<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 JUNE 30, 1999
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:
63,511,749 shares of Common Stock, $0.0001 par value as of August 13, 1999.
Page 1 of 24
Exhibit Index is located on Page 23.
<PAGE> 2
SPIEKER PROPERTIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 1999
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 June 30, 1999, and December 31, 1998 ................... 4
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 1999 and 1998 ................................................................ 6
Consolidated Statement of Stockholders' Equity for the Six Months Ended
June 30, 1999 ......................................................................... 7
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998 ................................................................ 8
Notes to Consolidated Financial Statements ............................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................... 23
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ......................................................... 23
Signatures ........................................................................................ 24
</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 June 30, 1999, and December 31,
1998
(ii) Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 1999 and 1998
(iii) Consolidated Statement of Stockholders' Equity for the Six Months
Ended June 30, 1999
(iv) Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998
(v) Notes to Consolidated Financial Statements
The financial statements referred to above should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended December 31, 1998
and Report on Form 10-Q for the quarterly period ended March 31, 1999.
3
<PAGE> 4
SPIEKER PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999, AND DECEMBER 31, 1998
(unaudited, dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
----------- -----------
<S> <C> <C>
INVESTMENTS IN REAL ESTATE
Land, land improvements and leasehold interests $ 775,251 $ 770,670
Buildings and improvements 2,897,828 2,924,290
Construction in progress 300,338 255,710
----------- -----------
3,973,417 3,950,670
Less - Accumulated depreciation (267,051) (240,778)
----------- -----------
3,706,366 3,709,892
----------- -----------
Land held for investment 139,849 131,530
Investments in mortgages 18,725 28,069
Property held for disposition, net 167,507 72,537
----------- -----------
Net investments in real estate 4,032,447 3,942,028
CASH AND CASH EQUIVALENTS 20,454 4,916
ACCOUNTS RECEIVABLE, net of allowance for doubtful accounts of $1,653
as of June 30, 1999 and $894 as of December 31, 1998 4,966 9,416
DEFERRED RENT RECEIVABLE 17,975 12,746
RECEIVABLE FROM AFFILIATES 228 183
DEFERRED FINANCING AND LEASING COSTS, net of accumulated
amortization of $17,688 as of June 30, 1999 and
$14,539 as of December 31, 1998 48,126 44,607
FURNITURE, FIXTURES AND EQUIPMENT, net 4,278 4,495
PREPAID EXPENSES, DEPOSITS ON PROPERTIES AND OTHER ASSETS
33,915 17,616
INVESTMENT IN AFFILIATES 20,630 20,863
----------- -----------
$ 4,183,019 $ 4,056,870
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
SPIEKER PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999, AND DECEMBER 31, 1998
(unaudited, dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
----------- -----------
<S> <C> <C>
DEBT
Unsecured notes $ 1,836,500 $ 1,436,500
Unsecured short-term borrowings 28,012 300,000
Mortgage loans 110,805 110,698
----------- -----------
Total debt 1,975,317 1,847,198
----------- -----------
ASSESSMENT BONDS PAYABLE 10,759 11,339
ACCOUNTS PAYABLE 10,665 24,938
ACCRUED REAL ESTATE TAXES 2,599 2,251
ACCRUED INTEREST 33,119 25,263
UNEARNED RENTAL INCOME 24,383 22,635
DIVIDENDS AND DISTRIBUTIONS PAYABLE 47,819 44,728
OTHER ACCRUED EXPENSES AND LIABILITIES 56,949 56,704
----------- -----------
Total liabilities 2,161,610 2,035,056
----------- -----------
MINORITY INTERESTS 292,956 298,352
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
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 96,401
Common Stock: $.0001 par value, 660,500,000 shares
authorized, 63,511,349 and 61,916,459 shares issued and
outstanding as of June 30, 1999, and December 31, 1998,
respectively 6 6
Class C Common Stock: $.0001 par value, 1,500,000 shares
authorized, no shares issued and outstanding as of
June 30, 1999 and 1,176,470 issued and outstanding as of
December 31, 1998 -- --
Excess Stock: $.0001 par value per share, 330,000,000 shares
authorized, no shares issued or outstanding -- --
Additional paid-in capital 1,367,477 1,359,946
Deferred compensation (7,403) (4,863)
Retained earnings -- --
----------- -----------
Total stockholders' equity 1,728,453 1,723,462
----------- -----------
$ 4,183,019 $ 4,056,870
=========== ===========
</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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(unaudited, dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Rental income $ 156,895 $ 132,443 $ 306,109 $ 250,080
Interest and other income 1,838 6,173 3,272 13,844
--------- --------- --------- ---------
158,733 138,616 309,381 263,924
--------- --------- --------- ---------
OPERATING EXPENSES
Rental expenses 35,773 29,086 67,414 53,476
Real estate taxes 11,493 10,350 23,047 19,650
Interest expense, including amortization of finance costs 29,905 30,931 58,710 60,198
Depreciation and amortization 27,100 22,646 52,504 42,231
General and administrative and other expenses 5,746 4,973 11,396 9,795
--------- --------- --------- ---------
110,017 97,986 213,071 185,350
--------- --------- --------- ---------
Income from operations before disposition of property and
minority interests 48,716 40,630 96,310 78,574
--------- --------- --------- ---------
GAIN ON DISPOSITION OF PROPERTIES 4,665 6,689 9,831 15,715
--------- --------- --------- ---------
Income from operations before minority interests 53,381 47,319 106,141 94,289
--------- --------- --------- ---------
MINORITY INTERESTS' SHARE IN NET INCOME (7,665) (6,772) (15,382) (12,514)
--------- --------- --------- ---------
Net income 45,716 40,547 90,759 81,775
--------- --------- --------- ---------
PREFERRED DIVIDENDS
Series A Preferred Stock (744) (695) (1,488) (1,390)
