SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-14162
GLENBOROUGH REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
Maryland 94-3211970
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 South El Camino Real, 94402-1708
Suite 1100 San Mateo, California - (650) 343-9300 (Zip Code)
(Address of principal executive offices
and telephone number)
Securities registered under Section 12(b) of the Act:
Name of Exchange
Title of each class: on which registered:
Common Stock, $.001 par value New York Stock Exchange
7 3/4% Series A Convertible Preferred Stock,
$.001 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ]
As of March 20, 1998, the aggregate market value of the voting stock held
by nonaffiliates of the registrant was $886,666,791. The aggregate market value
was computed with reference to the closing price on the New York Stock Exchange
on such date. This calculation does not reflect a determination that persons are
affiliates for any other purpose.
As of March 20, 1998, 31,549,256 shares of Common Stock ($.001 par value)
and 11,500,000 shares of 7 3/4% Series A Convertible Preferred Stock ($.001 par
value) were outstanding.
DOCUMENTS INCORPORATED:
Part III: Portions of the Registrant's definitive proxy statement to be issued
in conjunction with the Registrant's annual stockholder's meeting to be held on
May 14, 1998.
EXHIBITS: The index of exhibits is contained in Part IV herein on page number
83.
1
<PAGE>
This Form 10-K of Glenborough Realty Trust Incorporated (the "Company") for the
year ended December 31, 1997 is being amended and restated in its entirety to
(i) amend Item 3, Legal Proceedings, to add certain information therein, (ii)
amend Item 6, Selected Financial Data, to add certain line items in that Item's
financial tables and to revise certain footnotes and other disclosures therein,
(iii) amend Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, to revise certain captions in the risk factor
sections of such Item (the sections that follow the caption "Forward Looking
Statements; Factors That May Affect Operating Results") and to add and revise
certain information in such risk factor sections, (iv) amend Item 14, Financial
Statements, Schedules and Reports on Form 8-K, to add certain information to
Note 2, Note 4 and Note 12 of the Notes to the Company's Consolidated Financial
Statements and (v) amend and restate in their entirety Exhibit 12.1 and Exhibit
23.1.
TABLE OF CONTENTS
Page No.
PART I
Item 1 Business 3
Item 2 Properties 6
Item 3 Legal Proceedings 15
Item 4 Submission of Matters to a Vote of Security Holders 16
PART II
Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters 17
Item 6 Selected Financial Data 18
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 21
Item 8 Financial Statements and Supplementary Data 35
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 35
PART III
Item 10 Directors and Executive Officers of the Registrant 36
Item 11 Executive Compensation 36
Item 12 Security Ownership of Certain Beneficial Owners and
Management 36
Item 13 Certain Relationships and Related Transactions 36
PART IV
Item 14 Exhibits, Financial Statements, Schedules and Reports
on Form 8-K 37
2
<PAGE>
PART I
Item 1. Business
General Development and Description of Business
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 December 31, 1997, the Company owned and
operated 128 income-producing properties (the "Properties," and each a
"Property") and held two mortgage receivables. The Properties are comprised of
30 office Properties, 43 office/flex Properties, 26 industrial Properties, 9
retail Properties, 14 multi-family Properties and 6 hotel Properties, located in
23 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, a California corporation, and eight public
limited partnerships (the "Partnerships") collectively, the "GRT Predecessor
Entities", merged with and into the Company. The Company (i) issued 5,753,709
shares (the "Shares") of the $.001 par value Common Stock of the Company to the
Partnerships in exchange for the net assets of the Partnerships; (ii) merged
with Glenborough Corporation, with the Company being the surviving entity; (iii)
acquired an interest in three companies (the "Associated Companies"), two of
which merged on June 30, 1997, that provide asset and property management
services, as well as other services; and (iv) through a subsidiary operating
partnership, Glenborough Properties, L.P. (the "Operating Partnership"),
acquired interests in certain warehouse distribution facilities from GPA, Ltd.,
a California limited partnership ("GPA"). A portion of the Company's operations
are conducted through the Operating Partnership, of which the Company is the
sole general partner, and in which the Company holds a 91.48% 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 stock of the Company (the "Common
Stock") is listed on the New York Stock Exchange ("NYSE") under the trading
symbol "GLB".
The Company seeks to achieve sustainable long-term growth in Funds from
Operations primarily through the following strategies:
Acquiring diversified portfolios or individual properties on attractive
terms, often from public and private partnerships as well as from other
REITs, life insurance companies and other institutions;
Improving the performance of Properties in the Company's portfolio;
Constantly reviewing the Company's current portfolio for opportunities to
redeploy capital from certain existing Properties into other properties
which the Company believes have characteristics more suited to its overall
growth strategy and operating goals; and
Entering into real estate development joint ventures with selected real
estate developers.
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 and 90
properties in 1997. In addition, the Company has acquired 16 properties
subsequent to December 31, 1997. The total acquired Properties consist of
an aggregate of approximately 12.6 million rentable square feet, 2,147
multi-family units and 227 hotel suites and had aggregate acquisition
costs, including capitalized costs, of approximately $1.2 billion. In
addition, the Company has entered into two separate definitive agreements,
subject to a number of contingencies, to acquire 12 properties in 5 states,
aggregating 1,006,622 rentable square feet. However, there can be no
assurance that any or all of these properties will be acquired.
From January 1, 1996 to the date of this filing, sold four industrial
properties, 16 retail properties and one multi-family property to redeploy
capital into properties the Company believes have characteristics more
suited to its overall growth strategy and operating goals.
Entered into a $250 million unsecured line of credit (the "Acquisition
Credit Facility") with Wells Fargo Bank, N.A. ("Wells Fargo Bank") which
replaced its $50 million secured line of credit and closed a $150 million
unsecured loan agreement (the "Interim Loan") with Wells Fargo Bank.
3
<PAGE>
Completed four offerings of Common Stock in October 1996, March 1997, July
1997 and October 1997 (respectively, the "October 1996 Offering," the
"March 1997 Offering," the "July 1997 Offering," and the "October 1997
Offering"), resulting in aggregate gross proceeds of approximately $562
million.
Completed an offering of 7 3/4% Series A Convertible Preferred Stock (the
"January 1998 Convertible Preferred Stock Offering") for total gross
proceeds of approximately $287.5 million.
Issued $150 million of 75/8% Senior Notes which are due on March 15, 2005.
Paid off the Interim Loan with proceeds from the issuance of $150 million
of 7 5/8% Senior Notes.
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.
The Associated Companies
Glenborough Corporation. Glenborough Corporation ("GC"), a California
corporation formerly known as Glenborough Realty Corporation, serves as general
partner of several real estate limited partnerships (the "Controlled
Partnerships") for whom it provides asset and property management services. It
also provides property management services for a limited portfolio of property
owned by unaffiliated third parties. The majority of services to the
unaffiliated third parties were previously provided by Glenborough Inland Realty
Corporation ("GIRC"), a California corporation, which merged with GC effective
June 30, 1997. 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.
Following the merger, the Company owns 100% of the 38,000 shares (representing
95% of total outstanding shares) of non-voting preferred stock of GC. Five
individuals, including Sandra L. Boyle and Frank E. Austin, executive officers
of the Company, each own 20% of the 2,000 shares (representing 5% of total
outstanding shares) of voting common stock of GC. The Company and GC intend that
the Company's interest in GC complies with REIT qualification standards.
The Company, through its ownership of preferred stock of GC, is entitled to
receive cumulative, preferred annual dividends of $4.53 per share, which GC must
pay before it pays any dividends with respect to the common stock of GC. Once GC
pays the required cumulative preferred dividend, it will pay any additional
dividends in equal amounts per share on both the preferred stock and the common
stock at 95% and 5%, respectively. Through the preferred stock, the Company is
also entitled to receive a preferred liquidation value of $114.50 per share plus
all cumulative and unpaid dividends. The preferred stock is subject to
redemption at the option of GC after December 31, 2005, for a redemption price
of $114.50 per share. As the holder of preferred stock of GC, the Company has no
voting power with respect to the election of the directors of GC; all power to
elect directors of GC is held by the owners of the common stock of GC.
This structure is intended to provide the Company with a significant portion of
the economic benefits of the operations of GC. The Company accounts for the
financial results of GC using the equity method.
Glenborough Hotel Group. The Company, through the Operating Partnership, leases
its hotel properties to Glenborough Hotel Group ("GHG"). The Company, through
the Operating Partnership, holds a first mortgage on another hotel, which is
managed by GHG under a contract with its owner. GHG also manages a hotel owned
by an affiliated entity as well as two resort condominium hotels and a hotel
owned by an unaffiliated third party.
The Company owns 100% of the 50 shares of non-voting preferred stock of GHG.
Three individuals, one of whom, Terri Garnick, is an executive officer of the
Company, each own 33 1/3% of the 1,000 shares of voting common stock of GHG. The
Company and GHG intend that the Company's interest in GHG complies with REIT
qualification standards.
The Company, through its ownership of preferred stock, is entitled to receive
cumulative, preferred annual dividends of $600 per share, which GHG must pay
before it pays any dividends with respect to the common stock. Once GHG pays the
required cumulative preferred dividend, it will pay 75% of any additional
dividends to holders of the preferred stock, and 25% to holders of the common
stock. Through the preferred stock, the Company is also entitled to receive a
preferred liquidation value of $40,000 per share plus all cumulative and unpaid
dividends. The preferred stock will be subject to redemption at the option of
GHG after December 31, 1999, for a redemption price of $40,000 per share. As the
holders of preferred stock of GHG, the Company has no voting power with respect
to the election of the directors of GHG; all power to elect directors of GHG is
held by the owners of the common stock of GHG.
4
<PAGE>
This structure is intended to provide the Company with a significant portion of
the economic benefits of the operations of GHG. The Company accounts for the
financial results of GHG using the equity method.
GHG owns approximately 80% of the common stock of Resort Group, Inc. ("RGI").
RGI manages homeowners associations and rental pools for two beachfront resort
condominium hotel properties and owns six units at one of the properties. GHG
receives 100% of the earnings of RGI and consolidates its operations with its
own.
GHG also owned 94% of the outstanding common stock of Atlantic Pacific Holdings,
Ltd., the sole owner of 100% of the common stock of Atlantic Pacific Assurance
Company, Limited (APAC), a Bermuda corporation formed to underwrite certain
insurable risks of certain of the Company's predecessor partnerships and related
entities. As anticipated, in July 1997, APAC was liquidated and GHG received a
liquidating distribution of approximately $2,136,000. GHG has recognized a gain
of $1,381,000 over its investment basis and costs of liquidation. GHG had
accounted for its investment in APAC using the cost method due to its
anticipated liquidation. The gain on liquidation was not subject to income
taxes.
Employees
As of December 31, 1997, the Company and the Associated Companies had
approximately 455 full-time employees.
Competition
The Company's Properties compete for tenants (or guests, in the case of hotels)
with similar properties located in their markets. Management believes that
characteristics influencing the competitiveness of a real estate project include
the geographic location of the property, the professionalism of the property
manager and the maintenance and appearance of the property, in addition to
external factors such as general economic circumstances, trends, and the
existence of new competing properties in the general area in which the Company
competes for tenants (or guests, in the case of hotels).
Additional competitive factors with respect to commercial properties include the
ease of access to the property, the adequacy of related facilities, such as
parking, and the ability to provide rent concessions and additional tenant
improvements commensurate with local market conditions. Such competition may
lead to rent concessions that could adversely affect the Company's cash flow.
Although the Company believes its Properties are competitive with comparable
properties as to those factors within the Company's control, continued
over-building and other external factors could adversely affect the ability of
the Company to attract and retain tenants. The marketability of the Properties
may also be affected (either positively or negatively) by these factors as well
as by changes in general or local economic conditions, including prevailing
interest rates.
The Company also experiences competition when attempting to acquire equity
interests in desirable real estate, including competition from domestic and
foreign financial institutions, other REITs, life insurance companies, pension
funds, trust funds, partnerships and individual investors.
Working Capital
The Company's practice is to maintain cash reserves for normal repairs,
replacements, improvements, working capital and other contingencies while
minimizing interest expense. Therefore, cash on hand is kept to a minimum by
frequently paying down on the Acquisition Credit Facility and drawing on the
Acquisition Credit Facility when necessary.
Other Factors
Compliance with laws and regulations regarding the discharge of materials into
the environment, or otherwise relating to the protection of the environment, is
not expected to have any material effect upon the capital expenditures, earnings
and competitive position of the Company.
The Properties have each been subject to Phase I Environmental Assessments and,
where such an assessment indicated it was appropriate, Phase II Environmental
Assessments (collectively, the "Environmental Reports") have been conducted.
These reports have not indicated any significant environmental issues.
In the event that pre-existing environmental conditions not disclosed in the
Environmental Reports which require remediation are subsequently discovered, the
cost of remediation will be borne by the Company. Additionally, no assurances
can be given that (i) future laws, ordinances, or regulations will not impose
any material environmental liability, (ii) the current environmental condition
of the Properties has not been or will not be affected by tenants and occupants
of the Properties, by the condition of properties in the vicinity of the
Properties or by third parties unrelated to the Company or (iii) that the
Company will not otherwise incur significant liabilities associated with costs
of remediation relating to the Properties.
5
<PAGE>
Item 2. Properties
The Location and Type of the Company's Properties
The Company's 128 Properties are diversified by type (office, office/flex,
industrial, retail, multi-family and hotel) and are located in four geographic
regions and 23 states within the United States comprising numerous local
markets. The following table sets forth the location, type and size of the
Properties (by rentable square feet and/or units) along with average occupancy
as of December 31, 1997.
<TABLE>
<CAPTION>
Office Office/Flex Industrial Retail Multi-
Square Square Square Square Family Hotel No. of
Region Footage Footage Footage Footage Units Rooms Properties
- ------------------ ------------ ------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
West 694,654 1,820,480 977,926 394,222 866 440 53
Midwest 684,193 608,986 1,067,884 132,190 -- -- 18
East 910,322 303,630 577,868 45,546 1,385 -- 30
South 632,192 790,599 909,832 407,130 -- 304 27
------------ ------------- ------------ ------------- ------------- ------------- -------------
Total 2,921,361 3,523,695 3,533,510 979,088 2,251 744 128
============ ============= ============ ============= ============= ============= =============
No. of Properties
30 43 26 9 14 6
Average Occupancy
93% 91% 97% 96% 95% 70%
</TABLE>
For the years ended December 31, 1997 and 1996, no tenant contributed 10% or
more of the rental revenue of the Company. The largest tenant occupied 748,426
square feet, or 7% of the total square footage of the Office, Office/Flex,
Industrial and Retail Properties. For the year ended December 31, 1995, rental
revenue from the two Properties leased to Navistar International contributed
approximately 10% of the combined total rental revenue of the GRT Predecessor
Entities. A complete listing of Properties owned by the Company at December 31,
1997 is included as part of Schedule III in Item 14.
Office Properties
The Company owns 30 office Properties with total rentable square footage of
2,921,361. The leases for the office Properties have terms ranging from one to
35 years. The office leases generally require the tenant to reimburse the
Company for increases in building operating costs over a base amount. Many of
the leases provide for rent increases that are either fixed or based on a
consumer price index ("CPI"). As of December 31, 1997, the average occupancy of
the office Properties was 93%.
The following table sets forth, for the periods specified, the total rentable
area, average occupancy, average effective base rent per leased square foot and
total effective annual base rent.
<TABLE>
<CAPTION>
Office Properties
Historical Rent and Occupancy
Total Average Effective Total Effective
Rentable Average Base Rent per Annual Base
Year Area (Sq. Ft) Occupancy Leased Sq. Ft. (1) Rent ($000s) (2)
<S> <C> <C> <C> <C>
1997 2,921,361 93% $ 15.81 $ 42,954
1996 641,923 94 13.19 7,918
1995 106,076 97 11.91 1,228
1994 105,770 88 11.44 1,065
1993 104,666 80 12.04 1,008
<FN>
(1) Total Effective Annual Base Rent divided by average occupancy in square feet. As used herein, "Effective Base Rent"
represents base rent less concessions.
6
<PAGE>
(2) Total Effective Annual Base Rent adjusted for any free rent given for the period.
</FN>
</TABLE>
The following table sets forth the contractual lease expirations for leases for
the office Properties as of December 31, 1997.
<TABLE>
<CAPTION>
Office Properties
Lease Expirations
Number Rentable Square Annual Base Percentage of Total
of Footage Subject Rent Under Annual Base Rent
Expiration Expiring to Expiring Expiring Represented by
Year Leases Leases Leases ($000s) Expiring Leases (1)
<S> <C> <C> <C> <C>
1998 (4) 221 422,047 $ 6,612 15.0%
1999 103 503,429 6,886 15.6
2000 98 414,760 8,022 18.2
2001 81 504,181 7,991 18.1
2002 47 204,864 3,109 7.0
Thereafter 34 698,766 11,545 26.1
Total 584 2,748,047 (2) $44,165 (3) 100.0%
<FN>
(1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual
increases).
(2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the
difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space).
(3) This figure is based on square footage actually leased and incorporates contractual rent increases arising after
1997, and thus differs from "Total Effective Annual Base Rent" in the preceding table, which is based on 1997 rents.
(4) Includes leases that have initial terms of less than one year.
</FN>
</TABLE>
Office/Flex Properties
The Company owns 43 office/flex Properties aggregating 3,523,695 square feet.
The office/flex Properties are designed for a combination of office and
warehouse uses with greater than 10% of the leasable square footage containing
office finish. The office/flex Properties range in size from 27,414 square feet
to 202,540 square feet, and have lease terms ranging from one to 23 years. Most
of the office/flex leases are "triple net" leases whereby the tenants are
required to pay their pro rata share of the Properties' operating costs, common
area maintenance, property taxes, insurance, and non-structural repairs. Some of
the leases are "industrial gross" leases whereby the tenant pays as additional
rent its pro rata share of common area maintenance and repair costs and its
share of the increase in taxes and insurance over a specified base year cost.
Many of these leases call for fixed or CPI-based rent increases. As of December
31, 1997, the average occupancy of the office/flex Properties was 91%.
The following table sets forth, for the periods specified, the total rentable
area, average occupancy, average effective base rent per leased square foot and
total effective annual base rent.
<TABLE>
<CAPTION>
Office/Flex Properties
Historical Rent and Occupancy
Total Average Effective Total Effective
Rentable Average Base Rent per Annual Base
Year (4) Area (Sq. Ft) Occupancy Leased Sq. Ft. (1) Rent ($000s) (2)
<S> <C> <C> <C> <C>
1997 3,523,695 91% $ 7.17 $ 22,991
1996(3) 247,506 96 5.50 1,307
<FN>
(1) Total Effective Annual Base Rent divided by average occupancy in square feet. As used herein, "Effective Base Rent"
represents base rent less concessions.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the period.
(3) Includes the TRP Properties. For these Properties, base rents are presented on an annualized basis based on
results since the acquisition as this information was not available for the year ended December 31, 1996.
(4) Prior to 1996, Properties currently classified as Office/Flex Properties were included in Industrial Properties.
See Industrial Properties table below.
</FN>
</TABLE>
7
<PAGE>
The following table sets forth the contractual lease expirations for leases for
the office/flex Properties as of December 31, 1997.
<TABLE>
<CAPTION>
Office/Flex Properties
Lease Expirations
Number Rentable Square Annual Base Percentage of Total
of Footage Subject Rent Under Annual Base Rent
Expiration Expiring to Expiring Expiring Represented by
Year Leases Leases Leases ($000s) Expiring Leases (1)
<S> <C> <C> <C> <C>
1998 237 1,069,040 $ 7,907 33.5%
1999 125 649,478 4,008 17.0
2000 85 511,434 3,506 14.9
2001 37 297,668 2,061 8.7
2002 27 273,013 1,931 8.2
Thereafter 18 455,110 4,182 17.7
Total 529 3,255,743 (2) $23,595 (3) 100.0%
<FN>
(1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual
increases).
(2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the
difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space).
(3) This figure is based on square footage actually leased and incorporates contractual rent increases arising after
1997, and thus differs from "Total Effective Annual Base Rent" in the preceding table, which is based on 1997 rents.
</FN>
</TABLE>
Industrial Properties
The Company owns 26 industrial Properties aggregating 3,533,510 square feet. The
industrial Properties are designed for warehouse, distribution and light
manufacturing, ranging in size from 23,826 square feet to 474,426 square feet.
As of December 31, 1997, 12 of the industrial Properties were leased to multiple
tenants, 14 were leased to single tenants, and all 14 of the single-tenant
Properties are adaptable in design to multi-tenant use. As of December 31, 1997,
the average occupancy of the industrial Properties was 97%.
Four of the single-tenant Properties are leased to a total of two tenants having
five years remaining on leases whose original terms were 20 years. The terms of
these leases include rent increases every three years based on all or a
percentage of the change in the CPI. Under these leases the tenants are required
to pay for all of the Properties' operating costs, such as common area
maintenance, property taxes, insurance, and all repairs including structural
repairs. The leases give the tenant a purchase option exercisable on March 1,
1999, and 2002 for an amount equal to the greater of the appraised value or a
specified minimum price. Management believes, based on discussions with both
tenants, that neither tenant has any present intention to exercise any option to
purchase.
The remaining industrial Properties have leases whose terms range from 1 to 29
years. Most of the leases are "triple net" leases whereby the tenants are
required to pay their pro rata share of the Properties' operating costs, common
area maintenance, property taxes, insurance, and non-structural repairs. Some of
the leases are "industrial gross" leases whereby the tenant pays as additional
rent its pro rata share of common area maintenance and repair costs and its
share of the increase in taxes and insurance over a specified base year cost.
Many of these leases call for fixed or CPI-based rent increases.
8
<PAGE>
The following table sets forth, for the periods specified, the total rentable
area, average occupancy, average effective base rent per leased square foot and
total effective annual base rent for the Industrial Properties.
<TABLE>
<CAPTION>
Industrial Properties
Historical Rent and Occupancy
Total Average Effective Total Effective
Rentable Average Base Rent per Annual Base
Year(4) Area (Sq. Ft) Occupancy Leased Sq. Ft. (1) Rent ($000s) (2)
<S> <C> <C> <C> <C>
1997 3,533,510 97% $ 3.36 $ 11,516
1996(3) 1,778,862 99 2.41 4,244
1995 1,491,827 100 2.29 3,405
1994 1,491,827 100 2.29 3,401
1993 1,491,827 98 2.24 3,294
<FN>
(1) Total Effective Annual Base Rent divided by average occupancy in square feet.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the period.
(3) Includes the TRP Properties. For these Properties, base rents are presented on an annualized basis based on
results since the acquisition as this information was not available for the year ended December 31, 1996.
(4) Prior to 1996, Properties currently classified as Office/Flex Properties were included in Industrial Properties.
</FN>
</TABLE>
The following table sets forth the contractual lease expirations for leases for
the industrial Properties as of December 31, 1997.
<TABLE>
<CAPTION>
Industrial Properties
Lease Expirations
Number Rentable Square Annual Base Percentage of Total
of Footage Subject Rent Under Annual Base Rent
Expiration Leases to Expiring Expiring Represented by
Year Expiring Leases Leases ($000s) Expiring Leases (1)
<S> <C> <C> <C> <C>
1998 28 480,017 $ 1,730 15.6%
1999 25 299,068 1,292 11.6
2000 17 329,290 1,323 11.9
2001 14 255,106 1,131 10.2
2002 9 236,250 959 8.6
Thereafter 7 1,646,195 4,677 42.1
Total 100 3,245,926 (2) $11,112 (3) 100.0%
<FN>
(1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases).
(2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the
difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space).
(3) This figure is based on square footage actually leased (which excludes vacant space) and incorporates contractual
rent increases arising after 1997, and thus differs from "Total Effective Annual Base Rent" in the preceding table,
which is based on 1997 rents.
</FN>
</TABLE>
Retail Properties
The Company owns nine retail Properties with total rentable square footage of
979,088. The leases for the retail Properties have terms ranging from one to 38
years. Eight of the retail Properties, representing 933,542 square feet or 95%
of the total rentable area, are anchored community shopping centers. The anchor
tenants of these centers are national or regional supermarkets and drug stores.
As of December 31, 1997, the average occupancy of the retail Properties was 96%.
The leases for the retail Properties generally include fixed or CPI-based rent
increases and some include provisions for the payment of additional rent based
on a percentage of the tenants' gross sales that exceed specified amounts.
Retail tenants also typically pay as additional rent their pro rata share of the
Properties' operating costs including common area maintenance, property taxes,
insurance and non-structural repairs. Some leases contain options to renew at
market rates or specified rates.
9
<PAGE>
The following table sets forth, for the periods specified, the total rentable
area, average occupancy, average effective base rent per leased square foot and
total effective annual base rent for the retail properties.
<TABLE>
<CAPTION>
Retail Properties
Historical Rent and Occupancy
Total Average Effective Total Effective
Rentable Average Base Rent per Annual Base
Year Area (Sq. Ft) Occupancy Leased Sq. Ft. (1) Rent ($000s) (2)
<S> <C> <C> <C> <C>
1997 979,088 96% $ 7.98 $ 7,501
1996(3) 630,700 96 7.82 (4) 4,726
1995 285,658 95 10.76 2,915
1994 285,722 94 10.76 2,890
1993 285,722 90 11.11 2,858
<FN>
(1) Total Effective Annual Base Rent divided by average occupancy in square feet.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the period.
(3) Includes the Carlsberg Properties and the TRP Properties. For these Properties, base rents are presented on an
annualized basis based on results since the acquisition as this information was not available for the year ended
December 31, 1996.
(4) Average effective base rent per leased square foot declined in 1996 due to the acquisition of properties with lower
base rents.
</FN>
</TABLE>
The following table sets forth the contractual lease expirations for the retail
Properties as of December 31, 1997.
<TABLE>
<CAPTION>
Retail Properties
Lease Expirations
Rentable Square Annual Base Percentage of Total
Number of Footage Subject Rent Under Annual Base Rent
Expiration Leases to Expiring Expiring Represented by
Year Expiring Leases Leases ($000s) Expiring Leases (1)
<S> <C> <C> <C> <C>
1998 39 90,664 $ 911 12.6%
1999 45 76,059 944 13.1
2000 24 42,249 542 7.5
2001 31 101,301 926 12.8
2002 7 13,560 176 2.4
Thereafter 40 567,531 3,719 51.6
Total 186 891,364 (2) $ 7,218 (3) 100.0%
<FN>
(1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual
increases).
(2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the
difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space).
(3) This figure is based on square footage actually leased (which excludes vacant space) and incorporates contractual
rent increases arising after 1997, and thus differs from "Total Effective Annual Base Rent" in the preceding table
which is based on 1997 rents.
</FN>
</TABLE>
10
<PAGE>
Tenant Improvements and Leasing Commissions
The following table summarizes by year the capitalized tenant improvement and
leasing commission expenditures incurred in the renewal or re-leasing of
previously occupied space since January 1, 1993.
<TABLE>
<CAPTION>
Capitalized Tenant Improvements and Leasing Commissions
1993 1994 1995 1996 1997
Office Properties
<S> <C> <C> <C> <C> <C>
Square footage renewed or re-leased 23,909 18,384 79,745 39,706 174,354
Capitalized tenant improvements and
commissions ($000s) $ 59 $ 58 $ 468(1) $ 617(2) $ 850
Average per square foot of renewed or
re-leased space $ 2.47 $ 3.18 $ 5.87 $ 15.54(2) $ 4.87
Office/Flex Properties
Square footage renewed or re-leased (3) (3) (3) 9,000 138,658
Capitalized tenant improvements and
commissions ($000s) (3) (3) (3) $ 23 $ 418
Average per square foot of renewed or
re-leased space (3) (3) (3) $ 2.56 $ 3.01
Industrial Properties
Square footage renewed or re-leased 66,500 89,000 141,523 60,000 198,055
Capitalized tenant improvements and
commissions ($000s) $ 64 $ 60 $ 114 $ 51 $ 235
Average per square foot of renewed or
re-leased space $ 0.96 $ 0.67 $ 0.81 $ 0.85 $ 1.19
Retail Properties
Square footage renewed or re-leased 31,443 46,833 33,294 32,998 12,080
Capitalized tenant improvements and
commissions ($000s) $ 59 $ 59 $ 98 $ 83 $ 42
Average per square foot of renewed or
re-leased space $ 1.87 $ 1.25 $ 2.94 $ 2.53 $ 3.51
All Properties
Square footage renewed or re-leased 121,852 154,217 254,562 141,704 523,147
Capitalized tenant improvements and
commissions ($000s) $ 182 $ 177 $ 680 $ 774 $ 1,545
Average per square foot of renewed or
re-leased space $ 1.49 $ 1.14 $ 2.67 $ 5.46 $ 2.95
<FN>
(1) The significant increase in capitalized tenant improvements and commissions in 1995 over the previous year is
primarily the result of re-leasing 15,491 sq. ft. at Regency Westpointe. The re-lease is for a term of ten years.
There were no commissions paid in this transaction. Tenant improvements totaled $405,000. This tenant occupies 43%
of Regency Westpointe.
(2) The significant increase in capitalized tenant improvements and commissions in 1996 over the previous years is
primarily the result of tenant improvements provided in connection with a lease extension of space for the
principal tenant of the UCT Property. The lease was extended 10 years and expires in 2010.
(3) Prior to 1996, Properties currently classified as Office/Flex Properties were included in Industrial Properties.
</FN>
</TABLE>
11
<PAGE>
Multi-family Properties
The Company owns 14 multi-family Properties, aggregating 2,251 units, and
1,971,887 square feet of space. All of the units are rented to residential
tenants on either a month-to-month basis or for terms of one year or less. As of
December 31, 1997, the multi-family properties were approximately 95% leased.
The following table sets forth, for the periods specified, total units, average
occupancy, monthly average effective base rent per unit and total effective
annual base rent for the multi-family Properties.
