ITEM 1. BUSINESS
GENERAL
Burnham Pacific Properties, Inc. (the "Company") is a real estate operating company which acquires, rehabilitates, develops and manages retail properties in the western United States. The Company began operations through a predecessor in 1963 and became a real estate investment trust ("REIT") in 1987. The Company's properties (the "Properties") are primarily neighborhood and community shopping centers located in major metropolitan areas. The Company focuses its investments on shopping centers in mature trade areas with a limited supply of vacant land and with established consumer shopping patterns. As of December 31, 1998, the Company owned interests in 71 operating retail properties comprising approximately 8.6 million square feet of Company-owned gross leasable area ("GLA") and in one retail project currently under development. The Company also owns four office and industrial properties which it considers non-strategic and which it may sell as suitable opportunities arise.
The Company owns its properties and conducts substantially all of its business through Burnham Pacific Operating Partnership, L.P. (the "Operating Partnership"), of which the Company is the sole general partner and, as the holder of preferred and common limited partnership units, the owner of a substantial majority of the economic interests. Other limited partners of the Operating Partnership are persons who have contributed interests in properties to the Operating Partnership in exchange for limited partnership units of the Operating Partnership. On January 1, 1998, the Operating Partnership became the paymaster and employer of all Company employees. At December 31, 1998, the Operating Partnership had 151 employees.
In August 1998, the Operating Partnership and the State of California Public Employees' Retirement system ("CalPERS") entered into a joint venture agreement for the acquisition of neighborhood, community, promotional and specialty shopping centers in the western United States. The joint venture agreement contemplates an aggregate $400 million investment by CalPERS and $100 million investment by the Operating Partnership, and provides for up to $165 million of leverage through mortgage or line of credit borrowings by the joint venture. On October 1, 1998, CalPERS made an initial contribution to the joint venture of five retail properties valued at approximately $80,000,000. During the fourth quarter, the joint venture purchased 5 retail properties for approximately $38.3 million. On December 22, 1998, the Operating Partnership made an initial contribution of two retail properties valued at approximately $22,195,000. On the same date, the Operating Partnership withdrew approximately $22,195,000 in cash from the joint venture pending finalization of the remainder of its required contributions, which is expected to be completed in the first quarter of 1999. The Company expects to conduct a significant portion of its acquisition activity through the CalPERS joint venture in 1999.
On March 9, 1999, the joint venture agreed to acquire 28 shopping centers owned by AMB Property Corporation aggregating 5.1 million square feet for approximately $663.4 million. The properties are to be acquired in three separate transactions, currently expected to close on or about April 30, July 31, and December 1, 1999. The Company has agreed to acquire six additional shopping centers from AMB aggregating 1.5 million square feet for approximately $284.4 million; if completed, this purchase, which is subject to the Company's obtaining financing and other conditions, is currently expected to close by year-end 1999. In connection with the AMB transaction, CalPERS and the Company agreed to increase the aggregate amount of indebtedness that the joint venture might incur through December 31, 2000 to approximately
$450,000,000 and the Company granted CalPERS an option expiring June 30, 2000 to purchase 1 million shares of Common Stock of the Company at an exercise price of $15.375 per share.
Historically, the Company has emphasized investments in properties located primarily in California. In late 1997, the Company expanded into the Pacific Northwest. The Company expects to expand its geographic presence through the activities of the CalPERS joint venture and, if completed through its acquisition of the AMB Properties.
The Company competes with real estate companies, pension funds and other real estate investors, many of which have greater financial resources than the Company, in seeking properties for acquisition, land for development, and tenants for leasing of properties.
There are numerous shopping centers that compete with the Properties in attracting retailers to lease space. In addition, retailers at the Properties face increasing competition from outlet malls, discount shopping clubs, direct mail, telemarketing and internet shopping.
The Company is incorporated under the laws of the State of Maryland. The Company's headquarters are located at 610 West Ash Street, Suite 1600, San Diego, California 92101, and its phone number is (619) 652-4700.
RETAIL PROPERTIES
As of December 31, 1998, the Company owned, either directly or through its interests in joint ventures, 71 operating retail properties comprising approximately 8.6 million square feet of Company-owned GLA. These Properties were located primarily in California, including 10 in the San Diego Region, 22 in the Los Angeles Region, and 22 in the San Francisco/Sacramento Region. In addition to the California Properties, the Company has 5 retail Properties in Oregon, 9 in Washington, 2 in New Mexico, and 1 in Utah.
These Properties consisted of 54 market/drug centers, 12 promotional centers, 3 entertainment centers, 1 convenience center, and one factory outlet center, and ranged in size from approximately 9,000 to approximately 517,000 square feet of Company-owned GLA. The Properties are designed to attract local and regional area customers and are typically anchored by one or more nationally or regionally known retailers. Depending on the market focus of a specific Property, major retailers at a Property may include supermarkets, drug stores, value-oriented discount stores, membership warehouses, multi-screen theatre complexes, shops or well-known specialty retailers.
The Company (primarily through the Operating Partnership and subsidiaries) owns 64 of these retail properties in fee and holds 7 under long-term ground leases with expiration dates ranging from 2013 to 2089. The Company leased these properties to approximately 1,240 different tenants and overall occupancy at year-end 1998 was approximately 91.3%. No individual Property or single tenant accounted for as much as 10% of the Company's revenues in 1998. No Property accounted for 10 percent or more of the total assets of the Company at December 31, 1998.
OFFICE/INDUSTRIAL PROPERTIES
As of December 31, 1998, the Company also owned 4 office/industrial Properties located in Southern California. These Properties range in size from approximately 29,000 square feet to approximately 338,000 square feet and aggregated approximately 591,000 square feet of Company-owned GLA. At year-end 1998, these Properties were 100% leased.
ACQUISITIONS
During 1998, the Company acquired interests in 14 shopping centers aggregating 1.0 million square feet of Company-owned GLA at an aggregate purchase price of approximately $98.3 million. The acquisitions consisted of the following:
ACQUISITIONS AND DISPOSITIONS
(1) Excludes all closing costs.
The acquisitions were financed through a variety of sources including draws from revolving credit facilities, new mortgages, assumption of existing mortgages, issuance of Operating Partnership units, and issuances of Common Stock of the Company.
DEVELOPMENT
During 1998, the Company substantially completed the redevelopment of the historic 1000 Van Ness Property in downtown San Francisco. The Company is retaining the 123,840 square-foot entertainment and retail portion of this property, which is anchored by a 74,000 square-foot multiscreen theater opened by AMC Theaters in July 1998. During 1998, the Company sold the parking lot structure to an investor and commenced the transfer of the residential units to a residential developer, applying the proceeds to pay down a portion of a construction loan secured by the Property and to reduce borrowings on the Company's credit facility. No gain or loss was recognized on either of these transactions.
In late 1998, the Company began construction of a market, promotional and entertainment anchored shopping center located in the city of Pleasant Hill, California, containing approximately 355,000 square feet of Company-owned GLA.
DISPOSITIONS
In December 1998, the Company sold its Plaza Rancho Carmel convenience shopping center, which was considered non-strategic, for $2.8 million. The proceeds from the sales were used to reduce borrowings on the Company's credit facility.
ITEM 2.
ITEM 2. PROPERTIES
The following table sets forth the completed operating properties owned by the Company at December 31, 1998:
PORTFOLIO COMPOSITION
The information in the following table indicates the composition of the Operating Properties owned by the Company as of December 31, 1998:
The information in the following table indicates the composition of the retail properties by retail property type owned by the Company as of December 31, 1998:
(1) The Company defines Market/Drug centers as those centers that serve a fairly localized trade area and that offer an assortment of goods and services designed to meet the daily needs of consumers.
(2) The Company defines Promotional Centers as those centers with multiple promotional retailers as anchor tenants. The Company defines promotional retailers as retailers which typically offer convenience, a broad selection and low pricing on a fairly discrete category of retail merchandise.
GEOGRAPHIC DISTRIBUTION
The Company's retail Properties are located in 20 metropolitan statistical areas ("MSA") in 5 states. The table below demonstrates the geographic distribution of Properties owned by the Company as of December 31, 1998:
GEOGRAPHIC DISTRIBUTION BY MSA
TENANT CONCENTRATION--Top Ten Retail Anchor Tenants (as of December 31, 1998) RANKED BY ANNUALIZED BASE RENT -
LEASE EXPIRATIONS OF THE COMPANY'S PORTFOLIO
The following table sets forth scheduled lease expirations for leases in effect as of December 31, 1998, for each of the next ten years for all of the Company's Properties. The table assumes that none of the tenants exercise renewal options or termination rights.
(1) Annualized base rent is calculated by multiplying base rent for December 1998 by twelve.
BANKRUPTCY REMOTE PROPERTIES
Twenty-eight of the Company's Properties, having a net book value of approximately $515,865,000 at December 31, 1998, (collectively, the "Bankruptcy Remote Properties" and, each a "Bankruptcy Remote Property") are wholly-owned by various "Bankruptcy Remote Entities" which are indirect subsidiaries of the Company. The assets of each Bankruptcy Remote Entity, including the respective Bankruptcy Remote Property or Properties owned by each, are owned by that Bankruptcy Remote Entity alone and are not available to satisfy claims that any creditor may have against the Company, its affiliates, or any other person or entity. No Bankruptcy Remote Entity has agreed to pay or make its assets available to pay creditors of the Company, any of its affiliates or any other person or entity. Neither the Company nor any of its affiliates has agreed to pay or make its assets available to pay creditors of any Bankruptcy Remote Entity (other than any agreement by a Bankruptcy Remote Entity to pay its own creditors). No affiliate of any Bankruptcy Remote Entity has agreed to pay or make its assets available to pay creditors of any Bankruptcy Remote Entity. The following table lists these Bankruptcy Remote Entities ("Owners") and their respective Bankruptcy Remote Properties.
INDEBTEDNESS
The Company's total outstanding consolidated mortgage debt secured by interests in its properties (other than those properties secured under the credit facility) was $373,483,779 at December 31, 1998. The following table sets forth certain information regarding this debt.
