ITEM 1. BUSINESS
Description of Business
Spieker Properties, Inc. (the "Company") is a self-administered and self-managed equity real estate investment trust ("REIT") that acquires, develops and operates commercial properties in California and Washington, Oregon and Idaho (the "Pacific Northwest"). As of December 31, 1996, the Company owned income-producing properties (the "Properties") aggregating approximately 21.4 million rentable square feet. The portfolio consists of industrial properties aggregating approximately 13.7 million rentable square feet, office properties aggregating approximately 6.3 million rentable square feet and retail properties aggregating approximately 1.4 million rentable square feet. The Company has acquired 3.3 million net rentable square feet of office and industrial properties since December 31, 1996, and has completed the disposal of one additional retail property. As of December 31, 1996, the average occupancy rate of the properties was approximately 96.6%.
The Company was incorporated in the state of Maryland on August 20, 1993, and commenced operations effective with the completion of its initial public offering ("IPO") on November 18, 1993. In the IPO, the Company issued 20,400,000 shares of Common Stock at $20.50 per share, or $418.2 million and used net proceeds of $386.8 million to purchase an approximate 77.6% general partnership interest in Spieker Properties L.P. (the "Operating Partnership"). Unless the context otherwise requires, the Company and the Operating Partnership are collectively referred to as the "Company." As of December 31, 1996, the Company owned an approximate 84.9% general partnership interest in the Operating Partnership. Following the equity offering in January 1997 described herein, the percentage ownership was increased to 86.9% as of March 18, 1997.
Business Strategy and Operational Philosophy
The Company's principal objective is to achieve sustainable long-term growth in Funds from Operations per share. The Company has pursued this goal since its inception through a focused, strategic approach to acquisition, development and property management.
BUSINESS STRATEGY
Focus on Quality Commercial Property. The Company invests in quality office and industrial properties that possess attributes that enable the properties to be competitive in both the short and the long run. The Company seeks to own properties in locations which provide easy access to major transportation arteries and are close to important services. With more than 25 years of experience in owning and operating income-producing properties, the Company's management possesses a high degree of knowledge of the physical and locational characteristics that give a property long-term viability.
The Company takes significant steps to differentiate its properties from those of nearby competitors, so as to maximize their attractiveness to potential users. The Company focuses on office properties that have ample glass line per square foot of office space, and user-friendly common areas, stairs, elevators and restrooms, convenient parking and efficient suite layouts. Additionally, the Company seeks to provide amenities and services such as conference rooms and health clubs. The Company's warehouse properties typically have high clear heights, numerous dock facilities, appropriate truck staging and high-capacity sprinkler systems. The
Company also seeks to differentiate its industrial properties through the use of landscaping as well as exterior glass walls.
The Company pays careful attention to the long-term quality of the buildings that it develops by emphasizing first-class materials, systems and workmanship during their construction. The exterior appearances of the Properties are designed to be attractive, enduring and appropriately simple. The Company avoids projects which are lavish or unnecessarily intricate, as these features tend to prematurely date buildings and often fail to deliver value from the tenants' perspective.
Serve Wide Range of Tenants. The Company focuses on leasing space to tenants of various sizes and on owning properties that are easily divisible and therefore appeal to a wide range of potential tenants. Such property flexibility also allows the Company to better serve existing tenants by accommodating their inevitable expansion and contraction needs. In addition, the Company's experience is that such project flexibility helps it maintain high occupancy rates particularly when market conditions are less favorable.
By focusing on divisible projects and a wide range of tenants, the Company has been able to control the capital expenditures associated with re-leasing space. Consequently, the Company's capital expenditure requirements are relatively lower than those associated with downtown office buildings or large single tenant suburban projects. The Company also attempts to limit tenant improvement expenditures to those which are in demand by, and adaptable to, a high number of users.
Own Suburban Properties. The Company focuses its efforts on properties in suburban markets surrounding major metropolitan areas. The Company believes that a number of significant demographic and technological factors have caused, and will continue to cause, properties in suburban areas to perform better than properties in central business districts. The desire of employees to work near their residence as well as transportation difficulties and safety concerns associated with central business districts have generally caused employers to seek facilities in the suburbs in the recent past. These factors are reinforced by technological changes which have enabled companies to operate efficiently from disparate locations.
In each specific local submarket of a suburban area in which it operates, the Company generally seeks to own a number of properties and to be one of the most significant commercial landlords in that market. The Company believes that this strategy gives it a measure of control over the rental rates it charges for its properties. Through this approach, the Company can also offer prospective tenants a variety of property options and can provide existing tenants, who are expanding, additional space in properties owned by the Company in the same area. The Company believes that it has achieved significant market penetration within a number of the submarkets in which it operates.
Invest in Growing Regions. The Company focuses its activities in California and the Pacific Northwest, where it believes economic growth will exceed national averages. The Company believes these regions possess diverse and vibrant economies with strong prospects for future growth due to their Pacific Rim location, quality of life, well-developed transportation infrastructures, high technology industries, well-educated employee base and excellent universities. Within California and the Pacific Northwest, the Company focuses its activities on the major metropolitan areas of Seattle, Portland, San Francisco, San Jose, Sacramento, Los Angeles, Orange County and San Diego, which have shown to be desired locations of a large number of businesses.
Provide Superior Level of Service. The Company's goal is to provide a superior level of service to its tenants in order to achieve high occupancy and rental rates, as well as low turnover. The Company's office property managers are located on-site, providing tenants with convenient access to management and allowing tenants to focus on their business rather than on property issues. On-site staff enable the Company's properties to be well-maintained and to convey a sense of quality, order and security that complements the suburban environments in which the properties are located. The Company has significant experience in acquiring properties managed by others and thereafter improving tenant satisfaction, occupancy levels, renewal rates and rental income by implementing the Company's tenant service programs.
OPERATING PHILOSOPHY
Fully-Integrated Management Capabilities. The Company has had, and will continue to have, a philosophy of maintaining in-house resources to add value to properties through the entire cycle of acquisition, development, and ownership, including design, construction, leasing and management. The Company utilizes in-house resources to market, lease and manage its properties and does not typically list its properties with outside businesses or use third-party management contractors. All of the Company's officers with real estate responsibility have had extensive experience marketing various properties and have, at least one time in their careers, been directly responsible for leasing specific properties. The Company believes this approach gives it a significant advantage as such depth of experience provides it with a detailed knowledge of markets and tenant preferences.
Accountability. The Company has a philosophy of holding one senior officer or a small group of senior officers accountable, under the supervision and direction of the Company's executive officers, for all phases of a property's development, from purchase, design and budgeting through construction, leasing and ongoing management. The Company believes that this approach increases the likelihood of a project's success because of the senior officer's accountability, continuity of involvement in the project and resulting detailed knowledge of the property and its tenants, particularly as compared to a compartmentalized approach to the real estate business where individuals are responsible only for certain limited areas of a project.
Training and Retention. The Company's hiring, training and retention of a talented management group has been an important factor in its success. The Company expends significant efforts in the training of new employees in fundamental real estate skills as well as in the continuing education of existing employees. All of the Company's officers, including the executive officers, are involved in the education program, which reinforces the program's importance to the Company and its personnel. The Company's officer compensation program includes cash bonuses and restricted stock payments tied largely to growth in net operating income from existing properties under their management, as well as contribution to Funds from Operations from new acquisitions and developments in their regions. Non-officer compensation includes subjective bonuses based upon, among other factors, tenant satisfaction and leasing and re-leasing success. The Company also believes that stock options are an effective means of linking employees' actions to stockholder value and has granted options to 70 of the Company's 212 employees.
Employees
As of December 31, 1996, the Company had 212 employees.
Competition
Other properties within the Company's markets compete with the Properties in attracting tenants, primarily on the bases of location, rental rates, services provided, and the design and condition of the improvements. In each of the Company's markets, the competition for tenants has been, and continues to be, intense. Some of these competing properties are newer, better located or better capitalized than the Company's properties. The number of competitive commercial properties in a particular area could have a material effect on the Company's ability to lease space in its properties or at newly developed or acquired properties and on the rents charged.
The Company also faces competition in its efforts to acquire equity interests in desirable real estate; such competitors include domestic and foreign financial institutions, other REITs, life insurance companies, pension funds, trust funds, partnerships and individual investors.
Working Capital
The Company believes that the cash provided by operations and its unsecured line of credit provide sufficient sources of liquidity to fund the Company's working capital requirements.
Environmental Matters
Compliance with laws and regulations relating to the protection of the environment, including those regarding the discharge of materials into the environment, has not had any material effects upon the capital expenditures, earnings or competitive position of the Company.
