ITEM 1. BUSINESS
The Company is a self-managed real estate investment trust ("REIT") that owns, acquires, develops, manages and leases health care properties. The Company's business currently consists of investments, made either directly or through joint ventures, in health care properties and in debt obligations secured by health care properties. The Company's operations focus primarily on opportunities to own or develop medical office buildings ("MOB") through its MOB operations, or own or finance senior care facilities ("Senior Care Facilities") through its senior care operations. The Company was incorporated in Maryland on September 15, 1993.
The MOB business strategy is to acquire, develop, manage and lease a portfolio of medical office buildings. The Company currently seeks growth opportunities mainly in Southern California through acquisition or development of additional MOBs directly or through strategic joint ventures. The MOB portfolio currently consists of approximately 957,000 rentable square feet. The Company directly owns 27 high quality MOBs, an adjacent parking facility and two retail facilities and indirectly owns three additional MOBs (collectively, the "MOB Properties"). Twenty-five of the MOB Properties and the two retail properties are located in California and six of the MOB Properties are located in New Jersey. Several of the MOB Properties include retail space on the ground level. As of January 31, 2000, the MOB Properties were 93.1% leased, not including the six MOB Properties located in New Jersey. As of January 31, 2000, the six MOB Properties located in New Jersey were approximately 19% leased.
The senior care business strategy is to capitalize on consolidation opportunities in the senior care industry by making selected equity investments in Senior Care Facilities. The Company directly and indirectly owns 12 Senior Care Facilities, including projects under development, consisting of a skilled nursing facility and a senior resident apartment complex located in Arizona, four Senior Care Facilities in California, three nursing facilities in Massachusetts, a hospital located in California, a Senior Care Facility in Nebraska and a skilled nursing facility in Washington (the "Senior Care Properties"). The Senior Care Properties have an aggregate of 1,167 beds or units. In addition to the Senior Care Properties, the Company also holds a first deed of trust on a 196-bed skilled nursing facility located in Hyattsville, Maryland.
As part of its overall business strategy, the Company also develops both MOBs and Senior Care Facilities, either directly or through joint ventures. The Company has a long history of successful developments and believes that it can maximize growth through a combination of development and acquisition. The Company currently has one development project in progress consisting of a 50,000 square foot, 92-bed assisted living facility located in Yorba Linda, California. This project is a joint venture with D.D.& F., Inc., who will operate the facility upon its completion. The Company expects to complete this project within the next twelve to eighteen months.
The Company's primary business objective is to maximize the total return to stockholders through appreciation in the value of the Company's net assets and capital stock through long-term investment in MOBs and Senior Care Facilities, either directly or through affiliates. The Company seeks to achieve these objectives by enhancing the operating performance of its existing properties as well as through the selective acquisition and development of MOBs and Senior Care Facilities. Key elements of the Company's MOB operating strategy include: (i) improving rental income and cash flow by aggressively marketing available space; (ii) designing and renovating tenant space to meet the unique needs of medical practitioners; (iii) actively managing renovation costs and minimizing other operating expenses such as leasing commissions by conducting management, leasing, maintenance and marketing activities internally; (iv) maintaining a diversified tenant base consisting of a cross section of medical specialties; and (v) emphasizing regular maintenance, periodic renovation and capital improvements to maximize long-term returns. Key elements of the Company's Senior Care operating strategy include: (i) locating high-quality operators who will effectively and efficiently operate the Senior Care Facilities in which the Company has an investment interest to maximize their value and (ii) partnering with local operators to develop and manage Senior Care Facilities in under- served communities throughout the country.
Medical Office Building Operations. In its acquisition analysis, management reviews certain factors including: (i) location, particularly proximity to major hospitals; (ii) construction quality and design; (iii) historical, current and projected cash flow; (iv) potential for increased cash flow and capital appreciation; (v) tenant mix and terms of the tenant leases, including the potential for rent increases; (vi) occupancy rates and demand for medical office properties in the vicinity; and (vii) prospects for liquidity through sale, financing or refinancing. The Company anticipates that G&L Realty Partnership, L.P. (the "Operating Partnership"), the subsidiary through which the Company conducts its business, will continue to purchase fee interests in MOB Properties; however, the Company may participate, on a selective basis, in joint venture transactions, or acquire partnership interests as the Board of Directors may determine from time to time to be in the best interests of the Company. Such investments may be subject to existing mortgage financing and other indebtedness that have priority over the equity interest of the Company and may not afford the Company with the operating control it has with respect to the MOB Properties.
Senior Care Operations. In connection with its acquisition of Senior Care Facilities, management analyzes and reviews certain factors including: (i) operating and financial history of the entity and the managers who will be responsible for operating the Senior Care Facility; (ii) value of the property; (iii) location of the property, particularly proximity to shops, markets and other health care facilities; and (iv) anticipated potential for short-term gain and long-term profits from investment in the property. The Company anticipates that it will continue to acquire ownership interests, either directly or through joint ventures, in Senior Care Facilities.
Development Activities. In connection with its development projects, management analyzes and reviews certain factors including: (i) location, particularly proximity to major medical centers; (ii) demand for MOBs or Senior Care Facilities in the area; (iii) cost of construction in relation to direct acquisition; (iv) potential for capital appreciation; (v) potential for financing or sale; (vi) operating and development capabilities of potential partners; and (vii) estimated return on investment. The Company considers development to be a vital part of its operations and anticipates that it will continue to seek development opportunities in the future.
See Item 14 for financial information about the Company's two main business segments: investments in (i) healthcare properties and (ii) debt obligations secured by Senior Care Facilities.
Competitive Strengths
In addition to the Company's investments in its existing MOB Properties, the Company also seeks to make selective acquisitions of MOBs. From time to time hospital owners sell their MOBs to raise capital. These sales create opportunities for the Company to acquire MOBs on attractive terms. Because hospitals will often seek a buyer with the operating skills necessary to meet the needs of the medical practitioners located in the building, the Company believes that its successful history of operating MOBs provides it with a competitive advantage in the acquisition, development and management of MOBs.
Through its senior care operations, the Company seeks to selectively acquire ownership interests in Senior Care Facilities that have characteristics consistent with the Company's growth strategy. The Company believes that the aging population in the United States has increased the demand for efficiently operated Senior Care Facilities. The Company believes that it is in a position to capitalize on this increased demand by selectively acquiring ownership interests in attractively situated Senior Care Facilities. The Company also believes that there is potential for the Company to make additional acquisitions of Senior Care Facilities.
Financing for new acquisitions of MOB properties and Senior Care Facilities may be provided through existing or new joint ventures with third parties or third-party financing in the form of secured or unsecured debt. The Company's capacity to obtain debt financing facilitates its ability to acquire ownership interests in additional MOBs and Senior Care Facilities. However, notwithstanding any business policies or objectives of the Company, no assurance can be given that the Company, or its investment affiliates, will be able to make acquisitions on favorable terms or that such properties will be profitably operated. In addition, the Company and its investment affiliates will likely incur additional indebtedness in connection with future acquisitions.
Property Management
The Company provides a full range of management services for the operation of MOBs. The ability of the Company to manage MOBs to meet the unique needs of medical practitioners has been critical to its success to date. The Company has experienced lease renewal rates of approximately 87.3%, 86.7% and 76.2% for the years ended December 31, 1997, 1998 and 1999, respectively, with respect to medical office space in the MOB Properties based on the medical office space leases available for renewal in these periods. Developing and managing MOBs differs from developing and managing general office properties due to the special requirements of the tenants and their patients. MOBs generally have higher maintenance requirements in the public areas due to heavy foot traffic, many short appointments which increase demand on parking facilities, the use of sophisticated medical equipment requiring increased plumbing and electrical capacity and expanded environmental regulations that impose more stringent restrictions on the disposal of medical waste. The management of MOBs also generally requires experience in specialized tenant improvements and higher levels of responsiveness required by medical practitioners. Additional important management functions include the placement of tenants within MOBs to accommodate increased space needs and managing the tenant mix at properties so that referrals by practitioners with different specialties within the building are facilitated. The Company stresses meeting these and other special demands of medical property tenants.
Tax Status
The Company believes that it has operated in such a manner as to qualify for taxation as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year ended December 31, 1993, and the Company intends to continue to operate in such a manner. As long as the Company qualifies for taxation as a REIT under the Code, the Company generally will not be taxed at the corporate level. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed income.
Employees
As of March 24, 2000, the Company (including the Operating Partnership) employed 34 persons, 11 of whom are on-site building employees who provide maintenance services for the MOB Properties and 9 of whom are professional employees engaged in leasing, asset management and administration.
Dependence on Key Tenants
The Company's MOBs typically consist of several smaller tenants rather than one or two large tenants. As of December 31, 1999, no MOB tenant accounted for more than 10% of the Company's total revenues. Although no MOB tenant accounts for more than 10% of the Company's total revenues, the risks associated with smaller tenants include (i) less creditworthiness, (ii) greater tenant turnover and (iii) greater property management needs.
The Senior Care Facilities are either leased to senior care companies or managed by senior care companies that operate the facilities. For several of the Senior Care Facilities, the Company is currently in the process of replacing the lease agreements with management contracts. Once the Company replaces a Senior Care Facility lease with a management contract, all of the revenues and expenses relating to the operations of the Senior Care Facility will be reflected in the consolidated financial statements of the Company. The Company expects its consolidated financial statements for the first quarter of 2000 to reflect the operations of one of its Senior Care Facilities in this manner. The Company anticipates that two additional Senior Care Facilities will be presented in this manner in its consolidated financial statements for the second quarter of 2000. Although all of the Company's Senior Care Facilities are currently leased or under management contracts, finding experienced senior care managers is a time- consuming and difficult task. As of December 31, 1999, no Senior Care Facility tenant or manager accounted for more than 10% of the Company's total revenues. However, in January 2000, the Company replaced the manager of its three Hampden, Massachusetts skilled nursing facilities due to the bankruptcy of the manager and unhappiness with its performance. As a result, the Company recorded a $2.0 million addition to its bad debt reserves in 1999 to provide for the potential impairment of rent and operating expense reimbursements receivable. Should any of the
Company's other Senior Care Facilities require a change in manager, the Company's financial results could be materially impacted despite the fact that no Senior Care Facility tenant or manager accounts for more than 10% of the Company's total revenues.
Government Regulation
Environmental Matters. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in its property. These laws impose liability without regard to whether the owner knew of, or was responsible for, the presence of any hazardous or toxic substances. The presence of such substances, or the failure to properly remediate these substances, may adversely affect the owner's ability to borrow using the real estate as collateral and may subject the owner to material remediation costs. All of the MOB Properties and Senior Care Properties have been subject to Phase I environmental assessments (which involve inspection of the subject property, but no soil sampling or groundwater analysis) by independent environmental consultants. Although restricted in scope, these independent assessments revealed no material evidence of existing environmental liability, and the Company has not been notified by any governmental authority of any noncompliance by, liability for, or other claim against the Company in connection with environmental matters related to the MOB Properties or Senior Care Properties. While the Company is not aware of any environmental liability that it believes would have a material adverse effect on its business, assets or results of operations, no assurance can be given that the environmental assessments revealed all potential environmental liabilities or that a prior owner did not create any material environmental condition not known to the Company or that future uses or conditions (including changes in applicable environmental laws and regulations) will not result in imposition of environmental liability.
The independent environmental assessments include selective sampling for asbestos where the age of the buildings or the types of materials warranted such sampling. Limited quantities of non-friable asbestos were present in the Sherman Oaks Medical Plaza. The Company removed the asbestos in 1994 in connection with the renovation of this building. Limited quantities of non- friable asbestos were also discovered in the Maryland Gardens facility and Riverdale Gardens Nursing Home. Management believes that it has undertaken adequate measures to ensure that the asbestos will remain undisturbed and that it does not pose a current health risk. Management plans to continue to monitor this situation.
Physicians generate medical waste in the normal course of their practice. The Company's leases require the individual tenants to make arrangements for the disposal of medical waste and require all tenants to provide proof that they have contracted with a third party service to remove waste from the premises each night. The handling and disposal of this waste is the responsibility of the tenants; however, the Company remains responsible as the owner of the property. There can be no assurance that all such medical waste will be properly handled and disposed of or that the Company will not incur costs in connection with improper disposal of medical waste by its tenants.
Healthcare Industry Regulation. Physicians and senior care operators are subject to heavy government regulation including the determination of the level of reimbursements for medical costs incurred and services provided under government programs. Changes in government regulations regarding medical reimbursements and other regulations affecting the healthcare industry can have a dramatic impact on the operations of medical practitioners or senior care operators under government programs. Both the federal government and many state governments are exploring numerous reforms concerning the healthcare industry that could have a significant impact on many healthcare-related businesses. If legislation were enacted that decreased the level of government medical reimbursements or increased the degree of regulatory oversight, thereby increasing the expenses of healthcare businesses, the Company's tenant base could be adversely affected. This, in turn, could negatively impact the ability of the Company to make distributions.
Americans with Disabilities Act. All of the MOB Properties and Senior Care Properties are required to comply with the Americans with Disabilities Act ("ADA"). The ADA generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers and noncompliance could result in imposition of fines by the federal government or an award of damages to private litigants. The Company believes it is in substantial compliance with the ADA and that it will not be required to
make substantial capital expenditures to address the requirements of the ADA. If required changes involve a greater expenditure than the Company currently anticipates, the Company's ability to make distributions could be adversely affected.
G&L Realty Corp. Organizational Chart
[CHART APPEARS HERE]
1) The Company, a Maryland corporation, was formed to continue the ownership, management, acquisition and development activities previously conducted by G&L Development, a California general partnership.
2) The Company is the sole general partner and 81% owner of the Operating Partnership. Individual limited partners own the Operating Partnership's remaining 19% partnership interest.
3) G&L Realty Financing II, Inc. a Delaware corporation and a wholly owned subsidiary of the Company, is the sole general partner and 1% owner of the Realty Financing Partnership.
4) G&L Medical, Inc. a Delaware corporation and a wholly owned subsidiary of the Company, is the sole general partner and 1% owner of the Medical Partnership.
5) The Operating Partnership is the sole general partner and 61.75% owner of the Roxbury Partnership. Individual limited partners own the remaining 38.25% limited partnership interest.
6) G&L Management Delaware Corp., a Delaware corporation and a wholly owned subsidiary of the Company, is the managing member and the owner of a 1% membership interest of the GL/PHP.
7) G&L Senior Care Inc., a Delaware corporation and a wholly owned subsidiary of the Company, is the managing member and the owner of a 1% membership interest of G&L Gardens.
8) G&L Hampden, Inc., a Delaware corporation and a wholly owned subsidiary of the Company, is the sole managing member and 1% owner of Hampden.
9) Holy Cross, Burbank, Tustin, Hoquiam, Lyons and Coronado are owned 100% by the Operating Partnership.
10) The Operating Partnership is sole managing member and 80% owner of Valencia. The remaining 20% is owned by Landmark Healthcare Facilities, LLC.
11) The Operating Partnership is co-managing member and 93% owner of Pacific Gardens. The remaining 7% is owned by ASL Santa Monica, Inc.
12) The Operating Partnership is co-managing member and 85% owner of Tarzana. The remaining 15% is owned by ASL Tarzana Wedgewood, LLC.
13) GLN Capital is a Delaware limited liability company owned 49.9% by the Operating Partnership and 50.1% by Nomura Asset Capital Corp.
14) Valley Convalescent is a California limited liability company owned 50% by the Operating Partnership and 50% by Continuum Healthcare, Inc.
15) San Pedro is a California limited liability company owned 50% by the Operating Partnership and 50% by Gary Grabel.
16) Penasquitos LLC is a California limited liability company owned 50% by the Operating Partnership and 50% by Parsons House, LLC.
17) Penasquitos Inc. is a California Corporation owned 50% by the Operating Partnership and 50% by Parsons House, LLC.
18) Pacific Gardens Corp. is a California corporation owned 93% by the Operating Partnership in the form of non-voting preferred stock and 7% by ASL Santa Monica, Inc.
19) Eagle Run is a California limited liability company owned 50% by the Operating Partnership and 50% by Parsons House, LLC.
20) Eagle Run Inc. is a California corporation owned 50% by the Operating Partnership in the form of non-voting preferred stock and 50% by Parsons House, LLC.
21) Lakeview is a California limited liability company owned 50% by the Operating Partnership and 50% by D.D.&F., L.P.
22) Heritage Park is a California limited liability company owned 25% by the Operating Partnership and 75% by American Senior Living, Inc.
ITEM 2.
ITEM 2. PROPERTIES
The MOB Properties consist of 27 high quality MOBs directly owned by the Company, three MOBs indirectly-owned by the Company, an adjacent parking facility and two retail facilities. The Senior Care Properties consist of 11 Senior Care Facilities and one hospital. As of January 31, 2000, the MOB Properties, not including the six New Jersey MOBs, were 93.1% leased to over 420 tenants and the Senior Care Properties were 100% leased to operators who collectively had a weighted average occupancy of 70.8%. The Company's MOB tenants are primarily established medical practitioners representing a cross section of medical practices.
Description of the MOB Properties and Senior Care Properties
MOB Properties
The Company, through its MOB operations, acquires, develops, manages and leases MOBs, a parking facility and two retail facilities. Developing and managing MOBs differs from developing and managing conventional office buildings due to the special requirements of physicians and their patients. Because doctors now perform a variety of medical procedures in their offices, many MOBs have become sophisticated ambulatory centers that allow for outpatient surgery and procedures. In addition, MOBs generally have higher maintenance requirements in the public areas due to heavy foot traffic, many short appointments that increase demand on parking facilities, the use of sophisticated medical equipment requiring increased plumbing and electrical capacity and expanded environmental regulations that impose more stringent restrictions on the disposal of medical waste. The management of MOBs also generally requires experience in specialized tenant improvements and higher levels of responsiveness required by medical practitioners. Additional important management functions include the placement of tenants to accommodate increased space needs and managing the tenant mix at properties to facilitate referrals by practitioners with different specialties within the building. The Company stresses meeting these and other special demands of MOB tenants.
Senior Care Properties
The Company, as part of its overall strategy, acquires, develops and leases Senior Care Facilities. The Company leases its Senior Care Properties to third party senior care operators. The operation of Senior Care Facilities requires a high level of experience and expertise due to the specific needs of the residents and the complex administrative functions surrounding the admission and care of residents and the administering of government programs. The operators of Senior Care Facilities must also maintain a positive relationship with local hospitals and other medical providers in order to attract new residents. The Company considers all of the above factors when leasing its facilities to third party operators.
