ITEM 1. BUSINESS
The Company
Bedford Property Investors, Inc. is a self-administered and self-managed equity REIT engaged in the business of owning, managing, acquiring and developing industrial and suburban office properties proximate to metropolitan areas primarily in the Western United States. As of December 31, 1997, the Company owned and operated, either directly or through one of its wholly-owned subsidiaries, 75 properties aggregating approximately 6.2 million rentable square feet and comprised of 55 industrial properties (the "Industrial Properties") and 20 suburban office properties (the "Suburban Office Properties" and, together with the Industrial Properties, the "Properties"). This portfolio of properties includes 4 industrial properties which were developed by the Company in 1997 and 71 existing properties. In addition, the portfolio includes 7 parcels of land held for future development. As of December 31, 1997, the existing Properties were approximately 99% leased by over 440 tenants and the development properties were approximately 44% leased by 14 tenants. The Properties are located in Northern and Southern California, Oregon, Washington, Arizona, Nevada, Utah, Colorado, Texas and Kansas.
The Company seeks to grow its asset base through the acquisition of industrial and suburban office properties and portfolios of such properties, as well as through the development of new industrial and suburban office properties. The Company's strategy is to operate in suburban markets that are experiencing, or are expected by the Company to experience, superior economic growth that are subject to limitations on the development of similar properties. The Company believes that employment growth is a reliable indicator of future demand for both industrial and suburban office space. In addition, the Company believes that certain supply-side constraints, such as limited availability of undeveloped land in a market, increase a market's potential for higher average rents over time. The Company is currently targeting selected markets in which the Properties are located as well as selected markets in which the Company has expertise. The Company believes that due to recent economic improvements in these markets, and related improvements in the commercial property markets, an investment in industrial or suburban office properties in these markets provides the potential for attractive returns through increased occupancy levels, rents and real estate values.
Business Objectives and Growth Plan
Business Objectives
The Company's business objective is to increase stockholders' long-term total return through the appreciation in value of the common stock. To achieve this objective, the Company seeks to (i) increase cash flow from our existing Properties, (ii) acquire quality industrial and suburban office properties and/or portfolios of such properties, and (iii) develop new industrial and suburban office properties.
Internal Growth
The Company seeks to increase cash flow from existing Properties through (i) the lease-up of vacant space, (ii) the reduction of costs associated with tenant turnover through the retention of existing tenants, (iii) the negotiation of increases in rental rates and of contractual periodic rent increases when market conditions permit, and (iv) the strict containment of operating expenses and capital expenditures.
During 1997, leases for 946,920 square feet expired with a weighted average base rental rate of $8.25 per square foot. Approximately 76% of this space has been re-leased, and the weighted average base rental rate of the new leases is $9.10 per square foot, an increase of 10.3%. Changes in average rental rate do not reflect changes in expense recovery rates, if any. In addition, past performance is not necessarily indicative of results that will be obtained in the future, and no assurance can be given in that regard.
Acquisitions
The Company seeks to acquire quality industrial and suburban office properties and/or portfolios of such properties. The Company believes that (i) the experience of its management team, (ii) its conservative capital structure and its existing $175 million credit facility, (iii) its relationships with private and institutional real estate owners, (iv) its strong relationships with real estate brokers, and (v) its integrated asset management program enable it to effectively identify and capitalize on acquisition opportunities. Each acquisition opportunity is reviewed to evaluate whether it meets the following criteria: (i) potential for higher occupancy levels and/or rents as well as for lower turnover and/or operating expenses, (ii) ability to generate returns in excess of the Company's weighted average cost of capital, taking into account the estimated costs associated with tenant turnover (i.e., tenant improvements, leasing commissions and the loss of income due to vacancy), and (iii) availability for purchase at a price at or below estimated replacement cost. The Company has, however, acquired and may in the future acquire properties which do not meet one or more of these criteria. This may be particularly true with the acquisition of a portfolio of properties, which may include individual properties that do not meet one or more of the foregoing criteria.
Following completion of an initial review, the Company may make a purchase offer, subject to satisfactory completion of its due diligence process. The due diligence process enables the Company to refine its original estimate of a property's potential performance and typically includes a complete review and analysis of the property's physical structure, systems, environmental status and projected financial performance, as well as an evaluation of the local market and competitive properties and of relevant economic and demographic information. Mr. Bedford (the Chief Executive Officer) and at least one other member of the Board of Directors typically visit each proposed acquisition property before the purchase is closed.
The Company's activities relating to the acquisition of new properties, including the due diligence process, are conducted on an exclusive basis by Bedford Acquisitions, Inc. (BAI), a California corporation wholly- owned by Mr. Bedford. BAI receives a fee in an amount equal to the lesser of (i) 1 1/2% of the gross amount raised in financings or the aggregate purchase price of property acquisitions, or (ii) an amount equal to (a) the aggregate amount of approved expenses funded by BAI through the time of such acquisition or financing minus (b) the aggregate amount of fees previously paid to BAI pursuant to such arrangement. In no event will the aggregate amount of fees paid to BAI exceed the aggregate amount of costs funded by BAI. The agreement with BAI has a term of one year and is renewable at the option of the Company for additional one year terms. The current agreement will expire January 1, 1999.
Development
The Company seeks to develop properties in markets where (i) strong demand for space has caused or is expected to cause occupancy rates to remain high, and (ii) there is a limited supply of land available for new development. The Company's management team has experience in all phases of the development process, including market analysis, site selection, zoning, design, pre-development leasing, construction and permanent financing and construction management. The Company believes that a general decrease in competition in development activity as well as higher occupancy rates in most of the Company's markets will lead to additional attractive development opportunities. The Company is currently in the process of developing properties in Northern California, Arizona, and Kansas and is considering developing additional properties in Northern California, Southern California, Arizona, Colorado and Washington. The Company's management team has significant development experience in each of these markets. In 1997 the shell construction of 4 properties was completed, representing 365,000 square feet of industrial space. These properties are now in the lease up phase and were 44% leased by year end.
Corporate Strategies
In pursuing its business objectives and growth plans, the Company intends to:
1. Pursue a Market Driven Strategy.
The Company's strategy is to operate in suburban markets which are experiencing, or are expected by the Company to experience, economic growth, and which are, ideally, subject to supply-side constraints. The Company believes that the metropolitan areas in which it operates have multiple suburban "cores" and that the potential for growth in these metropolitan areas is generally greatest in and around these suburban cores. The Company believes that such suburban cores emerge as jobs move to the suburbs and typically offer a well-trained and well-educated work force, high quality of life and, in many cases, a diversified economic base. The Company focuses on owning, managing, acquiring and developing properties in these suburban cores. Additionally, the Company seeks out real estate markets that are subject to supply-side constraints such as limited availability of undeveloped land and/or geographic, topographic, regulatory and/or infrastructure restrictions. The Company believes that such restrictions limit the supply of new commercial space, which, when combined with a growing employment and population base, enhances the long-term return potential for an investment in real estate assets.
2. Focus its Efforts in the Western United States.
The Company is currently targeting selected suburban markets in the Western United States, including markets in which the Company's Properties are located as well as selected new markets. The Company believes that due to continued economic improvements in these markets, and related improvements in the commercial property markets, an investment in industrial or suburban office properties in these markets provides the potential for attractive returns through increased occupancy levels, rents and real estate values. The Company believes that this geographic focus, combined with management's market experience, contributes to a more thorough understanding of these industrial and suburban office property markets and allows the Company to anticipate trends and therefore to better identify investment opportunities.
3. Acquire and Develop "Service Center/Flex" Industrial Properties.
One of the Company's targeted property types is "service center/flex" industrial properties. These properties are generally smaller than other industrial buildings and are divisible into units ranging from approximately 1,500 square feet to approximately 20,000 square feet in order to accommodate multiple tenants of various sizes and needs. The buildings generally range in size from 8,000 to 80,000 square feet, have a clear height of 12 to 18 feet and are built using concrete tilt construction with store fronts incorporated in the front elevation and grade level service doors in the back elevation. The Company believes that these properties require more management expertise than other types of industrial properties and that it has developed such expertise. The Company also believes that many potential buyers do not wish or are not well-positioned to undertake such active management. As a result, the Company believes that it often faces fewer competitors for this product and is generally able to acquire these properties at above average yields.