The 97 Properties owned by the Company at December 31, 1993, were each subject to a Phase I environmental audit or update during the twelve-month period ended December 31, 1993, certain of the Properties were subject to Phase II environmental investigations, and all buildings on properties constructed prior to 1985 have been subject to asbestos detection investigations. In addition, for each of the properties acquired subsequent to December 31, 1993, and for each parcel of land purchased for development, a Phase I environmental audit or update was completed as part of the acquisition due diligence process. These investigations have not revealed any environmental condition that the Company believes would have a material effect on its business, assets or results of operations. Independent parties have reported that no asbestos-containing materials were used in buildings constructed on the Properties during or after 1985.
Site assessments have revealed soil and ground water contamination at the Stender Way II property in Santa Clara, California. A third party is primarily bearing the costs relating to this environmental condition and the Company believes that its exposure, if any, is not material. Additionally, three properties located in Stanford Research Park in Palo Alto, California, are subject to varying degrees of known environmental contamination. The remediation costs associated with this contamination have also been, and are expected to continue to be, borne by other parties. Furthermore, the Company has entered into indemnification agreements whereby the Company has been, and is to be, indemnified for liabilities arising from clean-up costs relating to these three properties. Environmental contamination has been found to have originated on the industrial development project site in Santa Clara, which is known as Walsh at Lafayette, and which was acquired by the Company in 1995. The relevant government agency has identified a third party as responsible for remediation, and the remediation process is continuing. The Company is being indemnified for environmental contamination on the Walsh at Lafayette property by a third party that was the former owner of the property.
Site assessments have revealed that soil and groundwater at the Company's Montgomery Ward property in Pleasant Hill, California, have been contaminated with volatile organic compounds. The likely sources of this contamination are on-site underground storage tanks and a potential off-site contamination source. To date, no government agency has issued any directives requiring that a remediation plan be filed or the contamination be cleaned up. The Spieker partnership (the "Spieker Predecessor") that transferred this property to the Company previously filed a lawsuit against the seller to enforce an indemnity agreement and against certain other potentially responsible parties to have those parties bear any clean-up costs. Settlement has been reached with certain of the defendants in the lawsuit, resulting in cash payments to the Company. A trial involving the remaining defendants ended without any additional cash awards being made. Due to the nature of this environmental condition and the Company's expectation that other parties will be primarily responsible for the clean-up costs, the Company believes that its exposure, if any, for clean-up costs would not have a material adverse effect on the Company's financial condition, results of operations or liquidity.
Site assessments have revealed soil and groundwater contamination at the Arden Square property in Sacramento, California. This property is one of the retail properties which are under contract to be sold to Pacific Retail Trust ("PRT"). The Company has agreed to indemnify PRT for the contamination. However, the Company believes that the liabilities and clean-up costs associated with this contamination are covered under the Company's pollution insurance policy (except to the extent of the deductible under such policy). A possible similar situation was recently discovered in Woodside, California, which retail property is also under contract to be sold to PRT. The extent of this possible contamination, if any, is still being tested. The Company also has pollution insurance coverage for this property and believes that such contamination will be covered by such insurance (except to the extent of the deductible under such policy).
Although the environmental investigations conducted to date have not revealed any environmental liability that the Company believes would have a material adverse effect on the Company's business, assets or results of operations, and the Company is not aware of any such liability, it is possible that these investigations
did not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. No assurances can be given that (i) future laws, ordinances, or regulations will not impose any material environmental liability, or (ii) the current environmental condition of the Properties has not been, or will not be, affected by tenants and occupants of the Properties, by the condition of properties in the vicinity of the Properties, or by third parties unrelated to the Company.
ITEM 2.
ITEM 2. PROPERTIES
General
As of December 31, 1996, the Company's portfolio of properties consisted of industrial, suburban office and retail income-producing properties located in California and the Pacific Northwest. The total rentable square footage of the Properties at December 31, 1996, was approximately 21.4 million rentable square feet, consisting of approximately 13.7 million square feet of industrial property, approximately 6.3 million square feet of office property and approximately 1.4 million square feet of retail property. As of December 31, 1996, the average occupancy rate of the Properties was approximately 96.6%.
After an extensive review of the Company's investment opportunities and strategic position, the Company has decided to focus exclusively on office and industrial properties. The Company has therefore decided to divest itself of its retail properties and reinvest the proceeds from these properties in office and industrial properties, which the Company believes offer better growth prospects. During 1996, the Company completed the disposal of three of its retail properties at an aggregate consideration of $45.4 million, and signed definitive agreements to dispose of six other retail properties for aggregate consideration of approximately $61.1 million. Of the six properties under contract, five will be disposed of before May 1, 1997, on dates to be determined by the Company, with the final property to be disposed of by December 31, 1997. In connection with these dispositions, the Company's retail employees have become employees of PRT, and PRT has agreed to manage the Company's remaining retail properties pending disposition. The Company is in the process of marketing and divesting other retail properties and it anticipates that the divestiture will be completed in 1998.
For the year ended December 31, 1996, none of the Properties had net book values equal to 10% or more of the Company's total assets or aggregate gross revenues. The Company's largest property represents 3.2% of net book value and 2.6% of base rental revenues.
The Location and Type of the Company's Properties
The Properties are located in six geographic areas within California and the Pacific Northwest, which are comprised of numerous local markets. The following table sets forth, as of December 31, 1996, the location and type of the Properties by rentable square feet.
RENTABLE SQUARE FOOTAGE OF PROPERTIES BY LOCATION AND TYPE OF PROPERTY
Property Operating Income
The following table sets forth for the quarter ended December 31, 1996, the Company's property operating income, which is rental revenue less rental expenses and real estate taxes and excluding interest, depreciation and amortization and general and administrative expenses, on a percentage basis by the location and type of the Properties.
PERCENTAGE OF NET OPERATING INCOME BY LOCATION AND TYPE OF PROPERTY FOR THE QUARTER ENDED DECEMBER 31, 1996
Average Occupancy Rates
The following table sets forth the aggregate average occupancy rates of the Properties during the years specified.
AVERAGE OCCUPANCY
The following table sets forth the aggregate average occupancy rates as of December 31, 1996, of the Properties, in terms of location and type of the Properties.
AVERAGE OCCUPANCY BY LOCATION AND TYPE OF PROPERTY
Tenant Improvements and Leasing Commissions
While maintaining high occupancy levels in each of its property types and markets, the Company also focuses on controlling the expenditures associated with renewing or re-leasing space. For the year ended December 31, 1996, the Company renewed or re-leased 3.7 million square feet of space, and the average committed capitalized tenant improvement and leasing commission expenditures per square foot of renewed or re-leased space was $2.20.
Lease Expirations
The following tables set forth the lease expirations in summary and by type for leases in place in the Properties as of January 1, 1997, assuming none of the tenants exercises renewal options or termination rights. The tables do not include month-to-month leases.
LEASE EXPIRATIONS OF THE COMPANY'S PORTFOLIO
- --------------- (1) Calculated by dividing annual base rent (amounts contractually due, which may include taxes, insurance, and common area maintenance ("Annual Base Rent")) as adjusted for contractual increases expiring during each period by the total Annual Base Rent inclusive of contractual increases.
LEASE EXPIRATIONS OF THE INDUSTRIAL PROPERTIES
- --------------- (1) Calculated by dividing Annual Base Rent as adjusted for contractual increases expiring during each period by the Total Base Rent inclusive of contractual increases.
LEASE EXPIRATIONS OF THE OFFICE PROPERTIES
- --------------- (1) Calculated by dividing Annual Base Rent as adjusted for contractual increases expiring during each period by the Total Base Rent inclusive of contractual increases.
LEASE EXPIRATIONS OF THE RETAIL PROPERTIES
- --------------- (1) Calculated by dividing Annual Base Rent as adjusted for contractual increases expiring during each period by the Total Base Rent inclusive of contractual increases.
1996 Acquisitions
The following table sets forth certain information regarding properties acquired by the Company during the year ended December 31, 1996.
PROPERTIES ACQUIRED IN 1996
- --------------- (1) Represents capitalized cost as of December 31, 1996, plus estimated repositioning costs.
(2) In addition to the square footage and total investment shown in this table, the purchase included eight buildings totaling 895,530 square feet that are currently under development. See the development project titled "Benicia Industrial II" in the table titled "Developments in Process."
(3) Represents an investment in two mortgages with an aggregate face value of $21.0 million secured by this property.
(4) In addition to the square footage and total investment shown in this table, the purchase included one building totaling 146,300 square feet that is currently under redevelopment. See the development project titled "The City -- 3800 Chapman" in the table titled "Developments in Process."
1996 Developments
The following table sets forth certain information regarding property developments completed by the Company during the year ended December 31, 1996.
