SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-14162
GLENBOROUGH REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
Maryland 94-3211970
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 South El Camino Real, 94402-1708
Suite 1100 San Mateo, California - (650) 343-9300 (Zip Code)
(Address of principal executive offices
and telephone number)
Securities registered under Section 12(b) of the Act:
Name of Exchange
Title of each class: on which registered:
Common Stock, $.001 par value New York Stock Exchange
7-3/4% Series A Convertible Preferred Stock, 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ]
As of March 10, 1999, the aggregate market value of the voting stock held
by nonaffiliates of the registrant was $532,582,829. The aggregate market value
was computed with reference to the closing price on the New York Stock Exchange
on such date. This calculation does not reflect a determination that persons are
affiliates for any other purpose.
As of March 10, 1999, 31,739,539 shares of Common Stock ($.001 par value)
and 11,500,000 shares of 7-1/4% Series A Convertible Preferred Stock $.001 par
value) were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Portions of the Registrant's definitive proxy statement to be
issued in conjunction with the Registrant's annual stockholder's meeting to be
held on May 7, 1999.
EXHIBITS:The index of exhibits is contained in Part IV herein on page number 77.
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TABLE OF CONTENTS
Page No.
PART I
Item 1 Business 3
Item 2 Properties 6
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security
Holders 15
PART II
Item 5 Market for Registrant's Common Stock and
Related Stockholder Matters 15
Item 6 Selected Financial Data 16
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 8 Financial Statements and Supplementary Data 36
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 36
PART III
Item 10 Directors and Executive Officers of the
Registrant 37
Item 11 Executive Compensation 37
Item 12 Security Ownership of Certain Beneficial
Owners and Management 37
Item 13 Certain Relationships and Related Transactions 37
PART IV
Item 14 Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 38
Page 2
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PART I
Item 1. Business
General Development and Description of Business
Glenborough Realty Trust Incorporated (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT") engaged primarily in the
ownership, operation, management, leasing, acquisition, expansion and
development of various types of income-producing properties. As of December 31,
1998, the Company owned and operated 186 income-producing properties (the
"Properties," and each a "Property"). The Properties are comprised of 54 office
Properties, 49 office/flex Properties, 30 industrial Properties, 13 retail
Properties, 37 multi-family Properties and 3 hotel Properties, located in 24
states.
The Company was incorporated in the State of Maryland on August 26, 1994. On
December 31, 1995, the Company completed a consolidation (the "Consolidation")
in which Glenborough Corporation, 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 87.25% limited partner
interest at December 31, 1998. 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 and 69 properties in
1998. In addition, the Company has acquired two properties subsequent to
December 31, 1998. The total acquired Properties consist of an aggregate of
approximately 15.7 million rentable square feet of office, office/flex,
industrial and retail space, 9,638 multi-family units and 227 hotel suites
and had aggregate acquisition costs, including capitalized costs, of
approximately $1.8 billion.
From January 1, 1996 to the date of this filing, sold 35 properties which
were comprised of one office property, seven 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.
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Entered into 4 development alliances to which the Company has made advances
of approximately $33 million and a loan of $35 million as of December 31,
1998.
The Company's principal business objectives are to achieve a stable and
increasing source of cash flow available for distribution to stockholders. By
achieving these objectives, the Company will seek to raise stockholder value
over time.
The Associated Companies
Glenborough Corporation. Glenborough Corporation ("GC"), a California
corporation, serves as general partner of various real estate limited
partnerships (the "Managed Partnerships") for whom it provides asset and
property management services. It also provides property management services for
a limited portfolio of property owned by unaffiliated third parties.
The Company owns 100% of the 38,000 shares (representing 95% of total out-
standing shares) of non-voting preferred stock of GC. Four individuals,
including Sandra L. Boyle and Frank E. Austin, executive officers of the
Company, own the 2,000 shares (representing 5% of total outstanding shares) of
voting common stock of GC. The Company and GC intend that the Company's interest
in GC complies with REIT qualification standards.
The Company, through its ownership of preferred stock of GC, is entitled to
receive cumulative, preferred annual dividends of $1.58 per share, which GC must
pay before it pays any dividends with respect to the common stock of GC. Once GC
pays the required cumulative preferred dividend, it will pay any additional
dividends in equal amounts per share on both the preferred stock and the common
stock at 95% and 5%, respectively. Through the preferred stock, the Company is
also entitled to receive a preferred liquidation equal to $159.24 per share plus
all cumulative and unpaid dividends. The preferred stock is subject to
redemption at the option of GC after December 31, 2005, for a redemption price
of $159.24 per share. As the holder of preferred stock of GC, the Company has no
voting power with respect to the election of the directors of GC; all power to
elect directors of GC is held by the owners of the common stock of GC.
This structure is intended to provide the Company with a significant portion of
the economic benefits of the operations of GC. The Company accounts for the
financial results of GC using the equity method.
Glenborough Hotel Group. Glenborough Hotel Group ("GHG"), through June 1998,
leased the six Country Suites by Carlson hotels owned by the Company and
operated them for its own account. In June 1998, two of the hotels were sold and
the other four hotels were leased to other operators. GHG also operated one
other Country Suites by Carlson hotel through June 30, 1998, and two resort
condominium hotels through April 30, 1998, under separate contracts. In August
1998, GHG acquired an interest in a real estate joint venture.
The Company owns 100% of the 50 shares of non-voting preferred stock of GHG.
Three individuals, one of whom, Terri Garnick, is an executive officer of the
Company, each own 33 1/3% of the 1,000 shares of voting common stock of GHG. The
Company and GHG intend that the Company's interest in GHG complies with REIT
qualification standards.
The Company, through its ownership of preferred stock, is entitled to receive
cumulative, preferred annual dividends of $600 per share, which GHG must pay
before it pays any dividends with respect to the common stock. Once GHG pays the
required cumulative preferred dividend, it will pay 75% of any additional
dividends to holders of the preferred stock and 25% to holders of the common
stock. Through the preferred stock, the Company is also entitled to receive a
preferred liquidation value of $40,000 per share plus all cumulative and unpaid
dividends. The preferred stock will be subject to redemption at the option of
GHG after December 31, 1999, for a redemption price of $40,000 per share. As the
holders of preferred stock of GHG, the Company has no voting power with respect
to
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the election of the directors of GHG; all power to elect directors of GHG is
held by the owners of the common stock of GHG.
This structure is intended to provide the Company with a significant portion of
the economic benefits of the operations of GHG. The Company accounts for the
financial results of GHG using the equity method.
Employees
As of December 31, 1998, the Company and the Associated Companies had
approximately 535 full-time employees.
Competition
For Tenants
The Company's Properties compete for tenants with similar properties located in
their markets. Management believes that characteristics influencing the
competitiveness of a real estate project include the geographic location of the
property, the professionalism of the property manager and the maintenance and
appearance of the property, in addition to external factors such as general
economic circumstances, trends, and the existence of new competing properties in
the general area in which the Company's properties are located.
Additional competitive factors with respect to commercial properties include the
ease of access to the property, the adequacy of related facilities, such as
parking, and the ability to provide rent concessions and additional tenant
improvements commensurate with local market conditions. Such competition may
lead to rent concessions that could adversely affect the Company's cash flow.
Although the Company believes its Properties are competitive with comparable
properties as to those factors within the Company's control, over-building and
other external factors could adversely affect the ability of the Company to
attract and retain tenants.
For Acquisitions of Real Estate
The Company experiences competition when attempting to acquire equity interests
in desirable real estate, including competition from domestic and foreign
financial institutions, other REITs, life insurance companies, pension funds,
trust funds, partnerships and individual investors. In competing for such
acquisitions, the Company has not given value guarantees in connection with
Operating Partnership units or stock issued in such acquisitions.
For Capital
The Company competes with other REITs and investors and owners for debt and
equity financing. The Company's ability to attract debt and equity capital at
favorable rates is impacted in part by its positioning in the marketplace
relative to similar investments. Factors impacting this include, among other
things, the perceived quality of the Company's portfolio and the risk adjustment
sources of capital give to the returns they expect from their investments. In
competing for capital, the Company has not entered into any forward equity
commitments or other arrangements which would subject the Company to risks tied
to changes in the market value of its equity securities.
Working Capital
The Company's practice is to maintain cash reserves for normal repairs,
replacements, improvements, working capital and other contingencies while
minimizing interest expense. Available cash is kept to a minimum by using
available funds to reduce the outstanding balance on the Company's unsecured
line of credit and drawing on it when necessary.
Other Factors
The Company's ability to achieve operational and capital targets is impacted by
economic conditions in the markets in which its Properties are located and by
broader factors such as prevailing interest rates and the general availability
of capital at favorable rates, both debt and equity, for real estate
investments. Local economic downturns may adversely effect the occupancy and
rental rates of the Company's Properties. A lack of available capital may hinder
the Company's acquisition and development program or cause it to look to other
types of transactions, such as asset redeployments, to generate needed
liquidity.
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Compliance with laws and regulations regarding the discharge of materials into
the environment, or otherwise relating to the protection of the environment, is
not expected to have any material effect upon the capital expenditures, earnings
and competitive position of the Company.
The Properties have each been subject to Phase I Environmental Assessments and,
where such an assessment indicated it was appropriate, Phase II Environmental
Assessments (collectively, the "Environmental Reports") have been conducted.
These reports have not indicated any significant environmental issues.
In the event that pre-existing environmental conditions not disclosed in the
Environmental Reports which require remediation are subsequently discovered, the
cost of remediation will be borne by the Company. Additionally, no assurances
can be given that (i) future laws, ordinances, or regulations will not impose
any material environmental liability, (ii) the current environmental condition
of the Properties has not been or will not be affected by tenants and occupants
of the Properties, by the condition of properties in the vicinity of the
Properties or by third parties unrelated to the Company or (iii) that the
Company will not otherwise incur significant liabilities associated with costs
of remediation relating to the Properties.
Item 2. Properties
The Location and Type of the Company's Properties
The Company's 186 Properties are diversified by type (office, office/flex,
industrial, retail, multi-family and hotel) and are located in four geographic
regions and 24 states within the United States comprising 35 local markets. The
following table sets forth the location, type and size of the Properties (by
rentable square feet and/or units) along with average occupancy as of December
31, 1998.
<TABLE>
<CAPTION>
Office Office/Flex Industrial Retail Multi-Family
Square Square Square Square Units Hotel Rooms No. of
Region Footage Footage Footage Footage Properties
- ------------------ ------------ ------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
West 885,857 2,051,831 1,427,744 394,222 958 283 58
Midwest 1,877,099 872,596 1,067,884 377,157 670 - 36
East 2,759,270 845,510 945,220 45,546 1,385 - 46
South 1,478,883 790,582 657,232 422,240 6,340 132 46
------------ ------------- ------------ ------------- ------------- ------------- -------------
Total 7,001,109 4,560,519 4,098,080 1,239,165 9,353 415 186
============ ============= ============ ============= ============= ============= =============
No. of Properties 54 49 30 13 37 3
Average Occupancy 92% 90% 98% 94% 93% 57%
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, no tenant contributed 10%
or more of the total rental revenue of the Company. The largest tenant's annual
rent was approximately 1.9% of total rental revenues for the year ended December
31, 1998. A complete listing of Properties owned by the Company at December 31,
1998 is included as part of Schedule III in Item 14.
Office Properties
The Company owns 54 office Properties with total rentable square footage of
7,001,109. The office Properties range in size from 14,255 square feet to
570,151 square feet, and have lease terms ranging from one to 35 years. The
office leases generally require the tenant to reimburse the Company for
increases in building operating costs over a base amount. Certain of the leases
provide for rent increases that are either fixed or based on a consumer price
index ("CPI"). As of December 31, 1998, the average occupancy of the office
Properties was 92%.
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The following table sets forth, for the periods specified, the total
rentable area, average occupancy, average effective base rent per leased square
foot and total effective annual base rent.
<TABLE>
<CAPTION>
Office Properties
Historical Rent and Occupancy
Average Effective Total Effective
Total Rentable Average Occupancy Base Rent per Annual Base Rent
Year Area (Sq. Ft.) Leased Sq. Ft.(1) ($000s)(2) (3)
(3)
- ------------------ ----------------- -------------------- -------------------- -----------------
<S> <C> <C> <C> <C>
1998 7,001,109 92% $ 16.04 $ 103,314
1997 2,921,361 93 15.81 42,954
1996 641,923 94 13.19 7,918
1995 106,076 97 11.91 1,228
1994 105,770 88 11.44 1,065
(1) Total Effective Annual Base Rent divided by Average Occupancy in square feet. As used herein, "Effective
Base Rent" represents base rent less concessions.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the period.
(3) In any given year, base rents are presented on an annualized basis based on results since the acquisition
for properties that were acquired during the year.
</TABLE>
The following table sets forth the contractual lease expirations for leases for
the office Properties as of December 31, 1998.
<TABLE>
<CAPTION>
Office Properties (5)
Lease Expirations
Percentage of Total
Number of Rentable Square Annual Base Rent Annual Base Rent
Expiration Year Expiring Leases Footage Subject to Under Expiring Represented by
Expiring Leases Leases ($000s) Expiring Leases (1)
- ------------------ ----------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
1999 (4) 234 1,114,169 $ 15,678 14.7%
2000 144 1,064,151 18,451 17.3
2001 166 960,697 16,588 15.6
2002 100 978,477 18,129 17.0
2003 81 406,689 7,825 7.4
Thereafter 113 1,695,936 29,783 28.0
================= ==================== ==================== ====================
Total 838 6,220,119 (2) $ 106,454 (3) 100.0%
================= ==================== ==================== ====================
(1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for
contractual increases).
(2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for
the difference between this figure and "Total Rentable Area" in the preceding table (which includes
vacant space).
(3) This figure is based on square footage actually leased and incorporates contractual rent increases
arising after 1998, and thus differs from "Total Effective Annual Base Rent" in the preceding table,
which is based on 1998 rents.
(4) Includes leases that have initial terms of less than one year.
(5) Numbers exclude the corporate headquarters building.
</TABLE>
Office/Flex Properties
The Company owns 49 office/flex Properties aggregating 4,560,519 square feet.
The office/flex Properties are designed for a combination of office and
warehouse uses with greater than 10% of the rentable square footage containing
office finish. The office/flex Properties range in size from 27,414 square feet
to 300,894 square feet, and have lease terms ranging from one to 23 years. Most
of the office/flex leases are "triple net" leases whereby the
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tenants are required to pay their pro rata share of the Properties' operating
costs, common area maintenance, property taxes, insurance, and non-structural
repairs. Some of the leases are "industrial gross" leases whereby the tenant
pays as additional rent its pro rata share of common area maintenance and repair
costs and its share of the increase in taxes and insurance over a specified base
year cost. Certain of these leases call for fixed or CPI-based rent increases.
As of December 31, 1998, the average occupancy of the office/flex Properties was
90%.
The following table sets forth, for the periods specified, the total rentable
area, average occupancy, average effective base rent per leased square foot and
total effective annual base rent.
<TABLE>
<CAPTION>
Office/Flex Properties
Historical Rent and Occupancy
Average Effective Total Effective
Total Rentable Average Occupancy Base Rent per Annual Base Rent
Year (4) Area (Sq. Ft.) Leased Sq. Ft. (1) ($000s)(2) (3)
(3)
- ------------------ ----------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
1998 4,560,519 90% $ 7.61 $ 31,235
1997 3,523,695 91 7.17 22,991
1996 247,506 96 5.50 1,307
(1) Total Effective Annual Base Rent divided by Average Occupancy in square feet. As used herein, "Effective Base
Rent" represents base rent less concessions.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the period.
(3) In any given year, base rents are presented on an annualized basis based on results since the acquisition for
properties that were acquired during the year.
(4) Prior to 1996, Properties currently classified as Office/Flex Properties were included in Industrial
Properties. See Industrial Properties table below.
</TABLE>
The following table sets forth the contractual lease expirations for leases for
the office/flex Properties as of December 31, 1998.
<TABLE>
<CAPTION>
Office/Flex Properties
Lease Expirations
Percentage of Total
Number of Rentable Square Annual Base Rent Annual Base Rent
Expiration Year Expiring Leases Footage Subject to Under Expiring Represented by
Expiring Leases Leases ($000s) Expiring Leases (1)
- ------------------ ----------------- -------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
1999 188 915,672 $ 6,565 20.6%
2000 105 641,225 4,714 14.8
2001 102 677,313 4,928 15.5
2002 32 417,161 3,447 10.9
2003 46 480,707 4,488 14.1
Thereafter 29 833,279 7,674 24.1
================= ==================== ==================== ======================
Total 502 3,965,357 (2) $ 31,816 (3) 100.0%
================= ==================== ==================== ======================
(1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for
contractual increases).
(2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the
difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space).
(3) This figure is based on square footage actually leased and incorporates contractual rent increases arising
after 1998, and thus differs from "Total Effective Annual Base Rent" in the preceding table, which is based
on 1998 rents.
</TABLE>
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Industrial Properties
The Company owns 30 industrial Properties aggregating 4,098,080 square feet. The
industrial Properties are designed for warehouse, distribution and light
manufacturing, ranging in size from 32,500 square feet to 474,426 square feet.
As of December 31, 1998, 16 of the industrial Properties were leased to multiple
tenants, 14 were leased to single tenants, and all 14 of the single-tenant
Properties are adaptable in design to multi-tenant use. As of December 31, 1998,
the average occupancy of the industrial Properties was 98%.
Four of the single-tenant Properties are leased to two tenants having five years
remaining on leases whose original terms were 20 years. The terms of these
leases include rent increases every three years based on all or a percentage of
the change in the CPI. Under these leases the tenants are required to pay for
all of the Properties' operating costs, such as common area maintenance,
property taxes, insurance, and all repairs including structural repairs. Each
lease gives the respective tenant a purchase option exercisable on March 1, 2002
for an amount equal to the greater of the appraised value or a specified minimum
price. Management believes, based on discussions with both tenants, that neither
tenant has any present intention to exercise any option to purchase.
The remaining industrial Properties have leases whose terms range from 1 to 25
years. Most of the leases are "triple net" leases whereby the tenants are
required to pay their pro rata share of the Properties' operating costs, common
area maintenance, property taxes, insurance, and non- structural repairs. Some
of the leases are "industrial gross" leases whereby the tenant pays as
additional rent its pro rata share of common area maintenance and repair costs
and its share of the increase in taxes and insurance over a specified base year
cost. Certain of these leases call for fixed or CPI-based rent increases.
The following table sets forth, for the periods specified, the total rentable
area, average occupancy, average effective base rent per leased square foot and
total effective annual base rent for the industrial Properties.
<TABLE>
<CAPTION>
Industrial Properties
Historical Rent and Occupancy
Average Effective Total Effective
Total Rentable Average Occupancy Base Rent per Annual Base Rent
Year (4) Area (Sq. Ft.) Leased Sq. Ft.(1) ($000s)(2) (3)
(3)
- ------------------ ----------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
1998 4,098,080 98% $ 3.91 $ 15,703
1997 3,533,510 97 3.36 11,516
1996 1,778,862 99 2.41 4,244
1995 1,491,827 100 2.29 3,405
1994 1,491,827 100 2.29 3,401
(1) Total Effective Annual Base Rent divided by Average Occupancy in square feet.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the period.
(3) In any given year, base rents are presented on an annualized basis based on results since the acquisition for
properties that were acquired during the year.
(4) Prior to 1996, Properties currently classified as Office/Flex Properties were included in Industrial
Properties.
</TABLE>
The following table sets forth the contractual lease expirations for leases for
the industrial Properties as of December 31, 1998.
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<PAGE>
<TABLE>
<CAPTION>
Industrial Properties
Lease Expirations
Percentage of Total
Number of Rentable Square Annual Base Rent Annual Base Rent
Expiration Year Expiring Leases Footage Subject to Under Expiring Represented by
Expiring Leases Leases ($000s) Expiring Leases (1)
- ------------------ ----------------- -------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
1999 23 411,592 $ 1,830 10.7%
2000 20 402,674 1,700 10.0
2001 19 394,519 1,708 10.0
2002 17 555,261 2,369 13.9
2003 5 214,275 1,005 5.9
Thereafter 12 1,946,599 8,428 49.5
================= ==================== ==================== ======================
Total 96 3,924,920 (2) $ 17,040 (3) 100.0%
================= ==================== ==================== ======================
(1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases).
(2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the
difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space).
(3) This figure is based on square footage actually leased (which excludes vacant space) and incorporates
contractual rent increases arising after 1998, and thus differs from "Total Effective Annual Base Rent" in
the preceding table, which is based on 1998 rents.
</TABLE>
Retail Properties
The Company owns 13 retail Properties with total rentable square footage of
1,239,165. The leases for the retail Properties have terms ranging from one to
40 years. Eleven of the retail Properties, representing 1,156,079 square feet or
93% of the total rentable area, are anchored community shopping centers. The
anchor tenants of these centers are national or regional supermarkets and drug
stores. As of December 31, 1998, the average occupancy of the retail Properties
was 94%.
The leases for the retail Properties generally include fixed or CPI- based rent
increases and some include provisions for the payment of additional rent based
on a percentage of the tenants' gross sales that exceed specified amounts.
Retail tenants also typically pay as additional rent their pro rata share of the
Properties' operating costs including common area maintenance, property taxes,
insurance and non-structural repairs. Some leases contain options to renew at
market rates or specified rates.
The following table sets forth, for the periods specified, the total rentable
area, average occupancy, average effective base rent per leased square foot and
total effective annual base rent for the retail properties.
<TABLE>
<CAPTION>
Retail Properties
Historical Rent and Occupancy
Average Effective Total Effective
Total Rentable Average Occupancy Base Rent per Annual Base Rent
Year Area (Sq. Ft.) Leased Sq. Ft.(1) ($000s)(2) (3)
(3)
- ------------------ ----------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
1998 1,239,165 94% $ 8.75 $ 10,192
1997 979,088 96 7.98 7,501
1996 630,700 96 7.82 (4) 4,726
1995 285,658 95 10.76 2,915
1994 285,722 94 10.76 2,890
(1) Total Effective Annual Base Rent divided by Average Occupancy in square feet.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the period.
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<PAGE>
(3) In any given year, base rents are presented on an annualized basis based on results since the acquisition for
properties that were acquired during the year.
(4) Average effective base rent per leased square foot declined in 1996 due to the acquisition of properties with
lower base rents.
</TABLE>
The following table sets forth the contractual lease expirations for the retail
Properties as of December 31, 1998.
<TABLE>
<CAPTION>
Retail Properties
Lease Expirations
Percentage of Total
Number of Rentable Square Annual Base Rent Annual Base Rent
Expiration Year Expiring Leases Footage Subject to Under Expiring Represented by
Expiring Leases Leases ($000s) Expiring Leases (1)
- ------------------ ----------------- -------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
1999 69 151,979 $ 1,898 17.4%
2000 37 72,344 918 8.4
2001 63 165,263 1,792 16.5
2002 15 26,301 359 3.3
2003 23 109,795 993 9.1
Thereafter 49 632,678 4,930 45.3
================= ==================== ==================== ======================
Total 256 1,158,360 (2) $ 10,890 (3) 100.0%
================= ==================== ==================== ======================
(1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for
contractual increases).
(2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the
difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space).
(3) This figure is based on square footage actually leased (which excludes vacant space) and incorporates
contractual rent increases arising after 1998, and thus differs from "Total Effective Annual Base Rent" in
the preceding table which is based on 1998 rents.
</TABLE>
Tenant Improvements and Leasing Commissions
The following table summarizes by year the capitalized tenant improvement and
leasing commission expenditures incurred in the renewal or re-leasing of
previously occupied space since January 1, 1994.
<TABLE>
<CAPTION>
Capitalized Tenant Improvements and Leasing Commissions
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Office Properties
Square footage renewed or re-leased 579,904 174,354 39,706 79,745 18,384
Capitalized tenant improvements and
commissions ($000s) $ 4,263 $ 850 $ 617 (1) $ 468 $ 58
Average per square foot of renewed or
re-leased space $ 7.35 $ 4.87 $ 15.54 (1) $ 5.87 $ 3.18
Office/Flex Properties
Square footage renewed or re-leased 876,490 138,658 9,000 (2) (2)
Capitalized tenant improvements and
commissions ($000s) $ 3,232 $ 418 $ 23 (2) (2)
Average per square foot of renewed or
re-leased space $ 3.69 $ 3.01 $ 2.56 (2) (2)
continued
</TABLE>
Page 11
<PAGE>
<TABLE>
<CAPTION>
Capitalized Tenant Improvements and Leasing Commissions - continued
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Industrial Properties
Square footage renewed or re-leased 307,896 198,055 60,000 141,523 89,000
Capitalized tenant improvements and
commissions ($000s) $ 370 $ 235 $ 51 $ 114 $ 60
Average per square foot of renewed or
re-leased space $ 1.20 $ 1.19 $ 0.85 $ 0.81 $ 0.67
Retail Properties
Square footage renewed or re-leased 45,894 12,080 32,998 33,294 46,833
Capitalized tenant improvements and
commissions ($000s) $ 283 $ 42 $ 83 $ 98 $ 59
Average per square foot of renewed or
re-leased space $ 6.16 (3) $ 3.51 $ 2.53 $ 2.94 $ 1.25
All Properties
Square footage renewed or re-leased 1,810,184 523,147 141,704 254,562 154,217
Capitalized tenant improvements and
commissions ($000s) $ 8,148 $ 1,545 $ 774 $ 680 $ 177
Average per square foot of renewed or
re-leased space $ 4.50 $ 2.95 $ 5.46 $ 2.67 $ 1.14
(1) The significant increase in capitalized tenant improvements and commissions in 1996 over the previous years
is primarily the result of tenant improvements provided in connection with a lease extension of space for the
principal tenant of one property. The lease was extended 10 years and expires in 2010.
(2) Prior to 1996, Properties currently classified as Office/Flex Properties were included in Industrial
Properties.
(3) The significant increase in capitalized tenant improvements and commissions in 1998 over the previous years
is primarily the result of accrued tenant improvements to be provided to a tenant who will not occupy until
January 1999. The square footage for this tenant is not included in the square footage renewed or re-leased
as this tenant does not yet occupy the space.