Series B Preferred Stock (2,510) (2,510) (5,020) (5,020)
Series C Preferred Stock (2,953) (2,953) (5,906) (5,906)
Series E Preferred Stock (2,000) (600) (4,000) (600)
--------- --------- --------- ---------
Net income available to Common Stockholders $ 37,509 $ 33,789 $ 74,345 $ 68,859
========= ========= ========= =========
INCOME PER SHARE OF COMMON STOCK
Net income - basic $ .59 $ .54 $ 1.17 $ 1.13
========= ========= ========= =========
Net income - diluted $ .59 $ .53 $ 1.16 $ 1.11
========= ========= ========= =========
DIVIDENDS PER SHARE
Series A Preferred Stock $ .74 $ .70 $ 1.48 $ 1.40
========= ========= ========= =========
Series B Preferred Stock $ .59 $ .59 $ 1.18 $ 1.18
========= ========= ========= =========
Series C Preferred Stock $ .49 $ .49 $ .98 $ .98
========= ========= ========= =========
Series E Preferred Stock $ .50 $ .15 $ 1.00 $ .15
========= ========= ========= =========
Common Stock, including Class B and Class C $ .61 $ .57 $ 1.22 $ 1.14
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
SPIEKER PROPERTIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Series A,
B, C and E Common Class C Common Additional
Preferred Stock Common Stock Par Paid-in Deferred Retained
Stock Shares Stock Shares Value Capital Compensation Earnings Total
---------- ------ ------------ ----- ------- ------------ --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 $ 368,373 61,916,459 1,176,470 $6 $ 1,359,946 $(4,863) $ -- $ 1,723,462
Conversion of Operating
Partnership Units -- 223,700 -- - 7,610 -- -- 7,610
Conversion of Class C
Common Stock to Common
Stock -- 1,176,470 (1,176,470) - -- -- -- --
Reallocation of Limited
Partners' interests in
the Operating Partnership -- -- -- - (2,628) -- -- (2,628)
Restricted Stock Grant -- 99,820 -- - 3,473 (3,473) -- --
Exercise of Stock options -- 94,900 -- - 2,069 -- -- 2,069
Deferred Compensation
amortization -- -- -- - -- 933 -- 933
Dividends Declared (16,414) -- -- - (2,993) -- (74,345) (93,752)
Net Income 16,414 -- -- - -- -- 74,345 90,759
--------- ---------- ---------- -- ----------- ------- -------- -----------
BALANCE AT JUNE 30, 1999 $ 368,373 63,511,349 -- $6 $ 1,367,477 $(7,403) $ -- $ 1,728,453
========= ========== ========== == =========== ======= ======== ===========
</TABLE>
7
<PAGE> 8
SPIEKER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 90,759 $ 81,775
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation and amortization 52,504 42,231
Amortization of discount and deferred financing costs 1,204 1,165
Non-cash compensation 492 42
Minority interest's share of net income 15,382 12,514
Gain on disposition of property (9,831) (15,715)
Increase in accounts receivable and other assets 14 198
Increase in receivable from related parties (45) (1,182)
Decrease in assessment bonds payable (472) (517)
(Decrease) increase in accounts payable, accrued expenses and other liabilities (12,648) 21,997
Increase in accrued real estate taxes 348 1,415
Increase in accrued interest 7,856 8,375
--------- ---------
Net cash provided by operating activities 145,563 152,298
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to properties (168,396) (923,209)
(Additions) reductions to deposits on properties, net (14,142) 29,018
Additions to investment in mortgages -- (11,610)
Additions to leasing costs (6,718) (7,561)
Proceeds from disposition of property 63,615 56,436
Proceeds from investment in mortgages -- 160,184
Proceeds from investment in affiliate 233 --
--------- ---------
Net cash used for investing activities (125,408) (696,742)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 535,000 981,500
Payments on debt (430,859) (607,326)
Payments of financing fees, net of hedging proceeds (1,279) (3,192)
Payments of dividends and distributions (109,548) (91,830)
Proceeds from sale of Preferred Stock net of issuance costs -- 96,401
Proceeds from sale of Common Stock, net of issuance costs -- 96,039
Proceeds from stock options exercised and partnership units sold 2,069 78,873
--------- ---------
Net cash (used) provided by financing activities (4,617) 550,465
--------- ---------
Net increase in cash and cash equivalents 15,538 6,021
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,916 22,628
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,454 $ 28,649
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for interest $ 49,617 $ 50,734
</TABLE>
8
<PAGE> 9
SPIEKER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 and 1998
(unaudited, dollars in thousands)
1. ORGANIZATION AND BASIS OF PRESENTATION
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 June 30,
1999, the Company owned an approximate 88.0 percent general and limited
partnership interests 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
June 30, 1999, and December 31, 1998, and its consolidated results of
operations and cash flows for the three and six months ended June 30, 1999
and 1998. 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 six months ended June 30, 1999 and
1998, 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, 1998
and Form 10-Q for the three month period ended March 31, 1999.
Investments in Real Estate
Investments in real estate are recorded at cost and are depreciated using
the straight-line method over the estimated useful lives of the assets. 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 the 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.
9
<PAGE> 10
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 June 30, 1999, and December 31, 1998,
none of the carrying values of the properties exceeded their estimated fair
values. As of June 30, 1999, and December 31, 1998, the properties are
located primarily in California and the Pacific Northwest. As a result of
this geographic concentration, the operations of these properties could be
adversely affected by a recession or general economic downturn 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). The Company
assesses possible impairment of these loans by reviewing the fair value of
the underlying real estate. As of June 30, 1999, 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, not including land 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 activities related to the property's
development are complete.
