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, 1998, the Company owned and operated, either directly or through wholly-owned subsidiaries, 93 properties aggregating approximately 7.5 million rentable square feet and comprised of 69 industrial properties (the "Industrial Properties") and 24 suburban office properties (the "Suburban Office Properties" and, together with the Industrial Properties, the "Properties"). The portfolio includes 2 properties which were under rehabilitation on December 31, 1998. As of December 31, 1998, the 91 operating Properties were approximately 96% leased with over 540 tenants. The Properties are located in Northern and Southern California, Oregon, Washington, Arizona, Nevada, Utah, Colorado, Texas, Kansas, and Missouri.
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 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 average rents 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 Objectives and Growth Plan
Business Objectives
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 from its 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 1998, leases for 1,326,200 square feet expired with a weighted average base rental rate of $7.99 per square foot. Approximately 87% of this space has been re-leased, and the weighted average base rental rate of the new leases is $9.52 per square foot, an increase of 19%. 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 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 available borrowings under 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 us to refine our 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 officer of the Company 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 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 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 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 is renewable at the option of the Company for additional one year terms. The current agreement will expire January 1, 2000.
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 Washington, 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 1998 the shell construction of five properties representing 322,000 square feet of industrial space and office space was started.
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. 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. Maximize its Capital Structure.
As of December 31, 1998 the Company's total market capitalization was $612 million. With a debt to total market capitalization ratio of 37%, the Company believes that it is well positioned for future growth. Funding of new acquisitions and development is expected to be provided by a combination of debt and limited asset sales. The Company currently intends to take advantage of the low interest rates 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.
Transactions and Significant Events During 1998
Acquisitions and Development
During the year, the Company acquired 18 Properties, including ten Industrial Properties, six Suburban Office Properties and two Properties under rehabilitation, aggregating approximately 1.3 million rentable square feet, for a total investment of approximately $152 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 the total acquisition cost) of 9.15%. The Company estimates the purchase price of acquisitions completed in 1998 to be approximately 91% of the replacement costs.
The Company also acquired 6 parcels of vacant land aggregating approximately 26 acres for a total investment of approximately $8.2 million, 3 of which were adjacent to existing Properties. The Company plans to develop industrial or office properties on each of these parcels when market conditions warrant new construction.
Development activity during the year included (i) the initial lease up of the four projects constructed in 1997, adding 107,374 rentable square feet to the available inventory (as of December 31, 1998, these projects were approximately 71% occupied); (ii) completion of construction and occupancy of the 297,228 square foot Adobe project in Seattle, which was under construction at the time of acquisition; and (iii) commencement of construction of five new projects which are expected to add approximately 322,000 rentable square feet to the inventory of available space in 1999. The Company believes that this new leasable space should provide it with a significant opportunity to increase its operating revenue.
The Company's Markets
The Properties are located in select markets proximate to metropolitan areas in Northern and Southern California, Oregon, Washington, Arizona, Nevada, Utah, Colorado, Texas, Kansas and Missouri. From 1994 through the early part of 1998 most of these markets were recovering from the economic recession of the early 1990's. During this recovery, these markets were characterized by strong demand for commercial property without significant increases in supply. The Company believes that this "recovery phase" of the economic cycle for the real estate market came to an end during 1998 and that we are now entering an "equilibrium phase" where supply and demand for properties are more or less in balance. Accordingly, the Company expects commercial property values during this equilibrium phase to be driven less by supply and demand imbalances and more by continuing economic strength in these markets. The Company believes that this continuing economic strength should result in high occupancy levels, increasing rents and potentially increasing real estate values.
In particular, the Company believes that continuing economic growth in the San Francisco Bay Area (where 35% of the square footage of the Company's Properties is located) and Seattle (where 10% of the square footage of the Company's Properties is located) will result in strong returns on its properties in those markets during the coming year. The Company believes that these markets are particularly attractive as a result of the excellent quality of life they offer and their limited supply of new commercial real estate resulting from environmental concerns and geographic barriers. In fact the 1999 edition of Emerging Trends in Real Estate, a publication of PricewaterhouseCoopers LLP and Lend Lease Real Estate Investments, ranked San Francisco, for the third consecutive year, and Seattle, for the second consecutive year, as the number one and number two investment markets for this equilibrium phase of the real estate cycle.
Despite this positive outlook, the Company's markets (particularly the San Francisco Bay Area) remain susceptible to the current economic downturn in Asia. During the first half of 1998, sources have indicated that California's exports to East Asia fell by 17.5% compared to the first half of 1997. Although the Company believes that the effect of this manufacturing slowdown on the California real estate market has been largely offset by strong demand
for California's products in the U.S. and Europe, there can be no assurance that a more sustained economic downturn in Asia will not have an adverse effect on California's manufacturing sector and accordingly on the California real estate market and the Company's portfolio.
Operating Performance
For the year ended December 31, 1998, the Company reported income before gain on sale of $31,496,000 or $1.38 per diluted share, on rental revenues of $73,451,000, compared with income before gain on sale of $19,758,000 or $1.23 per diluted share, on rental revenues of $46,377,000 for the year ended December 31, 1997. The Company's Funds From Operations ("FFO": see definition under "Selected Financial Data") for the year ended December 31, 1998 was $42,312,000 as compared to $25,582,000 for the year ended December 31, 1997.
