<PAGE>
DISCUSSION DRAFT
================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K/A
(AMENDMENT NO. 1)
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from to
---------- ---------
COMMISSION FILE NUMBER 1-12566
------------------------------
G & L REALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 95-4449388
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
439 N. BEDFORD DRIVE
BEVERLY HILLS, CALIFORNIA 90210
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 273-9930
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------------------- -----------------------
Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
<PAGE>
DISCUSSION DRAFT
================
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PART I PAGE
- ------ ----
<S> <C> <C>
ITEM 1. BUSINESS............................................ 1
ITEM 2. PROPERTIES.......................................... 5
PART II
- -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................. 15
PART IV
- -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K......................................... 20
</TABLE>
i
<PAGE>
DISCUSSION DRAFT
================
THIS ANNUAL REPORT ON FORM 10-K/A IS BEING FILED TO CLARIFY CERTAIN
DISCLOSURES AS SUGGESTED BY THE SECURITIES AND EXCHANGE COMMISSION.
PART I
ITEM 1. BUSINESS
G&L Realty Corp. (the "Company") is a self-administered real estate
investment trust ("REIT") that owns, manages, acquires and develops health care
properties throughout the United States. It is the successor of G&L
Development, which was formed in 1976. The Company completed its initial public
offering (the "IPO") of 3,680,000 shares of Common Stock in December 1993. The
Company's business consists of investments in health care properties and debt
obligations secured by health care properties.
The Medical Office Building ("MOB") Division's business strategy is to
aggressively manage and lease its portfolio of medical office buildings, parking
facilities and retail space (collectively, the "Properties") consisting of
approximately 563,000 rentable square feet located in Southern California. The
Company currently seeks growth opportunities through acquisition, development
and management of additional medical office properties directly or through
strategic joint ventures. Financing for new investments may be provided by the
Company's present line of credit, third party financing in the form of debt or
equity or from the sale of securities.
The Company's new Senior Care Division was formed to identify properties
which are economically under-utilized and to convert them to new uses which will
enhance their value. During the last half of 1995, the Senior Care Division
funded approximately $32 million in loans and investments secured by fully
occupied nursing homes and assisted living facilities. These investments
generate short term cash profits as well as future earnings from subordinated
notes received as part of the transactions. Selectively, the Company will retain
long-term ownership interests in certain facilities which were financed as part
of the interim loan program.
As an example of this new program, the Company identified a newly
constructed but vacant hospital and medical office building in Rancho Cucamonga,
California. In February 1996, the Company provided the initial capital and
management expertise to facilitate the transfer of this facility to Heritage
Rancho Healthcare, Inc., a Nebraska non-profit corporation ("Heritage").
Heritage will convert the hospital into a skilled nursing facility to benefit
the local community. In conjunction with the closing of this transaction, the
Company recognized cash revenues of $320,000, plus non-cash revenues of $840,000
relating to a ten-year subordinated note receivable with interest payable at 12
percent per annum. The Company was also retained to manage the 56,000 square-
foot medical office building.
1
<PAGE>
DISCUSSION DRAFT
================
The Company is the sole general partner of, and owns an 89.8 percent
interest in, G&L Realty Partnership, L.P. (the "Operating Partnership"). All of
the Company's assets are held by, and operations have been conducted through,
the Operating Partnership or one of two limited partnerships created for
financing purposes. G&L Financing Partnership, L.P. (the "Financing
Partnership"), was formed in 1994 to facilitate the acquisition of a $42.2
million credit facility. G&L Financing, Inc., a wholly owned subsidiary of the
Company, holds a one percent interest in the Financing Partnership and serves as
its sole general partner. In an effort to take advantage of lower interest
rates, the Company paid off the aforementioned $42.2 million credit facility
with the proceeds from a new $30 million ten year fixed rate loan at 7.89
percent per annum. In conjunction with the credit facility pay-off, the
Financing Partnership was liquidated. The new fixed rate loan is secured by
assets held by G&L Realty Financing Partnership II, L.P. (the "Realty Financing
Partnership"), a limited partnership created to facilitate the refinancing. G&L
Realty Financing II, Inc., a wholly owned subsidiary of the Company, holds a one
percent interest in the Realty Financing Partnership and also serves as the sole
general partner. The Operating Partnership is the sole limited partner and 99
percent owner of the Realty Financing Partnership. Unless the context requires
otherwise, all references to the Company's operations and assets include the
business and properties of the Company, the Operating Partnership, the Realty
Financing Partnership and the Financing Partnership (prior to its liquidation in
August, 1995).
The Company's executive offices are located at 439 North Bedford
Drive, Beverly Hills, California 90210 and its telephone number is (310) 273-
9930. Incorporated on September 15, 1993, the Company is a Maryland
corporation.
Medical Office Building Division
- --------------------------------
The current portfolio of eleven high-quality medical office buildings
and one adjacent parking structure with retail space constitutes the Company's
medical office building investments. The six Beverly Hills properties and the
St. Joseph's Medical Building in Burbank, California were acquired in
conjunction with the IPO in 1993. During 1994 the Company invested
approximately $42 million to acquire the Holy Cross Medical Plaza in Mission
Hills, California, the Sherman Oaks Medical Plaza in Sherman Oaks, California,
the Regents Medical Center in La Jolla, California, and the Cigna HealthCare
Building in Irwindale, California. The property at 1095 Irvine Boulevard in
Tustin,California, was acquired in 1994 and redeveloped into a medical office
building. The construction was completed and the building opened in August of
1995.
Medical office properties differ from conventional office buildings
due to the special requirements of the tenants and their patients. As a variety
of medical procedures are now performed in doctors' offices, many medical office
buildings have become sophisticated ambulatory centers that allow for out-
patient surgery procedures. In addition, medical office buildings generally
have higher maintenance requirements in the public areas due to heavy foot
traffic, require well-managed and ample parking facilities, require higher
plumbing and electrical capacity and have more stringent restrictions for waste
disposal. The management of medical office properties also requires experience
in the planning and construction of tenant improvements and higher levels of
responsiveness required by medical practitioners. Additional important
management functions include the placement of tenants within medical office
properties to accommodate increased space needs and managing the tenant mix at
properties so that referrals by practitioners with different specialties within
the building will be facilitated. The Company stresses meeting these and other
special demands of medical property tenants.
2
<PAGE>
DISCUSSION DRAFT
================
The health care industry is undergoing significant changes in connection with
of various political and cost-control initiatives regarding the cost and
delivery of health care. While substantially all of the Company's tenants are
in the medical profession, the Company does not believe health care reform will
have a significant impact on its operations for a variety of reasons. The
Company believes that the aging population in the United States together with an
increase in the number of persons who will have medical insurance under some
type of universal health care program will offset cost containment measures
designed to limit utilization. In addition, the Company believes that other
recent trends in the health care industry such as the performance of non-acute
procedures outside of hospitals could spur increased demand for space in full
service medical office buildings which contain surgical centers and out-patient
facilities.
Senior Care Division
- --------------------
The Senior Care Division emerged as a result of the Company's desire to
diversify its business activities while at the same time utilizing its expertise
in the ownership, management and development of health care properties. Market
research indicates that the senior assisted living facilities industry is about
to undergo a significant restructuring. Of the estimated 18,000 nursing homes
in the United States, half are considered "mom and pop" operated facilities.
The demands of an aging population coupled with the extensive operating
requirements and budgetary constraints of federal, state and local governments
is causing a consolidation of the senior assisted living industry.
Because of increased operating and regulatory pressures, many senior
facilities are currently for sale. The Senior Care Division seeks to develop
additional sources of revenue by facilitating the sale of such facilities to
non-profit organizations. The Company provides short-term loans and expertise
to non-profit organizations for use in acquiring fully occupied facilities. The
acquisition loan is subsequently repaid through the sale of 501(c)(3) tax exempt
bonds issued by the non-profit organization. The Company is also developing
relationships with various health care facility operators and may retain long-
term ownership of selected facilities. As of December 31, 1995 the company had
invested approximately $12 million in the short-term loan program and $20
million in unrated tax-exempt Series A and B bonds secured by three nursing
homes owned by a non-profit entity.
Investment Risk
- ---------------
The Company is subject to all related risks arising from investments in
real estate assets generally and more specifically risks associated with the
ownership and operation of medical office buildings and investment in trust
deeds secured by senior care facilities, including the effect of the local
economies in which the Properties are located; uncertainties regarding the
effect of national health care proposals, the growth of health maintenance
organizations and other changes in the health care regulatory environment; the
financial condition of the Company's tenants and their ability to make lease
payments; the financial condition of borrowers and the assets securing the
Company's loans; real estate financing risks such as the need to refinance debt
upon maturity and the impact of increased interest rates upon a refinancing or
otherwise; general real estate investment considerations such as the effect of
economic and other conditions on real estate values, the ability of tenants to
make lease payments and the need to renovate, maintain and release space and to
pay the cost thereof; the potential liability of the Company and its borrowers
for unknown or future environmental contamination; possible uninsured losses
resulting from events for which insurance coverage is not available or is not
economically insurable, and the concentration of assets in one geographic area
and in one business type.
3
<PAGE>
DISCUSSION DRAFT
================
Tax Status
- ----------
The Company believes that it has operated in such a manner as to qualify for
taxation as a "real estate investment trust" under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its
taxable year ended December 31, 1993, and the Company intends to continue to
operate in such a manner. As long as the Company qualifies for taxation as a
REIT under the Federal income tax laws, the Company generally will not be taxed
at the corporate level. If the Company fails to qualify as a REIT in any
taxable year, the Company will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. Even if the Company qualifies for taxation as a REIT, the Company may be
subject to certain state and local taxes on its income and property and to
federal income and excise taxes on its undistributed income.
Employees
- ---------
As of March 25, 1996, the Company employed 24 persons including on-site
building employees and professional employees engaged in asset management and
administration. The Company considers its relations with its employees to be
good.
4
<PAGE>
DISCUSSION DRAFT
================
ITEM 2. PROPERTIES
Medical Office Building Division - General
- ------------------------------------------
As of December 31, 1995, the Properties were approximately 94 percent
occupied (occupancy increased to 95 percent in February, 1996). The Properties
are leased to over 200 tenants who are primarily established medical
practitioners representing a cross section of medical practices. The following
table sets forth certain information regarding each of the Properties.
G&L REALTY CORP.
PROPERTIES - SUMMARY DATA
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
YEAR RENTABLE RENTED TOTAL AVERAGE
CONSTRUCTED SQUARE SQUARE OCCUPANCY ANNUALIZED RENT PER
PROPERTY (1) OR REHABILITATED FEET (2) FEET (3) RENT (4) SQ. FT. (5)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
405 N. Bedford, Beverly Hills, CA 1947/1987 48,835 48,835 100.0% $ 2,033,290 $ 41.64
4
415 N. Bedford, Beverly Hills (6) 1955 5,977 5,977 100.0% 216,417 36.21
416 N. Bedford, Beverly Hills 1946/1986 40,776 40,776 100.0% 1,510,494 37.04
435 N. Bedford, Beverly Hills 1950/1963/1984 55,116 51,961 89.2% 1,689,631 34.35
435 N. Roxbury, Beverly Hills 1956/1983 42,455 41,059 95.6% 1,506,796 37.11
436 N. Bedford, Beverly Hills 1990 78,799 71,216 90.0% 2,987,731 42.13
Holy Cross Medical Plaza
11550 Indian Hills Road
Mission Hills, CA 1985 71,253 64,859 94.7% 1,749,187 25.91
St. Joseph's Medical Office Bldg.