DEVELOPMENTS COMPLETED IN 1996
- --------------- (1) Represents capitalized cost as of December 31, 1996.
(2) Properties to be disposed of pursuant to retail divestiture.
Developments In Process
The following table sets forth certain information regarding the Company's property developments in process as of December 31, 1996.
DEVELOPMENTS IN PROCESS
- --------------- (1) Shell completion date refers to the date when the property is first available for occupancy.
(2) Represents total estimated cost of development.
Acquisitions Completed Subsequent to Year-End
The following table sets forth certain information regarding the properties acquired by the Company between January 1, 1997, and March 15, 1997.
PROPERTIES ACQUIRED IN 1997 (THROUGH MARCH 15, 1997)
- --------------- (1) Represents initial purchase price plus estimated repositioning costs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which either the Company or the Properties is a party, or to which any of the assets of the Company or the Properties are subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in the fourth quarter of the fiscal year ended December 31, 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The shares of the Company's Common Stock are traded on the New York Stock Exchange under the symbol SPK.
Market Information
The Company's Common Stock has been traded on the New York Stock Exchange since November 18, 1993. The high, low, and closing price per share of Common Stock for the four quarters of fiscal 1995 and the four quarters of fiscal 1996 are as follows:
On March 18, 1997, the closing price of the Common Stock on the NYSE was $39.50 per share.
There is no established public trading market for the Company's Class B and Class C Common Stock.
Holders
The approximate number of holders of record of the shares of the Company's Common Stock was 403 as of March 18, 1997. As of such date, there was one record holder of the Company's Class B Common Stock and one record holder of the Company's Class C Common Stock. The Company is not aware of the number of beneficial owners of the Class B and Class C Common Stock.
Dividends and Distributions
On March 12, 1997, the Company announced that the dividend payable to holders of Common Stock for the first quarter of 1997 would be $0.47 per share. This represents a 9.3% increase over the quarterly dividend declared for each of the four quarters of 1996. Concurrent with the increase in the dividend on Common Stock, the dividends declared on shares of Class B and Class C Common Stock and Series A Preferred Stock were increased to $0.5975, $0.4825 and $0.5732, respectively.
For each of the four quarters of 1996, the Company declared quarterly dividends to holders of Common Stock of $0.43 per share, which was 2.4% higher than the $0.42 per share for each of the four quarters of 1995. In addition to the dividends declared to holders of Common Stock, the Company also declared dividends to holders of its Class B and Class C Common Stock, Series A Preferred Stock and Series B Preferred Stock. The Company declared dividends to holders of Series A Preferred Stock of $0.5122 per share for each of the four quarters of 1995 and $0.5244 per share for each of the four quarters of 1996. For the fourth quarter of 1995, the Company declared dividends to the holders of Series B Preferred Stock of $0.1379 per share. For the four quarters of 1996, the Company declared dividends to the holders of Series B Preferred Stock of $0.59 per share. For the second, third and fourth quarters of 1995, the Company declared quarterly dividends to holders of Class B Common Stock of $0.5472 per share and for the four quarters of 1996, the Company declared quarterly dividends of $0.5575 per share. For the four quarters of 1996, the Company declared quarterly dividends of $0.4425 per share to holders of Class C Common Stock.
Future dividends by the Company will be at the discretion of the Board of Directors and will depend upon the actual Funds from Operations of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, applicable legal restrictions and such other factors as the Board of Directors deems relevant. Although the Company intends to continue to make quarterly distributions to its stockholders, no assurances can be given as to the amounts of dividends, if any, distributed in the future. The Company's policy is to review its dividends on an annual basis.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for:
- Spieker Properties, Inc. consolidated operating data presented for the years ended December 31, 1996, December 31, 1995, and December 31, 1994, and for the period from November 19, 1993, to December 31, 1993. The consolidated balance sheet data presented as of December 31, 1996, 1995, 1994, and 1993.
- Spieker Partner Properties combined operating data presented for the period from January 1, 1993, to November 18, 1993, and for the year ended December 31, 1992. The combined balance sheet data presented as of December 31, 1992.
This selected financial data should be read in conjunction with financial statements (including the notes thereto) of the Company included in Item 14.
SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND NUMBER OF PROPERTIES)
- --------------- (1) Per share amounts are presented for the period for the years ended December 31, 1996, 1995 and 1994, based upon weighted average shares outstanding of 34,691,140, 26,140,488 and 20,417,513, respectively, and for the period from November 19, 1993, to December 31, 1993, based upon weighted average shares outstanding of 20,400,000. Dividends and distributions per share include dividends on the Class B and Class C Common Stock. The actual Class B Common Stock dividends declared in 1996 and 1995 were $2.23 and $1.64 per share, and the actual Class C Common Stock dividends declared in 1996 and 1995 were $1.77 and $0 per share.
(2) Net of discount of approximately $31.6 million and $38.3 million as of December 31, 1994 and 1993, respectively.
(3) Funds from Operations means income (loss) from operations before disposal of real estate properties, minority interests and extraordinary items plus depreciation and amortization and an adjustment for straight-lined rents less cash distributable to minority interests in certain properties owned by the Company. In February 1995, the National Association of Real Estate Investment Trusts ("NAREIT") established new guidelines clarifying its definition of Funds from Operations and requested that REITs adopt this new definition beginning in 1996. The new definition provides that the amortization of debt discount and deferred financing costs is no longer to be added back to net income to calculate Funds from Operations. In 1996, the Company substantially implemented the new NAREIT definition for calculating Funds from Operations. The amounts presented above for the years ended December 31, 1995 and 1994, have been restated to reflect the new NAREIT definition. Funds from Operations previously reported by the Company based on the old NAREIT definition for the years ended December 31, 1995 and 1994, were $70,790 and $52,142, respectively. Management generally considers Funds from Operations to be a useful financial performance measure of the operating performance of an equity REIT because, together with net income and cash flows, Funds from Operations provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. Funds from Operations does not represent net income or cash flows from operations as defined by GAAP and does not necessarily indicate that cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. Funds from Operations does not measure whether cash flow is sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to stockholders. Funds from Operations also does not represent cash flows generated from operating, investing or financing activities as defined by GAAP. Further, Funds from Operations as disclosed by other REITs may not be comparable to the Company's calculation of Funds from Operations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations and financial condition of the Company should be read in conjunction with the selected financial data and the Company's financial statements included elsewhere in this Form 10-K.
RESULTS OF OPERATIONS
OVERVIEW
In 1996, the Company continued to identify and complete attractive acquisition and development transactions and to focus on increasing the cash flow from its existing core portfolio of properties by maintaining high occupancy levels and increasing effective rents. The Company also continued to strengthen its balance sheet and to establish a capital structure that allows the Company to take advantage of growth opportunities.
During 1996, the Company added 4.7 million square feet to its portfolio by completing acquisitions representing a total investment of approximately $329.3 million (the "1996 Acquisitions"). As used herein, the term "total investment" represents the initial purchase price of acquisitions, plus the estimated cost of certain repositioning capital expenditures anticipated at the time of purchase. Significantly, the Company increased its presence in Southern California by completing nine transactions representing a total investment of $150.6 million and over 2.0 million square feet.
While the Company was able to complete a number of acquisition transactions during 1996, the overall market for property acquisitions is getting more challenging. In all of the markets in which the Company operates, the Company is experiencing an increased level of competition for acquisitions, including competition from a number of REITs. The Company believes that as the fundamentals of these markets continue to strengthen and the number of qualified buyers increases, the average initial return achievable on new acquisitions may decrease and the acquisition cost of new properties may begin to approach replacement cost.
The Company also increased its level of development activity. In 1996, seven projects totaling 0.9 million square feet were completed at a total investment of $59.3 million. In addition, as of December 31, 1996, the Company had developments in process in each of its operating regions representing an estimated total investment of $157.2 million and a total of 3.1 million square feet of suburban office and industrial space. The developments completed during 1996 and the developments in process at December 31, 1996, are collectively referred to as the "Developments." Certain of the developments in process, though not yet completed, were partially leased and occupied during 1996 and, accordingly, certain revenue and expense amounts for such developments are included in the Company's operating results for the year ended December 31, 1996.
The Company was also able to increase rents in its core portfolio. On the 3.7 million square feet of second-generation space renewed or re-leased during the year, new effective rents were, on average, 10.7% higher than the expiring coupon rent. At year end, the Company's portfolio of properties was 96.6% leased.
The Company continued to strengthen its balance sheet by accessing both the public and private equity markets and the public debt market. The Company raised more than $151.3 million in equity capital in 1996 by completing a concurrent public and private offering of Common Stock and Class C Common Stock. In addition, over the course of the year, the Company issued $375.0 million of investment grade rated unsecured notes with maturities ranging from five to twenty years.