Land Held for Investment
The Company has costs related to land parcels that are either held for
investment or are in a design and approval process. There were no material
construction in process costs associated with these land parcels.
Cash and Cash Equivalents
Highly liquid investments with an original maturity of three months or less
when purchased are classified as cash and 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.
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 12.0% at June 30, 1999 and
12.2% at December 31, 1998.
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.
10
<PAGE> 11
Interest and Other Income
Interest and other income includes interest income on cash, cash
equivalents, and 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. The Class B Common Stock has subsequently been converted
into Common Stock during the last six months of 1998. The Class C Common
Stock has subsequently been converted into Common Stock in the first
quarter of 1999. 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 and
other common stock equivalents. The basic and diluted weighted average
common shares outstanding for the three and six months ended June 30, 1999
and 1998, are as follows:
<TABLE>
<CAPTION>
Basic Weighted Average Diluted Weighted Average
Common Shares Outstanding Common Shares Outstanding
------------------------- -------------------------
<S> <C> <C>
Three months ended:
June 30, 1999 63,322,217 65,363,882
June 30, 1998 62,350,563 64,515,746
Six months ended:
June 30, 1999 63,272,990 65,206,549
June 30, 1998 61,183,106 63,348,289
</TABLE>
Reclassifications
Certain items in the 1998 financial statements have been reclassified to
conform to the 1999 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.
3. ACQUISITIONS AND DISPOSITIONS
The Company acquired the following properties (the "1999 Acquisitions")
during the six months ended June 30, 1999:
<TABLE>
<CAPTION>
Property Total Rentable
Project Name Location Type(1) Square Feet Initial Cost(2)
------------ -------- ------- ----------- ---------------
<S> <C> <C>
Oakbrook Plaza Laguna Hills, CA O 119,847 $18,517
Eastgate Office Park Bellevue, WA O 273,892 40,384
Governor Executive Centre San Diego, CA O 52,196 8,263
</TABLE>
(1) "O" indicates office property.
(2) Represents the initial acquisition costs of the properties and excludes
any estimated repositioning costs.
11
<PAGE> 12
During the six months ended June 30, 1998, the Company acquired 5,978,007
square feet of office and industrial property at an initial cost of
$870,674 (the "1998 Acquisitions"). The 1999 and 1998 Acquisitions were
recorded using the purchase method of accounting.
During the six months ended June 30, 1999, the Company acquired one parcel
of land for development. The initial cost of this parcel was $35,565.
During the six months ended June 30, 1998, the Company acquired nine
parcels of land for development. The total initial cost of these nine
parcels was $34,658.
The Company disposed of the following properties (the "1999 Dispositions")
during the six months ended June 30, 1999.
<TABLE>
<CAPTION>
Property Total Rentable
Project Name Location Type(1) Square Feet Sales Price
------------ -------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Biltmore Commerce Center Phoenix, AZ O 262,875 $37,250
Overland Court Land Sacramento, CA L N/A 298
Ryan Ranch Industrial San Jose, CA I 26,500 3,025
Grandview Drive South San Francisco, CA I 36,400 3,800
Commerce Point Ontario, CA I 113,631 5,100
Progress Industrial Park San Diego, CA I 123,275 7,938
Coral Tree Commerce Center San Diego, CA I 130,866 8,262
</TABLE>
(1) O- Office; I- Industrial; L- Land.
During the six months ended June 30, 1998, the Company disposed of one
retail property for $40,928, one office property for $2,750 and three
industrial properties for $14,050 (the "1998 Dispositions").
4. TRANSACTIONS WITH AFFILIATES
Revenues and Expenses
The Company received $263 and $600 for the three and six months ended June
30, 1999 and $1,132 and $1,856 for the same periods in 1998, for management
services provided to certain properties that are controlled and operated by
either Spieker Northwest, Inc. or Spieker Partners related entities
(collectively, "Spieker Partners") and Spieker Griffin/W9 Associates, LLC.
Certain officers of the Company are partners in Spieker Partners.
Receivable From Affiliates
The $228 receivable from affiliates at June 30, 1999, and the $183 at
December 31, 1998, 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 $18,725 at June 30, 1999 and
December 31, 1998 of loans to Spieker Northwest, Inc. (SNI). The loans are
secured by deeds of trust on real property, bear interest at 8.5%, and
mature in 2012. Interest income of $342 and $684 related to these mortgages
is included in interest and other income for the three and six months ended
June 30, 1999 and $3,776 and $9,209 for same periods in 1998.
Investment in Affiliate
The investment in affiliate represents an investment in 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. At June 30, 1999, SNI owned
225,815 square feet of office and industrial property located in various
states. In addition, SNI owns 6 parcels of land totaling 24.6 acres.
Certain of these properties are held for sale at June 30, 1999. 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% common interest
and 37.5% preferred interest in Spieker Griffin/W9 Associates, LLC. Spieker
Griffin/W9, LLC Associates owns a 535,000 square foot office complex,
located in Orange County, California, which is managed by the Company.
12
<PAGE> 13
5. PROPERTY HELD FOR DISPOSITION
The Company continues to review its portfolio and its long-term strategy
for properties. The Company will dispose, over time, assets that do not
have a strategic fit with the portfolio. Included in property held for
disposition of $167,507 at June 30, 1999, are eighteen properties and two
land parcels. Two industrial properties are located in Northern California,
one industrial property and two land parcels are located in Southern
California, fourteen industrial properties are located in Washington, and
one office property is located in Oregon. The divestiture of the properties
held for disposition is subject to identification of a purchaser,
negotiation of acceptable terms and other customary conditions.
