UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 1-9016
___________________________
AMERICAN INDUSTRIAL PROPERTIES REIT
(Exact name of registrant as specified in its charter)
Texas 75-6335572
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6210 North Beltline Road, Suite 170
Irving, Texas 75063-2656
(Address of principal executive (Zip Code)
offices)
(972) 756-6000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
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 X No _____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
4,657,973 Shares of Beneficial Interest were outstanding as of
November 5, 1997.
American Industrial Properties REIT
Form 10-Q
For the Three Months and Nine Months Ended September 30, 1997
INDEX
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1997 and 1996
(unaudited) 3
Consolidated Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 (unaudited) 5
Notes to Consolidated Financial Statements
(unaudited) 6
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II - Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in the Rights of the Company's Security
Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 18
American Industrial Properties REIT
Consolidated Statements of Operations
(unaudited, in thousands except share and per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
REVENUES
Rents 2,007 2,150 5,902 6,568
Tenant reimbursements 559 643 1,885 2,071
Interest income 405 7 436 146
2,971 2,800 8,223 8,785
EXPENSES
Property operating expenses:
Property taxes 345 368 1,032 1,110
Property management fees 96 107 290 324
Utilities 111 118 294 335
General operating 194 189 616 610
Repairs and maintenance 100 153 279 318
Other property
operating expenses 71 75 247 220
Depreciation and amortization 715 769 2,105 2,177
Interest on 8.8% notes payable 427 1,001 1,312 3,350
Interest on mortgages payable 742 405 2,703 1,216
Administrative expenses:
Trust administration
and overhead 509 300 1,320 1,190
Litigation and proxy costs 2 116 439 1,004
3,312 3,601 10,637 11,854
Loss from operations (341) (801) (2,414) (3,069)
Extraordinary gain on
extinguishment of debt 0 0 2,643 1,367
Gain on sale of real estate 0 0 312 0
NET INCOME (LOSS) (341) (801) 541 (1,702)
PER SHARE DATA (a)
Loss from operations -0.08 -0.44 -0.86 -1.69
Extraordinary gain on
extinguishment of debt 0 0 0.94 0.75
Gain on sale of real estate 0 0 0.11 0
Net Income (Loss) -0.08 -0.44 0.19 -0.94
Distributions Paid 0 0.20 0 0.20
Weighted average number of
common shares outstanding 4354378 1815080 2793417 1815080
The accompanying notes are an integral part of these financial statements.
(a) The per share amounts and weighted average shares outstanding have
been restated to reflect a one for five reverse share split
approved by the Trust's shareholders on October 15, 1997
American Industrial Properties REIT
Consolidated Balance Sheets
(in thousands, except share and per share data)
September 30, December 31,
1997 1996
(unaudited)
ASSETS
Real estate:
Held for investment $ 98,634 $ 84,693
Held for sale - 9,779
98,634 94,472
Accumulated depreciation (24,877) (23,973)
Net real estate 73,757 70,499
Cash and cash equivalents:
Unrestricted 25,780 4,010
Restricted 1,401 1,366
Total cash
and cash equivalents 27,181 5,376
Other assets, net 4,151 3,061
Total Assets $ 105,089 $ 78,936
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 41,380 $ 43,797
8.8% notes payable 5,450 9,419
Accrued interest 1,078 602
Accounts payable, accrued
expenses and other
liabilities 2,108 1,964
Tenant security deposits 533 471
Total Liabilities 50,549 56,253
Shareholders' Equity:
Preferred shares, $0.10
par value; 50,000,000 shares
shares authorized; none
issued or outstanding 0 0
Shares of beneficial
interest, $0.10 par value;
500,000,000 Shares
authorized; 4,657,973
Shares issued and
outstanding (a) 466 200
Additional paid-in capital 158,906 127,856
Accumulated distributions (58,456) (58,456)
Accumulated loss from
operations and
extraordinary
gains (losses) (47,836) (48,065)
Accumulated net realized
gain on sales of
real estate 1,460 1,148
Total Shareholders' Equity 54,540 22,683
Total Liabilities and
Shareholders' Equity $ 105,089 $ 78,936
The accompanying notes are an integral part of these financial statements.
(a) Shares issued and outstanding have been restated to reflect a
one for five reverse share split approved by the Trust's
shareholders on October 15, 1997
American Industrial Properties REIT
Consolidated Statements of Cash Flows
(unaudited, in thousands)
Nine Months Ended
September 30,
1997 1996
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss) 541 (1,702)
Adjustments to reconcile
net income (loss) to net
cash used in
operating activities:
Extraordinary gain on
extinguishment of debt (2,643) (1,367)
Gain on sale of real estate (312) 0
Depreciation 1,846 1,933
Amortization of deferred
financing costs 146 54
Other amortization 259 244
Changes in operating assets
and liabilities:
Increase in other assets
and restricted cash (1,363) (450)
Increase (decrease) in
accounts payable, other
liabilities and tenant
security deposits 268 (260)
Increase (decrease) in
accrued interest 741 (3,108)
Net Cash Used In
Operating Activities (517) (4,656)
CASH FLOWS FROM
INVESTING ACTIVITIES:
Acquisition of real estate (6,404) 0
Capitalized improvements
and leasing commissions (646) (925)
Net proceeds from sales
of real estate 2,029 0
Net Cash Used In
Investing Activities (5,021) (925)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments on
mortgage notes payable (4,008) (170)
Proceeds from issuance
of common shares 31,316 0
Distributions to
shareholders 0 (363)
Net Cash Provided By (Used
In) Financing Activities 27,308 (533)
Net Increase (Decrease) in
Unrestricted Cash and Cash
Equivalents 21,770 (6,114)
Unrestricted Cash and
Cash Equivalents at
Beginning of Period 4,010 7,694
Unrestricted Cash and
Cash Equivalents at
End of Period 25,780 1,580
Cash Paid for Interest 3,128 7,674
The accompanying notes are an integral part of these financial statements.