Finally, in 1996 the Company announced a strategic decision to dispose of its existing portfolio of retail properties and replace such properties with office and industrial properties, which the Company believes provide superior long-term growth prospects. In December 1996, the Company disposed of three retail properties and signed definitive contracts to dispose of six additional retail properties to Pacific Retail Trust ("PRT"). The aggregate consideration for the dispositions to PRT will amount to approximately $106.5 million. Of this total amount, transactions valued at $45.4 million closed in December 1996. On the three properties disposed of in December 1996, the Company recognized a book gain of approximately $9.7 million. Of the six properties under contract, five will be disposed of before May 1, 1997, on dates to be determined by
the Company, with the final property to be disposed of by December 31, 1997. In connection with these dispositions, the Company's retail employees have become employees of PRT, and PRT has agreed to manage the Company's remaining retail properties pending disposition. The Company is in the process of divesting its other retail properties and it anticipates that such divestiture will be completed by the end of 1998.
COMPARISON OF 1996 TO 1995
The following compares the Company's results for the year ended December 31, 1996, with its results for the year ended December 31, 1995.
For the year ended December 31, 1996, rental revenues increased by $45.1 million, or 29.8%, to $196.5 million, as compared to $151.4 million for the corresponding period ended December 31, 1995. The increase was attributable to revenues in the amount of $18.9 million from the 1996 Acquisitions, $16.1 million from properties acquired during 1995 (the "1995 Acquisitions"), $7.9 million from the Developments, and $2.2 million from the Core Portfolio. As used herein, the term "Core Portfolio" refers to those stabilized properties owned by the Company as of January 1, 1995.
Interest and other income increased by $2.2 million, or 110.0%, to $4.2 million for the year ended December 31, 1996, as compared to the year ended December 31, 1995. The net increase in interest and other income was primarily due to $1.8 million in interest income earned on the Company's investment in two mortgages, which were acquired in January 1996.
Rental expenses increased by $10.1 million, or 41.1%, to $34.7 million for the year ended December 31, 1996, as compared to $24.6 million for 1995. Real estate taxes increased by $3.6 million, or 30.3%, to $15.5 million in 1996, as compared to $11.9 million in 1995. The total increase in property operating expenses (rental expenses and real estate taxes) is due to a $5.9 million increase attributable to the 1996 Acquisitions, a $5.3 million increase attributable to the 1995 Acquisitions, a $2.0 million increase attributable to the Developments, and a $0.5 million increase attributable to the Core Portfolio. On a percentage basis, property operating expenses were 25.5% and 24.1% of rental revenues for the years ended December 31, 1996 and 1995, respectively. The higher percentage of property operating expenses is attributable to an increasing percentage of office properties in the Company's portfolio, and to the Company's acquisition of properties with occupancy levels less than the expected stabilized occupancy, resulting in the Company recognizing the full expense burden of a property before recognizing the full revenue potential of the property, which doesn't occur until the acquired vacant space is leased.
The net property operating income (rental revenues less rental expenses and real estate taxes) in the Core Portfolio increased by $1.7 million or approximately 1.6% from the year ended December 31, 1995, to the year ended December 31, 1996. The increase is principally the result of increasing effective rents on leases signed for the renewal or releasing of second-generation space and contractual rent increases included in leases signed in prior years. For both the year ended December 31, 1995, and the year ended December 31, 1996, the occupancy in the Core Portfolio was stable at approximately 97%.
Interest expense decreased by $9.2 million, or 19.8%, to $37.2 million in 1996, from $46.4 million in 1995. The decrease in interest expense is due to the elimination of the amortization of debt discount as a result of the December 1995 refinancing of $347.0 million of secured mortgage debt (the "Prudential Debt"). The prepayment of the Prudential Debt resulted in the write-off of approximately $28.1 million in debt discount which was previously being amortized over the remaining term of the loans and recorded as interest expense. The Prudential Debt was prepaid with the net proceeds from the concurrent underwritten public offering of $260.0 million of investment grade rated unsecured notes and 4.25 million shares of Series B Preferred Stock.
Depreciation and amortization expenses increased by $5.8 million, or 18.4%, to $37.4 million for the year ended December 31, 1996, as compared with the same period in 1995, due to the 1995 and 1996 Acquisitions and the Developments.
General and administrative expenses and other expenses increased by $1.6 million, or 18.8%, to $10.1 million for the year ended December 31, 1996, as compared with 1995, primarily as a result of the increased number of employees, which rose from 175 at December 31, 1995, to 212 at December 31, 1996. On a
percentage basis, general and administrative expenses were 5.1% of rental revenues for the year ended December 31, 1996, as compared with 5.6% for 1995.
In 1996, net income before minority interests and disposal of real estate properties increased by $35.5 million, or 117.2%, to $65.8 million as compared to $30.3 million in 1995. The increase in net income is principally due to (i) the increase in income from the 1995 and 1996 Acquisitions, the Developments and the increased property operating income generated by the Core Portfolio as a result of increased rental rates realized on the renewal and re-leasing of second-generation space and (ii) the decrease in interest expense.
COMPARISON OF 1995 TO 1994
The following compares the Company's results for the year ended December 31, 1995, with its results for the year ended December 31, 1994.
Rental revenues increased by $31.0 million, or 25.7%, to $151.4 million in 1995, as compared with $120.4 million in 1994. Of this increase, $13.5 million was generated by the 1995 Acquisitions. During 1995 the Company invested $164.8 million for the acquisition of properties with over 2.3 million rentable square feet of space. By property type, 53.6% of the Company's 1995 Acquisitions were office properties, 41.7% were industrial properties and 4.7% were retail properties. Of the increase in rental revenues $11.1 million was generated by the properties acquired during 1994 (the "1994 Acquisitions") and $1.8 million was generated by the two properties developed during 1994 (the "1994 Developments"). The remaining increase is attributable to contractual rent increases and increased effective rents on leases signed for the renewal or re- leasing of previously leased space. During 1995, the Company signed 552 leases for the renewal or releasing of over 3.1 million square feet of space. On average, the new effective rents were 7.6% higher than ending rental rates on the expiring lease.
Interest and other income increased by $1.3 million, or 185.7%, to $2.0 million in 1995, as compared with $0.7 million in 1994. This increase is predominantly due to $0.8 million in management fee income earned by the Company from the third-party management of certain properties during 1995. Beginning in the first quarter of 1995, a portion of the third-party management and other services previously performed by Spieker Northwest, Inc. ("SPNW"), an unconsolidated subsidiary of the Company, was transferred to the Company. Accordingly, certain revenue and expense items previously recorded by SPNW are now recorded by the Company.
Rental expenses increased by $6.6 million, or 36.7%, to $24.6 million in 1995, as compared to $18.0 million in 1994. Real estate taxes increased by $1.8 million, or 17.8%, to $11.9 million in 1995, as compared to $10.1 million in 1994. Of the combined $8.4 million increase in rental expenses and real estate taxes, $3.8 million is attributable to the 1995 Acquisitions and $3.4 million is attributable to the 1994 Acquisitions and the 1994 Developments. The remainder is attributable to the Core Portfolios. In 1995, the Company's rental expenses and real estate taxes in total were 24.1% of rental revenues, as compared to 23.3% for 1994.
Interest expense increased by $2.0 million, or 4.5%, to $46.4 million in 1995, as compared to $44.4 million in 1994. The increase in interest expense resulted primarily from higher average outstanding debt balances during 1995 as compared with 1994. Such higher balances were due to the debt incurred to complete the 1995 and 1994 Acquisitions, the 1994 Developments, and the property developments commenced in 1995 (the "1995 Developments"). The Company's 1995 Developments consist of nine properties totaling over 1.0 million square feet with an estimated total capitalized cost of $74.0 million.
Depreciation and amortization increased by $2.6 million, or 9.0%, to $31.6 million in 1995, as compared to $29.0 million in 1994. The increase is primarily due to the 1995 and 1994 Acquisitions, the 1994 Developments and basis adjustments relating to the purchases of limited partners' interests in predecessor entities.
General and administrative and other expenses increased by $2.3 million, or 37.1%, to $8.5 million in 1995, as compared to $6.2 million in 1994. Of the increase, $1.0 million is due to expenses incurred related to the increased management fee income earned by the Company as discussed above. The remaining increase is
due to the increase in personnel and investments in upgrading the Company's management information systems to support the Company's growth.
Net income before minority interests and extraordinary items increased by $16.9 million, or 126.1%, to $30.3 million in 1995, as compared to $13.4 million in 1994. This increase is primarily due to the net income from the 1995 and 1994 Acquisitions and the 1994 Developments and the increased effective rents on leases signed for previously occupied space.
