10-K405 1 f70714e10-k405.txt FORM 10-K405 FISCAL YEAR ENDED DECEMBER 31, 2000 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-14162 GLENBOROUGH REALTY TRUST INCORPORATED (Exact name of Registrant as specified in its charter) Maryland 94-3211970 --------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 400 South El Camino Real, 94402-1708 Suite 1100 San Mateo, California - (650) 343-9300 ------------ ------------------------------------------------- (Zip Code) (Address of principal executive offices and telephone number) Securities registered under Section 12(b) of the Act: Name of Exchange Title of each class: on which registered: -------------------- ----------------------- Common Stock, $.001 par value New York Stock Exchange 7-3/4% Series A Convertible Preferred Stock, New York Stock Exchange $.001 par value Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] As of March 15, 2001, the aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $442,000,000. The aggregate market value was computed with reference to the closing price on the New York Stock Exchange on such date. This calculation does not reflect a determination that persons are affiliates for any other purpose. As of March 15, 2001, 26,993,247 shares of Common Stock ($.001 par value) and 10,097,800 shares of 7-3/4% Series A Convertible Preferred Stock ($.001 par value, $25 per share liquidation value) were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Part III: Portions of the Registrant's definitive proxy statement to be issued in conjunction with the Registrant's annual stockholder's meeting to be held on May 4, 2001. EXHIBITS: The index of exhibits is contained in Part IV herein on page number 65. 1 2 TABLE OF CONTENTS
Page No. PART I Item 1 Business 3 Item 2 Properties 4 Item 3 Legal Proceedings 9 Item 4 Submission of Matters to a Vote of Security Holders 9 PART II Item 5 Market for Registrant's Common Stock and Related Stockholder Matters 9 Item 6 Selected Financial Data 10 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 7A. Qualitative and Quantitative Information About Market Risk 28 Item 8 Financial Statements and Supplementary Data 29 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 29 PART III Item 10 Directors and Executive Officers of the Registrant 29 Item 11 Executive Compensation 29 Item 12 Security Ownership of Certain Beneficial Owners and Management 29 Item 13 Certain Relationships and Related Transactions 29 PART IV Item 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 30
2 3 PART I ITEM 1. BUSINESS General Development and Description of Business Glenborough Realty Trust Incorporated (the "Company") is a self-administered and self-managed real estate investment trust ("REIT") engaged primarily in the ownership, operation, management, leasing, acquisition, expansion and development of various types of income-producing properties. As of December 31, 2000, the Company owned and operated 88 income-producing properties (the "Properties," and each a "Property"), including 3 joint ventures. Office and industrial Properties represented approximately 75% and 25%, respectively, of the Company's total portfolio. The Company was incorporated in the State of Maryland on August 26, 1994. On December 31, 1995, the Company completed a consolidation (the "Consolidation") in which Glenborough Corporation, a California corporation, and eight public limited partnerships (the "Partnerships") collectively, the "GRT Predecessor Entities", merged with and into the Company. The Company has elected to qualify as a REIT under the Internal Revenue Code of 1986, as amended. The common and preferred stock of the Company (the "Common Stock" and the "Preferred Stock", respectively) are listed on the New York Stock Exchange ("NYSE") under the trading symbols "GLB" and "GLB Pr A", respectively. The Company's principal business objective is to achieve a stable and increasing source of cash flow available for distribution to stockholders. By achieving this objective, the Company will seek to raise the value of its shares over time. Employees As of December 31, 2000, the Company had approximately 190 full-time employees. Competition For Tenants The Company's Properties compete for tenants with similar properties located in their markets. Management believes that characteristics influencing the competitiveness of a real estate project include the geographic location of the property, the professionalism of the property manager and the maintenance and appearance of the property, in addition to external factors such as general economic circumstances, trends, and the existence of new competing properties in the area in which the Company's properties are located. Additional competitive factors with respect to commercial properties include the ease of access to the property, the adequacy of related facilities, such as parking, and the ability to provide rent concessions and additional tenant improvements commensurate with local market conditions. Such competition may lead to rent concessions that could adversely affect the Company's cash flow. Although the Company believes its Properties are competitive with comparable properties as to those factors within the Company's control, over-building and other external factors could adversely affect the ability of the Company to attract and retain tenants. For Acquisitions of Real Estate The Company experiences competition when attempting to acquire equity interests in desirable real estate, including competition from domestic and foreign financial institutions, other REITs, life insurance companies, pension funds, trust funds, partnerships and individual investors. For Capital The Company competes with other investors and owners for debt and equity financing. The Company's ability to attract debt and equity capital at favorable rates is impacted in part by its positioning in the marketplace relative to similar investments. Factors impacting this include, among other things, the perceived quality of the Company's 3 4 portfolio and the risk adjustment that sources of capital give to the returns they expect from their investments. In competing for capital, the Company has not entered into any forward equity commitments or other arrangements which would subject the Company to risks tied to changes in the market value of its equity securities. Working Capital The Company's practice is to maintain cash reserves for normal repairs, replacements, improvements, working capital and other contingencies while minimizing interest expense. Available cash is kept to a minimum by using available funds to reduce the outstanding balance on the Company's unsecured line of credit and drawing on it when necessary. Other Factors The Company's ability to achieve operational and capital targets is impacted by economic conditions in the markets in which its Properties are located and by broader factors such as prevailing interest rates and the general availability of capital at favorable rates, both debt and equity, for real estate investments. Local economic downturns may adversely affect the occupancy and rental rates of the Company's Properties. A lack of available capital may hinder the Company's acquisition and development program or cause it to look to other types of transactions, such as asset redeployments, to generate needed liquidity. Compliance with laws and regulations regarding the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not expected to have any material effect upon the capital expenditures, earnings and competitive position of the Company. The Properties have each been subject to Phase I Environmental Assessments and, where such an assessment indicated it was appropriate, Phase II Environmental Assessments (collectively, the "Environmental Reports") have been conducted. These reports have not indicated any significant environmental issues. In the event that pre-existing environmental conditions not disclosed in the Environmental Reports which require remediation are subsequently discovered, the cost of remediation will be borne by the Company. Additionally, no assurances can be given that (i) future laws, ordinances, or regulations will not impose any material environmental liability, (ii) the current environmental condition of the Properties has not been or will not be affected by tenants and occupants of the Properties, by the condition of properties in the vicinity of the Properties or by third parties unrelated to the Company or (iii) that the Company will not otherwise incur significant liabilities associated with costs of remediation relating to the Properties. ITEM 2. PROPERTIES The Location and Type of the Company's Properties The Company's 88 Properties, including Properties owned through joint ventures, consist of 54 office, 28 industrial, five retail and one multifamily Property located in four geographic regions in 21 states. 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, 2000. 4 5
Office Industrial Retail Multi- Square Square Square family No. of Region Footage Footage Footage Units Properties ------------------------------ ----------- --------- -------- ------- --------- West 1,688,050 2,383,829 -- -- 19 Midwest 2,041,966 1,298,446 339,617 -- 23 South 1,275,425 339,983 99,304 519 13 East 3,090,189 1,586,768 -- -- 33 --------- --------- -------- ------- --------- Total 8,095,630 5,609,026 438,921 519 88 ========= ========= ======== ======= ========= No. of Properties 54 28 5 1 Average Occupancy 94% 97% 91% 89%
For the years ended December 31, 2000, 1999 and 1998, no tenant contributed 10% or more of the total rental revenue of the Company. The largest tenant's annual rent was approximately 2.2% of total rental revenues for the year ended December 31, 2000. A complete listing of Properties owned by the Company at December 31, 2000 is included as part of Schedule III in Item 14. Office Properties The Company owns 54 office Properties with total rentable square footage of 8,095,630. The office Properties range in size from 14,255 square feet to 686,061 square feet, and have remaining lease terms ranging from one to 15 years. The office leases generally require the tenant to reimburse the Company for increases in building operating costs over a base amount. Certain of the leases provide for rent increases that are either fixed or based on a consumer price index ("CPI"). As of December 31, 2000, the average occupancy of the office Properties was 94%. 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 Total Total Effective Base Effective Rentable Rent per Annual Base Area (Sq. Average Leased Sq. Rent Year Ft.) Occupancy Ft.(1) (3) ($000s)(2) (3) ---------------- ------------ --------- -------------- ------------- 2000 (4) 8,095,630 94% $17.23 $131,118 1999 6,859,991 91 16.78 104,751 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
(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 2000, certain Properties currently classified as office Properties were classified as office/flex Properties (see the Company's Annual Report on Form 10-K for the year ended December 31, 1999). The following table sets forth the contractual lease expirations for leases for the office Properties as of December 31, 2000. 5 6 OFFICE PROPERTIES (5) LEASE EXPIRATIONS
Percentage of Rentable Annual Base Total Annual Number of Square Footage Rent Under Base Rent Expiration Expiring Subject to Expiring Represented by Year Leases Expiring Leases Leases ($000s) Expiring Leases(1) ---------------- ---------- --------------- -------------- ----------------- 2001 (4) 184 1,011,477 $ 17,220 14.8% 2002 135 1,029,615 19,297 16.6 2003 121 638,494 12,846 11.0 2004 96 773,411 14,742 12.7 2005 92 1,017,485 19,409 16.7 Thereafter 82 1,816,990 32,845 28.2 --------- --------- --------- ----- Total 710 6,287,472(2) $ 116,359(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 2000, and thus differs from "Total Effective Annual Base Rent" in the preceding table, which is based on 2000 rents. (4) Includes leases that have initial terms of less than one year. (5) Numbers exclude the corporate headquarters building. Industrial Properties The Company owns 28 industrial Properties aggregating 5,609,026 square feet. The industrial Properties are designed for warehouse, distribution and light manufacturing, ranging in size from 32,500 square feet to 1,162,274 square feet. As of December 31, 2000, 14 of the industrial Properties were leased to multiple tenants and 14 were leased to single tenants. All 14 of the single-tenant Properties are adaptable in design to multi-tenant use. As of December 31, 2000, the average occupancy of the industrial Properties was 97%. The industrial Properties have leases whose remaining terms range from 1 to 15 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 Base Rent per Annual Base Rent Year Area (Sq. Ft.) Average Occupancy Leased Sq. Ft.(1)(3) ($000s)(2)(3) ------------------- ---------------- -------------------- -------------------- ------------------ 2000(4) 5,609,026 97% $5.55 $30,196 1999 3,384,830 99 4.17 13,974 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
6 7 (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 2000, certain Properties currently classified as industrial Properties were classified as office/flex Properties (see the Company's Annual Report on Form 10-K for the year ended December 31, 1999). The following table sets forth the contractual lease expirations for leases for the industrial Properties as of December 31, 2000. INDUSTRIAL PROPERTIES LEASE EXPIRATIONS
Percentage of Total Number of Rentable Square Annual Base Rent Annual Base Rent Expiring Footage Subject to Under Expiring Represented by Expiration Year Leases Expiring Leases Leases ($000s) Expiring Leases (1) --------------- ---------------- -------------------- -------------------- ---------------------- 2001 37 359,004 $2,309 20.7% 2002 38 798,267 5,283 21.2 2003 33 540,398 4,005 18.4 2004 28 2,006,308 9,227 15.7 2005 17 311,669 2,225 9.5 Thereafter 26 1,143,457 10,284 14.5 ---------------- -------------------- -------------------- ---------------------- Total 179 5,159,103(2) $33,333(3) 100.0% ================ ==================== ==================== ======================
(1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases). (2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space). (3) This figure is based on square footage actually leased (which excludes vacant space) and incorporates contractual rent increases arising after 2000, and thus differs from "Total Effective Annual Base Rent" in the preceding table, which is based on 2000 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, 1996. 7 8 CAPITALIZED TENANT IMPROVEMENTS AND LEASING COMMISSIONS
2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- OFFICE PROPERTIES Square footage renewed or re-leased 1,438,159 1,627,615 579,904 174,354 39,706 Capitalized tenant improvements and commissions ($000s) $ 13,070 $ 11,353 $ 4,263 $ 850 $ 617 Average per square foot of renewed or re-leased space $ 9.09(3) $ 6.98 $ 7.35 $ 4.87 $ 15.54(1) OFFICE/FLEX PROPERTIES Square footage renewed or re-leased (2) 872,066 876,490 138,658 9,000 Capitalized tenant improvements and commissions ($000s) (2) $ 2,675 $ 3,232 $ 418 $ 23 Average per square foot of renewed or re-leased space (2) $ 3.07 $ 3.69 $ 3.01 $ 2.56 INDUSTRIAL PROPERTIES Square footage renewed or re-leased 969,476 457,561 307,896 198,055 60,000 Capitalized tenant improvements and commissions ($000s) $ 3,880 $ 840 $ 370 $ 235 $ 51 Average per square foot of renewed or re-leased space $ 4.00(3) $ 1.84 $ 1.20 $ 1.19 $ 0.85 ALL PROPERTIES Square footage renewed or re-leased 2,477,591 3,071,100 1,810,184 523,147 141,704 Capitalized tenant improvements and commissions ($000s) $ 17,287 $ 15,390 $ 8,148 $ 1,545 $ 774 Average per square foot of renewed or re-leased space $ 6.98(3) $ 5.01 $ 4.50 $ 2.95 $ 5.46
(1) The significant cost of capitalized tenant improvements and commissions per square foot renewed or re-leased in 1996 relative to the other years presented is primarily the result of tenant improvements provided in connection with a lease extension of space for the principal tenant of one property. The lease was extended 10 years and expires in 2010. (2) Effective in 2000, Properties previously classified as office/flex Properties are now included in office and industrial Properties. (3) The increase in capitalized tenant improvements and commissions per square foot renewed or re-leased in 2000 relative to the other years presented is due to several significant lease renewals and a general increase in market tenant improvements. Multifamily Properties In December 2000, the Company sold 36 of its 37 multifamily Properties (the "Multifamily Portfolio") to affiliates of Westdale Properties America I, Ltd. which owns and operates 38,000 multifamily units around the country. As of December 31, 2000, the Company owns one 519-unit multifamily Property located in Carrollton, Texas. 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, 2000, the remaining multifamily Property was approximately 89% leased. 8 9 Hotel Properties In December 2000, the Company's one remaining hotel, a 227-room property located in Scottsdale, Arizona, was sold to the independent operator who had leased it from the Company since 1998. The lease was terminated upon the sale. ITEM 3. LEGAL PROCEEDINGS For information regarding litigation fully resolved during the reporting period ended March 31, 2000, please refer to the Company's quarterly report on Form 10-Q for such period. Certain claims and lawsuits have arisen against the Company in its normal course of business. The Company believes that such claims and lawsuits will not have a material adverse effect on the Company's financial position, cash flow or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote of security holders in the fourth quarter of the year ended December 31, 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND PREFERRED STOCK AND RELATED STOCKHOLDER MATTERS (a) Market Information On January 31, 1996, the Company's Common Stock began trading on the NYSE at $12.00 per share under the symbol "GLB". On January 28, 1998, the Company's 7 3/4% Series A Convertible Preferred Stock began trading on the NYSE at $25.00 per share under the symbol "GLB Pr A". On December 31, 2000, the closing prices of the Company's Common and Preferred Stock were $17.38 and $16.88, respectively. On March 15, 2001, the last reported sales prices per share of the Company's Common Stock and Preferred Stock on the NYSE were $17.39 and $19.42, respectively. The following table sets forth the high and low closing prices per share of the Company's Common Stock and Preferred Stock for the periods indicated, as reported on the NYSE composite tape.
Common Stock Preferred Stock --------------- --------------- Quarterly Period High Low High Low ---------------- ---- --- ---- --- 1999 First Quarter $19.88 $16.50 $18.63 $16.25 Second Quarter 19.38 16.00 19.75 16.75 Third Quarter 18.19 16.00 20.50 16.06 Fourth Quarter 15.94 11.81 16.63 13.13 2000 First Quarter $15.19 $12.94 $15.94 $13.94 Second Quarter 18.19 14.56 17.25 14.63 Third Quarter 19.88 17.50 18.25 16.94 Fourth Quarter 17.75 14.88 17.50 15.69 2001 First Quarter(1) $19.05 $16.81 $19.88 $16.63
(1) High and low stock closing prices through March 15, 2001. Holders The approximate number of holders of record of the shares of the Company's Common Stock and Preferred Stock were 4,589 and 63, respectively, as of March 15, 2001. 9 10 Distributions Since the Consolidation, the Company has paid regular quarterly distributions to holders of its Common and Preferred Stock. During the years ended December 31, 1999 and 2000 the Company declared and/or paid the following quarterly distributions:
Common Stock Preferred Stock -------------------------------- --------------------------------- Distributions Total Distributions Total Quarterly Period Per share Distributions Per share Distributions --------------------- ------------ ---------------- ------------- ---------------- 1999 First Quarter $0.42 $13,309,606 $0.48 $5,570,313 Second Quarter $0.42 $13,292,265 $0.48 $5,570,313 Third Quarter $0.42 $12,864,624 $0.48 $5,570,313 Fourth Quarter $0.42 $12,944,671 $0.48 $5,487,969 2000 First Quarter $0.42 $12,476,353 $0.48 $5,442,583 Second Quarter $0.42 $12,129,842 $0.48 $4,891,122 Third Quarter $0.42 $12,115,189 $0.48 $4,891,122 Fourth Quarter $0.42 $12,158,179 $0.48 $4,891,122
The Company intends to declare regular quarterly distributions to its stockholders. Effective January 1, 2001, federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income. Future distributions by the Company will be at the discretion of the Board of Directors and will depend upon the actual Funds from Operations of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, applicable legal restrictions and such other factors as the Board of Directors deems relevant. The Company intends to continue its policy of paying quarterly distributions, but there can be no assurance that distributions will continue or be paid at any specific level. ITEM 6. SELECTED FINANCIAL DATA Set forth below is selected financial data for the Company. Consolidated balance sheet and operating data is presented as of and for each of the five years ending December 31, 2000. This selected financial data should be read in conjunction with the financial statements of the Company, including the notes thereto, included in Item 14.
