SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-14162
GLENBOROUGH REALTY TRUST INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland 94-3211970
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 South El Camino Real,
Suite 1100, San Mateo, California
(650) 343-9300 94402-1708
(Address of principal executive offices (Zip Code)
and telephone number)
Securities registered under Section 12(b) of the Act:
Name of Exchange
Title of each class: on which registered:
Common Stock, $.001 par value New York Stock Exchange
7.75% Series A Convertible Preferred Stock, New York Stock Exchange
$.001 par value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___
As of July 31, 1999, 31,324,351 shares of Common Stock ($.001 par value) and
11,500,000 shares of 7.75% Series A Convertible Preferred Stock ($.001 par
value) were outstanding.
1
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INDEX
GLENBOROUGH REALTY TRUST INCORPORATED
Page No.
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements of
Glenborough Realty Trust Incorporated
(Unaudited except for the Consolidated
Balance Sheet at December 31, 1998):
Consolidated Balance Sheets at June
30, 1999 and December 31, 1998 3
Consolidated Statements of
Operations for the six months ended
June 30, 1999 and 1998 4
Consolidated Statements of
Operations for the three months
ended June 30, 1999 and 1998 5
Consolidated Statement of
Stockholders' Equity for the six
months ended June 30, 1999 6
Consolidated Statements of Cash
Flows for the six months ended June
30, 1999 and 1998 7-8
Notes to Consolidated Financial
Statements 9-20
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 21-29
PART II OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
EXHIBIT INDEX 33
2
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 30, December 31,
1999 1998
(Unaudited) (Audited)
---------------- -----------------
ASSETS
<S> <C> <C>
Rental property, net of accumulated depreciation of
$83,713 and $72,951 in 1999 and 1998, respectively $ 1,584,220 $ 1,720,579
Real estate held for sale 48,641 21,860
Investments in Development 39,293 35,131
Investments in Associated Companies 7,960 8,807
Mortgage loans receivable 43,982 42,420
Cash and cash equivalents 2,001 4,357
Other assets 61,881 45,862
---------------- -----------------
TOTAL ASSETS $ 1,787,978 $ 1,879,016
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage loans $ 692,384 $ 708,578
Unsecured Series A Senior Notes 132,890 150,000
Unsecured bank line 21,247 63,519
Other liabilities 28,309 28,921
---------------- -----------------
Total liabilities 874,830 951,018
---------------- -----------------
Commitments and contingencies -- --
Minority interest 98,115 99,465
Stockholders' Equity:
Common stock, 31,593,251 and 31,758,915 shares issued
and outstanding at June 30, 1999 and
December 31, 1998, respectively 32 32
Preferred stock, 11,500,000 shares issued and outstanding
at June 30, 1999 and December 31, 1998 11 11
Additional paid-in capital 862,823 865,692
Deferred compensation (685) (181)
Retained earnings (deficit) (47,148) (37,021)
---------------- -----------------
Total stockholders' equity 815,033 828,533
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,787,978 $ 1,879,016
================ =================
See accompanying notes to consolidated financial statements
</TABLE>
3
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<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the six months ended June 30, 1999 and 1998
(in thousands, except per share amounts)
(Unaudited)
1999 1998
--------------- ---------------
REVENUE
<S> <C> <C>
Rental revenue $ 129,193 $ 97,582
Fees and reimbursements from affiliates 1,874 1,232
Interest and other income 3,437 603
Equity in earnings (loss) of Associated Companies (565) 1,061
Net gain on sales of real estate assets 7,093 2,139
--------------- ---------------
Total revenue 141,032 102,617
--------------- ---------------
EXPENSES
Property operating expenses 43,861 30,589
General and administrative 4,773 4,825
Depreciation and amortization 29,312 20,943
Interest expense 32,958 18,852
--------------- ---------------
Total expenses 110,904 75,209
--------------- ---------------
Income from operations before minority interest and
extraordinary item 30,128 27,408
Minority interest (2,196) (1,274)
--------------- ---------------
Net income before extraordinary item 27,932 26,134
Extraordinary item:
Net loss on early extinguishment of debt (303) --
--------------- ---------------
Net income 27,629 26,134
Preferred dividends (11,140) (9,480)
--------------- ---------------
Net income available to Common Stockholders $ 16,489 $ 16,654
=============== ===============
Basic Per Share Data:
Net income available to Common Stockholders before
extraordinary item $ 0.53 $ 0.53
Extraordinary item (0.01) --
=============== ===============
Net income available to Common Stockholders $ 0.52 $ 0.53
=============== ===============
Basic weighted average shares outstanding 31,714,274 31,598,648
=============== ===============
Diluted Per Share Data:
Net income available to Common Stockholders before
extraordinary item $ 0.53 $ 0.52
Extraordinary item (0.01) --
=============== ===============
Net income available to Common Stockholders $ 0.52 $ 0.52
=============== ===============
Diluted weighted average shares outstanding 36,040,578 34,612,985
=============== ===============
See accompanying notes to consolidated financial statements
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 1999 and 1998
(in thousands, except per share amounts)
(Unaudited)
1999 1998
--------------- ---------------
REVENUE
<S> <C> <C>
Rental revenue $ 64,552 $ 51,619
Fees and reimbursements from affiliates 743 759
Interest and other income 1,778 246
Equity in earnings (loss) of Associated Companies (874) 709
Net gain on sales of real estate assets 5,742 693
--------------- ---------------
Total revenue 71,941 54,026
--------------- ---------------
EXPENSES
Property operating expenses 21,860 16,265
General and administrative 2,551 2,603
Depreciation and amortization 14,220 10,934
Interest expense 16,418 9,707
--------------- ---------------
Total expenses 55,049 39,509
--------------- ---------------
Income from operations before minority interest and
extraordinary item 16,892 14,517
Minority interest (1,529) (596)
--------------- ---------------
Net income before extraordinary item 15,363 13,921
Extraordinary item:
Net gain on early extinguishment of debt 1,688 --
--------------- ---------------
Net income 17,051 13,921
Preferred dividends (5,570) (5,570)
--------------- ---------------
Net income available to Common Stockholders $ 11,481 $ 8,351
=============== ===============
Basic Per Share Data:
Net income available to Common Stockholders before
extraordinary item $ 0.31 $ 0.26
Extraordinary item 0.05 --
=============== ===============
Net income available to Common Stockholders $ 0.36 $ 0.26
=============== ===============
Basic weighted average shares outstanding 31,664,269 31,648,041
=============== ===============
Diluted Per Share Data:
Net income available to Common Stockholders before
extraordinary item $ 0.31 $ 0.26
Extraordinary item 0.05 --
=============== ===============
Net income available to Common Stockholders $ 0.36 $ 0.26
=============== ===============
Diluted weighted average shares outstanding 35,984,107 34,868,905
=============== ===============
See accompanying notes to consolidated financial statements
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended June 30, 1999
(in thousands)
(Unaudited)
Common Stock Preferred Stock
--------------------- ---------------------
Additional Deferred Retained
Par Par Paid-in Compen- Earnings
Shares Value Shares Value Capital sation (Deficit) Total
--------- ---------- ---------- ---------- ------------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 31,759 $ 32 11,500 $ 11 $ 865,692 $ (181) $ (37,021) $828,533
Exercise of stock options 63 -- -- -- 920 -- -- 920
Conversion of Operating Partnership
units into common stock
35 -- -- -- -- -- -- --
Issuance of common stock to officers
30 -- -- -- 550 (550) -- --
Common stock repurchases (294) -- -- -- (4,339) -- -- (4,339)
Amortization of deferred compensation
-- -- -- -- -- 46 -- 46
Unrealized gain on marketable
securities -- -- -- -- -- -- 34 34
Distributions -- -- -- -- -- -- (37,790) (37,790)
Net income -- -- -- -- -- -- 27,629 27,629
--------- ---------- ---------- ---------- ------------- ------------- ------------- --------
Balance at June 30, 1999 31,593 $ 32 11,500 $ 11 $ 862,823 $ (685) $ (47,148) $815,033
========= ========== ========== ========== ============= ============= ============= ========
See accompanying notes to consolidated financial statements
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1999 and 1998
(in thousands)
(Unaudited)
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 27,629 $ 26,134
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 29,312 20,943
Amortization of loan fees, included in
interest expense 993 592
Minority interest in income from operations 2,196 1,274
Equity in (earnings) loss of Associated
Companies 565 (1,061)
Net gain on sales of real estate assets (7,093) (2,139)
Net loss on early extinguishment of debt 303 --
Amortization of deferred compensation 46 46
Changes in certain assets and liabilities, net (2,527) 833
--------------- ---------------
Net cash provided by operating activities 51,424 46,622
--------------- ---------------
Cash flows from investing activities:
Net proceeds from sales of real estate assets 111,027 37,804
Additions to rental properties (22,833) (570,536)
Investments in Development (4,162) (6,882)
Investment in Joint Ventures (3,176) --
Additions to mortgage loans receivable (1,562) (38,084)
Investments in marketable securities -- (26,006)
Principal receipts on mortgage loans receivable -- 507
Payments from affiliates 400 --
Distributions from Associated Companies 282 875
--------------- ---------------
Net cash provided by (used for) investing
activities 79,976 (602,322)
--------------- ---------------
continued
See accompanying notes to consolidated financial statements
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS -continued
For the six months ended June 30, 1999 and 1998
(in thousands)
(Unaudited)
1999 1998
--------------- --------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from borrowings $ 83,480 $ 530,321
Repayment of borrowings (156,046) (207,741)
Draws from (payments into) lender impound accounts, net
873 (7,137)
Retirement of Series A Senior Notes (15,282) --
Prepayment penalties on loan payoffs (2,026) --
Distributions to minority interest holders (3,546) (2,000)
Distributions to stockholders (37,790) (30,410)
Exercise of stock options 920 10
Repurchases of common stock (4,339) --
Proceeds from issuance of preferred stock, net of
offering costs -- 274,615
--------------- --------------
Net cash (used for) provided by financing
activities (133,756) 557,658
--------------- --------------
Net (decrease) increase in cash and cash equivalents (2,356) 1,958
Cash and cash equivalents at beginning of period 4,357 5,070
--------------- --------------
Cash and cash equivalents at end of period $ 2,001 $ 7,028
=============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest (net of capitalized interest of
$1,330 in 1999) $ 30,262 $ 12,165
=============== ==============
Supplemental disclosure of Non-Cash Investing and Financing
Activities:
Acquisition of real estate through assumption of first
trust deed notes payable $ 14,100 $ 317,527
=============== ==============
Acquisition of real estate through issuance of shares
of common stock and Operating Partnership units $ -- $ 41,365
=============== ==============
See accompanying notes to consolidated financial statements
</TABLE>
8
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1999
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 June 30, 1999,
the following Common Stock transactions occurred: (i) 67,250 shares of Common
Stock were issued to officers and directors as stock compensation; (ii)
25,446,000 shares were issued in four separate public equity offerings; (iii)
448,172 shares were issued in connection with various acquisitions; (iv) 85,207
shares were issued in connection with the exercise of employee stock options;
(v) 86,188 shares were issued in connection with the exchange of Operating
Partnership units; (vi) 293,216 shares were repurchased by the Company (see
discussion below) and (vii) 59 shares were retired, resulting in total shares of
Common Stock issued and outstanding at June 30, 1999, of 31,593,251. Assuming
the issuance of 4,184,314 shares of Common Stock issuable upon redemption of
4,184,314 partnership units in the Operating Partnership, there would be
35,777,565 shares of Common Stock outstanding as of June 30, 1999.
