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, 1996
OR
[]Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number: 0-28354
Great Lakes REIT, Inc.
(Exact name of Registrant as specified in its Charter)
Maryland 36-3844714
(State or other jurisdiction (I.R.S.employer identification no.)
of incorporation organization)
823 Commerce Drive, Suite 300, Oak Brook, IL 60521
(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 common shares outstanding at August 9, 1996 4,824,392
<PAGE>
Great Lakes REIT, Inc.
Index to Form 10-Q
March 31, 1996
Page Number
Part I
Item 1. Financial Information:
Condensed Balance Sheets
as of June 30, 1996
and December 31, 1995 1
Condensed Statements of Income
for the three months
ended June 30, 1996 and 1995 2
Condensed Statements of Income
for the six months 3
ended June 30, 1996 and 1995
Condensed Statement of Changes
in Stockholders' Equity
for the six months ended June 30, 1996 4
Condensed Statements of Cash flows
for the six months
ended June 30, 1996 and 1995 6
Notes to Condensed Financial Statements 7
Item 2. Management Discussion and Analysis
of Results of Operations and
Financial Condition 8
<TABLE>
<CAPTION>
Great Lakes REIT, Inc.
Condensed Balance Sheets
(unaudited)
June 30, 1996 December 31, 1995
<S> <C> <C>
Assets
Properties:
Land ........................................... $ 19,566,500 $ 18,673,750
Buildings, improvements and equipment 83,994,002 75,667,086
Less accumulated depreciation ............... 3,872,237 2,482,844
--------- ---------
99,688,265 91,857,992
Cash and cash equivalents ........................ 327,681 1,302,728
Other assets ..................................... 4,957,849 5,817,716
--------- ---------
Total assets ................................ $ 104,973,795 $ 98,978,436
============= =============
Liabilities and Stockholders Equity
Bank loan payable ................................ $ 29,002,368 $ 24,253,148
Bonds payable .................................... 5,235,000 5,420,000
Mortgage notes payable ........................... 18,320,320 18,634,022
Accounts payable, accrued expenses and
other liabilities .............................. 6,939,396 5,706,069
--------- ---------
Total liabilities .............................. 59,497,084 54,013,239
---------- ----------
Preferred stock (none issued)
Common stock (4,832,216 shares issued) ........... 48,322 45,209
Paid-in capital .................................. 49,236,068 45,861,352
Distributions in excess of accumulated earnings .. (3,172,268)
Treasury stock, at cost (12,951 shares) .......... (155,411) (155,411)
Deferred compensation (40,000 shares) ............ (480,000)
------- --------
Total stockholders equity ....................... 45,476,711 44,965,197
---------- ----------
Total liabilities and stockholders equity ...... $104,973,795 $98,978,436
============ ===========
</TABLE>
The accompany notes are an integral part of these condensed financial
statements.
<TABLE>
<CAPTION>
1
Great Lakes REIT, Inc.
Condensed Statements of Income
For the three months ended
June 30, 1996 and 1995
(unaudited)
1996 1995
<S> <C> <C>
Revenues
Rental ....................... $ 5,900,684 $ 3,120,944
Interest and other ........... 26,598 25,765
------ ------
Total revenues ......... 5,927,282 3,146,709
--------- ---------
Expenses
Property operating ........... 2,535,198 1,391,922
General and administrative ... 485,985 201,265
Interest ..................... 981,459 446,416
Depreciation and amortization 890,431 393,997
Contract termination ......... 1,597,273
---------
Total expenses ......... 6,490,346 2,433,600
--------- ---------
Net income (loss) ................. ($ 563,064) $ 713,109
=========== ===========
Earnings (loss)per common share and
common share equivalent ...... ($ 0.12) $ 0.21
=========== ===========
Weighted average number of common
shares and common share
equivalents outstanding ...... 4,848,197 3,377,054
========= =========
</TABLE>
The accompany notes are an integral part of these condensed financial statements
2
<TABLE>
<CAPTION>
Great Lakes REIT, Inc.