</TABLE>
Multi-Family Properties
The Company owns 37 multi-family Properties, aggregating 9,353 units. All of the
units are rented to residential tenants on either a month-to-month basis or for
terms of one year or less. As of December 31, 1998, the multi-family Properties
were approximately 93% leased.
The following table sets forth, for the periods specified, total units, average
occupancy, monthly average effective base rent per unit and total effective
annual base rent for the multi-family Properties.
Page 12
<PAGE>
<TABLE>
<CAPTION>
Multi-Family Properties
Historical Rent and Occupancy
Average Effective Total Effective
Average Occupancy Base Rent per Annual Base Rent
Year Total Units Leased Unit (1) (3) ($000s)(2) (3)
- ------------------ ----------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
1998 9,353 93% $ 618 $ 64,507
1997 2,251 95 619 15,884
1996 642 94 598 (4) 4,328
1995 104 94 630 739
1994 104 98 632 774
(1) Total Effective Annual Base Rent divided by average occupied unit.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the period.
(3) In any given year, base rents are presented on an annualized basis based on results since the acquisition for
properties that were acquired during the year.
(4) Average effective monthly base rent per unit declined in 1996 due to the acquisition of properties with lower
base rents.
</TABLE>
Hotel Properties
Through June 1998, the Company leased the six Country Suites by Carlson hotels
that it owned to GHG who operated them for its own account. In June 1998, two of
the hotels were sold and the other four hotels were leased to two other
operators. In December 1998, one of the four hotels was sold to one of the
operators and two other hotels are in contract to be sold to the other operator
in March 1999. The buyer has an option to extend the closing of the sale to June
1999 and it is anticipated that the buyer will exercise that option. These
leases terminate upon the closing of the sales of the properties.
Item 3. Legal Proceedings
Blumberg. The Company settled a class action complaint filed on February 21,
1995 in connection with the Consolidation. Certain parties objected to the
settlement, but the settlement has been 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, and the California Supreme Court. In August
1998 the objecting parties filed a petition for writ of certiorari in the
Supreme Court of the United States. The Company and the co-defendants filed a
brief in opposition to the petition. The Supreme Court of the United States has
not yet granted or denied the petition
The plaintiff in the case is Anthony E. Blumberg, an investor in Equitec B, one
of the Partnerships included in the Consolidation, on behalf of himself and all
others (the "Blumberg Action") similarly situated. The defendants are GC,
Glenborough Realty Corporation ("GRC"), Robert Batinovich, the Partnerships and
the Company.
The complaint alleged breaches by the defendants of their fiduciary duty and
duty of good faith and fair dealing to investors in the Partnerships. The
complaint sought injunctive relief and compensatory damages. The complaint
alleged that the valuation of Glenborough Corporation was excessive and was done
without appraisal of Glenborough Corporation's business or assets. The complaint
further alleged that the interest rate for the Notes to be issued to investors
in lieu of shares of Common Stock, if they so elected was too low for the risk
involved and that the Notes would likely sell, if at all, at a substantial
discount from their face value (as a matter entirely distinct from the
litigation and subsequent settlement, the Company, as it had the option to, paid
in full the amounts due plus interest in lieu of issuing Notes).
On October 9, 1995 the parties entered into an agreement to settle the action.
The defendants, in entering into the settlement agreement, did not acknowledge
any fault, liability or wrongdoing of any kind and continue to deny all material
allegations asserted in the litigation. Pursuant to the settlement agreement,
the defendants will be released from all claims, known or unknown, that have
been, could have been, or in the future might be asserted, relating to, among
Page 13
<PAGE>
other things, the Consolidation, the acquisition of the Company's shares
pursuant to the Consolidation, any misrepresentation or omission in the
Registration Statement on Form S-4, filed by the Company on September 1, 1994,
as amended, or the prospectus contained therein ("Prospectus/Consent
Solicitation Statement"), or the subject matter of the lawsuit. In return, the
defendants agreed to the following: (a) the inclusion of additional or expanded
disclosure in the Prospectus Consent Solicitation Statement, and (b) the
placement of certain restrictions on the sale of the stock by certain insiders
and the granting of stock options to certain insiders following consummation of
the Consolidation. Plaintiff's counsel indicated that it would request that the
court award it $850,000 in attorneys' fees, costs and expenses. In addition,
plaintiffs' counsel indicated it would request the court for an award of $5,000
payable to Anthony E. Blumberg as the class representative. The defendants
agreed not to oppose such requests.
On October 11, 1995, the court certified the class for purposes of settlement,
and scheduled a hearing to determine whether it should approve the settlement
and class counsel's application for fees. A notice of the proposed settlement
was distributed to the members of the class on November 15, 1995. The notice
specified that, in order to be heard at the hearing, any class member objecting
to the proposed settlement must, by December 15, 1995, file a notice of intent
to appear, and a detailed statement of the grounds for their objection.
Objections were received from a small number of class members. The objections
reiterated the claims in the original Blumberg complaint, and asserted that the
settlement agreement did not adequately compensate the class for releasing those
claims. One of the objections was filed by the same law firm that brought the
BEJ Action described below.
At a hearing on January 17, 1996, the court heard the arguments of the objectors
seeking to overturn the settlement, as well as the arguments of the plaintiffs
and the defendants in defense of the settlement. The court granted all parties a
period of time in which to file additional pleadings. On June 4, 1996, the court
granted approval of the settlement, finding it fundamentally fair, adequate and
reasonable to the respective parties to the settlement. However, the objectors
gave notice of their intent to appeal the June 4 decision. All parties filed
their briefs and a hearing was held on February 3, 1998. On February 17, 1998,
the Court of Appeals rejected the objectors' contentions and upheld the
settlement. The objectors filed with the California Supreme Court a petition for
review, which was denied on May 21, 1998. On August 18, 1998, the objectors
filed a petition for writ of certiorari in the Supreme Court of the United
States. On September 18, 1998, the Company and the co-defendants filed a brief
in opposition to the petition. The Supreme Court has not yet granted or denied
the petition.
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 have voluntarily stayed the action pending resolution of the Blumberg
Action.
The plaintiffs in the BEJ Action are BEJ Equity Partners, J/B Investment
Partners, Jesse B. Small and Sean O'Reilly as custodian f/b/o Jordan K.
O'Reilly, who as a group held limited partner interests in certain of the
Partnerships included in the Consolidation known as Outlook Properties Fund IV,
Glenborough All Suites Hotels, L.P., Glenborough Pension Investors, Equitec
Income Real Estate Investors-Equity Fund 4, Equitec Income Real Estate Investors
C and Equitec Mortgage Investors Fund IV, on behalf of themselves and all others
similarly situated. The defendants are GRC, GC, the Company, GPA, Ltd., Robert
Batinovich and Andrew Batinovich. The Partnerships are named as nominal
defendants.
This action alleges the same disclosure violations and breaches of fiduciary
duty as were alleged in the Blumberg Action. The complaint sought injunctive
relief, which was denied at a hearing on December 22, 1995. At that hearing, the
court also deferred all further proceedings in this case until after the
scheduled January 17, 1996 hearing in the Blumberg Action. Following several
stipulated extensions of time for the Company to respond to the complaint, the
Company filed a motion to dismiss the case. Plaintiffs in the BEJ Action
voluntarily stayed the action pending resolution of the Blumberg Action; such
plaintiffs can revive their lawsuit.
It is management's position that the BEJ Action, and the objections to the
settlement of the Blumberg Action, are without merit, and management intends to
pursue a vigorous defense in both matters. In view of the denial of the
objector's petition for review in the Blumberg Action, among other things, the
Company believes that it is very unlikely that this litigation would result in a
liability that would exceed the accrued liability by a material amount. However,
Page 14
<PAGE>
given the inherent uncertainties of litigation, there can be no assurance that
the ultimate outcome in these two legal proceedings will be in the Company's
favor.
Certain other claims and lawsuits have arisen against the Company in its normal
course of business. The Company believes that such other claims and lawsuits
will not have a material adverse effect on the Company's financial position,
cash flow or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to a vote of security holders in the
fourth quarter of the year ended December 31, 1998.
PART II
Item 5. Market for Registrant's Common Stock and Preferred Stock and
Related Stockholder Matters
(a) Market Information
On January 31, 1996, the Company's Common Stock began trading on the NYSE at
$12.00 per share under the symbol "GLB". On January 28, 1998, the Company's
7-3/4% Series A Convertible Preferred Stock began trading on the NYSE at $25.00
per share under the symbol "GLB Pr A". On December 31, 1998, the closing prices
of the Company's Common and Preferred Stock were $20.375 and $18.25,
respectively. On March 10, 1999, the last reported sales prices per share of the
Company's Common Stock and Preferred Stock on the NYSE were $17.6875 and
$17.9375, respectively. The following table sets forth the high and low closing
prices per share of the Company's Common Stock and Preferred Stock for the
periods indicated, as reported on the NYSE composite tape.
<TABLE>
<CAPTION>
Common Stock Preferred Stock
Quarterly Period High Low High Low
<S> <C> <C> <C> <C>
1996
First Quarter (1) $ 14.375 $ 12.00 (2) (2)
Second Quarter 15.25 13.375 (2) (2)
Third Quarter 14.75 13.375 (2) (2)
Fourth Quarter 17.625 13.625 (2) (2)
1997
First Quarter $ 20.50 $ 16.75 (2) (2)
Second Quarter 25.25 19.375 (2) (2)
Third Quarter 28.1875 22.3125 (2) (2)
Fourth Quarter 30.125 24.25 (2) (2)
1998
First Quarter $ 31.75 $ 26.125 $ 27.00 $ 25.50
Second Quarter 31.875 25.5625 26.875 24.00
Third Quarter 27.9375 20.625 25.4375 19.875
Fourth Quarter 21.8125 18.75 20.25 17.00
1999
First Quarter (3) $ 19.875 $ 16.5625 $ 18.625 $ 16.8125
(1) Although the Consolidation occurred on December 31, 1995 and the Company
began paying distributions on its Common Stock based on earnings in the
first quarter of 1996, the Common Stock did not begin trading on the NYSE
until January 31, 1996.
(2) The Company's Preferred Stock did not begin trading on the NYSE until
January 28, 1998.
(3) High and low stock closing prices through March 10, 1999.
</TABLE>
Holders
The approximate number of holders of record of the shares of the Company's
Common Stock and Preferred Stock was 12,600 and 3,300, respectively, as of March
10, 1999.
Page 15
<PAGE>
Distributions
Since the Consolidation, the Company has paid regular quarterly distributions to
holders of its Common and Preferred Stock. During the years ended December 31,
1996, 1997 and 1998, the Company declared and/or paid the following quarterly
distributions:
<TABLE>
<CAPTION>
Common Stock Preferred Stock
---------------------------------------- ----------------------------------------
Distributions Total Distributions Total
Quarterly Period Per share Distributions Per share Distributions
- ------------------------ ---------------- -------------------- --------------- --------------------
<S> <C> <C> <C> <C>
1996
First Quarter $ 0.30 $ 1,726,000 (1) (1)
Second Quarter $ 0.30 $ 1,737,000 (1) (1)
Third Quarter $ 0.30 $ 2,891,000 (1) (1)
Fourth Quarter $ 0.32 $ 3,092,000 (1) (1)
1997
First Quarter $ 0.32 $ 4,222,000 (1) (1)
Second Quarter $ 0.32 $ 6,456,000 (1) (1)
Third Quarter $ 0.32 $ 10,072,000 (1) (1)
Fourth Quarter $ 0.42 $ 13,250,000 (1) (1)
1998
First Quarter $ 0.42 $ 13,251,000 $ 0.34 (1) $ 3,910,000 (1)
Second Quarter $ 0.42 $ 13,308,000 $ 0.48 $ 5,570,312
Third Quarter $ 0.42 $ 13,330,000 $ 0.48 $ 5,570,313
Fourth Quarter $ 0.42 $ 13,339,000 $ 0.48 $ 5,570,313
(1) The Company's Preferred Stock did not begin trading on the NYSE until January 28, 1998.
</TABLE>
The Company intends to declare regular quarterly distributions to its
stockholders. Federal income tax law requires that a REIT distribute annually at
least 95% of its REIT taxable income. Future distributions by the Company will
be at the discretion of the Board of Directors and will depend upon the actual
Funds from Operations of the Company, its financial condition, capital
requirements, the annual distribution requirements under the REIT provisions of
the Internal Revenue Code, applicable legal restrictions and such other factors
as the Board of Directors deems relevant. The Company intends to continue its
policy of paying quarterly distributions, but there can be no assurance that
distributions will continue or be paid at any specific level.
(b) Recent Sales of Unregistered Securities
Sales of unregistered securities by the Company during 1998 are described in the
Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998,
June 30, 1998 and September 30, 1998.
Item 6. Selected Financial Data
Set forth below are selected financial data for:
Glenborough Realty Trust Incorporated: Consolidated balance sheet data
is presented as of December 31, 1998, 1997, 1996 and 1995.
Consolidated operating data is presented for the years ended December
31, 1998, 1997 and 1996, and As Adjusted consolidated operating data
is presented for the years ended December 31, 1995 and 1994. The As
Adjusted data assumes the Consolidation and related transactions
occurred on January 1, 1994, in order to present the operations of the
Company for those periods as if the Consolidation had been in effect
for those periods. As Adjusted data is presented to provide amounts
which are comparable to the consolidated results of operations of the
Company for the years ended December 31, 1998, 1997 and 1996.
Page 16
<PAGE>
The GRT Predecessor Entities: Combined operating data is presented for
the years ended December 31, 1995 and 1994. Combined balance sheet
data is presented as of December 31, 1994.
This selected financial data should be read in conjunction with the financial
statements of Glenborough Realty Trust Incorporated, including the notes
thereto, included in Item 14.
<TABLE>
As of and for the Year Ended December 31,
----------------------------------------------------------------------------------------
Historical Historical Historical As Adjusted Historical As Adjusted Historical
1998 1997 1996 1995 1995 1994 1994
------------ ----------- ----------- ------------- ----------- ------------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Rental Revenue......... $ 227,956 $ 61,393 $ 17,943 $ 13,495 $ 15,454 $ 12,867 $ 13,797
Fees and reimbursements 2,802 719 311 260 16,019 260 13,327
Interest and other income 4,607 1,802 1,080 982 2,698 1,109 3,557
Equity in earnings of
Associated Companies 1,314 2,743 1,598 1,691 - 1,649 -
Total Revenues(1)...... 241,475 68,148 21,253 16,428 34,171 15,885 30,681
Property operating expenses 74,079 18,958 5,266 4,084 8,576 3,673 6,782
General and administrative 11,038 3,319 1,393 983 15,947 954 13,454
Interest expense....... 53,289 9,668 3,913 2,767 2,129 2,767 1,140
Depreciation and
Amortization......... 50,194 14,873 4,575 3,654 4,762 3,442 4,041
Income (loss) from operations
before minority interest and 48,552 21,330 (1,131) 4,077 524 (2,721) 1,580
extraordinary items..
Net income (loss) before
Preferred Stock 44,602 19,368 (1,609) 3,796 524 (3,093) 1,580
dividends(2).........
Diluted amounts per common
share (3):
Net income (loss) before
extraordinary items $ 0.79 $ 1.09 $ (0.21) $ 0.66 - $ (0.47) -
Net income (loss).... 0.75 1.05 (0.24) 0.66 - (0.54) -
Distributions(4)..... 1.68 1.38 1.22 1.20 - 1.20 -
Balance Sheet Data:
Net investment in real estate $1,742,439 $ 825,218 $ 161,945 - $ 77,574 - $ 63,994
Mortgage loans receivable,
net.................. 42,420 3,692 9,905 - 7,465 - 19,953
Total assets........... 1,879,016 865,774 185,520 - 105,740 - 117,321
Total debt............. 922,097 228,299 75,891 - 36,168 - 17,906
Stockholders' equity... 828,533 580,123 97,600 - 55,628 - 80,558
Other Data:
EBIDA(5)............... $ 151,562 $ 44,380 $ 14,273 $ - $ 9,291 $ - $ 10,269
Cash flow provided by (used
for):
Operating activities. 76,421 24,078 4,138 4,656 (10,608) 5,742 22,426
Investing activities. (613,840) (569,242) (61,833) 3,263 8,656 1,710 (1,947)
Financing activities. 536,706 548,879 (54,463) (7,933) (17,390) (6,408) (2,745)
FFO(6)................. 79,920 36,087 11,491 9,638 7,162 9,536 9,129
CAD(7),(8)............. 68,357 32,335 10,497 8,856 3,237 8,754 6,919
Debt to total market
capitalization(9).... 47.5% 18.5% 29.5% - - - -
Ratio of Earnings to Fixed
Charges (10) 1.87 3.21 0.71 - 1.41 - 2.58
Ratio of Earnings to Fixed
Charges and Preferred
Dividends(11) 1.36 3.21 0.71 - 1.41 - 2.58
(1) Certain revenues which are included in the historical combined amounts for
1995 and prior are not included on an adjusted basis. These revenues are
included in two unconsolidated Associated Companies, GHG and GC, on an as
adjusted basis, from which the Company receives lease payments and
dividends.
(2) Historical 1996 and as adjusted 1994 net losses reflect $7,237 of
Consolidation and litigation costs incurred in connection with the
Consolidation. As adjusted 1994 data give effect to the Consolidation and
related transactions as if such transactions had occurred on January 1,
1994, whereas historical 1996 data reflect such transactions in the periods
they were expensed. The Consolidation and litigation costs were expensed on
January 1, 1996, the Company's first day of operations.
</TABLE>
Page 17
<PAGE>
(3) Diluted amounts include the effects of all classes of securities outstanding
at year-end, including units of Operating Partnership interests and options
to purchase stock of the Company. As adjusted net income per share is based
upon as adjusted weighted average shares outstanding of 5,753,709 for 1995
and 1994.
(4) Historical distributions per common share for the years ended December 31,
1998, 1997 and 1996 consist of distributions declared for the periods then
ended. As adjusted distributions per common share for each of the years
ended December 31, 1995 and 1994 are based on $0.30 per unit per quarter.
(5) EBIDA is computed as income (loss) before minority interests and
extraordinary items plus interest expense, depreciation and amortization,
gains (losses) on disposal of properties and loss provisions. In 1996,
consolidation and litigation costs were also added back to net income to
determine EBIDA. The Company believes that in addition to net income and
cash flows, EBIDA is a useful measure of the financial performance of an
equity REIT because, together with net income and cash flows, EBIDA provides
investors with an additional basis to evaluate the ability of a REIT to
incur and service debt and to fund acquisitions, developments and other
capital expenditures. To evaluate EBIDA and the trends it depicts, the
components of EBIDA, such as rental revenues, rental expenses, real estate
taxes and general and administrative expenses, should be considered. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Excluded from EBIDA are financing costs such as interest as
well as depreciation and amortization, each of which can significantly
affect a REIT's results of operations and liquidity and should be considered
in evaluating a REIT's operating performance. Further, EBIDA does not
represent net income or cash flows from operating, financing and investing
activities as defined by generally accepted accounting principles and does
not necessarily indicate that cash flows will be sufficient to fund all of
the Company's cash needs. It should not be considered as an alternative to
net income as an indicator of the Company's operating performance or as an
alternative to cash flows as a measure of liquidity. Further, EBIDA as
disclosed by other REITs may not be comparable to the Company's calculation
of EBIDA. The following table reconciles net income (loss) of the Company to
EBIDA for the periods presented (in thousands):
<TABLE>
<CAPTION>
The Company GRT Predecessor Entities
----------------------------------- ------------------------
For the Year Ended December 31,
---------------------------------------------------------------
Historical Historical Historical Historical Historical
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss)....... $ 44,602 $ 19,368 $ (1,609) $ 524 $ 1,580
Extraordinary items..... 1,400 843 186 - -
Minority interest....... 2,550 1,119 292 - -
Interest expense........ 53,289 9,668 3,913 2,129 1,140
Depreciation and 50,194 14,873 4,575 4,762 4,041
amortization
Net gain (loss) on sales of
real estate assets... (4,796) (1,491) (321) - -
Loss on interest rate
protection agreement. 4,323 - - - -
Consolidation and - - 7,237 - -
litigation costs
Loss provisions......... - - - 1,876 3,508
=========== =========== =========== =========== ============
EBIDA................... $ 151,562 $ 44,380 $ 14,273 $ 9,291 $ 10,269
=========== =========== =========== =========== ============
</TABLE>
(6) Funds from Operations, as defined by NAREIT, represents income (loss) before
minority interests and extraordinary items, adjusted for real estate related
depreciation and amortization and gains (losses) from the disposal of
properties. In 1996, consolidation and litigation costs were also added back
to net income to determine FFO. The Company believes that FFO is an
important and widely used measure of the financial performance of equity
REITs which provides a relevant basis for comparison among other REITs.
Together with net income and cash flows, FFO provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt
and to fund acquisitions, developments and other capital expenditures. FFO
does not represent net income or cash flows from operations as defined by
GAAP, and should not be considered as an alternative to net income
(determined in accordance with GAAP) as an indicator of the Company's
operating performance or as an alternative to cash flows from operating,
investing and financing activities (determined in accordance with GAAP) as a
measure of liquidity. FFO does not necessarily indicate that cash flows will
be sufficient to fund all of the Company's cash needs including principal
amortization, capital improvements and distributions to stockholders.
Further, FFO as disclosed by other REITs may not be comparable to the
Company's calculation of FFO. The Company calculates FFO in accordance with
the White Paper on FFO approved by the Board of Governors of NAREIT in March
1995.
(7) Cash available for distribution ("CAD") represents net income (loss) before
minority interests and extraordinary items, adjusted for depreciation and
amortization including amortization of deferred financing costs and gains
(losses) from the disposal of properties, less lease commissions and
recurring capital expenditures, consisting of tenant improvements and normal
expenditures intended to extend the useful life of the property such as roof
and parking lot repairs. CAD should not be considered an alternative to net
income (computed in accordance with GAAP) as a measure of the Company's
financial performance or as an alternative to cash flow from operating
activities (computed in accordance with GAAP) as a measure of the Company's
liquidity, nor is it necessarily indicative of sufficient cash flow to fund
all of the Company's cash needs. Further, CAD as disclosed by other REITs
may not be comparable to the Company's calculation of CAD.
(8) CAD for the year ended December 31, 1995 excludes approximately $6,782 that
represents the net proceeds received from the prepayment of a mortgage loan
receivable and the repayment of a related wrap note payable.
Page 18
<PAGE>
(9) Debt to total market capitalization is calculated as total debt at period
end divided by total debt plus the market value of the Company's outstand-
ing common stock and convertible units, based upon the closing prices of the
Common Stock of $20.375, $29.625 and $17.625 on December 31, 1998, 1997 and
1996, respectively, plus the liquidation value of the Company's outstanding
Preferred Stock based on the liquidation preference per share of $25.00 on
December 31, 1998.
(10)The ratio of earnings to fixed charges is computed as net income (loss)
from operations, before minority interest and extraordinary items, plus
fixed charges (excluding capitalized interest) divided by fixed charges.
Fixed charges consist of interest costs including amortization of deferred
financing costs.
(11)The ratio of earnings to fixed charges and preferred dividends is computed
as net income (loss) from operations, before minority interest and
extraordinary items, plus fixed charges (excluding capitalized interest) and
preferred dividends, divided by fixed charges. Fixed charges consist of
interest costs including amortization of deferred financing costs.
Funds from Operations
Funds from Operations, as defined by NAREIT, represents income (loss) before
minority interests and extraordinary items, adjusted for real estate related
depreciation and amortization and gains (losses) from the disposal of
properties. The Company believes that FFO is an important and widely used
measure of the financial performance of equity REITs which provides a relevant
basis for comparison among other REITs. Together with net income and cash flows,
FFO provides investors with an additional basis to evaluate the ability of a
REIT to incur and service debt and to fund acquisitions, developments and other
capital expenditures. FFO does not represent net income or cash flows from
operations as defined by GAAP, and should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indicator of the Company's
operating performance or as an alternative to cash flows from operating,
investing and financing activities (determined in accordance with GAAP) as a
measure of liquidity. FFO does not necessarily indicate that cash flows will be
sufficient to fund all of the Company's cash needs including principal
amortization, capital improvements and distributions to stockholders. Further,
FFO as disclosed by other REITs may not be comparable to the Company's
calculation of FFO. The Company calculates FFO in accordance with the White
Paper on FFO approved by the Board of Governors of NAREIT in March 1995.
Cash available for distribution ("CAD") represents net income (loss) before
minority interests and extraordinary items, adjusted for depreciation and
amortization including amortization of deferred financing costs and gains
(losses) from the disposal of properties, less lease commissions and recurring
capital expenditures, consisting of tenant improvements and normal expenditures
intended to extend the useful life of the property such as roof and parking lot
repairs. CAD should not be considered an alternative to net income (computed in
accordance with GAAP) as a measure of the Company's financial performance or as
an alternative to cash flow from operating activities (computed in accordance
with GAAP) as a measure of the Company's liquidity, nor is it necessarily
indicative of sufficient cash flow to fund all of the Company's cash needs.
Further, CAD as disclosed by other REITs may not be comparable to the Company's
calculation of CAD.