The health care industry is facing various challenges, including increased government and private payor pressure to reduce medical delivery costs. Substantially all of the Company's tenants are in the medical profession and could be or have been adversely affected by the new Medicare prospective payment system, cost containment and other health care reform proposals. In the past twelve months, the Company has changed managers at six of its Senior Care Facilities in response to financial difficulties encountered by the managers or dissatisfaction with the operating results of the managers. Any future proposals that limit access to medical care or reduce reimbursement for physicians' services may also impact the ability of the Company's tenants to pay rent. However, the Company believes that the aging population in the United States, combined with other recent trends in the health care industry, such as the performance of non-acute procedures outside of hospitals, could spur increased demand for space in full service MOBs that contain surgery centers and out-patient facilities, such as those owned by the Company.
The following tables set forth certain information regarding each of the MOB Properties and Senior Care Properties as of January 31, 2000. All of the MOB Properties and Senior Care Properties are held in fee by the Company or, in the case of jointly-owned properties, by the joint venture property partnership or limited liability company.
MOB Properties--Summary Data
_______________________________ See footnotes on following page Continued....
1) Rentable square feet includes space used for management purposes but does not include storage space. 2) Occupancy includes occupied space and space used for management purposes. Rented square feet includes space that is leased but not yet occupied. Occupancy figures have been rounded to the nearest tenth of one percent. 3) Rent is based on third-party leased space billed in January 2000; no rent is assumed from management space. 4) Average rent per square foot is calculated based upon third-party leased space as of January 31, 2000. 5) This property consists of retail space and parking facilities. 6) Building is currently vacant although tenant continued paying rent through November 1999. Tenant has been in default on rental payments since December 1999 and the Company has sued the tenant and the sub-tenant in order to recover the delinquent rent.
Senior Care Properties--Summary Data
_______________________________ 1) Occupancy is on a per-bed or unit basis. 2) Average rent per bed is calculated based upon annualized rents as of January 31, 2000. 3) Tustin Hospital is leased 100% to Pacific Health Corporation. Occupancy percentage of 18.9% represents average hospital census for January 2000. 4) Property was acquired on January 6, 2000 in joint venture with ASL Tarzana, Inc.
MOB Properties
Southern California Properties - ------------------------------
Six of the MOB Properties are located on North Bedford and North Roxbury Drives in the "Golden Triangle" area of Beverly Hills, California, near three major hospitals--Cedars Sinai Medical Center, Century City Hospital and UCLA Medical Center. The buildings feature high quality interior improvements, including rich wood paneling and brass hardware appointments, both in the common areas and in most of the doctors' offices. These six MOB Properties include twenty-one operating rooms. The 405, 416 and 436 North Bedford Drive buildings each have emergency back-up generators. Parking for these six MOB Properties is provided in the 415 North Bedford garage and in subterranean parking at 436 North Bedford and 435 North Roxbury Drives. Each of these MOBs has copper insulated pipe with sufficient capacity for medical use, electrical systems designed for extra load requirements and extensive security systems.
405 North Bedford Drive, Beverly Hills
The 405 North Bedford Drive MOB, built in 1947 and extensively remodeled in 1987, consists of four stories plus a penthouse and a basement. The reinforced brick building, with ground floor retail space, features cherry wood paneled walls and brass hardware in the common areas and decorative concrete trim on the exterior.
Currently, only one tenant occupies more than 10% of the rentable square footage of the building. A surgery center occupies 6,019 square feet (approximately 14.5%) of the rentable square footage pursuant to a lease that provides for monthly rent of $22,000. The lease expires on August 31, 2004 and provides for a five-year renewal option.
415 North Bedford Drive, Beverly Hills
The 415 North Bedford Drive building is a four-level parking structure with approximately 5,720 square feet of ground floor retail space for seven tenants. The parking structure contains 316 spaces and is valet operated.
416 North Bedford Drive, Beverly Hills
The 416 North Bedford Drive property is a four-story reinforced brick MOB with a basement and ground floor retail space. Built in 1946 and extensively remodeled in 1986, the building features oak paneled walls and moldings, brass hardware, tinted concrete borders on the exterior, and fourth floor skylights that provide an open, airy atmosphere in the hallway and in some of the suites.
A plastic surgeon occupies 5,141 square feet or 12.7% of the rentable square footage of the building, pursuant to a lease that provides for monthly rent of $22,000. The lease expires on November 30, 2002 and contains a five-year renewal option.
435 North Bedford Drive, Beverly Hills
The 435 North Bedford Drive property is a four-story, reinforced brick and masonry MOB with a penthouse, basement, and ground floor retail space. Built in 1950 and extensively remodeled in 1984, the building features oak molding, wall sconces and paneling in the hallways plus stained runner boards and built-in stained hardwood cabinets in some of the medical office suites.
435 North Roxbury Drive, Beverly Hills
The 435 North Roxbury Drive property is a four-story MOB with a penthouse, subterranean parking and retail space on the ground floor. The building, which was built in 1956 and extensively remodeled in 1983, features a reinforced brick and masonry exterior and raised, oak-stained paneling and molding in the hallways.
Two tenants in 435 North Roxbury each occupy more than 10% of the rentable square footage. A dermatologist occupies 5,291 square feet (12.5% of the rentable square footage) pursuant to a lease which provides for a monthly rental of $18,000. The lease expires September 30, 2001 and contains a provision for a five-year renewal option. An internist occupies 6,183 square feet (14.6% of the rentable square footage) pursuant to a lease which provides for a monthly rental of $19,000. The lease was renewed for five years during 1999 and expires on November 30, 2004.
436 North Bedford Drive, Beverly Hills
The 436 North Bedford Drive property is a three-story MOB with three levels of subterranean parking. Built in 1987, the building features ground floor retail and office space surrounding a central courtyard and balconies at selected locations on the second and third floors. The exterior is clad in rose color sandstone with cast stone and granite trim. The central courtyard features a cascading waterfall sculpture and stone pavers with intricate marble and stone patterns. Cherry wood paneled walls also line the elevator lobbies on all floors and portions of the hallways.
Sherman Oaks Medical Plaza, Sherman Oaks
The Sherman Oaks Medical Plaza is a seven-story office building, constructed in 1969, that is adjacent to the Sherman Oaks Hospital and Health Center, a 156-bed hospital which includes the major burn center for the San Fernando Valley. A $1 million capital improvement program renovating the building systems and common areas of the Sherman Oaks Medical Plaza was completed in 1993. The Company also owns the adjacent air rights and three-level parking structure behind the property which provides a total of 426 parking spaces. The land beneath the parking structure is owned by Sherman Oaks Hospital which also leases 150 parking spaces in the structure.
Cigna Health Care Building, Irwindale
The Cigna Health Care Building in Irwindale, California is a two-story MOB, constructed in 1992, on a site that provides two parking areas with a total of 244 spaces. This property is 100% leased to Cigna Healthcare of California ("Cigna"). Rent obligations under the lease are guaranteed by Cigna Health Care, Inc., the parent company of Cigna. The lease also provides for certain rights against Med Partners, Inc., a former sub-tenant of Cigna. The lease, which provides for monthly rent of $91,000 triple net, expires on November 30, 2004 and provides for two, five-year options. The property was vacated in stages by Med Partners beginning in September 1998, but Med Partners continued to pay rent until December 1999. In December 1999, Cigna and Med Partners defaulted on the rent and the Company has sued both Cigna and Med Partners to recover the delinquent rent payments. In addition, the Company has received full possession of the building and has hired a broker to lease the building. Cigna, as lessee, and Cigna Health Care, Inc., as guarantor, both remain liable for all future rent through the lease expiration date and all costs of re- leasing the premises.
Coronado Plaza
Coronado Plaza is a three-story, 40,000 square foot office and retail complex located in Coronado, California. The building is located on the beach across the street from the Hotel Del Coronado and the majority of the second and third floor suites have unobstructed ocean views. The building has subterranean parking for 96 vehicles plus street parking surrounding the entire property.
Two tenants each occupy more than 10% of the rentable square footage in Coronado Plaza. Marie Calendar's Restaurant occupies 6,163 square feet (approximately 15.5%) of the rentable area pursuant to a lease that provides for monthly rent of $12,000. The leases expire on September 30, 2008 and provide for two, five-year renewal options. G&L Coronado Managers Corp. occupies 7,596 square feet (approximately 19.1%) of the rentable area pursuant to a lease that provides for monthly rent of $19,000. The lease expires on December 31, 2008. G&L Coronado Managers Corp. operates the third-floor executive suites in the building. G&L Coronado Managers Corp. is owned by Daniel M. Gottlieb and Steven D. Lebowitz, both officers and directors of the Company.
Holy Cross Medical Plaza, Mission Hills
The Holy Cross Medical Plaza is situated on approximately 2.6 acres of the 15-acre campus of Holy Cross Medical Plaza, a 316-bed hospital. The campus also includes the Villa de la Santa Cruz skilled nursing facility, another MOB, a magnetic resonance imaging center, and an outpatient diagnostic center. Built in 1985, the Holy Cross Medical Plaza is a three-story office building occupied primarily by medical and dental practitioners. A two-story parking structure and an open asphalt-paved lot can accommodate a total of 333 vehicles. The surrounding site is landscaped with grass, trees, shrubs and planter boxes.
Two tenants each occupy more than 10% of the rentable square footage in the Holy Cross Medical Plaza property. Holy Cross Surgical Center occupies 12,456 square feet (17.3% of the rentable square footage) pursuant to a lease that provides for monthly rent of $42,000. The lease expires October 31, 2006 and provides for a ten-year renewal option. Dialysis Center occupies 10,639 square feet (14.7% of the rentable square footage) pursuant to a lease that provides for monthly rent of $20,000. The lease expires March 31, 2006 and provides for two, five-year renewal options.
St. Joseph's Professional Building, Burbank
The St. Joseph's Professional Building is a steel frame, brick-facade building, constructed in 1987, that features two floors of office space over three levels of subterranean parking which can accommodate up to 100 vehicles. The building is located one-quarter of a mile from St. Joseph's Hospital and is directly across the street from the Walt Disney Company's world headquarters campus. Saint Joseph's Hospital includes 658 beds and is owned by the Sisters of Providence, an organization which owns other hospitals throughout North America.
Two tenants in the St. Joseph's Professional Building each occupy more than 10% of the rentable square footage. Total Renal Care occupies 9,067 square feet (35.2% of the rentable square footage) pursuant to a lease which provides for a monthly rental of $22,000 plus expense reimbursements for excess utility consumption. This lease expires October 31, 2000. The Company is currently negotiating a ten-year lease extension with Total Renal Care. Two internists occupy an aggregate of 7,788 square feet (30.2%) of the rentable square footage pursuant to three leases that provide for aggregate monthly rent of $17,000. The leases expire on October 31, 2001 and November 30, 2001 and have five-year renewal options.
Lyons Avenue Medical Building
The Lyons Avenue Medical Building is a two-story, 49,000 square foot MOB located in Valencia, California only 1/2 mile from the Henry Mayo Newhall Memorial Hospital. The building has subterranean parking and a two-story atrium entry. The building's excellent market position provides first class medical space for those doctors that do not need an association with the hospital.
Three tenants each occupy more than 10% of the rentable square footage of the building. Valencia Surgical Center occupies 7,212 square feet (approximately 14.7%) of the rentable area pursuant to a lease that provides for monthly rent of $13,000. The lease expires on September 1, 2005. Santa Clarita Imaging occupies 5,782 square feet (approximately 11.8%) of the rentable area pursuant to a lease that provides for monthly rent of $9,000. The lease expires on June 30, 2009. Two orthopedists occupy 6,233 square feet (approximately 12.7%) of the rentable area pursuant to a lease that provides for monthly rent of $10,000. The lease expires on December 31, 2001 and provides for one, five-year renewal option.
Tustin--MOB I
The 14591 Newport Avenue building in Tustin, California is a two-story MOB that was constructed in 1969 on a 1.2-acre site. The site is landscaped with grass lawns, shrubs, and trees and includes an asphalt-paved parking lot with approximately 105 parking spaces, representing a parking ratio of 5.8 parking spaces per 1,000 square feet of building area.
Three tenants each occupy more than 10% of the rentable square footage of the building. A general practice physician occupies 2,604 square feet (approximately 14.4%) of the rentable area of the building pursuant to a lease that provides for monthly rent of $3,000. The lease expires on July 31, 2004. A neurologist occupies 2,954 square feet (approximately 16.3%) of the rentable area of the building pursuant to a lease that provides for monthly rent of $4,500. The lease expires on January 31, 2001. Tri-Therapy Rehab occupies 2,019 square feet (approximately 11.2%) of the rentable area of the building pursuant to a lease that provides for monthly rent of $3,000. The lease expires on March 31, 2002.
Tustin--MOB II
The 14642 Newport Avenue building in Tustin, California is a four-story MOB, developed in 1985, that features a surgery center with three operating rooms, a pharmacy, and an industrial clinic on the first floor. Medical offices are located on all of the other floors.
Three tenants each occupy more than 10% of the rentable square footage in the 14642 Newport Avenue Building. Pacific Health Corporation leases the surgery center and occupies a total of 13,465 square feet (approximately 27.9%) of the rentable area of the building pursuant to two leases that provide for monthly rent of $29,000. The leases expire on November 30, 2001 and March 31, 2003. The surgery center lease provides for one, five-year renewal option. Prospect Medical Systems, Inc. occupies 6,004 square feet (approximately 12.5%) of the rentable area pursuant to a lease that provides for monthly rent of $10,000. The leases expire on September 30, 2003. Southern California Medical occupies 5,208 square feet (approximately 10.8%) of the rentable area of the building pursuant to a lease that provides for monthly rent of $9,000. The lease expires on December 31, 2004.
Regents Medical Center, La Jolla
The Regents Medical Center is a three-story building situated on approximately 2.6 acres in the University Town Center area of San Diego, near the University of California, San Diego. The building, which was constructed in 1989, has ground level retail spaces, two upper floors of medical offices, and subterranean and ground level parking that can accommodate a total of 285 vehicles.
UCSD Orthomed, an affiliate of the University of California, occupies 14,036 square feet (approximately 21.5%) of the rentable area of the building pursuant to leases that provide for an aggregate monthly rent of $32,000. The leases expire at various dates between January 31, 2000 and January 31, 2002.
Pier One Retail Center
The Pier One Retail Center is a one-story, 9,100 square foot retail facility built by the Company in 1998 in Aliso Viejo, California. The building is 100% leased to Pier One Imports, Inc. for ten years on a triple net basis.
Pacific Park
The Pacific Park building in Aliso Viejo, California is a 23,000 square foot MOB, developed by the Company in 1999. The building was completed in December 1999 and opened in January 2000. The building is 73% leased to a major not-for-profit medical provider on a triple net basis. The remaining space is currently under negotiations to be leased.
San Pedro Medical Plaza
The San Pedro Medical Plaza in San Pedro, California is a 59,000 square foot complex consisting of three MOBs. The buildings are located across the street from the San Pedro Peninsula Hospital and are situated on 7.85 acres incorporating a 383 space surface parking lot.
One tenant occupies more than 10% of the rentable square footage of the building. Cor Healthcare Medical Associates occupies 6,470 square feet (approximately 10.9%) of the rentable area pursuant to a lease that provides for monthly rent of $9,000. The lease is currently month-to-month.
1095 Irvine Boulevard, Tustin
The 1095 Irvine Boulevard building in Tustin, California was redeveloped in 1995 as a primary health care center for physicians who are part of the St. Joseph Hospital of Orange health care network. The property is leased to St. Joseph Hospital, Inc. under a net lease with a 15-year term, which began in August 1995, and provides for annual cost of living rent escalations. The lease provides for a monthly rental of $17,500 and expires on July 31, 2010.
Santa Clarita Valley Medical Center
The Santa Clarita Valley Medical Center in Valencia, California is a 42,000 square foot complex consisting of four one-story MOBs and one two-story MOB. The buildings are located on the Henry Mayo Newhall Memorial Hospital Campus, the only regional hospital in the area. The campus includes a 241-bed medical center and another MOB. An open-air asphalt parking lot can accommodate up to 435 vehicles. The buildings are subject to a 60-year ground lease which includes payments of $11,000 per month.
One tenant occupies more than 10% of the rentable square footage of the buildings. A plastic surgeon occupies 4,428 square feet (approximately 10.5%) of the rentable area of the buildings pursuant to a lease that provides for monthly rent of $7,000. This space includes a surgery center. The lease expires on November 30, 2005.
Santa Clarita Valley Medical Center, Bldg F
Building F at the Santa Clarita Valley Medical Center is a two-story, 44,000 square foot MOB built by the Company in 1999. The building is located on the Henry Mayo Newhall Memorial Hospital Campus and is adjacent to the other five MOBs owned by the Company on the Hospital Campus. Building F is the premier medical office building in the Santa Clarita Valley area. The building is subject to a 60-year ground lease that includes payments of $11,000 per month.
Four tenants each occupy more than 10% of the rentable square footage of the building. The Henry Mayo Newhall Memorial Hospital occupies 10,765 square feet (approximately 24.5%) of the rentable area of the building pursuant to three leases that provide for aggregate monthly rent of $23,500. All three leases expire on May 31, 2009. Southern California Orthopedic Institute occupies 10,848 square feet (approximately 24.7%) of the rentable area of the building pursuant to a lease that provides for monthly rent of $21,500. The lease expires on February 28, 2009. SCV Quality Care occupies 5,257 square feet (approximately 12.0%) of the rentable area of the building pursuant to a lease that provides for monthly rent of $10,500. The lease expires on February 28, 2009. The Regents of UCLA occupy 4,454 square feet (approximately 10.1%) of the rentable area of the building pursuant to a lease that provides for monthly rent of $9,000. The lease expires on March 28, 2005.
New Jersey Properties - ---------------------
As of August 15, 1997, Pinnacle Health Enterprises, LLC ("Pinnacle") leased the New Jersey Properties from GL/PHP under the terms of a 17-year net operating lease. PHP Healthcare Corporation ("PHP") guaranteed the obligations of its subsidiary, Pinnacle, under the lease. In November 1998, Pinnacle filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court of the District of Delaware and its case was voluntarily converted to a Chapter 7 case. Also in November 1998, PHP filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court of the District of Delaware. The Commissioner of the New Jersey Department of Banking and Insurance (the "Commissioner") took over the operations of Pinnacle. The Commissioner acting as rehabilitator for the entity operating the facilities under a medical services agreement with Pinnacle, paid Pinnacle's administrative rent through the bankruptcy proceeding up to and including March 5, 1999. After the Commissioner ceased paying rent, Pinnacle's Chapter 7 trustee elected to reject the lease. The Commissioner continued to occupy and lease certain of the buildings through March 31, 1999.
