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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 June 30, 1998
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
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AMERICAN INDUSTRIAL PROPERTIES REIT
(Exact name of registrant as specified in its charter)
TEXAS 75-6335572
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
6210 NORTH BELTLINE ROAD, SUITE 170
IRVING, TEXAS 75063-2656
(Address of principal executive offices) (Zip Code)
(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: 13,336,041 Shares of
Beneficial Interest were outstanding as of August 11, 1998.
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AMERICAN INDUSTRIAL PROPERTIES REIT
FORM 10-Q
FOR THE THREE MONTHS AND THE SIX MONTHS ENDED JUNE 30, 1998
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the three months and six months
ended June 30, 1998 and 1997 (unaudited)............................................... 3
Consolidated Balance Sheets as of June 30, 1998 (unaudited) and
December 31, 1997...................................................................... 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 (unaudited)..................................................... 5
Notes to Consolidated Financial Statements (unaudited)................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 17
Item 2. Changes in the Rights of the Company's Security Holders................................ 17
Item 6. Exhibits and Reports on Form 8-K....................................................... 17
SIGNATURES........................................................................................... 18
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AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except share and per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
REVENUES
Rents $ 8,533 $ 1,925 $ 15,763 $ 3,895
Tenant reimbursements 2,371 659 3,640 1,326
Interest income 171 2 398 31
------------ ------------ ------------ ------------
11,075 2,586 19,801 5,252
------------ ------------ ------------ ------------
EXPENSES
Property operating expenses:
Property taxes 1,072 332 2,000 687
Property management fees 339 96 598 194
Utilities 539 86 857 183
General operating 852 203 1,273 422
Repairs and maintenance 348 90 593 179
Other property operating expenses 391 98 718 176
Depreciation and amortization 1,937 697 3,553 1,390
Interest on unsecured notes payable 48 495 208 885
Interest on mortgages payable 3,431 947 5,934 1,961
Administrative expenses:
Trust administration and overhead 955 395 1,749 811
Litigation and proxy costs -- 201 -- 437
------------ ------------ ------------ ------------
9,912 3,640 17,483 7,325
------------ ------------ ------------ ------------
Gain (loss) from operations 1,163 (1,054) 2,318 (2,073)
Minority interests in
consolidated subsidiaries (62) -- (119) --
Gain on sale of real estate -- -- -- 312
------------ ------------ ------------ ------------
Income (loss) before extraordinary items 1,101 (1,054) 2,199 (1,761)
Extraordinary gain on extinguishment of debt -- -- -- 2,643
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 1,101 $ (1,054) $ 2,199 $ 882
============ ============ ============ ============
PER SHARE DATA (BASIC AND DILUTED) (A)
Income (loss) before extraordinary items $ 0.10 $ (0.53) $ 0.20 $ (0.88)
Extraordinary gain on extinguishment of debt -- -- -- 1.32
------------ ------------ ------------ ------------
Net Income (Loss) $ 0.10 $ (0.53) $ 0.20 $ 0.44
============ ============ ============ ============
Distributions Paid $ 0.20 $ -- $ 0.38 $ --
============ ============ ============ ============
Weighted average shares outstanding-basic 11,080,452 2,000,000 10,849,035 2,000,000
============ ============ ============ ============
Weighted average shares outstanding-diluted 11,107,452 2,000,000 10,862,535 2,000,000
============ ============ ============ ============
(a) The number of Shares outstanding and per share data for the three and
six months ended June 30, 1997 have been restated to reflect the
impact of the one-for-five reverse Share split, which was approved by
the Trust's shareholders on October 15, 1997.
The accompanying notes are an integral part
of these financial statements.
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AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
JUNE 30, December 31,
1998 1997
------------ ------------
(unaudited)
ASSETS
Real estate:
Held for investment $ 349,330 $ 265,312
Accumulated depreciation (28,874) (25,521)
------------ ------------
Net real estate 320,456 239,791
Cash and cash equivalents:
Unrestricted 10,107 11,683
Restricted 3,926 2,121
------------ ------------
Total cash and cash equivalents 14,033 13,804
Other assets, net 7,536 4,800
------------ ------------
Total Assets $ 342,025 $ 258,395
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 189,519 $ 114,226
Unsecured notes payable -- 7,200
Accrued interest 1,098 269
Accounts payable, accrued expenses and other liabilities 4,286 7,231
Distribution payable 2,394 --
Tenant security deposits 1,414 1,254
------------ ------------
Total Liabilities 198,711 130,180
------------ ------------
Minority interests 7,268 6,444
Shareholders' Equity:
Shares of beneficial interest, $0.10 par value; authorized 500,000,000
Shares issued and outstanding 11,231,680 Shares at June 30, 1998 and
9,817,171 Shares at December 31, 1997 1,124 982
Additional paid-in capital 242,415 224,989
Less Shares in treasury, at cost; 138,086 at June 30, 1998 and 42,103 at
December 31, 1997 (1,888) (626)
Accumulated distributions (62,686) (58,456)
Accumulated loss from operations and extraordinary gains (losses) (46,230) (48,429)
Accumulated net realized gain on sales of real estate 3,311 3,311
------------ ------------
Total Shareholders' Equity 136,046 121,771
------------ ------------
Total Liabilities and Shareholders' Equity $ 342,025 $ 258,395
============ ============
The accompanying notes are an integral part
of these financial statements.