The following table sets forth the Company's calculation of FFO and CAD for the
three months ended March 31, June 30, September 30 and December 31, 1998 and the
year ended December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
Year to
March 31, June 30, Sept 30, Dec 31, Date
1998 1998 1998 1998 1998
------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Income from operations before minority
interest and extraordinary item $ 12,891 $ 14,517 $ 11,145 $ 9,999 $ 48,552
Depreciation and amortization 10,009 10,934 14,309 14,782 50,034
Preferred dividends (3,910) (5,570) (5,570) (5,570) (20,620)
Net (gain) loss on sales of real estate assets (1,446) (693) 250 (2,907) (4,796)
Loss on interest rate protection agreement - - - 4,323 4,323
Costs of terminated stock offering - - - 247 247
Adjustment to reflect FFO of Associated
Companies (1) 210 174 1,163 633 2,180
------------- ------------- ------------- -------------- --------------
FFO $ 17,754 $ 19,362 $ 21,297 $ 21,507 $ 79,920
============= ============= ============= ============== ==============
</TABLE>
Page 19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Amortization of deferred financing fees 418 174 406 565 1,563
Capital reserve (1,088) (330) (69) 2,440 953
Capital expenditures (1,122) (2,870) (3,789) (6,298) (14,079)
------------- ------------- ------------- -------------- --------------
CAD $ 15,962 $ 16,336 $ 17,845 $ 18,214 $ 68,357
============= ============= ============= ============== ==============
Distributions per share (2) $ 0.42 $ 0.42 $ 0.42 $ 0.42 $ 1.68
============= ============= ============= ============== ==============
Diluted weighted average common shares
outstanding 34,372,364 34,868,905 36,261,228 36,191,009 35,576,210
============= ============= ============= ============== ==============
(1) Reflects the adjustments to FFO required to reflect the FFO of the Associated Companies allocable to the
Company. The Company's investments in the Associated Companies are accounted for using the equity method of
accounting.
(2) The distributions for the three months ended December 31, 1998, were paid on January 15, 1999.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the financial condition and results of
operations of the Company should be read in conjunction with the selected
financial data in Item 6 and the Consolidated Financial Statements of
Glenborough Realty Trust Incorporated, including the notes thereto, included in
Item 14.
Results of Operations
Comparison of the year ended December 31, 1998 to the year ended December 31,
1997.
Following is a table of net operating income by property type, for comparative
purposes, presenting the results for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Results of Operations by Property Type
For the Years Ended December 31, 1998 and 1997
(in thousands)
Office/ Multi- Property Eliminating Total
Office Flex Industrial Retail Family Hotel Total Entry(1) Reported
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998
Rental Revenue $117,746 $36,987 $16,104 $12,072 $40,865 $4,182 $227,956 - $227,956
Operating Expenses 44,775 10,898 3,609 3,840 17,235 967 81,324 ($7,245) 74,079
Net Operating Income 72,971 26,089 12,495 8,232 23,630 3,215 146,632 7,245 153,877
Percentage of
Total NOI 50% 18% 8% 6% 16% 2% 100%
1997
Rental Revenue $25,071 $10,354 $7,320 $7,224 $5,536 $5,980 $61,485 ($92) $61,393
Operating Expenses 9,986 3,062 1,459 2,183 2,309 1,894 20,893 (1,935) 18,958
Net Operating Income 15,085 7,292 5,861 5,041 3,227 4,086 40,592 1,843 42,435
Percentage of
Total NOI 37% 18% 15% 12% 8% 10% 100%
(1) Eliminating entry represents internal market level property management fees included in operating expenses
to provide comparison to industry performance.
</TABLE>
Rental Revenue. Rental revenue increased $166,563,000, or 271%, to $227,956,000
for the year ended December 31, 1998, from $61,393,000 for the year ended
December 31, 1997. The increase included growth in revenue from the office,
office/flex, industrial, retail and multi-family Properties of $92,675,000,
$26,633,000, $8,784,000,
Page 20
<PAGE>
$4,848,000 and $35,329,000, respectively. These increases were partially offset
by a $1,798,000 decrease in revenue from the hotel Properties due to the 1998
sales of two hotels. Rental revenue for the year ended December 31, 1998,
included $17,404,000 of rental revenue generated from the acquisition of 20
properties in 1996 (the "1996 Acquisitions"), $96,130,000 of rental revenue
generated from the acquisition of 90 properties in 1997 (the "1997
Acquisitions") and $104,254,000 of rental revenue generated from the acquisition
of 69 properties in 1998 (the "1998 Acquisitions").
Fees and Reimbursements. Fees and reimbursements revenue consists primarily of
property management fees, asset management fees and lease commissions paid to
the Company under property and asset management agreements from unconsolidated
entities. This revenue increased $2,083,000, or 290%, to $2,802,000 for the year
ended December 31, 1998, from $719,000 for the year ended December 31, 1997. The
change consists primarily of increased lease commissions from an affiliated
entity and fees resulting from the sale of managed properties.
Interest and Other Income. Interest and other income increased $2,805,000, or
156%, to $4,607,000 for the year ended December 31, 1998, from $1,802,000 for
the year ended December 31, 1997. This increase is primarily due to $1,749,000
of interest income on a mortgage loan receivable secured by Gateway Center which
originated on June 30, 1998. In addition, in 1998, the Company invested
approximately $20 million in the securities of a private REIT which was
accounted for using the equity method. In 1998, the Company recognized
approximately $990,000 as equity in the earnings of this private REIT.
Equity in Earnings of Associated Companies. Equity in earnings from Associated
Companies decreased $1,429,000, or 52%, to $1,314,000 for the year ended
December 31, 1998, from $2,743,000 for the year ended December 31, 1997. The
decrease is primarily due to a decrease in earnings from GHG resulting from the
June 30, 1998 cancellation of GHG's hotel leases with the Company. The Company
cancelled the leases with GHG when it sold two of its hotels and leased the
other four hotels to other operators. In December 1998, one of the remaining
four hotels was sold to one of the operators and two other hotels are in
contract to be sold to those operators in March 1999. This decrease is partially
offset by transaction fees earned by GC related to the disposition of several
properties under its management.
Net Gain on Sales of Real Estate Assets. The net gain on sales of real estate
assets of $4,796,000 during the year ended December 31, 1998, resulted from the
sales of one office property, two office/flex properties, four industrial
properties, one multi-family property and three hotel properties from the
Company's portfolio. This net gain was partially offset by a $3.1 million loss
on the sale of the Company's investment in the securities of a private REIT. The
net gain on sales of real estate assets of $839,000 during the year ended
December 31, 1997, resulted from the sales of 16 retail properties from the
Company's portfolio.
Gain on Collection of Mortgage Loan Receivable. The gain on collection of
mortgage loan receivable of $652,000 during the year ended December 31, 1997
resulted from the collection of a mortgage loan receivable which had a net
carrying value of $6,700,000. The payoff amount totaled $6,863,000, plus a
$500,000 note receivable, which, net of legal costs, resulted in a gain of
$652,000.
Property Operating Expenses. Property operating expenses increased $55,121,000,
or 291%, to $74,079,000 for the year ended December 31, 1998, from $18,958,000
for the year ended December 31, 1997. This increase primarily consists of
$22,750,000 attributable to the 1997 Acquisitions and $31,997,000 attributable
to the 1998 Acquisitions.
General and Administrative Expenses. General and administrative expenses
increased $7,719,000, or 233%, to $11,038,000 for the year ended December 31,
1998, from $3,319,000 for the year ended December 31, 1997. The increase is
primarily due to increased salary and overhead costs resulting from the 1997
Acquisitions and 1998 Acquisitions. As a percentage of rental revenue, general
and administrative expenses actually decreased from 5.4% for the year ended
December 31, 1997 to 4.8% for the year ended December 31, 1998.
Depreciation and Amortization. Depreciation and amortization increased
$35,321,000, or 237%, to $50,194,000 for the year ended December 31, 1998, from
$14,873,000 for the year ended December 31, 1997. The increase is primarily due
to depreciation and amortization associated with the 1997 Acquisitions and 1998
Acquisitions.
Page 21
<PAGE>
Interest Expense. Interest expense increased $43,621,000, or 451%, to
$53,289,000 for the year ended December 31, 1998, from $9,668,000 for the year
ended December 31, 1997. Substantially all of the increase was the result of
higher average borrowings during the year ended December 31, 1998, as compared
to the year ended December 31, 1997, due to new debt and the assumption of debt
related to the 1997 Acquisitions and 1998 Acquisitions.
Loss on Interest Rate Protection Agreement. During 1998, the Company entered
into a forward interest rate agreement to lock in the risk-free interest
component of a portion of a secured mortgage to be issued in October 1998. The
10-year Treasury rates decreased during the term of the hedge. During the fourth
quarter of 1998, the Company recorded an expense for its payment of $4,323,000
to terminate a portion of the forward interest rate agreement in connection with
a reduction in the amount of the mortgage to be issued. The Company's payment of
$6,244,000 in settlement of the remaining portion of the forward interest rate
agreement will offset the reduced financing costs of the $248.8 million mortgage
issued in October 1998.
Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt of
$1,400,000 during the year ended December 31, 1998, consists of prepayment
penalties and the write-off of unamortized loan fees upon the early payoff of
debt. Various loans were paid-off early when more favorable terms were obtained
through new financing (discussed below) and upon the sale of one of the hotels.
Loss on early extinguishment of debt of $843,000 during the year ended December
31, 1997, resulted from the write-off of unamortized loan fees related to a $50
million secured line of credit which was replaced with a $250 million unsecured
line of credit (the "Credit Facility") from a commercial bank.
Net Income and Earnings Per Share (EPS). Net income increased $25,234,000, or
130%, to $44,602,000 for the year ended December 31, 1998, from $19,368,000 for
the year ended December 31, 1997. However, Basic EPS decreased $0.32 per share
and Diluted EPS decreased $0.30 per share for the year ended December 31, 1998,
from the year ended December 31, 1997. The decreases in Basic and Diluted EPS
are due to a decrease in Net Income Available to Common Stockholders resulting
from the dividends payable to preferred stockholders in 1998. There were no
preferred stock dividends paid in 1997 as there was no preferred stock
outstanding until January 1998.
Comparison of the year ended December 31, 1997 to the year ended December 31,
1996.
Following is a table of net operating income by property type, for comparative
purposes, presenting the results for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Results of Operations by Property Type
For the Years Ended December 31, 1997 and 1996
(in thousands)
Office/ Multi- Property Eliminating Total
Office Flex Industrial Retail Family Hotel Total Entry(1) Reported
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997
Rental Revenue $25,071 $10,354 $7,320 $7,224 $5,536 $5,980 $61,485 ($92) $61,393
Operating Expenses 9,986 3,062 1,459 2,183 2,309 1,894 20,893 (1,935) 18,958
Net Operating Income 15,085 7,292 5,861 5,041 3,227 4,086 40,592 1,843 42,435
Percentage of
Total NOI 37% 18% 15% 12% 8% 10% 100%
1996
Rental Revenue $3,905 $769 $3,491 $3,746 $1,519 $4,513 $17,943 $17,943
Operating Expenses 1,697 275 469 991 601 1,698 5,731 ($465) 5,266
Net Operating Income 2,208 494 3,022 2,755 918 2,815 12,212 465 12,677
Percentage of
Total NOI 18% 4% 25% 23% 7% 23% 100%
(1) Eliminating entry represents internal market level property management fees included in operating expenses
to provide comparison to industry performance.
</TABLE>
Page 22
<PAGE>
Rental Revenue. Rental revenue increased $43,450,000, or 242%, to $61,393,000
for the year ended December 31, 1997, from $17,943,000 for the year ended
December 31, 1996. The increase included growth in revenue from the office,
office/flex, industrial, retail, multi-family and hotel Properties of
$21,166,000, $9,585,000, $3,829,000, $3,478,000, $4,017,000 and $1,467,000,
respectively. Of the rental revenue for the year ended December 31, 1997,
$48,030,000 represents rental revenue generated from the acquisition of 20
properties in 1996 (the "1996 Acquisitions") and the acquisition of 90
properties during the year ended December 31, 1997 (the "1997 Acquisitions").
The increase in rental revenue for the year ended December 31, 1997, was
partially offset by a decrease in revenue due to the 1996 sale of two industrial
properties and the 1997 sales of sixteen retail properties.
Fees and Reimbursements. Fees and reimbursements revenue consists primarily of
property management fees, asset management fees and lease commissions paid to
the Company under property and asset management agreements. This revenue
increased $408,000, or 131%, to $719,000 for the year ended December 31, 1997,
from $311,000 for the year ended December 31, 1996. The increase primarily
consisted of increases in asset management fees of $131,000, roperty management
fees of $257,000 and lease commissions of $20,000. The Company's contract was
expanded to include asset management fees in 1997.
Interest and Other Income. Interest and other income, which consists primarily
of interest on cash investments nd mortgage loans receivable, increased
$722,000, or 67%, to $1,802,000 for the year ended December 31, 1997, from
$1,080,000 for the year ended December 31, 1996. The increase was primarily due
to a $1,040,000 increase in interest income as a result of higher invested cash
balances and a $365,000 increase in interest income from the Grunow mortgage
loan receivable. This increase in interest income is partially offset by a
$649,000 reduction in interest and other income due to the payoff of the Hovpark
mortgage loan receivable in January 1997.
Equity in Earnings of Associated Companies. Equity in earnings of Associated
Companies increased $1,145,000, or 72%, to $2,743,000 for the year ended
December 31, 1997, from $1,598,000 for the year ended December 31, 1996. This
increase was primarily due to an increase in the net operating income of
Glenborough Hotel Group ("GHG") due to the lease of the Scottsdale Hotel and
from a $1,381,000 gain on the liquidation of Atlantic Pacific Assurance Company,
Limited ("APAC", a Bermuda corporation formed to underwrite certain insurable
risks of certain GLB predecessor partnerships and related entities) and an
increase in transaction fees earned by GC. The increase is offset by reduced
management fees in 1997 as a result of the sales of several properties under
management and partnership liquidations, as well as the write-off of GC's
unamortized balance of its investment in a management contract.
Net Gain on Sales of Rental Properties. The net gain on sales of rental
properties of $839,000 during the year ended December 31, 1997, resulted from
the sales of sixteen retail properties. The net gain on sales of rental
properties of $321,000 during the year ended December 31, 1996, resulted from
the sale of two self-storage facilities from the Company's industrial portfolio.
Gain on Collection of Mortgage Loan Receivable. The gain on collection of
mortgage loan receivable of $652,000 during the year ended December 31, 1997
resulted from the collection of the Hovpark mortgage loan receivable which had a
net carrying value of $6,700,000. The payoff amount totaled $6,863,000 in cash,
plus a $500,000 note receivable, which, net of legal costs, resulted in a gain
of $652,000.
Property Operating Expenses. Property operating expenses increased $13,692,000,
or 260%, to $18,958,000 for the year ended December 31, 1997, from $5,266,000
for the year ended December 31, 1996. Of this increase, $14,687,000 represents
property operating expenses attributable to the 1996 Acquisitions and the 1997
Acquisitions, which was slightly offset by the reduction in expenses resulting
from the 1996 sale of two industrial properties and the 1997 sales of sixteen
retail properties.
General and Administrative Expenses. General and administrative expenses
increased $1,926,000, or 138%, to $3,319,000 for the year ended December 31,
1997, from $1,393,000 for the year ended December 31, 1996. The increase is
primarily due to increased salary and overhead costs resulting from the 1996
Acquisitions and the 1997
Page 23
<PAGE>
Acquisitions. As a percentage of rental revenue, general and administrative
expenses actually decreased from 7.8% for the year ended December 31, 1996 to
5.4% for the year ended December 31, 1997.
Depreciation and Amortization. Depreciation and amortization increased
$10,298,000, or 225%, to $14,873,000 for the year ended December 31, 1997, from
$4,575,000 for the year ended December 31, 1996. The increase is primarily due
to depreciation and amortization associated with the 1996 Acquisitions and the
1997 Acquisitions.
Interest Expense. Interest expense increased $5,755,000, or 147%, to $9,668,000
for the year ended December 31, 1997, from $3,913,000 for the year ended
December 31, 1996. Substantially all of the increase was the result of higher
average borrowings during the year ended December 31, 1997, as compared to the
year ended December 31, 1996, due to new debt and the assumption of debt related
to the 1996 Acquisitions and the 1997 Acquisitions.
Consolidation Costs. Consolidation costs in 1996 consist of the costs associated
with preparing, printing and mailing the Prospectus/Consent Solicitation
Statement and other documents related to the Consolidation, and all other costs
incurred in the forwarding of the Prospectus/Consent Solicitation Statement to
investors.
Litigation Costs. Litigation costs consist of the legal fees incurred in
connection with defending two class action complaints filed by investors in
certain of the GRT Predecessor Entities as well as an accrual for the proposed
settlement in one case.
Loss on early extinguishment of debt. Loss on early extinguishment of debt of
$843,000 during the year ended December 31, 1997, resulted from the write- off
of unamortized loan fees related to a $50 million secured line of credit which
was replaced with a new $250 million unsecured line of credit (the "Credit
Facility") from a commercial bank. Loss on early extinguishment of debt of
$186,000 during the year ended December 31, 1996, resulted from the write-off of
unamortized loan fees related to a $10,000,000 line of credit from Imperial Bank
which was paid-off with proceeds from a $50 million secured line of credit from
a commercial bank.
Liquidity and Capital Resources
Cash Flows
For the year ended December 31, 1998, cash provided by operating activities
increased by $63,123,000 to $87,482,000 as compared to $24,359,000 in 1997. The
increase is primarily due to an increase in net income (before depreciation and
amortization, minority interest and net gain on sales of real estate assets and
collection of mortgage loan receivable) of $60,023,000 due to the 1997
Acquisitions and 1998 Acquisitions. Cash used for investing activities increased
by $44,598,000 to $613,840,000 for the year ended December 31, 1998, as compared
to $569,242,000 in 1997. The increase is primarily due to the 1998 Acquisitions,
investments in development and additions to mortgage loans receivable. This
increase was partially offset by the collection of a mortgage loan receivable in
1997 and the proceeds from the 1998 sales of real estate assets. Cash provided
by financing activities decreased by $22,953,000 to $525,645,000 for the year
ended December 31, 1998, as compared to $548,598,000 in 1997. This change was
primarily due to a decrease in net proceeds from the issuance of stock. In 1998,
the Company completed one offering of Preferred Stock (as discussed below) as
compared to threeb offerings of Common Stock in 1997. The majority of this
decrease is offset by an increase in proceeds from new debt.
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 an unsecured Credit Facility,
permanent secured debt financing, public unsecured debt financing, public and
Page 24
<PAGE>
private equity and debt issuances, the issuance of partnership units in the
Operating Partnership and cash flow provided by operations.
Mortgage Loans Receivable
Mortgage loans receivable increased from $3,692,000 at December 31, 1997, to
$42,420,000 at December 31, 1998. This increase was primarily due to a loan made
by the Company under a development alliance (as discussed below) which had an
outstanding balance (including accrued interest) of $35,336,000 at December 31,
1998, and a $3,600,000 loan made by the Company to the buyer of one of the hotel
properties.
Secured and Unsecured Financing
Mortgage loans payable increased from $148,139,000 at December 31, 1997, to
$708,578,000 at December 31, 1998. This increase resulted from the assumption of
mortgage loans totaling approximately $358.9 million in connection with the 1998
Acquisitions and new financing of approximately $248.8 million (as discussed
below). These increases were partially offset by the payoff of approximately
$42.1 million of mortgage loans in connection with 1998 sales of properties and
refinancing of debt, and scheduled principal payments of approximately $6.5
million on other mortgage debt.
The Company has an unsecured line of credit provided by a commercial bank (the
"Credit Facility"). Outstanding borrowings under the Credit Facility decreased
from $80,160,000 at December 31, 1997, to $63,519,000 at December 31, 1998. The
$80,160,000 balance outstanding at December 31, 1997, was paid off in January
1998 with proceeds from the January 1998 Convertible Preferred Stock Offering
(discussed below). In December 1998, due in part to an overall slowing of
acquisition activity, the Company reduced its Credit Facility from $250 million
to $100 million. As part of the modification, certain covenants that relate to
the Company's development activity were changed and the interest rate was
modified to LIBOR plus 1.38% to 1.75%. This rate is an increase over the
previous rate of LIBOR plus 1.10% to 1.30% which was a direct result of
increased credit spreads in the market.
In January 1998, the Company closed a $150 million loan with a commercial bank
(the "Interim Loan"). The Interim Loan had a term of three months with interest
at LIBOR plus 1.75%. The purpose of the Interim Loan was to fund acquisitions.
The Interim Loan was paid off in March 1998 with proceeds from the issuance of
$150 million of unsecured Series A Senior Notes (discussed below).
In June 1998, the Company obtained a $150 million unsecured loan from a
commercial bank (the "Bridge Loan") which had a variable interest rate of LIBOR
plus 1.3%, and a maturity date of December 31, 1998. Approximately $147.7
million was drawn under the Bridge Loan to fund acquisitions and development
activities. The Company paid off this loan on October 30, 1998 with proceeds
from the $248.8 million financing discussed below.
In October 1998, the Company obtained $248.8 million of financing which has a
term of ten years, bears interest at a fixed rate of 6.125% (effective interest
rate of 6.50%) and is secured by 35 properties. The proceeds were used to retire
the $150 million Bridge Loan which had a December 31, 1998 maturity date, to pay
off four mortgage loans and to reduce the outstanding balance of the Credit
Facility.
At December 31, 1998, the Company's total indebtedness included fixed-rate debt
of $733,348,000 (including $390,461,000 subject to cross-collateralization) and
floating-rate indebtedness of $188,749,000 (including $114,950,000 subject to
cross-collateralization). Approximately 61% of the Company's total assets,
comprising 114 properties, is encumbered by debt at December 31, 1998.
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 December 31, 1998, approximately 20% 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 December 31, 1998, the Company was not a party to any
open interest rate protection agreements.
Page 25
<PAGE>
Equity and Debt Offerings
In January 1998, the Company completed a public offering of 11,500,000 shares of
7-3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible
Preferred Stock Offering" or the "January 1998 Offering"). The 11,500,000 shares
were sold at a per share price of $25.00 for net proceeds of approximately $276
million, which were used to repay the outstanding balance under the Company's
Credit Facility, to fund certain subsequent property acquisitions and for
general corporate purposes. The shares are convertible at any time at the option
of the holder thereof into shares of Common Stock at an initial conversion price
of $32.83 per share of Common Stock (equivalent to a conversion rate of 0.7615
shares of Common Stock for each share of Series A Convertible Preferred Stock),
subject to adjustment in certain circumstances.
In March 1998, the Operating Partnership, as to which the Company is general
partner, issued $150 million of unsecured 7.625% Series A Senior Notes (the
"Notes") in an unregistered 144A offering. The Notes mature on March 15, 2005,
unless previously redeemed. Interest on the Notes is payable semiannually on
March 15 and September 15, commencing September 15, 1998. The Operating
Partnership used the net proceeds of the offering to repay the outstanding
balance under the Interim Loan. In May 1998, the Company filed a registration
statement with the Securities and Exchange Commission (the "SEC") to exchange
all outstanding Notes (the "Old Notes") for Notes which have been registered
under the Securities Act of 1933 (the "New Notes"). The form and term of the New
Notes are substantially identical to the Old Notes in all material respects,
except that the New Notes are registered under the Securities Act, and therefore
are not subject to certain transfer restrictions, registration rights and
related special interest provisions applicable to the Old Notes.
In January 1997 and May 1997, the Company filed shelf registration statements
with the SEC to register $250 million and $350 million, respectively, of equity
securities of the Company. In November 1997, the Company filed a shelf
registration statement with the SEC to register an additional $1 billion of
equity securities of the Company (the "November 1997 Shelf Registration
Statement"). The November 1997 Shelf Registration Statement was declared
effective by the SEC on December 18, 1997. After the completion of the March
1997, July 1997, October 1997 and January 1998 Offerings, the Company had the
capacity pursuant to the November 1997 Shelf Registration Statement to issue up
to approximately $801.2 million in equity securities.
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 the November 1997 Shelf Registration Statement.
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.
Development Alliances
The Company has formed 4 development alliances to which it has committed
approximately $42 million for the development of approximately 1.4 million
square feet of office, office/flex and distribution properties and 2,050
multi-family units in North Carolina, Colorado, Texas, New Jersey, Kansas and
Michigan. As of December 31, 1998, the Company has advanced approximately $33
million. Under these development alliances, the Company has certain rights to
purchase the properties upon completion of development and, thus, through these
alliances, the Company could acquire an additional 1.4 million square feet of
commercial properties and 2,050 multi-family units over the next five years. In
addition, the Company has loaned approximately $35 million under another
development alliance to continue the build-out of a 1,200 acre master-planned
development in Denver, Colorado.
Inflation
Substantially all of the leases at the 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 multi-family properties generally provide for an initial term of
one month or one year and allow for rent adjustments at the time of renewal.
Leases at the office Properties typically provide for rent adjustment and
pass-through of certain operating expenses during the term of the lease. All of
these provisions may permit the Company
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to increase rental rates or other charges to tenants in response to rising
prices and therefore, serve to reduce the Company's exposure to the adverse
effects of inflation.
Forward Looking Statements; Factors That May Affect Operating Results
This Report on Form 10-K contains forward looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934, including statements regarding the Company's
expectations, hopes, intentions, beliefs and strategies regarding the future.
Forward looking statements include statements regarding potential acquisitions,
the anticipated performance of future acquisitions, recently completed
acquisitions and existing properties, and statements regarding the Company's
financing activities. All forward looking statements included in this document
are based on information available to the Company on the date hereof. It is
important to note that the Company's actual results could differ materially from
those stated or implied in such forward looking statements. Some of the factors
that could cause actual results to differ materially are set forth below.
The Limited Availability of and Competition for Real Estate Acquisitions May
Restrict Our Ability to Grow
Our growth depends, in part, upon acquisitions. We cannot be sure that
properties will be available for acquisition or, if available, that we will be
able to purchase those properties on favorable terms. The unavailability of such
acquisitions could limit our growth. Furthermore, we face competition from
several other businesses, individuals, fiduciary accounts and plans and entities
in the acquisition, operation and sale of properties. Some of our competitors
are larger than we are and have greater financial resources than we do. This
competition could cause the cost of properties we wish to purchase to rise. If
we are unable to continue to grow through acquisitions, then our results of
operations and financial condition could be negatively impacted.
Competition for Tenants Could Adversely Affect Our Operations
When space becomes available at our properties, the leases may not be renewed,
the space may not be leased or re-leased, or the terms of the renewal or
re-lease (including the cost of required renovations or concessions to tenants)
may be less favorable to us than the prior lease. We have established annual
property budgets that include estimates of costs for renovation and re-leasing
expenses. We believe that these estimates are reasonable in light of each
property's situation; however, no assurance can be given that these estimates
will sufficiently cover these expenses. If we cannot lease all or substantially
all of the space at our properties promptly, if the rental rates are
significantly lower than expected, or if our reserves for these purposes prove
inadequate, then our results of operations and financial condition could be
negatively impacted.
