-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LcuRIDeA+jXRrXi9JC6/t4sn2o0hZaHKs079zQ0PwRXZsbf8qvTyGFvMMWHFXI9L BsHsxJrfIz3zknTHrXGtjQ== 0000929454-99-000007.txt : 19990319 0000929454-99-000007.hdr.sgml : 19990319 ACCESSION NUMBER: 0000929454-99-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLENBOROUGH PROPERTIES L P CENTRAL INDEX KEY: 0001039223 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS, ROOMING HOUSE, CAMPS & OTHER LODGING PLACES [7000] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-08808 FILM NUMBER: 99567506 BUSINESS ADDRESS: STREET 1: 400 SOUTH EL CAMINO REAL STREET 2: 11TH FLOOR CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 6503439300 MAIL ADDRESS: STREET 1: 400 SOUTH EL CAMINO REAL STREET 2: 11TH FLOOR CITY: SAN MATEO STATE: CA ZIP: 94402 10-K 1 1998 FORM 10-K FOR GLENBOROUGH PROPERTIES, L.P. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-14162 GLENBOROUGH PROPERTIES, L.P. (Exact name of Registrant as specified in its charter) California 94-3231041 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 400 South El Camino Real, 94402-1708 Suite 1100 San Mateo, California - (650) 343-9300 (Zip Code) (Address of principal executive offices and telephone number) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ X ] State the aggregate market value of the voting stock held by non-affiliates of the Partnership. Not applicable. No market for the Limited Partnership Units exists and therefore, a market value for such Units cannot be determined. DOCUMENTS INCORPORATED BY REFERENCE: EXHIBITS:The index of exhibits is contained in Part IV herein on page number 73. Page 1 of 73 TABLE OF CONTENTS Page No. PART I Item 1 Business 3 Item 2 Properties 6 Item 3 Legal Proceedings 12 Item 4 Submission of Matters to a Vote of Security Holders 14 PART II Item 5 Market for Partnership's Common Equity and Related Partner Matters 15 Item 6 Selected Financial Data 15 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 8 Financial Statements and Supplementary Data 34 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 34 PART III Item 10 Directors and Executive Officers of the Company 35 Item 11 Executive Compensation 35 Item 12 Security Ownership of Certain Beneficial Owners and Management 35 Item 13 Certain Relationships and Related Transactions 35 PART IV Item 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 36 Page 2 of 73 PART I Item 1. Business General Development and Description of Business Glenborough Properties, L.P., a California Limited Partnership (the "Operating Partnership"), is engaged primarily in the ownership, operation, management, leasing, acquisition, expansion and development of various types of income-producing properties. As of December 31, 1998, the Operating Partnership, directly and through various subsidiaries, owned and operated 186 income-producing properties (the "Properties," and each a "Property"). The Properties are comprised of 54 office Properties, 49 office/flex Properties, 30 industrial Properties, 13 retail Properties, 37 multi-family Properties and 3 hotel Properties, located in 24 states. The Operating Partnership was organized in the State of California on August 23, 1995. The Operating Partnership is the primary operating subsidiary of Glenborough Realty Trust Incorporated (the "Company"), a self-administered and self-managed real estate investment trust ("REIT"). On December 31, 1995, the Company completed a consolidation (the "Consolidation") in which eight public limited partnerships (the "Partnerships," collectively with Glenborough Corporation (defined below), 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 to the Partnerships in exchange for 3,979,376 Operating Partnership units; and (ii) merged with Glenborough Corporation, a California Corporation, with the Company being the surviving entity. The Company then transferred certain real estate and related assets to the Operating Partnership in exchange for a sole general partner interest of 1% and a limited partnership interest of 85.37% (87.25% limited partnership interest as of December 31, 1998). The Operating Partnership also acquired interests in certain warehouse distribution facilities from GPA, Ltd., a California limited partnership ("GPA"). The Operating Partnership commenced operations on January 1, 1996. The Operating Partnership 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. Effective April 1, 1998, the Company contributed to the Operating Partnership the majority of its assets, including 100% of its shares of the non-voting preferred stock of Glenborough Corporation (formerly Glenborough Realty Corporation), as well as all of the Company's tangible personal property including furniture and fixtures, all cash and investments, and a property management contract. As part of that transaction, the Company also agreed to a substantial reduction in the asset management fees paid by the Operating Partnership to the Company. In return, the Operating Partnership canceled certain obligations of the Company to the Operating Partnership, and issued 2,248,869 units of partnership interest in the Operating Partnership ("Units") to the Company. The contribution of 100% of the shares of non-voting preferred stock in Glenborough Corporation has been accounted for as a reorganization of entities under common control, similar to a pooling of interests. All periods have been restated to give effect to this transaction as if it occurred on December 31, 1995. As a result of this transaction, the only assets of the Company that were not contributed to the Operating Partnership are (i) its shares of non-voting preferred stock in Glenborough Hotel Group, (ii) its shares of common stock in twelve qualified REIT subsidiaries, which produce dividends that are not material to the Company and (iii) a 4.05% limited partnership interest in Glenborough Partners. Since the Consolidation, and consistent with its strategy for growth, the Operating Partnership has completed the following transactions: -Acquired 20 properties in 1996, 90 properties in 1997 and 69 properties in 1998. In addition, the Operating Partnership has acquired two properties subsequent to December 31, 1998. The total acquired properties consist of an aggregate of approximately 15.7 million rentable square feet of office, office/flex, industrial and retail space, 9,638 multi-family units and 227 hotel suites and had aggregate acquisition costs, including capitalized costs, of approximately $1.8 billion. -From January 1, 1996 to the date of this filing, sold 35 properties which were comprised of one office property, seven office/flex properties, six industrial properties, 17 retail properties, one multi-family Page 3 of 73 property and three hotel properties, to redeploy capital into properties the Operating Partnership believes have characteristics more suited to its overall growth strategy and operating goals. -Issued $150 million of unsecured 7.625% Series A Senior Notes which mature on March 15, 2005. Entered into 4 development alliances to which the Operating Partnership has made advances of approximately $33 million and a loan of $35 million as of December 31, 1998. The Associated Company Glenborough Corporation. Glenborough Corporation ("GC"), a California corporation, serves as general partner of various real estate limited partnerships (the "Managed Partnerships") for whom it provides asset and property management services. It also provides property management services for a limited portfolio of property owned by unaffiliated third parties. The Operating Partnership owns 100% of the 38,000 shares (representing 95% of total outstanding shares) of non-voting preferred stock of GC. Four individuals, including Sandra L. Boyle and Frank E. Austin, executive officers of the Company, own the 2,000 shares (representing 5% of total outstanding shares) of voting common stock of GC. The Operating Partnership, through its ownership of preferred stock of GC, is entitled to receive cumulative, preferred annual dividends of $1.58 per share, which GC must pay before it pays any dividends with respect to the common stock of GC. Once GC pays the required cumulative preferred dividend, it will pay any additional dividends in equal amounts per share on both the preferred stock and the common stock at 95% and 5%, respectively. Through the preferred stock, the Operating Partnership is also entitled to receive a preferred liquidation equal to $159.24 per share plus all cumulative and unpaid dividends. The preferred stock is subject to redemption at the option of GC after December 31, 2005, for a redemption price of $159.24 per share. As the holder of preferred stock of GC, the 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. Employees The Operating Partnership has no employees. Competition For Tenants The Operating Partnership's properties compete for tenants with similar properties located in their markets. Management believes that characteristics influencing the competitiveness of a real estate project include the geographic location of the property, the professionalism of the property manager and the maintenance and appearance of the property, in addition to external factors such as general economic circumstances, trends, and the existence of new competing properties in the general area in which the Operating Partnership's Properties are located. Additional competitive factors with respect to commercial properties include the ease of access to the property, the adequacy of related facilities, such as parking, and the ability to provide rent concessions and additional tenant improvements commensurate with local market conditions. Such competition may lead to rent concessions that could adversely affect the Operating Partnership's cash flow. Although the Operating Partnership believes its Page 4 of 73 Properties are competitive with comparable properties as to those factors within the Operating Partnership's control, over-building and other external factors could adversely affect the ability of the Operating Partnership to attract and retain tenants. For Acquisitions of Real Estate The Operating Partnership experiences competition when attempting to acquire equity interests in desirable real estate, including competition from domestic and foreign financial institutions, other REITs, life insurance companies, pension funds, trust funds, partnerships and individual investors. In competing for such acquisitions, the Operating Partnership and the Company have not given value guarantees in connection with Operating Partnership units or the Company's stock issued in such acquisitions. For Capital The Operating Partnership and the Company compete with other REITs and investors and owners for debt and equity financing. The Operating Partnership and the Company's ability to attract debt and equity capital at favorable rates is impacted in part by their positioning in the marketplace relative to similar investments. Factors impacting this include, among other things, the perceived quality of the Operating Partnership's portfolio and the risk adjustment sources of capital give to the returns they expect from their investments. In competing for capital, the Company has not entered into any forward equity commitments or other arrangements which would subject the Company to risks tied to changes in the market value of its equity securities. Working Capital The Operating Partnership's practice is to maintain cash reserves for normal repairs, replacements, improvements, working capital and other contingencies while minimizing interest expense. Available cash is kept to a minimum by using available funds to reduce the outstanding balance on the Operating Partnership's unsecured line of credit and drawing on it when necessary. Other Factors The Operating Partnership's ability to achieve operational and capital targets is impacted by economic conditions in the markets in which its Properties are located and by broader factors such as prevailing interest rates and the general availability of capital at favorable rates, both debt and equity, for real estate investments. Local economic downturns may adversely effect the occupancy and rental rates of the Operating Partnership's Properties. A lack of available capital may hinder the Operating Partnership's acquisition and development program or cause it to look to other types of transactions, such as asset redeployments, to generate needed liquidity. Compliance with laws and regulations regarding the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not expected to have any material effect upon the capital expenditures, earnings and competitive position of the Operating Partnership. The Properties have each been subject to Phase I Environmental Assessments and, where such an assessment indicated it was appropriate, Phase II Environmental Assessments (collectively, the "Environmental Reports") have been conducted. These reports have not indicated any significant environmental issues. In the event that pre-existing environmental conditions not disclosed in the Environmental Reports which require remediation are subsequently discovered, the cost of remediation will be borne by the Operating Partnership. Additionally, no assurances can be given that (i) future laws, ordinances, or regulations will not impose any material environmental liability, (ii) the current environmental condition of the Properties has not been or will not be affected by tenants and occupants of the Properties, by the condition of properties in the vicinity of the Properties or by third parties unrelated to the Operating Partnership or (iii) that the Operating Partnership will not otherwise incur significant liabilities associated with costs of remediation relating to the Properties. Page 5 of 73 Item 2. Properties The Location and Type of the Operating Partnership's Properties The Operating Partnership's 186 Properties are diversified by type (office, office/flex, industrial, retail, multi-family and hotel) and are located in four geographic regions and 24 states within the United States comprising 35 local markets. The following table sets forth the location, type and size of the Properties (by rentable square feet and/or units) along with average occupancy as of December 31, 1998.
Office Office/Flex Industrial Retail Multi-Family Square Square Square Square Units Hotel Rooms No. of Region Footage Footage Footage Footage Properties - ------------- ------------ ------------- ------------ ------------ ------------- ------------- ------------- West 885,857 2,051,831 1,427,744 394,222 958 283 58 Midwest 1,877,099 872,596 1,067,884 377,157 670 -- 36 East 2,759,270 845,510 945,220 45,546 1,385 -- 46 South 1,478,883 790,582 657,232 422,240 6,340 132 46 ------------ ------------- ------------ ------------ ------------- ------------- ------------- Total 7,001,109 4,560,519 4,098,080 1,239,165 9,353 415 186 ============ ============= ============ ============ ============= ============= ============= No. of Properties 54 49 30 13 37 3 Average Occupancy 92% 90% 98% 94% 93% 57%
For the years ended December 31, 1998, 1997 and 1996, no tenant contributed 10% or more of the total rental revenue of the Operating Partnership. The largest tenant's annual rent was approximately 1.9% of total rental revenues for the year ended December 31, 1998. A complete listing of Properties owned by the Operating Partnership at December 31, 1998 is included as part of Schedule III in Item 14. Office Properties The Operating Partnership owns 54 office Properties with total rentable square footage of 7,001,109. The office Properties range in size from 14,255 square feet to 570,151 square feet, and have lease terms ranging from one to 35 years. The office leases generally require the tenant to reimburse the Operating Partnership for increases in building operating costs over a base amount. Certain of the leases provide for rent increases that are either fixed or based on a consumer price index ("CPI"). As of December 31, 1998, the average occupancy of the office Properties was 92%. The following table sets forth, for the periods specified, the total rentable area, average occupancy, average effective base rent per leased square foot and total effective annual base rent.
Office Properties Historical Rent and Occupancy Average Effective Total Effective Total Rentable Average Occupancy Base Rent per Annual Base Rent Year Area (Sq. Ft.) Leased Sq. Ft.(1)(3) ($000s)(2) (3) - ------------------ ----------------- -------------------- -------------------- ------------------- 1998 7,001,109 92% $ 16.04 $ 103,314 1997 2,921,361 93 15.81 42,954 1996 641,923 94 13.19 7,918 1995 106,076 97 11.91 1,228 1994 105,770 88 11.44 1,065
Page 6 of 73 (1)Total Effective Annual Base Rent divided by Average Occupancy in square feet. As used herein, "Effective Base Rent" represents base rent less concessions. (2) Total Effective Annual Base Rent adjusted for any free rent given for the period. (3) In any given year, base rents are presented on an annualized basis based on results since the acquisition for properties that were acquired during the year. The following table sets forth the contractual lease expirations for leases for the office Properties as of December 31, 1998.
Office Properties (5) Lease Expirations Percentage of Total Number of Rentable Square Annual Base Rent Annual Base Rent Expiration Year Expiring Leases Footage Subject to Under Expiring Represented by Expiring Leases Leases ($000s) Expiring Leases (1) - ------------------ ----------------- -------------------- -------------------- ---------------------- 1999 (4) 234 1,114,169 $ 15,678 14.7% 2000 144 1,064,151 18,451 17.3 2001 166 960,697 16,588 15.6 2002 100 978,477 18,129 17.0 2003 81 406,689 7,825 7.4 Thereafter 113 1,695,936 29,783 28.0 ================= ==================== ==================== ====================== Total 838 6,220,119 (2) $ 106,454 (3) 100.0% ================= ==================== ==================== ======================
(1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases). (2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space). (3) This figure is based on square footage actually leased and incorporates contractual rent increases arising after 1998, and thus differs from "Total Effective Annual Base Rent" in the preceding table, which is based on 1998 rents. (4) Includes leases that have initial terms of less than one year. (5) Numbers exclude the corporate headquarters building. Office/Flex Properties The Operating Partnership owns 49 office/flex Properties aggregating 4,560,519 square feet. The office/flex Properties are designed for a combination of office and warehouse uses with greater than 10% of the rentable square footage containing office finish. The office/flex Properties range in size from 27,414 square feet to 300,894 square feet, and have lease terms ranging from one to 23 years. Most of the office/flex leases are "triple net" leases whereby the tenants are required to pay their pro rata share of the Properties' operating costs, common area maintenance, property taxes, insurance, and non-structural repairs. Some of the leases are "industrial gross" leases whereby the tenant pays as additional rent its pro rata share of common area maintenance and repair costs and its share of the increase in taxes and insurance over a specified base year cost. Certain of these leases call for fixed or CPI-based rent increases. As of December 31, 1998, the average occupancy of the office/flex Properties was 90%. The following table sets forth, for the periods specified, the total rentable area, average occupancy, average effective base rent per leased square foot and total effective annual base rent. Page 7 of 73
Office/Flex Properties Historical Rent and Occupancy Average Effective Total Effective Total Rentable Average Occupancy Base Rent per Annual Base Rent Year (4) Area (Sq. Ft.) Leased Sq. Ft. (1)(3) ($000s)(2) (3) - ------------------ ----------------- -------------------- -------------------- ------------------- 1998 4,560,519 90% $ 7.61 $ 31,235 1997 3,523,695 91 7.17 22,991 1996 247,506 96 5.50 1,307
(1) Total Effective Annual Base Rent divided by Average Occupancy in square feet. As used herein, "Effective Base Rent" represents base rent less concessions. (2) Total Effective Annual Base Rent adjusted for any free rent given for the period. (3) In any given year, base rents are presented on an annualized basis based on results since the acquisition for properties that were acquired during the year. (4) Prior to 1996, Properties currently classified as Office/Flex Properties were included in Industrial Properties. See Industrial Properties table below. The following table sets forth the contractual lease expirations for leases for the office/flex Properties as of December 31, 1998.
Office/Flex Properties Lease Expirations Percentage of Total Number of Rentable Square Annual Base Rent Annual Base Rent Expiration Year Expiring Leases Footage Subject to Under Expiring Represented by Expiring Leases Leases ($000s) Expiring Leases (1) - ------------------ ----------------- -------------------- -------------------- ---------------------- 1999 188 915,672 $ 6,565 20.6% 2000 105 641,225 4,714 14.8 2001 102 677,313 4,928 15.5 2002 32 417,161 3,447 10.9 2003 46 480,707 4,488 14.1 Thereafter 29 833,279 7,674 24.1 ================= ==================== ==================== ====================== Total 502 3,965,357 (2) $ 31,816 (3) 100.0% ================= ==================== ==================== ======================
(1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases). (2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space). (3) This figure is based on square footage actually leased and incorporates contractual rent increases arising after 1998, and thus differs from "Total Effective Annual Base Rent" in the preceding table, which is based on 1998 rents. Industrial Properties The Operating Partnership owns 30 industrial Properties aggregating 4,098,080 square feet. The industrial Properties are designed for warehouse, distribution and light manufacturing, ranging in size from 32,500 square feet to 474,426 square feet. As of December 31, 1998, 16 of the industrial Properties were leased to multiple tenants, 14 were leased to single tenants, and all 14 of the single-tenant Properties are adaptable in design to multi-tenant use. As of December 31, 1998, the average occupancy of the industrial Properties was 98%. Four of the single-tenant Properties are leased to two tenants having five years remaining on leases whose original terms were 20 years. The terms of these leases include rent increases every three years based on all or a percentage Page 8 of 73 of the change in the CPI. Under these leases the tenants are required to pay for all of the Properties' operating costs, such as common area maintenance, property taxes, insurance, and all repairs including structural repairs. Each lease gives the respective tenant a purchase option exercisable on March 1, 2002 for an amount equal to the greater of the appraised value or a specified minimum price. Management believes, based on discussions with both tenants, that neither tenant has any present intention to exercise any option to purchase. The remaining industrial Properties have leases whose terms range from 1 to 25 years. Most of the leases are "triple net" leases whereby the tenants are required to pay their pro rata share of the Properties' operating costs, common area maintenance, property taxes, insurance, and non-structural repairs. Some of the leases are "industrial gross" leases whereby the tenant pays as additional rent its pro rata share of common area maintenance and repair costs and its share of the increase in taxes and insurance over a specified base year cost. Certain of these leases call for fixed or CPI-based rent increases. The following table sets forth, for the periods specified, the total rentable area, average occupancy, average effective base rent per leased square foot and total effective annual base rent for the industrial Properties.
Industrial Properties Historical Rent and Occupancy Average Effective Total Effective Total Rentable Average Occupancy Base Rent per Annual Base Rent Year (4) Area (Sq. Ft.) Leased Sq. Ft.(1)(3) ($000s)(2) (3) - ------------------ ----------------- -------------------- -------------------- ------------------- 1998 4,098,080 98% $ 3.91 $ 15,703 1997 3,533,510 97 3.36 11,516 1996 1,778,862 99 2.41 4,244 1995 1,491,827 100 2.29 3,405 1994 1,491,827 100 2.29 3,401
(1) Total Effective Annual Base Rent divided by Average Occupancy in square feet. (2) Total Effective Annual Base Rent adjusted for any free rent given for the period. (3) In any given year, base rents are presented on an annualized basis based on results since the acquisition for properties that were acquired during the year. (4) Prior to 1996, Properties currently classified as Office/Flex Properties were included in Industrial Properties. The following table sets forth the contractual lease expirations for leases for the industrial Properties as of December 31, 1998.
Industrial Properties Lease Expirations Percentage of Total Number of Rentable Square Annual Base Rent Annual Base Rent Expiration Year Expiring Leases Footage Subject to Under Expiring Represented by Expiring Leases Leases ($000s) Expiring Leases (1) - ------------------ ----------------- -------------------- -------------------- ---------------------- 1999 23 411,592 $ 1,830 10.7% 2000 20 402,674 1,700 10.0 2001 19 394,519 1,708 10.0 2002 17 555,261 2,369 13.9 2003 5 214,275 1,005 5.9 Thereafter 12 1,946,599 8,428 49.5 ================= ==================== ==================== ====================== Total 96 3,924,920 (2) $ 17,040 (3) 100.0% ================= ==================== ==================== ======================
(1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases). (2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space). Page 9 of 73 (3) This figure is based on square footage actually leased (which excludes vacant space) and incorporates contractual rent increases arising after 1998, and thus differs from "Total Effective Annual Base Rent" in the preceding table, which is based on 1998 rents. Retail Properties The Operating Partnership owns 13 retail Properties with total rentable square footage of 1,239,165. The leases for the retail Properties have terms ranging from one to 40 years. Eleven of the retail Properties, representing 1,156,079 square feet or 93% of the total rentable area, are anchored community shopping centers. The anchor tenants of these centers are national or regional supermarkets and drug stores. As of December 31, 1998, the average occupancy of the retail Properties was 94%. The leases for the retail Properties generally include fixed or CPI-based rent increases and some include provisions for the payment of additional rent based on a percentage of the tenants' gross sales that exceed specified amounts. Retail tenants also typically pay as additional rent their pro rata share of the Properties' operating costs including common area maintenance, property taxes, insurance and non-structural repairs. Some leases contain options to renew at market rates or specified rates. The following table sets forth, for the periods specified, the total rentable area, average occupancy, average effective base rent per leased square foot and total effective annual base rent for the retail Properties.
Retail Properties Historical Rent and Occupancy Average Effective Total Effective Total Rentable Average Occupancy Base Rent per Annual Base Rent Year Area (Sq. Ft.) Leased Sq. Ft.(1)(3) ($000s)(2) (3) - ------------------ ----------------- -------------------- -------------------- ------------------- 1998 1,239,165 94% $ 8.75 $ 10,192 1997 979,088 96 7.98 7,501 1996 630,700 96 7.82 (4) 4,726 1995 285,658 95 10.76 2,915 1994 285,722 94 10.76 2,890
(1) Total Effective Annual Base Rent divided by Average Occupancy in square feet. (2) Total Effective Annual Base Rent adjusted for any free rent given for the period. (3) In any given year, base rents are presented on an annualized basis based on results since the acquisition for properties that were acquired during the year. (4) Average effective base rent per leased square foot declined in 1996 due to the acquisition of properties with lower base rents. The following table sets forth the contractual lease expirations for the retail Properties as of December 31, 1998.
Retail Properties Lease Expirations Percentage of Total Number of Rentable Square Annual Base Rent Annual Base Rent Expiration Year Expiring Leases Footage Subject to Under Expiring Represented by Expiring Leases Leases ($000s) Expiring Leases (1) - ------------------ ----------------- -------------------- -------------------- ---------------------- 1999 69 151,979 $ 1,898 17.4% 2000 37 72,344 918 8.4 2001 63 165,263 1,792 16.5 2002 15 26,301 359 3.3 2003 23 109,795 993 9.1 Thereafter 49 632,678 4,930 45.3 ================= ==================== ==================== ====================== Total 256 1,158,360 (2) $ 10,890 (3) 100.0% ================= ==================== ==================== ======================
Page 10 of 73 (1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases). (2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space). (3) This figure is based on square footage actually leased (which excludes vacant space) and incorporates contractual rent increases arising after 1998, and thus differs from "Total Effective Annual Base Rent" in the preceding table which is based on 1998 rents. Tenant Improvements and Leasing Commissions The following table summarizes by year the capitalized tenant improvement and leasing commission expenditures incurred in the renewal or re-leasing of previously occupied space since January 1, 1994.
