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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


ý
Quarterly Report Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2002

OR

o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 1-14307

Great Lakes REIT
(Exact name of Registrant as specified in its Charter)

Maryland
(State or other jurisdiction
of incorporation or organization)		   36-4238056
(IRS employer identification no.)

823 Commerce Drive, Suite 300, Oak Brook, IL 60523
(Address of principal executive offices) (Zip Code)

(630) 368 - 2900
(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No o

        Number of shares of the registrant's common shares of beneficial interest, $.01 par value per share, outstanding as of November 1, 2002: 16,541,630


Great Lakes REIT

Index to Form 10-Q

September 30, 2002

 
  
   Page Number
Part I—Financial Information    
 
Item 1.
Financial Statements (unaudited):
 
 

 
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001
 
3

 
Consolidated Statements of Income for the three months ended September 30, 2002 and 2001
 
4

 
Consolidated Statements of Income for the nine months ended September 30, 2002 and 2001
 
5

 
Consolidated Statement of Changes in Shareholders' Equity for the nine months ended September 30, 2002
 
6

 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001
 
7

 
Notes to Consolidated Financial Statements
 
8
 
Item 2.
Management's Discussion and Analysis of Results of Operations and Financial Condition
 
12
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
16
 
Item 4.
Controls and Procedures
 
17

Part II—Other Information
 
18
 
Item 4.
Submission of Matters to a Vote of Security Holders
 
18
 
Item 6.
Exhibits and Reports on Form 8-K
 
18
 
Signatures
 
19
 
Certifications
 
20

2


Great Lakes REIT

Consolidated Balance Sheets

(Dollars in Thousands, except per share data)

 
   September 30,
2002
   December 31,
2001
  
Assets              
Properties:              
Land   $ 63,065   $ 60,199  
Buildings, improvements, and equipment     458,007     434,204  
   
 
 
      521,072     494,403  
Less accumulated depreciation     63,371     53,792  
   
 
 
      457,701     440,611  
Properties held for sale, net     767     25,135  
Cash and cash equivalents     23,324     2,896  
Real estate tax escrows     288     225  
Rents receivable     6,478     6,661  
Deferred financing and leasing costs, net of accumulated amortization     8,736     6,674  
Goodwill, net of accumulated amortization     1,061     1,061  
Other assets     2,887     3,229  
   
 
 
Total assets   $ 501,242   $ 486,492  
   
 
 

Liabilities and shareholders' equity:
 
 
 
 
 
 
 
Bank loan payable   $ 114,450   $ 102,250  
Mortgage loans payable     148,123     150,868  
Bonds payable     3,620     3,960  
Accounts payable and accrued liabilities     4,341     2,960  
Accrued real estate taxes     14,183     12,710  
Prepaid rent     4,270     3,539  
Security deposits     1,532     1,629  
Dividends payable     2,538     —  
   
 
 
Total liabilities     293,057     277,916  
   
 
 
Minority interests     676     682  
   
 
 
Preferred shares of beneficial interest ($0.01 par value, 10,000 shares authorized; 1,500 93/4% Series A Cumulative Redeemable shares, with a $25.00 per share liquidation preference, issued and outstanding)     37,500     37,500  
Common shares of beneficial interest ($0.01 par value, 60,000 shares authorized; 18,309 and 18,275 shares issued in 2002 and 2001, respectively)     183     183  
Paid-in-capital     235,484     235,371  
Retained earnings (deficit)     (16,975 )   (15,927 )
Employee share loans     (18,101 )   (20,083 )
Deferred compensation     (2,111 )   (2,325 )
Accumulated other comprehensive income (loss)     (1,147 )   499  
Treasury shares, at cost (1,772 shares)     (27,324 )   (27,324 )
   
 
 
Total shareholders' equity     207,509     207,894  
   
 
 
Total liabilities and shareholders' equity   $ 501,242   $ 486,492  
   
 
 

The accompanying notes are an integral part of these financial statements.

