revenues:
Rental $19,187 $18,723
Reimbursements 5,466 5,080
Interest and other 751 476
-------------------------------------
Total revenues 25,404 24,279
-------------------------------------
Expenses:
Real estate taxes 3,348 3,683
Other property operating 6,677 6,364
General and administrative 1,354 1,210
Interest 3,890 3,593
Depreciation and amortization 4,286 4,063
-------------------------------------
Total expenses 19,555 18,913
-------------------------------------
Income before gain on sale of properties 5,849 5,366
Gain on sale of properties, net - 3,203
-------------------------------------
Income before allocation to minority interests 5,849 8,569
Minority interests 14 30
-------------------------------------
Net income 5,835 8,539
Income allocated to preferred shareholders 914 914
-------------------------------------
Net income applicable to common shares $4,921 $7,625
=====================================
Earnings per common share - basic $0.30 $0.46
=====================================
Weighted average common shares outstanding - basic 16,634 16,522
=====================================
Diluted earnings per common share $0.29 $0.46
=====================================
Weighted average common shares outstanding - diluted 16,822 16,602
=====================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Great Lakes REIT
Consolidated Statements of Income (unaudited)
(In Thousands, except per share data)
Nine months ended September 30,
------------------------------------------
2000 1999
---- ----
<S> <C> <C>
Revenues:
Rental $56,879 $54,864
Reimbursements 16,066 15,081
Interest and other 1,824 996
------------------------------------------
Total revenues 74,769 70,941
------------------------------------------
Expenses:
Real estate taxes 10,431 11,828
Other property operating 19,110 18,377
General and administrative 3,925 3,424
Interest 11,445 10,349
Depreciation and amortization 12,585 11,812
------------------------------------------
Total expenses 57,496 55,790
------------------------------------------
Income before gain on sale of properties 17,273 15,151
Gain on sale of properties, net 2,964 8,061
------------------------------------------
Income before allocation to minority interests 20,237 23,212
Minority interests 48 79
------------------------------------------
Net income 20,189 23,133
Income allocated to preferred shareholders 2,742 2,742
------------------------------------------
Net income applicable to common shares $17,447 $20,391
==========================================
Earnings per common share - basic $1.06 $1.23
==========================================
Weighted average common shares outstanding - basic 16,483 16,529
==========================================
Diluted earnings per common share $1.05 $1.23
==========================================
Weighted average common shares outstanding - diluted 16,581 16,609
==========================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Great Lakes REIT
Consolidated Statement of Changes in Shareholders' Equity (unaudited)
For the Nine Months Ended September 30, 2000
(Dollars in Thousands)
2000
------------------------------------------------------------------------------
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 178
Restricted share award 2
Exercise of share options 2
------------------------------------------------------------------------------
Balance at end of period 182
Paid-in capital
Balance at beginning of period 227,907
Restricted share award 3,136
Exercise of share options 2,567
------------------------------------------------------------------------------
Balance at end of period 233,610
Retained earnings (deficit)
Balance at beginning of period (5,936)
Net income 20,189
Distributions/dividends (20,296)
------------------------------------------------------------------------------
Balance at end of period (6,043)
Employee share loans
Balance at beginning of period (16,335)
Exercise of share options (2,512)
------------------------------------------------------------------------------
Balance at end of period (18,847)
Deferred compensation
Balance at beginning of period (22)
Restricted share award (3,138)
Amortization of deferred compensation 360
------------------------------------------------------------------------------
Balance at end of period (2,800)
Treasury shares
Balance at beginning of period (23,358)
Purchase of treasury shares (316)
------------------------------------------------------------------------------
Balance at end of period (23,674)
------------------------------------------------------------------------------
Total shareholders' equity $219,928
==============================================================================
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,
----------------------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $20,189 $23,133
Adjustments to reconcile net income to cash
flows from operating activities
Depreciation and amortization 12,585 11,812
Gain on sale of properties (2,964) (8,061)
Other non cash items 407 96
Net changes in assets and liabilities:
Rents receivable 445 95
Real estate tax escrows and other assets (358) 34
Accounts payable, accrued expenses and other liabilities 2,090 2,141
Accrued real estate taxes (2,496) 988
Payment of deferred leasing costs (1,408) (1,545)
----------------------------------------
Net cash provided by operating activities 28,490 28,693
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of properties (9,928) (19,634)
Additions to buildings, improvements and equipment (8,015) (8,918)
Proceeds from property sales, net 12,144 21,959
Other investing activities - (362)
