SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ Quarterly Report Pursuant to
Section 13 OR 15(d)
of the Securities Exchange Act of
1934
For the quarterly period ended September 30, 2001
OR
/ /Transition Report Pursuant toSection 13 or 15(d)
of the Securities Exchange Act of
1934
Commission file number: 1-14307
(Exact name of Registrant as specified in its Charter)
| Maryland | 36-4238056 | |
| (State or other jurisdiction | (IRS employer identification no.) | |
| of incorporation or organization) |
823 Commerce Drive, Suite 300, Oak Brook, IL 60523
(Address of principal executive offices) (Zip Code)
(630) 368 - 2900
(Registrant's telephone number, including area code)
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
Number of shares of the registrant's common shares of beneficial interest, $.01 par value per share, outstanding as of November 1, 2001: 16,547,079
Great Lakes REIT
Index to Form 10-Q
September 30, 2001
Page Number
-----------
Part I - Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets
as of September 30, 2001
and December 31, 2000 3
Consolidated Statements of Income
for the three months
ended September 30, 2001 and 2000 4
Consolidated Statements of Income for
the nine months ended September 30, 2001 and 2000 5
Consolidated Statement of Changes
in Shareholders' Equity
for the nine months ended September 30, 2001 6
Consolidated Statements of Cash Flows
for the nine months
ended September 30, 2001 and 2000 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Great Lakes REIT Consolidated Balance Sheets (unaudited) (In thousands, except per share data) September 30, December 31, --------------------------------- 2001 2000 ---- ---- Assets Properties: Land $65,014 $57,636 Buildings, improvements, and equipment 456,477 400,058 --------------------------------- 521,491 457,694 Less accumulated depreciation 53,583 43,692 --------------------------------- 467,908 414,002 Cash and cash equivalents 2,575 785 Real estate tax escrows 286 231 Rents receivable 7,906 7,728 Deferred financing and leasing costs, net of accumulated amortization 6,916 5,893 Goodwill, net of accumulated amortization 1,079 1,135 Other assets 2,725 1,836 --------------------------------- Total assets $489,395 $431,610 ================================= Liabilities and shareholders' equity Bank loan payable $112,650 $89,000 Mortgage loans payable 128,622 97,641 Bonds payable 3,960 4,270 Accounts payable and accrued liabilities 4,788 5,950 Accrued real estate taxes 13,615 10,884 Dividends payable 6,701 - Prepaid rent 3,368 2,599 Security deposits 1,867 1,514 --------------------------------- Total liabilities 275,571 211,858 --------------------------------- Minority interests 671 679 --------------------------------- Preferred shares of beneficial interest ($0.01 par value, 10,000 shares authorized; 1,500 9 3/4% Series A Cumulative Redeemable shares, with a $25.00 per share 37,500 37,500 Liquidation Preference, issued and outstanding in 2001 and 2000) Common shares of beneficial interest ($0.01 par value, 60,000 shares authorized; 18,301 and 18,275 shares issued in 2001 and 2000, respectively) 183 183 Paid-in-capital 235,307 234,959 Retained earnings (deficit) (12,935) (7,176) Employee share loans (20,206) (20,096) Deferred compensation (2,399) (2,623) Treasury shares, at cost (1,583 shares in 2001, and 1,543 shares in 2000) (24,297) (23,674) --------------------------------- Total shareholders' equity 213,153 219,073 --------------------------------- Total liabilities and shareholders' equity $489,395 $431,610 ================================= The accompanying notes are an integral part of these financial statements. RETURN TO INDEXGreat Lakes REIT Consolidated Statements of Income (unaudited) (In thousands, except per share data) Three months ended September 30, --------------------------------------- 2001 2000 ---- ---- Revenues: Rental $19,912 $19,004 Reimbursements 5,319 5,466 Parking 120 92 Telecommunications 153 112 Tenant service 111 167 Interest 383 442 Other 124 121 --------------------------------------- Total revenues 26,122 25,404 --------------------------------------- Expenses: Real estate taxes 4,221 3,348 Other property operating 6,778 6,677 General and administrative 1,210 1,354 Interest 3,676 3,890 Depreciation and amortization 4,835 4,286 --------------------------------------- Total expenses 20,720 19,555 --------------------------------------- Income before allocation to minority interests 5,402 5,849 Minority interests 13 