SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-14162
GLENBOROUGH REALTY TRUST INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland 94-3211970
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 South El Camino Real,
Suite 1100 San Mateo, California
(415) 343-9300 94402-1708
(Address of principal executive offices (Zip Code)
and telephone number)
Securities registered under Section 12(b) of the Act:
Name of Exchange
Title of each class: on which registered:
Common Stock, $.001 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___
As of November 10, 1997, 31,474,692 shares of Common Stock ($.001 par value)
were outstanding.
Page 1 of 44
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INDEX
GLENBOROUGH REALTY TRUST INCORPORATED
Page No.
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements of Glenborough Realty Trust
Incorporated (Unaudited except for the Consolidated Balance
Sheet at December 31, 1996):
Consolidated Balance Sheets at September 30, 1997 and
December 31, 1996 4
Consolidated Statements of Operations for the nine months
ended September 30, 1997 and 1996 5
Consolidated Statements of Operations for the three months
ended September 30, 1997 and 1996 6
Consolidated Statements of Stockholders' Equity for the
nine months ended September 30, 1997 and 1996 7
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 8-9
Notes to Consolidated Financial Statements 10-21
Consolidated Financial Statements of Glenborough Hotel Group
(Unaudited except for the Consolidated Balance Sheet at
December 31, 1996):
Consolidated Balance Sheets at September 30, 1997 and
December 31, 1996 22
Consolidated Statements of Income for the nine months ended
September 30, 1997 and 1996 23
Consolidated Statements of Income for the three months ended
September 30, 1997 and 1996 24
Consolidated Statements of Stockholders' Equity for the
nine months ended September 30, 1997 and 1996 25
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 26
Notes to Consolidated Financial Statements 27-29
Page 2 of 44
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations:
Glenborough Realty Trust Incorporated 30-37
Glenborough Hotel Group 38-39
PART II OTHER INFORMATION
Item 1. Legal Proceedings 40-41
Item 2. Changes in Securities 41
Item 6. Exhibits and Reports on Form 8-K 42
SIGNATURES 43
EXHIBIT INDEX 44
Page 3 of 44
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30, December 31,
1997 1996
(Unaudited) (Audited)
-------------- -------------
<S> <C> <C>
ASSETS
Rental property, net of accumulated depreciation of
$35,185 and $28,784 in 1997 and 1996, respectively $ 588,644 $ 161,945
Investments in Associated Companies and Glenborough
Partners 7,567 7,350
Mortgage loans receivable, net of provision for loss of
$863 in 1996 3,622 9,905
Cash and cash equivalents 2,770 1,355
Other assets 13,373 4,965
------------- -------------
TOTAL ASSETS $ 615,976 $ 185,520
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage loans $ 228,580 $ 54,584
Secured bank line 28,865 21,307
Other liabilities 11,216 3,198
------------- -------------
Total liabilities 268,661 79,089
------------- -------------
Minority interest 36,012 8,831
Stockholders' Equity:
Common stock, 20,174,692 and 9,661,553 shares issued
and outstanding at September 30, 1997, and
December 31, 1996, respectively 20 10
Additional paid-in capital 321,771 105,952
Deferred compensation (257) (399)
Retained earnings (deficit) (10,231) (7,963)
------------- -------------
Total stockholders' equity 311,303 97,600
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 615,976 $ 185,520
============= =============
See accompanying notes to consolidated financial statements
</TABLE>
Page 4 of 44
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended September 30, 1997 and 1996
(in thousands, except per share amounts)
(Unaudited)
1997 1996
-------------- -------------
<S> <C> <C>
REVENUE
Rental revenue $ 35,899 $ 11,281
Fees and reimbursements from affiliate 572 199
Interest and other income 1,167 623
Equity in earnings of Associated Companies 1,942 1,363
Gain on collection of mortgage loan receivable 652 ---
Net gain on sales of rental properties 555 321
-------------- -------------
Total revenue 40,787 13,787
-------------- -------------
EXPENSES
Property operating expenses 11,282 3,244
General and administrative 2,031 977
Depreciation and amortization 8,867 2,694
Interest expense 6,416 2,546
Consolidation costs --- 6,082
Litigation costs --- 1,155
--------------- -------------
Total expenses 28,596 16,698
-------------- -------------
Income (loss) from operations before minority interest and
extraordinary item 12,191 (2,911)
Minority interest (689) (312)
--------------- -------------
Net income (loss) before extraordinary item 11,502 (3,223)
Loss on debt refinancing --- (186)
-------------- -------------
Net income (loss) $ 11,502 $ (3,409)
============== =============
Primary earnings (loss) per share $ 0.79 $ (0.60)
============== =============
Primary weighted average shares outstanding 14,512,987 5,763,742
============== =============
See accompanying notes to consolidated financial statements
</TABLE>
Page 5 of 44
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30, 1997 and 1996
(in thousands, except per share amounts)
(Unaudited)
1997 1996
-------------- -------------
<S> <C> <C>
REVENUE
Rental revenue $ 16,208 $ 4,242
Fees and reimbursements from affiliate 205 66
Interest and other income 554 253
Equity in earnings of Associated Companies 1,339 394
Reduction in gain on prior quarter sales of rental
properties (15) ---
-------------- -------------
Total revenue 18,291 4,955
-------------- -------------
EXPENSES
Property operating expenses 5,237 1,335
General and administrative 657 302
Depreciation and amortization 4,823 935
Interest expense 2,616 1,125
-------------- -------------
Total expenses 13,333 3,697
-------------- -------------
Income from operations before minority interest and
extraordinary item 4,958 1,258
Minority interest (60) (69)
--------------- -------------
Net income before extraordinary item 4,898 1,189
Loss on debt refinancing --- (186)
-------------- -------------
Net income $ 4,898 $ 1,003
============== =============
Primary earnings per share $ 0.25 $ 0.17
============== =============
Primary weighted average shares outstanding 19,737,153 5,778,545
============== =============
See accompanying notes to consolidated financial statements
</TABLE>
Page 6 of 44
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the nine months ended September 30, 1997 and 1996
(in thousands)
(Unaudited)
Common Stock Additional Deferred Retained
Par Paid-in Compen- Earnings
Shares Value Capital sation (Deficit) Total
------------- ------------- -------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 9,662 $ 10 $ 105,952 $ (399) $ (7,963) $ 97,600
Issuance of common stock, net of offering
costs of $13,601 10,480 10 215,186 --- --- 215,196
Issuance of common stock related to
acquisition of E&L Properties 33 --- 633 --- --- 633
Amortization of deferred compensation --- --- --- 142 --- 142
Distributions --- --- --- --- (13,770) (13,770)
Net income --- --- --- --- 11,502 11,502
-----------------------------------------------------------------------------------
Balance at September 30, 1997 20,175 $ 20 $ 321,771 $ (257) $ (10,231) $ 311,303
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
Common Stock Additional Deferred Retained
Par Paid-in Compen- Earnings
Shares Value Capital sation (Deficit) Total
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 5,754 $ 6 $ 55,622 $ --- $ --- $ 55,628
Issuance of stock to officers and directors 35 --- 525 (446) --- 79
Distributions --- --- --- --- (3,463) (3,463)
Net loss --- --- --- --- (3,409) (3,409)
-----------------------------------------------------------------------------------
Balance at September 30, 1996 5,789 $ 6 $ 56,147 $ (446) $ (6,872) $ 48,835
===================================================================================
See accompanying notes to consolidated financial statements
</TABLE>
Page 7 of 44
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<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1997 and 1996
(in thousands)
(Unaudited)
1997 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 11,502 $ (3,409)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 8,867 2,694
Amortization of loan fees, included in
interest expense 174 141
Minority interest in income from operations 689 312
Equity in earnings of Associated
Companies (1,942) (1,363)
Gain on collection of mortgage loan receivable (652) ---
Net gain on sales of rental properties (555) (321)
Loss on debt refinancing --- 186
Amortization of deferred compensation 142 ---
Consolidation costs --- 6,082
Litigation costs --- 1,155
Changes in certain assets and liabilities, net (913) (5,475)
--------------- ---------------
Net cash provided by operating activities 17,312 2
--------------- ---------------
Cash flows from investing activities:
Net proceeds from sales of rental properties 11,873 2,882
Additions to rental property (393,534) (26,631)
Proceeds from collection of mortgage loan receivable 652 ---
Additions to mortgage loans receivable (2,420) ---
Principal receipts on mortgage loans receivable 8,703 252
Investments in Associated Companies --- (389)
Distributions from Associated Companies and
Glenborough Partners 1,725 1,326
--------------- ---------------
Net cash used for investing activities (373,001) (22,560)
--------------- ---------------
continued
See accompanying notes to consolidated financial statements
</TABLE>
Page 8 of 44
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<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
For the nine months ended September 30, 1997 and 1996
(in thousands)
(Unaudited)
1997 1996
--------------- --------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from borrowings $ 369,540 $ 35,122
Repayment of borrowings (212,910) (10,263)
Payment of investor notes --- (2,483)
Distributions to minority interest holders (952) (332)
Distributions (13,770) (3,463)
Proceeds from issuance of stock, net of offering costs 215,196 ---
--------------- --------------
Net cash provided by financing activities 357,104 18,581
--------------- --------------
Net increase (decrease) in cash and cash equivalents 1,415 (3,977)
Cash and cash equivalents at beginning of period 1,355 4,587
--------------- --------------
Cash and cash equivalents at end of period $ 2,770 $ 610
=============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 5,695 $ 2,070
=============== ==============
Supplemental disclosure of Non-Cash Investing and Financing
Activities:
Acquisition of real estate through assumption of first
trust deed notes payable $ 24,924 $ ---
=============== ==============
Acquisition of real estate through issuance of shares
of common stock and Operating Partnership units
$ 28,078 $ ---
=============== ==============
See accompanying notes to consolidated financial statements
</TABLE>
Page 9 of 44
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1997
Note 1. ORGANIZATION
Glenborough Realty Trust Incorporated (the "Company") was organized in the State
of Maryland on August 26, 1994. The Company has elected to qualify as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended (the "Code"). The Company completed a consolidation with certain public
California limited partnerships and other entities (the "Consolidation") engaged
in real estate activities (the "GRT Predecessor Entities") through an exchange
of assets of the GRT Predecessor Entities for 5,753,709 shares of Common Stock
of the Company. The Consolidation occurred on December 31, 1995, and the Company
commenced operations on January 1, 1996.
Subsequent to the Consolidation on December 31, 1995, and through September 30,
1997, the following Common Stock transactions occurred: (i) 35,000 shares of
Common Stock were issued to officers and directors as stock compensation; (ii)
14,146,000 shares were issued in three separate public equity offerings; (iii)
240,042 shares were issued in connection with various acquisitions; and (iv) 59
shares were retired, resulting in total shares of Common Stock issued and
outstanding at September 30, 1997, of 20,174,692. In addition, fully converted
shares issued and outstanding (including 1,932,047 partnership units in the
Operating Partnership) totaled 22,106,739 at September 30, 1997.
To maintain the Company's qualification as a REIT, no more than 50% in value of
the outstanding shares of the Company may be owned, directly or indirectly, by
five or fewer individuals (defined to include certain entities), applying
certain constructive ownership rules. To help ensure that the Company will not
fail this test, the Company's Articles of Incorporation provide for certain
restrictions on the transfer of the Common Stock to prevent further
concentration of stock ownership.
The Company, through several subsidiaries, is engaged primarily in the
ownership, operation, management, leasing, acquisition, expansion and
development of various income-producing properties. The Company's major
consolidated subsidiary, in which it holds a 1% general partner interest and a
90.17% limited partner interest at September 30, 1997, is Glenborough
Properties, L.P. (the "Operating Partnership"). As of September 30, 1997, the
Operating Partnership, directly and through various subsidiaries in which it and
the Company own 100% of the ownership interests, controls a total of 103 real
estate projects and 2 mortgage loans receivable.
As of September 30, 1997, the Company also holds 100% of the non-voting
preferred stock of the following two Associated Companies (the "Associated
Companies"):
Glenborough Corporation (formerly known as Glenborough Realty Corporation)
("GC") is the general partner of eight partnerships and provides asset and
property management services for these eight partnerships (the "Controlled
Partnerships"). It also provides partnership administration, asset
management, property management and development services under a long term
contract to a group of unaffiliated partnerships which include six public
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"). The services to
the Rancon Partnerships were previously provided by Glenborough Inland
Realty Corporation ("GIRC"), a California corporation, which merged with GC
effective June 30, 1997. GC also provides property management services for
a limited portfolio of property owned by other unaffiliated third parties.
