SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-14162
GLENBOROUGH REALTY TRUST INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland 94-3211970
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 South El Camino Real,
Suite 1100, San Mateo, California
(650) 343-9300 94402-1708
(Address of principal executive offices (Zip Code)
and telephone number)
Securities registered under Section 12(b) of the Act:
Name of Exchange
Title of each class: on which registered:
Common Stock, $.001 par value New York Stock Exchange
7.75% Series A Convertible Preferred Stock, New York Stock Exchange
$.001 par value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___
As of November 5, 1999, 31,055,079 shares of Common Stock ($.001 par value) and
11,500,000 shares of 7.75% Series A Convertible Preferred Stock ($.001 par
value) were outstanding.
1
<PAGE>
INDEX
GLENBOROUGH REALTY TRUST INCORPORATED
Page No.
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
of Glenborough Realty Trust
Incorporated (Unaudited except for
the Consolidated Balance Sheet at
December 31, 1998):
Consolidated Balance Sheets at
September 30, 1999 and
December 31, 1998 3
Consolidated Statements of
Operations for the nine months
ended September 30, 1999 and
1998 4
Consolidated Statements of
Operations for the three
months ended September 30,
1999 and 1998 5
Consolidated Statement of
Stockholders' Equity for the
nine months ended September
30, 1999 6
Consolidated Statements of
Cash Flows for the nine months
ended September 30, 1999 and
1998 7-8
Notes to Consolidated
Financial Statements 9-21
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 22-30
PART II OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of
Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
EXHIBIT INDEX 33
2
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30, December 31,
1999 1998
(Unaudited) (Audited)
----------------- -----------------
ASSETS
<S> <C> <C>
Rental property, net of accumulated depreciation of
$100,700 and $72,951 in 1999 and 1998, respectively $ 1,637,991 $ 1,720,579
Real estate held for sale 18,507 21,860
Investments in Development 42,263 35,131
Investments in Associated Companies 9,586 8,807
Mortgage loans receivable 43,003 42,420
Cash and cash equivalents 3,315 4,357
Other assets 63,367 45,862
----------------- -----------------
TOTAL ASSETS $ 1,818,032 $ 1,879,016
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage loans $ 694,288 $ 708,578
Unsecured Series A Senior Notes 124,140 150,000
Unsecured bank line 83,207 63,519
Other liabilities 28,650 28,921
----------------- -----------------
Total liabilities 930,285 951,018
----------------- -----------------
Commitments and contingencies -- --
Minority interest 97,245 99,465
Stockholders' Equity:
Common stock, 30,630,058 and 31,758,915 shares issued
and outstanding at September 30, 1999 and
December 31, 1998, respectively 31 32
Preferred stock, 11,500,000 shares issued and outstanding
at September 30, 1999 and December 31, 1998 11 11
Additional paid-in capital 844,942 865,692
Deferred compensation (649) (181)
Retained earnings (deficit) (53,833) (37,021)
----------------- -----------------
Total stockholders' equity 790,502 828,533
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,818,032 $ 1,879,016
================= =================
See accompanying notes to consolidated financial statements
</TABLE>
3
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<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended September 30, 1999 and 1998
(in thousands, except per share amounts)
(Unaudited)
1999 1998
--------------- ---------------
REVENUE
<S> <C> <C>
Rental revenue $ 192,127 $ 162,903
Fees and reimbursements from affiliates 2,492 2,452
Interest and other income 5,216 2,019
Equity in earnings of Associated Companies 1,212 1,690
Net gain on sales of real estate assets 6,722 1,889
--------------- ---------------
Total revenue 207,769 170,953
--------------- ---------------
EXPENSES
Property operating expenses 66,006 53,035
General and administrative 7,054 8,197
Depreciation and amortization 43,578 35,252
Interest expense 48,678 35,916
--------------- ---------------
Total expenses 165,316 132,400
--------------- ---------------
Income from operations before minority interest and
extraordinary item 42,453 38,553
Minority interest (3,084) (1,909)
--------------- ---------------
Net income before extraordinary item 39,369 36,644
Extraordinary item:
Net gain on early extinguishment of debt 437 --
--------------- ---------------
Net income 39,806 36,644
Preferred dividends (16,710) (15,050)
--------------- ---------------
Net income available to Common Stockholders $ 23,096 $ 21,594
=============== ===============
Basic Per Share Data:
Net income available to Common Stockholders before
extraordinary item $ 0.72 $ 0.68
Extraordinary item 0.01 --
=============== ===============
Net income available to Common Stockholders $ 0.73 $ 0.68
=============== ===============
Basic weighted average shares outstanding 31,480,583 31,634,138
=============== ===============
Diluted Per Share Data:
Net income available to Common Stockholders before
extraordinary item $ 0.72 $ 0.67
Extraordinary item 0.01 --
=============== ===============
Net income available to Common Stockholders $ 0.73 $ 0.67
=============== ===============
Diluted weighted average shares outstanding 35,782,784 35,114,838
=============== ===============
See accompanying notes to consolidated financial statements
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30, 1999 and 1998
(in thousands, except per share amounts)
(Unaudited)
1999 1998
--------------- ---------------
REVENUE
<S> <C> <C>
Rental revenue $ 62,934 $ 65,321
Fees and reimbursements from affiliates 618 1,220
Interest and other income 1,779 1,416
Equity in earnings of Associated Companies 1,777 629
Net loss on sales of real estate assets (371) (250)
--------------- ---------------
Total revenue 66,737 68,336
--------------- ---------------
EXPENSES
Property operating expenses 22,145 22,446
General and administrative 2,281 3,372
Depreciation and amortization 14,266 14,309
Interest expense 15,720 17,064
--------------- ---------------
Total expenses 54,412 57,191
--------------- ---------------
Income from operations before minority interest and
extraordinary item 12,325 11,145
Minority interest (888) (635)
--------------- ---------------
Net income before extraordinary item 11,437 10,510
Extraordinary item:
Net gain on early extinguishment of debt 740 --
--------------- ---------------
Net income 12,177 10,510
Preferred dividends (5,570) (5,570)
--------------- ---------------
Net income available to Common Stockholders $ 6,607 $ 4,940
=============== ===============
Basic Per Share Data:
Net income available to Common Stockholders before
extraordinary item $ 0.19 $ 0.16
Extraordinary item 0.02 --
=============== ===============
Net income available to Common Stockholders $ 0.21 $ 0.16
=============== ===============
Basic weighted average shares outstanding 31,020,822 31,703,963
=============== ===============
Diluted Per Share Data:
Net income available to Common Stockholders before
extraordinary item $ 0.19 $ 0.15
Extraordinary item 0.02 --
=============== ===============
Net income available to Common Stockholders $ 0.21 $ 0.15
=============== ===============
Diluted weighted average shares outstanding 35,274,940 36,261,228
=============== ===============
See accompanying notes to consolidated financial statements
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the nine months ended September 30, 1999
(in thousands)
(Unaudited)
Common Stock Preferred Stock
--------------------- ---------------------
Additional Deferred Retained
Par Par Paid-in Compen- Earnings
Shares Value Shares Value Capital sation (Deficit) Total
---------- ---------- ----------- --------- ------------ ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 31,759 $ 32 11,500 $ 11 $ 865,692 $ (181) $ (37,021) $ 828,533
Exercise of stock options 85 -- -- -- 1,275 -- -- 1,275
Conversion of Operating Partnership
units into common stock 60 -- -- -- -- -- -- --
Issuance of common stock to officers 30 -- -- -- 550 (550) -- --
Common stock repurchases (1,304) (1) -- -- (22,575) -- -- (22,576)
Amortization of deferred compensation -- -- -- -- -- 82 -- 82
Unrealized gain on marketable
securities -- -- -- -- -- -- 34 34
Distributions -- -- -- -- -- -- (56,652) (56,652)
Net income -- -- -- -- -- -- 39,806 39,806
---------- ---------- ------------ -------- ------------- ------------ ------------- --------
Balance at September 30, 1999 30,630 $ 31 11,500 $ 11 $ 844,942 $ (649) $ (53,833) $ 790,502
========== ========== =========== ========= ============= ============= ========== ==========
See accompanying notes to consolidated financial statements
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1999 and 1998
(in thousands)
(Unaudited)
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 39,806 $ 36,644
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 43,578 35,252
Amortization of loan fees, included in
interest expense 1,470 998
Minority interest in income from operations 3,084 1,909
Equity in earnings of Associated Companies (1,212) (1,690)
Net gain on sales of real estate assets (6,722) (1,889)
Net gain on early extinguishment of debt (437) --
Amortization of deferred compensation 82 68
Changes in certain assets and liabilities, net (8,820) 5,386
--------------- ---------------
Net cash provided by operating activities 70,829 76,678
--------------- ---------------
Cash flows from investing activities:
Net proceeds from sales of real estate assets 111,490 39,247
Additions to rental properties (39,857) (589,480)
Investments in Development (7,132) (23,856)
Investment in Joint Ventures (3,301) --
Additions to mortgage loans receivable (583) (37,397)
Investments in marketable securities -- (24,087)
Principal receipts on mortgage loans receivable -- 507
Payments from affiliates 400 --
Distributions from Associated Companies 433 1,200
--------------- ---------------
Net cash provided by (used for) investing
activities 61,450 (633,866)
--------------- ---------------
See accompanying notes to consolidated financial statements
</TABLE>
continued
7
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS -continued
For the nine months ended September 30, 1999 and 1998
(in thousands)
(Unaudited)
1999 1998
--------------- --------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from borrowings $ 256,240 $ 425,350
Repayment of borrowings (280,116) (227,281)
Proceeds from issuance of Series A Senior Notes -- 150,000
Retirement of Series A Senior Notes (less gain on
retirement of $2,568 in 1999) (23,292) --
Draws from (payments into) lender impound accounts, net (870) (10,001)
Prepayment penalties on loan payoffs (2,026) --
Distributions to minority interest holders (5,304) (3,280)
Distributions to stockholders (56,652) (49,288)
Exercise of stock options 1,275 138
Repurchases of common stock (22,576) --
Proceeds from issuance of preferred stock, net of
offering costs -- 273,861
--------------- --------------
Net cash (used for) provided by financing
activities (133,321) 559,499
--------------- --------------
Net (decrease) increase in cash and cash equivalents (1,042) 2,311
Cash and cash equivalents at beginning of period 4,357 5,070
--------------- --------------
Cash and cash equivalents at end of period $ 3,315 $ 7,381
=============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest (net of capitalized interest of
$2,077 and $724 in 1999 and 1998, respectively) $ 48,560 $ 30,691
=============== ==============
Supplemental disclosure of Non-Cash Investing and Financing
Activities:
Acquisition of real estate through assumption of first
trust deed notes payable $ 29,275 $ 358,876
=============== ==============
Acquisition of real estate through issuance of shares
of common stock and Operating Partnership units $ -- $ 52,621
=============== ==============
See accompanying notes to consolidated financial statements
</TABLE>
8
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1999
Note 1. ORGANIZATION
Glenborough Realty Trust Incorporated (the "Company") was organized in the State
of Maryland on August 26, 1994. The Company has elected to qualify as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended (the "Code"). The Company completed a consolidation with certain public
California limited partnerships and other entities (the "Consolidation") engaged
in real estate activities (the "GRT Predecessor Entities") through an exchange
of assets of the GRT Predecessor Entities for 5,753,709 shares of Common Stock
of the Company. The Consolidation occurred on December 31, 1995, and the Company
commenced operations on January 1, 1996.
