ITEM 1. BUSINESS
The Company is a self-administered and self-managed REIT that finances, acquires, develops, manages and leases health care properties. The Company's business currently consists of investments, either directly or through joint ventures, in health care properties (primarily through its Medical Office Building Division) and in debt obligations secured by health care properties (primarily through its Senior Care Division).
Medical Office Building Division
The Medical Office Building ("MOB") Division's business strategy is to acquire, develop, manage and lease a portfolio of medical office buildings and related health care facilities, parking facilities and retail space. The Company's MOB Division currently seeks growth opportunities nationwide in major population centers through acquisition or development of additional medical office properties directly or through strategic joint ventures. The MOB Division's portfolio currently consists of approximately 725,000 rentable square feet located in Southern California. The Company directly owns 15 properties exclusive of vacant land (the "Properties"), including 13 high quality medical office buildings, an adjacent parking facility and one hospital. Several of the Properties include retail space on the ground level. As of February 1, 1997, the Properties were approximately 80.8% leased to over 280 tenants. In June 1996, the Company acquired Tustin Medical Plaza in Tustin, California. Tustin Medical Plaza includes two medical office buildings, a parcel of vacant land and a hospital (the "Tustin Properties") which was vacant when purchased. Leases for the Tustin Hospital are currently being negotiated. As of February 1, 1997, the Company's Properties, excluding Tustin Hospital, had an occupancy rate of approximately 93.8%.
The Company recently entered into an operating agreement with PHP Healthcare Corporation, a NYSE listed company ("PHP") forming a new joint venture named "GL/PHP, LLC", a Delaware limited liability company, (the "PHP Joint Venture"). The Company holds an 80.5% interest in the unconsolidated joint venture, which owns six primary health care facilities located in New Jersey consisting of approximately 80,000 aggregate rentable square feet. Until July 31, 1997 PHP has an option to purchase the Company's interest in the PHP Joint Venture.
Senior Care Division
The Senior Care Division's business strategy is to originate short term (typically 6-24 months) loans secured by senior care facilities throughout the United States. Since its inception in June 1995, the Senior Care Division has made seven loans totaling $26.9 million of which four have been repaid through the issuance of revenue bonds. As of February 1, 1997, the Senior Care Division had three loans aggregating $12.5 million outstanding. In October 1995, the Company invested $19.9 million to acquire outstanding Series A and Series B bonds with an aggregate face value of $26.0 million issued by the Massachusetts Industrial Finance Agency and secured by three nursing homes in Massachusetts. (In March 1997 the Company sold these bonds.) These loans and bonds generate cash flow from principal and interest payments received from outstanding loans. The Company may receive future revenues in the form of subordinated notes in lieu of interest or loan fees.
In November 1996, the Company expanded its activities in the Senior Care Division by entering into an unconsolidated operating venture with Nomura Asset Capital Corporation ("Nomura"), named GLN Capital Co., LLC (the "GLN Venture"), having an anticipated maximum leveraged investment capacity for short term loans of $200.0 million. GMAC-CM has previously funded four loans with the Company and has committed to provide a credit line to the GLN Venture of up to $50.0 million, which will be secured by loans originated by the GLN Venture.
The Company's Senior Care Division currently seeks growth opportunities nationwide through short term financing and participating loans to facilitate the purchase of senior care facilities. Sellers of senior care facilities generally fall into one of two categories: (a) small independent operators who are struggling to maintain operating margins in a consolidating industry, and (b) large owner operators seeking to divest themselves of real estate operations and concentrate on facility management and ancillary services. The Company believes that the extensive operating requirements and budgetary constraints of Federal, state and local governments, have caused competitive pressures that particularly impact small operators and which in turn are causing a consolidation of the senior care industry. Large operators have also been affected by the consolidation of the senior care industry and often seek to sell their senior care facilities while retaining management service contracts, providing these large operators with ongoing revenues in connection with their management services.
Nonprofit entities are particularly attracted to investments in senior care facilities because of their unique ability to finance acquisitions through the issuance of tax-exempt bonds, providing nonprofit entities with a relatively lower cost of capital as compared to for-profit purchasers. In addition, in certain states health care facilities owned by nonprofit entities are exempt from taxes on real property.
General
Daniel M. Gottlieb and Steven D. Lebowitz, the two senior officers and founders of the Company, have over 40 years of combined experience in acquiring, developing, managing and leasing medical office properties. Messrs. Gottlieb and Lebowitz own, in the aggregate, approximately 22.6% of the equity of the Company, inclusive of their interests ("Units") in G&L Realty Partnership, L.P., a Delaware limited partnership (the "Operating Partnership"). The Company is the sole general partner of, and owns an 89.1% interest in, the Operating Partnership. Substantially all of the Company's assets are held by, and operations are conducted through, the Operating Partnership or other entities created for financing purposes.
The Company's executive offices are located at 439 North Bedford Drive, Beverly Hills, California 90210, and its telephone number is (310) 273-9930. The Company is a Maryland corporation that was incorporated on September 15, 1993.
Recent Developments
In February 1997, the Company formed the PHP Joint Venture which purchased six primary health care facilities located throughout New Jersey consisting of approximately 80,000 aggregate square feet for $22.4 million. The Company funded its 80.5% equity contribution to the PHP Joint Venture with a loan provided by the GLN Venture. The Company does not hold the requisite level of control and therefore does not consolidate the PHP Joint Venture in its financial statements. Until July 31, 1997, PHP has an option to purchase the Company's interest in the PHP Joint Venture. PHP has leased the properties from the PHP Joint Venture for 25 years and has a three year contract as a preferred provider to Blue Cross/Blue Shield of New Jersey. Charles P. Reilly, a director of the Company and Chairman of the Compensation Committee of the Board of Directors of the Company, is Chairman of the Board of Directors of PHP.
In February 1997, the Company funded its first senior care loan through the GLN Venture, a $6.4 million participating loan to CoreCare Behavioral Management. The loan has a term of 18 months and is secured by a first deed of trust on the Institute of Pennsylvania Hospital in Philadelphia, Pennsylvania, which CoreCare acquired in connection with the loan by the GLN Venture.
In March 1997, the Company sold Series A and B bonds issued by the Massachusetts Industrial Finance Agency to the GLN Venture for $7.7 million and assigned $14 million of indebtedness owed to GMAC-CM. The bonds, which were purchased for $19.9 million in October 1995, had an outstanding balance of $27.7 million, including principal and accrued, unpaid interest, at the time of sale.
Tax Status
The Company believes that it has operated in such a manner as to qualify for taxation as a "REIT" under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year ended December 31, 1993, and the Company intends to continue to operate in such a manner. As long as the Company qualifies for taxation as a REIT under the Code, the Company generally will not be taxed at the corporate level. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to Federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to Federal income and excise taxes on its undistributed income.
Employees
As of March 31, 1997, the Company employed 28 persons including on-site building employees and professional employees engaged in asset management and administration. The Company considers its relations with its employees to be good.
ORGANIZATIONAL STRUCTURE
The current structure of the Company and the ownership of interests in the Operating Partnership and other related entities directly or indirectly controlled by the Company, through which the Company does business, are shown in the following chart.
[ORGANIZATIONAL STRUCTURE CHART APPEARS HERE]
- -------- (1) G&L Realty Financing II, Inc. is the sole general partner and 1% owner of the Realty Financing Partnership.
(2) G&L Medical, Inc. is the sole general partner and 1% owner of the Medical Partnership.
(3) The Operating Partnership is the sole limited partner and 99% owner of the Medical Partnership.
(4) The Operating Partnership is the sole limited partner and 99% owner of the Realty Financing Partnership.
(5) The Company is the sole general partner and 89% owner of the Operating Partnership. Of its 89% interest, 1% is held as general partner and 88% is held as a limited partner. The Operating Partnership's remaining 11% partnership interest is owned by individual limited partners.
ITEM 2.
ITEM 2. PROPERTIES
The Properties are 13 high quality medical office buildings, an adjacent parking facility, one hospital and incidental retail space. As of February 1, 1997, the Properties were approximately 80.8% leased to over 280 tenants. In June 1996, the Company acquired Tustin Hospital, for which leases are currently being negotiated. The Company's Properties, not including Tustin Hospital, had an occupancy rate of approximately 93.8% as of February 1, 1997. The Company's tenants are primarily established medical practitioners representing a cross section of medical practices.
DESCRIPTION OF THE PROPERTIES AND TENANTS
Company Properties
The Company, through the MOB Division, acquires, develops, manages and leases medical office buildings and related health care facilities. Developing and managing medical office properties differs from developing and managing conventional office buildings due to the special requirements of the tenants and their patients. As a variety of medical procedures are now performed in doctors' offices, many medical office buildings have become sophisticated ambulatory centers that allow for out-patient surgery and procedures. In addition, medical office buildings generally have higher maintenance requirements in the public areas due to heavy foot traffic, many short appointments which increase demand on parking facilities, the use of sophisticated medical equipment requiring increased plumbing and electrical capacity and expanded environmental regulations that impose more stringent restrictions on the disposal of medical waste. The management of medical office properties also generally requires experience in specialized tenant improvements and higher levels of responsiveness required by medical practitioners. Additional important management functions include the placement of tenants within medical office properties to accommodate increased space needs and managing the tenant mix at properties so that referrals by practitioners with different specialties within the building is facilitated. The Company stresses meeting these and other special demands of medical property tenants.
The health care industry is facing various challenges, including increased government and private payor pressure to reduce medical delivery costs. Substantially all of the Company's tenants are in the medical profession and could be adversely affected by cost containment and other health care reform proposals. Proposals that limit access to medical care or reduce the reimbursement of physicians' services may impact the ability of the Company's tenants to pay rent. The Company believes that the aging population in the United States combined with other recent trends in the health care industry such as the performance of non-acute procedures outside of hospitals could spur increased demand for space in full service medical office buildings which contain surgicenters and out-patient facilities, such as those owned by the Company.
The following table sets forth certain information regarding each of the Properties as of February 1, 1997. The Operating Partnership owns a 100% fee simple interest in all of the Properties, other than 435 North Roxbury in which it owns an indirect 61.75% interest.