American Industrial Properties REIT
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
Note 1 - Basis of Presentation
The accompanying consolidated financial statements are
presented in accordance with the requirements of Form 10-Q
and consequently do not include all of the disclosures
required by generally accepted accounting principles or
those contained in the Trust's Annual Report on Form 10-K.
Accordingly, these financial statements should be read in
conjunction with the audited financial statements of the
Trust for the year ended December 31, 1996, included in the
Trust's Annual Report on Form 10-K.
The financial information included herein has been prepared
in accordance with the Trust's customary accounting
practices and has not been audited. In the opinion of
management, the information presented reflects all
adjustments necessary for a fair presentation of interim
results. All such adjustments are of a normal and recurring
nature.
Certain amounts in prior year financial statements have been
reclassified to conform with the current year presentation.
Note 2 - Significant Accounting Policies
Principles of Consolidation. The consolidated financial
statements of the Trust include the accounts of American
Industrial Properties REIT and its wholly-owned
subsidiaries. Significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ significantly
from such estimates and assumptions.
Real Estate. The Trust carries its real estate held for
investment at depreciated cost unless the asset is
determined to be impaired. Real estate classified as held
for sale is carried at the lower of depreciated cost or fair
market value less costs to sell. In accordance with
Statement of Financial Accounting Standards No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, the Trust records impairment
losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired
and the expected undiscounted cash flows estimated to be
generated by those assets are less than the related carrying
amounts. If an asset held for investment is determined to be
impaired, the impairment would be measured based upon the
excess of the asset's carrying value over the fair value.
In addition, the Trust records impairment losses on assets
held for sale when the estimated sales proceeds, after
estimated selling costs, is less than the carrying value of
the related asset. At September 30, 1997, all of the
Trust's properties were classified as held for investment.
Should unforeseen factors cause certain properties to be
reclassified to held for sale, significant adjustments to
reduce the net book value of such properties could be
required.
Property improvements are capitalized while maintenance and
repairs are expensed as incurred. Depreciation of buildings
and capital improvements is computed using the straight-line
method over forty years. Depreciation of tenant
improvements is computed using the straight-line method over
ten years.
American Industrial Properties REIT
Notes to Consolidated Financial Statements (continued)
September 30, 1997
(unaudited)
Other Assets. Other assets consists primarily of deferred
rent receivable, prepaid leasing commissions and loan fees.
Deferred rent receivable arises as the Trust recognizes
rental income, including contractual rent increases or
delayed rent starts, on a straight-line basis over the lease
term. The Trust has recorded deferred rent receivable of
$525,000 and $599,000 at September 30, 1997 and December 31,
1996, respectively. Leasing commissions are capitalized and
amortized on a straight-line basis over the life of the
lease. Loan fees are capitalized and amortized to interest
expense on a level yield basis over the term of the related
loan.
Income Taxes. The Trust operates as a real estate
investment trust ("REIT") for federal income tax purposes.
Under the REIT provisions, the Trust is required to
distribute 95% of REIT taxable income and is allowed a
deduction for dividends paid during the year. No provisions
for Federal income taxes have been required or recorded to
date.
Reverse Share Split. On October 15, 1997, the Trust's
shareholders approved a one for five reverse Share split.
All references to the number of Shares, per Share amounts
and the market prices of the Shares have been restated to
reflect the impact of the reverse Share split.
Earnings per share. Earnings per share is computed based
upon the weighted average number of common shares
outstanding. The computation of earnings per share does not
include common share equivalents as the inclusion of such
does not result in dilution (based upon application of the
"treasury stock" method) or, in periods where there is a net
loss, is anti-dilutive.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("Statement 128"). Statement 128
specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted
earnings per share. Management believes that adoption of
Statement 128 will not have a material effect on the Trust's
earnings per share.
Share Compensation. The Trust accounts for its share
compensation arrangements under the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees ("APB 25") and intends to continue to do so.
See Note 5 for a discussion of the Trust's share
compensation arrangements.
Note 3 - Zero Coupon Notes
In December 1993 and November 1994, the Trust deposited
United States Government investment securities into an
irrevocable trust to complete in-substance defeasance of
certain of its Zero Coupon Notes due November 1997. The
debt, which aggregated $16,067,000 at September 30, 1997,
was accounted for as if extinguished in December 1993 and
November 1994. The funds in the trust, which will be used
solely to satisfy the principal and interest of the defeased
debt, will be sufficient to satisfy all future debt service
requirements for the defeased debt instruments.