----------------------------------------
Net cash provided by (used in) investing activities (5,799) (6,955)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of share options 57 124
Proceeds from bank and mortgage loans payable 9,500 29,775
Distributions / dividends paid (14,306) (13,544)
Distributions to minority interests (48) (37)
Purchase of minority interests (258) (256)
Purchase of treasury shares (316) (12,157)
Payment of bank and mortgage loans and bonds (11,117) (18,055)
Payment of deferred financing costs (66) (229)
----------------------------------------
Net cash provided by (used in) financing activities (16,554) (14,379)
----------------------------------------
Net increase in cash and cash equivalents 6,137 7,359
Cash and cash equivalents, beginning of year 1,518 2,466
========================================
Cash and cash equivalents, end of quarter $7,655 $9,825
========================================
Supplemental disclosure of cash flow:
Interest paid $11,399 $10,335
========================================
Non cash financing transactions:
Employee share loans $2,515 $4,386
========================================
Mortgage assumed by purchaser of property -- $2,079
========================================
Increase in preferred dividends payable -- $142
========================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Great Lakes REIT
Notes to Consolidated Financial Statements
Dollars in thousands, except per share data
(Unaudited)
1. Basis of Presentation
Great Lakes REIT, a Maryland real estate investment trust (the "Company"), was
formed in 1992 to invest in income-producing real property. The principal
business of the Company is the ownership, management, leasing, renovation and
acquisition of suburban office and light industrial properties primarily located
in the Midwest. At September 30, 2000, the Company owned and operated 36
properties primarily located in suburban areas of Chicago, Detroit, Milwaukee,
Denver, Cincinnati, Columbus and Minneapolis. The Company leases office and
light industrial space to over 500 tenants in a variety of businesses.
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, 1999, as amended (the
"1999 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 1999 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 the
properties are primarily located in the Midwest. As of September 30, 2000, the
properties were leased to more than 500 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.
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes the Company's segment information for the three
and nine months ended September 30, 2000 and 1999.
For the nine months ended For the three months ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues
Office $67,567 $64,328 $22,783 $21,839
Office/service center 5,013 5,012 1,648 1,693
Industrial - 172 - -
Deferred rental revenues 364 433 222 271
Interest and other 1,824 996 751 476
------------------------------------------------------------------------------
Total $74,768 $70,941 $25,404 $24,279
==============================================================================
Net operating income
Office $39,611 $35,939 $13,235 $12,274
Office/service center 3,429 3,228 1,171 1,211
Industrial - 140 - -
------------------------------------------------------------------------------
Total $43,040 $39,307 $14,406 $13,485
==============================================================================
Depreciation
and amortization
Office $11,219 $10,440 $3,850 $3,580
Office/service center 957 953 298 339
Industrial - 33 - -
Other 409 386 138 144
------------------------------------------------------------------------------
Total $12,585 $11,812 $4,286 $4,063
==============================================================================
Interest expense
Office $10,294 $9,194 $3,499 $3,205
Office/service center 1,151 1,085 391 388
Industrial - 70 -
------------------------------------------------------------------------------
Total $11,445 $10,349 $3,890 $3,593
==============================================================================
Additions to properties
Office $17,720 $27,816 $12,548 $2,656
Office/service center 188 669 59 163
Industrial - 36 - -
Other 35 41 2 1
------------------------------------------------------------------------------
Total $17,943 $28,562 $12,609 $2,820
==============================================================================
Income before allocation to minority interests and gains on sale of properties
For the nine months ended For the three months ended
September 30, September 30,
2000 1999 2000 1999
Office $18,098 $16,305 $5,886 $5,489
Office/service center 1,321 1,190 482 484
Industrial - 37 -
Deferred rental revenues 364 433 222 271
Interest and other income 1,824 996 751 476
General and administrative (3,925) (3,424) (1,354) (1,210)
Other depreciation (409) (386) (138) (144)
------------------------------------------------------------------------------
Total $17,273 $15,151 $5,849 $5,366
==============================================================================
</TABLE>
Following is a summary of segment assets at September 30, 2000 and December 31,
1999:
September 30, December 31,
--------------------------------------
2000 1999
Assets
Office $414,751 $411,738
Office/service center 24,741 30,635
Other 19,412 12,829
--------------------------------------
Total $458,904 $455,202
======================================
<PAGE>
3. Property Acquisitions and Dispositions
On April 6, 2000, the Company sold its property located at 3010 and 3020
Woodcreek Drive, Downers Grove, Illinois for a contract price of $12,700
resulting in a gain on sale of $2,964.