In January 1998, the Company completed a public offering of 11,500,000 shares of
7 3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible
Preferred Stock Offering"). The shares are convertible at any time at the option
of the holder thereof into shares of Common Stock at an initial conversion price
of $32.83 per share of Common Stock (equivalent to a conversion rate of 0.7615
shares of Common Stock for each share of Series A Convertible Preferred Stock),
subject to adjustment in certain circumstances. Shares of Preferred Stock issued
and outstanding at June 30, 1999, totaled 11,500,000.
In July 1998, the Company's Board of Directors adopted a stockholder rights plan
which is intended to protect the Company's stockholders in the event of coercive
or unfair takeover tactics, or an unsolicited attempt to acquire control of the
Company in a transaction the Board of Directors believes is not in the best
interests of the stockholders. Under the plan, the Company declared a dividend
of Rights on its Common Stock. The rights issued under the plan will be
triggered, with certain exceptions, if and when any person or group acquires, or
commences a tender offer to acquire, 15% or more of the Company's shares.
In January 1999, the Company's Board of Directors authorized the Company to
repurchase up to 3.1 million shares of its outstanding Common Stock. This
represents approximately 10% of the Company's total outstanding Common Stock.
Such purchases will be made from time to time in the open market or otherwise
and the timing will depend on market conditions and other factors. As of June
30, 1999, 293,216 shares have been repurchased.
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 its majority owned 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
87.30% limited partner interest at June 30, 1999, is Glenborough Properties,
L.P. (the "Operating Partnership"). As of June 30, 1999, the Operating
Partnership, directly and through the subsidiaries in which it and the Company
own 100% of the ownership interests, controls a total of 167 real estate
9
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1999
projects. As of June 30, 1999, the Operating Partnership 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 and
development services for these partnerships (the "Managed Partnerships").
It also provides partnership administration, asset management, property
management and development services to a group of unaffiliated partnerships
which include three 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").
Glenborough Hotel Group ("GHG") owns an approximate 36% limited partner
interest in a real estate joint venture.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements present the consolidated financial
position of the Company as of June 30, 1999, and December 31, 1998, and the
consolidated results of operations and cash flows of the Company for the six
months ended June 30, 1999 and 1998. All intercompany transactions, receivables
and payables have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal accruals) necessary to
present fairly the financial position and results of operations of the Company
as of June 30, 1999, and for the period then ended.
Reclassification
Certain prior year balances have been reclassified to conform to the current
year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the results of operations during the reporting period. Actual results could
differ from those estimates.
New Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998. SFAS No.
133 was originally effective for fiscal years beginning after June 15, 1999,
with early adoption permitted. In June 1999, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an amendment of FASB Statement No. 133" was issued
which, among other things, deferred the final implementation to fiscal quarters
beginning after June 15, 2000. SFAS No. 133 provides comprehensive guidelines
for the recognition and measurement of derivatives and hedging activities and
specifically requires all derivatives to be recorded on the balance sheet at
fair value. Management is evaluating the effects, if any, that this
pronouncement will have on the Company's consolidated financial position,
results of operations and financial statement position.
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. 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
10
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GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1999
valuation process and in the economy, it is reasonably possible that the actual
results of operating and disposing of the Company's properties could be
materially different than current expectations.
Depreciation is provided using the straight line method over the useful lives of
the respective assets.
The useful lives are as follows:
Buildings and Improvements 10 to 40 years
Tenant Improvements Term of the related lease
Furniture and Equipment 5 to 7 years
Real Estate Held for Sale
Real estate held for sale consists of rental properties that are under contract
or in active negotiations to be disposed of. The fulfillment of the Company's
plans to dispose of property is dependent upon, among other things, the presence
of economic conditions which will enable the Company to hold the property for
eventual sale. The Company discontinues depreciation of rental property once it
is classified as held for sale.
Investments in Development
The Company, through mezzanine loans and equity contributions, invests in
various development alliances with projects currently under development. The
interest on advances and other direct project costs incurred by the Company are
capitalized to the investment during the period in which the projects are under
development. See Note 6 for further discussion.
Investments in Associated Companies
The Company's investments in the Associated Companies are accounted for using
the equity method, as discussed further in Note 4.
Mortgage Loans Receivable
The Company monitors the recoverability of its loans and notes receivable
through ongoing contact with the borrowers to ensure timely receipt of interest
and principal payments, and where appropriate, obtains financial information
concerning the operation of the properties. Interest on mortgage loans is
recognized as revenue as it accrues during the period the loan is outstanding.
Mortgage loans receivable will be evaluated for impairment if it becomes evident
that the borrower is unable to meet its debt service obligations in a timely
manner and cannot satisfy its payments using sources other than the operations
of the property securing the loan. If it is concluded that such circumstances
exist, then the loan will be considered to be impaired and its recorded amount
will be reduced to the fair value of the collateral securing it. Interest income
will also cease to accrue under such circumstances. Due to uncertainties
inherent in the valuation process, it is reasonably possible that the amount
ultimately realized from the Company's collection on these receivables will be
different than the recorded amounts.
Cash Equivalents
The Company considers short-term investments (including certificates of deposit)
with a maturity of three months or less at the time of investment to be cash
equivalents.
Marketable Securities
The Company records its marketable securities at fair value. Unrealized gains
and losses on securities are reported as a separate component of stockholders'
equity and realized gains and losses are included in net income.
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.
Certain assumed debt instruments have been recorded at a premium based upon the
stated rate on the instrument and the then available borrowing rates for the
Company. 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.
11
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1999
Derivative Financial Instruments
The Company may use derivative financial instruments in the event that it
believes such instruments will be an effective hedge against fluctuations in
interest rates on a specific anticipated borrowing. Derivative financial
instruments such as forward rate agreements or interest rate swaps may be used
in this capacity. To the extent such instruments do not qualify as hedges, they
will be accounted for on a mark-to-market basis and recorded in earnings each
period as appropriate. The cost of terminated instruments not qualifying as
hedges will be recorded in earnings in the period they are terminated.
Instruments which qualify as hedges upon obtaining the related debt will be
recorded as a premium or discount on the related debt principal and amortized
into earnings over the life of the debt instrument. If the hedged instrument is
retired early, the unamortized discount or premium will be included as a
component of the calculation of gain or loss on retirement.
At June 30, 1999, the Company was not a party to any open interest rate
protection agreements.
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 11.70% 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 six months ended June 30, 1999, no tenants represented 10% or more of
rental revenue of the Company.
Fees and reimbursement revenue consists of property management fees, overhead
administration fees, and transaction fees from the acquisition, disposition,
refinancing, leasing and construction supervision of real estate for an
unconsolidated affiliate.
