SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 OR 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
OR
/ /Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number: 1-14307
Great Lakes REIT
(Exact name of Registrant as specified in its Charter)
Maryland 36-4238056
(State or other jurisdiction (IRS employer identification no.)
of incorporation or organization)
823 Commerce Drive, Suite 300, Oak Brook, IL 60523
(Address of principal executive offices) (Zip Code)
(630) 368 - 2900
(Registrant's telephone number, including area code)
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
Number of shares of the registrant's common shares of beneficial interest, $.01
par value per share, outstanding as of May 5, 2000: 16,409,100
Great Lakes REIT
Index to Form 10-Q
March 31, 2000
Page Number
Part I - Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets
as of March 31, 2000
and December 31, 1999 4
Consolidated Statements of Income
for the three months
ended March 31, 2000 and 1999 5
Consolidated Statement of Changes
in Shareholders' Equity
for the three months ended March 31, 2000 6
Consolidated Statements of Cash Flows
for the three months
ended March 31, 2000 and 1999 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
Part II - Other Information
Item 2. Changes in Securities 12
Item 6. Exhibits and Reports on Form 8-K 12
Great Lakes REIT
Consolidated Balance Sheets (unaudited)
(Dollars in Thousands, except per share data) March 31, December 31,
2000 1999
---- ----
Assets
Properties:
Land $60,983 $60,983
Buildings, improvements, and equipment 412,755 410,478
----------------------------------------
473,738 471,461
Less accumulated depreciation 36,141 33,074
----------------------------------------
437,597 438,387
Cash and cash equivalents 1,780 1,518
Real estate tax escrows 263 277
Rents receivable 6,453 6,274
Deferred financing and leasing costs, net of accumulated amortization 5,945 6,069
Goodwill, net of accumulated amortization 1,191 1,210
Other assets 1,708 1,467
----------------------------------------
Total assets $454,937 $455,202
========================================
Liabilities and shareholders' equity
Bank loan payable $107,000 $107,000
Mortgage loans payable 99,516 100,113
Bonds payable 4,550 4,550
Accounts payable and accrued liabilities 3,347 5,947
Accrued real estate taxes 10,149 11,687
Dividends payable 5,580 0
Prepaid rent 4,271 3,936
Security deposits 1,109 1,084
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Total liabilities 235,522 234,317
----------------------------------------
Minority interests 686 951
----------------------------------------
Preferred shares of beneficial interest ($0.01 par value, 37,500 37,500
10,000,000 shares authorized; 1,500,000 9 3/4% Series A
Cumulative Redeemable shares, with a $25.00 per share
Liquidation Preference, issued and outstanding in 2000 and 1999)
Common shares of beneficial interest ($0.01 par value, 179 178
60,000,000 shares authorized; 17,952,485 and 17,816,883
shares issued in 2000 and 1999, respectively)
Paid-in-capital 230,064 227,907
Retained earnings (deficit) (6,900) (5,936)
Employee share loans (18,453) (16,335)
Deferred compensation (17) (22)
Treasury shares, at cost (1,543,385 and 1,521,785 shares in (23,644) (23,358)
2000 and 1999, respectively)
----------------------------------------
Total shareholders' equity 218,729 219,934
----------------------------------------
Total liabilities and shareholders' equity $454,937 $455,202
========================================
The accompanying notes are an integral part of these financial statements.
