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, 2002.
Transition Report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934. For the transition period from ________ to ________.
Commission File Number 1-12222
BEDFORD PROPERTY INVESTORS, INC.
(Exact name of Registrant as specified in its charter)
MARYLAND 68-0306514
-------- ----------
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
270 LAFAYETTE CIRCLE, LAFAYETTE, CA 94549
- ----------------------------------- -----
(Address of principal executive offices) (Zip Code)
(925) 283-8910
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether 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 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of May 7, 2002
- --------------------------------- -----------------------------
Common Stock, $0.02 par value 16,693,502
BEDFORD PROPERTY INVESTORS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS
Statement 1
Balance Sheets as of March 31, 2002
and December 31, 2001 (Unaudited) 2
Statements of Income for the three months ended
March 31, 2002 and 2001 (Unaudited) 3
Statements of Stockholders' Equity and Comprehensive Income
for the three months ended March 31, 2002 (Unaudited) 4
Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 (Unaudited) 5
Notes to Financial Statements 6-15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16-22
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES
ABOUT MARKET RISK 23-24
PART II. OTHER INFORMATION
ITEMS 1 - 6 24
SIGNATURES 25
BEDFORD PROPERTY INVESTORS, INC.
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
STATEMENT
The financial statements included herein have been prepared by Bedford Property
Investors, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The information furnished
reflects all adjustments which are, in the opinion of management, necessary for
a fair presentation of its financial condition and results of operations for the
interim periods presented. Such adjustments are of a normal recurring nature.
These financial statements should be read in conjunction with the notes to
consolidated financial statements appearing in the annual report to stockholders
for the year ended December 31, 2001.
When used in the discussion in this Form 10-Q, the words "believes," "expects,"
"intends," "anticipates" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
discussed, including, but not limited to, those set forth in the section
entitled "Potential Factors Affecting Future Operating Results," below. Readers
are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
1
BEDFORD PROPERTY INVESTORS, INC.
BALANCE SHEETS
AS OF MARCH 31, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
MARCH 31, 2002 DECEMBER 31, 2001
- -------------------------------------------------------------------------------------------------------------------
ASSETS:
Real estate investments:
Industrial buildings $298,329 $303,563
Office buildings 335,467 328,619
Operating properties held for sale - 11,157
Land held for development 13,505 13,469
- -------------------------------------------------------------------------------------------------------------------
647,301 656,808
Less accumulated depreciation 52,233 49,154
- -------------------------------------------------------------------------------------------------------------------
595,068 607,654
Net operating properties held for sale - discontinued operations 10,705 -
- -------------------------------------------------------------------------------------------------------------------
Total real estate investments 605,773 607,654
Cash and cash equivalents 5,074 5,512
Other assets 22,599 22,728
- -------------------------------------------------------------------------------------------------------------------
$633,446 $635,894
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Bank loan payable $84,725 $ 80,925
Mortgage loans payable 240,750 242,066
Accounts payable and accrued expenses 6,952 11,653
Dividend and distributions payable 8,012 7,962
Other liabilities 9,536 11,184
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 349,975 353,790
- -------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated partnership - 1,135
- -------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, par value $0.02 per share;
authorized 50,000,000 shares; issued and
outstanding 16,692,337 shares in 2002 and
16,515,200 shares in 2001 334 330
Additional paid-in capital 295,022 292,731
Accumulated dividends in
excess of net income (11,744) (11,782)
Accumulated other comprehensive loss (141) (310)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 283,471 280,969
- -------------------------------------------------------------------------------------------------------------------
$633,446 $635,894
===================================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
2
BEDFORD PROPERTY INVESTORS, INC.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2002 2001
- -------------------------------------------------------------------------------------------------------------------
Property operations:
Rental income $24,494 $24,040
Rental expenses:
Operating expenses 4,070 3,752
Real estate taxes 2,153 2,264
Depreciation and amortization 4,112 3,779
- -------------------------------------------------------------------------------------------------------------------
Income from property operations 14,159 14,245
General and administrative expenses (1,059) (1,018)
Interest income 36 56
Interest expense (5,293) (5,791)
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before minority interest 7,843 7,492
Minority interest - (35)
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations 7,843 7,457
Income from discontinued operations, net 208 142
- -------------------------------------------------------------------------------------------------------------------
Net income $8,051 $7,599
===================================================================================================================
Earnings per share - basic:
Income from continuing operations $ 0.49 $0.43
Income from discontinued operations 0.01 0.01
- -------------------------------------------------------------------------------------------------------------------
Net income per share - basic $0.50 $0.44
===================================================================================================================
Weighted average number of shares - basic 16,197,385 17,404,680
===================================================================================================================
Earnings per share - diluted:
Income from continuing operations $0.47 $0.42
Income from discontinued operations 0.01 0.01
- -------------------------------------------------------------------------------------------------------------------
Net income per share - diluted $0.48 $0.43
===================================================================================================================
Weighted average number of shares - diluted 16,589,831 17,731,411
===================================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3
BEDFORD PROPERTY INVESTORS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACCUMULATED ACCUMULATED TOTAL
ADDITIONAL DIVIDENDS OTHER STOCK-
COMMON PAID-IN IN EXCESS OF COMPREHENSIVE HOLDERS'
STOCK CAPITAL NET INCOME LOSS EQUITY
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $330 $292,731 $(11,782) $(310) $280,969
Issuance of common stock 4 2,313 - - 2,317
Repurchase and retirement of common stock - (538) - - (538)
Amortization of deferred compensation - 516 - - 516
Dividends to common stockholders
($0.48 per share) - - (8,013) - (8,013)
- -------------------------------------------------------------------------------------------------------------------
Subtotal 334 295,022 (19,795) (310) 275,251
- -------------------------------------------------------------------------------------------------------------------
Net income - - 8,051 - 8,051
Other comprehensive income - - - 169 169
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income - - 8,051 169 8,220
- -------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 $334 $295,022 $(11,744) $(141) $283,471
===================================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
BEDFORD PROPERTY INVESTORS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS)
2002 2001
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 8,051 $ 7,599
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest - 35
Depreciation and amortization 4,697 4,428
Stock compensation amortization 516 416
Uncollectible accounts expense 204 32
Change in other assets (774) (1,501)
Change in accounts payable and accrued expenses (3,829) (6,709)
Change in other liabilities (1,479) (349)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,386 3,951
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Investments in real estate (2,400) (4,385)
- -------------------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (2,400) (4,385)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from bank loan payable, net of loan costs 8,384 7,749
Repayments of bank loan payable (4,626) (973)
Refund of loan costs 2 52
Repayments of mortgage loans payable (1,316) (931)
Issuance of common stock 834 276
Payment of dividends and distributions (7,962) (8,005)
Repurchase and retirement of common stock (538) (543)
Redemption of Operating Partnership Units (202) -
- -------------------------------------------------------------------------------------------------------------------
Net cash (used) by financing activities (5,424) (2,375)
- -------------------------------------------------------------------------------------------------------------------
Net (decrease) in cash and cash equivalents (438) (2,809)
Cash and cash equivalents at beginning of period 5,512 3,160
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 5,074 $ 351
===================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest, net of amounts capitalized of
$273 in 2002 and $304 in 2001 $ 4,869 $ 5,437
===================================================================================================================
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Redemption of Operating Partnership Units paid in common stock $ (1,483) $ -
Investment in real estate assets $ 550 $ -
Minority interest in consolidated partnership $ 933 $ -
===================================================================================================================
5
BEDFORD PROPERTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
- ------------------------------------------------------------------------
PRACTICES
- ---------
The Company
- -----------
Bedford Property Investors, Inc. (the "Company") is a Maryland real estate
investment trust with investments primarily in industrial and suburban office
properties concentrated in the western United States. The Company's common stock
trades under the symbol "BED" on both the New York Stock Exchange and the
Pacific Exchange.