Revenues are recognized only after the Company is contractually entitled to
receive payment, after the services for which the fee is received have been
provided, and after the ability and timing of payments are reasonably assured
and predictable.
Scheduled rent increases are based primarily on the Consumer Price Index or a
similar factor. Material incentives paid, if any, by the Company to a tenant are
amortized as a reduction of rental income over the life of the related lease.
Income Taxes
The Company has made an election to be taxed as a REIT under Sections 856
through 860 of the Code. As a REIT, the Company generally will not be subject to
Federal income tax to the extent that it distributes at least 95% of its REIT
taxable income to its stockholders. REITs are subject to a number of
organizational and operational requirements. If the Company fails to qualify as
a REIT in any taxable year, the Company will be subject to Federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate tax rates. Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain state and local taxes on its income
and property and to Federal income and excise taxes on its undistributed income.
Reference to 1998 Audited Financial Statements
These unaudited financial statements should be read in conjunction with the
Notes to Consolidated Financial Statements included in the 1998 audited
financial statements.
Note 3. INVESTMENTS IN REAL ESTATE
Acquisitions
In the second quarter of 1999, the Company expanded its existing holdings near
Los Angeles International Airport by purchasing a 41,709 square foot industrial
building which is the second phase of the project purchased in the first quarter
12
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1999
(see below). This second phase has been leased on a long term triple net basis
to the tenant currently occupying phase one of the project. The total
acquisition cost, including capitalized costs, was approximately $5.6 million.
In the first quarter of 1999, the Company acquired a 285 unit multifamily
property ("Springs of Indian Creek") located in Carrolton, Texas. The property
is the first phase of a two phase project comprising a total of 519 units. The
234 unit second phase of the project is currently under construction through one
of the Company's development alliances and is expected to be completed in the
first quarter of the year 2000. The total acquisition cost, including
capitalized costs of Phase I was approximately $20.8 million comprising: (i)
approximately $14.1 million in assumption of debt and (ii) the balance in cash.
In addition, the Company acquired a 1.45-acre parcel containing 34,500 square
feet of industrial buildings in Los Angeles, California, near the Los Angeles
International Airport. This property is the first phase of a two phase project.
The total acquisition cost, including capitalized costs, was approximately $3.1
million, which was paid entirely in cash. The property has been leased to a
single tenant under a 15-year triple-net lease.
Dispositions
In the second quarter of 1999, the Company sold fourteen properties, including
five office, four office/flex, one retail, two industrial, one multifamily and
one hotel. The assets were sold for an aggregate sales price of approximately
$109,135,000 and generated an aggregate net gain of approximately $5,742,000.
In the first quarter of 1999, the Company sold seven properties, including five
office/flex properties and two retail properties, and a partial interest in a
REIT. These assets were sold for an aggregate sales price of approximately $27.3
million and generated an aggregate net gain of approximately $1,351,000.
These transactions are reflected as the net gain on sales of real estate assets
on the accompanying consolidated statement of operations for the six months
ended June 30, 1999.
Prospective Acquisitions and Dispositions
The Company has entered into a short-term lease agreement on the hotel property
located in Arlington, Texas with the prospective purchaser of this property.
This prospective purchaser has entered into a purchase agreement for this
property, with an anticipated closing date of August 31, 1999. The lease
terminates on the closing date of the sale of the property. The net book value
of the hotel property totals $4,112,000 at June 30, 1999. Net income earned by
the Company (before depreciation) from the hotel totaled $178,000 and $202,000
for the six months ended June 30, 1999 and 1998, respectively.
The Company has entered into separate definitive agreements to sell eight
properties, including two office properties, two office/flex properties, two
industrial properties and two retail properties. The sales are expected to close
in the third quarter of 1999 for an aggregate sales price of approximately $44.9
million, however, they are subject to certain contingencies, including
satisfactory completion of due diligence and customary closing conditions. As a
result, there can be no assurance that these sales will be completed. These
properties are reflected as Real Estate Held For Sale on the accompanying
consolidated balance sheet as of June 30, 1999. See Note 12 for discussion of
sales subsequent to June 30, 1999.
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 their economic
benefits flow to the Company by virtue of its 100% non-voting preferred stock
interest in each of them, which interests constitute substantially all of their
capitalization. Two of the holders of the voting common stock of GC and one of
the holders of the voting common stock of GHG are officers of the Company;
however, the Company has no direct voting or management control of either GC or
GHG. 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.
13
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1999
As of June 30, 1999, the Company had the following investments in the Associated
Companies (in thousands):
GC GHG Total
Investment at December 31, 1998 $ 6,800 $ 2,007 $ 8,807
Distributions (267) (15) (282)
Equity in earnings (loss) (535) (30) (565)
---------- --------- ---------
Investment at June 30, 1999 $ 5,998 $ 1,962 $ 7,960
========== ========= =========
Note 5. MORTGAGE LOANS RECEIVABLE
The Company's mortgage loans receivable consist of the following as of June 30,
1999, and December 31, 1998 (dollars in thousands):
1999 1998
------------ -----------
Note secured by an office property in Phoenix, AZ,
with a fixed interest rate of 7% (until May 31,
2000, at which time the rate shall change to a
fixed rate of 9%) and a maturity date of May 2001 $ 3,728 $ 3,484
Note secured by a hotel property in Dallas, TX,
with a fixed interest rate of 9%, monthly
interest-only payments and a maturity date of
August 31, 1999 3,600 3,600
Note secured by Gateway Park land located in
Aurora, CO, with a stated fixed interest rate of
13%, quarterly interest-only payments and a
maturity date of July 2005 (see below for further
discussion) 36,654 35,336
------------ ----------
Total $ 43,982 $ 42,420
============ ==========
In 1998, the Company entered into a development alliance with The Pauls
Corporation (see Note 6). In addition to this development alliance, the Company
loaned approximately $34 million ($36.7 million, including accrued interest, at
June 30, 1999), secured by a First Mortgage, to continue the build-out of
Gateway Park. In this arrangement, the Company has rights under certain
conditions and subject to certain contingencies to purchase the properties upon
completion of development and, thus, through this arrangement, the Company could
acquire up to 2.2 million square feet of office, office/flex and industrial
space and 1,600 multifamily units over the next ten years.
Note 6. INVESTMENTS IN DEVELOPMENT AND OTHER ASSETS
The Company has formed 4 development alliances for the development of
approximately 713,000 square feet of office, office/flex and distribution
properties and 1,710 multifamily units in North Carolina, Colorado, Texas, New
Jersey, Kansas and Michigan. As of June 30, 1999, the Company has advanced
approximately $39 million. Under these development alliances, the Company has
certain rights to purchase the properties upon completion of development over
the next five years. The Company entered into a joint venture in which it sold a
90% interest in Rockwall I & II, a 340,252 square foot office complex located in
Rockville, Maryland. The Company maintains a 10% interest in the asset along
with a contract for property management services. The proceeds from the sale
were used to paydown the Credit Facility (discussed below) and to reduce other
secured debt. The value of this 10% interest is approximately $1.3 million and
is included in Other Assets on the accompanying consolidated balance sheet as of
June 30, 1999. This investment will be accounted for using the equity method.
The Company also purchased a 10% interest in the fee simple interest in the land
under Rincon Center I & II in San Francisco, California. The land was purchased
from the United States Post Office for a purchase price of $80.5 million. The
land has a triple net ground lease with a remaining term of 51 years with
minimum 30% rental increases every six years. Occupying a full city block near
14
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1999
the waterfront in the Financial District, Rincon Center I & II contains 476,709
square feet of commercial office and retail space, 320 multifamily units and 381
subterranean parking spaces. The value of this 10% interest is approximately $2
million and is included in Other Assets on the accompanying consolidated balance
sheet as of June 30, 1999. This investment will be accounted for using the
equity method.
Note 7. SECURED AND UNSECURED LIABILITIES
The Company had the following mortgage loans, bank lines, unsecured notes and
notes payable outstanding as of June 30, 1999, and December 31, 1998 (dollars in
thousands):
1999 1998
--------- ---------
Secured loans with various lenders, net of
unamortized discount of $5,828 and $6,140 at June
30, 1999 and December 31, 1998, respectively. All
loans have a fixed interest rate of 6.125% and a
November 10, 2008 maturity date. Monthly principal
and interest payments range between $296 and $458.
These loans are secured by 35 properties with an
aggregate net carrying value of $404,157 and
$408,439 at June 30, 1999 and December 31, 1998,
respectively. $ 233,858 $ 234,871
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 $108,707 and
$110,129 at June 30, 1999 and December 31, 1998,
respectively. 58,561 58,942
Secured loan with an investment bank with a fixed
interest rate of 7.57%, monthly principal and
interest payments (based upon a 25-year
amortization) of $103 and a maturity date of
January 1, 2006. This loan was paid off in March
1999 with the proceeds from a $26 million loan
discussed below. -- 13,220
Secured loans with various lenders, bearing
interest at fixed rates between 6.95% and 9.25%
(approximately $53,042 of these loans include an
unamortized premium of approximately $445 which
reduces the effective interest rate on those
instruments to 6.75%), with monthly principal and
interest payments ranging between $14 and $371 and
maturing at various dates through July 1, 2008.