In July 2000, the Company signed a contract to sell its property located at 183
Inverness Drive, Englewood, Colorado for a contract price of $28,250.
On August 1, 2000, the Company acquired a 109,647 square foot one-story office
building in Schaumburg, Illinois for approximately $9,700. The Company used a
portion of the proceeds from the sale of its Downers Grove, Illinois property to
purchase this investment.
4. Restricted Share Grants
On June 1, 2000, the Company issued 200,000 restricted common shares to certain
officers and employees. The shares vest ten years from the date of issuance
provided the recipient is still employed by the Company but may vest in
increments during the period ended December 31, 2002 subject to the Company
achieving certain performance objectives. Upon a change in control of the
Company, up to 100,000 of the restricted shares issued to certain officers of
the Company vest immediately. The total fair value of the restricted shares at
the date of issuance ($3,138) is being amortized into expense over ten years on
a straight-line basis subject to adjustment when the Company determines that it
is probable to achieve certain performance objectives which accelerate the full
or partial vesting of the shares. The Board has, in its sole discretion,
selected the following companies to comprise the Company's peer group for 2000:
Bedford Property Investors, Inc., Koger Equity, Inc., Prime Group Realty Trust,
Pacific Gulf Properties, Inc., Kilroy Realty Corporation, Arden Realty, Inc., SL
Green Realty Corporation, Washington REIT, CenterPoint Properties Trust and
Parkway Properties, Inc.. However, the Board may at any time make appropriate
modifications to the peer group to reflect changes in the operations of the
Company or other companies.
5. Accounting for Hedging Activities
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivatives
Instruments and Hedging Activities." This statement will be adopted by the
Company effective January 1, 2001, but is not expected to materially impact the
Company's financial statements.
6. Commitments
In July 2000, the Company signed a contract to acquire, upon completion, Two
Riverwood Place, a 96,000 square foot office building in Pewaukee, Wisconsin for
a maximum price of $8,500. The total investment in this property is expected to
be $11,700 (including tenant improvements). The Company expects to acquire this
property in July 2001. The Company has posted a $2,000 letter of credit as
security for this commitment.
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, 2000. 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
1999 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, 2000, the Company owned and operated 36 properties
primarily located in suburban areas of Chicago, Detroit, Milwaukee, Columbus,
Minneapolis, Denver and Cincinnati. The Company leases space to over 500 tenants
who are engaged in a variety of businesses.
Three months ended September 30, 2000 compared to three months ended September
30, 1999
In analyzing the operating results for the quarter ended September 30, 2000, the
changes in rental and reimbursement income, real estate taxes and property
operating expenses from the same period in 1999 are due principally to the
following factors: (1) the addition of operating results from properties
acquired subsequent to September 30, 1999, (2) the addition of operating results
from properties acquired in 2000, (3) the omission of operating results of
properties sold in 2000 and (4) improved operations of properties during 2000 as
compared to 1999.
<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 $490 $73 $73
in 1999
Increase due to properties acquired in 2000 356 74 101
Decrease due to property dispositions in 1999 and 2000 (613) (93) (105)
Increase (decrease) in operations in 2000 as compared to 1999 617 (389) 244
--------------------------------------
Total $850 ($335) $313
======================================
</TABLE>
Interest expense during the quarter ended September 30, 2000 increased by $297
as the Company had greater amounts of debt outstanding in 2000 as compared to
1999 as well as an increase in the interest rate on the variable rate portion of
the Company's line of credit.
General and administrative expenses increased primarily due to the amortization
expense associated with the May 2000 restricted share grants.
Depreciation and amortization increased in 2000 by $223 as the Company had a
gross book value of depreciable assets of $416,672 at September 30, 2000 as
compared to $399,760 at September 30, 1999.
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 2000.
Nine months ended September 30, 2000 as compared to the nine months ended
September 30, 1999
In analyzing the operating results for the nine months ended September 30, 2000,
the changes in rental and reimbursement income, real estate taxes and property
operating expenses, from 1999 are due principally to the following factors: (1)
the addition of operating results from properties acquired in 1999, (2) the
addition of operating results from properties acquired in 2000, (3) the omission
of operating results of properties sold in 1999 and 2000 and (4) improved
operations of properties during 2000 as compared to 1999.
<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 $1,991 $365 $693
in 1999
Increase due to properties acquired in 2000 356 74 101
Decrease due to property dispositions in 1999 and 2000 (2,931) (468) (663)
Increase (decrease) in operations in 2000 as compared to 1999 3,584 (1,368) 602
--------------------------------------------
Total $3,000 ($1,397) $733
============================================
</TABLE>
Interest expense during the nine months ended September 30, 2000 increased by
$1,096 as the Company had greater amounts of debt outstanding in 2000 as
compared to 1999 as well as an increase in the interest rate on the variable
rate portion of the Company's line of credit.
