<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, 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:
64,916,952 shares of Common Stock, $0.0001 par value as of November 12, 1999.
Page 1 of 24
Exhibit Index is located on Page 23.
<PAGE> 2
SPIEKER PROPERTIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 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 September 30, 1999 and
December 31, 1998 ..................................................... 4
Consolidated Statements of Operations for the Three and Nine months ended
September 30, 1999 and 1998 ............................................ 6
Consolidated Statement of Stockholders' Equity for the Nine months ended
September 30, 1999 ..................................................... 7
Consolidated Statements of Cash Flows for the Nine months ended
September 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 ............... 22
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 September 30, 1999, and
December 31, 1998
(ii) Consolidated Statements of Operations for the Three and Nine
months ended September 30, 1999 and 1998
(iii) Consolidated Statement of Stockholders' Equity for the Nine
months ended September 30, 1999
(iv) Consolidated Statements of Cash Flows for the Nine months ended
September 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-Qs for the three month period ended March 31, 1999 and for
the six month period ended June 30, 1999.
3
<PAGE> 4
SPIEKER PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999, AND DECEMBER 31, 1998
(unaudited, dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
INVESTMENTS IN REAL ESTATE
Land, land improvements and leasehold interests $ 794,757 $ 770,670
Buildings and improvements 3,064,332 2,924,290
Construction in progress 195,842 255,710
----------- -----------
4,054,931 3,950,670
Less - Accumulated depreciation (291,758) (240,778)
----------- -----------
3,763,173 3,709,892
----------- -----------
Land held for investment 131,705 131,530
Investments in mortgages 18,725 28,069
Properties held for disposition, net 154,554 72,537
----------- -----------
Net investments in real estate 4,068,157 3,942,028
CASH AND CASH EQUIVALENTS 20,166 4,916
ACCOUNTS RECEIVABLE, net of allowance for doubtful accounts of
$1,859 as of September 30, 1999 and $894 as of December 31, 1998 4,983 9,416
DEFERRED RENT RECEIVABLE 20,321 12,746
RECEIVABLE FROM AFFILIATES 403 183
DEFERRED FINANCING AND LEASING COSTS, net of accumulated
amortization of $19,550 as of September 30, 1999 and $14,539
as of December 31, 1998 50,629 44,607
FURNITURE, FIXTURES AND EQUIPMENT, net 4,913 4,495
PREPAID EXPENSES, DEPOSITS ON PROPERTIES AND OTHER ASSETS
12,609 17,616
INVESTMENT IN AFFILIATES 20,671 20,863
----------- -----------
$ 4,202,852 $ 4,056,870
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 5
SPIEKER PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999, AND DECEMBER 31, 1998
(unaudited, dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 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 101,301 110,698
----------- -----------
Total debt 1,965,813 1,847,198
----------- -----------
ASSESSMENT BONDS PAYABLE 10,635 11,339
ACCOUNTS PAYABLE 11,948 24,938
ACCRUED REAL ESTATE TAXES 15,524 2,251
ACCRUED INTEREST 41,513 25,263
UNEARNED RENTAL INCOME 26,320 22,635
DIVIDENDS AND DISTRIBUTIONS PAYABLE 47,715 44,728
OTHER ACCRUED EXPENSES AND LIABILITIES 63,440 56,704
----------- -----------
Total liabilities 2,182,908 2,035,056
----------- -----------
MINORITY INTERESTS 265,936 298,352
----------- -----------
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,
64,749,890 and 61,916,459 shares issued and outstanding as of
September 30, 1999, and December 31, 1998, respectively 6 6
Class C Common Stock: $.0001 par value, 1,500,000 shares
authorized, no shares issued or outstanding as of September 30,
1999 and 1,176,470 shares 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 1,392,505 1,359,946
Deferred compensation (6,876) (4,863)
Retained earnings -- --
----------- -----------
Total stockholders' equity 1,754,008 1,723,462
----------- -----------
$ 4,202,852 $ 4,056,870
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 6
SPIEKER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(unaudited, dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Rental income $ 163,005 $ 143,139 $ 469,114 $ 393,219
Interest and other income 1,595 2,651 4,867 16,495
--------- --------- --------- ---------
164,600 145,790 473,981 409,714
--------- --------- --------- ---------
OPERATING EXPENSES
Rental expenses 37,937 34,218 105,350 87,694
Real estate taxes 12,798 11,076 35,846 30,726
Interest expense, including amortization of
finance costs 30,678 28,613 89,388 88,811
Depreciation and amortization 29,327 24,191 81,832 66,423
General and administrative and other expenses 5,906 4,430 17,301 14,225
--------- --------- --------- ---------
116,646 102,528 329,717 287,879
--------- --------- --------- ---------
Income from operations before disposition of
real estate and minority interests 47,954 43,262 144,264 121,835