These loans are secured by properties with an
aggregate net carrying value of $430,143 and
$447,444 at June 30, 1999 and December 31, 1998,
respectively. 255,030 261,938
15
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1999
1999 1998
---------- ---------
Secured loans with various banks bearing interest
at variable rates ranging between 7.44% and 8.18%
at June 30, 1999 (approximately $114,458 of these
loans include an unamortized premium of
approximately $1,258 which reduces the effective
interest rate on those instruments to 6.75%),
monthly principal and interest payments ranging
between $16 and $790 and maturing at various dates
through December 22, 2000. These loans are secured
by properties with an aggregate net carrying value
of $187,123 and $179,438 at June 30, 1999 and
December 31, 1998, respectively. $ 130,613 $ 125,230
Secured loans with a lender, bearing interest at
fixed rates between 7.60% and 7.85%, with monthly
principal and interest payments ranging between
$11 and $22. All of these loans have a maturity
date of December 1, 2030. These loans are secured
by multifamily properties with an aggregate net
carrying value of $17,961 and $19,060 at June 30,
1999 and December 31, 1998, respectively. 14,322 14,377
Unsecured $100,000 line of credit with a bank
("Credit Facility") with a variable interest rate
of LIBOR plus 1.625% (6.690% and 7.401% at June
30, 1999 and December 31, 1998, respectively),
monthly interest only payments and a maturity date
of December 22, 2000, with one option to extend
for 10 years. In June 1999, the Credit Facility
was modified. See below for further discussion. 21,247 63,519
Unsecured Series A Senior Notes with a fixed
interest rate of 7.625%, interest payable
semiannually on March 15 and September 15, and a
maturity date of March 15, 2005. Approximately
$17.1 million of the notes were retired in June
1999 as discussed below. 132,890 150,000
--------- ---------
Total $ 846,521 $ 922,097
========= =========
In March 1999, the Company obtained a $26 million loan from a commercial bank.
The loan was non-recourse and was secured by seven properties and had a maturity
date of December 22, 1999, with an option to extend for six months. The proceeds
were used to pay off a loan which was previously secured by these same
properties and to reduce other debt. This loan was paid off in June 1999 with
proceeds generated from the sales of four properties.
In June 1999, the Company retired approximately $17.1 million of unsecured
Series A Senior Notes at a discount. As a result of this transaction, a gain on
early extinguishment of debt of approximately $1.8 million was recorded which is
included in the net loss on early extinguishment of debt on the accompanying
consolidated statements of operations for the six and three months ended June
30, 1999, as discussed below.
In June 1999, in order to increase the Company's financial flexibility, the
Credit Facility was modified to increase the commitment from $100 million to
$142.5 million. The interest rate, monthly payments and maturity date remain
unchanged.
In connection with the loan payoffs discussed above and the payoff of other
mortgage debt, the Company incurred a net loss on early extinguishment of debt
of $303,000 for the six months ended June 30, 1999. This loss consists of
$2,026,000 of losses due to prepayment penalties and $105,000 of losses upon the
writeoff of unamortized loan fees, offset by a gain on payoff of Series A Senior
Notes of $1,828,000 (as discussed above).
16
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1999
Some of the Company's properties are held in limited partnerships and limited
liability companies in order to facilitate financing. Such limited partnerships
and limited liability companies are included in the consolidated financial
statements of the Company in accordance with Generally Accepted Accounting
Principles ("GAAP").
The required principal payments on the Company's debt for the next five years
and thereafter, as of June 30, 1999, are as follows (in thousands):
Year Ending
December 31,
1999 $ 119,093
2000 100,167
2001 15,435
2002 14,301
2003 37,891
Thereafter 559,634
----------
Total $ 846,521
==========
Note 8. RELATED PARTY TRANSACTIONS
Fee and reimbursement income earned by the Company from related parties totaled
$1,874,000 and $1,232,000 for the six months ended June 30, 1999 and 1998,
respectively, and consisted of property management fees, asset management fees
and other fee income. In addition, the Company paid GC property management fees
and salary reimbursements totaling $734,000 and $608,000 for the six months
ended June 30, 1999 and 1998, respectively, for management of a portfolio of
residential properties owned by the Company, which is included in property
operating expenses on the accompanying consolidated statements of operations.
The Company acquired from a Managed Partnership an option to acquire all of its
rights under a Lease with Option to Purchase Agreement, to acquire certain
undeveloped land located in Burlingame, California. Upon expiration of the
option period, the independent members of the Company's Board of Directors
concluded that proceeding with the development of the property would have
required that the Company incur substantial debt. Accordingly, on February 1,
1999, the Company elected not to proceed with the development and not to
exercise the option in return for the Managed Partnership's agreement to
reimburse the Company for $2,309,000 of predevelopment costs, $462,000 to be
paid in cash with the balance in a promissory note bearing interest at 10% and
due on the earlier of sale, refinance or March 31, 2002. The note also contains
a participation in profits realized by the Managed Partnership from the
development and sale of the property. The principal balance of the note is
included in Other Assets on the accompanying consolidated balance sheet as of
June 30, 1999.
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 modified the
guidance for computing diluted earnings per share. 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. Earnings per
share are as follows (in thousands, except for weighted average shares and per
share amounts):
17
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1999
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income available to common
Stockholders - Basic $ 11,481 $ 8,351 $ 16,489 $ 16,654
Minority interest 1,529 596 2,196 1,274
-------------
------------- ------------- -------------
Net income available to common
Stockholders - Diluted $ 13,010 $ 8,947 $ 18,685 $ 17,928
------------- ------------- ------------- -------------
Weighted average shares:
Basic 31,664,269 31,648,041 31,714,274 31,598,648
Stock options 109,092 438,686 111,759 438,686
Convertible Operating Partnership Units 4,210,746 2,782,178 4,214,545 2,575,651
------------- ------------- ------------- --------------
Diluted 35,984,107 34,868,905 36,040,578 34,612,985
------------- ------------- ------------- --------------
Basic earnings per share $ 0.36 $ 0.26 $ 0.52 $ 0.53
Diluted earnings per share $ 0.36 $ 0.26 $ 0.52 $ 0.52
</TABLE>
Note 10. STOCK COMPENSATION PLAN
In May 1996, the Company adopted an employee stock incentive plan (the "Plan")
to provide incentives to attract and retain high quality executive officers and
key employees. Certain amendments to the Plan were ratified and approved by the
stockholders of the Company at the Company's 1997 Annual Meeting of
Stockholders. The Plan, as amended, provides for the grant of (i) shares of
Common Stock of the Company, (ii) options, stock appreciation rights ("SARs") or
similar rights with an exercise or conversion privilege at a fixed or variable
price related to the Common Stock and/or the passage of time, the occurrence of
one or more events, or the satisfaction of performance criteria or other
conditions, or (iii) any other security with the value derived from the value of
the Common Stock of the Company or other securities issued by a related entity.
Such awards include, without limitation, options, SARs, sales or bonuses of
restricted stock, dividend equivalent rights ("DERs"), Performance Units or
Preference Shares. The total number of shares of Common Stock available under
the Plan is equal to the greater of 1,140,000 shares or 8% of the number of
shares outstanding determined as of the day immediately following the most
recent issuance of shares of Common Stock or securities convertible into shares
of Common Stock; provided that the maximum aggregate number of shares of Common
Stock available for issuance under the Plan may not be reduced. For purposes of
calculating the number of shares of Common Stock available under the Plan, all
classes of securities of the Company and its related entities that are
convertible presently or in the future by the security holder into shares of
Common Stock or which may presently or in the future be exchanged for shares of
Common Stock pursuant to redemption rights or otherwise, shall be deemed to be
outstanding shares of Common Stock. Notwithstanding the foregoing, the aggregate
number of shares as to which incentive stock options, one type of security
available under the Plan, may be granted under the Plan may not exceed 1,140,000
shares. The Company accounts for the fair value of the options and bonus grants
in accordance with APB Opinion No. 25. As of June 30, 1999, 67,250 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 June 30, 1999, 3,753,993
options to purchase shares of Common Stock were outstanding. The exercise price
of each incentive stock option granted is greater than or equal to the per-share
fair market value of the Common Stock on the date the option is granted and, as
such, no compensation expense has been recognized. The options vest over periods
between 1 and 6 years, and have a maximum term of 10 years.
18
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1999
Note 11. SEGMENT INFORMATION
The Company owns a diverse portfolio of properties comprising six product types:
office, office/flex, industrial, retail, multifamily and hotels. Each of these
product types represents a reportable segment with distinct uses and tenant
types which require the Company to employ different management strategies. Each
segment contains properties located in various regions and markets within the
United States. The office portfolio consists primarily of suburban office
buildings. The office/flex portfolio consists of properties designed for a
combination of office and warehouse uses. The industrial portfolio consists of
properties designed for warehouse, distribution and light manufacturing for
single-tenant or multi-tenant use. The retail portfolio consists primarily of
community shopping centers anchored with national or regional supermarkets or
drug stores. The properties in the multifamily portfolio are apartment buildings
with units rented to residential tenants on either a month-by-month basis or for
terms of one year or less. The Company's hotel operations are limited service
"all-suite" properties leased to and operated by third parties. One of the
Company's hotels is in contract to be sold.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance of
its property types based on net operating income derived by subtracting rental
expenses and real estate taxes (operating expenses) from rental revenues.