Great Lakes REIT
Consolidated Statements of Income (unaudited)
(Dollars in Thousands, except per share data)
Three months ended March 31,
---------------------------------------
2000 1999
---- ----
Revenues:
Rental $18,785 $17,524
Reimbursements 5,251 4,968
Interest and other 443 246
---------------------------------------
Total revenues 24,479 22,738
---------------------------------------
Expenses:
Real estate taxes 3,922 3,625
Other property operating 6,036 6,124
General and administrative 1,105 1,163
Interest 3,746 3,276
Depreciation and amortization 4,127 3,721
---------------------------------------
Total expenses 18,936 17,909
---------------------------------------
Income before allocation to minority interests 5,543 4,829
Minority interests 13 16
---------------------------------------
Net income 5,530 4,813
Income allocated to preferred shareholders 914 914
---------------------------------------
Net income applicable to common shares $4,616 $3,899
=======================================
Earnings per common share - basic $0.28 $0.24
=======================================
Weighted average common shares outstanding - basic 16,334 16,574
=======================================
Diluted earnings per common share $0.28 $0.23
=======================================
Weighted average common shares outstanding - diluted 16,402 16,659
=======================================
The accompanying notes are an integral part of these financial statements.
Great Lakes REIT
Consolidated Statement of Changes in Shareholders' Equity (unaudited)
For the Three Months Ended March 31, 2000
(Dollars in Thousands)
Preferred Shares
Balance at beginning of period $37,500
Proceeds from the sale of preferred shares --
- --------------------------------------------------------------------------------
Balance at end of period 37,500
Common Shares
Balance at beginning of period 178
Exercise of share options 1
- --------------------------------------------------------------------------------
Balance at end of period 179
Paid-in capital
Balance at beginning of period 227,907
Exercise of share options 2,157
- --------------------------------------------------------------------------------
Balance at end of period 230,064
Retained earnings (deficit)
Balance at beginning of period (5,936)
Net income 5,530
Distributions/dividends (6,494)
- --------------------------------------------------------------------------------
Balance at end of period (6,900)
Employee share loans
Balance at beginning of period (16,335)
Exercise of share options (2,118)
- --------------------------------------------------------------------------------
Balance at end of period (18,453)
Deferred compensation
Balance at beginning of period (22)
Amortization of deferred compensation 5
- --------------------------------------------------------------------------------
Balance at end of period (17)
Treasury shares
Balance at beginning of period (23,358)
Purchase of treasury shares (286)
- --------------------------------------------------------------------------------
Balance at end of period (23,644)
- --------------------------------------------------------------------------------
Total shareholders' equity $218,729
================================================================================
The accompanying notes are an integral part of these financial statements.
Great Lakes REIT
Consolidated Statements of Cash Flows (unaudited)
(Dollars in Thousands)
Three Months Ended March 31,
---------------------------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $5,530 $4,813
Adjustments to reconcile net income to cash
flows from operating activities
Depreciation and amortization 4,127 3,721
Other non cash items 18 23
Net changes in assets and liabilities:
Rents receivable (179) 232
Real estate tax escrows and other assets (224) (46)
Accounts payable, accrued expenses and other liabilities (2,240) 862
Accrued real estate taxes (1,538) (1,440)
Payment of deferred leasing costs (369) (495)
---------------------------------------
Net cash provided by operating activities 5,125 7,670
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to buildings, improvements and equipment (2,828) (3,660)
Other investing activities -- (200)
---------------------------------------
Cash used by investing activities (2,828) (3,860)
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common and preferred shares -- --
Payment of share offering costs -- --
Proceeds from exercise of share options 40 1
Proceeds from bank and mortgage loans payable -- 7,275
Distributions / dividends paid (914) (6,060)
Distributions to minority interests (19) --
Purchase of minority interests (259) (256)
Purchase of treasury shares (286) (4,405)
Payment of bank and mortgage loans and bonds (597) (577)
Payment of deferred financing costs -- (13)
---------------------------------------
Net cash used by financing activities (2,035) (4,035)
---------------------------------------
Net increase (decrease) in cash and cash equivalents 262 (225)
Cash and cash equivalents, beginning of year 1,518 2,466
=======================================
Cash and cash equivalents, end of quarter $1,780 $2,241
=======================================
Supplemental disclosure of cash flow:
Interest paid $3,717 $3,310
=======================================
Non cash financing transactions:
Employee share loans $2,118 $433
=======================================
Increase in preferred dividends payable -- $142
=======================================
The accompanying notes are an integral part of these financial statements.