PROPERTIES--SUMMARY DATA
- -------- (1) The Operating Partnership or the Realty Financing Partnership owns a 100% fee simple interest in all of the properties except 435 North Roxbury, which is owned by 435 North Roxbury Drive, Ltd., of which the Operating Partnership owns a 61.75% partnership interest and is the sole general partner.
(2) Rentable square feet includes space used for management purposes but does not include storage space.
(3) Occupancy includes occupied space and space used for management purposes. Rented square feet includes space that is leased but not yet occupied.
(4) Rent is based on third-party leased space billed in February 1997; no rent is assumed from management space.
(5) Average rent per square foot is calculated based upon third-party leased space, excluding management space.
(6) This property includes retail space and parking facilities.
(7) The total annualized rent reflects a rental guarantee from the Sisters of Providence discussed below, which expires October 31, 1998.
(8) This property consists of a vacant lot.
Beverly Hills, California Properties
Six of the Properties are located on North Bedford and North Roxbury Drives in the "Golden Triangle" area of Beverly Hills, California, near three major hospitals--Cedars Sinai Medical Center, Century City Hospital and UCLA Medical Center. The buildings feature high quality interior improvements, including rich wood paneling and brass hardware appointments, both in the common areas and in most of the doctors' offices. These six Properties include ten operating rooms, two of which are located in the Saint John's Hospital surgicenter at 405 North Bedford Drive. The 405, 416 and 436 North Bedford Drive buildings each have emergency back-up generators. Parking for these six Properties is provided in the 415 North Bedford garage and in subterranean parking at 436 North Bedford and 435 North Roxbury Drives. Each of these medical office buildings has copper insulated pipe with sufficient capacity for medical use, electrical systems designed for extra load requirements and extensive security systems.
405 North Bedford Drive, Beverly Hills
The 405 North Bedford Drive medical office building, built in 1947 and extensively remodeled in 1988, consists of four stories plus a penthouse and a basement. The reinforced brick building, with ground floor retail space, features cherry wood paneled walls and brass hardware in the common areas and decorative concrete trim on the exterior.
Saint John's Hospital is the only tenant leasing more than 10% of the rentable square footage of 405 North Bedford, occupying 36,787 square feet (approximately 75%) of the rentable square footage in that building. Its lease expires on March 31, 1998 and provides for a monthly rental of $144,015. The lease contains an option to renew for two consecutive five-year terms. Saint John's Hospital subleases much of the space to doctors affiliated with the hospital. Management anticipates that the Company will enter into new leases with the existing sublease tenants at the expiration of Saint John's lease in March 1998.
415 North Bedford Drive, Beverly Hills
The 415 North Bedford Drive building is a four-level parking structure with approximately 5,700 square feet of ground floor retail space for seven tenants. The parking structure contains 316 tandem-striped spaces and is valet operated.
416 North Bedford Drive, Beverly Hills
The 416 North Bedford Drive property is a four-story reinforced brick medical office building with a basement and ground floor retail space. Built in 1946 and extensively remodeled in 1987, the building features oak paneled walls and molding, brass hardware, tinted concrete borders on the exterior, and fourth floor skylights that provide an open, airy atmosphere in the hallway and some of the suites.
A plastic surgeon leases more than 10% of the rentable square footage of 416 North Bedford, occupying 4,622 square feet or 11.3% of the rentable square footage of the building. The monthly rental is $17,293. The lease expires on November 30, 2002 and contains a five-year renewal option.
435 North Bedford Drive, Beverly Hills
The 435 North Bedford Drive property is a four-story, reinforced brick and masonry medical office building with a penthouse, basement, and ground floor retail space. Built in 1959 and extensively remodeled in 1984, the
building features oak molding, wall sconces and paneling in the hallways plus stained runner boards and built-in stained hardwood cabinets in some of the medical office suites.
435 North Roxbury Drive, Beverly Hills
The 435 North Roxbury Drive property is a four-story medical office building with a penthouse, subterranean parking, and retail space on the ground floor. The building, which was built in 1956 and extensively remodeled in 1983, features a reinforced brick and masonry exterior and raised, oak-stained paneling and molding in the hallways.
Two tenants in 435 North Roxbury each occupy more than 10% of the rentable square footage. A dermatologist occupies 5,291 square feet (12.5% of the rentable square footage) pursuant to a lease which provides for a monthly rental of $16,667. The lease expires September 30, 2001 and contains a provision for a five-year renewal option. An internist occupies 6,183 square feet (14.6% of the rentable square footage) pursuant to a lease which provides for a monthly rental of $18,549. The lease expires on November 30, 1999.
436 North Bedford Drive, Beverly Hills
The 436 North Bedford Drive property is a three-story medical office building with three levels of subterranean parking. Built in 1990, the building features ground floor retail and office space surrounding a central courtyard and balconies at selected locations on the second and third floors. The exterior is clad in rose color sandstone with cast stone and granite trim. The central courtyard features a cascading waterfall sculpture and stone pavers with intricate marble and stone patterns. Cherry wood paneled walls also line the elevator lobbies on all floors and portions of the hallways.
Holy Cross Medical Plaza, Mission Hills
The Holy Cross Medical Plaza is situated on approximately 2.6 acres of the 15-acre campus of Holy Cross Medical Plaza, a 316-bed hospital. The campus also includes the Villa de la Santa Cruz skilled nursing facility, another medical office building, a magnetic resonance imaging center, and an outpatient diagnostic center. Built in 1984, the Holy Cross Medical Plaza is a three-story office building occupied primarily by medical and dental practitioners. A two-story parking structure and an open asphalt-paved lot can accommodate a total of 333 vehicles. The surrounding site is landscaped with grass, trees, shrubs, and planter boxes.
Two tenants occupy more than 10% of the rentable square footage in the Holy Cross Medical Plaza property. Holy Cross Surgical Center occupies 12,456 square feet (17.247% of the rentable square footage) pursuant to a lease that provides for monthly rent of $37,040.20. The lease expires October 31, 2006 and provides for a ten-year renewal option. Dialysis Center occupies 10,639 square feet (14.66% of the rentable square footage) pursuant to a lease that provides for monthly rent of $19,633.00. The lease expires March 31, 2006 and provides for two, five-year renewal options.
St. Joseph's Professional Building, Burbank
The Saint Joseph's Professional Building is a steel frame, brick-facade building, constructed in 1987, that features two floors of office space over three levels of subterranean parking which can accommodate up to 100 vehicles. The building is located one-quarter of a mile from Saint Joseph's Hospital and is directly across the street from the Walt Disney Company's world headquarters campus. Saint Joseph's Hospital includes 658 beds and is owned by the Sisters of Providence, an organization which owns other hospitals throughout North America. The Saint Joseph's Professional Building was acquired from the Sisters of Providence, who have guaranteed up to an annual gross rent of $765,000 per year through October 31, 1998; however, the guarantee is limited to a maximum annual reimbursement of $225,000. Currently, the office building is fully leased. Since the acquisition, the Company has negotiated with the existing tenants to extend their leases beyond the rent guarantee period.
Two tenants in St. Joseph's Professional Building occupy more than 10% of the rentable square footage. Total Renal Care occupies 9,067 square feet (35.3% of the rentable square footage) pursuant to a lease which provides for a monthly rental of $21,403 plus expense reimbursements for excess utility consumption. Its lease expires October 31, 2000 and provides for one, five- year renewal option. A doctors' group occupies five medical suites totaling 8,942 square feet (34.82% of the rentable square footage) pursuant to leases which provide for aggregate monthly rents of $19,145. The leases expire beginning on various dates between October 31, 1998 and October 31, 2001.
Sherman Oaks Medical Plaza, Sherman Oaks
The Sherman Oaks Medical Plaza is a seven-story office building, constructed in 1968, that is adjacent to the Sherman Oaks Hospital and Health Center, a 156-bed hospital which includes the major burn center for the San Fernando Valley. A $1 million capital improvement program renovating the building systems and common areas of the Sherman Oaks Medical Plaza was completed in 1994. The Company also owns the adjacent air rights and three-level parking structure behind the property which provides a total of 426 parking spaces. The land beneath the parking structure is owned by Sherman Oaks Hospital which also leases 150 parking spaces in the structure. As of December 31, 1996, the Sherman Oaks Medical Plaza was 86.7% occupied.
Regents Medical Center, La Jolla
The Regents Medical Center is a three story building situated on approximately 2.6 acres in the University Town Center area of San Diego, near the University of California, San Diego. The building, which was constructed in 1989, has ground level retail spaces, two upper floors of medical offices, and subterranean and ground level parking that can accommodate a total of 285 vehicles. As of December 31, 1996, the building was 100% occupied.
UCSD Orthomed, an affiliate of the University of California, occupies 14,036 square feet (approximately 21%) of the rentable area of the building pursuant to leases which provide for an aggregate monthly rental of $27,167. The leases expire at various dates between January 31, 2000 and January 31, 2002.
Cigna HealthCare Building, Irwindale
The Cigna HealthCare Building in Irwindale, California is a two story medical office building, constructed in 1992, on a site that provides two parking areas with a total of 244 spaces. This property was 100% leased to Cigna HealthCare of California, Inc., which subsequently assigned the lease to Caremark International, Inc., effective January 1, 1996. The Company gave its conditional approval of the assignment on April 5, 1996 subject to certain conditions. Rent obligations under the lease are guaranteed by Cigna HealthCare, Inc. The lease, which provides for monthly rent of $91,399 triple net, expires November 30, 2004 and provides for two, five-year options.
1095 Irvine Boulevard, Tustin
The 1095 Irvine Boulevard building in Tustin, California was redeveloped in 1995 as a primary healthcare center for physicians who are part of the St. Joseph Hospital of Orange healthcare network. The property is leased to St. Joseph Hospital, Inc. under a net lease with a 15 year term, which began in August 1995, and provides for annual cost of living rent escalations. The lease provides for a monthly rental of $16,087 and expires on July 31, 2010.
Tustin Medical Plaza, Tustin
In June 1996, the Company acquired the Tustin Properties in Tustin, California. Tustin Medical Plaza consists of two medical office buildings, a parcel of vacant land and a hospital which was vacant when purchased. Leases for the hospital are currently being negotiated.
