-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J35QlTnMSSVoUrXvTEp7znOoeMc1HkVgNx91Fiu39907wP1B9xwR0QbUCl/J5p5i q0o2HTY7sqjamQswDOR8+w== 0000929454-98-000022.txt : 19980911 0000929454-98-000022.hdr.sgml : 19980911 ACCESSION NUMBER: 0000929454-98-000022 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980910 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLENBOROUGH REALTY TRUST INC CENTRAL INDEX KEY: 0000929454 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 943211970 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-14162 FILM NUMBER: 98706408 BUSINESS ADDRESS: STREET 1: 400 SOUTH EL CAMINO REAL STREET 2: STE 1100 CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 6503439300 MAIL ADDRESS: STREET 1: 400 SOUT EL CAMINO REAL STREET 2: 11TH FL CITY: SAN MATEO STATE: CA ZIP: 94402 10-K/A 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 (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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-14162 GLENBOROUGH REALTY TRUST INCORPORATED (Exact name of Registrant as specified in its charter) Maryland 94-3211970 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 400 South El Camino Real, 94402-1708 Suite 1100 San Mateo, California - (650) 343-9300 (Zip Code) (Address of principal executive offices and telephone number) Securities registered under Section 12(b) of the Act: Name of Exchange Title of each class: on which registered: Common Stock, $.001 par value New York Stock Exchange 7 3/4% Series A Convertible Preferred Stock, $.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 20, 1998, the aggregate market value of the voting stock held by nonaffiliates of the registrant was $886,666,791. The aggregate market value was computed with reference to the closing price on the New York Stock Exchange on such date. This calculation does not reflect a determination that persons are affiliates for any other purpose. As of March 20, 1998, 31,549,256 shares of Common Stock ($.001 par value) and 11,500,000 shares of 7 3/4% Series A Convertible Preferred Stock ($.001 par value) were outstanding. DOCUMENTS INCORPORATED: 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 14, 1998. EXHIBITS: The index of exhibits is contained in Part IV herein on page number 83. 1 This Form 10-K of Glenborough Realty Trust Incorporated (the "Company") for the year ended December 31, 1997 is being amended and restated in its entirety to (i) amend Item 3, Legal Proceedings, to add certain information therein, (ii) amend Item 6, Selected Financial Data, to add certain line items in that Item's financial tables and to revise certain footnotes and other disclosures therein, (iii) amend Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, to revise certain captions in the risk factor sections of such Item (the sections that follow the caption "Forward Looking Statements; Factors That May Affect Operating Results") and to add and revise certain information in such risk factor sections, (iv) amend Item 14, Financial Statements, Schedules and Reports on Form 8-K, to add certain information to Note 2, Note 4 and Note 12 of the Notes to the Company's Consolidated Financial Statements and (v) amend and restate in their entirety Exhibit 12.1 and Exhibit 23.1. TABLE OF CONTENTS Page No. PART I Item 1 Business 3 Item 2 Properties 6 Item 3 Legal Proceedings 15 Item 4 Submission of Matters to a Vote of Security Holders 16 PART II Item 5 Market for Registrant's Common Stock and Related Stockholder Matters 17 Item 6 Selected Financial Data 18 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 8 Financial Statements and Supplementary Data 35 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35 PART III Item 10 Directors and Executive Officers of the Registrant 36 Item 11 Executive Compensation 36 Item 12 Security Ownership of Certain Beneficial Owners and Management 36 Item 13 Certain Relationships and Related Transactions 36 PART IV Item 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 37 2 PART I Item 1. Business General Development and Description of Business Glenborough Realty Trust Incorporated (the "Company") is a self-administered and self-managed real estate investment trust ("REIT") engaged primarily in the ownership, operation, management, leasing and acquisition of various types of income-producing properties. As of December 31, 1997, the Company owned and operated 128 income-producing properties (the "Properties," and each a "Property") and held two mortgage receivables. The Properties are comprised of 30 office Properties, 43 office/flex Properties, 26 industrial Properties, 9 retail Properties, 14 multi-family Properties and 6 hotel Properties, located in 23 states. The Company was incorporated in the State of Maryland on August 26, 1994. On December 31, 1995, the Company completed a consolidation (the "Consolidation") in which Glenborough Corporation, a California corporation, and eight public limited partnerships (the "Partnerships") collectively, the "GRT Predecessor Entities", merged with and into the Company. The Company (i) issued 5,753,709 shares (the "Shares") of the $.001 par value Common Stock of the Company to the Partnerships in exchange for the net assets of the Partnerships; (ii) merged with Glenborough Corporation, with the Company being the surviving entity; (iii) acquired an interest in three companies (the "Associated Companies"), two of which merged on June 30, 1997, that provide asset and property management services, as well as other services; and (iv) through a subsidiary operating partnership, Glenborough Properties, L.P. (the "Operating Partnership"), acquired interests in certain warehouse distribution facilities from GPA, Ltd., a California limited partnership ("GPA"). A portion of the Company's operations are conducted through the Operating Partnership, of which the Company is the sole general partner, and in which the Company holds a 91.48% limited partner interest. The Company operates the assets acquired in the Consolidation and in subsequent acquisitions (see further discussion below) and intends to invest in income property directly and through joint ventures. In addition, the Associated Companies may acquire general partner interests in other real estate limited partnerships. The Company has elected to qualify as a REIT under the Internal Revenue Code of 1986, as amended. The common stock of the Company (the "Common Stock") is listed on the New York Stock Exchange ("NYSE") under the trading symbol "GLB". The Company seeks to achieve sustainable long-term growth in Funds from Operations primarily through the following strategies: Acquiring diversified portfolios or individual properties on attractive terms, often from public and private partnerships as well as from other REITs, life insurance companies and other institutions; Improving the performance of Properties in the Company's portfolio; Constantly reviewing the Company's current portfolio for opportunities to redeploy capital from certain existing Properties into other properties which the Company believes have characteristics more suited to its overall growth strategy and operating goals; and Entering into real estate development joint ventures with selected real estate developers. Since the Consolidation, and consistent with its strategy for growth, the Company has completed the following transactions: Acquired 20 properties in the third and fourth quarters of 1996 and 90 properties in 1997. In addition, the Company has acquired 16 properties subsequent to December 31, 1997. The total acquired Properties consist of an aggregate of approximately 12.6 million rentable square feet, 2,147 multi-family units and 227 hotel suites and had aggregate acquisition costs, including capitalized costs, of approximately $1.2 billion. In addition, the Company has entered into two separate definitive agreements, subject to a number of contingencies, to acquire 12 properties in 5 states, aggregating 1,006,622 rentable square feet. However, there can be no assurance that any or all of these properties will be acquired. From January 1, 1996 to the date of this filing, sold four industrial properties, 16 retail properties and one multi-family property to redeploy capital into properties the Company believes have characteristics more suited to its overall growth strategy and operating goals. Entered into a $250 million unsecured line of credit (the "Acquisition Credit Facility") with Wells Fargo Bank, N.A. ("Wells Fargo Bank") which replaced its $50 million secured line of credit and closed a $150 million unsecured loan agreement (the "Interim Loan") with Wells Fargo Bank. 3 Completed four offerings of Common Stock in October 1996, March 1997, July 1997 and October 1997 (respectively, the "October 1996 Offering," the "March 1997 Offering," the "July 1997 Offering," and the "October 1997 Offering"), resulting in aggregate gross proceeds of approximately $562 million. Completed an offering of 7 3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible Preferred Stock Offering") for total gross proceeds of approximately $287.5 million. Issued $150 million of 75/8% Senior Notes which are due on March 15, 2005. Paid off the Interim Loan with proceeds from the issuance of $150 million of 7 5/8% Senior Notes. The Company's principal business objectives are to achieve a stable and increasing source of cash flow available for distribution to stockholders. By achieving these objectives, the Company will seek to raise stockholder value over time. The Associated Companies Glenborough Corporation. Glenborough Corporation ("GC"), a California corporation formerly known as Glenborough Realty Corporation, serves as general partner of several real estate limited partnerships (the "Controlled Partnerships") for whom it provides asset and property management services. It also provides property management services for a limited portfolio of property owned by unaffiliated third parties. The majority of services to the unaffiliated third parties were previously provided by Glenborough Inland Realty Corporation ("GIRC"), a California corporation, which merged with GC effective June 30, 1997. In the merger between GC and GIRC, the Company received preferred stock of GC in exchange for its preferred stock of GIRC, on a one-for-one basis. Following the merger, the Company holds the same preferences with respect to dividends and liquidation distributions paid by GC as it previously held with respect to GC and GIRC combined. Following the merger, the Company owns 100% of the 38,000 shares (representing 95% of total outstanding shares) of non-voting preferred stock of GC. Five individuals, including Sandra L. Boyle and Frank E. Austin, executive officers of the Company, each own 20% of the 2,000 shares (representing 5% of total outstanding shares) of voting common stock of GC. The Company and GC intend that the Company's interest in GC complies with REIT qualification standards. The Company, through its ownership of preferred stock of GC, is entitled to receive cumulative, preferred annual dividends of $4.53 per share, which GC must pay before it pays any dividends with respect to the common stock of GC. Once GC pays the required cumulative preferred dividend, it will pay any additional dividends in equal amounts per share on both the preferred stock and the common stock at 95% and 5%, respectively. Through the preferred stock, the Company is also entitled to receive a preferred liquidation value of $114.50 per share plus all cumulative and unpaid dividends. The preferred stock is subject to redemption at the option of GC after December 31, 2005, for a redemption price of $114.50 per share. As the holder of preferred stock of GC, the Company has no voting power with respect to the election of the directors of GC; all power to elect directors of GC is held by the owners of the common stock of GC. This structure is intended to provide the Company with a significant portion of the economic benefits of the operations of GC. The Company accounts for the financial results of GC using the equity method. Glenborough Hotel Group. The Company, through the Operating Partnership, leases its hotel properties to Glenborough Hotel Group ("GHG"). The Company, through the Operating Partnership, holds a first mortgage on another hotel, which is managed by GHG under a contract with its owner. GHG also manages a hotel owned by an affiliated entity as well as two resort condominium hotels and a hotel owned by an unaffiliated third party. The Company owns 100% of the 50 shares of non-voting preferred stock of GHG. Three individuals, one of whom, Terri Garnick, is an executive officer of the Company, each own 33 1/3% of the 1,000 shares of voting common stock of GHG. The Company and GHG intend that the Company's interest in GHG complies with REIT qualification standards. The Company, through its ownership of preferred stock, is entitled to receive cumulative, preferred annual dividends of $600 per share, which GHG must pay before it pays any dividends with respect to the common stock. Once GHG pays the required cumulative preferred dividend, it will pay 75% of any additional dividends to holders of the preferred stock, and 25% to holders of the common stock. Through the preferred stock, the Company is also entitled to receive a preferred liquidation value of $40,000 per share plus all cumulative and unpaid dividends. The preferred stock will be subject to redemption at the option of GHG after December 31, 1999, for a redemption price of $40,000 per share. As the holders of preferred stock of GHG, the Company has no voting power with respect to the election of the directors of GHG; all power to elect directors of GHG is held by the owners of the common stock of GHG. 4 This structure is intended to provide the Company with a significant portion of the economic benefits of the operations of GHG. The Company accounts for the financial results of GHG using the equity method. GHG owns approximately 80% of the common stock of Resort Group, Inc. ("RGI"). RGI manages homeowners associations and rental pools for two beachfront resort condominium hotel properties and owns six units at one of the properties. GHG receives 100% of the earnings of RGI and consolidates its operations with its own. GHG also owned 94% of the outstanding common stock of Atlantic Pacific Holdings, Ltd., the sole owner of 100% of the common stock of Atlantic Pacific Assurance Company, Limited (APAC), a Bermuda corporation formed to underwrite certain insurable risks of certain of the Company's predecessor partnerships and related entities. As anticipated, in July 1997, APAC was liquidated and GHG received a liquidating distribution of approximately $2,136,000. GHG has recognized a gain of $1,381,000 over its investment basis and costs of liquidation. GHG had accounted for its investment in APAC using the cost method due to its anticipated liquidation. The gain on liquidation was not subject to income taxes. Employees As of December 31, 1997, the Company and the Associated Companies had approximately 455 full-time employees. Competition The Company's Properties compete for tenants (or guests, in the case of hotels) with similar properties located in their markets. Management believes that characteristics influencing the competitiveness of a real estate project include the geographic location of the property, the professionalism of the property manager and the maintenance and appearance of the property, in addition to external factors such as general economic circumstances, trends, and the existence of new competing properties in the general area in which the Company competes for tenants (or guests, in the case of hotels). 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, continued over-building and other external factors could adversely affect the ability of the Company to attract and retain tenants. The marketability of the Properties may also be affected (either positively or negatively) by these factors as well as by changes in general or local economic conditions, including prevailing interest rates. The Company also 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. 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. Therefore, cash on hand is kept to a minimum by frequently paying down on the Acquisition Credit Facility and drawing on the Acquisition Credit Facility when necessary. Other Factors Compliance with laws and regulations regarding the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not expected to have any material effect upon the capital expenditures, earnings and competitive position of the Company. The Properties have each been subject to Phase I Environmental Assessments and, where such an assessment indicated it was appropriate, Phase II Environmental Assessments (collectively, the "Environmental Reports") have been conducted. These reports have not indicated any significant environmental issues. In the event that pre-existing environmental conditions not disclosed in the Environmental Reports which require remediation are subsequently discovered, the cost of remediation will be borne by the Company. Additionally, no assurances can be given that (i) future laws, ordinances, or regulations will not impose any material environmental liability, (ii) the current environmental condition of the Properties has not been or will not be affected by tenants and occupants of the Properties, by the condition of properties in the vicinity of the Properties or by third parties unrelated to the Company or (iii) that the Company will not otherwise incur significant liabilities associated with costs of remediation relating to the Properties. 5 Item 2. Properties The Location and Type of the Company's Properties The Company's 128 Properties are diversified by type (office, office/flex, industrial, retail, multi-family and hotel) and are located in four geographic regions and 23 states within the United States comprising numerous local markets. The following table sets forth the location, type and size of the Properties (by rentable square feet and/or units) along with average occupancy as of December 31, 1997.
Office Office/Flex Industrial Retail Multi- Square Square Square Square Family Hotel No. of Region Footage Footage Footage Footage Units Rooms Properties - ------------------ ------------ ------------- ------------ ------------- ------------- ------------- ------------- West 694,654 1,820,480 977,926 394,222 866 440 53 Midwest 684,193 608,986 1,067,884 132,190 -- -- 18 East 910,322 303,630 577,868 45,546 1,385 -- 30 South 632,192 790,599 909,832 407,130 -- 304 27 ------------ ------------- ------------ ------------- ------------- ------------- ------------- Total 2,921,361 3,523,695 3,533,510 979,088 2,251 744 128 ============ ============= ============ ============= ============= ============= ============= No. of Properties 30 43 26 9 14 6 Average Occupancy 93% 91% 97% 96% 95% 70%
For the years ended December 31, 1997 and 1996, no tenant contributed 10% or more of the rental revenue of the Company. The largest tenant occupied 748,426 square feet, or 7% of the total square footage of the Office, Office/Flex, Industrial and Retail Properties. For the year ended December 31, 1995, rental revenue from the two Properties leased to Navistar International contributed approximately 10% of the combined total rental revenue of the GRT Predecessor Entities. A complete listing of Properties owned by the Company at December 31, 1997 is included as part of Schedule III in Item 14. Office Properties The Company owns 30 office Properties with total rentable square footage of 2,921,361. The leases for the office Properties have terms ranging from one to 35 years. The office leases generally require the tenant to reimburse the Company for increases in building operating costs over a base amount. Many of the leases provide for rent increases that are either fixed or based on a consumer price index ("CPI"). As of December 31, 1997, the average occupancy of the office Properties was 93%. 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 Total Average Effective Total Effective Rentable Average Base Rent per Annual Base Year Area (Sq. Ft) Occupancy Leased Sq. Ft. (1) Rent ($000s) (2) 1997 2,921,361 93% $ 15.81 $ 42,954 1996 641,923 94 13.19 7,918 1995 106,076 97 11.91 1,228 1994 105,770 88 11.44 1,065 1993 104,666 80 12.04 1,008 (1) Total Effective Annual Base Rent divided by average occupancy in square feet. As used herein, "Effective Base Rent" represents base rent less concessions. 6 (2) Total Effective Annual Base Rent adjusted for any free rent given for the period.
The following table sets forth the contractual lease expirations for leases for the office Properties as of December 31, 1997.
Office Properties Lease Expirations Number Rentable Square Annual Base Percentage of Total of Footage Subject Rent Under Annual Base Rent Expiration Expiring to Expiring Expiring Represented by Year Leases Leases Leases ($000s) Expiring Leases (1) 1998 (4) 221 422,047 $ 6,612 15.0% 1999 103 503,429 6,886 15.6 2000 98 414,760 8,022 18.2 2001 81 504,181 7,991 18.1 2002 47 204,864 3,109 7.0 Thereafter 34 698,766 11,545 26.1 Total 584 2,748,047 (2) $44,165 (3) 100.0% (1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases). (2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space). (3) This figure is based on square footage actually leased and incorporates contractual rent increases arising after 1997, and thus differs from "Total Effective Annual Base Rent" in the preceding table, which is based on 1997 rents. (4) Includes leases that have initial terms of less than one year.
Office/Flex Properties The Company owns 43 office/flex Properties aggregating 3,523,695 square feet. The office/flex Properties are designed for a combination of office and warehouse uses with greater than 10% of the leasable square footage containing office finish. The office/flex Properties range in size from 27,414 square feet to 202,540 square feet, and have lease terms ranging from one to 23 years. Most of the office/flex leases are "triple net" leases whereby the tenants are required to pay their pro rata share of the Properties' operating costs, common area maintenance, property taxes, insurance, and non-structural repairs. Some of the leases are "industrial gross" leases whereby the tenant pays as additional rent its pro rata share of common area maintenance and repair costs and its share of the increase in taxes and insurance over a specified base year cost. Many of these leases call for fixed or CPI-based rent increases. As of December 31, 1997, the average occupancy of the office/flex 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/Flex Properties Historical Rent and Occupancy Total Average Effective Total Effective Rentable Average Base Rent per Annual Base Year (4) Area (Sq. Ft) Occupancy Leased Sq. Ft. (1) Rent ($000s) (2) 1997 3,523,695 91% $ 7.17 $ 22,991 1996(3) 247,506 96 5.50 1,307 (1) Total Effective Annual Base Rent divided by average occupancy in square feet. As used herein, "Effective Base Rent" represents base rent less concessions. (2) Total Effective Annual Base Rent adjusted for any free rent given for the period. (3) Includes the TRP Properties. For these Properties, base rents are presented on an annualized basis based on results since the acquisition as this information was not available for the year ended December 31, 1996. (4) Prior to 1996, Properties currently classified as Office/Flex Properties were included in Industrial Properties. See Industrial Properties table below.
7 The following table sets forth the contractual lease expirations for leases for the office/flex Properties as of December 31, 1997.
Office/Flex Properties Lease Expirations Number Rentable Square Annual Base Percentage of Total of Footage Subject Rent Under Annual Base Rent Expiration Expiring to Expiring Expiring Represented by Year Leases Leases Leases ($000s) Expiring Leases (1) 1998 237 1,069,040 $ 7,907 33.5% 1999 125 649,478 4,008 17.0 2000 85 511,434 3,506 14.9 2001 37 297,668 2,061 8.7 2002 27 273,013 1,931 8.2 Thereafter 18 455,110 4,182 17.7 Total 529 3,255,743 (2) $23,595 (3) 100.0% (1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases). (2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space). (3) This figure is based on square footage actually leased and incorporates contractual rent increases arising after 1997, and thus differs from "Total Effective Annual Base Rent" in the preceding table, which is based on 1997 rents.
Industrial Properties The Company owns 26 industrial Properties aggregating 3,533,510 square feet. The industrial Properties are designed for warehouse, distribution and light manufacturing, ranging in size from 23,826 square feet to 474,426 square feet. As of December 31, 1997, 12 of the industrial Properties were leased to multiple tenants, 14 were leased to single tenants, and all 14 of the single-tenant Properties are adaptable in design to multi-tenant use. As of December 31, 1997, the average occupancy of the industrial Properties was 97%. Four of the single-tenant Properties are leased to a total of two tenants having five years remaining on leases whose original terms were 20 years. The terms of these leases include rent increases every three years based on all or a percentage of the change in the CPI. Under these leases the tenants are required to pay for all of the Properties' operating costs, such as common area maintenance, property taxes, insurance, and all repairs including structural repairs. The leases give the tenant a purchase option exercisable on March 1, 1999, and 2002 for an amount equal to the greater of the appraised value or a specified minimum price. Management believes, based on discussions with both tenants, that neither tenant has any present intention to exercise any option to purchase. The remaining industrial Properties have leases whose terms range from 1 to 29 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. Many of these leases call for fixed or CPI-based rent increases. 8 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 Total Average Effective Total Effective Rentable Average Base Rent per Annual Base Year(4) Area (Sq. Ft) Occupancy Leased Sq. Ft. (1) Rent ($000s) (2) 1997 3,533,510 97% $ 3.36 $ 11,516 1996(3) 1,778,862 99 2.41 4,244 1995 1,491,827 100 2.29 3,405 1994 1,491,827 100 2.29 3,401 1993 1,491,827 98 2.24 3,294 (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) Includes the TRP Properties. For these Properties, base rents are presented on an annualized basis based on results since the acquisition as this information was not available for the year ended December 31, 1996. (4) Prior to 1996, Properties currently classified as Office/Flex Properties were included in Industrial Properties.
The following table sets forth the contractual lease expirations for leases for the industrial Properties as of December 31, 1997.
Industrial Properties Lease Expirations Number Rentable Square Annual Base Percentage of Total of Footage Subject Rent Under Annual Base Rent Expiration Leases to Expiring Expiring Represented by Year Expiring Leases Leases ($000s) Expiring Leases (1) 1998 28 480,017 $ 1,730 15.6% 1999 25 299,068 1,292 11.6 2000 17 329,290 1,323 11.9 2001 14 255,106 1,131 10.2 2002 9 236,250 959 8.6 Thereafter 7 1,646,195 4,677 42.1 Total 100 3,245,926 (2) $11,112 (3) 100.0% (1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases). (2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space). (3) This figure is based on square footage actually leased (which excludes vacant space) and incorporates contractual rent increases arising after 1997, and thus differs from "Total Effective Annual Base Rent" in the preceding table, which is based on 1997 rents.
Retail Properties The Company owns nine retail Properties with total rentable square footage of 979,088. The leases for the retail Properties have terms ranging from one to 38 years. Eight of the retail Properties, representing 933,542 square feet or 95% of the total rentable area, are anchored community shopping centers. The anchor tenants of these centers are national or regional supermarkets and drug stores. As of December 31, 1997, the average occupancy of the retail Properties was 96%. The leases for the retail Properties generally include fixed or CPI-based rent increases and some include provisions for the payment of additional rent based on a percentage of the tenants' gross sales that exceed specified amounts. Retail tenants also typically pay as additional rent their pro rata share of the Properties' operating costs including common area maintenance, property taxes, insurance and non-structural repairs. Some leases contain options to renew at market rates or specified rates. 9 The following table sets forth, for the periods specified, the total rentable area, average occupancy, average effective base rent per leased square foot and total effective annual base rent for the retail properties.
Retail Properties Historical Rent and Occupancy Total Average Effective Total Effective Rentable Average Base Rent per Annual Base Year Area (Sq. Ft) Occupancy Leased Sq. Ft. (1) Rent ($000s) (2) 1997 979,088 96% $ 7.98 $ 7,501 1996(3) 630,700 96 7.82 (4) 4,726 1995 285,658 95 10.76 2,915 1994 285,722 94 10.76 2,890 1993 285,722 90 11.11 2,858 (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) Includes the Carlsberg Properties and the TRP Properties. For these Properties, base rents are presented on an annualized basis based on results since the acquisition as this information was not available for the year ended December 31, 1996. (4) Average effective base rent per leased square foot declined in 1996 due to the acquisition of properties with lower base rents.
The following table sets forth the contractual lease expirations for the retail Properties as of December 31, 1997.
Retail Properties Lease Expirations Rentable Square Annual Base Percentage of Total Number of Footage Subject Rent Under Annual Base Rent Expiration Leases to Expiring Expiring Represented by Year Expiring Leases Leases ($000s) Expiring Leases (1) 1998 39 90,664 $ 911 12.6% 1999 45 76,059 944 13.1 2000 24 42,249 542 7.5 2001 31 101,301 926 12.8 2002 7 13,560 176 2.4 Thereafter 40 567,531 3,719 51.6 Total 186 891,364 (2) $ 7,218 (3) 100.0% (1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases). (2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space). (3) This figure is based on square footage actually leased (which excludes vacant space) and incorporates contractual rent increases arising after 1997, and thus differs from "Total Effective Annual Base Rent" in the preceding table which is based on 1997 rents.
10 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, 1993.
Capitalized Tenant Improvements and Leasing Commissions 1993 1994 1995 1996 1997 Office Properties Square footage renewed or re-leased 23,909 18,384 79,745 39,706 174,354 Capitalized tenant improvements and commissions ($000s) $ 59 $ 58 $ 468(1) $ 617(2) $ 850 Average per square foot of renewed or re-leased space $ 2.47 $ 3.18 $ 5.87 $ 15.54(2) $ 4.87 Office/Flex Properties Square footage renewed or re-leased (3) (3) (3) 9,000 138,658 Capitalized tenant improvements and commissions ($000s) (3) (3) (3) $ 23 $ 418 Average per square foot of renewed or re-leased space (3) (3) (3) $ 2.56 $ 3.01 Industrial Properties Square footage renewed or re-leased 66,500 89,000 141,523 60,000 198,055 Capitalized tenant improvements and commissions ($000s) $ 64 $ 60 $ 114 $ 51 $ 235 Average per square foot of renewed or re-leased space $ 0.96 $ 0.67 $ 0.81 $ 0.85 $ 1.19 Retail Properties Square footage renewed or re-leased 31,443 46,833 33,294 32,998 12,080 Capitalized tenant improvements and commissions ($000s) $ 59 $ 59 $ 98 $ 83 $ 42 Average per square foot of renewed or re-leased space $ 1.87 $ 1.25 $ 2.94 $ 2.53 $ 3.51 All Properties Square footage renewed or re-leased 121,852 154,217 254,562 141,704 523,147 Capitalized tenant improvements and commissions ($000s) $ 182 $ 177 $ 680 $ 774 $ 1,545 Average per square foot of renewed or re-leased space $ 1.49 $ 1.14 $ 2.67 $ 5.46 $ 2.95 (1) The significant increase in capitalized tenant improvements and commissions in 1995 over the previous year is primarily the result of re-leasing 15,491 sq. ft. at Regency Westpointe. The re-lease is for a term of ten years. There were no commissions paid in this transaction. Tenant improvements totaled $405,000. This tenant occupies 43% of Regency Westpointe. (2) The significant increase in capitalized tenant improvements and commissions in 1996 over the previous years is primarily the result of tenant improvements provided in connection with a lease extension of space for the principal tenant of the UCT Property. The lease was extended 10 years and expires in 2010. (3) Prior to 1996, Properties currently classified as Office/Flex Properties were included in Industrial Properties.
11 Multi-family Properties The Company owns 14 multi-family Properties, aggregating 2,251 units, and 1,971,887 square feet of space. All of the units are rented to residential tenants on either a month-to-month basis or for terms of one year or less. As of December 31, 1997, the multi-family properties were approximately 95% leased. The following table sets forth, for the periods specified, total units, average occupancy, monthly average effective base rent per unit and total effective annual base rent for the multi-family Properties.
Multi-family Properties Historical Rent and Occupancy Average Monthly Average Total Effective Total Occupancy Effective Base Rent Annual Base Year Units for the Period per Leased Unit (1) Rent ($000s) (2) 1997 2,251 95% $ 619 $ 15,884 1996(3) 642 94 598 (4) 4,328 1995 104 94 630 739 1994 104 98 632 774 1993 104 93 632 734 (1) Total Effective Annual Base Rent divided by average occupied unit. (2) Total Effective Annual Base Rent adjusted for any free rent given for the period. (3) Includes the TRP Properties. For these Properties, occupancy rates are presented as of December 31, 1996, and base rents are presented on an annualized basis based on results since the acquisition as this information was not available for the year ended December 31, 1996. (4) Average effective monthly base rent per unit declined in 1996 due to the acquisition of properties with lower base rents.