For the year ended December 31, 1995, the Company recorded a net loss of $8.8 million as compared to net income of $10.5 million in 1994. The net loss in 1995 is attributable to a one time extraordinary loss of $40.8 million, before minority interests share of the loss of $7.3 million, recorded during the fourth quarter of 1995 in connection with the prepayment of a $347.0 million cross collateralized mortgage obligation with the net proceeds from the issuance of $260.0 million of unsecured investment grade debt and $106.3 million of Series B Preferred Stock. The loss included a $28.1 million, noncash charge related to the write-off of unamortized debt discount and deferred financing fees and a $12.7 million charge related to prepayment penalties and fees. By prepaying the debt, the Company was able to increase its financial flexibility by unencumbering a large pool of assets and to extend the weighted average maturity of its debt at attractive interest rates.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1996, cash provided by operating activities increased by $28.0 million, or 37.0%, to $103.6 million, as compared to $75.6 million for 1995. The increase is primarily due to the increase in net income resulting from the 1995 and 1996 Acquisitions, the Developments, increased property operating income generated by the Core Portfolio and a decrease in interest expense. Cash used for investing activities increased by $179.0 million, or 89.7%, to $378.6 million for 1996, as compared to $199.6 million for 1995. The increase is attributable to the Company's ongoing acquisition and development of suburban office and industrial properties. Cash provided by financing activities increased by $174.7 million, or 143.2%, to $296.7 million for 1996, as compared to $122.0 million for 1995. During 1996, cash provided by financing activities consisted, primarily, of $152.4 million in net proceeds from the sale of Common Stock and Class C Common Stock, and $371.5 million in net proceeds from the issuance of unsecured notes, which was offset by net payments of $78.7 million on the Facility (as defined below) and net payments of $66.7 million on mortgage loans. Additionally, payments of distributions increased by $27.2 million to $81.6 million for 1996, as compared with $54.4 million for 1995. The distribution payment increase is due to the greater number of shares outstanding and a 2.4% increase in the distribution rate.
The principal sources of funding for acquisitions, development, expansion and renovation of the properties are an unsecured line of credit, permanent secured debt financings, public and privately placed equity financing, public unsecured debt financing, the issuance of partnership units in the Operating Partnership, and cash flow provided by operations. In addition, during 1996 the Company made the strategic decision to sell its retail assets and use the proceeds from the sale of the retail properties for the acquisition and development of office and industrial properties. The Company believes that its liquidity and its ability to access capital are adequate to continue to meet liquidity requirements for the foreseeable future.
At December 31, 1996, the Company had no material commitments for capital expenditures related to the renewal or releasing of space. The Company believes that the cash provided by operations and its line of credit provide sufficient sources of liquidity to fund capital expenditure costs associated with the renewal or re-leasing of space.
The Company has a $150.0 million unsecured line of credit facility (the "Facility") with interest at London Interbank Offered Rates ("LIBOR") plus 1.25%. The Facility matures in November 1997 and the Company has an option to extend the Facility for one year upon payment of a fee equal to 0.12% of the total Facility. The Facility also includes a fee on average unused funds, which varies between 0.125% and 0.20% based on the average outstanding balance. At December 31, 1996, the Company had $39.0 million outstanding under the Facility.
In December 1995, the Company issued in a public offering $260.0 million of unsecured investment grade rated notes (the "Unsecured Notes") and the Company issued $106.3 million of Series B Preferred Stock (the offering of the Unsecured Notes and the offering of the Series B Preferred Stock are collectively referred to as the "December 1995 Offerings"). The Unsecured Notes were issued in three tranches as follows: $100.0 million of 6.65% notes due December 15, 2000, priced to yield 6.683%, $50.0 million of 6.80% notes due December 15, 2001, priced to yield 6.823%, and $110.0 million of 6.95% notes due December 15, 2002, priced at par. The Series B Preferred Stock was issued at $25.00 per share and a dividend yield of 9.45%.
The proceeds from the December 1995 Offerings of $358.9 million were used to prepay a cross-collateralized mortgage obligation outstanding to Prudential Insurance Company. The amount paid to Prudential Insurance Company included the repayment of principal, interest due through December 10, 1995, and a negotiated prepayment penalty of $11.8 million. The prepayment resulted in the unencumbrance of 55 of the Company's properties.
On January 19, 1996, the Company issued $100.0 million of investment grade rated unsecured notes. The notes carry an interest rate of 6.90%, were priced to yield 6.97%, and mature on January 15, 2004. Net proceeds of $98.8 million were used to repay borrowings on the unsecured line of credit. In June 1996, the Company commenced a $200.0 million medium-term note program. In July 1996, the Company issued $100.0 million of 8.00% medium-term notes due July 19, 2005, and $50.0 million of 7.58% medium-term notes due December 17, 2001, (the "July 1996 Notes"). The net proceeds of $148.8 million from the issuance of the July 1996 Notes were used to repay borrowings on the line of credit and to fund the ongoing acquisition and development of properties. In December 1996, the Company issued $100.0 million of 7.125% investment grade rated unsecured notes, priced to yield 7.14% and maturing on December 1, 2006, and $25.0 million of 7.875% investment grade rated unsecured notes, priced to yield 7.91% and maturing on December 1, 2016. The net proceeds of $123.9 million were used to pay down borrowings on the line of credit and to fund the ongoing acquisition and development of properties.
As of December 31, 1996, the Company had $635.0 million of investment grade rated unsecured notes outstanding. The notes have interest rates which vary from 6.65% to 8.00%, and various maturity dates which range from 2000 to 2016.
In addition to the Unsecured Notes and the Facility, the Company has $46.0 million of secured indebtedness (the "Mortgages") at December 31, 1996. The Mortgages have interest rates varying from 7.5% to 9.75% and maturity dates from 1997 to 2012. The Mortgages are secured by a first or second deed of trust on the related properties and generally require monthly principal and interest payments. The Company also has $4.8 million of assessment bonds outstanding as of December 31, 1996.
On February 28, 1996, the Company concurrently sold 4,887,500 shares of Common Stock (including 637,500 shares sold pursuant to the underwriters' exercise of their over-allotment option) through an underwritten public offering and directly placed 1,176,470 shares of Class C Common Stock and 135,000 shares of Common Stock with a limited number of institutional investors at $25.50 per share. The net proceeds of $151.3 million were used primarily to repay floating rate debt.
In January 1996, the Company filed a shelf registration statement (the "January 1996 Shelf Registration Statement") with the SEC to register 1,407,005 shares of Common Stock issuable by the Company upon conversion of shares of Series A Preferred Stock and upon conversion of partnership units in the Operating Partnership by certain holders thereof. The January 1996 Shelf Registration Statement was declared effective by the SEC on February 28, 1996. The Company will receive no proceeds from the sale of Common Stock under the January 1996 Shelf Registration Statement.
In May 1996, the Company and the Operating Partnership filed a shelf registration statement (the "May 1996 Shelf Registration Statement") with the SEC which registered $250.0 million of equity securities of the Company and $250.0 million of debt securities of the Operating Partnership. The May 1996 Shelf Registration Statement was declared effective by the SEC on June 20, 1996.
In August 1996, the Company filed a shelf registration statement (the "August 1996 Shelf Registration Statement") with the SEC to register 50,000 shares of Common Stock issuable by the Company upon
exchange of partnership units in the Operating Partnership by certain holders thereof. In October 1996, the Company filed a registration statement (the "October 1996 Shelf Registration Statement") with the SEC to register 245,738 shares of Common Stock issuable by the Company upon exchange of partnership units in the Operating Partnership by certain holders thereof. The Company will receive no proceeds from the sale of Common Stock under the August 1996 Shelf Registration Statement or the October 1996 Shelf Registration Statement.
Subsequent to year-end, in January 1997, the Company sold 11,500,000 shares of Common Stock (including 1,500,000 shares sold to the underwriters in the exercise of their over-allotment option) through an underwritten public offering at $34.50 per share. The net proceeds of $374.8 million were used to purchase properties during the first quarter of 1997, many of which were under contract or letter of intent at the time of the offering, and to repay indebtedness. Also, in January 1997, the Company and the Operating Partnership filed a shelf registration statement (the "January 1997 Shelf Registration Statement") with the SEC which registered $500.0 million of equity securities of the Company and $500.0 million of debt securities of the Operating Partnership and became effective in January 1997.
After completion of the January 1997 equity offering, the Company has the capacity pursuant to the January 1997 Shelf Registration Statement to issue up to approximately $500.0 million in equity securities and the Operating Partnership has the capacity pursuant to the May 1996 Shelf Registration Statement and the January 1997 Shelf Registration Statement to issue up to $615.0 million in debt securities (including the $50.0 million of medium-term notes available under the Company's existing medium-term note program).