2031 West Alameda Ave.
Burbank, CA (7) 1987 26,017 26,017 100.0% 757,500 29.12
Sherman Oaks Medical Plaza
4955 Van Nuys Blvd.
Sherman Oaks, CA 1969/1993 69,425 63,110 90.0% 1,457,313 23.32
Regents Medical Center
4150 Regents Park Row
La Jolla, CA 1989 66,560 62,778 90.9% 1,639,642 27.11
Cigna HealthCare Building
12701 Schabarum Ave.
Irwindale, CA 1992 47,604 47,604 100.0% 1,096,796 23.04
1095 Irvine Boulevard
Tustin, CA 1995 10,125 10,125 100.0% 173,500 17.14
--------- --------- ----------- --------
Total/Weighted average of all
properties 562,942 534,317 94.2% $16,818,297 31.70
========= ========= ===========
--------------------------------
</TABLE>
(1) The Operating Partnership or the Realty Financing Partnership owns a 100
percent fee simple interest in all of the properties except 435 North
Roxbury, with respect to which the Operating Partnership owns a 61.75
percent partnership interest and is the sole general partner of 435 North
Roxbury Drive, L.P., which owns such property.
(2) Rentable square feet includes space used for management purposes but does
not include storage space.
(3) Occupancy includes occupied space and space used for management purposes.
As of December 31, 1995 the properties were 94 percent occupied (rented
square feet includes space which is leased but not yet occupied).
(4) Rent is from third-party leased space based upon rent billed in February
1996; no rent is assumed from management space.
5
<PAGE>
DISCUSSION DRAFT
================
(5) Average rent per square foot is calculated based upon third-party leased
space, excluding all management space.
(6) Retail space and parking facilities.
(7) The total annualized rent reflects the rental guarantee from the Sisters of
Providence discussed below, which expires October 31, 1998.
Six of the Properties are located on North Bedford and North Roxbury Drives
in Beverly Hills, California, near three major hospitals - Cedars Sinai Medical
Center, Century City Hospital and UCLA Medical Center. Each of these medical
office buildings has copper insulated pipe with sufficient capacity for medical
use, electrical systems designed for extra load requirements and extensive
security systems. 405, 416 and 436 North Bedford each have emergency back-up
generators. The buildings contain high quality interior improvements, both in
the common areas and in most of the doctors' offices. Parking for these six
Properties is provided in the 415 North Bedford garage and in subterranean
parking at 436 North Bedford and 435 North Roxbury. These six Properties
include ten operating rooms, including two in the Saint John's Hospital
surgicenter at 405 North Bedford. Saint John's Hospital leases 75 percent of
405 North Bedford and subleases a portion of the space to doctors primarily
affiliated with the Hospital.
Saint John's Hospital is the only tenant occupying more than 10% of the
rentable square footage of 405 North Bedford, occupying 36,787 square feet, or
74.6%, of the rentable square footage in that building. Its lease expires on
March 31, 1998 and provides for a monthly rental of $144,015.82. The lease
contains an option to renew for two consecutive five-year terms. Saint John's
Hospital subleases much of the space to doctors affiliated with the hospital.
A plastic surgeon occupies more than 10% of the rentable square footage of
416 North Bedford, occupying 4,622 square feet. or 11.3% of the rentable square
footage in that building. The monthly rental is $16,469. The lease expires on
November 30, 2002 and contains an option to renew the lease for one five-year
term.
Two tenants in 435 North Roxbury occupy more than 10% of the rentable square
footage. A dermatologist occupies 5,291 square feet (12.5% of the rentable
square footage) pursuant to a lease which provides for a monthly rental of
$16,667. The lease expires September 30, 2001 and provides for one five-year
renewal option. An internist occupies 6,183 square feet (14.6% of the rentable
square footage) pursuant to a lease which provides for a monthly rental of
$18,987.
The Holy Cross Medical Plaza is located on the 15 acre campus of Holy Cross
Medical Center, a 316 bed hospital. Also on this campus are the Villa de la
Santa Cruz skilled nursing facility, another medical office building, a magnetic
resonance imaging center, and an outpatient diagnostic center.
One tenant occupies more than 10% of the rentable square footage in the Holy
Cross Medical Center property. Holy Cross Surgical Center occupies 12,456 square
feet (17.5% of the rentable square footage) pursuant to a lease which provides
for a monthly rental of $18,453. The lease expires October 31, 2006 and
provides for one five-year renewal option.
The Saint Joseph's Medical Office Building is located one-quarter of a mile
from Saint Joseph's Hospital and is directly across the street from the Walt
Disney Company's world headquarters campus. Saint Joseph's Hospital includes
658 beds and is owned by the Sisters of Providence, an organization
6
<PAGE>
DISCUSSION DRAFT
================
which owns several other hospitals in North America. The Saint Joseph's Medical
Office Building was acquired from the Sisters of Providence, who have guaranteed
up to a maximum of $225,000 per year in rental payments through October 31,
1998. Currently, the office building is fully leased. Since the acquisition, the
Company has obtained lease extensions from all of the tenants beyond the
expiration of the rent guarantee, thus management does not anticipate changes in
rent revenues when the rent guarantee expires in October, 1998.
Two tenants in St. Joseph's Medical Office Building occupy more than 10% of
the rentable square footage. Total Renal Care occupies 8,045 square feet (30.9%
of the rentable square footage) pursuant to a lease which provides for a monthly
rental of $21,403. Its lease expires October 31, 2000 and provides for one
five-year renewal option. An internist occupies 6,207 square feet (26.4% of the
rentable square footage) pursuant to a lease which provides for a monthly rental
of $14,887. The lease expires November 30, 1998 and provides for one five-year
renewal option.
The Sherman Oaks Medical Plaza is adjacent to the Sherman Oaks Hospital and
Health Center, a 156 bed hospital which includes the major burn center for the
San Fernando Valley. A $1 million capital improvement program to renovate the
building systems and common areas is substantially complete. As of December
1995 this building was 90 percent occupied; however, during the first quarter of
1996, additional leases have been negotiated which will increase occupancy to 96
percent by June of 1996.
The Regents Medical Center is a three story medical office building with
subterranean parking located in the University Town Center area of San Diego,
near La Jolla. The ground floor contains primarily retail tenants, while the
upper two floors consist of medical offices. As of March 1996, the building had
an occupancy rate of over 95 percent.
One tenant occupies more than 10% of the rentable square footage in the
Regents Medical Center. UCSD Orthomed occupies 11,166 square feet (16.9% of the
rentable square footage) pursuant to a lease which provides for a monthly
rental of $23,225. The lease expires January 31, 2002 and provides for one
five-year renewal option.
The Cigna HealthCare Building in Irwindale, California is a two story medical
office building with nearby access from Interstate 10. This property was 100
percent leased to Cigna HealthCare of California, Inc. and has since been
assigned to Caremark International, Inc.. Rent obligations under the lease are
guaranteed by Cigna HealthCare, Inc. The lease provides for a monthly rental of
$91,399. It expires November 30, 2004 and provides for two five-year options at
90% of fair market value.
The 1095 Irvine Boulevard building in Tustin, California was redeveloped in
1995 as a primary healthcare center for physicians who are part of the St.
Joseph Hospital of Orange healthcare network. The property is leased to St.
Joseph Hospital, Inc. under a net lease with a 15 year term which began in
August of 1995 and provides for annual cost of living rent escalations. The
lease provides for a monthly rental of $16.087 and expires on July 31, 2010.
Medical Office Building Division - Leases
- -----------------------------------------
As of February 1996, the Properties were approximately 95 percent leased. New
leases and extensions are normally granted for a minimum of five years and
provide for annual rent increases.
7
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================
Office tenants generally have gross leases under which the lessee pays its share
of property expenses in excess of a base year. Most retail tenants have net
leases and pay their share of all operating expenses including property taxes
and insurance. The following lease expiration schedule sets forth the number of
leases, the square feet of the leases expiring, and the associated annual rent
for these leases expiring during each year:
G&L REALTY CORP.
LEASE EXPIRATION ANALYSIS
<TABLE>
<CAPTION>
NUMBER OF APPROXIMATE TOTAL PERCENT OF
YEAR OF LEASE LEASES TOTAL RENTED TOTAL
EXPIRATION EXPIRING SQUARE FEET ANNUAL RENT ANNUAL RENT
(1) (1) (2)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 34 44,195 $ 1,579,654 9.39%
1997 32 34,096 1,317,686 7.83%
1998 58 115,655 4,170,479 24.80% (3)
1999 34 48,387 1,395,871 8.30%
2000 47 71,337 2,161,976 12.85%
2001 13 17,303 603,445 3.59%
2002 13 32,917 987,641 5.87%
2003 4 4,249 76,482 0.45%
2004 4 51,683 1,204,135 7.16%
2005 10 24,470 834,760 4.96%
2006 8 22,279 760,224 4.52%
2007 or later 3 21,123 456,129 2.71%
</TABLE>
- -------------------------------------
(1) Does not include month-to-month leases, management space or vacant space.
(2) Percent of Total Annual Rent is based upon annualized revenues of
$16,818,297.
(3) Includes the 36,787 sq. ft. lease with St. John's Hospital. St.
John's Hospital has subleased the majority of this space to third-party
doctors. The Company will assume these existing subleases when the lease
expires in 1998 if St. John's does not extend its option to renew.
The Company has been successful in obtaining lease renewals with respect to
the Properties. Through December 31, 1995, the Company has achieved a lease
renewal rate of approximately [XX.X%] percent with respect to medical office
space in the Properties based on the last lease expiration for such space. While
there can be no assurances that such renewal level can be maintained, the
Company believes this high renewal rate is due in part to, the tendency of
medical practitioners to continue to practice in the same space over a number of
years. Management of the Company believes that its tenants frequently have
invested large sums of money in equipment and fixtures for their offices.
Furthermore, relocating a doctor's office can be disruptive to the patients who
are familiar with the location of the doctor's office.
8
<PAGE>
DISCUSSION DRAFT
================
The following table sets forth the annual rent increases for the leases with
respect to the Properties as of August 31,1993:
<TABLE>
<CAPTION>
PERCENT OF TOTAL
RENTABLE SQUARE
TYPE OF ANNUAL RENT INCREASES SQUARE FEET (1) FEET (1)
- -------------------------------- --------------- ----------------
<S> <C> <C>
None 73,454 13.27%
CPI related 204,248 36.91%
2% 4,332 0.78%
3% 11,502 2.08%
4% 22,809 4.12%
5% 183,795 33.21%
8% 3,851 0.70%
</TABLE>
(1) Does not include vacant space, space used for building management, and space
used for management of the Company.
