1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 MARCH 31, 1999
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 offices) (Zip Code)
Registrant's telephone number, including area code: (972) 756-6000
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: 20,652,164 Shares of
Beneficial Interest were outstanding as of May 13, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
AMERICAN INDUSTRIAL PROPERTIES REIT
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the
three months ended March 31, 1999 and 1998
(unaudited)....................................... 3
Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998................. 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998
(unaudited)....................................... 5
Notes to Consolidated Financial Statements
(unaudited)....................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 21
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................. 22
Item 2. Changes in the Rights of the Company's Security
Holders................................................ 22
Item 6. Exhibits and Reports on Form 8-K.................. 22
Signatures.................................................. 23
2
3
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
----------- -----------
Property Revenues
Rents..................................................... $ 16,952 $ 7,230
Tenant reimbursements..................................... 3,283 1,269
----------- -----------
Total Property Revenues........................... 20,235 8,499
----------- -----------
Property Expenses
Property taxes............................................ 2,015 928
Property management fees.................................. 607 259
Utilities................................................. 820 318
General operating......................................... 914 421
Repairs and maintenance................................... 519 245
Other property operating expenses......................... 1,286 327
----------- -----------
Total Property Expenses........................... 6,161 2,498
----------- -----------
Income from Property Operations........................... 14,074 6,001
Trust administration and overhead......................... (1,090) (794)
Depreciation.............................................. (3,335) (1,522)
Amortization.............................................. (138) (94)
Interest income........................................... 88 227
Interest on notes payable................................. (111) (160)
Interest on mortgages payable............................. (6,159) (2,503)
----------- -----------
Income from operations.................................... 3,329 1,155
Minority interests in consolidated subsidiaries........... (80) (57)
----------- -----------
NET INCOME.................................................. $ 3,249 $ 1,098
=========== ===========
PER SHARE DATA (Basic and Diluted)
Net income................................................ $ 0.16 $ 0.10
=========== ===========
Distributions paid........................................ $ 0.20 $ 0.18
=========== ===========
Weighted average Shares outstanding....................... 19,939,209 10,617,617
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
4
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
Real estate:
Held for investment....................................... $595,999 $476,641
Held for sale............................................. 40,547 28,491
-------- --------
Total real estate......................................... 636,546 505,132
Accumulated depreciation.................................. (36,784) (33,449)
-------- --------
Net real estate........................................... 599,762 471,683
Cash and cash equivalents:
Unrestricted.............................................. 9,248 6,145
Restricted................................................ 4,497 5,422
-------- --------
Total cash and cash equivalents................... 13,745 11,567
Other assets, net........................................... 13,292 17,080
-------- --------
Total Assets...................................... $626,799 $500,330
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................... $344,341 $252,481
Unsecured notes payable to related parties................ -- 14,058
Accrued interest.......................................... 2,011 1,477
Accounts payable, accrued expenses and other
liabilities............................................ 15,940 17,651
Tenant security deposits.................................. 2,680 2,138
-------- --------
Total Liabilities................................. 364,972 287,805
-------- --------
Minority interests.......................................... 6,939 6,946
Shareholders' Equity:
Shares of beneficial interest, $0.10 par value; authorized
500,000,000 Shares; issued and outstanding 20,652,164
Shares at March 31, 1999 and 17,201,591 Shares at
December 31, 1998...................................... 2,065 1,721
Additional paid-in capital................................ 379,836 330,031
Less 165,886 Shares in treasury at March 31, 1999 and
December 31, 1998, at cost............................. (2,226) (2,226)
Accumulated distributions................................. (72,845) (68,756)
Accumulated deficit....................................... (51,942) (55,191)
-------- --------
Total Shareholders' Equity........................ 254,888 205,579
-------- --------
Total Liabilities and Shareholders' Equity........ $626,799 $500,330
======== ========
The accompanying notes are an integral part of these financial statements.