Significant information used by the Company for its reportable segments as of
and for the six months ended June 30, 1999 and 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
Multi-
1999 Office Office/Flex Industrial Retail family Hotel Total
----------- ------------- ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rental revenue $ 59,957 $ 18,716 $ 9,519 $ 6,043 $ 33,970 $ 988 $ 129,193
Property operating expenses 23,270 5,479 2,259 2,057 14,654 205 47,924
=========== ============= =========== =========== ============ ============ =============
Net operating income (NOI) $ 36,687 $ 13,237 $ 7,260 $ 3,986 $ 19,316 $ 783 $ 81,269
=========== ============= =========== =========== ============ ============ =============
1998
Rental revenue $ 56,339 $ 17,594 $ 6,772 $ 5,431 $ 8,438 $ 3,008 $ 97,582
Property operating expenses 20,818 5,250 1,642 1,928 3,302 705 33,645
=========== ============= =========== =========== ============ ============ =============
Net operating income (NOI) $ 35,521 $ 12,344 $ 5,130 $ 3,503 $ 5,136 $ 2,303 $ 63,937
=========== ============= =========== =========== ============ ============ =============
</TABLE>
The following is a reconciliation of segment revenues and income to consolidated
revenues and income for the periods presented above (in thousands):
19
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1999
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Revenues
Total revenue for reportable segments $ 129,193 $ 97,582
Other revenue (1) 11,839 5,035
================ ================
Total consolidated revenues $ 141,032 $ 102,617
================ ================
Net Income
NOI for reportable segments $ 81,269 $ 63,937
Elimination of internal property management fees 4,063 3,056
Unallocated amounts:
Other revenue (1) 11,839 5,035
General and administrative expenses (4,773) (4,825)
Depreciation and amortization (29,312) (20,943)
Interest expense (32,958) (18,852)
================ ================
Income from operations before minority interest and
extraordinary items $ 30,128 $ 27,408
================ ================
</TABLE>
(1) Other revenue includes fee income, interest and other income, equity in
earnings (loss) of Associated Companies and net gain on sales of real estate
assets.
Note 12. SUBSEQUENT EVENTS
Subsequent to June 30, 1999, and through the date of this filing, the Company
sold two office/flex properties. These properties were sold for an aggregate
sales price of $9,340,000 and generated an aggregate net gain of approximately
$1,523,000.
In July 1999, the Company acquired all of the real estate assets of
Prudential-Bache/Equitec Real Estate Partnership, a California limited
partnership in which the managing general partner is Prudential-Bache
Properties, Inc., and in which GC and Robert Batinovich, Chief Executive Officer
of the Company, have served as co-general partners since March 1994, but do not
hold a material equity or economic interest (the "Pru-Bache Portfolio"). The
acquisition was unanimously approved by the Company's independent directors,
with Robert Batinovich and Andrew Batinovich abstaining. The total acquisition
cost, including capitalized costs, was approximately $49.1 million, which
consisted of (i) approximately $15.2 million of assumed debt and (ii) the
balance in cash. The cash was funded with proceeds from the sales of real estate
assets and an advance under the Credit Facility. The Pru-Bache Portfolio
consists of four office buildings and one office/flex property, aggregating
550,592 total square feet and located in Rockville, Maryland, Memphis,
Tennessee, Sacramento, California and Seattle, Washington.
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Background
Glenborough Realty Trust Incorporated (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT") engaged primarily in the
ownership, operation, management, leasing, acquisition, expansion and
development of various types of income-producing properties. As of June 30,
1999, the Company owned and operated 167 income-producing properties (the
"Properties," and each a "Property"). The Properties are comprised of 49 office
Properties, 40 office/flex Properties, 29 industrial Properties, 10 retail
Properties, 37 multifamily Properties and 2 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 $.001 par value Common Stock of the Company to the
Partnerships in exchange for the net assets of the Partnerships; (ii) merged
with Glenborough Corporation, with the Company being the surviving entity; (iii)
acquired an interest in three companies (the "Associated Companies"), two of
which merged on June 30, 1997, that provide asset and property management
services, as well as other services; and (iv) through a subsidiary operating
partnership, Glenborough Properties, L.P. (the "Operating Partnership"),
acquired interests in certain warehouse distribution facilities from GPA, Ltd.,
a California limited partnership ("GPA"). A portion of the Company's operations
are conducted through the Operating Partnership, of which the Company is the
sole general partner, and in which the Company holds a 87.30% limited partner
interest at June 30, 1999. The Company operates the assets acquired in the
Consolidation and in subsequent acquisitions (see further discussion below) and
intends to continue to invest in income-producing property directly and through
joint ventures. In addition, the Associated Companies may acquire general
partner interests in other real estate limited partnerships. The Company has
elected to qualify as a REIT under the Internal Revenue Code of 1986, as
amended. The common and preferred stock of the Company (the "Common Stock" and
the "Preferred Stock", respectively) are listed on the New York Stock Exchange
("NYSE") under the trading symbols "GLB" and "GLB Pr A", respectively.
Since the Consolidation, and consistent with its strategy for growth, the
Company has completed the following transactions:
Acquired 20 properties in 1996, 90 properties in 1997, 69 properties
in 1998 and 2 properties in 1999. The total acquired Properties
consist of an aggregate of approximately 15.8 million rentable square
feet of office, office/flex, industrial and retail space, 9,638
multifamily units and 227 hotel suites and had aggregate acquisition
costs, including capitalized costs, of approximately $1.8 billion.
From January 1, 1996 to the date of this filing, sold 52 properties
which were comprised of six office properties, thirteen office/flex
properties, eight industrial properties, 19 retail properties, two
multifamily properties and four hotel properties, to redeploy capital
into properties the Company believes have characteristics more suited
to its overall growth strategy and operating goals. 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 $287.5 million.
Issued $150 million of unsecured 7.625% Series A Senior Notes which
mature on March 15, 2005. In June 1999, $17.1 million of the Senior
Notes were retired at a discount which resulted in a gain on early
extinguishment of debt of approximately $1.8 million.
Entered into 4 development alliances to which the Company has made
advances of approximately $39 million and a loan (including accrued
interest) of $36.7 million as of June 30, 1999.
21
<PAGE>
The Company's principal business objectives are to achieve a stable and
increasing source of cash flow available for distribution to stockholders. By
achieving these objectives, the Company will seek to raise the value of its
shares over time.
Results of Operations
Comparison of the six months ended June 30, 1999 to the six months ended June
30, 1998.
Rental Revenue. Rental revenue increased $31,611,000, or 32%, to $129,193,000
for the six months ended June 30, 1999, from $97,582,000 for the six months
ended June 30, 1998. The increase included growth in revenue from the office,
industrial, office/flex, retail and multifamily Properties of $3,618,000,
$2,747,000, $1,122,000, $612,000 and $25,532,000, respectively. These increases
were partially offset by a $2,020,000 decrease in revenue from the hotel
Properties due to the 1998 and 1999 sales of four hotels. Excluding properties
that have been sold, rental revenue for the six months ended June 30, 1999,
included $11,165,000 generated from the 1996 Acquisitions, $43,863,000 generated
from the 1997 Acquisitions, $65,830,000 generated from the 1998 Acquisitions and
$1,200,000 generated from the 1999 Acquisitions. In addition, $7,135,000 of
rental revenue was generated from 21 properties that were sold during the six
months ended June 30, 1999.
Fees and Reimbursements from Affiliates. Fees and reimbursements from affiliates
consist primarily of property management fees, asset management fees and lease
commissions paid to the Company under property and asset management agreements
with the Managed Partnerships. This revenue increased $642,000, or 52%, to
$1,874,000 for the six months ended June 30, 1999, from $1,232,000 for the six
months ended June 30, 1998. The increase was primarily due to transaction and
management fees from GC.
Interest and Other Income. Interest and other income increased $2,834,000 to
$3,437,000 for the six months ended June 30, 1999, from $603,000 for the six
months ended June 30, 1998. The increase primarily consisted of interest income
on a mortgage loan receivable secured by land located in Aurora, Colorado which
originated on June 30, 1998, and interest earned on lender impound accounts,
invested cash balances and notes receivable for tenant improvements.
Equity in Earnings (Loss) of Associated Companies. Equity in earnings (loss) of
Associated Companies decreased $1,626,000 or 153%, to a loss of $565,000 for the
six months ended June 30, 1999, from earnings of $1,061,000 for the six months
ended June 30, 1998. The decrease is primarily due to a decrease in earnings
from GC resulting from a provision to reduce the carrying value of management
contracts with certain of the Managed Partnerships. This decrease is also due to
a decrease in earnings from GHG resulting from the sales and pending sales of
the Company's hotel properties which resulted in the June 30, 1998, cancellation
of GHG's hotel leases with the Company.
