SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
7.75% Series A Convertible Preferred Stock, New York Stock Exchange
$.001 par value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of November 13, 1998, 31,737,286 shares of Common Stock ($.001 par value) and
11,500,000 shares of 7.75% Series A Convertible Preferred Stock ($.001 par
value) were outstanding.
1
<PAGE>
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 September 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the nine months
ended September 30, 1998 and 1997 4
Consolidated Statements of Operations for the three months
ended September 30, 1998 and 1997 5
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 1998 6
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 7-8
Notes to Consolidated Financial Statements 9-22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 23-31
PART II OTHER INFORMATION
Item 1. Legal Proceedings 32-33
Item 2. Changes in Securities 33-34
Item 4. Submission of Matters to a Vote of Security Holders 34-35
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 36
SIGNATURES 37
EXHIBIT INDEX 38
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited) (Audited)
-------------- -------------
ASSETS
Rental property, net of accumulated depreciation of
<S> <C> <C>
$73,878 and $41,213 in 1998 and 1997, respectively $ 1,754,260 $ 825,218
Investments in Associated Companies 11,438 10,948
Mortgage loans receivable 40,582 3,692
Cash and cash equivalents 7,381 5,070
Other assets 92,780 20,846
--------------- -------------
TOTAL ASSETS $ 1,906,441 $ 865,774
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage loans $ 492,394 $ 148,139
Unsecured senior notes 150,000 --
Unsecured loan 147,710 --
Unsecured bank line 145,140 80,160
Other liabilities 31,984 11,091
--------------- -------------
Total liabilities 967,228 239,390
--------------- -------------
Commitments and contingencies -- --
Minority interest 100,603 46,261
Stockholders' Equity:
Common stock, 31,737,286 and 31,547,256 shares issued
and outstanding at September 30, 1998 and
December 31, 1997, respectively 32 31
Preferred stock, 11,500,000 shares issued and outstanding
at September 30, 1998 11 --
Additional paid-in capital 864,660 593,702
Deferred compensation (204) (210)
Retained earnings (deficit) (25,889) (13,400)
--------------- -------------
Total stockholders' equity 838,610 580,123
--------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,906,441 $ 865,774
=============== =============
</TABLE>
See aacinoabtubg notes to consolidated financial statements
3
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended September 30, 1998
and 1997 (in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
REVENUE
<S> <C> <C>
Rental revenue $ 162,903 $ 35,899
Fees and reimbursements from affiliates 2,452 572
Interest and other income 2,007 1,167
Equity in earnings of Associated Companies 1,690 1,942
Net gain on sales of rental properties 1,901 555
Gain on collection of mortgage loan receivable -- 652
-------------- -------------
Total revenue 170,953 40,787
-------------- -------------
EXPENSES
Property operating expenses 53,035 11,282
General and administrative 8,197 2,031
Depreciation and amortization 35,252 8,867
Interest expense 35,916 6,416
-------------- -------------
Total expenses 132,400 28,596
-------------- -------------
Income from operations before minority interest 38,553 12,191
Minority interest (1,909) (689)
--------------- -------------
Net income 36,644 11,502
-------------- -------------
Preferred dividends (15,050) --
-------------- -------------
Net income available to Common Stockholders $ 21,594 $ 11,502
=============
==============
Basic Earnings Per Share Data:
Net income available to Common Stockholders $ 0.68 $ 0.81
============== =============
Basic weighted average shares outstanding 31,634,138 14,258,627
============== =============
Diluted Earnings Per Share Data:
Net income available to Common Stockholders $ 0.67 $ 0.79
============== =============
Diluted weighted average shares outstanding 35,114,838 15,505,886
============== =============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30, 1998
and 1997 (in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
REVENUE
<S> <C> <C>
Rental revenue $ 65,321 $ 16,208
Fees and reimbursements from affiliates 1,220 205
Interest and other income 1,404 554
Equity in earnings of Associated Companies 629 1,339
Reduction in gain on prior quarter sales of rental
properties (238) (15)
-------------- -------------
Total revenue 68,336 18,291
-------------- -------------
EXPENSES
Property operating expenses 22,446 5,237
General and administrative 3,372 657
Depreciation and amortization 14,309 4,823
Interest expense 17,064 2,616
-------------- -------------
Total expenses 57,191 13,333
-------------- -------------
Income from operations before minority interest 11,145 4,958
Minority interest (635) (60)
--------------- -------------
Net income $ 10,510 $ 4,898
-------------- -------------
Preferred dividends (5,570) --
-------------- -------------
Net income available to Common Stockholders $ 4,940 $ 4,898
============== =============
Basic Earnings Per Share Data:
Net income available to Common Stockholders $ 0.16 $ 0.25
============== =============
Basic weighted average shares outstanding 31,703,963 19,395,779
============== =============
Diluted Earnings Per Share Data:
Net income available to Common Stockholders $ 0.15 $ 0.24
============== =============
Diluted weighted average shares outstanding 36,261,228 21,132,947
============== =============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the nine months ended September 30, 1998
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
--------------------- ---------------------
Additional Deferred Retained
Par Par Value Paid-in Compen-sation Earnings
Shares Value Shares Capital (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 $13,639 -- -- 11,500 11 273,850 -- -- 273,861
Issuance of common stock related to
acquisitions 136 1 -- -- 3,389 -- -- 3,390
Exercise of stock options 17 -- -- -- 138 -- -- 138
Conversion of Operating Partnership
units into common stock
35 -- -- -- -- -- -- --
Amortization of deferred compensation
-- -- -- -- -- 68 -- 68
Issuance of common stock to director
2 -- -- -- 62 (62) -- --
Unrealized gain on marketable
securities -- -- -- -- -- -- 155 155
Adjustment to fair value of minority
interest -- -- -- -- (6,481) -- -- (6,481)
Distributions -- -- -- -- -- -- (49,288) (49,288)
Net income -- -- -- -- -- -- 36,644 36,644
--------------------- ------------------------------------------------ ----------------------
Balance at September 30, 1998 31,737 $ 32 11,500 $ 11 $ 864,660 $ (204) $ (25,889) $ 838,610
===================== ================================================ ======================
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1998 and 1997
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 36,644 $ 11,502
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 35,252 8,867
Amortization of loan fees, included in
interest expense 998 174
Minority interest in income from operations 1,909 689
Equity in earnings of Associated
Companies (1,690) (1,942)
Gain on collection of mortgage loan receivable
-- (652)
Net gain on sales of rental properties (1,901) (555)
Amortization of deferred compensation 68 142
Changes in certain assets and liabilities, net (4,603) (913)
--------------- ---------------
Net cash provided by operating activities 66,677 17,312
--------------- ---------------
Cash flows from investing activities:
Net proceeds from sales of rental properties 39,247 11,873
Additions to rental property (589,480) (393,534)
Additions to mortgage loans receivable (37,397) (2,420)
Principal receipts on mortgage loans receivable 507 9,355
Distributions from Associated Companies 1,200 1,725
Other investments (included in other assets) (47,943) --
--------------- ---------------
Net cash used for investing activities (633,866) (373,001)
--------------- ---------------
</TABLE>
continued
See accompanying notes to consolidated financial statements
7
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS -continued
For the nine months ended September 30, 1998 and 1997
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
Cash flows from financing activities:
<S> <C> <C>
Proceeds from borrowings $ 425,350 $ 369,540
Repayment of borrowings (227,281) (212,910)
Proceeds from issuance of Series A Redeemable Notes
150,000 --
Distributions to minority interest holders (3,280) (952)
Distributions (49,288) (13,770)
Exercise of stock options 138 --
Proceeds from issuance of preferred stock, net of
offering costs 273,861 215,196
--------------- --------------
Net cash provided by financing activities 569,500 357,104
--------------- --------------
Net increase in cash and cash equivalents 2,311 1,415
Cash and cash equivalents at beginning of period 5,070 1,355
--------------- --------------
Cash and cash equivalents at end of period $ 7,381 $ 2,770
=============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest (net of capitalized interest of
$724 in 1998) $ 30,691 $ 5,695
=============== ==============
Supplemental disclosure of Non-Cash Investing and Financing
Activities:
Acquisition of real estate through assumption of first
trust deed notes payable $ 358,876 $ 24,924
=============== ==============
Acquisition of real estate through issuance of shares
of common stock and Operating Partnership units
$ 52,621 $ 28,078
=============== ==============
Unrealized gain on marketable securities $ 155 $ --
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
8
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 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 September 30,
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)
448,172 shares were issued in connection with various acquisitions; (iv) 17,407
shares were issued in connection with the exercise of employee stock options;
(v) 35,057 shares were issued in connection with the exchange of Operating
Partnership units and (vi) 59 shares were retired, resulting in total shares of
Common Stock issued and outstanding at September 30, 1998, of 31,737,286.
