10-K405 1 f80120ore10-k405.txt FORM 10-K405 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, 2001 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.) 94402-1708 400 South El Camino Real, ----------- 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, $.001 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 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, 2002, the aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $572,000,000. The aggregate market value was computed with reference to the closing price on the New York Stock Exchange on such date. This calculation does not reflect a determination that persons are affiliates for any other purpose. As of March 15, 2002, 26,962,803 shares of Common Stock ($.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 9, 2002. EXHIBITS: The index of exhibits is contained in Part IV herein on page number 66. 1 TABLE OF CONTENTS
Page No. PART I Item 1 Business 3 Item 2 Properties 4 Item 3 Legal Proceedings 8 Item 4 Submission of Matters to a Vote of Security Holders 8 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 14 Item 7A. Qualitative and Quantitative Information About Market Risk 30 Item 8 Financial Statements and Supplementary Data 31 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 31 PART III Item 10 Directors and Executive Officers of the Registrant 32 Item 11 Executive Compensation 32 Item 12 Security Ownership of Certain Beneficial Owners and Management 32 Item 13 Certain Relationships and Related Transactions 32 PART IV Item 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 33
2 PART I ITEM 1. BUSINESS General Description of Business Glenborough Realty Trust Incorporated (the "Company") is a self-administered and self-managed real estate investment trust ("REIT") with a portfolio of 79 primarily office and industrial properties (the "Properties," and each a "Property"), including 2 operating joint ventures, as of December 31, 2001. The portfolio encompasses approximately 14 million square feet in 17 metropolitan markets. The Company is currently focusing on high-quality multi-tenant office properties in the following core markets: Northern New Jersey, Washington D.C., Boston, Northern California, Chicago, Southern California and Denver. The Company also participates in several alliances to develop property for both its own portfolio and for sale to third parties. 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 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, 2001, the Company had approximately 160 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 3 similar investments. Factors impacting this include, among other things, the perceived quality of the Company's 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. The Associated Company Prior to October 24, 2000, the Company held 100% of the non-voting preferred stock of Glenborough Corporation ("GC" or the "Associated Company). GC provided partnership administration, asset management, property management and development services to a group of unaffiliated partnerships, which included 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 Operating Partnership units and issued shares of common stock to GC's common stock holders. ITEM 2. PROPERTIES The Location and Type of the Company's Properties The Company's 79 Properties, including Properties owned through joint ventures, consist of 51 office, 25 industrial, one retail and two multifamily Properties located in four geographic regions in 19 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, 2001.
Office Industrial Retail Multi- Square Square Square family No. of Region Footage Footage Footage Units Properties ----------- --------- --------- --------- --------- --------- West 1,917,702 2,411,932 -- -- 18 Midwest 1,892,466 1,298,446 69,294 -- 19 South 1,174,723 134,389 -- 868 11 East 3,174,775 1,549,968 -- -- 31 --------- --------- --------- --------- --------- Total 8,159,666 5,394,735 69,294 868 79 ========= ========= ========= ========= ========= No. of Properties 51 25 1 2 Average Occupancy 91% 95% 90% 95%
For the years ended December 31, 2001, 2000 and 1999, no tenant contributed 10% or more of the total rental revenue of the Company. The largest tenant's annual rent was approximately 2.5% of total rental revenues for the year ended December 31, 2001. A complete listing of Properties owned by the Company at December 31, 2001 is included as part of Schedule III in Item 14. 4 Office Properties The Company owns 51 office Properties with total rentable square footage of 8,159,666. The office Properties range in size from 40,000 square feet to 757,455 square feet, and have remaining lease terms ranging from 1 to 14 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, 2001, the average occupancy of the office Properties was 91%. The following table sets forth, for the periods specified, the total rentable area, average occupancy, average effective base rent per leased square foot and total effective annual base rent. OFFICE PROPERTIES HISTORICAL RENT AND OCCUPANCY
Average Effective Total Effective Total Rentable Average Base Rent per Annual Base Rent Year Area (Sq. Ft.) Occupancy Leased Sq. Ft.(1)(3) ($000s)(2)(3) ------------- --------------- ---------- -------------------- ------------------ 2001 8,159,666 91% $19.19 $142,491 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
(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, 2001. OFFICE PROPERTIES LEASE EXPIRATIONS
Percentage of Total Rentable Square Annual Base Rent Annual Base Rent Number of Footage Subject to Under Expiring Represented by Expiration Year Expiring Leases Expiring Leases Leases ($000s) Expiring Leases(1) ------------------- --------------- ------------------ ----------------- ------------------- 2002(4) 137 923,125 $18,076 14.3% 2003 99 526,037 9,813 7.7 2004 125 1,073,389 21,735 17.1 2005 90 1,086,690 20,945 16.5 2006 95 885,428 16,068 12.7 Thereafter 86 1,848,107 40,158 31.7 --------------- ------------------ ----------------- ------------------- Total 632 6,342,776(2) $126,795(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). 5 (3) This figure is based on square footage actually leased and incorporates contractual rent increases arising after 2001, and thus differs from "Total Effective Annual Base Rent" in the preceding table, which is based on 2001 rents. (4) Includes leases that have initial terms of less than one year. Industrial Properties The Company owns 25 industrial Properties aggregating 5,394,735 square feet. The industrial Properties are designed for warehouse, distribution and light manufacturing, ranging in size from 32,500 square feet to 1,328,534 square feet and have remaining lease terms ranging from 1 to 14 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. As of December 31, 2001, the average occupancy of the industrial Properties was 95%. The following table sets forth, for the periods specified, the total rentable area, average occupancy, average effective base rent per leased square foot and total effective annual base rent for the industrial Properties. INDUSTRIAL PROPERTIES HISTORICAL RENT AND OCCUPANCY
Average Effective Total Effective Total Rentable Average Base Rent per Annual Base Rent Year Area (Sq. Ft.) Occupancy Leased Sq. Ft.(1)(3) ($000s)(2)(3) ------------ -------------- --------- -------------------- ---------------- 2001 5,394,735 95% $6.38 $32,697 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
(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, 2001. INDUSTRIAL PROPERTIES LEASE EXPIRATIONS
Percentage of Total Rentable Square Annual Base Rent Annual Base Rent Expiration Number of Footage Subject to Under Expiring Represented by Year Expiring Leases Expiring Leases Leases ($000s) Expiring Leases (1) ----------- --------------- ------------------ --------------- -------------------- 2002 34 796,282 $6,218 18.2% 2003 38 653,488 4,884 14.3 2004 33 1,905,921 9,421 27.5 2005 18 363,731 2,516 7.3 2006 15 296,141 2,162 6.3 Thereafter 24 1,121,541 9,042 26.4 --------- --------------- --------------- --------- Total 162 5,137,104(2) $34,243(3) 100.0% ========== =============== =============== =========
6 (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 2001, and thus differs from "Total Effective Annual Base Rent" in the preceding table, which is based on 2001 rents. Other Properties As of December 31, 2001, the Company owns two multifamily properties, with 868 total units and average occupancy of 95%, and one retail property with total square footage of 69,294 and 90% occupancy. 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, 1997. CAPITALIZED TENANT IMPROVEMENTS AND LEASING COMMISSIONS
2001 2000 1999 1998 1997 ----------- ----------- ----------- ----------- ----------- OFFICE PROPERTIES Square footage renewed or re-leased 1,216,319 1,438,159 1,627,615 579,904 174,354 Capitalized tenant improvements and commissions ($000s) $ 12,164 $ 13,070 $ 11,353 $ 4,263 $ 850 Average per square foot of renewed or re-leased space $ 10.00 $ 9.09(2) $ 6.98 $ 7.35 $ 4.87 OFFICE/FLEX PROPERTIES Square footage renewed or re-leased (1) (1) 872,066 876,490 138,658 Capitalized tenant improvements and commissions ($000s) (1) (1) $ 2,675 $ 3,232 $ 418 Average per square foot of renewed or re-leased space (1) (1) $ 3.07 $ 3.69 $ 3.01 INDUSTRIAL PROPERTIES Square footage renewed or re-leased 640,196 969,476 457,561 307,896 198,055 Capitalized tenant improvements and commissions ($000s) $ 2,000 $ 3,880 $ 840 $ 370 $ 235 Average per square foot of renewed or re-leased space $ 3.12 $ 4.00(2) $ 1.84 $ 1.20 $ 1.19 ALL PROPERTIES Square footage renewed or re-leased 1,856,515 2,477,591 3,071,100 1,810,184 523,147 Capitalized tenant improvements and commissions ($000s) $ 14,164 $ 17,287 $ 15,390 $ 8,148 $ 1,545 Average per square foot of renewed or re-leased space $ 7.63 $ 6.98(2) $ 5.01 $ 4.50 $ 2.95
(1) Effective January 1, 2000, Properties previously classified as office/flex Properties are now classified as office or industrial Properties. (2) 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. 7 ITEM 3. LEGAL PROCEEDINGS 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, 2001. 8 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, 2001, the closing prices of the Company's Common and Preferred Stock were $19.40 and $21.10, respectively. On March 15, 2002, the last reported sales prices per share of the Company's Common Stock and Preferred Stock on the NYSE were $22.73 and $22.85, 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 ---------------- ---- --- ---- --- 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 $ 19.05 $ 16.81 $ 19.88 $ 16.63 Second Quarter 19.30 16.66 20.24 18.05 Third Quarter 21.20 17.25 20.75 18.26 Fourth Quarter 19.65 16.89 21.50 19.15 2002 First Quarter(1) $ 22.73 $ 19.25 $ 23.25 $ 21.15
(1) High and low stock closing prices through March 15, 2002. Holders The approximate number of holders of record of the shares of the Company's Common Stock and Preferred Stock were 3,790 and 67, respectively, as of March 15, 2002. 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, 2000 and 2001 the Company declared the following quarterly distributions:
Common Stock Preferred Stock ------------------------------------ ------------------------------------- Distributions Total Distributions Total Quarterly Period Per share Distributions Per share Distributions ---------------- ------------- ------------- ------------- ------------- 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 2001 First Quarter $0.42 $11,335,604 $0.48 $4,891,122 Second Quarter $0.42 $11,335,604 $0.48 $4,891,122 Third Quarter $0.42 $11,318,804 $0.48 $4,891,122 Fourth Quarter $0.43 $11,583,686 $0.48 $4,891,122
9 The Company intends to declare regular quarterly distributions to its stockholders. Prior to January 1, 2001, federal income tax law required that a REIT distribute annually at least 95% of its REIT taxable income. 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, 2001. This selected financial data should be read in conjunction with the financial statements of the Company, including the notes thereto, included in Item 14.