Net Gain on Sales of Real Estate Assets. A net gain on sales of real estate
assets of $7,093,000 during the six months ended June 30, 1999, resulted from
the sale of five office properties, nine office/flex properties, two industrial
properties, three retail properties, one multifamily property, one hotel and a
small interest in real estate securities from the Company's portfolio. The net
gain on sales of real estate assets of $2,139,000 during the six months ended
June 30, 1998, resulted from the sale of one multifamily property, two
industrial properties, two office/flex properties and two hotel properties from
the Company's portfolio.
Property Operating Expenses. Property operating expenses increased $13,272,000,
or 43%, to $43,861,000 for the six months ended June 30, 1999, from $30,589,000
for the six months ended June 30, 1998. This increase represents increases in
property operating expenses attributable to the 1998 Acquisitions and the 1999
Acquisitions offset by decreases in property operating expenses due to the 1998
and 1999 sales of properties.
General and Administrative Expenses. General and administrative expenses did not
change significantly with a decrease of $52,000, or 1%, to $4,773,000 for the
six months ended June 30, 1999, from $4,825,000 for the six months ended June
30, 1998. However, as a percentage of rental revenue, general and administrative
expenses decreased from 4.9% for the six months ended June 30, 1998, to 3.7% for
the six months ended June 30, 1999.
Depreciation and Amortization. Depreciation and amortization increased
$8,369,000, or 40%, to $29,312,000 for the six months ended June 30, 1999, from
22
<PAGE>
$20,943,000 for the six months ended June 30, 1998. The increase is primarily
due to depreciation and amortization associated with the 1998 Acquisitions and
1999 Acquisitions.
Interest Expense. Interest expense increased $14,106,000 or 75%, to $32,958,000
for the six months ended June 30, 1999, from $18,852,000 for the six months
ended June 30, 1998. Substantially all of the increase was the result of higher
average borrowings during the six months ended June 30, 1999, as compared to the
six months ended June 30, 1998, due to new debt and the assumption of debt
related to the 1998 Acquisitions and 1999 Acquisitions.
Net Loss on Early Extinguishment of Debt. Net loss on early extinguishment of
debt of $303,000 during the six months ended June 30, 1999, consists of a
$1,828,000 gain on the retirement of Senior Notes at a discount, offset by
$2,026,000 of prepayment penalties and $105,000 for the write-off of unamortized
loan fees upon the early payoff of four loans. These loans were paid-off early
when more favorable terms were obtained through new financing (discussed below)
and upon the sale of the properties securing the loans.
Comparison of the three months ended June 30, 1999 to the three months ended
June 30, 1998.
Rental Revenues. Rental revenues increased $12,933,000, or 25%, to $64,552,000
for the three months ended June 30, 1999, from $51,619,000 for the three months
ended June 30, 1998. The increase included growth in revenues from the
industrial, office/flex and multifamily Properties of $1,276,000, $168,000, and
$12,623,000, respectively. These increases were partially offset by decreases in
revenue from the office, retail and hotel Properties of $161,000, $241,000 and
$732,000, respectively. Excluding properties that have been sold, rental revenue
for the three months ended June 30, 1999, included $5,630,000 generated from the
1996 Acquisitions, $21,951,000 generated from the 1997 Acquisitions, $33,084,000
generated from the 1998 Acquisitions and $743,000 generated from the 1999
Acquisitions. In addition, $3,144,000 of rental revenue was generated from 14
properties that were sold during the three months ended June 30, 1999.
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 did not
change significantly with a decrease of $16,000, or 2%, to $743,000 for the
three months ended June 30, 1999, from $759,000 for the three months ended June
30, 1998.
Interest and Other Income. Interest and other income increased $1,532,000 to
$1,778,000 for the six months ended June 30, 1999, from $246,000 for the six
months ended June 30, 1998. The increase primarily consisted of interest income
on a mortgage loan receivable secured by land located in Aurora, Colorado which
originated on June 30, 1998, and interest earned on lender impound accounts,
invested cash balances and notes receivable for tenant improvements.
Equity in Earnings (Loss) of Associated Companies. Equity in earnings (loss) of
Associated Companies decreased $1,583,000, or 223%, to a loss of $874,000 for
the three months ended June 30, 1999, from earnings of $709,000 for the three
months ended June 30, 1998. The decrease is primarily due to a decrease in
earnings from GC resulting from a provision to reduce the carrying value of
management contracts with certain of the Managed Partnerships. This decrease is
also due to a decrease in earnings from GHG resulting from the sales and pending
sales of the Company's hotel properties which resulted in the June 30, 1998,
cancellation of GHG's hotel leases with the Company.
Net Gain on Sales of Real Estate Assets. The net gain on sales of real estate
assets of $5,742,000 during the three months ended June 30, 1999, resulted from
the sales of five office properties, four office/flex properties, two industrial
properties, one retail property, one multifamily property and one hotel property
from the Company's portfolio. The net gain on sales of rental properties of
$693,000 during the three months ended June 30, 1998, resulted from the sales of
one office/flex property and two hotel properties from the Company's portfolio.
Property Operating Expenses. Property operating expenses increased $5,595,000,
or 34%, to $21,860,000 for the three months ended June 30, 1999, from
$16,265,000 for the three months ended June 30, 1998. This increase represents
increases in property operating expenses attributable to the 1998 Acquisitions
and the 1999 Acquisitions offset by decreases in property operating expenses due
to the 1998 and 1999 sales of properties.
23
<PAGE>
General and Administrative Expenses. General and administrative expenses did not
change significantly with a decrease of $52,000, or 2%, to $2,551,000 for the
three months ended June 30, 1999, from $2,603,000 for the three months ended
June 30, 1998. However, as a percentage of rental revenue, general and
administrative expenses decreased from 5% for the three months ended June 30,
1998, to 4% for the three months ended June 30, 1999.
Depreciation and Amortization. Depreciation and amortization increased
$3,286,000, or 30%, to $14,220,000 for the three months ended June 30, 1999,
from $10,934,000 for the three months ended June 30, 1998. The increase is
primarily due to depreciation and amortization associated with the 1998
Acquisitions and 1999 Acquisitions.
Interest Expense. Interest expense increased $6,711,000, or 69%, to $16,418,000
for the three months ended June 30, 1999, from $9,707,000 for the three months
ended June 30, 1998. Substantially all of the increase was the result of higher
average borrowings during the three months ended June 30, 1999, as compared to
the three months ended June 30, 1998, due to new debt and the assumption of debt
related to the 1998 Acquisitions and 1999 Acquisitions.
Net Gain on Early Extinguishment of Debt. Net gain on early extinguishment of
debt of $1,688,000 during the three months ended June 30, 1999, consists of a
$1,828,000 gain on the retirement of Senior Notes at a discount, offset by a
$35,000 prepayment penalty and $105,000 for the write-off of unamortized loan
fees upon the early payoff of two mortgage loans. These loans were paid-off
early with proceeds from the sales of properties.
Liquidity and Capital Resources
Cash Flows
For the six months ended June 30, 1999, cash provided by operating activities
increased by $4,802,000 to $51,424,000 as compared to $46,622,000 for the same
period in 1998. The increase is primarily due to an increase in net income
(before depreciation and amortization, minority interest, net gain on sales of
real estate assets and net loss on early extinguishment of debt) of $6,536,000
due to the 1998 Acquisitions and 1999 Acquisitions. Cash from investing
activities increased by $682,298,000 to $79,976,000 of cash provided by
investing activities for the six months ended June 30, 1999, as compared to
$602,322,000 of cash used for investing activities for the same period in 1998.
The increase is primarily due to a decrease in property acquisitions in 1999 as
compared to the same period in 1998. During the six months ended June 30, 1998,
the Company acquired 58 properties as compared to two properties during the six
months ended June 30, 1999. This decrease is partially offset by an increase in
proceeds from sales of properties during 1999. Cash from financing activities
decreased by $691,414,000 to $133,756,000 of cash used for financing activities
for the six months ended June 30, 1999, as compared to $557,658,000 of cash
provided by financing activities for the same period in 1998. This change was
primarily due to a decrease in net proceeds from the issuance of stock and
proceeds from new debt. In 1998, the Company completed an offering of Preferred
Stock; there have been no offerings in 1999. In addition, in 1998, the Company
issued $150,000,000 of unsecured Series A Senior Notes.
The Company expects to meets its short-term liquidity requirements generally
through its working capital, its Credit Facility (as defined below) and cash
generated by operations. The Company believes that its cash generated by
operations will be adequate to meet operating requirements and to make
distributions in accordance with REIT requirements in both the short and the
long-term. In addition to cash generated by operations, the 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 the unsecured Credit Facility,
permanent secured debt financing, public unsecured debt financing, public and
private equity and debt issuances, the issuance of partnership units in the
Operating Partnership, proceeds from property sales and cash flow provided by
operations.
Mortgage Loans Receivable
Mortgage loans receivable increased from $42,420,000 at December 31, 1998, to
$43,982,000 at June 30, 1999. This increase was primarily due to accrued
interest on a loan made by the Company under a development alliance.