Condensed Statements of Income
For the six months ended June 30, 1996 and 1995
(unaudited)
1996 1995
<S> <C> <C>
Revenues
Rental ....................... $11,423,630 $ 5,718,771
Interest and other ........... 47,435 47,928
------ ------
Total revenues ......... 11,471,065 5,766,699
---------- ---------
Expenses
Property operating ........... 5,003,110 2,542,792
General and administrative ... 824,037 365,447
Interest ..................... 1,922,245 801,352
Depreciation and amortization 1,716,053 719,167
Contract termination ......... 1,597,273
---------
Total expenses ......... 11,062,718 4,428,758
---------- ---------
Net income (loss) ................. $ 408,347 $ 1,337,941
=========== ===========
Earnings (loss)per common share and
common share equivalent ...... $ 0.09 $ 0.44
=========== ===========
Weighted average number of common
shares and common share
equivalents outstanding ...... 4,707,565 3,069,497
========= =========
</TABLE>
The accompany notes are an integral part of these condensed financial
statements.
3
<TABLE>
<CAPTION>
Great Lakes REIT, Inc.
Condensed Statement of Changes in Stock Equity
For the six months ended June 30, 1996
(Unaudited)
Distribution Total
in Excess of Stock-
Accumulated Treasury Deferred holders
Earnings Stock Compensation Equity
<S> <C> <C> <C> <C>
Balance, 1/1/96 .. ($ 785,953) (155,411) -- $ 44,965,197
Exercise of
stock options ... -- -- 288,797
Net income ....... 971,412 -- -- 971,412
Distributions/
dividends payable
($0.30 per share) (1,356,155) -- -- (1,356,155)
Balance at 3/31/96 (1,170,696) (155,411) $ 44,869,251
Exercise of
stock options ... 1,409,032
Issuance of shares
in merger ....... 1,200,000
Restricted stock
awards .......... (480,000) --
Net income (loss) (563,065) (563,065)
Distribution/
dividends payable
($0.30 per share) (1,438,507) (1,438,507)
Balance at 6/30/96 ($ 3,172,268) (155,411) (480,000) $ 45,476,711
The accompanying notes are an integral part of these condensed financial
statements.
</TABLE>
<TABLE>
<CAPTION>
5
Great Lakes REIT, Inc.
Condensed Statement of Changes in Stock Equity
For the six months ended June 30, 1996
(Unaudited)
Common Stock
Shares Paid-in
Outstanding Amount Capital
<S> <C> <C> <C>
Balance, 1/1/96 .. 4,507,945 45,209 45,861,352
Exercise of
stock options ... 29,235 292 288,505
Net income ....... -- -- --
Distributions/
dividends payable
($0.30 per share) -- -- --
Balance at 3/31/96 4,537,180 45,501 46,149,857
Exercise of
stock options ... 142,085 1,421 1,407,611
Issuance of shares
in merger ....... 100,000 1,000 1,199,000
Restricted stock
awards .......... 40,000 400 479,600
Net income (loss) -- -- --
Distributions/
dividends payable
($0.30 per share) -- -- --
Balance at 6/30/96 4,819,265 $ 48,322 49,236,068
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<TABLE>
<CAPTION>
Great Lakes REIT, Inc.
Condensed Statements of Cash Flows
For the six months ended June 30, 1996 and 1995
(unaudited)
Cash flows from operating activities 1996 1995
<S> <C> <C>
Net income .................................................. $ 408,347 1,337,841
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization .............................. 1,716,053 719,167
Contract termination expense .............................. 1,597,273
Net changes in assets and liabilities:
Other assets ............................................. 322,184
Accounts payable and accrued liabilities ................. 1,233,327 1,796,654
Payment of deferred leasing costs ........................... (611,793) (211,211)
Net cash provided by operating activities ............ 4,665,391 2,447,884
Cash flows from investing activities
Purchase of properties ...................................... (7,399,198)
Payment of tenant & building improvement costs .............. (1,820,468) (1,153,678)
Decrease in earnest money deposits .......................... 875,000 --
Net cash used by investing activities (8,344,666) (8,440,721)
Cash flows from financing activities
Proceeds from sale of common stock .......................... 16,745,311
Payment of stock issuance costs ............................. (3,250,000)
Proceeds from exercise of stock options ..................... 1,697,829
Proceeds from bank and mortgage loans payable ............... 4,749,220 1,200,000
Distributions/dividends paid and payable .................... (2,794,662)
Repayment of mortgage notes and bonds payable ............... (498,702) (439,752)
Payment of deferred financing costs ......................... (449,457) --
Increase in other assets .................................... (2,946,207)
Net cash (used) provided by financing activities ..... 2,704,228 13,872,899
Net (decrease) increase in cash and cash equivalents ........ (975,047) 7,880,062
Cash and cash equivalents, beginning of quarter ............. 1,302,728 2,676,594
Cash and cash equivalents, end of quarter ................... $ 327,681 $10,556,656
Non-cash financing transactions:
Bonds payable assumed in purchase of property ............... $ -- $ 5,590,000
Issuance of common stock for acquisition of Advisor ......... $ 1,200,000 --
Restricted stock awards ..................................... $ 480,000 --
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
6
Great Lakes REIT, Inc.
