SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 OR 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998
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 or organization)
823 Commerce Drive, Suite 300, Oak Brook, IL 60523
(Address of principal executive offices) (Zip 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 stock, $.01 par value,
outstanding as of May 12, 1998: 17,305,618
<PAGE>
Great Lakes REIT, Inc.
Index to Form 10-Q
March 31, 1998
Page Number
Part I - Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets
as of March 31, 1998
and December 31, 1997 4
Consolidated Statements of Income
for the three months
ended March 31, 1998 and 1997 5
Consolidated Statement of Changes
in Stockholders' Equity
for the three months ended March 31, 1998 6
Consolidated Statements of Cash Flows
for the three months
ended March 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 13
Part II - Other Information
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
<PAGE>
<TABLE>
Great Lakes REIT, Inc.
Consolidated Balance Sheets (unaudited)
(Dollars in Thousands) March 31, 1998 December 31, 1997
- ---------------------- -------------- -----------------
<CAPTION>
<S> <C> <C>
Assets
Properties:
Land $45,734 $46,044
Buildings, improvements, and equipment 275,673 251,353
---------------------------------------
321,407 297,397
Less accumulated depreciation 13,353 11,456
---------------------------------------
308,054 285,941
Cash and cash equivalents 3,810 1,437
Real estate tax escrows 366 332
Rents receivable 3,118 3,279
Deferred financing and leasing costs, net of accumulated amortization 3,807 3,444
Goodwill, net of accumulated amortization 1,340 1,359
Other assets 964 1,345
---------------------------------------
Total assets $321,459 $297,137
=======================================
Liabilities and Stockholders' Equity
Bank loan payable $93,566 $72,500
Mortgage loans payable 17,485 17,568
Bonds payable 5,030 5,030
Accounts payable and accrued liabilities 3,663 3,464
Accrued real estate taxes 7,333 7,777
Prepaid rent 2,372 2,781
Security deposits 906 925
Distributions/dividends payable 4,806
---------------------------------------
Total liabilities 135,161 110,045
---------------------------------------
Common stock ($0.01 par value, 60,000,000 authorized; 15,920,691 and 159 159
15,862,811 shares issued as of March 31, 1998 and December 31, 1997 respectively)
Paid-in-capital 197,354 196,431
Retained earnings (deficit) (5,302) (4,501)
Employee stock loans (5,578) (4,654)
Deferred compensation (65) (73)
Treasury stock, at cost (21,784 shares) (270) (270)
---------------------------------------
Total stockholders' equity 186,298 187,092
---------------------------------------
Total liabilities and stockholders' equity $321,459 $297,137
=======================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
Great Lakes REIT, Inc.
Consolidated Statements of Income (unaudited)
(Dollars in Thousands, except per share data)
<CAPTION>
Three months ended March 31,
--------------------------------------
1998 1997
<S> <C> <C>
Revenues:
Rental $12,863 $7,879
Reimbursements 3,765 2,694
Interest and other 175 70
--------------------------------------
Total revenues 16,803 10,643
--------------------------------------
Expenses:
Real estate taxes 2,728 1,869
Other property operating 4,236 2,733
General and administrative 1,097 931
Interest 2,035 1,604
Depreciation and amortization 2,739 1,697
--------------------------------------
Total expenses 12,835 8,834
--------------------------------------
Net income $3,968 $1,809
======================================
Earnings per common share-basic $0.25 $0.20
======================================
Weighted average common shares outstanding-basic 15,860,320 8,886,726
======================================
Diluted earnings per common share $0.25 $0.20
======================================
Weighted average common shares outstanding - diluted 16,145,417 9,020,008
======================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
Great Lakes REIT, Inc.
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
For the Three Months Ended March 31, 1998
(Dollars in Thousands)
<CAPTION>
Common Stock
--------------------------------------- Retained
Shares Paid in Earnings
Outstanding Amount Capital (Deficit)
<S> <C> <C> <C> <C>
Balance at 1/1/98 15,841,027 $158 $196,431 ($4,501)
Exercise of stock options 57,880 1 923
Net income 3,968
Distributions / dividends
($.30 per share) (4,769)
Amortization of deferred compensation
------------------------------------------------------------------------------
Balance at 3/31/98 15,898,907 $159 $197,354 ($5,302)
==============================================================================
<CAPTION>
Employee Deferred Treasury Stockholders'
Stock Loans Compensation Stock Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at 1/1/98 ($4,654) ($72) ($270) $187,092
Exercise of stock options (924) 0
Net income 3,968
Distributions / dividends
($1.20 per share) (4,769)
Amortization of deferred compensation 7 7
------------------------------------------------------------------------------
Balance at 3/31/98 ($5,578) ($65) ($270) $186,298
==============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
Great Lakes REIT, Inc.
