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 in the western United States. As of December 31, 2000, the Company owned and operated, either directly or through wholly-owned subsidiaries, 86 properties aggregating approximately 6.9 million rentable square feet. Of these 86 properties (the "Properties"), there are 61 industrial (the "Industrial Properties") and 25 suburban office (the "Suburban Office Properties"). As of December 31, 2000, the Properties were approximately 97% leased to 466 tenants. The Properties are located in Northern and Southern California, Washington, Arizona, Nevada and Colorado.
In addition to the Properties, the Company owns one suburban office and four office-flex development projects totaling 365,045 rentable square feet. During 2000, the Company completed the shell construction and began the initial lease- up on two of these projects, which were approximately 67% leased as of December 31, 2000.
The Company seeks to grow its asset base through the development of new industrial and suburban office properties as well as through the acquisition of industrial and suburban office properties and portfolios of such 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 and 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 than average rental growth over time. The Company continues to target selected markets in which the Properties are located as well as selected other markets in which the Company has expertise.
Business Objective and Growth Plan
Business Objective
The Company's business objective is to increase stockholders' long-term total return through increases in the dividend and the appreciation in value of the Common Stock. To achieve this objective, the Company seeks to (i) increase cash flow by internal growth of rents from its existing Properties, (ii) develop new industrial and suburban office properties, (iii) acquire quality industrial and suburban office properties and/or portfolios of such properties, and (iv) repurchase its common stock.
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 by retaining 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 2000, leases for 1,510,323 square feet of space expired with a weighted average base rental rate of $10.91 per square foot. Approximately 91% of this space has been re-leased, and the weighted average base rental rate of the new leases is $13.79 per square foot, an increase of 26.5%. Past performance is not necessarily indicative of results that will be obtained in the future, and no assurance can be given in that regard.
Development
The Company seeks to develop properties in strong markets where (i) demand for space has caused or is expected to cause occupancy rates to remain high, (ii) barriers to entry such as scarcity of land or entitlement challenges exist, and (iii) the project complements the existing portfolio. 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 management and permanent financing. Since 2000, the Company has been especially focused on the development of office tech and flex tech product. These are multi-tenant buildings designed to meet the needs of a wide range of uses. The flex tech product anticipates the changing needs of high-growth tenants and accommodates their need for flexible facility configurations. The Company evaluates the competitive environment, demand and rent trends, and development pipelines before embarking on or acquiring each new development project. The Company is currently in the process of developing properties in Northern and Southern California and Colorado, and is considering developing additional properties in the same markets as well as in the Pacific Northwest. The Company's management team has significant development experience in each of these markets.
The Company's activities relating to the development 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 fees in amounts equal to the lesser of (i) 1 1/2% of the gross amount of the aggregate purchase price of property acquisitions and dispositions, up to 1 1/2% of any loans arranged by BAI, plus 5% of development project costs, or (ii) an amount equal to (a) the aggregate amount of approved expenses funded by BAI through the time of such acquisition, disposition, loan or development 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 current agreement with BAI has a one-year term expiring January 1, 2002.
Acquisitions
The Company seeks to acquire industrial and suburban office properties and/or portfolios of such properties. The Company believes that (i) the experience of its management team, (ii) 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. However, the Company has in the past 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 of a property, 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. The due diligence also includes an evaluation of the local market including competitive properties and relevant economic and demographic information. Mr. Bedford (the Chief Executive Officer), along with at least one other officer and one other Board member of the Company, will typically visit each proposed acquisition property before the purchase is closed. Acquisitions of properties for the Company are conducted by BAI as noted above.
Share Repurchase
From November 1998 through the early part of 2000, the Company's stock traded at a discount to its net asset value (estimated based on current cap rate and earning estimates) as a result of the softening of the REIT capital markets. With a dividend yield approximately equal to 9% and an average borrowing cost of 7.24%, the repurchase and retirement of the Company's common stock increases the stockholders' percentage ownership in the Company and therefore brings additional value to that ownership.
In July 1998, the Company's board of directors approved a share repurchase program of 3 million shares which was increased first to 4.5 million shares in September 1999 and later to 8 million shares in September 2000. Since November 1998, the Company has repurchased and retired 5.7 million shares at an average price of $17.49 per share.
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 continue to operate in suburban markets which are experiencing, or are expected by the Company to experience, above average economic growth, and which are, ideally, subject to supply-side constraints. The metropolitan areas in which the Company operates have multiple suburban "cores" and it believes that the potential for growth in these metropolitan areas is generally greatest in and around these suburban cores. It is the Company's experience 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. 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. Continued economic improvements in these markets, and related improvements in the commercial property markets, as well as the level of investment in industrial or suburban office properties in these markets should provide the potential for attractive returns through increased occupancy levels, rents and real estate values. 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.
During 2000, the Company decided to take advantage of the growth opportunities in the strong markets of the West Coast and exited the slow-velocity markets of the Mid-West by selling all of its operating properties in Kansas and Texas.
3. Develop and Acquire "Service-Flex, Tech-Flex and Office-Tech" Properties.
Among the Company's targeted properties are service and tech-flex industrial properties as well as office-tech buildings. These buildings provide for a wider range of function than that offered by traditional office or industrial properties and are an efficient facility choice for today's high growth technology sector firms that have frequently changing space needs. These properties 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, which 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 service doors or continued storefront 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. Asset Sales
The Company funds a portion of its development and acquisition activities and share repurchase program through the sale of selected assets. Such assets include buildings that have maximized their value or have become obsolete due to their physical attributes. In addition, the Company has redefined its geographical focus in the western United States and sold real estate assets that did not fit this western orientation.
5. Neighborhooding
Neighborhooding describes the expansion in areas where the Company owns existing properties. This strategy capitalizes on management's expertise and knowledge of the local market, economy and tenant needs for expansion. It results in efficiency in property management and therefore enables the Company to acquire or develop properties at greater yields. The Company utilized this concept in developing projects and acquiring properties in Fremont, Napa, Petaluma, and San Diego, California; Phoenix, Arizona; Denver, Colorado; and Federal Way, Washington.