American Industrial Properties REIT
Notes to Consolidated Financial Statements (continued)
September 30, 1997
(unaudited)
Note 4 - Shareholder Transactions
On February 26, 1997, USAA Real Estate Company ("REALCO"),
the owner at that time of approximately 31.8% of the Trust's
outstanding Shares of Beneficial Interest (the "Shares"),
purchased outstanding indebtedness of the Trust totaling
$9,419,213. Pursuant to an earlier agreement with the
Trust, the notes were then modified by REALCO to, among
other things, reduce the principal amount of these notes
from $9,419,213 to $7,040,721, resulting in an extraordinary
gain on extinguishment of debt (including certain accrued
interest) to the Trust of $2,643,000. At the time the notes
were modified, the Trust made a principal payment of
$1,591,103, reducing the outstanding principal amount to
$5,449,618. According to the modification terms, interest
continues to accrue at 8.8%, payable monthly, and the
maturity of the notes is extended from March 31, 1997 to
December 31, 2000. Pursuant to shareholder approval on June
30, 1997, REALCO has the option to convert the principal
amount of the notes into Shares of the Trust at the
conversion rate of $10.00 per share (if converted prior to
December 31, 1997) or $11.25 per share (if converted between
December 31, 1997 and December 31, 2000). The Trust
currently expects REALCO to elect this conversion in the
fourth quarter of 1997. As a result, the Trust will reflect
approximately $1,022,000, based upon the difference between
the market trading price of $11.90 per share on February 26,
1997 and the $10.00 conversion price, as interest expense
between February 26, 1997 and December 31, 1997. The date of
February 26, 1997 is used to measure market value as this is
deemed to be the date of issuance of the modified note,
which contains the convertibility option. Based upon these
assumptions, the Trust recorded additional interest expense
of $188,000 in the third quarter of 1997 ($835,000 for the
nine months ended September 30, 1997) and expects to record
the remaining $187,000 of interest expense in the fourth
quarter of 1997.
On June 30, 1997, the shareholders of the Trust approved an
increase in the authorized number of shares of beneficial
interest from 10,000,000 to 500,000,000 and approved the
authorization of 50,000,000 preferred shares. The
preferences or rights of the preferred shares, which have a
par value per share of $0.10, will be set as such shares are
issued.
In July 1997, the Trust sold a total of 1,433,483 Shares to
clients and affiliates of Morgan Stanley Asset Management,
Inc. (collectively "MSAM"). Pursuant to an earlier
agreement, the Shares were issued at $12.25 per Share,
generating total proceeds of $17,560,176. Also in July
1997, the Trust sold to certain clients of ABKB/LaSalle
Securities Limited Partnership and LaSalle Advisors Limited
Partnership (collectively, "ABKB") a total of 1,224,489
Shares at $12.25 per Share for total proceeds of
$15,000,000. The agreement with MSAM allows them to
purchase an additional 199,169 Shares at $12.25 per Share.
In connection with these transactions, the Board of Trust
Managers was expanded from five to eight members, with two
MSAM representatives and one ABKB representative appointed
as Trust Managers.
On July 7, 1997, the Trust signed definitive merger
agreements with USAA Real Estate Income Investments I, A
California Limited Partnership, USAA Real Estate Income
Investments II Limited Partnership, a Texas limited
partnership, USAA Income Properties III Limited Partnership,
a Delaware limited partnership, and USAA Income Properties
IV Limited Partnership, a Delaware limited partnership
(collectively, the "RELPs") pursuant to which the RELPs will
be merged into the Trust (the "Merger"). If the Merger is
accomplished, the Trust will acquire nine real estate
properties consisting of three office buildings totaling
550,000 square feet, two industrial properties totaling
320,000 square feet, three office/research and development
properties totaling 156,000 square feet, and one retail
property totaling 77,000 square feet. In addition, the
Trust will acquire a 55.84% joint venture interest in a
291,000 square foot office property. The agreed value of
the interests in these properties, including assumption of
$31,704,000 in related debt, is $89,622,000.
American Industrial Properties REIT
Notes to Consolidated Financial Statements (continued)
September 30, 1997
(unaudited)
Pursuant to the terms of the agreements, the Trust will
issue an aggregate of 4,412,829 shares of beneficial
interest at $13.125 per share (for a total value of
$57,918,385) to the limited partners in the RELPs in
exchange for their limited partnership interests in the
RELPs. The Merger, which has been approved by the Trust's
Board of Trust Managers and the Board of Directors of each
of the general partners of the RELPs, is subject to due
diligence by both parties and certain other conditions,
including approval by the shareholders of the Trust and the
limited partners of each of the RELPs.
On August 20, 1997, a lawsuit was filed in the Superior
Court of the State of Arizona against certain entities,
including the Trust and the general partners of each RELP,
alleging, among other things, breaches of fiduciary duty in
connection with the transactions contemplated in the merger
agreements. The lawsuit seeks, among other things, to
enjoin the consummation of the merger and damages, including
attorneys' fees and expenses. The defendants in the lawsuit
believe that the plaintiffs' claims are without merit and
intend to defend vigorously against the lawsuit. However,
no assurance can be given that the plaintiffs in the lawsuit
will not be successful.
Note 5 - Incentive Compensation
On June 30, 1997, the shareholders of the Trust approved an
Employee and Trust Manager Incentive Share Plan (the
"Plan"). The Plan, which is to be administered by the
Compensation Committee of the Board of Trust Managers (the
"Committee"), reserves a total of 160,000 common shares for
issuance under the Plan pursuant to the exercise of
incentive and non-qualified share options and the grant of
restricted share awards. On June 30, 1997, the Committee
awarded a total of 125,000 options to management with an
exercise price of $15.00 (the closing trading price of
common shares on June 30, 1997), an expiration date of June
30, 2007, and vesting of 20% annually, beginning on June 30,
1997. As provided in the Plan, the Committee also awarded
2,000 options to each Trust Manager with an exercise price
ranging from $14.69 to $15.00, an expiration date of June
30, 2007, and immediate vesting.