Capitalized Tenant Improvements and Leasing Commissions 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Office Properties Square footage renewed or re-leased 579,904 174,354 39,706 79,745 18,384 Capitalized tenant improvements and commissions ($000s) $ 4,263 $ 850 $ 617 (1) $ 468 $ 58 Average per square foot of renewed or re-leased space $ 7.35 $ 4.87 $ 15.54 (1) $ 5.87 $ 3.18 Office/Flex Properties Square footage renewed or re-leased 876,490 138,658 9,000 (2) (2) Capitalized tenant improvements and commissions ($000s) $ 3,232 $ 418 $ 23 (2) (2) Average per square foot of renewed or re-leased space $ 3.69 $ 3.01 $ 2.56 (2) (2) Industrial Properties Square footage renewed or re-leased 307,896 198,055 60,000 141,523 89,000 Capitalized tenant improvements and commissions ($000s) $ 370 $ 235 $ 51 $ 114 $ 60 Average per square foot of renewed or re-leased space $ 1.20 $ 1.19 $ 0.85 $ 0.81 $ 0.67 Retail Properties Square footage renewed or re-leased 45,894 12,080 32,998 33,294 46,833 Capitalized tenant improvements and commissions ($000s) $ 283 $ 42 $ 83 $ 98 $ 59 Average per square foot of renewed or re-leased space $ 6.16 (3) $ 3.51 $ 2.53 $ 2.94 $ 1.25 All Properties Square footage renewed or re-leased 1,810,184 523,147 141,704 254,562 154,217 Capitalized tenant improvements and commissions ($000s) $ 8,148 $ 1,545 $ 774 $ 680 $ 177 Average per square foot of renewed or re-leased space $ 4.50 $ 2.95 $ 5.46 $ 2.67 $ 1.14
(1) The significant increase in capitalized tenant improvements and commissions in 1996 over the previous years is primarily the result of tenant improvements provided in connection with a lease extension of space for the principal tenant of one property. The lease was extended 10 years and expires in 2010. Page 11 of 73 (2) Prior to 1996, Properties currently classified as Office/Flex Properties were included in Industrial Properties. (3) The significant increase in capitalized tenant improvements and commissions in 1998 over the previous years is primarily the result of accrued tenant improvements to be provided to a tenant who will not occupy until January 1999. The square footage for this tenant is not included in the square footage renewed or re-leased as this tenant does not yet occupy the space. Multi-Family Properties The Operating Partnership owns 37 multi-family Properties, aggregating 9,353 units. All of the units are rented to residential tenants on either a month-to-month basis or for terms of one year or less. As of December 31, 1998, the multi-family Properties were approximately 93% leased. The following table sets forth, for the periods specified, total units, average occupancy, monthly average effective base rent per unit and total effective annual base rent for the multi-family Properties.
Multi-Family Properties Historical Rent and Occupancy Average Effective Total Effective Average Occupancy Base Rent per Annual Base Rent Year Total Units Leased Unit (1) (3) ($000s)(2) (3) - ------------------ ----------------- -------------------- -------------------- ------------------- 1998 9,353 93% $ 618 $ 64,507 1997 2,251 95 619 15,884 1996 642 94 598 (4) 4,328 1995 104 94 630 739 1994 104 98 632 774
(1) Total Effective Annual Base Rent divided by average occupied unit. (2) Total Effective Annual Base Rent adjusted for any free rent given for the period. (3) In any given year, base rents are presented on an annualized basis based on results since the acquisition for properties that were acquired during the year. (4) Average effective monthly base rent per unit declined in 1996 due to the acquisition of properties with lower base rents. Hotel Properties Through June 1998, the Operating Partnership leased the six Country Suites by Carlson hotels that it owned to Glenborough Hotel Group ("GHG") who operated them for its own account. In June 1998, two of the hotels were sold and the other four hotels were leased to other operators. In December 1998, one of the four hotels was sold to one of the operators and two other hotels are in contract to be sold to the other operator in March 1999. The buyer has an option to extend the closing of the sale to June 1999 and it is anticipated that the buyer will exercise that option. These leases terminate upon the closing of the sales of the properties. Item 3. Legal Proceedings Blumberg. The Company settled a class action complaint filed on February 21, 1995 in connection with the Consolidation. Certain parties objected to the settlement, but the settlement has been approved (or review denied) by the Superior Court of the State of California in and for San Mateo County, the California state court of appeals, and the California Supreme Court. In August 1998 the objecting parties filed a petition for writ of certiorari in the Supreme Court of the United States. The Company and the co-defendants filed a brief in opposition to the petition. The Supreme Court of the United States has not yet granted or denied the petition. Page 12 of 73 The plaintiff in the case is Anthony E. Blumberg, an investor in Equitec B, one of the Partnerships included in the Consolidation, on behalf of himself and all others (the "Blumberg Action") similarly situated. The defendants are GC, Glenborough Realty Corporation ("GRC"), Robert Batinovich, the Partnerships and the Company. The complaint alleged breaches by the defendants of their fiduciary duty and duty of good faith and fair dealing to investors in the Partnerships. The complaint sought injunctive relief and compensatory damages. The complaint alleged that the valuation of Glenborough Corporation was excessive and was done without appraisal of Glenborough Corporation's business or assets. The complaint further alleged that the interest rate for the Notes to be issued to investors in lieu of shares of Common Stock, if they so elected was too low for the risk involved and that the Notes would likely sell, if at all, at a substantial discount from their face value (as a matter entirely distinct from the litigation and subsequent settlement, the Company, as it had the option to, paid in full the amounts due plus interest in lieu of issuing Notes). On October 9, 1995 the parties entered into an agreement to settle the action. The defendants, in entering into the settlement agreement, did not acknowledge any fault, liability or wrongdoing of any kind and continue to deny all material allegations asserted in the litigation. Pursuant to the settlement agreement, the defendants will be released from all claims, known or unknown, that have been, could have been, or in the future might be asserted, relating to, among other things, the Consolidation, the acquisition of the Company's shares pursuant to the Consolidation, any misrepresentation or omission in the Registration Statement on Form S-4, filed by the Company on September 1, 1994, as amended, or the prospectus contained therein ("Prospectus/Consent Solicitation Statement"), or the subject matter of the lawsuit. In return, the defendants agreed to the following: (a) the inclusion of additional or expanded disclosure in the Prospectus Consent Solicitation Statement, and (b) the placement of certain restrictions on the sale of the stock by certain insiders and the granting of stock options to certain insiders following consummation of the Consolidation. Plaintiff's counsel indicated that it would request that the court award it $850,000 in attorneys' fees, costs and expenses. In addition, plaintiffs' counsel indicated it would request the court for an award of $5,000 payable to Anthony E. Blumberg as the class representative. The defendants agreed not to oppose such requests. On October 11, 1995, the court certified the class for purposes of settlement, and scheduled a hearing to determine whether it should approve the settlement and class counsel's application for fees. A notice of the proposed settlement was distributed to the members of the class on November 15, 1995. The notice specified that, in order to be heard at the hearing, any class member objecting to the proposed settlement must, by December 15, 1995, file a notice of intent to appear, and a detailed statement of the grounds for their objection. Objections were received from a small number of class members. The objections reiterated the claims in the original Blumberg complaint, and asserted that the settlement agreement did not adequately compensate the class for releasing those claims. One of the objections was filed by the same law firm that brought the BEJ Action described below. At a hearing on January 17, 1996, the court heard the arguments of the objectors seeking to overturn the settlement, as well as the arguments of the plaintiffs and the defendants in defense of the settlement. The court granted all parties a period of time in which to file additional pleadings. On June 4, 1996, the court granted approval of the settlement, finding it fundamentally fair, adequate and reasonable to the respective parties to the settlement. However, the objectors gave notice of their intent to appeal the June 4 decision. All parties filed their briefs and a hearing was held on February 3, 1998. On February 17, 1998, the Court of Appeals rejected the objectors' contentions and upheld the settlement. The objectors filed with the California Supreme Court a petition for review, which was denied on May 21, 1998. On August 18, 1998, the objectors filed a petition for writ of certiorari in the Supreme Court of the United States. On September 18, 1998, the Company and the co-defendants filed a brief in opposition to the petition. The Supreme Court has not yet granted or denied the petition. BEJ Equity Partners. On December 1, 1995, a second class action complaint relating to the Consolidation was filed in Federal District Court for the Northern District of California (the "BEJ Action"). The plaintiffs in the BEJ Action have voluntarily stayed the action pending resolution of the Blumberg Action. The plaintiffs in the BEJ Action are BEJ Equity Partners, J/B Investment Partners, Jesse B. Small and Sean O'Reilly as custodian f/b/o Jordan K. O'Reilly, who as a group held limited partner interests in certain of the Partnerships included Page 13 of 73 in the Consolidation known as Outlook Properties Fund IV, Glenborough All Suites Hotels, L.P., Glenborough Pension Investors, Equitec Income Real Estate Investors-Equity Fund 4, Equitec Income Real Estate Investors C and Equitec Mortgage Investors Fund IV, on behalf of themselves and all others similarly situated. The defendants are GRC, GC, the Company, GPA, Ltd., Robert Batinovich and Andrew Batinovich. The Partnerships are named as nominal defendants. This action alleges the same disclosure violations and breaches of fiduciary duty as were alleged in the Blumberg Action. The complaint sought injunctive relief, which was denied at a hearing on December 22, 1995. At that hearing, the court also deferred all further proceedings in this case until after the scheduled January 17, 1996 hearing in the Blumberg Action. Following several stipulated extensions of time for the Company to respond to the complaint, the Company filed a motion to dismiss the case. Plaintiffs in the BEJ Action voluntarily stayed the action pending resolution of the Blumberg Action; such plaintiffs can revive their lawsuit. It is management's position that the BEJ Action, and the objections to the settlement of the Blumberg Action, are without merit, and management intends to pursue a vigorous defense in both matters. In view of the denial of the objector's petition for review in the Blumberg Action, among other things, the Company believes that it is very unlikely that this litigation would result in a liability that would exceed the accrued liability by a material amount. However, given the inherent uncertainties of litigation, there can be no assurance that the ultimate outcome in these two legal proceedings will be in the Company's favor. Certain other claims and lawsuits have arisen against the Operating Partnership and the Company in their normal course of business. The Operating Partnership and the Company believe that such other claims and lawsuits will not have a material adverse effect on the Operating Partnership's or the Company's financial position, cash flow or results of operations. Item 4. Submission of Matters to a Vote of Security Holders None Page 14 of 73 PART II Item 5. Market for Partnership's Common Equity and Related Partner Matters (a) Market Information There is no established trading market for the Units issued by the Operating Partnership. Holders As of December 31, 1998, there were 100 holders of Operating Partnership Units. Distributions Since its organization, the Operating Partnership has paid regular quarterly distributions to holders of its Units. During the years ended December 31, 1996, 1997 and 1998, the Operating Partnership paid the following quarterly distributions: Distributions Total Quarterly Period Per Unit Distributions - ------------------------ ---------------- -------------------- 1996 First Quarter $ 0.30 $ 1,194,000 Second Quarter $ 0.30 $ 1,201,000 Third Quarter $ 0.30 $ 2,346,000 Fourth Quarter $ 0.32 $ 2,511,000 1997 First Quarter $ 0.32 $ 3,744,000 Second Quarter $ 0.32 $ 6,076,000 Third Quarter $ 0.32 $ 9,903,000 Fourth Quarter $ 0.42 $ 13,210,000 1998 First Quarter $ 0.42 $ 17,122,000 Second Quarter $ 0.42 $ 20,130,000 (1) Third Quarter $ 0.42 $ 20,650,000 (2) Fourth Quarter $ 0.42 $ 20,607,000 (2) (1) Total distributions include a preferred partner interest distribution paid to the Company of $3,910,000. (2) Total distributions include a preferred partner interest distribution paid to the Company of $5,570,000. The Operating Partnership intends to pay regular quarterly distributions to its Unit holders. Future distributions by the Operating Partnership will be at the discretion of management and will depend upon the actual operations of the Operating Partnership, its financial condition, capital requirements, applicable legal restrictions and such other factors as management deems relevant. The Operating Partnership intends to continue its policy of paying quarterly distributions, but there can be no assurance that distributions will continue or be paid at any specific level. (b) Recent Sales of Unregistered Securities Sales of unregistered securities by the Operating Partnership during 1998 are described in the Operating Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. Item 6. Selected Financial Data Set forth below are selected financial data for: Glenborough Properties, L.P.: Consolidated balance sheet data is presented as of December 31, 1998, 1997, 1996 and 1995. Consolidated operating data is presented for the years ended December 31, 1998, 1997 and 1996, and As Adjusted consolidated operating data is presented for the years Page 15 of 73 ended December 31, 1995 and 1994. The As Adjusted data assumes the Consolidation and related transactions occurred on January 1, 1994, in order to present the operations of the Operating Partnership for those periods as if the Consolidation had been in effect for those periods. As Adjusted data is presented to provide amounts which are comparable to the consolidated results of operations of the Operating Partnership for the years ended December 31, 1998, 1997 and 1996. The GRT Predecessor Entities: Combined operating data is presented for the years ended December 31, 1995 and 1994. Combined balance sheet data is presented as of December 31, 1994. This selected financial data should be read in conjunction with the financial statements of Glenborough Properties, L.P., including the notes thereto, included in Item 14.
As of and for the Year Ended December 31, --------------------------------------------------------------------------------------- Historical Historical Historical As Adjusted Historical As Adjusted Historical 1998 1997 1996 1995 1995 1994 1994 ------------ ----------- ----------- ------------- ----------- ------------ ------------ (In thousands, except per share data) Operating Data: Rental Revenue......... $ 227,956 $ 61,393 $ 17,943 $ 13,495 $ 15,454 $ 12,867 $ 13,797 Fees and reimbursements 2,802 719 311 -- 16,019 -- 13,327 Interest and other income 4,557 1,627 1,070 982 2,698 1,109 3,557 Equity in earnings of Glenborough Corporation 1,533 1,687 1,571 -- -- -- -- Total Revenues(1)...... 241,644 66,917 21,216 14,477 34,171 13,976 30,681 Property operating expenses 75,426 20,904 5,735 4,624 8,576 4,188 6,782 General and administrative 10,682 4,002 1,490 983 15,947 954 13,454 Interest expense....... 53,289 9,668 3,913 2,767 2,129 2,767 1,140 Depreciation and amortization......... 50,169 14,829 4,583 3,654 4,762 3,442 4,041 Income (loss) from operations before extraordinary items and Preferred Partner Interest 47,755 17,514 (1,742) 1,586 524 (5,145) 1,580 Distributions........ Net income (loss) before Preferred Partner Interest 46,355 16,671 (1,928) 1,586 524 (5,145) 1,580 Distributions(2) Net income (loss) allocable to general and limited partners 25,735 16,671 (1,928) 1,586 524 (5,145) 1,580 Per Unit (3): Net income (loss) before extraordinary items allocable to general and limited partners 0.78 0.92 (0.24) 0.40 -- (1.29) -- Net income (loss) allocable to general and limited partners 0.74 0.88 (0.27) 0.40 -- (1.29) -- Balance Sheet Data: Net investment in real estate $1,742,439 $ 825,218 $ 161,945 -- $ 77,574 -- $ 63,994 Mortgage loans receivable, net 42,420 3,692 9,905 -- 7,216 -- 19,953 Total assets........... 1,876,246 864,450 183,335 -- 95,801 -- 117,321 Total debt............. 922,097 228,299 75,891 -- 33,685 -- 17,906 Partners' equity....... 925,228 623,884 104,128 -- 57,592 -- 80,558 Other Data: Distributions per unit (excluding Preferred Partner Interest Distributions) (4) $ 1.68 $ 1.38 $ 1.22 $ 1.20 $ -- $ 1.20 $ -- Preferred Partner Interest 20,620 -- -- -- -- -- -- Distributions EBIDA(5)............... 150,740 40,520 13,670 -- 9,291 -- 10,269 Ratios: Ratio of Earnings to Fixed 1.86 2.81 0.55 -- 1.41 -- 2.58 Charges (6) Ratio of Earnings to Fixed Charges and Preferred Partner Interest Distributions(7) 1.35 2.81 0.55 -- 1.41 -- 2.58 Annual Service Charge Coverage 2.31 4.29 3.67 -- -- -- -- (8) Debt to Total Assets (9) 48.9% 27.0% 39.0% -- -- -- -- Secured Debt to Total Assets (10) 36.5% 16.7% 37.3% -- -- -- -- Total Unencumbered Assets to Unsecured Debt (11) 283.0% 632.9% -- -- -- -- -- Cash flow provided by (used for): Operating activities. $ 77,068 $ 19,570 $ 5,163 -- $(10,608) -- $ 22,426 Investing activities. (614,043) (569,373) (61,974) -- 8,656 -- (1,947) Financing activities. 537,324 552,688 57,458 -- (17,390) -- (2,745)
Page 16 of 73 (1) Certain revenues which are included in the historical combined amounts for 1995 and prior are not included on an adjusted basis. These revenues are included in the financial statements of the unconsolidated Associated Companies, on an as adjusted basis, from which the Operating Partnership receives lease payments and the Company and the Operating Partnership receive dividends. (2) Historical 1996 and as adjusted 1994 net losses reflect $7,237 of Consolidation and litigation costs incurred in connection with the Consolidation. As adjusted 1994 data give effect to the Consolidation and related transactions as if such transactions had occurred on January 1, 1994, whereas historical 1996 data reflect such transactions in the periods they were expensed. The Consolidation and litigation costs were expensed on January 1, 1996, the Operating Partnership's first day of operations. (3) As adjusted net income per unit is based upon as adjusted weighted average units outstanding of 3,979,376 for 1995 and 1994. (4) Historical distributions per unit for the years ended December 31, 1998, 1997 and 1996 consist of distributions declared for the periods then ended. As adjusted distributions per unit for each of the years ended December 31, 1995 and 1994 are based on $0.30 per unit per quarter. (5) EBIDA is computed as income (loss) before minority interests and extraordinary items plus interest expense, depreciation and amortization, gains (losses) on disposal of properties and loss provisions. In 1996, consolidation and litigation costs were also added back to net income to determine EBIDA. The Operating Partnership believes that in addition to net income and cash flows, EBIDA is a useful measure of the financial performance of an equity REIT because, together with net income and cash flows, EBIDA provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions, developments and other capital expenditures. To evaluate EBIDA and the trends it depicts, the components of EBIDA, such as rental revenues, rental expenses, real estate taxes and general and administrative expenses, should be considered. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Excluded from EBIDA are financing costs such as interest as well as depreciation and amortization, each of which can significantly affect the Operating Partnership's results of operations and liquidity and should be considered in evaluating the Operating Partnership's operating performance. Further, EBIDA does not represent net income or cash flows from operating, financing and investing activities as defined by generally accepted accounting principles and does not necessarily indicate that cash flows will be sufficient to fund all of the Operating Partnership's cash needs. It should not be considered as an alternative to net income as an indicator of the Operating Partnership 's operating performance or as an alternative to cash flows as a measure of liquidity. Further, EBIDA as disclosed by other REITs may not be comparable to the Operating Partnership's calculation of EBIDA. The following table reconciles net income (loss) of the Operating Partnership to EBIDA for the periods presented (in thousands):
The Operating Partnership GRT Predecessor Entities ----------------------------------- ------------------------ For the Year Ended December 31, --------------------------------------------------------------- Historical Historical Historical Historical Historical 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ------------ Net income (loss) before Preferred Partner $ 46,355 $ 16,671 $ (1,928) $ 524 $ 1,580 Interest Distributions Extraordinary items..... 1,400 843 186 -- -- Interest expense........ 53,289 9,668 3,913 2,129 1,140 Depreciation and 50,169 14,829 4,583 4,762 4,041 amortization Gains (losses) on disposal of properties and collection of mortage (4,796) (1,491) (321) -- -- loan receivable...... Loss on interest rate protection agreement. 4,323 -- -- -- -- Consolidation and -- -- 7,237 -- -- litigation costs Loss provisions......... -- -- -- 1,876 3,508 =========== =========== =========== =========== ============ EBIDA................... $ 150,740 $ 40,520 $ 13,670 $ 9,291 $ 10,269 =========== =========== =========== =========== ============
(6) The ratio of earnings to fixed charges is computed as net income (loss) from operations, before extraordinary items, plus fixed charges (excluding capitalized interest) divided by fixed charges. Fixed charges consist of interest costs including amortization of deferred financing costs. (7) The ratio of earnings to fixed charges and Preferred Partner Interest Distributions is computed as net income (loss) from operations, before extraordinary items, plus fixed charges (excluding capitalized interest) divided by fixed charges plus Preferred Partner Interest Distributions. Fixed charges consist of interest costs including amortization of deferred financing costs. (8) The annual service charge coverage is computed as EBIDA divided by annual service charge. Annual Service Charge for any period means the aggregate interest expense for such period and the amortization during such period of any original issue discount of, debt of the Operating Partnership and its subsidiaries. (9) Debt to total assets is computed as debt divided by total assets. (10) Secured debt to total assets is computed as secured debt divided by total assets. (11) Total unencumbered assets to unsecured debt is computed as total unencumbered assets divided by unsecured debt. Page 17 of 73 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the financial condition and results of operations of the Operating Partnership should be read in conjunction with the selected financial data in Item 6 and the Consolidated Financial Statements of Glenborough Properties, L.P., including the notes thereto, included in Item 14. Results of Operations Comparison of the year ended December 31, 1998 to the year ended December 31, 1997. Following is a table of net operating income by property type, for comparative purposes, presenting the results for the years ended December 31, 1998 and 1997.