Transactions and Significant Events During 2000
Development and Acquisitions
Development activity during the year included the continued leasing of 389,000 square feet in six projects located in Arizona, Washington, and Northern California, which were shell complete during 1999. As of December 31, 2000, these projects were 94% leased with yields ranging from 11% to 12%. The Company also completed the shell construction and partial lease-up of two projects located in Colorado and Northern California, adding 143,000 square feet to the available inventory. As of December 31, 2000 these projects were 67% leased. In addition, the Company commenced the construction of one new project in Northern California and two new projects in Colorado, which will add approximately 222,000 rentable square feet to the inventory of available space in 2001. This new leasable space provides the Company with a significant opportunity to increase its operating revenue.
The Company also acquired three parcels of vacant land in Napa and Ontario, California, aggregating 21 acres for a total investment of approximately five million dollars. These parcels of land are adjacent to existing Properties. The Company is in the preliminary planning stage to develop industrial or office properties on each of these parcels.
During the year, the Company acquired a 165,000 square foot three- building single-story office complex in Denver, Colorado for $21.5 million. The property is 97% leased and has a first year going-in yield of 9.42%.
Sell Selected Assets
During the year, the Company sold 20 Properties, including 15 Industrial Properties and 5 Suburban Office Properties, aggregating 1.2 million rentable square feet for $135,576,000. In addition, the Company sold one 1.43 acre parcel of land for $160,000. These sales produced gain totaling $38,171,000.
The disposition of one Suburban Office Property was structured as a like-kind exchange to defer approximately $12 million of taxable gain.
The cash proceeds from other sales were used to fund the repurchases of the Company's common stock and pay down debt.
Use of Information Technology
The Company's management has made a significant commitment to employ information technology in all the day-to-day operations of the firm. A number of steps have been taken during the last two years to digitize internal practices and eliminate redundancies. These steps include the creation of a management information system designed to facilitate real-time dissemination of operating results to field offices. This system provides the framework for timely operations reviews with each Regional Manager, the focus of which are market opportunities and the action steps necessary to take advantage of them. In addition, all basic business functions have been, or are being, digitized to simplify practices, reduce paper-flow, and enhance productivity.
The Company's Markets
The Properties are located in select markets proximate to metropolitan areas in Northern and Southern California, Washington, Arizona, Nevada and Colorado. From 1994 through the early part of 1998 most of these markets were recovering from the economic recession of the early 1990s. During this recovery, these markets were characterized by strong demand for commercial property without significant increases in supply. As the current economic expansion matures, job growth in several of the Company's markets has slowed. Additions to the commercial real estate stock have not been excessive, however, compared to previous cycles, and most of the markets in which the Company operates remain healthy. Accordingly, the Company expects commercial property values to remain in equilibrium during this period of slowing economic growth. Occupancy levels and rents will not be as robust as during the earlier recovery phase, but considering the absence of overbuilding in most markets, they should remain buoyant.
In particular, the Company believes that continuing economic growth in the San Francisco Bay Area (where 32% of the square footage of the Company's Properties are located) and Seattle (where 15% of the square footage of the Company's Properties are located) will result in strong returns on its properties in these markets during the coming year. These markets are particularly attractive as a result of the excellent quality of life they offer. Environmental concerns, as well as topographic and other barriers to entry, have effectively limited significant additions to real estate stock. The 2001 edition of Emerging Trends in Real Estate, a publication of PricewaterhouseCoopers and Lend Lease Real Estate Investments, ranked San Francisco (for the fifth consecutive year) and Seattle, as the number one and number six investment markets in the United States, respectively.
Operating Performance
For the year ended December 31, 2000, the Company reported income before gain on sales and extraordinary item of $29,916,000, on rental revenues of $97,518,000, compared with income before gain on sale and extraordinary item of $32,410,000, on rental revenues of $90,527,000 for the year ended December 31, 1999. Gain on sale of real estate investments for the year ended December 31, 2000 was $38,171,000 compared with gain on sale of real estate investments of $7,743,000 for the year ended December 31, 1999. The Company's Funds From Operations ("FFO": see definition under "Selected Financial Data") for the year ended December 31, 2000 was $43,864,000 as compared to $45,554,000 for the year ended December 31, 1999. The decrease in income before gain on sale and extraordinary item and the decrease in FFO for the year ended December 31, 2000, when compared with income before gain on sale and extraordinary item and FFO for the year ended December 31, 1999, are due to the increased borrowings under the Company's line of credit which were used to partially fund the repurchases of the Company's common stock in 1999. With the share repurchase program, FFO was spread over fewer shares, resulting in the growth of the "per share" amount.
Increase in Dividends on Common Stock
In September 2000, the Company announced a 7% increase in its quarterly Common Stock dividend from $0.42 to $0.45 per share, or $1.80 on an annualized basis. The higher dividend rate commenced with the Company's dividend for the third quarter of 2000. The dividends declared for the four quarters in 2000 totaled $1.74, a 12% increase compared with the dividends declared for the four quarters in 1999.
Credit Facility
In June 1998, the Company amended and restated its secured revolving line of credit facility led by Bank of America. Under the facility, which matures June 2001, the Company can borrow up to $175 million on a secured basis. The facility contains an unsecured sub-line of $50 million. The secured loans bear interest at a floating rate equal to either the lender's published "reference rate" or LIBOR plus a margin ranging from 1.10% to 1.35% depending on the Company's leverage level. The unsecured loans bear interest at either the lender's published "reference rate" or LIBOR plus a margin of 1.50%. At December 31, 2000, the facility, which was all secured, had an outstanding balance of $77,320,000, with an interest rate of LIBOR plus 1.35%. The Company was in compliance with the covenants and requirements of its revolving credit facility throughout 2000.
Currently the Company is in the process of renewing the credit facility with its existing bank group.
Mortgage Loans Payable
In May 1999, the Company obtained a total of $108 million of new first mortgage financing from Teachers Insurance and Annuity Association of America (TIAA). The financing consists of a $43.45 million 10-year loan, a $37.2 million 8-year loan, and a $27.35 million 6-year loan, all with interest at a fixed rate of 7.17%.
In November 1999, the Company secured an additional $22.15 million mortgage loan from TIAA. The loan has a 7-year term with interest at a fixed rate of 7.95%.
In December 1999, the Company secured a $4.6 million mortgage loan from Union Bank. The loan has a 5-year term with interest at a variable rate of LIBOR plus 2.50%. Proceeds of the mortgage loans were used to pay down the outstanding balance of the Company's $175 million line of credit.
In July 2000, the Company secured $30.89 million of new first mortgage financing from Security Life of Denver Insurance Company. The financing consists of two cross-collateralized five-year loans, each bearing interest at a floating rate of 30-day LIBOR plus 140 basis points with a provision to convert to a fixed rate and extend the term within the first three years. Proceeds of the mortgage loans were used to pay down the outstanding balance of the Company's credit facility.