<TABLE>
<CAPTION>
Multi-family Properties
Historical Rent and Occupancy
Average Monthly Average Total Effective
Total Occupancy Effective Base Rent Annual Base
Year Units for the Period per Leased Unit (1) Rent ($000s) (2)
<S> <C> <C> <C> <C>
1997 2,251 95% $ 619 $ 15,884
1996(3) 642 94 598 (4) 4,328
1995 104 94 630 739
1994 104 98 632 774
1993 104 93 632 734
<FN>
(1) Total Effective Annual Base Rent divided by average occupied unit.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the period.
(3) Includes the TRP Properties. For these Properties, occupancy rates are presented as of December 31, 1996, and base
rents are presented on an annualized basis based on results since the acquisition as this information was not
available for the year ended December 31, 1996.
(4) Average effective monthly base rent per unit declined in 1996 due to the acquisition of properties with lower base
rents.
</FN>
</TABLE>
Hotels
The Hotel portfolio consists of six hotels (the "Hotels," and each a "Hotel")
ranging from 64 to 163 rooms each. Four of the Hotels are all-suite Hotels which
consist primarily of one-bedroom suites, but each also includes some studio
suites and two-bedroom suites. All of the Hotels are currently operating under
license agreements with Country Lodging by Carlson, Inc. The four all-suite
Hotels are marketed as Country Suites by Carlson ("Country Suites") and of the
other two Hotels, one is marketed as a Country Inn by Carlson and one is
marketed as a Country Inn and Suites by Carlson. Country Lodging is part of the
Carlson Companies, based in Minneapolis, Minnesota. The Carlson Companies own,
operate and franchise Radisson Hotels, TGI Friday's Restaurants, Country Kitchen
Restaurants and the Carlson Travel Agency Network.
12
<PAGE>
The following table contains, for the periods indicated, occupancy, average
daily rate ("ADR") and revenue per available room ("REVPAR") information for the
Company's Hotels as well as comparative information for all U.S. Hotels and all
Country Lodging hotels.
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1994 1995 1996 1997
Irving, TX
<S> <C> <C> <C> <C> <C>
Occupancy 76.3% 77.5% 76.0% 75.2% 66.8%
ADR $ 50.22 $ 58.52 $ 66.55 $ 76.56 $ 70.38
REVPAR $ 38.33 $ 45.36 $ 50.57 $ 57.28 $ 47.19
Ontario, CA
Occupancy 59.6% 56.4% 65.5% 71.6% 75.3%
ADR $ 51.61 $ 52.02 $ 48.38 $ 54.89 $ 62.45
REVPAR $ 30.74 $ 29.35 $ 31.67 $ 38.95 $ 47.02
Arlington, TX
Occupancy 61.0% 63.4% 70.2% 68.7% 70.0%
ADR $ 51.58 $ 62.73 $ 64.96 $ 67.61 $ 66.34
REVPAR $ 31.46 $ 39.79 $ 45.63 $ 45.75 $ 46.45
Tucson, AZ
Occupancy 77.4% 77.4% 79.0% 81.4% 77.7%
ADR $ 54.46 $ 57.21 $ 58.93 $ 63.85 $ 66.42
REVPAR $ 42.16 $ 44.29 $ 46.53 $ 50.42 $ 51.60
San Antonio, TX (3)
Occupancy -- -- 53.3%(5) 54.6%(6) 63.2%
ADR -- -- $ 57.80(5) $ 58.68(6) $ 51.51
REVPAR -- -- $ 30.79(5) $ 32.03(6) $ 32.55
Scottsdale, AZ (4)
Occupancy -- -- -- 62.7%(7) 66.8%(8)
ADR -- -- -- $ 84.82(7) $ 92.84(8)
REVPAR -- -- -- $ 53.18(7) $ 62.05(8)
All U.S. Hotels (1)
Occupancy 63.7% 65.2% 66.0% 65.7% 64.5%
ADR $ 60.99 $ 63.63 $ 66.88 $ 71.66 $ 75.16
REVPAR $ 38.85 $ 41.49 $ 44.14 $ 47.06 $ 48.48
Country Lodging System (2)
Occupancy 71.4% 75.0% 75.4% 73.0% 70.0%
ADR $ 50.00 $ 53.00 $ 56.00 $ 62.42 $ 63.00
REVPAR $ 35.72 $ 39.75 $ 41.00 $ 45.45 $ 44.10
<FN>
(1) Source: Smith Travel Research and Country Hospitality.
(2) Source: Country Hospitality. Data for all years is limited to U.S. properties.
(3) The San Antonio Hotel opened in 1995.
(4) The Scottsdale Hotel opened in 1996.
(5) Information supplied for historical comparison only as this hotel was not acquired by the Company until August
1996. Source: Unaudited operating statements provided by previous owner of the hotel.
(6) Information represents a full year of operations including operations prior to the Company's acquisition of the
hotel in August 1996.
(7) Information supplied for historical comparison only as this hotel was not acquired by the Company until February
1997. Source: Unaudited operating statements provided by previous owner of the hotel.
(8) Information represents a full year of operations including operations prior to the Company's acquisition of the
hotel in February 1997.
</FN>
</TABLE>
The Percentage Leases
In order for the Company to qualify as a REIT, neither the Company nor the
Operating Partnership can operate the Hotels. Therefore, the Operating
Partnership has leased five of the Hotels to GHG, each for a term of five years
pursuant to percentage leases ("Percentage Leases") which provide for rent equal
to the greater of the Base Rent (as defined in the Percentage Leases) or a
specified percentage of room revenues (the "Percentage Rent"). Each Hotel is
separately leased to GHG. GHG's ability to make rent payments will, to a large
degree, depend on its ability to generate cash flow from the operations of the
Hotels. Each Percentage Lease contains the provisions described below.
13
<PAGE>
Each Percentage Lease has a non-cancelable term of five years, subject to
earlier termination upon the occurrence of certain contingencies described in
the Percentage Lease. The lessee under the Percentage Lease has one five-year
renewal option at the then current fair market rent.
During the term of each Percentage Lease, the lessee is obligated to pay the
greater of Base Rent or Percentage Rent. Base Rent accrues and is required to be
paid monthly in advance. Percentage Rent is calculated by multiplying fixed
percentages by room revenues for each of the five Hotels owned by the Company.
The applicable percentage changes when revenue exceeds a specified threshold,
and the threshold may be adjusted annually in accordance with changes in the
applicable CPI. Percentage Rent accrues monthly and is due quarterly.
The table below sets forth the annual Base Rent and the Percentage Rent formulas
for each of the five Hotels owned by the Company.
<TABLE>
<CAPTION>
Percentage Rent Incurred
Hotel Initial Annual for the year ended
Location Base Rent December 31, 1997 Annual Percentage Rent Formulas
<S> <C> <C> <C>
Ontario, CA $ 240,000 $ 324,000 24% of the first $1,668,000 of room revenue plus
40% of room revenue above $1,668,000 and 5% of
other revenue
Arlington, TX $ 360,000 $ 333,000 27% of the first $1,694,000 of room revenue plus
42% of room revenue above $1,694,000 and 5% of
other revenue
Tucson, AZ $ 600,000 $ 682,000 40% of the first $1,429,000 of room revenue plus
46% of room revenue above $1,429,000 and 5% of
other revenue
San Antonio, TX $ 312,000 $ 3,000 33% of the first $1,240,000 of room revenue plus
40% of room revenue above $1,240,000 and 5% of
other revenue
Scottsdale, AZ $ 720,000 (1) $ 548,000 41% of the first $2,600,000 of room revenue plus
60% of room revenue above $2,600,000 and 5% of
other revenue
<FN>
(1) Hotel was acquired in February 1997, therefore, rent incurred for the year ended December 31, 1997 was less than
a full year's rent.
</FN>
</TABLE>
Other than real estate and personal property taxes, casualty insurance, a fixed
capital improvement allowance and maintenance of underground utilities and
structural elements, which are the responsibility of the Company, the Percentage
Leases require the lessee to pay rent, insurance, salaries, utilities and all
other operating costs incurred in the operation of the Hotels.
GHG will not be permitted to sublet all or any part of the Hotels or to assign
its interest under any of the Percentage Leases, other than to an affiliate,
without the prior written consent of the Company. No assignment or subletting
will release GHG from any of its obligations under the Percentage Leases.
If the Company enters into an agreement to sell or otherwise transfer a Hotel,
the Company has the right to terminate the Percentage Lease with respect to such
Hotel upon paying GHG the fair market value of its leasehold interest in the
remaining term of the Percentage Lease to be terminated.
Mortgage Loans Receivable
Although the Company does not intend to engage in the business of making real
estate loans, the Company holds two notes receivable, secured by first priority
real property liens, which had a total outstanding principal balance of
$3,692,000 at December 31, 1997. As of the date of this filing, all payments are
current. In connection with the Grunow loan, the Company entered into an Option
Agreement which provides the Operating Partnership the option to purchase the
Grunow Medical building based on an agreed upon formula. See Note 5 in Item 14
for further discussion. The following table summarizes these two mortgages.
14
<PAGE>
<TABLE>
<CAPTION>
Summary of Mortgage Loans Receivable
Principal Current
Collateral Property Balance at Interest
Name Type 12/31/97 Rate Maturity
<S> <C> <C> <C> <C>
Laurel Cranford Industrial $ 507,000 9.00% 6/1/01
Grunow Medical Office $ 3,185,000 11.00% 11/19/99
</TABLE>
Item 3. 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 GRT Predecessor Entities, on behalf of himself
and all others (the "Blumberg Action") similarly situated. The defendants are GC
(formerly known as Glenborough Realty Corporation), Glenborough Realty
Corporation ("GRC"), Robert Batinovich, the Partnerships and the Company.
The complaint alleged breaches by the defendants of their fiduciary duty and
duty of good faith and fair dealing to investors in the Partnerships. The
complaint sought injunctive relief and compensatory damages. The complaint
alleged that the valuation of GC was excessive and was done without appraisal of
GC's business or assets. The complaint further alleged that the interest rate
for the Notes to be issued to investors in lieu of shares of Common Stock, if
they so elected was too low for the risk involved and that the Notes would
likely sell, if at all, at a substantial discount from their face value (as a
matter entirely distinct from the litigation and subsequent settlement, the
Company, as it had the option to, paid in full the amounts due plus interest in
lieu of issuing Notes).
On October 9, 1995 the parties entered into an agreement to settle the action.
The defendants, in entering into the settlement agreement, did not acknowledge
any fault, liability or wrongdoing of any kind and continue to deny all material
allegations asserted in the litigation. Pursuant to the settlement agreement,
the defendants will be released from all claims, known or unknown, that have
been, could have been, or in the future might be asserted, relating to, among
other things, the Consolidation, the acquisition of the Company's shares
pursuant to the Consolidation, any misrepresentation or omission in the
Registration Statement on Form S-4, filed by the Company on September 1, 1994,
as amended, or the prospectus contained therein ("Prospectus/Consent
Solicitation Statement"), or the subject matter of the lawsuit. In return, the
defendants agreed to the following: (a) the inclusion of additional or expanded
disclosure in the Prospectus Consent Solicitation Statement, and (b) the
placement of certain restrictions on the sale of the stock by certain insiders
and the granting of stock options to certain insiders following consummation of
the Consolidation. Plaintiff's counsel indicated that it would request that the
court award it $850,000 in attorneys' fees, costs and expenses. In addition,
plaintiffs' counsel indicated it would request the court for an award of $5,000
payable to Anthony E. Blumberg as the class representative. The defendants
agreed not to oppose such requests.
On October 11, 1995, the court certified the class for purposes of settlement,
and scheduled a hearing to determine whether it should approve the settlement
and class counsel's application for fees. A notice of the proposed settlement
was distributed to the members of the class on November 15, 1995. The notice
specified that, in order to be heard at the hearing, any class member objecting
to the proposed settlement must, by December 15, 1995, file a notice of intent
to appear, and a detailed statement of the grounds for their objection.
Objections were received from a small number of class members. The objections
reiterated the claims in the original Blumberg complaint, and asserted that the
settlement agreement did not adequately compensate the class for releasing those
claims. One of the objections was filed by the same law firm that brought the
BEJ Action described below.
At a hearing on January 17, 1996, the court heard the arguments of the objectors
seeking to overturn the settlement, as well as the arguments of the plaintiffs
and the defendants in defense of the settlement. The court granted all parties a
period of time in which to file additional pleadings. On June 4, 1996, the court
granted approval of the settlement, finding it fundamentally fair, adequate and
reasonable to the respective parties to the settlement. However, the objectors
gave notice of their intent to appeal the June 4 decision. All parties filed
their briefs and a hearing was held on February 3, 1998. On February 17, 1998,
the court of appeals rendered its decision rejecting the objectors' contentions
and upholding the settlement.
15
<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 GRT Predecessor Entities known as Outlook Properties
Fund IV, Glenborough All Suites Hotels, L.P., Glenborough Pension Investors,
Equitec Income Real Estate Investors-Equity Fund 4, Equitec Income Real Estate
Investors C and Equitec Mortgage Investors Fund IV, on behalf of themselves and
all others similarly situated. The defendants are GRC, GC, the Company, GPA,
Ltd., Robert Batinovich and Andrew Batinovich. The Partnerships are named as
nominal defendants.
This action alleges the same disclosure violations and breaches of fiduciary
duty as were alleged in the Blumberg Action. The complaint sought injunctive
relief, which was denied at a hearing on December 22, 1995. At that hearing, the
court also deferred all further proceedings in this case until after the
scheduled January 17, 1996 hearing in the Blumberg Action. Following several
stipulated extensions of time for the Company to respond to the complaint, the
Company filed a motion to dismiss the case. Plaintiffs in the BEJ Action
voluntarily stayed the action pending resolution of the Blumberg Action; such
plaintiffs can revive their lawsuit.
It is management's position that the BEJ Action, and the objections to the
settlement of the Blumberg Action, are without merit, and management intends to
pursue a vigorous defense in both matters. The Company believes that it is very
unlikely that this litigation would result in a liability that would exceed the
accrued liability by a material amount. However, given the inherent
uncertainties of litigation, there can be no assurance that the ultimate outcome
in these two legal proceedings will be in the Company's favor.
Certain other claims and lawsuits have arisen against the Company in its normal
course of business. The Company believes that such other claims and lawsuits
will not have a material adverse effect on the Company's financial position,
cash flow or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
The company did not submit any matters to a vote of security holders in the
fourth quarter of the year ended December 31, 1997.
16
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Preferred Stock and
Related Stockholder Matters
(a) Market Information
On January 31, 1996, the Company's Common Stock began trading on the NYSE at
$12.00 per share under the symbol "GLB". On December 31, 1997, the closing price
of the Company's Common Stock was $29.625. On January 28, 1998, the Company's 7
3/4% Series A Convertible Preferred Stock (the "Preferred Stock") began trading
on the NYSE at $25.00 per share under the symbol "GLB Pr A". On March 20, 1998,
the last reported sales prices per share of the Company's Common Stock and
Preferred Stock on the NYSE were $29.5625 and $26.875, respectively. The
following table sets forth the high and low closing prices per share of the
Company's Common Stock and Preferred Stock for the periods indicated, as
reported on the NYSE composite tape.
Common Stock Preferred Stock
Quarterly Period High Low High Low
1996
First Quarter (1) $ 14.375 $ 12.000 (2) (2)
Second Quarter 15.250 13.375 (2) (2)
Third Quarter 14.750 13.375 (2) (2)
Fourth Quarter 17.625 13.625 (2) (2)
1997
First Quarter $ 20.500 $ 16.750 (2) (2)
Second Quarter 25.250 19.375 (2) (2)
Third Quarter 28.188 22.313 (2) (2)
Fourth Quarter 30.125 24.250 (2) (2)
1998
First Quarter (3) $ 31.750 $ 26.125 $ 27.000 $ 25.500
(1) Although the Consolidation occurred on December 31, 1995 and the Company
began paying distributions on its Common Stock based on earnings in the first
quarter of 1996, the Common Stock did not begin trading on the NYSE until
January 31, 1996.
(2) The Company's Preferred Stock did not begin trading on the NYSE until
January 28, 1998.
(3) High and low stock closing prices through March 20, 1998.
Holders
The approximate number of holders of record of the shares of the Company's
Common Stock and Preferred Stock were 4,951 and 19, respectively, as of March
20, 1998.
Distributions
Since the Consolidation, the Company has paid regular quarterly distributions to
holders of its Common Stock. During the years ended December 31, 1996 and 1997,
the Company declared and/or paid the following quarterly distributions:
Distributions Total
Quarterly Period per share Distributions
1996
First Quarter $ 0.30 $ 1,726,000
Second Quarter $ 0.30 $ 1,737,000
Third Quarter $ 0.30 $ 2,891,000
Fourth Quarter $ 0.32(1) $ 3,092,000(1)
1997
First Quarter $ 0.32 $ 4,222,000
Second Quarter $ 0.32 $ 6,456,000
Third Quarter $ 0.32 $ 10,072,000
Fourth Quarter $ 0.42(2) $ 13,250,000(2)
(1) Distributions for the fourth quarter of 1996 were paid on February 19, 1997.
(2) Distributions for the fourth quarter of 1997 were paid on January 27, 1998.
17
<PAGE>
The Company intends to declare regular quarterly distributions to its
stockholders. Federal income tax law requires that a REIT distribute annually at
least 95% of its REIT taxable income. Future distributions by the Company will
be at the discretion of the Board of Directors and will depend upon the actual
Funds from Operations of the Company, its financial condition, capital
requirements, the annual distribution requirements under the REIT provisions of
the Internal Revenue Code, applicable legal restrictions and such other factors
as the Board of Directors deems relevant. The Company intends to continue its
policy of paying quarterly distributions, but there can be no assurance that
distributions will continue or be paid at any specific level.
(b) Recent Sales of Unregistered Securities
In December 1997, the Company and Glenborough Properties, L.P. (the "Operating
Partnership," as to which the Company is general partner) issued approximately
$14.1 million in the form of 433,362 partnership units in the Operating
Partnership and 72,564 unregistered shares of Common Stock of the Company (based
on an agreed per unit and per share value of $27.896) to acquire all of the
limited partnership interests of GRC Airport Associates, a California limited
partnership ("GRCAA"). The units and shares were issued to the limited partners
of GRCAA, all of whom the Company believes are accredited investors. 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. GRCAA's sole asset consisted
of one property that was sold to a third party in February 1998 and generated
net cash proceeds of approximately $14.1 million. The units and shares were
issued in reliance on the exemption provided by Section 4(2) of the Securities
Act of 1933, as amended.
Other sales of unregistered securities by the Company during 1997 are described
in the Company's Quarterly Reports on Form 10-Q for the quarters ended June 30,
1997 and September 30, 1997.
Item 6. Selected Financial Data
Set forth below are selected financial data for:
Glenborough Realty Trust Incorporated: Consolidated balance sheet data
is presented as of December 31, 1997, 1996 and 1995. Consolidated
operating data is presented for the years ended December 31, 1997 and
1996, and As Adjusted consolidated operating data is presented for the
years ended December 31, 1995 and 1994, and assumes the Consolidation
and related transactions occurred on January 1, 1994, in order to
present the operations of the Company for those periods as if the
Consolidation had been in effect for those periods and to provide
amounts which are comparable to the consolidated results of operations
of the Company for the years ended December 31, 1997 and 1996.
The GRT Predecessor Entities: Combined operating data is presented for
the years ended December 31, 1995, 1994 and 1993. The combined balance
sheet data is presented as of December 31, 1994 and 1993.
This selected financial data should be read in conjunction with the financial
statements of Glenborough Realty Trust Incorporated, including the notes
thereto, included in Item 14.
<TABLE>
<CAPTION>
As of and for the Year Ended December 31,
Historical Historical As Adjusted Historical As Adjusted Historical Historical
1997 1996 1995 1995 1994 1994 1993
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Rental Revenue......... $ 61,393 $ 17,943 $ 13,495 $ 15,454 $ 12,867 $ 13,797 $ 13,546
Fees and reimbursements 719 311 260 16,019 260 13,327 15,439
Interest and other income 1,802 1,080 982 2,698 1,109 3,557 3,239
Equity in earnings of
Associated Companies 2,743 1,598 1,691 -- 1,649 -- --
Total Revenues(1)...... 68,148 21,253 16,428 34,171 15,885 30,681 32,224
Property operating expenses 18,958 5,266 4,084 8,576 3,673 6,782 7,553
General and administrative 3,319 1,393 983 15,947 954 13,454 14,321
Interest expense....... 9,668 3,913 2,767 2,129 2,767 1,140 1,301
Depreciation and
Amortization......... 14,873 4,575 3,654 4,762 3,442 4,041 4,572
Income (loss) from
operations before minority
interest and extraordinary
items 21,330 (1,131) 4,077 524 (2,721) 1,580 2,144
Net income (loss)(2)... 19,368 (1,609) 3,796 524 (3,093) 1,580 4,418
Diluted amounts per share(3):
Net income (loss) before
extraordinary items $ 1.09 $ (0.21) $ 0.66 -- $ (0.47) -- --
Net income (loss).... 1.05 (0.24) 0.66 -- (0.54) -- --
Distributions(4)..... 1.38 1.22 1.20 -- 1.20 -- --
</TABLE>
continued
18
<PAGE>
<TABLE>
<CAPTION>
As of and for the Year Ended December 31,
Historical Historical As Adjusted Historical As Adjusted Historical Historical
1997 1996 1995 1995 1994 1994 1993
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Net investment in real estate $ 825,218 $ 161,945 -- $ 77,574 -- $ 63,994 $ 70,245
Mortgage loans receivable,
net.................. 3,692 9,905 -- 7,465 -- 19,953 18,825
Total assets........... 865,774 185,520 -- 105,740 -- 117,321 102,635
Total debt............. 228,299 75,891 -- 36,168 -- 17,906 12,172
Stockholders' equity... 580,123 97,600 -- 55,628 -- 80,558 85,841
Other Data:
EBIDA(5)............... $ 44,380 $ 14,273 -- $ 9,291 -- $ 10,269 $ 10,326
Cash flow provided by (used
for):
Operating activities. 24,078 4,138 $ 4,656 (10,608) $ 5,742 22,426 12,505
Investing activities. (569,242) (61,833) 3,263 8,656 1,710 (1,947) (2,002)
Financing activities. 548,879 (54,463) (7,933) (17,390) (6,408) (2,745) (8,927)
FFO(6)................. 36,087 11,491 9,638 7,162 9,536 9,129 9,025
CAD(7),(8)............. 32,335 10,497 8,856 3,237 8,754 6,919 6,921
Debt to total market
capitalization(9).... 18.5% 29.5% -- -- -- -- --
Ratio of Earnings to Fixed
Charges (10) 3.21 0.71 -- 1.41 -- 2.58 2.67
<FN>
(1) Certain revenues which are included in the historical combined amounts for 1995 and prior are not included on an adjusted
basis. These revenues are included in two unconsolidated Associated Companies, GHG and GC, on an as adjusted basis, from which
the Company receives lease payments and dividends.
(2) Historical 1996 and as adjusted 1994 net losses reflect $7,237 of Consolidation and litigation costs incurred in connection
with the Consolidation. As adjusted 1994 data give effect to the Consolidation and related transactions as if such
transactions had occurred on January 1, 1994, whereas historical 1996 data reflect such transactions in the periods they were
expensed. The Consolidation and litigation costs were expensed on January 1, 1996, the Company's first day of operations.
(3) Diluted amounts are computed in accordance with SFAS No. 128 - "Earnings Per Share" and include the dilutive effects of all
classes of securities outstanding at year-end, including units of Operating Partnership interests and options to purchase
stock of the Company. As adjusted net income per share is based upon as adjusted weighted average shares outstanding of
5,753,709 for 1995 and 1994.
(4) Historical distributions per unit for the years ended December 31, 1997 and 1996 consist of distributions declared for the
periods then ended. As adjusted distributions per unit for each of the years ended December 31, 1995 and 1994 are based on
$0.30 per unit per quarter.
(5) EBIDA is computed as income (loss) before minority interests and extraordinary items plus interest expense, depreciation and
amortization, gains (losses) on disposal of properties and loss provisions. In 1996, consolidation and litigation costs were
also added back to net income to determine EBIDA. The Company believes that in addition to net income and cash flows, EBIDA is
a useful measure of the financial performance of an equity REIT because, together with net income and cash flows, EBIDA
provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund
acquisitions, developments and other capital expenditures. To evaluate EBIDA and the trends it depicts, the components of
EBIDA, such as rental revenues, rental expenses, real estate taxes and general and administrative expenses, should be
considered. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Excluded from EBIDA
are financing costs such as interest as well as depreciation and amortization, each of which can significantly affect a REIT's
results of operations and liquidity and should be considered in evaluating a REIT's operating performance. Further, EBIDA does
not represent net income or cash flows from operating, financing and investing activities as defined by generally accepted
accounting principles and does not necessarily indicate that cash flows will be sufficient to fund all of the Company's cash
needs. It should not be considered as an alternative to net income as an indicator of the Company's operating performance or
as an alternative to cash flows as a measure of liquidity. Further, EBIDA as disclosed by other REITs may not be comparable to
the Company's calculation of EBIDA. The following table reconciles net income (loss) of the Company to EBIDA for the periods
presented:
</FN>
</TABLE>
<TABLE>
<CAPTION>
As of and for the Year Ended December 31,
Historical Historical Historical Historical Historical
1997 1996 1995 1994 1993
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net income (loss)...... $ 19,368 $ (1,609) $ 524 $ 1,580 $ 4,418
Extraordinary items.... 843 186 -- -- (2,274)
Minority interest...... 1,119 292 -- -- --
Interest expense....... 9,668 3,913 2,129 1,140 1,301
Depreciation and amortization 14,873 4,575 4,762 4,041 4,572
Gains (losses) on disposal of
properties........... (1,491) (321) -- -- --
Consolidation and litigation
costs................ -- 7,237 -- -- --
Loss provisions........ -- -- 1,876 3,508 2,309
-------- -------- ------- ------- -------
EBIDA.................. 44,380 14,273 9,291 10,269 10,326
======== ======== ======= ======= =======
<FN>
(6) Funds from Operations, as defined by NAREIT, represents income (loss) before minority interests and extraordinary items,
adjusted for real estate related depreciation and amortization and gains (losses) from the disposal of properties. In 1996,
consolidation and litigation costs were also added back to net income to determine FFO. 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.
(7) Cash available for distribution ("CAD") represents net income (loss) before minority interests and extraordinary items,
adjusted for depreciation and amortization including amortization of deferred financing costs and gains (losses) from the
disposal of properties, less lease commissions and recurring capital expenditures, consisting of tenant improvements and
normal expenditures intended to extend the useful life of the property such as roof and parking lot repairs. CAD should not be
considered an alternative to net income (computed in accordance with GAAP) as a measure of the Company's financial performance
or as an alternative to cash flow from operating activities (computed in accordance with GAAP) as a measure of the Company's
liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's cash needs. Further, CAD as
disclosed by other REITs may not be comparable to the Company's calculation of CAD.
(8) CAD for the year ended December 31, 1995 excludes approximately $6,782 that represents the net proceeds received from the
prepayment of a mortgage loan receivable and the repayment of a related wrap note payable.
19
<PAGE>
(9) Debt to total market capitalization is calculated as total debt at period end divided by total debt plus the market value of
the Company's outstanding common stock, on a fully converted basis, based upon the closing price of the Common Stock of
$29.625 on December 31, 1997, and $17.625 on December 31, 1996.
(10)The ratio of earnings to fixed charges is computed as net income (loss) from operations, before extraordinary items, plus
fixed charges (excluding capitalized interest) divided by fixed charges. Fixed charges consist of interest costs including
amortization of deferred financing costs.
</FN>
</TABLE>
Funds from Operations
Funds from Operations, as defined by NAREIT, represents income (loss) before
minority interests and extraordinary items, adjusted for real estate related
depreciation and amortization and gains (losses) from the disposal of
properties. The Company believes that FFO is an important and widely used
measure of the financial performance of equity REITs which provides a relevant
basis for comparison among other REITs. Together with net income and cash flows,
FFO provides investors with an additional basis to evaluate the ability of a
REIT to incur and service debt and to fund acquisitions, developments and other
capital expenditures. FFO does not represent net income or cash flows from
operations as defined by GAAP, and should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indicator of the Company's
operating performance or as an alternative to cash flows from operating,
investing and financing activities (determined in accordance with GAAP) as a
measure of liquidity. FFO does not necessarily indicate that cash flows will be
sufficient to fund all of the Company's cash needs including principal
amortization, capital improvements and distributions to stockholders. Further,
FFO as disclosed by other REITs may not be comparable to the Company's
calculation of FFO. The Company calculates FFO in accordance with the White
Paper on FFO approved by the Board of Governors of NAREIT in March 1995.
Cash available for distribution ("CAD") represents net income (loss) before
minority interests and extraordinary items, adjusted for depreciation and
amortization including amortization of deferred financing costs and gains
(losses) from the disposal of properties, less lease commissions and recurring
capital expenditures, consisting of tenant improvements and normal expenditures
intended to extend the useful life of the property such as roof and parking lot
repairs. CAD should not be considered an alternative to net income (computed in
accordance with GAAP) as a measure of the Company's financial performance or as
an alternative to cash flow from operating activities (computed in accordance
with GAAP) as a measure of the Company's liquidity, nor is it necessarily
indicative of sufficient cash flow to fund all of the Company's cash needs.
Further, CAD as disclosed by other REITs may not be comparable to the Company's
calculation of CAD.
