SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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, $.001 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___
As of July 31, 2000, 28,696,576 shares of Common Stock ($.001 par value) and
10,097,800 shares of 7.75% Series A Convertible Preferred Stock ($.001 par
value) were outstanding.
1
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INDEX
GLENBOROUGH REALTY TRUST INCORPORATED
Page No.
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements of Glenborough Realty Trust
Incorporated (Unaudited):
Consolidated Balance Sheets at June 30, 2000 and
December 31, 1999 3
Consolidated Statements of Income for the six months ended
June 30, 2000 and 1999 4
Consolidated Statements of Income for the three months
ended June 30, 2000 and 1999 5
Consolidated Statement of Stockholders' Equity for
the six months ended June 30, 2000 6
Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 7-8
Notes to Consolidated Financial Statements 9-20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21-28
PART II OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
EXHIBIT INDEX 30
2
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
June 30, December 31,
2000 1999
----------------- -----------------
ASSETS
<S> <C> <C>
Rental properties, gross $ 1,605,341 $ 1,756,061
Accumulated depreciation (129,218) (114,170)
----------------- -----------------
Rental properties, net 1,476,123 1,641,891
Real estate held for sale, gross 25,207 -
Accumulated depreciation (2,556) -
----------------- -----------------
Real estate held for sale, net 22,651 -
Investments in Development and Joint Ventures 48,258 44,452
Investment in Associated Company 9,344 9,404
Mortgage loans receivable 37,617 37,582
Cash and cash equivalents 3,024 6,482
Other assets 58,843 54,793
----------------- -----------------
TOTAL ASSETS $ 1,655,860 $ 1,794,604
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage loans $ 669,327 $ 701,715
Unsecured term debt 125,000 125,015
Unsecured bank line 39,811 70,628
Other liabilities 25,041 30,625
----------------- -----------------
Total liabilities 859,179 927,983
----------------- -----------------
Commitments and contingencies
Minority interest 79,573 82,287
Stockholders' Equity:
Common stock, 28,880,576 and 30,820,646 shares issued
and outstanding at June 30, 2000 and
December 31, 1999, respectively 29 31
Preferred stock, 10,097,800 and 11,330,000 shares issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively 10 11
Additional paid-in capital 799,380 846,693
Deferred compensation (555) (613)
Retained earnings (deficit) (81,756) (61,788)
----------------- -----------------
Total stockholders' equity 717,108 784,334
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,655,860 $ 1,794,604
================= =================
See accompanying notes to consolidated financial statements
3
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GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
For the six months ended June 30, 2000 and 1999
(in thousands, except per share amounts)
(Unaudited)
2000 1999
--------------- ----------------
REVENUE
<S> <C> <C>
Rental revenue $ 123,978 $ 129,193
Fees and reimbursements from affiliates 2,362 1,874
Interest and other income 4,643 3,380
Equity in earnings (loss) of Associated Company 622 (565)
Equity in (loss) earnings of unconsolidated joint
ventures (171) 57
Net (loss) gain on sales of real estate assets (3,042) 7,093
--------------- ----------------
Total revenue 128,392 141,032
--------------- ----------------
EXPENSES
Property operating expenses 41,847 43,861
General and administrative 6,373 4,773
Depreciation and amortization 30,213 29,312
Interest expense 32,370 32,958
--------------- ----------------
Total expenses 110,803 110,904
--------------- ----------------
Income from operations before minority interest and
extraordinary item 17,589 30,128
Minority interest (656) (2,196)
--------------- ----------------
Net income before extraordinary item 16,933 27,932
Extraordinary item:
Net loss on early extinguishment of debt (550) (303)
--------------- ----------------
Net income 16,383 27,629
Preferred dividends (10,931) (11,140)
--------------- ----------------
Net income available to Common Stockholders $ 5,452 $ 16,489
=============== ================
Basic Per Share Data:
Net income before extraordinary item $ 0.20 $ 0.53
Extraordinary item (0.02) (0.01)
--------------- ----------------
Net income available to Common Stockholders $ 0.18 $ 0.52
=============== ================
Basic weighted average shares outstanding 29,842,924 31,714,274
=============== ================
Diluted Per Share Data:
Net income before extraordinary item $ 0.20 $ 0.53
Extraordinary item (0.02) (0.01)
--------------- ----------------
Net income available to Common Stockholders $ 0.18 $ 0.52
=============== ================
Diluted weighted average shares outstanding 33,602,425 36,040,578
=============== ================
See accompanying notes to consolidated financial statements
4
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GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended June 30, 2000 and 1999
(in thousands, except per share amounts)
(Unaudited)
2000 1999
--------------- ----------------
REVENUE
<S> <C> <C>
Rental revenue $ 60,817 $ 64,552
Fees and reimbursements from affiliates 1,894 743
Interest and other income 3,427 1,721
Equity in earnings (loss) of Associated Company 576 (874)
Equity in (loss) earnings of unconsolidated joint
ventures (140) 57
Net (loss) gain on sales of real estate assets (2,347) 5,742
--------------- ----------------
Total revenue 64,227 71,941
--------------- ----------------
EXPENSES
Property operating expenses 20,290 21,860
General and administrative 4,064 2,551
Depreciation and amortization 15,084 14,220
Interest expense 16,023 16,418
--------------- ----------------
Total expenses 55,461 55,049
--------------- ----------------
Income from operations before minority interest and
extraordinary item 8,766 16,892
Minority interest (350) (1,529)
--------------- ----------------
Net income before extraordinary item 8,416 15,363
Extraordinary item:
Net (loss) gain on early extinguishment of debt (84) 1,688
--------------- ----------------
Net income 8,332 17,051
Preferred dividends (5,443) (5,570)
--------------- ----------------
Net income available to Common Stockholders $ 2,889 $ 11,481
=============== ================
Basic Per Share Data:
Net income before extraordinary item $ 0.10 $ 0.31
Extraordinary item - 0.05
--------------- ----------------
Net income available to Common Stockholders $ 0.10 $ 0.36
=============== ================
Basic weighted average shares outstanding 29,330,163 31,664,269
=============== ================
Diluted Per Share Data:
Net income before extraordinary item $ 0.10 $ 0.31
Extraordinary item - 0.05
--------------- ----------------
Net income available to Common Stockholders $ 0.10 $ 0.36
=============== ================
Diluted weighted average shares outstanding 33,111,493 35,984,107
=============== ================
See accompanying notes to consolidated financial statements
5
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<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended June 30, 2000
(in thousands)
(Unaudited)
Common Stock Preferred Stock
--------------------- ---------------------
Additional Deferred Retained
Par Par Value Paid-in Compen-sation Earnings
Shares Value Shares Capital (Deficit) Total
--------------------- ------------------------------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 30,821 $ 31 11,330 $ 11 $ 846,693 $ (613) $ (61,788) $ 784,334
Exercise of stock options 13 - - - 203 - - 203
Conversion of Operating
Partnership units into
common stock 13 - - - 196 - - 196
Common and preferred stock
repurchases (1,967) (2) (1,232) (1) (47,712) - - (47,715)
Amortization of deferred
compensation - - - - - 58 - 58
Distributions - - - - - - (36,351) (36,351)
Net income - - - - - - 16,383 16,383
----------- -------- --------- -------- ------------ ----------- ------------ ------------
Balance at June 30, 2000 28,880 $ 29 10,098 $ 10 $ 799,380 $ (555) $ (81,756) $ 717,108
=========== ======== ========= ======== ============ =========== ============ ============
See accompanying notes to consolidated financial statements
6
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<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2000 and 1999
(in thousands)
(Unaudited)
2000 1999
------------------------------------------------------------- --------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 16,383 $ 27,629
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 30,213 29,312
Amortization of loan fees, included in
interest expense 1,249 993