Increase in Dividends on Common Stock
On December 7, 1998, the Company announced a 9% increase in its quarterly Common Stock dividend from $.33 to $.36 per share, which is equal to $1.44 on an annualized basis. The higher dividend rate commenced with the Company's dividend for the fourth quarter of 1998. The Company previously announced, in May 1998, a 10% increase in its quarterly dividend from $.30 to $.33 per share which, together with the December 1998 increase, represents a total increase of 17% in the Company's dividends declared for 1998 when compared with the dividends declared for 1997.
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 leverage levels). The unsecured loans bear interest at either the lender's published "reference rate" or LIBOR plus a margin of 1.50%. As of December 31, 1998 the Company was in compliance with the covenants and requirements of its revolving credit facility which had an outstanding balance of $147,443,000, all of which was secured. During the first quarter of 1999, the Company entered into discussions with Bank of America regarding a bridge facility of $28 million. This facility would consist of secured loans, bear the same interest rates as the secured loans under the $175 million facility and have a six-month term with the option to extend for another six months.
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 ten times since that time from $0.10 per share in the second quarter of 1993 to $0.36 per share in the fourth quarter of 1998. In March 1999, the Company declared a dividend distribution for the first quarter 1999 to its stockholders in the amount of $0.36 per share of Common Stock, payable 15 days after the quarter-end.
Tenants
Based on rentable square feet, as of December 31, 1998, the Suburban Office Properties and Industrial Properties were approximately 96% occupied by a total of 546 tenants, of which 112 were Suburban Office Property tenants and 434 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 2001. 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 $20 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. 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.
Year 2000 Compliance
In 1997 the Company purchased and put in place new information system hardware and software to accommodate the rapid growth of its real estate portfolio. The Company believes the new information system hardware and software is Year 2000 compliant. In addition, the Company has evaluated Year 2000 compliance risk relative to operations of its rental properties, and retained the services of a team of consultants. Since January 1998, these consultants have been conducting a survey of the Company's outside relationships (e.g., tenants, vendors and creditors) to assess their state of readiness in regards to Year 2000 compliance. The survey indicates that a majority of these parties' information systems are or will be Year 2000 compliant. In addition, the Company is performing a detailed Information Technology review of its key outside relationships. As of December 31, 1998, the Company has spent $10,000 on surveys and systems reviews and expects to spend approximately $20,000 in 1999. The Company is in the process of developing a contingency plan in the event of non-compliance. The Company believes that Year 2000 compliance will not have a material impact on the Company's financial position, results of operations, or liquidity.
Other Information
The Company currently employs 34 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, 1998, the Company's real estate investments were diversified by property type as follows:
Number of Percent Properties Cost of Total
Industrial properties 68 $312,911,000 52 Office properties 23 258,479,000 43 Properties under development 9 24,686,000 4 Land held for development 6 3,905,000 1
Total 106 $599,981,000 100
As of December 31, 1998, the Company's real estate investments (net of accumulated depreciation) were diversified by geographic region as follows: Number of Investment % of Total Properties Amount Investment
Industrial Properties Northern California 33 $162,691,000 27 Southern California 10 50,908,000 9 Arizona 10 48,431,000 8 Greater Kansas City Area 7 20,456,000 3 Texas 4 14,039,000 2 Greater Portland Area 2 11,192,000 2 Colorado 2 5,194,000 1
Total Industrial Properties 68 312,911,000 52
Suburban Office Properties Greater Seattle Area 4 93,948,000 16 Colorado 2 50,821,000 9 Arizona 4 26,393,000 4 Southern California 3 25,427,000 4 Northern California 5 23,689,000 4 Nevada 1 12,635,000 2 Texas 1 9,855,000 2 Greater Kansas City Area 2 8,780,000 1 Salt Lake City 1 6,931,000 1
Total Suburban Office Properties 23 258,479,000 43
Industrial Properties Under Development Arizona 6 13,500,000 2 Greater Seattle Area 1 8,110,000 1 Greater Kansas City Area 1 2,086,000 1 Northern California 1 990,000 *
Total Industrial Properties Under Development 9 24,686,000 4
Land Held for Development Northern California 3 2,654,000 * Southern California 2 1,063,000 * Texas 1 188,000 *
Total Land held for Development 6 3,905,000 1
Total 106 $599,981,000 100
* 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, 1998.
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 beginning January 1, 1999. 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 Base Year Expiring Square Feet Base Rent Rent
1999 125 749,836 6,867,552 9.7% 2000 134 1,039,117 10,726,704 15.2% 2001 117 1,157,838 10,856,304 15.4% 2002 81 709,617 7,074,012 10.0% 2003 52 826,042 9,710,916 13.7% 2004 14 713,867 6,490,848 9.2% 2005 8 536,605 8,519,916 12.0% 2006 7 513,271 2,990,640 4.2% 2007 6 421,219 2,411,316 3.4% 2008 and thereafter 6 420,114 5,124,516 7.2%
Total 550 7,087,526 $70,772,724 100.0%
Principal Provisions of Leases
The following table sets forth the principal provisions of leases which represent more than 10% of the gross leasable area ("GLA") of each of the Company's Properties and the realty tax rate for each Property for 1998.