--------- --------- --------- ---------
GAIN ON DISPOSITION OF REAL ESTATE 6,159 1,417 15,990 17,132
--------- --------- --------- ---------
Income from operations before minority interests 54,113 44,679 160,254 138,967
--------- --------- --------- ---------
MINORITY INTERESTS' SHARE OF NET INCOME (6,902) (6,735) (22,285) (19,248)
--------- --------- --------- ---------
Net income 47,211 37,944 137,969 119,719
--------- --------- --------- ---------
PREFERRED DIVIDENDS
Series A Preferred Stock (744) (695) (2,232) (2,085)
Series B Preferred Stock (2,510) (2,510) (7,530) (7,530)
Series C Preferred Stock (2,953) (2,953) (8,859) (8,859)
Series E Preferred Stock (2,000) (2,000) (6,000) (2,600)
--------- --------- --------- ---------
Net income available to Common Stockholders $ 39,004 $ 29,786 $ 113,348 $ 98,645
========= ========= ========= =========
INCOME PER SHARE OF COMMON STOCK
Net income - basic $ .60 $ .47 $ 1.78 $ 1.60
========= ========= ========= =========
Net income - diluted $ .60 $ .47 $ 1.76 $ 1.58
========= ========= ========= =========
DIVIDENDS PER SHARE
Series A Preferred Stock $ .74 $ .70 $ 2.22 $ 2.10
========= ========= ========= =========
Series B Preferred Stock $ .59 $ .59 $ 1.77 $ 1.77
========= ========= ========= =========
Series C Preferred Stock $ .49 $ .49 $ 1.47 $ 1.47
========= ========= ========= =========
Series E Preferred Stock $ .50 $ .50 $ 1.50 $ .65
========= ========= ========= =========
Common Stock, including Class B and Class C $ .61 $ .57 $ 1.83 $ 1.72
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE> 7
SPIEKER PROPERTIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Series A, B, Class C
C and E Common Common Common Additional
Preferred Stock Stock Stock Par Paid-in
Stock Shares Shares Value Capital
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 $ 368,373 61,916,459 1,176,470 $ 6 $ 1,359,946
Conversion of Operating Partnership Units -- 1,462,203 -- -- 53,859
Conversion of Class C Common Stock to
Common Stock -- 1,176,470 (1,176,470) -- --
Reallocation of Limited Partners'
interests in the Operating Partnership -- -- -- -- (23,369)
Restricted Stock Grant -- 99,458 -- -- 3,473
Exercise of Stock options -- 95,300 -- -- 2,083
Deferred Compensation amortization -- -- -- -- --
Dividends Declared (24,621) -- -- -- (3,487)
Net Income 24,621 -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1999 $ 368,373 64,749,890 -- $ 6 $ 1,392,505
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Deferred Retained
Compensation Earnings Total
------------ ----------- -----------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 $ (4,863) $ -- $ 1,723,462
Conversion of Operating Partnership Units -- -- 53,859
Conversion of Class C Common Stock to
Common Stock -- -- --
Reallocation of Limited Partners'
interests in the Operating Partnership -- -- (23,369)
Restricted Stock Grant (3,473) -- --
Exercise of Stock options -- -- 2,083
Deferred Compensation amortization 1,460 -- 1,460
Dividends Declared -- (113,348) (141,456)
Net Income -- 113,348 137,969
----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1999 $ (6,876) $ -- $ 1,754,008
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
7
<PAGE> 8
SPIEKER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------- -----------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 137,969 $ 119,719
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 81,832 66,423
Amortization of discount and deferred financing costs 1,747 1,675
Loss from affiliate 192 --
Non-cash compensation 736 63
Minority interests' share of net income 22,285 19,248
Gain on disposition of real estate (15,990) (17,132)
Increase in accounts receivable and other assets (2,075) (4,350)
(Increase) decrease in receivable from related parties (220) 294
Decrease in assessment bonds payable (728) (798)
(Decrease) increase in accounts payable and other accrued
expenses and liabilities (735) 21,043
Increase in accrued real estate taxes 13,274 12,132
Increase in accrued interest 16,250 10,304
----------- -----------
Net cash provided by operating activities 254,537 228,621
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to properties (245,002) (1,039,222)
Reductions to deposits on properties, net 3,123 39,181
Additions to investment in mortgages -- (11,610)
Additions to investment in affiliates -- (8,574)
Additions to leasing costs (11,669) (12,282)
Proceeds from disposition of real estate 88,618 314,130
Distributions from affiliates -- 31,670
----------- -----------
Net cash used for investing activities (164,930) (686,707)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt 570,000 1,021,500
Payments on debt (480,930) (697,809)
Payments of financing fees, net of hedging proceeds (1,311) (3,246)
Payments of dividends and distributions (164,199) (144,182)
Proceeds from sale of Preferred Stock, net of issuance costs -- 96,401
Proceeds from sale of Common Stock, net of issuance costs -- 102,534
Proceeds from stock options exercised and partnership units sold 2,083 79,530
----------- -----------