Minority interest in income from operations 656 2,196
Equity in (earnings) loss of Associated Company (622) 565
Net loss (gain) on sales of real estate assets 3,042 (7,093)
Net loss on early extinguishment of debt 550 303
Amortization of deferred compensation 58 46
Changes in certain assets and liabilities, net (6,205) (1,654)
--------------- ----------------
Net cash provided by operating activities 45,324 52,297
--------------- ----------------
Cash flows from investing activities:
Net proceeds from sales of real estate assets 108,782 111,027
Additions to rental properties (26,012) (22,833)
Investments in Development (382) (4,162)
Investments in Joint Ventures (3,424) (3,176)
Additions to mortgage loans receivable (1,176) (1,562)
Principal receipts on mortgage loans receivable 1,141 -
Repayments of notes receivable 1,025 -
Payments from affiliates 200 400
Distributions from Associated Company 682 282
--------------- ----------------
Net cash provided by investing activities 80,836 79,976
--------------- ----------------
Cash flows from financing activities:
Proceeds from borrowings 191,832 83,480
Repayment of borrowings (142,855) (156,046)
Retirement of Series A Senior Notes (plus loss on
retirement of $512 in 2000) (91,662) (15,282)
Prepayment penalties on loan payoffs (38) (2,026)
Distributions to minority interest holders (3,032) (3,546)
Distributions to stockholders (36,351) (37,790)
Exercise of stock options 203 920
Repurchases of common stock (29,196) (4,339)
Repurchases of preferred stock (18,519) -
--------------- ----------------
Net cash used for financing activities (129,618) (134,629)
--------------- ----------------
continued
See accompanying notes to consolidated financial statements
7
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<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
For the six months ended June 30, 2000 and 1999
(in thousands)
(Unaudited)
2000 1999
------------------------------------------------------------- --------------- ----------------
<S> <C> <C>
Net decrease in cash and cash equivalents (3,458) (2,356)
Cash and cash equivalents at beginning of period 6,482 4,357
--------------- ----------------
Cash and cash equivalents at end of period $ 3,024 $ 2,001
=============== ================
Supplemental disclosure of cash flow information:
Cash paid for interest (net of capitalized interest of
$1,559 and $1,330 in 2000 and 1999, respectively) $ 32,443 $ 30,262
=============== ================
Supplemental disclosure of Non-Cash Investing and Financing
Activities:
Assumption of first trust deed notes payable in
acquisition of real estate $ 4,300 $ 14,100
=============== ================
Disposition of real estate involving buyer's
assumption of first trust deed notes payable $ 25,347 $ -
=============== ================
Conversion of Operating Partnership units into common
stock, at current market value of common stock
$ 196 $ -
=============== ================
See accompanying notes to consolidated financial statements
8
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GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 2000
Note 1. ORGANIZATION
Glenborough Realty Trust Incorporated (the "Company") was organized in the State
of Maryland on August 26, 1994. The Company has elected to qualify as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended (the "Code"). The Company completed a consolidation with certain public
California limited partnerships and other entities (the "Consolidation") engaged
in real estate activities (the "GRT Predecessor Entities") through an exchange
of assets of the GRT Predecessor Entities for 5,753,709 shares of Common Stock
of the Company. The Consolidation occurred on December 31, 1995, and the Company
commenced operations on January 1, 1996.
Subsequent to the Consolidation on December 31, 1995, and through June 30, 2000,
the following Common Stock transactions occurred: (i) 25,446,000 shares were
issued in four separate public equity offerings; (ii) 453,507 shares were issued
in connection with various acquisitions; (iii) 120,914 shares were issued in
connection with the exercise of employee stock options; (iv) 663,371 shares were
issued in connection with the exchange of Operating Partnership units; (v)
70,250 shares of Common Stock were issued to officers and directors as stock
compensation; (vi) 3,627,116 shares were repurchased by the Company (see
discussion below) and (vii) 59 shares were retired, resulting in total shares of
Common Stock issued and outstanding at June 30, 2000, of 28,880,576. Assuming
the issuance of 3,520,979 shares of Common Stock issuable upon redemption of
3,520,979 partnership units in the Operating Partnership, there would be
32,401,555 shares of Common Stock outstanding as of June 30, 2000.
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. Except in certain instances
relating to the preservation of the Company's status as a REIT, the 7-3/4%
Series A Convertible Preferred Stock is not redeemable prior to January 16,
2003. On and after January 16, 2003, the Series A Preferred Stock may be
redeemed at the option of the Company, in whole or in part, initially at 103.88%
of the liquidation preference per share, and thereafter at prices declining to
100% of the liquidation preference on and after January 16, 2008, plus in each
case accumulated, accrued and unpaid dividends, if any, to the redemption date.
Shares of Preferred Stock issued and outstanding at June 30, 2000, totaled
10,097,800. As of June 30, 2000, 1,402,200 shares, representing approximately
81% of the preferred stock repurchase program (see discussion below) have been
repurchased.
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
represented approximately 10% of the Company's total outstanding Common Stock at
the time of authorization. In November 1999, the Company announced that its
Board of Directors had doubled the size of the repurchase authorization under
the Company's common stock repurchase plan. The repurchase plan was increased to
6.2 million shares, or approximately 20% of the Company's total outstanding
common stock. Such purchases will be made from time to time in the open market
or otherwise and the timing will depend on market conditions and other factors.
As of June 30, 2000, 3,627,116 shares, representing approximately 59% of the
expanded repurchase authorization, have been repurchased. In addition, during
the third quarter of 1999, 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% of the 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
9
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GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 2000
development of various income-producing properties. The Company's major
consolidated subsidiary, in which it holds a 1% general partner interest and a
88.16% limited partner interest at June 30, 2000, is Glenborough Properties,
L.P. (the "Operating Partnership"). Each of the holders of the remaining
interests in the Operating Partnership ("OP Units") has the option to redeem its
OP Units and to receive, at the option of the Company, in exchange for each OP
Unit, either (i) one share of common stock of the Company, or (ii) cash equal to
the fair market value of one share of common stock of the Company. As of June
30, 2000, the Operating Partnership, directly and through the subsidiaries in
which it and the Company own 100% of the ownership interests, controls a
portfolio of 136 real estate projects.
Prior to September 30, 1999, the Operating Partnership also held 100% of the
non-voting preferred stock of the following associated companies:
o Glenborough Corporation ("GC") is the general partner of several real
estate limited partnerships and provides asset and property management
services for these partnerships (the "Managed Partnerships"). It also
provides partnership administration, asset management, property management
and development services to a group of unaffiliated partnerships, which
include three public partnerships sponsored by Rancon Financial
Corporation, an unaffiliated corporation which has significant real estate
assets in the Inland Empire region of Southern California (the "Rancon
Partnerships").
o 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. The merger was accounted for as a reorganization of entities under
common control.
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 (the "Associated Company"). 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 accounts 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 June 30, 2000, and December 31, 1999, and the
consolidated results of operations and cash flows of the Company for the six
months ended June 30, 2000 and 1999. All intercompany transactions, receivables
and payables have been eliminated in consolidation.