14 --------------------------------------- Net income 5,389 5,835 Income allocated to preferred shareholders 914 914 --------------------------------------- Net income applicable to common shares $4,475 $4,921 ======================================= Earnings per common share - basic $0.27 $0.30 ======================================= Weighted average common shares outstanding - basic 16,580 16,634 ======================================= Diluted earnings per common share $0.27 $0.29 ======================================= Weighted average common shares outstanding - diluted 16,737 16,822 ======================================= The accompanying notes are an integral part of these financial statements. RETURN TO INDEX Great Lakes REIT Consolidated Statements of Income (unaudited) (In thousands, except per share data) Nine months ended September 30, --------------------------------------- 2001 2000 ---- ---- Revenues: Rental $58,839 $56,256 Reimbursements 15,577 16,066 Parking 322 281 Telecommunications 384 300 Tenant service 300 167 Interest 1,167 1,276 Other 471 422 --------------------------------------- Total revenues 77,060 74,769 --------------------------------------- Expenses: Real estate taxes 12,036 10,431 Other property operating 19,353 19,110 General and administrative 3,835 3,925 Interest 10,713 11,445 Depreciation and amortization 13,997 12,585 --------------------------------------- Total expenses 59,934 57,496 --------------------------------------- Income before gain on sale of properties 17,126 17,273 Gain on sale of properties, net - 2,964 --------------------------------------- Income before allocation to minority interests 17,126 20,237 Minority interests 41 48 --------------------------------------- Net income 17,085 20,189 Income allocated to preferred shareholders 2,742 2,742 --------------------------------------- Net income applicable to common shares $14,343 $17,447 ======================================= Earnings per common share - basic $0.87 $1.06 ======================================= Weighted average common shares outstanding - basic 16,572 16,483 ======================================= Diluted earnings per common share $0.86 $1.05 ======================================= Weighted average common shares outstanding - diluted 16,727 16,581 ======================================= The accompanying notes are an integral part of these financial statements. RETURN TO INDEX Great Lakes REIT Consolidated Statement of Changes in Shareholders' Equity (unaudited) For the Nine Months Ended September 30, 2001 (in thousands) -------------------------------------------------------------------------------- Preferred Shares Balance at beginning of period $37,500 -------------------------------------------------------------------------------- Balance at end of period 37,500 Common Shares Balance at beginning of period 183 Exercise of share options - -------------------------------------------------------------------------------- Balance at end of period 183 Paid-in capital Balance at beginning of period 234,959 Exercise of share options 348 -------------------------------------------------------------------------------- Balance at end of period 235,307 Retained earnings (deficit) Balance at beginning of period (7,176) Net income 17,085 Distributions/dividends (22,844) -------------------------------------------------------------------------------- Balance at end of period (12,935) Employee share loans Balance at beginning of period (20,096) Repayment of share loans 156 Exercise of share options (266) -------------------------------------------------------------------------------- Balance at end of period (20,206) Deferred compensation Balance at beginning of period (2,623) Amortization of deferred compensation 224 -------------------------------------------------------------------------------- Balance at end of period (2,399) Treasury shares Balance at beginning of period (23,674) Purchase of treasury shares (623) -------------------------------------------------------------------------------- Balance at end of period (24,297) -------------------------------------------------------------------------------- Total shareholders' equity $213,153 ================================================================================ The accompanying notes are an integral part of these financial statements. RETURN TO INDEX Great Lakes REIT Consolidated Statements of Cash Flows (unaudited) (Dollars in Thousands) Nine Months Ended September 