SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-14162
GLENBOROUGH REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
Maryland 94-3211970
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 South El Camino Real,
Suite 1100 San Mateo, California
(415) 343-9300 94402-1708
(Address of principal executive offices (Zip Code)
and telephone number)
Securities registered under Section 12(b) of the Act:
Name of Exchange
Title of each class: on which registered:
Common Stock, $.001 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of August 1, 1996, 5,768,709 shares of Common Stock ($.001
par value) were outstanding.
1
INDEX
GLENBOROUGH REALTY TRUST INCORPORATED
Page No.
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements of
Glenborough Realty Trust Incorporated
and Combined Financial Statements of
the GRT Predecessor Entities (Unaudited
except for the Consolidated Balance
Sheet at December 31, 1995):
Consolidated Balance Sheets at
June 30, 1996 and December 31, 1995 4
Consolidated and Combined Statements
of Operations for the six months
ended June 30, 1996 and 1995 5
Consolidated and Combined Statements
of Income for the three months ended
June 30, 1996 and 1995 6
Consolidated and Combined Statements
of Equity for the six months ended
June 30, 1996 and 1995 7
Consolidated and Combined Statements
of Cash Flows for the six months
ended June 30, 1996 and 1995 8-9
Notes to Consolidated Financial
Statements 10-16
Consolidated Financial Statements of
Glenborough Hotel Group (Unaudited):
Consolidated Balance Sheet at
June 30, 1996 17
Consolidated Statements of Income for
the six and three months ended
June 30, 1996 18
Consolidated Statement of Equity for
the six months ended June 30, 1996 19
Consolidated Statement of Cash Flows
for the six months ended June 30, 1996 20
Notes to Consolidated Financial
Statements 21-24
2
INDEX
GLENBOROUGH REALTY TRUST INCORPORATED
Page No.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations:
Glenborough Realty Trust Incorporated 25-32
Glenborough Hotel Group 33-34
PART II OTHER INFORMATION
Item 1. Legal Proceedings 35-37
Item 2. Changes in Securities 37
Item 3. Defaults Upon Senior Securities 37
Item 4. Submission of Matters to a Vote of Security
Holders 37
Item 5. Other Information 37
Item 6. Exhibits and Reports on Form 8-K 37
SIGNATURES 38
3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
June 30, December 31,
1996 1995
ASSETS -------- ---------
Rental property, net of accumulated
depreciation of $26,082 and $24,877
in 1996 and 1995, respectively $ 73,791 $ 77,574
Investments in Associated Companies
and Glenborough Partners 6,466 5,763
Investments in management contracts
and other, net 388 484
Mortgage loans receivable, net of
provision for loss of $863 in 1996
and 1995 7,213 7,465
Cash and cash equivalents 1,690 4,587
Prepaid consolidation costs --- 6,082
Prepaid litigation costs --- 1,155
Other assets 3,204 2,630
-------- --------
TOTAL ASSETS $ 92,752 $ 105,740
======== ========
LIABILITIES
Mortgage loans $ 23,520 $ 23,685
Secured bank line 9,210 10,000
Investor notes payable --- 2,483
Other liabilities 2,459 5,982
-------- --------
Total liabilities 35,189 42,150
-------- --------
MINORITY INTEREST 8,041 7,962
STOCKHOLDERS' EQUITY
Common stock (5,768,709 and 5,753,709
shares issued and outstanding in 1996
and 1995, respectively) 6 6
Additional paid-in capital 55,847 55,622
Deferred compensation (193) ---
Retained earnings (deficit) (6,138) ---
-------- --------
Total stockholders' equity 49,522 55,628
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 92,752 $ 105,740
======== ========
The accompanying notes are an integral part
of these financial statements.
4
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
For the six months ended June 30, 1996 and 1995
(in thousands, except per share amounts)
(Unaudited)
Glenborough GRT
Realty Trust Predecessor
Incorporated Entities
Consolidated Combined
June 30, 1996 June 30, 1995
------------ ------------
REVENUES
Rental revenue $ 7,039 $ 7,964
Fees and reimbursements (including
$133 and $2,267 from affiliates
in 1996 and 1995) 133 7,173
Interest and other income 370 1,812
Equity in earnings of Associated
Companies 969 ---
Gain on sale of rental property 321 ---
-------- --------
Total revenue 8,832 16,949
-------- --------
OPERATING EXPENSES
Property operating expenses 1,909 3,040
General and administrative 675 7,230
Depreciation and amortization 1,759 2,359
Interest expense 1,421 1,083
-------- --------
Total operating expense 5,764 13,712
-------- --------
Income from operations before
provision for income taxes
and minority interest 3,068 3,237
Provision for income taxes --- (287)
Minority interest (243) ---
------- --------
Net income before Consolidation
and Litigation costs 2,825 2,950
Consolidation costs (6,082) ---
Litigation costs (1,155) ---
-------- --------
Net income (loss) $ (4,412) $ 2,950
======== ========
Net income per share before
Consolidation and Litigation costs $ 0.49
========
Net loss per share $ (0.77)
========
Weighted average shares
outstanding 5,757,995
=========
The accompanying notes are an integral part
of these financial statements.
5
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
For the three months ended June 30, 1996 and 1995
(in thousands, except per share amounts)
(Unaudited)
Glenborough GRT
Realty Trust Predecessor
Incorporated Entities
Consolidated Combined
June 30, 1996 June 30, 1995
------------ ------------
REVENUES
Rental revenue $ 3,450 $ 4,036
Fees and reimbursements (including
$67 and $1,003 from affiliates
in 1996 and 1995) 67 3,466
Interest and other income 179 894
Equity in earnings of Associated
Companies 544 ---
Gain on sale of rental property 321 ---
-------- --------
Total revenue 4,561 8,396
-------- --------
OPERATING EXPENSES
Property operating expenses 892 1,583
General and administrative 394 3,552
Depreciation and amortization 862 1,298
Interest expense 699 580
-------- --------
Total operating expense 2,847 7,013
-------- --------
Income from operations before
provision for income taxes and
minority interest 1,714 1,383
Provision for income taxes --- (127)
Minority interest (142) ---
------- --------
Net income $ 1,572 $ 1,256
======== ========
Net income per share $ 0.27
========
Weighted average shares
outstanding 5,761,209
=========
The accompanying notes are an integral part
of these financial statements.