In the merger between GC and GIRC, the Company received preferred stock of
GC in exchange for its preferred stock of GIRC, on a one-for-one basis.
Following the merger, the Company holds the same preferences with respect
to dividends and liquidation distributions paid by GC as it previously held
with respect to GC and GIRC combined.
Glenborough Hotel Group ("GHG") leases the five Country Suites by Carlson
hotels owned by the Company and operates them for its own account. It also
operates two Country Suites By Carlson hotels owned by the Controlled
Partnerships, and two resort condominium hotels. On October 14, 1997, one
of the hotels owned by a Controlled Partnership was sold, however, GHG has
retained management of the hotel.
Page 10 of 44
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1997
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements present the consolidated financial
position of the Company as of September 30, 1997, and December 31, 1996, and the
consolidated results of operations and cash flows of the Company for the nine
and three months ended September 30, 1997 and 1996. All intercompany
transactions, receivables and payables have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal accruals) necessary to
present fairly the financial position and results of operations of the Company
as of September 30, 1997, and for the period then ended.
Reclassification
Certain 1996 balances have been reclassified to conform with the current year
presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the results of operations during the reporting period. Actual results could
differ from those estimates.
Investments in Real Estate
Investments in real estate are stated at cost unless circumstances indicate that
cost cannot be recovered, in which case, the carrying value of the property is
reduced to estimated fair value. Estimated fair value: (i) is based upon the
Company's plans for the continued operation of each property; (ii) is computed
using estimated sales price, as determined by prevailing market values for
comparable properties and/or the use of capitalization rates multiplied by
annualized rental income based upon the age, construction and use of the
building, and (iii) does not purport, for a specific property, to represent the
current sales price that the Company could obtain from third parties for such
property. The fulfillment of the Company's plans related to each of its
properties is dependent upon, among other things, the presence of economic
conditions which will enable the Company to continue to hold and operate the
properties prior to their eventual sale. Due to uncertainties inherent in the
valuation process and in the economy, it is reasonably possible that the actual
results of operating and disposing of the Company's properties could be
materially different than current expectations.
Depreciation is provided using the straight line method over the useful lives of
the respective assets.
The useful lives are as follows:
Buildings and Improvements 10 to 40 years
Tenant Improvements Term of the related lease
Furniture and Equipment 5 to 7 years
Investments in Associated Companies and Glenborough Partners
The Company's investments in the Associated Companies are accounted for using
the equity method and its investment in Glenborough Partners is accounted for
using the cost method, as discussed further in Note 4.
Investment in Management Contract
Investment in management contract is recorded at cost and amortized on a
straight-line basis over the term of the contract, and is included in other
assets.
Page 11 of 44
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GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1997
Mortgage Loans Receivable
The Company monitors the recoverability of its loans and notes receivable
through ongoing contact with the borrowers to ensure timely receipt of interest
and principal payments, and where appropriate, obtains financial information
concerning the operation of the properties. Interest on mortgage loans is
recognized as revenue as it accrues during the period the loan is outstanding.
Mortgage loans receivable will be evaluated for impairment if it becomes evident
that the borrower is unable to meet its debt service obligations in a timely
manner and cannot satisfy its payments using sources other than the operations
of the property securing the loan. If it is concluded that such circumstances
exist, then the loan will be considered to be impaired and its recorded amount
will be reduced to the fair value of the collateral securing it. Interest income
will also cease to accrue under such circumstances. Due to uncertainties
inherent in the valuation process, it is reasonably possible that the amount
ultimately realized from the Company's collection on these receivables will be
different than the recorded amounts.
Cash Equivalents
The Company considers short-term investments (including certificates of deposit)
with a maturity of three months or less at the time of investment to be cash
equivalents.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure about
fair value for all financial instruments. Based on the borrowing rates currently
available to the Company, the carrying amount of debt approximates fair value.
Cash and cash equivalents consist of demand deposits, certificates of deposit
and short-term investments with financial institutions. The carrying amount of
cash and cash equivalents as well as the mortgage notes receivable described
above, approximates fair value.
Deferred Financing and Other Fees
Fees paid in connection with the financing and leasing of the Company's
properties are amortized over the term of the related notes payable or leases
and are included in other assets.
Minority Interest
Minority interest represents the 8.83% limited partner interests in the
Operating Partnership not held by the Company.
Revenues
All leases are classified as operating leases. Rental revenue is recognized as
earned over the terms of the leases.
For the nine months ended September 30, 1997, no tenants represented 10% or more
of rental revenue of the Company.
Fees and reimbursement revenue consists of property management fees, overhead
administration fees, and transaction fees from the leasing and construction
supervision of real estate owned by an affiliated partnership.
Revenues are recognized only after the Company is contractually entitled to
receive payment, after the services for which the fee is received have been
provided, and after the ability and timing of payments are reasonably assured
and predictable.
Income Taxes
The Company has made an election to be taxed as a REIT under Sections 856
through 860 of the Code. As a REIT, the Company generally will not be subject to
Federal income tax to the extent that it distributes at least 95% of its REIT
taxable income to its shareholders. REITs are subject to a number of
organizational and operational requirements. If the Company fails to qualify as
a REIT in any taxable year, the Company will be subject to Federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate tax rates. Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain state and local taxes on its income
and property and to Federal income and excise taxes on its undistributed income.
Page 12 of 44
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GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1997
Earnings Per Share
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share."
SFAS No. 128 requires the disclosure of basic earnings per share and modifies
existing guidance for computing fully diluted earnings per share. Under the new
standard, basic earnings per share is computed as earnings divided by weighted
average shares, excluding the dilutive effects of stock options and other
potentially dilutive securities. The effective date of SFAS No. 128 is December
15, 1997, and early adoption is not permitted. The Company intends to adopt SFAS
No. 128 during the quarter and year ended December 31, 1997. Had the provisions
of SFAS No. 128 been applied to the Company's results of operations for the
three and nine months ended September 30, 1997 and 1996, the Company's basic
earnings per share would not have been materially different than amounts already
reported.
Reference to 1996 Audited Financial Statements
These unaudited financial statements should be read in conjunction with the
Notes to Consolidated Financial Statements included in the 1996 audited
financial statements.
Note 3. RENTAL PROPERTY
On February 28, 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 $4.6 million
of mortgage debt assumed, and the balance in cash. The cash portion was financed
through advances under the Company's Line of Credit (as defined below). The
Scottsdale Hotel is marketed as a Country Inns and Suites by Carlson.
On April 8, 1997, the Company acquired from two limited partnerships and one
limited liability company managed by affiliates of Lennar Partners, a portfolio
of three properties, aggregating approximately 282,000 square feet (the "Lennar
Properties"). The total acquisition cost, including capitalized costs, was
approximately $23.2 million, which was paid in cash from the proceeds of the
March 1997 Offering (see Note 10). The Lennar Properties consist of one office
property located in Virginia and one office/flex property and one industrial
property, each located in Massachusetts.
On April 14, 1997, the Company acquired from a private seller a 227,129 square
foot, 15-story office building located in Bloomington, Minnesota (the "Riverview
Property"). The total acquisition cost, including capitalized costs, was
approximately $20.5 million, of which approximately $16.3 million was paid in
cash from the proceeds of the March 1997 Offering, and the balance was paid in
cash from borrowings under the Company's existing line of credit (the "Line of
Credit").
On April 18, 1997, the Company acquired from seven partnerships and their
general partner, a Southern California syndicator, a portfolio of eleven
properties, aggregating approximately 523,000 square feet, together with
associated management interests (the "E & L Properties"). The total acquisition
cost, including capitalized costs, was approximately $22.2 million, which
consisted of (i) approximately $12.8 million of mortgage debt assumed, (ii)
approximately $6.7 million in the form of 352,197 partnership units in the
Operating Partnership (based on an agreed per unit value of $19.075), (iii)
approximately $633,000 in the form of 33,198 shares of Common Stock of the
Company (based on an agreed per share value of $19.075), and (iv) the balance in
cash. The cash portion was paid from borrowings under the Line of Credit. Of the
$12.8 million of mortgage debt assumed in the acquisition, approximately $8.9
million was paid off on May 1, 1997, through a draw on the Line of Credit. The E
& L Properties consist of one office property, nine office/flex properties and
one industrial property, all located in Southern California.
On April 29, 1997, the Company acquired from two partnerships formed and managed
by affiliates of CIGNA, 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, was approximately $45.4
million, which was
Page 13 of 44
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1997
paid entirely in cash from the proceeds of the $40 million unsecured loan from
Wells Fargo Bank (see Note 6) and a draw under the Line of Credit. The CIGNA
Properties are located in four states and consist of two office properties, two
office/flex properties, a shopping center and a multi-family property.
On June 18, 1997, the Company acquired from Carlsberg Realty, Inc. a portfolio
of three properties, aggregating approximately 245,600 square feet (the "CRI
Properties"). The total acquisition cost, including capitalized costs, was
approximately $14.8 million, which was paid entirely in cash from borrowings
under the Line of Credit. The CRI Properties consist of one office property
located in California and one office/flex property and one industrial property,
each located in Arizona. The CRI Properties have been managed by GC since
December 1996.
In June 1997, the Company sold from its retail portfolio six Atlanta Auto Care
Center properties and nine of the ten QuikTrip properties for an aggregate sales
price of approximately $12.1 million. These sales generated a net gain of
$555,000. The proceeds from the sale of the QuikTrip properties were used to
fund the acquisition of the Centerstone Property and the proceeds from the sale
of the Auto Care Center properties were used to paydown the Line of Credit and
to payoff a mortgage loan. The remaining QuikTrip property was sold on October
1, 1997, for a sales price of approximately $1.1 million. See Note 11 for
further discussion.
On July 1, 1997, the Company acquired an office property containing 157,579
square feet (the "Centerstone Property") located in Irvine, California. The
total acquisition cost, including capitalized costs, was approximately $30.4
million, which consisted of (i) approximately $5.5 million in the form of
275,000 partnership units in the Operating Partnership (based on an agreed per
unit value of $20.00), and (ii) the balance in cash from a combination of
borrowings under the Line of Credit and the net proceeds of the sale of the
QuikTrip retail properties.
On September 12, 1997, the Company acquired a portfolio of 27 properties,
aggregating approximately 2,888,000 square feet (the "T. Rowe Price Properties")
from five limited partnerships, two general partnerships and one private REIT,
each organized by affiliates of T. Rowe Price Associates, Inc. The total
acquisition cost, including capitalized costs, was approximately $146.8 million,
which was paid entirely in cash from the proceeds of a new $114 million
unsecured loan from Wells Fargo Bank (see Note 6), approximately $23 million of
the proceeds from a new $60 million secured loan from Wells Fargo Bank (see Note
6), a $6.5 million draw on the existing $50 million Wells Fargo Bank Line of
Credit and the balance from the proceeds from the July 1997 Offering (see Note
10). The T. Rowe Price Properties consist of three office properties, nine
office/flex properties, twelve industrial properties and three retail properties
located in 12 states.
On September 12, 1997, the Company acquired a portfolio of ten properties,
aggregating approximately 755,006 square feet (the "Advance Properties") from a
group of partnerships affiliated with The Advance Group of Bedminster, New
Jersey. The total acquisition cost, including capitalized costs, was
approximately $103.0 million, which consisted of (i) approximately $7.4 million
of mortgage debt assumed, (ii) approximately $13.6 million in the form of
599,508 partnership units in the Operating Partnership (based on an assumed per
unit value of $22.625), (iii) approximately $37 million of the proceeds from a
new $60 million secured loan from Wells Fargo Bank (see Note 6) and (iv) the
balance in cash. The cash portion of the acquisition was paid with proceeds from
the July 1997 Offering (see Note 10). The Advance Properties consist of five
office properties, three office/flex properties and two industrial properties.
Nine of the properties are located in New Jersey and one is located in Maryland.
Concurrent with this acquisition, the Company invested $2,985,000 in a joint
venture with The Advance Group for the development of new projects in the New
Jersey market. This joint venture owns 57 acres of land suitable for office and
office/flex development of up to 560,000 square feet. At September 30, 1997, the
Company's investment in this joint venture is included in other assets.
On September 30, 1997, the Company acquired an office property containing
147,978 square feet ("Citibank Park") located in Las Vegas, Nevada. The total
acquisition cost, including capitalized costs, was approximately $23.3 million,
which consisted of (i) approximately $1.66 million in the form of 61,222
partnership units in the Operating Partnership (based on an agreed per unit
value of $27.156), (ii) a $19.4 million draw on the Line of Credit, and (iii)
the balance in cash.
