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Filed Pursuant to Rule 424(b)(5)
Registration No. 333-19279
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 25, 1997)
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LOGO 3,500,000 SHARES
LOGO
COMMON STOCK
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(PAR VALUE $.001 PER SHARE)
------------------------
Glenborough Realty Trust Incorporated is a self-administered and
self-managed real estate investment trust that
owns a portfolio of 55 office, industrial, retail, multi-family and hotel
properties located in 17 states throughout the country. In addition, three
associated companies provide comprehensive asset, partnership and property
management services for 65 additional properties that are not owned by the
Company. The combined portfolios encompass approximately 11 million rentable
square feet in 21 states.
The 3,500,000 shares of Common Stock of the Company offered hereby are all
being sold by the Company. The Company plans to use the net proceeds of this
offering to fund acquisition activities and repay outstanding indebtedness. The
Common Stock is listed on the New York Stock Exchange under the symbol "GLB." On
March 17, 1997, the last reported sale price of the Common Stock on the New York
Stock Exchange was $20 1/4 per share.
The shares of Common Stock are subject to certain restrictions on ownership
and transfer designed to assist the Company in maintaining its status as a real
estate investment trust for federal income tax purposes. See "Restrictions on
Ownership and Transfer of Common Stock" in the accompanying Prospectus.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO PROCEEDS TO
PUBLIC UNDERWRITING COMPANY(2)
DISCOUNT(1)
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Per Share.............................................. $20.25 $1.12 $19.13
- ----------------------------------------------------------------------------------------------------
Total(3)............................................... $70,875,000 $3,919,388 $66,955,612
====================================================================================================
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(1) The Company and the Operating Partnership (as hereinafter defined) have
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $900,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
525,000 additional shares of Common Stock to cover over-allotments, if any.
If all of these shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $81,506,250,
$4,507,296 and $76,998,954, respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered severally by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, subject to approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the shares of Common Stock will be made against
payment therefor on or about March 21, 1997 at the offices of Bear, Stearns &
Co. Inc., 245 Park Avenue, New York, New York 10167.
------------------------
BEAR, STEARNS & CO. INC.
ROBERTSON, STEPHENS & COMPANY
JEFFERIES & COMPANY, INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MARCH 17, 1997
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[CHART/GRAPH]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OF
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OPEN MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
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PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus
Supplement and the accompanying Prospectus and incorporated by reference herein
and therein. Unless indicated otherwise, the information contained in this
Prospectus Supplement assumes that the Underwriters' over-allotment option is
not exercised. As used herein, the term "Company" means Glenborough Realty Trust
Incorporated, a Maryland corporation, and its consolidated subsidiaries for the
periods from and after December 31, 1995 (the date of the Consolidation referred
to below) and the Company's predecessor partnerships and companies for periods
prior to the Consolidation, and the term "Operating Partnership" means
Glenborough Properties, L.P. in which the Company holds a 1% interest as sole
general partner, and an approximate 91% limited partner interest. The offering
of 3,500,000 shares of Common Stock, par value $.001 per share (the "Common
Stock"), made hereby is herein referred to as the "Offering." The last reported
sale price on the New York Stock Exchange (the "NYSE") on March 17, 1997 was
$20 1/4 per share. Unless otherwise indicated, ownership percentages of the
Common Stock have been computed on a fully converted basis, assuming an exchange
of Operating Partnership units for Common Stock on a one-for-one basis. This
Prospectus Supplement and the accompanying Prospectus, and the documents
incorporated herein and therein, contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934 (the "Exchange Act"), which statements
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" in the
accompanying Prospectus and elsewhere in this Prospectus Supplement and the
accompanying Prospectus.
THE COMPANY
The Company is a self-administered and self-managed real estate investment
trust ("REIT") that owns a diversified portfolio of 55 office, industrial,
retail, multi-family and hotel properties (the "Properties" and each a
"Property") located in 17 states throughout the country. The Company's principal
growth strategy is to capitalize on the opportunity to acquire portfolios or
individual properties from public and private partnerships on attractive terms.
This strategy has evolved from the Company's predecessors' experience since 1978
in managing real estate partnerships and their assets and, since 1989, in
acquiring portfolios and management interests from third parties. In addition,
three associated companies (the "Associated Companies") provide comprehensive
asset, partnership and property management services for a diversified portfolio
of 65 additional properties that are not owned by the Company. The combined
portfolios encompass approximately 11 million rentable square feet in 21 states.
Today's real estate limited partnership market encompasses some ten million
owners of units in public and private limited partnerships, representing
original equity investments in excess of $70 billion, according to 1997
estimates of industry consultant Robert A. Stanger & Co., Inc. Because there is
only a limited market for their partnership interests, investors in such
partnerships, many of which invested in diversified portfolios of properties,
often seek to increase the liquidity of their investments on a tax deferred
basis. Unlike most other REITs, the Company actively seeks to purchase
diversified portfolios, which the Company believes are available to be purchased
on favorable terms. Additionally, because the Company has established an UPREIT
structure, it has the flexibility to address general and limited partner
concerns and to structure transactions that may defer tax gains.
The Company seeks to enhance, expand and diversify its real estate holdings
by acquiring portfolios and individual properties, improving individual property
performance and constantly reviewing the mix of its holdings by redeploying
assets and reinvesting the proceeds. The Company seeks to acquire individual
properties and diversified portfolios that can be purchased at attractive prices
and have characteristics consistent with the Company's growth strategy. The
Company believes that its growth strategies may be aided by the Associated
Companies, which may acquire general partnership interests, enter into asset
management
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and property management agreements with third parties, and lease hotels that may
in the future be acquired by the Company.
As a result of the Company's primary strategy of acquiring diversified
portfolios rather than focusing on a single property type or economic region,
the Company's portfolio is broadly diversified with respect to both property
type and location. The Company's 55 Properties are located in 17 states and are
comprised of 11 office Properties, 14 industrial Properties, 21 retail
Properties, three multi-family Properties and six hotel Properties. The Company
believes such diversification reduces the risks associated with owning and
operating a single property type or owning properties in a single geographic
region.
The following table sets forth, as of December 31, 1996, certain
information with respect to the Company's Properties on a pro forma basis,
assuming that the acquisition of the CIGNA Properties and the E&L Properties
(each defined below) were completed and that such acquisitions and the
acquisition of the Scottsdale Hotel (defined below) and all the Properties
acquired by the Company during 1996 had been completed on January 1, 1996. For
similar information regarding the Properties, see "Properties -- General."
PRO FORMA PROPERTY TABLE BY TYPE OF PROPERTY(1)
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PROPERTY REVENUES FOR
YEAR ENDED
DECEMBER 31, 1996(2) AVERAGE OCCUPANCY
NUMBER OF SQUARE --------------------- FOR YEAR ENDED
TYPE OF PROPERTY PROPERTIES FEET/UNITS AMOUNT PERCENT DECEMBER 31, 1996(2)
---------------------- --------- --------- ----------- ------- --------------------
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Office................ 13 907,406 $12,414,230 29.7% 95
Industrial............ 27 2,753,076 10,468,852 25.1 97%
Retail................ 22 778,450 6,638,388 15.9 96
Multi-family.......... 4 866 5,968,579 14.3 94
Hotels................ 6 726 6,252,460 15.0 70(3)
-- --
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Total/Weighted
Average... 72 $41,742,509 100.0% 95%(4)
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(1) Includes 17 properties expected to be acquired. See "-- Recent Activities."
(2) Represents average economic occupancy (calculated using month-end actual
occupancy rates), and actual 1996 revenues, except for the TRP Properties
and Carlsberg Properties (each defined below), which reflect occupancy rates
as of December 31, 1996 and property revenues on an annualized basis based
on results since the acquisition, as average rates and actual property
revenues are not available for this period for these properties.
(3) This occupancy rate reflects the first year operations of Scottsdale Hotel
acquired by the Company in February 1997. The average occupancy for the
hotels owned by the Company in 1996 was 72%.
(4) Excluding hotel Properties.
The Company's seven executive officers, and its directors who are not
employees of the Company, collectively own approximately 14% of the Company's
Common Stock and will own approximately 10% after giving effect to the Offering.
The executive officers have been with the Company or its predecessors for an
average of nine years. The Company and the Associated Companies employ an
experienced staff of approximately 430 employees who provide a full range of
real estate services from their headquarters in San Mateo, California and from
29 property management offices located across the country.
The Company commenced operations on December 31, 1995 through the merger of
eight public limited partnerships and a management company with and into the
Company (the "Consolidation"). A portion of the Company's operations is
conducted through the Operating Partnership in which the Company holds a 1%
interest as the sole general partner and an approximate 91% limited partner
interest. The Company intends to elect treatment as a REIT when it files its tax
return for the year ended December 31, 1996.
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RECENT ACTIVITIES
Consistent with the Company's strategy for growth, the Company has, during
1996 and during the first quarter of 1997 through the date of this Prospectus
Supplement, acquired, or entered into agreements to acquire, 40 properties in 10
states, aggregating approximately 2.6 million rentable square feet, 762
apartment units, and 227 hotel rooms, for an aggregate total purchase price of
approximately $170 million. In June 1996, the Company sold two industrial
properties to redeploy capital into properties the Company believes have
characteristics more suited to its overall growth strategy and operating goals.
In addition, in July 1996, the Company entered into a $50 million line of credit
("Line of Credit") and a $6.1 million term loan ("Term Loan") with Wells Fargo
Bank, N.A. ("Wells Fargo Bank"), and in October 1996, the Company completed a
public offering of 3,666,000 shares of Common Stock.
The following is a summary of the Company's acquisition, sales and
financing activities during 1996 and the first quarter of 1997 through the date
of this Prospectus Supplement.
COMPLETED ACQUISITIONS
Acquisitions from Partnerships and Other Third Party Sellers
Scottsdale Hotel. In February 1997, the Company acquired a 163-suite hotel
Property (the "Scottsdale Hotel"), which began operations in January 1996 and is
located in Scottsdale, Arizona. The total acquisition cost, including
capitalized costs, was approximately $12.1 million, which consisted of
approximately $4.7 million of mortgage debt assumed, and the balance in cash.
The cash portion was financed through advances under the Line of Credit. Like
four of the Company's other hotel Properties, the Scottsdale Hotel is marketed
as a Country Suites by Carlson.
Carlsberg Acquisition. In November 1996, the Company acquired from various
partnerships and their general partner, a Southern California syndicator, a
portfolio of six Properties (including one property on which the Company made a
mortgage loan which included a purchase option), aggregating approximately
342,000 square feet, together with associated management interests (the
"Carlsberg Properties"). The total acquisition cost, including the mortgage loan
and capitalized costs, was approximately $23.2 million, which consisted of (i)
approximately $8.9 million of mortgage debt assumed, (ii) approximately $350,000
in the form of 24,844 shares of Common Stock of the Company (based on a per
share value of $14.09) and (iii) the balance in cash. The cash portion was
financed through advances under the Line of Credit. The Carlsberg Properties
consist of five office Properties and one retail Property, located in two
states. Concurrently with the Company's acquisition of the Carlsberg Properties,
one of the Associated Companies assumed management of a portfolio of 13
additional properties with an aggregate of one million square feet under a
venture with an affiliate of the seller.
TRP Acquisition. In October 1996, the Company acquired a portfolio of 12
properties, aggregating approximately 784,000 square feet and 538 multi-family
units, together with associated management interests (the "TRP Properties"). The
total acquisition cost, including capitalized costs, was approximately $43.8
million, which consisted of (i) approximately $16.3 million of mortgage debt
assumed, (ii) approximately $760,000 in the form of 52,387 partnership units in
the Operating Partnership (based on a per unit value of $14.50), (iii)
approximately $2.6 million in the form of 182,000 shares of Common Stock of the
Company (based on a per share value of $14.50) and (iv) the balance in cash. The
cash portion was financed through advances under the Line of Credit. The TRP
Properties consist of three office, six industrial, one retail and two
multi-family Properties, located in six states.
San Antonio Hotel. In August 1996, the Company acquired a 64-room hotel
property (the "San Antonio Hotel"), which is located in San Antonio, Texas. The
total acquisition cost, including capitalized costs, was approximately $2.8
million, which was paid in cash. The acquisition was financed through advances
under the Line of Credit.
Kash n' Karry. In August 1996, the Company also expanded an existing
shopping center in Tampa, Florida through a purchase-leaseback transaction with
the anchor tenant. The Company's initial acquisition cost, including capitalized
costs, was approximately $1.6 million, all of which was paid in cash which was
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financed through advances under the Line of Credit. In addition, the Company
committed an additional $1.8 million for future expansion and tenant
improvements, which the Company expects will also be paid in cash.
Acquisitions from Entities Controlled by Associated Companies
Bond Street Property. In September 1996, the Company acquired a two-story,
40,595 square foot office building in Farmington Hills, Michigan (the "Bond
Street Property"). The total acquisition cost, including capitalized costs, was
approximately $3.2 million, which consisted of $391,000 in the form of 26,067
partnership units in the Operating Partnership (based on a per unit value of
$15.00), and the balance paid in cash. The cash portion was financed through
advances under the Line of Credit.
UCT Property. In July 1996, the Company acquired a 23-story, 272,443 square
foot office building in St. Louis, Missouri (the "UCT Property"). The total
acquisition cost, including capitalized costs, was approximately $18.8 million,
which consisted of $350,000 in the form of 23,333 partnership units in the
Operating Partnership (based on a per unit value of $15.00), and the balance
paid in cash. The cash portion was financed through advances under the Line of
Credit.
PENDING ACQUISITIONS
CIGNA Properties. In January 1997, the Company entered into a definitive
agreement with two limited partnerships organized by affiliates of CIGNA Corp.
to acquire a portfolio of six properties, aggregating approximately 616,000
square feet and 224 multi-family units (the "CIGNA Properties"). The total
acquisition cost, including capitalized costs, is expected to be approximately
$45.5 million, which will be paid entirely in cash from the proceeds of the
Offering. The CIGNA Properties consist of two office properties, two R&D
properties, a neighborhood shopping center and a multifamily property, located
in four states. These acquisitions are subject to a number of contingencies,
including approval of the acquisition by a majority in interest of the voting
power of the limited partners of each of the selling partnerships, satisfactory
completion of environmental and engineering due diligence and customary closing
conditions. Accordingly, there can be no assurance that any or all of these
acquisitions will be completed.
E&L Properties. In February 1997, the Company entered into definitive
agreements with various partnerships and their general partner, a Southern
California syndicator, to acquire a portfolio of up to 11 properties,
aggregating approximately 524,000 square feet, together with associated
management interests (the "E&L Properties"). The total acquisition cost,
including capitalized costs, is expected to be approximately $22.2 million,
which will consist of (i) approximately $9.5 million of mortgage debt assumed,
(ii) approximately $7.8 million in the form of 410,537 partnership units in the
Operating Partnership (based on a per unit value of $19.075), (iii)
approximately $650,000 in the form of 34,076 shares of Common Stock of the
Company (based on a per share value of $19.075) to be issued in connection with
the acquisition of the management interests relating to the E&L Properties, and
(iv) the balance in cash. The cash portion of the acquisition cost will be
funded with proceeds of the Offering. The E&L Properties consist of one office
and ten industrial properties, all located in Southern California. These
acquisitions are subject to a number of contingencies, including the approval of
the acquisition by a majority of the voting power of the limited partners of
each of the selling partnerships, satisfactory completion of environmental and
engineering due diligence and customary closing conditions. Accordingly, there
can be no assurance that any or all of these acquisitions will be completed, and
it is possible that fewer than all of these acquisitions may be completed.
Other Acquisition Opportunities. The Company maintains an active
acquisition department which identifies, evaluates, negotiates and consummates
portfolio and individual property investments. Currently, the Company is
considering acquisitions involving, in the aggregate, in excess of $200 million
in total capitalized costs. The acquisitions are subject to a number of
contingencies, including a review of the physical and economic characteristics
of the properties involved, negotiation of detailed terms, which among other
things could alter the scope of the acquisitions, and formal documentation.
Accordingly, the Company cannot reach a conclusion that any of these
acquisitions is probable, and there can be no assurance that these current
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discussions, or other discussions involving potential acquisition opportunities
will result in any agreement or consummation of any transaction. See "Risk
Factors -- Risks Associated with Acquisitions" in the accompanying Prospectus.
Possible Tender Offer Acquisitions. In addition to its current program of
negotiated property and portfolio acquisitions, the Company intends to consider
opportunities to acquire interests in properties and portfolios of properties
through tender offers for public and private limited partnerships. Depending
upon the opportunity and the circumstances, these offers may be made with or
without the cooperation of the general partner. As the Company is currently
evaluating this addition to its acquisition strategy and no tender offer
transactions have been initiated, there is no certainty that the Company will
adopt this strategy or that any such transactions will be completed. See "Risk
Factors -- Risks Associated with Tender Offers" in the accompanying Prospectus.
1996 PROPERTY SALES
As part of its strategy to achieve sustainable long-term growth in Funds
from Operations (as defined below, "Funds from Operations," or "FFO"), the
Company periodically reviews its current portfolio of properties for
opportunities to redeploy capital from certain existing Properties to other
properties that the Company believes have characteristics more suited to its
overall growth strategy and operating goals. Consistent with this strategy, in
June 1996, the Company sold two self-storage facilities (the "All American
Industrial Properties") held in its industrial portfolio. The sales price for
these two facilities was approximately $2.9 million and generated a book value
gain of approximately $321,000.
FINANCING ACTIVITIES
Line of Credit. In 1996, the Company entered into the $50 million Line of
Credit with Wells Fargo Bank. The Line of Credit has a term of two years,
subject to annual extensions at the option of the Company. The Line of Credit
bears interest at an annual rate equal to LIBOR plus 2.375%, which will be
reduced to LIBOR plus 1.75% upon completion of the Offering. If the Line of
Credit lender terminates the Line of Credit (other than by reason of the
Company's default thereunder), at the Company's option, any remaining balance
outstanding under the Line of Credit will be converted to a ten-year term loan,
bearing interest at a fixed rate of 275 points over the then 10-year treasury
rate, with a twenty-year amortization schedule. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Term Loan. In 1996, the Company entered into the $6.1 million Term Loan
with Wells Fargo Bank. The Term Loan has a term of two years, bears interest at
the same rate as the Line of Credit and is secured by first mortgage liens on 10
"QuikTrip" facilities owned by the Company, with full recourse to the Company.
Required payments under the Term Loan are interest only for the first year, and
principal and interest payments in the second year based on monthly principal
payments of $25,500 plus interest on the outstanding balance.
Public Offering. In October 1996, the Company completed a public offering
of 3,666,000 shares of its Common Stock at a price of $13.875 per share (the
"Prior Offering"). The net proceeds of approximately $47.8 million were used for
the acquisition of certain Properties and to repay approximately $24.0 million
of the then outstanding balance under the Line of Credit.
Increased Distribution. In January 1997, the Company announced a 6.7%
increase in its regular quarterly distribution from $.30 to $.32 per share of
Common Stock. See "Distribution Policy."
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THE OFFERING
All of the shares of Common Stock offered hereby are being sold by the
Company. None of the Company's stockholders is selling any shares of Common
Stock in the Offering.
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Shares of Common Stock Offered................. 3,500,000
Shares of Common Stock Outstanding
Before this Offering(1)..................... 10,305,673
Shares of Common Stock Outstanding
After this Offering(1)(2)................... 14,250,286
To fund acquisition activities, repay
outstanding indebtedness and for general
corporate purposes. See "Use of
Use of Proceeds................................ Proceeds."
NYSE Symbol.................................... "GLB"
</TABLE>
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(1) Assumes the exchange of all 644,120 existing units of the Operating
Partnership eligible for exchange to Common Stock.
(2) Assumes the issuance of 34,076 shares of Common Stock and the issuance of
410,537 units of the Operating Partnership in connection with the pending
acquisition of the E&L Properties, and the exchange of the units for shares
of Common Stock.
RISK FACTORS
See "Risk Factors" beginning at page 6 of the accompanying Prospectus for
certain factors relating to an investment in the Common Stock.
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THE COMPANY
The Company is a self-administered and self-managed REIT that owns a
diversified portfolio of 55 office, industrial, retail, multi-family and hotel
Properties located in 17 states throughout the country. In addition, the three
Associated Companies provide comprehensive asset, partnership and property
management services for a diversified portfolio of 65 additional properties that
are not owned by the Company. The combined portfolios encompass approximately 11
million rentable square feet in 21 states.
The Company was incorporated in the state of Maryland on August 26, 1994.
On December 31, 1995, the Company completed the Consolidation in which
Glenborough Corporation, a California corporation ("Old GC"), and eight public
limited partnerships (the "Partnerships" and, collectively with Old GC, the "GRT
Predecessor Entities") merged with and into the Company. A portion of the
Company's operations are conducted through the Operating Partnership, in which
the Company holds a 1% interest as the sole general partner and an approximate
91% limited partnership interest.
The Company's executive offices are located at 400 South El Camino Real,
Suite 1100, San Mateo, California 94402-1708, and its telephone number is (415)
343-9300.
GROWTH STRATEGY
The Company seeks to achieve sustainable long-term growth in Funds from
Operations primarily through the following strategies:
- Acquiring portfolios or individual properties on attractive terms, often
from public and private partnerships;
- Acquiring properties from entities controlled by the Associated
Companies;
- Improving the performance of Properties in the Company's portfolio; and
- Constantly reviewing the Company's current portfolio for opportunities to
redeploy capital from certain existing Properties into other properties
which the Company believes have characteristics more suited to its
overall growth strategy and operating goals.
Acquisitions
The Company primarily seeks to acquire portfolios and individual properties
with certain of the following characteristics: (i) a stable stream of income,
both historical and projected; (ii) existing management fees and costs that,
when internalized, would augment the Company's investment return; (iii)
properties generally constructed after 1970; (iv) little or no exposure to
hazardous materials; (v) prudent debt levels; (vi) potential for substantial
overhead savings that could be converted to distributions; (vii) low-to-moderate
vacancy levels; (viii) diversified tenant risk; (ix) low-to-moderate deferred
maintenance; (x) substantial geographic overlap with the Company's existing
portfolio, to capitalize on the Company's existing management capabilities; and
(xi) predominantly comprised of office, industrial, retail, multi-family
properties, and/or hotel properties.
Portfolio Acquisitions. The Company seeks to grow by acquiring diversified
portfolios of real estate, and believes that the primary, though not exclusive,
holders of such diversified portfolios are public and private limited
partnerships. Today's real estate limited partnership market encompasses some
ten million owners of units in public and private limited partnerships,
representing original equity investments in excess of $70 billion, according to
1997 estimates of Robert A. Stanger & Co., Inc. According to Stanger, few of the
private partnerships, and less than half of the public partnerships, are traded
in any active secondary market, and a substantial percentage of the public
partnerships' portfolios are diversified either geographically or by property
type or both.
The Company believes the majority of the limited partners in these
partnerships would be interested in solutions providing liquidity. The principal
options available to such limited partners include (i) selling their units for
cash on the secondary market, which according to Stanger has a pricing structure
that typically
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discounts unit values relative to underlying asset values, and (ii) more
recently, selling their units for cash to large, well-financed investors who
solicit limited partners to sell their interests at prices that are higher than
prevailing secondary market prices but generally lower than the seller's
underlying asset value. In addition to their discounted pricing structure, these
solutions may not be preferred by limited partners who, as a result of past tax
benefits or other factors, may incur significant tax liabilities as a result of
such sale.
Moreover, the Company believes it is often not feasible for a partnership
or other entity with a diversified portfolio to provide liquidity to its
investors on a cost-effective basis by liquidating and dissolving. For example,
if overhead costs are significant, a gradual sell-off of assets over time may be
considered prohibitively expensive and a bulk sale may be considered the most
efficient liquidation strategy. The Company also believes that the number of
potential bulk purchasers of such diversified portfolios is limited. Most REITs
actively seeking to grow through acquisitions pursue a strategy that focuses
either on specific property types or geographic regions or both, and thus do not
provide an outlet for bulk sales by partnerships and other holders of
diversified portfolios.
Given the limited alternatives available to partnerships and other holders
of diversified portfolios as described above, the Company believes that its
emphasis on diversified portfolios, its long-term investment strategy and
self-managed structure enable it to compete very effectively for the acquisition
in bulk of such diversified portfolios. The Company believes it can offer
consideration (in the form of units of the Operating Partnership, Common Stock
of the Company, and/or cash) which both exceeds that otherwise available to such
limited partners and meets the Company's investment criteria. Furthermore, the
Company's UPREIT structure allows it to make such acquisitions on a basis which
is tax-deferred to the seller's investors.
Individual Property Acquisitions. From time to time the Company will
acquire individual properties that it believes will enhance the Company's
profitability and take advantage of existing management resources.
Possible Tender Offer Acquisitions. In addition to its current program of
negotiated portfolio and individual property acquisitions, the Company intends
to consider opportunities to acquire interests in portfolios and individual
properties through tender offers for public and private limited partnerships.
Depending upon the opportunity and the circumstances, such offers may be made
with or without the cooperation of the general partner of such partnerships. As
the Company is currently evaluating this addition to its acquisition strategy
and no tender offer transactions have been initiated, there is no certainty that
the Company will adopt this strategy or that any such transactions will be
completed. See "Risk Factors -- Risks Relating to Tender Offers" in the
accompanying Prospectus.
The Associated Companies
The Company seeks to acquire properties from entities controlled by the
Associated Companies described below.
Glenborough Corporation. Glenborough Corporation ("GC"), a California
corporation formerly known as Glenborough Realty Corporation, serves as general
partner of several real estate limited partnerships for whom it provides
management services, asset management and property management services. GC also
provides property management services for a limited portfolio of properties
owned by unaffiliated third parties.
The Company owns 100% of the 19,000 shares (representing 95% of total
outstanding shares) of non-voting preferred stock of GC. Three individuals, one
of whom, Sandra L. Boyle, is an executive officer of the Company, each own
33 1/3% of the 1,000 shares (representing 5% of total outstanding shares) of
voting common stock of GC. The Company and GC intend that the Company's interest
in GC comply with REIT qualification standards.
The Company, through its ownership of preferred stock of GC, is entitled to
receive cumulative, preferred annual dividends of $1.465 per share, which GC
must pay before it pays any dividends with respect to the common stock of GC.
Once GC pays the required cumulative preferred dividend, it will pay any
additional dividends in equal amounts per share on both the preferred stock and
the common stock at 95% and 5%, respectively. Through the preferred stock, the
Company is also entitled to receive a preferred liquidation value of $174.00 per
share plus all cumulative and unpaid dividends. The preferred stock is subject
to redemption at
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<PAGE> 11
the option of GC after December 31, 2005, for a redemption price of $174.00 per
share. As the holder of preferred stock of GC, the Company has no voting power
with respect to the election of the directors of GC; all power to elect
directors of GC is held by the owners of the common stock of GC.
This structure is intended to provide the Company with a significant
portion of the economic benefits of the operations of GC. The Company accounts
for the financial results of GC using the equity method.
Glenborough Inland Realty Corporation. Glenborough Inland Realty
Corporation ("GIRC") provides management services for certain partnerships
sponsored by Rancon Financial Corporation, an unaffiliated corporation which has
significant real estate assets in the Inland Empire region of Southern
California (the "Rancon Partnerships"). These services include asset management,
property development, Securities and Exchange Commission reporting, accounting,
investor relations, property management services, and may in the future also
include general partner services.
The Company owns 100% of the 19,000 shares (representing 95% of total
outstanding shares) of non-voting preferred stock of GIRC. Three individuals,
one of whom, Frank E. Austin, is an executive officer of the Company, each own
33 1/3% of the 1,000 shares (representing 5% of total outstanding shares) of
voting common stock of GIRC. The Company and GIRC intend that the Company's
interest in GIRC comply with REIT qualification standards.
The Company, through its ownership of preferred stock, is entitled to
receive cumulative, preferred annual dividends of $0.80 per share, which GIRC
must pay before it pays any dividends with respect to the common stock. Once
GIRC pays the required cumulative preferred dividend, it will pay any additional
dividends in equal amounts per share on both the preferred stock and the common
stock at 95% and 5%, respectively. Through the preferred stock, the Company is
also entitled to receive a preferred liquidation value of $55.00 per share plus
all cumulative and unpaid dividends. The preferred stock is subject to
redemption at the option of GIRC after December 31, 2005, for a redemption price
of $55.00 per share plus cumulative and unpaid dividends. As the holder of
preferred stock of GIRC, the Company has no voting power with respect to the
election of the directors of GIRC; all power to elect directors of GIRC is held
by the owners of the common stock of GIRC.
This structure is intended to provide the Company with a significant
portion of the economic benefits of the operations of GIRC. The Company accounts
for the financial results of GIRC using the equity method.
Glenborough Hotel Group. The Operating Partnership leases its hotel
properties to Glenborough Hotel Group ("GHG"). The Operating Partnership holds a
first mortgage on another hotel, which is managed by GHG under a contract with
its owner. GHG also manages two other hotels owned by Outlook Income Fund 9, a
partnership whose general partner is GC, as well as two resort condominium
hotels.
The Company owns 100% of the 50 shares of non-voting preferred stock of
GHG. Three individuals, one of whom, Terri Garnick, is an executive officer of
the Company, each own 33 1/3% of the 1,000 shares of voting common stock of GHG.
The Company and GHG intend that the Company's interest in GHG comply with REIT
qualification standards.
The Company, through its ownership of preferred stock, is entitled to
receive cumulative, preferred annual dividends of $600 per share, which GHG must
pay before it pays any dividends with respect to the common stock. Once GHG pays
the required cumulative preferred dividend, it will pay 75% of any additional
dividends to holders of the preferred stock, and 25% to holders of the common
stock. Through the preferred stock, the Company is also entitled to receive a
preferred liquidation value of $40,000 per share plus all cumulative and unpaid
dividends. The preferred stock will be subject to redemption at the option of
GHG after December 31, 1999, for a redemption price of $40,000 per share. As the
holders of preferred stock of GHG, the Company has no voting power with respect
to the election of the directors of GHG; all power to elect directors of GHG is
held by the owners of the common stock of GHG.
This structure is intended to provide the Company with a significant
portion of the economic benefits of the operations of GHG. The Company accounts
for the financial results of GHG using the equity method.
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<PAGE> 12
Internal Growth
The Company seeks market rent increases as leases are renewed. In addition,
many of the commercial leases provide for rent increases that are either fixed
or based on a consumer price index ("CPI"). Such increases, together with
anticipated future rents from space now vacant, provide an opportunity for
increased revenues. The leases for the hotel portfolio provide the Company with
either a base rent amount or a percentage of the hotel's revenue, whichever is
higher; thus, the Company will participate in increasing hotel revenues, if any.
Redeployment of Assets
The Company periodically reviews the existing Properties, and sells certain
Properties and reinvests the proceeds in other properties which the Company
believes have characteristics more suited to its overall growth strategy and
operating goals. For example, the Company may: (i) sell properties that have
matured beyond a point of significant future growth potential and replace them
with properties with comparable cash flow but higher growth potential; (ii) sell
some smaller or management intensive properties and replace them with larger or
more management-efficient properties; and (iii) seek to reduce the number of
cities in which it does business. By redeploying assets in this manner, the
Company believes it can achieve certain economies of scale with respect to
staffing and overhead levels. For example, the Company recently sold the All
American Industrial Properties located outside Minneapolis that were
geographically isolated, required outside management and did not otherwise fit
the Company's portfolio strategy.
FINANCING POLICIES
Conservative Debt Strategy. On a pro forma basis, and giving effect to the
Offering and the application of the net proceeds therefrom, the Company's total
indebtedness as of December 31, 1996 would have been $80.6 million, which
represents a debt to total market capitalization (debt divided by the sum of
market value of equity plus debt) ratio of approximately 22%. This ratio is
consistent with the Company's conservative strategy of maintaining its debt to
total market capitalization ratio at a level of 30% or less. In addition, the
Company's Articles of Incorporation (the "Charter") limits the Company's ability
to incur additional debt if the Company's total debt would exceed 50% of the
greater of the Company's fair market value or total market capitalization (sum
of market value of equity plus debt), as defined in the Charter. This debt
limitation contained in the Company's Charter cannot be changed without the
affirmative vote of the stockholders of the Company in accordance with Maryland
General Corporation Law.
Limited Floating Interest Rate Debt. The Company seeks to limit the amount
of its indebtedness that is subject to floating interest rates. On a pro forma
basis, giving effect to the Offering and the application of the net proceeds
therefrom, as of December 31, 1996, $23.1 million, or 29%, the Company's
aggregate indebtedness, would be subject to floating rates of interest.
INVESTMENT POLICIES
The Company seeks to invest in income-producing property, both directly and
through joint ventures with unaffiliated third parties, including institutional
investors. Prospective real estate investment opportunities undergo an
underwriting process that evaluates the following: (i) reasonably anticipated
levels of net cash and ultimate sales value, based on evaluation of a range of
factors including, but not limited to, rental levels under existing leases; (ii)
financial strength of tenants; (iii) levels of expense required to maintain
operating services and routine building maintenance at competitive levels; and
(iv) levels of capital expenditures required to maintain the capital components
of the building in good working order and in conformance with building codes,
health, safety and environmental and other standards.
The Company conducts physical site inspections of each property under
consideration and also engages outside professionals to independently inspect
properties prior to acquisition. The Company either engages outside
professionals to conduct Phase I Environmental Assessments for all acquisitions,
or relies on either: (i) the availability of a recent report prepared for a
third party; or (ii) in the case of a property managed by an
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<PAGE> 13
Associated Company, the experience of the Associated Company in managing the
property, when the incremental benefit of obtaining a report is believed by the
Company to be outweighed by the cost. Based upon the results of these
inspections, assessments, reports and experience, the Company evaluates the
risks associated with a proposed acquisition prior to its completion and takes
appropriate corrective measures.