2001 2000 1999 1998 1997 ----------- ----------- ----------- ----------- ----------- OPERATING DATA: Rental revenue $ 188,683 $ 242,582 $ 255,339 $ 227,956 $ 61,393 Fees and reimbursements 6,628 3,713 3,312 2,802 719 Interest and other income 4,920 8,311 6,404 4,607 1,802 Equity in earnings of Associated Companies -- 1,455 1,222 1,314 2,743 Equity in earnings (losses) of unconsolidated operating joint ventures 246 (386) (310) -- -- Total revenue 200,477 255,675 265,967 236,679 66,657 Property operating expenses 56,857 82,906 88,037 74,079 18,958 General and administrative 10,458 13,353 9,688 11,038 3,319 Depreciation and amortization 47,892 59,490 58,295 50,194 14,873 Interest expense 37,802 63,281 64,782 53,289 9,668 Income from operations before minority interest and extraordinary items 48,352 48,936 52,949 48,552 21,330 Net income allocable to common shareholders(1) 24,311 18,156 28,006 23,982 19,368 Diluted amounts per common share(2): Net income before extraordinary items $ 0.94 $ 0.85 $ 0.86 $ 0.79 $ 1.09 Net income 0.89 0.62 0.89 0.75 1.05 Distributions(3) 1.69 1.68 1.68 1.68 1.38 BALANCE SHEET DATA: Rental properties, gross $ 1,338,022 $ 1,208,566 $ 1,756,061 $ 1,825,308 $ 866,431 Accumulated depreciation (146,198) (115,061) (114,170) (82,869) (41,213) Rental properties, net 1,191,824 1,093,505 1,641,891 1,742,439 825,218 Investments in development 98,105 86,286 38,773 35,131 7,251 Investments in operating joint ventures 8,089 9,119 5,679 -- -- Mortgage loans receivable 39,061 37,250 37,582 42,420 3,692 Total assets 1,388,403 1,371,158 1,794,604 1,879,016 865,774 Total debt 653,014 606,677 897,358 922,097 228,299 Stockholders' equity 646,150 668,856 784,334 828,533 580,123 OTHER DATA: EBIDA(4) $ 133,162 $ 159,416 $ 168,242 $ 151,562 $ 44,380 Cash flow provided by (used for): Operating activities 79,719 86,054 91,667 76,421 24,359 Investing activities (74,372) 356,325 83,807 (613,840) (569,242) Financing activities (103,132) (346,666) (173,349) 536,706 548,598 FFO(5) 72,784 71,860 84,047 79,920 36,087 CAD(6) 58,294 51,756 66,576 68,357 32,335 Debt to total market capitalization(7) 43.9% 43.9% 54.7% 47.5% 18.5%
(1) Net income allocable to common shareholders includes certain non-recurring items described in (4) below. 10 (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, 2001, 2000, 1999, 1998 and 1997 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. 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 REITs results of operations and liquidity and should be considered in evaluating a REITs 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, --------------------------------------------------------------------- 2001 2000 1999 1998 1997 --------- --------- --------- --------- --------- Net income $ 43,875 $ 38,869 $ 50,286 $ 44,602 $ 19,368 Extraordinary item 1,732 7,910 (984) 1,400 843 Minority interest 2,745 2,157 3,647 2,550 1,119 Interest expense 37,802 63,281 64,782 53,289 9,668 Depreciation and amortization 47,892 59,490 58,295 50,194 14,873 Net gain on sales of real estate assets (884) (21,495) (9,013) (4,796) (1,491) Loss on sale of mortgage loan receivable -- -- 1,229 -- -- Loss on interest rate protection agreement -- -- -- 4,323 -- Loss provisions -- 9,204 -- -- -- --------- --------- --------- --------- --------- EBIDA $ 133,162 $ 159,416 $ 168,242 $ 151,562 $ 44,380 ========= ========= ========= ========= =========
(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 believes that FFO is helpful to investors as a measure of performance of an equity REIT because, along with cash flow from operating activities, FFO provides investors with an indication of our ability to incur and service debt, to make capital expenditures and to fund other cash needs. The Company computes FFO in accordance with the clarified definition except that we eliminate straight-line rent from the calculation, which may not be comparable to FFO reported by other REITs that interpret the clarified definition differently than we do. 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 $19.40, $17.375, $13.375, $20.375 and $29.625 on December 31, 2001, 2000, 1999, 1998 and 1997, 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, 2001, 2000, 1999 and 1998. 11 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 believes that FFO is helpful to investors as a measure of performance of an equity REIT because, along with cash flow from operating activities, FFO provides investors with an indication of our ability to incur and service debt, to make capital expenditures and to fund other cash needs. The Company computes FFO in accordance with the clarified definition except that we eliminate straight-line rent from the calculation, which may not be comparable to FFO reported by other REITs that interpret the clarified definition differently than we do. 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, 2001 and the year ended December 31, 2001 (in thousands, except weighted average shares and per share amounts):
March 31, June 30, Sept 30, Dec 31, Year to Date 2001 2001 2001 2001 2001 -------- -------- -------- -------- -------- Income from operations before minority interest, extraordinary items and preferred dividends $ 11,386 $ 11,398 $ 15,357 $ 10,211 $ 48,352 Depreciation and amortization(1) 10,579 11,617 11,750 12,695 46,641 Preferred dividends (4,891) (4,891) (4,891) (4,891) (19,564) Net (gain) loss on sales of real estate assets (58) 182 (3,007) 1,999 (884) Adjustment for straight-line rents -- (793) (777) (793) (2,363) Adjustment to reflect FFO of unconsolidated operating JV's(2) 247 158 96 101 602 -------- -------- -------- -------- -------- FFO $ 17,263 $ 17,671 $ 18,528 $ 19,322 $ 72,784 ======== ======== ======== ======== ========
continued 12
March 31, June 30, Sept 30, Dec 31, Year to Date 2001 2001 2001 2001 2001 ------------ ------------ ------------ ------------ ------------ FFO $ 17,263 $ 17,671 $ 18,528 $ 19,322 $ 72,784 Amortization of deferred financing fees 387 347 409 431 1,574 Capital reserve (2,966) (2,924) (5,260) (4,914) (16,064) ------------ ------------ ------------ ------------ ------------ CAD $ 14,684 $ 15,094 $ 13,677 $ 14,839 $ 58,294 ============ ============ ============ ============ ============ Distributions per common share(3) $ 0.42 $ 0.42 $ 0.42 $ 0.43 $ 1.69 ============ ============ ============ ============ ============ Diluted weighted average common shares outstanding 30,476,401 30,467,322 30,588,078 30,472,064 30,517,525 ============ ============ ============ ============ ============
(1) Excludes non-real estate depreciation and amortization. (2) Reflects the adjustments to FFO required to reflect the FFO of the unconsolidated operating 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, 2001, were paid on January 14, 2002. 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 (in thousands, except weighted average shares and per share amounts):
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 (3) 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 operating 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 (4,989) (6,319) (5,471) (5,829) (22,608) ------------ ------------ ------------ ------------ ------------ CAD $ 14,949 $ 15,118 $ 15,540 $ 6,149 $ 51,756 ============ ============ ============ ============ ============ Distributions per common share $ 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 ============ ============ ============ ============ ============
13 (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 operating joint ventures allocable to the Company. The Company's investments in the joint ventures are accounted for using the equity method of accounting. (3) Excludes non-real estate depreciation and amortization. (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, 2001 TO THE YEAR ENDED DECEMBER 31, 2000. Following is a table of net operating income by property type, for comparative purposes, presenting the results for the years ended December 31, 2001 and 2000. RESULTS OF OPERATIONS BY PROPERTY TYPE FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 (IN THOUSANDS)
Multi- Hotel and Property Eliminating Total Office Industrial Retail family Other Total Entry(1) Reported ------ ---------- ------ ------ --------- ----- ----------- --------- 2001 Rental Revenue $137,489 $ 40,075 $ 2,497 $ 8,622 -- $188,683 -- $188,683 Operating Expenses 49,149 9,055 537 3,468 -- 62,209 ($5,352) 56,857 Net Operating Income 88,340 31,020 1,960 5,154 -- 126,474 5,352 131,826 Percentage of Total NOI 69.9% 24.5% 1.5% 4.1% -- 100.0% 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%
(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 $53,899,000, or 22%, to $188,683,000 for the year ended December 31, 2001, from $242,582,000 for the year ended December 31, 2000. The decrease consisted of declines in revenue from the retail, multifamily and hotel Properties of $5,768,000, $60,805,000 and $818,000, respectively, due to the 2000 and 2001 sales of substantially all of the Company's retail and multifamily Properties and the Company's one remaining hotel Property. These decreases were offset by increases in revenue from the office and industrial Properties of $11,291,000 and $2,201,000, respectively, due to acquisitions, net of dispositions, and increases in rental rates. 14 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 unconsolidated operating and development joint ventures and the Rancon Partnerships. This revenue increased $2,915,000, or 79%, to $6,628,000 for the year ended December 31, 2001, from $3,713,000 for the year ended December 31, 2000, primarily due to property management and asset management fees received from the Rancon Partnerships and development, acquisition and financing fees relating to several development projects. Certain of these fees were previously earned by GC, prior to its merger with the Company, and were recognized as equity in earnings of Associated Company. Interest and Other Income. Interest and other income decreased $3,391,000, or 41%, to $4,920,000 for the year ended December 31, 2001, from $8,311,000 for the year ended December 31, 2000. The decrease was primarily due to interest income earned on three development projects sold by a development alliance in the second and third quarters of 2000, offset slightly by interest income earned on a development project sold by a development alliance in the first quarter of 2001. Equity in Earnings of Associated Company. Equity in earnings of Associated Company decreased to $0 for the year ended December 31, 2001, from $1,455,000 for the year ended December 31, 2000. The decrease is due to the merger of GC into the Company in the fourth quarter of 2000. Equity in Earnings (Losses) of Unconsolidated Operating Joint Ventures. Equity in earnings (losses) of unconsolidated operating joint ventures increased $632,000 to $246,000 for the year ended December 31, 2001, from a loss of $386,000 for the year ended December 31, 2000. This increase is primarily due to an increase in net operating income at one joint venture, which began operations in October of 2000. Property Operating Expenses. Property operating expenses decreased $26,049,000, or 31%, to $56,857,000 for the year ended December 31, 2001, from $82,906,000 for the year ended December 31, 2000. This decrease resulted from the 2000 and 2001 sales of substantially all of the Company's retail and multifamily Properties and the Company's one remaining hotel Property. General and Administrative Expenses. General and administrative expenses decreased $2,895,000, or 22%, to $10,458,000 for the year ended December 31, 2001, from $13,353,000 for the year ended December 31, 2000. This decrease is primarily due to a reduction in costs associated with supplemental retirement agreements for certain of the Company's executive officers. The decrease was also due to reduced staff and overhead expenses resulting from the sale of the Company's multifamily portfolio in December 2000, partially offset by an increase in general and administrative costs as a result of the merger of the Company and GC in October 2000. These costs were previously recognized as a component of equity in earnings of Associated Company. Depreciation and Amortization. Depreciation and amortization decreased $11,598,000, or 19%, to $47,892,000 for the year ended December 31, 2001, from $59,490,000 for the year ended December 31, 2000. This decrease is primarily due to the sale of 78 Properties from the Company's portfolio since January 1, 2000. Interest Expense. Interest expense decreased $25,479,000, or 40%, to $37,802,000 for the year ended December 31, 2001, from $63,281,000 for the year ended December 31, 2000. This decrease is primarily due to payoffs of loans in connection with property sales, retirement of the Senior Notes, and decreases in variable interest rates. Net Gain on Sales of Real Estate Assets. The net gain on sales of real estate assets of $884,000 during the year ended December 31, 2001, resulted from the sale of six office Properties, three industrial Properties, four retail Properties and one multifamily Property. The net gain on sales 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. These sales are consistent with the Company's strategy to focus on high-quality multi-tenant office Properties in its core markets. 15 Net Loss on Early Extinguishment of Debt. Net loss on early extinguishment of debt of $1,732,000 during the year ended December 31, 2001, consists of losses due to the writeoff of unamortized loan fees and prepayment penalties on the payoff and refinancing of debt as discussed in Liquidity and Capital Resources below. 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 $7,910,000 during the year ended December 31, 2000, consisted 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 included $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. 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. 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 was primarily due to the acquisition of two multifamily Properties 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 was 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 were partially 16 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 was 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 Company. Equity in earnings of Associated Company 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 was primarily due to income tax savings recognized upon the merger of the Company and GC in the fourth quarter of 2000. 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 was 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. 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 was 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 was primarily due to retirement of the Senior Notes, paydowns on the Credit Facility and payoffs of loans in connection with property sales. 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. 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. Proceeds from the sale were invested in the repurchase of preferred stock. 17 Net Gain on Sales of Real Estate Assets. The net gain on sales 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 sales 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. 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, consisted 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 included $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, 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. LIQUIDITY AND CAPITAL RESOURCES Cash Flows For the year ended December 31, 2001, cash provided by operating activities decreased by $6,335,000 to $79,719,000 as compared to $86,054,000 in 2000, due to the sale of the Company's multifamily portfolio at the end of 2000 and the related reductions in outstanding debt and number of outstanding shares of common stock. Cash used for investing activities was $74,372,000 for the year ended December 31, 2001, as compared to $356,325,000 provided by investing activities for the year ended December 31, 2000. The change is primarily due to a decrease in proceeds from sales of real estate assets in 2001, slightly offset by increased cash used for real estate acquisitions. During the year ended December 31, 2001, the Company disposed of 14 properties as compared to 64 properties in 2000. Cash used for financing activities decreased by $243,534,000 to $103,132,000 for the year ended December 31, 2001, as compared to $346,666,000 for the same period in 2000. This change was primarily due to a decrease 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 its ability to meet its operating requirements and the amount of its distributions. If significant decreases in occupancy or rental rates occurred at the Company's properties, this could have an adverse impact on the Company's operating cash flows. Similarly, increases in interest rates could have an adverse impact on the Company's operating cash flows. 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 Land and Development The Company is independently developing approximately 436,000 square feet of commercial property in California, Colorado, New Jersey and Maryland. As of December 31, 2001, the Company had invested approximately $41.1 million in these projects. Additionally, the Company has approximately 119 acres of land with a book value of approximately $19.6 million as of December 31, 2001. This land has potential for future development of approximately 1,355,000 square feet of office space. The Company is obligated to fund approximately $5.5 million to these developments in 2002. The loans secured by certain of these development properties contain recourse 18 provisions to the Company in the aggregate amount of $26.5 million, however, some of the loans were not fully drawn as of December 31, 2001. The Company is currently involved in a number of alliances for the development of approximately 911,000 square feet of commercial properties in California and Colorado. The alliances grant the Company certain rights to purchase the properties upon completion of development. As of December 31, 2001, the Company had invested approximately $11.2 million in these alliances and had acquired properties from them aggregating approximately $114.2 million. The Company has no further contractual obligations for the future funding of these developments; however, the Company will likely be funding a portion of their working capital needs until such time as other financing is obtained. Under these alliances, the Company has provided an aggregate of $12.8 million in debt guarantees, however, some of the loans were not fully drawn as of December 31, 2001. Additionally, the Company has formed two joint ventures (the "Pauls Joint Ventures") with the Pauls Corporation ("Pauls"). The Company and Pauls each own an equal 50% interest in the Pauls Joint Ventures. The Company accounts for its investment in the Pauls Joint Ventures using the equity method. In the fourth quarter of 2000, the Pauls Joint Ventures acquired two sites aggregating 35.54 acres in the San Francisco Bay Area for mixed use development. As of December 31, 2001, the Company had invested approximately $26.2 million in these developments. The Company has no further contractual obligations for the future funding of these developments; however, the Company will likely be funding a portion of their working capital needs until such time as other financing is obtained. In addition, the loans secured by certain of these development properties contain recourse provisions to the Company in the aggregate amount of $24.8 million, however, some of the loans were not fully drawn as of December 31, 2001. Investments in Unconsolidated Operating Joint Ventures Investments in unconsolidated operating joint ventures decreased from $9,119,000 at December 31, 2000, to $8,089,000 at December 31, 2001. This decrease was due to the Company's acquisition of one of the joint venture Properties, slightly offset by the Company's 2001 equity interest in the joint ventures' earnings. Mortgage Loans Receivable Mortgage loans receivable increased from $37,250,000 at December 31, 2000, to $39,061,000 at December 31, 2001. This increase was due to accrued interest on a loan made by the Company under a development alliance, net of repayments. Secured and Unsecured Financing Mortgage loans payable increased from $450,624,000 at December 31, 2000, to $588,420,000 at December 31, 2001. This increase resulted from $82,203,000 of new mortgage loans in connection with acquisitions, $183,613,000 of new mortgage loans due to new financing, $3,055,000 of draws on existing construction