SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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
(650) 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
7 3/4% Series A Convertible Preferred Stock,
$.001 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
As of May 15, 1998, 31,676,520 shares of Common Stock ($.001 par value) and
11,500,000 shares of 7 3/4% Series A Convertible Preferred Stock ($.001 par
value) were outstanding.
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This Form 10-Q of Glenborough Realty Trust Incorporated (the "Company") for the
quarter ended March 31, 1998 is being amended and restated in its entirety (i)
to add certain information to Note 2 and Note 4 of the Notes to the Company's
Consolidated Financial Statements in Item 1 of Part I, (ii) as to Item 2 of Part
I, Management's Discussion and Analysis of Financial Condition and Results of
Operations, to revise "Funds from Operations" and "Cash Available for
Distribution" and to revise the first paragraph after the caption "Forward
Looking Statements; Factors That May Affect Operating Results", (iii) to add
certain information in Item 1 of Part II, Legal Proceedings, and (iv) to amend
and restate in its entirety Exhibit 12.1.
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, 1997):
Consolidated Balance Sheets at March 31, 1998 and
December 31, 1997 4
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997 5
Consolidated Statement of Stockholders' Equity for the
three months ended March 31, 1998 6
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997 7-8
Notes to Consolidated Financial Statements 9-18
Consolidated Financial Statements of Glenborough Hotel Group
(Unaudited except for the Consolidated Balance Sheet at
December 31, 1997):
Consolidated Balance Sheets at March 31, 1998 and
December 31, 1997 19
Consolidated Statements of Income for the three months ended
March 31, 1998 and 1997 20
Consolidated Statement of Stockholders' Equity for the
three months ended March 31, 1998 21
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 22
Notes to Consolidated Financial Statements 23-25
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
Glenborough Realty Trust Incorporated 26-31
Glenborough Hotel Group 32
PART II OTHER INFORMATION
Item 1. Legal Proceedings 33-34
Item 2. Changes in Securities 34
Item 6. Exhibits and Reports on Form 8-K 35
SIGNATURES 36
EXHIBIT INDEX 37
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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)
March 31, December 31,
1998 1997
(Unaudited) (Audited)
-------------- -------------
<S> <C> <C>
ASSETS
Rental property, net of accumulated depreciation of
$50,138 and $41,213 in 1998 and 1997, respectively $ 1,306,931 $ 825,218
Investments in Associated Companies 10,752 10,948
Mortgage loans receivable 3,740 3,692
Cash and cash equivalents 6,666 5,070
Other assets 34,056 20,846
--------------- -------------
TOTAL ASSETS $ 1,362,145 $ 865,774
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage loans $ 242,083 $ 148,139
Unsecured senior notes 150,000 --
Unsecured bank line 50,332 80,160
Other liabilities 18,881 11,091
--------------- -------------
Total liabilities 461,296 239,390
--------------- -------------
Commitments and contingencies -- --
Minority interest 52,531 46,261
Stockholders' Equity:
Common stock, 31,549,756 and 31,547,256 shares issued
and outstanding at March 31, 1998 and
December 31, 1997, respectively 31 31
Preferred stock, 11,500,000 shares issued and outstanding
at March 31, 1998 11 --
Additional paid-in capital 862,962 593,702
Deferred compensation (249) (210)
Retained earnings (deficit) (14,437) (13,400)
--------------- -------------
Total stockholders' equity 848,318 580,123
--------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,362,145 $ 865,774
=============== =============
See accompanying notes to consolidated financial statements
</TABLE>
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<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 1998 and 1997
(in thousands, except per share amounts)
(Unaudited)
1998 1997
-------------- -------------
<S> <C> <C>
REVENUE
Rental revenue $ 45,963 $ 7,907
Fees and reimbursements from affiliate 473 187
Interest and other income 357 344
Equity in earnings of Associated Companies 352 145
Net gain on sales of rental properties 1,446 --
Gain on collection of mortgage loan receivable -- 154
-------------- -------------
Total revenue 48,591 8,737
-------------- -------------
EXPENSES
Property operating expenses 14,324 2,382
General and administrative 2,222 651
Depreciation and amortization 10,009 1,537
Interest expense 9,145 1,573
-------------- -------------
Total expenses 35,700 6,143
-------------- -------------
Income from operations before minority interest 12,891 2,594
Minority interest (678) (231)
--------------- -------------
Net income $ 12,213 $ 2,363
-------------- -------------
Preferred dividend requirement (3,910) --
-------------- -------------
Net income available to Common Stockholders $ 8,303 $ 2,363
============= =============
Basic Per Share Data:
Net income available to Common Stockholders $ 0.26 $ 0.23
============== =============
Basic weighted average shares outstanding 31,548,706 10,089,331
============== =============
Diluted Per Share Data:
Net income available to Common Stockholders $ 0.26 $ 0.23
============== =============
Diluted weighted average shares outstanding 34,372,364 10,256,129
============== =============
See accompanying notes to consolidated financial statements
</TABLE>
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<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the three months ended March 31, 1998
(in thousands)
(Unaudited)
Common Stock Preferred Stock
--------------------- ---------------------
Additional Deferred Retained
Par Par Paid-in Compen- Earnings
Shares Value Shares Value Capital sation (Deficit) Total
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 31,547 $ 31 -- $ -- $ 593,702 $ (210) $ (13,400) $ 580,123
Issuance of preferred stock, net of
offering costs of $11,820 -- -- 11,500 11 275,669 -- -- 275,680
Exercise of stock options 1 -- -- -- 10 -- -- 10
Amortization of deferred compensation -- -- -- -- -- 23 -- 23
Issuance of common stock to director 2 -- -- -- 62 (62) -- --
Adjustment to fair value of minority
interest -- -- -- -- (6,481) -- -- (6,481
Distributions -- -- -- -- -- -- (13,250) (13,250)
Net income -- -- -- -- -- -- 12,213 12,213
-------------------------------------------------------------------------------------------------
Balance at March 31, 1998 31,550 $ 31 11,500 $ 11 $ 862,962 $ (249) $ (14,437) $ 848,318
=================================================================================================
See accompanying notes to consolidated financial statements
</TABLE>
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<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1998 and 1997
(in thousands)
(Unaudited)
1998 1997
--------------- ---------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 12,213 $ 2,363
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 10,009 1,537
Amortization of loan fees, included in
interest expense 418 64
Minority interest in income from operations 678 231
Equity in earnings of Associated
Companies (352) (145)
Gain on collection of mortgage loan receivable -- (154)
Net gain on sales of rental properties (1,446) --
Amortization of deferred compensation 23 47
Changes in certain assets and liabilities, net (6,216) (3,219)
--------------- ---------------
Net cash provided by operating activities 15,327 724
--------------- ---------------
Cash flows from investing activities:
Net proceeds from sales of rental properties 28,559 --
Additions to rental property (412,585) (8,226)
Additions to mortgage loans receivable (49) (250)
Principal receipts on mortgage loans receivable 1 6,855
Distributions from Associated Companies 548 631
--------------- ---------------
Net cash used for investing activities (383,526) (990)
--------------- ---------------
continued
See accompanying notes to consolidated financial statements
</TABLE>
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<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
For the three months ended March 31, 1998 and 1997
(in thousands)
(Unaudited)
1998 1997
--------------- --------------
Cash flows from financing activities:
<S> <C> <C>
Proceeds from borrowings $ 309,365 $ 10,700
Repayment of borrowings (201,005) (32,196)
Distributions to minority interest holders (1,005) (206)
Distributions (13,250) (3,092)
Exercise of stock options 10 --
Proceeds from issuance of preferred stock, net of
offering costs 275,680 66,308
--------------- --------------
Net cash provided by financing activities 369,795 41,514
--------------- --------------
Net increase in cash and cash equivalents 1,596 41,248
Cash and cash equivalents at beginning of period 5,070 1,355
--------------- --------------
Cash and cash equivalents at end of period $ 6,666 $ 42,603
=============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 7,329 $ 1,467
=============== ==============
Supplemental disclosure of Non-Cash Investing and Financing
Activities:
Acquisition of real estate through assumption of first
trust deed notes payable $ 105,756 $ 4,612
=============== ==============
Acquisition of real estate through issuance of
Operating Partnership units $ 116 $ --
=============== ==============
See accompanying notes to consolidated financial statements
</TABLE>
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GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
March 31, 1998
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 through an exchange of assets 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 March 31,
1998, the following Common Stock transactions occurred: (i) 37,000 shares of
Common Stock were issued to officers and directors as stock compensation; (ii)
25,446,000 shares were issued in four separate public equity offerings; (iii)
312,606 shares were issued in connection with various acquisitions; (iv) 500
shares were issued in connection with the exercise of employee stock options;
and (v) 59 shares were retired, resulting in total shares of Common Stock issued
and outstanding at March 31, 1998, of 31,549,756. Fully converted shares of
common stock issued and outstanding (including 2,369,283 partnership units in
the Operating Partnership) totaled 33,919,039 at March 31, 1998.