The Company emphasizes equity real estate investments, but may also invest
in mortgages, securitized mortgage portfolios or other assets consistent with
maintaining qualification as a REIT. The Company will not invest in derivative
financial instruments except for the limited purpose of prudently hedging
interest rate risk under variable interest rate debt. The Company has no plans
to invest in derivative financial instruments.
The Board of Directors of the Company reviews the investment policies of
the Company periodically to determine that the investment policies being
followed by the Company at any time are in the best interests of the Company's
stockholders. The Board of Directors may alter the Company's investment policies
if they determine in the future that such a change is in the best interests of
the Company and its stockholders. The methods of implementing the Company's
investment policies may vary as new investment and financing techniques are
developed or for other reasons.
The Company has also adopted a policy that no acquisition of properties
from GPA, Ltd. or Robert or Andrew Batinovich or their families or from other
entities in which they have an interest will be made without the approval of at
least two-thirds of the Company's independent directors.
S-13
<PAGE> 14
ORGANIZATIONAL DIAGRAM
(at December 31, 1996)
(1) The remaining interests in the Operating Partnership, other
than the interests held by the Company, are: (i) a 7.38%
limited partner interest held by GPA, Ltd., a California
limited partnership ("GPA"), (ii) a 0.16% limited partner
interest held by Robert Batinovich, and (iii) an aggregate of
0.67% of limited partner interests held by certain other
persons. GPA is owned by Robert Batinovich, who holds a 1%
general partner interest, and Glenborough Partners, a
California limited partnership, which holds a 99% limited
partner interest. The Company owns a 4.0% limited partner
interest in Glenborough Partners, and Robert Batinovich and
Andrew Batinovich and members of their immediate families own
an approximate 21% aggregate interest (including both general
partner and limited partner interests) in Glenborough
Partners. The remaining 75% interests in Glenborough Partners
are held in aggregate by approximately 400 private investors.
See "Certain Relationships and Related Transactions."
S-14
<PAGE> 15
RECENT ACTIVITIES
Consistent with the Company's strategy for growth, the Company has, during
1996 and during the first quarter of 1997 through the date of this Prospectus
Supplement, acquired, or entered into agreements to acquire, 40 properties in 10
states, aggregating approximately 2.6 million rentable square feet, 762
apartment units, and 227 hotel rooms, for an aggregate total investment of
approximately $170 million. In June 1996, the Company sold the All American
Industrial Properties to redeploy capital into properties the Company believes
have characteristics more suited to its overall growth strategy and operating
goals. In addition, in July 1996, the Company entered into the $50 million Line
of Credit with Wells Fargo Bank, and in October 1996, the Company completed a
public offering of 3,666,000 shares of Common Stock. The following is a summary
of the Company's acquisition, sales and financing activities during 1996 and the
first quarter of 1997 through the date of this Prospectus Supplement.
COMPLETED ACQUISITIONS
Acquisitions from Partnerships and Other Third Party Sellers
Scottsdale Hotel. In February 1997, the Company acquired a 163-suite hotel
Property (the "Scottsdale Hotel"), which began operations in January 1996 and is
located in Scottsdale, Arizona. The total acquisition cost, including
capitalized costs, was approximately $12.1 million, which consisted of
approximately $4.7 million of mortgage debt assumed, and the balance in cash.
The cash portion was financed through advances under the Line of Credit. Like
four of the Company's other hotel Properties, the Scottsdale Hotel is marketed
as a Country Suites by Carlson.
Carlsberg Acquisition. In November 1996, the Company acquired from various
partnerships and their general partner, a Southern California syndicator, the
Carlsberg Properties, a portfolio of six Properties (including one property on
which the Company made a mortgage loan which included a purchase option),
aggregating approximately 342,000 square feet, together with associated
management interests. The total acquisition cost including the mortgage loan and
capitalized costs, was approximately $23.2 million, which consisted of (i)
approximately $8.9 million of mortgage debt assumed, (ii) approximately $350,000
in the form of 24,844 shares of Common Stock of the Company (based on a per
share value of $14.09) and (iii) the balance in cash. The cash portion was
financed through advances under the Line of Credit. The Carlsberg Properties
consist of five office Properties and one retail Property, located in two
states. Concurrently with the Company's acquisition of the Carlsberg Properties,
one of the Associated Companies assumed management of a portfolio of 13
additional properties with an aggregate of one million square feet under a
venture with an affiliate of the seller.
The shares of Common Stock issued in connection with the Carlsberg
Properties acquisition are unregistered, but the holders of these shares have
certain piggyback and demand registration rights. The piggyback rights are
available for a one-year period commencing on the date of completion of the
acquisition. At the end of the piggyback period, the holders will have the right
to demand registration under the Securities Act of any unsold shares that cannot
then be sold freely without registration. The holder of such shares will then be
limited within the first six months to the sale of not more than 25% of the
original of number shares issued, within the first 12 months to the sale of not
more than 50% of the original number of shares issued and within 18 months to
the sale of not more than 75% of the original number of shares issued.
TRP Acquisition. In October 1996, the Company acquired the TRP Properties,
a portfolio of 12 properties, aggregating approximately 784,000 square feet and
538 multi-family units, together with associated management interests. The total
acquisition cost, including capitalized costs, was approximately $43.8 million,
which consisted of (i) approximately $16.3 million of mortgage debt assumed,
(ii) approximately $760,000 in the form of 52,387 partnership units in the
Operating Partnership (based on a per unit value of $14.50), (iii) approximately
$2.6 million in the form of 182,000 shares of Common Stock of the Company (based
on a per share value of $14.50) and (iv) the balance in cash. The cash portion
was financed through advances under the Line of Credit. The TRP Properties
consist of three office, six industrial, one retail and two multi-family
Properties, located in six states.
S-15
<PAGE> 16
The Operating Partnership units issued in connection with the TRP
Properties acquisition are accompanied by an option permitting the holder of the
units to require the Operating Partnership to redeem the units. If the holder
requires a redemption, the Company, as general partner of the Operating
Partnership, will have the option to acquire the units by delivering the Common
Stock on a one-for-one basis, or causing the Operating Partnership to distribute
cash in an amount equal to the fair market value of the units being redeemed.
The shares of the Company's Common Stock to be issued upon redemption of the
Operating Partnership units will have certain piggyback and demand registration
rights. The piggyback rights are available for a one-year period commencing on
the date any of the Operating Partnership units are redeemed for shares of
Common Stock. At the end of the piggyback period, the holders will have the
right to demand registration under the Securities Act of any unsold shares that
cannot then be sold freely without registration. The holders of shares issued
upon redemption of the Operating Partnership units will be limited to the sale
of not more than 15,000 shares in any three-month period during the first three
years after issuance.
The shares of the Common Stock issued in connection with this transaction
are unregistered, but the holders of these shares will have the same piggyback
and demand registration rights as applicable to the Operating Partnership units.
The holders of these shares, however, are restricted from selling any of such
shares until the first anniversary of the closing, and thereafter will be
limited to the sale of not more than 50,000 shares in any six-month period
during the first three years after issuance.
San Antonio Hotel. In August 1996, the Company acquired the San Antonio
Hotel, a 64-room hotel property, which is located in San Antonio, Texas. The
total acquisition cost, including capitalized costs, was approximately $2.8
million, which was paid in cash. The acquisition was financed with an advance on
the Line of Credit.
Kash n' Karry. In August 1996, the Company also expanded an existing
shopping center in Tampa, Florida through a purchase-leaseback transaction with
the anchor tenant. The Company's initial acquisition cost, including capitalized
costs, was approximately $1.6 million, all of which was paid in cash which was
financed through advances under the Line of Credit, and in addition the Company
committed an additional $1.8 million for future expansion and tenant
improvements, which the Company expects will also be paid in cash.
Acquisitions from Entities Controlled by Associated Companies
Bond Street Property. In September 1996, the Company acquired the Bond
Street Property, a two-story, 40,595 square foot office building, in Farmington
Hills, Michigan. The total acquisition cost, including capitalized costs, was
approximately $3.2 million, which consisted of $391,000 in the form of 26,067
partnership units in the Operating Partnership (based on a per unit value of
$15.00), and the balance paid in cash. The cash portion was financed through
advances under the Line of Credit.
The Operating Partnership units delivered in connection with the Bond
Street Property acquisition are accompanied by an option permitting a holder of
the units to require the Operating Partnership to redeem the units beginning one
year following the closing of the acquisition of the Bond Street Property. If
the holder requires a redemption, the Company, as general partner for the
Operating Partnership, will have the option to acquire the units by either (i)
paying cash in an amount equal to the fair market value, on the date of receipt
of the notice of redemption, of the units being acquired, or (ii) delivering a
number of shares of the Company's Common Stock having a fair market value equal
to the fair market value of the units being acquired. If the shares of the
Company's Common Stock are issued to acquire units of the Operating Partnership,
the holder of those shares will have the right for one year to participate in
any offerings filed by the Company or, if no registered offering is filed by the
Company within that year, to demand registration of the shares under the
securities laws if a sufficient number of holders so request. In any event, a
holder is limited to the sale of not more than 35,000 shares in any three month
period.
UCT Property. In July 1996, the Company acquired the UCT Property, a
23-story, 272,443 square foot office building, in St. Louis, Missouri. The total
acquisition cost, including capitalized costs, was approximately $18.8 million,
which consisted of $350,000 in the form of 23,333 partnership units in the
Operating
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<PAGE> 17
Partnership (based on a per unit value of $15.00), and the balance paid in cash.
The cash portion was financed through advances under the Line of Credit.
The Operating Partnership units delivered in connection with the UCT
Property acquisition are accompanied by an option permitting a holder of the
units to require the Operating Partnership to redeem the units beginning July
15, 1997. If the holder requires a redemption, the Company, as general partner
for the Operating Partnership, will have the option to acquire the units by
either (i) paying cash in an amount equal to the fair market value, on the date
of receipt of the notice of redemption, of the units being acquired, or (ii)
delivering a number of shares of the Company's Common Stock having a fair market
value equal to the fair market value of the units being acquired. If shares of
the Company's Common Stock are issued to acquire units of the Operating
Partnership, the holder of those shares will have the right for one year to
participate in any offerings filed by the Company or, if no registered offering
is filed by the Company within that year, to demand registration of the shares
under the securities laws if a sufficient number of holders so request. In any
event, though, a holder will be limited to the sale of not more than 35,000
shares in any three month period.
PENDING ACQUISITIONS
CIGNA Properties. In January 1997, the Company entered into a definitive
agreement with two limited partnerships organized by affiliates of CIGNA Corp.
to acquire the CIGNA Properties, a portfolio of six properties, aggregating
approximately 616,000 square feet and 224 multi-family units. The total
acquisition cost, including capitalized costs, is expected to be approximately
$45.5 million, which will be paid entirely in cash from the proceeds of the
Offering. The CIGNA Properties consist of two office properties, two R&D
properties, a neighborhood shopping center and a multi-family property, located
in four states. These acquisitions are subject to a number of contingencies,
including approval of the acquisition by a majority in interest of the voting
power of the limited partners of each of the selling partnerships, satisfactory
completion of environmental and engineering due diligence and customary closing
conditions. Accordingly, there can be no assurance that any or all of these
acquisitions will be completed.
The following table sets forth for each of the CIGNA Properties, the name,
the property type, general location, year completed, approximate square footage
(or, in the case of the multi-family property, units) and, for the year ended
December 31, 1996, average occupancy rate, average effective rent per leased
square foot (or, in the case of the multifamily property, average rent per
unit), annual effective base rent, property revenues and percentage of the total
CIGNA Properties' revenues.
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<PAGE> 18
CIGNA PROPERTIES
<TABLE>
<CAPTION>
AVERAGE PROPERTY REVENUES
OCCUPANCY FOR AVERAGE ANNUAL FOR YEAR
THE YEAR EFFECTIVE EFFECTIVE ENDED 12/31/96
YEAR SQUARE ENDED RENT/LEASED BASE --------------------
PROPERTY CITY ST COMPLETED FEET/UNITS 12/31/96(1) SQUARE FEET RENT(3) AMOUNT PERCENT
- ------------------ ---------- --- --------- ---------- ------------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OFFICE
Westford
Corporate
Center........ Westford MA 1987 163,247 100% $ 8.73 $1,425,303 $1,816,614 23.2 %
Woodlands
Plaza......... St. Louis MO 1983 72,276 96% 15.04 1,043,701 1,040,250 13.3 %
INDUSTRIAL
Lake Point...... Orlando FL 1985 134,984 100% 8.77 1,183,364 1,366,256 17.5 %
Woodlands Tech
Center........ St. Louis MO 1986 98,037 83% 7.63 616,981 786,648 10.1 %
RETAIL
Piedmont
Plaza......... Apopka FL 1985 147,750 97% 6.22 891,626 1,160,614 14.9 %
------- ------- ---------- --------- -----
Subtotal/Total... 616,294 8.72 5,160,975 6,170,382 79.0 %
======= ======= ========== ========= =====
MULTI-FAMILY
Overlook
Apartments.... Scottsdale AZ 1988 224 94% 610.36(2) 1,537,325 1,640,641 21.0 %
------- ----- ---------- --------- -----
Total/Weighted
Average..... 96% $6,698,300 $7,811,023 100.0 %
===== ========== ========= =====
</TABLE>
- ---------------
(1) Represents average economic occupancy (calculated using month-end actual
occupancy rates).
(2) Represents average monthly rent per unit.
(3) As used herein, "Effective Base Rent" represents base rent less concessions.
The following table sets forth combined financial information for the CIGNA
Properties for the year ended December 31, 1996.
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
FOR THE CIGNA PROPERTIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
REVENUES............................................. $ 7,811
CERTAIN EXPENSES:
Operating.......................................... 1,947
Real estate taxes.................................. 729
------
2,676
------
REVENUES IN EXCESS OF CERTAIN
EXPENSES........................................... $ 5,135
======
</TABLE>
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<PAGE> 19
The following table sets forth lease expirations for the CIGNA Properties
other than multi-family for 1997 and thereafter.
LEASE EXPIRATIONS -- CIGNA PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
RENTABLE SQUARE ANNUAL BASE RENT
YEAR OF NUMBER OF FOOTAGE SUBJECT TO ANNUAL BASE RENT REPRESENTED BY
LEASE EXPIRATION LEASES EXPIRING EXPIRING LEASES UNDER EXPIRING LEASES EXPIRING LEASES(1)
- ------------------------ --------------- ------------------ --------------------- -------------------
<S> <C> <C> <C> <C>
1997(2)................. 11 58,616 $ 675,145 13.1%
1998.................... 9 39,798 411,384 8.0%
1999.................... 14 235,283 2,036,241 39.5%
2000.................... 9 49,705 492,026 9.6%
2001.................... 9 57,932 618,517 12.0%
2002.................... 2 11,873 76,958 1.5%
2003.................... 3 4,800 44,160 0.9%
2004.................... 0 0 0 0.0%
2005.................... 1 2,900 57,600 1.1%
2006.................... 3 31,013 146,676 2.9%
Thereafter.............. 1 107,400 590,700 11.5%
--
------- ---------- -----
Total......... 62 599,320(3) $ 5,148,407(4) 100.0%
== ======= ========== =====
</TABLE>
- ---------------
(1) Annual base rent expiring during each period, divided by total base rent
(both adjusted for contractual increases).
(2) Includes leases that have initial terms of less than one year.
(3) This figure is based on square footage actually leased (which excludes
vacant space), which accounts for the difference between this figure and
"Total Rentable Area" in the preceding table (which includes vacant space).
(4) This figure is based on square footage actually leased (which excludes
vacant space) and incorporates contractual rent increases arising after
1996, and thus differs from "Total Annual Effective Base Rent" in the
preceding table, which is based on 1996 rents.
E&L Properties. In February 1997, the Company entered into definitive
agreements with various partnerships and their general partner, a Southern
California syndicator, to acquire the E&L Properties, a portfolio of up to 11
properties, aggregating approximately 524,000 square feet, together with
associated management interests. The total acquisition cost, including
capitalized costs, is expected to be approximately $22.2 million, which will
consist of (i) approximately $9.5 million of mortgage debt assumed, (ii)
approximately $7.8 million in the form of 410,537 partnership units in the
Operating Partnership (based on a per unit value of $19.075), (iii)
approximately $650,000 in the form of 34,076 shares of Common Stock of the
Company (based on a per share value of $19.075) to be issued in connection with
the acquisition of the management interests relating to the E&L Properties, and
(iv) the balance in cash. The cash portion of the acquisition cost will be
funded with proceeds of the Offering. The E&L Properties consist of one office
and ten industrial properties, all located in Southern California. These
acquisitions are subject to a number of contingencies, including the approval of
the acquisition by a majority of the voting power of the limited partners of
each of the selling partnerships, satisfactory completion of environmental and
engineering due diligence and customary closing conditions. Accordingly, there
can be no assurance that any or all of these acquisitions will be completed, and
it is possible that fewer than all of these acquisitions may be completed.
The Operating Partnership units to be issued in connection with the E&L
Properties acquisition will be accompanied by an option permitting a holder of
the units to require the Operating Partnership to redeem the units. If the
holder requires a redemption, the Company, as general partner of the Operating
Partnership, will have the option to acquire the units by delivering Common
Stock on a one-for-one basis, or causing the
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<PAGE> 20
Operating Partnership to distribute cash in an amount equal to the fair market
value of the units being redeemed. The shares of the Company's Common Stock to
be issued upon redemption of the Operating Partnership units will have certain
piggyback and demand registration rights. The shares of the Company's Common
Stock to be issued in connection with the E&L Properties acquisition will be
unregistered, but the holders of these shares will have similar piggyback and
demand registration rights as applicable to the Operating Partnership Units
issued in the transaction.
The following table sets forth for each of the E&L Properties, the name,
the property type, general location, year completed, approximate square footage
and, for the year ended December 31, 1996, average occupancy, average effective
rent per leased square foot, annual effective base rent, property revenues and
percentage of the total E&L Properties' revenues.
E&L PROPERTIES
<TABLE>
<CAPTION>
PROPERTY REVENUES
AVERAGE AVERAGE FOR YEAR
OCCUPANCY FOR EFFECTIVE ANNUAL ENDED 12/31/96
YEAR SQUARE YEAR ENDED RENT/LEASED EFFECTIVE --------------------
PROPERTY CITY ST COMPLETED FEET 12/31/96(1) SQUARE FEET BASE RENT AMOUNT PERCENT
- -------------------- -------------- ---- --------- ------- ------------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Industrial
Chatsworth........ Chatsworth CA 1975 29,764 100% $ 5.84 $ 173,799 $ 182,018 6.2%
Sandhill
Industrial
Park............ Carson CA 1975 90,922 97% 4.47 394,142 394,142 13.5%
Arrow/San Dimas
Center.......... San Dimas CA 1980 35,996 91% 5.44 178,244 183,372 6.3%
Kraemer Business
Park............ Anaheim CA 1974 55,246 92% 5.61 284,882 284,882 9.7%
Piedmont Belshaw.. Carson CA 1973 23,826 88% 3.61 75,600 75,909 2.6%
Piedmont
Dominguez....... Carson CA 1973 85,120 84% 5.55 396,891 407,574 13.9%
Piedmont Dunn
Way............. Placentia CA 1968 59,832 94% 5.15 289,903 292,030 10.0%
Monroe Business
Park............ Placentia CA 1988 38,655 89% 5.21 179,283 180,561 6.2%
Piedmont Upland... Upland CA 1978 27,414 73% 4.23 84,660 86,062 2.9%
Katella/Glassell
Business Park... Orange CA 1976 46,912 91% 10.02 427,961 430,544 14.7%
Office
Academy Center.... Rolling Hills CA 1974 29,960 85% 15.58 396,769 408,276 14.0%
------- --- ------ ---------- ---------- -----
Total/Weighted
Average....... 523,647 90% $ 6.10 $2,882,134 $2,925,370 100.0%
======= === ====== ========== ========== =====
</TABLE>
- ---------------
(1) Represents average economic occupancy (calculated using month-end actual
occupancy rates).
S-20
<PAGE> 21
The following table sets forth combined financial information for the E&L
Properties for the year ended December 31, 1996.
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
FOR THE E&L PROPERTIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
REVENUES............................................. $ 2,925
CERTAIN EXPENSES:
Operating.......................................... 418
Real estate taxes.................................. 157
------
575
------
REVENUES IN EXCESS OF CERTAIN EXPENSES............... $ 2,350
======
</TABLE>
The following table sets forth lease expirations for the E&L Properties for
1997 and thereafter.
LEASE EXPIRATIONS -- E&L PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
RENTABLE SQUARE ANNUAL BASE RENT ANNUAL BASE RENT
YEAR OF LEASE NUMBER OF FOOTAGE SUBJECT TO UNDER EXPIRING REPRESENTED BY
EXPIRATION LEASES EXPIRING EXPIRING LEASES LEASES EXPIRING LEASES(1)
- ---------------------------------- --------------- ------------------ ---------------- -------------------
<S> <C> <C> <C> <C>
1997(2)........................... 108 223,297 $1,412,576 52.0%
1998.............................. 44 108,598 616,124 22.7%
1999.............................. 15 56,788 269,264 9.9%
2000.............................. 5 21,469 120,384 4.4%
2001.............................. 15 53,420 299,844 11.0%
Thereafter........................ 0 0 0 0.0%
--- ------- ---------- -----
Total................... 187 463,572(3) $2,718,192(4) 100.0%
=== ======= ========== =====
</TABLE>
- ---------------
(1) Annual base rent expiring during each period, divided by total base rent
(both adjusted for contractual increases).
(2) Leases for these types of properties have terms of one to three years and
typically require minimal tenant improvements. The Company believes the
lease expirations generally provide an opportunity for rent increases.
(3) This figure is based on square footage actually leased (which excludes
vacant space), which accounts for the difference between this figure and
"Total Rentable Area" in the preceding table (which includes vacant space).
(4) This figure is based on square footage actually leased (which excludes
vacant space) and incorporates contractual rent increases arising after
1996, and thus differs from "Total Annual Effective Annual Base Rent" in the
preceding table, which is based on 1996 rents.
Other Acquisition Opportunities. The Company maintains an active
acquisition department which identifies, evaluates, negotiates and consummates
portfolio and individual property investments. Currently, the Company is
considering acquisitions involving, in the aggregate, in excess of $200 million
in total capitalized costs. The acquisitions are subject to a number of
contingencies, including a review of the physical and economic characteristics
of the properties involved, negotiation of detailed terms, which among other
things could alter the scope of the acquisitions, and formal documentation.
Accordingly, the Company cannot reach a conclusion that any of these
acquisitions is probable, and there can be no assurance that these current
discussions, or other discussions involving potential acquisition opportunities
will result in any agreement or
S-21
<PAGE> 22
consummation of any transaction. See "Risk Factors -- Risks Associated with
Acquisitions" in the accompanying Prospectus.
1996 PROPERTY SALES
As part of its strategy to achieve sustainable long-term growth in FFO, the
Company periodically reviews its current portfolio of properties for
opportunities to redeploy capital from certain existing Properties to other
properties that the Company believes have characteristics more suited to its
overall growth strategy and operating goals. Consistent with this strategy, in
June 1996, the Company sold the All American Industrial Properties held in its
industrial portfolio. The sales price for these two facilities was approximately
$2.9 million and generated a book value gain of approximately $321,000.
FINANCING ACTIVITIES
Line of Credit. In 1996, the Company entered into the $50 million Line of
Credit with Wells Fargo Bank. The Line of Credit has a term of two years,
subject to annual extensions at the option of the Company. The Line of Credit
bears interest at an annual rate equal to LIBOR plus 2.375%, which will be
reduced to LIBOR plus 1.75%, upon completion of the Offering. If the Line of
Credit lender terminates the Line of Credit (other than by reason of the
Company's default thereunder), at the Company's option, any remaining balance
outstanding under the Line of Credit will be converted to a ten-year term loan,
bearing interest at a fixed rate of 275 points over the then 10-year treasury
rate, with a twenty-year amortization schedule. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Term Loan. In 1996, the Company entered into the $6.1 million Term Loan
with Wells Fargo Bank. The Term Loan has a term of two years, bears interest at
the same rate as the Line of Credit and is secured by first mortgage liens on 10
"QuikTrip" facilities owned by the Company, with full recourse to the Company.
Required payments under the Term Loan are interest only for the first year, and
principal and interest payments in the second year based on monthly principal
payments of $25,500 plus interest on the outstanding balance.
Public Offering. In October 1996, the Company completed a public offering
of 3,666,000 shares of its Common Stock at a price of $13.875 per share (the
"Prior Offering"). The net proceeds of approximately $47.8 million were used for
the acquisition of certain Properties and to repay approximately $24.0 million
of the then outstanding balance under the Line of Credit.
Increased Distribution. In January 1997, the Company announced a 6.7%
increase in its regular quarterly distribution from $.30 to $.32 per share of
Common Stock. See "Distribution Policy."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are expected to be approximately $66.1 million (approximately $76.1
million if the Underwriters' over-allotment option is exercised in full). The
Company intends to contribute such proceeds to the Operating Partnership to
purchase an additional proportionate interest in the Operating Partnership. The
Operating Partnership will use the net proceeds to fund acquisition activities,
repay outstanding indebtedness, including indebtedness incurred in connection
with the Scottsdale Hotel acquisition, and for general corporate purposes.
The only indebtedness to be repaid with the net proceeds from the Offering
are outstanding borrowings under the Line of Credit. As of March 17, 1997, the
interest rate on the Line of Credit was 7.8750% and the initial maturity date of
the Line of Credit was July 14, 1998, subject to certain extension provisions.
The Company is continuously engaged, in the ordinary course of its
business, in the evaluation of properties for acquisition. Pending application
of any remaining portion of net proceeds, the Company will invest that portion
in interest-bearing accounts and short-term, interest-bearing securities that
are consistent with the Company's intention to qualify for taxation as a REIT.
Such investments may include, for example, government and government agency
securities, certificates of deposit and interest-bearing bank deposits.
S-22
<PAGE> 23
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY
On January 31, 1996, the Company's Common Stock began trading on the NYSE
under the symbol "GLB." On March 17, 1997, the last reported sale price per
share of the Company's Common Stock on the NYSE was $20 1/4. The following table
sets forth the high and low closing prices per share of the Company's Common
Stock for the periods indicated, as reported on the NYSE composite tape, and the
distributions per share paid by the Company with respect to the periods
indicated.
<TABLE>
<CAPTION>
QUARTERLY PERIOD HIGH LOW DISTRIBUTIONS
---------------------------------------------- ---- --- -------------
<S> <C> <C> <C>
1996
First Quarter(1)............................ $14 1/4 $13 $0.30
Second Quarter.............................. 15 1/8 13 1/2 $0.30
Third Quarter............................... 14 5/8 13 3/8 $0.30
Fourth Quarter.............................. 17 5/8 13 5/8 $0.32
1997
First Quarter(2)............................ $20 1/2 16 3/4 (3)
</TABLE>
- ---------------
(1) Although the Consolidation occurred on December 31, 1995 and the Company
began paying distributions on its Common Stock based on earnings in the
first quarter of 1996, the Common Stock did not begin trading on the NYSE
until January 31, 1996.
(2) High and low stock closing prices through March 17, 1997.
(3) Distributions for the quarter ending March 31, 1997 had not been declared as
of March 17, 1997.
DISTRIBUTION POLICY
Since the Consolidation, the Company has paid regular quarterly
distributions to holders of its Common Stock. The Company paid quarterly
distributions of $0.30 per share for the first, second and third quarters of
1996 on May 13, 1996, August 14, 1996 and October 15, 1996, respectively. In
January 1997, the Company announced a 6.7% increase in its regular quarterly
distribution, increasing the quarterly distribution from $0.30 to $0.32 per
share. The distributions for the fourth quarter of 1996 of $0.32 per share were
paid on February 19, 1997. Distributions are declared quarterly by the Company
based on financial results for the prior calendar quarter.
The Company makes distributions to stockholders if, as and when declared by
its Board of Directors out of funds legally available therefor. The Company
expects to continue its policy of paying quarterly distributions, but there can
be no assurance that distributions will continue or be paid at any specific
level.
The Board of Directors, in setting the level of the stockholders'
distributions, takes into account, among other things, the Company's financial
performance, debt covenants and its need of funds for working capital reserves,
capital improvements and new investment opportunities. At present, the Company
intends to retain from net cash receipts from operations amounts necessary for
working capital reserves, debt payments and capital improvements and
replacements for existing properties, and to distribute the balance to
stockholders as distributions. The Company does not, however, intend to
distribute net cash receipts from sales or refinancings of assets, but instead
to retain such funds to make new investments or for other corporate purposes,
taking into account the income tax impact, if any, of reinvesting such proceeds
rather than distributing them. These policies are within the discretion of the
Board of Directors and may be changed from time to time subject only to the
distribution requirements under the REIT provisions of the Internal Revenue Code
of 1996, as amended (the "Code") and other legal restrictions. See "Federal
Income Tax Consequences -- Annual Distribution Requirements" in the accompanying
Prospectus.
The Company believes it will have sufficient available cash to make
distributions at a level necessary to maintain REIT status. Additionally, the
Company would be required to make a special distribution with respect to
accumulated earnings and profits, if any, from any portion of a year in which it
does not elect REIT status, including any earnings and profits attributable to
the Company and GC.
S-23
<PAGE> 24
Although the Company believes that a small portion of its distributions for
1997 will be classified as a return of capital for federal income tax purposes,
it cannot currently predict the portion of 1997 or future distributions that may
be so classified. See "Federal Income Tax Consequences -- Taxation of
Stockholders -- Taxation of Taxable Domestic Stockholders" in the accompanying
Prospectus. No part of the 1996 distributions were classified as a return of
capital for federal income tax purposes.
S-24
<PAGE> 25
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of December 31, 1996, and on a pro forma basis as if (i) the acquisition of
the CIGNA Properties, the E&L Properties and the Scottsdale Hotel, and (ii) the
Offering and the application of the net proceeds therefrom as described in "Use
of Proceeds" had each been completed on December 31, 1996. This capitalization
table should be read in conjunction with all financial statements and notes
thereto included in this Prospectus Supplement and the accompanying Prospectus
or incorporated herein and therein by reference.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
------------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
DEBT:
Mortgage loans(1)............................................ $ 54,584 $ 68,757
Line of Credit(2)............................................ 21,307 11,835
-------- --------
Total debt........................................... 75,891 80,592
-------- --------
MINORITY INTEREST(3)........................................... 8,831 16,662
-------- --------
STOCKHOLDERS' EQUITY:
Common stock: $0.001 par value, 50,000,000 shares authorized,
9,661,553 and 13,195,629 issued and outstanding,
respectively(4)........................................... 10 13
Additional paid-in capital................................... 105,952 172,655
Deferred compensation........................................ (399) (399)
Retained deficit............................................. (7,963) (7,963)
-------- --------
Total stockholders' equity........................... 97,600 164,306
-------- --------
TOTAL CAPITALIZATION......................................... $ 182,322 $ 261,560
======== ========
</TABLE>
- ---------------
(1) The pro forma balance reflects the assumption of mortgage loans in
connection with the acquisition of the Scottsdale Hotel and E&L Properties.
(2) The pro forma balance reflects a net decrease in borrowings under the Line
of Credit due to repayment of such borrowings.
(3) The pro forma minority interest reflects the issuance of 410,537 units of
partnership interest in the Operating Partnership in connection with the E&L
Properties acquisition.
(4) The pro forma outstanding Common Stock includes the issuance of 34,076
shares of Common Stock in connection with the E&L Properties acquisition.
S-25
<PAGE> 26
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
The following table sets forth selected financial and other data on a
historical, as adjusted and pro forma basis for the Company, and on a historical
combined basis for the GRT Predecessor Entities.
The following unaudited pro forma operating and other data have been
prepared to reflect (i) the Consolidation and related transactions, (ii) the
Line of Credit, (iii) all property acquisitions completed in 1996 and the
acquisition of the Scottsdale Hotel, the CIGNA Properties, and the E&L
Properties, as described under the caption "Recent Activities" and (iv) the
Offering and the application of the net proceeds therefrom as set forth in "Use
of Proceeds," as if each of such transactions had occurred and had been
completed on January 1, 1996. The unaudited pro forma balance sheet data has
been prepared to reflect (i) the acquisition of the Scottsdale Hotel, the CIGNA
Properties and the E&L Properties described under the caption "Recent
Activities" and (ii) the Offering and the application of the net proceeds
therefrom as set forth in "Use of Proceeds" as if each of such transactions had
occurred and had been completed on December 31, 1996. In the opinion of
management, all adjustments necessary to reflect the effects of the transactions
have been made.
The following unaudited as adjusted operating data, balance sheet data, and
other data have been prepared to reflect the Consolidation and related
transactions as if such transactions had occurred on January 1, 1994.
The pro forma selected financial and other data is unaudited and is not
necessarily indicative of the consolidated results which would have occurred if
the transactions had been consummated in the periods presented, or on any
particular date in the future, nor does it purport to represent the financial
position, results of operations or cash flows for future periods. The following
table should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and with all financial statements
and notes thereto included in this Prospectus Supplement and the accompanying
Prospectus or incorporated herein and therein by reference.