Basis of Presentation
- ---------------------
The accompanying unaudited financial statements have been prepared in accordance
with the requirements of Form 10-Q and, therefore, do not include all
information and footnotes necessary for a presentation of financial condition,
results of operations and cash flows in conformity with accounting principles
generally accepted in the United States of America. The unaudited interim
financial statements reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of results for the interim periods
presented in compliance with the instructions to Form 10-Q. All such adjustments
are of a normal, recurring nature.
Real Estate Investments Held for Sale
- -------------------------------------
Real estate investments that are considered held for sale are carried at the
lower of carrying amount or fair value less costs to sell and such properties
are no longer depreciated. The Company adopted Financial Accounting Standards
Board's Statement of Financial Accounting Standard ("FAS") 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," on January 1, 2002. FAS 144
supersedes FAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The primary objectives of FAS 144 are to
develop one accounting model based on the framework established in FAS 121 for
long-lived assets to be disposed of by sale, and to address significant
implementation issues regarding impairment of long-lived assets held for use. In
accordance with FAS 144, real estate assets are classified as held for sale in
the period in which all of the following criteria are met: (a) management,
having the authority to approve the action, commits to a plan to sell the asset;
(b) the asset is available for immediate sale in its present condition subject
only to terms that are usual and customary for sales of such assets; (c) an
active program to locate a buyer and other actions required to complete the plan
to sell the asset have been initiated; (d) the sale of the asset is probable and
the transfer of the asset is expected to qualify for recognition as a completed
sale within one year; (e) the asset is being actively marketed for sale at a
price that is reasonable in relation to its current fair value; and (f) actions
required to complete the plan indicate that it is unlikely that significant
changes to the plan will be made or that the plan will be withdrawn. The
Company's adoption of FAS 144 resulted in: (i) the presentation of the operating
properties held for sale, net of accumulated depreciation, as discontinued
operations on the balance sheet and (ii) the presentation of the net operating
results of properties considered held for sale during the three months ended
March 31, 2002, less allocated interest expense, as income from discontinued
operations for all periods presented. Interest expense was allocated based on
the percentage of the cost basis of properties held for sale to the total cost
basis of real estate assets as of March 31, 2002. Implementation of FAS 144 only
impacted the balance sheet and income statement classification but had no effect
on results of operations.
Per Share Data
- --------------
Per share data are based on the weighted average number of common shares
outstanding during the year. Stock options issued under the Company's stock
option plans, non-vested restricted stock, and the Operating Partnership ("OP")
Units of Bedford Realty Partners, L.P. (prior to their redemption on January 15,
2002) are included in the calculation of diluted per share data if, upon
exercise or vestiture, they would have a dilutive effect.
Cash and Cash Equivalents
- -------------------------
The Company considers all demand deposits, money market accounts and temporary
cash investments to be cash equivalents. The Company maintains its cash and cash
equivalents at financial institutions. The combined account balances at each
institution periodically exceed the Federal Depository Insurance Corporation
("FDIC") insurance coverage, and, as a result, there is a concentration of
credit risk related to amounts on deposit in excess of FDIC insurance coverage.
The Company believes that the risk is not significant, as the Company does not
anticipate their non-performance.
6
Reclassifications
- -----------------
Certain prior year accounts have been reclassified to conform to the current
year presentation.
Recent Accounting Pronouncements
- --------------------------------
In June 2001, the Financial Accounting Standards Board issued FAS 143,
Accounting for Asset Retirement Obligations. Under FAS 143, the fair value of a
liability for an asset retirement obligation must be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. FAS 143 is effective for fiscal years beginning after
June 15, 2002. The Company does not believe that FAS 143 will have a material
impact on its financial position or results of operations.
NOTE 2 - REAL ESTATE INVESTMENTS
- --------------------------------
As of March 31, 2002, the Company's real estate investments were diversified by
property type as follows (DOLLARS IN THOUSANDS):
NUMBER OF PERCENT
PROPERTIES COST OF TOTAL
- --------------------------------------------------------------------------------
Industrial buildings 56 $298,329 45%
Office buildings 30 335,467 51%
Operating properties held for sale-
discontinued operations 4 11,584 2%
Land held for development 11 13,505 2%
- --------------------------------------------------------------------------------
Total 101 $658,885 100%
================================================================================
7
The following table sets forth the Company's real estate investments as of March
31, 2002 (IN THOUSANDS):
LESS
DEVELOPMENT ACCUMULATED
LAND BUILDING IN-PROGRESS DEPRECIATION TOTAL
-------------------------------------------------------------------------
Industrial buildings
- --------------------
Northern California $44,700 $112,794 $ - $16,017 $141,477
Northwest 3,408 10,797 - 1,569 12,636
Southern California 16,437 37,180 - 4,843 48,774
Arizona 18,825 54,188 - 6,376 66,637
-------------------------------------------------------------------------
Total industrial buildings 83,370 214,959 - 28,805 269,524
-------------------------------------------------------------------------
Office buildings
- ----------------
Northern California 6,281 26,209 - 2,621 29,869
Northwest 16,811 100,887 - 9,071 108,627
Southern California 9,361 22,057 - 2,507 28,911
Arizona 10,622 25,624 - 2,327 33,919
Colorado 13,935 90,716 - 5,628 99,023
Nevada 2,102 10,862 - 1,274 11,690
-------------------------------------------------------------------------
Total office buildings 59,112 276,355 - 23,428 312,039
-------------------------------------------------------------------------
Operating properties held for sale-
- -----------------------------------
discontinued operations
-----------------------
Southern California 2,761 8,823 - 879 10,705
-------------------------------------------------------------------------
Land held for development
- -------------------------
Northern California 5,737 - - - 5,737
Northwest 7 - - - 7
Southern California 3,174 - - - 3,174
Arizona 646 - - - 646
Colorado 3,941 - - - 3,941
-------------------------------------------------------------------------
Total land held for development 13,505 - - - 13,505
-------------------------------------------------------------------------
Total as of March 31, 2002 $158,748 $500,137 $ - $53,112 $605,773
=========================================================================
Total as of December 31, 2001 $158,637 $498,171 $ - $49,154 $607,654
=========================================================================
Company personnel directly manage all but one of the Company's properties from
regional offices in Lafayette, California; Tustin, California; Phoenix, Arizona;
Denver, Colorado; and Seattle, Washington. The Company has retained an outside
manager to assist in some of the management functions for U.S. Bank Centre in
Reno, Nevada. All financial record-keeping is centralized at the Company's
corporate office in Lafayette, California.