Tustin Hospital, Tustin
The 14662 Newport Avenue building in Tustin, California is a single-story, 183-bed, 101,000 square foot hospital that was developed in two phases beginning in 1969 and ending in 1974. The hospital includes a full service emergency room, five operating rooms, an intensive care ward, administrative offices, conference rooms, kitchen and cafeteria, pharmacy, gift shop, x-ray facilities and a basement service area. The hospital has an emergency back-up generator with a 10,000 gallon underground fuel tank that complies with current environmental requirements. In addition, all of the hospital's medical equipment and supplies are still located within the hospital. The hospital was vacant when the Company acquired the property on June 14, 1996.
The Company is engaged in lease negotiations with respect to the hospital and the vacant space in the adjacent buildings. Although there can be no assurances, management anticipates that a lease will be signed in the near future. The hospital facility was leased to a television production company from January 31, 1997 through March 9, 1997.
Tustin--MOB I
The 14591 Newport Avenue building in Tustin, California is a two-story medical office building that was constructed in 1975 on a 1.2-acre site. The site is landscaped with grass lawns, shrubs, and trees and includes an asphalt-paved parking lot with approximately 105 parking spaces, representing a parking ratio of 6.4 parking spaces per 1,000 square feet of building area. The office building was approximately 49.6% leased as of December 1996.
Tustin--MOB II
The 14642 Newport Avenue building in Tustin, California is a four-story medical office building, developed in 1985, that features a surgery center with three operating rooms, a pharmacy, and an industrial clinic on the first floor. Medical offices are located on all of the other floors. The occupancy rate was approximately 85.1% as of December 1996.
One tenant occupies more than 10% of the rentable square footage in the 14642 Newport Avenue Building. Pacific Health Corporation leases the surgery center and occupies 7,444 square feet (14% of the rentable square footage) pursuant to a lease that provides for a monthly rental of $16,749.00. The lease expires on November 30, 2001 and provides for one, five-year renewal option.
PHP JOINT VENTURE PROPERTIES
In February 1997, the Company entered into the PHP Joint Venture. The PHP Joint Venture subsequently purchased six medical office properties in New Jersey having a total of 80,415 square feet at a purchase price of $22.4 million. The Company and PHP funded the $4.4 million down payment in proportion to their ownership interests in the PHP Joint Venture (80.5% for the Company and 19.5% for PHP), with the Company's contribution financed by a loan from the GLN Venture to the Company. The balance of the purchase price was financed by two loans from PHP, secured by first and second deeds of trust. The greater of the two loans, at $16 million, carries a term of six months and gives PHP a right upon default to purchase the Company's interest in the new entity. PHP has leased the properties from the PHP Joint Venture pursuant to a 25-year net operating lease and has entered into a three-year contract as a preferred provider to Blue Cross/Blue Shield of New Jersey.
The following table sets forth certain information regarding each of the PHP properties as of March 1, 1997. Each of the following properties is 100% leased by the PHP Joint Venture to PHP under the terms of a 25-year net operating lease.
- -------- (1) Rentable square feet includes space used for management purposes but does not include storage space. (2) Rent is based on third-party leased space billed in February 1997; no rent is assumed from management space. (3) Average rent per square foot is calculated based upon third-party leased space, excluding management space.
LEASES
The Company's Properties
As of February 1, 1997, the Properties were approximately 81% leased. New leases and extensions are normally granted for a minimum of five years and provide for annual rent increases. Office tenants generally have gross leases whereby rents may be adjusted for a tenant's proportionate share of any increases in the cost of operating the building. Most retail tenants have net leases and pay their share of all operating expenses including property taxes and insurance. The following is a lease expiration table setting forth the number, square feet, and associated annual rent for those leases expiring in future years.
- -------- (1) Does not include month-to-month leases, management space or vacant space. (2) % of Total Annual Rent is based upon annualized revenues of $17,565,877. (3) Includes the 36,787 sq. ft. lease with St. John's Hospital. St. John's Hospital has subleased the majority of this space to third-party doctors. The Company will enter into new leases with the existing sublease tenants when the lease with Saint John's Hospital expires in 1998 if St. John's does not extend its option to renew.
The Company has been successful in obtaining lease renewals, achieving a weighted average renewal rate of approximately 91.1% on medical office leases expiring during the 12 month period ended December 31, 1996. Although there can be no assurances that such renewal level can be maintained, the Company believes this high renewal rate is due in part to the tendency of medical practitioners to continue to practice in the same space over a number of years. Also, the Company's tenants frequently invest large sums of money in equipment and fixtures for their offices. Furthermore, relocating a doctor's office can be disruptive to the patients who are familiar with the doctor's office location.
The following table sets forth the scheduled annual rent increases for the leases with respect to the Properties in effect at December 31, 1996.
- -------- (1) Does not include 6.3% of the total rental square feet which is leased on a month-to-month basis, vacant space, space used for building management and space used for management of the Company.
The historical occupancy of the Properties is shown in the following table:
- -------- (1) Retail space and parking facilities
(2) Acquired in 1994
(3) Acquired in December 1993
(4) Placed in service in 1995
(5) Acquired in June 1996
The following tables set forth the base rent per square foot and annualized base rent for the Properties for the past five years.
BASE RENT PER SQUARE FOOT
- -------- (1) Retail space and parking facilities
(2) Acquired in 1994
(3) Acquired in December 1993
(4) Placed in service in 1995
(5) Acquired in June 1996
ANNUALIZED BASE RENT (AMOUNTS IN THOUSANDS)
- -------- (1) Retail space and parking facilities
(2) Acquired in 1994
(3) Acquired in December 1993
(4) Placed in service in 1995
(5) Acquired in June 1996
The Company's medical offices include a broad mix of medical specialties and other uses as shown in the table below:
PHP Joint Venture Properties
As of March 1, 1997, the PHP Joint Venture properties were 100% leased to PHP pursuant to 25-year net operating leases. Each property is subject to a single lease for 100% of the space. Each lease provides for a fixed rent through August 31, 1999 and thereafter provides for increases (but not decreases) related to the Consumer Price Index.
The following table sets forth the base rent per square foot and annualized base rent for the PHP properties pursuant to leases with the PHP Venture.
BASE RENT PER SQUARE FOOT
LENDING
Senior Care Division
The Company, through the Senior Care Division, makes first mortgage loans for the purpose of acquiring independent senior care facilities, which loans are secured by the facilities acquired. The loans typically are intended to serve as bridge or interim financing (6 to 24 months) for the acquisition of senior care facilities by unrelated parties. The maturity of the loan made by the Company is determined primarily by the timing of the sale of tax exempt bonds or the completion of other permanent financing. Some of the proceeds received from the sale of newly issued bonds are used to repay the first mortgage loan issued by the Company. The Company has from time to time extended the maturity dates of the outstanding loans to give borrowers additional time to obtain tax exempt financing and taken a participation interest in such loans upon maturity in lieu of full debt repayment in the form of cash. The loans generally bear interest at fixed rates, with the per annum interest rate increasing under certain circumstances in which an extension of the original maturity date is required due to the timing and availability of financing. The Company may receive fees and certain other consideration for making the loans. From June 1995 through December 31, 1996, the Company made a total of seven loans in an aggregate principal amount of approximately $26.9 million for the purpose of acquiring senior care facilities and acquired $20.0 million in existing bonds, all of which are secured by first mortgages on the facilities acquired.
The following table sets forth certain information regarding the loans secured by senior care facilities made by the Company's Senior Care Division from its inception in June 1995 through March 1, 1997:
- -------- (1) Date of repayment
Medical Office Building Division
In May 1995, the Company entered into an agreement to loan $1.2 million to an unaffiliated partnership for use in redeveloping a 120,000 square foot medical center in Beverly Hills, California. The loan, which was originally secured by a second deed of trust on the medical center, is personally guaranteed by the general partner of this partnership. The guaranty is secured by a pledge of 1.0 million shares of common stock issued by a publicly traded company, which shares had an aggregate value of approximately $1.1 million as of March 28, 1997. The loan, which bears interest at the rate of 10% per annum, had an original maturity date of June 1, 1996; the maturity date was subsequently extended to May 31, 1997. Under the terms of the extension agreement, the medical center in Beverly Hills, California was released as security for the loan, and a hospital facility located in Fort Worth, Texas valued at approximately $3.0 million was pledged as replacement security.
GLN Venture
The GLN Venture markets two different loan products: a short-term loan and a participating loan. The short-term loan is a purchase-money mortgage designed for stabilized facilities that enables buyers to close an acquisition quickly without the delays inherent in a bond financing transaction. The typical loan is for approximately 12 months and is generally repaid from the proceeds of a bond offering. The GLN Venture earns points as well as interest on these loans. The participating loans generally has a 24-month horizon and involves facilities in which management believes there is an opportunity to create value in a project, in many cases a turnaround situation. The participating loans enable the GLN Venture to participate in gains resulting from a turnaround in addition to the standard points and interest.
The GLN Venture funded its first loan in February 1997, providing $6.4 million for the acquisition of the Institute of Pennsylvania Hospital in Philadelphia, Pennsylvania. The loan is a participating mortgage that carries an 18-month term, has an interest rate of 30-day LIBOR plus 6.5% and is secured by a first deed of trust. The borrower, CoreCare Behavioral Management, expects to operate a 162-bed psychiatric facility on the property and lease the balance of the property, with the exception of a portion of the land which will be sold. Pursuant to the terms of the loan, the borrower will be required to pay an additional participation amount of up to approximately $700,000 when the loan is repaid.
The GLN Venture funded its second loan in March 1997 in the principal amount of $3,542,000 to the Company for purposes of funding the Company's contribution to the PHP Joint Venture. The loan carries a term of six months and an interest rate of 12%. The loan may be extended for additional six-month periods, provided, however, that during each month that the loan is outstanding after the first six-month term the interest rate is increased by 1% per month. The loan may be prepaid at any time after the first four months and is secured by the Company's interest in the PHP Joint Venture.