10
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GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 2000
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal accruals) necessary to
present fairly the financial position and results of operations of the Company
as of June 30, 2000, and for the period then ended.
Reclassification
Certain prior year balances have been reclassified to conform to the current
year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the results of operations during the reporting period. Actual results could
differ from those estimates.
New Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998. SFAS No.
133 was originally effective for fiscal years beginning after June 15, 1999,
with early adoption permitted. In June 1999, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an amendment of FASB Statement No. 133" was issued
which, among other things, deferred the final implementation to fiscal 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 presentation.
Rental Properties
Rental properties are stated at cost, net of accumulated depreciation, unless
circumstances indicate that cost, net of accumulated depreciation, 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 net
operating 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
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 and Joint Ventures
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
11
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 2000
development. The Company's investments in joint ventures are accounted for using
the equity method. See Note 6 for further discussion.
Investment in Associated Company
The Company's Investment in Associated Company is accounted for using the equity
method, as discussed further in Note 4.
Mortgage Loans Receivable
The Company monitors the recoverability of its loans and notes receivable
through ongoing contact with the borrowers to ensure timely receipt of interest
and principal payments, and where appropriate, obtains financial information
concerning the operation of the properties. Interest on mortgage loans is
recognized as revenue as it accrues during the period the loan is outstanding.
Mortgage loans receivable will be evaluated for impairment if it becomes evident
that the borrower is unable to meet its debt service obligations in a timely
manner and cannot satisfy its payments using sources other than the operations
of the property securing the loan. If it is concluded that such circumstances
exist, then such loan will be considered to be impaired and its recorded amount
will be reduced to the fair value of the collateral securing it. Interest income
will also cease to accrue under such circumstances. Due to uncertainties
inherent in the valuation process, it is reasonably possible that the amount
ultimately realized from the Company's collection on these receivables will be
different than the recorded amounts.
Cash Equivalents
The Company considers short-term investments (including certificates of deposit)
with a maturity of three months or less at the time of investment to be cash
equivalents.
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 June 30, 2000 and December 31, 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 8 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 10.84% 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
June 30, 2000
For the six months ended June 30, 2000 and 1999, no tenants represented 10% or
more of rental revenue of the Company.
Fees and reimbursement revenue consists of property management fees, overhead
administration fees, and transaction fees from the acquisition, disposition,
refinancing, leasing and construction supervision of real estate for
unconsolidated affiliates.
Revenues are recognized only after the Company is contractually entitled to
receive payment, after the services for which the fee is to be received have
been provided, and after the ability and timing of payments are reasonably
assured and predictable.
Some scheduled rent increases are based primarily on the Consumer Price Index or
a similar factor. Material incentives paid, if any, by the Company to a tenant
are amortized as a reduction of rental income over the life of the related
lease.
The Company's portfolio of leases turns over continuously, with the number and
value of expiring leases varying from year to year. The Company's ability to
release the space to existing or new tenants at rates equal to or greater than
those realized historically is impacted by, among other things, the economic
conditions of the market in which a property is located, the availability of
competing space, and the level of improvements which may be required at the
property. No assurance can be given that the rental rates that the Company will
obtain in the future will be equal to or greater than those obtained under
existing contractual commitments.
Income Taxes
The Company has made an election to be taxed as a REIT under Sections 856
through 860 of the Code. As a REIT, the Company generally will not be subject to
Federal income tax to the extent that it distributes at least 95% of its REIT
taxable income to its shareholders. REITs are subject to a number of
organizational and operational requirements. If the Company fails to qualify as
a REIT in any taxable year, the Company will be subject to Federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate tax rates. Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain state and local taxes on its income
and property and to Federal income and excise taxes on its undistributed income.
Reference to 1999 Audited Financial Statements
These unaudited financial statements should be read in conjunction with the
Notes to Consolidated Financial Statements included in the 1999 audited
financial statements.
Note 3. RENTAL PROPERTY
Acquisitions
In the first quarter of 2000, through one of its development alliances, the
Company acquired Gateway 14, a 113,538 square foot industrial property located
in Denver, Colorado. The total acquisition cost of $6.2 million consisted of
approximately $1.9 million in cash, which was funded with the proceeds from a
tax deferred exchange, and the assumption of $4.3 million in debt.
Dispositions
In the second quarter of 2000, the Company sold eleven properties, including
five office, three industrial and three retail. These assets were sold for an
aggregate sales price of approximately $105.6 million and generated an aggregate
net loss of approximately $2.3 million.
In the first quarter of 2000, the Company sold an industrial property known as
Columbia Warehouse, located in Columbia, Maryland, to an independent third party
for all cash consideration of $1.6 million. This resulted in a loss on sale of
approximately $420,000.
In the first quarter of 2000, the Company formed a limited liability company
with an independent third party and contributed its interest in the office
property known as 2000 Corporate Ridge, located in McLean, Virginia. This
transaction resulted in a loss on sale of approximately $211,000. See Note 6 for
further discussion.
These transactions are reflected in the net loss on sales of real estate assets
13
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 2000
in the accompanying consolidated statement of income for the six months ended
June 30, 2000.
Prospective Dispositions
The Company entered into separate definitive agreements to sell one office
property, six industrial properties, one retail property and a parcel of land.
These properties are reflected in real estate held for sale on the accompanying
consolidated balance sheet as of June 30, 2000. See Note 14 for discussion of
sales subsequent to June 30, 2000.
Note 4. INVESTMENT IN ASSOCIATED COMPANY
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.
As of December 31, 1999 and June 30, 2000, the Company had the following
investment in the Associated Company (in thousands):
GC (1)
Investment at December 31, 1998 $ 8,807
Distributions (625)
Equity in earnings 1,222
Investment at December 31, 1999 9,404
Distributions (682)
Equity in earnings 622
Investment at June 30, 2000 $ 9,344
(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 June 30, 2000, and December 31, 1999 (dollars in thousands):
2000 1999
-------------- ---------------
<S> <C> <C>
Note secured by a hotel property in Arlington, TX, with a fixed interest rate
of 9%, monthly interest-only payments and a maturity date of March 2000. (see
below for further discussion). $ - $ 1,141
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). 37,617 36,441
-------------- ---------------
Total $ 37,617 $ 37,582
============== ===============
In September 1999, the Company sold a hotel property in Arlington, Texas, to a
third party for a sale price of $2.1 million, of which $1.14 million was
represented by a note receivable secured by the hotel property. This note was
paid off in January 2000.
In 1998, the Company entered into a development alliance with The Pauls
Corporation. In addition to this development alliance, the Company loaned
14
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 2000
approximately $34 million ($37.6 million, including accrued interest, at June
30, 2000), secured by a first mortgage, to facilitate 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 and industrial space and 1,600 multifamily
units over the next ten years.
Note 6. INVESTMENTS IN DEVELOPMENT AND JOINT VENTURES
The Company is currently involved in 3 development alliances for the development
of approximately 579,000 square feet of office and distribution properties and
1,702 multifamily units in Colorado, Texas, New Jersey, Kansas and Florida. As
of June 30, 2000, the Company has advanced approximately $39 million to these
alliances. Under these development alliances, the Company has certain rights to
purchase the properties upon completion of development over the next five years.