4. Plan for Future Anticipated Expenses Associated with Tenant Turnover.
The cash flow of a real estate asset can vary significantly from year to year depending on tenant turnover. When a lease expires and a tenant renews or vacates its space, costs associated with tenant improvements, lease commissions and lost income due to vacancy or construction down- time can significantly reduce property cash flow. Due to the capital intensive nature of suburban office properties, and to a lesser degree, industrial properties, the Company believes that planning and budgeting for future costs associated with tenant turnover is a prudent component of managing the cash flow of the Properties. For its existing portfolio, the Company estimates the future costs for tenant improvements, lease commissions and lost income due to vacancy and construction down-time on a property by property basis. Although these future costs are not accrued for financial reporting purposes, the Company incorporates these estimates in its annual budgets and longer-term forecasts and seeks to maintain cash and/or availability under the Credit Facility adequate to cover these budgeted expenditures. The Company believes that its ability to commit capital to fund tenant improvements and pay lease commissions helps to retain and attract tenants. To the extent that a vacancy in one of the Properties does occur, the Company believes that its policy of budgeting ahead for anticipated tenant improvement costs and leasing commissions enables it to compete effectively for new tenants.
5. Utilize In-House Asset and Property Management.
The Company believes that the long-term value of its Properties is enhanced through in-house asset management and currently manages 68 of its 75 properties from its seven regional property management offices and its corporate headquarters. The Company conducts its Northern California property management activities out of its headquarters office in Lafayette, California; its Southern California property management activities out of its regional office in Tustin, California; its Kansas City property management activities out of its regional office in Lenexa, Kansas; its Arizona property management activities out of its regional office in Phoenix, Arizona; its Washington property management activities out of its regional office in Seattle, Washington; its Colorado property management activities out of its regional office in Denver, Colorado; and its Texas property management activities out of its regional office in Dallas, Texas. The Company's three Properties in Utah and Oregon are currently managed for the Company by third parties. The Company intends to open additional property management offices in those regions as its portfolios grow to a point where it becomes economically justified.
The Company's asset management team develops and monitors a comprehensive asset management plan for each Property in an effort to ensure its efficient operation. The Company's Senior Vice President of Property/Asset Management works directly with the Company's internal finance and accounting staff to develop and monitor detailed budgets and financial reports for each Property. He also works with each property manager to identify and implement opportunities to improve cash flow from each Property and to maximize each Property's long-term investment value. The Company's property management staff is generally responsible for leasing activities, ordinary maintenance and repairs, financial record keeping on income and expenses, rent collection, payment of operating expenses and property operations. The Company's property management philosophy is based on the belief that the long-term value of the Properties is enhanced by attention to detail and hands-on service provided by professional in-house property managers. The Company believes that a successful leasing program starts by servicing existing tenants first. Costs associated with tenant turnover (i.e., tenant improvements, leasing commissions and the loss of income due to vacancy) can be significant and, by addressing and attending to existing tenants' needs, the Company believes that it can increase its retention of existing tenants and simultaneously make its properties more attractive to tenants.
6. Cooperate with Local Real Estate Brokers.
The Company seeks to develop strong relationships with local real estate brokers, who can provide access to tenants as well as general market intelligence and research. The Company believes that these relationships have enhanced the Company's ability to attract and retain tenants.
7. Maximize its Capital Structure.
As of December 31, 1997 the Company's total market capitalization was $565 million. With a debt to total market capitalization ratio of 12%, the Company is well positioned for future growth. Funding of new acquisitions and development is expected to be provided by a combination of debt and equity. The Company currently intends to take advantage of the low interest rates available today by locking in long term debt financing on a portion of its portfolio. At the same time, the Company intends to preserve its financing flexibility through the use of short term debt facilities such as its existing $175 million bank line of credit as well as other means of managing interest rate risk. The Company plans to access the equity markets from time to time to balance its overall capital structure.
Transactions and Significant Events During 1997
Acquisitions and Development
During the year, the Company acquired 26 Properties, including 13 Industrial Properties and 13 Suburban Office Properties aggregating approximately 2.3 million rentable square feet, for a total investment of approximately $206 million. At acquisition, the Company estimated that these Properties would provide an initial weighted average unleveraged return on cost (computed as annualized property NOI at the date of acquisition divided by total acquisition cost) of 9.4%. The Company estimates that the purchase price of acquisitions completed in 1997 is approximately 84% of the replacement cost.
In addition, the Company completed shell construction of four industrial properties aggregating approximately 365,000 square feet, for a total investment to date of approximately $18 million.
The Company also acquired 6 parcels of land aggregating approximately 21 acres for a total investment of approximately $5 million, 5 of which are adjacent to existing Properties. The Company plans to develop industrial or office properties on each of these parcels.
Property Dispositions
In 1997, the Company sold three properties aggregating approximately 297,000 square feet. On July 31, 1997, two of its Southern California office properties were sold for a sale price of approximately $25.8 million, which resulted in a gain of approximately $10.8 million. The properties were 1000 Town Center Drive in Oxnard, California and Mariner Court in Torrance, California. On October 22, 1997, Academy Place Shopping Center in Colorado Springs, Colorado was sold for a sale price of approximately $7.5 million, which resulted in a gain of approximately $748,000.
Common Stock Offerings and Credit Facility
The Company completed the sale of 4,600,000 shares of common stock at $17 3/8 per share in February 1997 and 7,245,000 shares of common stock at $19 5/8 per share in November 1997. Net cash proceeds from these offerings were used to pay off the outstanding borrowings under the Company's credit facility. The facility was amended and expanded to $150 million in June 1997, and was further expanded to $175 million in September 1997. Under this facility, the Company can borrow up to $25 million on an unsecured basis. The secured loans bear interest at a rate of LIBOR plus 1.50% and the unsecured loans bear interest at LIBOR plus 1.75%. The amended facility matures on June 1, 2000 and had an outstanding balance of $8 million at December 31, 1997. The Company was in compliance with the covenants and requirements of its revolving credit facility at December 31, 1997.
Dividends
The Company has made regular quarterly distributions to the holders of the Common Stock in each quarter since the second quarter of 1993, having increased the dividend eight times since that time from $0.10 per share in the second quarter of 1993 to $0.30 per share in each of the third and fourth quarters of 1997. In March 1998, the Company declared a dividend distribution for the first quarter 1998 to its stockholders in the amount of $0.30 per share of Common Stock, payable 15 days after the quarter- end.
The Company paid dividends to the holders of the 8,333,334 shares of its Series A Convertible Preferred Stock par value $0.01 per share (the "Convertible Preferred Stock") in the amount of $.135 per share for each of the first two quarters of 1997 and $.15 per share for the third quarter of 1997. In October 1997, the Convertible Preferred stock was converted to 4,166,667 shares of common stock.
Tenants
Based on rentable square feet, as of December 31, 1997, the Suburban Office Properties and Industrial Properties were approximately 99% occupied by a total of 444 tenants, of which 94 were Suburban Office Property tenants and 350 were Industrial Property tenants. The Company's tenants include local, regional, national and international companies engaged in a wide variety of businesses.
Financing
The Company expects cash flow from operations to be sufficient to pay operating expenses, real estate taxes, general and administrative expenses, and interest on indebtedness and to make distributions to stockholders required to maintain the Company's REIT qualification.
The Company expects to fund the cost of acquisitions, capital expenditures, costs associated with lease renewals and reletting of space, repayment of indebtedness, and development of properties from (i) cash flow from operations, (ii) borrowings under the credit facility and, if available, other indebtedness (which may include indebtedness assumed in acquisitions), (iii) the sale of real estate investments, and (iv) the sale of equity securities and, possibly, the issuance of equity securities in connection with acquisitions.
The Company does not anticipate that cash flow from operations will be sufficient to enable it to repay amounts then outstanding under the credit facility when it becomes due in 2000. The Company expects to make such payment by refinancing or extending the credit facility or by raising funds through the sale of equity securities or properties.