loans and $8,362,000 of draws on a new construction loan, offset by decreases of $25,620,000 due to property sales, $92,877,000 due to new financing, $13,254,000 due to debt maturities and $7,686,000 due to scheduled principal payments on other debt. In the fourth quarter of 2001, the Company closed a $27 million secured loan which replaced four existing loans secured by seven of the Gateway Park Industrial properties located in Aurora, Colorado ("Gateway Refinance"). The previous loans had an aggregate balance of approximately $26 million, with approximately $17 million bearing fixed interest rates ranging between 7.24% and 7.57% and maturing on May 10, 2007, and approximately $9 million bearing a floating rate of LIBOR plus 1.55% and maturing at various dates in the fourth quarter of 2001. The new loan has a maturity date of May 10, 2007 and bears interest at a fixed rate of 7.24%. The excess proceeds from the new loan were used to paydown the Credit Facility as discussed below. In the fourth quarter of 2001, the Company closed a $52.5 million secured loan with an insurance company ("Secured Financing"). The Secured Financing is an expansion of an existing $53 million loan secured by nine properties, with a maturity date of November 10, 2008 and a fixed interest rate of 6.125%. The additional $52.5 million loan bears interest at a floating rate of 30-day LIBOR plus 3.25% (5.12% at December 31, 2001) and has a separate initial maturity of December 11, 2004, with two one-year extension options. The two loans are cross- 19 collateralized and, after the addition of two properties to the loan pool, are secured by eleven properties with an aggregate net book value of approximately $168 million at December 31, 2001. The excess proceeds from the Secured Financing were used to paydown the Credit Facility as discussed below. In connection with the Secured Financing, the Company entered into an interest rate cap agreement to hedge increases in 30-day LIBOR rates above a specified level. The agreement is for a term concurrent with the Secured Financing, is indexed to a 30-day LIBOR rate, is for a notional amount equal to the maximum amount available on the Secured Financing, and caps 30-day LIBOR to a maximum of 6%. As of December 31, 2001, the 30-day LIBOR rate was 1.87%. The Company paid a $594,000 fee at the inception of the cap agreement which is being amortized as additional interest expense over the life of the agreement. In the third quarter of 2001, the Company closed a $45 million secured loan with an insurance company. The new loan replaced an existing loan secured by Rockwall I and II located in Rockville, Maryland. The previous loan of $37 million, which was assumed through the acquisition of Rockwall I and II (see below), had a floating rate of LIBOR plus 2.50% and a maturity date of June 30, 2004, and was paid off with the proceeds from the new secured loan which has a maturity date of October 1, 2006, and bears interest at a fixed rate of 6.77%. The excess proceeds from the new loan were used to pay down the Credit Facility as discussed below. In the third quarter of 2001, the Company closed a $29 million secured loan with an insurance company. The new secured loan replaced the three existing loans (including two construction loans) on the first three phases of Bridgewater Executive Quarters located in Bridgewater, New Jersey. The previous loans totaling approximately $24.6 million were paid off with the proceeds from the new secured loan which has a maturity date of August 1, 2006 and bears interest at a fixed rate of 6.83%. The excess proceeds from the new loan were used to pay down the Credit Facility as discussed below. In the third quarter of 2001, the Company closed an $8 million secured loan with an insurance company. The loan is secured by an office property located in Parsippany, New Jersey, has a maturity date of August 1, 2006, and bears interest at a fixed rate of 6.86%. The proceeds from the new loan were used to pay down the Credit Facility as discussed below. In the second quarter of 2001, through the acquisition of a multifamily property from a development alliance, the Company assumed a $19.1 million loan. The loan has a maturity date of March 31, 2002 and bears interest at the floating rate of LIBOR plus 2.25%. The interest rate on this loan at December 31, 2001 was 4.12%. In the second quarter of 2001, through the acquisition of a multifamily property from a development alliance, the Company assumed a $21.4 million loan. The loan had a maturity date of March 31, 2002 and a floating interest rate of LIBOR plus 2%. This loan was paid off with the sale of the property securing the loan in the fourth quarter of 2001. In the second quarter of 2001, through the acquisition of an industrial property from a development alliance, the Company assumed a $4.7 million loan. The loan had a maturity date of December 1, 2001 and a floating interest rate of LIBOR plus 1.55%. This loan was paid off in the fourth quarter of 2001 with proceeds from the Gateway Refinance discussed above. In the second quarter of 2001, through the acquisition of Rockwall I and II, a two-building office property, from a joint venture partner, the Company assumed a $37 million loan. The loan had a maturity date of June 30, 2004 and a floating interest rate of LIBOR plus 2.5%. This loan was refinanced in the third quarter of 2001 (see above). In the second quarter of 2001, the Company closed a $22 million secured loan with an insurance company. The new secured loan replaced the existing loan on Montrose Office Park located in Rockville, Maryland. The existing loan of $15.1 million had a floating rate of LIBOR plus 2.50% and a maturity date of June 29, 2001, and was paid off with the proceeds from the new secured loan which has a maturity date of June 28, 2006, and bears interest at a fixed rate of 6.83%. The excess proceeds from the new loan were used to pay down the Credit Facility as discussed below. 20 In the first and second quarters of 2001, the Company paid off its unsecured term loan with the proceeds from the sale of its multifamily portfolio on December 29, 2000 and a draw on the Credit Facility, as discussed below. In the first quarter of 2001, the Company obtained a $14 million construction loan to build a 96,000 square foot office property in Bridgewater, New Jersey. Approximately $8.4 million was outstanding at December 31, 2001. The loan has a maturity date of January 5, 2003 and bears interest at the floating rate of LIBOR plus 2.35%. The interest rate on this loan at December 31, 2001 was 4.22%. Outstanding borrowings under the Credit Facility increased from $31,053,000 at December 31, 2000, to $64,594,000 at December 31, 2001. The increase was due to draws totaling $252,658,000 for the payoff of the unsecured term loan, stock repurchases and acquisitions, offset by pay downs totaling $219,117,000 generated from proceeds from the sales of properties, debt refinancing and cash from operations. In May 2001, the maturity date on the Credit Facility was extended from June 2002 to June 2003. In addition, the maximum amount of the Credit Facility was increased from $142 million to $180 million, with the additional proceeds applied to pay off the unsecured term loan, as discussed above. The Credit Facility requires, among other things, the Company to be in compliance with certain financial covenants and ratios. The Company has been in compliance during all of 2001 and remains in compliance at December 31, 2001. Some of the Company's properties are held in limited partnerships and limited liability companies in order to facilitate financing. All such entities are owned 100% directly or indirectly by the Company. At December 31, 2001, the Company's total indebtedness included fixed-rate debt of $436,673,000 and floating-rate debt of $216,341,000. The Company's ratio of total debt to gross book assets was approximately 43% at December 31, 2001. 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, 2001, approximately 33% 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. It is not the Company's policy to engage in hedging activities for speculative purposes. At December 31, 2001, the Company was not a party to any open interest rate protection agreements other than the interest rate cap contract entered into in December 2001 as discussed above. Equity Offerings In January 1999, the Company filed a shelf registration statement with the SEC (the "January 1999 Shelf Registration Statement") 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 Company have the capacity pursuant to the January 1999 Shelf Registration Statement to issue up to $801.2 million in equity securities. The Company currently has no plans to issue equity under this shelf registration. 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. In connection with the sale of 36 multifamily Properties in December 2000, the repurchase authorization was increased to approximately 8.2 million shares, representing approximately 26% of Common Stock outstanding when the repurchase program began. As of December 31, 2001, 6,146,816 common shares have been repurchased for a total cost of approximately $101,865,000; this represents approximately 75% of the expanded repurchase authorization and approximately 20% of Common Stock outstanding when the repurchase program began. In addition, during 1999, the Company announced that its Board of Directors had approved the repurchase of up to 15% of its Preferred Stock, or 1,725,000 shares. In May 2000, the Preferred Stock repurchase authorization was increased to 3,450,000 shares, representing approximately 30% of Preferred Stock outstanding when the repurchase program began. As of December 31, 2001, 1,402,200 preferred shares have been repurchased for a total cost of 21 approximately $21,037,000; this represents approximately 41% of the expanded repurchase authorization and approximately 12% of Preferred Stock outstanding when the repurchase program began. Future stock repurchases will be made from time to time in the open market or otherwise and the timing will depend on market conditions and other factors. CRITICAL ACCOUNTING POLICIES Revenue recognized on a straight-line basis The Company recognizes rental revenue on a straight-line basis at amounts that it believes it will collect on a tenant by tenant basis. The estimation process may result in higher or lower levels from period to period as the Company's collection experience and the credit quality of the Company's tenants changes. Actual amounts collected could be lower or higher than the amounts recognized on a straight-line basis if specific tenants are unable to pay rent that the Company has previously recognized as revenue, or if other tenants remain whom the Company previously believed would not. Carrying value of rental properties, investments in development and other investment assets The Company's rental properties, investments in development and other investment assets such as operating joint ventures and mortgage loans receivable are generally carried at the lower of cost or estimated fair value. Certain development and operating joint ventures include the Company's share of undistributed income or loss arising from the investment, and the mortgage loans receivable include accrued interest. In addition, under the Company's long-term development program, some interest, payroll and general and administrative costs incurred in connection with this program may be capitalized. The actual value of the Company's portfolio of property, investments in development and other investments could be significantly higher or lower than their carrying amounts. The Company's status as a real estate investment trust (REIT) 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 90% 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. Management believes that the Company has complied with all requirements to qualify as a REIT for the years ended December 31, 2001, 2000 and 1999. Accordingly, no provision for income taxes is included in its consolidated financial statements. 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 did not have a material effect on the Company's consolidated financial position, results of operations and financial statement presentation. In June 2001, the Financial Accounting Standards Board (FASB) approved for issuance SFAS No. 141, "Business Combinations." SFAS No. 141 requires that all business combinations initiated after June 30, 2001, use the purchase method of accounting. The pooling-of-interests method of accounting is prohibited except for transactions initiated before July 1, 2001. This standard did not have a material impact on the Company's consolidated financial position or results of operations. 22 In June 2001, the FASB approved for issuance SFAS No. 142, "Goodwill and Other Intangible Assets." The provisions of SFAS No. 142 will be effective January 1, 2002, for the Company. Under SFAS No. 142, goodwill and intangible assets with indefinite lives will not be amortized but will be tested for impairment annually using a fair value approach, except in certain circumstances, and whenever there is an impairment indicator. Other intangible assets will continue to be valued and amortized over their estimated lives. Management does not expect this standard to have a material impact on the Company's consolidated financial position or results of operations. In June 2001, the FASB approved for issuance SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and that the associated asset retirement costs be capitalized as part of the carrying value of the related long-lived asset. SFAS No. 143 will be effective January 1, 2003 for the Company. Management does not expect this standard to have a material impact on the Company's consolidated financial position or results of operations. In August 2001, the FASB approved for issuance SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 broadens the presentation of discontinued operations to include more transactions and eliminates the need to accrue for future operating losses. Additionally, SFAS No. 144 prohibits the retroactive classification of assets as held for sale and requires revisions to the depreciable lives of long-lived assets to be abandoned. SFAS No. 144 will be effective January 1, 2002 for the Company. Management is currently assessing the impact of this new standard on the Company's consolidated financial position and results of operations. INFLATION Leases at the office Properties typically provide for rent adjustment and pass-through of certain operating expenses during the term of the lease. 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. 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. RISK FACTORS MARKET FLUCTUATIONS IN RENTAL RATES AND OCCUPANCY COULD ADVERSELY AFFECT THE COMPANY'S OPERATIONS 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 re-lease 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. If the Company cannot lease all or substantially all of the expiring space at its properties promptly or if the rental rates are significantly lower than expected, then the Company's results of operations and financial condition could be negatively impacted. 23 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. 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 $180 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, 2001, approximately $312.1 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, 2001, the Company had approximately $216.3 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. 24 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. 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. 25 ENVIRONMENTAL ASSESSMENTS AND POTENTIAL LIABILITY DUE TO ASBESTOS-CONTAINING MATERIALS Environmental Laws also govern the presence, maintenance and removal of asbestos-containing building materials. These laws require that asbestos-containing building materials be properly managed and maintained and that those who may come into contact with asbestos-containing building materials be adequately informed and trained. They also require that special precautions, including removal or other abatement, be undertaken in the event asbestos-containing building materials is disturbed during renovation or demolition of a building. These laws may impose fines and penalties on building owners or operators for failure to comply with these requirements. They also may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers. All of the properties that 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: 26 - 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. 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. In addition, although the Company's existing policies of insurance covering property damage do not exclude coverage for acts of terrorism, it is possible that such an exclusion could be imposed by an insurance carrier either during the current policy term upon satisfaction of certain notice requirements, or upon future policy renewal, in which case any losses from acts of terrorism might be uninsured. 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 THE COMPANY'S ABILITY TO VARY ITS PORTFOLIO Real estate investments are relatively illiquid and, therefore, will tend to limit the Company's ability to vary its portfolio quickly 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. Twenty-six 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 for limited periods of time. 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 27 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. 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 28 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 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. 29 RISKS OF LITIGATION 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. 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 33% and 44% of the Company's outstanding debt, including amounts borrowed under the Credit Facility, were subject to variable rates at December 31, 2001 and 2000, respectively. In addition, the average interest rate on the Company's debt decreased from 7.62% at December 31, 2000 to 5.95% at December 31, 2001. 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 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, 2001, the Company was not a party to any forward interest rate or similar agreements other than the interest rate cap contract entered into in December 2001 as discussed above. 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. 30
Expected Maturity Date -------------------------------------------------------------------------------------------------------- Fair 2002 2003 2004 2005 2006 Thereafter Total Value ---- ---- ---- ---- ---- ---------- ----- ----- (in thousands) Secured Fixed $ 12,809 $ 36,223 $ 9,735 $ 24,917 $ 106,732 $ 246,257 $ 436,673 $436,673 Average interest rate 7.41% 7.63% 7.08% 7.13% 6.82% 6.59% 6.80% Secured Variable $ 62,885 $ 36,362 $ 52,500 $ -- $ -- $ -- $ 151,747 $151,747 Average interest rate 4.19% 4.34% 5.12% -- -- -- 4.55% Unsecured Variable $ -- $ 64,594 $ -- $ -- $ -- $ -- $ 64,594 $ 64,594 Average interest rate -- 3.50% -- -- -- -- 3.50%
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, 2001. 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 $270, based upon the balances outstanding on variable rate instruments at December 31, 2001. 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. 31 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 9, 2002. 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 9, 2002. 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 9, 2002. 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 9, 2002. 32 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 34 Consolidated Balance Sheets at December 31, 2001 and 2000 35 Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999 36 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 37 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 38 Notes to Consolidated Financial Statements 40 (2) Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation 59 Schedule IV - Mortgage Loans Receivable, Secured by Real Estate 63 (3) Exhibits to Financial Statements The Exhibit Index attached hereto is hereby incorporated by reference to this Item. 66 (b) Reports on Form 8-K (incorporated herein by reference) On November 9, 2001, the Company filed a report on Form 8-K with respect to the acquisition of two office properties. On January 8, 2002, the Company filed a report on Form 8-K/A with respect to the acquisition of three office properties.