The Trust has elected to follow APB No. 25 and related
interpretations in accounting for its employee stock options
because the alternative fair value accounting provided for
under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, requires use of
option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the
exercise price of the Trust's employee stock options equals
the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Note 6 - Subsequent Events
On October 15, 1997, the Trust's shareholders approved a one
for five reverse Share split. All references to the number
of Shares, per Share amounts and the market prices of the
Shares have been restated to reflect the impact of the
reverse Share split.
On October 3, 1997, the Trust, as general partner in a
limited partnership, purchased a portfolio of eight
properties with 783,780 net rentable square feet located in
Dallas and suburban areas of Dallas, Texas. The purchase
price of the portfolio was $36.8 million. The purchase
price was partially financed by a borrowing of approximately
$20.7 million under a secured acquisition line (see below)
and approximately $2.8 million of limited partnership units
("OP Units") issued to the limited partners of the
partnership. Beginning on October 3, 1999, the OP Units are
redeemable for cash or, at the election of the Trust (as
general partner), common shares on a one-for-one basis. In
addition, the limited partners received warrants, which
expire on October 3, 2000, to purchase 40,000 common shares
at $17.50 per share.
American Industrial Properties REIT
Notes to Consolidated Financial Statements (continued)
September 30, 1997
(unaudited)
On October 3, 1997, the Trust entered into a $35,000,000
secured acquisition line with Prudential Securities
Corporation. The credit line, which will be secured by
properties acquired with proceeds from the credit line,
bears variable interest at a rate based on the 30 day LIBOR
rate plus 200 basis points. The maximum loan to value ratio
for borrowings is 70%. Unless extended, borrowings under
the credit line mature on October 3, 1998 and, if not
repaid, allow the lender to move such borrowings into a
securitized mortgage pool. The Trust intends to refinance
borrowings under this credit line with proceeds from future
permanent financing transactions or equity offerings.
On October 20, 1997, the Trust filed preliminary proxy
materials for a special meeting of shareholders, to be held
in December 1997, relating to a proposed offering of up to
$75 million of common shares in a private placement
transaction.
The Trust expects to close the purchase of a 286,000 square
foot warehouse and service center property in Houston, Texas
in November 1997. The Trust anticipates borrowing
approximately $6,600,000 of the $10,700,000 purchase price
under the acquisition line discussed above.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction with
all of the financial statements and notes thereto appearing
elsewhere in this report as well as the audited financial
statements appearing in the Trust's 1996 Annual Report to
Shareholders. The statements contained in this report that are
not historical facts are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended,
and Sections 21E of the Securities Act of 1934, as amended.
Actual results may differ materially from those included in the
forward-looking statements. These forward-looking statements
involve risks and uncertainties including, but not limited to,
the following: changes in general economic conditions in the
markets that could impact demand for the Trust's properties and
changes in financial markets and interest rates impacting the
Trust's ability to meet its financing needs and obligations.
Comparison of Three Months Ended September 30, 1997 to September
30, 1996
The overall occupancy of the Trust's portfolio on September
30, 1997 was 92.7%, compared to 92.0% on September 30, 1996 and
93.7% on June 30, 1997. Property revenues decreased from
$2,793,000 to $2,566,000 and property operating expenses
decreased from $1,010,000 to $917,000 when comparing the quarter
ended September 30, 1996 to the same quarter in 1997, primarily
as a result of the sale of two properties during the fourth
quarter of 1996 and one property during the first quarter of
1997. When comparing the quarter ended September 30, 1997 to the
same period in 1996 on a same property basis, revenue increased
3.3% and net operating income increased 5.3% for the Trust's
industrial properties whereas revenue increased 3.0% and net
operating income decreased 1.2% for the Trust's retail property.
The Trust is continuing its efforts to increase leasing at the
retail property.
The Trust had a loss from operations of $341,000 for the
quarter ended September 30, 1997 compared to $801,000 for the
same quarter in 1996. This improvement is related to an increase
in interest income of $398,000 (due to net proceeds of $31.3
million received from a private placement in July 1997), a
decrease in litigation, proxy and reorganization expenses of
$114,000 (due to the settlement of litigation and contested proxy
contests in 1996), a net decrease in interest expense of $237,000
(due to the paydown/forgiveness of certain debt in 1996, offset
by the accrual of $188,000 in interest expense related to the
expected conversion of debt to equity), a decrease in net
operating income of $134,000 explained above and an increase in
administration and overhead of $209,000 (due to an increase in
the number of employees from six to eleven and the addition of
five Trust Managers in 1997).
Comparison of Nine Months Ended September 30, 1997 to September
30, 1996
When comparing the nine months ended September 30, 1997 with
the same period in 1996, property revenues decreased from
$8,639,000 in 1996 to $7,787,000 in 1997 and property operating
expenses decreased from $2,917,000 in 1996 to $2,758,000 in 1997,
primarily as a result of the sale of two properties during the
fourth quarter of 1996 and one property during the first quarter
of 1997. When comparing the nine months ended September 30, 1997
to the same period in 1996 on a same property basis, revenue
increased 6.3% and net operating income increased 6.6% for the
Trust's industrial properties whereas revenue decreased 9.1% and
net operating income decreased 18.0% for the Trust's retail
property. The decline in the performance of the Trust's retail
property was primarily related to nonrecurring collections of
approximately $85,000 in lease termination fees and $76,000 in
percentage rents in 1996, bad debt writeoffs of approximately
$20,000 in 1997 and a decline in average occupancy from 85.0% in
1996 to 82.6% in 1997. As noted above, the Trust is continuing
its efforts to increase leasing at this property.