Results of Operations by Property Type For the Years Ended December 31, 1998 and 1997 (in thousands) Office/ Multi- Property Eliminating Total Office Flex Industrial Retail Family Hotel Total Entry(1) Reported 1998 Rental Revenue $117,746 $36,987 $16,104 $12,072 $40,865 $4,182 $227,956 -- $227,956 Operating Expenses 44,775 10,898 3,609 3,840 17,235 967 81,324 ($5,898) 75,426 Net Operating Income 72,971 26,089 12,495 8,232 23,630 3,215 146,632 5,898 152,530 Percentage of Total NOI 50% 18% 8% 6% 16% 2% 100% 1997 Rental Revenue $ 25,071 $10,354 $ 7,320 $ 7,224 $ 5,536 $5,980 $ 61,485 ($92) $ 61,393 Operating Expenses 9,986 3,062 1,459 2,183 2,309 1,894 20,893 11 20,904 Net Operating Income 15,085 7,292 5,861 5,041 3,227 4,086 40,592 (103) 40,489 Percentage of Total NOI 37% 18% 15% 12% 8% 10% 100%
(1) Eliminating entry represents internal market level property management fees included in operating expenses to provide comparison to industry performance. Rental Revenue. Rental revenue increased $166,563,000, or 271%, to $227,956,000 for the year ended December 31, 1998, from $61,393,000 for the year ended December 31, 1997. The increase included growth in revenue from the office, office/flex, industrial, retail and multi-family Properties of $92,675,000, $26,633,000, $8,784,000, $4,848,000 and $35,329,000, respectively. These increases were partially offset by a $1,798,000 decrease in revenue from the hotel Properties due to the 1998 sales of two hotels. Rental revenue for the year ended December 31, 1998, included $17,404,000 of rental revenue generated from the acquisition of 20 properties in 1996 (the "1996 Acquisitions"), $96,130,000 of rental revenue generated from the acquisition of 90 properties in 1997 (the "1997 Acquisitions") and $104,254,000 of rental revenue generated from the acquisition of 69 properties in 1998 (the "1998 Acquisitions"). Fees and Reimbursements. Fees and reimbursements revenue consists primarily of property management fees, asset management fees and lease commissions paid to the Operating Partnership under property and asset management agreements. This revenue increased $2,083,000, or 290%, to $2,802,000 for the year ended December 31, 1998, from $719,000 for the year ended December 31, 1997. The change consists primarily of increased lease commissions from an affiliated entity and fees resulting from the sale of managed properties. Page 18 of 73 Interest and Other Income. Interest and other income increased $2,930,000, or 180%, to $4,557,000 for the year ended December 31, 1998, from $1,627,000 for the year ended December 31, 1997. This increase is primarily due to $1,749,000 of interest income on a mortgage loan receivable secured by Gateway Center which originated on June 30, 1998. In addition, in 1998, the Operating Partnership invested approximately $20 million in the securities of a private REIT which was accounted for using the equity method. In 1998, the Operating Partnership recognized approximately $990,000 as equity in the earnings of this private REIT. Equity in Earnings of Glenborough Corporation. Equity in earnings of Glenborough Corporation decreased $154,000, or 9%, to $1,533,000 for the year ended December 31, 1998, from $1,687,000 for the year ended December 31, 1997. This decrease is due to a reduction in the number of managed properties upon the sale of such properties. Net Gain on Sales of Real Estate Assets. The net gain on sales of real estate assets of $4,796,000 during the year ended December 31, 1998, resulted from the sales of one office property, two office/flex properties, four industrial properties, one multi-family property and three hotel properties from the Operating Partnership's portfolio. This net gain was offset by a $3.1 million loss on the sale of the Operating Partnership's investment in the securities of a private REIT. The net gain on sales of real estate assets of $839,000 during the year ended December 31, 1997, resulted from the sales of 16 retail properties from the Operating Partnership's portfolio. Gain on Collection of Mortgage Loan Receivable. The gain on collection of mortgage loan receivable of $652,000 during the year ended December 31, 1997 resulted from the collection of a mortgage loan receivable which had a net carrying value of $6,700,000. The payoff amount totaled $6,863,000, plus a $500,000 note receivable, which, net of legal costs, resulted in a gain of $652,000. Property Operating Expenses. Property operating expenses increased $54,522,000, or 261%, to $75,426,000 for the year ended December 31, 1998, from $20,904,000 for the year ended December 31, 1997. This increase primarily consists of $22,750,000 attributable to the 1997 Acquisitions and $31,997,000 attributable to the 1998 Acquisitions. General and Administrative Expenses. General and administrative expenses increased $6,680,000, or 167%, to $10,682,000 for the year ended December 31, 1998, from $4,002,000 for the year ended December 31, 1997. The increase is primarily due to increased salary and overhead costs resulting from the 1997 Acquisitions and 1998 Acquisitions. As a percentage of rental revenue, general and administrative expenses actually decreased from 6.5% for the year ended December 31, 1997 to 4.7% for the year ended December 31, 1998. Depreciation and Amortization. Depreciation and amortization increased $35,340,000, or 238%, to $50,169,000 for the year ended December 31, 1998, from $14,829,000 for the year ended December 31, 1997. The increase is primarily due to depreciation and amortization associated with the 1997 Acquisitions and 1998 Acquisitions. Interest Expense. Interest expense increased $43,621,000, or 451%, to $53,289,000 for the year ended December 31, 1998, from $9,668,000 for the year ended December 31, 1997. Substantially all of the increase was the result of higher average borrowings during the year ended December 31, 1998, as compared to the year ended December 31, 1997, due to new debt and the assumption of debt related to the 1997 Acquisitions and 1998 Acquisitions. Loss on Interest Rate Protection Agreement. During 1998, the Operating Partnership entered into a forward interest rate agreement to lock in the risk-free interest component of a portion of a secured mortgage to be issued in October 1998. The 10-year Treasury rates decreased during the term of the hedge. During the fourth quarter of 1998, the Operating Partnership recorded an expense for its payment of $4,323,000 to terminate a portion of the forward interest rate agreement in connection with a reduction in the amount of the mortgage to be issued. The Operating Partnership's payment of $6,244,000 in settlement of the remaining portion of the forward interest rate agreement will offset the reduced financing costs of the $248.8 million mortgage issued in October 1998. Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt of $1,400,000 during the year ended December 31, 1998, consists of prepayment penalties and the write-off of unamortized loan fees upon the early payoff of debt. Various loans were paid-off early when more favorable terms were obtained through new financing Page 19 of 73 (discussed below) and upon the sale of one of the hotels. Loss on early extinguishment of debt of $843,000 during the year ended December 31, 1997, resulted from the write-off of unamortized loan fees related to a $50 million secured line of credit which was replaced with a $250 million unsecured line of credit (the "Credit Facility") from a commercial bank. Comparison of the year ended December 31, 1997 to the year ended December 31, 1996. Following is a table of net operating income by property type, for comparative purposes, presenting the results for the years ended December 31, 1997 and 1996.
Results of Operations by Property Type For the Years Ended December 31, 1997 and 1996 (in thousands) Office/ Multi- Property Eliminating Total Office Flex Industrial Retail Family Hotel Total Entry Reported 1997 Rental Revenue $25,071 $10,354 $7,320 $7,224 $5,536 $5,980 $61,485 ($92) $61,393 Operating Expenses 9,986 3,062 1,459 2,183 2,309 1,894 20,893 11 20,904 Net Operating Income 15,085 7,292 5,861 5,041 3,227 4,086 40,592 (103) 40,489 Percentage of Total NOI 37% 18% 15% 12% 8% 10% 100% 1996 Rental Revenue $ 3,905 $ 769 $3,491 $3,746 $1,519 $4,513 $17,943 $17,943 Operating Expenses 1,697 275 469 991 601 1,698 5,731 4 5,735 Net Operating Income 2,208 494 3,022 2,755 918 2,815 12,212 (4) 12,208 Percentage of Total NOI 18% 4% 25% 23% 7% 23% 100%
Rental Revenue. Rental revenue increased $43,450,000, or 242%, to $61,393,000 for the year ended December 31, 1997, from $17,943,000 for the year ended December 31, 1996. The increase included growth in revenue from the office, office/flex, industrial, retail, multi-family and hotel Properties of $21,166,000, $9,585,000, $3,829,000, $3,478,000, $4,017,000 and $1,467,000, respectively. Of the rental revenue for the year ended December 31, 1997, $48,030,000 represents rental revenue generated from the acquisition of 20 properties in 1996 (the "1996 Acquisitions") and the acquisition of 90 properties during the year ended December 31, 1997 (the "1997 Acquisitions"). The increase in rental revenue for the year ended December 31, 1997, was partially offset by a decrease in revenue due to the 1996 sale of two industrial properties and the 1997 sales of sixteen retail properties. Fees and Reimbursements. Fees and reimbursements revenue consists primarily of property management fees, asset management fees and lease commissions paid to the Operating Partnership under property and asset management agreements. This revenue increased $408,000, or 131%, to $719,000 for the year ended December 31, 1997, from $311,000 for the year ended December 31, 1996. The increase primarily consisted of increases in asset management fees of $131,000, property management fees of $257,000 and lease commissions of $20,000. The Operating Partnership's contract was expanded to include asset management fees in 1997. Interest and Other Income. Interest and other income, which consists primarily of interest on cash investments and mortgage loans receivable, increased $557,000, or 52%, to $1,627,000 for the year ended December 31, 1997, from $1,070,000 for the year ended December 31, 1996. The increase was primarily due to an increase in interest income as a result of higher invested cash balances and interest income from the Grunow mortgage loan receivable. This increase is partially offset by a reduction in interest income due to the payoff of the Hovpark mortgage loan receivable in January 1997. Page 20 of 73 Equity in Earnings of Glenborough Corporation. Equity in earnings of Glenborough Corporation increased $116,000, or 7%, to $1,687,000 for the year ended December 31, 1997, from $1,571,000 for the year ended December 31, 1996, due to increased transaction fees earned by GC. Net Gain on Sales of Rental Properties. The net gain on sales of rental properties of $839,000 during the year ended December 31, 1997, resulted from the sales of sixteen retail properties. The net gain on sales of rental properties of $321,000 during the year ended December 31, 1996, resulted from the sale of two self-storage facilities from the Operating Partnership's industrial portfolio. Gain on Collection of Mortgage Loan Receivable. The gain on collection of mortgage loan receivable of $652,000 during the year ended December 31, 1997 resulted from the collection of the Hovpark mortgage loan receivable which had a net carrying value of $6,700,000. The payoff amount totaled $6,863,000 in cash, plus a $500,000 note receivable, which, net of legal costs, resulted in a gain of $652,000. Property Operating Expenses. Property operating expenses increased $15,169,000, or 264%, to $20,904,000 for the year ended December 31, 1997, from $5,735,000 for the year ended December 31, 1996. This increase represents property operating expenses attributable to the 1996 Acquisitions and the 1997 Acquisitions. General and Administrative Expenses. General and administrative expenses increased $2,512,000, or 169%, to $4,002,000 for the year ended December 31, 1997, from $1,490,000 for the year ended December 31, 1996. The increase is primarily due to increased salary and overhead costs resulting from the 1996 Acquisitions and the 1997 Acquisitions. As a percentage of rental revenue, general and administrative expenses actually decreased from 8.3% for the year ended December 31, 1996 to 6.5% for the year ended December 31, 1997. Depreciation and Amortization. Depreciation and amortization increased $10,246,000, or 224%, to $14,829,000 for the year ended December 31, 1997, from $4,583,000 for the year ended December 31, 1996. The increase is primarily due to depreciation and amortization associated with the 1996 Acquisitions and the 1997 Acquisitions. Interest Expense. Interest expense increased $5,755,000, or 147%, to $9,668,000 for the year ended December 31, 1997, from $3,913,000 for the year ended December 31, 1996. Substantially all of the increase was the result of higher average borrowings during the year ended December 31, 1997, as compared to the year ended December 31, 1996, due to new debt and the assumption of debt related to the 1996 Acquisitions and the 1997 Acquisitions. Consolidation Costs. Consolidation costs in 1996 consist of the costs associated with preparing, printing and mailing the Prospectus/Consent Solicitation Statement and other documents related to the Consolidation, and all other costs incurred in the forwarding of the Prospectus/Consent Solicitation Statement to investors. Litigation Costs. Litigation costs consist of the legal fees incurred in connection with defending two class action complaints filed by investors in certain of the GRT Predecessor Entities as well as an accrual for the proposed settlement in one case. Loss on early extinguishment of debt. Loss on early extinguishment of debt of $843,000 during the year ended December 31, 1997, resulted from the write-off of unamortized loan fees related to a $50 million secured line of credit which was replaced with a new $250 million unsecured line of credit (the "Credit Facility") from a commercial bank. Loss on early extinguishment of debt of $186,000 during the year ended December 31, 1996, resulted from the write-off of unamortized loan fees related to a $10,000,000 line of credit from Imperial Bank which was paid-off with proceeds from a $50 million secured line of credit from a commercial bank. Page 21 of 73 Liquidity and Capital Resources Cash Flows For the year ended December 31, 1998, cash provided by operating activities increased by $68,278 to $88,129 as compared to $19,851 in 1997. The increase is primarily due to an increase in net income (before depreciation and amortization and net gain on sales of real estate assets and collection of mortgage loan receivable) of $63,061,000 due to the 1997 Acquisitions and 1998 Acquisitions. Cash used for investing activities increased by $44,670,000 to $614,043,000 for the year ended December 31, 1998, as compared to $569,373,000 in 1997. The increase is primarily due to the 1998 Acquisitions, investments in development and additions to mortgage loans receivable. This increase was partially offset by the collection of a mortgage loan receivable in 1997 and the proceeds from the 1998 sales of real estate assets. Cash provided by financing activities decreased by $26,144 to $526,263 for the year ended December 31, 1998, as compared to $552,407 in 1997. This change was primarily due to a decrease in contributions from the Company of the net proceeds from the issuance of stock. In 1998, the Company completed one offering of Preferred Stock (as discussed below) as compared to three offerings of Common Stock in 1997. The majority of this decrease is offset by an increase in proceeds from new debt. The Operating Partnership expects to meets its short-term liquidity requirements generally through its working capital, its Credit Facility (as defined below) and cash generated by operations. The Operating Partnership believes that its cash generated by operations will be adequate to meet operating requirements and to make distributions 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 Operating Partnership'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 Operating Partnership's principal sources of funding for acquisitions, development, expansion and renovation of properties include an unsecured Credit Facility, permanent secured debt financing, public unsecured debt financing, contributions from the Company, privately placed financing, the issuance of Operating Partnership units and cash flow provided by operations. Mortgage Loans Receivable Mortgage loans receivable increased from $3,692,000 at December 31, 1997, to $42,420,000 at December 31, 1998. This increase was primarily due to a loan made by the Operating Partnership under a development alliance (as discussed below) which had an outstanding balance (including accrued interest) of $35,336,000 at December 31, 1998, and a $3,600,000 loan made by the Operating Partnership to the buyer of one of the hotel properties. Secured and Unsecured Financing Mortgage loans payable increased from $148,139,000 at December 31, 1997, to $708,578,000 at December 31, 1998. This increase resulted from the assumption of mortgage loans totaling approximately $358.9 million in connection with the 1998 Acquisitions and new financing of approximately $248.8 million (as discussed below). These increases were partially offset by the payoff of approximately $42.1 million of mortgage loans in connection with 1998 sales of properties and refinancing of debt, and scheduled principal payments of approximately $6.5 million on other mortgage debt. The Operating Partnership has an unsecured line of credit provided by a commercial bank (the "Credit Facility"). Outstanding borrowings under the Credit Facility decreased from $80,160,000 at December 31, 1997, to $63,519,000 at December 31, 1998. The $80,160,000 balance outstanding at December 31, 1997, was paid off in January 1998 with proceeds from the January 1998 Convertible Preferred Stock Offering (discussed below). In December 1998, due in part to an overall slowing of acquisition activity, the Operating Partnership reduced its Credit Facility from $250 million to $100 million. As part of the modification, certain covenants that relate to the Operating Partnership's development activity were changed and the interest rate was modified to LIBOR plus 1.38% to 1.75%. This rate is an increase over the previous rate of LIBOR plus 1.10% to 1.30% which was a direct result of increased credit spreads in the market. Page 22 of 73 In January 1998, the Operating Partnership closed a $150 million loan with a commercial bank (the "Interim Loan"). The Interim Loan had a term of three months with interest at LIBOR plus 1.75%. The purpose of the Interim Loan was to fund acquisitions. The Interim Loan was paid off in March 1998 with proceeds from the issuance of $150 million of unsecured Series A Senior Notes (discussed below). In June 1998, the Operating Partnership obtained a $150 million unsecured loan from a commercial bank (the "Bridge Loan") which had a variable interest rate of LIBOR plus 1.3%, and a maturity date of December 31, 1998. Approximately $147.7 million was drawn under the Bridge Loan to fund acquisitions and development activities. The Operating Partnership paid off this loan on October 30, 1998 with proceeds from the $248.8 million financing discussed below. In October 1998, the Operating Partnership obtained $248.8 million of financing which has a term of ten years, bears interest at a fixed rate of 6.125% (effective interest rate of 6.50%) and is secured by 35 properties. The proceeds were used to retire the $150 million Bridge Loan which had a December 31, 1998 maturity date, to pay off four mortgage loans and to reduce the outstanding balance of the Credit Facility. At December 31, 1998, the Operating Partnership's total indebtedness included fixed-rate debt of $733,348,000 (including $390,461,000 subject to cross-collateralization) and floating-rate indebtedness of $188,749,000 (including $114,950,000 subject to cross-collateralization). Approximately 61% of the Operating Partnership's total assets, comprising 114 properties, is encumbered by debt at December 31, 1998. It is the Operating Partnership's policy to manage its exposure to fluctuations in market interest rates through the use of fixed rate debt instruments to the extent possible. At December 31, 1998, approximately 20% of the Operating Partnership's outstanding debt, including amounts borrowed under the Credit Facility, were subject to variable rates. The Operating Partnership 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 Operating Partnership's policy to engage in hedging activities for previously outstanding debt instruments or for speculative purposes. At December 31, 1998, the Operating Partnership was not a party to any open interest rate protection agreements. Equity and Debt Offerings In January 1998, the Company completed a public offering of 11,500,000 shares of 7 3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible Preferred Stock Offering" or the "January 1998 Offering"). The 11,500,000 shares were sold at a per share price of $25.00 for net proceeds of approximately $276 million, which were contributed to the Operating Partnership and then used to repay the outstanding balance under the Operating Partnership's Credit Facility, to fund certain subsequent property acquisitions and for general corporate purposes. In March 1998, the Operating Partnership issued $150 million of unsecured 7.625% Series A Senior Notes (the "Notes") in an unregistered 144A offering. The Notes mature on March 15, 2005, unless previously redeemed. Interest on the Notes is payable semiannually on March 15 and September 15, commencing September 15, 1998. The Operating Partnership used the net proceeds of the offering to repay the outstanding balance under the Interim Loan. In May 1998, the Operating Partnership filed a registration statement with the Securities and Exchange Commission (the "SEC") to exchange all outstanding Notes (the "Old Notes") for Notes which have been registered under the Securities Act of 1933 (the "New Notes"). The form and term of the New Notes are substantially identical to the Old Notes in all material respects, except that the New Notes are registered under the Securities Act, and therefore are not subject to certain transfer restrictions, registration rights and related special interest provisions applicable to the Old Notes. In January 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 previously filed shelf registration statement of the Company. 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 Page 23 of 73 January 1999 Shelf Registration Statement to issue up to $300 million in debt securities and $801.2 million in equity securities, respectively. Development Alliances The Operating Partnership has formed 4 development alliances to which it has committed approximately $42 million for the development of approximately 1.4 million square feet of office, office/flex and distribution properties and 2,050 multi-family units in North Carolina, Colorado, Texas, New Jersey, Kansas and Michigan. As of December 31, 1998, the Operating Partnership has advanced approximately $33 million. Under these development alliances, the Operating Partnership has certain rights to purchase the properties upon completion of development and, thus, through these alliances, the Operating Partnership could acquire an additional 1.4 million square feet of commercial properties and 2,050 multi-family units over the next five years. In addition, the Operating Partnership has loaned approximately $35 million under another development alliance to continue the build-out of a 1,200 acre master-planned development in Denver, Colorado. Inflation Substantially all of the leases at the office/flex, industrial and retail Properties provide for pass-through to tenants of certain operating costs, including real estate taxes, common area maintenance expenses, and insurance. Leases at the multi-family properties generally provide for an initial term of one month or one year and allow for rent adjustments at the time of renewal. Leases at the office Properties typically provide for rent adjustment and pass-through of certain operating expenses during the term of the lease. All of these provisions may permit the Operating Partnership to increase rental rates or other charges to tenants in response to rising prices and therefore, serve to reduce the Operating Partnership's exposure to the adverse effects of inflation. Forward Looking Statements; Factors That May Affect Operating Results This Report on Form 10-K contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, including statements regarding the Operating Partnership's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward looking statements include statements regarding potential acquisitions, the anticipated performance of future acquisitions, recently completed acquisitions and existing properties, and statements regarding the Operating Partnership's financing activities. All forward looking statements included in this document are based on information available to the Operating Partnership on the date hereof. It is important to note that the Operating Partnership's actual results could differ materially from those stated or implied in such forward looking statements. Some of the factors that could cause actual results to differ materially are set forth below. The Limited Availability of and Competition for Real Estate Acquisitions May Restrict Our Ability to Grow Our growth depends, in part, upon acquisitions. We cannot be sure that properties will be available for acquisition or, if available, that we will be able to purchase those properties on favorable terms. The unavailability of such acquisitions could limit our growth. Furthermore, we face competition from several other businesses, individuals, fiduciary accounts and plans and entities in the acquisition, operation and sale of properties. Some of our competitors are larger than we are and have greater financial resources than we do. This competition could cause the cost of properties we wish to purchase to rise. If we are unable to continue to grow through acquisitions, then our results of operations and financial condition could be negatively impacted. Competition for Tenants Could Adversely Affect Our Operations When space becomes available at our properties, the leases may not be renewed, the space may not be leased or re-leased, or the terms of the renewal or re-lease (including the cost of required renovations or concessions to tenants) may be less favorable to us than the prior lease. We have established annual property budgets that include estimates of costs for renovation and re-leasing expenses. We believe that these estimates are reasonable in light of each property's situation; however, no assurance can be given that these estimates will sufficiently cover these expenses. If we cannot lease all or substantially all of the space at our properties promptly, if the rental rates are significantly lower than expected, or if our reserves for these purposes prove inadequate, then our results of operations and financial condition could be negatively impacted. Page 24 of 73 Tenants' Defaults Could Adversely Affect Our Operations Our ability to manage our assets is subject to federal bankruptcy laws and state laws that limit creditors' rights and remedies available to real property owners to collect delinquent rents. If a tenant becomes insolvent or bankrupt, we cannot be sure that we could recover the premises from the tenant promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to that tenant. We also cannot be sure that we would receive rent in the proceeding sufficient to cover our expenses with respect to the premises. If a tenant becomes bankrupt, the federal bankruptcy code will apply, which in some instances may restrict the amount and recoverability of our claims against the tenant. A tenant's default on its obligations to us could adversely affect our results of operations and financial condition. Cash