33 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, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended December 31, 2001, 2000 and 1999. 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, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001, 2000 and 1999, 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, 2002 34 GLENBOROUGH REALTY TRUST INCORPORATED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2001 2000 --------------- --------------- ASSETS Rental properties, gross $1,338,022 $1,208,566 Accumulated depreciation (146,198) (115,061) --------------- --------------- Rental properties, net 1,191,824 1,093,505 Investments in land and development 98,105 86,286 Investments in unconsolidated operating joint ventures 8,089 9,119 Mortgage loans receivable 39,061 37,250 Cash and cash equivalents 4,410 102,195 Other assets 46,914 42,803 --------------- --------------- TOTAL ASSETS $1,388,403 $1,371,158 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage loans $588,420 $450,624 Unsecured term debt -- 125,000 Unsecured bank line 64,594 31,053 Other liabilities 22,730 26,871 --------------- --------------- Total liabilities 675,744 633,548 --------------- --------------- Commitments and contingencies (Note 15) Minority interest 66,509 68,754 Stockholders' Equity: Common stock, $0.001 par value, 26,938,804 and 26,991,770 shares issued and outstanding at December 31, 2001 and 2000, respectively 27 27 Preferred stock, $0.001 par value, $25.00 liquidation preference, 10,097,800 shares issued and outstanding at December 31, 2001 and 2000 10 10 Additional paid-in capital 762,050 763,974 Deferred compensation (945) (1,143) Retained earnings (deficit) (114,992) (94,012) --------------- --------------- Total stockholders' equity 646,150 668,856 --------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,388,403 $1,371,158 =============== ===============
The accompanying notes are an integral part of these consolidated financial statements 35 GLENBOROUGH REALTY TRUST INCORPORATED CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2001 2000 1999 ------------ ------------ ------------ REVENUE Rental revenue $ 188,683 $ 242,582 $ 255,339 Fees and reimbursements from affiliates 6,628 3,713 3,312 Interest and other income 4,920 8,311 6,404 Equity in earnings of Associated Company -- 1,455 1,222 Equity in earnings (losses) of unconsolidated operating joint ventures 246 (386) (310) ------------ ------------ ------------ Total revenue 200,477 255,675 265,967 ------------ ------------ ------------ EXPENSES Property operating expenses 56,857 82,906 88,037 General and administrative 10,458 13,353 9,688 Depreciation and amortization 47,892 59,490 58,295 Interest expense 37,802 63,281 64,782 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 ------------ ------------ ------------ Total expenses 153,009 228,234 222,031 ------------ ------------ ------------ Income before gain on sales of real estate assets, minority interest and extraordinary item 47,468 27,441 43,936 Net gain on sales of real estate assets 884 21,495 9,013 ------------ ------------ ------------ Income before minority interest and extraordinary item 48,352 48,936 52,949 Minority interest (2,745) (2,157) (3,647) ------------ ------------ ------------ Net income before extraordinary item 45,607 46,779 49,302 Extraordinary item: Net (loss) gain on early extinguishment of debt (1,732) (7,910) 984 ------------ ------------ ------------ Net income 43,875 38,869 50,286 Preferred dividends (19,564) (20,713) (22,280) ------------ ------------ ------------ Net income available to Common Stockholders $ 24,311 $ 18,156 $ 28,006 ============ ============ ============ Basic Per Share Data: Net income before extraordinary item $ 0.96 $ 0.89 $ 0.86 Extraordinary item (0.06) (0.27) 0.03 ------------ ------------ ------------ Net income available to Common Stockholders $ 0.90 $ 0.62 $ 0.89 ============ ============ ============ Basic weighted average shares outstanding 26,974,963 29,295,250 31,346,568 ============ ============ ============ Diluted Per Share Data: Net income before extraordinary item $ 0.94 $ 0.85 $ 0.86 Extraordinary item (0.05) (0.23) 0.03 ------------ ------------ ------------ Net income available to Common Stockholders $ 0.89 $ 0.62 $ 0.89 ============ ============ ============ Diluted weighted average shares outstanding 30,517,525 33,023,802 35,522,627 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements 36 GLENBOROUGH REALTY TRUST INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)
Common Stock Preferred Stock ------------------ ------------------ Additional Deferred Retained Par Par Paid-in Compen- Earnings Shares Value Shares Value Capital sation (Deficit) Total ------ --------- ------ --------- --------- --------- --------- --------- 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 paid to common and preferred stockholders -- -- -- -- -- -- (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 64 -- -- -- 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 paid to common and preferred stockholders -- -- -- -- -- -- (71,093) (71,093) Net income -- -- -- -- -- -- 38,869 38,869 ------ --------- ------ --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 2000 26,992 $ 27 10,098 $ 10 $ 763,974 $ (1,143) $ (94,012) $ 668,856 ------ --------- ------ --------- --------- --------- --------- --------- Exercise of stock options 5 -- -- -- 327 -- -- 327 Conversion of Operating Partnership units into common stock 2 -- -- -- (1,135) -- -- (1,135) Common and preferred stock repurchases (60) -- -- -- (1,116) -- -- (1,116) Amortization of deferred compensation -- -- -- -- -- 198 -- 198 Unrealized gain on marketable securities -- -- -- -- -- -- 31 31 Dividends paid to common and preferred stockholders -- -- -- -- -- -- (64,886) (64,886) Net income -- -- -- -- -- -- 43,875 43,875 ------ --------- ------ --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 2001 26,939 $ 27 10,098 $ 10 $ 762,050 $ (945) $(114,992) $ 646,150 ====== ========= ====== ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements 37 GLENBOROUGH REALTY TRUST INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)
2001 2000 1999 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 43,875 $ 38,869 $ 50,286 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 47,892 59,490 58,295 Amortization of loan fees, included in interest expense 1,574 2,504 2,035 Accrued interest on mortgage loans receivable (1,811) (2,075) (1,246) Minority interest in income from operations 2,745 2,157 3,647 Equity in earnings of Associated Company -- (1,455) (1,222) Equity in (earnings) losses of unconsolidated operating joint ventures (246) 386 310 Loss on sale of mortgage loan receivable -- -- 1,229 Net gain on sales of real estate assets (884) (21,495) (9,013) Net loss (gain) on early extinguishment of debt 1,732 7,910 (984) Provision for impairment of real estate assets -- 4,800 -- Provision for impairment of non-real estate assets -- 4,404 -- Amortization of deferred compensation 198 115 118 Changes in certain assets and liabilities, net (15,356) (9,556) (11,788) --------- --------- --------- Net cash provided by operating activities 79,719 86,054 91,667 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sales of real estate assets 107,314 468,432 144,846 Additions to real estate assets (131,893) (72,753) (51,227) Deposits on prospective acquisitions -- (2,273) -- Investments in land and development (49,707) (48,356) (10,203) Investments in unconsolidated operating joint ventures (86) (3,845) (5,989) Distributions from unconsol. operating joint ventures -- 535 -- Additions to mortgage loans receivable -- -- (1,141) Principal payments from mortgage loans receivable -- 2,407 5,996 Repayment of notes receivable -- 3,040 -- Payments from affiliates -- 200 900 Contribution to Associated Company -- (25) -- Distributions from Associated Company -- 1,258 625 Merger of Associated Company and the Company -- 7,705 -- --------- --------- --------- Net cash (used for) provided by investing activities (74,372) 356,325 83,807 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 447,688 310,360 342,348 Repayment of borrowings (479,306) (485,336) (403,162) Prepayment penalties on repayment of borrowings (849) (2,708) (2,026) Contributions from minority interest holders 147 -- -- Distributions to minority interest holders (5,137) (5,990) (7,050) Dividends paid to common and preferred stockholders (64,886) (71,093) (75,087) Exercise of stock options 327 686 1,275 Repurchases of common stock (1,116) (74,066) (27,129) Repurchases of preferred stock -- (18,519) (2,518) --------- --------- --------- Net cash used for financing activities (103,132) (346,666) (173,349) --------- --------- ---------
continued The accompanying notes are an integral part of these consolidated financial statements 38 GLENBOROUGH REALTY TRUST INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS -CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)
2001 2000 1999 --------- --------- --------- Net (decrease) increase in cash and cash equivalents $ (97,785) $ 95,713 $ 2,125 Cash and cash equivalents at beginning of year 102,195 6,482 4,357 --------- --------- --------- Cash and cash equivalents at end of year $ 4,410 $ 102,195 $ 6,482 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest (net of capitalized interest of $4,573, $3,777 and $2,675 in 2001, 2000 and 1999, respectively) $ 37,483 $ 62,645 $ 63,316 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Assumption of mortgage loans in acquisition of real estate $ 82,203 $ 4,300 $ 39,275 ========= ========= ========= Disposition of real estate involving buyer's assumption of mortgage loans $ 4,248 $ 120,517 $ -- ========= ========= ========= Acquisition of real estate assets from development alliances and unconsolidated operating joint ventures $ 39,250 $ 327 $ 597 ========= ========= ========= Conversion of Operating Partnership units into common stock, at market value on date of issuance $ 1,135 $ 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 $ -- ========= ========= ========= Unrealized gain on marketable securities $ 31 $ -- $ 34 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements 39 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000 NOTE 1. ORGANIZATION Glenborough Realty Trust Incorporated (the "Company") was incorporated in the State of Maryland on August 26, 1994. The Company commenced operations on January 1, 1996. 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, 2001, 26,938,804 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. Assuming the issuance of 3,068,463 shares of Common Stock issuable upon redemption of 3,068,463 partnership units in the Operating Partnership (as defined below), there would be 30,007,267 shares of Common Stock outstanding as of December 31, 2001. In 1999 and 2000, the Company's Board of Directors authorized the repurchase of up to approximately 8.2 million shares of common stock and approximately 1.7 million shares of preferred stock. As of December 31, 2001, 6,146,816 shares of Common Stock and 1,402,200 shares of Preferred Stock have been repurchased at a total cost of approximately $123 million. The Company's Preferred Stock has a $25.00 per share liquidation preference and 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 principal consolidated subsidiary, in which it holds a 1% general partner interest and a 88.77% limited partner interest at December 31, 2001, 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, 2001, the Operating Partnership, directly and through the subsidiaries in which it and the Company own 100% of the ownership interests, controls a portfolio of 79 real estate projects. Prior to October 24, 2000, the Operating Partnership held 100% of the non-voting preferred stock of Glenborough Corporation ("GC" or the "Associated Company"). GC provided partnership administration, asset management, property management and development services to a group of unaffiliated partnerships, which included 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 approximately 162,000 shares of common stock to GC's common stock holders. 40 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000 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, 2001 and 2000, and the consolidated results of operations and cash flows of the Company and its subsidiaries for the years ended December 31, 2001, 2000 and 1999. All significant intercompany transactions, receivables and payables have been eliminated in consolidation. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform with the current year presentation, with no effect on consolidated results of operations. 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 did not have a material effect on the Company's consolidated financial position, results of operations and financial statement presentation. In June 2001, the Financial Accounting Standards Board (FASB) approved for issuance SFAS No. 141, "Business Combinations." SFAS No. 141 requires that all business combinations initiated after June 30, 2001, use the purchase method of accounting. The pooling-of-interests method of accounting is prohibited except for transactions initiated before July 1, 2001. This standard did not have a material impact on the Company's consolidated financial position or results of operations. In June 2001, the FASB approved for issuance SFAS No. 142, "Goodwill and Other Intangible Assets." The provisions of SFAS No. 142 will be effective January 1, 2002, for the Company. Under SFAS No. 142, goodwill and intangible assets with indefinite lives will not be amortized but will be tested for impairment annually using a fair value approach, except in certain circumstances, and whenever there is an impairment indicator. Other intangible assets will continue to be valued and amortized over their estimated lives. Management does not expect this standard to have a material impact on the Company's consolidated financial position or results of operations. In June 2001, the FASB approved for issuance SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and that the associated asset retirement costs be capitalized as part of the carrying value of the related long-lived asset. SFAS No. 143 will be effective January 1, 2003 for the Company. Management does not expect this standard to have a material impact on the Company's consolidated financial position or results of operations. In August 2001, the FASB approved for issuance SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 broadens the presentation of discontinued operations to include more transactions and eliminates the need to accrue for future operating losses. Additionally, SFAS No. 144 prohibits the retroactive classification of assets as held for sale and requires revisions to the depreciable lives of long-lived assets to be abandoned. SFAS No. 144 will be effective January 1, 2002 for the Company. Management is currently 41 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000 assessing the impact of this new standard on the Company's consolidated financial position and results of operations. RENTAL PROPERTIES Rental properties are stated at cost, net of accumulated depreciation, unless circumstances indicate that cost, net of accumulated depreciation, cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value. Estimated fair value: (i) is based upon the Company's plans for the continued operation of each property; and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized net operating income based upon the age, construction and use of the building. The fulfillment of the Company's plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Company to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, it is reasonably possible that the actual results of operating and disposing of the Company's properties could be materially different than current expectations. Depreciation is provided using the straight line method over the useful lives of the respective assets. The useful lives are as follows: Buildings and Improvements 10 to 40 years Tenant Improvements Term of the related lease Furniture and Equipment 5 to 7 years Expenditures for maintenance and repairs are charged to operations as incurred. Maintenance expenditures include planned major maintenance activities such as painting, paving, HVAC and roofing repair costs. The Company expenses costs as incurred and does not accrue in advance of planned major maintenance activities. Significant renovations or betterments that extend the economic useful lives of assets are capitalized. INVESTMENTS IN LAND AND 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 UNCONSOLIDATED OPERATING JOINT VENTURES The Company's investments in operating joint ventures are accounted for using the equity method. The Company does not hold a controlling interest in any operating joint venture. 