Page 14 of 44
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1997
The Company has entered into a definitive agreement to sell the Shannon Crossing
retail property for $3.1 million in December 1997. In connection with this sale,
the Company has agreed to lend $6.2 million to the buyer under a construction
loan with a fixed interest rate of 8%, to be funded as needed. The initial
funding under the loan occurred in November 1997 for approximately $2 million.
As of September 30, 1997, approximately $1.3 million of escrow deposits for
future acquisitions of properties are included in rental property.
Note 4. INVESTMENTS IN ASSOCIATED COMPANIES AND GLENBOROUGH PARTNERS
The Company's investments in the Associated Companies are accounted for using
the equity method as the Company has significant ownership interests through its
100% preferred stock ownership but does not own any voting interests. The
Company records earnings on its investments in the Associated Companies equal to
its cash flow preference, to the extent of earnings, plus its pro rata share of
remaining earnings, based on cash flow allocation percentages. Distributions
received from the Associated Companies are recorded as a reduction of the
Company's investments.
The Company's investment in Glenborough Partners ("GP") is accounted for using
the cost method as the Company holds only a 3.98% limited partner interest.
As of September 30, 1997, the Company had the following investments in the
Associated Companies and GP (in thousands):
<TABLE>
<CAPTION>
GC(1) GHG GP Total
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Investment at December 31, 1996 $ 5,261 $ 1,504 $ 585 $ 7,350
Distributions (1,620) (93) (12) (1,725)
Equity in earnings 816 1,126 --- 1,942
---------- ----------- ----------- ------------
Investment at September 30, 1997 $ 4,457 $ 2,537 $ 573 $ 7,567
========== =========== =========== ============
</TABLE>
(1) All amounts presented for GC represent combined amounts for GC and GIRC due
to the June 30, 1997 merger, as previously discussed in Note 1.
Note 5. MORTGAGE LOANS RECEIVABLE
The Company held a first mortgage loan with a principal balance of $7,563,000
and a carrying value of $6,700,000 at December 31, 1996, secured by an office
and research complex in Eatontown, New Jersey. The loan had an original maturity
date of November 1, 1996 with interest only payable monthly at the fixed rate of
eight percent (8%) per annum. In 1995, due to the uncertainty surrounding the
borrower's ability to payoff the note receivable upon its November 1996
maturity, the Company recorded a $863,000 loss provision on this mortgage loan
receivable to reduce its carrying value to the estimated fair value of the
underlying property. The terms of the note were renegotiated in December 1996
with the maturity date extended to February 1, 1997. The interest rate continued
at 8% per annum. The borrower had the right to payoff the loan at a discount
between January 10 and January 31, 1997. The discounted payoff was i) $6,863,000
in cash and ii) a note for $500,000 payable over a term of twelve years at six
percent (6%) interest amortized over twenty-five years. On January 28, 1997, the
borrower paid off the note at the above discounted terms, resulting in a gain to
the Company of $152,000 ($163,000 net of $11,000 in legal costs) and recognition
of $2,000 of the related $500,000 deferred gain. In June 1997, in connection
with the acquisition of the CRI Properties, the note receivable was assigned to
a third party. Therefore, the remaining balance of the deferred gain of $498,000
has been recognized in the Company's Consolidated Statement of Operations for
the nine months ended September 30, 1997.
Page 15 of 44
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1997
At September 30, 1997, the Company held a first mortgage loan in the amount of
$508,000 secured by an industrial property in Los Angeles, California. The terms
of the note include interest accruing at eight percent (8%) per annum for the
first twenty-four months (ended June 1996) and at nine percent (9%) per annum
for the next sixty months until the note matures in June 2001. Monthly payments
of principal and interest, computed based on a thirty year amortization
schedule, commenced January 1995 and continue until maturity.
In 1996, the Operating Partnership entered into a Loan Agreement and Option
Agreement (the "Option Agreement") with Carlsberg Properties, LTD. ("the
Borrower"). The loan amount was $3,600,000, of which $2,694,000 was initially
disbursed to the Borrower and $906,000 was held by the Operating Partnership as
leasing and interest reserves. On June 18, 1997, the Loan Agreement was amended
to include an additional advance to the borrower of $250,000 which was applied
in its entirety to the interest reserve, resulting in an amended loan amount of
$3,850,000 and an increase in the interest reserve of $250,000. During the nine
months ended September 30, 1997, $420,000 of reserves were disbursed to the
borrower which resulted in an outstanding balance at September 30, 1997, of
$3,114,000. The loan is secured by a 48,000 square foot medical building in
Phoenix, Arizona (the "Grunow Building"), and matures on November 19, 1999, with
interest only payable monthly at the fixed rate of eleven percent (11%) per
annum calculated on the full amount of the loan. The Option Agreement provides
the Operating Partnership the option to purchase the Grunow Building on either
the second or third anniversary of the closing date of November 19, 1996, for
the greater of i) the then outstanding loan balance plus $50,000 or ii) the
value of the Secured Property as defined in the Option Agreement.
Note 6. SECURED AND UNSECURED LIABILITIES
The Company had the following mortgage loans, bank lines, and notes payable
outstanding as of September 30, 1997, and December 31, 1996 (in thousands):
1997 1996
-------- --------
Secured $50,000 line of credit with a bank
with variable interest rates of LIBOR plus
1.75% and prime rate (7.44% and 8.50%,
respectively at September 30, 1997), monthly
interest only payments and a maturity date
of July 14, 1998, with an option to extend
for 10 years. The line is secured by
nineteen properties with an aggregate net
carrying value of $60,557 and $67,118 at
September 30, 1997, and December 31, 1996,
respectively. $ 28,865 $ 21,307
Secured loan with a bank with a fixed
interest rate of 7.50%, monthly principal
and interest payments (based upon a 25 year
amortization) of $443 and a maturity date of
September 11, 2007. The loan is secured by
ten properties with an aggregate net
carrying value of $111,667 at September 30,
1997. See below for further discussion.
60,000 ---
Secured loan with a bank with variable
interest rates of LIBOR plus 2.375% and
prime rate plus 0.50%, monthly interest only
payments and a maturity date of July 14,
1998. The loan was paid-off in June 1997
upon the sale of the properties securing the
loan. --- 6,120
Secured loan with an investment bank with a
fixed interest rate of 7.57%, monthly
principal and interest payments (based upon
a 25 year amortization) of $149 and a
maturity date of January 1, 2006. The loan
is secured by nine properties with an
aggregate net carrying value of $37,720 and
$39,298 at September 30, 1997 and December
31, 1996, respectively. 19,521 19,744
Page 16 of 44
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1997
1997 1996
--------- --------
Secured loans with various lenders, bearing
interest at fixed rates between 7.75% and
9.25%, with monthly principal and interest
payments ranging between $9 and $62 and
maturing at various dates through April 1,
2012. These loans are secured by properties
with an aggregate net carrying value of
$38,707 and $30,441 at September 30, 1997,
and December 31, 1996, respectively. $19,944 $ 17,581
Secured loans with various banks, bearing
interest at variable rates (ranging between
7.39% and 8.18% at September 30, 1997),
monthly principal and interest payments
ranging between $4 and $46 and maturing at
various dates through May 1, 2017. These
loans are secured by properties with an
aggregate net carrying value of $17,447 and
$6,975 at September 30, 1997, and December
31, 1996, respectively. 7,866 3,807
Secured loan with an investment company with
a fixed interest rate of 7.50%, monthly
principal and interest payments of $55 and a
maturity date of March 1, 2021. The loan is
secured by a multifamily property with a net
carrying value of $9,361 and $9,491 at
September 30, 1997, and December 31, 1996,
respectively. 7,249 7,332
Unsecured loan with a bank with a fixed
interest rate of 7.50%, monthly interest
only payments and a maturity date of
December 11, 1997, with two 90-day options
to extend. See below for further discussion. 114,000 ---
---------- ---------
Total $ 257,445 $ 75,891
========== =========
In April 1997, the Operating Partnership entered into a $40 million unsecured
loan with Wells Fargo Bank to fund the acquisition of the CIGNA Properties (the
"CIGNA Acquisition Financing"). The CIGNA Acquisition Financing had a term of
three months (extendible to six months at the Company's option), interest at a
variable annual rate equal to 175 basis points above 30-day LIBOR, was unsecured
and was guaranteed by the Company. Required payments under the CIGNA Acquisition
Financing were monthly, interest only.
As of June 30, 1997, Wells Fargo had substantially completed underwriting and
due diligence for a $60 million mortgage loan to the Company (the "$60 Million
Mortgage") to be secured by the Lennar Properties, the Riverview Property, the
Centerstone Property and five of the CIGNA Properties. In the interim, Wells
Fargo funded on June 19, 1997, a $60 million unsecured "bridge" loan (the "$60
Million Unsecured Bridge Loan"), which was used to (i) repay all principal and
accrued interest under the $40 million CIGNA Acquisition Financing, and (ii)
reduce the outstanding balance under the Line of Credit by approximately $20
million.
The $60 Million Unsecured Bridge Loan was paid-off on July 18, 1997 from the
proceeds of the July 1997 Offering (see Note 10) and was replaced with the $60
Million Mortgage on September 12, 1997. This loan has a 10-year term, bears
interest at a fixed annual rate of 7.5%, and requires monthly payments based on
a 25-year amortization schedule. Proceeds from the $60 Million Mortgage were
used to fund the acquisitions of the T. Rowe Price Properties and the Advance
Properties.
In September 1997, the Company closed a $114 million unsecured loan (the "$114
Million Interim Unsecured Loan") with Wells Fargo Bank. This loan has a 90-day
term with two 90-day extension options, bears interest at a fixed annual rate of
7.5% and requires monthly payments of interest only. The proceeds of this loan
were used to
Page 17 of 44
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1997
fund a portion of the purchase price for the T. Rowe Price Properties. In
October 1997, the Company repaid the $114 Million Interim Unsecured Loan with
net proceeds from the October 1997 Offering (see Note 11).
The required principal payments on the Company's debt for the next five years
and thereafter, as of September 30, 1997, are as follows (in thousands):
Year Ending
December 31,
1997 $ 114,490
1998 30,942
1999 3,578
2000 4,401
2001 2,546
Thereafter 101,488
-----------
Total $ 257,445
===========
Note 7. RELATED PARTY TRANSACTIONS
Fee and reimbursement income earned by the Company from a related partnership
totaled $572,000 and $199,000 for the nine months ended September 30, 1997, and
1996, respectively, and consisted of property management fees, lease commissions
and asset management fees for the nine months ended September 30, 1997, and
asset management fees for the nine months ended September 30, 1996.
Note 8. STOCK COMPENSATION PLAN
In May 1996, the Company adopted an employee stock incentive plan (the "Plan")
to provide incentives to attract and retain high quality executive officers and
key employees. Certain amendments to the Plan were ratified and approved by the
stockholders of the Company at the Company's 1997 Annual Meeting of
Stockholders. The Plan, as amended, provides for the grant of (i) shares of
Common Stock of the Company, (ii) options, stock appreciation rights ("SARs") or
similar rights with an exercise or conversion privilege at a fixed or variable
price related to the Common Stock and/or the passage of time, the occurrence of
one or more events, or the satisfaction of performance criteria or other
conditions, or (iii) any other security with the value derived from the value of
the Common Stock of the Company or other securities issued by a related entity.
Such awards include, without limitation, options, SARs, sales or bonuses of
restricted stock, dividend equivalent rights ("DERs"), Performance Units or
Preference Shares. The total number of shares of Common Stock available for
grant under the Plan is equal to the greater of 1,140,000 shares or 8% of the
number of shares outstanding determined as of the day immediately following the
most recent issuance of shares of Common Stock or securities convertible into
shares of Common Stock; provided that the maximum aggregate number of shares of
Common Stock available for issuance under the Plan may not be reduced. For
purposes of calculating the number of outstanding shares of Common Stock, all
classes of securities of the Company and its related entities that are
convertible presently or in the future by the security holder into shares of
Common Stock or which may presently or in the future be exchanged for shares of
Common Stock pursuant to redemption rights or otherwise, shall be deemed to be
outstanding shares of Common Stock. Notwithstanding the foregoing, the aggregate
number of shares as to which incentive stock options may be granted under the
Plan may not exceed 1,140,000 shares. The Company accounts for the fair value of
the options and bonus grants in accordance with APB Opinion No. 25. As of
September 30, 1997, 35,000 shares of bonus grants have been issued under the
Plan. The fair value of the shares granted have been recorded as deferred
compensation in the accompanying financial statements and will be charged to
earnings ratably over the respective vesting periods that range from 2 to
5 years. As of September 30, 1997, 1,078,000 options to purchase shares of
Common Stock have been granted. The exercise price of each option granted is
greater than or equal to the per-share fair market value of the Common Stock on
the date the option is granted. To date, all options granted have been at higher
than the fair market value of the shares on the grant date, and as such, no
compensation expense has been recognized as
Page 18 of 44
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1997
accounted for under APB Opinion No. 25. The options vest over periods between 1
and 6 years, and have a maximum term of 10 years.