Great Lakes REIT
Notes to Consolidated Financial Statements
Dollars in thousands, except per share data
(Unaudited)
1. Basis of Presentation
Great Lakes REIT, a Maryland real estate investment trust, (the "Company"), was
formed in 1992 to invest in income-producing real property. The principal
business of the Company is the ownership, management, leasing, renovation and
acquisition of suburban office and light industrial properties primarily located
in the Midwest. At March 31, 2000, the Company owned and operated 36 properties
primarily located in suburban areas of Chicago, Detroit, Milwaukee, Denver,
Cincinnati, Columbus and Minneapolis. The Company leases office and light
industrial space to over 500 tenants in a variety of businesses.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries and controlled partnership. Intercompany accounts
and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all information
and footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. These statements should be read in conjunction with the Company's
most recent year-end audited financial statements contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999, as amended (the
"1999 10-K"). In the opinion of management, the financial statements contain all
adjustments (which are normal and recurring) necessary for a fair statement of
financial results for the interim periods. For further information, refer to the
consolidated financial statements and notes thereto included in the 1999 10-K.
2. Segment Information
The Company has three reportable segments distinguished by property type. The
property types are office, with 89% (as measured by square feet) of the
Company's overall portfolio, office/service center (11%), and industrial (0%, as
the Company sold its only industrial property in 1999), and are primarily
located in the Midwest. As of March 31, 2000, the properties were leased to more
than 500 tenants, no single tenant accounted for more than 5% of the aggregate
annualized base rent of the Company's portfolio and only 20 tenants individually
represented more than 1% of such aggregate annualized base rent.
The Company evaluates performance and allocates resources based on property
revenues (rental and reimbursement income) less property operating expenses and
real estate taxes to arrive at net operating income which is a widely recognized
industry measure of a property's performance.
Following is a summary report of segment information for the three months ended
March 31, 2000 and 1999.
For the three months ended
March 31,
---------------------------------------
2000 1999
Revenues
Office $22,302 $20,661
Office/service center 1,734 1,619
Industrial -- 139
Deferred rental revenues -- 73
Interest and other 443 246
========================================
Total $24,479 $22,738
========================================
Net operating income
Office $12,966 $11,652
Office/service center 1,112 914
Industrial -- 104
========================================
Total $14,078 $12,670
========================================
Depreciation
and amortization
Office $3,645 $3,281
Office/service center 348 298
Industrial -- 26
Other 134 116
========================================
Total $4,127 $3,721
========================================
Interest expense
Office $3,371 $2,890
Office/service center 375 332
Industrial -- 54
========================================
Total $3,746 $3,276
========================================
Additions to properties
Office $2,684 $3,418
Office/service center 121 189
Industrial -- 36
Other 24 17
========================================
Total $2,829 $3,660
========================================
Income before allocation to
minority interests
Office $5,950 $5,481
Office/service center 389 284
Industrial -- 24
Deferred rental revenues -- 73
Interest and other income 443 246
General and administrative (1,105) (1,163)
Other depreciation (134) (116)
----------------------------------------
Income before allocation
to minority interests $5,543 $4,829
========================================
Following is a summary of segment assets at March 31, 2000 and December 31,1999:
March 31, December 31,
----------------------------------------
2000 1999
Assets
Office $410,687 $411,738
Office/service center 30,439 30,635
Other 13,811 12,829
----------------------------------------
Total $454,937 $455,202
========================================
3. Subsequent Events
On April 6, 2000, the Company sold its Downers Grove, Illinois property for a
contract price of $12,700.
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Dollars in thousands)
The following is a discussion and analysis of the consolidated financial
condition and results of operations for the three months ended March 31, 2000.
The following should be read in conjunction with the consolidated financial
statements and related notes appearing elsewhere herein and the consolidated
financial statements and related notes contained in the 1999 10-K.