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AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Six Months Ended
June 30,
--------------------------
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,199 $ 882
Adjustments to reconcile net income to net cash
used in operating activities:
Extraordinary gains -- (2,643)
Gains on sale of real estate -- (312)
Minority interests in consolidated subsidiaries 119 --
Depreciation 3,353 1,218
Amortization of deferred financing costs 181 98
Other amortization 617 172
Changes in operating assets and liabilities:
(Increase) decrease in other assets and
restricted cash (4,377) 57
Decrease in accounts payable, other
liabilities and tenant security deposit (3,255) (623)
Increase in accrued interest 829 636
---------- ----------
Net Cash Used In Operating Activities (334) (515)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of real estate and related working capita (80,565) --
Net proceeds from sale of real estate -- 2,029
Capitalized expenditures (2,905) (430)
---------- ----------
Net Cash Provided By (Used In) Investing Activities (83,470) 1,599
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgage notes payable (47,032) (3,841)
Proceeds from mortgage financing 115,125 --
Proceeds from sale of Shares, net 17,568 --
Purchase of treasury shares (1,262) --
Distributions to minority interests (170) --
Distributions to shareholders (2,001) --
---------- ----------
Net Cash Provided By (Used In) Financing Activities 82,228 (3,841)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (1,576) (2,757)
Cash and Cash Equivalents at Beginning of Year 11,683 4,010
---------- ----------
Cash and Cash Equivalents at End of Year $ 10,107 $ 1,253
========== ==========
Cash Paid for Interest $ 5,132 $ 2,112
========== ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Operating partnership units 875 --
Other assets and unrestricted cash (427) --
Accounts payable and tenant security deposits 635 --
Declaration of distributions 2,219
========== ==========
Net Non-Cash Investing and Financing Activities $ 3,302 $ --
========== ==========
The accompanying notes are an integral part
of these financial statements.
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AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(unaudited)
NOTE 1 -- BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
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 American Industrial Properties REIT's (the "Trust") 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, 1997, 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.
The Trust is a self-administered Texas real estate investment trust
which, as of June 30, 1998, owned and operated 46 commercial real estate
properties consisting of 34 industrial properties, 10 office buildings and 2
retail properties. The Trust was formed September 26, 1985 and commenced
operations on November 27, 1985. Pursuant to the Trust's 1993 Annual Meeting of
Shareholders, amendments to the Trust's Declaration of Trust and Bylaws were
approved which, among other things, changed the name of the Trust to American
Industrial Properties REIT and converted the Trust from a finite life entity to
a perpetual life entity.
Principles of Consolidation. The consolidated financial statements of
the Trust include the accounts of the Trust and its wholly-owned subsidiaries
and majority-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.
Rents and Tenant Reimbursements. Rental income, including contractual
rent increases or delayed rent starts, is recognized on a straight-line basis
over the lease term. The Trust has recorded deferred rent receivable
(representing the excess of rental revenue recognized on a straight line basis
over actual rents received under the applicable lease provisions) of $881,000
and $525,000 at June 30, 1998 and December 31, 1997, respectively.
Manhattan Towers, an office property, has rental revenues in excess of
10% of the total revenues of the Trust. Rental revenues and tenant
reimbursements from Manhattan Towers totaled $1,223,000 in the second quarter of
1998, representing 11% of the Trust's total revenues for the period.
Income Tax Matters. 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 distributions paid during the year.
Earnings and profits, which will determine the taxability of
distributions to shareholders, will differ from that reported for financial
reporting purposes due primarily to differences in the basis of the assets, the
estimated useful lives used to compute depreciation and the straight line rent
adjustment.
Reverse Share Split. On October 15, 1997, the Trust's shareholders
approved a one-for-five reverse share split of its Common Shares of Beneficial
Interest ("Shares"). All references to the number of Shares and per Share
amounts have been restated to reflect the impact of the reverse Share split.
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AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(unaudited)
NOTE 2 -- REAL ESTATE:
At June 30, 1998 and December 31, 1997, real estate was comprised of
the following:
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
Held for investment:
Land................................. $ 75,789,000 $ 56,315,000
Buildings and improvements 273,541,000 208,997,000
------------- -------------
Total.................................... $ 349,330,000 $ 265,312,000
============= =============
In the second quarter of 1998, the Trust acquired seven real estate
properties for approximately $65.8 million. To fund these acquisitions, the
Trust paid approximately $23.1 million in cash and obtained $42.7 million of
financing under a secured bridge loan.
In accordance with accounting pronouncement EITF 97-11, the Trust has
changed its capitalization policy with respect to internal preacquisition costs.
On March 19, 1998, the Trust ceased capitalizing the costs related to the
internal acquisition department. The Trust capitalized $160,000 through March
19, 1998 and $401,000 for the year ended December 31, 1997.
NOTE 3 -- MORTGAGE NOTES PAYABLE:
At June 30, 1998, 41 of the Trust's 46 properties were subject to liens
securing mortgage notes payable totaling $189,519,000. Of this amount,
approximately $108,836,000 was represented by mortgage notes with fixed interest
rates ranging from 7.25% to 11.0% and a weighted average interest rate of 8.0%.