Subsequent to the Consolidation on December 31, 1995, and through September 30,
1999, the following Common Stock transactions occurred: (i) 67,250 shares of
Common Stock were issued to officers and directors as stock compensation; (ii)
25,446,000 shares were issued in four separate public equity offerings; (iii)
448,172 shares were issued in connection with various acquisitions; (iv) 107,414
shares were issued in connection with the exercise of employee stock options;
(v) 111,188 shares were issued in connection with the exchange of Operating
Partnership units; (vi) 1,303,616 shares were repurchased by the Company (see
discussion below) and (vii) 59 shares were retired, resulting in total shares of
Common Stock issued and outstanding at September 30, 1999, of 30,630,058.
Assuming the issuance of 4,159,314 shares of Common Stock issuable upon
redemption of 4,159,314 partnership units in the Operating Partnership, there
would be 34,789,372 shares of Common Stock outstanding as of September 30, 1999.
In January 1998, the Company completed a public offering of 11,500,000 shares of
7 3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible
Preferred Stock Offering"). The shares are convertible at any time at the option
of the holder thereof into shares of Common Stock at an initial conversion price
of $32.83 per share of Common Stock (equivalent to a conversion rate of 0.7615
shares of Common Stock for each share of Series A Convertible Preferred Stock),
subject to adjustment in certain circumstances. Shares of Preferred Stock issued
and outstanding at September 30, 1999, totaled 11,500,000.
In July 1998, the Company's Board of Directors adopted a stockholder rights plan
which is intended to protect the Company's stockholders in the event of coercive
or unfair takeover tactics, or an unsolicited attempt to acquire control of the
Company in a transaction the Board of Directors believes is not in the best
interests of the stockholders. Under the plan, the Company declared a dividend
of Rights on its Common Stock. The rights issued under the plan will be
triggered, with certain exceptions, if and when any person or group acquires, or
commences a tender offer to acquire, 15% or more of the Company's shares.
In February 1999, the Company's Board of Directors authorized the Company to
repurchase up to 3.1 million shares of its outstanding Common Stock. This
represents approximately 10% of the Company's total outstanding Common Stock.
Such purchases will be made from time to time in the open market or otherwise
and the timing will depend on market conditions and other factors. As of
September 30, 1999, 1,303,616 shares have been repurchased. In addition, during
the third quarter, the Company announced that its Board of Directors had
approved an expansion of the stock repurchase program to include preferred stock
as well as common stock. The Company is authorized to repurchase up to 15% of
its preferred stock, or 1,725,000 shares.
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
9
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1999
87.04% limited partner interest at September 30, 1999, is Glenborough
Properties, L.P. (the "Operating Partnership"). As of September 30, 1999, the
Operating Partnership, directly and through the subsidiaries in which it and the
Company own 100% of the ownership interests, controls a portfolio of 167 real
estate projects, including office, office/flex, industrial, multifamily, retail
and hotel properties. The portfolio encompasses approximately 23 million square
feet in 22 states.
Prior to September 30, 1999, the Operating Partnership also held 100% of the
non-voting preferred stock of the following associated companies (the
"Associated Companies"):
Glenborough Corporation ("GC") is the general partner of several real
estate limited partnerships and provides asset and property management and
development services for these partnerships (the "Managed Partnerships").
It also provides partnership administration, asset management, property
management and development services to a group of unaffiliated partnerships
which include three public partnerships sponsored by Rancon Financial
Corporation, an unaffiliated corporation which has significant real estate
assets in the Inland Empire region of Southern California (the "Rancon
Partnerships").
Glenborough Hotel Group ("GHG") owns an approximate 36% limited partner
interest in a real estate joint venture.
Effective September 30, 1999, GHG merged with GC. In the merger, the Operating
Partnership received preferred stock of GC in exchange for its preferred stock
of GHG.
Following the merger, the Operating Partnership owns 100% of the 47,500 shares
(representing 95% of total outstanding shares) of non-voting preferred stock of
GC. Six individuals, including Sandra Boyle, Frank Austin and Terri Garnick,
executive officers of the Company, own the 2,500 shares (representing 5% of
total outstanding shares) of voting common stock of GC. The Operating
Partnership and GC intend that the Operating Partnership's interest in GC
complies with REIT qualification standards.
The Operating Partnership, through its ownership of preferred stock of GC, is
entitled to receive cumulative, preferred annual dividends of $1.896 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
Operating Partnership is also entitled to receive a preferred liquidation value
of $169.49 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 $169.49 per share. As the holder of preferred stock of GC,
the Operating Partnership 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 Operating Partnership with a
significant portion of the economic benefits of the operations of GC. The
Operating Partnership will account for the financial results of GC using the
equity method.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements present the consolidated financial
position of the Company as of September 30, 1999, and December 31, 1998, and the
consolidated results of operations and cash flows of the Company for the nine
months ended September 30, 1999 and 1998. All intercompany transactions,
receivables and payables have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal accruals) necessary to
present fairly the financial position and results of operations of the Company
as of September 30, 1999, and for the period then ended.
10
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1999
Reclassification
Certain prior year balances have been reclassified to conform to the current
year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the results of operations during the reporting period. Actual results could
differ from those estimates.
New Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998. SFAS No.
133 was originally effective for fiscal years beginning after June 15, 1999,
with early adoption permitted. In June 1999, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an amendment of FASB Statement No. 133" was issued
which, among other things, deferred the final implementation to fiscal years
beginning after June 15, 2000. SFAS No. 133 provides comprehensive guidelines
for the recognition and measurement of derivatives and hedging activities and
specifically requires all derivatives to be recorded on the balance sheet at
fair value. Management is evaluating the effects, if any, that this
pronouncement will have on the Company's consolidated financial position,
results of operations and financial statement position.
Rental Property
Rental properties are stated at cost unless circumstances indicate that cost
cannot be recovered, in which case, the carrying value of the property is
reduced to estimated fair value. Estimated fair value: (i) is based upon the
Company's plans for the continued operation of each property; and (ii) is
computed using estimated sales price, as determined by prevailing market values
for comparable properties and/or the use of capitalization rates multiplied by
annualized rental income based upon the age, construction and use of the
building. The fulfillment of the Company's plans related to each of its
properties is dependent upon, among other things, the presence of economic
conditions which will enable the Company to continue to hold and operate the
properties prior to their eventual sale. Due to uncertainties inherent in the
valuation process and in the economy, it is reasonably possible that the actual
results of operating and disposing of the Company's properties could be
materially different than current expectations.
Depreciation is provided using the straight line method over the useful lives of
the respective assets.
The useful lives are as follows:
Buildings and Improvements 10 to 40 years
Tenant Improvements Term of the related lease
Furniture and Equipment 5 to 7 years
Real Estate Held for Sale
Real estate held for sale consists of rental properties that are under contract
or in active negotiations to be disposed of. The fulfillment of the Company's
plans to dispose of property is dependent upon, among other things, the presence
of economic conditions which will enable the Company to hold the property for
eventual sale. The Company discontinues depreciation of rental property once it
is classified as held for sale.
Investments in Development
The Company, through mezzanine loans and equity contributions, invests in
various development alliances with projects currently under development. The
interest on advances and other direct project costs incurred by the Company are
capitalized to the investment during the period in which the projects are under
development. See Note 6 for further discussion.
Investments in Associated Companies
The Company's investments in Associated Companies are accounted for using the
equity method, as discussed further in Note 4.
11
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1999
Mortgage Loans Receivable
The Company monitors the recoverability of its loans and notes receivable
through ongoing contact with the borrowers to ensure timely receipt of interest
and principal payments, and where appropriate, obtains financial information
concerning the operation of the properties. Interest on mortgage loans is
recognized as revenue as it accrues during the period the loan is outstanding.
Mortgage loans receivable will be evaluated for impairment if it becomes evident
that the borrower is unable to meet its debt service obligations in a timely
manner and cannot satisfy its payments using sources other than the operations
of the property securing the loan. If it is concluded that such circumstances
exist, then the loan will be considered to be impaired and its recorded amount
will be reduced to the fair value of the collateral securing it. Interest income
will also cease to accrue under such circumstances. Due to uncertainties
inherent in the valuation process, it is reasonably possible that the amount
ultimately realized from the Company's collection on these receivables will be
different than the recorded amounts.
Cash Equivalents
The Company considers short-term investments (including certificates of deposit)
with a maturity of three months or less at the time of investment to be cash
equivalents.
Marketable Securities
The Company records its marketable securities at fair value. Unrealized gains
and losses on securities are reported as a separate component of stockholders'
equity and realized gains and losses are included in net income.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure about
fair value for all financial instruments. Based on the borrowing rates currently
available to the Company, the carrying amount of debt approximates fair value.
Certain assumed debt instruments have been recorded at a premium based upon the
stated rate on the instrument and the then available borrowing rates for the
Company. Cash and cash equivalents consist of demand deposits and certificates
of deposit with financial institutions. The carrying amount of cash and cash
equivalents as well as the mortgage loans receivable described above,
approximates fair value.