The historical occupancy of the Properties consistently has ranged between
85 percent and full occupancy as shown in the following table:
OCCUPANCY RATES
===============
<TABLE>
<CAPTION>
Property 1995 1994 1993 1992 1991
- --------------------------------- -------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
405 N. Bedford 100.0% 96.2% 97.8% 96.3% 93.3%
415 N. Bedford (1) 100.0% 100.0% 100.0% 84.0% 89.8%
416 N. Bedford 100.0% 100.0% 97.2% 97.3% 93.1%
435 N. Bedford 89.2% 85.3% 97.7% 97.9% 95.0%
435 N. Roxbury 95.6% 91.7% 94.5% 98.6% 99.3%
436 N. Bedford 90.0% 92.8% 100.0% 91.3% 62.2%
Holy Cross Medical Plaza (3) 94.7% 87.7% N/A N/A N/A
St. Joseph's Medical Bldg. (2) 100.0% 100.0% N/A N/A N/A
Sherman Oaks Medical Plaza (3) 90.0% 79.8% N/A N/A N/A
Regents Medical Center (3) 90.9% 87.6% N/A N/A N/A
Cigna HealthCare Building (3) 100.0% 100.0% N/A N/A N/A
1095 Irvine Boulevard (4) 100.0% N/A N/A N/A N/A
-------- ------ ------ ------ -----
Weighted average 94.2% 90.9% 97.9% 95.4% 85.5%
======== ====== ====== ====== =====
</TABLE>
(1) Retail space and parking facilities
(2) Acquired in December 1993
(3) Acquired in 1994
(4) Placed in service in 1995
9
<PAGE>
DISCUSSION DRAFT
================
The following tables set forth the base rent per square foot and annualized base
rent for the Properties for the past five years:
BASE RENT PER SQUARE FOOT
<TABLE>
<CAPTION>
PROPERTY 1995 1994 1993 1992 1991
- --------------------------------- -------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
405 N. Bedford $41.64 $42.01 $37.87 $37.02 $35.43
415 N. Bedford (1) 36.21 36.79 36.41 33.30 37.70
416 N. Bedford 37.04 40.88 39.31 38.25 36.42
435 N. Bedford 34.35 39.25 39.03 39.07 36.13
435 N. Roxbury 37.11 38.39 38.12 36.02 35.51
436 N. Bedford 42.13 44.71 44.17 44.34 42.50
Holy Cross Medical Plaza (3) 25.91 28.77 N/A N/A N/A
St. Joseph's Medical Bldg. (2) 29.12 29.92 N/A N/A N/A
Sherman Oaks Medical Plaza (3) 23.32 23.57 N/A N/A N/A
Regents Medical Center (3) 27.11 28.38 N/A N/A N/A
Cigna HealthCare Building (3) 23.04 23.01 N/A N/A N/A
1095 Irvine Boulevard (4) 17.14 N/A N/A N/A N/A
-------- ------ ------ ------ ------
Weighted average $31.70 $34.01 $40.15 $39.50 $37.83
======== ====== ====== ====== ======
</TABLE>
ANNUALIZED BASE RENT
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PROPERTY 1995 1994 1993 1992 1991
- --------------------------------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
405 N. Bedford $ 2,033.3 $ 1,904.2 $ 1,914.2 $ 1,740.8 $1,614.3
415 N. Bedford (1) 216.4 210.4 205.2 167.2 202.3
416 N. Bedford 1,510.5 1,658.0 1,598.9 1,517.6 1,382.6
435 N. Bedford 1,689.6 1,660.3 2,043.6 2,108.2 1,891.8
435 N. Roxbury 1,506.8 1,494.9 1,597.7 1,507.8 1,497.0
436 N. Bedford 2,987.7 3,221.9 3,433.8 3,189.9 2,083.1
Holy Cross Medical Plaza (3) 1,749.2 1,784.5 N/A N/A N/A
St. Joseph's Medical Bldg. (2) 757.5 764.4 N/A N/A N/A
Sherman Oaks Medical Plaza (3) 1,457.3 1,276.9 N/A N/A N/A
Regents Medical Center (3) 1,639.6 1,531.0 N/A N/A N/A
Cigna HealthCare Building (3) 1,096.8 1,096.8 N/A N/A N/A
1095 Irvine Boulevard (4) 173.5 N/A N/A N/A N/A
---------- ---------- ---------- ---------- ---------
Total $ 16,818.3 $ 16,603.3 $ 10,793.4 $ 10,231.5 $ 8,671.1
========== ========== ========== ========== =========
</TABLE>
(1) Retail space and parking facilities
(2) Acquired in December 1993
(3) Acquired in 1994
(4) Placed in service in 1995
10
<PAGE>
DISCUSSION DRAFT
================
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF LEASED MEDICAL
PRACTICE AREA SUITES OFFICE SPACE
- -------------------------- ------------ ------------------
<S> <C> <C>
Chiropractics
Dentistry
Dermatology
Ear/Nose/Throat
General Surgery
Imaging Center TO BE COMPLETED
Internal Medicine PRIOR TO FILING
Obstetrics/Gynecology
Ophthalmology
Orthopedics
Pediatrics
Physical Therapy
Pharmacy
Plastic Surgery
Podiatry
Psychiatry
Psychology
Renal Dialysis
Urology
Other
Total
</TABLE>
Medical Office Building Division - Construction Loan
- ----------------------------------------------------
In May 1995, the Company entered into an agreement to loan $1.225 million
to an unaffiliated partnership for use in redeveloping a 120,000 square foot
medical center in Beverly Hills, California. The loan, which is secured by a
second deed of trust on the medical center, is guaranteed by the general partner
of such partnership. The guaranty is secured by a pledge of 600,000 shares of
common stock issued by a publicly traded company, which shares had a value of
$5.75 as of March 25, 1996. The loan bears interest at the rate of 10 percent
per annum and principal and interest are due and payable on June 1, 1996. The
Operating Partnership also entered into a consulting agreement to assist the
borrower with its development and leasing activities, for which the Operating
Partnership received fees of $100,000 in 1995.
Senior Care Division - General
- ------------------------------
The Operating Partnership, through the Senior Care Division, makes first
mortgage loans to non-profit organizations for the purpose of acquiring
independent senior care facilities, which loans are secured by the facilities
acquired. The loans are intended to serve as interim financing (6 to 12
months), with maturities determined primarily by the timing of the sale of tax
exempt bonds by the non-profit
11
<PAGE>
DISCUSSION DRAFT
================
organization. In conjunction with the acquisition of a facility, the subject
non-profit organization typically engages the services of accountants, lawyers
and investment bankers to obtain tax exempt bond financing. Some of the proceeds
received from the sale of newly issued bonds are used to repay the first
mortgage loan issued by the Company. The Company has from time to time extended
the maturity dates of the outstanding loans due to additional time needed by the
borrowers to obtain tax exempt financing. The loans generally bear interest at a
fixed rate of 12 percent per annum, with the per annum interest rate increasing
to 20 percent under certain circumstances in which an extension of the original
maturity date is required due to the timing of availability of tax exempt
financing. The Company may receive fees and certain other consideration for
making the loans. From June 1995 through December 31, 1995, the Company made a
total of four loans in an aggregate principal amount of approximately $11.8
million to nonprofit organizations for the purpose of acquiring senior care
facilities, all of which are secured by first mortgages on the facilities
acquired. Although no assurance can be given, the Company anticipates that $8
million of the principal amount of such loans will be repaid sometime during the
second quarter of 1996.
Additionally, in October 1995, for a purchase price of approximately $19.9
million, the Company acquired approximately $20.97 million face amount of Series
A Healthcare Revenue Bonds (the Series A Bonds) and $5 million face amount of
Series B Healthcare Revenue Bonds (the Series B Bonds) issued in each case by
the Massachusetts Industrial Finance Agency and collateralized by three skilled
nursing homes owned by Hampden Nursing Homes, Inc. and by debt service reserves
of $2.4 million. Interest on the Series A Bonds and the Series B Bonds is
payable semi-annually at rates of 9.75 percent and 9.5 percent per annum,
respectively. Graduated principal payments on the Series A Bonds are payable
annually each October through 2017, with the payments ranging from $305,000 in
October 1996 to $2,140,000 in October 2017. The principal amount of the Series
B Bonds is due and payable in a lump sum on October 1, 2018.
Senior Care Division - Secured Loans
- ------------------------------------
The following table sets forth certain information regarding the Operating
Partnership's loans secured by senior care facilities.
<TABLE>
<CAPTION>
PROPERTY SECURING LOAN MORTGAGE AMOUNT DEBT SERVICE
- ----------------------------- --------------- ---------------------------------
<S> <C> <C>
93-bed nursing home located
in Huntingdon County, Monthly interest only payments in
Pennsylvania. $1,472,500 arrears at 12 percent per annum.
72-unit assisted living Monthly interest only payments
facility located in Berlin, Maryland. 4,042,500 in arrears at 12 percent per annum.
58-bed nursing home located in
Richfield, Pennsylvania; and a
48-bed nursing home located Monthly interest only payments in
in Eldred, Pennsylvania. 2,215,000 arrears at 12 percent per annum.
60-bed intermediate care nursing
home and 16 Alzheimer's
apartments capable of accom-
modating 38 residents located Monthly interest only payments in
in Phoenix, Arizona. 4,080,000 arrears at 12 percent per annum.
</TABLE>
12
<PAGE>
DISCUSSION DRAFT
================
Debt Structure
- --------------
As of December 31, 1995 the Company had $111.6 million of debt, of which
$69.0 million, or 61.8 percent, was floating rate, and $42.6 million, or 38.2
percent, was fixed rate. The eight loans comprising such $111.6 million in debt
are described below.
435 North Roxbury is security for a $9 million loan from Citibank, N.A. The
mortgagor on this loan is 435 North Roxbury Drive, Ltd. (the "Roxbury
Partnership") in which the Operating Partnership is the general partner with a
61.75 percent interest. The Operating Partnership has guaranteed $1.0 million of
principal and interest. The interest rate is LIBOR plus 1.30 percent. The loan
is due June 1, 1996 and does not provide for amortization of principal. As of
March 25, 1996 the interest rate on this loan was 7.375 percent. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" regarding the disposition of this
loan at maturity.
Sherman Oaks Medical Plaza is security for two non-recourse notes from
Windy City Holdings, Inc. One note has an outstanding balance of approximately
$5.8 million, bears interest at 7.55 percent per annum, and amortizes on a 30
year schedule. The other note has an outstanding balance of approximately
$900,000, also bears interest at 7.55 percent per annum, is interest only, and
provides for additional advances of approximately $40,000 for building
improvements. Both notes are due February 23, 1998 and have two one-year renewal
options at the one year Treasury Rate plus 2.25 percent.