30, 2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $17,085 $20,189 Adjustments to reconcile net income to cash flows from operating activities Depreciation and amortization 13,997 12,585 Gain on sale of properties - (2,964) Other non cash items 265 407 Net changes in assets and liabilities: Rents receivable (178) 445 Real estate tax escrows and other assets (937) (358) Accounts payable, accrued expenses and other liabilities (40) 2,090 Accrued real estate taxes 2,731 (2,496) Payment of deferred leasing costs (1,277) (1,408) ------------------------------------ Net cash provided by operating activities 31,646 28,490 ------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of properties (57,038) (9,928) Additions to buildings, improvements and equipment (9,035) (8,015) Proceeds from property sales, net - 12,144 Other investing activities (86) - ------------------------------------ Net cash provided by (used in) investing activities (66,159) (5,799) ------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of share options 238 57 Proceeds from bank and mortgage loans payable 220,070 9,500 Distributions / dividends paid (16,143) (14,306) Distributions to minority interests (48) (48) Purchase of minority interests - (258) Purchase of treasury shares (624) (316) Payment of bank and mortgage loans and bonds (165,749) (11,117) Payment of deferred financing costs (1,441) (66) ------------------------------------ Net cash provided by (used in) financing activities 36,303 (16,554) ------------------------------------ Net increase in cash and cash equivalents 1,790 6,137 Cash and cash equivalents, beginning of year 785 1,518 ------------------------------------ Cash and cash equivalents, end of quarter $2,575 $7,655 ==================================== Supplemental disclosure of cash flow: Interest paid $10,823 $11,399 ==================================== Non cash financing transactions: Employee share loans $265 $2,515 ==================================== The accompanying notes are an integral part of these financial statements. RETURN TO INDEX
1. Basis of Presentation
Great Lakes REIT, a Maryland real estate investment trust (the “Company”), was formed in 1992 to invest in income-producing real property. The principal business of the Company is the ownership, management, leasing, renovation and acquisition of suburban office properties, primarily located in the Midwest region of the United States. At September 30, 2001, the Company owned and operated 37 properties, primarily located in suburban areas of Chicago, Detroit, Milwaukee, Denver, Cincinnati, Columbus and Minneapolis. The Company leases office space to over 500 tenants that are engaged in a variety of businesses.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and controlled partnership. Intercompany accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. These statements should be read in conjunction with the Company’s most recent year-end audited financial statements, which are contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000, (the “2000 10-K”). In the opinion of management, the financial statements contain all adjustments (which are normal and recurring) necessary for a fair statement of financial results for the interim periods. For further information, refer to the consolidated financial statements and notes thereto included in the 2000 10-K.
2. Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivatives and Hedging Activities, and its amendments, Statements No. 137 and 138, in June 1999 and June 2000, respectively. Statement No. 133, as amended, requires the Company to recognize all derivatives on its balance sheet at fair value effective January 1, 2001. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings.
In 1999, the Company purchased an interest rate cap agreement that expired in June 2001 to hedge its exposure to increases in interest costs under its variable rate debt. During the nine months ended September 30, 2001, the Company recorded $78 of interest expense, which reduced the carrying value of the cap to -0-.
In October 2001, the Company entered into two separate interest rate swap agreements with notional amounts of $25,000 each. One agreement has a term of two years and fixes the interest rate on $25,000 of the Company’s unsecured credit facility at a maximum of 4.12%. The second swap agreement has a term of three years and fixes the interest rate on $25,000 of the Company’s unsecured credit facility at a maximum of 4.51% per annum.