In January 1998, the Company completed a public offering of 11,500,000 shares of
7 3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible
Preferred Stock Offering"). The shares are convertible at any time at the option
of the holder thereof into shares of Common Stock at an initial conversion price
of $32.83 per share of Common Stock (equivalent to a conversion rate of 0.7615
shares of Common Stock for each share of Series A Convertible Preferred Stock),
subject to adjustment in certain circumstances. Shares of Preferred Stock issued
and outstanding at March 31, 1998 totaled 11,500,000.
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
91.47% limited partner interest at March 31, 1998, is Glenborough Properties,
L.P. (the "Operating Partnership"). As of March 31, 1998, the Operating
Partnership, directly and through various subsidiaries in which it and the
Company own 100% of the ownership interests, controls a total of 147 real estate
projects.
As of March 31, 1998, the Company also holds 100% of the non-voting preferred
stock of the following two Associated Companies (the "Associated Companies"):
Glenborough Corporation ("GC") is the general partner of several real
estate limited partnerships and provides asset and property management
services for these 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 five 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.
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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 and two resort condominium
hotels under separate contracts.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements present the consolidated financial
position of the Company as of March 31, 1998, and December 31, 1997, and the
consolidated results of operations and cash flows of the Company for the three
months ended March 31, 1998 and 1997. 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 March 31, 1998, and for the period then ended.
Reclassification
Certain 1997 balances have been reclassified to conform to 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.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information," which will be effective for financial
statements issued for fiscal years beginning after December 15, 1997. SFAS 131
will require the Company to report certain financial and descriptive information
about its reportable operating segments, segments for which separate financial
information is available that is evaluated regularly by management in deciding
how to allocate resources and in assessing performance. For these segments, SFAS
131 will require the Company to report profit and loss, certain specific revenue
and expense items and assets. It also requires disclosures about each segment's
products and services, geographic areas of operation and major customers. The
Company will adopt the disclosures required by SFAS 131 in the financial
statements for the year ended December 31, 1998.
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; and (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. 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.
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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
The Company's investments in the Associated Companies are accounted for using
the equity method, as discussed further in Note 4.
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 7.53% 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 related leases.
For the three months ended March 31, 1998, 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 acquisition, disposition,
refinance, leasing and construction supervision of real estate.
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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.
Scheduled rent increases are based primarily on the Consumer Price Index or a
similar factor. Material incentives paid, if any, by the Company to a tenant are
amortized as a reduction of rental income over the life of the related lease.
The Company recognizes contingent rental income after the related target is
achieved, consistent with EITF 98-9, "Accounting for Contingent Rent in Interim
Financial Periods."
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.
Earnings Per Share
In 1997, the Company adopted the disclosure requirements of SFAS No. 128,
"Earnings per Share." SFAS 128 requires the disclosure of basic earnings per
share and modified existing guidance for computing diluted earnings per share.
Earnings per share for all periods presented have been restated to conform to
the new standard. For additional required disclosures, see Note 8.
Reference to 1997 Audited Financial Statements
These unaudited financial statements should be read in conjunction with the
Notes to Consolidated Financial Statements included in the 1997 audited
financial statements.
Note 3. INVESTMENTS IN REAL ESTATE
In January 1998, the Company acquired a portfolio of 13 suburban office
properties and one office/flex property (the "Windsor Portfolio") located in
eight states. The Company acquired the Windsor Portfolio from Windsor Realty
Fund II, L.P., of which Windsor Advisor, LLC is the general partner and DuPont
Pension Fund Investments and Gid/S&S Limited Partnership are limited partners,
and other entities affiliated with Windsor Realty Fund II, L.P. The Windsor
Portfolio properties aggregate 3,383,240 net rentable square feet, located in
the eastern and mid-western United States and are concentrated in suburban
Washington, D.C., Chicago, Atlanta, Boston, Philadelphia, Tampa, Florida and
Cary, North Carolina. The total acquisition cost, including capitalized costs,
was approximately $423.2 million, comprised of (i) approximately $167.2 million
in assumption of debt; (ii) $150.0 million in borrowings under a $150 million
loan agreement with Wells Fargo Bank (the "Interim Loan" as defined in Note 6);
and (iii) the balance in cash, including cash from borrowings under the
Acquisition Credit Facility (as defined in Note 6). Subsequent to the
acquisition, approximately $68 million of the assumed debt was paid off with
proceeds from the January 1998 Convertible Preferred Stock Offering (as defined
in Note 1).
In January 1998, the Company sold a multi-family property for a sales price of
$4.95 million. This sale generated a net gain of approximately $948,000 and net
proceeds of approximately $2.1 million. The proceeds from the sale were
deposited into a deferred exchange account and were applied to the acquisition
of 400 El Camino Real (as defined below) on a tax-deferred basis pursuant to
Section 1031 of the Internal Revenue Code. The sale was an all-cash sale and the
Company has no continuing obligations or involvement with this property.
Accordingly, the Company recognized the sale under the full accrual method of
accounting.
In 1997, the Company issued approximately $14.1 million in the form of 433,362
partnership units in the Operating Partnership and 72,564 shares of Common Stock
(based on an agreed per unit and per share value of $27.896, respectively, which
was equal to the average closing price of the Company's Common Stock for the ten
business days preceding the closing) and paid approximately $200,000 in cash to
acquire all of the limited partnership interests of GRC Airport Associates, a
California limited partnership ("GRCAA"). GRCAA's sole asset consisted of one
industrial property ("Skypark") that was subject to a binding sales agreement.
By virtue of interests held directly or indirectly in GRCAA, Robert Batinovich
received consideration of approximately $2.2 million and GC
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(as defined in Note 1) received consideration of approximately $1.7 million for
the GRCAA limited partnership interests in the form of partnership units in the
Operating Partnership. 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 transaction. In February 1998,
the sale of the Skypark property was completed to an unaffiliated third party
for a price of $22 million. This sale generated a net gain of approximately
$139,000 and net proceeds of approximately $14.1 million. The proceeds from the
sale of the property were deposited into a deferred exchange account and were
applied to the acquisition of 400 El Camino Real on a tax-deferred basis
pursuant to Section 1031 of the Internal Revenue Code. 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.