The Trust had a net loss from operations of $2,414,000 for
the nine months ended September 30, 1997 compared to $3,069,000
for the same period in 1996. This improvement is related to an
increase in interest income of $290,000 (due to net proceeds of
$31.3 million received from a private placement in July 1997), a
decrease in litigation, proxy and reorganization expenses of
$565,000 (due to the settlement of litigation and contested proxy
contests in 1996), a net decrease in interest expense of $551,000
(due to the paydown/forgiveness of certain debt in 1996, offset
by the accrual of $835,000 in interest expense related to the
expected conversion of debt to equity), a decrease in net
operating income of $693,000 explained above and an increase in
administration and overhead of $130,000 (due to an increase in
the number of employees from six to eleven, the addition of five
Trust Managers in 1997, higher legal and consulting fees in 1997,
expenses associated with the move of the Trust's offices, and an
offsetting $240,000 in incentive compensation in January 1996.).
Net cash used in operating activities was $517,000 for the
nine months ended September 30, 1997. This is primarily the net
result of the operational items discussed above, a decrease in
accounts payable, other liabilities and tenant security deposits
of $268,000 and an increase in accrued interest of $741,000 (due
to the accrual of $835,000 in interest related to the expected
conversion of debt to equity). Included in net cash used in
operating activities is approximately $439,000 in litigation and
proxy costs, which management believes is of a nonrecurring
nature. Management believes that, in the future, cash flow
provided by operations will increase due to the elimination of
such nonrecurring items and the Trust's plans to pursue a growth
strategy.
Net cash used in investing activities was $5,021,000 for the
nine months ended September 30, 1997 resulting from the purchase
of two properties in August 1997 for $6,404,000 and the
expenditure of $646,000 for capitalized leasing commissions and
improvements to real estate properties, offset by $2,029,000
received from the sale of the Trust's Burnsville property in
March 1997.
Net cash provided by financing activities was $27,308,000,
resulting primarily from a private placement of securities in
July 1997 for net proceeds of $31.3 million.
Funds From Operations
The table below provides a reconciliation of net loss, funds
from operations ("FFO") and funds available for distribution
("FAD") for the three months and nine months ended September 30,
1997 and 1996. The determination of FFO is based on the
definition adopted by the National Association of Real Estate
Investment Trusts ("NAREIT") which is net income (loss) computed
in accordance with generally accepted accounting principles,
excluding gains or losses from debt restructuring and sales of
property, plus real estate related depreciation and amortization
and after adjustments for unconsolidated partnerships and joint
ventures. In addition, NAREIT recommends that extraordinary
items or significant non-recurring items that distort
comparability should not be considered in arriving at FFO.
Accordingly, the Trust does not include the interest expense
accrued related to the expected future conversion of certain debt
into equity or the default rate interest accrued on its $45.2
million in unsecured notes payable in the determination of FFO.
FAD is also presented as it more accurately portrays the ability
of the Trust to make distributions because it reflects capital
expenditures. The Trust believes FFO and FAD are appropriate
measures of performance relative to other REITs. FFO provides
investors with an understanding of the ability of the Trust to
incur and service debt and make capital expenditures. There can
be no assurance that FFO and FAD presented by the Trust is
comparable to similarly titled measures of other REITs. While
other REITs may not always use a similar definition, this
information does add comparability to those which have adopted
the NAREIT definitions.
FFO and FAD should be not be considered as an alternative to
net income or other measurements under generally accepted
accounting principles as an indicator of the Trust's operating
performance or to cash flows from operating, investing or
financing activities as a measure of liquidity. FFO does not
reflect working capital changes, cash expenditures for capital
improvements or principal payments on indebtedness.
The following table shows the Trust's cash flows from its
operating, investing and financing activities, prepared in
accordance with generally accepted accounting principles:
Nine Months Ended
September 30,
1997 1996
(in thousands)
Net cash used in operating activities $(517) $(4,656)
Net cash used in investing activities $(5,021) $(925)
Net cash provided by (used in)
financing activities $27,308 $(533)
FFO and FAD are calculated as follows:
(000) (000)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Net income (loss) $(341) $(801) $541 $(1,702)
Exclude effects of:
Gain on sales of real estate 0 0 (312) 0
Extraordinary gain on
extinguishment of debt 0 0 (2,643) (1,367)
Real estate depreciation and
amortization 713 761 2,102 2,165
Non-recurring interest accrual
assuming future conversion of
debt to equity 188 0 835 0
Default rate interest accrual 0 0 0 369
Funds from operation ("FFO") $560 $(40) $523 $(535)
Funds from operation ("FFO") $560 $(40) $523 $(535)
Capitalized improvements and
leasing commissions (216) (307) (646) (925)
Non-cash effect of straight line
rents on FFO 28 19 73 128
Funds available for distribution
("FAD") $372 $(328) $(50) $(1,332)
FFO for the Trust improved from $(40,000) to $560,000 when
comparing the quarter ended September 30, 1996 to the same
quarter in 1997. This improvement primarily results from a
smaller loss from operations explained above and the offsetting
elimination of $188,000 in accrued interest related to the
expected future conversion of the REALCO debt to equity.