Income from property operations for operating properties held for sale at March
31, 2002 was $307,000 and $253,000 for the three months ended March 31, 2002 and
2001, respectively. Income from discontinued operations includes allocated
interest expense of $99,000 and $111,000 for the three months ended March 31,
2002 and 2001, respectively.
8
NOTE 3. DEBT
- -------------
Bank Loan Payable
- -----------------
In May 2001, the Company renewed its revolving credit facility with a bank group
led by Bank of America. The facility, which matures on June 1, 2004, consists of
a $150 million secured line with an accordion feature which allows the Company
at its option to expand the facility to $175 million, if needed. Interest on the
facility is at a floating rate equal to either the lender's prime rate or LIBOR
plus a margin ranging from 1.30% to 1.55% depending on the Company's leverage
level. As of March 31, 2002, the facility had an outstanding balance of
$84,725,000 and was secured by 31 properties and interests in such properties,
which collectively accounted for approximately 34% of the Company's annualized
base rent and approximately 34% of the Company's total real estate assets.
The credit facility contains various restrictive covenants including, among
other things, a covenant limiting quarterly dividends to 95% of average Funds
From Operations. The Company was in compliance with the covenants and
requirements of its revolving credit facility during the quarter ended March 31,
2002.
The daily weighted average amount owed to the bank was $84,173,000 and
$83,153,000 for the three months ended March 31, 2002 and 2001, respectively.
The weighted average annual interest rates in each of these periods was 4.98%
and 7.59%, respectively. The effective interest rate at March 31, 2002 was
5.07%.
Mortgage Loans Payable
- ----------------------
Mortgage loans payable at March 31, 2002 consist of the following (IN
THOUSANDS):
Interest Rate as of
Maturity Date March 31, 2002 Balance
------------- ------------------- -------
March 15, 2003 7.02% $18,454
November 19, 2004 4.02%(1) 21,640
January 1, 2005 6.00%(2) 4,458
June 1, 2005 7.17% 26,155
August 1, 2005 5.55%(3) 3,522
August 1, 2005 5.55%(3) 22,719
July 31, 2006 8.90% 8,093
July 31, 2006 6.91% 19,423
December 1, 2006 7.95% 21,458
June 1, 2007 7.17% 35,575
June 1, 2009 7.17% 41,552
August 1, 2011 6.918%(4) 17,701
---------
Total $240,750
=========
(1) Floating rate based on LIBOR plus 1.60%.
(2) Floating rate based on 3 month LIBOR plus 2.50% (adjusted quarterly).
(3) Floating rate based on fixed rate on interest swap agreements. See Note 4.
(4) Floating rate based on a 12-month average of U.S. Treasury Security Yields
plus 2.60% (adjusted semi-annually).
9
The mortgage loans are collaterized by 49 properties and interests in such
properties, which collectively accounted for approximately 62% of the Company's
annualized base rents and approximately 56% of the Company's total real estate
assets as of March 31, 2002. The Company was in compliance with the covenants
and requirements of its various mortgages during the quarter ended March 31,
2002.
The following table presents scheduled principal payments on mortgage loans as
of March 31, 2002 (IN THOUSANDS):
Twelve month period ending March 31, 2003 $ 24,188
Twelve month period ending March 31, 2004 6,109
Twelve month period ending March 31, 2005 30,613
Twelve month period ending March 31, 2006 53,202
Twelve month period ending March 31, 2007 48,263
Total thereafter 78,375
--------
$240,750
========
NOTE 4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
- ------------------------------------------------------
In the normal course of business, the Company is exposed to the effects of
interest rate changes. The Company limits these risks by following established
risk management policies and procedures, including the use of derivatives. For
interest rate exposures, interest rate swaps are used primarily to hedge the
cash flow risk of variable rate borrowing obligations.
The Company does not use derivatives for trading or speculative purposes.
Further, the Company has a policy of only entering into contracts with major
financial institutions. When viewed in conjunction with the underlying and
offsetting exposure that the derivatives are designed to hedge, the Company has
not sustained a material loss from those instruments, and does not anticipate
any material adverse effect on its net income or financial position in the
future from the use of derivatives.
Interest rate swaps that convert variable payments to fixed payments are cash
flow hedges. Hedging relationships that are fully effective have no effect on
net income or FFO. The unrealized gains and losses in the fair value of these
interest rate swaps are reported on the balance sheet, as a component of other
assets or other liabilities as appropriate, with a corresponding adjustment to
accumulated other comprehensive income (loss).
On June 18, 2001, the Company entered into interest swap agreements with United
California Bank. The swap agreements allow the Company to hedge its exposure to
variable interest rates on two mortgages with remaining principal balances
totaling $26,241,000 as of March 31, 2002, by effectively paying a fixed rate of
interest over the term of the swap agreement. Interest rate pay differentials
that arise under these swap agreements are recognized in interest expense over
the term of the contracts. These interest rate swap agreements were considered
to be fully effective in hedging the variable rate risk associated with the two
mortgages.
The following summarizes the principal value and fair value of the Company's
interest swap contracts. The principal value below provides an indication of the
amount that has been hedged in these contracts but does not represent an
obligation or exposure to credit risk at March 31, 2002 (DOLLARS IN THOUSANDS):
Approximate
Principal Fixed Contract Cumulative Liability at
Amount Rate Maturity Cash Paid, Net March 31, 2002 (1)
------ ----- -------- -------------- ------------------
$22,719 5.55% July 1, 2002 $258 $122
3,522 5.55% July 1, 2002 49 19
- ---------------------------------------------------------------------------------------
$26,241 $307 $141
=======================================================================================
(1) Represents the approximate amount which the Company would have paid as of
March 31, 2002 if the swap contracts were terminated.