3


Great Lakes REIT

Consolidated Statements of Income

(Dollars in Thousands, except per share data)

 
   Three months ended September 30,
  
 
   2002
   2001
  
Revenues:              
Rental   $ 18,931   $ 18,657  
Reimbursements     5,094     5,186  
Parking     118     116  
Telecommunications     56     148  
Tenant service     128     107  
Interest     330     383  
Other     231     116  
   
 
 
Total revenues     24,888     24,713  
   
 
 
Expenses:              
Real estate taxes     3,961     3,988  
Other property operating     6,684     6,400  
General and administrative     1,318     1,210  
Interest     3,807     3,676  
Depreciation and amortization     5,007     4,563  
   
 
 
Total expenses     20,777     19,837  
   
 
 
Income from continuing operations     4,111     4,876  
Gain on sale of properties     6,130     —  
Discontinued operations, net     134     525  
Minority interests     (10 )   (12 )
   
 
 
Net income     10,365     5,389  
Income allocated to preferred shareholders     914     914  
   
 
 
Net income applicable to common shares   $ 9,451   $ 4,475  
   
 
 

Earnings per common share—basic
 
$
0.58
 
$
0.27
 
   
 
 

Weighted average common shares outstanding—basic
 
 
16,372
 
 
16,580
 
   
 
 

Diluted earnings per common share
 
$
0.57
 
$
0.27
 
   
 
 

Weighted average common shares outstanding—diluted
 
 
16,552
 
 
16,737
 
   
 
 

Comprehensive income:
 
 
 
 
 
 
 
Net income   $ 10,365   $ 5,389  
Change in fair value of interest rate swap agreements     (1,023 )   —  
   
 
 
Total comprehensive income   $ 9,342   $ 5,389  
   
 
 

The accompanying notes are an integral part of these financial statements.

4


Great Lakes REIT

Consolidated Statements of Income

(Dollars in Thousands, except per share data)

 
   Nine months ended September 30,
  
 
   2002
   2001
  
Revenues:              
Rental   $ 56,697   $ 55,005  
Reimbursements     16,028     15,199  
Parking     373     309  
Telecommunications     119     370  
Tenant service     257     284  
Interest     1,000     1,167  
Other     698     443  
   
 
 
Total revenues     75,172     72,777  
   
 
 
Expenses:              
Real estate taxes     12,049     11,342  
Other property operating     19,856     18,923  
General and administrative     3,888     3,835  
Interest     11,334     10,713  
Depreciation and amortization     14,362     13,202  
   
 
 
Total expenses     61,489     57,385  
   
 
 
Income from continuing operations     13,683     15,392  
Gain on sale of properties     7,165     —  
Discontinued operations, net     812     1,730  
Minority interests     (34 )   (37 )
   
 
 
Net income     21,626     17,085  
Income allocated to preferred shareholders     2,742     2,742  
   
 
 
Net income applicable to common shares   $ 18,884   $ 14,343  
   
 
 

Earnings per common share—basic
 
$
1.15
 
$
0.87
 
   
 
 

Weighted average common shares outstanding—basic
 
 
16,370
 
 
16,572
 
   
 
 

Diluted earnings per common share
 
$
1.14
 
$
0.86
 
   
 
 

Weighted average common shares outstanding—diluted
 
 
16,532
 
 
16,727
 
   
 
 

Comprehensive income:
 
 
 
 
 
 
 
Net income   $ 21,626   $ 17,085  
Change in fair value of interest rate swap agreements     (1,646 )   —  
   
 
 
Total comprehensive income   $ 19,980   $ 17,085  
   
 
 

The accompanying notes are an integral part of these financial statements.