The following table sets forth the Company's calculation of FFO and CAD for the
three months ended March 31, June 30, September 30 and December 31, 1997 and the
year ended December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
Year to
March 31, June 30, Sept 30, Dec 31, Date
1997 1997 1997 1997 1997
------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net income before minority interest $ 2,594 $ 4,639 $ 4,958 $ 9,139 $ 21,330
Gain on collection of mortgage loan receivable (154) (498) -- -- (652)
Net gain on sales of rental properties -- (570) 15 (284) (839)
Prepayment penalty on payoff of mortgage loan -- -- 75 -- 75
Depreciation and amortization 1,537 2,507 4,823 6,006 14,873
Adjustment to reflect FFO of Associated
Companies (1) 623 248 (776) 1,205 1,300
------------- ------------- ------------- -------------- --------------
FFO $ 4,600 $ 6,326 $ 9,095 $ 16,066 $ 36,087
============= ============= ============= ============== ==============
Amortization of deferred financing fees 64 64 46 47 221
Capital reserve (110) (220) (204) (748) (1,282)
Capital expenditures (421) (541) (853) (876) (2,691)
------------- ------------- ------------- -------------- --------------
CAD $ 4,133 $ 5,629 $ 8,084 $ 14,489 $ 32,335
============= ============= ============= ============== ==============
Distributions per share (2) $ 0.32 $ 0.32 $ 0.32 $ 0.42 $ 1.38
============= ============= ============= ============== ==============
Fully converted weighted average shares
outstanding 10,935,951 14,466,852 21,194,507 31,512,511 19,688,489
============= ============= ============= ============== ==============
<FN>
(1) Reflects the adjustments to FFO required to reflect the FFO of the Associated Companies allocable to the Company. The
Company's investments in the Associated Companies are accounted for using the equity method of accounting.
(2) The distributions for the three months ended December 31, 1997, were paid on January 27, 1998.
</FN>
</TABLE>
20
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the selected data in
Item 6 and the Consolidated Financial Statements of Glenborough Realty Trust
Incorporated and the GRT Predecessor Entities, including the notes thereto,
included in Item 14.
Background
The Company commenced operations on December 31, 1995, through the merger (the
"Consolidation") of eight public limited partnerships (the "Partnerships") and a
management company, Glenborough Corporation ("GC", and with the Partnerships,
collectively, the "GRT Predecessor Entities") with and into the Company. A
portion of the Company's operations is conducted through Glenborough Properties,
L.P. (the "Operating Partnership") in which the Company holds a 1% interest as
the sole general partner and a 91.48% limited partner interest as of December
31, 1997. The Company has made an election to be taxed as a REIT under Sections
856 through 860 of the Internal Revenue Code.
The statements of operations, equity and cash flows for the year ended December
31, 1995, of the GRT Predecessor Entities includes the historical operations of
GC and the Partnerships. This statement has been adjusted to reflect the
consolidation of two joint ventures which were, in aggregate, wholly owned by
the Partnerships. The statements of operations, equity and cash flows for the
year ended December 31, 1995, of the GRT Predecessor Entities are included as
the Consolidation of these entities to form the Company did not occur until
December 31, 1995.
Certain components of the Company's results of operations are not comparable to
those of the GRT Predecessor Entities. The primary reason for the difference is
the segregation in 1996 of the operations (management fees and reimbursements,
as well as related expenses) of GC and Glenborough Hotel Group (collectively,
the "Associated Companies"), all of which were combined in the GRT Predecessor
Entities 1995 financial statements. Effective January 1, 1996, the Company owns
100% of the preferred stock in each of the Associated Companies and accounts for
its interests under the equity method. Another factor in the comparability
difference is the change in the operational structure of the three hotel
properties owned at the time of the Consolidation.
The Hotels were wholly owned by the GRT Predecessor Entities and, thus, the
operations of the Hotels were included in the financial statements of the GRT
Predecessor Entities. In order for the Company to qualify as a REIT, neither the
Company nor the Operating Partnership can operate the Hotels. Under the current
structure, the Company owns the Hotels but leases them to GHG. The Company
includes only the related lease payments earned from GHG in its statement of
operations. When comparing historical year ended December 31, 1996 to historical
year ended December 31, 1995, the decreases in fees and reimbursements, property
operating expenses and general and administrative expenses are the primary
components affected by these changes in structure.
Results of Operations
Comparison of the historical year ended December 31, 1997 to the historical year
ended December 31, 1996.
Following is a table of net operating income by property type, for comparative
purposes, presenting the results for the years ended December 31, 1997 and 1996.
21
<PAGE>
<TABLE>
<CAPTION>
Results of Operations by Property Type
For the Years Ended December 31, 1997 and 1996
(in thousands)
Office/ Multi- Property Eliminating Total
Office Flex Industrial Retail Family Hotel Total Entry(1) Reported
1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $25,071 $10,354 $7,320 $7,224 $5,536 $5,980 $61,485 ($92) $61,393
Operating Expenses 9,986 3,062 1,459 2,183 2,309 1,894 20,893 ($1,935) 18,958
Net Operating Income 15,085 7,292 5,861 5,041 3,227 4,086 40,592 1,843 42,435
Percentage of
Total NOI 37% 18% 15% 12% 8% 10% 100%
1996
Revenue $3,905 $769 $3,491 $3,746 $1,519 $4,513 $17,943 $17,943
Operating Expenses 1,697 275 469 991 601 1,698 5,731 ($465) 5,266
Net Operating Income 2,208 494 3,022 2,755 918 2,815 12,212 465 12,677
Percentage of
Total NOI 18% 4% 25% 23% 7% 23% 100%
<FN>
(1) Eliminating entry represents internal market level property management fees included in operating expenses to
provide comparison to industry performance.
</FN>
</TABLE>
Rental Revenue. Rental revenue increased $43,450,000, or 242%, to $61,393,000
for the year ended December 31, 1997, from $17,943,000 for the year ended
December 31, 1996. The increase included growth in revenue from the office,
office/flex, industrial, retail, multi-family and hotel Properties of
$21,166,000, $9,585,000, $3,829,000, $3,478,000, $4,017,000 and $1,467,000,
respectively. Of the rental revenue for the year ended December 31, 1997,
$48,030,000 represents rental revenue generated from the acquisition of 20
properties (the "1996 Acquisitions") in the third and fourth quarters of 1996
and the acquisition of 89 properties during the year ended December 31, 1997
(the "1997 Acquisitions"). The increase in rental revenue for the year ended
December 31, 1997, was partially offset by a decrease in revenue due to the 1996
sale of two industrial properties and the 1997 sales of sixteen retail
properties.
Fees and Reimbursements. Fees and reimbursements revenue consists primarily of
property management fees, asset management fees and lease commissions paid to
the Company under property and asset management agreements. This revenue
increased $408,000, or 131%, to $719,000 for the year ended December 31, 1997,
from $311,000 for the year ended December 31, 1996. The increase primarily
consisted of increases in asset management fees of $131,000, property management
fees of $257,000 and lease commissions of $20,000. The Company's contract was
expanded to include asset management fees in 1997.
Interest and Other Income. Interest and other income, which consists primarily
of interest on cash investments and mortgage loans receivable, increased
$722,000, or 67%, to $1,802,000 for the year ended December 31, 1997, from
$1,080,000 for the year ended December 31, 1996. The increase was primarily due
to a $1,040,000 increase in interest income as a result of higher invested cash
balances and a $365,000 increase in interest income from the Grunow mortgage
loan receivable. This increase in interest income is partially offset by a
$649,000 reduction in interest and other income due to the payoff of the Hovpark
mortgage loan receivable in January 1997.
Equity in Earnings of Associated Companies. Equity in earnings of Associated
Companies increased $1,145,000, or 72%, to $2,743,000 for the year ended
December 31, 1997, from $1,598,000 for the year ended December 31, 1996. This
increase was primarily due to an increase in the net operating income of
Glenborough Hotel Group ("GHG") due to the lease of the Scottsdale Hotel and
from a $1,381,000 gain on the liquidation of Atlantic Pacific Assurance Company,
Limited ("APAC", a Bermuda corporation formed to underwrite certain insurable
risks of certain GLB predecessor partnerships and related entities) and an
increase in transaction fees earned by GC. The increase is offset by reduced
management fees in 1997 as a result of the sales of several properties under
management and partnership liquidations, as well as the write-off of GC's
unamortized balance of its investment in a management contract.
22
<PAGE>
Net Gain on Sales of Rental Properties. The net gain on sales of rental
properties of $839,000 during the year ended December 31, 1997, resulted from
the sales of sixteen retail properties. The net gain on sales of rental
properties of $321,000 during the year ended December 31, 1996, resulted from
the sale of two self-storage facilities from the Company's industrial portfolio.
Gain on Collection of Mortgage Loan Receivable. The gain on collection of
mortgage loan receivable of $652,000 during the year ended December 31, 1997
resulted from the collection of the Hovpark mortgage loan receivable which had a
net carrying value of $6,700,000. The payoff amount totaled $6,863,000 in cash,
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 $13,692,000,
or 260%, to $18,958,000 for the year ended December 31, 1997, from $5,266,000
for the year ended December 31, 1996. Of this increase, $14,687,000 represents
property operating expenses attributable to the 1996 Acquisitions and the 1997
Acquisitions, which was slightly offset by the reduction in expenses resulting
from the 1996 sale of two industrial properties and the 1997 sales of sixteen
retail properties.
General and Administrative Expenses. General and administrative expenses
increased $1,926,000, or 138%, to $3,319,000 for the year ended December 31,
1997, from $1,393,000 for the year ended December 31, 1996. The increase is
primarily due to increased salary and overhead costs resulting from the 1996
Acquisitions and the 1997 Acquisitions.
Depreciation and Amortization. Depreciation and amortization increased
$10,298,000, or 225%, to $14,873,000 for the year ended December 31, 1997, from
$4,575,000 for the year ended December 31, 1996. The increase is primarily due
to depreciation and amortization associated with the 1996 Acquisitions and the
1997 Acquisitions.
Interest Expense. Interest expense increased $5,755,000, or 147%, to $9,668,000
for the year ended December 31, 1997, from $3,913,000 for the year ended
December 31, 1996. Substantially all of the increase was the result of higher
average borrowings during the year ended December 31, 1997, as compared to the
year ended December 31, 1996, due to new debt and the assumption of debt related
to the 1996 Acquisitions and the 1997 Acquisitions.
Loss on early extinguishment of debt. Loss on early extinguishment of debt of
$843,000 during the year ended December 31, 1997, resulted from the write-off of
unamortized loan fees related to the $50 million secured line of credit from
Wells Fargo Bank which was replaced with a new $250 million unsecured line of
credit (the "Acquisition Credit Facility") from Wells Fargo Bank. Loss on early
extinguishment of debt of $186,000 during the year ended December 31, 1996,
resulted from the write-off of unamortized loan fees related to the $10,000,000
line of credit from Imperial Bank which was paid-off with proceeds from the $50
million secured line of credit from Wells Fargo Bank.
Comparison of the historical year ended December 31, 1996 to the as adjusted
year ended December 31, 1995.
Set forth below is a discussion comparing the historical results of operations
for the year ended December 31, 1996 to the results of operations for the year
ended December 31, 1995 adjusted to reflect the Consolidation as if the
Consolidation had occurred on January 1, 1994.
Following is a table of net operating income by property type, for comparative
purposes, presenting the results for the year ended December 31, 1996 and the as
adjusted year ended December 31, 1995.
23
<PAGE>
<TABLE>
<CAPTION>
Results of Operations by Property Type
Historical Year Ended December 31, 1996 and As Adjusted Year Ended December 31, 1995
Multi- Property Eliminating Total
Office Industrial Retail Family Hotel Total Entry(1) Reported
1996 Historical
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $3,905,000 $4,260,000 $3,746,000 $1,519,000 $4,513,000 $17,943,000 $17,943,000
Operating Expenses 1,697,000 744,000 991,000 601,000 1,698,000 5,731,000 ($465,000) 5,266,000
Net Operating Income 2,208,000 3,516,000 2,755,000 918,000 2,815,000 12,212,000 465,000 12,677,000
Percentage of
Total NOI 18% 29% 23% 7% 23% 100%
1995 As Adjusted
Revenue $1,280,000 $4,133,000 $3,366,000 $782,000 $3,934,000 $13,495,000 $13,495,000
Operating Expenses 599,000 775,000 814,000 448,000 1,718,000 4,354,000 ($270,000) 4,084,000
Net Operating Income 681,000 3,358,000 2,552,000 334,000 2,216,000 9,141,000 270,000 9,411,000
Percentage of
Total NOI 7% 37% 28% 4% 24% 100%
<FN>
(1) Eliminating entry represents internal market level property management fees included in operating expenses to
provide comparison to industry performance.
</FN>
</TABLE>
Rental Revenue. Rental Revenue increased by $4,448,000, or 33%, to $17,943,000
for the year ended December 31, 1996 from $13,495,000 for the as adjusted year
ended December 31, 1995. The increase consisted of increases in revenue from the
office, industrial, retail, multi-family and hotel properties of $2,625,000,
$127,000, $380,000, $737,000 and $579,000, respectively. Moreover, of this
increase, $4,442,000 represents rental revenue generated from the acquisition in
1996 of 20 properties (the "1996 Acquisitions"). The increase was offset by the
elimination of revenue from two industrial properties which were sold in June
1996. These properties represented annual revenue of approximately $600,000.
Fees and Reimbursements. Fees and reimbursements revenue consists primarily of
asset management fees paid to the Company by a controlled partnership and
increased slightly to $311,000 in 1996 from $260,000 in 1995.
Interest and Other Income. Interest and other income consists primarily of
interest on mortgage loans receivable and increased slightly to $1,080,000 in
1996 from $982,000 in 1995.
Equity in Earnings of Associated Companies. Equity in earnings of Associated
Companies decreased slightly from $1,691,000 in 1995 to $1,598,000 in 1996,
primarily resulting from the acquisition of the UCT and Bond Street Properties
by the Company from entities controlled by the Associated Companies. Prior to
the acquisition by the Company of these Properties, the partnerships owning
these Properties paid all their fees and reimbursed all their related salary
costs to GC.
Net Gain on Sale of Rental Properties. Gain on sale of rental properties of
$321,000 during 1996 resulted from the sale of two properties held in the
Company's industrial portfolio.
Property Operating Expenses. Property operating expenses increased by
$1,182,000, or 29%, to $5,266,000 in the year ended December 31, 1996 from
$4,084,000 for the as adjusted year ended December 31, 1995. Of this increase,
$1,722,000 represents expenses of the 1996 Acquisitions, offset in part by the
reduction in expenses resulting from the sale of two industrial properties.
General and Administrative Expenses. General and administrative expenses
increased $410,000, or 42%, from $983,000 in 1995 to $1,393,000 in 1996. The
increase is due in part to increased overhead costs resulting from the 1996
Acquisitions, including a portion of the transaction costs relating to the 1996
Acquisitions.
Depreciation and Amortization. Depreciation and amortization increased $921,000,
or 25%, to $4,575,000 in 1996 from $3,654,000 in 1995. The increase was
primarily due to depreciation and amortization associated with the 1996
Acquisitions.
24
<PAGE>
Interest Expense. Interest expense increased by $1,146,000, or 41%, to
$3,913,000 in the year ended December 31, 1996 from $2,767,000 in the as
adjusted year ended December 31, 1995. Substantially all of the increase was the
result of higher average borrowings during 1996 as compared to 1995. The
increased borrowings in 1996 were used to finance the cash portion of the 1996
Acquisitions.
Consolidation Costs. Consolidation costs in 1996 consist of the costs associated
with preparing, printing and mailing the Prospectus/Consent Solicitation
Statement and other documents related to the Consolidation, and all other costs
incurred in the forwarding of the Prospectus/Consent Solicitation Statement to
investors.
Litigation Costs. Litigation costs consist of the legal fees incurred in
connection with defending two class action complaints filed by investors in
certain of the GRT Predecessor Entities as well as an accrual for the proposed
settlement in one case.
Loss on early extinguishment of debt. Loss on early extinguishment of debt of
$186,000 during the year ended December 31, 1996 resulted from the write-off of
unamortized loan fees when the $10,000,000 Imperial Bank line of credit was paid
off with proceeds from the Wells Fargo Bank line of credit.
Comparison of the historical year ended December 31, 1996 to the historical year
ended December 31, 1995.
Rental Revenue. Rental Revenue increased by $2,489,000, or 16%, to $17,943,000
in 1996 from $15,454,000 in 1995. Of this increase, $4,442,000 represents rental
revenue generated from the 1996 Acquisitions. The increase in 1996 revenues was
offset by the elimination of revenue from two industrial properties which were
sold in June 1996. The increase in rental revenue was also offset by a decrease
in hotel revenue due to the change in the operational structure of the hotels.
As discussed above, three of the original hotels were owned and operated by the
GRT Predecessor entities prior to 1996 and accordingly, the revenue of the
hotels is included in the 1995 statement of operations. However, under the
current structure, the Company owns the hotels but leases them to GHG and
accordingly, the 1996 statement of operations reflects only the lease payments
due under the operating leases. For the year ended December 31, 1996, each of
the four originally owned hotels increased their ADR (Average Daily Rate) and
REVPAR (Revenue Per Available Room).
Fees and Reimbursements and Equity in Earnings of Associated Companies. Fees and
reimbursements revenue decreased to $311,000 for the year ended December 31,
1996 from $16,019,000 for the year ended December 31, 1995; equity in earnings
of the Associated Companies increased to $1,598,000 for the year ended December
31, 1996 from zero for the year ended December 31, 1995. As previously
discussed, the primary reason for the difference between 1996 and 1995 results
is the segregation in 1996 of the operations of the Associated Companies, and
the resulting recognition of earnings from them using the equity method by the
Company. In 1995, the earnings of the Associated Companies were consolidated
with the partnerships participating in the Consolidation.
Interest and Other Income. Interest and other income decreased $1,618,000, or
60%, in 1996 to $1,080,000 from $2,698,000 in 1995. This decrease resulted
primarily from the lower note receivable balance in 1996, primarily as a result
of the early prepayment of a note receivable in April 1995 and the early
repayment in January and June of 1995 of three of the four notes received from
the sale of the Laurel Cranford buildings. Also, in 1996, cash balances
decreased primarily as a result of the prepayment of the investor notes payable,
payment of declared dividends and the payment of costs associated with the
Consolidation.
Net Gain on Sale of Rental Properties. Gain on sale of rental properties of
$321,000 during 1996 resulted from the sale of two properties held in the
Company's industrial portfolio.
Property Operating Expenses. Property operating expenses decreased $3,310,000,
or 39%, to $5,266,000 in 1996 from $8,576,000 in 1995. Of the decrease,
$4,993,000 is primarily the result of the change in the operational structure of
the hotels, as previously discussed. The decrease was offset by an increase of
$1,722,000 associated with the operating expenses of the 1996 Acquisitions.
General and Administrative. General and administrative expenses decreased to
$1,393,000 in 1996 from $15,947,000 in 1995. The decrease is due primarily to
the segregation in 1996 of the operations of the Associated Companies, as
previously discussed.
Depreciation and Amortization. Depreciation and amortization remained relatively
constant, decreasing to $4,575,000 in 1996 from $4,762,000 in 1995. Depreciation
and amortization in 1995 includes the amortization of the management
25
<PAGE>
contracts, which are now reflected in the results of the Associated Companies in
1996. Depreciation and amortization in 1996 includes depreciation and
amortization related to the 1996 Acquisitions.
Interest Expense. Interest expense increased $1,784,000, or 84%, to $3,913,000
in 1996 from $2,129,000 in 1995. Substantially all of the increase was the
result of higher average borrowings during 1996 as compared to 1995. The
increased borrowings were used to finance the 1996 Acquisitions.
Liquidity and Capital Resources
For the year ended December 31, 1997, cash provided by operating activities
increased by $19,940,000 to $24,078,000 as compared to $4,138,000 for the same
period in 1996. The increase is primarily due to an increase in earnings before
depreciation and amortization of $31,303,000 due to the 1996 Acquisitions and
1997 Acquisitions and the one-time payment in 1996 of consolidation costs and
litigation costs in the aggregate amount of $7,237,000. Cash used for investing
activities increased by $507,409,000 to $569,242,000 for the year ended December
31, 1997, as compared to $61,833,000 for the same period in 1996. The increase
is primarily due to the 1997 Acquisitions. This increase was partially offset by
the collection of the Hovpark mortgage loan receivable and the proceeds from the
1997 sales of sixteen retail properties. Cash provided by financing activities
increased by $494,416,000 to $548,879,000 for the year ended December 31, 1997,
as compared to $54,463,000 for the same period in 1996. This increase was
primarily due to the net proceeds from the March 1997 Offering, the July 1997
Offering and the October 1997 Offering (as defined below) and the proceeds from
new debt reduced by the repayment of prior debt.
The Company expects to meets its short-term liquidity requirements generally
through its working capital, its Acquisition Credit Facility (as defined below)
and cash generated by operations. As of December 31, 1997, the Company had no
material commitments for capital improvements. Planned capital improvements
consist of tenant improvements, expenditures necessary to lease and maintain the
Properties and expenditures for furniture and fixtures and building improvements
at the hotel properties.
The Company believes that its cash generated by operations will be adequate to
meet operating requirements and to make distributions in accordance with REIT
requirements in both the short and the long-term. In addition to cash generated
by operations, the Acquisition Credit Facility provides for working capital
advances. However, there can be no assurance that the Company's results of
operations will not fluctuate in the future and at times affect (i) its ability
to meet its operating requirements and (ii) the amount of its distributions.
The Company's principal sources of funding for acquisitions, development,
expansion and renovation of properties include an unsecured Acquisition Credit
Facility, permanent secured debt financing, public unsecured debt financing,
public and private equity and debt issuances, the issuance of Operating
Partnership Units and cash flow provided by operations.
Mortgage loans receivable decreased from $9,905,000 at December 31, 1996, to
$3,692,000 at December 31, 1997. This decrease was primarily due to the payoff
of the Hovpark mortgage loan receivable which had a net carrying value of
$6,700,000, and scheduled principal payments on the Laurel Cranford mortgage
loan receivable. The reduction in mortgage loans receivable was partially offset
by $491,000 of draws made by the borrower on the leasing and interest reserves
related to the Grunow mortgage loan receivable.
Mortgage loans payable increased from $54,584,000 at December 31, 1996, to
$148,139,000 at December 31, 1997. This increase primarily resulted from the
assumption of mortgage loans totaling $60,628,000 in connection with the 1997
Acquisitions, the funding of $3,289,000 of secured loans from Wells Fargo Bank,
and the funding of a $60 million secured loan. These increases were partially
offset by the payoff of a $6,120,000 term loan which was secured by ten of the
retail properties that were sold and the payoff of $22,960,000 of mortgage loans
and scheduled principal payments on other mortgage debt.
In April 1997, the Operating Partnership entered into a $40 million unsecured
loan with Wells Fargo Bank to fund the acquisition of the CIGNA Properties (the
"CIGNA Acquisition Financing"). The CIGNA Acquisition Financing had a term of
three months (extendible to six months at the Company's option), interest at a
variable annual rate equal to 175 basis points above 30-day LIBOR, was unsecured
and was guaranteed by the Company. Required payments under the CIGNA Acquisition
Financing were monthly, interest only.
In June 1997, Wells Fargo had substantially completed underwriting and due
diligence for a $60 million mortgage loan to the Company (the "$60 Million
Mortgage") to be secured by the Lennar Properties, the Riverview Property, the
Centerstone Property and five of the CIGNA Properties. In the interim, Wells
Fargo funded a $60 million unsecured
26
<PAGE>
"bridge" loan (the "$60 Million Unsecured Bridge Loan"), which was used to (i)
repay all principal and accrued interest under the $40 million CIGNA Acquisition
Financing, and (ii) reduce the outstanding balance under the Line of Credit by
approximately $20 million.
The $60 Million Unsecured Bridge Loan was paid-off in July 1997 from the
proceeds of the July 1997 Offering and the $60 Million Mortgage was obtained in
September 1997. This loan has a 25-year term, bears interest at an annual rate
of 7.5% (which is fixed until 2007) and requires monthly principal and interest
payments. The proceeds from this loan were used to fund acquisitions.
In September 1997, the Company closed a $114 million unsecured loan (the "$114
Million Interim Unsecured Loan") with Wells Fargo Bank. This loan had a 90-day
term with two 90-day extension options, interest at a fixed annual rate of 7.5%
and required monthly interest-only payments. The proceeds of this loan were used
to fund a portion of the purchase price for the T. Rowe Price Properties. In
October 1997, the Company repaid the $114 Million Interim Unsecured Loan with
net proceeds from the October 1997 Offering (defined below).
The Company had a $50 million secured line of credit provided by Wells Fargo
Bank (the "Line of Credit"). Outstanding borrowings under the Line of Credit
were $21,307,000 at December 31, 1996. In December 1997, the Company repaid the
outstanding balance under the Line of Credit and replaced it with a new $250
million unsecured line of credit as discussed below.
In December 1997, the Company replaced its $50 million secured line of credit
with a new $250 million unsecured line of credit (the "Acquisition Credit
Facility") with Wells Fargo Bank. The Acquisition Credit Facility has a three
year term with an option to extend the term for an additional 10 years and bears
interest on a sliding scale ranging from LIBOR plus 1.1% to LIBOR plus 1.3%,
which represents a rate that is lower by at least 0.45% than the rate under the
Company's previous $50 million secured line of credit. The Acquisition Credit
Facility agreement provides that if the Company's debt securities receive
certain ratings from at least two rating agencies, as specified in the
Acquisition Credit Facility agreement, the interest rate will decrease to a
sliding scale ranging from LIBOR plus 0.80% to LIBOR plus 1.15%, depending on
the rating. Draws under the Acquisition Credit Facility have been used to fund
acquisitions.
In January 1998, the Company closed a $150 million loan agreement with Wells
Fargo Bank (the "Interim Loan"). The Interim Loan bears interest at LIBOR plus
1.75% and has a term of three months with an option to extend the term an
additional three months. The purpose of the Interim Loan is to fund
acquisitions.
At December 31, 1997, the Company's total indebtedness included fixed-rate debt
of $140,333,000 (including $85,672,000 subject to cross-collateralization) and
floating-rate indebtedness of $87,966,000. Approximately 32% of the Company's
total assets, comprising 45 properties, is encumbered by debt at December 31,
1997.
In January 1997 and May 1997, the Company filed shelf registration statements
with the Securities and Exchange Commission (the "SEC") to register $250 million
and $350 million, respectively, of equity securities of the Company. In November
1997, the Company filed a shelf registration statement with the SEC to register
an additional $1 billion of equity securities of the Company (the "November 1997
Shelf Registration Statement"). The November 1997 Shelf Registration Statement
was declared effective by the SEC on December 18, 1997. After the completion of
the March 1997, July 1997, October 1997 and January 1998 Offerings (as defined
below), 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 March 1997, the Company completed a public offering of 3,500,000 shares of
its Common Stock at a price of $20.25 per share (the "March 1997 Offering"). The
net proceeds from the offering of approximately $66.1 million were used to fund
acquisitions and to repay approximately $24.9 million of the then outstanding
balance under the Company's previous secured line of credit.
In July 1997, the Company completed a public offering of 6,980,000 shares of its
Common Stock at a price of $22.625 per share (the "July 1997 Offering"). The net
proceeds from the offering of approximately $149.2 million were used to fund
acquisitions and to repay debt.
In October 1997, the Company completed a public offering of 11,300,000 shares of
its Common Stock at a price of $25.00 per share (the "October 1997 Offering").
The net proceeds from the offering of approximately $267.3 million were used to
fund acquisitions, to repay approximately $142.8 million of indebtedness and for
general corporate purposes.
27
<PAGE>
In January 1998, the Company completed a public offering of 11,500,000 shares of
7 3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible
Preferred Stock Offering"). The 11,500,000 shares were sold at a per share price
of $25.00 for net proceeds of approximately $276 million, which were used to
repay the outstanding balance under the Company's Acquisition Credit Facility,
to fund certain subsequent property acquisitions and for general corporate
purposes. The shares are convertible at any time at the option of the holder
thereof into shares of Common Stock at an initial conversion price of $32.83 per
share of Common Stock (equivalent to a conversion rate of 0.7615 shares of
Common Stock for each share of Series A Convertible Preferred Stock), subject to
adjustment in certain circumstances.
In March 1998, the Operating Partnership, as to which the Company is general
partner, issued $150 million of 7 5/8% Senior Notes (the "Notes") in an
unregistered 144A offering. The Notes mature on March 15, 2005, unless
previously redeemed. Interest on the Notes is payable semiannually on March 15
and September 15, commencing September 15, 1998. The Operating Partnership
intends to use the net proceeds of the offering to repay substantially all of
the outstanding balance under the Interim Loan.
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.
Forward Looking Statements; Factors That May Affect Operating Results
This Report on Form 10-K contains forward looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934, including statements regarding the Company's
expectations, hopes, intentions, beliefs and strategies regarding the future.
Forward looking statements include statements regarding potential acquisitions,
the anticipated performance of future acquisitions, recently completed
acquisitions and existing properties, and statements regarding the Company's
financing activities. All forward looking statements included in this document
are based on information available to the Company on the date hereof. It is
important to note that the Company's actual results could differ materially from
those stated or implied in such forward looking statements. Some of the factors
that could cause actual results to differ materially are set forth below.
POTENTIAL INABILITY TO MANAGE EXPANSION DUE TO ADDITION OF NEW PROPERTIES
The Company is currently experiencing a period of rapid growth. Since the
Consolidation on December 31, 1995, the Company has invested approximately $1.2
billion in properties, as of the date of this filing. The Company's ability to
manage its growth effectively will require it to apply successfully its
experience managing its existing portfolio to new markets and to an increased
number of properties. There can be no assurance that the Company will be able to
manage these operations effectively. The Company's inability to effectively
manage its expansion could have an adverse effect on the Company's results of
operations and financial condition.
ACQUISITIONS COULD ADVERSELY AFFECT OPERATIONS
Consistent with its growth strategy, the Company is continually pursuing and
evaluating potential acquisition opportunities, and is from time to time
actively considering the possible acquisition of specific properties, which may
include properties managed or controlled by one of the Associated Companies or
owned by affiliated parties. It is possible that one or more of such possible
future acquisitions, if completed, could adversely affect the Company's funds
from operations or cash available for distribution, in the short term or the
long term or both, or increase the Company's debt, or be perceived negatively
among investors such that such an acquisition could be followed by a decline in
the market value of the Common Stock.