Assuming the issuance of 4,233,739 shares of Common Stock issuable upon
redemption of 4,233,739 partnership units in the Operating Partnership, there
were 35,971,025 shares of Common Stock outstanding as of September 30, 1998.
In January 1998, the Company completed a public offering of 11,500,000 shares of
7.75% 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 September 30, 1998 totaled 11,500,000.
In July 1998, the Company's Board of Directors adopted a stockholder rights plan
which is intended to protect the Company's stockholders in the event of coercive
or unfair takeover tactics, or an unsolicited attempt to acquire control of the
Company in a transaction the Board of Directors believes is not in the best
interests of the stockholders. Under the plan, the Company declared a dividend
of Rights on its Common Stock. The rights issued under the plan will be
triggered, with certain exceptions, if and when any person or group acquires, or
commences a tender offer to acquire, 15% or more of the Company's shares.
To maintain the Company's qualification as a REIT, no more than 50% in value of
the outstanding shares of stock 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 an
87.2% limited partner interest at September 30, 1998, is Glenborough Properties,
L.P. (the "Operating Partnership"). As of September 30, 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 190 real estate
projects.
As of September 30, 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 "Managed Partnerships"). It also
provides partnership administration, asset management, property management
and development services under a long
9
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1998
term contract to a group of unaffiliated partnerships which include several
public partnerships sponsored by Rancon Financial Corporation,an
unaffiliated corporation which has significant real estate assets in the
Inland Empire region of Southern California (the "Rancon Partnerships").
The services to the Rancon Partnerships were previously provided by
Glenborough Inland Realty Corporation ("GIRC"), a California corporation,
which merged with GC effective June 30, 1997. GC also provides property
management services for a limited portfolio of property owned by other
unaffiliated third parties. In the merger between GC and GIRC, the Company
received preferred stock of GC in exchange for its preferred stock of GIRC,
on a one-for-one basis. Following the merger, the Company holds the same
preferences with respect to dividends and liquidation distributions paid by
GC as it previously held with respect to GC and GIRC combined.
Glenborough Hotel Group ("GHG"), through June 1998, leased the six Country
Suites by Carlson hotels owned by the Company and operated them for its own
account. In June 1998, as discussed further below, two of the hotels were
sold and the other four hotels were leased to other operators. Three of the
four remaining hotels are in contract to be sold to those operators in
December 1998. GHG also operated one other Country Suites by Carlson hotel
through June 30, 1998, and two resort condominium hotels through April 30,
1998, 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 September 30, 1998, and December 31, 1997, and the
consolidated results of operations and cash flows of the Company for the nine
months ended September 30, 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 September 30, 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
10
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1998
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.
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.
Marketable Securities
The Company records its marketable securities at fair value. Unrealized gains
and losses on securities are reported as a separate component of stockholders'
equity and realized gains and losses are included in net income. As of September
30, 1998, marketable securities with a fair value of approximately $4,133,000
were included in other assets on the accompanying consolidated balance sheet.
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.
11
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1998
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.
Development Alliances
The Company, through mezzanine loans and equity contributions, invests in
various development alliances with projects currently under development. The
interest on advances and other direct project costs incurred by the Company are
capitalized to the investment since such funds are used for development
purposes.
Minority Interest
Minority interest represents the 11.8% 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 nine months ended September 30, 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,
refinancing, leasing and construction supervision of real estate for an
unconsolidated affiliate.
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 stockholders. 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 prior periods presented have been restated to conform
to the new standard. For additional required disclosures, see Note 9.
12
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1998
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 August 1998, the Company acquired a 85,765 square foot office building
located in northern New Jersey ("Executive Place") from a German partnership.
The total acquisition cost, including capitalized costs, was approximately $12.4
million which was paid entirely in cash. The cash portion was financed through
advances under the Acquisition Credit Facility (as defined in Note 7).
In August 1998, the Company sold one of three buildings (totaling 85,548 square
feet) from a 187,843 square foot office/flex property for $1,700,000. No gain or
loss was recognized upon the sale and the Company received net proceeds of
approximately $1,687,000. The remaining buildings totaling 102,295 square feet
are still included in the Company's office/flex portfolio.
In July 1998, the Company acquired a portfolio of ten properties (the "Pauls
Portfolio") from The Pauls Corporation, a premier national developer
headquartered in Denver, Colorado. The Pauls Portfolio properties aggregate
1,128,785 square feet located in Aurora, Colorado, and consist of one office,
four office/flex and five industrial buildings. The total acquisition cost,
including capitalized costs, was approximately $54.9 million, comprising: (i)
approximately $41.3 million of net assumed debt; (ii) approximately $11.3
million of equity in the form of 423,843 partnership units in the Operating
Partnership (based on an agreed per unit value of $26.556); and (iii) the
balance in cash. The cash portion was financed through advances under the Bridge
Loan from a commercial bank as discussed in Note 7. In addition to the
acquisition of the Pauls Portfolio, the Company has entered into a loan
agreement and a development alliance with The Pauls Corporation. See Notes 5 and
6 for further discussion.
In June 1998, the Company acquired a portfolio of multi-family properties (the
"Galesi Portfolio") from the Galesi Group, a privately owned company. The Galesi
Portfolio includes 21 properties with 6,536 units located primarily in Houston,
Austin, Dallas and San Antonio. Four properties are located outside of Texas:
two in Atlanta, one in Nashville and one in Colorado Springs. The total
acquisition cost, including capitalized costs, was approximately $275.8 million,
comprising: (i) approximately $169.4 million of net assumed debt (including an
unamortized premium totaling approximately $3.1 million, which results in an
effective interest rate on these instruments of 6.75%); (ii) approximately $21.2
million of equity in the form of 806,393 partnership units in the Operating
Partnership (based on an agreed per unit value of $26.2315); and (iii) the
balance in cash. The cash portion was financed through advances under a $150
million Bridge Loan from a commercial bank as discussed in Note 7.
