<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 1-12528
SPIEKER PROPERTIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 94-3185802
------------------------------ -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2180 SAND HILL ROAD, MENLO PARK, CA 94025
---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(650) 854-5600
(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
-----. ----.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
61,181,202 shares of Common Stock, $0.0001 par value as of November 9, 1998.
557,549 shares of Class B Common Stock, $0.0001 par value as of November 9,
1998. 1,176,470 shares of Class C Common Stock, $0.0001 par value as of
November 9, 1998.
Page 1 of 25
Exhibit Index is located on Page 24.
<PAGE> 2
SPIEKER PROPERTIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
<S> <C> <C>
Item 1. Financial Statements (unaudited)............................................. 3
Consolidated Balance Sheets as of September 30, 1998, and December 31, 1997.. 4
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1998 and 1997.......................................... 6
Consolidated Statement of Stockholders' Equity for the Nine Months Ended
September 30, 1998......................................................... 7
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997................................................ 8
Notes to Consolidated Financial Statements................................... 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities........................................................ 24
Item 6. Exhibits and Reports on Form 8-K............................................. 24
Signatures........................................................................... 25
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Attached are the following unaudited financial statements of Spieker Properties,
Inc. (the "Company"):
(i) Consolidated Balance Sheets as of September 30, 1998, and December 31,
1997
(ii) Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1998 and 1997
(iii) Consolidated Statement of Stockholders' Equity for the Nine Months
Ended September 30, 1998
(iv) Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997
(v) Notes to Consolidated Financial Statements
The financial statements referred to above should be read in conjunction with
the Company's Annual Report on the Form 10-K for the year ended December 31,
1997.
3
<PAGE> 4
SPIEKER PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998, AND DECEMBER 31, 1997
(unaudited, dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
INVESTMENTS IN REAL ESTATE
Land, land improvements and leasehold interests $ 915,697 $ 694,621
Buildings and improvements 2,879,165 2,159,581
Construction in progress 209,490 89,509
----------- -----------
4,004,352 2,943,711
Less - Accumulated depreciation (221,483) (169,051)
----------- -----------
3,782,869 2,774,660
Investments in mortgages 33,105 271,675
Property held for disposition, net 52,705 37,186
----------- -----------
Net investments in real estate 3,868,679 3,083,521
CASH AND CASH EQUIVALENTS 19,270 22,628
ACCOUNTS RECEIVABLE, net of allowance for
doubtful accounts of $595 and $260 as of
September 30, 1998, and December 31, 1997,
respectively 4,251 8,661
DEFERRED RENT RECEIVABLE 10,814 5,276
RECEIVABLE FROM AFFILIATES -- 294
DEFERRED FINANCING AND LEASING COSTS, net
of accumulated amortization of $13,078
and $10,036 as of September 30, 1998, and
December 31, 1997, respectively 41,067 30,983
FURNITURE, FIXTURES AND EQUIPMENT, net 4,184 3,375
PREPAID EXPENSES AND OTHER ASSETS 13,332 50,892
INVESTMENT IN AFFILIATE 19,209 37,304
----------- -----------
$ 3,980,806 $ 3,242,934
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
SPIEKER PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998, AND DECEMBER 31, 1997
(unaudited, dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
----------- -----------
<S> <C> <C>
DEBT
Unsecured notes $ 1,436,500 $ 1,135,000
Unsecured short-term borrowings 225,000 200,000
Mortgage loans 112,298 96,502
----------- -----------
Total debt 1,773,798 1,431,502
----------- -----------
ASSESSMENT BONDS PAYABLE 12,243 12,672
ACCOUNTS PAYABLE 17,190 9,519
ACCRUED REAL ESTATE TAXES 13,135 1,003
ACCRUED INTEREST 31,845 21,541
UNEARNED RENTAL INCOME 18,646 13,712
DIVIDENDS AND DISTRIBUTIONS PAYABLE 44,717 41,110
OTHER ACCRUED EXPENSES AND LIABILITIES 47,284 32,034
----------- -----------
Total liabilities 1,958,858 1,563,093
----------- -----------
MINORITY INTERESTS 296,688 186,013
----------- -----------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Series A Preferred Stock: convertible, cumulative,
$.0001 par value, 1,000,000 shares authorized, issued
and outstanding, $25,000 liquidation preference 23,949 23,949
Series B Preferred Stock: cumulative, redeemable, $.0001
par value, 5,000,000 shares authorized, 4,250,000
issued and outstanding, $106,250 liquidation preference 102,064 102,064
Series C Preferred Stock: cumulative, redeemable, $.0001
par value, 6,000,000 shares authorized, issued and
outstanding, $150,000 liquidation preference 145,959 145,959
Series E Preferred Stock: cumulative, redeemable, $.0001
par value, 4,000,000 shares authorized, issued and
outstanding, $100,000 liquidation preference 96,401 --
Common Stock: $.0001 par value, 660,500,000 shares
authorized, 61,173,702 and 55,772,632 shares issued and
outstanding as of September 30, 1998, and December 31, 6 5
1997, respectively
Class B Common Stock: $.0001 par value, 557,549 and
2,000,000 shares authorized, issued and outstanding as
of September 30, 1998 and December 31, 1997, respectively -- --
Class C Common Stock: $.0001 par value, 1,500,000 shares
authorized, 1,176,470 issued and outstanding -- --
Excess Stock: $.0001 par value per share, 330,000,000
shares authorized, no shares issued or outstanding -- --
Additional paid-in capital 1,360,356 1,223,229
Deferred compensation (3,475) (1,378)
Retained earnings -- --
----------- -----------
Total stockholders' equity 1,725,260 1,493,828
----------- -----------
$ 3,980,806 $ 3,242,934
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
SPIEKER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997
(unaudited, dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Rental income $ 143,139 $ 82,504 $ 393,219 $ 221,424
Interest and other income 2,651 1,392 16,495 4,767
--------- --------- --------- ---------
145,790 83,896 409,714 226,191
--------- --------- --------- ---------
OPERATING EXPENSES
Rental expenses 34,218 17,431 87,694 44,514
Real estate taxes 11,076 6,038 30,726 17,077
Interest expense, including amortization of
finance costs 28,613 16,214 88,811 40,914
Depreciation and amortization 24,191 13,442 66,423 36,457
General and administrative and other expenses 4,430 3,720 14,225 10,255
--------- --------- --------- ---------
102,528 56,845 287,879 149,217
--------- --------- --------- ---------
Income from operations before disposition of
property and minority interests 43,262 27,051 121,835 76,974
--------- --------- --------- ---------
GAIN ON DISPOSITION OF PROPERTY 1,417 3,937 17,132 18,117
--------- --------- --------- ---------
Income from operations before minority
interests 44,679 30,988 138,967 95,091
--------- --------- --------- ---------
MINORITY INTERESTS' SHARE IN NET INCOME (6,735) (3,685) (19,248) (11,504)
--------- --------- --------- ---------
Net income before preferred dividends 37,944 27,303 119,719 83,587
--------- --------- --------- ---------