Hotels The Hotel portfolio consists of six hotels (the "Hotels," and each a "Hotel") ranging from 64 to 163 rooms each. Four of the Hotels are all-suite Hotels which consist primarily of one-bedroom suites, but each also includes some studio suites and two-bedroom suites. All of the Hotels are currently operating under license agreements with Country Lodging by Carlson, Inc. The four all-suite Hotels are marketed as Country Suites by Carlson ("Country Suites") and of the other two Hotels, one is marketed as a Country Inn by Carlson and one is marketed as a Country Inn and Suites by Carlson. Country Lodging is part of the Carlson Companies, based in Minneapolis, Minnesota. The Carlson Companies own, operate and franchise Radisson Hotels, TGI Friday's Restaurants, Country Kitchen Restaurants and the Carlson Travel Agency Network. 12 The following table contains, for the periods indicated, occupancy, average daily rate ("ADR") and revenue per available room ("REVPAR") information for the Company's Hotels as well as comparative information for all U.S. Hotels and all Country Lodging hotels.
Year Ended December 31, 1993 1994 1995 1996 1997 Irving, TX Occupancy 76.3% 77.5% 76.0% 75.2% 66.8% ADR $ 50.22 $ 58.52 $ 66.55 $ 76.56 $ 70.38 REVPAR $ 38.33 $ 45.36 $ 50.57 $ 57.28 $ 47.19 Ontario, CA Occupancy 59.6% 56.4% 65.5% 71.6% 75.3% ADR $ 51.61 $ 52.02 $ 48.38 $ 54.89 $ 62.45 REVPAR $ 30.74 $ 29.35 $ 31.67 $ 38.95 $ 47.02 Arlington, TX Occupancy 61.0% 63.4% 70.2% 68.7% 70.0% ADR $ 51.58 $ 62.73 $ 64.96 $ 67.61 $ 66.34 REVPAR $ 31.46 $ 39.79 $ 45.63 $ 45.75 $ 46.45 Tucson, AZ Occupancy 77.4% 77.4% 79.0% 81.4% 77.7% ADR $ 54.46 $ 57.21 $ 58.93 $ 63.85 $ 66.42 REVPAR $ 42.16 $ 44.29 $ 46.53 $ 50.42 $ 51.60 San Antonio, TX (3) Occupancy -- -- 53.3%(5) 54.6%(6) 63.2% ADR -- -- $ 57.80(5) $ 58.68(6) $ 51.51 REVPAR -- -- $ 30.79(5) $ 32.03(6) $ 32.55 Scottsdale, AZ (4) Occupancy -- -- -- 62.7%(7) 66.8%(8) ADR -- -- -- $ 84.82(7) $ 92.84(8) REVPAR -- -- -- $ 53.18(7) $ 62.05(8) All U.S. Hotels (1) Occupancy 63.7% 65.2% 66.0% 65.7% 64.5% ADR $ 60.99 $ 63.63 $ 66.88 $ 71.66 $ 75.16 REVPAR $ 38.85 $ 41.49 $ 44.14 $ 47.06 $ 48.48 Country Lodging System (2) Occupancy 71.4% 75.0% 75.4% 73.0% 70.0% ADR $ 50.00 $ 53.00 $ 56.00 $ 62.42 $ 63.00 REVPAR $ 35.72 $ 39.75 $ 41.00 $ 45.45 $ 44.10 (1) Source: Smith Travel Research and Country Hospitality. (2) Source: Country Hospitality. Data for all years is limited to U.S. properties. (3) The San Antonio Hotel opened in 1995. (4) The Scottsdale Hotel opened in 1996. (5) Information supplied for historical comparison only as this hotel was not acquired by the Company until August 1996. Source: Unaudited operating statements provided by previous owner of the hotel. (6) Information represents a full year of operations including operations prior to the Company's acquisition of the hotel in August 1996. (7) Information supplied for historical comparison only as this hotel was not acquired by the Company until February 1997. Source: Unaudited operating statements provided by previous owner of the hotel. (8) Information represents a full year of operations including operations prior to the Company's acquisition of the hotel in February 1997.
The Percentage Leases In order for the Company to qualify as a REIT, neither the Company nor the Operating Partnership can operate the Hotels. Therefore, the Operating Partnership has leased five of the Hotels to GHG, each for a term of five years pursuant to percentage leases ("Percentage Leases") which provide for rent equal to the greater of the Base Rent (as defined in the Percentage Leases) or a specified percentage of room revenues (the "Percentage Rent"). Each Hotel is separately leased to GHG. GHG's ability to make rent payments will, to a large degree, depend on its ability to generate cash flow from the operations of the Hotels. Each Percentage Lease contains the provisions described below. 13 Each Percentage Lease has a non-cancelable term of five years, subject to earlier termination upon the occurrence of certain contingencies described in the Percentage Lease. The lessee under the Percentage Lease has one five-year renewal option at the then current fair market rent. During the term of each Percentage Lease, the lessee is obligated to pay the greater of Base Rent or Percentage Rent. Base Rent accrues and is required to be paid monthly in advance. Percentage Rent is calculated by multiplying fixed percentages by room revenues for each of the five Hotels owned by the Company. The applicable percentage changes when revenue exceeds a specified threshold, and the threshold may be adjusted annually in accordance with changes in the applicable CPI. Percentage Rent accrues monthly and is due quarterly. The table below sets forth the annual Base Rent and the Percentage Rent formulas for each of the five Hotels owned by the Company.
Percentage Rent Incurred Hotel Initial Annual for the year ended Location Base Rent December 31, 1997 Annual Percentage Rent Formulas Ontario, CA $ 240,000 $ 324,000 24% of the first $1,668,000 of room revenue plus 40% of room revenue above $1,668,000 and 5% of other revenue Arlington, TX $ 360,000 $ 333,000 27% of the first $1,694,000 of room revenue plus 42% of room revenue above $1,694,000 and 5% of other revenue Tucson, AZ $ 600,000 $ 682,000 40% of the first $1,429,000 of room revenue plus 46% of room revenue above $1,429,000 and 5% of other revenue San Antonio, TX $ 312,000 $ 3,000 33% of the first $1,240,000 of room revenue plus 40% of room revenue above $1,240,000 and 5% of other revenue Scottsdale, AZ $ 720,000 (1) $ 548,000 41% of the first $2,600,000 of room revenue plus 60% of room revenue above $2,600,000 and 5% of other revenue (1) Hotel was acquired in February 1997, therefore, rent incurred for the year ended December 31, 1997 was less than a full year's rent.
Other than real estate and personal property taxes, casualty insurance, a fixed capital improvement allowance and maintenance of underground utilities and structural elements, which are the responsibility of the Company, the Percentage Leases require the lessee to pay rent, insurance, salaries, utilities and all other operating costs incurred in the operation of the Hotels. GHG will not be permitted to sublet all or any part of the Hotels or to assign its interest under any of the Percentage Leases, other than to an affiliate, without the prior written consent of the Company. No assignment or subletting will release GHG from any of its obligations under the Percentage Leases. If the Company enters into an agreement to sell or otherwise transfer a Hotel, the Company has the right to terminate the Percentage Lease with respect to such Hotel upon paying GHG the fair market value of its leasehold interest in the remaining term of the Percentage Lease to be terminated. Mortgage Loans Receivable Although the Company does not intend to engage in the business of making real estate loans, the Company holds two notes receivable, secured by first priority real property liens, which had a total outstanding principal balance of $3,692,000 at December 31, 1997. As of the date of this filing, all payments are current. In connection with the Grunow loan, the Company entered into an Option Agreement which provides the Operating Partnership the option to purchase the Grunow Medical building based on an agreed upon formula. See Note 5 in Item 14 for further discussion. The following table summarizes these two mortgages. 14
Summary of Mortgage Loans Receivable Principal Current Collateral Property Balance at Interest Name Type 12/31/97 Rate Maturity Laurel Cranford Industrial $ 507,000 9.00% 6/1/01 Grunow Medical Office $ 3,185,000 11.00% 11/19/99
Item 3. Legal Proceedings Blumberg. On February 17, 1998, the California state court of appeals affirmed the Company's settlement of a class action complaint filed on February 21, 1995 in the Superior Court of the State of California in and for San Mateo County in connection with the Consolidation. The plaintiff is Anthony E. Blumberg, an investor in Equitec B, one of the GRT Predecessor Entities, on behalf of himself and all others (the "Blumberg Action") similarly situated. The defendants are GC (formerly known as Glenborough Realty Corporation), Glenborough Realty Corporation ("GRC"), Robert Batinovich, the Partnerships and the Company. The complaint alleged breaches by the defendants of their fiduciary duty and duty of good faith and fair dealing to investors in the Partnerships. The complaint sought injunctive relief and compensatory damages. The complaint alleged that the valuation of GC was excessive and was done without appraisal of GC's business or assets. The complaint further alleged that the interest rate for the Notes to be issued to investors in lieu of shares of Common Stock, if they so elected was too low for the risk involved and that the Notes would likely sell, if at all, at a substantial discount from their face value (as a matter entirely distinct from the litigation and subsequent settlement, the Company, as it had the option to, paid in full the amounts due plus interest in lieu of issuing Notes). On October 9, 1995 the parties entered into an agreement to settle the action. The defendants, in entering into the settlement agreement, did not acknowledge any fault, liability or wrongdoing of any kind and continue to deny all material allegations asserted in the litigation. Pursuant to the settlement agreement, the defendants will be released from all claims, known or unknown, that have been, could have been, or in the future might be asserted, relating to, among other things, the Consolidation, the acquisition of the Company's shares pursuant to the Consolidation, any misrepresentation or omission in the Registration Statement on Form S-4, filed by the Company on September 1, 1994, as amended, or the prospectus contained therein ("Prospectus/Consent Solicitation Statement"), or the subject matter of the lawsuit. In return, the defendants agreed to the following: (a) the inclusion of additional or expanded disclosure in the Prospectus Consent Solicitation Statement, and (b) the placement of certain restrictions on the sale of the stock by certain insiders and the granting of stock options to certain insiders following consummation of the Consolidation. Plaintiff's counsel indicated that it would request that the court award it $850,000 in attorneys' fees, costs and expenses. In addition, plaintiffs' counsel indicated it would request the court for an award of $5,000 payable to Anthony E. Blumberg as the class representative. The defendants agreed not to oppose such requests. On October 11, 1995, the court certified the class for purposes of settlement, and scheduled a hearing to determine whether it should approve the settlement and class counsel's application for fees. A notice of the proposed settlement was distributed to the members of the class on November 15, 1995. The notice specified that, in order to be heard at the hearing, any class member objecting to the proposed settlement must, by December 15, 1995, file a notice of intent to appear, and a detailed statement of the grounds for their objection. Objections were received from a small number of class members. The objections reiterated the claims in the original Blumberg complaint, and asserted that the settlement agreement did not adequately compensate the class for releasing those claims. One of the objections was filed by the same law firm that brought the BEJ Action described below. At a hearing on January 17, 1996, the court heard the arguments of the objectors seeking to overturn the settlement, as well as the arguments of the plaintiffs and the defendants in defense of the settlement. The court granted all parties a period of time in which to file additional pleadings. On June 4, 1996, the court granted approval of the settlement, finding it fundamentally fair, adequate and reasonable to the respective parties to the settlement. However, the objectors gave notice of their intent to appeal the June 4 decision. All parties filed their briefs and a hearing was held on February 3, 1998. On February 17, 1998, the court of appeals rendered its decision rejecting the objectors' contentions and upholding the settlement. 15 BEJ Equity Partners. On December 1, 1995, a second class action complaint relating to the Consolidation was filed in Federal District Court for the Northern District of California (the "BEJ Action"). The plaintiffs are BEJ Equity Partners, J/B Investment Partners, Jesse B. Small and Sean O'Reilly as custodian f/b/o Jordan K. O'Reilly, who as a group held limited partner interests in certain of the GRT Predecessor Entities known as Outlook Properties Fund IV, Glenborough All Suites Hotels, L.P., Glenborough Pension Investors, Equitec Income Real Estate Investors-Equity Fund 4, Equitec Income Real Estate Investors C and Equitec Mortgage Investors Fund IV, on behalf of themselves and all others similarly situated. The defendants are GRC, GC, the Company, GPA, Ltd., Robert Batinovich and Andrew Batinovich. The Partnerships are named as nominal defendants. This action alleges the same disclosure violations and breaches of fiduciary duty as were alleged in the Blumberg Action. The complaint sought injunctive relief, which was denied at a hearing on December 22, 1995. At that hearing, the court also deferred all further proceedings in this case until after the scheduled January 17, 1996 hearing in the Blumberg Action. Following several stipulated extensions of time for the Company to respond to the complaint, the Company filed a motion to dismiss the case. Plaintiffs in the BEJ Action voluntarily stayed the action pending resolution of the Blumberg Action; such plaintiffs can revive their lawsuit. It is management's position that the BEJ Action, and the objections to the settlement of the Blumberg Action, are without merit, and management intends to pursue a vigorous defense in both matters. The Company believes that it is very unlikely that this litigation would result in a liability that would exceed the accrued liability by a material amount. However, given the inherent uncertainties of litigation, there can be no assurance that the ultimate outcome in these two legal proceedings will be in the Company's favor. Certain other claims and lawsuits have arisen against the Company in its normal course of business. The Company believes that such other claims and lawsuits will not have a material adverse effect on the Company's financial position, cash flow or results of operations. Item 4. Submission of Matters to a Vote of Security Holders The company did not submit any matters to a vote of security holders in the fourth quarter of the year ended December 31, 1997. 16 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 December 31, 1997, the closing price of the Company's Common Stock was $29.625. On January 28, 1998, the Company's 7 3/4% Series A Convertible Preferred Stock (the "Preferred Stock") began trading on the NYSE at $25.00 per share under the symbol "GLB Pr A". On March 20, 1998, the last reported sales prices per share of the Company's Common Stock and Preferred Stock on the NYSE were $29.5625 and $26.875, 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 1996 First Quarter (1) $ 14.375 $ 12.000 (2) (2) Second Quarter 15.250 13.375 (2) (2) Third Quarter 14.750 13.375 (2) (2) Fourth Quarter 17.625 13.625 (2) (2) 1997 First Quarter $ 20.500 $ 16.750 (2) (2) Second Quarter 25.250 19.375 (2) (2) Third Quarter 28.188 22.313 (2) (2) Fourth Quarter 30.125 24.250 (2) (2) 1998 First Quarter (3) $ 31.750 $ 26.125 $ 27.000 $ 25.500 (1) Although the Consolidation occurred on December 31, 1995 and the Company began paying distributions on its Common Stock based on earnings in the first quarter of 1996, the Common Stock did not begin trading on the NYSE until January 31, 1996. (2) The Company's Preferred Stock did not begin trading on the NYSE until January 28, 1998. (3) High and low stock closing prices through March 20, 1998. Holders The approximate number of holders of record of the shares of the Company's Common Stock and Preferred Stock were 4,951 and 19, respectively, as of March 20, 1998. Distributions Since the Consolidation, the Company has paid regular quarterly distributions to holders of its Common Stock. During the years ended December 31, 1996 and 1997, the Company declared and/or paid the following quarterly distributions: Distributions Total Quarterly Period per share Distributions 1996 First Quarter $ 0.30 $ 1,726,000 Second Quarter $ 0.30 $ 1,737,000 Third Quarter $ 0.30 $ 2,891,000 Fourth Quarter $ 0.32(1) $ 3,092,000(1) 1997 First Quarter $ 0.32 $ 4,222,000 Second Quarter $ 0.32 $ 6,456,000 Third Quarter $ 0.32 $ 10,072,000 Fourth Quarter $ 0.42(2) $ 13,250,000(2) (1) Distributions for the fourth quarter of 1996 were paid on February 19, 1997. (2) Distributions for the fourth quarter of 1997 were paid on January 27, 1998. 17 The Company intends to declare regular quarterly distributions to its stockholders. Federal income tax law requires that a REIT distribute annually at least 95% 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. (b) Recent Sales of Unregistered Securities In December 1997, the Company and Glenborough Properties, L.P. (the "Operating Partnership," as to which the Company is general partner) issued approximately $14.1 million in the form of 433,362 partnership units in the Operating Partnership and 72,564 unregistered shares of Common Stock of the Company (based on an agreed per unit and per share value of $27.896) to acquire all of the limited partnership interests of GRC Airport Associates, a California limited partnership ("GRCAA"). The units and shares were issued to the limited partners of GRCAA, all of whom the Company believes are accredited investors. The units are redeemable for cash, or, at the election of the Company, for shares of Common Stock of the Company on a one-for-one basis. GRCAA's sole asset consisted of one property that was sold to a third party in February 1998 and generated net cash proceeds of approximately $14.1 million. The units and shares were issued in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended. Other sales of unregistered securities by the Company during 1997 are described in the Company's Quarterly Reports on Form 10-Q for the quarters ended June 30, 1997 and September 30, 1997. Item 6. Selected Financial Data Set forth below are selected financial data for: Glenborough Realty Trust Incorporated: Consolidated balance sheet data is presented as of December 31, 1997, 1996 and 1995. Consolidated operating data is presented for the years ended December 31, 1997 and 1996, and As Adjusted consolidated operating data is presented for the years ended December 31, 1995 and 1994, and assumes the Consolidation and related transactions occurred on January 1, 1994, in order to present the operations of the Company for those periods as if the Consolidation had been in effect for those periods and to provide amounts which are comparable to the consolidated results of operations of the Company for the years ended December 31, 1997 and 1996. The GRT Predecessor Entities: Combined operating data is presented for the years ended December 31, 1995, 1994 and 1993. The combined balance sheet data is presented as of December 31, 1994 and 1993. This selected financial data should be read in conjunction with the financial statements of Glenborough Realty Trust Incorporated, including the notes thereto, included in Item 14.
As of and for the Year Ended December 31, Historical Historical As Adjusted Historical As Adjusted Historical Historical 1997 1996 1995 1995 1994 1994 1993 (In thousands, except per share data) Rental Revenue......... $ 61,393 $ 17,943 $ 13,495 $ 15,454 $ 12,867 $ 13,797 $ 13,546 Fees and reimbursements 719 311 260 16,019 260 13,327 15,439 Interest and other income 1,802 1,080 982 2,698 1,109 3,557 3,239 Equity in earnings of Associated Companies 2,743 1,598 1,691 -- 1,649 -- -- Total Revenues(1)...... 68,148 21,253 16,428 34,171 15,885 30,681 32,224 Property operating expenses 18,958 5,266 4,084 8,576 3,673 6,782 7,553 General and administrative 3,319 1,393 983 15,947 954 13,454 14,321 Interest expense....... 9,668 3,913 2,767 2,129 2,767 1,140 1,301 Depreciation and Amortization......... 14,873 4,575 3,654 4,762 3,442 4,041 4,572 Income (loss) from operations before minority interest and extraordinary items 21,330 (1,131) 4,077 524 (2,721) 1,580 2,144 Net income (loss)(2)... 19,368 (1,609) 3,796 524 (3,093) 1,580 4,418 Diluted amounts per share(3): Net income (loss) before extraordinary items $ 1.09 $ (0.21) $ 0.66 -- $ (0.47) -- -- Net income (loss).... 1.05 (0.24) 0.66 -- (0.54) -- -- Distributions(4)..... 1.38 1.22 1.20 -- 1.20 -- --
continued 18
As of and for the Year Ended December 31, Historical Historical As Adjusted Historical As Adjusted Historical Historical 1997 1996 1995 1995 1994 1994 1993 (In thousands, except per share data) Net investment in real estate $ 825,218 $ 161,945 -- $ 77,574 -- $ 63,994 $ 70,245 Mortgage loans receivable, net.................. 3,692 9,905 -- 7,465 -- 19,953 18,825 Total assets........... 865,774 185,520 -- 105,740 -- 117,321 102,635 Total debt............. 228,299 75,891 -- 36,168 -- 17,906 12,172 Stockholders' equity... 580,123 97,600 -- 55,628 -- 80,558 85,841 Other Data: EBIDA(5)............... $ 44,380 $ 14,273 -- $ 9,291 -- $ 10,269 $ 10,326 Cash flow provided by (used for): Operating activities. 24,078 4,138 $ 4,656 (10,608) $ 5,742 22,426 12,505 Investing activities. (569,242) (61,833) 3,263 8,656 1,710 (1,947) (2,002) Financing activities. 548,879 (54,463) (7,933) (17,390) (6,408) (2,745) (8,927) FFO(6)................. 36,087 11,491 9,638 7,162 9,536 9,129 9,025 CAD(7),(8)............. 32,335 10,497 8,856 3,237 8,754 6,919 6,921 Debt to total market capitalization(9).... 18.5% 29.5% -- -- -- -- -- Ratio of Earnings to Fixed Charges (10) 3.21 0.71 -- 1.41 -- 2.58 2.67 (1) Certain revenues which are included in the historical combined amounts for 1995 and prior are not included on an adjusted basis. These revenues are included in two unconsolidated Associated Companies, GHG and GC, on an as adjusted basis, from which the Company receives lease payments and dividends. (2) Historical 1996 and as adjusted 1994 net losses reflect $7,237 of Consolidation and litigation costs incurred in connection with the Consolidation. As adjusted 1994 data give effect to the Consolidation and related transactions as if such transactions had occurred on January 1, 1994, whereas historical 1996 data reflect such transactions in the periods they were expensed. The Consolidation and litigation costs were expensed on January 1, 1996, the Company's first day of operations. (3) Diluted amounts are computed in accordance with SFAS No. 128 - "Earnings Per Share" and include the dilutive effects of all classes of securities outstanding at year-end, including units of Operating Partnership interests and options to purchase stock of the Company. As adjusted net income per share is based upon as adjusted weighted average shares outstanding of 5,753,709 for 1995 and 1994. (4) Historical distributions per unit for the years ended December 31, 1997 and 1996 consist of distributions declared for the periods then ended. As adjusted distributions per unit for each of the years ended December 31, 1995 and 1994 are based on $0.30 per unit per quarter. (5) EBIDA is computed as income (loss) before minority interests and extraordinary items plus interest expense, depreciation and amortization, gains (losses) on disposal of properties and loss provisions. In 1996, consolidation and litigation costs were also added back to net income to determine EBIDA. The Company believes that in addition to net income and cash flows, EBIDA is a useful measure of the financial performance of an equity REIT because, together with net income and cash flows, EBIDA provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions, developments and other capital expenditures. To evaluate EBIDA and the trends it depicts, the components of EBIDA, such as rental revenues, rental expenses, real estate taxes and general and administrative expenses, should be considered. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Excluded from EBIDA are financing costs such as interest as well as depreciation and amortization, each of which can significantly affect a REIT's results of operations and liquidity and should be considered in evaluating a REIT's operating performance. Further, EBIDA does not represent net income or cash flows from operating, financing and investing activities as defined by generally accepted accounting principles and does not necessarily indicate that cash flows will be sufficient to fund all of the Company's cash needs. It should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Further, EBIDA as disclosed by other REITs may not be comparable to the Company's calculation of EBIDA. The following table reconciles net income (loss) of the Company to EBIDA for the periods presented:
As of and for the Year Ended December 31, Historical Historical Historical Historical Historical 1997 1996 1995 1994 1993 (In thousands, except per share data) Net income (loss)...... $ 19,368 $ (1,609) $ 524 $ 1,580 $ 4,418 Extraordinary items.... 843 186 -- -- (2,274) Minority interest...... 1,119 292 -- -- -- Interest expense....... 9,668 3,913 2,129 1,140 1,301 Depreciation and amortization 14,873 4,575 4,762 4,041 4,572 Gains (losses) on disposal of properties........... (1,491) (321) -- -- -- Consolidation and litigation costs................ -- 7,237 -- -- -- Loss provisions........ -- -- 1,876 3,508 2,309 -------- -------- ------- ------- ------- EBIDA.................. 44,380 14,273 9,291 10,269 10,326 ======== ======== ======= ======= ======= (6) Funds from Operations, as defined by NAREIT, represents income (loss) before minority interests and extraordinary items, adjusted for real estate related depreciation and amortization and gains (losses) from the disposal of properties. In 1996, consolidation and litigation costs were also added back to net income to determine FFO. The Company believes that FFO is an important and widely used measure of the financial performance of equity REITs which provides a relevant basis for comparison among other REITs. Together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions, developments and other capital expenditures. FFO does not represent net income or cash flows from operations as defined by GAAP, and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company's operating performance or as an alternative to cash flows from operating, investing and financing activities (determined in accordance with GAAP) as a measure of liquidity. FFO does not necessarily indicate that cash flows will be sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to stockholders. Further, FFO as disclosed by other REITs may not be comparable to the Company's calculation of FFO. The Company calculates FFO in accordance with the White Paper on FFO approved by the Board of Governors of NAREIT in March 1995. (7) 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. (8) CAD for the year ended December 31, 1995 excludes approximately $6,782 that represents the net proceeds received from the prepayment of a mortgage loan receivable and the repayment of a related wrap note payable. 19 (9) 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, on a fully converted basis, based upon the closing price of the Common Stock of $29.625 on December 31, 1997, and $17.625 on December 31, 1996. (10)The ratio of earnings to fixed charges is computed as net income (loss) from operations, before extraordinary items, plus fixed charges (excluding capitalized interest) divided by fixed charges. Fixed charges consist of interest costs including amortization of deferred financing costs.
Funds from Operations Funds from Operations, as defined by NAREIT, represents income (loss) before minority interests and extraordinary items, adjusted for real estate related depreciation and amortization and gains (losses) from the disposal of properties. The Company believes that FFO is an important and widely used measure of the financial performance of equity REITs which provides a relevant basis for comparison among other REITs. Together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions, developments and other capital expenditures. FFO does not represent net income or cash flows from operations as defined by GAAP, and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company's operating performance or as an alternative to cash flows from operating, investing and financing activities (determined in accordance with GAAP) as a measure of liquidity. FFO does not necessarily indicate that cash flows will be sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to stockholders. Further, FFO as disclosed by other REITs may not be comparable to the Company's calculation of FFO. The Company calculates FFO in accordance with the White Paper on FFO approved by the Board of Governors of NAREIT in March 1995. 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, 1997 and the year ended December 31, 1997 (dollars in thousands):
Year to March 31, June 30, Sept 30, Dec 31, Date 1997 1997 1997 1997 1997 ------------- ------------- ------------- -------------- -------------- Net income before minority interest $ 2,594 $ 4,639 $ 4,958 $ 9,139 $ 21,330 Gain on collection of mortgage loan receivable (154) (498) -- -- (652) Net gain on sales of rental properties -- (570) 15 (284) (839) Prepayment penalty on payoff of mortgage loan -- -- 75 -- 75 Depreciation and amortization 1,537 2,507 4,823 6,006 14,873 Adjustment to reflect FFO of Associated Companies (1) 623 248 (776) 1,205 1,300 ------------- ------------- ------------- -------------- -------------- FFO $ 4,600 $ 6,326 $ 9,095 $ 16,066 $ 36,087 ============= ============= ============= ============== ============== Amortization of deferred financing fees 64 64 46 47 221 Capital reserve (110) (220) (204) (748) (1,282) Capital expenditures (421) (541) (853) (876) (2,691) ------------- ------------- ------------- -------------- -------------- CAD $ 4,133 $ 5,629 $ 8,084 $ 14,489 $ 32,335 ============= ============= ============= ============== ============== Distributions per share (2) $ 0.32 $ 0.32 $ 0.32 $ 0.42 $ 1.38 ============= ============= ============= ============== ============== Fully converted weighted average shares outstanding 10,935,951 14,466,852 21,194,507 31,512,511 19,688,489 ============= ============= ============= ============== ============== (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) The distributions for the three months ended December 31, 1997, were paid on January 27, 1998.