6
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
For the six months ended June 30, 1996 and 1995
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
GRT Predecessor Entities Combined
- - ------------------------------------------------------------------
Add- Receivable
itional from
Retained
General Limited Common Paid-in Stock-
Earnings
Partner Partners Stock Capital holder
(Deficit) Total
------ ------- ------- ------- ---------
- - --------- -----
<S> <C> <C> <C> <C> <C>
<C> <C>
BALANCE at
December 31, 1994 $(1,730) $85,337 $ 5 $ 6,613 $(8,763)
$ (904) $80,558
Distributions (85) (8,560) --- --- ---
--- (8,645)
Redemption of shares --- --- (2) (6,613) ---
(4,002) (10,617)
Repayment of
Stockholder
advances, net --- --- --- --- 8,763
--- 8,763
Net income 20 1,998 --- --- ---
932 2,950
------ ------ ------ ------ ------
- - ------ ------
BALANCE at
June 30, 1995 $(1,795) $78,775 $ 3 $ --- $ ---
$(3,974) $73,009
====== ====== ====== ====== ======
====== ======
</TABLE>
<TABLE>
<CAPTION>
Glenborough Realty Trust
Incorporated
- - -------------------------------------------------
Common Stock Add -
------------ itional Deferred
Retained
Par Paid-in Comp-
Earnings
Shares Value Capital ensation
(Deficit) Total
----- ----- ------- --------
- - ------- -----
<S> <C> <C> <C> <C>
<C> <C>
BALANCE at
December 31, 1995 5,754 $ 6 $55,622 $ --- $
--- $55,628
Issuance of stock
to directors 15 --- 225 (193)
--- 32
Dividends --- --- --- ---
(1,726) (1,726)
Net loss --- --- --- ---
(4,412) (4,412)
------- ------- ------- -------
- - ------- -------
Balance at
June 30, 1996 5,769 $ 6 $55,847 $ (193)
$(6,138) $49,522
======= ======= ======= =======
======= =======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
7
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
CONSOLIDATED AND COMBINED STATEMENT OF CASH FLOWS
For the six months ended June 30, 1996 and 1995
(in thousands)
(Unaudited)
Glenborough GRT
Realty Trust Predecessor
Incorporated Entities
Consolidated Combined
June 30, 1996 June 30, 1995
------------ ------------
Cash flows from operating
activities:
Net income (loss) $ (4,412) $ 2,950
Adjustments to reconcile net
income (loss) to net cash
used for operating
activities:
Depreciation and amortization 1,759 2,359
Amortization of loan fees 72 46
Gain on sale of rental property (321) ---
Minority interest in income
from operations 243 ---
Equity in earnings of
Associated Companies (969) ---
Consolidation costs 6,082 ---
Litigation costs 1,155 ---
Changes in certain assets and
liabilities, net (4,057) (16,635)
-------- --------
Net cash used for operating
activities (448) (11,280)
-------- --------
Cash flows from investing
activities:
Proceeds from sale of property 2,882 ---
Additions to rental property (293) (2,765)
Principal receipts on mortgage
loans receivable 252 11,891
Investment in Associated Companies (389) ---
Dividends from Associated Companies 655 ---
Deposits on pending acquisitions,
included in other assets (230) ---
-------- --------
Net cash provided by investing
activities 2,877 9,126
-------- --------
- continued -
8
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
CONSOLIDATED AND COMBINED STATEMENT OF CASH FLOWS - continued
For the six months ended June 30, 1996 and 1995
(in thousands)
(Unaudited)
Glenborough GRT
Realty Trust Predecessor
Incorporated Entities
Consolidated Combined
June 30, 1996 June 30, 1995
------------ ------------
Cash flows from financing
activities:
Repayment of borrowings (955) (5,249)
Payment of investor notes (2,483) ---
Distribution to minority partner (162) ---
Payments from Stockholder, net --- 8,763
Dividends and distributions (1,726) (8,645)
Redemption of shares --- (10,617)
-------- --------
Net cash used for
financing activities (5,326) (15,748)
-------- --------
Net decrease in cash and cash
equivalents (2,897) (17,902)
Cash and cash equivalents, at
beginning of period 4,587 23,929
-------- --------
Cash and cash equivalents, at
end of period $ 1,690 $ 6,027
======== ========
Supplemental disclosure of
cash flow information:
Cash paid for interest $ 1,349 $ 1,037
======== ========
The accompanying notes are an integral part
of these financial statements.
9
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
Note 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------
Glenborough Realty Trust Incorporated (the "Company") was
organized in the State of Maryland on August 26, 1994. It is the
intent of the Company to qualify as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986, as
amended (the "Code"). The Company completed a Consolidation with
certain public California limited partnerships and other entities
engaged in real estate activities (the "GRT Predecessor
Entities") through an exchange of assets of the GRT Predecessor
Entities for 5,753,709 shares of Common Stock of the Company.
Proxy materials were mailed to the limited partners of the GRT
Predecessor Entities on October 29, 1995. The Solicitation
period expired on December 28, 1995, and the Consolidation
occurred on December 31, 1995. The Company commenced operations
on January 1, 1996.
To maintain the Company's qualification as a REIT, no more than
50% in value of the outstanding shares of the Company may be
owned, directly or indirectly, by five or fewer individuals
(defined to include certain entities), applying certain
constructive ownership rules. To help ensure that the Company
will not fail this test, the Company s Charter provides for
certain restrictions on the transfer of the Common Stock to
prevent further concentration of stock ownership.
The Company, through several subsidiaries, is engaged primarily
in the ownership, operation, management, leasing, acquisition,
expansion and development of various income-producing properties.
The Company s major consolidated subsidiary, in which it holds a
1% general partner interest and an 85.37% limited partner
interest, is Glenborough Properties, L.P. (the "Operating
Partnership"). The Operating Partnership, directly and through
various subsidiaries in which it and the Company own 100% of the
ownership interests, controls a total of 34 real estate projects
and two notes receivable. The remaining 13.63% limited
partnership interest in the Operating Partnership is owned by
GPA, Ltd., an affiliated partnership which exchanged certain of
its assets for an interest in the Operating Partnership.
The Company also holds 100% of the non-voting preferred stock of
three Associated Companies:
Glenborough Corporation (formerly known as Glenborough Realty
Corporation) ("GC") is the general partner of nine partnerships
and provides asset and property management services for these
nine partnerships and two partnerships for which an affiliate
serves as general partner (the "Controlled Partnerships"). It
10
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
also provides property management services for a limited
portfolio of property owned by unaffiliated third parties.
Glenborough Inland Realty Corporation ("GIRC") provides
partnership administration, asset management, property management
and development services under a long term contract to an
additional group of partnerships which include six public
partnerships.
Glenborough Hotel Group ("GHG") leases the three Country Suites
By Carlson hotels owned by the Company and operates them for its
own account. It also operates three Country Suites By Carlson
hotels owned by the Controlled Partnerships, and operates two
resort condominium hotels.
The Associated Companies are accounted for using the equity
method.
In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting of only
normal accruals) necessary to present fairly the financial
position and results of operations of the Company as of June 30,
1996 and for the period then ended.
Basis of Presentation - The accompanying financial statements
present the consolidated financial position of the Company as of
June 30, 1996 and December 31, 1995, the consolidated statements
of income and cash flows of the Company for the six months ended
June 30, 1996 and the combined statements of income and cash
flows of the GRT Predecessor Entities for the six months ended
June 30, 1995, as the Consolidation transaction discussed in Note
1 above was not effective until December 31, 1995. All
intercompany transactions, receivables and payables have been
eliminated in consolidation and combination.
Reclassification - Certain 1995 balances have been reclassified
to conform with the current year presentation.
Note 2. REFERENCE TO 1995 AUDITED FINANCIAL STATEMENTS
----------------------------------------------
These unaudited financial statements should be read in
conjunction with the Notes to Financial Statements included in
the 1995 audited financial statements.
Note 3. INVESTMENTS IN ASSOCIATED COMPANIES AND GLENBOROUGH
---------------------------------------------------
PARTNERS
--------
The Company's investments in the Associated Companies are
accounted for on the equity method as the Company has significant
11
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
ownership interests through its 100% preferred stock ownership
but does not own any voting interests. The Company records
earnings on its investments in the Associated Companies equal to
its cash flow preference, to the extent of earnings, plus its pro
rata share of remaining earnings, based upon cash flow allocation
percentages. Dividends received from the Associated Companies
are recorded as a reduction of the Company s investments. The
Company's investment in Glenborough Partners ("GP") is accounted
for on the cost method as the Company holds only a 3.9% limited
partnership interest.