During 1999, GL/PHP leased one of the buildings and a portion of an additional building. Also during 1999, GL/PHP attempted to restructure the Nomura loan in order to attempt to preserve its investment in the New Jersey Properties. See Item 7 for discussion of Nomura loan. On May 5, 1999, GL/PHP presented a loan-restructuring plan to Amresco Management, Inc. ("Amresco"), the loan servicer, in regards to the mortgage secured by the New Jersey Properties. GL/PHP has been in default on this loan since May 1999. On May 10, 1999, Amresco rejected the Company's restructuring plan.
On July 6, 1999, Amresco served GL/PHP with a complaint commencing a judicial foreclosure and requesting the appointment of a receiver in the Superior Court of New Jersey Chancery Division Bergen County. On September 15, 1999, the Superior Court ruled in Amresco's favor and appointed a receiver for these buildings. Amresco filed a motion to foreclose its mortgage against the New Jersey Properties. In February 2000, the court granted the motion and transferred the matter to the foreclosure court of the New Jersey Superior Court. New Jersey counsel has advised that the actual transfer of title should be completed in approximately three to four months. A non-cash impairment loss of $6.4 million was recorded in 1999 to reflect the decline in value of these buildings as a result of the loss of current and future rental revenue due to the Pinnacle and PHP bankruptcies in November 1998 and subsequent departure from the buildings in March 1999. This impairment loss was recorded in the third quarter of 1999 in response to the appointment of the receiver for the buildings in September 1999 and their pending foreclosure.
150 Century Parkway, Mount Laurel Township
The property is located in Burlington County and consists of a one-story MOB containing a net rentable area of approximately 12,560 square feet. The building is situated on approximately 2.50 acres.
80 Eisenhower Drive, Paramus Borough
The property is located in Bergen County and consists of a one-story MOB containing a net rentable area of approximately 12,675 square feet. The building is situated on approximately 2.27 acres.
16 Commerce Drive, Cranford Township
The property is located in Union County and consists of a two level MOB containing a net rentable area of approximately 17,500 square feet. The building is situated on approximately 3.06 acres.
4622 Black Horse Pike, Hamilton Township
The property is located in Atlantic County and consists of a one level MOB containing a net rentable area of approximately 12,560 square feet. The building is situated on approximately 2.73 acres.
2103 Mount Holly Road, Burlington Township
The property is located in Burlington County and consists of a one level MOB containing a net rentable area of approximately 12,560 square feet. The building is situated on approximately 2.43 acres.
274 Route 35, Eaton Town Borough
The property is located in Monmouth County and consists of a one level MOB containing a net rentable area of approximately 12,560 square feet. The building is situated on approximately 4.66 acres.
Senior Care Properties
Southern California Properties - ------------------------------
Pacific Gardens Santa Monica
Pacific Gardens Santa Monica is a 92-unit, 61,000 square foot, four-story assisted living facility located in Santa Monica, California just two blocks from the beach. The building contains a 3-story, subterranean parking garage for 112 vehicles. The facility features a kitchen, 150-seat dining room, community room, TV lounges, library, beauty parlor and guest laundry areas on each floor. The facility is in close proximity to nearby shopping, restaurants and entertainment. Two major hospitals, Santa Monica Hospital Medical Center and St. John's Hospital are located within two miles of the property.
Tustin Hospital
The 14662 Newport Avenue building in Tustin, California is a single-story, 183-bed, 101,000 square foot hospital that was developed in two phases beginning in 1969 and ending in 1974. The hospital includes a full service emergency room, five operating rooms, an intensive care ward, administrative offices, conference rooms, kitchen and cafeteria, pharmacy facilities, gift shop, x-ray facilities and a basement service area. The hospital has an emergency back-up generator with a 10,000-gallon underground fuel tank that complies with current environmental requirements. The hospital was vacant when the Company acquired the property on June 14, 1996. As of May 1, 1997, the hospital was 100% leased to Pacific Health Corporation. The lease provides for triple net rental payments that commenced in January 1998. Rental payments for the months of October through December 1997 were deferred until July 1998, at which time the monthly rent was increased from $33,000 to approximately $35,000. The lease expires June 30, 2002 and provides for three, five-year renewal options. In July 1997, the Company granted Pacific Health Corporation an option, which expires on July 1, 2001, to purchase the hospital during the first six months of 2002 for $5.0 million.
The Arbors at Rancho Penasquitos
The Arbors at Rancho Penasquitos is a 97-unit, 52,000 square foot, three- story assisted living facility located in Rancho Penasquitos, California. The building was originally built in 1988 as a Ramada Hotel. In 1998, the Company, in joint venture with Parsons House, LLC, purchased the property and converted it into The Arbors at Rancho Penasquitos. The facility opened for business in March 1999.
Each unit contains approximately 360 square feet and includes a small kitchenette. The facility contains a kitchen, dining room, activity room and a lounge. The 2.07-acre property also has a parking lot that can accommodate up to 114 cars.
Pacific Gardens Tarzana
Pacific Gardens Tarzana is a two-story, 80-unit, 44,117 square foot assisted living facility located in Tarzana, California. The facility features a formal dining room, two living rooms, pharmaceutical services, daily maid service and personal laundry service.
Lakeview Courtyards
Lakeview Courtyards is a to-be-constructed two story, 80-unit, 50,417 square foot assisted living facility located in Yorba Linda, California. The project is a joint venture with Prestige Care Inc., an experienced assisted living facility operator. Construction began on the facility in October 1999 and is expected to be completed in Spring 2001.
Arizona Properties - ------------------
Maryland Gardens
Maryland Gardens is a 98-bed skilled nursing facility located in Phoenix. The facility is situated on approximately 1.84 acres. American Healthcare Associates, Inc. has managed the facility on a month-to-month basis since April 1999. The Company is currently negotiating a management contract with a new manager.
Maryland Gardens II
Maryland Gardens II is a 20-unit, 30,000 square foot apartment complex acquired by the Company in May 1998. The building is located on a 1.0-acre lot adjacent to the Maryland Gardens skilled nursing facility. The building, named the Winter Gardens Apartments, currently consists of residential tenants. The property also includes a 1.0-acre vacant parcel of land and a duplex building.
Massachusetts Properties - ------------------------
Hampden Properties
G&L Hampden, LLC, a wholly-owned subsidiary of the Company, acquired three nursing home properties in Massachusetts on October 28, 1997 from Hampden Nursing Homes, Inc. ("HNH"), a nonprofit corporation. Lenox Healthcare, Inc. ("Lenox") managed the three facilities from October 1998 through December 1999. In November 1999, Lenox filed for bankruptcy protection. The Company immediately moved to replace Lenox as the manager of the nursing homes. In January 2000, the Company received the bankruptcy court's permission to replace Lenox as the manager and a new management firm, a subsidiary of Roush & Associates ("Roush"), was immediately retained. Since acquiring the properties from HNH, HNH has held the licenses necessary to operate the facilities. In March 2000, the Company successfully transferred the licenses to G&L Massachusetts, LLC, a subsidiary of the Operating Partnership. G&L Massachusetts, LLC subsequently leased the three facilities from the Company while Roush continued to manage them. The lease requires monthly payments of $225,000 net of property taxes, insurance and costs to maintain the facilities. During the first quarter of 2000, the Company received payments totaling $125,000.
Riverdale Gardens
Riverdale Gardens Nursing Home, located in West Springfield, Massachusetts, is a 168-bed nursing facility currently licensed for 84 skilled care and 84 intermediate care beds with 16 private and 76 double occupancy rooms. Constructed in various stages between 1957 and 1975, the property consists of a single story 54,451 square foot building on approximately 3.85 acres as well as a 3,366 square foot single family residence on an adjacent 30,000 square foot lot.
Chestnut Hill
Chestnut Hill Nursing Home, located in East Longmeadow, Massachusetts, is a 123 bed nursing home consisting of 82 skilled nursing and 41 intermediate care beds with 15 private and 54 double occupancy rooms. The facility is a 49,198 square foot single story building constructed in 1984 on approximately 11.9 acres of land.
Mary Lyon
Mary Lyon Nursing Home, located in Hampden, Massachusetts, occupies a 28,940 square foot building situated on 3.7 acres and was originally constructed in 1959 and renovated in 1986. The facility is licensed for 100 beds of which 40 are skilled nursing and 60 are intermediate care beds with ten private rooms, 39 double occupancy rooms and three quadruple occupancy rooms.
Nebraska Property - -----------------
Parsons House on Eagle Run
Parsons House on Eagle Run is a 88-unit assisted living facility located in Omaha. The facility was built through a joint venture between the Company and Parsons House, LLC, who is also the manager, and was completed in October 1999. The facility features private suites, dining room service, housekeeping and laundry services, transportation and a wide range of activities for its residents. The facility staff includes licensed nurses and caregivers who provide assistance with medication, bathing and dressing twenty-four hours a day.
Washington Property - -------------------
Pacific Care Center
Pacific Care Center is a 118-bed skilled nursing facility located in Hoquiam. American Healthcare Associates, Inc. has managed the facility on a month-to-month basis since April 1999. The Company is currently negotiating a management contract with a new manager.
Leases
MOB Properties
As of January 31, 2000, the MOB Properties were approximately 93.1% leased, excluding the six MOB Properties located in New Jersey. New leases and extensions are normally granted for a minimum of three to five years and provide for annual rent increases. Office tenants generally have gross leases whereby rents may be adjusted for a tenant's proportionate share of any increases in the cost of operating the building. Most retail tenants have net leases and pay their share of all operating expenses including property taxes and insurance. The following is a lease expiration table setting forth the number, square feet and associated annual rent for those leases expiring in future years.
MOB Properties--Lease Expirations
________________________________
1) Does not include month-to-month leases or vacant space. There are 63 month- to-month tenants who occupy approximately 66,000 square feet of space and pay approximately $119,000 per month in rent.
The Company was successful in obtaining lease renewals, achieving a weighted average renewal rate of approximately 76.2% on MOB leases that expired during 1999. Although there can be no assurance that this renewal level will be maintained, the Company believes this high renewal rate is due in part to the tendency of medical practitioners to continue to practice in the same space over a number of years. Also, the Company's tenants frequently invest large sums of money in equipment and fixtures for their offices. Furthermore, relocating a doctor's office can be disruptive to the patients who are familiar with the doctor's office location.
The following table sets forth the scheduled annual rent increases for the leases with respect to the MOB Properties in effect at January 31, 2000.
MOB Properties--Rent Increases
______________________________ 1) Does not include 5,935 square feet, or 0.7% of the total rented square feet, which is used as management space. 2) Percent of total rented square feet has been rounded to the nearest tenth of one percent. 3) Approximately 55% of these leases are month-to-month.
The historical occupancy, rounded to the nearest tenth of one percent, of the MOB Properties is shown in the following table:
MOB Properties--Historical Occupancy
______________________________ 1) Retail space. 2) Acquired in 1994. 3) Acquired in December 1993. 4) Placed in service in 1995. 5) Acquired in June 1996 from a creditors committee. Previous operating statistics were not available. 6) Property acquired in 1998. 7) Property was built in 1998. 8) Property was built in 1999. 9) All six facilities were acquired in February 1997.
The following tables set forth the annualized base rent per square foot and annualized base rent for the MOB Properties for the past five years.
MOB Properties--Annualized Average Base Rent Per Square Foot
__________________________ 1) Retail space. 2) Acquired in 1994. 3) Acquired in December 1993. 4) Placed in service in 1995. 5) Acquired in June 1996 from a creditors committee. Previous operating statistics were not available. 6) Property acquired in 1998 7) Property was built in 1998. 8) Property was built in 1999. 9) All six facilities were acquired in February 1997.
MOB Properties--Annualized Base Rent (Amounts in Thousands)
___________________________ 1) Retail space 2) Acquired in 1994. 3) Acquired in December 1993. 4) Placed in service in 1995. 5) Acquired in June 1996 from a creditors committee. Previous operating statistics were not available 6) Property acquired in 1998 7) Property built in 1998. 8) Property built in 1999. 9) All six facilities were acquired in February 1997.
Senior Care Loans
Lending Operations
As of December 31, 1999, the Company had fourteen loans outstanding that total approximately $20.6 million before reserves of $4.6 million. Two of the fourteen loans, which total approximately $11.9 million before reserves, are first deeds of trust secured by healthcare facilities in California and Maryland. The fourteen loans are described in the following paragraphs.
In October 1999, the Company provided $1.65 million of bridge financing for a $9.0 million apartment complex located in Tulsa, Oklahoma. The apartment complex was purchased by G&L Realty Partners, LLC ("G&L Partners"), a company controlled by Joe Carroll, a former Company employee, in which the Company has no equity interest. G&L Partners sold the apartment complex in December 1999 through a tax-exempt bond offering to NVHF Park Chase, LLC ("NVHF"), a not-for- profit company. As part of its loan repayment, the Company received approximately $380,000 in cash. For the remaining balance, the Company received $1.26 million in tax-exempt, subordinated B-bonds from the offering. The tax- exempt bonds are due in December 2029 and bear interest at 8.75% per annum. In addition, the Company received a 10-year, 10%, $500,000 unsecured note from NVHF Affiliates, LLC, the parent company of NVHF. The Company is also the guarantor on a $500,000 letter of credit in favor of NVHF Affiliates, LLC.
On June 17, 1996, the Company funded a $6.1 million loan for the acquisition of a nursing home facility in Baltimore, Maryland (the "Carroll Manor facility") by Heritage Care, Inc. ("Heritage Care"), a non-profit corporation. The Company received a first deed of trust on that facility and Carroll Manor, Inc. ("Carroll Manor"), the seller, received a second deed of trust which secured its $500,000 loan to Heritage Care. In addition to the $6.1 million, the Company made additional advances in 1997, which total $2.6 million, to enable Heritage Care to meet its payroll and other current expenses necessary to remain in operation and thereby protect the value of the Company's security interest in the Carroll Manor facility. On March 31, 1999, the Company refinanced the $6.1 million loan, the $2.6 million in additional advances and all accrued interest into a $7.3 million,10-year, 12% promissory note secured by a first deed of trust on the Carroll Manor facility and a $2.7 million, 10-year, 12% unsecured promissory note. In September 1999, the Company purchased the $500,000 second deed of trust from Carroll Manor for $503,000, including all unpaid interest and late fees. In December 1999, the Company consolidated the $7.3 million first deed of trust and the $500,000 second deed of trust into an $7.8 million promissory note with the same terms and conditions as the previous $7.3 million promissory note. Principal and interest payments on the $7.8 million and the $2.7 million promissory notes due monthly total $125,000. The facility is currently being operated by Future Care, an experienced Maryland operator of nursing homes. Future Care took over operations in June 1997 and has turned around the operations and substantially increased the occupancy and the profitability of the facility. As a result, the Company received $0.9 million in debt service payments from the facility in 1999. In 1999, the Carroll Manor facility was appraised for $11.8 million.
In December 1997, the Company funded $4.6 million into an escrow, to be loaned to Aspen Paso Robles, Inc. ("Aspen") at the close of escrow. This loan was to be secured by (i) a 59-bed nursing and rehabilitation center in Chico, California; (ii) a 38-bed skilled nursing facility in Paso Robles, California; and (iii) a 57-bed intermediate care center in Beaumont, California. The loan closed on February 25, 1998 although certain funds were held in escrow pending the close of the real estate in which the Chico and Beaumont facilities were located. The purchase of the Chico real estate subsequently closed. The funds for the Beaumont real estate remained in escrow until October 1998 at which time the Company secured the return of those funds and applied them to pay down the loan balance to $3.6 million. The borrower subsequently filed a Chapter 11 proceeding under the U.S. Bankruptcy Code. The remaining $3.6 million balance of the loan is currently in default and the two facilities securing the loan have been closed. The Company is currently in the process of taking title to the facilities through two deeds in lieu of foreclosure after securing permission from the bankruptcy court and the agreement of the trustee. Once the Company obtains title to these facilities, the Company intends to lease them to an operator or sell them. In addition, the Company is pursuing legal action against the borrower and other parties involved in the transaction based on
allegations of fraud and negligent misrepresentation. In December 1998, due to the uncertainty surrounding the recovery of the loan, the Company increased its loan loss reserves by $1 million.
On April 25, 1996, the Company entered into a loan participation agreement with Iatros to fund two loans secured by third and fifth trust deeds in the amount of approximately $750,000 and $1.1 million, respectively, to facilitate the purchase of a nursing home in Olathe, Kansas (the "Crystal Park facility"). Following the acquisition of the Crystal Park facility, the borrower engaged an affiliate of Iatros to operate the facility. On May 16, 1997, the borrower filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code and engaged a new operator for the Crystal Park facility, which subsequently closed. In October 1997, the Company assigned its remaining interest in the participation agreement and the promissory notes to Iatros in exchange for an $800,000 note and title to the accounts receivable of the former owner of the facility which had served as additional collateral for the promissory note. The $800,000 note is due October 1, 2004 and accrues interest at 10.0% per annum. Interest payments are due monthly based upon 5.0% per annum of the outstanding balance. In addition, the Company holds two other promissory notes from Iatros in the amounts of $300,000 and $47,000. All of the Iatros promissory notes are currently in default. In December 1998, the Company established a reserve for the full amount of all these notes.
In addition to the notes on the Tulsa, Carroll Manor and Aspen facilities and the three notes due from Iatros, the Company had six other loans outstanding at December 31, 1999, with an aggregate face value of $1.7 million, excluding approximately $0.6 million of additional accrued, unpaid interest. The following is a summary of the six other loans as of December 31, 1999:
. $425,000 note secured by a first deed of trust due June 30, 2000, interest payable monthly at a rate of 10% per annum.
. $150,000 note secured by second deed of trust, interest payable semiannually at a rate of 10.0% per annum.
. $300,000 unsecured promissory note due April 1, 2003, interest payable quarterly at 8.0% per annum. This note is currently in default and accrues interest at the default rate of 12.0% per annum. This note was fully reserved for in December 1998.
. $1,356,000 unsecured promissory notes payable upon demand, interest accrues at 12.0% per annum. In December 1998, the Company established a reserve for a portion of these notes.
. $115,000 unsecured credit line due May 31, 1998, interest payable annually at 12.0% per annum. Unpaid principal accrues interest at 12.0% per annum after maturity date. This amount is currently in default. In December 1998, the Company established a reserve for the full amount of this credit line.
. $44,000 unsecured promissory note due June 30, 1999, interest payable at 10.0% per annum. This amount is currently in default.
As of December 31, 1999, the Company had reserves of $4.6 million for doubtful notes receivable. Management believes that $4.6 million is appropriate in relation to the status of the loans in the Company's portfolio as of March 24, 2000.