20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the selected data in Item 6 and the Consolidated Financial Statements of Glenborough Realty Trust Incorporated and the GRT Predecessor Entities, including the notes thereto, included in Item 14. Background The Company commenced operations on December 31, 1995, through the merger (the "Consolidation") of eight public limited partnerships (the "Partnerships") and a management company, Glenborough Corporation ("GC", and with the Partnerships, collectively, the "GRT Predecessor Entities") with and into the Company. A portion of the Company's operations is conducted through Glenborough Properties, L.P. (the "Operating Partnership") in which the Company holds a 1% interest as the sole general partner and a 91.48% limited partner interest as of December 31, 1997. The Company has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. The statements of operations, equity and cash flows for the year ended December 31, 1995, of the GRT Predecessor Entities includes the historical operations of GC and the Partnerships. This statement has been adjusted to reflect the consolidation of two joint ventures which were, in aggregate, wholly owned by the Partnerships. The statements of operations, equity and cash flows for the year ended December 31, 1995, of the GRT Predecessor Entities are included as the Consolidation of these entities to form the Company did not occur until December 31, 1995. Certain components of the Company's results of operations are not comparable to those of the GRT Predecessor Entities. The primary reason for the difference is the segregation in 1996 of the operations (management fees and reimbursements, as well as related expenses) of GC and Glenborough Hotel Group (collectively, the "Associated Companies"), all of which were combined in the GRT Predecessor Entities 1995 financial statements. Effective January 1, 1996, the Company owns 100% of the preferred stock in each of the Associated Companies and accounts for its interests under the equity method. Another factor in the comparability difference is the change in the operational structure of the three hotel properties owned at the time of the Consolidation. The Hotels were wholly owned by the GRT Predecessor Entities and, thus, the operations of the Hotels were included in the financial statements of the GRT Predecessor Entities. In order for the Company to qualify as a REIT, neither the Company nor the Operating Partnership can operate the Hotels. Under the current structure, the Company owns the Hotels but leases them to GHG. The Company includes only the related lease payments earned from GHG in its statement of operations. When comparing historical year ended December 31, 1996 to historical year ended December 31, 1995, the decreases in fees and reimbursements, property operating expenses and general and administrative expenses are the primary components affected by these changes in structure. Results of Operations Comparison of the historical year ended December 31, 1997 to the historical year ended December 31, 1996. Following is a table of net operating income by property type, for comparative purposes, presenting the results for the years ended December 31, 1997 and 1996. 21
Results of Operations by Property Type For the Years Ended December 31, 1997 and 1996 (in thousands) Office/ Multi- Property Eliminating Total Office Flex Industrial Retail Family Hotel Total Entry(1) Reported 1997 Revenue $25,071 $10,354 $7,320 $7,224 $5,536 $5,980 $61,485 ($92) $61,393 Operating Expenses 9,986 3,062 1,459 2,183 2,309 1,894 20,893 ($1,935) 18,958 Net Operating Income 15,085 7,292 5,861 5,041 3,227 4,086 40,592 1,843 42,435 Percentage of Total NOI 37% 18% 15% 12% 8% 10% 100% 1996 Revenue $3,905 $769 $3,491 $3,746 $1,519 $4,513 $17,943 $17,943 Operating Expenses 1,697 275 469 991 601 1,698 5,731 ($465) 5,266 Net Operating Income 2,208 494 3,022 2,755 918 2,815 12,212 465 12,677 Percentage of Total NOI 18% 4% 25% 23% 7% 23% 100% (1) Eliminating entry represents internal market level property management fees included in operating expenses to provide comparison to industry performance.
Rental Revenue. Rental revenue increased $43,450,000, or 242%, to $61,393,000 for the year ended December 31, 1997, from $17,943,000 for the year ended December 31, 1996. The increase included growth in revenue from the office, office/flex, industrial, retail, multi-family and hotel Properties of $21,166,000, $9,585,000, $3,829,000, $3,478,000, $4,017,000 and $1,467,000, respectively. Of the rental revenue for the year ended December 31, 1997, $48,030,000 represents rental revenue generated from the acquisition of 20 properties (the "1996 Acquisitions") in the third and fourth quarters of 1996 and the acquisition of 89 properties during the year ended December 31, 1997 (the "1997 Acquisitions"). The increase in rental revenue for the year ended December 31, 1997, was partially offset by a decrease in revenue due to the 1996 sale of two industrial properties and the 1997 sales of sixteen retail properties. Fees and Reimbursements. Fees and reimbursements revenue consists primarily of property management fees, asset management fees and lease commissions paid to the Company under property and asset management agreements. This revenue increased $408,000, or 131%, to $719,000 for the year ended December 31, 1997, from $311,000 for the year ended December 31, 1996. The increase primarily consisted of increases in asset management fees of $131,000, property management fees of $257,000 and lease commissions of $20,000. The Company's contract was expanded to include asset management fees in 1997. Interest and Other Income. Interest and other income, which consists primarily of interest on cash investments and mortgage loans receivable, increased $722,000, or 67%, to $1,802,000 for the year ended December 31, 1997, from $1,080,000 for the year ended December 31, 1996. The increase was primarily due to a $1,040,000 increase in interest income as a result of higher invested cash balances and a $365,000 increase in interest income from the Grunow mortgage loan receivable. This increase in interest income is partially offset by a $649,000 reduction in interest and other income due to the payoff of the Hovpark mortgage loan receivable in January 1997. Equity in Earnings of Associated Companies. Equity in earnings of Associated Companies increased $1,145,000, or 72%, to $2,743,000 for the year ended December 31, 1997, from $1,598,000 for the year ended December 31, 1996. This increase was primarily due to an increase in the net operating income of Glenborough Hotel Group ("GHG") due to the lease of the Scottsdale Hotel and from a $1,381,000 gain on the liquidation of Atlantic Pacific Assurance Company, Limited ("APAC", a Bermuda corporation formed to underwrite certain insurable risks of certain GLB predecessor partnerships and related entities) and an increase in transaction fees earned by GC. The increase is offset by reduced management fees in 1997 as a result of the sales of several properties under management and partnership liquidations, as well as the write-off of GC's unamortized balance of its investment in a management contract. 22 Net Gain on Sales of Rental Properties. The net gain on sales of rental properties of $839,000 during the year ended December 31, 1997, resulted from the sales of sixteen retail properties. The net gain on sales of rental properties of $321,000 during the year ended December 31, 1996, resulted from the sale of two self-storage facilities from the Company's industrial portfolio. Gain on Collection of Mortgage Loan Receivable. The gain on collection of mortgage loan receivable of $652,000 during the year ended December 31, 1997 resulted from the collection of the Hovpark mortgage loan receivable which had a net carrying value of $6,700,000. The payoff amount totaled $6,863,000 in cash, plus a $500,000 note receivable, which, net of legal costs, resulted in a gain of $652,000. Property Operating Expenses. Property operating expenses increased $13,692,000, or 260%, to $18,958,000 for the year ended December 31, 1997, from $5,266,000 for the year ended December 31, 1996. Of this increase, $14,687,000 represents property operating expenses attributable to the 1996 Acquisitions and the 1997 Acquisitions, which was slightly offset by the reduction in expenses resulting from the 1996 sale of two industrial properties and the 1997 sales of sixteen retail properties. General and Administrative Expenses. General and administrative expenses increased $1,926,000, or 138%, to $3,319,000 for the year ended December 31, 1997, from $1,393,000 for the year ended December 31, 1996. The increase is primarily due to increased salary and overhead costs resulting from the 1996 Acquisitions and the 1997 Acquisitions. Depreciation and Amortization. Depreciation and amortization increased $10,298,000, or 225%, to $14,873,000 for the year ended December 31, 1997, from $4,575,000 for the year ended December 31, 1996. The increase is primarily due to depreciation and amortization associated with the 1996 Acquisitions and the 1997 Acquisitions. Interest Expense. Interest expense increased $5,755,000, or 147%, to $9,668,000 for the year ended December 31, 1997, from $3,913,000 for the year ended December 31, 1996. Substantially all of the increase was the result of higher average borrowings during the year ended December 31, 1997, as compared to the year ended December 31, 1996, due to new debt and the assumption of debt related to the 1996 Acquisitions and the 1997 Acquisitions. Loss on early extinguishment of debt. Loss on early extinguishment of debt of $843,000 during the year ended December 31, 1997, resulted from the write-off of unamortized loan fees related to the $50 million secured line of credit from Wells Fargo Bank which was replaced with a new $250 million unsecured line of credit (the "Acquisition Credit Facility") from Wells Fargo Bank. Loss on early extinguishment of debt of $186,000 during the year ended December 31, 1996, resulted from the write-off of unamortized loan fees related to the $10,000,000 line of credit from Imperial Bank which was paid-off with proceeds from the $50 million secured line of credit from Wells Fargo Bank. Comparison of the historical year ended December 31, 1996 to the as adjusted year ended December 31, 1995. Set forth below is a discussion comparing the historical results of operations for the year ended December 31, 1996 to the results of operations for the year ended December 31, 1995 adjusted to reflect the Consolidation as if the Consolidation had occurred on January 1, 1994. Following is a table of net operating income by property type, for comparative purposes, presenting the results for the year ended December 31, 1996 and the as adjusted year ended December 31, 1995. 23
Results of Operations by Property Type Historical Year Ended December 31, 1996 and As Adjusted Year Ended December 31, 1995 Multi- Property Eliminating Total Office Industrial Retail Family Hotel Total Entry(1) Reported 1996 Historical Revenue $3,905,000 $4,260,000 $3,746,000 $1,519,000 $4,513,000 $17,943,000 $17,943,000 Operating Expenses 1,697,000 744,000 991,000 601,000 1,698,000 5,731,000 ($465,000) 5,266,000 Net Operating Income 2,208,000 3,516,000 2,755,000 918,000 2,815,000 12,212,000 465,000 12,677,000 Percentage of Total NOI 18% 29% 23% 7% 23% 100% 1995 As Adjusted Revenue $1,280,000 $4,133,000 $3,366,000 $782,000 $3,934,000 $13,495,000 $13,495,000 Operating Expenses 599,000 775,000 814,000 448,000 1,718,000 4,354,000 ($270,000) 4,084,000 Net Operating Income 681,000 3,358,000 2,552,000 334,000 2,216,000 9,141,000 270,000 9,411,000 Percentage of Total NOI 7% 37% 28% 4% 24% 100% (1) Eliminating entry represents internal market level property management fees included in operating expenses to provide comparison to industry performance.
Rental Revenue. Rental Revenue increased by $4,448,000, or 33%, to $17,943,000 for the year ended December 31, 1996 from $13,495,000 for the as adjusted year ended December 31, 1995. The increase consisted of increases in revenue from the office, industrial, retail, multi-family and hotel properties of $2,625,000, $127,000, $380,000, $737,000 and $579,000, respectively. Moreover, of this increase, $4,442,000 represents rental revenue generated from the acquisition in 1996 of 20 properties (the "1996 Acquisitions"). The increase was offset by the elimination of revenue from two industrial properties which were sold in June 1996. These properties represented annual revenue of approximately $600,000. Fees and Reimbursements. Fees and reimbursements revenue consists primarily of asset management fees paid to the Company by a controlled partnership and increased slightly to $311,000 in 1996 from $260,000 in 1995. Interest and Other Income. Interest and other income consists primarily of interest on mortgage loans receivable and increased slightly to $1,080,000 in 1996 from $982,000 in 1995. Equity in Earnings of Associated Companies. Equity in earnings of Associated Companies decreased slightly from $1,691,000 in 1995 to $1,598,000 in 1996, primarily resulting from the acquisition of the UCT and Bond Street Properties by the Company from entities controlled by the Associated Companies. Prior to the acquisition by the Company of these Properties, the partnerships owning these Properties paid all their fees and reimbursed all their related salary costs to GC. Net Gain on Sale of Rental Properties. Gain on sale of rental properties of $321,000 during 1996 resulted from the sale of two properties held in the Company's industrial portfolio. Property Operating Expenses. Property operating expenses increased by $1,182,000, or 29%, to $5,266,000 in the year ended December 31, 1996 from $4,084,000 for the as adjusted year ended December 31, 1995. Of this increase, $1,722,000 represents expenses of the 1996 Acquisitions, offset in part by the reduction in expenses resulting from the sale of two industrial properties. General and Administrative Expenses. General and administrative expenses increased $410,000, or 42%, from $983,000 in 1995 to $1,393,000 in 1996. The increase is due in part to increased overhead costs resulting from the 1996 Acquisitions, including a portion of the transaction costs relating to the 1996 Acquisitions. Depreciation and Amortization. Depreciation and amortization increased $921,000, or 25%, to $4,575,000 in 1996 from $3,654,000 in 1995. The increase was primarily due to depreciation and amortization associated with the 1996 Acquisitions. 24 Interest Expense. Interest expense increased by $1,146,000, or 41%, to $3,913,000 in the year ended December 31, 1996 from $2,767,000 in the as adjusted year ended December 31, 1995. Substantially all of the increase was the result of higher average borrowings during 1996 as compared to 1995. The increased borrowings in 1996 were used to finance the cash portion of the 1996 Acquisitions. Consolidation Costs. Consolidation costs in 1996 consist of the costs associated with preparing, printing and mailing the Prospectus/Consent Solicitation Statement and other documents related to the Consolidation, and all other costs incurred in the forwarding of the Prospectus/Consent Solicitation Statement to investors. Litigation Costs. Litigation costs consist of the legal fees incurred in connection with defending two class action complaints filed by investors in certain of the GRT Predecessor Entities as well as an accrual for the proposed settlement in one case. Loss on early extinguishment of debt. Loss on early extinguishment of debt of $186,000 during the year ended December 31, 1996 resulted from the write-off of unamortized loan fees when the $10,000,000 Imperial Bank line of credit was paid off with proceeds from the Wells Fargo Bank line of credit. Comparison of the historical year ended December 31, 1996 to the historical year ended December 31, 1995. Rental Revenue. Rental Revenue increased by $2,489,000, or 16%, to $17,943,000 in 1996 from $15,454,000 in 1995. Of this increase, $4,442,000 represents rental revenue generated from the 1996 Acquisitions. The increase in 1996 revenues was offset by the elimination of revenue from two industrial properties which were sold in June 1996. The increase in rental revenue was also offset by a decrease in hotel revenue due to the change in the operational structure of the hotels. As discussed above, three of the original hotels were owned and operated by the GRT Predecessor entities prior to 1996 and accordingly, the revenue of the hotels is included in the 1995 statement of operations. However, under the current structure, the Company owns the hotels but leases them to GHG and accordingly, the 1996 statement of operations reflects only the lease payments due under the operating leases. For the year ended December 31, 1996, each of the four originally owned hotels increased their ADR (Average Daily Rate) and REVPAR (Revenue Per Available Room). Fees and Reimbursements and Equity in Earnings of Associated Companies. Fees and reimbursements revenue decreased to $311,000 for the year ended December 31, 1996 from $16,019,000 for the year ended December 31, 1995; equity in earnings of the Associated Companies increased to $1,598,000 for the year ended December 31, 1996 from zero for the year ended December 31, 1995. As previously discussed, the primary reason for the difference between 1996 and 1995 results is the segregation in 1996 of the operations of the Associated Companies, and the resulting recognition of earnings from them using the equity method by the Company. In 1995, the earnings of the Associated Companies were consolidated with the partnerships participating in the Consolidation. Interest and Other Income. Interest and other income decreased $1,618,000, or 60%, in 1996 to $1,080,000 from $2,698,000 in 1995. This decrease resulted primarily from the lower note receivable balance in 1996, primarily as a result of the early prepayment of a note receivable in April 1995 and the early repayment in January and June of 1995 of three of the four notes received from the sale of the Laurel Cranford buildings. Also, in 1996, cash balances decreased primarily as a result of the prepayment of the investor notes payable, payment of declared dividends and the payment of costs associated with the Consolidation. Net Gain on Sale of Rental Properties. Gain on sale of rental properties of $321,000 during 1996 resulted from the sale of two properties held in the Company's industrial portfolio. Property Operating Expenses. Property operating expenses decreased $3,310,000, or 39%, to $5,266,000 in 1996 from $8,576,000 in 1995. Of the decrease, $4,993,000 is primarily the result of the change in the operational structure of the hotels, as previously discussed. The decrease was offset by an increase of $1,722,000 associated with the operating expenses of the 1996 Acquisitions. General and Administrative. General and administrative expenses decreased to $1,393,000 in 1996 from $15,947,000 in 1995. The decrease is due primarily to the segregation in 1996 of the operations of the Associated Companies, as previously discussed. Depreciation and Amortization. Depreciation and amortization remained relatively constant, decreasing to $4,575,000 in 1996 from $4,762,000 in 1995. Depreciation and amortization in 1995 includes the amortization of the management 25 contracts, which are now reflected in the results of the Associated Companies in 1996. Depreciation and amortization in 1996 includes depreciation and amortization related to the 1996 Acquisitions. Interest Expense. Interest expense increased $1,784,000, or 84%, to $3,913,000 in 1996 from $2,129,000 in 1995. Substantially all of the increase was the result of higher average borrowings during 1996 as compared to 1995. The increased borrowings were used to finance the 1996 Acquisitions. Liquidity and Capital Resources For the year ended December 31, 1997, cash provided by operating activities increased by $19,940,000 to $24,078,000 as compared to $4,138,000 for the same period in 1996. The increase is primarily due to an increase in earnings before depreciation and amortization of $31,303,000 due to the 1996 Acquisitions and 1997 Acquisitions and the one-time payment in 1996 of consolidation costs and litigation costs in the aggregate amount of $7,237,000. Cash used for investing activities increased by $507,409,000 to $569,242,000 for the year ended December 31, 1997, as compared to $61,833,000 for the same period in 1996. The increase is primarily due to the 1997 Acquisitions. This increase was partially offset by the collection of the Hovpark mortgage loan receivable and the proceeds from the 1997 sales of sixteen retail properties. Cash provided by financing activities increased by $494,416,000 to $548,879,000 for the year ended December 31, 1997, as compared to $54,463,000 for the same period in 1996. This increase was primarily due to the net proceeds from the March 1997 Offering, the July 1997 Offering and the October 1997 Offering (as defined below) and the proceeds from new debt reduced by the repayment of prior debt. The Company expects to meets its short-term liquidity requirements generally through its working capital, its Acquisition Credit Facility (as defined below) and cash generated by operations. As of December 31, 1997, the Company had no material commitments for capital improvements. Planned capital improvements consist of tenant improvements, expenditures necessary to lease and maintain the Properties and expenditures for furniture and fixtures and building improvements at the hotel properties. 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 Acquisition Credit Facility provides for working capital advances. However, there can be no assurance that the Company's results of operations will not fluctuate in the future and at times affect (i) its ability to meet its operating requirements and (ii) the amount of its distributions. The Company's principal sources of funding for acquisitions, development, expansion and renovation of properties include an unsecured Acquisition Credit Facility, permanent secured debt financing, public unsecured debt financing, public and private equity and debt issuances, the issuance of Operating Partnership Units and cash flow provided by operations. Mortgage loans receivable decreased from $9,905,000 at December 31, 1996, to $3,692,000 at December 31, 1997. This decrease was primarily due to the payoff of the Hovpark mortgage loan receivable which had a net carrying value of $6,700,000, and scheduled principal payments on the Laurel Cranford mortgage loan receivable. The reduction in mortgage loans receivable was partially offset by $491,000 of draws made by the borrower on the leasing and interest reserves related to the Grunow mortgage loan receivable. Mortgage loans payable increased from $54,584,000 at December 31, 1996, to $148,139,000 at December 31, 1997. This increase primarily resulted from the assumption of mortgage loans totaling $60,628,000 in connection with the 1997 Acquisitions, the funding of $3,289,000 of secured loans from Wells Fargo Bank, and the funding of a $60 million secured loan. These increases were partially offset by the payoff of a $6,120,000 term loan which was secured by ten of the retail properties that were sold and the payoff of $22,960,000 of mortgage loans and scheduled principal payments on other mortgage debt. In April 1997, the Operating Partnership entered into a $40 million unsecured loan with Wells Fargo Bank to fund the acquisition of the CIGNA Properties (the "CIGNA Acquisition Financing"). The CIGNA Acquisition Financing had a term of three months (extendible to six months at the Company's option), interest at a variable annual rate equal to 175 basis points above 30-day LIBOR, was unsecured and was guaranteed by the Company. Required payments under the CIGNA Acquisition Financing were monthly, interest only. In June 1997, Wells Fargo had substantially completed underwriting and due diligence for a $60 million mortgage loan to the Company (the "$60 Million Mortgage") to be secured by the Lennar Properties, the Riverview Property, the Centerstone Property and five of the CIGNA Properties. In the interim, Wells Fargo funded a $60 million unsecured 26 "bridge" loan (the "$60 Million Unsecured Bridge Loan"), which was used to (i) repay all principal and accrued interest under the $40 million CIGNA Acquisition Financing, and (ii) reduce the outstanding balance under the Line of Credit by approximately $20 million. The $60 Million Unsecured Bridge Loan was paid-off in July 1997 from the proceeds of the July 1997 Offering and the $60 Million Mortgage was obtained in September 1997. This loan has a 25-year term, bears interest at an annual rate of 7.5% (which is fixed until 2007) and requires monthly principal and interest payments. The proceeds from this loan were used to fund acquisitions. In September 1997, the Company closed a $114 million unsecured loan (the "$114 Million Interim Unsecured Loan") with Wells Fargo Bank. This loan had a 90-day term with two 90-day extension options, interest at a fixed annual rate of 7.5% and required monthly interest-only payments. The proceeds of this loan were used to fund a portion of the purchase price for the T. Rowe Price Properties. In October 1997, the Company repaid the $114 Million Interim Unsecured Loan with net proceeds from the October 1997 Offering (defined below). The Company had a $50 million secured line of credit provided by Wells Fargo Bank (the "Line of Credit"). Outstanding borrowings under the Line of Credit were $21,307,000 at December 31, 1996. In December 1997, the Company repaid the outstanding balance under the Line of Credit and replaced it with a new $250 million unsecured line of credit as discussed below. In December 1997, the Company replaced its $50 million secured line of credit with a new $250 million unsecured line of credit (the "Acquisition Credit Facility") with Wells Fargo Bank. The Acquisition Credit Facility has a three year term with an option to extend the term for an additional 10 years and bears interest on a sliding scale ranging from LIBOR plus 1.1% to LIBOR plus 1.3%, which represents a rate that is lower by at least 0.45% than the rate under the Company's previous $50 million secured line of credit. The Acquisition Credit Facility agreement provides that if the Company's debt securities receive certain ratings from at least two rating agencies, as specified in the Acquisition Credit Facility agreement, the interest rate will decrease to a sliding scale ranging from LIBOR plus 0.80% to LIBOR plus 1.15%, depending on the rating. Draws under the Acquisition Credit Facility have been used to fund acquisitions. In January 1998, the Company closed a $150 million loan agreement with Wells Fargo Bank (the "Interim Loan"). The Interim Loan bears interest at LIBOR plus 1.75% and has a term of three months with an option to extend the term an additional three months. The purpose of the Interim Loan is to fund acquisitions. At December 31, 1997, the Company's total indebtedness included fixed-rate debt of $140,333,000 (including $85,672,000 subject to cross-collateralization) and floating-rate indebtedness of $87,966,000. Approximately 32% of the Company's total assets, comprising 45 properties, is encumbered by debt at December 31, 1997. In January 1997 and May 1997, the Company filed shelf registration statements with the Securities and Exchange Commission (the "SEC") to register $250 million and $350 million, respectively, of equity securities of the Company. In November 1997, the Company filed a shelf registration statement with the SEC to register an additional $1 billion of equity securities of the Company (the "November 1997 Shelf Registration Statement"). The November 1997 Shelf Registration Statement was declared effective by the SEC on December 18, 1997. After the completion of the March 1997, July 1997, October 1997 and January 1998 Offerings (as defined below), the Company has the capacity pursuant to the November 1997 Shelf Registration Statement to issue up to approximately $801.2 million in equity securities. In March 1997, the Company completed a public offering of 3,500,000 shares of its Common Stock at a price of $20.25 per share (the "March 1997 Offering"). The net proceeds from the offering of approximately $66.1 million were used to fund acquisitions and to repay approximately $24.9 million of the then outstanding balance under the Company's previous secured line of credit. In July 1997, the Company completed a public offering of 6,980,000 shares of its Common Stock at a price of $22.625 per share (the "July 1997 Offering"). The net proceeds from the offering of approximately $149.2 million were used to fund acquisitions and to repay debt. In October 1997, the Company completed a public offering of 11,300,000 shares of its Common Stock at a price of $25.00 per share (the "October 1997 Offering"). The net proceeds from the offering of approximately $267.3 million were used to fund acquisitions, to repay approximately $142.8 million of indebtedness and for general corporate purposes. 27 In January 1998, the Company completed a public offering of 11,500,000 shares of 7 3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible Preferred Stock Offering"). The 11,500,000 shares were sold at a per share price of $25.00 for net proceeds of approximately $276 million, which were used to repay the outstanding balance under the Company's Acquisition Credit Facility, to fund certain subsequent property acquisitions and for general corporate purposes. The shares are convertible at any time at the option of the holder thereof into shares of Common Stock at an initial conversion price of $32.83 per share of Common Stock (equivalent to a conversion rate of 0.7615 shares of Common Stock for each share of Series A Convertible Preferred Stock), subject to adjustment in certain circumstances. In March 1998, the Operating Partnership, as to which the Company is general partner, issued $150 million of 7 5/8% Senior Notes (the "Notes") in an unregistered 144A offering. The Notes mature on March 15, 2005, unless previously redeemed. Interest on the Notes is payable semiannually on March 15 and September 15, commencing September 15, 1998. The Operating Partnership intends to use the net proceeds of the offering to repay substantially all of the outstanding balance under the Interim Loan. Inflation Substantially all of the leases at the retail Properties provide for pass-through to tenants of certain operating costs, including real estate taxes, common area maintenance expenses, and insurance. Leases at the multi-family properties generally provide for an initial term of one month or one year and allow for rent adjustments at the time of renewal. Leases at the office Properties typically provide for rent adjustment and pass-through of certain operating expenses during the term of the lease. All of these provisions may permit the 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. POTENTIAL INABILITY TO MANAGE EXPANSION DUE TO ADDITION OF NEW PROPERTIES The Company is currently experiencing a period of rapid growth. Since the Consolidation on December 31, 1995, the Company has invested approximately $1.2 billion in properties, as of the date of this filing. The Company's ability to manage its growth effectively will require it to apply successfully its experience managing its existing portfolio to new markets and to an increased number of properties. There can be no assurance that the Company will be able to manage these operations effectively. The Company's inability to effectively manage its expansion could have an adverse effect on the Company's results of operations and financial condition. ACQUISITIONS COULD ADVERSELY AFFECT OPERATIONS Consistent with its growth strategy, the Company is continually pursuing and evaluating potential acquisition opportunities, and is from time to time actively considering the possible acquisition of specific properties, which may include properties managed or controlled by one of the Associated Companies 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 funds from operations or cash available for distribution, in the short term or the long term or both, or increase the Company's debt, or be perceived negatively among investors such that such an acquisition could be followed by a decline in the market value of the Common Stock. 28 POTENTIAL ADVERSE EFFECT ON OPERATIONS DUE TO ASSUMPTION OF GENERAL PARTNER LIABILITIES The Company and its predecessors have acquired a number of their properties by acquiring partnerships that own the properties or by first acquiring general partnership interests and at a later date acquiring the properties, and the Company may pursue acquisitions in this manner in the future. When the Company uses this acquisition technique, a subsidiary of the Company becomes a general partner. As a general partner the Company's subsidiary becomes generally liable for the debts and obligations of the partnership, including debts and obligations that may be contingent or unknown at the time of the acquisition. In addition, the Company's subsidiary assumes obligations under the partnership agreements, which may include obligations to make future contributions for the benefit of other partners. The Company undertakes detailed due diligence reviews to ascertain the nature and extent of obligations that its subsidiary will assume when it becomes a general partner, but there can be no assurance that the obligations assumed will not exceed the Company's estimates or that the assumed liabilities will not have an adverse effect on the Company's results of operations or financial condition. In addition, an Associated Company may enter into management agreements pursuant to which it assumes certain obligations as manager of properties. There can be no assurance that these obligations will not have an adverse effect on the Associated Companies' results of operations or financial condition, which could adversely affect the value of the Company's preferred stock interest in those companies. UNCERTAINTY RELATED TO ACQUISITIONS THROUGH TENDER OFFERS The Company may, as part of its growth strategy, acquire properties and portfolios of properties through tender offer acquisitions of interests in public and private partnerships and other REITs. Tender offers often result in competing tender offers, as well as litigation initiated by limited partners in the subject partnerships or by competing bidders. Due to the inherent uncertainty of litigation, the Company could be subject to adverse judgments in substantial amounts. As the Company has not yet attempted an acquisition through the tender offer process, and because of competing offers and possible litigation, there can be no assurance that, if undertaken, the Company would be successful in acquiring properties through a tender offer or that the tender offer process would not result in litigation and a significant judgment adverse to the Company. 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 may provide substantial economic benefits such as the payments or unit issuances, relief or deferral of tax liabilities, relief of primary or secondary liability for debt, and reduction in exposure to other property-related liabilities. Despite 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 and there can be no assurance that these transactions will be as favorable to the Company as transactions that the Company negotiates with unrelated parties or will not result in undue benefit to Robert and Andrew Batinovich and members of their families. Neither Robert Batinovich nor Andrew Batinovich has guaranteed that any properties acquired from entities they control or in which they or their families 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 is dependent on the efforts of Robert and Andrew Batinovich, its Chief Executive Officer and its President and Chief Operating Officer, respectively, and of its other executive officers. The loss of the services of any of them could have an adverse effect on the results of operations and financial condition of the Company. Both Robert and Andrew Batinovich have entered into employment agreements with the Company. MATERIAL TAX RISKS The Company has elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year ended December 31, 1996. No assurance can be given, however, that the Company will be able to operate in a manner which will permit it to maintain its status as a REIT. Qualification as a REIT involves the satisfaction of numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which only limited judicial or administrative interpretation exists, and involves the 29 determination of various factual matters and circumstances not entirely within the Company's control. The Company receives nonqualifying management fee income and owns nonqualifying preferred stock in the Associated Companies. As a result, the Company may approach the income and asset test limits imposed by the Code and could be at risk of not satisfying those tests. In order to avoid exceeding the asset test limit, for example, the Company may have to reduce its interest in the Associated Companies. The Company is relying on the opinion of its tax counsel regarding its ability to qualify as a REIT. This legal opinion is not binding on the Internal Revenue Service ("IRS"). CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT If the Company were to fail to qualify as a REIT in any taxable year, the Company would be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at corporate rates. Moreover, unless entitled to relief under certain statutory provisions, the Company also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. This treatment would reduce the net earnings of the Company available for investment or distribution to stockholders because of the additional tax liability to the Company for the years involved. In addition, distributions to stockholders would no longer be required to be made. 