3. Segment Information
The Company has two reportable segments, distinguished by property type. The property types are office and office service center which represent 89% and 11% (as measured by square feet) of the Company’s overall portfolio, respectively. Office buildings are generally single-story or multi-story buildings used by tenants for office activities. The buildings generally have common area lobbies and other amenities, including food service areas, atriums and limited underground parking facilities. Office service center buildings generally are one-story buildings with no common areas. Tenant spaces generally have less than 100% office use with the non-office space used for showroom, technical or light storage purposes. As of September 30, 2001, the properties were leased to more than 500 tenants, no single tenant accounted for more than 5% of the aggregate annualized base rent of the Company’s portfolio and only 20 tenants individually represented more than 1% of the aggregate annualized base rent.
The Company evaluates performance and makes investment decisions in part based on net operating income, which is property revenues (rental and reimbursement income) less property operating expenses and real estate taxes. Net operating income is a widely-recognized industry measure of a property’s performance.
The following table represents a summary report of segment information for the three and nine months ended September 30, 2001 and 2000:
Three months ended Nine months ended
September 30, September 30,
---------------------------
2001 2000 2001 2000
Revenues
Office $23,938 $22,783 $70,300 $67,567
Office service center 1,293 1,648 4,116 5,013
Deferred rental revenues - 222 - 364
Interest and other 891 751 2,644 1,824
------------------------------------------------------------------------------
Total $26,122 $25,404 $77,060 $74,768
==============================================================================
Net operating income
Office $13,404 $13,235 $40,454 $39,611
Office service center 828 1,171 2,573 3,429
------------------------------------------------------------------------------
Total $14,232 $14,406 $43,027 $43,040
==============================================================================
Depreciation
and amortization
Office $4,382 $3,850 $12,653 $11,219
Office service center 308 298 916 957
Other 145 138 428 409
------------------------------------------------------------------------------
Total $4,835 $4,286 $13,997 $12,585
==============================================================================
Interest expense
Office $3,462 $3,499 $10,072 $10,294
Office service center 214 391 641 1,151
------------------------------------------------------------------------------
Total $3,676 $3,890 $10,713 $11,445
==============================================================================
Additions to properties
Office $33,054 $12,548 $65,471 $17,720
Office service center - 59 602 188
Other - 2 - 35
--------------------------------------------------------------------------
Total $33,054 $12,609 $66,073 $17,943
==========================================================================
Income before allocation to
minority interests
Office net operating income $13,404 $13,235 $40,454 $39,611
Office service center net operating income 828 1,171 2,573 3,429
Office interest expense (3,462) (3,499) (10,072) (10,294)
Office service center interest expense (214) (391) (641) (1,151)
Office depreciation (4,382) (3,850) (12,653) (11,219)
Office service center depreciation (308) (298) (916) (957)
Deferred rental revenues - 222 - 364
Interest and other income 891 751 2,644 1,824
General and administrative (1,210) (1,354) (3,835) (3,925)
Other depreciation (145) (138) (428) (409)
--------------------------------------------------------------------------
Income before allocation
to minority interests $5,402 $5,849 $17,126 $17,273
==========================================================================
Following is a summary of segment assets at September 30, 2001 and
December 31, 2000:
September 30, December 31,
----------------------------------------
2001 2000
Assets
Office $450,004 $394,972
Office service center 24,291 24,782
Other 15,100 11,856
----------------------------------------
Total $489,395 $431,610
========================================
4. Long-Term Debt
The Company is a party to a $150,000 unsecured credit facility that matures on March 23, 2004. The interest rate on borrowings under the credit facility is LIBOR plus 1.0% to 1.2% depending on overall Company leverage. The credit facility contains financial covenants, including requirements for a minimum tangible net worth, maximum liabilities to asset values, debt service requirements, maximum liabilities to asset values, debt service coverage and net property operating income. The credit facility also contains restrictions on, among other things, indebtedness, investments, dividends, liens, mergers and development activities.
On June 1, 2001 the Company entered into a $33,046 loan agreement with an institutional lender. The loan is secured by a first mortgage lien on its Milwaukee Center property, located in Milwaukee, Wisconsin, and bears interest at a fixed annual interest rate of 7.435% with a ten-year term. The net proceeds from the loan (approximately $33 million) were used to repay a portion of the Company’s unsecured credit facility.