INVESTMENTS IN BONDS
In October 1995, the Company acquired $20.9 million face value of tax-exempt 1989 Series A Health Care Bonds issued by the Massachusetts Industrial Finance Agency due 2017 (the "Series A Bonds") and $5 million face value of 1989 Series B Health Care Revenue Bonds issued by the Massachusetts Industrial Finance Agency due 2019 (the "Series B Bonds") for an aggregate purchase price of $19.9 million. The Series A Bonds and Series B Bonds are secured by three nursing homes owned by Hampden Nursing Homes, Inc., a Massachusetts nonprofit corporation. Principal and interest payments due on these unrated bonds are paid by the bond trustee out of the debt service payments received from the underlying mortgages. The State of Massachusetts has not guaranteed the bonds and the underlying mortgages are not insured in the event of default. Interest on the Series A and Series B Bonds is payable at the rates of 9.75% and 9.5%, respectively. At the time of acquisition, there was approximately $1.9 million of unpaid interest accrued on the Series B Bonds. The Series A Bonds are not callable and the Series B Bonds are subordinated in right of payment to the Series A Bonds.
The three senior care facilities pledged as security for the bonds are Riverdale Gardens Nursing Home located in West Springfield, Massachusetts, Chestnut Hill Nursing Home in East Longmeadow, Massachusetts and Mary Lyon Nursing Home in Hampden, Massachusetts.
Riverdale Gardens Nursing Home is a 168-bed nursing facility currently licensed for 84 skilled care and 84 intermediate care beds with 16 private and 76 double occupancy rooms. Constructed in various stages between 1957 and 1975, the property consists of a single story 54,451 square foot masonry building on a 3,85 acre site with a 3,366 square foot single family residence on an adjacent 30,000 square foot lot.
Chestnut Hill Nursing Home is a 123-bed nursing home consisting of 82 skilled nursing and 41 intermediate care beds in 15 private and 54 double occupancy rooms. The facility is a 49,198 square foot single story brick building constructed in 1984 on approximately 11.9 acres of land.
Mary Lyon Nursing Home occupies a 28,940 square foot building situated on 3.7 acres and was originally constructed in 1959 and renovated in 1986. The facility is licensed for 100 beds of which 40 are skilled nursing and 60 are intermediate beds. The bed compliment consists of ten private rooms, 39 double occupancy and three quadruple occupancy rooms.
In March 1997, the Company sold the Series A and Series B Bonds, which collectively had an outstanding face value of $25.6 million plus an additional $1.1 million of accrued and unpaid interest, to the GLN Venture for $7.7 million in cash and assigned to the GLN Venture $14.0 million in indebtedness owed to GMAC-CM.
INSURANCE
The Company carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to the Properties. There are certain types of losses which may either be uninsurable or not economically insurable. There can be no assurance that policies maintained by the Company will be adequate in the event of a loss. The Company carries earthquake insurance with respect to eight of its Properties. All of the Properties directly owned by the Company are located in Southern California (the Company indirectly owns six properties located in New Jersey through the PHP Joint Venture of which the Company owns approximately 80%), which has a history of seismic activity including the 1994 Northridge earthquake, which damaged the Holy Cross Medical Plaza property. Should an uninsured loss occur, the Company could lose its investment in, and anticipated earnings and cash flow from, a Property. See "Risk Factors--Uninsured Loss."
GOVERNMENT REGULATION
Environmental Matters. 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 certain hazardous or toxic substances on or in its property. These laws impose liability without regard to whether the owner knew of, or was responsible for, the presence of any hazardous or toxic substances. The presence of such substances, or the failure to properly remediate these substances, may adversely affect the owner's ability to borrow using the real estate as collateral and may subject the owner to material remediation costs. All of the Properties have been subject to Phase I environmental assessments (which involve inspection of the subject property, but no soil sampling or groundwater analysis) by independent environmental consultants. Although restricted in scope, these independent assessments revealed no material evidence of existing environmental liability, and the Company has not been notified by any governmental authority of any noncompliance by, liability for, or other claim against the Company in connection with environmental matters related to the Properties. While the Company is not aware of any environmental liability that it believes would have a material adverse effect on its business, assets or results of operations, no assurance can be given that the environmental assessments revealed all potential environmental liabilities or that no prior owner created any material environmental condition not known to the Company or that future uses or conditions (including changes in applicable environmental laws and regulations) will not result in imposition of environmental liability.
The independent environmental assessments include selective sampling for asbestos where the age of the buildings or the types of materials warranted such sampling. Limited quantities of non-friable asbestos were present in the Sherman Oaks Medical Plaza. The Company removed the asbestos in 1994 in connection with the renovation of this building.
As part of the normal practice of doctors, medical waste is generated. The Company's leases require the individual tenants to make arrangements for the disposal of medical waste and requires all tenants to provide proof that they have contracted with a third party service to remove it from the premises each night. The handling and disposal of this waste is the responsibility of the tenants; however, the Company remains responsible as the owner of the property. There can be no assurances that all such medical waste will be properly handled and disposed of or that the Company will not incur costs in connection with improper disposal of medical waste by its tenants.
Americans with Disabilities Act. All of the Properties are required to comply with the ADA. The ADA generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers and noncompliance could result in imposition of fines by the U.S. government or an award of damages to private litigants. The Company believes it is in substantial compliance with the ADA and that it will not be required to make substantial capital expenditures to address the requirements of the ADA. If required changes involve a greater expenditure than the Company currently anticipates, the Company's ability to make expected distributions could be adversely affected. See "Risk Factors-- Government Regulation; Cost of Compliance with Americans with Disabilities Act."
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There is no material pending litigation to which the Company, the Operating Partnership, the Realty Financing Partnership, the Medical Partnership, the Roxbury Partnership, the Nomura Venture or the PHP Joint Venture is a party or to which any of their properties is subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the stockholders of the Company during the quarter ended December 31, 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the NYSE under the symbol GLR. It has been the Company's policy to declare quarterly distributions to holders of the Company's Common Stock so as to comply with applicable sections of the Code governing REITs. Units and shares of Common Stock receive equal distributions. Distributions are declared and paid at the discretion of the Company's Board of Directors and generally depend on the Company's cash flow, its financial condition, capital requirements, the distribution requirements under the REIT provisions of the Code and such other factors as the Company's Board of Directors deem relevant.
The table below sets forth the high and low sales prices of the Company's stock for each full quarterly period since January 1, 1995, as reported by the NYSE. The table also includes, on a per share basis, the quarterly cash dividends declared and paid to holders of the Company's common stock for each of the last two fiscal years.
- -------- (1) The Company declared a quarterly distribution for the first quarter of 1997 in the amount of $0.36 per share to be paid on April 16, 1997 to stockholders of record on March 31, 1997.
The number of holders of record of the shares of Common Stock was 162 as of March 21, 1997. Such number does not include the total number of beneficial holders of Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information for the Company and its predecessor. Data presented as of December 31, 1996, 1995, 1994 and 1993 and for each of the years ended December 31, 1996, 1995 and 1994 is for the Company. Data presented for the year ended December 31, 1993 includes data for the six Properties located in Beverly Hills (the "G&L Development Properties") for January 1, 1993 through December 16, 1993 and for the Company for December 16, 1993 through December 31, 1993. Data presented as of December 31, 1992 and for the year ended December 31, 1992 is for the G&L Development Properties. For comparison purposes only, the G&L Development Properties are considered the predecessor entity to the Company. The following information should be read in conjunction with all of the financial statements and notes thereto included in this Form 10-K. This data also should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K. The selected consolidated financial information as of December 31, 1996, 1995, 1994, 1993 and 1992 and for each of the years ended December 31, 1996, 1995, 1994, 1993 and 1992 have been derived from audited financial statements.
- -------- (1) Funds from operations ("FFO") represents net income (computed in accordance with generally accepted accounting principles, consistently applied ("GAAP")), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real property, less preferred stock dividends and after adjustments for consolidated and unconsolidated entities in which the Company holds a partial interest. FFO is computed in accordance with the definition adopted by the National Association of Real Estate Investment Trusts ("NAREIT"). FFO should not be considered as an alternative to net income or any other indicator developed in compliance with GAAP, including measures of liquidity such as cash flows from operating, investing and financing activities. FFO is helpful in evaluating the performance of a real estate portfolio considering the fact that historical cost accounting assumes that the value of real estate diminishes predictably over time. FFO is only one of a range of indicators which should be considered in determining a company's operating performance. The methods of calculating FFO among different companies are subject to variation; therefore, FFO may be an invalid measure for purposes of comparing companies. Also, the elimination of depreciation and gains and losses on sales of property may not be a true indication of an entity's ability to recover its investment in properties. The Company implemented the new method of calculating FFO effective as of the NAREIT- suggested adoption date of January 1, 1996. FFO has been restated for all prior periods under the new method. (2) For purposes of these computations, earnings consist of net income plus fixed charges. Fixed charges consist of interest expense, capitalized interest and amortization of deferred financing costs. (3) For purposes of these computations, the ratio of funds from operations to fixed charges consists of FFO as defined in Note (1) plus fixed charges. Fixed charges consist of interest expense, capitalized interest and amortization of deferred financing costs. (4) Total capitalization as of the dates presented is total debt plus the aggregate market value of the Company's Common Stock and Operating Partnership Units not owned by the Company, assuming one Unit is equivalent in value to one share of Common Stock.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected Consolidated Financial and Operating Data and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
Comparison of the Year Ended December 31, 1996 Versus the Year Ended December 31, 1995
Net income for the year ended December 31, 1996, increased approximately $6.4 million, or 190%, from the previous year. The major component of this increase was the $9.3 million extraordinary gain which resulted from the surrender of the property located at 436 North Bedford Drive in Beverly Hills, California to the holder of the $28.5 million lien on the property. The book value of the land, buildings and related assets associated with the 436 North Bedford property was approximately $22.9 million at the time of the transaction. In conjunction with the transfer, the Company recorded a $4.9 million loss on disposition of the property which was the difference between the $22.9 million book value and the estimated market value of $18.0 million. At the same time, the Company recorded a $10.5 million extraordinary gain resulting from the elimination of debt, which represented the difference between the $28.5 million loan balance and the estimated $18.0 million market value of the property. The $10.5 million extraordinary gain was partially offset by $134,000 of other extraordinary net gains and losses resulting from the early retirement of three other notes payable. For reporting purposes, the net extraordinary gain was adjusted to approximately $9.3 million to reflect the portion of the gain attributable to the minority interest partners.