Net cash (used for) provided by financing activities (74,357) 454,728
----------- -----------
Net increase (decrease) in cash and cash equivalents 15,250 (3,358)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,916 22,628
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,166 $ 19,270
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for interest $ 87,328 $ 87,921
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
8
<PAGE> 9
SPIEKER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30,
1999, the Company owned an approximate 88.2 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
September 30, 1999, and December 31, 1998, and their consolidated results of
operations and cash flows for the three and nine months ended September 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 as of, and for the three and nine
months ended September 30, 1999 and 1998, 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, 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-Qs for the three month period ended March 31, 1999 and for the
six month period ended June 30, 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:
<TABLE>
<S> <C>
Land improvements and leasehold interests 18 to 40 years
Buildings and improvements 10 to 40 years
Tenant improvements Term of the related lease
</TABLE>
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.
9
<PAGE> 10
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, 1999, and December 31,
1998, none of the carrying values of the properties exceeded their estimated
fair values. As of September 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. As of
September 30, 1999, all of the 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 September 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 incurred costs related to land parcels that are either held
for investment or are in a design and approval process. As of September 30,
1999, approximately $32.9 million of construction in progress is 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 Interests
Minority interest in the Company consists of the limited partners' interest
in the Operating Partnership of approximately 11.8% at September 30, 1999
and 12.2% at December 31, 1998.
10
<PAGE> 11
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. Unearned rental income represents rental obligations prepaid to
the Company.
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 was converted into Common Stock
during the last six months of 1998. The Class C Common Stock was converted
into Common Stock in the first quarter of 1999. 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 nine
months ended September 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:
September 30, 1999 64,473,256 65,243,805
September 30, 1998 62,976,362 63,593,983
Nine Months Ended:
September 30, 1999 63,677,475 64,410,356
September 30, 1998 61,787,427 62,618,310
</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 nine months ended September 30, 1999:
<TABLE>
<CAPTION>
Property Total Rentable Initial
Project Name Location Type (1) Square Feet Cost (2)
-------------------------- ------------------- --------- -------------- ----------
<S> <C> <C> <C> <C>
Oakbrook Plaza Laguna Hills, CA O 119,847 $ 18,527
Eastgate Office Park Bellevue, WA O 273,892 40,392
Governor Executive Centre San Diego, CA O 52,196 8,263
First Financial Center Ontario, CA O 80,406 8,703
</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 nine months ended September 30, 1998, the Company acquired
6,040,876 square feet of office and industrial property at an initial cost
of $800,479 (the "1998 Acquisitions"). In addition, in the acquisitions for
the nine months ended September 30, 1998, included approximately 48.6 acres
of land held for future development and redevelopment at the initial cost of
$86,202. The 1999 and 1998 Acquisitions were recorded using the purchase
method of accounting.
During the nine months ended September 30, 1999, the Company acquired four
parcels of land for development. The initial cost of these parcels was
$46,633. During the nine months ended September 30, 1998, the Company
acquired twelve parcels of land for development. The initial cost of these
twelve parcels was $62,430.
The Company disposed of the following investments in real estate (the "1999
Dispositions") during the nine months ended September 30, 1999.
<TABLE>
<CAPTION>
Property Total Rentable
Project Name Location Type (1) Square Feet
-------------------------- --------------------- ---------- --------------
<S> <C> <C> <C>
Biltmore Commerce Center Phoenix, AZ O 262,875
Overland Court Land Sacramento, CA L N/A
Ryan Ranch Industrial Monterey, CA I 26,500
Grandview Drive South San Francisco, CA I 36,400
Commerce Pointe Ontario, CA I 113,631
Progress Industrial Park San Diego, CA I 123,275
Coral Tree Commerce Center San Diego, CA I 130,866
Ontario Commerce Land II Ontario, CA L N/A
Benicia Industrial Park Benicia, CA I 43,776
Airport Office Mortgage San Jose, CA M N/A
</TABLE>
(1) O- Office; I- Industrial; L- Land, M- Mortgage.