2000 1999 1998 1997 1996 ----------------------------------------------------------- OPERATING DATA: Rental revenue $242,582 $255,339 $227,956 $61,393 $17,943 Fees and reimbursements 3,713 3,312 2,802 719 311 Interest and other income 8,311 6,404 4,607 1,802 1,080 Equity in earnings of Associated Companies 1,455 1,222 1,314 2,743 1,598 Equity in loss of unconsolidated operating joint ventures (386) (310) -- -- -- Total revenue 277,170 274,980 241,475 68,148 21,253 Property operating expenses 82,906 88,037 74,079 18,958 5,266 General and administrative 13,353 9,688 11,038 3,319 1,393 Interest expense 63,281 64,782 53,289 9,668 3,913 Depreciation and amortization 59,490 58,295 50,194 14,873 4,575 Income (loss) from operations before minority interest and extraordinary item 48,936 52,949 48,552 21,330 (1,131) Net income (loss) allocable to common shareholders(1) 18,156 28,006 23,982 19,368 (1,609)
10 11
2000 1999 1998 1997 1996 ------------------------------------------------------------------------------- OPERATING DATA CONTINUED: Diluted amounts per common share(2): Net income (loss) before extraordinary item $ 0.85 $ 0.86 $ 0.79 $ 1.09 $ (0.21) Net income (loss) 0.62 0.89 0.75 1.05 (0.24) Distributions(3) 1.68 1.68 1.68 1.38 1.22 BALANCE SHEET DATA: Rental properties, gross $ 1,208,566 $ 1,756,061 $ 1,825,308 $ 866,431 $ 190,729 Accumulated depreciation (115,061) (114,170) (82,869) (41,213) (28,784) ------------------------------------------------------------------------------- Rental properties, net 1,093,505 1,641,891 1,742,439 825,218 161,945 Investments in development 86,286 38,773 35,131 7,251 -- Investments in operating joint ventures 9,119 5,679 -- -- -- Mortgage loans receivable 37,250 37,582 42,420 3,692 9,905 Total assets 1,371,158 1,794,604 1,879,016 865,774 185,520 Total debt 606,677 897,358 922,097 228,299 75,891 Stockholders' equity 668,856 784,334 828,533 580,123 97,600 OTHER DATA: EBIDA(4) $ 159,416 $ 168,242 $ 151,562 $ 44,380 $ 14,273 Cash flow provided by (used for): Operating activities 88,129 92,913 76,421 24,359 4,702 Investing activities 354,250 82,561 (613,840) (569,242) (61,833) Financing activities (346,666) (173,349) 536,706 548,598 (53,899) FFO(5) 71,860 84,047 79,920 36,087 11,491 CAD(6) 51,756 66,576 68,357 32,335 10,497 Debt to total market capitalization(7) 43.9% 54.7% 47.5% 18.5% 29.5%
(1) Net income (loss) allocable to common shareholders includes certain non-recurring items described in (4) below. (2) Diluted amounts include the effects of all classes of securities outstanding at year-end, including units of Operating Partnership interests and options to purchase stock of the Company. (3) Historical distributions per common share for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 consist of distributions declared for the periods then ended. (4) EBIDA is computed as income (loss) before minority interests and extraordinary items plus interest expense, depreciation and amortization, gains (losses) on disposal of properties and loss provisions. In 1996, consolidation and litigation costs were also added back to net income to determine EBIDA. The Company believes that in addition to net income and cash flows, EBIDA is a useful measure of the financial performance of an equity REIT because, together with net income and cash flows, EBIDA provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions, developments and other capital expenditures. To evaluate EBIDA and the trends it depicts, the components of EBIDA, such as rental revenues, rental expenses, real estate taxes and general and administrative expenses, should be considered. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Excluded from EBIDA are financing costs such as interest as well as depreciation and amortization, each of which can significantly affect a REIT's results of operations and liquidity and should be considered in evaluating a REIT's operating performance. Further, EBIDA does not represent net income or cash flows from operating, financing and investing activities as defined by generally accepted accounting principles and does not necessarily indicate that cash flows will be sufficient to fund all of the Company's cash needs. It should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Further, EBIDA as disclosed by other REITs may not be comparable to the Company's calculation of EBIDA. The following table reconciles net income (loss) of the Company to EBIDA for the periods presented (in thousands):
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------------------------------------------------------------ Net income (loss) $ 38,869 $ 50,286 $ 44,602 $ 19,368 $ (1,609) Extraordinary item 7,910 (984) 1,400 843 186 Minority interest 2,157 3,647 2,550 1,119 292 Interest expense 63,281 64,782 53,289 9,668 3,913 Depreciation and amortization 59,490 58,295 50,194 14,873 4,575 Net (gain) loss on sales of real estate assets (21,495) (9,013) (4,796) (1,491) (321) Loss on sale of mortgage loan receivable -- 1,229 -- -- -- Loss on interest rate protection agreement -- -- 4,323 -- -- Consolidation and litigation costs -- -- -- -- 7,237 Loss provisions 9,204 -- -- -- -- --------- --------- --------- --------- --------- EBIDA $ 159,416 $ 168,242 $ 151,562 $ 44,380 $ 14,273 ========= ========= ========= ========= =========
11 12 (5) In October 1999, the Board of Governors of NAREIT issued `White Paper on FFO-October 1999' to clarify its definition of Funds from Operations ("FFO"). The clarification is effective January 1, 2000 and requires restatement for all periods presented in financial statements or tables. FFO, as clarified by NAREIT, represents "net income excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis." The Company is reporting using the clarified definition for all periods presented. The Company believes that FFO is a widely used measure of the financial performance of equity REITs which provides a relevant basis for comparison among other REITs. Together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions, developments and other capital expenditures. FFO does not represent net income or cash flows from operations as defined by GAAP, and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company's operating performance or as an alternative to cash flows from operating, investing and financing activities (determined in accordance with GAAP) as a measure of liquidity. FFO does not necessarily indicate that cash flows will be sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to stockholders. Further, FFO as disclosed by other REITs may not be comparable to the Company's calculation of FFO. (6) Cash available for distribution ("CAD") represents net income (loss) before minority interests and extraordinary items, adjusted for depreciation and amortization including amortization of deferred financing costs and gains (losses) from the disposal of properties, less lease commissions and recurring capital expenditures, consisting of tenant improvements and normal expenditures intended to extend the useful life of the property such as roof and parking lot repairs. CAD should not be considered an alternative to net income (computed in accordance with GAAP) as a measure of the Company's financial performance or as an alternative to cash flow from operating activities (computed in accordance with GAAP) as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's cash needs. Further, CAD as disclosed by other REITs may not be comparable to the Company's calculation of CAD. (7) Debt to total market capitalization is calculated as total debt at period end divided by total debt plus the market value of the Company's outstanding common stock and convertible units, based upon the closing prices of the Common Stock of $17.375, $13.375, $20.375, $29.625 and $17.625 on December 31, 2000, 1999, 1998, 1997 and 1996, respectively, plus the liquidation value of the Company's outstanding Preferred Stock based on the liquidation preference per share of $25.00 on December 31, 2000, 1999 and 1998. FUNDS FROM OPERATIONS In October 1999, the Board of Governors of NAREIT issued `White Paper on FFO-October 1999' to clarify its definition of Funds from Operations ("FFO"). The clarification is effective January 1, 2000 and requires restatement for all periods presented in financial statements or tables. FFO, as clarified by NAREIT, represents "net income excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis." The Company is reporting using the clarified definition for all periods presented. The Company believes that FFO is a widely used measure of the financial performance of equity REITs which provides a relevant basis for comparison among other REITs. Together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions, developments and other capital expenditures. FFO does not represent net income or cash flows from operations as defined by GAAP, and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company's operating performance or as an alternative to cash flows from operating, investing and financing activities (determined in accordance with GAAP) as a measure of liquidity. FFO does not necessarily indicate that cash flows will be sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to stockholders. Further, FFO as disclosed by other REITs may not be comparable to the Company's calculation of FFO. Cash available for distribution ("CAD") represents net income (loss) before minority interests and extraordinary items, adjusted for depreciation and amortization including amortization of deferred financing costs and gains (losses) from the disposal of properties, less lease commissions and recurring capital expenditures, consisting of tenant improvements and normal expenditures intended to extend the useful life of the property such as roof and parking lot repairs. CAD should not be considered an alternative to net income (computed in accordance with GAAP) as a measure of the Company's financial performance or as an alternative to cash flow from operating activities (computed in accordance with GAAP) as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's cash needs. Further, CAD as disclosed by other REITs may not be comparable to the Company's calculation of CAD. The following table sets forth the Company's calculation of FFO and CAD for the three months ended March 31, June 30, September 30 and December 31, 2000 and the year ended December 31, 2000 (dollars in thousands): 12 13
March 31, June 30, Sept 30, Dec 31, Year to Date 2000 2000 2000 2000 2000 ------------ ------------ ------------ ------------ ------------ Income from operations before minority interest, extraordinary items and preferred dividends $ 8,823 $ 8,766 $ 15,773 $ 15,574 $ 48,936 Depreciation and amortization 14,915 14,871 14,167 14,575 58,528 Preferred dividends (5,488) (5,443) (4,891) (4,891) (20,713) Net (gain) loss on sales of real estate assets 695 2,347 (4,694) (19,843) (21,495) Gain on sale of land -- -- -- 712 712 Provision for impairment of real estate assets -- -- -- 4,800 4,800 Adjustment to reflect FFO of unconsolidated JV's(2) 190 264 250 248 952 Adjustment to reflect FFO of Associated Companies (1) 164 22 (191) 145 140 ------------ ------------ ------------ ------------ ------------ FFO (4) $ 19,299 $ 20,827 $ 20,414 $ 11,320 $ 71,860 ============ ============ ============ ============ ============ Amortization of deferred financing fees 639 610 597 658 2,504 Capital reserve (surplus)/deficit -- -- -- -- -- Capital expenditures (4,989) (6,319) (5,471) (5,829) (22,608) ------------ ------------ ------------ ------------ ------------ CAD $ 14,949 $ 15,118 $ 15,540 $ 6,149 $ 51,756 ============ ============ ============ ============ ============ Distributions per share (3) $ 0.42 $ 0.42 $ 0.42 $ 0.42 $ 1.68 ============ ============ ============ ============ ============ Diluted weighted average common shares outstanding 34,096,464 33,111,493 32,636,164 32,337,449 33,023,802 ============ ============ ============ ============ ============
(1) Reflects the adjustments to FFO required to reflect the FFO of the Associated Companies allocable to the Company. The Company's investments in the Associated Companies are accounted for using the equity method of accounting. (2) Reflects the adjustments to FFO required to reflect the FFO of the unconsolidated joint ventures allocable to the Company. The Company's investments in the joint ventures are accounted for using the equity method of accounting. (3) The distributions for the three months ended December 31, 2000, were paid on January 16, 2001. (4) In accordance with NAREIT's `White Paper on FFO-October 1999' as discussed above, FFO includes a $406 gain from the sale of an incidental parcel of land by the Associated Company in June 2000. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the selected financial data in Item 6 and the Consolidated Financial Statements of the Company, including the notes thereto, included in Item 14. RESULTS OF OPERATIONS COMPARISON OF THE YEAR ENDED DECEMBER 31, 2000 TO THE YEAR ENDED DECEMBER 31, 1999. Following is a table of net operating income by property type, for comparative purposes, presenting the results for the years ended December 31, 2000 and 1999. 13 14 RESULTS OF OPERATIONS BY PROPERTY TYPE FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (IN THOUSANDS)
Multi- Hotel and Property Eliminating Total Office Industrial Retail family Other Total Entry(1) Reported ------ ---------- ------ ------ ----- ----- ----- -------- 2000 Rental Revenue $126,198 $ 37,874 $ 8,265 $ 69,427 $ 818 $242,582 -- $242,582 Operating Expenses 46,556 9,113 2,675 31,910 229 90,483 ($ 7,577) 82,906 Net Operating Income 79,642 28,761 5,590 37,517 589 152,099 7,577 159,676 Percentage of Total NOI 52.3% 18.9% 3.7% 24.7% 0.4% 100.0% 1999 Rental Revenue $131,032 $ 43,569 $ 11,182 $ 68,144 $ 1,412 $255,339 -- $255,339 Operating Expenses 49,732 11,737 3,640 30,570 420 96,099 ($ 8,062) 88,037 Net Operating Income 81,300 31,832 7,542 37,574 992 159,240 8,062 167,302 Percentage of Total NOI 51.1% 20.0% 4.7% 23.6% 0.6% 100.0%
(1) Eliminating entry represents internal market level property management fees included in operating expenses to provide comparison to industry performance. Rental Revenue. Rental revenue decreased $12,757,000, or 5%, to $242,582,000 for the year ended December 31, 2000, from $255,339,000 for the year ended December 31, 1999. The decrease consisted of declines in revenue from the office, industrial, retail and hotel Properties of $4,834,000, $5,695,000, $2,917,000 and $594,000, respectively, due to the 1999 and 2000 sales of 20 office Properties, 30 industrial Properties, eight retail Properties and three hotel Properties. These decreases were slightly offset by an increase in revenue from the multifamily Properties of $1,283,000 which is primarily due to the acquisition of two multifamily Properties since September 30, 1999, and overall increases in occupancy. The Company sold its Multifamily Portfolio on December 29, 2000. Fees and Reimbursements from Affiliates. Fees and reimbursements from affiliates consist primarily of property management fees, asset management fees and lease commissions paid to the Company under property and asset management agreements with the Managed Partnerships. This revenue increased $401,000, or 12%, to $3,713,000 for the year ended December 31, 2000, from $3,312,000 for the year ended December 31, 1999. The change is primarily due to transaction fees received from an affiliate in the second quarter of 2000. In addition, due to the merger of the Company and GC (as discussed above), the Company received property management fees and asset management fees directly from the Rancon Partnerships in the fourth quarter of 2000. These increases are partially offset by lower property and asset management fees from the Managed Partnerships due to sales of the managed properties. Interest and Other Income. Interest and other income increased $1,907,000 or 30%, to $8,311,000 for the year ended December 31, 2000, from $6,404,000 for the year ended December 31, 1999. The increase is primarily due to interest income earned upon the payoff of loans made to three development projects sold by a development alliance in the second and third quarters of 2000, offset by decreases in interest earned on notes receivable that were paid off. Equity in Earnings of Associated Companies. Equity in earnings of Associated Companies increased $233,000, or 19%, to $1,455,000 for the year ended December 31, 2000, from $1,222,000 for the year ended December 31, 1999. The increase is primarily due to income tax savings recognized upon the merger of the Company and GC in the fourth quarter of 2000. This increase is also due to the discontinued operations of GHG which had a loss in 1999. 14 15 Equity in Loss of Unconsolidated Operating Joint Ventures. Equity in loss of unconsolidated operating joint ventures increased $76,000 to an equity in loss of $386,000 for the year ended December 31, 2000, from an equity in loss of $310,000 for the year ended December 31, 1999. This increased loss is due to a decrease in the capitalization of interest expense and property taxes, recognition of depreciation expense and payment of operating expenses by a joint venture upon the completion of a development project in 2000. Net Gain on Sale of Real Estate Assets. The net gain on sale of real estate assets of $21,495,000 during the year ended December 31, 2000, resulted from the sale of ten office Properties, 12 industrial Properties, 36 multifamily Properties, five retail Properties and one hotel Property. The net gain on sale of real estate assets of $9,013,000 during the year ended December 31, 1999, resulted from the sale of ten office Properties, 18 industrial Properties, three retail Properties, one multifamily Property, two hotel Properties and a small interest in a REIT. Property Operating Expenses. Property operating expenses decreased $5,131,000, or 6%, to $82,906,000 for the year ended December 31, 2000, from $88,037,000 for the year ended December 31, 1999. This decrease corresponds to the 5% decrease in rental revenues resulting from the sale of Properties. General and Administrative Expenses. General and administrative expenses increased $3,665,000, or 38%, to $13,353,000 for the year ended December 31, 2000, from $9,688,000 for the year ended December 31, 1999. The increase is primarily due to one-time costs associated with the adoption of supplemental retirement agreements for certain of the Company's executive officers. The initial funding of $3,300,000 was funded from the gain on sale of the multifamily portfolio. Depreciation and Amortization. Depreciation and amortization increased $1,195,000, or 2%, to $59,490,000 for the year ended December 31, 2000, from $58,295,000 for the year ended December 31, 1999. The net increase was due to depreciation of the 1999 and 2000 acquisitions of real estate and fixed asset additions, offset by the 1999 and 2000 dispositions of real estate. Interest Expense. Interest expense decreased $1,501,000, or 2%, to $63,281,000 for the year ended December 31, 2000, from $64,782,000 for the year ended December 31, 1999. This decrease is primarily due to retirement of the Senior Notes, paydowns on the Credit Facility and payoffs of loans in connection with property sales as discussed below. Loss on Sale of Mortgage Loan Receivable. During 1999, a note secured by an office property in Phoenix, Arizona was sold to a third-party at a discount of $1,229,000. The proceeds of the sale were invested in the repurchase of preferred stock. Provision for Impairment of Real Estate Assets. During 2000, a loss provision in the amount of $4,800,000 was recorded to provide for a decrease in the estimated fair market value of a 418,458 square foot office Property located in Memphis, Tennessee. In addition to a softening in the Memphis office market, the Company was notified by Federal Express, a major tenant occupying 121,218 square feet, or 29%, of this Property, of its plans not to renew their lease upon expiration in September 2001. Provision for Impairment of Non-Real Estate Assets. During 2000, in connection with the Company's decision to sell its Multifamily Portfolio, the Company recorded an impairment charge of approximately $4.4 million relating to the writeoff of certain corporate office fixed assets. Net Gain (Loss) on Early Extinguishment of Debt. Net loss on early extinguishment of debt of $7,910,000 during the year ended December 31, 2000, consists primarily of prepayment penalties and writeoff of unamortized loan fees of $7,360,000 related to the payoff of debt in connection with the sale of the Company's Multifamily Portfolio in the fourth quarter of 2000. In addition, the net loss includes $931,000 of gains on retirement of Senior Notes at a discount, offset by the related writeoff of unamortized loan fees in the amount of $1,481,000. Net gain on early extinguishment of debt of $984,000 during the year ended December 31, 1999, consists of $3,115,000 of net gains on retirement of Senior Notes at a discount, offset by $2,026,000 of losses due to prepayment penalties and $105,000 of losses due to the writeoff of unamortized loan fees upon the early payoff of four loans. These loans 15 16 were paid-off early when more favorable terms were obtained through new financings and upon the sale of the properties securing the loans. COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31, 1998. Following is a table of net operating income by property type, for comparative purposes, presenting the results for the years ended December 31, 1999 and 1998. RESULTS OF OPERATIONS BY PROPERTY TYPE FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 (IN THOUSANDS)
Multi- Hotel and Property Eliminating Total Office Industrial Retail family Other Total Entry(1) Reported ------ ---------- ------ ------ ----- ----- ----- -------- 1999 Rental Revenue $131,032 $ 43,569 $ 11,182 $ 68,144 $ 1,412 $255,339 -- $255,339 Operating Expenses 49,732 11,737 3,640 30,570 420 96,099 $ (8,062) 88,037 Net Operating Income 81,300 31,832 7,542 37,574 992 159,240 8,062 167,302 Percentage of Total NOI 51.1% 20.0% 4.7% 23.6% 0.6% 100.0% 1998 Rental Revenue $128,748 $ 42,089 $ 12,072 $ 40,865 $ 4,182 $227,956 -- $227,956 Operating Expenses 47,975 11,307 3,840 17,235 967 81,324 $ (7,245) 74,079 Net Operating Income 80,773 30,782 8,232 23,630 3,215 146,632 7,245 153,877 Percentage of Total NOI 55.1% 21.0% 5.6% 16.1% 2.2% 100.0%