Tenants' Defaults Could Adversely Affect Our Operations
Our ability to manage our assets is subject to federal bankruptcy laws and state
laws that limit creditors' rights and remedies available to real property owners
to collect delinquent rents. If a tenant becomes insolvent or bankrupt, we
cannot be sure that we could recover the premises from the tenant promptly or
from a trustee or debtor-in-possession in any bankruptcy proceeding relating to
that tenant. We also cannot be sure that we would receive rent in the proceeding
sufficient to cover our expenses with respect to the premises. If a tenant
becomes bankrupt, the federal bankruptcy code will apply, which in some
instances may restrict the amount and recoverability of our claims against the
tenant. A tenant's default on its obligations to us could adversely affect our
results of operations and financial condition.
Cash Flow May Be Insufficient for Debt Service Requirements
We intend to incur indebtedness in the future, including through borrowings
under our Credit Facility, to finance property acquisitions. As a result, we
expect to be subject to the following risks associated with debt financing
including:
that interest rates may increase;
that our cash flow may be insufficient to meet required payments on
our debt; and
that we may be unable to refinance or repay the debt as it comes due.
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Debt Restrictions May Affect Operations and Negatively Affect Our Ability to
Repay Indebtedness at Maturity
Our current $100 million unsecured Credit Facility contains provisions that
restrict the amount of distributions we can make. These provisions provide that
distributions may not exceed the lesser of (i) 90% of funds from operations or
(ii) the minimum amount that the Company must distribute to its stockholders in
order to avoid federal tax liability and remain qualified as a REIT. If we
cannot obtain acceptable financing to repay indebtedness at maturity, we may
have to sell properties to repay indebtedness or properties may be foreclosed
upon, which could adversely affect our results of operations, financial
condition and ability to service debt. Also, as of December 31, 1998,
approximately $505.4 million of our total indebtedness included secured
mortgages with cross-collateralization provisions. In the event of a default,
the holders of this indebtedness may seek to foreclose upon properties which are
not the primary collateral for their loan. This may, in turn, accelerate other
indebtedness secured by these properties. Foreclosure of properties would cause
a loss to us of income and asset value.
Fluctuations in Interest Rates May Adversely Affect Our Operations
As of December 31, 1998, we had approximately $188.7 million of variable
interest rate indebtedness. Accordingly, an increase in interest rates will
adversely affect our net income and results of operations.
Management of Newly Acquired Properties Could Be Difficult
Since the Consolidation on December 31, 1995, and through December 31, 1998, we
acquired approximately $1.8 billion in properties. To manage these new
properties effectively, we have sought to successfully apply our experience
managing our existing portfolio to expanded markets and to an increased number
of properties. The assimilation of these properties is a continuing process
whose success cannot be assured indefinitely. Should we encounter future
difficulties in managing these newly acquired properties, this could adversely
affect our results of operations and financial condition.
Acquisitions Could Adversely Affect Operations
Consistent with our growth strategy, we are continually pursuing and evaluating
potential acquisition opportunities. From time to time we are actively
considering the possible acquisition of specific properties, which may include
properties managed by GC or owned by affiliated parties. It is possible that one
or more of such possible future acquisitions, if completed, could adversely
affect our results of operations and financial condition.
Assumption of General Partner Liabilities May Adversely Affect Operations
We and our predecessors have acquired a number of properties by acquiring
interests in partnerships that own the properties or by first acquiring general
partnership interests and acquiring properties from the partnership at a later
date. We may pursue acquisitions in this manner in the future. When we use this
acquisition technique, a subsidiary of the Company may become a general partner.
As a general partner, such subsidiary would become generally liable for the
debts and obligations of the partnership, including debts and obligations that
may be contingent or unknown at the time of the acquisition. In addition, the
Company's subsidiary assumes obligations under the partnership agreements, which
may include obligations to make future contributions for the benefit of other
partners. We undertake detailed due diligence reviews to ascertain the nature
and extent of obligations that the subsidiary will assume when it becomes a
general partner, but we cannot be sure the obligations assumed may exceed our
estimates. Also, we cannot be sure that the assumed liabilities will not have an
adverse effect on our results of operations or financial condition and ability
to service debt. In addition, GC or another subsidiary may enter into management
agreements pursuant to which it assumes certain obligations as a manager of
properties. These obligations may have an adverse effect on such subsidiary's
results of operations or financial condition, which could adversely affect our
results of operations and financial conditions.
Potential Adverse Consequences of Transactions Involving Conflicts of Interest
We have acquired, and from time to time may acquire, properties from
partnerships that Robert Batinovich, our Chairman and Chief Executive Officer,
and Andrew Batinovich, our President and Chief Operating Officer, control, and
in which they and members of their families have substantial interests. These
transactions involve or will involve conflicts of interest. These transactions
also may provide substantial economic benefits to those individuals such as:
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payments or issuances of partnership units in the Operating Partnership,
relief or deferral of tax liabilities,
relief of primary or secondary liability for debt, and
reduction in exposure to other property-related liabilities.
Our policy provides that interested directors may not vote with regard to
transactions in which they have a substantial interest. These transactions may
only be completed if they are approved by a majority of the disinterested
directors, with the interested directors abstaining. Despite this policy and the
presence of appraisals or fairness opinions or review by parties who have no
interest in the transactions, the transactions will not be the product of
arm's-length negotiation. These transactions may not be as favorable to us as
transactions that we negotiate with unrelated parties and they could result in
undue benefit to Robert and Andrew Batinovich and members of their families.
None of these parties has guaranteed that any properties acquired from entities
they control or in which they have a significant interest will be as profitable
as other investments made by us or will not result in losses.
Dependence on Executive Officers
We depend on the efforts of Robert Batinovich, our Chief Executive Officer and
Andrew Batinovich, our President and Chief Operating Officer, and of our other
executive officers. The loss of the services of any of them could have an
adverse effect on our results of operations and financia condition. Both Robert
and Andrew Batinovich have entered into employment agreements with the Company.
Potential Liability Due to Environmental Matters
Under federal, state and local laws relating to protection of the environment
("Environmental Laws"), a current or previous owner or operator of real estate
may be liable for contamination resulting from the presence or discharge of
petroleum products or other hazardous or toxic substances on the property. These
owners may be required to investigate and clean-up the contamination on the
property as well as the contamination which has migrated from the property.
Environmental Laws typically impose liability and clean-up responsibility
without regard to whether the owner or operator knew of, or was responsible for,
the presence of the contamination. This liability may be joint and several
unless the harm is divisible and there is a reasonable basis for allocation of
responsibility. In addition, the owner or operator of a property may be subject
to claims by third parties based on personal injury, property damage and/or
other costs, including investigation and clean-up costs, resulting from
environmental contamination. Environmental Laws may also impose restrictions on
the manner in which a property may be used or transferred or in which businesses
may be operated. These restrictions may require expenditures. Under the
Environmental Laws, any person who arranges for the transportation, disposal or
treatment of hazardous or toxic substances may also be liable for the costs of
investigation or clean-up of those substances at the disposal or treatment
facility, whether or not the facility is or ever was owned or operated by that
person.
Tenants of our properties generally are required by their leases to operate in
compliance with all applicable Environmental Laws, and to indemnify us against
any environmental liability arising from their activities on the properties.
However, we could be subject to environmental liability relating to our
management of the properties or strict liability by virtue of our ownership
interest in the properties. Also tenants may not satisfy their indemnification
obligations under the leases. We are also subject to the risk that:
any environmental assessments of our properties, properties being
considered for acquisition, or the properties owned by the partnerships
managed by GC may not have revealed all potential environmental
liabilities,
any prior owner or prior or current operator of such properties may have
created an environmental condition not known to us, or
an environmental condition may otherwise exist as to any one or more of
such properties.
Any one of these conditions could have an adverse effect on our results of
operations and financial condition or ability to service debt, either directly
(with respect to our properties), or indirectly (with respect to properties
owned by partnerships managed by GC). Any condition adversely
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affecting the financial condition of GC could adversely affect us by diminishing
the value of our interest in GC. Moreover, future environmental laws, ordinances
or regulations may have an adverse effect on our results of operations,
financial condition and ability to service debt. Also, the current environmental
condition of those properties may be affected by tenants and occupants of the
properties, by the condition of land or operations in the vicinity of the
properties (such as the presence of underground storage tanks), or by third
parties unrelated to us.
Environmental Assessments and Potential Liability Due to Asbestos-Containing
Materials
Environmental Laws also govern the presence, maintenance and removal of
asbestos-containing building materials. These laws require that asbestos-
containing building materials be properly managed and maintained and that those
who may come into contact with asbestos-containing building materials be
adequately informed and trained. They also require that special precautions,
including removal or other abatement, be undertaken in the event
asbestos-containing building materials is disturbed during renovation or
demolition of a building. These laws may impose fines and penalties on building
owners or operators for failure to comply with these requirements. They also may
allow third parties to seek recovery from owners or operators for personal
injury associated with exposure to asbestos fibers.
All of the properties that we presently own have been subject to Phase I
environmental assessments by independent environmental consultants. Some of the
Phase I environmental assessments recommended further investigations in the form
of Phase II environmental assessments, including soil and groundwater sampling.
We have completed all of these investigations or are in the process of
completing them. Certain of our properties have been found to contain
asbestos-containing building materials. We believe that these materials have
been adequately contained and we have implemented an asbestos-containing
building materials operations and maintenance program for the properties found
to contain asbestos-containing building materials.
Some, but not all, of the properties owned by partnerships managed by GC have
been subject to Phase I environmental assessments by independent environmental
consultants. GC determines on a case-by-case basis whether to obtain Phase I
environmental assessments on these properties and whether to undertake further
investigation or remediation. Certain of these properties contain
asbestos-containing building materials. In each case GC believes that these
materials have been adequately contained and has implemented an
asbestos-containing building materials operations and maintenance program has
been implemented for the properties found to contain asbestos-containing
building materials.
Potential Environmental Liability Resulting From Underground Storage Tanks
Some of our properties, as well as properties that we have previously owned, are
leased or have been leased to owners or operators of businesses that use, store
or otherwise handle petroleum products or other hazardous or toxic substances.
These businesses include dry cleaners that operate on-site dry cleaning plants
and auto care centers. Some of these properties contain, or may have contained,
underground storage tanks for the storage of petroleum products and other
hazardous or toxic substances. These operations create a potential for the
release of those substances. Some of our properties are adjacent to or near
other properties that have contained or currently contain underground storage
tanks used to store petroleum products or other hazardous or toxic substances.
Several of our properties have been contaminated with these substances from
on-site operations or operations on adjacent or nearby properties. In addition,
certain of our properties are on, or are adjacent to or near other properties
upon which others, including former owners or tenants of the properties, have
engaged or may engage in activities that may release petroleum products or other
hazardous or toxic substances.
Environmental Liabilities May Adversely Affect Operating Costs and Ability to
Borrow
The obligation to pay for the cost of complying with existing Environmental Laws
as well as the cost of complying with future legislation may affect our
operating costs. In addition, the presence of petroleum products or other
hazardous or toxic substances at any of our properties, or the failure to
remediate those properties properly, may adversely affect our ability to borrow
by using those properties as collateral. The cost of defending against claims of
liability and the cost of complying with Environmental Laws, including
investigation or clean-up of contaminated property, could materially adversely
affect our results of operations and financial condition.
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General Risks of Ownership of Real Estate
We are subject to risks generally incidental to the ownership of real estate.
These risks include:
changes in general economic or local conditions;
changes in supply of or demand for similar or competing properties in an
area;
the impact of environmental protection laws;
changes in interest rates and availability of financing which may render
the sale or financing of a property difficult or unattractive;
changes in tax, real estate and zoning laws; and
the creation of mechanics' liens or similar encumbrances placed on the
property by a lessee or other parties without our knowledge and consent.
Should any of these events occur, our results of operations and financial
condition could be adversely affected.
General Risks Associated With Management, Leasing and Brokerage Contracts
We are subject to the risks generally associated with the property management,
leasing and brokerage businesses. These risks include the risk that:
management contracts or service agreements may be terminated;
contracts will not be renewed upon expiration or will not be renewed on
terms consistent with current terms; and
leasing and brokerage activity generally may decline.
In addition, our acquisition of properties from partnerships managed by GC or
another subsidiary could result in a decrease in revenues to such subsidiary and
a corresponding decrease in dividends received by us from such subsidiary. Each
of these developments could have an adverse effect on our results of operations
and financial condition.
To maintain our status as a REIT while realizing income from GC's third-party
management business, the capital stock of GC is divided into two classes. All of
the voting common stock of GC, representing 5% of GC's total equity, is held by
individual stockholders. Nonvoting preferred stock representing the remaining
equity of GC is held entirely by the Operating Partnership. Although the
Operating Partnership holds a majority of the equity interest in GC, it is not
able to elect GC's directors and, consequently, we have no ability to influence
GC's day-to-day decisions.
Uninsured Losses May Adversely Affect Operations
We, or in certain instances, tenants of the properties, carry comprehensive
liability, fire and extended coverage with respect to the properties. This
coverage has policy specification and insured limits customarily carried for
similar properties. However, certain types of losses (such as from earthquakes
and floods) may be either uninsurable or not economically insurable. Further,
certain of the properties are located in areas that are subject to earthquake
activity and floods. Should a property sustain damage as a result of an
earthquake or flood, we may incur losses due to insurance deductibles,
co-payments on insured losses or uninsured losses. Should an uninsured loss
occur, we could lose some or all of our capital investment, cash flow and
anticipated profits related to one or more properties. This could have an
adverse effect on our results of operations and financial condition.
Illiquidity of Real Estate May Limit Our Ability to Vary Our Portfolio
Real estate investments are relatively illiquid and, therefore, will tend to
limit our ability to vary our portfolio promptly in response to changes in
economic or other conditions. In addition, the Internal Revenue Code of 1986, as
amended (the "Code"), and individual agreements with sellers of properties place
limits on our ability to sell properties. Eighty- five of our properties were
acquired on terms and conditions under which they can be disposed of only in a
like-kind exchange or other non-taxable transaction. The agreed upon time
periods for these restrictions on dispositions vary from transaction to
transaction.
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Potential Liability Under the Americans With Disabilities Act
As of January 26, 1992, all of our properties were required to be in compliance
with the Americans With Disabilities Act. The Americans With Disabilities Act
generally requires that places of public accommodation be made accessible to
people with disabilities to the extent readily achievable. Compliance with the
Americans With Disabilities Act requirements could require removal of access
barriers. Non-compliance could result in imposition of fines by the federal
government, an award of damages to private litigants and/or a court order to
remove access barriers. Because of the limited history of the Americans With
Disabilities Act, the impact of its application to our properties, including the
extent and timing of required renovations, is uncertain. Pursuant to lease
agreements with tenants in certain of the "single-tenant" properties, the
tenants are obligated to comply with the Americans With Disabilities Act
provisions. If our costs are greater than anticipated or tenants are unable to
meet their obligations, our results of operations and financial condition could
be adversely affected.
Development Alliances May Adversely Affect Operations
We may, from time to time, enter into alliances with selected developers for the
purpose of developing new projects in which these developers have, in the
opinion of management, significant expertise or experience. These projects
generally require various governmental and other approvals, the receipt of which
cannot be assured. These development activities also may entail certain risks,
including the risk that:
management may expend funds on and devote time to projects which may not
come to fruition;
construction costs of a project may exceed original estimates, possibly
making the project uneconomical;
occupancy rates and rents at a completed project may be less than
anticipated; and
expenses at a completed development may be higher than anticipated.
In addition, the partners in development alliances may have significant control
over the operation of the alliance project. Therefore, these investments may,
under certain circumstances, involve risks such as the possibility that the
partner might:
become bankrupt;
have economic or business interests or goals that are inconsistent with our
business interest or goals; or
be in a position to take action contrary to our instructions or requests or
contrary to our policies or objectives.
Consequently, actions by a partner in a development alliance might subject
property owned by the alliance to additional risk. Although we will seek to
maintain sufficient control of any alliance to permit our objectives to be
achieved, we may be unable to take action without the approval of our
development alliance partners. Conversely, our development alliance partners
could take actions binding on the alliance without our consent. In addition,
should a partner in a development alliance become bankrupt we could become
liable for the partner's share of the project's liabilities. These risks may
result in a development project adversely affecting our results of operations
and financial condition.
Material Tax Risks
Since 1996, we have operated as a REIT under the Code. However, we may not be
able to maintain our status as a REIT. To qualify as a REIT we must satisfy
numerous requirements (some on an annual and quarterly basis) established under
highly technical and complex Code provisions. Only limited judicial or
administrative interpretation exists for these provisions and involves the
determination of various factual matters and circumstances not entirely within
our control. We receive nonqualifying management fee income and own
nonqualifying preferred stock in certain subsidiaries. As a result, we may
approach the income and asset test limits imposed by the Code. There is a risk
that we may not satisfy these tests. In order to avoid exceeding the asset test
limit, for example, we may have to reduce our interest in our subsidiaries. We
are relying on the opinion of our tax counsel regarding our ability to qualify
as a REIT. This legal opinion, however, is not binding on the Internal Revenue
Service ("IRS").
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Consequences of Failure to Qualify as a REIT
If the Company fails to qualify as a REIT in any taxable year, the Company would
be subject to federal income tax on its taxable income at corporate rates. In
addition, the Company also may be disqualified from treatment as a REIT for the
four taxable years following the year in which the Company failed to qualify.
This would reduce our net earnings available for investment or distribution to
stockholders because of the additional tax liability. In addition, the Company
would no longer be required to make distributions to stockholders.
Even if the Company continues to qualify as a REIT, it will be subject to
certain federal, state and local taxes on our income and property.
Possible Changes in Tax Laws; Effect on the Market Value of Real Estate
Investments
Income tax treatment of REITs may be modified by legislative, judicial or
administrative action at any time. These changes may be applied to past as well
as future operations. Legislation, regulations, administrative interpretations
or court decisions may significantly change the tax laws with respect to (1) the
qualification as a REIT or (2) the federal income tax consequences of this
qualification. In addition, the changes might also indirectly affect the market
value of all real estate investments, and consequently our ability to realize
our investment objectives.
Additional Capital Requirements; Possible Adverse Effects on Holders of Equity
Our ability to continue our growth pattern established in 1996-1998, which was
funded largely through the raising of equity capital, depends in large part upon
our ability to raise additional capital in the future on satisfactory terms. If
we raise additional capital through the issuance of additional equity
securities, or securities convertible into or exercisable for equity securities,
the interests of holders of the Company's shares of Common Stock could be
diluted. Likewise, our Board of Directors is authorized to issue Preferred Stock
and to determine the rights of the Preferred Stock. Accordingly, the Board of
Directors may authorize the issuance of Preferred Stock with rights which may
dilute or otherwise adversely affect the interests of holders of the Company's
shares of Common Stock. If we raise additional capital through debt financing,
we will be subject to the risks described below, among others.
Our Indebtedness Restrictions May Adversely Affect Our Ability to Incur
Indebtedness
Our organizational documents limit our ability to incur additional debt if the
total debt, including the additional debt, would exceed 50% of the "Borrowing
Base." This debt limitation in our Charter can only be amended by an affirmative
vote of the majority of all outstanding stock entitled to vote on such
amendment. The term "Borrowing Base" is defined as the greater of Fair Market
Value or Total Market Capitalization. Fair Market Value is based upon the value
of our assets as determined by an independent appraiser. Total Market
Capitalization is the sum of the market value of our outstanding capital stock,
including shares issuable on exercise of redemption options by holders of units
of the limited partnership, plus debt. An exception is made for refinancings and
borrowings required to make distributions to maintain our status as a REIT. In
light of these debt restrictions, it should be noted that a change in the value
of our common stock could affect the Borrowing Base, and therefore our ability
to incur additional indebtedness, even though such change in the common stock's
value is unrelated to our liquidity.
Limitation on Ownership of Common Stock And Stockholder's Rights Plan May
Preclude Acquisition of Control
Provisions of our Charter are designed to assist us in maintaining our
qualification as a REIT under the Code by preventing concentrated ownership of
the Company which might jeopardize REIT qualification. Among other things, these
provisions provide that:
any transfer or acquisition of our common or preferred stock that would
result in our disqualification as a REIT under the Code will be void; and
if any person attempts to acquire shares of our common or preferred stock
that after the acquisition would cause the person to own an amount of
common stock and preferred stock in excess of a predetermined limit, such
acquisitions would be void.
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Ownership is determined by operation of certain attribution rules set out in the
Code. Pursuant to Board action, the limit currently is 9.9% of the value of the
outstanding shares of common stock and preferred stock (the "Ownership
Limitation"). The common stock or preferred stock the transfer of which would
cause any person to violate the Ownership Limitation, is referred to as the
"Excess Shares." A transfer that would violate the Ownership Limitation will be
void and the common stock or preferred stock subject to the transfer will
automatically be transferred to an unaffiliated trustee for the benefit of a
charitable organization designated by the Board of Directors until sold by the
trustee to a third party or purchased by us. This limitation on the ownership of
common stock and preferred stock may preclude the acquisition of control of the
Company by a third party without the consent of the Board of Directors. If the
Board of Directors waives the Ownership Limitation for any person, the Ownership
Limitation will be proportionally and automatically reduced with regard to all
other persons such that no five persons may own more than 50% of the value of
the common stock and preferred stock. Certain other provisions contained in our
Charter and Bylaws may also have the effect of discouraging a third party from
making an acquisition proposal for the Company and may thereby inhibit a change
in control in the Company even if a change in control would be in the best
interests of the stockholders.
In addition, in July 1998, the Board of Directors adopted a stockholder rights
plan. Under the plan, we declared a dividend of rights on our 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 our shares. The rights plan is intended to prevent abusive hostile
takeover attempts by requiring a potential acquirer to negotiate the terms of an
acquisition with the Board of Directors. However, it could have the effect of
deterring or preventing an acquisition of the Company, even if a majority of our
stockholders would be in favor of such acquisition, and could also have the
effect of making it more difficult for a person or group to gain control of the
Company or to change existing management.
Losses Relating to Consolidation
We were created through the merger of eight partnerships and a corporation (the
"Consolidation"). Prior to the Consolidation, two lawsuits were filed in 1995
contesting the fairness of the Consolidation, one in California State court and
one in federal court. We have been named as a defendant in each of the suits.
The complaints in both actions alleged, among other things, breaches by the
defendants of fiduciary duties and inadequate disclosures. The California State
court action was settled and, upon appeal, the settlement was affirmed by the
State Court of Appeals on February 17, 1998. The objectors petitioned the
California Supreme Court for review, which was denied on May 21, 1998. On August
18, 1998, the objectors filed with the United States Supreme Court a petition
for writ of certiorari. On September 18, 1998, the defendants filed a brief in
opposition to the objectors' petition for writ of certiorari, and on September
25, 1998, the objectors filed a reply in support of their petition. The United
States Supreme Court has not yet ruled on the petition for writ of certiorari.
Pursuant to the terms of the settlement in the California State court action,
pending appeal, we have paid one-third of the $855,000 settlement amount and the
remaining two-thirds are being held in escrow. In the federal court action, the
court in December of 1995 deferred all further proceedings pending a ruling in
the California State court action. The federal court action has been voluntarily
stayed pending final outcome of the California State court action. We believe
that it is very unlikely that this litigation would result in a liability that
would exceed our accrued liability by a material amount. However, given the
inherent uncertainties of litigation, we cannot be sure that the ultimate
outcomes of these actions will be favorable to us.
From time to time we are involved in other litigation arising out of our
business activities. Certain other claims and lawsuits have arisen against us in
our normal course of business. It is possible that this litigation and the other
litigation previously described could result in significant losses in excess of
amounts reserved, which could have an adverse effect on our results of
operations and financial condition.
Uncertainty Due to the Board of Directors' Ability to Change Investment Policies
The Board of Directors may change our investment policies without a vote of the
stockholders. If our investment policies change, the risks and potential rewards
of an investment in the shares may also change. In addition, the methods of
implementing our investment policies may vary as new investment techniques are
developed.
Page 34
<PAGE>
Effect of Market Interest Rates on Price of Common Stock
The annual yield on the price paid for shares of our common stock from
distributions by the Company may influence the market price of the shares of our
common stock in public markets. An increase in market interest rates may lead
prospective purchasers of our common stock to seek a higher annual yield from
their investments. This may adversely affect the market price of our common
stock.
Shares Available for Future Sale
We cannot predict the effect, if any, that future sales of shares of our common
stock or future conversions or exercises of securities for future sales will
have on the market price of our common stock. Sales of substantial amounts of
our common stock, or the perception that such sales could occur, may adversely
affect the prevailing market price for our common stock.
Impact of Year 2000 Compliance Costs on Operations
State of Readiness. We use a number of computer software programs and operating
systems across our entire organization. These programs and systems primarily
comprise (i) information technology systems ("IT Systems") (i.e., software
programs and computer operating systems) that serve our 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 our properties ("Property Systems"). To the extent that our
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, we have completed our identification of IT Systems, including
hardware components, that are not yet Year 2000 compliant. To the best of
our knowledge based on available information and a reasonable level of
inquiry and investigation, we have completed such upgrading of such systems
that we believe are called for under the circumstances, and in accordance
with prevailing industry practice. We have commenced a testing program
which we anticipate will be completed during 1999. In addition, we are
currently communicating with third parties with whom we do 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, we have also completed our identification of Property
Systems, including hardware components, that are not yet Year 2000
compliant. We have commenced such upgrading of such systems that we believe
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, we will
initiate a testing program which we anticipate will be completed during
1999. To the best of our knowledge, there are no Property Systems, the
failure of which would have a material effect on our operations.
Costs of Addressing Our Year 2000 Issues. Given the information known at this
time about our systems that are non-compliant, coupled with our ongoing, normal
course-of-business efforts to upgrade or replace critical systems, as necessary,
we do not expect Year 2000 compliance costs to have any material adverse impact
on our liquidity or ongoing results of operations. The costs of such assessment
and remediation will be paid as an operating expense.