- ------------------ (1) "Bankruptcy Remote Property." (2) Adjusted annually at February 1. (3) Balloon payment at maturity.
Additionally, at December 31, 1998, the Company had $111,017,713 and $69,981,538 outstanding under the secured and unsecured portions of its credit facility, respectively. The following Properties secured the secured portion of the credit facility: San Diego Factory Outlet Center, Navajo Shopping Center, Santee Village Square, Poway Plaza, Meridian Village, Auburn Village, La Mancha Shopping Center, Independence Square, Santa Fe Springs, Central Shopping Center, Foothill Plaza and Fremont Hub. For a discussion concerning the Company's credit facility, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources."
In addition, the Company has a construction loan which matures in December 1999, which is secured by 1000 Van Ness. At December 31, 1998, $5,427,000 was outstanding under this loan at a rate of approximately 7.61%. The Company is also obligated under three leases, in
connection with the historic portion of 1000 Van Ness. At December 31, 1998, the present value of the related minimum lease payments is approximately $15,118,000. The net annual payment under these leases in 1999 is approximately $1,237,500.
For additional information concerning debt secured by the Company's Properties, reference is made to Notes 2, 3, 4 and 5 to the Consolidated Financial Statements.
OFFICE PREMISES LEASED BY THE COMPANY
The Company has entered into leases with third party landlords for the office space that it occupies for its regional offices (see Notes 12 and 14 to the Consolidated Financial Statements). Such leases are generally on commercially standard terms and do not involve any commitments which management believes are material to its operations or financial condition.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved in any material litigation nor, to its knowledge, is any material litigation threatened against the Company or its properties, other than routine litigation arising in the ordinary course of business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET DATA
Common Stock of the Company is listed on the New York Stock Exchange under the symbol "BPP". The following table sets forth the high and low sale prices of the Common Stock, as reported by the New York Stock Exchange Composite Tape, and the per share common dividends paid by the Company for each calendar quarter during 1998 and 1997.
At December 31, 1998, there were 2,423 holders of record of the Company's Common Stock.
RECENT ISSUES OF UNREGISTERED SECURITIES
There were no unregistered securities issued by the Company (or by the Operating Partnership) during the fourth quarter of the fiscal year ended December 31, 1998.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read with Management's Discussion and Analysis of Financial Conditions and Results of Operations, which is included elsewhere in this Annual Report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
OVERVIEW
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report. Historical results and percentage relationships set forth in the consolidated statements of income contained in the consolidated financial statements, including trends which might appear, should not be taken as indicative of future operations. References herein to the Company include Burnham Pacific Operating Partnership L.P. (the "Operating Partnership") and the other directly and indirectly owned subsidiaries of the Company unless the context otherwise requires. Effective in the fourth quarter of 1997, the Company formed the Operating Partnership and transferred the fee or beneficial interest in substantially all of its assets to the Operating Partnership or subsidiaries of the Operating Partnership, thereby becoming what is commonly referred to as an "UPREIT".
The Company's strategic focus is the development, acquisition, rehabilitation, and operation of retail shopping centers in the western United States. At December 31, 1998, the Company owned interests in 72 retail shopping centers, 71 of which were fully operational, and one of which is being developed. Fifty-five of the properties are located in California, nine in Washington, five in Oregon, two in New Mexico, and one in Utah. As of December 31, 1998, the Company also owned four office/industrial properties located in Southern California, which are considered non-strategic.
During 1998, the Company entered into a joint venture agreement with the State of California Public Employees' Retirement System ("CalPERS") to acquire neighborhood, community, promotional and specialty shopping centers in the western United States. The Company expects to conduct a significant portion of its acquisition activity during 1999 in this joint venture.
As part of its ongoing business, the Company regularly engages in discussions with public and private real estate entities regarding possible portfolio or asset acquisitions or business combinations.
ACQUISITIONS AND DEVELOPMENTS
During 1998, the Company acquired interests in 14 shopping centers aggregating 1,017,000 square feet of Company-owned GLA (gross leasable area) for an aggregate purchase price of approximately $98,343,000.
During 1997, the Company acquired interests in 42 shopping centers aggregating approximately 5,600,000 square feet of Company-owned GLA at an aggregate initial purchase price of approximately $598,100,000. Twenty of these properties aggregating approximately 2,600,000 square feet were acquired on December 31, 1997, as a portfolio from Golden State Properties. The initial purchase price was $302,400,000 which was funded through $150,000,000 of secured indebtedness, $50,000,000 of Preferred Limited Partnership Units of the Operating Partnership, $70,000,000 of Preferred Stock of the Company, and $32,400,000 of cash drawn principally from the Company's credit facility. The Company is obligated to pay up to $41,600,000 of additional consideration for additional value resulting from the lease-up of certain specified portions of the Golden State Properties and construction and lease-up of certain additional space
through June 30, 1999. $19,168,000 of such additional consideration was paid during or for events occurring during 1998.
During 1998, the Company substantially completed the redevelopment of a mixed-use project in San Francisco, California, totaling 123,840 square-feet, at an aggregate net cost of approximately $46,200,000. In late 1998, construction commenced on a 355,000 square-foot shopping center development in Pleasant Hill, California with a projected net cost of approximately $72,000,000.
RESULTS OF OPERATIONS
COMPARISON OF 1998 TO 1997. NET INCOME available to common stockholders for 1998 totaled $13,156,000 compared with $18,698,000 in 1997. Net income for 1998 included a loss of $1,814,000 on the sale of two non-core properties while net income for 1997 included a net gain of $5,896,000 on the sale of three non-core properties. Income before gain (loss) on the sales of real estate, extraordinary item and before income allocated to minority interest increased from $12,899,000 to $25,434,000. Distributions on the Series 1997-A Convertible Preferred Stock issued in connection with the acquisition of the Golden State Properties Portfolio on December 31, 1997 amounted to $5,600,000, while income allocated to minority interest increased to $4,864,000 from $45,000 in 1997.
TOTAL REVENUES increased $63,549,000 to $131,723,000 in 1998 from $68,174,000 in 1997. This increase is primarily attributable to the acquisition of 28 shopping centers in the fourth quarter of 1997 and an additional 14 centers during 1998. The increase also included a one-time lease termination fee of $3,875,000 received in 1998.
RENTAL OPERATING EXPENSES increased $17,827,000 to $36,543,000 in 1998 from $18,716,000 in 1997. This increase is primarily attributable to the aforementioned acquisition activity.
INTEREST EXPENSE increased $17,158,000 to $35,630,000 in 1998 from $18,472,000 in 1997. The increase in interest expense is primarily attributable to an increase in both notes payable and average borrowings under the Company's lines of credit related to the aforementioned acquisition activity. Total debt outstanding (exclusive of $14,828,000 of fixed rate mortgage debt in unconsolidated subsidiaries) on December 31, 1998 and related weighted average interest rate were $575,028,000 and 7.49%, respectively, compared with $550,380,000 and 7.56%, respectively on December 31, 1997. Interest capitalized in conjunction with development and expansion projects was $6,518,000 for 1998, compared with $3,242,000 for 1997.
DEPRECIATION AND AMORTIZATION EXPENSES increased $13,332,000 to $28,607,000 in 1998 from $15,275,000 in 1997. This increase is primarily related to the aforementioned acquisition activity.
GENERAL AND ADMINISTRATIVE EXPENSES increased $2,688,000 to $5,723,000 in 1998 from $3,035,000 in 1997. This increase represents the costs associated with the increased level of operations in the Company, including preparation for administering the new CalPERS joint venture arrangement.
LOSS ON SALE OF REAL ESTATE. Consistent with its policy of disposing of non-core properties when reasonable sales proceeds are available, the Company sold its remaining portion of Plaza Rancho Carmel Shopping Center in 1998 at a loss of $1,814,000, compared with the sale of the original portion of that center and two other non-core properties in 1997 at a net gain of $5,896,000.
Also in 1998, the Company sold the parking garage at its 1000 Van Ness property for $13,125,000. No gain or loss resulted from this sale.
Income allocated to MINORITY INTEREST increased $4,819,000 to $4,864,000 in 1998 from $45,000 in 1997. This increase reflects the issuance of preferred and common operating partnership units as a portion of the consideration for various acquisitions in late 1997 and 1998.
COMPARISON OF 1997 TO 1996. NET INCOME increased $7,427,000 to $18,698,000 in 1997 from $11,271,000 in 1996. The increase in net income was primarily attributable to increased net operating income aggregating $15,157,000, resulting from new leasing and higher levels of expense reimbursement of core portfolio properties and from additional shopping centers acquired or developed in 1997, an increase in income from unconsolidated subsidiaries of $223,000, and an increase in gain on sales of real estate of $3,598,000. The aforementioned increases to net income were partially offset by increases in depreciation and amortization, general and administrative expenses and interest expense of $4,025,000, $620,000, and $7,728,000, respectively.
TOTAL REVENUES increased $20,860,000 to $68,174,000 in 1997 from $47,314,000 in 1996. This increase was primarily attributable to the acquisition activity in 1997.
RENTAL OPERATING EXPENSES increased $5,703,000 to $18,716,000 in 1997 from $13,013,000 in 1996. This increase was primarily attributable to the addition of new properties in 1997.
INTEREST EXPENSE increased $7,728,000 to $18,472,000 in 1997 from $10,744,000 in 1996. The overall increase in interest expense was primarily related to the 1997 acquisitions. The debt outstanding (exclusive of $15,035,000 of fixed rate mortgage debt in unconsolidated subsidiaries) on December 31, 1997 and related weighted average interest rate were $550,380,000 and 7.56%, respectively, compared with $178,452,000 and 8.0%, respectively on December 31, 1996. Interest capitalized in conjunction with development and expansion projects was $3,242,000 for 1997, compared with $1,658,000 for 1996.
DEPRECIATION AND AMORTIZATION EXPENSES increased $4,025,000 to $15,275,000 in 1997 from $11,250,000 in 1996. The increase was primarily attributable to the growth related to the shopping centers acquired in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES increased $620,000 to $3,035,000 in 1997 from $2,415,000 in 1996. The increase was attributable to the growth of the Company primarily related to the 1997 acquisitions and developments.