(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 $27,383,000, or 12%, to $255,339,000 for the year ended December 31, 1999, from $227,956,000 for the year ended December 31, 1998. The increase included growth in revenue from the office, industrial, and multifamily Properties of $2,284,000, $1,480,000 and $27,279,000, respectively, which was primarily due to the 1998 and 1999 acquisitions of properties. These increases were partially offset by decreases in revenue from the retail and hotel Properties of $890,000 and $2,770,000, respectively, due to the 1998 and 1999 sales of three retail and five hotel properties. Fees and Reimbursements from Affiliates. Fees and reimbursements from affiliates consist primarily of property management fees, asset management fees and lease commissions paid to the Company under property and asset management agreements with the Managed Partnerships. This revenue increased $510,000, or 18%, to $3,312,000 for the year ended December 31, 1999, from $2,802,000 for the year ended December 31, 1998. The change consisted primarily of increased transaction fees from GC, which were generated from the disposition of a property and development fees paid by an affiliated entity, and fees earned for the management of two properties in which the Company owns a 10% interest. These management fees did not occur in 1998. Interest and Other Income. Interest and other income increased $1,487,000 or 32%, to $6,094,000 for the year ended December 31, 1999, from $4,607,000 for the year ended December 31, 1998. The increase primarily consisted of interest income on a mortgage loan receivable secured by land located in Aurora, Colorado which originated on June 30, 1998, and interest earned on lender impound accounts and invested cash balances. Equity in Earnings of Associated Companies. Equity in earnings of Associated Companies decreased $92,000, or 7%, to $1,222,000 for the year ended December 31, 1999, from $1,314,000 for the year ended December 31, 1998. The decrease was primarily due to a decrease in earnings from GC resulting from a provision to reduce the carrying 16 17 value of management contracts with certain of the Managed Partnerships. This decrease was also due to a decrease in earnings from GHG resulting from the cancellation of GHG's hotel leases with the Company. Net Gain on Sales of Real Estate Assets and Repayment of Notes Receivable. The net gain on sale of real estate assets of $9,013,000 during the year ended December 31, 1999, resulted from the sale of ten office Properties, 18 industrial Properties, three retail Properties, one multifamily Property, two hotel Properties and a small interest in a REIT. The net gain on sales of real estate assets and repayment of notes receivable of $4,796,000 during the year ended December 31, 1998, resulted from the sales of one office property, six industrial properties, one multifamily property and three hotel properties from the Company's portfolio. Property Operating Expenses. Property operating expenses increased $13,958,000, or 19%, to $88,037,000 for the year ended December 31, 1999, from $74,079,000 for the year ended December 31, 1998. This increase represented increases in property operating expenses attributable to the 1998 and 1999 acquisitions offset by decreases in property operating expenses due to the 1998 and 1999 sales of properties. General and Administrative Expenses. General and administrative expenses decreased $1,350,000, or 12%, to $9,688,000 for the year ended December 31, 1999, from $11,038,000 for the year ended December 31, 1998. The decrease was primarily due to a reduction in staff and overhead expenses in response to a decrease in acquisition and marketing activities since mid-1998 and a reduction in the number of properties owned. As a percentage of rental revenue, general and administrative expenses decreased from 4.8% for the year ended December 31, 1998 to 3.8% for the year ended December 31, 1999. Depreciation and Amortization. Depreciation and amortization increased $8,101,000, or 16%, to $58,295,000 for the year ended December 31, 1999, from $50,194,000 for the year ended December 31, 1998. The increase was primarily due to depreciation and amortization associated with the 1998 and 1999 acquisitions. Interest Expense. Interest expense increased $11,493,000, or 22%, to $64,782,000 for the year ended December 31, 1999, from $53,289,000 for the year ended December 31, 1998. Substantially all of the increase was the result of higher average borrowings during the year ended December 31, 1999, as compared to the year ended December 31, 1998, due to new debt and the assumption of debt related to the 1998 and 1999 acquisitions. Loss on Sale of Mortgage Loan Receivable. During 1999, a note secured by an office property in Phoenix, Arizona was sold to a third-party at a discount of $1,229,000. The proceeds of the sale were invested in the repurchase of preferred stock. Net Gain (Loss) on Early Extinguishment of Debt. Net gain on early extinguishment of debt of $984,000 during the year ended December 31, 1999, consisted of $3,115,000 of net gains on retirement of Senior Notes at a discount, offset by $2,026,000 of losses due to prepayment penalties and $105,000 of losses due to the writeoff of unamortized loan fees upon the early payoff of four loans. These loans were paid-off early when more favorable terms were obtained through new financing and upon the sale of the properties securing the loans. Net loss on early extinguishment of debt of $1,400,000 during the year ended December 31, 1998, consisted of prepayment penalties and the writeoff 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 and upon the sale of one of the hotels. LIQUIDITY AND CAPITAL RESOURCES Cash Flows For the year ended December 31, 2000, cash provided by operating activities decreased by $4,784,000 to $88,129,000 as compared to $92,913,000 in 1999. The decrease is primarily due to a decrease in net income (before depreciation and amortization, minority interest, net gain on sales of real estate assets and other non-recurring gains and losses) of $6,856,000 due to the 1999 and 2000 sales of real estate assets, offset by a decrease in cash used for other assets and liabilities. Cash from investing activities increased by $271,689,000 to $354,250,000 for the year ended December 31, 2000, as compared to $82,561,000 in 1999. The change is primarily due to increased property dispositions from 1999 to 2000. During the year ended December 31, 2000, the Company disposed of 65 properties 17 18 as compared to 34 properties in 1999. Included in the 2000 dispositions is the sale of the Multifamily Portfolio from which the Company received approximately $93 million of net cash proceeds which are included in cash on the Company's consolidated balance sheet as of December 31, 2000. In addition, cash used for investments in development increased significantly during the year ended December 31, 2000 as compared to the same period in 1999. Cash used for financing activities increased by $173,317,000 to $346,666,000 of cash used for financing activities for the year ended December 31, 2000, as compared to $173,349,000 of cash used for financing activities for the same period in 1999. This change was primarily due to an increase in cash used for repayment of debt and repurchases of common and preferred stock. The Company expects to meet its short-term liquidity requirements generally through its working capital, its Credit Facility (as defined below) and cash generated by operations. The Company believes that its cash generated by operations will be adequate to meet operating requirements and to make distributions in accordance with REIT requirements in both the short and the long-term. In addition to cash generated by operations, the Credit Facility provides for working capital advances. However, there can be no assurance that the Company's results of operations will not fluctuate in the future and at times affect (i) its ability to meet its operating requirements and (ii) the amount of its distributions. The Company's principal sources of funding for acquisitions, development, expansion and renovation of properties and stock repurchases include the unsecured Credit Facility, permanent secured debt financing, public and private equity and debt issuances, the issuance of partnership units in the Operating Partnership, proceeds from property sales and cash flow provided by operations. Investments in Development The Company is currently involved in a number of alliances for the development of approximately 418,000 square feet of commercial properties and 1,146 multifamily units in California, Colorado and Texas. The alliances grant the Company certain rights to purchase the properties upon completion of development over the next five years. As of December 31, 2000, the Company had invested approximately $20.5 million in these alliances and had acquired properties from these alliances for approximately $52 million. The Company is also independently developing approximately 346,000 square feet of commercial properties in New Jersey and Massachusetts which are 46% pre-leased. As of December 31, 2000, the Company had invested approximately $18.4 million in these projects. In 2000, the Company formed a new joint venture with the Pauls Corporation ("Pauls"), Glenborough Pauls Development LLC (the "Development LLC"). The Company and Pauls each own an equal 50% interest in the Development LLC. The Company accounts for its investment in the Development LLC using the equity method. In the fourth quarter of 2000, the Development LLC acquired two sites: (i) a 33 acre parcel located in Redwood City, California, with a development potential of 400,000 square feet of office space and approximately 500 residential units, surrounding an existing marina, on which the Development LLC plans to pursue a significant mixed-use waterfront development and (ii) a 2.3-acre mixed-use development site in Millbrae, California, at the new hub of the BART and CalTrain regional transportation systems near the San Francisco International Airport. This site has potential for a 300,000 square-foot mixed-use development. As of December 31, 2000, the Company had advanced approximately $13.4 million to this joint venture and had provided guarantees on $21.6 million of joint venture debt. In the fourth quarter of 2000, the Company acquired a 255,185 square foot fully leased industrial property located on 13.6 acres in Burlingame, California. When the existing leases at this property expire in 2002, the Company anticipates major redevelopment in which some or all of the existing industrial space will be converted to office space. Approximately $20 million of the total acquisition cost of $43.5 million was classified as investment in development on the Company's consolidated balance sheet as of December 31, 2000. Investments in Operating Joint Ventures In the first quarter of 2000, the Company formed a limited liability company (the "LLC") with an independent third party and contributed its interest in the office property known as 2000 Corporate Ridge, located in McLean, 18 19 Virginia. The Company now has a 10% interest in the LLC and the LLC agreement provides for, among other things, a 3% annual management fee to the Company for property management services, certain asset management fees and certain additional distributions in excess of its 10% interest, if available, upon the ultimate sale of the property by the LLC. The book value of this 10% interest is approximately $3.8 million and is included in Investments in Operating Joint Ventures on the Company's consolidated balance sheet as of December 31, 2000. The Company accounts for its interest in the LLC using the equity method. Mortgage Loans Receivable Mortgage loans receivable decreased from $37,582,000 at December 31, 1999, to $37,250,000 at December 31, 2000. This decrease was due to the payoff of a $1,141,000 loan made by the Company to the buyer of one of the hotel Properties offset by accrued interest on a loan made by the Company under a development alliance. Secured and Unsecured Financing Mortgage loans payable decreased from $701,715,000 at December 31, 1999, to $450,624,000 at December 31, 2000. This decrease resulted from the assumption of mortgage loans by the buyers of the Company's Properties of $120,517,000, the payoff of approximately $241,308,000 of mortgage loans in connection with 2000 sales of Properties, and scheduled principal payments of approximately $8,831,000. This decrease is partially offset by $119,565,000 of new mortgage loans in connection with acquisitions, a refinance, the construction of a property in Bedminster, New Jersey and the expansion of a property in Indianapolis, Indiana (see below for further discussion). In the fourth quarter of 2000, the Company obtained a $28 million loan related to the acquisition of a 255,185 square foot industrial property located in Burlingame, California. The new loan has a maturity date of November 28, 2003 and bears interest at the floating rate of LIBOR plus 2.50%. The interest rate on this loan at December 31, 2000 was 9.06%. In the third quarter of 2000, the Company refinanced the loan on the first phase of a multifamily property located in Carrollton, Texas, in connection with the acquisition of the second phase of this property. The loan includes both phases which increased the loan balance from $14.1 million to $26.6 million. The new loan has a maturity date of September 30, 2001 and bears interest at the floating rate of LIBOR plus 2.25%. The interest rate on this loan at December 31, 2000 was 8.81%. In the second quarter of 2000, the Company obtained an $18 million construction loan to refinance a 264,000 square foot industrial property located in Indianapolis, Indiana, and to provide funds to build an approximate 83,000 square foot expansion to this property. Approximately $16.1 million was outstanding at December 31, 2000. The loan has a maturity date of June 15, 2002 and bears interest at the floating rate of LIBOR plus 2.50%. The interest rate on this loan at December 31, 2000 was 9.06%. In the first quarter of 2000, the Company obtained a $10.5 million construction loan to build an 80,000 square foot office property in Bedminster, New Jersey. Approximately $8.5 million was outstanding at December 31, 2000. The loan has a maturity date of November 12, 2001 and bears interest at the floating rate of LIBOR plus 2.50%. The interest rate on this loan at December 31, 2000 was 9.06%. In the first quarter of 2000, the Company formed a limited liability company (the "LLC") with an independent third party and contributed its interest in the office property known as 2000 Corporate Ridge, located in McLean, Virginia. Consideration received for this contribution included $14.7 million in cash and the assumption of a $20.6 million mortgage by the LLC. In the first quarter of 2000, related to the acquisition of an industrial property from one of the Company's development alliances, the Company assumed a $4.3 million secured loan. This loan has a maturity date of April 1, 2001 (with one 6-month extension option) and bears interest at the floating rate of LIBOR plus 1.55%. The interest rate on this loan at December 31, 2000 was 8.11%. During the first two quarters of 2000, the Company retired the remaining $91.2 million of unsecured Senior Notes at a discount. As a result of these retirements and the related writeoff of unamortized loan fees, a net loss on early 19 20 extinguishment of debt of $550,000 was recognized by the Company in the consolidated statement of income for the year ended December 31, 2000. In December 2000, related to the sale of the Company's Multifamily Portfolio, approximately $257.4 of the Company's mortgage loans (including the Secured Financing discussed below) were paid off or assumed by the buyer. In connection with the payoffs and assumptions, the Company recognized a net loss on early extinguishment of debt of $7,360,000 which consisted of prepayment penalties and writeoff of unamortized loan fees. This loss is included in the net loss on early extinguishment of debt in the Company's consolidated statement of income for the year ended December 31, 2000. In addition, on January 2, 2001, approximately $70 million of the proceeds from the sale were used to paydown the Company's Credit Facility (discussed below) and an unsecured term loan. In August 1999, the Company closed a $97.6 million secured financing with a commercial bank ("Secured Financing"). In August 2000, the Company expanded the Secured Financing by $50.2 million and used the proceeds to payoff a $52 million note which matured on September 1, 2000. In connection with the Secured Financing, the Company entered into two separate interest rate cap agreements to hedge increases in interest rates above a specified level. The agreements were for terms concurrent with the Secured Financing instrument, were indexed to the 90-day LIBOR rate, and were for a notional amount equal to the maximum amount available on the Secured Financing loan. The Company paid premiums totaling approximately $517,000 at the inception of the cap agreements, which were being amortized as additional interest expense over the life of the agreement. As discussed above, in December 2000, in connection with the sale of the Company's Multifamily Portfolio, the Secured Financing was paid off and the remaining unamortized premiums were written off. This amount is included in the net loss on early extinguishment of debt in the Company's consolidated statement of income for the year ended December 31, 2000. The Company has an unsecured line of credit provided by a group of commercial banks (the "Credit Facility"). Outstanding borrowings under the Credit Facility decreased from $70,628,000 at December 31, 1999, to $31,053,000 at December 31, 2000. The decrease was due to draws of $154,194,000 for acquisitions, stock repurchases, and retirement of the Company's Series A Senior Notes, offset by pay downs of $193,769,000 generated from proceeds from the sales of Properties and cash from operations. In February 2000, the maturity date on the Credit Facility was extended from December 2000 to June 2002. The Credit Facility requires, among other things, the Company to be in compliance with certain financial covenants and ratios. Management believes the Company is in compliance at December 31, 2000. At December 31, 2000, the Company's total indebtedness included fixed-rate debt of $342,043,000 and floating-rate indebtedness of $264,634,000. Approximately 54% of the Company's total assets, comprising 59 properties, is encumbered by debt at December 31, 2000. It is the Company's policy to manage its exposure to fluctuations in market interest rates through the use of fixed rate debt instruments to the extent possible. At December 31, 2000, approximately 44% of the Company's outstanding debt, including amounts borrowed under the Credit Facility, was subject to variable rates. The Company may, from time to time, enter into interest rate protection agreements intended to hedge the cost of new borrowings that are reasonably assured of completion. It is not the Company's policy to engage in hedging activities for previously outstanding debt instruments or for speculative purposes. At December 31, 2000, the Company was not a party to any open interest rate protection agreements. Equity and Debt Offerings In January 1999, the Operating Partnership and the Company filed a shelf registration statement with the SEC (the "January 1999 Shelf Registration Statement") to register $300 million of debt securities of the Operating Partnership and to carry forward the remaining $801.2 million in equity securities of the Company from a November 1997 shelf registration statement (declared effective by the SEC on December 18, 1997). The January 1999 Shelf Registration Statement was declared effective by the SEC on January 25, 1999. Therefore, the Operating Partnership and the Company have the capacity pursuant to the January 1999 Shelf Registration Statement to issue up to $300 million in debt securities and $801.2 million in equity securities, respectively. The Company currently has no plans to issue equity or debt under these shelf registrations. 20 21 Stock Repurchases In 1999, the Company's Board of Directors authorized the Company to repurchase up to 6.2 million shares of its outstanding Common Stock. This represented approximately 20% of the Company's total outstanding Common Stock. Such purchases will be made from time to time in the open market or otherwise and the timing will depend on market conditions and other factors. In connection with the sale of the Multifamily Portfolio, the repurchase authorization was increased to approximately 8.2 million shares. As of December 31, 2000, 6,086,816 common shares, representing approximately 76% of the expanded repurchase authorization, have been repurchased at approximately $101,195,000. In addition, during 1999, the Company announced that its Board of Directors had approved an expansion of the stock repurchase program to include preferred stock as well as common stock. The Company is authorized to repurchase up to 15% of its preferred stock, or 1,725,000 shares. As of December 31, 2000, 1,402,200 preferred shares, representing approximately 81% of the repurchase authorization, have been repurchased at approximately $21,037,000. INFLATION Substantially all of the leases at the industrial and retail Properties provide for pass-through to tenants of certain operating costs, including real estate taxes, common area maintenance expenses, and insurance. Leases at the multifamily properties generally provide for an initial term of one month or one year and allow for rent adjustments at the time of renewal. Leases at the office Properties typically provide for rent adjustment and pass-through of certain operating expenses during the term of the lease. All of these provisions may permit the Company to increase rental rates or other charges to tenants in response to rising prices and therefore, serve to reduce the Company's exposure to the adverse effects of inflation. FORWARD LOOKING STATEMENTS; FACTORS THAT MAY AFFECT OPERATING RESULTS This Report on Form 10-K contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward looking statements include statements regarding potential acquisitions, the anticipated performance of future acquisitions, recently completed acquisitions and existing properties, and statements regarding the Company's financing activities. All forward looking statements included in this document are based on information available to the Company on the date hereof. It is important to note that the Company's actual results could differ materially from those stated or implied in such forward looking statements. Some of the factors that could cause actual results to differ materially are set forth below. COMPETITION FOR TENANTS COULD ADVERSELY AFFECT THE COMPANY'S OPERATIONS When space becomes available at the Company's 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 it than the prior lease. The Company has established annual property budgets that include estimates of costs for renovation and re-leasing expenses. The Company believes 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 the Company cannot lease all or substantially all of the space at its properties promptly, if the rental rates are significantly lower than expected, or if the Company's reserves for these purposes prove inadequate, then the Company's results of operations and financial condition could be negatively impacted. TENANTS' DEFAULTS COULD ADVERSELY AFFECT THE COMPANY'S OPERATIONS The Company's ability to manage its 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, the Company cannot be sure that it could recover the premises from the tenant promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to that tenant. The Company also cannot be sure that it would receive rent in the proceeding sufficient to cover its 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 the Company's claims against the tenant. A tenant's default on its obligations to the Company could adversely affect its results of operations and financial condition. 21 22 CASH FLOW MAY BE INSUFFICIENT FOR DEBT SERVICE REQUIREMENTS The Company intends to incur indebtedness in the future, including through borrowings under its Credit Facility, to finance property acquisitions, retirement of debt and stock repurchases. As a result, the Company expects to be subject to the following risks associated with debt financing including: - that interest rates may increase; - that the Company's cash flow may be insufficient to meet required payments on its debt; and - that the Company may be unable to refinance or repay the debt as it comes due. DEBT RESTRICTIONS MAY AFFECT OPERATIONS AND NEGATIVELY AFFECT THE COMPANY'S ABILITY TO REPAY INDEBTEDNESS AT MATURITY The Company's current $142.5 million unsecured Credit Facility contains provisions that restrict the amount of distributions it can make. These provisions provide that distributions may not exceed 90% of funds from operations for any fiscal quarter. If the Company cannot obtain acceptable financing to repay indebtedness at maturity, it may have to sell properties to repay indebtedness or properties may be foreclosed upon, which could adversely affect its results of operations, financial condition and ability to service debt. Also, as of December 31, 2000, approximately $249.6 million of the Company's 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 the Company of income and asset value. FLUCTUATIONS IN INTEREST RATES MAY ADVERSELY AFFECT THE COMPANY'S OPERATIONS As of December 31, 2000, the Company had approximately $264.6 million of variable interest rate indebtedness. Accordingly, an increase in interest rates will adversely affect the Company's net income and results of operations. ACQUISITIONS COULD ADVERSELY AFFECT OPERATIONS Consistent with the Company's strategy, the Company is continually evaluating potential acquisition opportunities. From time to time the Company is actively considering the possible acquisition of specific properties, which may include properties managed by the Company or owned by affiliated parties. It is possible that one or more of such possible future acquisitions, if completed, could adversely affect the Company's results of operations and financial condition. POTENTIAL ADVERSE CONSEQUENCES OF TRANSACTIONS INVOLVING CONFLICTS OF INTEREST The Company has acquired, and from time to time may acquire, properties from partnerships that Robert Batinovich, the Company's Chairman and Chief Executive Officer, and Andrew Batinovich, the Company's 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. The Company's 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 the Company as transactions that it negotiates 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 the Company or will not result in losses. 