Rents, tenant reimbursements and parking revenues as a group declined approximately $1.2 million from an aggregate of approximately $19.0 million for the year ended December 31, 1995 to $17.8 million for the same period in 1996. This decline was mainly attributed to the 436 North Bedford Drive property which the Company surrendered to the noteholder on May 24, 1996. Subsequent to that date, the noteholder put the property on the market for sale and on August 30, 1996, the Company, through the Medical Partnership, reacquired the property. During the period from May 24, 1996 to August 30, 1996, the property generated $778,000 in rents, tenant reimbursements and parking revenues which were earned by the entity that owned the property during that time. The remaining $368,000 decline is attributable to rents received on leases that expired during 1995 and 1996 and renewed at lower rates.
Interest, loan fees and related revenues are primarily the result of investments in short term loans secured by senior care facilities. The senior loan program, started in June 1995, has continued to expand since its inception. Investments made in 1995 combined with new loans in 1996 contributed to the 265% increase in such revenues for the year ended December 31, 1996 as compared to the same period in 1995. In February 1996, the Company completed a transaction whereby the Company provided the initial capital and management expertise to facilitate the purchase of a newly constructed but vacant hospital and medical office facility in Rancho Cucamonga, California by Heritage Rancho Healthcare, Inc., a Nebraska nonprofit corporation ("Heritage"). Heritage converted the hospital into a long term care facility to benefit the local community. In conjunction with the closing of this transaction, the Company recognized cash revenues of $320,000 and received a $840,000 ten year subordinated note, which the Company sold during the fourth quarter of 1996 for approximately $665,000 plus accrued interest.
Property operating expense increased approximately 10.0%, or $497,000, from approximately $5.2 million for the year ended December 31, 1995 to approximately $5.7 million for the year ended December 31, 1996. Recurring operating expenses declined as a result of the 436 North Bedford Drive transactions as previously discussed. This decline was more than offset by increases in real property taxes, the increased expense of earthquake insurance and the acquisition of the Tustin Properties. In June 1996, the Los Angeles County Assessor's Office notified the Company that it was increasing its valuation on four of the Bedford Drive
properties as a result of a transfer of ownership in conjunction with the Company's initial public offering (the "IPO") on December 16, 1993. The Company retained consultants specializing in property valuation appeals and, as of March 21, 1997, obtained partial reductions in the increased assessments on two of the four properties. Although there can be no assurances, management believes that the Company will be able to obtain further reductions in these increased assessments.
The addition of earthquake insurance partially contributed to the rise in operating expense. In 1995, earthquake coverage was added on four properties, and in 1996, coverage was added on four additional properties. As of December 31, 1996, the Sherman Oaks, Regents and Cigna HealthCare properties all had coverage for certain losses resulting from seismic activity, as do the five properties located on Bedford Drive.
The acquisition of the Tustin Properties also contributed to an increase in the Company's operating expense during 1996. At the time of the acquisition, the hospital was vacant and the medical office buildings were approximately 50% occupied by doctors who were affiliated with the hospital before its closure. The Company's management is currently working to revitalize these assets. The Company is currently involved in discussions with several health care organizations to lease the hospital and additional space in the medical office buildings. Although there can be no assurance that these discussions will be successfully completed, management believes the Company will obtain a lease for the vacant hospital under favorable terms during 1997.
Depreciation and amortization expenses declined from approximately $4.0 million during 1995 to approximately $3.3 million in 1996. The decline is primarily the result of the 436 North Bedford Drive transactions discussed above. Prior to its transfer in May 1996, the property had a depreciable cost basis of approximately $21.1 million. When the property was reacquired in August 1996, the depreciable cost basis dropped to approximately $15.4 million. Also, no depreciation was recorded for the period during which the Company did not own the property. The decline in depreciation and amortization was partially offset by the acquisition of the Tustin Properties in June 1996.
Interest expense increased from approximately $6.4 million for the 12 months ended December 31, 1995 to approximately $8.8 million for the same period in 1996, an increase of approximately 38%. Funding of the senior care loan program was the primary reason for the increase. The increase would have been larger had it not been for the decline in interest expense which was realized when a $28.5 million loan was extinguished in May 1996 by the transfer of the 436 North Bedford Drive property to the noteholder.
General and administrative expenses increased approximately $147,000, from approximately $1.6 million for the year ended December 31, 1995 to approximately $1.8 million for the same period in 1996, as a result of added travel and professional fees resulting from the expansion of the senior loan program.
Comparison of the Year Ended December 31, 1995 Versus the Year Ended December 31, 1994
Net income for the year ended December 31, 1995, before an extraordinary item, was $3.7 million, or $0.91 per share, an increase of 16.9% from $3.2 million, or $0.77 per share, reported in the previous year, based on 4,091,000 and 4,159,000 average shares outstanding, respectively. Net income after the effect of an extraordinary item of $393,000, or $0.09 per share, was $3.3 million or $0.82 per share. The extraordinary item related to a one-time charge in the third quarter for repayment of approximately $31 million in variable rate debt with a $30 million 7.89% fixed rate 10-year loan, and the replacement of the Company's credit line.
Revenues increased $4.1 million, or 24%, in 1995, as a result of the properties acquired during 1994 and added revenues from the newly created Senior Care Division. Rent revenues including tenant reimbursements and parking fees increased $2.4 million from $16.5 million to $18.9 million. This increase was due primarily to the acquisition of the following five properties in 1994: Holy Cross Medical Plaza in January, Regents Medical Center in June, Sherman Oaks Medical Plaza in June, Cigna HealthCare Building in July and 1095 Irvine Boulevard in October. Operations for the year ended December 31, 1994, included only partial year revenues for all of the five properties except for the 1095 Irvine Boulevard building. The 1995 revenues benefited from a full
year of operations except for the 1095 Irvine Boulevard building which was placed in service in August of 1995. The MOB Division also benefited from higher occupancy rates: 94% for 1995, up from an average of 92% in 1994.
In late 1994, the Company changed its collection practices and made a deliberate effort to pursue all delinquent accounts. Some were resolved in direct negotiations with tenants while others were litigated. By the end of 1995, substantially all delinquencies were resolved through judgments, payment plans or dissolutions. The previous backlog of uncollected rents has been reduced through a combination of collections and write-offs.
Under generally accepted accounting principals, the Company is required to average the billable rent due over the term of its leases and include a portion of future years' billable rent increases in the current year's rent revenues. This accounting practice creates an "unbilled rent receivable" from the Company's tenants. In conjunction with the preparation of its financial statements, the Company reviews all receivable accounts, including its unbilled rent receivable for purposes of determining the collectability of such receivables. Management believes that the overall trend toward larger medical provider groups has contributed toward the financial stability of the existing tenant population which, in turn, has led to improved collections of monthly rent billings. This improved collections rate has allowed the Company to decrease its allowance for doubtful accounts including the corresponding allowance for unbilled rent receivable. The Company believes that the current level of allowance is appropriate.
Beginning late in the second quarter of 1995, the Company began recognizing revenues from its new Senior Care Division. Interest and loan fees totaled $1.8 million in 1995 versus $113,000 in 1994.
Total 1995 expenses increased approximately $3.5 million, or 26%, from $13.6 million in 1994 to $17.1 million in 1995. The majority of the increase was the result of added interest expense which climbed $2.8 million from $3.6 million in 1994 to $6.4 million in 1995. Two factors fueled the increase: higher debt and increased rates of interest. Outstanding debt increased from $74.0 million to $111.6 million at December 31, 1994 and 1995, respectively. In general, 1995 interest rates were up from 1994 and this was amplified by the fact that rate caps on the Company's interest rate protection agreements also increased from 4% in 1994 to 5% in 1995.
Property operating expense and depreciation also increased from 1994 to 1995. The overall increase of $1.2 million is primarily the result of showing a full year of expense for the acquired properties. The effect of increased operating expense was partially offset by a $768,000 difference relating to costs and reimbursements from the 1994 Northridge earthquake.
General and administrative costs increased $342,000, at about the same rate as revenues, largely as a result of investments in consulting services, travel, professional and other fees related to creating the new Senior Care Division.
LIQUIDITY AND CAPITAL RESOURCES
The Company obtains its liquidity from multiple internal and external sources. Internally, funds are derived from the operation of medical offices and senior care lending activities and primarily consist of FFO less dividends. Since the IPO, external sources have primarily consisted of various secured loans and lines of credit. The Company's ability to expand its medical office and senior care lending operations requires continued access to capital to fund new acquisitions and loans. During 1996, the Company's payout ratio was approximately 77% of its funds from operations. Undistributed FFO were used internally to fund maintenance capital expenditures necessary to maintain the Company's existing properties. All of the Company's properties secure existing notes payable.
Debt Structure
As of December 31, 1996, the Company had $109.0 million of debt, of which $44.6 million, or 40.9%, was floating rate and $64.4 million, or 59.1%, was fixed rate. The seven loans comprising the $109.0 million in debt are described below.
In August 1995 the Company borrowed $30 million from Nomura for ten years at a fixed rate of 7.89%. The note had an outstanding balance of approximately $29.5 million as of December 31, 1996 and amortizes on a 25-year schedule. The following Properties have been pledged as security for the $30 million blanket first trust deed: 405 North Bedford, 415 North Bedford, 416 North Bedford and 435 North Bedford Drive.
Concurrently with the above described fixed rate loan from Nomura, the Company obtained a new $20 million credit line from Tokai Bank of California. The loan is secured by a blanket first trust deed on Holy Cross, St. Joseph's Professional Building in Burbank, St. Joseph's Medical Center of Orange, and the recently acquired Tustin Properties. The credit line requires monthly interest payments at 30-day LIBOR plus 1.75% and is due August 17, 1998. At any time prior to maturity, and upon 30 days notice, the Company may convert the outstanding balance or increments thereof into a five year term loan. Upon conversion, the new term loan would bear interest at the variable rate of prime plus 50 basis points or LIBOR plus 175 basis points. As of December 31, 1996 the Company owed $15.4 million and was paying interest at the rate of 7.3% per annum. As of March 21, 1997, $18.0 million in principal is outstanding at a rate of 7.55% per annum.