The Cigna HealthCare Building is security for a non-recourse loan of
approximately $6.1 million from the Independent Order of Foresters. The
interest rate is 8.75 percent per annum. The loan amortizes on a 17 year
schedule and is due on January 1, 1998. This loan may be extended for a period
of five years at prevailing market rates available in December, 1997.
The Company currently has a $28.5 million loan secured by 436 North Bedford
Drive. This loan came due in August 1995 and is without recourse to the Company
or its assets other than 436 North Bedford Drive. In light of recent prices at
which other medical buildings in Beverly Hills have been sold or offered for
sale and the possible need to retrofit the building to meet more stringent
earthquake standards anticipated in the future, management believes that the
value of this Property is less than the amount of the loan. Although this
building has been generating cash flow to the Company, this may not continue,
particularly if retrofitting is required. The Company began negotiations with
the lender prior to the loan's due date. In August of 1995, the company signed
a forbearance agreement with the lender to provide additional time for
discussion regarding a possible loan restructure on terms that would permit the
Company to retain the building with a reasonable expectation of generating
future cash flow. If there is no agreement between the Company and the lender,
the Company intends to surrender this building in satisfaction of the debt.
In January 1995 the Company extended its $42.2 million line of credit (the
"Acquisition Facility") for a term of two years. The interest rate was LIBOR
plus 2.25 percent. The Company established the Financing Partnership to serve
as borrower under the Acquisition Facility. The following Properties were
transferred into the Financing Partnership and were used as security for the
blanket first trust deed: 405 North Bedford, 415 North Bedford, 435 North
Bedford, Holy Cross Medical Plaza, St. Joseph's Medical Office Building, and
Regents Medical Center.
13
<PAGE>
DISCUSSION DRAFT
================
In August 1995 the Company borrowed $30 million from Nomura Asset Capital
Corporation for 10 years at a fixed rate of 7.89 percent. The note had an
outstanding balance of approximately $29.9 million at December 31, 1995 and
amortizes on a 25 year schedule. Proceeds from this new loan were used to
retire the $8.0 million floating rate obligation due on 416 North Bedford and
the outstanding balance on the Acquisition Facility described above. The
balance of the Acquisition Facility had increased from $15.5 million at December
31, 1994 to $23.0 million in August, 1995 when it was paid-off. In order to
meet certain requirements of the lender, the Financing Partnership was
liquidated and the Realty Financing Partnership was set-up. The following
Properties were transferred into the newly created Realty Financing Partnership
and were used as security for the $30 million blanket first trust deed: 405
North Bedford, 415 North Bedford, 416 North Bedford and 435 North Bedford.
Concurrently with the above fixed rate loan from Nomura Asset Capital
Corporation, the Company obtained a new $20 million credit line from Tokai Bank
of California. The loan is secured by a blanket first trust deed on Holy Cross,
St. Joseph's Medical Center and Regents Medical Center. The credit line
requires monthly interest payments at LIBOR plus 1.75 percent and is due August
17, 1998. At any time prior to maturity, and upon 30 days notice, the Company
may convert the outstanding balance or increments thereof into a five year term
loan. Upon conversion, the new term loan would bear interest at the variable
rate of prime plus 50 basis points or LIBOR plus 175 basis points. As of
December 31, 1995 the Company owed $17.5 million and was paying interest at the
rate of 7.90625 percent per annum. Currently, $18.9 million principal amount is
outstanding at a rate of 7.25 percent per annum.
In December, 1995 the Company obtained a one year $14 million term loan
from General Motors Acceptance Commercial Credit Corporation ("GMAC") which is
collateralized by the $20,970,000 face value, Series A Health Care Revenue Bonds
issued by the Massachusetts Industrial Finance Agency. The loan is due December
6, 1996 and requires monthly interest only payments, in arrears, at prime plus
1.5 percent. As of December 31, 1995 interest was accruing at a rate of 9.75
percent. The Company has the option to extend this loan for a period of six
months to June 6, 1997. The Company has retained GMAC to assist in filing
applications for mortgage insurance on the Series A Health Care Revenue Bonds.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" regarding the disposition of this
loan at maturity.
In January 1994, the Operating Partnership entered into interest rate
protection agreements with respect to the indebtedness secured by 436 North
Bedford and 416 North Bedford and with respect to its pro rata share of the
indebtedness secured by 435 North Roxbury. These agreements provide interest
rate protection if LIBOR exceeds 4 percent for 1994, 5 percent for 1995 and 6
percent thereafter. The interest rate protection agreement relating to the
mortgage secured by 436 North Bedford expired in August 1995. The Company sold
the agreement relating to the 416 North Bedford loan for $67,500 when the loan
was paid off in August 1995. The remaining agreement will expire in June 1996
when the $9.0 million loan is due.
14
<PAGE>
DISCUSSION DRAFT
================
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Form 10-K. Such financial statements and
information have been prepared to reflect the historical combined operations,
assets and liabilities of G&L Developments properties prior to the completion of
the IPO (on December 16, 1993) and related transactions and the operations of
the Company for the period from inception, September 15, 1993, through December
31, 1995 (the Company did not commence operations until December 16, 1993).
Results of Operations
- ---------------------
Comparison of the Year Ended December 31, 1995 Versus the Year Ended December
31, 1994
Net income for the year ended December 31, 1995, before an extraordinary
item, was $3,735,000 or $0.91 per share, an increase of 16.9 percent from
$3,194,000, or $0.77 per share, reported in the previous year, based on
4,091,000 and 4,159,000 average shares outstanding, respectively. Net income
after the effect of an extraordinary item of $393,000, or $0.09 per share, was
$3,341,000 or $0.82 per share. The extraordinary item related to a one-time
charge in the third quarter for repayment of approximately $31 million in
variable rate debt with a $30 million 7.89 percent fixed rate 10-year loan, and
the replacement of the Company's credit line.
Revenues increased $4.1 million, or 24 percent in 1995, as a result of the
new properties acquired during 1994 and added revenues from the newly created
Senior Care Division. Rent revenues including tenant reimbursements and parking
fees increased $2.4 million from $16.5 million to $18.9 million. This increase
was due primarily to the acquisition of the following five properties in 1994:
Holy Cross Medical Plaza in January, Regents Medical Center in June, Sherman
Oaks Medical Plaza in June, Cigna HealthCare Building in July and 1095 Irvine
Boulevard in October.
1994 operations included only partial year revenues for all of the five
properties except for the 1095 Irvine Boulevard building. 1995 revenues
benefited from a full year of operations except for the 1095 Irvine Boulevard
building which was placed in service in August of 1995. The Medical Office
Building Division also benefited from higher occupancy rates: 94 percent for
1995, up from an average of 92 percent in 1994.
In late 1994, the Company changed its collection practices and made a very
deliberate effort to pursue all delinquent accounts. Some were resolved in
direct negotiations with tenants while others were litigated. By the end of
1995, substantially all delinquencies were resolved through judgments, payment
plans or dissolutions. The previous backlog of uncollected rents has been
reduced through a combination of collections and write-offs.
Management believes that the overall trend toward larger medical provider
groups has contributed toward the financial stability of the existing tenant
population. Realization of monthly tenant billings has improved along with
management's expectation of a higher realization of the unbilled straight-line
rents. The previous requirement for maintaining the
15
<PAGE>
DISCUSSION DRAFT
================
allowance for doubtful accounts has diminished and the Company believes that the
current level of allowance is appropriate.
Beginning late in the second quarter of 1995, the Company began
recognizing revenues from its new Senior Care Division. Interest and loan fees
totaled $1.8 million in 1995 versus $113,000 in 1994.
1995 expenses increased approximately $3.5 million, or 26 percent, from
$13.6 million in 1994 to $17.1 million in 1995. The majority of the increase was
the result of added interest expense which climbed $2.8 million from $3.6
million in 1994 to $6.4 million in 1995. Two factors fueled the increase: higher
debt and increased rates. Outstanding debt increased from $74.0 million to
$111.6 million at December 31, 1994 and 1995, respectively. In general, 1995
rates were up from 1994 and this was amplified by the fact that rate caps on the
interest rate protection agreements also increased from 4 percent in 1994 to 5
percent in 1995.
Property operating expense and depreciation also increased from 1994 to
1995. The overall increase of $1.2 million is primarily the result of showing a
full year of expense for the acquired properties. The effect of increased
operating expense was partially offset by a $768,000 difference relating to
costs and reimbursements from the 1994 Northridge earthquake.
General and administrative costs increased $342,000, at about the same
rate as revenues, largely as a result of investments in consulting services,
travel, professional and other fees related to creating the new Senior Care
Division.
Comparison of the Year Ended December 31, 1994 versus the Year Ended December
31, 1993
Revenue increased by $5.5 million or 47 percent, due primarily to the
acquisition of the following properties: the St. Joseph Medical Office Building
in December 1993, the Holy Cross Medical Plaza in January 1994, the Regents
Medical Center in June 1994, the Sherman Oaks Medical Plaza in June 1994 and the
Cigna HealthCare Building in July 1994. Increases in rental income, tenant
reimbursements, and parking income were all due primarily to these acquisitions.
Other income increased $573,000, from $77,000 in 1993 to $650,000 in 1994,
primarily due to accrued income from the Sherman Oaks Medical Plaza prior to its
acquisition and to the inclusion during 1994 of management fee income.
Expenses increased $2.9 million or 27 percent, due primarily to these
acquisitions, earthquake costs, and general and administrative expenses,
partially offset by a decrease in interest expense. The Company incurred costs
of $635,000 for 1994, net of insurance proceeds, as a result of the Northridge
earthquake, which occurred on January 17, 1994. General and administrative
expenses increased $1.2 million; these expenses were excluded from the
historical combined operations of the G&L Development Properties prior to the
completion of the IPO on December 16, 1993 as these expenses were not directly
comparable to the operation of the Company as a public entity. Interest expense
decreased $1.4 million, or 28 percent, due primarily to the repayment of
approximately $44.0 million of debt in connection with the IPO, offset by
increased interest expense associated with the acquisitions.
As an extraordinary item, the Company expensed $352,000 of capitalized
loan fees during 1993 in connection with the IPO, due to the repayment of loans.
16
<PAGE>
DISCUSSION DRAFT
================
Liquidity and Capital Resources
- -------------------------------
During 1995, the Company generated $7.9 million in cash from operations
and distributed $5.7 million, or 72.1 percent, of such funds to stockholders and
minority interest partners. In addition, G&L reinvested $1.9 million of its cash
to maintain the quality of its rental properties and $157,000 in commissions for
new leases and renewals.
The Company obtained new loan proceeds of $35.8 million during the year,
net of loan costs and retirements, most of which was used to expand into a new
and rapidly emerging niche in managed care through the initiation of the Senior
Care Division in 1995. The Company invested these funds in different ways: $19.9
million for acquisition of bonds secured by 3 skilled nursing facilities; $11.8
million in short-term loans yielding over 20 percent; $1.2 million to open
escrows on pending acquisitions, including Rancho Cucamonga; $1.1 million for a
redevelopment loan, and $800,000 to complete the purchase of the 1095 Irvine
Boulevard property, which was leased in August 1995.