FUNDS FROM OPERATIONS
The Company considers Funds from Operations to be a useful financial measure of the operating performance of an equity REIT because, together with net income and cash flows, Funds from Operations provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions, developments, and other capital expenditures. Funds from Operations does not represent net income or cash flows from operations as defined by generally accepted accounting principles ("GAAP") and Funds from Operations should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Funds from Operations does not measure whether cash flow is sufficient to fund all of the Company's cash needs including principal amortization, capital improvements, and distributions to stockholders. Funds from Operations does not represent cash flows from operating, investing, or financing activities as defined by GAAP. Further, Funds from Operations as disclosed by other REITs may not be comparable to the Company's calculation of Funds from Operations, as described below.
Pursuant to the National Association of Real Estate Investment Trusts ("NAREIT") revised definition of Funds from Operations, beginning with the quarter ended March 31, 1996, the Company calculated Funds from Operations by adjusting net income before minority interest, calculated in accordance with GAAP, for certain non-cash items, principally the amortization and depreciation of real property and for dividends on shares and other equity interests that are not convertible into shares of Common Stock. The Company does not add back the depreciation of corporate items, such as computers or furniture and fixtures, or the amortization of deferred financing costs or debt discount. However, the Company includes an adjustment for the straight-lining of rent under GAAP, as management believes this presents a more meaningful picture of rental income over the reporting period.
Funds from Operations per share is calculated based on weighted average shares equivalents outstanding, assuming the conversion of all shares of Series A Preferred Stock, Class B Common Stock, Class C Common Stock and all partnership units in the Operating Partnership into shares of Common Stock.
The tables below sets forth the Company's calculation of Funds from Operations for 1996 and 1995, based on the new NAREIT definition.
STATEMENT OF FUNDS FROM OPERATIONS (BASED ON THE NEW NAREIT DEFINITION) (AMOUNTS IN THOUSANDS)
- --------------- (1) Assumes conversion of the shares of Class B and Class C Common Stock, shares of Series A Preferred Stock and partnership units in the Operating Partnership into shares of Common Stock.
STATEMENT OF FUNDS FROM OPERATIONS (BASED ON THE NEW NAREIT DEFINITION) (AMOUNTS IN THOUSANDS)
- --------------- (1) Assumes conversion of the shares of Class B and Class C Common Stock, shares of Series A Preferred Stock and partnership units in the Operating Partnership into shares of Common Stock.
Because of the impact of the December 1995 Offerings on the Company's balance sheet and results of operations, the Company believes that an adjusted calculation of 1995 Funds from Operations, based on the new NAREIT definition and reflecting the effect of the December 1995 Offerings and the conversion of the secured line of credit into an unsecured facility as if such transactions had occurred on January 1, 1995, provides a helpful basis for analyzing the impact of the new NAREIT definition. The table below sets forth the Company's calculation of Funds from Operations for 1995 based upon the new NAREIT definition and adjusted to reflect the December 1995 Offerings and conversion of the secured line of credit into an unsecured facility as if they occurred on January 1, 1995.
PRO-FORMA STATEMENT OF FUNDS FROM OPERATIONS (BASED ON THE NEW NAREIT DEFINITION) (AMOUNTS IN THOUSANDS)
- --------------- (1) Adjustment reflects interest cost of unsecured notes and dividend cost of Series B Preferred Stock less previously recorded cash interest cost on $347 million of prepaid debt.
(2) Adjustment reflects amortization of discount and deferred financing fees added back in calculating FFO based on the old NAREIT definition less amortization on the $347 million of prepaid debt and the previous secured line of credit and adding in amortization on the new unsecured line of credit.
(3) Assumes conversion of the shares of Class B and Class C Common Stock, shares of Series A Preferred Stock and partnership units in the Operating Partnership into shares of Common Stock.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Form 10-K. See Item 14.
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 Item 10 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on June 10, 1997.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on June 10, 1997.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on June 10, 1997.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on June 10, 1997.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS AND REPORTS OF ARTHUR ANDERSON LLP, INDEPENDENT AUDITORS
2. FINANCIAL STATEMENT SCHEDULES:
All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.
(B) REPORTS ON FORM 8-K
During the quarter ended December 31, 1996, the Company filed the following report on Form 8-K:
(i) Form 8-K dated December 4, 1996, which includes combined statements of revenues and certain expenses of the Three Property Transactions (as defined therein)
(C) EXHIBITS
The exhibits cited in the following Index to Exhibits are filed herewith or are incorporated by reference to exhibits previously filed.
EXHIBITS (ENCLOSED ATTACHMENTS ARE SEQUENTIALLY NUMBERED)
INDEX TO EXHIBITS
- --------------- * Indicates management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the identically numbered exhibit to the Company's Registration Statement on Form S-11 (Registration No. 33-67906), which became effective on November 10, 1993.
(2) Incorporated by reference to the identically numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Spieker Properties, Inc.:
We have audited the accompanying consolidated balance sheets of Spieker Properties, Inc. (a Maryland corporation) as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1996, 1995 and 1994. These consolidated financial statements and the schedule referred to below are the responsibility of the management of Spieker Properties, Inc. Our responsibility is to express an opinion on these consolidated financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spieker Properties, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years ended December 31, 1996, 1995 and 1994, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying schedule listed in the index to the financial statements is presented for purposes of complying with the Securities and Exchange Commission rules and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California January 24, 1997
SPIEKER PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these statements.
SPIEKER PROPERTIES, INC.
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of these statements.
SPIEKER PROPERTIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these statements.
SPIEKER PROPERTIES, INC.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these statements.
SPIEKER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
Spieker Properties, Inc. (the "Company") was organized in the state of Maryland on August 20, 1993, and commenced operations effective with the completion of its initial public offering ("IPO") on November 18, 1993. The Company qualifies as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986 (the "Code"), as amended. As of December 31, 1996, the Company owned an approximate 84.9 percent general partnership interest in Spieker Properties L.P. (the "Operating Partnership"). The Company and the Operating Partnership are collectively referred to as the "Company".
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The Company's consolidated financial statements include the consolidated financial position of the Operating Partnership and its subsidiaries as of December 31, 1996 and 1995, and its consolidated results of operations and cash flows for the years ended December 31, 1996, 1995 and 1994. The Company's investment in Spieker Northwest, Inc. is accounted for under the equity method. The carrying value of Spieker Northwest, Inc. of $53 at December 31, 1996 and 1995, is included in prepaid expenses and other assets. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
Properties
Properties are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the properties. The estimated lives are as follows:
The cost of buildings and improvements includes the purchase price of the property or interests in property, legal fees, acquisition costs and interest, property taxes and other costs incurred during the period of construction.
Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations or betterments which extend the economic useful life of assets are capitalized.
Investments in real estate are stated at the lower of depreciated cost or estimated fair value. Fair value for financial reporting purposes is evaluated periodically by the Company on a property by property basis using undiscounted cash flow. If a potential impairment is identified, it is measured by the property's fair value based on either sales comparables or the net cash expected to be generated by the property, less estimated carrying costs (including interest) throughout the anticipated holding period, plus the estimated cash proceeds from the ultimate disposition of the property. To the extent that the carrying value exceeds the estimated fair value, a provision for decrease in net realizable value is recorded. Estimated fair value is not necessarily an indication of a property's current value or the amount that will be realized upon the ultimate disposition of the property. As of December 31, 1996 and 1995, none of the carrying values of the properties exceeded their estimated fair values. As of December 31, 1996 and 1995, the properties are located primarily in California, Oregon and Washington. As a result of this geographic concentration, the operations of these properties could be adversely affected by a recession or general economic downturn in the areas where these properties are located.
SPIEKER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company owns two mortgage loans that are secured by real estate. The Company assesses possible impairment of these loans by reviewing the fair value of the underlying real estate. As of December 31, 1996, the fair value of the underlying real estate was in excess of the Company's book value of the mortgage loans.
Construction in Progress
Project costs clearly associated with the development and construction of a real estate project are capitalized as construction in progress. In addition, interest, real estate taxes and other costs are capitalized during the period in which activities necessary to get the property ready for its intended use are in progress.
Cash and Cash Equivalents
Highly liquid investments with an original maturity of three months or less when purchased are classified as cash equivalents.
Ground Leases
The land on which three of the Company's properties are located is owned by Stanford University and is subject to ground leases. The ground leases expire in 2039 or 2040, and unless the leases are extended, the use of the land, together with all improvements, will revert back to Stanford University. The former owners of the three properties prepaid the ground leases through 2011, 2012 and 2017; thereafter, the Company will be responsible for the ground lease payments, as defined under the terms of the leases. These ground lease payments have been segregated from the total purchase price of the properties, capitalized as leasehold interests in the accompanying consolidated balance sheet, and are being amortized ratably over the terms of the related prepayment periods (18 to 24 years).