In May 1996, the Company repaid loans of $6.2 million, $6.4 million and $6.9 million secured by the Cigna HealthCare property, Sherman Oaks Medical Plaza, and Regents Medical Center, respectively with the proceeds of a new loan from Nomura. These loans were retired with the proceeds of a new $19.8 million ten year fixed rate loan bearing interest at 8.5%. When the Company reacquired the 436 North Bedford Drive property, the Company borrowed an additional $15.2 million as part of the purchase price and increased the $19.8 million loan to $35.0 million with a due date of August 10, 2006. As of December 31, 1996, the note had an outstanding balance of approximately $34.9 million and amortizes on a 25 year schedule. The following properties have been pledged as security for the $35 million blanket first trust deed: Sherman Oaks Medical Plaza, Regents Medical Center, Cigna HealthCare Building and 436 North Bedford Drive.
The 435 North Roxbury Drive property is security for the $8.1 million loan from Citibank, N.A. ("Citibank"). The mortgagor on this loan is 435 North Roxbury Drive, Ltd. (the "Roxbury Partnership"), of which the Operating Partnership is the sole general partner with a 61.75% interest. The Citibank loan came due on June 1, 1996 at which time the loan had a $9.0 million balance. Under the terms of the extension agreement, Citibank required the Roxbury Partnership to make two principal payments aggregating $650,000 and, effective June 1, 1996, to begin making monthly principal reductions of $35,000 per month plus accrued interest. The agreement extended the loan's maturity date from June 1, 1996 to May 31, 1999. In addition, pursuant to the loan extension agreement, the Roxbury Partnership is also required to make additional semiannual principal reductions equal to the amount of excess cash flow from the 435 North Roxbury Drive property. The interest rate is adjusted monthly to 30-day LIBOR plus 1.50%. In order to comply with the terms of the loan extension agreement, the Operating Partnership made a $350,000 unsecured loan to the Roxbury Partnership to enable it to meet the principal repayments required by the loan extension. As of March 31, 1997 the interest rate on the Citibank loan was 7.4%.
In December 1995, the Company obtained a one-year $14.0 million term loan from GMAC-CM which is secured by $21.0 million of face value, Series A Health Care Revenue Bonds issued by the Massachusetts Industrial Finance Agency. The loan was originally due on December 6, 1996 and required monthly interest only payments, in arrears, at prime plus 1.5%. As of December 31, 1996 interest was accruing at a rate of 9.75%. The Company exercised its option to extend the loan for six months to June 6, 1997. In March 1997 the Company sold the Series A Health Care Revenue Bonds to the GLN Venture, pursuant to which the GLN Venture assumed the $14 million debt to GMAC-CM.
During 1996, the Company obtained three new loans from GMAC-CM secured by the Company's senior care notes receivable. The three loans provided the Senior Care Division with $12.0 million in cash which was used to fund new senior care loans secured by The Phoenix, a senior care facility in Olathe, Kansas, Beacon Manor in Indiana Township, Pennsylvania and Carroll Manor in Hyattsville, Maryland. As of December 31, 1996, two loans totaling $7.1 million remained outstanding, including a $3.0 million one-year term loan due May 31, 1997 and a $4.1 million one-year term loan due June 17, 1997. Both of these one-year term loans require interest only monthly payments at the prime rate of interest as established by Citibank (8.25% as of December 31, 1996).
Capital Commitments
In November 1996, the Company entered into the GLN Venture with Nomura to expand the Senior Care Division's activities. The Company and Nomura have agreed to contribute $10.0 million and $30.0 million, respectively, to the GLN Venture, and GMAC-CM has agreed to provide the GLN Venture with a credit line of up to $50.0 million secured by loans originated by the GLN Venture.
The Company is responsible for administering the short term loans originated by the GLN Venture and will receive reimbursement from the GLN Venture for its general and administrative expenses associated with the GLN Venture. Due to its structure, the operations of the GLN Venture do not appear on the Company's balance sheet and there is no recourse to the Company for the GLN Venture. Cash flow generated by each loan made through the GLN Venture is distributed in the following order: (i) to repay GMAC-CM's outstanding principal and interest; (ii) to repay capital of the loan allocated to Nomura; (iii) to repay capital of the loan allocated to the Company; (iv) to pay Nomura a 9% return on its capital; (v) to pay the Company a 9% return on its capital. After cash generated by loans made through the GLN Venture is distributed as described above, Nomura and the Company share equally in any further distributions.
In February 1997, the Company also entered into the PHP Joint Venture, which purchased six primary health care facilities in New Jersey, totaling approximately 80,000 rentable square feet, at a purchase price of approximately $22.4 million. The Company and PHP funded the $4.4 million down payment in proportion to their ownership interests in the PHP Joint Venture (80.5% for the Operating Partnership and 19.5% for PHP), with the Company's contribution financed by a loan from the GLN Venture to the Company. The balance of the purchase price was financed by two loans from PHP and secured by first and second deeds of trust. Subject to certain conditions, PHP has an option to acquire the Company's interest in the PHP Joint Venture at any time prior to July 31, 1997. PHP has leased the properties from the PHP Joint Venture pursuant to a 25 year net operating lease and has a three-year contract as a preferred provider to Blue Cross/Blue Shield of New Jersey (the seller of the properties) whereby PHP will provide medical services on the properties to Blue Cross/Blue Shield of New Jersey insurance plan members. Charles P. Reilly, a director of the Company and Chairman of the Compensation Committee of the Board of Directors of the Company, is Chairman of the Board of Directors of PHP.
The Company owes approximately $21.1 million on notes payable that are due in 1997. All of the Company's loans due in 1997 are secured by bonds or loans related to senior care facilities. Management believes that the notes and bonds receivables of the Company will be paid or sold and a portion of the proceeds will be used to extinguish the related notes payable prior to their due dates and in the ordinary course of business.
The Company expects to continue meeting its short term liquidity and operating requirements, as well as providing sufficient funds to maintain stockholder distributions in accordance with REIT requirements, in the short and long term, through its working capital and cash flow provided by operations. The Company expects to continue meeting its long-term liquidity requirements, such as refinancing mortgages, financing acquisitions and financing major capital improvement projects through long-term borrowings, the issuance of debt securities and the offering of additional equity securities.
As of March 21, 1997, the Company had $49.3 million of outstanding debt at variable rates ranging from 7% to 9 3/4%. The interest rates on these loans may be affected by inflationary conditions and economic factors.
Distributions
In 1996, the Company announced two distribution increases. During the first quarter of 1996 the Company increased the quarterly dividend from $0.31 per share in the fourth quarter of 1995 to $0.32 per share for the first quarter of 1996. In the third quarter, the Company again increased the dividend to $0.36 per share from its first and second quarter levels of $0.32 per share. The effective dividend for the year ended December 31, 1996 was $1.36 per share as compared to $1.24 per share for the year ended December 31, 1995. The Company declared a quarterly distribution for the first quarter of 1997 in the amount of $0.36 per share to be paid on April 16, 1997 to stockholders of record as of March 31, 1997, which is equal to an annualized distribution of $1.44 per share.
Financing Policies
To the extent that the Board of Directors of the Company decides to seek additional funding, the Company may raise such capital using various means, including retention of internally generated funds (subject to the distribution requirements in the Code with respect to REITs), existing working capital and possibly the issuance of additional debt (secured or unsecured) or equity securities or any combination of the above. If, as is the case with this Offering, the Board of Directors determines to raise additional equity capital to fund investments by the Operating Partnership, the Company will contribute such funds to the Operating Partnership as a contribution to capital and purchase of additional interests in the Operating Partnership. It is anticipated that borrowings will continue to be made through the Operating Partnership or other entities, although the Company may also incur indebtedness that may be re-borrowed by the Operating Partnership on the same terms and conditions as are applicable to the Company's borrowing of such funds. The Company has not established any limit on the number or amount of mortgages or unsecured debt that may be placed on any single property or on its portfolio as a whole.
The Board of Directors also has the authority to cause the Operating Partnership to issue additional Units in any manner (and subject to certain limitations in the Partnership Agreement on such terms and for such consideration) as it deems appropriate.
The Board of Directors of the Company may also decide to seek financing for the purposes of managing the Company's balance sheet by adjusting the Company's existing capitalization. The refinancing of the Company's balance sheet may entail the issuance and/or retirement of debt, equity or hybrid securities.
Funds from Operations
Industry analysts generally consider Funds from Operations (FFO) to be an appropriate measure of the performance of a REIT. The Company's financial statements use the concept of FFO as defined by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT"). FFO is calculated to include the minority interests' share of income since the Operating Partnership's net income is allocated proportionately among all owners of Operating Partnership Units. The number of Operating Partnership units held by the Company is identical to the number of outstanding shares of the Company's Common Stock, and owners of Operating Partnership Units may, at their discretion, convert their Units into shares of Common Stock on a one- for-one basis.
The Company believes that in order to facilitate a clear understanding of the operating results of the Company, FFO should be examined in conjunction with the Company's net income as presented in the Selected Financial Data and Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K and the additional data presented below. The table on the following page presents an analysis of FFO and additional data for each of the four quarters and the year ended December 31, 1996 for the Operating Partnership:
G&L REALTY CORP.
FUNDS FROM OPERATIONS FOR THE FOUR QUARTERS AND YEAR ENDED DECEMBER 31, 1996
- ------- (1) FFO represents net income computed in accordance with GAAP, excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real property and after adjustments for consolidated and unconsolidated entities in which the Company holds a partial interest. FFO is computed in accordance with the definition adopted by NAREIT effective as of January 1, 1996. FFO should not be considered as an alternative to net income or any other indicator developed in accordance with generally accepted accounting principles, consistently applied, including measures of liquidity such as cash flows from operations, investing, and financing activities. FFO is helpful in evaluating the performance of a real estate portfolio considering the fact that historical cost accounting assumes the value of real estate diminishes predictably over time. FFO is only one of a range of indicators which should be considered in determining a company's operating performance. The methods of calculating FFO among different companies are subject to variation; therefore, FFO may be an invalid measure for purposes of comparing companies. Also, the elimination of depreciation and gains and losses on sales of property may not be a true indicator of an entity's ability to recover its investments in properties.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules on Page 32.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is contained in the Company's definitive proxy statement for its 1997 annual meeting of stockholders which will be filed on or before April 30, 1997 and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the Company's definitive proxy statement for its 1997 annual meeting of stockholders which will be filed on or before April 30, 1997 and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Company's definitive proxy statement for its 1997 annual meeting of stockholders which will be filed on or before April 30, 1997 and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Company's definitive proxy statement for its 1997 annual meeting of stockholders which will be filed on or before April 30, 1997 and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES:
(B) REPORTS ON FORM 8-K
Not applicable.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders G&L Realty Corp.:
We have audited the accompanying consolidated balance sheets of G&L Realty Corp. and subsidiaries (the Company) as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Los Angeles, California February 10, 1997
G&L REALTY CORP.