5. Property Acquisitions
On March 1, 2001, the Company acquired 1600 Corporate Center, a 252,000 square foot multi-story office building located in Rolling Meadows, Illinois, for a contract price of $26,000.
On August 10, 2001, the Company acquired Bannockburn Corporate Center, a 202,000 square foot multi-story office building located in Bannockburn, Illinois, for a contract price of $31,800.
6. Restricted Share Grants
On June 1, 2000, the Company issued 200,000 restricted common shares to certain officers and employees. The shares vest ten years from the date of issuance provided the recipient is still employed by the Company, but may vest earlier in increments during the period ending December 31, 2002 if the Company achieves certain performance objectives. Upon a change in control of the Company, up to 100,000 of the restricted shares issued to certain officers of the Company vest immediately. The total fair value of the restricted shares at the date of issuance ($3,138) is being amortized into expense over ten years on a straight-line basis, subject to adjustment when the Company determines that it is probable to achieve certain performance objectives which accelerate the full or partial vesting of the shares. The Company recorded compensation expense of $72 and $216 for the three and nine months ended September 30, 2001, respectively.
7. Earnings per Share
The unvested restricted common share grants (166,664 shares at September 30, 2001) are excluded from the common shares used to compute basic earnings per share. The unvested restricted common shares are included in the shares used to compute fully diluted earnings per share using the treasury stock method whereby the unamortized deferred compensation related to these shares is assumed to be the exercise value of these shares.
The Company has 40,199 operating partnership units held by non-affiliates of the Company outstanding at September 30, 2001, which are convertible to common shares on a one for one basis at the option of the holder.
8. Goodwill
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with these Statements.
The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of these Statements is expected to result in an increase in net income of $75 per year. During 2002, the Company will perform the first of the required impairment tests of goodwill as of January 1, 2002, and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company.
9. Impairment of Assets
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-lived Assets, which is effective for fiscal years beginning after December 15, 2001. Application of the provisions of this statement is not expected to affect the earnings and financial position of the Company.
10. Commitments and Contingencies
In 2000, the Company entered into a contract to acquire a 99,500 square foot office building currently under construction in suburban Milwaukee for a contract price of $8,500. The Company’s total investment in this property, including tenant improvements, is expected to be $11,700. The Company has guaranteed a letter of credit in the amount of $2,000 to secure its obligations related to this property.
ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (Dollars in thousands)
The following is a discussion and analysis of the consolidated financial condition and results of operations for the three and nine months ended September 30, 2001. The following should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere herein and the consolidated financial statements and related notes contained in the 2000 10-K.
Overview
The principal business of the Company is the ownership, management, leasing, renovation, and acquisition of suburban office properties located primarily in the Midwest region of the United States. At September 30, 2001, the Company owned and operated 37 properties, primarily located in suburban areas of Chicago, Detroit, Milwaukee, Columbus, Minneapolis, Denver and Cincinnati. The Company leases space to over 500 tenants that are engaged in a variety of businesses.
Three months ended September 30, 2001 compared to three months ended September 30, 2000.
In analyzing the operating results for the three months ended September 30, 2001, the changes in rental and reimbursement income, real estate taxes and other property operating expenses from 2000 are due principally to: (i) the addition of a full year’s operating results in 2001 of properties acquired in 2000 compared to the partial year’s operating results from the dates of their respective acquisitions in 2000, (ii) the addition of operating results of properties acquired in 2001 from the dates of acquisition, (iii) the effect of property dispositions in 2000 and (iv) changes in operations of properties during 2001 compared to 2000. Other property operating expenses include contract services, repairs, maintenance, utilities, personnel, insurance and other costs directly associated with the leasing, management and operation of the properties.