As of June 30, 1996 and December 31, 1995 the Company had the
following investments in the Associated Companies and GP (in
thousands):
GC GIRC GHG GP Total
------- ------- ------- ------- ------
Investment at
December 31,
1995 $ (109) $ 3,919 $ 1,368 $ 585 $ 5,763
Cash contribution 94 95 200 --- 389
Dividends (131) (485) (39) --- (655)
Equity in
earnings 258 620 91 --- 969
------ ------ ------ ------ ------
Investment at
June 30, 1996 $ 112 $ 4,149 $ 1,620 $ 585 $ 6,466
====== ====== ====== ====== ======
On July 16, 1996 and July 23, 1996, the boards of directors of
the Associated Companies declared the following respective
dividends to be made in July 1996 (in thousands):
GC GIRC GHG Total
------- ------- ------- ------
Preferred dividends
to the Company $ 4 $ 4 $ 7 $ 15
Additional dividends
to the Company 319 317 20 656
------ ------ ------ ------
Total dividends
to the Company 323 321 27 671
Dividends to others 17 17 6 40
------ ------ ------ ------
Total dividends $ 340 $ 338 $ 33 $ 711
====== ====== ====== =====
12
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
Financial statements and notes thereto of Glenborough Hotel Group
follow Note 7 of the Company's Notes to Financial Statements.
Note 4. STOCK COMPENSATION PLAN
-----------------------
The Company has adopted an employee stock incentive plan (the
"Incentive Plan"), approved by the Stockholders at the Company's
1996 Annual Meeting, to enable certain executive officers and key
employees of the Company to participate in the ownership of the
Company.
The purpose of the Incentive Plan is to attract and retain high
quality executive officers and other key employees and to provide
an opportunity for the executive officers and key employees to
benefit from stock price appreciation that generally accompanies
improved financial performance, which the Company believes
increases incentives to contribute to the Company's success and
prosperity. Under the Incentive Plan, incentive stock options,
nonqualified stock options, restricted stock, performance units
and stock appreciation rights may be awarded to eligible plan
participants.
680,000 shares of Common Stock (comprising 10.7% of the total
number of issued and outstanding shares of the Company including
shares issuable to exchange for units of the Operating
Partnership) have been reserved for issuance under the Incentive
Plan. The Incentive Plan will remain in effect for 10 years
unless terminated earlier by the Board of Directors. The
Incentive Plan is administered by the Compensation Committee,
which is composed of two or more Independent Directors who
qualify as disinterested administrators under Rule 16b-3 (b) of
the Exchange Act, and who will determine the eligibility for the
Incentive Plan and the amounts of any awards to be granted under
it. The Company intends that the Incentive Plan satisfy the
necessary criteria to ensure that compensation to executive
officers and key employees under the plan are deductible by the
Company.
The options granted under the Incentive Plan may either be
"incentive" stock options under Section 422 of the Code or
"nonqualified" stock options. The Compensation Committee
determines the term of each option granted, however the term of
an incentive option may not be greater than ten years (or five
years, in the case of a grantee possessing more than 10% of the
13
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
combined voting power of the Company or an Affiliate). The
exercise price of any option granted under the Incentive Plan may
not be less than the fair market value of the Common Stock as of
the date the option is granted, and the Compensation Committee
may, in its discretion and with the grantee's consent, cancel,
substitute or accelerate the options or extend the scheduled
expiration date on any of the options. In addition, no options
will be granted by the Company for an exercise price of less than
$15 per share of Common Stock prior to December 31, 1996.
In accordance with the approved Incentive Plan, on May 30, 1996,
the Stockholders approved the granting of 5,000 shares of Common
Stock to each of the three non-employee directors. These shares
vest, as to any director only if such director serves
continuously for a period of two years, and are not freely
tradeable. The market value of the shares at the date of grant
has been recorded as deferred compensation in the accompanying
financial statements and will be charged to earnings ratably over
the vesting period.
The Incentive Plan may also include some or all of the following
types of incentive compensation: restricted shares subject to
forfeiture, performance awards based on specified performance
targets, stock appreciation rights and any other stock-based
awards.
Note 5. LITIGATION SETTLEMENT
---------------------
Prior to the completion of the Consolidation, two lawsuits were
filed in 1995 contesting the fairness of the Consolidation, one
in California state court and one in federal court. The
complaints in both actions alleged, among other things, breaches
by the defendants of fiduciary duties and inadequate disclosures.
The state court action was settled, and the settlement was
approved by the state court despite objections by certain members
of the class, who subsequently filed notice that they would
appeal the approval of the settlement. The appeal has not yet
been filed. Pursuant to the terms of the settlement in the state
court action, pending the appeal, the Company has paid one-third
of the $855,000 settlement amount and the remaining two-thirds is
being held in escrow. In the federal action, the court in
December of 1995 deferred all further proceeds pending a ruling
in the state court action. Following the state court decision
approving the settlement, the defendants filed a motion to
dismiss the federal court action. Given the inherent
uncertainties of litigation, there can be no assurance that the
ultimate outcomes of these actions will be favorable to the
Company.
14
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
Note 6. PROPERTY SALES AND ACQUISITIONS
-------------------------------
On June 4, 1996, the Company sold the two self-storage facilities
held in its industrial portfolio. The sales price for these two
facilities was $2,900,000. The sales generated a gain of
$321,000 and cash proceeds of $2,882,000. In connection with
this sale $790,000 was paid down on the Company's secured bank
line.
The Company has signed three letters of intent and two purchase
agreements and is in varying stages of final documentation and
acquisition of 17 properties located in ten states from four
sellers for securities, cash and payoff or assumption of debt, as
discussed below.
On July 15, 1996, the Company's Operating Partnership acquired a
23-story, 272,443 square foot office building known as University
Club Tower (the "UCT Property"), for total consideration valued
at $18,600,000, which comprised (i) assumption of debt in the
amount of $18,250,000, which was paid off with proceeds of the
Company's new line of credit from Wells Fargo Bank, N.A.
(discussed below), and (ii) 23,333 new limited partnership units
("Units") issued by the Operating Partnership having an initial
redemption value of $350,000 (based on a $15 per Unit value).
The transaction was structured as a contribution of partnership
interests in University Club Tower Associates to the Operating
Partnership, by Robert Batinovich (Chairman, President and Chief
Executive Officer of the Company) and by GPA, Ltd., a partnership
in which certain executive officers of the Company hold a
substantial indirect interest, in exchange for the Units.
In August, 1996, the Company expects to acquire a two-story,
40,545 square foot suburban office building, referred to as the
Bond Street Property, from GPA Ltd., subject to a number of
significant conditions, for a total of $3,150,000 comprising
Units and assumption of debt.
The Company has entered into a letter of intent to acquire a
portfolio of 13 industrial, office, retail and multifamily
properties located in seven states. If completed, such
transaction would add approximately 866,010 square feet of net
rentable area and 538 residential units to the Company's current
property portfolio. The total purchase price would be
approximately $46,000,000, comprising Units and assumption of
debt. Acquisition of these properties is subject to a number of
contingencies including, among other things, completion of due
diligence and customary closing conditions. There can be no
assurance that these properties will ultimately be acquired by
the Company.
15
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
In August, 1996, the Company (i) acquired a 64-room limited
service hotel in San Antonio, Texas, and (ii) expanded an
existing shopping center in Tampa, Florida through a
sale/leaseback with the center's anchor tenant. The Company is
committed to investing an additional $1,760,000 in the
supermarket property upon completion of certain expansion related
improvements anticipated in mid-1997.
The Company has entered into two new financing agreements with
Wells Fargo Bank, N.A. ("Wells Fargo"). The first financing
agreement (the "Facility") is a $50,000,000 secured revolving
line of credit to replace an existing $10,000,000 line of credit.