Approximately $38,033,000 and $42,650,000 represented borrowings under the
Trust's secured acquisition credit line and secured bridge loan, respectively,
with Prudential Securities Credit Corporation. The acquisition credit line and
bridge loan bear interest at the 30 day LIBOR rate plus 1.75% and mature in
December 1998. The interest rate at June 30, 1998 was 7.41%.
Certain of the mortgage notes payable contain cross default and cross
collateralization provisions whereby a default under one note can trigger a
default under other notes. Certain of the mortgage notes payable, including the
line of credit and bridge loan, also contain various borrowing restrictions and
operating performance covenants. The Trust is in compliance with all such
restrictions and covenants as of June 30, 1998. The unused commitment under the
acquisition credit line and the bridge loan at June 30, 1998 are $37.0 and $2.3
million, respectively, subject to certain restrictions and provisions of the
line of credit.
NOTE 4 -- UNSECURED NOTES PAYABLE:
As a result of the December 31, 1997 merger with four real estate
limited partnerships, the Trust assumed an unsecured indebtedness of $7,200,000
payable to a significant shareholder of the Trust. In April 1998, the Trust
refinanced this amount with proceeds from a financing under its acquisition
credit line.
NOTE 5 -- MINORITY INTERESTS:
Operating Partnerships. The AIP-SWAG Operating L.P. and the AIP
Operating, L.P. have 179,085 and 58,333 limited partnership units outstanding,
respectively, as of June 30, 1998 (excluding limited partnership units held by
the Trust). Pursuant to the limited partnership agreement for each partnership,
the limited partners received rights (the "Redemption Rights") that enable them
to cause the partnership to redeem each limited partnership unit for cash equal
to the value, as determined in accordance with the partnership agreement, of a
Share (or, at the Trust's election, the Trust may purchase each limited
partnership unit offered for redemption for one Share). The
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Redemption Rights generally may be exercised at any time after one year
following the issuance of the limited partnership units. The number of Shares
issuable upon exercise of the Redemption Rights will be adjusted for share
splits, mergers, consolidations or similar pro rata transactions, which would
have the effect of diluting the ownership interests of the limited partners or
the shareholders of the Trust. The limited partners' interest in each
partnership is reflected as minority interest in the accompanying consolidated
financial statements.
Other Partnerships. In connection with the merger of four real estate
limited partnerships, effective December 31, 1997, the Trust acquired a 55.84%
interest in Chelmsford Associates LLC, formerly Chelmsford Associates Joint
Venture, a joint venture owning one office property. The remaining 44.16%
interest is owned by a significant shareholder of the Trust. The financial
position and results of operations of the joint venture is included in the
consolidated financial statements of the Trust. The other venturer's interest in
the partnership is reflected as minority interest in the accompanying
consolidated financial statements.
NOTE 6 -- SHAREHOLDERS' EQUITY:
Capital Stock. On March 5, 1998, the Trust announced a Share repurchase
program, wherein the Trust may purchase up to 1,000,000 Shares over the next six
months. These purchases will be made in open market transactions, as price and
market conditions allow. As of June 30, 1998, the Trust has purchased 95,983
Shares in the open market, for an aggregate cost of $1,258,958. These Shares are
held in treasury.
On March 24, 1998 the Trust announced a dividend reinvestment and share
purchase plan. As of June 30, 1998, 11,264 Shares were purchased for a cost of
$138,618.
Private Placement. On January 30, 1998, the Trust completed a $10
million private equity placement at $13.625 per Share. In February 1998, two
investment groups exercised their preemptive rights and acquired $5 million and
$3.75 million, respectively, of Shares at $13.625 per Share. The Shares are of
the same class as the Trust's existing Shares and are entitled to the same
voting and distribution rights as all Shares, subject to certain restrictions on
the resale of the Shares.
Share Options, Dividend Equivalent Rights and Restricted Shares.
Effective April 1, 1998, the Board of Trust Managers approved awards of 460,000
share options to 12 members of management. The options vest 20% annually and
have an exercise price of $13.625 per Share. The Board also approved grants of
dividend equivalent rights to the 12 members of management whereby the grantees
are entitled to receive a payment equal to the dividends declared and paid by
the Trust on 460,000 Shares. The dividends payable to the grantees shall be paid
annually on or before December 31 of each calendar year, for a period of ten
years from the date of grant, unless earlier terminated. In addition, the Board
approved the award of 27,000 restricted shares to four members of management.
The restricted shares vest 25% annually beginning on the first anniversary date
of the date of grant.
NOTE 7 -- TRANSACTIONS WITH RELATED PARTIES:
Certain real estate investments are managed by Quorum Real Estate
Services Corporation ("Quorum") an affiliate of a major shareholder of the
Trust. For Quorum services, including but not limited to construction, tenant
finish, leasing and management, Quorum is paid competitive rates.
The Trust paid management fees of $139,000 and leasing commissions of
$19,000 to Quorum for the quarter ended June 30, 1998. For the six months ended
June 30, 1998, management fees and leasing commissions paid by the Trust to
Quorum were $249,000 and $125,000, respectively. No such fees were paid by the
Trust in 1997.
NOTE 8 -- LITIGATION:
The Trust is currently named as a defendant in a lawsuit related to the
Trust's merger with four real estate
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limited partnerships. The lawsuit purports to be both a class action and a
derivative lawsuit against the defendants. The plaintiffs have asserted various
claims, including breach of fiduciary duty and various securities law
violations, against the parties to the merger and certain individuals and are
seeking monetary damages. On April 13, 1998 the Trust was named as a defendant
in an additional purported class action lawsuit related to the Trust's merger
with the four real estate limited partnerships. The plaintiffs have asserted
various claims, including breach of fiduciary and contractual duties and various
securities law violations, against the parties to the merger and are seeking
monetary damages. The Trust intends to vigorously defend against these claims.