In June 1998, the Company acquired a 133,090 square foot office property and a
229,352 square foot industrial property, both located in northern New Jersey
(the "Donau/Gruppe Portfolio") from a German partnership. The total acquisition
cost, including capitalized costs, was approximately $28.5 million, which was
comprised of: (i) approximately $10.5 million of assumed debt; and (ii) the
balance in cash. The cash portion was financed through advances under a $150
million Bridge Loan from a commercial bank.
In June 1998, the Company acquired a 263,610 square foot office/flex property
located in Indianapolis, Indiana (the "Covance Property") from Eaton & Lauth.
The total acquisition cost, including capitalized costs, was approximately $16.5
million, comprising: (i) approximately $4 million of equity in the form of
161,492 partnership units in the Operating Partnership (based on an agreed per
unit value of $25.00); (ii) approximately $220,000 of equity in the form of
8,802 shares of Common Stock of the Company (based on an agreed per share value
of $25.00); and (iii) the balance in cash. The cash portion was financed through
advances under the Acquisition Credit Facility.
In June 1998, the Company sold two hotel properties for $6,100,000. After
accounting for closing costs, the sales generated a net gain of approximately
$73,000 and net proceeds of approximately $2,327,000. The Company received
consideration in cash for one of the hotels with a selling price of $1,900,000.
In conjunction with the sale
13
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1998
of the other hotel with a selling price of$4,200,000, the Company agreed to loan
$3,600,000 to the buyer for a term of six months at a fixed interest rate of 9%
(see Note 5). As the buyer contributed cash (approximately $600,000) to the
purchase of this hotel, the historical operations of the hotel are sufficient to
service the loan and the Company has no other continuing obligations or
involvement with this property, the Company recognized the sale under the full
accrual method of accounting. The net book value of the two hotel properties
aggregated to $5,642,000 on the date of sale. Net income earned by the Company
from the two hotels totaled $426,000 in the nine months ended September 30, 1997
and $275,000 during the period from January 1, 1998 to the date of sale. No debt
was secured by these properties prior to the sale.
In May 1998, the Company acquired a 125,507 square foot office building and a
5.45 acre parcel of land located in Omaha, Nebraska ("One and Three Pacific")
from Shorenstein Company, L.P. The total acquisition cost, including capitalized
costs, was approximately $20.1 million which was paid entirely in cash,
including cash from borrowings under the Acquisition Credit Facility and
proceeds from the sales of two office/flex properties as discussed below.
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 $68.7
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 for $3,600,000. The sale
generated a net gain of approximately $449,000 and net proceeds after closing
costs of approximately $1,571,000. The proceeds from the sale were deposited
into a deferred exchange account and were applied to the acquisition of One and
Three Pacific on a tax-deferred basis pursuant to Section 1031 of the Internal
Revenue Code.
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.
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 45,000
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 for $1,368,000. The sale
generated a net gain of approximately $106,000 and net proceeds of approximately
$696,000. The proceeds from the sale were deposited into a deferred exchange
account and were applied to the acquisition of One and Three Pacific on a
tax-deferred basis pursuant to Section 1031 of the Internal Revenue Code.
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.
14
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1998
In February 1998, the Company sold an industrial property for $930,000. The sale
generated a net gain of approximately $246,000 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.
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 (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 for a price of $22 million. This sale
generated a net gain of approximately $83,000 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.
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 a commercial bank (the "Interim Loan" as defined in Note 7);
and (iii) the balance in cash, including cash from borrowings under the
Acquisition Credit Facility. 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 $4.95 million.
This sale generated a net gain of approximately $944,000 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 on a tax-deferred basis pursuant to Section 1031 of the Internal Revenue
Code.
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
$3.5 million of the project budget for the renovation and expansion has been
funded. The Company anticipates that the sale of Shannon Crossing will not be
completed until the first quarter of 1999.
The Company has entered into three short-term lease agreements on the hotel
properties located in Arlington, Texas, Tucson, Arizona and Ontario, California,
with three prospective purchasers of these properties. These prospective
purchasers have entered into purchase agreements for these properties, with
closing dates of December 30, 1998. These leases all terminate on that closing
date for the sale of the properties. The net book value of the three hotel
properties aggregates to $12,772,000 at September 30, 1998. The properties
secure, in part, a loan to the Company with an outstanding principal balance of
$19,203,000 at September 30, 1998. Net income earned by the Company from the
three hotels totaled $665,000 and $1,102,000 in the nine months ended September
30, 1998 and 1997, respectively.
15
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1998
The Company has entered into a definitive agreement to acquire all of the real
estate assets of Prudential-Bache/Equitec Real Estate Partnership, a California
limited partnership in which the managing general partner is Prudential-Bache
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 (the "Pru-Bache Portfolio"). The total acquisition cost,
including capitalized costs, is expected to be approximately $49.9 million,
which is to be paid entirely in cash. The Pru-Bache Portfolio comprises four
office buildings aggregating 405,825 square feet and one office/flex property
containing 121,645 square feet. This acquisition is subject to certain
contingencies, including the resolution of litigation relating to the proposed
acquisition, to which neither the Company nor the Operating Partnership is a
party, and customary closing conditions. Although the Company is still pursuing
this acquisition, because of the litigation contingency, the Company does not
currently believe the acquisition is probable.
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 September 30, 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 (1,005) (195) (1,200)
Equity in earnings (loss) 1,889 (199) 1,690
--------- ---------- ---------
Investment at September 30, 1998 $ 9,403 $ 2,035 $ 11,438
========= ========= =========
With the termination of all leasing contracts by June 30, 1998, the operations
of GHG have been substantially reduced and lease income paid by GHG to GLB will
be zero in the future.
Note 5. MORTGAGE LOANS RECEIVABLE
The Company's mortgage loans receivable consist of the following as of
September 30, 1998, and December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
Note secured by an industrial property in Los Angeles, CA, with a fixed
interestrate of 9% and a maturity date of June 2001. This note was paid off
<S> <C> <C> <C>
in June 1998. $ -- $ 507
Note secured by an office property in Phoenix, AZ, with a fixed interest rate of
11% and a maturity date of November 1999. As of September 30, 1998, the
Partnership is committed to additional advances totaling $454 for tenant
improvements and other leasing costs. 3,396 3,185
</TABLE>
16
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1998
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
Note secured by a hotel property in Dallas, TX, with a fixed interest rate of
<C> <C> <C>
9%, monthly interest-only payments and a maturity date of December 1998 3,600 --
Note secured by Gateway Park land located in Aurora, CO, with a
stated fixed interest rate of 13%, quarterly interest-only payments and a
maturity date of July 2005 (see below for further discussion) 33,586 --
--------------- ---------------
Total $ 40,582 $ 3,692
=============== ===============
</TABLE>
In July 1998, concurrent with the acquisition of the Pauls Portfolio (as defined
in Note 3), the Company entered into a development alliance with The Pauls
Corporation (see Note 6). In addition to this development alliance, the Company
has loaned approximately $34 million to continue the build-out of Gateway Park.
These advances were made in the form of a secured loan and accordingly, are
recorded as a mortgage loan receivable. In this arrangement the Company has
certain rights under certain conditions and subject to certain contingencies to
purchase the properties upon completion of development and, thus, through this
arrangement, the Company could acquire up to 2.9 million square feet of office,
office/flex, industrial and multi-family properties over the next five years.