Average Base Rent
The following table sets forth for each of the Properties the average rent at the end of each year for the last five years.
Average Base Rent Average Base Rent ($/Sq/Yr) ($/Sq/Yr) Properties At End of Year Properties At End of Year
INDUSTRIAL PROPERTIES: Northern California Building #3 at Contra Costa Diablo 350 East Plumeria Drive 1994 $8.35 1994 N/A 1995 $4.95 1995 $7.80 1996 $6.64 1996 $7.80 1997 $6.84 1997 $8.40 1998 $6.84 1998 $15.00
Building #8 at Contra Costa Diablo Auburn Court 1994 $7.81 1994 N/A 1995 $6.00 1995 $6.54 1996 $6.00 1996 $6.78 1997 $6.00 1997 $7.80 1998 $6.00 1998 $10.62
Building #18 at Mason Industrial Park 47650 Westinghouse Drive 1994 $6.95 1994 N/A 1995 $6.63 1995 $5.52 1996 $6.78 1996 $5.52 1997 $6.88 1997 $9.00 1998 $6.93 1998 $9.60
Milpitas Town Center 417 Eccles 1994 $7.11 1994 N/A 1995 $7.35 1995 $5.71 1996 $8.03 1996 $6.01 1997 $8.90 1997 $6.36 1998 $10.69 1998 $7.68
598 Gibraltar Drive 410 Allerton 1994 N/A 1994 N/A 1995 N/A 1995 $5.16 1996 $9.48 1996 $5.16 1997 $9.48 1997 $5.16 1998 $10.44 1998 $6.60
Average Base Rent Average Base Rent ($/Sq/Yr) ($/Sq/Yr) Properties At End of Year Properties At End of Year
INDUSTRIAL PROPERTIES(continued):
400 Grandview 47600 Westinghouse Drive 1994 N/A 1994 N/A 1995 $7.49 1995 N/A 1996 $7.53 1996 $5.94 1997 $7.03 1997 $10.20 1998 $7.50 1998 $10.56
342 Allerton 860-870 Napa Valley Corporate 1994 N/A 1994 N/A 1995 $6.88 1995 N/A 1996 $7.18 1996 $9.44 1997 $7.57 1997 $8.86 1998 $7.73 1998 $9.48
301 East Grand 47633 Westinghouse Drive 1994 N/A 1994 N/A 1995 $5.92 1995 N/A 1996 $5.57 1996 $11.37 1997 $5.58 1997 $11.60 1998 $6.30 1998 $11.83
Fourier Avenue 47513 Westinghouse Drive 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 $8.99 1996 N/A 1997 $8.99 1997 N/A 1998 $8.99 1998 $14.32
Lundy Avenue Bordeaux Centre 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 $7.09 1996 N/A 1997 $7.09 1997 N/A 1998 $7.36 1998 $7.33
115 Mason Circle O'Toole Business Center 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 $6.05 1996 $8.75 1997 $6.22 1997 $10.31 1998 $6.59 1998 $13.81
Average Base Rent Average Base Rent ($/Sq/Yr) ($/Sq/Yr) Properties At End of Year Properties At End of Year
INDUSTRIAL PROPERTIES (continued):
Doherty Avenue Monterey Commerce Center 2 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 $1.87 1996 N/A 1997 $1.88 1997 $14.16 1998 $1.89 1998 $14.64
6500 Kaiser Drive Monterey Commerce Center 3 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $9.00 1997 $14.70 1998 $9.60 1998 $15.22
Bedford Fremont Business Center Parkpoint Business Center 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $11.93 1997 N/A 1998 $14.63 1998 $15.19
Spinnaker Court 2180 S. McDowell 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $8.01 1997 N/A 1998 $8.25 1998 $8.37
2277 Pine View Way 2190 S. McDowell 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $6.91 1997 N/A 1998 $6.91 1998 $8.19
The Mondavi Building 1994 N/A 1995 N/A 1996 N/A 1997 $4.92 1998 $4.92
Average Base Rent Average Base Rent ($/Sq/Yr) ($/Sq/Yr) Properties At End of Year Properties At End of Year
INDUSTRIAL PROPERTIES (continued): Southern California
Dupont Industrial Center Signal Systems Building 1994 $3.07 1994 N/A 1995 $3.17 1995 N/A 1996 $3.53 1996 $7.80 1997 $3.40 1997 $8.11 1998 $3.44 1998 $10.20
3002 Dow Business Center Carroll Tech II 1994 N/A 1994 N/A 1995 $8.88 1995 N/A 1996 $8.55 1996 N/A 1997 $8.32 1997 $11.52 1998 $8.86 1998 $12.00
Carroll Tech I 2230 Oak Ridge Way 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 $10.35 1996 N/A 1997 $11.93 1997 N/A 1998 $3.17 1998 $6.49
Vista 1 5502 Oberlin Drive 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 $5.16 1996 N/A 1997 $0.00** 1997 N/A 1998 $0.00 1998 $9.96
Vista 2 6960 Flanders Drive 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 $6.36 1996 N/A 1997 $6.61 1997 N/A 1998 $6.88 1998 $9.60
**Bankruptcy
Average Base Rent Average Base Rent ($/Sq/Yr) ($/Sq/Yr) Properties At End of Year Properties At End of Year
INDUSTRIAL PROPERTIES (continued):
Greater Kansas City Area Ninety-Ninth Street #3 Ninety-Ninth Street #4 1994 $5.86 1994 N/A 1995 $5.86 1995 N/A 1996 $5.30 1996 N/A 1997 $6.08 1997 N/A 1998 $6.14 1998 $6.16