4
5
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 3,249 $ 1,098
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Minority interest in consolidated subsidiaries......... 80 57
Depreciation........................................... 3,335 1,521
Amortization of deferred financing costs............... 280 60
Other amortization..................................... (9) 94
Issuance of shares to Trust Managers................... 54 --
Changes in operating assets and liabilities:
Other assets and restricted cash..................... 6,316 (548)
Accounts payable, other liabilities and tenant
security deposits................................... (3,761) (3,227)
Accrued interest..................................... 534 --
--------- --------
Net Cash Provided By (Used In) Operating
Activities.......................................... 10,078 (945)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized expenditures.................................. (2,946) (1,122)
Acquisition of real estate and related working capital.... (127,168) (14,892)
--------- --------
Net Cash Used In Investing Activities................ (130,114) (16,014)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgage notes payable............ (59,056) (272)
Proceeds from mortgage financing.......................... 136,985 7,891
Payment of deferred loan costs............................ (1,387) (712)
Proceeds from sale of shares.............................. 50,095 17,646
Purchase of treasury shares............................... -- (393)
Distributions to shareholders............................. (3,411) --
Distributions to limited partnership unit holders......... (87) (40)
--------- --------
Net Cash Provided By Financing Activities................... 123,139 24,120
--------- --------
Net Increase in Cash and Cash Equivalents................... 3,103 7,161
Cash and Cash Equivalents at Beginning of Period............ 6,145 11,683
--------- --------
Cash and Cash Equivalents at End of Period.................. $ 9,248 $ 18,844
========= ========
Cash Paid for Interest...................................... $ 5,583 $ 2,603
========= ========
The accompanying notes are an integral part of these financial statements.
5
6
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property Operations. As a result of the acquisition of nine properties and
an undeveloped tract of land in the first quarter of 1999, the Trust assumed
approximately $1.8 million of accounts payable and tenant security deposits.
As a result of the acquisition of three properties in the first quarter of
1998, the Trust issued $0.9 million in limited partnership units and assumed
approximately $0.1 million of accounts payable and tenant security deposits.
Real Estate Held for Sale. During the first quarter of 1999, the Trust
reclassified two properties and one tract of land with a total cost basis of
approximately $12.1 million to real estate held for sale.
6
7
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 -- 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, 1998, 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.
General. The Trust is a self-administered Texas real estate investment
trust ("REIT") which, as of March 31, 1999, directly or indirectly owns and
operates 74 commercial real estate properties consisting of 60 industrial
properties, 12 office buildings and 2 retail properties. Additionally, the Trust
currently has one industrial property under development.
Principles of Consolidation. The consolidated financial statements of the
Trust include the accounts of American Industrial Properties REIT and its
wholly-owned subsidiaries and controlled 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 lower of depreciated cost or fair
value less costs to sell. 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, are less than
the carrying value of the related asset (see Note 2).
Property improvements which extend the useful life 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 the lease term, but not to exceed ten years.
Interest is capitalized during the period in which real estate assets are
undergoing construction or major renovation. During the three months ended March
31, 1999 and 1998 the Trust had no capitalized interest.
Cash and Cash Equivalents. Cash equivalents include demand deposits and all
highly liquid instruments purchased with an original maturity of three months or
less. Restricted cash amounts reflect escrow deposits held by third parties for
the payment of taxes and insurance and reserves held by third parties for
property repairs or tenant improvements.
Other Assets. Other assets primarily consist of direct costs related to
potential property acquisitions, deferred rents receivable, deferred commissions
and loan fees. Potential property acquisition costs are
7
8
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capitalized and depreciated on a straight-line basis over the life of the asset
when the asset is acquired. 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.
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 $1,754,000 and
$1,398,000 at March 31, 1999 and December 31, 1998, respectively.
Several tenants in the Trust's retail properties are also required to pay
as rent a percentage of their gross sales volume, to the extent such percentage
rent exceeds their base rents. Such percentage rents amounted to $18,000 and
$90,000 for the quarters ended March 31, 1999 and 1998, respectively. In
addition to paying base and percentage rents, most tenants are required to
reimburse the Trust for operating expenses in excess of a negotiated base
amount.
Income Tax Matters. The Trust operates as a 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 and the estimated useful
lives used to compute depreciation.
Earnings Per Share. Basic earnings per share excludes any dilutive effects
of options, warrants and convertible securities. The computation of diluted
earnings per share does not include common share equivalents where 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 from operations, is
anti-dilutive.
Share Compensation. The Trust accounts for its share compensation
arrangements using the intrinsic value method.
Segment Reporting. The Trust classifies its reportable segments by property
type. See Note 11 for the Trust's segment disclosures.
Reclassification. Certain amounts in prior years financial statements have
been reclassified to conform with the current year presentation.