Notes to Condensed Financial Statements
June 30,1996
(Unaudited)
1. Basis of Presentation
The accompanying condensed unaudited 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 since the user of these statements is assumed to
read them in conjunction with the most recent year-end audited financial
statements. 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
financial statements and notes thereto included in the Great Lakes REIT, Inc.
financial statements on Form 10/A for the year ended December 31, 1995.
2. Properties Acquired in 1996
On January 1, 1996, the Company acquired a 43,300 square foot single-story
office building in Schaumburg, Illinois for an acquisition price of
approximately $1,086,000.
On April 17, 1006, the Company acquired a 96,000 square foot office
building in Springdale, Ohio, for a contract price of $6,075,000. A portion of
the purchase price was financed using the Company s Bank of Boston bank line of
credit.
3. Related Party Transactions
The following fees will be or have been paid to Equity Partners Ltd., (the
Advisor ) or affiliates. Two directors of the Company were owners of the
Advisor.
Paid Paid Payable
1996 1995 at
June 30, 1996
Property acquisition fees ............. $ 87,731 $190,275 -
Stock offering fees ................... 6,481 -- --
Advisory fees ......................... 278,006 -- -
Property management fees .............. 282,094 -- -
Construction management fees .......... 120,136 -- --
Other fees, primarily legal fees 21,484 -- --
On February 27, 1996, the shareholders of the Company approved the
acquisition of all the outstanding shares of the Advisor in exchange for 100,000
of its shares. This transaction closed on April 1, 1996. Upon completion of the
merger, the cost of the merger ($1,597,273) was assigned to contracts between
the Advisor and the Company.
As these contracts are effectively terminated, these costs have been
charged to contract termination expenses in the quarter ended June 30, 1996. In
addition, certain employees of the Advisor received 40,000 restricted shares of
the Company. The fair value of the restricted stock awards ($480,000) has been
deferred in the accompanying balance sheet. These amounts will be recognized as
compensation expense when the restrictions on the shares are removed. As of
April 1, 1996, the Company absorbed the employees of the Advisor and is now
self-managed and self-advised.
4. Financing Activities
On April 15, 1996, the Company refinanced its bank line of credit with the
First National Bank of Boston. The new line of credit allows for maximum
borrowings of $35,000,000 subject to certain loan covenants. On June 28, 1996,
the maximum borrowings under the line of credit were increased to $50,000,000
subject to certain loan covenants. Interest on the new line of credit accrues at
LIBOR + 1.875% per annum. Amounts outstanding under this line of credit are due
on April 12, 1998. On June 30, 1996, the Company extended its line of credit
with American National Bank until June 30, 1997. The maximum amount available to
be borrowed under this line of credit is $5,000,000.
5. Proforma Financial Statements
The following unaudited pro forma summary
presents the results of operations of the Company as if the acquisition of the
Advisor and the property acquisitions in 1996 and 1995 had occurred at the
beginning of 1995, after giving effect to certain adjustments, including
increased depreciation and interest expense. The unaudited pro forma summary
information does not necessarily reflect the results of operations as they would
have been if the Company had acquired the Advisor and properties on January 1,
1995.