The Company also used an additional $815,000 to acquire 97,000 shares of
outstanding Company Common Stock when the effective dividend yield approached 15
percent. The average price was approximately $8.25 per share.
The Company declared a quarterly distribution for the first quarter of
1996 in the amount of $0.32 per share to be paid on April 16, 1996 to
stockholders of record on March 29,1996, which is equal to an annualized
distribution of $1.28 per share. This is an increase from the previous quarterly
distribution of $0.31 per share.
The Company expects to continue meeting its short term liquidity
requirements through its working capital and cash flow provided by operations.
The Company considers its ability to generate cash to be good and expects to
continue meeting all operating requirements as well as providing sufficient
funds to maintain stockholder distributions in accordance with REIT requirements
in the short and long term.
The Company is currently negotiating with Citibank, the existing lender,
to obtain a multi-year extension on the $9 million note secured by 435 North
Roxbury Drive. The Company has also obtained refinancing proposals from other
sources. Management believes an extension agreement or new loan will be in place
by June 1, 1996, the due date of the loan.
The $14 million loan due GMAC will be paid-off once the Series A Health
Care Revenue Bonds have been restructured. The company has retained GMAC to
obtain credit enhancement of the Series A bonds. GMAC submitted applications to
the Federal Housing Administration and the Department of Housing and Urban
Development to obtain a commitment for mortgage insurance on the Series A bonds
pursuant to Section 232/223(F) of the National Housing Act. It is anticipated
that approval will be obtained in the third quarter of 1996. Once the mortgage
insurance is in place, the currently unrated Series A bonds will be reissued on
a rated basis with an expected decrease in the 9.75 percent interest rate. These
reissued Series A bonds will be sold and the proceeds used to repay the $14
million term loan to GMAC plus return the Company's investment capital. The
Company intends to retain ownership of the $5 million Series B bonds as a long-
term investment. Management believes that by restructuring the debt on the
Series A bonds the underlying properties will generate sufficient cash flow to
begin servicing their obligation on the Series B bonds.
17
<PAGE>
DISCUSSION DRAFT
================
The Company currently has a $28.5 million loan secured by 436 North
Bedford Drive. This loan came due in August 1995 and is without recourse to the
Company or its assets other than 436 North Bedford Drive. In light of recent
prices at which other medical buildings in Beverly Hills have been sold or
offered for sale and the possible need to retrofit the building to meet more
stringent earthquake standards anticipated in the future, management believes
that the value of this Property is less than the amount of the loan. Although
this building has been generating cash flow to the Company, this may not
continue, particularly if retrofitting is required. The Company began
negotiations with the lender prior to the loan's due date. In August of 1995,
the Company signed a forbearance agreement with the lender to provide additional
time for discussion regarding a possible loan restructure on terms that would
permit the Company to retain the building with a reasonable expectation of
generating future cash flow. If there is no agreement between the Company and
the lender, the Company intends to surrender this building in satisfaction of
the debt.
In general, the Company expects to meet its long-term liquidity
requirements such as refinancing mortgages, financing acquisitions and financing
capital improvements through long-term borrowings, the issuance of debt
securities and the offering of additional equity securities. The Company owes
approximately $52.3 million on notes payable that are due in 1996. Based upon
the Company's current arrangement with various lenders, $51.5 will be resolved
as indicated above. The remaining portion will be discharged out of cash flows
from operations.
As of March 25, 1996 the Company had $69.0 million of floating rate debt.
The interest rate on these loans may be affected by inflationary conditions and
economic factors.
Funds from Operations
- ---------------------
Industry analysts generally consider Funds From Operations (FFO) to be an
appropriate measure of the performance of a REIT. The Company presents FFO as
defined by the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT"). FFO is calculated to include the minority
interests share of income since the Operating Partnership's net income is
allocated proportionately among all owners of Operating Partnership units. The
number of Operating Partnership units held by the Company is identical to the
number of outstanding shares of the Company's common stock and owners of
Operating Partnership units may, at their discretion, convert their units into
shares of common stock on a one-for-one basis.
The Company believes that in order to facilitate a clear understanding of
the operating results of the Company, FFO should be examined in conjunction with
the Company's net income as presented in the Selected Financial Data and
Consolidated Financial Statements and Notes thereto included elsewhere in this
Form 10-K and the additional data presented below. FFO is only one of a range of
indicators which should be considered in determining a company's operating
performance. The methods of calculating FFO among different companies are
subject to variation, and FFO therefore may be an invalid measure of comparing
companies. Also, the elimination of depreciation and gains and losses on sales
of property may not be a true indication of an entity's ability to recover its
investment in properties. The following table presents an analysis of FFO and
additional data for each of the four quarters and the year ended December 31,
1995 for the Operating Partnership:
18
<PAGE>
DISCUSSION DRAFT
================
G&L REALTY CORP.
FUNDS FROM OPERATIONS
FOR THE FOUR QUARTERS AND YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1/ST/ 2/ND/ 3/RD/ 4/TH/
QUARTER QUARTER QUARTER QUARTER 1995
-----------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Funds from Operations
- ---------------------
Net income $ 927 $ 690 $ 696 $ 1,028 $ 3,341
Extraordinary item (net of minority
interest) 393 393
Minority interest in Operating
Partnership 102 78 123 114 417
-------- -------- -------- -------- --------
Net income for Operating Partnership 1,029 768 1,212 1,142 4,151
Earthquake costs (reimbursements) (245) 112 (133)
Depreciation and amortization 1,045 1,021 904 1,077 4,047
Straight-line rent in excess of billed
rent (29) (99) (59) (140) (327)
Adjustment for minority interest in
consolidated partnership (12) (2) (5) (7) (26)
-------- -------- -------- -------- --------
Operating Partnership
Funds from Operations 1,788 1,800 2,052 2,072 7,712
Minority Interest in Operating Partnership (178) (182) (208) (210) (778)
-------- -------- -------- -------- --------
Funds from Operations 1,610 1,618 1,844 1,862 6,934
======== ======== ======== ======== ========
Dividends paid $ 1,289 $ 1,259 $ 1,259 $ 1,259 $ 5,067
======== ======== ======== ======== ========
Pay-out ratio 80.1% 77.8% 68.3% 67.6% 73.1%
Weighted averages:
Units Outstanding 4,618.3 4,539.4 4,521.3 4,521.3 4,550.1
Shares Outstanding 4,159.0 4,080.1 4,062.0 4,062.0 4,090.8
</TABLE>
G&L REALTY CORP.
ADDITIONAL CASH FLOW DATA
FOR THE FOUR QUARTERS AND YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1/ST/ 2/ND/ 3/RD/ 4/TH/
QUARTER QUARTER QUARTER QUARTER 1995
--------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Additional Data
- ---------------
Straight-line rent $ 4,209 $ 4,291 $ 4,189 $ 4,112 $ 16,801
Billed rent 4,180 4,192 4,130 3,972 16,474
Building improvements 120 157 164 132 573
Tenant improvements 415 347 249 289 1,300
Leasing commissions 53 43 38 23 157
Amortization of capitalized financing
costs 196 135 49 234 614
</TABLE>
19
<PAGE>
DISCUSSION DRAFT
================
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
1. CONSOLIDATED FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
Page
Reference
Form 10-K
----------
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1994 and 1993 F-3
Consolidated Statement of Stockholders'/Owners' Equity/Deficit
for the Years Ended December 31, 1995, 1994 and 1993 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 F-5
Notes to Consolidated Financial Statements F-6 to 17
</TABLE>
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted because the required information
is not present in amounts sufficient to require submission of the schedule or
because the required information is included elsewhere in the Consolidated
Financial Statements or the Notes thereto.
(b) REPORTS ON FORM 8-K
Not applicable.
20
<PAGE>
DISCUSSION DRAFT
================
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
G&L Realty Corp.:
We have audited the accompanying consolidated balance sheets of G&L
Realty Corp. (the Company) as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders'/owners'/(deficit), and cash
flows for each of the three years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reaonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of December
31, 1995 and 1994, and its results of operations and cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche, L.L.P.