Insurance
The Company carries commercial general liability coverage with primary limits of $1 million per occurrence and $2 million in the aggregate, as well as a $20 million umbrella liability policy. This coverage protects the Company against liability claims as well as the cost of defense. The Company carries property insurance on a replacement value basis covering both the cost of direct physical damage and the loss of rental income. Separate flood and earthquake insurance is provided with an annual aggregate limit of $12.5 million subject to a deductible of 5-10% of total insurable value per building with respect to the earthquake coverage. The Company also carries director and officer liability insurance with an aggregate limit of $10 million. This coverage protects the Company's directors and officers against liability claims as well as the cost of defense.
Competition, Regulation, and Other Factors
The success of the Company depends upon, among other factors, general economic conditions and trends, including real estate trends, interest rates, government regulations and legislation, income tax laws and zoning laws.
The Company's real estate investments are located in markets in which they face significant competition for the rental revenues they generate. Many of the Company's investments, particularly the office buildings, are located in markets in which there is a significant supply of available space, resulting in intense competition for tenants and low rents.
Government Regulations
The Company's properties are subject to various federal, state and local regulatory requirements such as local building codes and other similar regulations. The Company believes its properties are currently in substantial compliance with all applicable regulatory requirements, although expenditures at its properties may be required to comply with changes in these laws. No material expenditures are contemplated at this time in order to comply with any such laws or regulations.
Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances released on, above, under, or in such property. Such laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of such removal or remediation could be substantial.
Additionally, the presence of such substances or the failure to properly remediate such substances may adversely affect the owner's ability to borrow using such real estate as collateral.
The Company believes that it is in compliance in all material respects with all federal, state and local laws regarding hazardous or toxic substances, and the Company has not been notified by any governmental authority of any non-compliance or other claim in connection with any of its present or former properties. The Company does not anticipate that compliance with federal, state and local environmental protection regulations will have any material adverse impact on the financial position, results of operations or liquidity of the Company.
Other Information
The Company currently employs 46 full time employees. The Company is not dependent upon a single tenant or a limited number of tenants.
The Company has conducted a comprehensive review of its computer systems to identify "Year 2000" issues. The Year 2000 problem is a result of computer programs being written using two digits rather than four to define the applicable year. The Company purchased and implemented a new computer information system in January 1997 in order to increase efficiencies related to asset management and reporting. The new computer information system is Year 2000 compliant. The Company presently believes that the Year 2000 issue will not pose significant operational problems for the Company and the Company does not anticipate material expenditures related to this issue.
ITEM 2.
ITEM 2. PROPERTIES
Real Estate Summary As of December 31, 1997, the Company's real estate investments (net of accumulated depreciation) were diversified by property type as follows:
Number of Investment Properties Amount % of Total
Industrial Buildings 51 $230,890,000 55 Office Buildings 20 168,326,000 40 Properties Under Development 4 18,158,000 4 Land Held for Development 7 5,712,000 1
Total 82 $423,086,000 100
As of December 31, 1997, the Company's real estate investments (net of accumulated depreciation) were diversified by geographic region as follows:
Number of Investment Properties Amount % of Total
Industrial Northern California 28 132,735,000 31 Southern California 8 43,276,000 10 Denver, Colorado 2 5,014,000 1 Arizona 4 20,486,000 5 Greater Portland Area 2 10,596,000 3 Greater Kansas City Area 6 16,039,000 4 Dallas, Texas 1 2,744,000 1
Total Industrial 51 230,890,000 55
Suburban Office Northern California 4 17,394,000 4 Southern California 3 25,028,000 6 Salt Lake City 1 6,093,000 1 Greater Kansas City Area 1 6,361,000 2 Greater Seattle Area 2 44,871,000 11 Reno, Nevada 1 12,387,000 3 Austin, Texas 1 9,750,000 2 Arizona 6 31,382,000 7 Denver, Colorado 1 15,060,000 4
Total Suburban Office 20 168,326,000 40
Industrial Properties Under Development Northern California 2 10,484,000 2 Arizona 1 4,407,000 1 Greater Kansas City Area 1 3,267,000 1
Total Industrial Properties Under Development 4 18,158,000 4
Land Held for Development Northern California 2 1,752,000 * Southern California 2 981,000 * Arizona 2 1,334,000 * Denver, Colorado 1 1,645,000 *
Total Land held for Development 7 5,712,000 1
Total 82 423,086,000 100
* Less than 1%.
Percentage Leased and 10% Tenants
The following table sets forth the occupancy rates for each of the last five years, the number of tenants occupying 10% or more of the developed square feet at the Property as of the end of the year and the principal business of the tenants in the Company's properties at December 31, 1997.
Lease Expirations - Real Estate Portfolio
The following table presents lease expirations for each of the ten years beginning January 1, 1998. The table presents: (i) the number of leases that expire each year, (ii) the square feet covered by such expiring leases, (iii) the annualized base rent (the "Annualized Base Rent") represented by such expiring leases and (iv) the percentage of total Annualized Base Rent for expiring leases.
Number of Percentage Leases Rentable Annualized of Annualized Year Expiring Square Feet Base Rent Base Rent
1998 118 905,135 7,146,108 14.5% 1999 86 664,328 5,819,472 11.8% 2000 102 839,316 8,766,924 17.8% 2001 51 953,514 8,022,576 16.3% 2002 53 507,664 5,138,448 10.4% 2003 8 235,997 3,325,836 6.8% 2004 5 585,359 5,267,640 10.7% 2005 3 127,203 1,400,148 2.9% 2006 4 413,327 1,862,940 3.8% 2007 and thereafter 5 478,168 2,447,544 5.0%
Total 435 5,710,011 49,197,636 100.0%
Principal Provisions of Leases
The following table sets forth the principal provisions of leases which represent more than 10% of the gross leasable area ("GLA") of each of the Company's Properties and the realty tax rate for each Property for 1997.
Average Effective Rent
The following table sets forth for each of the Properties the average rent at the end of each year for the last five years.