Lackman Business Center Panorama Business Center 1994 N/A 1994 N/A 1995 $8.36 1995 N/A 1996 $8.59 1996 $6.54 1997 $8.77 1997 $6.70 1998 $9.36 1998 $6.87
Ninety-Ninth Street #1 17725 W. 85th Street 1994 N/A 1994 N/A 1995 $7.96 1995 N/A 1996 $8.32 1996 N/A 1997 $7.72 1997 $3.11 1998 $7.89 1998 $3.20
Ninety-Ninth Street #2 1994 N/A 1995 $7.56 1996 $8.62 1997 $8.62 1998 $8.62
Colorado
Bryant Street Quad Bryant Street Annex 1994 N/A 1994 N/A 1995 $3.09 1995 $4.02 1996 $3.39 1996 $3.93 1997 $3.82 1997 $4.09 1998 $3.96 1998 $4.17
Average Base Rent Average Base Rent ($/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 1994 N/A 1994 N/A 1995 $7.27 1995 $7.75 1996 $7.32 1996 $8.35 1997 $7.67 1997 $8.86 1998 $7.78 1998 $8.87
Arizona
Westech Business Center Phoenix Airport Center #4 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 $8.85 1996 N/A 1997 $9.44 1997 $7.20 1998 $9.99 1998 $7.80
Westech II Phoenix Airport Center #5 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 N/A 1997 $7.21 1998 $8.86 1998 $8.68
2601 W. Broadway Butterfield Business Center 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $7.14 1997 $7.08 1998 $7.14 1998 $7.11
Phoenix Airport Center #2 Cimarron Business Park 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $7.20 1997 N/A 1998 $7.20 1998 $8.94
Phoenix Airport Center #3 Expressway Corporate Center 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $6.36 1997 N/A 1998 $6.36 1998 $8.21
Average Base Rent Average Base Rent ($/Sq/Yr) ($/Sq/Yr) Properties At End of Year Properties At End of Year
INDUSTRIAL PROPERTIES(continued): Texas Ferrell Drive Austin Rutland 10 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $4.55 1997 N/A 1998 $4.62 1998 $6.54
Austin Braker 2 Austin Southpark A, B and C 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 N/A 1997 N/A 1998 $8.79 1998 $8.38
SUBURBAN OFFICE PROPERTIES: Northern California
Village Green Monterey Commerce Center 1 1994 $20.85 1994 N/A 1995 $18.23 1995 N/A 1996 $19.99 1996 N/A 1997 $23.24 1997 $20.12 1998 $23.70 1998 $19.78
100 View Street 3880 Cypress Drive 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 $18.82 1996 N/A 1997 $20.10 1997 N/A 1998 $21.72 1998 $13.08
Canyon Park 1994 N/A 1995 N/A 1996 N/A 1997 $15.92 1998 $16.44
Average Base Rent Average Base Rent ($/Sq/Yr) ($/Sq/Yr) Properties At End of Year Properties At End of Year
SUBURBAN OFFICE PROPERTIES(continued): Southern California
Laguna Hills Square Scripps Wateridge 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 $25.38 1996 N/A 1997 $23.90 1997 $11.41 1998 $24.79 1998 $12.53
Carroll Tech III 1994 N/A 1995 N/A 1996 N/A 1997 $8.52 1998 $8.52
Greater Kansas City Area 6600 College Boulevard Didde Building 1994 N/A 1994 N/A 1995 $12.01 1995 N/A 1996 $11.99 1996 N/A 1997 $12.28 1997 N/A 1998 $12.35 1998 $18.25
Colorado Oracle Building Texaco Building 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $23.37 1997 N/A 1998 $23.34 1998 $18.05
Salt Lake City Woodlands Tower II 1994 $14.47 1995 $14.25 1996 $14.58 1997 $15.86 1998 $16.75
Average Base Rent Average Base Rent ($/Sq/Yr) ($/Sq/Yr) Properties At End of Year Properties At End of Year
Arizona Executive Center at Southbank Phoenix Airport Center #1 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $9.23 1997 $13.81 1998 $9.46 1998 $13.69
Troika Building Cabrillo Executive Center 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $9.00 1997 N/A 1998 $10.00 1998 $16.64
Greater Seattle Area Kenyon Center Adobe Systems Bldg. 1 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 $11.61 1996 N/A 1997 $11.61 1997 N/A 1998 $11.61 1998 $15.53
Orillia Office Park Adobe Systems Bldg. 2 1994 N/A 1994 N/A 1995 N/A 1995 N/A 1996 N/A 1996 N/A 1997 $9.35 1997 N/A 1998 $9.35 1998 $22.04
Texas 9737 Great Hills Trail 1994 N/A 1995 N/A 1996 N/A 1997 $18.00 1998 $18.00
Nevada U. S. Bank Centre 1994 N/A 1995 N/A 1996 N/A 1997 $18.59 1998 $18.76
Tax Information
The following table sets forth tax information of the Company's real estate investments at December 31, 1998, 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, 1998 the Company had 869 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 1997 and 1998.