5


Great Lakes REIT

Consolidated Statement of Changes in Shareholders' Equity

For the Nine Months Ended September 30, 2002

(Dollars in Thousands)

Preferred Shares        
Balance at beginning of period   $ 37,500  
   
 
Balance at end of period     37,500  

Common Shares
 
 
 
 
Balance at beginning of period     183  
   
 
Balance at end of period     183  

Paid-in capital
 
 
 
 
Balance at beginning of period     235,371  
Exercise of share options     113  
   
 
Balance at end of period     235,484  

Retained earnings (deficit)
 
 
 
 
Balance at beginning of period     (15,927 )
Net income     21,626  
Distributions/dividends     (22,674 )
   
 
Balance at end of period     (16,975 )

Employee share loans
 
 
 
 
Balance at beginning of period     (20,083 )
Repayment of loans     1,982  
   
 
Balance at end of period     18,101  

Deferred compensation
 
 
 
 
Balance at beginning of period     (2,325 )
Amortization of deferred compensation     214  
   
 
Balance at end of period     (2,111 )

Accumulated other comprehensive income (loss)
 
 
 
 
Balance at beginning of period     499  
Change in fair value of interest rate swap agreements     (1,646 )
   
 
Balance at end of period     (1,147 )

Treasury shares
 
 
 
 
Balance at beginning of period     (27,324 )
   
 
Balance at end of period     (27,324 )
   
 
Total shareholders' equity   $ 207,509  
   
 

The accompanying notes are an integral part of these financial statements.

6


Great Lakes REIT

Consolidated Statements of Cash Flows

(in thousands)

 
   Nine Months Ended September 30,
  
 
   2002
   2001
  
CASH FLOWS FROM OPERATING ACTIVITIES              
Net income   $ 21,626   $ 17,085  
Adjustments to reconcile net income to cash flows from operating activities              
  Depreciation and amortization     15,056     13,997  
  Gain on sale of properties     (7,165 )   —  
  Other non cash items     250     265  
Net changes in assets and liabilities:              
  Rents receivable     183     (178 )
  Real estate tax escrows and other assets     (1,364 )   (937 )
  Accounts payable, accrued expenses and other liabilities     2,319     (40 )
  Accrued real estate taxes     1,473     2,731  
  Payment of deferred leasing costs     (2,393 )   (1,277 )
   
 
 
Net cash provided by operating activities     29,986     31,646  
   
 
 
CASH FLOWS FROM INVESTING ACTIVITIES              
Purchase of properties     (18,647 )   (57,038 )
Additions to buildings and improvements     (10,842 )   (9,035 )
Proceeds from property sales     31,679     —  
Other investing activities     (635 )   (86 )
   
 
 
Net cash used by investing activities     1,555     (66,159 )
   
 
 
CASH FLOWS FROM FINANCING ACTIVITIES              
Proceeds from exercise of share options     113     238  
Proceeds from repayment of employee share loans     1,982     —  
Proceeds from bank and mortgage loans payable     19,200     220,070  
Distributions / dividends paid     (20,442 )   (16,143 )
Distributions to minority interests     (59 )   (49 )
Payment of bank and mortgage loans and bonds     (10,085 )   (165,749 )
Payment of deferred financing costs     (1,821 )   (1,441 )
   
 
 
Net cash provided by financing activities     (11,112 )   36,303  
   
 
 
Net increase (decrease) in cash and cash equivalents     20,428     1,790  
Cash and cash equivalents, beginning of year     2,896     785  
   
 
 
Cash and cash equivalents, end of period   $ 23,324   $ 2,575  
   
 
 

Supplemental disclosure of cash flow:
 
 
 
 
 
 
 
Interest paid   $ 11,352   $ 7,224  
   
 
 
Non cash financing transactions:              
Employee share purchase loans     —   $ 265  
   
 
 

The accompanying notes are an integral part of these financial statements.