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 September 30, 1999, the Company was not a party to any open interest rate
protection agreements other than the interest rate cap contract entered into in
August 1999 and discussed in Note 7 below.
Deferred Financing and Other Fees
Fees paid in connection with the financing and leasing of the Company's
properties are amortized over the term of the related notes payable or leases
and are included in other assets.
Minority Interest
Minority interest represents the 11.96% 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.
12
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1999
For the nine months ended September 30, 1999 and 1998, no tenants represented
10% or more of rental revenue of the Company.
Fees and reimbursement revenue consists of property management fees, overhead
administration fees, and transaction fees from the acquisition, disposition,
refinancing, leasing and construction supervision of real estate for
unconsolidated affiliates.
Revenues are recognized only after the Company is contractually entitled to
receive payment, after the services for which the fee is received have been
provided, and after the ability and timing of payments are reasonably assured
and predictable.
Scheduled rent increases are based primarily on the Consumer Price Index or a
similar factor. Material incentives paid, if any, by the Company to a tenant are
amortized as a reduction of rental income over the life of the related lease.
Income Taxes
The Company has made an election to be taxed as a REIT under Sections 856
through 860 of the Code. As a REIT, the Company generally will not be subject to
Federal income tax to the extent that it distributes at least 95% of its REIT
taxable income to its stockholders. REITs are subject to a number of
organizational and operational requirements. If the Company fails to qualify as
a REIT in any taxable year, the Company will be subject to Federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate tax rates. Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain state and local taxes on its income
and property and to Federal income and excise taxes on its undistributed income.
Reference to 1998 Audited Financial Statements
These unaudited financial statements should be read in conjunction with the
Notes to Consolidated Financial Statements included in the 1998 audited
financial statements.
Note 3. RENTAL PROPERTY
Acquisitions
In the third quarter of 1999, the Company acquired all of the real estate assets
of Prudential-Bache/Equitec Real Estate Partnership, a California limited
partnership (the "Pru Bache Portfolio") in which the managing general partner is
Prudential-Bache Properties, Inc., and in which GC and Robert Batinovich, Chief
Executive Officer of the Company, have served as co-general partners since March
1994. Neither GC nor Robert Batinovich held a material equity or economic
interest in the Pru-Bache Portfolio. The acquisition was unanimously approved by
the Company's independent directors, with Robert Batinovich and Andrew
Batinovich abstaining. The total acquisition cost, including third party
expenditures incurred for the purpose of the transaction, was approximately
$49.1 million, which consisted of (i) approximately $15.2 million of assumed
debt and (ii) the balance in cash, including approximately $21.4 million of
proceeds from the sales of real estate assets and an $11.2 million advance under
the Credit Facility. The Pru-Bache Portfolio consists of four office buildings
and one office/flex property, aggregating 550,592 total square feet and located
in Rockville, Maryland, Memphis, Tennessee, Sacramento, California and Seattle,
Washington.
In the second quarter of 1999, the Company expanded its existing holdings near
Los Angeles International Airport by purchasing a 41,709 square foot industrial
building which is the second phase of the project purchased in the first quarter
(see below). This second phase has been leased on a long term triple net basis
to the tenant currently occupying phase one of the project. The total
acquisition cost, including third party expenditures incurred for the purpose of
the transaction, was approximately $5.6 million.
In the first quarter of 1999, the Company acquired a 285 unit multifamily
property ("Springs of Indian Creek") located in Carrolton, Texas. The property
is the first phase of a two-phase project comprising a total of 519 units. The
234 unit second phase of the project is currently under construction through one
of the Company's development alliances and is expected to be completed in the
first quarter of the year 2000. The total acquisition cost, including third
13
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1999
party expenditures incurred for the purpose of the transaction, was
approximately $20.8 million comprising: (i) approximately $14.1 million in
assumption of debt and (ii) the balance in cash. In addition, the Company
acquired a 1.45-acre parcel containing 34,500 square feet of industrial
buildings in Los Angeles, California, near the Los Angeles International
Airport. This property is the first phase of a two-phase project. The total
acquisition cost, including third party expenditures incurred for the purpose of
the transaction, was approximately $3.1 million, which was paid entirely in
cash. The property has been leased to a single tenant under a 15-year triple-net
lease.
Dispositions
In the third quarter of 1999, the Company sold five properties, including two
office, two office/flex and one hotel. The assets were sold for an aggregate
sales price of approximately $19,865,000 and generated an aggregate net gain of
approximately $1,229,000. This gain was offset by a $1,600,000 reduction in the
sale price of a hotel sold in June 1998 (see Note 5 for further discussion),
resulting in an aggregate net loss for the quarter of $371,000.
In the second quarter of 1999, the Company sold fourteen properties, including
five office, four office/flex, one retail, two industrial, one multifamily and
one hotel. The assets were sold for an aggregate sales price of approximately
$109,135,000 and generated an aggregate net gain of approximately $5,742,000.
In the first quarter of 1999, the Company sold seven properties, including five
office/flex properties and two retail properties, and a partial interest in a
REIT. These assets were sold for an aggregate sales price of approximately $27.3
million and generated an aggregate net gain of approximately $1,351,000.
These transactions are reflected as the net gain on sales of real estate assets
on the accompanying consolidated statement of operations for the nine months
ended September 30, 1999.
Prospective Dispositions
The Company has entered into separate definitive agreements to sell six
properties, including two office properties, two office/flex properties and two
industrial properties. The sales are expected to close in the fourth quarter of
1999 and the first quarter of 2000 for an aggregate sales price of approximately
$22.7 million, however, they are subject to certain contingencies, including
satisfactory completion of due diligence and customary closing conditions. As a
result, there can be no assurance that these sales will be completed. These
properties are reflected as Real Estate Held For Sale on the accompanying
consolidated balance sheet as of September 30, 1999. See Note 13 for discussion
of sales subsequent to September 30, 1999.
Note 4. INVESTMENTS IN ASSOCIATED COMPANIES
The Company accounts for its investment in GC (as defined in Note 1) using the
equity method as a substantial portion of its economic benefits flow to the
Company by virtue of its 100% non-voting preferred stock interest in GC, which
interest constitutes substantially all of GC's capitalization. Three of the
holders of the voting common stock of GC are officers of the Company; however,
the Company has no direct voting or management control of GC. The Company
records earnings on its investment in GC 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 GC are recorded as
a reduction of the Company's investment.
14
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1999
As of September 30, 1999 and 1998, the Company had the following investments in
the Associated Companies (in thousands):
GC (1)
Investment at December 31, 1998 $ 8,807
Distributions (433)
Equity in earnings 1,212
---------
Investment at September 30, 1999 $ 9,586
=========
GC GHG Total
Investment at December 31, 1997 $ 8,519 $ 2,429 $ 10,948
Distributions (1,005) (195) (1,200)
Equity in earnings (loss) 1,889 (199) 1,690
--------- ---------- ---------
Investment at September 30, 1998 $ 9,403 $ 2,035 $ 11,438
========= ========= =========
(1) All amounts presented for GC represent combined amounts for GC and GHG due
to the September 30, 1999 merger, as previously discussed in Note 1.
Note 5. MORTGAGE LOANS RECEIVABLE
The Company's mortgage loans receivable consist of the following as of September
30, 1999, and December 31, 1998 (dollars in thousands):
1999 1998
--------- ---------
Note secured by an office property in Phoenix, AZ,
with a fixed interest rate of 7% (until May 31,
2000, at which time the rate shall change to a
fixed rate of 9%) and a maturity date of May 2001 $ 3,728 $ 3,484
Note secured by a hotel property in Dallas, TX,
with a fixed interest rate of 9%, monthly
interest-only payments and a maturity date of
March 2000. The principal amount of this loan was
reduced in September 1999. See below for further
discussion. 2,000 3,600
Note secured by Gateway Park land located in
Aurora, CO, with a stated fixed interest rate of
13%, quarterly interest-only payments and a
maturity date of July 2005 (see below for further
discussion) 37,275 35,336
---------- ---------
Total $ 43,003 $ 42,420
========== =========
In 1998, the Company entered into a development alliance with The Pauls
Corporation (see Note 6). In addition to this development alliance, the Company
loaned approximately $34 million ($37.3 million, including accrued interest, at
September 30, 1999), secured by a First Mortgage, to continue the build-out of
Gateway Park. In this arrangement, the Company has rights under certain
conditions and subject to certain contingencies to purchase the properties upon
completion of development and, thus, through this arrangement, the Company could
acquire up to 2.2 million square feet of office, office/flex and industrial
space and 1,600 multifamily units over the next ten years.
In June 1998, the Company sold a hotel property in Dallas, Texas, to a third
party for a sale price of $4.2 million, of which $3.6 million was represented by
a note receivable secured by the hotel property. In September 1999, the loan
agreement was modified to reduce the sale price of the hotel by $1.6 million
and, thus, the principal amount of the note receivable was also reduced by $1.6
million. In addition, the maturity date of the note was extended to March 2000.
This reduction in the sale price of the hotel was recorded as a loss on sale of
the property and is included in the $371,000 net loss on sales of real estate
assets on the accompanying consolidated statement of operations for the three
months ended September 30, 1999.
15
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1999
Note 6. INVESTMENTS IN DEVELOPMENT AND OTHER ASSETS
The Company has formed 4 development alliances for the development of
approximately 713,000 square feet of office, office/flex and distribution
properties and 1,710 multifamily units in North Carolina, Colorado, Texas, New
Jersey, Kansas and Michigan. As of September 30, 1999, the Company has advanced
approximately $42 million. Under these development alliances, the Company has
certain rights to purchase the properties upon completion of development over
the next five years.
In June 1999, the Company entered into a joint venture in which it sold a 90%
interest in Rockwall I & II, a 340,252 square foot office complex located in
Rockville, Maryland. The Company maintains a 10% interest in the asset along
with a contract for property management and asset management services under
which the Company is entitled to receive property management fees of 3% of cash
receipts and an annual asset management fee of $350,000. The proceeds from the
sale were used to paydown the Credit Facility (discussed below) and to reduce
other secured debt. The value of this 10% interest is approximately $1.3 million
and is included in Other Assets on the accompanying consolidated balance sheet
as of September 30, 1999. This investment is accounted for using the equity
method.