Los Angeles, California
February 13, 1996
F-1
<PAGE>
DISCUSSION DRAFT
================
G&L REALTY CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1995 1994
---------------------------
<S> <C> <C>
ASSETS
- ------
Rental properties:
Land $ 15,262,221 $ 14,900,421
Building and improvements, net 76,884,946 77,814,325
------------ -----------
Total rental properties 92,147,167 92,714,746
Cash and cash equivalents 1,280,191 1,168,983
Accounts receivable, net 129,265 705,615
Tenant rent and reimbursements
receivable, net 709,436 491,924
Unbilled rent receivable, net 2,581,756 2,254,859
Mortgage loans and bonds receivable 33,633,635 0
Deferred charges and other assets, net 2,865,707 1,048,029
------------- -----------
TOTAL ASSETS $ 133,347,157 $ 98,384,156
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Notes payable $ 111,626,872 $ 74,018,179
Accounts payable and other
liabilities 1,766,718 1,228,990
Distributions payable 1,401,607 1,927,988
Tenant security deposits 1,032,437 987,969
------------- ------------
Total liabilities 115,827,634 78,163,126
Minority interest in consolidated
partnership (2,846,777) (3,443,450)
Minority interest in Operating
Partnership 2,099,204 2,353,544
Stockholders' equity:
Common shares - $.01 par value,
50,000,000 shares authorized,
4,062,000 and 4,159,000 shares
issued and outstanding as of
12/31/95 and 12/31/94 respectively 40,620 41,590
Preferred shares - $.01 par value,
10,000,000 shares authorized, no
shares issued and outstanding 0 0
Additional paid-in capital 23,705,496 25,022,821
Distributions in excess of net income (5,479,020) (3,753,475)
------------- ------------
Total stockholders' equity 18,267,096 21,310,936
------------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 133,347,157 $ 98,384,156
============= ============
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-2
<PAGE>
DISCUSSION DRAFT
================
G&L REALTY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
-----------------------------------------
<S> <C> <C> <C>
REVENUES:
Rental $16,801,193 $14,740,358 $10,169,589
Tenant reimbursements 731,860 586,974 465,205
Parking 1,388,042 1,196,264 1,029,465
Interest and loan fees 1,834,558 113,268 57,862
Other 651,884 650,009 76,621
----------- ----------- -----------
Total revenues 21,407,537 17,286,873 11,798,742
----------- ----------- -----------
EXPENSES:
Property operations 5,198,933 4,317,016 3,084,214
Earthquake costs (reimbursements) (133,162) 635,075 0
Depreciation and amortization 4,047,277 3,696,993 2,503,452
Interest 6,372,002 3,625,316 5,049,562
General and administrative 1,639,678 1,297,694 43,040
----------- ----------- -----------
Total expenses 17,124,728 13,572,094 10,680,268
----------- ----------- -----------
Income from operations 4,282,809 3,714,779 1,118,474
Minority interest in consolidated
partnership (130,987) (167,494) (211,126)
Minority interest in Operating
Partnership (417,016) (352,794) (18,103)
Net income before extraordinary item 3,734,806 3,194,491 889,245
Extraordinary item
(net of minority interest) (393,401) 0 (351,861)
----------- ----------- -----------
Net income $ 3,341,405 $ 3,194,491 $ 537,384
=========== =========== ===========
Per share data:
Before extraordinary item $0.91 $0.77
Extraordinary item (0.09) 0.00
----------- -----------
Net income $0.82 $0.77
=========== ===========
Weighted average number of outstanding
shares 4,090,769 4,159,000
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-3
<PAGE>
DISCUSSION DRAFT
================
G&L REALTY CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS'/OWNERS' EQUITY/(DEFICIT)
<TABLE>
<CAPTION>
Total
Additional Distributions Total shareholders'/
Common Stock paid - in in excess of owners' owners'
Shares Amount capital net income (deficit) equity/(deficit)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1993 $(40,296,910) $(40,296,910)
Contributions 3,618,170 3,618,170
Net income 373,460 373,460
------------ ------------
BALANCE DECEMBER 16, 1993 (36,305,280) (36,305,280)
Initial public offering 4,159,000 $41,590 $ 60,337,290 60,378,880
Elimination of Accumulated
Deficit of Predecessor (36,305,280) 36,305,280 0
Purchase partnership interests 1,500,518 1,500,518
Purchase minority interest (408,971) (408,971)
Net income $ 163,924 163,924
Distributions declared (291,130) (291,130)
--------- ------- ------------ ------------ ------------ ------------
BALANCE DECEMBER 31, 1993 4,159,000 41,590 25,123,557 (127,206) 0 25,037,941
Adjustments to Accumulated
Deficit (100,736) (100,736)
Net income 3,194,491 3,194,491
Distributions declared (6,820,760) (6,820,760)
--------- ------- ------------ ------------ ------------ ------------
BALANCE DECEMBER 31, 1994 4,159,000 41,590 25,022,821 (3,753,475) 0 21,310,936
Adjustment to Accumulated
Deficit (503,763) (503,763)
Repurchase of Common Stock (97,000) (970) (813,562) (814,532)
Net income 3,341,405 3,341,405
Distributions declared (5,066,950) (5,066,950)
--------- ------- ------------ ------------ ------------ ------------
BALANCE DECEMBER 31, 1995 4,062,000 $40,620 $ 23,705,496 ($ 5,479,020) $ 0 $ 18,267,096
========= ======= ============ ============ ============ ============
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-4
<PAGE>
DISCUSSION DRAFT
================
G&L REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
-----------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,341,405 $ 3,194,491 $ 537,384
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 4,047,277 3,696,993 2,503,452
Extraordinary item 393,401 0 351,861
Minority interests 548,003 520,288 229,229
(Increase) decrease in:
Prepaid expense and other assets 73,720 37,374 (105,802)
Accounts receivable 31,942 (400,928) (754,677)
Loan and bond interest receivable (629,244) 0 0
Accounts payable and other liabilities 11,347 316,636 (684,308)
Tenant security deposits 44,468 266,772 16,897
------------ ------------ ------------
Net cash provided by operating
activities 7,862,319 7,631,626 2,094,036
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to rental properties (1,872,508) (1,830,716) (267,502)
Purchases of real estate assets (800,000) (41,713,637) (5,227,789)
Pre-acquisition costs (1,203,838) 0 (20,000)
Leasing commissions (156,541) (208,015) (8,393)
Decrease (increase) in notes and bonds
receivable (33,004,391) 12,200,000 (12,200,000)
------------ ------------ ------------
Net cash (used in) investing activities (37,037,278) (31,552,368) (17,723,684)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable proceeds 82,156,447 28,652,248 0
Repayment of notes payable (44,547,752) (134,069) (38,716,264)
Deferred financing costs (1,775,674) (397,070) (629,000)
Purchase of partnership interests 0 0 (2,162,905)
Repurchase of common stock (814,532) 0 0
Net proceeds from offering 0 0 60,378,880
Distributions (5,732,322) (6,272,447) 0
------------ ------------ ------------
Net cash provided by financing
activities 29,286,167 21,848,662 18,870,711
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS:
BEGINNING CASH AND CASH EQUIVALENTS 111,208 (2,072,080) 3,241,063
ENDING CASH AND CASH EQUIVALENTS 1,168,983 3,241,063 0
------------ ------------ ------------
$ 1,280,191 $ 1,168,983 $ 3,241,063
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest $ 5,079,521 $ 3,600,365 $ 5,231,559
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Cost of partnership interest acquired 0 0 3,663,423
Notes payable not assumed 0 0 5,256,158
Acquisition of minority interest 0 0 (408,971)
Distributions declared not yet paid 1,401,607 1,604,706 323,282
</TABLE>
See accompanying notes to Consolidated Financial Statement
F-5
<PAGE>
DISCUSSION DRAFT
================
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
G&L Realty Corp. (the Company) was formed as a Maryland corporation on
September 15, 1993 by Daniel M. Gottlieb and Steven D. Lebowitz to continue the
ownership, management, acquisition and development operations of medical office
buildings carried on previously by G&L Development, the Company's predecessor.
All of the Company's assets are held by, and all of its operations are conducted
through, G&L Realty Partnership, L.P. (the Operating Partnership), a Delaware
limited partnership, G&L Financing Partnership, L.P. (the Financing Partnership)
(prior to its liquidation in August, 1995), a Delaware limited partnership, and
G&L Realty Financing Partnership II, L.P. (the Realty Financing Partnership), a
Delaware limited partnership. The Company is the sole general partner of, and
owns approximately 90% of the Operating Partnership. Prior to its liquidation in
August, 1995 the Company controlled the Financing Partnership through its wholly
owned subsidiary G&L Financing, Inc., a Delaware corporation, which was the sole
general partner and 1% owner of the Financing Partnership. The sole limited
partner and 99% owner of the Financing Partnership was the Operating
Partnership. As a result of a debt refinancing, the Financing Partnership was
liquidated effective August 17, 1995, and all assets were transferred to its
partners. The Company also controls the Realty Financing Partnership through its
wholly owned subsidiary, G&L Realty Financing II, Inc., a Delaware corporation,
which is the sole general partner and 1% owner of the Realty Financing
Partnership. The sole limited partner and 99% owner of the Realty Financing
Partnership is the Operating Partnership.
In connection with the initial public offering of shares of common stock
(the IPO) on December 9, 1993, the Company, through the Operating Partnership,
engaged in the following transactions:
. acquired substantially all of the medical office building assets of G&L
Development including four medical office buildings, an adjacent parking
garage with retail space and a 61.75% partnership interest in 435 North
Roxbury Drive, Ltd.;
. acquired Saint Joseph's Medical Office Building at a price of
approximately $5.2 million;
. loaned $12.2 million to the owner of the Holy Cross Medical Plaza and
exercised its option to acquire Holy Cross Medical Plaza at a price of
approximately $12.8 million (the acquisition was consummated on January
14, 1994, with the outstanding amount of the loan credited against the
purchase price);
. exercised its option to acquire Sherman Oaks Medical Plaza at a price of
approximately $3.2 million plus the amount of indebtedness secured by the
property of up to $7.0 million (the acquisition was consummated on June
28, 1994); and
. sold 3,680,000 shares of common stock to the public in connection with
the IPO at a price of $18.25 per share, whereby the proceeds derived from
the
F-6
<PAGE>
DISCUSSION DRAFT
================
IPO, net of related transaction costs of approximately $6.5 million,
totaling $60.4 million, were used primarily to repay indebtedness
relating to certain of the properties, to fund purchases of real estate
and to fund the $12.2 million secured by the Holy Cross Medical Plaza.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business- The Company is a self-administered equity Real Estate Investment
Trust (REIT) with two operating divisions, Medical Office Building (MOB) and
Senior Care. The MOB Division acquires and operates medical office buildings.
The Senior Care Division provides interim financing to facilitate the transfer
of independent senior care facilities to non-profit organizations.
Basis of Presentation- The accompanying consolidated financial statements
include the accounts of the Company and the Company's predecessor, G&L
Development. The interests in 435 North Roxbury Drive, Ltd. not owned by the
Company have been reflected in minority interests. All significant intercompany
accounts and transactions have been eliminated in consolidation. Prior year
amounts have been reclassified to conform to the current year's presentation.
Properties- The Operating Partnership or the Realty Financing Partnership
owns a 100% fee simple interest in all of its properties, other than 435 North
Roxbury in which it owns a 61.75% partnership interest and is the sole general
partner.
Minority interest in consolidated partnership- The deficit in the
minority interest account represents cash distributed to minority partners in
excess of their original investment and subsequent accumulated earnings.
Real Estate and Depreciation- Rental property is recorded at cost less
accumulated depreciation. Depreciation is computed on a straight-line basis
over the estimated useful lives of the assets, as follows:
Buildings and improvements.......... 40 years
Tenant improvement.................. Life of lease
Furniture, fixtures and equipment... 5 years
Expenditures for maintenance and repairs are charged to operations as
incurred. Significant renovations and all costs directly related to
acquisitions are capitalized.
Revenue Recognition- Base rental income is recognized on a straight-
line basis over the term of the lease regardless of when payments are due.
Certain leases include rent concessions and escalation clauses creating an
effective rent which is included in unbilled rent receivable (Note 8).
Cash and Cash Equivalents- All demand and money market accounts and
short-term investments in governmental funds with a maturity of three months or
less are considered to be cash and cash equivalents. Cash equivalents are
carried at cost which approximates fair value, due to the short period of time
to maturity. As of December 31, 1995, the Company had $348,390 in a segregated
interest bearing account to be used for debt service due in January 1996,
current property taxes, insurance and property improvements. Throughout the
year, the Company maintained balances in various operating and money market
accounts in excess of federally insured limits.
F-7
<PAGE>
DISCUSSION DRAFT
================
Deferred Charges and Other Assets- Deferred charges and other assets
consist of leasing commissions, deferred loan fees, financing costs,
investments, deposits and prepaid expenses.
Leasing commissions are amortized on a straight-line basis over the
lives of the leases, which range typically from five to ten years. Deferred
loan fees are amortized over the terms of the respective agreements.
The Company incurred costs relating to new loans and certain
refinancings, interest rate protection agreements and a $20 million credit
facility (Note 7). Refinancing costs are capitalized and amortized over the
term of the related loan. Interest rate protection agreement fees are
capitalized and amortized over the term of the agreements.
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.