Note 6. DEVELOPMENT ALLIANCES AND OTHER ASSETS
The Company has formed 4 development alliances to which it has committed a total
of approximately $42 million for the development of approximately 1.4 million
square feet of office, office/flex and distribution properties and 2,050
multi-family units in North Carolina, Colorado, Texas, New Jersey, Kansas and
Michigan. As of September 30, 1998, the Company has advanced approximately $29
million under these commitments. Under these development alliances, the Company
has certain rights to purchase the properties upon completion of development
and, thus, through these alliances, the Company could acquire an additional 1.4
million square feet of commercial properties and 2,050 multi-family units over
the next five years.
As of September 30, 1998, the Company had investments of approximately
$20,100,000 in securities of a private REIT. As of September 30, 1998, the
Company's ownership interest was 24.47%. The Company accounts for this
investment using the equity method. Also, as of September 30, 1998 the Company
had investments in marketable securities with a fair value of approximately
$4,133,000.
Note 7. SECURED AND UNSECURED LIABILITIES
The Company had the following mortgage loans, bank lines, unsecured notes and
notes payable outstanding as of September 30, 1998, and December 31, 1997
(dollars in thousands):
<TABLE>
<CAPTION>
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% (6.84% and 7.07% at September 30, 1998 and December 31, 1997,
respectively), monthly interest only payments and a maturity date of December
<C> <C> <C>
22, 2000, with one option to extend for 10 years $ 145,140 $ 80,160
Unsecured loan with a bank ("$150 Million Bridge Loan") with a variable interest
rate of LIBOR plus 1.3% (6.93% at September 30, 1998), monthly interest only
payments and a maturity date of December 31, 1998. See below for further
discussion. 147,710 --
17
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1998
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 $110,433
and $111,372 at September 30, 1998 and December 31, 1997, respectively. $ 59,128 $ 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 $38,549 and $37,711 at
September 30, 1998 and December 31, 1997, respectively. 19,203 19,444
Secured loans with various lenders, bearing interest at fixed rates between
6.95% and 9.25% (approximately $168,962 of these loans include an unamortized
premium of approximately $2,764 which reduces the effective interest rate on
those instruments to 6.75%), with monthly principal and interest payments
ranging between $8 and $371 and maturing at various dates through October 1,
2010. These loans are secured by properties with an aggregate net carrying value
of $449,810 and $66,353 at September 30, 1998 and December 31, 1997,
respectively. 263,613 30,519
Secured loans with various banks bearing interest at variable rates
(ranging between 6.75% and 8.50% at September 30, 1998), monthly principal and
interest payments ranging between $4 and $773 and maturing at various dates
through May 1, 2017. These loans are secured by properties with an aggregate net
carrying value of $189,185 and $17,246 at September 30, 1998 and December 31,
1997, respectively. 120,076 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 multi-family properties with an aggregate net carrying value of
$41,673 and $41,862 at September 30, 1998 and December 31, 1997, respectively.
30,374 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 $ 935,244 $ 228,299
========= ========
</TABLE>
In January 1998, the Company closed a $150 million loan agreement with a
commercial 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.
18
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1998
In March 1998, the Operating Partnership issued $150 million of unsecured 7 5/8%
Series A Redeemable 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 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. However, the Notes
will be effectively 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 September
30, 1998, such secured arrangements and mortgages aggregated approximately
$492.4 million.
In May 1998, the Company filed a registration statement with the Securities and
Exchange Commission (the "SEC") to exchange all outstanding Notes (the "Old
Notes") for Notes which have been registered under the Securities Act of 1933
(the "New Notes"). The form and term of the New Notes are substantially
identical to the Old Notes in all material respects, except that the New Notes
will be registered under the Securities Act, and therefore will not be subject
to certain transfer restrictions, registration rights and related special
interest provisions applicable to the Old Notes.
In June 1998, the Company obtained a $150 million unsecured loan from a
commercial bank (the "Bridge Loan") which bears interest at a variable rate of
LIBOR plus 1.3%, and has a maturity date of December 31, 1998. As of the date of
this filing, approximately $147.7 million has been drawn under the Bridge Loan
to fund acquisitions, including the Galesi Portfolio, the Donau/Gruppe Portfolio
and the Pauls Portfolio (as discussed in Note 3), and to fund development
advances. The Company paid off the loan on October 30, 1998, with proceeds from
the new $247 million loan discussed in Note 13.
Some of the Company's properties are held in limited partnerships and limited
liability companies in order to provide bankruptcy remote borrowers for certain
lenders. Such limited partnerships and limited liability companies are included
in the consolidated financial statements of the Company in accordance with
Generally Accepted Accounting Principles ("GAAP").
The required principal payments on the Company's debt for the next five years
and thereafter, as of September 30, 1998, are as follows (in thousands):
Year Ending
December 31,
------------
1998 $ 152,521
1999 124,531
2000 208,375
2001 13,677
2002 12,402
Thereafter 423,738
---------
Total $ 935,244
=========
Note 8. RELATED PARTY TRANSACTIONS
Fee and reimbursement income earned by the Company from related parties totaled
$2,452,000 and $572,000 for the nine months ended September 30, 1998 and 1997,
respectively, and consisted of property management fees, asset management fees
and other fee income. In addition, for the nine months ended September 30, 1998,
the Company paid GC property management fees and salary reimbursements totaling
$940,000 for management of a portfolio of residential properties owned by the
Company.
19
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1998
Note 9. 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 prior periods presented have been restated
to conform to the new standard as follows (in thousands, except for weighted
average shares and per share amounts):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------- -------------- -------------- --------------
Net income available to common
<S> <C> <C> <C> <C>
stockholders - Basic $ 4,940 $ 4,898 $ 21,594 $ 11,502
Minority interest 635 60 1,909 689
------------- -------------- -------------- --------------
Net income available to common
stockholders - Diluted $ 5,575 $ 4,958 $ 23,503 $ 12,191
------------- -------------- -------------- --------------
Weighted average shares:
Basic 31,703,963 19,395,779 31,634,138 14,258,627
Stock options 325,661 341,374 346,666 254,360
Convertible Operating Partnership Units 4,231,604 1,395,794 3,134,034 992,899
------------- -------------- -------------- -------------
Diluted 36,261,228 21,132,947 35,114,838 15,505,886
------------- -------------- -------------- -------------
Basic earnings per share $ 0.16 $ 0.25 $ 0.68 $ 0.81
Diluted earnings per share $ 0.15 $ 0.24 $ 0.67 $ 0.79
</TABLE>
Note 10. 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 September 30, 1998, 37,000 shares
20
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1998
of bonus grants have been issued under the Plan. The fair value of the shares
granted have been recorded as deferred compensation in the accompanying
financial statements and will be charged to earnings ratably over the respective
vesting periods that range from 2 to 5 years. As of September 30, 1998,
2,623,243 options to purchase shares of Common Stock were outstanding. 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 11. DISTRIBUTIONS
Common Stock Preferred Stock
---------------------- --------------------
Distributions per share:
First Quarter $ 0.42 $ 0.340 (1)
Second Quarter 0.42 0.485
Third Quarter 0.42 0.485
====================== =====================
Year-to-Date Total $ 1.26 $ 1.310
====================== =====================
(1) Distribution was prorated for the number of days the stock was outstanding
during the first quarter of 1998.