The Facility is secured by first mortgages on selected properties
with full recourse to the Company and availability is limited to
the borrowing base provided by these properties. The Facility
has a term of two years, subject to annual extensions. At the
Company's option, the Facility will bear interest at LIBOR plus
2.375% or at a base rate. The base rate is based upon the higher
of Wells Fargo's prime rate plus 0.5% or the Federal Funds Rate
plus 1.0%. The second financing arrangement (the "Term Loan") is
a two-year term loan in the amount of $6,100,000 that bears
interest at the same rate as the Facility and will be secured by
first mortgage liens on 10 "QuikTrip" facilities owned by the
Company. The combined proceeds of the fundings under the
Facility and the Term Loan loans were $28,400,000, of which the
Company applied $18,300,000 to the acquisition of the UCT
Property, $9,200,000 to the repayment of the outstanding amount
under the existing line of credit, and the balance to loan fees
and closing costs. Initial funding under the Facility and full
disbursement of the Term Loan occurred on July 15, 1996. On July
29, 1996, the Company funded an additional $3,800,000 under the
Facility which was applied toward the purchase of the properties
described above.
Note 7. DECLARATION OF DIVIDENDS
------------------------
On April 24, 1996, the Company's Board of Directors declared a
dividend for the first quarter of $0.30 per share or $1,726,000
which was paid on May 13, 1996 to Stockholders of record at the
close of business on May 6, 1996. Such dividend was made from
the Company's cash reserves at March 31, 1996 combined with the
first quarter dividends received from the Associated Companies.
On July 24, 1996, the Company's Board of Directors declared a
dividend for the second quarter of $0.30 per share or $1,731,000
payable on August 14, 1996 to Stockholders of record at the close
of business on August 5, 1996. Such dividends will be made from
the Company's cash reserves at June 30, 1996 combined with the
dividends received from the Associated Companies as was discussed
in Note 3.
16
GLENBOROUGH HOTEL GROUP
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
(Unaudited)
June 30,
1996
--------
ASSETS
Rental property and equipment, net of
accumulated depreciation of $101 $ 184
Investments in management contracts, net 468
Cash and cash equivalents 422
Investment in Atlantic Pacific Assurance
Company, Limited 755
Other assets 494
--------
TOTAL ASSETS $ 2,323
========
LIABILITIES
Mortgage loan $ 73
Accrued lease expense 286
Other liabilities 309
--------
Total liabilities 668
--------
STOCKHOLDERS' EQUITY
Common stock (1,000 shares) 20
Non-Voting preferred stock (50 shares) ---
Additional paid-in capital 1,568
Retained earnings 67
--------
Total stockholders' equity 1,655
--------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,323
========
The accompanying notes are an integral part
of these financial statements.
17
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
(Unaudited)
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1996
------------ -----------
REVENUES
Room revenue $ 1,669 $ 3,584
Fees and reimbursements 633 1,183
Other revenue 160 239
------- -------
Total revenue 2,462 5,006
------- -------
EXPENSES
Leased Hotel Properties
-----------------------
Room expenses 416 992
Lease payments to an affiliate 585 1,268
Sales and marketing to an affiliate 196 381
Property general and administrative 206 369
Other operating expenses 258 448
Managed Hotel Properties
------------------------
Salaries and benefits 436 837
Other Expenses
--------------
General and administrative 235 466
Depreciation and amortization 24 49
Interest expense 2 3
------- -------
Total expense 2,358 4,813
------- -------
Income from operations before provision
for income taxes 104 193
Provision for income taxes (36) (76)
------- -------
Net income $ 68 $ 117
======= =======
The accompanying notes are an integral part
of these financial statements.
18
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENT OF EQUITY
For the six months ended June 30, 1996
(in thousands, except shares)
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Add -
--------------- ------------- itional
Retained
Par Par Paid-in
Earnings
Shares Value Shares Value Capital
(Deficit) Total
------ ----- ------ ----- -------
- - ------- -----
<S> <C> <C> <C> <C> <C>
<C> <C>
BALANCE at
December 31, 1995 50 $ --- 1,000 $ 20 $ 1,368
$ --- $1,388
Additional paid-
in capital --- --- --- --- 200
--- 200
Dividends
(50) (50)
Net income --- --- --- --- ---
117 117
------ ------ ------ ------ ------
- - ------ ------
Balance at
June 30, 1996 50 $ --- 1,000 $ 20 $ 1,568
$ 67 $1,655
====== ====== ====== ====== ======
====== ======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
19
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months
Ended
June 30,
1996
-----------
Cash flows from operating activities:
Net income $ 117
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 49
Changes in certain assets and
liabilities 96
--------
Net cash provided by operating
activities 262
--------
Cash flows from investing activities:
Additions to rental property and equipment (10)
--------
Net cash used for investing activities (10)
--------
Cash flows from financing activities:
Capital contributions 200
Dividends (50)
Repayment of borrowings (13)
--------
Net cash provided by financing activities 137
--------
Net increase in cash 389
Cash and cash equivalents at
beginning of period 33
--------
Cash and cash equivalents at
end of period $ 422
========
Supplemental disclosure of
cash flow information:
Cash paid for interest $ 3
========
The accompanying notes are an integral part
of these financial statements.
20
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
Note 1. ORGANIZATION
------------
Glenborough Hotel Group ("GHG") was organized in the state of
Nevada on September 23, 1991. GHG currently operates hotel
properties owned by Glenborough Realty Trust Incorporated ("GRT")
under three separate percentage leases and manages three hotel
properties owned by two partnerships whose managing general
partner is Glenborough Corporation. GRT owns 100% of the 50
shares of non-voting preferred stock of GHG and three
individuals, including one executive officer of GRT, each own 33
1/3% of the 1,000 shares of voting common stock of GHG.
GHG also owns approximately 80% of the common stock of Resort
Group, Inc. ("RGI"). RGI manages homeowners associations and
rental pools for two beachfront resort condominium hotel
properties and owns six units at one of the properties. GHG
receives 100% of the earnings of RGI and consolidates its
operations with its own.
GHG also owns 94% of the outstanding common stock of Atlantic
Pacific Holdings, Ltd., the sole owner of 100% of the common
stock of Atlantic Pacific Assurance Company, Limited ("APAC"), a
Bermuda corporation formed to underwrite certain insurable risks
of certain of GRT's predecessor partnerships and related
entities. APAC no longer underwrites any business and is
expected to be liquidated in 1997. GHG accounts for its
investment in APAC using the cost method due to its anticipated
liquidation.
In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting only of
normal accruals) necessary to present fairly, the consolidated
financial position and consolidated results of operations of GHG
as of June 30, 1996 and for the period then ended.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Presentation - The accompanying financial statements
present the consolidated financial position of GHG and RGI as of
June 30, 1996 and the consolidated results of operations and cash
flows of GHG and RGI for the six months ended June 30, 1996. All
intercompany transactions, receivables and payables have been
eliminated in the consolidation.
Pervasiveness 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 results of operations during the
21
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
reporting period. Actual results could differ from those
estimates.
Rental Property to be Held and Used - Rental properties are
stated at cost unless circumstances indicate that cost cannot be
recovered, in which case, the carrying value of the property is
reduced to estimated fair value.
Depreciation is provided using the straight line method over the
useful lives of the respective assets.
Investments in Management Contracts - Investments in management
contracts are recorded at cost and are amortized on a straight-
line basis over seven years.
Cash Equivalents - The Company considers short-term investments
(including certificates of deposit) with a maturity of three
months or less at the time of investment to be cash equivalents.