Risks of Our Year 2000 Issues. In light of our assessment and upgrading efforts
to date, and assuming completion of the planned, normal course-of- business
upgrades and subsequent testing, we believe 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 our overall operations. We believe that all of our
systems will be Year 2000 compliant and that compliance will not materially
adversely affect our future liquidity or results of operations or ability to
service debt, but we cannot give absolute assurance that this is the case.
Page 35
<PAGE>
Our Contingency Plans. We are currently developing our 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 our ability to plan for major regional or industrial failures such as
regional power outages or regional or industrial communications breakdowns. We
expect such contingency plans to be completed during 1999.
Item 7A. Qualitative and Quantitative Information About Market Risk
Interest Rates
The Company's primary market risk exposure is to changes in interest rates
obtainable on its mortgage loans receivable and its secured and unsecured
borrowings. The Company does not believe that changes in market interest rates
will have a material impact on the performance or fair value of its portfolio of
mortgage loans receivable.
It is the Company's policy to manage its exposure to fluctuations in market
interest rates for its borrowings through the use of fixed rate debt instruments
to the extent that reasonably favorable rates are obtainable with such
arrangements. Approximately 20% and 38% of the Company's outstanding debt,
including amounts borrowed under the Credit Facility, were subject to variable
rates at December 31, 1998 and 1997, respectively. In addition, the average
interest rate on the Company's debt decreased from 7.49% at December 31, 1997 to
7.08% at December 31, 1998. The Company reviews interest rate exposure in the
portfolio quarterly in an effort to minimize the risk of interest rate
fluctuations. The Company does not have any other material market-sensitive
financial instruments. It is not the Company's policy to engage in hedging
activities for previously outstanding debt instruments or for speculative or
trading purposes.
The Company may enter into forward interest rate, or similar, agreements to
hedge specific anticipated debt issuances where management believes the risk of
adverse changes in market rates is significant. Under a forward interest rate
agreement, if the referenced interest rate increases, the Company is entitled to
a receipt in settlement of the agreement that economically would offset the
higher financing cost of the debt issued. If the referenced interest rate
decreases, the Company makes payment in settlement of the agreement, creating an
expense that economically would offset the reduced financing cost of the debt
issued. At December 31, 1998, the Company was not a party to any forward
interest rate or similar agreements.
The table below provides information about the Company's financial instruments
that are sensitive to changes in interest rates. For debt obligations, the table
presents principal cash flows and related weighted average interest rates by
expected maturity dates. Weighted average variable rates are based on rates in
effect at the reporting date.
<TABLE>
<CAPTION>
Expected Maturity Date
-------------------------------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Secured Fixed $ 11,775 $ 63,174 $ 15,857 $ 14,748 $ 38,365 $ 439,429 $ 583,348 $583,348
Average interest rate 7.33% 6.89% 7.92% 7.47% 7.64% 6.86% 6.97%
Secured Variable $ 115,074 $ 9,484 $ 24 $ 26 $ 28 $ 594 $ 125,230 $125,230
Average interest rate 6.75% 7.45% 7.26% 7.26% 7.26% 7.26% 6.81%
Unsecured Fixed $ - $ - $ - $ - $ - $ 150,000 $ 150,000 $150,000
Average interest rate - - - - - 7.63% 7.63%
Unsecured Variable $ - $ 63,519 $ - $ - $ - $ - $ 63,519 $ 63,519
Average interest rate - 7.40% - - - - 7.40%
</TABLE>
The Company believes that the interest rates given in the table for fixed rate
borrowings approximate the rates the Company could currently obtain for
instruments of similar terms and maturities and that the fair values of such
instruments approximate carrying value at December 31, 1998.
Page 36
<PAGE>
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this Form 10-K.
See Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 7, 1999.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 7, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 7, 1999.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 7, 1999.
Page 37
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
Page No.
(a) (1) Financial Statements
Report of Independent Public Accountants 39
Consolidated Balance Sheets at December 31, 1998 and 1997 40
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 41
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 42
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 43
Notes to Consolidated Financial Statements 45
(2) Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation 63
Schedule IV - Mortgage Loans Receivable, Secured by Real Estate 73
(3) Exhibits to Financial Statements
The Exhibit Index attached hereto is hereby incorporated by
reference to this Item. 77
(b) Reports on Form 8-K (incorporated herein by reference)
On October 27, 1998, the Company filed a report on Form 8-K
with respect to Supplemental Information for the quarter
ended September 30, 1998.
On January 27, 1999, the Company filed a report on Form 8-K
with respect to Supplemental Information for the quarter
ended December 31, 1998.
Page 38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
GLENBOROUGH REALTY TRUST INCORPORATED:
We have audited the accompanying consolidated balance sheets of GLENBOROUGH
REALTY TRUST INCORPORATED, as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1998, 1997 and 1996. These consolidated financial
statements and the schedules referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of GLENBOROUGH REALTY
TRUST INCORPORATED, as of December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for the years ended December 31,
1998, 1997 and 1996, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying schedules
listed in the index to financial statements and schedules are presented for the
purpose of complying with the Securities and Exchange Commission's rules and are
not a required part of the basic consolidated financial statements. These
schedules have been subjected to the auditing procedures applied in our audits
of the basic consolidated financial statements and, in our opinion, are fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California
March 15, 1999
Page 39
<PAGE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1997
(in thousands, except share amounts)
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Rental property, net of accumulated depreciation of
$72,951 and $40,349 in 1998 and 1997, respectively $ 1,720,579 $ 799,501
Real estate held for sale, net of accumulated depreciation
of $9,918 and $864 in 1998 and 1997, respectively 21,860 25,717
Investments in Development 35,131 7,251
Investments in Associated Companies 8,807 10,948
Mortgage loans receivable 42,420 3,692
Cash and cash equivalents 4,357 5,070
Other assets 45,862 13,595
-------------- --------------
TOTAL ASSETS $ 1,879,016 $ 865,774
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage loans $ 708,578 $ 148,139
Unsecured Series A Senior Notes 150,000 -
Unsecured bank line 63,519 80,160
Other liabilities 28,921 11,091
-------------- --------------
Total liabilities 951,018 239,390
-------------- --------------
Commitments and contingencies - -
Minority interest 99,465 46,261
Stockholders' Equity:
Common stock, 31,758,915 and 31,547,256 shares issued
and outstanding at December 31, 1998 and 1997, respectively
32 31
Preferred stock, 11,500,000 shares issued and outstanding
at December 31, 1998 11 -
Additional paid-in capital 865,692 593,702
Deferred compensation (181) (210)
Retained earnings (deficit) (37,021) (13,400)
-------------- --------------
Total stockholders' equity 828,533 580,123
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,879,016 $ 865,774
============== ==============
See accompanying notes to consolidated financial statements
</TABLE>
Page 40
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
(in thousands, except per share amounts)
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
REVENUE
Rental revenue $ 227,956 $ 61,393 $ 17,943
Fees and reimbursements from affiliates 2,802 719 311
Interest and other income 4,607 1,802 1,080
Equity in earnings of Associated Companies 1,314 2,743 1,598
Net gain on sales of real estate assets 4,796 839 321
Gain on collection of mortgage loan receivable - 652 -
---------------- ---------------- ----------------
Total revenue 241,475 68,148 21,253
---------------- ---------------- ----------------
EXPENSES
Property operating expenses 74,079 18,958 5,266
General and administrative 11,038 3,319 1,393
Depreciation and amortization 50,194 14,873 4,575
Interest expense 53,289 9,668 3,913
Loss on interest rate protection agreement 4,323 - -
Consolidation costs - - 6,082
Litigation costs - - 1,155
---------------- ---------------- ----------------
Total expenses 192,923 46,818 22,384
---------------- ---------------- ----------------
Income (loss) from operations before minority interest and
extraordinary item 48,552 21,330 (1,131)
Minority interest (2,550) (1,119) (292)
---------------- ---------------- ----------------
Net income (loss) before extraordinary item 46,002 20,211 (1,423)
Extraordinary item:
Loss on early extinguishment of debt (1,400) (843) (186)
---------------- ---------------- ----------------
Net income (loss) 44,602 19,368 (1,609)
Preferred dividends (20,620) - -
================ ================ ================
Net income (loss) available to Common Stockholders $ 23,982 $ 19,368 $ (1,609)
================ ================ ================
Basic Per Share Data:
Net income (loss) available to Common Stockholders before
extraordinary item $ 0.80 $ 1.12 $ (0.21)
Extraordinary item (0.04) (0.04) (0.03)
---------------- ---------------- ----------------
Net income (loss) available to Common Stockholders $ 0.76 $ 1.08 $ (0.24)
================ ================ ================
Basic weighted average shares outstanding 31,661,810 17,982,817 6,632,707
================ ================ ================
Diluted Per Share Data:
Net income (loss) available to Common Stockholders before
extraordinary item $ 0.79 $ 1.09 $ (0.21)
Extraordinary item (0.04) (0.04) (0.03)
---------------- ---------------- ----------------
Net income (loss) available to Common Stockholders $ 0.75 $ 1.05 $ (0.24)
================ ================ ================
Diluted weighted average shares outstanding 35,576,210 19,517,543 6,751,259
================ ================ ================
See accompanying notes to consolidated financial statements
</TABLE>
Page 41
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
(in thousands)
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, 1995 5,754 $ 6 - $ - $ 56,585 $ - $ (963) $ 55,628
Issuance of common stock to directors
and officers 35 - - - 525 (399) - 126
Issuance of common stock, net of
offering costs of $4,046 3,873 4 - - 49,805 - - 49,809
Distributions - - - - - - (6,354) (6,354)
Net loss - - - - - - (1,609) (1,609)
--------------------- ------------------------------------------------ ----------------------
Balance at December 31, 1996 9,662 10 - - 106,915 (399) (8,926) 97,600
--------------------- ------------------------------------------------ ----------------------
Amortization of deferred compensation
- - - - - 189 - 189
Issuance of common stock, net of
offering costs of $28,785 21,780 21 - - 482,491 - - 482,512
Issuance of common stock related to
acquisitions 105 - - - 2,655 - - 2,655
Adjustment to fair value of minority
interest - - - - 1,641 - - 1,641
Distributions - - - - - - (23,842) (23,842)
Net income - - - - - - 19,368 19,368
--------------------- ------------------------------------------------ ----------------------
Balance at December 31, 1997 31,547 31 - - 593,702 (210) (13,400) 580,123
--------------------- ------------------------------------------------ ----------------------
Issuance of preferred stock, net of
offering costs of $12,813 - - 11,500 11 274,676 - - 274,687
Issuance of common stock related to
acquisitions 136 1 - - 3,389 - - 3,390
Exercise of stock options 22 - - - 344 - - 344
Conversion of Operating Partnership
units into common stock
52 - - - - - - -
Amortization of deferred compensation
- - - - - 91 - 91
Issuance of common stock to director
2 - - - 62 (62) - -
Unrealized loss on marketable
securities - - - - - - (34) (34)
Adjustment to fair value of minority
interest - - - - (6,481) - - (6,481)
Distributions - - - - - - (68,189) (68,189)
Net income - - - - - - 44,602 44,602
--------------------- ------------------------------------------------ ----------------------
Balance at December 31, 1998 31,759 $ 32 11,500 $ 11 $ 865,692 $ (181) $ (37,021) $ 828,533
===================== ================================================ ======================
See accompanying notes to consolidated financial statements
</TABLE>
Page 42
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 44,602 $ 19,368 $ (1,609)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 50,194 14,873 4,575
Amortization of loan fees, included in
interest expense 1,563 221 193
Minority interest in income from operations 2,550 1,119 292
Equity in earnings of Associated
Companies (1,314) (2,743) (1,598)
Net gain on sales of real estate assets (4,796) (839) (321)
Gain on collection of mortgage loan receivable
- (652) -
Loss on early extinguishment of debt 1,400 843 186
Amortization of deferred compensation 91 189 -
Consolidation costs - - 6,082
Litigation costs - - 1,155
Changes in certain assets and liabilities, net (6,808) (8,020) (4,253)
--------------- --------------- --------------
Net cash provided by operating activities 87,482 24,359 4,702
--------------- --------------- --------------
Cash flows from investing activities:
Net proceeds from sales of real estate assets 73,339 12,950 2,882
Additions to real estate assets (626,161) (586,965) (62,286)
Investments in Development (25,745) - -
Additions to mortgage loans receivable (39,613) (1,855) (2,694)
Principal receipts on mortgage loans receivable 885 8,068 254
Investments in Associated Companies - (3,700) (1,890)
Distributions from Associated Companies 3,455 2,260 1,901
--------------- --------------- --------------
Net cash used for investing activities (613,840) (569,242) (61,833)
--------------- --------------- --------------
Cash flows from financing activities:
Proceeds from borrowings 696,618 467,689 52,599
Repayment of borrowings (511,696) (375,909) (35,593)
Payments into lender impound accounts, net (11,061) (281) (564)
Proceeds from issuance of Series A Senior Notes
150,000 - -
Payment of investor notes - - (2,483)
Distributions to minority interest holders (5,058) (1,571) (526)
Distributions (68,189) (23,842) (6,354)
Exercise of stock options 344 - -
Proceeds from issuance of stock, net of offering costs
274,687 482,512 46,820
--------------- --------------- --------------
Net cash provided by financing activities 525,645 548,598 53,899
--------------- --------------- --------------
continued
See accompanying notes to consolidated financial statements
</TABLE>
Page 43
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
For the years ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents $ (713) $ 3,715 $ (3,232)
Cash and cash equivalents at beginning of year 5,070 1,355 4,587
--------------- --------------- --------------
Cash and cash equivalents at end of year $ 4,357 $ 5,070 $ 1,355
=============== =============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest (net of capitalized interest of
$1,108 in 1998) $ 46,608 $ 9,373 $ 3,270
=============== =============== ==============
Supplemental disclosure of Non-Cash Investing and Financing
Activities:
Acquisition of real estate through assumption of first
trust deed notes payable $ 358,876 $ 60,628 $ 25,200
=============== =============== ==============
Acquisition of real estate through issuance of shares
of common stock and Operating Partnership units
$ 52,621 $ 42,177 $ 3,749
=============== =============== ==============
Unrealized loss on marketable securities $ (34) $ - $ -
=============== =============== ==============
See accompanying notes to consolidated financial statements
</TABLE>
Page 44
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Note 1. ORGANIZATION
Glenborough Realty Trust Incorporated (the "Company") was organized in the State
of Maryland on August 26, 1994. The Company has elected to qualify as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended (the "Code"). The Company completed a consolidation with certain public
California limited partnerships and other entities (the "Consolidation") engaged
in real estate activities (the "GRT Predecessor Entities") through an exchange
of assets of the GRT Predecessor Entities for 5,753,709 shares of Common Stock
of the Company. The Consolidation occurred on December 31, 1995, and the Company
commenced operations on January 1, 1996.
Subsequent to the Consolidation on December 31, 1995, and through December 31,
1998, the following Common Stock transactions occurred: (i) 37,000 shares of
Common Stock were issued to officers and directors as stock compensation; (ii)
25,446,000 shares were issued in four separate public equity offerings; (iii)
448,172 shares were issued in connection with various acquisitions; (iv) 22,407
shares were issued in connection with the exercise of employee stock options;
(v) 51,686 shares were issued in connection with the exchange of Operating
Partnership units and (vi) 59 shares were retired, resulting in total shares of
Common Stoc issued and outstanding at December 31, 1998, of 31,758,915. Assuming
the issuance of 4,217,886 shares of Common Stock issuable upon redemption of
4,217,886 partnership units in the Operating Partnership, there would be
35,976,801 shares of Common Stock outstanding as of December 31, 1998.
In January 1998, the Company completed a public offering of 11,500,000 shares of
7-3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible
Preferred Stock Offering"). The shares are convertible at any time at the option
of the holder thereof into shares of Common Stock at an initial conversion price
of $32.83 per share of Common Stock (equivalent to a conversion rate of 0.7615
shares of Common Stock for each share of Series A Convertible Preferred Stock),
subject to adjustment in certain circumstances. Shares of Preferred Stock issued
and outstanding at December 31, 1998 totaled 11,500,000.
In July 1998, the Company's Board of Directors adopted a stockholder rights plan
which is intended to protect the Company's stockholders in the event of coercive
or unfair takeover tactics, or an unsolicited attempt to acquire control of the
Company in a transaction the Board of Directors believes is not in the best
interests of the stockholders. Under the plan, the Company declared a dividend
of Rights on its Common Stock. The rights issued under the plan will be
triggered, with certain exceptions, if and when any person or group acquires, or
commences a tender offer to acquire, 15% or more of the Company's shares.
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.
Any 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.
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
87.25% limited partner interest at December 31, 1998, is Glenborough Properties,
L.P. (the "Operating Partnership"). As of December 31, 1998, the Operating
Partnership, directly and through various subsidiaries in which it and the
Company own 100% of the ownership interests, controls a total of 186 real estate
projects.
As of December 31, 1998, the Company also holds 100% of the non-voting preferred
stock of the following two Associated Companies (the "Associated Companies"):
Page 45
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Glenborough Corporation ("GC") is the general partner of several real
estate limited partnerships and provides asset and property management
services for these partnerships (the "Managed Partnerships"). It also
provides partnership administration, asset management, property management
and development services 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"), through June 1998, leased the six Country
Suites by Carlson hotels owned by the Company and operated them for its own
account. In June 1998, two of the hotels were sold and the other four
hotels were leased to other operators. GHG also operated one other Country
Suites by Carlson hotel through June 30, 1998, and two resort condominium
hotels through April 30, 1998, under separate contracts. In August 1998,
GHG acquired an 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 and its wholly owned or controlled subsidiaries as of
December 31, 1998 and 1997, and the consolidated results of operations and cash
flows of the Company for the years ended December 31, 1998, 1997 and 1996. All
intercompany transactions, receivables and payables have been eliminated in
consolidation.
Reclassification
Certain prior year balances have been reclassified to conform with the current
year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the results of operations during the reporting period. Actual results could
differ from those estimates.
New Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999, and early
adoption is permitted. 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.
Investments in Real Estate
Investments in real estate are stated at cost unless circumstances indicate that
cost cannot be recovered, in which case, the carrying value of the property is
reduced to estimated fair value. Estimated fair value: (i) is based upon the
Company's plans for the continued operation of each property; and (ii) is
computed using estimated sales price, as determined by prevailing market values
for comparable properties and/or the use of capitalization rates multiplied by
annualized rental income based upon the age, construction and use of the
building. The fulfillment of the Company's plans related to each of its
properties is dependent upon, among other things, the presence of economic
conditions which will enable the Company to continue to hold and operate the
properties prior to their eventual sale. Due to uncertainties inherent in the
valuation process and in the economy, it is reasonably possible that the actual
results of operating and disposing of the Company's properties could be
materially different than current expectations.
Depreciation is provided using the straight line method over the useful lives of
the respective assets.
The useful lives are as follow:
Page 46
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Buildings and Improvements 10 to 40 years
Tenant Improvements Term of the related lease
Furniture and Equipment 5 to 7 years
Investments in Associated Companies
The Company's investments in the Associated Companies are accounted for using
the equity method, as discussed further in Note 4.
Mortgage Loans Receivable
The Company monitors the recoverability of its loans and notes receivable
through ongoing contact with the borrowers to ensure timely receipt of interest
and principal payments, and where appropriate, obtains financial information
concerning the operation of the properties. Interest on mortgage loans is
recognized as revenue as it accrues during the period the loan is outstanding.
Mortgage loans receivable will be evaluated for impairment if it becomes evident
that the borrower is unable to meet its debt service obligations in a timely
manner and cannot satisfy its payments using sources other than the operations
of the property securing the loan. If it is concluded that such circumstances
exist, then such loan will be considered to be impaired and its recorded amount
will be reduced to the fair value of the collateral securing it. Interest income
will also cease to accrue under such circumstances. Due to uncertainties
inherent in the valuation process, it is reasonably possible that the amount
ultimately realized from the Company's collection on these receivables will be
different than the recorded amounts.
Cash Equivalents
The Company considers short-term investments (including certificates of deposit)
with a maturity of three months or less at the time of investment to be cash
equivalents.
Marketable Securities
The Company records its marketable securities at fair value. Unrealized gains
and losses on securities are reported as a separate component of stockholders'
equity and realized gains and losses are included in net income. As of December
31, 1998, marketable securities with a fair value of approximately $2,639,000
were included in other assets on the accompanying consolidated balance sheet.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure about
fair value for all financial instruments. Based on the borrowing rates currently
available to the Company, the carrying amount of debt approximates fair value.
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.
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 December 31, 1998, the Company was not a party to any open interest rate
protection agreements.
Page 47
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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.
Investments in Development Alliances
The Company, through mezzanine loans and equity contributions, invests in
various development alliances with projects currently under development. The
interest on advances and other direct project costs incurred by the Company are
capitalized to the investment since such funds are used for development
purposes. See Note 6 for further discussion.
Minority Interest
Minority interest represents the 11.75% limited partner interests in the
Operating Partnership not held by the Company.
Revenues
All leases are classified as operating leases. Rental revenue is recognized as
earned over the terms of the related leases.
For the years ended December 31, 1998, 1997 and 1996, no tenants represented 10%
or more of rental revenue of the Company.
Fees and reimbursements 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 shareholders. REITs are subject to a number of
organizational and operational requirements. If the Company fails to qualify as
a REIT in any taxable year, the Company will be subject to Federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate tax rates. Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain state and local taxes on its income
and property and to Federal income and excise taxes on its undistributed income.
Earnings Per Share
In 1997, the Company adopted the disclosure requirements of SFAS No. 128,
"Earnings per Share." SFAS 128 requires the disclosure of basic earnings per
share and modified existing guidance for computing diluted earnings per share.
Earnings per share for all periods presented have been restated to conform to
the new standard. For additional required disclosures, see Note 9.
Page 48
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Note 3. INVESTMENTS IN REAL ESTATE
The cost and accumulated depreciation of real estate investments as of December
31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Buildings
and Net Recorded
Improve-ments Accumulated Value
1998: Land Total Cost Depreciation
------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Office properties $ 92,166 $ 773,018 $ 865,184 $ (35,318) $ 829,866
Office/Flex properties 54,167 251,714 305,881 (11,443) 294,438
Industrial properties 21,329 115,451 136,780 (10,217) 126,563
Retail properties 20,524 72,654 93,178 (8,369) 84,809
Multi-family properties 46,590 350,011 396,601 (8,796) 387,805
Hotel properties 2,756 24,928 27,684 (8,726) 18,958
============= =============== =============== =============== ===============
Total $ 237,532 $ 1,587,776 $ 1,825,308 $ (82,869) $ 1,742,439
============= =============== =============== =============== ===============
1997:
Office properties $ 62,442 $ 282,129 $ 344,571 $ (9,310) $ 335,261
Office/Flex properties 46,496 163,606 210,102 (3,274) 206,828
Industrial properties 20,903 88,802 109,705 (7,503) 102,202
Retail properties 16,687 50,447 67,134 (5,845) 61,289
Multi-family properties 19,512 71,288 90,800 (1,780) 89,020
Hotel properties 5,587 38,532 44,119 (13,501) 30,618
============= =============== =============== =============== ===============
Total $ 171,627 $ 694,804 $ 866,431 $ (41,213) $ 825,218
============= =============== =============== =============== ===============
</TABLE>
In the first quarter of 1998, the Company acquired 22 properties which consisted
of approximately 4.2 million rentable square feet of office, office/flex and
industrial space and had aggregate acquisition costs, including capitalized
costs, of approximately $520.4 million. In addition, the Company sold four
properties to redeploy capital into properties the Company believes have
characteristics more suited to its overall growth strategy and operating goals.
The sold properties included one office/flex property, two industrial properties
and one multi-family property. These properties were sold for an aggregate sales
price of $29,248,000 and generated an aggregate net gain of approximately
$1,374,000.
In the second quarter of 1998, the Company acquired 35 properties which
consisted of approximately 1.2 million rentable square feet of office,
office/flex, industrial and retail space and 7,206 multi-family units and had
aggregate acquisition costs, including capitalized costs, of approximately
$410.9 million. In addition, the Company sold three properties, including one
office/flex property and two hotel properties. These properties were sold for an
aggregate sales price of $9.7 million and generated an aggregate net gain of
approximately $552,000.
In the third quarter of 1998, the Company acquired eleven properties which
consisted of approximately 1.2 million rentable square feet of office,
office/flex and industrial space and had aggregate acquisition costs, including
capitalized costs, of approximately $67.3 million. In addition, the Company sold
one of three buildings from an office/flex property. This building was sold for
$1.7 million and no gain or loss was recognized upon the sale.
In the fourth quarter of 1998, the Company sold four properties, including one
office property, two industrial properties and one hotel property. These
properties were sold for an aggregate sales price of $16.7 million and generated
an aggregate net gain of approximately $6.4 million.
The Company has entered into short-term lease agreements on the hotel properties
located in Arlington, Texas, and Ontario, California, with two prospective
purchasers of these properties. These prospective purchasers have entered into
purchase agreements for these properties, with anticipated closing dates of
March 30, 1999. These leases terminate on the closing date for the sale of the
properties. The net book value of the two hotel properties aggregates
Page 49
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
to $7,956,000 at December 31, 1998. The properties secure, in part, a loan to
the Company with an outstanding principal balance of $13,220,000 at December 31,
1998. Net income earned by the Company from the two hotels totaled $429,000,
$598,000 and $485,000 in the years ended December 31, 1998, 1997 and 1996,
respectively.
The Company has entered into a definitive agreement to acquire all of the real
estate assets of Prudential-Bache/Equitec Real Estate Partnership, a California
limited partnership in which the managing general partner is Prudential-Bache
Properties, Inc., and in which GC and Robert Batinovich have served as
co-general partners since March 1994, but do not hold a material equity or
economic interest (the "Pru-Bache Portfolio"). The total acquisition cost,
including capitalized costs, is expected to be approximately $49.9 million,
which is to be paid entirely in cash. The Pru-Bache Portfolio comprises four
office buildings aggregating 405,825 square feet and one office/flex property
containing 121,645 square feet. This acquisition is subject to certain
contingencies, including customary closing conditions and the resolution of
litigation relating to the proposed acquisition, to which neither the Company
nor the Operating Partnership is a party.