Dividend High Low Per Share
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
First Quarter $22 $19 3/16 $.30 Second Quarter $20 $17 7/16 $.33 Third Quarter $20 1/8 $15 $.33 Fourth Quarter $18 3/4 $15 3/4 $.36
Credit Facility
In June 1998, the Company amended and restated its secured revolving credit facility with Bank of America. Under this facility, which matures June 15, 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 leverage levels). The interest rate of the unsecured loans is either the lender's published "reference rate" or LIBOR plus a margin of 1.50%. The credit facility contains various restrictive covenants including, among other things, a covenant limiting quarterly dividends to 95% of average Funds From Operations. During the first quarter of 1999, the Company entered into discussions with Bank of America regarding a bridge facility of $28 million. This facility would consist of secured loans, bear the same interest rates as the secured loans under the $175 million facility and have a six-month term with the option to extend for another six months.
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, sales of property, and non-recurring items, 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 REITs may not be comparable to the Company's calculation of Funds From Operations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 sections entitled "Potential Factors Affecting Future Operating Results" and "Market Risk" 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 properties as follows:
1998 1997 1996
Comparison of 1998 to 1997 Income from Property Operations Income from property operations (defined as rental income less rental expenses) increased $16,108,000 or 54% in 1998 compared with 1997. This is due to an increase in rental income of $27,074,000 offset by an increase in rental expenses (which include operating expenses, real estate taxes and depreciation and amortization) of $10,966,000.
The increase in rental income and expenses is primarily attributable to the acquisition and development of real estate investments during 1998 and 1997. This acquisition and development activity increased rental income and rental expenses in 1998 by $24,964,000 and $10,133,000, respectively, as compared to 1997. The remaining increase in rental income of $5,226,000 is due primarily to overall increases in property rental rates, while the remaining increase in rental expenses of $2,113,000 is due primarily to increases in property tax assessments, landscaping costs and other property operating expenses. These increases were partially offset by the sales of two office properties and one retail property in 1997, which resulted in a reduction in rental income and rental expenses in 1998 of $3,116,000 and $1,280,000, respectively, as compared to 1997.
Expenses Interest expense, which includes amortization of loan fees, increased $3,246,000 or 41% in 1998 compared with 1997. The increase is attributable to the Company's higher level of borrowings to finance the acquisition and development of properties in 1998, and higher financing costs incurred in connection with its credit facility and mortgage loans. The amortization of loan fees was $1,013,000 and $816,000 for 1998 and 1997, respectively. General and administrative expense increased $1,049,000 or 45% from $2,337,000 in 1997 to $3,386,000 in 1998. 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 26% in 1998 compared with 1997, primarily the result of managing a larger real estate portfolio. The 1997 general and administrative expenses included $250,000 alternative minimum tax expense the Company incurred on the retention and reinvestment of gains on property sales.
Gain on Sale In July 1997, the Company sold two of its Southern California office properties for a combined sales 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.
Dividends The 1998 quarterly dividend declared for each share of common stock was $0.30 for the first quarter, $0.33 for the second and third quarters, and $0.36 for the fourth quarter. Consistent with the Company's policy, dividends are paid in the quarter after the quarter in which they are declared.
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 in 1997 by $21,545,000 and $7,055,000, respectively, as compared to 1996. This increase 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 in 1997 of $3,256,000 and $1,779,000, respectively, as compared to 1996.
Expenses Interest expense, which includes amortization of loan fees, increased $3,571,000 or 82% 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% in 1997 compared with 1996, as a result of managing a larger real estate portfolio and as a result of the $250,000 alternative minimum tax expense the Company incurred in 1997 on the retention and reinvestment of gains on property sales.
Gain on Sale In July 1997, the Company sold two of its Southern California office properties for a combined sales 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. 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 The 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 the quarter in which they are 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.
Financial Condition
Total assets of the Company at December 31, 1998 increased by $164,421,000 compared with December 31, 1997, primarily as a result of an increase in real estate investments of $167,910,000. Total liabilities at December 31, 1998 increased by $163,386,000 compared with December 31, 1997, primarily as a result of the increase in bank and mortgage loan borrowings made in support of property acquisitions and development.
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 15, 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%. The interest rate of the unsecured loans is either the lender's published "reference rate" or LIBOR plus a margin of 1.50%. As of December 31, 1998, the Company was in compliance with the covenants and requirements of its revolving credit facility which had an outstanding balance of $147,443,000 and an effective interest rate of 6.48%. During the first quarter of 1999, the Company entered into discussions with Bank of America regarding a bridge facility of $28 million. This facility would consist of secured loans, bear the same interest rates as the secured loans under the $175 million facility and have a six-month term with the option to extend for another six months.