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 thirteen times since that time from $0.10 per share in the second quarter of 1993 to $0.45 per share in the fourth quarter of 2000. In March 2001, the Company declared a dividend distribution for the first quarter 2001 to its stockholders in the amount of $0.45 per share of Common Stock, payable 15 days after the quarter-end.
Tenants
Based on rentable square feet, as of December 31, 2000, the Suburban Office Properties and Industrial Properties were approximately 97% occupied by a total of 466 tenants, of which 111 were Suburban Office Property tenants and 355 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), and (iii) the sale of certain real estate investments.
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 2001. The Company expects to make such payment by renewing the credit facility with its existing bank group.
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 $40 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 $10 million subject to a deductible of 5-10% of total insurable value per building with respect to the earthquake coverage. Additional flood and earthquake coverage with an aggregate limit of $20 million is provided for property located in California. The Company also carries director and officer liability insurance with an aggregate limit of $10 million, and a fidelity bond in the amount of $1 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. Accordingly, the Company does not currently 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. There can be no assurance, however, that future discoveries or events at the Company's properties, or changes to current environmental regulations, will not result in such a material adverse impact.
Other Information
The Company currently employs 33 full time employees. The Company is not dependent upon a single tenant or a limited number of tenants.
ITEM 2.
ITEM 2. PROPERTIES
Real Estate Summary As of December 31, 2000, the Company's real estate investments were diversified by property type as follows (dollars in thousands):
Number of Percent Properties Cost of Total
Industrial buildings 60 $ 305,857 47% Office buildings 27 310,882 48% Operating properties held for sale 2 5,226 1% Properties under development 5 13,702 2% Land held for development 9 11,721 2%
Total 103 $ 647,388 100%
As of December 31, 2000, the Company's real estate investments were diversified by geographic region as follows:
* 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, 2000.
Percentage Occupied/Number of Tenants Occupying 10% or more
Lease Expirations - Real Estate Portfolio
The following table presents lease expirations for each of the ten years and thereafter beginning January 1, 2001. The table presents: (i) the number of leases that expire each year, (ii) the square feet covered by such expiring leases, and (iii) the percentage of total occupied square feet for expiring leases.
Number of Percentage Leases Occupied of Occupied Year Expiring Square Feet Square Feet
2001 111 940,947 14.0% 2002 89 768,166 11.5 2003 90 986,768 14.7 2004 68 1,364,764 20.4 2005 70 1,117,461 16.7 2006 16 473,002 7.1 2007 10 493,042 7.4 2008 2 11,170 0.2 2009 2 41,758 0.6 2010 and thereafter 8 496,075 7.4
Total 466 6,693,153 100.0%
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 2000.
Average Base Rent
The following table sets forth the average rent at the end of each year for the last five years for each property owned as of December 31, 2000.
Average Base Rent ($/Sq Ft/Yr) At End of Year
* Shell construction completed during 2000; property in lease-up phase.
Average Base Rent ($/Sq Ft/Yr) At End of Year
Average Base Rent ($/Sq Ft/Yr) At End of Year
* Shell construction completed during 2000; property in lease-up phase.
Tax Information
The following table sets forth tax information of the Company's real estate investments at December 31, 2000, 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 Stock Exchange and the Pacific Exchange under the symbol "BED." As of December 31, 2000 the Company had 940 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 1999 and 2000.
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 is generally defined by the National Association of Real Estate Investment Trusts as net income (loss) (computed in accordance with generally accepted accounting principles), excluding extraordinary items such as 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. Beginning in the first quarter of 2000, non-recurring items other than extraordinary items as defined by generally accepted accounting principles are no longer excluded in the calculation of Funds From Operations. 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 REITs may not be comparable to the Company's presentation.
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.
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 properties as follows:
Comparison of 2000 to 1999
Income from Property Operations Income from property operations (defined as rental income less rental expenses) increased $3,085,000 or 6% in 2000 compared with 1999. This is due to an increase in rental income of $6,991,000 offset by an increase in rental expenses (which include operating expenses, real estate taxes and depreciation and amortization) of $3,906,000.
The increase in rental income and expenses is primarily attributable to properties acquired and properties developed during 2000 and 1999. These acquisition and development activities increased rental income and rental expenses in 2000 by $9,513,000 and $4,367,000, respectively, as compared to 1999. These increases were partially offset by the sale of one office property and three industrial properties in 1999, and the sale of fifteen industrial properties and five office properties in 2000, which resulted in a reduction in rental income and rental expenses of $7,300,000 and $2,946,000, respectively, as compared to 1999. The remaining increase in rental income of $4,778,000 is primarily due to an increase in rental rates and expense recovery income. The remaining increase of $2,485,000 in rental expenses is mainly due to increases in property tax assessments, management fees and electricity costs.
Other Income During 2000, the Company recorded $615,000 in other income. This sum represents a forfeited earnest money deposit from a buyer who failed to perform under the terms of the Purchase and Sale Agreement for a property located in Tempe, Arizona.
Expenses Interest expense, which includes amortization of loan fees, increased $5,856,000 or 31% in 2000 compared with 1999. The increase is attributable to the Company's higher borrowing costs and related costs to finance the property acquisitions and development activities during 1999 and 2000 and the repurchase of shares since November 1998. The amortization of loan fees was $1,658,000 and $1,495,000 for 2000 and 1999, respectively. General and administrative expenses increased $648,000 or 18% in 2000 compared to 1999, primarily as a result of increased costs associated with stock compensation benefits.
Gain on Sales In the first quarter 2000, the Company sold an industrial property in San Jose, California and two industrial properties in Beaverton, Oregon for net sale prices totaling $36,338,000, which resulted in an aggregate gain of approximately $15,234,000.
In the second quarter 2000, the Company sold an industrial property in San Diego, California for a net sale price of $2,165,000, which resulted in a loss of approximately $6,000.
In the third quarter 2000, the Company sold three office properties, ten industrial properties, and a .99 acre parcel of land for net sale prices totaling $74,773,000, which resulted in an aggregate net gain of approximately $20,219,000. The properties were located in Mountain View, California; Bellevue, Washington; Overland Park and Lenexa, Kansas; Kansas City, Missouri; and Austin, Texas.