28
<PAGE>
POTENTIAL ADVERSE EFFECT ON OPERATIONS DUE TO ASSUMPTION OF GENERAL PARTNER
LIABILITIES
The Company and its predecessors have acquired a number of their properties by
acquiring partnerships that own the properties or by first acquiring general
partnership interests and at a later date acquiring the properties, and the
Company may pursue acquisitions in this manner in the future. When the Company
uses this acquisition technique, a subsidiary of the Company becomes a general
partner. As a general partner the Company's subsidiary becomes generally liable
for the debts and obligations of the partnership, including debts and
obligations that may be contingent or unknown at the time of the acquisition. In
addition, the Company's subsidiary assumes obligations under the partnership
agreements, which may include obligations to make future contributions for the
benefit of other partners. The Company undertakes detailed due diligence reviews
to ascertain the nature and extent of obligations that its subsidiary will
assume when it becomes a general partner, but there can be no assurance that the
obligations assumed will not exceed the Company's estimates or that the assumed
liabilities will not have an adverse effect on the Company's results of
operations or financial condition. In addition, an Associated Company may enter
into management agreements pursuant to which it assumes certain obligations as
manager of properties. There can be no assurance that these obligations will not
have an adverse effect on the Associated Companies' results of operations or
financial condition, which could adversely affect the value of the Company's
preferred stock interest in those companies.
UNCERTAINTY RELATED TO ACQUISITIONS THROUGH TENDER OFFERS
The Company may, as part of its growth strategy, acquire properties and
portfolios of properties through tender offer acquisitions of interests in
public and private partnerships and other REITs. Tender offers often result in
competing tender offers, as well as litigation initiated by limited partners in
the subject partnerships or by competing bidders. Due to the inherent
uncertainty of litigation, the Company could be subject to adverse judgments in
substantial amounts. As the Company has not yet attempted an acquisition through
the tender offer process, and because of competing offers and possible
litigation, there can be no assurance that, if undertaken, the Company would be
successful in acquiring properties through a tender offer or that the tender
offer process would not result in litigation and a significant judgment adverse
to the Company.
POTENTIAL ADVERSE CONSEQUENCES OF TRANSACTIONS INVOLVING CONFLICTS OF INTEREST
The Company has acquired, and from time to time may acquire, properties from
partnerships that Robert Batinovich, the Company's Chairman and Chief Executive
Officer, and Andrew Batinovich, the Company's President and Chief Operating
Officer, control, and in which they and members of their families have
substantial interests. These transactions involve or will involve conflicts of
interest. These transactions may provide substantial economic benefits such as
the payments or unit issuances, relief or deferral of tax liabilities, relief of
primary or secondary liability for debt, and reduction in exposure to other
property-related liabilities. Despite the presence of appraisals or fairness
opinions or review by parties who have no interest in the transactions, the
transactions will not be the product of arm's-length negotiation and there can
be no assurance that these transactions will be as favorable to the Company as
transactions that the Company negotiates with unrelated parties or will not
result in undue benefit to Robert and Andrew Batinovich and members of their
families. Neither Robert Batinovich nor Andrew Batinovich has guaranteed that
any properties acquired from entities they control or in which they or their
families have a significant interest will be as profitable as other investments
made by the Company or will not result in losses.
DEPENDENCE ON EXECUTIVE OFFICERS
The Company is dependent on the efforts of Robert and Andrew Batinovich, its
Chief Executive Officer and its President and Chief Operating Officer,
respectively, and of its other executive officers. The loss of the services of
any of them could have an adverse effect on the results of operations and
financial condition of the Company. Both Robert and Andrew Batinovich have
entered into employment agreements with the Company.
MATERIAL TAX RISKS
The Company has elected to be treated as a REIT under the Internal Revenue Code
of 1986, as amended (the "Code"), commencing with its taxable year ended
December 31, 1996. No assurance can be given, however, that the Company will be
able to operate in a manner which will permit it to maintain its status as a
REIT. Qualification as a REIT involves the satisfaction of numerous requirements
(some on an annual and quarterly basis) established under highly technical and
complex Code provisions for which only limited judicial or administrative
interpretation exists, and involves the
29
<PAGE>
determination of various factual matters and circumstances not entirely within
the Company's control. The Company receives nonqualifying management fee income
and owns nonqualifying preferred stock in the Associated Companies. As a result,
the Company may approach the income and asset test limits imposed by the Code
and could be at risk of not satisfying those tests. In order to avoid exceeding
the asset test limit, for example, the Company may have to reduce its interest
in the Associated Companies. The Company is relying on the opinion of its tax
counsel regarding its ability to qualify as a REIT. This legal opinion is not
binding on the Internal Revenue Service ("IRS").
CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at corporate rates. Moreover,
unless entitled to relief under certain statutory provisions, the Company also
would be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. This treatment would
reduce the net earnings of the Company available for investment or distribution
to stockholders because of the additional tax liability to the Company for the
years involved. In addition, distributions to stockholders would no longer be
required to be made.
Even if the Company continues to qualify as a REIT, it will be subject to
certain federal, state and local taxes on its income and property.
POSSIBLE CHANGES IN TAX LAWS; EFFECT ON THE MARKET VALUE OF REAL ESTATE
INVESTMENTS
Income tax treatment of REITs may be modified, prospectively or retroactively,
by legislative, judicial or administrative action at any time. No assurance can
be given that legislation, regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to the
qualification as a REIT or the federal income tax consequences of this
qualification. In addition to any direct effects the changes might have, the
changes might also indirectly affect the market value of all real estate
investments, and consequently the ability of the Company to realize its
investment objectives.
POTENTIAL LIABILITY DUE TO ENVIRONMENTAL MATTERS
Under federal, state and local laws, ordinances and regulations relating to
protection of the environment ("Environmental Laws"), a current or previous
owner or operator of real estate may be liable for contamination resulting from
the presence or discharge of petroleum products or other hazardous or toxic
substances at such property, and may be required to investigate and clean-up
such contamination at such property or such contamination which has migrated
from such property. Such laws typically impose liability and clean-up
responsibility without regard to whether the owner or operator knew of, or was
responsible for, the presence of such contamination, and the liability under
such laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation of responsibility. In
addition, the owner or operator of a property may be subject to claims by third
parties based on personal injury, property damage and/or other costs, including
investigation and clean-up costs, resulting from environmental contamination
present at or emanating from such property. Environmental Laws may also impose
restrictions on the manner in which a property may be used or transferred or in
which businesses may be operated, and these restrictions may require
expenditures. Under the Environmental Laws, any person who arranges for the
transportation, disposal or treatment of hazardous or toxic substances may also
be liable for the costs of investigation or clean-up of such substances at the
disposal or treatment facility, whether or not such facility is or ever was
owned or operated by such person.
Although tenants of the Properties owned by the Company generally are required
by their leases to operate in compliance with all applicable federal, state and
local environmental laws, ordinances and regulations and to indemnify the
Company against any environmental liability arising from the tenants' activities
on the Properties, the Company could nevertheless be subject to environmental
liability relating to its management of the Properties or strict liability by
virtue of its ownership interest in the Properties and there can be no assurance
that the tenants would satisfy their indemnification obligations under the
leases. There can be no assurance that any environmental assessments of the
Properties owned by the Company, properties being considered for acquisition by
the Company, or the properties owned by the partnerships managed by the
Associated Companies have revealed all potential environmental liabilities, that
any prior owner or prior or current operator of such properties did not create
an environmental condition not known to the Company or that an environmental
condition does not otherwise exist as to any one or more of such properties that
could have an adverse effect on the Company's results of operations and
financial condition, either directly (with respect to properties owned by the
Company), or indirectly (with respect to properties owned by partnerships
managed by an Associated Company) by adversely affecting the financial condition
of the Associated Company and thus the value of the Company's preferred stock
interest in the Associated Company. Moreover, there can be no assurance that (i)
future environmental laws, ordinances or regulations will not have an adverse
effect on the Company's results of operations and financial condition or (ii)
the current environmental condition of such properties will not be affected by
tenants and occupants of such properties, by the condition of land or operations
in the vicinity of the properties (such as the presence of underground storage
tanks), or by third parties unrelated to the Company.
ENVIRONMENTAL ASSESSMENTS AND POTENTIAL LIABILITY DUE TO ASBESTOS-CONTAINING
MATERIALS
Environmental Laws also govern the presence, maintenance and removal of
asbestos-containing building materials ("ACM"). Such laws require that ACM be
properly managed and maintained, that those who may come into contact with ACM
be adequately apprised and trained, and that special precautions, including
removal or other abatement, be undertaken in the event ACM is disturbed during
renovation or demolition of a building. Such laws may impose fines and penalties
on building owners or operators for failure to comply with these requirements
and may allow third parties to seek recovery from owners or operators for
personal injury associated with exposure to asbestos fibers.
All of the Properties presently owned by the Company have been subject to Phase
I environmental assessments by independent environmental consultants. Some of
the Phase I environmental assessments recommended further investigations in the
form of Phase II environmental assessments, including soil and groundwater
sampling, and all of these investigations have been completed by the Company or
are in the process of being completed. Certain of the Properties owned by the
Company have been found to contain ACMs. The Company believes that these
materials have been adequately contained and that an ACM operations and
maintenance program has been implemented or is in the process of being
implemented for the Properties found to contain ACMs.
Some, but not all, of the properties owned by partnerships managed by the
Associated Companies have been subject to Phase I environmental assessments by
independent environmental consultants. The Associated Companies determine on a
case-by-case basis whether to obtain Phase I environmental assessments on these
properties and whether to undertake further investigation or remediation.
Certain of these properties contain ACMs. In each case the responsible
Associated Company believes that these materials have been adequately contained
and that an ACM operations and maintenance program has been implemented for the
properties found to contain ACMs.
POTENTIAL ENVIRONMENTAL LIABILITY RESULTING FROM UNDERGROUND STORAGE TANKS
Some of the Properties, as well as properties previously owned by the Company,
are leased or have been leased, in part, to owners and operators of dry cleaners
that operate on-site dry cleaning plants, auto care centers, or to owners or
operators of other businesses that use, store or otherwise handle petroleum
products or other hazardous or toxic substances. Some of these Properties
contain, or may have contained, underground storage tanks for the storage of
petroleum products and other hazardous or toxic substances. These operations
create a potential for the release of
30
<PAGE>
petroleum products or other hazardous or toxic substances. Some of the
Properties are adjacent to or near other properties that have contained or
currently contain underground storage tanks used to store petroleum products or
other hazardous or toxic substances. Several of the Properties have been
contaminated with petroleum products or other hazardous or toxic substances from
on-site operations or operations on adjacent or nearby properties. In addition,
certain of the Properties are on, or are adjacent to or near other properties
upon which others, including former owners or tenants of the Properties, have
engaged or may in the future engage in activities that may release petroleum
products or other hazardous or toxic substances.
POTENTIAL ADVERSE EFFECTS OF ENVIRONMENTAL LIABILITIES ON OPERATING COSTS AND
ABILITY TO BORROW
The Company's operating costs may be affected by the obligation to pay for the
cost of complying with existing Environmental Laws as well as the cost of
complying with future legislation. In addition, the presence of petroleum
products or other hazardous or toxic substances at any of the Properties owned
by the Company, or the failure to remediate such property properly, may
adversely affect the Company's ability to borrow by using such real property as
collateral. The cost of defending against claims of liability and the cost of
complying with Environmental Laws, including investigation or clean-up of
contaminated property, could materially adversely affect the Company's results
of operations and financial condition.
GENERAL RISKS OF OWNERSHIP AND FINANCING OF REAL ESTATE
The Company is subject to risks generally incidental to the ownership of real
estate, including changes in general economic or local conditions, changes in
supply of or demand for similar or competing properties in an area, the impact
of environmental protection laws, changes in interest rates and availability of
financing which may render the sale or financing of a property difficult or
unattractive, changes in tax, real estate and zoning laws, and the creation of
mechanics' liens or similar encumbrances placed on the property by a lessee or
other parties without the Company's knowledge and consent. Should any of these
events occur, there could be an adverse effect on the Company's results of
operations and financial condition.
31
<PAGE>
POTENTIAL INABILITY TO GROW DUE TO LIMITED AVAILABILITY OF AND COMPETITION
FOR REAL ESTATE ACQUISITIONS
The Company's growth is dependent upon acquisitions. There can be no assurance
that properties will be available for acquisition or, if available, that the
Company will be able to purchase such properties on favorable terms. If such
acquisitions are not available it could have a negative impact on the growth of
the Company, which could have an adverse effect on the performance of the
Company's Common Stock. Furthermore, the Company faces competition from other
businesses, individuals, fiduciary accounts and plans and other entities in the
acquisition, operation and sale of its properties. Some of the Company's
competitors are larger and have greater financial resources than the Company.
This competition may result in a higher cost for properties the Company wishes
to purchase.
POTENTIAL ADVERSE EFFECTS ON OPERATIONS DUE TO COMPETITION FOR TENANTS
The Company is subject to the risk that when space becomes available at its
properties the leases may not be renewed, the space may not be let or relet, or
the terms of the renewal or reletting (including the cost of required
renovations or concessions to tenants) may be less favorable to the Company.
Although the Company has established annual property budgets that include
estimates of costs for renovation and reletting expenses that it believes are
reasonable in light of each property's situation, no assurance can be given that
these estimates will sufficiently cover these expenses. If the Company is unable
to promptly lease all or substantially all of the space at its properties, if
the rental rates are significantly lower than expected, or if the Company's
reserves for these purposes prove inadequate, then there could be an adverse
effect on the Company's results of operations and financial condition.
POTENTIAL ADVERSE EFFECTS ON OPERATIONS DUE TO TENANTS' DEFAULTS
The ability of the Company to manage its assets is subject to federal bankruptcy
laws and state laws affecting creditors' rights and remedies available to real
property owners. In the event of the financial failure or bankruptcy of a
tenant, there can be no assurance that the Company could promptly recover the
tenant's premises from the tenant or from a trustee or debtor-in-possession in
any bankruptcy proceeding filed by or against that tenant, or that the Company
would receive rent in the proceeding sufficient to cover its expenses with
respect to the premises. In the event of the bankruptcy of a tenant, the Company
will be subject to the provisions of the federal bankruptcy code, which in some
instances may restrict the amount and recoverability of claims held by the
Company against the tenant. If any tenant defaults on its obligations to the
Company, there could be an adverse effect on the Company's results of operations
and financial condition.
GENERAL RISKS ASSOCIATED WITH MANAGEMENT, LEASING AND BROKERAGE CONTRACTS
The Company is subject to the risks associated with the property management,
leasing and brokerage businesses. These risks include the risk that management
contracts or service agreements may be terminated, that contracts will not be
renewed upon expiration or will not be renewed on terms consistent with current
terms, and that leasing and brokerage activity generally may decline.
Acquisition of properties by the Company from the Associated Companies could
result in a decrease in revenues to the Associated Companies and a corresponding
decrease in dividends received by the Company from the Associated Companies.
Each of these developments could have an adverse effect on the Company's results
of operations and financial condition.
To maintain the Company's status as a REIT while realizing income from the
Company's third-party management business, the capital stock of Glenborough
Hotel Group, a Nevada corporation ("GHG") and Glenborough Corporation, a
California corporation ("GC," and together with GHG, the "Associated Companies")
(which conduct the Company's third-party management, leasing and brokerage
businesses) is divided into two classes. All of the voting common stock of the
Associated Companies, representing 5% of the total equity of GC, and 25% of the
total equity of GHG, is held by individual stockholders. Nonvoting preferred
stock representing the remaining equity of each Associated Company is held
entirely by the Company. Although the Company holds a majority of the equity
interest in each Associated Company, the Company is not able to elect directors
of any Associated Company and, consequently, the Company has no ability to
influence the day-to-day decisions of each entity.
ADVERSE EFFECTS ON OPERATIONS DUE TO UNINSURED LOSS
The Company or in certain instances tenants of the properties carry
comprehensive liability, fire and extended coverage with respect to the
Company's properties, with policy specification and insured limits customarily
carried for similar properties. There are, however, certain types of losses
(such as from earthquakes and floods) that may be either uninsurable or not
economically insurable. Further, certain of the properties are located in areas
that are subject to earthquake activity and floods. Should a property sustain
damage as a result of an earthquake or flood, the Company may
32
<PAGE>
incur losses due to insurance deductibles, co-payments on insured losses or
uninsured losses. Should an uninsured loss occur, the Company could lose some or
all of its capital investment, cash flow and anticipated profits related to one
or more properties, which could have an adverse effect on the Company's results
of operations and financial condition.
INABILITY TO VARY PORTFOLIO DUE TO ILLIQUIDITY OF REAL ESTATE
Real estate investments are relatively illiquid and, therefore, will tend to
limit the ability of the Company to vary its portfolio promptly in response to
changes in economic or other conditions. In addition, the Code and individual
agreements with sellers of properties place limits on the Company's ability to
sell properties, which may adversely affect returns to holders of Common Stock.
Forty-two of the properties owned by the Company were acquired on terms and
conditions under which they can be disposed of only in a like-kind exchange or
other non-taxable transaction.
POTENTIAL LIABILITY UNDER THE AMERICANS WITH DISABILITIES ACT
As of January 26, 1992, all of the Company's properties were required to be in
compliance with the Americans With Disabilities Act (the "ADA"). The ADA
generally requires that places of public accommodation be made accessible to
people with disabilities to the extent readily achievable. Compliance with the
ADA requirements could require removal of access barriers and non-compliance
could result in imposition of fines by the federal government, an award of
damages to private litigants and/or a court order to remove access barriers.
Because of the limited history of the ADA, the impact of its application to the
Company's properties, including the extent and timing of required renovations,
is uncertain. Pursuant to certain lease agreements with tenants in certain of
the "single-tenant" Properties, the tenants are obligated to comply with the ADA
provisions. If the Company's costs are greater than anticipated or tenants are
unable to meet their obligations, there could be an adverse effect on the
Company's results of operations and financial condition.
POTENTIAL ADVERSE EFFECTS ON OPERATIONS OF DEVELOPMENT JOINT VENTURES
The Company may from time to time enter into joint ventures with selected
developers ("JV Partners") for the purpose of developing new projects in which
such JV Partner has, in the opinion of management, significant expertise or
experience. Such projects generally require various governmental and other
approvals, the receipt of which cannot be assured. Such development activities
may entail certain risks, including the risk that: (i) the expenditure of funds
on and devotion of management's time to projects which may not come to fruition;
(ii) construction costs of a project may exceed original estimates, possibly
making the project uneconomical; (iii) occupancy rates and rents at a completed
project may be less than anticipated; and (iv) expenses at a completed
development may be higher than anticipated. In addition, JV Partners may have
significant control over the operation of the joint venture assets. Therefore,
such investments may, under certain circumstances, involve risks such as the
possibility that the JV Partner might become bankrupt, have economic or business
interests or goals that are inconsistent with the business interest or goals of
the Company, or be in a position to take action contrary to the instructions or
the requests of the Company or contrary to the Company's policies or objectives.
Consequently, actions by a JV Partner might result in subjecting property owned
by the joint venture to additional risk. Although the Company will seek to
maintain sufficient control of any joint venture to permit the Company's
objectives to be achieved, it may be unable to take action without the approval
of its JV Partners or its JV Partners could take actions binding on the joint
venture without the Company's consent. Additionally, should a JV Partner become
bankrupt the Company could become liable for such JV Partner's share of joint
venture liabilities. These risks may result in a development project having an
adverse effect on the Company's result of operations and financial condition.
ADDITIONAL CAPITAL REQUIREMENTS; POSSIBLE ADVERSE EFFECTS ON HOLDERS OF
EQUITY SECURITIES
The Company's future growth depends in large part upon its ability to raise
additional capital on satisfactory terms or at all. There can be no assurance
that the Company will be able to raise sufficient capital to achieve its
objectives. If the Company were to raise additional capital through the issuance
of additional equity securities, or securities convertible into or exercisable
for equity securities, the interests of holders of the Common Stock or of other
equity securities of the Company could be diluted. Likewise, the Company's Board
of Directors is authorized to cause the Company to issue preferred stock in one
or more series and to determine the distributions and voting and other rights of
the preferred stock. Accordingly, the Board of Directors may authorize the
issuance of preferred stock with voting, distribution and other similar rights
which could be dilutive to or otherwise adversely affect the interests of
holders of Common Stock or of other equity securities of the Company. If the
Company were to raise additional capital through debt financing, the Company
will be subject to the risks described below, among others. See "Other Risks --
Debt Financing."
33
<PAGE>
LIMITATION ON OWNERSHIP OF COMMON STOCK MAY PRECLUDE ACQUISITION OF CONTROL
Provisions of the Company's Charter are designed to assist the Company in
maintaining its qualification as a REIT under the Code by preventing
concentrated ownership of the Company which might jeopardize REIT qualification.
Among other things, these provisions provide that (a) any transfer or
acquisition of Common Stock (or preferred stock, as the case may be) that would
result in the disqualification of the Company as a REIT under the Code will be
void, and (b) if any person attempts to acquire shares of Common Stock (or
shares of preferred stock, as the case may be) that after the acquisition would
cause the person to own or to be deemed to own, by operation of certain
attribution rules set out in the Code, an amount of Common Stock and preferred
stock in excess of a predetermined limit, which, pursuant to Board action,
currently is 9.9% of the value of the outstanding shares of Common Stock and
preferred stock (the "Ownership Limitation" and as to the Common Stock or
preferred stock, the transfer of which would cause any person to actually own
Common Stock and preferred stock in excess of the Ownership Limitation, the
"Excess Shares"), the transfer shall be void and the Common Stock (or preferred
stock, as the case may be) subject to the transfer shall automatically be
transferred to an unaffiliated trustee for the benefit of a charitable
organization designated by the Board of Directors of the Company until sold by
the trustee to a third party or purchased by the Company. Robert Batinovich, his
spouse and children (including Andrew Batinovich) and individuals or entities
whose ownership of Common Stock is attributed to Robert Batinovich in
determining the number of shares of Common Stock owned by him for purposes of
compliance with Section 856 of the Code (the "Attributed Owners"), are exempt
from these restrictions, but are prohibited from acquiring shares of Common
Stock or preferred stock if, after the acquisition, they would own in excess of
9.9% of the outstanding shares of Common Stock and preferred stock. This
limitation on the ownership of Common Stock and preferred stock may have the
effect of precluding the acquisition of control of the Company by a third party
without the consent of the Board of Directors. If the Board of Directors waives
the Ownership Limitation for any person, the Ownership Limitation shall be
proportionally and automatically reduced with regard to all other persons such
that no five persons may own more than 50% of the value of the Common Stock and
preferred stock (the aggregate Ownership Limitations as to all of these persons,
as adjusted, the "Adjusted Ownership Limitation").
LOSSES RELATING TO CONSOLIDATION
Two lawsuits were filed contesting the fairness of the Consolidation, one in
California state court and one in federal court. A settlement of the state court
action was approved by the court, but objectors to the settlement appealed that
approval. 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.
Plaintiffs in the federal court action court stipulated to a stay of the action
pending resolution of the state court action. Pursuant to the terms of the
settlement in the State court action, pending final resolution of these matters,
the Company has paid one-third of the $855,000 settlement amount and the
remaining two-thirds is being held in escrow.
From time to time, the Company is involved in other litigation arising out of
its business activities. It is possible that this litigation and the other
litigation previously described could result in significant losses in excess of
amounts reserved, which could have an adverse effect on the Company's results of
operations and the financial condition of the Company.
INVOLVEMENT OF SENIOR MANAGEMENT IN PREVIOUS CHAPTER 11 REORGANIZATION
Robert and Andrew Batinovich, two of the senior officers of the Company, were
also senior members of a management team that formed a publicly registered
limited partnership in 1986 to consolidate a number of predecessor partnerships.
That public partnership was involved in litigation with its primary creditor
and, in order to prevent foreclosure, filed a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code in May of 1992. The public
partnership, which owns an approximate 1.7% limited partner interest in the
Operating Partnership along with other substantial real estate assets, and less
than 0.5% interest in the Company, settled the litigation and obtained
confirmation of a plan of reorganization in January 1994.
DEBT FINANCING; RISK THAT CASH FLOW IS INSUFFICIENT FOR DEBT SERVICE
REQUIREMENTS; RISK THAT DEBT RESTRICTIONS WILL AFFECT OPERATIONS; RISK OF
INABILITY TO REPAY INDEBTEDNESS AT MATURITY
34
<PAGE>
The Company intends to incur additional indebtedness in the future, including
through borrowings under a credit facility, to finance property acquisitions. As
a result, the Company expects to be subject to risks associated with debt
financing, including the risk that interest rates may increase, the risk that
the Company's cash flow will be insufficient to meet required payments on its
debt and the risk that the Company may be unable to refinance or repay the debt
as it comes due. The Company's current $250 million unsecured Acquisition Credit
Facility with Wells Fargo Bank, N.A. provides that distributions may not exceed
90% of funds from operations and that, in the event of a failure to pay
principal or interest on borrowings thereunder when due (subject to any
applicable grace period), the Company and its subsidiaries may not pay any
distributions on the Common Stock or the Preferred Stock. If the Company is
unable to obtain acceptable financing to repay indebtedness at maturity, the
Company may have to sell properties to repay indebtedness or properties may be
foreclosed upon, which could have an adverse effect on the Company's results of
operations and financial condition. Also, as of December 31, 1997, $79,168,000
of the Company's total indebtedness was secured by mortgages that included
cross-collateralization provisions.
ADVERSE EFFECTS ON OPERATIONS DUE TO FLUCTUATIONS IN INTEREST RATES
As of December 31, 1997, the Company had approximately $88.0 million of variable
rate indebtedness, which bears interest at a floating rate. Therefore, an
increase in interest rates will have an adverse effect on the Company's net
income and results of operations.
THE COMPANY'S INDEBTEDNESS POLICY IS SUBJECT TO CHANGE BY THE BOARD OF DIRECTORS
While the Company's current policy is to maintain a debt to Total Market
Capitalization (as defined below) ratio of 30%, the Company's organizational
documents limit the Company's ability to incur additional debt if the total
debt, including the additional debt, would exceed 50% of the Borrowing Base,
defined as the greater of Fair Market Value or Total Market Capitalization. The
debt limitation in the Company's Charter can only be amended by an affirmative
vote of the majority of all outstanding stock entitled to vote on such
amendment. Fair Market Value is based upon the value of the Company's assets as
determined by an independent appraiser. Total Market Capitalization is the sum
of the market value of the Company's outstanding capital stock, including shares
issuable on exercise of redemption options by holders of units of the Operating
Partnership, plus debt. An exception is made for refinancings and borrowings
required to make distributions to maintain the Company's status as a REIT.
Subject to these limitations contained in the Company's organizational
documents, the Company's Board of Directors may change its indebtedness policy
without a vote of the stockholders. If the Company changes its indebtedness
policy, the Company could become more highly leveraged, resulting in an
increased risk of default on the obligations of the Company and in an increase
in debt service requirements that could adversely affect the financial condition
and results of operations of the Company. In addition, in light of the debt
restrictions set forth in the Company's organizational documents, it should be
noted that a change in the value of the Common Stock could affect the Borrowing
Base as defined in such documents, and therefore the Company's ability to incur
additional indebtedness, even though such change in the Common Stock's value is
unrelated to the Company's liquidity.
UNCERTAINTY DUE TO BOARD OF DIRECTORS' ABILITY TO CHANGE INVESTMENT POLICIES
The Company's Board of Directors may change the investment policies of the
Company without a vote of the stockholders. If the Company changes its
investment policies, the risks and potential rewards of an investment in the
Company may also change. In addition, the methods of implementing the Company's
investment policies may vary as new investment techniques are developed.
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK
One of the factors that may influence the market price of the shares of Common
Stock in public markets will be the annual yield on the price paid for shares of
Common Stock from distributions by the Company. An increase in market interest
rates may lead prospective purchasers of the Common Stock to seek a higher
annual yield from their investments. Such circumstances may adversely affect the
market price of the Common Stock.
IMPACT OF YEAR 2000 COMPLIANCE COSTS ON OPERATIONS
The Company utilizes a number of computer software programs and operating
systems across its entire organization, including applications used in financial
business systems and various administrative functions. To the extent that the
Company's software applications contain source code that is unable to
appropriately interpret the upcoming calendar year "2000" and beyond, some level
of modification, or replacement of such applications will be necessary. The
Company has completed its identification of applications that are not yet "Year
2000" compliant and has commenced modification or replacement of such
applications, as necessary. Given information known at this time about the
Company's systems that are non-compliant, coupled with the Company's ongoing,
normal course-of-business efforts to upgrade or replace critical systems, as
necessary, management does not expect Year 2000 compliance costs to have any
material adverse impact on the Company's liquidity or ongoing results of
operations. No assurance can be given, however, that all of the Company's
systems will be Year 2000 compliant or that compliance costs or the impact of
the Company's failure to achieve substantial Year 2000 compliance will not have
a material adverse effect on the Company's future liquidity or results of
operations.
SHARES AVAILABLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of shares
of Common Stock or future conversions or exercises of securities for future
sales, including shares of Common Stock issuable upon exchange of Operating
Partnership units, will have on the market price of the Common Stock prevailing
from time to time. Sales of substantial amounts of Common Stock, or the
perception that such sales could occur, may adversely affect the prevailing
market price for the Common Stock.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this Form 10-K.
See Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
35
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 14, 1998.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 14, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 14, 1998.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders meeting to be
held on May 14, 1998.
36
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K
Page No.