GAIN ON SALES OF REAL ESTATE. In February 1997, the Company disposed of a portion of its Plaza Rancho Carmel Shopping Center for $735,000. On June 11, 1997, title to the Company's Village Station Shopping Center was conveyed to the holder of the $3,900,000 non-recourse mortgage secured by the property. No gain or loss resulted from either of these events. In December 1997, the Company sold its Pacific West Outlet Center for approximately $38,500,000, resulting in a gain of $5,896,000.
FUNDS FROM OPERATIONS
The Company considers FUNDS FROM OPERATIONS ("FFO") to be a relevant supplemental measure of the performance of an equity REIT since such measure does not recognize depreciation and certain amortization expenses as operating expenses. Management believes that reductions for these charges are not meaningful in evaluating income producing real estate, which historically has not depreciated. Consistent with the standards established in the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts in March 1995, the Company defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring, sales of property and non-recurring items, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. Management believes FFO is helpful to investors as a measure of the performance of an equity REIT because, along with cash flows from operating activities, financing activities and investing activities, it provides investors with an understanding of the ability of the Company to incur and service debt and make capital expenditures. The Company computes FFO in accordance with standards established by the White Paper, which may differ from the methodology for calculating FFO utilized by other equity REITs, and accordingly, may not be comparable to such other REITs. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or to cash flows from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make distributions, needed capital replacements or expansions, debt service obligations, or other commitments and uncertainties. The Company believes that in order to facilitate a clear understanding of the combined historical operating results of the Company, FFO should be examined in conjunction with net income as presented in the consolidated financial statements and information included elsewhere in this report.
In 1998, diluted FFO increased $24,968,000 to $52,022,000, compared with $27,054,000 in 1997. This increase was net of several effects, but was primarily attributable to the acquisition activity during the last quarter of 1997 and 1998. In 1997, diluted FFO increased $6,553,000 to $27,054,000, compared with $20,501,000 in 1996. The increase was net of several effects, but was primarily attributable to the increase in revenues from core portfolio properties, acquisitions, and developments. The Company's calculation of basic and diluted FFO is as follows (in thousands):
CASH FLOWS
COMPARISON OF 1998 TO 1997. Cash and cash equivalents were $20,873,000 and $6,841,000 at December 31, 1998 and 1997, respectively. Cash and cash equivalents increased $14,032,000 during 1998 compared with an increase of $2,746,000 in 1997. The increase is due to a $20,725,000 increase in net cash provided by operating activities from $26,880,000 to $47,605,000 and a $285,889,000 decrease in net cash used by investing activities from $386,348,000 to $100,459,000, offset by a $295,328,000 decrease in net cash provided by financing activities from $362,214,000 to $66,886,000. The principal reasons for the increase in cash provided by operating activities of $20,725,000 are discussed in Results of Operations above. The decrease in net cash used in investing activities of $285,889,000 is primarily attributable to a decrease in acquisitions of real estate and capital improvements of $299,183,000, reimbursements of development costs of $11,362,000, and an advance from joint venture partner of $22,195,000, offset by a decrease in proceeds from sales of real estate of $49,923,000. The decrease in net cash provided by financing activities of $295,328,000 is primarily attributable to a decrease of $316,681,000 in net borrowings resulting from the decrease in acquisition activity, an increase in dividends paid of $15,054,000, and an increase in distributions to minority interests of $5,373,000, offset by an increase in proceeds from the issuance of common stock of $39,807,000.
COMPARISON OF 1997 TO 1996. Cash and cash equivalents were $6,841,000 and $4,095,000 at December 31, 1997 and 1996, respectively. Cash and cash equivalents increased $2,746,000 during 1997 compared with an increase of $2,552,000 in 1996. The increase is due to a $9,324,000 increase in cash provided by operating activities from $17,556,000 to $26,880,000 and a $343,819,000 increase in net cash provided by financing activities from $18,395,000 to $362,214,000, offset by an increase in net cash used by investing activities of $352,949,000 from $33,399,000 to $386,348,000. The principal reasons for the increase in net cash provided by operating activities of $9,324,000 are discussed in Results of Operations above. The increase in net cash used by investing activities of $352,949,000 is primarily attributable to an increase in acquisitions of real estate and capital improvements of $376,776,000, offset by an increase in proceeds from sales of real estate of $24,621,000. The increase in net cash provided by financing activities of $343,819,000 is primarily attributable to an increase in net borrowings of $280,836,000 and an increase in net proceeds from the issuance of common stock of $73,175,000, both relating to the increased acquisition activity.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that cash flow from operating activities will continue to provide adequate capital for all payments on notes payable, tenant improvements, distributions to minority interest holders, preferred stock dividends, and common stock dividend payments in accordance with REIT requirements through the end of 1999. However, the Company will require additional sources of capital to finance the acquisition and development of additional properties. Sources of this additional capital may include cash on hand, borrowings under credit facilities and mortgage indebtedness, proceeds from sales of non-strategic assets, the sale of interests in certain properties to third parties, the issuance of Operating Partnership units to contributors of properties and, to the extent market conditions permit, the issuance of debt or equity securities. However, there can be no assurances that capital necessary to finance future acquisitions and developments will be available on acceptable terms or at all.
The Company satisfied its REIT requirement under the Internal Revenue Code by distributing at least 95% of ordinary taxable income with distributions to stockholders of $36,910,000 in 1998, of which $5,600,000 was to holders of preferred stock and $31,310,000 to holders of common stock. Accordingly, Federal income taxes were not incurred at the corporate level.
FINANCING ACTIVITIES
The acquisitions and developments described above were financed through cash provided from operating activities, revolving credit facilities, new mortgages, mortgages assumed, construction loans, issuance of Operating Partnership units, and issuance of preferred and common stock of the Company. Total debt outstanding at December 31, 1998 was $575,028,000, compared with $550,380,000 at December 31, 1997.
The Company currently maintains a credit facility with Capital Company of America in the amount of $205,000,000 of which $135,000,000 is to be secured by various mortgages and $70,000,000 is unsecured. At December 31, 1998, borrowings of approximately $180,999,000 were outstanding of which $111,018,000 and $69,981,000 were outstanding under the secured and unsecured portions, respectively. Borrowings under the secured and unsecured portions of the credit facility bear interest at rates of LIBOR plus 1.40% and LIBOR plus 1.50%, respectively. In connection with the Company's transfer of substantially all of its assets to the Operating Partnership in December 1997, the Operating Partnership became the principal obligor under the credit facility, which is now guaranteed by the Company. The credit facility is scheduled to mature in November 1999. Capital Company of America has notified the Company that, due to a change in strategic focus, it intends to liquidate its line of credit business in 1999 and, therefore, will not entertain a request to renew the facility at maturity. The Company intends to refinance the facility with another lender prior to the maturity date.
At December 31, 1998, the Company had $5,427,000 outstanding under a construction loan agreement with a bank, secured by one of the Company's development properties. Borrowings under this loan bear interest at LIBOR plus 1.90%. The loan is scheduled to mature in December 1999.
In March 1998, the Company issued 8,440,500 common shares and received net proceeds of approximately $112,471,000, which was used to retire debt. In May 1997, the Company issued 6,325,000 common shares and received net proceeds of approximately $73,125,000, which was used to retire debt.
On December 31, 1997, the Company issued 2,800,000 shares of Series 1997-A Convertible Preferred Stock to affiliates of Westbrook Real Estate Partnership II, L.P., and Westbrook Real Estate Co-Investment Partnership II, L.P. and received $70,000,000 of proceeds. The Company used the proceeds to finance, in part, the acquisition of the Golden State Properties Portfolio. The Series A Preferred Stock has a dividend yield of 8% and is convertible into common stock at a conversion price per share initially equal to $15.375. At the same time, the Company issued 2,000,000 Series 1997-A Preferred Limited Partnership Units (the "Preferred Units") of the Operating Partnership to Blackacre Capital Group, L.P. and Highridge Partners representing $50,000,000 of the initial consideration for the acquisition of the Golden State Properties Portfolio. The Preferred Units were issued on terms comparable to the Company's Series A Preferred Stock and, subject to the satisfaction of certain conditions, are exchangeable on a 1-for-1 basis for shares of Series A Preferred Stock.
Portions of the consideration for seven shopping centers acquired during 1998 and six shopping centers acquired during 1997 consisted of an aggregate of 1,195,007 and 576,129 Common Units of the Operating Partnership, respectively (or of other limited partnership subsidiaries of the Operating Partnership). Subject to the satisfaction of certain conditions, each such Common Unit is exchangeable on a 1-for-1 basis for a share of Common Stock of the Company.
At December 31, 1998, the Company's capitalization consisted of $575,028,000 of debt (excluding the Company's proportionate share of joint venture mortgage debt of $14,828,000), $120,000,000 stated value of Preferred Stock and Preferred Limited Partnership Units of the Operating Partnership, and $408,430,000 of market equity (market equity is defined as (a) the sum of (i) outstanding shares of Common Stock of the Company and (ii) outstanding Common Units of the Operating Partnership, held by partners of the Operating Partnership other than the Company, multiplied by (b) the closing price of the shares of Common Stock on the New York Stock Exchange at December 31, 1998 of $12.0625) resulting in total debt plus equity capitalization of $1,103,458,000 and a ratio of debt to total capitalization of .52 to 1.0. Comparable ratios at December 31, 1997 and 1996 were .53 to 1.0 and .41 to 1.0, respectively. At December 31, 1998, the Company's total debt consisted of $371,910,000 of fixed rate debt, and $203,118,000 of variable rate debt.
It is management's intention that the Company has access to the capital resources necessary to expand and develop its business. Accordingly, the Company may seek to obtain funds through additional borrowings and public offerings and private placements of debt and equity securities. At December 31, 1998, the Company had effective shelf registration statements on file with the Securities and Exchange Commission relating to an aggregate of $202,144,000 registered and unissued equity securities.