Flow May Be Insufficient for Debt Service Requirements We intend to incur indebtedness in the future, including through borrowings under our Credit Facility, to finance property acquisitions. As a result, we expect to be subject to the following risks associated with debt financing including: - that interest rates may increase; - that our cash flow may be insufficient to meet required payments on - our debt; and that we may be unable to refinance or repay the debt as it comes due. Debt Restrictions May Affect Operations and Negatively Affect Our Ability to Repay Indebtedness at Maturity Our current $100 million unsecured Credit Facility contains provisions that restrict the amount of distributions the Company can make. These provisions provide that distributions may not exceed the lesser of (i) 90% of funds from operations or (ii) the minimum amount that the Company must distribute to its stockholders in order to avoid federal tax liability and remain qualified as a REIT. If we cannot obtain acceptable financing to repay indebtedness at maturity, we may have to sell properties to repay indebtedness or properties may be foreclosed upon, which could adversely affect our results of operations, financial condition and ability to service debt. Also, as of December 31, 1998, approximately $505.4 million of our total indebtedness included secured mortgages with cross-collateralization provisions. In the event of a default, the holders of this indebtedness may seek to foreclose upon properties which are not the primary collateral for their loan. This may, in turn, accelerate other indebtedness secured by these properties. Foreclosure of properties would cause a loss to us of income and asset value. Fluctuations in Interest Rates May Adversely Affect Our Operations As of December 31, 1998, we had approximately $188.7 million of variable interest rate indebtedness. Accordingly, an increase in interest rates will adversely affect our net income and results of operations. Management of Newly Acquired Properties Could Be Difficult Since the Consolidation on December 31, 1995, and through December 31, 1998, we acquired approximately $1.8 billion in properties. To manage these new properties effectively, we have sought to successfully apply our experience managing our existing portfolio to expanded markets and to an increased number of properties. The assimilation of these properties is a continuing process whose success cannot be assured indefinitely. Should we encounter future difficulties in managing these newly acquired properties, this could adversely affect our results of operations and financial condition. Acquisitions Could Adversely Affect Operations Consistent with our growth strategy, we are continually pursuing and evaluating potential acquisition opportunities. From time to time we are actively considering the possible acquisition of specific properties, which may include properties managed by GC or owned by affiliated parties. It is possible that one or more of such possible future acquisitions, if completed, could adversely affect our results of operations and financial condition. Page 25 of 73 Assumption of General Partner Liabilities May Adversely Affect Operations We and our predecessors have acquired a number of properties by acquiring interests in partnerships that own the properties or by first acquiring general partnership interests and acquiring properties from the partnership at a later date. We may pursue acquisitions in this manner in the future. When we use this acquisition technique, a subsidiary of the Company may become a general partner. As a general partner, such subsidiary would become generally liable for the debts and obligations of the partnership, including debts and obligations that may be contingent or unknown at the time of the acquisition. In addition, the Company's subsidiary assumes obligations under the partnership agreements, which may include obligations to make future contributions for the benefit of other partners. We undertake detailed due diligence reviews to ascertain the nature and extent of obligations that the subsidiary will assume when it becomes a general partner, but we cannot be sure the obligations assumed may exceed our estimates. Also, we cannot be sure that the assumed liabilities will not have an adverse effect on our results of operations or financial condition and ability to service debt. In addition, GC or another subsidiary may enter into management agreements pursuant to which it assumes certain obligations as a manager of properties. These obligations may have an adverse effect on such subsidiary's results of operations or financial condition, which could adversely affect our results of operations and financial conditions. Potential Adverse Consequences of Transactions Involving Conflicts of Interest We have acquired, and from time to time may acquire, properties from partnerships that Robert Batinovich, our Chairman and Chief Executive Officer, and Andrew Batinovich, our President and Chief Operating Officer, control, and in which they and members of their families have substantial interests. These transactions involve or will involve conflicts of interest. These transactions also may provide substantial economic benefits to those individuals such as: - payments or issuances of partnership units in the Operating Partnership, relief or deferral of tax liabilities, relief of primary or secondary liability for debt, and reduction in exposure to other property-related liabilities. Our policy provides that interested directors may not vote with regard to transactions in which they have a substantial interest. These transactions may only be completed if they are approved by a majority of the disinterested directors, with the interested directors abstaining. Despite this policy and the presence of appraisals or fairness opinions or review by parties who have no interest in the transactions, the transactions will not be the product of arm's-length negotiation. These transactions may not be as favorable to us as transactions that we negotiate with unrelated parties and they could result in undue benefit to Robert and Andrew Batinovich and members of their families. None of these parties has guaranteed that any properties acquired from entities they control or in which they have a significant interest will be as profitable as other investments made by us or will not result in losses. Dependence on Executive Officers We depend on the efforts of Robert Batinovich, our Chief Executive Officer and Andrew Batinovich, our President and Chief Operating Officer, and of our other executive officers. The loss of the services of any of them could have an adverse effect on our results of operations and financial condition. Both Robert and Andrew Batinovich have entered into employment agreements with the Company. Potential Liability Due to Environmental Matters Under federal, state and local laws relating to protection of the environment ("Environmental Laws"), a current or previous owner or operator of real estate may be liable for contamination resulting from the presence or discharge of petroleum products or other hazardous or toxic substances on the property. These owners may be required to investigate and clean-up the contamination on the property as well as the contamination which has migrated from the property. Environmental Laws typically impose liability and clean-up responsibility without regard to whether the owner or operator knew of, or was responsible for, the presence of the contamination. This liability may be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. In addition, the owner or operator of a property may be subject to claims by third parties based on personal injury, property Page 26 of 73 damage and/or other costs, including investigation and clean-up costs, resulting from environmental contamination. Environmental Laws may also impose restrictions on the manner in which a property may be used or transferred or in which businesses may be operated. These restrictions may require expenditures. Under the Environmental Laws, any person who arranges for the transportation, disposal or treatment of hazardous or toxic substances may also be liable for the costs of investigation or clean-up of those substances at the disposal or treatment facility, whether or not the facility is or ever was owned or operated by that person. Tenants of our properties generally are required by their leases to operate in compliance with all applicable Environmental Laws, and to indemnify us against any environmental liability arising from their activities on the properties. However, we could be subject to environmental liability relating to our management of the properties or strict liability by virtue of our ownership interest in the properties. Also tenants may not satisfy their indemnification obligations under the leases. We are also subject to the risk that: - any environmental assessments of our properties, properties being considered for acquisition, or the properties owned by the partnerships managed by GC may not have revealed all potential environmental liabilities, - any prior owner or prior or current operator of such properties may have created an environmental condition not known to us, or - an environmental condition may otherwise exist as to any one or more of such properties. Any one of these conditions could have an adverse effect on our results of operations and financial condition or ability to service debt, either directly (with respect to our properties), or indirectly (with respect to properties owned by partnerships managed by GC). Any condition adversely affecting the financial condition of GC could adversely affect us by diminishing the value of our interest in GC. Moreover, future environmental laws, ordinances or regulations may have an adverse effect on our results of operations, financial condition and ability to service debt. Also, the current environmental condition of those properties may be affected by tenants and occupants of the properties, by the condition of land or operations in the vicinity of the properties (such as the presence of underground storage tanks), or by third parties unrelated to us. Environmental Assessments and Potential Liability Due to Asbestos-Containing Materials Environmental Laws also govern the presence, maintenance and removal of asbestos-containing building materials. These laws require that asbestos-containing building materials be properly managed and maintained and that those who may come into contact with asbestos-containing building materials be adequately informed and trained. They also require that special precautions, including removal or other abatement, be undertaken in the event asbestos-containing building materials is disturbed during renovation or demolition of a building. These laws may impose fines and penalties on building owners or operators for failure to comply with these requirements. They also may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers. All of the properties that we presently own have been subject to Phase I environmental assessments by independent environmental consultants. Some of the Phase I environmental assessments recommended further investigations in the form of Phase II environmental assessments, including soil and groundwater sampling. We have completed all of these investigations or are in the process of completing them. Certain of our properties have been found to contain asbestos-containing building materials. We believe that these materials have been adequately contained and we have implemented an asbestos-containing building materials operations and maintenance program for the properties found to contain asbestos-containing building materials. Some, but not all, of the properties owned by partnerships managed by GC have been subject to Phase I environmental assessments by independent environmental consultants. GC determines on a case-by-case basis whether to obtain Phase I environmental assessments on these properties and whether to undertake further investigation or remediation. Certain of these properties contain asbestos-containing building materials. In each case GC believes that these materials have been adequately contained and has implemented an asbestos-containing Page 27 of 73 building materials operations and maintenance program has been implemented for the properties found to contain asbestos-containing building materials. Potential Environmental Liability Resulting From Underground Storage Tanks Some of our properties, as well as properties that we have previously owned, are leased or have been leased to owners or operators of businesses that use, store or otherwise handle petroleum products or other hazardous or toxic substances. These businesses include dry cleaners that operate on-site dry cleaning plants and auto care centers. Some of these properties contain, or may have contained, underground storage tanks for the storage of petroleum products and other hazardous or toxic substances. These operations create a potential for the release of those substances. Some of our properties are adjacent to or near other properties that have contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances. Several of our properties have been contaminated with these substances from on-site operations or operations on adjacent or nearby properties. In addition, certain of our properties are on, or are adjacent to or near other properties upon which others, including former owners or tenants of the properties, have engaged or may engage in activities that may release petroleum products or other hazardous or toxic substances. Environmental Liabilities May Adversely Affect Operating Costs and Ability to Borrow The obligation to pay for the cost of complying with existing Environmental Laws as well as the cost of complying with future legislation may affect our operating costs. In addition, the presence of petroleum products or other hazardous or toxic substances at any of our properties, or the failure to remediate those properties properly, may adversely affect our ability to borrow by using those properties as collateral. The cost of defending against claims of liability and the cost of complying with Environmental Laws, including investigation or clean-up of contaminated property, could materially adversely affect our results of operations and financial condition. General Risks of Ownership of Real Estate We are subject to risks generally incidental to the ownership of real estate. These risks include: - changes in general economic or local conditions; - changes in supply of or demand for similar or competing properties in an area - the impact of environmental protection laws; - changes in interest rates and availability of financing which may render the sale or financing of a property difficult or unattractive; - changes in tax, real estate and zoning laws; and - the creation of mechanics' liens or similar encumbrances placed on the property by a lessee or other parties without our knowledge and consent. Should any of these events occur, our results of operations and financial condition could be adversely affected. General Risks Associated With Management, Leasing and Brokerage Contracts We are subject to the risks generally associated with the property management, leasing and brokerage businesses. These risks include the risk that: - management contracts or service agreements may be terminated; - contracts will not be renewed upon expiration or will not be renewed on terms consistent with current terms; and - leasing and brokerage activity generally may decline. In addition, our acquisition of properties from partnerships managed by GC or another subsidiary could result in a decrease in revenues to such subsidiary and a corresponding decrease in dividends received by us from such subsidiary. Each of these developments could have an adverse effect on our results of operations and financial condition. Page 28 of 73 Uninsured Losses May Adversely Affect Operations We, or in certain instances, tenants of the properties, carry comprehensive liability, fire and extended coverage with respect to the properties. This coverage has policy specification and insured limits customarily carried for similar properties. However, certain types of losses (such as from earthquakes and floods) may be either uninsurable or not economically insurable. Further, certain of the properties are located in areas that are subject to earthquake activity and floods. Should a property sustain damage as a result of an earthquake or flood, we may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. Should an uninsured loss occur, we could lose some or all of our capital investment, cash flow and anticipated profits related to one or more properties. This could have an adverse effect on our results of operations and financial condition. Illiquidity of Real Estate May Limit Our Ability to Vary Our Portfolio Real estate investments are relatively illiquid and, therefore, will tend to limit our ability to vary our portfolio promptly in response to changes in economic or other conditions. In addition, the Internal Revenue Code of 1986, as amended (the "Code"), and individual agreements with sellers of properties place limits on our ability to sell properties. Eighty-five of our properties were acquired on terms and conditions under which they can be disposed of only in a like-kind exchange or other non-taxable transaction. The agreed upon time periods for these restrictions on dispositions vary from transaction to transaction. Potential Liability Under the Americans With Disabilities Act As of January 26, 1992, all of our properties were required to be in compliance with the Americans With Disabilities Act. The Americans With Disabilities Act generally requires that places of public accommodation be made accessible to people with disabilities to the extent readily achievable. Compliance with the Americans With Disabilities Act requirements could require removal of access barriers. Non-compliance could result in imposition of fines by the federal government, an award of damages to private litigants and/or a court order to remove access barriers. Because of the limited history of the Americans With Disabilities Act, the impact of its application to our properties, including the extent and timing of required renovations, is uncertain. Pursuant to lease agreements with tenants in certain of the "single-tenant" properties, the tenants are obligated to comply with the Americans With Disabilities Act provisions. If our costs are greater than anticipated or tenants are unable to meet their obligations, our results of operations and financial condition could be adversely affected. Development Alliances May Adversely Affect Operations We may, from time to time, enter into alliances with selected developers for the purpose of developing new projects in which these developers have, in the opinion of management, significant expertise or experience. These projects generally require various governmental and other approvals, the receipt of which cannot be assured. These development activities also may entail certain risks, including the risk that: - management may expend funds on and devote time to projects which may not come to fruition; - construction costs of a project may exceed original estimates, possibly making the project uneconomical; - occupancy rates and rents at a completed project may be less than anticipated; - and expenses at a completed development may be higher than anticipated. In addition, the partners in development alliances may have significant control over the operation of the alliance project. Therefore, these investments may, under certain circumstances, involve risks such as the possibility that the partner might: - become bankrupt; - have economic or business interests or goals that are inconsistent with our business interest or goals; or - be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives. Consequently, actions by a partner in a development alliance might subject property owned by the alliance to additional risk. Although we will seek to maintain sufficient control of any alliance to permit our objectives to be achieved, we may be unable to take action without the approval of our development alliance partners. Conversely, Page 29 of 73 our development alliance partners could take actions binding on the alliance without our consent. In addition, should a partner in a development alliance become bankrupt we could become liable for the partner's share of the project's liabilities. These risks may result in a development project adversely affecting our results of operations and financial condition. Material Tax Risks Since 1996, the Company has operated as a REIT under the Code. However, the Company may not be able to maintain its status as a REIT. To qualify as a REIT, the Company must satisfy numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions. Only limited judicial or administrative interpretation exists for these provisions and involves the determination of various factual matters and circumstances not entirely within the Company's control. The Company receives nonqualifying management fee income and owns nonqualifying preferred stock in certain subsidiaries. As a result, it may approach the income and asset test limits imposed by the Code. There is a risk that the Company may not satisfy these tests. In order to avoid exceeding the asset test limit, for example, the Company may have to reduce its interest in its subsidiaries. The Company is relying on the opinion of its tax counsel regarding its ability to qualify as a REIT. This legal opinion, however, is not binding on the Internal Revenue Service ("IRS"). Consequences of Failure to Qualify as a REIT If the Company fails to qualify as a REIT in any taxable year, the Company would be subject to federal income tax on its taxable income at corporate rates. In addition, the Company also may be disqualified from treatment as a REIT for the four taxable years following the year in which the Company failed to qualify. This would reduce its net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, the Company would no longer be required to make distributions to stockholders. Even if the Company continues to qualify as a REIT, it will be subject to certain federal, state and local taxes on its income and property. Possible Changes in Tax Laws; Effect on the Market Value of Real Estate Investments Income tax treatment of REITs may be modified by legislative, judicial or administrative action at any time. These changes may be applied to past as well as future operations. Legislation, regulations, administrative interpretations or court decisions may significantly change the tax laws with respect to (1) the qualification as a REIT or (2) the federal income tax consequences of this qualification. In addition, the changes might also indirectly affect the market value of all real estate investments, and consequently, the Company's ability to realize its investment objectives. Additional Capital Requirements; Possible Adverse Effects on Holders of Equity Our ability to continue our growth pattern established in 1996-1998, which was funded largely through the raising of equity capital, depends in large part upon our ability to raise additional capital in the future on satisfactory terms. If we raise additional capital through the issuance of additional equity securities, or securities convertible into or exercisable for equity securities, the interests of holders of the Company's shares of Common Stock could be diluted. Likewise, the Company's Board of Directors is authorized to issue Preferred Stock and to determine the rights of the Preferred Stock. Accordingly, the Board of Directors may authorize the issuance of Preferred Stock with rights which may dilute or otherwise adversely affect the interests of holders of the Company's shares of Common Stock. If we raise additional capital through debt financing, we will be subject to the risks described below, among others. Our Indebtedness Restrictions May Adversely Affect Our Ability to Incur Indebtedness The Company's organizational documents limit our ability to incur additional debt if the total debt, including the additional debt, would exceed 50% of the "Borrowing Base." This debt limitation in the Company's Charter can only be amended by an affirmative vote of the majority of all outstanding stock entitled to vote on such amendment. The term "Borrowing Base" is defined as the greater of Fair Market Value or Total Market Capitalization. Fair Market Value is based upon the value of our assets as determined by an independent appraiser. Total Market Capitalization is the sum of the market value of the Company's outstanding capital stock, including shares issuable on exercise of redemption options by holders of Operating Partnership units, plus debt. An exception is made for Page 30 of 73 refinancings and borrowings required to make distributions to maintain the Company's status as a REIT. In light of these debt restrictions, it should be noted that a change in the value of the Company's common stock could affect the Borrowing Base, and therefore our ability to incur additional indebtedness, even though such change in the common stock's value is unrelated to our liquidity. Limitation on Ownership of Common Stock And Stockholder's Rights Plan May Preclude Acquisition of Control Provisions of the Company's Charter are designed to assist it in maintaining its qualification as a REIT under the Code by preventing concentrated ownership of the Company which might jeopardize REIT qualification. Among other things, these provisions provide that: - any transfer or acquisition of the Company's common or preferred stock that would result in its disqualification as a REIT under the Code will be void; and - if any person attempts to acquire shares of the Company's common or preferred stock that after the acquisition would cause the person to own an amount of common stock and preferred stock in excess of a predetermined limit, such acquisitions would be void. Ownership is determined by operation of certain attribution rules set out in the Code. Pursuant to Board action, the limit currently is 9.9% of the value of the outstanding shares of common stock and preferred stock (the "Ownership Limitation"). The common stock or preferred stock the transfer of which would cause any person to violate the Ownership Limitation, is referred to as the "Excess Shares." A transfer that would violate the Ownership Limitation will be void and the common stock or preferred stock subject to the transfer will automatically be transferred to an unaffiliated trustee for the benefit of a charitable organization designated by the Board of Directors until sold by the trustee to a third party or purchased by the Company. This limitation on the ownership of common stock and preferred stock may preclude the acquisition of control of the Company by a third party without the consent of the Board of Directors. If the Board of Directors waives the Ownership Limitation for any person, the Ownership Limitation will be proportionally and automatically reduced with regard to all other persons such that no five persons may own more than 50% of the value of the common stock and preferred stock. Certain other provisions contained in the Company's Charter and Bylaws may also have the effect of discouraging a third party from making an acquisition proposal for the Company and may thereby inhibit a change in control in the Company even if a change in control would be in the best interests of the stockholders. In addition, in July 1998, the Board of Directors adopted a stockholder rights plan. Under the plan, the Company declared a dividend of rights on its common stock. The rights issued under the plan will be triggered, with certain exceptions, if and when any person or group acquires, or commences a tender offer to acquire, 15% or more of the Company's shares. The rights plan is intended to prevent abusive hostile takeover attempts by requiring a potential acquirer to negotiate the terms of an acquisition with the Board of Directors. However, it could have the effect of deterring or preventing