In the fourth quarter 2000, the Company sold an office property in Overland Park, Kansas, an office property in Austin, Texas, and an industrial property in Farmers Branch, Texas, which included 1.43 acres of land. These properties were sold for net sale prices totaling $17,306,000, which resulted in an aggregate net gain of $2,724,000.
In the first quarter 1999, the Company sold an industrial property in South San Francisco, California for a net sale price of $1,789,000, which resulted in a gain of approximately $540,000.
In the second quarter 1999, the Company sold an office property in Salt Lake City, Utah and a 1.35 acre parcel of land in Vista, California for net sale prices totaling $13,545,000, which resulted in an aggregate gain of approximately $7,043,000.
In the third quarter 1999, the Company sold an industrial property in Modesto, California for a net sale price of $4,012,000, which resulted in a gain of approximately $218,000.
In the fourth quarter 1999, the Company sold an industrial property in Lenexa, Kansas for a net sale price of $4,895,000, which resulted in a loss of approximately $58,000.
Dividends Common stock dividends and distributions per OP Unit declared for the first and second quarters of 2000 were $0.42 per share, and $0.45 per share for the third and fourth quarters. Consistent with the Company's policy, dividends and distributions were paid in the quarter after the quarter in which they were declared.
Comparison of 1999 to 1998
Income from Property Operations Income from property operations increased $8,947,000 or 19% in 1999 compared with 1998. This is due to an increase in rental income of $17,076,000 offset by an increase in rental expenses of $8,129,000.
The increase in rental income and expenses is primarily attributable to properties acquired and, to a lesser extent, properties developed during 1999 and 1998. These acquisition and development activities increased rental income and rental expenses in 1999 by $14,787,000 and $7,646,000, respectively, as compared to 1998. These increases were partially offset by the sale of one office property and three industrial properties in 1999, which resulted in a reduction in rental income and rental expenses of $1,505,000 and $729,000, respectively, as compared to 1998. The remaining increase in rental income of $3,794,000 and rental expenses of $1,212,000 is due primarily to increased occupancy in 1999 as compared to 1998, as well as an overall increase in rental rates.
Expenses Interest expense, which includes amortization of loan fees, increased $7,806,000 or 70% in 1999 compared with 1998. The increase is attributable to the Company's higher level of borrowings and related costs to finance the property acquisitions and development activities during 1998 and 1999 and the repurchase of shares since November 1998. The amortization of loan fees was $1,495,000 and $1,013,000 for 1999 and 1998, respectively. General and administrative expenses increased $175,000 or 5% from $3,386,000 in 1998 to $3,561,000 in 1999. The 1998 general and administrative expenses included costs of $434,000 related to the Company exploring strategic alternatives including selling its portfolio of properties. Such discussions were terminated in the fourth quarter of 1998. Excluding these costs, general and administrative expenses increased 21% in 1999 compared with 1998, primarily the result of increased personnel costs.
Gain on Sales In the first quarter 1999, the Company sold an industrial property in South San Francisco, California for a net sale price of $1,789,000, which resulted in a gain of approximately $540,000.
In the second quarter 1999, the Company sold an office property in Salt Lake City, Utah and a 1.35 acre parcel of land in Vista, California for net sale prices totaling $13,545,000, which resulted in an aggregate gain of approximately $7,043,000.
In the third quarter 1999, the Company sold an industrial property in Modesto, California for a net sale price of $4,012,000, which resulted in a gain of approximately $218,000.
In the fourth quarter 1999, the Company sold an industrial property in Lenexa, Kansas for a net sale price of $4,895,000, which resulted in a loss of approximately $58,000.
Dividends Common stock dividends and distributions per OP Unit declared were $0.36 for the first quarter of 1999, $0.39 for the second and third quarters, and $0.42 for the fourth quarter. Consistent with the Company's policy, dividends and distributions were paid in the quarter after the quarter in which they were declared.
Financial Condition
Total assets of the Company at December 31, 2000 decreased by $37,244,000 compared with December 31, 1999, primarily resulting from the sale of real estate investments of $92,410,000, offset by additions of $27,246,000 in development costs and $27,268,000 in property and land acquisitions. Total liabilities at December 31, 2000 decreased by $36,579,000 compared with December 31, 1999, primarily as a result of the pay down of debt with proceeds from real estate sales.
Liquidity and Capital Resources
In June 1998, the Company amended and restated its secured revolving credit facility with Bank of America. Under this facility, which matures June 1, 2001, the Company can borrow up to $175 million on a secured basis. The facility contains an unsecured sub-line of $50 million. Secured loans bear interest at a floating rate equal to either the lender's published "reference rate" or LIBOR plus a margin ranging from 1.10% to 1.35% depending on the Company's leverage level. The interest rate on the unsecured loans is either the lender's published "reference rate" or LIBOR plus a margin of 1.50%. As of December 31, 2000, the facility, which was all secured, had an outstanding balance of $77,320,000 and an effective interest rate of 7.98%. Currently, the Company is in the process of renewing the credit facility with its existing bank group.
In May 1999, the Company obtained a total of $108 million of mortgage financing from TIAA. The financing consists of a $43.45 million 10-year loan, a $37.2 million 8-year loan, and a $27.35 million 6-year loan, all with interest at a fixed rate of 7.17%. In November 1999, the Company obtained an additional $22.15 million mortgage loan from TIAA. The loan has a 7-year term with interest at a fixed rate of 7.95%. In December 1999, the Company obtained a $4.6 million mortgage loan from Union Bank. The loan has a 5-year term with interest at a variable rate of LIBOR plus 2.50%. In July 2000, the Company obtained a total of $30.89 million of mortgage financing from Security Life of Denver Insurance Company. The loans have a 5-year term with options to renew for four additional 5-year terms. Interest on the mortgages are at a variable rate of LIBOR plus 1.40%. Proceeds from the mortgage loans, net of loan costs, were used to pay down a portion of the outstanding balance of the Company's $175 million line of credit.
The Company was in compliance with the covenants and requirements of its various debt financings throughout 2000. The Company anticipates that the cash flow generated by its real estate investments and funds available under the above credit facility will be sufficient to meet its short-term liquidity requirements.
During the twelve months ended December 31, 2000, the Company's operating activities provided cash flow of $44,290,000. Investing activities utilized cash of $60,576,000 for real estate investments and development, offset by proceeds from real estate sales of $130,581,000. Financing activities utilized net cash flow of $112,719,000 consisting of the net proceeds from bank borrowings and mortgage loans of $109,777,000 and net proceeds from the issuance of common stock of $4,764,000, offset by repayment of bank borrowings and mortgage loans of $153,344,000, payment of dividends and distributions of $31,978,000, and the repurchase of 2,280,837 shares of common stock for $41,938,000.