10
To determine the fair values of derivative instruments in accordance with SFAS
133, the Company uses the discounted cash flow method, which requires the use of
assumptions about market conditions and risks existing at the balance sheet
date. Considerable judgment is required in interpreting market data to develop
estimates of market value. Accordingly, estimated fair value is a general
approximation of value, and such value may or may not actually be realized.
At March 31, 2002, $141,000 is included in other liabilities and accumulated
other comprehensive loss, a stockholders' equity account, reflecting the
estimated market value of the swap contract obligations at that date.
11
NOTE 5. SEGMENT DISCLOSURE
- ---------------------------
The Company has five reportable segments organized by the region in which they
operate: Northern California (Northern California and Nevada), Arizona, Southern
California, Northwest (greater Seattle, Washington) and Colorado.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based upon income from real estate from the combined properties in each segment.
For the three months ended March 31, 2002 (IN THOUSANDS, EXCEPT PERCENTAGES)
----------------------------------------------------------------------------------------------
Northern Southern Corporate
California Arizona California Northwest Colorado & Other Consolidated
----------------------------------------------------------------------------------------------
Rental income $9,077 $3,987 $3,077 $4,794 $3,559 $ - $24,494
Operating expenses and
real estate taxes 1,897 1,106 630 1,329 1,261 - 6,223
Depreciation and
amortization 1,428 718 455 940 571 - 4,112
----------------------------------------------------------------------------------------------
Income from property
operations 5,752 2,163 1,992 2,525 1,727 - 14,159
Percent of income from
property operations 41% 15% 14% 18% 12% 0% 100%
General and administrative
expenses - - - - - (1,059) (1,059)
Interest income(1) 7 - - 4 - 25 36
Interest expense - - - - - (5,293) (5,293)
----------------------------------------------------------------------------------------------
Income (loss) from
continuing operations 5,759 2,163 1,992 2,529 1,727 (6,327) 7,843
Income from discontinued
operations, net - - 208 - - - 208
----------------------------------------------------------------------------------------------
Net income (loss) $5,759 $2,163 $2,200 $2,529 $1,727 $(6,327) $8,051
==============================================================================================
Real estate investments $208,685 $109,905 $99,793 $131,910 $108,592 $ - $658,885
==============================================================================================
Additions of real
estate investments $411 $695 $512 $53 $406 $ - $2,077
==============================================================================================
Total assets $219,090 $105,835 $109,787 $115,444 $77,419 $5,871 $633,446
==============================================================================================
(1) The interest income in the Northern California and Northwest segments
represents interest earned from tenant notes receivable.
12
For the three months ended March 31, 2001 (IN THOUSANDS, EXCEPT PERCENTAGES)
----------------------------------------------------------------------------------------------
Northern Southern Corporate
California Arizona California Northwest Colorado & Other Consolidated
----------------------------------------------------------------------------------------------
Rental income $8,550 $4,146 $3,126 $4,694 $3,524 $ - $24,040
Operating expenses and
real estate taxes 1,772 1,109 598 1,317 1,220 - 6,016
Depreciation and
amortization 1,222 739 425 901 492 - 3,779
----------------------------------------------------------------------------------------------
Income from property
operations 5,556 2,298 2,103 2,476 1,812 - 14,245
Percent of income from
property operations 39% 16% 15% 17% 13% 0% 100%
General and administrative
expenses - - - - - (1,018) (1,018)
Interest income (1) 6 - - 2 - 48 56
Interest expense - - - - - (5,791) (5,791)
----------------------------------------------------------------------------------------------
Income (loss) before
minority interest 5,562 2,298 2,103 2,478 1,812 (6,761) 7,492
Minority interest - - - - - (35) (35)
----------------------------------------------------------------------------------------------
Income (loss) from
continuing operations 5,562 2,298 2,103 2,478 1,812 (6,796) 7,457
Income from discontinued
operations, net - - 142 - - - 142
----------------------------------------------------------------------------------------------
Net income (loss) $5,562 $2,298 $2,245 $2,478 $1,812 $(6,796) $7,599
==============================================================================================
Real estate investments $202,156 $117,328 $96,456 $130,872 $104,807 $ - $651,619
==============================================================================================
Additions of real estate
investments $1,415 $323 $255 $23 $2,215 $ - $4,231
==============================================================================================
Total assets $213,754 $110,503 $106,982 $116,708 $81,196 $3,658 $632,801
==============================================================================================
(1) The interest income in the Northern California and Northwest segments
represents interest earned from tenant notes receivable.
13
NOTE 6. EARNINGS PER SHARE
- ---------------------------
Following is a reconciliation of earnings per share (IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS):
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2001
-------------------------------------------------------
BASIC:
Income from continuing operations $7,843 $7,457
Income from discontinued operations, net 208 142
-------------------------------------------------------
Net income $8,051 $7,599
=======================================================
Weighted average number of shares - basic 16,197,385 17,404,680
=======================================================
Earnings per share:
Income from continuing operations $0.49 $0.43
Income from discontinued operations 0.01 0.01
-------------------------------------------------------
Earnings per share - basic $0.50 $0.44
=======================================================
DILUTED:
Income from continuing operations $7,843 $7,457
Income from discontinued operations, net 208 142
Add: minority interest - 35
-------------------------------------------------------
Net income for diluted earnings per share $8,051 $7,634
=======================================================
Weighted average number of shares - basic 16,197,385 17,404,680
Weighted average shares of dilutive stock
options using average period stock price
under the treasury stock method 189,318 47,886
Weighted average shares issuable upon the
conversion of Operating Partnership Units 11,210 77,992
Weighted average shares of non-vested
restricted stock using average period
stock price under the treasury stock method 191,918 200,853
-------------------------------------------------------
Weighted average number of shares - diluted 16,589,831 17,731,411
=======================================================
Earnings per share:
Income from continuing operations $0.47 $0.42
Income from discontinued operations 0.01 0.01
-------------------------------------------------------
Earnings per share - diluted $0.48 $0.43
=======================================================
14
NOTE 7. RELATED PARTY TRANSACTIONS
- -----------------------------------
The Company's activities relating to the acquisition of new properties, sales of
Company owned real estate, development of real property, and financing
arrangements are currently performed by Bedford Acquisitions, Inc. ("BAI"), a
corporation wholly-owned by Peter Bedford, the Company's Chairman of the Board
and Chief Executive Officer. The Company uses the services of BAI for its
acquisition, disposition, financing and development activities because the
Company incurs expenses related only to those transactions which are
successfully completed rather than incurring expenses related to unsuccessful
efforts and associated overhead costs.