Deferred Financing and Leasing Costs
Costs incurred in connection with financing or leasing are capitalized and amortized on a straight-line basis over the term of the related loan or lease for periods ranging from 1 to 23 years. Unamortized leasing costs are charged to expense upon the early termination of the lease or upon the early payment of financing.
Fair Value of Financial Investments
Statement of Financial Accounting Standards No. 107 requires disclosure about fair value for all financial instruments. Based on the borrowing rates currently available to the Company, the carrying amount of debt approximates fair value. Cash and cash equivalents consist of demand deposits, certificates of deposit and overnight repurchase agreements with financial institutions. The carrying amount of cash and cash equivalents approximates fair value.
Minority Interest
Minority interest in the Company represents (i) the individual Spieker Partners' limited partnership interest in the Operating Partnership of approximately 15.1 percent and 17.7 percent at December 31, 1996 and 1995, respectively, and (ii) a 10 percent interest in one property and a 7.5 percent interest in a second property held by outside interests.
Revenues
All leases are classified as operating leases. Rental income is recognized on the straight-line basis over the terms of the leases. Deferred rent receivable represents the excess of rental revenue recognized on a straight-line basis over cash received under the applicable lease provisions.
SPIEKER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest and Other Income
Interest and other income includes interest income on cash, cash equivalents, and investment in mortgages and management fee income.
Extraordinary Items
Extraordinary items for the year ended December 31, 1995, consist of (i) $11,767 in prepayment penalties, and a write-off of $28,100 in previously capitalized debt discount (prepaid interest and arrangement fee paid to Prudential at the time of the IPO and until December 1995 was amortized to interest expense) related to the Prudential Debt paydown as a result of the stock offering in December 1995, and (ii) a fee of $938 paid in connection with the conversion of the secured line of credit into an unsecured facility.
Net Income (Loss) Per Share of Common Stock
Per share amounts for the Company are computed using the weighted average common shares outstanding (including Class B Common Stock and Class C Common Stock) during the period, including the dilutive effect of stock options. The weighted average common shares outstanding for the year ended December 31, 1996, 1995 and 1994 are as follows:
Earnings used in the calculation are reduced by dividends owed to preferred stockholders.
Reclassifications
Certain items in the 1995 and 1994 financial statements have been reclassified to conform to the 1996 presentation.
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.
3. TRANSACTIONS WITH AFFILIATES
Revenues and Expenses
The Company received $802, $1,427 and $0 during 1996, 1995 and 1994, respectively, for management services provided to certain properties that are controlled and operated by Spieker Partners, a California general partnership, and its affiliates (collectively, "Spieker Partners"). Certain officers of Spieker Properties, Inc., are partners in Spieker Partners.
Acquisition of Properties
During the years ended December 31, 1996 and 1995, the Company purchased certain properties and land parcels from Spieker Partners totaling $1,783 and $22,216, respectively, pursuant to the provisions of
SPIEKER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain landholding and excluded property agreements entered into during the Company's IPO. Under the landholding agreements, the Company has an option to purchase specific land parcels from Spieker Partners at the lower of an established fixed price or independently appraised value. Under the excluded property agreements, the Company has an option to acquire certain properties or partnership interests after a purchase agreement can be reached with certain unaffiliated partners in the partnerships. Acquisitions from Spieker Partners are subject to approval by the Board of Directors.
Receivable From Affiliates
The $117 and $386 receivable from affiliates at December 31, 1996 and 1995, respectively, primarily represents management fees and reimbursements due from Spieker Partners affiliates.
4. PROPERTY HELD FOR DISPOSITION
The Company has determined to focus exclusively on office and industrial properties. The Company has therefore decided to divest itself of its thirteen retail properties and to reinvest the proceeds from these properties in office and industrial properties.
In December 1996, the Company entered into agreements to dispose of nine retail properties located in California, Oregon, and Washington to a third party for $106,500. Three of the nine properties closed on December 20, 1996. Five of the remaining properties are scheduled to be disposed of by May 1, 1997, and the final property by December 31, 1997.
The following summarizes the condensed results of operations of the properties disposed of in 1996 for the years ended December 31, 1996, 1995 and 1994:
In addition, the Company is in the process of divesting itself of four other retail properties. The divestiture of the remaining four retail properties is subject to negotiation of acceptable terms and other customary conditions.
The following summarizes the condensed results of operations of the ten retail properties held for disposition for the years ended December 31, 1996, 1995 and 1994:
The net carrying amount of the ten retail properties held for disposition as of December 31, 1996, is $117,732.
SPIEKER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT
As of December 31, 1996 and 1995, debt consists of the following:
On November 6, 1995, the Company converted its secured line of credit to a $150 million unsecured line of credit (the "line"). The line matures in November 1997 and the Company has an option to extend the line for one year upon payment of a fee equal to 0.12% of the total line. The line also includes a fee on average unused funds, which varies between 0.125% and 0.20% based on the average outstanding balance.
Mortgage loans generally require monthly principal and interest payments. The mortgage loans are secured by deeds of trust on fourteen properties. The undepreciated book value of real estate assets pledged as collateral under deeds of trust for mortgage loans at December 31, 1996, and December 31, 1995, is $79,440 and $162,885, respectively.
Interest capitalized for the years ended December 31, 1996, 1995 and 1994, was $3,116, $1,301 and $468, respectively.
Maturity Schedule
The scheduled maturities of all debt outstanding as of December 31, 1996, are as follows:
SPIEKER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LEASING ACTIVITY
Future minimum rentals due under noncancelable operating leases in effect at December 31, 1996, with tenants are as follows:
In addition to minimum rental payments, tenants pay reimbursements for their pro rata share of specified operating expenses, which amounted to $44,155, $32,125 and $16,463 for the years ended December 31, 1996, 1995 and 1994, respectively. These amounts are included as rental revenue and rental expense in the accompanying statements of operations. Certain of the leases also provide for the payment of additional rent based on a percentage of the tenant's revenues. Additional rents under these leases for the years ended December 31, 1996, 1995 and 1994, were $362, $310 and $298 respectively. Certain leases contain options to renew.
7. DIVIDENDS AND DISTRIBUTIONS PAYABLE
The dividends and distributions payable at December 31, 1996, and December 31, 1995, represent amounts payable to stockholders of record and distributions payable to minority interest holders as of the same dates. The stockholders of record and minority interests holders as of December 31, 1996, and December 31, 1995, are as follows:
8. INCOME TAXES
The Company has elected to be taxed as a REIT pursuant to Section 856(c)(1) of the Code. As a REIT, the Company generally will not be subject to federal income tax to the extent that it distributes at least 95 percent of its taxable income to its stockholders. Additionally, REITs are subject to a number of organizational and operational requirements. 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) based on its taxable income using corporate income tax 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 taxable income.
Taxable income allocable to the Company, excluding minority interests, for the years ended December 31, 1996, 1995 and 1994, was approximately $66,200, $3,800 and $20,000, respectively. The taxable
SPIEKER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income for the years ended December 31, 1996, 1995 and 1994, includes $12,138, $2,634 and $1,238, respectively, allocable to the preferred stockholders.
The differences between book income and taxable income primarily result from timing differences consisting of depreciation expense for tenant improvements and unearned rental income.
Approximately 10%, 90% and 39% of the dividends paid or payable to Common Stockholders for the years ended December 31, 1996, 1995 and 1994, respectively, represents a return of capital for income tax purposes. In addition, approximately 0.66% of the dividends paid or payable for the year ended December 31, 1996, represents a dividend taxable as a long-term capital gain.
9. STOCKHOLDERS' EQUITY
Preferred Stock
The 1,000,000 shares of Series A Cumulative, Convertible, Preferred Stock rank senior to the Company's Common Stock as to dividends and liquidation rights. The shares are convertible into 1,219,512 shares of the Company's Common Stock and have voting rights equal to 1,219,512 shares of Common Stock. The dividend per share, calculated on the converted numbers of shares, is equal to the Common Stock dividend, provided that the dividend yield on the preferred stock may not be less than the initial dividend rate thereof. With respect to the payment of dividends and amounts upon liquidation, the Series A Preferred Stock ranks on parity with the Company's Series B Preferred Stock and ranks senior to the Company's Common Stock, Class B Common Stock and Class C Common Stock.