(a) (1) Financial Statements
Report of Independent Public Accountants 39
Glenborough Realty Trust Incorporated Consolidated Balance Sheets 40
Glenborough Realty Trust Incorporated and GRT Predecessor
Entities Consolidated and Combined Statements of Operations 41
Glenborough Realty Trust Incorporated and GRT Predecessor
Entities Statements of Equity 42
Glenborough Realty Trust Incorporated and GRT Predecessor
Entities Consolidated and Combined Statements of Cash Flows 43
Notes to Financial Statements 45
(2) Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation 63
Schedule IV - Mortgage Loans Receivable, Secured by Real Estate 70
(3) Exhibits to Financial Statements
Glenborough Hotel Group, Consolidated Financial Statements as
of December 31, 1997 and 1996 74
The Exhibit Index attached hereto is hereby incorporated by
reference to this Item. 83
(b) Reports on Form 8-K (incorporated herein by reference)
On October 17, 1997, the Company filed a report on Form 8-K/A
with respect to the acquisition of the T. Rowe Price Properties
and the Advance Properties.
On October 17, 1997, the Company filed a report on Form 8-K/A
with respect to the acquisition of the Citibank Park Property.
On October 17, 1997, the Company filed a report on Form 8-K with
respect to the Press Release for the quarter ended September 30,
1997 earnings.
On October 23, 1997, the Company filed a report on Form 8-K with
respect to the October 1997 Offering.
On November 7, 1997, the Company filed a report on Form 8-K to
provide certain additional ownership and operational information
concerning the Company and the properties owned or managed by it
as of September 30, 1997.
On November 10, 1997, the Company filed a report on Form 8-K with
respect to the acquisition of the Copley Properties.
On December 18, 1997, the Company filed a report on Form 8-K with
respect to the Press Release dated December 10, 1997.
On December 31, 1997, the Company filed a report on Form 8-K with
respect to the acquisition of the Thousand Oaks Property.
37
<PAGE>
On January 6, 1998, the Company filed a report on Form 8-K with
respect to the Acquisition Credit Facility and the acquisition of
the Opus Portfolio.
On January 9, 1998, the Company filed a report on Form 8-K/A with
respect to the acquisition of the Copley Properties.
On January 12, 1998, the Company filed a report on Form 8-K/A
with respect to the acquisition of the Thousand Oaks Property.
On January 12, 1998, the Company filed a report on Form 8-K/A
with respect to the Acquisition Credit Facility and the
acquisition of the Opus Portfolio.
On January 12, 1998, the Company filed a report on Form 8-K with
respect to the acquisitions of the Marion Bass Portfolio, the
Windsor Portfolio, Bryant Lake and the CRI Properties.
On January 12, 1998, the Company filed a report on Form 8-K with
respect to the January 1998 Offering.
On January 22, 1998, the Company filed a report on Form 8-K with
respect to the Press Release for the year ended December 31, 1997
earnings.
On January 27, 1998, the Company filed a report on Form 8-K with
respect to the January 1998 Offering.
On February 20, 1998, the Company filed a report on Form 8-K to
provide certain additional ownership and operational information
concerning the Company and the properties owned or managed by it
as of December 31, 1997.
On March 3, 1998, the Company filed a report on Form 8-K with
respect to the sale of GRC Airport Associates' sole property.
On March 12, 1998, the Company filed a report on Form 8-K with
respect to the acquisition of the San Mateo Headquarters.
On March 24, 1998, the Company filed a report on Form 8-K/A with
respect to the sale of GRC Airport Associates' sole property.
38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
GLENBOROUGH REALTY TRUST INCORPORATED:
We have audited the accompanying consolidated balance sheets of GLENBOROUGH
REALTY TRUST INCORPORATED, as of December 31, 1997 and 1996, the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1997 and 1996, and the combined statements of
operations, stockholders' equity and cash flows of the GRT Predecessor Entities
for the year ended December 31, 1995. These consolidated and combined financial
statements and the schedules referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated and combined financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of GLENBOROUGH REALTY
TRUST INCORPORATED, as of December 31, 1997 and 1996, the consolidated results
of its operations and its cash flows for the years ended December 31, 1997 and
1996, and the combined results of operations and cash flows of the GRT
Predecessor Entities for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated and combined financial statements taken as a whole. The
accompanying schedules listed in the index to financial statements and schedules
are presented for the purpose of complying with the Securities and Exchange
Commission's rules and are not a required part of the basic consolidated and
combined financial statements. These schedules have been subjected to the
auditing procedures applied in our audits of the basic consolidated and combined
financial statements and, in our opinion, are fairly stated in all material
respects in relation to the basic consolidated and combined financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California
January 21, 1998 (except with respect to
matters discussed in Note 14, as to which
the date is March 20, 1998)
39
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(in thousands, except share amounts)
1997 1996
<S> <C> <C>
ASSETS
Investments in real estate, net of accumulated depreciation
of $41,213 and $28,784 in 1997 and 1996, respectively $ 825,218 $ 161,945
Investments in Associated Companies 10,948 6,765
Mortgage loans receivable, net of reserve for loss of
$863 in 1996 3,692 9,905
Cash and cash equivalents 5,070 1,355
Other assets 20,846 5,550
TOTAL ASSETS $ 865,774 $ 185,520
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage loans $ 148,139 $ 54,584
Secured bank line -- 21,307
Unsecured bank line 80,160 --
Other liabilities 11,091 3,198
Total liabilities 239,390 79,089
Commitments and contingencies -- --
Minority interest 46,261 8,831
Stockholders' Equity:
Common Stock, 31,547,256 and 9,661,553 shares
issued and outstanding at December 31, 1997
and 1996, respectively 31 10
Additional paid-in capital 592,739 105,952
Deferred compensation (210) (399)
Retained earnings (deficit) (12,437) (7,963)
Total stockholders' equity 580,123 97,600
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 865,774 $ 185,520
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
For the years ended December 31, 1997, 1996 and 1995
(in thousands, except per share amounts)
Glenborough Glenborough GRT
Realty Trust Realty Trust Predecessor
Incorporated Incorporated Entities
Consolidated Consolidated Combined
1997 1996 1995
REVENUE
<S> <C> <C> <C>
Rental revenue $ 61,393 $ 17,943 $ 15,454
Fees and reimbursements, including $719,
$311 and $2,995 from affiliates in 1997,
1996 and 1995, respectively 719 311 16,019
Interest and other income 1,802 1,080 2,698
Equity in earnings of Associated Companies 2,743 1,598 --
Net gain on sales of rental properties 839 321 --
Gain on collection of mortgage loan receivable 652 -- --
Total revenue 68,148 21,253 34,171
EXPENSES
Property operating expenses 18,958 5,266 8,576
General and administrative 3,319 1,393 15,947
Depreciation and amortization 14,873 4,575 4,762
Interest expense 9,668 3,913 2,129
Provision for loss on investments in real estate,
real estate partnerships and mortgage loans receivable -- -- 1,876
Consolidation costs -- 6,082 --
Litigation costs -- 1,155 --
Total expenses 46,818 22,384 33,290
Income (loss) from operations before provision for
income taxes, minority interest and extraordinary item 21,330 (1,131) 881
Provision for income taxes -- -- (357)
Minority interest (1,119) (292) --
Net income (loss) before extraordinary item 20,211 (1,423) 524
Extraordinary item:
Loss on early extinguishment of debt (843) (186) --
Net income (loss) $ 19,368 $ (1,609) $ 524
Basic Per share Data:
Net income (loss) before extraordinary item $ 1.12 $ (0.21)
Extraordinary item (0.04) (0.03)
Net income (loss) $ 1.08 $ (0.24)
Basic weighted average shares outstanding 17,982,817 6,632,707
Diluted Per share Data:
Net income (loss) before extraordinary item $ 1.09 $ (0.21)
Extraordinary item (0.04) (0.03)
Net income (loss) $ 1.05 $ (0.24)
Diluted weighted average shares outstanding 19,517,543 6,751,259
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
STATEMENTS OF EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
GRT Predecessor Entities Combined
Additional Receivable Retained
General Limited Common Paid-in from Earnings
Partner Partners Stock Capital Stockholder (Deficit) Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1994 $ (1,730) $ 85,337 $ 5 $ 6,613 $ (8,763) $ (904) $ 80,558
Distributions (117) (10,507) -- -- -- -- (10,624)
Redemption of shares -- -- (2) (6,613) -- (6,533) (13,148)
Repayment of
Stockholder advances, net -- -- -- -- 8,763 -- 8,763
Net income (loss) 17 1,751 -- -- -- (1,244) 524
Issuance of investor
notes in exchange
for units of limited
partnership interest -- (2,483) -- -- -- -- (2,483)
Equity in consolidation
attributable to
minority interest -- (7,962) -- -- -- -- (7,962)
Consolidation and
issuance of shares 1,830 (66,136) (3) -- -- 8,681 (55,628)
BALANCE AT
DECEMBER 31, 1995 -- -- -- -- -- -- --
Issuance of common stock to
directors and officers -- -- -- -- -- -- --
Issuance of common stock,
net of offering costs of $4,046 -- -- -- -- -- -- --
Distributions -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
BALANCE AT
DECEMBER 31, 1996 -- -- -- -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- -- --
Issuance of common stock,
net of offering costs of $28,785 -- -- -- -- -- -- --
Issuance of common stock
related to acquisitions -- -- -- -- -- -- --
Adjustment to fair value of
minority interest -- -- -- -- -- -- --
Distributions -- -- -- -- -- -- --
Net income -- -- -- -- -- -- --
BALANCE AT
DECEMBER 31, 1997 $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
Glenborough Realty Trust Incorporated
Additional Deferred Retained
Common Stock Paid-in Compen- Earnings
Shares Par Value Capital sation (Deficit) Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1994 -- $ -- $ -- $ -- $ -- $ --
Distributions -- -- -- -- -- --
Redemption of shares -- -- -- -- -- --
Repayment of
Stockholder advances, net -- -- -- -- -- --
Net income (loss) -- -- -- -- -- --
Issuance of investor
notes in exchange
for units of limited
partnership interest -- -- -- -- -- --
Equity in consolidation
attributable to
minority interest -- -- -- -- -- --
Consolidation and
issuance of shares 5,754 6 55,622 -- -- 55,628
BALANCE AT
DECEMBER 31, 1995 5,754 6 55,622 -- -- 55,628
Issuance of common stock to
directors and officers 35 -- 525 (399) -- 126
Issuance of common stock,
net of offering costs
of $4,046 3,873 4 49,805 -- -- 49,809
Distributions -- -- -- -- (6,354) (6,354)
Net loss -- -- -- -- (1,609) (1,609)
BALANCE AT
DECEMBER 31, 1996 9,662 10 105,952 (399) (7,963) 97,600
Amortization of deferred
compensation -- -- -- 189 -- 189
Issuance of common stock,
net of offering costs
of $28,785 21,780 21 482,491 -- -- 482,512
Issuance of common stock
related to acquisitions 105 -- 2,655 -- -- 2,655
Adjustment to fair value of
minority interest -- -- 1,641 -- -- 1,641
Distributions -- -- -- -- (23,842) (23,842)
Net income -- -- -- -- 19,368 19,368
BALANCE AT
DECEMBER 31, 1997 31,547 $ 31 $ 592,739 $ (210) $(12,437) $ 580,123
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
Glenborough Glenborough GRT
Realty Trust Realty Trust Predecessor
Incorporated Incorporated Entities
Consolidated Consolidated Combined
1997 1996 1995
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 19,368 $ (1,609) $ 524
Adjustments to reconcile net
income (loss) to net cash provided
by (used for) operating activities:
Depreciation and amortization 14,873 4,575 4,762
Amortization of loan fees, included
in interest expense 221 193 --
Provision for loss on investments
in real estate, real estate partnerships
and mortgage loans receivable -- -- 1,876
Minority interest in income from operations 1,119 292 --
Equity in earnings of Associated
Companies (2,743) (1,598) --
Net gain on sales of rental properties (839) (321) --
Gain on collection of mortgage loan receivable (652) -- --
Loss on early extinguishment of debt 843 186 --
Amortization of deferred compensation 189 -- --
Consolidation costs -- 6,082 --
Litigation costs -- 1,155 --
Changes in certain assets and liabilities, net (8,301) (4,817) (17,770)
Net cash provided by (used for)
operating activities 24,078 4,138 (10,608)
Cash flows from investing activities:
Net proceeds from sales of rental properties 12,950 2,882 --
Additions to rental property (586,965) (62,286) (3,925)
Additions to mortgage loans receivable (1,855) (2,694) --
Principal receipts on mortgage loans receivable 8,068 254 12,581
Investments in Associated Companies (3,700) (1,890) --
Distributions from Associated Companies 2,260 1,901 --
Net cash provided by (used for)
investing activities (569,242) (61,833) 8,656
<FN>
(continued)
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS - continued
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
Glenborough Glenborough GRT
Realty Trust Realty Trust Predecessor
Incorporated Incorporated Entities
Consolidated Consolidated Combined
1997 1996 1995
Cash flows from financing activities:
<S> <C> <C> <C>
Proceeds from borrowings $ 467,689 $ 52,599 $ 8,910
Repayment of borrowings (375,909) (35,593) (14,050)
Payment of investor notes -- (2,483) --
Distributions to minority interest holders (1,571) (526) --
Repayments from Stockholder, net -- -- 8,763
Distributions (23,842) (6,354) (10,624)
Redemption of shares -- -- (10,389)
Proceeds from issuance of stock, net of
offering costs 482,512 46,820 --
Net cash provided by (used for)
financing activities 548,879 54,463 (17,390)
Net increase (decrease) in cash and cash equivalents 3,715 (3,232) (19,342)
Cash and cash equivalents at beginning of year 1,355 4,587 23,929
Cash and cash equivalents at end of year $ 5,070 $ 1,355 $ 4,587
Supplemental disclosure of cash flow information:
Cash paid for interest $ 9,373 $ 3,270 $ 1,951
Supplemental Disclosure of Non-Cash
Investing and Financing activities:
Acquisition of real estate through assumption of
first trust deed notes payable. $ 60,628 $ 25,200 $ --
Acquisition of real estate through issuance of
shares of common stock and Operating
Partnership units $ 42,177 $ 3,749 $ --
Conversion of shares of common stock into
investor notes payable $ -- $ -- $ 2,483
Conversion of equity to minority interest $ -- $ -- $ 7,962
Consolidation and issuance of shares of common
stock in exchange for limited partnership units
and common stock in GRT Predecessor Entities $ -- $ -- $ 55,628
Refinancing of debt $ -- $ -- $ 28,200
Acquisition of real estate through foreclosure and
assumption of first trust deed note payable $ -- $ -- $ 3,908
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
44
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
Note 1. ORGANIZATION
Glenborough Realty Trust Incorporated (the "Company") was organized in the State
of Maryland on August 26, 1994. The Company has elected to qualify as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended (the "Code"). The Company completed a consolidation with certain public
California limited partnerships and other entities (the "Consolidation") engaged
in real estate activities (the "GRT Predecessor Entities") through an exchange
of assets of the GRT Predecessor Entities for 5,753,709 shares of Common Stock
of the Company. The Consolidation occurred on December 31, 1995, and the Company
commenced operations on January 1, 1996.
Subsequent to the Consolidation on December 31, 1995, and through December 31,
1997, the following Common Stock transactions occurred: (i) 35,000 shares of
Common Stock were issued to officers and directors as stock compensation; (ii)
25,446,000 shares were issued in four separate public equity offerings; (iii)
312,606 shares were issued in connection with various acquisitions; and (iv) 59
shares were retired, resulting in total shares of Common Stock issued and
outstanding at December 31, 1997, of 31,547,256. In addition, fully converted
shares issued and outstanding (including 2,365,409 partnership units in the
Operating Partnership) totaled 33,912,665 at December 31, 1997.
To maintain the Company's qualification as a REIT, no more than 50% in value of
the outstanding shares of the Company may be owned, directly or indirectly, by
five or fewer individuals (defined to include certain entities), applying
certain constructive ownership rules. To help ensure that the Company will not
fail this test, the Company's Articles of Incorporation provide for certain
restrictions on the transfer of the Common Stock to prevent further
concentration of stock ownership.
The Company, through several subsidiaries, is engaged primarily in the
ownership, operation, management, leasing, acquisition, expansion and
development of various income-producing properties. The Company's major
consolidated subsidiary, in which it holds a 1% general partner interest and a
91.48% limited partner interest at December 31, 1997, is Glenborough Properties,
L.P. (the "Operating Partnership"). As of December 31, 1997, the Operating
Partnership, directly and through various subsidiaries in which it and the
Company own 100% of the ownership interests, controls a total of 128 real estate
projects and 2 mortgage loans receivable.
As of December 31, 1997, the Company also holds 100% of the non-voting preferred
stock of the following two Associated Companies (the "Associated Companies"):
Glenborough Corporation ("GC") is the general partner of several real
estate limited partnerships and provides asset and property management
services for these partnerships (the "Controlled Partnerships"). It also
provides partnership administration, asset management, property management
and development services under a long term contract to a group of
unaffiliated partnerships which include five public partnerships sponsored
by Rancon Financial Corporation, an unaffiliated corporation which has
significant real estate assets in the Inland Empire region of Southern
California (the "Rancon Partnerships"). The services to the Rancon
Partnerships were previously provided by Glenborough Inland Realty
Corporation ("GIRC"), a California corporation, which merged with GC
effective June 30, 1997. GC also provides property management services for
a limited portfolio of property owned by other unaffiliated third parties.
In the merger between GC and GIRC, the Company received preferred stock of
GC in exchange for its preferred stock of GIRC, on a one-for-one basis.
Following the merger, the Company holds the same preferences with respect
to dividends and liquidation distributions paid by GC as it previously held
with respect to GC and GIRC combined.
Glenborough Hotel Group ("GHG") leases the five Country Suites by Carlson
hotels owned by the Company and operates them for its own account. It also
operates two Country Suites By Carlson hotels and two resort condominium
hotels under separate contracts.
45
<PAGE>
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements present the consolidated financial
position of the Company as of December 31, 1997 and 1996, the consolidated
results of operations and cash flows of the Company for the years ended December
31, 1997 and 1996, and the combined results of operations and cash flows of the
GRT Predecessor Entities for the year ended December 31, 1995, as the
Consolidation transaction discussed in Note 1 above was not effective until
December 31, 1995. All intercompany transactions, receivables and payables have
been eliminated in consolidation and combination.
Reclassification
Certain 1996 balances have been reclassified to conform with the current year
presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the results of operations during the reporting period. Actual results could
differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information," which will be effective for financial
statements issued for fiscal years beginning after December 15, 1997. SFAS 131
will require the Company to report certain financial and descriptive information
about its reportable operating segments, segments for which separate financial
information is available that is evaluated regularly by management in deciding
how to allocate resources and in assessing performance. For these segments, SFAS
131 will require the Company to report profit and loss, certain specific revenue
and expense items and assets. It also requires disclosures about each segment's
products and services, geographic areas of operation and major customers. The
Company will adopt the disclosures required by SFAS 131 in the financial
statements for the year ended December 31, 1998.
Investments in Real Estate
Investments in real estate are stated at cost unless circumstances indicate that
cost cannot be recovered, in which case, the carrying value of the property is
reduced to estimated fair value. Estimated fair value: (i) is based upon the
Company's plans for the continued operation of each property; and (ii) is
computed using estimated sales price, as determined by prevailing market values
for comparable properties and/or the use of capitalization rates multiplied by
annualized rental income based upon the age, construction and use of the
building. The fulfillment of the Company's plans related to each of its
properties is dependent upon, among other things, the presence of economic
conditions which will enable the Company to continue to hold and operate the
properties prior to their eventual sale. Due to uncertainties inherent in the
valuation process and in the economy, it is reasonably possible that the actual
results of operating and disposing of the Company's properties could be
materially different than current expectations.
Depreciation is provided using the straight line method over the useful lives of
the respective assets.
The useful lives are as follow:
Buildings and Improvements 10 to 40 years
Tenant Improvements Term of the related lease
Furniture and Equipment 5 to 7 years
46
<PAGE>
Investments in Associated Companies
The Company's investments in the Associated Companies are accounted for using
the equity method, as discussed further in Note 4.
Mortgage Loans Receivable
The Company monitors the recoverability of its loans and notes receivable
through ongoing contact with the borrowers to ensure timely receipt of interest
and principal payments, and where appropriate, obtains financial information
concerning the operation of the properties. Interest on mortgage loans is
recognized as revenue as it accrues during the period the loan is outstanding.
Mortgage loans receivable will be evaluated for impairment if it becomes evident
that the borrower is unable to meet its debt service obligations in a timely
manner and cannot satisfy its payments using sources other than the operations
of the property securing the loan. If it is concluded that such circumstances
exist, then the loan will be considered to be impaired and its recorded amount
will be reduced to the fair value of the collateral securing it. Interest income
will also cease to accrue under such circumstances. Due to uncertainties
inherent in the valuation process, it is reasonably possible that the amount
ultimately realized from the Company's collection on these receivables will be
different than the recorded amounts.
Cash Equivalents
The Company considers short-term investments (including certificates of deposit)
with a maturity of three months or less at the time of investment to be cash
equivalents.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure about
fair value for all financial instruments. Based on the borrowing rates currently
available to the Company, the carrying amount of debt approximates fair value.
Cash and cash equivalents consist of demand deposits and certificates of deposit
with financial institutions. The carrying amount of cash and cash equivalents as
well as the mortgage loans receivable described above, approximates fair value.
Deferred Financing and Other Fees
Fees paid in connection with the financing and leasing of the Company's
properties are amortized over the term of the related notes payable or leases
and are included in other assets.
Minority Interest
Minority interest represents the 7.52% 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 years ended December 31, 1997 and 1996, no tenants represented 10% or
more of rental revenue of the Company. For the year ended December 31, 1995,
rental revenue from two properties leased to one tenant represented
approximately 10% of the Company's total rental revenue.
Fees and reimbursements revenue consists of property management fees, overhead
administration fees, and transaction fees from the acquisition, disposition,
refinance, leasing and construction supervision of real estate.
Revenues are recognized only after the Company is contractually entitled to
receive payment, after the services for which the fee is received have been
provided, and after the ability and timing of payments are reasonably assured
and predictable.
Scheduled rent increases are based primarily on the Consumer Price Index or a
similar factor. Material incentives paid, if any, by the Company to a tenant are
amortized as a reduction of rental income over the life of the related lease.
The Company recognizes contingent rental income after the related target is
achieved, consistent with EITF 98-9, "Accounting for Contingent Rent in Interim
Financial Periods."
Income Taxes
The Company has made an election to be taxed as a REIT under Sections 856
through 860 of the Code. As a REIT, the Company generally will not be subject to
Federal income tax to the extent that it distributes at least 95% of its REIT
taxable income to its shareholders. REITs are subject to a number of
organizational and operational
47
<PAGE>
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.
Certain of the Company's predecessors were subject to income taxes, the
provisions for which have been included in the accompanying 1995 combined
results of operations of the GRT Predecessor Entities.
Earnings Per Share
In 1997, the Company adopted the disclosure requirements of SFAS No. 128,
"Earnings per Share." SFAS 128 requires the disclosure of basic earnings per
share and modified existing guidance for computing diluted earnings per share.
Earnings per share for all periods presented have been restated to conform to
the new standard. For additional required disclosures, see Note 9.
Note 3. INVESTMENTS IN REAL ESTATE
The cost and accumulated depreciation of real estate investments as of December
31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Buildings and Total Accumulated Net
1997: Land Improvements Cost Depreciation Recorded Value
<S> <C> <C> <C> <C> <C>
Office properties $ 62,442 $ 282,129 $ 344,571 $ (9,310) $ 335,261
Office/Flex properties 46,496 163,606 210,102 (3,274) 206,828
Industrial properties 20,903 88,802 109,705 (7,503) 102,202
Retail properties 16,687 50,447 67,134 (5,845) 61,289
Multi-family properties 19,512 71,288 90,800 (1,780) 89,020
Hotel properties 5,587 38,532 44,119 (13,501) 30,618
Total $ 171,627 $ 694,804 $ 866,431 $ (41,213) $ 825,218
1996:
Office properties $ 9,721 $ 39,582 $ 49,303 $ (4,224) $ 45,079
Office/Flex properties 2,326 9,163 11,489 (624) 10,865
Industrial properties 4,293 23,633 27,926 (5,533) 22,393
Retail properties 16,578 30,681 47,259 (6,164) 41,095
Multi-family properties 5,652 17,440 23,092 (510) 22,582
Hotel properties 5,586 26,074 31,660 (11,729) 19,931
Total $ 44,156 $ 146,573 $ 190,729 $ (28,784) $ 161,945
</TABLE>
In February 1997, the Company acquired a 163-suite hotel property (the
"Scottsdale Hotel"), which began operations in January 1996 and is located in
Scottsdale, Arizona. The total acquisition cost, including capitalized costs,
was approximately $12.1 million, which consisted of approximately $4.6 million
of mortgage debt assumed, and the balance in cash. The cash portion was financed
through advances under the Company's previous secured line of credit from Wells
Fargo Bank (the "Line of Credit") (see Note 6). The Scottsdale Hotel is marketed
as a Country Inn and Suites by Carlson.
In April 1997, the Company acquired from two limited partnerships and one
limited liability company managed by affiliates of Lennar Partners, a portfolio
of three properties, aggregating approximately 282,000 square feet (the "Lennar
Properties"). The total acquisition cost, including capitalized costs, was
approximately $23.2 million, which was paid in cash from the proceeds of the
March 1997 Offering (see Note 13). The Lennar Properties consist of one office
property located in Virginia and one office/flex property and one industrial
property, each located in Massachusetts.
In April 1997, the Company acquired from a private seller a 227,129 square foot,
15-story office building located in Bloomington, Minnesota (the "Riverview
Property"). The total acquisition cost, including capitalized costs, was
approximately $20.5 million, of which approximately $16.3 million was paid in
cash from the proceeds of the March 1997 Offering (see Note 13), and the balance
was paid in cash from borrowings under the Line of Credit.
48
<PAGE>
In April 1997, the Company acquired from seven partnerships and their general
partner, a Southern California syndicator, a portfolio of eleven properties,
aggregating approximately 523,000 square feet, together with associated
management interests (the "E&L Properties"). The total acquisition cost,
including capitalized costs, was approximately $22.2 million, which consisted of
(i) approximately $12.8 million of mortgage debt assumed; (ii) approximately
$6.7 million in the form of 352,197 partnership units in the Operating
Partnership (based on an agreed per unit value of $19.075); (iii) approximately
$633,000 in the form of 33,198 shares of Common Stock of the Company (based on
an agreed per share value of $19.075); and (iv) the balance in cash. The cash
portion was paid from borrowings under the Line of Credit. Of the $12.8 million
of mortgage debt assumed in the acquisition, approximately $8.9 million was paid
off on May 1, 1997, through a draw on the Line of Credit. The E&L Properties
consist of one office property, nine office/flex properties and one industrial
property, all located in Southern California.
In April 1997, the Company acquired from two partnerships formed and managed by
affiliates of CIGNA, a portfolio of six properties, aggregating approximately
616,000 square feet and 224 multi-family units (the "CIGNA Properties"). The
total acquisition cost, including capitalized costs, was approximately $45.4
million, which was paid entirely in cash from the proceeds of a $40 million
unsecured loan from Wells Fargo Bank (see Note 6) and a draw under the Line of
Credit. The CIGNA Properties are located in four states and consist of two
office properties, two office/flex properties, a shopping center and a
multi-family property.
In June 1997, the Company acquired from Carlsberg Realty, Inc. a portfolio of
three properties, aggregating approximately 245,600 square feet (the "CRI
Properties"). The total acquisition cost, including capitalized costs, was
approximately $14.8 million, which was paid entirely in cash from borrowings
under the Line of Credit. The CRI Properties consist of one office property
located in California and one office/flex property and one industrial property,
each located in Arizona. The CRI Properties had been managed by GC since
December 1996.
In June 1997, the Company sold from its retail portfolio six Atlanta Auto Care
Center properties and nine of the ten QuikTrip properties for an aggregate sales
price of approximately $12 million. The proceeds from the sale of the QuikTrip
properties were used to fund the acquisition of the Centerstone Property (as
discussed below) and the proceeds from the sale of the Auto Care Center
properties were used to paydown the Line of Credit and to payoff a mortgage
loan. The remaining QuikTrip property was sold on October 1, 1997, for a sales
price of approximately $1.1 million. The sales generated a net gain of $839,000.
In July 1997, the Company acquired an office property containing 157,579 square
feet (the "Centerstone Property") located in Irvine, California. The total
acquisition cost, including capitalized costs, was approximately $30.4 million,
which consisted of (i) approximately $5.5 million in the form of 275,000
partnership units in the Operating Partnership (based on an agreed per unit
value of $20.00); and (ii) the balance in cash from a combination of borrowings
under the Line of Credit and the net proceeds from the sale of the QuikTrip
retail properties (as discussed above).
In September 1997, the Company acquired a portfolio of 27 properties,
aggregating approximately 2,888,000 square feet (the "T. Rowe Price Properties")
from five limited partnerships, two general partnerships and one private REIT,
each organized by affiliates of T. Rowe Price Associates, Inc. The total
acquisition cost, including capitalized costs, was approximately $146.8 million,
which was paid entirely in cash from the proceeds of a $114 million unsecured
loan from Wells Fargo Bank (see Note 6), approximately $23 million of the
proceeds from a $60 million secured loan from Wells Fargo Bank (see Note 6), a
$6.5 million draw on the Line of Credit and the balance from the proceeds from
the July 1997 Offering (see Note 13). The T. Rowe Price Properties consist of
four office properties, twelve office/flex properties, eight industrial
properties and three retail properties located in 12 states.
In September 1997, the Company acquired a portfolio of ten properties,
aggregating 755,006 square feet (the "Advance Properties") from a group of
partnerships affiliated with The Advance Group of Bedminster, New Jersey. The
total acquisition cost, including capitalized costs, was approximately $103.0
million, which consisted of (i) approximately $7.4 million of mortgage debt
assumed; (ii) approximately $13.6 million in the form of 599,508 partnership
units in the Operating Partnership (based on an agreed per unit value of
$22.625); (iii) approximately
49
<PAGE>
$37 million of the proceeds from a $60 million secured loan from Wells Fargo
Bank (see Note 6); and (iv) the balance in cash. The cash portion of the
acquisition was paid with proceeds from the July 1997 Offering (see Note 13).