In April 1999, the Company also purchased a 10% interest in a joint venture
holding the fee simple title to the land under Rincon Center I & II in San
Francisco, California. The land was purchased from the United States Post Office
for a purchase price of $80.5 million. The land has a triple net ground lease
with a remaining term of 51 years with minimum 30% rental increases every six
years. Occupying a full city block near the waterfront in the Financial
District, Rincon Center I & II contains 476,709 square feet of commercial office
and retail space, 320 multifamily units and 381 subterranean parking spaces. The
value of this 10% interest is approximately $2 million and is included in Other
Assets on the accompanying consolidated balance sheet as of September 30, 1999.
This investment is accounted for using the equity method. In October 1999, the
joint venture acquired Rincon Center I & II. See Note 13 for further discussion.
Note 7. SECURED AND UNSECURED LIABILITIES
The Company had the following mortgage loans, bank lines, unsecured notes and
notes payable outstanding as of September 30, 1999, and December 31, 1998
(dollars in thousands):
1999 1998
------ ------
Secured loans with various lenders, net of
unamortized discount of $5,671 and $6,140 at
September 30, 1999 and December 31, 1998,
respectively. All loans have a fixed interest rate
of 6.125% and a November 10, 2008 maturity date.
Monthly principal and interest payments range
between $296 and $458. These loans are secured by
35 properties with an aggregate net carrying value
of $402,418 and $408,439 at September 30, 1999 and
December 31, 1998, respectively. $ 233,322 $ 234,871
Secured loan with an investment bank with a fixed
interest rate of 7.57% and a maturity date of
January 1, 2006. This loan was paid off in March
1999 with the proceeds from a $26 million loan
discussed below. -- 13,220
16
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1999
1999 1998
------ ------
Secured loans with various lenders, bearing
interest at fixed rates between 6.95% and 9.25%
(approximately $52,824 of these loans include an
unamortized premium of approximately $366 which
reduces the effective interest rate on those
instruments to 6.75%), with monthly principal and
interest payments ranging between $11 and $443 and
maturing at various dates through December 1,
2030. These loans are secured by properties with
an aggregate net carrying value of $549,627 and
$576,633 at September 30, 1999 and December 31,
1998, respectively. $ 324,841 $ 335,257
Secured loans with various banks bearing interest
at variable rates ranging between 6.20% and 8.25%
at September 30, 1999, monthly principal and
interest payments ranging between $16 and $500 and
maturing at various dates through August 30, 2004.
These loans are secured by properties with an
aggregate net carrying value of $210,007 and
$179,438 at September 30, 1999 and December 31,
1998, respectively. 136,125 125,230
Unsecured $142,500 line of credit with a bank
("Credit Facility") with a variable interest rate
of LIBOR plus 1.625% (6.960% and 7.401% at
September 30, 1999 and December 31, 1998,
respectively), monthly interest only payments and
a maturity date of December 22, 2000, with one
option to extend for 10 years. 83,207 63,519
Unsecured Series A Senior Notes with a fixed
interest rate of 7.625%, interest payable
semiannually on March 15 and September 15, and a
maturity date of March 15, 2005. Approximately
$25.9 million of the notes were retired in 1999 as
discussed below. 124,140 150,000
Total $ 901,635 $ 922,097
========= =========
In March 1999, the Company obtained a $26 million loan from a commercial bank.
The loan was non-recourse and was secured by seven properties and had a maturity
date of December 22, 1999, with an option to extend for six months. The proceeds
were used to pay off a loan which was previously secured by these same
properties and to reduce other debt. This loan was paid off in June 1999 with
proceeds generated from the sales of four properties.
In June 1999, in order to increase the Company's financial flexibility, the
Credit Facility was modified to increase the commitment from $100 million to
$142.5 million. The interest rate, monthly payments and maturity date remain
unchanged.
In August 1999, the Company closed a $97.6 million secured financing with Key
Bank/FNMA. The proceeds from this financing, combined with proceeds from a new
$7.2 million mortgage and a draw on the Credit Facility, were used to retire a
$113.2 million mortgage which would have matured in December of 1999. The new
financing is a revolving line of credit maturing in five years with a five-year
extension option, and bears interest at a floating rate equal to 75 basis points
over the rate for 90-day mortgage backed securities credit-enhanced by FNMA. The
current interest rate on this loan is 6.2%.
In connection with the Key Bank/FNMA secured financing, the Company entered into
an interest rate cap agreement to hedge increases in interest rates above a
specified level of 11.21%. The agreement is for a term concurrent with the Key
17
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1999
Bank/FNMA instrument, is indexed to a 90-day LIBOR rate, and is for a notional
amount equal to the maximum amount available on the Key Bank/FNMA loan. As of
September 30, 1999, the 90-day LIBOR rate was 6.084%. The Company paid a premium
of approximately $434,000 at the inception of the cap agreement, which is being
amortized as additional interest expense over the life of the agreement.
In the second and third quarters of 1999, the Company retired approximately
$25.9 million of unsecured Series A Senior Notes at a discount. As a result of
these transactions, a gain on early extinguishment of debt of approximately $2.6
million was recorded which is included in the net gain on early extinguishment
of debt on the accompanying consolidated statement of operations for the nine
months ended September 30, 1999, as discussed in Note 8 below.
Some of the Company's properties are held in limited partnerships and limited
liability companies in order to facilitate financing. Such limited partnerships
and limited liability companies are included in the consolidated financial
statements of the Company in accordance with Generally Accepted Accounting
Principles ("GAAP").
The required principal payments on the Company's debt for the next five years
and thereafter, as of September 30, 1999, are as follows (in thousands):
Year Ending
December 31,
1999 $ 2,377
2000 176,050
2001 22,532
2002 14,301
2003 37,891
Thereafter 648,484
---------
Total $ 901,635
=========
Note 8. NET GAIN ON EARLY EXTINGUISHMENT OF DEBT
In connection with the loan payoffs discussed above and the payoff of other
mortgage debt, the Company recorded a net gain on early extinguishment of debt
of $437,000 for the nine months ended September 30, 1999. This gain consists of
$2,568,000 of gains on retirement of Series A Senior Notes (as discussed above)
offset by $2,026,000 of losses due to prepayment penalties and $105,000 of
losses due to the writeoff of unamortized loan fees upon the early payoff of
four loans. These loans were paid-off early when more favorable terms were
obtained through new financing (discussed above) and upon the sale of the
properties securing the loans.
Note 9. RELATED PARTY TRANSACTIONS
Fee and reimbursement income earned by the Company from related parties totaled
$2,492,000 and $2,452,000 for the nine months ended September 30, 1999 and 1998,
respectively, and consisted of property management fees, asset management fees
and other fee income. In addition, the Company paid GC property management fees
and salary reimbursements totaling $1,180,000 and $940,000 for the nine months
ended September 30, 1999 and 1998, respectively, for management of a portfolio
of residential properties owned by the Company, which is included in property
operating expenses and general and administrative expenses on the accompanying
consolidated statements of operations.
In 1998, the Company acquired from a Managed Partnership an option to purchase
all of its rights under a Lease with Option to Purchase Agreement, for certain
undeveloped land located in Burlingame, California. Upon expiration of the
option period, the independent members of the Company's Board of Directors
concluded that proceeding with the development of the property would have
required that the Company incur substantial debt. Accordingly, on February 1,
1999, the Company elected not to proceed with the development and not to
exercise the option in return for the Managed Partnership's agreement to
reimburse the Company for $2,309,000 of predevelopment costs, $462,000 to be
paid in cash with the balance in a promissory note bearing interest at 10% and
due on the earlier of sale, refinance or March 31, 2002. The note also contains
a participation in profits realized by the Managed Partnership from the
development and sale of the property. The principal balance of the note is
included in Other Assets on the accompanying consolidated balance sheet as of
September 30, 1999.
18
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1999
Note 10. EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." SFAS
No. 128 requires the disclosure of basic earnings per share and modified the
guidance for computing diluted earnings per share. Basic earnings per share is
computed as earnings divided by weighted average shares, excluding the dilutive
effects of stock options and other potentially dilutive securities. Earnings per
share are as follows (in thousands, except for weighted average shares and per
share amounts):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income available to common
Stockholders - Basic $ 6,607 $ 4,940 $ 23,096 $ 21,594
Minority interest 888 635 3,084 1,909
------------- ------------- ------------- -------------
Net income available to common
Stockholders - Diluted $ 7,495 $ 5,575 $ 26,180 $ 23,503
------------- ------------- ------------- -------------
Weighted average shares:
Basic 31,020,822 31,703,963 31,480,583 31,634,138
Stock options 86,380 325,661 103,430 346,666
Convertible Operating Partnership Units 4,167,738 4,231,604 4,198,771 3,134,034
------------- ------------- ------------- --------------
Diluted 35,274,940 36,261,228 35,782,784 35,114,838
------------- ------------- ------------- --------------
Basic earnings per share $ 0.21 $ 0.16 $ 0.73 $ 0.68
Diluted earnings per share $ 0.21 $ 0.15 $ 0.73 $ 0.67
</TABLE>
Note 11. STOCK COMPENSATION PLAN
In May 1996, the Company adopted an employee stock incentive plan (the "Plan")
to provide incentives to attract and retain high quality executive officers and
key employees. Certain amendments to the Plan were ratified and approved by the
stockholders of the Company at the Company's 1997 Annual Meeting of
Stockholders. The Plan, as amended, provides for the grant of (i) shares of
Common Stock of the Company, (ii) options, stock appreciation rights ("SARs") or
similar rights with an exercise or conversion privilege at a fixed or variable
price related to the Common Stock and/or the passage of time, the occurrence of
one or more events, or the satisfaction of performance criteria or other
conditions, or (iii) any other security with the value derived from the value of
the Common Stock of the Company or other securities issued by a related entity.