In management's opinion, the liabilities, if any, that may ultimately result
from such legal actions are not expected to have a material adverse effect on
the consolidated financial position or results of operations of the Trust.
Although the Trust is not currently involved in any significant
litigation other than that described above, the Trust may, on occasion and in
the normal course of business, be involved in legal actions relating to the
ownership and operations of its properties. In management's opinion, the
liabilities, if any, that may ultimately result from such legal actions are not
expected to have a material adverse effect on the consolidated financial
position or results of operations of the Trust.
NOTE 9 -- DISTRIBUTIONS:
On January 29, 1998, the Trust reinstated quarterly distributions to
shareholders. A distribution of $0.18 per share was paid on April 14, 1998, to
shareholders of record on April 3, 1998. A distribution of $0.20 per share was
payable on July 14, 1998, to shareholders of record on July 3, 1998.
NOTE 10 -- PER SHARE DATA:
The following table sets forth the computation of basic and diluted
earnings per share:
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Basic and diluted earnings per share:
Numerator:
Income/(Loss) before extraordinary items ..... $ 1,101,000 $(1,054,000) $ 2,199,000 $(1,761,000)
Extraordinary items .......................... -- -- -- 2,643,000
----------- ----------- ----------- -----------
Net income ................................... $ 1,101,000 $(1,054,000) $ 2,199,000 $ 882,000
Denominator:
Weighted average shares ...................... 11,080,452 2,000,000 10,849,035 2,000,000
Plus restricted shares ....................... 27,000 -- 13,500 --
----------- ----------- ----------- -----------
Adjusted weighted average shares ............. 11,107,452 2,000,000 10,862,535 2,000,000
Basic and diluted earnings per share:
Income/(Loss) before extraordinary ........... $ 0.10 $ (0.53) $ 0.20 $ (0.88)
Extraordinary items .......................... -- -- -- 1.32
Net income ................................... $ 0.10 $ (0.53) $ 0.20 $ 0.44
The following potential common Shares were not included in the adjusted
weighted average shares for 1998 as (i) options to purchase 460,000 Shares at
$13.625 per share, 135,000 Shares at $15.00 per share and 4,000 Shares at
$14.688 per share were outstanding but were not included in a computation of
diluted earnings per share because the options' exercise price was greater than
the average market price of the Shares and, therefore, the effect would be
antidilutive; and (ii) diluted earnings per share are the same as basic earnings
per share for 1997, as the Trust had a loss from operations and, therefore, the
effect would be antidilutive.
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At June 30, 1998, 40,000 warrants were outstanding. The warrants have
an exercise price of $17.50 per share and expire in October 2000. Because the
warrants exercise price was greater than the average market price of the Shares
the effect would be antidilutive.
On April 1, 1998, 27,000 restricted Shares were issued to members of
management pursuant to the Trust's Employee and Trust Manager Share Incentive
Plan. The restricted Shares vest 25% annually beginning on the first anniversary
date of the date of grant.
NOTE 11 -- SUBSEQUENT EVENTS:
On July 17, 1998, the Trust paid off a mortgage loan of approximately
$1.2 million, which carried a fixed interest rate of 11%. The Trust incurred a
prepayment penalty of approximately $12,000.
On July 29, 1998, the Board of Trust Managers declared a distribution
for the third quarter of 1998 of $0.20 per share, payable on October 14, 1998,
to shareholders of record as of October 2, 1998.
On July 30, 1998, the Trust purchased Norfolk Commerce Park, a 323,731
square foot light industrial project consisting of three buildings in Norfolk,
Virginia for $20,450,000. The acquisition was initially funded with proceeds
from a $21.2 million demand note to Developers Diversified Realty Corporation
("DDR"). Terms of the note include an interest rate of 10.25% and interest only
payments to be paid quarterly. This note was reduced to $6.5 million with
proceeds from the equity transaction described below.
On August 3, 1998, the Trust entered into a definitive agreement
providing for a strategic investment by DDR in the Trust. Under the terms of the
Share Purchase and Merger Agreements (the "Agreements"), dated to be effective
as of July 30, 1998, DDR will acquire approximately $115 million of newly issued
common shares of beneficial interest at $15.50 per share. DDR made an initial
purchase of 949,147 shares for $14.7 million and additionally acquired 1,258,471
shares in exchange for five properties previously owned by DDR and valued at
approximately $19.5 million. The total shares acquired represent 19.9% of the
Trust's outstanding shares. DDR will purchase an additional 5,226,583 shares for
$81.0 million, increasing its ownership to 40.0% of the Trust's shares on a
fully-diluted basis, following shareholder approval at a Special Meeting of
Shareholders to be held before the end of 1998, to fund property acquisitions.
The Trust acquired the five industrial properties under the Merger
Agreement between the Trust and DDR Office Flex Corporation, a wholly owned
subsidiary of DDR. The five properties, consisting of light and bulk industrial
space totaling approximately 464,000 square feet, are located in the Cleveland,
Ohio area.