Note 3. RENTAL PROPERTY, NET
--------------------
Rental property and equipment of $285,000, net of accumulated
depreciation of $101,000 at June 30, 1996 represents the six
condominium hotel units owned by RGI as well as furniture and
fixtures in GHG's corporate offices. The six units owned by RGI
participate in a resort rental program on an "at will" basis,
whereby there is no fixed term of participation. Such
participation generated approximately $18,000 of net rental pool
profit and approximate cash flow of $9,000 after deductions for
capital reserves for the six months ended June 30, 1996.
Note 4. INVESTMENTS IN MANAGEMENT CONTRACTS, NET
----------------------------------------
Investments in management contracts reflects the unamortized
portion of the management contracts RGI holds with the two
beachfront resort condominium hotel properties for both
management of the homeowners associations and the rental pool
programs.
Note 5. MORTGAGE LOAN
-------------
Mortgage loan of $73,000 represents the debt secured by the six
condominium hotel units owned by RGI. Such debt bears interest
at 7% payable in monthly installments of principal and interest
totaling $2,304 and matures June 30, 1999.
Note 6. THE PERCENTAGE LEASES
---------------------
GHG is leasing the three hotels owned by GRT for a term of five
years pursuant to percentage leases ("Percentage Leases") which
22
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
provide for rent equal to the greater of the Base Rent (as
defined in the lease) or a specified percentage of rent (the
"Percentage Rent"). Each hotel is separately leased to GHG (the
"lessee"). The lessee's ability to make rent payments will, to a
large degree, depend on its ability to generate cash flow from
the operations of the hotels. Each Percentage Lease contains the
provisions described below.
Each Percentage Lease has a non-cancelable term of five years,
subject to earlier termination upon the occurrence of certain
contingencies described in the Percentage Lease. The lessee
under the Percentage Lease has one five-year renewal option at
the then current fair market rent.
During the term of each Percentage Lease, the lessee is obligated
to pay the greater of Base Rent or Percentage Rent. Base Rent
accrues and is required to be paid monthly in advance.
Percentage
Rent is calculated by multiplying fixed percentages by room
revenues for each of the three hotels; the applicable percentage
changes when revenue exceeds a specified threshold, and the
threshold may be adjusted annually in accordance with changes in
the applicable CPI. Percentage Rent is due quarterly.
The table below sets forth the annual Base Rent and the
Percentage Rent formulas for each of the three hotels.
23
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
Hotel Lease Rent Provisions
Rent
Incurred
Initial For the Annual
Annual Six months Percentage
Base ended Rent
Hotel Rent June 30, 1996 Formulas
-------- -------- -------------- ----------
Ontario, CA $ 240,000 $ 195,000 24% of the first
$1,575,000 of room
revenue plus 40% of
room revenue above
$1,575,000 and 5% of
other revenue
Arlington, TX 360,000 358,000 27% of the first
$1,600,000 of room
revenue plus 42% of
room revenue above
$1,600,000 and 5% of
other revenue
Tucson, AZ 600,000 715,000 40% of the first
$1,350,000 of room
revenue plus 46% of
room revenue above
$1,350,000 and 5% of
other revenue
Other than real estate and personal property taxes, casualty
insurance, a fixed capital improvement allowance and maintenance
of underground utilities and structural elements, which are the
responsibility of GRT, the Percentage Leases require the Lessee
to pay rent, insurance, all costs, salaries, and expenses and all
utility and other charges incurred in the operation of the
hotels.
Note 7. DECLARATION OF DIVIDENDS
-------------------------
On April 23, 1996, the board of directors of GHG declared
dividends for the first quarter of $50,000 of which $39,400 was
made to GRT as the preferred stockholder and the balance to the
holders of GHG's common stock.
Only July 23, 1996, the board of directors of GHG declared
dividends for the second quarter of $33,000 of which $27,000 will
be made to GRT as the preferred stockholder and the balance to
the holders of GHG's common stock.
24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR
ENTITIES
Statements contained in this Item 2, "Management's Discussion and
Analysis of Financial Conditions and Results of Operations", and
elsewhere in this Quarterly Report on Form 10-Q which are not
historical facts may be forward-looking statements. Such
statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those
projected, including, but not limited to, those risks and special
considerations set forth in the Company's other Securities and
Exchange Commission filings. Readers are cautioned not to place
undue reliance on these forward-looking statements which speak
only as of the date hereof. The Company undertakes no obligation
to publicly release the result of any revision to these forward-
looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence
of unanticipated events.
Background
----------
Glenborough Realty Trust Incorporated (the "Company") is a self-
administered and self-managed equity real estate investment trust
("REIT") engaged primarily in the ownership, operation,
management, leasing and acquisition of various types of income-
producing properties. As of June 30, 1996 and December 31, 1995
the Company owned and operated 34 and 36 income-producing
properties, respectively, (the "Properties," and each a
"Property") and held two mortgage receivables. The Properties
currently owned by the Company are comprised of eight industrial
Properties, 19 retail Properties, one residential Property, four
hotel Properties and two office Properties, located in 17 states.
During 1996, two industrial buildings (self-storage facilities)
were sold by the Company.
The Company was incorporated in the state of Maryland on August
26, 1994. On December 31, 1995, the Company completed a
consolidation (the "Consolidation") in which Glenborough
Corporation, a California corporation ("GC") and eight public
limited partnerships (the "Partnerships") collectively, the "GRT
Predecessor Entities", merged with and into the Company. The
Company (i) issued shares (the "Shares") of the $.001 par value
Common Stock of the Company to the Partnerships in exchange for
the net assets of the Partnerships; (ii) merged with GC, with the
Company being the surviving entity; (iii) acquired an interest in
three companies (the "Associated Companies") that provide asset
and property management services, as well as other services; and
(iv) through a subsidiary operating partnership, Glenborough
Properties, L.P. (the "Operating Partnership"), acquired
interests in certain warehouse distribution facilities from GPA,
Ltd., a California limited partnership ("GPA"). A portion of
the Company's operations are conducted through the Operating
Partnership, of which the Company is the sole general partner and
25
in which the limited partner interests not held by the Company
are held by GPA at June 30, 1996 (see further discussion below).
The Company operates the assets acquired in the Consolidation and
intends to invest in income-producing property directly and
through joint ventures. In addition, the Associated Companies
may acquire general partner interests in other real estate
limited partnerships. The Company intends to qualify as a REIT
under the Internal Revenue Code of 1986, as amended. The common
stock of the Company (the "Common Stock") is listed on the New
York Stock Exchange ("NYSE") under the trading symbol "GLB".
The Company's principal business objectives are to achieve a
stable and increasing source of cash flow available for
distribution to Stockholders. By achieving these objectives, the
Company will seek to raise Stockholder value over time.
Liquidity and Capital Resources
General
-------
Historically for the Partnerships, the principal sources of
funding for the acquisition of Properties was the sale of limited
partnership interests in the Partnerships and permanent
financing. The Company intends to rely upon cash generated by
operations, permanent debt financing, public debt and equity as
its funding sources for acquisition, expansion and renovation of
Properties.
The Company expects to meet its short-term liquidity requirements
generally through its initial working capital and cash generated
by operations. As of June 30, 1996, the Company had no material
commitments for capital improvements (see below). Planned
capital improvements consist only of tenant improvements and
other expenditures necessary to lease and maintain the Properties
and furniture fixtures and building improvements at the Hotel
Properties. The Company believes that its cash generated by
operations has been and will continue to be adequate to meet both
operating requirements and dividends in accordance with REIT
requirements in both the short-term and the long-term. However,
there can be no assurance that the Company's results of
operations will not fluctuate in the future and at times
negatively affect its ability to meet its operating requirements
and to declare dividends on a regular basis.