In the first quarter of 2000, the Company formed a limited liability company
(the "LLC") with an independent third party and contributed its interest in the
office property known as 2000 Corporate Ridge, located in McLean, Virginia. This
transaction resulted in a loss on sale of approximately $211,000 and is included
in net loss on sales of real estate assets in the accompanying consolidated
statement of income for the six months ended June 30, 2000. Consideration
received for this contribution included $14.7 million in cash and the assumption
of a $20.6 million mortgage by the LLC. The Company now has a 10% interest in
the LLC and the LLC agreement provides for, among other things, a 3% annual
management fee to the Company for property management services, certain asset
management fees and certain additional distributions in excess of its 10%
interest, if available, upon the ultimate sale of the property by the LLC. The
Company accounts for its interest in the LLC under the equity method.
Note 7. OTHER ASSETS
As of June 30, 2000 and December 31, 1999, other assets on the consolidated
balance sheets consist of the following (in thousands):
2000 1999
------------ ------------
<S> <C> <C>
Accounts receivable, net $ 6,171 $ 3,856
Prepaid expenses 6,074 8,164
Section 1031 exchange accounts 9,499 -
Impound accounts 8,261 12,970
Lease commissions and deferred financing
fees, net 20,539 20,867
Corporate office fixed assets, net 5,116 4,726
Related party receivable (Note 10) 1,815 1,847
Other 1,368 2,363
------------ ------------
Total other assets $ 58,843 $ 54,793
============ ============
Note 8. SECURED AND UNSECURED LIABILITIES
The Company had the following mortgage loans, bank lines, unsecured notes and
notes payable outstanding as of June 30, 2000, and December 31, 1999 (dollars in
thousands):
15
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 2000
2000 1999
<S> <C> <C>
Secured loans with various lenders, net of unamortized discount of $5,203 and $5,515 at
June 30, 2000 and December 31, 1999, 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 $343 and $458. These loans are secured by 30 properties with an aggregate
net carrying value of $405,056 and $409,130 at June 30, 2000 and December 31, 1999,
respectively. $231,567 $232,735
Secured loans with various lenders, bearing interest at fixed rates between 6.95% and
9.25% (approximately $52,146 of these loans include an unamortized premium of
approximately $121 which reduces the effective interest rate on those instruments to
6.75%), with monthly principal and interest payments ranging between $5 and $443 and
maturing at various dates through December 1, 2030. These loans are secured by
properties with an aggregate net carrying value of $445,537 and $547,264 at June 30,
2000 and December 31, 1999, respectively. 272,917 322,878
Secured loans with various banks bearing interest at variable rates ranging between
7.613% and 9.50% at June 30, 2000 and 6.53% and 8.52% at December 31, 1999, and maturing
at various dates through August 30, 2004. These loans are secured by properties with an
aggregate net carrying value of $243,403 and $224,526 at June 30, 2000 and December 31,
1999, respectively. 164,843 146,102
Unsecured $142,500 line of credit with a bank ("Credit Facility") with a variable
interest rate of LIBOR plus 1.75% at June 30, 2000 and LIBOR plus 1.625% at December 31,
1999 (8.392% and 7.753%, respectively), monthly interest only payments and a maturity
date of June 10, 2002, with one option to extend for 10 years. 39,811 70,628
Unsecured $125,000 term loan with a bank with a variable interest rate of LIBOR plus
1.75% (8.392% and 8.25% at June 30, 2000 and December 31, 1999, respectively), monthly
interest only payments and a maturity date of June 10, 2002. 125,000 33,865
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. All of
the notes were retired in the first six months of 2000, as discussed below. - 91,150
Total $834,138 $897,358
In the second quarter of 2000, the Company obtained an $18 million construction
loan to refinance a 264,000 square foot industrial property located in
Indianapolis, Indiana, and to provide funds to build an approximate 83,000
square foot expansion to this property. Approximately $9.4 million was
outstanding at June 30, 2000. The loan has a maturity date of June 15, 2002 and
bears interest at the floating rate of LIBOR plus 2.50%. The interest rate on
this loan at June 30, 2000 was 9.14%.
In the first quarter of 2000, the Company obtained a $10.5 million construction
loan to build an 80,000 square foot office property in Bedminster, New Jersey.
Approximately $5 million was outstanding at June 30, 2000. The loan has a
maturity date of November 12, 2001 and bears interest at the floating rate of
LIBOR plus 2.25%. The interest rate on this loan at June 30, 2000 was 8.89%.
16
</TABLE>
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 2000
In the first quarter of 2000, the Company contributed its interest in the office
property known as 2000 Corporate Ridge to a limited liability company (the
"LLC"). The LLC assumed the $20.6 million mortgage loan on this property. See
Note 6 for further discussion.
In the first quarter of 2000, related to the acquisition of an industrial
property from one of the Company's development alliances (as discussed in Note 3
above), the Company assumed a $4.3 million secured loan. This loan has a
maturity date of October 1, 2000 (with options for two 6-month extensions) and
bears interest at the floating rate of LIBOR plus 1.55%. The interest rate on
this loan at June 30, 2000 was 7.61%.
During the six months ended June 30, 2000, the Company retired the remaining
$91.2 million of unsecured Series A Senior Notes at a discount. As a result of
these transactions and the related write-off of capitalized original issuance
costs, a net loss on early extinguishment of debt of $550,000 was recorded in
the accompanying consolidated statement of income for the six months ended June
30, 2000, as discussed in Note 9 below.
In August 1999, the Company closed a $97.6 million secured financing with a
commercial bank ("Secured Financing"). In connection with the 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 Secured Financing instrument, is indexed to the 90-day LIBOR
rate, and is for a notional amount equal to the maximum amount available on the
Secured Financing loan. As of June 30, 2000, the 90-day LIBOR rate was 6.77%.
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.
Some of the Company's properties are held in limited partnerships and limited
liability companies in order to facilitate financing. Such limited partnerships
and limited liability companies are included in the consolidated financial
statements of the Company in accordance with Generally Accepted Accounting
Principles ("GAAP").
The required principal payments on the Company's debt for the next five years
and thereafter, as of June 30, 2000, are as follows (in thousands):
Year Ending
December 31,
2000 $ 76,742
2001 49,131
2002 187,510
2003 36,745
2004 107,845
Thereafter 376,165
Total $ 834,138
Note 9. NET LOSS ON EARLY EXTINGUISHMENT OF DEBT
In connection with the unsecured Series A Senior Notes repurchases discussed
above, the Company recorded a net loss on early extinguishment of debt of
$550,000 for the six months ended June 30, 2000. This loss consists of $931,000
of discounts on retirement offset by $1,481,000 of losses due to the writeoff of
unamortized original issuance costs.
Note 10. RELATED PARTY TRANSACTIONS
Fee and reimbursement income earned by the Company from related parties totaled
$2,362,000 and $1,874,000 for the six months ended June 30, 2000 and 1999,
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 $505,000 and $734,000 for the six months
ended June 30, 2000 and 1999, 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 income.
17
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 2000
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 and unentitled 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 and entitlement
risk. 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 sale of the property if such sale
occurs within 3 years. As of June 30, 2000, principal payments of approximately
$32,000 have been received resulting in an outstanding principal balance of
$1,815,000. This note is included in other assets on the accompanying
consolidated balance sheets.