Concurrent with entering into the Agreements, the Trust increased its
Board of Trust Managers by four positions and appointed DDR designees Scott A.
Wolstein, Albert T. Adams, Robert H. Gidel and James A. Schoff to the Board. Mr.
Wolstein has been named Chairman of the Board of Trust Managers.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Trust and accompanying Notes included
elsewhere in this report as well as the audited financial statements appearing
in the Trust's 1997 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
Section 21E of the Securities Exchange 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, 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.
RESULTS OF OPERATIONS
Comparison of Three Months Ended June 30, 1998 to June 30, 1997
The weighted average amount of net rentable square feet owned by the
Trust increased from 1,403,000 square feet during the three months ended June
30, 1997 to 4,837,000 square feet for the same period in 1998, an increase of
245%. Property revenues increased 322% to $10,904,000 in 1998 from $2,584,000 in
1997, and net operating income increased 339% to $7,363,000 in 1998 from
$1,679,000 in 1997 as a result of these acquisitions. The percentage increase in
property revenues and net operating income was larger due to the significant
amount of office properties acquired in late 1997. Overall leased occupancy of
the Trust's portfolio was 91.1% at June 30, 1998 compared to 93.7% at June 30,
1997. This decrease in occupancy reflects the 1998 acquisition of certain
properties with less than stabilized occupancy and the non-renewal of certain
tenants occurring during June 1998.
On a same property basis, property revenues increased from $2,413,000 in
1997 to $2,481,000 in 1998, an increase of 2.8%, comprised of a 1.6% increase in
revenue related to nine industrial properties, a 19.3% increase in revenue
related to an office property, and a 1.8% increase in revenue at the Trust's
retail property in Denver, Colorado.
On a same property basis, net operating income (which is defined as
property revenues less property operating expenses and which does not include
depreciation and amortization, interest expense, or Trust administration and
overhead expenses) increased from $1,548,000 in 1997 to $1,567,000 in 1998, an
increase of 1.2%. This overall increase is comprised of a 1.2% increase related
to nine industrial properties, a 21.4% increase related to an office property,
and a 2.1% decrease related to the Trust's retail property. Same property
operating expenses increased by 5.7%, due in large part to higher property
taxes.
For the three months ending June 30, 1998, the Trust reported income
before extraordinary items of $1,101,000, compared to a loss of $1,054,000 in
1997. This increase relates to the increase in net operating income of
$5,684,000 explained above, an increase in interest income of $169,000 (due to
higher investable amounts as a result of approximately $18.7 million in private
equity placements in 1998), offset by an increase in total interest expense of
$2,037,000 (due to the increased debt levels associated with property
acquisitions), an increase in Trust administration and overhead expenses and
litigation and proxy costs of $359,000 (consisting of an increase in general
expenses of $560,000 due to the increased activity of the Trust during 1997 and
1998 and a decrease of $201,000 in litigation and proxy costs as a result of the
settlement of shareholder litigation in 1996) and an increase in depreciation
and amortization of $1,240,000 (due to the acquisition of approximately $250
million of properties between August 1997 and May 1998).
Comparison of Six Months Ended June 30, 1998 to June 30, 1997
The weighted average amount of net rentable square feet owned by the
Trust during the six months ended June 30, 1998 increased to 4,521,000 square
feet from 1,424,000 square feet for the same period in 1997, an increase of
217%. Property revenues increased 272% to $19,403,000 for the six months ended
June 30, 1998 from $5,221,000 for the same period in 1997, and net operating
income increased 295% to $13,364,000 for the six months ended June 30, 1998 from
$3,380,000 for the same period in 1997 as a result of acquisitions. The
percentage increase in
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property revenues and net operating income was larger than the percentage
increase in the weighted average square feet owned primarily as a result of the
significant amount of office properties acquired in late 1997.
On a same property basis, property revenues increased from $4,775,000
for the six months ended June 30, 1997 to $4,865,000 for the same period in
1998, an increase of 1.9%, comprised of a 0.2% decrease in revenue related to
nine industrial properties, a 14.2% increase in revenue at an office property,
and a 3.4% increase in revenue at the Trust's retail property in Denver,
Colorado. The increase in revenue at the Trust's retail property stemmed
principally from an increase in percentage rents, of which the majority related
to higher ticket sales at the movie theatre tenant.
On a same property basis, net operating income (which is defined as
property revenues less property operating expenses and which does not include
depreciation and amortization, interest expense, or Trust administration and
overhead expenses) increased from $3,052,000 for the six months ended June 30,
1997 to $3,125,000 for the same period in 1998, an increase of 2.4%. This
overall increase is comprised of a 0.1% decrease related to nine industrial
properties a 15.5% increase related to an office property, and a 6.5% increase
related to the Trust's retail property. The increase in the Trust's retail
property is primarily related to the increase in revenue explained above. Same
property operating expenses increased by 1.0%.
During the six months ended June 30, 1997, the Trust recognized
extraordinary gains on extinguishment of debt of $2,643,000 resulting from the
settlement of litigation.
Cash flow used in operating activities in the six months ended June 30,
1998 was $334,000. Included in this amount is $4,377,000 related to an increase
in other assets and restricted cash and $3,255,000 related to a decrease in
accounts payable, other liabilities and tenant security deposits. These amounts
include certain items which the Trust believes to be nonrecurring, including the
reclassification of certain accrued amounts and the payment of costs accrued at
December 31, 1997 related to the Trust's merger with four real estate limited
partnerships.