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 receivable is recognized as revenue as it accrues during the period the loan is outstanding. Mortgage loans receivable will be evaluated for impairment if it becomes evident that the borrower is unable to meet its debt service obligations in a timely manner and cannot satisfy its payments using sources other than the operations of the property securing the loan. If it is concluded that such circumstances exist, then such loan will be considered to be impaired and its recorded amount will be reduced to the 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 its mortgage loans receivable will be different than the recorded amounts. See Note 6 for further discussion. CASH AND 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. 42 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000 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. At December 31, 2001 and 2000, the Company was not a party to any open interest rate protection agreements other than the interest rate cap contract entered into in December 2001 as discussed in Note 8. 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 10.23% and 10.24% limited partner interests in the Operating Partnership not held by the Company at December 31, 2001 and 2000, respectively. REVENUES All leases are classified as operating leases. Rental revenue is recognized as earned over the terms of the related leases. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenue in the period the applicable expenses are incurred. Differences between estimated and actual amounts are recognized in the subsequent year. For the years ended December 31, 2001, 2000 and 1999, 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. The Company recognizes rental revenue on a straight-line basis at amounts that it believes it will collect on a tenant by tenant basis. The estimation process may result in higher or lower levels from period to period as the Company's collection experience and the credit quality of the Company's tenants changes. Actual amounts collected could be lower or higher than the amounts recognized on a straight-line basis if specific tenants are unable to pay rent that the Company has previously recognized as revenue, or if other tenants remain whom the Company previously believed would not. 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 re-lease 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. 43 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000 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 90% 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, 2001, 2000 and 1999, approximately 5%, 0% and 24%, respectively, of the dividends paid to common stockholders represented a return of capital for income tax purposes. For the years ended December 31, 2001, 2000 and 1999, 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, 2001, 2000 and 1999, the Company elected to distribute all of its taxable capital gain. Approximately 2%, 4% and 6% of the dividends paid to common and preferred stockholders represents a dividend taxable as long term capital gain and approximately 1%, 27% and 0% represents a dividend taxable as unrecaptured Section 1250 gain for the years ended December 31, 2001, 2000 and 1999, respectively. NOTE 3. RENTAL PROPERTY The cost and accumulated depreciation of rental property as of December 31, 2001 and 2000 are as follows (in thousands):
Buildings and Net Improve- Accumulated Recorded 2001: Land ments Total Cost Depreciation Value -------- ---------- ---------- ------------ ---------- Office properties $112,687 $ 841,178 $ 953,865 $(106,511) $ 847,354 Industrial properties 67,097 252,692 319,789 (35,944) 283,845 Retail properties 1,517 4,609 6,126 (591) 5,535 Multifamily properties and other 5,464 52,778 58,242 (3,152) 55,090 -------- ---------- ---------- --------- ---------- Total $186,765 $1,151,257 $1,338,022 $(146,198) $1,191,824 ======== ========== ========== ========= ========== 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 ======== ========== ========== ========= ==========
Acquisitions In the fourth quarter of 2001, the Company acquired a 133,000 square foot multi-tenant office building located in Alexandria, Virginia, and a 112,000 square foot multi-tenant office building and 3 1/2 level parking garage located in Newport Beach, California. The aggregate acquisition costs of approximately $54.5 million were funded primarily with the proceeds from property sales and tax-deferred exchanges. In the second quarter of 2001, the Company acquired its venture partner's interest in Canyons I and Santa Fe Ranch, two multifamily properties with a combined total of 706 units located in Fort Worth, Texas and Irving, Texas, respectively. The aggregate acquisition costs of approximately $42 million consisted of approximately $1.5 million in cash and the assumption of approximately $40.5 million in debt. In addition, the Company acquired Gateway 19, a 166,000 square foot industrial property located in Aurora, Colorado, from another development alliance. The total 44 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000 acquisition cost of $6.8 million consisted of proceeds from a tax-deferred exchange, a draw on the Credit Facility (as defined in Note 8) and the assumption of approximately $4.7 million in debt. Also in the second quarter of 2001, the Company acquired from a joint venture partner Rockwall I and II, a two-building, 343,000 square foot office property located in Rockville, Maryland. The total acquisition cost of approximately $58.8 million consisted of proceeds from tax-deferred exchanges, a draw on the Credit Facility (as defined in Note 8) and the assumption of $37 million in debt. In the first quarter of 2001, the Company acquired Creekside Business Park, a 171,000 square foot office property located in Dublin, California. The total acquisition cost of approximately $30 million consisted primarily of proceeds from tax-deferred exchanges and a draw on the Credit Facility (as defined in Note 8). During the year ended December 31, 2000, the Company acquired four properties which consisted of approximately 449,000 square feet of office and industrial space and 234 multifamily units and had aggregate acquisition costs of approximately $76 million. 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. Dispositions During the year ended December 31, 2001, the Company sold 14 properties, including six office, three industrial, four retail and one multifamily. The assets were sold for an aggregate sales price of approximately $115.5 million and generated an aggregate net gain of approximately $884,000. 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, 2001. During the year ended December 31, 2000, the Company sold 64 properties, including ten office, twelve industrial, five retail, 36 multifamily and one hotel. The assets were sold for an aggregate sales price of approximately $1 billion and generated an aggregate net gain of approximately $21.5 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, 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. The Company leases its commercial and industrial property under non-cancelable operating lease agreements. Future minimum rents to be received as of December 31, 2001 are as follows (in thousands):
Year Ending December 31, ------------ 2002 $143,652 2003 125,103 2004 102,651 2005 78,228 2006 58,760 Thereafter 132,270 -------- $640,664 ========
45 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000 NOTE 4. INVESTMENTS IN LAND AND DEVELOPMENT The Company is independently developing approximately 436,000 square feet of commercial property in California, Colorado, New Jersey and Maryland. As of December 31, 2001, the Company had invested approximately $41.1 million in these projects. Additionally, the Company has approximately 119 acres of land with a book value of approximately $19.6 million as of December 31, 2001. This land has potential for future development of approximately 1,355,000 square feet of office space. The Company is obligated to fund approximately $5.5 million to these developments in 2002. The loans secured by certain of these development properties contain recourse provisions to the Company in the aggregate amount of $26.5 million, however, some of the loans were not fully drawn as of December 31, 2001. The Company is currently involved in a number of alliances for the development of approximately 911,000 square feet of commercial properties in California and Colorado. The alliances grant the Company certain rights to purchase the properties upon completion of development. As of December 31, 2001, the Company had invested approximately $11.2 million in these alliances and had acquired properties from them aggregating approximately $114.2 million. The Company has no further contractual obligations for the future funding of these developments; however, the Company will likely be funding a portion of their working capital needs until such time as other financing is obtained. Under these alliances, the Company has provided an aggregate of $12.8 million in debt guarantees, however, some of the loans were not fully drawn as of December 31, 2001. Additionally, the Company has formed two joint ventures (the "Pauls Joint Ventures") with the Pauls Corporation ("Pauls"). The Company and Pauls each own an equal 50% interest in the Pauls Joint Ventures. The Company accounts for its investment in the Pauls Joint Ventures using the equity method. In the fourth quarter of 2000, the Pauls Joint Ventures acquired two sites aggregating 35.54 acres in the San Francisco Bay Area for mixed use development. As of December 31, 2001, the Company had invested approximately $26.2 million in these developments. The Company has no further contractual obligations for the future funding of these developments; however, the Company will likely be funding a portion of their working capital needs until such time as other financing is obtained. In addition, the loans secured by certain of these development properties contain recourse provisions to the Company in the aggregate amount of $24.8 million, however, some of the loans were not fully drawn as of December 31, 2001. NOTE 5. INVESTMENTS IN UNCONSOLIDATED OPERATING JOINT VENTURES The Company's investments in unconsolidated 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 unconsolidated operating joint ventures consist of the following as of December 31, 2001 and 2000 (dollars in thousands):
Investment Balance at December 31, Ownership Property Square Property ----------------------------- Joint Venture Interest Location Footage Type 2001 2000 ---------------------------- -------------- -------------- ------------ -------------- ------------ ------------- Rincon Center I & II 10% San 757,000 Mixed-Use $ 4,045 $ 3,952 Francisco, California Rockwall I & II 10% Rockville, 343,000 Office -- (1) 1,326 Maryland 2000 Corporate Ridge 10% McLean, 256,000 Office 4,044 3,841 Virginia --------- --------- $ 8,089 $ 9,119 ========= =========
46 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000 (1) In the second quarter of 2001, the Company acquired 100% of Rockwall I and II from the joint venture. See Note 3 for further discussion. NOTE 6. MORTGAGE LOANS RECEIVABLE The Company holds a first mortgage of approximately $39.1 million, including accrued interest, at December 31, 2001, secured by land at Gateway Park in Aurora, Colorado. The loan bears interest at a fixed rate of 13% and matures in July 2005. Periodic payments of interest and principal are received on the loan from proceeds of land parcel sales in the project. Gateway Park is a development project where the Company and the Pauls Corporation 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 5 million square feet of office and industrial space over the next ten years. NOTE 7. OTHER ASSETS As of December 31, 2001 and 2000, other assets on the consolidated balance sheets consists of the following (in thousands):
2001 2000 ------- ------- Accounts receivable, net $ 3,011 $ 2,463 Prepaid expenses 4,188 6,632 Impound accounts 4,901 7,792 Deferred leasing and financing costs, net 22,983 18,837 Investment in management contracts 2,963 3,567 Corporate office fixed assets, net 2,936 2,822 Marketable securities, at fair value 3,157 -- Other 2,775 690 ------- ------- Total other assets $46,914 $42,803 ======= =======
NOTE 8. SECURED AND UNSECURED LIABILITIES The Company had the following mortgage loans, bank lines, and notes payable outstanding as of December 31, 2001 and 2000 (in thousands):
2001 2000 -------- -------- Secured loans with various lenders, bearing interest at fixed rates between 6.77% and 8.47%, with monthly principal and interest payments ranging between $19 and $391 and maturing at various dates through July 1, 2008. These loans are secured by properties with an aggregate net carrying value of $403,982 and $303,532 at December 31, 2001 and 2000, respectively $267,728 $171,144 Secured loans with various lenders, bearing interest at variable rates ranging between 4.12% and 4.37% at December 31, 2001 and 8.11% and 9.06% at December 31, 2000, and maturing at various dates through November 28, 2003. These loans are secured by properties with an aggregate net carrying value of $124,381 and $119,008 at December 31, 2001 and 2000, respectively 99,247 108,581
47 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000