Such awards include, without limitation, options, SARs, sales or bonuses of
restricted stock, dividend equivalent rights ("DERs"), Performance Units or
Preference Shares. The total number of shares of Common Stock available under
the Plan is equal to the greater of 1,140,000 shares or 8% of the number of
shares outstanding determined as of the day immediately following the most
recent issuance of shares of Common Stock or securities convertible into shares
of Common Stock; provided that the maximum aggregate number of shares of Common
Stock available for issuance under the Plan may not be reduced. For purposes of
calculating the number of shares of Common Stock available under the Plan, all
classes of securities of the Company and its related entities that are
convertible presently or in the future by the security holder into shares of
Common Stock or which may presently or in the future be exchanged for shares of
Common Stock pursuant to redemption rights or otherwise, shall be deemed to be
outstanding shares of Common Stock. Notwithstanding the foregoing, the aggregate
number of shares as to which incentive stock options, one type of security
available under the Plan, may be granted under the Plan may not exceed 1,140,000
19
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1999
shares. The Company accounts for the fair value of the options and bonus grants
in accordance with APB Opinion No. 25. As of September 30, 1999, 67,250 shares
of bonus grants have been issued under the Plan. The fair value of the shares
granted have been recorded as deferred compensation in the accompanying
financial statements and will be charged to earnings ratably over the respective
vesting periods that range from 2 to 5 years. As of September 30, 1999,
3,831,493 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.
Note 12. SEGMENT INFORMATION
The Company owns a diverse portfolio of properties comprising six product types:
office, office/flex, industrial, retail, multifamily and hotels. Each of these
product types represents a reportable segment with distinct uses and tenant
types which require the Company to employ different management strategies. Each
segment contains properties located in various regions and markets within the
United States. The office portfolio consists primarily of suburban office
buildings. The office/flex portfolio consists of properties designed for a
combination of office and warehouse uses. The industrial portfolio consists of
properties designed for warehouse, distribution and light manufacturing for
single-tenant or multi-tenant use. The retail portfolio consists primarily of
community shopping centers anchored with national or regional supermarkets or
drug stores. The properties in the multifamily portfolio are apartment buildings
with units rented to residential tenants on either a month-by-month basis or for
terms of one year or less. The Company's hotel operations are from three limited
service "all-suite" properties leased to and operated by third parties. As of
September 30, 1999, two of these hotel properties have been sold with only one
remaining in the Company's portfolio.
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 nine months ended September 30, 1999 and 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
1999 Office Office/Flex Industrial Retail Multi-family Hotel Total
- ----
----------- ------------- ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rental revenue $ 89,946 $ 27,289 $ 14,229 $ 8,561 $ 50,891 $ 1,211 $ 192,127
Property operating expenses 35,310 7,875 3,328 2,853 22,353 377 72,096
=========== ============= =========== =========== ============ ============ =============
Net operating income (NOI) $ 54,636 $ 19,414 $ 10,901 $ 5,708 $ 28,538 $ 834 $ 120,031
=========== ============= =========== =========== ============ ============ =============
1998
Rental revenue $ 87,647 $ 27,063 $ 11,432 $ 8,638 $ 24,695 $ 3,428 $ 162,903
Property operating expenses 33,429 8,165 2,761 2,876 10,306 838 58,375
=========== ============= =========== =========== ============ ============ =============
Net operating income (NOI) $ 54,218 $ 18,898 $ 8,671 $ 5,762 $ 14,389 $ 2,590 $ 104,528
=========== ============= =========== =========== ============ ============ =============
</TABLE>
20
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1999
The following is a reconciliation of segment revenues and income to consolidated
revenues and income for the periods presented above (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Revenues
Total revenue for reportable segments $ 192,127 $ 162,903
Other revenue (1) 15,642 8,050
================ ================
Total consolidated revenues $ 207,769 $ 170,953
================ ================
</TABLE>
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Net Income
NOI for reportable segments $ 120,031 $ 104,528
Elimination of internal property management fees 6,090 5,340
Unallocated amounts:
Other revenue (1) 15,642 8,050
General and administrative expenses (7,054) (8,197)
Depreciation and amortization (43,578) (35,252)
Interest expense (48,678) (35,916)
================ ================
Income from operations before minority interest and
extraordinary items $ 42,453 $ 38,553
================ ================
</TABLE>
(1) Other revenue includes fee income, interest and other income, equity in
earnings of Associated Companies and net gain on sales of real estate assets.
Note 13. SUBSEQUENT EVENTS
Acquisitions
In October 1999, through one of its development alliances, the Company acquired
the recently completed Phase II (96 units) of the Chase Monroe Apartments in
Monroe, North Carolina. Phase I (120 units) was acquired as part of the Marion
Bass Portfolio acquisition in December 1997.
In October 1999, a joint venture in which the Company holds a 10% interest
purchased the leasehold improvements comprising Rincon Center I & II in San
Francisco, California, after having previously acquired the fee simple title to
the land. In connection with this acquisition, the Company invested an
additional $6,425,000 in the joint venture. The Company took over management and
leasing of the project on November 1, 1999 and is now entitled to receive
property management fees of 1.75% of cash receipts. See Note 6 for further
discussion of this joint venture.
Dispositions
Subsequent to September 30, 1999, and through the date of this filing, the
Company sold two office/flex properties and a 22,314 square foot building from a
300,894 square foot office/flex property. These properties were sold for an
aggregate sales price of $7.4 million and generated an aggregate net gain of
approximately $1.1 million.
Common Stock Repurchase Plan
In November 1999, the Company announced that its Board of Directors has doubled
the size of the repurchase authorization under the Company's common stock
repurchase plan. The repurchase plan, under which the Board of Directors had
originally approved the repurchase of up to 3.1 million shares, was increased to
6.2 million shares. To date, the Company has repurchased approximately 1.4
million shares, representing approximately 22% of the expanded repurchase
authorization.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Background
Glenborough Realty Trust Incorporated (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT") engaged primarily in the
ownership, operation, management, leasing, acquisition, expansion and
development of various types of income-producing properties. As of September 30,
1999, the Company owned and operated 167 income-producing properties (the
"Properties," and each a "Property"). The Properties are comprised of 51 office
Properties, 39 office/flex Properties, 29 industrial Properties, 10 retail
Properties, 37 multifamily Properties and 1 hotel Property, located in 22
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 87.04% limited partner
interest at September 30, 1999. The Company operates the assets acquired in the
Consolidation and in subsequent acquisitions (see further discussion below) and
intends to continue to invest in income-producing property directly and through
joint ventures. In addition, the Associated Companies may acquire general
partner interests in other real estate limited partnerships. The Company has
elected to qualify as a REIT under the Internal Revenue Code of 1986, as
amended. The common and preferred stock of the Company (the "Common Stock" and
the "Preferred Stock", respectively) are listed on the New York Stock Exchange
("NYSE") under the trading symbols "GLB" and "GLB Pr A", respectively.
Since the Consolidation, and consistent with its strategy for growth, the
Company has completed the following transactions:
Acquired 20 properties in 1996, 90 properties in 1997, 69 properties in
1998 and 8 properties in 1999. The total acquired Properties consist of an
aggregate of approximately 16.4 million rentable square feet of office,
office/flex, industrial and retail space, 9,734 multifamily units and 227
hotel suites and had aggregate acquisition costs, including third party
expenditures incurred for the purpose of these transactions, of
approximately $1.84 billion.
From January 1, 1996 to the date of this filing, sold 57 properties which
were comprised of eight office properties, 15 office/flex properties, eight
industrial properties, 19 retail properties, two multifamily properties and
five hotel properties, to redeploy capital into properties the Company
believes have characteristics more suited to its overall growth strategy
and operating goals.
Completed four offerings of Common Stock in October 1996, March 1997, July
1997 and October 1997 (respectively, the "October 1996 Offering," the
"March 1997 Offering," the "July 1997 Offering," and the "October 1997
Offering"), resulting in aggregate gross proceeds of approximately $562
million.
Completed an offering of 7 3/4% Series A Convertible Preferred Stock (the
"January 1998 Convertible Preferred Stock Offering") for total gross
proceeds of $287.5 million.
Issued $150 million of unsecured 7.625% Series A Senior Notes which mature
on March 15, 2005. In the second and third quarters of 1999, $25.9 million
of the Senior Notes were retired at a discount which resulted in a gain on
early extinguishment of debt of approximately $2.6 million.
22
<PAGE>
Entered into 4 development alliances to which the Company has made
advances of approximately $42 million and a loan (including accrued
interest) of $37.3 million as of September 30, 1999.
The Company's principal business objectives are to achieve a stable and
increasing source of cash flow available for distribution to stockholders. By
achieving these objectives, the Company will seek to raise the value of its
shares over time.
Results of Operations
Comparison of the nine months ended September 30, 1999 to the nine months ended
September 30, 1998.
Rental Revenue. Rental revenue increased $29,224,000, or 18%, to $192,127,000
for the nine months ended September 30, 1999, from $162,903,000 for the nine
months ended September 30, 1998. The increase included growth in revenue from
the office, office/flex, industrial and multifamily Properties of $2,299,000,
$226,000, $2,797,000 and $26,196,000, respectively, due primarily to 1998 and
1999 acquisitions. These increases were partially offset by decreases in revenue
from the retail and hotel Properties of $77,000 and $2,217,000, respectively,
due to the 1998 and 1999 sales of three retail properties and five hotel
properties. Excluding properties that have been sold, rental revenue for the
nine months ended September 30, 1999, included $13,329,000 generated from the
1996 Acquisitions, $67,313,000 generated from the 1997 Acquisitions, $98,740,000
generated from the 1998 Acquisitions and $3,615,000 generated from the 1999
Acquisitions. In addition, $9,130,000 of rental revenue was generated from 26
properties that were sold during the nine months ended September 30, 1999.
Fees and Reimbursements from Affiliates. Fees and reimbursements from affiliates
consist primarily of property management fees, asset management fees and lease
commissions paid to the Company under property and asset management agreements
with the Managed Partnerships. This revenue did not change significantly, with
an increase of $40,000, or 2%, to $2,492,000 for the nine months ended September
30, 1999, from $2,452,000 for the nine months ended September 30, 1998.
Interest and Other Income. Interest and other income increased $3,197,000, or
158%, to $5,216,000 for the nine months ended September 30, 1999, from
$2,019,000 for the nine months ended September 30, 1998. The increase primarily
consisted of interest income on a mortgage loan receivable secured by land
located in Aurora, Colorado which originated on June 30, 1998, and interest
earned on lender impound accounts, invested cash balances and notes receivable
for tenant improvements.
Equity in Earnings of Associated Companies. Equity in earnings of Associated
Companies decreased $478,000 or 28%, to $1,212,000 for the nine months ended
September 30, 1999, from $1,690,000 for the nine months ended September 30,
1998. The decrease is primarily due to a decrease in earnings from GC resulting
from a provision to reduce the carrying value of management contracts with
certain of the Managed Partnerships. This decrease is also due to a decrease in
earnings from GHG resulting from the cancellation of GHG's hotel leases with the
Company.