The following summarizes the condensed results of operations of the
properties held for disposition at June 30, 1999 for the six months ended
June 30, 1999 and 1998. Some properties held for disposition were acquired
during the periods presented, therefore the Net Operating Income for these
periods may not be comparable.
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Income $14,646 $13,220
Property Operating Expenses (3,020) (2,716)
------- -------
Net Operating Income $11,626 $10,504
======= =======
</TABLE>
6. DEBT
As of June 30, 1999, debt consists of the following:
<TABLE>
<CAPTION>
1999
----------
<S> <C>
Unsecured investment grade notes, varying fixed
interest rates from 6.65% to 8.00% payable
semi-annually, due from 2000 to 2027 $1,836,500
Unsecured short-term borrowings (see "Facility" and
"Bank Facility" below), due 2001 28,012
Mortgage loans, varying interest rates from
7.00% to 9.88%, due 2001 to 2013(1) 110,805
----------
$1,975,317
----------
</TABLE>
(1) Mortgage loans generally require monthly principal and interest
payments.
The Company has an Unsecured Line of Credit Facility (the "Facility"). The
maximum amount available under the Facility is $250,000. The Facility
carries interest at LIBOR (London Interbank Offered Rate) plus 0.80%,
matures in August 2001, includes an annual administrative fee of $50 and an
annual Facility fee of .20%. The one-month LIBOR at June 30, 1999 was 5.1%.
As of June 30, 1999, the amount drawn on the Facility was $28,012. The
Facility is subject to financial covenants concerning leverage, interest
coverage and certain other ratios. The Company is currently in compliance
with all of the covenants in the Facility concerning its indebtedness.
As of December 31, 1998, the Company had a $200,000 short-term Bank
Facility outstanding. This short-term Bank Facility carried interest at
LIBOR plus .65% and matured November 1999. During the quarter ended June
30, 1999 the Company paid down the Bank Facility in its entirety.
The Facility is subject to financial covenants concerning leverage,
interest coverage and certain other ratios. The Company is currently in
compliance with all of the covenants in the Facility concerning its
indebtedness.
In May 1999, the Operating Partnership issued $400,000 of investment grade
rated unsecured notes (the "May 1999 Notes") in two tranches: $200,000 of
6.80% notes due May 1, 2004 priced to yield 6.83% and $200,000 of 7.25%
notes due May 1, 2009 priced to yield 7.27%. Net proceeds of approximately
$397,000 from the offering were used to repay amounts outstanding under the
Facility and Bank Facility.
In conjunction with the issuance of the May 1999 Notes, the Company hedged
its exposure to pricing benchmarks so that the net cost to the Company was
6.74% for the 2004 note and 7.18% for the 2009 note. Once the issuance was
completed on the Notes, the Company was released of any further obligations
under the hedge.
The Company's unsecured investment grade notes are subject to financial
covenants concerning leverage, interest coverage and certain other ratios.
The Company is currently in compliance with all of the covenants in the
unsecured note agreements governing its indebtedness.
Interest capitalized on the Company's properties under development was
$5,652 and $10,675 for the three and six months ended June 30, 1999 and
$3,613 and $6,585 for the same periods in 1998.
13
<PAGE> 14
7. DIVIDENDS AND DISTRIBUTIONS PAYABLE
The dividends and distributions payable at June 30, 1999, and December 31, 1998,
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 June 30, 1999, and December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Shares of:
Common Stock 63,511,349 61,916,459
Class C Common Stock -- 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 4,000,000
Units of:
Minority Interest Holders 8,865,915 8,902,915
Minority Interest Holders - Preferred 3,016,459 3,221,831
</TABLE>
8. STOCKHOLDERS' EQUITY
In the first quarter of 1999, 1,176,470 shares of Class C Common Stock were
converted into 1,176,470 shares of Common Stock by the shareholder.
9. 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 and 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).
10. GAIN ON DISPOSITION OF PROPERTY
Gain on disposition of property for the three months ended June 30, 1999 of
$4,665 represents the gain on disposition of five properties and one land
parcel. These properties along with the property disposed of in the first
quarter brings the total gain on disposition of property to $9,831 (see
note 3).
14
<PAGE> 15
11. SEGMENT INFORMATION
The Company has four reportable segments: Pacific Northwest; North-East
Bay, San Francisco/Sacramento, California; Silicon Valley; and Southern
California. Each region has a Regional Senior Vice President who is
directly responsible for managing all phases of the region's operations
including acquisition, development, leasing and property management. Each
reportable segment includes both office and industrial properties which are
leased to tenants engaged in various types of businesses. The accounting
policies of the four regions are the same as those described in the summary
of significant accounting policies. The Company evaluates performance based
upon net operating income from the combined properties in each segment.
Each of the four operating regions consists of differing mixes of office
and industrial properties. The following table may not be comparable by the
regions listed below given the differing mixes of properties within the
regions. Significant information used by the Company in the reportable
segments for the six months ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Pacific North-East Bay/ Silicon Southern
Northwest Sacramento, CA Valley California Total
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 Revenue $65,964 $80,620 $71,355 $88,170 $306,109
1998 Revenue 55,880 63,383 60,403 70,414 250,080
1999 Net Operating Income(1) 47,050 55,921 55,707 56,970 215,648
1998 Net Operating Income(1) 40,968 44,323 46,647 45,016 176,954
</TABLE>
(1) Net operating income (NOI) for the properties is calculated by
subtracting property related rental expenses and real estate taxes from
rental income.
12. SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
<TABLE>
<CAPTION>
Six Months ended June 30
------------------------
1999 1998
---- ----
<S> <C> <C>
Debt assumed in relation to property acquisitions 29,475 23,252
Increase to land and assessment bonds payable 82 4,196
Write-off of fully depreciated property 3,476 4,660
Write-off of fully amortized deferred financing and leasing costs 767 --
Restricted Stock grants 3,473 --
Capital recorded in relation to properties acquired with Operating Partnership Units -- 55,420
Property acquired through the issuance of Common Stock -- 6,900
</TABLE>
15
<PAGE> 16
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 six month periods ended June 30, 1999, as compared to the
corresponding periods ended June 30, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------------------
Rental Revenues 1999 1998 $ CHANGE % CHANGE
---------------------------------------------
<S> <C> <C> <C> <C>
1998 Core Portfolio $115.7 $106.2 $ 9.5 8.9%
1998 Acquisitions 28.6 20.8 7.8 37.5
1999 Acquisitions 1.8 - 1.8 100.0
Developments 10.1 3.0 7.1 236.7
Dispositions 0.7 2.4 (1.7) (70.8)
---------------------------------------------
$156.9 $132.4 $24.5 18.5%
=============================================
</TABLE>
For the quarter ended June 30, 1999 rental revenues increased by $24.5 million.
$9.5 million of the rental revenue increase is primarily due to revenues
generated by the "1998 Core Portfolio", defined as properties owned at January
1, 1998 and still owned at June 30, 1999. The increase in the 1998 Core
Portfolio revenue during the last twelve months, was attributable to higher
roll-over rental rates realized on the renewal and re-leasing of second
generation space and increases in occupancies. During the quarter ended June 30,
1999, the Company completed 393 lease transactions for the renewal and re-lease
of 1.9 million square feet of second generation space.
Properties acquired during 1998 contributed $7.8 million to the rental revenue
increase for the quarter. During 1998, the Company invested $884.8 million for
properties totaling 6.3 million square feet (the "1998 Acquisitions"). The
properties were acquired at various dates throughout the year, therefore a full
quarters worth of revenue and expense may not be reflected in the quarter ended
June 30, 1998.
Properties developed by the Company (the "Developments") contributed $7.1
million to the rental revenue increase for the quarter. The Developments include
both properties completed and added to the Company's portfolio of stabilized
properties, as well as properties currently under development. During the three
months ended June 30, 1999 the Company added three properties totaling 510,927
square feet for an estimated final cost of $39.2 million 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 Developments are occupied at increasing
levels throughout the year, therefore the periods presented may not be
comparable based on the average percentage occupied during any one quarter.
Properties acquired during the first six months of 1999 (the "1999
Acquisitions") contributed $1.8 million of the increase in rental revenues for
the quarter ended June 30, 1999. For the quarter ended June 30, 1999 the Company
acquired one office property totaling 52,196 square feet for a total investment
of $8.8 million. The property was acquired at the end of the quarter and, as
such, a full quarters revenue and expense was not recognized during the period.
As used herein, the term "total investment" represents the initial purchase
price of acquisitions, plus projected costs of certain repositioning and rehab
capital expenditures anticipated at the time of purchase.
The increases in rental revenues are partially offset by a decrease of $1.7
million attributable to properties which the Company has subsequently disposed
of during the six months ended June 30, 1999 or during the year ended December
31, 1998 (the "Dispositions").
16
<PAGE> 17
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------
Rental Revenues 1999 1998 $ CHANGE % CHANGE
---------------------------------------------
<S> <C> <C> <C> <C>
1998 Core Portfolio $228.7 $210.7 $18.0 8.5%
1998 Acquisitions 55.6 29.9 25.7 86.0
1999 Acquisitions 2.4 -- 2.4 100.0
Developments 17.0 4.5 12.5 277.8
Dispositions 2.4 4.9 (2.5) (51.0)
---------------------------------------------
$306.1 $250.0 $56.1 22.4%
=============================================
</TABLE>
Rental revenues for the six month period ended June 30, 1999 increased by $56.1
million primarily due to revenues generated by the 1998 Acquisitions of $25.7
million.
The 1998 Core Portfolio contributed $18.0 million of the increase in rental
revenues. The increase in the 1998 Core Portfolio revenue during the last twelve
months, was attributable to higher roll-over rental rates realized on the
renewal and re-leasing of second generation space and increases in occupancies.
During the six months ended June 30, 1999 the Company completed 783 lease
transactions for the renewal and re-lease of 3.6 million square feet of second
generation space. On average, year-to-date, the new effective rates were 36.0%
higher than the expiring coupon rent.
The Developments contributed $12.5 million to the rental revenue increase for
the six months ended June 30, 1999. At June 30, 1999, the Company has a current
development pipeline of 2.9 million square feet representing a total projected
cost of $396.3 million. Certain properties in the development pipeline are shell
complete and are partially occupied but are not yet considered stabilized.
The 1999 Acquisitions contributed $2.4 million to 1999 rental revenues. During
the six months ended June 30, 1999 the Company has acquired three office
properties totaling 445,935 square feet for a total investment of $69.8 million.
The increases in rental revenues are partially offset by a decrease of $2.5
million attributable to the Dispositions.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -----------------------------
CHANGE CHANGE
-------------- ---------------
1999 1998 $ % 1999 1998 $ %
--------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and Other Income $1.8 $6.2 $(4.4) (71.0)% $3.3 $13.8 $(10.5) (76.1)%
</TABLE>
Interest and other income decreased due primarily to the reduction in interest
income from mortgage loans made to SNI in relation to SNI's 1997 acquisitions of
non-core assets (see note 4). The majority of these assets were disposed of
during 1998. Additionally interest earned decreased due to lower cash balances
period over period. Average cash balances for the three and six month periods
ended June 30, 1999 were $27.6 and $24.8 million and for 1998 were $40.0 and
$38.1 million.