The Company expects to meet certain of its long-term liquidity
requirements, such as scheduled debt maturities and possible
acquisitions, through a combination of cash generated by
operations, long-term secured and unsecured borrowings and the
issuance of debt and equity securities of the Company.
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed Of" in the fourth quarter of
1995. The adoption of SFAS No. 121 did not have a material
effect on the recorded amounts of the Company's long-lived
assets, its financial position or results of operations.
26
In April and July 1996, the boards of directors of the Associated
Companies declared dividends which were made in April and July
1996 in the cumulative amounts of $478,000, $848,000 and $83,000
by GC, GIRC and GHG, respectively. Of such dividends, the
cumulative amounts received by the Company were $454,000,
$806,000 and $66,000 from GC, GIRC and GHG, respectively.
On April 24, 1996, the Company's Board of Directors declared a
dividend for the first quarter of $0.30 per share or $1,726,000
which was paid on May 13, 1996 to Stockholders of record at the
close of business on May 6, 1996. Such dividend was made from
the Company's cash reserves at March 31, 1996 combined with the
dividends received from the Associated Companies, as discussed
above.
On July 24, 1996, the Company's Board of Directors declared a
dividend for the second quarter of $0.30 per share or $1,731,000
payable on August 14, 1996 to Stockholders of record at the close
of business on August 5, 1996. Such dividends will be made from
the Company's cash reserves at June 30, 1996 combined with the
dividends received from the Associated Companies as was discussed
above.
On June 4, 1996, the Company sold the two self-storage facilities
held in its industrial portfolio. The sales price for these two
facilities was $2,900,000. The sales generated a gain of
$321,000 and cash proceeds of $2,882,000. In connection with
this sale $790,000 was paid down on the Company's secured bank
line.
The Company has signed three letters of intent and two purchase
agreements and is in varying stages of final documentation and
acquisition of 17 properties located in ten states from four
sellers for securities, cash and payoff or assumption of debt, as
discussed below.
On July 15, 1996, the Company's Operating Partnership acquired a
23-story, 272,443 square foot office building known as University
Club Tower (the "UCT Property"), for total consideration valued
at $18,600,000, which comprised (i) assumption of debt in the
amount of $18,250,000, which was paid off with proceeds of the
Company's new line of credit from Wells Fargo Bank, N.A.
(discussed below), and (ii) 23,333 new limited partnership units
("Units") issued by the Operating Partnership having an initial
redemption value of $350,000 (based on a $15 per Unit value).
The transaction was structured as a contribution of partnership
interests in University Club Tower Associates to the Operating
Partnership, by Robert Batinovich (Chairman, President and Chief
Executive Officer of the Company) and by GPA, Ltd., a partnership
in which certain executive officers of the Company hold a
substantial indirect interest, in exchange for the Units.
In August, 1996, the Company expects to acquire a two-story,
40,545 square foot suburban office building, referred to as the
Bond Street Property, from GPA Ltd., subject to a number of
27
significant conditions, for a total of $3,150,000 comprising
Units and assumption of debt.
The Company has entered into a letter of intent to acquire a
portfolio of 13 industrial, office, retail and multifamily
properties located in seven states. If completed, such
transaction would add approximately 866,010 square feet of net
rentable area and 538 residential units to the Company's current
property portfolio. The total purchase price would be
approximately $46,000,000, comprising Units and assumption of
debt. Acquisition of these properties is subject to a number of
contingencies including, among other things, completion of due
diligence and customary closing conditions. There can be no
assurance that these properties will ultimately be acquired by
the Company.
In August, 1996, the Company (i) acquired a 64-room limited
service hotel in San Antonio, Texas, and (ii) expanded an
existing shopping center in Tampa, Florida through a
sale/leaseback with the center's anchor tenant. The Company is
committed to investing an additional $1,760,000 in the
supermarket property upon completion of certain expansion related
improvements anticipated in mid-1997.
The Company has entered into two new financing agreements with
Wells Fargo Bank, N.A. ("Wells Fargo"). The first financing
agreement (the "Facility") is a $50,000,000 secured revolving
line of credit to replace an existing $10,000,000 line of credit.
The Facility is secured by first mortgages on selected properties
with full recourse to the Company and availability is limited to
the borrowing base provided by these properties. The Facility
has a term of two years, subject to annual extensions. At the
Company's option, the Facility will bear interest at LIBOR plus
2.375% or at a base rate. The base rate is based upon the higher
of Wells Fargo's prime rate plus 0.5% or the Federal Funds Rate
plus 1.0%. The second financing arrangement (the "Term Loan") is
a two-year term loan in the amount of $6,100,000 that bears
interest at the same rate as the Facility and will be secured by
first mortgage liens on 10 "QuikTrip" facilities owned by the
Company. The combined proceeds of the fundings under the
Facility and the Term Loan loans were $28,400,000, of which the
Company applied $18,300,000 to the acquisition of the UCT
Property, $9,200,000 to the repayment of the outstanding amount
under the existing line of credit, and the balance to loan fees
and closing costs. Initial funding under the Facility and full
disbursement of the Term Loan occurred on July 15, 1996. On July
29, 1996, the Company funded an additional $3,800,000 under the
Facility which was applied toward the purchase of the properties
described above.
The Company has adopted an employee stock incentive plan (the
"Incentive Plan"), approved by the Stockholders at the Company's
1996 Annual Meeting, to enable certain executive officers and key
employees of the Company to participate in the ownership of the
Company.
28
The purpose of the Incentive Plan is to attract and retain high
quality executive officers and other key employees and to provide
an opportunity for the executive officers and key employees to
benefit from stock price appreciation that generally accompanies
improved financial performance, which the Company believes
increases incentives to contribute to the Company's success and
prosperity. Under the Incentive Plan, incentive stock options,
nonqualified stock options, restricted stock, performance units
and stock appreciation rights may be awarded to eligible plan
participants.
680,000 shares of Common Stock (comprising 10.7% of the total
number of issued and outstanding shares of the Company including
shares issuable to exchange for units of the Operating
Partnership) have been reserved for issuance under the Incentive
Plan. The Incentive Plan will remain in effect for 10 years
unless terminated earlier by the Board of Directors. The
Incentive Plan is administered by the Compensation Committee,
which is composed of two or more Independent Directors who
qualify as disinterested administrators under Rule 16b-3 (b) of
the Exchange Act, and who will determine the eligibility for the
Incentive Plan and the amounts of any awards to be granted under
it. The Company intends that the Incentive Plan satisfy the
necessary criteria to ensure that compensation to executive
officers and key employees under the plan are deductible by the
Company.
The options granted under the Incentive Plan may either be
"incentive" stock options under Section 422 of the Code or
"nonqualified" stock options. The Compensation Committee
determines the term of each option granted, however the term of
an incentive option may not be greater than ten years (or five
years, in the case of a grantee possessing more than 10% of the
combined voting power of the Company or an Affiliate). The
exercise price of any option granted under the Incentive Plan may
not be less than the fair market value of the Common Stock as of
the date the option is granted, and the Compensation Committee
may, in its discretion and with the grantee's consent, cancel,
substitute or accelerate the options or extend the scheduled
expiration date on any of the options. In addition, no options
will be granted by the Company for an exercise price of less than
$15 per share of Common Stock prior to December 31, 1996.
In accordance with the approved Incentive Plan, on May 30, 1996,
the Stockholders approved the granting of 5,000 shares of Common
Stock to each of the three non-employee directors. These shares
vest, as to any director only if such director serves
continuously for a period of two years, and are not freely
tradeable. The market value of the shares at the date of grant
has been recorded as deferred compensation in the accompanying
financial statements and will be charged to earnings ratably over
the vesting period.