PREFERRED DIVIDENDS
Series A Preferred Stock (695) (573) (2,085) (1,720)
Series B Preferred Stock (2,510) (2,510) (7,530) (7,530)
Series C Preferred Stock (2,953) -- (8,859) --
Series E Preferred Stock (2,000) -- (2,600) --
--------- --------- --------- ---------
Net income available to Common Stockholders $ 29,786 $ 24,220 $ 98,645 $ 74,337
========= ========= ========= =========
INCOME PER SHARE OF COMMON STOCK
Net income - basic $ .47 $ .51 $ 1.60 $ 1.61
========= ========= ========= =========
Net income - diluted $ .47 $ .50 $ 1.58 $ 1.59
========= ========= ========= =========
DIVIDENDS PER SHARE
Series A Preferred Stock $ .70 $ .57 $ 2.10 $ 1.72
========= ========= ========= =========
Series B Preferred Stock $ .59 $ .59 $ 1.77 $ 1.77
========= ========= ========= =========
Series C Preferred Stock $ .49 $ -- $ 1.47 $ --
========= ========= ========= =========
Series E Preferred Stock $ .50 $ -- $ .65 $ --
========= ========= ========= =========
Common Stock, including Class B and Class C $ .57 $ .47 $ 1.71 $ 1.45
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
SPIEKER PROPERTIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Series A,
Series B
Series C and Class B Class C
Series E Common Common Common Common Additional Retained
Preferred Stock Stock Stock Stock Par Paid-in Deferred Earnings
Stock Shares Shares Shares Value Capital Compensation (Deficit) Total
----------- ---------- ---------- --------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1997 $ 271,972 55,772,632 2,000,000 1,176,470 $ 5 $1,223,229 $(1,378) $ -- $1,493,828
Common Stock Offering -- 2,659,468 -- -- 1 102,533 -- -- 102,534
Preferred Stock
Offering 96,401 -- -- -- -- -- -- -- 96,401
Common Stock Issued
for Property -- 165,985 -- -- -- 6,900 -- -- 6,900
Conversion of
Operating
Partnership Units
to Common Stock -- 339,727 -- -- -- 10,840 -- -- 10,840
Conversion of
Class B Common
Stock to Common
Stock 1,825,883 (1,442,451)
Stock Options
Exercised -- 306,750 -- -- -- 6,405 -- -- 6,405
Restricted Stock Grant -- 103,257 -- -- -- 2,265 (2,265) -- --
Amortization of
Deferred
Compensation -- -- -- -- -- -- 168 -- 168
Allocation from
minority interests -- -- -- -- -- 16,090 -- -- 16,090
Dividends Declared (21,074) -- -- -- -- (7,906) -- (98,645) (127,625)
Net Income 21,074 -- -- -- -- -- -- 98,645 119,719
---------- ---------- ---------- --------- ---- ---------- ------- -------- ----------
BALANCE AT
SEPTEMBER 30, 1998 $ 368,373 61,173,702 557,549 1,176,470 $ 6 $1,360,356 $(3,475) $ 0 $1,725,260
========== ========== ========== ========= ==== ========== ======= ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE> 8
SPIEKER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997
(unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30
------------------
1998 1997
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 119,719 $ 83,587
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 66,423 36,457
Amortization of prepaid interest and deferred financing costs 1,675 848
Non-cash compensation 63 597
Minority share of net income 19,248 11,504
Gain on disposition of property (17,132) (18,117)
Increase in deferred rent receivable (5,538) (1,406)
Decrease (increase) in accounts receivable 4,410 (1,213)
Decrease in receivable from affiliates 294 76
Increase in prepaid expenses and other assets (3,222) (11,973)
Decrease in assessment bonds payable (798) (624)
Increase in accounts payable 7,671 3,774
Increase in accrued real estate taxes 12,132 5,883
Increase in accrued interest 10,304 5,917
Increase in other accrued expenses and liabilities 8,438 9,184
Increase in unearned rental income 4,934 3,918
----------- ---------
Net cash provided by operating activities 228,621 128,412
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to properties (1,039,222) (872,246)
Reductions to deposits on properties, net 39,181 --
Additions to investment in mortgages (11,610) (17,073)
Additions to investment in affiliates (8,574) --
Additions to leasing costs (12,282) (5,541)
Proceeds from investment in mortgages 250,179 --
Proceeds from investment in affiliate 31,670 --
Proceeds from disposition of property 63,951 100,115
----------- ---------
Net cash used for investing activities (686,707) (794,745)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt, net of financing fees 1,018,254 699,138
Payments on debt (697,809) (321,986)
Payment of dividends/distributions (144,182) (78,474)
Proceeds from sale of Common Stock, net of issuance costs 102,534 374,835
Proceeds from Stock Options exercised 6,405 2,245
Proceeds from sale of Preferred Stock, net of issuance costs 96,401 --
Proceeds from sale of Preferred Operating Partnership Units 73,125 --
Proceeds from sale of Operating Partnership Units -- 25
----------- ---------
Net cash provided by financing activities 454,728 675,783
----------- ---------
Net increase (decrease) in cash and cash equivalents (3,358) 9,450
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,628 29,336
----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,270 $ 38,786
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE> 9
SPIEKER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997
(unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30
------------------
1998 1997
------ ------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for interest 76,831 38,416
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Liabilities assumed in relation to property acquisitions 23,623 54,496
Minority interest capital recorded in relation to property acquisitions 65,395 26,072
Write-off of fully depreciated property 6,884 4,973
Write-off of fully amortized deferred financing and leasing costs 1,947 6,591
Restricted Stock Grants 2,265 491
Property acquired through the issuance of Common Stock 6,900 --
Conversion of operating partnership units into Common Stock
with resulting reduction in minority interest and increase in
additional paid-in-capital -- 524
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 and 1997
(unaudited, in thousands, except share and square foot data)
1. ORGANIZATION AND BASIS OF PRESENTATION
Spieker Properties, Inc.
Spieker Properties, Inc. (the "Company") was organized in the state of
Maryland on August 20, 1993, and commenced operations effective with the
completion of its initial public offering ("IPO") on November 18, 1993. The
Company qualifies as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986 (the "Code"), as amended. As of September 30,
1998, the Company owned an approximate 87.9 percent general and limited
partnership interest in Spieker Properties, L.P. (the "Operating
Partnership"). The Company and the Operating Partnership are collectively
referred to as the "Company."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The Company's consolidated financial statements include the consolidated
financial position of the Operating Partnership and its subsidiaries as of
September 30, 1998, and December 31, 1997, and its consolidated results of
operations for the three and nine months ended September 30, 1998 and 1997
and its consolidated cash flows for the nine months ended September 30,
1998 and 1997. The Company's investment in Spieker Northwest, Inc. (an
unconsolidated Preferred Stock subsidiary of the Company) and its
investment in Spieker Griffin/W9 Associates, LLC are accounted for under
the equity method. All significant intercompany balances and transactions
have been eliminated in the consolidated financial statements.