Six months Six months
ended ended
June 30, 1996 June 30, 1995
Revenues .......... $11,649,000 $10,648,000
Net Income ........ $ 297,000 $ 183,000
Earnings per common
share and common
share equivalent . $ 0.06 $ 0.04
5. Subsequent Event
On July 24, 1996, the Company acquired a 41,500 square foot single-story
office building located in Lincolnshire, Illinois for a contract price of
$2,800,000. A portion of the purchase price of this property was financed under
the American National Bank line of credit.
ITEM 2.Management s Discussion and Analysis of Results of Operations and
Financial Condition
Overview
- --------
Great Lakes REIT, Inc. (the Company ) a Maryland corporation, was formed on
June 22, 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 industrial properties located in the Midwest.
At June 30, 1996, the Company owns and operates eighteen properties located in
suburban areas of Chicago, Detroit, Milwaukee, Cincinnati and Minneapolis. The
Company leases office and industrial space to over 200 tenants in a variety of
businesses.
Over the past three years, the Company has expanded its real estate
portfolio through the acquisition of suburban office and office/service center
properties in the Midwest. The Company has financed its growth by the issuance
of additional shares of its common stock and by issuing short and long-term
mortgage notes payable secured by its property assets. Growth in net income and
funds from operations (FFO) for the three and six months ended June 30, 1996 as
compared to June 30, 1995 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 1995 and 1996 from the dates of their respective
acquisitions.
The Company believes that to facilitate a clear understanding of its
operating results, FFO should be examined in conjunction with the net income as
presented in the Condensed Financial Statements included elsewhere in this Form
10-Q. However, FFO should not be considered as a substitute for net income (as
an indicator of the Company s performance) or as a substitute for cash flows (as
a measure of liquidity).
Results of Operations
Six months ended June 30, 1996
In analyzing the operating results for the six months ended June 30, 1996
of the Company, the changes in rental income and property operating expenses,
from 1995 are due principally to three factors: (1) the addition of operating
results from properties acquired during 1996; (2) the addition of six months of
operating results in 1996 of properties acquired in 1995 as compared to the
partial period of operating results from the dates of their respective
acquisitions in 1995 and (3) improved operations of properties during 1996 as
compared to 1995.
During the six months ended June 30, 1996, the Company acquired two new
investment properties. The operating results of these properties have been
included in the Company s financial statements from the date of its acquisition.
In 1995, the Company acquired 7 properties, and in 1996 a full six months of
operations of these properties has been included in the Company s financial
statements.
A summary of these changes as they impact rental income, and property
operating expenses follows:
Rental income Property
operating
expenses
Increase due to inclusion
of results of properties acquired
after January 1, 1995 $5,129,000 2,252,000
Increase due to 1996 acquisitions 263,000 208,000
Improved operations in 1996
compared to 1995 313,000 -
Total increase in 1996 $5,705,000 2,460,000
Interest expense during the six months ended June 30, 1996 increased by
$1,121,000 as the Company had greater amounts of long and short-term debt
outstanding in 1996. This debt was used to finance the acquisition of properties
acquired in 1995 and 1996.
General and administrative expenses increased by $459,000 due to the
increase in the size of the Company.
Depreciation and amortization increased in 1996 by $997,000 as the Company
incurred these expenses on eighteen properties in 1996 versus eleven properties
in 1995.
In April 1996, the Company acquired all the outstanding shares of its
Advisor in exchange of 100,000 shares of the Company s stock. All contracts
between the Advisor and the Company were transferred to the Company. As these
contracts are effectively terminated, the costs assigned to the contracts
($1,597,273) have been charged to contract termination expense in the three and
six months ended June 30, 1996.
Three months ended June 30, 1996
In analyzing the operating results for the quarter ended June 30, 1996 of
the Company, the changes in rental income and property operating expenses, from
1995 are due principally to three factors: (1) the addition of operating results
from properties acquired during 1996; (2) the addition of full quarter of
operating results in 1996 of properties acquired in 1995 as compared to the
partial quarter of operating results from the dates of their respective
acquisitions in 1995 and (3) improved operations of properties during 1996 as
compared to 1995.
The Company acquired two new investment properties. The operating results
of these properties have been included in the Company s financial statements
from the date of its acquisition. In 1995, the Company acquired 7 properties,
and in 1996 a full quarter months of operations of these properties has been
included in the Company s financial statements.