2001 2000 -------- -------- Secured loan with a bank, net of unamortized discount of $2,110 and $2,418 at December 31, 2001 and December 31, 2000, respectively. The loan has a fixed interest rate of 6.125%, a November 10, 2008 maturity date, and requires monthly principal and interest payments of $754 This loan is secured by properties with an aggregate net carrying value of $210,928 and $213,347 at December 31, 2001 and 2000, respectively $116,133 $117,476 Secured loan with an insurance company, net of unamortized discount of $959 and $1,100 at December 31, 2001 and December 31, 2000, respectively. The loan has both a fixed rate and a variable rate component. The fixed rate component of $52,812 bears interest at 6.125%, matures on November 10, 2008, and requires monthly principal and interest payments of $343. An additional variable rate financing of $52,500 was entered into in December 2001 (see below) and bears interest at a floating rate of 30-day LIBOR plus 3.25% (5.12% at December 31, 2001), matures on December 11, 2004, and requires monthly interest-only payments. The loans are cross-collateralized and are secured by properties with an aggregate net carrying value of $167,563 and $108,720 at December 31, 2001 and 2000, respectively 105,312 53,423 -------- -------- Total mortgage loans 588,420 450,624 -------- -------- Unsecured $125,000 term loan with a group of commercial banks with a variable interest rate of LIBOR plus 1.75%, monthly interest only payments and a maturity date of June 10, 2002. This loan was paid off in the second quarter of 2001 (see below) -- 125,000 Unsecured $180,000 line of credit with a group of commercial banks ("Credit Facility") with a variable interest rate of LIBOR plus 1.625% at December 31, 2001 and 2000 (3.50% and 8.19%, respectively), monthly interest only payments and a maturity date of June 10, 2003, with one option to extend for 10 years 64,594 31,053 -------- -------- Total secured and unsecured liabilities $653,014 $606,677 ======== ========
In the fourth quarter of 2001, the Company closed a $27 million secured loan which replaced four existing loans secured by seven of the Gateway Park Industrial properties located in Aurora, Colorado. The previous loans had an aggregate balance of approximately $26 million, with approximately $17 million bearing fixed interest rates ranging between 7.24% and 7.57% and maturing on May 10, 2007, and approximately $9 million bearing a floating rate of LIBOR plus 1.55% and maturing at various dates in the fourth quarter of 2001. The new loan has a maturity date of May 10, 2007 and bears interest at a fixed rate of 7.24%. The excess proceeds from the new loan were used to paydown the Credit Facility as discussed below. In the fourth quarter of 2001, the Company closed a $52.5 million secured loan with an insurance company ("Secured Financing"). The Secured Financing is an expansion of an existing $53 million loan secured by nine properties, with a maturity date of November 10, 2008 and a fixed interest rate of 6.125%. The additional $52.5 million loan bears interest at a floating rate of 30-day LIBOR plus 3.25% (5.12% at December 31, 2001) and has a separate initial maturity of December 11, 2004, with two one-year extension options. The two loans are cross-collateralized and, after the addition of two properties to the loan pool, are secured by eleven properties with an 48 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000 aggregate net book value of approximately $168 million at December 31, 2001. The excess proceeds from the Secured Financing were used to paydown the Credit Facility as discussed below. In connection with the Secured Financing, the Company entered into an interest rate cap agreement to hedge increases in 30-day LIBOR rates above a specified level. The agreement is for a term concurrent with the Secured Financing, is indexed to a 30-day LIBOR rate, is for a notional amount equal to the maximum amount available on the Secured Financing, and caps 30-day LIBOR to a maximum of 6%. As of December 31, 2001, the 30-day LIBOR rate was 1.87%. The Company paid a $594,000 fee at the inception of the cap agreement which is being amortized as additional interest expense over the life of the agreement. In the third quarter of 2001, the Company closed a $45 million secured loan with an insurance company. The new loan replaced an existing loan secured by Rockwall I and II located in Rockville, Maryland. The previous loan of $37 million, which was assumed through the acquisition of Rockwall I and II (see below), had a floating rate of LIBOR plus 2.50% and a maturity date of June 30, 2004, and was paid off with the proceeds from the new secured loan which has a maturity date of October 1, 2006, and bears interest at a fixed rate of 6.77%. The excess proceeds from the new loan were used to pay down the Credit Facility as discussed below. In the third quarter of 2001, the Company closed a $29 million secured loan with an insurance company. The new secured loan replaced the three existing loans (including two construction loans) on the first three phases of Bridgewater Executive Quarters located in Bridgewater, New Jersey. The previous loans totaling approximately $24.6 million were paid off with the proceeds from the new secured loan which has a maturity date of August 1, 2006 and bears interest at a fixed rate of 6.83%. The excess proceeds from the new loan were used to pay down the Credit Facility as discussed below. In the third quarter of 2001, the Company closed an $8 million secured loan with an insurance company. The loan is secured by an office property located in Parsippany, New Jersey, has a maturity date of August 1, 2006, and bears interest at a fixed rate of 6.86%. The proceeds from the new loan were used to pay down the Credit Facility as discussed below. In the second quarter of 2001, through the acquisition of Canyons I (see Note 3), the Company assumed a $19.1 million loan. The loan has a maturity date of March 31, 2002, and bears interest at the floating rate of LIBOR plus 2.25%. The interest rate on this loan at December 31, 2001 was 4.12%. In the second quarter of 2001, through the acquisition of Santa Fe Ranch (see Note 3), the Company assumed a $21.4 million loan. The loan had a maturity date of March 31, 2002, and a floating interest rate of LIBOR plus 2%. This loan was paid off with the sale of the Santa Fe Ranch property in the fourth quarter of 2001. In the second quarter of 2001, through the acquisition of Gateway 19 (see Note 3), the Company assumed a $4.7 million loan. The loan had a maturity date of December 1, 2001, and a floating interest rate of LIBOR plus 1.55%. This loan was paid off in the fourth quarter of 2001 with proceeds from the Gateway refinance discussed above. In the second quarter of 2001, through the acquisition of Rockwall I and II (see Note 3), the Company assumed a $37 million loan. The loan had a maturity date of June 30, 2004 and a floating rate of LIBOR plus 2.5%. This loan was refinanced in the third quarter of 2001 (see above). In the second quarter of 2001, the Company closed a $22 million secured loan with an insurance company. The new secured loan replaced the existing loan on Montrose Office Park located in Rockville, Maryland. The existing loan of $15.1 million had a floating rate of LIBOR plus 2.50% and a maturity date of June 29, 2001, and was paid off with the proceeds from the new secured loan which has a maturity date of June 28, 2006, and bears interest at a fixed rate of 6.83%. The excess proceeds from the new loan were used to pay down the Credit Facility as discussed below. 49 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000 In the first and second quarters of 2001, the Company paid off its unsecured term loan with the proceeds from the sale of its multifamily portfolio on December 29, 2000, and a draw on the Credit Facility, as discussed below. In the first quarter of 2001, the Company obtained a $14 million construction loan to build a 96,000 square foot office property in Bridgewater, New Jersey. Approximately $8.4 million was outstanding at December 31, 2001. The loan has a maturity date of January 5, 2003, and bears interest at the floating rate of LIBOR plus 2.35%. The interest rate on this loan at December 31, 2001 was 4.22%. Outstanding borrowings under the Credit Facility increased from $31,053,000 at December 31, 2000, to $64,594,000 at December 31, 2001. The increase was due to draws totaling $252,658,000 for the payoff of the unsecured term loan, stock repurchases and acquisitions, offset by pay downs totaling $219,117,000 generated from proceeds from the sales of properties, debt refinancing and cash from operations. In May 2001, the maturity date on the Credit Facility was extended from June 2002 to June 2003. In addition, the maximum amount of the Credit Facility was increased from $142 million to $180 million, with the additional proceeds applied to pay off the unsecured term loan, as discussed above. The Credit Facility requires, among other things, the Company to be in compliance with certain financial covenants and ratios. The Company has been in compliance during all of 2001 and remains in compliance at December 31, 2001. Some of the Company's properties are held in limited partnerships and limited liability companies in order to facilitate financing. All such entities are owned 100% directly or indirectly by the Company. The required principal payments on the Company's debt for the next five years and thereafter, as of December 31, 2001, are as follows (in thousands). Included in the year ending December 31, 2003, is the Credit Facility balance of $64,594 which has an initial maturity of June 10, 2003.
Year Ending December 31, ------------ 2002 $ 75,694 2003 137,179 2004 62,235 2005 24,917 2006 106,732 Thereafter 246,257 -------- Total $653,014 ========
NOTE 9. NET GAIN (LOSS) ON EARLY EXTINGUISHMENT OF DEBT In connection with various loan payoffs, as discussed above, the Company recorded a net loss on early extinguishment of debt of $1,732,000 for the year ended December 31, 2001. This loss consists of the writeoff of unamortized original issuance costs and prepayment penalties. Net loss on early extinguishment of debt of $7,910,000 during the year ended December 31, 2000, primarily consisted of $7,360,000 of losses due to prepayment penalties and writeoff of unamortized loan fees upon the payoff of approximately $257.4 million of the Company's mortgage loans which were paid off or assumed by the buyer in connection with the sale of the Company's multifamily portfolio. Additionally, in connection with the retirement of the Company's unsecured Series A Senior Notes, 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 50 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000 were paid-off early when more favorable terms were obtained through new financing and upon the sale of the properties securing the loans. NOTE 10. RELATED PARTY TRANSACTIONS Fee and reimbursement income earned by the Company from related parties totaled $6,628,000, $3,713,000 and $3,312,000 for the years ended December 31, 2001, 2000 and 1999, respectively, and consisted of property management fees, asset management fees and other fee income. In addition, the Company paid GC property management fees and salary reimbursements totaling $931,000 and $1,572,000 for the years ended December 31, 2000 and 1999, respectively, for management of a portfolio of residential properties owned by the Company, which is included in property operating expenses and general and administrative expenses on the accompanying consolidated statements of income. As discussed in Note 1, effective October 24, 2000, GC merged with the Company. NOTE 11. EARNINGS PER SHARE Earnings per share are as follows (in thousands, except for weighted average shares and per share amounts):
Years ended December 31, ------------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Net income available to common Stockholders - Basic $ 24,311 $ 18,156 $ 28,006 Minority interest 2,745 2,157 3,647 ----------- ----------- ----------- Net income available to common Stockholders - Diluted $ 27,056 $ 20,313 $ 31,653 =========== =========== =========== Weighted average shares: Basic 26,974,963 29,295,250 31,346,568 Stock options 469,834 249,200 95,026 Convertible Operating Partnership Units 3,072,728 3,479,352 4,081,033 ----------- ----------- ----------- Diluted 30,517,525 33,023,802 35,522,627 =========== =========== =========== Basic earnings per share $ 0.90 $ 0.62 $ 0.89 Diluted earnings per share $ 0.89 $ 0.62 $ 0.89
The preferred stock has been excluded from the calculation of diluted earnings per share as it is anti-dilutive in all periods presented. NOTE 12. STOCK COMPENSATION PLAN In May 1996, the Company adopted an employee stock incentive plan (the "Plan") to provide incentives to attract and retain high quality executive officers and key employees. Certain amendments to the Plan were ratified and approved by the stockholders of the Company at the Company's 1997 Annual Meeting of Stockholders. The Plan, as amended, provides for the grant of (i) shares of Common Stock of the Company, (ii) options, stock appreciation rights ("SARs") or similar rights with an exercise or conversion privilege at a fixed or variable price related to the Common Stock and/or the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or (iii) any other security with the value derived from the value of the Common Stock of the Company or other securities issued by a related entity. Such awards include, without limitation, options, SARs, sales or bonuses of restricted stock, dividend equivalent rights ("DERs"), Performance Units or Preference Shares. The total number of shares of Common Stock available under the Plan is equal to the greater of 1,140,000 shares or 8% of the number of shares outstanding determined as of the day immediately following the most recent issuance of shares of Common Stock or securities convertible into shares of Common Stock; provided that the maximum 51 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000 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, CEO of the Company, and 300,000 non-qualified stock options to Andrew Batinovich, COO of the Company, outside the Plan, at exercise prices ranging from $27.03 to $37.84. The Company accounts for the fair value of the options and bonus grants in accordance with APB Opinion No. 25. As of December 31, 2001, 103,062 shares of bonus grants were outstanding 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, 2001, 4,146,186 options to purchase shares of Common Stock were outstanding under the Plan, including the 1,000,000 stock options granted to Robert Batinovich and Andrew Batinovich as described above. The exercise price of each incentive stock option granted is greater than or equal to the per-share fair market value of the Common Stock on the date the option is granted and, as such, no compensation expense has been recognized. The options vest over periods between 1 and 6 years, and have a maximum term of 10 years. As permitted by Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation" (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).