Interim Financial Information
The consolidated financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC")
and, in management's opinion, include all adjustments necessary for a fair
presentation of results for such interim periods. Certain information and
note disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to SEC rules or regulations; however, the
Company believes that adequate disclosures have been made.
The interim results for the three and nine months ended September 30, 1998
and 1997, are not necessarily indicative of results for the full year. It
is suggested that these financial statements be read in conjunction with
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.
Land
The Company has costs related to land parcels that are either held for
investment or are in a design and approval process in the amounts of $119.4
million at September 30, 1998 and 20.9 million at December 31, 1997. There
were no material Construction in process costs associated with these land
parcels.
10
<PAGE> 11
Properties
Properties are recorded at cost and are depreciated using the straight-line
method over the estimated useful lives of the properties. The estimated
lives are as follows:
Land improvements and leasehold interests 18 to 40 years
Buildings and improvements 10 to 40 years
Tenant improvements Term of the related lease
The cost of buildings and improvements includes the purchase price of the
property or interests in property, legal fees, acquisition costs,
capitalized interest, property taxes and other costs incurred during the
period of construction. All acquisitions are recorded using the purchase
method of accounting.
Expenditures for maintenance and repairs are charged to operations as
incurred. Significant renovations or betterments which extend the economic
useful life of assets are capitalized.
Investments in real estate are stated at the lower of depreciated cost or
estimated fair value. Fair value for financial reporting purposes is
evaluated periodically by the Company on a property by property basis using
undiscounted cash flow. If a potential impairment is identified, it is
measured by the property's fair value based on either sales comparables or
the net cash expected to be generated by the property, less estimated
carrying costs (including interest) throughout the anticipated holding
period, plus the estimated cash proceeds from the ultimate disposition of
the property. To the extent that the carrying value exceeds the estimated
fair value, a provision for decrease in net realizable value is recorded.
Estimated fair value is not necessarily an indication of a property's
current value or the amount that will be realized upon the ultimate
disposition of the property. As of September 30, 1998, and December 31,
1997, none of the carrying values of the properties exceeded their
estimated fair values. As of September 30, 1998, and December 31, 1997, the
properties are located primarily in California, Oregon and Washington. As a
result of this geographic concentration, the operations of these properties
could be adversely affected by a recession or general economic downturn in
the areas where these properties are located.
The Company owns mortgage loans that are secured by real estate. Certain
loans are with an affiliate of the Company (see note 4 Investments in
Mortgages). The Company assesses possible impairment of these loans by
reviewing the fair value of the underlying real estate. As of September 30,
1998, the estimated fair value of the underlying real estate was in excess
of the Company's book value of the mortgage loans.
Construction in Progress
Project costs clearly associated with the development and construction of a
real estate project are capitalized as construction in progress. In
addition, interest, real estate taxes and other costs are capitalized
during the period in which the property is under construction and until all
costs related to the property's development are complete.
Cash and Cash Equivalents
Highly liquid investments with an original maturity of three months or less
when purchased are classified as cash equivalents.
Deferred Financing and Leasing Costs
Costs incurred in connection with financing or leasing are capitalized and
amortized on a straight-line basis over the term of the related loan or
lease. Unamortized financing and leasing costs are charged to expense upon
the early termination of the lease or upon the early payment of financing.
11
<PAGE> 12
Fair Value of Financial Instruments
Based on the borrowing rates currently available to the Company, the
carrying amount of debt approximates fair value. Cash and cash equivalents
consist of demand deposits, certificates of deposit, and overnight
repurchase agreements, with financial institutions. The carrying amount of
cash and cash equivalents approximates fair value.
Minority Interest
Minority interest in the Company consists of the limited partners' interest
in the Operating Partnership of approximately 12.1 percent and 10.8 percent
at September 30, 1998 and December 31, 1997, respectively.
Revenues
All leases are classified as operating leases. Rental income is recognized
on the straight-line basis over the terms of the leases. Deferred rent
receivable represents the excess of rental revenue recognized on a
straight-line basis over cash received under the applicable lease
provisions.
Interest and Other Income
Interest and other income includes interest income on cash, cash
equivalents, investments in mortgages and management fee income.
Net Income Per Share of Common Stock
Per share amounts for the Company are computed using the weighted average
common shares outstanding (including Class B and Class C Common Stock)
during the period. Additionally, earnings used in the calculation are
reduced by dividends owed to preferred stockholders. The diluted weighted
average common shares outstanding include the dilutive effect of stock
options. The basic and diluted weighted average common shares outstanding
for the three and nine months ended September 30, 1998 and 1997, are as
follows:
<TABLE>
<CAPTION>
Basic Weighted Average Diluted Weighted Average
Common Shares Outstanding Common Shares Outstanding
------------------------- -------------------------
<S> <C> <C>
Three months ended:
September 30, 1998 62,976,362 63,593,983
September 30, 1997 47,272,378 48,038,867
Nine months ended:
September 30, 1998 61,787,427 62,618,321
September 30, 1997 46,048,726 46,815,215
</TABLE>
Reclassifications
Certain items in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
12
<PAGE> 13
3. ACQUISITIONS AND DISPOSITIONS
The Company acquired the following properties (the "1998 Acquisitions")
during the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
Property Total Rentable
Project Name Location Type(1) Square Feet Initial Cost(2)
------------ -------- -------- -------------- ---------------
<S> <C> <C> <C> <C>
The Concourse San Jose, CA O 540,224 $172,421(4)
Koll Bellefield Center Bellefield, WA O 65,946 10,324
Santa Monica Business Park (3) Santa Monica, CA O 960,081 105,649
Marina Business Center (3) Marina Del Rey, CA O 261,966 21,613
The City Office Portfolio Orange, CA O 409,492 97,306(5)
Skyport Plaza San Jose, CA O 359,600 56,873(6)
Hayward Business Park Hayward, CA I 630,944 33,610
Commerce Park West I, II and III Sacramento, CA I 579,945 26,202(7)
Brea Park Center - Building C Brea, CA O 26,856 2,297
Allegiance Center Ontario, CA O 73,778 5,191
Ontario Corporate Center Ontario, CA O 97,703 10,479
2600 Michelson (3) Irvine, CA O 391,166 64,287
Cerritos Towne Center (3) Cerritos, CA O 332,608 41,531
Metro Center (3) San Mateo, CA O 711,584 131,058
Biltmore Commerce Center (3) Phoenix, AZ O 262,875 41,786
Benjamin Franklin Plaza Portland, OR O 273,239 50,047
SAN MATEO BAY CENTER III SAN MATEO, CA O 62,869 16,007
</TABLE>
(1) "O" indicates office property; "I" indicates industrial property.
(2) Represents the initial acquisition costs of the properties excluding any
additional repositioning costs.
(3) Previously identified as a part of the TDC Portfolio.
(4) Includes approximately $22.1 million allocated to 6.6 acres of land held
for future development.
(5) Includes approximately $3.5 million allocated to 11.5 acres of land held
for future development and $35.6 million allocated to a property currently
under redevelopment.
(6) Includes approximately $23.1 million allocated to 19.0 acres of land held
for future development.