In February 1998, the Company acquired a 161,468 square foot office complex
("Capitol Center") located in Des Moines, Iowa. The total acquisition cost,
including capitalized costs, was approximately $12.3 million, comprising: (i)
$116,000 in the form of 3,874 partnership units in the Operating Partnership
(based on an agreed per unit value of $30.00) and (ii) the balance in cash.
In February 1998, the Company sold an industrial property to an unaffiliated
third party for $930,000. The sale generated a net gain of approximately
$247,000 and net proceeds of approximately $359,000. The proceeds from the sale
were deposited into a deferred exchange account and were applied to the
acquisition of 400 El Camino Real on a tax-deferred basis pursuant to Section
1031 of the Internal Revenue Code. The sale was an all-cash sale and the Company
has no continuing obligations or involvement with this property. Accordingly,
the Company recognized the sale under the full accrual method of accounting.
In March 1998, the Company acquired a 15-story office property located in San
Mateo, California ("400 El Camino Real"), which contains 139,109 square feet and
currently houses the Company's corporate headquarters in approximately 30,000
square feet, from Prudential Insurance Company of America. The total acquisition
cost, including capitalized costs, was approximately $34.7 million and was paid
in cash, including cash from borrowings under the Acquisition Credit Facility.
In March 1998, the Company sold an office/flex property to an unaffiliated third
party for $1,368,000. The sale generated a net gain of approximately $112,000
and net proceeds of approximately $696,000. The proceeds from the sale were
deposited into a deferred exchange account and will be applied to a future
acquisition of property on a tax-deferred basis pursuant to Section 1031 of the
Internal Revenue Code. The sale was an all-cash sale and the Company has no
continuing obligations or involvement with this property. Accordingly, the
Company recognized the sale under the full accrual method of accounting.
In March 1998, the Company acquired a portfolio of seven properties (the "BGK
Portfolio") from BGK Development. The BGK Portfolio properties aggregate 515,445
net rentable square feet, located in Boston, Massachusetts and Kansas City,
Kansas, and consist of four office properties, two industrial properties and one
office/flex property. The total acquisition cost, including capitalized costs,
was approximately $50.2 million, comprised of (i) approximately $13.3 million in
assumption of debt; and (ii) the balance in cash, including cash from borrowings
under the Acquisition Credit Facility.
The Company has entered into a definitive agreement to sell the Shannon Crossing
retail property for $9.3 million. The property is currently undergoing a $6.2
million renovation and expansion. As of the date of this filing, approximately
$1.4 million of the project budget for the renovation and expansion has been
funded. The sale of Shannon Crossing will not be completed until the first
quarter of 1999.
As of March 31, 1998, approximately $4.8 million of escrow deposits for future
acquisitions of properties are included in rental property.
Page 13 of 38
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Note 4. INVESTMENTS IN ASSOCIATED COMPANIES
The Company accounts for its investments in the Associated Companies (as defined
in Note 1) using the equity method as a substantial portion of the economic
benefits of the Associated Companies flow to the Company by virtue of its 100%
non-voting preferred stock interest in each of the Associated Companies, which
interests constitute substantially all of the Associated Companies'
capitalization. Two of the holders of the voting common stock of Glenborough
Corporation and one of the holders of the voting common stock of Glenborough
Hotel Group are officers of the Company; however, the Company has no direct
voting or management control of either Glenborough Corporation or Glenborough
Hotel Group. 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.
As of March 31, 1998, the Company had the following investments in the
Associated Companies (in thousands):
GC GHG Total
----------- ------------ ------------
Investment at December 31, 1997 $ 8,519 $ 2,429 $ 10,948
Distributions (510) (38) (548)
Equity in earnings 110 242 352
----------- ------------ ------------
Investment at March 31, 1998 $ 8,119 $ 2,633 $ 10,752
=========== ============ ============
Note 5. MORTGAGE LOANS RECEIVABLE
The Company's mortgage loans receivable consist of the following as of March 31,
1998, and December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
Note secured by an industrial property in Los
Angeles, CA, with a fixed interest rate of 9% and a
maturity date of June 2001. $ 506 $ 507
Note secured by an office property in Phoenix, AZ,
with a fixed interest rate of 11% and a maturity
date of November 1999. The Partnership is committed
to additional advances totaling $320 as of March
31, 1998, for tenant improvements and other leasing
costs. 3,234 3,185
--------------- --------------
Total $ 3,740 $ 3,692
=============== ==============
</TABLE>
Note 6. SECURED AND UNSECURED LIABILITIES
The Company had the following mortgage loans, bank lines, unsecured notes and
notes payable outstanding as of March 31, 1998, and December 31, 1997 (dollars
in thousands):
1998 1997
--------- --------
Unsecured $250,000 line of credit with a bank
("Acquisition Credit Facility") with a variable
interest rate ranging between LIBOR plus 1.10%
and LIBOR plus 1.30% (6.79% and 7.07% at March
31, 1998 and December 31, 1997, respectively),
monthly interest only payments and a maturity
date of December 22, 2000, with one option to
extend for 10 years. $ 50,332 $ 80,160
Page 14 of 38
<PAGE>
1998 1997
--------- --------
Secured loan with a bank with a fixed interest
rate of 7.50%, monthly principal and interest
payments of $443 and a maturity date of October
1, 2022. The loan is secured by ten properties
with an aggregate net carrying value of
$110,858 and $111,372 at March 31, 1998 and
December 31, 1997, respectively. $ 59,583 $ 59,724
Secured loan with an investment bank with a
fixed interest rate of 7.57%, monthly principal
(based upon a 25-year amortization) and
interest payments of $149 and a maturity date
of January 1, 2006. The loan is secured by nine
properties with an aggregate net carrying value
of $37,565 and $37,711 at March 31, 1998 and
December 31, 1997, respectively. 19,365 19,444
Secured loans with various lenders, bearing
interest at fixed rates between 7.25% and
9.25%, with monthly principal and interest
payments ranging between $8 and $165 and
maturing at various dates through April 1,
2012. These loans are secured by properties
with an aggregate net carrying value of
$266,886 and $66,353 at March 31, 1998 and
December 31, 1997, respectively. 129,759 30,519
Secured loans with various banks bearing
interest at variable rates (ranging between
7.49% and 8.18% at March 31, 1998), monthly
principal and interest payments ranging between
$4 and $16 and maturing at various dates
through May 1, 2017. These loans are secured by
properties with an aggregate net carrying value
of $5,030 and $17,246 at March 31, 1998 and
December 31, 1997, respectively. 2,809 7,806
Secured loans with various lenders, bearing
interest at fixed rates between 7.25% and
7.85%, with monthly principal and interest
payments ranging between $5 and $55 and
maturing at various dates through December 1,
2030. These loans are secured by Housing and
Urban Development properties with an aggregate
net carrying value of $41,692 and $41,862 at
March 31, 1998 and December 31, 1997,
respectively. 30,567 30,646
Unsecured Senior Notes with a fixed interest
rate of 7.625%, interest payable semiannually
on March 15 and September 15, commencing
September 15, 1998, and a maturity date of
March 15, 2005. See below for further
discussion. 150,000 --
----------- ---------
Total $ 442,415 $ 228,299
=========== =========
In January 1998, the Company closed a $150 million loan agreement with Wells
Fargo Bank (the "Interim Loan"). The Interim Loan had a term of three months
with interest at LIBOR plus 1.75%. The purpose of the Interim Loan was to fund
the acquisition of the Windsor Portfolio as discussed in Note 3. The Interim
Loan was paid off in March 1998 with proceeds from the $150 million of unsecured
Senior Notes as discussed below.