Cash flow used in investing activities in the six months ended June 30,
1998 was $83,470,000, representing amounts expended on the acquisition of real
estate and related working capital totaling $80,565,000, and capitalized
expenditures of $2,905,000.
Cash flow provided by financing activities in the six months ended June
30, 1998 was $82,228,000. This amount reflects net proceeds from mortgage
financings and repayments of mortgage principal of $68,093,000, net proceeds
from the private placement of Shares of $17,568,000, repurchase of Shares
totaling $1,262,000 and distributions to shareholders of $2,001,000.
Funds from Operations
The Board of Governors of the National Association of Real Estate
Investment Trusts, Inc. ("NAREIT") defines Funds from Operations ("FFO") as 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. The Trust
calculates FFO in a manner consistent with the NAREIT definition. 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 non-recurring interest accrual
related to the conversion of the modified notes held by an affiliate into
Shares. Funds Available for Distribution ("FAD") is also presented as it more
accurately portrays the ability of the Trust to make distributions because it
reflects recurring capital expenditures.
The Trust characterizes its capital expenditures as recurring and
nonrecurring. Recurring capital expenditures include 1) tenant improvements and
leasing commissions, which include improvements and prepaid leasing commissions
related to new and renewing tenants; 2) capital repairs and replacements, which
extend the useful life of an asset, such as roofs or parking lots; and 3)
corporate fixed assets, which are primarily relate to corporate furniture,
fixtures and equipment. Nonrecurring capital expenditures include 1) initial
capital expenditures, which are costs identified at the time of property
acquisition as costs required to bring the property to intended leasable
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condition at the acquisition date; and 2) expansions and renovations, which are
expenditures resulting in additions to leasable square footage or major
renovations which are revenue enhancing.
A summary of capital expenditures for each of the six months ended June
30, 1998 and 1997 is as follows:
1998 1997
------------------ --------------------
Amt PSF (a) Amt PFS (a)
(000) (000)
Recurring capital expenditures:
Tenant improvements and
leasing commissions ............................ $ 857 $ 0.19 $ 430 $ 0.30
Capital repairs and replacements .................. 26 0.01 -- --
Corporate fixed assets ............................ 143 0.03 -- --
------- ------- ------- -------
Total .......................................... 1,026 $ 0.23 430 $ 0.30
======= ======= ======= =======
Nonrecurring capital expenditures:
Initial capital expenditures ...................... 1,616 --
Expansions and renovations ........................ 263 --
------- -------
Total .......................................... 1,879 --
------- -------
Total ................................................ $ 2,905 $ 430
======= =======
(a) Based on weighted average square feet owned of 4,521,000
in 1998, and 1,424,000 in 1997.
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 definition. FFO and FAD should 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:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1998 1997 1998 1997
(in thousands) (in thousands)
Net cash provided by (used in) operating $ 1,323 $ (55) $ (334) $ (515)
activities
Net cash provided by (used in) investing (67,456) (254) (83,470) 1,599
activities
Net cash provided by (used in) financing 57,396 (163) 82,228 (3,841)
activities
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The following table shows the Trust's calculation of FFO AND FAD:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(in thousands) (in thousands)
NET INCOME/(LOSS) ........................................ $ 1,101 $ (1,054) $ 2,199 $ 882
Exclude effects of:
Real estate depreciation and
amortization, net of minority
interest share ................................ 1,874 696 3,430 1,389
Minority interest in operating
partnerships .................................. 47 -- 90 --
Gain on sale of real estate ....................... -- -- -- (312)
Extraordinary gain on extinguishment of
debt .............................................. -- -- -- (2,643)
Non-recurring interest accrual related
to conversion of debt to equity ................... -- 375 -- 647
------------ ------------ ------------ ------------
Funds from Operations .................................... $ 3,022 $ 17 $ 5,719 $ (37)
============ ============ ============ ============
Funds from Operations .................................... $ 3,022 $ 17 $ 5,719 $ (37)
Tenant improvements and leasing commissions ....... (471) (254) (857) (430)
Corporate repairs and replacements ................ (26) -- (26) --
Corporate fixed assets ............................ (79) -- (143) --
Non-cash effect of straight-line rents on FFO ... (193) 1 (357) 45
------------ ------------ ------------ ------------
Funds available for distribution ......................... $ 2,253 $ (236) $ 4,336 $ (422)
============ ============ ============ ============
Weighted average Shares and operating
partnership units outstanding (a) ........................ 11,317,870 2,000,000 11,086,453 2,000,000
(a) The number of Shares outstanding for the three and six months ended June
30, 1997 have been restated to reflect the impact of the one-for-five
reverse Share split, which was approved by the Trust's shareholders on
October 15, 1997.