GLN
GLN was formed with Nomura Asset Capital Corp. ("Nomura") for the purpose of making short-term loans to third parties to purchase senior care facilities. Due to market conditions and other financial constraints, it does not appear likely that the Company or Nomura will use GLN to make future loans. As of December 31, 1999, GLN had one loan outstanding. In May 1997, GLN acquired a 50% limited partnership interest in a limited partnership created to acquire a recreational vehicle ("RV") park in Florida for approximately $1.2 million. In connection with the acquisition of the RV park, GLN funded a secured loan of approximately $1.5 million to the limited partnership. This loan bears interest at a rate of approximately 9.0% per annum and matured on May 1, 1999. The loan provided for monthly payments of interest only. As of December 31, 1999, the borrower was in default on the interest payments. Management is currently in the process of negotiating its exit strategy with the borrower with respect to this loan. The Company believes that it will recover its full investment in the loan. The RV park is operated by
Camper Clubs of America, Inc., ("Camper Clubs") the largest RV park operator in the U.S. and a limited partner in the limited partnership.
Insurance
The Company carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to the MOB Properties and Senior Care Properties. There are certain types of losses that may either be uninsurable or not economically insurable; moreover, there can be no assurance that policies maintained by the Company will be adequate in the event of a loss. The Company carries earthquake and flood insurance for coverage of losses up to $35 million on the MOB Properties and Senior Care Properties located in California and Arizona, which amount represents approximately 24% of the net book value of these properties. This coverage is subject to a 10% deductible up to the amount of insured loss. The Senior Care Properties located in Washington and Massachusetts do not carry earthquake or flood insurance. Thirty-two of the 45 properties directly or indirectly owned by the Company are located in Southern California, which has a history of seismic activity, including the 1994 Northridge earthquake that damaged the Holy Cross Medical Plaza property. Two Senior Care Properties owned by the Company are located in Phoenix, Arizona, in an area with a history of flood activity. Should an uninsured loss occur, the Company could lose its investment in, and anticipated earnings and cash flow from, a property.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There is no material pending litigation to which the Company or its consolidated or unconsolidated subsidiaries is a defendant or to which any of their properties is subject other than routine litigation arising in the ordinary course of business, most, if not all, of which is expected to be covered by insurance, except as discussed below.
On August 15, 1997, a subsidiary of the Company, GL/PHP, LLC ("GL/PHP") borrowed $16 Million from Nomura, the proceeds of which were used to repay a loan made by PHP Healthcare Corporation ("PHP") in connection with the purchase by GL/PHP of six New Jersey primary care centers (the "New Jersey Properties"). Nomura received a first lien against the real properties. The New Jersey Properties were leased by Pinnacle Health Enterprises, LLC ("Pinnacle"), a subsidiary of PHP, and PHP guaranteed the lease. Concurrently with the $16 Million loan, the Operating Partnership obtained a new $2 Million loan from PHP. The note by its terms is nonnegotiable and provides for a right of offset against payments of interest and principal in an amount equal to any losses sustained by reason of any defaults by Pinnacle; under its lease with GL/PHP, discussed below.
As of August 15, 1997, Pinnacle leased the New Jersey Properties from GL/PHP under the terms of a 17-year net operating lease. PHP guaranteed the obligations of its subsidiary under the lease. In November 1998, Pinnacle filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court of the District of Delaware and its case was voluntarily converted to a Chapter 7 case. Also in November 1998, PHP filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court of the District of Columbia. The Commissioner of the New Jersey Department of Banking and Insurance (the "Commissioner") took over the operations of Pinnacle. The Commissioner acting as rehabilitator for the entity operating the facilities under a medical services agreement with Pinnacle, paid Pinnacle's administrative rent through the bankruptcy proceeding up to and including March 5, 1999. After the Commissioner ceased paying rent, Pinnacle's Chapter 7 trustee elected to reject the lease. The Commissioner continued to occupy and lease certain of the buildings through March 31, 1999.
During 1999, GL/PHP leased one of the buildings and a portion of an additional building. Also during 1999, GL/PHP attempted to restructure the Nomura loan in order to attempt to preserve its investment in the New Jersey Properties. See Item 7 for discussion of Nomura loan. On May 5, 1999, GL/PHP presented a loan-restructuring plan to Amresco Management, Inc. ("Amresco"), the loan servicer, in regards to the mortgage secured by the New Jersey Properties. GL/PHP has been in default on this loan since May 1999. On May 10, 1999, Amresco rejected the Company's restructuring plan.
On July 6, 1999, Amresco served GL/PHP with a complaint commencing a judicial foreclosure and requesting the appointment of a receiver in the Superior Court of New Jersey Chancery Division Bergen County. On September 15, 1999, the Superior Court ruled in Amresco's favor and appointed a receiver for these buildings. Amresco filed a motion to foreclose its mortgage against the New Jersey Properties. In February 2000, the court granted the motion and transferred the matter to the foreclosure court of the New Jersey Superior Court. New Jersey counsel has advised that the actual transfer of title should be completed in approximately three to four months. A non-cash impairment loss of $6.4 million was recorded in 1999 to reflect the decline in value of these buildings as a result of the loss of current and future rental revenue because of the Pinnacle and PHP bankruptcies in November 1998 and their subsequent departure from the buildings in March 1999. This impairment loss was recorded in the third quarter of 1999 in response to the appointment of the receiver for the buildings in September 1999 and their pending foreclosure.
LaSalle National Bank ("LaSalle"), as trustee in trust for the holders of certain obligations including the Nomura loan by and through Amresco, has also filed an action in March 2000 in the United States District Court, Central District of California seeking to cause the Operating Partnership to turn over the $2 Million borrowed from PHP to LaSalle as part of the security LaSalle claims it is entitled to under the deed of trust and assignment of rent with GL/PHP. The Operating Partnership believes that LaSalle is not entitled to these funds and that LaSalle will not be successful in its claims but no assurances can be given at this time that this result will be obtained.
Landmark Healthcare Facilities, LLC ("Landmark") filed a lawsuit against a subsidiary of the Company, G&L Valencia, LLC, claiming that Landmark is entitled to approximately $600,000 plus interest costs under a development agreement entered into between G&L Valencia, LLC and Landmark for development of an MOB project in Valencia, California. The Company is vigorously opposing the lawsuit and has filed a counter suit to recover approximately $400,000 plus interest that was already paid under the development agreement and for a judgment and declaration that all of Landmark's rights, title and interest in G&L Valencia, LLC has been terminated or assigned to the Company. The litigation is in its earliest stages and the likelihood of recovery by either party is therefore inestimable.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the stockholders of the Company during the quarter ended December 31, 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange under the symbol GLR. It has been the Company's policy to declare quarterly distributions to holders of the Company's Common Stock so as to comply with applicable sections of the Code governing REITs. Operating Partnership units ("Units") and shares of Common Stock receive equal distributions. Distributions are declared and paid at the discretion of the Company's Board of Directors and generally depend on the Company's cash flow, its financial condition, capital requirements, the distribution requirements under the REIT provisions of the Code and such other factors as the directors of the Company deem relevant.
The table below sets forth the high and low sales prices of the Company's stock for each full quarterly period from January 1, 1998 to March 24, 2000 as reported by the New York Stock Exchange. The table also includes, on a per share basis, the quarterly cash distribution declared and paid to holders of the Company's Common Stock and Units for each of the last two fiscal years and the current year to date.
______________________________
The Company also paid monthly dividends to holders of the Company's Series A and Series B Preferred Stock on the fifteenth day of each month. Dividends are paid monthly at the rate of $2.56 and $2.45 per annum on shares of the Company's Series A and Series B Preferred Stock, respectively. Distributions on the Company's Series A and Series B Preferred Stock are senior to all classes of the Company's Common Stock.
At various times during the year ending December 31, 1999, the Company repurchased a total of 1,359,300 shares of the Company's Common Stock at an average price of approximately $10.44 per share, including 1,000,000 shares that were purchased pursuant to a tender offer by the Company in November 1999 at a price of $10.50.
During 1999, the Company also purchased 3,500 shares of its Series A Preferred Stock at an average price of $15.24 and 4,200 shares of its Series B Preferred Stock at an average price of $14.36.
The approximate number of holders of record of the shares of Common Stock was 1,747 as of March 24, 2000. This number does not represent the total number of beneficial holders of Common Stock.
ITEM 6.
ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA
The following table sets forth consolidated selected financial and operating information for the Company for each of the years ended December 31, 1999, 1998, 1997, 1996 and 1995. The following information should be read in conjunction with all of the financial statements and notes thereto included in this Form 10-K. This data also should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K. The consolidated selected financial and operating data as of December 31, 1999, 1998, 1997, 1996 and 1995 and for each of the years ended December 31, 1999, 1998, 1997, 1996 and 1995 have been derived from audited financial statements.
______________________________ 1) Funds from operations ("FFO") represents net income (computed in accordance with generally accepted accounting principles, consistently applied ("GAAP")), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real property, less preferred stock dividends paid to holders of preferred stock during the period and after adjustments for consolidated and unconsolidated entities in which the Company holds a partial interest. FFO is computed in accordance with the definition adopted by the National Association of Real Estate Investment Trusts ("NAREIT"). FFO should not be considered as an alternative to net income or any other indicator developed in compliance with GAAP, including measures of liquidity such as cash flows from operations, investing and financing activities. FFO is helpful in evaluating the performance of a real estate portfolio considering the fact that historical cost accounting assumes that the value of real estate diminishes predictably over time. FFO is only one of a range of indicators which should be considered in determining a company's operating performance. The methods of calculating FFO among different companies are subject to variation, and FFO therefore may be an invalid measure for purposes of comparing companies. Also, the elimination of depreciation and gains and losses on sales of property may not be a true indication of an entity's ability to recover its investment in properties. The Company implemented the new method of calculating FFO effective as of the NAREIT-suggested adoption date of January 1, 1996. FFO has been restated for all prior periods under the new method. 2) For purposes of these computations, earnings consist of net income plus fixed charges. Fixed charges and preferred dividends consist of interest expense, capitalized interest, amortization of deferred financing costs and preferred dividends paid to preferred stockholders during the period. The deficit of earnings to fixed charges and preferred dividends for the years ended December 31, 1999 and 1998 was $9,327,000 and $3,038,000, respectively. 3) For purposes of these computations, ratio of funds from operations to fixed charges consists of FFO as defined in note (1) plus fixed charges and preferred dividends paid to preferred stock holders during the period. Fixed charges and preferred dividends consist of interest expense, capitalized interest, amortization of deferred financing costs and preferred dividends paid to preferred stockholders during the period. The deficit of funds from operations to fixed charges for the year ended December 31, 1999 was $5,966,000. 4) Total market capitalization as of the dates presented is long-term debt plus the aggregate market value of the Company's Common Stock and Units not owned by the Company, assuming one Unit is equivalent in value to one share of Common Stock plus the liquidation value of the Preferred Stock outstanding.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Selected Financial Data and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K.
Information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements. These statements can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other comparable terminology. Any one factor or combination of factors could cause the Company's actual operating performance or financial results to differ substantially from those anticipated by management. Factors influencing the Company's operating performance and financial results include, but are not limited to, changes in the general economy, the supply of, and demand for, healthcare related real estate in markets in which the Company has investments, the availability of financing, governmental regulations concerning, but not limited to, new construction and development, the creditworthiness of tenants and borrowers, environmental issues, healthcare services and government participation in the financing thereof, and other risks and unforeseen circumstances affecting the Company's investments which may be discussed elsewhere in this Annual Report on Form 10-K.
Results of Operations
Comparison of the Year Ended December 31, 1999 Versus the Year Ended December 31, 1998
Total revenues increased by $1.8 million, or 6%, from $31.7 million for the year ended December 31, 1998, to $33.5 million in 1999. Rents, tenant reimbursements and parking revenues increased an aggregate $3.5 million, or 13%, from a combined total of $26.9 million for the year ended December 31, 1998, to $30.4 million in 1999. The purchase of a 49,000 square foot MOB in Valencia, California and a 40,000 square foot office and retail complex in Coronado, California in December 1998 accounted for $2.4 million of this increase. The purchase of two senior care facilities located in Santa Monica, California and Hoquiam, Washington during June and August 1998, respectively, accounted for an additional $0.9 million increase. In addition, recently completed construction projects in Valencia and Aliso Viejo accounted for $0.8 million of this increase. These increases were offset by a decrease of $0.7 million in rental revenue due to the vacancy of the Company's six MOBs located in New Jersey. Interest, loan fees and related revenues derived from loans secured by Senior Care Facilities decreased by $1.7 million, or 38%, from $4.5 million for the year ended December 31, 1998, to $2.8 million for the same period in 1999. This decrease was partially due to the repayment during 1998 of seven outstanding loans, representing a total decrease of $0.5 million in interest and loan fee income. An additional $0.9 million of this decrease was due to the loss of interest, during 1999, on non-performing loans for which the Company had previously reserved approximately $2.8 million in December 1998. Furthermore, interest earned on cash on hand decreased during 1999 by approximately $0.3 million as the Company had an average of approximately $11.0 million in cash on hand during 1998 and only $8.0 million during 1999. Other income increased by $0.1 million, or 33%, from $0.3 million in 1998, to $0.4 million in 1999. This increase was due to the gain on sale of a vacant parcel of land located in Tustin, California by the Company of $0.2 million.
Total expenses increased by $9.6 million, or 35%, from $27.6 million for the year ended December 31, 1998, to $37.2 million in 1999. $6.4 million of this increase was due to an impairment loss recognized during 1999 on the Company's six MOBs located in New Jersey. Property operating expenses increased by $1.4 million, or 23%, from $6.2 million for the year ended December 31, 1998, to $7.6 million for the same period in 1999. Property acquisitions and development projects completed by the Company during 1998 and 1999 accounted for $1.0 million of this increase. Management and overhead expenses associated with a wholly-owned subsidiary formed by the Company in November 1998 for the purpose of making loans to Senior Care Facilities accounted for $0.2 million of this increase. The joint venture ceased operations in April 1999. The remaining increase was due to legal and administrative costs relating to the six MOBs located in New Jersey. Depreciation and amortization increased $1.1 million, or 24%, from $4.6 million for the year ended December 31, 1998, to $5.7 million for same period in 1999.
This increase was attributable to property acquisitions made by the Company during 1998 and new building developments placed into service during 1999. Interest expense increased $3.7 million, or 43%, from $8.7 million for the year ended December 31, 1998 to $12.4 million in 1999. This increase was mainly due to interest incurred on net new borrowings of approximately $45.9 million made by the Company during 1999. General and administrative expenses increased $0.6 million, or 23%, from $2.6 million for the year ended December 31, 1998, to $3.2 million for the same period in 1999. This increase was related to the addition of new administrative personnel, greater external accounting expenses, an increase in costs associated with failed acquisitions and an increase in costs associated with the Company's annual report and other SEC filings. These increases were offset by a $3.6 million decrease in provisions for doubtful accounts, notes and bonds receivable as the Company increased its bad debt reserves by $2.0 million for the year ended December 31, 1999, and $5.6 million for the same period in 1998.
Equity in earnings (loss) of unconsolidated affiliates decreased $0.4 million, or 400%, from $0.1 million for the year ended December 31, 1998 to $(0.3) million for the same period in 1999. This decrease was primarily the result of start-up losses associated with the Company's 75% investment in G&L Penasquitos, Inc. and the Company's 50% investment in G&L Parsons on Eagle Run, Inc. In March 1999, The Arbors at Rancho Penasquitos, an assisted living facility operated by G&L Penasquitos, Inc., commenced operations. The facility has been in a lease-up phase since its opening in March 1999 and therefore produced a net operating loss. Eagle Run commenced operations in November 1999 and also produced a net loss for 1999. Occupancy rates at both facilities are increasing on a monthly basis and are expected to stabilize during 2000, at which time both facilities are expected to produce income for the Company.
Net income decreased $6.5 million, or 148%, from $4.4 million for the twelve months ended December 31, 1998 to $(2.1) million in 1999. This decrease was primarily due to the $6.4 million impairment of the Company's six MOBs in New Jersey, the $3.7 million increase in interest expense, the $2.5 million increase in property operating expenses and depreciation as well as the $1.7 million decrease in interest and loan fee income. These amounts were offset by a $3.4 million increase in rents, tenant reimbursements and parking revenues and a $3.6 million decrease in provisions for doubtful accounts, notes and bonds receivable.
Comparison of the Year Ended December 31, 1998 Versus the Year Ended December 31, 1997
Total revenues increased by $4.6 million, or 17%, from $27.1 million for the year ended December 31, 1997, to $31.7 million in 1998. Rents, tenant reimbursements and parking revenues increased an aggregate $4.5 million, or 20%, from a combined total of $22.4 million for the year ended December 31, 1997, to $26.9 million in 1998. Three million of the aggregate increase in rents, tenant reimbursements and parking revenues was related to the acquisition of $23.2 million in rental properties and the remaining 19.5% interest in six New Jersey MOBs since June 30, 1997. The acquisition of five MOBs located in Valencia, California in March 1998 accounted for an additional $0.8 million of this increase and the purchase of two Senior Care Facilities located in Santa Monica, California and Hoquiam, Washington during 1998 resulted in the remaining $0.7 million increase. Interest, loan fees and related revenues derived from loans secured by Senior Care Facilities increased $0.2 million for the year ended December 31, 1998 compared to 1997. Interest and loan fee income increased $1.0 million due to interest and loan fees related to five loans that were originated in late 1997 or early 1998 and increased $0.3 million due to interest earned on excess cash from the November 1997 Preferred Stock offering and the April 1998 debt refinancing. These increases were offset by a decrease of $0.6 million related to a gain from the sale of bonds on March 31, 1997 and a decrease of $0.4 million related to the repayment of $4.6 million of notes receivable during 1998.
Total expenses increased by $6.6 million, or 32%, from $21.0 million for the year ended December 31, 1997, to $27.6 million in 1998. The primary reason for this increase was a $5.6 million increase in the Company's allowance for doubtful accounts, notes and bonds receivable as of December 31, 1998. Excluding this increase in the Company's allowance during the year ended December 31, 1998, operating expenses increased by $1.0 million, or 5%, from $21.0 million for the year ended December 31, 1997 to $22.0 million in 1998.
Property operating expenses decreased $0.1 million, or 2%, from $6.3 million for the year ended December 31, 1997, to $6.2 million in 1998, despite a $0.4 million increase in operating costs related to the five MOBs acquired in
March 1998. This reduction is part of management's ongoing efforts to reduce property operating costs and includes a $0.1 million reduction of property taxes as a result of the Company's successful efforts in appealing the assessed value of its MOB properties. Furthermore, the $18.8 million in MOB Properties and Senior Care Properties acquired between June 30 and December 31, 1997 and the two Senior Care Properties acquired during 1998 were leased on a triple-net basis, thus the Company incurred no operating costs related to these buildings.