In March 1998, the Operating Partnership issued $150 million of 7 5/8% unsecured
Senior Notes (the "Notes") in an unregistered 144A offering. The Notes mature on
March 15, 2005, unless previously redeemed. Interest on the Notes will be
payable semiannually on March 15 and September 15, commencing September 15,
1998. The Notes
Page 15 of 38
<PAGE>
may be redeemed at any time at the option of the Operating Partnership, in whole
or in part, at a redemption price equal to the sum of (i) the principal amount
of the Notes being redeemed plus accrued interest to the redemption date and
(ii) the Make-Whole Amount, as defined, if any. The Notes will be general
unsecured and unsubordinated obligations of the Operating Partnership, and will
rank pari passu with all other unsecured and unsubordinated indebtedness of the
Operating Partnership. The Notes will be subordinated to secured borrowing
arrangements that the Operating Partnership has and from time to time may enter
into with various banks and other lenders, and to the prior claims of each
secured mortgage lender to any specific property which secures any lender's
mortgage. As of March 31, 1998, such secured arrangements and mortgages
aggregated approximately $242.1 million.
The required principal payments on the Company's debt for the next five years
and thereafter, as of March 31, 1998, are as follows (in thousands):
Year Ending
December 31,
1998 $ 5,747
1999 5,670
2000 56,989
2001 10,765
2002 9,120
Thereafter 354,124
-----------
Total $ 442,415
===========
Note 7. RELATED PARTY TRANSACTIONS
Fee and reimbursement income earned by the Company from a related partnership
totaled $473,000 and $187,000 for the three months ended March 31, 1998 and
1997, respectively, and consisted of property management fees, asset management
fees and other fee income. In addition, for the three months ended March 31,
1998, the Company paid GC property management fees and salary reimbursements of
$295,000 for management of a portfolio of residential properties owned by the
Company.
Note 8. EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." SFAS
No. 128 requires the disclosure of basic earnings per share and modifies
existing guidance for computing 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. Earnings per share for all periods presented have been restated to
conform to the new standard as follows (in thousands, except for weighted
average shares and per share amounts):
Three months ended March 31,
1998 1997
----------- -----------
Net income available to common
stockholders - Basic 8,303 2,363
Minority interest 678 231 (1)
----------- -----------
Net income - Diluted 8,981 2,594
----------- -----------
Weighted average shares:
Basic 31,548,706 10,089,331
Stock options 456,829 166,798
Convertible Operating Partnership Units 2,366,829 -- (1)
----------- -----------
Diluted 34,372,364 10,256,129
----------- -----------
Page 16 of 38
<PAGE>
Basic earnings per share 0.26 0.23
Diluted earnings per share 0.26 0.23 (1)
(1) Diluted earnings per share for the three months ended March 31, 1997, does
not include the conversion of units of the Operating Partnership into common
stock (644,120 weighted average units outstanding) as the effect is
anti-dilutive.
Note 9. 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 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 shares of Common Stock available under the Plan, 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, one type of security
available under the Plan, 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 March 31, 1998, 37,000 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 March 31, 1998, 2,041,200
options to purchase shares of Common Stock have been granted. The exercise price
of each incentive stock 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 incentive stock options granted have been at exercise prices equal to
or higher than the fair market value of the shares on the grant date, and as
such, no compensation expense has been recognized as 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 10. DECLARATION OF DIVIDENDS
On March 12, 1998, the Company's Board of Directors declared a dividend of $0.42
per share of common stock for the first quarter of 1998. This dividend was paid
on April 10, 1998, to stockholders of record at the close of business on March
31, 1998.
Additionally, the Company's Board of Directors declared a dividend of $0.34 per
share on the Company's 7 3/4% Series A Convertible Preferred Stock (discussed
below). This dividend was paid on April 15, 1998 to stockholders of record on
March 25, 1998. The dividend was prorated for the number of days the stock was
outstanding during the first quarter of 1998.
Page 17 of 38
<PAGE>
Note 11. PUBLIC STOCK OFFERINGS
In January 1998, the Company completed a public offering of 11,500,000 shares of
7 3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible
Preferred Stock Offering"). The 11,500,000 shares were sold at a per share price
of $25.00 for net proceeds of approximately $276 million. The shares are
convertible at any time at the option of the holders thereof into shares of
Common Stock at an initial conversion price of $32.83 per share of Common Stock
(equivalent to a conversion rate of 0.7615 shares of Common Stock for each share
of Series A Convertible Preferred Stock), subject to adjustment in certain
circumstances. Except in certain instances relating to the preservation of the
Company's status as a REIT, the 7 3/4% Series A Convertible Preferred Stock is
not redeemable prior to January 16, 2003. On and after January 16, 2003, the
Series A Preferred Stock may be redeemed at the option of the Company, in whole
or in part, initially at 103.88% of the liquidation preference per share, and
thereafter at prices declining to 100% of the liquidation preference on and
after January 16, 2008, plus in each case accumulated, accrued and unpaid
dividends, if any, to the redemption date. A portion of this additional capital
was used to repay the outstanding balance under the Company's Acquisition Credit
Facility (as defined in Note 6). The remaining proceeds were used to fund the
acquisitions discussed in Note 3 and for general corporate purposes.
Approximately $320,000 in other costs have been incurred in connection with the
January 1998 Convertible Preferred Stock Offering.
Note 12. SUBSEQUENT EVENTS
In April 1998, the Company acquired a portfolio of three office properties and
four retail properties aggregating 417,745 square feet and three multi-family
properties containing 670 units (the "Eaton & Lauth Portfolio") from a number of
partnerships in which affiliates of Eaton & Lauth serve as general partners. The
total acquisition cost, including capitalized costs, was approximately $70.0
million, comprising: (i) approximately $32.0 million of net assumed debt; (ii)
approximately $15.9 million of equity which consisted of (a) approximately $3.2
million in the form of 126,764 shares of Common Stock of the Company (based on
an agreed per share value of $25.00); and (b) approximately $12.7 million in the
form of 506,788 partnership units in the Operating Partnership (based on an
agreed per unit value of $25.00); and (iii) the balance in cash. The cash
portion was financed through advances under the Acquisition Credit Facility. The
Eaton & Lauth Portfolio properties are located in Indiana.
In April 1998, the Company sold an office/flex property to an unaffiliated third
party for $3.6 million. The sale generated a net gain of approximately $466,000
and net proceeds of approximately $1.6 million. The proceeds from the sale were
deposited into a deferred exchange account and will be applied to a future
acquisition of property on a tax-deferred basis pursuant to Section 1031 of the
Internal Revenue Code. The sale was an all-cash sale and the Company has no
continuing obligations or involvement with this property. Accordingly, the
Company recognized the sale under the full accrual method of accounting.
Note 13. PENDING ACQUISITION
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 (the "Pru-Bache Portfolio") in which the managing general
partner is Prudential-Bache Properties, Inc., and in which GC and Robert
Batinovich have served as co-general partners since March 1994, but do not hold
a material equity or economic interest. Because of this affiliation, 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. The total acquisition cost, including
capitalized costs, is expected to be approximately $47.9 million, which is to be
paid entirely in cash. The Pru-Bache 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 a number of contingencies
including approval of the acquisition by a majority vote of the limited partners
of Prudential-Bache/Equitec Real Estate Partnership, satisfactory completion of
due diligence and customary closing conditions. As a result, there can be no
assurance that this acquisition will be completed.