Note 12. PUBLIC STOCK OFFERING
In January 1998, the Company completed a public offering of 11,500,000 shares of
7.75% 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 7.75% 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 7). The remaining proceeds were used to fund the
acquisitions discussed in Note 3 and for general corporate purposes.
Approximately $927,000 in other costs have been incurred in connection with the
January 1998 Convertible Preferred Stock Offering.
Note 13. SUBSEQUENT EVENTS
In October 1998, the Company obtained a $248.8 million loan from Goldman Sachs
Mortgage Corporation which has a term of ten years, bears interest at a fixed
rate of 6.125% and is secured by 36 properties. The proceeds were used to retire
the Company's $150 million Bridge Loan maturing December 31, 1998, to pay off
four mortgage loans and to pay down the Acquisition Credit Facility.
In November 1998, the Company sold an industrial property for $4.7 million.
The sale generated a net gain of approximately $2.3 million and net proceeds of
approximately $4.67 million.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GLENBOROUGH REALTY TRUST INCORPORATED
Background
Glenborough Realty Trust Incorporated (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT") engaged primarily in the
ownership, operation, management, leasing and acquisition of various types of
income-producing properties. As of September 30, 1998, the Company owned and
operated 190 income-producing properties (the "Properties," and each a
"Property"). The Properties are comprised of 55 office Properties, 49
office/flex Properties, 32 industrial Properties, 13 retail Properties, 37
multi-family Properties and 4 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 87.2% 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 69 properties in 1998. The total acquired
Properties consist of an aggregate of approximately 15.7 million
rentable square feet, 9,353 multi-family units and 227 hotel suites and
had aggregate acquisition costs, including capitalized costs, of
approximately $1.8 billion.
* From January 1, 1996 to the date of this filing, sold four industrial
properties, 16 retail properties, two office/flex properties, one
multi-family property and two hotel properties 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 a commercial bank which replaced its $50 million
secured line of credit and closed a $150 million unsecured loan
agreement (the "Interim Loan") with a commercial 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 7.75% 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 the Company's unsecured 7 5/8% Series A
Redeemable 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.
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<PAGE>
* Closed a $150 million unsecured loan agreement (the "Bridge Loan") with
a commercial bank.
* Entered into 4 development alliances to which the Company has made
advances to date of approximately $29 million and a loan of $34 million
* Paid off the Bridge Loan and four mortgage loans, and paid down the
balance of the Acquisition Credit Facility with proceeds from a $248.8
million secured loan from Goldman Sachs Mortgage Corporation.
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 nine months ended September 30, 1998 to the nine months ended
September 30, 1997.
Rental Revenue. Rental revenue increased $127,004,000, or 354%, to $162,903,000
for the nine months ended September 30, 1998, from $35,899,000 for the nine
months ended September 30, 1997. The increase included growth in revenue from
the office, industrial, office/flex, retail and multi-family Properties of
$73,438,000, $7,200,000, $22,830,000, $3,955,000 and $20,675,000, respectively.
Rental revenue for the nine months ended September 30, 1998, included
$13,063,000 of rental revenue generated from the acquisition of 20 properties in
the third and fourth quarters of 1996 (the "1996 Acquisitions"), $72,261,000 of
rental revenue generated from the acquisition of 90 properties in 1997 (the
"1997 Acquisitions") and $69,882,000 of rental revenue generated from the
acquisition of 69 properties during the nine months ended September 30, 1998
(the "1998 Acquisitions"). These increases were partially offset by a $1,083,000
decrease in revenue from the hotel Properties due to the 1998 sales of two
hotels.
Fees and Reimbursements. Fees and reimbursements revenue consists primarily of
property management fees, asset management fees and lease commissions paid to
the Company under property and asset management agreements. This revenue
increased $1,880,000, or 329%, to $2,452,000 for the nine months ended September
30, 1998, from $572,000 for the nine months ended September 30, 1997. The change
consisted primarily of increased lease commissions from the managed portfolio
and a one-time asset management fee from the sale of properties owned by the
Managed Partnerships.
Interest and Other Income. Interest and other income increased $840,000, or 72%,
to $2,007,000 for the nine months ended September 30, 1998, from $1,167,000 for
the nine months ended September 30, 1997. The increase primarily consisted of
interest income on a mortgage loan receivable secured by land located in Aurora,
Colorado which originated on June 30, 1998.
Equity in Earnings of Associated Companies. Equity in earnings from Associated
Companies decreased $252,000, or 13%, to $1,690,000 for the nine months ended
September 30, 1998, from $1,942,000 for the nine months ended September 30,
1997. The decrease is primarily due to a decrease in earnings from GHG resulting
from the June 30, 1998 cancellation of GHG's hotel leases with the Company. The
Company cancelled the leases with GHG when it sold two of its hotels and leased
the other four hotels to another operator. This decrease is partially offset by
transaction fees earned by GC related to the disposition of several of the
managed properties.
Net Gain on Sales of Rental Properties. The net gain on sales of rental
properties of $1,901,000 during the nine months ended September 30, 1998,
resulted from the sales of one multi-family property, two industrial properties,
two office/flex properties and two hotel properties. The net gain on sales of
rental properties of $555,000 during the nine months ended September 30, 1997,
resulted from the sales of 15 retail properties from the Company's portfolio.
Gain on Collection of Mortgage Loan Receivable. The gain on collection of
mortgage loan receivable of $652,000 during the nine months ended September 30,
1997 resulted from the collection of a mortgage loan receivable which
23
<PAGE>
had a net carrying value of $6,700,000. The payoff amount totaled $6,863,000,
plus a $500,000 note receivable, which, net of legal costs, resulted in a gain
of $652,000.
Property Operating Expenses. Property operating expenses increased $41,753,000,
or 370%, to $53,035,000 for the nine months ended September 30, 1998, from
$11,282,000 for the nine months ended September 30, 1997. Of this increase,
$42,528,000 represents increases in 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 $6,166,000, or 304%, to $8,197,000 for the nine months ended September
30, 1998, from $2,031,000 for the nine months ended September 30, 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
$26,385,000, or 298%, to $35,252,000 for the nine months ended September 30,
1998, from $8,867,000 for the nine months ended September 30, 1997. The increase
is primarily due to depreciation and amortization associated with the 1997
Acquisitions and 1998 Acquisitions.
Interest Expense. Interest expense increased $29,500,000, or 460%, to
$35,916,000 for the nine months ended September 30, 1998, from $6,416,000 for
the nine months ended September 30, 1997. Substantially all of the increase was
the result of higher average borrowings during the nine months ended September
30, 1998, as compared to the nine months ended September 30, 1997, due to new
debt and the assumption of debt related to the 1997 Acquisitions and 1998
Acquisitions.
Net Income and Earnings Per Share (EPS). Net income increased $25,142,000, or
219%, to $36,644,000 for the nine months ended September 30, 1998, from
$11,502,000 for the nine months ended September 30, 1997. However, Basic EPS
decreased $0.13 per share and Diluted EPS decreased $0.12 per share for the nine
months ended September 30, 1998, from the nine months ended September 30, 1997.