The Advance Properties consist of five office properties, three office/flex
properties and two industrial properties. Nine of the properties are located in
New Jersey and one is located in Maryland. Concurrent with this acquisition, the
Company invested $2,985,000 in exchange for a 50% ownership interest in
Advance/GLB Development Partners, LLC (the "Joint Venture"), a Delaware limited
liability company formed by the Company and The Advance Group for the
development of selected new projects. The Joint Venture owns 57 acres of land
suitable for office and office/flex development of up to 560,000 square feet.
The Company accounts for its investment in the Joint Venture using the equity
method as the Company has a significant ownership interest. At December 31,
1997, the Company's investment in the Joint Venture totaled $7,251,000 and is
included in other assets.
In September 1997, the Company acquired a 147,978 square-foot office building
("Citibank Park") located in Las Vegas, Nevada. The total acquisition cost,
including capitalized costs, was approximately $23.3 million, which consisted of
(i) approximately $1.66 million in the form of 61,222 partnership units in the
Operating Partnership (based on an agreed per unit value of $27.156); (ii) a
$19.4 million draw on the Line of Credit, and (iii) the balance in cash.
In October 1997, the Company acquired eight properties, aggregating 766,269
square feet, from six separate limited partnerships in which affiliates of AEW
Capital Management, L.P. (successors in interest to one or more affiliates of
Copley Advisors Inc.) serve as general partners (the "Copley Properties"). The
total acquisition cost, including capitalized costs, was approximately $63.7
million, which was paid entirely in cash. The Copley Properties are comprised of
two industrial properties located in Tempe, Arizona and Anaheim, California, and
six office/flex properties, one in Columbia, Maryland and five in Las Vegas,
Nevada.
In November 1997, the Company acquired a 171,789 square-foot office/flex
building in Eden Prairie, Minnesota ("Bryant Lake"), from Outlook Income Fund 9,
a limited partnership in which GC was the managing general partner. Robert
Batinovich was co-general partner of Outlook Income Fund 9 and held an economic
interest therein equal to an approximate 0.83% limited partnership interest.
Because of this affiliation, and consistent with the Company's Board of
Directors' policy, neither Robert Batinovich nor Andrew Batinovich voted when
the Board of Directors considered and acted to approve this acquisition. The
price paid for Bryant Lake equaled 100% of the appraised value as determined by
an independent appraiser. The total acquisition cost, including capitalized
costs, was approximately $9.4 million, comprising approximately $4.6 million in
the form of cash and the balance in the form of assumption of debt.
In December 1997, the Company acquired an office complex consisting of three
office buildings, aggregating 418,457 square feet ("Thousand Oaks"). The total
acquisition cost, including capitalized costs, was approximately $51.3 million,
which was paid entirely in cash, including cash from borrowings under the
Acquisition Credit Facility (see Note 6). The Thousand Oaks property includes 10
acres suitable for the development of 182,000 square feet of office space.
Thousand Oaks is located in Memphis, Tennessee.
In December 1997, the Company acquired four office/flex properties and one
office property (the "Opus Portfolio") aggregating 289,874 square feet from four
limited liability companies affiliated with Opus Properties, LLC. The total
acquisition cost, including capitalized costs, was approximately $27.9 million,
all of which was paid in cash, including cash from borrowings under the
Acquisition Credit Facility. Four of the Opus Portfolio properties are located
in or near Tampa, Florida, and one is located in Denver, Colorado.
In December 1997, the Company acquired 10 multi-family properties (the "Marion
Bass Portfolio") aggregating 1,385 units from various limited partnerships, each
of whose general partner is Marion Bass Real Estate Group. The total acquisition
cost, including capitalized costs, was approximately $58.3 million, comprising
$23.5 million of assumed debt and the balance in cash, including cash from
borrowings under the Acquisition Credit Facility. Of the 10 Marion Bass
Portfolio properties, six are located in Charlotte, North Carolina, two are in
Monroe, North Carolina, one is in Raleigh, North Carolina and one is in
Pineville, North Carolina.
50
<PAGE>
In December 1997, the Company issued, subject to a rescission right,
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, which, upon
completion, was anticipated to generate net cash proceeds of $14.1 million. By
virtue of interests held directly or indirectly in GRCAA, Robert Batinovich
received consideration of approximately $2.2 million and GC 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. The sale of GRCAA's property to a third
party was completed in February 1998. See Note 14 for further discussion.
The Company has entered into a definitive agreement to sell the Shannon Crossing
retail property for $3.1 million. In connection with this sale, the Company has
agreed to lend $6.2 million to the buyer under a construction loan with a fixed
interest rate of 8%, to be funded as needed. As of the date of this filing,
approximately $1.1 million has been funded under this construction loan. The
sale of Shannon Crossing will not be completed until the fourth quarter of 1998
as its sale is currently precluded by the terms of the mortgage loan secured by
the property.
As of December 31, 1997, approximately $13 million of escrow deposits for future
acquisitions of properties are included in rental property.
The Company leases its commercial and industrial property under non-cancelable
operating lease agreements. Future minimum rents to be received as of December
31, 1997 are as follows (in thousands):
Year Ending
December 31,
1998 $ 17,160
1999 13,131
2000 13,393
2001 12,109
2002 6,174
Thereafter 24,123
$ 86,090
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.
51
<PAGE>
As of December 31, 1997 and 1996, the Company had the following investments in
the Associated Companies (in thousands):
GC(1) GHG Total
--------- --------- ---------
Investment at December 31, 1995 $ 3,810 $ 1,368 $ 5,178
Contributions 1,690 200 1,890
Distributions (1,810) (91) (1,901)
Equity in earnings 1,571 27 1,598
--------- --------- ---------
Investment at December 31, 1996 5,261 1,504 6,765
Contribution 3,700 -- 3,700
Distributions (2,129) (131) (2,260)
Equity in earnings 1,687 1,056 2,743
--------- --------- ---------
Investment at December 31, 1997 $ 8,519 $ 2,429 $ 10,948
========= ========= =========
(1) All amounts presented for GC represent combined amounts for GC and GIRC due
to the June 30, 1997 merger, as previously discussed in Note 1.
Summary condensed balance sheet information as of December 31, 1997 and 1996,
and the condensed statements of operations for the years then ended are as
follows (in thousands):
<TABLE>
<CAPTION>
Balance Sheets
GC (1) GHG
As of December 31, As of December 31,
1997 1996 1997 1996
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Investments in management contracts, net $ 8,108 $ 6,756 $ 354 $ 430
Other Assets 3,631 1,930 3,381 1,825
=========== =========== =========== ==========
Total assets $ 11,739 $ 8,686 $ 3,735 $ 2,255
=========== =========== =========== ==========
Notes payable $ 1,483 $ 2,383 $ 37 $ 61
Other liabilities 1,764 1,016 962 692
----------- ----------- ----------- ----------
Total liabilities 3,247 3,399 999 753
Stockholders' equity 8,492 5,287 2,736 1,502
=========== =========== =========== ==========
Total liabilities and stockholders' equity $ 11,739 $ 8,686 $ 3,735 $ 2,255
=========== =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Statements of Operations
GC (1) GHG
For the year ended For the year ended
December 31, December 31,
1997 1996 1997 1996
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue $ 15,105 $ 11,375 $ 14,857 $ 9,952
Expenses 13,331 9,723 13,457 9,925
=========== =========== =========== ==========
Net income $ 1,774 $ 1,652 $ 1,400 $ 27
=========== =========== =========== ==========
</TABLE>
52
<PAGE>
(1) All amounts presented for GC represent combined amounts for GC and GIRC due
to the June 30, 1997 merger, as previously discussed in Note 1. Included in the
revenues of GC for the year ended December 31, 1997 is a fee of approximately
$1.7 million earned in connection with the GRCAA transaction discussed in Note 3
above.
Note 5. MORTGAGE LOANS RECEIVABLE
The Company held a first mortgage loan with a principal balance of $7,563,000
and a carrying value of $6,700,000 at December 31, 1996, secured by an office
and research complex in Eatontown, New Jersey. The loan had an original maturity
date of November 1, 1996 with interest only payable monthly at the fixed rate of
eight percent (8%) per annum. In 1995, due to the uncertainty surrounding the
borrower's ability to payoff the note receivable upon its November 1996
maturity, the Company recorded a $863,000 loss provision on this mortgage loan
receivable to reduce its carrying value to the estimated fair value of the
underlying property. In December 1996, the maturity date was extended to
February 1, 1997. On January 28, 1997, the borrower paid off the note. Total
proceeds of the payoff were $7,352,000, net of collection costs, resulting in a
gain on collection of $652,000.
At December 31, 1997, the Company held a first mortgage loan in the amount of
$507,000 secured by an industrial property in Los Angeles, California. The terms
of the note include interest accruing at eight percent (8%) per annum for the
first twenty-four months (ended June 1996) and at nine percent (9%) per annum
for the next sixty months until the note matures in June 2001. Monthly payments
of principal and interest, computed based on a thirty year amortization
schedule, commenced January 1995 and continue until maturity.
In 1996, the Operating Partnership entered into a Loan Agreement and Option
Agreement (the "Option Agreement") with Carlsberg Properties, LTD. ("the
Borrower"). The loan amount was $3,600,000, of which $2,694,000 was initially
disbursed to the Borrower and $906,000 was held by the Operating Partnership as
leasing and interest reserves. On June 18, 1997, the Loan Agreement was amended
to include an additional advance to the borrower of $250,000 which was applied
in its entirety to the interest reserve, resulting in an amended loan amount of
$3,850,000 and an increase in the interest reserve of $250,000. During the year
ended December 31, 1997, $491,000 of reserves were disbursed to the borrower
which resulted in an outstanding balance at December 31, 1997, of $3,185,000.
The loan is secured by a 48,000 square foot medical building in Phoenix, Arizona
(the "Grunow Building"), and matures on November 19, 1999, with interest only
payable monthly at the fixed rate of eleven percent (11%) per annum calculated
on the full amount of the loan. The Option Agreement provides the Operating
Partnership the option to purchase the Grunow Building on either the second or
third anniversary of the closing date of November 19, 1996, for the greater of
i) the then outstanding loan balance plus $50,000 or ii) the value of the
Secured Property as defined in the Option Agreement.
Contractually due principal payments of the mortgage loans receivable are as
follows (in thousands):
Year Ending
December 31,
1998 $ 5
1999 3,190
2000 5
2001 492
2002 --
Thereafter --
----------
Total $ 3,692
==========
Note 6. SECURED AND UNSECURED LIABILITIES
The Company had the following mortgage loans, bank lines, and notes payable
outstanding as of December 31, 1997 and 1996 (in thousands):
53
<PAGE>
1997 1996
Secured $50 million line of credit with a bank with
variable interest rates of LIBOR plus 1.75% and
prime rate, monthly interest only payments and a
maturity date of July 14, 1998, with an option to
extend for 10 years. In December 1997, the line was
paid-off when the Company obtained a $250 million
unsecured line of credit (discussed below). $ -- $ 21,307
Unsecured $250 million 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% (7.07% at December 31, 1997),
monthly interest only payments and a maturity date
of December 22, 2000, with one option to extend for
10 years. 80,160 --
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 $111,372 at December 31, 1997.
See below for further discussion. 59,724 --
Secured loan with a bank with variable interest
rates of LIBOR plus 2.375% and prime rate plus
0.50%, monthly interest only payments and a maturity
date of July 14, 1998. The loan was paid off in June
1997 upon the sale of the properties securing the
loan. -- 6,120
Secured loan with an investment bank with a fixed
interest rate of 7.57%, monthly principal (based
upon a 25-year amortization) and interest payments
of $149 and a maturity date of January 1, 2006. The
loan is secured by nine properties with an aggregate
net carrying value of $37,711 and $39,298 at
December 31, 1997 and 1996, respectively. 19,444 19,744
Secured loans with various lenders, bearing interest
at fixed rates between 7.63% and 9.25%, with monthly
principal and interest payments ranging between $9
and $62 and maturing at various dates through April
1, 2012. These loans are secured by properties with
an aggregate net carrying value of $66,353 and
$30,441 at December 31, 1997 and 1996, respectively. 30,519 17,581
Secured loans with various banks bearing interest at
variable rates (ranging between 7.46% and 8.18% at
December 31, 1997), monthly principal and interest
payments ranging between $4 and $46 and maturing at
various dates through May 1, 2017. These loans are
secured by properties with an aggregate net carrying
value of $17,246 and $6,975 at December 31, 1997 and
1996, respectively. 7,806 3,807
Secured loans with various lenders, bearing interest
at fixed rates between 7.25% and 7.85%, with monthly
principal and interest payments ranging between $5
and $55 and maturing at various dates through
December 1, 2030. These loans are secured by Housing
and Urban Development properties with an aggregate
net carrying value of $41,862 and $9,491 at December
31, 1997 and 1996, respectively. 30,646 7,332
Total $ 228,299 $ 75,891
54
<PAGE>
In April 1997, the Operating Partnership entered into a $40 million unsecured
loan with Wells Fargo Bank to fund the acquisition of the CIGNA Properties (the
"CIGNA Acquisition Financing"). The CIGNA Acquisition Financing had a term of
three months (extendible to six months at the Company's option), interest at a
variable annual rate equal to 175 basis points above 30-day LIBOR, was unsecured
and was guaranteed by the Company. Required payments under the CIGNA Acquisition
Financing were monthly, interest only.
In June 1997, Wells Fargo had substantially completed underwriting and due
diligence for a $60 million mortgage loan to the Company (the "$60 Million
Mortgage") to be secured by the Lennar Properties, the Riverview Property, the
Centerstone Property and five of the CIGNA Properties. In the interim, Wells
Fargo funded a $60 million unsecured "bridge" loan (the "$60 Million Unsecured
Bridge Loan"), which was used to (i) repay all principal and accrued interest
under the $40 million CIGNA Acquisition Financing, and (ii) reduce the
outstanding balance under the Line of Credit by approximately $20 million.
The $60 Million Unsecured Bridge Loan was paid-off in July 1997 from the
proceeds of the July 1997 Offering (see Note 13) and was replaced with the $60
Million Mortgage in September 1997. This loan has a 25-year term, bears interest
at a fixed annual rate of 7.5%, and requires monthly payments of principal and
interest. Proceeds from the $60 Million Mortgage were used to fund the
acquisitions of the T. Rowe Price Properties and the Advance Properties.
In September 1997, the Company closed a $114 million unsecured loan (the "$114
Million Interim Unsecured Loan") with Wells Fargo Bank. This loan had a 90-day
term with two 90-day extension options, interest at a fixed annual rate of 7.5%
and required monthly interest-only payments. The proceeds of this loan were used
to fund a portion of the purchase price for the T. Rowe Price Properties. In
October 1997, the Company repaid the $114 Million Interim Unsecured Loan with
net proceeds from the October 1997 Offering (see Note 13).
In December 1997, the Company replaced its $50 million secured line of credit
with a new $250 million unsecured line of credit (the "Acquisition Credit
Facility") with Wells Fargo Bank. The Acquisition Credit Facility has a three
year term with an option to extend the term for an additional 10 years and bears
interest on a sliding scale ranging from LIBOR plus 1.1% to LIBOR plus 1.3%,
which represents a rate that is lower by at least 0.45% than the rate under the
Company's previous $50 million secured line of credit. In connection with the
repayment of the $50 million secured line of credit, the Company expensed, as an
extraordinary item, the unamortized deferred costs incurred to obtain the
secured line of credit of $843,000. Draws under the Acquisition Credit Facility
were used to fund acquisitions as discussed in Note 3.
The required principal payments on the Company's debt for the next five years
and thereafter are as follows (in thousands):
Year Ending
December 31,
1998 $ 5,562
1999 3,893
2000 84,900
2001 2,914
2002 3,148
Thereafter 127,882
---------
Total $ 228,299
=========
Note 7. RELATED PARTY TRANSACTIONS
Fee and reimbursement income earned by the Company and the GRT Predecessor
Entities from related partnerships totaled $719,000, $311,000 and $2,995,000 for
the years ended December 31, 1997, 1996 and 1995, respectively, and consisted of
property management fees and/or asset management fees for the years ended
December 31, 1997 and 1996, and property management fees, asset management fees,
reimbursements and related expenses for the year ended December 31, 1995.
55
<PAGE>
Note 8. PROVISION FOR LOSS ON INVESTMENTS IN REAL ESTATE, REAL ESTATE
PARTNERSHIPS AND MORTGAGE LOANS RECEIVABLE
The loss provisions recorded during the year ended December 31, 1995 were as
follows:
Reduction in the carrying value of the New
Jersey note receivable to the value of collateral $ 863
Reduction in value of the GC investments in real
estate partnerships to estimated net realizable value 955
Other 58
-------
Total $ 1,876
=======
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 periods presented have been restated to
conform to the new standard as follows (in thousands, except for weighted
average shares and per share amounts):
Years ending December 31,
1997 1996
Net income - Basic 19,368 (1,609)
Minority interest 1,119 -- (1)
Net income - Diluted 20,487 (1,609)
Weighted average shares:
Basic 17,982,817 6,632,707
Stock options 281,365 118,552
Convertible Operating Partnership Units 1,253,361 -- (1)
Diluted 19,517,543 6,751,259
Basic earnings per share 1.08 (0.24)
Diluted earnings per share 1.05 (0.24)(1)
(1) Diluted earnings per share for the year ended December 31, 1996, does not
include the conversion of units of the Operating Partnership into common stock
(570,364 weighted average units outstanding) as the effect is anti-dilutive.
Note 10. CONSOLIDATION AND LITIGATION COSTS
The consolidation costs included in the Company's December 31, 1996 consolidated
statement of operations included accounting fees as well as the costs of mailing
and printing the Prospectus/Consent Solicitation Statement, any supplements
thereto or other documents related to the Consolidation, the costs of the
Information Agent, Investor brochure, telephone calls, broker-dealer fact
sheets, printing, postage, travel, meetings, legal and other fees related to the
solicitation of consents, as well as reimbursement of costs incurred by brokers
and banks in forwarding the Prospectus/Consent Solicitation Statement to
Investors.
The litigation costs included in the Company's December 31, 1996 consolidated
statement of operations included the legal fees incurred in connection with
defending two class action complaints filed by investors in certain of the
56
<PAGE>
GRT Predecessor Entities as well as an accrual for the amount of the settlement
that the plaintiff's counsel in one case was requesting be awarded by the court
(see Note 12).
Note 11. 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 December 31, 1997, 35,000 shares of
bonus grants have been issued under the Plan. The fair value of the shares
granted have been recorded as deferred compensation in the accompanying
financial statements and will be charged to earnings ratably over the respective
vesting periods that range from 2 to 5 years. As of December 31, 1997, 1,708,200
options to purchase shares of Common Stock have been granted. The exercise price
of each option granted is greater than or equal to the per-share fair market
value of the Common Stock on the date the option is granted. To date, all
options granted have been at 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.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation"
(SFAS 123). As permitted by SFAS 123, the Company has not changed its method of
accounting for stock options but has provided the additional required
disclosures. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands except for per share amounts).
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
Net income (loss) As reported 19,368 (1,609)
SFAS No. 123 Adjustment (1,947) (3)
Pro forma 17,421 (1,612)
Basic earnings per share As reported 1.08 (0.24)
SFAS No. 123 Adjustment (0.11) --
Pro forma 0.97 (0.24)
Diluted earnings per share As reported 1.05 (0.24)
SFAS No. 123 Adjustment (0.10) --
Pro forma 0.95 (0.24)
</TABLE>
57
<PAGE>
A summary of the status of the Company's stock option plan as of December 31,
1997 and 1996, and changes during the years then ended is presented in the table
below:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------- ----------------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
-------------- ---------------------- ------------- ----------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 796,000 $ 15.00 --
Granted 912,200 $ 26.29 796,000 $ 15.00
Exercised -- -- -- --
Purchased -- -- -- --
-------------- ---------------------- ------------- ----------------------
Outstanding at end of year 1,708,200 $ 21.03 796,000 $ 15.00
Exercisable at end of year 356,000 $ 27.29 -- --
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------- -------------------------------------
Number Weighted-average Weighted- Number Weighted-
Outstanding at remaining average Exercisable at average
12/31/97 contractual life exercise price 12/31/97 exercise price
----------------- --------------------- ----------------- ----------------- -----------------
Range of Exercise Prices
<S> <C> <C> <C> <C> <C>
$15.00 to $20.25 884,000 8.63 years $ 15.45 6,000 $ 15.00
$20.38 to $24.56 62,000 8.27 years $ 22.76 - -
$25.00 to $30.00 762,200 9.76 years $ 27.36 350,000 $ 27.50
----------------- --------------------- ----------------- ----------------- -----------------
1,708,200 $ 21.03 356,000 $ 27.29
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during 1997 and 1996, respectively: expected
dividend yield of 5.28% and 8.5%, expected volatility of 27.90% and 5.0%,
weighted average risk-free interest rate of 5.74% and 6.3%, and expected lives
of 10, 7, 5 and 2 years. Based on these assumptions, the weighted average fair
value of options granted would be calculated as $4.52 in 1997 and $0.02 in 1996.
Note 12. COMMITMENTS AND CONTINGENCIES
Environmental Matters. The Company follows a policy of monitoring its properties
for the presence of hazardous or toxic substances. The Company is not aware of
any environmental liability with respect to the properties that would have a
material adverse effect on the Company's business, assets or results of
operations. There can be no assurance that such a material environmental
liability does not exist. The existence of any such material environmental
liability could have an adverse effect on the Company's results of operations
and cash flow.
General Uninsured Losses. The Company carries comprehensive liability, fire,
flood, extended coverage and rental loss insurance with policy specifications,
limits and deductibles customarily carried for similar properties. There are,
however, certain types of extraordinary losses which may be either uninsurable,
or not economically insurable. Further, certain of the properties are located in
areas that are subject to earthquake activity. Should a property sustain damage
as a result of an earthquake, the Company may incur losses due to insurance
deductibles, co-payments on insured losses or uninsured losses. Should an
uninsured loss occur, the Company could lose its investment in, and anticipated
profits and cash flows from, a property.
Litigation. Prior to the completion of the Consolidation, two lawsuits were
filed in 1995 contesting the fairness of the Consolidation, one in California
State court and one in federal court. The complaints in both actions alleged,
among other things, breaches by the defendants of fiduciary duties and
inadequate disclosures. The State court action was settled and, upon appeal, the
settlement was affirmed by the State court on February 17, 1998. Pursuant to the
terms of the settlement in the State court action, pending appeal, the Company
has paid one-third of the
58
<PAGE>
$855,000 settlement amount and the remaining two-thirds is being held in escrow.
In the federal action, the court in December of 1995 deferred all further
proceedings pending a ruling in the State court action. Following the State
court decision approving the settlement, the defendants filed a motion to
dismiss the federal court action. 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 outcomes of these
actions will be favorable to the Company.
Note 13. PUBLIC STOCK OFFERINGS
In October 1996, the Company completed the "October 1996 Offering" of 3,666,000
shares of Common Stock. The 3,666,000 shares were sold at a per share price of
$13.875 for total proceeds of $47,814,000 (net of 6% underwriting fee of
$3,052,000. Approximately $1,100,000 in other costs were incurred in connection
with the October 1996 Offering.
In March 1997, the Company completed the "March 1997 Offering" of 3,500,000
shares of Common Stock. The 3,500,000 shares were sold at a per share price of
$20.25 for total proceeds of $66,955,000 (net of 6% underwriting fee of
$3,920,000). Approximately $916,000 in other costs were incurred in connection
with the March 1997 Offering.
In July 1997, the Company completed the "July 1997 Offering" of 6,980,000 shares
of Common Stock. The 6,980,000 shares were sold at a per share price of $22.625
for total proceeds of $149,965,300 (net of underwriting fees of $7,957,200).
Approximately $810,000 in other costs were incurred in connection with the July
1997 Offering.
In October 1997, the Company completed the "October 1997 Offering" of 11,300,000
shares of Common Stock. The 11,300,000 shares were sold at a per share price of
$25.00 for total proceeds of $268,092,500 (net of underwriting fees of
$14,407,500). Approximately $772,000 in other costs were incurred in connection
with the October 1997 Offering.
Following are unaudited proforma statements of operations of the Company for
each of the years ended December 31, 1997 and 1996 giving effect to the 1997 and
1996 offerings and related acquisitions (including those discussed in Note 3) as
if they had been completed on January 1, 1996 (in thousands except for weighted
average shares and per share amounts):
<TABLE>
<CAPTION>
1997 1996
(Unaudited) (Unaudited)
---------------- ----------------
REVENUE
<S> <C> <C>
Rental revenue $ 118,286 $ 111,862
Equity in earnings of Associated Companies 2,861 1,627
Fees, interest and other income 2,471 1,133
---------------- ----------------
Total Revenue 123,618 114,622
---------------- ----------------
OPERATING EXPENSES
Property operating expenses 37,366 35,611
General and administrative 4,558 3,134
Depreciation and amortization 23,607 21,950
Interest expense 16,700 15,363
---------------- ----------------
Total Operating Expenses 82,231 76,058
---------------- ----------------
Income from operations before minority interest 41,387 38,564
Minority interest (2,646) (2,720)
================ ================
Net income $ 38,741 $ 35,844
================ ================
Basic net income per share $ 1.23 $ 1.14
================ ================
Diluted net income per share $ 1.21 $ 1.12
================ ================
Basic weighted average shares outstanding 31,547,256 31,547,256
================ ================
Diluted weighted average shares outstanding 34,338,513 34,338,513
================ ================
</TABLE>
59
<PAGE>
Note 14. SUBSEQUENT EVENTS
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 $160.5 million
in assumption of debt; (ii) approximately $150.0 million in borrowings under a
$150 million loan agreement with Wells Fargo Bank (the "Interim Loan" as
discussed below); and (iii) the balance in cash, including cash from borrowings
under the Acquisition Credit Facility (see Note 6). Subsequent to the
acquisition, approximately $68 million of the assumed debt was paid off with
proceeds from the January 1998 Convertible Preferred Stock Offering (defined
below).
In January 1998, the Company sold a multi-family property for a sales price of
$4.95 million. This sale generated a net gain of approximately $947,000 and net
proceeds of approximately $2.1 million. The proceeds from the sale will be used
to fund future acquisitions. The sale was an all-cash sale and the Company has
no continuing obligations or involvement with this property. Accordingly, the
Company recognized the sale under the full accrual method of accounting.
In January 1998, the Company closed a $150 million loan agreement with Wells
Fargo Bank (the "Interim Loan"). The Interim Loan bears interest at LIBOR plus
1.75% and has a term of three months with an option to extend the term an
additional three months. The purpose of the Interim Loan was to fund the
acquisition of the Windsor Portfolio as discussed above.
In January 1998, the Company completed a public offering of 11,500,000 shares of
7 3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible
Preferred Stock Offering"). The 11,500,000 shares were sold at a per share price
of $25.00 for net proceeds of approximately $276 million. The shares are
convertible at any time at the option of the holders thereof into shares of
Common Stock at an initial conversion price of $32.83 per share of Common Stock
(equivalent to a conversion rate of 0.7615 shares of Common Stock for each share
of Series A Convertible Preferred Stock), subject to adjustment in certain
circumstances. Except in certain instances relating to the preservation of the
Company's status as a REIT, the 7 3/4% Series A Convertible Preferred Stock is
not redeemable prior to January 16, 2003. On and after January 16, 2003, the
Series A Preferred Stock may be redeemed at the option of the Company, in whole
or in part, initially at 103.88% of the liquidation preference per share, and
thereafter at prices declining to 100% of the liquidation preference on and
after January 16, 2008, plus in each case accumulated, accrued and unpaid
dividends, if any, to the redemption date. A portion of this additional capital
was used to repay the outstanding balance under the Company's Acquisition Credit
Facility. The remaining proceeds will be used to fund the pending acquisitions
discussed in Note 15 and for general corporate purposes. Approximately $211,000
in other costs have been incurred in connection with the January 1998
Convertible Preferred Stock Offering.
In February 1998, GRCAA sold its sole property to an unaffiliated third party
for a price of $24 million, $2 million of which is conditioned on the
purchaser's success in its efforts to purchase the Operator's leasehold
interest. If the purchaser's efforts are successful and the Operating
Partnership collects the additional $2 million, then the Company will pay $2
million of additional consideration to the former partners of GRCAA in the form
of either (at the option of such former partners) cash, Operating Partnership
Units or stock. The proceeds from the sale of the Property were deposited into a
deferred exchange account and will be applied to the acquisition of other
properties on a tax-deferred basis pursuant to Section 1031 of the Internal
Revenue Code. No gain or loss on the sale of the property will be realized by
the Company.
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.
60
<PAGE>
In February 1998, the Company sold an industrial property to an unaffiliated
third party for $930,000. The sale generated a net gain of approximately
$247,000 and net proceeds of approximately $359,000. The proceeds from the sale
will be used to fund future acquisitions. The sale was an all-cash sale and the
Company has no continuing obligations or involvement with this property.
Accordingly, the Company will recognize the sale under the full accrual method
of accounting.
In March 1998, the Company acquired a 15-story office property located in San
Mateo, California (the "San Mateo Headquarters"), which contains 139,109 square
feet and currently houses the Company's corporate headquarters, from Prudential
Insurance Company of America. The San Mateo Headquarters property includes a
contiguous parking garage. 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 Operating Partnership issued $150 million of 7 5/8% Senior
Notes (the "Notes") in an unregistered 144A offering. The Notes mature on March
15, 2005, unless previously redeemed. Interest on the Notes will be payable
semiannually on March 15 and September 15, commencing September 15, 1998. The
Notes may be redeemed at any time at the option of the Operating Partnership, in
whole or in part, at a redemption price equal to the sum of (i) the principal
amount of the Notes being redeemed plus accrued interest to the redemption date
and (ii) the Make-Whole Amount, as defined, if any. The Notes will be general
unsecured and unsubordinated obligations of the Operating Partnership, and will
rank pari passu with all other unsecured and unsubordinated indebtedness of the
Operating Partnership. The Notes will be subordinated to secured borrowing
arrangements that the Operating Partnership has and from time to time may enter
into with various banks and other lenders, and to the prior claims of each
secured mortgage lender to any specific property which secures any lender's
mortgage. As of December 31, 1997, such secured arrangements and mortgages
aggregated approximately $148.1 million. The Operating Partnership intends to
use the net proceeds from the issuance of the Notes to repay substantially all
of the outstanding balance under the Interim Loan.