Net Effective Rent Net Effective Rent ($/Sq/Yr) ($/Sq/Yr) Properties At End of Year Properties At End of Year
INDUSTRIAL PROPERTIES: Northern California Building #3 at Contra Costa Diablo 47650 Westinghouse Drive 1993 $8.35 1993 N/A 1994 $8.35 1994 N/A 1995 $4.95 1995 $5.52 1996 $6.64 1996 $5.52 1997 $6.84 1997 $9.00
Building #8 at Contra Costa Diablo 47600 Westinghouse Drive 1993 $7.43 1993 N/A 1994 $7.81 1994 N/A 1995 $6.00 1995 N/A 1996 $6.00 1996 $5.94 1997 $6.00 1997 $10.20
Building #18 at Mason Industrial Park 47633 Westinghouse Drive 1993 $7.03 1993 N/A 1994 $6.95 1994 N/A 1995 $6.63 1995 N/A 1996 $6.78 1996 $11.37 1997 $6.88 1997 $11.60
115 Mason Circle 6500 Kaiser Drive 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 $6.05 1996 N/A 1997 $6.22 1997 $9.00
Auburn Court Bedford Fremont Business Center 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 $6.54 1995 N/A 1996 $6.78 1996 N/A 1997 $7.80 1997 $11.93
Net Effective Rent Net Effective Rent ($/Sq/Yr) ($/Sq/Yr) Properties At End of Year Properties At End of Year
INDUSTRIAL PROPERTIES(continued):
Spinnaker Court The Mondavi Building 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $8.01 1997 $4.92
Fourier Avenue 350 East Plumeria Drive 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 $7.80 1996 $8.99 1996 $7.80 1997 $8.99 1997 $8.40
Milpitas Town Center Lundy Avenue 1993 N/A 1993 N/A 1994 $7.11 1994 N/A 1995 $7.35 1995 N/A 1996 $8.03 1996 $7.09 1997 $8.90 1997 $7.09
598 Gibraltar Drive O'Toole Business Center 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 $9.48 1996 $8.75 1997 $9.48 1997 $10.31
Doherty Avenue 301 East Grand 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 $5.92 1996 $1.87 1996 $5.57 1997 $1.88 1997 $5.58
860-870 Napa Valley Corporate 342 Allerton 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 $6.88 1996 $9.44 1996 $7.18 1997 $8.86 1997 $7.57
Net Effective Rent Net Effective Rent ($/Sq/Yr) ($/Sq/Yr) Properties At End of Year Properties At End of Year
INDUSTRIAL PROPERTIES(continued):
400 Grandview 410 Allerton 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 $7.49 1995 $5.16 1996 $7.53 1996 $5.16 1997 $7.03 1997 $5.16
417 Eccles 2277 Pine View Way 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 $5.71 1995 $5.16 1996 $6.01 1996 $5.16 1997 $6.36 1997 $5.16
Monterey Commerce Center 2 Monterey Commerce Center 3 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $14.16 1997 $14.70
Southern California
Dupont Industrial Center Carroll Tech II 1993 N/A 1993 N/A 1994 $3.07 1994 N/A 1995 $3.17 1995 N/A 1996 $3.53 1996 N/A 1997 $3.40 1997 $11.52
3002 Dow Business Center Signal Systems Building 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 $8.88 1995 N/A 1996 $8.55 1996 $7.80 1997 $8.32 1997 $8.11
Carroll Tech I Vista 1 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 $10.35 1996 $5.16 1997 $11.93 1997 $0.00**
**Bankruptcy
Net Effective Rent Net Effective Rent ($/Sq/Yr) ($/Sq/Yr) Properties At End of Year Properties At End of Year
INDUSTRIAL PROPERTIES (continued):
Vista 2 1993 N/A 1994 N/A 1995 N/A 1996 $6.36 1997 $6.61
Denver
Bryant Street Annex Bryant Street Quad 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 $4.02 1995 $3.09 1996 $3.93 1996 $3.39 1997 $4.09 1997 $3.82
Arizona
Westech Business Center Phoenix Airport Center #3 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 $8.85 1996 N/A 1997 $9.44 1997 $6.36
2601 W. Broadway Butterfield Business Center 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $7.14 1997 $7.08
Net Effective Rent Net Effective Rent ($/Sq/Yr) ($/Sq/Yr) Properties At End of Year Properties At End of Year
INDUSTRIAL PROPERTIES (continued): Greater Portland Area, Oregon
Twin Oaks Technology Center Twin Oaks Business Park 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 $7.27 1995 $7.75 1996 $7.32 1996 $8.35 1997 $7.67 1997 $8.86
Greater Kansas City Area
Ninety-Ninth Street #1 Ninety-Ninth Street #2 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 $7.96 1995 $7.56 1996 $8.32 1996 $8.62 1997 $7.72 1997 $8.62
Lackman Business Center Ninety-Ninth Street #3 1993 N/A 1993 $5.86 1994 N/A 1994 $5.86 1995 $8.36 1995 $5.86 1996 $8.59 1996 $5.30 1997 $8.77 1997 $6.08
85th Street, Lenexa Panorama Business Center 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 $6.54 1997 $3.11 1997 $6.70
Dallas, Texas
Ferrell 1993 N/A 1994 N/A 1995 N/A 1996 N/A 1997 $4.55
Net Effective Rent Net Effective Rent ($/Sq/Yr) ($/Sq/Yr) Properties At End of Year Properties At End of Year
SUBURBAN OFFICE PROPERTIES: Northern California
Village Green 100 View Street 1993 N/A 1993 N/A 1994 $20.85 1994 N/A 1995 $18.23 1995 N/A 1996 $19.99 1996 $18.82 1997 $23.24 1997 $20.10
Monterey Commerce Center 1 Canyon Park 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $20.12 1997 $15.92
Southern California
Laguna Hills Square Scripps Wateridge 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 $25.38 1996 N/A 1997 $23.90 1997 $11.41
Carroll Tech III 1993 N/A 1994 N/A 1995 N/A 1996 N/A 1997 $8.52
Net Effective Rent Net Effective Rent ($/Sq/Yr) ($/Sq/Yr) Properties At End of Year Properties At End of Year
SUBURBAN OFFICE PROPERTIES(continued): Denver, Colorado Reno
Oracle Building U.S. Bank Centre 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $23.37 1997 $18.59
Salt Lake City Austin
Woodlands Tower II 9737 Great Hills Trail 1993 $13.02 1993 N/A 1994 $14.47 1994 N/A 1995 $14.25 1995 N/A 1996 $14.58 1996 N/A 1997 $15.86 1997 $18.00
Greater Kansas City Area
6600 College Boulevard 1993 N/A 1994 N/A 1995 $12.01 1996 $11.99 1997 $12.28
Greater Seattle Area
Kenyon Center 1993 N/A 1994 N/A 1995 N/A 1996 $11.61 1997 $11.61
Orillia Office Park 1993 N/A 1994 N/A 1995 N/A 1996 N/A 1997 $9.35
Net Effective Rent Net Effective Rent ($/Sq/Yr) ($/Sq/Yr) Properties At End of Year Properties At End of Year
SUBURBAN OFFICE PROPERTIES(continued):
Arizona
Executive Center at Southbank Phoenix Airport Center #2 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $9.23 1997 $7.20
Troika Building Phoenix Airport Center #4 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $9.00 1997 $7.20
Phoenix Airport Center #1 Phoenix Airport Center #5 1993 N/A 1993 N/A 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $13.81 1997 $7.21
Tax Information
The following table sets forth tax information of the Company's real estate investments at December 31, 1997, as follows: (i) Federal tax basis, (ii) annual rate of depreciation, (iii) method of depreciation, and (iv) life claimed, with respect to each property or component thereof for purposes of depreciation (in thousands):
For additional information on the Company's real estate portfolio, see Note 2 to the Consolidated Financial Statements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company trades on the New York Exchange and the Pacific Exchange under the symbol "BED." As of December 31, 1997 the Company had 518 stockholders of record. A significant number of these stockholders are also nominees holding stock in street name for individuals. The following table shows the high and low sale prices per share reported on the New York Stock Exchange and the dividends declared per share by the Company on the Common Stock for each quarterly period during 1996 and 1997. All of the following quotations have been adjusted to reflect the one-for-two reverse stock split of the Common Stock effected on March 29, 1996.
Dividend High Low Per Share
First Quarter $15 1/4 $14 $.24 Second Quarter $16 $12 3/8 $.24 Third Quarter $14 5/8 $12 3/4 $.26 Fourth Quarter $17 1/2 $14 1/8 $.26
First Quarter $21 1/4 $16 5/8 $.26 Second Quarter $20 1/8 $17 $.27 Third Quarter $22 $19 $.30 Fourth Quarter $22 7/8 $19 3/16 $.30
Credit Facility
Effective January 13, 1997, the Company's existing credit facility (the "Credit Facility") was amended to lower the interest rate from LIBOR plus 2.00% to LIBOR plus 1.75%. On June 13, 1997, the Company further reduced this interest rate to LIBOR plus 1.50% and increased the size of the Credit Facility to $150 million. On September 24, 1997 the Company again increased the size of the Credit Facility from $150 million to $175 million. The credit facility contains various restrictive covenants including, among other things, a covenant limiting quarterly dividends to 95% of average Funds From Operations for the immediately preceding two fiscal quarters. The Company is currently under negotiations to restructure its Credit Facility as an unsecured line and to further lower the interest rate thereunder. No assurance can be given that the Credit Facility will be restructured or that the interest rate will be further reduced.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Following is a table of selected financial data of the Company for the last five years (which should be read in conjunction with the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto contained herein):
(in thousands of dollars, except per share data)
(1) Management considers Funds From Operations to be one measure of the performance of an equity REIT. Funds From Operations is used by financial analysts in evaluating REITs and can be one measure of a REIT's ability to make cash distributions. Presentation of this information provides the reader with an additional measure to compare the performance of REITs. Funds From Operations generally is defined by NAREIT as net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (losses) from debt restructurings and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Funds From Operations was computed by the Company in accordance with this definition. Funds From Operations does not represent cash generated by operating activities in accordance with generally accepted accounting principles; it is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to net income (loss) as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. Further, Funds from Operations as disclosed by other Reit's 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
Overview
The following should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto, all of which are included herein.