S-26
<PAGE> 27
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
PRO FORMA HISTORICAL AS ADJUSTED HISTORICAL AS ADJUSTED HISTORICAL HISTORICAL HISTORICAL
1996 1996 1995 1995 1994 1994 1993 1992
--------- ---------- ----------- ---------- ----------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental Revenue................. $ 41,920 $ 17,943 $13,495 $ 15,454 $12,867 $ 13,797 $ 13,546 $ 13,759
Fees and reimbursements........ 311 311 260 16,019 260 13,327 15,439 14,219
Interest and other income...... 1,427 1,080 982 2,698 1,109 3,557 3,239 3,150
Equity in earnings of
Associated Companies......... 1,640 1,598 1,691 -- 1,649 -- -- --
Total Revenues(1).............. 45,298 21,253 16,428 34,171 15,885 30,681 32,224 31,128
Property operating expenses.... 13,029 5,266 4,084 8,576 3,673 6,782 7,553 8,692
General and administrative..... 1,851 1,393 983 15,947 954 13,454 14,321 13,496
Interest expense............... 6,832 3,913 2,767 2,129 2,767 1,140 1,301 1,466
Depreciation and
Amortization................. 7,767 4,575 3,654 4,762 3,442 4,041 4,572 4,933
Income (loss) from operations
before minority interest and
extraordinary income......... 15,819 (1,131) 4,077 524 4,516 1,580 2,144 (2,139)
Net income (loss)(2)........... 14,677 (1,609) 3,796 524 (3,093) 1,580 4,418 (2,681)
Per share (3):
Net income (loss) before
extraordinary items........ $ 1.11 $ (0.21) $ 0.66 -- $ 0.72 -- -- --
Net income (loss)............ 1.11 (0.24) 0.66 -- (0.54) -- -- --
Distributions(4)............. 1.28 1.22 1.20 -- 1.20 -- -- --
BALANCE SHEET DATA:
Net investment in real
estate....................... 241,788 161,945 -- $ 77,574 -- $ 63,994 $ 70,245 $ 75,022
Mortgage loans receivable,
net.......................... 9,905 9,905 -- 7,465 -- 19,953 18,825 18,967
Total assets................... 264,758 185,520 -- 105,740 -- 117,321 102,635 108,168
Total debt..................... 80,592 75,891 -- 36,168 -- 17,906 12,172 15,350
Stockholders' equity........... 164,306 97,600 -- 55,628 -- 80,558 85,841 87,172
OTHER DATA:
EBIDA(5)....................... $ 30,418 $ 14,273 $11,361 $ 9,291 $11,258 $ 10,269 $ 10,326 $ 8,815
Cash flow provided by (used
for):
Operating activities......... 23,586 4,138 4,656 (10,608) 5,742 22,426 12,505 6,891
Investing activities......... (119,022) (61,833) 3,263 8,656 1,710 (1,947) (2,002) (1,437)
Financing activities......... 99,161 (54,463) (7,933) (17,390) (6,408) (2,745) (8,927) (9,476)
FFO(6)......................... 24,838 11,491 9,638 7,162 9,536 9,129 9,025 7,349
CAD(7),(8)..................... 22,216 10,497 8,856 3,237 8,754 6,919 6,921 4,731
Debt to total market
capitalization(9)............ 21.9% 29.5% -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Certain revenues which are included in the historical combined amounts for
1995 and prior are not included on a pro forma or as adjusted basis. These
revenues are included in three unconsolidated Associated Companies, GHG, GC
and GIRC, on a pro forma basis and on an as adjusted basis, from which the
Company receives lease payments and dividend income.
(2) Historical 1996 and as adjusted 1994 net losses reflect $7,237 of
Consolidation and litigation costs incurred in connection with the
Consolidation. As adjusted 1994 data give effect to the Consolidation and
related transactions as if such transactions had occurred on January 1,
1994, whereas historical 1996 data reflect such transactions in the periods
they were expensed. The Consolidation and litigation costs were expensed on
January 1, 1996, the Company's first day of operations. Net loss in 1992
includes a non-recurring writedown of $4,282 on GPI's investment in the
master agreement that resulted from GPI's in-substance foreclosure on the
AFP Partners' properties.
(3) Pro Forma net income per share is based upon pro forma weighted average
shares outstanding (assuming units of partnership interest in the Operating
Partnership held by minority interests are not converted into shares) of
13,195,629 for 1996. As adjusted net income per share is based upon as
adjusted weighted average shares outstanding of 5,753,709 for 1995 and 1994.
(4) Consists of distributions declared for the period then ended.
(5) EBIDA represents and is computed as earnings before interest expense,
depreciation, amortization, loss provisions and minority interests. The
Company believes that in addition to cash flows and net income, EBIDA is a
useful financial performance measurement for assessing the operating
performance of an equity REIT because, together
S-27
<PAGE> 28
with net income and cash flows, EBIDA provides investors with an additional
basis to evaluate the ability of a REIT to incur and service debt and to
fund acquisitions and other capital expenditures. To evaluate EBIDA and the
trends it depicts, the components of EBIDA, such as rental revenues, rental
expenses, real estate taxes and general and administrative expenses, should
be considered. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Excluded from EBIDA are financing
costs such as interest as well as depreciation and amortization, each of
which can significantly affect a REIT's results of operations and liquidity
and should be considered in evaluating a REIT's operating performance.
Further, EBIDA does not represent net income or cash flows from operating,
financing and investing activities as defined by generally accepted
accounting principles and does not necessarily indicate that cash flows will
be sufficient to fund cash needs. It should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity.
(6) Funds from Operations represents income (loss) from operations before
minority interests and extraordinary items plus depreciation and
amortization except amortization of deferred financing costs and loss
provisions. In 1996, consolidation and litigation costs were also added back
to net income to determine FFO. Management generally considers FFO to be a
useful financial performance measure of the operating performance of an
equity REIT because, together with net income and cash flows, FFO provides
investors with an additional basis to evaluate the ability of a REIT to
incur and service debt and to fund acquisitions and other capital
expenditures. FFO does not represent net income or cash flows from
operations as defined by GAAP and does not necessarily indicate that cash
flows will be sufficient to fund cash needs. It should not be considered as
an alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. FFO does not measure
whether cash flow is sufficient to fund all of the Company's cash needs
including principal amortization, capital improvements and distributions to
stockholders. FFO also does not represent cash flows generated from
operating, investing or financing activities as defined by GAAP. Further,
FFO as disclosed by other REITs may not be comparable to the Company's
calculation of FFO.
(7) Cash available for distribution ("CAD") represents net income (loss)
(computed in accordance with GAAP), excluding extraordinary gains or losses
or loss provisions, plus depreciation and amortization including
amortization of deferred financing costs, less lease commissions and capital
expenditures. CAD 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 cash needs.
(8) CAD for the year ended December 31, 1995 excludes approximately $6,782 that
represents the net proceeds received from the prepayment of the Finley
mortgage loan and the repayment of the wrap note payable.
(9) Debt to total market capitalization is calculated as total debt at period
end divided by total debt plus the market value of the Company's outstanding
common stock, on a fully converted basis, based upon a sales price of the
Company's Common Stock of $20.25 per share on a pro forma basis and the
closing price of the Common Stock of $17.625 on December 31, 1996.
S-28
<PAGE> 29
PRO FORMA FINANCIAL INFORMATION
The following unaudited, pro forma consolidated balance sheet as of
December 31, 1996 has been prepared to reflect (i) the Line of Credit described
under the caption "Recent Activities," (ii) the property acquisitions and
pending acquisitions described under the caption "Recent Activities" and (iii)
the Offering, and the application of the net proceeds therefrom as set forth in
"Use of Proceeds" as if such transactions had occurred on December 31, 1996. The
unaudited, pro forma consolidated statements of operations for the year ended
December 31, 1996 have been prepared to reflect (i) the Consolidation and
related transactions, (ii) the Line of Credit described under the caption
"Recent Activities," (iii) the Property acquisitions and pending acquisitions
described under the caption "Recent Activities" and (iv) the Offering and the
application of the net proceeds therefrom as set forth in "Use of Proceeds," as
if such transactions had occurred on January 1, 1996. These unaudited, pro forma
consolidated financial statements should be read in conjunction with the
financial statements and notes of the Company, included elsewhere in this
Prospectus Supplement and included in the Company's filings under the Exchange
Act, which are incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus. In the opinion of management, all adjustments necessary
to reflect the effects of the transactions have been made.
The pro forma consolidated financial information is unaudited and is not
necessarily indicative of the results of which would have occurred if the
transactions had been consummated in the periods presented, or on any particular
date in the future, nor does it purport to represent the financial position,
results of operations or cash flows for future periods.
S-29
<PAGE> 30
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1996
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REPAYMENT
PROPERTY OF
HISTORICAL(1) ACQUISITIONS(2) OFFERING(3) DEBT(4) PRO FORMA
------------- ---------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Rental property, net...... $ 161,945 $ 79,843 $ -- $ -- $241,788
Investments in Associated
Companies.............. 7,350 -- -- -- 7,350
Mortgage loans receivable,
net.................... 9,905 -- -- -- 9,905
Cash and cash
equivalents............ 1,355 (57,189) 66,056 (9,472) 750
Other Assets.............. 4,965 -- -- 4,965
-------- ------- ------- ------- --------
Total Assets...... $ 185,520 $ 22,654 $66,056 $(9,472) $264,758
======== ======= ======= ======= ========
LIABILITIES
Mortgage loans............ $ 54,584 $ 14,173 $ -- $ -- $ 68,757
Line of Credit............ 21,307 -- -- (9,472) 11,835
Other liabilities......... 3,198 -- -- -- 3,198
-------- ------- ------- ------- --------
Total
Liabilities..... 79,089 14,173 -- (9,472) 83,790
-------- ------- ------- ------- --------
MINORITY INTEREST........... 8,831 7,831 -- -- 16,662
-------- ------- ------- ------- --------
STOCKHOLDERS' EQUITY
Common stock.............. 10 -- 3 -- 13
Additional paid-in
capital................ 105,952 650 66,053 -- 172,655
Deferred compensation..... (399) -- -- -- (399)
Retained earnings
(deficit).............. (7,963) -- -- -- (7,963)
-------- ------- ------- ------- --------
Total Equity
(Deficit)....... 97,600 650 66,056 -- 164,306
-------- ------- ------- ------- --------
Total Liability
and
Stockholders'
Equity.......... $ 185,520 $ 22,654 $66,056 $(9,472) $264,758
======== ======= ======= ======= ========
</TABLE>
S-30
<PAGE> 31
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA CONSOLIDATED
BALANCE SHEET AS OF DECEMBER 31, 1996
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER UNIT AND PER SHARE AMOUNTS)
1. Reflects the historical consolidated balance sheet of the Company as of
December 31, 1996, which includes the acquisitions of the following
properties and property portfolios:
<TABLE>
<CAPTION>
PROPERTY PURCHASE PRICE DATE ACQUIRED
---------------------------------------------------- -------------- -------------------
<S> <C> <C>
UCT Property........................................ $ 18,844 July 15, 1996
San Antonio Hotel................................... 2,805 August 1, 1996
Kash n' Karry Property.............................. 1,617 August 2, 1996
Bond Street Property................................ 3,185 September 24, 1996
TRP Properties...................................... 43,798 October 17, 1996
Carlsberg Properties................................ 23,152 November 19, 1996
</TABLE>
UCT Property. In July 1996, the Company acquired the UCT Property, a
23-story, 272,443 square foot office building, in St. Louis, Missouri. The
total acquisition cost, including capitalized costs, was approximately
$18,844, which consisted of $350 in the form of 23,333 partnership units in
the Operating Partnership (based on a per unit value of $15.00), and the
balance paid in cash. The cash portion was financed through advances under
the Line of Credit.
San Antonio Hotel. In August 1996, the Company acquired the San Antonio
Hotel, a 64-room hotel property, which is located in San Antonio, Texas. The
total acquisition cost, including capitalized costs, was approximately
$2,805, which was paid in cash. The acquisition was financed with an advance
on the Line of Credit.
Kash n' Karry. In August 1996, the Company also expanded an existing shopping
center in Tampa, Florida through a purchase-leaseback transaction with the
anchor tenant. The Company's initial acquisition cost, including capitalized
costs, was approximately $1,617, all of which was paid in cash which was
financed through advances under the Line of Credit, and in addition the
Company committed an additional $1,800 for future expansion and tenant
improvements, which the Company expects will also be paid in cash.
Bond Street Property. In September 1996, the Company acquired the Bond Street
Property, a two-story, 40,595 square foot office building, in Farmington
Hills, Michigan. The total acquisition cost, including capitalized costs, was
approximately $3,185, which consisted of $391 in the form of 26,067
partnership units in the Operating Partnership (based on a per unit value of
$15.00), and the balance paid in cash.
TRP Acquisition. In October 1996, the Company acquired the TRP Properties, a
portfolio of 12 properties, aggregating approximately 784,000 square feet and
538 multi-family units, together with associated management interests. The
total acquisition cost, including capitalized costs, was approximately
$43,798, which consisted of (i) approximately $16,300 of mortgage debt
assumed, (ii) approximately $760 in the form of 52,387 partnership units in
the Operating Partnership (based on a per unit value of $14.50), (iii)
approximately $2,600 in the form of 182,000 shares of Common Stock of the
Company (based on a per share value of $14.50) and (iv) the balance in cash.
The cash portion was financed through advances under the Line of Credit. The
TRP Properties consist of three office, six industrial, one retail and two
multi-family Properties, located in six states.
Carlsberg Acquisition. In November 1996, the Company acquired from various
partnerships and their general partner, a Southern California syndicator, the
Carlsberg Properties, a portfolio of six Properties (including one property
on which the Company made a mortgage loan which included a purchase option),
aggregating approximately 342,000 square feet, together with associated
management interests. The total acquisition cost including the mortgage loan
and capitalized costs, was approximately $23,152, which consisted of (i)
approximately $8,900 of mortgage debt assumed, (ii) approximately $350 in the
S-31
<PAGE> 32
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA CONSOLIDATED -- (CONTINUED)
BALANCE SHEET AS OF DECEMBER 31, 1996
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER UNIT AND PER SHARE AMOUNTS)
form of 24,844 shares of Common Stock of the Company (based on a per share
value of $14.09) and (iii) the balance in cash. The cash portion was financed
through advances under the Line of Credit. The Carlsberg Properties consist
of five office Properties and one retail Property, located in two states.
Concurrently with the Company's acquisition of the Carlsberg Properties, one
of the Associated Companies assumed management of a portfolio of 13
additional properties with an aggregate of one million square feet under a
venture with an affiliate of the seller.
2. Reflects the acquisition of the following properties:
<TABLE>
<CAPTION>
ACQUISITION COSTS
-----------------
<S> <C>
Scottsdale Hotel...................................... $12,132
CIGNA Properties...................................... 45,463
E&L Properties........................................ 22,248
</TABLE>
Scottsdale Hotel. In February 1997, the Company acquired the Scottsdale
Hotel, a 163-suite hotel Property, which began operations in January 1996 and
is located in Scottsdale, Arizona. The total acquisition cost, including
capitalized costs, was approximately $12,132, which consisted of
approximately $4,675 of mortgage debt assumed, and the balance in cash. The
cash portion was financed through advances under the Line of Credit. Like
four of the Company's other hotel Properties, the Scottsdale Hotel is
marketed as a Country Suites by Carlson.
CIGNA Properties. In January 1997, the Company entered into a definitive
agreement with two limited partnerships organized by affiliates of CIGNA
Corp. to acquire the CIGNA Properties, a portfolio of six properties,
aggregating approximately 616,000 square feet and 224 multi-family units. The
total acquisition cost, including capitalized costs, is expected to be
approximately $45,463, which will be paid entirely in cash from the proceeds
of the Offering. The CIGNA Properties consist of two office properties, two
office/R&D properties, a neighborhood shopping center and a multi-family
property, located in four states. These acquisitions are subject to a number
of contingencies, including approval of the acquisition by a majority in
interest of the voting power of the limited partners of each of the selling
partnerships, satisfactory completion of environmental and engineering due
diligence and customary closing conditions. Accordingly, there can be no
assurance that any or all of these acquisitions will be completed.
E&L Properties. In February 1997, the Company entered into definitive
agreements with various partnerships and their general partner, a Southern
California syndicator, to acquire the E&L Properties, a portfolio of up to 11
properties, aggregating approximately 524,000 square feet, together with
associated management interests. The total acquisition cost, including
capitalized costs, is expected to be approximately $22,248, which will
consist of (i) approximately $9,498 of mortgage debt assumed, (ii)
approximately $7,831 in the form of 410,537 partnership units in the
Operating Partnership (based on per unit value of $19.075), (iii)
approximately $650 in the form of 34,076 shares of Common Stock of the
Company (based on per share value of $19.075) to be issued in connection with
the acquisition of the management interests relating to the E&L Properties,
and (iv) the balance in cash. The cash portion of the acquisition cost will
be funded with proceeds of the Offering. The E&L Properties consist of one
office and ten industrial properties, all located in Southern California.
These acquisitions are subject to a number of contingencies, including the
approval of the acquisition by a majority of the voting power of the limited
partners of each of the selling partnerships, satisfactory completion of
environmental and engineering due diligence and customary closing conditions.
Accordingly, there can be no assurance that any or all of these acquisitions
will be completed, and it is possible that fewer than all of these
acquisitions may be completed.
S-32
<PAGE> 33
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA CONSOLIDATED -- (CONTINUED)
BALANCE SHEET AS OF DECEMBER 31, 1996
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER UNIT AND PER SHARE AMOUNTS)
These acquisitions are being funded with approximately $57,189 of the net
proceeds from the Offering, assumption of approximately $14,173 of mortgage
debt, the issuance of approximately 410,537 Operating Partnership units
with an aggregate approximate value of $7,831 (based on $19.075 per unit
value) and approximately 34,076 shares of unregistered Common Stock with an
aggregate approximate value of $650 (based on $19.075 per share value). The
assumed mortgages bear interest at rates of 7.3% to 8.4% and mature between
2006 and 2017.
3. Reflects the net proceeds from the Offering. In connection with the Offering,
the Company incurred costs of approximately $4,819.
4. Reflects the repayment of borrowings on the Line of Credit of approximately
$9,472. On a pro forma basis giving effect to the Offering, the net proceeds
therefrom and the acquisitions of the Scottsdale Hotel, the CIGNA properties,
and the E&L Properties, the Company would have approximately $38,165 of
remaining borrowing capacity on the Line of Credit.
S-33
<PAGE> 34
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
AS OF DECEMBER 31, 1996
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PROPERTY OTHER
HISTORICAL(1) LINE OF CREDIT(2) ACQUISITIONS(3) ADJUSTMENTS(4) PRO FORMA
---------- ----------------- --------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES
Rental revenue................. $ 17,943 $ -- $24,237 $ (260) $ 41,920
Equity in earnings of
Associated Companies......... 1,598 -- -- 42 1,640
Fees, interest and other
income....................... 1,391 -- -- 347 1,738
---------- ------- --------------- -------------- ----------
Total Revenue........ 20,932 -- 24,237 129 45,298
---------- ------- --------------- -------------- ----------
OPERATING EXPENSES
Operating expenses............. 5,266 -- 7,806 (43) 13,029
General and administrative..... 1,393 -- -- 458 1,851
Depreciation and
amortization................. 4,575 -- 3,242 (50) 7,767
Interest expense............... 3,913 70 2,849 -- 6,832
---------- ------- --------------- -------------- ----------
Total operating
expenses........... 15,147 70 13,897 365 29,479
---------- ------- --------------- -------------- ----------
Income from operations before
minority interests........... 5,785 (70) 10,340 (236) 15,819
Minority interest.............. (292) -- -- (850) (1,142)
---------- ------- --------------- -------------- ----------
Net income(5).................. $ 5,493 $ (70) $10,340 $ (1,086) $ 14,677
======== ============= =========== =========== =========
Net income per common share.... $ 0.83 $ 1.11
======== =========
Weighted average common shares
outstanding.................. 6,632,707 13,195,629
======== =========
</TABLE>
S-34
<PAGE> 35
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, DOLLARS IN THOUSANDS)
1. Reflects the historical consolidated operations of the Company for the year
ended December 31, 1996, excluding the gain on the sale of the All American
Industrial Properties of $321, an extraordinary loss on refinancing of debt
of $186, Consolidation costs of $6,082 and Litigation costs of $1,155.
Consolidation and litigation costs all related to the formation of the
Company and are non-recurring.
2. Reflects the estimated interest on the pro forma repayment of the Company's
original secured bank line with the borrowings on the Line of Credit as well
as repayments as a result of the Offering. The repayment results in a net
increase in interest expense consisting of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Interest differential................................ $ 650
Interest on Line of Credit repayments................ (739)
Amortization of new loan fees........................ 101
Amortization of old loan fees........................ (37)
Unused Line of Credit fees........................... 95
---
$ 70
===
</TABLE>
Interest expense is reduced as a result of the repayment of borrowings on the
Line of Credit of approximately $9,472 at an assumed interest rate of 7.80%.
The Company's Line of Credit is subject to changes in LIBOR. Based upon the
pro forma Line of Credit balance as of December 31, 1996, a 1/8% increase or
decrease in LIBOR will result in increased or decreased annual interest
expense of approximately $15.
The amortization of the new loan fees is based upon total estimated fees and
costs of $1,121 over the respective terms of the Line of Credit and Term
Loan. The unused Line of Credit fees are based upon 0.25% of the pro forma
unused Line of Credit capacity as of December 31, 1996 of approximately
$38,165.
The Line of Credit provides for maximum borrowings of up to $50,000, but is
limited to a specified borrowing base ($50,000 on a pro forma basis), has an
initial term of two years which can be extended an additional three years at
the option of the Company, bears interest at LIBOR plus 2.375% (assumed to be
7.80%), requires monthly interest-only payments and requires annual unused
Line of Credit fees equal to 0.25% of the unused Line of Credit balance. The
Term Loan has a term of two years and bears interest at LIBOR plus 2.375%
(assumed to be 7.80%). In connection with obtaining the Line of Credit and
Term Loan, the Company incurred commitment fees and other costs totaling
approximately $1,121.
3. Reflects the historical 1996 operations of the Carlsberg Properties, TRP
Properties, UCT Property, Bond Street Property, Kash n' Karry Property and
the San Antonio Hotel (collectively "the 1996 Acquisitions") for the period
prior to acquisition, and the historical operations of the Scottsdale Hotel,
the CIGNA Properties and the E&L Properties for the year ended December 31,
1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
(OR PORTION OF 1996 PRIOR TO ACQUISITION)
---------------------------------------------------------------------------
1996 SCOTTSDALE CIGNA E&L COMBINED
ACQUISITIONS HOTEL PROPERTIES PROPERTIES TOTAL
------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................... $11,943 $ 1,558 $ 7,811 $ 2,925 $24,237
Operating expenses......... (4,324) (231) (2,676) (575) (7,806)
------- ------ ------ ------ -------
$ 7,619 $ 1,327 $ 5,135 $ 2,350 $16,431
======= ====== ====== ====== =======
</TABLE>
S-35
<PAGE> 36
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA CONSOLIDATED -- (CONTINUED)
Also, reflects estimated annual depreciation and amortization, based upon
estimated useful lives of 30-40 years on a straight-line basis.
Also, reflects the estimated interest on the pro forma mortgage debt
assumed of approximately $39,373 in connection with the acquisition of the
Carlsberg Properties, the TRP Properties, the Scottsdale Hotel and the E&L
Properties. The estimated interest on the mortgage loans assumed is based
upon an assumed weighted average rate of 8.20%.
4. Reflects the following adjustments:
<TABLE>
<S> <C> <C>
Rental revenue
Elimination of revenues of All American Industrial Properties..... $(260)
=====
Equity in earnings of the Associated Companies
GHG
Addition of the Scottsdale Hotel............................... $ 168
Addition of the San Antonio Hotel.............................. (158)
GC
Addition of the Carlsberg fee managed properties............... 141
Sale of the UCT Property to the Company........................ (77)
-----
Net additional income........................................ 74
Provision for income taxes................................... (32)
-----
Net additional equity in earnings to the Company............. $ 42
=====
Fees, interest and other income
Additional Interest on Grunow note receivable relating to the
Carlsberg Properties acquisition at 11% per annum.............. $ 347
=====
Operating expenses
Elimination of expenses of All American Industrial Properties..... $(128)
Additional expenses of the E&L Properties......................... 85
-----
$ (43)
=====
General and administrative expenses attributable to 1996 and 1997
acquisitions...................................................... $ 458
=====
Depreciation and amortization of All American Industrial
Properties........................................................ $ (50)
=====
</TABLE>
5. The pro forma taxable income before dividends paid deduction for the Company
for the year ended December 31, 1996 was approximately $17,330 which has been
calculated as pro forma net income from operations of approximately $14,677
plus GAAP basis depreciation and amortization of approximately $7,767 less
tax basis depreciation and amortization of $5,412 plus other book-to-tax
differences of approximately $298.
S-36
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Historical and Pro Forma Financial and Other Data" and the Company's financials
included elsewhere in this Prospectus Supplement or the accompanying Prospectus
or incorporated by reference in this Prospectus Supplement or the accompanying
Prospectus.
BACKGROUND
The Company commenced operations on December 31, 1995 through the merger of
eight public limited partnerships and a management company with and into the
Company. A portion of the Company's operations is conducted through the
Operating Partnership in which the Company holds a 1% interest as the sole
general partner and an approximate 91% limited partner interest. The Company
intends to elect treatment as a REIT when it files its tax return for the year
ended December 31, 1996.
The statements of operations, equity and cash flows for the years ended
December 31, 1995, 1994 and 1993 of the GRT Predecessor Entities include the
historical operations of GC and the Partnerships. These statements have been
adjusted to reflect the consolidation of two joint ventures which were, in
aggregate, wholly owned by the Partnerships. The statements of operations,
equity and cash flows for the years ended December 31, 1995, 1994 and 1993 of
the GRT Predecessor entities are included as the Consolidation of these entities
to form the Company did not occur until December 31, 1995.
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 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 the 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 three original hotel properties, not including the San
Antonio Hotel which was acquired in 1996 and the Irving, Texas Hotel (the
"Hotels"). The Hotels were wholly owned by the GRT Predecessor Entities and,
thus, the operations of the Hotels were included in the financial statements of
the GRT Predecessor Entities. In order for the Company to qualify as a REIT,
neither the Company nor the Operating Partnership can operate the Hotels. Under
the current structure, the Company owns the Hotels but leases them to GHG. The
Company includes only the related lease payments earned from GHG in its
statement of operations. When comparing historical year ended December 31, 1996
to historical years ended December 31, 1995 and 1994, the decreases in fees and
reimbursements, property operating expenses and general and administrative
expenses are the primary components affected by these changes in structure.
RESULTS OF OPERATIONS
COMPARISON OF THE HISTORICAL YEAR ENDED DECEMBER 31, 1996 TO THE AS ADJUSTED
YEAR ENDED DECEMBER 31, 1995.
Set forth below is a discussion comparing the historical results of
operations for the year ended December 31, 1996 to the results of operations for
the year ended December 31, 1995 adjusted to reflect the Consolidation as if the
Consolidation had occurred on January 1, 1994.
S-37
<PAGE> 38
Following is a table of net operating income by property type, for
comparative purposes, presenting the results for the year ended December 31,
1996 and the as adjusted year ended December 31, 1995.
RESULTS OF OPERATIONS BY PROPERTY TYPE
HISTORICAL YEAR ENDED DECEMBER 31, 1996 AND AS ADJUSTED YEAR ENDED DECEMBER 31,
1995
<TABLE>
<CAPTION>
MULTI- PROPERTY ELIMINATING TOTAL
OFFICE INDUSTRIAL RETAIL FAMILY HOTEL TOTAL ENTRY(1) REPORTED
---------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 HISTORICAL
Revenue................ $3,905,000 $4,260,000 $3,746,000 $1,519,000 $4,513,000 $17,943,000 $17,943,000
Operating Expenses..... 1,697,000 744,000 991,000 601,000 1,698,000 5,731,000 ($465,000) 5,266,000
Net Operating Income... 2,208,000 3,516,000 2,755,000 918,000 2,815,000 12,212,000 465,000 12,677,000
Percentage of Total
NOI.............. 18% 29% 23% 7% 23% 100%
1995 AS ADJUSTED
Revenue................ $1,280,000 $4,133,000 $3,366,000 $ 782,000 $3,934,000 $13,495,000 $13,495,000
Operating Expenses..... 599,000 775,000 814,000 448,000 1,718,000 4,354,000 ($270,000) 4,084,000
Net Operating Income... 681,000 3,358,000 2,552,000 334,000 2,216,000 9,141,000 270,000 9,411,000
Percentage of Total
NOI.............. 7% 37% 28% 4% 24% 100%
</TABLE>
- ---------------
(1) Eliminating entry represents internal market level property management fees
included in operating expenses to provide comparison to industry
performance.
Rental Revenues. Rental Revenues increased by $4,448,000, or 33%, to
$17,943,000 for the year ended December 31, 1996 from $13,495,000 for the as
adjusted year ended December 31, 1995. The increase consisted of increases in
revenues from the Office, Industrial, Retail, Multi-Family and Hotel properties
of $2,625,000, $127,000, $380,000, $737,000 and $579,000, respectively.
Moreover, of this increase, $4,442,000 represents rental revenues generated from
the acquisition in 1996 of 22 properties (the "1996 Acquisitions"). The increase
was offset by the elimination of revenues from the All American Industrial
Properties due to the sale of such properties in June 1996. These properties
represented annual revenues of approximately $600,000.
Fees and Reimbursements. Fees and reimbursements revenue consists
primarily of asset management fees paid to the Company by a controlled
partnership and increased slightly to $311,000 in 1996 from $260,000 in 1995.
Interest and Other Income. Interest and other income consists primarily of
interest on mortgage loans receivable and increased slightly to $1,080,000 in
1996 from $982,000 in 1995.
Equity in Earnings of Associated Companies. Equity in earnings of
Associated Companies decreased slightly from $1,691,000 in 1995 to $1,598,000 in
1996, primarily resulting from the acquisition of the UCT Property and Bond
Street Properties by the Company from entities controlled by the Associated
Companies. Prior to the acquisition by the Company of these Properties, the
partnerships owning these Properties paid all their fees and reimbursed all
their related salary costs to GC.
Property Operating Expenses. Property operating expenses increased by
$1,182,000, or 29%, to $5,266,000 in the year ended December 31, 1996 from
$4,084,000 for the as adjusted year ended December 31, 1995. Of this increase,
$1,722,000 represents expenses of the 1996 Acquisitions, offset in part by the
reduction in expenses resulting from the sale of the All American Industrial
Properties.
General and Administrative Expenses. General and administrative expenses
increased $410,000, or 42%, from $983,000 in 1995 to $1,393,000 in 1996. The
increase is due in part to increased overhead costs resulting from the 1996
Acquisitions, including a portion of the transaction costs relating to the 1996
Acquisitions.
Interest Expense. Interest expense increased by $1,146,000, or 41%, to
$3,913,000 in the year ended December 31, 1996 from $2,767,000 in the as
adjusted year ended December 31, 1995. Substantially all of the
S-38
<PAGE> 39
increase was the result of higher average borrowings during 1996 as compared to
1995. The increased borrowings in 1996 were used to finance the cash portion of
the 1996 Acquisitions.
Depreciation and Amortization. Depreciation and amortization increased
$921,000, or 25%, to $4,575,000 in 1996 from $3,654,000 in 1995. The increase
was primarily due to depreciation and amortization associated with the 1996
Acquisitions.
Gain on Sale of Rental Properties. Gain on sale of rental properties of
$321,000 during 1996 resulted from the sale of the All American Industrial
Properties held in the Company's industrial portfolio.
Consolidation Costs. Consolidation costs in 1996 consist of the costs
associated with preparing, printing and mailing the Prospectus/Consent
Solicitation Statement and other documents related to the Consolidation, and all
other costs incurred in the forwarding of the Prospectus/Consent Solicitation
Statement to investors.
Litigation Costs. Litigation costs consist of the legal fees incurred in
connection with defending two class action complaints filed by investors in
certain of the GRT Predecessor Entities as well as an accrual for the proposed
settlement in one case.
Loss on Debt Refinancing. Loss on debt refinancing of $186,000 during the
year ended December 31, 1996 resulted from the write-off of unamortized loan
fees when the $10,000,000 Imperial Bank line of credit was paid off with
proceeds from the Wells Fargo Bank Line of Credit.
COMPARISON OF THE AS ADJUSTED YEAR ENDED DECEMBER 31, 1995 TO THE AS ADJUSTED
YEAR ENDED DECEMBER 31, 1994
Set forth below is a discussion comparing the as adjusted results of
operations for the year ended December 31, 1995 to the as adjusted results of
operations for the year ended December 31, 1994, each adjusted to reflect the
Consolidation as if the Consolidation had occurred on January 1, 1994.
Rental Revenues. Rental revenues increased $628,000, or 5%, to $13,495,000
in 1995 from $12,867,000 in 1994. The increase was primarily due to a net
increase in occupancy at certain commercial properties and a small increase in
lease payments from the hotel properties.
Fees and Reimbursements. Fees and reimbursements remained unchanged from
1994 to 1995 and consist primarily of asset management fees paid to the Company
by a controlled partnership.
Interest and Other Income. Interest and other income decreased $127,000,
or 11%, to $982,000 in 1995 from $1,109,000 in 1994. The decrease was primarily
due to a decrease in interest earned on cash balances.
Equity in Earnings of Associated Companies. Equity in earnings of
Associated Companies increased slightly to $1,691,000 in 1995 from $1,649,000 in
1994. As adjusted amounts for both 1995 and 1994 include the effect of the
Rancon contracts as if such contracts commenced on January 1, 1994, as well as
the loss of certain other contracts which occurred in 1994 as if such losses
occurred prior to January 1, 1994. The portfolio of properties and partnerships
managed or controlled by the Associated Companies was otherwise unchanged from
1994 to 1995.
Property Operating Expenses. Property operating expenses increased by
$411,000, or 11%, to $4,084,000 in 1995 from $3,673,000 in 1994. The increase
was primarily due to expenses related to increased occupancy at certain
commercial properties.
General and Administrative. General and administrative expenses increased
slightly to $983,000 in 1995 from $954,000 in 1994. The number of properties
owned by the Company remained consistent.
Interest Expense. Interest expense remained unchanged from 1994 to 1995.
Depreciation and Amortization. Depreciation and amortization expense
increased $212,000, or 6%, in 1995 to $3,654,000 from $3,442,000 in 1994. The
increase was due to the depreciation and amortization of newly capitalized
costs.