an acquisition of the Company, even if a majority of our stockholders would be in favor of such acquisition, and could also have the effect of making it more difficult for a person or group to gain control of the Company or to change existing management. Losses Relating to Consolidation The Company was created through the merger of eight partnerships and a corporation (the "Consolidation"). Prior to the Consolidation, two lawsuits were filed in 1995 contesting the fairness of the Consolidation, one in California State court and one in federal court. The Company has been named as a defendant in each of the suits. The complaints in both actions alleged, among other things, breaches by the defendants of fiduciary duties and inadequate disclosures. The California State court action was settled and, upon appeal, the settlement was affirmed by the State Court of Appeals on February 17, 1998. The objectors petitioned the California Supreme Court for review, which was denied on May 21, 1998. On August 18, 1998, the objectors filed with the United States Supreme Court a petition for writ of certiorari. On September 18, 1998, the defendants filed a brief in opposition to the objectors' petition for writ of certiorari, and on September 25, 1998, the objectors filed a reply in support of their petition. The United States Supreme Court has not yet ruled on the petition for writ of certiorari. Pursuant to the terms of the settlement in the California State court action, pending appeal, we have paid one-third of the Page 31 of 73 $855,000 settlement amount and the remaining two-thirds are being held in escrow. In the federal court action, the court in December of 1995 deferred all further proceedings pending a ruling in the California State court action. The federal court action has been voluntarily stayed pending final outcome of the California State court action. We believe that it is very unlikely that this litigation would result in a liability that would exceed our accrued liability by a material amount. However, given the inherent uncertainties of litigation, we cannot be sure that the ultimate outcomes of these actions will be favorable to us. From time to time, the Operating Partnership and the Company are involved in other litigation arising out of their business activities. Certain other claims and lawsuits have arisen against the Operating Partnership and the Company in their normal course of business. It is possible that this litigation and the other litigation previously described could result in significant losses in excess of amounts reserved, which could have an adverse effect on their results of operations and financial condition. Uncertainty Due to the Board of Directors' Ability to Change Investment Policies The Board of Directors may change the Company's investment policies without a vote of the stockholders. If the Company's investment policies change, the risks and potential rewards of an investment in its shares may also change. In addition, the methods of implementing the Company's investment policies may vary as new investment techniques are developed. Effect of Market Interest Rates on Price of Common Stock The annual yield on the price paid for shares of the Company's common stock from distributions by the Company may influence the market price of the shares of the Company's common stock in public markets. An increase in market interest rates may lead prospective purchasers of the Company's common stock to seek a higher annual yield from their investments. This may adversely affect the market price of the Company's common stock. Shares Available for Future Sale The Company cannot predict the effect, if any, that future sales of shares of its common stock or future conversions or exercises of securities for future sales will have on the market price of the Company's common stock. Sales of substantial amounts of the Company's common stock, or the perception that such sales could occur, may adversely affect the prevailing market price for the Company's common stock. Impact of Year 2000 Compliance Costs on Operations State of Readiness. We use a number of computer software programs and operating systems across our entire organization. These programs and systems primarily comprise (i) information technology systems ("IT Systems") (i.e., software programs and computer operating systems) that serve our management operations, and (ii) embedded systems such as devices used to control, monitor or assist the operation of equipment and machinery systems (e.g., HVAC, fire safety and security) at our properties ("Property Systems"). To the extent that our software applications contain source code that is unable to appropriately interpret the upcoming calendar year "2000" and beyond, some level of modification or replacement of these applications will be necessary. - IT Systems. Employing a team made up of internal personnel and third-party consultants, we have completed our identification of IT Systems, including hardware components, that are not yet Year 2000 compliant. To the best of our knowledge based on available information and a reasonable level of inquiry and investigation, we have completed such upgrading of such systems that we believe are called for under the circumstances, and in accordance with prevailing industry practice. We have commenced a testing program which we anticipate will be completed during 1999. In addition, we are currently communicating with third parties with whom we do significant business, such as financial institutions, tenants and vendors, to determine their readiness for Year 2000 compliance. - Property Systems. Employing a team made up of internal personnel and third-party consultants, we have also completed our identification of Property Systems, including hardware components, that are not yet Year 2000 compliant. We have commenced such upgrading of such systems that we believe are called for under the circumstances, based on available information and a reasonable level of inquiry and Page 32 of 73 investigation, and in accordance with prevailing industry practice. Upon completion of such upgrading, we will initiate a testing program which we anticipate will be completed during 1999. To the best of our knowledge, there are no Property Systems, the failure of which would have a material effect on our operations. Costs of Addressing Our Year 2000 Issues. Given the information known at this time about our systems that are non-compliant, coupled with our ongoing, normal course-of-business efforts to upgrade or replace critical systems, as necessary, we do not expect Year 2000 compliance costs to have any material adverse impact on our liquidity or ongoing results of operations. The costs of such assessment and remediation will be paid as an operating expense. Risks of Our Year 2000 Issues. In light of our assessment and upgrading efforts to date, and assuming completion of the planned, normal course-of-business upgrades and subsequent testing, we believe that any residual Year 2000 risk will be limited to non-critical business applications and support hardware, and to short-term interruptions affecting Property Systems which, if they occur at all, will not be material to our overall operations. We believe that all of our systems will be Year 2000 compliant and that compliance will not materially adversely affect our future liquidity or results of operations or ability to service debt, but we cannot give absolute assurance that this is the case. Our Contingency Plans. We are currently developing our contingency plans for all operations to address the most reasonably likely worst case scenarios regarding Year 2000 compliance. Such plans, however, will recognize material limitations on our ability to plan for major regional or industrial failures such as regional power outages or regional or industrial communications breakdowns. We expect such contingency plans to be completed during 1999. Item 7A. Qualitative and Quantitative Information About Market Risk Interest Rates The Operating Partnership's primary market risk exposure is to changes in interest rates obtainable on its mortgage loans receivable and its secured and unsecured borrowings. The Operating Partnership does not believe that changes in market interest rates will have a material impact on the performance or fair value of its portfolio of mortgage loans receivable. It is the Operating Partnership's policy to manage its exposure to fluctuations in market interest rates for its borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. Approximately 20% and 38% of the Operating Partnership's outstanding debt, including amounts borrowed under the Credit Facility, were subject to variable rates at December 31, 1998 and 1997, respectively. In addition, the average interest rate on the Operating Partnership's debt decreased from 7.49% at December 31, 1997 to 7.08% at December 31, 1998. The Operating Partnership reviews interest rate exposure in the portfolio quarterly in an effort to minimize the risk of interest rate fluctuations. The Operating Partnership does not have any other material market-sensitive financial instruments. It is not the Operating Partnership's policy to engage in hedging activities for previously outstanding debt instruments or for speculative or trading purposes. The Operating Partnership may enter into forward interest rate, or similar, agreements to hedge specific anticipated debt issuances where managements believes the risk of adverse changes in market rates is significant. Under a forward interest rate agreement, if the referenced interest rate increases, the Operating Partnership is entitled to a receipt in settlement of the agreement that economically would offset the higher financing cost of the debt issued. If the referenced interest rate decreases, the Operating Partnership makes payment in settlement of the agreement, creating an expense that economically would offset the reduced financing cost of the debt issued. At December 31, 1998, the Operating Partnership was not a party to any forward interest rate or similar agreements. The table below provides information about the Operating Partnership's financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on rates in effect at the reporting date. Page 33 of 73
Expected Maturity Date ------------------------------------------------------------------------- Fair 1999 2000 2001 2002 2003 Thereafter Total Value ---- ---- ---- ---- ---- ---------- ----- ------ (in thousands) Secured Fixed $ 11,775 $ 63,174 $ 15,857 $ 14,748 $ 38,365 $ 439,429 $ 583,348 $ 583,348 Average interest rate 7.33% 6.89% 7.92% 7.47% 7.64% 6.86% 6.97% Secured Variable $ 115,074 $ 9,484 $ 24 $ 26 $ 28 $ 594 $ 125,230 $ 125,230 Average interest rate 6.75% 7.45% 7.26% 7.26% 7.26% 7.26% 6.81% Unsecured Fixed $ -- $ -- $ -- $ -- $ -- $ 150,000 $ 150,000 $ 150,000 Average interest rate -- -- -- -- -- 7.63% 7.63% Unsecured Variable $ -- $ 63,519 $ -- $ -- $ -- $ -- $ 63,519 $ 63,519 Average interest rate -- 7.40% -- -- -- -- 7.40%
The Operating Partnership believes that the interest rates given in the table for fixed rate borrowings approximate the rates the Operating Partnership could currently obtain for instruments of similar terms and maturities and that the fair values of such instruments approximate carrying value at December 31, 1998. Item 8. Financial Statements and Supplementary Data The response to this item is submitted as a separate section of this Form 10-K. See Item 14. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Page 34 of 73 PART III Item 10. Directors and Executive Officers of the Company The information required by Item 10 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 7, 1999. Item 11. Executive Compensation The information required by Item 11 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 7, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by Item 12 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 7, 1999. Item 13. Certain Relationships and Related Transactions The information required by Item 13 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 7, 1999. Page 35 of 76 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K Page No. (a) (1) Financial Statements Report of Independent Public Accountants 37 Consolidated Balance Sheets at December 31, 1998 and 1997 38 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 39 Consolidated Statements of Partners' Equity for the years ended December 31, 1998, 1997 and 1996 40 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 41 Notes to Consolidated Financial Statements 43 (2) Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation 59 Schedule IV - Mortgage Loans Receivable, Secured by Real Estate 69 (3) Exhibits to Financial Statements The Exhibit Index attached hereto is hereby incorporated by reference to this Item. 73 (b) Reports on Form 8-K (incorporated herein by reference) On October 27, 1998, the Company filed a report on Form 8-K with respect to Supplemental Information for the quarter ended September 30, 1998. On January 27, 1999, the Company filed a report on Form 8-K with respect to Supplemental Information for the quarter ended December 31, 1998. Page 36 of 73 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of GLENBOROUGH PROPERTIES, L.P.: We have audited the accompanying consolidated balance sheets GLENBOROUGH PROPERTIES, L.P., as of December 31, 1998 and 1997, and the related consolidated statements of operations, partners' equity and cash flows for the years ended December 31, 1998, 1997 and 1996. These consolidated financial statements and the schedules referred to below are the responsibility of the Operating Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of GLENBOROUGH PROPERTIES, L.P., as of December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for the years ended December 31, 1998, 1997 and 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The accompanying schedules listed in the index to financial statements and schedules are presented for the purpose of complying with the Securities and Exchange Commission's rules and are not a required part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP San Francisco, California March 15, 1999 Page 37 of 73
GLENBOROUGH PROPERTIES, L.P. CONSOLIDATED BALANCE SHEETS As of December 31, 1998 and 1997 (in thousands, except unit amounts) 1998 1997 --------------- --------------- ASSETS Rental property, net of accumulated depreciation of $72,951 and $40,349 in 1998 and 1997, respectively $ 1,720,579 $ 799,501 Real estate held for sale, net of accumulated depreciation of $9,918 and $864 in 1998 and 1997, respectively 21,860 25,717 Investments in Development 35,131 7,251 Investment in Glenborough Corporation 6,800 8,519 Mortgage loans receivable 42,420 3,692 Cash and cash equivalents 4,019 3,670 Other assets 45,437 16,100 --------------- --------------- TOTAL ASSETS $ 1,876,246 $ 864,450 =============== =============== LIABILITIES AND PARTNERS' EQUITY Liabilities: Mortgage loans $ 708,578 $ 148,139 Unsecured Series A Senior Notes 150,000 -- Unsecured bank line 63,519 80,160 Other liabilities 28,921 12,267 --------------- --------------- Total liabilities 951,018 240,566 --------------- --------------- Commitments and contingencies -- -- Partners' Equity: General partner, 359,090 and 337,018 units issued and outstanding at December 31, 1998 and 1997, respectively 9,046 6,239 Limited partners, 35,549,914 and 33,364,801 units issued and outstanding at December 31, 1998 and 1997, respectively 916,182 617,645 --------------- --------------- Total partners' equity 925,228 623,884 --------------- --------------- TOTAL LIABILITIES AND PARTNERS' EQUITY $ 1,876,246 $ 864,450 =============== =============== See accompanying notes to consolidated financial statements
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GLENBOROUGH PROPERTIES, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 1998, 1997 and 1996 (in thousands, except per share amounts) 1998 1997 1996 ---------------- ---------------- ---------------- REVENUE Rental revenue $ 227,956 $ 61,393 $ 17,943 Fees and reimbursements from affiliates 2,802 719 311 Interest and other income 4,557 1,627 1,070 Equity in earnings of Glenborough Corporation 1,533 1,687 1,571 Net gain on sales of real estate assets 4,796 839 321 Gain on collection of mortgage loan receivable -- 652 -- ---------------- ---------------- ---------------- Total revenue 241,644 66,917 21,216 ---------------- ---------------- ---------------- EXPENSES Property operating expenses, including $1,347, $3,028 and $769 paid to the Company in 1998, 1997 and 1996, respectively 75,426 20,904 5,735 General and administrative, including $1,815, $3,382 and $1,120 paid to an affiliate in 1998, 1997 and 1996, respectively 10,682 4,002 1,490 Depreciation and amortization 50,169 14,829 4,583 Interest expense 53,289 9,668 3,913 Loss on interest rate protection agreement 4,323 -- -- Consolidation costs -- -- 6,082 Litigation costs -- -- 1,155 ---------------- ---------------- ---------------- Total expenses 193,889 49,403 22,958 ---------------- ---------------- ---------------- Income (loss) from operations before extraordinary item 47,755 17,514 (1,742) Extraordinary item: Loss on early extinguishment of debt (1,400) (843) (186) ---------------- ---------------- ---------------- Net income (loss) 46,355 16,671 (1,928) Preferred partner interest distributions (20,620) -- -- ================ ================ ================ Net income (loss) available to general and limited partners $ 25,735 $ 16,671 $ (1,928) ================ ================ ================ Per Partnership Unit Data: Net income (loss) available to general and limited partners before extraordinary item $ 0.78 $ 0.92 $ (0.24) Extraordinary item (0.04) (0.04) (0.03) ---------------- ---------------- ---------------- Net income (loss) available to general and limited partners $ 0.74 $ 0.88 $ (0.27) ================ ================ ================ Weighted average number of partnership units outstanding 34,968,596 19,025,314 7,104,648 ================ ================ ================ See accompanying notes to consolidated financial statements
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GLENBOROUGH PROPERTIES, L.P. CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY For the years ended December 31, 1998, 1997 and 1996 (in thousands) General Limited Partners Partner Total ------------------- ------------------- ------------------ Balance at December 31, 1995 $ 618 $ 61,237 $ 61,855 Contributions 511 50,594 51,105 Distributions (69) (6,835) (6,904) Net loss (19) (1,909) (1,928) ------------------- ------------------- ------------------ Balance at December 31, 1996 1,041 103,087 104,128 Contributions 5,283 523,010 528,293 Distributions (252) (24,956) (25,208) Net income 167 16,504 16,671 ------------------- ------------------- ------------------ Balance at December 31, 1997 6,239 617,645 623,884 Contributions 3,316 328,241 331,557 Distributions (765) (75,769) (76,534) Unrealized loss on marketable securities (1) (33) (34) Net income 257 46,098 46,355 ------------------- ------------------- ------------------ Balance at December 31, 1998 $ 9,046 $ 916,182 $ 925,228 =================== =================== ================== See accompanying notes to consolidated financial statements
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GLENBOROUGH PROPERTIES, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1998, 1997 and 1996 (in thousands) 1998 1997 1996 --------------- --------------- -------------- Cash flows from operating activities: Net income (loss) $ 46,355 $ 16,671 $ (1,928) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 50,169 14,829 4,583 Amortization of loan fees, included in interest expense 1,563 221 193 Equity in earnings of Glenborough Corporation (1,533) (1,687) (1,571) Net gain on sales of real estate assets (4,796) (839) (321) Gain on collection of mortgage loan receivable -- (652) -- Loss on early extinguishment of debt 1,400 843 186 Consolidation costs -- -- 6,082 Litigation costs -- -- 1,155 Changes in certain assets and liabilities, net ( 5,029) (9,535) (2,652) --------------- --------------- -------------- Net cash provided by operating activities 88,129 19,851 5,727 --------------- --------------- -------------- Cash flows from investing activities: Net proceeds from sales of real estate assets 73,339 12,950 2,882 Additions to real estate assets (626,161) (586,965) (62,286) Investments in Development (25,745) -- -- Additions to mortgage loans receivable (39,613) (1,855) (2,694) Principal receipts on mortgage loans receivable 885 8,068 4 Investments in Glenborough Corporation -- (3,700) (1,690) Distributions from Glenborough Corporation 3,252 2,129 1,810 --------------- --------------- -------------- Net cash used for investing activities (614,043) (569,373) (61,974) --------------- --------------- -------------- Cash flows from financing activities: Proceeds from borrowings 696,618 467,689 52,599 Payments into lender impound accounts, net (11,061) (281) (564) Repayment of borrowings (511,696) (375,909) (35,593) Proceeds from issuance of Series A Senior Notes 150,000 -- -- Partner contributions 278,936 486,116 47,356 Partner distributions (76,534) (25,208) (6,904) --------------- --------------- -------------- Net cash provided by financing activities 526,263 552,407 56,894 --------------- --------------- -------------- continued See accompanying notes to consolidated financial statements
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GLENBOROUGH PROPERTIES, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS-continued For the years ended December 31, 1998, 1997 and 1996 (in thousands) 1998 1997 1996 --------------- --------------- -------------- Net increase in cash and cash equivalents $ 349 $ 2,885 $ 647 Cash and cash equivalents at beginning of period 3,670 785 138 --------------- --------------- -------------- Cash and cash equivalents at end of period $ 4,019 $ 3,670 $ 785 =============== =============== ============== Supplemental disclosure of cash flow information: Cash paid for interest (net of capitalized interest of $1,108 in 1998) $ 46,608 $ 9,373 $ 3,270 =============== =============== ============== Supplemental disclosure of Non-Cash Investing and Financing Activities: Acquisition of real estate through assumption of first trust deed notes payable $ 358,876 $ 60,628 $ 25,200 =============== =============== ============== Acquisition of real estate through issuance of shares of common stock and Operating Partnership units $ 52,621 $ 42,177 $ 3,749 =============== =============== ============== Unrealized loss on marketable securities $ (34) $ -- $ -- =============== =============== ============== See accompanying notes to consolidated financial statements
Page 42 of 73 GLENBOROUGH PROPERTIES, L.P. Notes to Consolidated Financial Statements December 31, 1998 and 1997 Note 1. ORGANIZATION Glenborough Properties, L.P., a California Limited Partnership (the "Operating Partnership") was organized in the State of California on August 23, 1995. The Operating Partnership is the primary operating subsidiary of Glenborough Realty Trust Incorporated (the "Company"), a self-administered and self-managed real estate investment trust ("REIT"). On December 31, 1995, the Company completed a consolidation (the "Consolidation") in which eight public limited partnerships (the "Partnerships," collectively with Glenborough Corporation (defined below), 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 to the Partnerships in exchange for 3,979,376 Operating Partnership units; and (ii) merged with Glenborough Corporation, a California Corporation, with the Company being the surviving entity. The Company then transferred certain real estate and related assets to the Operating Partnership in exchange for a sole general partner interest of 1% and a limited partnership interest of 85.37% (87.25% limited partnership interest as of December 31, 1998). The Operating Partnership also acquired interests in certain warehouse distribution facilities from GPA, Ltd., a California limited partnership ("GPA"). The Operating Partnership commenced operations on January 1, 1996. The Operating Partnership, through several subsidiaries, is engaged primarily in the ownership, operation, management, leasing, acquisition, expansion and development of various types of income-producing properties. As of December 31, 1998, the Operating Partnership, directly and through various subsidiaries in which it owns 99% of the ownership interests, controls a total of 186 real estate projects. Effective April 1, 1998, the Company contributed to the Operating Partnership the majority of its assets, including 100% of its shares of the non-voting preferred stock of Glenborough Corporation ("GC"), as well as all of the Company's tangible personal property including furniture and fixtures, all cash and investments, and a property management contract. As part of that transaction, the Company also agreed to a substantial reduction in the asset management fees paid by the Operating Partnership to the Company. In return, the Operating Partnership canceled certain obligations of the Company to the Operating Partnership, and issued 2,248,869 units of partnership interest in the Operating Partnership to the Company. The contribution of 100% of the shares of non-voting preferred stock in GC has been accounted for as a reorganization of entities under common control, similar to a pooling of interests. All periods have been restated to give effect to the transaction as if it occurred on December 31, 1995. As a result of this transaction, the only assets of the Company that were not contributed to the Operating Partnership are (i) its shares of non-voting preferred stock in Glenborough Hotel Group, (ii) its shares of common stock in twelve qualified REIT subsidiaries, which produce dividends that are not material to the Company, and (iii) a 4.05% limited partnership interest in Glenborough Partners. As of December 31, 1998, resulting from the transaction discussed above, the Operating Partnership holds 100% of the non-voting preferred stock of GC. 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"). Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements present the consolidated financial position of the Operating Partnership and its majority owned subsidiaries as of December 31, 1998 and 1997, and the consolidated results of operations and cash flows of the Operating Partnership for the years ended December 31, 1998, 1997 and 1996. All intercompany transactions, receivables and payables have been eliminated in consolidation. Reclassification Certain prior year balances have been reclassified to conform with the current year presentation. Page 43 of 73 GLENBOROUGH PROPERTIES, L.P. Notes to Consolidated Financial Statements December 31, 1998 and 1997 Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the results of operations during the reporting period. Actual results could differ from those estimates. New Accounting Pronouncements Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, and early adoption is permitted. SFAS No. 133 provides comprehensive guidelines for the recognition and measurement of derivatives and hedging activities and specifically requires all derivatives to be recorded on the balance sheet at fair value. Management is evaluating the effects, if any, that this pronouncement will have on the Operating Partnership's consolidated financial position, results of operations and financial statement position. Investments in Real Estate Investments in real estate are stated at cost unless circumstances indicate that cost cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value. Estimated fair value: (i) is based upon the Operating Partnership's plans for the continued operation of each property; and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized rental income based upon the age, construction and use of the building. The fulfillment of the Operating Partnership's plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Operating Partnership 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 Operating Partnership's properties could be materially different than current expectations. Depreciation is provided using the straight line method over the useful lives of the respective assets. The useful lives are as follow: Buildings and Improvements 10 to 40 years Tenant Improvements Term of the related lease Furniture and Equipment 5 to 7 years Investment in Glenborough Corporation The Operating Partnership's investment in Glenborough Corporation is accounted for using the equity method, as discussed further in Note 4. Mortgage Loans Receivable The Operating Partnership 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 Operating Partnership's collection on these receivables will be different than the recorded amounts. Page 44 of 73 GLENBOROUGH PROPERTIES, L.P. Notes to Consolidated Financial Statements December 31, 1998 and 1997 Cash Equivalents The Operating Partnership considers short-term investments (including certificates of deposit) with a maturity of three months or less at the time of investment to be cash equivalents. Marketable Securities The Operating Partnership records its marketable securities at fair value. Unrealized gains and losses on securities are reported as a separate component of stockholders' equity and realized gains and losses are included in net income. As of December 31, 1998, marketable securities with a fair value of approximately $2,639,000 were included in other assets on the accompanying consolidated balance sheet. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107 requires disclosure about fair value for all financial instruments. Based on the borrowing rates currently available to the Operating Partnership, 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 Operating Partnership. 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 Operating Partnership may use derivative financial instruments in the event that it believes such instruments will be an effective hedge against fluctuations in interest rates on a specific anticipated borrowing. Derivative financial instruments such as forward rate agreements or interest rate swaps may be used in this capacity. To the extent such instruments do not qualify as hedges, they will be accounted for on a mark-to-market basis and recorded in earnings each period as appropriate. The cost of terminated instruments not qualifying as hedges will be recorded in earnings in the period they are terminated. Instruments which qualify as hedges upon obtaining the related debt will be recorded as a premium or discount on the related debt principal and amortized into earnings over the life of the debt instrument. If the hedged instrument is retired early, the unamortized discount or premium will be included as a component of the calculation of gain or loss on retirement. At December 31, 1998, the Operating Partnership was not a party to any open interest rate protection agreements. Deferred Financing and Other Fees Fees paid in connection with the financing and leasing of the Operating Partnership's properties are amortized over the term of the related notes payable or leases and are included in other assets. Investments in Development Alliances The Operating Partnership, 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 Operating Partnership are capitalized to the investment since such funds are used for development purposes. See Note 6 for further discussion. Revenues All leases are classified as operating leases. Rental revenue is recognized as earned over the terms of the related leases. For the years ended December 31, 1998, 1997 and 1996, no tenants represented 10% or more of rental revenue of the Operating Partnership. Fees and reimbursements revenue consists of property management fees, overhead administration fees, and transaction fees from the acquisition, disposition, refinancing, leasing and construction supervision of real estate for an unconsolidated affiliate. Page 45 of 73 GLENBOROUGH PROPERTIES, L.P. Notes to Consolidated Financial Statements December 31, 1998 and 1997 Revenues are recognized only after the Operating Partnership is contractually entitled to receive payment, after the services for which the fee is received have been provided, and after the ability and timing of payments are reasonably assured and predictable. Scheduled rent increases are based primarily on the Consumer Price Index or a similar factor. Material incentives paid, if any, by the Operating Partnership to a tenant are amortized as a reduction of rental income over the life of the related lease. Net Income Per Partnership Unit Net income per partnership unit is calculated using the weighted average number of partnership units outstanding during the period. No effect on per unit amounts has been attributed to a potential conversion of the Preferred Partner Interest (see Note 12) into limited partner units as the impact is anti-dilutive. No other potentially dilutive securities of the Operating Partnership exist. Income Taxes No provision for income taxes is included in the Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 as the Operating Partnership's results of operations are allocated to the partners for inclusion in their respective income tax returns. Note 3. INVESTMENTS IN REAL ESTATE The cost and accumulated depreciation of real estate investments as of December 31, 1998 and 1997 are as follows (in thousands):
Buildings and Net Recorded Improvements Accumulated Value 1998: Land Total Cost Depreciation ------------- --------------- --------------- --------------- --------------- Office properties $ 92,166 $ 773,018 $ 865,184 $ (35,318) $ 829,866 Office/Flex properties 54,167 251,714 305,881 (11,443) 294,438 Industrial properties 21,329 115,451 136,780 (10,217) 126,563 Retail properties 20,524 72,654 93,178 (8,369) 84,809 Multi-family properties 46,590 350,011 396,601 (8,796) 387,805 Hotel properties 2,756 24,928 27,684 (8,726) 18,958 ============= =============== =============== =============== =============== Total $ 237,532 $ 1,587,776 $ 1,825,308 $ (82,869) $ 1,742,439 ============= =============== =============== =============== =============== 1997: Office properties $ 62,442 $ 282,129 $ 344,571 $ (9,310) $ 335,261 Office/Flex properties 46,496 163,606 210,102 (3,274) 206,828 Industrial properties 20,903 88,802 109,705 (7,503) 102,202 Retail properties 16,687 50,447 67,134 (5,845) 61,289 Multi-family properties 19,512 71,288 90,800 (1,780) 89,020 Hotel properties 5,587 38,532 44,119 (13,501) 30,618 ============= =============== =============== =============== =============== Total $ 171,627 $ 694,804 $ 866,431 $ (41,213) $ 825,218 ============= =============== =============== =============== ===============
In the first quarter of 1998, the Operating Partnership acquired 22 properties which consisted of approximately 4.2 million rentable square feet of office, office/flex and industrial space and had aggregate acquisition costs, including capitalized costs, of approximately $520.4 million. In addition, the Operating Partnership sold four properties to redeploy capital into properties the Operating Partnership believes have characteristics more suited to its overall growth strategy and operating goals. The sold properties included one office/flex property, two industrial properties and one multi-family property. These properties were sold for an aggregate sales price of $29,248,000 and generated an aggregate net gain of approximately $1,374,000. Page 46 of 73 GLENBOROUGH PROPERTIES, L.P. Notes to Consolidated Financial Statements December 31, 1998 and 1997 In the second quarter of 1998, the Operating Partnership acquired 35 properties which consisted of approximately 1.2 million rentable square feet of office, office/flex, industrial and retail space and 7,206 multi-family units and had aggregate acquisition costs, including capitalized costs, of approximately $410.9 million. In addition, the Operating Partnership sold three properties, including one office/flex property and two hotel properties. These properties were sold for an aggregate sales price of $9.7 million and generated an aggregate net gain of approximately $552,000. In the third quarter of 1998, the Operating Partnership acquired eleven properties which consisted of approximately 1.2 million rentable square feet of office, office/flex and industrial space and had aggregate acquisition costs, including capitalized costs, of approximately $67.3 million. In addition, the Operating Partnership sold one of three buildings from an office/flex property. This building was sold for $1.7 million and no gain or loss was recognized upon the sale. In the fourth quarter of 1998, the Operating Partnership sold four properties, including one office property, two industrial properties and one hotel property. These properties were sold for an aggregate sales price of $16.7 million and generated an aggregate net gain of approximately $6.4 million. The Operating Partnership has entered into short-term lease agreements on the hotel properties located in Arlington, Texas, and Ontario, California, with two prospective purchasers of these properties. These prospective purchasers have entered into purchase agreements for these properties, with anticipated closing dates of March 30, 1999. These leases terminate on the closing date for the sale of the properties. The net book value of the two hotel properties aggregates to $7,956,000 at December 31, 1998. The properties secure, in part, a loan to the Operating Partnership with an outstanding principal balance of $13,220,000 at December 31, 1998. Net income earned by the Operating Partnership from the two hotels totaled $429,000, $598,000 and $485,000 in the years ended December 31, 1998, 1997 and 1996, respectively. The Operating Partnership has entered into a definitive agreement to acquire all of the real estate assets of Prudential-Bache/Equitec Real Estate Partnership, a California limited partnership in which the managing general partner is Prudential-Bache Properties, Inc., and in which GC and Robert Batinovich have served as co-general partners since March 1994, but do not hold a material equity or economic interest (the "Pru-Bache Portfolio"). The total acquisition cost, including capitalized costs, is expected to be approximately $49.9 million, which is to be paid entirely in cash. The Pru-Bache Portfolio comprises four office buildings aggregating 405,825 square feet and one office/flex property containing 121,645 square feet. This acquisition is subject to certain contingencies, including customary closing conditions and the resolution of litigation relating to the proposed acquisition, to which neither the Operating Partnership nor the Company is a party. The Operating Partnership leases its commercial and industrial property under non-cancelable operating lease agreements. Future minimum rents to be received as of December 31, 1998 are as follows (in thousands): Year Ending December 31, ------------ 1999 $ 144,106 2000 120,681 2001 99,952 2002 76,651 2003 56,473 Thereafter 140,058 ---------- $ 637,921 ========== Note 4. INVESTMENT IN GLENBOROUGH CORPORATION The Operating Partnership accounts for its investment in GC using the equity method as a substantial portion of GC's economic benefits flow to the Operating Partnership by virtue of its 100% non-voting preferred stock interest in GC, which interest constitutes substantially all of GC's capitalization. Two of the holders of the voting common Page 47 of 73 GLENBOROUGH PROPERTIES, L.P. Notes to Consolidated Financial Statements December 31, 1998 and 1997 stock of GC are officers of the Company; however, the Operating Partnership has no direct voting or management control of GC. The Operating Partnership 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 Operating Partnership's investment. As of December 31, 1998 and 1997, the Operating Partnership had the following investment in GC (in thousands): Investment at December 31, 1996 $ 5,261 Contributions 3,700 Distributions (2,129) Equity in earnings 1,687 --------- Investment at December 31, 1997 8,519 Distributions (3,252) Equity in earnings 1,533 --------- Investment at December 31, 1998 $ 6,800 ========= GC's summary condensed balance sheet information as of December 31, 1998 and 1997, and the condensed statements of operations for the years then ended are as follows (in thousands): Balance Sheets As of December 31, 1998 1997 ----------- ----------- Investments in management contracts, net $ 6,332 $ 8,108 Investment in real estate joint venture 2,025 -- Other assets 2,329 3,631 =========== =========== Total assets $ 10,686 $ 11,739 =========== =========== Notes payable $ 3,525 $ 1,483 Other liabilities 368 1,764 ----------- ----------- Total liabilities 3,893 3,247 Stockholders' equity 6,793 8,492 =========== =========== Total liabilities and stockholders' equity $ 10,686 $ 11,739 =========== =========== Statements of Operations For the year ended December 31, 1998 1997 (1) ----------- ----------- Revenue $ 12,549 $ 15,105 Expenses 10,939 13,331 =========== =========== Net income (loss) $ 1,610 $ 1,774 =========== =========== (1)Included in revenues for the year ended December 31, 1997 is a fee of approximately $1.7 million earned in connection with the disposition of a managed property owned by a related party. Note 5. MORTGAGE LOANS RECEIVABLE The Operating Partnership's mortgage loans receivable consist of the following as of December 31, 1998 and 1997 (dollars in thousands): Page 48 of 73 GLENBOROUGH PROPERTIES, L.P. Notes to Consolidated Financial Statements December 31, 1998 and 1997
1998 1997 --------------- --------------- Note secured by an industrial property in Los Angeles, CA, with a fixed interest rate of 9% and a maturity date of June 2001. This note was paid off in June 1998. $ -- $ 507 Note secured by an office property in Phoenix, AZ, with a fixed interest rate of 11% and a maturity date of November 1999. As of December 31, 1998, the Partnership is committed to additional advances totaling $366 for tenant improvements and other leasing costs. 3,484 3,185 Note secured by a hotel property in Dallas, TX, with a fixed interest rate of 9%, monthly interest-only payments and a maturity date of March 31, 1999, with an option to extend for 3 months. 3,600 -- Note secured by Gateway Park land located in Aurora, CO, with a stated fixed interest rate of 13%, quarterly interest-only payments and a maturity date of July 2005 (see below for further discussion). 35,336 -- --------------- --------------- Total $ 42,420 $ 3,692 =============== ===============
In July 1998, the Operating Partnership entered into a development alliance with The Pauls Corporation (see Note 6). In addition to this development alliance, the Operating Partnership has loaned approximately $35 million to continue the build-out of Gateway Park. These advances were made in the form of a secured loan and accordingly, are recorded as a mortgage loan receivable. Contractually due principal payments of the mortgage loans receivable are as follows (in thousands): Year Ending December 31, ------------ 1999 $ 7,084 2000 -- 2001 -- 2002 -- 2003 -- Thereafter 35,336 ---------- Total $ 42,420 ========== Note 6. DEVELOPMENT ALLIANCES AND OTHER ASSETS The Operating Partnership has formed 4 development alliances to which it has committed a total of approximately $42 million for the development of approximately 1.4 million square feet of office, office/flex and distribution properties and 2,050 multi-family units in North Carolina, Colorado, Texas, New Jersey, Kansas and Michigan. As of December 31, 1998, the Operating Partnership has advanced approximately $33 million under these commitments. Under these development alliances, the Operating Partnership has certain rights to purchase the properties upon completion of development and, thus, through these alliances, the Operating Partnership could acquire an additional 1.4 million square feet of commercial properties and 2,050 multi-family units over the next five years. In December 1998, the Operating Partnership sold its investment in a private REIT for $17.4 million. At the time of sale, the Operating Partnership had a book value in this investment of $20.5 million which resulted in a net loss of $3.1 million. In addition, in 1998, the Operating Partnership sold marketable securities which resulted in total Page 49 of 73 GLENBOROUGH PROPERTIES, L.P. Notes to Consolidated Financial Statements December 31, 1998 and 1997 realized losses of approximately $325,000. These losses are included in the net gain on sales of real estate assets on the accompanying consolidated statement of operations for the year ended December 31, 1998. Note 7. SECURED AND UNSECURED LIABILITIES The Operating Partnership had the following mortgage loans, bank lines, and notes payable outstanding as of December 31, 1998 and 1997 (in thousands):
1998 1997 --------- --------- Secured loans with various lenders, net of unamortized discount of $6,140, with a fixed interest rate of 6.125%, monthly principal and interest payments ranging between $296 and $458, and a maturity date of November 10, 2008. These loans are secured by 35 properties with an aggregate net carrying value of $408,439 at December 31, 1998. See below for further discussion. $ 234,871 $ -- Secured loan with a bank with a fixed interest rate of 7.50%, monthly principal and interest payments of $443 and a maturity date of October 1, 2022. The loan is secured by ten properties with an aggregate net carrying value of $110,129 and $111,372 at December 31, 1998 and 1997, respectively. 58,942 59,724 Secured loan with an investment bank with a fixed interest rate of 7.57%, monthly principal (based upon a 25-year amortization) and interest payments of $103 and a maturity date of January 1, 2006. The loan is secured by properties with an aggregate net carrying value of $33,506 and $37,711 at December 31, 1998 and 1997, respectively. In December 1998, a portion of this loan was paid off in connection with the sales of two properties which secured the loan. 13,220 19,444 Secured loans with various lenders, bearing interest at fixed rates between 6.95% and 9.25% (approximately $53,469 of these loans include an unamortized premium of approximately $602 which reduces the effective interest rate on those instruments to 6.75%), with monthly principal and interest payments ranging between $8 and $371 and maturing at various dates through October 1, 2010. These loans are secured by properties with an aggregate net carrying value of $447,444 and $66,353 at December 31, 1998 and 1997, respectively. 261,938 30,519 Secured loans with various banks bearing interest at variable rates ranging between 7.25% and 8.18% at December 31, 1998 (approximately $114,950 of these loans include an unamortized premium of approximately $1,750 which reduces the effective interest rate on those instruments to 6.75%), monthly principal and interest payments ranging between $4 and $790 and maturing at various dates through May 1, 2017. These loans are secured by properties with an aggregate net carrying value of $179,438 and $17,246 at December 31, 1998 and 1997, respectively. 125,230 7,806
Page 50 of 73 GLENBOROUGH PROPERTIES, L.P. Notes to Consolidated Financial Statements December 31, 1998 and 1997
1998 1997 --------- --------- Secured loans with an investment bank, bearing interest at fixed rates between 7.60% and 7.85%, with monthly principal and interest payments ranging between $11 and $22 and a maturity date of December 1, 2030. These loans are secured by multi-family properties with an aggregate net carrying value of $19,060 and $41,862 at December 31, 1998 and 1997, respectively. In 1998, three of these loans which had outstanding balances totaling $16,136 at December 31, 1997 were paid off with proceeds from the new $248.8 million loan discussed below. $ 14,377 $ 30,646 Unsecured $100,000 line of credit with a bank ("Credit Facility") with a variable interest rate of LIBOR plus 1.625% (7.401% at December 31, 1998), monthly interest only payments and a maturity date of December 22, 2000, with one option to extend for 10 years. See below for further discussion. 63,519 80,160 Unsecured Series A Senior Notes with a fixed interest rate of 7.625%, interest payable semiannually on March 15 and September 15, commencing September 15, 1998, and a maturity date of March 15, 2005. See below for further discussion. 150,000 -- --------- --------- Total $ 922,097 $228,299 ========= =========
In January 1998, the Operating Partnership closed a $150 million loan agreement with a commercial bank (the "Interim Loan"). The Interim Loan had a term of three months with interest at LIBOR plus 1.75%. The purpose of the Interim Loan was to fund the acquisition of properties as discussed in Note 3. The Interim Loan was paid off in March 1998 with proceeds from the $150 million of unsecured Series A Senior Notes as discussed below. In March 1998, the Operating Partnership issued $150 million of unsecured 7.625% Series A Senior Notes (the "Notes") in an unregistered 144A offering. The Notes mature on March 15, 2005, unless previously redeemed. Interest on the Notes is payable semiannually on March 15 and September 15, commencing September 15, 1998. The Notes may be redeemed at any time at the option of the Operating Partnership, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the Notes being redeemed plus accrued interest to the redemption date and (ii) the Make-Whole Amount, as defined, if any. The Notes are general unsecured and unsubordinated obligations of the Operating Partnership, and rank pari passu with all other unsecured and unsubordinated indebtedness of the Operating Partnership. However, the Notes are effectively subordinated to secured borrowing arrangements that the Operating Partnership has and from time to time may enter into with various banks and other lenders, and to the prior claims of each secured mortgage lender to any specific property which secures any lender's mortgage. As of December 31, 1998, such secured arrangements and mortgages aggregated approximately $708.6 million. In May 1998 (declared effective in November 1998), the Operating Partnership filed a registration statement with the Securities and Exchange Commission (the "SEC") to exchange all outstanding Notes (the "Old Notes") for Notes which have been registered under the Securities Act of 1933 (the "New Notes"). The form and term of the New Notes are substantially identical to the Old Notes in all material respects, except that the New Notes are registered under the Securities Act, and therefore are not subject to certain transfer restrictions, registration rights and related special interest provisions applicable to the Old Notes. In June 1998, the Operating Partnership obtained a $150 million unsecured loan from a commercial bank (the "Bridge Loan") which had a variable interest rate of LIBOR plus 1.3%, and a maturity date of December 31, 1998. Approximately $147.7 million was drawn under the Bridge Loan to fund acquisitions (as discussed in Note 3), and Page 51 of 73 GLENBOROUGH PROPERTIES, L.P. Notes to Consolidated Financial Statements December 31, 1998 and 1997 to fund development advances. The Operating Partnership paid off the loan on October 30, 1998, with proceeds from the new $248.8 million loan discussed below. In October 1998, the Operating Partnership obtained $248.8 million of financing which has a term of ten years, bears interest at a fixed rate of 6.125% and was secured by 36 properties. The proceeds were used to retire the Operating Partnership's $150 million Bridge Loan maturing December 31, 1998, to pay off four mortgage loans and to reduce the outstanding balance of the Credit Facility. In December 1998, approximately $7.4 million of this financing was paid off and one multi-family property was released as security. This multi-family property was then used as security for the new $7.5 million loan discussed below. In connection with obtaining the $248.8 million of financing discussed above, the Operating Partnership entered into an interest rate protection agreement intended to hedge against potential increases in the risk-free interest rate prior to closing the loan. The Operating Partnership elected to reduce the final loan amount and the risk-free interest rate that the interest rate protection agreement was intended to hedge declined during the period of the agreement. As a result of these factors, the Operating Partnership was required to terminate a portion of the protection agreement at a loss of $4,323,000, which was recorded as an operating expense in the fourth quarter of 1998. The $6,244,000 cost of the remaining portion of the protection agreement, which was terminated upon closing of the loan, has been recorded as a discount on the outstanding principal amount of the loan and will be amortized as additional interest expense over the remaining life. In December 1998, the Operating Partnership obtained a $7.5 million loan from a bank which is secured by a multi-family property, bears interest at a variable rate of prime minus 0.50% (7.25% at December 31, 1998) and has a maturity date of December 22,2000. In December 1998, due in part to an overall slowing of acquisition activity, the Operating Partnership reduced its Credit Facility from $250 million to $100 million. As part of the modification, certain covenants that relate to the Operating Partnership's development activity were changed and the interest rate was modified to LIBOR plus 1.38% to 1.75%. This rate is an increase over the previous rate of LIBOR plus 1.10% to 1.30% which was a direct result of rates obtainable in the market. Some of the Operating Partnership's properties are held in limited partnerships and limited liability companies in order to provide bankruptcy remote borrowers for certain lenders. Such limited partnerships and limited liability companies are included in the consolidated financial statements of the Operating Partnership in accordance with Generally Accepted Accounting Principles ("GAAP"). The required principal payments on the Operating Partnership's debt for the next five years and thereafter, as of December 31, 1998, are as follows (in thousands): Year Ending December 31, ------------ 1999 $ 126,849 2000 136,177 2001 15,881 2002 14,774 2003 38,393 Thereafter 590,023 --------- Total $ 922,097 ========= Note 8. RELATED PARTY TRANSACTIONS Fee and reimbursement income earned by the Operating Partnership from related entities totaled $2,802,000, $719,000 and $311,000 for the years ended December 31, 1998, 1997 and 1996, respectively, and consisted of property management fees, asset management fees and other fee income. Page 52 of 73 GLENBOROUGH PROPERTIES, L.P. Notes to Consolidated Financial Statements December 31, 1998 and 1997 For the year ended December 31, 1998, the Operating Partnership paid the Company property and asset management fees of $1,347,000 and $1,815,000, respectively, which are included in property operating expenses and general and administrative expenses on the accompanying consolidated statement of operations. In addition, for the year ended December 31, 1998, the Operating Partnership paid GC property management fees and salary reimbursements totaling $1,273,000 for management of a portfolio of residential properties owned by the Operating Partnership which is included in property operating expenses on the accompanying consolidated statement of operations. For the years ended December 31, 1997 and 1996, the Operating Partnership paid the Company property management fees and asset management fees totaling $6,410,000 and $1,889,000, respectively, which are included in property operating expenses and general and administrative expenses on the accompanying consolidated statements of operations. Note 9. CONSOLIDATION AND LITIGATION COSTS The consolidation costs included in the Operating Partnership's December 31, 1996 consolidated statement of operations included accounting fees as well as the costs of mailing and printing the Prospectus/Consent Solicitation Statement, any supplements thereto or other documents related to the Consolidation, the costs of the Information Agent, investor brochure, telephone calls, broker-dealer fact sheets, printing, postage, travel, meetings, legal and other fees related to the solicitation of consents, as well as reimbursement of