FFO for the Trust improved from $(535,000) to $523,000 when
comparing the nine months ended September 30, 1996 to the same
period in 1997. This improvement reflects a smaller loss from
operations explained above and adjustments to eliminate $835,000
in accrued interest related to the expected future conversion
debt to equity in 1997 and $369,000 in default rate interest on
the MLI notes accrued in 1996.
Liquidity and Capital Resources
The Trust intends to execute a growth strategy which will
emphasize the purchase of light industrial real estate
properties. The Trust believes that such properties represent a
highly fragmented sector of the industry and offer superior
yields because of the general lack of pricing pressure from
institutional investors. The Trust also believes that the
management intensive nature of these properties offers
opportunities for enhancing returns through efficient customer-
oriented operating systems. The Trust may also purchase low rise
office buildings as part of its growth plans. Although the Trust
believes that it can make reasonable and prudent purchases of
such real estate properties, there is no assurance that such
investments will be available to the Trust or that the yield on
such investments will result in an adequate return to
shareholders. The Trust's growth strategy is dependent upon
raising significant capital, most likely in the form of private
placements of equity or secondary public offerings. The Trust
may also issue debt in the form of secured or unsecured
acquisition lines or mortgage financings in order to raise
additional capital to invest in real estate properties.
On July 10, 1997 and July 17, 1997, the Trust sold a total
of 1,433,483 Shares to clients and affiliates of Morgan Stanley
Asset Management, Inc. (collectively "MSAM"). Pursuant to an
earlier agreement, the shares were issued at $12.25 per Share,
generating total proceeds of $17,560,176. On July 11, 1997, the
Trust sold to certain clients and affiliates of ABKB/LaSalle
Securities Limited Partnership and LaSalle Advisors Limited
Partnership (collectively, "ABKB") a total of 1,224,489 Shares at
$12.25 per Share for total proceeds of $15,000,000. The
agreement with MSAM allows them to purchase an additional 199,169
Shares at $12.25 per Share.
On July 7, 1997, the Trust signed definitive merger
agreements with USAA Real Estate Income Investments I, A
California Limited Partnership, USAA Real Estate Income
Investments II Limited Partnership, a Texas limited partnership,
USAA Income Properties III Limited Partnership, a Delaware
limited partnership, and USAA Income Properties IV Limited
Partnership, a Delaware limited partnership (collectively, the
"RELPs") pursuant to which the RELPs will be merged into the
Trust (the "Merger"). If the Merger is accomplished, the Trust
will acquire nine real estate properties consisting of three
office buildings totaling 550,000 square feet, two industrial
properties totaling 320,000 square feet, three office/research
and development properties totaling 156,000 square feet, and one
retail property totaling 77,000 square feet. In addition, the
Trust will acquire a 55.84% joint venture interest in a 291,000
square foot office property. The agreed value of the interests
in these properties, including assumption of $31,704,000 in
related debt, is $89,622,000. Pursuant to the terms of the
agreements, the Trust will issue an aggregate of 4,412,829 shares
of beneficial interest at $13.125 per share (for a total value of
$57,918,385) to the limited partners in the RELPs in exchange for
their limited partnership interests in the RELPs. The Merger,
which has been approved by the Trust's Board of Trust Managers
and the Board of Directors of each of the general partners of the
RELPs, is subject to due diligence by both parties and certain
other conditions, including approval by the shareholders of the
Trust and the limited partners of each of the RELPs.
On February 26, 1997, REALCO purchased outstanding
indebtedness of the Trust totaling $9,419,213. Pursuant to an
earlier agreement with the Trust, the notes were then modified by
REALCO to, among other things, reduce the principal amount of
these notes from $9,419,213 to $7,040,721, resulting in an
extraordinary gain on extinguishment of debt (including certain
accrued interest) to the Trust of $2,643,000. At the time the
notes were modified, the Trust made a principal payment of
$1,591,103, reducing the outstanding principal amount to
$5,449,618. According to the modification terms, interest
continues to accrue at 8.8%, payable monthly, and the maturity of
the notes is extended from March 31, 1997 to December 31, 2000.
Pursuant to shareholder approval on June 30, 1997, REALCO has the
option to convert the principal amount of the notes into Shares
of the Trust at the conversion rate of $10.00 per share (if
converted prior to December 31, 1997) or $11.25 per share (if
converted between December 31, 1997 and December 31, 2000). The
Trust currently expects REALCO to elect this conversion in the
fourth quarter of 1997.
The Trust has not paid distributions on a regular basis
since 1993. On November 4, 1997, the Board of Trust Managers
announced that a review of the Trust's distribution policy had
commenced. While the Trust may resume regular quarterly
distributions in the near future, any resumption of distributions
will depend upon accretive property acquisitions, continued
improvement in the Trust's operations, liquidity of the Trust,
and other circumstances existing at such time.
At September 30, 1997, the Trust had $41,380,000 in mortgage
debt outstanding, all of which is comprised of fixed rate debt
with a weighted average interest rate of 8.61%. This debt
represents a debt to total market capitalization ratio of
approximately 37%. The Trust intends to lower this ratio in the
future through additional equity placements and future purchases
of real estate properties with less leverage.
Recent Developments
On August 29, 1997, the Trust purchased two light industrial
properties with 137,265 net rentable square feet in the Dallas,
Texas area for a total of $6.4 million in cash.