S-39
<PAGE> 40
Loss Provision. During the year ended December 31, 1995, the Company had
recorded a loss provision of $863,000 to reduce the carrying value of its
mortgage loan receivable secured by the Eatontown, New Jersey property to its
estimated realizable value, which is equal to the value used for consolidation
purposes, in anticipation of a renegotiation of the terms of the note upon its
maturity on November 1, 1996. For the year ended December 31, 1994, the Company
had recorded a loss provision of $533,000 to reduce its investment in
Glenborough Partners to estimated fair market value.
COMPARISON OF THE HISTORICAL YEAR ENDED DECEMBER 31, 1996 TO THE HISTORICAL
YEAR ENDED DECEMBER 31, 1995.
Rental Revenue. Rental Revenue increased by $2,489,000, or 16%, to
$17,943,000 in 1996 from $15,454,000 in 1995. Of this increase, $4,442,000
represents rental revenues generated from the 1996 Acquisitions. The increase in
1996 revenues was offset by the elimination of revenues from the All American
Industrial Properties due to the sale of such properties in June 1996. The
increase in rental revenues was also offset by a decrease in hotel revenues due
to the change in the operational structure of the Hotels. As discussed above,
three of the original Hotels were owned and operated by the GRT Predecessor
entities prior to 1996 and accordingly, the revenues of the Hotels are included
in the 1995 statement of operations. However, under the current structure, the
Company owns the Hotels but leases them to GHG and accordingly, the 1996
statement of operations reflects only the lease payments due under the operating
leases. For the year ended December 31, 1996, each of the four originally owned
hotels increased their ADR (Average Daily Rate) and REVPAR (Revenue Per
Available Room).
Fees and Reimbursements and Equity in Earnings of Associated
Companies. Fees and reimbursements revenue decreased to $311,000 for the year
ended December 31, 1996 from $16,019,000 for the year ended December 31, 1995;
equity in earnings of the Associated Companies increased to $1,598,000 for the
year from the year ended December 31, 1996 from zero for the year ended December
31, 1995. As previously discussed, the primary reason for the difference between
1996 and 1995 results is the segregation in 1996 of the operations of the
Associated Companies, and the resulting recognition of earnings from them using
the equity method by the Company. In 1995, the earnings of the Associated
Companies were consolidated with the partnerships participating in the
Consolidation.
Interest and Other Income. Interest and other income decreased $1,618,000,
or 60%, in 1996 to $1,080,000 from $2,698,000 in 1995. This decrease resulted
primarily from the lower note receivable balance in 1996, primarily as a result
of the early prepayment of a note receivable in April 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. Also, in 1996, cash balances
decreased primarily as a result of the prepayment of the investor notes payable,
payment of declared dividends and the payment of costs associated with the
Consolidation.
Property Operating Expenses. Property operating expenses decreased
$3,310,000, or 39%, to $5,266,000 in 1996 from $8,576,000 in 1995. Of the
decrease, $4,993,000 is primarily the result of the change in the operational
structure of the hotels, as previously discussed. The decrease was offset by an
increase of $1,722,000 associated with the operating expenses of the 1996
Acquisitions.
General and Administrative. General and administrative expenses decreased
to $1,393,000 in 1996 from $15,947,000 in 1995. The decrease is due primarily to
the segregation in 1996 of the operations of the Associated Companies, as
previously discussed.
Interest Expense. Interest expense increased $1,784,000, or 84%, to
$3,913,000 in 1996 from $2,129,000 in 1995. Substantially all of the increase
was the result of higher average borrowings during 1996 as compared to 1995. The
increased borrowings were used to finance the 1996 Acquisitions.
Depreciation and Amortization. Depreciation and amortization remained
relatively constant, decreasing to $4,575,000 in 1996 from $4,762,000 in 1995.
Depreciation and amortization in 1995 includes the amortization of the
management contracts, which are now reflected in the results of the Associated
Companies in 1996. Depreciation and amortization in 1996 includes depreciation
and amortization related to the 1996 Acquisitions.
S-40
<PAGE> 41
COMPARISON OF THE HISTORICAL YEAR ENDED DECEMBER 31, 1995 TO THE HISTORICAL
YEAR ENDED DECEMBER 31, 1994
Rental Revenue. Rental Revenue increased by $1,657,000, or 12%, to
$15,454,000 in 1995 from $13,797,000 in 1994. This increase was primarily due to
a net increase in occupancy at certain commercial properties, the acquisition of
the Summerbreeze apartment complex and a significant increase in hotel revenues
due to overall increases in occupancy and average daily room rates.
Fees and Reimbursements. Fees and reimbursements increased by $2,692,000,
or 20%, to $16,019,000 in 1995 from $13,327,000 in 1994. The increase was
primarily due to an increase in property and asset management fees and related
expense reimbursements due to the acquisition of the Rancon and RGI management
contracts.
Interest and Other Income. Interest and other income decreased $859,000,
or 24%, to $2,698,000 in 1995 from $3,557,000 in 1994. Substantially all of the
decrease resulted from the early repayment of the Finley Square note receivable
in April 1995 and the early repayment in January and June of 1995 of three of
the four notes from the sale of the Laurel Cranford buildings.
Property Operating Expenses. Property operating expenses increased
$1,794,000, or 26%, to $8,576,000 in 1995 from $6,782,000 in 1994. The increase
was primarily due to the higher expenses related to increased occupancy rates
and to the acquisition of the Summerbreeze apartment complex in January 1995.
General and Administrative. General and administrative expenses, including
salaries, increased $2,493,000, or 19%, to $15,947,000 in 1995 from $13,454,000
in 1994. Substantially all of this increase resulted from expenses incurred by
Glenborough Realty Corporation in concluding its business as a stand alone
corporation prior to merging with the Company. Such expenses will not be
incurred again by the Company or the Associated Companies. In the same period,
general and administrative cost reductions resulting from property sales in 1994
were offset by increased general and administrative costs associated with the
Rancon and RGI management contracts acquired in 1995.
Interest Expense. Interest expense increased $989,000, or 87%, to
$2,129,000 in 1995 from $1,140,000 in 1994. Substantially all of the increase
was the result of increased debt levels primarily related to the financing of
the acquisition of the Rancon management contracts and a first deed of trust on
the Summerbreeze apartment complex acquired in 1995.
Depreciation & Amortization. Depreciation and amortization increased by
$721,000, or 18%, to $4,762,000 in 1995 from $4,041,000 in 1996, due primarily
to the acquisition of the Rancon and RGI management contracts on January 1,
1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to meets its short-term liquidity requirements
generally through its working capital and cash generated by operations. As of
December 31, 1996, the Company had no material commitments for capital
improvements other than certain expansion related improvements estimated at
approximately $1,750,000 at its existing shopping center in Tampa, Florida.
Other planned capital improvements consist of tenant improvements, expenditures
necessary to lease and maintain the Properties and expenditures for furniture
and fixtures and building improvements at the Hotel Properties. The Company
believes that its cash generated by operations will be adequate to meet both
operating requirements and to make distributions in accordance with REIT
requirements in both the short and the long-term. In addition to cash generated
by operations, the Line of Credit provides for working capital advances.
However, there can be no assurance that the Company's results of operations will
not fluctuate in the future and at times affect (i) its ability to meet its
operating requirements and (ii) the amount of its distributions.
The Company expects to meet certain of its long-term liquidity
requirements, such as scheduled debt maturities and possible acquisitions,
through a combination of short and long-term borrowings and the issuance of debt
and equity securities of the Company.
Mortgage loans payable and secured bank lines increased from $33,685,000 at
December 31, 1995 to $75,891,000 at December 31, 1996. This increase was
primarily due to new borrowings in 1996 to fund the
S-41
<PAGE> 42
1996 Acquisitions. The $10,000,000 Imperial Bank line of credit that existed at
December 31, 1995 was replaced with the $50,000,000 Line of Credit provided by
Wells Fargo Bank that is secured by first mortgages on certain of the Company's
Properties. The proceeds from the Line of Credit were used to retire the
$10,000,000 Imperial Bank line of credit and to fund the 1996 Acquisitions. The
Line of Credit had an outstanding balance of $21,307,000 at December 31, 1996.
In addition to increased borrowings under the Line of Credit, approximately
$25,000,000 of new debt was assumed in connection with the 1996 Acquisitions and
a $6,120,000 term loan was obtained to partially finance a 1996 Acquisition.
In October 1996, the Company completed a public equity offering of
3,666,000 shares of Common Stock at an offering price of $13.875 per share. The
net proceeds from the offering of approximately $47.8 million were used to fund
certain of the 1996 Acquisitions and to repay outstanding indebtedness.
At December 31, 1996, the Company's total indebtedness included fixed-rate
debt of $44,657,000, or 59% of the Company's aggregate indebtedness, and
floating-rate indebtedness of $31,234,000, or 41% of the Company's aggregate
indebtedness. The Company's total market capitalization as of December 31, 1996
was $257,528,000 resulting in a ratio of debt to total market capitalization of
approximately 29.5%.
In January 1997, the Company filed a shelf registration statement (the
"January 1997 Shelf Registration Statement") with the Securities and Exchange
Commission to register $250.0 million of equity securities. The January 1997
Shelf Registration Statement was declared effective by the Securities and
Exchange Commission on February 25, 1997.
INFLATION
Substantially all of the leases at the retail Properties provide for
pass-through to tenants of certain operating costs, including real estate taxes,
common area maintenance expenses, and insurance. Leases at the multi-family
Properties generally provide for an initial term of one month or one year and
allow for rent adjustments at the time of renewal. Leases at the office
properties typically provide for rent adjustment and pass-through of certain
operating expenses during the term of the lease. All of these provisions permit
the Company to increase rental rates or other charges to tenants in response to
rising prices and therefore, serve to minimize the Company's exposure to the
adverse effects of inflation.
S-42
<PAGE> 43
THE PROPERTIES
GENERAL
The 55 Properties owned by the Company consist of 11 office Properties, 14
industrial Properties, 21 retail Properties, three multi-family Properties and
six hotel Properties, and are located in numerous local markets among four
geographic regions and 17 states.
The following table sets forth certain information with respect to the
Company's Properties on a pro forma basis assuming the acquisition of the
Properties acquired in 1996 and the acquisition of the Scottsdale Hotel had been
completed on January 1, 1996.
PROPERTY TABLE BY TYPE OF PROPERTY
<TABLE>
<CAPTION>
PROPERTY REVENUES FOR
YEAR ENDED
DECEMBER 31, 1996(1) AVERAGE OCCUPANCY
NUMBER OF TOTAL RENTABLE SQUARE ----------------------- FOR YEAR ENDED
TYPE OF PROPERTY PROPERTIES FEET/UNITS AMOUNT PERCENT DECEMBER 31, 1996(1)
- -------------------------- --------- --------------------- ----------- ------- --------------------
<S> <C> <C> <C> <C> <C>
Office.................... 11 641,923 $ 9,149,090 29.5% 94%
Industrial................ 14 2,026,368 5,798,854 18.7 99
Retail.................... 21 630,700 5,477,774 17.7 96
Multi-family.............. 3 642 4,327,937 13.9 94
Hotels.................... 6 726 6,252,460 20.2 70(2)
----------- -----
-- --
Total................ $31,006,115 100.0%
55 96%(3)
=========== =====
== ==
</TABLE>
- ---------------
(1) For the TRP Properties and the Carlsberg Properties, occupancy rates are
represented as of December 31, 1996, and property revenues are presented on
an annualized basis, as such average occupancy rates and property revenues
are not available for this period for these properties.
(2) This occupancy rate reflects the first year operations of Scottsdale Hotel
acquired by the Company in February 1997. The average occupancy for the
hotels owned by the Company in 1996 was 72%.
(3) Not including hotels.
The following table sets forth the region and type of the Company's
Properties by rentable square feet and/or units, along with average occupancy
for the year ended December 31, 1996 on a pro forma basis assuming the
acquisition of the Properties acquired in 1996 and the acquisition of the
Scottsdale Hotel had been completed on January 1, 1996.
RENTABLE SQUARE FEET
<TABLE>
<CAPTION>
RENTABLE SQUARE FEET
---------------------------------- HOTEL NO. OF
REGION OFFICE INDUSTRIAL RETAIL MULTIFAMILY UNITS ROOMS PROPERTIES
- ------------------------------ -------- ---------- -------- ----------------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
East.......................... 0 274,000 0 0 0 1
South......................... 0 629,829 223,678 0 286 22
Midwest....................... 383,497 813,776 12,800 0 0 12
West.......................... 258,426 308,763 394,222 642 440 20
------- --------- ------- --- ---
--
Total.................... 641,923 2,026,368 630,700 642 726
55
======= ========= ======= === ===
==
No. of Properties............. 11 14 21 3 6
55
</TABLE>
OFFICE PROPERTIES
The Company owns 11 office Properties aggregating 641,923 rentable square
feet. The leases for spaces within the office Properties have terms ranging from
one to 10 years. The office space leases generally require the tenant to
reimburse the Company for increases in building operating costs over a base
amount. Many of the leases contain fixed or CPI-based rent increases.
S-43
<PAGE> 44
The following table lists the office Properties of the Company, indicating
the property name, city, state, year completed, approximate square footage and,
for the year ended December 31, 1996 (except where indicated), average
occupancy, average effective rent per leased square foot, annual effective base
rent, Property revenues and percentage of Property revenues on a pro forma basis
assuming the acquisition of the office Properties acquired in 1996 had been
completed on January 1, 1996.
OFFICE PROPERTIES
<TABLE>
<CAPTION>
PRO FORMA
PROPERTY REVENUES
TOTAL AVERAGE AVERAGE FOR THE YEAR
RENTABLE OCCUPANCY FOR EFFECTIVE ANNUAL ENDED 12/31/96
YEAR SQUARE YEAR ENDED RENT/LEASED EFFECTIVE -------------------
PROPERTY CITY ST COMPLETED FEET 12/31/96 SQUARE FEET BASE RENT AMOUNT PERCENT
- ------------------------ --------------- ---- --------- -------- ------------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Vintage Point(1)........ Phoenix AZ 1985 55,948 83% $ 12.42 $ 576,816 $ 596,968 6.5%
Tradewinds Phoenix
Financial(1).......... AZ 1986 17,778 92 19.19 313,840 330,080 3.6
Dallidet Center(1)...... San Luis Obispo CA 1993 23,051 82 18.35 346,856 363,424 4.0
Hillcrest Office Fullerton
Plaza(1).............. CA 1974 34,623 85 12.55 369,376 370,336 4.0
Warner Village Medical Fountain Valley
Center(1)............. CA 1977 32,272 97 17.14 536,405 592,934 6.5
Bond Street Building.... Farmington MI 1986 40,595 98 13.75 546,861 557,946 6.1
Hills
University Club Tower... St. Louis MO 1974 272,443 97 11.61 3,069,337 4,080,778 44.6
One Professional
Square(1)............. Omaha NE 1980 34,352 88 12.26 370,618 392,309 4.3
Regency Westpointe...... Omaha NE 1981 36,107 96 15.44 535,235 545,995 6.0
4500 Plaza.............. Salt Lake City UT 1983 69,975 96 12.66 850,770 913,078 10.0
Globe Building(1)....... Mercer Island WA 1979 24,779 88 18.43 401,918 405,242 4.4
--
------- ------ ---------- ---------- -----
Total/Weighted
Average........... 641,923 94% $ 13.19 $7,918,032 $9,149,090 100.0%
======= == ====== ========== ========== =====
</TABLE>
- ---------------
(1) For these Properties, occupancy rates are presented as of December 31, 1996,
and base rent and Property revenues are presented on an annualized basis
based on results since the acquisition.
The following table sets forth, for the periods specified, the total
rentable area, aggregate average occupancy, average effective base rent per
leased square foot and total effective annual base rent for the office
Properties owned by the Company during each of the years indicated and on a pro
forma basis assuming the acquisition of the office Properties acquired in 1996
had been completed on January 1, 1996.
OFFICE PROPERTIES
HISTORICAL RENT AND OCCUPANCY
<TABLE>
<CAPTION>
AVERAGE EFFECTIVE TOTAL EFFECTIVE
TOTAL RENTABLE AVERAGE OCCUPANCY BASE RENT/ ANNUAL BASE RENT
YEAR AREA (SQ. FT.) RATE FOR THE PERIOD LEASED SQ. FT.(1) ($000S)(2)
- ----------------------------- -------------- ------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
1996(3)...................... 641,923 94% $ 13.19 $7,918
1995......................... 106,076 97 11.91 1,228
1994......................... 105,770 88 11.44 1,065
1993......................... 104,666 80 12.04 1,008
1992......................... 104,754 80 11.10 930
</TABLE>
- ---------------
(1) Total Effective Annual Base Rent divided by average occupancy in square
feet.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the
period.
(3) Includes the Carlsberg Properties and the TRP Properties. For these
Properties, occupancy rates are presented as of December 31, 1996, and base
rents are presented on an annualized basis based on results since the
acquisition as this information is not available for the year ended December
31, 1996.
S-44
<PAGE> 45
The following table sets forth the contractual lease expirations for the
office Properties for 1997 and thereafter, as of December 31, 1996.
OFFICE PROPERTIES
LEASE EXPIRATIONS
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
RENTABLE SQUARE ANNUAL BASE RENT ANNUAL BASE RENT
NUMBER OF FOOTAGE SUBJECT TO UNDER EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRATION LEASES EXPIRING EXPIRING LEASES LEASES ($000S) EXPIRING LEASES(1)
- ---------------------------- --------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
1997(2)..................... 147 143,834 $2,305 25.8%
1998........................ 44 132,455 2,052 22.9
1999........................ 41 90,026 1,453 16.2
2000........................ 18 57,532 967 10.8
2001........................ 27 63,800 1,094 12.2
2002........................ 3 4,395 72 0.8
2003........................ 2 8,348 144 1.6
2004........................ 1 3,544 68 0.8
2005........................ 2 25,250 449 5.0
2006........................ 0 0 0 0
Thereafter.................. 1 66,309 349 3.9
--- ------- ------ -----
Total.................. 286 595,493(3) $8,953(4) 100.0%
=== ======= ====== =====
</TABLE>
- ---------------
(1) Annual base rent expiring during each period, divided by total annual base
rent (both adjusted for contractual increases).
(2) Includes leases that have initial terms of less than one year.
(3) This figure is based on square footage actually leased (which excludes
vacant space), which accounts for the difference between this figure and
"Total Rentable Area" in the preceding table (which includes vacant space).
(4) This figure is based on square footage actually leased (which excludes
vacant space) and incorporates contractual rent increases arising after
1996, and thus differs from "Total Effective Annual Base Rent" in the
preceding table, which is based on 1996 rents.
S-45
<PAGE> 46
The following table sets forth, the capitalized tenant improvements and
leasing commissions paid by the Company on the office Properties owned by the
Company during each of the five years indicated.
OFFICE PROPERTIES
CAPITALIZED TENANT IMPROVEMENTS AND LEASING COMMISSIONS
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Square footage renewed or re-leased.... 26,989 23,909 18,384 79,745 39,706
Capitalized tenant improvements and
commissions (in thousands)........... $ 192 $ 59 $ 58 $ 468(1) $ 617(2)
Average per square foot of renewed or
re-leased space...................... $ 7.12 $ 2.47 $ 3.18 $ 5.87 $ 15.54(2)
</TABLE>
- ---------------
(1) The significant increase in capitalized tenant improvements and commissions
in 1995 over the previous year is primarily the result of re-leasing 15,491
square feet at Regency Westpointe. The re-lease is for a term of ten years.
There were no commissions paid in this transaction. Tenant improvements
totaled $405,000. This tenant occupies 43% of Regency Westpointe.
(2) The significant increase in capitalized tenant improvements and commissions
in 1996 over the previous years is primarily the result of tenant
improvements provided in connection with a lease extension of space for the
principal tenant of the UCT Property. The lease was extended ten years and
expires in 2010.
INDUSTRIAL PROPERTIES
The Company owns 14 industrial Properties aggregating 2,026,368 square
feet. During June 1996, the Company sold two other industrial properties, which
had 97,200 square feet. The industrial Properties are designed for warehouse,
distribution and light manufacturing, ranging in size from 37,200 square feet to
474,426 square feet. As of December 31, 1996, seven of the industrial Properties
were leased to multiple tenants, seven were leased to single tenants, and all
seven of the single-tenant Properties are adaptable in design to multi-tenant
use.
The following table lists the industrial Properties of the Company
indicating the property name, city, state, year completed, approximate square
footage, and for the year ended December 31, 1996 (except where indicated),
average occupancy, average effective rent per leased square foot, annual
effective base rent, Property revenues and percentage of Property revenues on a
pro forma basis assuming the acquisition of the industrial Properties acquired
in 1996 had been completed on January 1, 1996.
S-46
<PAGE> 47
INDUSTRIAL PORTFOLIO
<TABLE>
<CAPTION>
AVERAGE PRO FORMA
OCCUPANCY AVERAGE REVENUES FOR YEAR
FOR YEAR EFFECTIVE ANNUAL ENDED 12/31/96
YEAR SQUARE ENDED RENT/LEASED EFFECTIVE --------------------
PROPERTY CITY ST COMPLETED FEET 12/31/96 SQUARE FEET BASE RENT AMOUNT PERCENT
- ----------------------- ------------- ---- --------- ---------- --------- ----------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hoover Industrial
Center(1)............ Mesa AZ 1985 57,441 100% $4.82 $ 276,610 $ 320,496 5.5%
Benicia Industrial
Park................. Benicia CA 1980 156,800 100 3.23 506,172 484,614 8.4
Rancho Bernardo(1)..... Rancho CA 1982 52,865 83 6.75 296,122 354,888 6.1
Bernardo
Navistar International
Trans. Corp.......... W. Chicago IL 1977 474,426 100 2.19 1,037,872 1,037,872 17.9
Park 100 -- Building
42................... Indianapolis IN 1980 37,200 93 6.09 210,687 228,700 3.9
Park 100 -- Building
46................... Indianapolis IN 1981 102,400 100 2.85 291,840 342,201 5.9
Case Equipment Corp.... Kansas City KS 1975 199,750 100 1.92 384,312 384,312 6.6
Navistar International
Trans. Corp. ........ Baltimore MD 1962 274,000 100 1.58 432,414 432,414 7.5
Case Equipment Corp.... Memphis TN 1950 205,594 100 1.68 346,115 346,115 6.0
Mercantile I(1)........ Dallas TX 1970 236,092 95 2.94 658,546 677,986 11.7
Quaker Industrial(1)... Dallas TX 1974 46,060 100 2.25 103,507 121,359 2.1
Pinewood
Industrial(1)........ Arlington TX 1971 42,083 100 3.36 141,552 136,558 2.4
Walnut Creek Business
Center (1)........... Austin TX 1984 100,000 100 5.14 513,902 645,264 11.1
Sea Tac II(2).......... Seattle WA 1984 41,657 100 5.14 214,250 286,075 4.9
--- ----- ------ ---- ---------- -----
Total/Weighted
Average............ 2,026,368 99% $2.70 $ 5,413,901 $ 5,798,854 100.0%
=== ===== ========== ========== =====
</TABLE>
- ---------------
(1) For these Properties, occupancy rates are presented as of December 31, 1996,
and base rent and Property revenues are presented on an annualized basis
based on results since the acquisition.
(2) Mortgage receivable accounted for as real estate under GAAP. The property is
owned by a partnership managed by one of the Associated Companies.
Four of the single-tenant Properties have eight years remaining on leases
whose original terms were 20 years and include rent increases every three years
based on all or a percentage of the change in the CPI. Under these leases the
tenants are required to pay for all of the Properties' operating costs, such as
common area maintenance, property taxes, insurance, and all repairs including
structural repairs. These four Properties are leased to Navistar International
Transportation Corporation ("Navistar"), but two of the leases have been assumed
by Case Equipment Corporation ("Case"). Navistar has options under its leases to
purchase either or both of the Properties on March 1, 1999, and 2002. The option
price is equal to the lesser of (i) the greater of the appraised value or a
specified option floor price; or (ii) a price derived by applying a specified
capitalization rate to a specified rental amount. The Case leases give the
tenant a purchase option exercisable on March 1, 1999, and 2002 for an amount
equal to the greater of the appraised value or a specified minimum price.
Management believes, based on discussions with both tenants, that neither tenant
has any present intention to exercise any option to purchase.
The remaining warehouse Properties have leases whose terms range from one
to eight years. Most of the leases are "triple net" leases whereby the tenants
are required to pay their pro rata share of the Properties' operating costs,
common area maintenance, property taxes, insurance, and non-structural repairs.
Some of the leases are "industrial gross" leases whereby the tenant pays as
additional rent its pro rata share of common area maintenance and repair costs
and its share of the increase in taxes and insurance over a specified base year
cost. Many of these leases call for fixed or CPI-based rent increases.
S-47
<PAGE> 48
The Company holds fee title to all of the industrial Properties except a
41,657 square-foot warehouse facility in Seattle known as Sea Tac II. This
property is owned by a partnership managed by one of the Associated Companies.
The Company holds a participating first mortgage interest in Sea Tac II. In
accordance with GAAP, the Company accounts for the property as though it held
fee title, as substantially all risks and rewards of ownership have been
transferred to the Company as a result of the terms of the mortgage. The
participating mortgage had a principal balance of $2,333,338 as of December 31,
1996 and accrued interest of $1,201,164, as compared with an appraised value of
$2,000,000 as of June 30, 1994. The loan, which was modified in early 1994 and
accrues interest at 10%, allows the borrower to defer the payment of any
interest in excess of the property's cash flow. The loan also allows the Company
to receive 75% of the property value over the total loan balance at maturity.
The loan is due March 31, 2001, but the borrower may extend the loan for five
one-year periods for payment of a fee equal to 0.25% of the then outstanding
principal balance for each extension.
The following table sets forth, for the periods specified, the total
rentable area, aggregate average occupancy, average effective base rent per
leased square foot and total effective annual base rent for the industrial
Properties owned by the Company during each of the years indicated and on a pro
forma basis assuming the acquisition of the industrial Properties acquired in
1996 had been completed on January 1, 1996.
INDUSTRIAL PROPERTIES
HISTORICAL RENT AND OCCUPANCY
<TABLE>
<CAPTION>
AVERAGE OCCUPANCY AVERAGE EFFECTIVE TOTAL EFFECTIVE
TOTAL RENTABLE RATE FOR THE BASE RENT/ ANNUAL BASE
YEAR AREA (SQ. FT.) PERIOD LEASED SQ. FT.(1) RENT($000S)(2)
- ------------------------------------ -------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
1996(3)............................. 2,026,368 99% $2.70 $ 5,414
1995................................ 1,491,827 100 2.29 3,405
1994................................ 1,491,827 100 2.29 3,401
1993................................ 1,491,827 98 2.24 3,294
1992................................ 1,491,827 96 2.14 3,075
</TABLE>
- ---------------
(1) Total Effective Annual Base Rent divided by average occupancy in square
feet.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the
period.
(3) Includes the TRP Properties. For these Properties, occupancy rates are
presented as of December 31, 1996, and base rents are presented on an
annualized basis based on results since the acquisition as this information
is not available for the year ended December 31, 1996.
The following table sets forth the contractual lease expirations for the
industrial Properties for 1997 and thereafter, as of December 31, 1996.
INDUSTRIAL PROPERTIES
LEASE EXPIRATIONS
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
NUMBER OF RENTABLE SQUARE ANNUAL BASE RENT ANNUAL BASE RENT
LEASES FOOTAGE SUBJECT TO UNDER EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES ($000S) EXPIRING LEASES(1)
- ------------------------------------- --------- ------------------ ---------------- -------------------
<S> <C> <C> <C> <C>
1997(2).............................. 27 336,867 $1,229 22.1%
1998................................. 11 130,461 564 10.1
1999................................. 15 143,265 536 9.6
2000................................. 6 78,206 324 5.8
2001................................. 4 59,757 324 5.8
2002 to 2006......................... 0 0 0 0
Thereafter........................... 5 1,256,170 2,594 46.6
--------- ------ -----
--
Total........................... 2,004,726(3) $5,571(4) 100.0%
68
========= ====== =====
==
</TABLE>
S-48
<PAGE> 49
- ---------------
(1) Annual base rent expiring during each period, divided by total annual base
rent (both adjusted for contractual increases).
(2) Includes leases that have initial terms of less than one year.
(3) This figure is based on square footage actually leased (which excludes
vacant space), which accounts for the difference between this figure and
"Total Rentable Area" in the preceding table (which includes vacant space).
(4) This figure is based on square footage actually leased (which excludes
vacant space) and incorporates contractual rent increases arising after
1996, and thus differs from "Total Effective Annual Base Rent" in the
preceding table, which is based on 1996 rents.
The following table sets forth the capitalized tenant improvements and
leasing commissions paid by the Company on the industrial Properties owned by
the Company during each of the five years indicated.
INDUSTRIAL PROPERTIES
CAPITALIZED TENANT IMPROVEMENTS AND LEASING COMMISSIONS
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Square footage renewed or re-leased..... 52,491 66,500 89,000 141,523 69,000
Capitalized tenant improvements and
commissions (in thousands)............ $ 21 $ 64 $ 60 $ 114 $ 74
Average per square foot of renewed or
released space........................ $ 0.40 $ 0.96 $ 0.67 $ 0.81 $ 1.07
</TABLE>
RETAIL PROPERTIES
The retail portfolio consists of 21 Properties with a total of 630,700
square feet. The following table lists the retail Properties of the Company,
indicating the property name, city, state, year completed, approximate square
footage, and for the year ended December 31, 1996 (except when indicated),
average occupancy, average effective rent per leased square foot, annual
effective base rent, Property revenues and percentage of Property revenues on a
pro forma basis assuming the acquisition of the Properties acquired in 1996 had
been completed on January 1, 1996.
RETAIL PROPERTIES
<TABLE>
<CAPTION>
PRO FORMA
PROPERTY REVENUES
AVERAGE AVERAGE FOR YEAR
OCCUPANCY FOR EFFECTIVE ANNUAL ENDED 12/31/96
YEAR SQUARE YEAR ENDED RENT/LEASED EFFECTIVE --------------------
PROPERTY CITY ST COMPLETED FEET 12/31/96 SQUARE FEET BASE RENT AMOUNT PERCENT
- ------------------- ---------- ---- --------- -------- ------------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Park Center(1)..... Santa Ana CA 1979 73,500 97% $ 6.18 $ 440,300 $ 589,683 10.8%
Sonora Plaza(4).... Sonora CA 1974 162,126 99 5.69 913,656 1,065,104 19.4
Westwood Plaza..... Tampa FL 1984 85,689 91 7.07 551,379 719,130 13.1
Atlanta Auto
Center(2)........ (2) (2) (2) 54,750 89 10.77 522,126 626,977 11.4
QuikTrip(3)........ (3) (3) (3) 32,000 100 32.28 1,033,000 1,033,000 18.9
Shannon Crossing... Atlanta GA 1981 64,039 94 6.88 414,092 437,728 8.0
Auburn
North(4)(5)...... Auburn WA 1978 158,596 97 5.53 851,333 1,006,152 18.4
------- --- ------ ---------- ---------- -----
Total/Weighted
Average...... 630,700 96% $ 7.82 $4,725,886 $5,477,774 100.0%
======= === ====== ========== ========== =====
</TABLE>
- ---------------
(1) Mortgage receivable accounted for as real estate under GAAP. The Property is
owned by a partnership managed by one of the Associated Companies.
(2) Represents six Properties located in Georgia with facilities ranging from
5,720 square feet to 10,920 square feet completed in 1985 and 1986.
S-49
<PAGE> 50
(3) Represents ten 3,200 square foot properties located in Georgia, Missouri and
Oklahoma completed in 1988 through 1990.
(4) For these Properties, occupancy rates are presented as of December 31, 1996,
and base rent and Property revenues are presented on an annualized basis
based on results since the acquisition.
(5) Includes a space at which the tenant has ceased operations and filed
bankruptcy. In connection with the Company's acquisition, a principal of the
former owner of the Property guaranteed the tenant's rental obligations
under the lease. Subsequently, the tenant's leasehold interest under the
lease was sold to a third party, who is awaiting approval from the
bankruptcy court. Payments to the Company under the lease have been kept
current by the third party.
The Company holds fee title to all of the retail Properties except the Park
Center community center. Park Center is owned by a partnership managed by one of
the Associated Companies. The Company holds a participating first mortgage
interest in Park Center. In accordance with GAAP, the Company accounts for Park
Center as though it held fee title, as substantially all risks and rewards of
ownership have been transferred to the Company as a result of the terms of the
mortgage. The participating mortgage had a principal balance of $5,448,427 as of
December 31, 1996 and accrued interest of $2,680,024, as compared with an
appraised value of $3,550,000 as of June 30, 1994. The loan, which was modified
in mid-1994 and accrues interest at 10%, allows the borrower to defer the
payment of any interest in excess of the property's cash flow. The loan also
allows the Company to receive 75% of the property value over the total loan
balance at maturity. The loan is due March 31, 2001, but the borrower may extend
the loan for five one-year periods for payment of a fee equal to 0.25% of the
then outstanding principal balance, for each extension.
Five of the retail Properties, representing 543,950 rentable square feet,
or 86% of the total rentable area, are anchored community shopping centers. The
anchor tenants of these centers are national or regional supermarkets and drug
stores.
Six of the retail Properties are located in the Atlanta metropolitan area
and are leased to tenants in the automotive care industry. The leases for the
retail Properties (excluding the QuikTrip leases described above) generally
include fixed or CPI-based rent increases and some include provisions for the
payment of additional rent based on a percentage of the tenants' gross sales
that exceed specified amounts. Retail tenants also typically pay as additional
rent their pro rata share of the Property operating costs including common area
maintenance, property taxes, insurance, and nonstructural repairs. Some of the
leases contain options to renew at market rates or specified rates.