Depreciation and amortization increased $1.0 million, or 28%, from $3.6 million for the year ended December 31, 1997 to $4.6 million in 1998. Of this increase, $0.7 million was attributable to property acquisitions made by the Company since June 30, 1997. The remaining $0.3 million increase consisted of depreciation on building and tenant improvements, non-real estate assets and the amortization of leasing commissions.
Interest expense decreased $0.4 million, or 4%, from $9.1 million for the year ended December 31, 1997, to $8.7 million in 1998. This decrease in interest expense was attributable to the reduction of $40 million of the Company's notes payable and $19 million of borrowings on a line of credit which were paid down with the net proceeds of $71.9 million from the two preferred stock offerings in 1997 resulting in a $1.3 million decrease in interest expense. Interest expense also decreased due to the write-off of $0.4 million in loan costs in 1997 associated with these notes payable and the capitalization of $0.5 million of interest related to development projects in 1998. This decrease was offset by interest incurred of $1.5 million on $66.1 million of new borrowings in 1998.
General and administrative expense increased by $0.5 million, or 25%, from $2.0 million for the year ended December 31, 1997 to $2.5 million in 1998. This increase is related to the Company's addition of acquisition, development and support personnel.
Net income decreased $2.2 million, or 34%, from $6.5 million for the twelve months ended December 31, 1997 to $4.3 million in 1998. This decrease is primarily due to an increase in the Company's reserves of $5.6 million and a decrease in equity in earnings from unconsolidated affiliates of $1.1 million offset by a $4.5 million increase in rental revenues, tenant reimbursements and parking revenues.
Liquidity and Capital Resources
The Company's goal is to create wealth through growth in cash flow from its real estate investments. The Company believes that this goal is being realized through its management expertise in the areas of acquisition, development, financing, leasing and strategic management of the MOB Properties and Senior Care Facilities. The Company seeks to maximize cash flow from its existing properties and make new investments that are accretive to cash flow over the long-term. The Company's use of leverage is viewed as a means to grow its asset base without diluting shareholder value.
As of December 31, 1999, the Company's direct investment in net real estate assets totaled approximately $180.4 million, $9.7 million in joint ventures and $16.0 million invested in notes receivable. Total debt outstanding at year-end totaled $177.4 million.
During 1999, the Company completed more than $30 million in new development projects, either directly or through joint ventures. Since January 1, 1999, the Company has completed the following development projects:
. $7.5 million MOB in Valencia, California totaling 43,912 square feet. The building is adjacent to the Company's five existing MOBs on the Henry Mayo Newhall Hospital Campus. The building was completed in March 1999.
. $7.0 million MOB in Aliso Viejo, California totaling 33,000 square feet. The building was 100% pre-leased to Hoag Memorial Hospital and was completed in May 1999. The building was sold to Hoag Hospital for $8.3 million in January 2000.
. $3.5 million MOB in Aliso Viejo, California totaling 22,960 square feet. The building was 73% pre-leased to a major not-for-profit medical provider. As of March 24, 2000, the remaining space has outstanding proposals. The building was completed in December 1999.
. $7.2 million 97-unit, 52,000 square foot, three-story assisted living facility located in Rancho Penasquitos, California. The building was originally built in 1988 as a Ramada Hotel. In 1998, the Company, in joint venture with Parsons House, LLC, purchased the property and converted it into The Arbors at Rancho Penasquitos. The facility was completed and opened for business in March 1999.
. $5.9 million 88-unit assisted living facility located in Omaha, Nebraska. The facility was completed in October 1999 and opened for business in November 1999.
In January 2000, the Company, in joint venture with ASL Tarzana Wedgewood, LLC, purchased a two-story, 80-unit, 44,117 square foot assisted living facility located in Tarzana, California for $10.3 million. The Company contributed $2.5 million for an 85% equity interest in the newly formed joint venture. The facility is operated by ASL Tarzana, Inc., an affiliate of ASL Tarzana Wedgewood, LLC.
Since January 1, 1999, the Company has sold the following assets:
. In June 1999, the Company sold a vacant parcel of land located in Tustin, California for $500,000 to Tustin Heritage Park, LLC. The Company received $75,000 in cash and a $425,000 first deed of trust on the land. The Company also received a 25% equity interest in Tustin Heritage Park, LLC which intends to develop a 53-unit senior apartment residence on the land.
. In October 1999, the Company sold a 50% tenants-in-common interest in a 23,000 square foot MOB under construction in Aliso Viejo, California to Triad Partners/SCP, LLC, whose President is Joseph D. Carroll, a former officer of the Company, for $2.85 million. The purchase price consisted of $1.05 million in cash and the assumption of $1.8 million in mortgage debt.
. In January 2000, the Company sold a 33,000 square foot MOB located in Aliso Viejo, California to Hoag Memorial Hospital for $8.3 million.
Due to uncertainties related to the Company's receivables, the Company increased its allowance for doubtful accounts from $1.3 million at the end of 1998 to $3.4 million as of December 31, 1999. Management believes that $3.4 million is appropriate in relation to the status of certain receivables as of March 24, 2000.
The Company increased its bad debt reserves in 1999 mainly to reflect the potential impairment of delinquent rent and operating expense reimbursements owed to the Company related to the Hampden skilled nursing facilities in Massachusetts. This increase in the reserves was in response to the November 1999 bankruptcy filing of nursing home operator Lenox. From November 1998 until December 1999, Lenox operated these skilled nursing facilities. At December 31, 1999, Lenox owed the Company approximately $2.0 million in delinquent rent and operating expense reimbursements. G&L is pursuing all available means to recover its losses. However, due to the uncertainty surrounding the collectibility of the receivables, the company increased its bad debt reserves by the entire $2.0 million.
At various times during the year ending December 31, 1999, the Company repurchased a total of 1,359,300 shares of the Company's Common Stock, including 1.0 million shares repurchased pursuant to a tender offer discussed below, at an average price of approximately $10.44 per share. In addition, the Company repurchased a total of 3,500 shares of its Series A Preferred Stock at an average price of $15.24 per share and total of 4,200 shares of its Series B Preferred Stock at an average price of $14.36 per share.
On October 1, 1999 the Company made a tender offer for up to 1.0 million shares, or approximately 26%, of its outstanding Common Stock at the time at a purchase price of $10.50 per share. The purpose of the offer was to provide liquidity for those stockholders whose investment objectives may be inconsistent with the Company's new dividend policy. (See "Distributions" below.) The offer expired on October 29, 1999. On November 4, 1999, the
Company announced that 2,047,756 shares of Common Stock had been validly tendered and that the Company would repurchase approximately 48.7% of the shares tendered. The Company completed the tender offer by repurchasing 1.0 million shares of its Common Stock on November 8, 1999. The total cost of the tender offer was approximately $10.6 million including all offering fees.
The Company obtains its liquidity from multiple internal and external sources. Internally, funds are derived from the operation of MOBs and Senior Care Facilities. These funds primarily consist of Funds from Operations (''FFO'' - see discussion below of FFO). The Company's external sources of capital consist of various secured loans and lines of credit as well as access to public equity markets. The Company's ability to expand its MOB and Senior Care Facility operations requires continued access to capital to fund new investments.
In general, the Company expects to continue meeting its short-term liquidity requirements through its working capital, cash flow provided by operations and, if necessary, from its line of credit. The Company considers its ability to generate cash to be good and expects to continue meeting all operating requirements as well as providing sufficient funds to maintain stockholder distributions in accordance with REIT requirements. Long-term liquidity requirements such as refinancing mortgages, financing acquisitions and financing capital improvements will be accomplished through long-term borrowings, the sale of assets, the issuance of debt securities and the offering of additional equity securities.
Historical Cash Flows
The Company's net cash from operating activities decreased $4.0 million, or 32%, from $12.7 million for the year ended December 31, 1998 to $8.7 million for the same period in 1999. Changes include a $6.5 million decrease in net income, a decrease in minority interests of $1.8 million and a decrease in provisions for doubtful accounts, notes and bonds receivables of $3.4 million. These decreases were offset by an increase of $6.4 million in impairment of long-lived assets, a $1.1 million increase in depreciation and amortization and an increase of $1.5 million in accounts payable and other liabilities.
Net cash used in investing activities decreased $38.8 million, or 76%, from $51.1 million for the year ended December 31, 1998 to $12.3 million for the same period in 1999. The decrease was primarily due to a $37.8 million decrease in rental property acquisitions, a $2.1 million decrease in investments in notes and bonds receivable, a $10.8 million decrease in contributions to unconsolidated affiliates and a $1.2 million decrease in investments in marketable securities. These decreases were offset by a $2.0 million increase in additions to rental properties, a $4.9 million decrease in principal payments on notes receivable and a $7.2 million decrease in distributions from unconsolidated affiliates.
Cash flows provided by financing activities decreased $16.4 million, or 63%, from $26.2 million for the twelve months ended December 31, 1998, to $9.8 million for the same period in 1999. The decrease was due primarily to a $8.5 million increase in restricted cash, a $12.0 million increase in purchases of the Company's Common Stock and a $20.1 million increase in notes payable repayments. These were offset by an increase in notes payable proceeds of $22.3 million.
Debt Structure
As of December 31, 1999, the Company had twenty loans approximating $177.4 million. The terms of these twenty loans are described below.
In August 1995, the Company borrowed $30.0 million from Nomura for ten years at a fixed rate of 7.89%. As of December 31, 1999, the outstanding balance under this loan was approximately $28.2 million, requiring monthly principal and interest payments of approximately $229,000 (25-year amortization), and will have a balance of $24.7 million on August 11, 2005, when the note is due. Pursuant to the loan agreement, the Company has the option to prepay this loan at any time upon the payment of a premium which, when added to the remaining principal amount of the note, will be sufficient to purchase non-callable obligations of the U.S. government sufficient to provide for the scheduled payments remaining under the note. No prepayment premium is required during the 90-day period
prior to the note's due date. The properties located at 405 North Bedford, 415 North Bedford, 416 North Bedford and 435 North Bedford have been pledged as security for this note.
During 1996, the Company borrowed $35.0 million from Nomura for ten years at a fixed rate of 8.492%. This note had an outstanding balance of approximately $33.6 million as of December 31, 1999, requires monthly principal and interest payments of approximately $282,000 (25-year amortization), and will have a balance of $29.4 million on August 11, 2006, when the note is due. Pursuant to this loan agreement, the Company has the option to prepay this loan at any time after August 30, 1999 upon the payment of a premium which, when added to the remaining principal amount of the note, will be sufficient to purchase non- callable obligations of the U.S. government sufficient to provide for the scheduled payments remaining under this note. The Sherman Oaks Medical Plaza, Regents Medical Center, Cigna HealthCare Building and the 436 North Bedford Drive MOB have been pledged as security for this note.
On August 15, 1997, a subsidiary of the Company, GL/PHP, LLC ("GL/PHP") borrowed $16 Million from Nomura, the proceeds of which were used to repay a loan made by PHP Healthcare Corporation ("PHP") in connection with the purchase by GL/PHP of six New Jersey primary care centers (the "New Jersey Properties"). Nomura received a first lien against the real properties. On October 11, 1997, the Company began making monthly principal and interest payments on this loan of approximately $155,000 (16 1/2 -year amortization). The loan had a balance of $15.3 million at December 31, 1999. Concurrently with the $16 Million loan, the Operating Partnership obtained a new $2 Million loan from PHP. The note by its terms is nonnegotiable and provides for a right of offset against payments of interest and principal in an amount equal to any losses sustained by reason of any defaults by PHP's subsidiary, Pinnacle Health Enterprises, LLC ("Pinnacle"); under its lease with GL/PHP, discussed below. The loan is unsecured and requires interest-only payments quarterly at the end of October, January, April and July at the rate of 8.5% a year. The full $2.0 million is due on July 31, 2007, but may be prepaid at any time prior to maturity without penalty. Since PHP filed a bankruptcy petition in December 1998, the Company has made no payments on this loan.
As of August 15, 1997, Pinnacle leased the New Jersey Properties from GL/PHP under the terms of a 17-year net operating lease. PHP guaranteed the obligations of its subsidiary under the lease. In November 1998, Pinnacle filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court of the District of Delaware and its case was voluntarily converted to a Chapter 7 case. Also in November 1998, PHP filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court of the District of Delaware. The Commissioner of the New Jersey Department of Banking and Insurance (the "Commissioner") took over the operations of Pinnacle. The Commissioner acting as rehabilitator for the entity operating the facilities under a medical services agreement with Pinnacle, paid Pinnacle's administrative rent through the bankruptcy proceeding through March 5, 1999. After the Commissioner ceased paying rent, Pinnacle's Chapter 7 trustee elected to reject the Lease. The Commissioner continued to occupy and lease certain of the buildings through March 31, 1999.
During 1999, GL/PHP leased one of the buildings and a portion of an additional building. Also during 1999, GL/PHP attempted to restructure the Nomura loan in order to attempt to preserve its investment in the New Jersey Properties. On May 5, 1999, GL/PHP presented a loan-restructuring plan to Amresco Management, Inc. ("Amresco"), the loan servicer, in regards to the mortgage secured by the New Jersey Properties. GL/PHP has been in default on this loan since May 1999. On May 10, 1999, Amresco rejected the Company's restructuring plan.
On July 6, 1999, Amresco served GL/PHP with a complaint commencing a judicial foreclosure and requesting the appointment of a receiver in the Superior Court of New Jersey Chancery Division Bergen County. On September 15, 1999, the Superior Court ruled in Amresco's favor and appointed a receiver for these buildings. Amresco filed a motion to foreclose its mortgage against the New Jersey Properties. In February 2000, the Court granted the motion and transferred the matter to the foreclosure court of the New Jersey Superior Court. New Jersey counsel has advised that the actual transfer of title should be completed in approximately three to four months. A non-cash impairment loss of $6.4 million was recorded in September 1999 to reflect the decline in value of these buildings as a result of the loss of current and future rental revenue due to the Pinnacle and PHP bankruptcies in November 1998 and their subsequent departure from the buildings in March 1999. This impairment loss was recorded in the third quarter of 1999 in response to the appointment of the receiver for the buildings in September 1999 and their pending foreclosure.
On October 28, 1997, the Company acquired the Hampden Properties for a total consideration of approximately $20.0 million. Of this amount, the Company borrowed $6.0 million from Nomura at an interest rate of 8.62% per annum. The three properties were pledged as security for the repayment of this loan and the loan is also guaranteed by the Company. During the fourth quarter of 1999, the Company obtained a $13.92 million loan from GMAC Commercial Mortgage Corp. ("GMAC") secured by the Hampden properties and repaid the $6.0 million Nomura loan. The new loan bears interest at LIBOR plus 2.75% and is due in three years.
On April 22, 1998, 435 North Roxbury Drive, Ltd. (the "Roxbury Partnership"), of which the Operating Partnership is the sole general partner with an ownership interest of 61.75%, refinanced the 435 North Roxbury Drive property. The Roxbury Partnership refinanced the property with a new $7.83 million loan from Tokai Bank of California ("Tokai"). The Roxbury Partnership repaid the remaining balance on the old loan of $7.5 million with the new loan, which bears interest at a fixed rate of 7.05% and is due on April 1, 2008. This loan, which had an outstanding balance of $7.6 million as of December 31, 1999, requires monthly principal and interest payments of approximately $56,000 (25-year amortization), and will have a balance at maturity of $6.2 million. The 435 North Roxbury Drive property has been pledged as security for this loan.
On April 22, 1998, the Company borrowed an additional $12.7 million from Tokai at a fixed rate of 7.05%. On June 1, 1998, the Company began making monthly principal and interest payments on these loans of approximately $91,000 (25-year amortization). These notes, which will have a balance at maturity of $10.0 million, are due on April 1, 2008. As of December 31, 1999, the balance on these notes was $12.4 million. The Holy Cross Medical Plaza, the St. Joseph's Medical Office Building and the Tustin Medical Plaza have been pledged as security for these loans.
On June 30, 1998, the Company, through GLH Pacific Gardens, LLC, acquired Pacific Gardens, a 92-unit senior care facility in Santa Monica, California for $11.2 million. Of this amount, GLH Pacific Gardens, LLC borrowed $8.5 million from GMAC at an interest rate of 30-day LIBOR plus 2.35%. The note required monthly interest-only payments. In August 1999, the Company refinanced this mortgage with an $11.4 million 35-year HUD loan at an interest rate of 8%. The loan requires monthly principal and interest payments of approximately $77,000. As of December 31, 1999, the unpaid balance on this loan was $11.4 million.
On August 6, 1998, the Company acquired a 110-bed skilled nursing facility in Hoquiam, Washington for $3.3 million. Of this amount, the Company borrowed $2.5 million from GMAC at a fixed rate of 7.49%. On October 1, 1998, the Company began making monthly principal and interest payments of approximately $18,000 (25-year amortization). This note, which will have a balance at maturity of $2.0 million, is due on September 1, 2008. The Pacific Care Center has been pledged as security for this note. As of December 31, 1999, the unpaid balance on this note was $2.4 million.
On November 3, 1998, the Company obtained a new $4.6 million unsecured credit line from Tokai. The credit line requires monthly interest payments at 30-day LIBOR plus 2.25% and is due on August 31, 2000. The Company has the option to prepay the outstanding balance, or increments thereof, at any time upon not less than 30 days notice to Tokai. As of December 31, 1999, the Company had an outstanding balance on the credit line of $4.6 million. On January 26, 2000, the Company repaid $3.0 million of the outstanding balance. The outstanding balance as of March 24, 2000 was $1.6 million.
On December 22, 1998, the Company acquired a 49,000 square foot MOB in Valencia, California for $7.4 million. Of this amount, the Company borrowed $5.2 million from The Life Insurance Co. of Virginia at a fixed rate of 6.75%. On February 1, 1999, the Company began making monthly principal and interest payments of approximately $38,000 (25-year amortization). This note, which will have a balance at maturity of $0.9 million, is due on January 1, 2019. The Lyons Avenue Medical Building has been pledged as security for this note. As of December 31, 1999, the unpaid balance on this note was $5.1 million.
On December 31, 1998, the Company acquired a 40,000 square foot office and retail complex in Coronado, California for $9.5 million. Of this amount, the Company borrowed $7.5 million from GMAC at a fixed rate of 6.90%. On February 10, 1999, the Company began making monthly principal and interest payments of
approximately $50,000 (25-year amortization). This note, which will have a balance at maturity of $6.4 million, is due on December 11, 2008. The Coronado Plaza has been pledged as security for this note. The unpaid balance on this note was $7.4 million as of December 31, 1999.
On June 11, 1999, the Company obtained a $5.5 million loan secured by a 33,000 square foot medical office building in Aliso Viejo, California. The loan bore interest at a rate of LIBOR plus 3.0% and was due on February 1, 2001. The building is 100% leased by Hoag Memorial Hospital Presbyterian ("Hoag"). On January 25, 2000 Hoag purchased the building at a price of $8.3 million. The Company used a portion of the proceeds to repay the $5.5 million loan.