INVESTMENT IN JOINT VENTURES
In August 1998, the Operating Partnership and CalPERS entered into a joint venture agreement for the acquisition of neighborhood, community, promotional and specialty shopping centers in the western United States. The joint venture agreement contemplates an aggregate $400,000,000 investment by CalPERS and $100,000,000 investment by the Operating Partnership, and provides for up to $165,000,000 of leverage through mortgage or line of credit borrowings by the joint venture. On October 1, 1998, CalPERS made an initial contribution to the joint venture of five retail properties valued at approximately $80,000,000. During the fourth quarter, the joint venture purchased five retail properties for approximately $38,261,000. On December 22, 1998, the Operating Partnership made an initial contribution of two retail properties valued at approximately $22,195,000. On the same date, the Operating Partnership withdrew approximately $22,195,000 in cash from the joint venture pending finalization of the remainder of its required contributions, which is expected to be completed in the first quarter of 1999. The Company expects to conduct a significant portion of its acquisition activity during 1999 in the CalPERS joint venture.
On March 9, 1999, the joint venture agreed to acquire 28 shopping centers owned by AMB Property Corporation aggregating 5.1 million square feet for approximately $663.4 million. The properties are to be acquired in three separate transactions, currently expected to close on or about April 30, July 31, and December 1, 1999. The Company has agreed to acquire six additional shopping centers from AMB aggregating 1.5 million square feet for approximately $284.4 million; if completed, this purchase, which is subject to the Company's obtaining financing and other conditions, is currently expected to close by year-end 1999. In connection
with the AMB transaction, CalPERS and the Company agreed to increase the aggregate amount of indebtedness that the joint venture might incur through December 31, 2000 to approximately $450,000,000 and the Company granted CalPERS an option expiring June 30, 2000 to purchase 1 million shares of Common Stock of the Company at an exercise price of $15.375 per share.
YEAR 2000 ISSUES
The statements under this caption include "Year 2000 Readiness Disclosures" within the meaning of the Year 2000 Readiness Disclosure Act of 1998, which Act does not, however, relieve the Company from any responsibilities or liabilities it may have under the Federal securities laws.
The Company continues to identify its Year 2000 issues, with the evaluation process approximately half completed at December 31, 1998. The Company's approach to becoming Year 2000 ready includes a standard set of methods and tools, including taking inventory, renovating if necessary, and testing. Management does not believe that the costs associated with becoming Year 2000 ready will exceed $250,000. The manufacturer of the accounting software that the Company uses has indicated that its software is materially Year 2000 ready and a version of the software which is fully Year 2000 ready will be available during the first quarter of 1999. Depending on the timing of the availability of this updated software, the Company plans to install it in the first or the second quarter of 1999. The Company believes that the hardware used to run its software is Year 2000 ready.
The Company is completing an inventory of the Year 2000 readiness status of the computer hardware and software used to run the property operating systems such as security, energy, elevator and safety systems at its properties. Once this inventory is complete, the Company will test the time-sensitive systems that it believes to be Year 2000 ready. Any systems found not to be Year 2000 ready will be reprogrammed or replaced.
The Company's ability to complete the Year 2000 modifications outlined above prior to any anticipated impact on its operating systems is based on numerous assumptions of future events and is dependent upon numerous factors, including the ability of third party software and hardware manufacturers to make necessary modifications to current versions of their products, the availability of resources to install and test the modified systems and other factors. Accordingly, these modifications may not be successful.
Even if all of its own systems are Year 2000 ready, the Company's business could still be disrupted if its tenants, business partners, suppliers and other parties are not ready. Management is currently surveying material vendors and tenants regarding the Year 2000 readiness status of their computer hardware and software, and will review the results of this survey, assess the impact of the results on the Company's operations and take appropriate corrective actions. Testing may be required for several, but not all, third parties. Test strategies and schedules will be tailored to each situation once management understands the respective requirements and readiness levels.
The Company's business could be harmed if other entities, including the governmental units and utility companies that provide services to its properties and their respective tenants and customers fail to be Year 2000 ready. In addition to significant tenants, the Company is seeking to ascertain the Year 2000 readiness of each utility company servicing each property and of each
city, town, county or other governmental unit providing police, fire, traffic control and other governmental services relevant to the efficient operation of the property.
After the survey of the Year 2000 readiness of other parties, management intends to determine if the Company will need any contingency plans to deal with the non-readiness of others. At the present time, management does not believe that Year 2000 non-readiness of tenants is likely to have any significant effect on the Company and its operations. However, if a major tenant is not Year 2000 ready, its business could suffer. This could result in that tenant's inability to pay rent, and a decrease in customer traffic and business of other tenants at that property.
Management does not anticipate that contingency plans will be needed to deal with tenant non-readiness. However, contingency plans may be needed to provide for the continued operation of one or more individual properties whose suppliers of services necessary for the efficient operation of the property may not be fully Year 2000 ready by January 1, 2000. Management believes that the most reasonable worst-case Year 2000 scenario that may affect the Company would be a prolonged failure of a supplier of these services, particularly utility services, that may harm operations of one or several tenants at one or several locations.
EFFECTS OF INFLATION
Substantially all of the Company's leases contain provisions designed to mitigate the adverse impact of inflation. Such provisions include clauses enabling the Company to receive percentage rentals based on tenants' gross sales, which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the leases. Such escalation clauses are often related to increases in the consumer price index or similar inflation indices. Most of the Company's leases require the tenant to pay its share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in these operating expenses resulting from inflation to the extent that its properties are occupied. The Company periodically evaluates its exposure to short-term interest rates and may, from time to time, enter into interest rate protection agreements which mitigate, but do not eliminate, the effect of changes in interest rates on its floating-rate loans.
CERTAIN CAUTIONARY STATEMENTS
Certain of the statements in this Management's Discussion and Analysis section are forward-looking statements. See "Forward Looking Statements and Certain Risk Factors" at the beginning of this report for certain risks, uncertainties and other factors which may cause the actual results of the Company to be materially different from historical results or from any results expressed or implied by such forward-looking statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
The Company's quantitative and qualitative disclosures of market risk can be found in the "Forward Looking Statements and Certain Risk Factors" at the beginning of this report; "Indebtedness" (Item 2 herein); "Financing Activities" (Item 7 herein); and Notes 2, 4 and 5 to the consolidated financial statements (Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Burnham Pacific Properties, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in Item 14(a). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Burnham Pacific Properties, Inc. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
//Deloitte & Touche LLP// San Diego, California February 23, 1999 (March 9, 1999 as to paragraph 4 of Note 18)
BURNHAM PACIFIC PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997
(in thousands, except share amounts)
BURNHAM PACIFIC PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (in thousands, except per share amounts)
BURNHAM PACIFIC PROPERTIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1998, 1997 and 1996 (in thousands, except share amounts)
BURNHAM PACIFIC PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (in thousands)
BURNHAM PACIFIC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Burnham Pacific Properties, Inc. (the "Company") is a real estate operating company which acquires, rehabilitates, develops and manages retail properties in the western United States. On November 14, 1997, the Company formed Burnham Pacific Operating Partnership, L.P. (the "Operating Partnership") under the Delaware Revised Uniform Limited Partnership Act, and subsequently transferred to the Operating Partnership legal or beneficial ownership of substantially all of the real property and related personal property owned by the Company and its subsidiaries and of the beneficial interest owned by the Company and its subsidiaries in any partnership or limited liability company that owns a direct or indirect interest in real property and related personal property. The Operating Partnership is the vehicle through which the Company owns its current properties, will make its future acquisitions, and generally conducts its business.
As of December 31, 1998, the Company owns an approximately 86.1% economic interest in the Operating Partnership and is its sole general partner.
The Company, primarily through the Operating Partnership and subsidiaries of the Operating Partnership, owns interests in 72 retail shopping centers, 71 of which were fully operational, and one of which is being developed. Fifty-five of the properties are located in California, nine in Washington, five in Oregon, two in New Mexico, and one in Utah. As of December 31, 1998, the Company also owned four office/industrial properties located in Southern California. The Company has elected to qualify as a real estate investment trust ("REIT") for Federal income tax purposes.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the Company and the Operating Partnership and subsidiaries of the Operating Partnership. All significant intercompany balances and transactions have been eliminated in consolidation.
The 13.9% limited partner interest in the Operating Partnership not owned by the Company is reflected in these financial statements as minority interest.
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.
REAL ESTATE
Real estate is stated at cost or, in the case of real estate which management believes is impaired, at the lower fair value of such properties. Additions, renovations and improvements are capitalized. The Company reviews real estate 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. Maintenance and repairs which do not extend asset lives are expensed as incurred. Depreciation is computed using the straight-line method over estimated useful lives ranging from 14 to 30 years for buildings, 2 to 17 years for improvements, and 3 to 10 years for furniture, fixtures and equipment.
AMORTIZATION
Deferred loan fees, direct lease costs and certain other costs are amortized using the straight-line method over the related estimated life.
STRAIGHT-LINE RENT
As of December 31, 1998 and 1997, approximately $4,973,000 and $2,463,000, respectively, of straight-line rent is included in Other Assets.
INCOME TAXES
Income taxes have not been provided as the Company believes that it has met all requirements in 1998, 1997 and 1996 to qualify as a REIT under Internal Revenue Code Sections 856-860 including the distribution of at least 95% of ordinary taxable income to stockholders. Taxable income differs from net income for financial reporting purposes principally because of differences in the timing of recognition of interest, depreciation, rental revenue, and sales of assets. The reported amounts of the Company's net assets at December 31, 1998 was greater than their tax basis for Federal purposes by approximately $52,299,000.
NET INCOME PER SHARE
Net income per share is calculated using the weighted average number of shares outstanding during each year. At December 31, 1997, the Company adopted the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share (EPS). This statement requires the presentation of earnings per share to reflect both "Basic EPS" and "Diluted EPS" on the face of the income statement.
Basic earnings per share is calculated on the weighted average shares of common stock outstanding during the period. Diluted earnings per share includes the effect of all potential common shares.
The following table is the reconciliation from the basic to the diluted EPS computations for "net income" for 1998, 1997 and 1996 (in thousands, except per share amounts):
In 1998, dividends and shares from conversion of Preferred Stock and minority interest and shares from the conversion of operating partnership units were excluded from the diluted earnings per share calculations because they were anti-dilutive. (There was no Preferred Stock for the 1996 period presented).