(7) Previously identified as Enterprise Business Park II. Includes
approximately $2.0 million allocated to 11.5 acres of land held for future
development.
The Company disposed of the following properties (the "1998 Dispositions")
during the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
Property Total Rentable
Project Name Location Type Square Feet Sales Price
- ------------ -------- -------- -------------- -----------
<S> <C> <C> <C> <C>
Rose Pavilion Pleasanton, CA Retail 292,902 $40,928
Camino West Business Park Carlsbad, CA Office 44,574 2,750
Fresno Warehouse II Fresno, CA Industrial 122,000 3,934
Fresno Warehouse III Fresno, CA Industrial 100,200 3,653
Fresno Associates I Fresno, CA Industrial 175,900 6,463
MCARTHUR PARK SANTA ANA, CA OFFICE 94,023 7,800
</TABLE>
During the nine months ended September 30, 1998, the Company acquired twelve
parcels of land for development. The total initial cost of these twelve parcels
was $62,430.
13
<PAGE> 14
4. TRANSACTIONS WITH AFFILIATES
Revenues and Expenses
The Company received $2,197 and $538 for nine months ended September 30,
1998, and 1997, respectively, for management services provided to certain
properties that are controlled and operated by either Spieker Northwest,
Inc., Spieker Griffin/W9 Associates, LLC or Spieker Partners related
entities (collectively, "Spieker Partners"). Certain officers of Spieker
Properties, Inc. are partners in Spieker Partners.
Receivable From Affiliates
The receivable from affiliates at September 30, 1998, and December 31,
1997, represents management fees and reimbursements due from Spieker
Northwest, Inc., Spieker Griffin/W9 Associates, LLC and Spieker Partners.
Investments in Mortgages
Included in Investments in Mortgages are $18,700 at September 30, 1998 and
$257,294 at December 31, 1997, of loans to Spieker Northwest, Inc. The
loans are secured by deeds of trust on real property, bear interest at
8.5%, and mature in 2012. Interest income of $1,160 and $10,369 is included
in interest and other income for the three and the nine months ended
September 30, 1998.
Investment in Affiliate
The investment in affiliate represents an investment in Spieker Northwest,
Inc. ("SNI"). The Company owns 95% of the Preferred Stock of SNI. Certain
senior officers of the Company own 100% of the voting stock of SNI. SNI
owns 226,785 square feet of office and industrial property located in
various states. In addition, SNI owns one parcel of land totaling 20.0
acres. The entire portfolio of property is held for sale at September 30,
1998. In addition to property ownership, SNI provides property management
services to certain properties owned by Spieker Partners.
Additionally, investment in affiliates represents the 12.5% interest in
Spieker Griffin/W9 Associates, LLC. Spieker Griffin/W9 Associates, LLC
purchased in April 1998 a 535,000 square foot office complex, which is
managed by the Company, located in Orange County, California for an initial
cost of $100,000.
5. PROPERTY HELD FOR DISPOSITION
The Company has determined to focus exclusively on properties that meet its
long-term strategic objectives. The Company has therefore decided to divest
itself of certain properties. Included in property held for disposition of
$52,705 at September 30, 1998, is one industrial property located in
Washington, one industrial property and one land parcel located in
Southern California and, one office property in Arizona. The divestiture of
these properties is subject to identification of a purchaser, negotiation
of acceptable terms and other customary conditions.
6. DEBT
Unsecured Notes
As of September 30, 1998, the Company has outstanding $1,436,500 in
investment grade rated unsecured debt securities with interest rates
ranging from 6.65% to 8.0% payable semi-annually. The debt securities
mature on various dates from 2000 to 2027.
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<PAGE> 15
Unsecured Short-Term Borrowings
The Company has an Unsecured Line of Credit facility. The maximum amount
available under the facility is $250,000. The facility carries interest at
LIBOR (London Interbank Offered Rates) plus 0.80%, matures in August 2001,
includes an annual administrative fee of $50 and an annual facility fee of
.20%. As of September 30, 1998, the amount drawn on the facility was
$25,000. In addition, the Company has a $200,000 short-term bank facility
outstanding at September 30, 1998. This short-term facility carries
interest at LIBOR plus .65% and matures November 1999.
Mortgage Loans
Mortgage loans of $112,298 as of September 30, 1998, are secured by deeds
of trust on related properties. The mortgage loans carry interest rates
ranging from 7.37% to 9.88%, require monthly principal and interest
payments, and mature on various dates from 1998 to 2013.
7. DIVIDENDS AND DISTRIBUTIONS PAYABLE
The dividends and distributions payable at September 30, 1998, and December
31, 1997, represent amounts payable to stockholders of record and
distributions payable to minority interest holders as of the same dates.
The stockholders of record and minority interests holders as of September
30, 1998, and December 31, 1997, are as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Shares of:
Common Stock 61,173,702 55,772,632
Class B Common Stock 557,549 2,000,000
Class C Common Stock 1,176,470 1,176,470
Series A Preferred Stock 1,000,000 1,000,000
Series B Preferred Stock 4,250,000 4,250,000
Series C Preferred Stock 6,000,000 6,000,000
Series E Preferred Stock 4,000,000 --
Units of:
Minority Interest Holders 8,835,450 7,322,126
Minority Interest Holders -
Series D Preferred Units 3,221,831 2,007,495
</TABLE>
8. MINORITY INTEREST
Preferred Operating Partnership Units
In November 1997, the Company issued limited partner's interest of
2,007,495 Preferred Operating Partnership Units. Preferred Operating
Partnership Units are convertible into 1,824,994 Operating Partnership
Units at the discretion of the holder subsequent to May 3, 1998, or they
may be redeemable for cash subsequent to December 3, 2002 at the option of
the Company. Preferred Operating Partnership Units are paid distributions
quarterly in the amount of $.63 per share. For the nine months ended
September 30, 1998, 285,664 Preferred Operating Partnership Units have been
converted into 259,694 Operating Partnership Units. There were no
conversions during the quarter ended September 30, 1998.
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<PAGE> 16
Series D Cumulative Redeemable Preferred Units
In April 1998, the Operating Partnership sold 1,500,000 Series D Cumulative
Redeemable Preferred Units (the "Series D Preferred Units") to an
institutional investor for $50.00 per unit. Dividends are payable at an
annual rate of 7.6875%. The Series D Preferred Units are exchangeable for
the Series D Cumulative Redeemable Preferred Stock of the Company on or
after April 20, 2008.
9. STOCKHOLDERS' EQUITY
Equity Offerings and Common Stock Conversion
In July 1998, the Company issued 173,664 shares of Common Stock at $39.17
per share in a direct placement. Net proceeds of approximately $6,667 were
used to repay borrowings on the unsecured line of credit.
In July 1998, 1,442,451 shares of Class B Common Stock were converted into
1,825,883 shares of Common at the discretion of the Common Shareholder.
Series E Cumulative Redeemable Preferred Stock
In June 1998, the Company sold 4,000,000 shares of Series E Cumulative
Redeemable Preferred Stock for $25.00 per share through an underwritten
public offering. Dividends are payable at an annual rate of 8.00% of the
liquidation preference of $100.0 million. The shares are redeemable solely
at the option of the Company.