The aggregated disposition proceeds for land, mortgage and properties were
$20,256 for the three months and $91,099 for the nine months ended September
30, 1999, including $5,170 for a condemnation gain recognized in the first
quarter of 1999.
During the nine months ended September 30, 1998, the Company disposed of one
retail property, two office properties and three industrial properties for
$65,528 (the "1998 Dispositions").
4. TRANSACTIONS WITH AFFILIATES
Revenues and Expenses
The Company received $276 for the three months ended September 30, 1999 and
$876 for the nine months ended September 30, 1999 and $341 and $2,197 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 $403 receivable from affiliates at September 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 of $18,725 at September 30, 1999 and
$28,069 at December 31, 1998 are 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 $1,027 related to these
mortgages is included in interest and other income for the three and nine
months ended September 30, 1999 and $1,160 and $10,369 is included in
interest and other income for the same periods in 1998.
12
<PAGE> 13
Investment in Affiliate
The investment in affiliate represents an investment in SNI. The Company
owns 95% of the non-voting Preferred Stock of SNI. Certain senior officers
of the Company own 100% of the voting stock of SNI. At September 30, 1999,
SNI owned 225,815 square feet of office and industrial property located in
California. In addition, SNI owns 1 parcel of land totaling 3.4 acres.
Certain of these properties are held for sale at September 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.
5. PROPERTIES HELD FOR DISPOSITION
The Company continues to review its portfolio and its long-term strategy for
properties. The Company will dispose of, over time, assets that do not have
a strategic fit with the portfolio. Included in properties held for
disposition of $154,554 at September 30, 1999, are seventeen properties and
one land parcel. One industrial property is located in Northern California,
one industrial property and one land parcel are located in Southern
California, fourteen industrial properties and one office property are
located in the Pacific Northwest. 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 September 30, 1999 for the nine months
ended September 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>
1999 1998
-------- --------
<S> <C> <C>
Revenues $ 20,632 $ 18,811
Property Operating Expenses (4,418) (4,088)
-------- --------
Net Operating Income(1) $ 16,214 $ 14,723
======== ========
</TABLE>
(1) Property Operating Expenses includes property related rental expenses
and real estate taxes.
6. DEBT
As of September 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" below), due 2001 28,012
Mortgage loans, varying interest rates from 7.00% to 9.88%, due
2001 to 2013(1) 101,301
----------
$1,965,813
==========
</TABLE>
(1) Mortgage loans generally require monthly principal and interest
payments.
13
<PAGE> 14
The Company has a $250,000 Unsecured Line of Credit Facility (the
"Facility") which matures in August 2001. The Facility carries interest at
the London Interbank Offering Rate ("LIBOR") plus 0.80%. The one-month
LIBOR at September 30, 1999 was 5.1%. The Facility also includes an annual
administrative fee of $50 and an annual Facility fee of 0.20%. 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 of the Facility concerning its indebtedness.
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
$5,311 and $15,986 for the three and nine months ended September 30, 1999
and $4,505 and $11,090 for the same periods in 1998.
7. DIVIDENDS AND DISTRIBUTIONS PAYABLE
The dividends and distributions payable at September 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 September 30,
1999, and December 31, 1998, are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Shares of:
Common Stock 64,749,890 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 1,654,106 3,221,831
</TABLE>
8. MINORITY INTERESTS
During the third quarter of 1999, 1,362,353 of Convertible Preferred
Operating Partnership Units were converted into 1,238,503 shares of Common
Stock.
9. 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.
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 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 prepaid ground lease payments have been segregated from the
total purchase price of the properties, capitalized as leasehold interests
in the accompanying consolidated balance sheets, and are being amortized
ratably over the terms of the related original prepayment periods (18 to 24
years).
14
<PAGE> 15
11. GAIN ON DISPOSITION OF REAL ESTATE
Gain on disposition of real estate for the three months ended September 30,
1999 of $6,159 represents the gain on the disposition of one industrial
property, one parcel of land and a gain recognized on a mortgage held by the
Company, which was repaid by the borrower. The property, the land, the
mortgage and a condemnation gain recorded in the first quarter of 1999 along
with the properties and land parcels disposed of in the first six months of
1999 brings the total gain on disposition of real estate to $15,990 for the
nine months ended September 30, 1999 (see note 3 to the consolidated
financial statements).
12. SEGMENT INFORMATION
The Company has four reportable segments: Pacific Northwest; North-East
Bay/Sacramento, California; Silicon Valley; and Southern California. Each
region has a Regional 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 the combined net
operating income of the properties in each segment. Each of the four
operating regions consists of differing mixes of office and industrial
properties. The revenue and net operating income for the regions is not
comparable, given the differing mixes of properties within the regions.