Options to purchase 329,373 shares at price ranges of $14.50 to $18.88 per share were outstanding as of December 31, 1998, but were not included in the computation of diluted EPS because the options' exercise price was greater than the market price of the Common Stock of the Company.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash and certificates of deposit with original maturities of less than 90 days.
RESTRICTED CASH
Restricted cash is required to be held in escrow accounts as specified by the terms of certain of the Company's notes payable at December 31, 1998 and 1997. The restricted cash is to be used to pay for insurance, taxes and capital expenditures pertaining to the related real estate that collateralizes the notes payable.
ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of approximately $1,778,000 and $1,311,000 at December 31, 1998 and 1997, respectively.
FINANCIAL INSTRUMENTS
The carrying values reflected in the consolidated balance sheets at December 31, 1998 and 1997 reasonably approximate the fair values for cash and cash equivalents, receivables, accounts payable, and line of credit advances. In making such assessment, the Company has utilized discounted cash flow analyses, estimates, and quoted market prices as appropriate. At December 31, 1998, the Company estimated that the fair value of notes payable was greater than their carrying value by approximately $2,620,000. At December 31, 1997, the Company estimated that the fair value of notes payable was lower than their carrying value by approximately $9,736,000.
REDEEMABLE SECURITIES
At December 31, 1997, the Company had a contingent obligation to redeem 1,126,386 shares of its 2,800,000 shares of Series 1997-A Convertible Preferred Stock outstanding; therefore, the value of such potentially redeemable shares of approximately $28,160,000 was not included in Stockholders' Equity at December 31, 1997. During 1998, this contingent obligation was relieved and as a result, $28,160,000 was reclassified into Stockholders' Equity.
STATEMENT OF POSITION 98-5
In April 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-up Activities. This SOP requires that entities expense the costs of start-up activities and organization costs as incurred. The Company will be required to adopt the SOP in the first quarter of 1999 as a cumulative effect of a change in accounting principle. The implementation of this SOP will require the Company to write-off unamortized organization costs of approximately $2,500,000.
RECLASSIFICATIONS
Certain of the 1997 and 1996 amounts have been reclassified to conform to the 1998 presentation.
2. REAL ESTATE
SUMMARY: Real Estate is summarized as follows (in thousands):
The real estate is leased to tenants under leases expiring at various dates through 2047. Certain of these leases contain provisions for rent increases based on cost-of-living indices and certain leases contain renewal options of up to 55 years. Future minimum rental income to be received by the Company under the terms of these operating leases is as follows as of December 31, 1998 (in thousands):
Fifty-eight properties, including the twenty-eight Bankruptcy Remote Properties described in the following paragraph, having a net book value of approximately $878,871,000 at December 31, 1998, are pledged as collateral for notes payable described in Notes 4 and 5. In addition, the notes are secured by assignments of rents on such real estate. Certain real estate is located on land which is subject to noncancelable ground leases expiring at various dates through 2089 with minimum annual lease payments of approximately $2,370,000.
BANKRUPTCY REMOTE PROPERTIES: Twenty-eight properties having a net book value of approximately $515,865,000 at December 31, 1998, (collectively the "Bankruptcy Remote Properties," and each a "Bankruptcy Remote Property") are wholly-owned by various "Bankruptcy Remote Entities". Each Bankruptcy Remote Entity is an indirect subsidiary of the Company. The assets of each Bankruptcy Remote Entity, including the respective Bankruptcy Remote Property or Properties owned by each, are owned by that Bankruptcy Remote Entity alone and are not available to satisfy claims that any creditor may have against the Company, its affiliates, or any other person or entity. No Bankruptcy Remote Entity has agreed to pay or make its assets available to pay creditors of the Company, any of its affiliates, or any other person or entity. Neither the Company nor any of its affiliates has agreed to pay or make its assets available to pay creditors of any Bankruptcy Remote Entity (other than any agreement by a Bankruptcy Remote Entity to pay its own creditors). No affiliate of any Bankruptcy Remote Entity has agreed to pay or make its assets available to pay creditors of any Bankruptcy Remote Entity.
DEVELOPMENT PROPERTIES: During 1995, the Company and various persons affiliated with The Martin Group of Companies, Inc., a San Francisco-based real estate development firm owned by J. David Martin, president and chief executive officer of the Company, executed definitive documents relating to the Company's acquisition of interests in certain retail properties in the San Francisco Bay area (the "Martin Properties"). Each of the Martin Properties is currently owned by a separate limited partnership of which the Company is general partner and Mr. Martin and various other persons affiliated with The Martin Group (collectively, including Mr. Martin, the "Martin Group Affiliates") are the limited partners. Each of the partnership agreements contemplates that the Company will acquire or develop a specified Martin Property through the relevant partnership and that upon completion and stabilization of rental revenues from the property, the limited partners will receive a number of limited partnership units determined as follows: (i) the annualized net operating income of the Martin Property will be multiplied by 10 in order to arrive at a hypothetical value of the completed property, (ii) the cost of construction and other project costs will be deducted from such hypothetical value in order to "value" the equity interests of the limited partners in the Martin Property, and (iii) such equity interest will be stated as a number of limited partnership units determined by dividing such
limited partners' equity by $16. Each holder of limited partnership units will have the right to "put" such units to the partnership at a price equal to the then market value of an equivalent number of shares of the Company's Common Stock. As a result, the actual value which a holder of limited partnership units would be entitled to receive upon exercise of such "put" option will depend upon the market value of the Common Stock at the time, which may be more or less than $16 per limited partnership unit. If such "put" is exercised, the Company has the option of either purchasing the limited partnership units for cash or delivering one share of Common Stock for each limited partnership unit.
Each partnership agreement specifies the maximum number of limited partnership units that may be issued to the limited partners of that partnership. If the hypothetical equity value of any such partnership is determined to be less than originally estimated (either because project costs are higher than estimated or because stabilized net operating income is less than estimated or both), then the number of limited partnership units and the corresponding number of shares of Common Stock of the Company which may be exchanged for such units will be reduced. Other than to reflect a stock split or other capital adjustment of the shares of Common Stock, under no circumstances can the number of units be increased above the number specified in the applicable partnership agreement. Limited partnership units exchangeable for 118,403 shares of Common Stock have been issued to the Martin Group Affiliates as of December 31, 1998. At December 31, 1998 and 1997, these partnership units had a cost basis of $1,742,000 and $477,000, respectively and are reflected as minority interest in the accompanying consolidated financial statements. A maximum of 1,000,000 shares of Common Stock have been reserved for issuance upon exchange of the maximum number of 1,000,000 limited partnership units that may be issued with respect to the remaining Martin Properties. In connection with each of the Martin Properties, the Company entered into a registration rights agreement with the limited partners of each limited partnership pursuant to which such limited partners will have the right to require the Company to register under the Securities Act the shares of Common Stock which are issued upon the exchange of limited partnership units for offer and sale to the public and to join in certain registrations of securities of the Company. The total remaining project costs (exclusive of partnership units representing the equity interest of the limited partners) for the Martin Properties are estimated at approximately $44,000,000 at December 31, 1998.
On November 30, 1998, the Company, through a subsidiary, entered into a purchase and sale agreement (the "Agreement") whereby the Company sold, at its cost, a portion of the improvements made by the Company to the historic commercial portion of its development project known as 1000 Van Ness (the "Project") to Historic Van Ness, LLC ("Historic Van Ness"). The purchase price of $15,118,000 was paid by Historic Van Ness by it assuming the same amount of the Company's construction loan on the Project and may be adjusted within sixty days after the completion of all improvements to the historic commercial portion of the Project. This transaction was accounted for by the Company as a financing transaction. The improvements purchased by Historic Van Ness are considered to be Qualified Rehabilitation Expenditures ("QRE") for Federal income tax purposes (as defined in the Internal Revenue Code of 1986), which generates a rehabilitation tax credit (the "Historic Tax Credit"). The construction loan assumed by Historic Van Ness matures in December 1999 subject to a right to extend for approximately nine months. In this regard, the Company has committed to make a loan to Historic Van Ness to refinance the construction loan of up to $15,150,000 less the amount of any permanent loan (not to exceed $7,000,000) allocable to the historic commercial portion of the Project. The term of the loan by the Company would be for ten years, plus three
ten year options. The rate of interest on the Company's commitment will be determined when the loan is finalized. This commitment expires on December 31, 2000.
The Company has an option (the "Option") during the period from January 1, 2005 to December 31, 2006 to purchase the interest of the investor member of Historic Van Ness for an amount equal to the then fair market value (as defined in the Option Agreement) of such interest.
Simultaneously with the Agreement, the Company through two subsidiaries entered into a Master Lease Agreement and Master Sublease Agreement (the "Master Leases") with Historic Van Ness, whereby one of the subsidiaries leased the remaining historic commercial portion of the Project to Historic Van Ness and the other subsidiary subleased from Historic Van Ness certain retail space contained within the remaining historic commercial portion of the Project. The Master Leases commenced on December 1, 1998 and have a term of forty-five years and forty years for the Master Lease and Master Sub-Lease, respectively. Both leases will terminate should the Company exercise the Option to buy out the investor member of Historic Van Ness. The Agreement also stipulates that the Company's subsidiary pay Historic Van Ness $320,000 for each calendar year that the Master Lease is in effect for the use of the common area of the historic commercial portion of the Project (the "Common Area Lease").
Future net minimum lease payments to be made by the Company's subsidiaries under the terms of the Master Leases and Common Area Lease are as follows as of December 31, 1998:
The present value of the minimum lease payments is reflected in notes payable in the accompanying consolidated balance sheet (see Note 4).
In connection with the above agreements, the Company has guaranteed completion of the historic commercial portion of the Project which is estimated to be approximately $1,100,000. In addition, the Company has guaranteed, within certain circumstances and limits, the Historic Tax Credits of the investor member in Historic Van Ness, which maximum amount, depending on those certain circumstances and limits, is estimated to be between $640,000 and $3,200,000.