Overview
The principal business of the Company is the ownership, management, leasing,
renovation, and acquisition of suburban office properties located primarily in
the Midwest. At March 31, 2000, the Company owned and operated 36 properties
primarily located in suburban areas of Chicago, Detroit, Milwaukee, Columbus,
Minneapolis, Denver and Cincinnati. The Company leases space to over 500 tenants
in a variety of businesses.
Three months ended March 31, 2000 compared to three months ended March 31, 1999
In analyzing the operating results for the quarter ended March 31, 2000, the
changes in rental and reimbursement income, real estate taxes, and other
property operating expenses from 1999 are due principally to: (i) the addition
of a full year's operating results in 2000 of properties acquired in 1999
compared to the partial year's operating results from the dates of their
respective acquisitions in 1999, (ii) the effect of property dispositions in
1999 and (iii) improved operations of properties during 2000 compared to 1999.
Rental and Real estate Property
reimbursement taxes operating
income expenses
Increase due to inclusion of results of properties $910 $185 $296
acquired in 1999
Effect of property dispositions in 1999 (1,083) (186) (276)
Improved operations in 2000 as compared to 1999 1,717 298 (108)
----------- ----------- ----------
Total $1,544 $297 $(88)
=========== =========== ===========
Interest expense during the quarter ended March 31, 2000 increased by $470 as
the Company had greater amounts of debt outstanding in 2000.
Depreciation and amortization increased in 2000 by $406 as the Company had a
gross book value of depreciable assets at March 31, 2000 of $412,755 compared to
$391,698 at March 31, 1999.
Liquidity and Capital Resources
The Company expects to meet its short-term liquidity requirements principally
through its working capital and net cash provided by operating activities. The
Company considers its cash provided by operating activities to be adequate to
meet operating requirements and to fund the payment of dividends in order to
comply with certain federal income tax requirements applicable to real estate
investment trusts ("REITs").
The Company expects to meet its liquidity requirements for property acquisitions
and significant capital improvements through property dispositions and
additional borrowings on its existing $150,000 unsecured bank credit facility
that matures in April 2001. The Company had $43,000 available for future
borrowings under this credit facility at March 31, 2000.
The Company expects to meet its long-term liquidity requirements (such as
scheduled mortgage debt maturities, property acquisitions and significant
capital improvements) through long-term collateralized and uncollateralized
borrowings, the issuance of debt or equity securities and targeted property
dispositions.
In 2000, the Company announced a plan to repurchase up to 250,000 common shares.
Through April 2000, the Company repurchased 21,600 of its common shares for an
aggregate purchase price of $316. Funds for the share repurchases came from
borrowings under the Company's unsecured bank credit facility and working
capital.
In April 2000, the Company sold its Downers Grove, Illinois property for a
contract price of $12,700. The Company has deposited the proceeds from the sale
in a tax-deferred exchange trust and currently expects to use the proceeds to
acquire additional investment properties. The Company may elect to use the
proceeds to reduce the outstanding balance on its unsecured bank credit facility
and for working capital.
Funds from Operations (FFO)
The White Paper on Funds From Operations approved by the Board of Governors of
the National Association of Real Estate Investment Trusts ("NAREIT") in October
1999 (the "White Paper") defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. Management considers Funds from Operations an appropriate measure of
performance of an equity REIT because it is predicated on cash flow analyses.
The Company computes Funds from Operations in accordance with standards
established by the White Paper, which may differ from the methodology for
calculating Funds from Operations utilized by other equity REITs and,
accordingly, may not be comparable to such other REITs. Funds from Operations
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indicator of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make distributions.