17
<PAGE> 18
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------- ---------------------------------
CHANGE CHANGE
---------------- --------------
Property Operating Expenses 1999 1998 $ % 1999 1998 $ %
--------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rental Expenses $ 35.8 $29.1 $ 6.7 23.0% $ 67.4 $ 53.5 $13.9 26.0%
Real Estate Tax 11.5 10.3 1.2 11.7 23.1 19.6 3.5 17.9
------ ----- ----- ---- ------ ------ ----- ----
$ 47.3 $39.4 $ 7.9 20.0% $ 90.5 $ 73.1 $17.4 23.8%
====== ===== ===== ==== ====== ====== ===== ====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------- ---------------------------------
CHANGE CHANGE
---------------- ---------------
Property Operating Expenses 1999 1998 $ % 1999 1998 $ %
--------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 Core Portfolio $ 32.9 $29.7 $ 3.2 10.8% $ 63.0 $ 58.3 $ 4.7 8.1%
1998 Acquisitions 10.7 7.9 2.8 35.4 20.7 11.5 9.2 80.0
1999 Acquisitions 0.6 - 0.6 100.0 0.8 -- 0.8 100.0
Developments 2.8 1.2 1.6 133.3 5.3 2.0 3.3 165.0
Dispositions 0.3 0.6 (0.3) (0.5) 0.7 1.3 (0.6) (46.2)
--------------------------------------- ---------------------------------
$ 47.3 $39.4 $ 7.9 20.0% $ 90.5 $ 73.1 $17.4 23.8%
======================================= =================================
Property Operating Expenses as
% of Rental Revenues 30.1% 29.8% 29.6% 29.2%
====== ===== ====== ======
</TABLE>
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.
Rental revenues net of property operating expenses, referred to as "net
operating income," is presented in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------- ---------------------------------
CHANGE CHANGE
------------------ --------------
Net Operating Income 1999 1998 $ % 1999 1998 $ %
--------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 Core Portfolio $ 82.9 $76.5 $ 6.4 8.4% $165.6 $152.4 $13.2 9.0%
1998 Acquisitions 17.6 13.0 4.6 35.4 34.9 18.5 16.4 88.6
1999 Acquisitions 1.2 - 1.2 100.0 1.6 -- 1.6 100.0
Developments 7.3 1.8 5.5 305.6 11.7 2.5 9.2 368.0
Dispositions 0.6 1.7 (1.1) (65.0) 1.8 3.5 (1.7) (48.6)
--------------------------------------- ---------------------------------
$109.6 $93.0 $16.6 17.8% $215.6 $176.9 $38.7 21.9%
======================================= =================================
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ -------------------------------
CHANGE CHANGE
------------- -------------
1999 1998 $ % 1999 1998 $ %
------------------------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Expense $29.9 $30.9 $(1.0) (3.2)% $58.7 $60.2 $(1.5) (2.5)%
Depreciation and Amortization Expense 27.1 22.6 4.5 19.9 52.5 42.2 10.3 24.4
G & A and Other Expense 5.7 5.0 0.7 14.0 11.4 9.8 1.6 16.3
</TABLE>
Interest expense decreased slightly, even as average debt balances slightly
increased. This decrease is the net effect of additions to interest expense from
additional note offerings which occurred during 1998, offset by lower balances
outstanding under the Facility and the Bank Facility and an increase in interest
capitalized in relation to the Developments that the Company had in process
during the three and six months ended June 30, 1999 and 1998. Average
outstanding debt was $2.0 billion for the quarter ended June 30, 1999 and $1.9
billion for the quarter ended June 30, 1998. Capitalized interest was $6.0
million for the three months ended June 30, 1999 and $3.6 million for the three
months ended June 30, 1998. For the six months ended June 30, 1999, the average
debt balances outstanding was $1.9 billion compared to $1.8 billion in 1998.
Capitalized interest was $10.7 million for the six months in 1999 and $6.6
million in 1998.
Depreciation and amortization expenses increased by $4.5 million for the three
month and $10.3 million for the six month periods ended June 30, 1999, compared
with the same periods in 1998, due primarily to the 1999 and 1998 Acquisitions
and the Developments.
General and administrative and other expenses increased by $0.7 million and $1.6
million for the three and six month periods ended June 30, 1999 as compared with
the same periods in 1998 primarily as a result of the increased number of
employees, as well as the costs associated with all employees. On a percentage
basis, general and administrative and other expenses were 3.6% and 3.7% of
rental revenues for the three and six month periods ended June 30, 1999, as
compared with 3.8% and 3.9% for the same periods in 1998, reflecting economies
of scale achieved as the Company has grown.
During the second quarter of 1999, the Company disposed of five industrial
properties and one parcel of land resulting in a gain of $4.7 million. This
brings the total gain on disposition for the first two quarters of 1999 to $9.8
million on the disposition of seven properties.
Net income before minority interests and disposition of property increased by
$8.1 million or 20.0% to $48.7 million for the second quarter of 1999, from
$40.6 million for the second quarter of 1998. For the six month period ended
June 30, 1999, net income before minority interests and disposition of property
increased by $17.7 million or 22.5% to $96.3 million, from $78.6 million for the
same period in 1998. The increase in net income is principally due to the 1998
Acquisitions, the 1998 Core Portfolio and the Developments.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------
1999 1998 $ CHANGE % CHANGE
---------------------------------------------
<S> <C> <C> <C> <C>
Cash provided by operating activities $ 145.6 $ 152.3 $ (6.7) (4.4)%
Cash used for investing activities (125.4) (696.7) 571.3 82.0
Cash (used) provided by financing activities (4.6) 550.5 (555.1) (100.8)
</TABLE>
19
<PAGE> 20
The decrease in cash provided by operating activities is primarily due to a
decrease in accounts payable offset by increases in cash provided from the 1998
and 1999 Acquisitions, the Developments and the 1998 Core Portfolio. The
decrease in accounts payable is due to timing differences in the pay down of
accounts payable balances at the end of each comparable quarter. Cash used for
investing activities and cash required for financing activities was
significantly lower due to the decrease in the number of acquisitions completed.