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, prospectively or retroactively, by legislative, judicial or administrative action at any time. No assurance can be given that legislation, regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to the qualification as a REIT or the federal income tax consequences of this qualification. In addition to any direct effects the changes might have, the changes might also indirectly affect the market value of all real estate investments, and consequently the ability of the Company to realize its investment objectives. POTENTIAL LIABILITY DUE TO ENVIRONMENTAL MATTERS Under federal, state and local laws, ordinances and regulations 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 at such property, and may be required to investigate and clean-up such contamination at such property or such contamination which has migrated from such property. Such 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 such contamination, and the liability under such laws has been interpreted to 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 present at or emanating from such property. 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, and 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 such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. Although tenants of the Properties owned by the Company generally are required by their leases to operate in compliance with all applicable federal, state and local environmental laws, ordinances and regulations and to indemnify the Company against any environmental liability arising from the tenants' activities on the Properties, the Company could nevertheless be subject to environmental liability relating to its management of the Properties or strict liability by virtue of its ownership interest in the Properties and there can be no assurance that the tenants would satisfy their indemnification obligations under the leases. There can be no assurance that any environmental assessments of the Properties owned by the Company, properties being considered for acquisition by the Company, or the properties owned by the partnerships managed by the Associated Companies have revealed all potential environmental liabilities, that any prior owner or prior or current operator of such properties did not create an environmental condition not known to the Company or that an environmental condition does not otherwise exist as to any one or more of such properties that could have an adverse effect on the Company's results of operations and financial condition, either directly (with respect to properties owned by the Company), or indirectly (with respect to properties owned by partnerships managed by an Associated Company) by adversely affecting the financial condition of the Associated Company and thus the value of the Company's preferred stock interest in the Associated Company. Moreover, there can be no assurance that (i) future environmental laws, ordinances or regulations will not have an adverse effect on the Company's results of operations and financial condition or (ii) the current environmental condition of such properties will not be affected by tenants and occupants of such properties, by the condition of land or operations in the vicinity of the properties (such as the presence of underground storage tanks), or by third parties unrelated to the Company. ENVIRONMENTAL ASSESSMENTS AND POTENTIAL LIABILITY DUE TO ASBESTOS-CONTAINING MATERIALS Environmental Laws also govern the presence, maintenance and removal of asbestos-containing building materials ("ACM"). Such laws require that ACM be properly managed and maintained, that those who may come into contact with ACM be adequately apprised and trained, and that special precautions, including removal or other abatement, be undertaken in the event ACM is disturbed during renovation or demolition of a building. Such laws may impose fines and penalties on building owners or operators for failure to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers. All of the Properties presently owned by the Company 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, and all of these investigations have been completed by the Company or are in the process of being completed. Certain of the Properties owned by the Company have been found to contain ACMs. The Company believes that these materials have been adequately contained and that an ACM operations and maintenance program has been implemented or is in the process of being implemented for the Properties found to contain ACMs. Some, but not all, of the properties owned by partnerships managed by the Associated Companies have been subject to Phase I environmental assessments by independent environmental consultants. The Associated Companies determine 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 ACMs. In each case the responsible Associated Company believes that these materials have been adequately contained and that an ACM operations and maintenance program has been implemented for the properties found to contain ACMs. POTENTIAL ENVIRONMENTAL LIABILITY RESULTING FROM UNDERGROUND STORAGE TANKS Some of the Properties, as well as properties previously owned by the Company, are leased or have been leased, in part, to owners and operators of dry cleaners that operate on-site dry cleaning plants, auto care centers, or to owners or operators of other businesses that use, store or otherwise handle petroleum products or other hazardous or toxic substances. 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 30 petroleum products or other hazardous or toxic substances. Some of the 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 Properties have been contaminated with petroleum products or other hazardous or toxic substances from on-site operations or operations on adjacent or nearby properties. In addition, certain of the 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 in the future engage in activities that may release petroleum products or other hazardous or toxic substances. POTENTIAL ADVERSE EFFECTS OF ENVIRONMENTAL LIABILITIES ON OPERATING COSTS AND ABILITY TO BORROW The Company's operating costs may be affected by the obligation to pay for the cost of complying with existing Environmental Laws as well as the cost of complying with future legislation. In addition, the presence of petroleum products or other hazardous or toxic substances at any of the Properties owned by the Company, or the failure to remediate such property properly, may adversely affect the Company's ability to borrow by using such real property 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 AND FINANCING OF REAL ESTATE The Company is subject to risks generally incidental to the ownership of real estate, including 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, there could be an adverse effect on the Company's results of operations and financial condition. 31 POTENTIAL INABILITY TO GROW DUE TO LIMITED AVAILABILITY OF AND COMPETITION FOR REAL ESTATE ACQUISITIONS The Company's growth is dependent upon acquisitions. There can be no assurance that properties will be available for acquisition or, if available, that the Company will be able to purchase such properties on favorable terms. If such acquisitions are not available it could have a negative impact on the growth of the Company, which could have an adverse effect on the performance of the Company's Common Stock. Furthermore, the Company faces competition from other businesses, individuals, fiduciary accounts and plans and other entities in the acquisition, operation and sale of its properties. Some of the Company's competitors are larger and have greater financial resources than the Company. This competition may result in a higher cost for properties the Company wishes to purchase. POTENTIAL ADVERSE EFFECTS ON OPERATIONS DUE TO COMPETITION FOR TENANTS The Company is subject to the risk that when space becomes available at its properties the leases may not be renewed, the space may not be let or relet, or the terms of the renewal or reletting (including the cost of required renovations or concessions to tenants) may be less favorable to the Company. Although the Company has established annual property budgets that include estimates of costs for renovation and reletting expenses that it believes are reasonable in light of each property's situation, no assurance can be given that these estimates will sufficiently cover these expenses. If the Company is unable to promptly lease all or substantially all of the space at its properties, if the rental rates are significantly lower than expected, or if the Company's reserves for these purposes prove inadequate, then there could be an adverse effect on the Company's results of operations and financial condition. POTENTIAL ADVERSE EFFECTS ON OPERATIONS DUE TO TENANTS' DEFAULTS The ability of the Company to manage its assets is subject to federal bankruptcy laws and state laws affecting creditors' rights and remedies available to real property owners. In the event of the financial failure or bankruptcy of a tenant, there can be no assurance that the Company could promptly recover the tenant's premises from the tenant or from a trustee or debtor-in-possession in any bankruptcy proceeding filed by or against that tenant, or that the Company would receive rent in the proceeding sufficient to cover its expenses with respect to the premises. In the event of the bankruptcy of a tenant, the Company will be subject to the provisions of the federal bankruptcy code, which in some instances may restrict the amount and recoverability of claims held by the Company against the tenant. If any tenant defaults on its obligations to the Company, there could be an adverse effect on the Company's results of operations and financial condition. GENERAL RISKS ASSOCIATED WITH MANAGEMENT, LEASING AND BROKERAGE CONTRACTS The Company is subject to the risks associated with the property management, leasing and brokerage businesses. These risks include the risk that management contracts or service agreements may be terminated, that contracts will not be renewed upon expiration or will not be renewed on terms consistent with current terms, and that leasing and brokerage activity generally may decline. Acquisition of properties by the Company from the Associated Companies could result in a decrease in revenues to the Associated Companies and a corresponding decrease in dividends received by the Company from the Associated Companies. Each of these developments could have an adverse effect on the Company's results of operations and financial condition. To maintain the Company's status as a REIT while realizing income from the Company's third-party management business, the capital stock of Glenborough Hotel Group, a Nevada corporation ("GHG") and Glenborough Corporation, a California corporation ("GC," and together with GHG, the "Associated Companies") (which conduct the Company's third-party management, leasing and brokerage businesses) is divided into two classes. All of the voting common stock of the Associated Companies, representing 5% of the total equity of GC, and 25% of the total equity of GHG, is held by individual stockholders. Nonvoting preferred stock representing the remaining equity of each Associated Company is held entirely by the Company. Although the Company holds a majority of the equity interest in each Associated Company, the Company is not able to elect directors of any Associated Company and, consequently, the Company has no ability to influence the day-to-day decisions of each entity. ADVERSE EFFECTS ON OPERATIONS DUE TO UNINSURED LOSS The Company or in certain instances tenants of the properties carry comprehensive liability, fire and extended coverage with respect to the Company's properties, with policy specification and insured limits customarily carried for similar properties. There are, however, certain types of losses (such as from earthquakes and floods) that 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 32 incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. Should an uninsured loss occur, the Company could lose some or all of its capital investment, cash flow and anticipated profits related to one or more properties, which could have an adverse effect on the Company's results of operations and financial condition. INABILITY TO VARY PORTFOLIO DUE TO ILLIQUIDITY OF REAL ESTATE Real estate investments are relatively illiquid and, therefore, will tend to limit the ability of the Company to vary its portfolio promptly in response to changes in economic or other conditions. In addition, the Code and individual agreements with sellers of properties place limits on the Company's ability to sell properties, which may adversely affect returns to holders of Common Stock. Forty-two of the properties owned by the Company were acquired on terms and conditions under which they can be disposed of only in a like-kind exchange or other non-taxable 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 "ADA"). The ADA generally requires that places of public accommodation be made accessible to people with disabilities to the extent readily achievable. Compliance with the ADA requirements could require removal of access barriers and 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 ADA, the impact of its application to the Company's properties, including the extent and timing of required renovations, is uncertain. Pursuant to certain lease agreements with tenants in certain of the "single-tenant" Properties, the tenants are obligated to comply with the ADA provisions. If the Company's costs are greater than anticipated or tenants are unable to meet their obligations, there could be an adverse effect on the Company's results of operations and financial condition. POTENTIAL ADVERSE EFFECTS ON OPERATIONS OF DEVELOPMENT JOINT VENTURES The Company may from time to time enter into joint ventures with selected developers ("JV Partners") for the purpose of developing new projects in which such JV Partner has, in the opinion of management, significant expertise or experience. Such projects generally require various governmental and other approvals, the receipt of which cannot be assured. Such development activities may entail certain risks, including the risk that: (i) the expenditure of funds on and devotion of management's time to projects which may not come to fruition; (ii) construction costs of a project may exceed original estimates, possibly making the project uneconomical; (iii) occupancy rates and rents at a completed project may be less than anticipated; and (iv) expenses at a completed development may be higher than anticipated. In addition, JV Partners may have significant control over the operation of the joint venture assets. Therefore, such investments may, under certain circumstances, involve risks such as the possibility that the JV Partner might become bankrupt, have economic or business interests or goals that are inconsistent with the business interest or goals of the Company, or be in a position to take action contrary to the instructions or the requests of the Company or contrary to the Company's policies or objectives. Consequently, actions by a JV Partner might result in subjecting property owned by the joint venture to additional risk. Although the Company will seek to maintain sufficient control of any joint venture to permit the Company's objectives to be achieved, it may be unable to take action without the approval of its JV Partners or its JV Partners could take actions binding on the joint venture without the Company's consent. Additionally, should a JV Partner become bankrupt the Company could become liable for such JV Partner's share of joint venture liabilities. These risks may result in a development project having an adverse effect on the Company's result of operations and financial condition. ADDITIONAL CAPITAL REQUIREMENTS; POSSIBLE ADVERSE EFFECTS ON HOLDERS OF EQUITY SECURITIES The Company's future growth depends in large part upon its ability to raise additional capital on satisfactory terms or at all. There can be no assurance that the Company will be able to raise sufficient capital to achieve its objectives. If the Company were to raise additional capital through the issuance of additional equity securities, or securities convertible into or exercisable for equity securities, the interests of holders of the Common Stock or of other equity securities of the Company could be diluted. Likewise, the Company's Board of Directors is authorized to cause the Company to issue preferred stock in one or more series and to determine the distributions and voting and other rights of the preferred stock. Accordingly, the Board of Directors may authorize the issuance of preferred stock with voting, distribution and other similar rights which could be dilutive to or otherwise adversely affect the interests of holders of Common Stock or of other equity securities of the Company. If the Company were to raise additional capital through debt financing, the Company will be subject to the risks described below, among others. See "Other Risks -- Debt Financing." 33 LIMITATION ON OWNERSHIP OF COMMON STOCK 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 (a) any transfer or acquisition of Common Stock (or preferred stock, as the case may be) that would result in the disqualification of the Company as a REIT under the Code will be void, and (b) if any person attempts to acquire shares of Common Stock (or shares of preferred stock, as the case may be) that after the acquisition would cause the person to own or to be deemed to own, by operation of certain attribution rules set out in the Code, an amount of Common Stock and preferred stock in excess of a predetermined limit, which, pursuant to Board action, currently is 9.9% of the value of the outstanding shares of Common Stock and preferred stock (the "Ownership Limitation" and as to the Common Stock or preferred stock, the transfer of which would cause any person to actually own Common Stock and preferred stock in excess of the Ownership Limitation, the "Excess Shares"), the transfer shall be void and the Common Stock (or preferred stock, as the case may be) subject to the transfer shall automatically be transferred to an unaffiliated trustee for the benefit of a charitable organization designated by the Board of Directors of the Company until sold by the trustee to a third party or purchased by the Company. Robert Batinovich, his spouse and children (including Andrew Batinovich) and individuals or entities whose ownership of Common Stock is attributed to Robert Batinovich in determining the number of shares of Common Stock owned by him for purposes of compliance with Section 856 of the Code (the "Attributed Owners"), are exempt from these restrictions, but are prohibited from acquiring shares of Common Stock or preferred stock if, after the acquisition, they would own in excess of 9.9% of the outstanding shares of Common Stock and preferred stock. This limitation on the ownership of Common Stock and preferred stock may have the effect of precluding 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 shall 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 (the aggregate Ownership Limitations as to all of these persons, as adjusted, the "Adjusted Ownership Limitation"). LOSSES RELATING TO CONSOLIDATION Two lawsuits were filed contesting the fairness of the Consolidation, one in California state court and one in federal court. A settlement of the state court action was approved by the court, but objectors to the settlement appealed that approval. On February 17, 1998, the Court of Appeals rejected the objectors' contentions and upheld the settlement. The objectors filed with the California Supreme Court a petition for review, which was denied on May 21, 1998. Plaintiffs in the federal court action court stipulated to a stay of the action pending resolution of the state court action. Pursuant to the terms of the settlement in the State court action, pending final resolution of these matters, the Company has paid one-third of the $855,000 settlement amount and the remaining two-thirds is being held in escrow. From time to time, the Company is involved in other litigation arising out of its business activities. It is possible that this litigation and the other litigation previously described could result in significant losses in excess of amounts reserved, which could have an adverse effect on the Company's results of operations and the financial condition of the Company. INVOLVEMENT OF SENIOR MANAGEMENT IN PREVIOUS CHAPTER 11 REORGANIZATION Robert and Andrew Batinovich, two of the senior officers of the Company, were also senior members of a management team that formed a publicly registered limited partnership in 1986 to consolidate a number of predecessor partnerships. That public partnership was involved in litigation with its primary creditor and, in order to prevent foreclosure, filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code in May of 1992. The public partnership, which owns an approximate 1.7% limited partner interest in the Operating Partnership along with other substantial real estate assets, and less than 0.5% interest in the Company, settled the litigation and obtained confirmation of a plan of reorganization in January 1994. DEBT FINANCING; RISK THAT CASH FLOW IS INSUFFICIENT FOR DEBT SERVICE REQUIREMENTS; RISK THAT DEBT RESTRICTIONS WILL AFFECT OPERATIONS; RISK OF INABILITY TO REPAY INDEBTEDNESS AT MATURITY 34 The Company intends to incur additional indebtedness in the future, including through borrowings under a credit facility, to finance property acquisitions. As a result, the Company expects to be subject to risks associated with debt financing, including the risk that interest rates may increase, the risk that the Company's cash flow will be insufficient to meet required payments on its debt and the risk that the Company may be unable to refinance or repay the debt as it comes due. The Company's current $250 million unsecured Acquisition Credit Facility with Wells Fargo Bank, N.A. provides that distributions may not exceed 90% of funds from operations and that, in the event of a failure to pay principal or interest on borrowings thereunder when due (subject to any applicable grace period), the Company and its subsidiaries may not pay any distributions on the Common Stock or the Preferred Stock. If the Company is unable to obtain acceptable financing to repay indebtedness at maturity, the Company may have to sell properties to repay indebtedness or properties may be foreclosed upon, which could have an adverse effect on the Company's results of operations and financial condition. Also, as of December 31, 1997, $79,168,000 of the Company's total indebtedness was secured by mortgages that included cross-collateralization provisions. ADVERSE EFFECTS ON OPERATIONS DUE TO FLUCTUATIONS IN INTEREST RATES As of December 31, 1997, the Company had approximately $88.0 million of variable rate indebtedness, which bears interest at a floating rate. Therefore, an increase in interest rates will have an adverse effect on the Company's net income and results of operations. THE COMPANY'S INDEBTEDNESS POLICY IS SUBJECT TO CHANGE BY THE BOARD OF DIRECTORS While the Company's current policy is to maintain a debt to Total Market Capitalization (as defined below) ratio of 30%, the Company's organizational documents limit the Company's ability to incur additional debt if the total debt, including the additional debt, would exceed 50% of the Borrowing Base, defined as the greater of Fair Market Value or Total Market Capitalization. The 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. 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 Operating Partnership, plus debt. An exception is made for refinancings and borrowings required to make distributions to maintain the Company's status as a REIT. Subject to these limitations contained in the Company's organizational documents, the Company's Board of Directors may change its indebtedness policy without a vote of the stockholders. If the Company changes its indebtedness policy, the Company could become more highly leveraged, resulting in an increased risk of default on the obligations of the Company and in an increase in debt service requirements that could adversely affect the financial condition and results of operations of the Company. In addition, in light of the debt restrictions set forth in the Company's organizational documents, it should be noted that a change in the value of the Common Stock could affect the Borrowing Base as defined in such documents, and therefore the Company's ability to incur additional indebtedness, even though such change in the Common Stock's value is unrelated to the Company's liquidity. UNCERTAINTY DUE TO BOARD OF DIRECTORS' ABILITY TO CHANGE INVESTMENT POLICIES The Company's Board of Directors may change the investment policies of the Company without a vote of the stockholders. If the Company changes its investment policies, the risks and potential rewards of an investment in the Company 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 One of the factors that may influence the market price of the shares of Common Stock in public markets will be the annual yield on the price paid for shares of Common Stock from distributions by the Company. An increase in market interest rates may lead prospective purchasers of the Common Stock to seek a higher annual yield from their investments. Such circumstances may adversely affect the market price of the Common Stock. IMPACT OF YEAR 2000 COMPLIANCE COSTS ON OPERATIONS The Company utilizes a number of computer software programs and operating systems across its entire organization, including applications used in financial business systems and various administrative functions. To the extent that the Company's software applications contain source code that is unable to appropriately interpret the upcoming calendar year "2000" and beyond, some level of modification, or replacement of such applications will be necessary. The Company has completed its identification of applications that are not yet "Year 2000" compliant and has commenced modification or replacement of such applications, as necessary. Given information known at this time about the Company's systems that are non-compliant, coupled with the Company's ongoing, normal course-of-business efforts to upgrade or replace critical systems, as necessary, management does not expect Year 2000 compliance costs to have any material adverse impact on the Company's liquidity or ongoing results of operations. No assurance can be given, however, that all of the Company's systems will be Year 2000 compliant or that compliance costs or the impact of the Company's failure to achieve substantial Year 2000 compliance will not have a material adverse effect on the Company's future liquidity or results of operations. SHARES AVAILABLE FOR FUTURE SALE No prediction can be made as to the effect, if any, that future sales of shares of Common Stock or future conversions or exercises of securities for future sales, including shares of Common Stock issuable upon exchange of Operating Partnership units, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, may adversely affect the prevailing market price for the Common Stock. 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. 35 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 14, 1998. 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 14, 1998. 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 14, 1998. 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 14, 1998. 36 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 39 Glenborough Realty Trust Incorporated Consolidated Balance Sheets 40 Glenborough Realty Trust Incorporated and GRT Predecessor Entities Consolidated and Combined Statements of Operations 41 Glenborough Realty Trust Incorporated and GRT Predecessor Entities Statements of Equity 42 Glenborough Realty Trust Incorporated and GRT Predecessor Entities Consolidated and Combined Statements of Cash Flows 43 Notes to Financial Statements 45 (2) Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation 63 Schedule IV - Mortgage Loans Receivable, Secured by Real Estate 70 (3) Exhibits to Financial Statements Glenborough Hotel Group, Consolidated Financial Statements as of December 31, 1997 and 1996 74 The Exhibit Index attached hereto is hereby incorporated by reference to this Item. 83 (b) Reports on Form 8-K (incorporated herein by reference) On October 17, 1997, the Company filed a report on Form 8-K/A with respect to the acquisition of the T. Rowe Price Properties and the Advance Properties. On October 17, 1997, the Company filed a report on Form 8-K/A with respect to the acquisition of the Citibank Park Property. On October 17, 1997, the Company filed a report on Form 8-K with respect to the Press Release for the quarter ended September 30, 1997 earnings. On October 23, 1997, the Company filed a report on Form 8-K with respect to the October 1997 Offering. On November 7, 1997, the Company filed a report on Form 8-K to provide certain additional ownership and operational information concerning the Company and the properties owned or managed by it as of September 30, 1997. On November 10, 1997, the Company filed a report on Form 8-K with respect to the acquisition of the Copley Properties. On December 18, 1997, the Company filed a report on Form 8-K with respect to the Press Release dated December 10, 1997. On December 31, 1997, the Company filed a report on Form 8-K with respect to the acquisition of the Thousand Oaks Property. 37 On January 6, 1998, the Company filed a report on Form 8-K with respect to the Acquisition Credit Facility and the acquisition of the Opus Portfolio. On January 9, 1998, the Company filed a report on Form 8-K/A with respect to the acquisition of the Copley Properties. On January 12, 1998, the Company filed a report on Form 8-K/A with respect to the acquisition of the Thousand Oaks Property. On January 12, 1998, the Company filed a report on Form 8-K/A with respect to the Acquisition Credit Facility and the acquisition of the Opus Portfolio. On January 12, 1998, the Company filed a report on Form 8-K with respect to the acquisitions of the Marion Bass Portfolio, the Windsor Portfolio, Bryant Lake and the CRI Properties. On January 12, 1998, the Company filed a report on Form 8-K with respect to the January 1998 Offering. On January 22, 1998, the Company filed a report on Form 8-K with respect to the Press Release for the year ended December 31, 1997 earnings. On January 27, 1998, the Company filed a report on Form 8-K with respect to the January 1998 Offering. On February 20, 1998, the Company filed a report on Form 8-K to provide certain additional ownership and operational information concerning the Company and the properties owned or managed by it as of December 31, 1997. On March 3, 1998, the Company filed a report on Form 8-K with respect to the sale of GRC Airport Associates' sole property. On March 12, 1998, the Company filed a report on Form 8-K with respect to the acquisition of the San Mateo Headquarters. On March 24, 1998, the Company filed a report on Form 8-K/A with respect to the sale of GRC Airport Associates' sole property. 38 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of GLENBOROUGH REALTY TRUST INCORPORATED: We have audited the accompanying consolidated balance sheets of GLENBOROUGH REALTY TRUST INCORPORATED, as of December 31, 1997 and 1996, the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1997 and 1996, and the combined statements of operations, stockholders' equity and cash flows of the GRT Predecessor Entities for the year ended December 31, 1995. These consolidated and combined 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 consolidated and combined financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of GLENBOROUGH REALTY TRUST INCORPORATED, as of December 31, 1997 and 1996, the consolidated results of its operations and its cash flows for the years ended December 31, 1997 and 1996, and the combined results of operations and cash flows of the GRT Predecessor Entities for the year ended December 31, 1995, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic consolidated and combined 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 and combined financial statements. These schedules have been subjected to the auditing procedures applied in our audits of the basic consolidated and combined financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic consolidated and combined financial statements taken as a whole. ARTHUR ANDERSEN LLP San Francisco, California January 21, 1998 (except with respect to matters discussed in Note 14, as to which the date is March 20, 1998) 39
GLENBOROUGH REALTY TRUST INCORPORATED CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 (in thousands, except share amounts) 1997 1996 ASSETS Investments in real estate, net of accumulated depreciation of $41,213 and $28,784 in 1997 and 1996, respectively $ 825,218 $ 161,945 Investments in Associated Companies 10,948 6,765 Mortgage loans receivable, net of reserve for loss of $863 in 1996 3,692 9,905 Cash and cash equivalents 5,070 1,355 Other assets 20,846 5,550 TOTAL ASSETS $ 865,774 $ 185,520 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage loans $ 148,139 $ 54,584 Secured bank line -- 21,307 Unsecured bank line 80,160 -- Other liabilities 11,091 3,198 Total liabilities 239,390 79,089 Commitments and contingencies -- -- Minority interest 46,261 8,831 Stockholders' Equity: Common Stock, 31,547,256 and 9,661,553 shares issued and outstanding at December 31, 1997 and 1996, respectively 31 10 Additional paid-in capital 592,739 105,952 Deferred compensation (210) (399) Retained earnings (deficit) (12,437) (7,963) Total stockholders' equity 580,123 97,600 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 865,774 $ 185,520 See accompanying notes to consolidated financial statements.
40
GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS For the years ended December 31, 1997, 1996 and 1995 (in thousands, except per share amounts) Glenborough Glenborough GRT Realty Trust Realty Trust Predecessor Incorporated Incorporated Entities Consolidated Consolidated Combined 1997 1996 1995 REVENUE Rental revenue $ 61,393 $ 17,943 $ 15,454 Fees and reimbursements, including $719, $311 and $2,995 from affiliates in 1997, 1996 and 1995, respectively 719 311 16,019 Interest and other income 1,802 1,080 2,698 Equity in earnings of Associated Companies 2,743 1,598 -- Net gain on sales of rental properties 839 321 -- Gain on collection of mortgage loan receivable 652 -- -- Total revenue 68,148 21,253 34,171 EXPENSES Property operating expenses 18,958 5,266 8,576 General and administrative 3,319 1,393 15,947 Depreciation and amortization 14,873 4,575 4,762 Interest expense 9,668 3,913 2,129 Provision for loss on investments in real estate, real estate partnerships and mortgage loans receivable -- -- 1,876 Consolidation costs -- 6,082 -- Litigation costs -- 1,155 -- Total expenses 46,818 22,384 33,290 Income (loss) from operations before provision for income taxes, minority interest and extraordinary item 21,330 (1,131) 881 Provision for income taxes -- -- (357) Minority interest (1,119) (292) -- Net income (loss) before extraordinary item 20,211 (1,423) 524 Extraordinary item: Loss on early extinguishment of debt (843) (186) -- Net income (loss) $ 19,368 $ (1,609) $ 524 Basic Per share Data: Net income (loss) before extraordinary item $ 1.12 $ (0.21) Extraordinary item (0.04) (0.03) Net income (loss) $ 1.08 $ (0.24) Basic weighted average shares outstanding 17,982,817 6,632,707 Diluted Per share Data: Net income (loss) before extraordinary item $ 1.09 $ (0.21) Extraordinary item (0.04) (0.03) Net income (loss) $ 1.05 $ (0.24) Diluted weighted average shares outstanding 19,517,543 6,751,259 See accompanying notes to consolidated financial statements.