A summary of these changes as they impact rental income, and property
operating expenses follows:
Rental income Property
operating
expenses
Increase due to inclusion
of results of properties acquired
after January 1, 1995 $2,438,000 989,000
Increase due to 1996 acquisitions 201,000 152,000
Improved operations in 1996
compared to 1995 141,000 2,000
Total increase in 1996 $2,780,000 1,143,000
Interest expense during the quarter ended June 30, 1996 increased by
$535,000 as the Company had greater amounts of long and short-term debt
outstanding in 1996. This debt was used to finance the acquisistion of
properties acquired in 1995 and 1996.
General and administrative expenses increased by $285,000 due to the
increase in the size of the Company.
Depreciation and amortization increased in 1996 by $496,000 as the Company
incurred these expenses on eighteen properties in 1996 versus eleven properties
in 1995.
Liquidity and Capital Resources
Cash and cash equivalents as of June 30, 1996 were $328,000, a decrease of
$975,000 as compared to December 31, 1995. The decline is primarily due to the
Company continuing to invest in tenant and other capital improvements at its
properties and the acquisition of two investment properties in 1996.
The Company expects to meet its short-term liquidity requirements generally
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 accordance
with the REIT requirements under the Internal Revenue Code.
The Company expects to meet its long-term liquidity requirements (such as
scheduled mortgage debt maturities, property acquisitions, and significant
capital improvements) by long-term collateralized and uncollateralized
borrowings and the issuance of debt or additional equity securities in the
Company. In April 1996, the Company established a $35 million revolving credit
facility with the First National Bank of Boston (as agent) and repaid
substantially all of the balance outstanding on the American National Bank line
of credit. In June of 1996, the Company increased its line of credit with the
First National Bank of Boston to $50 million, subject to certain loan covenants.
The Company also extended its line of credit with the American National Bank
until June 30, 1997. The maximum amount that may be borrowed from the American
National Bank is $5 million. At June 30, 1996, the Company has $29,002,368
outstanding on its line of credit with the First National Bank of Boston with
approximately $950,000 available to borrow. The amount available to be borrowed
at June 30, 1996 under the American National Bank line of credit is $5 million.
At June 30, 1996, the Company had committed to a $1.3 million (with
$600,000 remaining outstanding) renovation program at its Oak Brook, Illinois
property. The Company has also committed to fund approximately $1.1 million of
tenant improvements at its Springdale, Ohio property. The Company expects to
fund these commitments, in part, through its Bank of Boston and American
National Bank lines of credit.
Funds from Operations (FFO)
FFO, as defined by the National Association of Real Estate Investment
Trusts (NAREIT), is a measure of operating performance for real estate
investment trusts and is defined as net income computed in accordance with
generally accepted accounting principles (GAAP), excluding gains and losses from
debt restructuring and sales of property, plus real estate depreciation and
amortization. In addition to the mandated adjustments to net income, the Company
excludes rental income recorded due to the GAAP required straight-lining
adjustment for contractual rent increases included in certain leases. FFO for
the six months ended June 30, 1996 is calculated by the Company as follows:
1996 1995
---- ----
Net income ......................... $ 408,347 $1,337,841
Depreciation and amortization ...... 1,517,904 719,167
Contract termination expenses ...... 1,597,273
---------
FFO-NAREIT definition .............. 3,523,524 2,057,008
Less: Adjustment for straight-lining
of rents ...................... 275,100 208,244
------- -------
FFO as reported by the Company ..... $3,248,424 $1,848,764
========== ==========
FFO
for the three months ended June 30, 1996 and 1995 is as follows:
1996 1995
---- ----
Net income (loss) ($563,065) 713,109
Depreciation and amortization 793,041 393,997
Contract termination expense 1,597,273 -
---------
FFO-NAREIT definition 1,827,249 1,107,106
less:
adjustment
for straight-lining of rents 188,165 103,574
------- -------
FFO as reported by the Company $1,639,084 $1,003,532
========== ==========
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, Inc.
(Registrant)
August 9, 1996
Date James Hicks
Senior Vice President & Chief Financial Officer
(Principal Financial Officer)
August 9, 1996
Date Brett A. Brown
Vice President & Controller
(Principal Accounting Officer)