Ten of the retail Properties are leased to QuikTrip Corporation on
long-term leases expiring after 2008. QuikTrip is a regional convenience store
operator with over 300 stores in six states. The leases require the tenant to
pay for all property costs and provide for periodic fixed increases of base
rent. Under such leases, the tenant has one five-year option to renew at
specified rental rates.
The following table sets forth, for the periods specified, the total
rentable area, aggregate average occupancy, average effective base rent per
leased square foot and total effective annual base rent for the retail
Properties owned by the Company during each of the years indicated and on a pro
forma basis assuming the acquisition of the retail Properties acquired in 1996
had been completed on January 1, 1996.
S-50
<PAGE> 51
RETAIL PROPERTIES
HISTORICAL RENT AND OCCUPANCY
<TABLE>
<CAPTION>
TOTAL
AVERAGE OCCUPANCY AVERAGE EFFECTIVE EFFECTIVE
TOTAL RENTABLE RATE FOR THE BASE RENT/ ANNUAL BASE
YEAR AREA (SQ. FT.) PERIOD LEASED SQ. FT.(1) RENT($000S)(2)
- ------------------------------------- -------------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
1996(3).............................. 630,700 96% $ 7.82(4) $4,726
1995................................. 285,658 95 10.76 2,915
1994................................. 285,722 94 10.76 2,890
1993................................. 285,722 90 11.11 2,858
1992................................. 285,722 88 11.12 2,823
</TABLE>
- ---------------
(1) Total Effective Annual Base Rent divided by average occupancy in square
feet.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the
period.
(3) Includes the Carlsberg Properties and the TRP Properties. For these
Properties, occupancy rates are presented as of December 31, 1996, and base
rents are presented on an annualized basis based on results since the
acquisition as this information is not available for the year ended December
31, 1996.
(4) Average effective base rent per leased square foot declined in 1996 due to
the acquisition of properties with lower base rents.
The following table sets forth the contractual lease expirations for the
retail Properties for 1997 and thereafter, as of December 31, 1996.
RETAIL PROPERTIES
LEASE EXPIRATIONS
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
RENTABLE SQUARE ANNUAL BASE RENT ANNUAL BASE RENT
NUMBER OF FOOTAGE SUBJECT TO UNDER EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRATION LEASES EXPIRING EXPIRING LEASES LEASES ($000S) EXPIRING LEASES(1)
- ---------------------------- --------------- ------------------ ---------------- -------------------
<S> <C> <C> <C> <C>
1997(2)..................... 14 25,889 $ 302 5.7%
1998........................ 19 55,488 418 7.8
1999........................ 29 59,201 633 11.8
2000........................ 18 40,175 456 8.5
2001........................ 18 70,423 595 11.1
2002........................ 2 6,100 59 1.1
2003........................ 2 59,390 222 4.2
2004........................ 8 142,144 621 11.6
2005........................ 2 32,233 330 6.2
2006........................ 1 2,400 27 0.5
Thereafter.................. 13 118,777 1,685 31.5
--- ------- ------ -----
Total.................. 126 612,220(3) $5,348(4) 100.0%
=== ======= ====== =====
</TABLE>
- ---------------
(1) Annual base rent expiring during each period, divided by total annual base
rent (both adjusted for contractual increases).
(2) Includes leases that have initial terms of less than one year.
(3) This figure is based on square footage actually leased (which excludes
vacant space), which accounts for the difference between this figure and
"Total Rentable Area" in the preceding table (which includes vacant space).
(4) This figure is based on square footage actually leased (which excludes
vacant space) and incorporates contractual rent increases arising after
1996, and thus differs from "Total Effective Annual Base Rent" in the
preceding table, which is based on 1996 rents.
S-51
<PAGE> 52
The following table sets forth the capitalized tenant improvements and
leasing commissions paid by the Company on the retail Properties owned by the
Company during each of the five years indicated.
RETAIL PROPERTIES
CAPITALIZED TENANT IMPROVEMENTS AND LEASING COMMISSIONS
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Square footage renewed or re-leased...... 26,403 31,443 46,833 33,294 32,998
Capitalized tenant improvements and
commissions (in thousands)............. $ 63 $ 59 $ 59 $ 98 $ 83
Average per square foot of renewed or
released space......................... $ 2.38 $ 1.87 $ 1.87 $ 2.94 $ 2.53
</TABLE>
MULTI-FAMILY PROPERTIES
The Company owns three multi-family Properties, aggregating 642 units, and
542,710 square feet of space. All of the units are rented to residential tenants
on either a month-to-month basis or for terms of one year or less.
The following table sets forth the name, city, state, year of completion,
number of units, approximate square footage and, for the year ended December 31,
1996 (except where indicated), average occupancy, Property revenues and
percentage of Property revenues on a pro forma basis assuming the acquisition of
the Properties acquired in 1996 had been completed on January 1, 1996.
MULTI-FAMILY PORTFOLIO
<TABLE>
<CAPTION>
PRO FORMA
AVERAGE PROPERTY REVENUES
OCCUPANCY FOR YEAR ENDED
FOR YEAR 12/31/96
YEAR # OF ENDED --------------------
PROPERTY CITY ST COMPLETED UNITS SQ. FT. 12/31/96 AMOUNT PERCENT
- --------------------- -------------- ---- --------- ----- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Summerbreeze......... No. Hollywood CA 1981 104 73,284 93% $ 779,509 18.0%
Sahara Gardens(1).... Las Vegas NV 1983 312 277,056 92 1,968,014 45.5
Villas de
Mission(1)......... Las Vegas NV 1979 226 192,370 98 1,580,414 36.5
--
--- ------- ---------- -----
Total/Weighted
Average....... 642 542,710 94% $4,327,937 100.0%
=== ======= == ========== =====
</TABLE>
- ---------------
(1) For these Properties, occupancy rates are presented as of December 31, 1996,
and base rent and Property revenues are presented on an annualized basis
based on results since the acquisition.
S-52
<PAGE> 53
The following table sets forth, for the periods specified, the total units,
average occupancy, monthly average Effective Base Rent per unit, and total
effective annual base rent, for the multi-family Properties, as of December 31,
1996.
MULTI-FAMILY PROPERTIES
HISTORICAL RENT AND OCCUPANCY
<TABLE>
<CAPTION>
MONTHLY
AVERAGE EFFECTIVE TOTAL EFFECTIVE
AVERAGE OCCUPANCY BASE RENT PER ANNUAL BASE
YEAR TOTAL UNITS RATE FOR THE PERIOD LEASED UNIT(1) RENT ($000S)(2)
- --------------------------------- ----------- ------------------- ----------------- ---------------
<S> <C> <C> <C> <C>
1996(3).......................... 642 94% $ 598(4) $ 4,328
1995............................. 104 94 630 739
1994............................. 104 98 632 774
1993............................. 104 93 632 734
1992............................. 104 98 633 758
</TABLE>
- ---------------
(1) Total Effective Annual Base Rent divided by Average Occupied Unit.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the
period.
(3) Includes the TRP Properties. For these Properties, occupancy rates are
presented as of December 31, 1996, and base rents are presented on an
annualized basis based on results since the acquisition as this information
is not available for the year ended December 31, 1996.
(4) Average effective monthly base rent per unit declined in 1996 due to the
acquisition of properties with lower base rents.
HOTELS
The hotel portfolio consists of six hotels ranging from 64 to 163 rooms,
comprising a total of 342,403 square feet of space and 726 rooms. Five of the
hotels are all-suite hotels which consist primarily of one-bedroom suites, but
each also includes some studio suites and two-bedroom suites. All of the hotels
operate under license agreements with Country Lodging by Carlson, Inc. The five
all-suite hotels are marketed as Country Suites by Carlson and the sixth hotel
is marketed as Country Inns and Suites by Carlson. Country Lodging is part of
the Carlson Companies, based in Minneapolis, Minnesota. The Carlson Companies
own, operate, and franchise Radisson Hotels, TGI Friday's Restaurants, Country
Kitchen Restaurants, and the Carlson Travel Agency Network. Currently there are
a total of more than 85 Country Inns and Suites, with 30 additional under
construction.
The following table sets forth for each of the Company's hotel Properties,
the Property name, city, state, year completed, number of rooms, approximate
square footage, average occupancy and for the year ended December 31, 1996
(except where indicated), Property revenues and percentage of total hotel
Properties' revenues, average daily rate ("ADR") and revenue per available room
("REVPAR") for the hotel Properties owned by the Company on a pro forma basis
assuming the acquisitions of the Properties acquired in 1996 had been completed
on January 1, 1996.
S-53
<PAGE> 54
HOTEL PORTFOLIO
<TABLE>
<CAPTION>
PRO FORMA
PROPERTY REVENUES
FOR YEAR ENDED
12/31/96
YEAR # OF SQUARE AVERAGE --------------------
PROPERTY CITY ST COMPLETED ROOMS FEET OCC. AMOUNT PERCENT ADR REVPAR
- -------------------- ------------ ---- --------- ----- ------- ------- ---------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Country Suites by
Carlson(1)........ Scottsdale AZ 1995 163 80,568 63% $1,558,000 24.9% $88.11 $53.22
Country Suites by
Carlson(2)........ Tucson AZ 1986 157 61,552 81 1,256,490 20.1 63.85 50.42
Country Suites by
Carlson(2)........ Ontario CA 1985 120 54,019 72 431,927 6.9 54.89 38.95
Country Suites by
Carlson(2)........ Arlington TX 1986 132 56,200 69 688,272 11.0 67.61 45.75
Country Suites by
Carlson(3)........ Irving TX 1986 90 45,032 75 2,005,771 32.1 76.56 57.28
Country Inns and
Suites by
Carlson(2)........ San Antonio TX 1994 64 29,330 55 312,000 5.0 58.68 32.03
--
--- ------- ---------- ----- ------ ------
Total/Weighted
Average....... 726 326,701 70% $6,252,460 100.0% $68.28 $46.28
=== ======= == ========== ===== ====== ======
</TABLE>
- ---------------
(1) Pro forma revenue reported consists of the pro forma lease payments to be
received from GHG, which leases the Hotel from the Company and operates it
for its own account.
(2) Revenue reported consists of the lease payments received from GHG, which
leases the Hotel from the Company and operates it for its own account.
(3) Mortgage receivable accounted for as real estate under GAAP. The Property is
owned by a partnership managed by one of the Associated Companies.
The Company holds fee title to five of the six hotels. The sixth, the
Country Suites in Irving, Texas, is owned by a partnership managed by one of the
Associated Companies. The Company holds a participating first mortgage interest
in the Property. In accordance with GAAP, the Company accounts for the Property
as though it held fee title, as substantially all the risks and rewards of
ownership have been transferred to the Company as a result of the terms of the
mortgage. The participating mortgage had a principal balance of $5,039,434 as of
December 31, 1996, with accrued interest of $2,571,306, as compared with an
appraised value of $2,650,000 as of June 30, 1994. The loan, which was modified
in early 1994 and accrues interest at 10%, allows the borrower to defer the
payment of any interest in excess of the Property's cash flow. The loan also
allows the Company to receive 75% of the Property value over the total loan
balance at maturity. The loan is due March 31, 2001, but the borrower may extend
the loan for five one-year periods for payment of a fee equal to 0.25% of the
then outstanding principal balance for each extension. The hotels owned in fee
title are leased to GHG; the Irving, Texas hotel is managed by GHG under terms
of a pre-existing contract.
S-54
<PAGE> 55
The following table contains, for the periods indicated, average occupancy,
ADR and REVPAR information for the Company's hotels as well as comparative
information for all U.S. hotels and all Country Lodging hotels.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Scottsdale, AZ(1)
Occupancy....................... -- -- -- -- 63%
ADR............................. -- -- -- -- $88.11
REVPAR.......................... -- -- -- -- $53.22
Tucson, AZ
Occupancy....................... 72% 77% 77% 79% 81%
ADR............................. $54.38 $54.46 $57.21 $58.93 $63.85
REVPAR.......................... $39.05 $42.16 $44.29 $46.53 $50.42
Ontario, CA
Occupancy....................... 59% 60% 56% 66% 72%
ADR............................. $52.93 $51.61 $52.02 $48.38 $54.89
REVPAR.......................... $31.42 $30.74 $29.35 $31.67 $38.95
Arlington, TX
Occupancy....................... 68% 61% 63% 70% 69%
ADR............................. $57.85 $51.58 $62.73 $64.96 $67.61
REVPAR.......................... $39.14 $31.46 $39.79 $45.63 $45.75
Irving, TX
Occupancy....................... 66% 76% 78% 76% 75%
ADR............................. $53.53 $50.22 $58.52 $66.55 $76.56
REVPAR.......................... $35.37 $38.33 $45.36 $50.57 $57.28
San Antonio, TX(2)
Occupancy....................... -- -- -- 53%(5) 55%(6)
ADR............................. -- -- -- 57.80(5) 58.68(6)
REVPAR.......................... -- -- -- 30.79(5) 32.03(6)
All U.S. Hotels(3)
Occupancy....................... 62% 64% 65% 66% 66%
ADR............................. $59.65 $60.99 $63.63 $66.88 $71.66
REVPAR.......................... $37.04 $38.85 $41.49 $44.14 $47.06
Country Lodging System(4)
Occupancy....................... 67% 71% 75% 75% 73%
ADR............................. $50.62 $50.00 $53.00 $56.00 $62.42
REVPAR.......................... $33.94 $35.72 $39.75 $41.00 $45.45
</TABLE>
- ---------------
(1) The Scottsdale Hotel opened in January 1996.
(2) The San Antonio Hotel opened in 1995.
(3) Source: Smith Travel Research and Country Hospitality.
(4) Source: Country Hospitality. Data for all years is limited to U.S.
properties.
(5) Information supplied for historical comparison only as this hotel was not
acquired by the Company until August 1996.
(6) Information represents a full year of operations including operations prior
to the Company's acquisition of the hotel in August 1996.
In order for the Company to qualify as a REIT, neither the Company nor the
Operating Partnership can operate the hotels. Therefore, the Operating
Partnership has leased five of the hotels to GHG, each for a term of five years
pursuant to percentage leases (the "Percentage Leases"), which provide for rent
equal to the greater of the Base Rent (as defined in the Percentage Leases) or a
specified percentage of room revenues (the "Percentage Rent"). Each hotel is
separately leased to GHG. GHG'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.
S-55
<PAGE> 56
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 five hotels owned by the
Company. 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 accrues and is due quarterly.
The table below sets forth the annual Base Rent and the Percentage Rent
formulas for each of the five hotels owned by the Company.
HOTEL LEASE RENT PROVISIONS
<TABLE>
<CAPTION>
AMOUNT OF
INITIAL PERCENTAGE RENT INCURRED
ANNUAL BASE FOR YEAR ENDED
HOTEL LOCATION RENT ANNUAL PERCENTAGE RENT FORMULAS DECEMBER 31, 1996
- --------------------- ----------- ------------------------------------------ ------------------------
<S> <C> <C> <C>
Ontario, CA.......... $ 240,000 24% of room revenue up to $1,575,000 plus $ 192,000
40% of room revenue above $1,575,000 and
5% of other revenue.
San Antonio, TX...... $ 312,000(2) 33% of room revenue up to $1,200,000 plus $ 0
40% of room revenue above $1,200,000 and
5% of other revenue.
Arlington, TX........ $ 360,000 27% of room revenue up to $1,600,000 plus $ 328,000
42% of room revenue above $1,600,000 and
5% of other revenue.
Tucson, AZ........... $ 600,000 40% of room revenue up to $1,350,000 plus $ 656,000
46% of room revenue above $1,350,000 and
5% of other revenue.
Scottsdale, AZ(1).... $ 360,000 45% of room revenue up to $3,200,000 plus $1,198,000(3)
60% of room revenue above $3,200,000 and
5% of other revenue.
</TABLE>
- ---------------
(1) Assumes the acquisition of the Scottsdale Hotel was completed on January 1,
1996.
(2) Hotel was acquired in August 1996, so rent for the year ended December 31,
1996 was less than a full year's base rent.
(3) Percentage lease revenue is shown on a pro forma basis assuming the
Scottsdale Hotel was purchased on January 1, 1996.
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 the Company, the Percentage
Leases require the lessee to pay rent, insurance, salaries, utilities and all
other operating costs incurred in the operation of the hotels.
Under the Percentage Leases, the Company is required to maintain the
underground utilities and the structural elements of the improvements, including
exterior walls (excluding plate glass) and roof. In addition, the Company must
fund periodic capital improvements to the buildings and grounds, and the
periodic repair, replacement and refurbishment of furniture, fixtures and
equipment, up to the following amounts per quarter for the first year of the
Percentage Lease: Ontario -- $22,750; Arlington -- $25,000; San
Antonio -- $10,500; Tucson -- $28,500; and Scottsdale -- $24,500. These amounts
increase annually in accordance with the CPI. These obligations carry forward to
the extent not expended, and any unexpended amounts remain the property of the
Company upon termination of the Percentage Leases. Except for capital
improvements and maintenance of structural elements and underground utilities,
GHG bears the obligation, at its expense, to maintain the hotels in good order
and repair, except for ordinary wear and tear, and to make non-structural,
foreseen and unforeseen, and ordinary and extraordinary repairs which may be
necessary and appropriate to keep the hotels in good order and repair.
S-56
<PAGE> 57
GHG will not be permitted to sublet all or any part of the hotels or assign
its interest under any of the Percentage Leases, other than to an affiliate of
the lessee, without the prior written consent of the Company. No assignment or
subletting will release GHG from any of its obligations under the Percentage
Leases.
If the Company enters into an agreement to sell or otherwise transfer a
hotel, the Company has the right to terminate the Percentage Lease with respect
to such hotel upon paying GHG the fair market value of its leasehold interest in
the remaining term of the Percentage Lease to be terminated.
GHG is the licensee under the franchise licenses on the hotels. The
franchise agreements are assignable to the Company, another lessee or a new
owner, with a payment of $2,500 per hotel.
MORTGAGE RECEIVABLES
Although the Company does not intend to engage in the business of making
real estate loans, the Company holds three notes receivable, secured by first
priority real property liens, which had a total outstanding principal balance at
December 31, 1996 of $10,678,000. The financial statement carrying value of the
Hovpark loan at December 31, 1996 was approximately $6.7 million, the estimated
fair value of the underlying collateral. Effective February 1, 1997, as the
result of repayment of principal by the borrower, the principal balance of this
loan was reduced to $500,000, and the maturity was extended to February 1, 2009.
All payments are current on all loans. In connection with the Grunow loan, the
Company entered into an Option Agreement which provides the Company with the
option to purchase the Grunow Medical building based upon an agreed upon
formula. The following table summarizes these three mortgages.
SUMMARY OF MORTGAGE RECEIVABLES
<TABLE>
<CAPTION>
COLLATERAL PROPERTIES PRINCIPAL BALANCE
- ---------------------------------------------- INTEREST -------------------------
NAME TYPE RATE MATURITY 12/31/96 12/31/95
- -------------------------- ------------------ -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Hovpark(1)................ Industrial/Office 8.00% 02/01/97 $7,563,000 $7,563,000
Laurel Cranford........... Industrial 9.00% 06/01/01 $ 511,000 $ 516,000
Grunow.................... Medical Office 11.00% 11/19/99 $2,694,000 N/A
</TABLE>
- ---------------
(1) This loan is currently secured by a pledge of partnership interests in the
borrower.
MANAGEMENT BUSINESS
The Company conducts its management operations through the Associated
Companies. The Company holds 100% of the preferred stock of each of the
Associated Companies. Although the Company holds none of the voting common stock
of the Associated Companies, the Company has the right, through its preferred
stock holdings, to receive a significant portion of the economic benefits of the
Associated Companies' operations. The voting common stock of the Associated
Companies is held by individuals. See "-- The Associated Companies."
The Associated Companies control a substantial asset management and
property management portfolio by virtue of GC's general partner interests in
certain limited partnerships, and through contracts with unaffiliated owners.
The current management operations of the Company, the Operating Partnership and
the Associated Companies are summarized in the following table.
S-57
<PAGE> 58
- ---------------
(1) Properties owned by the Operating Partnership or the Company (including the
CIGNA Properties and the E&L Properties to be acquired) and either (i)
leased to GHG, in the case of hotels, or (ii) managed by the Company.
(2) Properties owned by partnerships of which GC or an affiliate is the general
partner, or by third parties, and managed by GC, GIRC or GHG.
The portfolio of 65 properties managed by the Associated Companies includes
622 hotel rooms, approximately 4.9 million square feet of retail, industrial and
office properties, more than 2,000 multi-family residential units, and
approximately 284 acres of undeveloped land. The Associated Companies each
receive substantial fees for their management services. The Associated
Companies, in turn, pay a portion of their income to their stockholders,
including the Company, through distributions on their capital stock.
S-58
<PAGE> 59
MANAGEMENT PORTFOLIO
The following table lists the properties managed by the Associated
Companies as of December 31, 1996, indicating property name, city, state,
approximate square footage, size or number of units, if applicable, and acreage,
if applicable.
MANAGEMENT PORTFOLIO
<TABLE>
<CAPTION>
SQ.
ASSET CITY STATE FT.(1)
- --------------------------------------------------------------- ----------------- ----- ---------
<S> <C> <C> <C>
OFFICE
One West Madison............................................... Phoenix AZ 25,000
GSK Corporate Plaza............................................ Phoenix AZ 31,234
Grunow Medical Building........................................ Phoenix AZ 47,479
Rosemead Springs Center........................................ El Monte CA 129,503
University Tech Center......................................... Pomona CA 101,177
Civic Center II................................................ Rancho Cucamonga CA 17,857
Gateway Professional Center.................................... Sacramento CA 50,556
Park Plaza..................................................... Sacramento CA 67,688
Carnegie Business Center I..................................... San Bernardino CA 62,605
Carnegie Business Center II.................................... San Bernardino CA 50,804
One Vanderbilt Way............................................. San Bernardino CA 73,809
Two Vanderbilt Way............................................. San Bernardino CA 69,094
Lakeside Tower................................................. San Bernardino CA 112,814
One Carnegie Plaza............................................. San Bernardino CA 102,693
Two Carnegie Plaza............................................. San Bernardino CA 68,925
One Parkside................................................... San Bernardino CA 70,069
Santa Fe Railway............................................... San Bernardino CA 36,288
Inland Regional Center......................................... San Bernardino CA 81,079
Bristol Medical Center......................................... Santa Ana CA 52,311
26th Street Office............................................. Santa Monica CA 14,573
Montrose Office Building....................................... Rockville MD 187,161
Directors Plaza................................................ Memphis TN 131,727
Poplar Towers I................................................ Memphis TN 100,901
Bluemound Commerce Center...................................... Brookfield WI 48,113
---------
Total................................................. 1,733,460
=========
INDUSTRIAL
Magnolia Industrial............................................ Phoenix AZ 35,385
Fifth Street Industrial........................................ Phoenix AZ 109,699
San Sevaine Business Park...................................... Mira Loma CA 172,057
Rancon Centre Ontario.......................................... Ontario CA 245,000
SkyPark Airport Parking........................................ San Bruno CA 216,780
Wakefield Engineering Building................................. Temecula CA 44,200
Esplanade...................................................... Tustin CA 141,700
Bryant Lake Phases I & II...................................... Eden Prairie MN 80,057
Bryant Lake Phase III.......................................... Eden Prairie MN 91,732
Black Satchel.................................................. Charlotte NC 228,800
North Park Business Center..................................... Charlotte NC 319,960
The Commons at Great Valley.................................... Malvern PA 200,000
Totem Valley Business Center................................... Kirkland WA 121,645
---------
Total................................................. 2,007,015
=========
RETAIL
Baseline Mercado............................................... Mesa AZ 22,886
Mountain View Plaza............................................ Mojave CA 57,456
Weist Plaza.................................................... Riverside CA 145,778
Promotional Retail Phase II.................................... San Bernardino CA 104,865
Service Retail Center.......................................... San Bernardino CA 20,780
Outback Steak House............................................ San Bernardino CA 6,500
Bally's Health Club............................................ San Bernardino CA 25,000
</TABLE>
S-59
<PAGE> 60
<TABLE>
<CAPTION>
SQ.
ASSET CITY STATE FT.(1)
- --------------------------------------------------------------- ----------------- ---------
<S> <C> <C> <C>
Aztec Shopping Center.......................................... San Diego CA 23,789
Silver Creek Plaza............................................. San Jose CA 71,005
RCC Auto Center................................................ Temecula CA 25,761
Town & Country Center.......................................... Arlington Heights IL 323,591
Glenlake Plaza................................................. Indianapolis IN 93,593
Heritage Square................................................ San Antonio TX 75,528
San Mar Plaza.................................................. San Marcos TX 96,206
Vashon East.................................................... Seattle WA 53,143
---------
Total................................................. 1,145,881
=========
NO. UNITS
---------
MULTI-FAMILY
Green Meadows.................................................. Davis CA 120
Huntington Breakers............................................ Huntington Beach CA 342
Villa La Jolla................................................. La Jolla CA 385
La Jolla Canyon................................................ La Jolla CA 157
Pacific Bay Club............................................... San Diego CA 159
Shadowridge Woodbend........................................... Vista CA 240
Promontory Point............................................... Henderson NV 180
Lake Mead Estates.............................................. Las Vegas NV 160
Georgetown Apartments.......................................... Omaha NE 288
---------
Total................................................. 2,031
=========
HOTEL
Country Suites By Carlson...................................... Tempe AZ 139
Country Suites By Carlson...................................... Memphis TN 121
Condominium Resort Hotel....................................... Galveston TX 276
Condominium Resort Hotel....................................... Port Aransas TX 86
---------
Total................................................. 622
=========
LAND(2) ACREAGE
---------
Lake Elsinore Square (Retail).................................. Lake Elsinore CA 24.79
Mountain View Plaza (Retail)................................... Mojave CA 8.99
Perris-4th Avenue (Comm./Retail)............................... Perris CA 17.67
Perris-Ethanac (Comm./Retail).................................. Perris CA 23.76
Perris-Nuevo (Comm./Retail).................................... Perris CA 60.41
Rancon Centre Ontario (Industrial)............................. Ontario CA 33.76
Rancon Center (Office)......................................... Rancho Cucamonga CA 1.80
Rancon Center (Retail)......................................... Rancho Cucamonga CA 5.98
Rancon Commerce Center (Industrial)............................ Temecula CA 15.52
Rancon Towne Village (Retail).................................. Temecula CA 11.97
Tippecanoe (Commercial)........................................ San Bernardino CA 8.79
Tri-City Corporate Center (Office/Retail)...................... San Bernardino CA 70.33
---------
Total................................................. 283.77
=========
</TABLE>
- ---------------
(1) Total square footage of the management portfolio is 6,792,332 square feet,
including 1,905,976 square feet of hotel and multi-family properties as of
December 31, 1996.
(2) The 65 properties listed as actively managed elsewhere in this Prospectus
Supplement do not include the land portfolio.
S-60
<PAGE> 61
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and the executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITION
- ----------------------- ---- -----------------------------------------------------------
<S> <C> <C>
Robert Batinovich...... 60 Chairman, President and Chief Executive Officer
Andrew Batinovich...... 38 Director, Executive Vice President, Chief Operating Officer
and Chief Financial Officer
Sandra L. Boyle........ 48 Senior Vice President
Frank E. Austin........ 49 Senior Vice President, General Counsel and Secretary
Terri Garnick.......... 36 Senior Vice President, Treasurer and Chief Accounting
Officer
Stephen R. Saul........ 43 Vice President
Anna Cheng............. 42 Vice President
Patrick Foley.......... 65 Director
Richard A. Magnuson.... 39 Director
Laura Wallace.......... 43 Director
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE FORMATION AND CONSOLIDATION
The Company began operations on December 31, 1995 concurrently with the
Consolidation, a merger and consolidation in which Old GC and the Partnerships
merged with and into the Company. To effect the Consolidation, the Company (i)
issued securities of the Company to the Partnerships in exchange for the assets
of the Partnerships, (ii) merged with Old GC, with the Company being the
surviving entity; (iii) obtained certain limited partnership interests held by
Old GC, which Old GC contributed to the Company; (iv) obtained nonvoting
preferred stock in three companies involved in the management of public and
private real estate partnerships and the operations of the Company's hotels; and
(v) through the Operating Partnership, acquired interests in certain warehouse
distribution facilities from GPA, Ltd., a California limited partnership, which
were controlled by Robert Batinovich. The Partnerships' assets included the
stock of an insurance holding company which is currently held by one of the
Associated Companies. Prior to the Consolidation, Robert Batinovich and GC (then
known as Glenborough Realty Corporation) were the general partners of the
Partnerships.
REDEMPTION AND REGISTRATION RIGHTS
Robert Batinovich, Andrew Batinovich, Sandra L. Boyle and Frank E. Austin
hold or control, in aggregate, limited partnership interests representing
approximately 21% of Glenborough Partners, a California limited partnership.
Glenborough Partners is a 99% limited partner of GPA, Ltd. which holds an
approximately 7% interest in the Operating Partnership, in which the Company has
a 1.0% general partnership interest and an approximate 91% limited partnership
interest. The officers named above, through their interest in Glenborough
Partners, share indirectly with the Company in the net income or loss or any
distributions of the Operating Partnership. Pursuant to the partnership
agreement of the Operating Partnership, GPA, Ltd. holds certain redemption
rights which are exercisable under which GPA, Ltd.'s interest in the Operating
Partnership may be redeemed in exchange for shares of the Company's Common
Stock. The Company has granted GPA, Ltd. certain demand and piggyback
registration rights with respect to shares of Common Stock that may be owned or
acquired by GPA, Ltd. in connection with the exercise of such redemption rights.
See "Description of Capital Stock -- Shares Eligible for Future
Sale -- Registration Rights." As of December 31, 1996, the portion of the shares
of Common Stock of the Company issuable upon redemption by GPA, Ltd. and covered
by the "demand" and "piggyback" registration rights which are attributable to
each of Robert
S-61
<PAGE> 62
Batinovich, Andrew Batinovich, Sandra L. Boyle and Frank E. Austin is 114,659
shares, 4,760 shares, 277 shares and 387 shares, respectively. In addition,
Robert Batinovich directly holds an approximately 0.3% interest in the Operating
Partnership, which includes similar redemption and registration rights to those
held by GPA, Ltd. As of December 31, 1996 the number of shares of the Common
Stock issuable upon redemption by Robert Batinovich and covered by the
registration rights was 12,727.
RELATED COMPANIES
GPA, Ltd.'s Relationship with the Company
The Company owns an approximate 4% limited partner interest in Glenborough
Partners, a California limited partnership, which in turn owns a 99% limited
partner interest in GPA, Ltd. Thus, the Company effectively owns an approximate
4% interest in GPA, Ltd. The value of this interest is reflected in the
Company's audited balance sheet.
GPA, Ltd.'s Relationship with the Operating Partnership
GPA, Ltd. owns an approximate 7% limited partner interest in the Operating
Partnership. Thus, because the Company owns an approximate 4% interest in GPA,
Ltd., the Company owns an approximate 1% indirect interest in the Operating
Partnership, in addition to its approximate 91% direct interest as limited and
general partner of the Operating Partnership.
GPA, Ltd.'s Relationship with GC
GC owns a 0.1% general partner interest in GPA, Ltd.
GPA, Ltd.'s Relationship with Robert Batinovich
Robert Batinovich and members of his immediate family own an approximate
21% aggregate interest (including both general partner and limited partner
interests) in Glenborough Partners, which in turn owns a 99% limited partner
interest in GPA, Ltd. In addition, Robert Batinovich owns an approximate 1%
general partner interest in GPA, Ltd. Thus, Robert Batinovich and members of his
immediate family own an approximate 22% aggregate interest in GPA, Ltd.
ACQUISITIONS FROM RELATED PARTIES
In 1996, the Company acquired the UCT Property and the Bond Street
Property. The UCT Property and the Bond Street Property were substantially or
partially owned by GPA, Ltd. and Robert Batinovich. Because of the ownership
interests of Robert and Andrew Batinovich and their families through GPA, Ltd.
or directly, these transactions involved a conflict of interest. The terms of
the transactions were reviewed by independent directors to determine if these
transactions were fair to the Company and its stockholders. The independent
directors, after completing their review and considering, among other things,
appraisals on each of the properties that show values in excess of the amounts
to be paid by the Company, unanimously approved each transaction, with Robert
and Andrew Batinovich abstaining. The Company believes that these transactions
were on terms that are at least as favorable as those that could have been
obtained with arms-length bargaining with a third-party, but there can be no
assurance that this was the case. See "Recent Activities."
The Company may acquire other properties in which GPA, Ltd. or Robert and
Andrew Batinovich or their families have an interest, although there are no
agreements or proposals to acquire properties currently under consideration
other than those referred to under the heading "Recent Activities." The
Company's Board of Directors has adopted a policy that no acquisition of
properties from GPA, Ltd. or Robert or Andrew Batinovich or their immediate
families or from other entities in which they have an interest will be made
without the Company first obtaining the approval of at least two-thirds of the
Company's independent Directors. In addition, the employment agreements of
Robert and Andrew Batinovich provide that in the event either of them or their
immediate family members or any entity in which any of them has an interest has
an opportunity during the term of the employment agreements to acquire any
interest in real property for investment purposes or the right to manage any
interest in real property, he or she must first offer the opportunity to the
Company or to a designated entity in which the Company has an interest, for such
reasonable period of time as may be necessary for a disinterested majority of
the Company's Board of Directors to evaluate the opportunity for investment or
acquisition by the Company.