Rental Reimbursement Real estate Property
income income taxes operating
expenses
Increase due to properties
acquired in 2000 $ 111 $122 $240 $14
Increase due to properties acquired in 2001 1,121 710 344 500
Effect of property dispositions in 2000 (430) (366) (153) (241)
Increase (decrease) in 2001 as compared
to 2000 106 (613) 442 (172)
Total $908 ($147) $873 $101
===================================================================
Telecommunications income increased by $41 during the quarter ended September 30, 2001 as compared to 2000 as the Company signed additional agreements subsequent to September 30, 2001.
Tenant service income decreased by $56 in the quarter ended September 30, 2001 as compared to 2000 as tenants use of additional services declined.
Interest income decreased by $59 during the quarter ended September 30, 2001, as compared to 2000 as the Company had a higher average cash balance in 2000 as compared to 2001.
General and administrative expenses decreased by $144 during the quarter ended September 30, 2001 as compared to 2000 due to decreased bonus compensation costs and decreased compensation expenses associated with the restricted share plan.
Interest expense declined by $214 during the quarter ended September 30, 2001 as compared to 2000 due to lower interest rates on amounts outstanding under its unsecured credit facility in 2001.
Depreciation and amortization expenses increased by $549 during the quarter ended September 30, 2001 as compared to 2000 because the Company had a gross book value of depreciable assets of $456,477 at September 30, 2001 as compared to $416,672 at September 30, 2000.
Nine months ended September 30, 2001 compared to nine months ended September 30, 2001
In analyzing the operating results for the nine months ended September 30, 2001, the changes in rental and reimbursement income, real estate taxes and other property operating expenses from 2000 are due principally to: (i) the addition of a full year’s operating results in 2001 of properties acquired in 2000 compared to the partial year’s operating results from the dates of their respective acquisitions in 2000, (ii) the addition of operating results of properties acquired in 2001 from the dates of acquisition, (iii) the effect of property dispositions in 2000 and (iv) changes in operations of properties during 2001 compared to 2000. Other property operating expenses include contract services, repairs, maintenance, utilities, personnel, insurance and other costs directly associated with the leasing, management and operation of the properties.
Rental Reimbursement Real estate Property
income income taxes operating
expenses
Increase due to properties
acquired in 2000 $ 731 $647 $466 $329
Increase due to property acquired
in 2001 2,067 1,448 716 887
Effect of property dispositions
in 2000 (1,681) (1,029) (396) (603)
Increase (decrease) in 2001
as compared to 2000 1,466 (1,555) 819 (370)
----------------------------------------------------------------
Total $2,583 ($489) $1,605 $243
=================================================================
Telecommunications income increased by $84 during the nine months ended September 30, 2001 as compared to 2000 due to agreements signed in 2000 having nine months of revenue in 2001 compared to less than nine months of revenue in 2000.
Tenant service income increased by $133 in the nine months ended September 30, 2001 as the Company earned nine months of income in 2001 as compared to a partial period in 2000 since the Company commenced its efforts to increase this income in mid-2000.
Interest income decreased by $109 during the nine months ended September 30, 2001 as compared to 2000 as the Company had a higher average cash balance in 2000 as compared to 2001.
Interest expense declined by $732 during the nine months ended September 30, 2001 as compared to 2000 due to lower interest rates on its unsecured credit facility in 2001.
Depreciation and amortization expenses increased by $1,412 during the nine months ended September 30, 2001 as compared to 2000 because the Company had a gross book value of depreciable assets of $456,477 at September 30, 2001 as compared to $416,672 at September 30, 2000.
Segment Operations
The Company has two reportable segments, distinguished by property type. The property types are office and office service center. Office buildings are generally single-story or multi-story buildings used by tenants for office activities. The buildings generally have common area lobbies and other amenities including food service areas, atriums and limited underground parking facilities. Office service center buildings generally are one-story buildings with no common areas. Tenant spaces generally have less than 100% office use with the non-office space used for showroom, technical or light storage purposes.