On June 30, 1999, the Company obtained a $1.44 million loan from American United Life Insurance Company. The loan, which is secured by the Pier One Retail Center in Aliso Viejo, California, bears interest at a rate of 7.375% and is due on July 1, 2009. On July 1, 1999, the Company began making monthly principal and interest payments of approximately $10,525. As of December 31, 1999, the unpaid balance on this note was $1.4 million.
On July 2, 1999, the Company obtained a $10 million long-term loan secured by its six building portfolio of MOBs located at the Henry Mayo Newhall Hospital campus in Valencia, California. The Company used $5.0 million of the total proceeds to repay a short-term loan secured by these buildings while an additional $2.5 million was escrowed by the lender until the Company meets certain occupancy thresholds at the collateralized buildings. The loan, which is due on July 1, 2009, bears an interest rate of 6.85% and had an unpaid balance of $9.9 million as of December 31, 1999.
On July 26, 1999, the Company obtained a $7.5 million short-term loan secured by three of its properties located in Tustin, California, at an interest rate of prime plus 0.75%. The loan is also guaranteed by the Company. On August 1, 1999, the Company began making monthly principal and interest payments of approximately $64,000. The loan is due on January 21, 2002 and had an unpaid balance of $7.5 million as of December 31, 1999.
On October 22, 1999, the Company obtained a $4.2 million loan secured by a newly-constructed 23,000 square foot MOB in Aliso Viejo, California. The loan is also guaranteed by the Company. On October 1, 1999, the Company sold a 50% tenants-in-common interest in this building to Triad Partners/SCP, LLC. The purchase price included the assumption of 50% of the mortgage debt. The loan bears an interest rate of LIBOR plus 3.40% and is due on November 1, 2002. As of December 31, 1999, the Company's 50% portion of the unpaid balance was $2.1 million.
On December 21, 1999, the Company obtained a loan in the amount of $8.5 million from GMAC secured by its first deed of trust on the Carroll Manor Facility. The loan is also guaranteed by the Company. The loan, which bears interest at LIBOR plus 2.75%, is due on July 1, 2001. On February 1, 2000, the Company began making monthly principal and interest payments of approximately $71,000.
Capital Commitments
As of March 24, 2000, the Company had no commitments to acquire, either directly of indirectly, any MOBs or Senior Care Facilities. However, the Company is actively searching for acquisitions that will be accretive to the Company's stockholders. In general, the Company expects to continue meeting its short-term liquidity requirements through its working capital, cash flow provided by operations and, if necessary, from its line of credit. The Company considers its ability to generate cash to be good and expects to continue meeting all operating requirements as well as providing sufficient funds to maintain stockholder distributions in accordance with REIT requirements. Long- term liquidity requirements such as refinancing mortgages, financing acquisitions and financing capital improvements will be accomplished through long-term borrowings, the sale of assets and the issuance of debt securities.
Distributions
The Company declared a quarterly distribution payable to holders of the Company's Common Stock for the first and second quarter of 1999 in the amount of $0.39 per common share, which was paid on April 15 and July 15, 1999 to stockholders of record on March 31 and June 30, respectively. For the third and fourth quarters of 1999, the Company declared a distribution payable to holders of the Company's Common Stock in the amount of $0.125 per common share, which was paid on October 15, 1999 and January 15, 2000 to stockholders of record on September 30 and December 31, 1999 respectively. The board of directors of the Company reduced the Company's Common Stock distribution in the third quarter of 1999 in order to preserve more of the Company's cash flow for acquisition and development activities. In prior years, the Company has maintained a relatively constant quarterly dividend. However, this has resulted in a return of capital to stockholders because the Company's earnings have not kept pace with such distributions. In order to maximize its cash flow in the future, the Company expects to pay a Common Stock dividend in the amount that approximates the minimum dividend required to maintain its status as a real estate investment trust. This may result in fluctuations in total dividends from year to year or even quarter to quarter depending upon variations in the Company's taxable income resulting from such factors as sales of properties or adjustments to reserves.
The Company also paid monthly dividends to holders of the Company's Series A and Series B Preferred Stock on the fifteenth day of each month. Dividends are paid monthly at the rate of $2.56 and $2.45 per annum on shares of the Company's Series A and Series B Preferred Stock, respectively. The Company distributed dividends of $4.5 million to holders of the Company's Common Stock during 1999 while the Company's FFO was $(6.0) million for the same period. However, excluding the $6.4 million non-cash impairment loss and the $2.0 million increase in bad debt reserves, the Company's FFO for 1999 was $2.4 million. The Company believes that the reduced Common Stock dividend rate will benefit stockholders in the future by allowing the Company to preserve its cash flow to invest in new acquisition and development projects. However, the Company can offer no assurances that the reduced Common Stock dividend will allow the Company to consistently produce a level of FFO at least equal to the current level of distributions in the future. The dividends paid to the Company's preferred stockholders remain unchanged.
Financing Policies
The Company's ratio of debt to total market capitalization was 63.8% based upon the closing price of the Common Stock at December 31, 1999. Total market capitalization is based on the long-term debt of the Operating Partnership, plus (i) the aggregate market value of the Company's Common Stock and Operating Partnership Units not owned by the Company assuming one Unit is equivalent in value to one share of Common Stock, and (ii) the aggregate liquidation value of the Series A Preferred Stock and the Series B Preferred Stock.
To the extent that the Board of Directors of the Company decides to seek additional funding, the Company may raise such capital using various means, including retention of internally generated funds (subject to the distribution requirements in the Code with respect to REITs), existing working capital and possibly the issuance of additional debt (secured or unsecured) or any combination of the above. It is anticipated that borrowings will continue to be made through the Operating Partnership or other entities, although the Company may also incur indebtedness that may be re-borrowed by the Operating Partnership on the same terms and conditions as are applicable to the Company's borrowing of such funds. Except as required pursuant to existing financing agreements, the Company has not established any limit on the number or amount of mortgages or unsecured debt that may be placed on any single property or on its portfolio as a whole.
The Board of Directors of the Company also has the authority to cause the Operating Partnership to issue additional Units in any manner (and subject to certain limitations in the Partnership Agreement on such terms and for such consideration) as it deems appropriate and may also decide to seek financing for the purposes of managing the Company's balance sheet by adjusting the Company's existing capitalization. The refinancing of the Company's balance sheet may entail the issuance and/or retirement of debt, equity or hybrid securities.
Inflation
The majority of the Company's leases are long-term leases designed to mitigate the adverse effect of inflation. Approximately 50% of the Company's leases contain provisions that call for annual rent increases equal to the increase in the Consumer Price Index and the majority of the remaining leases allow for specific annual rent increases. Furthermore, many of the Company's leases require tenants to pay a pro rata share of building operating expenses, including real estate taxes, insurance and common area maintenance. The effect of such provisions is to reduce the Company's exposure to increases in costs and operating expenses resulting from inflation.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for fiscal years beginning after June 15, 1999 and requires all derivatives to be recorded on the balance sheet at fair value as either assets or liabilities depending on the rights or obligations under the contract. SFAS 133 also establishes new accounting methodologies for the following three classifications of hedges: fair value, cash flow and net investment in foreign operations. Management believes the adoption of SFAS 133 will not have a material impact on the Company's financial position or results of operations.
Year 2000 Compliance
The information provided below contains Year 2000 statements and is a Year 2000 Readiness Disclosure pursuant to Pub. L. No. 105-271.
Many computers, software programs and other equipment which utilize microprocessors (collectively referred to as "Systems" and individually as a "System") process date sensitive data in the normal course of operations. Some of these Systems use a 2-digit field to designate the year. As the year 2000 approached, there was concern these Systems might not be capable of distinguishing between events occurring in the year 1900 and the year 2000, and that these Systems might become inoperable or produce information that was unreliable.
The Company experienced no adverse affects related to the Year 2000 problem. None of the Company's Systems nor any of its vendors' or tenants' Systems have adversely affected the Company. The Company believes that it is not at risk for any Year 2000 related problems, but will continue to monitor all Systems that could, but have not, been affected. The cost to the Company to make its internal Systems Year 2000 compliant was not material to the Company's financial position.
Funds from Operations
Industry analysts generally consider FFO to be an appropriate measure of the performance of a REIT. The Company's financial statements use the concept of FFO as defined by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT"). FFO is calculated to include the minority interests' share of income since the Operating Partnership's net income is allocated proportionately among all owners of Operating Partnership Units. The number of Operating Partnership Units held by the Company is identical to the number of outstanding shares of the Company's Common Stock, and owners of Operating Partnership Units may, at their discretion, convert their Units into shares of Common Stock on a one-for-one basis.
The Company believes that, in order to facilitate a clear understanding of the operating results of the Company, FFO should be examined in conjunction with the Company's net income as presented in the Selected Financial Data and Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K and the additional data presented below. The table on the following page presents an analysis of FFO and additional data for each of the four quarters and the year ended December 31, 1999 for the Operating Partnership:
G&L REALTY CORP. FUNDS FROM OPERATIONS FOR THE FOUR QUARTERS AND YEAR ENDED DECEMBER 31, 1999
______________________________ 1) FFO represents net income (computed in accordance with GAAP, consistently applied), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real property, less preferred stock dividends paid to holders of preferred stock during the period and after adjustments for consolidated and unconsolidated entities in which the Company holds a partial interest. FFO is computed in accordance with the definition adopted by NAREIT. FFO should not be considered as an alternative to net income or any other indicator developed in compliance with GAAP, including measures of liquidity such as cash flows from operations, investing and financing activities. FFO is helpful in evaluating the performance of a real estate portfolio considering the fact that historical cost accounting assumes that the value of real estate diminishes predictably over time. FFO is only one of a range of indicators which should be considered in determining a company's operating performance. The methods of calculating FFO among different companies are subject to variation, and FFO therefore may be an invalid measure for purposes of comparing companies. Also, the elimination of depreciation and gains and losses on sales of property may not be a true indication of an entity's ability to recover its investment in properties. The Company implemented the new method of calculating FFO effective as of the NAREIT- suggested adoption date of January 1, 1996. FFO has been restated for all prior periods under the new method.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary risk inherent in the Company's market sensitive instruments is the risk of loss resulting from interest rate fluctuations. Approximately 10% of the Company's notes payable bear interest at a rate indexed to the one-month LIBOR rate. The tables below provide information as of December 31, 1999 and 1998 about the Company's long-term debt obligations that are sensitive to changes in interest rates, including principal cash flows by scheduled maturity, weighted average interest rate and estimated fair value. The weighted average interest rates presented are the actual rates as of December 31, 1999 and 1998.
The Company's future earnings and cash flows relating to market sensitive instruments are primarily dependent upon prevailing LIBOR market interest rate. Based upon interest rates as of December 31, 1999, a 1% increase in the LIBOR rate would decrease future earnings by $420,000 and future cash flow by $101,000. A 1% decrease in the LIBOR rate would increase future earnings by $420,000 and future cash flow by $101,000. A 1% change in the LIBOR rate would not have a material impact on the fair value of the Company's debt.
The Company's future earnings and cash flows relating to market sensitive instruments are primarily dependent upon prevailing LIBOR market interest rate. Based upon interest rates as of December 31, 1998, a 1% increase in the LIBOR rate would decrease future earnings and cash flow by $131,000. A 1% decrease in the LIBOR rate would increase future earnings and cash flow by $131,000. A 1% change in the LIBOR rate would not have a material impact on the fair value of the Company's debt.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See Index to Consolidated Financial Statements and Schedules on Page 46.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is provided under the captions "Election of Directors," "Executive Officers" and "Section 16 Reporting" of the Company's definitive proxy statement for its 2000 annual meeting of stockholders which will be filed on or before April 30, 2000 and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is provided under the caption of "Executive Compensation" of the Company's definitive proxy statement for its 2000 annual meeting of stockholders which will be filed on or before April 30, 2000 and is incorporated herein by reference; provided, however, that neither the Report of the Compensation Committee on executive compensation nor the Stock Performance Graph set forth therein shall be incorporated by reference herein, in any of the Company's past or future filings under the Securities Act of 1933, as amended, or the Securities Act of 1934, as amended, except to the extent the Company specifically incorporates such report or Stock Performance Graph by reference therein and should not be otherwise deemed filed under either such Act.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is provided under the captions "Principal Stockholders," "Information Regarding Nominees and Directors" and "Executive Officers" of the Company's definitive proxy statement for its 2000 annual meeting of stockholders that will be filed on or before April 30, 2000 and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is provided under the caption "Certain Transactions" of the Company's definitive proxy statement for its 2000 annual meeting of stockholders that will be filed on or before April 30, 2000 and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Consolidated Financial Statements and Schedules:
(c) Exhibits
(c) Exhibits - (continued from previous page)
(c) Exhibits - (continued from previous page)
(c) Exhibits - (continued from previous page)
1) Previously filed as an exhibit of like number to the Registrant's Registration Statement on Form S-11 and amendments thereto (File No. 33- 68984) and incorporated herein by reference.
2) Previously filed as an exhibit of like number to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference.
3) Previously filed as an exhibit of like number to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference.
4) Previously filed as Exhibits 10.1 (with respect to Exhibit 10.22), 10.2 (with respect to Exhibit 10.23), and 10.3 (with respect to Exhibit 10.24) to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995 and incorporated herein by reference.
5) Previously filed as an exhibit of like number to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference.
6) Previously filed as an exhibit of like number to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference.
7) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference.
8) Filed as an exhibit to the Company's Registration Statement on Form S-11 and amendments thereto (File No. 333-24911) and incorporated herein by reference.
9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference.
10) Filed as an exhibit to the Company's Current Report on Form 8-K (filed as of August 15, 1997) and incorporated herein by reference.
11) Filed as an exhibit to the Company's Current Report on Form 8-K (filed as of October 28, 1997) and incorporated herein by reference.
12) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (filed as of November 5, 1997) for the quarter ended September 30, 1997 and incorporated herein by reference.
13) Filed as an exhibit to the Company's Annual Report on Form 10-K (filed as of April 9, 1999) for the year ended December 31, 1998 and incorporated herein by reference.
14) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (filed as of May 17, 1999) for the quarter ended March 31, 1999 and incorporated herein by reference.
15) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (filed as of November 12, 1999) for the quarter ended September 30, 1999 and incorporated herein by reference.
c) Management contract or compensatory plan or arrangement.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders G&L Realty Corp.:
We have audited the accompanying consolidated balance sheets of G&L Realty Corp. and subsidiaries (the Company) as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 the Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Los Angeles, California March 10, 2000
G&L REALTY CORP.
CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
See accompanying notes to Consolidated Financial Statements
G&L REALTY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
See accompanying notes to Consolidated Financial Statements
G&L REALTY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
See accompanying notes to Consolidated Financial Statements
G&L REALTY CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
G&L REALTY CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
NONCASH INVESTING AND FINANCING ACTIVITIES
G&L REALTY CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Concluded
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1999
1. General
G&L Realty Corp. (the "Company") was formed as a Maryland corporation to continue the ownership, management, acquisition and development activities previously conducted by G&L Development, a California general partnership, the Company's predecessor. All of the Company's assets are held by, and all of its operations are conducted through, the following entities:
G&L Realty Partnership, L.P., a Delaware limited partnership (the "Operating Partnership") G&L Realty Financing Partnership II, L.P., a Delaware limited partnership (the "Realty Financing Partnership")* G&L Medical Partnership, L.P., a Delaware limited partnership (the "Medical Partnership")* G&L Gardens, LLC, an Arizona limited liability company ("Maryland Gardens")* 435 North Roxbury Drive, Ltd., a California limited partnership (the "Roxbury Partnership") GL/PHP, LLC, a Delaware limited liability company ("GL/PHP")* G&L Hampden, LLC, a Delaware limited liability company ("Hampden")* G&L Valencia, LLC, a California limited liability company ("Valencia") G&L Holy Cross, LLC, a California limited liability company ("Holy Cross")* G&L Burbank, LLC, a California limited liability company ("Burbank")* G&L Tustin, LLC, a California limited liability company ("Tustin")* GLH Pacific Gardens, LLC, a California limited liability company ("Pacific Gardens") G&L Hoquiam, LLC, a California limited liability company ("Hoquiam") G&L Lyons, LLC, a California limited liability company ("Lyons") G&L Coronado (1998), LLC, a California limited liability company ("Coronado")
* The Realty Financing Partnership, the Medical Partnership, Maryland Gardens, GL/PHP, Hampden, Holy Cross, Burbank and Tustin are herein defined collectively as the "Financing Entities" and individually as the "Financing Entity".
The Company, as the sole general partner and as owner of an approximately 81% ownership interest, controls the Operating Partnership. The Company controls the Financing Entities through wholly owned subsidiaries incorporated in either the State of Delaware or the State of California (collectively, the "Subsidiaries" and individually, a "Subsidiary"). Each Subsidiary either (i) owns, as sole general partner or sole managing member, a 1% ownership interest in its related Financing Entity or (ii) owns no interest and acts as the manager of the Financing Entity. The remaining 99% ownership interest in each Financing Entity which is owned 1% by a Subsidiary is owned by the Operating Partnership, acting as sole limited partner or member. Financing Entities in which a Subsidiary owns no interest are 100% owned by the Operating Partnership.
References in these consolidated financial statements to the Company include its operations, assets and liabilities including the operations, assets and liabilities of the Operating Partnership, the Subsidiaries, the Financing Entities, the Roxbury Partnership (in which the Operating Partnership owns a 61.75% partnership interest and is the sole general partner), Valencia (in which the Operating Partnership owns an 80% membership interest and is the sole managing member), Pacific
Gardens (in which the Operating Partnership owns a 93% membership interest and is a co-managing member) and Hoquiam, Lyons and Coronado (in which the Operating Partnership owns a 100% interest).
In addition to the Subsidiaries, the Company also owns interests in various unconsolidated affiliates. Although the Company's investment represents a significant portion of the capital of such affiliates and the Company exercises significant influence over the activities of these entities, the Company does not have the requisite level of voting control to include the assets, liabilities and operating activities of these affiliates in the consolidated financial statements of the Company. The entities in which the Company has unconsolidated financial interests are as follows:
. GLN Capital Co., LLC ("GLN") is a Delaware limited liability company formed in 1996. GLN is owned 49.9% by the Operating Partnership and 50.1% by an affiliate of Nomura Asset Capital Corp. ("Nomura"). The purpose of GLN is to fund loans to the senior care industry.