Net Gain on Sales of Real Estate Assets. A net gain on sales of real estate
assets of $6,722,000 during the nine months ended September 30, 1999, resulted
from the sale of seven office properties, eleven office/flex properties, two
industrial properties, three retail properties, one multifamily property, two
hotel properties and a small interest in real estate securities from the
Company's portfolio. The net gain on sales of real estate assets of $1,889,000
during the nine months ended September 30, 1998, resulted from the sale of one
multifamily property, two industrial properties, two office/flex properties and
two hotel properties from the Company's portfolio.
Property Operating Expenses. Property operating expenses increased $12,971,000,
or 24%, to $66,006,000 for the nine months ended September 30, 1999, from
$53,035,000 for the nine months ended September 30, 1998. This increase
represents increases in property operating expenses attributable to the 1998
Acquisitions and the 1999 Acquisitions offset by decreases in property operating
expenses due to the 1998 and 1999 sales of properties.
23
<PAGE>
General and Administrative Expenses. General and administrative expenses
decreased $1,143,000, or 14%, to $7,054,000 for the nine months ended September
30, 1999, from $8,197,000 for the nine months ended September 30, 1998. This
decrease is primarily due to a reduction in staff and overhead expenses in
response to a decrease in acquisition and marketing activities since mid-1998
and a reduction in the number of properties owned. As a percentage of rental
revenue, general and administrative expenses decreased from 5.0% for the nine
months ended September 30, 1998, to 3.7% for the nine months ended September 30,
1999.
Depreciation and Amortization. Depreciation and amortization increased
$8,326,000, or 24%, to $43,578,000 for the nine months ended September 30, 1999,
from $35,252,000 for the nine months ended September 30, 1998. The increase is
primarily due to depreciation and amortization associated with the 1998
Acquisitions and 1999 Acquisitions.
Interest Expense. Interest expense increased $12,762,000 or 36%, to $48,678,000
for the nine months ended September 30, 1999, from $35,916,000 for the nine
months ended September 30, 1998. Substantially all of the increase was the
result of higher average borrowings during the nine months ended September 30,
1999, as compared to the nine months ended September 30, 1998, due to new debt
and the assumption of debt related to the 1998 Acquisitions and 1999
Acquisitions.
Net Gain on Early Extinguishment of Debt. Net gain on early extinguishment of
debt of $437,000 during the nine months ended September 30, 1999, consists of a
$2,568,000 gain on the retirement of Senior Notes at a discount, offset by
$2,026,000 of prepayment penalties and $105,000 for the write-off of unamortized
loan fees upon the early payoff of four loans. These loans were paid-off early
when more favorable terms were obtained through new financing (discussed below)
and upon the sale of the properties securing the loans.
Comparison of the three months ended September 30, 1999 to the three months
ended September 30, 1998.
Rental Revenues. Rental revenues decreased $2,387,000, or 4%, to $62,934,000 for
the three months ended September 30, 1999, from $65,321,000 for the three months
ended September 30, 1998. The decrease included decreases in revenues from the
office, office/flex, retail and hotel Properties of $1,319,000, $896,000,
$690,000 and $211,000, respectively. These decreases are primarily due to the
sale of eight office properties, eleven office/flex properties, three retail
properties and three hotels since September 30, 1998. These decreases are
partially offset by increases in revenue from the industrial and multifamily
Properties of $64,000 and $665,000, respectively. The increase in multifamily
revenue is primarily due to the acquisition of a 285-unit property in the first
quarter of 1999.
Fees and Reimbursements. Fees and reimbursements revenue consists primarily of
property management fees, asset management fees and lease commissions paid to
the Company under property and asset management agreements. This revenue
decreased $602,000, or 49%, to $618,000 for the three months ended September 30,
1999, from $1,220,000 for the three months ended September 30, 1998, primarily
due to transaction fees received from GC in 1998.
Interest and Other Income. Interest and other income increased $363,000 to
$1,779,000 for the three months ended September 30, 1999, from $1,416,000 for
the three months ended September 30, 1998. The increase primarily consisted of
an increase in interest income from a mortgage loan receivable secured by land
located in Aurora, Colorado, which originated on June 30, 1998. Interest on this
loan is compounded annually on June 30 which resulted in an increase of
approximately $100,000 during the three months ended September 30, 1999 as
compared to the three months ended September 30, 1998. In addition, interest
from other notes receivable which originated in 1999 in connection with property
sales was approximately $133,000 during the three months ended September 30,
1999. These other notes receivable have a book value of approximately $6,400,000
at September 30, 1999, and are included in other assets on the Company's
consolidated balance sheet as of September 30, 1999.
Equity in Earnings of Associated Companies. Equity in earnings of Associated
Companies increased $1,148,000, or 183%, to $1,777,000 for the three months
ended September 30, 1999, from $629,000 for the three months ended September 30,
1998. The increase is primarily due to an increase in earnings from GC arising
from a benefit for income taxes generated by the write-off of certain tax basis
assets which had no book basis for financial reporting purposes.
24
<PAGE>
Net Loss on Sales of Real Estate Assets. The net loss on sales of real estate
assets of $371,000 during the three months ended September 30, 1999, resulted
from the $1,229,000 gain on sales of two office properties, two office/flex
properties and one hotel property from the Company's portfolio, offset by a
$1,600,000 loss on the 1998 sale of a hotel property. In June 1998, the Company
sold a hotel property in Dallas, Texas, to a third party for a sale price of
$4.2 million, of which $3.6 million was represented by a note receivable secured
by the hotel property. In September 1999, the loan agreement was modified to
reduce the sale price of the hotel by $1.6 million and, thus, the principal
amount of the note receivable was also reduced by $1.6 million. This reduction
in the sale price of the hotel was recorded as a loss on sale of the property.
The net loss on sales of real estate assets of $250,000 during the three months
ended September 30, 1998, resulted from additional costs to sell one office/flex
property, one industrial property, one multifamily property and two hotel
properties from the Company's portfolio in the first and second quarters of
1998.
Property Operating Expenses. Property operating expenses did not change
significantly with a decrease of $301,000, or 1%, to $22,145,000 for the three
months ended September 30, 1999, from $22,446,000 for the three months ended
September 30, 1998.
General and Administrative Expenses. General and administrative expenses
decreased $1,091,000, or 32%, to $2,281,000 for the three months ended September
30, 1999, from $3,372,000 for the three months ended September 30, 1998. This
decrease is primarily due to a reduction in staff and overhead expenses in
response to a decrease in acquisition and marketing activities since mid-1998
and a reduction in the number of properties owned. As a percentage of rental
revenue, general and administrative expenses decreased from 5.2% for the three
months ended September 30, 1998, to 3.6% for the three months ended September
30, 1999.
Depreciation and Amortization. Depreciation and amortization did not change
significantly with a decrease of $43,000, or 0.30%, to $14,266,000 for the three
months ended September 30, 1999, from $14,309,000 for the three months ended
September 30, 1998.
Interest Expense. Interest expense decreased $1,344,000, or 8%, to $15,720,000
for the three months ended September 30, 1999, from $17,064,000 for the three
months ended September 30, 1998. Substantially all of the decrease was the
result of higher average borrowings during the three months ended September 30,
1998, as compared to the three months ended September 30, 1999, due to pay downs
of debt in connection with sales of properties in 1999.
Net Gain on Early Extinguishment of Debt. Net gain on early extinguishment of
debt of $740,000 during the three months ended September 30, 1999, represents a
gain on the retirement of $8,750,000 of Senior Notes at a discount.
Liquidity and Capital Resources
Cash Flows
For the nine months ended September 30, 1999, cash provided by operating
activities decreased by $5,849,000 to $70,829,000 as compared to $76,678,000 for
the same period in 1998. The decrease is primarily due to an increase in cash
used for other assets and liabilities offset by an increase in net income
(before depreciation and amortization, minority interest, net gain on sales of
real estate assets and net gain on early extinguishment of debt) of $7,865,000
due to the 1998 Acquisitions and 1999 Acquisitions. Cash from investing
activities increased by $695,316,000 to $61,450,000 of cash provided by
investing activities for the nine months ended September 30, 1999, as compared
to $633,866,000 of cash used for investing activities for the same period in
1998. The increase is primarily due to a decrease in property acquisitions in
1999 as compared to the same period in 1998. During the nine months ended
September 30, 1998, the Company acquired 69 properties as compared to seven
properties during the nine months ended September 30, 1999. In addition, cash
used for investments in development, marketable securities and mortgage loans
receivable decreased significantly during the nine months ended September 30,
1999 as compared to the same period in 1998. These decreases are partially
offset by an increase in proceeds from sales of properties during 1999. Cash
from financing activities decreased by $692,820,000 to $133,321,000 of cash used
for financing activities for the nine months ended September 30, 1999, as
compared to $559,499,000 of cash provided by financing activities for the same
period in 1998. This change was primarily due to a decrease in net proceeds from
the issuance of stock and proceeds from new debt. In 1998, the Company completed
an offering of Preferred Stock; there have been no offerings in 1999. In
addition, in 1998, the Company issued $150,000,000 of unsecured Series A Senior
Notes.
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<PAGE>
The Company expects to meet 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 and stock repurchases include the
unsecured Credit Facility, permanent secured debt financing, public unsecured
debt financing, public and private equity and debt issuances, the issuance of
partnership units in the Operating Partnership, proceeds from property sales and
cash flow provided by operations.
Mortgage Loans Receivable
Mortgage loans receivable increased from $42,420,000 at December 31, 1998, to
$43,003,000 at September 30, 1999. This increase was primarily due to accrued
interest on a loan made by the Company under a development alliance, offset by a
$1.6 million decrease in a loan secured by a hotel property as discussed above.
Secured and Unsecured Financing
Mortgage loans payable decreased from $708,578,000 at December 31, 1998, to
$694,288,000 at September 30, 1999. This decrease resulted from the payoff of
approximately $167,438,000 of mortgage loans in connection with 1999 sales of
properties and refinancing of debt, and scheduled principal payments of
approximately $6,927,000. This decrease is partially offset by $29,275,000 of
new mortgage loans in connection with 1999 Acquisitions and new financing of
$130,800,000 (as discussed below).