On October 3, 1997, the Trust, as general partner in a
limited partnership, purchased a portfolio of eight properties
with 783,780 net rentable square feet located in Dallas and
suburban areas of Dallas, Texas. The purchase price of the
portfolio was $36.8 million. The purchase price was partially
financed by a borrowing of approximately $20.7 million under the
secured acquisition line described below and approximately $2.8
million of limited partnership units ("OP Units") issued to the
limited partners of the partnership. Beginning on October 3,
1999, the OP Units are redeemable for cash or, at the election of
the Trust (as general partner), common shares on a one-for-one
basis. In addition, the limited partners received warrants,
which expire on October 3, 2000, to purchase 40,000 common shares
at $17.50 per share.
The Trust entered into a $35,000,000 secured acquisition
line with Prudential Securities Corporation on October 3, 1997.
The credit line, which will be secured by properties acquired
with proceeds from the credit line, bears variable interest at a
rate based on the 30 day LIBOR rate plus 200 basis points. The
maximum loan to value ratio for borrowings is 70%. Unless
extended, borrowings under the credit line mature on October 3,
1998 and, if not repaid, allow the lender to move such borrowings
into a securitized mortgage pool. The Trust intends to refinance
borrowings under this credit line with proceeds from future
permanent financing transactions or equity offerings.
PART II. OTHER INFORMATION
Item 1.Legal Proceedings.
On August 20, 1997, a lawsuit was filed in the Superior
Court of the State of Arizona against certain entities, including
the Trust and the general partners of each RELP, alleging, among
other things, breaches of fiduciary duty in connection with the
transactions contemplated in the merger agreements. The lawsuit
seeks, among other things, to enjoin the consummation of the
merger and damages, including attorneys' fees and expenses. The
defendants in the lawsuit believe that the plaintiffs' claims are
without merit and intend to defend vigorously against the
lawsuit. However, no assurance can be given that the plaintiffs
in the lawsuit will not be successful.
Item 2.Changes in the Rights of the Company's Security Holders
REALCO holds outstanding debt of the Trust in the amount of
$5,449,618 and has the option to convert the principal amount of
this debt into Shares of the Trust at $10.00 per share (if
converted prior to December 31, 1997) or $11.25 per share (if
converted between December 31, 1997 and December 31, 2000). If
REALCO converts prior to December 31, 1997, REALCO will receive
544,962 Shares. This transaction was determined to be exempt
from registration under Section 4(2) of the Securities Act of
1933, as amended, because the transaction did not involve a
public offering.
In two separate transactions in July 1997, the Trust sold a
total of 1,433,483 Shares at $12.25 per Share (total proceeds of
$17,560,176) to certain clients and affiliates of Morgan Stanley
Asset Management, Inc. (collectively, "MSAM"). The placement
agent for the transaction was Prudential Securities, Inc. and the
total commission charged was $702,407. The agreement with MSAM
allows them to purchase an additional 199,169 Shares at $12.25
per Share. This transaction was determined to be exempt from
registration under Section 4(2) of the Securities Act of 1933, as
amended, because the transaction did not involve a public
offering and the sale was made to an accredited investor.
In July 1997, the Trust sold a total of 1,224,489 Shares at
$12.25 per Share (total proceeds of $15,000,000) to certain
clients of ABKB/LaSalle Securities Limited Partnership and
LaSalle Advisors Limited Partnership. The placement agent for
the transaction was Prudential Securities, Inc. and the total
commission charged was $600,000. This transaction was determined
to be exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended, because the transaction did
not involve a public offering and the sale was made to an
accredited investor.
Item 6.Exhibits and Reports on Form 8-K.
(a) Exhibits
2.1 Agreement and Plan of Merger by and between the
Trust and USAA Real Estate Investments I, A California
Limited Partnership dated as of June 30, 1997 (filed as
Exhibit 10.1 to the Trust's Current Report on Form 8-K
dated June 30, 1997, filed with the Commission on July
22, 1997 (File No. 1-9016), and incorporated by
reference herein)
2.2 Agreement and Plan of Merger by and between the
Trust and USAA Real Estate Investments II Limited
Partnership dated as of June 30, 1997 (filed as Exhibit
10.2 to the Trust's Current Report on Form 8-K dated
June 30, 1997, filed with the Commission on July 22,
1997 (File No. 1-9016), and incorporated by reference
herein)
2.3 Agreement and Plan of Merger by and between the
Trust and USAA Income Properties III Limited
Partnership dated as of June 30, 1997 (filed as Exhibit
10.3 to the Trust's Current Report on Form 8-K dated
June 30, 1997, filed with the Commission on July 22,
1997 (File No. 1-9016), and incorporated by reference
herein)
2.4 Agreement and Plan of Merger by and between the
Trust and USAA Income Properties IV Limited Partnership
dated as of June 30, 1997 (filed as Exhibit 10.4 to the
Trust's Current Report on Form 8-K dated June 30, 1997,
filed with the Commission on July 22, 1997 (File No. 1-
9016), and incorporated by reference herein)
3.1 Third Amended and Restated Declaration of Trust