Note 11. 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):
Three months ended Six months ended
June 30, June 30,
------------------------------- ------------------------------------
2000 1999 2000 1999
-------------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income available to Common
Stockholders - Basic $ 2,889 $ 11,481 $ 5,452 $ 16,489
Minority interest 350 1,529 656 2,196
-------------- ------------- ---------------- ----------------
Net income available to Common
Stockholders - Diluted $ 3,239 $ 13,010 $ 6,108 $ 18,685
-------------- ------------- ---------------- ----------------
Weighted average shares:
Basic 29,330,163 31,664,269 29,842,924 31,714,274
Stock options 226,745 109,092 178,346 111,759
Convertible Operating Partnership Units 3,554,585 4,210,746 3,581,155 4,214,545
-------------- -------------- ---------------- ----------------
Diluted 33,111,493 35,984,107 33,602,425 36,040,578
-------------- -------------- ---------------- ----------------
Basic earnings per share $ 0.10 $ 0.36 $ 0.18 $ 0.52
Diluted earnings per share $ 0.10 $ 0.36 $ 0.18 $ 0.52
Note 12. 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
18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 2000
Stock available for issuance under the Plan may not be reduced. For purposes of
calculating the number of shares of Common Stock available under the Plan, all
classes of securities of the Company and its related entities that are
convertible presently or in the future by the security holder into shares of
Common Stock or which may presently or in the future be exchanged for shares of
Common Stock pursuant to redemption rights or otherwise, shall be deemed to be
outstanding shares of Common Stock. Notwithstanding the foregoing, the aggregate
number of shares as to which incentive stock options, one type of security
available under the Plan, may be granted under the Plan may not exceed 1,140,000
shares. In May 1999, the Company's stockholders approved the grant of 700,000
non-qualified stock options to Robert Batinovich and 300,000 non-qualified stock
options to Andrew Batinovich, outside the Plan. The Company accounts for the
fair value of the options and bonus grants in accordance with APB Opinion No.
25. As of June 30, 2000, 70,250 shares of bonus grants have been issued under
the Plan. The fair value of the shares granted has 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 June 30, 2000, 2,662,086 options to purchase shares of Common Stock
were outstanding under the Plan, excluding the 1,000,000 stock options granted
to Robert Batinovich and Andrew Batinovich as described above. 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 13. SEGMENT INFORMATION
The Company owns a diverse portfolio of properties comprising five product
types: office, industrial, retail, multifamily and hotels. Effective January 1,
2000, in order to simplify reporting, the Company eliminated the office/flex
property type and reallocated the properties to either the office or industrial
category. 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 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 one 227-room
property leased to and operated by a third party.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance of
its property types based on net operating income derived by subtracting rental
expenses and real estate taxes (operating expenses) from rental revenues.
Significant information used by the Company for its reportable segments as of
and for the six months ended June 30, 2000 and 1999 is as follows (in
thousands):
Multifamily
2000 Office Industrial Retail Hotel Total
------------ ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rental revenue $ 64,199 $ 19,890 $ 5,203 $ 34,136 $ 550 $ 123,978
Property operating expenses 23,714 5,060 1,677 15,083 115 45,649
------------ ----------- ----------- ----------- ----------- -------------
Net operating income (NOI) $ 40,485 $ 14,830 $ 3,526 $ 19,053 $ 435 $ 78,329
============ =========== =========== =========== =========== =============
1999
Rental revenue $ 65,527 $ 22,665 $ 6,043 $ 33,970 $ 988 $ 129,193
Property operating expenses 24,822 6,186 2,057 14,654 205 47,924
------------ ----------- ----------- ----------- ----------- -------------
Net operating income (NOI) $ 40,705 $ 16,479 $ 3,986 $ 19,316 $ 783 $ 81,269
============ =========== =========== =========== =========== =============
19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 2000
The following is a reconciliation of segment revenues and income to consolidated
revenues and income for the periods presented above (in thousands):
2000 1999
----------------- -----------------
Revenues
<S> <C> <C>
Total revenue for reportable segments $ 123,978 $ 129,193
Other revenue (1) 4,414 11,839
----------------- -----------------
Total consolidated revenues $ 128,392 $ 141,032
================= =================
Net Income
NOI for reportable segments $ 78,329 $ 81,269
Elimination of internal property management fees 3,802 4,063
Unallocated amounts:
Other revenue (1) 4,414 11,839
General and administrative expenses (6,373) (4,773)
Depreciation and amortization (30,213) (29,312)
Interest expense (32,370) (32,958)
----------------- -----------------
Income from operations before minority interest and
extraordinary items $ 17,589 $ 30,128
================= =================
(1) Other revenue includes fee income, interest and other income, equity in
earnings/loss of Associated Company, equity in earnings/loss of
unconsolidated joint ventures and net gain/loss on sales of real estate
assets.
Note 14. SUBSEQUENT EVENTS
Subsequent to June 30, 2000, the Company sold five industrial properties and one
retail property. These properties were sold for an aggregate sales price of
approximately $22.2 million and generated an aggregate net gain of approximately
$1.5 million.
20
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Background
Glenborough Realty Trust Incorporated (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT") engaged primarily in the
ownership, operation, management, leasing, acquisition, expansion and
development of various types of income-producing properties. As of June 30,
2000, the Company owned and operated 136 income-producing properties (the
"Properties," and each a "Property"). The Properties are comprised of 55 office
Properties, 34 industrial Properties, 6 retail Properties, 37 multifamily
Properties, 1 hotel Property and 3 joint ventures, located in 27 metropolitan
markets.
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, two of which merged on June 30, 1997,
and the remaining two of which merged on September 30, 1999 (the "Associated
Company"), 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 88.16% limited partner interest at June 30, 2000.
The Company operates the assets acquired in the Consolidation and in subsequent
acquisitions and intends to continue to invest in income-producing property
directly and through joint ventures. In addition, the Associated Company 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.
The Company's principal business objectives are to achieve a stable and
increasing source of cash flow available for distribution to stockholders. By
achieving these objectives, the Company will seek to raise the value of its
shares over time.
Results of Operations
Comparison of the six months ended June 30, 2000 to the six months ended June
30, 1999.
Rental Revenue. Rental revenue decreased $5,215,000, or 4%, to $123,978,000 for
the six months ended June 30, 2000 from $129,193,000 for the six months ended
June 30, 1999, due to decreases in revenues from the office, industrial, retail
and hotel Properties of $1,328,000, $2,775,000, $840,000 and $438,000,
respectively. These decreases are primarily due to the sales of 11 office
Properties, 11 industrial Properties, three retail Properties and one hotel
since June 30, 1999. These decreases are offset by an increase in revenue from
the multifamily Properties of $166,000.
Fees and Reimbursements from Affiliates. Fees and reimbursements from affiliates
consist primarily of property and asset management fees paid to the Company
under agreements with the Managed Partnerships. This revenue increased $488,000,
or 26%, to $2,362,000 for the six months ended June 30, 2000, from $1,874,000
for the six months ended June 30, 1999, primarily due to transaction fees
received from an affiliate in the second quarter of 2000.
Interest and Other Income. Interest and other income increased $1,263,000, or
37%, to $4,643,000 for the six months ended June 30, 2000, from $3,380,000 for
the six months ended June 30, 1999. The increase is primarily due to interest
income earned upon the payoff of loans made on two development projects sold by
a development alliance in the second quarter of 2000 offset by decreases in
interest earned on notes receivable as a result of payoffs received.