S-62
<PAGE> 63
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Bear, Stearns &
Co. Inc. ("Bear Stearns"), Robertson, Stephens & Company LLC ("Robertson
Stephens") and Jefferies & Company, Inc. are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement, to purchase from the Company the number of shares
of Common Stock set forth opposite their respective names below. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent, and that the Underwriters are committed
to purchase all of such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER COMMON STOCK
------------------------------------------------------------------- ----------------
<S> <C>
Bear, Stearns & Co. Inc............................................ 1,200,000
Robertson, Stephens & Company LLC.................................. 1,200,000
Jefferies & Company, Inc........................................... 600,000
A.G. Edwards & Sons, Inc........................................... 100,000
J.P. Morgan Securities Inc......................................... 100,000
PaineWebber Incorporated........................................... 100,000
Arnhold and S. Bleichroeder, Inc................................... 50,000
Cruttenden Roth Incorporated....................................... 50,000
Legg Mason Wood Walker, Incorporated............................... 50,000
The Shemano Group, Inc............................................. 50,000
---------
Total.................................................... 3,500,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the Common Stock to the public at the public offering price set forth
on the cover page of this Prospectus Supplement and to certain dealers at that
price less a concession not in excess of $0.67 per share. The Underwriters may
allow, and such dealers may reallow, a discount not in excess of $0.10 per share
on sales to certain other dealers. After the initial offering to the public, the
public offering price, concession and discount may be changed.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus Supplement, to purchase up to 525,000
additional shares of Common Stock (the "Option Shares") to cover
over-allotments, if any, at the public offering price per share set forth on the
cover page of this Prospectus Supplement, less the underwriting discount. If the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage of total Option Shares that the number of Common Stock to be
purchased by it shown in the foregoing table bears to the Common Stock initially
offered hereby.
In the Underwriting Agreement, the Company and the Operating Partnership
have agreed to indemnify the several Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended
or to contribute to payments the Underwriters may be required to make in respect
thereof.
The Company and the Operating Partnership have agreed not to, directly or
indirectly, issue, sell, offer or agree to sell, grant any option to purchase,
or otherwise dispose (or announce any offer, sale, grant of an option to
purchase or other disposition) of, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock for a period of
90 days after the date of this Prospectus Supplement without the prior written
consent of Bear Stearns (except for issuances by the Company upon the exercise
of outstanding stock options, in connection with bona fide acquisitions of real
property or interests therein, of shares of Common Stock or partnership units in
the Operating Partnership such that the aggregate number of shares of Common
Stock issued, or which may be issued upon conversion or exchange of such units,
will not exceed 3,500,000). All directors and officers and certain stockholders
of the Company have agreed not to directly or indirectly issue, sell, offer or
agree to sell, grant any option to purchase or otherwise dispose of any shares
of Common Stock (or any securities convertible into, exercise for or
exchangeable for shares of Common Stock) for a period of 180 days after the date
of this Prospectus Supplement without the prior written consent of the
Representatives. In connection with the settlement of the Blumberg litigation,
Robert Batinovich, Andrew Batinovich and certain family members agreed not to
sell any of their shares of Common Stock until after December 31, 1997.
S-63
<PAGE> 64
Bear Stearns and Robertson Stephens have provided various financial
advisory services to the Company or affiliates of the Company, for which they
have received customary compensation. Bear, Stearns Funding, Inc. ("Bear Stearns
Funding"), an affiliate of Bear Stearns, has loaned the Company $20,000,000 at
an interest rate of 7.57% with a maturity date of January 1, 2006. Bear Stearns
Funding has also made certain loans to limited partnerships for which GIRC
provides management services.
The Shemano Group, Inc. ("Shemano"), a participating Underwriter, has
provided consulting services to the Company in connection with the Offering and
has agreed to continue to provide consulting services to the Company with
respect to certain securities matters. The Company has paid Shemano $25,000 to
date and has agreed to pay Shemano an additional $25,000 at the closing of the
Offering.
LEGAL MATTERS
The legality of the Common Stock offered by this Prospectus Supplement will
be passed upon for the Company by Morrison & Foerster LLP, Palo Alto,
California, and certain matters will be passed upon for the Underwriters by
Latham & Watkins, San Francisco, California. Morrison & Foerster LLP will rely
upon the opinion of Hogan & Hartson LLP, Baltimore, Maryland as to certain
matters of Maryland law. In addition, Morrison & Foerster LLP will provide an
opinion as the basis of the description of federal income tax consequences
contained in the accompanying Prospectus in the section entitled "Federal Income
Tax Consequences."
EXPERTS
The financial statements of the Company, the GRT Predecessor Entities,
Glenborough Hotel Group, Atlantic Pacific Assurance Company Limited and
Glenborough Inland Realty Corporation and related financial statement schedules
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996, incorporated by reference herein, have been audited by Arthur Andersen
LLP, independent public accountants, to the extent and for the periods indicated
in their reports, and have been incorporated herein in reliance on such reports
given on the authority of that firm as experts in accounting and auditing.
In addition, the respective financial statements of the E&L Properties and
the CIGNA Properties included in this Prospectus Supplement, to the extent and
for the periods indicated in their reports, have also been audited by Arthur
Andersen LLP, independent public accountants, and are included herein in
reliance on such reports given on the authority of that firm as experts in
accounting and auditing.
S-64
<PAGE> 65
GLENBOROUGH REALTY TRUST INCORPORATED
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES OF THE CIGNA PROPERTIES FOR THE
YEAR ENDED DECEMBER 31, 1996:
Report of Independent Public Accountants.......................................... F-2
Combined Statement of Revenues and Certain Expenses of the CIGNA Properties for
the year ended December 31, 1996............................................... F-3
Notes to Combined Statement of Revenues and Certain Expenses of the CIGNA
Properties for the year ended December 31, 1996................................ F-4
COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES OF THE E&L PROPERTIES FOR THE
YEAR ENDED DECEMBER 31, 1996:
Report of Independent Public Accountants.......................................... F-5
Combined Statement of Revenue and Certain Expenses of the E&L Properties for the
year ended December 31, 1996................................................... F-6
Notes to Combined Statement of Revenue and Certain Expenses of the E&L Properties
for the year ended December 31, 1996........................................... F-7
</TABLE>
F-1
<PAGE> 66
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Glenborough Realty Trust Incorporated:
We have audited the accompanying combined statement of revenues and certain
expenses of the CIGNA Properties, as defined in Note 1, for the year ended
December 31, 1996. This combined financial statement is the responsibility of
the management of the Company. Our responsibility is to express an opinion on
this combined financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying combined statement of revenues and certain expenses has
been prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, as described in Note 1, and is not intended
to be a complete presentation of the revenues and expenses of the CIGNA
Properties.
In our opinion, the combined financial statement referred to above presents
fairly, in all material respects, the revenues and certain expenses of the CIGNA
Properties for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
February 11, 1997
F-2
<PAGE> 67
GLENBOROUGH REALTY TRUST INCORPORATED
COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES OF
THE CIGNA PROPERTIES
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES.......................................................................... $7,811
CERTAIN EXPENSES:
Operating....................................................................... 1,947
Real estate taxes............................................................... 729
------
2,676
------
REVENUES IN EXCESS OF CERTAIN EXPENSES............................................ $5,135
======
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE> 68
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES TO COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES OF
THE CIGNA PROPERTIES
FOR THE YEAR ENDED DECEMBER 31, 1996
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICY
Property Acquired - The accompanying combined statement of revenues and
certain expenses include the operations (see "Basis of Presentation" below) of
the following six properties (the "CIGNA Properties") to be acquired by
Glenborough Realty Trust Incorporated (the "Company"), from an unaffiliated
third party.
<TABLE>
<CAPTION>
PROPERTY CITY STATE TYPE
------------------------------------------- ----------- ----- -------------
<S> <C> <C> <C>
Woodlands Plaza............................ St. Louis MO Office
Woodlands Tech............................. St. Louis MO Industrial
Lake Point................................. Orlando FL Industrial
Overlook Apartments........................ Scottsdale AZ Multi-family
Piedmont Plaza............................. Apopka FL Retail
Westford Corporate Center.................. Westford MA Office
</TABLE>
Basis of Presentation - The accompanying combined statement of revenues and
certain expenses is not intended to be a complete presentation of the actual
operations of the CIGNA Properties for the period presented. Certain expenses
may not be comparable to the expenses expected to be incurred by the Company in
the future operations of the CIGNA Properties; however, the Company is not aware
of any material factors relating to the CIGNA Properties that would cause the
reported financial information not to be indicative of future operating results.
Excluded expenses consist of property management fees, interest expense,
depreciation and amortization and other costs not directly related to the future
operations of the CIGNA Properties.
This combined financial statement has been prepared for the purpose of
complying with certain rules and regulations of the Securities and Exchange
Commission.
Revenue Recognition - All leases are classified as operating leases. Rental
revenue is recognized as earned over the terms of the leases.
2. LEASING ACTIVITY
The minimum future rental revenues from leases in effect as of January 1,
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
--------------------------------------------------- -------
<S> <C>
1997............................................... 5,351
1998............................................... 5,024
1999............................................... 3,233
2000............................................... 2,310
2001............................................... 1,799
Thereafter......................................... 11,677
-------
Total.................................... $29,394
=======
</TABLE>
In addition to minimum rental payments, tenants pay reimbursements for
their pro rata share of specified operating expenses, which amounted to $1,171
for the year ended December 31, 1996. Certain leases contain lessee renewal
options.
F-4
<PAGE> 69
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Glenborough Realty Trust Incorporated:
We have audited the accompanying combined statement of revenues and certain
expenses of the E&L Properties, as defined in Note 1, for the year ended
December 31, 1996. This combined financial statement is the responsibility of
the management of the Company. Our responsibility is to express an opinion on
this combined financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying combined statement of revenues and certain expenses has
been prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, as described in Note 1, and is not intended
to be a complete presentation of the revenues and expenses of the E&L
Properties.
In our opinion, the combined financial statement referred to above presents
fairly, in all material respects, the revenues and certain expenses of the E&L
Properties for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 31, 1997
F-5
<PAGE> 70
GLENBOROUGH REALTY TRUST INCORPORATED
COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES OF
THE E&L PROPERTIES
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES............................................................................ $2,925
CERTAIN EXPENSES:
Operating......................................................................... 418
Real estate taxes................................................................. 157
------
575
------
REVENUES IN EXCESS OF CERTAIN EXPENSES.............................................. $2,350
======
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE> 71
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES TO COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES OF
THE E&L PROPERTIES
FOR THE YEAR ENDED DECEMBER 31, 1996
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property Acquired -- The accompanying combined statement of revenues and
certain expenses include the operations (see "Basis of Presentation" below) of
the following E&L Properties to be acquired by Glenborough Realty Trust
Incorporated (the "Company") from Ellis & Lane Partnerships, an unaffiliated
third party.
<TABLE>
<CAPTION>
PROPERTY CITY STATE TYPE
------------------------------------------- ------------- ----- ----------
<S> <C> <C> <C>
Academy Center............................. Rolling Hills CA Office
Chatsworth Industrial Park................. Chatsworth CA Industrial
Sandhill Industrial Park................... Carson CA Industrial
Arrow/San Dimas Center..................... San Dimas CA Industrial
Katella/Glassell Business Park............. Orange CA Retail
Kraemer Business Park...................... Anaheim CA Industrial
Piedmont -- Belshaw........................ Carson CA Industrial
Piedmont -- Dominguez...................... Carson CA Industrial
Piedmont -- Dunn Way....................... Placentia CA Industrial
Monroe Business Park....................... Placentia CA Industrial
Piedmont -- Upland......................... Upland CA Industrial
</TABLE>
Basis of Presentation -- The accompanying combined statements of revenues
and certain expenses is not intended to be a complete presentation of the actual
operations of the E&L Properties for the period presented. Certain expenses may
not be comparable to the expenses expected to be incurred by the Company in the
future operations of the Properties; however, the Company is not aware of any
material factors relating to the E&L Properties that would cause the reported
financial information not to be indicative of future operating results. Excluded
expenses consist of property management fees, interest expense, depreciation and
amortization and other costs not directly related to the future operations of
the E&L Properties.
This combined financial statement has been prepared for the purpose of
complying with certain rules and regulations of the Securities and Exchange
Commission.
Revenue Recognition -- All leases are classified as operating leases.
Rental revenue is recognized as earned over the terms of the leases.
2. LEASING ACTIVITY
The minimum future rental revenues from leases in effect as of January 1,
1997 are as follows (in thousands)
<TABLE>
<CAPTION>
YEAR AMOUNT
---------------------------------------------------- ------
<S> <C>
1997................................................ 2,123
1998................................................ 1,060
1999................................................ 570
2000................................................ 438
2001................................................ 208
Thereafter.......................................... 6
-----
Total..................................... 4,405
=====
</TABLE>
F-7
<PAGE> 72
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES TO COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES OF
THE E&L PROPERTIES
FOR THE YEAR ENDED DECEMBER 31, 1996 -- (CONTINUED)
In addition to minimum rental payments, tenants pay reimbursements for
their pro rata share of specified operating expenses, which amounted to $52 for
the year ended December 31, 1996. Certain leases contain lessee renewal options.
F-8
<PAGE> 73
PROSPECTUS
<TABLE>
<S> <C> <C>
LOGO $250,000,000
LOGO
PREFERRED STOCK,
COMMON STOCK AND WARRANTS
</TABLE>
------------------------
Glenborough Realty Trust Incorporated (the "Company") may from time to time
offer in one or more series or classes (i) shares or fractional shares of its
preferred stock, par value $.001 (the "Preferred Stock"), (ii) shares of its
common stock, par value $0.001 per share (the "Common Stock") or (iii) warrants
to purchase shares of Preferred Stock or Common Stock (the "Warrants"), with an
aggregate public offering price of up to $250,000,000, on terms to be determined
at the time of the offering. The Preferred Stock, Common Stock and Warrants
(collectively, the "Offered Securities") may be offered, separately or together,
in separate classes or series in amounts, at prices and on terms to be set forth
in a supplement to this Prospectus (each a "Prospectus Supplement").
The specific terms of the Offered Securities in respect to which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable (i) in the case of Preferred
Stock, the specific title and stated value per share, any dividend, liquidation,
redemption, conversion, voting and other rights, and any initial public offering
price; (ii) in the case of Common Stock, the specific title and stated value and
any initial public offering price; and (iii) in the case of Warrants, the
duration, offering price, exercise price and detachability. In addition, such
specific terms may include limitations on direct or beneficial ownership and
restrictions on transfer of the Offered Securities, in each case as may be
appropriate to preserve the status of the Company as a real estate investment
trust ("REIT") for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States Federal Income Tax Consequences relating
to, and any listing on a securities exchange of, the Offered Securities covered
by such Prospectus Supplement.
The Offered Securities may be offered directly, through agents designated
from time to time by the Company, or to or through underwriters or dealers. If
any agents or underwriters are involved in the sale of any of the Offered
Securities, their names, and any applicable purchase price, fee, commission or
discount arrangement between or among them, will be set forth or will be
calculable from the information set forth in the applicable Prospectus
Supplement. See "Plan of Distribution." No Offered Securities may be sold
without delivery of the applicable Prospectus Supplement describing the method
and terms of the offering of such Offered Securities.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE OFFERED SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is February 25, 1997.
<PAGE> 74
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR AN APPLICABLE PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER,
DEALER OR AGENT. THIS PROSPECTUS AND ANY APPLICABLE PROSPECTUS SUPPLEMENT DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement, and exhibits and schedules forming a part thereof and the reports,
proxy statements and other information filed by the Company with the Commission
in accordance with the Exchange Act can be inspected and copied at the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.,
20549, and at the following regional offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The address of the
Commission's Web Site is (http://www.sec.gov). In addition, the Common Stock is
listed on the New York Stock Exchange and similar information concerning the
Company can be inspected and copied at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") (of which this Prospectus is a part) under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Offered Securities. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. Statements
contained in this Prospectus as to the contents of any contract or other
documents are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
regarding the Company and the Offered Securities, reference is hereby made to
the Registration Statement and such exhibits and schedules which may be obtained
from the Commission at its principal office in Washington, D.C., upon payment of
the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the
Exchange Act with the Commission and are incorporated herein by reference:
a. The Company's Annual Report on Form 10-K for the year ended
December 31, 1995;
b. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, June 30, and September 30, 1996;
c. The Company's Current Reports on Form 8-K dated June 30, 1996, July
15, 1996, September 30, 1996, October 17, 1996 and December 4, 1996 and
Current Reports on Form 8-K/A dated March 14, 1996, August 8, 1996,
December 30, 1996 and December 30, 1996;
d. The description of the Registrant's Common Stock contained in the
Company's Registration Statement on Form 8-A (File No. 1-14162).
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All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Offered Securities shall be
deemed to be incorporated by reference in this Prospectus and to be part hereof
from the date of filing such documents.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in the applicable Prospectus Supplement) or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus (or in the applicable Prospectus
Supplement).
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such information, unless such exhibits are
specifically incorporated by reference in such information) will be provided
without charge to each person, including any beneficial owner, to whom this
Prospectus is delivered upon written or oral request. Requests should be
directed to the Vice President, Capital Markets, Glenborough Realty Trust
Incorporated, 400 South El Camino Real, Suite 1100, San Mateo, California
95402-1708, telephone number (415) 343-9300.
As used herein, the term "Company" means Glenborough Realty Trust
Incorporated, a Maryland real estate investment trust, and its consolidated
subsidiaries for the periods from and after December 31, 1995 (the date of the
merger of eight public limited partnerships and Glenborough Corporation, a
California corporation, (the "Predecessors") with and into the Company (the
"Consolidation")). This Prospectus contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus. Unless otherwise indicated, ownership percentages
of the Company s Common Stock have been computed on a fully converted basis,
using an exchange of Operating Partnership units for Common Stock on a
one-for-one basis.
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THE COMPANY
The Company is a self-administered and self-managed real estate investment
trust (a "REIT") that owns a portfolio of 54 industrial, office, hotel, retail
and multifamily properties (the "Properties") located in 17 states throughout
the country, as of December 31, 1996. The Company's principal growth strategy is
to capitalize on the opportunity to acquire portfolios or single properties from
public and private partnerships on attractive terms. This strategy has evolved
from the Company's predecessors' experience since 1978 in managing real estate
partnerships and their assets and, since 1989, in acquiring management interests
from third parties. In addition, three associated companies (the "Associated
Companies") provide comprehensive asset, partnership and property management
services for 65 other properties that are not owned by the Company.
The Company expects to continue to enhance, expand and diversify its real
estate holdings by making property and portfolio acquisitions, improving
individual property performance and constantly reviewing the mix of its holdings
by selling appropriate properties and reinvesting the proceeds. The Company will
pursue the acquisition of individual properties and diversified portfolios that
can be purchased at attractive prices and have characteristics consistent with
the Company's growth strategy. The Company also intends to expand through the
growth of the Associated Companies, which it anticipates will occur through the
acquisition of general partnership interests, execution of asset management and
property management agreements with third parties and the leasing of hotels that
may in the future be acquired by the Company.
A portion of the Company's operations is conducted through a subsidiary
operating partnership (the "Operating Partnership") in which the Company holds a
1% interest as the sole general partner and in which the Company holds an
approximate 90.8% limited partner interest, as of December 31, 1996.
The Common Stock is listed on the New York Stock Exchange under the Symbol
"GLB." The Company commenced operations on December 31, 1995, through the merger
of eight public limited partnerships and a management company with and into the
Company. The Company's executive offices are located at 400 South El Camino
Real, Suite 1100, San Mateo, California 95402-1708 and its telephone number is
(415) 343-9300.
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with
its taxable year ended December 31, 1996. As a REIT, the Company generally will
not be subject to Federal income tax on net income that it distributes to its
stockholders. Even if the Company qualifies for taxation as a REIT, the Company
may be subject to certain Federal, state and local taxes on its income and
property. See "Federal Income Tax Consequences."
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RISK FACTORS
Prospective investors should read this entire Prospectus and the applicable
Prospectus Supplement carefully, including all appendices and supplements hereto
or thereto, and should consider carefully the following factors before
purchasing the Offered Securities offered hereby.
LITIGATION RELATED TO CONSOLIDATION
Recent business reorganizations sponsored by others involving the
conversion of partnerships into corporations have given rise to a number of
investor lawsuits. These lawsuits have included claims against the general
partners of the participating partnerships, the partnerships themselves and
related persons involved in the structuring of or benefiting from the conversion
or reorganization, as well as claims against the surviving entity and its
directors and officers. The lawsuits have included, among others, claims that
the structure of the reorganizations, as well as the manner in which they were
submitted for investor approval, involved violations of federal and state
securities laws, common law fraud and negligent misrepresentations, breaches of
fiduciary duty, unfair and deceptive trade practices, negligence and waste,
breaches of the partnership documents of the participating partnerships, failure
to comply with applicable reporting requirements, violations of the rules of the
NASD on suitability and fair practices, and violations of the Racketeer
Influenced and Corrupt Organizations Act. Two lawsuits have been filed
contesting the fairness of the Consolidation, one in California state court and
one in federal court. A settlement of the state court action has been approved
by the court, but objectors to the settlement have appealed that approval.
Plaintiffs in the federal court action have agreed voluntarily to take the
action off calendar pending resolution of the state court action. The Company
and the other defendants in the state court action have filed a responsive brief
and the appeal is now pending.
From time to time the Company is involved in other litigation arising out
of its business activities. It is possible that this litigation and the other
litigation previously described could result in significant losses in excess of
amounts reserved, which could have an adverse effect on the Company's results of
operations and the financial condition of the Company.
CHAPTER 11 REORGANIZATION OF PARTNERSHIP CONSOLIDATION BY SENIOR MANAGEMENT
Robert and Andrew Batinovich, two of the senior officers of the Company,
were also senior members of a management team that formed a publicly registered
limited partnership in 1986 to consolidate a number of predecessor partnerships.
That public partnership was involved in litigation with its primary creditor and
in order to prevent foreclosure filed a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code in May of 1992. The public
partnership, the primary subsidiary of which is GPA, Ltd., which owns an
approximately 7% limited partner interest in the Operating Partnership along
with other substantial real estate assets, settled the litigation and obtained
confirmation of a plan of reorganization in January 1994. Investors in the
Offered Securities should consider that the consolidation of partnerships into
GPA, Ltd.'s parent partnership did not achieve all of the objectives stated at
the time and should further consider the relevance of that fact to their
investment in the Offered Securities of the Company.
RISKS ASSOCIATED WITH ACQUISITIONS
Acquisitions Could Adversely Affect Operations or Stock Value
Consistent with its growth strategy, the Company is continually pursuing
and evaluating potential acquisition opportunities, and is from time to time
actively considering the possible acquisition of specific properties, which may
include properties managed or controlled by one of the Associated Companies or
owned by affiliated parties. It is possible that one or more of such possible
future acquisitions, if completed, could adversely affect the Company's funds
from operations or cash available for distribution, in the short term or the
long term or both, or increase the Company's debt, or be perceived negatively
among investors such that such an acquisition could be followed by a decline in
the market value of the Common Stock.
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Expansion Risk
The Company is experiencing a period of rapid expansion, which management
expects will continue in the near future. This growth has increased the
operating complexity of the Company as well as the level of responsibility for
both existing and new management personnel. The Company's ability to manage its
expansion effectively will require it to continue to update its operational and
financial systems and to expand, train and manage its employee base. The
Company's inability to effectively manage its expansion could have an adverse
effect on the Company's results of operations and financial condition.
Conflict of Interest
The Company has acquired, and from time to time may acquire, properties
from partnerships that Robert Batinovich, the Company's Chief Executive Officer,
and Andrew Batinovich, the Company's Chief Operating Officer, control, and in
which they and members of their families have substantial interests. It is also
possible that the Company may enter into transactions to acquire other
properties controlled by these individuals or in which they or members of their
families have substantial interests in the future. These transactions involve or
will involve conflicts of interest. These transactions may provide substantial
economic benefits such as the payments or unit issuances, relief or deferral of
tax liabilities, relief of primary or secondary liability for debt, and
reduction in exposure to other property-related liabilities. Despite the
presence of appraisals or fairness opinions or review by parties who have no
interest in the transactions, the transactions will not be the product of
arm's-length negotiation and there can be no assurance that these transactions
will be as favorable to the Company as transactions that the Company negotiates
with unrelated parties or will not result in undue benefit to Robert and Andrew
Batinovich and members of their families. Neither Robert Batinovich nor Andrew
Batinovich has guaranteed that any properties acquired from entities they
control or in which they or their families have a significant interest will be
as profitable as other investments made by the Company or will not result in
losses.
Assumption of General Partner Liabilities
The Company and its predecessors have acquired a number of their properties
by acquiring partnerships that own the properties or by first acquiring general
partnership interests and at a later date acquiring the properties, and the
Company may pursue acquisitions in this manner in the future. When the Company
uses this acquisition technique, a subsidiary of the Company becomes a general
partner. As a general partner the Company's subsidiary becomes generally liable
for the debts and obligations of the partnership, including debts and
obligations that may be contingent or unknown at the time of the acquisition. In
addition, the Company's subsidiary assumes obligations under the partnership
agreements, which may include obligations to make future contributions for the
benefit of other partners. The Company undertakes detailed due diligence reviews
to ascertain the nature and extent of obligations that its subsidiary will
assume when it becomes a general partner, but there can be no assurance that the
obligations assumed will not exceed the Company's estimates or that the assumed
liabilities will not have an adverse effect on the Company's results of
operations or financial condition. In addition, an Associated Company may enter
into management agreements pursuant to which it assumes certain obligations as
manager of properties. There can be no assurance that these obligations will not
have an adverse effect on the Associated Companies' results of operations or
financial condition, which could adversely affect the value of the Company's
preferred stock interest in those companies.
Risks Relating to Tender Offers
The Company may, as part of its growth strategy, acquire properties and
portfolio of properties through tender offer acquisitions of interests in public
and private partnerships. Tender offers often result in competing tender offers,
as well as litigation initiated by limited partners in the subject partnerships
or by competing bidders. Due to the inherent uncertainty of litigation, the
Company could be subject to adverse judgments in substantial amounts. As the
Company has not yet attempted an acquisition through the tender offer process,
and because of competing offers and possible litigation, there can be no
assurance that, if undertaken, the
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Company would be successful in acquiring properties through a tender offer or
that the tender offer process would not result in litigation and a significant
judgment adverse to the Company.
CERTAIN TAX RISKS
Consequences of Failure to Qualify as a REIT
The Company intends to elect to be treated as a REIT under the Code
commencing with its taxable year ending December 31, 1996. No assurance can be
given, however, that the Company will be able to operate in a manner which would
permit it to qualify to make this election. Qualification as a REIT involves the
satisfaction of numerous requirements (some on an annual and quarterly basis)
established under highly technical and complex Code provisions for which only
limited judicial or administrative interpretation exists, and involves the
determination of various factual matters and circumstances not entirely within
the Company's control. The Company will receive nonqualifying management fee
income and will own nonqualifying preferred stock in the Associated Companies.
As a result, the Company may approach the income and asset test limits imposed
by the Code and could be at risk of not satisfying those tests. In order to
avoid exceeding the asset test limit, for example, the Company may have to
reduce its interest in the Associated Companies. The Company is relying on the
opinion of its tax counsel regarding its ability to qualify as a REIT. This
legal opinion is not binding on the IRS. See "Federal Income Tax
Consequences -- Taxation of the Company."
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at corporate rates. Moreover,
unless entitled to relief under certain statutory provisions, the Company would
also be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. This treatment would
reduce the net earnings of the Company available for investment or distribution
to stockholders because of the additional tax liability to the Company for the
years involved. In addition, distributions to stockholders would no longer be
required to be made. See "Federal Income Tax Consequences -- Failure to
Qualify."
Even if the Company qualifies as a REIT, it will be subject to certain
federal, state and local taxes on its income and property. See "Federal Income
Tax Consequences -- Taxation of the Company."
Consequences of Failure of the Operating Partnership to Qualify as a
Partnership
The Company expects that the Operating Partnership, which is organized as a
limited partnership, will qualify for treatment as such under the Code. If the
Operating Partnership, or any of the other partnerships owned by the Operating
Partnership, fails to qualify for treatment as a partnership under the Code, the
Company would cease to qualify as a REIT, and both the Company and the Operating
Partnership would be subject to federal income tax (including any alternative
minimum tax on the Company's income, at corporate rates). See "Federal Income
Tax Consequences -- Failure to Qualify."
Possible Changes in Tax Laws
Income tax treatment of REITs may be modified, prospectively or
retroactively, by legislative, judicial or administrative action at any time. No
assurance can be given that legislation, regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to the qualification as a REIT or the federal income tax
consequences of this qualification. In addition to any direct effects the
changes might have, the changes might also indirectly affect the market value of
all real estate investments, and consequently the ability of the Company to
realize its investment objectives.
RISKS RELATING TO REAL ESTATE
Environmental Matters
All of the Properties presently owned by the Company have been subject to
Phase I environmental assessments by independent environmental consultants. Some
of the Phase I environmental assessments recommended further investigations in
the form of Phase II environmental assessments, including soil and
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groundwater sampling, and all of these investigations have been completed by the
Company or are in the process of being completed. Certain of the Properties
owned by the Company have been found to contain ACMs. The Company believes that
these materials have been adequately contained and that an ACM operations and
maintenance program has been implemented or is in the process of being
implemented for the Properties found to contain ACMs.
Some, but not all, of the properties owned by partnerships managed by the
Associated Companies have been subject to Phase I environmental assessments by
independent environmental consultants. The Associated Companies determine on a
case-by-case basis whether to obtain Phase I environmental assessments on these
properties and whether to undertake further investigation or remediation.
Certain of these properties contain ACMs. In each case the responsible
Associated Company believes that these materials have been adequately contained
and that an ACM operations and maintenance program has been implemented for the
properties found to contain ACMs.
Six of the Properties owned by the Company are leased in whole or in part
to an operator of auto care centers which include oil change and tune-up
facilities, and ten of the Properties are leased to operators of convenience
stores which sell petroleum-based fuels. These Properties and other of the
Properties contain, and/or may have contained in the past, underground storage
tanks for the storage of petroleum products and/or other hazardous or toxic
substances which create a potential for release of petroleum products and/or
other hazardous or toxic substances. Some of the Properties owned by the Company
are adjacent to or near properties that have contained in the past or currently
contain, underground storage tanks used to store petroleum products or other
hazardous or toxic substances. Several of the Properties have been contaminated
with petroleum products or other hazardous or toxic substances from on-site
operations or operations on adjacent or nearby properties. In addition, certain
of the Properties are on, adjacent to or near properties upon which others have
engaged or may in the future engage in activities that may release petroleum
products or other hazardous or toxic substances.
Although tenants of the Properties owned by the Company generally are
required by their leases to operate in compliance with all applicable federal,
state and local environmental laws, ordinances and regulations and to indemnify
the Company against any environmental liability arising from the tenants'
activities on the Properties, the Company could nevertheless be subject to
environmental liability relating to its management of the Properties or strict
liability by virtue of its ownership interest in the Properties and there can be
no assurance that the tenants would satisfy their indemnification obligations
under the leases. There can be no assurance that any environmental assessments
of the Properties owned by the Company, properties being considered for
acquisition by the Company, or the properties owned by the partnerships managed
by the Associated Companies have revealed all potential environmental
liabilities, that any prior owner or prior or current operator of such
properties did not create an environmental condition not known to the Company or
that an environmental condition does not otherwise exist as to any one or more
of such properties that could have an adverse effect on the Company's results of
operations and financial condition, either directly (with respect to properties
owned by the Company), or indirectly (with respect to properties owned by
partnerships managed by an Associated Company) by adversely affecting the
financial condition of the Associated Company and thus the value of the
Company's preferred stock interest in the Associated Company. Moreover, there
can be no assurance that (i) future environmental laws, ordinances or
regulations will not have an adverse effect on the Company's results of
operations and financial condition or (ii) the current environmental condition
of such properties will not be affected by tenants and occupants of such
properties, by the condition of land or operations in the vicinity of the
properties (such as the presence of underground storage tanks), or by third
parties unrelated to the Company.
Risks Related to Ownership and Financing of Real Estate
The Company is subject to risks generally incidental to the ownership of
real estate, including changes in general economic or local conditions, changes
in supply of or demand for similar or competing properties in an area, the
impact of environmental protection laws, changes in interest rates and
availability of financing which may render the sale or financing of a property
difficult or unattractive, changes in tax, real estate and zoning laws, and the
creation of mechanics' liens or similar encumbrances placed on the property by a
lessee or other
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parties without the Company's knowledge and consent. Should any of these events
occur, there could be an adverse effect on the Company's results of operations
and financial condition.
Availability of Real Estate for Acquisitions
The Company's growth is dependent upon acquisitions. There can be no
assurance that properties will be available for acquisition or, if available,
that the Company will be able to purchase such properties on favorable terms. If
such acquisitions are not available it could have a negative impact on the
growth of the Company, which could have an adverse effect on the performance of
the Company's Common Stock.
Competition for Acquisition of Real Estate
The Company faces competition from other businesses, individuals, fiduciary
accounts and plans and other entities in the acquisition, operation and sale of
its properties. Some of the Company's competitors are larger and have greater
financial resources than the Company. This competition may result in a higher
cost for properties the Company wishes to purchase.
Competition for Tenants
The Company is subject to the risk that when space becomes available at its
properties the leases may not be renewed, the space may not be let or relet, or
the terms of the renewal or reletting (including the cost of required
renovations or concessions to tenants) may be less favorable to the Company.
Although the Company has established annual property budgets that include
estimates of costs for renovation and reletting expenses that it believes are
reasonable in light of each property's situation, no assurance can be given that
these estimates will sufficiently cover these expenses. If the Company is unable
to promptly lease all or substantially all of the space at its properties, if
the rental rates are significantly lower than expected, or if the Company's
reserves for these purposes prove inadequate, then there could be an adverse
effect on the Company's results of operations and financial condition.