7


Great Lakes REIT

Notes to Consolidated Financial Statements

(Unaudited)

Dollars in thousands, except per share data

1.    Basis of Presentation

        Great Lakes REIT, a Maryland real estate investment trust (the "Company"), was formed in 1992 to invest in income-producing real property. The principal business of the Company is the ownership, management, leasing, renovation and acquisition of suburban office properties, primarily located in the Midwest region of the United States. At September 30, 2002, the Company owned and operated 36 properties, primarily located in suburban areas of Chicago, Milwaukee, Detroit, Columbus, Minneapolis, Denver and Cincinnati. The Company leases office space to over 500 tenants that are engaged in a variety of businesses.

        The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and controlled partnership. Intercompany accounts and transactions have been eliminated in consolidation.

        The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. These statements should be read in conjunction with the Company's most recent year-end audited financial statements, which are contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 (the "2001 10-K"). In the opinion of management, the financial statements herein contain all adjustments (which are normal and recurring) necessary for a fair statement of financial results for the interim periods. For further information, refer to the consolidated financial statements and notes thereto included in the 2001 10-K.

2.    Derivatives and Hedging Activities

        In October 2001, the Company entered into two separate interest rate swap agreements with notional amounts of $25,000 each. One agreement has a term of two years and fixes the interest rate on $25,000 of the Company's unsecured bank credit facility outstanding at a maximum of 4.12% per annum. The second swap agreement has a term of three years and fixes the interest rate on $25,000 of the Company's unsecured bank credit facility outstanding at a maximum of 4.73% per annum. The Company is exposed to credit loss in the event of non-performance by counterparties under these agreements, but the Company does not expect non-performance by any of these counterparties. The amount of such exposure is generally limited to the amount of any payments due but not yet received from the counterparty.

        At September 30, 2002, the fair value of the swap agreements was a liability of $1,147 and is reflected as accumulated other comprehensive income (loss) in the consolidated balance sheet as of September 30, 2002.

3.    Segment Information

        The Company has two reportable segments, distinguished by property type. The property types are office and office service center and represent 92% and 8% (as measured by square feet) of the Company's overall portfolio, respectively. Office buildings are generally single-story or multi-story buildings used by tenants for office activities. The buildings generally have common area lobbies and other amenities, including food service areas, atriums and limited underground parking facilities. Office service center buildings generally are one-story buildings with no common areas. Tenant spaces

8


generally have less than 100% office use with the non-office space used for showroom, technical or light storage purposes. As of September 30, 2002, the properties were leased to more than 500 tenants, no single tenant accounted for more than 5% of the aggregate annualized base rent of the Company's portfolio and only 20 tenants individually represented more than 1% of the aggregate annualized base rent.

        The Company evaluates performance and makes investment decisions in part based on net operating income, which is total property revenues (rental, reimbursement, parking, telecommunications, tenant service and other income), less property operating expenses and real estate taxes. Net operating income is a widely recognized industry measure of a property's performance.

        The following table represents a summary report of segment information for the three months ended September 30, 2002 and 2001:

 
   Three months ended September 30,
   Nine months ended September 30,
  
 
   2002
   2001
   2002
   2001
  
Revenues:                          
Office   $ 23,388   $ 23,096   $ 70,466   $ 67,723  
Office service center     1,063     1,234     3,368     3,887  
Deferred rental income     107     —     338     —  
Interest     330     383     1,000     1,167  
   
 
 
 
 
Total   $ 24,888   $ 24,713   $ 75,172   $ 72,777  
   
 
 
 
 

Net operating income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Office   $ 13,109   $ 13,169   $ 40,014   $ 39,666  
Office service center     697     773     1,915     2,309  
   
 
 
 
 
Total   $ 13,806   $ 13,942   $ 41,929   $ 41,975  
   
 
 
 
 

Depreciation and amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
Office   $ 4,624   $ 4,126   $ 13,137   $ 11,912  
Office service center     256     286     852     856  
Other     127     151     373     434  
   
 
 
 
 
Total   $ 5,007   $ 4,563   $ 14,362   $ 13,202  
   
 
 
 
 
Interest expense:                          
Office