Page 18 of 38
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
March 31, December 31,
1998 1997
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 3,510 $ 2,632
Accounts receivable 565 472
Investments in management contracts, net 335 354
Rental property and equipment, net of
accumulated depreciation of $134 and $129
in 1998 and 1997, respectively 149 154
Prepaid expenses 156 119
Other assets 22 4
TOTAL ASSETS $ 4,737 $ 3,735
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued lease expense $ 842 $ 557
Mortgage loan 33 37
Other liabilities 891 405
Total liabilities 1,766 999
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 1,542 1,568
Retained earnings 1,409 1,148
Total stockholders' equity 2,971 2,736
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,737 $ 3,735
See accompanying notes to consolidated financial statements
</TABLE>
Page 19 of 38
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 1998 and 1997
(in thousands)
(Unaudited)
1998 1997
<S> <C> <C>
REVENUE
Hotel revenue $ 3,804 $ 2,918
Fees and reimbursements 390 567
Other revenue 36 --
Total revenue 4,230 3,485
EXPENSES
Leased Hotel Properties:
Room expenses 748 637
Lease payments to affiliates 1,399 1,048
Sales and marketing 356 272
Property general and administrative 231 232
Other operating expenses 428 286
Managed Hotel Properties:
Salaries and benefits 242 400
Other Expenses:
General and administrative 274 270
Depreciation and amortization 24 24
Interest expense 1 1
Total expenses 3,703 3,170
Income from operations before provision
for income taxes and minority interest 527 315
Provision for income taxes (211) (136)
Minority interest 4 --
Net income $ 320 $ 179
See accompanying notes to consolidated financial statements
</TABLE>
Page 20 of 38
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the three months ended March 31, 1998
(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, 1997 50 $ -- 1,000 $ 20 $ 1,568 $ 1,148 $ 2,736
Redemption of minority interest in
consolidated subsidiary -- -- -- -- (26) -- (26)
Dividends -- -- -- -- -- (59) (59)
Net income -- -- -- -- -- 320 320
BALANCE at
March 31, 1998 50 $ -- 1,000 $ 20 $ 1,542 $ 1,409 $ 2,971
See accompanying notes to consolidated financial statements
</TABLE>
Page 21 of 38
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1998 and 1997
(in thousands)
(Unaudited)
1998 1997
Cash flows from operating activities:
<S> <C> <C>
Net income $ 320 $ 179
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 24 24
Changes in certain assets and liabilities 623 521
Net cash provided by operating activities 967 724
Cash flows from investing activities:
Additions to equipment -- (36)
Net cash used for investing activities -- (36)
Cash flows from financing activities:
Dividends (59) (20)
Redemption of minority interest in consolidated
subsidiary (26) --
Repayment of borrowings (4) (6)
Net cash used for financing activities (89) (26)
Net increase in cash and cash equivalents 878 662
Cash and cash equivalents at beginning of period 2,632 461
Cash and cash equivalents at end of period $ 3,510 $ 1,123
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1 $ 1
See accompanying notes to consolidated financial statements
</TABLE>
Page 22 of 38
<PAGE>
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
March 31, 1998
Note 1. ORGANIZATION
Glenborough Hotel Group ("GHG") was organized in the State of Nevada on
September 23, 1991. As of March 31, 1998, GHG operates hotel properties owned by
Glenborough Realty Trust Incorporated ("GLB") under five separate percentage
leases and manages two hotel properties owned by affiliates. 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"). GHG consolidates its financial statements with RGI and recognizes its
joint venture partner's interest as minority interest. RGI manages homeowners
associations and rental pools for two beachfront resort condominium hotel
properties and owns six units at one of the properties.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting only of normal accruals) necessary to
present fairly, the consolidated financial position and consolidated results of
operations of GHG as of March 31, 1998, 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 March 31, 1998, and
December 31, 1997 and the consolidated results of operations and cash flows of
GHG and RGI for the three months ended March 31, 1998 and 1997. All intercompany
transactions, receivables and payables have been eliminated in the
consolidation.
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. Certain items are reported in different periods for tax and financial
reporting purposes. Timing differences arising from such items are recorded as
deferred tax assets, net of related valuation reserves, or liabilities, as
appropriate.
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.
Page 23 of 38
<PAGE>
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
March 31, 1998
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 $3,000 of cash flow after deductions for capital reserves for each
of the three months ended March 31, 1998 and 1997.
Note 5. MORTGAGE LOAN
The mortgage loan of $33,000 at March 31, 1998, 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 three
Annual months ended Annual Percentage
Hotel Base Rent March 31, 1998 Rent Formulas
<S> <C> <C> <C>
Ontario, CA $ 240,000 $ 82,000 24% of the first $1,711,000 of room revenue plus 40% of room revenue
above $1,711,000 and 5% of other revenue
Arlington, TX $ 360,000 $ 38,000 27% of the first $1,738,000 of room revenue plus 42% of room revenue
above $1,738,000 and 5% of other revenue
continued
</TABLE>
Page 24 of 38
<PAGE>
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
March 31, 1998
<TABLE>
<CAPTION>
Hotel Lease Rent Provisions - continued
Percentage Rent
incurred for the three
Annual months ended Annual Percentage
Hotel Base Rent March 31, 1998 Rent Formulas
<S> <C> <C> <C>
Tucson, AZ $ 600,000 $ 315,000 40% of the first $1,467,000 of room revenue plus 46% of room revenue
above $1,467,000 and 5% of other revenue
San Antonio, TX $ 312,000 $ 1,000 33% of the first $1,272,000 of room revenue plus 40% of room revenue
above $1,272,000 and 5% of other revenue
Scottsdale, AZ $ 720,000 $ 406,000 45% of the first $3,200,000 of room revenue plus 60% of room revenue
above $3,200,000 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 quarter of 1998:
<TABLE>
<CAPTION>
Preferred Stock Common Stock Total
<S> <C> <C> <C>
Q1 1998 $ 78,375 $ 23,625 $ 102,000
Total paid from 1998 earnings $ 78,375 $ 23,625 $ 102,000
</TABLE>
Page 25 of 38
<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 March 31, 1998, the Company owned and
operated 147 income-producing properties (the "Properties," and each a
"Property") and held two mortgage loans receivable. The Properties are comprised
of 26 industrial Properties, 45 office/flex Properties, 48 office Properties, 9
retail Properties, 13 multi-family Properties and 6 hotel Properties, located in
24 states.
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 ("GC"), a California corporation, and eight
public limited partnerships (the "Partnerships") 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 three
companies (the "Associated Companies"), two of which merged on June 30, 1997,
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 91.47% limited partner interest. The Company operates
the assets acquired in the Consolidation and in subsequent acquisitions (see
further discussion below) and intends to invest in income property directly and
through joint ventures. In addition, the Associated Companies may acquire
general partner interests in other real estate limited partnerships. The Company
has elected to qualify as a REIT under the Internal Revenue Code of 1986, as
amended. The common and preferred stock of the Company (the "Common Stock" and
the "Preferred Stock", respectively) are listed on the New York Stock Exchange
("NYSE") under the trading symbols "GLB" and "GLB Pr A", respectively.
Since the Consolidation, and consistent with its strategy for growth, the
Company has completed the following transactions:
Acquired 20 properties in the third and fourth quarters of 1996, 90
properties in 1997 and 33 properties in 1998. The total acquired Properties
consist of an aggregate of approximately 13.8 million rentable square feet,
2,817 multi-family units and 227 hotel suites and had aggregate acquisition
costs, including capitalized costs, of approximately $1.4 billion. In
addition, the Company has entered into a definitive agreement, subject to a
number of contingencies, to acquire five properties in four states,
aggregating 527,470 rentable square feet. However, there can be no
assurance that any or all of these properties will be acquired.
From January 1, 1996 to the date of this filing, sold four industrial
properties, 16 retail properties, two office/flex properties and one
multi-family property to redeploy capital into properties the Company
believes have characteristics more suited to its overall growth strategy
and operating goals.