Equity in Earnings (Loss) of Associated Company. Equity in earnings (loss) of
Associated Company increased $1,187,000, or 210%, to $622,000 for the six months
ended June 30, 2000, from an equity in loss of $565,000 for the six months ended
June 30, 1999. The increase is primarily due to a decrease in GC's 1999 earnings
21
<PAGE>
resulting from a provision to reduce the carrying value of management contracts
with certain of the Managed Partnerships. In addition, GC's 2000 earnings
increased due to transaction fees received in the second quarter of 2000.
Equity in (Loss) Earnings of Unconsolidated Joint Ventures. Equity in (loss)
earnings of unconsolidated joint ventures decreased $228,000 to an equity in
loss of $171,000 for the six months ended June 30, 2000, from an equity in
earnings of $57,000 during the six months ended June 30, 1999. This decrease is
due to a decrease in the capitalization of interest expense and property taxes,
recognition of depreciation expense, and payment of operating expenses by the
joint ventures upon the completion of development of several projects in 2000.
Net (Loss) Gain on Sales of Real Estate Assets. The net loss on sales of real
estate assets of $3,042,000 during the six months ended June 30, 2000, resulted
from the sales of six office Properties, four industrial Properties and three
retail Properties from the Company's portfolio in 2000. The net gain on sales of
real estate assets of $7,093,000 during the six months ended June 30, 1999,
resulted from the sale of six office Properties, ten industrial Properties,
three retail Properties, one multifamily Property, one hotel and a small partial
interest in a REIT.
Property Operating Expenses. Property operating expenses decreased $2,014,000,
or 5%, to $41,847,000 for the six months ended June 30, 2000, from $43,861,000
for the six months ended June 30, 1999. This decrease corresponds to the 4%
decrease in rental revenues resulting from the sale of Properties.
General and Administrative Expenses. General and administrative expenses
increased $1,600,000, or 34%, to $6,373,000 for the six months ended June 30,
2000, from $4,773,000 for the six months ended June 30, 1999. This increase was
primarily due to timing differences in incentive compensation costs which were
recognized in the second quarter of 2000 versus the third and fourth quarters of
1999.
Depreciation and Amortization. Depreciation and amortization did not change
significantly with an increase of $901,000, or 3%, to $30,213,000 for the six
months ended June 30, 2000, from $29,312,000 for the six months ended June 30,
1999.
Interest Expense. Interest expense did not change significantly with a decrease
of $588,000, or 2%, to $32,370,000 for the six months ended June 30, 2000, from
$32,958,000 for the six months ended June 30, 1999.
Net Loss on Early Extinguishment of Debt. Net loss on early extinguishment of
debt of $550,000 during the six months ended June 30, 2000, consists of $931,000
of gains on retirement of Series A Senior Notes at a discount, offset by the
related write-off of unamortized loan fees in the amount of $1,481,000. The net
loss on early extinguishment of debt of $303,000 during the six months ended
June 30, 1999, consists of gains on the retirement of Series A Senior Notes
offset by prepayment penalties and the write-off of unamortized loan fees upon
early payoff of debt.
Comparison of the three months ended June 30, 2000 to the three months ended
June 30, 1999.
Rental Revenue. Rental revenue decreased $3,735,000, or 6%, to $60,817,000 for
the three months ended June 30, 2000 from $64,552,000 for the three months ended
June 30, 1999, due to decreases in revenues from the office, industrial, retail,
multifamily and hotel Properties of $1,651,000, $1,217,000, $465,000, $187,000
and $215,000, respectively. These decreases are primarily due to the sales of 11
office Properties, 11 industrial Properties, three retail Properties and one
hotel since June 30, 1999.
Fees and Reimbursements from Affiliates. Fees and reimbursements from affiliates
consist primarily of property and asset management fees paid to the Company
under agreements with the Managed Partnerships. This revenue increased
$1,151,000, or 155%, to $1,894,000 for the three months ended June 30, 2000,
from $743,000 for the three months ended June 30, 1999, primarily due to
transaction fees received from an affiliate in the second quarter of 2000.
Interest and Other Income. Interest and other income increased $1,706,000, or
99%, to $3,427,000 for the three months ended June 30, 2000, from $1,721,000 for
the three months ended June 30, 1999. The increase is primarily due to interest
income earned upon the payoff of loans made on two development projects sold by
a development alliance in the second quarter of 2000.
Equity in Earnings (Loss) of Associated Company. Equity in earnings of
Associated Company increased $1,450,000, or 166%, to $576,000 for the three
22
<PAGE>
months ended June 30, 2000, from an equity in loss of $874,000 for the three
months ended June 30, 1999. The increase is primarily due to a decrease in GC's
1999 earnings resulting from a provision to reduce the carrying value of
management contracts with certain of the Managed Partnerships. In addition, GC's
2000 earnings increased due to transaction fees received in the second quarter
of 2000.
Equity in (Loss) Earnings of Unconsolidated Joint Ventures. Equity in (loss)
earnings of unconsolidated joint ventures decreased $197,000 to an equity in
loss of $140,000 for the three months ended June 30, 2000, from an equity in
earnings of $57,000 during the three months ended June 30, 1999. This decrease
is due to a decrease in the capitalization of interest expense and property
taxes, recognition of depreciation expense, and payment of operating expenses by
the joint ventures upon the completion of development of several projects in
2000.
Net (Loss) Gain on Sales of Real Estate Assets. The net loss on sales of real
estate assets of $2,347,000 during the three months ended June 30, 2000,
primarily resulted from the sales of five office Properties, three industrial
Properties and three retail Properties from the Company's portfolio in 2000. The
net gain on sales of real estate assets of $5,742,000 during the three months
ended June 30, 1999, resulted from the sale of six office Properties, five
industrial Properties, one retail Property, one multifamily Property and one
hotel.
Property Operating Expenses. Property operating expenses decreased $1,570,000,
or 7%, to $20,290,000 for the three months ended June 30, 2000, from $21,860,000
for the three months ended June 30, 1999. This decrease corresponded to the 6%
decrease in rental revenues resulting from the sale of Properties.
General and Administrative Expenses. General and administrative expenses
increased $1,513,000, or 59%, to $4,064,000 for the three months ended June 30,
2000, from $2,551,000 for the three months ended June 30, 1999. This increase
was primarily due to timing differences in incentive compensation costs which
were recognized in the second quarter of 2000 versus the third and fourth
quarters of 1999.
Depreciation and Amortization. Depreciation and amortization did not change
significantly with an increase of $864,000, or 6%, to $15,084,000 for the three
months ended June 30, 2000, from $14,220,000 for the three months ended June 30,
1999.
Interest Expense. Interest expense did not change significantly with a decrease
of $395,000, or 2%, to $16,023,000 for the three months ended June 30, 2000,
from $16,418,000 for the three months ended June 30, 1999.
Net (Loss) Gain on Early Extinguishment of Debt. Net loss on early
extinguishment of debt of $84,000 during the three months ended June 30, 2000,
consists of the write-off of unamortized loan fees upon the retirement of Series
A Senior Notes. The net gain on early extinguishment of debt of $1,688,000
during the three months ended June 30, 1999, consists of gains on the retirement
of Series A Senior Notes at a discount offset by prepayment penalties and the
write-off of unamortized loan fees upon early payoff of debt.