This arrangement provides that BAI earns a success fee in an amount equal to 1
1/2% of the purchase price of property acquisitions, 1 1/2% of the sale price of
dispositions, up to 1 1/2% of the amount of any loans (less third-party
commissions), and 7% of the development costs. The total amount of such fees
payable to BAI by the Company is limited to the lesser of: (i) the aggregate
amount of such fees earned, or (ii) the aggregate amount of approved expenses
incurred by BAI through the time of such acquisition, disposition, financing or
development. The current agreement with BAI has a one-year term expiring
December 31, 2002, which is automatically extended for an additional term of one
year unless either party gives notice of its interest to terminate the agreement
by October 31, 2002.
For the quarters ended March 31, 2002 and 2001, the Company paid BAI an
aggregate amount of approximately $1,345,000 and $1,308,000, respectively, for
acquisition, disposition, financing, and development activities performed
pursuant to the foregoing arrangements. As of March 31, 2002 and December 31,
2001, the Company had an accrued liability of $680,000 and $1,945,000,
respectively, for fees earned by BAI in excess of the amounts paid to BAI by the
Company under the agreement.
At March 31, 2002 and 2001, the Company did not have any other relationships
with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As such, the Company is not
materially exposed to any financing, liquidity, market or credit risk that could
arise if the Company had engaged in such relationships.
NOTE 8. COMMITMENTS AND CONTINGENCIES
- --------------------------------------
As of March 31, 2002, the Company had contractual construction commitments
generally relating to tenant improvements on its developed properties of
approximately $700,000. The Company had outstanding undrawn letters of credit
against its credit facility of approximately $2.1 million as of March 31, 2002.
From time to time, the Company is subject to legal claims in the ordinary course
of business. The financial statements presented include an accrual of $400,000
for one such matter. The Company is not aware of any legal proceedings or claims
that it believes will have, individually or in the aggregate, a material adverse
effect on its business, prospects, financial condition, operating results or
cash flows.
NOTE 9. SUBSEQUENT EVENTS
- --------------------------
On April 18, 2002, the Company sold four industrial properties for a total sales
price of approximately $12,095,000, resulting in a gain of approximately
$268,000. Three properties are located in Vista, California and one property is
located in San Diego, California. Proceeds from the sale were used to pay down a
portion of the outstanding balance on the Company's $150 million line of credit.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of these financial statements in accordance with accounting
principles generally accepted in the United States of America requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. The Company believes that its critical accounting
policies are those that require significant judgments and estimates such as
those related to valuation of real estate investments, income recognition,
allowance for doubtful accounts, and deferred assets. These estimates are made
based on the information that is currently available as well as various other
assumptions believed to be reasonable under the circumstances and are evaluated
on an on-going basis. Actual results could vary from those estimates and those
estimates could be different under different assumptions or conditions.
Real estate investments are recorded at cost less accumulated depreciation. The
cost of real estate includes acquisition costs and fees, and development costs
and fees (including interest, insurance, and real estate taxes). These costs
also include fees paid to Bedford Acquisitions, Inc., ("BAI"). See "-Related
Party Transactions" for a description of BAI. Expenditures for maintenance and
repairs that do not add to the value or prolong the useful life of the property
are expensed. Expenditures for asset replacements or significant improvements
that extend the life or increase the property's value are capitalized. Real
estate properties are depreciated using the straight-line method over estimated
useful lives. When circumstances such as adverse market conditions indicate an
impairment of a property, the Company will recognize a loss to the extent that
the carrying value exceeds the fair value of the property.
Base rental income is recognized on a straight-line basis over the terms of the
respective lease agreements. Differences between rental income recognized and
amounts contractually due under the lease agreements are credited or charged, as
applicable, to rent receivable. The amount of straight-line rent receivable is
charged against income upon early termination of a lease or as a reduction of
gain on sale of the property. The Company maintains an allowance for doubtful
accounts for estimated losses resulting from the inability of tenants to make
required payments, which results in a reduction to income. Management determines
the adequacy of this allowance by continually evaluating individual tenant
receivables considering the tenant's financial condition, security deposits,
letters of credit, lease guarantees and current economic conditions.
Costs incurred for debt financing and property leasing are capitalized as
deferred assets. Deferred loan costs include amounts paid to lenders and others
to obtain financing and amounts paid to BAI. Such costs are amortized over the
term of the related loan. Amortization of deferred financing costs is included
in interest expense in the Company's statements of income. Deferred leasing
costs include leasing commissions that are amortized using the straight-line
method over the term of the related lease. Deferred leasing costs are included
with the basis when a property is sold and therefore reduce the gain on sale.
Unamortized financing and leasing costs are charged to expense in the event of
debt prepayment or early termination of the lease.
16
RESULTS OF OPERATIONS
The Company's operations consist of developing, owning and operating industrial
and suburban office properties located primarily in the western United States.
Variances in revenues, expenses, net income and cash flows for the three months
ended March 31, 2002 when compared with the same period in 2001 were due
primarily to the development and sale of operating properties during the
following periods:
ACTIVITIES FROM JANUARY 1, 2001 ACTIVITIES FROM APRIL 1, 2001
TO MARCH 31, 2001 TO MARCH 31, 2002
-------------------------------------------------------------------------------
NUMBER OF SQUARE NUMBER OF SQUARE
PROPERTIES FEET PROPERTIES FEET
-------------------------------------------------------------------------------
DEVELOPMENT
Industrial - - 1 36,885
Office 1 29,400 3 155,289
-------------------------------------------------------------------------------
1 29,400 4 192,174
===============================================================================
SALES
Industrial - - 3 289,867
Office - - 1 52,000
-------------------------------------------------------------------------------
- - 4 341,867
===============================================================================
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2001
INCOME FROM PROPERTY OPERATIONS
- -------------------------------
Income from property operations (defined as rental income less rental expenses)
decreased $86,000 or less than 1% in 2002 compared with 2001. This decrease is
attributable to an increase in rental income of $454,000, offset by an increase
in rental expenses (which include operating expenses, real estate taxes, and
depreciation and amortization) of $540,000.
The increases in rental income and rental expenses are primarily attributable to
the development activities and sales of properties during the year 2001.
Development activities increased rental income and rental expenses in 2002 by
$382,000 and $340,000, respectively, as compared to 2001. These increases were
offset by the sale of three industrial properties and one office property in
2001 which resulted in a reduction in rental income and rental expenses in 2002
of $615,000 and $179,000, respectively, as compared to 2001. The remaining
increase in rental income of $687,000 is due to an increase in rental rates and
expense recovery income, as well as early termination fees earned in 2002. The
remaining increase in rental expenses of $379,000 is primarily due to an
increase in gas and electricity costs.