Significant information used by the Company in the reportable segments for
the nine months ended September 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 $100,581 $124,636 $108,569 $135,328 $469,114
1998 Revenue 86,580 101,445 93,413 111,781 393,219
1999 Net Operating Income (1) 72,078 85,795 84,345 85,700 327,918
1998 Net Operating Income (1) 62,755 70,341 71,549 70,154 274,799
</TABLE>
(1) Net operating income (NOI) for the properties is calculated by
subtracting property related rental expenses and real estate taxes from
rental income.
13. SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------
1999 1998
------- -------
<S> <C> <C>
Debt assumed in relation to property acquisitions $29,475 $23,623
Increase to land and assessment bonds payable 206 --
Write-off of fully depreciated property 3,686 6,884
Write-off of fully depreciated furniture fixtures and equipment 328 167
Write-off of fully amortized deferred financing and leasing costs 1,246 1,947
Restricted Stock grants, net of amortization 2,750 2,159
Capital recorded in relation to properties acquired with Operating
Partnership Units -- 65,395
Property acquired through the issuance of Common Stock -- 6,900
</TABLE>
14. SUBSEQUENT EVENTS
Subsequent to September 30, 1999, the Company, in conjunction with eight
other real estate companies and Kleiner Perkins Caufield & Byers, a leading
venture capital firm, formed Broadband Office, Inc., a national
telecommunications company, for the purpose of providing voice and data
communication services to customers in their respective office buildings
across the country. All start-up costs are being contributed by Kleiner
Perkins, and no capital costs have been contributed by the Company. The
Company owns approximately 8 percent of the voting stock of Broadband
Office, Inc.
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 nine month periods ended September 30, 1999, as compared to the
corresponding periods ended September 30, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
Rental Revenues 1999 1998 $ CHANGE % CHANGE
--------------- ---------------------------------------------
<S> <C> <C> <C> <C>
1998 Core Portfolio $119.7 $111.0 $ 8.7 7.8%
1998 Acquisitions 30.1 25.2 4.9 19.4
1999 Acquisitions 2.3 -- 2.3 --
Developments 10.9 4.7 6.2 131.9
Dispositions --(1) 2.2 (2.2) --
--------------------------------------------
$163.0 $143.1 $ 19.9 13.9%
============================================
</TABLE>
(1) Reflects the minimal amount of income associated with the Dispositions
for the three months ended September 30, 1999.
For the quarter ended September 30, 1999 rental revenues increased by $19.9
million. $8.7 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 September 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 September 30, 1999, the Company completed 322 lease
transactions for the renewal and re-lease of 2.2 million square feet of
second generation space. On average, the new effective rates were 34.6%
higher than the expiring coupon rents.
Properties developed by the Company (the "Developments") contributed $6.2
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 September 30, 1999 the Company added six
properties totaling 1.1 million square feet for an estimated final cost of
$105.9 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. During the quarter ended September 30, 1999, the Company completed
25 lease transactions totaling 500,681 square feet of rentable space for the
Developments. 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 1998 contributed $4.9 million to the rental
revenue increase for the quarter. During 1998, the Company invested $884.8
million in acquiring 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 September 30, 1998.
Properties acquired during the first nine months of 1999 (the "1999
Acquisitions") contributed $2.3 million of the increase in rental revenues
for the quarter ended September 30, 1999. For the quarter ended September
30, 1999 the Company acquired one office property totaling 80,406 square
feet for a total investment of $10.1 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.
16
<PAGE> 17
The increases in rental revenues are partially offset by a decrease of $2.2
million attributable to properties which the Company disposed of during the
nine months ended September 30, 1999 or during the year ended December 31,
1998 (the "Dispositions") (see note 3 to the consolidated financial
statements).
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
Rental Revenues 1999 1998 $ CHANGE % CHANGE
--------------- ---------------------------------------------
<S> <C> <C> <C> <C>
1998 Core Portfolio $346.8 $321.6 $ 25.2 7.8%
1998 Acquisitions 86.8 55.1 31.7 57.5
1999 Acquisitions 4.9 -- 4.9 --
Developments 28.1 9.3 18.8 202.2
Dispositions 2.5 7.2 (4.7) (65.3)
------ ------ ------ ------
$469.1 $393.2 $ 75.9 19.3%
====== ====== ====== ======
</TABLE>
Rental revenues for the nine month period ended September 30, 1999 increased
by $75.9 million primarily due to revenues generated by the 1998
Acquisitions of $31.7 million and $25.2 million generated by the 1998 Core
Portfolio.