NOTE 2 -- REAL ESTATE AND PROVISIONS FOR POSSIBLE LOSSES ON REAL ESTATE:
At March 31, 1999 and December 31, 1998, real estate was comprised of the
following:
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
Held for investment:
Land................................................... $136,961,000 $102,891,000
Buildings and improvements............................. 459,038,000 373,750,000
------------ ------------
595,999,000 476,641,000
------------ ------------
Held for sale:
Land................................................... 9,360,000 6,000,000
Buildings and improvements............................. 31,187,000 22,491,000
------------ ------------
40,547,000 28,491,000
------------ ------------
Total.......................................... $636,546,000 $505,132,000
============ ============
8
9
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the first quarter of 1999, the Trust purchased a portfolio of nine
properties for $127.3 million. The purchase price was primarily funded with
$75.2 million in borrowings under a secured bridge loan with Prudential
Securities Credit Corporation ("PSCC") and $51.8 million in Common Shares of
Beneficial Interest ("Shares") issued to Developers Diversified Realty
Corporation ("DDR").
During the first quarter of 1999, the Trust reclassified two industrial
properties and one tract of land from held for investment to held for sale. The
two industrial properties and the one tract of land are not located in target
markets currently identified by the Trust. The Trust's intent is to sell these
properties in 1999. These properties are included in the "Industrial" operating
segment and reported net operating income of $0.3 and $0.2 million for the
quarters ended March 31, 1999 and March 31, 1998, respectively.
During 1998, the Trust acquired 29 real estate properties for approximately
$237 million. To fund these acquisitions, the Trust paid approximately $37.8
million in cash, obtained $28.3 million and $42.7 million of financing under its
acquisition line of credit and secured bridge loan, respectively, assumed
approximately $32.7 million in mortgage debt with a fair value of $34.9 million,
obtained $47.2 million of financing through unsecured borrowings with DDR,
issued $0.9 million of limited partnership units and issued $47.7 million in
Shares to DDR. The difference between the assumed amount and the fair value of
the mortgage debt assumed was recorded as debt premium.
In 1998, the Trust reclassified its retail property in Denver, Colorado
from held for investment to held for sale. The Trust's current intent is to sell
this property in 1999, thereby allowing the Trust to continue its focus on the
light industrial sector of the real estate market. This property is included in
the "Retail" operating segment and reported net operating income of $0.4 and
$0.5 million for the quarters ended March 31, 1999 and March 31, 1998,
respectively.
NOTE 3 -- MORTGAGE NOTES PAYABLE:
At March 31, 1999, all of the Trust's 74 properties were subject to liens
securing mortgage notes payable with principal balances totaling $344,341,000,
including $1,837,000 of debt premiums (see Note 2). Of this amount,
approximately $187,386,000 was represented by mortgage notes with stated fixed
interest rates ranging from 7.25% to 9.13%, a stated weighted average interest
rate of 7.84%, and maturity dates in 2001 to 2016. Mortgage notes payable with
variable interest rates total approximately $156,955,000 with a weighted average
interest rate of 7.02%. The variable rate debt consists of $68,753,000 and
$75,202,000 under the Trust's PSCC secured acquisition credit line and secured
bridge loan, respectively, as well as $13,000,000 under the Bank One line of
credit. The acquisition credit line bears interest at the 30 day LIBOR rate plus
1.75% and matures in April 2000, as extended. The bridge loan bears interest at
the 30 day LIBOR rate plus 1.75% and matures in July 1999. The Bank One line of
credit, which provides for a variable rate spread based upon the company's
overall debt leverage, currently bears interest at the 30 day LIBOR plus 1.75%
and matures in January 2000. The interest rate on the acquisition credit line,
bridge loan and the line of credit at March 31, 1999 is 6.715%.
Debt premiums are amortized into interest expense over the terms of the
related mortgages using the effective interest method. As of March 31, 1999 and
December 31, 1998, the unamortized debt premiums were $1,837,000 and $1,958,000,
respectively.
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
acquisition credit line, bridge loan and line of credit, also contain various
borrowing restrictions and operating performance covenants. The Trust is in
compliance with all such restrictions and covenants as of March 31, 1999. The
unused commitment under the acquisition credit line at March 31, 1999 is
$6,247,000, subject to certain restrictions and provisions.