22 23 DEPENDENCE ON EXECUTIVE OFFICERS The Company depends on the efforts of Robert Batinovich, its Chief Executive Officer and Andrew Batinovich, its President and Chief Operating Officer, and of its other executive officers. The loss of the services of any of them could have an adverse effect on the Company's 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 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 the Company's properties generally are required by their leases to operate in compliance with all applicable Environmental Laws, and to indemnify the Company against any environmental liability arising from their activities on the properties. However, the Company could be subject to environmental liability relating to its management of the properties or strict liability by virtue of its ownership interest in the properties. Also tenants may not satisfy their indemnification obligations under the leases. The Company is also subject to the risk that: - any environmental assessments of its properties, properties being considered for acquisition, or the properties owned by the partnerships managed by the Company 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 the Company, 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 the Company's results of operations and financial condition or ability to service debt, either directly (with respect to its properties), or indirectly (with respect to properties owned by partnerships managed by the Company). Moreover, future environmental laws, ordinances or regulations may have an adverse effect on the Company's 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 the Company. 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. 23 24 All of the properties that the Company presently owns 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. The Company has completed all of these investigations or is in the process of completing them. Certain of the Company's properties have been found to contain asbestos-containing building materials. The Company believes that these materials have been adequately contained and it has 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 the Company have been subject to Phase I environmental assessments by independent environmental consultants. The Company 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, the Company believes that these materials have been adequately contained and it has implemented an asbestos-containing building materials operations and maintenance program for the properties found to contain asbestos-containing building materials. POTENTIAL ENVIRONMENTAL LIABILITY RESULTING FROM UNDERGROUND STORAGE TANKS Some of the Company's properties, as well as properties that it has 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 the Company's 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 the Company's properties have been contaminated with these substances from on-site operations or operations on adjacent or nearby properties. In addition, certain of the Company's 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 the Company's operating costs. In addition, the presence of petroleum products or other hazardous or toxic substances at any of the Company's properties, or the failure to remediate those properties properly, may adversely affect its 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 the Company's results of operations and financial condition. GENERAL RISKS OF OWNERSHIP OF REAL ESTATE The Company is 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 the Company's knowledge and consent. 24 25 Should any of these events occur, the Company's results of operations and financial condition could be adversely affected. GENERAL RISKS ASSOCIATED WITH MANAGEMENT, LEASING AND BROKERAGE CONTRACTS The Company is 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. UNINSURED LOSSES MAY ADVERSELY AFFECT OPERATIONS The Company, 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, the Company may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. Should an uninsured loss occur, the Company could lose some or all of its capital investment, cash flow and anticipated profits related to one or more properties. This could have an adverse effect on the Company's results of operations and financial condition. ILLIQUIDITY OF REAL ESTATE MAY LIMIT OUR ABILITY TO VARY THE COMPANY'S PORTFOLIO Real estate investments are relatively illiquid and, therefore, will tend to limit the Company's ability to vary its 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 the Company's ability to sell properties. Forty-three of the Company's 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 the Company's 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 the Company's 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 the Company's costs are greater than anticipated or tenants are unable to meet their obligations, the Company's results of operations and financial condition could be adversely affected. DEVELOPMENT ALLIANCES MAY ADVERSELY AFFECT OPERATIONS The Company 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. 25 26 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 the Company's business interest or goals; or - be in a position to take action contrary to the Company's instructions or requests or contrary to its policies or objectives. Consequently, actions by a partner in a development alliance might subject property owned by the alliance to additional risk. Although the Company will seek to maintain sufficient control of any alliance to permit its objectives to be achieved, the Company may be unable to take action without the approval of its development alliance partners. Conversely, the Company's development alliance partners could take actions binding on the alliance without the Company's consent. In addition, should a partner in a development alliance become bankrupt, the Company could become liable for the partner's share of the project's liabilities. These risks may result in a development project adversely affecting the Company's 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, as a result, the Company may approach the income test limits imposed by the Code. There is a risk that the Company may not satisfy these tests. 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 the Company's 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. THE COMPANY'S INDEBTEDNESS RESTRICTIONS MAY ADVERSELY AFFECT ITS ABILITY TO INCUR INDEBTEDNESS The Company's organizational documents limit its 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 the Company's 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 units of the limited partnership, plus debt. An exception is 26 27 made for 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 its ability to incur additional indebtedness, even though such change in the common stock's value is unrelated to the Company's 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 the Company 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 the Company's 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 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 over the objection of certain parties, and the settlement was approved (or review denied) by the Superior Court of the State of California in and for San Mateo County, the California state court of appeals, the California Supreme Court and the Supreme Court of the United States. In the federal action, the court in December of 1995 deferred all further proceedings pending a ruling in the State court action. Following the final resolution of the State court action, the defendants filed a motion to dismiss the federal court action in January 2000. On March 14, 2000, the Federal District Court for the Northern District of California dismissed the federal action with prejudice. The plaintiffs in the action failed to file an appeal within the permitted period, so the federal action is fully resolved. 27 28 Certain other claims and lawsuits have arisen against the Company in its normal course of business. The Company believes that such other claims and lawsuits will not have a material adverse effect on the Company's financial position, cash flow or results of operations. 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 the 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 its 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 its 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. ITEM 7A. QUALITATIVE AND QUANTITATIVE INFORMATION ABOUT MARKET RISK INTEREST RATES The Company's primary market risk exposure is to changes in interest rates obtainable on its secured and unsecured borrowings. The Company does not believe that changes in market interest rates will have a material impact on the performance or fair value of its mortgage loan receivable. It is the Company's policy to manage its exposure to fluctuations in market interest rates for its borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. In order to maximize financial flexibility when selling properties and minimize potential prepayment penalties on fixed rate loans, the Company has also entered into variable rate debt arrangements. Approximately 44% and 28% of the Company's outstanding debt, including amounts borrowed under the Credit Facility, were subject to variable rates at December 31, 2000 and 1999, respectively. In addition, the average interest rate on the Company's debt increased from 7.16% at December 31, 1999 to 7.62% at December 31, 2000. The Company reviews interest rate exposure in the portfolio continually in an effort to minimize the risk of interest rate fluctuations. The Company does not have any other material market-sensitive financial instruments. It is not the Company's policy to engage in hedging activities for previously outstanding debt instruments or for speculative or trading purposes. The Company may enter into forward interest rate, or similar, agreements to hedge specific anticipated debt issuances where management believes the risk of adverse changes in market rates is significant. Under a forward interest rate agreement, if the referenced interest rate increases, the Company is entitled to a receipt in settlement of the agreement that economically would offset the higher financing cost of the debt issued. If the referenced interest rate decreases, the Company makes payment in settlement of the agreement, creating an expense that economically would offset the reduced financing cost of the debt issued. At December 31, 2000, the Company was not a party to any forward interest rate or similar agreements. The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on rates in effect at the reporting date. 28 29
Expected Maturity Date ------------------------------------------------------------------------------------------------- 2001 2002 2003 2004 2005 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- (in thousands) Secured Fixed $10,355 $ 11,747 $35,088 $8,520 $27,473 $248,860 $342,043 $342,043 Average interest rate 7.91% 7.50% 7.67% 7.18% 7.40% 6.64% 6.89% Secured Variable $64,498 $ 16,083 $28,000 $ -- $ -- $ -- $108,581 $108,581 Average interest rate 8.90% 9.06% 9.06% -- -- -- 8.96% Unsecured Variable $ -- $156,053 $ -- $ -- $ -- $ -- $156,053 $156,053 Average interest rate -- 8.29% -- -- -- -- 8.29%
The Company believes that the interest rates given in the table for fixed rate borrowings approximate the rates the Company could currently obtain for instruments of similar terms and maturities and that the fair values of such instruments approximate carrying value at December 31, 2000. A change of 1/8% in the index rate to which the Company's variable rate debt is tied would change the annual interest incurred by the Company by $331,000, based upon the balances outstanding on variable rate instruments at December 31, 2000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted as a separate section of this Form 10-K. See Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 4, 2001. 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 4, 2001. 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 4, 2001. 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 4, 2001. 29 30 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 31 Consolidated Balance Sheets at December 31, 2000 and 1999 32 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 33 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 34 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 35 Notes to Consolidated Financial Statements 37 (2) Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation 57 Schedule IV - Mortgage Loans Receivable, Secured by Real Estate 62 (3) Exhibits to Financial Statements The Exhibit Index attached hereto is hereby incorporated by reference to this Item. 65
(b) Reports on Form 8-K (incorporated herein by reference) On October 25, 2000, the Company filed a report on Form 8-K with respect to Supplemental Information for the quarter ended September 30, 2000. On January 16, 2001, the Company filed a report on Form 8-K with respect to the sale of the Company's Multifamily Portfolio. On January 24, 2001, the Company filed a report on Form 8-K with respect to Supplemental Information for the quarter ended December 31, 2000. 30 31 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of GLENBOROUGH REALTY TRUST INCORPORATED: We have audited the accompanying consolidated balance sheets of GLENBOROUGH REALTY TRUST INCORPORATED (a Maryland corporation) and subsidiaries, as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended December 31, 2000, 1999 and 1998. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial position of GLENBOROUGH REALTY TRUST INCORPORATED and subsidiaries, as of December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for the years ended December 31, 2000, 1999 and 1998, in conformity with accounting principles generally accepted in the United States. 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, 2001 31 32 GLENBOROUGH REALTY TRUST INCORPORATED CONSOLIDATED BALANCE SHEETS As of December 31, 2000 and 1999 (in thousands, except share amounts)
2000 1999 ----------- ----------- ASSETS Rental properties, gross $ 1,208,566 $ 1,756,061 Accumulated depreciation (115,061) (114,170) ----------- ----------- Rental properties, net 1,093,505 1,641,891 Investments in Development 86,286 38,773 Investments in Operating Joint Ventures 9,119 5,679 Mortgage loans receivable 37,250 37,582 Investment in Associated Company -- 9,404 Cash and cash equivalents 102,195 6,482 Other assets 42,803 54,793 ----------- ----------- TOTAL ASSETS $ 1,371,158 $ 1,794,604 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage loans $ 450,624 $ 701,715 Unsecured term debt 125,000 125,015 Unsecured bank line 31,053 70,628 Other liabilities 26,871 30,625 ----------- ----------- Total liabilities 633,548 927,983 ----------- ----------- Commitments and contingencies (Note 15) -- -- Minority interest 68,754 82,287 Stockholders' Equity: Common stock, 26,981,770 and 30,820,646 shares issued and outstanding at December 31, 2000 and 1999, respectively 27 31 Preferred stock, 10,097,800 and 11,330,000 shares issued and outstanding at December 31, 2000 and 1999, respectively 10 11 Additional paid-in capital 763,974 846,693 Deferred compensation (1,143) (613) Retained earnings (deficit) (94,012) (61,788) ----------- ----------- Total stockholders' equity 668,856 784,334 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,371,158 $ 1,794,604 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements 32 33 GLENBOROUGH REALTY TRUST INCORPORATED CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 2000, 1999 and 1998 (in thousands, except share and per share amounts)
2000 1999 1998 ------------ ------------ ------------ REVENUE Rental revenue $ 242,582 $ 255,339 $ 227,956 Fees and reimbursements from affiliates 3,713 3,312 2,802 Interest and other income 8,311 6,404 4,607 Equity in earnings of Associated Company 1,455 1,222 1,314 Equity in losses of unconsolidated operating joint ventures (386) (310) -- Net gain on sales of real estate assets and repayment of notes receivable 21,495 9,013 4,796 ------------ ------------ ------------ Total revenue 277,170 274,980 241,475 ------------ ------------ ------------ EXPENSES Property operating expenses 82,906 88,037 74,079 General and administrative 13,353 9,688 11,038 Depreciation and amortization 59,490 58,295 50,194 Interest expense 63,281 64,782 53,289 Provision for impairment of real estate assets 4,800 -- -- Provision for impairment of non-real estate assets 4,404 -- -- Loss on sale of mortgage loan receivable -- 1,229 -- Loss on interest rate protection agreement -- -- 4,323 ------------ ------------ ------------ Total expenses 228,234 222,031 192,923 ------------ ------------ ------------ Income from operations before minority interest and extraordinary item 48,936 52,949 48,552 Minority interest (2,157) (3,647) (2,550) ------------ ------------ ------------ Net income before extraordinary item 46,779 49,302 46,002 Extraordinary item: Net (loss) gain on early extinguishment of debt (7,910) 984 (1,400) ------------ ------------ ------------ Net income 38,869 50,286 44,602 Preferred dividends (20,713) (22,280) (20,620) ------------ ------------ ------------ Net income available to Common Stockholders $ 18,156 $ 28,006 $ 23,982 ============ ============ ============ Basic Per Share Data: Net income before extraordinary item $ 0.89 $ 0.86 $ 0.80 Extraordinary item (0.27) 0.03 (0.04) ------------ ------------ ------------ Net income available to Common Stockholders $ 0.62 $ 0.89 $ 0.76 ============ ============ ============ Basic weighted average shares outstanding 29,295,250 31,346,568 31,661,810 ============ ============ ============ Diluted Per Share Data: Net income before extraordinary item $ 0.85 $ 0.86 $ 0.79 Extraordinary item (0.23) 0.03 (0.04) ------------ ------------ ------------ Net income available to Common Stockholders $ 0.62 $ 0.89 $ 0.75 ============ ============ ============ Diluted weighted average shares outstanding 33,023,802 35,522,627 35,576,210 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements 33 34 GLENBOROUGH REALTY TRUST INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended December 31, 2000, 1999 and 1998 (in thousands)
Common Stock Preferred Stock ----------------- ------------------- Deferred Retained Additional Compen- Earnings Shares Par Value Shares Par Value Paid-in Capital sation (Deficit) Total ------ --------- ------ --------- --------------- -------- -------- ------ Balance at December 31, 1997 31,547 $ 31 -- $ -- $ 593,702 $ (210) $ (13,400) $580,123 Issuance of preferred stock, net of offering costs of $12,813 -- -- 11,500 11 274,676 -- -- 274,687 Issuance of common stock related to acquisitions 136 1 -- -- 3,389 -- -- 3,390 Exercise of stock options 22 -- -- -- 344 -- -- 344 Conversion of Operating Partnership units into common stock 52 -- -- -- -- -- -- -- Amortization of deferred compensation -- -- -- -- -- 91 -- 91 Issuance of common stock to directors 2 -- -- -- 62 (62) -- -- Unrealized loss on marketable securities -- -- -- -- -- -- (34) (34) Adjustment to fair value of minority interest -- -- -- -- (6,481) -- -- (6,481) Dividends -- -- -- -- -- -- (68,189) (68,189) Net income -- -- -- -- -- -- 44,602 44,602 ------ ---- ------ ---- -------- ----- -------- --------- Balance at December 31, 1998 31,759 32 11,500 11 865,692 (181) (37,021) 828,533 ------ ---- ------ ---- -------- ----- -------- --------- Exercise of stock options 85 -- -- -- 1,275 -- -- 1,275 Conversion of Operating Partnership units into common stock 607 1 -- -- 8,821 -- -- 8,822 Issuance of common stock to directors 30 -- -- -- 550 (550) -- -- Common and preferred stock repurchases (1,660) (2) (170) -- (29,645) -- -- (29,647) Amortization of deferred compensation -- -- -- -- -- 118 -- 118 Unrealized gain on marketable securities -- -- -- -- -- -- 34 34 Dividends -- -- -- -- -- -- (75,087) (75,087) Net income -- -- -- -- -- -- 50,286 50,286 ------ ---- ------ ---- -------- ----- -------- --------- Balance at December 31, 1999 30,821 31 11,330 11 846,693 (613) (61,788) 784,334 ------ ---- ------ ---- -------- ----- -------- --------- Exercise of stock options 54 -- -- -- 686 -- -- 686 Conversion of Operating Partnership units into common stock 335 -- -- -- 5,915 -- -- 5,915 Issuance of common stock related to merger of the Company and GC 162 -- -- -- 2,615 -- -- 2,615 Issuance of common stock to officers 40 -- -- -- 645 (645) -- -- Common and preferred stock repurchases (4,430) (4) (1,232) (1) (92,580) -- -- (92,585) Amortization of deferred compensation -- -- -- -- -- 115 -- 115 Dividends -- -- -- -- -- -- (71,093) (71,093) Net income -- -- -- -- -- -- 38,869 38,869 ------ ---- ------ ---- -------- ----- -------- --------- Balance at December 31, 2000 26,982 $ 27 10,098 $ 10 $ 763,974 $(1,143) $ (94,012) $668,856 ====== ==== ====== ==== ======== ===== ======== =========
The accompanying notes are an integral part of these consolidated financial statements 34 35 GLENBOROUGH REALTY TRUST INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2000, 1999 and 1998 (in thousands)
2000 1999 1998 --------- --------- --------- Cash flows from operating activities: Net income $ 38,869 $ 50,286 $ 44,602 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 59,490 58,295 50,194 Amortization of loan fees, included in interest expense 2,504 2,035 1,563 Minority interest in income from operations 2,157 3,647 2,550 Equity in earnings of Associated Company (1,455) (1,222) (1,314) Equity in losses of unconsolidated operating joint ventures 386 310 -- Loss on sale of mortgage loan receivable -- 1,229 -- Net gain on sales of real estate assets (21,495) (9,013) (4,796) Net loss (gain) on early extinguishment of debt 7,910 (984) 1,400 Provision for impairment of real estate assets 4,800 -- -- Provision for impairment of non-real estate assets 4,404 -- -- Amortization of deferred compensation 115 118 91 Changes in certain assets and liabilities, net (9,556) (11,788) (17,869) --------- --------- --------- Net cash provided by operating activities 88,129 92,913 76,421 --------- --------- --------- Cash flows from investing activities: Net proceeds from sales of real estate assets 468,432 144,846 73,339 Additions to real estate assets (73,080) (51,824) (626,161) Deposits on prospective acquisitions (2,273) -- -- Investments in development (48,029) (9,606) (25,745) Investments in operating joint ventures (3,845) (5,989) -- Distributions from operating joint ventures 535 -- -- Additions to mortgage loans receivable (3,550) (2,936) (39,613) Principal payments from mortgage loans receivable 3,882 6,545 885 Repayment of notes receivable 3,040 -- -- Payments from affiliates 200 900 -- Contribution to Associated Company (25) -- -- Distributions from Associated Company 1,258 625 3,455 Merger of Associated Company and the Company 7,705 -- -- --------- --------- --------- Net cash provided by (used for) investing activities 354,250 82,561 (613,840) --------- --------- --------- Cash flows from financing activities: Proceeds from borrowings 310,360 342,348 846,618 Repayment of borrowings (485,336) (403,162) (511,696) Prepayment penalties on repayment of borrowings (2,708) (2,026) -- Distributions to minority interest holders (5,990) (7,050) (5,058) Dividends to stockholders (71,093) (75,087) (68,189) Exercise of stock options 686 1,275 344 Repurchases of common stock (74,066) (27,129) -- Repurchases of preferred stock (18,519) (2,518) -- Proceeds from issuance of stock, net of offering costs -- -- 274,687 --------- --------- --------- Net cash (used for) provided by financing activities (346,666) (173,349) 536,706 --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements 35 36 GLENBOROUGH REALTY TRUST INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS -CONTINUED For the years ended December 31, 2000, 1999 and 1998 (in thousands)