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 nine months ended September 30, 1999, the Company
completed 1,009 lease transactions for the renewal and re-lease of 5.9
million square feet of second generation space. On average, the new
effective rates were 35.5% higher than the expiring coupon rent.
The Developments contributed $18.8 million to the rental revenue increase
for the nine months ended September 30, 1999. At September 30, 1999, the
Company had a current development pipeline of 2.4 million square feet
representing a total projected cost of $393.6 million. Certain properties in
the development pipeline are shell complete and are partially occupied but
are not yet considered stabilized. During the nine months ended September
30, 1999, the Company completed 43 lease transactions totaling 727,214
square feet of rentable space for the Developments.
The 1999 Acquisitions contributed $4.9 million to 1999 rental revenues.
During the nine months ended September 30, 1999 the Company has acquired
four office properties totaling 526,341 square feet for a total investment
of $79.9 million.
The increases in rental revenues are partially offset by a decrease of $4.7
million attributable to the Dispositions.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- -------------------------------------
CHANGE CHANGE
----------------- -----------------
1999 1998 $ % 1999 1998 $ %
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and Other Income $ 1.6 $ 2.7 $ (1.1) (40.7)% $ 4.9 $ 16.5 $(11.6) (70.3)%
</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 to the consolidated financial
statements). The majority of these assets were disposed of during 1998.
Additionally interest earned decreased slightly due to lower cash balances
period over period and from the reduction of mortgage interest income due to
the payoff on a mortgage held by the Company, which was repaid by the
borrower. Average cash balances for the three and nine month periods ended
September 30, 1999 were $33.9 and $27.8 million and for 1998 were $34.5 and
$36.9 million.
17
<PAGE> 18
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ----------------------------------------
CHANGE CHANGE
------------------ ------------------
Property Operating Expenses 1999 1998 $ % 1999 1998 $ %
--------------------------- ---------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rental Expenses $ 37.9 $ 34.2 $ 3.7 10.8% $105.4 $ 87.7 $ 17.7 20.2%
Real Estate Taxes 12.8 11.1 1.7 15.3 35.8 30.7 5.1 16.6
------ ------ ------ ------ ------ ------ ------ ------
$ 50.7 $ 45.3 $ 5.4 11.9% $141.2 $118.4 $ 22.8 19.3%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ----------------------------------------
CHANGE CHANGE
------------------ ------------------
Property Operating Expenses 1999 1998 $ % 1999 1998 $ %
--------------------------- ---------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 Core Portfolio $ 33.6 $ 32.4 $ 1.2 3.7% $ 96.1 $ 90.7 $ 5.4 6.0%
1998 Acquisitions 12.7 10.4 2.3 22.1 33.9 21.9 12.0 55.0
1999 Acquisitions 0.8 -- 0.8 -- 1.5 -- 1.5 --
Developments 3.6 1.8 1.8 100.0 8.8 3.8 5.0 131.6
Dispositions --(1) 0.7 (0.7) -- 0.9 2.0 (1.1) (55.0)
------ ------ ------ ------ ------ ------ ------ ------
$ 50.7 $ 45.3 $ 5.4 11.9% $141.2 $118.4 $ 22.8 19.3%
====== ====== ====== ====== ====== ====== ====== ======
Property Operating Expenses
as % of Rental Revenues 31.1% 31.7% 30.1% 30.1%
====== ====== ====== ======
</TABLE>
(1) Reflects the minimal amount of expense associated with the Dispositions
for the three months ended September 30, 1999.
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.
The increased number of employees, as well as the costs associated with all
employees also contributes to the increase in rental expenses. The increases
experienced are consistent with the increase in rental revenue.
