<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(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)
<TABLE>
<S> <C>
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)
</TABLE>
Securities registered under Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Exchange
Title of each class: on which registered:
<S> <C>
Common Stock, $.001 par value New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of August 1, 1996, 5,768,709 shares of Common Stock ($.001 par value) were
outstanding.
Page 1 of 35
<PAGE> 2
EXPLANATORY NOTE
All items of the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 1996 are included herein; however, only the
items set forth below are hereby amended, to the extent set forth
herein, by this Form 10-Q/A:
PART I
Item 1
Item 2
PART II
Item 1
INDEX
GLENBOROUGH REALTY TRUST INCORPORATED
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
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 10-15
Consolidated Financial Statements of
Glenborough Hotel Group (Unaudited):
Consolidated Balance Sheet at
June 30, 1996 16
Consolidated Statements of Income for
the six and three months ended
June 30, 1996 17
Consolidated Statement of Equity for
the six months ended June 30, 1996 18
Consolidated Statement of Cash Flows
for the six months ended June 30, 1996 19
Notes to Consolidated Financial
Statements 20-22
</TABLE>
Page 2 of 35
<PAGE> 3
INDEX
GLENBOROUGH REALTY TRUST INCORPORATED
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations:
Glenborough Realty Trust Incorporated 23-29
Glenborough Hotel Group 30-31
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 32-33
ITEM 2. Changes in Securities 33
ITEM 3. Defaults Upon Senior Securities 33
ITEM 4. Submission of Matters to a Vote of Security Holders 33
ITEM 5. Other Information 34
ITEM 6. Exhibits and Reports on Form 8-K 34
SIGNATURES 35
</TABLE>
Page 3 of 35
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
ASSETS -------- ---------
<S> <C> <C>
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
======== ========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
Page 4 of 35
<PAGE> 5
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)
<TABLE>
<CAPTION>
Glenborough GRT
Realty Trust Predecessor
Incorporated Entities
Consolidated Combined
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
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
Consolidation costs 6,082 --
Litigation costs 1,155 --
----------- -----------
Total operating expense 13,001 13,712
----------- -----------
Income (Loss) from operations before
provision for income taxes
and minority interest (4,169) 3,237
Provision for income taxes -- (287)
Minority interest (243) --
----------- -----------
Net income (loss) $ (4,412) $ 2,950
=========== ===========
Net Loss per share $ (0.77)
===========
Weighted average shares
outstanding 5,757,995
===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
Page 5 of 35
<PAGE> 6
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)
<TABLE>
<CAPTION>
Glenborough GRT
Realty Trust Predecessor
Incorporated Entities
Consolidated Combined
June 30, 1996 June 30, 1995
------------ ------------
<S> <C> <C>
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
===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
Page 6 of 35
<PAGE> 7
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.
Page 7 of 35
<PAGE> 8
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)
<TABLE>
<CAPTION>
Glenborough GRT
Realty Trust Predecessor
Incorporated Entities
Consolidated Combined
June 30, 1996 June 30, 1995
------------- ------------
<S> <C> <C>
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
-------- --------
</TABLE>
- continued -
Page 8 of 35
<PAGE> 9
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)
<TABLE>
<CAPTION>
Glenborough GRT
Realty Trust Predecessor
Incorporated Entities
Consolidated Combined
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
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
======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
Page 9 of 35
<PAGE> 10
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 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.
Page 10 of 35
<PAGE> 11
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
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.
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 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.
Page 11 of 35
<PAGE> 12
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
As of June 30, 1996 and December 31, 1995 the Company had the following
investments in the Associated Companies and GP (in thousands):
<TABLE>
<CAPTION>
GC GIRC GHG GP Total
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
GC GIRC GHG Total
------- ------- ------- ------
<S> <C> <C> <C> <C>
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
====== ====== ======= =======
</TABLE>
Financial statements and notes thereto of Glenborough Hotel Group follow Note 7
of the Company's Notes to Financial Statements.
Page 12 of 35
<PAGE> 13
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
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 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
Page 13 of 35
<PAGE> 14
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
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.
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
Page 14 of 35
<PAGE> 15
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
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.
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.
Page 15 of 35
<PAGE> 16
GLENBOROUGH HOTEL GROUP
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
June 30,
1996
------
<S> <C>
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
======
</TABLE>
The accompanying notes are an integral
part of these financial statements.
Page 16 of 35
<PAGE> 17
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1996
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
The accompanying notes are an integral
part of these financial statements.
Page 17 of 35
<PAGE> 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.
Page 18 of 35
<PAGE> 19
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
1996
-----
<S> <C>
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
=====
</TABLE>
The accompanying notes are an integral part
of these financial statements.
Page 19 of 35
<PAGE> 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 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.
Page 20 of 35
<PAGE> 21
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
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 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.
Page 21 of 35
<PAGE> 22
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
HOTEL LEASE RENT PROVISIONS
<TABLE>
<CAPTION>
Rent
Incurred
Initial For the Annual
Annual Six months Percentage
Base ended Rent
Hotel Rent June 30, 1996 Formulas
-------- ------- -------------- ----------
<S> <C> <C> <C>
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
</TABLE>
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.
Page 22 of 35
<PAGE> 23
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 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.
Page 23 of 35
<PAGE> 24
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.
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.
Page 24 of 35
<PAGE> 25
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.
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.
Page 25 of 35
<PAGE> 26
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 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
Page 26 of 35
<PAGE> 27
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:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Retail 92.1% 95.6%
Industrial 100 % 97.2%
Office 100 % 98.7%
Residential 96.2% 94.0%
Hotel 75.5% 76.4%
</TABLE>
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 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 ended June 30, 1996
to $1,421,000 from $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. In the first quarter of 1996, consolidation and litigation costs that
were charged to net income have also been added back to determine FFO.
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,
Page 27 of 35
<PAGE> 28
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.
Beginning with the first quarter of 1996, the Company calculates 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.
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<PAGE> 29
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).
<TABLE>
<CAPTION>
March 31, June 30,
1996 1996
----------- -----------
<S> <C> <C>
Net income (loss) before provision for income
taxes and minority interest $ (5,883) $ 1,714
Consolidation costs 6,082 --
Litigation costs 1,155 --
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
=========== ===========
</TABLE>
(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.
Page 29 of 35
<PAGE> 30
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.
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.
Page 30 of 35
<PAGE> 31
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.
Page 31 of 35
<PAGE> 32
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. 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
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<PAGE> 33
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.
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 judgment 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.
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<PAGE> 34
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.
Page 34 of 35
<PAGE> 35
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
Date: February 21, 1997 By: /s/ Terri Garnick
------------------
Terri Garnick
Senior Vice President
Chief Accounting Officer,
Treasurer
(Principal Accounting Officer)
Page 35 of 35