41
GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES STATEMENTS OF EQUITY For the Years Ended December 31, 1997, 1996 and 1995 (in thousands) GRT Predecessor Entities Combined Additional Receivable Retained General Limited Common Paid-in from Earnings Partner Partners Stock Capital Stockholder (Deficit) Total BALANCE AT DECEMBER 31, 1994 $ (1,730) $ 85,337 $ 5 $ 6,613 $ (8,763) $ (904) $ 80,558 Distributions (117) (10,507) -- -- -- -- (10,624) Redemption of shares -- -- (2) (6,613) -- (6,533) (13,148) Repayment of Stockholder advances, net -- -- -- -- 8,763 -- 8,763 Net income (loss) 17 1,751 -- -- -- (1,244) 524 Issuance of investor notes in exchange for units of limited partnership interest -- (2,483) -- -- -- -- (2,483) Equity in consolidation attributable to minority interest -- (7,962) -- -- -- -- (7,962) Consolidation and issuance of shares 1,830 (66,136) (3) -- -- 8,681 (55,628) BALANCE AT DECEMBER 31, 1995 -- -- -- -- -- -- -- Issuance of common stock to directors and officers -- -- -- -- -- -- -- Issuance of common stock, net of offering costs of $4,046 -- -- -- -- -- -- -- Distributions -- -- -- -- -- -- -- Net loss -- -- -- -- -- -- -- BALANCE AT DECEMBER 31, 1996 -- -- -- -- -- -- -- Amortization of deferred compensation -- -- -- -- -- -- -- Issuance of common stock, net of offering costs of $28,785 -- -- -- -- -- -- -- Issuance of common stock related to acquisitions -- -- -- -- -- -- -- Adjustment to fair value of minority interest -- -- -- -- -- -- -- Distributions -- -- -- -- -- -- -- Net income -- -- -- -- -- -- -- BALANCE AT DECEMBER 31, 1997 $ -- $ -- $ -- $ -- $ -- $ -- $ --
Glenborough Realty Trust Incorporated Additional Deferred Retained Common Stock Paid-in Compen- Earnings Shares Par Value Capital sation (Deficit) Total BALANCE AT DECEMBER 31, 1994 -- $ -- $ -- $ -- $ -- $ -- Distributions -- -- -- -- -- -- Redemption of shares -- -- -- -- -- -- Repayment of Stockholder advances, net -- -- -- -- -- -- Net income (loss) -- -- -- -- -- -- Issuance of investor notes in exchange for units of limited partnership interest -- -- -- -- -- -- Equity in consolidation attributable to minority interest -- -- -- -- -- -- Consolidation and issuance of shares 5,754 6 55,622 -- -- 55,628 BALANCE AT DECEMBER 31, 1995 5,754 6 55,622 -- -- 55,628 Issuance of common stock to directors and officers 35 -- 525 (399) -- 126 Issuance of common stock, net of offering costs of $4,046 3,873 4 49,805 -- -- 49,809 Distributions -- -- -- -- (6,354) (6,354) Net loss -- -- -- -- (1,609) (1,609) BALANCE AT DECEMBER 31, 1996 9,662 10 105,952 (399) (7,963) 97,600 Amortization of deferred compensation -- -- -- 189 -- 189 Issuance of common stock, net of offering costs of $28,785 21,780 21 482,491 -- -- 482,512 Issuance of common stock related to acquisitions 105 -- 2,655 -- -- 2,655 Adjustment to fair value of minority interest -- -- 1,641 -- -- 1,641 Distributions -- -- -- -- (23,842) (23,842) Net income -- -- -- -- 19,368 19,368 BALANCE AT DECEMBER 31, 1997 31,547 $ 31 $ 592,739 $ (210) $(12,437) $ 580,123 See accompanying notes to consolidated financial statements.
42
GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS For the years ended December 31, 1997, 1996 and 1995 (in thousands) Glenborough Glenborough GRT Realty Trust Realty Trust Predecessor Incorporated Incorporated Entities Consolidated Consolidated Combined 1997 1996 1995 Cash flows from operating activities: Net income (loss) $ 19,368 $ (1,609) $ 524 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 14,873 4,575 4,762 Amortization of loan fees, included in interest expense 221 193 -- Provision for loss on investments in real estate, real estate partnerships and mortgage loans receivable -- -- 1,876 Minority interest in income from operations 1,119 292 -- Equity in earnings of Associated Companies (2,743) (1,598) -- Net gain on sales of rental properties (839) (321) -- Gain on collection of mortgage loan receivable (652) -- -- Loss on early extinguishment of debt 843 186 -- Amortization of deferred compensation 189 -- -- Consolidation costs -- 6,082 -- Litigation costs -- 1,155 -- Changes in certain assets and liabilities, net (8,301) (4,817) (17,770) Net cash provided by (used for) operating activities 24,078 4,138 (10,608) Cash flows from investing activities: Net proceeds from sales of rental properties 12,950 2,882 -- Additions to rental property (586,965) (62,286) (3,925) Additions to mortgage loans receivable (1,855) (2,694) -- Principal receipts on mortgage loans receivable 8,068 254 12,581 Investments in Associated Companies (3,700) (1,890) -- Distributions from Associated Companies 2,260 1,901 -- Net cash provided by (used for) investing activities (569,242) (61,833) 8,656 (continued) See accompanying notes to consolidated financial statements.
43
GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS - continued For the years ended December 31, 1997, 1996 and 1995 (in thousands) Glenborough Glenborough GRT Realty Trust Realty Trust Predecessor Incorporated Incorporated Entities Consolidated Consolidated Combined 1997 1996 1995 Cash flows from financing activities: Proceeds from borrowings $ 467,689 $ 52,599 $ 8,910 Repayment of borrowings (375,909) (35,593) (14,050) Payment of investor notes -- (2,483) -- Distributions to minority interest holders (1,571) (526) -- Repayments from Stockholder, net -- -- 8,763 Distributions (23,842) (6,354) (10,624) Redemption of shares -- -- (10,389) Proceeds from issuance of stock, net of offering costs 482,512 46,820 -- Net cash provided by (used for) financing activities 548,879 54,463 (17,390) Net increase (decrease) in cash and cash equivalents 3,715 (3,232) (19,342) Cash and cash equivalents at beginning of year 1,355 4,587 23,929 Cash and cash equivalents at end of year $ 5,070 $ 1,355 $ 4,587 Supplemental disclosure of cash flow information: Cash paid for interest $ 9,373 $ 3,270 $ 1,951 Supplemental Disclosure of Non-Cash Investing and Financing activities: Acquisition of real estate through assumption of first trust deed notes payable. $ 60,628 $ 25,200 $ -- Acquisition of real estate through issuance of shares of common stock and Operating Partnership units $ 42,177 $ 3,749 $ -- Conversion of shares of common stock into investor notes payable $ -- $ -- $ 2,483 Conversion of equity to minority interest $ -- $ -- $ 7,962 Consolidation and issuance of shares of common stock in exchange for limited partnership units and common stock in GRT Predecessor Entities $ -- $ -- $ 55,628 Refinancing of debt $ -- $ -- $ 28,200 Acquisition of real estate through foreclosure and assumption of first trust deed note payable $ -- $ -- $ 3,908 See accompanying notes to consolidated financial statements.
44 GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES Notes to Consolidated Financial Statements December 31, 1997 and 1996 Note 1. ORGANIZATION Glenborough Realty Trust Incorporated (the "Company") was organized in the State of Maryland on August 26, 1994. The Company has elected to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). The Company completed a consolidation with certain public California limited partnerships and other entities (the "Consolidation") engaged in real estate activities (the "GRT Predecessor Entities") through an exchange of assets of the GRT Predecessor Entities for 5,753,709 shares of Common Stock of the Company. The Consolidation occurred on December 31, 1995, and the Company commenced operations on January 1, 1996. Subsequent to the Consolidation on December 31, 1995, and through December 31, 1997, the following Common Stock transactions occurred: (i) 35,000 shares of Common Stock were issued to officers and directors as stock compensation; (ii) 25,446,000 shares were issued in four separate public equity offerings; (iii) 312,606 shares were issued in connection with various acquisitions; and (iv) 59 shares were retired, resulting in total shares of Common Stock issued and outstanding at December 31, 1997, of 31,547,256. In addition, fully converted shares issued and outstanding (including 2,365,409 partnership units in the Operating Partnership) totaled 33,912,665 at December 31, 1997. To maintain the Company's qualification as a REIT, no more than 50% in value of the outstanding shares of the Company may be owned, directly or indirectly, by five or fewer individuals (defined to include certain entities), applying certain constructive ownership rules. To help ensure that the Company will not fail this test, the Company's Articles of Incorporation provide for certain restrictions on the transfer of the Common Stock to prevent further concentration of stock ownership. The Company, through several subsidiaries, is engaged primarily in the ownership, operation, management, leasing, acquisition, expansion and development of various income-producing properties. The Company's major consolidated subsidiary, in which it holds a 1% general partner interest and a 91.48% limited partner interest at December 31, 1997, is Glenborough Properties, L.P. (the "Operating Partnership"). As of December 31, 1997, the Operating Partnership, directly and through various subsidiaries in which it and the Company own 100% of the ownership interests, controls a total of 128 real estate projects and 2 mortgage loans receivable. As of December 31, 1997, the Company also holds 100% of the non-voting preferred stock of the following two Associated Companies (the "Associated Companies"): Glenborough Corporation ("GC") is the general partner of several real estate limited partnerships and provides asset and property management services for these partnerships (the "Controlled Partnerships"). It also provides partnership administration, asset management, property management and development services under a long term contract to a group of unaffiliated partnerships which include five public partnerships sponsored by Rancon Financial Corporation, an unaffiliated corporation which has significant real estate assets in the Inland Empire region of Southern California (the "Rancon Partnerships"). The services to the Rancon Partnerships were previously provided by Glenborough Inland Realty Corporation ("GIRC"), a California corporation, which merged with GC effective June 30, 1997. GC also provides property management services for a limited portfolio of property owned by other unaffiliated third parties. In the merger between GC and GIRC, the Company received preferred stock of GC in exchange for its preferred stock of GIRC, on a one-for-one basis. Following the merger, the Company holds the same preferences with respect to dividends and liquidation distributions paid by GC as it previously held with respect to GC and GIRC combined. Glenborough Hotel Group ("GHG") leases the five Country Suites by Carlson hotels owned by the Company and operates them for its own account. It also operates two Country Suites By Carlson hotels and two resort condominium hotels under separate contracts. 45 Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements present the consolidated financial position of the Company as of December 31, 1997 and 1996, the consolidated results of operations and cash flows of the Company for the years ended December 31, 1997 and 1996, and the combined results of operations and cash flows of the GRT Predecessor Entities for the year ended December 31, 1995, as the Consolidation transaction discussed in Note 1 above was not effective until December 31, 1995. All intercompany transactions, receivables and payables have been eliminated in consolidation and combination. Reclassification Certain 1996 balances have been reclassified to conform with the current year presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the results of operations during the reporting period. Actual results could differ from those estimates. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," which will be effective for financial statements issued for fiscal years beginning after December 15, 1997. SFAS 131 will require the Company to report certain financial and descriptive information about its reportable operating segments, segments for which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. For these segments, SFAS 131 will require the Company to report profit and loss, certain specific revenue and expense items and assets. It also requires disclosures about each segment's products and services, geographic areas of operation and major customers. The Company will adopt the disclosures required by SFAS 131 in the financial statements for the year ended December 31, 1998. Investments in Real Estate Investments in real estate are stated at cost unless circumstances indicate that cost cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value. Estimated fair value: (i) is based upon the Company's plans for the continued operation of each property; and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized rental income based upon the age, construction and use of the building. The fulfillment of the Company's plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Company to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, it is reasonably possible that the actual results of operating and disposing of the Company's properties could be materially different than current expectations. Depreciation is provided using the straight line method over the useful lives of the respective assets. The useful lives are as follow: Buildings and Improvements 10 to 40 years Tenant Improvements Term of the related lease Furniture and Equipment 5 to 7 years 46 Investments in Associated Companies The Company's investments in the Associated Companies are accounted for using the equity method, as discussed further in Note 4. Mortgage Loans Receivable The Company monitors the recoverability of its loans and notes receivable through ongoing contact with the borrowers to ensure timely receipt of interest and principal payments, and where appropriate, obtains financial information concerning the operation of the properties. Interest on mortgage loans is recognized as revenue as it accrues during the period the loan is outstanding. Mortgage loans receivable will be evaluated for impairment if it becomes evident that the borrower is unable to meet its debt service obligations in a timely manner and cannot satisfy its payments using sources other than the operations of the property securing the loan. If it is concluded that such circumstances exist, then the loan will be considered to be impaired and its recorded amount will be reduced to the fair value of the collateral securing it. Interest income will also cease to accrue under such circumstances. Due to uncertainties inherent in the valuation process, it is reasonably possible that the amount ultimately realized from the Company's collection on these receivables will be different than the recorded amounts. Cash Equivalents The Company considers short-term investments (including certificates of deposit) with a maturity of three months or less at the time of investment to be cash equivalents. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107 requires disclosure about fair value for all financial instruments. Based on the borrowing rates currently available to the Company, the carrying amount of debt approximates fair value. 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. 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 7.52% limited partner interests in the Operating Partnership not held by the Company. Revenues All leases are classified as operating leases. Rental revenue is recognized as earned over the terms of the related leases. For the years ended December 31, 1997 and 1996, no tenants represented 10% or more of rental revenue of the Company. For the year ended December 31, 1995, rental revenue from two properties leased to one tenant represented approximately 10% of the Company's total rental revenue. Fees and reimbursements revenue consists of property management fees, overhead administration fees, and transaction fees from the acquisition, disposition, refinance, leasing and construction supervision of real estate. Revenues are recognized only after the Company is contractually entitled to receive payment, after the services for which the fee is received have been provided, and after the ability and timing of payments are reasonably assured and predictable. Scheduled rent increases are based primarily on the Consumer Price Index or a similar factor. Material incentives paid, if any, by the Company to a tenant are amortized as a reduction of rental income over the life of the related lease. The Company recognizes contingent rental income after the related target is achieved, consistent with EITF 98-9, "Accounting for Contingent Rent in Interim Financial Periods." Income Taxes The Company has made an election to be taxed as a REIT under Sections 856 through 860 of the Code. As a REIT, the Company generally will not be subject to Federal income tax to the extent that it distributes at least 95% of its REIT taxable income to its shareholders. REITs are subject to a number of organizational and operational 47 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. Certain of the Company's predecessors were subject to income taxes, the provisions for which have been included in the accompanying 1995 combined results of operations of the GRT Predecessor Entities. Earnings Per Share In 1997, the Company adopted the disclosure requirements of SFAS No. 128, "Earnings per Share." SFAS 128 requires the disclosure of basic earnings per share and modified existing guidance for computing diluted earnings per share. Earnings per share for all periods presented have been restated to conform to the new standard. For additional required disclosures, see Note 9. Note 3. INVESTMENTS IN REAL ESTATE The cost and accumulated depreciation of real estate investments as of December 31, 1997 and 1996 are as follows (in thousands):
Buildings and Total Accumulated Net 1997: Land Improvements Cost Depreciation Recorded Value Office properties $ 62,442 $ 282,129 $ 344,571 $ (9,310) $ 335,261 Office/Flex properties 46,496 163,606 210,102 (3,274) 206,828 Industrial properties 20,903 88,802 109,705 (7,503) 102,202 Retail properties 16,687 50,447 67,134 (5,845) 61,289 Multi-family properties 19,512 71,288 90,800 (1,780) 89,020 Hotel properties 5,587 38,532 44,119 (13,501) 30,618 Total $ 171,627 $ 694,804 $ 866,431 $ (41,213) $ 825,218 1996: Office properties $ 9,721 $ 39,582 $ 49,303 $ (4,224) $ 45,079 Office/Flex properties 2,326 9,163 11,489 (624) 10,865 Industrial properties 4,293 23,633 27,926 (5,533) 22,393 Retail properties 16,578 30,681 47,259 (6,164) 41,095 Multi-family properties 5,652 17,440 23,092 (510) 22,582 Hotel properties 5,586 26,074 31,660 (11,729) 19,931 Total $ 44,156 $ 146,573 $ 190,729 $ (28,784) $ 161,945
In February 1997, the Company acquired a 163-suite hotel property (the "Scottsdale Hotel"), which began operations in January 1996 and is located in Scottsdale, Arizona. The total acquisition cost, including capitalized costs, was approximately $12.1 million, which consisted of approximately $4.6 million of mortgage debt assumed, and the balance in cash. The cash portion was financed through advances under the Company's previous secured line of credit from Wells Fargo Bank (the "Line of Credit") (see Note 6). The Scottsdale Hotel is marketed as a Country Inn and Suites by Carlson. In April 1997, the Company acquired from two limited partnerships and one limited liability company managed by affiliates of Lennar Partners, a portfolio of three properties, aggregating approximately 282,000 square feet (the "Lennar Properties"). The total acquisition cost, including capitalized costs, was approximately $23.2 million, which was paid in cash from the proceeds of the March 1997 Offering (see Note 13). The Lennar Properties consist of one office property located in Virginia and one office/flex property and one industrial property, each located in Massachusetts. In April 1997, the Company acquired from a private seller a 227,129 square foot, 15-story office building located in Bloomington, Minnesota (the "Riverview Property"). The total acquisition cost, including capitalized costs, was approximately $20.5 million, of which approximately $16.3 million was paid in cash from the proceeds of the March 1997 Offering (see Note 13), and the balance was paid in cash from borrowings under the Line of Credit. 48 In April 1997, the Company acquired from seven partnerships and their general partner, a Southern California syndicator, a portfolio of eleven properties, aggregating approximately 523,000 square feet, together with associated management interests (the "E&L Properties"). The total acquisition cost, including capitalized costs, was approximately $22.2 million, which consisted of (i) approximately $12.8 million of mortgage debt assumed; (ii) approximately $6.7 million in the form of 352,197 partnership units in the Operating Partnership (based on an agreed per unit value of $19.075); (iii) approximately $633,000 in the form of 33,198 shares of Common Stock of the Company (based on an agreed per share value of $19.075); and (iv) the balance in cash. The cash portion was paid from borrowings under the Line of Credit. Of the $12.8 million of mortgage debt assumed in the acquisition, approximately $8.9 million was paid off on May 1, 1997, through a draw on the Line of Credit. The E&L Properties consist of one office property, nine office/flex properties and one industrial property, all located in Southern California. In April 1997, the Company acquired from two partnerships formed and managed by affiliates of CIGNA, a portfolio of six properties, aggregating approximately 616,000 square feet and 224 multi-family units (the "CIGNA Properties"). The total acquisition cost, including capitalized costs, was approximately $45.4 million, which was paid entirely in cash from the proceeds of a $40 million unsecured loan from Wells Fargo Bank (see Note 6) and a draw under the Line of Credit. The CIGNA Properties are located in four states and consist of two office properties, two office/flex properties, a shopping center and a multi-family property. In June 1997, the Company acquired from Carlsberg Realty, Inc. a portfolio of three properties, aggregating approximately 245,600 square feet (the "CRI Properties"). The total acquisition cost, including capitalized costs, was approximately $14.8 million, which was paid entirely in cash from borrowings under the Line of Credit. The CRI Properties consist of one office property located in California and one office/flex property and one industrial property, each located in Arizona. The CRI Properties had been managed by GC since December 1996. In June 1997, the Company sold from its retail portfolio six Atlanta Auto Care Center properties and nine of the ten QuikTrip properties for an aggregate sales price of approximately $12 million. The proceeds from the sale of the QuikTrip properties were used to fund the acquisition of the Centerstone Property (as discussed below) and the proceeds from the sale of the Auto Care Center properties were used to paydown the Line of Credit and to payoff a mortgage loan. The remaining QuikTrip property was sold on October 1, 1997, for a sales price of approximately $1.1 million. The sales generated a net gain of $839,000. In July 1997, the Company acquired an office property containing 157,579 square feet (the "Centerstone Property") located in Irvine, California. The total acquisition cost, including capitalized costs, was approximately $30.4 million, which consisted of (i) approximately $5.5 million in the form of 275,000 partnership units in the Operating Partnership (based on an agreed per unit value of $20.00); and (ii) the balance in cash from a combination of borrowings under the Line of Credit and the net proceeds from the sale of the QuikTrip retail properties (as discussed above). In September 1997, the Company acquired a portfolio of 27 properties, aggregating approximately 2,888,000 square feet (the "T. Rowe Price Properties") from five limited partnerships, two general partnerships and one private REIT, each organized by affiliates of T. Rowe Price Associates, Inc. The total acquisition cost, including capitalized costs, was approximately $146.8 million, which was paid entirely in cash from the proceeds of a $114 million unsecured loan from Wells Fargo Bank (see Note 6), approximately $23 million of the proceeds from a $60 million secured loan from Wells Fargo Bank (see Note 6), a $6.5 million draw on the Line of Credit and the balance from the proceeds from the July 1997 Offering (see Note 13). The T. Rowe Price Properties consist of four office properties, twelve office/flex properties, eight industrial properties and three retail properties located in 12 states. In September 1997, the Company acquired a portfolio of ten properties, aggregating 755,006 square feet (the "Advance Properties") from a group of partnerships affiliated with The Advance Group of Bedminster, New Jersey. The total acquisition cost, including capitalized costs, was approximately $103.0 million, which consisted of (i) approximately $7.4 million of mortgage debt assumed; (ii) approximately $13.6 million in the form of 599,508 partnership units in the Operating Partnership (based on an agreed per unit value of $22.625); (iii) approximately 49 $37 million of the proceeds from a $60 million secured loan from Wells Fargo Bank (see Note 6); and (iv) the balance in cash. The cash portion of the acquisition was paid with proceeds from the July 1997 Offering (see Note 13). The Advance Properties consist of five office properties, three office/flex properties and two industrial properties. Nine of the properties are located in New Jersey and one is located in Maryland. Concurrent with this acquisition, the Company invested $2,985,000 in exchange for a 50% ownership interest in Advance/GLB Development Partners, LLC (the "Joint Venture"), a Delaware limited liability company formed by the Company and The Advance Group for the development of selected new projects. The Joint Venture owns 57 acres of land suitable for office and office/flex development of up to 560,000 square feet. The Company accounts for its investment in the Joint Venture using the equity method as the Company has a significant ownership interest. At December 31, 1997, the Company's investment in the Joint Venture totaled $7,251,000 and is included in other assets. In September 1997, the Company acquired a 147,978 square-foot office building ("Citibank Park") located in Las Vegas, Nevada. The total acquisition cost, including capitalized costs, was approximately $23.3 million, which consisted of (i) approximately $1.66 million in the form of 61,222 partnership units in the Operating Partnership (based on an agreed per unit value of $27.156); (ii) a $19.4 million draw on the Line of Credit, and (iii) the balance in cash. In October 1997, the Company acquired eight properties, aggregating 766,269 square feet, from six separate limited partnerships in which affiliates of AEW Capital Management, L.P. (successors in interest to one or more affiliates of Copley Advisors Inc.) serve as general partners (the "Copley Properties"). The total acquisition cost, including capitalized costs, was approximately $63.7 million, which was paid entirely in cash. The Copley Properties are comprised of two industrial properties located in Tempe, Arizona and Anaheim, California, and six office/flex properties, one in Columbia, Maryland and five in Las Vegas, Nevada. In November 1997, the Company acquired a 171,789 square-foot office/flex building in Eden Prairie, Minnesota ("Bryant Lake"), from Outlook Income Fund 9, a limited partnership in which GC was the managing general partner. Robert Batinovich was co-general partner of Outlook Income Fund 9 and held an economic interest therein equal to an approximate 0.83% limited partnership interest. Because of this affiliation, and consistent with the Company's Board of Directors' policy, neither Robert Batinovich nor Andrew Batinovich voted when the Board of Directors considered and acted to approve this acquisition. The price paid for Bryant Lake equaled 100% of the appraised value as determined by an independent appraiser. The total acquisition cost, including capitalized costs, was approximately $9.4 million, comprising approximately $4.6 million in the form of cash and the balance in the form of assumption of debt. In December 1997, the Company acquired an office complex consisting of three office buildings, aggregating 418,457 square feet ("Thousand Oaks"). The total acquisition cost, including capitalized costs, was approximately $51.3 million, which was paid entirely in cash, including cash from borrowings under the Acquisition Credit Facility (see Note 6). The Thousand Oaks property includes 10 acres suitable for the development of 182,000 square feet of office space. Thousand Oaks is located in Memphis, Tennessee. In December 1997, the Company acquired four office/flex properties and one office property (the "Opus Portfolio") aggregating 289,874 square feet from four limited liability companies affiliated with Opus Properties, LLC. The total acquisition cost, including capitalized costs, was approximately $27.9 million, all of which was paid in cash, including cash from borrowings under the Acquisition Credit Facility. Four of the Opus Portfolio properties are located in or near Tampa, Florida, and one is located in Denver, Colorado. In December 1997, the Company acquired 10 multi-family properties (the "Marion Bass Portfolio") aggregating 1,385 units from various limited partnerships, each of whose general partner is Marion Bass Real Estate Group. The total acquisition cost, including capitalized costs, was approximately $58.3 million, comprising $23.5 million of assumed debt and the balance in cash, including cash from borrowings under the Acquisition Credit Facility. Of the 10 Marion Bass Portfolio properties, six are located in Charlotte, North Carolina, two are in Monroe, North Carolina, one is in Raleigh, North Carolina and one is in Pineville, North Carolina. 50 In December 1997, the Company issued, subject to a rescission right, approximately $14.1 million in the form of 433,362 partnership units in the Operating Partnership and 72,564 shares of Common Stock (based on an agreed per unit and per share value of $27.896, respectively, which was equal to the average closing price of the Company's Common Stock for the ten business days preceding the closing) and paid approximately $200,000 in cash to acquire all of the limited partnership interests of GRC Airport Associates, a California limited partnership ("GRCAA"). GRCAA's sole asset consisted of one industrial property ("Skypark") that was subject to a binding sales agreement, which, upon completion, was anticipated to generate net cash proceeds of $14.1 million. By virtue of interests held directly or indirectly in GRCAA, Robert Batinovich received consideration of approximately $2.2 million and GC received consideration of approximately $1.7 million for the GRCAA limited partnership interests in the form of partnership units in the Operating Partnership. Consistent with the Company's Board of Directors' policy, neither Robert Batinovich nor Andrew Batinovich voted when the Board of Directors considered and acted to approve this transaction. The sale of GRCAA's property to a third party was completed in February 1998. See Note 14 for further discussion. The Company has entered into a definitive agreement to sell the Shannon Crossing retail property for $3.1 million. In connection with this sale, the Company has agreed to lend $6.2 million to the buyer under a construction loan with a fixed interest rate of 8%, to be funded as needed. As of the date of this filing, approximately $1.1 million has been funded under this construction loan. The sale of Shannon Crossing will not be completed until the fourth quarter of 1998 as its sale is currently precluded by the terms of the mortgage loan secured by the property. As of December 31, 1997, approximately $13 million of escrow deposits for future acquisitions of properties are included in rental property. The Company leases its commercial and industrial property under non-cancelable operating lease agreements. Future minimum rents to be received as of December 31, 1997 are as follows (in thousands): Year Ending December 31, 1998 $ 17,160 1999 13,131 2000 13,393 2001 12,109 2002 6,174 Thereafter 24,123 $ 86,090 Note 4. INVESTMENTS IN ASSOCIATED COMPANIES The Company accounts for its investments in the Associated Companies (as defined in Note 1) using the equity method as a substantial portion of the economic benefits of the Associated Companies flow to the Company by virtue of its 100% non-voting preferred stock interest in each of the Associated Companies, which interests constitute substantially all of the Associated Companies' capitalization. Two of the holders of the voting common stock of Glenborough Corporation and one of the holders of the voting common stock of Glenborough Hotel Group are officers of the Company; however, the Company has no direct voting or management control of either Glenborough Corporation or Glenborough Hotel Group. The Company records earnings on its investments in the Associated Companies equal to its cash flow preference, to the extent of earnings, plus its pro rata share of remaining earnings, based on cash flow allocation percentages. Distributions received from the Associated Companies are recorded as a reduction of the Company's investments. 51 As of December 31, 1997 and 1996, the Company had the following investments in the Associated Companies (in thousands): GC(1) GHG Total --------- --------- --------- Investment at December 31, 1995 $ 3,810 $ 1,368 $ 5,178 Contributions 1,690 200 1,890 Distributions (1,810) (91) (1,901) Equity in earnings 1,571 27 1,598 --------- --------- --------- Investment at December 31, 1996 5,261 1,504 6,765 Contribution 3,700 -- 3,700 Distributions (2,129) (131) (2,260) Equity in earnings 1,687 1,056 2,743 --------- --------- --------- Investment at December 31, 1997 $ 8,519 $ 2,429 $ 10,948 ========= ========= ========= (1) All amounts presented for GC represent combined amounts for GC and GIRC due to the June 30, 1997 merger, as previously discussed in Note 1. Summary condensed balance sheet information as of December 31, 1997 and 1996, and the condensed statements of operations for the years then ended are as follows (in thousands):
Balance Sheets GC (1) GHG As of December 31, As of December 31, 1997 1996 1997 1996 ----------- ----------- ----------- ---------- Investments in management contracts, net $ 8,108 $ 6,756 $ 354 $ 430 Other Assets 3,631 1,930 3,381 1,825 =========== =========== =========== ========== Total assets $ 11,739 $ 8,686 $ 3,735 $ 2,255 =========== =========== =========== ========== Notes payable $ 1,483 $ 2,383 $ 37 $ 61 Other liabilities 1,764 1,016 962 692 ----------- ----------- ----------- ---------- Total liabilities 3,247 3,399 999 753 Stockholders' equity 8,492 5,287 2,736 1,502 =========== =========== =========== ========== Total liabilities and stockholders' equity $ 11,739 $ 8,686 $ 3,735 $ 2,255 =========== =========== =========== ==========