2000 1999 1998 --------- ------- --------- Net increase (decrease) in cash and cash equivalents $ 95,713 $ 2,125 $ (713) Cash and cash equivalents at beginning of year 6,482 4,357 5,070 --------- ------- --------- Cash and cash equivalents at end of year $ 102,195 $ 6,482 $ 4,357 ========= ======= ========= Supplemental disclosure of cash flow information: Cash paid for interest (net of capitalized interest of $3,777, $2,675 and $1,108 in 2000, 1999 and 1998, respectively) $ 62,645 $63,316 $ 46,608 ========= ======= ========= Supplemental disclosure of Non-Cash Investing and Financing Activities: Assumption of first trust deed notes payable in acquisition of real estate $ 4,300 $39,275 $ 358,876 ========= ======= ========= Buyer's assumption of first trust deed notes payable in disposition of real estate $ 120,517 $ -- $ -- ========= ======= ========= Acquisition of real estate through issuance of shares of common stock and Operating Partnership units $ -- $ -- $ 52,621 ========= ======= ========= Conversion of Operating Partnership units into common stock, at current market value of common stock $ 5,915 $ 8,822 $ -- ========= ======= ========= Redemption of Operating Partnership units $ 2,586 $ -- $ -- ========= ======= ========= Issuance of Common Stock in merger of Associated Company and the Company $ 2,615 $ -- $ -- ========= ======= =========
The accompanying notes are an integral part of these consolidated financial statements 36 37 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 NOTE 1. ORGANIZATION Glenborough Realty Trust Incorporated (the "Company") was incorporated in the State of Maryland on August 26, 1994. On December 31, 1995, the Company completed a consolidation (the "Consolidation") in which Glenborough Corporation, a California corporation, and eight public limited partnerships (the "Partnerships"), collectively, the "GRT Predecessor Entities", merged with and into the Company. The Company has elected to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). The common and preferred stock of the Company (the "Common Stock" and the "Preferred Stock", respectively) are listed on the New York Stock Exchange ("NYSE") under the trading symbols "GLB" and "GLB Pr A", respectively. As of December 31, 2000, 26,981,770 shares of Common Stock and 10,097,800 shares of Preferred Stock were issued and outstanding. Common and preferred shares authorized are 188,000,000 and 12,000,000, respectively. Under the Company's Common and Preferred Stock repurchase authorizations which were approved by the Company's Board of Directors in 1999, 6,086,816 shares of Common Stock and 1,402,200 shares of Preferred Stock have been repurchased as of December 31, 2000. The Company's Preferred Stock is convertible at any time at the option of the holder thereof into shares of Common Stock at an initial conversion price of $32.83 per share of Common Stock (equivalent to a conversion rate of 0.7615 shares of Common Stock for each share of Series A Convertible Preferred Stock), subject to adjustment in certain circumstances. Except in certain instances relating to the preservation of the Company's status as a REIT, the 7 3/4% Series A Convertible Preferred Stock is not redeemable prior to January 16, 2003. On and after January 16, 2003, the Series A Preferred Stock may be redeemed at the option of the Company, in whole or in part, initially at 103.88% of the liquidation preference per share, and thereafter at prices declining to 100% of the liquidation preference on and after January 16, 2008, plus in each case accumulated, accrued and unpaid dividends, if any, to the redemption date. To maintain the Company's qualification as a REIT, no more than 50% of the value of the outstanding shares of the Company may be owned, directly or indirectly, by five or fewer individuals (defined to include certain entities), applying certain constructive ownership rules. To help ensure that the Company will not fail this test, the Company's Articles of Incorporation provide for certain restrictions on the transfer of the Common Stock to prevent further concentration of stock ownership. The Company, through its majority owned subsidiaries, is engaged primarily in the ownership, operation, management, leasing, acquisition, expansion and development of various income-producing properties. The Company's major consolidated subsidiary, in which it holds a 1% general partner interest and a 88.76% limited partner interest at December 31, 2000, is Glenborough Properties, L.P. (the "Operating Partnership"). Each of the holders of the remaining interests in the Operating Partnership ("OP Units") has the option to redeem its OP Units and to receive, at the option of the Company, in exchange for each OP Unit, either (i) one share of common stock of the Company, or (ii) cash equal to the fair market value of one share of common stock of the Company. As of December 31, 2000, the Operating Partnership, directly and through the subsidiaries in which it and the Company own 100% of the ownership interests, controls a portfolio of 85 real estate projects. Prior to October 2000, the Operating Partnership held 100% of the non-voting preferred stock of Glenborough Corporation ("GC" or the "Associated Company). GC was the general partner of several real estate limited partnerships and provided asset and property management services for these partnerships (the "Managed Partnerships"). It also provided 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 real estate assets in the Inland Empire region of Southern California (the "Rancon Partnerships"). Effective October 24, 2000, GC merged with the Company. In the merger, the Company received the net assets of GC, including the contract to manage the Rancon Partnerships, in exchange for its preferred stock of GC. In addition, the Company redeemed GC's OP units and issued shares of common stock to GC's common stock holders. 37 38 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements present the consolidated financial position of the Company and its subsidiaries as of December 31, 2000 and 1999, and the consolidated results of operations and cash flows of the Company and its subsidiaries for the years ended December 31, 2000, 1999 and 1998. All significant intercompany transactions, receivables and payables have been eliminated in consolidation. RECLASSIFICATION Certain prior year balances have been reclassified to conform with the current year presentation. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the results of operations during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998. SFAS No. 133 was originally effective for fiscal years beginning after June 15, 1999, with early adoption permitted. In June 1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an amendment of FASB Statement No. 133" was issued which, among other things, deferred the final implementation to fiscal years beginning after June 15, 2000. SFAS No. 133 provides comprehensive guidelines for the recognition and measurement of derivatives and hedging activities and specifically requires all derivatives to be recorded on the balance sheet at fair value. Upon implementation, this pronouncement will not have a material effect on the Company's consolidated financial position, results of operations and financial statement presentation. Staff Accounting Bulletin (SAB) No. 100, "Restructuring and Impairment Charges" was issued in November 1999. SAB 100 provides guidance on applying generally accepted accounting principles to restructuring and impairment charges in financial statements. The Company has adopted SAB 100 as required and believes that SAB 100 did not have a material impact on the Company's consolidated financial position, results of operations and financial statement presentation. Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition" was issued in December 1999. SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The Company has adopted SAB 101 as required and believes that SAB 101 did not have a material impact on the Company's consolidated financial position, results of operations and financial statement presentation. RENTAL PROPERTIES Rental properties are stated at cost, net of accumulated depreciation, unless circumstances indicate that cost, net of accumulated depreciation, cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value. Estimated fair value: (i) is based upon the Company's plans for the continued operation of each property; and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized net operating income based upon the age, construction and use of the building. The fulfillment of the Company's plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Company to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, it is reasonably possible that the actual results of operating and disposing of the Company's properties could be materially different than current expectations. Depreciation is provided using the straight line method over the useful lives of the respective assets. The useful lives are as follows: 38 39 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 Buildings and Improvements 10 to 40 years Tenant Improvements Term of the related lease Furniture and Equipment 5 to 7 years INVESTMENTS IN DEVELOPMENT The Company, through mezzanine loans and equity contributions, invests in various development alliances with projects currently under development. The interest on advances and other direct project costs incurred by the Company are capitalized to the investments during the period in which the projects are under development. See Note 4 for further discussion. INVESTMENTS IN OPERATING JOINT VENTURES The Company's investments in operating joint ventures are accounted for using the equity method. See Note 5 for further discussion. MORTGAGE LOANS RECEIVABLE The Company monitors the recoverability of its mortgage loans 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. The 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 estimated fair value of the collateral securing it. Interest income will also cease to accrue under such circumstances. Due to uncertainties inherent in the valuation process, it is reasonably possible that the amount ultimately realized from the Company's collection on these receivables will be different than the recorded amounts. INVESTMENT IN ASSOCIATED COMPANY Prior to the October 2000 merger as discussed in Note 1, the Company's Investment in Associated Company was accounted for using the equity method. See Note 7 for further discussion. CASH EQUIVALENTS The Company considers short-term investments (including certificates of deposit) with a maturity of three months or less at the time of investment to be cash equivalents. As of December 31, 2000, approximately $23 million of tax-deferred exchange proceeds were included in cash and cash equivalents on the accompanying consolidated balance sheet. FAIR VALUE OF FINANCIAL INSTRUMENTS Based on the borrowing rates currently available to the Company, the carrying amount of debt approximates fair value. Cash and cash equivalents consist of demand deposits and certificates of deposit with financial institutions. The carrying amount of cash and cash equivalents as well as the mortgage loans receivable described above, approximates fair value. DERIVATIVE FINANCIAL INSTRUMENTS The Company may use derivative financial instruments in the event that it believes such instruments will be an effective hedge against fluctuations in interest rates on a specific 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. 39 40 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 At December 31, 2000, the Company was not a party to any open interest rate protection agreements. DEFERRED FINANCING AND OTHER FEES Fees paid in connection with the financing and leasing of the Company's properties are amortized over the term of the related notes payable or leases and are included in other assets. MINORITY INTEREST Minority interest represents the 10.24% and 10.50% limited partner interests in the Operating Partnership not held by the Company at December 31, 2000 and 1999, respectively. 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, 2000, 1999 and 1998, no tenants represented 10% or more of rental revenue of the Company. Fee and reimbursement revenue consists of property management fees, overhead administration fees, and transaction fees from the acquisition, disposition, refinancing, leasing and construction supervision of real estate for unconsolidated affiliates. Revenues are recognized only after the Company is contractually entitled to receive payment, after the services for which the fee is to be received have been provided, and after the ability and timing of payments are reasonably assured and predictable. Some scheduled rent increases are based primarily on the Consumer Price Index or a similar factor. Material incentives paid, if any, by the Company to a tenant are amortized as a reduction of rental income over the life of the related lease. The Company's portfolio of leases turns over continuously, with the number and value of expiring leases varying from year to year. The Company's ability to release the space to existing or new tenants at rates equal to or greater than those realized historically is impacted by, among other things, the economic conditions of the market in which a property is located, the availability of competing space, and the level of improvements which may be required at the property. No assurance can be given that the rental rates that the Company will obtain in the future will be equal to or greater than those obtained under existing contractual commitments. INCOME TAXES The Company has made an election to be taxed as a REIT under Sections 856 through 860 of the Code. As a REIT, the Company generally will not be subject to Federal income tax to the extent that it distributes at least 95% of its REIT taxable income to its shareholders. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to Federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to Federal income and excise taxes on its undistributed income. For the years ended December 31, 2000, 1999 and 1998, approximately 0%, 24% and 22%, respectively, of the dividends paid to common stockholders represented a return of capital for income tax purposes. For the years ended December 31, 2000, 1999 and 1998, none of the dividends paid to preferred stockholders represented a return of capital for income tax purposes. In addition, for the years ended December 31, 2000, 1999 and 1998, the Company elected to distribute all of its taxable capital gain. Approximately 4%, 6% and 0% of the dividends paid to common and preferred stockholders represents a dividend taxable as long term capital gain and approximately 27%, 0% and 1% represents a dividend taxable as unrecaptured Section 1250 gain for the years ended December 31, 2000, 1999 and 1998, respectively. 40 41 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 NOTE 3. RENTAL PROPERTY The cost and accumulated depreciation of rental property as of December 31, 2000 and 1999 are as follows (in thousands):
Buildings Net and Accumulated Recorded Land Improvements Total Cost Depreciation Value ----------- ------------ ------------ ------------ ----------- 2000: Office properties $ 98,908 $ 724,735 $ 823,643 $ (79,976) $ 743,667 Industrial properties 68,486 240,075 308,561 (27,896) 280,665 Retail properties 8,960 35,608 44,568 (5,947) 38,621 Multifamily properties and other 2,826 28,968 31,794 (1,242) 30,552 ---------- ---------- ---------- ---------- ---------- Total $ 179,180 $1,029,386 $1,208,566 $ (115,061) $1,093,505 ========== ========== ========== ========== ========== 1999: Office properties $ 112,149 $ 821,916 $ 934,065 $ (59,637) $ 874,428 Industrial properties 58,206 261,655 319,861 (23,167) 296,694 Retail properties 15,188 62,440 77,628 (7,131) 70,497 Multifamily properties 47,299 369,859 417,158 (22,421) 394,737 Hotel properties and other -- 7,349 7,349 (1,814) 5,535 ---------- ---------- ---------- ---------- ---------- Total $ 232,842 $1,523,219 $1,756,061 $ (114,170) $1,641,891 ========== ========== ========== ========== ==========
Acquisitions In the fourth quarter of 2000, the Company acquired a 255,185 square foot fully leased industrial property located on 13.6 acres in Burlingame, California. The total acquisition cost of $43.5 million was funded with the proceeds from tax-deferred exchanges and a new $28 million loan. When the existing leases at this property expire in 2002, the Company anticipates major redevelopment in which some or all of the existing industrial space will be converted to office space. In addition, the Company acquired from a development alliance Two Gateway Center, a 80,049 square foot office property located in Aurora, Colorado. The total acquisition cost of $9.7 million was funded with proceeds from tax-deferred exchanges. In the third quarter of 2000, the Company acquired from a development alliance the second phase of Springs of Indian Creek, a multifamily property located in Carrollton, Texas. The second phase consists of 234 units which, combined with the 285 units of the first phase, brings this property to a total of 519 multifamily units. The total acquisition cost was approximately $16.3 million. In the first quarter of 2000, the Company acquired from a development alliance Gateway 14, a 113,538 square foot industrial property located in Denver, Colorado. The total acquisition cost of $6.2 million consisted of approximately $1.9 million in cash, which was funded with the proceeds from a tax-deferred exchange, and the assumption of $4.3 million in debt. During the year ended December 31, 1999, the Company acquired nine properties which consisted of approximately 711,000 square feet of office and industrial space and 381 multifamily units and had aggregate acquisition costs of approximately $98 million. During the year ended December 31, 1998, the Company acquired 68 properties which consisted of approximately 6.6 million square feet of office, industrial and retail space and 7,206 multi-family units and had aggregate acquisition costs of approximately $999 million. 41 42 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 Dispositions In December 2000, the Company sold 36 multifamily properties (the "Multifamily Portfolio") consisting of 9,253 total units, to affiliates of Westdale Properties America I, Ltd. which owns and operates 25,000 apartment units around the country. The $400 million sale price was comprised of three components: (i) $257 million of existing mortgage debt either assumed or retired, (ii) approximately $106 million in cash, and (iii) approximately $37 million in the form of 2,010,700 shares of the Company's stock held by Westdale Properties America I, Ltd. and affiliates. The transaction produced a gain on sale for the Company of approximately $24 million and net cash proceeds of approximately $93 million which are included in cash on the accompanying consolidated balance sheet as of December 31, 2000. Included in the gain on sale of the Multifamily Portfolio is a $1.8 million charge for severance related costs for Multifamily Portfolio employees. As of March 15, 2001, substantially all of this amount had been paid. In addition, the Company recognized extraordinary expenses relating to the writeoff of deferred loan fees and prepayment penalties on the prepayment of debt of approximately $7.4 million. Of the net cash proceeds received by the Company from the transaction, approximately $23 million was set aside in tax deferred exchange accounts to fund future acquisitions, and approximately $70 million was used to paydown the Company's Credit Facility and the unsecured term loan in January 2001. In the fourth quarter of 2000, in addition to the sale of the Multifamily Portfolio, the Company sold 4 other properties, including one office, one industrial, one retail and one hotel. Including the Multifamily Portfolio, the Company sold 40 properties for an aggregate sales price of approximately $414.3 million which generated an aggregate net gain of approximately $19.8 million. In the third quarter of 2000, the Company sold eleven properties, including three office, seven industrial and one retail. These assets were sold for an aggregate sales price of approximately $49.1 million and generated an aggregate net gain of approximately $4.7 million. In the second quarter of 2000, the Company sold eleven properties, including five office, three industrial and three retail. These assets were sold for an aggregate sales price of approximately $105.6 million and generated an aggregate net loss of approximately $2.3 million. In the first quarter of 2000, the Company formed a limited liability company with an independent third party and contributed its interest in the office property known as 2000 Corporate Ridge, located in McLean, Virginia. See Note 5 for further discussion. In addition, the Company sold an industrial property for an aggregate sales price of $1.6 million. These transactions resulted in an aggregate loss on sale of approximately $695,000. These transactions are reflected in the net gain on sales of real estate assets in the accompanying consolidated statement of income for the year ended December 31, 2000. During the year ended December 31, 1999, the Company sold 34 properties, including eight office, 13 office/flex, seven industrial, three retail, one multifamily, two hotels and a partial interest in a REIT. The assets were sold for an aggregate sales price of approximately $185 million and generated an aggregate net gain of approximately $9 million. These transactions are reflected as the net gain on sales of real estate assets on the accompanying consolidated statement of income for the year ended December 31, 1999. During the year ended December 31, 1998, the Company sold eleven properties, including one office, two office/flex, four industrial, one multifamily and three hotels. The assets were sold for an aggregate sales price of approximately $56 million and generated an aggregate net gain of approximately $4.8 million. These transactions are reflected as the net gain on sales of real estate assets on the accompanying consolidated statement of income for the year ended December 31, 1998. 42 43 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 Provision for Impairment of Real Estate Assets During 2000, a loss provision in the amount of $4,800,000 was recorded to provide for a decrease in the estimated fair market value of a 418,458 square foot office property located in Memphis, Tennessee. In addition to a softening in the Memphis office market, the Company was notified by Federal Express, a major tenant occupying 121,218 square feet, or 29%, of this property, of its plans not to renew their lease upon expiration in September 2001. The Company leases its commercial and industrial property under non-cancelable operating lease agreements. Future minimum rents to be received as of December 31, 2000 are as follows (in thousands): Year Ending December 31, ------------ 2001 $157,233 2002 117,761 2003 97,519 2004 74,091 2005 52,908 Thereafter 148,954 -------- $648,466 ======== NOTE 4. INVESTMENTS IN DEVELOPMENT The Company is currently involved in a number of alliances for the development of approximately 418,000 square feet of commercial properties and 1,146 multifamily units in California, Colorado and Texas. The alliances grant the Company certain rights to purchase the properties upon completion of development over the next five years. As of December 31, 2000, the Company had invested approximately $20.5 million in these alliances and had acquired properties from these alliances for approximately $52 million. The Company is also independently developing approximately 346,000 square feet of commercial properties in New Jersey and Massachusetts which are 46% pre-leased. As of December 31, 2000, the Company had invested approximately $18.4 million in these projects. In 2000, the Company formed a new joint venture with the Pauls Corporation ("Pauls"), Glenborough Pauls Development LLC (the "Development LLC"). The Company and Pauls each own an equal 50% interest in the Development LLC. The Company accounts for its investment in the Development LLC using the equity method. In the fourth quarter of 2000, the Development LLC acquired two sites: (i) a 33 acre parcel located in Redwood City, California, with a development potential of 400,000 square feet of office space and approximately 500 residential units, surrounding an existing marina, on which the Development LLC plans to pursue a significant mixed-use waterfront development and (ii) a 2.3-acre mixed-use development site in Millbrae, California, at the new hub of the BART and CalTrain regional transportation systems near the San Francisco International Airport. This site has potential for a 300,000 square-foot mixed-use development. As of December 31, 2000, the Company had advanced approximately $13.4 million to this joint venture and had provided guarantees on $21.6 million of joint venture debt. As discussed in Note 3, in the fourth quarter of 2000, the Company acquired a 255,185 square foot fully leased industrial property located on 13.6 acres in Burlingame, California. When the existing leases at this property expire in 2002, the Company anticipates major redevelopment in which some or all of the existing industrial space will be converted to office space. Approximately $20 million of the total acquisition cost of $43.5 million was classified as investment in development on the Company's consolidated balance sheet as of December 31, 2000. 43 44 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 NOTE 5. INVESTMENTS IN OPERATING JOINT VENTURES The Company's investments in operating joint ventures are accounted for using the equity method. The Company records earnings on its investments equal to its ownership interest in the venture's earnings (losses). Distributions are recorded as a reduction of the Company's investment. The Company's investments in operating joint ventures consist of the following as of December 31, 2000 and 1999 (dollars in thousands):