The Company leases its commercial and industrial property under non-cancelable
operating lease agreements. Future minimum rents to be received as of December
31, 1998 are as follows (in thousands):
Year Ending
December 31,
1999 $ 144,106
2000 120,681
2001 99,952
2002 76,651
2003 56,473
Thereafter 140,058
$ 637,921
Note 4. INVESTMENTS IN ASSOCIATED COMPANIES
The Company accounts for its investments in the Associated Companies (as defined
in Note 1) using the equity method as a substantial portion of the economic
benefits of the Associated Companies flow to the Company by virtue of its 100%
non-voting preferred stock interest in both of the Associated Companies. The
Company's interests constitute substantially all of the Associated Companies'
capitalization. Two of the holders of the voting common stock of Glenborough
Corporation and one of the holders of the voting common stock of Glenborough
Hotel Group are officers of the Company; however, the Company has no direct
voting or management control of either Glenborough Corporation or Glenborough
Hotel Group. The Company records earnings on its investments in the Associated
Companies equal to its cash flow preference, to the extent of earnings, plus its
pro rata share of remaining earnings, based on cash flow allocation percentages.
Distributions received from the Associated Companies are recorded as a reduction
of the Company's investments.
As of December 31, 1998 and 1997, the Company had the following investments in
the Associated Companies (in thousands):
<TABLE>
<CAPTION>
GC GHG Total
<S> <C> <C> <C>
Investment at December 31, 1996 $ 5,261 $ 1,504 $ 6,765
Contributions 3,700 - 3,700
Distributions (2,129) (131) (2,260)
Equity in earnings 1,687 1,056 2,743
Investment at December 31, 1997 8,519 2,429 10,948
Distributions (3,252) (203) (3,455)
Equity in earnings (loss) 1,533 (219) 1,314
Investment at December 31, 1998 $ 6,800 $ 2,007 $ 8,807
</TABLE>
Page 50
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
With the termination of all leasing contracts by June 30, 1998, the operations
of GHG have been substantially reduced and lease income paid by GHG to the
Company will be zero in the future.
Summary condensed balance sheet information as of December 31, 1998 and 1997,
and the condensed statements of operations for the years then ended are as
follows (in thousands):
<TABLE>
<CAPTION>
Balance Sheets
GC GHG
As of December 31, As of December 31,
1998 1997 1998 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Investments in management contracts, net $ 6,332 $ 8,108 $ - $ 354
Investment in real estate joint venture 2,025 - 2,025 -
Other Assets 2,329 3,631 318 3,381
=========== =========== =========== ============
Total assets $ 10,686 $ 11,739 $ 2,343 $ 3,735
=========== =========== =========== ============
Notes payable $ 3,525 $ 1,483 $ - $ 37
Other liabilities 368 1,764 85 962
----------- ----------- ----------- ------------
Total liabilities 3,893 3,247 85 999
Stockholders' equity 6,793 8,492 2,258 2,736
=========== =========== =========== ============
Total liabilities and stockholders' equity $ 10,686 $ 11,739 $ 2,343 $ 3,735
=========== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Statements of Operations
GC GHG
For the year ended For the year ended
December 31, December 31,
1998 1997 (1) 1998 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue $ 12,549 $ 15,105 $ 7,393 $ 14,857
Expenses 10,939 13,331 7,611 13,457
=========== =========== =========== ============
Net income (loss) $ 1,610 $ 1,774 $ (218) $ 1,400
=========== =========== =========== ============
(1)Included in the revenues of GC for the year ended December 31, 1997 is a fee of approximately $1.7 million earned in
connection with the disposition of a managed property owned by a related party.
</TABLE>
Note 5. MORTGAGE LOANS RECEIVABLE
The Company's mortgage loans receivable consist of the following as of December
31, 1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Note secured by an industrial property in Los Angeles, CA, with a fixed
interest rate of 9% and a maturity date of June 2001. This note was paid off
in June 1998. $ - $ 507
Note secured by an office property in Phoenix, AZ, with a fixed interest rate
of 11% and a maturity date of November 1999. As of December 31, 1998, the
Partnership is committed to additional advances totaling $366 for tenant
improvements and other leasing costs. 3,484 3,185
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 March 31, 1999,
with an option to extend for 3 months. 3,600 -
</TABLE>
Page 51
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
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). $ 35,336 $ -
--------------- ---------------
Total $ 42,420 $ 3,692
=============== ===============
</TABLE>
In July 1998, the Company entered into a development alliance with The Pauls
Corporation (see Note 6). In addition to this development alliance, the Company
has loaned approximately $35 million to continue the build-out of Gateway Park.
These advances were made in the form of a secured loan and accordingly, are
recorded as a mortgage loan receivable.
Contractually due principal payments of the mortgage loans receivable are as
follows (in thousands):
Year Ending
December 31,
1999 $ 7,084
2000 -
2001 -
2002 -
2003 -
Thereafter 35,336
Total $ 42,420
Note 6. DEVELOPMENT ALLIANCES AND OTHER ASSETS
The Company has formed 4 development alliances to which it has committed a total
of approximately $42 million for the development of approximately 1.4 million
square feet of office, office/flex and distribution properties and 2,050
multi-family units in North Carolina, Colorado, Texas, New Jersey, Kansas and
Michigan. As of December 31, 1998, the Company has advanced approximately $33
million under these commitments. Under these development alliances, the Company
has certain rights to purchase the properties upon completion of development
and, thus, through these alliances, the Company could acquire an additional 1.4
million square feet of commercial properties and 2,050 multi-family units over
the next five years.
In December 1998, the Company sold its investment in a private REIT for $17.4
million. At the time of sale, the Company had a book value in this investment of
$20.5 million which resulted in a net loss of $3.1 million. In addition, in
1998, the Company sold marketable securities which resulted in total realized
losses of approximately $325,000. These losses are included in the net gain on
sales of real estate assets on the accompanying consolidated statement of
operations for the year ended December 31, 1998.
Note 7. SECURED AND UNSECURED LIABILITIES
The Company had the following mortgage loans, bank lines, and notes payable
outstanding as of December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Secured loans with various lenders, net of unamortized discount of
$6,140, with a fixed interest rate of 6.125%, monthly principal and
interest payments ranging between $296 and $458, and a maturity date
of November 10, 2008. These loans are secured by 35 properties with
an aggregate net carrying value of $408,439 at December 31, 1998.
See below for further discussion. $234,871 $ -
</TABLE>
Page 52
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Secured loan with a bank with a fixed interest rate of 7.50%,
monthly principal and interest payments of $443 and a maturity date
of October 1, 2022. The loan is secured by ten properties with an
aggregate net carrying value of $110,129 and $111,372 at December
31, 1998 and 1997, respectively. $ 58,942 $59,724
Secured loan with an investment bank with a fixed interest rate of
7.57%, monthly principal (based upon a 25-year amortization) and
interest payments of $103 and a maturity date of January 1, 2006.
The loan is secured by properties with an aggregate net carrying
value of $33,506 and $37,711 at December 31, 1998 and 1997,
respectively. In December 1998, a portion of this loan was paid off
in connection with the sales of two properties which secured the
loan. 13,220 19,444
Secured loans with various lenders, bearing interest at fixed rates
between 6.95% and 9.25% (approximately $53,469 of these loans
include an unamortized premium of approximately $602 which reduces
the effective interest rate on those instruments to 6.75%), with
monthly principal and interest payments ranging between $8 and $371
and maturing at various dates through October 1, 2010. These loans
are secured by properties with an aggregate net carrying value of
$447,444 and $66,353 at December 31, 1998 and 1997, respectively. 261,938 30,519
Secured loans with various banks bearing interest at variable rates
ranging between 7.25% and 8.18% at December 31, 1998 (approximately
$114,950 of these loans include an unamortized premium of
approximately $1,750 which reduces the effective interest rate on
those instruments to 6.75%), monthly principal and interest payments
ranging between $4 and $790 and maturing at various dates through
May 1, 2017. These loans are secured by properties with an aggregate
net carrying value of $179,438 and $17,246 at December 31, 1998 and
1997, respectively. 125,230 7,806
Secured loans with an investment bank, bearing interest at fixed
rates between 7.60% and 7.85%, with monthly principal and interest
payments ranging between $11 and $22 and a maturity date of December
1, 2030. These loans are secured by multi-family properties with an
aggregate net carrying value of $19,060 and $41,862 at December 31,
1998 and 1997, respectively. In 1998, three of these loans which had
outstanding balances totaling $16,136 at December 31, 1997 were paid
off with proceeds from the new $248.8 million loan discussed below. 14,377 30,646
Unsecured $100,000 line of credit with a bank ("Credit Facility")
with a variable interest rate of LIBOR plus 1.625% (7.401% at
December 31, 1998), monthly interest only payments and a maturity
date of December 22, 2000, with one option to extend for 10 years.
See below for further discussion. 63,519 80,160
</TABLE>
Page 53
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Unsecured Series A Senior Notes with a fixed interest rate of
7.625%, interest payable semiannually on March 15 and September 15,
commencing September 15, 1998, and a maturity date of March 15,
2005. See below for further discussion. $ 150,000 $ -
Total $ 922,097 $228,299
</TABLE>
In January 1998, the Company closed a $150 million loan agreement with a
commercial bank (the "Interim Loan"). The Interim Loan had a term of three
months with interest at LIBOR plus 1.75%. The purpose of the Interim Loan was to
fund the acquisition of properties as discussed in Note 3. The Interim Loan was
paid off in March 1998 with proceeds from the $150 million of unsecured Series A
Senior Notes as discussed below.
In March 1998, the Operating Partnership issued $150 million of unsecured 7.625%
Series A Senior Notes (the "Notes") in an unregistered 144A offering. The Notes
mature on March 15, 2005, unless previously redeemed. Interest on the Notes is
payable semiannually on March 15 and September 15, commencing September 15,
1998. The Notes may be redeemed at any time at the option of the Operating
Partnership, in whole or in part, at a redemption price equal to the sum of (i)
the principal amount of the Notes being redeemed plus accrued interest to the
redemption date and (ii) the Make-Whole Amount, as defined, if any. The Notes
are general unsecured and unsubordinated obligations of the Operating
Partnership, and rank pari passu with all other unsecured and unsubordinated
indebtedness of the Operating Partnership. However, the Notes are effectively
subordinated to secured borrowing arrangements that the Operating Partnership
has and from time to time may enter into with various banks and other lenders,
and to the prior claims of each secured mortgage lender to any specific property
which secures any lender's mortgage. As of December 31, 1998, such secured
arrangements and mortgages aggregated approximately $708.6 million.
In May 1998 (declared effective in November 1998), the Company filed a
registration statement with the Securities and Exchange Commission (the "SEC")
to exchange all outstanding Notes (the "Old Notes") for Notes which have been
registered under the Securities Act of 1933 (the "New Notes"). The form and term
of the New Notes are substantially identical to the Old Notes in all material
respects, except that the New Notes are registered under the Securities Act, and
therefore are not subject to certain transfer restrictions, registration rights
and related special interest provisions applicable to the Old Notes.
In June 1998, the Company obtained a $150 million unsecured loan from a
commercial bank (the "Bridge Loan") which had a variable interest rate of LIBOR
plus 1.3%, and a maturity date of December 31, 1998. Approximately $147.7
million was drawn under the Bridge Loan to fund acquisitions (as discussed in
Note 3), and to fund development advances. The Company paid off the loan on
October 30, 1998, with proceeds from the new $248.8 million loan discussed
below.
In October 1998, the Company obtained $248.8 million of financing which has a
term of ten years, bears interest at a fixed rate of 6.125% and was secured by
36 properties. The proceeds were used to retire the Company's $150 million
Bridge Loan maturing December 31, 1998, to pay off four mortgage loans and to
reduce the outstanding balance of the Credit Facility. In December 1998,
approximately $7.4 million of this financing was paid off and one multi-family
property was released as security. This multi-family property was then used as
security for the new $7.5 million loan discussed below.
In connection with obtaining the $248.8 million of financing discussed above,
the Company entered into an interest rate protection agreement intended to hedge
against potential increases in the risk-free interest rate prior to closing the
loan. The Company elected to reduce the final loan amount and the risk-free
interest rate that the interest rate protection agreement was intended to hedge
declined during the period of the agreement. As a result of these factors, the
Company was required to terminate a portion of the protection agreement at a
loss of $4,323,000, which was recorded as an operating expense in the fourth
quarter of 1998. The $6,244,000 cost of the remaining portion of the protection
agreement, which was terminated upon closing of the loan, has been recorded as a
discount on the
Page 54
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
outstanding principal amount of the loan and will be amortized as additional
interest expense over the remaining life.
In December 1998, the Company obtained a $7.5 million loan from a bank which is
secured by a multi-family property, bears interest at a variable rate of prime
minus 0.50% (7.25% at December 31, 1998) and has a maturity date of December
22,2000.
In December 1998, due in part to an overall slowing of acquisition activity, the
Company reduced its Credit Facility from $250 million to $100 million. As part
of the modification, certain covenants that relate to the Company's development
activity were changed and the interest rate was modified to LIBOR plus 1.38% to
1.75%. This rate is an increase over the previous rate of LIBOR plus 1.10% to
1.30% which was a direct result of rates obtainable in the market.
Some of the Company's properties are held in limited partnerships and limited
liability companies in order to provide bankruptcy remote borrowers for certain
lenders. Such limited partnerships and limited liability companies are included
in the consolidated financial statements of the Company in accordance with
Generally Accepted Accounting Principles ("GAAP").
The required principal payments on the Company's debt for the next five years
and thereafter, as of December 31, 1998, are as follows (in thousands):
Year Ending
December 31,
1999 $ 126,849
2000 136,177
2001 15,881
2002 14,774
2003 38,393
Thereafter 590,023
Total $ 922,097
Note 8. RELATED PARTY TRANSACTIONS
Fee and reimbursement income earned by the Company from related entities totaled
$2,802,000, $719,000 and $311,000 for the years ended December 31, 1998, 1997
and 1996, respectively, and consisted of property management fees, asset
management fees and other fee income. In addition, for the year ended December
31, 1998, the Company paid GC property management fees and salary reimbursements
totaling $1,273,000 for management of a portfolio of residential properties
owned by the Company.
Note 9. EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." SFAS
No. 128 requires the disclosure of basic earnings per share and modifies
existing guidance for computing diluted earnings per share. Under the new
standard, basic earnings per share is computed as earnings divided by weighted
average shares, excluding the dilutive effects of stock options and other
potentially dilutive securities. The effective date of SFAS No. 128 is December
15, 1997. Earnings per share for all periods presented have been restated to
conform to the new standard as follows (in thousands, except for weighted
average shares and per share amounts):
Page 55
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Years ended
December 31,
--------------------------------------------------
1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
Net income (loss) available to common
Stockholders - Basic $ 23,982 $ 19,368 $ (1,609)
Minority interest 2,550 1,119 - (1)
------------- -------------- -------------
Net income (loss) available to common
Stockholders - Diluted $ 26,532 $ 20,487 $ (1,609)
------------- -------------- -------------
Weighted average shares:
Basic 31,661,810 17,982,817 6,632,707
Stock options 503,729 281,365 118,552
Convertible Operating Partnership Units 3,410,670 1,253,361 - (1)
------------- -------------- -------------
Diluted 35,576,210 19,517,543 6,751,259
------------- -------------- -------------
Basic earnings per share $ 0.76 $ 1.08 $ (0.24)
Diluted earnings per share $ 0.75 $ 1.05 $ (0.24 (1)
(1) Diluted earnings per share for the year ended December 31, 1996, does not include the conversion of units of the Operating
Partnership into common stock (570,364 weighted average units outstanding) as the effect is antidilutive.
</TABLE>
Note 10. CONSOLIDATION AND LITIGATION COSTS
The consolidation costs included in the Company's December 31, 1996 consolidated
statement of operations included accounting fees as well as the costs of mailing
and printing the Prospectus/Consent Solicitation Statement, any supplements
thereto or other documents related to the Consolidation, the costs of the
Information Agent, investor brochure, telephone calls, broker-dealer fact
sheets, printing, postage, travel, meetings, legal and other fees related to the
solicitation of consents, as well as reimbursement of costs incurred by brokers
and banks in forwarding the Prospectus/Consent Solicitation Statement to
Investors.
The litigation costs included in the Company's December 31, 1996 consolidated
statement of operations included the legal fees incurred in connection with
defending two class action complaints filed by investors in certain of the GRT
Predecessor Entities as well as an accrual for the amount of the settlement that
the plaintiff's counsel in one case was requesting be awarded by the court (see
Note 12).
Note 11. STOCK COMPENSATION PLAN
In May 1996, the Company adopted an employee stock incentive plan (the "Plan")
to provide incentives to attract and retain high quality executive officers and
key employees. Certain amendments to the Plan were ratified and approved by the
stockholders of the Company at the Company's 1997 Annual Meeting of
Stockholders. The Plan, as amended, provides for the grant of (i) shares of
Common Stock of the Company, (ii) options, stock appreciation rights ("SARs") or
similar rights with an exercise or conversion privilege at a fixed or variable
price related to the Common Stock and/or the passage of time, the occurrence of
one or more events, or the satisfaction of performance criteria or other
conditions, or (iii) any other security with the value derived from the value of
the Common Stock of the Company or other securities issued by a related entity.
Such awards include, without limitation, options, SARs, sales or bonuses of
restricted stock, dividend equivalent rights ("DERs"), Performance Units or
Preference Shares. The total number of shares of Common Stock available under
the Plan is equal to the greater of 1,140,000 shares or 8% of the number of
shares outstanding determined as of the day immediately following the most
recent issuance of shares of Common Stock or securities convertible into shares
of Common Stock; provided that the maximum aggregate number of shares of Common
Stock available for issuance under the Plan may not be reduced. For purposes of
calculating the number of shares of Common Stock available under the Plan, all
classes of securities of the Company and its related entities that are
convertible presently or in the future by the security holder into shares
Page 56
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
of Common Stock or which may presently or in the future be exchanged for shares
of Common Stock pursuant to redemption rights or otherwise, shall be deemed to
be outstanding shares of Common Stock. Notwithstanding the foregoing, the
aggregate number of shares as to which incentive stock options, one type of
security available under the Plan, may be granted under the Plan may not exceed
1,140,000 shares. The Company accounts for the fair value of the options and
bonus grants in accordance with APB Opinion No. 25. As of December 31, 1998,
37,000 shares of bonus grants have been issued under the Plan. The fair value of
the shares granted have been recorded as deferred compensation in the
accompanying financial statements and will be charged to earnings ratably over
the respective vesting periods that range from 2 to 5 years. As of December 31,
1998, 2,868,293 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.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation"
(SFAS 123). As permitted by SFAS 123, the Company has not changed its method of
accounting for stock options but has provided the additional required
disclosures. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates for awards
under those plans, consistent with the method of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands except for per share amounts).
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) As reported 23,982 19,368 (1,609)
SFAS No. 123 Adjustment (1,428) (1,947) (3)
---------------- ---------------- ----------------
Pro forma 22,554 17,421 (1,612)
Basic earnings per share As reported 0.76 1.08 (0.24)
SFAS No. 123 Adjustment (0.05) (0.11) -
---------------- ---------------- ----------------
Pro forma 0.71 0.97 (0.24)
Diluted earnings per share As reported 0.75 1.05 (0.24)
SFAS No. 123 Adjustment (0.04) (0.10) -
---------------- ---------------- ----------------
Pro forma 0.71 0.95 (0.24)
</TABLE>
A summary of the status of the Company's stock option plan as of December 31,
1998, 1997 and 1996, and changes during the years then ended is presented in the
table below:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Avg Weighted
Shares Avg Shares Exercise Shares Avg
Exercise Price Exercise
Price Price
----------- ------------- ---------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of 1,708,200 $ 21.03 796,000 $ 15.00 - $ -
year
Granted 1,251,500 $ 23.34 912,200 $ 26.29 796,000 $ 15.00
Exercised (22,407) $ 15.35 - $ - - $ -
Forfeited/Cancelled (69,000) $ 23.25 - $ - - $ -
----------- ------------- ---------- -------------- ----------- -------------
Outstanding at end of year 2,868,293 $ 22.03 1,708,200 $ 21.03 796,000 $ 15.00
Exercisable at end of year 1,149,343 $ 18.92 356,000 $ 27.29 - $ -
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
Page 57
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------- --------------------------------------
Number Weighted-average Weighted- Number
Outstanding at remaining average Exercisable at Weighted-average
12/31/98 contractual life exercise price 12/31/98 exercise price
----------------- --------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Range of Exercise Prices
$15.00 to $20.25 865,593 7.64 years $ 15.47 781,843 $ 15.05
$20.38 to $25.00 992,350 8.41 years $ 21.74 17,500 $ 20.71
$25.56 to $30.13 1,010,350 8.78 years $ 27.93 350,000 $ 27.50
----------------- --------------------- ----------------- ----------------- ------------------
2,868,293 $ 22.03 1,149,343 $ 18.92
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during 1998, 1997 and 1996, respectively: expected
dividend yield of 6.57%, 5.28% and 8.5%, expected volatility of 29.78%, 27.90%
and 5.0%, and weighted average risk-free interest rate of 4.61%, 5.74% and 6.3%.
Expected lives of 10, 7, 5 and 2 years were used in each of 1998, 1997 and 1996.
Based on these assumptions, the weighted average fair value of options granted
would be calculated as $3.90 in 1998, $4.52 in 1997 and $0.02 in 1996.
Compensation cost in 1998 has been adjusted by 2% to account for assumed
forfeitures based on historical experience and management expectations.
Note 12. COMMITMENTS AND CONTINGENCIES
Environmental Matters. The Company follows a policy of monitoring its properties
for the presence of hazardous or toxic substances. The Company is not aware of
any environmental liability with respect to the properties that would have a
material adverse effect on the Company's business, assets or results of
operations. There can be no assurance that such a material environmental
liability does not exist. The existence of any such material environmental
liability could have an adverse effect on the Company's results of operations
and cash flow.
General uninsured losses. The company carries comprehensive liability, fire,
flood, extended coverage and rental loss insurance with policy specifications,
limits and deductibles customarily carried for similar properties. There are,
however, certain types of extraordinary losses which may be either uninsurable,
or not economically insurable. Further, certain of the properties are located in
areas that are subject to earthquake activity. Should a property sustain damage
as a result of an earthquake, the company may incur losses due to insurance
deductibles, co-payments on insured losses or uninsured losses. Should an
uninsured loss occur, the company could lose its investment in, and anticipated
profits and cash flows from, a property.
Litigation. Prior to the completion of the Consolidation, two lawsuits were
filed in 1995 contesting the fairness of the Consolidation, one in California
State court and one in federal court. The complaints in both actions alleged,
among other things, breaches by the defendants of fiduciary duties and
inadequate disclosures. The State court action was settled and, upon appeal, the
settlement was affirmed by the State court on February 17, 1998. The objectors
filed with the California Supreme Court a petition for review, which was denied
on May 21, 1998. On August 18, 1998, the objectors filed a petition for writ of
certiorari in the Supreme Court of the United States. On September 18, 1998, the
Company and the co-defendants filed a brief in opposition to the petition. The
Supreme Court has not yet granted or denied the petition. Pursuant to the terms
of the settlement in the State court action, pending appeal, the Company has
paid one-third of the $855,000 settlement amount and the remaining two-thirds is
being held in escrow. In the federal action, the court in December of 1995
deferred all further proceedings pending a ruling in the State court action.
Following the State court decision approving the settlement, the defendants
filed a motion to dismiss the federal court action. The Company believes that it
is very unlikely that this litigation would result in a liability that would
exceed the accrued liability by a material amount. However, given the inherent
uncertainties of litigation, there can be no assurance that the ultimate
outcomes of these actions will be favorable to the Company.
Page 58
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Note 13. SEGMENT INFORMATION
The Company owns a diverse portfolio of properties comprising six product types:
office, office/flex, industrial, retail, multi-family 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 multi-family 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.
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 years ended December 31, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 Office Office/Flex Industrial Retail Multi-family Hotel Total
----------- ------------- ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rental revenue $ 117,746 $ 36,987 $ 16,104 $ 12,072 $ 40,865 $ 4,182 $ 227,956
Property operating expenses 44,775 10,898 3,609 3,840 17,235 967 81,324
=========== ============= =========== =========== ============ ============ =============
Net operating income (NOI) $ 72,971 $ 26,089 $ 12,495 $ 8,232 $ 23,630 $ 3,215 $ 146,632
=========== ============= =========== =========== ============ ============ =============
Real estate assets, net $ 829,866 $ 294,438 $ 126,563 $ 84,809 $ 387,805 $ 18,958 $1,742,439
=========== ============= =========== =========== ============ ============ =============
1997
Rental revenue $ 25,071 $ 10,354 $ 7,320 $ 7,224 $ 5,536 $ 5,980 $ 61,485
Property operating expenses 9,986 3,062 1,459 2,183 2,309 1,894 20,893
=========== ============= =========== =========== ============ ============ =============
Net operating income (NOI) $ 15,085 $ 7,292 $ 5,861 $ 5,041 $ 3,227 $ 4,086 $ 40,592
=========== ============= =========== =========== ============ ============ =============
Real estate assets, net $ 335,261 $ 206,828 $ 102,202 $ 61,289 $ 89,020 $ 30,618 $ 825,218
=========== ============= =========== =========== ============ ============ =============
</TABLE>
The following is a reconciliation of segment revenues, income and assets to
consolidated revenues, income and assets for the periods presented above (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Total revenue for reportable segments $ 227,956 $ 61,485
Elimination of internal property management fees - (92)
Other revenue (1) 13,519 6,755
================ ================
Total consolidated revenues $ 241,475 $ 68,148
================ ================
Net Income
NOI for reportable segments $ 146,632 $ 40,592
Elimination of internal property management fees 7,245 1,843
Unallocated amounts:
Other revenue (1) 13,519 6,755
General and administrative expenses (11,038) (3,319)
Depreciation and amortization (50,194) (14,873)
</TABLE>
Page 59
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Interest expense (53,289) (9,668)
Loss on interest rate protection agreement (4,323) -
================ ================
Income from operations before minority interest and
extraordinary items $ 48,552 $ 21,330
================ ================
Assets
Total assets for reportable segments $ 1,742,439 $ 825,218
Investments in Development 35,131 7,251
Investments in Associated Companies 8,807 10,948
Mortgage loans receivable 42,420 3,692
Cash and cash equivalents 4,357 5,070
Other assets 45,862 13,595
================ ================
Total consolidated assets $ 1,879,016 $ 865,774
================ ================
(1) Other revenue includes fee income, interest and other income, equity in earnings of
Associated Companies, net gains on sales of real estate assets and a gain on collection
of mortgage loan receivable.