The Series B Preferred Stock dividends are paid quarterly in arrears at 9.45% of the initial liquidation preference per annum. The Series B Preferred Stock is redeemable on or after December 11, 2000 at the option of the Company in whole or in part at a redemption price of $25.00 per share, plus accrued and unpaid dividends. With respect to the payments of dividends and amounts upon liquidation, the Series B Preferred Stock ranks on parity with the Company's Series A Preferred Stock and ranks senior to the Company's Common Stock, Class B Common Stock and Class C Common Stock.
Class B Common Stock
The Class B Common Stock ranks on parity with the Company's Common Stock and Class C Common Stock with respect to dividends. In the event of any liquidation of the Company, the holders of Class B Common Stock rank on parity with Class C Common Stock and are entitled to receive prior and in preference to holders of Common Stock, an amount per share of Class B Common Stock equal to all declared but unpaid dividends for each share of Class B Common Stock.
Class C Common Stock
The Class C Common Stock ranks on parity with the Company's Common Stock and Class B Common Stock with respect to dividends. In the event of any liquidation of the Company, the holders of Class C Common Stock rank on parity with Class B Common Stock and are entitled to receive prior to and in preference to the holders of Common Stock, an amount per share of Class C Common Stock equal to all declared but unpaid dividends for each share of Class C Common Stock.
Ownership Limitations
To maintain its qualification as a REIT, not more than 50 percent of the value of the outstanding shares of the Company may be owned, directly or indirectly, by five or fewer individuals (defined to include certain entities), applying certain constructive ownership rules. To help ensure that the Company will not fail this test, the Company's Charter provides for certain restrictions on the transfer of the Common Stock to prevent further concentration of stock ownership. Moreover, to evidence compliance with these requirements, the
SPIEKER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company must maintain records that disclose the actual ownership of its outstanding Common Stock and will demand written statements each year from the record holders of designated percentages of its Common Stock disclosing the actual owners of such Common Stock.
10. EMPLOYEE RETIREMENT AND STOCK PLANS
Retirement Savings Plan
Effective January 1, 1994, the Company adopted a retirement savings plan pursuant to Section 401(k) of the Internal Revenue Code, whereby participants may contribute a percentage of compensation, but not in excess of the maximum allowed under the Code. The plan provides for a matching contribution by the Company which amounted to $292 and $266 for the years ended December 31, 1996 and 1995. In addition, the Company may make additional contributions at the discretion of management. Management authorized additional contributions of $230 and $126 for the years ended December 31, 1996 and 1995.
Stock Incentive Plan
The Company has adopted the Spieker Properties, Inc. 1993 Stock Incentive Plan (the "Stock Incentive Plan") to provide incentives to attract and retain officers and key employees. Under the Plan as amended on May 22, 1996, the number of shares available for option grant is 9.9% of the number of shares of Common Stock, on a fully-converted basis, outstanding as of the last day of the immediately preceding quarter, reduced by the number of shares of Common Stock reserved for issuance under other stock compensation plans of the Company. As of December 31, 1996, options on approximately 3,138,750 shares of Common Stock at an average exercise price of $25.39 per share have been granted under the Plan. To date, 85,250 share options have been exercised and 1,157,249 share options are currently exercisable.
Employee Stock Incentive Pool
At the time of the Company's initial public offering, the Senior Officers of the Company reserved a portion of their Operating Partnership Units for awards to personnel employed by the Company at the time of the IPO. The units are converted into Common Stock at the time of grant. The aggregate number of units reserved for the Employee Stock Incentive Pool is equivalent to 69,990 shares of Common Stock. The participants in the Pool were granted 25% of their respective allocations on January 1, 1994, January 1, 1995, and January 1, 1996, resulting in a total of 75% of potential stock awards having been granted. The remainder of the employees' allocations will be granted on January 1, 1997, provided that the employee has not previously terminated employment.
The initial deferred compensation of $1,320 pertaining to the 69,990 units was recorded on the books of the Company, and is being amortized annually based on the vesting period. The initial value was calculated by converting the 69,990 partnership units into shares of Common Stock and multiplying by the Company's Common Stock price on the date of the grant.
Non-cash compensation expense for the awards is measured by the number of Operating Partnership units converted multiplied by the Company's Common Stock price on the date of conversion.
For the years ended December 31, 1996, 1995 and 1994, non-cash compensation expense recognized for such awards was $388, $339 and $0, respectively.
Merit Plan
The Senior Officers of the Company reserved a portion of their limited partnership interests in the Operating Partnership, equivalent to 153,659 Operating Partnership units, to reward Senior Officers and other key employees of the Company for significant individual contributions to the enhancement of the Company's value and to encourage further equity interests in the Company.
SPIEKER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On an annual basis, the Executive Officers will review the performance of the Senior Officers and other key employees and will award, at their discretion, options to acquire limited partnership interests from the Merit Plan to qualifying individuals. The Merit Plan represents a reallocation of the Senior Officers' ownership of limited partnership interests and does not have a dilutive effect on the stockholders of the Company. As of December 31, 1996, 49,730 units have been awarded under the Merit Plan.
To the extent that awards are made under the Merit Plan, they will be compensatory. Accordingly, non-cash compensation expense is recorded in the Company's financial statements. For the years ended December 31, 1996, 1995 and 1994, non-cash compensation expense recognized under the Merit Plan was $120, $29 and $0.
Directors Stock Option Plan
On May 22, 1996, the Directors' Stock Option Plan was amended to increase the number of shares of Common Stock subject to automatic annual option grants to the Company's independent directors from 500 shares to 4,000 shares, to increase the number of shares of Common Stock available for option grant from 30,000 to 150,000, and to provide that, in the event of a Change in Control, outstanding options will become fully vested. To date 14,000 shares have been granted under the plan.
Stock Options
The Company applies APB 25 and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized. Had compensation cost for the plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated as follows:
For these disclosure purposes, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1996 and 1995, respectively; dividend yield of 6.15% for both years; expected volatility of 13.28% for both years; expected lives of seven years for both years; and risk-free interest rates of 6.21% for both years.
During the initial phase-in period, the effects of applying SFAS No. 123 may not be representative of the effects on disclosed pro forma net income for future years because options vest over several years and additional awards can be made each year.
11. COMMITMENTS AND CONTINGENCIES
Environmental Matters
The Company follows the policy of monitoring its properties for the presence of hazardous or toxic substances. The Company is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Company's business, assets or results of operations. There can be no
SPIEKER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assurance that such a material environmental liability does not exist. The existence of any such material environmental liability would have an adverse effect on the Company's results of operations and cash flow.
Lease Commitments
The Company will be responsible for minimum ground lease payments of $213, $900 and $1,108 beginning in 2011, 2012 and 2017, respectively, through 2040, 2039 and 2040, respectively.
General Uninsured Losses
The Company carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with policy specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of extraordinary losses which may be either uninsurable, or not economically insurable. Should an uninsured loss occur, the Company could lose its investment in, and anticipated profits and cash flows from, a property.
Certain of the properties are located in areas that are subject to earthquake activity; the Company has therefore obtained limited earthquake insurance. In the event of an earthquake, properties are self-insured for the first $25,000 of loss. The Company is insured for the next $50,000 of loss, any losses in excess of $75,000 will be borne by the Company.
12. SUPPLEMENTAL CASH FLOW INFORMATION
SPIEKER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------- (1) Includes reclassification of extraordinary gain on early extinguishment of debt of $150.
14. SUBSEQUENT EVENTS
On January 21, 1997, the Company sold 10,000,000 shares of Common Stock at $34.50 per share through an underwritten public offering. In addition, shortly thereafter, the underwriters exercised their over-allotment option resulting in the Company selling an additional 1,500,000 shares of Common Stock. The aggregate net proceeds of $374,835 were used primarily to acquire properties under contract at the time of the offering.
On various dates subsequent to December 31, 1996 the Company acquired nine properties totaling 3.3 million rentable square feet at a total initial acquisition cost of $369,751.
SPIEKER PROPERTIES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1996
SPIEKER PROPERTIES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED) AS OF DECEMBER 31, 1996
SPIEKER PROPERTIES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED) AS OF DECEMBER 31, 1996
SPIEKER PROPERTIES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED) AS OF DECEMBER 31, 1996
SPIEKER PROPERTIES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED) AS OF DECEMBER 31, 1996
SPIEKER PROPERTIES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED) AS OF DECEMBER 31, 1996
(1) Includes assessment bonds payable
SCHEDULE III -- (CONTINUED)
SPIEKER PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
A summary of activity for real estate and accumulated depreciation is as follows (in thousands):
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SPIEKER PROPERTIES, INC. (Registrant)
INDEX TO EXHIBITS
- ---------------
* Indicates management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the identically numbered exhibit to the Company's Registration Statement on Form S-11 (Registration No. 33-67906), which became effective on November 10, 1993.
(2) Incorporated by reference to the identically numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995.