Balance of Investment at December 31, Ownership Property Square Property Joint Venture Interest Location Footage Type 2000 1999 ----------------------- ----------- ------------ ---------- ------------ ---------- ---------- Rincon Center I & II 10% San 700,000 Mixed-Use $ 3,952 $ 4,197 Francisco, California Rockwall I & II 10% Rockville, 340,252 Office 1,326 1,422 Maryland 2000 Corporate Ridge 10% McLean, 255,980 Office 3,841 60 (see below for Virginia further discussion) ---------- ---------- $ 9,119 $ 5,679 ========== ==========
In the first quarter of 2000, the Company formed a limited liability company (the "LLC") with an independent third party and contributed its interest in the office property known as 2000 Corporate Ridge, located in McLean, Virginia. The Company now has a 10% interest in the LLC and the LLC agreement provides for, among other things, a 3% annual management fee to the Company for property management services, certain asset management fees and certain additional distributions in excess of its 10% interest, if available, upon the ultimate sale of the property by the LLC. As noted in the above table, approximately $60,000 of preliminary costs related to this LLC were incurred during the year ended December 31, 1999. NOTE 6. MORTGAGE LOANS RECEIVABLE The Company's mortgage loans receivable consist of the following as of December 31, 2000 and 1999 (dollars in thousands):
2000 1999 --------- -------- Note secured by a hotel property in Arlington, TX, with a fixed interest rate of 9%, monthly interest-only payments and a maturity date of March 2000. This note was paid off in January 2000. $ -- $ 1,141 Note secured by Gateway Park land located in Aurora, CO, with a stated fixed interest rate of 13%, quarterly interest-only payments and a maturity date of July 2005 (see below for further discussion). 37,250 36,441 --------- --------- Total $ 37,250 $ 37,582 ========= =========
In 1998, the Company loaned approximately $34 million ($37.2 million, including accrued interest, at December 31, 2000), secured by a first mortgage to Pauls, to continue the build-out of Gateway Park. Gateway Park is a development project where the Company and Pauls have an alliance and where the Company has also acquired property. In this arrangement, the Company has rights under certain conditions and subject to certain contingencies to purchase the properties upon completion of development and, thus, through this arrangement, the Company could acquire up to 2.2 million square feet of office and industrial space and 1,600 multifamily units over the next ten years. 44 45 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 NOTE 7. INVESTMENT IN ASSOCIATED COMPANY As discussed in Note 1, effective October 24, 2000, GC merged with the Company. Prior to the merger, the Company accounted for its investment in GC using the equity method as a substantial portion of the economic benefits flowed to the Company by virtue of its 100% non-voting preferred stock interest in GC, which interest constituted substantially all of GC's capitalization. Two of the holders of the voting common stock of GC were officers of the Company; however, the Company had no direct voting or management control of GC. The Company recorded 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 were recorded as a reduction of the Company's investments. As of December 31, 2000 and 1999, the Company had the following investment in the Associated Company (in thousands): GC (1) -------- Investment at December 31, 1998 $ 8,807 Distributions (625) Equity in earnings 1,222 -------- Investment at December 31, 1999 9,404 Distributions (10,859) Equity in earnings (loss) 1,455 -------- Investment at December 31, 2000 $ -- ======== Summary condensed balance sheet information as of December 31, 2000 and 1999, and the condensed statements of income for the years then ended are as follows (in thousands): Balance Sheets GC (1) As of December 31, 2000 1999 ---- ------- Investments in management contracts, net $-- $ 3,468 Investment in real estate joint venture -- 4,512 Other assets -- 8,011 --- ------- Total assets $-- $15,991 === ======= Notes payable $-- $ 6,025 Other liabilities -- 287 --- ------- Total liabilities -- 6,312 Common stockholders -- 275 Preferred stockholder -- 9,404 --- ------- Stockholders' equity -- 9,679 --- ------- Total liabilities and stockholders' equity $-- $15,991 === ======= Statements of Income GC (1) For the year ended December 31, 2000 1999 ------ ------ Revenue $5,845 $8,528 Expenses 4,317 7,247 ------ ------ Net income (loss) $1,528 $1,281 ====== ====== Net income allocable to the Company $1,455 $1,222 ====== ====== 45 46 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 (1) All amounts presented for GC represent combined amounts for GC and GHG due to the September 30, 1999 merger. NOTE 8. OTHER ASSETS As of December 31, 2000 and 1999, other assets on the consolidated balance sheets consists of the following (in thousands):
2000 1999 ------- ------- Accounts receivable $ 2,463 $ 3,856 Prepaid expenses 6,632 8,164 Impound accounts 7,792 12,970 Deferred leasing and financing costs 20,421 20,867 Investment in management contracts 3,567 -- Corporate office fixed assets(1) 1,238 4,726 Related party receivable (Note 11) -- 1,847 Other 690 2,363 ------- ------- Total other assets $42,803 $54,793 ======= =======
(1) In connection with the Company's decision to sell its Multifamily Portfolio, the Company recorded an impairment charge of approximately $4.4 million in 2000 relating to the writeoff of certain corporate office fixed assets. This charge is reflected as a provision for impairment of non-real estate assets on the accompanying consolidated statement of operations for the year ended December 31, 2000. NOTE 9. SECURED AND UNSECURED LIABILITIES The Company had the following mortgage loans, bank lines, and notes payable outstanding as of December 31, 2000 and 1999 (in thousands):
2000 1999 ------------- ------------- Secured loans with various lenders, net of unamortized discount of $3,518 and $5,515 at December 31, 2000 and December 31, 1999, respectively. All loans have a fixed interest rate of 6.125% and a November 10, 2008 maturity date. Monthly principal and interest payments range between $296 and $458. These loans are secured by properties with an aggregate net carrying value of $322,067 and $409,130 at December 31, 2000 and 1999, respectively. $ 170,899 $ 232,735 Secured loans with various lenders, bearing interest at fixed rates between 6.95% and 9.25%, with monthly principal and interest payments ranging between $19 and $443 and maturing at various dates through July 1, 2008. These loans are secured by properties with an aggregate net carrying value of $303,532 and $547,264 at December 31, 2000 and 1999, respectively. 171,144 322,878 Secured loans with various banks bearing interest at variable rates ranging between 8.11% and 9.06% at December 31, 2000 and 6.53% and 8.52% at December 31, 1999, and maturing at various dates through November 28, 2003. These loans are secured by properties with an aggregate net carrying value of $119,008 and $224,526 at December 31, 2000 and 1999, respectively. 108,581 146,102
46 47 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999
2000 1999 ------------- ----------- Unsecured $142,500 line of credit with a group of commercial banks ("Credit Facility") with a variable interest rate of LIBOR plus 1.625% at December 31, 2000 and 1999 (8.186% and 7.753%, respectively), monthly interest only payments and a maturity date of June 10, 2002, with one option to extend for 10 years. $ 31,053 $ 70,628 Unsecured $125,000 term loan with a group of commercial banks with a variable interest rate of LIBOR plus 1.75% (8.31% and 8.25% at December 31, 2000 and 1999, respectively), monthly interest only payments and a maturity date of June 10, 2002. 125,000 33,865 Unsecured Series A Senior Notes with a fixed interest rate of 7.625%, interest payable semiannually on March 15 and September 15, and a maturity date of March 15, 2005. All of the notes were retired in the first six months of 2000, as -- 91,150 discussed below. ----------- ----------- Total $ 606,677 $ 897,358 =========== ===========
In the fourth quarter of 2000, the Company obtained a $28 million loan related to the acquisition of a 255,185 square foot industrial property located in Burlingame, California (as discussed in Note 3). This loan has a maturity date of November 28, 2003 and bears interest at the floating rate of LIBOR plus 2.50%. The interest rate on this loan at December 31, 2000 was 9.06%. In the third quarter of 2000, the Company refinanced the loan on the first phase of the Springs of Indian Creek in connection with the acquisition of the second phase of the property (as discussed in Note 3). The loan includes both phases which increased the loan balance from $14.1 million to $26.6 million. The new loan has a maturity date of September 30, 2001 and bears interest at the floating rate of LIBOR plus 2.25%. The interest rate on this loan at December 31, 2000 was 8.81%. In addition, during the third quarter, the Company paid off a $2 million loan which was secured by an office property located in Phoenix, Arizona. In the second quarter of 2000, the Company obtained an $18 million construction loan to refinance a 264,000 square foot industrial property located in Indianapolis, Indiana, and to provide funds to build an approximate 83,000 square foot expansion to this property. Approximately $16.1 million was outstanding at December 31, 2000. The loan has a maturity date of June 15, 2002 and bears interest at the floating rate of LIBOR plus 2.50%. The interest rate on this loan at December 31, 2000 was 9.06%. In the first quarter of 2000, the Company obtained a $10.5 million construction loan to build an 80,000 square foot office property in Bedminster, New Jersey. Approximately $8.5 million was outstanding at December 31, 2000. The loan has a maturity date of November 12, 2001 and bears interest at the floating rate of LIBOR plus 2.50%. The interest rate on this loan at December 31, 2000 was 9.06%. In the first quarter of 2000, the Company contributed its interest in the office property known as 2000 Corporate Ridge to a limited liability company (the "LLC"). The LLC assumed the $20.6 million mortgage loan on this property. See Note 5 for further discussion. In the first quarter of 2000, related to the acquisition of an industrial property from one of the Company's development alliances (as discussed in Note 3 above), the Company assumed a $4.3 million secured loan. This loan has a maturity date of April 1, 2001 (with one 6-month extension option) and bears interest at the floating rate of LIBOR plus 1.55%. The interest rate on this loan at December 31, 2000 was 8.11%. 47 48 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 During the first two quarters of 2000, the Company retired the remaining $91.2 million of unsecured Series A Senior Notes at a discount. As a result of these transactions and the related writeoff of capitalized original issuance costs, a net loss on early extinguishment of debt of $550,000 was recorded in the accompanying consolidated statement of income for the year ended December 31, 2000, as discussed in Note 10 below. In December 2000, related to the sale of the Company's Multifamily Portfolio, approximately $257.4 million of the Company's mortgage loans (including the Secured Financing discussed below) were paid off or assumed by the buyer. In connection with the payoffs and assumptions, the Company recognized a net loss on early extinguishment of debt of $7,360,000 which consisted of prepayment penalties and writeoff of unamortized loan fees. This loss is included in the net loss on early extinguishment of debt in the Company's consolidated statement of income for the year ended December 31, 2000, as discussed in Note 10 below. In August 1999, the Company closed a $97.6 million secured financing with a commercial bank ("Secured Financing"). In August 2000, the Company expanded the Secured Financing by $50.2 million and used the proceeds to payoff a $52 million note which matured on September 1, 2000. In connection with the Secured Financing, the Company entered into two separate interest rate cap agreements to hedge increases in interest rates above a specified level. The agreements were for terms concurrent with the Secured Financing instrument, were indexed to the 90-day LIBOR rate, and were for a notional amount equal to the maximum amount available on the Secured Financing loan. The Company paid premiums totaling approximately $517,000 at the inception of the cap agreements, which were being amortized as additional interest expense over the life of the agreement. As discussed above, in December 2000, in connection with the sale of the Company's Multifamily Portfolio, the Secured Financing was paid off and the remaining unamortized premiums were written off. This amount is included in the net loss on early extinguishment of debt in the Company's consolidated statement of income for the year ended December 31, 2000. Outstanding borrowings under the Credit Facility (as discussed above) decreased from $70,628,000 at December 31, 1999, to $31,053,000 at December 31, 2000. The decrease was due to draws of $154,194,000 for acquisitions, stock repurchases, and retirement of the Company's Series A Senior Notes, offset by pay downs of $193,769,000 generated from proceeds from the sales of Properties and cash from operations. In February 2000, the maturity date on the Credit Facility was extended from December 2000 to June 2002. The Credit Facility requires, among other things, the Company to be in compliance with certain financial covenants and ratios. Management believes the Company is in compliance at December 31, 2000. Some of the Company's properties are held in limited partnerships and limited liability companies in order to facilitate financing. Such limited partnerships and limited liability companies are included in the consolidated financial statements of the Company in accordance with Generally Accepted Accounting Principles ("GAAP"). The required principal payments on the Company's debt for the next five years and thereafter, as of December 31, 2000, are as follows (in thousands): Year Ending December 31, ------------ 2001 $ 74,853 2002 183,883 2003 63,088 2004 8,520 2005 27,473 Thereafter 248,860 -------- Total $606,677 ======== NOTE 10. NET GAIN (LOSS) ON EARLY EXTINGUISHMENT OF DEBT In December 2000, related to the sale of the Company's Multifamily Portfolio, approximately $257.4 million of the Company's mortgage loans (including the Secured Financing discussed above) were paid off or assumed by the 48 49 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 buyer. In connection with the payoffs and assumptions, the Company recognized a net loss on early extinguishment of debt of $7,360,000 which consisted of $2,670,000 of prepayment penalties and $4,690,000 of losses due to the writeoff of unamortized loan fees. Additionally, in connection with the retirement of the unsecured Series A Senior Notes as discussed above, the Company recorded a net loss on early extinguishment of debt of $550,000 which consisted of $931,000 of gains on retirement offset by $1,481,000 of losses due to the writeoff of unamortized original issuance costs. These losses are included in the net loss on early extinguishment of debt in the Company's consolidated statement of income for the year ended December 31, 2000. Net gain on early extinguishment of debt of $984,000 during the year ended December 31, 1999, consisted of $3,115,000 of gains on retirement of Senior Notes offset by $2,026,000 of losses due to prepayment penalties and $105,000 of losses due to the writeoff of unamortized loan fees upon the early payoff of four loans. These loans were paid-off early when more favorable terms were obtained through new financing and upon the sale of the properties securing the loans. NOTE 11. RELATED PARTY TRANSACTIONS Fee and reimbursement income earned by the Company from related parties totaled $3,713,000, $3,312,000 and $2,802,000 for the years ended December 31, 2000, 1999 and 1998, respectively, and consisted of property management fees, asset management fees and other fee income. In addition, the Company paid GC property management fees and salary reimbursements totaling $931,000, $1,572,000 and $1,273,000 for the years ended December 31, 2000, 1999 and 1998, respectively, for management of a portfolio of residential properties owned by the Company, which is included in property operating expenses and general and administrative expenses on the accompanying consolidated statements of income. As discussed in Note 1 and 7, effective October 24, 2000, GC merged with the Company. Prior to 2000, the Company owned 116,945 units of limited partnership interest in a Managed Partnership. This Managed Partnership owned 666,883 units of limited partnership interest in the Operating Partnership. In 2000, the Company and this Managed Partnership agreed to a redemption transaction in which the Company surrendered 102,945 of its units in the Managed Partnership. As consideration for this redemption, the Managed Partnership transferred 80,817 units in the Operating Partnership to the Company. This transaction is reflected on the Company's Consolidated Balance Sheet as of December 31, 2000, as a reduction in other assets and minority interest of $504,000, the book value of the units in the Managed Partnership that were surrendered. The remaining value of the Company's interest in the Managed Partnership in included in other assets on the Company's Consolidated Balance Sheet as of December 31, 2000. In 1998, the Company acquired from a Managed Partnership an option to purchase all of its rights under a Lease with Option to Purchase Agreement, for certain undeveloped and unentitled land located in Burlingame, California. Upon expiration of the option period, the independent members of the Company's Board of Directors concluded that proceeding with the development of the property would have required that the Company incur substantial debt and entitlement risk. Accordingly, on February 1, 1999, the Company elected not to proceed with the development and not to exercise the option in return for the Managed Partnership's agreement to reimburse the Company for $2,309,000 of predevelopment costs, $462,000 to be paid in cash with the balance in a promissory note bearing interest at 10% and due on the earlier of sale, refinance or March 31, 2002. The note also contained a participation in profits realized by the Managed Partnership from the sale of the property if such sale occurred within 3 years. During the third quarter of 2000, this note receivable was paid in full. 49 50 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 NOTE 12. EARNINGS PER SHARE Earnings per share are as follows (in thousands, except for weighted average shares and per share amounts):
Years ended December 31, ------------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Net income available to common Stockholders - Basic $ 18,156 $ 28,006 $ 23,982 Minority interest 2,157 3,647 2,550 ----------- ----------- ----------- Net income available to common Stockholders - Diluted $ 20,313 $ 31,653 $ 26,532 =========== =========== =========== Weighted average shares: Basic 29,295,250 31,346,568 31,661,810 Stock options 249,200 95,026 503,730 Convertible Operating Partnership Units 3,479,352 4,081,033 3,410,670 ----------- ----------- ----------- Diluted 33,023,802 35,522,627 35,576,210 =========== =========== =========== Basic earnings per share $ 0.62 $ 0.89 $ 0.76 Diluted earnings per share $ 0.62 $ 0.89 $ 0.75
The preferred stock has been excluded from the calculation of diluted earnings per share as it is anti-dilutive in all periods presented. NOTE 13. STOCK COMPENSATION PLAN In May 1996, the Company adopted an employee stock incentive plan (the "Plan") to provide incentives to attract and retain high quality executive officers and key employees. Certain amendments to the Plan were ratified and approved by the stockholders of the Company at the Company's 1997 Annual Meeting of Stockholders. The Plan, as amended, provides for the grant of (i) shares of Common Stock of the Company, (ii) options, stock appreciation rights ("SARs") or similar rights with an exercise or conversion privilege at a fixed or variable price related to the Common Stock and/or the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or (iii) any other security with the value derived from the value of the Common Stock of the Company or other securities issued by a related entity. Such awards include, without limitation, options, SARs, sales or bonuses of restricted stock, dividend equivalent rights ("DERs"), Performance Units or Preference Shares. The total number of shares of Common Stock available under the Plan is equal to the greater of 1,140,000 shares or 8% of the number of shares outstanding determined as of the day immediately following the most recent issuance of shares of Common Stock or securities convertible into shares of Common Stock; provided that the maximum aggregate number of shares of Common Stock available for issuance under the Plan may not be reduced. For purposes of calculating the number of shares of Common Stock available under the Plan, all classes of securities of the Company and its related entities that are convertible presently or in the future by the security holder into shares of Common Stock or which may presently or in the future be exchanged for shares of Common Stock pursuant to redemption rights or otherwise, shall be deemed to be outstanding shares of Common Stock. Notwithstanding the foregoing, the aggregate number of shares as to which incentive stock options, one type of security available under the Plan, may be granted under the Plan may not exceed 1,140,000 shares. In May 1999, the Company's stockholders approved the grant of 700,000 non-qualified stock options to Robert Batinovich and 300,000 non-qualified stock options to Andrew Batinovich, outside the Plan. The Company accounts for the fair value of the options and bonus grants in accordance with APB Opinion No. 25. As of December 31, 2000, 110,250 shares of bonus grants have been issued under the Plan. The fair value of the shares granted has been recorded as deferred compensation in the accompanying financial statements and will be charged to earnings ratably over the respective vesting periods that range from 2 to 7 years. As of December 31, 2000, 3,683,186 options to purchase shares of Common Stock were outstanding under the Plan, including the 1,000,000 stock options granted to Robert 50 51 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 Batinovich and Andrew Batinovich as described above. The exercise price of each incentive stock option granted is greater than or equal to the per-share fair market value of the Common Stock on the date the option is granted and, as such, no compensation expense has been recognized. The options vest over periods between 1 and 6 years, and have a maximum term of 10 years. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation" (SFAS 123). As permitted by SFAS 123, the Company has not changed its method of accounting for stock options but has provided the additional required disclosures. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans, consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except for per share amounts).