</TABLE>
Note 14. PUBLIC STOCK OFFERING
In January 1998, the Company completed a public offering of 11,500,000 shares of
7-3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible
Preferred Stock Offering"). The 11,500,000 shares were sold at a per share price
of $25.00 for net proceeds of approximately $276 million. The shares are
convertible at any time at the option of the holders thereof into shares of
Common Stock at an initial conversion price of $32.83 per share of Common Stock
(equivalent to a conversion rate of 0.7615 shares of Common Stock for each share
of Series A Convertible Preferred Stock), subject to adjustment in certain
circumstances. Except in certain instances relating to the preservation of the
Company's status as a REIT, the 7-3/4% Series A Convertible Preferred Stock is
not redeemable prior to January 16, 2003. On and after January 16, 2003, the
Series A Preferred Stock may be redeemed at the option of the Company, in whole
or in part, initially at 103.88% of the liquidation preference per share, and
thereafter at prices declining to 100% of the liquidation preference on and
after January 16, 2008, plus in each case accumulated, accrued and unpaid
dividends, if any, to the redemption date. A portion of this additional capital
was used to repay the outstanding balance under the Company's Credit Facility
(as defined in Note 7). The remaining proceeds were used to fund the
acquisitions discussed in Note 3 and for general corporate purposes.
Following are unaudited proforma statements of operations of the Company for
each of the years ended December 31, 1998 and 1997 giving effect to the equity
and debt offerings, property acquisitions and property dispositions (including
those discussed in Note 3) completed in 1997 and 1998 as if they had been
completed on January 1, 1997 (in thousands except for weighted average shares
and per share amounts):
<TABLE>
<CAPTION>
1998 1997
(Unaudited) (Unaudited)
---------------- ----------------
<S> <C> <C>
Rental revenue $ 257,927 $ 233,352
Equity in earnings of Associated Companies 1,262 1,998
Fees, interest and other income 9,237 6,154
---------------- ----------------
Total Revenue 268,426 241,504
---------------- ----------------
OPERATING EXPENSES
Property operating expenses 84,884 81,192
General and administrative 11,622 6,690
Depreciation and amortization 52,524 48,337
Interest expense 63,935 62,298
Loss on interest rate protection agreement 4,323 -
---------------- ----------------
Total Operating Expenses 217,288 198,517
---------------- ----------------
</TABLE>
Page 60
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
(Unaudited) (Unaudited)
---------------- ----------------
<S> <C> <C>
Income from operations before minority interest 51,138 42,987
Minority interest (3,290) (1,987)
================ ================
Net income before Preferred Dividends $ 47,848 $ 41,000
================ ================
Preferred Dividends (22,281) (22,281)
================ ================
Net income available to common stockholders $ 25,567 $ 18,719
================ ================
Basic net income per share $ 0.81 $ 0.59
================ ================
Diluted net income per share $ 0.79 $ 0.57
================
================
Basic weighted average shares outstanding 31,758,915 31,758,915
================ ================
Diluted weighted average shares outstanding 36,480,530 36,480,530
================ ================
</TABLE>
Note 15. SUBSEQUENT EVENTS
In February 1999, the Company acquired a 285 unit multi-family 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 next year. 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 February 1999, 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. The total acquisition cost, including capitalized
costs, was approximately $3.1 million, which was paid entirely in cash. The
property was part of a tax-deferred Section 1031 exchange involving the sale of
an office/flex property as discussed below. The property has been leased to
Dollar Rent-a-Car under a 15-year triple-net lease.
In January and February 1999, the Company sold six properties, including five
office/flex properties and one retail property. These properties were sold for
an aggregate sales price of approximately $15.9 million and generated an
aggregate net gain of approximately $364,000. Approximately $2.4 million of the
net proceeds were deposited into a deferred exchange account and were applied to
the acquisition of land discussed above on a tax-deferred basis pursuant to
Section 1031 of the Internal Revenue Code.
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.
Any 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 March 9, 1999, the Company had purchased 70,000 shares of Common Stock at
prices ranging from $16.25 to $18.25 per share.
Note 16. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following represents an unaudited summary of quarterly results of operations
for the year ended December 31, 1998 (in thousands, except for weighted average
shares and per share amounts):
Page 61
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------
March 31, June 30, 1998 Sept 30, Dec 31,
1998 1998 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUE
Rental revenue $ 45,963 $ 51,619 $ 65,321 $ 65,053
Fees and reimbursements from affiliates 473 759 1,220 350
Interest and other income 357 246 1,416 2,588
Equity in earnings (loss) of Associated
Companies 352 709 629 (376)
Net gain (reduction in prior quarter gain) on
sales of real estate assets 1,446 693 (250) 2,907
--------------- --------------- --------------- ---------------
Total revenue 48,591 54,026 68,336 70,522
--------------- --------------- --------------- ---------------
EXPENSES
Property operating expenses 14,324 16,265 22,446 21,044
General and administrative 2,222 2,603 3,372 2,841
Depreciation and amortization 10,009 10,934 14,309 14,942
Interest expense 9,145 9,707 17,064 17,373
Loss on interest rate protection agreement - - - 4,323
--------------- --------------- --------------- ---------------
Total expenses 35,700 39,509 57,191 60,523
--------------- --------------- --------------- ---------------
Income from operations before minority interest and
extraordinary item 12,891 14,517 11,145 9,999
Minority interest (678) (596) (635) (641)
--------------- --------------- --------------- ---------------
Net income before extraordinary item 12,213 13,921 10,510 9,358
Extraordinary item:
Loss on early extinguishment of debt - - - (1,400)
--------------- --------------- --------------- ---------------
Net income 12,213 13,921 10,510 7,958
Preferred dividends (3,910) (5,570) (5,570) (5,570)
=============== =============== =============== ===============
Net income available to Common Stockholders $ 8,303 $ 8,351 $ 4,940 $ 2,388
=============== =============== =============== ===============
Basic Per Share Data:
Net income available to Common Stockholders before
extraordinary item $ 0.26 $ 0.26 $ 0.16 $ 0.12
Extraordinary item - - - (0.04)
--------------- --------------- --------------- ---------------
Net income available to Common Stockholders $ 0.26 $ 0.26 $ 0.16 $ 0.08
=============== =============== =============== ===============
Basic weighted average shares outstanding 31,548,706 31,648,041 31,703,963 31,743,924
=============== =============== =============== ===============
Diluted Per Share Data:
Net income available to Common Stockholders before
extraordinary item $ 0.26 $ 0.26 $ 0.15 $ 0.12
Extraordinary item - - - (0.04)
--------------- --------------- --------------- ---------------
Net income available to Common Stockholders $ 0.26 $ 0.26 $ 0.15 $ 0.08
=============== =============== =============== ===============
Diluted weighted average shares outstanding 34,372,364 34,868,905 36,261,228 36,191,009
=============== =============== =============== ===============
</TABLE>
Per share amounts do not necessarily sum to per share amounts for the year as
weighted average shares outstanding are measured for each period presented,
rather than solely for the entire year.
Page 62
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Costs Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (4)
Buildings
and
Description Encumbrances Land Improvements Improvements
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tradewinds Financial, AZ $ - $ 304 $ 1,214 $ 47
Vintage Pointe, AZ 2,067 738 2,950 213
400 South El Camino Real, CA (8) 4,000 30,549 3,355
Academy Prof. Center, CA - 481 1,866 100
Centerstone Plaza, CA (6) 6,077 24,265 214
Dallidet Prof. Center, CA - 677 2,703 51
University Tech Center, CA (2) - 2,086 8,046 469
Warner Village Medical, CA - 558 2,232 207
One Gateway Center, CO (9) 470 9,498 195
Buschwood III, FL (8) 1,479 5,890 184
Park Place, FL (8) 1,895 12,982 266
Temple Terrace Bus. Center, FL - 1,788 6,949 24
Ashford Perimeter, GA 21,369 1,174 42,227 158
Powers Ferry Landing East, GA 18,896 2,744 40,600 92
Capitol Center, IA (8) - 11,981 72
Columbia Center II, IL - 208 20,329 237
Embassy Plaza, IL - 436 15,680 457
Oak Brook International, IL (8) 757 11,126 315
Oakbrook Terrace, IL 19,420 552 37,635 154
Crosspoint Four, IN - 394 2,847 56
Meridian Park, IN - 1,296 5,906 117
The Osram Building, IN - 264 4,515 12
Leawood Office Building, KS 4,299 1,124 10,300 59
Blue Ridge Office Building, MA 2,996 734 5,877 164
Bronx Park I, MA - 916 9,104 275
Marlborough Corporate Place, MA - 5,655 55,908 368
The Hartwood Building, MA 2,557 527 5,426 94
Westford Corporate Center, MA (6) 2,091 8,310 55
Montgomery Exec. Center, MD (8) 1,928 7,676 422
(continued)
</TABLE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1998
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Office Properties:
Tradewinds Financial, AZ $ 304 $ 1,261 $ 1,565 $ 110 11/96 1-30 yrs.
Vintage Pointe, AZ 738 3,163 3,901 301 11/96 1-30 yrs.
400 South El Camino Real, CA 4,000 33,904 37,904 1,536 3/98 1-30 yrs.
Academy Prof. Center, CA 481 1,966 2,447 115 4/97 1-30 yrs.
Centerstone Plaza, CA 6,077 24,479 30,556 1,242 7/97 1-30 yrs.
Dallidet Prof. Center, CA 677 2,754 3,431 237 11/96 1-30 yrs.
University Tech Center, CA (2) 2,086 8,515 10,601 444 6/97 1-30 yrs.
Warner Village Medical, CA 558 2,439 2,997 202 10/96 1-30 yrs.
One Gateway Center, CO 470 9,693 10,163 162 7/98 1-30 yrs.
Buschwood III, FL 1,479 6,074 7,553 302 9/97 1-30 yrs.
Park Place, FL 1,895 13,248 15,143 451 1/98 1-30 yrs.
Temple Terrace Bus. Center, FL 1,788 6,973 8,761 290 12/97 1-30 yrs.
Ashford Perimeter, GA 1,174 42,385 43,559 1,416 1/98 1-30 yrs.
Powers Ferry Landing East, GA 2,744 40,692 43,436 1,367 1/98 1-30 yrs.
Capitol Center, IA - 12,053 12,053 401 2/98 1-30 yrs.
Columbia Center II, IL 208 20,566 20,774 707 1/98 1-30 yrs.
Embassy Plaza, IL 436 16,137 16,573 532 1/98 1-30 yrs.
Oak Brook International, IL 757 11,441 12,198 399 1/98 1-30 yrs.
Oakbrook Terrace, IL 552 37,789 38,341 1,246 1/98 1-30 yrs.
Crosspoint Four, IN 394 2,903 3,297 71 4/98 1-30 yrs.
Meridian Park, IN 1,296 6,023 7,319 145 4/98 1-30 yrs.
The Osram Building, IN 264 4,527 4,791 113 4/98 1-30 yrs.
Leawood Office Building, KS 1,124 10,359 11,483 318 3/98 1-30 yrs.
Blue Ridge Office Building, MA 734 6,041 6,775 222 3/98 1-30 yrs.
Bronx Park I, MA 916 9,379 10,295 299 3/98 1-30 yrs.
Marlborough Corporate Place, MA 5,655 56,276 61,931 1,884 1/98 1-30 yrs.
The Hartwood Building, MA 527 5,520 6,047 184 3/98 1-30 yrs.
Westford Corporate Center, MA 2,091 8,365 10,456 488 4/97 1-30 yrs.
Montgomery Exec. Center, MD 1,928 8,098 10,026 428 9/97 1-30 yrs.
(continued)
</TABLE>
Page 63
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (4)
Buildings
and
Description Encumbrances Land Improvements Improvements
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Office Properties continued:
Rockwall I & II, MD $ - $ 807 $ 47,259 $ 263
Bond Street Building, MI - 716 2,147 311
Riverview Office Tower, MN (6) 4,095 16,333 1,254
University Club Tower, MO - 4,087 14,519 2,535
Woodlands Plaza, MO (6) 1,114 4,426 448
Edinburgh Center, NC (8) 984 14,232 167
One & Three Pacific Place, NE (8) 1,985 18,014 65
One Professional Square, NE - 285 1,142 230
Regency Westpointe, NE (5) (7) 530 3,147 864
25 Independence Blvd., NJ (8) 4,547 18,141 51
Bridgewater Exec. Quarters, NJ 4,433 2,075 7,337 20
Executive Place, NJ - 944 11,347 27
Frontier Exec. Quarters I, NJ (8) 4,200 33,892 242
Frontier Exec. Quarters II, NJ (8) 631 5,091 65
Gatehall, NJ - 1,865 7,427 495
Morristown Medical Offices, NJ - 518 1,832 6
Vreeland Business Ctr., NJ - 1,863 8,714 39
Citibank Park, NV (8) 4,628 18,442 865
Thousand Oaks, TN - 9,741 40,355 962
Post Oak Place, TX - 396 1,579 85
4500 Plaza, UT (5) 788 1,123 4,606 838
2000 Corporate Ridge, VA 20,994 909 41,096 229
700 South Washington, VA (6) 1,981 7,894 53
Cameron Run, VA 10,194 414 18,964 231
Globe Building, WA - 375 1,501 213
- -----------------------------------------------------------------------------------------------------
Office Total 92,166 754,028 18,990
- -----------------------------------------------------------------------------------------------------
(continued)
</TABLE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1998
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Office Properties continued:
Rockwall I & II, MD $ 807 $ 47,522 $ 48,329 $ 1,610 1/98 1-30 yrs.
Bond Street Building, MI 716 2,458 3,174 198 9/96 1-40 yrs.
Riverview Office Tower, MN 4,095 17,587 21,682 1,059 4/97 1-30 yrs.
University Club Tower, MO 4,087 17,054 21,141 1,492 7/96 1-40 yrs.
Woodlands Plaza, MO 1,114 4,874 5,988 353 4/97 1-30 yrs.
Edinburgh Center, NC 984 14,399 15,383 486 1/98 1-30 yrs.
One & Three Pacific Place, NE 1,985 18,079 20,064 452 5/98 1-30 yrs.
One Professional Square, NE 285 1,372 1,657 126 10/96 1-30 yrs.
Regency Westpointe, NE (5) 530 4,011 4,541 1,679 6/87 1-30 yrs.
25 Independence Blvd., NJ 4,547 18,192 22,739 909 9/97 1-30 yrs.
Bridgewater Exec. Quarters, NJ 2,075 7,357 9,432 368 9/97 1-30 yrs.
Executive Place, NJ 944 11,374 12,318 190 8/98 1-30 yrs.
Frontier Exec. Quarters I, NJ 4,200 34,134 38,334 1,702 9/97 1-30 yrs.
Frontier Exec. Quarters II, NJ 631 5,156 5,787 256 9/97 1-30 yrs.
Gatehall, NJ 1,865 7,922 9,787 388 9/97 1-30 yrs.
Morristown Medical Offices, NJ 518 1,838 2,356 92 9/97 1-30 yrs.
Vreeland Business Ctr., NJ 1,863 8,753 10,616 218 6/98 1-30 yrs.
Citibank Park, NV 4,628 19,307 23,935 824 9/97 1-30 yrs.
Thousand Oaks, TN 9,741 41,317 51,058 1,746 12/97 1-30 yrs.
Post Oak Place, TX 396 1,664 2,060 89 9/97 1-30 yrs.
4500 Plaza, UT (5) 1,123 5,444 6,567 2,817 3/86 1-30 yrs.
2000 Corporate Ridge, VA 909 41,325 42,234 1,377 1/98 1-30 yrs.
700 South Washington, VA 1,981 7,947 9,928 465 4/97 1-30 yrs.
Cameron Run, VA 414 19,195 19,609 648 1/98 1-30 yrs.
Globe Building, WA 375 1,714 2,089 162 10/96 1-30 yrs.
- -----------------------------------------------------------------------------------------------------------------------
Office Total 92,166 773,018 865,184 35,318
- -----------------------------------------------------------------------------------------------------------------------
(continued)
</TABLE>
Page 64
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (4)
Buildings
and
Description Encumbrances Land Improvements Improvements
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Office/Flex Properties:
Baseline Business Park, AZ $ - $ 886 $ 3,527 $ 190
Hoover Industrial, AZ - 322 1,290 80
Magnolia Industrial, AZ - 322 1,241 151
Chatsworth Ind. Park, CA 795 264 1,014 62
Dominguez Industrial, CA - 697 2,662 137
Dunn Way Industrial, CA - 427 1,601 227
Glassell Industrial Center, CA 1,278 704 2,630 228
Kraemer Industrial Park, CA 1,442 401 1,537 106
Monroe Industrial, CA 713 282 1,101 105
Rancho Bernardo, CA - 518 2,072 55
Scripps Terrace, CA - 678 2,685 73
Tierrasanta Research Park, CA (8) 1,303 5,189 727
Upland Industrial, CA - 155 576 81
Gateway Eight, CO (9) 442 3,870 30
Gateway Four, CO (10) 523 3,517 28
Gateway One, CO 2,416 402 3,608 27
Gateway Six, CO (10) 568 5,040 129
Northglenn Bus. Center, CO - 1,335 3,354 37
Valley Business Park, CO - 1,764 7,027 134
Cypress Creek Bus. Center, FL - 876 3,490 525
Fingerhut Business Center, FL - 1,188 3,282 10
Grand Regency Business Ctr., FL - 1,120 4,302 1,082
Lake Point Business Park, FL (6) 1,344 5,343 244
Newport Business Center, FL - 654 2,604 171
Primeco Business Center, FL - 950 3,418 12
Oakbrook Corners, GA (8) 1,057 4,209 98
The Business Park, GA (8) 1,485 5,912 375
Covance Business Center, IN - 1,405 15,109 -
Park 100 - Building 42, IN (5) - 712 3,286 (522)
(continued)
</TABLE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1998
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Baseline Business Park, AZ $ 886 $ 3,717 $ 4,603 $ 193 9/97 1-30 yrs.
Hoover Industrial, AZ 322 1,370 1,692 114 10/96 1-30 yrs.
Magnolia Industrial, AZ 322 1,392 1,714 82 6/97 1-30 yrs.
Chatsworth Ind. Park, CA 264 1,076 1,340 62 4/97 1-30 yrs.
Dominguez Industrial, CA 697 2,799 3,496 166 4/97 1-30 yrs.
Dunn Way Industrial, CA 427 1,828 2,255 112 4/97 1-30 yrs.
Glassell Industrial Center, CA 704 2,858 3,562 166 4/97 1-30 yrs.
Kraemer Industrial Park, CA 401 1,643 2,044 99 4/97 1-30 yrs.
Monroe Industrial, CA 282 1,206 1,488 72 4/97 1-30 yrs.
Rancho Bernardo, CA 518 2,127 2,645 189 10/96 1-30 yrs.
Scripps Terrace, CA 678 2,758 3,436 137 9/97 1-30 yrs.
Tierrasanta Research Park, CA 1,303 5,916 7,219 342 9/97 1-30 yrs.
Upland Industrial, CA 155 657 812 41 4/97 1-30 yrs.
Gateway Eight, CO 442 3,900 4,342 65 7/98 1-30 yrs.
Gateway Four, CO 523 3,545 4,068 59 7/98 1-30 yrs.
Gateway One, CO 402 3,635 4,037 60 7/98 1-30 yrs.
Gateway Six, CO 568 5,169 5,737 97 7/98 1-30 yrs.
Northglenn Bus. Center, CO 1,335 3,391 4,726 141 12/97 1-30 yrs.
Valley Business Park, CO 1,764 7,161 8,925 357 9/97 1-30 yrs.
Cypress Creek Bus. Center, FL 876 4,015 4,891 210 9/97 1-30 yrs.
Fingerhut Business Center, FL 1,188 3,292 4,480 137 12/97 1-30 yrs.
Grand Regency Business Ctr., FL 1,120 5,384 6,504 286 12/97 1-30 yrs.
Lake Point Business Park, FL 1,344 5,587 6,931 345 4/97 1-30 yrs.
Newport Business Center, FL 654 2,775 3,429 142 9/97 1-30 yrs.
Primeco Business Center, FL 950 3,430 4,380 143 12/97 1-30 yrs.
Oakbrook Corners, GA 1,057 4,307 5,364 219 9/97 1-30 yrs.
The Business Park, GA 1,485 6,287 7,772 323 9/97 1-30 yrs.
Covance Business Center, IN 1,405 15,109 16,514 294 7/98 1-30 yrs.
Park 100 - Building 42, IN (5) 712 2,764 3,476 773 10/86 5-25 yrs.
(continued)
</TABLE>
Page 65
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (4)
Buildings
and
Description Encumbrances Land Improvements Improvements
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Office/Flex Properties continued:
Canton Business Center, MA $ 3,318 $ 796 $ 6,758 $ 29
Fisher-Pierce, MA (6) 718 2,860 115
Columbia Warehouse, MD - 393 1,565 9
Germantown Business Center, MD (8) 1,442 5,753 17
Bryant Lake Business Center, MN (8) 1,907 7,531 751
Riverview Industrial Park, MN - 841 3,348 213
Winnetka Industrial Center, MN - 1,189 4,737 87
Woodlands Tech Center, MO (6) 949 3,773 431
Fairfield Business Quarters, NJ 2,794 817 3,479 67
Fox Hollow Bus. Quarters, NJ - 1,576 2,358 119
Palms Business Center III, NV (8) 3,984 10,207 73
Palms Business Center IV, NV (8) 627 3,272 15
Palms Business Center North, NV (8) 2,492 7,067 43
Palms Business Center South, NV (8) 4,134 9,610 133
Post Palms Business Center, NV - 2,522 9,453 65
Clark Avenue, PA - 649 2,584 20
Lehigh Valley Exec. Campus, PA - 1,748 12,826 210
Valley Forge Corporate Center, PA - 2,614 34,805 126
Walnut Creek Bus. Center, TX 1,371 774 3,093 140
Kent Business Park, WA (8) 1,211 4,822 52
- -------------------------------------------------------------------------------------------------------
Office/Flex Total 54,167 244,397 7,317
- -------------------------------------------------------------------------------------------------------
Industrial Properties:
Fairmont Commerce Center, AZ - 735 2,928 21
Fifth Street Industrial, AZ - 654 2,522 86
Benicia Industrial Park, CA (5) (7) 978 4,787 203
Coronado Industrial, CA (8) 711 2,831 41
East Anaheim Industrial, CA (8) 1,480 3,282 23
(continued)
</TABLE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1998
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Office/Flex Properties continued:
Canton Business Center, MA $ 796 $ 6,787 $ 7,583 $ 233 3/98 1-30 yrs.
Fisher-Pierce, MA 718 2,975 3,693 168 4/97 1-30 yrs.
Columbia Warehouse, MD 393 1,574 1,967 65 10/97 1-30 yrs.
Germantown Business Center, MD 1,442 5,770 7,212 288 9/97 1-30 yrs.
Bryant Lake Business Center, MN 1,907 8,282 10,189 344 11/97 1-30 yrs.
Riverview Industrial Park, MN 841 3,561 4,402 171 9/97 1-30 yrs.
Winnetka Industrial Center, MN 1,189 4,824 6,013 238 9/97 1-30 yrs.
Woodlands Tech Center, MO 949 4,204 5,153 289 4/97 1-30 yrs.
Fairfield Business Quarters, NJ 817 3,546 4,363 174 9/97 1-30 yrs.
Fox Hollow Bus. Quarters, NJ 1,576 2,477 4,053 127 9/97 1-30 yrs.
Palms Business Center III, NV 3,984 10,280 14,264 429 10/97 1-30 yrs.
Palms Business Center IV, NV 627 3,287 3,914 137 10/97 1-30 yrs.
Palms Business Center North, NV 2,492 7,110 9,602 297 10/97 1-30 yrs.
Palms Business Center South, NV 4,134 9,743 13,877 410 10/97 1-30 yrs.
Post Palms Business Center, NV 2,522 9,518 12,040 399 10/97 1-30 yrs.
Clark Avenue, PA 649 2,604 3,253 130 9/97 1-30 yrs.
Lehigh Valley Exec. Campus, PA 1,748 13,036 14,784 436 1/98 1-30 yrs.
Valley Forge Corporate Center, PA 2,614 34,931 37,545 1,173 1/98 1-30 yrs.
Walnut Creek Bus. Center, TX 774 3,233 4,007 262 10/96 1-30 yrs.
Kent Business Park, WA 1,211 4,874 6,085 247 9/97 1-30 yrs.
- ----------------------------------------------------------------------------------------------------------------------
Office/Flex Total 54,167 251,714 305,881 11,443
- ----------------------------------------------------------------------------------------------------------------------
Industrial Properties:
Fairmont Commerce Center, AZ 735 2,949 3,684 123 10/97 1-30 yrs.
Fifth Street Industrial, AZ 654 2,608 3,262 153 6/97 1-30 yrs.
Benicia Industrial Park, CA (5) 978 4,990 5,968 2,034 7/86 1-30 yrs.
Coronado Industrial, CA 711 2,872 3,583 143 9/97 1-30 yrs.
East Anaheim Industrial, CA 1,480 3,305 4,785 138 10/97 1-30 yrs.