Consolidated Statements of Cash Flows (unaudited)
(Dollars in Thousands)
<CAPTION>
Three Months Ended March 31,
--------------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $3,968 $1,809
Adjustments to reconcile net income to cash
flows from operating activities
Depreciation and amortization 2,746 1,774
Net changes in assets and liabilities:
Rents receivable 161 (276)
Real estate tax escrows and other assets 46 (280)
Accounts payable, accrued expenses and other liabilities (193) 197
Accrued real estate taxes (443) (671)
Payment of deferred leasing costs (717) (248)
--------------------------------------
Net cash provided by operating activities 5,568 2,305
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of properties (21,939) (134)
Additions to buildings, improvements and equipment (3,767) (1,591)
Other investing activities 1,610 (50)
--------------------------------------
Net cash used by investing activities (24,096) (1,775)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 28
Proceeds from bank and mortgage loans payable 21,066
Payment of bank and mortgage loans and bonds (83) (851)
Payment of deferred financing costs (82) (176)
--------------------------------------
Net cash provided by financing activities 20,901 (999)
--------------------------------------
Net increase (decrease) in cash and cash equivalents 2,373 (469)
Cash and cash equivalents, beginning of year 1,437 1,688
======================================
Cash and cash equivalents, end of quarter $3,810 $1,219
======================================
Supplemental disclosure of cash flow:
Interest paid $1,840 $1,444
======================================
Non cash financing transactions:
Employee stock loans $923 $235
======================================
Issuance of shares to acquire properties $1,536
===================
Mortgages and bonds assumed to acquire properties $2,989
===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Great Lakes REIT, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Great Lakes REIT, Inc., a Maryland corporation, formed in 1992 owns a limited
partnership interest and the sole general partnership interest in Great Lakes
REIT, L.P. (The "Operating Partnership") totaling more than 99% of the
outstanding partnership interests of the Operating Partnership. Great Lakes
REIT, Inc., its subsidiaries and the Operating Partnership are referred to
herein collectively as the "Company".
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. 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 Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
2. Properties Acquired in 1998
In January 1998, the Company acquired a 196,105 square foot building located in
Columbus, Ohio for a total acquisition cost of $21,939,000. The pro forma
effects of this acquisition on the results of operations for the three months
ended March 31, 1998 and 1997 are not significant.
3. Financing Activities
On January 6, 1998, the Company entered into a $35 million unsecured revolving
loan agreement with a commercial bank. Amounts due under this agreement mature
July 6, 1998 and bear interest at LIBOR plus 1.1%. At March 31, 1998,
$21,066,000 was outstanding on the loan.
4. Subsequent Events
On April 6, 1998, the Company entered into a $150 million unsecured credit
facility with a group of banks which refinanced its $75 million secured line of
credit. Amounts due mature in April 2001 and bear interest at LIBOR plus 1.1% to
1.3%, depending on overall Company leverage (as defined).
On April 15, 1998, the Company acquired Milwaukee Center Office Tower, a 370,000
square foot, 28-story office building located in Milwaukee, Wisconsin, for a
contract price of $46,700,000.
On April 24, 1998, the Company closed the sale of common stock to a newly-formed
registered unit
<PAGE>
investment trust. The Company sold 1,184,211 shares of common stock with net
proceeds of approximately $21.4 million, all of which were used to repay a
portion of its bank lines of credit.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following is a discussion and analysis of the consolidated financial
condition and results of operations for the three months ended March 31, 1998.
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 Company's 1997 Form
10-K.
Overview
Great Lakes REIT, Inc., a Maryland corporation, formed in 1992 owns a limited
partnership interest and the sole general partnership interest in Great Lakes
REIT, L.P. (The "Operating Partnership") totaling more than 99% of the
outstanding partnership interests of the Operating Partnership. Great Lakes
REIT, Inc., its subsidiaries and the Operating Partnership are referred to
herein collectively as the "Company". The primary business of the Company is the
ownership, management, leasing, renovation, and acquisition of suburban office
properties located within a 500 mile radius of Chicago. At March 31, 1998, the
Company owned and operated 34 properties located in suburban areas of Chicago,
Detroit, Milwaukee, Cincinnati, Columbus and Minneapolis. The Company leases
space to over 500 tenants in a variety of businesses.
The Company has expanded its real estate portfolio through the acquisition of
suburban office and office/service center properties. The Company has financed
its growth by the issuance of shares of its common stock and short and long-term
debt. Growth in net income and funds from operations (FFO) for the three months
ended March 31, 1998 as compared to March 31, 1997 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 1997 and 1998 from the dates of
their respective acquisitions.