YEAR 2000 ISSUES
Some older computer software was written using two digits rather than
four to define the applicable year. As a result, those computer programs have
time-sensitive software that recognize a date using "00" as the year 1900 rather
than the year 2000. This could cause a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Trust has begun a review of its operations to identify areas of
risk associated with its computer systems functioning properly with respect to
dates in the year 2000 and thereafter. Management believes that the Trust
utilizes Year 2000 compliant hardware and systems for its internal use. Although
the Trust is not aware of any Year 2000 problems with third parties that provide
services to the Trust, management is preparing surveys for its vendors to
identify whether such problems exist. The Trust is also reviewing all properties
which may use date sensitive software in elevators and heating and cooling
equipment to confirm no problem exists. Although a potential area of significant
exposure to the Trust is the contracting to third parties of property management
and leasing services, the Trust utilizes thirty-day cancelable contracts and,
should a material risk arise with respect to the Year 2000 problem, anticipates
terminating the contract and hiring a new vendor. In addition, the Trust
currently plans to transition to self-management and leasing of its own
properties, thereby significantly eliminating the use of third parties for
leasing and management. Although management does not currently believe that the
effect of the Year 2000 problem will have a material impact on the Trust, there
is no guarantee that unforeseen circumstances will not arise which could cause a
material adverse effect upon the Trust's operations.
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LIQUIDITY AND CAPITAL RESOURCES
The principal sources of funds for the Trust's liquidity requirements
are funds generated from operation of the Trust's real estate assets, equity
offerings, debt financings and/or refinancings, and unrestricted cash reserves.
As of June 30, 1998, the Trust had $10.1 million in unrestricted cash.
In order to fund future property acquisitions, the Trust anticipates
entering into equity transactions from time to time. In January 1998, the Trust
completed a $10 million private placement of Shares at $13.625 per Share. In
February 1998, two shareholders exercised their preemptive rights and acquired
an aggregate of $8.7 million of Shares at $13.625 per Share. On February 18,
1998, the Trust filed a Form S-3 shelf registration with the Securities and
Exchange Commission which would provide for the issuance of up to $500 million
in Shares, Preferred Shares of Beneficial Interest, unsecured senior debt
securities and/or warrants to purchase such securities in amounts, at prices and
on terms to be determined by market conditions at the time of future offerings.
The Trust anticipates utilization of this shelf registration in the future to
fund acquisitions and growth of the Trust.
On March 5, 1998, the Board of Trust Managers authorized a Share
repurchase program allowing the Trust to purchase up to 1,000,000 Shares from
time to time in open market transactions, as price and market conditions allow,
over the following six months. As of August 12, 1998, the Trust has purchased
95,983 Shares in the open market, at an aggregate cost of approximately
$1,259,000.
The Trust will also initiate debt transactions from time to time as a
means of sourcing capital with which to acquire properties. The Trust currently
has a secured acquisition line of credit with Prudential Securities Credit
Corporation ("PSCC") which has a maturity in December 1998. The acquisition line
was amended on April 30, 1998 to increase the maximum borrowing amount from $35
million to $75 million and to lower the variable interest rate to the 30 day
LIBOR rate plus 1.75%. The Trust utilizes this line, which limits borrowing to
70% of the value of the properties acquired, to fund acquisitions and
anticipates the repayment of this borrowing with proceeds from future equity
fundings or permanent debt financings.
At June 30, 1998, the Trust had $189.5 million in debt outstanding, of
which approximately $108.8 million was represented by fixed rate debt with a
weighted average interest rate of 8.0%, and of which approximately $80.7 million
was represented by floating rate debt under a secured acquisition line and a
secured bridge loan with an interest rate at June 30, 1998 of 7.41%. At June 30,
1998, the Trust's total market capitalization (based upon a June 30, 1998 share
price of $13.00 per Share) was approximately $333.7 million. Based upon this
amount, the Trust's debt to total market capitalization ratio at June 30, 1998
was 56.8%.
On a long term basis, the Trust expects to meet liquidity requirements
generated by property operating expenses, debt service, and future distributions
with funds generated by the operations of its real estate properties. Should
such funds not cover these needs, the possibility of future distributions may be
reduced or eliminated. Although the Trust currently intends to lower its debt to
total market capitalization ratio to less than 50%, the Trust may exceed this
leverage ratio in order to fund growth opportunities in anticipation of reducing
this leverage through future equity offerings. Should the Trust be unable to
complete anticipated equity offerings, the risk of financial default would
increase.
On January 29, 1998, the Trust announced a reinstatement of quarterly
distributions to shareholders. A distribution of $0.18 per Share was paid on
April 14, 1998 to shareholders of record on April 3, 1998. A distribution of
$0.20 per Share was payable on July 14, 1998 to shareholders of record on July
3, 1998. Future distributions will be at the discretion of the Board of Trust
Managers. The Trust has approximately $33.9 million in net operating loss
carryforwards, of which approximately $1.2 million per year could be utilized to
reduce the payout required by the Internal Revenue Code of 95% of taxable
income. However, the Trust intends to follow a distribution policy which targets
a payout between 65% and 75% of FFO which will exceed the minimum payout
required.
The nature of the Trust's operating properties, which generally provide
for leases with a term of between three and five years, results in an
approximate turnover rate of 15% to 25% of the Trust's tenants and related
revenue annually. Such turnover requires capital expenditures related to tenant
improvements and leasing commissions,
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capital repairs and replacements, initial capital expenditures and expansions
and renovations related to properties acquired in order to maintain or improve
the Trust's occupancy levels. These costs have historically been funded out of
the Trust's operating cash flow and cash reserves. The Trust has made no
commitments for additional capital expenditures beyond those related to normal
leasing and releasing activities, related escrows and initial capital
expenditures. Initial capital expenditures, which are costs necessary to bring
acquired properties to intended leasable condition at the time of acquisition,
are estimated at $8,017,000 at June 30, 1998.