9
10
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, 51 of the Trust's 65 properties were subject to liens
securing mortgage notes payable with principal balances totaling $252,481,000,
including $1,958,000 of debt premiums. Of this amount, approximately
$141,308,000 was represented by mortgage notes with stated fixed interest rates
ranging from 7.25% to 9.13%, a stated weighted average interest rate of 8.01%
and maturity dates in 2001 to 2016. Mortgage notes payable with variable
interest rates consisted of $68,523,000 and $42,650,000 under the Trust's
secured acquisition credit line and secured bridge loan, respectively. The
acquisition credit line and bridge loan bear interest at the 30 day LIBOR rate
plus 1.75% and mature in April 1999 and January 1999 as extended, respectively.
The interest rate on these loans at December 31, 1998 was 7.38%.
Debt premiums were amortized into interest expense over the terms of the
related mortgages using the effective interest method. As of December 31, 1998,
the unamortized debt premiums were $1,958,000.
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
acquisition credit line and bridge loan, also contain various borrowing
restrictions and operating performance covenants. The Trust was in compliance
with all such restrictions and covenants as of December 31, 1998. The unused
commitment under the acquisition credit line at December 31, 1998 was
$4,195,000, subject to certain restrictions and provisions.
NOTE 4 -- UNSECURED NOTES PAYABLE -- RELATED PARTY:
In January 1999, the Trust repaid in full the unsecured loans obtained from
DDR to finance acquisitions. The Trust paid interest of $111,000 to DDR at the
time of repayment. The interest rate on these demand notes was 10.25%. At
December 31, 1998, the Trust had three unsecured notes outstanding totaling
$14,058,000. The Trust paid interest of $660,850 to DDR for the year ended
December 31, 1998.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES:
Environmental Matters
The Trust has been notified of the existence of limited underground
petroleum based contamination at a portion of Tamarac Square, the Trust's Denver
retail property. The source of the contamination is apparently related to
underground storage tanks ("USTs") located on an adjacent property. The owner of
the adjacent property has agreed to remediate the property to comply with state
standards and has indemnified the Trust against costs related to its sampling
activity. The responsible party for the adjacent USTs has submitted a corrective
Action Plan to the Colorado Department of Public Health and Environment.
Implementation of the plan is ongoing. The responsible party is negotiating to
obtain access agreements from impacted landowners, including the Trust.
The Trust has been notified of the existence of limited cleaning solvents
("mineral spirits") contamination at Tech Center 29 Phase I. The contamination
is the apparent result of a service center operated on the property until 1996.
The tenant's primary operations consisted of the distribution of parts, cleaning
equipment and cleaning solvents to industrial customers. Two USTs used in the
operation were removed in 1996. The former tenant has been working with the
Maryland Department of the Environment since the onset and has issued a letter
of credit and standby trust agreement as financial assurance for remediation of
the site.
With the exception of Tamarac Square and Tech 29 Phase I, the Trust has not
been notified, and is not otherwise aware, of any material non-compliance,
liability or claim relating to hazardous or toxic substances in connection with
any of its properties.
10
11
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Litigation
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. 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. The lawsuits
described above are on-going, therefore, management cannot predict the outcome
of such litigation, however, management believes 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 6 -- MINORITY INTEREST:
Operating Partnerships. AIP-SWAG Operating L.P. and AIP Operating, L.P.
have 179,085 and 58,333 limited partnership units outstanding, respectively, as
of March 31, 1999 (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 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 7 -- SHAREHOLDERS' EQUITY:
Capital Stock. The Trust is authorized to issue up to 500,000,000 Shares,
of which 450,000,000 are designated as Common Shares of Beneficial Interest and
50,000,000 Preferred Shares of Beneficial Interest. The Shares have dividend,
distribution, liquidation and other rights as disclosed in the Declaration of
the Trust. As of March 31, 1999, 20,652,164 Common Shares are issued and
outstanding.
The Preferred Shares may be issued in one or more series. The number of
shares in each series and the designation, powers, preferences and rights of
each such series and the qualifications, limitations or restrictions thereof
have not been established. As of March 31, 1999, no Preferred Shares of
Beneficial Interest were issued and outstanding.
On March 9, 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. This program resulted in the Trust purchasing 123,783
Shares
11
12
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in the open market, for an aggregate cost of $1,598,000. These Shares are held
in Treasury. As a result of the one-for-five reverse Share split and the odd lot
redemption program, effective on October 15, 1997, the Trust repurchased 42,103
Shares which are held in treasury. As of March 31, 1999, the Trust holds 165,806
Shares in treasury.