EXPENSES
- --------
General and administrative expense increased $41,000 or 4% in 2002 compared with
2001, primarily as a result of increased compensation costs. Interest expense,
which includes amortization of loan fees, decreased $498,000 or 9% in 2002
compared with 2001. The decrease is attributable to lower interest rates on the
Company's variable rate debt. The amortization of loan fees was $518,000 and
$515,000 in 2002 and 2001, respectively.
17
DIVIDENDS
- ---------
Common stock dividends to stockholders declared for the first quarter of 2002
were $0.48 per share. Common stock dividends to stockholders and distributions
to Operating Partnership ("OP") Unitholders declared for the first quarter of
2001 were $0.45 per share or OP Unit. The outstanding OP Units were redeemed by
the Company on January 15, 2002. Consistent with the Company's policy, dividends
and distributions were paid in the quarter following the quarter in which they
were declared.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to fund the cost of acquisitions, capital expenditures,
costs associated with lease renewals and reletting of space, repayment of
indebtedness, share repurchases, and development of properties from (i) cash
flow from operations, (ii) borrowings under the credit facility and, if
available, other indebtedness (which may include indebtedness assumed in
acquisitions), and (iii) the sale of certain real estate investments.
The Company's capital expenditures for operating properties were approximately
$1,100,000 and $1,500,000 in the first quarter of 2002 and 2001, respectively.
These capital expenditures consisted of building improvements, tenant
improvements, and lease commissions. The Company expects to have additional
capital expenditures of approximately $8,900,000 for the remainder of 2002.
The Company's cash and cash equivalents decreased to $5,074,000 at March 31,
2002, from $5,512,000 at December 31, 2001. This decrease is due to $7,386,000
of cash provided from operations, partially offset by $2,400,000 and $5,424,000
used by investing activities and financing activities, respectively.
Net cash of $7,386,000 provided by operating activities consisted primarily of
$13,468,000 of net income adjusted for non-cash items, offset by $6,082,000 used
in working capital and other activities. Net cash used in working capital and
other activities resulted from expenditures incurred by the Company in acquiring
other assets and decreases in accounts payable, accrued expenses, and other
liabilities.
Net cash of $2,400,000 used for investing activities consisted of cash used for
investments in real estate, resulting from $1,300,000 of cash used for
investments in developed properties, and approximately $1,100,000 of cash used
for investments in existing operating properties. Investments in real estate
include the cost of land, buildings, building improvements, and tenant
improvements.
Net cash used by financing activities of $5,424,000 consisted of repayments of
bank borrowings and mortgage loans of $5,942,000, payment of dividends and
distributions of $7,962,000, the repurchase of 22,589 shares of stock for
$538,000, and the redemption of 8,623 shares of OP Units for $202,000 in cash
and $1,483,000 worth of Company common stock, offset by net proceeds from bank
borrowings of $8,384,000, refund of loan costs of $2,000, and net proceeds from
stock options exercised by employees and directors of $834,000.
The Company's ability to continue to finance its operations is subject to
several uncertainties. For example, the Company's ability to obtain mortgage
loans on income producing property is dependent upon the ability to attract and
retain tenants and the economics of the various markets in which the properties
are located, as well as the willingness of mortgage-lending institutions to make
loans secured by real property. Approximately 90% of the Company's real estate
investments serve as collateral for the Company's existing indebtedness as of
March 31, 2002. The Company's ability to sell real estate investments is
partially dependent upon the ability of purchasers to obtain financing at
reasonable commercial rates.
In May 2001, the Company renewed its revolving credit facility with a bank group
led by Bank of America. The facility, which matures on June 1, 2004, consists of
a $150 million secured line with an accordion feature which allows the Company
at its option to expand the facility to $175 million, if needed. Interest on the
facility is at a floating rate equal to either the lender's prime rate or LIBOR
plus a margin ranging from 1.30% to 1.55% depending on the Company's leverage
level. As of March 31, 2002, the facility had an outstanding balance of
$84,725,000 and an effective interest rate of 5.07%.
18
Mortgage loans payable at March 31, 2002 consist of the following (IN
THOUSANDS):
Interest Rate as of
Maturity Date March 31, 2002 Balance
------------- ------------------- ---------
March 15, 2003 7.02% $ 18,454
November 19, 2004 4.02%(1) 21,640
January 1, 2005 6.00%(2) 4,458
June 1, 2005 7.17% 26,155
August 1, 2005 5.55%(3) 3,522
August 1, 2005 5.55%(3) 22,719
July 31, 2006 8.90% 8,093
July 31, 2006 6.91% 19,423
December 1, 2006 7.95% 21,458
June 1, 2007 7.17% 35,575
June 1, 2009 7.17% 41,552
August 1, 2011 6.918%(4) 17,701
--------
Total $240,750
========
(1) Floating rate based on LIBOR plus 1.60%.
(2) Floating rate based on 3 month LIBOR plus 2.50% (adjusted quarterly).
(3) Floating rate based on fixed rate on interest swap agreements. See Note 4
of the Company's notes to financial statements.
(4) Floating rate based on a 12-month average of U.S. Treasury Security Yields
plus 2.60% (adjusted semi-annually).
The Company was in compliance with the covenants and requirements of its various
debt financings during the quarter ended March 31, 2002. The Company anticipates
that the cash flow generated by its real estate investments and funds available
under the credit facility will be sufficient to meet its short-term liquidity
requirements.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following summarizes the Company's contractual obligations and other
commitments at March 31, 2002, and the effect such obligations could have on its
liquidity and cash flow in future periods (IN THOUSANDS):
Amount of Commitment Expiring by Period
---------------------------------------------------------
Less
than 1-3 4-5 Over 5
1 year Years Years Years Total
---------------------------------------------------------
Bank Loan Payable $ - $ 84,725 $ - $ - $ 84,725
Mortgage Loans Payable 24,188 36,722 101,465 78,375 240,750
Construction Contract Commitments 700 - - - 700
Standby Letters of Credit 2,096 - - - 2,096
---------------------------------------------------------
Total $26,984 $121,447 $101,465 $78,375 $328,271
=========================================================
RELATED PARTY TRANSACTIONS
The Company's activities relating to the acquisition of new properties, sales of
Company owned real estate, development of real property, and financing
arrangements are currently performed by BAI, a corporation wholly-owned by Peter
Bedford, the Company's Chairman of the Board and Chief Executive Officer. The
Company uses the services of BAI for its acquisition, disposition, financing
19
and development activities because the Company incurs expenses related only to
those transactions which are successfully completed rather than incurring
expenses related to unsuccessful efforts and associated overhead costs. These
services have been provided pursuant to written contracts (renewable annually
since January 1, 1995), which provide that BAI is obligated to provide services
to the Company with respect to the Company's acquisition, disposition, financing
and development activities, and that BAI is responsible for the payment of
expenses incurred in connection therewith. BAI must submit to the Company a cost
estimate for the Company's approval relating to each activity, setting forth the
estimated timing and amount of all projected BAI costs relating to such
activities. Pursuant to the contract, Mr. Bedford is obligated to pay BAI's
expenses described above if BAI fails to make any such payments in a timely
fashion, provided that Mr. Bedford is not obligated to pay any such amounts
exceeding $1 million or following a termination of BAI's obligations based on
the expiration or termination of the term of the contract.