RECENT DEVELOPMENTS
On July 17, 1998, the Trust paid off a mortgage loan of approximately
$1.2 million, which carried a fixed interest rate of 11%. The Trust incurred a
prepayment penalty of approximately $12,000.
On July 29, 1998, the Board of Trust Managers declared a distribution
for the third quarter of 1998 of $0.20 per share, payable on October 14, 1998,
to shareholders of record as of October 2, 1998.
On July 30, 1998, the Trust purchased Norfolk Commerce Park, a 323,731
square foot light industrial project consisting of three buildings in Norfolk,
Virginia for $20,450,000. The acquisition was initially funded with proceeds
from a $21.2 million demand note to DDR. Terms of the note include an interest
rate of 10.25% and interest only payments to be paid quarterly. This note was
reduced to $6.5 million with proceeds from the equity transaction described
below.
On August 3, 1998, the Trust entered into a definitive agreement
providing for a strategic investment by DDR in the Trust. Under the terms of the
Share Purchase and Merger Agreements (the "Agreements"), dated to be effective
as of July 30, 1998, DDR will acquire approximately $115 million of newly issued
common shares of beneficial interest at $15.50 per share. DDR made an initial
purchase of 949,147 shares for $14.7 million and additionally acquired 1,258,471
shares in exchange for five properties previously owned by DDR and valued at
approximately $19.5 million. The total shares acquired represent 19.9% of the
Trust's outstanding shares. DDR will purchase an additional 5,226,583 shares for
$81.0 million, increasing its ownership to 40.0% of the Trust's shares on a
fully-diluted basis, following shareholder approval at a Special Meeting of
Shareholders to be held before the end of 1998, to fund property acquisitions.
The Trust acquired the five industrial properties under the Merger
Agreement between the Trust and DDR Office Flex Corporation, a wholly owned
subsidiary of DDR. The five properties, consisting of light and bulk industrial
space totaling approximately 464,000 square feet, are located in the Cleveland,
Ohio area.
Concurrent with entering into the Agreements, the Trust increased its
Board of Trust Managers by four positions and appointed DDR designees Scott A.
Wolstein, Albert T. Adams, Robert H. Gidel and James A. Schoff to the Board. Mr.
Wolstein has been named Chairman of the Board of Trust Managers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Trust is currently named as a defendant in a lawsuit related to the
Trust's merger with four real estate limited partnerships. The lawsuit purports
to be both a class action and a derivative lawsuit against the defendants. The
plaintiffs have asserted various claims, including breach of fiduciary duty and
various securities law violations, against the parties to the merger and certain
individuals and are seeking monetary damages. The Trust intends to vigorously
defend against the plaintiffs' claims. In management's opinion, the liabilities,
if any, that may ultimately result from such legal action are not expected to
have a material adverse effect on the consolidated financial position or results
of operations of the Trust.
On April 13, 1998 the Trust was named as a defendant in an additional
purported class action lawsuit related to the Trust's merger with the four real
estate limited partnerships. The plaintiffs have asserted various claims,
including breach of fiduciary and contractual duties and various securities law
violations, against the parties to the merger and are seeking monetary damages.
The Trust intends to vigorously defend against the plaintiffs' claims. In
management's opinion, the liabilities, if any, that may ultimately result from
such legal action are not expected to have a material adverse effect on the
consolidated financial position or results of operations of the Trust.
ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS
In January 1998, the Trust sold a total of 733,945 Shares at $13.625
per Share (total proceeds of $10,000,000) to Praedium II Industrial Associates
LLC. The placement agent for the transaction was Prudential Securities, Inc. and
the total commission charged was $400,000. 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.
In February 1998, the Trust sold 367,000 Shares at $13.625 per Share
(total proceeds of $5,000,000) to certain clients and affiliates of Morgan
Stanley Asset Management, Inc. (collectively, "MSAM") and sold 275,300 Shares at
$13.625 per Share (total proceeds of $3,750,000) to certain clients of
ABKB/LaSalle Securities Limited Partnership and LaSalle Advisors Limited
Partnership. The placement agent for these transactions was Prudential
Securities, Inc. and the total commission charged was $350,000. These
transactions were determined to be exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended, because the transactions did not
involve a public offering and the sales were made to an accredited investor.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
---------- -----------
27.1 * Financial Data Schedule
* Filed herewith
(b) Reports on Form 8-K
(1) Current Report on Form 8-K filed with the
Commission on April 20, 1998;
(2) Current Report on Form 8-K filed with the
Commission on May 14, 1998 and Amendment No. 1
thereto filed with the Commission on July 13,
1998;
(3) Amendment No. 1 filed with the Commission on May
15, 1998 to Current Report of Form 8-K filed
with the Commission on March 23, 1998;
(4) Current Report on Form 8-K filed with the
Commission on May 22, 1998;
(5) Current Report on Form 8-K filed with the
Commission on June 17, 1998.
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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: August 14, 1998 /s/ MARC A. SIMPSON
--------------------------------------------------
Marc A. Simpson
Senior Vice President and Chief Financial Officer
(principal financial officer)
Date: August 14, 1998 /s/ GARY A. WILLIAMS
-------------------------------------------------
Gary A. Williams
Vice President and Chief Accounting Officer
(principal accounting officer)
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EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27 Financial Data Schedule