Note 9. DECLARATION OF DIVIDENDS
On April 22, 1997, the Company's Board of Directors declared a dividend for the
first quarter of $0.32 per share or $4,222,301 payable on May 13, 1997, to
stockholders of record at the close of business on May 2, 1997. Such dividend
was made from the Company's cash reserves at March 31, 1997, combined with the
dividends received from the Associated Companies.
On July 22, 1997, the Company's Board of Directors declared a dividend for the
second quarter of $0.32 per share or $6,455,901 payable on August 12, 1997, to
stockholders of record at the close of business on August 1, 1997. Such dividend
was made from the Company's cash reserves at June 30, 1997, combined with the
dividends received from the Associated Companies.
On October 21, 1997, the Company's Board of Directors declared a dividend for
the third quarter of $0.32 per share or $10,071,901 payable on November 11,
1997, to stockholders of record at the close of business on October 31, 1997.
Such dividend will be made from the Company's available cash.
Note 10. PUBLIC STOCK OFFERINGS
In March 1997, the Company completed the "March 1997 Offering" of 3,500,000
shares of Common Stock. The 3,500,000 shares were sold at a per share price of
$20.25 for total proceeds of $66,955,000 (net of 6% underwriting fee of
$3,920,000). This additional capital was used to acquire the Scottsdale Hotel
and the Lennar, Riverview and Ellis & Lane Properties (see Note 3) and to repay
the outstanding balance under the Company's Line of Credit with Wells Fargo. In
addition, approximately $916,000 in other costs were incurred in connection with
the March 1997 Offering.
In July 1997, the Company completed a public offering of 6,980,000 shares of
Common Stock (the "July 1997 Offering"). The 6,980,000 shares were sold at a per
share price of $22.625 for total proceeds of $149,965,300 (net of underwriting
fees of $7,957,200). This additional capital was used to repay the $60 Million
Unsecured Bridge Loan and the outstanding balance under the Company's Line of
Credit with Wells Fargo. In addition, the remaining proceeds were used to fund
the acquisitions of the T. Rowe Price Properties and the Advance Properties as
discussed in Note 3. As of September 30, 1997, approximately $806,000 in other
costs had been incurred in connection with the July 1997 Offering.
Note 11. SUBSEQUENT EVENTS
On October 1, 1997, the Company sold from its retail portfolio the remaining
QuikTrip property for a sales price of approximately $1.1 million. This sale
generated a net gain of $297,000 and cash proceeds of $1.1 million. The proceeds
from the sale of the QuikTrip property will be used to fund future acquisitions
of properties. This sale was an all-cash sale and the Company has no continuing
obligations or involvement with this property. Accordingly, the Company will
recognize the sale under the full accrual method of accounting.
On October 24, 1997, the Company acquired eight properties from six separate
limited partnerships in which affiliates of AEW Capital Management, L.P.
(successors in interest to one or more affiliates of Copley Advisors Inc.) serve
as general partners (the "Copley Properties"). The total acquisition cost,
including capitalized costs, was approximately $63.7 million, which was paid
entirely in cash from the proceeds of the October 1997 Offering (as discussed
below). The Copley Properties comprise 766,269 square feet of industrial space,
with one property located in Tempe, Arizona, one in Anaheim, California, one in
Columbia, Maryland and five in Las Vegas, Nevada.
On November 4, 1997, the Company acquired a 171,789 square-foot office property
located in Eden Prairie, Minnesota ("Bryant Lake"), from Outlook Income Fund 9,
a limited partnership in which GC is managing general
Page 19 of 44
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1997
partner. Robert Batinovich, the Company's Chairman and Chief Executive Officer,
is co-general partner of Outlook Income Fund 9 and holds an indirect economic
interest therein equal to an approximate 0.83% limited partnership interest.
Because of this affiliation, and consistent with the Company's Board of
Directors' policy, neither Robert Batinovich nor Andrew Batinovich, the
Company's President and Chief Operating Officer, voted when the Board of
Directors considered and acted to approve this acquisition. The total
acquisition cost, including capitalized costs, was approximately $9.4 million,
comprising approximately $4.8 million in the form of cash and the balance in the
form of assumption of debt.
In October 1997, the Company completed a public offering of 11,300,000 shares of
Common Stock (the "October 1997 Offering"). The 11,300,000 shares were sold at a
per share price of $25.00 for total proceeds of $268,092,500 (net of
underwriting fees of $14,407,500). This additional capital was used to repay the
$114 Million Unsecured Loan and the outstanding balance under the Company's Line
of Credit with Wells Fargo. In addition, the remaining proceeds were used to
fund the acquisitions of the Copley Properties and the Bryant Lake property as
discussed above.
In November 1997, the Company received a firm commitment from Wells Fargo Bank
to establish a $250 million unsecured line of credit (the "Credit Facility"),
which will replace the Company's existing $50 million secured Line of Credit.
The Credit Facility will bear interest on a sliding scale ranging from LIBOR
plus 0.8% to LIBOR plus 1.3%, which represents a rate that is lower by at least
0.45% than the rate under the current $50 million Line of Credit.
Note 12. PENDING ACQUISITIONS
The Company has entered into a definitive agreement to acquire all of the real
estate assets of Rancon Realty Fund IV, a California limited partnership which
has been managed by GC since January 1995 (the "Rancon IV Portfolio"). The total
acquisition cost, including capitalized costs, is expected to be approximately
$49.0 million, comprising approximately $32.0 million in the form of cash and
the balance in the form of assumption of debt. The Rancon IV Portfolio is
comprised of three office properties aggregating 223,938 square feet; one
office/flex property containing 62,605 square feet; four retail properties
aggregating 135,554 square feet; one 240-unit multi-family property totaling
214,400 square feet; and approximately 74 acres of undeveloped land. All of the
office and retail properties, and approximately 26 acres of the undeveloped
land, are located within the Tri-City mixed use complex in San Bernardino,
California. The multi-family complex is located in Vista (San Diego County),
California, and the remaining approximately 48 acres of undeveloped land are
located in three separate sites in the Inland Empire region of Southern
California. Robert Batinovich holds an indirect economic interest in Rancon Fund
IV equal to an approximate 0.54% limited partnership interest. Because of this
interest, and consistent with the Company's Board of Directors' policy, neither
Robert Batinovich nor Andrew Batinovich voted when the Board of Directors
considered and acted to approve this acquisition. This acquisition is subject to
approval by a majority vote of the limited partners of Rancon Realty Fund IV,
which has filed with the Securities and Exchange Commission a preliminary proxy
statement to solicit such approval. As a result, there can be no assurance that
this transaction will be completed.
The Company has entered into a definitive agreement to acquire all of the real
estate assets of Rancon Realty Fund V, a California limited partnership which
has been managed by GC since January 1995 (the "Rancon V Portfolio"). The total
acquisition cost, including capitalized costs, is expected to be $45.5 million,
comprising approximately $31.8 million in the form of cash and the balance in
the form of assumption of debt. The Rancon V Portfolio is comprised of five
office properties aggregating 390,785 square feet; one office/flex property
containing 50,804 square feet; one 245,000 square foot industrial property; two
retail properties aggregating 31,500 square feet; and approximately 139 acres of
undeveloped land. All of the office and retail properties, and approximately 14
acres of the undeveloped land, are located within the Tri-City mixed use complex
in San Bernardino, California. The industrial property is located in Ontario,
California, and the remaining approximately 125 acres of undeveloped land are
located in three separate sites in the Inland Empire region of Southern
California. Robert Batinovich holds an indirect economic interest in Rancon Fund
V equal to an approximate 0.7% limited partnership interest. Because of this
interest, and consistent with the Company's Board of Directors' policy, neither
Robert Batinovich nor Andrew
Page 20 of 44
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1997
Batinovich voted when the Board of Directors considered and acted to approve
this acquisition. This acquisition is subject to approval by a majority vote of
the limited partners of Rancon Realty Fund V, which has filed with the
Securities and Exchange Commission a preliminary proxy statement to solicit such
approval. As a result, there can be no assurance that this transaction will be
completed.
The Company has entered into a definitive agreement to acquire all of the real
estate assets of Prudential-Bache / Equitec Real Estate Partnership, a
California limited partnership in which the managing general partner is
Prudential-Bache Securities, Inc., and in which GC and Robert Batinovich have
served as co-general partners since March 1994, but do not hold a material
equity interest (the "Prudential-Bache / Equitec Portfolio"). The total
acquisition cost, including capitalized costs, is expected to be approximately
$43.5 million, which is to be paid entirely in cash. The Prudential-Bache /
Equitec Portfolio is comprised of four office buildings aggregating 405,825
square feet and one office/flex property containing 121,645 square feet. The
largest of these properties are in Rockville, Maryland (186,680 square feet) and
Memphis, Tennessee (100,901 square feet), with the remaining properties located
in Sacramento, California and Kirkland, Washington. This acquisition is subject
to approval by a majority vote of the limited partners of Prudential-Bache /
Equitec Real Estate Limited Partnership, thus, there can be no assurance that
this transaction will be completed.