Entered into a $250 million unsecured line of credit (the "Acquisition
Credit Facility") with Wells Fargo Bank, N.A. ("Wells Fargo Bank") which
replaced its $50 million secured line of credit and closed a $150 million
unsecured loan agreement (the "Interim Loan") with Wells Fargo Bank.
Completed four offerings of Common Stock in October 1996, March 1997, July
1997 and October 1997 (respectively, the "October 1996 Offering," the
"March 1997 Offering," the "July 1997 Offering," and the "October 1997
Offering"), resulting in aggregate gross proceeds of approximately $562
million.
Completed an offering of 7 3/4% Series A Convertible Preferred Stock (the
"January 1998 Convertible Preferred Stock Offering") for total gross
proceeds of approximately $287.5 million.
Issued $150 million of 7 5/8% unsecured Senior Notes which are due on March
15, 2005.
Paid off the Interim Loan with proceeds from the issuance of $150 million
of 7 5/8% unsecured Senior Notes.
Page 26 of 38
<PAGE>
The Company's principal business objectives are to achieve a stable and
increasing source of cash flow available for distribution to stockholders. By
achieving these objectives, the Company will seek to raise stockholder value
over time.
Results of Operations
Comparison of the three months ended March 31, 1998 to the three months ended
March 31, 1997.
Rental Revenues. Rental revenues increased $38,056,000, or 481%, to $45,963,000
for the three months ended March 31, 1998, from $7,907,000 for the three months
ended March 31, 1997. The increase included growth in revenues from the office,
industrial, office/flex, retail, multi-family and hotel Properties of
$23,716,000, $2,243,000, $8,192,000, $921,000, $2,632,000 and $352,000,
respectively. Of the rental revenue for the three months ended March 31, 1998,
$4,379,000 represented rental revenues generated from the acquisition of 20
properties in the third and fourth quarters of 1996 (the "1996 Acquisitions"),
$23,894,000 represented rental revenues generated from the acquisition of 90
properties in 1997 (the "1997 Acquisitions") and $14,688,000 represented rental
revenues generated from the acquisition of 23 properties during the three months
ended March 31, 1998 (the "1998 Acquisitions").
Fees and Reimbursements. Fees and reimbursements revenue consists primarily of
property management fees, asset management fees and lease commissions paid to
the Company under a property and asset management agreement. This revenue
increased $286,000, or 153%, to $473,000 for the three months ended March 31,
1998, from $187,000 for the three months ended March 31, 1997. The increase
primarily consisted of an increase in lease commissions of $250,000 due to the
completion of an eight year lease renewal at one of the managed properties.
Equity in Earnings of Associated Companies. Equity in earnings from Associated
Companies increased $207,000, or 143%, to $352,000 for the three months ended
March 31, 1998, from $145,000 for the three months ended March 31, 1997. This
increase was primarily due to GC's 1997 write-off of the unamortized balance of
its investment in a management contract and an increase in Glenborough Hotel
Group's ("GHG") net income due to the February 1997 origination of the
Scottsdale Hotel lease.
Net Gain on Sales of Rental Properties. The net gain on sales of rental
properties of $1,446,000 during the three months ended March 31, 1998, resulted
from the sales of one multi-family property, two industrial properties and one
office/flex property from the Company's portfolio.
Gain on Collection of Mortgage Loan Receivable. The gain on collection of
mortgage loan receivable of $154,000 during the three months ended March 31,
1997, resulted from the collection of a mortgage loan receivable which had a net
carrying value of $6,700,000. The payoff amount totaled $6,863,000, which, net
of legal costs, resulted in a gain of $154,000.
Property Operating Expenses. Property operating expenses increased $11,942,000,
or 501%, to $14,324,000 for the three months ended March 31, 1998, from
$2,382,000 for the three months ended March 31, 1997. Of this increase,
$11,807,000 represents property operating expenses attributable to the 1997
Acquisitions and the 1998 Acquisitions. This increase is partially offset by
decreases in property operating expenses due to the 1997 and 1998 sales of
properties.
General and Administrative Expenses. General and administrative expenses
increased $1,571,000, or 241%, to $2,222,000 for the three months ended March
31, 1998, from $651,000 for the three months ended March 31, 1997. The increase
is primarily due to increased salary and overhead costs resulting from the 1997
Acquisitions and 1998 Acquisitions.
Depreciation and Amortization. Depreciation and amortization increased
$8,472,000, or 551%, to $10,009,000 for the three months ended March 31, 1998,
from $1,537,000 for the three months ended March 31, 1997. The increase is
primarily due to depreciation and amortization associated with the 1997
Acquisitions and 1998 Acquisitions.
Interest Expense. Interest expense increased $7,572,000, or 481%, to $9,145,000
for the three months ended March 31, 1998, from $1,573,000 for the three months
ended March 31, 1997. Substantially all of the increase was the result of higher
average borrowings during the three months ended March 31, 1998, as compared to
the three
Page 27 of 38
<PAGE>
months ended March 31, 1997, due to new debt and the assumption of debt related
to the 1997 Acquisitions and 1998 Acquisitions.
Liquidity and Capital Resources
For the three months ended March 31, 1998, cash provided by operating activities
increased by $14,603,000 to $15,327,000 as compared to $724,000 for the same
period in 1997. The increase is primarily due to an increase in net income
before depreciation and amortization, minority interest and net gain on sales of
rental properties of $17,677,000 due to the 1997 Acquisitions and 1998
Acquisitions. Cash used for investing activities increased by $382,536,000 to
$383,526,000 for the three months ended March 31, 1998, as compared to $990,000
for the same period in 1997. The increase is primarily due to the 1998
Acquisitions. This increase was partially offset by the collection of a mortgage
loan receivable in 1997 and the proceeds from the 1998 sales of properties. Cash
provided by financing activities increased by $328,281,000 to $369,795,000 for
the three months ended March 31, 1998, as compared to $41,514,000 for the same
period in 1997. This increase was primarily due to the net proceeds from the
January 1998 Convertible Preferred Stock 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 Acquisition Credit Facility (as defined below)
and cash generated by operations. As of March 31, 1998, the Company had no
material commitments for capital improvements. Planned capital improvements
consist of tenant improvements, expenditures necessary to lease and maintain the
Properties and expenditures for furniture and fixtures and building improvements
at the hotel Properties.
The Company believes that its cash generated by operations will be adequate to
meet operating requirements and to make distributions in accordance with REIT
requirements in both the short and the long-term. In addition to cash generated
by operations, the Acquisition Credit Facility provides for working capital
advances. However, there can be no assurance that the Company's results of
operations will not fluctuate in the future and at times affect (i) its ability
to meet its operating requirements and (ii) the amount of its distributions.
The Company's principal sources of funding for acquisitions, development,
expansion and renovation of properties include an unsecured Acquisition Credit
Facility, permanent secured debt financing, public unsecured debt financing,
public and private equity and debt issuances, the issuance of partnership units
in the Operating Partnership and cash flow provided by operations.
Mortgage loans payable increased from $148,139,000 at December 31, 1997, to
$242,083,000 at March 31, 1998. This increase primarily resulted from the
assumption of mortgage loans totaling $105,789,000 in connection with the 1998
Acquisitions. These increases were partially offset by the payoff of $11,845,000
of mortgage loans in connection with 1998 sales of properties and scheduled
principal payments on other mortgage debt.
The Company has a $250,000,000 unsecured line of credit provided by Wells Fargo
Bank (the "Acquisition Credit Facility"). Outstanding borrowings under the
Acquisition Credit Facility decreased from $80,160,000 at December 31, 1997, to
$50,332,000 at March 31, 1998. The $80,160,000 balance outstanding at December
31, 1997, was paid off in January 1998 with proceeds from the January 1998
Convertible Preferred Stock Offering. The $50,332,000 balance outstanding at
March 31, 1998, consists of draws for 1998 Acquisitions. Borrowings under the
Acquisition Credit Facility currently bear interest at an annual rate of LIBOR
plus 1.1% or prime rate.