Income Taxes- The Company qualified and elected to be taxed as a REIT
for Federal Income tax purposes. Such qualification and taxation as a REIT
depends upon the Company's ability to meet, on a continuing basis, distribution
levels and diversity of stock ownership. The Company computes its taxable
income as does a regular corporation except that it is eligible for a deduction
for dividends paid to shareholders. Accordingly, the Company generally is not
subject to federal corporate income taxes on net income that it currently
distributes to shareholders. No provisions for federal income taxes are
included in accompanying financial statements.
Per Share Data- Earnings per share are computed based upon the
weighted average number of common shares outstanding during the period. The
treasury stock method is used to determine the number of incremental common
equivalent shares resulting from options granted under the incentive and non-
qualified share options plans. The effect of such incremental common equivalent
shares is considered to be non-dilutive.
F-8
<PAGE>
DISCUSSION DRAFT
================
3. BUILDINGS AND IMPROVEMENTS
Buildings and improvements consist of the following:
<TABLE>
<CAPTION>
December 31,
1995 1994
----------------------------
<S> <C> <C>
Buildings and improvements $ 84,638,984 $ 84,583,185
Tenant improvements 3,450,249 7,042,198
Furniture, fixtures and equipment 296,070 572,117
------------ ------------
88,385,303 92,197,500
Less accumulated depreciation
and amortization (11,500,357) (14,383,175)
------------ ------------
Total $ 76,884,946 $ 77,814,325
============ ============
</TABLE>
4. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following:
<TABLE>
<CAPTION>
December 31,
1995 1994
-------------------------
<S> <C> <C>
Loan fees $1,459,051 $ 2,921,633
Pre-acquisition costs 1,203,838 0
Leasing commissions 1,115,595 959,054
Prepaid expense and other assets 46,643 120,363
---------- -----------
3,825,127 4,001,050
Less accumulated amortization (959,420) (2,953,021)
---------- -----------
Total $2,865,707 $ 1,048,029
========== ===========
</TABLE>
5. TENANT RENT AND REIMBURSEMENTS RECEIVABLE
Tenant rent and reimbursements receivable are net of provisions for
uncollectible amounts of $7,500 (1995), $107,556 (1994) and $213,107 (1993).
The provisions for uncollectible accounts consist of the following:
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
----------------------------------
<S> <C> <C> <C>
Balance, beginning of period $ 107,556 $ 213,107 $ 32,320
Charge-offs (210,340) (160,641) 0
Additions 110,284 55,090 180,787
--------- --------- --------
Balance, end of period $ 7,500 $ 107,556 $213,107
========= ========= ========
</TABLE>
F-9
<PAGE>
DISCUSSION DRAFT
================
6. MORTGAGE LOANS AND BONDS RECEIVABLE
Mortgage Loans and Bonds receivable as of December 31, 1995 consist of the
following:
<TABLE>
<S> <C>
Note due December 31, 1996, collateralized by deed of trust,
interest payable monthly at 12% per annum. Commencing
January 6, 1996 interest will be payable monthly at
20% per annum.................................................... $ 1,472,500
Note due May 1, 1997, collateralized by deed of trust,
interest payable monthly at 12% per annum. Commencing
January 6, 1996 interest will be payable monthly at
20% per annum.................................................... 4,042,500
Note due December 31, 1996, collateralized by deed of trust,
interest payable monthly at 12% per annum. Commencing January 25,
1996 interest will be payable monthly at 20% per annum........... 2,215,000
Note due April 5, 1997, collateralized by deed of trust,
interest payable monthly at 12% per annum........................ 4,080,000
Note due June 1, 1996, construction loan, collateralized by deed
of trust and pledged stock, interest accrues monthly at 10% per
annum. Loan commitment for $1,225,000........................... 1,135,597
Accrued interest due January 1, 1996.............................. 118,100
Accrued loan costs receivable (payable at due date)............... 161,056
-----------
Total Mortgage Loans receivable.................................... 13,224,753
Unrated Series A and B bonds due October 1, 2017 and 2018
respectively, collateralized by deed of trust. Face value is
$20,970,000 and $5,000,000, with interest payable semi annually
on April 1 and October 1 at the rate of 9.75% and 9.5% per annum
for the Series A and B bonds respectively........................ 19,897,738
Accrued interest due April 1, 1996................................ 511,144
-----------
Total Series A and B bonds......................................... 20,408,882
-----------
Total Mortgage Loans and
Bonds receivable.................................................. $33,633,635
===========
</TABLE>
Aggregate future principal payments as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Year Ending
December 31
-----------
<S> <C>
1996 $ 9,170,597
1997 4,410,000
1998 365,000
1999 400,000
2000 440,000
2001 480,000
==== ===========
2002-2007 4,065,000
========= ===========
Thereafter 19,585,000
-----------
Total face value 38,915,597
Less:
Discount on bonds (6,072,262)
-----------
Total principal 32,843,335
Accrued interest and loan
costs 790,300
-----------
Total loans and bonds
receivable $33,633,635
===========
</TABLE>
F-10
<PAGE>
DISCUSSION DRAFT
================
7. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
1995 1994
--------------------------
<S> <C> <C>
Note due August 14, 1995,
collateralized by deed of trust,
interest payable monthly at LIBOR plus
1.25% per annum........................ $ 28,500,000 $28,500,000
Note due June 1, 1996, collateralized
by deed of trust, interest payable
monthly at LIBOR plus 1.30% per annum,
$1,000,000 of principal guaranteed by
the Company............................ 9,000,000 9,000,000
Note due December 6, 1996,
collateralized by a security interest
in $20,970,000 face value of unrated
bonds, interest payable monthly at the
prime rate of interest plus 1.5% per
annum.................................. 14,000,000 0
Note due January 11, 1997,
collateralized by deeds of trust,
interest payable monthly at LIBOR plus
2.25% per annum, guaranteed by the
Company (retired August 17, 1995)...... 0 15,500,000
Note due April 1, 1997, collateralized
by deed of trust, interest payable
monthly at LIBOR plus 1.50% per annum
(retired August 17, 1995).............. 0 8,000,000
Note due January 1, 1998,
collateralized by deed of trust,
monthly payments of $67,908 of
principal and interest, interest at
8.75% per annum........................ 6,065,375 6,358,080
Note due February 23, 1998,
collateralized by deed of trust,
monthly payments of $41,807 of
principal and interest, interest at
7.55% per annum........................ 5,806,821 5,865,455
Note due February 23, 1998,
collateralized by deed of trust,
interest payable monthly at 7.55% per
annum.................................. 921,090 794,644
Note due August 17, 1999,
collateralized by deeds of trust,
interest payable monthly at 30 day
LIBOR plus 1.75% per annum............. 17,450,000 0
Note due August 10, 2005,
collateralized by deed of trust,
monthly payments of $229,250 of
principal and interest, interest at
7.89% per annum........................ 29,883,586 0
------------ -----------
Total................................... $111,626,872 $74,018,179
============ ===========
</TABLE>
As of December 29, 1995, LIBOR was 5.875% and Prime was 8.25%.
Aggregate future principal payments as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Year Ending
December 31
-----------
<S> <C>
1996.................................... $ 52,271,698
1997.................................... 837,337
1998.................................... 1,829,188
1999.................................... 18,435,382
2000.................................... 1,069,265
Thereafter.............................. 37,184,002
------------
Total.................................. $111,626,872
============
</TABLE>
F-11
<PAGE>
DISCUSSION DRAFT
================
As of December 31, 1995, the Company had a $350,000 letter of credit
outstanding in favor of a secured lender. The letter of credit is held as
additional collateral for tenant security deposits outstanding in the event of a
default on the secured loan.
The Company currently has a $28.5 million loan secured by 436 North Bedford
Drive. This loan came due in August 1995 and is without recourse to the Company
or its assets other than 436 North Bedford Drive. In light of recent prices at
which other medical buildings in Beverly Hills have been sold or offered for
sale and the possible need to retrofit the building to meet more stringent
earthquake standards anticipated in the future, management believes that the
value of this Property is less than the amount of the loan. Although this
building has been generating cash flow to the Company, this may not continue,
particularly if retrofitting is required. The Company began negotiations with
the lender prior to the loan's due date. In August of 1995, the company signed a
forbearance agreement with the lender to provide additional time for discussion
regarding a possible loan restructure on terms that would permit the Company to
retain the building with a reasonable expectation of generating future cash
flow. If there is no agreement between the Company and the lender, the Company
intends to surrender this building in satisfaction of the debt.
The Operating Partnership entered into interest rate protection agreements
with respect to the indebtedness secured by 436 North Bedford and 416 North
Bedford and with respect to its pro rata share of the indebtedness secured by
435 North Roxbury. These agreements provide interest rate protection if LIBOR
exceeds 4% for 1994, 5% for 1995 and 6% thereafter. The interest rate
protection agreement relating to the $28.5 million mortgage secured by 436 North
Bedford expired in August 1995. The Company sold the agreement relating to the
416 North Bedford loan for $67,500 when the $8.0 million loan was paid-off. The
remaining agreement will expire in June 1996 when the $9.0 million loan is due.
8. FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments is
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is necessary to interpret market
data and develop the related estimates of fair value. The use of different
market assumptions or estimation methodologies may have a material impact on the
estimated fair value amounts.
Cash,cash equivalents, tenant rent and other accounts receivable, accounts
payable and other liabilities - The carrying amount of these instruments
approximate fair value due to their short-term maturities.
Notes payable - The carrying amount approximates fair value because the
interest rates are comparable to rates currently being offered to the Company.
Mortgage loans and bonds receivable - These assets are held to maturity
rather than held for trading and their estimated fair value is based upon market
values of loans and bonds receivable with similar characteristics adjusted for
risk inherent in the underlying transactions. Management estimates the fair
value of these assets to approximate their amortized cost basis and as such,
there are no realized or unrealized gains or losses to report.
F-12
<PAGE>
DISCUSSION DRAFT
================
9. FUTURE MINIMUM RENT
The Company has operating leases with tenants that expire at various dates
through 2010. The minimum rents due under these leases are subject to either
scheduled fixed increases or adjustments based on the Consumer Price Index.
Generally, the leases also require tenants to reimburse the Company for
increases in certain operating costs.