Page 21 of 44
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30, December 31,
1997 1996
(Unaudited) (Audited)
-------------- --------------
ASSETS
<S> <C> <C>
Cash $ 2,818 $ 461
Accounts receivable 251 247
Investments in management contracts, net 373 430
Rental property and equipment, net of
accumulated depreciation of $125 and $111
in 1997 and 1996, respectively 159 170
Investment in Atlantic Pacific Assurance Company, Limited --- 755
Prepaid expenses 150 156
Other assets 5 36
-------------- --------------
TOTAL ASSETS $ 3,756 $ 2,255
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued lease expense $ 406 $ 285
Mortgage loan 45 61
Other liabilities 427 407
-------------- --------------
Total liabilities 878 753
-------------- --------------
Stockholders' Equity:
Common stock (1,000 shares authorized,
issued and outstanding) 20 20
Non-voting preferred stock (50 shares
authorized, issued and outstanding) --- ---
Additional paid-in capital 1,568 1,568
Retained earnings 1,290 (86)
-------------- --------------
Total stockholders' equity 2,878 1,502
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,756 $ 2,255
============== ==============
See accompanying notes to consolidated financial statements
</TABLE>
Page 22 of 44
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENTS OF INCOME
For the nine months ended September 30, 1997 and 1996
(in thousands)
(Unaudited)
1997 1996
------------ ------------
REVENUE
<S> <C> <C>
Hotel revenue $ 8,549 $ 5,532
Fees and reimbursements 1,674 1,836
Net gain on liquidation of APAC 1,381 ---
Other revenue 18 72
------------ ------------
Total revenue 11,622 7,440
------------ ------------
EXPENSES
Leased Hotel Properties:
Room expenses 2,260 1,468
Lease payments to affiliates 2,990 1,843
Sales and marketing 883 571
Property general and administrative 884 597
Other operating expenses 1,082 751
Managed Hotel Properties:
Salaries and benefits 1,044 1,222
Other Expenses:
General and administrative 812 706
Depreciation and amortization 73 74
Interest expense 3 4
------------ ------------
Total expenses 10,031 7,236
------------ ------------
Income from operations before provision
for income taxes 1,591 204
Provision for income taxes (98) (76)
------------ ------------
Net income $ 1,493 $ 128
============ ============
See accompanying notes to consolidated financial statements
</TABLE>
Page 23 of 44
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended September 30, 1997 and 1996
(in thousands)
(Unaudited)
1997 1996
------------ ------------
REVENUE
<S> <C> <C>
Hotel revenue $ 2,412 $ 1,948
Fees and reimbursements 561 280
Net gain on liquidation of APAC 1,381 ---
Other revenue 18 206
------------ ------------
Total revenue 4,372 2,434
------------ ------------
EXPENSES
Leased Hotel Properties:
Room expenses 787 476
Lease payments to affiliates 783 575
Sales and marketing 264 190
Property general and administrative 306 228
Other operating expenses 407 303
Managed Hotel Properties:
Salaries and benefits 301 385
Other Expenses:
General and administrative 287 240
Depreciation and amortization 24 25
Interest expense 1 1
------------ ------------
Total expenses 3,160 2,423
------------ ------------
Income from operations before provision
for income taxes 1,212 11
Income tax benefit 64 ---
------------ ------------
Net income $ 1,276 $ 11
============ ============
See accompanying notes to consolidated financial statements
</TABLE>
Page 24 of 44
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the nine months ended September 30, 1997 and 1996
(in thousands, except shares)
(Unaudited)
Addi-
Preferred Stock Common Stock tional Retained
Par Par Paid-in Earnings
Shares Value Shares Value Capital (Deficit) Total
------ --------- ------ --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE at
December 31, 1996 50 $ --- 1,000 $ 20 $ 1,568 $ (86) $ 1,502
Dividends --- --- --- --- --- (117) (117)
Net income --- --- --- --- --- 1,493 1,493
------ --------- ------ --------- ---------- ---------- -----------
BALANCE at
September 30, 1997 50 $ --- 1,000 $ 20 $ 1,568 $ 1,290 $ 2,878
====== ========= ====== ========= ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Addi-
Preferred Stock Common Stock tional Retained
Par Par Paid-in Earnings
Shares Value Shares Value Capital (Deficit) Total
-------- ---------- ------ -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE at
December 31, 1995 50 $ --- 1,000 $ 20 $ 1,368 $ --- $ 1,388
Additional paid-in capital --- --- --- --- 200 --- 200
Dividends --- --- --- --- --- (83) (83)
Net income --- --- --- --- --- 128 128
-------- ---------- ------- -------- ---------- ---------- -----------
BALANCE at
September 30, 1996 50 $ --- 1,000 $ 20 $ 1,568 $ 45 $ 1,633
======== ========== ======= ======== ========== ========== ===========
See accompanying notes to consolidated financial statements
</TABLE>
Page 25 of 44
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1997 and 1996
(in thousands)
(Unaudited)
1997 1996
------------- ------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 1,493 $ 128
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 73 74
Net gain on liquidation of APAC (1,381) ---
Changes in certain assets and liabilities 171 123
------------- ------------
Net cash provided by operating activities 356 325
------------- ------------
Cash flows from investing activities:
Additions to equipment (2) (7)
Liquidation of investment in APAC 2,136 ---
------------- ------------
Net cash provided by (used for) investing activities 2,134 (7)
------------- ------------
Cash flows from financing activities:
Dividends (117) (83)
Capital contributions --- 200
Repayment of borrowings (16) (19)
------------- ------------
Net cash provided by (used for) financing activities (133) 98
------------- ------------
Net increase in cash 2,357 416
Cash at beginning of period 461 33
------------- ------------
Cash at end of period $ 2,818 $ 449
============= ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3 $ 4
============= ============
See accompanying notes to consolidated financial statements
</TABLE>
Page 26 of 44
<PAGE>
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
September 30, 1997
Note 1. ORGANIZATION
Glenborough Hotel Group ("GHG") was organized in the State of Nevada on
September 23, 1991. As of September 30, 1997, GHG operates hotel properties
owned by Glenborough Realty Trust Incorporated ("GLB") under five separate
percentage leases and manages two hotel properties owned by two partnerships
whose managing general partner is Glenborough Corporation. GLB owns 100% of the
50 shares of non-voting preferred stock of GHG and three individuals, including
Terri Garnick, an executive officer of GLB, each own 33 1/3% of the 1,000 shares
of voting common stock of GHG.
GHG also owns approximately 80% of the common stock of Resort Group, Inc.
("RGI"). RGI manages homeowners associations and rental pools for two beachfront
resort condominium hotel properties and owns six units at one of the properties.
GHG receives 100% of the earnings of RGI and consolidates RGI's operations with
its own.
In 1997, GHG also owned 94% of the outstanding common stock of Atlantic Pacific
Holdings, Ltd., the sole owner of 100% of the common stock of Atlantic Pacific
Assurance Company, Limited ("APAC"), a Bermuda corporation formed to underwrite
certain insurable risks of certain of GLB's predecessor partnerships and related
entities. As anticipated, in July 1997, APAC was liquidated and GHG received a
liquidating distribution of approximately $2,136,000. GHG has recognized a gain
of $1,381,000 over its investment basis and costs of liquidation. GHG had
accounted for its investment in APAC using the cost method due to its
anticipated liquidation.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting only of normal accruals) necessary to
present fairly, the financial position and results of operations of GHG as of
September 30, 1997, and for the period then ended.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying financial statements present the
consolidated financial position of GHG and RGI as of September 30, 1997, and
December 31, 1996 and the consolidated results of operations and cash flows of
GHG and RGI for the nine and three months ended September 30, 1997 and 1996. All
intercompany transactions, receivables and payables have been eliminated in the
consolidation.
Reclassification - Certain 1996 balances have been reclassified to conform with
current year presentation.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the results of operations during the reporting period. Actual
results could differ from those estimates.
Rental Property - Rental properties are stated at cost unless circumstances
indicate that cost cannot be recovered, in which case, the carrying value of the
property is reduced to estimated fair value.
Depreciation is provided using the straight line method over the useful lives of
the respective assets.
Investments in Management Contracts - Investments in management contracts are
recorded at cost and are amortized on a straight-line basis over the term of the
contracts.
Cash Equivalents - GHG considers short-term investments (including certificates
of deposit) with a maturity of three months or less at the time of investment to
be cash equivalents.
Income Taxes - Provision for income taxes is based on financial accounting
income.
Page 27 of 44
<PAGE>
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
September 30, 1997
Note 3. INVESTMENTS IN MANAGEMENT CONTRACTS, NET
Investments in management contracts reflects the unamortized portion of the
management contracts RGI holds with the two beachfront resort condominium hotel
properties for both management of the homeowners associations and the rental
pool programs.
Note 4. RENTAL PROPERTY
Rental property and equipment represents the six condominium hotel units owned
by RGI as well as furniture and fixtures in GHG's corporate offices. The six
units owned by RGI participate in a resort rental program on an "at will" basis,
whereby there is no fixed term of participation. Such participation generated
approximately $21,000 and $17,000 of cash flow after deductions for capital
reserves for the nine months ended September 30, 1997 and 1996, respectively.
Note 5. MORTGAGE LOAN
Mortgage loan of $45,000 at September 30, 1997, represents the debt secured by
the six condominium hotel units owned by RGI. Such debt bears interest at 7%,
payable in monthly installments of principal and interest totaling $2,304, and
matures June 30, 1999.
Note 6. THE PERCENTAGE LEASES
GHG is leasing the five hotels owned by GLB for a term of five years pursuant to
individual percentage leases ("Percentage Leases") which provide for rent equal
to the greater of the Base Rent (as defined in the lease) or a specified
percentage of room revenues (the "Percentage Rent"). Each hotel is separately
leased to GHG (the "lessee"). The lessee's ability to make rent payments will,
to a large degree, depend on its ability to generate cash flow from the
operations of the hotels. Each Percentage Lease contains the provisions
described below.
Each Percentage Lease has a non-cancelable term of five years, subject to
earlier termination upon the occurrence of certain contingencies described in
the Percentage Lease. The lessee under the Percentage Lease has one five-year
renewal option at the then current fair market rent.
During the term of each Percentage Lease, the lessee is obligated to pay the
greater of Base Rent or Percentage Rent. Base Rent 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; the applicable
percentage changes when revenue exceeds a specified threshold, and the threshold
may be adjusted annually in accordance with changes in the applicable Consumer
Price Index. Percentage Rent is due quarterly.
The table below sets forth the annual Base Rent and the Percentage Rent formulas
for each of the five hotels.
<TABLE>
<CAPTION>
Hotel Lease Rent Provisions
Percentage Rent
incurred for the nine
Initial Annual months ended Annual Percentage
Hotel Base Rent September 30, 1997 Rent Formulas
<S> <C> <C> <C>
Ontario, CA $ 240,000 $ 254,000 24% of the first $1,575,000 of room revenue plus 40%
of room revenue above $1,575,000 and 5% of other revenue
continued
</TABLE>
Page 28 of 44
<PAGE>
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
September 30, 1997
<TABLE>
<CAPTION>
Hotel Lease Rent Provisions - continued
Percentage Rent
incurred for the nine
Annual months ended Annual Percentage
Hotel Base Rent September 30, 1997 Rent Formulas
<S> <C> <C> <C>
Arlington, TX $ 360,000 $ 298,000 27% of the first $1,600,000 of room revenue plus 42%
of room revenue above $1,600,000 and 5% of other revenue
Tucson, AZ $ 600,000 $ 537,000 40% of the first $1,350,000 of room revenue plus 46%
of room revenue above $1,350,000 and 5% of other revenue
San Antonio, TX $ 312,000 $ 2,000 33% of the first $1,200,000 of room revenue plus 40%
of room revenue above $1,200,000 and 5% of other revenue
Scottsdale, AZ $ 720,000 $ 345,000 41% of the first $2,600,000 of room revenue plus 60%
of room revenue above $2,600,000 and 5% of other revenue
</TABLE>
Other than real estate and personal property taxes, casualty insurance, a fixed
capital improvement allowance and maintenance of underground utilities and
structural elements, which are the responsibility of GLB, the Percentage Leases
require the lessees to pay rent, insurance, salaries, utilities and all other
operating costs incurred in the operation of the Hotels.
Note 7. DECLARATION OF DIVIDENDS
The board of directors of GHG declared and paid the following dividends for the
first, second and third quarters of 1997:
<TABLE>
<CAPTION>
Preferred Stock Common Stock Total
---------------- -------------- -------------
<S> <C> <C> <C>
April, 1997 $ 38,438 $ 10,312 $ 48,750
July, 1997 38,438 10,312 48,750
October, 1997 38,438 10,312 48,750
--------------- -------------- -------------
Total paid from 1997 earnings $ 115,314 $ 30,936 $ 146,250
=============== ============== =============
</TABLE>
Page 29 of 44
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
GLENBOROUGH REALTY TRUST INCORPORATED
Background
Glenborough Realty Trust Incorporated (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT") engaged primarily in the
ownership, operation, management, leasing and acquisition of various types of
income-producing properties. As of September 30, 1997, the Company owned and
operated 103 income-producing properties (the "Properties," and each a
"Property") and held two mortgage loans receivable. The Properties are comprised
of 23 industrial Properties, 32 office/flex Properties, 28 office Properties, 10
retail Properties, 4 multifamily Properties and 6 hotel Properties, located in
22 states. The 103 income-producing Properties include three Properties in which
the Company holds a participating first mortgage interest, not fee title. These
three Properties consist of one retail Property, one industrial Property and one
hotel Property which are each owned by AFP Partners. In accordance with GAAP,
the Company accounts for these properties as though it holds fee title as
substantially all risks and rewards of ownership have been transferred to the
Company as a result of the terms of the mortgages.
The Company was incorporated in the State of Maryland on August 26, 1994. On
December 31, 1995, the Company completed a consolidation (the "Consolidation")
in which Glenborough Corporation, a California corporation ("GC"), and eight
public limited partnerships (the "Partnerships," collectively with GC, the "GRT
Predecessor Entities"), merged with and into the Company. The Company (i) issued
5,753,709 shares (the "Shares") of the $.001 par value Common Stock of the
Company to the Partnerships in exchange for the net assets of the Partnerships;
(ii) merged with Glenborough Corporation, with the Company being the surviving
entity; (iii) acquired an interest in the Associated Companies that provide
asset and property management services, as well as other services; and (iv)
through a subsidiary operating partnership, Glenborough Properties, L.P. (the
"Operating Partnership"), acquired interests in certain warehouse distribution
facilities from GPA, Ltd., a California limited partnership ("GPA"). A portion
of the Company's operations are conducted through the Operating Partnership, of
which the Company is the sole general partner, and in which the Company holds a
90.17% limited partner interest as of September 30, 1997. The Company operates
the assets acquired in the Consolidation and in subsequent acquisitions and
intends to invest in income-producing property directly and through joint
ventures. In addition, two associated companies, Glenborough Corporation and
Glenborough Hotel Group (the "Associated Companies") may acquire general partner
interests in other real estate limited partnerships. The Company elected to
qualify as a REIT under the Internal Revenue Code of 1986, as amended.