Rental revenues net of property operating expenses, referred to as "net
operating income," is presented in the following tables:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- --------------------------------------
CHANGE CHANGE
------------------ ------ ------ ------------------
Net Operating Income 1999 1998 $ % 1999 1998 $ %
-------------------- -------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 Core Portfolio $ 86.1 $ 78.6 $ 7.5 9.5% $251.0 $231.0 $ 20.0 8.7%
1998 Acquisitions 17.4 14.8 2.6 17.6 53.0 33.2 19.8 60.0
1999 Acquisitions 1.5 -- 1.5 -- 3.4 -- 3.4 --
Developments 7.3 2.9 4.4 151.7 19.2 5.4 13.8 255.6
Dispositions -- 1.5 (1.5) -- 1.3 5.2 (3.9) (75.0)
------ ------ ------ ------ ------ ------ ------ ------
$112.3 $ 97.8 $ 14.5 14.8% $327.9 $274.8 $ 53.1 19.3%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- --------------------------------------
CHANGE CHANGE
---------------- ----------------
1999 1998 $ % 1999 1998 $ %
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Expense, including
Amortization of Finance Costs $ 30.7 $ 28.6 $ 2.1 7.3% $ 89.4 $ 88.8 $ 0.6 0.7%
Depreciation and Amortization Expense 29.3 24.2 5.1 21.1 81.8 66.4 15.4 23.2
G & A and Other Expenses 6.0 4.4 1.6 36.4 17.3 14.2 3.1 21.8
G & A and Other Expenses
as % of Rental Revenues 3.6% 3.1% 3.7% 3.6%
Capitalized Interest $ 5.3 $ 4.5 $ 16.0 $ 11.1
</TABLE>
Interest expense increased due to increases in the total average outstanding
debt balances. This increase is the net effect of additions to interest
expense from additional note offerings which occurred during 1999 and 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 nine
months ended September 30, 1999 and 1998. Average outstanding debt was $2.0
billion for the quarter ended September 30, 1999 and $1.8 billion for the
quarter ended September 30, 1998. For the nine months ended September 30,
1999, the average debt balances outstanding was $1.9 billion compared to
$1.8 billion in 1998.
Depreciation and amortization expense increased by $5.1 million for the
three month and $15.4 million for the nine month periods ended September 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 $1.6 million and
$3.1 million for the three and nine month periods ended September 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.
During the third quarter of 1999, the Company recorded gains on disposition
of real estate of $6.2 million. The gain includes $5.2 of gain recognized on
a mortgage held by the Company, which was repaid by the borrower and a gain
of $1.0 million on the disposition of one industrial property and one parcel
of land. This brings the total gain on disposition for the three quarters of
1999 to $16.0 million on the disposition of seven properties, two land
parcels, the mortgage held by the Company and a condemnation gain recognized
in the first quarter of 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ ------------------------------------
CHANGE CHANGE
---------------- ----------------
1999 1998 $ % 1999 1998 $ %
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income from Operations
before Disposition of
Real Estate and Minority
Interests $ 48.0 $ 43.3 $ 4.7 10.9% $144.3 $121.8 $ 22.5 18.5%
</TABLE>
The increase in income from operations before disposition of real estate and
minority interests of $4.7 million and $22.5 million for the three and nine
month periods ended September 30, 1999 is principally due to the 1998
Acquisitions, the 1998 Core Portfolio and Developments.
19
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998 $ CHANGE % CHANGE
-----------------------------------------
<S> <C> <C> <C> <C>
Cash Provided by Operating Activities $254.5 $228.6 $ 25.9 11.3%
Cash Used for Investing Activities (164.9) (686.7) 521.8 75.9
Cash (Used for) Provided by Financing Activities (74.4) 454.7 (529.1) (116.4)
</TABLE>
The increase in cash provided by operating activities is primarily due to
increases in cash provided from the 1998 and 1999 Acquisitions, the
Developments and the 1998 Core Portfolio partially offset by a decrease in
accounts payable. The decrease in accounts payable is due to timing
differences in the pay down of accounts payable balances at the end of each
comparable period. Cash used for investing activities and cash required for
financing activities were significantly lower due to the decrease in the
number of acquisitions completed. Cash provided by financing activities
decreased by $529.1 million for the first nine months of 1999, as compared
to the same period in 1998. During the first nine months of 1999 cash
provided by financing activities consisted primarily of $400.0 million in
gross proceeds from the issuance of unsecured notes (see below). These
increases were offset by the payoff of $200.0 million on the Company's
short-term bank facility (the "Bank Facility"), net payments of $72.0
million on the Facility, payoff of $34.0 million in mortgage loans and
principal payments of $4.9 million on mortgage loans. Additionally, payments
of dividends and distributions increased by $20.0 million from $144.2
million to $164.2 million for the first nine months of 1999 compared with
1998. This increase is due to the greater number of common and preferred
shares outstanding and the 7.0% increase in the common share and operating
partnership unit distribution rate of $1.83 per share and unit for the first
nine months of 1999 from $1.71 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, proceeds from disposition of
non-strategic properties 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 September 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 expenditures, associated
with the renewal or re-leasing of space.
As of September 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 September 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 $101.3 million of secured indebtedness (the "Mortgages") at September
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 $10.6 million of
assessment bonds outstanding as of September 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.
20
<PAGE> 21
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 notes and 7.18% for the 2009 notes. The Company was
released from any further obligations under the hedge, upon issuance of the
May 1999 Notes.