2000 1999 1998 ------- ------- ------- Net income As reported $18,156 $28,006 $23,982 SFAS No. 123 Adjustment (2,736) (2,380) (1,537) ------- ------- ------- Pro forma $15,420 $25,626 $22,445 ======= ======= ======= Basic earnings per share As reported $0.62 $ 0.89 $ 0.76 SFAS No. 123 Adjustment (0.09) (0.07) (0.05) ------- ------- ------- Pro forma $ 0.53 $ 0.82 $ 0.71 ======= ======= ======= Diluted earnings per share As reported $ 0.62 $ 0.89 $ 0.75 SFAS No. 123 Adjustment (0.08) (0.07) (0.05) ------- ------- ------- Pro forma $ 0.54 $ 0.82 $ 0.70 ======= ======= =======
A summary of the status of the Company's stock option plan as of December 31, 2000, 1999 and 1998, and changes during the years then ended is presented in the table below:
2000 1999 1998 -------------------------- ------------------------ ------------------------- Weighted Weighted Weighted Shares Avg Shares Avg Shares Avg Exercise Exercise Exercise Price Price Price ----------- ----------- ---------- ---------- ---------- ----------- Outstanding at beginning of year 4,583,786 $22.13 3,787,293 $24.75 1,708,200 $21.03 Granted 497,000 $15.91 1,112,000 $13.07 2,170,500 $27.61 Exercised (53,500) $15.00 (85,007) $15.00 (22,407) $15.35 Forfeited/Cancelled (1,344,100) $24.36 (230,500) $24.18 (69,000) $23.25 ----------- ----------- ---------- ---------- ---------- ----------- Outstanding at end of year 3,683,186 $20.53 4,583,786 $22.13 3,787,293 $24.75 Exercisable at end of year 948,332 $17.07 1,152,831 $21.69 1,149,343 $18.92
51 52 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 The following table summarizes information about stock options outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- -------------------------------- Number Weighted-average Number Outstanding remaining Weighted-average Exercisable Weighted-average at 12/31/00 contractual life exercise price at 12/31/00 exercise price -------------- ----------------- ---------------- -------------- ---------------- Range of Exercise Prices $11.35 to $15.14 1,479,586 6.9 years $13.38 513,022 $14.97 $15.14 to $18.92 546,000 7.9 years $16.60 170,000 $16.23 $18.92 to $22.70 611,600 6.8 years $21.47 241,250 $21.30 $22.70 to $26.49 34,000 4.9 years $24.78 21,060 $24.64 $26.49 to $30.27 345,333 7.7 years $27.13 3,000 $30.00 $30.27 to $34.06 333,333 7.8 years $32.44 0 $0.00 $34.06 to $37.84 333,334 7.8 years $37.84 0 $0.00 -------------- ----------------- ---------------- -------------- ---------------- 3,683,186 $20.53 948,332 $17.07
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants during 2000, 1999 and 1998, respectively: expected dividend yield of 10.44%, 10.22% and 6.57%, expected volatility of 28.77%, 29.93% and 29.78% and weighted average risk-free interest rate of 5.09%, 6.44% and 4.61%. Expected lives of 10, 7, 5 and 2 years were used in each of 2000, 1999 and 1998. Based on these assumptions, the weighted average fair value of options granted would be calculated as $0.91, $1.33 and $3.90 in 2000, 1999 and 1998, respectively. Compensation cost has been adjusted by 18.27%, 4.54% and 2.00% in 2000, 1999 and 1998, respectively, to account for assumed forfeitures based on historical experience and management expectations. NOTE 14. RETIREMENT BENEFIT In December 2000, the Company entered into retirement agreements with certain of its executive officers providing for annual payments following retirement, based on years of service and subject to vesting requirements of up to 10 years. In 2000, the Company recognized a general and administrative expense of $3.3 million representing the currently vested portion. Future costs for these agreements will be accrued over the vesting periods. NOTE 15. COMMITMENTS AND CONTINGENCIES Environmental Matters. The Company follows a policy of monitoring its properties for the presence of hazardous or toxic substances. The Company is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Company's business, assets or results of operations. There can be no assurance that such a material environmental liability does not exist. The existence of any such material environmental liability could have an adverse effect on the Company's results of operations and cash flow. General Uninsured Losses. The Company carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with policy specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of extraordinary losses which may be either uninsurable, or not economically insurable. Further, certain of the properties are located in areas that are subject to earthquake activity. Should a property sustain damage as a result of an earthquake, the Company may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. Should an uninsured loss occur, the Company could lose its investment in, and anticipated profits and cash flows from, a property. Litigation. Prior to the completion of the Consolidation, two lawsuits were filed in 1995 contesting the fairness of the Consolidation, one in California State court and one in federal court. The complaints in both actions alleged, among other things, breaches by the defendants of fiduciary duties and inadequate disclosures. The State court action was settled over the objection of certain parties, and the settlement was approved (or review denied) by the 52 53 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 Superior Court of the State of California in and for San Mateo County, the California state court of appeals, the California Supreme Court and the Supreme Court of the United States. In the federal action, the court in December of 1995 deferred all further proceedings pending a ruling in the State court action. Following the final resolution of the State court action, the defendants filed a motion to dismiss the federal court action in January 2000. On March 14, 2000, the Federal District Court for the Northern District of California dismissed the federal action with prejudice. The plaintiffs in the action failed to file an appeal within the permitted period, so the federal action is fully resolved. Certain other claims and lawsuits have arisen against the Company in its normal course of business. The Company believes that such other claims and lawsuits will not have a material adverse effect on the Company's financial position, cash flow or results of operations. NOTE 16. SEGMENT INFORMATION During the years ended December 31, 2000 and 1999, the Company owned a diverse portfolio of properties comprising five product types: office, industrial, retail, multifamily and hotel. Each of these product types represents a reportable segment with distinct uses and tenant types which require the Company to employ different management strategies. Each segment contains properties located in various regions and markets within the United States. The office portfolio consists primarily of suburban office buildings. The industrial portfolio consists of properties designed for warehouse, distribution and light manufacturing for single-tenant or multi-tenant use. The retail portfolio consists primarily of community shopping centers anchored with national or regional supermarkets or drug stores. The properties in the Multifamily Portfolio are apartment buildings with units rented to residential tenants on either a month-by-month basis or for terms of one year or less. The Company's hotel operations are from one 227-room property leased to and operated by a third party. In December 2000, 36 of the Company's 37 multifamily properties and the one remaining hotel property were sold (see Note 3 for further discussion). The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance of its property types based on net operating income derived by subtracting rental expenses and real estate taxes (operating expenses) from rental revenues. Significant information used by the Company for its reportable segments as of and for the years ended December 31, 2000 and 1999 is as follows (in thousands):
Multi- Office Industrial Retail family Hotel Total ---------- ---------- ---------- ---------- ---------- ---------- 2000 Rental revenue $ 126,198 $ 37,874 $ 8,265 $ 69,427 $ 818 $ 242,582 Property operating expenses 46,556 9,113 2,675 31,910 229 90,483 ---------- ---------- ---------- ---------- ---------- ---------- Net operating income (NOI) $ 79,642 $ 28,761 $ 5,590 $ 37,517 $ 589 $ 152,099 ========== ========== ========== ========== ========== ========== Real estate assets, net $ 743,667 $ 280,665 $ 38,621 $ 30,552 $-- $1,093,505 ========== ========== ========== ========== ========== ========== 1999 Rental revenue $ 131,032 $ 43,569 $ 11,182 $ 68,144 $ 1,412 $ 255,339 Property operating expenses 49,732 11,737 3,640 30,570 420 96,099 ---------- ---------- ---------- ---------- ---------- ---------- Net operating income (NOI) $ 81,300 $ 31,832 $ 7,542 $ 37,574 $ 992 $ 159,240 ========== ========== ========== ========== ========== ========== Real estate assets, net $ 874,428 $ 296,694 $ 70,497 $ 394,737 $ 5,535 $1,641,891 ========== ========== ========== ========== ========== ========== 1998 Rental revenue $ 128,748 $ 42,089 $ 12,072 $ 40,865 $ 4,182 $ 227,956 Property operating expenses 47,975 11,307 3,840 17,235 967 81,324 ---------- ---------- ---------- ---------- ---------- ---------- Net operating income (NOI) $ 80,773 $ 30,782 $ 8,232 $ 23,630 $ 3,215 $ 146,632 ========== ========== ========== ========== ========== ========== Real estate assets, net $ 901,606 $ 349,261 $ 84,809 $ 387,805 $ 18,958 $1,742,439 ========== ========== ========== ========== ========== ==========
53 54 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 The following is a reconciliation of segment revenues, income and assets to consolidated revenues, income and assets for the periods presented above (in thousands):
2000 1999 1998 ----------- ----------- ----------- REVENUES Total revenue for reportable segments $ 242,582 $ 255,339 $ 227,956 Other revenue (1) 34,588 19,641 13,519 ----------- ----------- ----------- Total consolidated revenues $ 277,170 $ 274,980 $ 241,475 =========== =========== =========== NET INCOME NOI for reportable segments $ 152,099 $ 159,240 $ 146,632 Elimination of internal property management fees 7,577 8,062 7,245 Unallocated amounts: Other revenue (1) 34,588 19,641 13,519 General and administrative expenses (13,353) (9,688) (11,038) Depreciation and amortization (59,490) (58,295) (50,194) Interest expense (63,281) (64,782) (53,289) Provision for impairment of real estate asset (4,800) -- -- Provision for impairment of non-real estate asset (4,404) -- -- Loss on sale of mortgage loan receivable -- (1,229) -- Loss on interest rate protection agreement -- -- (4,323) ----------- ----------- ----------- Income from operations before minority interest and extraordinary item $ 48,936 $ 52,949 $ 48,552 =========== =========== =========== ASSETS Total assets for reportable segments $ 1,093,505 $ 1,641,891 $ 1,742,439 Investments in Development 86,286 38,773 35,131 Investments in Operating Joint Ventures 9,119 5,679 -- Mortgage loans receivable 37,250 37,582 42,420 Investment in Associated Company -- 9,404 8,807 Cash and cash equivalents 102,195 6,482 4,357 Other assets 42,803 54,793 45,862 ----------- ----------- ----------- Total consolidated assets $ 1,371,158 $ 1,794,604 $ 1,879,016 =========== =========== ===========
(1) Other revenue includes fee income, interest and other income, equity in earnings of Associated Company, equity in losses of operating joint ventures and net gains on sales of real estate assets. NOTE 17. SUBSEQUENT EVENTS Acquisitions In March 2001, the Company acquired a 171,077 square foot business park, consisting of two office buildings on 11.49 acres, located in a master-planned development near BART in Dublin, California. The total acquisition cost of approximately $30 million was funded with the proceeds from tax-deferred exchanges and a draw on the Credit Facility. Dispositions In February 2001, the Company sold a 132,190 square foot retail property located in Westchester, Illinois, for a sale price of $15.3 million. This resulted in a gain on sale of approximately $200,000, to be recognized in the first quarter of 2001. 54 55 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999 NOTE 18. UNAUDITED QUARTERLY RESULTS OF OPERATIONS The following represents an unaudited summary of quarterly results of operations for the years ended December 31, 2000 and 1999 (in thousands, except for weighted average shares and per share amounts):
Quarter Ended ------------------------------------------------------------------ March 31, June 30, Sept 30, Dec 31, 2000 2000 2000 2000 ------------ ------------ ------------ ------------ REVENUE Rental revenue $ 63,161 $ 60,817 $ 58,891 $ 59,713 Fees and reimbursements from affiliates 468 1,894 479 872 Interest and other income 1,216 3,427 2,224 1,444 Equity in earnings of Associated Company 46 576 405 428 Equity in losses of unconsolidated operating joint ventures (31) (140) (92) (123) Net gain (loss) on sales of real estate assets (695) (2,347) 4,694 19,843 ------------ ------------ ------------ ------------ Total revenue 64,165 64,227 66,601 82,177 ------------ ------------ ------------ ------------ EXPENSES Property operating expenses 21,557 20,290 20,514 20,545 General and administrative 2,309 4,064 953 6,027 Depreciation and amortization 15,129 15,084 14,382 14,895 Interest expense 16,347 16,023 14,979 15,932 Provision for impairment of real estate assets -- -- -- 4,800 Provision for impairment of non-real estate assets -- -- -- 4,404 ------------ ------------ ------------ ------------ Total expenses 55,342 55,461 50,828 66,603 ------------ ------------ ------------ ------------ Income from operations before minority interest and extraordinary item 8,823 8,766 15,773 15,574 Minority interest (306) (350) (1,177) (324) ------------ ------------ ------------ ------------ Net income before extraordinary item 8,517 8,416 14,596 15,250 Extraordinary item: Net loss on early extinguishment of debt (466) (84) -- (7,360) ------------ ------------ ------------ ------------ Net income 8,051 8,332 14,596 7,890 Preferred dividends (5,488) (5,443) (4,891) (4,891) ------------ ------------ ------------ ------------ Net income available to Common Stockholders $ 2,563 $ 2,889 $ 9,705 $ 2,999 ============ ============ ============ ============ Basic Per Share Data: Net income before extraordinary item $ 0.10 $ 0.10 $ 0.34 $ 0.36 Extraordinary item (0.02) -- -- (0.26) ------------ ------------ ------------ ------------ Net income available to Common Stockholders $ 0.08 $ 0.10 $ 0.34 $ 0.10 ============ ============ ============ ============ Basic weighted average shares outstanding 30,355,685 29,330,163 28,677,017 28,830,040 ============ ============ ============ ============ Diluted Per Share Data: Net income before extraordinary item $ 0.10 $ 0.10 $ 0.33 $ 0.33 Extraordinary item (0.02) -- -- (0.23) ------------ ------------ ------------ ------------ Net income available to Common Stockholders $ 0.08 $ 0.10 $ 0.33 $ 0.10 ============ ============ ============ ============ Diluted weighted average shares outstanding 34,096,464 33,111,493 32,636,164 32,337,449 ============ ============ ============ ============
Per share amounts do not necessarily sum to per share amounts for the year as weighted average shares outstanding are measured for each period presented, rather than solely for the entire year. 55 56 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2000 and 1999
Quarter Ended --------------------------------------------------------------- March 31, June 30, Sept 30, Dec 31, 1999 1999 1999 1999 ------------ ------------ ------------ ------------ REVENUE Rental revenue $ 64,641 $ 64,552 $ 62,934 $ 63,212 Fees and reimbursements from affiliates 1,131 743 618 820 Interest and other income 1,659 1,721 1,677 1,347 Equity in earnings (loss) of Associated Companies 309 (874) 1,777 10 Equity in earnings (loss) of unconsolidated operating joint ventures -- 57 102 (469) Net gain (loss) on sales of real estate assets 1,351 5,742 (371) 2,291 ------------ ------------ ------------ ------------ Total revenue 69,091 71,941 66,737 67,211 ------------ ------------ ------------ ------------ EXPENSES Property operating expenses 22,001 21,860 22,145 22,031 General and administrative 2,222 2,551 2,281 2,634 Depreciation and amortization 15,092 14,220 14,266 14,717 Interest expense 16,540 16,418 15,720 16,104 Loss on sale of mortgage loan receivable -- -- -- 1,229 ------------ ------------ ------------ ------------ Total expenses 55,855 55,049 54,412 56,715 ------------ ------------ ------------ ------------ Income from operations before minority interest and extraordinary item 13,236 16,892 12,325 10,496 Minority interest (667) (1,529) (888) (563) ------------ ------------ ------------ ------------ Net income before extraordinary item 12,569 15,363 11,437 9,933 Extraordinary item: Gain (loss) on early extinguishment of debt (1,991) 1,688 740 547 ------------ ------------ ------------ ------------ Net income 10,578 17,051 12,177 10,480 Preferred dividends (5,570) (5,570) (5,570) (5,570) ============ ============ ============ ============ Net income available to Common Stockholders $ 5,008 $ 11,481 $ 6,607 $ 4,910 ============ ============ ============ ============ Basic Per Share Data: Net income before extraordinary item $ 0.22 $ 0.31 $ 0.19 $ 0.14 Extraordinary item (0.06) 0.05 0.02 0.02 ------------ ------------ ------------ ------------ Net income available to Common Stockholders $ 0.16 $ 0.36 $ 0.21 $ 0.16 ============ ============ ============ ============ Basic weighted average shares outstanding 31,764,834 31,664,269 31,020,822 30,948,894 ============ ============ ============ ============ Diluted Per Share Data: Net income before extraordinary item $ 0.21 $ 0.31 $ 0.19 $ 0.14 Extraordinary item (0.05) 0.05 0.02 0.02 ------------ ------------ ------------ ------------ Net income available to Common Stockholders $ 0.16 $ 0.36 $ 0.21 $ 0.16 ============ ============ ============ ============ Diluted weighted average shares outstanding 36,098,374 35,984,107 35,274,940 34,726,581 ============ ============ ============ ============
Per share amounts do not necessarily sum to per share amounts for the year as weighted average shares outstanding are measured for each period presented, rather than solely for the entire year. 56 57 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2000 (in thousands)
------------------------------------------------------------------------------------------------------------------------------ COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ------------------------------------------------------------------------------------------------------------------------------ Costs Capitalized/ (Reduced) Initial Cost to Subsequent to Gross Amount Carried at Company (1) Acquisition (4) December 31, 2000 ------------------------------------------------------------------------------------------------------------------------------ Buildings Buildings and and Description Encumbrances Land Improvements Improvements Land Improvements Total (3) ------------------------------------------------------------------------------------------------------------------------------ Office Properties: 400 South El Camino Real, CA $ (7) $ 4,000 $ 30,549 $ 4,807 $ 4,000 $ 35,356 $ 39,356 Centerstone, CA (6) 6,077 24,265 536 6,077 24,801 30,878 Tierrasanta Research Park, CA (7) 1,303 5,189 781 1,303 5,970 7,273 University Tech Center, CA (2) -- 2,086 8,046 603 2,086 8,649 10,735 Northglenn Business Center, CO -- 1,335 3,354 305 1,335 3,659 4,994 Gateway Park, CO -- 1,420 18,104 798 1,420 18,902 20,322 Buschwood III, FL (7) 1,479 5,890 715 1,479 6,605 8,084 Fingerhut Business Center, FL -- 1,188 3,282 10 1,188 3,292 4,480 Grand Regency Business Center, FL -- 1,120 4,302 1,101 1,120 5,403 6,524 Park Place, FL (7) 1,895 12,982 899 1,895 13,881 15,776 PrimeCo Business Center, FL -- 950 3,418 12 950 3,430 4,380 Temple Terrace Business Center, FL -- 1,788 6,949 51 1,788 7,000 8,788 Ashford Perimeter, GA 20,443 1,174 42,227 1,347 1,174 43,574 44,748 Capitol Center, IA (7) 500 11,981 532 500 12,513 13,014 Columbia Center II, IL -- 208 20,329 796 208 21,125 21,333 Embassy Plaza, IL -- 436 15,680 3,666 436 19,346 19,782 Oak Brook International Center, IL -- 757 11,126 1,293 757 12,419 13,176 Oakbrook Terrace Corp Ctr III, IL 18,744 552 37,635 438 552 38,073 38,625 Crosspoint Four, IN -- 394 2,847 81 394 2,928 3,322 Meridian Park, IN -- 1,296 5,906 1,316 1,296 7,222 8,518 Osram Building, IN -- 264 4,515 20 264 4,535 4,799 Leawood Office Building, KS 4,139 1,124 10,300 226 1,124 10,526 11,650 Bronx Park I, MA -- 916 9,104 509 916 9,613 10,529 Marlborough Corp Place, MA (7) 3,390 55,908 2,430 3,390 58,338 61,728 Hartwood Building, MA 2,475 527 5,426 248 527 5,674 6,201 Westford Corporate Center, MA (6) 2,091 8,310 350 2,091 8,660 10,751 Germantown, MD (7) 1,442 5,753 23 1,442 5,776 7,218 Montgomery Executive Center, MD (7) 1,928 7,676 717 1,928 8,393 10,320 Montrose Office Park, MD 15,150 3,871 20,360 669 3,871 21,029 24,900 Bryant Lake, MN (7) 1,907 7,531 1,083 1,907 8,614 10,521 Riverview Office Tower, MN (6) 4,095 16,333 1,898 4,095 18,231 22,326 University Club Tower, MO -- 4,087 14,519 3,185 4,087 17,704 21,792 Woodlands Plaza, MO (6) 1,114 4,426 542 1,114 4,968 6,081 ----------------------------------------------------------------------- COLUMN A COLUMN F COLUMN G COLUMN H ----------------------------------------------------------------------- ----------------------------------------------------------------------- Life Accum. Date Deprec. Description Deprec. Acquired (1) Over ----------------------------------------------------------------------- Office Properties: 400 South El Camino Real, CA $ 4,955 3/98 1-30 yrs. Centerstone, CA 2,967 7/97 1-30 yrs. Tierrasanta Research Park, CA 911 9/97 1-30 yrs. University Tech Center, CA (2) 1,109 7/97 1-30 yrs. Northglenn Business Center, CO 388 12/97 1-30 yrs. Gateway Park, CO 993 7/98 1-30 yrs. Buschwood III, FL 810 9/97 1-30 yrs. Fingerhut Business Center, FL 357 12/97 1-30 yrs. Grand Regency Business Center, FL 789 12/97 1-30 yrs. Park Place, FL 1,577 1/98 1-30 yrs. PrimeCo Business Center, FL 372 12/97 1-30 yrs. Temple Terrace Business Center, FL 758 12/97 1-30 yrs. Ashford Perimeter, GA 4,448 1/98 1-30 yrs. Capitol Center, IA 1,257 2/98 1-30 yrs. Columbia Center II, IL 2,245 1/98 1-30 yrs. Embassy Plaza, IL 2,085 1/98 1-30 yrs. Oak Brook International Center, IL 1,286 1/98 1-30 yrs. Oakbrook Terrace Corp Ctr III, IL 3,839 1/98 1-30 yrs. Crosspoint Four, IN 268 4/98 1-30 yrs. Meridian Park, IN 830 4/98 1-30 yrs. Osram Building, IN 415 4/98 1-30 yrs. Leawood Office Building, KS 1,038 3/98 1-30 yrs. Bronx Park I, MA 1,105 3/98 1-30 yrs. Marlborough Corp Place, MA 5,978 1/98 1-30 yrs. Hartwood Building, MA 580 3/98 1-30 yrs. Westford Corporate Center, MA 1,121 4/97 1-30 yrs. Germantown, MD 675 9/97 1-30 yrs. Montgomery Executive Center, MD 1,117 9/97 1-30 yrs. Montrose Office Park, MD 1,067 7/99 1-30 yrs. Bryant Lake, MN 1,006 11/97 1-30 yrs. Riverview Office Tower, MN 2,452 4/97 1-30 yrs. University Club Tower, MO 3,076 7/96 1-40 yrs. Woodlands Plaza, MO 759 4/97 1-30 yrs.