Generally accepted accounting principles require that rents due under these
operating leases be recorded on a straight-line basis. The straight-line rent
calculation assumes no new or renegotiated rents or extension periods and
excludes operating cost reimbursements. The following table summarizes rents due
under existing leases and the corresponding straight-line rent calculation:
<TABLE>
<CAPTION>
Unbilled
Year Ending Straight-line Billable Rent
December 31 Rent Rent Receivable
- -----------------------------------------------------------
<S> <C> <C> <C>
1996......... $14,235,116 $14,344,518 $ 109,402
1997......... 12,206,169 12,566,101 359,932
1998......... 9,485,463 9,732,905 247,442
1999......... 6,668,216 6,905,125 236,909
2000......... 5,452,259 5,752,699 300,440
Thereafter... 25,597,073 27,891,854 2,294,781
----------- ----------- ----------
Total.......... $73,644,296 $77,193,202 $3,548,906
=========== =========== ==========
</TABLE>
The provisions for unbilled rent deemed uncollectible, recorded as a
reduction of rental revenue, consist of the following:
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
--------------------------------------
<S> <C> <C> <C>
Balance, beginning of period... $1,177,168 $1,333,543 $1,139,774
Charge-offs (210,018) (156,375) 0
Additions 0 0 193,769
---------- ---------- ----------
Balance, end of period $ 967,150 $1,177,168 $1,333,543
========== ========== ==========
</TABLE>
10. SHAREHOLDERS' EQUITY
Distributions in Excess of Net Income- As described in Note 2, the
Company has elected to be treated as a REIT for federal income tax purposes. As
such, the Company is required to distribute at least 95% of its annual taxable
income. Cash flows from operating activities differ from net income primarily
due to depreciation and amortization expense, a non-cash item. Distributions in
excess of net income are primarily the result of this difference. In reporting
periods where distributions exceed net income, stockholders' equity will be
reduced by the excess of distributions over net income. For tax reporting
purposes, a portion of the dividends declared in 1994 and 1995 represent a non-
taxable return of capital. The following table reconciles distributions in
excess of net income for the years ended December 31, 1995 and 1994:
F-13
<PAGE>
DISCUSSION DRAFT
================
DISTRIBUTIONS IN EXCESS OF NET INCOME
<TABLE>
<CAPTION>
December 31,
1995 1994
--------------------------
<S> <C> <C>
Distributions in excess of net income
at beginning of period $(3,753,475) $ (127,206)
Net income during period 3,341,405 3,194,491
Less: distributions declared (5,066,950) (6,820,760)
----------- -----------
Distributions in excess of net income $(5,479,020) $(3,753,475)
=========== ===========
</TABLE>
For years ended December 31, 1994 and 1995, cash distributed to
shareholders in the form of dividends exceeded the Company's taxable income and
is therefore considered to be a return of capital. Approximately 64.58 and
47.66 percent of the dividends paid for the years ended December 31, 1994 and
1995 respectively represent a non-taxable return of capital to shareholders.
11. COMMITMENTS AND CONTINGENCIES
None of the Company, the Operating Partnership, the Realty Financing
Partnership or the Properties are currently a party to any material litigation.
12. CONCENTRATION OF CREDIT RISK
All of the medical office buildings are located in southern California.
Most of the tenants in these properties provide specialized health care
services. The customers of the tenants primarily reside in the nearby area. The
ability of the tenants to honor the terms of their respective leases is
dependent upon the economic, regulatory and social factors affecting the
communities and industry in which the tenants operate.
A substantial portion of the Company's assets are invested in debt
instruments secured by long-term senior care or skilled nursing facilities. The
ability of these facilities to pay their obligations as they come due, as well
as their ability to obtain other permanent financing through the sale of bonds
or other forms of long-term financing, is dependent upon the facility's ability
to attract patients who are able to pay for the services they require. These
facilities have complex licensing requirements as do the professionals they
employ. The majority of the services rendered are paid by various federal,
state and local agencies. Each of these facilities function in a complex web of
changing government regulations which have a significant impact on economic
viability.
13. SHARE PLANS
The Company has established an incentive and non-qualified share options
plan and a restricted share plan under which an aggregate of 520,000 shares of
the Company's Common Stock are reserved for issuance. Options may be granted at
per share amounts not less than fair market value at the date of grant, and, in
the case of incentive options, expire within ten years thereafter. Granted
options vest in
F-14
<PAGE>
DISCUSSION DRAFT
================
even increments over a two or three year period beginning one year from the
grant date. Changes in stock options are summarized as follows:
<TABLE>
<S> <C>
Outstanding at December 31, 1994 237,800
Granted 241,300
Exercised 0
Canceled (222,800)
Outstanding at December 31, 1995 256,300
</TABLE>
In December 1995, the Company canceled all outstanding options for 218,800
shares of common stock, including fully vested options for 213,000 shares of
common stock held by three executives. Concurrently the Company issued new
options for the same aggregate amount. The canceled options held by the
executives had originally been issued at the time of the Company's initial
public offering at exercise prices of $18.25 per share. The new options have
exercise prices of $9.625 per share, the market price of the common stock on the
date of grant, and vest in equal installments over a three year period. The
replacement options were issued in order to preserve the value of management's
incentive.
At December 31, 1995 options for 20,500 shares were exercisable and options
for 263,700 shares remained available for future grants.
The following table summarizes the information on the options outstanding
at December 31, 1995:
<TABLE>
<CAPTION>
SHARES GRANT DATE PRICE
------------------------------
<S> <C> <C>
2,500 5/17/95 $ 91/8
218,800 12/18/95 95/8
15,000 5/25/95 97/8
2,000 6/1/95 10
3,000 11/3/95 103/8
15,000 12/16/93 175/8
-------
Total: 256,300
=======
</TABLE>
F-15
<PAGE>
DISCUSSION DRAFT
================
14. UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION
Summarized consolidated quarterly financial information for the periods as
follows:
<TABLE>
<CAPTION>
Three Months Ended
(Unaudited)
December 31 September 30 June 30 March 31
-------------------------------------------------------
<S> <C> <C> <C> <C>
1995 Revenues $6,139,880 $5,340,606 $5,037,020 $4,887,920
Expenses 4,976,026 4,090,633 4,225,701 3,832,368
Net Income 1,026,472 696,391 689,903 925,528
1994 Revenues $4,787,930 $4,663,054 $4,037,640 $3,834,440
Expenses 3,540,410 3,874,954 2,702,990 3,489,931
Net income 1,097,361 675,807 1,160,178 261,145
</TABLE>
F-16
<PAGE>
DISCUSSION DRAFT
================
15. CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31,
1995
<TABLE>
<CAPTION>
Cost capitalized
Initial cost to company subsequent to acquisition
---------------------------- --------------------------
Encumbrances Building and Building and
Description (See Notes) Land Improvements Land Improvements
- ----------------------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
405 North Bedford Drive (See Note A) $ 2,186,188 $ 4,076,313 $451,640 $ 9,504,317
415 North Bedford Drive (See Note A) 292,120 572,705 0 539,234
416 North Bedford Drive (See Note A) 427,087 247,475 0 2,149,054
435 North Bedford Drive (See Note A) 1,143,512 2,853,168 0 1,884,315
435 North Roxbury Drive 9,000,000 161,652 390,494 39,149 2,276,193
436 North Bedford Drive 28,500,000 2,046,547 0 0 22,017,503
439 North Bedford Drive 0 0 108,689 0 207,292
Holy Cross Medical Plaza (See Note B) 2,556,200 10,255,679 0 658,005
St. Joseph's Medical
Office Bldg. (See Note B) 1,300,000 3,935,536 0 180,116
Sherman Oaks Medical
Plaza 6,727,911 1,453,826 8,278,226 0 1,016,335
Regents Medical Center (See Note B) 1,470,000 8,389,545 0 446,506
Cigna HealthCare Bldg. 6,065,375 1,260,000 7,282,341 0 0
1095 Irvine Boulevard 0 474,300 663,465 0 452,797
---------- ------------ ----------- -------- -----------
Total 50,293,286 $ 14,771,432 $47,053,636 $490,789 $41,331,667
========== ============ =========== ======== ===========
Realty Financing Partnership
(See Note A) 29,883,586
Credit Line (See Note B) 17,450,000
Other Notes (See Note C) 14,000,000
------------
Total encumbrances $111,626,872
============
</TABLE>
<TABLE>
<CAPTION>
Gross amount at which carried
at close of period (See Note D) Date of
--------------------------------------------------------- Construction
Building and Accumulated or
Description Land Improvements Total Depreciation Rehabilitation
- ----------------------- ------------ ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
405 North Bedford Drive $ 2,637,828 $13,580,630 $ 16,218,458 $ 2,581,213 1947/1987
415 North Bedford Drive 292,120 1,111,939 1,404,059 428,345 1955
416 North Bedford Drive 427,087 2,396,529 2,823,616 591,690 1946/1986
435 North Bedford Drive 1,143,512 4,737,483 5,880,995 1,726,392 1950/1963/1984
435 North Roxbury Drive 200,801 2,666,687 2,867,488 880,470 1956/1983
436 North Bedford Drive 2,046,547 22,017,503 24,064,050 3,307,144 1980
439 North Bedford Drive 0 315,981 315,981 37,824 1956/1983
Holy Cross Medical Plaza 2,556,200 10,913,684 13,469,884 599,895 1985
St. Joseph's Medical
Office Bldg. 1,300,000 4,115,652 5,415,652 230,227 1987
Sherman Oaks Medical
Plaza 1,453,826 9,294,561 10,748,387 459,103 1969/1993
Regents Medical Center 1,470,000 8,836,051 10,306,051 379,725 1989
Cigna HealthCare Bldg. 1,260,000 7,282,341 8,542,341 257,916 1992
1095 Irvine Boulevard 474,300 1,116,262 1,590,562 20,413 1994
----------- ----------- ------------ -----------
Total $15,262,221 $88,385,303 $103,647,524 $11,500,357
=========== =========== ============ ===========
</TABLE>
Depreciation is computed on the straight-line basis over the estimated
useful lives of the assets, as follows:
Building and improvements 40 years
Tenant improvements Life of lease
Furniture, fixtures and equipment 5 years
The changes in total real estate assets and accumulated depreciation for
the years ended December 31, are as follows:
<TABLE>
<CAPTION>
Total Real Estate Assets
----------------------------------------------
1995 1994 1993
----------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $107,097,921 $ 63,553,568 $54,394,854
Improvements and acquisitions 2,672,508 43,544,353 9,158,714
Write-offs (6,122,905) 0 0
------------ ------------ -----------
Balance at end of year $103,647,524 $107,097,921 $63,553,568
============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated Depreciation
-----------------------------------------------
1995 1994 1993
-----------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $14,383,175 $11,645,228 $ 9,509,975
Depreciation 3,240,087 2,737,947 2,135,253
Write-offs (6,122,905) 0 0
----------- ----------- -----------
Balance at end of year $11,500,357 $14,383,175 $11,645,228
=========== =========== ===========
</TABLE>
Note A: The Realty Financing Partnership owns the following properties, which
are each security for a blanket first trust deed: 405 North Bedford,
415 North Bedford, 416 North Bedford and 435 North Bedford.
Note B: The Operating Partnership owns the following properties, which are each
security for a blanket first trust deed for the Credit Line: Holy Cross
Medical Plaza, St. Joseph's Medical Office Building and Regents Medical
Center.
Note C: Total debt as of December 31, 1995 includes $14,000,000 which is
secured by unrated, tax-exempt Series A bonds.
Note D: The aggregate costs for federal income tax purposes were $116,805,286
as of December 31, 1995.
F-17
<PAGE>
DISCUSSION DRAFT
================
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
G&L REALTY CORP.
Date: March 29, 1996 By: /s/ Quentin Thompson
---------------------------------
Quentin Thompson
Controller and Secretary
(Principal Financial and
Accounting Officer)
F-18