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.
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.
21
<PAGE> 22
STATEMENT OF FUNDS FROM OPERATIONS
(amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income from operations before disposition of properties
and minority interests: $ 47,954 $ 43,262 $ 144,264 $ 121,835
Dividends on Series B Preferred Stock (2,510) (2,510) (7,530) (7,530)
Dividends on Series C Preferred Stock (2,953) (2,953) (8,859) (8,859)
Dividends on Series E Preferred Stock (2,000) (2,000) (6,000) (2,600)
Distributions on Preferred Operating Partnership Units (1,538) (2,527) (6,463) (6,016)
--------- --------- --------- ---------
Income from operations after Series B, C and E dividends,
and Preferred Operating Partnership Unit distributions 38,953 33,272 115,412 96,830
--------- --------- --------- ---------
Add:
Depreciation and Amortization 28,981 23,924 80,811 65,699
Other, net 153 105 481 76
--------- --------- --------- ---------
Funds from Operations before Straight-line rent 68,087 57,301 196,704 162,605
--------- --------- --------- ---------
Straight-line rent (2,345) (2,408) (7,568) (5,556)
--------- --------- --------- ---------
Funds from Operations $ 65,742 $ 54,893 $ 189,136 $ 157,049
========= ========= ========= =========
Weighted average diluted share equivalents outstanding 75,329 73,639 74,499 72,121
========= ========= ========= =========
</TABLE>
OTHER DISCLOSURE
Year 2000 Compliance
See Form 10Q for the six month period ended June 30, 1999.
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 September 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 $ 158.7 $ 110.0 $ -- $1,569.1 $1,937.8
Average Interest Rate -- 6.65% 7.21% 6.95% -- 7.20% 7.16%
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 September 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 notes and 7.18% for the 2009 notes. The Company was released
from any further obligations under the hedge, upon issuance of the May 1999
Notes. 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.
22
<PAGE> 23
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.
<TABLE>
<CAPTION>
Exhibit Number
--------------
<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>
(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: November 12, 1999 /s/ Elke Strunka
-----------------------------------
Elke Strunka
Vice President and
Principal Accounting Officer
24
<PAGE> 25
LIST OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number
--------------
<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 Nine Months Ended
-------------------------------------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings:
Income from operations before disposition of
properties and minority interests $ 47,954 $ 43,262 $144,264 $121,835
Interest expense (1) 30,678 28,613 89,388 88,811
Amortization of capitalized interest 248 148 669 385
--------------------------------------------------------
Total earnings $ 78,880 $ 72,023 $234,321 $211,031
========================================================
Fixed charges:
Interest expense (1) $ 30,678 $ 28,613 $ 89,388 $ 88,811
Capitalized interest 5,311 4,505 15,986 11,090
Series A Preferred Dividends 744 695 2,232 2,085
Series B Preferred Dividends 2,510 2,510 7,530 7,530
Series C Preferred Dividends 2,953 2,953 8,859 8,859
Series E Preferred Dividends 2,000 2,000 6,000 2,600
Series D Preferred Operating Partnership Units 1,538 2,527 6,463 6,015
--------------------------------------------------------
Total fixed charges and preferred dividends $ 45,734 $ 43,803 $136,458 $126,990
========================================================
Ratio of earnings to fixed charges
(excluding preferred dividends) 2.19 2.17 2.22 2.11
========================================================
Ratio of earnings to combined fixed charges
and preferred dividends 1.72 1.64 1.72 1.66
========================================================
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> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 20,166 19,270
<SECURITIES> 0 0
<RECEIVABLES> 6,842 4,846
<ALLOWANCES> 1,859 595
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 4,339,722 4,057,057
<DEPRECIATION> 291,758 221,483
<TOTAL-ASSETS> 4,202,852 3,980,806
<CURRENT-LIABILITIES> 0 0
<BONDS> 1,965,813 1,773,798
0 0
368,373 368,373
<COMMON> 6 6
<OTHER-SE> 1,385,629 1,356,881
<TOTAL-LIABILITY-AND-EQUITY> 4,202,852 3,980,806
<SALES> 0 0
<TOTAL-REVENUES> 473,981 409,714
<CGS> 0 0
<TOTAL-COSTS> 141,196 118,420
<OTHER-EXPENSES> 99,133 80,648
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 89,388 88,811
<INCOME-PRETAX> 144,264 121,835
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 137,969 119,719
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 113,348 98,645
<EPS-BASIC> 1.78 1.60
<EPS-DILUTED> 1.76 1.58
</TABLE>