Statements of Operations GC (1) GHG For the year ended For the year ended December 31, December 31, 1997 1996 1997 1996 ----------- ----------- ----------- ---------- Revenue $ 15,105 $ 11,375 $ 14,857 $ 9,952 Expenses 13,331 9,723 13,457 9,925 =========== =========== =========== ========== Net income $ 1,774 $ 1,652 $ 1,400 $ 27 =========== =========== =========== ==========
52 (1) All amounts presented for GC represent combined amounts for GC and GIRC due to the June 30, 1997 merger, as previously discussed in Note 1. Included in the revenues of GC for the year ended December 31, 1997 is a fee of approximately $1.7 million earned in connection with the GRCAA transaction discussed in Note 3 above. Note 5. MORTGAGE LOANS RECEIVABLE The Company held a first mortgage loan with a principal balance of $7,563,000 and a carrying value of $6,700,000 at December 31, 1996, secured by an office and research complex in Eatontown, New Jersey. The loan had an original maturity date of November 1, 1996 with interest only payable monthly at the fixed rate of eight percent (8%) per annum. In 1995, due to the uncertainty surrounding the borrower's ability to payoff the note receivable upon its November 1996 maturity, the Company recorded a $863,000 loss provision on this mortgage loan receivable to reduce its carrying value to the estimated fair value of the underlying property. In December 1996, the maturity date was extended to February 1, 1997. On January 28, 1997, the borrower paid off the note. Total proceeds of the payoff were $7,352,000, net of collection costs, resulting in a gain on collection of $652,000. At December 31, 1997, the Company held a first mortgage loan in the amount of $507,000 secured by an industrial property in Los Angeles, California. The terms of the note include interest accruing at eight percent (8%) per annum for the first twenty-four months (ended June 1996) and at nine percent (9%) per annum for the next sixty months until the note matures in June 2001. Monthly payments of principal and interest, computed based on a thirty year amortization schedule, commenced January 1995 and continue until maturity. In 1996, the Operating Partnership entered into a Loan Agreement and Option Agreement (the "Option Agreement") with Carlsberg Properties, LTD. ("the Borrower"). The loan amount was $3,600,000, of which $2,694,000 was initially disbursed to the Borrower and $906,000 was held by the Operating Partnership as leasing and interest reserves. On June 18, 1997, the Loan Agreement was amended to include an additional advance to the borrower of $250,000 which was applied in its entirety to the interest reserve, resulting in an amended loan amount of $3,850,000 and an increase in the interest reserve of $250,000. During the year ended December 31, 1997, $491,000 of reserves were disbursed to the borrower which resulted in an outstanding balance at December 31, 1997, of $3,185,000. The loan is secured by a 48,000 square foot medical building in Phoenix, Arizona (the "Grunow Building"), and matures on November 19, 1999, with interest only payable monthly at the fixed rate of eleven percent (11%) per annum calculated on the full amount of the loan. The Option Agreement provides the Operating Partnership the option to purchase the Grunow Building on either the second or third anniversary of the closing date of November 19, 1996, for the greater of i) the then outstanding loan balance plus $50,000 or ii) the value of the Secured Property as defined in the Option Agreement. Contractually due principal payments of the mortgage loans receivable are as follows (in thousands): Year Ending December 31, 1998 $ 5 1999 3,190 2000 5 2001 492 2002 -- Thereafter -- ---------- Total $ 3,692 ========== Note 6. SECURED AND UNSECURED LIABILITIES The Company had the following mortgage loans, bank lines, and notes payable outstanding as of December 31, 1997 and 1996 (in thousands): 53 1997 1996 Secured $50 million line of credit with a bank with variable interest rates of LIBOR plus 1.75% and prime rate, monthly interest only payments and a maturity date of July 14, 1998, with an option to extend for 10 years. In December 1997, the line was paid-off when the Company obtained a $250 million unsecured line of credit (discussed below). $ -- $ 21,307 Unsecured $250 million line of credit with a bank ("Acquisition Credit Facility") with a variable interest rate ranging between LIBOR plus 1.10% and LIBOR plus 1.30% (7.07% at December 31, 1997), monthly interest only payments and a maturity date of December 22, 2000, with one option to extend for 10 years. 80,160 -- Secured loan with a bank with a fixed interest rate of 7.50%, monthly principal and interest payments of $443 and a maturity date of October 1, 2022. The loan is secured by ten properties with an aggregate net carrying value of $111,372 at December 31, 1997. See below for further discussion. 59,724 -- Secured loan with a bank with variable interest rates of LIBOR plus 2.375% and prime rate plus 0.50%, monthly interest only payments and a maturity date of July 14, 1998. The loan was paid off in June 1997 upon the sale of the properties securing the loan. -- 6,120 Secured loan with an investment bank with a fixed interest rate of 7.57%, monthly principal (based upon a 25-year amortization) and interest payments of $149 and a maturity date of January 1, 2006. The loan is secured by nine properties with an aggregate net carrying value of $37,711 and $39,298 at December 31, 1997 and 1996, respectively. 19,444 19,744 Secured loans with various lenders, bearing interest at fixed rates between 7.63% and 9.25%, with monthly principal and interest payments ranging between $9 and $62 and maturing at various dates through April 1, 2012. These loans are secured by properties with an aggregate net carrying value of $66,353 and $30,441 at December 31, 1997 and 1996, respectively. 30,519 17,581 Secured loans with various banks bearing interest at variable rates (ranging between 7.46% and 8.18% at December 31, 1997), monthly principal and interest payments ranging between $4 and $46 and maturing at various dates through May 1, 2017. These loans are secured by properties with an aggregate net carrying value of $17,246 and $6,975 at December 31, 1997 and 1996, respectively. 7,806 3,807 Secured loans with various lenders, bearing interest at fixed rates between 7.25% and 7.85%, with monthly principal and interest payments ranging between $5 and $55 and maturing at various dates through December 1, 2030. These loans are secured by Housing and Urban Development properties with an aggregate net carrying value of $41,862 and $9,491 at December 31, 1997 and 1996, respectively. 30,646 7,332 Total $ 228,299 $ 75,891 54 In April 1997, the Operating Partnership entered into a $40 million unsecured loan with Wells Fargo Bank to fund the acquisition of the CIGNA Properties (the "CIGNA Acquisition Financing"). The CIGNA Acquisition Financing had a term of three months (extendible to six months at the Company's option), interest at a variable annual rate equal to 175 basis points above 30-day LIBOR, was unsecured and was guaranteed by the Company. Required payments under the CIGNA Acquisition Financing were monthly, interest only. In June 1997, Wells Fargo had substantially completed underwriting and due diligence for a $60 million mortgage loan to the Company (the "$60 Million Mortgage") to be secured by the Lennar Properties, the Riverview Property, the Centerstone Property and five of the CIGNA Properties. In the interim, Wells Fargo funded a $60 million unsecured "bridge" loan (the "$60 Million Unsecured Bridge Loan"), which was used to (i) repay all principal and accrued interest under the $40 million CIGNA Acquisition Financing, and (ii) reduce the outstanding balance under the Line of Credit by approximately $20 million. The $60 Million Unsecured Bridge Loan was paid-off in July 1997 from the proceeds of the July 1997 Offering (see Note 13) and was replaced with the $60 Million Mortgage in September 1997. This loan has a 25-year term, bears interest at a fixed annual rate of 7.5%, and requires monthly payments of principal and interest. Proceeds from the $60 Million Mortgage were used to fund the acquisitions of the T. Rowe Price Properties and the Advance Properties. In September 1997, the Company closed a $114 million unsecured loan (the "$114 Million Interim Unsecured Loan") with Wells Fargo Bank. This loan had a 90-day term with two 90-day extension options, interest at a fixed annual rate of 7.5% and required monthly interest-only payments. The proceeds of this loan were used to fund a portion of the purchase price for the T. Rowe Price Properties. In October 1997, the Company repaid the $114 Million Interim Unsecured Loan with net proceeds from the October 1997 Offering (see Note 13). In December 1997, the Company replaced its $50 million secured line of credit with a new $250 million unsecured line of credit (the "Acquisition Credit Facility") with Wells Fargo Bank. The Acquisition Credit Facility has a three year term with an option to extend the term for an additional 10 years and bears interest on a sliding scale ranging from LIBOR plus 1.1% to LIBOR plus 1.3%, which represents a rate that is lower by at least 0.45% than the rate under the Company's previous $50 million secured line of credit. In connection with the repayment of the $50 million secured line of credit, the Company expensed, as an extraordinary item, the unamortized deferred costs incurred to obtain the secured line of credit of $843,000. Draws under the Acquisition Credit Facility were used to fund acquisitions as discussed in Note 3. The required principal payments on the Company's debt for the next five years and thereafter are as follows (in thousands): Year Ending December 31, 1998 $ 5,562 1999 3,893 2000 84,900 2001 2,914 2002 3,148 Thereafter 127,882 --------- Total $ 228,299 ========= Note 7. RELATED PARTY TRANSACTIONS Fee and reimbursement income earned by the Company and the GRT Predecessor Entities from related partnerships totaled $719,000, $311,000 and $2,995,000 for the years ended December 31, 1997, 1996 and 1995, respectively, and consisted of property management fees and/or asset management fees for the years ended December 31, 1997 and 1996, and property management fees, asset management fees, reimbursements and related expenses for the year ended December 31, 1995. 55 Note 8. PROVISION FOR LOSS ON INVESTMENTS IN REAL ESTATE, REAL ESTATE PARTNERSHIPS AND MORTGAGE LOANS RECEIVABLE The loss provisions recorded during the year ended December 31, 1995 were as follows: Reduction in the carrying value of the New Jersey note receivable to the value of collateral $ 863 Reduction in value of the GC investments in real estate partnerships to estimated net realizable value 955 Other 58 ------- Total $ 1,876 ======= Note 9. EARNINGS PER SHARE In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." SFAS No. 128 requires the disclosure of basic earnings per share and modifies existing guidance for computing diluted earnings per share. Under the new standard, basic earnings per share is computed as earnings divided by weighted average shares, excluding the dilutive effects of stock options and other potentially dilutive securities. The effective date of SFAS No. 128 is December 15, 1997. Earnings per share for all periods presented have been restated to conform to the new standard as follows (in thousands, except for weighted average shares and per share amounts): Years ending December 31, 1997 1996 Net income - Basic 19,368 (1,609) Minority interest 1,119 -- (1) Net income - Diluted 20,487 (1,609) Weighted average shares: Basic 17,982,817 6,632,707 Stock options 281,365 118,552 Convertible Operating Partnership Units 1,253,361 -- (1) Diluted 19,517,543 6,751,259 Basic earnings per share 1.08 (0.24) Diluted earnings per share 1.05 (0.24)(1) (1) Diluted earnings per share for the year ended December 31, 1996, does not include the conversion of units of the Operating Partnership into common stock (570,364 weighted average units outstanding) as the effect is anti-dilutive. Note 10. CONSOLIDATION AND LITIGATION COSTS The consolidation costs included in the Company's December 31, 1996 consolidated statement of operations included accounting fees as well as the costs of mailing and printing the Prospectus/Consent Solicitation Statement, any supplements thereto or other documents related to the Consolidation, the costs of the Information Agent, Investor brochure, telephone calls, broker-dealer fact sheets, printing, postage, travel, meetings, legal and other fees related to the solicitation of consents, as well as reimbursement of costs incurred by brokers and banks in forwarding the Prospectus/Consent Solicitation Statement to Investors. The litigation costs included in the Company's December 31, 1996 consolidated statement of operations included the legal fees incurred in connection with defending two class action complaints filed by investors in certain of the 56 GRT Predecessor Entities as well as an accrual for the amount of the settlement that the plaintiff's counsel in one case was requesting be awarded by the court (see Note 12). Note 11. STOCK COMPENSATION PLAN In May 1996, the Company adopted an employee stock incentive plan (the "Plan") to provide incentives to attract and retain high quality executive officers and key employees. Certain amendments to the Plan were ratified and approved by the stockholders of the Company at the Company's 1997 Annual Meeting of Stockholders. The Plan, as amended, provides for the grant of (i) shares of Common Stock of the Company, (ii) options, stock appreciation rights ("SARs") or similar rights with an exercise or conversion privilege at a fixed or variable price related to the Common Stock and/or the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or (iii) any other security with the value derived from the value of the Common Stock of the Company or other securities issued by a related entity. Such awards include, without limitation, options, SARs, sales or bonuses of restricted stock, dividend equivalent rights ("DERs"), Performance Units or Preference Shares. The total number of shares of Common Stock available under the Plan is equal to the greater of 1,140,000 shares or 8% of the number of shares outstanding determined as of the day immediately following the most recent issuance of shares of Common Stock or securities convertible into shares of Common Stock; provided that the maximum aggregate number of shares of Common Stock available for issuance under the Plan may not be reduced. For purposes of calculating the number of shares of Common Stock available under the Plan, all classes of securities of the Company and its related entities that are convertible presently or in the future by the security holder into shares of Common Stock or which may presently or in the future be exchanged for shares of Common Stock pursuant to redemption rights or otherwise, shall be deemed to be outstanding shares of Common Stock. Notwithstanding the foregoing, the aggregate number of shares as to which incentive stock options, one type of security available under the Plan, may be granted under the Plan may not exceed 1,140,000 shares. The Company accounts for the fair value of the options and bonus grants in accordance with APB Opinion No. 25. As of December 31, 1997, 35,000 shares of bonus grants have been issued under the Plan. The fair value of the shares granted have been recorded as deferred compensation in the accompanying financial statements and will be charged to earnings ratably over the respective vesting periods that range from 2 to 5 years. As of December 31, 1997, 1,708,200 options to purchase shares of Common Stock have been granted. The exercise price of each 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. To date, all options granted have been at exercise prices equal to or higher than the fair market value of the shares on the grant date, and as such, no compensation expense has been recognized as accounted for under APB Opinion No. 25. The options vest over periods between 1 and 6 years, and have a maximum term of 10 years. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation" (SFAS 123). As permitted by SFAS 123, the Company has not changed its method of accounting for stock options but has provided the additional required disclosures. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except for per share amounts).
1997 1996 Net income (loss) As reported 19,368 (1,609) SFAS No. 123 Adjustment (1,947) (3) Pro forma 17,421 (1,612) Basic earnings per share As reported 1.08 (0.24) SFAS No. 123 Adjustment (0.11) -- Pro forma 0.97 (0.24) Diluted earnings per share As reported 1.05 (0.24) SFAS No. 123 Adjustment (0.10) -- Pro forma 0.95 (0.24)
57 A summary of the status of the Company's stock option plan as of December 31, 1997 and 1996, and changes during the years then ended is presented in the table below:
1997 1996 ---------------------------------------- ---------------------------------------- Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price -------------- ---------------------- ------------- ---------------------- Outstanding at beginning of year 796,000 $ 15.00 -- Granted 912,200 $ 26.29 796,000 $ 15.00 Exercised -- -- -- -- Purchased -- -- -- -- -------------- ---------------------- ------------- ---------------------- Outstanding at end of year 1,708,200 $ 21.03 796,000 $ 15.00 Exercisable at end of year 356,000 $ 27.29 -- --
The following table summarizes information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------- ------------------------------------- Number Weighted-average Weighted- Number Weighted- Outstanding at remaining average Exercisable at average 12/31/97 contractual life exercise price 12/31/97 exercise price ----------------- --------------------- ----------------- ----------------- ----------------- Range of Exercise Prices $15.00 to $20.25 884,000 8.63 years $ 15.45 6,000 $ 15.00 $20.38 to $24.56 62,000 8.27 years $ 22.76 - - $25.00 to $30.00 762,200 9.76 years $ 27.36 350,000 $ 27.50 ----------------- --------------------- ----------------- ----------------- ----------------- 1,708,200 $ 21.03 356,000 $ 27.29
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 1997 and 1996, respectively: expected dividend yield of 5.28% and 8.5%, expected volatility of 27.90% and 5.0%, weighted average risk-free interest rate of 5.74% and 6.3%, and expected lives of 10, 7, 5 and 2 years. Based on these assumptions, the weighted average fair value of options granted would be calculated as $4.52 in 1997 and $0.02 in 1996. Note 12. COMMITMENTS AND CONTINGENCIES Environmental Matters. The Company follows a policy of monitoring its properties for the presence of hazardous or toxic substances. The Company is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Company's business, assets or results of operations. There can be no assurance that such a material environmental liability does not exist. The existence of any such material environmental liability could have an adverse effect on the Company's results of operations and cash flow. General Uninsured Losses. The Company carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with policy specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of extraordinary losses which may be either uninsurable, or not economically insurable. Further, certain of the properties are located in areas that are subject to earthquake activity. Should a property sustain damage as a result of an earthquake, the Company may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. Should an uninsured loss occur, the Company could lose its investment in, and anticipated profits and cash flows from, a property. Litigation. Prior to the completion of the Consolidation, two lawsuits were filed in 1995 contesting the fairness of the Consolidation, one in California State court and one in federal court. The complaints in both actions alleged, among other things, breaches by the defendants of fiduciary duties and inadequate disclosures. The State court action was settled and, upon appeal, the settlement was affirmed by the State court on February 17, 1998. Pursuant to the terms of the settlement in the State court action, pending appeal, the Company has paid one-third of the 58 $855,000 settlement amount and the remaining two-thirds is being held in escrow. In the federal action, the court in December of 1995 deferred all further proceedings pending a ruling in the State court action. Following the State court decision approving the settlement, the defendants filed a motion to dismiss the federal court action. The Company believes that it is very unlikely that this litigation would result in a liability that would exceed the accrued liability by a material amount. However, given the inherent uncertainties of litigation, there can be no assurance that the ultimate outcomes of these actions will be favorable to the Company. Note 13. PUBLIC STOCK OFFERINGS In October 1996, the Company completed the "October 1996 Offering" of 3,666,000 shares of Common Stock. The 3,666,000 shares were sold at a per share price of $13.875 for total proceeds of $47,814,000 (net of 6% underwriting fee of $3,052,000. Approximately $1,100,000 in other costs were incurred in connection with the October 1996 Offering. In March 1997, the Company completed the "March 1997 Offering" of 3,500,000 shares of Common Stock. The 3,500,000 shares were sold at a per share price of $20.25 for total proceeds of $66,955,000 (net of 6% underwriting fee of $3,920,000). Approximately $916,000 in other costs were incurred in connection with the March 1997 Offering. In July 1997, the Company completed the "July 1997 Offering" of 6,980,000 shares of Common Stock. The 6,980,000 shares were sold at a per share price of $22.625 for total proceeds of $149,965,300 (net of underwriting fees of $7,957,200). Approximately $810,000 in other costs were incurred in connection with the July 1997 Offering. In October 1997, the Company completed the "October 1997 Offering" of 11,300,000 shares of Common Stock. The 11,300,000 shares were sold at a per share price of $25.00 for total proceeds of $268,092,500 (net of underwriting fees of $14,407,500). Approximately $772,000 in other costs were incurred in connection with the October 1997 Offering. Following are unaudited proforma statements of operations of the Company for each of the years ended December 31, 1997 and 1996 giving effect to the 1997 and 1996 offerings and related acquisitions (including those discussed in Note 3) as if they had been completed on January 1, 1996 (in thousands except for weighted average shares and per share amounts):
1997 1996 (Unaudited) (Unaudited) ---------------- ---------------- REVENUE Rental revenue $ 118,286 $ 111,862 Equity in earnings of Associated Companies 2,861 1,627 Fees, interest and other income 2,471 1,133 ---------------- ---------------- Total Revenue 123,618 114,622 ---------------- ---------------- OPERATING EXPENSES Property operating expenses 37,366 35,611 General and administrative 4,558 3,134 Depreciation and amortization 23,607 21,950 Interest expense 16,700 15,363 ---------------- ---------------- Total Operating Expenses 82,231 76,058 ---------------- ---------------- Income from operations before minority interest 41,387 38,564 Minority interest (2,646) (2,720) ================ ================ Net income $ 38,741 $ 35,844 ================ ================ Basic net income per share $ 1.23 $ 1.14 ================ ================ Diluted net income per share $ 1.21 $ 1.12 ================ ================ Basic weighted average shares outstanding 31,547,256 31,547,256 ================ ================ Diluted weighted average shares outstanding 34,338,513 34,338,513 ================ ================
59 Note 14. SUBSEQUENT EVENTS In January 1998, the Company acquired a portfolio of 13 suburban office properties and one office/flex property (the "Windsor Portfolio") located in eight states. The Company acquired the Windsor Portfolio from Windsor Realty Fund II, L.P., of which Windsor Advisor, LLC is the general partner and DuPont Pension Fund Investments and Gid/S&S Limited Partnership are limited partners, and other entities affiliated with Windsor Realty Fund II, L.P. The Windsor Portfolio properties aggregate 3,383,240 net rentable square feet, located in the eastern and mid-western United States and are concentrated in suburban Washington, D.C., Chicago, Atlanta, Boston, Philadelphia, Tampa, Florida and Cary, North Carolina. The total acquisition cost, including capitalized costs, was approximately $423.2 million, comprised of (i) approximately $160.5 million in assumption of debt; (ii) approximately $150.0 million in borrowings under a $150 million loan agreement with Wells Fargo Bank (the "Interim Loan" as discussed below); and (iii) the balance in cash, including cash from borrowings under the Acquisition Credit Facility (see Note 6). Subsequent to the acquisition, approximately $68 million of the assumed debt was paid off with proceeds from the January 1998 Convertible Preferred Stock Offering (defined below). In January 1998, the Company sold a multi-family property for a sales price of $4.95 million. This sale generated a net gain of approximately $947,000 and net proceeds of approximately $2.1 million. The proceeds from the sale will be used to fund future acquisitions. The sale was an all-cash sale and the Company has no continuing obligations or involvement with this property. Accordingly, the Company recognized the sale under the full accrual method of accounting. In January 1998, the Company closed a $150 million loan agreement with Wells Fargo Bank (the "Interim Loan"). The Interim Loan bears interest at LIBOR plus 1.75% and has a term of three months with an option to extend the term an additional three months. The purpose of the Interim Loan was to fund the acquisition of the Windsor Portfolio as discussed above. In January 1998, the Company completed a public offering of 11,500,000 shares of 7 3/4% Series A Convertible Preferred Stock (the "January 1998 Convertible Preferred Stock Offering"). The 11,500,000 shares were sold at a per share price of $25.00 for net proceeds of approximately $276 million. The shares are convertible at any time at the option of the holders 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. A portion of this additional capital was used to repay the outstanding balance under the Company's Acquisition Credit Facility. The remaining proceeds will be used to fund the pending acquisitions discussed in Note 15 and for general corporate purposes. Approximately $211,000 in other costs have been incurred in connection with the January 1998 Convertible Preferred Stock Offering. In February 1998, GRCAA sold its sole property to an unaffiliated third party for a price of $24 million, $2 million of which is conditioned on the purchaser's success in its efforts to purchase the Operator's leasehold interest. If the purchaser's efforts are successful and the Operating Partnership collects the additional $2 million, then the Company will pay $2 million of additional consideration to the former partners of GRCAA in the form of either (at the option of such former partners) cash, Operating Partnership Units or stock. The proceeds from the sale of the Property were deposited into a deferred exchange account and will be applied to the acquisition of other properties on a tax-deferred basis pursuant to Section 1031 of the Internal Revenue Code. No gain or loss on the sale of the property will be realized by the Company. In February 1998, the Company acquired a 161,468 square foot office complex ("Capitol Center") located in Des Moines, Iowa. The total acquisition cost, including capitalized costs, was approximately $12.3 million, comprising: (i) $116,000 in the form of 3,874 partnership units in the Operating Partnership (based on an agreed per unit value of $30.00 and (ii) the balance in cash. 60 In February 1998, the Company sold an industrial property to an unaffiliated third party for $930,000. The sale generated a net gain of approximately $247,000 and net proceeds of approximately $359,000. The proceeds from the sale will be used to fund future acquisitions. The sale was an all-cash sale and the Company has no continuing obligations or involvement with this property. Accordingly, the Company will recognize the sale under the full accrual method of accounting. In March 1998, the Company acquired a 15-story office property located in San Mateo, California (the "San Mateo Headquarters"), which contains 139,109 square feet and currently houses the Company's corporate headquarters, from Prudential Insurance Company of America. The San Mateo Headquarters property includes a contiguous parking garage. The total acquisition cost, including capitalized costs, was approximately $34.7 million and was paid in cash, including cash from borrowings under the Acquisition Credit Facility. In March 1998, the Operating Partnership issued $150 million of 7 5/8% Senior Notes (the "Notes") in an unregistered 144A offering. The Notes mature on March 15, 2005, unless previously redeemed. Interest on the Notes will be payable semiannually on March 15 and September 15, commencing September 15, 1998. The Notes may be redeemed at any time at the option of the Operating Partnership, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the Notes being redeemed plus accrued interest to the redemption date and (ii) the Make-Whole Amount, as defined, if any. The Notes will be general unsecured and unsubordinated obligations of the Operating Partnership, and will rank pari passu with all other unsecured and unsubordinated indebtedness of the Operating Partnership. The Notes will be subordinated to secured borrowing arrangements that the Operating Partnership has and from time to time may enter into with various banks and other lenders, and to the prior claims of each secured mortgage lender to any specific property which secures any lender's mortgage. As of December 31, 1997, such secured arrangements and mortgages aggregated approximately $148.1 million. The Operating Partnership intends to use the net proceeds from the issuance of the Notes to repay substantially all of the outstanding balance under the Interim Loan. Note 15. PENDING ACQUISITIONS The Company has entered into a definitive agreement to acquire all of the real estate assets of Prudential-Bache/ Equitec Real Estate Partnership, a California limited partnership (the "Pru-Bache Portfolio") in which the managing general partner is Prudential-Bache Properties, Inc., and in which GC and Robert Batinovich have served as co-general partners since March 1994, but do not hold a material equity or economic interest. Because of this affiliation, and consistent with the Company's Board of Directors' policy, neither Robert Batinovich nor Andrew Batinovich voted when the Board of Directors considered and acted to approve this acquisition. The total acquisition cost, including capitalized costs, is expected to be approximately $43.6 million, which is to be paid entirely in cash. The Pru-Bache Portfolio is comprised of four office buildings aggregating 405,825 square feet and one office/flex property containing 121,645 square feet. The largest of these properties are in Rockville, Maryland (186,680 square feet) and Memphis, Tennessee (100,901 square feet), with the remaining properties located in Sacramento, California and Kirkland, Washington. This acquisition is subject to a number of contingencies including approval of the acquisition by a majority vote of the limited partners of Prudential-Bache/Equitec Real Estate Partnership, satisfactory completion of due diligence and customary closing conditions. As a result, there can be no assurance that this acquisition will be completed. The Company is negotiating the terms of an agreement to acquire a portfolio of eight office properties and four retail properties aggregating 741,913 square feet and three multi-family properties containing 670 units (the "Eaton & Lauth Portfolio") from a number of partnerships in which affiliates of Eaton & Lauth serve as general partners. The total acquisition cost, including capitalized costs, is expected to be approximately $90.0 million, comprising: (i) approximately $32.0 million of net assumed debt; (ii) approximately $21.1 million of equity which will consist of: (a) approximately $4.3 million in the form of shares of Common Stock of the Company (based on a negotiated per share value of $25.00); and (b) approximately $16.8 million in the form of partnership units in the Operating Partnership (based on a negotiated per unit value of $25.00); and (iii) the balance in cash. The Eaton & Lauth Portfolio properties are located in the Indianapolis, Indiana area. This acquisition is subject to a number of contingencies including the negotiation of terms of a definitive agreement, approval of the assumption of loans, 61 satisfactory completion of due diligence and customary closing conditions. As a result, there can be no assurance that this acquisition will be completed. Note 16. UNAUDITED QUARTERLY RESULTS OF OPERATIONS The following represents an unaudited summary of quarterly results of operations for the year ended December 31, 1997 (in thousands, except for weighted average shares and per share amounts):
Quarter Ended March 31, June 30, September 30, December 31, 1997 1997 1997 1997 REVENUE Rental revenue $ 7,907 $ 11,784 $ 16,209 $ 25,493 Fees and reimbursements 187 180 204 148 Interest and other income 344 269 554 635 Equity in earnings of Associated Companies 145 458 1,339 801 Net gain on sales of rental properties -- 570 (15) 284 Gain on collection of mortgage loan receivable 154 498 -- -- Total revenue 8,737 13,759 18,291 27,361 EXPENSES Property operating expenses 2,382 3,663 5,237 7,676 General and administrative 651 723 657 1,288 Depreciation and amortization 1,537 2,507 4,823 6,006 Interest expense 1,573 2,227 2,616 3,252 Total expenses 6,143 9,120 13,333 18,222 Income from operations before minority interest and extraordinary item 2,594 4,639 4,958 9,139 Minority interest (231) (398) (60) (430) Net income before extraordinary item 2,363 4,241 4,898 8,709 Extraordinary item: Loss on early extinguishment of debt -- -- -- (843) Net income $ 2,363 $ 4,241 $ 4,898 $ 7,866 Basic Per Share Data: Net income before extraordinary item $ 0.23 $ 0.32 $ 0.25 $ 0.30 Extraordinary item -- -- -- (0.03) Net income $ 0.23 $ 0.32 $ 0.25 $ 0.27 Basic weighted average shares outstanding 10,089,331 13,188,504 19,395,779 29,033,945 Diluted Per Share Data: Net income before extraordinary item $ 0.23 $ 0.32 $ 0.24 $ 0.29 Extraordinary item -- -- -- (0.03) Net income $ 0.23 $ 0.32 $ 0.24 $ 0.26 Diluted weighted average shares outstanding 10,256,129 13,432,442 21,132,947 31,450,823 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.