Cash provided by financing activities decreased by $555.1 million for the first
six months of 1999, as compared to the same period in 1998. During the first six
months of 1999 cash provided by financing activities consisted primarily of
$400.0 million in net proceeds from the issuance of unsecured notes (see below).
These increases were offset by the payoff of $200.0 million on the Company's
Bank Facility, net payments of $72.0 million on the Facility, net payments of
$23.8 million on mortgage loans and a $5.6 million reduction related to the
payoff of amounts related to properties sold during the second quarter of 1999.
Additionally, payments of distributions increased by $17.7 million from $91.8
million to $109.5 million for the first six months of 1999 and 1998. This
increase is due to the greater number of common and preferred shares outstanding
and the 7.0% increase in the common share distribution rate of $1.22 per share
for the first six months of 1999 from $1.14 per share in 1998.
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 properties acquired and cash flow provided by operations. The Company
believes that its liquidity and its ability to access capital and proceeds from
disposition of non-strategic assets are adequate to continue to meet liquidity
requirements for the foreseeable future.
At June 30, 1999, 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.
As of June 30, 1999, the Operating Partnership had $1.8 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 Company has a $250.0 million unsecured line of credit facility with interest
at LIBOR plus .80%. The Facility matures in August 2001 and has a competitive
bid option that allows the Company to request bids from the lenders for advances
up to $150.0 million. At June 30, 1999, the Company had $28.0 million
outstanding under the Facility. The Facility is subject to financial covenants
concerning leverage, interest coverage and certain other ratios. The Company is
currently in compliance with all of the covenants in the Facility concerning its
indebtedness. During the quarter ended June 30, 1999 the Company paid down the
Bank Facility which had an outstanding balance of $200.0 million. The Bank
Facility carried interest at LIBOR plus 0.65% and was to mature in November
1999.
In addition to the unsecured debt securities and the Facility, the Company has
$110.8 million of secured indebtedness (the "Mortgages") at June 30, 1999. The
Mortgages have interest rates varying from 7.00% to 9.88% and maturity dates
from 2001 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 $10.8 million of assessment bonds outstanding as
of June 30, 1999.
In May 1999, the Operating Partnership issued $400.0 million of investment grade
rated unsecured notes in two tranches as follows: $200.0 million of 6.8% notes
due May 1, 2004 priced to yield 6.83% and $200.0 million of 7.25% notes due May
1, 2009 priced to yield 7.27%. The Company used the net proceeds of
approximately $397.0 million from this offering to reduce amounts outstanding
under the Facility and the Bank Facility.
In conjunction with the issuance of the May 1999 Notes, the Company hedged its
exposure to pricing benchmarks so that the net cost to the Company was 6.74% for
the 2004 note and 7.18% for the 2009 note. Once the issuance was completed on
the Notes, the Company was released of any further obligations under the hedge.
The Company has the capacity pursuant to shelf registration statements to issue
up to approximately $663.8 million in equity securities and the Operating
Partnership has the capacity to issue up to $413.5 million in debt securities.
20
<PAGE> 21
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.
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-line 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 shares of 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. During the
second half of 1998, the Class B Common Stock was converted into shares of
Common Stock. During the first quarter of 1999, the Class C Common Stock was
converted into shares of Common Stock.
STATEMENT OF FUNDS FROM OPERATIONS
(amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income from operations before disposition of property
and minority interests: $ 48,716 $ 40,630 $ 96,310 $ 78,574
Dividends on Series B Preferred Stock (2,510) (2,510) (5,020) (5,020)
Dividends on Series C Preferred Stock (2,953) (2,953) (5,906) (5,906)
Dividends on Series E Preferred Stock (2,000) (600) (4,000) (600)
Distributions on Preferred Operating Partnership Units (2,397) (2,223) (4,924) (3,489)
-------- -------- --------- ---------
Income from operations after Series B, C and E
dividends, and Preferred Operating Partnership
Unit distributions 38,856 32,344 76,460 63,559
-------- -------- --------- ---------
Add:
Depreciation and Amortization 26,727 22,404 51,830 41,769
Other, net 289 (14) 328 (28)
-------- -------- --------- ---------
Funds from Operations before Straight-line rent 65,872 54,734 128,618 105,300
-------- -------- --------- ---------
Straight-line rent (2,675) (1,508) (5,223) (3,148)
-------- -------- --------- ---------
Funds from Operations $ 63,197 $ 53,226 $ 123,395 $ 102,152
======== ======== ========= =========
Weighted average diluted share equivalents outstanding 74,233 72,883 74,077 71,348
======== ======== ========= =========
</TABLE>
21
<PAGE> 22
OTHER DISCLOSURE
Year 2000 Compliance
Certain matters discussed within this year 2000 compliance disclosure are
forward-looking statements within the meaning of the federal securities law.
Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved.
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 systems within its real
estate facilities that may contain date sensitive software and/or data sensitive
imbedded micro-processors.
To evaluate the impact of Year 2000 compliance on its operations, the Company
established a Year 2000 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 Company's IT and facility
systems.
The Company's IT department inventoried all IT administrative 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 manufacturer's and/or supplier's
assurances, do not appear to present Year 2000 issues.
The Task Force, together with the regional facilities managers, have inventoried
each facility for all systems that may contain date sensitive software and/or
date sensitive imbedded microprocessors. Manufacturers and/or suppliers have
been contacted to determine which systems are Year 2000 compliant. Where
non-compliance was detected, recommendations for solutions to potential problems
were requested and implemented. Approximately 95% of all facilities
modifications have been completed. Final testing of all facilities is under way
and is scheduled to be complete by the end of the third quarter of 1999.