In March 1999, the Company obtained a $26 million loan from a commercial bank.
The loan was non-recourse and was secured by seven properties and had a maturity
date of December 22, 1999, with an option to extend for six months. The proceeds
were used to pay off a loan which was previously secured by these same
properties and to reduce other debt. This loan was paid off in June 1999 with
proceeds from the sales of four properties.
In August 1999, the Company closed a $97.6 million secured financing with Key
Bank/FNMA. The proceeds from this financing, combined with proceeds from a new
$7.2 million mortgage and a draw on the Credit Facility (as defined below), were
used to retire a $113.2 million mortgage which would have matured in December of
1999. The new financing is a revolving line of credit maturing in five years
with a five-year extension option, and bears interest at a floating rate equal
to 75 basis points over the rate for 90-day mortgage backed securities
credit-enhanced by FNMA. The current interest rate on this loan is 6.2%.
In connection with the Key Bank/FNMA secured financing, the Company entered into
an interest rate cap agreement to hedge increases in interest rates above a
specified level of 11.21%. The agreement is for a term concurrent with the Key
Bank/FNMA instrument, is indexed to a 90-day LIBOR rate, and is for a notional
amount equal to the maximum amount available on the Key Bank/FNMA loan. As of
September 30, 1999, the 90-day LIBOR rate was 6.084%. The Company paid a premium
of approximately $434,000 at the inception of the cap agreement, which is being
amortized as additional interest expense over the life of the agreement.
In the second and third quarters of 1999, the Company retired approximately
$25.9 million of unsecured Series A Senior Notes at a discount. As a result of
these transactions, a gain on early extinguishment of debt of approximately $2.6
million was recorded which is included in the net gain on early extinguishment
of debt on the Company's consolidated statement of operations for the nine
months ended September 30, 1999, as discussed below.
In connection with the loan payoffs discussed above and the payoff of other
mortgage debt, the Company recorded a net gain on early extinguishment of debt
of $437,000 for the nine months ended September 30, 1999. This gain consists of
$2,568,000 of gains on retirement of Series A Senior Notes (as discussed above)
offset by $2,026,000 of losses due to prepayment penalties and $105,000 of
losses due to the writeoff of unamortized loan fees upon the early payoff of
four loans. These loans were paid-off early when more favorable terms were
obtained through new financing (discussed above) and upon the sale of the
properties securing the loans.
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<PAGE>
The Company has an unsecured line of credit provided by a group of commercial
banks (the "Credit Facility"). Outstanding borrowings under the Credit Facility
increased from $63,519,000 at December 31, 1998, to $83,207,000 at September 30,
1999, due to draws for acquisitions, stock repurchases, purchases of the
Company's Series A Senior Notes, and debt refinancing, offset by pay downs from
proceeds from the sales of properties and cash from operations. In June 1999, in
order to increase the Company's financial flexibility, the Credit Facility was
modified to increase the commitment from $100 million to $142.5 million. The
interest rate, monthly payments and maturity date remain unchanged.
At September 30, 1999, the Company's total indebtedness included fixed-rate debt
of $682,303,000 and floating-rate indebtedness of $219,332,000. Approximately
64% of the Company's total assets, comprising 101 properties, is encumbered by
debt at September 30, 1999.
It is the Company's policy to manage its exposure to fluctuations in market
interest rates through the use of fixed rate debt instruments to the extent
possible. At September 30, 1999, approximately 24% 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 September 30, 1999, the Company was not a party to any
open interest rate protection agreements other than the interest rate cap
contract associated with the Key Bank/FNMA loan discussed above.
Equity and Debt Offerings
In January 1999, the Operating Partnership and the Company filed a shelf
registration statement with the SEC (the "January 1999 Shelf Registration
Statement") to register $300 million of debt securities of the Operating
Partnership and to carry forward the remaining $801.2 million in equity
securities of the Company from a November 1997 shelf registration statement
(declared effective by the SEC on December 18, 1997). The January 1999 Shelf
Registration Statement was declared effective by the SEC on January 25, 1999.
Therefore, the Operating Partnership and the Company have the capacity pursuant
to the January 1999 Shelf Registration Statement to issue up to $300 million in
debt securities and $801.2 million in equity securities, respectively. The
Company currently has no plans to issue equity or debt under these shelf
registrations.
Development Alliances
The Company has formed 4 development alliances for the development of
approximately 713,000 square feet of office, office/flex and distribution
properties and 1,710 multifamily units in North Carolina, Colorado, Texas, New
Jersey, Kansas and Michigan. As of September 30, 1999, the Company has advanced
approximately $42 million. Under these development alliances, the Company has
certain rights to purchase the properties upon completion of development over
the next five years. In addition, the Company has loaned approximately $37.3
million (including accrued interest) under another development alliance to
continue the build-out of a 1,200 acre master-planned development in Denver,
Colorado.
Inflation
Substantially all of the leases at the office/flex, industrial and retail
Properties provide for pass-through to tenants of certain operating costs,
including real estate taxes, common area maintenance expenses, and insurance.
Leases at the multifamily properties generally provide for an initial term of
one month or one year and allow for rent adjustments at the time of renewal.
Leases at the office Properties typically provide for rent adjustment and
pass-through of certain operating expenses during the term of the lease. All of
these provisions may permit the Company to increase rental rates or other
charges to tenants in response to rising prices and therefore, serve to reduce
the Company's exposure to the adverse effects of inflation.
Funds from Operations and Cash Available for Distribution
Funds from Operations, as defined by NAREIT, represents income (loss) before
minority interests and extraordinary items, adjusted for real estate related
depreciation and amortization and gains (losses) from the disposal of
properties. The Company believes that FFO is a 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
27
<PAGE>
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, and September 30, 1999 (in thousands,
except weighted average shares and per share amounts):
<TABLE>
<CAPTION>
March 31, June 30, September 30, YTD
1999 1999 1999 1999
------------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income before minority interest $ 13,236 $ 16,892 $ 12,325 $ 42,453
Preferred dividends (5,570) (5,570) (5,570) (16,710)
Net (gain) loss on sales of real estate assets (1,351) (5,742) 371 (6,722)
Depreciation and amortization (1) 14,947 14,075 14,096 43,118
Adjustment to reflect FFO of Associated
Companies(2) 253 2,170 135 2,558
------------- ------------- ---------------- ----------------
FFO $ 21,515 $ 21,825 $ 21,357 $ 64,697
============= ============= ================ ================
Amortization of deferred financing fees 485 508 477 1,470
Capital reserve (1,465) 994 550 79
Capital expenditures (2,573) (5,392) (5,592) (13,557)
------------- ------------- ---------------- ----------------
CAD $ 17,962 $ 17,935 $ 16,792 $ 52,689
============= ============= ================ ================
Distributions per share (3) $ 0.42 $ 0.42 $ 0.42 $ 1.26
============= ============= ================ ================
Diluted weighted average shares outstanding 36,098,374 35,984,107 35,274,940 35,782,784
============= ============= ================ ================
</TABLE>
(1) Excludes depreciation of corporate office fixed assets.
(2) Reflects the adjustments to FFO required to reflect the FFO of the
Associated Companies allocable to the Company. The Company's investments in
the Associated Companies are accounted for using the equity method of
accounting.
(3) The distributions for the three months ended September 30, 1999, were paid
on October 15, 1999.
Forward Looking Statements; Factors That May Affect Operating Results
This Report on Form 10-Q contains forward looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934, including statements regarding the Company's
28
<PAGE>
expectations, hopes, intentions, beliefs and strategies regarding the future
including the Company's belief that cash generated by operations will be
adequate to meet operating requirements and to make distributions, the Company's
expectations as to the timing of the completion of the development projects
through its development alliances and the acquisition by the Company of
properties developed through its development alliances. There can be no
assurance that the actual outcomes or results will be consistent with such
expectations, hopes, intentions, beliefs and strategies. Forward looking
statements include statements regarding potential acquisitions, the anticipated
performance of future acquisitions, recently completed acquisitions and existing
properties, and statements regarding the Company's financing activities. All
forward looking statements included in this document are based on information
available to the Company on the date hereof. It is important to note that the
Company's actual results could differ materially from those stated or implied in
such forward-looking statements.
Factors which may cause the Company's results to differ include the inability to
complete anticipated future acquisitions, defaults or non-renewal of leases,
increased interest rates and operational costs, failure to obtain necessary
outside financing, difficulties in identifying properties to acquire and in
effecting acquisitions, failure to qualify as a real estate investment trust
under the Internal Revenue Code of 1986, environmental uncertainties, risks
related to natural disasters, financial market fluctuations, changes in real
estate and zoning laws, increases in real property tax rates and other factors
discussed under the caption "Forward Looking Statements; Factors That May Affect
Operating Results" in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, and other risk factors set forth
in the Company's other Securities and Exchange Commission filings. In addition,
past performance of the Company's Common Stock is not necessarily indicative of
results that will be obtained in the future from an investment in the Company's
Common Stock. Furthermore, the Company makes distributions to stockholders if,
as and when declared by its Board of Directors, and expects to continue its
policy of paying quarterly distributions, however, there can be no assurance
that distributions will continue or be paid at any specific level.
Impact of Year 2000 Compliance Costs on Operations
State of Readiness. The Company uses a number of computer software programs and
operating systems across the entire organization. These programs and systems
primarily comprise (i) information technology systems ("IT Systems") (i.e.,
software programs and computer operating systems) that serve management
operations, and (ii) embedded systems such as devices used to control, monitor
or assist the operation of equipment and machinery systems (e.g., HVAC, fire
safety and security) at the Company's properties ("Property Systems"). To the
extent that the Company's software applications contain source code that is
unable to appropriately interpret the upcoming calendar year "2000" and beyond,
some level of modification or replacement of these applications will be
necessary.
IT Systems. Employing a team made up of internal personnel and
third-party consultants, the Company has completed its identification
of IT Systems, including hardware components, that are not yet Year
2000 compliant. To the best of the Company's knowledge, based on
available information and a reasonable level of inquiry and
investigation, the Company has completed such upgrading of such
systems that it believes are called for under the circumstances, and
in accordance with prevailing industry practice. The Company has
commenced a testing program which it anticipates will be completed
during 1999. In addition, the Company is currently communicating with
third parties with whom it does significant business, such as
financial institutions, tenants and vendors, to determine their
readiness for Year 2000 compliance.