During the twelve months ended December 31, 1999, the Company's operating activities provided cash flow of $45,540,000. Investing activities utilized cash of $96,558,000 for real estate acquisitions, offset by proceeds from real estate sales of $24,241,000. Financing activities provided net cash flow of $27,075,000 consisting of the proceeds from bank borrowings and mortgage loans of $276,180,000 and net proceeds from the exercise of stock options of $2,004,000, offset by repayment of bank borrowings and mortgage loans of $161,652,000, payment of dividends and distributions of $32,712,000, redemption of partnership units of $160,000, and the repurchase of 3,346,625 shares of common stock for $56,585,000.
The Company expects to fund the cost of acquisitions, capital expenditures, costs associated with lease renewals and reletting of space, repayment of indebtedness, share repurchases, 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), and (iii) the sale of certain real estate investments.
The ability to obtain mortgage loans on income producing property 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
Many 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. These factors include the following:
Interest Rate Fluctuations
At the present time, borrowings under the Company's credit facility, the $4.6 million mortgage loan from Union Bank, and the $30.89 million mortgage loans from Security Life of Denver Insurance Company bear interest at floating rates. The Company recognizes that its results from operations may be negatively impacted by future increases in interest rates and substantial additional borrowings to finance property acquisitions, development projects and share repurchases.
Lease Renewals
While the Company historically has been successful in renewing and reletting space, the Company is subject to the risk that certain leases expiring in 2001 and beyond may not be renewed, or the terms of renewal may be less favorable to the Company than current lease terms. The Company expects to incur costs in making improvements or repairs to its portfolio of properties required by new or renewing tenants and expects to incur expenses associated with brokerage commissions payable in connection with the reletting of space.
Inflation
Most of the 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, including escalations in electricity costs in California and neighboring states, however, could result in an increase in the Company's borrowing and other operating expenses.
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. Accordingly, the Company does not currently 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. There can be no assurance, however, that future discoveries or events at the Company's properties, or changes to current environmental regulations, will not result in such a material adverse impact.
Financial Performance
Management considers Funds From Operations (FFO) to be one measure of the performance of an equity REIT. FFO during the three and twelve months ended December 31, 2000 was $10,533,000 and $43,864,000, respectively. During the same periods in 1999, FFO was $11,014,000 and $45,554,000, respectively. FFO 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. FFO is generally defined by the National Association of Real Estate Investment Trusts as net income (loss) (computed in accordance with accounting principles generally accepted in the United States of America), excluding extraordinary items such as gains (losses) from debt restructurings and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO was computed by the Company in accordance with this definition. In accordance with the clarification of Funds From Operations issued by NAREIT's leadership in October 1999, beginning in the first quarter of 2000, non-recurring items other than extraordinary items as defined by generally accepted accounting principles are no longer excluded in the calculation of FFO. FFO 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, FFO as disclosed by other REITs may not be comparable to the Company's presentation.
Funds From Operations (in thousands, except share amounts):
ITEM 7A.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate changes primarily as a result of its line of credit and long-term debt used to maintain liquidity and fund capital expenditures and expansion of the Company's real estate investment portfolio and operations. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company balances its borrowings between fixed and variable rate debt. The Company does not enter into derivative or interest rate transactions for speculative purposes.
The Company's interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts, weighted average interest rates, fair values and other terms required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes (dollars in thousands):
As the table incorporates only those exposures that exist as of December 31, 2000, it does not consider those exposures or positions which could arise after that date. Moreover, because firm commitments are not presented in the table above, the information presented therein has limited predictive value. As a result, the Company's ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, the Company's hedging strategies at that time, and interest rates.
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
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 17, 2001.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. 1. Financial Statements
Page
Independent Auditors' Report. 48
Consolidated Balance Sheets as of December 31, 2000 and 1999. 49
Consolidated Statements of Income for the years ended December 50 31, 2000, 1999 and 1998.
Consolidated Statements of Stockholders' Equity for the years 51 ended December 31, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the years ended 52 December 31, 2000, 1999 and 1998.
Notes to Consolidated Financial Statements. 53
2. Financial Statement Schedules
Page
Schedule III - Real Estate and Accumulated Depreciation 69
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(a) Articles of Incorporation of Bedford Property Investors, Inc. is incorporated herein by reference to Exhibit 4.2 of the Company's Registration Statement on Form S-2 (File No. 333-00921) filed on February 14, 1996.
3.1(b) Charter of the Company, as amended, is incorporated herein by reference to Exhibit 4.2 of the Company's Amendment No. 1 to its Registration Statement on Form S-2 (File No. 333-00921) filed on March 29, 1996.
3.1(c) Articles of Amendment of Charter of Bedford Property Investors, Inc. is incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter ended June 30, 1997.
3.2* Amended and Restated Bylaws of the Company.
10.6(a)* BPIA Agreement dated as of January 1, 1995, by and between Westminster Holdings, Inc., a California corporation doing business as BPI Acquisitions and Bedford Property Investors, Inc.
10.6(b)* Amendment to BPIA Agreement dated as of January 1, 1997.
10.6(c)* Second Amendment to BPIA Agreement dated as of January 1, 1999.
10.6(d)* Third Amendment to BPIA Agreement dated as of December 10, 2000.
10.6(e)* Fourth Amendment to BPIA Agreement dated as of December 10, 2000.
10.13 Promissory Note dated March 20, 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 Amendment No. 1 to its Registration Statement on Form S-2 (File No. 333-00921) filed on March 29, 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 The Company's Dividend Reinvestment and Stock Purchase Plan is incorporated herein by reference to the Company's post-effective Amendment No. 1 to its Registration Statement on Form S-3 (File No. 333-33795) filed on November 20, 1997.
10.16 The Company's Amended and Restated Employee Stock Plan incorporated herein by reference to Exhibit 10.16 to the Company's Form 10-K for the year ended December 31, 1997.
10.17 Fourth Amended and Restated Credit Agreement (Secured Loan) among Bedford Property Investors, Inc., The Banks Party Hereto and Bank of America National Trust and Savings Association, as Arranger and as Administrative Agent for the Banks, and Union Bank of California, NA as Co-Agent for the Banks, dated June 15, 1998 is incorporated herein by reference to Exhibit 10.17 to the Company's Form 10-Q for the quarter ended June 30, 1998.