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, 1998, the Company's operating activities provided cash flow of $38,949,000. Investing activities utilized cash of $168,018,000 for real estate acquisitions. Financing activities provided net cash flow of $128,994,000 consisting of the proceeds from bank borrowings and mortgage loans of $179,181,000 and net proceeds from the exercise of stock options of $1,367,000, offset by repayment of bank borrowings and mortgage loans of $20,996,000, payment of dividends and distributions of $28,615,000, and redemption of partnership units of $128,000. Net cash flow was also offset by the repurchase of 111,375 shares of common stock at an average purchase price of $16.30 per share during the fourth quarter of 1998.
The Company expects to fund the cost of acquisitions, capital expenditure 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 certain 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 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 bear interest at a floating rate. 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.
Lease Renewals
While the Company has historically been successful in renewing and reletting space, the Company is subject to the risk that certain leases expiring in 1999 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, however, could result in an increase in the Company's borrowing costs.
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, 1998 amounted to $11,666,000 and $42,312,000, respectively. During the same periods in 1997, FFO amounted to $8,092,000 and $25,582,000, respectively. 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 the National Association of Real Estate Investment Trusts as net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (losses) from debt restructurings, sales of property and non-recurring items, 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 REITs may not be comparable to the Company's calculation of Funds From Operations.
Three Months Ended Twelve Months Ended December 31, December 31, 1998 1997 1998 1997
Funds From Operations (in thousands):
Net Income $ 8,243 $ 6,995 $31,496 $31,291
Add Back: Depreciation and Amortization 2,958 1,814 10,265 5,716 Minority Interest 31 29 117 108 Non-recurring Portfolio Disposition Costs (1) 434 - 434 - Less Gain on Sale - (746) - (11,533)
Funds From Operations $11,666 $ 8,092 $42,312 $25,582
(1) In the second quarter of 1998, the Company engaged Lehman Brothers, Inc. as financial advisor to assist the Company in the exploration of strategic alternatives, which included the potential sale of the Company's operating portfolio. Due to changes in the real estate market, the Company abandoned its plan to sell its operating portfolio and expensed all related costs.
Year 2000 Compliance
In 1997 the Company purchased and put in place new information system hardware and software to accommodate the rapid growth of its real estate portfolio. The Company believes the new information system hardware and software is Year 2000 compliant. In addition, the Company has evaluated Year 2000 compliance risk relative to operations of its rental properties, and retained the services of a team of consultants. Since January 1998, these consultants have been conducting a survey of the Company's outside relationships (e.g., tenants, vendors and creditors) to assess their state of readiness in regards to Year 2000 compliance. The survey indicates that a majority of these parties' information systems are or will be Year 2000 compliant. In addition, the Company is performing a detailed Information Technology review of its key outside relationships. As of December 31, 1998, the Company has spent $10,000 on surveys and systems reviews and expects to spend approximately $20,000 in 1999. The Company is in the process of developing a contingency plan in the event of non-compliance. The Company believes that Year 2000 compliance will not have a material impact on the Company's financial statements.
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 (in thousands):
As the table incorporates only those exposures that exist as of December 31, 1998, 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
Index to Financial Statements and Schedule Covered by Independent Auditors' Report
Independent Auditors' Report 53 Consolidated Balance Sheets as of December 31, 1998 and 1997 54 For the Years Ended December 31, 1998, 1997 and 1996: - - Consolidated Statements of Income 55 - - Consolidated Statements of Stockholders' Equity 56 - - Consolidated Statements of Cash Flows 57 Notes to Consolidated Financial Statements 58 Financial Statement Schedule: - - Schedule III - Real Estate and Accumulated Depreciation 71
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, 1999.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. 1. Financial Statements
Independent Auditors' Report.
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, 1998 and 1997.
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.
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 is incorporated herein by reference to Exhibit 10.15 to the Company's Form 10-K for the year ended December 31, 1997.
10.16 The Company's Amended and Restated Employee Stock Plan is incorporated herein by reference to Exhibit 10.16 to the Company's Form 10-K for the year ended December 31, 1997.
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 is incorporated herein by reference to Exhibit 10.17 to the Company's Form 10-K for the year ended December 31, 1997.
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.
10.19 Form of Retention Agreement is incorporated herein by reference to Exhibit 10.19 to the Company's Form 10-K for the year ended December 31, 1997.
10.20 Employment Agreement made as of August 4, 1997, by and between Bedford Property Investors Incorporated and Scott R. Whitney is incorporated herein by reference to Exhibit 10.20 to the Company's Form 10-K for the year ended December 31, 1997.
10.21 Employment Agreement made as of November 18, 1997, by and between Bedford Property Investors Incorporated and Dennis Klimmek is incorporated herein by reference to Exhibit 10.21 to the Company's Form 10-K for the year ended December 31, 1997.
10.22* Credit Agreement made as of February 26, 1999, by and between Bedford Property Investors Incorporated and Bank of America National Trust and Savings Association and the several financial institutions (the "Banks") as may be party thereto from time to time.
10.23* Revolving Note made as of March 5, 1999, by and between Bedford Property Investors Incorporated and Bank of America National Trust and Savings Association.
10.24* Revolving Note made as of March 5, 1999, by and between Bedford Property Investors Incorporated and Union Bank of California.
12* Ratio of Earnings to Fixed Charges.
21.1* Subsidiaries of the Company.
23.1* Consent of KPMG LLP, independent auditors.