The Incentive Plan may also include some or all of the following
types of incentive compensation: restricted shares subject to
forfeiture, performance awards based on specified performance
29
targets, stock appreciation rights and any other stock-based
awards.
Results of Operations
Certain components of the Company's results of operations are not
comparable to those of the GRT Predecessor Entities. The primary
reason for the difference is the segregation in 1996 of the
operations (management fees and reimbursements, as well as
related expenses) of GHG, GIRC and GC (the Associated Companies),
all of which were combined in the GRT Predecessor Entities 1995
financial statements. Effective January 1, 1996, the Company
owns 100% of the preferred stock in each of these Associated
Companies and accounts for its interests under the equity method.
Also contributing to the comparability difference is the change
in the operational structure of the three hotel properties (the
"Hotels"). The Hotels were wholly owned by the GRT Predecessor
Entities and thereby, the operations of the Hotels were included
in the financial statements of the GRT Predecessor Entities.
Under the current structure, the Company owns the Hotels but
leases them to GHG. The Company includes only the related lease
payments received from GHG in its statement of operations. The
decrease in fees and reimbursements by $7,040,000 or 98% from
$7,173,000 in 1995 to $133,000 in 1996 and the decrease of
$6,555,000, or 91% in general and administrative expenses,
including salaries, from $7,230,000 in 1995 to $675,000 in 1996
are the primary components affected by these changes in
structure.
Average occupancy at the Company's properties, summarized by
property type, at June 30 was:
1996 1995
----- -----
Retail 92.1% 95.6%
Industrial 100 % 97.2%
Office 100 % 98.7%
Residential 96.2% 94.0%
Hotel 75.5% 76.4%
Interest and other income decreased $1,442,000, or 80%, to
$370,000 in the six months ended June 30, 1996 from $1,812,000 in
1995. This decrease resulted primarily from the 1995 short-term
investment of funds generated from the early repayment of a note
receivable in April of 1995 and the early repayment in January
and June of 1995 of three of the four notes received from the
sale of the Laurel Cranford buildings. In 1996, cash balances
have been used to prepay the investor notes payable, pay declared
dividends and Consolidation costs, as previously discussed.
Gain on sale of rental property of $321,000 during the six months
ended June 30, 1996 resulted from the sale of the two self-
storage facilities held in the Company's industrial portfolio, as
previously discussed.
Property operating expenses decreased by $1,131,000 or 37% to
$1,909,000 in the six months ended June 30, 1996 from $3,040,000
30
in the same period in 1995. The decrease is due primarily to the
change in the operational structure of the leased hotels as
previously discussed.
Depreciation and amortization expense decreased $600,000, or 25%,
to date in 1996 to $1,759,000 from $2,359,000 in the same period
in 1995. The decrease was due primarily to certain of the
Company's fixed assets and deferred leasing commissions becoming
fully depreciated and amortized in 1995, combined with the lower
depreciable base resulting from the sale of two industrial
properties as previously discussed.
Interest expense increased $338,000 or 31% in the six months
June 30, 1996 to $1,421,000 dein $1,083,000 during the six months
ended June 30, 1995. The increase is primarily the result of an
increase in average borrowings during 1996 compared to 1995.
Funds From Operations
The Company believes that Funds From Operations ("FFO") is a
measure of cash flow which, when considered in conjunction with
other measures of operating performance, affects the value of
equity REITs such as the Company. FFO, as defined by the
National Association of Real Estate Investment Trusts ("NAREIT"),
means net income (computed in accordance with GAAP) excluding
gains (losses) from debt restructuring and sales of property,
plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures.
FFO is not necessarily indicative of cash flow available to fund
cash needs and is not the same as cash flow from operations as
defined by GAAP, and should not be considered as an alternative
to net income (loss) as an indicator of the Company's operating
performance, or as an alternative to cash flows from operating,
investing and financing activities as a measure of liquidity or
ability to make distributions. Management generally considers
FFO to be a useful financial performance measurement because it
provides investors with an additional basis to evaluate the
performance of a REIT. FFO as disclosed by other REITs may not
be comparable to the Company's calculation of FFO.
In February 1995, NAREIT established new guidelines for
calculating FFO that clarify previous guidelines. The primary
change from the old definition to the new definition is the
treatment of amortization of deferred financing fees. Under the
new definition, the amortization of deferred financing fees is no
longer added back to net income in calculating FFO. The new
guidelines are effective beginning in 1996.
31
Beginning with the first quarter of 1996, the Company caluclates
its FFO based upon the new NAREIT definition and, accordingly,
does not add back amortization of deferred financing fees and
costs. The change does not affect the Company's Funds Available
for Distribution ("FAD"). FAD represents FFO plus recurring
principal receipts from mortgage loans less reserves for lease
commissions, capital expenditures (excluding property
acquisitions) and debt principal amortization. FAD should not be
considered an alternative to net income as a measure of the
Company's financial performance or to cash flow from operating
activities (computed in accordance with GAAP) as a measure of the
Company's liquidity, nor is it necessarily indicative of
sufficient cash flow to fund all of the Company's needs.
The following table sets forth the Company's calculation of FFO,
based upon the new NAREIT definition, and FAD for the three
months ended March 31, 1996 and June 30, 1996 (dollars in
thousands).
March 31, June 30,
1996 1996
--------- --------
Net income before provision for income
taxes and minority interest $ 1,354 $ 1,714
Depreciation and amortization 897 862
Gain on sale of rental property --- (321)
Adjustment to reflect FFO of
Associated Companies (1) 284 311
-------- -------
FFO 2,535 2,566
-------- --------
Amortization of deferred financing fees 36 36
Principal receipts on mortgage loans 14 5
Capital reserve (185) (106)
Capital expenditures (54) (133)
Principal amortization reserve (86) (125)
-------- --------
FAD $ 2,260 $ 2,243
======== ========
FFO per share $ 0.40 $ 0.41
======== ========
FAD per share $ 0.36 $ 0.36
======== ========
Distributions per share $ 0.30 $ 0.30
======== ========
Fully converted weighted
average shares outstanding 6,296,042 6,303,542
========= =========
(1) Reflects the adjustments to FFO required to reflect the FFO
of the Associated Companies allocable to the Company. The
Company s investments in the Associated Companies are
accounted for using the equity method of accounting.
32
GLENBOROUGH HOTEL GROUP
Background
----------
Glenborough Hotel Group ("GHG") was organized in the state of
Nevada on September 23, 1991. GHG currently operates hotel
properties owned by Glenborough Realty Trust Incorporated ("GRT")
under three separate percentage leases and manages three hotel
properties owned by two partnerships whose managing general
partner is Glenborough Corporation. GRT owns 100% of the 50
shares of non-voting preferred stock of GHG and three
individuals, including one executive officer of GRT, each own 33
1/3% of the 1,000 shares of voting common stock of GHG.
GHG also owns approximately 80% of the common stock of Resort
Group, Inc. ("RGI"). RGI manages homeowners associations and
rental pools for two beachfront resort condominium hotel
properties and owns six rental units at one of the properties.
GHG receives 100% of the earnings of RGI and consolidates their
operations with its own.
GHG also owns 94% of the outstanding common stock of Atlantic
Pacific Holdings, Ltd., the sole owner of 100% of the common
stock of APAC. APAC no longer underwrites any business and is
expected to be liquidated in 1997. GHG accounts for its
investment in APAC using the cost method due to its anticipated
liquidation.
Liquidity and Capital Resources
GHG's primary source of funding is the cash generated by the
operations of the three hotels leased from GRT and fees received
for (i) managing three hotels owned by two partnerships and (ii)
managing the homeowners associations and rental pools for the
resort condominium hotel properties as discussed above.