(filed as Exhibit 3.1 to the Trust's Registration
Statement on Form S-4 filed with the Commission on July
22, 1997 (File No. 333-31823), and incorporated by
reference herein)
3.2 Fourth Amended and Restated Bylaws of Trust (filed
as Exhibit 3.1 to the Trust's Current Report on Form 8-
K dated October 3, 1995, filed with the Commission on
October 3, 1995 (File No. 1-9016), and incorporated by
reference herein)
3.3 Amendment to the Fourth Amended and Restated
Bylaws of Trust (filed as Exhibit 99.1 to the Trust's
Current Report on Form 8-K dated November 13, 1995,
filed with the Commission on November 15, 1995 (File
No. 1-9016), and incorporated by reference herein)
3.4 Amendment to the Fourth Amended and Restated
Bylaws of Trust (filed as Exhibit 99.3 to the Trust's
Current Report on Form 8-K dated December 23, 1996,
filed with the Commission on December 24, 1996 (File
No. 1-9016), and incorporated by reference herein)
3.5 Amendments to the Fourth Amended and Restated
Bylaws of Trust (filed as Exhibit 99.3 to the Trust's
Current Report on Form 8-K dated December 23, 1996,
filed with the Commission on December 24, 1996 (File
No. 1-9016), and incorporated by reference herein)
4.1 Registration Rights Agreement dated as of December
19, 1996 by and between the Trust and USAA Real Estate
Company ("REALCO") (filed as Exhibit 99.8 to the
Trust's Current Report on Form 8-K dated December 23,
1996, filed with the Commission on December 24, 1996
(File No. 1-9016), and incorporated by reference
herein)
4.2 Registration Rights Agreement dated as of December
20, 1996 by and between the Trust and REALCO (filed as
Exhibit 99.8 to the Trust's Current Report on Form 8-K
dated December 23, 1996, filed with the Commission on
December 24, 1996 (File No. 1-9016), and incorporated
by reference herein)
4.3 Registration Rights Agreement dated as of June 20,
1997, by and among the Trust, MS Real Estate Special
Situations, Inc. ("MSRE") and Morgan Stanley Asset
Management, Inc. ("MSAM") as agent and attorney-in-fact
for specified clients (the "MSAM Purchasers") (filed as
Exhibit 10.6 to the Trust's Current Report on Form 8-K
dated June 30, 1997, filed with the Commission on July
22, 1997 (File No. 1-9016), and incorporated by
reference herein)
4.4 Registration Rights Agreement dated as of July 10,
1997, by and among the Trust, ABKB/LaSalle Securities
Limited Partnership as agent for and for the benefit of
certain clients, and LaSalle Advisors Limited
Partnership as agent for and for the benefit of a
certain client (filed as Exhibit 10.10 to the Trust's
Current Report on Form 8-K dated June 30, 1997, filed
with the Commission on July 22, 1997 (File No. 1-9016),
and incorporated by reference herein)
4.5 Renewal, Extension, Modification and Amendment
Agreement dated as of February 26, 1997, executed by
the Trust in favor of REALCO (filed as Exhibit 10.1 to
the Trust's Current Report on Form 8-K dated March 4,
1997, filed with the Commission on March 4, 1997 (File
No. 1-9016), and incorporated by reference herein)
10.1 Common Share Purchase Agreement dated as of June
20, 1997, by and among the Trust, MSRE and MSAM, as
agent and attorney-in-fact on behalf of the MSAM
Purchasers (filed as Exhibit 10.5 to the Trust's
Current Report on Form 8-K dated June 30, 1997, filed
with the Commission on July 22, 1997 (File No. 1-9016),
and incorporated by reference herein)
10.2 Common Share Purchase Agreement dated as of July
3, 1997, by and between the Trust and ABKB/LaSalle
Securities Limited Partnership as agent for and for the
benefit of a certain client (filed as Exhibit 10.7 to
the Trust's Current Report on Form 8-K dated June 30,
1997, filed with the Commission on July 22, 1997 (File
No. 1-9016), and incorporated by reference herein)
10.3 Common Share Purchase Agreement dated as of July
3, 1997, by and between the Trust and ABKB/LaSalle
Securities Limited Partnership as agent for and for the
benefit of a certain client (filed as Exhibit 10.8 to
the Trust's Current Report on Form 8-K dated June 30,
1997, filed with the Commission on July 22, 1997 (File
No. 1-9016), and incorporated by reference herein)
10.4 Common Share Purchase Agreement dated as of July
3, 1997, by and between the Trust and LaSalle Advisors
Limited Partnership as agent for and for the benefit of
a certain client (filed as Exhibit 10.9 to the Trust's
Current Report on Form 8-K dated June 30, 1997, filed
with the Commission on July 22, 1997 (File No. 1-9016),
and incorporated by reference herein)
10.5 Employee and Trust Manager Incentive Share Plan
(filed as Exhibit 3.1 to the Trust's Registration
Statement on Form S-4 filed with the Commission on July
22, 1997 (File No. 333-31823), and incorporated by
reference herein)
22.1 Final Report of Inspectors of Election (filed as
Exhibit 99.1 to the Trust's Current Report on Form 8-K
dated June 30, 1997, filed with the Commission on July
22, 1997 (File No. 1-9016), and incorporated by
reference herein)
27.1 Financial Data Schedule (filed only electronically
with the Commission)
(b) Reports on Form 8-K
Current Report on Form 8-K dated August 20, 1997 and
filed on September 2, 1997, containing information under
Item 5 (Other Events)
SIGNATURES
Pursuant to the requirements 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.
AMERICAN INDUSTRIAL PROPERTIES REIT
(Registrant)
Date:November 12, 1997 /s/ Marc A. Simpson
Marc A. Simpson
Vice President and
Chief Financial Officer
(principal accounting
and financial officer)