When used in this annual report, the words "believes," "anticipates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected, including, but not limited to, those set forth in the section entitled "Potential Factors Affecting Future Operating Results" below. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Results of Operations
The Company's operations consist of owning and operating industrial and suburban office properties located primarily in the Western United States.
Increases in revenues, expenses, net income and cash flows in the years compared below were due primarily to the acquisition, development and sale of operating property as follows:
1997 1996 1995
Comparison of 1997 to 1996
Income from Property Operations Income from property operations (defined as rental income less rental expenses) increased $13,268,000 or 80% in 1997 compared with 1996. This is due to an increase in rental income of $18,836,000 offset by an increase in rental expenses (which include operating expenses, real estate taxes and depreciation and amortization) of $5,568,000.
The increase in rental income and expenses is primarily attributable to the acquisition of real estate investments during 1997 and 1996. This acquisition activity increased rental income and rental expenses by $21,545,000 and $7,055,000,
respectively. This was partially offset by the sales of two office properties and one retail property in 1997 and two industrial properties in 1996, which generated a reduction in rental income and rental expenses of $3,256,000 and $1,779,000, respectively.
Expenses Interest expense, which includes amortization of loan fees, increased $3,571,000 or 82.1% in 1997 compared with 1996. The increase is attributable to the Company's higher level of borrowings to finance the acquisition of properties in 1997, and higher financing costs incurred in connection with its credit facility and mortgage loans. The amortization of loan fees was $816,000 and $650,000 for 1997 and 1996, respectively. General and administrative expenses increased $585,000 or 33.4% in 1997 compared with 1996, a result of managing a larger real estate portfolio.
Gain on Sale In July 1997, the Company sold two of its Southern California office properties for a sale price of approximately $25,800,000, which resulted in a gain of $10,785,000. In October 1997, the Company sold Academy Place Shopping Center in Colorado Springs, Colorado for a sale price of approximately $7,500,000, which resulted in a gain of approximately $748,000. Net operating loss carryforward was utilized to offset substantially all of the 1997 taxable income remaining after the deduction of dividends paid in 1997. Retention and reinvestment of gains on property sales generated alternative minimum tax expense of approximately $250,000 which is included in 1997 general and administrative expense.
In April 1996, the Company sold 3.6 acres of land adjacent to its suburban office property in Utah for $1,000,000, receiving $950,000 in cash and a $50,000 note. The 10% interest bearing note was paid in April 1997. The sale resulted in a gain of $359,000. In December 1996, the Company sold two industrial properties in St. Paul, Minnesota for a cash price of $6,705,000. The sale resulted in a gain of $47,000.
Dividends 1997 quarterly dividend declared for each share of common stock was $0.26 for the first quarter, $0.27 for the second quarter, and $0.30 for the third and fourth quarters. Consistent with the Company's policy, dividends are paid in the quarter after declared. In addition, the Company declared a quarterly dividend of $1,125,000 in each of the first two quarters of 1997 and $1,250,000 for the third quarter of 1997 on the Series A Convertible Preferred Stock. The preferred shares were converted into 4,166,667 shares of common stock on October 15, 1997.
Comparison of 1996 to 1995
Income from Property Operations Income from property operations increased $10,202,000 or 160% in 1996 compared with 1995. This is due to an increase in rental income of $15,846,000 offset by an increase in rental expenses of $5,644,000.
The increase in rental income and expenses is primarily attributable to the acquisition and development of real estate investments. This acquisition and development activity increased rental income and rental expenses by $16,684,000 and $5,445,000, respectively. This was partially offset by the sale of an office property and an industrial property in 1995 which generated a reduction in rental income and rental expenses of $1,078,000 and $687,000, respectively.
Expenses Interest expense, which includes amortization of loan fees, increased $2,753,000 or 173% in 1996 compared with 1995. The increase is attributable to the Company's higher level of borrowings to finance the acquisition of properties in 1996, and higher financing costs incurred in connection with its credit facility and mortgage loans. The amortization of loan fees was $650,000 and $277,000 for 1996 and 1995, respectively. General and administrative expenses increased $295,000 or 20% in 1996 compared with 1995, a result of managing a larger real estate portfolio.
Gain on Sale In April 1996, the Company sold 3.6 acres of land adjacent to its suburban office property in Salt Lake City, Utah for $1,000,000, receiving $950,000 in cash and a $50,000 note due in April 1997, with 10% interest payable monthly. The sale resulted in a gain of $359,000. In December 1996, the Company sold two industrial properties in St. Paul, Minnesota for a cash sale price of $6,705,000. The sale resulted in a gain of $47,000.
In 1995, the Company sold an office property located in Mississippi and an industrial property located in Kansas for $8,000,000 cash. The sales resulted in a loss of $642,000.
Dividends Quarterly dividends declared for the first and second quarters of 1996 were $0.24 per share of common stock, and $0.26 per share of common stock for the third and fourth quarters of 1996. Consistent with the Company's policy, dividends are paid in the quarter after declared. In addition, the Company declared a quarterly dividend of $1,125,000 on the Series A Convertible Preferred Stock in each of the four quarters of 1996. The preferred stock dividends are due and payable 45 days after the quarter end.
Financial Condition
Total assets of the Company at December 31, 1997 increased by $202,079,000 compared with December 31, 1996, primarily as a result of an increase in real estate investments (net of depreciation) of $198,585,000. Total liabilities at December 31, 1997 decreased by $20,379,000 compared with December 31, 1996, primarily as a result of the paydown of the Company's credit facility.
Liquidity and Capital Resources
During the year ended December 31, 1997, the Company's operating activities provided net cash flow of $25,041,000. Investing activities provided cash flow of $31,909,000 from the sale of properties and utilized $212,267,000 to acquire and improve real estate investments. Financing activities provided net cash flow of $155,350,000 consisting of the proceeds from bank borrowings of $167,559,000 and net proceeds from the sale of common stock of $210,953,000, offset by repayment of bank borrowings and mortgage loans of $207,245,000, payment of dividends of $15,660,000, and redemption of partnership units of $257,000.
The Company's mortgage loans, obtained in 1997 and 1996, totaled $60,323,000 at December 31, 1997. They are secured by 17 properties (which Properties collectively accounted for approximately 26% of the Company's Annualized Base Rent and 20% of the Company's total assets as of December 31, 1997). The loans bear interest at rates ranging from 7.02% to 8.9% per annum and have terms ranging from two to nine years. Interest is due and payable monthly. In February 1998, the Company secured a mortgage loan of $20,900,000 which bears interest at 6.9% and has an eight year term. The proceeds of the mortgage loans were used to pay down a portion of the outstanding borrowings under the credit facility.
The Company completed the sale of 3,350,000 shares of common stock at $13 per share in April 1996. In February 1997, the Company completed the sale of 4,600,000 shares of the common stock at $17 3/8 per share and in November 1997 sold an additional 7,245,000 shares of common stock at $19 5/8 per share. Net cash proceeds from each of these offerings was used to pay off the outstanding borrowings under the Company's credit facility. The facility was amended and expanded to $150 million in June 1997, and was further expanded to $175 million in September 1997. Under this facility, the Company can borrow up to $25 million on an unsecured basis. The secured loans bear interest at a rate of LIBOR plus 1.50% and the unsecured loans bear interest at LIBOR plus 1.75%. The credit facility contains various restrictive covenants including, among other things, a covenant limiting quarterly dividends to 95% of average Funds From Operations for the immediately preceding two fiscal quarters. At December 31, 1997 the Company was in compliance with the covenants and requirements of the credit facility.
The Company anticipates that the cash flow generated by its real estate investments will be sufficient to meet its short-term liquidity requirements. The Company expects to fund the cost of acquisitions, capital expenditures, costs associated with lease renewals and reletting of space, repayment of indebtedness, and development of properties from (i) cash flow from operations, (ii) borrowings under the credit facility and, if available, other indebtedness (which may include indebtedness assumed in acquisitions), (iii) the sale of real estate investments, and (iv) the sale of equity securities and, possibly, the issuance of equity securities in connection with acquisitions.