The Company seeks to achieve sustainable long-term growth in Funds from
Operations primarily through the following strategies: (i) acquiring portfolios
or individual properties on attractive terms often from public and private
partnerships; (ii) acquiring properties from entities controlled by the
Associated Companies; (iii) improving the performance of Properties in the
Company's portfolio; and (iv) 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.
Consistent with the Company's strategy for growth, the Company acquired 20
properties in the third and fourth quarters of 1996 and, as of September 30,
1997, had acquired 64 properties during 1997. In addition, the Company has
acquired 9 properties subsequent to September 30, 1997. The total acquired
Properties consist of an aggregate of approximately 8.2 million rentable square
feet, 762 multi-family units and 227 hotel suites and had aggregate acquisition
costs, including capitalized costs, of approximately $606 million. In addition,
the Company has entered into two separate definitive agreements, subject to a
number of contingencies, and has negotiated the definitive terms of an
additional agreement to acquire 23 properties and 213 acres of undeveloped land
in 4 states, aggregating approximately 1.9 million rentable square feet.
However, there can be no assurance that any or all of these 23 properties and
213 acres of undeveloped land will be acquired.
Page 30 of 44
<PAGE>
Results of Operations
Comparison of the nine months ended September 30, 1997 to the nine months ended
September 30, 1996.
Rental Revenues. Rental revenues increased $24,618,000, or 218%, to $35,899,000
for the nine months ended September 30, 1997, from $11,281,000 for the nine
months ended September 30, 1996. The increase included growth in revenues from
the office, industrial, office/flex, retail, multi-family and hotel Properties
of $12,293,000, $1,779,000, $3,800,000, $2,166,000, $3,436,000 and $1,144,000,
respectively. Of the rental revenue for the nine months ended September 30,
1997, $11,255,000 represented rental revenues generated from the acquisition of
20 properties (the "1996 Acquisitions") in the third and fourth quarters of
1996, and $13,167,000 represented rental revenues generated from the acquisition
of 64 properties during the nine months ended September 30, 1997 (the "1997
Acquisitions"). The increase in rental revenue for the nine months ended
September 30, 1997, was partially offset by a decrease in revenues due to the
June 1996 sale of the All American Self Storage industrial properties and the
June 1997 sales of the QuikTrip and Atlanta Auto Care Center retail properties.
Fees and Reimbursements. Fees and reimbursements revenue consists primarily of
property management fees, asset management fees and lease commissions paid to
the Company under property and asset management agreements. This revenue
increased $373,000, or 187%, to $572,000 for the nine months ended September 30,
1997, from $199,000 for the nine months ended September 30, 1996. The increase
primarily consisted of an increase in asset management fees of $133,000, an
increase in property management fees of $220,000 and lease commissions of
$20,000; in 1996, such fees were paid to GC, and during the nine months ended
September 30, 1997, they were paid to the Company.
Interest and Other Income. Interest and other income, which consists primarily
of interest on cash investments and mortgage loans receivable, increased
$544,000, or 87%, to $1,167,000 for the nine months ended September 30, 1997,
from $623,000 for the nine months ended September 30, 1996. The increase was
primarily due to a $583,000 increase in interest income as a result of higher
invested cash balances following the March 1997 Offering and the July 1997
Offering, a $50,000 loan fee received for the extension of the Hovpark mortgage
loan receivable and $305,000 of interest income on the Carlsberg Properties,
Ltd. mortgage loan receivable. This increase is partially offset by a $397,000
reduction in income caused by the payoff of the Hovpark mortgage loan receivable
in January 1997.
Equity in Earnings of Associated Companies. Equity in earnings from Associated
Companies increased $579,000, or 42%, to $1,942,000 for the nine months ended
September 30, 1997, from $1,363,000 for the nine months ended September 30,
1996. This increase was primarily due to an increase in the net operating income
of Glenborough Hotel Group ("GHG") due to the acquisition of the management of
the Scottsdale Hotel and from a $1,381,000 gain on the liquidation of Atlantic
Pacific Assurance Company, Limited ("APAC", a Bermuda corporation formed to
underwrite certain insurable risks of certain GLB predecessor partnerships and
related entities). This increase is offset by reduced management fees in 1997 as
a result of sales of several properties under management and a partnership
liquidation as well as the write-off of GC's unamortized balance of its
investment in a management contract, offset by lower income tax expense.
Gain on Collection of Mortgage Loan Receivable. The gain on collection of
mortgage loan receivable of $652,000 during the nine months ended September 30,
1997, resulted from the collection of the Hovpark mortgage loan receivable which
had a net carrying value of $6,700,000. The payoff amount totaled $6,863,000,
plus a $500,000 note receivable, which, net of legal costs, resulted in a gain
of $652,000.
Net Gain on Sales of Rental Properties. The net gain on sales of rental
properties of $555,000 during the nine months ended September 30, 1997, resulted
from the sale of nine of the ten QuikTrips and six Atlanta Auto Care Centers
from the Company's retail portfolio. The net gain on sales of rental properties
of $321,000 during the nine months ended September 30, 1996, resulted from the
sale of the two self-storage facilities from the Company's industrial portfolio.
Property Operating Expenses. Property operating expenses increased $8,038,000,
or 248%, to $11,282,000 for the nine months ended September 30, 1997, from
$3,244,000 for the nine months ended September 30, 1996. Of this increase,
$8,077,000 represents property operating expenses attributable to the 1996
Acquisitions and the 1997 Acquisitions, which was slightly offset by the
reduction in expenses resulting from the June 1996 sale of the All
Page 31 of 44
<PAGE>
American Self Storage industrial properties and the June 1997 sales of the
QuikTrip and Atlanta Auto Care Center retail properties.
General and Administrative Expenses. General and administrative expenses
increased $1,054,000, or 108%, to $2,031,000 for the nine months ended September
30, 1997, from $977,000 for the nine months ended September 30, 1996. The
increase is primarily due to increased costs resulting from the 1996
Acquisitions and the 1997 Acquisitions.
Depreciation and Amortization. Depreciation and amortization increased
$6,173,000, or 229%, to $8,867,000 for the nine months ended September 30, 1997,
from $2,694,000 for the nine months ended September 30, 1996. The increase is
primarily due to depreciation and amortization associated with the 1996
Acquisitions and the 1997 Acquisitions.
Interest Expense. Interest expense increased $3,870,000, or 152%, to $6,416,000
for the nine months ended September 30, 1997, from $2,546,000 for the nine
months ended September 30, 1996. Substantially all of the increase was the
result of higher average borrowings during the nine months ended September 30,
1997, as compared to the nine months ended September 30, 1996, due to new debt
and the assumption of debt related to the 1996 Acquisitions and the 1997
Acquisitions.
Consolidation Costs. Consolidation costs during the nine months ended September
30, 1996, consisted 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/Solicitation Statement to investors.
Litigation Costs. Litigation costs during the nine months ended September 30,
1996, consisted of the legal fees incurred in connection with defending two
class action complaints filed by investors in certain of the Company's
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 nine
months ended September 30, 1996 resulted from the write-off of unamortized loan
fees when a $10,000,000 line of credit from Imperial Bank was paid off with
proceeds from a line of credit with Wells Fargo Bank.
Comparison of the three months ended September 30, 1997 to the three months
ended September 30, 1996.
Rental Revenues. Rental revenues increased $11,966,000, or 282%, to $16,208,000
for the three months ended September 30, 1997, from $4,242,000 for the three
months ended September 30, 1996. The increase included growth in revenues from
the office, office/flex, industrial, retail, multi-family and hotel Properties
of $6,401,000, $2,355,000, $945,000, $784,000, $1,273,000 and $208,000,
respectively. Of the rental revenues for the three months ended September 30,
1997, $12,295,000 represented rental revenues generated from the acquisition of
20 properties (the "1996 Acquisitions") in the third and fourth quarters of 1996
and the acquisition of 64 properties during the nine months ended September 30,
1997 (the "1997 Acquisitions"). The increase in rental revenues for the three
months ended September 30, 1997, was partially offset by a decrease in revenues
due to the June 1996 sale of the All American Self Storage industrial properties
and the June 1997 sales of the QuikTrip and Atlanta Auto Care Center retail
properties.
Fees and Reimbursements. Fees and reimbursements revenue consists primarily of
property management fees, asset management fees and lease commissions paid to
the Company under property and asset management agreements. This revenue
increased $139,000, or 211%, to $205,000 for the three months ended September
30, 1997, from $66,000 for the three months ended September 30, 1996. The
increase consisted of an increase in asset management fees of $44,000, an
increase in property management fees of $75,000 and lease commissions of
$20,000. In 1996, such fees were paid to GC, and during the three months ended
September 30, 1997, they were paid to the Company.
Interest and Other Income. Interest and other income, which consists primarily
of interest on cash investments and mortgage loans receivable, increased
$301,000, or 119%, to $554,000 for the three months ended September 30, 1997,
from $253,000 for the three months ended September 30, 1996. The increase was
primarily due to a $423,000 increase in interest income as a result of higher
invested cash balances following the July 1997 Offering,
Page 32 of 44
<PAGE>
and $107,000 of interest income on the Carlsberg Properties, Ltd. mortgage loan
receivable. This increase was partially offset by a $151,000 reduction in income
caused by the payoff of the Hovpark mortgage loan receivable in January 1997 and
$78,000 of other income received during the three months ended September 30,
1996 from a workers' compensation refund and franchise fee refunds on the hotel
properties.
Equity in Earnings of Associated Companies. Equity in earnings from Associated
Companies increased $945,000, or 240%, to $1,339,000 for the three months ended
September 30, 1997, from $394,000 for the three months ended September 30, 1996.
This increase was primarily due to an increase in the net operating income of
GHG due to the acquisition of the management of the Scottsdale Hotel and from a
$1,381,000 gain on the liquidation of APAC. This increase was partially offset
by reduced management fees in 1997 as a result of sales of several properties
under management and a partnership liquidation as well as the write-off of GC's
unamortized balance of its investment in a management contract.
Property Operating Expenses. Property operating expenses increased $3,902,000,
or 292%, to $5,237,000 for the three months ended September 30, 1997, from
$1,335,000 for the three months ended September 30, 1996. Of this increase,
$3,857,000 represented property operating expenses attributable to the 1996
Acquisitions and the 1997 Acquisitions.
General and Administrative Expenses. General and administrative expenses
increased $355,000, or 118%, to $657,000 for the three months ended September
30, 1997, from $302,000 for the three months ended September 30, 1996. The
increase is primarily due to increased costs resulting from the 1996
Acquisitions and the 1997 Acquisitions.
Depreciation and Amortization. Depreciation and amortization increased
$3,888,000, or 416%, to $4,823,000 for the three months ended September 30,
1997, from $935,000 for the three months ended September 30, 1996. The increase
is primarily due to depreciation and amortization associated with the 1996
Acquisitions and the 1997 Acquisitions.
Interest Expense. Interest expense increased $1,491,000, or 133%, to $2,616,000
for the three months ended September 30, 1997, from $1,125,000 for the three
months ended September 30, 1996. Substantially all of the increase was the
result of higher average borrowings during the three months ended September 30,
1997, as compared to the three months ended September 30, 1996, due to new debt
and the assumption of debt related to the 1996 Acquisitions and the 1997
Acquisitions.
Loss on debt refinancing. Loss on debt refinancing of $186,000 during the three
months ended September 30, 1996 resulted from the write-off of unamortized loan
fees when a $10,000,000 line of credit from Imperial Bank was paid off with
proceeds from the Wells Fargo Line of Credit.
Liquidity and Capital Resources
For the nine months ended September 30, 1997, cash provided by operating
activities increased by $17,310,000 to $17,312,000 as compared to $2,000 for the
same period in 1996. The increase is primarily due to an increase in net income
of $21,117,000 before depreciation and amortization due to the 1996 Acquisitions
and 1997 Acquisitions and the one-time payment in 1996 of consolidation costs
and litigation costs in the aggregate amount of $7,237,000. Cash used for
investing activities increased by $350,441,000 to $373,001,000 for the nine
months ended September 30, 1997, as compared to $22,560,000 for the same period
in 1996. The increase is primarily due to the 1997 Acquisitions. This increase
was partially offset by the collection of the Hovpark mortgage loan receivable
and the proceeds from the June 1997 sales of the QuikTrip and Atlanta Auto Care
Center retail properties. Cash provided by financing activities increased by
$338,523,000 to $357,104,000 for the nine months ended September 30, 1997, as
compared to $18,581,000 for the same period in 1996. This increase was primarily
due to the net proceeds from the March 1997 Offering and the July 1997 Offering
(as defined below) and the proceeds from new debt.