The net income for the office segment is as follows:
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net operating income $13,404 $13,235 $40,454 $39,611
Interest expense (3,462) (3,499) (10,072) (10,294)
Depreciation (4,382) (3,850) (12,653) (11,219)
-------------------------------- ----------------------------------
Segment net income $ 5,560 $ 5,886 $17,729 $18,098
================================ ==================================
The decrease in the office segment net income for the three months and nine months ended September 30, 2001 as compared to 2000 was due to increased depreciation expense in 2001 as the Company had a higher gross book value of depreciable office assets in 2001 as compared to 2000.
The net income for the office service center segment is as follows:
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net operating income $ 828 $ 1,171 $2,573 $ 3,429
Interest expense (214) (391) (641) (1,151)
Depreciation (308) (298) (916) (957)
------------------------------ -------------------------------
Segment net income $ 306 $ 482 $1,016 $1,321
=============================== ===============================
The decrease in segment net income for the three months and nine months ended September 30, 2001 as compared to 2000 was due to the sale of the Company’s Woodcreek office service center property in 2000 as well as decreases caused by declining occupancies in this property segment.
Liquidity and Capital Resources
The Company expects to meet its short-term liquidity requirements principally through its working capital and net cash provided by operating activities. The Company considers its cash provided by operating activities to be adequate to meet operating requirements and to fund the payment of dividends in order to comply with certain federal income tax requirements applicable to real estate investment trusts (“REITs”).
The Company is a party to a $150,000 unsecured credit matures on March 23, 2004. Borrowings under the credit facility bear interest at LIBOR plus 1.0% to 1.2%, depending on overall Company leverage. The credit facility contains financial covenants, including requirements for a minimum tangible net worth, maximum liabilities to asset values, debt service coverage and net property operating income. The credit facility also contains restrictions on, among other things, indebtedness, investments, dividends, liens, mergers and development activities.
On June 1, 2001, the Company entered into a $33,046 loan agreement with an institutional lender. The loan is secured by a first mortgage lien on its Milwaukee Center property, located in Milwaukee, Wisconsin, and bears interest at a fixed annual interest rate of 7.435% with a ten-year term. The net proceeds from the loan (approximately $33 million) were used to repay a portion of the outstanding borrowings under the Company’s unsecured credit facility.
In October 2001, the Company entered into two separate interest rate swap agreements with notional amounts of $25,000 each. One agreement has a term of two years and fixes the interest rate on $25,000 of the Company’s unsecured credit facility at a maximum of 4.12%. The second swap agreement has a term of three years and fixes the interest rate on $25,000 of the Company’s unsecured credit facility at a maximum of 4.51% per annum.
In 2001, the Company repurchased 223,400 common shares for $3,650 which completed the 250,000 common share repurchase plan authorized by the Board of Trustees in 2000.
The Company expects to meet its liquidity requirements for property acquisitions and significant capital improvements through property dispositions and additional borrowings under its unsecured credit facility. The Company had $37,350 available for future borrowings under the credit facility at September 30, 2001.
The Company expects to meet its long-term liquidity requirements (such as scheduled mortgage debt maturities, property acquisitions and significant capital improvements) through long-term collateralized and uncollateralized borrowings, the issuance of debt or equity securities and targeted property dispositions.
The Company entered into a contract in 2000 to acquire a 99,500 square foot office building, which was completed in June 2001, in suburban Milwaukee, Wisconsin, for a contract price of $8,500. The Company’s total investment in this property, including tenant improvements, is expected to be $11,700. The Company expects to acquire this property in early 2002. The Company has guaranteed a letter of credit in the amount of $2,000 to secure its obligations related to this property.