10.18 The Company's Amended and Restated 1992 Directors' Stock Option Plan is incorporated herein by reference to Exhibit 10.18 to the Company's Form 10-K for the year ended December 31, 1997.
10.22 Promissory Note made as of May 28, 1999, by and between Bedford Property Investors, Incorporated and Teachers Insurance and Annuity Association of America is incorporated herein by reference to Exhibit 10.22 to the Company's Form 10-Q for the quarter ended June 30, 1999.
10.23 Promissory Note made as of May 28, 1999, by and between Bedford Property Investors, Incorporated and Teachers Insurance and Annuity Association of America is incorporated herein by reference to Exhibit 10.23 to the Company's Form 10-Q for the quarter ended June 30, 1999.
10.24 Promissory Note made as of May 28, 1999, by and between Bedford Property Investors, Incorporated and Teachers Insurance and Annuity Association of America is incorporated herein by reference to Exhibit 10.24 to the Company's Form 10-Q for the quarter ended June 30, 1999.
10.28 Promissory Note made as of November 22, 1999, by and between Bedford Property Investors, Incorporated and Teachers Insurance and Annuity Association of America is incorporated herein by reference to Exhibit 10.28 to the Company's Form 10-K for the year ended December 31, 1999.
10.29 Loan Agreement dated as of July 27, 2000, between Bedford Property Investors, Inc. as Borrower and Security Life of Denver Insurance Company as Lender is incorporated herein by reference to Exhibit 10.29 to the Company's Form 10-Q for the quarter ended June 30, 2000.
10.30 Loan Agreement dated as of July 27, 2000, between Bedford Property Investors, Inc. as Borrower and Security Life of Denver Insurance Company as Lender is incorporated herein by reference to Exhibit 10.30 to the Company's Form 10-Q for the quarter ended June 30, 2000.
10.31 Amended and Restated Promissory Note dated 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 Form 10-Q for the quarter ended June 30, 1996.
10.32 Loan Agreement dated as of January 30, 1998 between Bedford Property Investors, Inc. as Borrower and Prudential Insurance Company of America as Lender is incorporated herein by reference to Exhibit 10.15 to the Company's Form 10-K for the year ended December 31, 1997.
10.33 Amended and Restated Unsecured Credit Agreement among Bedford Property Investors, Inc., The Banks Party Hereto and Bank of America National Trust and Savings Association, as Arranger and as Administrative Agent for the Banks, and Union Bank of California, N.A., as Co- Agent for the Banks, dated June 15, 1999, is incorporated herein by reference to Exhibit 10.18 to the Company's Form 10-Q for the quarter ended June 30, 1998.
10.34* Form of Retention Agreement.
12* Ratio of Earnings to Fixed Charges.
21.1* Subsidiaries of the Company.
23.1* Consent of KPMG LLP, independent public accountants.
* Filed herewith
Independent Auditors' Report
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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 LLP
San Francisco, California February 2, 2001
BEDFORD PROPERTY INVESTORS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND 1999 (in thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements.
BEDFORD PROPERTY INVESTORS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 and 1998 (in thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements.
BEDFORD PROPERTY INVESTORS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (in thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
BEDFORD PROPERTY INVESTORS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (in thousands)
See accompanying notes to consolidated financial statements.
BEDFORD PROPERTY INVESTORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999
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 Stock Exchange and Pacific Exchange.
Principles of Consolidation The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and Bedford Realty Partners, L.P. All significant inter-entity balances have been eliminated in consolidation.
Cash and Cash Equivalents The Company considers all demand deposits, money market accounts and investments in certificates of deposit and repurchase agreements purchased with a maturity of three months or less, at the date of purchase, to be cash equivalents. The Company maintains its cash and cash equivalents at financial institutions. The combined account balances at each institution periodically exceed the Federal Depository Insurance Corporation ("FDIC") insurance coverage, and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company believes that the risk is not significant, as the Company does not anticipate their non- performance.
Use of Estimates The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America 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.
As of December 31, 2000, for federal income tax purposes, the Company had an ordinary loss carry forward of approximately $19 million. As the Company does not expect to incur income tax liabilities, the asset value of these losses has been effectively fully reserved. For federal income tax purposes, dividend distributions made for 2000 were classified 2% as ordinary, 19% as unrecaptured section 1250 gain, and 79% capital gain; dividend distributions made for 1999 were classified 97% as ordinary and 3% as capital gain; dividend distributions made for 1998 were classified 96% as ordinary and 4% as return of capital.
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 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 are considered held for sale are carried at the lower of the carrying amount or fair value less costs to sell and such properties are no longer depreciated.
Income Recognition Rental income from operating leases is recognized in income on a straight-line basis over the period of the related lease agreement. Aggregate rental income exceeded contractual rentals by $2,597,000, $2,797,000, and $2,252,000 for 2000, 1999, and 1998, respectively.
Stock-Based Compensation The Company measures compensation expense for its employee stock-based compensation plans using the intrinsic value method and has provided in Note 6 pro forma disclosures of the effect on net income and earnings per share as if the fair value-based method had been applied in measuring compensation expense.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation - an interpretation of APB Opinion No. 25 (FIN 44). The provisions of FIN 44 were effective July 1, 2000. The adoption of FIN 44 did not have a material impact on the Company's financial statements.
Comprehensive Income There are no adjustments necessary to net income as presented in the accompanying consolidated statements of income to derive comprehensive income in accordance with FASB Statement No. 130, Reporting Comprehensive Income.
Per Share Data Per share data are based on the weighted average number of common shares outstanding during the year. Stock options issued under the Company's stock option plans, non-vested restricted stock, and the limited partnership units of Bedford Realty Partners, L.P. are included in the calculation of diluted per share data if, upon exercise or vestiture, they would have a dilutive effect.
Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management believes that the adoption of this statement will not have a material impact on the Company's financial statements.