. Valley Convalescent, LLC ("Valley Convalescent") is a California limited liability company formed by the Company, through the Operating Partnership, and Continuum Health Incorporated, a Delaware corporation ("Continuum"). Both the Operating Partnership and Continuum hold a 50% ownership interest in Valley Convalescent. Continuum is the managing member of Valley Convalescent, which was formed for the purpose of acquiring Valley Convalescent Center located in El Centro, California.
. G&L Grabel San Pedro, LLC ("San Pedro") is a California limited liability company, formed on March 10, 1998 by the Company through the Operating Partnership, and Gary Grabel, an experienced MOB manager. The Company and Gary Grabel contributed to San Pedro 84% and 16% of the equity, respectively. However, the initial ownership interests of the parties will be adjusted to 50% as each partner receives a return of its initial capital contribution through preferred distributions. San Pedro was formed for the purpose of acquiring three MOBs located at 1360 West 6th street in San Pedro, California.
. G&L Penasquitos, LLC ("Penasquitos LLC") is a California limited liability company, formed by the Company on April 24, 1998, through the Operating Partnership, and Parsons House, LLC, a California limited liability company ("Parsons"). The Company and Parsons contributed to Penasquitos LLC 75% and 25% of the equity, respectively. However, the initial ownership interests of the parties will be adjusted to 50% as each partner receives a return of its initial capital contribution through preferred distributions. Penasquitos LLC was formed for the purpose of acquiring and converting a building located in Rancho Penasquitos, California into a senior care facility.
. G&L Penasquitos, Inc. ("Penasquitos Inc.") is a California corporation formed on April 21, 1998 by the Company, through the Operating Partnership, and Parsons House, LLC, a California limited liability company. The Company owns 75% of the total equity in Penasquitos Inc. in the form of non-voting preferred stock. Parsons holds 25% of the total equity and all of the voting common stock. Penasquitos Inc. was formed for the purpose of operating a senior care facility in Rancho Penasquitos, California.
. GLH Pacific Gardens Corp. ("Pacific Gardens Corp.") is a California corporation formed on June 25, 1998 by the Company, through the Operating Partnership, and ASL Santa Monica, Inc., a California corporation ("ASL"). The Company owns 93% of the total equity in Pacific Gardens Corp. in the form of non-voting preferred stock. ASL holds 7% of the total equity in the form of common stock. Pacific Gardens Corp. was formed for the purpose of operating a senior care facility located in Santa Monica, California, which was purchased by the Company.
. G&L Parsons on Eagle Run, LLC ("Eagle Run") is a California limited liability company, formed on December 29, 1998, through the Operating Partnership and Parsons. The Company and Parsons each contributed 50% of the total equity in Eagle Run. Eagle Run was formed for the purpose of acquiring a vacant piece of land in Omaha, Nebraska upon which the members developed a senior care facility.
. G&L Parsons on Eagle Run, Inc. ("Eagle Run, Inc.") is a California corporation formed on December 20, 1998 by the Company, through the Operating Partnership and Parsons. Eagle Run, Inc. was formed for the purpose of operating a senior care facility in Omaha, Nebraska on the land acquired by Eagle Run.
. Lakeview Associates, LLC ("Lakeview") is a California limited liability company, formed on September 2, 1999 by the Company, through the Operating Partnership and D.D.&F. ("Prestige"), an Oregon general partnership. The Company and Prestige each contributed 50% of the total equity of Lakeview. The Company contributed land and construction in progress in exchange for 50% of the equity of Lakeview and a $1.4 million note receivable. Prestige contributed $250,000 for a 50% interest in Lakeview. Lakeview was formed for the purpose of developing a two story, 80 unit, 92 bed assisted living facility in Yorba Linda, California.
. Tustin Heritage Park, LLC ("Heritage Park") is a California limited liability company in which the Company has a 25% equity ownership interest. In June 1999, the Company sold a vacant piece of land in Tustin to Heritage Park. In exchange, the Company received $75,000 in cash, a $425,000 first deed of trust and a 25% equity ownership interest in Heritage Park. Heritage Park intends to develop a 53-unit senior apartment residence on the land.
GLN, Valley Convalescent, San Pedro, Penasquitos LLC, Penasquitos Inc., Pacific Gardens Corp., Eagle Run, Eagle Run, Inc., Lakeview and Heritage Park are herein defined collectively as the "Unconsolidated Affiliates" and individually as "Unconsolidated Affiliate".
2. Summary of Significant Accounting Policies
Business-- The Company is a self-managed Real Estate Investment Trust ("REIT") that acquires, develops, manages, finances and leases health care properties. The Company's business currently consists of investments in healthcare properties and in debt obligations secured by healthcare properties. Investments in healthcare property consists of acquisitions, made either directly or through joint ventures, in MOBs or senior care facilities which are leased to healthcare providers. The Company's lending activities consist of providing short-term secured loans to facilitate third party acquisitions.
Basis of presentation-- The accompanying condensed consolidated financial statements include the accounts of the Company. The interests in the Roxbury Partnership, Valencia and Pacific Gardens which are not owned by the Company, have been reflected as minority interests. All significant intercompany accounts and transactions have been eliminated in consolidation.
Properties-- The Operating Partnership, the Realty Financing Partnership, the Medical Partnership, Maryland Gardens, the Roxbury Partnership, GL/PHP, Hampden, Valencia, Holy Cross, Burbank, Tustin, Pacific Gardens, Hoquiam, Lyons and Coronado own a 100% fee simple interest in all of the properties.
Income taxes-- The Company expects to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company is generally not subject to corporate Federal income taxes so long as it distributes at least 95% of its taxable income to stockholders and meets certain other requirements relating to its income and assets. For the years ended December 31, 1999, 1998 and 1997, the Company met all of these requirements. Therefore, no provisions for Federal income taxes are included in the accompanying financial statements. State income tax requirements are similar to Federal requirements.
Real estate and depreciation-- Rental property is recorded at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:
Depreciation expense for the years ended December 31, 1999, 1998 and 1997 was $5,424,000, $4,432,000 and $3,484,000 respectively. Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations and all costs directly related to acquisitions are capitalized.
Revenue recognition-- Base rental income is recognized on a straight-line basis over the term of the lease regardless of when payments are due. Certain leases include rent concessions and escalation clauses creating an effective rent that is included in unbilled rent receivable (Note 5).
Cash and cash equivalents-- All demand and money market accounts and short- term investments in governmental funds with a maturity of three months or less are considered to be cash and cash equivalents. Cash equivalents are carried at cost, which approximates fair value due to the short period of time to maturity. The Company invests its excess cash balances in commercial paper and auction notes issued by companies with investment grade ratings. Throughout the year, the Company also maintained cash balances at banks in excess of federally insured limits.
Restricted Cash-- Pursuant to various loan agreements, the Company is required to fund segregated interest bearing accounts to be used for debt service payments, tenant security deposits, property taxes, insurance premiums and property improvements.
Marketable Securities-- The Company determines the appropriate classification of marketable securities at the time of purchase. Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are stated at cost, adjusted for amortization of premiums and discounts to maturity. Marketable securities not classified as held-to-maturity are classified as available-for-sale or trading securities. As of December 31, 1999, the Company has no securities classified as available-for-sale or trading. Interest and amortization of premiums and discounts for all securities are included in interest income.
Deferred charges and other assets-- Deferred charges and other assets consist of leasing commissions, deferred loan fees, financing costs, construction-in- progress, investments, deposits and prepaid expenses. Leasing commissions are amortized on a straight-line basis over the lives of the leases which range typically from five to ten years. Deferred loan fees are amortized over the terms of the respective agreements. Expenses incurred to obtain financing are capitalized and amortized over the term of the related loan as a yield adjustment. Interest rate protection agreement fees are capitalized and amortized over the term of the agreements.
Minority interest in consolidated affiliates-- The Operating Partnership, as sole general partner, has a 61.75% ownership interest in the Roxbury Partnership which owns the property located at 435 North Roxbury Drive. The minority interest is a debit balance that resulted from depreciation allocations and cash distributed to partners in excess of their original investment and subsequent accumulated earnings. It is management's opinion that the deficit is adequately secured by the unrecognized appreciated value of the Roxbury property and will be recovered through an accumulation of undistributed earnings or sale of the property. The Operating Partnership, as sole general partner, also owns an 80% interest in Valencia and a 93% interest in Pacific Gardens.
Long-lived assets-- The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that an asset's book value exceeds the undiscounted expected future cash flows to be derived from that asset. Whenever undiscounted expected future cash flows are less than the book value, the asset will be reduced to estimated fair value and an impairment loss will be recognized. During 1999, the Company recorded a $6.4 million impairment loss related to its six New Jersey MOBs. (See Note 3).
Per share data-- Earnings per share are computed based upon the weighted average number of shares of the Company's Common Stock, $.01 par value (the "Common Stock") outstanding during the period. The treasury stock method is used to determine the number of incremental common equivalent shares resulting from options granted under the Company's stock incentive plan. Computation of the number of shares is included in Note 14.
Financial instruments--The estimated fair value of the Company's financial instruments is determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value. The use of different market assumptions or estimation methodologies may have a material impact on the estimated fair value amounts. Cash, cash equivalents, tenant rent and other accounts receivable, accounts payable and other liabilities are carried at book value as the amount of these instruments approximates fair value due to their short-term maturities. The carrying amount of the Company's variable rate notes payable as of December 31, 1999 and 1998 and the carrying amount of the Company's fixed rate notes payable as of December 31, 1998 approximate fair value because the interest rates are comparable to rates currently being offered to the Company. The fair value of the Company's fixed rate notes payable as of December 31, 1999 was $130.7 million because the interest rates on the Company's fixed rate notes payable are lower than the rates currently being offered to the Company. The estimated fair values of the company's mortgage loans and bonds receivable, are based upon market values of loans and bonds receivable with similar characteristics adjusted for risk inherent in the underlying transactions. Management estimates that the fair value of the Company's mortgage loans and bonds receivable approximate their amortized cost basis, after adjustment for the allowance for amounts deemed to be uncollectible. There are no realized or unrealized gains or losses included in the accompanying financial statements.
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.
Recent accounting pronouncements-- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133").
SFAS 133 is effective for fiscal years beginning after June 15, 1999 and requires all derivatives to be recorded on the balance sheet at fair value as either assets or liabilities depending on the rights or obligations under the contract. SFAS 133 also establishes new accounting methodologies for the following three classifications of hedges: fair value, cash flow and net investment in foreign operations. Management believes the adoption of SFAS 133 will not have a material impact on the Company's financial position or results of operations.
3. Buildings and Improvements
Buildings and improvements consist of the following:
Impairment loss - In 1999, the Company recorded a non-cash impairment charge related to six New Jersey medical office buildings owned by the Company as required by SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Recording these buildings at their estimated fair market value resulted in a write down of the carrying value of these buildings of $6.4 million.
4. Tenant Rent and Reimbursements Receivable
Tenant rent and reimbursements receivable are net of an allowance for uncollectible amounts of $3,409,000 and $1,261,000 as of December 31, 1999 and 1998, respectively. The activity in the allowance for uncollectible tenant accounts for the three years ending December 31, 1999, was as follows:
During the year ended December 31, 1999, the Company increased its allowance for uncollectible amounts by $2.2 million. This increase was mainly related to delinquent rents and operating expense reimbursements due from the operator of the Company's three skilled nursing facilities in Hampden, Massachusetts (See Note 15). The remaining balance represents increases for the Company's MOB tenants incurred through the normal course of business.
5. Unbilled Rent Receivable
The Company has operating leases with tenants that expire at various dates through 2011. The minimum rents due under these leases are subject to either scheduled fixed increases or adjustments based on the Consumer Price Index. In general, the retail leases require tenants to pay their pro-rata share of property taxes, insurance and common area operating costs, while the medical office leases require tenants to reimburse the Company for annual increases in property taxes, insurance and specified operating expenses over a base year amount.
Generally accepted accounting principles require that rents due under operating leases with fixed increases be averaged over the life of the lease. This practice, known as "straight-line rents" creates an unbilled rent receivable in any period during which the amount of straight-line rent exceeds the actual rent billed (this occurs primarily at the inception of the lease period). As the lease approaches its expiration date, billed rent will eventually exceed the amount of straight-line rent causing the unbilled rent receivable to decline. The straight-line rent calculation assumes no new or re- negotiated rents or extension periods during the life of the lease and excludes operating cost reimbursements. The following table summarizes future rents due under existing leases and the corresponding straight-line rent calculation:
The activity in the allowance for unbilled rent, recorded as a reduction of rental revenue for the three years ending December 31, 1999, consisted of the following:
6. Other Receivables
Other receivables consist of all outstanding balances due to the Company other than amounts due from current tenants and are net of the allowance for uncollectible amounts of $205,000 and $330,000 as of December 31, 1999 and 1998. The activity in the allowance for uncollectible accounts for the three years ending December 31, 1999, is as follows:
7. Mortgage Loans and Bonds Receivable
Mortgage loans and bonds receivable consist of the following:
As of December 31, 1999, the principal balance on notes receivable of $6,807,000 was either past due or currently due as a result of default. The $3.7 million promissory note in default is secured by two skilled nursing facilities upon which the Company is in the process of taking title. Thus, the $6.8 million of notes receivable in default are not reserved in total.
The activity in the allowance for uncollectible notes receivable for the three years ending December 31, 1999, is as follows:
8. Investments In Unconsolidated Affiliates
The Company has investments in various unconsolidated affiliates as described in Note 1. The following tables provide a summary of the Company's investment in each of these entities as of December 31, 1999 and 1998 (in thousands).
Following is a summary of the condensed financial information of each of the unconsolidated affiliates as of and for the year ended December 31, 1999 (in thousands).
Following is a summary of the condensed financial information of each of the unconsolidated affiliates as of and for the year ended December 31, 1998 (in thousands).
9. Marketable Securities
Marketable securities consist of the following:
See Footnote 15 for additional discussion of marketable securities.
10. Deferred Charges and Other Assets
Deferred charges and other assets consist of the following:
11. Notes Payable
As of December 31, 1999, 30-day LIBOR was 5.832% and the prime rate was 8.50%.
Aggregate future principal payments as of December 31, 1999 are as follows:
As of December 31, 1999 the Company was in default on its $4.6 million unsecured line of credit with Tokai Bank of California due to a loan covenant violation. The loan covenant requires that the Company maintain a ratio of EBITDA less distributions to debt service of at least 1.20 to 1.0. The Company believes it will receive a waiver from Tokai Bank for the violation of this loan covenant as of December 31, 1999 and that the loan will not be declared due and payable. Furthermore, the Company repaid $3.0 million of the $4.6 million outstanding to Tokai Bank in January 2000 and is not in default on its monthly interest payments. The Company believes that the reduction in the Common Stock dividend in 1999 will allow the Company to comply with the loan covenant in the future.
During 1999 and 1998, the Company capitalized interest relating to development projects, either directly owned by the Company or through joint ventures of $430,000 and $545,000, respectively.
12. Commitments and Contingencies
Neither the Company, the Operating Partnership, the Financing Entities, the Subsidiaries, Maryland Gardens, the Roxbury Partnership, Valencia, Pacific Gardens, Hoquiam, Lyons, Coronado, the Unconsolidated Affiliates nor any of the assets within their portfolios of MOBs, parking facilities, and retail space (the "Properties") is currently a party to any material litigation, except as discussed below.
On August 15, 1997, a subsidiary of the Company, GL/PHP, LLC ("GL/PHP") borrowed $16 Million from Nomura, the proceeds of which were used to repay a loan made by PHP Healthcare Corporation ("PHP") in connection with the purchase by GL/PHP of six New Jersey primary care centers (the "New Jersey Properties"). Nomura received a first lien against the real properties. The New Jersey Properties were leased by Pinnacle Health Enterprises, LLC ("Pinnacle"), a subsidiary of PHP, and PHP guaranteed the lease. Concurrently with the $16 Million loan, the Operating Partnership obtained a new $2 Million loan from PHP. The note by its terms is nonnegotiable and provides for a right of offset against payments of interest and principal in an amount equal to any losses sustained by reason of any defaults by Pinnacle; under its lease with GL/PHP, discussed below.
As of August 15, 1997, Pinnacle leased the New Jersey Properties from GL/PHP under the terms of a 17-year net operating lease. PHP guaranteed the obligations of its subsidiary under the lease. In November 1998, Pinnacle filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court of the District of Delaware and its case was voluntarily converted to a Chapter 7 case. Also in November 1998, PHP filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court of the District of Delaware. The Commissioner of the New Jersey Department of Banking and Insurance (the "Commissioner") took over the operations of Pinnacle. The Commissioner acting as rehabilitator for the entity operating the facilities under a medical services agreement with Pinnacle, paid Pinnacle's administrative rent through the bankruptcy proceeding up to and including March 5, 1999. After the Commissioner ceased paying rent, Pinnacle's Chapter 7 trustee elected to reject the lease. The Commissioner continued to occupy and lease certain of the buildings through March 31, 1999.
During 1999, GL/PHP leased one of the buildings and a portion of an additional building. Also during 1999, GL/PHP attempted to restructure the Nomura loan in order to attempt to preserve its investment in the New Jersey Properties. On May 5, 1999, GL/PHP presented a loan-restructuring plan to Amresco Management, Inc. ("Amresco"), the loan servicer, in regards to the mortgage secured by the New Jersey Properties. GL/PHP has been in default on this loan since May 1999. On May 10, 1999, Amresco rejected the Company's restructuring plan.
On July 6, 1999, Amresco served GL/PHP with a complaint commencing a judicial foreclosure and requesting the appointment of a receiver in the Superior Court of New Jersey Chancery Division Bergen County. On September 15, 1999, the Superior Court ruled in Amresco's favor and appointed a receiver for these buildings. Amresco filed a motion to foreclose its mortgage against the New Jersey Properties. In February 2000, the court granted the motion and transferred the matter to the foreclosure court of the New Jersey Superior Court. New Jersey counsel has advised that the actual transfer of title should be completed in approximately three to four months. A non-cash impairment loss of $6.4 million was recorded in September 1999 to reflect the decline in value of these buildings as a result of the loss of current and future rental revenue due to the Pinnacle and PHP bankruptcies in November 1998 and their subsequent departure from the buildings in March 1999. This impairment loss was recorded in the third quarter of 1999 in response to the appointment of the receiver for the buildings in September 1999 and their pending foreclosure.
LaSalle National Bank ("LaSalle"), as trustee in trust for the holders of certain obligations including the Nomura loan by and through Amresco, has also filed an action in March 2000 in the United States District Court, Central District of California seeking to cause the Operating Partnership to turn over the $2 Million borrowed from PHP to LaSalle as part of the security LaSalle claims it is entitled to under the deed of trust and assignment of rent with GL/PHP. The Operating Partnership believes that LaSalle is not entitled to these funds and that LaSalle will not be successful in its claims but no assurances can be given at this time that this result will be obtained.