CONSOLIDATED BALANCE SHEETS
See accompanying notes to Consolidated Financial Statements
G&L REALTY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to Consolidated Financial Statements
G&L REALTY CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
See accompanying notes to Consolidated Financial Statements
G&L REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to Consolidated Financial Statements
G&L REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
See accompanying notes to Consolidated Financial Statements
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
G&L Realty Corp. (the "Company") was formed as a Maryland corporation on September 15, 1993 by Daniel M. Gottlieb and Steven D. Lebowitz to continue the ownership, management, acquisition and development operations of medical office buildings conducted previously by G&L Development, the Company's predecessor. All of the Company's assets are held by, and all of its operations are conducted through, the following Delaware limited partnerships:
G&L Realty Partnership, L.P. (the "Operating Partnership") G&L Realty Financing Partnership II, L.P. (the "Realty Financing Partnership") G&L Medical Partnership, L.P. (the "Medical Partnership")
The Company, as the sole general partner and as owner of an approximately 90% ownership interest, controls the Operating Partnership. The Company also controls the Realty Financing Partnership through its wholly owned subsidiary G&L Realty Financing II, Inc., a Delaware corporation, which is the sole general partner and 1% owner of the Realty Financing Partnership. The sole limited partner and 99% owner of the Realty Financing Partnership is the Operating Partnership. In May 1996 and in conjunction with a financing transaction, the Company transferred three buildings into a newly formed limited partnership, the Medical Partnership, a Delaware limited partnership. The sole limited partner and 99% owner of the Medical Partnership is the Operating Partnership. The Company controls the Medical Partnership through its wholly owned subsidiary, G&L Medical, Inc., a Delaware corporation, which is the sole general partner and 1% owner of the Medical Partnership.
Reference, in these consolidated financial statements, to the Company, its operations, assets and liabilities includes the operations, assets and liabilities of its wholly owned subsidiaries, the Operating Partnership, the Realty Financing Partnership, the Medical Partnership and 435 North Roxbury Drive, Ltd., (the "Roxbury Partnership"), a California limited partnership in which the Operating Partnership owns a 61.75% partnership interest and is the sole general partner.
Prior to August 1995, the Company, through its wholly owned subsidiary, G&L Financing, Inc., a Delaware corporation, was the sole general partner and 1% owner of G&L Realty Financing Partnership, L.P. (the "Financing Partnership"), a Delaware limited partnership. The Operating Partnership was the sole limited partner and 99% owner of the Financing Partnership which owned six medical office buildings. These six buildings were security for a $42.5 million credit line which was paid off on August 17, 1995. Thereafter, the Financing Partnership was liquidated and the assets were transferred to its partners.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business. The Company is a growth-oriented health care Real Estate Investment Trust ("REIT") with two major areas of operation: (a) the Medical Office Building Division, which owns, develops and manages high-quality, strategically located properties, and (b) the Senior Care Division, which provides loan funds to facilitate the sale of skilled nursing and assisted living facilities to various entities throughout the United States.
Basis of presentation. The accompanying consolidated financial statements include the accounts of the Company, the Operating Partnership, the Realty Financing Partnership, the Medical Partnership and, prior to its liquidation, the Financing Partnership. The interests in the Operating Partnership and Roxbury Partnership not owned by the Company have been reflected in minority interests. All significant intercompany accounts and transactions have been eliminated in consolidation. Prior year amounts have been reclassified to conform to the current year's presentation.
Properties. The Operating Partnership, the Realty Financing Partnership, the Medical Partnership and the Roxbury Partnership own a 100% fee simple interest in all of the properties.
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income taxes. The Company qualified and elected to be taxed as a REIT for federal income tax purposes. Such qualification and taxation as a REIT depends upon the Company's ability to meet, on a continuing basis, various REIT qualification requirements. As a REIT, the Company is eligible for a deduction for dividends paid to shareholders. For the years ended December 31, 1996, 1995 and 1994, the Company paid dividends to its stockholders in excess of its earnings and profits (See Note 12). Therefore, no provisions for federal income taxes are included in the accompanying financial statements.
Real estate and depreciation. Rental property is recorded at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:
Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations and all costs directly related to acquisitions are capitalized.
Revenue recognition. Base rental income is recognized on a straight-line basis over the term of the lease regardless of when payments are due. Certain leases include rent concessions and escalation clauses creating an effective rent which is included in unbilled rent receivable (Note 11).
Cash and cash equivalents. All demand and money market accounts and short- term investments in governmental funds with a maturity of three months or less are considered to be cash and cash equivalents. Cash equivalents are carried at cost which approximates fair value due to the short period of time to maturity. As of December 31, 1996, the Company had $1,966,993 in a segregated interest bearing account to be used for debt service due in January 1997, current property taxes, insurance and property improvements. Throughout the year, the Company maintained balances in various operating and money market accounts in excess of federally insured limits.
Deferred charges and other assets. Deferred charges and other assets consist of leasing commissions, deferred loan fees, financing costs, investments, deposits and prepaid expenses.
Leasing commissions are amortized on a straight-line basis over the lives of the leases which range typically from five to ten years. Deferred loan fees are amortized over the terms of the respective agreements.
The Company incurred costs relating to new loans and certain refinancings, interest rate protection agreements and a $20 million credit facility (Note 7). Refinancing costs are capitalized and amortized over the term of the related loan. Interest rate protection agreement fees are capitalized and amortized over the term of the agreements.
Minority interest in consolidated partnership. The Operating Partnership, as sole general partner, has a 61.75% ownership interest in the Roxbury Partnership which owns the property located at 435 North Roxbury Drive. The minority interest is a debit balance that resulted from depreciation allocations and cash distributed to minority interest partners in excess of their original investment and subsequent accumulated earnings. It is management's opinion that the deficit is adequately secured by the unrecognized appreciated value of the Roxbury property and will be recovered through an accumulation of undistributed earnings or sale of the property.
Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-lived assets. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that an asset's book value exceeds the undiscounted expected future cash flows to be derived from that asset. Whenever undiscounted expected future cash flows are less than the book value, the asset will be reduced to a value equal to the net present value of the expected future cash flows and an impairment loss will be recognized. Management believes that the expected future cash flows of its long-lived assets exceeded the related book values as of December 31, 1996 and 1995.
Per share data. Earnings per share are computed based upon the weighted average number of common shares of the Company's Common Stock, $.01 par value (the "Common Stock") outstanding during the period. The treasury stock method is used to determine the number of incremental common equivalent shares resulting from options granted under the Company's stock incentive plan. Computation of the number of shares is included in Note 15.
3. BUILDINGS AND IMPROVEMENTS
Buildings and improvements consist of the following:
4. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following:
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. TENANT RENT AND REIMBURSEMENTS RECEIVABLE
Tenant rent and reimbursements receivable are net of the allowance for uncollectible amounts of $261,425, $7,500 and $107,556 as of December 31, 1996, 1995 and 1994, respectively. The activity in the allowance for uncollectible tenant accounts consisted of the following:
6. OTHER RECEIVABLES
Other receivables consist of all outstanding balances due to the Company other than amounts due from current tenants and are net of the allowance for uncollectible amounts of $248,000 as of December 31, 1996. There was no balance in the allowance account as of December 31, 1994 and 1995 and no activity during the years then ended. The activity in the allowance for uncollectible accounts for the year ended December 31, 1996 was as follows:
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. NOTES PAYABLE
Notes payable consist of the following:
As of December 31, 1996, 30-day LIBOR was 5.53% and the Citibank Prime rate was 8.25%.
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate future principal payments as of December 31, 1996 are as follows:
As of December 31, 1996, the Company had a $300,000 letter of credit outstanding in favor of a secured lender. The letter of credit is held as additional collateral for tenant security deposits outstanding in the event of a default on the secured loan.
8. MORTGAGE LOANS AND BONDS RECEIVABLE
Mortgage loans and bonds receivable consist of the following:
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate future principal pay-downs as of December 31, 1996 are as follows:
The activity in the allowance for uncollectible notes receivable for the year ended December 31, 1996 was as follows:
9. ASSETS AVAILABLE FOR SALE
Assets available for sale as of December 31, 1996 consist of the following:
10. FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments is determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value. The use of different market assumptions or estimation methodologies may have a material impact on the estimated fair value amounts.
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash, cash equivalents, tenant rent and other accounts receivable, accounts payable and other liabilities. The carrying amount of these instruments approximates fair value due to their short-term maturities.
Notes payable. The carrying amount approximates fair value because the interest rates are comparable to rates currently being offered to the Company.
Mortgage loans and bonds receivable. The estimated fair values of these assets are based upon market values of loans and bonds receivable with similar characteristics adjusted for risk inherent in the underlying transactions. Management estimates the fair value of these assets to approximate their amortized cost basis and, as such, there are no realized or unrealized gains or losses to report.
11. FUTURE MINIMUM RENT
The Company has operating leases with tenants that expire at various dates through 2010. The minimum rents due under these leases are subject to either scheduled fixed increases or adjustments based on the Consumer Price Index. In general, the retail leases require tenants to pay their pro-rata share of property taxes, insurance and common area operating costs, while the medical office leases require tenants to reimburse the Company for annual increases in property taxes, insurance and specified operating expenses over a base year amount.