62
GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1997 (in thousands) COLUMN A COLUMN B COLUMN C COLUMN D Cost Capitalized (Reduced) Initial Cost to Subsequent to Company (1) Acquisition (6) Buildings and Description Encumbrances Land Improvements Improvements - -------------------------------------------------------------------------------------------------- Office Properties: 4500 Plaza, UT (8) $ 875 $ 1,192 $ 4,606 $ 667 Warner Village, CA -- 558 2,232 24 Globe Building, WA -- 375 1,501 165 One Professional Square, NE -- 285 1,142 112 Vintage Pointe, AZ 2,087 738 2,950 130 Tradewinds Financial, AZ -- 303 1,214 22 Dallidet Center, CA -- 676 2,703 11 Hillcrest Office Plaza, CA -- 330 1,319 146 Academy Prof. Center, CA -- 467 1,866 107 University Tech Center, CA -- 2,011 8,046 450 Montgomery Exec. Center, MD -- 1,919 7,676 288 Post Oak Place, TX -- 395 1,579 26 Gatehall, NJ -- 1,857 7,427 46 Buschwood III, FL -- 1,472 5,890 42 25 Independence Blvd., NJ -- 4,535 18,141 60 Morristown Medical Offices, NJ -- 517 1,832 6 Frontier Executive Quarters I, NJ -- 4,189 33,892 99 Frontier Executive Quarters II, NJ -- 629 5,091 15 Bridgewater Exec. Quarters, NJ 4,487 2,069 7,337 25 Citibank Park, NV -- 4,611 18,442 107 Temple Terrace, FL -- 1,782 6,949 18 Thousand Oaks, TN -- 10,741 40,355 190 Regency Westpointe, NE (8) (5) 530 3,147 834 Centerstone Plaza, CA (4) 6,066 24,265 88 Woodlands Plaza, MO (4) 1,107 4,426 143 700 South Washington, VA (4) 1,974 7,894 53 Riverview Office Tower, MN (4) 4,083 16,333 409 Westford Corporate Center, MA (4) 2,078 8,310 68 Bond Street, MI -- 716 2,147 189
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H Gross Amount Carried at December 31, 1997 Buildings (1) Life and (3) Accumulated Date Depreciated Description Land Improvements Total Depreciation Acquired Over - ----------------------------------------------------------------------------------------------------------------------- Office Properties: 4500 Plaza, UT (8) $ 1,123 $ 5,342 $ 6,465 $ 2,629 3/86 1-30 yrs. Warner Village, CA 558 2,256 2,814 114 10/96 1-30 yrs. Globe Building, WA 375 1,666 2,041 86 10/96 1-30 yrs. One Professional Square, NE 285 1,254 1,539 67 10/96 1-30 yrs. Vintage Pointe, AZ 738 3,080 3,818 159 11/96 1-30 yrs. Tradewinds Financial, AZ 304 1,235 1,539 62 11/96 1-30 yrs. Dallidet Center, CA 677 2,713 3,390 136 11/96 1-30 yrs. Hillcrest Office Plaza, CA 330 1,465 1,795 74 11/96 1-30 yrs. Academy Prof. Center, CA 481 1,959 2,440 49 4/97 1-30 yrs. University Tech Center, CA 2,086 8,421 10,507 142 6/97 1-30 yrs. Montgomery Exec. Center, MD 1,928 7,955 9,883 135 9/97 1-30 yrs. Post Oak Place, TX 396 1,604 2,000 27 9/97 1-30 yrs. Gatehall, NJ 1,865 7,465 9,330 124 9/97 1-30 yrs. Buschwood III, FL 1,479 5,925 7,404 99 9/97 1-30 yrs. 25 Independence Blvd., NJ 4,547 18,189 22,736 304 9/97 1-30 yrs. Morristown Medical Offices, NJ 518 1,837 2,355 31 9/97 1-30 yrs. Frontier Executive Quarters I, NJ 4,200 33,980 38,180 566 9/97 1-30 yrs. Frontier Executive Quarters II, NJ 631 5,104 5,735 85 9/97 1-30 yrs. Bridgewater Exec. Quarters, NJ 2,075 7,356 9,431 122 9/97 1-30 yrs. Citibank Park, NV 4,628 18,532 23,160 155 9/97 1-30 yrs. Temple Terrace, FL 1,786 6,963 8,749 58 12/97 1-30 yrs. Thousand Oaks, TN 10,741 40,545 51,286 336 12/97 1-30 yrs. Regency Westpointe, NE (8) 530 3,981 4,511 1,491 6/87 5-30 yrs. Centerstone Plaza, CA 6,077 24,342 30,419 407 7/97 1-30 yrs. Woodlands Plaza, MO 1,114 4,562 5,676 183 4/97 1-30 yrs. 700 South Washington, VA 1,981 7,940 9,921 199 4/97 1-30 yrs. Riverview Office Tower, MN 4,095 16,730 20,825 424 4/97 1-30 yrs. Westford Corporate Center, MA 2,091 8,365 10,456 209 4/97 1-30 yrs. Bond Street, MI 716 2,336 3,052 106 9/96 1-40 yrs.
(continued) 63
GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1997 (in thousands) COLUMN A COLUMN B COLUMN C COLUMN D Cost Capitalized (Reduced) Initial Cost to Subsequent to Company (1) Acquisition (6) Buildings and Description Encumbrances Land Improvements Improvements - ---------------------------------------------------------------------------------------------------- Office Properties continued: University Club Tower, MO -- $ 4,087 $ 14,519 $ 1,472 Windsor Portfolio (7) -- -- 13,036 -- - ---------------------------------------------------------------------------------------------------- Office Total 62,292 276,267 6,012 - ---------------------------------------------------------------------------------------------------- Office/Flex Properties: Park 100 - Building 42, IN (8) -- 712 3,286 (560) Rancho Bernardo, CA -- 518 2,072 55 Hoover Industrial, AZ -- 322 1,290 14 Walnut Creek Industrial. TX $ 1,407 773 3,093 3 Chatsworth Ind. Park, CA 833 253 1,014 74 Sandhill Industrial Park, CA 1,753 563 2,254 104 San Dimas Industrial Ctr., CA 591 237 947 49 Glassell Industrial Center, CA 1,273 658 2,630 264 Kraemer Industrial Park, CA 1,425 384 1,537 90 Magnolia Industrial, AZ -- 310 1,241 58 The Business Park, GA -- 1,478 5,912 52 Newport Business Center, FL -- 651 2,604 31 Oakbrook Corners, GA -- 1,052 4,209 36 Baseline Business Park, AZ -- 882 3,527 27 Cypress Creek Business Ctr., FL -- 872 3,490 76 Scripps Terrace, CA -- 676 2,685 15 Riverview Industrial Park, MN -- 837 3,348 19 Winnetka Industrial Center, MN -- 1,184 4,737 27 Kent Business Park, WA -- 1,206 4,822 46 Valley Business Park, CO -- 1,757 7,027 39 Tierrasanta Research Park, CA -- 1,297 5,189 249 Germantown Business Center, MD -- 1,438 5,753 19 Fox Hollow Business Quarters, NJ -- 1,572 2,358 10 Fairfield Business Quarters, NJ 2,903 816 3,479 3 Columbia Warehouse, MD -- 391 1,565 7
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H Gross Amount Carried at December 31, 1997 Buildings (1) Life and (3) Accumulated Date Depreciated Description Land Improvements Total Depreciation Acquired Over - ----------------------------------------------------------------------------------------------------------------------- Office Properties continued: University Club Tower, MO $ 4,087 $ 15,991 $ 20,078 $ 731 7/96 1-40 yrs. Windsor Portfolio (7) -- 13,036 13,036 -- (7) (7) - ----------------------------------------------------------------------------------------------------------------------- Office Total 62,442 282,129 344,571 9,310 - ----------------------------------------------------------------------------------------------------------------------- Office/Flex Properties: Park 100 - Building 42, IN (8) 712 2,726 3,438 643 10/86 5-25 yrs. Rancho Bernardo, CA 518 2,127 2,645 109 10/96 1-30 yrs. Hoover Industrial, AZ 322 1,304 1,626 66 10/96 1-30 yrs. Walnut Creek Industrial. TX 774 3,095 3,869 155 10/96 1-30 yrs. Chatsworth Ind. Park, CA 264 1,077 1,341 27 4/97 1-30 yrs. Sandhill Industrial Park, CA 584 2,337 2,921 58 4/97 1-30 yrs. San Dimas Industrial Ctr., CA 246 987 1,233 25 4/97 1-30 yrs. Glassell Industrial Center, CA 704 2,848 3,552 71 4/97 1-30 yrs. Kraemer Industrial Park, CA 401 1,610 2,011 40 4/97 1-30 yrs. Magnolia Industrial, AZ 322 1,287 1,609 32 6/97 1-30 yrs. The Business Park, GA 1,485 5,957 7,442 100 9/97 1-30 yrs. Newport Business Center, FL 654 2,632 3,286 44 9/97 1-30 yrs. Oakbrook Corners, GA 1,057 4,240 5,297 71 9/97 1-30 yrs. Baseline Business Park, AZ 886 3,550 4,436 60 9/97 1-30 yrs. Cypress Creek Business Ctr., FL 876 3,562 4,438 64 9/97 1-30 yrs. Scripps Terrace, CA 678 2,698 3,376 43 9/97 1-30 yrs. Riverview Industrial Park, MN 841 3,363 4,204 56 9/97 1-30 yrs. Winnetka Industrial Center, MN 1,190 4,758 5,948 79 9/97 1-30 yrs. Kent Business Park, WA 1,211 4,863 6,074 82 9/97 1-30 yrs. Valley Business Park, CO 1,765 7,058 8,823 117 9/97 1-30 yrs. Tierrasanta Research Park, CA 1,303 5,432 6,735 98 9/97 1-30 yrs. Germantown Business Center, MD 1,442 5,768 7,210 96 9/97 1-30 yrs. Fox Hollow Business Quarters, NJ 1,576 2,364 3,940 39 9/97 1-30 yrs. Fairfield Business Quarters, NJ 817 3,481 4,298 58 9/97 1-30 yrs. Columbia Warehouse, MD 393 1,570 1,963 13 10/97 1-30 yrs. (continued)
64
GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1997 (in thousands) COLUMN A COLUMN B COLUMN C COLUMN D Cost Capitalized (Reduced) Initial Cost to Subsequent to Company (1) Acquisition (6) Buildings and Description Encumbrances Land Improvements Improvements - -------------------------------------------------------------------------------------------------- Office/Flex Properties continued: Palms Business Centre North, NV -- $ 2,483 $ 7,067 $ 35 Palms Business Centre South, NV -- 4,119 9,610 51 Palms Business Centre III, NV -- 3,970 10,207 53 Palms Business Centre IV, NV -- 623 3,272 16 Post Palms, NV -- 2,513 9,453 44 Bryant Lake Business Center, MN -- 1,883 7,531 135 ADS Alliance Data Systems, CO -- 1,331 3,354 10 Fingerhut Call Center Facility, FL -- 1,184 3,282 9 PrimeCo Call Center Facility, FL -- 947 3,418 10 Atlantic Tech @ Regency, FL -- 1,117 4,302 11 Clark Avenue, PA -- 646 2,584 14 Dominguez Industrial, CA -- 665 2,662 168 Dunn Way Industrial, CA -- 400 1,601 166 Monroe Industrial, CA $ 733 275 1,101 58 Upland Industrial, CA -- 144 576 64 Fisher-Pierce, MA (4) 715 2,860 16 Woodlands Tech Center, MO (4) 943 3,773 138 Lake Point Business Park, FL (4) 1,336 5,343 99 - -------------------------------------------------------------------------------------------------- Office/Flex Total 46,133 162,065 1,904 - -------------------------------------------------------------------------------------------------- Industrial Properties: Case Equipment Corp.: Kansas City, KS (8) -- 383 3,264 (1,397) Memphis, TN (8) -- 305 2,583 (1,106) Park 100 - Building 46, IN (8) -- -- -- 211 Mercantile I, TX -- 783 3,133 118 Quaker Industrial, TX -- 103 412 40 Pinewood Industrial, TX -- 144 577 6 Fifth Street, AZ -- 630 2,522 135 Airport Perimeter Bus. Park, GA -- 482 1,928 17 Springdale Commerce Ctr., CA -- 1,025 4,101 23
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H Gross Amount Carried at December 31, 1997 Buildings (1) Life and (3) Accumulated Date Depreciated Description Land Improvements Total Depreciation Acquired Over - ----------------------------------------------------------------------------------------------------------------------- Office/Flex Properties continued: Palms Business Centre North, NV $ 2,492 $ 7,093 $ 9,585 $ 59 10/97 1-30 yrs. Palms Business Centre South, NV 4,134 9,646 13,780 80 10/97 1-30 yrs. Palms Business Centre III, NV 3,984 10,246 14,230 85 10/97 1-30 yrs. Palms Business Centre IV, NV 626 3,285 3,911 27 10/97 1-30 yrs. Post Palms, NV 2,522 9,488 12,010 79 10/97 1-30 yrs. Bryant Lake Business Center, MN 1,907 7,642 9,549 63 11/97 1-30 yrs. ADS Alliance Data Systems, CO 1,334 3,361 4,695 28 12/97 1-30 yrs. Fingerhut Call Center Facility, FL 1,187 3,288 4,475 27 12/97 1-30 yrs. PrimeCo Call Center Facility, FL 949 3,426 4,375 29 12/97 1-30 yrs. Atlantic Tech @ Regency, FL 1,119 4,311 5,430 36 12/97 1-30 yrs. Clark Avenue, PA 649 2,595 3,244 43 9/97 1-30 yrs. Dominguez Industrial, CA 697 2,798 3,495 71 4/97 1-30 yrs. Dunn Way Industrial, CA 427 1,740 2,167 43 4/97 1-30 yrs. Monroe Industrial, CA 282 1,152 1,434 28 4/97 1-30 yrs. Upland Industrial, CA 155 629 784 16 4/97 1-30 yrs. Fisher-Pierce, MA 718 2,873 3,591 72 4/97 1-30 yrs. Woodlands Tech Center, MO 949 3,905 4,854 105 4/97 1-30 yrs. Lake Point Business Park, FL 1,344 5,434 6,778 137 4/97 1-30 yrs. - ----------------------------------------------------------------------------------------------------------------------- Office/Flex Total 46,496 163,606 210,102 3,274 - ----------------------------------------------------------------------------------------------------------------------- Industrial Properties: Case Equipment Corp.: Kansas City, KS (8) 236 2,014 2,250 558 3/84 50 yrs. Memphis, TN (8) 187 1,595 1,782 442 3/84 50 yrs. Park 100 - Building 46, IN (8) -- 211 211 94 10/86 5-25 yrs. Mercantile I, TX 783 3,251 4,034 179 10/96 1-30 yrs. Quaker Industrial, TX 103 452 555 23 10/96 1-30 yrs. Pinewood Industrial, TX 144 583 727 30 10/96 1-30 yrs. Fifth Street, AZ 654 2,633 3,287 65 6/97 1-30 yrs. Airport Perimeter Bus. Park, GA 484 1,943 2,427 33 9/97 1-30 yrs. Springdale Commerce Ctr., CA 1,030 4,119 5,149 69 9/97 1-30 yrs. (continued)
65
GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1997 (in thousands) COLUMN A COLUMN B COLUMN C COLUMN D Cost Capitalized (Reduced) Initial Cost to Subsequent to Company (1) Acquisition (6) Buildings and Description Encumbrances Land Improvements Improvements - -------------------------------------------------------------------------------------------------- Industrial Properties continued: Atlantic Industrial, GA -- $ 967 $ 3,866 $ 22 Coronado Industrial, CA -- 708 2,831 16 Glenn Avenue Business Ctr., IL -- 563 2,250 12 Wood Dale Business Center, IL -- 601 2,403 13 Burnham Industrial Warehouse, FL -- 591 2,366 14 Bonnie Lane Business Center, IL -- 735 2,938 16 Jencraft Industrial, NJ -- 1,323 4,975 16 Eatontown Industrial, NJ -- 763 1,963 7 E. Anaheim, CA -- 1,474 3,282 18 Fairmont Commerce Center, AZ -- 732 2,928 14 Benicia Industrial Park, CA (8) (5) 1,037 4,787 66 Navistar International: W. Chicago, IL (8) (5) 1,289 10,941 (4,618) Baltimore, MD (8) (5) 577 4,911 (2,100) Belshaw Industrial, CA 530 103 520 46 Southworth-Milton, MA (4) 1,913 7,652 43 Skypark, CA 7,428 3,899 17,802 -- Sea Tac II, WA (2) (8) -- 712 1,474 (178) - -------------------------------------------------------------------------------------------------- Industrial Total 21,842 96,409 (8,546) - -------------------------------------------------------------------------------------------------- Retail Properties: Auburn North, WA -- 1,099 4,397 162 Piedmont Plaza, FL -- 1,308 5,233 43 River Run Shopping Ctr., FL -- 1,422 5,687 41 Goshen Plaza, MD -- 989 3,958 22 Westbrook Commons, IL -- 3,053 12,213 68 Sonora Plaza, CA 4,965 1,945 7,781 18 Shannon Crossing, GA (8) (5) 2,488 2,075 360 Westwood Plaza, FL (8) (5) 2,599 5,110 563 Park Center, CA (2) (8) -- 1,748 3,296 (544) - -------------------------------------------------------------------------------------------------- Retail Total 16,651 49,750 733 - --------------------------------------------------------------------------------------------------
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H Gross Amount Carried at December 31, 1997 Buildings (1) Life and (3) Accumulated Date Depreciated Description Land Improvements Total Depreciation Acquired Over - ----------------------------------------------------------------------------------------------------------------------- Industrial Properties continued: Atlantic Industrial, GA $ 971 $ 3,884 $ 4,855 $ 65 9/97 1-30 yrs. Coronado Industrial, CA 711 2,844 3,555 47 9/97 1-30 yrs. Glenn Avenue Business Ctr., IL 565 2,260 2,825 38 9/97 1-30 yrs. Wood Dale Business Center, IL 603 2,414 3,017 40 9/97 1-30 yrs. Burnham Industrial Warehouse, FL 594 2,377 2,971 40 9/97 1-30 yrs. Bonnie Lane Business Center, IL 738 2,951 3,689 49 9/97 1-30 yrs. Jencraft Industrial, NJ 1,326 4,988 6,314 83 9/97 1-30 yrs. Eatontown Industrial, NJ 765 1,968 2,733 33 9/97 1-30 yrs. E. Anaheim, CA 1,480 3,294 4,774 27 10/97 1-30 yrs. Fairmont Commerce Center, AZ 735 2,939 3,674 24 10/97 1-30 yrs. Benicia Industrial Park, CA (8) 978 4,912 5,890 1,866 7/86 5-30 yrs. Navistar International: W. Chicago, IL (8) 793 6,819 7,612 1,892 3/84 50 yrs. Baltimore, MD (8) 356 3,032 3,388 839 3/84 50 yrs. Belshaw Industrial, CA 134 535 669 13 4/97 1-30 yrs. Southworth-Milton, MA 1,922 7,686 9,608 192 4/97 1-30 yrs. Skypark, CA 3,899 17,802 21,701 443 12/97 30 yrs. Sea Tac II, WA (2) (8) 712 1,296 2,008 319 2/86 5-25 yrs. - ----------------------------------------------------------------------------------------------------------------------- Industrial Total 20,903 88,802 109,705 7,503 - ----------------------------------------------------------------------------------------------------------------------- Retail Properties: Auburn North, WA 1,099 4,559 5,658 229 10/96 1-30 yrs. Piedmont Plaza, FL 1,317 5,267 6,584 132 4/97 1-30 yrs. River Run Shopping Ctr., FL 1,428 5,722 7,150 95 9/97 1-30 yrs. Goshen Plaza, MD 994 3,975 4,969 66 9/97 1-30 yrs. Westbrook Commons, IL 3,067 12,267 15,334 204 9/97 1-30 yrs. Sonora Plaza, CA 1,947 7,797 9,744 390 11/96 1-30 yrs. Shannon Crossing, GA (8) 2,488 2,435 4,923 1,581 10/88 3-14 yrs. Westwood Plaza, FL (8) 2,599 5,673 8,272 2,523 1/88 3-23 yrs. Park Center, CA (2) (8) 1,748 2,752 4,500 625 9/86 5-25 yrs. - ----------------------------------------------------------------------------------------------------------------------- Retail Total 16,687 50,447 67,134 5,845 - ----------------------------------------------------------------------------------------------------------------------- (continued)
66
GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1997 (in thousands) COLUMN A COLUMN B COLUMN C COLUMN D Cost Capitalized (Reduced) Initial Cost to Subsequent to Company (1) Acquisition (6) Buildings and Description Encumbrances Land Improvements Improvements - -------------------------------------------------------------------------------------------------- Multi-family Properties: Summer Breeze, CA (8) $ 2,578 $ 1,857 $ 2,138 $ 217 Sahara Gardens, NV -- 1,871 7,500 215 Sharonridge I & II, NC 1,756 518 2,071 24 Wendover Glen, NC 2,497 586 2,346 27 The Oaks, NC 2,341 662 2,649 31 The Landing on Farmhurst, NC 3,131 826 3,306 39 The Courtyard, NC 1,595 431 1,723 20 Sabal Point I, II & III, NC -- 3,650 14,602 169 Willow Glen, NC 2,412 809 3,236 37 Arrowood Crossing I & II, NC 6,504 1,805 7,222 83 The Chase (Commonwealth), NC 3,190 771 3,083 35 The Chase (Monroe), NC -- 1,015 4,062 47 Villas de Mission, NV 7,220 1,924 7,695 99 Overlook, AZ (4) 2,259 9,036 104 - -------------------------------------------------------------------------------------------------- Multi-family Total 18,984 70,669 1,147 - -------------------------------------------------------------------------------------------------- Hotel Properties: Country Inn by Carlson: San Antonio, TX -- 784 2,032 99 Country Inn & Suites by Carlson: Scottsdale, AZ 4,457 -- 12,059 61 Country Suites by Carlson: Arlington, TX (8) (5) 1,527 5,346 1,336 Irving, TX (2) (8) -- 972 3,850 (1,027) Ontario, CA (8) (5) 1,224 5,576 367 Tucson, AZ (8) (5) 1,048 7,600 1,265 - -------------------------------------------------------------------------------------------------- Hotel Total 5,555 36,463 2,101 - -------------------------------------------------------------------------------------------------- Combined Total $ 228,299 $ 171,457 $ 691,623 $ 3,351 ==================================================================================================
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H Gross Amount Carried at December 31, 1997 Buildings (1) Life and (3) Accumulated Date Depreciated Description Land Improvements Total Depreciation Acquired Over - ----------------------------------------------------------------------------------------------------------------------- Multi-family Properties: Summer Breeze, CA (8) $ 1,857 $ 2,355 $ 4,212 $ 407 1/95 3-18 yrs. Sahara Gardens, NV 1,872 7,714 9,586 385 10/96 1-30 yrs. Sharonridge I & II, NC 542 2,071 2,613 17 12/97 1-30 yrs. Wendover Glen, NC 613 2,346 2,959 20 12/97 1-30 yrs. The Oaks, NC 693 2,649 3,342 22 12/97 1-30 yrs. The Landing on Farmhurst, NC 865 3,306 4,171 28 12/97 1-30 yrs. The Courtyard, NC 451 1,723 2,174 14 12/97 1-30 yrs. Sabal Point I, II & III, NC 3,819 14,602 18,421 122 12/97 1-30 yrs. Willow Glen, NC 846 3,236 4,082 27 12/97 1-30 yrs. Arrowood Crossing I & II, NC 1,888 7,222 9,110 60 12/97 1-30 yrs. The Chase (Commonwealth), NC 806 3,083 3,889 26 12/97 1-30 yrs. The Chase (Monroe), NC 1,062 4,062 5,124 34 12/97 1-30 yrs. Villas de Mission, NV 1,924 7,794 9,718 390 10/96 1-30 yrs. Overlook, AZ 2,274 9,125 11,399 228 4/97 1-30 yrs. - ------------------------------------------------------------------------------------------------------------------------ Multi-family Total 19,512 71,288 90,800 1,780 - ------------------------------------------------------------------------------------------------------------------------ Hotel Properties: Country Inn by Carlson: San Antonio, TX 785 2,130 2,915 126 8/96 3-30 yrs. Country Inn & Suites by Carlson: Scottsdale, AZ -- 12,120 12,120 594 2/97 3-30 yrs. Country Suites by Carlson: Arlington, TX (8) 1,610 6,599 8,209 3,751 12/86 7-25 yrs. Irving, TX (2) (8) 954 2,841 3,795 798 10/86 5-25 yrs. Ontario, CA (8) 1,145 6,022 7,167 3,260 11/86 5-30 yrs. Tucson, AZ (8) 1,093 8,820 9,913 4,972 12/86 7-25 yrs. - ------------------------------------------------------------------------------------------------------------------------ Hotel Total 5,587 38,532 44,119 13,501 - ------------------------------------------------------------------------------------------------------------------------ Combined Total $ $ 171,627 $ 694,804 $ 866,431 $ 41,213 ======================================================================================================================== (continued)
67 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1997 (in thousands) (1) Initial cost and date acquired by GRT Predecessor Entities, where applicable. (2) The Company holds a participating first mortgage interest in the property. In accordance with GAAP, the Company is accounting for the property as though it holds fee title. (3) The aggregate cost for Federal income tax purposes is $711,995. (4) Pledged as security for Wells Fargo Bank Secured Loan - $59,724. (5) Pledged as security for loan with an investment bank -- $19,444. (6) Bracketed amounts represent reductions to carrying value in prior years. (7) Initial Cost represents escrow deposit related to the acquisition of the Windsor Portfolio which occurred in January 1998 (see Note 14). (8) Initial Cost represents original book value carried forward from the financial statements of the GRT Predecessor Entities. 68
GLENBOROUGH REALTY TRUST INCORPORATED December 31, 1997 (in thousands) Reconciliation of gross amount at which real estate was carried for the years ended December 31: 1997 1996 1995 ---------- ---------- ---------- Investments in real estate: Balance at beginning of year $ 190,729 $ 102,451 $ 83,449 Additions during year: Property acquisitions 687,523 89,653 17,151 Improvements 2,691 1,572 1,851 Retirements/sales (14,512) (2,947) -- ---------- ---------- ---------- Balance at end of year $ 866,431 $ 190,729 $ 102,451 ========== ========== ========== Accumulated Depreciation: Balance at beginning of year $ 28,784 $ 24,877 $ 19,455 Additions during year: Depreciation 14,496 4,305 2,254 Acquisitions 443 -- 3,168 Retirements/sales (2,510) (398) -- ---------- ---------- ---------- Balance at end of year $ 41,213 $ 28,784 $ 24,877 ========== ========== ==========
69
GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE December 31, 1997 (in thousands) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Description of Loan Current Maturity Periodic and Securing Property Interest Rate Date Payment Terms Prior Liens First Mortgage Loan 9% 6/1/01 Monthly interest and principal None Industrial property, payments, based on a thirty Los Angeles, CA year amortization First Mortgage Loan 11% 11/19/99 Monthly interest only payments None Medical building commencing January 1, 1997 Phoenix, AZ Principal due upon maturity
COLUMN A COLUMN F COLUMN G COLUMN H Principal Amount of Loans Subject Description of Loan Face Carrying to Delinquent and Securing Property Amount Amount Principal or Interest First Mortgage Loan $ 553 $ 507 None Industrial property, Los Angeles, CA First Mortgage Loan 3,850 3,185 (1) None Medical building Phoenix, AZ Total $ 4,403 $ 3,692 (1) The loan amount is $3,850,000, of which $2,694,000 was initially disbursed to the borrower and $906,000 was held by the Company as leasing and interest reserves. In 1997, $491,000 of the leasing and interest reserves were drawn by the borrower.