27* Financial Data Schedules
* Filed herewith
B. Reports on Form 8-K
None
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 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, 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 LLP
San Francisco, California January 29, 1999
BEDFORD PROPERTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 (in thousands, except share and per share amounts)
1998 1997 Assets:
Real estate investments: Industrial buildings $312,911 $237,184 Office buildings 258,479 170,948 Properties under development 24,686 18,227 Land held for development 3,905 5,712
599,981 432,071 Less accumulated depreciation 18,523 8,985
581,458 423,086 Cash 1,286 1,361 Other assets 15,580 9,456
$598,324 $433,903
Liabilities and Stockholders' Equity:
Bank loan payable $147,443 $ 8,216 Mortgage loans payable 80,116 60,323 Accounts payable and accrued expenses 7,574 6,026 Dividends and distributions payable 8,191 6,804 Other liabilities 6,042 4,611
Total liabilities 249,366 85,980
Minority interest in consolidated partnership 1,369 1,497
Stockholders' equity: Common stock, par value $0.02 per share; authorized 50,000,000 shares; issued and outstanding 22,666,856 shares in 1998 and 22,583,867 shares in 1997 453 452 Additional paid-in capital 407,760 408,209 Accumulated dividends in excess of net income (60,624) (62,235) Total stockholders' equity 347,589 346,426
$598,324 $433,903
See accompanying notes to consolidated financial statements.
BEDFORD PROPERTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996 (in thousands, except share and per share amounts)
1998 1997 1996
Property operations: Rental income $73,451 $46,377 $27,541 Rental expenses: Operating expenses 11,026 6,852 5,352 Real estate taxes 6,220 3,977 2,595 Depreciation and amortization 10,265 5,716 3,030
Income from property operations 45,940 29,832 16,564
General and administrative expenses (3,386) (2,337) (1,752) Interest income 223 289 150 Interest expense (11,164) (7,918) (4,347)
Income before gain on sales of real estate investments and minority interest 31,613 19,866 10,615
Gain on sales of real estate investments - 11,533 406
Minority interest (117) (108) -
Net income $31,496 $31,291 $11,021
Net income applicable to common stockholders $31,496 $27,791 $ 6,516
Earnings per share - basic $ 1.39 $ 2.21 $ 1.21
Weighted average number of shares - basic 22,634,656 12,566,065 5,405,727
Earnings per share - assuming dilution $ 1.38 $ 1.94 $ 1.14
Weighted average number of shares - assuming dilution 22,929,807 16,166,454 9,702,552
See accompanying notes to consolidated financial statements.
BEDFORD PROPERTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 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 CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (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 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.
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, 1998, 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. For Federal income tax purposes, dividend distributions made for 1998 were classified 96% as ordinary income and 4% as return of capital; dividend distributions made for 1997 were classified 88% as ordinary income and 12% as capital gain; all dividend distributions made for 1996 were classified as ordinary income.
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 are considered as 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 $2,252,000, $1,644,000 and $573,000 for 1998, 1997 and 1996, respectively.
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 are included in the calculation of diluted per share data if, upon exercise, they would have a dilutive effect. The diluted earnings per share calculation also 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.
Recent Accounting Pronouncements In June 1998, the FASB issued Financial Accounting Standard No. 133, Accounting for Derivatives Instruments and Hedging Activities. FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. 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
The following table sets forth the Company's real estate investments as of December 31, 1998 (in thousands):
The Company internally manages all but 8 of its properties from its regional offices in Lafayette, CA; Tustin, CA; Phoenix, AZ; Lenexa, KS; Denver, CO; and Seattle, WA. For the 8 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.
In December 1998, an industrial property located in Northern California was identified for sale. Proceeds from the sale will be reinvested in further property acquisitions.
During 1998 and 1997, the Company capitalized interest costs relating to properties under development totaling $2,177,000 and $627,000, respectively.
The Company has remaining construction commitments of $12.5 million at December 31, 1998 relating to five of its properties under development.
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. 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. As of December 31, 1998 the Company has redeemed 21,607 OP units for cash.
Note 4 - Leases
Minimum future lease payments to be received as of December 31, 1998 are as follows (in thousands):
1999 $ 72,490 2000 64,478 2001 56,010 2002 44,663 2003 36,291 Thereafter 74,023 $347,955
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 of the aggregate purchase price of the property for acquisitions and dispositions 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 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 is renewable at the option of the Company for additional one-year terms. The current agreement will expire on January 1, 2000.
For 1998, 1997 and 1996, the Company paid BAI $2,272,000, $3,156,000, and $1,808,000, 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 Option 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 1997, 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. 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 was $1,021,000 and $1,466,000 at December 31, 1998 and 1997, 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 key employees. These shares generally vest over five years and are subject to forfeiture under certain conditions. As of December 31, 1998, the Company has granted 105,200 shares.
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:
1998 1997 1996 Net income: As reported $31,496,000 $31,291,000 $11,021,000 Pro forma 31,158,000 31,045,000 10,831,000
Earnings per share - basic: As reported $ 1.39 $ 2.21 $ 1.21 Pro forma 1.38 2.19 1.17
Earnings per share - assuming dilution: As reported $ 1.38 $ 1.94 $ 1.14 Pro forma 1.36 1.92 1.12
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 1998, 1997 and 1996, respectively: dividend yield of 7.3%, 5.8% and 6.9%; expected volatility of 17.0%, 16.8%, and 18.1%; risk-free interest rates of 4.6%, 5.7% and 6.3%. The expected life for the director's options is five years for each period. The expected life for the employee's options is ten years for 1998, and five years each for 1997 and 1996.