10. COMMITMENTS AND CONTINGENCIES
The land on which three of the Company's properties are located is owned by
Stanford University and is subject to ground leases. The ground leases
expire in 2039 or 2040 and, unless the leases are extended, the use of the
land, together with all improvements, will revert back to Stanford
University. The former owners of the three properties prepaid the ground
leases through 2011, 2012 and 2017; thereafter, the Company will be
responsible for the ground lease payments, as defined under the terms of
the leases. These ground lease payments have been segregated from the total
purchase price of the properties, capitalized as leasehold interests in the
accompanying consolidated balance sheet, and are being amortized ratably
over the terms of the related original prepayment periods (18 to 24 years).
In addition, the Company has entered into operating ground leases on
certain land parcels with periods ranging from 16 to 53 years. Certain
ground leases contain purchase options. Payments for the ground leases for
1998 are $5,937.
11. GAIN ON DISPOSITION OF PROPERTY
Gain on disposition of property for the nine months ended September 30,
1998, represents the gain on dispositions of one retail property located in
Pleasanton, California, two office properties located in Carlsbad and Santa
Ana, California and three industrial buildings located in Fresno,
California.
12. SUBSEQUENT EVENTS
Subsequent to September 30, 1998, the Company acquired one property
totaling approximately 51,431 square feet at a total initial acquisition
cost of $4.9 located in Ontario, California. This acquisition was funded
with proceeds from property dispositions.
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<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements contained in this Item 2, "Management's Discussion and Analysis of
Financial Conditions and Results of Operations," and elsewhere in this Quarterly
Report on Form 10-Q which are not historical facts may be forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those projected, including,
but not limited to, those risks and special considerations set forth in the
Company's other SEC filings. Readers are cautioned not to place undue reliance
on these forward-looking statements which speak only as of the date hereof. The
Company undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The following comparison is of the Company's consolidated operations for the
three and nine month periods ended September 30, 1998, as compared to the
corresponding periods ended September 30, 1997.
Rental revenues for the third quarter of 1998 increased by $60.6 million or
73.5% to $143.1 million, as compared with $82.5 million for the quarter ended
September 30, 1997. Of this increase, $27.5 million was generated by properties
acquired during the first nine months of 1998 (the "1998 Acquisitions"). In the
third quarter of 1998 the Company acquired one property totaling 63 thousand
square feet for a total investment of $16.3 million. As used herein, the terms
"invested" and "total investment" represent the initial purchase price of
acquisitions, plus projected cost of certain repositioning and rehab capital
expenditures anticipated at the time of purchase. The only property acquired in
the third quarter was purchased on July 7, 1998 and therefore, a full quarter's
revenue and expense was not recognized during the quarter.
$28.4 million of the rental revenue increase in the third quarter of 1998 was
generated by properties acquired during 1997. During 1997, the Company invested
$1.5 billion to acquire properties totaling 12.5 million square feet (the "1997
Acquisitions").
$2.8 million of the increase in rental revenues is attributable to revenue
increases in properties owned at January 1, 1997, and still owned at September
30, 1998 (the "Core Portfolio"). This increase in the Core Portfolio is due to
increased rental rates realized on the renewal and re-leasing of
second-generation space and contractual rent increases in existing leases.
During the quarter ended September 30, 1998, the Company completed 343 lease
transactions for the renewal or re-leasing of 2.4 million square feet of
second-generation space. On average, for the quarter, the new effective rates
were 40.5% higher than the expiring coupon rent.
$5.5 million of the rental revenue increase in the third quarter of 1998 was
generated by properties developed by the Company (the "Developments"). The
Developments include both properties completed and added to the Company's
portfolio of stabilized properties during 1997 and 1998, as well as properties
currently under development. During the nine months ended September 30, 1998,
five properties totaling 812,651 square feet were completed for an estimated
final cost of $50,673 million and were added to the Company's portfolio of
stabilized properties. Properties are considered stabilized when either a 95.0%
occupancy rate has been achieved or eighteen months after shell completion,
whichever is sooner. The Company also has a current development pipeline of 3.4
million square feet representing a total projected cost of $376.9 million.
Certain of the properties in the development pipeline are shell complete and
partially occupied but are not considered stabilized.
The increases in rental revenue are partially offset by a decrease of $3.6
million attributable to the disposition of properties which were owned by the
Company during the quarter ended September 30, 1997 and sold subsequent to the
end of such quarter (the "Property Dispositions").
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<PAGE> 18
Rental revenues for the nine month period ended September 30, 1998, increased by
$171.8 million or 77.6% to $393.2 million as compared to $221.4 million for the
same period ended September 30, 1997. $58.2 million and $103.7 million of this
increase was attributable to the 1998 and 1997 Acquisitions, $8.1 million
relates to the Core Portfolio, $13.6 million is attributable to the
Developments, with the remainder attributable to an $11.8 million decrease from
Property Dispositions.
As a result of the 1998 Acquisitions, the 1997 Acquisitions, and the
Developments, the Company's rentable square footage, not including retail
properties and properties sold, increased by 12.3 million square feet or 43.3%
to 40.7 million square feet on September 30, 1998, from 28.4 million on
September 30, 1997. At September 30, 1998, the portfolio of stabilized
properties was 96.3% occupied. By property type, the office portfolio was 94.8%
occupied and the industrial portfolio was 97.7% occupied.
Interest and other income increased by $1.2 million and $11.7 million or 85.7%
and 243.8% for the three and nine month periods ended September 30, 1998, over
the same periods ended September 30, 1997. The net increase in interest and
other income is due to interest income from mortgage loans made to Spieker
Northwest, Inc. (SNI), an affiliate of Spieker Properties, Inc., in relation to
SNI's acquisition of non-core assets in the WCB Portfolio. Refer to footnote (4)
Transactions with Affiliates--"Investment in Affiliate" for further explanation.
Rental expenses increased by $16.7 million or 95.4% for the quarter ended
September 30, 1998, as compared with the same period in 1997. Real estate taxes
increased by $5.1 million or 85.0% in 1998, as compared to $6.0 million in 1997.
The overall increase in rental expenses and real estate taxes (collectively
referred to as "property operating expenses") is primarily a result of the
growth in the total square footage of the Company's portfolio of properties. Of
the total $21.8 million increase in property operating expenses, $9.1 million is
attributable to the 1997 Acquisitions, $10.9 million is attributable to the 1998
Acquisitions, $1.8 million is attributable to the Developments, and $1.0 million
is attributable to the Core Portfolio offset by a $1.0 million decrease
attributable to the Property Dispositions. On a percentage basis, property
operating expenses were 31.7% and 28.5% of rental revenues for the quarter ended
September 30, 1998, and September 30, 1997, respectively. The increase in
property operating expenses as a percentage of rental revenues is attributable
to the increased percentage of office properties in the Company's portfolio. For
the quarter ended September 30, 1998, 69.0% of the Company's net operating
income (rental revenues less property operating expenses) was generated by
office properties as compared with 62.0% during 1997.