2001 2000 1999 ------- ------- ------- Net income As reported $24,311 $18,156 $28,006 SFAS No. 123 Adjustment (2,210) (2,736) (2,380) Pro forma $22,101 $15,420 $25,626 ======= ======= ======= Basic earnings per share As reported $0.90 $0.62 $0.89 SFAS No. 123 Adjustment (0.08) (0.09) (0.07) ------- ------- ------- Pro forma $0.82 $0.53 $0.82 ======= ======= ======= Diluted earnings per share As reported $0.89 $0.62 $0.89 SFAS No. 123 Adjustment (0.07) (0.08) (0.07) ------- ------- ------- Pro forma $0.82 $0.54 $0.82 ======= ======= =======
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 2001, 2000 and 1999, respectively: expected dividend yield of 9.09%, 10.44% and 10.22%, expected volatility of 28.42%, 28.77% and 29.93% and weighted average risk-free interest rate of 4.73%, 5.09% and 6.44%. Expected lives of 10, 7, 5 and 2 years were used in each of 2001, 2000 and 1999. Based on these assumptions, the weighted average fair value of options granted would be calculated as $1.68, $0.91 and $1.33 in 2001, 2000 and 1999, respectively. Compensation cost has been adjusted by 4.50%, 18.27% and 4.54% in 2001, 2000 and 1999, respectively, to account for assumed forfeitures based on historical experience and management expectations. A summary of the status of the Company's stock option plan as of December 31, 2001, 2000 and 1999, and changes during the years then ended is presented in the table below: 52 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000
2001 2000 1999 --------------------------- ---------------------------- --------------------------- Weighted Weighted Weighted Avg Avg Avg Exercise Exercise Exercise Shares Price Shares Price Shares Price -------- -------- ---------- -------- -------- -------- Outstanding at beginning of year 3,683,186 $20.53 4,583,786 $22.13 3,787,293 $24.75 Granted 640,000 $17.79 497,000 $15.91 1,112,000 $13.07 Exercised (15,000) $14.00 (53,500) $15.00 (85,007) $15.00 Forfeited/Cancelled (162,000) $18.02 (1,344,100) $24.36 (230,500) $24.18 --------- ------ --------- ------ --------- ------ Outstanding at end of year 4,146,186 $20.23 3,683,186 $20.53 4,583,786 $22.13 Exercisable at end of year 2,661,802 $22.23 948,332 $17.07 1,152,831 $21.69
The following table summarizes information about stock options outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------------- ---------------------------------- Number Weighted-average Weighted- Number Outstanding remaining average Exercisable at Weighted-average Range of Exercise Prices at 12/31/01 contractual life exercise price 12/31/01 exercise price ------------------------ --------------- ----------------- -------------- --------------- ---------------- $11.35 to $15.14 1,419,086 6.0 years $13.41 964,670 $13.65 $15.14 to $18.92 1,122,500 7.8 years $17.21 320,000 $16.79 $18.92 to $22.70 563,600 5.9 years $21.32 349,012 $21.39 $22.70 to $26.49 29,000 4.7 years $24.65 22,120 $24.54 $26.49 to $30.27 345,333 6.7 years $27.13 339,333 $27.08 $30.27 to $34.06 333,333 6.8 years $32.44 333,333 $32.44 $34.06 to $37.84 333,334 6.8 years $37.84 333,334 $37.84 --------- --------- ------ ------- ------ 4,146,186 $20.23 2,661,802 $22.23
NOTE 13. RETIREMENT BENEFITS In 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. During the years ended December 31, 2001 and 2000, the Company recognized general and administrative expense of approximately $705,000 and $3.3 million, respectively, representing the currently vested portion. Future costs for these agreements will be accrued over the vesting periods. NOTE 14. PROVISIONS FOR IMPAIRMENT OF ASSETS 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. 53 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000 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, 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. In addition, although the Company's existing policies of insurance covering property damage do not exclude coverage for acts of terrorism, it is possible that such an exclusion could be imposed by an insurance carrier either during the current policy term upon satisfaction of certain notice requirements, or upon future policy renewal, in which case any losses from acts of terrorism might be uninsured. 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. Litigation 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. NOTE 16. SEGMENT INFORMATION During the year ended December 31, 2001, the Company owned a portfolio of properties comprising four product types: office, industrial, retail and multifamily. During the years ended December 31, 2000 and 1999, the Company's portfolio was comprised of five product types: office, industrial, retail, multifamily and hotel. Each of these product types represents a reportable segment with distinct uses and tenant types that 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 during the year ended December 31, 2000 were from one 227-room property leased to and operated by a third party. In December 2000, 36 of the Company's multifamily properties and the one remaining hotel property were sold. As of December 31, 2001, the Company owns two multifamily Properties with 868 total units located in Texas. 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, 2001, 2000 and 1999 is as follows (in thousands): 54 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000
Multi- 2001 Office Industrial Retail family Hotel Total ---- -------- -------- ------- -------- ------ ---------- Rental revenue $137,489 $ 40,075 $ 2,497 $ 8,622 $ -- $ 188,683 Property operating expenses 49,149 9,055 537 3,468 -- 62,209 -------- -------- ------- -------- ------ ---------- Net operating income (NOI) $ 88,340 $ 31,020 $ 1,960 $ 5,154 $ -- $ 126,474 ======== ======== ======= ======== ====== ========== Real estate assets, net $847,354 $283,845 $ 5,535 $ 55,090 $ -- $1,191,824 ======== ======== ======= ======== ====== ========== 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 ======== ======== ======= ======== ====== ==========
The following is a reconciliation of segment revenues, income and assets to consolidated revenues, income and assets for the periods presented above (in thousands):
2001 2000 1999 --------- --------- --------- REVENUES Total revenue for reportable segments $ 188,683 $ 242,582 $ 255,339 Other revenue(1) 11,794 13,093 10,628 --------- --------- --------- Total consolidated revenues $ 200,477 $ 255,675 $ 265,967 ========= ========= ========= NET INCOME NOI for reportable segments $ 126,474 $ 152,099 $ 159,240 Elimination of internal property management fees 5,352 7,577 8,062 Unallocated amounts: Other revenue(1) 11,794 13,093 10,628 General and administrative expenses (10,458) (13,353) (9,688) Depreciation and amortization (47,892) (59,490) (58,295) Interest expense (37,802) (63,281) (64,782) 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) --------- --------- --------- Income before gain on sales of real estate assets, minority interest and extraordinary item $ 47,468 $ 27,441 $ 43,936 ========= ========= =========
55 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000
2001 2000 1999 ---------- ---------- ---------- ASSETS Total assets for reportable segments $1,191,824 $1,093,505 $1,641,891 Investments in land and development 98,105 86,286 38,773 Investments in unconsolidated operating joint ventures 8,089 9,119 5,679 Mortgage loans receivable 39,061 37,250 37,582 Investment in Associated Company -- -- 9,404 Cash and cash equivalents 4,410 102,195 6,482 Other assets 46,914 42,803 54,793 ---------- ---------- ---------- Total consolidated assets $1,388,403 $1,371,158 $1,794,604 ========== ========== ==========
(1) Other revenue includes fee income, interest and other income, equity in earnings of Associated Company and equity in earnings (losses) of unconsolidated operating joint ventures. 56 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000 NOTE 17. UNAUDITED QUARTERLY RESULTS OF OPERATIONS The following represents an unaudited summary of quarterly results of operations for the years ended December 31, 2001 and 2000 (in thousands, except for weighted average shares and per share amounts):
Quarter Ended --------------------------------------------------------------- March 31, June 30, Sept 30, Dec 31, 2001 2001 2001 2001 ------------ ------------ ------------ ------------ REVENUE Rental revenue $ 43,904 $ 47,710 $ 48,739 $ 48,330 Fees and reimbursements from affiliates 2,310 1,206 1,785 1,327 Interest and other income 1,952 799 628 1,541 Equity in earnings (losses) of unconsolidated operating joint ventures 52 (1) 38 157 ------------ ------------ ------------ ------------ Total revenue 48,218 49,714 51,190 51,355 ------------ ------------ ------------ ------------ EXPENSES Property operating expenses 14,093 13,703 14,546 14,515 General and administrative 3,083 2,968 2,374 2,033 Depreciation and amortization 10,838 11,976 12,065 13,013 Interest expense 8,876 9,487 9,855 9,584 ------------ ------------ ------------ ------------ Total expenses 36,890 38,134 38,840 39,145 ------------ ------------ ------------ ------------ Income before gain or loss on sales of real estate assets, minority interest and extraordinary item 11,328 11,580 12,350 12,210 Net gain (loss) on sales of real estate assets 58 (182) 3,007 (1,999) ------------ ------------ ------------ ------------ Income before minority interest and extraordinary item 11,386 11,398 15,357 10,211 Minority interest (587) (631) (996) (531) ------------ ------------ ------------ ------------ Net income before extraordinary item 10,799 10,767 14,361 9,680 Extraordinary item: Net loss on early extinguishment of debt (763) (262) (682) (25) ------------ ------------ ------------ ------------ Net income 10,036 10,505 13,679 9,655 Preferred dividends (4,891) (4,891) (4,891) (4,891) ------------ ------------ ------------ ------------ Net income available to Common Stockholders $ 5,145 $ 5,614 $ 8,788 $ 4,764 ============ ============ ============ ============ Basic Per Share Data: Net income before extraordinary item $ 0.22 $ 0.22 $ 0.35 $ 0.18 Extraordinary item (0.03) (0.01) (0.02) -- ------------ ------------ ------------ ------------ Net income available to Common Stockholders $ 0.19 $ 0.21 $ 0.33 $ 0.18 ============ ============ ============ ============ Basic weighted average shares outstanding 26,992,324 26,989,534 26,984,208 26,934,323 ============ ============ ============ ============ Diluted Per Share Data: Net income before extraordinary item $ 0.22 $ 0.21 $ 0.34 $ 0.17 Extraordinary item (0.03) (0.01) (0.02) -- ------------ ------------ ------------ ------------ Net income available to Common Stockholders $ 0.19 $ 0.20 $ 0.32 $ 0.17 ============ ============ ============ ============ Diluted weighted average shares outstanding 30,476,401 30,467,322 30,588,078 30,472,064 ============ ============ ============ ============
Quarterly 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. 57 GLENBOROUGH REALTY TRUST INCORPORATED Notes to Consolidated Financial Statements December 31, 2001 and 2000
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) ---------- ---------- ---------- ---------- Total revenue 64,860 66,574 61,907 62,334 ---------- ---------- ---------- ---------- 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 (loss) before gain or loss on sales of real estate assets, minority interest and extraordinary item 9,518 11,113 11,079 (4,269) Net gain (loss) on sales of real estate assets (695) (2,347) 4,694 19,843 ---------- ---------- ---------- ---------- Income 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 ========== ========== ========== ==========
Quarterly 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. 58 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2001 (in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D Costs Capitalized/ (Reduced) Subsequent Initial Cost to to Company(1) Acquisition(4) --------------------- ------------ Buildings and Description Encumbrances Land Improvements Improvements ------------------------------------ ------------ ------ ------------ ------------ Office Properties: 400 South El Camino Real, CA $(7) $4,000 $30,549 $7,443 Centerstone, CA (6) 6,077 24,265 815 Creekside Business Park, CA -- 4,458 23,790 -- Newport Plaza, CA (7) 3,981 22,674 3 Tierrasanta Research Park, CA (8) 1,303 5,189 922 University Tech Center, CA (2) -- 2,086 8,046 648 Northglenn Business Center, CO -- 1,335 3,354 335 Gateway Park, CO (9) 1,420 18,104 1,258 Buschwood III, FL (8) 1,479 5,890 973 Fingerhut Business Center, FL -- 1,188 3,282 10 Grand Regency Business Center, FL -- 1,120 4,302 1,102 Park Place, FL (7) 1,895 12,982 1,330 PrimeCo Business Center, FL -- 950 3,418 12 Temple Terrace Business Center, FL -- 1,788 6,949 51 Ashford Perimeter, GA 19,927 1,174 42,227 3,202 Capitol Center, IA (7) 500 11,981 763 Columbia Center II, IL (7) 208 20,329 1,464 Embassy Plaza, IL -- 436 15,680 3,974 Oak Brook International Center, IL -- 757 11,126 1,857 Oakbrook Terrace Corp Ctr III, IL 18,366 552 37,635 1,511 Osram Building, IN -- 264 4,515 87 Leawood Office Building, KS 4,050 1,124 10,300 581 Bronx Park I, MA -- 916 9,104 813 Marlborough Corp Place, MA (8) 3,390 55,908 4,037 Hartwood Building, MA 2,429 527 5,426 339 Westford Corporate Center, MA (6) 2,091 8,310 803 Germantown, MD (8) 1,442 5,753 23 Montgomery Executive Center, MD (7) 1,928 7,676 794 Montrose Office Park, MD 21,887 3,871 20,360 1,195 Rockwall I & II, MD 44,884 6,821 50,137 3,097 Bryant Lake, MN (8) 1,907 7,531 1,567 Riverview Office Tower, MN (6) 4,095 16,333 2,463 University Club Tower, MO -- 4,087 14,519 3,675
GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2001 (in thousands)
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H Gross Amount Carried at December 31,2001 ------------------------------------ Buildings Life and Accum. Date Deprec. Description Land Improvements Total(3) Deprec. Acquired(1) Over ------------------------------------ ------ ------------ ------- ------ ----------- ------- Office Properties: 400 South El Camino Real, CA $4,000 $37,992 $41,992 $6,688 3/98 1-30 yrs. Centerstone, CA 6,077 25,080 31,157 3,863 7/97 1-30 yrs. Creekside Business Park, CA 4,458 23,790 28,248 595 3/01 1-30 yrs. Newport Plaza, CA 3,981 22,677 26,658 188 10/01 1-30 yrs. Tierrasanta Research Park, CA 1,303 6,111 7,414 1,194 9/97 1-30 yrs. University Tech Center, CA (2) 2,086 8,694 10,780 1,424 6/97 1-30 yrs. Northglenn Business Center, CO 1,335 3,689 5,024 523 12/97 1-30 yrs. Gateway Park, CO 1,420 19,362 20,782 1,780 7/98 1-30 yrs. Buschwood III, FL 1,479 6,863 8,342 1,110 9/97 1-30 yrs. Fingerhut Business Center, FL 1,188 3,292 4,480 466 12/97 1-30 yrs. Grand Regency Business Center, FL 1,120 5,404 6,524 1,040 12/97 1-30 yrs. Park Place, FL 1,895 14,312 16,207 2,166 1/98 1-30 yrs. PrimeCo Business Center, FL 950 3,430 4,380 486 12/97 1-30 yrs. Temple Terrace Business Center, FL 1,788 7,000 8,788 996 12/97 1-30 yrs. Ashford Perimeter, GA 1,174 45,429 46,603 6,105 1/98 1-30 yrs. Capitol Center, IA 500 12,744 13,244 1,748 2/98 1-30 yrs. Columbia Center II, IL 208 21,793 22,001 3,076 1/98 1-30 yrs. Embassy Plaza, IL 436 19,654 20,090 3,242 1/98 1-30 yrs. Oak Brook International Center, IL 757 12,983 13,740 1,817 1/98 1-30 yrs. Oakbrook Terrace Corp Ctr III, IL 552 39,146 39,698 5,204 1/98 1-30 yrs. Osram Building, IN 264 4,602 4,866 570 4/98 1-30 yrs. Leawood Office Building, KS 1,124 10,881 12,005 1,437 3/98 1-30 yrs. Bronx Park I, MA 916 9,917 10,833 1,549 3/98 1-30 yrs. Marlborough Corp Place, MA 3,390 59,945 63,335 8,213 1/98 1-30 yrs. Hartwood Building, MA 527 5,765 6,292 792 3/98 1-30 yrs. Westford Corporate Center, MA 2,091 9,113 11,204 1,467 4/97 1-30 yrs. Germantown, MD 1,442 5,776 7,218 869 9/97 1-30 yrs. Montgomery Executive Center, MD 1,928 8,470 10,398 1,492 9/97 1-30 yrs. Montrose Office Park, MD 3,871 21,555 25,426 1,860 7/99 1-30 yrs. Rockwall I & II, MD 6,821 53,234 60,055 1,121 6/01 1-30 yrs. Bryant Lake, MN 1,907 9,098 11,005 1,373 11/97 1-30 yrs. Riverview Office Tower, MN 4,095 18,796 22,891 3,219 4/97 1-30 yrs. University Club Tower, MO 4,087 18,194 22,281 3,830 7/96 1-40 yrs.