3. INVESTMENTS
During 1998, the Operating Partnership entered into a joint venture whereby the Operating Partnership and the state of California Public Employees' Retirement System ("CalPERS") are the sole members of a limited liability company, BPP Retail, LLC, whose operating agreement constitutes the joint venture agreement (the "Agreement") between the Operating Partnership and CalPERS ("JV"). The Agreement, dated August 31, 1998, contemplates that generally CalPERS will have an 80% interest and the Operating Partnership a 20% interest in the JV, whose purpose
is to serve as the vehicle through which the parties invest in neighborhood, community, promotional and specialty retail centers in the western United States. The Operating Partnership is the manager of the JV.
As of October 1, 1998, CalPERS made an initial contribution to the JV of five retail properties in Colorado, Texas and Oregon, valued at approximately $80,000,000, of which it had previously been the sole owner under arrangements with previous advisors. During the fourth quarter of 1998 the JV completed the acquisition of interests in five additional retail shopping centers for an aggregate purchase price of approximately $38,261,000 (see Note 12). In December 1998, the Operating Partnership and CalPERS entered into an Agreement Regarding Contribution of Certain Properties and Put Options, related to two of the Operating Partnership's retail properties (the "Contributed Projects"). The purpose of this option agreement was to permit the Operating Partnership to contribute the Contributed Projects into the JV even though CalPERS had not received all the required information (such as appraisals) to approve or disapprove the contribution. As a condition of permitting this contribution, CalPERS was granted an option (the "Put Option") to require that the JV rescind all or a portion of the contribution as CalPERS may elect in its sole discretion, after receiving and reviewing all the information as required in the Agreement of the JV. Upon the signing of this option agreement, the JV provided the Operating Partnership approximately $22,195,000 (the "Net Asset Value") in exchange for the economic interests in the Contributed Projects and the Put Option. Should CalPERS direct the JV to rescind all or a portion of the contribution, the related portion of the Net Asset Value must be returned by the Operating Partnership to the JV. Due to the Put Option, the consolidated balance sheet of the Company as of December 31, 1998 continues to include the net book value of the Contributed Assets, and the monies received for the Net Asset Value is included in accounts payable and other liabilities. The Put Option expires during the first quarter of 1999. During the first quarter of 1999, the Operating Partnership intends to contribute properties owned directly by the Operating Partnership for purposes of its initial contribution. The Agreement contemplates an aggregate $400 million investment by CalPERS and $100 million investment by the Operating Partnership through the period ending December 31, 1999, and provides for up to $165 million of leverage through mortgage or line of credit borrowings by the JV. Subject to certain qualifications, in making future acquisitions, the Operating Partnership is committed to offer qualifying retail property investment opportunities to the JV until the parties' respective investment obligations are satisfied, before making such acquisitions solely for its own direct account. There can be no assurance that the investment goals of the JV will be satisfied or that the parties may not agree to expand such goals or to vary their respective 80/20% participation in the JV.
CalPERS is entitled to a priority return on its investment in the JV before any return is paid to the Operating Partnership. The priority return is equal to a 5.00% "real" (i.e., inflation adjusted) annual rate of return plus (i) a premium, depending upon the type of property, from 50 basis points on existing shopping center projects to 200 basis points on speculative development projects and 300 basis points on undeveloped land, and (ii) a further premium of up to 60 basis points depending upon the currently anticipated leverage on the properties owned by the JV.
The Operating Partnership will receive specified annual asset management fees, property management fees, leasing, acquisition, disposition and development fees. In addition, after the priority return to CalPERS, the Operating Partnership will be entitled to receive an incentive distribution equal to 25% of the excess of the real internal rate of return over the real return benchmark.
The Agreement specifies a term of 30 years, contemplates a real estate cycle of nine years, and provides for the cumulative measurement of performance and total return. Accordingly, it is possible that in some years the Operating Partnership may not receive any distribution (other than the specified fees) with respect to its investment in the JV, because of its return being subordinated to CalPERS' priority return, although shortfalls in any year may be made up by performance in subsequent years. Also under certain circumstances, the return of the Operating Partnership's capital may be subordinated to the return of CalPERS' capital. While the payment of distributions to the Operating Partnership are subordinated to the payment of distributions to CalPERS, the Operating Partnership is not responsible to repay distributions that have been paid with respect to any prior period.
Notwithstanding the specific duration and expected real estate cycle of the JV, either CalPERS or the Operating Partnership may terminate early the JV upon giving specified advance notice. Subject to certain limitations, either party may also cause the JV to sell any particular property. Also subject to certain limitations, CalPERS may elect to convert its JV interest in one or more designated properties into up to an aggregate of 9.8% of the number of shares of Common Stock of the Company then outstanding, with the number of shares to be issued to be determined pursuant to a formula based upon a number of factors including the net operating income of the properties involved, debt to market capitalization, weighted cost of debt and the Company's recent stock price at the time of the conversion.
Under the Agreement, the Operating Partnership is obligated to observe a number of policies established by CalPERS with respect to its investments generally, to consult regularly with CalPERS relative to its policies for real estate investments particularly, to establish an annual business plan for the JV that is subject to CalPERS' approval, to advise CalPERS concerning major developments, and to obtain CalPERS' approval before taking specified major activities with respect to the properties. The fair market value of each property will be determined annually by an independent appraiser selected by CalPERS. CalPERS has the right to terminate the Operating Partnership as the manager of the JV and as property manager of the JV properties at any time, in which event both parties have the unilateral right to terminate the JV. See Note 18 for a description of subsequent events involving the JV.
In addition, during the year ended December 31, 1998, the Company and certain of its subsidiaries completed the acquisition of 14 retail shopping centers totaling approximately 1,017,000 square feet of Company owned GLA for an aggregate purchase price of approximately $98,343,000 (see Note 12).
During the year ended December 31, 1997, the Company and certain of its subsidiaries completed the acquisition of 42 retail shopping centers totaling approximately 5.6 million square feet of Company-owned GLA for an aggregate purchase price of approximately $598,100,000 (see Note 12). Included in this acquisition activity was the acquisition on December 31, 1997, of a portfolio of twenty shopping centers (the "Golden State Properties") containing approximately 2.6 million square feet of gross leasable area, all of which are located in California, and the related financing thereof. Pursuant to the terms of the agreement to contribute dated as of December 5, 1997 (the "Contribution Agreement") by and among the Company and certain investment funds (the "Contributors"), on December 31, 1997, the Contributors contributed the Golden State Properties to the Company's Operating Partnership in exchange for initial consideration of approximately $302,400,000. Of this consideration $50,000,000 was in the form of 2,000,000 preferred limited partner units of the Operating Partnership ("Preferred Units") (see Note 9). The Company financed the cash portion of the acquisition price of the Golden State
Properties through the privately negotiated sale of $70,000,000 of the Company's newly-designated and issued Series 1997-A Convertible Preferred Stock (see Note 9), the borrowing of first mortgage debt collateralized by nineteen of the Golden State Properties (see Note 4) and additional borrowings under its existing credit facility (see Note 5).
The Contributors were given the right to receive additional consideration of up to $41,600,000 for additional value resulting from the lease-up of certain specified portions of the Golden State Properties and construction and lease-up of certain additional space through June 30, 1999. During 1998, additional consideration of approximately $9,356,000 was paid out in cash to the Contributors. At December 31, 1998, $9,812,000 is recorded under the caption accounts payable and other liabilities for additional consideration earned but not paid.
4. NOTES PAYABLE
Notes payable are summarized as follows (in thousands):
Interest expense for the years ended December 31, 1998, 1997 and 1996 is reported net of capitalized interest totaling approximately $6,518,000, $3,242,000 and $1,658,000, respectively.
Principal maturities on the notes payable are summarized as follows (in thousands):
During February 1997, the Company paid off mortgage loans secured by one of its shopping
centers with borrowings under the Company's credit facilities. In addition, the Company refinanced a variable rate mortgage loan secured by another property with a fixed rate mortgage loan. In connection with these extinguishments of debt, the Company recorded an extraordinary loss of $52,000.
On December 31, 1997, the Company, through a Bankruptcy Remote Entity (see Note 2), sold to Nomura Asset Capital Corporation an 8.33%, $135,040,000 mortgage promissory note due December 31, 2007 for $150,000,000, being the equivalent of a 6.76%, $150,000,000 mortgage promissory note with the same maturity. The Company has accounted for the sale of the mortgage note and the payment of principal and interest thereon as if the note were a 6.76%, $150,000,000 mortgage promissory note. The first mortgage debt is collateralized by nineteen of the twenty Golden State Properties. The proceeds of this mortgage financing were used to finance, in part, the acquisitions of the Golden State Properties pursuant to the Contribution Agreement (see Note 3).
5. LINE OF CREDIT ADVANCES
In November 1996, the Company obtained a $90,000,000 revolving credit facility secured by certain real estate on which outstanding borrowings accrued interest at LIBOR (London Interbank Offer Rate) plus 1.65% and a $45,000,000 unsecured credit facility under which outstanding borrowings accrued interest at LIBOR plus 1.75%. During the third quarter of 1997, the Company obtained an increase in the borrowing capacity under its revolving credit facility from $135,000,000 to $205,000,000 of which $135,000,000 is to be secured by various mortgages and $70,000,000 is unsecured. The Company also negotiated a reduction of .25% in the interest rate to LIBOR plus 1.40% and LIBOR plus 1.50% on the secured and unsecured portions, respectively. At December 31, 1998 and 1997, the average rate of interest on line of credit advances was approximately 7.07% and 7.41%, respectively. At December 31, 1998, borrowings of approximately $180,999,000 were outstanding of which $111,018,000 and $69,981,000 were outstanding under the secured and unsecured portions, respectively. The credit facility is scheduled to mature in November 1999, and is subject to various loan covenants. The lender has notified the Company that, due to a change in strategic focus, it intends to liquidate its line of credit business in 1999 and, therefore, will not entertain a request to renew the credit facility at maturity. The Company intends to refinance the credit facility with another lender prior to the maturity date.