In relation to the Company's decision to divest itself of certain properties,
the following analysis is presented: Rental revenues net of property operating
expenses (referred to as "property operating income") increased by $41.4 million
or 73.4% to $97.8 million, as compared to $56.4 million for the quarter ended
September 30, 1997. Of this increase, $16.6 million and $19.3 million relates to
the 1998 and 1997 Acquisitions, $1.8 million is attributable to the Core
Portfolio, and $3.7 million is attributable to the Developments. For the nine
month period ended September 30, 1998, property operating income increased by
$123.5 million or 82.5% from $149.7 million to $273.2 million at September 30,
1998. $35.4 million and $72.4 million related to the 1998 and 1997 Acquisitions,
$6.5 million is related to the Core Portfolio, and $9.2 million is attributed to
the Developments.
For the nine month period ended September 30, 1998, rental expenses increased by
$43.2 million from $44.5 million for the nine months ended September 30, 1997.
This represents a 97.1% increase year over year. Real estate taxes increased by
$13.6 million or 79.5% to $30.7 million for the first three quarters of 1998 as
compared to $17.1 million for the same period in 1997. Of the total $56.8
million increase in property operating expenses, $31.3 million is attributable
to the 1997 Acquisitions, $22.8 million is for the 1998 Acquisitions, $4.4
million relates to the Developments, $1.6 million is attributed to the Core
Portfolio, and a $3.3 reduction attributable to the Property Dispositions. On a
percentage basis property operating expenses were 30.1% and 27.8% of rental
revenues for the nine months ended September 30, 1998, and 1997, respectively.
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<PAGE> 19
Interest expense increased by $12.4 million or 76.5% to $28.6 million for the
three months ended September 30, 1998, from $16.2 million for the same period in
1997. For the nine month period ended September 30, 1998, interest expense
increased by $47.9 million or 117.1% to $88.8 million from $40.9 million for the
same period in 1997. These increases in interest expense are due to increases in
the total average outstanding debt balances. The average outstanding debt for
the three months ended September 30, 1998, and 1997 was $1.8 billion and $981.3
million respectively. The average balance outstanding for the nine months ended
September 30, 1998, was $1.8 billion and $823.6 million for the same period in
1997. The increases in the average outstanding debt balances are consistent with
the increases in the size of the Company's portfolio of properties.
Depreciation and amortization expenses increased by $10.7 million and $29.9
million or 79.9% and 81.9% for the three and nine month periods ended September
30, 1998, respectively, as compared with the same periods in 1997, due to the
1998 and 1997 Acquisitions and the completed Developments.
General and administrative expenses and other expenses increased by $0.7 million
and $4.0 million for the three and nine month periods ended September 30, 1998
as compared with the same periods in 1997, primarily as a result of the growth
in the portfolio. On a percentage basis, general and administrative expenses
were 3.1% and 3.6% of rental revenues for the three and nine month periods ended
September 30, 1998, respectively, as compared with 4.5% and 4.6% for the same
periods in 1997.
During the third quarter of 1998, the Company disposed of properties resulting
in a gain on disposition of $1.4 million. This brings the total gain on
disposition of property for the first three quarters of 1998 to $17.1 million on
the disposition of six properties.
Net income before minority interests and disposition of property increased by
$16.2 million or 59.8% to $43.3 million for the three month period ended
September 30, 1998, from $27.1 million for the same period in 1997. For the nine
month period ended September 30, 1998, net income before minority interests and
disposition of property increased by $44.8 million or 58.2% to $121.8 million,
from $77.0 million for the same period in 1997. The increase in net income is
principally due to the 1998 and 1997 Acquisitions and revenue growth in the
Company's Core Portfolio.
LIQUIDITY AND CAPITAL RESOURCES
For the quarter ended September 30, 1998, cash provided by operating activities
increased by $100.2 million, or 78.0%, to $228.6 million, as compared to $128.4
million for 1997. The increase is primarily due to the increase in net operating
income resulting from the 1997 and 1998 Acquisitions, the Developments,
increased rental income generated by the Core Portfolio and is partially offset
by an increase in interest expense and property dispositions. Cash used for
investing activities decreased by $108.0 million, or 13.6%, to $686.7 million
for the first nine months of 1998, as compared to $794.7 million for the first
nine months of 1997. The decrease is attributable to the net effect of the
Company's ongoing acquisition and development of office and industrial
properties offset by proceeds from investments in mortgages and dispositions.
Cash provided by financing activities decreased by $221.1 million, or 32.7%, to
$454.7 million for the first nine months of 1998, as compared to $675.8 million
for the same period in 1997. During the first nine months of 1998, cash provided
by financing activities consisted primarily of $272.1 million in net proceeds
from the sale of Common and Preferred Stock and Preferred Operating Partnership
Units, $301.5 million in gross proceeds from the issuance of unsecured notes
(see below), net borrowings of $25.0 million on the Facility (as defined below)
and a net decrease of $2.8 million in payments of mortgage loans. Additionally,
payments of distributions increased by $65.7 million to $144.2 million for the
first nine months of 1998, as compared with $78.5 million for the same period in
1997. The distribution payment increase is due to the greater number of shares
outstanding and a 21.3% increase in the distribution rate of $1.14 per share for
the first nine months of 1998 from $.94 per share in 1997.
The principal sources of funding for acquisitions, development, expansion and
renovation of the properties are unsecured short-term borrowings, public and
privately placed equity financing, public unsecured debt financing, the issuance
of partnership units in the Operating Partnership, the assumption of secured
debt on
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<PAGE> 20
properties acquired and cash flow provided by operations. The Company believes
that its liquidity and its ability to access capital are adequate to continue to
meet liquidity requirements for the foreseeable future.
At September 30, 1998, the Company had no material commitments for capital
expenditures related to the renewal or re-leasing of space. The Company believes
that the cash provided by operations and its line of credit provide sufficient
sources of liquidity to fund capital expenditure costs associated with the
renewal or re-leasing of space.
In January 1997, the Company sold 11,500,000 shares of Common Stock (including
1,500,000 shares sold to the underwriters in the exercise of their
over-allotment option in February 1997) through an underwritten public offering
at $34.50 per share. The net proceeds of $374.8 million were used to purchase
properties during the first quarter of 1997, many of which were under contract
or letter of intent at the time of the offering, and to repay indebtedness.
Also, in January 1997, the Company and the Operating Partnership filed a shelf
registration statement with the SEC which registered $500.0 million of equity
securities of the Company and $500.0 million of debt securities of the Operating
Partnership and became effective in January 1997.
In September 1997, the Company and the Operating Partnership filed a shelf
registration statement (the "September 1997 Shelf Registration Statement") with
the SEC which registered $500.0 million of equity securities of the Company and
$500.0 million of debt securities of the Operating Partnership which became
effective in October 1997.