Tenants' Defaults
The ability of the Company to manage its assets is subject to federal
bankruptcy laws and state laws affecting creditors' rights and remedies
available to real property owners. In the event of the financial failure or
bankruptcy of a tenant, there can be no assurance that the Company could
promptly recover the tenant's premises from the tenant or from a trustee or
debtor-in-possession in any bankruptcy proceeding filed by or against that
tenant, or that the Company would receive rent in the proceeding sufficient to
cover its expenses with respect to the premises. In the event of the bankruptcy
of a tenant, the Company will be subject to the provisions of the federal
bankruptcy code, which in some instances may restrict the amount and
recoverability of claims held by the Company against the tenant. If any tenant
defaults on its obligations to the Company, there could be an adverse effect on
the Company's results of operations and financial condition.
Management, Leasing and Brokerage Risks; Lack of Control of Associated
Companies
The Company is subject to the risks associated with the property
management, leasing and brokerage businesses. These risks include the risk that
management contracts or service agreements may be terminated, that contracts
will not be renewed upon expiration or will not be renewed on terms consistent
with current terms, and that leasing and brokerage activity generally may
decline. Acquisition of properties by the Company from the Associated Companies
could result in a decrease in revenues to the Associated Companies and a
corresponding decrease in dividends received by the Company from the Associated
Companies. Each of these developments could have an adverse effect on the
Company's results of operations and financial condition.
To qualify for and to maintain the Company's status as a REIT while
realizing income from the Company's third-party management business, the capital
stock of Glenborough Hotel Group, a Nevada corporation ("GHG"), Glenborough
Corporation, a California corporation ("GC") and Glenborough Inland Realty
Corporation, a California corporation ("GIRC," and collectively with GHG and GC,
the "Associated Companies") (which conduct the Company's third-party management,
leasing and brokerage businesses) is divided into two classes. All of the voting
common stock of the Associated Companies, representing 5% of the
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total equity of GC and GIRC, and 25% of the total equity of GHG, is held by
individual stockholders. Nonvoting preferred stock representing the remaining
equity of each Associated Company is held entirely by the Company. Although the
Company holds a majority of the equity interest in each Associated Company, the
Company is not able to elect directors of any Associated Company and,
consequently, the Company has no ability to influence the day-to-day decisions
of each entity.
Uninsured Loss
The Company or in certain instances tenants of the properties carry
comprehensive liability, fire and extended coverage with respect to the
Company's properties, with policy specification and insured limits customarily
carried for similar properties. There are, however, certain types of losses
(such as from earthquakes and floods) that may be either uninsurable or not
economically insurable. Further, certain of the properties are located in areas
that are subject to earthquake activity and floods. Should a property sustain
damage as a result of an earthquake or flood, the Company may incur losses due
to insurance deductibles, co-payments on insured losses or uninsured losses.
Should an uninsured loss occur, the Company could lose some or all of its
capital investment, cash flow and anticipated profits related to one or more
properties, which could have an adverse effect on the Company's results of
operations and financial condition.
Illiquidity of Real Estate
Real estate investments are relatively illiquid and, therefore, will tend
to limit the ability of the Company to vary its portfolio promptly in response
to changes in economic or other conditions. In addition, the Internal Revenue
Code of 1986, as amended (the "Code"), and individual agreements with sellers of
properties place limits on the Company's ability to sell properties, which may
adversely affect returns to holders of Common Stock. Eighteen of the properties
owned by the Operating Partnership were acquired on terms and conditions under
which they be disposed of only in a like-kind exchange or other non-taxable
transaction.
Potential Liability Under the Americans With Disabilities Act
As of January 26, 1992, all of the Company's properties were required to be
in compliance with the Americans With Disabilities Act (the "ADA"). The ADA
generally requires that places of public accommodation be made accessible to
people with disabilities to the extent readily achievable. Compliance with the
ADA requirements could require removal of access barriers and non-compliance
could result in imposition of fines by the federal government, an award of
damages to private litigants and/or a court order to remove access barriers.
Because of the limited history of the ADA, the impact of its application to the
Company's properties, including the extent and timing of required renovations,
is uncertain. Pursuant to certain lease agreements with tenants in certain of
the "single-tenant" Properties, the tenants are obligated to comply with the ADA
provisions. If the Company's costs are greater than anticipated or tenants are
unable to meet their obligations, there could be an adverse effect on the
Company's results of operations and financial condition.
ADDITIONAL CAPITAL REQUIREMENTS
The Company's future growth depends in large part upon its ability to raise
additional capital on satisfactory terms or at all. There can be no assurance
that the Company will be able to raise sufficient capital to achieve its
objectives. If the Company were to raise additional capital through the issuance
of additional equity securities or securities convertible into or exercisable
for equity securities, the interests of holders of the Offered Securities, could
be diluted. Likewise, the Company's Board of Directors is authorized to cause
the Company to issue Preferred Stock in one or more classes or series and to
determine the distributions and voting and other rights of the Preferred Stock.
Accordingly, the Board of Directors may authorize the issuance of Preferred
Stock with voting, distribution and other similar rights which could be dilutive
to or otherwise adversely affect the interests of holders of the Offered
Securities. If the Company were to raise additional capital through debt
financing, the Company will be subject to the risks described below, among
others.
LIMITATION ON OWNERSHIP OF COMMON STOCK MAY PRECLUDE ACQUISITION OF CONTROL
Provisions of the Company's Articles of Incorporation are designed to
assist the Company in maintaining its qualification as a REIT under the Code by
preventing concentrated ownership of the Company which
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might jeopardize REIT qualification. Among other things, these provisions
provide that (a) any transfer or acquisition of Common Stock that would result
in the disqualification of the Company as a REIT under the Code will be void,
and (b) if any person attempts to acquire shares of Common Stock that after the
acquisition would cause the person to own or to be deemed to own, by operation
of certain attribution rules set out in the Code, an amount of Common Stock in
excess of a predetermined limit, which, pursuant to Board action, currently is
8.8% of the outstanding shares of Common Stock (the "Ownership Limitation" and
as to the Common Stock, the transfer of which would cause any person to actually
own Common Stock in excess of the Ownership Limitation, the "Excess Shares"),
the transfer shall be void and the Common Stock subject to the transfer shall
automatically be transferred to an unaffiliated trustee for the benefit of a
charitable organization designated by the Board of Directors of the Company
until sold by the trustee to a third party or purchased by the Company. Robert
Batinovich and individuals or entities whose ownership of Common Stock is
attributed to Robert Batinovich in determining the number of shares of Common
Stock owned by him for purposes of compliance with Section 856 of the Code (the
"Attributed Owners"), are exempt from these restrictions, but are prohibited
from acquiring shares of Common Stock if, after the acquisition, they would own
in excess of 14% of the outstanding shares of Common Stock. This limitation on
the ownership of Common Stock may have the effect of precluding the acquisition
of control of the Company by a third party without the consent of the Board of
Directors. If the Board of Directors waives the Ownership Limitation for any
person, the Ownership Limitation shall be proportionally and automatically
reduced with regard to all other persons such that no five persons may own more
than 49% of the Common Stock (the aggregate Ownership Limitations as to all of
these persons, as adjusted, the "Adjusted Ownership Limitation"). See
"Description of Common Stock -- Restrictions on Ownership and Transfer of Common
Stock" and "Federal Income Tax Consequences."
OTHER RISKS
Debt Financing
The Company intends to incur additional indebtedness in the future,
including through borrowings under a credit facility, if a credit facility is
available, to finance property acquisitions. As a result, the Company expects to
be subject to risks associated with debt financing, including the risk that
interest rates may increase, the risk that the Company's cash flow will be
insufficient to meet required payments on its debt and the risk that the Company
may be unable to refinance or repay the debt as it comes due. The Company's
current $50 million secured revolving line of credit with Wells Fargo Bank, N.A.
provides that distributions may not exceed 90% of funds from operations and
that, in the event of a failure to pay principal or interest on borrowings
thereunder when due (subject to any applicable grace period), the Company and
its subsidiaries may not pay any distributions on the Common Stock or the
Preferred Stock. If the Company is unable to obtain acceptable financing to
repay indebtedness at maturity, the Company may have to sell properties to repay
indebtedness or properties may be foreclosed upon, which could have an adverse
effect on the Company's results of operations and financial condition.
Dependence on Executive Officers
The Company is dependent on the efforts of Robert and Andrew Batinovich,
its President and Chief Executive Officer and its Executive Vice President,
Chief Financial Officer and Chief Operating Officer, respectively, and of its
other executive officers. The loss of the services of any of them could have an
adverse effect on the results of operations and financial condition of the
Company.
Board of Directors May Change Investment Policies
The descriptions in this Prospectus of the major policies and the various
types of investments to be made by the Company reflect only the current plans of
the Company's Board of Directors. The Company's Board of Directors may change
the investment policies of the Company without a vote of the stockholders. If
the Company changes its investment policies, the risks and potential rewards of
an investment in the Company may also change. In addition, the methods of
implementing the Company's investment policies may vary as new investment
techniques are developed. See "Business and Properties -- Investment Policies."
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Effect of Market Interest Rates on Price of Common Stock
One of the factors that may influence the market price of the shares of
Common Stock in public markets will be the annual yield on the price paid for
shares of Common Stock from distributions by the Company. An increase in market
interest rates may lead prospective purchasers of the Common Stock to seek a
higher annual yield from their investments. Such circumstances may adversely
affect the market price of the Common Stock.
Shares Available for Future Sale
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or future conversions or exercises of securities into or
for shares of Common Stock, or the availability of such securities for future
sales, including shares of Common Stock issuable upon exchange of Operating
Partnership units, will have on the market price of the Common Stock prevailing
from time to time. Sales of substantial amounts of Common Stock, or the
perception that such sales could occur, may adversely affect the prevailing
market price for the Common Stock.
USE OF PROCEEDS
Unless otherwise indicated in the applicable Prospectus Supplement, the
Company intends to use the proceeds from any sale of Offered Securities for
general corporate purposes including, without limitation, the acquisition and
development of properties and the repayment of debt. Net proceeds from the sale
of the Offered Securities initially may be temporarily invested in short-term
securities.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the three and
nine-month periods ended September 30, 1996 was 2.12x and 2.70x, respectively.
Prior to the Consolidation, the Company's Predecessors combined ratio of
earnings to fixed charges for 1991, 1992, 1993, 1994 and 1995 was 2.13x,
(0.37x), 2.67x, 2.58x and 1.41x, respectively. The ratio of earnings to fixed
charges is computed as income from operations, before minority interest, income
taxes and extraordinary items, plus fixed charges (primarily interest expense)
divided by fixed charges. The ratio of earnings to fixed charges was less than
1.0 in 1992 due to a non-recurring loss provision that did not affect cash flow.
To date, the Company has not issued any shares of preferred stock; therefore,
the ratios of earnings to combined fixed charges and preferred share dividends
are unchanged from the ratios presented in this section.
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DESCRIPTION OF PREFERRED STOCK
Subject to limitations prescribed by Maryland law and the Company's
Articles of Incorporation and Articles Supplementary (collectively, the
"Charter"), the Board of Directors is authorized to issue, from the authorized
but unissued capital stock of the Company, Preferred Stock in such classes or
series as the Board of Directors may determine and to establish from time to
time the number of shares of Preferred Stock to be included in any such class or
series and to fix the designation and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of the shares of any such class or
series, and such other subjects or matters as may be fixed by resolution of the
Board of Directors. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company.
Preferred Stock, upon issuance against full payment of the purchase price
therefor, will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock will be described in the
Prospectus Supplement relating to that class or series, including a Prospectus
Supplement providing that Preferred Stock may be issuable upon the exercise of
Warrants issued by the Company. The description of Preferred Stock set forth
below and the description of the terms of a particular class or series of
Preferred Stock set forth in a Prospectus Supplement do not purport to be
complete and are qualified in their entirety by reference to the articles
supplementary relating to that class or series.
The rights, preferences, privileges and restrictions of the Preferred Stock
of each class or series will be fixed by the articles supplementary relating to
such class or series. A Prospectus Supplement, relating to each class or series,
will specify the terms of the Preferred Stock as follows:
(1) The title and stated value of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered, the
liquidation preference per share and the offering price of such Preferred
Stock;
(3) The dividend rate(s), period(s), and/or payment date(s) or
method(s) of calculation thereof applicable to such Preferred Stock;
(4) Whether such Preferred Stock is cumulative or not and, if
cumulative, the date from which dividends on such Preferred Stock shall
accumulate;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) The provision for a sinking fund, if any, for such Preferred
Stock;
(7) The provision for redemption, if applicable, of such Preferred
Stock;
(8) Any listing of such Preferred Stock on any securities exchange;
(9) The terms and conditions, if applicable, upon which such
Preferred Stock will be converted into Common Stock of the Company,
including the conversion price (or manner of calculation thereof);
(10) A discussion of any material federal income tax consequences
applicable to such Preferred Stock;
(11) Any limitations on direct or beneficial ownership and
restrictions on transfer, in each case as may be appropriate to preserve
the status of the Company as a REIT;
(12) The relative ranking and preferences of such Preferred Stock as
to dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company;
(13) Any limitations on issuance of any class or series of preferred
stock ranking senior to or on a parity with such class or series of
Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company;
(14) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock; and
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(15) Any voting rights of such Preferred Stock.
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend rights and rights upon liquidation,
dissolution or winding up of the Company, rank (i) senior to all classes or
series of Common Stock and Excess Stock of the Company, and to all equity
securities ranking junior to such Preferred Stock with respect to dividend
rights or rights upon liquidation, dissolution or winding up of the Company;
(ii) on a parity with all equity securities issued by the Company the terms of
which specifically provide that such equity securities rank on a parity with the
Preferred Stock with respect to dividends rights or rights upon liquidation,
dissolution or winding up of the Company; and (iii) junior to all equity
securities issued by the Company the terms of which specifically provide that
such equity securities rank senior to the Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company.
The terms and conditions, if any, upon which shares of any class or series
of Preferred Stock are convertible into Common Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include the
number of shares of Common Stock into which the Preferred Stock is convertible,
the conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the holders of the
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such Preferred Stock.
All certificates representing shares of Preferred Stock will bear a legend
referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% of the outstanding Common Stock and Preferred Stock (or
1% if there are fewer than 2,000 stockholders) must file an affidavit with the
Company containing the information specified in the Charter within 30 days after
December 31 of each year. In addition, each stockholder shall upon demand be
required to disclose to the Company in writing such information with respect to
the direct, indirect and constructive ownership of shares as the Board of
Directors deems necessary to determine the Company's status as a real estate
investment trust and to insure compliance with the Ownership Limit.
The articles supplementary, if applicable, for the Offered Securities may
also contain provisions that further restrict the ownership and transfer of the
Offered Securities. The applicable Prospectus Supplement will specify any
additional ownership limitation relating to the Offered Securities.
DESCRIPTION OF COMMON STOCK
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock to which any Prospectus Supplement may
relate, including a Prospectus Supplement providing that Common Stock will be
issuable upon conversion of Preferred Stock or upon the exercise of Warrants
issued by the Company. This description is in all respects subject to and
qualified in its entirety by reference to the applicable provisions of the
Company's Charter and its Bylaws. The Common Stock is listed on the New York
Stock Exchange under the symbol "GLB." Registrar and Transfer Company is the
Company's transfer agent.
GENERAL
The Company's Charter authorizes the Company to issue up to 50,000,000
shares of Common Stock with a par value of $.001 per share. As of December 31,
1996 there were 9,661,553 shares of Common Stock issued and outstanding and no
shares of Excess Stock were issued and outstanding. Under Maryland law,
stockholders generally are not liable for the Company's debts or obligations.
The holders of shares of Common Stock are entitled to one vote per share on
all matters voted on by stockholders, including election of directors, and,
except as provided in the Charter in respect of any other class of or series of
stock, the holders of these shares exclusively possess all voting power. The
Charter does not
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provide for cumulative voting in the election of directors. Subject to any
preferential rights of any outstanding shares or series of stock, holders of
shares of Common Stock are entitled to receive distributions, when and as
declared by the Board of Directors, out of funds legally available therefor.
Upon any liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive pro rata all assets of the Company legally
available for distribution to its stockholders after payment of, or adequate
provisions for, all known debts and liabilities of the Company. All shares of
Common Stock now outstanding are fully paid and nonassessable, as will be the
shares of Common Stock offered by this Prospectus or any Prospectus Supplement
when issued. The holders of the Common Stock offered hereby will have no
preemptive rights to subscribe to additional stock or securities issued by the
Company at a subsequent date.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF COMMON STOCK
For the Company to qualify as a REIT under the Code, not more than 50% of
the value of its outstanding shares of Common Stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year) or during a proportionate part of a shorter taxable year. Shares of Common
Stock must be beneficially owned by 100 or more persons during at least 335 days
of a taxable year of 12 months (other than the first year) or during a
proportionate part of a shorter taxable year. See "Federal Income Tax
Consequences -- Taxation of the Company -- Requirements for Qualification."
Because the Board of Directors believes it is essential for the Company to
qualify as a REIT, the Charter, subject to certain exceptions, provides that no
holder, other than Robert Batinovich and the individuals or entities whose
ownership of shares of Common Stock is attributed to Mr. Batinovich under the
Code (the "Attributed Owners"), may own an amount of Common Stock in excess of
the Ownership Limitation, which, pursuant to Board action, currently is 8.8% of
the outstanding shares of Common Stock. A qualified trust (as defined in the
Charter) generally may own up to 9.9% of the outstanding shares of Common Stock.
The Ownership Limitation provides that Robert Batinovich and the Attributed
Owners may hold up to 14% of the outstanding shares of Common Stock, including
shares which Robert Batinovich and the Attributed Owners may acquire pursuant to
an option held by GPA, Ltd. or Mr. Batinovich to cause the Company to redeem
their respective partnership interests in the Operating Partnership, assuming
GPA, Ltd. then dissolves and distributes these shares to the partners of GPA,
Ltd.
The Board of Directors may waive the Ownership Limitation if evidence
satisfactory to the Board of Directors and the Company's tax counsel is
presented that such ownership will not jeopardize the Company's status as a
REIT. As a condition to such waiver, the Board of Directors may require opinions
of counsel satisfactory to it and/or an undertaking from the applicant with
respect to preserving the REIT status of the Company. The Ownership Limitation
will not apply if the Board of Directors and the stockholders determine that it
is no longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT. Any transfer of Common Stock that would (a)
create actual or constructive ownership of Common Stock in excess of the
Ownership Limitation, (b) result in the Common Stock being owned by fewer than
100 persons, or (c) result in the Company's being "closely held" under Section
856(h) of the Code, shall be null and void, and the intended transferee will
acquire no rights to the Common Stock.
The Charter also provides that Common Stock involved in a transfer or
change in capital structure that results in a person (other than Robert
Batinovich and the Attributed Owners) owning in excess of the Ownership
Limitation or would cause the Company to become "closely held" (within the
meaning of Section 856(h) of the Code) will automatically be transferred to a
trustee for the benefit of a charitable organization until purchased by the
Company or sold to a third party without violation of the Ownership Limitation.
While held in trust, the Excess Shares will remain outstanding for purposes of
any stockholder vote or the determination of a quorum for such vote and the
trustee will be empowered to vote the Excess Shares. Excess Shares shall be
entitled to distributions, provided that such distributions shall be paid to a
charitable organization selected by the Board of Directors as beneficiary of the
trust. The trustee may transfer the Excess Shares to any individual whose
ownership of Common Stock would be permitted under the Ownership Limitation and
would not cause the Company to become "closely held." In addition, the Company
would have the right, for a period of 90 days, to purchase all or any portion of
the Excess Shares from the
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trustee at the lesser of the price paid for the Shares by the intended
transferee or the closing market price for the Common Stock on the date the
Company exercises its option to purchase.
The Ownership Limitation will not be automatically removed even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration limitation is
increased. Except as otherwise described above, any change in the Ownership
Limitation would require an amendment to the Charter. Such amendments require
the affirmative vote of stockholders owning a majority of the outstanding Common
Stock. In addition to preserving the Company's status as a REIT, the Ownership
Limitation may have the effect of precluding an acquisition of control of the
Company by a third party without the approval of the Board of Directors.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
All stockholders of record who own 5% or more of the value of the
outstanding Common Stock (or 1% if there are fewer than 2,000 stockholders of
record but more than 200, or 1/2% if there are 200 or fewer stockholders of
record) must file written notice with the Company containing the information
specified in the Charter by January 30 of each year. In addition, each
stockholder shall upon demand be required to disclose to the Company in writing
such information with respect to the direct, indirect and constructive ownership
of Common Stock as the Board of Directors deems necessary to determine the
effect, if any, of such ownership on the Company's status as a REIT and to
ensure compliance with the Ownership Limitation. The Company intends to use its
best efforts to enforce the Ownership Limitation and will make prohibited
transferees aware of their obligation to pay over any distributions received,
will not give effect on its books to prohibited transfers, will institute
proceedings to enjoin any transfer violating the Ownership Limitation, and will
declare all votes of prohibited transferees invalid.
DESCRIPTION OF WARRANTS
The Company has no Warrants outstanding (other than options issued under
the Company's employee stock option plan). The Company may issue Warrants for
the purchase of Preferred Stock or Common Stock. Warrants may be issued
independently or together with any other Offered Securities offered by any
Prospectus Supplement and may be attached to or separate from such Offered
Securities. Each series of Warrants will be issued under a separate warrant
agreement (each, a "Warrant Agreement") to be entered into between the Company
and a warrant agent specified in the applicable Prospectus Supplement (the
"Warrant Agent"). The Warrant Agent will act solely as an agent of the Company
in connection with the Warrants of such series and will not assume any
obligation or relationship of agency or trust for or with any provisions of the
Warrants offered hereby. Further terms of the Warrants and the applicable
Warrant Agreements will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the
Warrants in respect of which this Prospectus is being delivered, including,
where applicable, the following:
(1) The title of such Warrants;
(2) The aggregate number of such Warrants;
(3) The price or prices at which such Warrants will be issued;
(4) The designation, number of terms of the shares of Preferred Stock
or Common Stock purchasable upon exercise of such Warrants;
(5) The designation and terms of the Offered Securities, if any, with
which such Warrants are issued and the number of such Warrants issued with
each such Offered Security;
(6) The date, if any, on and after which such Warrants and the
related Preferred Stock or Common Stock will be separately transferable;
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(7) The price at which each share of Preferred Stock or Common Stock
purchasable upon exercise of such Warrants may be purchased;
(8) The date on which the right to exercise such Warrants shall
commence and the date on which such right shall expire;
(9) The minimum or maximum amount of such Warrants which may be
exercised at any one time;
(10) Information with respect to book-entry procedures, if any;
(11) A discussion of certain federal income tax consequences; and
(12) Any other terms of such Warrants, including terms, procedures and
limitations relating to the exchange and exercise of such Warrants.
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS
Certain provisions of the Company's Charter and Bylaws might discourage
certain types of transactions that involve an actual or threatened change in
control of the Company that might involve a premium price for the Company's
capital stock or otherwise be in the best interest of the stockholders. See
"Description of Common Stock -- Restrictions on Transfer." The issuance of
shares of preferred stock or other capital stock by the Board of Directors may
also have the effect of delaying, depriving or preventing a change in control of
the Company. The Bylaws of the Company contain certain advance notice
requirements in the nomination of persons for election to the Board of Directors
which could have the effect of discouraging a takeover or other transaction in
which holders of some, or a majority, of the Common Stock might receive a
premium for their Common Stock over the prevailing market price, or which such
holders might believe to be otherwise in their best interests.
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FEDERAL INCOME TAX CONSEQUENCES
The following summary of material federal income tax consequences is based
on current law and does not purport to deal with all aspects of taxation that
may be relevant to particular stockholders in light of their personal investment
or tax circumstances, or to certain types of stockholders (including insurance
companies, financial institutions and broker-dealers) subject to special
treatment under the federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND
SALE OF THE OFFERED SECURITIES.
The Company believes that since January 1, 1996, it has operated in a
manner that permits it to satisfy the requirements for taxation as a REIT under
the applicable provisions of the Code. The Company intends to continue to
operate to satisfy such requirements. No assurance can be given, however, that
such requirements will be met.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following sets forth the material aspects
of the Code sections that govern the federal income tax treatment of a REIT and
its stockholders. Morrison & Foerster LLP has acted as tax counsel to the
Company in connection with Company's election to be taxed as a REIT.
In the opinion of Morrison & Foerster LLP, commencing with the Company's
taxable year that will end on December 31, 1996, the Company has been organized
in conformity with the requirements for qualification as a REIT, and its method
of operation has and will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based on various assumptions and is conditioned upon certain
representations made by the Company as to factual matters. Moreover, such
qualification and taxation as a REIT depends upon the Company's ability to
maintain diversity of stock ownership and meet, through actual quarterly and
annual operating results, distribution levels and the various qualification
tests imposed under the Code discussed below, the results of which will not be
reviewed by Morrison & Foerster LLP. Accordingly, no assurance can be given that
the actual results of the Company's operations for any particular taxable year
will satisfy such requirements. See "-- Failure to Qualify."
In brief, if certain detailed conditions imposed by the REIT provisions of
the Code are met, entities, such as the Company, that invest primarily in real
estate and that otherwise would be treated for federal income tax purposes as
corporations, are generally not taxed at the corporate level on their Real
Estate Investment Trust Taxable Income ("REITTI") that is currently distributed
to stockholders. This treatment substantially eliminates the "double taxation"
(i.e., taxation at both the corporate and stockholder levels) that generally
results from the use of corporate investment vehicles.
If the Company fails to qualify as a REIT in any year, however, it will be
subject to federal income tax as if it were a domestic corporation, and its
stockholders will be taxed in the same manner as stockholders of ordinary
corporations. In this event, the Company could be subject to potentially
significant tax liabilities and the amount of cash available for distribution to
its stockholders could be reduced.
TAXATION OF THE COMPANY
General
In any year in which the Company qualifies as a REIT, it will not generally
be subject to federal income tax on that portion of its net income that it
distributes to stockholders. This treatment substantially eliminates the "double
taxation" on income at the corporate and stockholder levels that generally
results from investment in a corporation. However, the REIT will be subject to
federal income tax as follows: First, the REIT will be taxed at regular
corporate rates on any undistributed REITTI, including undistributed net capital
gains. Second, under certain circumstances, the REIT may be subject to the
federal "alternative minimum tax" on its items of tax preference. Third, if the
REIT has (i) net income from the sale or other disposition of "foreclosure
property" which is held primarily for sale to customers in the ordinary course
of business or
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(ii) other nonqualifying income from foreclosure property, it will be subject to
tax at the highest corporate rate on such income. Fourth, if the REIT has net
income from prohibited transactions (which are, in general, certain sales or
other dispositions of property held primarily for sale to customers in the
ordinary course of business other than foreclosure property), such income will
be subject to a 100% tax. Fifth, if the REIT should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a real estate investment trust
because certain other requirements have been met, it will be subject to a 100%
tax on an amount equal to (a) the gross income attributable to the greater of
the amount by which the REIT fails the 75% gross income test or the 95% gross
income test, multiplied by (b) a fraction intended to reflect the REIT's
profitability. Sixth, if the REIT should fail to distribute during each calendar
year at least the sum of (i) 85% of its real estate investment trust ordinary
income for such year, (ii) 95% of its real estate investment trust capital gain
net income for such year, and (iii) any undistributed taxable income from prior
periods, the REIT would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, if the
REIT acquires any asset from a C corporation (i.e., generally a corporation
subject to full corporate-level tax) in a transaction in which the basis of the
asset in the REIT's hands is determined by reference to the basis of the asset
(or any other property) in the hands of the C corporation, and the REIT
recognizes gain on the disposition of such asset during the 10 year period
beginning on the date on which such asset was acquired by the REIT, then, to the
extent of any built-in gain at the time of acquisition, such gain will be
subject to tax at the highest regular corporate rate, assuming the REIT will
make an election pursuant to IRS Notice 88-19.
Requirements for Qualification
The Code defines a real estate investment trust as a corporation, trust or
association (1) which is managed by one or more trustees or directors; (2) the
beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation, but for Sections 856 through 860 of the Code; (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code; (5) the beneficial ownership of which is held by 100 or
more persons; (6) not more than 50% in value of the outstanding stock of which
is owned, directly or indirectly, by five or fewer individuals (as defined in
the Code) at any time during the last half of each taxable year; and (7) which
meets certain other tests, described below, regarding the nature of income and
assets. The Code provides that conditions (1) to (4), inclusive, must be met
during the entire taxable year and that condition (5) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months. Conditions (5) and (6) will not apply
until after the first taxable year for which an election is made by the Company
to be taxed as a REIT.
In order to assist the Company in complying with the ownership tests
described above, the Company has placed certain restrictions on the transfer of
the Common Stock and the Preferred Stock to prevent further concentration of
stock ownership. Moreover, to evidence compliance with these requirements, the
Company must maintain records which disclose the actual ownership of its
outstanding Common Stock and Preferred Stock. In fulfilling its obligations to
maintain records, the Company must and will demand written statements each year
from the record holders of designated percentages of its Common Stock and
Preferred Stock disclosing the actual owners of such Common Stock and Preferred
Stock. A list of those persons failing or refusing to comply with such demand
must be maintained as part of the Company's records. A stockholder failing or
refusing to comply with the Company's written demand must submit with his or her
tax returns a similar statement disclosing the actual ownership of Common Stock
and Preferred Stock and certain other information. In addition, the Company's
Charter provides restrictions regarding the transfer of its shares that are
intended to assist the Company in continuing to satisfy the share ownership
requirements. See "Description of Common Stock -- Restrictions on Ownership and
Transfer of Common Stock" and "Description of Preferred Stock."
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership shall retain the same character in
the hands of the REIT for purposes of Section
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856 of the Code, including satisfying the gross income tests and the asset
tests, described below. Thus, the Company's proportionate share of the assets,
liabilities and items of income of the Operating Partnership will be treated as
assets, liabilities and items of income of the Company for purposes of applying
the requirements described below.
Asset Tests
At the close of each quarter of the Company's taxable year, the Company
must satisfy two tests relating to the nature of its assets. First, at least 75%
of the value of the Company's total assets must be represented by interests in
real property, interests in mortgages on real property, shares in other REITs,
cash, cash items and government securities (as well as certain temporary
investments in stock or debt instruments purchased with the proceeds of new
capital raised by the Company). Second, although the remaining 25% of the
Company's assets generally may be invested without restriction, securities in
this class may not exceed either (i) 5% of the value of the Company's total
assets as to any one non-government issuer or (ii) 10% of the outstanding voting
securities of any one issuer. The Company's investment in real property through
its interest in the Operating Partnership constitutes qualified assets for
purposes of the 75% asset test. In addition, the Company may own 100% of
"qualified REIT subsidiaries" as defined in the Code. All assets, liabilities,
and items of income, deduction, and credit of such a qualified REIT subsidiary
will be treated as owned and realized directly by the Company.
The Company has analyzed the impact of its ownership interests in the
Associated Companies on its ability to satisfy the asset tests. Based upon its
analysis of the estimated value of the Company's total assets as well as its
estimate of the value of the respective nonvoting preferred stock interests in
the Associated Companies, the Company believes that none of such preferred stock
interests will exceed 5% of the value of the Company's total assets on the last
day of any calendar quarter in 1996. The Company intends to monitor compliance
with the 5% test on a quarterly basis and believes that it will be able to
manage its operations in a manner to comply with the tests, either by managing
the amount of its qualifying assets or reducing its interests in the Associated
Companies, although there can be no assurance that such steps will be
successful. In rendering its opinion as to the qualification of the Company as a
REIT, counsel has relied upon the Company's representation as to the value of
its assets and the value of its interests in the Associated Companies. Counsel
has discussed with the Company its valuation analysis and the future actions
available to it to comply with the 5% tests but it has not independently
verified the valuations.
Gross Income Tests
There are three separate percentage tests relating to the sources of the
Company's gross income which must be satisfied for each taxable year. For
purposes of these tests, where the Company invests in a partnership, the Company
will be treated as receiving its share of the income and loss of the
partnership, and the gross income of the partnership will retain the same
character in the hands of the Company as it has in the hands of the partnership.
See " -- Tax Aspects of the Company's Investment in the Operating
Partnerships -- General."
The 75% Test. At least 75% of the Company's gross income for the taxable
year must be "qualifying income." Qualifying income generally includes (i) rents
from real property (except as modified below); (ii) interest on obligations
collateralized by mortgages on, or interests in, real property; (iii) gains from
the sale or other disposition of interests in real property and real estate
mortgages, other than gain from property held primarily for sale to customers in
the ordinary course of the Company's trade or business ("dealer property"); (iv)
dividends or other distributions on shares in other REITs, as well as gain from
the sale of such shares; (v) abatements and refunds of real property taxes; (vi)
income from the operation, and gain from the sale, of property acquired at or in
lieu of a foreclosure of the mortgage collateralized by such property
("foreclosure property"); and (vii) commitment fees received for agreeing to
make loans collateralized by mortgages on real property or to purchase or lease
real property.
Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% test (or the 95% gross income test described
below) if the Company, or an owner of 10% or more of the
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Company, directly or constructively owns 10% or more of such tenant (a "related
party tenant"). In addition, if rent attributable to personal property, leased
in connection with a lease of real property, is greater than 15% of the total
rent received under the lease, then the portion of rent attributable to such
personal property will not qualify as rents from real property. Moreover, an
amount received or accrued generally will not qualify as rents from real
property (or as interest income) for purposes of the 75% and 95% gross income
tests if it is based in whole or in part on the income or profits of any person.
Rent or interest will not be disqualified, however, solely by reason of being
based on a fixed percentage or percentages of receipts or sales. Finally, for
rents received to qualify as rents from real property, the Company must
generally not operate or manage the property or furnish or render services to
tenants, other than through an "independent contractor" from whom the Company
derives no revenue. The "independent contractor" requirement, however, does not
apply to the extent that the services provided by the Company are "usually or
customarily rendered" in connection with the rental of space for occupancy only,
and are not otherwise considered "rendered to the occupant."