The decreases in Basic and Diluted EPS are due to a decrease in Net Income
Available to Common Stockholders resulting from the dividends payable to
preferred stockholders in 1998. There were no preferred stock dividends paid in
1997 as there was no preferred stock outstanding until January 1998.
Comparison of the three months ended September 30, 1998 to the three months
ended September 30, 1997.
Rental Revenue. Rental revenue increased $49,113,000, or 303%, to $65,321,000
for the three months ended September 30, 1998, from $16,208,000 for the three
months ended September 30, 1997. The increase included growth in revenue from
the office, industrial, office/flex, retail and multi-family Properties of
$23,710,000, $2,868,000, $7,052,000, $1,570,000 and $14,779,000, respectively.
Rental revenue for the three months ended September 30, 1998, included
$4,294,000 of rental revenue generated from the acquisition of 20 properties in
the third and fourth quarters of 1996 (the "1996 Acquisitions"), $23,546,000 of
rental revenue generated from the acquisition of 90 properties in 1997 (the
"1997 Acquisitions") and $35,286,000 of rental revenue generated from the
acquisition of 69 properties during the nine months ended September 30, 1998
(the "1998 Acquisitions"). These increases were partially offset by an $856,000
decrease in revenue from the hotel Properties due to the 1998 sales of two
hotels.
Fees and Reimbursements. Fees and reimbursements revenue consists primarily of
property management fees, asset management fees and lease commissions paid to
the Company under property and asset management agreements. This revenue
increased $1,015,000, or 495%, to $1,220,000 for the three months ended
September 30, 1998, from $205,000 for the three months ended September 30, 1997.
The increase was primarily due to an asset management fee from GC related to the
liquidation of one of the managed partnerships.
24
<PAGE>
Interest and Other Income. Interest and other income increased $850,000, or
153%, to $1,404,000 for the three months ended September 30, 1998, from $554,000
for the three months ended September 30, 1997. The increase primarily consisted
of interest income on a mortgage loan receivable secured by land located in
Aurora, Colorado which originated on June 30, 1998.
Equity in Earnings of Associated Companies. Equity in earnings from Associated
Companies decreased $710,000, or 53%, to $629,000 for the three months ended
September 30, 1998, from $1,339,000 for the three months ended September 30,
1997. The decrease is primarily due to a decrease in earnings from GHG resulting
from the June 30, 1998 cancellation of GHG's hotel leases with the Company. The
Company cancelled the leases with GHG when it sold two of its hotels and leased
the other four hotels to another operator. This decrease is partially offset by
transaction fees earned by GC related to the disposition of several of the
managed properties.
Reduction in Gain on Prior Quarter Sales of Rental Properties. The reduction in
gain on prior quarter sales of rental properties of $238,000 during the three
months ended September 30, 1998, consists of additional costs from the sales of
one multi-family property, two industrial properties, two office/flex properties
and two hotel properties from the Company's portfolio. The reduction in gain on
prior quarter sales of rental properties of $15,000 during the three months
ended September 30, 1997, consists of additional costs from the sales of 15
retail properties from the Company's portfolio.
Property Operating Expenses. Property operating expenses increased $17,209,000,
or 329%, to $22,446,000 for the three months ended September 30, 1998, from
$5,237,000 for the three months ended September 30, 1997. Of this increase,
$17,643,000 represents increases in 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 $2,715,000, or 413%, to $3,372,000 for the three months ended
September 30, 1998, from $657,000 for the three months ended September 30, 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
$9,486,000, or 197%, to $14,309,000 for the three months ended September 30,
1998, from $4,823,000 for the three months ended September 30, 1997. The
increase is primarily due to depreciation and amortization associated with the
1997 Acquisitions and 1998 Acquisitions.
Interest Expense. Interest expense increased $14,448,000, or 552%, to
$17,064,000 for the three months ended September 30, 1998, from $2,616,000 for
the three months ended September 30, 1997. Substantially all of the increase was
the result of higher average borrowings during the three months ended September
30, 1998, as compared to the three months ended September 30, 1997, due to new
debt and the assumption of debt related to the 1997 Acquisitions and 1998
Acquisitions.
Net Income and Earnings Per Share (EPS). Net income increased $5,612,000, or
115%, to $10,510,000 for the three months ended September 30, 1998, from
$4,898,000 for the three months ended September 30, 1997. However, both Basic
EPS and Diluted EPS decreased $0.09 per share, respectively, for the three
months ended September 30, 1998, from the three months ended September 30, 1997.
The decreases in Basic and Diluted EPS are due to a decrease in Net Income
Available to Common Stockholders resulting from the dividends payable to
preferred stockholders in 1998. There were no preferred stock dividends paid in
1997 as there was no preferred stock outstanding until January 1998.
Liquidity and Capital Resources
For the nine months ended September 30, 1998, cash provided by operating
activities increased by $49,365,000 to $66,677,000 as compared to $17,312,000
for the same period in 1997. The increase is primarily due to an increase
25
<PAGE>
in netincome of $52,877,000 (before depreciation and amortization, minority
interest and net gain on sales of rental properties and collection of mortgage
loan receivable) due to the 1997 Acquisitions and 1998 Acquisitions. Cash used
for investing activities increased by $260,865,000 to $633,866,000 for the nine
months ended September 30, 1998, as compared to $373,001,000 for the same period
in 1997. The increase is primarily due to the 1998 Acquisitions, additions to
mortgage loans receivable and other investments. 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 $212,396,000 to $569,500,000 for the nine months ended September
30, 1998, as compared to $357,104,000 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), the net proceeds from an issuance
of Notes (as defined below) and the proceeds from new debt. This increase was
partially offset by increased distributions to stockholders resulting from an
increase in the number of shares of common stock outstanding and the issuance of
preferred stock in January 1998.
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. 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
$492,394,000 at September 30, 1998. This increase primarily resulted from the
assumption of mortgage loans totaling $358,876,000 in connection with the 1998
Acquisitions and new debt of $2,000,000. These increases were partially offset
by the payoff of $12,854,000 of mortgage loans in connection with 1998 sales of
properties and scheduled principal payments of $3,767,000 on other mortgage
debt.
The Company has a $250,000,000 unsecured line of credit provided by a commercial
bank (the "Acquisition Credit Facility"). Outstanding borrowings under the
Acquisition Credit Facility increased from $80,160,000 at December 31, 1997, to
$145,140,000 at September 30, 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 $145,140,000 balance outstanding
at September 30, 1998 consists of draws for 1998 Acquisitions and working
capital. As of September 30, 1998, borrowings under the Acquisition Credit
Facility bear interest at an annual rate of LIBOR plus 1.25%.
In January 1998, the Company closed a $150 million loan with a commercial 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 unsecured 7 5/8% Series A Redeemable 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. In May 1998, the Company filed a registration
statement with the Securities and Exchange Commission (the "SEC") to exchange
all outstanding Notes (the "Old Notes") for Notes which have been registered
under the Securities Act of 1933 (the "New Notes"). The form and term of the New
Notes are substantially identical to the Old Notes in all material respects,
except that the New Notes will be
26
<PAGE>
registered under the Securities Act, and therefore will not be subject to
certain transfer restrictions, registration rights and related special interest
provisions applicable to the Old Notes.