Liquidity and Capital Resources
Cash Flows
For the six months ended June 30, 2000, cash provided by operating activities
decreased by $6,973,000 to $45,324,000 as compared to $52,297,000 for the same
period in 1999. The decrease is primarily due to a decrease in net income
resulting from the 1999 and 2000 sales of Properties. Cash provided by investing
activities increased by $860,000 to $80,836,000 for the six months ended June
30, 2000, as compared to $79,976,000 for the same period in 1999. The increase
is primarily due to a decrease in cash used for investments in development and
an increase in principal receipts on mortgage loans and notes receivable offset
by an increase in capital expenditures and a decrease in net proceeds from sales
of real estate assets. During the six months ended June 30, 2000, the Company
sold 13 Properties as compared to 21 Properties during the six months ended June
30, 1999. Cash used for financing activities decreased by $5,011,000 to
$129,618,000 for the six months ended June 30, 2000, as compared to $134,629,000
for the same period in 1999. This change was primarily due to a decrease in
prepayment penalties paid during the six months ended June 30, 2000 versus the
same period in 1999. In addition, distributions to stockholders decreased in
2000 due to the repurchases of common and preferred stock.
The Company expects to meet its short-term liquidity requirements generally
23
<PAGE>
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 $37,582,000 at December 31, 1999, to
$37,617,000 at June 30, 2000. This increase was due to accrued interest on a
loan made by the Company under a development alliance offset by the payoff of a
$1,141,000 loan made by the Company to the buyer of one of the hotel Properties.
Secured and Unsecured Financing
Mortgage loans payable decreased from $701,715,000 at December 31, 1999, to
$669,327,000 at June 30, 2000. This decrease resulted from the assumption by the
buyers of two of the Company's Properties of mortgage loans in the amount of
$25,346,000, the payoff of approximately $21,240,000 of mortgage loans in
connection with 2000 sales of Properties and scheduled principal payments of
approximately $4,569,000. This decrease is partially offset by $18,767,000 of
new mortgage loans in connection with an acquisition, the construction of a
property in Bedminster, New Jersey and the expansion of a property in
Indianapolis, Indiana (see below for further discussion).
In the second quarter of 2000, the Company obtained an $18 million construction
loan to build an approximate 83,000 square foot expansion to an existing
property in Indianapolis, Indiana. Approximately $9.4 million was outstanding at
June 30, 2000. The loan has a maturity date of June 15, 2002 and bears interest
at the floating rate of LIBOR plus 2.50%. The interest rate on this loan at June
30, 2000 was 9.14%.
In the first quarter of 2000, the Company obtained a $10.5 million construction
loan to build an 80,000 square foot office property in Bedminster, New Jersey.
Approximately $5 million was outstanding at June 30, 2000. The loan has a
maturity date of November 12, 2001 and bears interest at the floating rate of
LIBOR plus 2.25%. The interest rate on this loan at June 30, 2000 was 8.89%.
In the first quarter of 2000, the Company formed a limited liability company
(the "LLC") with an independent third party and contributed its interest in the
office property known as 2000 Corporate Ridge, located in McLean, Virginia.
Consideration received for this contribution included $14.7 million in cash and
the assumption of a $20.6 million mortgage by the LLC.
In the first quarter of 2000, related to the acquisition of an industrial
property from one of the Company's development alliances, the Company assumed a
$4.3 million secured loan. This loan has a maturity date of October 1, 2000
(with options for two 6-month extensions) and bears interest at the floating
rate of LIBOR plus 1.55%. The interest rate on this loan at June 30, 2000 was
7.61%.
During the six months ended June 30, 2000, the Company retired the remaining
$91.2 million of unsecured Series A Senior Notes at a discount. As a result of
these transactions and the related write-off of capitalized original issuance
costs, a net loss on early extinguishment of debt of approximately $550,000 was
recognized by the Company in the consolidated statement of income for the six
months ended June 30, 2000.
In August 1999, the Company closed a $97.6 million secured financing with a
commercial bank ("Secured Financing"). In connection with the 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 Secured Financing instrument, is indexed to the 90-day LIBOR
rate, and is for a notional amount equal to the maximum amount available on the
Secured Financing loan. As of June 30, 2000, the 90-day LIBOR rate was 6.77%.
24
<PAGE>
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.
The Company has an unsecured line of credit provided by a group of commercial
banks (the "Credit Facility"). Outstanding borrowings under the Credit Facility
decreased from $70,628,000 at December 31, 1999, to $39,811,000 at June 30,
2000. The decrease was due to draws of $86,229,000 for acquisitions, stock
repurchases, and purchases of the Company's Series A Senior Notes, offset by pay
downs of $117,046,000 generated from proceeds from the sales of Properties and
cash from operations. In February 2000, the maturity date on the Credit Facility
was extended from December 2000 to June 2002.
At June 30, 2000, the Company's total indebtedness included fixed-rate debt of
$504,484,000 and floating-rate indebtedness of $329,654,000. Approximately 66%
of the Company's total assets, comprising 96 properties, is encumbered by debt
at June 30, 2000.
It is the Company's policy to manage its exposure to fluctuations in market
interest rates through the use of fixed rate debt instruments to the extent
possible. At June 30, 2000, approximately 40% of the Company's outstanding debt,
including amounts borrowed under the Credit Facility, were subject to variable
rates. The Company may, from time to time, enter into interest rate protection
agreements intended to hedge the cost of new borrowings that are reasonably
assured of completion. It is not the Company's policy to engage in hedging
activities for previously outstanding debt instruments or for speculative
purposes. At June 30, 2000, the Company was not a party to any open interest
rate protection agreements other than the interest rate cap contract associated
with the Secured Financing 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 is currently involved in 3 development alliances for the development
of approximately 579,000 square feet of office and distribution properties and
1,702 multifamily units in Colorado, Texas, New Jersey, Kansas and Florida. As
of June 30, 2000, the Company has advanced approximately $39 million to these
alliances. 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 $37.6 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 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
25
<PAGE>
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
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.
In October 1999, NAREIT issued an update, 'White Paper on FFO-October 1999' to
clarify its definition of FFO. The clarification is effective January 1, 2000
and requires restatement for all periods presented in financial statements or
tables. FFO, as clarified by NAREIT, represents "net income excluding gains (or
losses) from sales of property, plus depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated partnerships and joint ventures will be calculated to reflect FFO
on the same basis." The Company will report using the clarified definition in
periods beginning after January 1, 2000.
Cash available for distribution ("CAD") represents net income (loss) before
minority interests and extraordinary items, adjusted for depreciation and
amortization including amortization of deferred financing costs and gains
(losses) from the disposal of properties, less lease commissions and recurring
capital expenditures, consisting of tenant improvements and normal expenditures
intended to extend the useful life of the property such as roof and parking lot
repairs. CAD should not be considered an alternative to net income (computed in
accordance with GAAP) as a measure of the Company's financial performance or as
an alternative to cash flow from operating activities (computed in accordance
with GAAP) as a measure of the Company's liquidity, nor is it necessarily
indicative of sufficient cash flow to fund all of the Company's cash needs.
Further, CAD as disclosed by other REITs may not be comparable to the Company's
calculation of CAD.