Note 2 - Real Estate Investments
As of December 31, 2000, the Company's real estate investments were diversified by property type as follows (dollars in thousands):
Number of Percent Properties Cost of Total
Industrial buildings 60 $305,857 47% Office buildings 27 310,882 48% Operating properties held for sale 2 5,226 1% Properties under development 5 13,702 2% Land held for development 9 11,721 2%
Total 103 $647,388 100%
Note 2 - Real Estate Investments (continued) The following table sets forth the Company's real estate investments as of December 31, 2000 (in thousands):
Company personnel directly manage all but five of the Company's properties from regional offices located in Lafayette, CA; Tustin, CA; Phoenix, AZ; Greenwood Village, CO; and Seattle, WA. The Company has retained outside managers to assist in some of the management functions for these five properties, which are U.S. Bank Centre in Reno, NV and Bryant Street Quad, Bryant Street Annex, Texaco and Oracle in Denver, CO. All financial record-keeping is centralized at the Company's corporate office in Lafayette, CA.
Income from property operations for properties held for sale as of December 31, 2000 was $821,000, $715,000, and $609,000 for the twelve months ending December 31, 2000, 1999 and 1998, respectively.
During 2000, 1999 and 1998, the Company capitalized interest costs relating to properties under development totaling $1,964,000, $2,148,000 and $2,177,000, 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 received limited partnership units ("OP Units"). A limited partner can seek redemption of the OP Units at any time. 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 108,497 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 December 1999, the Modesto, California property was exchanged for a property located in Phoenix, Arizona. As of December 31, 2000 the Company has redeemed 30,505 OP units for cash.
Note 4 - Leases
Minimum future lease payments to be received as of December 31, 2000 are as follows (in thousands):
2001 $ 78,243 2002 72,034 2003 64,818 2004 48,920 2005 28,710 Thereafter 49,120 $341,845
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
The Company's activities relating to the development and 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, as amended. 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 of the aggregate purchase price of the property for acquisitions and dispositions, up to 1 1/2% of any loans arranged by BAI, plus 5% of development project costs, or (ii) an amount equal to (a) the aggregate amount of approved expenses funded by BAI through the time of such acquisition, disposition, loan, or development 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 expires on December 31, 2001. The agreement is to be automatically extended for an additional term of one year unless either party gives notice of its intent to terminate the agreement by October 31, 2001.
For 2000, 1999, and 1998, the Company paid BAI $2,431,000, $2,783,000, and $2,272,000, 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 are properly includable in direct acquisition costs and capitalized as part of the asset or financing activities.
Note 6 - Stock Compensation Plans
Initially 900,000 shares of the Company's Common Stock were reserved for issuance under the Employee Stock Option Plan (the "Employee Plan"). In May 1998, the shareholders approved an additional 2,100,000 shares. 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"). In May 1996 and 1998, the shareholders approved an additional 250,000 shares and 500,000 shares, respectively. 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 which was subsequently modified by the Board in 1999. Under the program, certain options may be exercised by option holders with a recourse 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 on the first of nine years and nine months after the date of the grant or within ninety days from termination of employment, with interest payable quarterly. During 2000, 1999, 1996 and 1995, options for 200,750 shares of Common Stock were exercised in exchange for notes payable to the Company. The unpaid balance of the notes was $2,150,000 and $974,000 at December 31, 2000 and 1999, respectively, 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 employees pursuant to the Employee Plan. These shares generally vest over five years and are subject to forfeiture under certain conditions. For 2000, 1999, 1998 and 1997, the Company granted 110,651 shares, 201,751 shares, 48,500 shares, and 30,000 shares of restricted stock net of forfeitures, respectively. Deferred compensation associated with unvested restricted stock was $4,003,000 and $3,958,000 as of December 31, 2000 and 1999, respectively, and is included in the accompanying consolidated balance sheets as a reduction of additional paid-in capital.
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 the 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:
2000 1999 1998 Net income: As reported $68,087,000 $39,855,000 $31,496,000 Pro forma 67,865,000 39,496,000 31,158,000
Earnings per share - basic: As reported $ 3.73 $ 1.87 $ 1.39 Pro forma 3.72 1.86 1.38
Earnings per share - diluted: As reported $ 3.69 $ 1.86 $ 1.38 Pro forma 3.68 1.84 1.36
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 2000, 1999 and 1998, respectively: dividend yield of 9.2%, 9.4%, and 7.3%; expected volatility of 18.2%, 18.4% and 17.0%; risk-free interest rates of 5.1%, 6.8% and 4.6%. The expected life for the director's options is ten years for 2000 and five years for 1999 and 1998. The expected life for the employee's options is ten years for each period.
A summary of the status of the Company's plans as of December 31, 2000, 1999 and 1998 and changes during the years ended on those dates is presented below:
The following table summarizes information about stock options outstanding on December 31, 2000:
Note 7 - Bank Loan Payable
In June 1998, the Company amended and restated its secured revolving credit facility led by Bank of America. Under this facility, which matures June 1, 2001, the Company can borrow up to $175 million on a secured basis. The facility contains an unsecured sub-line of $50 million. The secured loans bear interest at a floating rate equal to either the lender's published "reference rate" or LIBOR plus a margin ranging from 1.10% to 1.35% depending on the Company's leverage level. The unsecured loans bear interest at either the lender's published "reference rate" or LIBOR plus a margin of 1.50%. At December 31, 2000, the facility, which was all secured, had an outstanding balance of $77,320,000 with an interest rate of LIBOR plus 1.35%. The credit facility is secured by mortgages on 26 properties, which properties collectively accounted for approximately 27% of the Company's annualized base rent and approximately 29% of the Company's total real estate assets as of December 31, 2000, 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. The Company was in compliance with the covenants and requirements of its revolving credit facility throughout 2000.
The daily weighted average amount owed to the bank was $116,683,000 and $113,082,000 in 2000 and 1999, respectively. The weighted average interest rates in these periods were 7.75% and 6.48%, respectively. The effective interest rate at December 31, 2000 was 7.98%. Currently, the Company is in the process of renewing the credit facility with its existing bank group.
Note 8 - Mortgage Loans Payable
In May 1999, the Company obtained a total of $108 million of mortgage financing from TIAA. The financing consists of a $43.45 million 10- year loan, a $37.2 million 8-year loan, and a $27.35 million 6-year loan, all with interest at a fixed rate of 7.17%. In November 1999, the Company obtained an additional $22.15 million mortgage loan from TIAA. The loan has a 7-year term with interest at a fixed rate of 7.95%. In December 1999, the Company obtained a $4.6 million mortgage loan from Union Bank. The loan has a 5-year term with interest at a variable rate of LIBOR plus 2.50%. In July 2000, the Company obtained a total of $30.89 million of mortgage financing from Security Life of Denver Insurance Company. The loans have a 5-year term with options to renew for four additional 5-year terms. Interest on the mortgages are at a variable rate of LIBOR plus 1.40%. Proceeds from the mortgage loans, net of loan costs, were used to pay down a portion of the outstanding balance of the Company's $175 million line of credit.