24
<PAGE>
Secured and Unsecured Financing
Mortgage loans payable decreased from $708,578,000 at December 31, 1998, to
$692,384,000 at June 30, 1999. This decrease resulted from the payoff of
approximately $51.6 million of mortgage loans in connection with 1999 sales of
properties and refinancing of debt, and scheduled principal payments of
approximately $4.7 million. This decrease is partially offset by the assumption
of a $14.1 million mortgage loan in connection with a 1999 Acquisition and new
financing of $26 million (as discussed below).
In March 1999, the Company obtained a $26 million loan from a commercial bank.
The loan was non-recourse and was secured by seven properties and had a maturity
date of December 22, 1999, with an option to extend for six months. The proceeds
were used to pay off a loan which was previously secured by these same
properties and to reduce other debt. This loan was paid off in June 1999 with
proceeds from the sales of four properties.
In June 1999, the Company retired $17,110,000 of the Series A Senior Notes at a
discount, which resulted in a gain on early extinguishment of debt of
approximately $1,828,000.
The Company has an unsecured line of credit provided by a commercial bank (the
"Credit Facility"). Outstanding borrowings under the Credit Facility decreased
from $63,519,000 at December 31, 1998, to $21,247,000 at June 30, 1999, due to
pay downs from proceeds from the sales of properties and refinancing of a
mortgage loan.
At June 30, 1999, the Company's total indebtedness included fixed-rate debt of
$694,661,000 and floating-rate indebtedness of $151,860,000. Approximately 64%
of the Company's total assets, comprising 101 properties, is encumbered by debt
at June 30, 1999.
It is the Company's policy to manage its exposure to fluctuations in market
interest rates through the use of fixed rate debt instruments to the extent
possible. At June 30, 1999, approximately 18% of the Company's outstanding debt,
including amounts borrowed under the Credit Facility, were subject to variable
rates. The Company may, from time to time, enter into interest rate protection
agreements intended to hedge the cost of new borrowings that are reasonably
assured of completion. It is not the Company's policy to engage in hedging
activities for previously outstanding debt instruments or for speculative
purposes. At June 30, 1999, the Company was not a party to any open interest
rate protection agreements.
Equity and Debt Offerings
In January 1999, the Operating Partnership and the Company filed a shelf
registration statement with the SEC (the "January 1999 Shelf Registration
Statement") to register $300 million of debt securities of the Operating
Partnership and to carry forward the remaining $801.2 million in equity
securities of the Company from a November 1997 shelf registration statement
(declared effective by the SEC on December 18, 1997). The January 1999 Shelf
Registration Statement was declared effective by the SEC on January 25, 1999.
Therefore, the Operating Partnership and the Company have the capacity pursuant
to the January 1999 Shelf Registration Statement to issue up to $300 million in
debt securities and $801.2 million in equity securities, respectively. The
Company currently has no plans to issue equity or debt under these shelf
registrations.
Development Alliances
The Company has formed 4 development alliances for the development of
approximately 713,000 square feet of office, office/flex and distribution
properties and 1,710 multifamily units in North Carolina, Colorado, Texas, New
Jersey, Kansas and Michigan. As of June 30, 1999, the Company has advanced
approximately $39 million. Under these development alliances, the Company has
certain rights to purchase the properties upon completion of development over
the next five years. In addition, the Company has loaned approximately $36.7
million (including accrued interest) under another development alliance to
continue the build-out of a 1,200 acre master-planned development in Denver,
Colorado.
Inflation
Substantially all of the leases at the office/flex, industrial and 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 multifamily properties generally provide for an initial term of
one month or one year and allow for rent adjustments at the time of renewal.
25
<PAGE>
Leases at the office Properties typically provide for rent adjustment and
pass-through of certain operating expenses during the term of the lease. All of
these provisions may permit the Company to increase rental rates or other
charges to tenants in response to rising prices and therefore, serve to reduce
the Company's exposure to the adverse effects of inflation.
Funds from Operations and Cash Available for Distribution
Funds from Operations, as defined by NAREIT, represents income (loss) before
minority interests and extraordinary items, adjusted for real estate related
depreciation and amortization and gains (losses) from the disposal of
properties. The Company believes that FFO is an important and widely used
measure of the financial performance of equity REITs which provides a relevant
basis for comparison among other REITs. Together with net income and cash flows,
FFO provides investors with an additional basis to evaluate the ability of a
REIT to incur and service debt and to fund acquisitions, developments and other
capital expenditures. FFO does not represent net income or cash flows from
operations as defined by GAAP, and should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indicator of the Company's
operating performance or as an alternative to cash flows from operating,
investing and financing activities (determined in accordance with GAAP) as a
measure of liquidity. FFO does not necessarily indicate that cash flows will be
sufficient to fund all of the Company's cash needs including principal
amortization, capital improvements and distributions to stockholders. Further,
FFO as disclosed by other REITs may not be comparable to the Company's
calculation of FFO. The Company calculates FFO in accordance with the White
Paper on FFO approved by the Board of Governors of NAREIT in March 1995.
Cash available for distribution ("CAD") represents net income (loss) before
minority interests and extraordinary items, adjusted for depreciation and
amortization including amortization of deferred financing costs and gains
(losses) from the disposal of properties, less lease commissions and recurring
capital expenditures, consisting of tenant improvements and normal expenditures
intended to extend the useful life of the property such as roof and parking lot
repairs. CAD should not be considered an alternative to net income (computed in
accordance with GAAP) as a measure of the Company's financial performance or as
an alternative to cash flow from operating activities (computed in accordance
with GAAP) as a measure of the Company's liquidity, nor is it necessarily
indicative of sufficient cash flow to fund all of the Company's cash needs.
Further, CAD as disclosed by other REITs may not be comparable to the Company's
calculation of CAD.
26
<PAGE>
The following table sets forth the Company's calculation of FFO and CAD for the
three months ended March 31 and June 30, 1999 (in thousands, except weighted
average shares and per share amounts):
<TABLE>
<CAPTION>
March 31, June 30, YTD
1999 1999 1999
------------- ------------- ----------------
<S> <C> <C> <C>
Net income before minority interest $ 13,236 $ 16,892 $ 30,128
Preferred dividend requirement (5,570) (5,570) (11,140)
Net gain on sales of rental properties (1,351) (5,742) (7,093)
Depreciation and amortization (1) 14,947 14,075 29,022
Adjustment to reflect FFO of Associated
Companies (2) 253 2,170 2,423
------------- ------------- ----------------
FFO $ 21,515 $ 21,825 $ 43,340
============= ============= ================
Amortization of deferred financing fees 485 508 993
Capital reserve (1,465) 994 (471)
Capital expenditures (2,573) (5,392) (7,965)
------------- ------------- ----------------
CAD $ 17,962 $ 17,935 $ 35,897
============= ============= ================
Distributions per share (3) $ 0.42 $ 0.42 $ 0.84
============= ============= ================
Diluted weighted average shares outstanding 36,098,374 35,984,107 36,040,578
============= ============= ================
</TABLE>
(1) Excludes depreciation of corporate office fixed assets.
(2) Reflects the adjustments to FFO required to reflect the FFO of the
Associated Companies allocable to the Company. The Company's investments in
the Associated Companies are accounted for using the equity method of
accounting.
(3) The distributions for the three months ended June 30, 1999, were paid on
July 15, 1999.
Forward Looking Statements; Factors That May Affect Operating Results
This Report on Form 10-Q contains forward looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934, including statements regarding the Company's
expectations, hopes, intentions, beliefs and strategies regarding the future
including the Company's belief that cash generated by operations will be
adequate to meet operating requirements and to make distributions, the Company's
expectations as to the timing of the completion of the development projects
through its development alliances and the acquisition by the Company of
properties developed through its development alliances. There can be no
assurance that the actual outcomes or results will be consistent with such
expectations, hopes, intentions, beliefs and strategies. Forward looking
statements include statements regarding potential acquisitions, the anticipated
performance of future acquisitions, recently completed acquisitions and existing
properties, and statements regarding the Company's financing activities. All
forward looking statements included in this document are based on information
available to the Company on the date hereof. It is important to note that the
Company's actual results could differ materially from those stated or implied in
such forward-looking statements.
Factors which may cause the Company's results to differ include the inability to
complete anticipated future acquisitions, defaults or non-renewal of leases,
increased interest rates and operational costs, failure to obtain necessary
outside financing, difficulties in identifying properties to acquire and in
effecting acquisitions, failure to qualify as a real estate investment trust
under the Internal Revenue Code of 1986, environmental uncertainties, risks
related to natural disasters, financial market fluctuations, changes in real
27
<PAGE>
estate and zoning laws, increases in real property tax rates and other factors
discussed under the caption "Forward Looking Statements; Factors That May Affect
Operating Results" in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, and other risk factors set forth
in the Company's other Securities and Exchange Commission filings. In addition,
past performance of the Company's Common Stock is not necessarily indicative of
results that will be obtained in the future from an investment in the Company's
Common Stock. Furthermore, the Company makes distributions to stockholders if,
as and when declared by its Board of Directors, and expects to continue its
policy of paying quarterly distributions, however, there can be no assurance
that distributions will continue or be paid at any specific level.