As of June 30, 1996, GHG has no plans for major capital
improvements. Any capital expenditures associated with the six
condominium units owned by RGI would be performed by the rental
pool and be deducted from the rental checks received monthly.
On April 23, 1996, the board of directors of GHG declared
dividends for the first quarter of $50,000 of which $39,400 was
made to GRT as the preferred stockholder and the balance to the
holders of GHG's common stock.
Results of Operations
Room revenue of $3,584,000 and $1,669,000 for the six and three
months ended June 30, 1996, respectively, represents the revenue
earned on the three hotels leased from GRT.
Fee revenue of $1,183,000 and $633,000 for the six and three
months ended June 30, 1996, respectively, represents the fees
earned for managing three hotels and two resort condominium
hotels.
33
The primary expenses associated with the leased hotels are room
expense of $992,000 and $416,000, respectively, lease payments of
$1,268,000 and $585,000, respectively, sales and marketing of
$381,000 and $196,000, respectively and other operating expenses
of $448,000 and $258,000, respectively, for the six and three
months ended June 30, 1996.
The only direct expenses incurred in connection with the
management of the three hotels and two resort condominium hotel
properties are salaries and benefits of $837,000 and $436,000,
respectively, for the six and three months ended June 30, 1996.
General and administrative costs of $466,000 and $235,000 for the
six and three months ended June 30, 1996, respectively,
represents the overhead costs associated with administering the
business of GHG.
34
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
Blumberg. On February 21, 1995, a class action
complaint was filed in the Superior Court of the State
of California in and for San Mateo County in connection
with the Consolidation. The plaintiff is Anthony E.
Blumberg, an Investor in Equitec B, on behalf of
himself and all others similarly situated. The
defendants are GRC, GC, Robert Batinovich, the
Partnerships and the Company.
The complaint alleged breaches by the defendants of
their fiduciary duty and duty of good faith and fair
dealing to investors in the Partnerships. The
complaint sought injunctive relief and compensatory
damages. The complaint alleged that the valuation of
GC was excessive and was done without appraisal of GC's
business or assets. The complaint further alleged that
the interest rate for the Notes to be issued to
investors in lieu of shares of Common Stock, if they so
elected was too low for the risk involved and that the
Notes would likely sell, if at all, at a substantial
discount from their face value (the Company, as it had
the option to, paid in full the amounts due plus
interest in lieu of issuing Notes).
On October 9, 1995 the parties entered into an
agreement to settle the action. The defendants, in
entering into the settlement agreement, did not
acknowledge any fault, liability or wrongdoing of any
kind and continue to deny all material allegations
asserted in the litigation. Pursuant to the settlement
agreement, the defendants will be released from all
claims, known or unknown, that have been, could have
been, or in the future might be asserted, relating to,
among other things, the Consolidation, the acquisition
of the Company s shares pursuant to the Consolidation,
any misrepresentation or omission in the Registration
Statement on Form S-4, filed by the Company on
September 1, 1994, as amended, or the prospectus
contained therein ("Prospectus/Consent Solicitation
Statement"), or the subject matter of the lawsuit. In
return, the defendants agreed to the following: (a) the
inclusion of additional or expanded disclosure in the
Prospectus/ Consent Solicitation Statement, and (b) the
placement of certain restrictions on the sale of the
stock by certain insiders and the granting of stock
options to certain insiders following consummation of
the Consolidation. Plaintiff's counsel indicated that
it would request that the court award it $850,000 in
attorneys' fees, costs and expenses. In addition,
plaintiffs' counsel indicated it would request the
court for an award of $5,000 payable to Anthony E.
35
Blumberg as the class representative. The defendants
agreed not to oppose such requests.
On October 11, 1995, the court certified the class for
purposes of settlement, and set a hearing on December
21, 1995, to determine whether it should approve the
settlement and class counsel s application for fees. A
notice of the proposed settlement was distributed to
the members of the class on November 15, 1995. The
notice specified that, in order to be heard at the
hearing, any class member objecting to the proposed
settlement must, by December 15, 1995, file a notice of
intent to appear, and a detailed statement of the
grounds for their objection.
A number of objections were received from class
members. The objections reiterated the claims in the
original Blumberg complaint, and asserted that the
settlement agreement did not adequately compensate the
class for releasing those claims. One of the
objections was filed by the same law firm that had
brought a class action against the former general
partners of one of the merging partnerships (described
as the "GPI Litigation in the issuer's Registration
Statement on Form S-4). The other was filed by the
same law firm that brought the "BEJ" action described
below.
The hearing originally scheduled for December 21, 1995
was continued to January 17, 1996. At the hearing on
January 17, the court heard the arguments of the
objectors seeking to overturn the settlement, as well
as the arguments of the plaintiffs and the defendants
in defense of the settlement. The court granted all
parties a period of time in which to file additional
pleadings. On June 4, 1996, the court granted approval
of the settlement, finding it fundamentally fair,
adequate and reasonable to the respective parties to
the settlement. However, the objectors have given
notice that they intend to appeal the June 4 decision.
BEJ Equity Partners. On December 1, 1995, a second
class action complaint relating to the Consolidation
was filed in Federal District Court for the Northern
District of California. The plaintiffs are BEJ Equity
Partners, J/B Investment Partners, Jesse B. Small and
Sean O'Reilly as custodian f/b/o Jordan K. O'Reilly,
who as a group held limited partner interests in the
California limited partnerships known as Outlook
Properties Fund IV, All Suites Hotels, L.P.,
Glenborough Pension Investors, Equitec Income Real
Estate Investors-Equity Fund 4, Equitec Income Real
Estate Investors C and Equitec Mortgage Investors Fund
IV, on behalf of themselves and all others similarly
situated. The defendants are GRC, GC, the Company,
GPA, Ltd., Robert Batinovich and Andrew Batinovich.
The Partnerships are named as nominal defendants.
36
This action alleges the same disclosure violations and
breaches of fiduciary duty as were alleged in the
Blumberg action. The complaint sought injunctive
relief, which was denied at a hearing on December 22,
1995. At that hearing, the court also deferred all
further proceedings in this case until after the
scheduled January 17 hearing in the Blumberg case.
Following the trial court's approval of the settlement
and entry of judgement in the Blumberg case, the
Company and the other defendants were required to file
a responsive pleading in BEJ, and filed a motion to
dismiss on July 1, 1996.
It is management s position that the BEJ action, and
the objections to the settlement of the Blumberg
action, are without merit, and management intends to
pursue a vigorous defense in both matters. However,
given the inherent uncertainties of litigation, there
can be no assurance that the ultimate outcome in these
two legal proceedings will be in the Company's favor.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
During the three month period ended June 30, 1996,
there were no documents of the Company required to be
filed as an exhibit to this Quarterly Report on Form
10-Q.
(b) Reports on Form 8-K:
On April 26, 1996, the Company filed a report on Form
8-K to make available additional ownership and
operation information concerning the Company and the
properties owned or managed by it as of March 31, 1996,
in the form of a Supplemental Information package.
37
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.
GLENBOROUGH REALTY TRUST INCORPORATED
By: Glenborough Realty Trust Incorporated,
Date: 8/13/96 /s/ Andrew Batinovich
Andrew Batinovich
Director, Executive Vice President,
Chief Operating Officer
and Chief Financial Officer
(Principal Financial Officer)
Date: 8/13/96 /s/ Terri Garnick
Terri Garnick
Senior Vice President,
Chief Accounting Officer,
Treasurer
(Principal Accounting Officer)
38
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