In June 1998, the Company obtained a $150 million unsecured loan from a
commercial bank (the "Bridge Loan") which bears interest at a variable rate of
LIBOR plus 1.3%, and has a maturity date of December 31, 1998. Approximately
$147.7 million was drawn under the Bridge Loan to fund acquisitions and
development activities. The Company paid off this loan on October 30, 1998 with
proceeds from the Goldman Sachs loan discussed below.
In October 1998, the Company obtained a $248.8 million loan from Goldman Sachs
Mortgage Corporation which has a term of ten years, bears interest at a fixed
rate of 6.125% and is secured by 36 properties. The proceeds were used to retire
the Company's $150 million Bridge Loan maturing December 31, 1998, to pay off
four mortgage loans and to pay down the Acquisition Credit Facility.
At September 30, 1998, the Company's total indebtedness included fixed-rate debt
of $522,318,000 (including $168,578,000 subject to cross-collateralization) and
floating-rate indebtedness of $412,926,000 (including $115,286,000 subject to
cross-collateralization). Approximately 43.5% of the Company's total assets,
comprising 84 properties, is encumbered by debt at September 30, 1998.
In January 1997 and May 1997, the Company filed shelf registration statements
with 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
7.75% Series A Convertible Preferred Stock (the "January 1998 Convertible
Preferred Stock Offering" or the "January 1998 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.
The Company has formed 4 development alliances to which it has committed
approximately $42 million for the development of approximately 1.4 million
square feet of office, office/flex and distribution properties and 2,050
multi-family units in North Carolina, Colorado, Texas, New Jersey, Kansas and
Michigan. As of September 30, 1998, the Company has advanced approximately $29
million. Under these development alliances, the Company has certain rights to
purchase the properties upon completion of development and, thus, through these
alliances, the Company could acquire an additional 1.4 million square feet of
commercial properties and 2,050 multi-family units over the next five years. In
addition, the Company has loaned approximately $34 million under another
development alliance to continue the build-out of a 1,200 acre master-planned
development in Denver, Colorado.
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.
27
<PAGE>
Funds from Operations and Cash Available for Distribution
Funds from Operations ("FFO"), 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 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.
The following table sets forth the Company's calculation of FFO and CAD for the
three months ended March 31, June 30, and September 30, 1998 (in thousands,
except weighted average shares and per share amounts):
<TABLE>
<CAPTION>
March 31, June 30, September 30, YTD
1998 1998 1998 1998
------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Net income before minority interest $ 12,891 $ 14,517 $ 11,145 $ 38,553
Preferred dividend requirement (3,910) (5,570) (5,570) (15,050)
Net gain on sales of rental properties (1,446) (693) 238 (1,901)
Depreciation and amortization 10,009 10,934 14,309 35,252
Loss on sale of marketable securities (1) -- -- 12 12
Adjustment to reflect FFO of Associated Companies
(2) 210 173 1,163 1,546
------------- ------------- ---------------- -------------
FFO $ 17,754 $ 19,361 $ 21,297 $ 58,412
============= ============= ================ =============
Amortization of deferred financing fees 418 174 406 998
Capital reserve (983) (330) (69) (983)
Capital expenditures (1,227) (2,870) (3,789) (8,285)
------------- ------------- ---------------- -------------
CAD $ 15,962 $ 16,335 $ 17,845 $ 50,142
============= ============= ================ =============
Distributions per share (3) $ 0.42 $ 0.42 $ 0.42 $ 1.26
============= ============= ================ =============
Diluted weighted average shares outst 34,372,364 34,868,905 36,261,228 35,114,838
============= ============= ================ =============
</TABLE>
(1) Loss on sale of marketable securities is included in other income in
the accompanying consolidated financial statements of the Company.
28
<PAGE>
(2) 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.
(3) The distributions for the three months ended September 30, 1998, were paid
on October 9, 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
including the Company's anticipated timing of the sale of Shannon Crossing, the
Company's belief that cash generated by operations will be adequate to meet
operating requirements and to make distributions, the Company's expectations as
to the timing of the completion of the development projects through its
development alliances and the acquisition by the Company of properties developed
through its development alliances. There can be no assurance that the actual
outcomes or results will be consistent with such expectations, hopes,
intentions, beliefs and strategies. 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.
Impact of Year 2000 Compliance Costs on Operations
The Company's State of Readiness. 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 currently believes that its
"Year 2000" issues are limited to information technology ("IT") systems (i.e.
software programs and computer operating systems). There are no non-IT systems
(i.e. embedded systems such as devices used to control, monitor or assist the
operation of equipment and machinery), the failure of which would have a
material effect on the Company's operations.
The Company, employing a team made up of internal personnel has completed its
identification of IT systems that are not yet Year 2000 compliant and has
commenced modification or replacement of such systems as necessary. The Company
is currently communicating with third parties with whom it does significant
business, such as financial institutions and vendors, to determine their
readiness for Year 2000 compliance. The Company has also completed its
assessment of the Year 2000 compliance issues presented by its hardware
components.
29
<PAGE>
Costs of Addressing the Company's Year 2000 Issues. Given the 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. The costs of such assessment and remediation will be paid
out of the Company's general and administrative expenses.
Risks of the Company's Year 2000 Issues. In light of the Company's assessment
and remediation efforts to date, and the planned, normal course-of-business
upgrades, management believes that any residual Year 2000 risk is limited to
non-critical business applications and support hardware. No assurance can be
given, however, that all of the Company's systems will be Year 2000 compliant or
that compliance will not have a material adverse effect on the Company's future
liquidity or results of operations or ability to service debt.
The Company's Contingency Plan. The Company is currently developing its
contingency plan for all operations to address the most reasonable likely worst
case scenarios regarding Year 2000 compliance. Management expects such
contingency plan to be completed by the end of the year. Risk Factors
Stockholders or potential stockholders should read the "Risk Factors" section of
the Company's latest annual report on Form 10-K/A 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.
30
<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 rejected the objectors' contentions and upheld the
settlement. The objectors filed with the California Supreme Court a petition for
review, which was denied on May 21, 1998. On August 18, 1998, the objectors
filed a petition for writ of certiorari in the Supreme Court of the United
States. On September 18, 1998, the Company and the co-defendants filed a brief
in opposition to the petition. The Supreme Court has not yet granted or denied
the petition.
31
<PAGE>
BEJ Equity Partners. On December 1, 1995, a second class action complaint
relating to the Consolidation was filed in Federal District Court for the
Northern District of California (the "BEJ Action"). The plaintiffs are BEJ
Equity Partners, J/B Investment Partners, Jesse B. Small and Sean O'Reilly as
custodian f/b/o Jordan K. O'Reilly, who as a group held limited partner
interests in 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. In view of the denial of the
objector's petition for review in the Blumberg Action, among other things, 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
(a) Rights of Holders of Registered Securities
On July 7, 1998, the Company's Board of Directors adopted a Stockholder Rights
Plan and pursuant thereto declared a dividend of one preferred share purchase
right for each outstanding share of the Company's Common Stock. A Form 8-A
relating to such plan was filed with the Securities and Exchange Commission on
July 16, 1998. Said Form 8-A is incorporated herein by reference.
(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 Property. The Units are redeemable for cash, or, at the
election of the Company, for shares of Common Stock of the Company on a
one-for-one basis. The Units were issued by the Operating Partnership in
reliance on the exemption provided by Section 4(2) of the Securities Act of
1933, as amended.