The Company expects to meet its short-term liquidity requirements generally
through its working capital, its Line of Credit (as defined below) and cash
generated by operations. As of September 30, 1997, the Company had no material
commitments for capital improvements other than certain expansion related
improvements estimated at approximately $1,620,000 at its existing shopping
center in Tampa, Florida. Other planned capital improvements
Page 33 of 44
<PAGE>
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's principal sources of funding for acquisitions, development,
expansion and renovation of properties are a secured Line of Credit (as defined
below), permanent secured debt financing, public equity and privately placed
financing, the issuance of partnership units in the Operating Partnership and
cash flow provided by operations.
Mortgage loans receivable decreased from $9,905,000 at December 31, 1996, to
$3,622,000 at September 30, 1997. This decrease was primarily due to the payoff
of the Hovpark mortgage loan receivable which had a net carrying value of
$6,700,000. This decrease was partially offset by $420,000 of draws made by the
borrower on the leasing and interest reserves related to the Grunow mortgage
loan receivable.
Mortgage loans payable increased from $54,584,000 at December 31, 1996, to
$228,580,000 at September 30, 1997. This increase primarily resulted from the
assumption of mortgage loans totaling $15,986,000 in connection with the 1997
Acquisitions and the funding of a $60 million secured loan and a $114 million
unsecured loan. These increases were partially offset by the payoff of a
$6,120,000 term loan which was secured by the QuikTrip retail properties, the
payoff of $9,172,000 of mortgage loans and scheduled principal payments on other
mortgage debt.
The Company has a $50,000,000 secured line of credit provided by Wells Fargo
Bank (the "Line of Credit"). Outstanding borrowings under the Line of Credit
increased from $21,307,000 at December 31, 1996, to $28,865,000 at September 30,
1997, due to draws for 1997 Acquisitions. Borrowings under the Line of Credit
currently bear interest at an annual rate of LIBOR plus 1.75%. The Company
repaid the outstanding balance under the Line of Credit in October 1997 with
proceeds from the October 1997 Offering as discussed below.
The Company has a $60,000,000 secured loan provided by Wells Fargo Bank. This
loan has a 10-year term, bears interest at a fixed annual rate of 7.5% and
requires monthly principal and interest payments based on a 25-year amortization
schedule. The proceeds from this loan were used to fund the acquisitions of the
T. Rowe Price Properties and the Advance Properties.
The Company had a $114,000,000 unsecured loan provided by Wells Fargo Bank. This
loan had a 90-day term with two 90-day extension options, interest at a fixed
annual rate of 7.5% and required monthly interest-only payments. The proceeds
from this loan were used to fund in part the acquisition of the T. Rowe Price
Properties. The Company repaid this loan in October 1997 with proceeds from the
October 1997 Offering as discussed below.
In November 1997, the Company received a firm commitment from Wells Fargo Bank
to establish a $250 million unsecured line of credit (the "Credit Facility"),
which will replace the Company's existing $50 million secured Line of Credit.
The Credit Facility will bear interest on a sliding scale ranging from LIBOR
plus 0.8% to LIBOR plus 1.3%, which represents a rate that is lower by at least
0.45% than the rate under the current $50 million Line of Credit.
In March 1997, the Company completed a public equity offering of 3,500,000
shares of Common Stock at an offering price of $20.25 per share (the "March 1997
Offering"). The net proceeds from the offering of approximately $66.3 million
were used to fund certain 1997 Acquisitions and to repay outstanding
indebtedness.
In July 1997, the Company completed a public equity offering of 6,980,000 shares
of Common Stock at an offering price of $22.625 per share (the "July 1997
Offering"). The net proceeds from the offering of approximately $149.3 million
were used to fund certain 1997 Acquisitions and for general corporate purposes.
In October 1997, the Company completed a public equity offering of 11,300,000
shares of Common Stock at an offering price of $25.00 per share (the "October
1997 Offering"). The net proceeds from the offering of approximately $268
million were used to repay the $114 million unsecured loan (discussed above) and
the outstanding balance under the Company's Line of Credit with Wells Fargo
Bank. In addition, the remaining proceeds were used to fund the acquisition of
the Copley Properties.
Page 34 of 44
<PAGE>
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 million of equity securities. The January 1997 Shelf
Registration Statement was declared effective by the Securities and Exchange
Commission on February 25, 1997. In May 1997, the Company filed a shelf
registration statement to register an additional $350 million of equity
securities of the Company (the "May 1997 Shelf Registration Statement). The May
1997 Shelf Registration Statement was declared effective by the Securities and
Exchange Commission on May 21, 1997. After the completion of the March 1997,
July 1997 and October 1997 Offerings, the Company has the capacity pursuant to
the May 1997 Shelf Registration Statement to issue up to approximately $88.7
million in equity securities.
At September 30, 1997, the Company's total indebtedness included fixed-rate debt
of $220,714,000, or 86% of the Company's aggregate indebtedness, and
floating-rate indebtedness of $36,731,000, or 14% of the Company's aggregate
indebtedness.
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 may
permit the Company to increase rental rates or other charges to tenants in
response to rising prices and therefore, serve to reduce the Company's exposure
to the adverse effects of inflation.
Funds from Operations and Cash Available for Distribution
The Company believes that funds from operations ("FFO") is a measure of cash
flow which, when considered in conjunction with other measures of operating
performance, affects the value of equity REITs such as the Company. FFO means
income (loss) from operations before minority interests and extraordinary items
plus depreciation and amortization, except amortization of deferred financing
costs and loss provisions.
FFO is not necessarily indicative of cash flow available to fund cash needs and
is not the same as cash flow from operations as defined by GAAP, and should not
be considered as an alternative to net income (loss) as an indicator of the
Company's operating performance, or as an alternative to cash flows from
operating, investing and financing activities as a measure of liquidity or
ability to make distributions. Management generally considers FFO to be a useful
financial performance 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 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. FFO as
disclosed by other REITs may not be comparable to the Company's calculation of
FFO.
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 recurring 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.
The following table sets forth the Company's calculation of FFO and CAD for the
three months ended March 31, June 30 and September 30, 1997 (dollars in
thousands):
Page 35 of 44
<PAGE>
<TABLE>
<CAPTION>
March 31, June 30, Sept 30, Year to Date
1997 1997 1997 Total
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net income before minority interest $ 2,594 $ 4,639 $ 4,958 $ 12,191
Gain on collection of mortgage loan receivable (154) (498) --- (652)
Net gain on sales of rental properties --- (570) 15 (555)
Prepayment penalty on payoff of mortgage loan --- --- 75 75
Depreciation and amortization 1,537 2,507 4,823 8,867
Adjustment to reflect FFO of Associated Companies(1) 623 248 (776) 95
------------- ------------- ------------- ---------------
FFO $ 4,600 $ 6,326 $ 9,095 $ 20,021
============= ============= ============= ===============
Amortization of deferred financing fees 64 64 46 174
Capital reserve (110) (220) (204) (534)
Capital expenditures (421) (541) (853) (1,815)
------------- ------------- ------------- ---------------
CAD $ 4,133 $ 5,629 $ 8,084 $ 17,846
============= ============= ============= ===============
Distributions per share (2) $ 0.32 $ 0.32 $ 0.32 $ 0.96
============= ============= ============= ===============
Fully diluted weighted average shares outstanding 10,935,951 14,466,852 21,194,507 15,654,461
============= ============= ============= ===============
</TABLE>
(1) Reflects the adjustments to FFO required to reflect the FFO of the
Associated Companies allocable to the Company. The Company's investments in the
Associated Companies are accounted for using the equity method of accounting.
(2) The distributions for the three months ended September 30, 1997, will be
paid on November 11, 1997.
Forward Looking Statements; Factors That May Affect Operating Results
This Report on Form 10-Q contains 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, including statements regarding the Company's
expectations, hopes, intentions, beliefs and strategies regarding the future.
Forward looking statements include statements regarding potential acquisitions,
the anticipated performance of future acquisitions, recently completed
acquisitions and existing properties, and statements regarding the Company's
financing activities. All forward looking statements included in this document
are based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward looking statements. It
is important to note that the Company's actual results could differ materially
from those stated or implied in such forward-looking statements.
Factors which may cause the Company's results to differ include the inability to
complete anticipated future acquisitions, defaults or non-renewal of leases,
increased interest rates and operational costs, failure to obtain necessary
outside financing, difficulties in identifying properties to acquire and in
effecting acquisitions, failure to qualify as a real estate investment trust
under the Internal Revenue Code of 1986, environmental uncertainties, risks
related to natural disasters, financial market fluctuations, changes in real
estate and zoning laws, increases in real property tax rates and other factors
discussed under the caption "Forward Looking Statements; Factors That May Affect
Operating Results" in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, and other risk factors set forth
in the Company's other Securities and Exchange Commission filings. In addition,
past performance of the Company's Common Stock is not necessarily indicative of
results that will be obtained in the future from an investment in the Company's
Common Stock. Furthermore, the Company makes distributions to stockholders if,
as and when declared by its Board of Directors, and expects to continue its
policy of paying quarterly distributions, however, there can be no assurance
that distributions will continue or be paid at any specific level.
Page 36 of 44
<PAGE>
Stockholders or potential stockholders should read the "Risk Factors" section of
the Company's latest annual report on Form 10-K filed with the Securities and
Exchange Commission ("SEC") in conjunction with this quarterly report on Form
10-Q to better understand the factors affecting the Company's results of
operations and the Company's common stock share price. The fact that some of the
risk factors may be the same or similar to the Company's past filings means only
that the risks are present in multiple periods. The Company believes that many
of the risks detailed here and in the Company's other SEC filings are part of
doing business in the real estate industry and will likely be present in all
periods reported. The fact that certain risks are endemic to the industry does
not lessen the significance of the risk.
Page 37 of 44
<PAGE>
GLENBOROUGH HOTEL GROUP
Background
Glenborough Hotel Group ("GHG") was organized in the state of Nevada on
September 23, 1991. As of September 30, 1997, GHG operates hotel properties
owned by the Company under five separate percentage leases and manages two hotel
properties owned by two partnerships whose managing general partner is
Glenborough Corporation. The Company owns 100% of the 50 shares of non-voting
preferred stock of GHG and three individuals, including Terri Garnick, an
executive officer of the Company, each own 33 1/3% of the 1,000 shares of voting
common stock of GHG.
In April 1997, the management contract of one of the managed hotel properties
was terminated due to the sale of the property.
GHG also owns approximately 80% of the common stock of Resort Group, Inc.
("RGI"). RGI manages homeowners associations and rental pools for two beachfront
resort condominium hotel properties and owns six rental units at one of the
properties. GHG receives 100% of the earnings of RGI and consolidates their
operations with its own.
As of June 30, 1997, GHG also owned 94% of the outstanding common stock of
Atlantic Pacific Holdings, Ltd., the sole owner of 100% of the common stock of
Atlantic Pacific Assurance Company, Limited ("APAC"), a Bermuda corporation
formed to underwrite certain insurable risks of certain of GLB's predecessor
partnerships and related entities. As anticipated, in July 1997, APAC was
liquidated and GHG received a liquidating distribution of approximately
$2,136,000. GHG has recognized a gain of approximately $1,381,000 over its
investment basis and costs of liquidation. GHG had accounted for its investment
in APAC using the cost method due to its anticipated liquidation.
Liquidity and Capital Resources
GHG's primary source of funding is the cash generated by the operations of the
five hotels leased from the Company and fees received for (i) managing two
hotels owned by two partnerships and (ii) managing the homeowners associations
and rental pools for the resort condominium hotel properties as discussed above.
The board of directors of GHG declared and paid the following quarterly
dividends for the three months ended March 31, June 30 and September 30, 1997:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter Year to Date
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Preferred dividends to the Company $ 7,500 $ 7,500 $ 7,500 $ 22,500
Additional dividends to the Company 30,938 30,938 30,938 92,814
------------- ------------- ------------- --------------
Total dividends to the Company 38,438 38,438 38,438 115,314
Dividends to others 10,312 10,312 10,312 30,936
------------- ------------- ------------- --------------
Total dividends $ 48,750 $ 48,750 $ 48,750 $ 146,250
============= ============= ============= ==============
</TABLE>
Results of Operations
Hotel revenue, which represents the revenue earned on the five hotels leased
from the Company, increased $3,017,000, or 55%, to $8,549,000 for the nine
months ended September 30, 1997, from $5,532,000 for the nine months ended
September 30, 1996. This increase is primarily due to the acquisition of the San
Antonio Hotel management contract in August 1996 and the acquisition of the
Scottsdale Hotel management contract in February 1997.