The ability to obtain mortgage loans on income-producing properties is dependent upon the ability to attract and retain tenants and the economics of the various markets in which the properties are located, as well as the willingness of mortgage-lending institutions to make loans secured by real property. The ability to sell real estate investments is partially dependent upon the ability of purchasers to obtain financing at commercially reasonable rates.
Potential Factors Affecting Future Operating Results
At the present time, borrowings under the Company's credit facility bear interest at a floating rate. Results from operations in 1998 may be negatively impacted if interest rates increase in the future.
While the Company has historically been successful in renewing and reletting space, the Company will be subject to the risk that certain leases expiring in 1998 may not be renewed or the terms of renewal may be less favorable than current lease terms. However, the Company expects to release the vacant spaces without any material adverse impact on 1998 operations. In addition, the Company expects to incur costs in making improvements or repairs to its portfolio of properties required by new or renewing tenants and expenses associated with brokerage commissions payable in connection with the reletting of space.
Many other factors affect the Company's actual financial performance and may cause the Company's future results to be markedly outside of the Company's current expectations.
Government Regulations
The Properties are subject to various federal, state and local regulatory requirements such as local building codes and other similar regulations. The Company believes that the Properties are currently in substantial compliance with all applicable regulatory requirements, although expenditures at Properties may be required to comply with changes in these laws. No material expenditures are contemplated at this time in order to comply with any such laws or regulations.
Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances released on, above, under, or in such property. Such laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of such removal or remediation could be substantial.
Additionally, the presence of such substances or the failure to properly remediate such substances may adversely affect the owner's ability to borrow using such real estate as collateral.
The Company believes that it is in compliance in all material respects with all federal, state and local laws regarding hazardous or toxic substances, and the Company has not been notified by any governmental authority of any non-compliance or other claim in connection with any of its present or former properties. The Company does not anticipate that compliance with federal, state and local environmental protection regulations will have any material adverse impact on the financial position, results of operations or liquidity of the Company.
Accounting Developments
In June 1997, the FASB issued Financial Accounting Standard No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS 130 is effective with the year-end 1998 financial statements; however, the total comprehensive income is required in the financial statements for interim periods beginning in 1998. In June 1997, the FASB issued Financial Accounting Standard No. 131, Disclosure About Segments of An Enterprise and Related Information. SFAS 131 is effective with the year-end 1998 financial statements. Management believes that the adoption of these statements will not have a material impact on the Company's financial statements.
General Litigation
The Company is involved in various legal matters in the ordinary course of business. In the opinion of management, none of these matters could have a material impact on the Company's financial statements.
Inflation
Most of the Company's leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. Inflation, however, could result in increases in the Company's borrowing costs.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Schedule Covered by Reports of Independent Public Accountants
Report of Independent Public Accountants 48 Consolidated Balance Sheets as of December 31, 1997 and 1996 49 For the Years Ended December 31, 1997, 1996 and 1995: - - Consolidated Statements of Income 50 - - Consolidated Statements of Stockholders' Equity 51 - - Consolidated Statements of Cash Flows 52 Notes to Consolidated Financial Statements 53 Financial Statement Schedule: - - Schedule III - Real Estate and Accumulated Depreciation 64
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required by Items 10 through 13 of Part III is incorporated by reference from the Registrant's Proxy Statement which will be mailed to stockholders in connection with the Registrant's annual meeting of stockholders scheduled to be held on May 13, 1998.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Report of independent public accountants.
The following consolidated financial statements of the Company and its subsidiaries are included in Item 8 of this report:
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation
All other schedules have been omitted as they are not applicable, or not required or because the information is given in the Consolidated Financial Statements or related Notes to Consolidated Financial Statements.
3. Exhibits
Exhibit No. List of Exhibits
3.1 Charter of the Company, as amended, is incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-2, Registration No. 333- 921.
3.2 Amended and Restated Bylaws of the Company are incorporated herein by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995.
10.1 The Company's Automatic Dividend Reinvestment and Share Purchase Plan, as adopted by the Company, is incorporated herein by reference to Exhibit 4.1 to Amendment No. 2 to Registration Statement No. 2-94354 of ICM Property Investors Incorporated.
10.4 Second Amended and Restated Credit Agreement dated as of June 26, 1996, by and between the Company, as Borrower, Bank of America National Trust and Savings Association and the several financial institutions (the "Banks") is incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.5 Sale and Option Agreement dated as of August 26, 1995, by and between Kemper Investors Life Insurance Company, on behalf of itself and Participants (as defined therein), as Lender, the Company, as Purchaser, and Tustin Properties, as Owner, for 3002 Dow Business Center is incorporated herein by reference to Exhibit 10.19 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995.
10.6 BPIA Agreement dated as of January 1, 1995, by and between Westminster Holdings, Inc., a California corporation and the Company is incorporated herein by reference to Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995.
10.7 Employment Agreement made as of February 17, 1993, by and between ICM Property Investors Incorporated and Peter B. Bedford is incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, as amended by Form 10-K/A filed on May 1, 1995, and Form 10-K/A-2 filed on August 8, 1995.
10.8 Amendment No. 1 to Employment Agreement dated as of September 18, 1995, by and between Peter B. Bedford and the Company is incorporated herein by reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995.
10.12 Purchase and Sale Agreement dated as of October 19, 1995, between Landsing Pacific Fund, Inc., a Maryland corporation as Seller, and the Company, the Buyer, as amended, is incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on December 27, 1995.
10.13 Amended and Restated Promissory Note date May 24, 1996 executed by the Company and payable to the order of Prudential Insurance Company of America is incorporated herein by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
10.14 Loan Agreement dated as of December 24, 1996 between Bedford Property Investors, Inc. as Borrower and Union Bank of California, N.A. as Lender is incorporated herein by reference to Exhibit 10.14 to the Company's Form 10-K for the year ended December 31, 1996.
10.15* Loan Agreement dated as of January 30, 1998 between Bedford Property Investors, Inc. as Borrower and Prudential Insurance Company of America as Lender.
10.16* The Company's Amended and Restated Employee Stock Plan.
10.17* Form of Employee Stock Plan Option Agreement between the Company and the Named Executive Officers under the Company's Amended and Restated Employee Stock Plan.
10.18* The Company's Amended and Restated 1992 Directors' Stock Option Plan.
10.19* Form of Retention Agreement.
10.20* Employment Agreement made as of August 4, 1997, by and between Bedford Property Investors Incorporated and Scott R. Whitney.
10.21* Employment Agreement made as of November 18, 1997, by and between Bedford Property Investors Incorporated and Dennis Klimmek.
12* Ratio of Earnings to Fixed Charges.
21.1* Subsidiaries of the Company.
23.1* Consent of KPMG Peat Marwick LLP, independent auditors.
27* Financial Data Schedule
* Filed herewith
B. Reports on Form 8-K
During the quarter ended December 31, 1997 the Company filed on October 31, 1997, a report on Form 8-K dated September 16, 1997, reporting items 5 and 7 and announcing the acquisitions of the Mondavi Building, 2230 Oak Ridge Way and Oracle Center.
The following financial statements were filed: (i) Historical Summary of Gross Income and Direct Operating Expenses for Oracle Center for the four months ended December 31, 1996 and (ii) pro forma financial statements showing the effect resulting from all the Company's acquisitions through October 16, 1997.
Report of Independent Public Accountants
To the Stockholders and the Board of Directors of Bedford Property Investors, Inc.:
We have audited the consolidated financial statements of Bedford Property Investors, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bedford Property Investors, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
San Francisco, California February 2, 1998
BEDFORD PROPERTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996 (in thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements.
BEDFORD PROPERTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995 (in thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements.
BEDFORD PROPERTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements.
BEDFORD PROPERTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in thousands)
See accompanying notes to consolidated financial statements.
BEDFORD PROPERTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Summary of Significant Accounting Policies and Practices
The Company Bedford Property Investors Inc. (the Company) is a Maryland real estate investment trust with investments primarily in industrial and suburban office properties concentrated in the Western United States. The Company's Common Stock trades under the symbol "BED" on both the New York Exchange and Pacific Exchange.
Principles of Consolidation The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its general partnership interest in Bedford Realty Partners, L.P. All significant inter-entity balances have been eliminated in consolidation.