costs incurred by brokers and banks in forwarding the Prospectus/Consent Solicitation Statement to Investors. The litigation costs included in the Operating Partnership's December 31, 1996 consolidated statement of operations included the legal fees incurred in connection with defending two class action complaints filed by investors in certain of the GRT Predecessor Entities as well as an accrual for the amount of the settlement that the plaintiff's counsel in one case was requesting be awarded by the court (see Note 10). Note 10. COMMITMENTS AND CONTINGENCIES Environmental Matters. The Operating Partnership follows a policy of monitoring its properties for the presence of hazardous or toxic substances. The Operating Partnership is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Operating Partnership's business, assets or results of operations. There can be no assurance that such a material environmental liability does not exist. The existence of any such material environmental liability could have an adverse effect on the Operating Partnership's results of operations and cash flow. General Uninsured Losses. The Operating Partnership carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with policy specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of extraordinary losses which may be either uninsurable, or not economically insurable. Further, certain of the properties are located in areas that are subject to earthquake activity. Should a property sustain damage as a result of an earthquake, the Operating Partnership may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. Should an uninsured loss occur, the Operating Partnership could lose its investment in, and anticipated profits and cash flows from, a property. Litigation. Prior to the completion of the Consolidation, two lawsuits were filed in 1995 contesting the fairness of the Consolidation, one in California State court and one in federal court. The complaints in both actions alleged, among other things, breaches by the defendants of fiduciary duties and inadequate disclosures. The State court action was settled and, upon appeal, the settlement was affirmed by the State court on February 17, 1998. The objectors filed with the California Supreme Court a petition for review, which was denied on May 21, 1998. On August 18, 1998, the objectors filed a petition for writ of certiorari in the Supreme Court of the United States. On September 18, 1998, the Company and the co-defendants filed a brief in opposition to the petition. The Supreme Court has not yet granted or denied the petition. Pursuant to the terms of the settlement in the State court action, pending appeal, the Company has paid one-third of the $855,000 settlement amount and the remaining two-thirds is being held in escrow. In the federal action, the court in December of 1995 deferred all further proceedings pending a ruling in the State court action. Following the State court decision approving the settlement, the defendants filed a motion to dismiss the federal court action. The Operating Partnership and the Company believe that it is very unlikely that this Page 53 of 73 GLENBOROUGH PROPERTIES, L.P. Notes to Consolidated Financial Statements December 31, 1998 and 1997 litigation would result in a liability that would exceed the accrued liability by a material amount. However, given the inherent uncertainties of litigation, there can be no assurance that the ultimate outcomes of these actions will be favorable to the Operating Partnership and the Company. Note 11. SEGMENT INFORMATION The Operating Partnership owns a diverse portfolio of properties comprising six product types: office, office/flex, industrial, retail, multi-family and hotels. Each of these product types represents a reportable segment with distinct uses and tenant types which require the Operating Partnership to employ different management strategies. Each segment contains properties located in various regions and markets within the United States. The office portfolio consists primarily of suburban office buildings. The office/flex portfolio consists of properties designed for a combination of office and warehouse uses. The industrial portfolio consists of properties designed for warehouse, distribution and light manufacturing for single-tenant or multi-tenant use. The retail portfolio consists primarily of community shopping centers anchored with national or regional supermarkets or drug stores. The properties in the multi-family portfolio are apartment buildings with units rented to residential tenants on either a month-by-month basis or for terms of one year or less. The Operating Partnership's hotel operations are limited service "all-suite" properties leased to and operated by third parties. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Operating Partnership 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 Operating Partnership for its reportable segments as of and for the years ended December 31, 1998 and 1997 is as follows (in thousands):
1998 Office Office/Flex Industrial Retail Multi-family Hotel Total - ---- ----------- ------------- ----------- ----------- ------------ ------------ ------------- Rental revenue $ 117,746 $ 36,987 $ 16,104 $ 12,072 $ 40,865 $ 4,182 $ 227,956 Property operating expenses 44,775 10,898 3,609 3,840 17,235 967 81,324 =========== ============= =========== =========== ============ ============ ============= Net operating income (NOI) $ 72,971 $ 26,089 $ 12,495 $ 8,232 $ 23,630 $ 3,215 $ 146,632 =========== ============= =========== =========== ============ ============ ============= Real estate assets, net $ 829,866 $ 294,438 $ 126,563 $ 84,809 $ 387,805 $ 18,958 $ 1,742,439 =========== ============= =========== =========== ============ ============ ============= 1997 Rental revenue $ 25,071 $ 10,354 $ 7,320 $ 7,224 $ 5,536 $ 5,980 $ 61,485 Property operating expenses 9,986 3,062 1,459 2,183 2,309 1,894 20,893 =========== ============= =========== =========== ============ ============ ============= Net operating income (NOI) $ 15,085 $ 7,292 $ 5,861 $ 5,041 $ 3,227 $ 4,086 $ 40,592 =========== ============= =========== =========== ============ ============ ============= Real estate assets, net $ 335,261 $ 206,828 $ 102,202 $ 61,289 $ 89,020 $ 30,618 $ 825,218 =========== ============= =========== =========== ============ ============ =============
The following is a reconciliation of segment revenues, income and assets to consolidated revenues, income and assets for the periods presented above (in thousands): 1998 1997 ---------------- ---------------- Revenues Total revenue for reportable segments $ 227,956 $ 61,485 Elimination of internal property management fees -- (92) Other revenue (1) 13,688 5,524 ================ ================ Total consolidated revenues $ 241,644 $ 66,917 ================ ================ Page 54 of 73 GLENBOROUGH PROPERTIES, L.P. Notes to Consolidated Financial Statements December 31, 1998 and 1997 1998 1997 --------------- --------------- Net Income NOI for reportable segments $ 146,632 $ 40,592 Elimination of internal property management fees 5,898 (103) Unallocated amounts: Other revenue (1) 13,688 5,524 General and administrative expenses (10,682) (4,002) Depreciation and amortization (50,169) (14,829) Interest expense (53,289) (9,668) Loss on interest rate protection agreement (4,323) -- ================ =============== Income from operations before extraordinary item $ 47,755 $ 17,514 ================ =============== Assets Total assets for reportable segments $ 1,742,439 $ 825,218 Investments in Development 35,131 7,251 Investment in Glenborough Corporation 6,800 8,519 Mortgage loans receivable 42,420 3,692 Cash and cash equivalents 4,019 3,670 Other assets 45,437 16,100 ================ =============== Total consolidated assets $ 1,876,246 $ 864,450 ================ =============== (1) Other revenue includes fee income, interest and other income, equity in earnings of Glenborough Corporation, net gains on sales of real estate assets and a gain on collection of mortgage loan receivable. Note 12. PUBLIC STOCK OFFERING In January 1998, the Company completed a public offering of 11,500,000 shares of 7 3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible Preferred Stock Offering"). The 11,500,000 shares were sold at a per share price of $25.00 for net proceeds of approximately $276 million. The proceeds from the January 1998 Convertible Preferred Stock Offering were contributed to the Operating Partnership for which the Company received a Preferred Partnership Interest, which is entitled to a priority distribution sufficient to pay dividends to the holders of the Company's Series A Convertible Preferred Stock. A portion of this additional capital was used to repay the outstanding balance under the Operating Partnership's Credit Facility. The remaining proceeds were used to fund the acquisitions discussed in Note 3 and for working capital. Following are unaudited pro forma statements of operations of the Operating Partnership for each of the years ended December 31, 1998 and 1997 giving effect to the equity and debt offerings, property acquisitions and property dispositions (including those discussed in Note 3) completed in 1997 and 1998 as if they had been completed on January 1, 1997 (in thousands except for weighted average units and per unit amounts): Page 55 of 73 GLENBOROUGH PROPERTIES, L.P. Notes to Consolidated Financial Statements December 31, 1998 and 1997
1998 1997 (Unaudited) (Unaudited) ---------------- ---------------- REVENUE Rental revenue $ 257,927 $ 233,352 Equity in earnings of Glenborough Corporation 1,428 966 Fees, interest and other income 9,187 5,979 ---------------- ---------------- Total Revenue 268,542 240,297 ---------------- ---------------- OPERATING EXPENSES Property operating expenses 86,231 83,138 General and administrative 11,266 7,373 Depreciation and amortization 52,499 48,293 Interest expense 63,935 62,298 Loss on interest rate protection agreement 4,323 - ---------------- ---------------- Total Operating Expenses 218,254 201,102 ---------------- ---------------- Net income before preferred partner interest distributions 50,288 39,195 Preferred partner interest distributions (22,281) (22,281) ---------------- ---------------- Net income available to general and limited partners $ 28,007 $ 16,914 ================ ================ Net income per unit $ 0.78 $ 0.47 ================ ================ Weighted average number of partnership units outstanding 35,909,004 35,909,004 ================ ================
Note 13. SUBSEQUENT EVENTS In February 1999, the Operating Partnership acquired a 285 unit multi-family property ("Springs of Indian Creek") located in Carrolton, Texas. The property is the first phase of a two phase project comprising a total of 519 units. The 234 unit second phase of the project is currently under construction through one of the Operating Partnership's development alliances and is expected to be completed in the first quarter of next year. The total acquisition cost, including capitalized costs of Phase I was approximately $20.8 million comprising: (i) approximately $14.1 million in assumption of debt and (ii) the balance in cash. In February 1999, the Operating Partnership acquired a 1.45-acre parcel containing 34,500 square feet of industrial buildings in Los Angeles, California, near the Los Angeles International Airport. The total acquisition cost, including capitalized costs, was approximately $3.1 million, which was paid entirely in cash. The property was part of a tax-deferred Section 1031 exchange involving the sale of an office/flex property as discussed below. The property has been leased to Dollar Rent-a-Car under a 15-year triple-net lease. In January and February 1999, the Operating Partnership sold six properties, including five office/flex properties and one retail property. These properties were sold for an aggregate sales price of approximately $15.9 million and generated an aggregate net gain of approximately $364,000. Approximately $2.4 million of the net proceeds were deposited into a deferred exchange account and were applied to the acquisition of land discussed above on a tax-deferred basis pursuant to Section 1031 of the Internal Revenue Code. In February 1999, the Company contributed to the Operating Partnership 100% of its shares of the non-voting preferred stock of Glenborough Hotel Group. In return, the Operating Partnership issued 67,797 units of partnership interest to the Company. As a result of this transaction, the only assets of the Company that were not contributed to the Operating Partnership are (i) its shares of common stock in twelve qualified REIT subsidiaries, which produce dividends that are not material to the Company and (ii) a 4.05% limited partnership interest in Glenborough Page 56 of 73 GLENBOROUGH PROPERTIES, L.P. Notes to Consolidated Financial Statements December 31, 1998 and 1997 Partners. This transaction will be accounted for as a reorganization of entities under common control, similar to a pooling of interests. Beginning in 1999, all periods presented will be restated to give effect to this transaction as if it occurred on December 31, 1995. The effect of this restatement on the consolidated financial statements of the Operating Partnership would be (i) Investment in Glenborough Hotel Group for the years ended December 31, 1998 and 1997 of $2,007,000 and $2,429,000, respectively, and (ii) Equity in earnings (loss) of Glenborough Hotel Group for the years ended December 31, 1998, 1997 and 1996 of $(219,000), $1,056,000 and $528,000, respectively. Note 14. UNAUDITED QUARTERLY RESULTS OF OPERATIONS The following represents an unaudited summary of quarterly results of operations for the year ended December 31, 1998 (in thousands, except for weighted average units and per unit amounts):
Quarter Ended -------------------------------------------------------------------- March 31, June 30, Sept 30, Dec 31, 1998 1998 1998 1998 -------------- -------------- -------------- -------------- REVENUE Rental revenue $ 45,963 $ 51,619 $ 65,321 $ 65,053 Fees and reimbursements from affiliates 473 759 1,220 350 Interest and other income 307 246 1,416 2,588 Equity in earnings (loss) of Glenborough Corporation 111 740 1,038 (356) Net gain (reduction in prior quarter gain) on sales of real estate assets 1,446 693 (250) 2,907 -------------- -------------- -------------- -------------- Total revenue 48,300 54,057 68,745 70,542 -------------- -------------- -------------- -------------- EXPENSES Property operating expenses 15,671 16,265 22,446 21,044 General and administrative 1,866 2,603 3,372 2,841 Depreciation and amortization 9,984 10,934 14,309 14,942 Interest expense 9,145 9,707 17,064 17,373 Loss on interest rate protection agreement -- -- -- 4,323 -------------- -------------- -------------- -------------- Total expenses 36,666 39,509 57,191 60,523 -------------- -------------- -------------- -------------- Income from operations before extraordinary item 11,634 14,548 11,554 10,019 Extraordinary item: Loss on early extinguishment of debt -- -- -- (1,400) -------------- -------------- -------------- -------------- Net income 11,634 14,548 11,554 8,619 Preferred partner interest distributions (3,910) (5,570) (5,570) (5,570) -------------- -------------- -------------- --------------- Net income after preferred partner interest distributions $ 7,724 $ 8,978 $ 5,984 $ 3,049 ============== ============== ============== ============== Per Partnership Unit Data: Net income after preferred partner interest distributions and before extraordinary item $ 0.23 $ 0.26 $ 0.17 $ 0.12 Extraordinary item -- -- -- (0.04) --------------- ------------- -------------- -------------- Net income after preferred partner interest distributions $ 0.23 $ 0.26 $ 0.17 $ 0.08 =============== ============= ============== ============== Weighted average number of partnership units outstanding 33,703,270 34,365,125 35,864,869 35,907,054 =============== ============= ============== ==============
Per unit amounts do not necessarily sum to per unit amounts for the year as weighted average units outstanding are measured for each period presented, rather than solely for the entire year. Page 57 of 73
GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) COLUMN A COLUMN B COLUMN C COLUMN D Costs Capitalized (Reduced) Initial Cost to Subsequent to Company (1) Acquisition (4) Buildings and Description Encumbrances Land Improvements Improvements - ------------------------------------------------------------------------------------------------------- Tradewinds Financial, AZ $ - $ 304 $ 1,214 $ 47 Vintage Pointe, AZ 2,067 738 2,950 213 400 South El Camino Real, CA (8) 4,000 30,549 3,355 Academy Prof. Center, CA - 481 1,866 100 Centerstone Plaza, CA (6) 6,077 24,265 214 Dallidet Prof. Center, CA - 677 2,703 51 University Tech Center, CA (2) - 2,086 8,046 469 Warner Village Medical, CA - 558 2,232 207 One Gateway Center, CO (9) 470 9,498 195 Buschwood III, FL (8) 1,479 5,890 184 Park Place, FL (8) 1,895 12,982 266 Temple Terrace Bus. Center, FL - 1,788 6,949 24 Ashford Perimeter, GA 21,369 1,174 42,227 158 Powers Ferry Landing East, GA 18,896 2,744 40,600 92 Capitol Center, IA (8) - 11,981 72 Columbia Center II, IL - 208 20,329 237 Embassy Plaza, IL - 436 15,680 457 Oak Brook International, IL (8) 757 11,126 315 Oakbrook Terrace, IL 19,420 552 37,635 154 Crosspoint Four, IN - 394 2,847 56 Meridian Park, IN - 1,296 5,906 117 The Osram Building, IN - 264 4,515 12 Leawood Office Building, KS 4,299 1,124 10,300 59 Blue Ridge Office Building, MA 2,996 734 5,877 164 Bronx Park I, MA - 916 9,104 275 Marlborough Corporate Place, MA - 5,655 55,908 368 The Hartwood Building, MA 2,557 527 5,426 94 Westford Corporate Center, MA (6) 2,091 8,310 55 Montgomery Exec. Center, MD (8) 1,928 7,676 422 (continued)
GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) COLUMN E COLUMN F COLUMN G COLUMN H Gross Amount Carried at December 31, 1998 Buildings (1) Life and (3) Accumulated Date Depreciated Description Land Improvements Total Depreciation Acquired Over - ------------------------------------------------------------------------------------------------------------------------ Office Properties: Tradewinds Financial, AZ $ 304 $ 1,261 $ 1,565 $ 110 11/96 1-30 yrs. Vintage Pointe, AZ 738 3,163 3,901 301 11/96 1-30 yrs. 400 South El Camino Real, CA 4,000 33,904 37,904 1,536 3/98 1-30 yrs. Academy Prof. Center, CA 481 1,966 2,447 115 4/97 1-30 yrs. Centerstone Plaza, CA 6,077 24,479 30,556 1,242 7/97 1-30 yrs. Dallidet Prof. Center, CA 677 2,754 3,431 237 11/96 1-30 yrs. University Tech Center, CA (2) 2,086 8,515 10,601 444 6/97 1-30 yrs. Warner Village Medical, CA 558 2,439 2,997 202 10/96 1-30 yrs. One Gateway Center, CO 470 9,693 10,163 162 7/98 1-30 yrs. Buschwood III, FL 1,479 6,074 7,553 302 9/97 1-30 yrs. Park Place, FL 1,895 13,248 15,143 451 1/98 1-30 yrs. Temple Terrace Bus. Center, FL 1,788 6,973 8,761 290 12/97 1-30 yrs. Ashford Perimeter, GA 1,174 42,385 43,559 1,416 1/98 1-30 yrs. Powers Ferry Landing East, GA 2,744 40,692 43,436 1,367 1/98 1-30 yrs. Capitol Center, IA - 12,053 12,053 401 2/98 1-30 yrs. Columbia Center II, IL 208 20,566 20,774 707 1/98 1-30 yrs. Embassy Plaza, IL 436 16,137 16,573 532 1/98 1-30 yrs. Oak Brook International, IL 757 11,441 12,198 399 1/98 1-30 yrs. Oakbrook Terrace, IL 552 37,789 38,341 1,246 1/98 1-30 yrs. Crosspoint Four, IN 394 2,903 3,297 71 4/98 1-30 yrs. Meridian Park, IN 1,296 6,023 7,319 145 4/98 1-30 yrs. The Osram Building, IN 264 4,527 4,791 113 4/98 1-30 yrs. Leawood Office Building, KS 1,124 10,359 11,483 318 3/98 1-30 yrs. Blue Ridge Office Building, MA 734 6,041 6,775 222 3/98 1-30 yrs. Bronx Park I, MA 916 9,379 10,295 299 3/98 1-30 yrs. Marlborough Corporate Place, MA 5,655 56,276 61,931 1,884 1/98 1-30 yrs. The Hartwood Building, MA 527 5,520 6,047 184 3/98 1-30 yrs. Westford Corporate Center, MA 2,091 8,365 10,456 488 4/97 1-30 yrs. Montgomery Exec. Center, MD 1,928 8,098 10,026 428 9/97 1-30 yrs. (continued)
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GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) COLUMN A COLUMN B COLUMN C COLUMN D Cost Capitalized (Reduced) Initial Cost to Subsequent to Company (1) Acquisition (4) Buildings and Description Encumbrances Land Improvements Improvements - ----------------------------------------------------------------------------------------------------- Office Properties continued: Rockwall I & II, MD $ - $ 807 $ 47,259 $ 263 Bond Street Building, MI - 716 2,147 311 Riverview Office Tower, MN (6) 4,095 16,333 1,254 University Club Tower, MO - 4,087 14,519 2,535 Woodlands Plaza, MO (6) 1,114 4,426 448 Edinburgh Center, NC (8) 984 14,232 167 One & Three Pacific Place, NE (8) 1,985 18,014 65 One Professional Square, NE - 285 1,142 230 Regency Westpointe, NE (5) (7) 530 3,147 864 25 Independence Blvd., NJ (8) 4,547 18,141 51 Bridgewater Exec. Quarters, NJ 4,433 2,075 7,337 20 Executive Place, NJ - 944 11,347 27 Frontier Exec. Quarters I, NJ (8) 4,200 33,892 242 Frontier Exec. Quarters II, NJ (8) 631 5,091 65 Gatehall, NJ - 1,865 7,427 495 Morristown Medical Offices, NJ - 518 1,832 6 Vreeland Business Ctr., NJ - 1,863 8,714 39 Citibank Park, NV (8) 4,628 18,442 865 Thousand Oaks, TN - 9,741 40,355 962 Post Oak Place, TX - 396 1,579 85 4500 Plaza, UT (5) 788 1,123 4,606 838 2000 Corporate Ridge, VA 20,994 909 41,096 229 700 South Washington, VA (6) 1,981 7,894 53 Cameron Run, VA 10,194 414 18,964 231 Globe Building, WA - 375 1,501 213 - ----------------------------------------------------------------------------------------------------- Office Total 92,166 754,028 18,990 - ----------------------------------------------------------------------------------------------------- (continued)
GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) COLUMN E COLUMN F COLUMN G COLUMN H Gross Amount Carried at December 31, 1998 Buildings (1) Life and (3) Accumulated Date Depreciated Description Land Improvements Total Depreciation Acquired Over - ----------------------------------------------------------------------------------------------------------------------- Office Properties continued: Rockwall I & II, MD $ 807 $ 47,522 $ 48,329 $ 1,610 1/98 1-30 yrs. Bond Street Building, MI 716 2,458 3,174 198 9/96 1-40 yrs. Riverview Office Tower, MN 4,095 17,587 21,682 1,059 4/97 1-30 yrs. University Club Tower, MO 4,087 17,054 21,141 1,492 7/96 1-40 yrs. Woodlands Plaza, MO 1,114 4,874 5,988 353 4/97 1-30 yrs. Edinburgh Center, NC 984 14,399 15,383 486 1/98 1-30 yrs. One & Three Pacific Place, NE 1,985 18,079 20,064 452 5/98 1-30 yrs. One Professional Square, NE 285 1,372 1,657 126 10/96 1-30 yrs. Regency Westpointe, NE (5) 530 4,011 4,541 1,679 6/87 1-30 yrs. 25 Independence Blvd., NJ 4,547 18,192 22,739 909 9/97 1-30 yrs. Bridgewater Exec. Quarters, NJ 2,075 7,357 9,432 368 9/97 1-30 yrs. Executive Place, NJ 944 11,374 12,318 190 8/98 1-30 yrs. Frontier Exec. Quarters I, NJ 4,200 34,134 38,334 1,702 9/97 1-30 yrs. Frontier Exec. Quarters II, NJ 631 5,156 5,787 256 9/97 1-30 yrs. Gatehall, NJ 1,865 7,922 9,787 388 9/97 1-30 yrs. Morristown Medical Offices, NJ 518 1,838 2,356 92 9/97 1-30 yrs. Vreeland Business Ctr., NJ 1,863 8,753 10,616 218 6/98 1-30 yrs. Citibank Park, NV 4,628 19,307 23,935 824 9/97 1-30 yrs. Thousand Oaks, TN 9,741 41,317 51,058 1,746 12/97 1-30 yrs. Post Oak Place, TX 396 1,664 2,060 89 9/97 1-30 yrs. 4500 Plaza, UT (5) 1,123 5,444 6,567 2,817 3/86 1-30 yrs. 2000 Corporate Ridge, VA 909 41,325 42,234 1,377 1/98 1-30 yrs. 700 South Washington, VA 1,981 7,947 9,928 465 4/97 1-30 yrs. Cameron Run, VA 414 19,195 19,609 648 1/98 1-30 yrs. Globe Building, WA 375 1,714 2,089 162 10/96 1-30 yrs. - ----------------------------------------------------------------------------------------------------------------------- Office Total 92,166 773,018 865,184 35,318 - ----------------------------------------------------------------------------------------------------------------------- (continued)
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GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) COLUMN A COLUMN B COLUMN C COLUMN D Cost Capitalized (Reduced) Initial Cost to Subsequent to Company (1) Acquisition (4) Buildings and Description Encumbrances Land Improvements Improvements - ------------------------------------------------------------------------------------------------------ Office/Flex Properties: Baseline Business Park, AZ $ - $ 886 $ 3,527 $ 190 Hoover Industrial, AZ - 322 1,290 80 Magnolia Industrial, AZ - 322 1,241 151 Chatsworth Ind. Park, CA 795 264 1,014 62 Dominguez Industrial, CA - 697 2,662 137 Dunn Way Industrial, CA - 427 1,601 227 Glassell Industrial Center, CA 1,278 704 2,630 228 Kraemer Industrial Park, CA 1,442 401 1,537 106 Monroe Industrial, CA 713 282 1,101 105 Rancho Bernardo, CA - 518 2,072 55 Scripps Terrace, CA - 678 2,685 73 Tierrasanta Research Park, CA (8) 1,303 5,189 727 Upland Industrial, CA - 155 576 81 Gateway Eight, CO (9) 442 3,870 30 Gateway Four, CO (10) 523 3,517 28 Gateway One, CO 2,416 402 3,608 27 Gateway Six, CO (10) 568 5,040 129 Northglenn Bus. Center, CO - 1,335 3,354 37 Valley Business Park, CO - 1,764 7,027 134 Cypress Creek Bus. Center, FL - 876 3,490 525 Fingerhut Business Center, FL - 1,188 3,282 10 Grand Regency Business Ctr., FL - 1,120 4,302 1,082 Lake Point Business Park, FL (6) 1,344 5,343 244 Newport Business Center, FL - 654 2,604 171 Primeco Business Center, FL - 950 3,418 12 Oakbrook Corners, GA (8) 1,057 4,209 98 The Business Park, GA (8) 1,485 5,912 375 Covance Business Center, IN - 1,405 15,109 - Park 100 - Building 42, IN (5) - 712 3,286 (522) (continued)
GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) COLUMN E COLUMN F COLUMN G COLUMN H Gross Amount Carried at December 31, 1998 Buildings (1) Life and (3) Accumulated Date Depreciated Description Land Improvements Total Depreciation Acquired Over - -------------------------------------------------------------------------------------------------------------------- Baseline Business Park, AZ $ 886 $ 3,717 $ 4,603 $ 193 9/97 1-30 yrs. Hoover Industrial, AZ 322 1,370 1,692 114 10/96 1-30 yrs. Magnolia Industrial, AZ 322 1,392 1,714 82 6/97 1-30 yrs. Chatsworth Ind. Park, CA 264 1,076 1,340 62 4/97 1-30 yrs. Dominguez Industrial, CA 697 2,799 3,496 166 4/97 1-30 yrs. Dunn Way Industrial, CA 427 1,828 2,255 112 4/97 1-30 yrs. Glassell Industrial Center, CA 704 2,858 3,562 166 4/97 1-30 yrs. Kraemer Industrial Park, CA 401 1,643 2,044 99 4/97 1-30 yrs. Monroe Industrial, CA 282 1,206 1,488 72 4/97 1-30 yrs. Rancho Bernardo, CA 518 2,127 2,645 189 10/96 1-30 yrs. Scripps Terrace, CA 678 2,758 3,436 137 9/97 1-30 yrs. Tierrasanta Research Park, CA 1,303 5,916 7,219 342 9/97 1-30 yrs. Upland Industrial, CA 155 657 812 41 4/97 1-30 yrs. Gateway Eight, CO 442 3,900 4,342 65 7/98 1-30 yrs. Gateway Four, CO 523 3,545 4,068 59 7/98 1-30 yrs. Gateway One, CO 402 3,635 4,037 60 7/98 1-30 yrs. Gateway Six, CO 568 5,169 5,737 97 7/98 1-30 yrs. Northglenn Bus. Center, CO 1,335 3,391 4,726 141 12/97 1-30 yrs. Valley Business Park, CO 1,764 7,161 8,925 357 9/97 1-30 yrs. Cypress Creek Bus. Center, FL 876 4,015 4,891 210 9/97 1-30 yrs. Fingerhut Business Center, FL 1,188 3,292 4,480 137 12/97 1-30 yrs. Grand Regency Business Ctr., FL 1,120 5,384 6,504 286 12/97 1-30 yrs. Lake Point Business Park, FL 1,344 5,587 6,931 345 4/97 1-30 yrs. Newport Business Center, FL 654 2,775 3,429 142 9/97 1-30 yrs. Primeco Business Center, FL 950 3,430 4,380 143 12/97 1-30 yrs. Oakbrook Corners, GA 1,057 4,307 5,364 219 9/97 1-30 yrs. The Business Park, GA 1,485 6,287 7,772 323 9/97 1-30 yrs. Covance Business Center, IN 1,405 15,109 16,514 294 7/98 1-30 yrs. Park 100 - Building 42, IN (5) 712 2,764 3,476 773 10/86 5-25 yrs. (continued)