Property Systems. Employing a team made up of internal personnel and
third-party consultants, the Company has also completed its
identification of Property Systems, including hardware components,
that are not yet Year 2000 compliant. The Company has commenced such
upgrading of such systems that it believes are called for under the
circumstances, based on available information and a reasonable level
of inquiry and investigation, and in accordance with prevailing
industry practice. Upon completion of such upgrading, the Company will
initiate a testing program which it anticipates will be completed
during 1999. To the best of the Company's knowledge, there are no
Property Systems, the failure of which would have a material effect on
operations.
29
<PAGE>
Costs of Addressing the Company's Year 2000 Issues. Given the information known
at this time about the Company's systems that are non-compliant, coupled with
its ongoing, normal course-of-business efforts to upgrade or replace critical
systems, as necessary, the Company does not expect Year 2000 compliance costs to
have any material adverse impact on liquidity or ongoing results of operations.
The costs of such assessment and remediation will be paid as an operating
expense.
Risks of the Company's Year 2000 Issues. In light of the Company's assessment
and upgrading efforts to date, and assuming completion of the planned, normal
course-of-business upgrades and subsequent testing, the Company believes that
any residual Year 2000 risk will be limited to non-critical business
applications and support hardware, and to short-term interruptions affecting
Property Systems which, if they occur at all, will not be material to overall
operations. The Company believes that all of its systems will be Year 2000
compliant and that compliance will not materially adversely affect its future
liquidity or results of operations or ability to service debt, but the Company
cannot give absolute assurance that this is the case.
The Company's Contingency Plans. The Company is currently developing its
contingency plans for all operations to address the most reasonably likely worst
case scenarios regarding Year 2000 compliance. Such plans, however, will
recognize material limitations on the Company's ability to plan for major
regional or industrial failures such as regional power outages or regional or
industrial communications breakdowns. The Company expects such contingency plans
to be completed during 1999.
Risk Factors
Stockholders or potential stockholders should read the "Risk Factors" section of
the Company's latest annual report on Form 10-K filed with the Securities and
Exchange Commission ("SEC") in conjunction with this quarterly report on Form
10-Q to better understand the factors affecting the Company's results of
operations and the Company's common stock share price. The fact that some of the
risk factors may be the same or similar to the Company's past filings means only
that the risks are present in multiple periods. The Company believes that many
of the risks detailed here and in the Company's other SEC filings are part of
doing business in the real estate industry and will likely be present in all
periods reported. The fact that certain risks are endemic to the industry does
not lessen the significance of the risk.
30
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Blumberg. On July 24, 1999, the Supreme Court of the United States denied a
petition for a writ of certiorari to review the Company's settlement of a class
action complaint originally filed on February 21, 1995 in connection with the
Consolidation. No further appeals are possible in this case, and the settlement
amount has been paid in full. Under the settlement, the Company agreed to pay
$855,000 to settle certain claims by Anthony E. Blumberg, and others (the
"Blumberg Action"), that the Company and others had, among other things,
breached their fiduciary duty and duty of good faith and fair dealing to
investors in the Partnerships involved in the Consolidation. Certain parties
objected to the settlement, but the settlement was approved (or review denied)
by the Superior Court of the State of California in and for San Mateo County,
the California state court of appeals, the California Supreme Court and the
Supreme Court of the United States.
BEJ Equity Partners. On December 1, 1995, a second class action complaint
relating to the Consolidation was filed in Federal District Court for the
Northern District of California (the "BEJ Action"). The plaintiffs in the BEJ
Action voluntarily stayed the action pending resolution of the Blumberg Action.
The plaintiffs in the BEJ Action are BEJ Equity Partners and others, who as a
group held limited partner interests in certain of the Partnerships included in
the Consolidation, on behalf of themselves and all others similarly situated.
The defendants are the Company and other Glenborough entities involved in the
Consolidation, as well as Robert Batinovich and Andrew Batinovich. The
Partnerships are named as nominal defendants.
This action alleges certain disclosure violations and substantially the same
breaches of fiduciary duty as were alleged in the Blumberg Action. The complaint
sought injunctive relief, which was denied at a hearing on December 22, 1995. At
that hearing, the court also deferred all further proceedings in this case until
after the scheduled January 17, 1996 hearing in the Blumberg Action. Following
several stipulated extensions of time for the Company to respond to the
complaint, the Company filed a motion to dismiss the case. Plaintiffs in the BEJ
Action voluntarily stayed the action pending resolution of the Blumberg Action;
such plaintiffs can revive their lawsuit.
It is management's position that the BEJ Action is without merit, and management
intends to pursue a vigorous defense. However, given the inherent uncertainties
of litigation, there can be no assurance that the ultimate outcome in the BEJ
Action will be in the Company's favor.
Certain other claims and lawsuits have arisen against the Company in its normal
course of business. The Company believes that such other claims and lawsuits
will not have a material adverse effect on the Company's financial position,
cash flow or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the quarter
ended September 30, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The Exhibit Index attached hereto is hereby incorporated by
reference to this item.
(b) Reports on Form 8-K:
On July 28, 1999, the Company filed a report on Form 8-K
with respect to Supplemental Information for the quarter
ended June 30, 1999.
On October 26, 1999, the Company filed a report on Form 8-K
with respect to Supplemental Information for the quarter
ended September 30, 1999.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange
Act of l934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GLENBOROUGH REALTY TRUST INCORPORATED
By: Glenborough Realty Trust Incorporated,
Date: November 15, 1999 /s/ Andrew Batinovich
---------------------
Andrew Batinovich
Director, President
and Chief Operating Officer
(Principal Operating Officer)
Date: November 15, 1999 /s/ Stephen Saul
----------------
Stephen Saul
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: November 15, 1999 /s/ Terri Garnick
-----------------
Terri Garnick
Senior Vice President,
Chief Accounting Officer,
Treasurer
(Principal Accounting Officer)
32
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Title
11.1 Statement re: Computation of Per Share Earnings is shown in Note
10 of the Consolidated Financial Statements of the Company in
Item 1.
12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Fixed Charges and Preferred Dividends.
27.1 Financial Data Schedule.
33
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12.1
GLENBOROUGH REALTY TRUST INCORPORATED Computation of Ratio of Earnings to Fixed
Charges and Ratio of Earnings to Fixed Charges and Preferred Dividends For the
five years ended December 31, 1998
and the three months ended March 31, June 30, and September 30, 1999
(in thousands)
GRT Predecessor
Entities,
Combined The Company
----------------------- ----------------------------------------------------------------------------
Three Three Three
Months Months Months
Ended Ended Ended Year To
Year Ended December 31, March 31, June 30, Sept. 30, Date
------------------------------------------------ ---------- --------- ---------- -------------
1994 1995 1996 1997 1998 1999 1999 1999 1999
---------- ------- -------- ------- ---------- ---------- --------- ---------- ------------
EARNINGS, AS DEFINED
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income (Loss) before
Preferred Dividends (2) $ 1,580 $ 524 $ (1,609) $19,368 $ 44,602 $10,578 $17,051 $ 12,177 $ 39,806
Extraordinary items -- -- 186 843 1,400 1,991 (1,688) (740) (437)
Federal & State income taxes 176 357 -- -- -- -- -- -- --
Minority Interest 43 -- 292 1,119 2,550 667 1,529 888 3,084
Fixed Charges 1,140 2,129 3,913 9,668 53,289 16,540 16,418 15,720 48,678
---------- ------- ---------- -------- ---------- --------- --------- ---------- ------------
$ 2,939 $3,010 $ 2,782 $30,998 $101,841 $29,776 $33,310 $ 28,045 $ 91,131
---------- ------- ---------- -------- ---------- --------- --------- ---------- ------------
FIXED CHARGES AND PREFERRED
DIVIDENDS, AS DEFINED
Interest Expense $ 1,140 $2,129 $ 3,913 $ 9,668 $53,289 $16,540 $16,418 $ 15,720 $ 48,678
Capitalized Interest -- -- -- -- 1,108 643 687 747 2,077
Preferred Dividends -- -- -- -- 20,620 5,570 5,570 5,570 16,710
---------- ------- ---------- -------- ---------- --------- --------- ---------- -----------
$ 1,140 $2,129 $ 3,913 $ 9,668 $75,017 $22,753 $22,675 $ 22,037 $ 67,465
RATIO OF EARNINGS TO FIXED
CHARGES (3) 2.58 1.41 0.71(1) 3.21 1.87 1.73 1.95 1.70 1.80
---------- ------- ---------- --------- --------- --------- --------- ---------- -----------
RATIO OF EARNINGS TO FIXED
CHARGES AND PREFERRED
DIVIDENDS (3) 2.58 1.41 0.71(1) 3.21 1.36 1.31 1.47 1.27 1.35
---------- ------- ---------- --------- --------- --------- --------- ---------- -----------
</TABLE>
(1) For the twelve months ended December 31, 1996, earnings were insufficient
to cover fixed charges by $1,131.
(2) Net Income (Loss) before Preferred Dividends includes depreciation and
amortization expense as a deduction.
(3) Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges
and Preferred Dividends includes depreciation and amortization expense as a
deduction from earnings.
34
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. dollars
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 3,315
<SECURITIES> 0
<RECEIVABLES> 3,389
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,704
<PP&E> 1,757,198
<DEPRECIATION> 100,700
<TOTAL-ASSETS> 1,818,032
<CURRENT-LIABILITIES> 21,108
<BONDS> 0
0
11
<COMMON> 31
<OTHER-SE> 750,654
<TOTAL-LIABILITY-AND-EQUITY> 1,818,032
<SALES> 192,127
<TOTAL-REVENUES> 207,769
<CGS> 0
<TOTAL-COSTS> 109,584
<OTHER-EXPENSES> 7,054
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,678
<INCOME-PRETAX> 39,369
<INCOME-TAX> 0
<INCOME-CONTINUING> 39,369
<DISCONTINUED> 0
<EXTRAORDINARY> 437
<CHANGES> 0
<NET-INCOME> 39,806
<EPS-BASIC> 0.73
<EPS-DILUTED> 0.73
</TABLE>