Use of Estimates The preparation of these financial statements in conformity with generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Federal Income Taxes The Company has elected to be taxed as a real estate investment trust under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended ("the Code"). A real estate investment trust is generally not subject to Federal income tax on that portion of its real estate investment trust taxable income ("Taxable Income") which is distributed to its stockholders, provided that at least 95% of Taxable Income is distributed and other requirements are met. The Company believes it is in compliance with the Code.
Taxable income differs from net income for financial reporting purposes primarily because of the different methods of accounting for depreciation. As of December 31, 1997, for Federal income tax purposes, the Company had an ordinary loss carry forward of approximately $32 million. As the Company does not expect to incur income tax liabilities, the asset value of these losses has been effectively fully reserved. Dividend distributions made for 1997 were classified 88% as ordinary income and 12% as capital gain for Federal income tax purposes.
Real Estate Investments Buildings and improvements are carried at cost less accumulated depreciation. Buildings are depreciated on a straight-line basis over 45 years. Upon the acquisition of an investment by the Company, acquisition related costs are added to the carrying cost of that investment. These costs are being depreciated over the useful lives of the buildings. Leasing commissions and improvements to tenants' space incurred subsequent to the acquisition are amortized over the terms of the respective leases. Expenditures for repairs and maintenance, which do not add to the value or prolong the useful life of a property, are expensed as incurred. When the Company concludes that the recovery of the carrying amount of a real estate investment is impaired, it reduces such carrying amount to the estimated fair value of the investment. Investments which have been classified as held for sale are carried at the lower of the carrying amount or fair value less costs to sell.
Income Recognition Rental income from operating leases is recognized in income on a straight-line basis over the period of the related lease agreement. The aggregate rental income exceeded contractual rentals by $1,644,000, $573,000 and $377,000 for 1997, 1996 and 1995, respectively.
Per Share Data Per share data are based on the weighted average number of common and common equivalent shares outstanding during the year. Per share data reflects the retroactive application of the one-for-two reverse stock split which took place on March 29, 1996. Stock options issued under the Company's stock option plans are included in the calculation of per share data if, upon exercise, they would have a dilutive effect. The diluted earnings per share calculation assumes conversion of the Series A Convertible Preferred Stock of the Company and the limited partnership units of Bedford Realty Partners, L.P., if such conversions would have dilutive effects, as of the beginning of the year. Dividends accrued on the Series A Convertible Preferred Stock and distributions accrued on the limited partnership units are deducted from net income for purposes of determining net income applicable to common stockholders.
Effective December 15, 1997, the Company adopted Statement of Financial Accounting Standard No. 128, Earnings per share (FAS 128). Earnings per share data for previous periods have been restated to conform to FAS 128.
Note 2 - Real Estate Investments
The following table sets forth the Company's real estate investments as of December 31, 1997 (in thousands):
The Company internally manages all but 7 of its properties from its regional offices in Lafayette, CA; Tustin, CA; Phoenix, AZ; Lenexa, KS; Denver, CO; Dallas, TX; and Seattle, WA. For the 7 properties located in markets not served by a regional office, the Company has subcontracted on-site management to local firms. All financial record-keeping is centralized at the Company's corporate office in Lafayette, CA.
During 1997 and 1996, the Company capitalized interest costs relating to properties under development totaling $627,000 and $223,000, respectively.
Note 3 - Consolidated Partnership
In December, 1996 the Company formed Bedford Realty Partners, L.P. (the "Operating Partnership"), with the Company as the sole general partner, for the purpose of acquiring real estate. In exchange for contributing a property into the Operating Partnership, the owners of the property receive limited partnership units ("OP Units"). A limited partner can seek redemption of the OP Units at any time after 90 days. The Company, at its option, may redeem the OP Units by either (i) issuing common stock at the rate of one share of common stock for each OP Unit, or (ii) paying cash to a limited partner based on the average trading price of its common stock. Each OP Unit is allocated partnership income and cash flow at a rate equal to the dividend being paid by the Company on a share of common stock. Additional partnership income and cash flow is allocated 99% to the Company and 1% to the limited partners.
This acquisition strategy is referred to as a "Down REIT" transaction; as long as certain tax attributes are maintained, the income tax consequences to a limited partner are generally deferred until such time as the limited partner redeems their OP Units.
On December 17, 1996, the Company acquired a $3.6 million industrial property located in Modesto, California utilizing the Operating Partnership. The sellers of the property received 108,495 OP Units. A director of the Company was a 9% owner of the property, but did not participate in the approval of the acquisition. In March 1997, 13,446 OP Units were redeemed for cash.
Note 4 - Leases
Minimum future lease payments to be received as of December 31, 1997 are as follows (in thousands):
1998 $ 7,146 1999 5,819 2000 8,767 2001 8,023 2002 5,138 Thereafter 14,304 $49,197
The total minimum future lease payments shown above do not include tenants' obligations for reimbursement of operating expenses or taxes as provided by the terms of certain leases.
Note 5 - Related Party Transactions
Due to the Company's limited financial resources existing in prior years, its activities relating to the acquisition of new properties and debt and equity financings have been performed by Bedford Acquisitions, Inc. (BAI) pursuant to a written contract dated January 1, 1995. The contract provides that BAI is obligated to provide services to the Company with respect to the Company's acquisition and financing activities, and that BAI is responsible for the payment of its expenses incurred in connection therewith. The contract provides that BAI is to be paid a fee in an amount equal to the lesser of (i) 1 1/2% of the gross amount raised in financings or the aggregated purchase price of the property for acquisitions, or (ii) an amount equal to (a) the aggregate amount of expenses funded by BAI through the time of such acquisition or financing minus (b) the aggregate amount of fees previously paid to BAI pursuant to such arrangement. In no event will the aggregate amount of fees paid to BAI exceed the aggregate amount of costs funded by BAI. The agreement with BAI has a term of one year and is renewable at the option of the Company for additional one-year terms. The current agreement will expire on January 1, 1999.
For 1997, 1996 and 1995, the Company paid BAI $3,156,000, $1,808,000 and $2,143,000, respectively for acquisition and financing activities performed pursuant to the foregoing arrangements. The Company believes that since the fees charged under the foregoing arrangements (i) have been and continue to be comparable to those charged by other sponsors of real estate investment entities or other third party service providers and (ii) have been and continue to be charged only for services on acquired properties or completed financings, such fees were and continue to be properly includable in direct acquisition costs and capitalized as part of the asset or financing activities.
Note 6 - Stock Option Plans
A total of 900,000 shares of the Company's Common Stock have been reserved for issuance under the Employee Stock Option Plan (the "Employee Plan"). The Employee Plan expires in 2003. The Employee Plan provides for non-qualified stock options and incentive stock options.
The Employee Plan is administered by the Compensation Committee of the Board of Directors, which determines the terms of options granted, including the exercise price, the number of shares subject to the option, and the exercisability of the options. Options granted to employees are exercisable upon vesting, and typically vest over a four-year period.
The Employee Plan requires that the exercise price of incentive stock options be at least equal to the fair market value of such shares on the date of grant and that the exercise price of non-qualified stock options be equal to at least 85% of the fair market value of such shares on the date of the grant. The maximum term of options granted is ten years.
Initially 250,000 shares of the Company's Common Stock were reserved for issuance under the Directors' Stock Option Plan (the "Directors' Plan"). On May 16, 1996 the shareholders approved an additional 250,000 shares. The Directors' Plan expires in 2002. The Directors' Plan provides for the grant of non-qualified stock options to directors of the Company. The Directors' Plan contains an automatic grant feature whereby a director receives a one-time "initial option" to purchase 25,000 shares upon a director's appointment to the Board of Directors and thereafter receives automatic annual grants of options to purchase 10,000 shares upon re-election to the Board of Directors. Options granted are generally exercisable six months from the date of grant.
The Directors' Plan requires that the exercise price of options be equal to the fair market value of the underlying shares on the date of grant. The maximum term of options granted is ten years.