In April 1998, the Company acquired the Eaton & Lauth portfolio of properties
for a total acquisition cost, including capitalized costs, of approximately
$68.7 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
32
<PAGE>
per unit and per share valueof $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.
In June 1998, the Company acquired the Covance Property for a total acquisition
cost, including capitalized costs, of approximately $16.5 million. In connection
with this acquisition, the Company and the Operating Partnership issued
approximately $4 million in the form of 161,492 partnership units in the
Operating Partnership and 8,802 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 Covance Property. The Units are redeemable for cash, or, at the
election of the Company, for shares of Common Stock of the Company on a
one-for-one basis. The Units 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.
In June 1998, the Company acquired the Galesi Portfolio for a total acquisition
cost, including capitalized costs, of approximately $275.8 million. In
connection with this acquisition, the Operating Partnership issued approximately
$21.2 million in the form of 806,393 partnership units in the Operating
Partnership (based on an agreed per unit value of $26.2315) as partial payment
for the Galesi 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 were issued by the Operating Partnership in reliance on the
exemption provided by Section 4(2) of the Securities Act of 1933, as amended.
In July 1998, the Company acquired the Pauls Portfolio for a total acquisition
cost, including capitalized costs, of approximately $54.9 million. In connection
with this acquisition, the Operating Partnership issued approximately $11.3
million in the form of 423,843 partnership units in the Operating Partnership
(based on an agreed per unit value of $26.556) as partial payment for the Pauls
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 were issued by the Operating Partnership in reliance on the exemption
provided by Section 4(2) of the Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the quarter
ended September 30, 1998.
Item 5: Other Information
Any stockholder proposal submitted with respect to the Company's 1999 Annual
Meeting of Stockholders, which proposal is submitted outside the requirements of
Rule 14a-8 under the Securities Exchange Act of 1934, will be considered
untimely for purposes of Rule 14a-4 and 14a-5 if notice thereof is received by
the Company after March 1, 1999.
33
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The Exhibit Index attached hereto is hereby incorporated by
reference to this item.
(b) Reports on Form 8-K:
On July 10, 1998, the Company filed a report on Form 8-K with
respect to its adoption of a stockholder rights plan.
On July 15, 1998, the Company filed a report on Form 8-K with
respect to the acquisition of the Galesi Portfolio, the
Donau/Gruppe Portfolio, the Pauls Portfolio and One and Three
Pacific and the Bridge Loan.
On July 22, 1998, the Company filed a report on Form 8-K with
respect to Supplemental Information as of June 30, 1998.
On August 13, 1998, the Company filed a report on Form 8-K/A
amending the Form 8-K filed on July 15, 1998.
On September 10, 1998, the Company filed two reports on Form
8-K/A amending reports on Form 8-K filed on April 29, 1998 and
May 15, 1998, respectively.
On October 27, 1998, the Company filed a report on Form 8-K
with respect to Supplemental Information as of September 30,
1998.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange
Act of l934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GLENBOROUGH REALTY TRUST INCORPORATED
By: Glenborough Realty Trust Incorporated,
Date: November 13, 1998 _____________________________
Andrew Batinovich
Director, President
and Chief Operating Officer
(Principal Operating Officer)
Date: November 13, 1998 _____________________________
Stephen Saul
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: November 13, 1998 ______________________________
Terri Garnick
Senior Vice President,
Chief Accounting Officer,
Treasurer
(Principal Accounting Officer)
35
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Title
--------------------------------------------------------------------
11.1 Statement re: Computation of Per Share Earnings is shown in Note
9 of the Consolidated Financial Statements of the Company in Item 1.
12.1 Computation of Ratios.
27.1 Financial Data Schedule.
36
<PAGE>
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, June 30, and September 30, 1998
GRT Predecessor Entities,
Combined
----------------------------------
Year Ended December 31,
-----------------------------------
1993 1994 1995
---------- ---------- --------
EARNINGS, AS DEFINED
Net Income (Loss) before Preferred
Dividends 4,418 1,580 524
Extraordinary and non-recurring items (2,274) -- --
Federal & State income taxes 24 176 357
Minority Interest 5 43 --
Fixed Charges 1,301 1,140 2,129
---------- ---------- ---------
3,474 2,939 3,010
---------- ---------- ---------
FIXED CHARGES AND PREFERRED DIVIDENDS, AS
DEFINED
Interest Expense 1,301 1,140 2,129
Capitalized Interest -- -- --
Preferred Dividends -- -- --
---------- ---------- ---------
1,301 1,140 2,129
RATIO OF EARNINGS TO FIXED CHARGES 2.67 2.58 1.41
---------- ---------- ---------
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED DIVIDENDS
2.67 2.58 1.41
---------- ---------- ---------
<TABLE>
<CAPTION>
The Company
------------------------------------------------------------------------------------
Three Months Three Three Nine Months
Months Months
Ended March Ended June Ended Ended
31, 30, September September
Year Ended December 31, 30, 30,
------------------------- ------------ ------------ ------------ -------------
1996 1997 1998 1998 1998 1998
----------- ----------- ------------- ------------ ------------ -------------
EARNINGS, AS DEFINED
Net Income (Loss) before Preferred
<S> <C> <C> <C> <C> <C> <C>
Dividends (1,609) 19,368 12,213 13,921 10,510 36,644
Extraordinary and non-recurring items 186 843 -- -- -- --
Federal & State income taxes -- -- -- -- -- --
Minority Interest 292 1,119 678 596 635 1,909
Fixed Charges 3,913 9,668 9,145 9,707 17,064 35,916
----------- ----------- ------------- ------------ ------------ ------------
2,782 30,998 22,036 24,224 28,209 74,469
----------- ----------- ------------- ------------ ------------ ------------
FIXED CHARGES AND PREFERRED DIVIDENDS, AS
DEFINED
Interest Expense 3,913 9,668 9,145 9,707 17,064 35,916
Capitalized Interest -- -- -- 131 593 724
Preferred Dividends -- -- 3,910 5,570 5,570 15,050
----------- ----------- ------------- ------------ ------------ ------------
3,913 9,668 13,055 15,408 23,227 51,690
RATIO OF EARNINGS TO FIXED CHARGES 0.71 (1) 3.21 2.41 2.46 1.60 2.03
----------- ----------- ------------- ------------ ------------ ------------
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED DIVIDENDS
0.71 (1) 3.21 1.69 1.57 1.21 1.44
----------- ----------- ------------- ------------ ------------ ------------
</TABLE>
(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.
37
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 7,381
<SECURITIES> 24,233
<RECEIVABLES> 4,290
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,107
<PP&E> 1,828,138
<DEPRECIATION> 73,878
<TOTAL-ASSETS> 1,906,441
<CURRENT-LIABILITIES> 176,190
<BONDS> 0
0
11
<COMMON> 32
<OTHER-SE> 838,567
<TOTAL-LIABILITY-AND-EQUITY> 1,906,441
<SALES> 0
<TOTAL-REVENUES> 170,953
<CGS> 0
<TOTAL-COSTS> 53,035
<OTHER-EXPENSES> 43,449
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,916
<INCOME-PRETAX> 36,644
<INCOME-TAX> 0
<INCOME-CONTINUING> 36,644
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,644
<EPS-PRIMARY> .68
<EPS-DILUTED> .67
</TABLE>