26
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth the Company's calculation of FFO and CAD for the
three and six months ended June 30, 2000 (in thousands, except weighted average
shares and per share amounts):
March 31, June 30, YTD
2000 2000 2000
------------- ------------- -------------
<S> <C> <C> <C>
Income from operations before minority interest,
extraordinary items and preferred dividends $ 8,823 $ 8,766 $ 17,589
Preferred dividends (5,488) (5,443) (10,931)
Net loss on sales of real estate assets 695 2,347 3,042
Depreciation and amortization (1) 14,915 14,871 29,786
Adjustment to reflect FFO of Unconsolidated
JV's (2) 190 264 454
Adjustment to reflect FFO of Associated Company(3) 164 22 186
------------- ------------- -------------
FFO(4) $ 19,299 $ 20,827 $ 40,126
============= ============= =============
Amortization of deferred financing fees 639 610 1,249
Capital reserve - - -
Capital expenditures (4,989) (6,319) (11,308)
------------- ------------- -------------
CAD $ 14,949 $ 15,118 $ 30,067
============= ============= =============
Distributions per share (5) $ 0.42 $ 0.42 $ 0.84
============= ============= =============
Diluted weighted average shares outstanding 34,096,464 33,111,493 33,602,425
============= ============= =============
(1) Excludes depreciation of corporate office fixed assets.
(2) Consists of the adjustments required to reflect the FFO of the
unconsolidated joint ventures allocable to the Company. The Company's
investments in the joint ventures are accounted for using the equity method
of accounting.
(3) Consists of the adjustments required to reflect the FFO of the Associated
Company allocable to the Company. The Company's investment in the
Associated Company is accounted for using the equity method of accounting.
(4) In accordance with NAREIT's 'White Paper on FFO-October 1999' as discussed
above, FFO includes a $406 gain from the sale of an incidental parcel of
land by the Associated Company in June 2000.
(5) The distributions for the three months ended June 30, 2000, were paid on
July 17, 2000.
Forward Looking Statements; Factors That May Affect Operating Results
This Report on Form 10-Q contains forward looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934, including statements regarding the Company's
expectations, hopes, intentions, beliefs and strategies regarding the future
including the Company's belief that cash generated by operations will be
adequate to meet operating requirements and to make distributions, the Company's
expectations as to the timing of the completion of the development projects
through its development alliances and the acquisition by the Company of
properties developed through its development alliances. There can be no
assurance that the actual outcomes or results will be consistent with such
expectations, hopes, intentions, beliefs and strategies. Forward looking
statements include statements regarding potential acquisitions, the anticipated
performance of future acquisitions, recently completed acquisitions and existing
properties, and statements regarding the Company's financing activities. All
forward looking statements included in this document are based on information
available to the Company on the date hereof. It is important to note that the
Company's actual results could differ materially from those stated or implied in
such forward-looking statements.
Factors which may cause the Company's results to differ include the inability to
complete anticipated future acquisitions, defaults or non-renewal of leases,
increased interest rates and operational costs, failure to obtain necessary
27
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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, 1999, 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.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding litigation fully resolved during the reporting period
ended March 31, 2000, please refer to the Company's quarterly report on Form
10-Q for such period.
Certain claims and lawsuits have arisen against the Company in its normal course
of business. The Company believes that such 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
At the Company's annual meeting, held on May 5 in Redwood City, California, the
following persons were duly elected by the holders of the Company's Common Stock
to serve as Class II directors:
Votes For Votes Against Votes Withheld Abstentions
------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Robert Batinovich 25,648,536 0 3,867,384 995,583
Patrick Foley 26,250,309 0 3,867,384 393,810
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The Exhibit Index attached hereto is hereby incorporated by
reference to this item.
(b) Reports on Form 8-K:
On April 26, 2000, the Company filed a report on Form 8-K
with respect to Supplemental Information for the quarter
ended March 31, 2000.
On July 25, 2000, the Company filed a report on Form 8-K
with respect to Supplemental Information for the quarter
ended June 30, 2000.
28
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange
Act of l934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GLENBOROUGH REALTY TRUST INCORPORATED
By: Glenborough Realty Trust Incorporated,
Date: August 10, 2000 /s/ Andrew Batinovich
Andrew Batinovich
Director, President
and Chief Operating Officer
(Principal Operating Officer)
Date: August 10, 2000 /s/ Stephen Saul
Stephen Saul
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: August 10, 2000 /s/ Terri Garnick
Terri Garnick
Senior Vice President,
Chief Accounting Officer,
Treasurer
(Principal Accounting Officer)
29
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Title
11.01 Statement re: Computation of Per Share Earnings is shown in Note 11 of
the Consolidated Financial Statements of the Company in Item 1.
12.01 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings
to Fixed Charges and Preferred Dividends.
27.01 Financial Data Schedule.
30
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<TABLE>
<CAPTION>
Exhibit 12.01
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, 1999
and the three months ended March 31, 2000 and June 30, 2000
(in thousands)
GRT
Predecessor
Entities,
Combined
------------- --------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- ----------- ----------- ------------ ------------
EARNINGS, AS DEFINED
<S> <C> <C> <C> <C> <C>
Net Income (Loss) before Preferred
Dividends (2) $ 524 $ (1,609) $19,368 $ 44,602 $ 50,286
Extraordinary items - 186 843 1,400 (984)
Federal & State income taxes 357 - - - -
Minority Interest - 292 1,119 2,550 3,647
Fixed Charges 2,129 3,913 9,668 53,289 64,782
------------- ----------- ----------- ------------ ------------
$ 3,010 $ 2,782 $30,998 $ 101,841 $ 117,731
------------- ----------- ----------- ------------ ------------
FIXED CHARGES AND PREFERRED DIVIDENDS, AS
DEFINED
Interest Expense $ 2,129 $ 3,913 $ 9,668 $ 53,289 $ 64,782
Capitalized Interest - - - 1,108 2,675
Preferred Dividends - - - 20,620 22,280
------------- ----------- ----------- ------------ ------------
$ 2,129 $ 3,913 $ 9,668 $ 75,017 $ 89,737
RATIO OF EARNINGS TO FIXED CHARGES (3) 1.41 0.71 (1) 3.21 1.87 1.75
------------- ----------- ----------- ------------ ------------
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED DIVIDENDS (3) 1.41 0.71 (1) 3.21 1.36 1.31
------------- ----------- ----------- ------------ ------------
(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.
31
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Company
------------------------------------------
Three Three
Months Months
Ended Ended Year
March 31, June 30, To Date
---------- ----------- ------------
2000 2000 2000
---------- ----------- ------------
EARNINGS, AS DEFINED
<S> <C> <C> <C>
Net Income (Loss) before Preferred
Dividends (2) $ 8,051 $ 8,332 $ 16,383
Extraordinary items 466 84 550
Federal & State income taxes - - -
Minority Interest 306 350 656
Fixed Charges 16,347 16,023 32,370
---------- ----------- ------------
$ 25,170 $ 24,789 $ 49,959
---------- ----------- ------------
FIXED CHARGES AND PREFERRED DIVIDENDS, AS
DEFINED
Interest Expense $ 16,347 $ 16,023 $ 32,370
Capitalized Interest 788 771 1,559
Preferred Dividends 5,488 5,443 10,931
---------- ----------- ------------
$ 22,623 $ 22,237 $ 44,860
RATIO OF EARNINGS TO FIXED CHARGES (3) 1.47 1.48 1.47
---------- ----------- ------------
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED DIVIDENDS (3) 1.11 1.11 1.11
---------- ----------- ------------
(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.
31
</TABLE>