Note 15. PENDING ACQUISITIONS
The Company has entered into a definitive agreement to acquire all of the real
estate assets of Prudential-Bache/ Equitec Real Estate Partnership, a California
limited partnership (the "Pru-Bache Portfolio") in which the managing general
partner is Prudential-Bache Properties, Inc., and in which GC and Robert
Batinovich have served as co-general partners since March 1994, but do not hold
a material equity or economic interest. Because of this affiliation, and
consistent with the Company's Board of Directors' policy, neither Robert
Batinovich nor Andrew Batinovich voted when the Board of Directors considered
and acted to approve this acquisition. The total acquisition cost, including
capitalized costs, is expected to be approximately $43.6 million, which is to be
paid entirely in cash. The Pru-Bache Portfolio is comprised of four office
buildings aggregating 405,825 square feet and one office/flex property
containing 121,645 square feet. The largest of these properties are in
Rockville, Maryland (186,680 square feet) and Memphis, Tennessee (100,901 square
feet), with the remaining properties located in Sacramento, California and
Kirkland, Washington. This acquisition is subject to a number of contingencies
including approval of the acquisition by a majority vote of the limited partners
of Prudential-Bache/Equitec Real Estate Partnership, satisfactory completion of
due diligence and customary closing conditions. As a result, there can be no
assurance that this acquisition will be completed.
The Company is negotiating the terms of an agreement to acquire a portfolio of
eight office properties and four retail properties aggregating 741,913 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, is expected to be approximately $90.0 million, comprising: (i)
approximately $32.0 million of net assumed debt; (ii) approximately $21.1
million of equity which will consist of: (a) approximately $4.3 million in the
form of shares of Common Stock of the Company (based on a negotiated per share
value of $25.00); and (b) approximately $16.8 million in the form of partnership
units in the Operating Partnership (based on a negotiated per unit value of
$25.00); and (iii) the balance in cash. The Eaton & Lauth Portfolio properties
are located in the Indianapolis, Indiana area. This acquisition is subject to a
number of contingencies including the negotiation of terms of a definitive
agreement, approval of the assumption of loans,
61
<PAGE>
satisfactory completion of due diligence and customary closing conditions. As a
result, there can be no assurance that this acquisition will be completed.
Note 16. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following represents an unaudited summary of quarterly results of operations
for the year ended December 31, 1997 (in thousands, except for weighted average
shares and per share amounts):
<TABLE>
<CAPTION>
Quarter Ended
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
REVENUE
<S> <C> <C> <C> <C>
Rental revenue $ 7,907 $ 11,784 $ 16,209 $ 25,493
Fees and reimbursements 187 180 204 148
Interest and other income 344 269 554 635
Equity in earnings of
Associated Companies 145 458 1,339 801
Net gain on sales of rental properties -- 570 (15) 284
Gain on collection of mortgage loan
receivable 154 498 -- --
Total revenue 8,737 13,759 18,291 27,361
EXPENSES
Property operating expenses 2,382 3,663 5,237 7,676
General and administrative 651 723 657 1,288
Depreciation and amortization 1,537 2,507 4,823 6,006
Interest expense 1,573 2,227 2,616 3,252
Total expenses 6,143 9,120 13,333 18,222
Income from operations before minority
interest and extraordinary item 2,594 4,639 4,958 9,139
Minority interest (231) (398) (60) (430)
Net income before extraordinary item 2,363 4,241 4,898 8,709
Extraordinary item:
Loss on early extinguishment of debt -- -- -- (843)
Net income $ 2,363 $ 4,241 $ 4,898 $ 7,866
Basic Per Share Data:
Net income before extraordinary item $ 0.23 $ 0.32 $ 0.25 $ 0.30
Extraordinary item -- -- -- (0.03)
Net income $ 0.23 $ 0.32 $ 0.25 $ 0.27
Basic weighted average shares outstanding 10,089,331 13,188,504 19,395,779 29,033,945
Diluted Per Share Data:
Net income before extraordinary item $ 0.23 $ 0.32 $ 0.24 $ 0.29
Extraordinary item -- -- -- (0.03)
Net income $ 0.23 $ 0.32 $ 0.24 $ 0.26
Diluted weighted average shares outstanding 10,256,129 13,432,442 21,132,947 31,450,823
<FN>
Per share amounts do not necessarily sum to per share amounts for the year as weighted average shares outstanding are
measured for each period presented, rather than solely for the entire year.
</FN>
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (6)
Buildings
and
Description Encumbrances Land Improvements Improvements
- --------------------------------------------------------------------------------------------------
Office Properties:
<S> <C> <C> <C> <C>
4500 Plaza, UT (8) $ 875 $ 1,192 $ 4,606 $ 667
Warner Village, CA -- 558 2,232 24
Globe Building, WA -- 375 1,501 165
One Professional Square, NE -- 285 1,142 112
Vintage Pointe, AZ 2,087 738 2,950 130
Tradewinds Financial, AZ -- 303 1,214 22
Dallidet Center, CA -- 676 2,703 11
Hillcrest Office Plaza, CA -- 330 1,319 146
Academy Prof. Center, CA -- 467 1,866 107
University Tech Center, CA -- 2,011 8,046 450
Montgomery Exec. Center, MD -- 1,919 7,676 288
Post Oak Place, TX -- 395 1,579 26
Gatehall, NJ -- 1,857 7,427 46
Buschwood III, FL -- 1,472 5,890 42
25 Independence Blvd., NJ -- 4,535 18,141 60
Morristown Medical Offices, NJ -- 517 1,832 6
Frontier Executive Quarters I, NJ -- 4,189 33,892 99
Frontier Executive Quarters II, NJ -- 629 5,091 15
Bridgewater Exec. Quarters, NJ 4,487 2,069 7,337 25
Citibank Park, NV -- 4,611 18,442 107
Temple Terrace, FL -- 1,782 6,949 18
Thousand Oaks, TN -- 10,741 40,355 190
Regency Westpointe, NE (8) (5) 530 3,147 834
Centerstone Plaza, CA (4) 6,066 24,265 88
Woodlands Plaza, MO (4) 1,107 4,426 143
700 South Washington, VA (4) 1,974 7,894 53
Riverview Office Tower, MN (4) 4,083 16,333 409
Westford Corporate Center, MA (4) 2,078 8,310 68
Bond Street, MI -- 716 2,147 189
</TABLE>
<TABLE>
<CAPTION>
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1997
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- -----------------------------------------------------------------------------------------------------------------------
Office Properties:
<S> <C> <C> <C> <C> <C> <C>
4500 Plaza, UT (8) $ 1,123 $ 5,342 $ 6,465 $ 2,629 3/86 1-30 yrs.
Warner Village, CA 558 2,256 2,814 114 10/96 1-30 yrs.
Globe Building, WA 375 1,666 2,041 86 10/96 1-30 yrs.
One Professional Square, NE 285 1,254 1,539 67 10/96 1-30 yrs.
Vintage Pointe, AZ 738 3,080 3,818 159 11/96 1-30 yrs.
Tradewinds Financial, AZ 304 1,235 1,539 62 11/96 1-30 yrs.
Dallidet Center, CA 677 2,713 3,390 136 11/96 1-30 yrs.
Hillcrest Office Plaza, CA 330 1,465 1,795 74 11/96 1-30 yrs.
Academy Prof. Center, CA 481 1,959 2,440 49 4/97 1-30 yrs.
University Tech Center, CA 2,086 8,421 10,507 142 6/97 1-30 yrs.
Montgomery Exec. Center, MD 1,928 7,955 9,883 135 9/97 1-30 yrs.
Post Oak Place, TX 396 1,604 2,000 27 9/97 1-30 yrs.
Gatehall, NJ 1,865 7,465 9,330 124 9/97 1-30 yrs.
Buschwood III, FL 1,479 5,925 7,404 99 9/97 1-30 yrs.
25 Independence Blvd., NJ 4,547 18,189 22,736 304 9/97 1-30 yrs.
Morristown Medical Offices, NJ 518 1,837 2,355 31 9/97 1-30 yrs.
Frontier Executive Quarters I, NJ 4,200 33,980 38,180 566 9/97 1-30 yrs.
Frontier Executive Quarters II, NJ 631 5,104 5,735 85 9/97 1-30 yrs.
Bridgewater Exec. Quarters, NJ 2,075 7,356 9,431 122 9/97 1-30 yrs.
Citibank Park, NV 4,628 18,532 23,160 155 9/97 1-30 yrs.
Temple Terrace, FL 1,786 6,963 8,749 58 12/97 1-30 yrs.
Thousand Oaks, TN 10,741 40,545 51,286 336 12/97 1-30 yrs.
Regency Westpointe, NE (8) 530 3,981 4,511 1,491 6/87 5-30 yrs.
Centerstone Plaza, CA 6,077 24,342 30,419 407 7/97 1-30 yrs.
Woodlands Plaza, MO 1,114 4,562 5,676 183 4/97 1-30 yrs.
700 South Washington, VA 1,981 7,940 9,921 199 4/97 1-30 yrs.
Riverview Office Tower, MN 4,095 16,730 20,825 424 4/97 1-30 yrs.
Westford Corporate Center, MA 2,091 8,365 10,456 209 4/97 1-30 yrs.
Bond Street, MI 716 2,336 3,052 106 9/96 1-40 yrs.
</TABLE>
(continued)
63
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (6)
Buildings
and
Description Encumbrances Land Improvements Improvements
- ----------------------------------------------------------------------------------------------------
Office Properties continued:
<S> <C> <C> <C> <C>
University Club Tower, MO -- $ 4,087 $ 14,519 $ 1,472
Windsor Portfolio (7) -- -- 13,036 --
- ----------------------------------------------------------------------------------------------------
Office Total 62,292 276,267 6,012
- ----------------------------------------------------------------------------------------------------
Office/Flex Properties:
Park 100 - Building 42, IN (8) -- 712 3,286 (560)
Rancho Bernardo, CA -- 518 2,072 55
Hoover Industrial, AZ -- 322 1,290 14
Walnut Creek Industrial. TX $ 1,407 773 3,093 3
Chatsworth Ind. Park, CA 833 253 1,014 74
Sandhill Industrial Park, CA 1,753 563 2,254 104
San Dimas Industrial Ctr., CA 591 237 947 49
Glassell Industrial Center, CA 1,273 658 2,630 264
Kraemer Industrial Park, CA 1,425 384 1,537 90
Magnolia Industrial, AZ -- 310 1,241 58
The Business Park, GA -- 1,478 5,912 52
Newport Business Center, FL -- 651 2,604 31
Oakbrook Corners, GA -- 1,052 4,209 36
Baseline Business Park, AZ -- 882 3,527 27
Cypress Creek Business Ctr., FL -- 872 3,490 76
Scripps Terrace, CA -- 676 2,685 15
Riverview Industrial Park, MN -- 837 3,348 19
Winnetka Industrial Center, MN -- 1,184 4,737 27
Kent Business Park, WA -- 1,206 4,822 46
Valley Business Park, CO -- 1,757 7,027 39
Tierrasanta Research Park, CA -- 1,297 5,189 249
Germantown Business Center, MD -- 1,438 5,753 19
Fox Hollow Business Quarters, NJ -- 1,572 2,358 10
Fairfield Business Quarters, NJ 2,903 816 3,479 3
Columbia Warehouse, MD -- 391 1,565 7
</TABLE>
<TABLE>
<CAPTION>
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1997
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- -----------------------------------------------------------------------------------------------------------------------
Office Properties continued:
<S> <C> <C> <C> <C> <C> <C>
University Club Tower, MO $ 4,087 $ 15,991 $ 20,078 $ 731 7/96 1-40 yrs.
Windsor Portfolio (7) -- 13,036 13,036 -- (7) (7)
- -----------------------------------------------------------------------------------------------------------------------
Office Total 62,442 282,129 344,571 9,310
- -----------------------------------------------------------------------------------------------------------------------
Office/Flex Properties:
Park 100 - Building 42, IN (8) 712 2,726 3,438 643 10/86 5-25 yrs.
Rancho Bernardo, CA 518 2,127 2,645 109 10/96 1-30 yrs.
Hoover Industrial, AZ 322 1,304 1,626 66 10/96 1-30 yrs.
Walnut Creek Industrial. TX 774 3,095 3,869 155 10/96 1-30 yrs.
Chatsworth Ind. Park, CA 264 1,077 1,341 27 4/97 1-30 yrs.
Sandhill Industrial Park, CA 584 2,337 2,921 58 4/97 1-30 yrs.
San Dimas Industrial Ctr., CA 246 987 1,233 25 4/97 1-30 yrs.
Glassell Industrial Center, CA 704 2,848 3,552 71 4/97 1-30 yrs.
Kraemer Industrial Park, CA 401 1,610 2,011 40 4/97 1-30 yrs.
Magnolia Industrial, AZ 322 1,287 1,609 32 6/97 1-30 yrs.
The Business Park, GA 1,485 5,957 7,442 100 9/97 1-30 yrs.
Newport Business Center, FL 654 2,632 3,286 44 9/97 1-30 yrs.
Oakbrook Corners, GA 1,057 4,240 5,297 71 9/97 1-30 yrs.
Baseline Business Park, AZ 886 3,550 4,436 60 9/97 1-30 yrs.
Cypress Creek Business Ctr., FL 876 3,562 4,438 64 9/97 1-30 yrs.
Scripps Terrace, CA 678 2,698 3,376 43 9/97 1-30 yrs.
Riverview Industrial Park, MN 841 3,363 4,204 56 9/97 1-30 yrs.
Winnetka Industrial Center, MN 1,190 4,758 5,948 79 9/97 1-30 yrs.
Kent Business Park, WA 1,211 4,863 6,074 82 9/97 1-30 yrs.
Valley Business Park, CO 1,765 7,058 8,823 117 9/97 1-30 yrs.
Tierrasanta Research Park, CA 1,303 5,432 6,735 98 9/97 1-30 yrs.
Germantown Business Center, MD 1,442 5,768 7,210 96 9/97 1-30 yrs.
Fox Hollow Business Quarters, NJ 1,576 2,364 3,940 39 9/97 1-30 yrs.
Fairfield Business Quarters, NJ 817 3,481 4,298 58 9/97 1-30 yrs.
Columbia Warehouse, MD 393 1,570 1,963 13 10/97 1-30 yrs.
(continued)
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (6)
Buildings
and
Description Encumbrances Land Improvements Improvements
- --------------------------------------------------------------------------------------------------
Office/Flex Properties continued:
<S> <C> <C> <C> <C>
Palms Business Centre North, NV -- $ 2,483 $ 7,067 $ 35
Palms Business Centre South, NV -- 4,119 9,610 51
Palms Business Centre III, NV -- 3,970 10,207 53
Palms Business Centre IV, NV -- 623 3,272 16
Post Palms, NV -- 2,513 9,453 44
Bryant Lake Business Center, MN -- 1,883 7,531 135
ADS Alliance Data Systems, CO -- 1,331 3,354 10
Fingerhut Call Center Facility, FL -- 1,184 3,282 9
PrimeCo Call Center Facility, FL -- 947 3,418 10
Atlantic Tech @ Regency, FL -- 1,117 4,302 11
Clark Avenue, PA -- 646 2,584 14
Dominguez Industrial, CA -- 665 2,662 168
Dunn Way Industrial, CA -- 400 1,601 166
Monroe Industrial, CA $ 733 275 1,101 58
Upland Industrial, CA -- 144 576 64
Fisher-Pierce, MA (4) 715 2,860 16
Woodlands Tech Center, MO (4) 943 3,773 138
Lake Point Business Park, FL (4) 1,336 5,343 99
- --------------------------------------------------------------------------------------------------
Office/Flex Total 46,133 162,065 1,904
- --------------------------------------------------------------------------------------------------
Industrial Properties:
Case Equipment Corp.:
Kansas City, KS (8) -- 383 3,264 (1,397)
Memphis, TN (8) -- 305 2,583 (1,106)
Park 100 - Building 46, IN (8) -- -- -- 211
Mercantile I, TX -- 783 3,133 118
Quaker Industrial, TX -- 103 412 40
Pinewood Industrial, TX -- 144 577 6
Fifth Street, AZ -- 630 2,522 135
Airport Perimeter Bus. Park, GA -- 482 1,928 17
Springdale Commerce Ctr., CA -- 1,025 4,101 23
</TABLE>
<TABLE>
<CAPTION>
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1997
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- -----------------------------------------------------------------------------------------------------------------------
Office/Flex Properties continued:
<S> <C> <C> <C> <C> <C> <C>
Palms Business Centre North, NV $ 2,492 $ 7,093 $ 9,585 $ 59 10/97 1-30 yrs.
Palms Business Centre South, NV 4,134 9,646 13,780 80 10/97 1-30 yrs.
Palms Business Centre III, NV 3,984 10,246 14,230 85 10/97 1-30 yrs.
Palms Business Centre IV, NV 626 3,285 3,911 27 10/97 1-30 yrs.
Post Palms, NV 2,522 9,488 12,010 79 10/97 1-30 yrs.
Bryant Lake Business Center, MN 1,907 7,642 9,549 63 11/97 1-30 yrs.
ADS Alliance Data Systems, CO 1,334 3,361 4,695 28 12/97 1-30 yrs.
Fingerhut Call Center Facility, FL 1,187 3,288 4,475 27 12/97 1-30 yrs.
PrimeCo Call Center Facility, FL 949 3,426 4,375 29 12/97 1-30 yrs.
Atlantic Tech @ Regency, FL 1,119 4,311 5,430 36 12/97 1-30 yrs.
Clark Avenue, PA 649 2,595 3,244 43 9/97 1-30 yrs.
Dominguez Industrial, CA 697 2,798 3,495 71 4/97 1-30 yrs.
Dunn Way Industrial, CA 427 1,740 2,167 43 4/97 1-30 yrs.
Monroe Industrial, CA 282 1,152 1,434 28 4/97 1-30 yrs.
Upland Industrial, CA 155 629 784 16 4/97 1-30 yrs.
Fisher-Pierce, MA 718 2,873 3,591 72 4/97 1-30 yrs.
Woodlands Tech Center, MO 949 3,905 4,854 105 4/97 1-30 yrs.
Lake Point Business Park, FL 1,344 5,434 6,778 137 4/97 1-30 yrs.
- -----------------------------------------------------------------------------------------------------------------------
Office/Flex Total 46,496 163,606 210,102 3,274
- -----------------------------------------------------------------------------------------------------------------------
Industrial Properties:
Case Equipment Corp.:
Kansas City, KS (8) 236 2,014 2,250 558 3/84 50 yrs.
Memphis, TN (8) 187 1,595 1,782 442 3/84 50 yrs.
Park 100 - Building 46, IN (8) -- 211 211 94 10/86 5-25 yrs.
Mercantile I, TX 783 3,251 4,034 179 10/96 1-30 yrs.
Quaker Industrial, TX 103 452 555 23 10/96 1-30 yrs.
Pinewood Industrial, TX 144 583 727 30 10/96 1-30 yrs.
Fifth Street, AZ 654 2,633 3,287 65 6/97 1-30 yrs.
Airport Perimeter Bus. Park, GA 484 1,943 2,427 33 9/97 1-30 yrs.
Springdale Commerce Ctr., CA 1,030 4,119 5,149 69 9/97 1-30 yrs.
(continued)
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (6)
Buildings
and
Description Encumbrances Land Improvements Improvements
- --------------------------------------------------------------------------------------------------
Industrial Properties continued:
<S> <C> <C> <C> <C>
Atlantic Industrial, GA -- $ 967 $ 3,866 $ 22
Coronado Industrial, CA -- 708 2,831 16
Glenn Avenue Business Ctr., IL -- 563 2,250 12
Wood Dale Business Center, IL -- 601 2,403 13
Burnham Industrial Warehouse, FL -- 591 2,366 14
Bonnie Lane Business Center, IL -- 735 2,938 16
Jencraft Industrial, NJ -- 1,323 4,975 16
Eatontown Industrial, NJ -- 763 1,963 7
E. Anaheim, CA -- 1,474 3,282 18
Fairmont Commerce Center, AZ -- 732 2,928 14
Benicia Industrial Park, CA (8) (5) 1,037 4,787 66
Navistar International:
W. Chicago, IL (8) (5) 1,289 10,941 (4,618)
Baltimore, MD (8) (5) 577 4,911 (2,100)
Belshaw Industrial, CA 530 103 520 46
Southworth-Milton, MA (4) 1,913 7,652 43
Skypark, CA 7,428 3,899 17,802 --
Sea Tac II, WA (2) (8) -- 712 1,474 (178)
- --------------------------------------------------------------------------------------------------
Industrial Total 21,842 96,409 (8,546)
- --------------------------------------------------------------------------------------------------
Retail Properties:
Auburn North, WA -- 1,099 4,397 162
Piedmont Plaza, FL -- 1,308 5,233 43
River Run Shopping Ctr., FL -- 1,422 5,687 41
Goshen Plaza, MD -- 989 3,958 22
Westbrook Commons, IL -- 3,053 12,213 68
Sonora Plaza, CA 4,965 1,945 7,781 18
Shannon Crossing, GA (8) (5) 2,488 2,075 360
Westwood Plaza, FL (8) (5) 2,599 5,110 563
Park Center, CA (2) (8) -- 1,748 3,296 (544)
- --------------------------------------------------------------------------------------------------
Retail Total 16,651 49,750 733
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1997
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- -----------------------------------------------------------------------------------------------------------------------
Industrial Properties continued:
<S> <C> <C> <C> <C> <C> <C>
Atlantic Industrial, GA $ 971 $ 3,884 $ 4,855 $ 65 9/97 1-30 yrs.
Coronado Industrial, CA 711 2,844 3,555 47 9/97 1-30 yrs.
Glenn Avenue Business Ctr., IL 565 2,260 2,825 38 9/97 1-30 yrs.
Wood Dale Business Center, IL 603 2,414 3,017 40 9/97 1-30 yrs.
Burnham Industrial Warehouse, FL 594 2,377 2,971 40 9/97 1-30 yrs.
Bonnie Lane Business Center, IL 738 2,951 3,689 49 9/97 1-30 yrs.
Jencraft Industrial, NJ 1,326 4,988 6,314 83 9/97 1-30 yrs.
Eatontown Industrial, NJ 765 1,968 2,733 33 9/97 1-30 yrs.
E. Anaheim, CA 1,480 3,294 4,774 27 10/97 1-30 yrs.
Fairmont Commerce Center, AZ 735 2,939 3,674 24 10/97 1-30 yrs.
Benicia Industrial Park, CA (8) 978 4,912 5,890 1,866 7/86 5-30 yrs.
Navistar International:
W. Chicago, IL (8) 793 6,819 7,612 1,892 3/84 50 yrs.
Baltimore, MD (8) 356 3,032 3,388 839 3/84 50 yrs.
Belshaw Industrial, CA 134 535 669 13 4/97 1-30 yrs.
Southworth-Milton, MA 1,922 7,686 9,608 192 4/97 1-30 yrs.
Skypark, CA 3,899 17,802 21,701 443 12/97 30 yrs.
Sea Tac II, WA (2) (8) 712 1,296 2,008 319 2/86 5-25 yrs.
- -----------------------------------------------------------------------------------------------------------------------
Industrial Total 20,903 88,802 109,705 7,503
- -----------------------------------------------------------------------------------------------------------------------
Retail Properties:
Auburn North, WA 1,099 4,559 5,658 229 10/96 1-30 yrs.
Piedmont Plaza, FL 1,317 5,267 6,584 132 4/97 1-30 yrs.
River Run Shopping Ctr., FL 1,428 5,722 7,150 95 9/97 1-30 yrs.
Goshen Plaza, MD 994 3,975 4,969 66 9/97 1-30 yrs.
Westbrook Commons, IL 3,067 12,267 15,334 204 9/97 1-30 yrs.
Sonora Plaza, CA 1,947 7,797 9,744 390 11/96 1-30 yrs.
Shannon Crossing, GA (8) 2,488 2,435 4,923 1,581 10/88 3-14 yrs.
Westwood Plaza, FL (8) 2,599 5,673 8,272 2,523 1/88 3-23 yrs.
Park Center, CA (2) (8) 1,748 2,752 4,500 625 9/86 5-25 yrs.
- -----------------------------------------------------------------------------------------------------------------------
Retail Total 16,687 50,447 67,134 5,845
- -----------------------------------------------------------------------------------------------------------------------
(continued)
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (6)
Buildings
and
Description Encumbrances Land Improvements Improvements
- --------------------------------------------------------------------------------------------------
Multi-family Properties:
<S> <C> <C> <C> <C>
Summer Breeze, CA (8) $ 2,578 $ 1,857 $ 2,138 $ 217
Sahara Gardens, NV -- 1,871 7,500 215
Sharonridge I & II, NC 1,756 518 2,071 24
Wendover Glen, NC 2,497 586 2,346 27
The Oaks, NC 2,341 662 2,649 31
The Landing on Farmhurst, NC 3,131 826 3,306 39
The Courtyard, NC 1,595 431 1,723 20
Sabal Point I, II & III, NC -- 3,650 14,602 169
Willow Glen, NC 2,412 809 3,236 37
Arrowood Crossing I & II, NC 6,504 1,805 7,222 83
The Chase (Commonwealth), NC 3,190 771 3,083 35
The Chase (Monroe), NC -- 1,015 4,062 47
Villas de Mission, NV 7,220 1,924 7,695 99
Overlook, AZ (4) 2,259 9,036 104
- --------------------------------------------------------------------------------------------------
Multi-family Total 18,984 70,669 1,147
- --------------------------------------------------------------------------------------------------
Hotel Properties:
Country Inn by Carlson:
San Antonio, TX -- 784 2,032 99
Country Inn & Suites by Carlson:
Scottsdale, AZ 4,457 -- 12,059 61
Country Suites by Carlson:
Arlington, TX (8) (5) 1,527 5,346 1,336
Irving, TX (2) (8) -- 972 3,850 (1,027)
Ontario, CA (8) (5) 1,224 5,576 367
Tucson, AZ (8) (5) 1,048 7,600 1,265
- --------------------------------------------------------------------------------------------------
Hotel Total 5,555 36,463 2,101
- --------------------------------------------------------------------------------------------------
Combined Total $ 228,299 $ 171,457 $ 691,623 $ 3,351
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1997
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- -----------------------------------------------------------------------------------------------------------------------
Multi-family Properties:
<S> <C> <C> <C> <C> <C> <C>
Summer Breeze, CA (8) $ 1,857 $ 2,355 $ 4,212 $ 407 1/95 3-18 yrs.
Sahara Gardens, NV 1,872 7,714 9,586 385 10/96 1-30 yrs.
Sharonridge I & II, NC 542 2,071 2,613 17 12/97 1-30 yrs.
Wendover Glen, NC 613 2,346 2,959 20 12/97 1-30 yrs.
The Oaks, NC 693 2,649 3,342 22 12/97 1-30 yrs.
The Landing on Farmhurst, NC 865 3,306 4,171 28 12/97 1-30 yrs.
The Courtyard, NC 451 1,723 2,174 14 12/97 1-30 yrs.
Sabal Point I, II & III, NC 3,819 14,602 18,421 122 12/97 1-30 yrs.
Willow Glen, NC 846 3,236 4,082 27 12/97 1-30 yrs.
Arrowood Crossing I & II, NC 1,888 7,222 9,110 60 12/97 1-30 yrs.
The Chase (Commonwealth), NC 806 3,083 3,889 26 12/97 1-30 yrs.
The Chase (Monroe), NC 1,062 4,062 5,124 34 12/97 1-30 yrs.
Villas de Mission, NV 1,924 7,794 9,718 390 10/96 1-30 yrs.
Overlook, AZ 2,274 9,125 11,399 228 4/97 1-30 yrs.
- ------------------------------------------------------------------------------------------------------------------------
Multi-family Total 19,512 71,288 90,800 1,780
- ------------------------------------------------------------------------------------------------------------------------
Hotel Properties:
Country Inn by Carlson:
San Antonio, TX 785 2,130 2,915 126 8/96 3-30 yrs.
Country Inn & Suites by Carlson:
Scottsdale, AZ -- 12,120 12,120 594 2/97 3-30 yrs.
Country Suites by Carlson:
Arlington, TX (8) 1,610 6,599 8,209 3,751 12/86 7-25 yrs.
Irving, TX (2) (8) 954 2,841 3,795 798 10/86 5-25 yrs.
Ontario, CA (8) 1,145 6,022 7,167 3,260 11/86 5-30 yrs.
Tucson, AZ (8) 1,093 8,820 9,913 4,972 12/86 7-25 yrs.
- ------------------------------------------------------------------------------------------------------------------------
Hotel Total 5,587 38,532 44,119 13,501
- ------------------------------------------------------------------------------------------------------------------------
Combined Total $ $ 171,627 $ 694,804 $ 866,431 $ 41,213
========================================================================================================================
(continued)
</TABLE>
67
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
(1) Initial cost and date acquired by GRT Predecessor Entities, where
applicable.
(2) The Company holds a participating first mortgage interest in the property.
In accordance with GAAP, the Company is accounting for the property as
though it holds fee title.
(3) The aggregate cost for Federal income tax purposes is $711,995.
(4) Pledged as security for Wells Fargo Bank Secured Loan - $59,724.
(5) Pledged as security for loan with an investment bank -- $19,444.
(6) Bracketed amounts represent reductions to carrying value in prior years.
(7) Initial Cost represents escrow deposit related to the acquisition of the
Windsor Portfolio which occurred in January 1998 (see Note 14).
(8) Initial Cost represents original book value carried forward from the
financial statements of the GRT Predecessor Entities.