Mortgage loans payable at December 31, 2000 and 1999 consist of the following (in thousands):
2000 1999 7.50% note due January 1, 2002 $ 14,321 $ 23,889 7.02% note due March 15, 2003 18,916 19,257 Floating rate note due January 1, 2005, current rate of 9.16% 4,553 4,600 7.17% note due June 1, 2005 26,727 27,150 8.90% note due July 31, 2006 8,336 8,513 6.91% note due July 31, 2006 19,920 20,288 7.95% note due December 1, 2006 21,858 22,150 7.17% note due June 1, 2007 36,353 36,928 7.75% note due April 1, 2009 - 973 7.17% note due June 1, 2009 42,461 43,132 Floating rate note due August 1, 2005, current rate of 8.015% 7,444 - Floating rate note due August 1, 2005, current rate of 8.015% 23,316 - $224,205 $206,880
The mortgage loans are collateralized by 49 properties at December 31, 2000, which properties collectively accounted for approximately 57% of the Company's annualized base rent and approximately 52% of the Company's total real estate assets as of December 31, 2000, together with the rental proceeds from such properties. The Company was in compliance with the covenants and requirements of its various mortgage financings throughout 2000.
The following table presents scheduled principal payments on mortgage loans as of December 31, 2000 assuming the exercise of the four additional 5-year terms on the Security Life of Denver Insurance Company mortgages (in thousands):
2001 $ 3,810 2002 17,842 2003 21,829 2004 3,956 2005 32,582 Thereafter 144,186 $224,205
Note 9 - Repurchases of Common Stock
In July 1998, the Company's board of directors approved a share repurchase program of 3 million shares which was increased first to 4.5 million shares in September 1999 and later to 8 million shares in September 2000. Since November 1998, the Company has repurchased and retired 5,739,000 shares at an average price of $17.49 per share.
Note 10 - Segment Disclosure The Company has six reportable segments organized by the region in which they operate: Northern California (Northern California and Nevada), Southwest (Arizona and greater Austin, Texas), Southern California, Northwest (greater Portland, Oregon and greater Seattle, Washington), Midwest (greater Kansas City, Kansas/Missouri and greater Dallas, Texas) and Colorado.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based upon income from real estate from the combined properties in each segment.
For the year ended December 31, 2000 (in thousands, except percentages)
(1) The interest income in Northern California, Southwest, Northwest, and Midwest segments represents interest earned from tenant notes receivable.
For the year ended December 31, 1999 (in thousands, except percentages)
(1) The interest income in Northern California, Southwest, and Northwest segments represents interest earned from tenant notes receivable.
For the year ended December 31, 1998 (in thousands, except percentages)
(1) The interest income in the Northern California and Northwest segments represents interest earned from tenant notes receivable.
Note 11 - Fair Value of Financial Instruments
The carrying values of trade accounts payable and receivables approximate fair value due to the short-term maturity of these instruments. Management has determined that the market value of the $188,892,000 fixed rate debt at December 31, 2000 is approximately $189,452,000 based on the terms of existing debt compared to those available in the marketplace. At December 31, 1999, the fixed rate debt of $202,280,000 had an approximate market value of $189,882,000. The carrying value of variable rate debt approximates fair value, as the interest rates and other terms are comparable to current market terms.
Note 12 - Earnings per Share
Following is a reconciliation of earnings per share: (in thousands, except share and per share amounts)
Since their effect would have been antidilutive, 280,000, 817,000, and 729,000 of the Company's stock options have been excluded from diluted earnings per share for the years ended December 31, 2000, 1999, and 1998, respectively.
Note 13 - Quarterly Financial Data-Unaudited
The following is a summary of quarterly results of operations for 2000 and 1999 (in thousands of dollars, except per share data):
Note 14 - Commitments and Contingencies
The Company has contractual construction commitments of $13.5 million as of December 31, 2000 relating to its properties under development.
From time to time, the Company is subject to legal claims in the ordinary course of business. The Company currently is not aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, prospects, financial condition or operating results.
BEDFORD PROPERTY INVESTORS, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000 (in thousands of dollars)
* Property is encumbered, see footnotes 7 and 8 to the consolidated financial statements.
See accompanying independent auditors' report.
NOTES TO SCHEDULE III (in thousands of dollars)
(A) An analysis of the activity in real estate investments for the years ended December 31, 2000, 1999, and 1998 is presented below:
(B) The property was sold in March 1999. (C) The properties were sold in June 1999. (D) The property was sold in August 1999. (E) The property was sold in December 1999. (F) The properties were sold in March 2000. (G) The property was sold in June 2000. (H) The property was sold in August 2000. (I) The properties were sold in September 2000. (J) The properties were sold in October 2000.
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 29, 2001
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 29, 2001 Peter B. Bedford, Chairman of the Board and Chief Executive Officer
/s/ Anthony Downs March 29, 2001 Anthony Downs, Director
/s/ Anthony M. Frank March 29, 2001 Anthony M. Frank, Director
/s/ Martin I. Zankel March 29, 2001 Martin I. Zankel, Director
/s/ Thomas H. Nolan, Jr. March 29, 2001 Thomas H. Nolan, Jr., Director
/s/ Hanh Kihara March 29, 2001 Hanh Kihara Senior Vice President and Chief Financial Officer
/s/ Krista K. Rowland March 29, 2001 Krista K. Rowland, Vice President Controller
Exhibit 12
Bedford Property Investors, Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends and Limited Partner Distributions (in thousands, except ratios)
Year Ended December 31,
Exhibit 21.1
Subsidiaries of Bedford Property Investors, Inc.
Exhibit 23.1
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 333-23687, 333-33643 and 333-33795) and the registration statements on Form S-8 (No.'s 033-52375, 333-18215, 333-70681 and 333- 74707) of Bedford Property Investors, Inc. of our report dated February 2, 2001, relating to the consolidated balance sheets of Bedford Property Investors, Inc. and subsidiaries as of December 31, 2000 and 1999, 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, 2000, and the related financial statement schedule as of December 31, 2000, which report appears in the December 31, 2000 annual report on Form 10-K of Bedford Property Investors, Inc.
KPMG LLP
San Francisco, California March 29, 2001