This arrangement provides that BAI earns a success fee in an amount equal to 1
1/2% of the purchase price of property acquisitions, 1 1/2% of the sale price of
dispositions, up to 1 1/2% of the amount of any loans (less third-party
commissions), and 7% of the development costs. The total amount of such fees
payable to BAI by the Company is limited to the lesser of: (i) the aggregate
amount of such fees earned, or (ii) the aggregate amount of approved expenses
incurred by BAI through the time of such acquisition, disposition, financing or
development. The current agreement with BAI has a one-year term expiring
December 31, 2002, which is automatically extended for an additional term of one
year unless either party gives notice of its interest to terminate the agreement
by October 31, 2002.
For the quarters ended March 31, 2002 and 2001, the Company paid BAI an
aggregate amount of approximately $1,345,000 and $1,308,000, respectively, for
acquisition, disposition, financing, and development activities performed
pursuant to the foregoing arrangements. As of March 31, 2002 and December 31,
2001, the Company had an accrued liability of $680,000 and $1,945,000,
respectively, for fees earned by BAI in excess of the amounts paid to BAI by the
Company under the agreement. The Company believes that since the fees charged
under the foregoing arrangements (i) are comparable to those charged by other
real estate service entities or other third party service providers under
similar arrangements and (ii) are charged only for services on successful
acquisitions, dispositions, financings and developed properties, such fees are
properly includable as costs of acquisitions or dispositions or as capitalized
costs of financings and developed properties. If the Company were to discontinue
this arrangement it would first look to other service providers to meet most if
not all of these services. There is no assurance that the same level of quality
and cost effectiveness would be achieved. Additionally, the Company would likely
incur additional internal costs to administer such services, which the Company
has estimated would not have a material impact on its financial statements.
At March 31, 2002 and 2001, the Company did not have any other relationships
with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As such, the Company is not
materially exposed to any financing, liquidity, market or credit risk that could
arise if the Company had engaged in such relationships.
POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS
Many factors affect the Company's actual financial performance and may cause the
Company's future results to be different from past performance or trends. These
factors include the following:
ECONOMIC ENVIRONMENT
Both the national economy and the economies of the western states in which the
Company owns, manages and develops properties have been and continue to be in a
recession. The early indicators of how this affects the real estate industry in
general, and the Company in particular, are slightly reduced occupancy rates,
flattening of growth in market rental rates, and reduced activity levels in the
flow of prospective tenants for space currently available for lease.
The Company's property types and locations provide some degree of risk
diversification but are not immune to a prolonged down cycle in the real estate
markets in which the Company operates. Although the Company believes it is well
positioned to meet the challenges ahead, it is possible that further reductions
in occupancy rates and the absence of rental rate growth, or even reductions in
market rental rates, will result in reduction of rental revenues, operating
income, cash flows, and the market value of the Company's shares. Prolonged
recession could also affect the Company's ability to obtain financing at
acceptable rates of interest and to access funds from the disposition of
properties at acceptable disposition prices.
20
These conditions, the risks that follow, and many other factors affect the
Company's actual financial performance and may cause the Company's future
results to be markedly outside of the Company's current expectations.
INTEREST RATE FLUCTUATIONS
At the present time, borrowings under the Company's credit facility, the $4.6
million and $21.8 million mortgage loans from Union Bank, the $30.9 million
mortgage loans from Security Life of Denver Insurance Company, and the $18.0
million mortgage loan from Washington Mutual bear interest at floating rates.
The floating interest rate on the $30.9 million mortgage loans has been fixed
for a period of one year with interest swap agreements which expire on July 1,
2002. The LIBOR rate on the $21.8 million mortgage loan has been fixed for a
period of one year. Its effective interest rate of 4.02% expires on December 20,
2002. The Company recognizes that its results from operations may be negatively
impacted by future increases in interest rates and substantial additional
borrowings to finance property acquisitions, development projects and share
repurchases.
LEASE RENEWALS
While the Company historically has been successful in renewing and reletting
space, the Company is subject to the risk that certain leases expiring in 2002
and beyond may not be renewed, or the terms of renewal may be less favorable to
the Company than current lease terms. The Company expects to incur costs in
making improvements or repairs to its portfolio of properties required by new or
renewing tenants and expects to incur expenses associated with brokerage
commissions payable in connection with the reletting of space.
INFLATION
Most of the leases require the tenants to pay their share of operating expenses,
including common area maintenance, real estate taxes and insurance, thereby
reducing the Company's exposure to increases in costs and operating expenses
resulting from inflation. Inflation, including escalations in electricity costs
in California and neighboring states, however, could result in an increase in
the Company's borrowing and other operating expenses.
GOVERNMENT REGULATIONS
The Company's properties are subject to various federal, state and local
regulatory requirements such as local building codes and other similar
regulations. The Company believes its properties are currently in substantial
compliance with all applicable regulatory requirements, although expenditures at
its properties may be required to comply with changes in these laws. No material
expenditures are contemplated at this time in order to comply with any such laws
or regulations.
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of hazardous or toxic substances released on, above, under, or in
the property. These laws often impose liability without regard to whether the
owner knew of, or was responsible for, the presence of such hazardous or toxic
substances. The costs of removal or remediation could be substantial.
Additionally, the presence of such substances or the failure to properly
remediate them may adversely affect the owner's ability to borrow using such
real estate as collateral.
The Company believes that it is in compliance in all material respects with all
federal, state and local laws regarding hazardous or toxic substances. Further,
the Company has not been notified by any governmental authority of any
non-compliance or other claim in connection with any of its present or former
properties. Accordingly, the Company does not currently anticipate that
compliance with federal, state and local environmental protection regulations
will have any material adverse impact on its financial position, results of
operations or liquidity. There can be no assurance, however, that future
discoveries or events at the Company's properties, or changes to current
environmental regulations, will not result in such a material adverse impact.