68
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
December 31, 1997
(in thousands)
Reconciliation of gross amount at which real estate was carried for the years ended December 31:
1997 1996 1995
---------- ---------- ----------
Investments in real estate:
<S> <C> <C> <C>
Balance at beginning of year $ 190,729 $ 102,451 $ 83,449
Additions during year:
Property acquisitions 687,523 89,653 17,151
Improvements 2,691 1,572 1,851
Retirements/sales (14,512) (2,947) --
---------- ---------- ----------
Balance at end of year $ 866,431 $ 190,729 $ 102,451
========== ========== ==========
Accumulated Depreciation:
Balance at beginning of year $ 28,784 $ 24,877 $ 19,455
Additions during year:
Depreciation 14,496 4,305 2,254
Acquisitions 443 -- 3,168
Retirements/sales (2,510) (398) --
---------- ---------- ----------
Balance at end of year $ 41,213 $ 28,784 $ 24,877
========== ========== ==========
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE
December 31, 1997
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Description of Loan Current Maturity Periodic
and Securing Property Interest Rate Date Payment Terms Prior Liens
<S> <C> <C> <C> <C>
First Mortgage Loan 9% 6/1/01 Monthly interest and principal None
Industrial property, payments, based on a thirty
Los Angeles, CA year amortization
First Mortgage Loan 11% 11/19/99 Monthly interest only payments None
Medical building commencing January 1, 1997
Phoenix, AZ Principal due upon maturity
</TABLE>
<TABLE>
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H
Principal Amount
of Loans Subject
Description of Loan Face Carrying to Delinquent
and Securing Property Amount Amount Principal or Interest
<S> <C> <C> <C>
First Mortgage Loan $ 553 $ 507 None
Industrial property,
Los Angeles, CA
First Mortgage Loan 3,850 3,185 (1) None
Medical building
Phoenix, AZ
Total $ 4,403 $ 3,692
<FN>
(1) The loan amount is $3,850,000, of which $2,694,000 was initially disbursed to the borrower and
$906,000 was held by the Company as leasing and interest reserves. In 1997, $491,000 of the
leasing and interest reserves were drawn by the borrower.
</FN>
</TABLE>
70
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE
December 31, 1997
(in thousands)
The following is a summary of changes in the carrying amount of mortgage loans
for the years ended December 31, 1997, 1996 and 1995 (in thousands):
1997 1996 1995
--------- --------- ---------
Balance at beginning of year $ 9,905 $ 7,465 $ 19,953
Additions during year:
New mortgage loans 491 2,694 7
Deductions during year:
Loss provision -- -- (863)
Collections of principal (6,704) (254) (11,632)
--------- --------- ---------
Balance at end of year $ 3,692 $ 9,905 $ 7,465
========= ========= =========
71
<PAGE>
UNCONSOLIDATED SUBSIDIARY
Due to the lessee-lessor relationship between GHG and the Company, the
Securities and Exchange Commission requires disclosures concerning GHG as if it
were a registrant. Accordingly, the financial statements of GHG have been
included in the Annual Report on Form 10-K of the Company for the year ended
December 31, 1997, and such financial statements follow the Company's
Consolidated Financial Statements in Item 14.
GLENBOROUGH HOTEL GROUP
Background
Glenborough Hotel Group ("GHG") was organized in the state of Nevada on
September 23, 1991. As of December 31, 1997, GHG operates hotel properties owned
by the Company under five separate percentage leases and manages two hotel
properties owned by affiliates. The Company owns 100% of the 50 shares of
non-voting preferred stock of GHG and three individuals, including Terri
Garnick, an executive officer of the Company, each own 33 1/3% of the 1,000
shares of voting common stock of GHG.
In April 1997, the management contract of one of the previously managed hotel
properties was terminated due to the sale of the property.
GHG also owns approximately 80% of the common stock of Resort Group, Inc.
("RGI"). RGI manages homeowners associations and rental pools for two beachfront
resort condominium hotel properties and owns six rental units at one of the
properties. GHG receives 100% of the earnings of RGI and consolidates their
operations with its own.
Through July 1997, GHG also owned 94% of the outstanding common stock of
Atlantic Pacific Holdings, Ltd., the sole owner of 100% of the common stock of
Atlantic Pacific Assurance Company, Limited ("APAC"), a Bermuda corporation
formed to underwrite certain insurable risks of certain of the Company's
predecessor partnerships and related entities. As anticipated, in July 1997,
APAC was liquidated and GHG received a liquidating distribution of approximately
$2,136,000. GHG has recognized a gain of approximately $1,381,000 over its
investment basis and costs of liquidation. GHG had accounted for its investment
in APAC using the cost method due to its anticipated liquidation.
Liquidity and Capital Resources
GHG's primary source of funding is the cash generated by the operations of the
five hotels leased from the Company and fees received for (i) managing two
hotels owned by two partnerships and (ii) managing the homeowners associations
and rental pools for the resort condominium hotel properties as discussed above.
The boards of directors of GHG declared and paid the following quarterly
dividends for the year ending December 31, 1997:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
<S> <C> <C> <C> <C> <C>
Preferred dividends to the Company $ 7,500 $ 7,500 $ 7,500 $ 7,500 $ 30,000
Additional dividends to the Company 30,938 30,938 30,938 30,938 123,752
Total dividends to the Company 38,438 38,438 38,438 38,438 153,752
Dividends to others 10,312 10,312 10,312 10,312 41,248
Total dividends $ 48,750 $ 48,750 $ 48,750 $ 48,750 $ 195,000
<FN>
(1) Dividends for the fourth quarter of 1997 were declared and paid in January 1998.
</FN>
</TABLE>
Results of Operations
Hotel revenue, which represents the revenue earned on the five hotels leased
from the Company, increased $3,917,000, or 52%, to $11,380,000 for the year
ended December 31, 1997, from $7,463,000 for the year ended December 31, 1996.
This increase is primarily due to the acquisition of the San Antonio Hotel lease
in August 1996 and the acquisition of the Scottsdale Hotel lease in February
1997.
Fee revenue and salary reimbursements of $2,060,000 represents the fees earned
for managing two hotels and two resort condominium hotels. The decrease from the
year ended December 31, 1996, to the year ended December 31,
72
<PAGE>
1997, is primarily due to the change in ownership of one of the managed hotel
properties (see discussion above) which resulted in GHG no longer managing this
hotel as of April 1997.
The gain on the liquidation of APAC resulted from the July 1997 receipt by GHG
of a liquidating distribution of approximately $2,136,000 which, net of
liquidation costs, resulted in a gain of $1,381,000 over its investment basis of
$755,000. GHG had accounted for its investment in APAC using the cost method due
to its anticipated liquidation. The gain on liquidation was not subject to
income taxes.
The primary expenses associated with the leased hotels are room expenses, lease
payments, sales and marketing, property general and administrative, and other
operating expenses, including utilities, maintenance and insurance. All leased
hotel expenses increased from the year ended December 31, 1996, to the year
ended December 31, 1997, due to the acquisition of two hotels as discussed
above.
The only direct expenses incurred in connection with the management of the two
hotels and two resort condominium hotel properties are salaries and benefits
which decreased $340,000 from the year ended December 31, 1996, to the year
ended December 31, 1997. This decrease is primarily due to the sale of one of
the managed hotel properties which resulted in GHG no longer managing this hotel
as of April 1997.
General and administrative costs represent the overhead costs associated with
administering the business of GHG. Such costs primarily consist of
administrative salaries and benefits, rent, legal fees and accounting fees.
These costs increased $109,000, or 11%, to $1,104,000 for the year ended
December 31, 1997, from $995,000 for the year ended December 31, 1996. The
increase is primarily due to higher salaries and benefits related to the growth
of GHG.
73
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
GLENBOROUGH HOTEL GROUP:
We have audited the accompanying consolidated balance sheets of GLENBOROUGH
HOTEL GROUP as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GLENBOROUGH HOTEL
GROUP as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 21, 1998
74
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and 1996
(in thousands, except share amounts)
1997 1996
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,632 $ 461
Accounts receivable 472 247
Investments in management contracts, net 354 430
Rental property and equipment, net of
accumulated depreciation of $129 and $111
in 1997 and 1996, respectively 154 170
Investment in Atlantic Pacific Assurance Company, Limited (APAC) -- 755
Prepaid expenses 119 156
Other assets 4 36
TOTAL ASSETS $ 3,735 $ 2,255
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued lease expense $ 557 $ 285
Mortgage loan 37 61
Other liabilities 405 407
Total liabilities 999 753
Stockholders' Equity:
Common stock (1,000 shares authorized,
issued and outstanding) 20 20
Non-voting preferred stock (50 shares
authorized, issued and outstanding) -- --
Additional paid-in capital 1,568 1,568
Retained earnings 1,148 (86)
Total stockholders' equity 2,736 1,502
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,735 $ 2,255
See accompanying notes to consolidated financial statements
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1997 and 1996
(in thousands)
1997 1996
REVENUE
<S> <C> <C>
Hotel revenue $ 11,380 $ 7,463
Fees and reimbursements 2,060 2,417
Gain on liquidation of APAC, net 1,381 --
Other revenue 36 72
Total revenue 14,857 9,952
EXPENSES
Leased Hotel Properties:
Room expenses 2,841 2,000
Lease payments to affiliates 4,002 2,507
Sales and marketing 1,213 770
Property general and administrative 991 855
Other operating expenses 1,870 1,036
Managed Hotel Properties:
Salaries and benefits 1,300 1,640
Other Expenses:
General and administrative 1,104 995
Depreciation and amortization 98 99
Interest expense 4 6
Total expenses 13,423 9,908
Income from operations before provision
for income taxes 1,434 44
Provision for income taxes (34) (17)
Net income $ 1,400 $ 27
See accompanying notes to consolidated financial statements
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1997 and 1996
(in thousands, except shares)
Addi-
Preferred Stock Common Stock tional Retained
Par Par Paid-in Earnings
Shares Value Shares Value Capital (Deficit) Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE at
December 31, 1995 50 $ -- 1,000 $ 20 $ 1,368 $ -- $ 1,388
Additional paid-in capital -- -- -- -- 200 -- 200
Dividends -- -- -- -- -- (113) (113)
Net income -- -- -- -- -- 27 27
BALANCE at
December 31, 1996 50 -- 1,000 20 1,568 (86) 1,502
Dividends -- -- -- -- -- (166) (166)
Net income -- -- -- -- -- 1,400 1,400
BALANCE at
December 31, 1997 50 $ -- 1,000 $ 20 $ 1,568 $ 1,148 $ 2,736
See accompanying notes to consolidated financial statements
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997 and 1996
(in thousands)
1997 1996
Cash flows from operating activities:
<S> <C> <C>
Net income $ 1,400 $ 27
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 98 99
Gain on liquidation of APAC, net (1,381) --
Changes in certain assets and liabilities 110 246
Net cash provided by operating activities 227 372
Cash flows from investing activities:
Additions to equipment (2) (7)
Proceeds from liquidation of investment in APAC 2,136 --
Net cash provided by (used for) investing activities 2,134 (7)
Cash flows from financing activities:
Dividends (166) (113)
Capital contributions -- 200
Repayment of borrowings (24) (24)
Net cash provided by (used for) financing activities (190) 63
Net increase in cash and cash equivalents 2,171 428
Cash and cash equivalents at beginning of period 461 33
Cash and cash equivalents at end of period $ 2,632 $ 461
Supplemental disclosure of cash flow information:
Cash paid for interest $ 4 $ 6
See accompanying notes to consolidated financial statements
</TABLE>
78
<PAGE>
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
Note 1. ORGANIZATION
Glenborough Hotel Group ("GHG") was organized in the State of Nevada on
September 23, 1991. As of December 31, 1997, GHG operates hotel properties owned
by Glenborough Realty Trust Incorporated ("GLB") under five separate percentage
leases and manages two hotel properties owned by affiliates. GLB owns 100% of
the 50 shares of non-voting preferred stock of GHG and three individuals,
including Terri Garnick, an executive officer of GLB, each own 33 1/3% of the
1,000 shares of voting common stock of GHG.
GHG also owns approximately 80% of the common stock of Resort Group, Inc.
("RGI"). RGI manages homeowners associations and rental pools for two beachfront
resort condominium hotel properties and owns six units at one of the properties.
GHG receives 100% of the earnings of RGI and consolidates RGI's operations with
its own.
Through July 1997, GHG also owned 94% of the outstanding common stock of
Atlantic Pacific Holdings, Ltd., the sole owner of 100% of the common stock of
Atlantic Pacific Assurance Company, Limited ("APAC"), a Bermuda corporation
formed to underwrite certain insurable risks of certain of GLB's predecessor
partnerships and related entities. As anticipated, in July 1997, APAC was
liquidated and GHG received a liquidating distribution of approximately
$2,136,000. GHG has recognized a gain of $1,381,000 over its investment basis
and costs of liquidation. GHG had accounted for its investment in APAC using the
cost method due to its anticipated liquidation.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying financial statements present the
consolidated financial position of GHG and RGI as of December 31, 1997 and 1996,
and the consolidated results of operations and cash flows of GHG and RGI for the
years ended December 31, 1997 and 1996. All intercompany transactions,
receivables and payables have been eliminated in the consolidation.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the results of operations during the reporting period. Actual
results could differ from those estimates.
Rental Property - Rental properties are stated at cost unless circumstances
indicate that cost cannot be recovered, in which case, the carrying value of the
property is reduced to estimated fair value.
Depreciation is provided using the straight-line method over the useful lives of
the respective assets.
Investments in Management Contracts - Investments in management contracts are
recorded at cost and are amortized on a straight-line basis over the term of the
contracts.
Cash Equivalents - GHG considers short-term investments (including certificates
of deposit) with a maturity of three months or less at the time of investment to
be cash equivalents.
Income Taxes - Provision for income taxes is based on financial accounting
income. Certain items are reported in different periods for tax and financial
reporting purposes. Timing differences arising from such items are recorded as
deferred tax assets, net of related valuation reserves, or liabilities, as
appropriate.
Note 3. INVESTMENTS IN MANAGEMENT CONTRACTS, NET
Investments in management contracts reflects the unamortized portion of the
management contracts RGI holds with the two beachfront resort condominium hotel
properties for both management of the homeowners associations and the rental
pool programs.
79
<PAGE>
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
Note 4. RENTAL PROPERTY
Rental property and equipment represents the six condominium hotel units owned
by RGI as well as furniture and fixtures in GHG's corporate offices. The six
units owned by RGI participate in a resort rental program on an "at will" basis,
whereby there is no fixed term of participation. Such participation generated
approximately $23,000 and $19,000 of cash flow after deductions for capital
reserves for the years ended December 31, 1997 and 1996, respectively.
Note 5. MORTGAGE LOAN
Mortgage loan of $37,000 at December 31, 1997, represents the debt secured by
the six condominium hotel units owned by RGI. Such debt bears interest at 7%,
payable in monthly installments of principal and interest totaling $2,304, and
matures June 30, 1999.
Note 6. THE PERCENTAGE LEASES
GHG is leasing the five hotels owned by GLB for a term of five years pursuant to
individual percentage leases ("Percentage Leases") which provide for rent equal
to the greater of the Base Rent (as defined in the lease) or a specified
percentage of room revenues (the "Percentage Rent"). Each hotel is separately
leased to GHG (the "lessee"). The lessee's ability to make rent payments will,
to a large degree, depend on its ability to generate cash flow from the
operations of the hotels. Each Percentage Lease contains the provisions
described below.
Each Percentage Lease has a non-cancelable term of five years, subject to
earlier termination upon the occurrence of certain contingencies described in
the Percentage Lease. The lessee under the Percentage Lease has one five-year
renewal option at the then current fair market rent.
During the term of each Percentage Lease, the lessee is obligated to pay Base
Rent plus Percentage Rent if defined levels of revenue are earned. Base Rent is
required to be paid monthly in advance. Percentage Rent is calculated by
multiplying fixed percentages by room revenues for each of the five hotels; the
applicable percentage changes when revenue exceeds a specified threshold, and
the threshold may be adjusted annually in accordance with changes in the
applicable Consumer Price Index. Percentage Rent is due quarterly.
The table below sets forth the annual Base Rent and the Percentage Rent formulas
for each of the five hotels.
<TABLE>
<CAPTION>
Hotel Lease Rent Provisions
Percentage Rent
incurred for the
Initial Annual year ended Annual Percentage
Hotel Base Rent December 31, 1997 Rent Formulas
<S> <C> <C> <C>
Ontario, CA $ 240,000 $ 324,000 24% of the first $1,668,000 of room revenue plus
40% of room revenue above $1,668,000 and 5% of
other revenue
continued
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
Hotel Lease Rent Provisions - continued
Percentage Rent
incurred for the
Annual year ended Annual Percentage
Hotel Base Rent December 31, 1997 Rent Formulas
<S> <C> <C> <C>
Arlington, TX $ 360,000 $ 333,000 27% of the first $1,694,000 of room revenue plus
42% of room revenue above $1,694,000 and 5%
of other revenue
Tucson, AZ $ 600,000 $ 682,000 40% of the first $1,429,000 of room revenue plus
46% of room revenue above $1,429,000 and 5%
of other revenue
San Antonio, TX $ 312,000 $ 3,000 33% of the first $1,240,000 of room revenue plus
40% of room revenue above $1,240,000 and 5%
of other revenue
Scottsdale, AZ $ 720,000(1) $ 548,000 41% of the first $2,600,000 of room revenue plus
60% of room revenue above $2,600,000 and 5%
of other revenue
<FN>
(1) Hotel was acquired in February 1997, therefore, rent incurred for the year ended December 31, 1997 was less
than a full year's rent.
</FN>
</TABLE>
Other than real estate and personal property taxes, casualty insurance, a fixed
capital improvement allowance and maintenance of underground utilities and
structural elements, which are the responsibility of GLB, the Percentage Leases
require the lessees to pay rent, insurance, salaries, utilities and all other
operating costs incurred in the operation of the Hotels.
Note 7. DECLARATION OF DIVIDENDS
The board of directors of GHG declared and paid the following dividends for
1997:
<TABLE>
<CAPTION>
Preferred Stock Common Stock Total
<S> <C> <C> <C> <C>
April, 1997 $ 38,438 $ 10,312 $ 48,750
July, 1997 38,438 10,312 48,750
October, 1997 38,438 10,312 48,750
January, 1998 38,438 10,312 48,750
Total paid from 1997 earnings $ 153,752 $ 41,248 $ 195,000
</TABLE>
81
<PAGE>
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange
Act of l934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GLENBOROUGH REALTY TRUST INCORPORATED
By: Glenborough Realty Trust Incorporated,
Date: September 9, 1998 /s/ Robert Batinovich
Robert Batinovich
Chairman of the Board
and Chief Executive Officer
Date: September 9, 1998 /s/ Andrew Batinovich
Andrew Batinovich
Director, President and
Chief Operating Officer
Date: September 9, 1998 /s/ Stephen Saul
Stephen Saul
Chief Financial Officer
(Principal Financial Officer)
Date: September 9, 1998 /s/ Terri Garnick
Terri Garnick
Senior Vice President,
Chief Accounting Officer,
Treasurer
(Principal Accounting Officer)
Date: September 9, 1998 /s/ Laura Wallace
Laura Wallace
Director
82
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Title
3.01 Articles of Amendment and Restatement of Articles of Incorporation of
the Company are incorporated herein by reference to the identically
numbered exhibit to the Company's Registration Statement on Form S-4
(Registration No. 33-83506), which became effective October 26, 1995.
3.02** Bylaws of the Company.
3.03** The Company's Form of Articles Supplementary relating to the 7 3/4%
Series A Convertible Preferred Stock.
3.04 Second Amended and Restated Agreement of Limited Partnership of
Glenborough Properties, L.P. is incorporated herein by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K which was
filed on November 1, 1996.
4.02 Form of Common Stock Certificate of the Company is incorporated herein
by reference to the identically numbered exhibit to the Company's
Registration Statement on Form S-4 (Registration No. 33-83506), which
became effective October 26, 1995.
4.03 Form of 7 3/4% Series A Convertible Preferred Stock Certificate of the
Company is incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8-A which was filed on
January 22, 1998.
10.02 Form of Indemnification Agreement for existing Officers and Directors
of the Company is incorporated herein by reference to the identically
numbered exhibit to the Company's Registration Statement on Form S-4
(Registration No. 33-83506), which became effective October 26, 1995.
10.03* Stock Incentive Plan of the Company (amended and restated as of March
20, 1997) is incorporated herein by reference to Exhibit 4.0 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
10.06 Lease Agreements between Glenborough Properties, L.P. and Glenborough
Hotel Group for Country Suites-Tucson, Country Suites-Ontario and
Country Suites-Arlington are incorporated herein by reference to the
identically numbered exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
10.24 Form of Indemnification Agreement for Existing Officers and Directors
of Glenborough Hotel Group is incorporated herein by reference to the
identically numbered exhibit to the Company's Registration Statement
on Form S-4 (Registration No. 33-83506), which became effective
October 26, 1995.
10.25 Form of Indemnification Agreement for Existing Officers and Directors
of Glenborough Realty Corporation is incorporated herein by reference
to the identically numbered exhibit to the Company's Registration
Statement on Form S-4 (Registration No. 33-83506), which became
effective October 26, 1995.
10.27 Registration Agreement between the Company and GPA, Ltd. is
incorporated herein by reference to the identically numbered exhibit
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.29 Subscription Agreement between Glenborough Properties, L.P. and GPA,
Ltd. is incorporated herein by reference to the identically numbered
exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.31 Indemnification Agreement for Glenborough Realty Corporation and the
Company, with Robert Batinovich as indemnitor is incorporated herein
by reference to the identically numbered exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
10.33 Agreement for contribution of Partnership Interests for the University
Club Tower Property is incorporated herein by reference to Exhibit
10.39 to the Company's Registration Statement on Form S-11
(Registration No. 333-09411), which was filed on August 1, 1996.
83
<PAGE>
EXHIBIT INDEX - continued
Exhibit
Number Exhibit Title
10.34 Credit agreement with Wells Fargo Bank N.A. related to $50,000,000
secured revolving line of credit is incorporated herein by reference
to Exhibit 10.31 to the Company's Registration Statement on Form S-11
(Registration No. 333-09411), which was filed on August 1, 1996.
10.35 Credit agreement with Wells Fargo Bank N.A. related to the $6,120,000
2-year secured term loan is incorporated herein by reference to
Exhibit 10.30 to the Company's Registration Statement on Form S-11
(Registration No. 333-09411), which was filed on August 1, 1996.
10.36 Purchase Agreement related to the acquisition of Carlsberg Plaza, one
of the Carlsberg Properties is incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K which was
filed on November 1, 1996.
10.37 Purchase Agreement related to the acquisition of Dallidet Professional
Center, one of the Carlsberg Properties is incorporated herein by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K
which was filed on November 1, 1996.
10.38 Purchase Agreement related to the acquisition of Hillcrest Office
Building, one of the Carlsberg Properties, is incorporated herein by
reference to Exhibit 10.3 to the Company's Current Report on Form 8-K
which was filed on November 1, 1996.
10.39 Purchase Agreement related to the acquisition of Tradewinds Office
Building, one of the Carlsberg Properties is incorporated herein by
reference to Exhibit 10.4 to the Company's Current Report on Form 8-K
which was filed on November 1, 1996.
10.40 Purchase Agreement related to the acquisition of Sonora Plaza, one of
the Carlsberg Properties is incorporated herein by reference to
Exhibit 10.5 to the Company's Current Report on Form 8-K which was
filed on November 1, 1996.
10.41 Loan Agreement between Glenborough Properties, L.P. and Carlsberg
Properties, Ltd. for the $3,600,000 Grunow mortgage loan receivable is
incorporated herein by reference to Exhibit 10.6 to the Company's
Current Report on Form 8-K which was filed on November 1, 1996.
10.42 Option Agreement between Glenborough Properties, L.P. and Carlsberg
Properties, Ltd. for the Grunow Medical Building is incorporated
herein by reference to Exhibit 10.7 to the Company's Current Report on
Form 8-K which was filed on November 1, 1996.
10.43 Contribution agreement related to the acquisition of the TRP
Properties is incorporated herein by reference to Exhibit 99 to the
Company's Current Report on Form 8-K filed on December 30, 1996.
10.44 Agreement for Contribution of Partnership Interests related to
acquisition of the Bond Street Property is incorporated herein by
reference to Exhibit 10.01 to the Company's Quarterly Report on Form
10Q/A for the quarter ended September 30, 1996.
10.45 Second Amendment to First Amended and Restated Agreement of Limited
Partnership of Glenborough Properties, L.P. is incorporated herein by
reference to Exhibit 10.02 to the Company's Quarterly Report on Form
10Q/A for the quarter ended September 30, 1996.
10.46 Second Amendment to Agreement of Limited Partnership of GPA Bond, a
Calif. Limited Partnership is incorporated herein by reference to
Exhibit 10.03 to the Company's Quarterly Report on Form 10Q/A for the
quarter ended September 30, 1996.
10.47 Lease Agreement between Glenborough Properties, L.P. and Glenborough
Hotel Group for Country Suites - San Antonio is incorporated herein by
reference to Exhibit 10.04 to the Company's Quarterly Report on Form
10Q/A for the quarter ended September 30, 1996.
10.48 Purchase agreement related to the acquisition of the Scottsdale Hotel
is incorporated herein by reference to the identically numbered
exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
84
<PAGE>
EXHIBIT INDEX - continued
Exhibit
Number Exhibit Title
10.49 First Amendment to the Agreement of Purchase of Sale related to the
purchase of the Scottsdale Hotel is incorporated herein by reference
to the identically numbered exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
10.50 Lease Agreement related to the Scottsdale Hotel is incorporated herein
by reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997.
10.51 Purchase and Sale Agreement related to the T. Rowe Price Realty Income
Fund II acquisition is incorporated herein by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997.
10.52 Purchase Agreement related to the Centerstone Property acquisition is
incorporated herein by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.53 Contribution Agreement related to the Centerstone Property acquisition
is incorporated herein by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.54 Purchase Agreement related to the CIGNA acquisition is incorporated
herein by reference to Exhibit 10.4 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
10.55 Unsecured Loan Agreement with Wells Fargo Bank, N.A. is incorporated
herein by reference to Exhibit 10.5 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
10.56** Credit Agreement with Wells Fargo Bank, N.A. related to $250,000,000
unsecured revolving line of credit.
11.1 Statement re: Computation of Per Share Earnings is shown in Note 9 of
the Consolidated Financial Statements of the Company in Item 14.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1** Significant Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP, independent public accountants.
27.1 Financial Data Schedule
* Indicates management contract or compensatory plan or arrangement.
** Previously filed as part of the Company's Form 10-K for the year
ended December 31, 1997.
85
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12.1
GLENBOROUGH REALTY TRUST INCORPORATED
Computation of Ratios
For the five years ended December 31, 1997
and the three months ended March 31, 1998
GRT Predecessor Entities, Combined The Company
---------------------------------------- -----------------------------------------
Three
Months
Ended
Twelve Months Ended December 31, March 31,
-------------------------------------------------------------------- ------------
1993 1994 1995 1996 1997 1998
----------- ------------ ------------ ------------ ----------- ------------
EARNINGS, AS DEFINED
<S> <C> <C> <C> <C> <C> <C>
Net Income (Loss) before Preferred Dividends 4,418 1,580 524 (1,609) 19,368 12,213
Extraordinary items (2,274) -- -- 186 843 --
Federal & State income taxes 24 176 357 -- -- --
Minority Interest 5 43 -- 292 1,119 678
Fixed Charges 1,301 1,140 2,129 3,913 9,668 9,145
----------- ------------ ------------ ------------ ----------- ------------
3,474 2,939 3,010 2,782 30,998 22,036
----------- ------------ ------------ ------------ ----------- ------------
FIXED CHARGES AND PREFERRED
DIVIDENDS, AS DEFINED
Interest Expense 1,301 1,140 2,129 3,913 9,668 9,145
Preferred Dividends -- -- -- -- -- 3,910
----------- ------------ ------------ ------------ ----------- ------------
1,301 1,140 2,129 3,913 9,668 13,055
RATIO OF EARNINGS TO FIXED CHARGES 2.67 2.58 1.41 0.71 (1) 3.21 2.41
----------- ------------ ------------ ------------ ----------- ------------
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED DIVIDENDS 2.67 2.58 1.41 0.71 (1) 3.21 1.69
----------- ------------ ------------ ------------ ----------- ------------
(1) For the twelve months ended December 31, 1996, earnings were insufficient to cover fixed charges and fixed charges plus
preferred dividends by $1,131.
</TABLE>
86
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 21, 1998 (except with respect to the matters discussed in
Note 14, as to which the date is March 20, 1998) on the financial statements of
Glenborough Realty Trust Incorporated and our report dated January 21, 1998 on
the financial statements of Glenborough Hotel Group included in this Form
10-K/A, into the Company's previously filed Registration Statements File Nos.
333-40959, 333-27677 and 333-08806.
/s/ ARTHUR ANDERSEN LLP
-------------------------
ARTHUR ANDERSEN LLP
San Francisco, California
September 9, 1998
87
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000929454
<NAME> GLENBOROUGH REALTY TRUST INCORPORATED
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 5,070
<SECURITIES> 0
<RECEIVABLES> 6,334
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,750
<PP&E> 866,431
<DEPRECIATION> 41,213
<TOTAL-ASSETS> 865,774
<CURRENT-LIABILITIES> 5,583
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 580,092
<TOTAL-LIABILITY-AND-EQUITY> 865,774
<SALES> 0
<TOTAL-REVENUES> 68,148
<CGS> 0
<TOTAL-COSTS> 37,150
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,668
<INCOME-PRETAX> 21,330
<INCOME-TAX> 0
<INCOME-CONTINUING> 21,330
<DISCONTINUED> 0
<EXTRAORDINARY> (843)
<CHANGES> 0
<NET-INCOME> 19,368
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.05
</TABLE>