In January 1998, the Company closed a $150 million loan with Wells Fargo Bank
(the "Interim Loan"). The Interim Loan had a term of three months with interest
at LIBOR plus 1.75%. The purpose of the Interim Loan was to fund acquisitions.
The Interim Loan was paid off in March 1998 with proceeds from the issuance of
$150 million of unsecured Senior Notes (discussed below).
In March 1998, the Operating Partnership, as to which the Company is general
partner, issued $150 million of 7 5/8% unsecured Senior Notes (the "Notes") in
an unregistered 144A offering. The Notes mature on March 15, 2005, unless
previously redeemed. Interest on the Notes is payable semiannually on March 15
and September 15, commencing September 15, 1998. The Operating Partnership used
the net proceeds of the offering to repay the outstanding balance under the
Interim Loan.
Page 28 of 38
<PAGE>
At March 31, 1998, the Company's total indebtedness included fixed-rate debt of
$389,274,000 (including $85,437,000 subject to cross-collateralization) and
floating-rate indebtedness of $53,141,000. Approximately 34% of the Company's
total assets, comprising 51 properties, is encumbered by debt at March 31, 1998.
In January 1997 and May 1997, the Company filed shelf registration statements
with the Securities and Exchange Commission (the "SEC") to register $250 million
and $350 million, respectively, of equity securities of the Company. In November
1997, the Company filed a shelf registration statement with the SEC to register
an additional $1 billion of equity securities of the Company (the "November 1997
Shelf Registration Statement"). The November 1997 Shelf Registration Statement
was declared effective by the SEC on December 18, 1997. After the completion of
the March 1997, July 1997, October 1997 and January 1998 Offerings, the Company
has the capacity pursuant to the November 1997 Shelf Registration Statement to
issue up to approximately $801.2 million in equity securities.
In January 1998, the Company completed a public offering of 11,500,000 shares of
7 3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible
Preferred Stock Offering"). The 11,500,000 shares were sold at a per share price
of $25.00 for net proceeds of approximately $276 million, which were used to
repay the outstanding balance under the Company's Acquisition Credit Facility,
to fund certain subsequent property acquisitions and for general corporate
purposes. The shares are convertible at any time at the option of the holder
thereof into shares of Common Stock at an initial conversion price of $32.83 per
share of Common Stock (equivalent to a conversion rate of 0.7615 shares of
Common Stock for each share of Series A Convertible Preferred Stock), subject to
adjustment in certain circumstances.
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
Funds from Operations, as defined by NAREIT, represents income (loss) before
minority interests and extraordinary items, adjusted for real estate related
depreciation and amortization and gains (losses) from the disposal of
properties. The Company believes that FFO is an important and widely used
measure of the financial performance of equity REITs which provides a relevant
basis for comparison among other REITs. 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, developments and other
capital expenditures. FFO does not represent net income or cash flows from
operations as defined by GAAP, and should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indicator of the Company's
operating performance or as an alternative to cash flows from operating,
investing and financing activities (determined in accordance with GAAP) as a
measure of liquidity. FFO 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. Further,
FFO as disclosed by other REITs may not be comparable to the Company's
calculation of FFO. The Company calculates FFO in accordance with the White
Paper on FFO approved by the Board of Governors of NAREIT in March 1995.
Cash available for distribution ("CAD") represents net income (loss) before
minority interests and extraordinary items, adjusted for depreciation and
amortization including amortization of deferred financing costs and gains
(losses) from the disposal of properties, less lease commissions and recurring
capital expenditures, consisting of tenant improvements and normal expenditures
intended to extend the useful life of the property such as roof and parking lot
repairs. CAD should not be considered an alternative to net income (computed in
accordance with GAAP) as a measure of the Company's financial performance or as
an alternative 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.
Further, CAD as disclosed by other REITs may not be comparable to the Company's
calculation of CAD.
Page 29 of 38
<PAGE>
The following table sets forth the Company's calculation of FFO and CAD for the
three months ended March 31, 1998 (dollars in thousands):
March 31,
1998
-------------
Net income before minority interest $ 12,891
Preferred dividend requirement (3,910)
Net gain on sales of rental properties (1,446)
Depreciation and amortization 10,009
Adjustment to reflect FFO of Associated Companies (1) 210
-------------
FFO $ 17,754
=============
Amortization of deferred financing fees 418
Capital reserve (983)
Capital expenditures (1,227)
-------------
CAD $ 15,962
=============
Distributions per share (2) $ 0.42
=============
Diluted weighted average shares outstanding 34,372,364
=============
(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 March 31, 1998, were paid on
April 10, 1998.
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. 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, 1997, 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 30 of 38
<PAGE>
Year 2000 Compliance
The Company utilizes a number of computer software programs and operating
systems across its entire organization, including applications used in financial
business systems and various administrative functions. To the extent that the
Company's software applications contain source code that is unable to
appropriately interpret the upcoming calendar year "2000" and beyond, some level
of modification, or replacement of such applications will be necessary. The
Company has completed its identification of applications that are not yet "Year
2000" compliant and has commenced modification or replacement of such
applications, as necessary. Given information known at this time about the
Company's systems that are non-compliant, coupled with the Company's ongoing,
normal course-of-business efforts to upgrade or replace critical systems, as
necessary, management does not expect Year 2000 compliance costs to have any
material adverse impact on the Company's liquidity or ongoing results of
operations. No assurance can be given, however, that all of the Company's
systems will be Year 2000 compliant or that compliance costs or the impact of
the Company's failure to achieve substantial Year 2000 compliance will not have
a material adverse effect on the Company's future liquidity or results of
operations.
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 31 of 38
<PAGE>
GLENBOROUGH HOTEL GROUP
Background
Glenborough Hotel Group ("GHG") was organized in the state of Nevada on
September 23, 1991. As of March 31, 1998, GHG operates hotel properties owned by
the Company under five separate percentage leases and manages two hotel
properties owned by affiliates. 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.
GHG also owns approximately 80% of the common stock of Resort Group, Inc.
("RGI"). GHG consolidates its financial statements with RGI and recognizes its
joint venture partner's interest as minority interest. RGI manages homeowners
associations and rental pools for two beachfront resort condominium hotel
properties and owns six rental units at one of the properties.
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, 1998:
1st Quarter
-------------
Preferred dividends to the Company $ 7,500
Additional dividends to the Company 70,875
-------------
Total dividends to the Company 78,375
Dividends to others 23,625
-------------
Total dividends $ 102,000
=============
Results of Operations
Hotel revenue, which represents the revenue earned on the five hotels leased
from the Company, increased $886,000, or 30%, to $3,804,000 for the three months
ended March 31, 1998, from $2,918,000 for the three months ended March 31, 1997.
This increase is primarily due to the commencement of the Scottsdale Hotel lease
in February 1997.
Fee revenue and salary reimbursements of $390,000 represents the fees earned for
managing two hotels and two resort condominium hotels. The decrease from the
three months ended March 31, 1997, to the three months ended March 31, 1998, is
primarily due to a change in ownership of one of the managed hotels, which
resulted in GHG no longer managing this hotel as of April 1997.
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 of these leased hotel expenses increased from the
three months ended March 31, 1997, to the three months ended March 31, 1998, due
to the commencement of the Scottsdale Hotel lease 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 $158,000 from the three months ended March 31, 1997, to the
three months ended March 31, 1998. This decrease is primarily due to a change in
ownership 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 remained relatively stable with an increase of only $4,000, or 1%,
to $274,000 for the three months ended March 31, 1998, from $270,000 for the
three months ended March 31, 1997.