Landmark Healthcare Facilities, LLC ("Landmark") filed a lawsuit against a subsidiary of the Company, G&L Valencia, LLC, claiming that Landmark is entitled to approximately $600,000 plus interest costs under a development agreement entered into between G&L Valencia, LLC and Landmark for development of an MOB project in Valencia, California. The Company is vigorously opposing the lawsuit and has filed a counter suit to recover approximately $400,000 plus interest that was already paid under the development agreement and for a judgment and declaration that all of Landmark's rights, title and interest in G&L Valencia, LLC has been terminated or assigned to the Company. The litigation is in its earliest stages and the likelihood of recovery by either party is therefore inestimable.
The Company is the guarantor on a $500,000 letter of credit in favor of NVHF Affiliates, LLC, a non-profit low-income apartment owner. The Company holds an unsecured promissory note from NVHF Affiliates, LLC in the same amount.
13. Stockholders' Equity
In May 1997, the Company issued 1,495,000 shares of the 10.25% Series A Preferred Stock, from which it received net proceeds of $35.4 million. In November 1997, the Company issued 1,380,000 shares of 9.8% Series B Preferred Stock and received net proceeds of $32.6 million. The Company's preferred stock has no stated maturity, is not subject to any sinking fund requirements and is not convertible into or exchangeable for any property or other securities of the Company. The Company, at its sole discretion, may call the Series A and Series B Preferred Stock at any time after June 1, 2001 and January 1, 2002, respectively. All classes of the Company's preferred stock have a par value of $0.01 and rank senior to the Company's common stock with respect to payment of dividends and upon liquidation. All classes of Preferred Stock are on parity with all other classes of the Company's Preferred Stock for payment of dividends and liquidation purposes. In the event of liquidation, or if the Company elects to call the Preferred Stock, holders of the Company's Preferred Stock are entitled to receive $25.00 per share plus any accrued and unpaid dividends, whether or not such dividends have been declared by the Company's Board of Directors. Holders of the Company's Series A Preferred Stock are entitled to receive monthly dividends at an annual rate of $2.56 per share. Series B Preferred Stockholders are entitled to receive monthly dividends at an annual rate of $2.45 per share.
Distributions in excess of net income-- As described in Note 2, the Company has elected to be treated as a REIT for Federal income tax purposes. As such, the Company is required to distribute at least 95% of its annual taxable income.
For years ended December 31, 1999, 1998 and 1997, cash distributed in the form of dividends to holders of the Company's Common Stock exceeded the Company's taxable income and is therefore considered to be a return of capital. In 1999, 4.46% of the Company's dividend was taxable as long-term capital gains and 95.54% was considered a return of capital to Common shareholders. For 1998, 18.55% of the dividend was taxable as ordinary income and the remaining 81.45% represented a return of capital. For 1997, 30.83% of the dividend was taxable as ordinary income, 21.66% was capital gains and 47.51% represented a return of capital. Dividends paid to holders of the Company's Preferred Stock are fully taxable as ordinary income.
Earnings per share-- Basic earnings per share is computed by dividing net income less preferred stock dividends by the weighted average number of common shares outstanding during each year. Fully diluted earnings per share is computed by dividing net income less preferred stock dividends by the weighted average number of common shares outstanding during each year plus the incremental shares that would have been outstanding upon the assumed exercise of dilutive stock options. In 1999 and 1998, the incremental shares that would have been outstanding upon the assumed exercise of stock options would have been anti-dilutive and, therefore, were not considered in the computation of fully diluted earnings per share. The following table reconciles the numerator and denominator of the basic and fully diluted per-share computations for net income for the years ended December 31, 1999, 1998 and 1997:
On March 10, 2000, the Company's board of directors declared a quarterly distribution for the first quarter of 2000 in the amount of $0.125 per Common share to be paid on April 15, 2000 to holders of the Company's Common Stock on March 31, 2000. This quarterly dividend is equal to an annualized distribution of $0.50 per share.
14. Stock Incentive Plan
As of December 31, 1999, the Company had a stock incentive plan under which an aggregate of 308,500 shares of the Company's Common Stock are reserved for issuance. Options are granted at per share amounts not less than fair market value at the date of grant and expire ten years thereafter. Granted options vest in even increments over a two or three year period beginning one year from the grant date. The Company does not charge the estimated compensation cost of options granted against income. Compensation cost is estimated to be the fair value of all options granted based on the Binary option-pricing model. Based upon the closing stock price at the end of the year, the costs associated with options granted in each of the years ended December 31, 1999, 1998, and 1997 are $5,000, $77,000, and $143,000, respectively. If the compensation costs had been charged against income at the time of vesting, adjusted for shares exercised and canceled during the period, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
A summary of the status of the Company's stock incentive plan as of December 31, 1999, 1998, 1997, and changes during the years ending on those dates is presented in the following table. The average price presented below represents the weighted average exercise price based upon the market value at the grant date.
The following table summarizes information relating to the Company's stock incentive plan as of December 31, 1999:
Fair value of the plan- The Company estimated the fair value of the options granted in 1999, 1998 and 1997 based on the following assumptions:
The Company assumes that the equivalent risk-free interest rate is the closing market rate, on the last trading day of the year, for three-year treasury bills.
The Company's stock incentive plan was introduced in conjunction with its initial public offering on December 16, 1993. Based upon the number of options exercised and cancelled since the inception of the plan, the Company assumes the estimated life of the outstanding option agreements to be three years.
The Company uses the treasury stock method for purposes of determining the number of shares to be issued to in conjunction with the Company's stock incentive plan. Based upon the number and amounts of vested and unvested options outstanding, the dilutive effect on the Company's outstanding shares for the years ended December 31, 1999, 1998 and 1997 is 10,000, 43,000 and 80,000 shares, respectively.
15. Concentration of Credit Risk
The Company is subject to the all risks associated with leasing property, including but not limited to, the risk that upon the expiration of leases for space located in the Company's properties, the leases may not be renewed, the space may not be re-leased or the terms of renewal or re-leasing (including any cost of required renovations or concessions to tenants) may be less favorable than current lease terms. If the Company is unable to promptly re-lease or renew leases for a significant portion of its space or if the rental rates upon renewal or re-leasing are significantly lower than expected, the Company's earnings and the ability to make distributions to stockholders may be adversely affected. Most of the tenants in the Company's healthcare properties provide specialized health care services. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory and social factors affecting the communities and industry in which the tenants operate.
Many of the Company's medical office properties are in close proximity to one or more local hospitals. Relocation or closure of a local hospital could make the Company's nearby properties (particularly those outside of the Beverly Hills area) less desirable to doctors and healthcare providers affiliated with the hospital and affect the Company's ability to collect rent due under existing leases, renew leases and attract new business.
A portion of the Company's assets are invested in debt instruments secured by long-term senior care or skilled nursing facilities. The ability of the facility owners to pay their obligations as they come due, as well as their ability to obtain other permanent financing through the sale of bonds or other forms of long-term financing is dependent upon their ability to attract patients who are able to pay for the services they require. These facilities have complex licensing requirements as do the professionals they employ. The majority of the services rendered are paid by various federal, state and local agencies. Each of these facilities function in a complex environment of changing government regulations which have a significant impact on economic viability.
G&L Hampden, LLC, a wholly-owned subsidiary of the Company, acquired three nursing home properties in Massachusetts on October 28, 1997 from Hampden Nursing Homes, Inc. ("HNH"), a nonprofit corporation. Lenox Healthcare, Inc. ("Lenox") managed the three facilities from October 1998 through December 1999. In November 1999, Lenox filed for bankruptcy protection. The Company immediately moved to replace Lenox as the manager of the nursing homes. In January 2000, the Company received the bankruptcy court's permission to replace Lenox as the manager and a new management firm, a subsidiary of Roush & Associates ("Roush"), was immediately retained. Although Lenox managed these Massachusetts nursing homes, HNH held the licenses necessary to operate the facilities. In March 2000, the Company successfully transferred the licenses to G&L Massachusetts, LLC, a subsidiary of the Operating Partnership. G&L Massachusetts, LLC subsequently leased the three facilities from the Company while Roush continued to manage them. The lease requires monthly payments of $225,000 net of property taxes, insurance and costs to maintain the facilities. Rents from the three Massachusetts nursing homes represented approximately 9.7%, 11.0% and 13.3% of the Company's rental revenues in 1999, 1998 and 1997, respectively. The Company's management believes that the current management of Roush is experienced and that Roush will be able to pay the lease obligations under the lease as they become due; however, the financial position of the Company, and its ability to make expected distributions to stockholders, may be adversely affected in the event that Roush experiences financial difficulties.
In addition to the nursing homes in Massachusetts, the Company owns other senior care facilities that it leases to operators. In the event that the operators of these facilities are unable to effectively operate the facilities, the ability of the operators to make rental payments to the Company may become impaired. If any of these operators experience financial difficulty, the financial position of the Company and the ability of the Company to make expected distributions may be adversely affected.
16. Segment Information
The Company's business currently consists of investments in healthcare properties and in debt obligations secured by healthcare properties. Investments in healthcare property consists of acquisitions, made either directly or indirectly through
joint ventures, in MOBs or Senior Care Facilities which are leased to healthcare providers. The Company's lending activities consist of providing short-term secured loans to facilitate third party acquisitions either directly or through GLN, an unconsolidated operating venture with Nomura Asset Capital Corporation. The following table reconciles the Company's income and expense activity for the year ending December 31, 1999 and balance sheet data as of December 31, 1999.
1999 Reconciliation of Reportable Segment Information
1999 Reconciliation of Reportable Segment Information - (Continued)
The following table reconciles the Company's income and expense activity for the year ending December 31, 1998 and balance sheet data as of December 31, 1998.
1998 Reconciliation of Reportable Segment Information
1998 Reconciliation of Reportable Segment Information - (Continued)
The following table reconciles the Company's income and expense activity for the year ending December 31, 1997 and balance sheet data as of December 31, 1997.
1997 Reconciliation of Reportable Segment Information
17. Extraordinary Loss on Early Retirement of Debt
On November 2, 1999, the Company obtained a $13.92 million short-term loan secured by three skilled nursing facilities located in Massachusetts at an interest rate of LIBOR plus 2.75%. The first portion of the loan closed on October 4, 1999 and was used to repay a $6.0 million loan secured by the three facilities. In repaying the $6.0 million loan, the Company incurred prepayment fees of approximately $129,000 and wrote off an additional $42,000 in loan fees relating to the loan. These amounts have been presented as an extraordinary loss on the statement of operations.
18. Related Party Transactions
In 1995, the Company acquired all of the outstanding 1989 Series A and B Health Care Revenue (the "Bonds") issued by the Massachusetts Industrial Finance Agency for $19.9 million. At the time of acquisition, the Series A and B Bonds had face values of $21.0 million and $5.0 million, respectively. The Bonds were backed by mortgages on three nursing homes owned by Hampden. Principal and interest payments due on these Bonds were paid by the bond trustee out of the debt service payments received from Hampden.
In March 1997, the Company sold the Bonds to GLN, a joint venture between the Company and Nomura Asset Capital Corporation ("Nomura"), for total consideration of $21.7 million. The Bonds, which had a book value of $20.7 million, had a combined outstanding balance of $27.7 million, including principal and accrued interest at the time of the sale. The Bonds were sold for $7.7 million and an assumption of $14.0 million in indebtedness owed to GMAC Commercial Mortgage Corporation ("GMAC-CM"). The $7.7 million amount consisted of a cash payment of $4.5 million and $3.2 million which was deemed a capital contribution to GLN. In June 1997, the Company loaned $14.0 million to GLN, which was used by GLN to retire the $14.0 million loan due to GMAC-CM.
The Operating Partnership's gain on sale of the Bonds to GLN was approximately $1.0 million, of which the Operating Partnership recognized approximately $500,000 during the first quarter of 1997 and deferred recognition of the remaining $500,000.
In October 1997, the Company acquired the three Massachusetts nursing homes from Hampden for a total aggregate consideration of approximately $20.0 million. Of this amount, the Company borrowed $6.0 million from Nomura at an interest rate of 8.62% per annum. The Massachusetts nursing homes were pledged as security for the repayment of this loan.
On June 30, 1998, GLH Pacific Gardens, LLC, a joint venture between the Company and American Senior Care, Inc., purchased a 92-unit senior care facility located in Santa Monica, California. Upon acquisition, this facility was leased to GLH Pacific Gardens Corp., an unconsolidated joint venture of the Company's in which the Company owns 93% of the equity in the form of non-voting preferred stock. On July 1, 1999, the lease was transferred to ASL Santa Monica Inc., an unaffiliated entity. During 1999 and 1998, GLH Pacific Gardens Corp. made lease payments of $480,000 and $420,000 to the Company, respectively.
During 1998, the Company owned 50% of the equity in AV Medical, LLC ("AV Medical") and G&L/M&Z Aliso Partners ("G&L/M&Z"), unconsolidated joint ventures formed in 1997 with M&Z Aliso Associates, LLC ("M&Z") for the purposes of buying undeveloped parcels of land in Aliso Viejo and building a 33,000 square foot MOB and a retail complex, respectively. In December 1998, the Company exchanged its 50% interest in G&L/M&Z Aliso Partners for M&Z's 50% interest in AV Medical, LLC. This transaction was treated as a non-taxable exchange of like-kind real estate assets under Section 1031 of the Internal Revenue Service Tax Code. As part of the exchange, M&Z paid the Company $295,000 in accrued distributions and accrued interest due on loans made by the Company to AV Medical and G&L/M&Z and signed a $44,000 promissory note due on June 30, 1999 for the remaining balance owed. Upon closing the exchange, AV Medical was dissolved and the property previously owned by AV Medical was owned 100% by the Operating Partnership.
On December 31, 1998, the Company acquired a 40,000 square foot office and retail complex located in Coronado, California. The property was acquired from a limited liability company (the "LLC") owned by Daniel M. Gottlieb and Steven D. Lebowitz, both directors and officers of the Company, who held interests in the LLC of 30% and 70%, respectively. The property was acquired for an aggregate purchase price of $9.5 million. The Company assumed $7.5 million in long-term debt and issued 134,499 Partnership Units valued at $2,000,000. These new units were issued at an effective rate of $14.87 per unit, a 15.5% premium over the $12.875 closing price of the Company's stock on December 31, 1998, the closing date of the transaction, effectively reducing the number of units issued to Messrs. Gottlieb and Lebowitz. In connection with the purchase of the property, G&L Coronado Managers Corp. ("Coronado Corp."), an entity owned 30% and 70% by Messrs. Gottlieb and Lebowitz, respectively, signed a lease (the "Master Lease Agreement") for the entire third floor of the building with the Company. Under the terms of the Master Lease Agreement, Coronado Corp. will operate the Executive Suites located on the third floor of the building on behalf of the Company for lease payments of $19,000 per month until November 30, 2010.
On April 15, 1999, the Company borrowed $2.0 million from Reese L. Milner, a director and an Operating Partnership unit holder of the Company. The loan bore interest at 12% per annum and was due on May 15, 1999. The Company also paid a loan fee of $20,000 to Mr. Milner. The loan was secured by a first trust deed against a parcel of real property owned by the Company. On May 13, 1999, the loan was extended until new financing on the collateralized property was obtained. The Company repaid the loan plus all accrued interest on June 13, 1999.
On May 4, 1999, the Company sold a vacant parcel of real property for $1.6 million to the Craig Corporation, whose president is S. Craig Tompkins, a director of the Company. The Company had the option to repurchase the property beginning on November 5, 1999 and ending on December 3, 1999 for $1.8 million plus any costs incurred by the Craig Corporation with respect to the property. Beginning on January 24, 2000 and ending on January 31, 2000, the Craig Corporation had the option to sell the property to the Company for $1.9 million. Thereafter, the option sale price would have increased at a rate of 3% per month, adjusted pro rata for any periods of less than one month. The Company accounted for this transaction in accordance with FAS 66 "Accounting for Sales of Real Estate" and treated this sale as a financing transaction. This amount was repaid on November 2, 1999 for $1.76 million.
On May 18, 1999, the Company entered into an agreement with the Craig Corporation, whose president is S. Craig Tompkins, a director of the Company, whereby the Craig Corporation would purchase up to 36,000 shares of the Company's common stock on the open market and the Company would have the option to purchase these shares from the Craig Corporation on or before December 3, 1999 at the Craig Corporation's cost plus a premium of 20% per annum, less any dividends received. After December 3, 1999, the Craig Corporation had the option to sell the shares to the Company
between January 24 and January 31, 2000 at its cost plus a premium of 25% per annum. Thereafter, the option sale price would have increased at a rate of 3% per month. The exercise of the Company's option was contingent upon the exercise of the Company's option to repurchase the vacant parcel of land from the Craig Corporation discussed above. On December 29, 1999, the Company purchased 34,400 shares of the Company's common stock for $404,000. This amount included $44,000 in interest.
On February 7, 2000, the board of directors of the Company unanimously approved the guarantee of a $500,000 line of credit from Tokai Bank to each of Daniel M. Gottlieb and Steven D. Lebowitz, both directors and officers of the Company, for a total of $1 million. In addition, on February 29, 2000, the board of directors granted 50,000 non-qualified Common Stock options to each of Messrs. Gottlieb and Lebowitz. The exercise price of the options was $8.875, the closing price of the Company's Common Stock on February 29, 2000.
19. Unaudited Consolidated Quarterly Information
Unaudited consolidated quarterly financial information for the periods as follows:
20. SCHEDULE OF CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1999 (In Thousands)
The changes in total real estate assets and accumulated depreciation for the years ended December 31 are as follows:
_______________________ Note A: The Realty Financing Partnership owns the following properties which are security for a blanket first trust deed: 405 North Bedford, 415 North Bedford, 416 North Bedford and 435 North Bedford. Note B: The Medical Partnership owns the following properties, which are each security for a blanket first trust deed: Sherman Oaks Medical Plaza, Cigna HealthCare Building, Regents Medical Center and 436 North Bedford Drive. Note C: GL/PHP, LLC owns the following properties which are security for a blanket first trust deed: 2103 Mt. Holly Road, 150 Century Parkway, 274 Highway 35, South, 80 Eisenhower Drive, 16 Commerce Drive, and 4622 Black Horse Pike. Note D: G&L Hampden, LLC owns the following properties, which are security for a first trust deed: 42 Prospect Avenue, 32 Chestnut Street, and 34 Main Street. Note E: G&L Realty Partnership, L.P. owns the following properties which are security for a first trust deed: 14662 Newport Avenue, 14591 Newport Avenue, and 14642 Newport Avenue.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
G&L REALTY CORP.
Date: March 30, 2000 By: /s/ David E. Hamer --------------------------- David E. Hamer Controller and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.