Depreciation and amortization increased in 1999 by $773 as the Company had a
gross book value of depreciable assets of $416,672 at September 30, 2000 as
compared to $399,760 at September 30, 1999.
The Company sold four properties during the nine months ended September 30, 1999
for a total net gain on sale of $8,061. The Company sold one property in 2000
resulting in a net gain on sale of $2,964.
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 $107,500
outstanding under its unsecured bank credit facility at September 30, 2000.
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 July 2000, the Company signed a contract to acquire, upon completion, Two
Riverwood Place, a 96,000 square foot office building in Pewaukee, Wisconsin for
a maximum price of $8,500. The total investment in this property is expected to
be $11,700 (including tenant improvements). The Company expects to acquire this
property in July 2001.
In April 2000, the Company sold its Downers Grove, Illinois property for a
contract price of $12,700. The Company deposited the proceeds from the sale in a
tax-deferred exchange trust and used a portion of the proceeds to acquire
Woodfield Green Executive Center, a 109,647 square foot office building in
Schaumburg, Illinois, on August 1, 2000 for approximately $9,700. The Company
elected to use the remaining proceeds for working capital.
In 2000, the Company announced a plan to repurchase up to 250,000 common shares.
Through September 30, 2000, the Company had repurchased 21,600 of its common
shares for an aggregate purchase price of $316. Funds for the share repurchases
came from borrowings under the Company's unsecured bank credit facility and
working capital.
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 ("NAREIT") in October
1999 (the "White Paper") defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. Management considers Funds from Operations an appropriate measure of
performance of an equity REIT because it is predicated on cash flow analyses.
The Company computes Funds from Operations in accordance with standards
established by the White Paper, which may differ from the methodology for
calculating Funds from Operations utilized by other equity REITs and,
accordingly, may not be comparable to such other REITs. Funds from Operations
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indicator of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make distributions. FFO
for the three and nine months ended September 30, 2000 and 1999 is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net income applicable to common shares $17,447 $20,391 $4,921 $7,625
Gain on sale of properties, net (2,964) (8,061) - (3,203)
Depreciation and amortization 12,102 11,307 4,121 3,917
Minority interests 48 79 14 30
----------------- ----------------- ------------ ---------------
FFO $26,633 $23,716 $9,056 $8,369
================= ================= ============ ===============
</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 the amount and timing of
expenditures relating to 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 these forward-looking
statements. Examples of these 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.
<PAGE>
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. In 1999, the Company 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 thereby limiting the interest rate on that portion of the Company's
line of credit to approximately 7.0% to 7.3% per annum.
At September 30, 2000, the Company had $148,276 of fixed rate debt outstanding
at an average rate of 7.07%. 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, 71% of the
Company's long-term debt outstanding (including the interest rate cap agreement
described above) at September 30, 2000, 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
2000 (1) 2001 2002 2003 2004 Thereafter
<S> <C> <C> <C> <C> <C> <C>
Liabilities:
Fixed Rate
Mortgage loans payable $646 $2,660 $2,851 $13,861 $5,440 $72,818
Average interest rate 6.97% 6.97% 6.97% 7.06% 7.86% 6.87%
Fixed Rate
Bank loan payable $50,000
Average interest rate(2)
Variable Rate
Bank loan payable $57,500
Average interest rate (3)
Bonds payable $310 $340 $375 $415 $2,830
Average interest rate (4) (4) (4) (4) (4) (4)
(1) For the period October 1, 2000 to December 31, 2000.
(2) The maximum interest rate on this loan is 7.4%. The average interest rate
for 2000 was 7.4%.
(3) The current interest rate on this debt is LIBOR + 1.15%. The average
interest rate for this loan for 2000 was 7.71%.
(4) The interest rate on the bonds payable is reset weekly. After
factoring in credit enhancement costs for the bonds, the average interest
rate in 2000 was 4.41%.
</TABLE>
<PAGE>
Part II Other Information
Item 2. Changes in Securities (Dollars in thousands)
During the quarter ended September 30, 2000, the Company issued 2,687
unregistered common shares pursuant to the exercise of outstanding share
options. 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, 2000.
<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 9, 2000 /s/ James Hicks
Chief Financial Officer
and Treasurer
(Principal Financial and
Accounting Officer)