The Company has engaged a third-party engineering firm to conduct testing of a
sampling of the facilities to evaluate the validity of the Company's Year 2000
compliance efforts with respect to facility systems. The completion of the
third-party audit is also due to be complete by the end of the third quarter.
In the event of unforeseen failure of any facility-related systems, due to a
Year 2000 issue, contingency plans are in place and include the planned
deployment of teams consisting of regional facility managers, facility engineers
and customer service personnel, which would manually override any such facility
system in a timely manner.
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.
22
<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses fixed and variable rate debt to finance its operations. The
information below summarizes the Company's market risks associated with debt
outstanding as of June 30, 1999. The following table presents principal cash
flows and related weighted average interest rates by year of maturity.
EXPECTED MATURITY DATE
(in millions)
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt $-- $100.0 $162.3 $110.0 $-- $1,575.0 $1,947.3
Average Interest Rate -- 6.65% 7.21% 6.95% -- 7.21% 7.17%
Variable Rate Debt -- -- $ 28.0 -- -- -- $ 28.0
Average Interest Rate -- -- 5.99% -- -- -- 5.99%
</TABLE>
The carrying amount of the Company's debt approximates fair value. The Company's
fixed and variable rate debt is described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations." At June 30, 1999,
the Company had no interest rate caps or swaps. In conjunction with the issuance
of the May 1999 Notes, the Company hedged its exposure to pricing benchmarks so
that the net cost to the Company was 6.74% for the 2004 note and 7.18% for the
2009 note. Once the issuance was completed on the Notes, the Company was
released of any further obligations under the hedge. All of the Company's debt
is denominated in United States dollars. The Company's risk management policies
do not provide for the utilization of financial instruments for trading purposes
and only minimal use for hedging purposes.
PART II. OTHER INFORMATION
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.
Exhibit Number
12.1 Statement of Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends
27.1 Article 5 Financial Data Schedule (EDGAR Filing Only)
(B) Reports on Form 8-K
None.
23
<PAGE> 24
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: August 13, 1999 /s/ Elke Strunka
---------------------------------------
Elke Strunka
Vice President and
Principal Accounting Officer
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- --------------------
<S> <C>
12.1 Statement of Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Dividends
27.1 Article 5 Financial Data Schedule (EDGAR Filing Only)
</TABLE>
<PAGE> 1
EXHIBIT 12.1
SPIEKER PROPERTIES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED DIVIDENDS
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings:
Income from operations before disposition of
property and minority interest $48,716 $40,630 $ 96,310 $ 78,574
Interest expense(1) 29,905 30,931 58,710 60,198
Amortization of capitalized interest 224 127 421 237
---------- ---------- ---------- ----------
Total earnings $78,845 $71,688 155,441 139,009
========== ========== ========== ==========
Fixed charges:
Interest expense(1) $29,905 $30,931 $ 58,710 $ 60,198
Capitalized interest 5,652 3,613 10,675 6,585
Series A Preferred Dividends 744 695 1,488 1,390
Series B Preferred Dividends 2,510 2,510 5,020 5,020
Series C Preferred Dividends 2,953 2,953 5,906 5,906
Series E Preferred Dividends 2,000 600 4,000 600
Series D Preferred Operating Partnership Units 2,397 2,223 4,924 3,488
---------- ---------- ---------- ----------
Total fixed charges and preferred dividends $46,161 $43,525 $ 90,723 $ 83,187
========== ========== ========== ==========
Ratio of earnings to fixed charges
(excluding preferred dividends) 2.22 2.08 2.24 2.08
========== ========== ========== ==========
Ratio of earnings to combined fixed charges
and preferred dividends 1.71 1.65 1.71 1.67
========== ========== ========== ==========
Fixed charges in excess of earnings $ -- $ -- $ -- $ --
========== ========== ========== ==========
</TABLE>
Notes:
(1) Includes amortization of debt discount and deferred financing fees.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 28,649
<SECURITIES> 0
<RECEIVABLES> 6,350
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,946,532
<DEPRECIATION> 201,788
<TOTAL-ASSETS> 4,012,011
<CURRENT-LIABILITIES> 0
<BONDS> 1,824,303
0
368,373
<COMMON> 6
<OTHER-SE> 1,353,025
<TOTAL-LIABILITY-AND-EQUITY> 4,012,011
<SALES> 0
<TOTAL-REVENUES> 263,924
<CGS> 0
<TOTAL-COSTS> 73,126
<OTHER-EXPENSES> 52,026
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,198
<INCOME-PRETAX> 78,574
<INCOME-TAX> 0
<INCOME-CONTINUING> 81,775
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,859
<EPS-BASIC> 1.13
<EPS-DILUTED> 1.11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 20,454
<SECURITIES> 0
<RECEIVABLES> 4,966
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 4,280,773
<DEPRECIATION> 267,051
<TOTAL-ASSETS> 4,183,019
<CURRENT-LIABILITIES> 0
<BONDS> 1,975,317
0
368,373
<COMMON> 6
<OTHER-SE> 1,360,074
<TOTAL-LIABILITY-AND-EQUITY> 4,183,019
<SALES> 0
<TOTAL-REVENUES> 309,381
<CGS> 0
<TOTAL-COSTS> 90,461
<OTHER-EXPENSES> 63,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,710
<INCOME-PRETAX> 96,310
<INCOME-TAX> 0
<INCOME-CONTINUING> 90,759
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,345
<EPS-BASIC> 1.17
<EPS-DILUTED> 1.16
</TABLE>