The Company will provide certain services with respect to properties owned
by the Operating Partnership. The Company believes that the services provided by
the Operating Partnership are usually or customarily rendered in connection with
the rental of space of occupancy only, and therefore that the provision of such
services will not cause the rents received with respect to its properties to
fail to qualify as rents from real property for purposes of the 75% and 95%
gross income tests. The Company does not intend to rent to related party tenants
or to charge rents that would not qualify as rents from real property because
the rents are based on the income or profits of any person (other than rents
that are based on a fixed percentage or percentages of receipts or sales).
Pursuant to the percentage leases ("Percentage Leases"), GHG leases from
the Operating Partnership the land, buildings, improvements, furnishings, and
equipment comprising the Hotels for a five-year period with a five-year renewal
option. The Percentage Leases provide that the lessee will be obligated to pay
to the Operating Partnership (a) the greater of a fixed rent (the "Base Rent")
or a percentage rent (the "Percentage Rent") (collectively, the "Rents") and (b)
certain other amounts, including interest accrued on any late payments or
charges (the "Additional Charges"). The Percentage Rent is calculated by
multiplying fixed percentages by the gross revenues from the operations of the
Hotels in excess of certain levels. The Base Rent accrues and is required to be
paid monthly. Percentage Rent is due quarterly; however, the lessee will not be
in default for non-payment of Percentage Rent due in any calendar year if the
lessee pays, within 90 days of the end of the calendar year, the excess of
Percentage Rent due and unpaid over the Base Rent with respect to such year.
In order for the Base Rent, the Percentage Rent, and the Additional Charges
to constitute "rents from real property," the Percentage Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Percentage Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (a) the intent of the parties, (b) the form of the agreement, (c) the
degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement), and (d) the extent to which the
property owner retains the risk of loss of the property (e.g., whether the
lessee bears the risk of increases in operating expenses or the risk of damage
to the property).
In addition, Section 7701(e) of the Code provides that a contract that
purports to be a service contract (or a partnership agreement) is treated
instead as a lease of property if the contract is properly treated as such,
taking into account all relevant factors, including whether or not: (a) the
service recipient is in physical possession of the property, (b) the service
recipient controls the property, (c) the service recipient has a significant
economic or possessory interest in the property (e.g., the property's use is
likely to be dedicated to the service recipient for a substantial portion of the
useful life of the property, the recipient shares the risk that the property
will decline in value, the recipient shares in any appreciation in the value of
the property, the recipient shares in savings in the property's operating costs,
or the recipient bears the risk of damage to or loss of the property), (d) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract, (e) the service provider
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does not use the property concurrently to provide significant services to
entities unrelated to the service recipient, and (f) the total contract price
does not substantially exceed the rental value of the property for the contract
period. Since the determination of whether a service contract should be treated
as a lease is inherently factual, the presence or absence of any single factor
may not be dispositive in every case.
Counsel is of the opinion that the Percentage Leases will be treated as
true leases for federal income tax purposes. Such opinion is based, in part, on
the following facts: (a) the Operating Partnership and the lessee intend for
their relationship to be that of a lessor and lessee and such relationship will
be documented by lease agreements, (b) the lessee has the right to exclusive
possession and use and quiet enjoyment of the Hotels during the term of the
Percentage Leases, (c) the lessee bears the cost of, and be responsible for,
day-to-day maintenance and repair of the Hotels, other than the cost of
maintaining underground utilities, structural elements and exterior painting,
and will dictate how the Hotels are operated, maintained, and improved, (d) the
lessee bears all of the costs and expenses of operating the Hotels (including
inventory costs) during the term of the Percentage Leases (other than real
property taxes, personal property taxes on property owned by the Operating
Partnership, casualty insurance and the cost of replacement or refurbishment of
furniture, fixtures and equipment, to the extent such costs do not exceed the
allowance for such costs provided by the Operating Partnership under the
Percentage Leases), (e) the lessee will benefit from any savings in the costs of
operating the Hotels during the term of the Percentage Leases, (f) in the event
of damage or destruction to a Hotel which renders the Hotel unsuitable for
continued use, the lessee will be at economic risk because the Operating
Partnership can elect to terminate the Percentage Lease as to such Hotel, in
which event the lessee can elect to rebuild at its cost less any insurance
proceeds, or accept such termination, (g) the lessee will indemnify the
Partnership against all liabilities imposed on the Partnership during the term
of the Percentage Leases by reason of (i) injury to persons or damage to
property occurring at the Hotels or (ii) the lessee's use, management,
maintenance or repair of the Hotels, (h) the lessee is obligated to pay
substantial fixed rent for the period of use of the Hotels, and (i) the lessee
stands to incur substantial losses (or reap substantial gains) depending on how
successfully it operates the Hotels. The Company has represented that the lessee
has and will have its own employees, physically distinct and separate office
space, furniture and equipment, and directors. Further, the Company has
represented that neither the Company nor the Operating Partnership will furnish
or render services to either the lessee or its customers.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Percentage Leases that discuss whether such
leases constitute true leases for federal income tax purposes. Therefore, the
opinion of counsel with respect to the relationship between the Operating
Partnership and the lessee is based upon all of the facts and circumstances, and
rulings and judicial decisions involving situations that are considered to be
analogous. Opinions of counsel are not binding upon the Service or any court,
and there can be no assurance that the Service will not assert successfully a
contrary position. If the Percentage Leases are recharacterized as service
contracts or partnership agreements, rather than true leases, part or all of the
payments that the Partnership receives from the lessee may not be considered
rent or may not otherwise satisfy the various requirements for qualification as
"rents from real property." In that case, the Company likely would not be able
to satisfy either the 75% or 95% gross income tests and, as a result, could lose
its REIT status.
In order for the Rents to constitute "rents from real property," several
other requirements also must be satisfied. One requirement is that the Rents
attributable to personal property leased in connection with the lease of the
real property comprising a Hotel must not be greater than 15% of the Rents
received under the Percentage Lease. The Rents attributable to the personal
property in a Hotel is the amount that bears the same ratio to total rent for
the taxable year as the average of the adjusted bases of the personal property
in the Hotel at the beginning and at the end of the taxable year bears to the
average of the aggregate adjusted bases of both the real and personal property
comprising the Hotel at the beginning and at the end of such taxable year (the
"Adjusted Basis Ratio"). Management has obtained an appraisal of the personal
property at each Hotel indicating that the appraised value of the personal
property at each Hotel is less than 15% of the value at which such Hotel is
acquired. However, the Company has represented that the Operating Partnership
will in no event acquire additional personal property for a Hotel to the extent
that such acquisition would cause the Adjusted Basis Ratio for that Hotel to
exceed 15%. There can be no assurance, however, that the Service
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would not assert that the personal property acquired from a particular
partnership had a value in excess of the appraised value, or that a court would
not uphold such assertion. If such a challenge were successfully asserted, the
Company could fail the 15% Adjusted Basis Ratio as to one or more of the
Percentage Leases, which in turn potentially could cause it to fail to satisfy
the 95% or 75% gross income test and thus could lose its REIT status.
Another requirement for qualification of the Rents as "rents from real
property" is that the Percentage Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however, will qualify
as "rents from real property" if it is based on percentages of receipts or sales
and the percentages (a) are fixed at the time the Percentage Leases are entered
into, (b) are not renegotiated during the term of the Percentage Leases in a
manner that has the effect of basing Percentage Rent on income or profits, and
(c) conform with normal business practice. More generally, the Percentage Rent
will not qualify as "rents from real property" if, considering the Percentage
Leases and all the surrounding circumstances, the arrangement does not conform
with normal business practice, but is in reality used as a means of basing the
Percentage Rent on income or profits. Since the Percentage Rent is based on
fixed percentages of the gross revenues from the Hotels that are established in
the Percentage Leases, and the Company has represented that the percentages (i)
will not be renegotiated during the terms of the Percentage Leases in a manner
that has the effect of basing the Percentage Rent on income or profit and (ii)
conform with normal business practice, the Percentage Rent should not be
considered based in whole or in part on the income or profits of any person.
Furthermore, the Company has represented that, with respect to other hotel
properties that it acquires in the future, it will not charge rent for any
property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a fixed percentage of gross revenue,
as described above).
A further requirement for qualification of Rents as "rents from real
property" limits the relationship between the Company and its tenants. In the
case of a corporate tenant, the Company must not own 10% or more of the total
combined voting power of the tenant's stock and must not own 10% or more of the
total number of shares of all classes of the tenant's outstanding stock. In the
case of a tenant that is not a corporation, the Company must not own 10% or more
in interest of the tenant's assets or net profits. The Company intends to limit
its ownership interest in GHG to nonvoting preferred stock which will constitute
less than 10% of the total number of outstanding shares of GHG stock. The common
stock of GHG, which is the only voting stock of GHG, is and will continue to be
owned by persons who are not related to the Company within the definition in the
applicable statute. The common stockholders have a significant economic interest
in GHG and will elect the board of directors of GHG. Based upon the foregoing,
counsel is of the opinion that rental payments from GHG will not constitute
rentals from a party related to the Company.
The Company will receive nonqualifying management fee income. As a result,
the Company may approach the income test limits and could be at risk of not
satisfying such tests and thus not qualifying as a REIT. Counsel's opinion is
based on the Company's representation that the actual amount of nonqualifying
income will not exceed such limits.
The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of the Company's gross income for the taxable
year must be derived from the above-described qualifying income, or from
dividends, interest or gains from the sale or disposition of stock or other
securities that are not dealer property. Dividends and interest on any
obligation not collateralized by an interest on real property are included for
purposes of the 95% test, but not for purposes of the 75% test. For purposes of
determining whether the Company complies with the 75% and 95% income tests,
gross income does not include income from prohibited transactions. A "prohibited
transaction" is a sale of dealer property, excluding certain property held by
the Company for at least four years and foreclosure property. See "-- Taxation
of the Company" and "-- Tax Aspects of the Company's Investment in the Operating
Partnership -- Sale of Properties."
The Company believes that it and the Operating Partnership has held and
managed its properties in a manner that has given rise to rental income
qualifying under the 75% and 95% gross income tests. Gains on sales of
properties will generally qualify under the 75% and 95% gross income tests.
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Even if the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may still qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will generally be available if: (i) the Company's failure to comply
was due to reasonable cause and not to willful neglect; (ii) the Company reports
the nature and amount of each item of its income included in the 75% and 95%
gross income tests on a schedule attached to its tax return; and (iii) any
incorrect information on this schedule is not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of these relief provisions. If these
relief provisions apply, the Company will, however, still be subject to a
special tax upon the greater of the amount by which it fails either the 75% or
95% gross income test for that year.
The 30% Test. The Company must derive less than 30% of its gross income for
each taxable year from the sale or other disposition of (i) real property held
for less than four years (other than foreclosure property and involuntary
conversions), (ii) stock or securities held for less than one year, and (iii)
property in a prohibited transaction. In this regard, certain of the Company's
assets are subject to existing purchase options. See "Business and
Properties -- Industrial Properties." Although the Company believes, based on
the historical experience of certain predecessor partnerships, that it will
satisfy this 30% test, if, contrary to expectations, large numbers of such
options are exercised, more than 30% of the Company's gross income in a taxable
year could be derived from a proscribed source. The Company will, however, use
its best efforts to ensure that it will continue to satisfy each of the
foregoing income requirements.
ANNUAL DISTRIBUTION REQUIREMENTS
The Company, in order to qualify as a REIT, is required to make
distributions (other than capital gain distributions) to its stockholders each
year in an amount at least equal to (A) the sum of (i) 95% of the Company's
REITTI (computed without regard to the dividends paid deduction and the REIT's
net capital gain) and (ii) 95% of the net income (after tax), if any, from
foreclosure property, minus (B) the sum of certain items of non-cash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular distribution
payment after such declaration. To the extent that the Company does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its REITTI, as adjusted, it will be subject to tax on the
undistributed amount at regular capital gains or ordinary corporate tax rates,
as the case may be. Furthermore, if the REIT should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, the REIT would be subject to a
4% excise tax on the excess of such required distribution over the amounts
actually distributed.
The Company believes that it has made and will make timely distributions
sufficient to satisfy the annual distribution requirements. In this regard, the
partnership agreement of the Operating Partnership authorizes the Company, as
general partner, to take such steps as may be necessary to cause the Operating
Partnership to distribute to its partners an amount sufficient to permit the
Company to meet these distribution requirements. It is possible that in the
future the Company may not have sufficient cash or other liquid assets to meet
the 95% distribution requirement, due to timing differences between the actual
receipt of income and actual payment of expenses on the one hand, and the
inclusion of such income and deduction of such expenses in computing the
Company's REITTI on the other hand. Further, as described below, it is possible
that, from time to time, the Company may be allocated a share of net capital
gain attributable to the sale of depreciated property that exceeds its allocable
share of cash attributable to that sale. To avoid any problem with the 95%
distribution requirement, the Company will closely monitor the relationship
between its REITTI and cash flow and, if necessary, will borrow funds (or cause
the Operating Partnership or other affiliates to borrow funds) in order to
satisfy the distribution requirement. The Company (through the Operating
Partnership) may be required to borrow funds at times when market conditions are
not favorable.
If the Company fails to meet the 95% distribution requirement as a result
of an adjustment to the Company's tax return by the Service, the Company may
retroactively cure the failure by paying a "deficiency dividend" (plus
applicable penalties and interest) within a specified period.
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FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify will not be deductible by the Company, nor will they be
required to be made. In such event, to the extent of the Company's current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and, subject to certain limitations in the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company also
will be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether the Company would be entitled to such statutory relief.
TAX ASPECTS OF THE COMPANY'S INVESTMENT IN THE OPERATING PARTNERSHIP
The following discussion summarizes certain federal income tax consequences
applicable solely to the Company's investment in the Operating Partnership.
General
The Company holds a direct ownership interest in the Operating Partnership.
In general, partnerships are "passthrough" entities which are not subject to
federal income tax. Rather, partners are allocated their proportionate shares of
the items of income, gain, loss, deduction and credit of a partnership, and are
potentially subject to tax thereon, without regard to whether the partners
receive distributions from the partnership. The Company includes its
proportionate share of the foregoing Operating Partnership items for purposes of
the various REIT income tests and in the computation of its REITTI. See
"-- Requirements for Qualification" and "-- Gross Income Tests." Any resultant
increase in the Company's REITTI increases its distribution requirements (see
"-- Requirements for Qualification" and "-- Annual Distribution Requirements"),
but is not subject to federal income tax in the hands of the Company provided
that such income is distributed by the Company to its stockholders. Moreover,
for purposes of the REIT asset tests (see "-- Requirements for Qualification"
and "-- Asset Tests"), the Company includes its proportionate share of assets
held by the Operating Partnership.
Entity Classification
The Company's interest in the Operating Partnership (and the Property
Partnerships) involves special tax considerations, including the possibility of
a challenge by the Internal Revenue Service (the "Service") of the status of the
Operating Partnership as a partnership (as opposed to an association taxable as
a corporation) for federal income tax purposes. If the Operating Partnership (or
any Property Partnership) were to be treated as an association, it would be
taxable as a corporation. In such a situation, the Operating Partnership (or
such Property Partnership) would be required to pay income tax at corporate
rates on its net income, and distributions to its partners would constitute
dividends that would not be deductible in computing net income. In addition, the
character of the Company's assets and items of gross income would change, which
would preclude the Company from satisfying the asset test and possibly the
income tests (see "-- Taxation of the Company Requirements for Qualification"
and "-- Taxation of the Company Asset Tests" and "-- Taxation of the Company
Gross Income Tests"), and in turn would prevent the Company from qualifying as a
REIT. See "-- Taxation of the Company Requirements for Qualification" and
"-- Failure to Qualify" above for a discussion of the effect of the Company's
failure to meet such tests for a taxable year.
Tax Allocations with Respect to Certain Properties
Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership, must be allocated in
a manner such that the contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of
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such unrealized gain or unrealized loss is generally equal to the difference
between the fair market value of contributed property at the time of
contribution and the adjusted tax basis of such property at the time of
contribution (a "Book-Tax Difference"). Such allocations are solely for federal
income tax purposes and do not affect the book capital accounts or other
economic or legal arrangements among the partners. The Operating Partnership was
formed by way of contributions of appreciated property. Consequently, the
partnership agreement of the Operating Partnership requires such allocations to
be made in a manner consistent with Section 704(c) of the Code.
In general, the limited partners of the Operating Partnership will be
allocated lower amounts of depreciation deductions for tax purposes and
increased taxable income and gain on sale by the Operating Partnership of the
contributed assets. This will tend to eliminate the Book-Tax Difference over the
life of the Operating Partnership. However, the special allocation rules under
Section 704(c) do not always entirely rectify the Book-Tax Difference on an
annual basis or with respect to a specific taxable transaction such as a sale.
Thus, the carryover basis of the contributed assets in the hands of the
Operating Partnership may cause the Company to be allocated lower depreciation
and other deductions, and possibly greater amounts of taxable income in the
event of a sale of such contributed assets in excess of the economic or book
income allocated to it as a result of such sale. This may cause the Company to
recognize taxable income in excess of cash proceeds, which might adversely
affect the Company's ability to comply with the REIT distribution requirements.
See "-- Requirements for Qualification -- Annual Distribution Requirements." In
addition, the application of Section 704(c) to the Operating Partnership is not
entirely clear and may be affected by authority that may be promulgated in the
future.
Basis in Operating Partnership Interest
The Company's adjusted tax basis in its partnership interest in the
Operating Partnership generally (i) is equal to the amount of cash and the basis
of any other property contributed to the Operating Partnership by the Company,
(ii) is increased by (a) its allocable share of the Operating Partnership's
income and (b) increases in its allocable share of indebtedness of the Operating
Partnership and (iii) is reduced, but not below zero, by the Company's allocable
share of (a) the Operating Partnership's loss and (b) the amount of cash
distributed to the Company, and by constructive distributions resulting from a
reduction in the Company's share of indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Operating Partnership below zero, the recognition of
such loss will be deferred until such time as the recognition of such loss would
not reduce the Company's adjusted tax basis below zero. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's share of
the nonrecourse indebtedness of the Operating Partnership (each such decrease
being considered a constructive cash distribution to the partners), would reduce
the Company's adjusted tax basis below zero, such distributions (including such
constructive distributions) constitute taxable income to the Company. Such
distributions and constructive distributions will normally be characterized as a
capital gain, and if the Company's partnership interest in the Operating
Partnership has been held for longer than the long-term capital gain holding
period (currently one year), the distributions and constructive distributions
will constitute long-term capital gains.
Sale of Properties
Generally, any gain realized by the Operating Partnership on the sale of
property held by the Operating Partnership for more than one year will be
long-term capital gain, except for any portion of gain attributable to
depreciation or cost recovery recapture on personal property. The Company's
share of any gain realized by the Operating Partnership on the sale of any
dealer property generally will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. See "Taxation of the Company"
and "-- Requirements for Qualification -- Gross Income Tests -- The 95% Test."
Under existing law, whether property is dealer property is a question of fact
that depends on all the facts and circumstances with respect to the particular
transaction. The Operating Partnership intends to hold its properties for
investment with a view to long-term appreciation, to engage in the business of
acquiring, developing, owning and operating its properties, and to
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<PAGE> 100
make such occasional sales of properties as are consistent with the Company's
investment objectives. Based upon such investment objectives, the Company
believes that in general its properties should not be considered dealer property
and that the amount of income from prohibited transactions, if any, will not be
material.
TAXATION OF STOCKHOLDERS
Taxation of Taxable Domestic Stockholders
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic stockholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income. Stockholders that are corporations will not
be entitled to a dividends received deduction. Distributions that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Company's actual net capital gain for the taxable
year) without regard to the period for which the stockholder has held its stock.
However, corporate stockholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. To the extent that the Company makes
distributions in excess of current and accumulated earnings and profits, these
distributions are treated first as a tax-free return of capital to the
stockholder, reducing the tax basis of a stockholder's Common Stock by the
amount of such distribution (but not below zero), with distributions in excess
of the stockholder's tax basis taxable as capital gains (if the Common Stock is
held as a capital asset). In addition, any dividend declared by the Company in
October, November or December of any year and payable to a stockholder of record
on a specific date in any such month shall be treated as both paid by the
Company and received by the stockholder on December 31 of such year, provided
that the dividend is actually paid by the Company during January of the
following calendar year. Stockholders may not include in their individual income
tax returns any net operating losses or capital losses of the Company.
In general, any loss upon a sale or exchange of Common Stock by a
stockholder who has held such stock for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss, to
the extent of distributions from the Company required to be treated by such
stockholder as long-term capital gains.
Backup Withholding
The Company will report to its domestic stockholders and to the Service the
amount of dividends paid during each calendar year, and the amount of tax
withheld, if any, with respect thereto. Under the backup withholding rules, a
stockholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid unless such stockholder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact, or
(b) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A stockholder that does not
provide the Company with its correct taxpayer identification number may also be
subject to penalties imposed by the Service. Any amount paid as backup
withholding will be creditable against the stockholder's income tax liability.
Taxation of Tax-Exempt Stockholders
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not constitute
unrelated business taxable income ("UBTI"). Revenue rulings, however, are
interpretive in nature and are subject to revocation or modification by the
Service. Based upon the ruling and the analysis therein, distributions by the
Company to a stockholder that is a tax-exempt entity should also not constitute
UBTI, provided that the tax exempt entity has not financed the acquisition of
its shares of Common Stock with "acquisition indebtedness" within the meaning of
the Code, and that the shares of Common Stock are not otherwise used in an
unrelated trade or business of the tax-exempt entity. In addition, REITs can
treat the beneficiaries of qualified pension trusts as the beneficial owners of
REIT shares owned by such pension trusts for purposes of determining if more
than 50% of the REIT's shares are owned by five or fewer individuals. However,
if a REIT relies on this new rule to meet the requirements of the five or fewer
rule, then pension trusts owning more than 10% of the REIT's shares can be
subject to UBTI on all or a
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<PAGE> 101
portion of REIT dividends made to it. Owing to the Ownership Limit Provision,
the Company expects to satisfy the five or fewer rule even if each pension trust
stockholder is treated as one individual for purposes of this test.
Consequently, a pension trust stockholder should not, as a result of the
"pension-held REIT" rules, be subject to UBTI on dividends that it receives from
the Company.
Taxation of Foreign Stockholders
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
stockholders are complex and no attempt is made herein to provide more than a
summary of such rules. Prospective foreign investors ("Non-U.S. Stockholders")
should consult with their own tax advisors to determine the impact of federal,
state, local and any foreign income tax laws with regard to an investment in the
Company, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
the Company or the Operating Partnership of United States real property
interests and not designated by the Company as capital gain dividends will be
treated as dividends of ordinary income to the extent made out of current or
accumulated earnings and profits of the Company. Such distributions will
ordinarily be subject to a withholding tax equal to 30% of the gross amount of
the distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the shares is treated as effectively
connected with the Non-U.S. Stockholder's conduct of a United States trade or
business, the Non-U.S. Stockholder will generally be subject to a tax at
graduated rates, in the same manner as U.S. stockholders are taxed with respect
to such distributions (and may also be subject to the 30% branch profits tax in
the case of a stockholder that is a foreign corporation). The Company expects to
withhold tax at the rate of 30% on the gross amount of any distributions of
ordinary income made to a Non-U.S. Stockholder unless (i) a lower treaty rate
applies and proper certification is provided or (ii) the Non-U.S. Stockholder
files an IRS Form 4224 with the Company claiming that the distribution is
effectively connected income. Unless the Company's stock constitutes a USRPI (as
defined below) distributions in excess of current and accumulated earnings and
profits of the Company will not be taxable to a stockholder to the extent that
such distributions do not exceed the adjusted basis of the stockholder's shares
but rather will reduce the adjusted basis of such shares. To the extent that
distributions in excess of current accumulated earnings and profits exceed the
adjusted basis of a Non-U.S. Stockholder's shares, such distributions will give
rise to tax liability if the Non-U.S. Stockholder would otherwise be subject to
tax on any gain from the sale or disposition of his shares in the Company, as
described below. If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of current and accumulated
earnings and profit, the distributions will be subject to withholding at the
same rate as dividends. However, amounts thus withheld are refundable if it is
subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company. If the Company's
stock constitutes a USRPI, then such distribution will be subject to a 10%
withholding tax and may be subject to additional taxation under FIRPTA (as
defined below).
For any year in which the Company qualifies as a real estate investment
trust, distributions that are attributable to gain from sales or exchanges by
the Company of United States Real Property Interests ("USRPIs") will be taxed to
a Non-U.S. Stockholder under the Provisions of the Foreign Investment in Real
Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, distributions attributable to
gain from sales of USRPIs ("USRPI Capital Gains") are taxed to a Non-U.S.
Stockholder as if such gain were effectively connected with a United States
business. Non-U.S. Stockholders would thus be taxed at the normal capital gain
rates applicable to U.S. stockholders (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate stockholder not entitled
to treaty exemption. The Company is required by applicable Treasury Regulations
to withhold 35% of any distribution to the extent such distribution is
attributable to USRPI Capital Gains. This amount is creditable against the
Non-U.S. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares generally
will not be taxed under FIRPTA if the Company is a "domestically controlled
REIT," defined generally as a real estate investment trust in which at all times
during a specified testing period less than 50% in value of the stock was held
directly
29
<PAGE> 102
or indirectly by foreign persons. It is currently anticipated that the Company
will be a "domestically controlled REIT," and therefore the sale of shares will
not be subject to taxation under FIRPTA. Because the Company's Common Stock is
publicly traded, no assurance can be given that the Company will continue to be
a domestically controlled REIT. However, a Non-U.S. Stockholder's sale of
Company's stock will still not be subject to taxation under FIRPTA as a sale of
USRPI if (i) the stock is "regularly traded on an established securities market"
(as defined by applicable Treasury Regulations) and (ii) such Non-U.S.
Stockholder held less than 5% of the Company's outstanding stock during a
specified testing period provided in the Code.
Gain not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i)
investment in the shares is effectively connected with a United States trade or
business of the Non-U.S. Stockholder, in which case the Non-U.S. Stockholder
will be subject to the same treatment as U.S. stockholders with respect to such
gain, or (ii) the Non-U.S. Stockholder is a nonresident alien individual who was
present in the United States for 183 days or more during the taxable year and
has a "tax home" in the United States, in which case the nonresident alien
individual will be subject to a 30% tax on the individual's capital gains. If
the gain on the sale of shares were to be subject to taxation under FIRPTA, the
Non-U.S. Stockholder would be subject to the same treatment as U.S. stockholders
with respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals).
If the proceeds of a disposition of Shares are paid by or through a United
States office of a broker, the payment is subject to information reporting and
backup withholding unless the disposing Non-U.S. Stockholder certifies as to his
name, address and non-United States status or otherwise establishes an
exemption. Generally, United States information reporting and backup withholding
will not apply to a payment of disposition proceeds if the payment is made
outside the United States through a non-United States office of a non-United
States broker. United States information reporting requirements (but not backup
withholding) will apply, however, to a payment of disposition proceeds outside
the United States if (i) the payment is made through an office outside the
United States of a broker that is either (a) a United States person, (b) a
foreign person that derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the United States or (c) a
"controlled foreign corporation" for United States federal income tax purposes,
and (ii) the broker fails to obtain documentary evidence that the stockholder is
a Non-U.S. Stockholder and that certain conditions are met or that the Non-U.S.
Stockholder otherwise is entitled to an exemption.
STATE TAX CONSEQUENCES AND WITHHOLDING
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Several states in which the Company may conduct business treat
REITs as ordinary corporations. The Company does not believe, however, that
stockholders will be required to file state tax returns, other than in their
respective states of residence, as a result of the ownership of Shares. However,
prospective stockholders should consult their own tax advisors regarding the
effect of state and local tax laws on an investment in the Company.
EACH INVESTOR IS ADVISED TO CONSULT WITH HIS OR HER TAX ADVISOR REGARDING
THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE OWNERSHIP AND SALE OF THE
OFFERED SECURITIES IN AN ENTITY ELECTING TO BE TAXED AS A REAL ESTATE INVESTMENT
TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES
OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
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<PAGE> 103
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more underwriters for
public offering and sale by them or may sell the Offered Securities to investors
directly or through agents, which agents may be affiliated with the Company. Any
such underwriter or agent involved in the offer and sale of the Offered
Securities will be named in the applicable Prospectus Supplement. Direct sales
to investors may be accomplished through subscription offerings or concurrent
rights offerings to the Company's stockholders and direct placements to third
parties.
Sales of Offered Securities offered pursuant to any applicable Prospectus
Supplement may be effected from time to time in one or more transactions on the
New York Stock Exchange or in negotiated transactions or any combination of such
methods of sale, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at other negotiated prices.
Underwriters may offer and sell Offered Securities at a fixed price or
prices which may be changed, at prices related to the prevailing market prices
at the time of sale, or at negotiated prices. The Company also may offer and
sell the Offered Securities in exchange for one or more of its then outstanding
issues of debt or convertible debt securities. The Company also may, from time
to time, authorize underwriters acting as the Company's agents to offer and sell
the Offered Securities upon the terms and conditions as set forth in the
applicable Prospectus Supplement. In connection with the sale of Offered
Securities, underwriters may be deemed to have received compensation from the
Company in the form of underwriting discounts or commissions and may also
receive commissions from purchasers of Offered Securities for whom they may act
as agent. Underwriters may sell Offered Securities to or through dealers, and
such dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Offered Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters, dealers
and agents participating in the distribution of the Offered Securities may be
deemed to be underwriters, and any discounts and commissions received by them
and any profit realized by them on resale of the Offered Securities may be
deemed to be underwriting discounts and commissions under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered into
with the Company, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act. Any such
indemnification agreements will be described in the applicable Prospectus
Supplement.
If so indicated in the applicable Prospectus Supplement, the Company may
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to Delayed
Delivery Contracts ("Contracts") providing for payment and delivery on the date
or dates stated in such Prospectus Supplement. Each Contract will be for an
amount not less than, and the aggregate principal amount of Offered Securities
sold pursuant to Contracts shall be not less nor more than, the respective
amounts stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions but will in all cases be subject
to the approval of the Company. Contracts will not be subject to any conditions
except (i) the purchase by an institution of the Offered Securities covered by
its Contracts shall not at the time of delivery be prohibited under the laws of
any jurisdiction in the United States to which such institution is subject, and
(ii) if the Offered Securities are being sold to underwriters, the Company shall
have sold to such underwriters the total principal amount of the Offered
Securities less the principal amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for, the Company and its
subsidiaries in the ordinary course of business.
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<PAGE> 104
EXPERTS
The consolidated financial statements and related financial statement
schedules included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated by reference herein and the statements
of revenues and certain expenses for the acquired properties, which reports are
included in the Company's Current Reports on Forms 8-K/A dated August 8 and
December 20, 1996, incorporated by reference herein, have been audited by Arthur
Andersen LLP, independent public accountants, to the extent and for the periods
indicated in their reports and have been incorporated herein in reliance on such
reports given on the authority of that firm as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the Offered Securities will be passed upon for the Company
by Morrison & Foerster LLP, Palo Alto, California. In addition, the description
of the Company's qualifications and taxation as a REIT under the Code contained
in the Prospects under the caption "Federal Income Tax Consequences -- General"
is based upon the opinion of Morrison & Foerster LLP.
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<PAGE> 105
Inside Front Cover
Map of the United States indicating the location of owned portfolios, portfolios
controlled by the Associated Companies and proposed acquisitions.
Pie chart indicating pro forma contribution to revenue by property type: Retail
15%, Multi-Family 14%, Industrial 24%, Office 29% and Hotel 18%.
Pie chart indicating pro forma square footage by property type: Retail 14%,
Multi-Family 13%, Industrial 50%, Office 17% and Hotel 6%.
Inside Back Cover
Six photographs of certain proposed acquisitions: Woodlands Plaza II, St. Louis,
MO; Overlook Apartments, Scottsdale, AZ; Lake Point Business Park, Orlando, FL;
Country Inn and Suites, Scottsdale, AZ; Sandhill Industrial Park, Carson, CA;
and Upland Industrial, Upland, CA.
S-14
Organizational Chart of the Company
S-58
Property Diagram
<PAGE> 106
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<PAGE> 107
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<PAGE> 108
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE OFFERING
COVERED BY THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THIS PROSPECTUS
SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS CONSTITUTES AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR
TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT, THE ACCOMPANYING PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATIONS THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary......... S-3
The Company........................... S-9
Recent Activities..................... S-15
Use of Proceeds....................... S-22
Price Range of Common Stock and
Distribution History................ S-23
Capitalization........................ S-25
Selected Historical and Pro Forma
Financial and Other Data............ S-26
Pro Forma Financial Information....... S-29
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... S-37
The Properties........................ S-43
Management............................ S-61
Certain Relationships and Related
Transactions........................ S-61
Underwriting.......................... S-63
Legal Matters......................... S-64
Experts............................... S-64
Index to Financial Information........ F-1
PROSPECTUS
Available Information................. 3
Incorporation of Certain Documents by
Reference........................... 3
The Company........................... 5
Tax Status of the Company............. 5
Risk Factors.......................... 6
Use of Proceeds....................... 13
Ratio of Earnings to Fixed Charges.... 13
Description of Preferred Stock........ 14
Description of Common Stock........... 15
Description of Warrants............... 17
Certain Provisions of the Company's
Charter and Bylaws.................. 18
Federal Income Tax Consequences....... 19
Plan of Distribution.................. 31
Experts............................... 32
Legal Matters......................... 32
</TABLE>
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3,500,000 SHARES
LOGO
LOGO
COMMON STOCK
------------------------
PROSPECTUS SUPPLEMENT
------------------------
BEAR, STEARNS & CO. INC.
ROBERTSON, STEPHENS & COMPANY
JEFFERIES & COMPANY, INC.
MARCH 17, 1997
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