Forward-Looking Statements
Statements regarding the Company’s liquidity requirements and certain other statements in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate” and similar expressions identify forward-looking statements. Although the Company believes that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there can be no assurance that such expectations will be met. Various factors could cause actual results to differ materially from the Company’s expectations, including changes in interest rates, unexpected delays in project lease-up, changes in the local or national economies, unanticipated changes in the supply or demand for office space, increased sub-lease availability which could negatively impact space absorption, and other risks inherent in the real estate business. Many of these factors are beyond the Company’s ability to control or predict. Forward-looking statements are not guarantees of performance. For forward-looking statements made in this report, the Company claims the protection of the safe harbor for forward-looking statements made in the Private Securities Litigation Reform Act of 1995. The Company assumes no obligation to update or supplement forward-looking statements.
ITEM 3. MARKET RISK (Dollars in thousands)
The Company's interest income is sensitive to changes in the general levels of U.S. short-term interest rates.
The Company’s interest expense is sensitive to changes in the general level of U.S. short-term and long-term interest rates as the Company has indebtedness outstanding at fixed and variable rates.
The Company’s variable rate debt bears interest at LIBOR plus 1% to 1.2% per annum depending on overall Company leverage. Increases in LIBOR rates would increase the Company’s interest expense and reduce its cash flow. Conversely, declines in LIBOR rates would decrease its interest expense and increase its cash flow.
At September 30, 2001, the Company had $128,622 of fixed rate debt outstanding at an average rate of 7.07%. If the general level of interest rates in the United States were to fall, the Company would not likely have the opportunity to refinance this fixed rate debt at lower interest rates due to prepayment restrictions and penalties on its fixed rate debt.
In general, the Company believes long-term fixed rate debt is preferable as a financing vehicle for its operations due to the long-term fixed contractual rental income the Company receives from its tenants. As a result, 52.5% of the Company’s long-term debt outstanding at September 30, 2001 was at fixed rates. The Company may, as market conditions warrant, enter into additional fixed rate long-term debt instruments on either a secured or unsecured basis.
A tabular presentation of interest rate sensitivity is as follows:
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
2001(1) 2002 2003 2004 2005 Thereafter
Liabilities:
Fixed Rate
Mortgage loans payable $758 $3,174 $14,208 $5,814 $3,450 $101,218
Average interest rate 7.02% 7.02% 7.07% 7.83% 6.93% 7.05%
Variable Rate (4)
Bank loan payable - - - $112,650 - -
Average interest rate (2)
Bonds payable - $340 $375 $415 $460 $2,370
Average interest rate (3) (3) (3) (3) (3) (3)
| (1) | For the period October 1, 2001 to December 31, 2001. |
| (2) | As of September 30, 2001, the interest rate on this debt was LIBOR + 1.1%. The average interest rate for the nine months ended September 30, 2001 was 6.06%. |
| (3) | The interest rate on the bonds payable is reset weekly. After factoring in credit enhancement costs for the bonds, the average interest rate for the nine months ended September 30, 2001 was 5.65%. |
| (4) | In October 2001, the Company entered into two separate interest rate swap agreements with notional amounts of $25,000 each. One agreement has a term of two years and fixes the interest rate on $25,000 of the Company’s unsecured credit facility at a maximum of 4.12%. The second swap agreement has a term of three years and fixes the interest rate on $25,000 of the Company’s unsecured credit facility at a maximum of 4.51% per annum. |
Part II Other Information
ITEM 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits |
| The following exhibits are attached hereto: |
| Exhibit | ||
| Number | Description of Document |
| (b) | Reports on Form 8-K: |
| Item 2 and Item 7. | Form 8-K dated August 24, 2001 Acquisition of Bannockburn Corporate Center |
| Item 2 and Item 7. | Form 8-K/A dated October 23, 2001 Acquisition of Bannockburn Corporater Center and 1600 Corporate Center and required financial statements. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Great Lakes REIT. | |
| (Registrant) |
| Date: November 9, 2001 | /s/James Hicks |
| Chief Financial Officer and Treasurer | |
| (Principal Financial and Accounting Officer) |