Generally accepted accounting principles require that rents due under operating leases with fixed increases be averaged over the life of the lease. This practice, known as "straight-line rents," creates an unbilled rent receivable in any period during which the amount of straight-line rent exceeds the actual rent billed (this occurs primarily at the inception of the lease period). As the lease approaches its expiration date, billed rent will eventually exceed the amount of straight-line rent causing the unbilled rent receivable to decline. The straight-line rent calculation assumes no new or renegotiated rents or extension periods during the life of the lease and excludes operating cost reimbursements. The following table summarizes future rents due under existing leases and the corresponding straight-line rent calculation:
The activity in the allowance for unbilled rent, recorded as a reduction of rental revenue, consisted of the following:
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. STOCKHOLDERS' EQUITY
Distributions in excess of net income. As described in Note 2, the Company has elected to be treated as a REIT for federal income tax purposes. As such, the Company is required to distribute at least 95% of its annual taxable income. In reporting periods for which distributions exceed net income, stockholders' equity will be reduced by the excess of distributions over net income. Conversely, net income in excess of distributions increases stockholders' equity. The following table reconciles distributions in excess of net income for the years ended December 31, 1996 and 1995:
For years ended December 31, 1996, 1995 and 1994, cash distributed to shareholders exceeded the Company's taxable income and is therefore considered to be a return of capital. Approximately 42.25%, 47.66% and 64.58% of the distributions paid for the years ended December 31, 1996, 1995 and 1994, respectively, represent a return of capital to shareholders.
The Company declared a quarterly distribution for the first quarter of 1997 in the amount of $0.36 per share to be paid on April 16, 1997 to stockholders of record on March 31, 1997. This distribution is equal to an annualized distribution of $1.44 per share.
13. COMMITMENTS AND CONTINGENCIES
Neither the Company, the Operating Partnership, the Realty Financing Partnership, the Medical Partnership, the Roxbury Partnership nor any of the assets within their portfolios of medical office buildings, parking facilities and retail space (the "Properties") is currently a party to any material litigation.
14. CONCENTRATION OF CREDIT RISK
All of the Company's medical office buildings are located in southern California, other than the properties owned by GL/PHP, LLC in which the Company holds an 80.5% interest (see Note 18). Most of the tenants in these properties provide specialized health care services. The customers of the tenants primarily reside in the nearby area. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory and social factors affecting the communities and industry in which the tenants operate.
A substantial portion of the Company's assets are invested in debt instruments secured by long-term senior care or skilled nursing facilities. The ability of the facility owners to pay their obligations as they come due, as well as their ability to obtain other permanent financing through the sale of bonds or other forms of long-term financing, is dependent upon their ability to attract patients who are able to pay for the services they require. These facilities have complex licensing requirements as do the professionals they employ. The majority of the services rendered are paid by various federal, state and local agencies. Each of these facilities function in a complex web of changing government regulations which have a significant impact on economic viability.
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. STOCK INCENTIVE PLAN
As of December 31, 1996, the Company had a stock incentive plan under which an aggregate of 520,000 shares of the Company's Common Stock are reserved for issuance. Options are granted at per share amounts not less than fair market value at the date of grant and expire ten years thereafter. Granted options vest in even increments over a two or three year period beginning one year from the grant date. The Company does not charge the estimated compensation cost of options granted against income. Compensation cost is estimated to be the fair value of all options granted based on the Binary option-pricing model. The costs associated with options granted in each of the years ended December 31, 1996 and 1995 are $353,132, and $392,067, respectively. No options were issued during 1994. If the compensation costs had been charged against income at the time of vesting, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
In December 1995, the Company canceled all outstanding options for 218,800 shares of Common Stock which were originally issued at the time of the Company's initial public offering at an average exercise price of $18.25 per share. Concurrently, the Company issued new unvested options for the same aggregate amount with exercise prices of $9.625 per share, the market price on the date the new options were granted.
A summary of the status of the Company's stock incentive plan as of December 31, 1996, 1995 and 1994, and changes during the years ending on those dates is presented in the following table. The average price presented below represents the weighted average exercise price based upon the market value at the grant date.
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information relating to the Company's stock incentive plan as of December 31, 1996:
Fair value of the plan. As of December 31, 1996, the Company estimated the fair value of all options granted to be $726,291, calculated based on the following assumptions:
The Company assumes that the equivalent risk-free interest rate is the closing market rate, on the last trading day of the year, for ten-year treasury bills.
The Company's stock incentive plan was introduced in conjunction with its initial public offering on December 16, 1993. As indicated earlier, most of the options issued in 1993 were repriced and reissued in December 1995; therefore, there is insufficient historical data to provide an accurate indicator as to the expected life of the options. For purposes of computing the estimated life of the outstanding option agreements, the Company has assumed the life to be five years.
The Company uses the treasury stock method for purposes of determining the number of shares to be issued to in conjunction with the Company's stock incentive plan. At a weighted average exercise price of $11.95 and a market price of $17.00 per share as of December 31, 1996, the number of shares to be issued is 109,050.
16. LOSS ON DISPOSITION OF REAL PROPERTY AND EXTRAORDINARY GAIN
In May 1996, the Company transferred ownership of the property located at 436 North Bedford Drive in Beverly Hills, California (the "Bedford Property") to the holder of the $28.5 million non-recourse lien in satisfaction of the debt ( the "deed-in-lieu transaction"). In August, the Medical Partnership reacquired the Bedford Property for approximately $18,100,000 which was funded by a $15,200,000 loan from Nomura Asset Capital Corporation ("Nomura") and $2,900,000 in cash.
As a result of the deed-in-lieu transaction, the Company recorded a $4,873,788 loss on disposition of the property (the difference between book value and market value) and a $10,500,000 extraordinary gain from retirement of the related $28,500,000 lien.
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1996, the Company refinanced three properties and obtained a new $19,800,000 loan from Nomura. The properties, pledged as collateral for the new loan, were subsequently transferred to the Medical Partnership along with the related $19,800,000 loan. In conjunction with the refinancing transaction, the Company negotiated a $350,000 discount on one note, and incurred other costs and prepayment penalties totaling $483,620. In conjunction with the $19,800,000 refinancing, the Company incurred a net extraordinary loss of $133,620. The net extraordinary gain was adjusted to $9,310,730 to reflect the portion of the gain attributable to the minority interest.
In August 1996, Nomura increased the Medical Partnership's original $19,800,000 loan by $15,200,000 in conjunction with the reacquisition of the Bedford Property. Consequently, the repayment terms were adjusted to reflect the new principal balance of $35,000,000.
17. ACQUISITION OF ASSETS AND RELATED PARTY TRANSACTION
On June 14, 1996 the Partnership and 445 Bedford, LLC, a California limited liability company ("445 LLC"), acquired undivided tenant-in-common interests in two medical office buildings, a hospital and a parcel of vacant land in Tustin, California (the "Tustin Properties"). The Tustin Properties were acquired for a sum of $4,633,957, of which $1,357,010 was contributed in cash by 445 LLC. Daniel M. Gottlieb and Steven D. Lebowitz, both directors and officers of the Company, and Reese L. Milner II, a director of G&L Realty, have financial interests in 445 LLC.
The Partnership acquired Mr. Milner's interest in 445 LLC for $808,000, after which 445 LLC redeemed the Partnership's interest in 445 LLC for an increased interest in the Tustin Properties. On June 28, 1996, 445 LLC contributed its remaining interest in the Tustin Properties to the Partnership in exchange for 39,215 newly issued Partnership units, valued at $549,010. The newly issued Partnership units are convertible into G&L Realty common stock one year from the date of issuance on a one-for-one basis. These new units were issued at an effective rate of $14.00 per unit which included a premium over the $13.00 closing price of G&L Realty's common stock on May 1, 1996, the commitment date.
The funds contributed by 445 LLC toward the purchase of the Tustin Property were obtained as part of a tax deferred exchange involving the sale of real estate previously held by 445 LLC to an unrelated third party.
18. SUBSEQUENT EVENT
On February 28, 1997, the Partnership entered into a joint venture with PHP Healthcare Corporation ("PHP"). GL/PHP, LLC is a newly formed Delaware limited liability company which recently purchased six medical buildings in New Jersey. The properties, acquired from Blue Cross/Blue Shield of New Jersey for approximately $22.4 million, will be leased to PHP under the terms of a 25 year net operating lease which provides fixed rent escalations during the term of the lease. PHP retained a 19.5% interest in GL/PHP, LLC and has the right to acquire the Company's 80.5 percent interest in the new venture at any time prior to July 31, 1997. Mr. Charles P. Reilly, a director of the Company and Chairman of the Compensation Committee of the Board of Directors of the Company, is Chairman of the Board of Directors of PHP.
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION
Summarized consolidated quarterly financial information for the periods as follows:
G & L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31,
Depreciation is computed on the straight-line basis over the estimated useful lives of the assets, as follows:
Building and improvements.............. 40 years
Tenant improvements.................... Life of lease
The changes in total real estate assets and accumulated depreciation for the years ended December 31, are as follows:
- ------- Note A: The Realty Financing Partnership owns the following properties, which are each security for a blanket first trust deed: 405 North Bedford, 415 North Bedford, 416 North Bedford and 435 North Bedford. Note B: The Medical Partnership owns the following properties, which are each security for a blanket first trust deed: Sherman Oaks Medical Plaza, Cigna HealthCare Building, Regents Medical Center and 436 North Bedford. Note C: The Operating Partnership owns the following properties, which are each security for a blanket first trust deed for the Credit Line: Holy Cross Medical Plaza, St. Joseph's Professional Building, St. Joseph's of Orange-Medical Office Building and the Tustin Hospital properties on Newport Avenue which include a hospital, an adjacent parcel of vacant land and two medical office buildings. Note D: Total debt as of December 31, 1996 includes $14,000,000 which is secured by unrated, tax-exempt Series A and B bonds and two term loans totaling $7,125,000 which are secured by notes receivable. Note E: The aggregate costs for federal income tax purposes were $111,635,622 as of December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
G&L Realty Corp.
By: /s/ Quentin Thompson ___________________________________ QUENTIN THOMPSON CONTROLLER AND SECRETARY (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
Date: April 9, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX TO EXHIBITS
- --------
* To be filed by amendment.
(1) Previously filed as an exhibit to the Company's Registration Statement on Form S-11 and amendments thereto (File No. 33-68984) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's Form 8-K dated May 24, 1996 and incorporated herein by reference.
(8) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference.
(9) Previously filed as an exhibit to the Company's Form 8-K dated August 30, 1996 and incorporated herein by reference.