59 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2001 (in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D Costs Capitalized/ (Reduced) Subsequent Initial Cost to to Company(1) Acquisition(4) --------------------- ------------ Buildings and Description Encumbrances Land Improvements Improvements ------------------------------------ ------------ ------ ------------ ------------ Office Properties continued: Woodlands Plaza, MO $(6) $1,114 $4,426 $827 Woodlands Tech, MO (6) 949 3,773 440 One Pacific Place, NE (8) 1,034 18,014 2,419 25 Independence, NJ (8) 4,547 18,141 813 Bridgewater Exec Qrtrs I, II and III, NJ 37,237 6,387 18,359 12,726 Executive Place, NJ -- 944 11,347 58 Fairfield Business Quarters, NJ 2,407 817 3,479 74 Frontier Executive Quarters I and II, NJ (8) 4,831 38,938 708 Gatehall I, NJ 7,966 1,865 7,427 1,227 Vreeland Business Center, NJ -- 1,863 8,714 58 Citibank, NV (8) 4,628 18,442 2,490 Clark Avenue, NV -- 649 2,584 163 Thousand Oaks, TN -- 7,249 40,355 (1,968) 700 South Washington, VA (6) 1,981 7,894 762 Cameron Run, VA 9,672 439 18,964 672 King Street Station, WA (7) 4,220 24,016 -- ------------------------------------------------------------------------------------------------ Office Total 112,687 772,562 68,616 ------------------------------------------------------------------------------------------------ Industrial Properties: Bellanca Airport Park, CA -- 8,697 -- -- Coronado Industrial, CA (7) 711 2,831 106 East Anaheim, CA (8) 1,480 3,282 42 Rollins Road, CA 28,000 18,880 4,754 75 Springdale Commerce Center, CA (7) 1,030 4,101 128 Gateway Park Industrial, CO (9) 6,187 51,895 1,606 Lake Point Business Park, FL (6) 1,344 5,343 1,194 Navistar International, IL (5) -- 793 10,941 (4,122) Covance Business Center, IN 17,162 1,405 15,109 11,797 Park 100, IN (5) -- 427 1,813 17 J.I. Case Equipment Corp., KS (5) -- 236 3,264 (1,241) Canton Business Center, MA -- 796 6,758 142 Fisher-Pierce Industrial, MA (6) 718 2,860 140
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H Gross Amount Carried at December 31,2001 ------------------------------------ Buildings Life and Accum. Date Deprec. Description Land Improvements Total(3) Deprec. Acquired(1) Over ------------------------------------ ------ ------------ ------- ------ ----------- ------- Office Properties continued: Woodlands Plaza, MO $1,114 $5,253 $6,367 $971 4/97 1-30 yrs. Woodlands Tech, MO 949 4,213 5,162 890 4/97 1-30 yrs. One Pacific Place, NE 1,034 20,433 21,467 2,641 5/98 1-30 yrs. 25 Independence, NJ 4,547 18,954 23,501 2,852 9/97 1-30 yrs. Bridgewater Exec Qrtrs I, II and III, NJ 6,387 31,085 37,472 3,358 9/97 1-30 yrs. Executive Place, NJ 944 11,405 12,349 1,329 8/98 1-30 yrs. Fairfield Business Quarters, NJ 817 3,553 4,370 533 9/97 1-30 yrs. Frontier Executive Quarters I and II, NJ 4,831 39,691 44,522 5,976 9/97 1-30 yrs. Gatehall I, NJ 1,865 8,654 10,519 1,423 9/97 1-30 yrs. Vreeland Business Center, NJ 1,863 8,772 10,635 1,099 6/98 1-30 yrs. Citibank, NV 4,628 20,932 25,560 3,114 9/97 1-30 yrs. Clark Avenue, NV 649 2,747 3,396 453 9/97 1-30 yrs. Thousand Oaks, TN 7,249 38,387 45,636 6,157 12/97 1-30 yrs. 700 South Washington, VA 1,981 8,656 10,637 1,424 4/97 1-30 yrs. Cameron Run, VA 439 19,636 20,075 2,655 1/98 1-30 yrs. King Street Station, WA 4,220 24,016 28,236 133 10/01 1-30 yrs. ---------------------------------------------------------------------------------------------------------------------- Office Total 112,687 841,178 953,865 106,511 ---------------------------------------------------------------------------------------------------------------------- Industrial Properties: Bellanca Airport Park, CA 8,697 -- 8,697 -- 2/99 n/a Coronado Industrial, CA 711 2,937 3,648 465 9/97 1-30 yrs. East Anaheim, CA 1,480 3,324 4,804 483 10/97 1-30 yrs. Rollins Road, CA 18,880 4,829 23,709 363 11/00 1-30 yrs. Springdale Commerce Center, CA 1,030 4,229 5,259 682 9/97 1-30 yrs. Gateway Park Industrial, CO 6,187 53,501 59,688 5,701 7/98 1-30 yrs. Lake Point Business Park, FL 1,344 6,537 7,881 1,213 4/97 1-30 yrs. Navistar International, IL (5) 793 6,819 7,612 2,471 3/84 40 yrs. Covance Business Center, IN 1,405 26,906 28,311 2,130 7/98 1-30 yrs. Park 100, IN (5) 427 1,830 2,257 1,101 10/86 5-25 yrs. J.I. Case Equipment Corp., KS (5) 236 2,023 2,259 723 3/84 40 yrs. Canton Business Center, MA 796 6,900 7,696 924 3/98 1-30 yrs. Fisher-Pierce Industrial, MA 718 3,000 3,718 472 4/97 1-30 yrs.
60 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND DEPRECIATION DECEMBER 31, 2001 (in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D Costs Capitalized/ (Reduced) Subsequent Initial Cost to to Company(1) Acquisition(4) --------------------- ------------ Buildings and Description Encumbrances Land Improvements Improvements ------------------------------------ ------------ ------ ------------ ------------ Industrial Properties continued: Flanders Industrial Park, MA $-- $739 $5,634 $619 Forest Street Business Center, MA -- 228 1,801 49 Southworth-Milton, MA (6) 1,921 7,652 80 Navistar International, MD (5) -- 356 4,911 (1,867) Winnetka Industrial Center, MN -- 1,142 4,737 949 Cottontail Distribution Center, NJ 4,926 1,616 16,278 81 Fox Hollow Business Quarters I, NJ -- 1,576 2,358 634 One Taft Industrial, NJ -- 1,326 4,975 363 Palms Business Center III and South, NV (7),(8) 8,118 19,817 1,113 Palms Business Center IV and North, NV (7),(8) 3,118 10,339 453 Lehigh Valley, PA -- 1,748 12,826 866 Valley Forge Corp Ctr, PA -- 2,505 33,359 1,830 ----------------------------------------------------------------------------------------------- Industrial Total 67,097 237,638 15,054 ----------------------------------------------------------------------------------------------- Retail Properties: Cross Creek Retail Centre, IN 4,869 1,517 4,351 258 ----------------------------------------------------------------------------------------------- Retail Total 1,517 4,351 258 ----------------------------------------------------------------------------------------------- Multifamily Properties and Other: Canyons I, TX 19,123 2,638 24,147 80 Springs of Indian Creek, TX 26,600 2,826 34,885 522 Miscellaneous Investments -- -- -- (6,856) ----------------------------------------------------------------------------------------------- Multifamily and Other Total 5,464 59,032 (6,254) ----------------------------------------------------------------------------------------------- Combined Total $588,420 $186,765 $1,073,583 $77,674 ===============================================================================================
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H Gross Amount Carried at December 31,2001 ------------------------------------ Buildings Life and Accum. Date Deprec. Description Land Improvements Total(3) Deprec. Acquired(1) Over ------------------------------------ ------ ------------ ------- ------ ----------- ------- Industrial Properties continued: Flanders Industrial Park, MA $739 $6,253 $6,992 $912 3/98 1-30 yrs. Forest Street Business Center, MA 228 1,850 2,078 243 3/98 1-30 yrs. Southworth-Milton, MA 1,921 7,732 9,653 1,226 4/97 1-30 yrs. Navistar International, MD (5) 356 3,044 3,400 1,082 3/84 40 yrs. Winnetka Industrial Center, MN 1,142 5,686 6,828 894 9/97 1-30 yrs. Cottontail Distribution Center, NJ 1,616 16,359 17,975 2,045 6/98 1-30 yrs. Fox Hollow Business Quarters I, NJ 1,576 2,992 4,568 486 9/97 1-30 yrs. One Taft Industrial, NJ 1,326 5,338 6,664 836 9/97 1-30 yrs. Palms Business Center III and South, NV 8,118 20,930 29,048 3,217 10/97 1-30 yrs. Palms Business Center IV and North, NV 3,118 10,792 13,910 1,597 10/97 1-30 yrs. Lehigh Valley, PA 1,748 13,692 15,440 1,952 1/98 1-30 yrs. Valley Forge Corp Ctr, PA 2,505 35,189 37,694 4,726 1/98 1-30 yrs. -------------------------------------------------------------------------------------------------------------------- Industrial Total 67,097 252,692 319,789 35,944 -------------------------------------------------------------------------------------------------------------------- Retail Properties: Cross Creek Retail Centre, IN 1,517 4,609 6,126 591 4/98 1-30 yrs. ------------------------------------------------------------------------------------------- ------------------------ Retail Total 1,517 4,609 6,126 591 -------------------------------------------------------------------------------------------------------------------- Multifamily Properties and Other: Canyons I, TX 2,638 24,227 26,865 538 4/01 1-30 yrs. Springs of Indian Creek, TX 2,826 35,407 38,233 2,614 2/99 1-30 yrs. Miscellaneous Investments -- (6,856) (6,856) -- -------------------------------------------------------------------------------------------------------------------- Multifamily and Other Total 5,464 52,778 58,242 3,152 -------------------------------------------------------------------------------------------------------------------- Combined Total $186,765 $1,151,257 $1,338,022 $146,198 ====================================================================================================================
(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 $1,254,526. (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 - $48,927. (7) Cross collateralized loan secured by 11 properties - $105,312. (8) Cross collateralized loan secured by 12 properties - $116,133. (9) Cross collateralized loans secured by properties at Gateway Office and Industrial Park - $48,543. 61 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 (in thousands) Reconciliation of gross amount at which real estate was carried for the years ended December 31:
2001 2000 1999 ----------- ----------- ----------- Rental Property: Balance at beginning of year $ 1,208,566 $ 1,756,061 $ 1,825,308 Additions during year: Property acquisitions and additions 252,533 79,214 119,251 Retirements/sales (121,942) (620,710) (183,545) Provision for impairment -- (4,800) -- Miscellaneous (1,135) (1,199) (4,953) ----------- ----------- ----------- Balance at end of year $ 1,338,022 $ 1,208,566 $ 1,756,061 =========== =========== =========== Accumulated Depreciation: Balance at beginning of year $ 115,061 $ 114,170 $ 82,869 Additions during year: Depreciation 43,282 55,356 56,004 Retirements/sales (12,145) (54,465) (24,703) ----------- ----------- ----------- Balance at end of year $ 146,198 $ 115,061 $ 114,170 =========== =========== ===========
62 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE December 31, 2001 (in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D Description of Loan and Current Periodic Securing Property Interest Rate Maturity Date Payment Terms ----------------- ------------- ------------- ------------- First Mortgage Loan 13% 7/1/05 Periodic interest and Secured by land located in principal payments from Aurora, Colorado proceeds of land parcel sales in the project
GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE December 31, 2001 (in thousands)
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H Carrying Amount, Principal Amount of including Loans Subject to Description of Loan and Face accrued Delinquent Securing Property Prior Liens Amount interest Principal or Interest ----------------- ----------- ------ -------- --------------------- First Mortgage Loan None None Secured by land located in Aurora, Colorado $ 43,082 $ 39,061 ======== ==========
63 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE December 31, 2001 (in thousands) The following is a summary of changes in the carrying amount of mortgage loans for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 -------- -------- -------- Balance at beginning of year $ 37,250 $ 37,582 $ 42,420 Additions during year: New mortgage loans -- -- 1,141 Interest accruals 4,090 3,900 3,653 Deductions during year: Collections of principal -- (2,407) (4,396) Collections of interest (2,279) (1,825) (2,407) Reduction in principal -- -- (1,600) Loss on sale -- -- (1,229) -------- -------- -------- Balance at end of year $ 39,061 $ 37,250 $ 37,582 ======== ======== ========
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, 2002 /s/ Robert Batinovich ------------------------------------------ Robert Batinovich Chairman of the Board and Chief Executive Officer Date: March 21, 2002 /s/ Andrew Batinovich ------------------------------------------ Andrew Batinovich Director, President and Chief Operating Officer Date: March 21, 2002 /s/ Stephen Saul ------------------------------------------ Stephen Saul Chief Financial Officer (Principal Financial Officer) Date: March 21, 2002 /s/ Brian Peay ------------------------------------------ Brian Peay Vice President, Finance and Accounting (Principal Accounting Officer) Date: March 21, 2002 /s/ Laura Wallace ------------------------------------------ Laura Wallace Director 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.
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 11 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 99 Company Representation from Independent Accountants * Indicates management contract or compensatory plan or arrangement.
67