(continued)
</TABLE>
Page 66
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (4)
Buildings
and
Description Encumbrances Land Improvements Improvements
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industrial Properties continued:
Springdale Commerce Center, CA (8) $ 1,030 $ 4,101 $ 74
Gateway Nine, CO $4,764612 4,941 214 612
Gateway Seven, CO (10) 638 5,143 183
Gateway Ten, CO (9) 524 4,762 36
Gateway Three, CO (10) 508 4,704 38
Gateway Two, CO 3,890 561 4,425 35
Burnham Industrial Warehouse, FL - 594 2,366 10
Atlantic Industrial, GA - 634 3,866 (1,278)
Bonnie Lane Business Center, IL - 738 2,938 20
Glenn Avenue Business Center, IL - 565 2,250 10
Navistar International, IL (5) (7) 793 10,941 (4,122)
Wood Dale Business Center, IL - 603 2,403 38
Park 100 - Building 46, IN (5) - - - 211
J.I. Case Equip. Corp., KS (5) - 236 3,264 (1,250)
Flanders Industrial Park, MA - 738 5,634 193
Forest Street Business Center, MA - 227 1,801 27
Southworth-Milton, MA (6) 1,922 7,652 78
Navistar International, MD (5) (7) 356 4,911 (1,879)
Cottontail Distribution Center, NJ9,782 1,616 16,278 68
Eatontown Industrial, NJ - 765 1,963 19
Jencraft Industrial, NJ (8) 1,326 4,975 14
J.I. Case Equip. Corp., TN (5) - 187 2,583 (988)
Mercantile I, TX - 783 3,133 192
Quaker Industrial, TX - 103 412 42
Sea Tac II, WA (5) - 712 1,474 (178)
- -----------------------------------------------------------------------------------------------------
Industrial Total 21,329 123,270 (7,819)
- -----------------------------------------------------------------------------------------------------
(continued)
</TABLE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1998
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Enc Land Improvements Total Depreciation Acquired Over
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Industrial Properties continued:
Springdale Commerce Center, CA $ 1,030 $ 4,175 $ 5,205 $ 206 9/97 1-30 yrs.
Gateway Nine, CO 612 5,155 5,767 103 7/98 1-30 yrs.
Gateway Seven, CO 638 5,326 5,964 88 7/98 1-30 yrs.
Gateway Ten, CO 524 4,798 5,322 80 7/98 1-30 yrs.
Gateway Three, CO 508 4,742 5,250 79 7/98 1-30 yrs.
Gateway Two, CO 561 4,460 5,021 74 7/98 1-30 yrs.
Burnham Industrial Warehouse, FL 594 2,376 2,970 119 9/97 1-30 yrs.
Atlantic Industrial, GA 634 2,588 3,222 120 9/97 1-30 yrs.
Bonnie Lane Business Center, IL 738 2,958 3,696 148 9/97 1-30 yrs.
Glenn Avenue Business Center, IL 565 2,260 2,825 113 9/97 1-30 yrs.
Navistar International, IL (5) 793 6,819 7,612 2,040 3/84 50 yrs.
Wood Dale Business Center, IL 603 2,441 3,044 121 9/97 1-30 yrs.
Park 100 - Building 46, IN (5) - 211 211 135 10/86 5-25 yrs.
J.I. Case Equip. Corp., KS (5) 236 2,014 2,250 598 3/84 50 yrs.
Flanders Industrial Park, MA 738 5,827 6,565 204 3/98 1-30 yrs.
Forest Street Business Center, MA 227 1,828 2,055 56 3/98 1-30 yrs.
Southworth-Milton, MA 1,922 7,730 9,652 449 4/97 1-30 yrs.
Navistar International, MD (5) 356 3,032 3,388 899 3/84 50 yrs.
Cottontail Distribution Center, NJ 1,616 16,346 17,962 409 6/98 1-30 yrs.
Eatontown Industrial, NJ 765 1,982 2,747 98 9/97 1-30 yrs.
Jencraft Industrial, NJ 1,326 4,989 6,315 249 9/97 1-30 yrs.
J.I. Case Equip. Corp., TN (5) 187 1,595 1,782 474 3/84 50 yrs.
Mercantile I, TX 783 3,325 4,108 328 10/96 1-30 yrs.
Quaker Industrial, TX 103 454 557 45 10/96 1-30 yrs.
Sea Tac II, WA (5) 712 1,296 2,008 391 2/86 5-25 yrs.
- -----------------------------------------------------------------------------------------------------------------------
Industrial Total 21,329 115,451 136,780 10,217
- -----------------------------------------------------------------------------------------------------------------------
(continued)
</TABLE>
Page 67
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (4)
Buildings
and
Description Encumbrances Land Improvements Improvements
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retail Properties:
Park Center, CA (5) $ - $ 1,748 $ 3,296 $ (502)
Sonora Plaza, CA 4,891 1,948 7,781 68
Piedmont Plaza, FL - 1,317 5,233 70
River Run Shopping Ctr., FL - 1,428 5,687 53
Westwood Plaza, FL (5) (7) 2,599 5,110 2,745
Shannon Crossing, GA (5) (7) 2,487 2,075 360
Westbrook Commons, IL (8) 3,067 12,213 495
Broad Ripple Retail Center, IN - 542 3,876 123
Cross Creek Retail Center, IN 5,019 1,516 4,351 144
Geist Retail Centre, IN 4,366 1,012 4,828 182
Woodfield Centre, IN - 765 4,685 187
Goshen Plaza, MD - 994 3,958 26
Auburn North, WA - 1,100 4,397 1,213
- ------------------------------------------------------------------------------------------------------
Retail Total 20,523 67,490 5,164
- ------------------------------------------------------------------------------------------------------
Multi-Family Properties:
Overlook Apartments, AZ (6) 2,274 9,036 181
Aspen Ridge, CO 7,500 983 8,853 55
Stone Ridge at Vinings, GA (11) 1,881 16,942 55
Woodmere Trace, GA (11) 1,002 9,029 25
Crosscreek Apartments, IN 6,287 701 9,042 41
Harcourt Club Apartments, IN 3,800 437 5,389 62
Island Club Apartments, IN 12,097 713 15,596 81
Arrowood Crossing I & II, NC (8) 1,837 7,222 430
The Chase (Commonwealth), NC 3,167 784 3,083 163
The Chase (Monroe), NC (8) 1,033 4,062 117
Sabal Point I, II & III, NC (8) 3,714 14,602 583
Sharonridge I & II, NC 1,744 527 2,071 57
The Courtyard, NC 1,584 438 1,723 85
(continued)
</TABLE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1998
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Retail Properties:
Park Center, CA (5) $ 1,748 $ 2,794 $ 4,542 $ 750 9/86 5-25 yrs.
Sonora Plaza, CA 1,948 7,849 9,797 652 11/96 1-30 yrs.
Piedmont Plaza, FL 1,317 5,303 6,620 311 4/97 1-30 yrs.
River Run Shopping Ctr., FL 1,428 5,740 7,168 289 9/97 1-30 yrs.
Westwood Plaza, FL (5) 2,599 7,855 10,454 2,918 1/88 1-30 yrs.
Shannon Crossing, GA (5) 2,487 2,435 4,922 1,766 10/88 1-30 yrs.
Westbrook Commons, IL 3,067 12,708 15,775 621 9/97 1-30 yrs.
Broad Ripple Retail Center, IN 542 3,999 4,541 97 4/98 1-30 yrs.
Cross Creek Retail Center, IN 1,516 4,495 6,011 111 4/98 1-30 yrs.
Geist Retail Centre, IN 1,012 5,010 6,022 124 4/98 1-30 yrs.
Woodfield Centre, IN 765 4,872 5,637 118 4/98 1-30 yrs.
Goshen Plaza, MD 994 3,984 4,978 199 9/97 1-30 yrs.
Auburn North, WA 1,100 5,610 6,710 413 10/96 1-30 yrs.
- ----------------------------------------------------------------------------------------------------------------------
Retail Total 20,523 72,654 93,177 8,369
- ----------------------------------------------------------------------------------------------------------------------
Multi-Family Properties:
Overlook Apartments, AZ 2,274 9,217 11,491 544 4/97 1-30 yrs.
Aspen Ridge, CO 983 8,908 9,891 152 6/98 1-30 yrs.
Stone Ridge at Vinings, GA 1,881 16,997 18,878 288 6/98 1-30 yrs.
Woodmere Trace, GA 1,002 9,054 10,056 154 6/98 1-30 yrs.
Crosscreek Apartments, IN 701 9,083 9,784 228 4/98 1-30 yrs.
Harcourt Club Apartments, IN 437 5,451 5,888 136 4/98 1-30 yrs.
Island Club Apartments, IN 713 15,677 16,390 393 4/98 1-30 yrs.
Arrowood Crossing I & II, NC 1,837 7,652 9,489 316 12/97 1-30 yrs.
The Chase (Commonwealth), NC 784 3,246 4,030 136 12/97 1-30 yrs.
The Chase (Monroe), NC 1,033 4,179 5,212 177 12/97 1-30 yrs.
Sabal Point I, II & III, NC 3,714 15,185 18,899 634 12/97 1-30 yrs.
Sharonridge I & II, NC 527 2,128 2,655 90 12/97 1-30 yrs.
The Courtyard, NC 438 1,808 2,246 76 12/97 1-30 yrs.
(continued)
</TABLE>
Page 68
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (4)
Buildings
and
Description Encumbrances Land Improvements Improvements
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Multi-Family Properties continued:
The Landing on Farmhurst, NC $ 3,109 $ 841 $ 3,306 $ 105
The Oaks, NC 2,292 644 2,649 123
Wendover Glen, NC 2,480 597 2,346 186
Willow Glen, NC (8) 823 3,236 150
Sahara Gardens, NV (8) 1,872 7,500 580
Villas De Mission, NV (8) 1,924 7,695 282
Player's Club of Brentwood, TN (8) 800 7,205 52
Bandera Crossing, TX (11) 675 6,077 12
Bear Creek Crossing, TX (11) 627 5,650 17
Cypress Creek Apartments, TX (11) 732 6,591 214
The Hollows, TX (11) 1,390 12,518 35
Hunterwood, TX (11) 563 5,067 27
Hunter's Chase, TX (11) 2,094 18,857 46
Jefferson Creek, TX (12) 1,889 17,017 35
Jefferson Place, TX (12) 2,620 23,598 46
La Costa, TX (12) 2,826 25,453 56
Longspur, TX (11) 1,240 11,165 46
North Park Crossing, TX (11) 1,147 10,332 25
Silver Vale Crossing, TX (11) 1,111 10,006 33
The Park at Woodlake, TX (8) 1,676 15,100 138
Vista Crossing, TX (11) 737 6,643 16
Walnut Creek Crossing, TX (11) 1,286 11,586 20
Willow Brook Crossing, TX (11) 716 6,448 126
Wind River Crossing, TX (11) 1,437 12,939 72
- ------------------------------------------------------------------------------------------------------
Multi-family Total 46,591 345,634 4,377
- ------------------------------------------------------------------------------------------------------
(continued)
</TABLE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1998
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Multi-Family Properties continued:
The Landing on Farmhurst, NC $ 841 $ 3,411 $ 4,252 $ 142 12/97 1-30 yrs.
The Oaks, NC 644 2,772 3,416 115 12/97 1-30 yrs.
Wendover Glen, NC 597 2,532 3,129 108 12/97 1-30 yrs.
Willow Glen, NC 823 3,386 4,209 142 12/97 1-30 yrs.
Sahara Gardens, NV 1,872 8,080 9,952 654 10/96 1-30 yrs.
Villas De Mission, NV 1,924 7,977 9,901 674 10/96 1-30 yrs.
Player's Club of Brentwood, TN 800 7,257 8,057 122 6/98 1-30 yrs.
Bandera Crossing, TX 675 6,089 6,764 104 6/98 1-30 yrs.
Bear Creek Crossing, TX 627 5,667 6,294 98 6/98 1-30 yrs.
Cypress Creek Apartments, TX 732 6,805 7,537 116 6/98 1-30 yrs.
The Hollows, TX 1,390 12,553 13,943 216 6/98 1-30 yrs.
Hunterwood, TX 563 5,094 5,657 87 6/98 1-30 yrs.
Hunter's Chase, TX 2,094 18,903 20,997 322 6/98 1-30 yrs.
Jefferson Creek, TX 1,889 17,052 18,941 288 6/98 1-30 yrs.
Jefferson Place, TX 2,620 23,644 26,264 401 6/98 1-30 yrs.
La Costa, TX 2,826 25,509 28,335 432 6/98 1-30 yrs.
Longspur, TX 1,240 11,211 12,451 192 6/98 1-30 yrs.
North Park Crossing, TX 1,147 10,357 11,504 178 6/98 1-30 yrs.
Silver Vale Crossing, TX 1,111 10,039 11,150 172 6/98 1-30 yrs.
The Park at Woodlake, TX 1,676 15,238 16,914 262 6/98 1-30 yrs.
Vista Crossing, TX 737 6,659 7,396 114 6/98 1-30 yrs.
Walnut Creek Crossing, TX 1,286 11,606 12,892 198 6/98 1-30 yrs.
Willow Brook Crossing, TX 716 6,574 7,290 112 6/98 1-30 yrs.
Wind River Crossing, TX 1,437 13,011 14,448 223 6/98 1-30 yrs.
- ----------------------------------------------------------------------------------------------------------------------
Multi-family Total 46,591 350,011 396,602 8,796
- ----------------------------------------------------------------------------------------------------------------------
(continued)
</TABLE>
Page 69
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (4)
Buildings
and
Description Encumbrances Land Improvements Improvements
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hotel Properties:
Country Inn & Suites by Carlson:
Scottsdale, AZ $ 4,255 $ - $ 12,117 $ 82
Country Suites by Carlson:
Ontario, CA (5) (7) 1,145 5,576 518
Arlington, TX (5) (7) 1,611 5,346 1,289
- ---------------------------------------------------------------------------------------------------
Hotel Total 2,756 23,039 1,889
- ---------------------------------------------------------------------------------------------------
Combined Total $ 228,299 $ 237,532 $ 1,557,858 $ 29,918
===================================================================================================
(1) Initial cost and date acquired by GRT Predecessor Entities, where applicable.
(2) The Company holds a participating first mortgage interest in the property. In accordance with GAAP, the Company
is accounting for the property as though it holds fee title.
(3) The aggregate cost for Federal income tax purposes is $1,704,942.
(4) Bracketed amounts represent reductions to carrying value in prior years.
(5) Initial Cost represents original book value carried forward from the financial statements of the GRT Predecessor Entities.
(6) Cross collateralized loan secured by ten properties - $58,942.
(7) Cross collateralized loan secured by eight properties - $13,220.
(8) Cross collateralized loans secured by 35 properties - $234,871.
(9) Cross collateralized loan secured by three properties - $15,650.
(10) Cross collateralized loan secured by four properties - $14,309.
(11) Cross collateralized loan secured by 15 properties - $114,950.
(12) Cross collateralized loan secured by three properties - $53,469.
</TABLE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1998
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hotel Properties:
Country Inn & Suites by Carlson:
Scottsdale, AZ $ - $ 12,199 $ 12,199 $ 1,197 2/97 3-30 yrs.
Country Suites by Carlson:
Ontario, CA (5) 1,145 6,094 7,239 3,470 11/86 5-30 yrs.
Arlington, TX (5) 1,611 6,635 8,246 4,059 12/86 5-30 yrs.
- --------------------------------------------------------------------------------------------------------------------
Hotel Total 2,756 24,928 27,684 8,726
- --------------------------------------------------------------------------------------------------------------------
Combined Total $ 237,532 $ 1,587,776 $ 1,825,308 $ 82,869
====================================================================================================================
(1) Initial cost and date acquired by GRT Predecessor Entities, where applicable.
(2) The Company holds a participating first mortgage interest in the property. In accordance with GAAP, the Company
is accounting for the property as though it holds fee title.
(3) The aggregate cost for Federal income tax purposes is $1,704,942.
(4) Bracketed amounts represent reductions to carrying value in prior years.
(5) Initial Cost represents original book value carried forward from the financial statements of the GRT Predecessor Entities.
(6) Cross collateralized loan secured by ten properties - $58,942.
(7) Cross collateralized loan secured by eight properties - $13,220.
(8) Cross collateralized loans secured by 35 properties - $234,871.
(9) Cross collateralized loan secured by three properties - $15,650.
(10) Cross collateralized loan secured by four properties - $14,309.
(11) Cross collateralized loan secured by 15 properties - $114,950.
(12) Cross collateralized loan secured by three properties - $53,469.
</TABLE>
Page 70
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Reconciliation of gross amount at which real estate was carried for the years
ended December 31:
1998 1997 1996
----------------- ---------------- -----------------
<S> <C> <C> <C>
Investments in real estate:
Balance at beginning of year $ 866,431 $ 190,729 $ 102,451
Additions during year:
Property acquisitions 999,091 687,523 89,653
Improvements 14,079 2,691 1,572
Retirements/sales (54,293) (14,512) (2,947)
----------------- ---------------- -----------------
Balance at end of year $ 1,825,308 $ 866,431 $ 190,729
================= ================ =================
Accumulated Depreciation:
Balance at beginning of year $ 41,213 $ 28,784 $ 24,877
Additions during year:
Depreciation 49,450 14,496 4,305
Acquisitions - 443 -
Retirements/sales (7,794) (2,510) (398)
----------------- ---------------- -----------------
Balance at end of year $ 82,869 $ 41,213 $ 28,784
================= ================ =================
</TABLE>
Page 71
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE
December 31, 1998
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Description of Loan and Current Periodic
Securing Property Interest Rate Maturity Date Payment Terms
<S> <C> <C> <C>
First Mortgage Loan Quarterly
Secured by land located interest-only
in Aurora, Colorado 13% 7/1/05 payments
First Mortgage Loan
Secured by a hotel Monthly
property located in interest-only
Dallas, Texas 9% 3/31/99 payments
First Mortgage Loan
Secured by a medical Monthly
building in Phoenix, interest-only
Arizona 11% 11/19/99 payments
(1) The loan amount is $3,850,000, of which $2,694,000 was initially disbursed to the borrower and
$1,156,000 was held by the Company as leasing and interest reserves. As of December 31, 1998, $790,000
of the leasing and interest reserves have been drawn by the borrower.
</TABLE>
Page 72
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE
December 31, 1998
(in thousands)
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H
Principal Amount of
Loans Subject to
Description of Loan and Face Carrying Delinquent
Securing Property Prior Liens Amount Amount Principal or Interest
<S> <C> <C> <C> <C>
First Mortgage Loan
Secured by land located
in Aurora, Colorado None $ 34,349 $ 35,336 None
First Mortgage Loan
Secured by a hotel
property located in
Dallas, Texas None 3,600 3,600 None
First Mortgage Loan
Secured by a medical
building in Phoenix,
Arizona None 3,850 3,484 (1) None
--------------- ---------------
Total $ 41,799 $ 42,420
=============== ===============
(1) The loan amount is $3,850,000, of which $2,694,000 was initially disbursed to the borrower and
$1,156,000 was held by the Company as leasing and interest reserves. As of December 31, 1998, $790,000
of the leasing and interest reserves have been drawn by the borrower.
</TABLE>
Page 72
Page 73
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE
December 31, 1998
(in thousands)
The following is a summary of changes in the carrying amount of mortgage loans
for the years ended December 31, 1998, 1997 and 1996 (in thousands):
1998 1997 1996
------------------- ------------------ ------------------
<S> <C> <C> <C>
Balance at beginning of year $ 3,692 $ 9,905 $ 7,465
Additions during year:
New mortgage loans 39,613 1,855 2,694
Deductions during year:
Collections of principal (885) (8,068) (254)
------------------- ------------------ ------------------
Balance at end of year $ 42,420 $ 3,692 $ 9,905
=================== ================== ==================
</TABLE>
Page 74
<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: March 16, 1999 /S/ Robert Batinovich
Robert Batinovich
Chairman of the Board
and Chief Executive Officer
Date: March 16, 1999 /S/ Andrew Batinovich
Andrew Batinovich
Director, President and
Chief Operating Officer
Date: March 16, 1999 /S/ Stephen Saul
Stephen Saul
Chief Financial Officer
(Principal Financial Officer)
Date: March 16, 1999 /S/ Terri Garnick
Terri Garnick
Senior Vice President,
Chief Accounting Officer,
Treasurer
(Principal Accounting Officer)
Date: March 16, 1999 /S/ Laura Wallace
Laura Wallace
Director
Page 75
<PAGE>
Exhibit Index
Exhibit
Number Exhibit Title
3.01 Articles of Amendment and Restatement of Articles of Incorporation of
the Company are incorporated herein by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
3.02 Amended Bylaws of the Company are incorporated herein by reference
to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
3.03 The Company's Form of Articles Supplementary relating to the 7-3/4%
Series A Convertible Preferred Stock is incorporated herein by
reference to Exhibit 3.03 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
3.04 Articles Supplementary of the Series B Preferred Stock (relating
to the Rights Plan) are incorporated herein by reference to Exhibit
3.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.
4.01 Form of Common Stock Certificate of the Company is incorporated herein
by reference to Exhibit 4.02 to the Company's Registration Statement
on Form S-4 (Registration No. 33-83506), which became effective
October 26, 1995.
4.02 Form of 7-3/4% Series A Convertible Preferred Stock Certificate
of the Company is incorporated herein by reference to Exhibit 4.1 to
the Company's Registration Statement on Form 8-A which was filed on
January 22, 1998.
10.01 Form of Indemnification Agreement for existing Officers and
Directors of the Company is incorporated herein by reference to
Exhibit 10.02 to the Company's Registration Statement on Form S-4
(Registration No. 33-83506), which became effective October 26, 1995.
10.02* Stock Incentive Plan of the Company (amended and restated as of
March 20, 1997) is incorporated herein by reference to Exhibit 4.0
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
10.03* Employment Agreement between the Company and Robert Batinovich is
incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
10.04* Employment Agreement between the Company and Andrew Batinovich is
incorporated herein by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
10.05 Rights Agreement, dated as of July 20, 1998, between the Company and
the Registrar and Transfer Company, together with Exhibit A Form of
Rights Certificate; Exhibit B Summary of Rights to Purchase Preferred
Stock; and Exhibit C Form of Articles Supplementary of the Series B
Preferred Stock are incorporated herein by reference to Exhibit 1 to
the Company's Form 8-A, filed on July 16, 1998.
10.06 Registration Agreement between the Company and GPA, Ltd. is
incorporated herein by reference to Exhibit 10.27 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
10.07 Indemnification Agreement for Glenborough Realty Corporation and
the Company, with Robert Batinovich as indemnitor is incorporated
herein by reference to Exhibit 10.31 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
Page 76
<PAGE>
EXHIBIT INDEX - continued
Exhibit
Number Exhibit Title
11.01 Statement re: Computation of Per Share Earnings is shown in Note 9 of
the Consolidated Financial Statements of the Company in Item 14.
12.01 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings
to Fixed Charges and Preferred Dividends
21.01 Significant Subsidiaries of the Registrant
23.01 Consent of Arthur Andersen LLP, independent public accountants
27.01 Financial Data Schedule
* Indicates management contract or compensatory plan or arrangement.
Page 77
<PAGE>
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
<TABLE>
<CAPTION>
GRT Predecessor
Entities,
Combined The Company
------------------------- ------------------------------------------
Twelve Months Ended December 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
EARNINGS, AS DEFINED
Net Income (Loss) before Preferred Dividends $ 1,580 $ 524 $ (1,609) $ 19,368 $ 44,602
Extraordinary items - - 186 843 1,400
Federal & State income taxes 176 357 - - -
Minority Interest 43 - 292 1,119 2,550
Fixed Charges 1,140 2,129 3,913 9,668 53,289
----------- ------------ ------------ ------------ -----------
$ 2,939 $ 3,010 $ 2,782 $ 30,998 $ 101,841
----------- ------------ ------------ ------------ -----------
FIXED CHARGES AND PREFERRED DIVIDENDS, AS DEFINED
Interest Expense $ 1,140 $ 2,129 $ 3,913 $ 9,668 $ 53,289
Capitalized Interest - - - - 1,108
Preferred Dividends - - - - 20,620
----------- ------------ ------------ ------------ -----------
$ 1,140 $ 2,129 $ 3,913 $ 9,668 $ 75,017
RATIO OF EARNINGS TO FIXED CHARGES 2.58 1.41 0.71 (1) 3.21 1.87
----------- ------------ ------------ ------------ -----------
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED
DIVIDENDS 2.58 1.41 0.71 (1) 3.21 1.36
----------- ------------ ------------ ------------ -----------
(1) For the twelve months ended December 31, 1996, earnings were insufficient to cover fixed charges by $1,131.
</TABLE>
Page 78
<PAGE>
Exhibit 21.1
SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
Glenborough Properties, L.P., a California Limited Partnership
Page 79
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated March 15, 1999 on the financial statements of Glenborough Realty
Trust Incorporated included in this Form 10-K, into the Company's previously
filed Registration Statement File Nos. 333-27677, 333-28601, 333-34329,
333-49845, 333-61319, 333-67839 and 333-70463.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Francisco, California
March 15, 1999
Page 80
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000929454
<NAME> GLENBOROUGH REALTY TRUST INCORPORATED
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 4,357
<SECURITIES> 2,639
<RECEIVABLES> 44,380
<ALLOWANCES> 412
<INVENTORY> 0
<CURRENT-ASSETS> 17,113
<PP&E> 1,825,308
<DEPRECIATION> 82,869
<TOTAL-ASSETS> 1,879,016
<CURRENT-LIABILITIES> 21,043
<BONDS> 708,578
0
11
<COMMON> 32
<OTHER-SE> 828,490
<TOTAL-LIABILITY-AND-EQUITY> 1,879,016
<SALES> 0
<TOTAL-REVENUES> 241,475
<CGS> 0
<TOTAL-COSTS> 139,634
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 412
<INTEREST-EXPENSE> 53,289
<INCOME-PRETAX> 48,552
<INCOME-TAX> 0
<INCOME-CONTINUING> 48,552
<DISCONTINUED> 0
<EXTRAORDINARY> (1,400)
<CHANGES> 0
<NET-INCOME> 23,982
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.75
</TABLE>