70 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE December 31, 1997 (in thousands) The following is a summary of changes in the carrying amount of mortgage loans for the years ended December 31, 1997, 1996 and 1995 (in thousands): 1997 1996 1995 --------- --------- --------- Balance at beginning of year $ 9,905 $ 7,465 $ 19,953 Additions during year: New mortgage loans 491 2,694 7 Deductions during year: Loss provision -- -- (863) Collections of principal (6,704) (254) (11,632) --------- --------- --------- Balance at end of year $ 3,692 $ 9,905 $ 7,465 ========= ========= ========= 71 UNCONSOLIDATED SUBSIDIARY Due to the lessee-lessor relationship between GHG and the Company, the Securities and Exchange Commission requires disclosures concerning GHG as if it were a registrant. Accordingly, the financial statements of GHG have been included in the Annual Report on Form 10-K of the Company for the year ended December 31, 1997, and such financial statements follow the Company's Consolidated Financial Statements in Item 14. GLENBOROUGH HOTEL GROUP Background Glenborough Hotel Group ("GHG") was organized in the state of Nevada on September 23, 1991. As of December 31, 1997, GHG operates hotel properties owned by the Company under five separate percentage leases and manages two hotel properties owned by affiliates. The Company owns 100% of the 50 shares of non-voting preferred stock of GHG and three individuals, including Terri Garnick, an executive officer of the Company, each own 33 1/3% of the 1,000 shares of voting common stock of GHG. In April 1997, the management contract of one of the previously managed hotel properties was terminated due to the sale of the property. GHG also owns approximately 80% of the common stock of Resort Group, Inc. ("RGI"). RGI manages homeowners associations and rental pools for two beachfront resort condominium hotel properties and owns six rental units at one of the properties. GHG receives 100% of the earnings of RGI and consolidates their operations with its own. Through July 1997, GHG also owned 94% of the outstanding common stock of Atlantic Pacific Holdings, Ltd., the sole owner of 100% of the common stock of Atlantic Pacific Assurance Company, Limited ("APAC"), a Bermuda corporation formed to underwrite certain insurable risks of certain of the Company's predecessor partnerships and related entities. As anticipated, in July 1997, APAC was liquidated and GHG received a liquidating distribution of approximately $2,136,000. GHG has recognized a gain of approximately $1,381,000 over its investment basis and costs of liquidation. GHG had accounted for its investment in APAC using the cost method due to its anticipated liquidation. Liquidity and Capital Resources GHG's primary source of funding is the cash generated by the operations of the five hotels leased from the Company and fees received for (i) managing two hotels owned by two partnerships and (ii) managing the homeowners associations and rental pools for the resort condominium hotel properties as discussed above. The boards of directors of GHG declared and paid the following quarterly dividends for the year ending December 31, 1997:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Preferred dividends to the Company $ 7,500 $ 7,500 $ 7,500 $ 7,500 $ 30,000 Additional dividends to the Company 30,938 30,938 30,938 30,938 123,752 Total dividends to the Company 38,438 38,438 38,438 38,438 153,752 Dividends to others 10,312 10,312 10,312 10,312 41,248 Total dividends $ 48,750 $ 48,750 $ 48,750 $ 48,750 $ 195,000 (1) Dividends for the fourth quarter of 1997 were declared and paid in January 1998.
Results of Operations Hotel revenue, which represents the revenue earned on the five hotels leased from the Company, increased $3,917,000, or 52%, to $11,380,000 for the year ended December 31, 1997, from $7,463,000 for the year ended December 31, 1996. This increase is primarily due to the acquisition of the San Antonio Hotel lease in August 1996 and the acquisition of the Scottsdale Hotel lease in February 1997. Fee revenue and salary reimbursements of $2,060,000 represents the fees earned for managing two hotels and two resort condominium hotels. The decrease from the year ended December 31, 1996, to the year ended December 31, 72 1997, is primarily due to the change in ownership of one of the managed hotel properties (see discussion above) which resulted in GHG no longer managing this hotel as of April 1997. The gain on the liquidation of APAC resulted from the July 1997 receipt by GHG of a liquidating distribution of approximately $2,136,000 which, net of liquidation costs, resulted in a gain of $1,381,000 over its investment basis of $755,000. GHG had accounted for its investment in APAC using the cost method due to its anticipated liquidation. The gain on liquidation was not subject to income taxes. The primary expenses associated with the leased hotels are room expenses, lease payments, sales and marketing, property general and administrative, and other operating expenses, including utilities, maintenance and insurance. All leased hotel expenses increased from the year ended December 31, 1996, to the year ended December 31, 1997, due to the acquisition of two hotels as discussed above. The only direct expenses incurred in connection with the management of the two hotels and two resort condominium hotel properties are salaries and benefits which decreased $340,000 from the year ended December 31, 1996, to the year ended December 31, 1997. This decrease is primarily due to the sale of one of the managed hotel properties which resulted in GHG no longer managing this hotel as of April 1997. General and administrative costs represent the overhead costs associated with administering the business of GHG. Such costs primarily consist of administrative salaries and benefits, rent, legal fees and accounting fees. These costs increased $109,000, or 11%, to $1,104,000 for the year ended December 31, 1997, from $995,000 for the year ended December 31, 1996. The increase is primarily due to higher salaries and benefits related to the growth of GHG. 73 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of GLENBOROUGH HOTEL GROUP: We have audited the accompanying consolidated balance sheets of GLENBOROUGH HOTEL GROUP as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GLENBOROUGH HOTEL GROUP as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Francisco, California January 21, 1998 74
GLENBOROUGH HOTEL GROUP CONSOLIDATED BALANCE SHEETS As of December 31, 1997 and 1996 (in thousands, except share amounts) 1997 1996 ASSETS Cash and cash equivalents $ 2,632 $ 461 Accounts receivable 472 247 Investments in management contracts, net 354 430 Rental property and equipment, net of accumulated depreciation of $129 and $111 in 1997 and 1996, respectively 154 170 Investment in Atlantic Pacific Assurance Company, Limited (APAC) -- 755 Prepaid expenses 119 156 Other assets 4 36 TOTAL ASSETS $ 3,735 $ 2,255 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accrued lease expense $ 557 $ 285 Mortgage loan 37 61 Other liabilities 405 407 Total liabilities 999 753 Stockholders' Equity: Common stock (1,000 shares authorized, issued and outstanding) 20 20 Non-voting preferred stock (50 shares authorized, issued and outstanding) -- -- Additional paid-in capital 1,568 1,568 Retained earnings 1,148 (86) Total stockholders' equity 2,736 1,502 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,735 $ 2,255 See accompanying notes to consolidated financial statements
75
GLENBOROUGH HOTEL GROUP CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1997 and 1996 (in thousands) 1997 1996 REVENUE Hotel revenue $ 11,380 $ 7,463 Fees and reimbursements 2,060 2,417 Gain on liquidation of APAC, net 1,381 -- Other revenue 36 72 Total revenue 14,857 9,952 EXPENSES Leased Hotel Properties: Room expenses 2,841 2,000 Lease payments to affiliates 4,002 2,507 Sales and marketing 1,213 770 Property general and administrative 991 855 Other operating expenses 1,870 1,036 Managed Hotel Properties: Salaries and benefits 1,300 1,640 Other Expenses: General and administrative 1,104 995 Depreciation and amortization 98 99 Interest expense 4 6 Total expenses 13,423 9,908 Income from operations before provision for income taxes 1,434 44 Provision for income taxes (34) (17) Net income $ 1,400 $ 27 See accompanying notes to consolidated financial statements
76
GLENBOROUGH HOTEL GROUP CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended December 31, 1997 and 1996 (in thousands, except shares) Addi- Preferred Stock Common Stock tional Retained Par Par Paid-in Earnings Shares Value Shares Value Capital (Deficit) Total BALANCE at December 31, 1995 50 $ -- 1,000 $ 20 $ 1,368 $ -- $ 1,388 Additional paid-in capital -- -- -- -- 200 -- 200 Dividends -- -- -- -- -- (113) (113) Net income -- -- -- -- -- 27 27 BALANCE at December 31, 1996 50 -- 1,000 20 1,568 (86) 1,502 Dividends -- -- -- -- -- (166) (166) Net income -- -- -- -- -- 1,400 1,400 BALANCE at December 31, 1997 50 $ -- 1,000 $ 20 $ 1,568 $ 1,148 $ 2,736 See accompanying notes to consolidated financial statements
77
GLENBOROUGH HOTEL GROUP CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1997 and 1996 (in thousands) 1997 1996 Cash flows from operating activities: Net income $ 1,400 $ 27 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 98 99 Gain on liquidation of APAC, net (1,381) -- Changes in certain assets and liabilities 110 246 Net cash provided by operating activities 227 372 Cash flows from investing activities: Additions to equipment (2) (7) Proceeds from liquidation of investment in APAC 2,136 -- Net cash provided by (used for) investing activities 2,134 (7) Cash flows from financing activities: Dividends (166) (113) Capital contributions -- 200 Repayment of borrowings (24) (24) Net cash provided by (used for) financing activities (190) 63 Net increase in cash and cash equivalents 2,171 428 Cash and cash equivalents at beginning of period 461 33 Cash and cash equivalents at end of period $ 2,632 $ 461 Supplemental disclosure of cash flow information: Cash paid for interest $ 4 $ 6 See accompanying notes to consolidated financial statements
78 GLENBOROUGH HOTEL GROUP Notes to Consolidated Financial Statements December 31, 1997 and 1996 Note 1. ORGANIZATION Glenborough Hotel Group ("GHG") was organized in the State of Nevada on September 23, 1991. As of December 31, 1997, GHG operates hotel properties owned by Glenborough Realty Trust Incorporated ("GLB") under five separate percentage leases and manages two hotel properties owned by affiliates. GLB owns 100% of the 50 shares of non-voting preferred stock of GHG and three individuals, including Terri Garnick, an executive officer of GLB, each own 33 1/3% of the 1,000 shares of voting common stock of GHG. GHG also owns approximately 80% of the common stock of Resort Group, Inc. ("RGI"). RGI manages homeowners associations and rental pools for two beachfront resort condominium hotel properties and owns six units at one of the properties. GHG receives 100% of the earnings of RGI and consolidates RGI's operations with its own. Through July 1997, GHG also owned 94% of the outstanding common stock of Atlantic Pacific Holdings, Ltd., the sole owner of 100% of the common stock of Atlantic Pacific Assurance Company, Limited ("APAC"), a Bermuda corporation formed to underwrite certain insurable risks of certain of GLB's predecessor partnerships and related entities. As anticipated, in July 1997, APAC was liquidated and GHG received a liquidating distribution of approximately $2,136,000. GHG has recognized a gain of $1,381,000 over its investment basis and costs of liquidation. GHG had accounted for its investment in APAC using the cost method due to its anticipated liquidation. Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The accompanying financial statements present the consolidated financial position of GHG and RGI as of December 31, 1997 and 1996, and the consolidated results of operations and cash flows of GHG and RGI for the years ended December 31, 1997 and 1996. All intercompany transactions, receivables and payables have been eliminated in the consolidation. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the results of operations during the reporting period. Actual results could differ from those estimates. Rental Property - Rental properties are stated at cost unless circumstances indicate that cost cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value. Depreciation is provided using the straight-line method over the useful lives of the respective assets. Investments in Management Contracts - Investments in management contracts are recorded at cost and are amortized on a straight-line basis over the term of the contracts. Cash Equivalents - GHG 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. Income Taxes - Provision for income taxes is based on financial accounting income. Certain items are reported in different periods for tax and financial reporting purposes. Timing differences arising from such items are recorded as deferred tax assets, net of related valuation reserves, or liabilities, as appropriate. Note 3. INVESTMENTS IN MANAGEMENT CONTRACTS, NET Investments in management contracts reflects the unamortized portion of the management contracts RGI holds with the two beachfront resort condominium hotel properties for both management of the homeowners associations and the rental pool programs. 79 GLENBOROUGH HOTEL GROUP Notes to Consolidated Financial Statements December 31, 1997 and 1996 Note 4. RENTAL PROPERTY Rental property and equipment represents the six condominium hotel units owned by RGI as well as furniture and fixtures in GHG's corporate offices. The six units owned by RGI participate in a resort rental program on an "at will" basis, whereby there is no fixed term of participation. Such participation generated approximately $23,000 and $19,000 of cash flow after deductions for capital reserves for the years ended December 31, 1997 and 1996, respectively. Note 5. MORTGAGE LOAN Mortgage loan of $37,000 at December 31, 1997, represents the debt secured by the six condominium hotel units owned by RGI. Such debt bears interest at 7%, payable in monthly installments of principal and interest totaling $2,304, and matures June 30, 1999. Note 6. THE PERCENTAGE LEASES GHG is leasing the five hotels owned by GLB for a term of five years pursuant to individual percentage leases ("Percentage Leases") which provide for rent equal to the greater of the Base Rent (as defined in the lease) or a specified percentage of room revenues (the "Percentage Rent"). Each hotel is separately leased to GHG (the "lessee"). The lessee's ability to make rent payments will, to a large degree, depend on its ability to generate cash flow from the operations of the hotels. Each Percentage Lease contains the provisions described below. Each Percentage Lease has a non-cancelable term of five years, subject to earlier termination upon the occurrence of certain contingencies described in the Percentage Lease. The lessee under the Percentage Lease has one five-year renewal option at the then current fair market rent. During the term of each Percentage Lease, the lessee is obligated to pay Base Rent plus Percentage Rent if defined levels of revenue are earned. Base Rent is required to be paid monthly in advance. Percentage Rent is calculated by multiplying fixed percentages by room revenues for each of the five hotels; the applicable percentage changes when revenue exceeds a specified threshold, and the threshold may be adjusted annually in accordance with changes in the applicable Consumer Price Index. Percentage Rent is due quarterly. The table below sets forth the annual Base Rent and the Percentage Rent formulas for each of the five hotels.
Hotel Lease Rent Provisions Percentage Rent incurred for the Initial Annual year ended Annual Percentage Hotel Base Rent December 31, 1997 Rent Formulas Ontario, CA $ 240,000 $ 324,000 24% of the first $1,668,000 of room revenue plus 40% of room revenue above $1,668,000 and 5% of other revenue continued
80
GLENBOROUGH HOTEL GROUP Notes to Consolidated Financial Statements December 31, 1997 and 1996 Hotel Lease Rent Provisions - continued Percentage Rent incurred for the Annual year ended Annual Percentage Hotel Base Rent December 31, 1997 Rent Formulas Arlington, TX $ 360,000 $ 333,000 27% of the first $1,694,000 of room revenue plus 42% of room revenue above $1,694,000 and 5% of other revenue Tucson, AZ $ 600,000 $ 682,000 40% of the first $1,429,000 of room revenue plus 46% of room revenue above $1,429,000 and 5% of other revenue San Antonio, TX $ 312,000 $ 3,000 33% of the first $1,240,000 of room revenue plus 40% of room revenue above $1,240,000 and 5% of other revenue Scottsdale, AZ $ 720,000(1) $ 548,000 41% of the first $2,600,000 of room revenue plus 60% of room revenue above $2,600,000 and 5% of other revenue (1) Hotel was acquired in February 1997, therefore, rent incurred for the year ended December 31, 1997 was less than a full year's rent.
Other than real estate and personal property taxes, casualty insurance, a fixed capital improvement allowance and maintenance of underground utilities and structural elements, which are the responsibility of GLB, the Percentage Leases require the lessees to pay rent, insurance, salaries, utilities and all other operating costs incurred in the operation of the Hotels. Note 7. DECLARATION OF DIVIDENDS The board of directors of GHG declared and paid the following dividends for 1997:
Preferred Stock Common Stock Total April, 1997 $ 38,438 $ 10,312 $ 48,750 July, 1997 38,438 10,312 48,750 October, 1997 38,438 10,312 48,750 January, 1998 38,438 10,312 48,750 Total paid from 1997 earnings $ 153,752 $ 41,248 $ 195,000
81 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: September 9, 1998 /s/ Robert Batinovich Robert Batinovich Chairman of the Board and Chief Executive Officer Date: September 9, 1998 /s/ Andrew Batinovich Andrew Batinovich Director, President and Chief Operating Officer Date: September 9, 1998 /s/ Stephen Saul Stephen Saul Chief Financial Officer (Principal Financial Officer) Date: September 9, 1998 /s/ Terri Garnick Terri Garnick Senior Vice President, Chief Accounting Officer, Treasurer (Principal Accounting Officer) Date: September 9, 1998 /s/ Laura Wallace Laura Wallace Director 82 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 the identically numbered exhibit to the Company's Registration Statement on Form S-4 (Registration No. 33-83506), which became effective October 26, 1995. 3.02** Bylaws of the Company. 3.03** The Company's Form of Articles Supplementary relating to the 7 3/4% Series A Convertible Preferred Stock. 3.04 Second Amended and Restated Agreement of Limited Partnership of Glenborough Properties, L.P. is incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K which was filed on November 1, 1996. 4.02 Form of Common Stock Certificate of the Company is incorporated herein by reference to the identically numbered exhibit to the Company's Registration Statement on Form S-4 (Registration No. 33-83506), which became effective October 26, 1995. 4.03 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. 10.02 Form of Indemnification Agreement for existing Officers and Directors of the Company is incorporated herein by reference to the identically numbered exhibit to the Company's Registration Statement on Form S-4 (Registration No. 33-83506), which became effective October 26, 1995. 10.03* 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. 10.06 Lease Agreements between Glenborough Properties, L.P. and Glenborough Hotel Group for Country Suites-Tucson, Country Suites-Ontario and Country Suites-Arlington are incorporated herein by reference to the identically numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.24 Form of Indemnification Agreement for Existing Officers and Directors of Glenborough Hotel Group is incorporated herein by reference to the identically numbered exhibit to the Company's Registration Statement on Form S-4 (Registration No. 33-83506), which became effective October 26, 1995. 10.25 Form of Indemnification Agreement for Existing Officers and Directors of Glenborough Realty Corporation is incorporated herein by reference to the identically numbered exhibit to the Company's Registration Statement on Form S-4 (Registration No. 33-83506), which became effective October 26, 1995. 10.27 Registration Agreement between the Company and GPA, Ltd. is incorporated herein by reference to the identically numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.29 Subscription Agreement between Glenborough Properties, L.P. and GPA, Ltd. is incorporated herein by reference to the identically numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.31 Indemnification Agreement for Glenborough Realty Corporation and the Company, with Robert Batinovich as indemnitor is incorporated herein by reference to the identically numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.33 Agreement for contribution of Partnership Interests for the University Club Tower Property is incorporated herein by reference to Exhibit 10.39 to the Company's Registration Statement on Form S-11 (Registration No. 333-09411), which was filed on August 1, 1996. 83 EXHIBIT INDEX - continued Exhibit Number Exhibit Title 10.34 Credit agreement with Wells Fargo Bank N.A. related to $50,000,000 secured revolving line of credit is incorporated herein by reference to Exhibit 10.31 to the Company's Registration Statement on Form S-11 (Registration No. 333-09411), which was filed on August 1, 1996. 10.35 Credit agreement with Wells Fargo Bank N.A. related to the $6,120,000 2-year secured term loan is incorporated herein by reference to Exhibit 10.30 to the Company's Registration Statement on Form S-11 (Registration No. 333-09411), which was filed on August 1, 1996. 10.36 Purchase Agreement related to the acquisition of Carlsberg Plaza, one of the Carlsberg Properties is incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K which was filed on November 1, 1996. 10.37 Purchase Agreement related to the acquisition of Dallidet Professional Center, one of the Carlsberg Properties is incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K which was filed on November 1, 1996. 10.38 Purchase Agreement related to the acquisition of Hillcrest Office Building, one of the Carlsberg Properties, is incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K which was filed on November 1, 1996. 10.39 Purchase Agreement related to the acquisition of Tradewinds Office Building, one of the Carlsberg Properties is incorporated herein by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K which was filed on November 1, 1996. 10.40 Purchase Agreement related to the acquisition of Sonora Plaza, one of the Carlsberg Properties is incorporated herein by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K which was filed on November 1, 1996. 10.41 Loan Agreement between Glenborough Properties, L.P. and Carlsberg Properties, Ltd. for the $3,600,000 Grunow mortgage loan receivable is incorporated herein by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K which was filed on November 1, 1996. 10.42 Option Agreement between Glenborough Properties, L.P. and Carlsberg Properties, Ltd. for the Grunow Medical Building is incorporated herein by reference to Exhibit 10.7 to the Company's Current Report on Form 8-K which was filed on November 1, 1996. 10.43 Contribution agreement related to the acquisition of the TRP Properties is incorporated herein by reference to Exhibit 99 to the Company's Current Report on Form 8-K filed on December 30, 1996. 10.44 Agreement for Contribution of Partnership Interests related to acquisition of the Bond Street Property is incorporated herein by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10Q/A for the quarter ended September 30, 1996. 10.45 Second Amendment to First Amended and Restated Agreement of Limited Partnership of Glenborough Properties, L.P. is incorporated herein by reference to Exhibit 10.02 to the Company's Quarterly Report on Form 10Q/A for the quarter ended September 30, 1996. 10.46 Second Amendment to Agreement of Limited Partnership of GPA Bond, a Calif. Limited Partnership is incorporated herein by reference to Exhibit 10.03 to the Company's Quarterly Report on Form 10Q/A for the quarter ended September 30, 1996. 10.47 Lease Agreement between Glenborough Properties, L.P. and Glenborough Hotel Group for Country Suites - San Antonio is incorporated herein by reference to Exhibit 10.04 to the Company's Quarterly Report on Form 10Q/A for the quarter ended September 30, 1996. 10.48 Purchase agreement related to the acquisition of the Scottsdale Hotel is incorporated herein by reference to the identically numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 84 EXHIBIT INDEX - continued Exhibit Number Exhibit Title 10.49 First Amendment to the Agreement of Purchase of Sale related to the purchase of the Scottsdale Hotel is incorporated herein by reference to the identically numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.50 Lease Agreement related to the Scottsdale Hotel 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, 1997. 10.51 Purchase and Sale Agreement related to the T. Rowe Price Realty Income Fund II acquisition is incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.52 Purchase Agreement related to the Centerstone Property acquisition is incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.53 Contribution Agreement related to the Centerstone Property acquisition is incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.54 Purchase Agreement related to the CIGNA acquisition is incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.55 Unsecured Loan Agreement with Wells Fargo Bank, N.A. is incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.56** Credit Agreement with Wells Fargo Bank, N.A. related to $250,000,000 unsecured revolving line of credit. 11.1 Statement re: Computation of Per Share Earnings is shown in Note 9 of the Consolidated Financial Statements of the Company in Item 14. 12.1 Computation of Ratio of Earnings to Fixed Charges. 21.1** Significant Subsidiaries of the Registrant 23.1 Consent of Arthur Andersen LLP, independent public accountants. 27.1 Financial Data Schedule * Indicates management contract or compensatory plan or arrangement. ** Previously filed as part of the Company's Form 10-K for the year ended December 31, 1997. 85
Exhibit 12.1 GLENBOROUGH REALTY TRUST INCORPORATED Computation of Ratios For the five years ended December 31, 1997 and the three months ended March 31, 1998 GRT Predecessor Entities, Combined The Company ---------------------------------------- ----------------------------------------- Three Months Ended Twelve Months Ended December 31, March 31, -------------------------------------------------------------------- ------------ 1993 1994 1995 1996 1997 1998 ----------- ------------ ------------ ------------ ----------- ------------ EARNINGS, AS DEFINED Net Income (Loss) before Preferred Dividends 4,418 1,580 524 (1,609) 19,368 12,213 Extraordinary items (2,274) -- -- 186 843 -- Federal & State income taxes 24 176 357 -- -- -- Minority Interest 5 43 -- 292 1,119 678 Fixed Charges 1,301 1,140 2,129 3,913 9,668 9,145 ----------- ------------ ------------ ------------ ----------- ------------ 3,474 2,939 3,010 2,782 30,998 22,036 ----------- ------------ ------------ ------------ ----------- ------------ FIXED CHARGES AND PREFERRED DIVIDENDS, AS DEFINED Interest Expense 1,301 1,140 2,129 3,913 9,668 9,145 Preferred Dividends -- -- -- -- -- 3,910 ----------- ------------ ------------ ------------ ----------- ------------ 1,301 1,140 2,129 3,913 9,668 13,055 RATIO OF EARNINGS TO FIXED CHARGES 2.67 2.58 1.41 0.71 (1) 3.21 2.41 ----------- ------------ ------------ ------------ ----------- ------------ RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS 2.67 2.58 1.41 0.71 (1) 3.21 1.69 ----------- ------------ ------------ ------------ ----------- ------------ (1) For the twelve months ended December 31, 1996, earnings were insufficient to cover fixed charges and fixed charges plus preferred dividends by $1,131.
86 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 21, 1998 (except with respect to the matters discussed in Note 14, as to which the date is March 20, 1998) on the financial statements of Glenborough Realty Trust Incorporated and our report dated January 21, 1998 on the financial statements of Glenborough Hotel Group included in this Form 10-K/A, into the Company's previously filed Registration Statements File Nos. 333-40959, 333-27677 and 333-08806. /s/ ARTHUR ANDERSEN LLP ------------------------- ARTHUR ANDERSEN LLP San Francisco, California September 9, 1998 87 EX-27 2 FDS --
5 0000929454 GLENBOROUGH REALTY TRUST INCORPORATED 1,000 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1.000 5,070 0 6,334 0 0 9,750 866,431 41,213 865,774 5,583 0 0 0 31 580,092 865,774 0 68,148 0 37,150 0 0 9,668 21,330 0 21,330 0 (843) 0 19,368 1.08 1.05
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