In September 1995, the Company established a Management Stock Acquisition program. Under the program, options exercised by key members of management shortly after the grant date may be exercised either in cash or with a note payable to the Company. Such note bears interest at 7.5% or the Applicable Federal Rate as defined by the Internal Revenue Service, whichever is higher. The note is due in five years or within ninety days from termination of employment, with interest payable quarterly. During 1996 and 1995, options for 155,000 shares of Common Stock were exercised in exchange for notes payable to the Company. The notes bear interest at 7.5%. The unpaid balance of the notes is $1,466,000 and is included in the accompanying consolidated balance sheet as a reduction of additional paid-in capital.
In addition, the Company may grant restricted stock to key employees. These shares generally vest over five years and are subject to forfeiture under certain conditions. In 1997, 42,500 shares were granted. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, compensation costs have not been recognized for either the Employee or Directors' Plan. Had compensation costs for the plans been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 Net income: As reported $31,291 $11,021 $2,895 Pro forma 31,045 10,831 2,821
Basic earnings per share: As reported $ 2.21 $ 1.21 $ 0.53 Pro forma 2.19 1.17 0.51
Earnings per share - assuming dilution: As reported $ 1.94 $ 1.14 $ 0.52 Pro forma 1.92 1.12 0.50
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 1997, 1996 and 1995, respectively: dividend yield of 5.8%, 6.9% and 6.7%; expected volatility of 16.8%, 18.1% and 19.4%; risk-free interest rates of 5.7%, 6.3% and 5.3%; and expected lives of five years for each period.
A summary of the status of the Company's plans as of December 31, 1997, 1996 and 1995 and changes during the years ended on those dates is presented below:
The following table summarizes information about stock options outstanding on December 31, 1997:
Note 7 - Bank Loan Payable
In June 1997, the Company expanded its secured revolving credit facility with Bank of America from $100 million to $150 million, maturing on June 1, 2000. In September 1997, the credit facility was further expanded to $175 million. Under this facility, the Company can borrow up to $25 million on an unsecured basis. The secured loans bear interest at a floating rate equal to either the lender's published "reference rate" or LIBOR plus 1.50%. The interest rate of the unsecured loans is 25 basis points higher than that of the secured loans. The credit facility is secured by mortgages on 35 properties (which properties collectively accounted for approximately 49% of the Company's Annualized Base Rent and approximately 47% of the Company's total assets as of December 31, 1997), together with the rental proceeds from such properties. The credit facility contains various restrictive covenants including, among other things, a covenant limiting quarterly dividends to 95% of average Funds From Operations for the immediately preceding two fiscal quarters.
The daily weighted average amount owed to the bank was $45,642,000 and $10,997,000 in 1997 and 1996, respectively. The weighted average interest rates in these periods were 7.42% and 8.03%, respectively. The effective interest rate at December 31, 1997 was 7.50%.
Note 8 - Mortgage Loans Payable
Mortgage loans payable at December 31, 1997 consist of the following (in thousands):
Floating rate note due December 15, 1999, current rate of 8.75% $ 1,823 7.5% note due January 1, 2002 24,677 7.02% note due March 15, 2003 25,000 8.9% note due July 31, 2006 8,823 $ 60,323
The mortgage loans are collaterized by 17 properties (which Properties collectively accounted for approximately 26% of the Company's Annualized Base Rent and approximately 20% of the Company's total assets as of December 31, 1997).
The following table presents scheduled principal payments on mortgage loans as of December 31, 1997 (in thousands):
1998 $ 838 1999 2,768 2000 1,048 2001 1,130 2002 23,681 Thereafter 30,858 $ 60,323
Note 9 - Redeemable Preferred Stock
On September 18, 1995, the Company issued and sold 8,333,334 shares of Series A Convertible Preferred Stock (the "Convertible Preferred Stock") for $6.00 per share. Holders of the Convertible Preferred Stock were entitled to cumulative quarterly dividends in cash in an amount equal to the greater of (i) $0.135 per share or (ii) the dividends payable in such quarter on the Common Stock into which the Convertible Preferred Stock is convertible plus, in both cases, the accumulated but unpaid dividends on the Convertible Preferred Stock. Dividends may be declared and paid on shares of Common Stock only if full cumulative dividends have been paid or authorized and set apart on all shares of Convertible Preferred Stock. Each share of Convertible Preferred Stock was convertible at any time after September 18, 1997 into one-half share of Common Stock. On October 14, 1997, the 8,333,334 shares of the Series A Convertible Preferred Stock were converted to 4,166,667 shares of common stock.
Note 10 - Sales of Common Stock
The Company completed the sale of 3,350,000 shares of common stock at $13 per share in April 1996. In February 1997, the Company completed the sale of 4,600,000 shares of the common stock at $17 3/8 per share and in November 1997 sold an additional 7,245,000 shares of common stock at $19 5/8 per share. Net cash proceeds from each of these offerings was used to pay off the outstanding borrowings under the Company's credit facility.
Note 11 - Earnings per Share
Following is a reconciliation of earnings per share:
Per share amounts and number of shares have been adjusted to reflect the one-for-two reverse stock split effective March 29, 1996.
1Not applicable before 1995. The Series A Convertible Preferred Stock was issued in September 1995.
2Not applicable before 1996. The Operating Partnership Units were issued in December 1996.
Note 12 - Quarterly Financial Data-Unaudited
The following is a summary of quarterly results of operations for 1997 and 1996 (in thousands of dollars, except per share data):
1Reflects reduction for dividends and distributions of $1,125 each for the first and second quarter of 1997 and $1,250 for the third quarter of 1997.
2Reflects reduction for dividends and distributions of $1,130 for the fourth quarter of 1996 and $1,125 each for the first, second and third quarter of 1996.
3Reflects the one-for-two reverse stock split effective March 29, 1996.
BEDFORD PROPERTY INVESTORS, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1997 (in thousands of dollars)
NOTES TO SCHEDULE III (in thousands of dollars)
(A) An analysis of the activity in real estate investments for the years ended December 31, 1997, 1996 and 1995 is presented below:
(B) The aggregate cost for Federal income tax purposes is $296,993. (C) In the third quarter 1995, the Company decided to sell the Cody Street Park, Building 6. The property was sold on September 20, 1995. (D) During 1995, the Company continued to offer for sale the IBM Building located in Jackson, Mississippi. This property was first offered for sale in 1991, at which time the Company's investment in the property was written down by $2,113,000. The property sold on October 2, 1995. (E) The property was sold in April 1996. (F) The properties were sold in December 1996. (G) The properties were sold in July 1997. (H) The property was sold in October 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BEDFORD PROPERTY INVESTORS, INC.
By: /s/ Peter B. Bedford Peter B. Bedford Chairman of the Board and Chief Executive Officer
Dated: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacity and on the date indicated.
/s/ Peter B. Bedford March 27, 1998 Peter B. Bedford, Chairman of the Board and Chief Executive Officer
/s/ Claude M. Ballard March 27, 1998 Claude M. Ballard, Director
/s/ Anthony Downs March 27, 1998 Anthony Downs, Director
/s/ Anthony M. Frank March 27, 1998 Anthony M. Frank, Director
/s/ Martin I. Zankel March 27, 1998 Martin I. Zankel, Director
/s/ Thomas H. Nolan, Jr. March 27, 1998 Thomas H. Nolan, Jr., Director
/s/ Thomas G. Eastman March 27, 1998 Thomas G. Eastman, Director
/s/ Scott R. Whitney March 27, 1998 Scott R. Whitney Senior Vice President and Chief Financial Officer
/s/ Hanh Kihara March 27, 1998 Hanh Kihara, Vice President Controller
Exhibit 12
Bedford Property Investors, Inc. Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends and Limited Partner Distributions (in thousands, except for ratio)
Exhibit 21.1
Subsidiaries of Bedford Property Investors, Inc.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors Bedford Property Investors, Inc.:
We consent to incorporation by reference in the registration statements on Form S-3 (No.'s 33-15233 and 333-23687) and the registration statement on Form S-8 (No. 333-18215) of Bedford Property Investors, Inc. of our report dated February 2, 1998, relating to the consolidated balance sheets of Bedford Property Investors, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, and the related financial statement schedule as of December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of Bedford Property Investors, Inc.
KPMG Peat Marwick LLP
San Francisco, California March 27, 1998