Fee revenue and salary reimbursements of $1,674,000 represents the fees earned
for managing two hotels and two resort condominium hotels. The decrease from the
nine months ended September 30, 1996, to the nine months ended September 30,
1997, is primarily due to the change in ownership of one of the managed hotel
properties (see discussion above) which resulted in GHG no longer managing this
hotel as of April 1997.
Page 38 of 44
<PAGE>
The net gain on the liquidation of APAC resulted from the July 1997 liquidation
of APAC from which GHG received a liquidating distribution of approximately
$2,136,000 which resulted in a gain of $1,381,000 over its investment basis of
$755,000 and costs of liquidation. GHG had accounted for its investment in APAC
using the cost method due to its anticipated liquidation.
The primary expenses associated with the leased hotels are room expenses, lease
payments, sales and marketing and other operating expenses, including utilities,
maintenance and insurance. All leased hotel expenses increased from the nine
months ended September 30, 1996, to the nine months ended September 30, 1997,
due to the acquisition of two hotels as discussed above.
The only direct expenses incurred in connection with the management of the two
hotels and two resort condominium hotel properties are salaries and benefits
which decreased $178,000 from the nine months ended September 30, 1996, to the
nine months ended September 30, 1997. This decrease is primarily due to the sale
of one of the managed hotel properties which resulted in GHG no longer managing
this hotel as of April 1997.
General and administrative costs represent the overhead costs associated with
administering the business of GHG. Such costs primarily consist of
administrative salaries and benefits, rent, legal fees and accounting fees.
These costs increased $106,000, or 15%, to $812,000 for the nine months ended
September 30, 1997, from $706,000 for the nine months ended September 30, 1996.
The increase is primarily due to higher salaries and benefits related to the
growth of GHG.
Page 39 of 44
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Blumberg. On February 21, 1995, a class action complaint was filed in the
Superior Court of the State of California in and for San Mateo County in
connection with the Consolidation. The plaintiff is Anthony E. Blumberg, an
investor in Equitec B, on behalf of himself and all others (the "Blumberg
Action") similarly situated. The defendants are GC (formerly known as
Glenborough Realty Corporation), Glenborough Realty Corporation ("GRC"), Robert
Batinovich, the Partnerships and the Company.
The complaint alleged breaches by the defendants of their fiduciary duty and
duty of good faith and fair dealing to investors in the Partnerships. The
complaint sought injunctive relief and compensatory damages. The complaint
alleged that the valuation of GC was excessive and was done without appraisal of
GC's business or assets. The complaint further alleged that the interest rate
for the Notes to be issued to investors in lieu of shares of Common Stock, if
they so elected was too low for the risk involved and that the Notes would
likely sell, if at all, at a substantial discount from their face value (as a
matter entirely distinct from the litigation and subsequent settlement, the
Company, as it had the option to, paid in full the amounts due plus interest in
lieu of issuing Notes).
On October 9, 1995 the parties entered into an agreement to settle the action.
The defendants, in entering into the settlement agreement, did not acknowledge
any fault, liability or wrongdoing of any kind and continue to deny all material
allegations asserted in the litigation. Pursuant to the settlement agreement,
the defendants will be released from all claims, known or unknown, that have
been, could have been, or in the future might be asserted, relating to, among
other things, the Consolidation, the acquisition of the Company's shares
pursuant to the Consolidation, any misrepresentation or omission in the
Registration Statement on Form S-4, filed by the Company on September 1, 1994,
as amended, or the prospectus contained therein ("Prospectus/Consent
Solicitation Statement"), or the subject matter of the lawsuit. In return, the
defendants agreed to the following: (a) the inclusion of additional or expanded
disclosure in the Prospectus Consent Solicitation Statement, and (b) the
placement of certain restrictions on the sale of the stock by certain insiders
and the granting of stock options to certain insiders following consummation of
the Consolidation. Plaintiff's counsel indicated that it would request that the
court award it $850,000 in attorneys' fees, costs and expenses. In addition,
plaintiffs' counsel indicated it would request the court for an award of $5,000
payable to Anthony E. Blumberg as the class representative. The defendants
agreed not to oppose such requests.
On October 11, 1995, the court certified the class for purposes of settlement,
and scheduled a hearing to determine whether it should approve the settlement
and class counsel's application for fees. A notice of the proposed settlement
was distributed to the members of the class on November 15, 1995. The notice
specified that, in order to be heard at the hearing, any class member objecting
to the proposed settlement must, by December 15, 1995, file a notice of intent
to appear, and a detailed statement of the grounds for their objection.
Objections were received from a small number of class members. The objections
reiterated the claims in the original Blumberg complaint, and asserted that the
settlement agreement did not adequately compensate the class for releasing those
claims. One of the objections was filed by the same law firm that brought the
BEJ Action described below.
At a hearing on January 17, 1996, the court heard the arguments of the objectors
seeking to overturn the settlement, as well as the arguments of the plaintiffs
and the defendants in defense of the settlement. The court granted all parties a
period of time in which to file additional pleadings. On June 4, 1996, the court
granted approval of the settlement, finding it fundamentally fair, adequate and
reasonable to the respective parties to the settlement. However, the objectors
gave notice of their intent to appeal the June 4 decision, and filed their
opening brief with the court of appeals on November 15, 1996. The Company and
the other defendants filed their answering brief on January 17, 1997. The
objectors filed a reply brief and have requested a hearing.
BEJ Equity Partners. On December 1, 1995, a second class action complaint
relating to the Consolidation was filed in Federal District Court for the
Northern District of California (the "BEJ Action"). The plaintiffs are BEJ
Equity Partners, J/B Investment Partners, Jesse B. Small and Sean O'Reilly as
custodian f/b/o Jordan K. O'Reilly, who as a group held limited partner
interests in the California limited partnerships known as Outlook Properties
Fund IV,
Page 40 of 44
<PAGE>
Glenborough All Suites Hotels, L.P., Glenborough Pension Investors, Equitec
Income Real Estate Investors-Equity Fund 4, Equitec Income Real Estate Investors
C and Equitec Mortgage Investors Fund IV, on behalf of themselves and all others
similarly situated. The defendants are GRC, GC, the Company, GPA, Ltd., Robert
Batinovich and Andrew Batinovich. The Partnerships are named as nominal
defendants.
This action alleges the same disclosure violations and breaches of fiduciary
duty as were alleged in the Blumberg Action. The complaint sought injunctive
relief, which was denied at a hearing on December 22, 1995. At that hearing, the
court also deferred all further proceedings in this case until after the
scheduled January 17, 1996 hearing in the Blumberg Action. Following several
stipulated extensions of time for the Company to respond to the complaint, the
Company filed a motion to dismiss the case. The court subsequently entered a
stipulated order staying the case pending final resolution of the Blumberg
action.
It is management's position that the BEJ Action, and the objections to the
settlement of the Blumberg Action, are without merit, and management intends to
pursue a vigorous defense in both matters. However, given the inherent
uncertainties of litigation, there can be no assurance that the ultimate outcome
in these two legal proceedings will be in the Company's favor.
Item 2. Changes in Securities
(c) Sales of Unregistered Securities
In September 1997, the Company acquired the Citibank Property for a total
acquisition cost, including capitalized costs, of approximately $23 million. In
connection with this acquisition, Glenborough Properties, L.P., a California
limited partnership (the "Operating Partnership"), issued to Schulman\Nielsen
Partnership, the seller of the Citibank Property, 61,222 units ("Units") of
partnership interest in Glenborough Properties, L.P. (with an agreed upon per
Unit value of $27.156, or an aggregate value of $1.7 million) as partial payment
for the Citibank Property. The Units are redeemable for cash, or, at the
election of the Company, for shares of Common Stock of the Company on a
one-for-one basis. The Units were issued by the Operating Partnership in
reliance on the exemption provided by Section 4(2) of the Securities Act of
1933, as amended.
In September 1997, the Company acquired the Advance Properties for a total
acquisition cost, including capitalized costs, of approximately $103 million. In
connection with this acquisition, Glenborough Properties, L.P., a California
limited partnership (the "Operating Partnership"), issued to affiliates of The
Advance Group, the seller of the Advance Properties, 599,508 units ("Units") of
partnership interest in Glenborough Properties, L.P. (with an agreed upon per
Unit value of $22.625, or an aggregate value of $13.6 million) as partial
payment for the Advance Properties. The Units are redeemable for cash, or, at
the election of the Company, for shares of Common Stock of the Company on a
one-for-one basis. The Units were issued by the Operating Partnership in
reliance on the exemption provided by Section 4(2) of the Securities Act of
1933, as amended.
In July 1997, the Company acquired the Centerstone Property for a total
acquisition cost, including capitalized costs, of approximately $30.4 million.
In connection with this acquisition, Glenborough Properties, L.P., a California
limited partnership (the "Operating Partnership"), issued to CT Realty Corp. and
RESCO, the sellers of the Centerstone Property, 275,000 units ("Units") of
partnership interest in Glenborough Properties, L.P. (with an agreed per Unit
value of $20.00, or an aggregate value of $5.5 million) as partial payment for
the Centerstone Property. The balance of the acquisition cost was paid in cash.
The Units are redeemable for cash, or, at the election of the Company, for
shares of Common Stock of the Company on a one-for-one basis. The Units were
issued by the Operating Partnership in reliance on the exemption provided by
Section 4(2) of the Securities Act of 1933, as amended.
Page 41 of 44
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The Exhibit Index attached hereto is hereby
incorporated by reference to this item.
(b) Reports on Form 8-K:
On July 15, 1997, the Company filed a report on Form 8-K
with respect to the acquisition of the Centerstone
Property.
On July 15, 1997, the Company filed a report on Form 8-K
with respect to the July 1997 Offering.
On July 28, 1997, the Company filed a report on Form 8-K
to provide certain additional ownership and operational
information concerning the Company and the properties
owned or managed by it as of June 30, 1997.
On August 8, 1997, the Company filed a report on Form
8-K/A with respect to the acquisition of the Centerstone
Property.
On September 29, 1997, the Company filed a report on Form
8-K with respect to the acquisition of the T. Rowe Price
Properties and the Advance Properties.
On October 17, 1997, the Company filed a report on Form
8-K/A with respect to the acquisition of the T. Rowe Price
Properties and the Advance Properties.
On October 17, 1997, the Company filed a report on Form
8-K/A with respect to the acquisition of the Citibank Park
Property.
On October 17, 1997, the Company filed a report on Form
8-K to announce funds from operations for the third
quarter of 1997 and to provide certain additional
operational information concerning the Company.
On October 23, 1997, the Company filed a report on Form
8-K with respect to the October 1997 Offering.
On November 7, 1997, the Company filed a report on Form
8-K to provide certain additional ownership and
operational information concerning the Company and the
properties owned or managed by it as of September 30,
1997.
On November 10, 1997, the Company filed a report on Form
8-K with respect to the acquisition of the Copley
Properties.
Page 42 of 44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange
Act of l934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GLENBOROUGH REALTY TRUST INCORPORATED
By: Glenborough Realty Trust Incorporated,
Date: November 10, 1997 /s/ Andrew Batinovich
Andrew Batinovich
Director, President
and Chief Operating Officer
(Principal Operating Officer)
Date: November 10, 1997 /s/ Terri Garnick
Terri Garnick
Senior Vice President,
Chief Accounting Officer,
Treasurer
(Principal Accounting Officer)
Page 43 of 44
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Title
27.1 Financial Data Schedule
Page 44 of 44
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000929454
<NAME> GLENBOROUGH REALTY TRUST INCORPORATED
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 2,770
<SECURITIES> 0
<RECEIVABLES> 2,805
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,645
<PP&E> 623,829
<DEPRECIATION> 35,185
<TOTAL-ASSETS> 615,976
<CURRENT-LIABILITIES> 121,018
<BONDS> 142,955
0
0
<COMMON> 20
<OTHER-SE> 311,283
<TOTAL-LIABILITY-AND-EQUITY> 615,976
<SALES> 0
<TOTAL-REVENUES> 40,787
<CGS> 0
<TOTAL-COSTS> 11,282
<OTHER-EXPENSES> 11,587
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,416
<INCOME-PRETAX> 11,502
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,502
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,502
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.73
</TABLE>