57 58 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2000 (in thousands)
------------------------------------------------------------------------------------------------------------------------------ COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ------------------------------------------------------------------------------------------------------------------------------ Costs Capitalized/ (Reduced) Initial Cost to Subsequent to Gross Amount Carried at Company (1) Acquisition (4) December 31, 2000 ------------------------------------------------------------------------------------------------------------------------------ Buildings Buildings and and Description Encumbrances Land Improvements Improvements Land Improvements Total (3) ------------------------------------------------------------------------------------------------------------------------------ Office Properties continued: Woodlands Tech, MO $ (6) $ 949 $ 3,773 $ 401 $ 949 $ 4,174 $ 5,123 Edinburgh Center, NC (7) 984 14,232 707 984 14,939 15,923 One Pacific Place, NE (7) 1,034 18,014 1,136 1,034 19,150 20,184 25 Independence, NJ (7) 4,547 18,141 436 4,547 18,577 23,124 Bridgewater Exec Quarters I and II, NJ 22,751 4,704 17,042 2,745 4,704 19,787 24,489 Executive Place, NJ -- 944 11,347 58 944 11,405 12,349 Fairfield Business Quarters, NJ 2,546 817 3,479 67 817 3,546 4,362 Frontier Executive Quarters I and II, NJ (7) 4,831 38,983 349 4,831 39,332 44,163 Gatehall I, NJ -- 1,865 7,427 1,071 1,865 8,498 10,363 Morristown Medical Offices, NJ -- 518 1,832 6 518 1,838 2,356 Vreeland Business Center, NJ -- 1,863 8,714 49 1,863 8,763 10,626 Citibank, NV (7) 4,628 18,442 1,695 4,628 20,137 24,765 Clark Avenue, NV -- 649 2,584 156 649 2,740 3,389 Poplar Towers, TN -- 1,688 3,787 812 1,688 4,599 6,287 Thousand Oaks, TN -- 7,249 40,355 (2,495) 7,249 37,860 45,109 700 South Washington, VA (6) 1,981 7,894 625 1,981 8,519 10,499 Cameron Run, VA 9,860 439 18,964 285 439 19,249 19,688 Totem Valley Business Center, WA -- 2,504 5,262 154 2,504 5,416 7,920 ------------------------------------------------------------------------------------------------------------------------------ Office Total 96,108 98,908 684,494 40,241 98,908 724,735 823,643 ------------------------------------------------------------------------------------------------------------------------------ Industrial Properties: Bellanca Airport Park, CA -- 8,697 -- -- 8,697 -- 8,697 Coronado Industrial, CA (7) 711 2,831 76 711 2,907 3,618 East Anaheim, CA (7) 1,480 3,282 41 1,480 3,323 4,803 Rollins Road, CA 28,000 18,807 4,754 -- 18,807 4,754 23,562 Springdale Commerce Center, CA (7) 1,030 4,101 114 1,030 4,215 5,244 Gateway Park Industrial, CO 43,862 5,440 45,642 1,148 5,440 46,790 52,227 Lake Point Business Park, FL (6) 1,344 5,343 809 1,344 6,152 7,497 Navistar International, IL (5) -- 793 10,941 (4,122) 793 6,819 7,612 Covance Business Center, IN 16,083 1,405 15,109 -- 1,405 15,109 16,514 Park 100, IN (5) -- 427 1,813 -- 427 1,813 2,241 J.I. Case Equipment Corp., KS (5) -- 236 3,264 (1,241) 236 2,023 2,259 Canton Business Center, MA 3,261 796 6,758 80 796 6,838 7,634 Fisher-Pierce Industrial, MA (6) 718 2,860 139 718 2,999 3,717 ----------------------------------------------------------------------- COLUMN A COLUMN F COLUMN G COLUMN H ----------------------------------------------------------------------- ----------------------------------------------------------------------- Life Accum. Date Deprec. Description Deprec. Acquired (1) Over ----------------------------------------------------------------------- Office Properties continued: Woodlands Tech, MO $ 686 4/97 1-30 yrs. Edinburgh Center, NC 1,699 1/98 1-30 yrs. One Pacific Place, NE 1,849 5/98 1-30 yrs. 25 Independence, NJ 2,184 9/97 1-30 yrs. Bridgewater Exec Quarters I and II, NJ 2,024 9/97 1-30 yrs. Executive Place, NJ 949 8/98 1-30 yrs. Fairfield Business Quarters, NJ 415 9/97 1-30 yrs. Frontier Executive Quarters I and II, NJ 4,636 9/97 1-30 yrs. Gatehall I, NJ 1,042 9/97 1-30 yrs. Morristown Medical Offices, NJ 215 9/97 1-30 yrs. Vreeland Business Center, NJ 804 6/98 1-30 yrs. Citibank, NV 2,320 9/97 1-30 yrs. Clark Avenue, NV 324 9/97 1-30 yrs. Poplar Towers, TN 243 7/99 1-30 yrs. Thousand Oaks, TN 4,596 12/97 1-30 yrs. 700 South Washington, VA 1,088 4/97 1-30 yrs. Cameron Run, VA 1,980 1/98 1-30 yrs. Totem Valley Business Center, WA 292 7/99 1-30 yrs. ----------------------------------------------------------------------- Office Total 79,976 ----------------------------------------------------------------------- Industrial Properties: Bellanca Airport Park, CA -- 2/99 n/a Coronado Industrial, CA 354 9/97 n/a East Anaheim, CA 367 10/97 1-30 yrs. Rollins Road, CA 203 11/00 1-30 yrs. Springdale Commerce Center, CA 521 9/97 1-30 yrs. Gateway Park Industrial, CO 3,858 7/98 1-30 yrs. Lake Point Business Park, FL 866 4/97 1-30 yrs. Navistar International, IL (5) 2,335 3/84 40 yrs. Covance Business Center, IN 1,301 7/98 1-30 yrs. Park 100, IN (5) 776 10/86 5-25 yrs. J.I. Case Equipment Corp., KS (5) 681 3/84 40 yrs. Canton Business Center, MA 689 3/98 1-30 yrs. Fisher-Pierce Industrial, MA 370 4/97 1-30 yrs.
58 59 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2000 (in thousands)
------------------------------------------------------------------------------------------------------------------------------ COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ------------------------------------------------------------------------------------------------------------------------------ Costs Capitalized/ (Reduced) Initial Cost to Subsequent to Gross Amount Carried at Company (1) Acquisition (4) December 31, 2000 ------------------------------------------------------------------------------------------------------------------------------ Buildings Buildings and and Description Encumbrances Land Improvements Improvements Land Improvements Total (3) ------------------------------------------------------------------------------------------------------------------------------ Industrial Properties continued: Flanders Industrial Park, MA $ -- $ 739 $ 5,634 $ 511 $ 739 $ 6,145 $ 6,884 Forest Street Business Center, MA -- 228 1,801 48 228 1,849 2,077 Southworth-Milton, MA (6) 1,922 7,652 80 1,922 7,732 9,653 Navistar International, MD (5) -- 356 4,911 (1,879) 356 3,032 3,387 Winnetka Industrial Center, MN -- 1,190 4,737 634 1,190 5,371 6,560 Cottontail Distribution Center, NJ 6,758 1,616 16,278 74 1,616 16,352 17,967 Eatontown Industrial, NJ -- 765 1,963 30 765 1,993 2,758 Fox Hollow Business Quarters I, NJ -- 1,576 2,358 472 1,576 2,830 4,406 One Taft Industrial, NJ -- 1,326 4,975 269 1,326 5,244 6,570 Palms Business Center III and South, NV (7) 8,118 19,817 1,004 8,118 20,821 28,940 Palms Business Center IV and North, NV (7) 3,118 10,339 320 3,118 10,659 13,777 Lehigh Valley, PA -- 1,748 12,826 614 1,748 13,440 15,188 Valley Forge Corp Ctr, PA -- 2,505 33,359 976 2,505 34,335 36,840 J.I. Case Equipment Corp., TN (5) -- 187 2,583 (988) 187 1,595 1,782 Kent Business Park, WA -- 1,211 4,822 113 1,211 4,935 6,146 ------------------------------------------------------------------------------------------------------------------------------ Industrial Total 97,964 68,486 240,753 (678) 68,486 240,075 308,561 ------------------------------------------------------------------------------------------------------------------------------ Retail Properties: Westwood Plaza, FL (5) -- 2,599 5,110 2,763 2,599 7,873 10,472 Westbrook Commons, IL -- 3,067 12,213 820 3,067 13,033 16,100 Cross Creek Retail Centre, IN 4,923 1,517 4,351 243 1,517 4,594 6,111 Geist Retail Centre, IN 4,267 1,012 4,828 277 1,012 5,105 6,117 Woodfield Centre, IN -- 765 4,685 318 765 5,003 5,768 ------------------------------------------------------------------------------------------------------------------------------ Retail Total 9,190 8,960 31,187 4,421 8,960 35,608 44,568 ------------------------------------------------------------------------------------------------------------------------------ Multifamily Properties and Other: Springs of Indian Creek, TX 26,600 2,826 34,885 42 2,826 34,927 37,753 Miscellaneous Investments -- -- -- (5,959) -- (5,959) (5,959) ------------------------------------------------------------------------------------------------------------------------------ Multifamily and Other Total 26,600 2,826 34,885 (5,917) 2,826 28,968 31,794 ------------------------------------------------------------------------------------------------------------------------------ Combined Total $450,624 $179,180 $991,319 $ 38,067 $179,180 $1,029,386 $1,208,566 ============================================================================================================================== ------------------------------------------------------------------------ COLUMN A COLUMN F COLUMN G COLUMN H ------------------------------------------------------------------------ ------------------------------------------------------------------------ Life Accum. Date Deprec. Description Deprec. Acquired (1) Over ------------------------------------------------------------------------ Industrial Properties continued: Flanders Industrial Park, MA $ 620 3/98 1-30 yrs. Forest Street Business Center, MA 179 3/98 1-30 yrs. Southworth-Milton, MA 967 4/97 1-30 yrs. Navistar International, MD (5) 1,021 3/84 40 yrs. Winnetka Industrial Center, MN 627 9/97 1-30 yrs. Cottontail Distribution Center, NJ 1,499 6/98 1-30 yrs. Eatontown Industrial, NJ 237 9/97 1-30 yrs. Fox Hollow Business Quarters I, NJ 339 9/97 1-30 yrs. One Taft Industrial, NJ 618 9/97 1-30 yrs. Palms Business Center III and South, NV 2,353 10/97 1-30 yrs. Palms Business Center IV and North, NV 1,192 10/97 1-30 yrs. Lehigh Valley, PA 1,413 1/98 1-30 yrs. Valley Forge Corp Ctr, PA 3,379 1/98 1-30 yrs. J.I. Case Equipment Corp., TN (5) 538 3/84 40 yrs. Kent Business Park, WA 593 9/97 1-30 yrs. ------------------------------------------------------------------------ Industrial Total 27,896 ------------------------------------------------------------------------ Retail Properties: Westwood Plaza, FL (5) 3,033 1/88 1-30 yrs. Westbrook Commons, IL 1,544 9/97 1-30 yrs. Cross Creek Retail Centre, IN 426 4/98 1-30 yrs. Geist Retail Centre, IN 475 4/98 1-30 yrs. Woodfield Centre, IN 469 4/98 1-30 yrs. ------------------------------------------------------------------------ Retail Total 5,947 ------------------------------------------------------------------------ Multifamily Properties and Other: Springs of Indian Creek, TX 1,242 2/99 1-30 yrs. Miscellaneous Investments -- ------------------------------------------------------------------------ Multifamily and Other Total 1,242 ------------------------------------------------------------------------ Combined Total $115,061 ========================================================================
59 60 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2000 (in thousands) (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 $1,026,351. (4) Bracketed amounts represent reductions to carrying value. (5) Initial Cost represents original book value carried forward from the financial statements of the GRT Predecessor Entities. (6) Cross collateralized loan secured by nine properties - $49,863. (7) Cross collateralized loan secured by 19 properties - $170,899. 60 61 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000 (in thousands) Reconciliation of gross amount at which real estate was carried for the years ended December 31:
2000 1999 1998 ----------- ----------- ----------- Rental Property: Balance at beginning of year $ 1,756,061 $ 1,825,308 $ 866,431 Additions during year: Property acquisitions and additions 79,214 119,251 1,013,170 Retirements/sales (620,710) (183,545) (54,293) Provision for impairment (4,800) -- -- Miscellaneous (1,199) (4,953) -- ----------- ----------- ----------- Balance at end of year $ 1,208,566 $ 1,756,061 $ 1,825,308 =========== =========== =========== Accumulated Depreciation: Balance at beginning of year $ 114,170 $ 82,869 $ 41,213 Additions during year: Depreciation 55,356 56,004 49,450 Acquisitions -- -- -- Retirements/sales (54,465) (24,703) (7,794) ----------- ----------- ----------- Balance at end of year $ 115,061 $ 114,170 $ 82,869 =========== =========== ===========
61 62 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE December 31, 2000 (in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F Description of Loan and Current Interest Periodic Payment Securing Property Rate Maturity Date Terms Prior Liens Face Amount ----------------- ---------------- ------------- ---------------- ----------- ----------- First Mortgage Loan Quarterly Secured by land located in interest-only Aurora, Colorado 13% 7/1/05 payments None $ 34,349 ==========
COLUMN G COLUMN H Carrying Amount, Principal Amount of Loans Description of Loan and including accrued Subject to Delinquent Securing Property interest Principal or Interest ----------------- ----------------- ------------------------- First Mortgage Loan Secured by land located in Aurora, Colorado $ 37,250 None ==========
62 63 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE December 31, 2000 (in thousands) The following is a summary of changes in the carrying amount of mortgage loans for the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998 -------- -------- -------- Balance at beginning of year $ 37,582 $ 42,420 $ 3,692 Additions during year: New mortgage loans -- 1,141 39,613 Interest accruals 2,075 1,296 -- Deductions during year: Collections of principal (2,407) (4,396) (885) Reduction in principal -- (1,600) -- Loss on sale -- (1,229) -- -------- -------- -------- Balance at end of year $ 37,250 $ 37,582 $ 42,420 ======== ======== ========
63 64 SIGNATURES Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GLENBOROUGH REALTY TRUST INCORPORATED By: Glenborough Realty Trust Incorporated, Date: March 21, 2001 /s/ Robert Batinovich ---------------------------------------- Robert Batinovich Chairman of the Board and Chief Executive Officer Date: March 21, 2001 /s/ Andrew Batinovich ---------------------------------------- Andrew Batinovich Director, President and Chief Operating Officer Date: March 21, 2001 /s/ Stephen Saul ---------------------------------------- Stephen Saul Chief Financial Officer (Principal Financial Officer) Date: March 21, 2001 /s/ Brian Peay ---------------------------------------- Brian Peay Vice President, Finance and Accounting (Principal Accounting Officer) Date: March 21, 2001 /s/ Laura Wallace ---------------------------------------- Laura Wallace Director 64 65 EXHIBIT INDEX
Exhibit Number Exhibit Title ------ ------------- 3.01 Articles of Amendment and Restatement of Articles of Incorporation of the Company are incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 3.02 Amended Bylaws of the Company are incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 3.03 The Company's Form of Articles Supplementary relating to the 7 3/4% Series A Convertible Preferred Stock is incorporated herein by reference to Exhibit 3.03 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 3.04 Articles Supplementary of the Series B Preferred Stock (relating to the Rights Plan) are incorporated herein by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 4.01 Form of Common Stock Certificate of the Company is incorporated herein by reference to Exhibit 4.02 to the Company's Registration Statement on Form S-4 (Registration No. 33-83506), which became effective October 26, 1995. 4.02 Form of 7 3/4% Series A Convertible Preferred Stock Certificate of the Company is incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form 8-A which was filed on January 22, 1998. 10.01 Form of Indemnification Agreement for existing Officers and Directors of the Company is incorporated herein by reference to Exhibit 10.02 to the Company's Registration Statement on Form S-4 (Registration No. 33-83506), which became effective October 26, 1995. 10.02* Stock Incentive Plan of the Company (amended and restated as of March 20, 1997) is incorporated herein by reference to Exhibit 4.0 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.03* Employment Agreement between the Company and Robert Batinovich is incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 10.04* Employment Agreement between the Company and Andrew Batinovich is incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 10.05 Rights Agreement, dated as of July 20, 1998, between the Company and the Registrar and Transfer Company, together with Exhibit A Form of Rights Certificate; Exhibit B Summary of Rights to Purchase Preferred Stock; and Exhibit C Form of Articles Supplementary of the Series B Preferred Stock are incorporated herein by reference to Exhibit 1 to the Company's Form 8-A, filed on July 16, 1998. 10.06 Registration Agreement between the Company and GPA, Ltd. is incorporated herein by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.07 Indemnification Agreement for Glenborough Realty Corporation and the Company, with Robert Batinovich as indemnitor is incorporated herein by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.08 Purchase Agreement, dated as of September 25, 2000, between the Company and Bush Gardens, LLC, related to the sale of the Company's Multifamily Portfolio, is incorporated herein by reference to Exhibit 2.1 to the Company's Form 8-K, filed on January 16, 2001. 10.09 First Amendment to the Purchase Agreement, dated as of November 10, 2000, between the Company and Bush Gardens, LLC, related to the sale of the Company's Multifamily Portfolio, is incorporated herein by reference to Exhibit 2.1.1 to the Company's Form 8-K, filed on January 16, 2001.
65 66 EXHIBIT INDEX - CONTINUED
Exhibit Number Exhibit Title ------ ------------- 10.10 Second Amendment to the Purchase Agreement, dated as of November 30, 2000, between the Company and Bush Gardens, LLC, related to the sale of the Company's Multifamily Portfolio, is incorporated herein by reference to Exhibit 2.1.2 to the Company's Form 8-K, filed on January 16, 2001. 10.11 Third Amendment to the Purchase Agreement, dated as of December 12, 2000, between the Company and Bush Gardens, LLC, related to the sale of the Company's Multifamily Portfolio, is incorporated herein by reference to Exhibit 2.1.3 to the Company's Form 8-K, filed on January 16, 2001. 10.12 Fourth Amendment to the Purchase Agreement, dated as of December 20, 2000, between the Company and Bush Gardens, LLC, related to the sale of the Company's Multifamily Portfolio, is incorporated herein by reference to Exhibit 2.1.4 to the Company's Form 8-K, filed on January 16, 2001. 10.13 Fifth Amendment to the Purchase Agreement, dated as of December 22, 2000, between the Company and Bush Gardens, LLC, related to the sale of the Company's Multifamily Portfolio, is incorporated herein by reference to Exhibit 2.1.5 to the Company's Form 8-K, filed on January 16, 2001. 10.14 Guaranty Agreement, dated as of September 25, 2000, between the Company and Bush Gardens, LLC, related to the sale of the Company's Multifamily Portfolio, is incorporated herein by reference to Exhibit 2.2 to the Company's Form 8-K, filed on January 16, 2001. 10.15 Stock Repurchase Agreement, dated as of September 25, 2000, between the Company and Bush Gardens, LLC, related to the sale of the Company's Multifamily Portfolio, is incorporated herein by reference to Exhibit 2.3 to the Company's Form 8-K, filed on January 16, 2001. 11.01 Statement re: Computation of Per Share Earnings is shown in Note 12 of the Consolidated Financial Statements of the Company in Item 14. 12.01 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Dividends 21.01 Significant Subsidiaries of the Registrant 23.01 Consent of Arthur Andersen LLP, independent public accountants
* Indicates management contract or compensatory plan or arrangement. 66