On October 10, 1997, the Company sold 6,000,000 shares of Series C Cumulative
Redeemable Preferred Stock for $25.00 per share. Dividends are payable at an
annual rate of 7.875% of the liquidation preference of $150.0 million. Net
proceeds of $146.0 million were used principally to repay borrowings on the
unsecured line of credit and to fund the ongoing acquisition and development of
property.
In November 1997, the Company sold 11,500,000 shares of Common Stock (including
1,500,000 shares sold to the underwriters in the exercise of their
over-allotment option) through an underwritten public offering at $38.875 per
share. The net proceeds of $425.0 million were used to repay indebtedness and to
purchase properties which were under contract at the time of the offering.
In December 1997, the Company placed 573,134 shares of Common Stock in a
Registered Unit Investment Trust at $41.875 per share together with other
publicly traded REITs. The net proceeds of $22.8 million were used to repay
borrowings on the unsecured line of credit and to fund the ongoing acquisition
and development of properties.
In February, March and April 1998, the Company placed 710,832 shares and 608,828
shares and 1,166,144 shares, respectively, of Common Stock at prices of $42.25,
$41.06 and $39.88 in Unit Investment Trusts along with other publicly traded
REITs. The net proceeds of $96.3 million were used to paydown borrowings on the
line of credit and to fund the ongoing acquisition and development of
properties.
In April 1998, the Company sold 1,500,000 Series D Cumulative Redeemable
Preferred Units (the "Series D Preferred Units") to an institutional investor
for $50.00 per unit. Dividends are payable at an annual rate of 7.6875%. The
Series D Preferred Units may be called by the Company at par on or after April
20, 2003, and have no stated maturity or mandatory redemption. The Series D
Preferred Units are exchangeable for the Series D Cumulative Redeemable
Preferred Stock of the Company on or after April 20, 2008. The net proceeds of
$73.1 million for the Series D Preferred Units were used to paydown the line of
credit and fund future growth of the Company.
In June 1998, the Company sold 4,000,000 shares of Series E Cumulative
Redeemable Preferred Stock for $25.00 per share. These shares are redeemable at
the option of the Company. Dividends are payable at an annual rate of 8.00% of
the redeemable liquidation preference of $100.0 million. Net proceeds of $96.8
million were used principally to repay borrowings on the unsecured line of
credit and to fund the ongoing acquisition and development of property.
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<PAGE> 21
In 1997 the Operating Partnership issued $500.0 million of investment grade
rated debt in three tranches as follows: On July 14, 1997, the Operating
Partnership issued $150.0 million of investment grade rated unsecured notes. The
notes carry an interest rate of 7.125%, were priced to yield 7.183%, and mature
on July 1, 2009. On September 29, 1997, the Operating Partnership issued $150.0
million of investment grade rated unsecured debentures. The debentures carry an
interest rate of 7.5%, were priced to yield 7.57% and mature on October 1, 2027.
On December 8, 1997, the Operating Partnership issued $200.0 million of 7.35%
debentures, priced to yield 7.37%, and mature on December 1, 2017. Net proceeds
from the July 1997, September 1997 and December 1997 unsecured debt securities
of $489.0 million were used to repay borrowings on the unsecured line of credit
and to fund the ongoing acquisition and development of properties.
During the first nine months of 1998 the Operating Partnership issued $301.5
million of investment grade rated unsecured notes in four tranches as follows:
$150.0 million of 6.75% notes due January 15, 2008; $125.0 million of 6.875%
notes due February 1, 2005; $1.5 million of 7.0% notes due February 2, 2007 and
$25.0 million of 6.875% notes due April 30, 2007. Net proceeds of $299.1 million
were used to repay borrowings on the unsecured line of credit and to fund the
acquisition and development of properties.
As of September 30, 1998, the Operating Partnership had $1.4 billion of
investment grade rated unsecured debt securities outstanding. The debt
securities have interest rates which vary from 6.65% to 8.0%, and maturity dates
which range from 2000 to 2027.
The Operating Partnership has a $250.0 million unsecured line of credit facility
(the "Facility") with interest at London Interbank Offered Rates ("LIBOR") plus
.80%. The Facility matures in August 2001. This facility has a competitive bid
option that allows the Operating Partnership to request bids from the Lenders
for advances up to $150.0 million. At September 30, 1998, the Operating
Partnership had $25.0 million outstanding as such $225.0 remains available under
the Facility as of September 30, 1998. In addition, the Operating Partnership
had $200.0 million outstanding under a separate short-term bank facility. This
short-term facility carries interest at LIBOR plus 0.65% and matures in November
1999.
In addition to the unsecured debt securities and the Facility, and the short-
term facility, the Operating Partnership has $112.3 million of secured
indebtedness (the "Mortgages") at September 30, 1998. The Mortgages have
interest rates varying from 10.0% to 7.4% and maturity dates from 1998 to 2013.
The Mortgages are secured by a first or second deed of trust on the related
properties and generally require monthly principal and interest payments. The
Company also has $12.2 million of assessment bonds outstanding as of September
30, 1998.
In addition, the Company and Operating Partnership filed a shelf registration
statement (the "May 1998 Shelf Registration Statement") with SEC which
registered $500.0 million of equity securities of the Company and $500.0 million
of debt securities of the Operating Partnership, which became effective in May
1998.
After completion of the equity and debt offerings, the Company has the capacity
pursuant to a shelf registration statement declared effective in September 1997
(the "September 1997 Registration Statement") and the May 1998 Shelf
Registration Statement to issue up to approximately $770.5 million in equity
securities and the Operating Partnership has the capacity pursuant to the
September 1997 Registration Statement and the May 1998 Shelf Registration
Statement to issue up to $813.5 million in debt securities.
YEAR 2000 COMPLIANCE
The Company utilizes information technology (IT) systems such as computer
hardware, software, and operating systems which are used for its financial and
accounting business systems, as well as for property management and
administrative functions. The Company also utilizes non-IT systems, such as
electrical and mechanical systems, within its real estate facilities.
To evaluate the impact of Year 2000 compliance on its operations, the Company
established a Year 2000 task force ("Task Force"). The Task Force consulted with
the Company's IT department, the Company's regional facilities managers, and an
outside consulting group to determine the impact to the IT and non-IT systems
within its facilities. Based upon their findings, a course of action was
developed, and the results are outlined below.
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<PAGE> 22
The Company's IT department inventoried all IT hardware and software to assess
the business risk of each item. Manufacturers and/or suppliers were contacted to
determine Year 2000 compliance. Hardware and software with high business risk,
based on the manufacturers and/or suppliers assurances, do not appear to present
Year 2000 issues with the exception of the Company's payroll system. The upgrade
that will put the payroll software into compliance will be installed by December
31, 1998. Items with medium or low risk factors will be phased out or upgraded.
None of the above upgrades constitutes a material capital expense for the
Company.
The Company's primary business is owning and managing real estate, therefore any
non-IT Year 2000 issues would reside in the Company's facilities. The Task
Force, together with the regional facilities managers, is in the process of
examining each building for electrical and mechanical systems that may contain
date sensitive software and/or date sensitive imbedded microprocessors. To date,
90 percent of the facilities have been examined. Manufacturers and/or suppliers
have been contacted to determine which such systems are Year 2000 compliant.