Three months ended March 31, 1998 compared to three months ended March 31, 1997
In analyzing the operating results for the quarter ended March 31, 1998 the
changes in rental income, real estate taxes and property operating expenses,
from 1997 are due principally to three factors: (1) the addition of operating
results from properties acquired subsequent to March 31, 1997; (2) the addition
of a full quarter of operating results in 1998 from properties acquired in the
first quarter of 1997 as compared to the partial quarter of operating results
from the dates of their respective acquisitions in 1997, and (3) improved
operations of properties during 1998 as compared to 1997.
The Company acquired one property during the first quarter of 1998. The
operating results of this property have been included in the Company's financial
statements from the date of its acquisition. In 1997 the Company acquired nine
properties including seven properties subsequent to March 31, 1997, and in 1998
a full quarter of operations for these properties has been included in the
Company's financial statements.
<PAGE>
A summary of these changes as they impact rental income, real estate taxes, and
property operating expenses follows:
Rental and Real estate Property
reimbursement taxes operating
income
Increase due to inclusion
of results of properties
acquired in 1997 $4,643,000 $785,000 $1,234,000
Increase due to 1998 acquisitions 800,000 122,000 229,000
Property disposition in 1998 (56,000) (11,000) (6,000)
Improved operations in 1998
compared to 1997 668,000 (59,000) 33,000
---- ------- ------- ------
Total increase in 1998 $6,055,000 $859,000 $1,502,000
==== ========== ======== ==========
Interest expense during the quarter ended March 31, 1998 increased by $431,000
as the Company had greater amounts of short-term debt outstanding in 1998. This
debt was used to finance a portion of the cost of properties acquired subsequent
to June 30, 1997.
General and administrative expenses increased by $166,000 due primarily to
increased compensation costs associated with the growth of the company.
Depreciation and amortization increased in 1998 by $1,042,000 as the Company
incurred these expenses on 34 properties as of March 31, 1998 as compared to 27
properties as of March 31, 1997.
Liquidity and Capital Resources
Cash and cash equivalents as of March 31, 1998 were $3,810,000, an increase of
$2,373,000 as compared to December 31, 1997. The increase is primarily due to
increased cash flow from operating activities in 1998 as compared to 1997 and
increased net cash provided by financing activities in 1998 as compared to 1997.
The Company expects to meet its short-term liquidity requirements for general
operations 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 certain federal income tax requirements
applicable to real estate investment trusts ("REITs").
The Company expects to meet its short-term liquidity requirements for property
acquisitions and significant capital improvements through additional borrowings
on its existing $35 million and $150 million unsecured lines of credit which
mature in July 1998 and April 2001, respectively.
The Company expects the lines of credit to be sufficient to provide the required
funds until such time as the short-term debt is replaced with long-term debt or
is repaid with the proceeds of
<PAGE>
additional equity offerings.
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 and the issuance of debt or additional equity securities in the
Company.
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 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 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 such 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, nor is it indicative of
funds available to fund the Company's cash needs, including its ability to make
distributions. FFO for the three months ended March 31, 1998 and 1997 is as
follows (Dollars in Thousands):
1998 1997
Net income $ 3,968 $ 1,809
Depreciation and amortization 2,462 1,555
----- -----
FFO $6,430 $3,364
====== ======
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 are forwardlooking 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 equity value of the Company, increased competition for
acquisition
<PAGE>
of new properties, availability of alternative financing sources, unanticipated
expenses and delays in acquiring properties or increasing occupancy rates and
regional economic and business conditions.
Item 3. Qualitative and Quantitative Disclosures about Market Risk.
Not applicable.
<PAGE>
Part II Other Information
Item 2. Changes in Securities
During the quarter ended March 31, 1998, the Company issued 57,880 shares of
common stock pursuant to the exercise of outstanding stock options with an
aggregate exercise price of $923,398. 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are attached hereto:
Exhibit
Number Description of Document
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
The following report on Form 8-K/A was filed during the quarter ended
March 31, 1998:
Current Report on Form 8-K/A dated February 20, 1998 reporting the
following item:
Item 7. Financial Statements, Proforma Financial Information and
Exhibits
<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, Inc.
(Registrant)
Date: May 13, 1998 /s/ James Hicks
Senior Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,810,000
<SECURITIES> 0
<RECEIVABLES> 3,118,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,258,000
<PP&E> 321,407,000
<DEPRECIATION> 13,353,000
<TOTAL-ASSETS> 321,459,000
<CURRENT-LIABILITIES> 112,646,000
<BONDS> 22,515,000
0
0
<COMMON> 159,000
<OTHER-SE> 186,139,000
<TOTAL-LIABILITY-AND-EQUITY> 321,459,000
<SALES> 16,628,000
<TOTAL-REVENUES> 16,803,000
<CGS> 0
<TOTAL-COSTS> 10,800,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,035,000
<INCOME-PRETAX> 3,968,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,968,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,968,000
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