6. CONVERTIBLE DEBENTURES
On March 6, 1992, the Company issued $75,000,000 of 8-1/2% Convertible Debentures due 2002 at $1,000 per Debenture. During November 1996, the Company redeemed the remaining balance of these Convertible Debentures at par ($25,700,000). Proceeds for the redemption were obtained from borrowings under the Company's credit facilities. In connection with this extinguishment of debt, the Company recorded an extraordinary loss of $884,000.
7. SALES OF REAL ESTATE
On August 4, 1998, the Company sold the parking garage of its 1000 Van Ness project for approximately $13,125,000. Proceeds of $7,875,000 were used to reduce borrowings under a construction loan secured by this project, with the remaining proceeds used to reduce borrowings under the Company's credit facility. No gain or loss resulted from such sale. At December 31, 1998, the Company sold its remaining portion of Plaza Rancho Carmel. Net
proceeds from the disposition totaled approximately $2,420,000, resulting in a loss of approximately $1,814,000.
At December 30, 1997, the Company sold the Pacific West Outlet Center. Proceeds from the disposition totaled approximately $38,500,000, resulting in a gain of approximately $5,896,000. Two other properties were disposed of without realization of gain or loss during 1997. During 1996, the Company disposed of the McDonnell Douglas Building, Highlands Plaza, the Fireman's Fund Building, the Miramar Business Plaza and its interest in the building which contains its corporate headquarters. Proceeds from the dispositions totaled approximately $40,874,000, resulting in a gain of approximately $2,298,000.
8. DIVIDEND DISTRIBUTIONS
The status of the Common Stock dividends distributed for 1998, 1997 and 1996 for Federal income tax purposes is as follows:
9. ISSUANCE OF SECURITIES
SERIES 1997-A CONVERTIBLE PREFERRED STOCK: On December 31, 1997, the Company issued 2,800,000 shares of Series 1997-A Convertible Preferred Stock, par value $.01 per share (the "Series A Preferred Stock") in a privately-negotiated sale at a price of $25.00 per share. The Series A Preferred Stock has a cumulative dividend yield of 8%. On and after December 31, 1998, March 31, 1999, June 30, 1999, and September 30, 1999 (or earlier in the event of certain defined events), each holder of shares of Series A Preferred Stock has the right to convert 25% of the shares of Series A Preferred Stock held of record by the holder into a number of shares of Common Stock equal to (i) the stated value plus the amount, if any, of the per share amount of outstanding dividends as of the effective time of the conversion, divided by (ii) the conversion price, initially equal to $15.375. After the fifth anniversary of the date of the first issuance of shares of Series A Preferred Stock, the Company may give notice of mandatory conversion of all of the outstanding Series A Preferred Stock if the value of the Common Stock (both on the day prior to the notice of conversion and on a value weighted basis over a period of time prior to such date) is greater than the initial conversion price; and after such notice all such outstanding shares shall be mandatorily converted into Common Stock, except that each holder of Series A Preferred Stock shall have the right, prior to the date established for such mandatory conversion, instead to cause the Company to redeem such holder's Series A Preferred Stock at its stated value plus accrued dividends to the redemption date multiplied by a percentage equal to 105% if the redemption date is prior to December 31, 2003, decreasing by 1% each year thereafter (but not less than 100% after December 31, 2007). The Company used the proceeds of the sale to finance, in part, the acquisition of the Golden State Properties (see Note 3).
COMMON STOCK: On March 30, 1998, the Company issued 7,475,000 shares of Common Stock at a public offering price of $14.125 per share. In addition, on March 30, 1998, the Company issued 965,518 shares of Common Stock to a Unit Investment Trust at a price based upon the March 25, 1998 market value of $14.50 per share. The combined shares were sold pursuant to the Company's shelf registration statements. The net proceeds from the combined
offerings of approximately $112,471,000 were used to reduce borrowings under the Company's credit facility, pay off the balance outstanding under a construction loan agreement secured by one of the Company's development properties and for general working capital purposes. On May 2, 1997, the Company issued 6,325,000 shares of Common Stock at a public offering price of $12.375 per share. The shares were sold pursuant to a previously filed $200 million shelf registration statement. The net proceeds of the offering of approximately $73,125,000 were used to reduce borrowings under the Company's credit facilities.
PREFERRED OPERATING PARTNERSHIP UNITS: On December 31, 1997, 2,000,000 Series 1997-A Preferred Limited Partner Units of the Operating Partnership (the "Preferred Units") were issued at a price of $25.00 per unit. After approximately a year and subject to certain conditions, Preferred Units are exchangeable at the option of the holder for Series A Preferred Stock on a 1-for-1 basis. Each Preferred Unit has substantially identical distribution and liquidation rights as each share of Series A Preferred Stock. Such Preferred Units are classified as minority interest at December 31, 1998 and 1997. The Company used the proceeds of the sale to finance, in part, the acquisition of the Golden State Properties (see Note 3). At December 31, 1998 and 1997, 2,000,000 shares of preferred stock were reserved for issuance upon the potential redemption of 2,000,000 preferred units.
ISSUANCE OF PARTNERSHIP UNITS "PUT" RIGHTS OF COMMON UNITS: Under the partnership agreement of the Operating Partnership, whenever the Company issues any shares of Common Stock or Preferred Stock, the Company must contribute the proceeds of such issuance to the Operating Partnership and the Operating Partnership will issue the same number of Common Units or Preferred Units to the Company, so that the Company will at all times own the same number of Common Units (including units held by the Company as general partner as well as limited partner units owned by the Company) and Preferred Units as there are outstanding shares of Common Stock and Preferred Stock, respectively, of the Company. Distributions by the Operating Partnership with respect to Preferred Units and Common Units provide the funds to enable the Company to make distributions to the holders of its Series A Preferred Stock and Common Stock. The partnership agreement also provides that, after the June 30 or December 31 next succeeding the first anniversary of the issuance of Common Units (or earlier in the event of certain extraordinary transactions), the holder of each Common Unit other than the Company will have the right to require the Operating Partnership to redeem each Common Unit at a redemption price equal to the then market value of a share of Common Stock. Such redemption will be in cash, except that the Company may assume the redemption obligation and pay the redemption in form of shares of its Common Stock. At December 31, 1998 and 1997, approximately 1,906,000 and 621,000 shares of common stock were reserved for issuance upon the potential redemption of approximately 1,906,000 and 621,000 partnership units.
UNISSUED REGISTERED SECURITIES: As of December 31, 1998, the Company has registered an aggregate of $202,144,000 of unissued securities under various shelf registration statements.
10. PRICE RANGE OF COMMON STOCK
Market quotations are from the New York Stock Exchange Index. As of December 31, 1998, there were 2,423 holders of record of the Company's shares.
11. STOCK OPTIONS
The Company has a stock option and incentive plan which expires in 2006 and is administered by the Compensation Committee of the Board of Directors. A maximum of 2,950,000 shares of Common Stock are reserved for issuance upon the exercise of options or other stock-based awards that may be granted under the plan. Options granted expire 10 years from the date of grant. The plan as revised in 1996 also provides for grants from such reserved shares to each non-employee director of the Company of restricted shares of the Company's Common Stock in lieu of cash compensation. Restricted stock vests evenly over a three year period or earlier upon such person's termination of service as director. At December 31, 1998, 219,159 shares had been purchased pursuant to the exercise of options under the plan, unexercised options for 1,920,373 shares are outstanding (of which 798,167 are subject to future vesting requirements), and options or other awards for 786,468 shares are available for future awards under the plan (see Note 18).
Activity under the stock option plan is summarized below:
During 1997, the Company repurchased 135,560 options for an average price of approximately $0.49 per option.
The following table summarizes information concerning options outstanding and exercisable at December 31, 1998:
Financial Accounting Standards Number 123, "Accounting for Stock-Based Compensation" ("FAS No. 123") was effective in 1996. FAS No. 123 requires either the recording or disclosure of compensation cost for stock-based employee compensation plans at fair value. The Company has adopted the disclosure-only provisions of FAS No. 123. Accordingly, no compensation costs have been recognized in 1998, 1997 or 1996. Had compensation cost for the Company's Stock Option Plan been recognized based on the fair value at the grant date for awards consistent with the provisions of FAS No. 123, the Company's income available to common stockholders and basic earnings per share would have been reflected as the pro forma amounts below (in thousands, except per share amounts):
The pro forma effect on net income for 1998, 1997 and 1996 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. No options were granted during 1997. The estimated fair value of options granted under the Company's stock option plan during 1998 and 1996 were $1,425,168 and $705,000, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 8.0% dividend yield, volatility of 25%, risk free rate of return of 6.00% and expected lives of 5 years. The estimated fair value of options granted are subject to the assumptions made and if the assumptions changed, the estimated fair value amounts could be significantly different. The above weighted-average assumptions are an approximation of historical information and are not intended to represent future events or trends.
12. TRANSACTIONS WITH RELATED PARTIES
The Company through a subsidiary entered into a Purchase and Sale Agreement with Holliday Development, L.P. ("Holliday"), whereby the Company would be reimbursed by Holliday for all of the Company's costs and expenses (the "Reimburseable Costs") incurred at the direction of Holliday, in connection with the acquisition and construction of the residential portion of 1000 Van Ness (one of the Martin Properties, see Note 2). This agreement also stipulates that the Reimbursable Costs will be paid to the Company in several successive transactions which coincide with the sale of the residential units to third parties. Once all the Reimbursable Costs are repaid to the Company (approximately $18,000,000), the Company shall convey all the unsold residential units to Holliday. The Company's president and chief executive officer has approximately a 35% interest in Holliday. In addition, the Company's director of development has approximately a 14% interest in Holliday. As of December 31, 1998, the Company had received approximately $10,750,000 of the Reimbursable Costs (see Note 18).
In December 1998, the Company entered into an operating lease for a corporate office in Emeryville, California. The landlord is a partnership in which the Company's president and chief executive officer has an economic interest. The lease commenced on January 1, 1999 with a five-year term. Monthly lease payments are approximately $11,460, with a three percent annual increase.