A summary of the status of the Company's plans as of December 31, 1998, 1997 and 1996 and changes during the years ended on those dates is presented below:
The following table summarizes information about stock options outstanding on December 31, 1998:
Note 7 - Bank Loan Payable
In June 1998, the Company amended and restated its secured revolving credit facility with Bank of America. Under this facility, which matures June 15, 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%. The interest rate of the unsecured loans is either the lender's published "reference rate" or LIBOR plus a margin of 1.50%. The credit facility contains various restrictive covenants including, among other things, a covenant limiting quarterly dividends to 95% of average Funds From Operations. As of December 31, 1998, the Company was in compliance with the covenants and requirements of its revolving credit facility which had an outstanding balance of $147,443,000. The credit facility is secured by mortgages on 47 properties (which properties collectively accounted for approximately 52% of the Company's Annualized Base Rent and approximately 43% of the Company's total assets as of December 31, 1998), together with the rental proceeds from such properties. During the first quarter of 1999, the Company entered into discussions with Bank of America regarding a bridge facility of $28 million. This facility would consist of secured loans, bear the same interest rates as the secured loans under the $175 million facility and have a six-month term with the option to extend for another six months.
The daily weighted average amount owed to the bank was $94,338,000 and $45,642,000 in 1998 and 1997, respectively. The weighted average interest rates in these periods were 6.81% and 7.42%, respectively. The effective interest rate at December 31, 1998 was 6.48%.
Note 8 - Mortgage Loans Payable
Mortgage loans payable at December 31, 1998 consist of the following (in thousands):
Floating rate note due December 15, 1999, current rate of 8.00% $ 1,797 7.5% note due January 1, 2002 24,297 7.02% note due March 15, 2003 24,717 8.9% note due July 31, 2006 8,674 6.91% note due July 31, 2006 20,631 $80,116
The mortgage loans are collaterized by 21 properties (which Properties collectively accounted for approximately 27% of the Company's Annualized Base Rent and approximately 21% of the Company's total assets as of December 31, 1998).
The following table presents scheduled principal payments on mortgage loans as of December 31, 1998 (in thousands):
1999 $ 3,112 2000 1,415 2001 1,524 2002 24,103 2003 23,608 Thereafter 26,354 $80,116
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 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. 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 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.
Note 11 - 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.
Note 12 - Segment Disclosure The Company has six reportable segments organized by the region in which they operate: Northern California (Northern California, Utah and Nevada), Southwest (Arizona and greater Austin, Texas area), Southern California, Northwest (greater Portland, Oregon and greater Seattle, Washington areas), Colorado and Midwest (greater Kansas City, Kansas/Missouri and greater Dallas, Texas areas).
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.
(1) The interest income in the Northern California and Northwest segments represents interest earned from tenant notes receivable.
1997 (in thousands)
(1) The interest income in the Northern California and Northwest segments represents interest earned from tenant notes receivable.
Note 13 - Fair Value of Financial Instruments
The carrying value of trade accounts payable and receivable approximate fair value due to the short-term maturity of these instruments. Management has determined that the carrying amount of debt approximates market value.
Note 14 - Earnings per Share
Following is a reconciliation of earnings per share:
Year Ended December 31,
Note 15 - Quarterly Financial Data-Unaudited
The following is a summary of quarterly results of operations for 1998 and 1997 (in thousands of dollars, except per share data):
(1) Reflects 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.
BEDFORD PROPERTY INVESTORS, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (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, 1998, 1997 and 1996 is presented below:
(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 25, 1999
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 25, 1999 Peter B. Bedford, Chairman of the Board and Chief Executive Officer
/s/ Claude M. Ballard March 25, 1999 Claude M. Ballard, Director
/s/ Anthony Downs March 25, 1999 Anthony Downs, Director
/s/ Anthony M. Frank March 25, 1999 Anthony M. Frank, Director
/s/ Martin I. Zankel March 25, 1999 Martin I. Zankel, Director
/s/ Thomas H. Nolan, Jr. March 25, 1999 Thomas H. Nolan, Jr., Director
/s/ Thomas G. Eastman March 25, 1999 Thomas G. Eastman, Director
/s/ Hanh Kihara March 25, 1999 Hanh Kihara Senior Vice President and Chief Financial Officer
/s/ Krista K. Rowland March 25, 1999 Krista K. Rowland, 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.
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 33-15233, 333-23687, 333-33643 and 333-33795) and the registration statements on Form S-8 (No.'s 333-52375, 333-18215, 333-70681 and 333-74707) of Bedford Property Investors, Inc. of our report dated January 29, 1999, relating to the consolidated balance sheets of Bedford Property Investors, Inc. as of December 31, 1998 and 1997, 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, 1998, and the related financial statement schedule as of December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of Bedford Property Investors, Inc.
KPMG LLP
San Francisco, California March 25, 1999