21
FINANCIAL PERFORMANCE
Management considers Funds From Operations ("FFO") to be one measure of the
performance of an equity REIT. FFO during the three months ended March 31, 2002
was $12,163,000. During the same period in 2001, FFO was $11,466,000. FFO is
used by financial analysts in evaluating REITs and can be one measure of a
REIT's ability to make cash distributions. Presentation of this information
provides the reader with an additional measure to compare the performance of
REITs. FFO is generally defined by the National Association of Real Estate
Investment Trusts as net income (loss) (computed in accordance with accounting
principles generally accepted in the United States of America), excluding
extraordinary items and gains (losses) from sales of property, plus depreciation
and amortization, and after adjustments for unconsolidated partnerships and
joint ventures. FFO was computed by the Company in accordance with this
definition. FFO does not represent cash generated by operating activities in
accordance with accounting principles generally accepted in the United States of
America; it is not necessarily indicative of cash available to fund cash needs
and should not be considered as an alternative to net income (loss) as an
indicator of the Company's operating performance or as an alternative to cash
flow as a measure of liquidity. Further, FFO as disclosed by other REITs may not
be comparable to the Company's presentation.
THREE MONTHS ENDED
MARCH 31
2002 2001
-----------------------------------------
Funds From Operations
(IN THOUSANDS, EXCEPT SHARE AMOUNTS):
Net income $8,051 $7,599
Add:
Depreciation and amortization 4,112 3,832
Minority interest - 35
-----------------------------------------
Funds From Operations $12,163 $11,466
=========================================
Weighted average number of
shares - diluted 16,589,831 17,731,411
=========================================
22
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company is exposed to interest rate changes primarily as a result of its
line of credit and long-term debt used to maintain liquidity and fund capital
expenditures and expansion of the Company's real estate investment portfolio and
operations. The Company's interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. To achieve its objectives, the Company balances its
borrowings between fixed and variable rate debt. While the Company has entered
into interest swap agreements to minimize its exposure to interest rate
fluctuations, the Company does not enter into derivative or interest rate
transactions for speculative purposes.
The Company's interest rate risk is monitored using a variety of techniques. The
table below presents the principal amounts, weighted average annual interest
rates, fair values and other terms required by year of expected maturity to
evaluate the expected cash flows and sensitivity to interest rate changes
(DOLLARS IN THOUSANDS):
Three Month Period Ending March 31,
Fair
2003 2004 2005 2006 2007 Thereafter Total Value
------------------------------------------------------------------------------------
Variable rate LIBOR debt $2,530 $2,931 $111,918 $25,583 $1,821 $9,731 $154,514 $154,514
Weighted average
interest rate 5.15% 5.06% 4.94% 5.29% 6.92% 6.92% 5.10% 5.10%
Fixed rate debt $21,659 $3,178 $3,420 $27,619 $46,441 $68,644 $170,961 $176,724
Weighted average
interest rate 7.24% 7.34% 7.34% 7.36% 7.32% 7.17% 7.28% 6.50%
As the table incorporates only those exposures that existed as of March 31,
2002, it does not consider those exposures or positions which could arise after
that date. Moreover, because firm commitments are not presented in the table
above, the information presented therein has limited predictive value. As a
result, the Company's ultimate realized gain or loss with respect to interest
rate fluctuations will depend on the exposures that arise during the period, the
Company's hedging strategies at that time, and interest rates.
On June 18, 2001, the Company entered into interest swap agreements with United
California Bank. The swap agreements allow the Company to hedge its exposure to
variable interest rates on two mortgages with remaining principal balances
totaling $26,241,000 as of March 31, 2002, by effectively paying a fixed rate of
interest over the term of the swap agreement. Interest rate pay differentials
that arise under these swap agreements are recognized in interest expense over
the term of the contracts. These interest rate swap agreements were considered
to be fully effective in hedging the variable rate risk associated with the two
mortgages.
The following summarizes the principal value and fair value of the Company's
interest swap contracts. The principal value below provides an indication of the
amount that has been hedged in these contracts but does not represent an
obligation or exposure to credit risk at March 31, 2002 (DOLLARS IN THOUSANDS):
Principal Fixed Contract Cumulative Approximate Liability
Amount (1) Rate Maturity Cash Paid, Net At March 31, 2002 (2)
---------- ----- -------- -------------- ---------------------
$22,719 5.55% July 1, 2002 $258 $122
3,522 5.55% July 1, 2002 49 19
--------------------------------------------------------------------------------------------------------
$26,241 $307 $141
========================================================================================================
(1) The principal amount is included in the table of qualitative and
quantitative disclosure about market risk as variable rate LIBOR debt and
fixed rate debt, as applicable.
(2) Represents the approximate amount which the Company would have paid as of
March 31, 2002 if the swap contracts were terminated.
23
To determine the fair values of derivative instruments in accordance with SFAS
133, the Company uses the discounted cash flow method, which requires the use of
assumptions about market conditions and risks existing at the balance sheet
date. Considerable judgment is required in interpreting market data to develop
estimates of market value. Accordingly, estimated fair value is a general
approximation of value, and such value may or may not actually be realized.
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
- ---------------------------
None
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
- ----------------------------------------------------------
None
ITEM 5. OTHER INFORMATION
- --------------------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
A. EXHIBITS
EXHIBIT NO. EXHIBIT
3.1(a) Articles of Incorporation of Bedford Property
Investors, Inc. is incorporated herein by reference
to Exhibit 4.2 of the Company's Registration
Statement on Form S-2 (File No. 333-00921) filed on
February 14, 1996.
3.1(b) Charter of the Company, as amended, is incorporated
herein by reference to Exhibit 4.2 of the Company's
Amendment No. 1 to its Registration Statement on
Form S-2 (File No. 333-00921) filed on March 29,
1996.
3.1(c) Articles of Amendment of Charter of Bedford Property
Investors, Inc. is incorporated herein by reference
to Exhibit 3.1 to the Company's Form 10-Q for the
quarter ended June 30, 1997.
3.2 Amended and Restated Bylaws of the Company is
incorporated herein by reference to Exhibit 3.2 to
the Company's Form 10-K for the year ended December
31, 2000.
B. REPORTS ON FORM 8-K
None
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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 of the
undersigned, hereunto duly authorized.
Dated: May 9, 2002
BEDFORD PROPERTY INVESTORS, INC.
(Registrant)
By: /s/ Hanh Kihara
-----------------------------
Hanh Kihara
Senior Vice President and
Chief Financial Officer
By: /s/ Krista K. Rowland
-----------------------------
Krista K. Rowland
Vice President and Controller
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