Where non-compliance was detected, recommendations for solutions to potential
problems were requested. Tests have been run, where possible, to determine which
of the systems are Year 2000 compliant. Based on these evaluations, it is
estimated that little modification work is required, and as a whole these
modifications should not constitute a material capital expense. The modification
work that is required should be completed in the first six months of 1999.
In the event of unforeseen failure of any facility-related mechanical system,
due to a Year 2000 issue, contingency plans include the deployment of teams
consisting of regional facility managers, building engineers and customer
service personnel which would manually override any such building systems in a
timely manner.
In addition to the "due diligence" being performed at the facility level, other
steps have been taken to attempt to minimize the Company's Year 2000 exposure:
i) The Company's third party "critical" vendors (utility providers, banks, etc.)
have been contacted to determine their state of Year 2000 preparedness; and the
Company is currently in the process of receiving their responses; ii) the Task
Force has attended Year 2000 seminars and has consulted with external legal
counsel and consultants regarding potential issues facing the Company; and iii)
an in-house database has been established to track building and vendor
compliance, as well as tenant requests and the Company's corresponding
responses.
Based on the Company's assessments to date and the proposed modifications, the
Company believes that there should not be a material impact on the Company's IT
and non-IT systems. No assurances, however, can be given that any or all of the
Company's systems will be Year 2000 compliant, or that compliance will not have
a material adverse effect on results of operations.
FUNDS FROM OPERATIONS
The Company considers Funds from Operations to be a useful financial measure of
the operating performance of an equity REIT because, together with net income
and cash flows, Funds from Operations provides investors with an additional
basis to evaluate the ability of a REIT to incur and service debt and to fund
acquisitions, developments, and other capital expenditures. Funds from
Operations does not represent net income or cash flows from operations as
defined by generally accepted accounting principles ("GAAP") and Funds from
Operations should not be considered as an alternative to net income as an
indicator of the Company's operating performance or as an alternative to cash
flows as a measure of liquidity. Funds from Operations does not measure whether
cash flow is sufficient to fund all of the Company's cash needs including
principal amortization, capital improvements, and distributions to stockholders.
Funds from Operations does not represent cash flows from operating, investing,
or financing activities as defined by GAAP. Further, Funds from Operations as
disclosed by other REITs may not be comparable to the Company's calculation of
Funds from Operations, as described below.
22
<PAGE> 23
Pursuant to the National Association of Real Estate Investment Trusts ("NAREIT")
revised definition of Funds from Operations, the Company calculates Funds from
Operations by adjusting net income before minority interest, calculated in
accordance with GAAP, for certain non-cash items, principally the amortization
and depreciation of real property and for dividends on shares and other equity
interests that are not convertible into shares of Common Stock. The Company does
not add back the depreciation of corporate items, such as computers or furniture
and fixtures, or the amortization of deferred financing costs or debt discount.
However, the Company eliminates the effect of straight-lined rents, as defined
under GAAP, in its FFO calculation, as management believes this presents a more
meaningful picture of rental income over the reporting period.
Funds from Operations per share is calculated based on weighted average shares
outstanding, assuming the conversion of all Series A Preferred Stock, Class B
and Class C Common Stock and all Operating Partnership units outstanding into
shares of Common Stock and including the dilutive effect of stock option
equivalents computed using the Treasury Stock method.
STATEMENT OF FUNDS FROM OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income before disposition of
property and minority interest $43,262 $27,051 $121,835 $ 76,974
Adjustments:
Dividends on Series B Preferred Stock (2,510) (2,510) (7,530) (7,530)
Dividends on Series C Preferred Stock (2,953) -- (8,859) --
Dividends on Series E Preferred Stock (2,000) -- (2,600) --
Distributions on Preferred Operating
Partnership Units (2,527) -- (6,016) --
Depreciation and Amortization 23,924 13,282 65,699 36,036
Other, net 105 186 76 560
Straight-lined rent (2408) (624) (5,556) (1,200)
------- ------- -------- --------
Funds from Operations $54,893 $37,385 $157,049 $104,840
======= ======= ======== ========
</TABLE>
23
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On September 30, 1998, the Company paid a dividend of one right for each
outstanding share of common stock of the Company held of record at the close of
business on September 30, 1998 or issued thereafter prior to the Separation Time
(as defined in the Rights Agreement referred to below). The rights were issued
pursuant to the Stockholder's Protection Rights Agreement, dated as of September
10, 1998 (the "Rights Agreement"), between the Company and The Bank of New York,
as Rights Agent.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
The exhibits listed below are filed as part of this quarterly report on
Form 10-Q.
<TABLE>
<CAPTION>
Exhibit Number
--------------
<S> <C>
27.1 Article 5 Financial Data Schedule (EDGAR Filing Only)
</TABLE>
(B) Reports on Form 8-K
(i) The Company filed a current report on Form 8-K dated July 1, 1998, which
included certain audited historical and unaudited pro forma financial
information concerning the TDC Portfolio.
(ii) The Company filed a current report on Form 8-K dated September 9, 1998,
which described the Rights Agreement.
24
<PAGE> 25
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 there unto duly authorized.
Spieker Properties, Inc.
(Registrant)
Dated: November 16, 1998 /s/ ELKE STRUNKA
----------------- -------------------------------------
Elke Strunka
Vice President and
Principal Accounting Officer
25
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27.1 Article 5 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 19,270
<SECURITIES> 0
<RECEIVABLES> 4,846
<ALLOWANCES> 595
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 4,057,057
<DEPRECIATION> 221,483
<TOTAL-ASSETS> 3,980,806
<CURRENT-LIABILITIES> 0
<BONDS> 1,773,798
0
368,373
<COMMON> 6
<OTHER-SE> 1,356,881
<TOTAL-LIABILITY-AND-EQUITY> 3,980,806
<SALES> 0
<TOTAL-REVENUES> 409,714
<CGS> 0
<TOTAL-COSTS> 118,420
<OTHER-EXPENSES> 80,648
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,811
<INCOME-PRETAX> 121,835
<INCOME-TAX> 0
<INCOME-CONTINUING> 119,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 98,645
<EPS-PRIMARY> 1.60
<EPS-DILUTED> 1.58
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 38,786
<SECURITIES> 0
<RECEIVABLES> 5,593
<ALLOWANCES> 581
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,296,271
<DEPRECIATION> 152,676
<TOTAL-ASSETS> 2,279,267
<CURRENT-LIABILITIES> 0
<BONDS> 1,157,863
0
126,013
<COMMON> 4
<OTHER-SE> 823,772
<TOTAL-LIABILITY-AND-EQUITY> 2,279,267
<SALES> 0
<TOTAL-REVENUES> 226,191
<CGS> 0
<TOTAL-COSTS> 61,591
<OTHER-EXPENSES> 46,712
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,914
<INCOME-PRETAX> 76,974
<INCOME-TAX> 0
<INCOME-CONTINUING> 83,587
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,337
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.59
</TABLE>