During 1998 and 1997, the Company acquired three leasehold interests in 126,557 square-feet of former Ernst Home Improvement Stores ("Ernst Stores") for approximately $6,520,000 in cash. In addition, during 1998 the JV (see Note 3) acquired a leasehold interest in a 44,875 square-foot former Ernst Store for approximately $2,000,000. The Company and the JV acquired the Ernst Stores from the purchaser of the leasehold interest in bankruptcy proceedings involving the Ernst Home Improvement chain. One of the principals of such purchaser is a brother of the chief investment officer of the Company. The chief investment officer of the Company disclaims any personal interest in his brother's interest in the purchaser and has no personal interest in any proceeds that the purchaser received in connection with the leasehold interests.
The Company acquired two retail centers in July and December 1996, having a net book value of $30,221,000 at December 31, 1996, with the expectation that an institutional investor would ultimately acquire 75% interests in such centers by paying the Company 75% of its acquisition costs for these properties. On February 20, 1997 and August 1, 1997, the institutional investor funded $7,173,000 and $15,254,000, respectively, to acquire a 75% interest in each of the two retail centers. The Company is advised that an entity controlled by a former director of the Company holds an approximately 1.5% interest in, and is an advisor to, the institutional investor.
For a description of transactions in which the Company's president and chief executive officer was an interested party prior to his election to such positions and as a director, see "Development Properties" in Note 2.
13. RETIREMENT SAVINGS PLAN
The Company has a contributory Retirement Savings Plan. The maximum contribution is 15% of annual salaries of which up to 3% is matched by the Company up to 75% of employee contributions, subject to limitations imposed by the Internal Revenue Service. The Company's contributions to this plan for 1998, 1997 and 1996 were approximately $77,000, $48,000 and $33,000, respectively.
14. OPERATING LEASES
The Company leases office space under various operating leases that expire at various times through 2005. Rental expense under these operating leases for the years ended December 31, 1998, 1997 and 1996 was approximately $326,000, $202,000 and $168,000, respectively.
Approximate minimum future lease payments under these operating leases at December 31, 1998, are as follows (in thousands):
15. QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data for 1998 and 1997 is as follows (in thousands, except per share amounts):
16. SEGMENT INFORMATION
The Company has two reportable segments: Retail Operating properties and Office/Industrial properties. The Company focuses its investments on retail shopping centers located in major metropolitan areas. As discussed in Note 1, the Company owns interests in 71 retail operating properties and has one retail project currently under development.
The Company also owns interests in four office and industrial properties which it considers non-strategic and therefore does not allocate a material amount of Company resources to this segment. For the years ended December 31, 1998, 1997 and 1996 there was no tenant of the Company that accounted for ten percent of the total revenues of the Company.
The Company's accounting policies for these segments are the same as those described in the summary of significant accounting policies in Note 1. The Company evaluates the performance of its assets within these segments based on the net operating income of the respective property. Net operating income is calculated as rental revenues of the property less its rental expenses (such as common area expenses, property taxes, insurance and other owner's expenses). The summary of the Company's operations by segment is as follows (in thousands):
The following table reconciles the Company's reportable segments' rental revenues and net operating income to consolidated net income of the Company for the years ended December 31, 1998, 1997 and 1996 (in thousands):
The following table reconciles the total real estate for the reportable segments to consolidated assets for the Company at December 31, 1998, 1997 and 1996 (in thousands):
Other real estate includes assets related to the corporate offices of the Company, which are not included in segment information.
17. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
As discussed in Notes 3 and 7, the Company and certain of its subsidiaries acquired and disposed of interests in certain properties during 1998 and 1997. The acquisitions have been accounted for as a purchase. The operating results of the acquisitions and disposals have been included in the consolidated statements of income from the date of acquisition and disposal.
The following unaudited supplemental pro forma operating data is presented for the years ended December 31, 1998 and 1997 as if each of the following transactions had occurred as of the beginning of the respective periods: (i) the acquisitions and dispositions by the Company of
properties in 1998 and 1997 and (ii) the completion of the sale by the Company of 8,440,518 and 6,325,000 shares of Common Stock in March 1998 and May 1997, respectively (see Note 9).
The unaudited pro forma financial information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transaction occurred as of January 1, 1998 or 1997, nor does it purport to represent the results of future operations. (in thousands, except per share amounts.)
18. SUBSEQUENT EVENTS
During January 1999, the Company entered into a $5,000,000 unsecured Revolving Credit Agreement with a bank. Outstanding borrowings will accrue interest at LIBOR plus 2.00% or prime. This credit facility is scheduled to mature in November 1999, and is subject to various borrowing base and debt service coverage limitations.
Through February 23, 1999, the Company received approximately $6,740,000 of additional Reimbursable Costs of the residential portion of the development project described in Note 12.
On February 9, 1999, the Compensation Committee of the Company's Board of Directors granted options for an aggregate of 560,000 shares of Common Stock to certain key executives and employees of the Company at an exercise price of $11.31 per share, the closing price of the Company's Common Stock on that day.
On March 9, 1999, BPP Retail, LLC (the joint venture between the Company and CalPERS, see Note 3) agreed to acquire 28 shopping centers owned by AMB Property Corporation aggregating 5.1 million square feet for approximately $663.4 million. The properties are to be acquired in three separate transactions, currently expected to close on or about April 30, July 31 and December 1, 1999. The Company has agreed to acquire six additional shopping centers from AMB aggregating 1.5 million square feet for approximately $284.4 million; if completed, this purchase, which is subject to the Company's obtaining financing and other conditions, is currently expected to close by year-end 1999. In connection with the AMB transaction, CalPERS and the Company agreed to increase the aggregate amount of indebtedness that the joint venture might incur through December 31, 2000 to approximately $450,000,000 and the Company granted CalPERS an option expiring June 30, 2000 to purchase 1 million shares of Common Stock of the Company at an exercise price of $15.375 per share.
PART III
ITEMS 10 THROUGH 13.
Incorporated by reference to the following sections of the Company's Proxy Statement for its 1999 Annual Meeting: "Nominees for Directors," "Executive Officers," "Beneficial Ownership of Management," "Beneficial Ownership of Non-Management," and "Executive Compensation" under "PROPOSAL I-ELECTION OF DIRECTORS" and "CERTAIN TRANSACTIONS WITH MANAGEMENT."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements and Independent Auditors' Report are included under Item 8.
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Income for each of the three years in the period ended December 31, 1998.
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1998.
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998.
Notes to Consolidated Financial Statements, December 31, 1998, 1997, and 1996.
The following Supplemental Financial Schedules are included herein:
III - Real Estate and Accumulated Depreciation.
All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the consolidated financial statements and notes.
(b) REPORTS ON FORM 8-K
Form 8-K Report filed December 23, 1998 (earliest event reported February 3, 1998): Item 5, regarding certain Shopping Center Acquisitions, Leasehold Interest Acquisitions, Sales of Real Estate and Joint Venture; and Item 7 regarding Financial Statements, Pro-Forma financial information and exhibits.
(c) EXHIBITS
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.
Burnham Pacific Properties, Inc.
By: /s/ J. David Martin ------------------------------------ J. David Martin, President
Dated: March 29, 1999 ---------------------------------
SIGNATURES
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.
Signature Title Date --------- ----- ---- /s/ Malin Burnham Chairman of the Board March 29, 1999 - ------------------------- Malin Burnham
/s/ J. David Martin President, Director March 29, 1999 - ------------------------- J. David Martin
/s/ Daniel B. Platt Chief Financial Officer March 29, 1999 - ------------------------- Daniel B. Platt
/s/ Marc T. Artino Chief Accounting Officer March 29, 1999 - ------------------------- Marc T. Artino
/s/ James D. Harper, Jr. Director March 29, 1999 - ------------------------- James D. Harper, Jr.
/s/ James D. Klingbeil Director March 29, 1999 - ------------------------- James D. Klingbeil
/s/ Nina Matis Director March 29, 1999 - ------------------------- Nina Matis
/s/ Donne P. Moen Director March 29, 1999 - ------------------------- Donne P. Moen
/s/ Thomas A. Page Director March 29, 1999 - ------------------------- Thomas A. Page
/s/ Phillip S. Schlein Director March 29, 1999 - ------------------------- Phillip S. Schlein
/s/ Robin Wolaner Director March 29, 1999 - ------------------------- Robin Wolaner
BURNHAM PACIFIC PROPERTIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION FORM 10-K SCHEDULE III DECEMBER 31, 1998
BURNHAM PACIFIC PROPERTIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION FORM 10-K SCHEDULE III NOTES DECEMBER 31, 1998
NOTE 1
Poway Shopping Center, Santee Village Square, Independence Square, Navajo Shopping Center, San Diego Factory Outlet, La Mancha Shopping Center, Santa Fe Springs Plaza, Central Shopping Center, Foothill Plaza, Fremont Hub Shopping Center, Auburn Village, Keizer Creekside, Park Manor, Meridian Village Shopping Center, and Greentree Plaza are jointly encumbered under the Company's secured line of credit, under which $111,017,713 was outstanding at December 31, 1998, which was not included in Schedule III.
NOTE 2
Menifee Town Center, San Marcos Lucky Plaza, Westminster Center, Buena Vista Marketplace, Ralph's Center, Centerwood Plaza, Prospector's Plaza, Santa Rosa Value Center, Fremont Gateway Plaza, Southampton Center, Silver Creek Plaza, Summerhills Shopping Center, Shasta Crossroads, Creekside Shopping Center, 580 Marketplace, Discovery Plaza, Sunset Center, Hallmark Town Center, and Arcade Square are jointly encumbered under a $148,109,955 Mortgage Loan at December 31, 1998, which was not included in Schedule III.
NOTE 3
Design Market, Fairwood Square, and Village East are jointly encumbered under a $16,005,128 Mortgage loan at December 31, 1998, which was not included in Schedule III.
NOTE 4
Schedule III does not include approximately $6,111,000 of furniture fixtures and equipment and acquisitions in progress and $2,120,000 of related accumulated depreciation, and $34,764,000 of costs incurred to date on development of a retail center which is also classified with property in the consolidated financial statements of the Company.
NOTE 5
The aggregate cost for federal income tax purposes for buildings and improvements at December 31, 1998 was approximately $724,683,000.