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GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) COLUMN A COLUMN B COLUMN C COLUMN D Cost Capitalized (Reduced) Initial Cost to Subsequent to Company (1) Acquisition (4) Buildings and Description Encumbrances Land Improvements Improvements - ------------------------------------------------------------------------------------------------------- Office/Flex Properties continued: Canton Business Center, MA $ 3,318 $ 796 $ 6,758 $ 29 Fisher-Pierce, MA (6) 718 2,860 115 Columbia Warehouse, MD - 393 1,565 9 Germantown Business Center, MD (8) 1,442 5,753 17 Bryant Lake Business Center, MN (8) 1,907 7,531 751 Riverview Industrial Park, MN - 841 3,348 213 Winnetka Industrial Center, MN - 1,189 4,737 87 Woodlands Tech Center, MO (6) 949 3,773 431 Fairfield Business Quarters, NJ 2,794 817 3,479 67 Fox Hollow Bus. Quarters, NJ - 1,576 2,358 119 Palms Business Center III, NV (8) 3,984 10,207 73 Palms Business Center IV, NV (8) 627 3,272 15 Palms Business Center North, NV (8) 2,492 7,067 43 Palms Business Center South, NV (8) 4,134 9,610 133 Post Palms Business Center, NV - 2,522 9,453 65 Clark Avenue, PA - 649 2,584 20 Lehigh Valley Exec. Campus, PA - 1,748 12,826 210 Valley Forge Corporate Center, PA - 2,614 34,805 126 Walnut Creek Bus. Center, TX 1,371 774 3,093 140 Kent Business Park, WA (8) 1,211 4,822 52 - ------------------------------------------------------------------------------------------------------- Office/Flex Total 54,167 244,397 7,317 - ------------------------------------------------------------------------------------------------------- Industrial Properties: Fairmont Commerce Center, AZ - 735 2,928 21 Fifth Street Industrial, AZ - 654 2,522 86 Benicia Industrial Park, CA (5) (7) 978 4,787 203 Coronado Industrial, CA (8) 711 2,831 41 East Anaheim Industrial, CA (8) 1,480 3,282 23 (continued)
GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) COLUMN E COLUMN F COLUMN G COLUMN H Gross Amount Carried at December 31, 1998 Buildings (1) Life and (3) Accumulated Date Depreciated Description Land Improvements Total Depreciation Acquired Over - ---------------------------------------------------------------------------------------------------------------------- Office/Flex Properties continued: Canton Business Center, MA $ 796 $ 6,787 $ 7,583 $ 233 3/98 1-30 yrs. Fisher-Pierce, MA 718 2,975 3,693 168 4/97 1-30 yrs. Columbia Warehouse, MD 393 1,574 1,967 65 10/97 1-30 yrs. Germantown Business Center, MD 1,442 5,770 7,212 288 9/97 1-30 yrs. Bryant Lake Business Center, MN 1,907 8,282 10,189 344 11/97 1-30 yrs. Riverview Industrial Park, MN 841 3,561 4,402 171 9/97 1-30 yrs. Winnetka Industrial Center, MN 1,189 4,824 6,013 238 9/97 1-30 yrs. Woodlands Tech Center, MO 949 4,204 5,153 289 4/97 1-30 yrs. Fairfield Business Quarters, NJ 817 3,546 4,363 174 9/97 1-30 yrs. Fox Hollow Bus. Quarters, NJ 1,576 2,477 4,053 127 9/97 1-30 yrs. Palms Business Center III, NV 3,984 10,280 14,264 429 10/97 1-30 yrs. Palms Business Center IV, NV 627 3,287 3,914 137 10/97 1-30 yrs. Palms Business Center North, NV 2,492 7,110 9,602 297 10/97 1-30 yrs. Palms Business Center South, NV 4,134 9,743 13,877 410 10/97 1-30 yrs. Post Palms Business Center, NV 2,522 9,518 12,040 399 10/97 1-30 yrs. Clark Avenue, PA 649 2,604 3,253 130 9/97 1-30 yrs. Lehigh Valley Exec. Campus, PA 1,748 13,036 14,784 436 1/98 1-30 yrs. Valley Forge Corporate Center, PA 2,614 34,931 37,545 1,173 1/98 1-30 yrs. Walnut Creek Bus. Center, TX 774 3,233 4,007 262 10/96 1-30 yrs. Kent Business Park, WA 1,211 4,874 6,085 247 9/97 1-30 yrs. - ---------------------------------------------------------------------------------------------------------------------- Office/Flex Total 54,167 251,714 305,881 11,443 - ---------------------------------------------------------------------------------------------------------------------- Industrial Properties: Fairmont Commerce Center, AZ 735 2,949 3,684 123 10/97 1-30 yrs. Fifth Street Industrial, AZ 654 2,608 3,262 153 6/97 1-30 yrs. Benicia Industrial Park, CA (5) 978 4,990 5,968 2,034 7/86 1-30 yrs. Coronado Industrial, CA 711 2,872 3,583 143 9/97 1-30 yrs. East Anaheim Industrial, CA 1,480 3,305 4,785 138 10/97 1-30 yrs. (continued)
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GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) COLUMN A COLUMN B COLUMN C COLUMN D Cost Capitalized (Reduced) Initial Cost to Subsequent to Company (1) Acquisition (4) Buildings and Description Encumbrances Land Improvements Improvements - ----------------------------------------------------------------------------------------------------- Industrial Properties continued: Springdale Commerce Center, CA (8) $ 1,030 $ 4,101 $ 74 Gateway Nine, CO $4,764612 4,941 214 612 Gateway Seven, CO (10) 638 5,143 183 Gateway Ten, CO (9) 524 4,762 36 Gateway Three, CO (10) 508 4,704 38 Gateway Two, CO 3,890 561 4,425 35 Burnham Industrial Warehouse, FL - 594 2,366 10 Atlantic Industrial, GA - 634 3,866 (1,278) Bonnie Lane Business Center, IL - 738 2,938 20 Glenn Avenue Business Center, IL - 565 2,250 10 Navistar International, IL (5) (7) 793 10,941 (4,122) Wood Dale Business Center, IL - 603 2,403 38 Park 100 - Building 46, IN (5) - - - 211 J.I. Case Equip. Corp., KS (5) - 236 3,264 (1,250) Flanders Industrial Park, MA - 738 5,634 193 Forest Street Business Center, MA - 227 1,801 27 Southworth-Milton, MA (6) 1,922 7,652 78 Navistar International, MD (5) (7) 356 4,911 (1,879) Cottontail Distribution Center, NJ9,782 1,616 16,278 68 Eatontown Industrial, NJ - 765 1,963 19 Jencraft Industrial, NJ (8) 1,326 4,975 14 J.I. Case Equip. Corp., TN (5) - 187 2,583 (988) Mercantile I, TX - 783 3,133 192 Quaker Industrial, TX - 103 412 42 Sea Tac II, WA (5) - 712 1,474 (178) - ----------------------------------------------------------------------------------------------------- Industrial Total 21,329 123,270 (7,819) - ----------------------------------------------------------------------------------------------------- (continued)
GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) COLUMN E COLUMN F COLUMN G COLUMN H Gross Amount Carried at December 31, 1998 Buildings (1) Life and (3) Accumulated Date Depreciated Description Enc Land Improvements Total Depreciation Acquired Over - ----------------------------------------------------------------------------------------------------------------------- Industrial Properties continued: Springdale Commerce Center, CA $ 1,030 $ 4,175 $ 5,205 $ 206 9/97 1-30 yrs. Gateway Nine, CO 612 5,155 5,767 103 7/98 1-30 yrs. Gateway Seven, CO 638 5,326 5,964 88 7/98 1-30 yrs. Gateway Ten, CO 524 4,798 5,322 80 7/98 1-30 yrs. Gateway Three, CO 508 4,742 5,250 79 7/98 1-30 yrs. Gateway Two, CO 561 4,460 5,021 74 7/98 1-30 yrs. Burnham Industrial Warehouse, FL 594 2,376 2,970 119 9/97 1-30 yrs. Atlantic Industrial, GA 634 2,588 3,222 120 9/97 1-30 yrs. Bonnie Lane Business Center, IL 738 2,958 3,696 148 9/97 1-30 yrs. Glenn Avenue Business Center, IL 565 2,260 2,825 113 9/97 1-30 yrs. Navistar International, IL (5) 793 6,819 7,612 2,040 3/84 50 yrs. Wood Dale Business Center, IL 603 2,441 3,044 121 9/97 1-30 yrs. Park 100 - Building 46, IN (5) - 211 211 135 10/86 5-25 yrs. J.I. Case Equip. Corp., KS (5) 236 2,014 2,250 598 3/84 50 yrs. Flanders Industrial Park, MA 738 5,827 6,565 204 3/98 1-30 yrs. Forest Street Business Center, MA 227 1,828 2,055 56 3/98 1-30 yrs. Southworth-Milton, MA 1,922 7,730 9,652 449 4/97 1-30 yrs. Navistar International, MD (5) 356 3,032 3,388 899 3/84 50 yrs. Cottontail Distribution Center, NJ 1,616 16,346 17,962 409 6/98 1-30 yrs. Eatontown Industrial, NJ 765 1,982 2,747 98 9/97 1-30 yrs. Jencraft Industrial, NJ 1,326 4,989 6,315 249 9/97 1-30 yrs. J.I. Case Equip. Corp., TN (5) 187 1,595 1,782 474 3/84 50 yrs. Mercantile I, TX 783 3,325 4,108 328 10/96 1-30 yrs. Quaker Industrial, TX 103 454 557 45 10/96 1-30 yrs. Sea Tac II, WA (5) 712 1,296 2,008 391 2/86 5-25 yrs. - ----------------------------------------------------------------------------------------------------------------------- Industrial Total 21,329 115,451 136,780 10,217 - ----------------------------------------------------------------------------------------------------------------------- (continued)
Page 62 of 73
GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) COLUMN A COLUMN B COLUMN C COLUMN D Cost Capitalized (Reduced) Initial Cost to Subsequent to Company (1) Acquisition (4) Buildings and Description Encumbrances Land Improvements Improvements - ------------------------------------------------------------------------------------------------------ Retail Properties: Park Center, CA (5) $ - $ 1,748 $ 3,296 $ (502) Sonora Plaza, CA 4,891 1,948 7,781 68 Piedmont Plaza, FL - 1,317 5,233 70 River Run Shopping Ctr., FL - 1,428 5,687 53 Westwood Plaza, FL (5) (7) 2,599 5,110 2,745 Shannon Crossing, GA (5) (7) 2,487 2,075 360 Westbrook Commons, IL (8) 3,067 12,213 495 Broad Ripple Retail Center, IN - 542 3,876 123 Cross Creek Retail Center, IN 5,019 1,516 4,351 144 Geist Retail Centre, IN 4,366 1,012 4,828 182 Woodfield Centre, IN - 765 4,685 187 Goshen Plaza, MD - 994 3,958 26 Auburn North, WA - 1,100 4,397 1,213 - ------------------------------------------------------------------------------------------------------ Retail Total 20,523 67,490 5,164 - ------------------------------------------------------------------------------------------------------ Multi-Family Properties: Overlook Apartments, AZ (6) 2,274 9,036 181 Aspen Ridge, CO 7,500 983 8,853 55 Stone Ridge at Vinings, GA (11) 1,881 16,942 55 Woodmere Trace, GA (11) 1,002 9,029 25 Crosscreek Apartments, IN 6,287 701 9,042 41 Harcourt Club Apartments, IN 3,800 437 5,389 62 Island Club Apartments, IN 12,097 713 15,596 81 Arrowood Crossing I & II, NC (8) 1,837 7,222 430 The Chase (Commonwealth), NC 3,167 784 3,083 163 The Chase (Monroe), NC (8) 1,033 4,062 117 Sabal Point I, II & III, NC (8) 3,714 14,602 583 Sharonridge I & II, NC 1,744 527 2,071 57 The Courtyard, NC 1,584 438 1,723 85 (continued)
GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) COLUMN E COLUMN F COLUMN G COLUMN H Gross Amount Carried at December 31, 1998 Buildings (1) Life and (3) Accumulated Date Depreciated Description Land Improvements Total Depreciation Acquired Over - ---------------------------------------------------------------------------------------------------------------------- Retail Properties: Park Center, CA (5) $ 1,748 $ 2,794 $ 4,542 $ 750 9/86 5-25 yrs. Sonora Plaza, CA 1,948 7,849 9,797 652 11/96 1-30 yrs. Piedmont Plaza, FL 1,317 5,303 6,620 311 4/97 1-30 yrs. River Run Shopping Ctr., FL 1,428 5,740 7,168 289 9/97 1-30 yrs. Westwood Plaza, FL (5) 2,599 7,855 10,454 2,918 1/88 1-30 yrs. Shannon Crossing, GA (5) 2,487 2,435 4,922 1,766 10/88 1-30 yrs. Westbrook Commons, IL 3,067 12,708 15,775 621 9/97 1-30 yrs. Broad Ripple Retail Center, IN 542 3,999 4,541 97 4/98 1-30 yrs. Cross Creek Retail Center, IN 1,516 4,495 6,011 111 4/98 1-30 yrs. Geist Retail Centre, IN 1,012 5,010 6,022 124 4/98 1-30 yrs. Woodfield Centre, IN 765 4,872 5,637 118 4/98 1-30 yrs. Goshen Plaza, MD 994 3,984 4,978 199 9/97 1-30 yrs. Auburn North, WA 1,100 5,610 6,710 413 10/96 1-30 yrs. - ---------------------------------------------------------------------------------------------------------------------- Retail Total 20,523 72,654 93,177 8,369 - ---------------------------------------------------------------------------------------------------------------------- Multi-Family Properties: Overlook Apartments, AZ 2,274 9,217 11,491 544 4/97 1-30 yrs. Aspen Ridge, CO 983 8,908 9,891 152 6/98 1-30 yrs. Stone Ridge at Vinings, GA 1,881 16,997 18,878 288 6/98 1-30 yrs. Woodmere Trace, GA 1,002 9,054 10,056 154 6/98 1-30 yrs. Crosscreek Apartments, IN 701 9,083 9,784 228 4/98 1-30 yrs. Harcourt Club Apartments, IN 437 5,451 5,888 136 4/98 1-30 yrs. Island Club Apartments, IN 713 15,677 16,390 393 4/98 1-30 yrs. Arrowood Crossing I & II, NC 1,837 7,652 9,489 316 12/97 1-30 yrs. The Chase (Commonwealth), NC 784 3,246 4,030 136 12/97 1-30 yrs. The Chase (Monroe), NC 1,033 4,179 5,212 177 12/97 1-30 yrs. Sabal Point I, II & III, NC 3,714 15,185 18,899 634 12/97 1-30 yrs. Sharonridge I & II, NC 527 2,128 2,655 90 12/97 1-30 yrs. The Courtyard, NC 438 1,808 2,246 76 12/97 1-30 yrs. (continued)
Page 63 of 73
GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) COLUMN A COLUMN B COLUMN C COLUMN D Cost Capitalized (Reduced) Initial Cost to Subsequent to Company (1) Acquisition (4) Buildings and Description Encumbrances Land Improvements Improvements - ------------------------------------------------------------------------------------------------------ Multi-Family Properties continued: The Landing on Farmhurst, NC $ 3,109 $ 841 $ 3,306 $ 105 The Oaks, NC 2,292 644 2,649 123 Wendover Glen, NC 2,480 597 2,346 186 Willow Glen, NC (8) 823 3,236 150 Sahara Gardens, NV (8) 1,872 7,500 580 Villas De Mission, NV (8) 1,924 7,695 282 Player's Club of Brentwood, TN (8) 800 7,205 52 Bandera Crossing, TX (11) 675 6,077 12 Bear Creek Crossing, TX (11) 627 5,650 17 Cypress Creek Apartments, TX (11) 732 6,591 214 The Hollows, TX (11) 1,390 12,518 35 Hunterwood, TX (11) 563 5,067 27 Hunter's Chase, TX (11) 2,094 18,857 46 Jefferson Creek, TX (12) 1,889 17,017 35 Jefferson Place, TX (12) 2,620 23,598 46 La Costa, TX (12) 2,826 25,453 56 Longspur, TX (11) 1,240 11,165 46 North Park Crossing, TX (11) 1,147 10,332 25 Silver Vale Crossing, TX (11) 1,111 10,006 33 The Park at Woodlake, TX (8) 1,676 15,100 138 Vista Crossing, TX (11) 737 6,643 16 Walnut Creek Crossing, TX (11) 1,286 11,586 20 Willow Brook Crossing, TX (11) 716 6,448 126 Wind River Crossing, TX (11) 1,437 12,939 72 - ------------------------------------------------------------------------------------------------------ Multi-family Total 46,591 345,634 4,377 - ------------------------------------------------------------------------------------------------------ (continued)
GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) COLUMN E COLUMN F COLUMN G COLUMN H Gross Amount Carried at December 31, 1998 Buildings (1) Life and (3) Accumulated Date Depreciated Description Land Improvements Total Depreciation Acquired Over - ---------------------------------------------------------------------------------------------------------------------- Multi-Family Properties continued: The Landing on Farmhurst, NC $ 841 $ 3,411 $ 4,252 $ 142 12/97 1-30 yrs. The Oaks, NC 644 2,772 3,416 115 12/97 1-30 yrs. Wendover Glen, NC 597 2,532 3,129 108 12/97 1-30 yrs. Willow Glen, NC 823 3,386 4,209 142 12/97 1-30 yrs. Sahara Gardens, NV 1,872 8,080 9,952 654 10/96 1-30 yrs. Villas De Mission, NV 1,924 7,977 9,901 674 10/96 1-30 yrs. Player's Club of Brentwood, TN 800 7,257 8,057 122 6/98 1-30 yrs. Bandera Crossing, TX 675 6,089 6,764 104 6/98 1-30 yrs. Bear Creek Crossing, TX 627 5,667 6,294 98 6/98 1-30 yrs. Cypress Creek Apartments, TX 732 6,805 7,537 116 6/98 1-30 yrs. The Hollows, TX 1,390 12,553 13,943 216 6/98 1-30 yrs. Hunterwood, TX 563 5,094 5,657 87 6/98 1-30 yrs. Hunter's Chase, TX 2,094 18,903 20,997 322 6/98 1-30 yrs. Jefferson Creek, TX 1,889 17,052 18,941 288 6/98 1-30 yrs. Jefferson Place, TX 2,620 23,644 26,264 401 6/98 1-30 yrs. La Costa, TX 2,826 25,509 28,335 432 6/98 1-30 yrs. Longspur, TX 1,240 11,211 12,451 192 6/98 1-30 yrs. North Park Crossing, TX 1,147 10,357 11,504 178 6/98 1-30 yrs. Silver Vale Crossing, TX 1,111 10,039 11,150 172 6/98 1-30 yrs. The Park at Woodlake, TX 1,676 15,238 16,914 262 6/98 1-30 yrs. Vista Crossing, TX 737 6,659 7,396 114 6/98 1-30 yrs. Walnut Creek Crossing, TX 1,286 11,606 12,892 198 6/98 1-30 yrs. Willow Brook Crossing, TX 716 6,574 7,290 112 6/98 1-30 yrs. Wind River Crossing, TX 1,437 13,011 14,448 223 6/98 1-30 yrs. - ---------------------------------------------------------------------------------------------------------------------- Multi-family Total 46,591 350,011 396,602 8,796 - ---------------------------------------------------------------------------------------------------------------------- (continued)
Page 64 of 73
GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) COLUMN A COLUMN B COLUMN C COLUMN D Cost Capitalized (Reduced) Initial Cost to Subsequent to Company (1) Acquisition (4) Buildings and Description Encumbrances Land Improvements Improvements - --------------------------------------------------------------------------------------------------- Hotel Properties: Country Inn & Suites by Carlson: Scottsdale, AZ $ 4,255 $ - $ 12,117 $ 82 Country Suites by Carlson: Ontario, CA (5) (7) 1,145 5,576 518 Arlington, TX (5) (7) 1,611 5,346 1,289 - --------------------------------------------------------------------------------------------------- Hotel Total 2,756 23,039 1,889 - --------------------------------------------------------------------------------------------------- Combined Total $ 228,299 $ 237,532 $ 1,557,858 $ 29,918 =================================================================================================== (1) Initial cost and date acquired by GRT Predecessor Entities, where applicable. (2) The Company holds a participating first mortgage interest in the property. In accordance with GAAP, the Company is accounting for the property as though it holds fee title. (3) The aggregate cost for Federal income tax purposes is $1,704,942. (4) Bracketed amounts represent reductions to carrying value in prior years. (5) Initial Cost represents original book value carried forward from the financial statements of the GRT Predecessor Entities. (6) Cross collateralized loan secured by ten properties - $58,942. (7) Cross collateralized loan secured by eight properties - $13,220. (8) Cross collateralized loans secured by 35 properties - $234,871. (9) Cross collateralized loan secured by three properties - $15,650. (10) Cross collateralized loan secured by four properties - $14,309. (11) Cross collateralized loan secured by 15 properties - $114,950. (12) Cross collateralized loan secured by three properties - $53,469.
GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H Gross Amount Carried at December 31, 1998 Buildings (1) Life and (3) Accumulated Date Depreciated Description Land Improvements Total Depreciation Acquired Over - -------------------------------------------------------------------------------------------------------------------- Hotel Properties: Country Inn & Suites by Carlson: Scottsdale, AZ $ - $ 12,199 $ 12,199 $ 1,197 2/97 3-30 yrs. Country Suites by Carlson: Ontario, CA (5) 1,145 6,094 7,239 3,470 11/86 5-30 yrs. Arlington, TX (5) 1,611 6,635 8,246 4,059 12/86 5-30 yrs. - -------------------------------------------------------------------------------------------------------------------- Hotel Total 2,756 24,928 27,684 8,726 - -------------------------------------------------------------------------------------------------------------------- Combined Total $ 237,532 $ 1,587,776 $ 1,825,308 $ 82,869 ==================================================================================================================== (1) Initial cost and date acquired by GRT Predecessor Entities, where applicable. (2) The Company holds a participating first mortgage interest in the property. In accordance with GAAP, the Company is accounting for the property as though it holds fee title. (3) The aggregate cost for Federal income tax purposes is $1,704,942. (4) Bracketed amounts represent reductions to carrying value in prior years. (5) Initial Cost represents original book value carried forward from the financial statements of the GRT Predecessor Entities. (6) Cross collateralized loan secured by ten properties - $58,942. (7) Cross collateralized loan secured by eight properties - $13,220. (8) Cross collateralized loans secured by 35 properties - $234,871. (9) Cross collateralized loan secured by three properties - $15,650. (10) Cross collateralized loan secured by four properties - $14,309. (11) Cross collateralized loan secured by 15 properties - $114,950. (12) Cross collateralized loan secured by three properties - $53,469.
Page 65 of 73 GLENBOROUGH PROPERTIES, L.P. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) Reconciliation of gross amount at which real estate was carried for the years ended December 31: 1998 1997 1996 ----------- ---------- ---------- Investments in real estate: Balance at beginning of year $ 866,431 $ 190,729 $ 102,451 Additions during year: Property acquisitions 999,091 687,523 89,653 Improvements 14,079 2,691 1,572 Retirements/sales (54,293) (14,512) (2,947) ----------- ---------- ---------- Balance at end of year $ 1,825,308 $ 866,431 $ 190,729 =========== =========== ========== Accumulated Depreciation: Balance at beginning of year $ 41,213 $ 28,784 $ 24,877 Additions during year: Depreciation 49,450 14,496 4,305 Acquisitions -- 443 -- Retirements/sales (7,794) (2,510) (398) ----------- ---------- ---------- Balance at end of year $ 82,869 $ 41,213 $ 28,784 =========== ========== ========== Page 66 of 73
GLENBOROUGH PROPERTIES, L.P. SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE December 31, 1998 (in thousands) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H Principal Amount of Current Loans Subject to Description of Loan Interest Maturity Periodic Face Carrying Delinquent and Securing Property Rate Date Payment Terms Prior Liens Amount Amount Principal or Interest -------------------- -------- -------- ------------- ---------- ------ --------- --------------------- First Mortgage Loan Quarterly Secured by land located interest-only in Aurora, Colorado 13% 7/1/05 payments None $ 34,349 $ 35,336 None First Mortgage Loan Secured by a hotel Monthly property located in interest-only Dallas, Texas 9% 3/31/99 payments None 3,600 3,600 None First Mortgage Loan Secured by a medical Monthly building in Phoenix, interest-only Arizona 11% 11/19/99 payments None 3,850 3,484 (1) None -------- --------- Total $ 41,799 $ 42,420 ======== =========
(1) The loan amount is $3,850,000, of which $2,694,000 was initially disbursed to the borrower and $1,156,000 was held by the Operating Partnership as leasing and interest reserves. As of December 31, 1998, $790,000 of the leasing and interest reserves have been drawn by the borrower. Page 67 of 73 72 GLENBOROUGH PROPERTIES, L.P. SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE December 31, 1998 (in thousands) The following is a summary of changes in the carrying amount of mortgage loans for the years ended December 31, 1998, 1997 and 1996 (in thousands): 1998 1997 1996 --------- -------- -------- Balance at beginning of year $ 3,692 $ 9,905 $ 7,465 Additions during year: New mortgage loans 39,613 1,855 2,694 Deductions during year: Collections of principal (885) (8,068) (254) --------- -------- -------- Balance at end of year $ 42,420 $ 3,692 $ 9,905 ========= ========= ======== Page 68 of 73 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 PROPERTIES, L.P., a California Limited Partnership By: Glenborough Realty Trust Incorporated, its General Partner Date: March 16, 1999 ____________________________ Andrew Batinovich Director, President and Chief Operating Officer Date: March 16, 1999 _____________________________ Stephen Saul Chief Financial Officer (Principal Financial Officer) Date: March 16, 1999 _____________________________ Terri Garnick Senior Vice President, Chief Accounting Officer, Treasurer (Principal Accounting Officer) Page 69 of 73 EXHIBIT INDEX Exhibit Number Exhibit Title 3.01 Articles of Amendment and Restatement of Articles of Incorporation of the Company are incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 3.02 Amended Bylaws of the Company are incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 3.03 The Company's Form of Articles Supplementary relating to the 7 3/4% Series A Convertible Preferred Stock is incorporated herein by reference to Exhibit 3.03 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 3.04 Articles Supplementary of the Series B Preferred Stock (relating to the Rights Plan) are incorporated herein by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 4.01 Form of Common Stock Certificate of the Company is incorporated herein by reference to Exhibit 4.02 to the Company's Registration Statement on Form S-4 (Registration No. 33-83506), which became effective October 26, 1995. 4.02 Form of 73/4% Series A Convertible Preferred Stock Certificate of the Company is incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form 8-A which was filed on January 22, 1998. 10.01 Form of Indemnification Agreement for existing Officers and Directors of the Company is incorporated herein by reference to Exhibit 10.02 to the Company's Registration Statement on Form S-4 (Registration No. 33-83506), which became effective October 26, 1995. 10.02* Stock Incentive Plan of the Company (amended and restated as of March 20, 1997) is incorporated herein by reference to Exhibit 4.0 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.03* Employment Agreement between the Company and Robert Batinovich is incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 10.04* Employment Agreement between the Company and Andrew Batinovich is incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 10.05 Rights Agreement, dated as of July 20, 1998, between the Company and the Registrar and Transfer Company, together with Exhibit A Form of Rights Certificate; Exhibit B Summary of Rights to Purchase Preferred Stock; and Exhibit C Form of Articles Supplementary of the Series B Preferred Stock are incorporated herein by reference to Exhibit 1 to the Company's Form 8-A, filed on July 16, 1998. 10.06 Registration Agreement between the Company and GPA, Ltd.is incorporated herein by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.07 Indemnification Agreement for Glenborough Realty Corporation and the Company, with Robert Batinovich as indemnitor is incorporated herein by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. Page 70 of 73 EXHIBIT INDEX - continued Exhibit Number Exhibit Title 12.01 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Partner Interest Distributions 23.01 Consent of Arthur Andersen LLP, independent public accountants 27.01 Financial Data Schedule * Indicates management contract or compensatory plan or arrangement. Page 71 of 73 Exhibit 12.1 GLENBOROUGH PROPERTIES, L.P. Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Partner Interest Distributions For the five years ended December 31, 1998
GRT Predecessor Entities, Combined The Operating Partnership ------------------------- ------------------------------------------ Twelve Months Ended December 31, ---------------------------------------------------------------------- 1994 1995 1996 1997 1998 ----------- ------------ ------------ ------------ ----------- EARNINGS, AS DEFINED Net Income (Loss) before Preferred Partner Interest Distributions $ 1,580 $ 524 $ (1,928) $ 16,671 $ 46,355 Extraordinary items -- -- 186 843 1,400 Federal & State income taxes 176 357 -- -- -- Minority Interest 43 -- -- -- -- Fixed Charges 1,140 2,129 3,913 9,668 53,289 ----------- ------------ ------------ ------------ ----------- $ 2,939 $ 3,010 $ 2,171 $ 27,182 $ 101,044 ----------- ------------ ------------ ------------ ----------- FIXED CHARGES AND PREFERRED PARTNER INTEREST DISTRIBUTIONS, AS DEFINED Interest Expense $ 1,140 $ 2,129 $ 3,913 $ 9,668 $ 53,289 Capitalized Interest -- -- -- -- 1,108 Preferred Partner Interest Distributions -- -- -- -- 20,620 ----------- ------------ ------------ ------------ ----------- $ 1,140 $ 2,129 $ 3,913 $ 9,668 $ 75,017 RATIO OF EARNINGS TO FIXED CHARGES 2.58 1.41 0.55 (1) 2.81 1.86 ----------- ------------ ------------ ------------ ----------- RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED PARTNER INTEREST DISTRIBUTIONS 2.58 1.41 0.55 (1) 2.81 1.35 ----------- ------------ ------------ ------------ -----------
(1) For the twelve months ended December 31, 1996, earnings were insufficient to cover fixed charges by $1,742. Page 72 of 73 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated March 15, 1999 on the financial statements of Glenborough Properties, L.P. included in this Form 10-K, into the Operating Partnership's previously filed Registration Statement File No. 333-70463. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP San Francisco, California March 15, 1999 Page 73 of 73 EX-27 2 FDS --
5 0001039223 GLENBOROUGH PROPERTIES, L.P. 1,000 U.S. DOLLAR 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1.000 4,019 4,019 44,388 412 0 16,782 1,825,308 82,862 1,876,246 21,043 708,578 0 0 0 925,228 1,876,246 0 241,644 0 75,426 64,762 412 53,289 47,755 0 47,755 0 (412) 0 46,355 0.74 0.74
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