Impact of Year 2000 Compliance Costs on Operations
State of Readiness. The Company uses a number of computer software programs and
operating systems across the entire organization. These programs and systems
primarily comprise (i) information technology systems ("IT Systems") (i.e.,
software programs and computer operating systems) that serve management
operations, and (ii) embedded systems such as devices used to control, monitor
or assist the operation of equipment and machinery systems (e.g., HVAC, fire
safety and security) at the Company's properties ("Property Systems"). 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 these applications will be
necessary.
IT Systems. Employing a team made up of internal personnel and
third-party consultants, the Company has completed its identification
of IT Systems, including hardware components, that are not yet Year
2000 compliant. To the best of the Company's knowledge, based on
available information and a reasonable level of inquiry and
investigation, the Company has completed such upgrading of such
systems that it believes are called for under the circumstances, and
in accordance with prevailing industry practice. The Company has
commenced a testing program which it anticipates will be completed
during 1999. In addition, the Company is currently communicating with
third parties with whom it does significant business, such as
financial institutions, tenants and vendors, to determine their
readiness for Year 2000 compliance.
Property Systems. Employing a team made up of internal personnel and
third-party consultants, the Company has also completed its
identification of Property Systems, including hardware components,
that are not yet Year 2000 compliant. The Company has commenced such
upgrading of such systems that it believes are called for under the
circumstances, based on available information and a reasonable level
of inquiry and investigation, and in accordance with prevailing
industry practice. Upon completion of such upgrading, the Company will
initiate a testing program which it anticipates will be completed
during 1999. To the best of the Company's knowledge, there are no
Property Systems, the failure of which would have a material effect on
operations.
Costs of Addressing the Company's Year 2000 Issues. Given the information known
at this time about the Company's systems that are non-compliant, coupled with
its ongoing, normal course-of-business efforts to upgrade or replace critical
systems, as necessary, the Company does not expect Year 2000 compliance costs to
have any material adverse impact on liquidity or ongoing results of operations.
The costs of such assessment and remediation will be paid as an operating
expense.
Risks of the Company's Year 2000 Issues. In light of the Company's assessment
and upgrading efforts to date, and assuming completion of the planned, normal
course-of-business upgrades and subsequent testing, the Company believes that
any residual Year 2000 risk will be limited to non-critical business
applications and support hardware, and to short-term interruptions affecting
Property Systems which, if they occur at all, will not be material to overall
operations. The Company believes that all of its systems will be Year 2000
compliant and that compliance will not materially adversely affect its future
liquidity or results of operations or ability to service debt, but the Company
cannot give absolute assurance that this is the case.
28
<PAGE>
The Company's Contingency Plans. The Company is currently developing its
contingency plans for all operations to address the most reasonably likely worst
case scenarios regarding Year 2000 compliance. Such plans, however, will
recognize material limitations on the Company's ability to plan for major
regional or industrial failures such as regional power outages or regional or
industrial communications breakdowns. The Company expects such contingency plans
to be completed during 1999.
Risk Factors
Stockholders or potential stockholders should read the "Risk Factors" section of
the Company's latest annual report on Form 10-K filed with the Securities and
Exchange Commission ("SEC") in conjunction with this quarterly report on Form
10-Q to better understand the factors affecting the Company's results of
operations and the Company's common stock share price. The fact that some of the
risk factors may be the same or similar to the Company's past filings means only
that the risks are present in multiple periods. The Company believes that many
of the risks detailed here and in the Company's other SEC filings are part of
doing business in the real estate industry and will likely be present in all
periods reported. The fact that certain risks are endemic to the industry does
not lessen the significance of the risk.
29
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Blumberg. On July 24, 1999, the Supreme Court of the United States, denied a
petition for a writ of certiorari to review the Company's settlement of a class
action complaint originally filed on February 21, 1995 in connection with the
Consolidation. No further appeals are possible in this case, and the settlement
amount has been paid in full. Under the settlement, the Company agreed to pay
$855,000 to settle certain claims by Anthony E. Blumberg, and others (the
"Blumberg Action"), that the Company and others had, among other things,
breached their fiduciary duty and duty of good faith and fair dealing to
investors in the Partnerships involved in the Consolidation. Certain parties
objected to the settlement, but the settlement was approved (or review denied)
by the Superior Court of the State of California in and for San Mateo County,
the California state court of appeals, the California Supreme Court and the
Supreme Court of the United States.
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 in the BEJ
Action voluntarily stayed the action pending resolution of the Blumberg Action.
The plaintiffs in the BEJ Action are BEJ Equity Partners and others, who as a
group held limited partner interests in certain of the Partnerships included in
the Consolidation, on behalf of themselves and all others similarly situated.
The defendants are the Company and other Glenborough entities involved in the
Consolidation, as well as Robert Batinovich and Andrew Batinovich. The
Partnerships are named as nominal defendants.
This action alleges certain disclosure violations and substantially the same
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 is without merit, and management
intends to pursue a vigorous defense. However, given the inherent uncertainties
of litigation, there can be no assurance that the ultimate outcome in the BEJ
Action 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
There were no matters submitted to a vote of security holders during the quarter
ended June 30, 1999.
30
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The Exhibit Index attached hereto is hereby incorporated by
reference to this item.
(b) Reports on Form 8-K:
On April 22, 1999, the Company filed a report on Form 8-K with
respect to Supplemental Information for the quarter ended
March 31, 1999.
On July 28, 1999, the Company filed a report on Form 8-K with
respect to Supplemental Information for the quarter ended June
30, 1999.
31
<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: August 13, 1999 /s/ Andrew Batinovich
Andrew Batinovich
Director, President
and Chief Operating Officer
(Principal Operating Officer)
Date: August 13, 1999 /s/ Stephen Saul
Stephen Saul
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 1999 /s/ Terri Garnick
Terri Garnick
Senior Vice President,
Chief Accounting Officer,
Treasurer
(Principal Accounting Officer)
32
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Title
11.1 Statement re: Computation of Per Share Earnings is shown in Note
9 of the Consolidated Financial Statements of the Company in Item
1.
12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Fixed Charges and Preferred Dividends.
27.1 Financial Data Schedule.
33
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12.1
GLENBOROUGH REALTY TRUST INCORPORATED Computation of Ratio of Earnings to Fixed
Charges and Ratio of Earnings to Fixed Charges and Preferred Dividends For the
five years ended December 31, 1998 and the three months ended March 31, 1999 and
June 30, 1999 (in thousands)
GRT Predecessor
Entities,
Combined The Company
----------------------- ---------------------------------------------------------------------------
Three Months Three Months
Ended Ended Year To
Year Ended December 31, March 31, June 30, Date
------------------------------------------------------------- ------------ ----------- ----------
1994 1995 1996 1997 1998 1999 1999 1999
---------- ---------- ---------- ---------- ------------ ------------ ----------- ----------
EARNINGS, AS DEFINED
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Preferred Dividends(2) $ 1,580 $ 524 $ (1,609) $19,368 $ 44,602 $ 10,578 $ 17,051 $ 27,629
Extraordinary items -- -- 186 843 1,400 1,991 (1,688) 303
Federal & State income taxes 176 357 -- -- -- -- -- --
Minority Interest 43 -- 292 1,119 2,550 667 1,529 2,196
Fixed Charges 1,140 2,129 3,913 9,668 53,289 16,540 16,418 32,958
---------- ---------- ---------- ---------- ------------ ------------- ----------- ---------
$ 2,939 $ 3,010 $ 2,782 $30,998 $ 101,841 $ 29,776 $ 33,310 $ 63,086
---------- ---------- ---------- ---------- ------------ ------------- ----------- ---------
FIXED CHARGES AND PREFERRED
DIVIDENDS, AS DEFINED
Interest Expense $ 1,140 $ 2,129 $ 3,913 $ 9,668 $ 53,289 $ 16,540 $ 16,418 $ 32,958
Capitalized Interest -- -- -- -- 1,108 643 687 1,330
Preferred Dividends -- -- -- -- 20,620 5,570 5,570 11,140
---------- ---------- ---------- ---------- ------------ ------------- ----------- ---------
$ 1,140 $ 2,129 $ 3,913 $ 9,668 $ 75,017 $ 22,753 $ 22,675 $ 45,428
RATIO OF EARNINGS TO FIXED
CHARGES(3) 2.58 1.41 0.71 (1) 3.21 1.87 1.73 1.95 1.84
---------- ---------- ---------- ---------- ------------ ------------- ----------- ---------
RATIO OF EARNINGS TO FIXED
CHARGES AND PREFERRED
DIVIDENDS(3) 2.58 1.41 0.71 (1) 3.21 1.36 1.31 1.47 1.39
---------- ---------- ---------- ---------- ------------ ------------- ----------- --------
</TABLE>
(1) For the twelve months ended December 31, 1996, earnings were insufficient to
cover fixed charges by $1,131. (2) Net Income (Loss) before Preferred Dividends
includes depreciation and amortization expense as a deduction.
(3) Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges
and Preferred Dividends includes depreciation and amortization expense as a
deduction from earnings.
34
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0
11
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