FFO for the three months ended March 31, 2000 and 1999 is as follows (Dollars in
Thousands):
2000 1999
---- ----
Net income applicable to common shares $4,616 $3,899
Depreciation and amortization 3,970 3,580
Minority interests 13 16
----------------- -------------
FFO $8,599 $7,495
================= =============
Forward-Looking Statements
Certain statements in this document constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, and the Company intends that such
"forward-looking statements" be subject to the safe harbors created thereby. The
words "believe," "expect" and "anticipate" and similar expressions identify
forward-looking statements. These forward-looking statements reflect the
Company's current views with respect to future events and financial performance,
but are subject to many uncertainties and factors relating to the Company's
operations and business environment that may cause the actual results of the
Company to be materially different from any future results expressed or implied
by such forward-looking statements. Examples of such uncertainties include, but
are not limited to, changes in interest rates, increased competition for
acquisition of new properties, unanticipated expenses and delays in acquiring
properties and regional occupancy rates and regional economic and business
conditions.
ITEM 3. MARKET RISK (Dollars in thousands)
The Company's interest income is sensitive to changes in the general levels of
U.S. short-term interest rates.
The Company's interest expense is sensitive to changes in the general level of
U.S. short-term and long-term interest rates as the Company has outstanding
indebtedness at fixed and variable rates.
The Company's variable rate debt bears interest at LIBOR plus 1% to 1.3% per
annum depending on overall Company leverage. Increases in LIBOR rates would
increase the Company's interest expense and reduce its cash flow. Conversely,
declines in LIBOR rates would decrease its interest expense and increase its
cash flow. In 1999, the Company entered into an interest rate cap agreement
whereby the LIBOR rate on $50,000 of its variable rate debt is limited to a
maximum of 6% until June 2001, thereby limiting the interest rate on that
portion of the Company's line of credit to 7.0% to 7.3%.
At March 31, 2000, the Company had $99,516 of fixed rate debt outstanding at an
average rate of 6.88 %. If the general level of interest rates in the United
States were to fall, the Company would not likely have the opportunity to
refinance this fixed rate debt at lower interest rates due to prepayment
restrictions and penalties on its fixed rate debt.
In general, the Company believes long-term fixed rate debt is preferable as a
financing vehicle for its operations due to the long-term fixed contractual
rental income the Company receives from its tenants. As a result, the Company
has 71% of its long-term debt outstanding at March 31, 2000 at fixed rates
(including the debt affected by the interest rate cap agreement). The Company
may, as market conditions warrant, enter into additional fixed rate long-term
debt instruments on either a secured or unsecured basis.
A tabular presentation of interest rate sensitivity is as follows:
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
2000 (1) 2001 2002 2003 2004 Thereafter
Liabilities:
Fixed Rate
Mortgage loans payable $1,886 $2,660 $2,851 $13,861 $5,440 $72,818
Average interest rate 6.97% 6.97% 6.97% 7.06% 7.86% 6.87%
Fixed Rate
Bank loan payable $50,000
Average interest rate(2)
Variable Rate
Bank loan payable $57,000
Average interest rate (3)
Bonds payable $280 $310 $340 $375 $415 $2,830
Average interest rate (4) (4) (4) (4) (4) (4)
(1) For the period April 1, 2000 to December 31, 2000.
(2) The maximum interest rate on this loan is 7.3%. The average interest rate
for 2000 was 7.3%.
(3) The current interest rate on this debt is LIBOR + 1.15%. The average
interest rate for this loan for 2000 was 7.43%. (3) The interest rate on
the bonds payable is reset weekly. After factoring in credit enhancement
costs for the bonds, the average interest rate in 2000 was 5.24%.
Part II Other Information
Item 2. Changes in Securities (Dollars in thousands)
During the quarter ended March 31, 2000, the Company issued 4,181 shares of
common stock pursuant to the exercise of outstanding share options with an
aggregate exercise price of $52. These shares were issued to the optionholders
pursuant to exemptions from the registration requirements of the Securities Act
of 1933, as amended (the "Act") provided by Section 4(2) of the Act or Rule 701
thereunder.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are attached hereto:
Exhibit
Number Description of Document
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Great Lakes REIT.
(Registrant)
Date: May 10, 2000 /s/ James Hicks
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)