Page 32 of 38
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Blumberg. On February 17, 1998, the California state court of appeals affirmed
the Company's settlement of a class action complaint filed on February 21, 1995
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, one of the Partnerships included in the Consolidation, 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. All parties filed
their briefs and a hearing was held on February 3, 1998. On February 17, 1998,
the court of appeals rendered its decision rejecting the objectors' contentions
and upholding the settlement. The objectors have petitioned the California
Supreme Court for review but no ruling has been issued.
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
Page 33 of 38
<PAGE>
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
certain of the Partnerships included in the Consolidation known as Outlook
Properties Fund IV, 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. Plaintiffs in the BEJ Action
voluntarily stayed the action pending resolution of the Blumberg Action; such
plaintiffs can revive their lawsuit.
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. The Company believes that it is very
unlikely that this litigation would result in a liability that would exceed the
accrued liability by a material amount. 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.
Certain other claims and lawsuits have arisen against the Company in its normal
course of business. The Company believes that such other claims and lawsuits
will not have a material adverse effect on the Company's financial position,
cash flow or results of operations.
Item 2. Changes in Securities
(c) Sales of Unregistered Securities
In February 1998, the Company acquired the Capitol Center property in Des
Moines, Iowa, for a total acquisition cost, including capitalized costs, of
approximately $12.3 million. In connection with this acquisition, Glenborough
Properties, L.P., a California limited partnership (the "Operating Partnership,"
as to which the Company is general partner), issued to Hubbell Realty
Corporation, the seller of the Capitol Center Property, 3,874 units ("Units") of
partnership interest in Glenborough Properties, L.P. (with an agreed upon per
Unit value of $30.00, or an aggregate value of $116,000) as partial payment for
the Capitol Center 9roperty. 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 April 1998, the Company acquired the Eaton & Lauth portfolio of properties
for a total acquisition cost, including capitalized costs, of approximately $70
million. In connection with this acquisition, the Company and the Operating
Partnership issued approximately $15.9 million in the form of 506,788
partnership units in the Operating Partnership and 126,764 unregistered shares
of Common Stock of the Company (based on an agreed per unit and per share value
of $25.00) as partial payment for the Eaton & Lauth portfolio. 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 and shares were issued by
the Operating Partnership and the Company in reliance on the exemption provided
by Section 4(2) of the Securities Act of 1933, as amended.
Page 34 of 38
<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 January 6, 1998, the Company filed a report on Form 8-K
with respect to the Acquisition Credit Facility and the
acquisition of the Opus Portfolio.
On January 9, 1998, the Company filed a report on Form 8-K/A
with respect to the acquisition of the Copley Properties.
On January 12, 1998, the Company filed a report on Form 8-K/A
with respect to the acquisition of the Thousand Oaks Property.
On January 12, 1998, the Company filed a report on Form 8-K/A
with respect to the Acquisition Credit Facility and the
acquisition of the Opus Portfolio.
On January 12, 1998, the Company filed a report on Form 8-K
with respect to the acquisitions of the Marion Bass Portfolio,
the Windsor Portfolio, Bryant Lake and the CRI Properties.
On January 12, 1998, the Company filed a report on Form 8-K
with respect to the January 1998 Offering.
On January 22, 1998, the Company filed a report on Form 8-K
with respect to the Press Release for the year ended December
31, 1997 earnings.
On January 27, 1998, the Company filed a report on Form 8-K
with respect to the January 1998 Offering.
On February 20, 1998, 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 December 31, 1997.
On March 3, 1998, the Company filed a report on Form 8-K with
respect to the sale of GRC Airport Associates' sole property.
On March 12, 1998, the Company filed a report on Form 8-K with
respect to the acquisition of 400 El Camino Real.
On March 24, 1998, the Company filed a report on Form 8-K/A
with respect to the sale of GRC Airport Associates' sole
property.
On May 7, 1998, the Company filed a report on Form 8-K with
respect to the acquisition of the Eaton & Lauth Portfolio and
the BGK Portfolio.
On May 15, 1998, the Company filed a report on Form 8-K/A with
respect to the acquisition of the Eaton & Lauth Portfolio and
the BGK Portfolio.
On May 15, 1998, the Company filed a report on Form 8-K/A,
Amendment No. 2, with respect to the acquisition of the Eaton
& Lauth Portfolio and the BGK Portfolio.
Page 35 of 38
<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: September 9, 1998 /s/ Andrew Batinovich
Andrew Batinovich
Director, President
and Chief Operating Officer
(Principal Operating Officer)
Date: September 9, 1998 /s/ Stephen Saul
Stephen Saul
Chief Financial Officer
(Principal Financial Officer)
Date: September 9, 1998 /s/ Terri Garnick
Terri Garnick
Senior Vice President,
Chief Accounting Officer,
Treasurer
(Principal Accounting Officer)
Page 36 of 38
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Title
3.1** Articles of Amendment of Articles of Incorporation of the Company.
10.1*,** Employment Agreement between the Company and Robert Batinovich.
10.2*,** Employment Agreement between the Company and Andrew Batinovich.
11.1 Statement re: Computation of Per Share Earnings is shown in
Note 8 of the Consolidated Financial Statements of the Company in
Item 14.
12.1 Computation of Ratios.
27.1 Financial Data Schedule.
* Indicates management contract or compensatory plan or arrangement.
** Previously filed as part of the Company's Form 10-Q for the
quarter ended March 31, 1998.
Page 37 of 38
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12.1
GLENBOROUGH REALTY TRUST INCORPORATED
Computation of Ratios
For the five years ended December 31, 1997
and the three months ended March 31, 1998
GRT Predecessor Entities, Combined The Company
---------------------------------------- -----------------------------------------
Three
Months
Ended
Twelve Months Ended December 31, March 31,
-------------------------------------------------------------------- ------------
1993 1994 1995 1996 1997 1998
----------- ------------ ------------ ------------ ----------- ------------
EARNINGS, AS DEFINED
<S> <C> <C> <C> <C> <C> <C>
Net Income (Loss) before Preferred Dividends 4,418 1,580 524 (1,609) 19,368 12,213
Extraordinary items (2,274) -- -- 186 843 --
Federal & State income taxes 24 176 357 -- -- --
Minority Interest 5 43 -- 292 1,119 678
Fixed Charges 1,301 1,140 2,129 3,913 9,668 9,145
----------- ------------ ------------ ------------ ----------- ------------
3,474 2,939 3,010 2,782 30,998 22,036
----------- ------------ ------------ ------------ ----------- ------------
FIXED CHARGES AND PREFERRED
DIVIDENDS, AS DEFINED
Interest Expense 1,301 1,140 2,129 3,913 9,668 9,145
Preferred Dividends -- -- -- -- -- 3,910
----------- ------------ ------------ ------------ ----------- ------------
1,301 1,140 2,129 3,913 9,668 13,055
RATIO OF EARNINGS TO FIXED CHARGES 2.67 2.58 1.41 0.71 (1) 3.21 2.41
----------- ------------ ------------ ------------ ----------- ------------
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED DIVIDENDS 2.67 2.58 1.41 0.71 (1) 3.21 1.69
----------- ------------ ------------ ------------ ----------- ------------
(1) For the twelve months ended December 31, 1996, earnings were insufficient to cover fixed charges and fixed charges plus
preferred dividends by $1,131.
</TABLE>
Page 38 of 38
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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0
11
<COMMON> 31
<OTHER-SE> 848,276
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