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 (which subsequently expired) 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.
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 Agreement, the transaction has three stages. The first stage of equity
investment, effective as of July 30, 1998, resulted in DDR acquiring 2,207,618
Shares at a price of $15.50 per Share in exchange for consideration valued at
approximately $34.2 million. As of December 31, 1998, the Trust has issued an
additional 3,683,578 Shares related to the second stage of the Agreement at a
price of $15.50 per Share to fund property acquisitions. The Shares issued in
the first and second stages 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. The remainder of
the second stage, 1,543,005 Shares at $15.50 per Share, and the entire third
stage, $200 million of equity investment, had not occurred as of December 31,
1998.
For the quarter ended March 31, 1999, the Trust issued 3,410,615 Shares to
DDR in connection with the purchase of nine properties (see Note 2), 35,094
Shares were issued in connection with the Dividend Reinvestment Plan and 4,995
Shares were issued to Trust Managers that elected base fee compensation in
Shares. In total, the Trust issued 3,450,704 Shares in the first quarter on
1999.
Share Incentive Plans. The Trust adopted the Employee and Trust Managers
Incentive Share Plan (the "Plan") for the purpose of (i) attracting and
retaining employees, Trust Managers and others, (ii) providing incentives to
those deemed important to the success of the Trust, and (iii) associating the
interests of these individuals with the interests of the Trust and its
shareholders through opportunities for increased share ownership.
All awards under the Plan are granted by the Compensation Committee of the
Board of Trust Managers and the maximum number of shares issuable under the Plan
is limited to an amount equal to of 10% of the total number of Shares
outstanding at any time on a fully-diluted basis.
Under the terms of the Plan, any person who is a full-time employee or a
Trust Manager of the Trust or of an affiliate (as defined in the Plan) of the
Trust or a person designated by the Compensation Committee as eligible because
such person performs bona fide consulting or advisory services for the Trust or
an affiliate of the Trust (other than services in connection with the offer or
sale of securities in a capital-raising transaction) and has a direct and
significant effect on the financial development of the Trust or an affiliate of
the Trust, shall be eligible to receive awards under the Plan.
Share Option Awards. In connection with the Agreement with DDR, on July 29,
1998, the Trust granted share options to purchase 100,000 Shares to the Chairman
of the Board of Trust Managers, who, in accordance with DDR's internal policies,
transferred the options to his employer, DDR. The exercise price of the options
is $12.625 (the closing price of the Trust's Shares on the date preceding the
date of grant) and the fair value of the options was $221,000. The options
vested on November 20, 1998.
On an annual basis, each non-employee Trust Manager shall receive a
non-qualified share option to purchase 1,000 shares. Each of these non-employee
Trust Manager options is fully exercisable upon the date of grant and generally
terminates (unless sooner terminated under the terms of the Plan) ten years
after the
12
13
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date of grant. The exercise price is determined by the Compensation Committee
and must have an exercise price equal to not less than 100% of the fair market
value of a Share on the date of grant. No share options have been granted in
1999. During 1998, 10,000 shares were granted.
During 1998, pursuant to the Plan, the Trust Managers granted share options
to purchase 460,000 shares to 12 members of management. The exercise price of
the options granted is $13.625. The option to purchase shares vest annually over
a period of five years, beginning April 1, 1998. In addition, the Board approved
the award of 27,000 restricted shares to the Trust's senior officers. The
restricted shares vest annually beginning on the first anniversary date of the
date of grant.
Pursuant to agreements between the Trust and four senior officers, a
"change in control" occurred on December 10, 1998 when DDR's ownership position
exceeded 33% of the Trust's voting shares. As a result, all options held by
these officers became fully vested and the restrictions on 27,000 restricted
shares held by these officers were lifted. A total of 395,000 previously
unvested options became vested on this date.
At March 31, 1999, 716,000 options are outstanding of which 668,000 are
fully vested. The remaining 48,000 options vest annually through April 2002. The
term of these options range from June 2007 through December 2008. As of March
31, 1999, no options had been exercised.
The limited partners of AIP-SWAG Operating Partnership L.P. received
warrants to purchase 40,000 shares at $17.50 per Share. The warrants expire on
October 3, 2000 (See Note 2).
NOTE 8 -- DISTRIBUTIONS:
A distribution of $0.20 per Share was paid on April 15, 1999 and on January
20, 1999. On May 13, 1999, the Trust declared a distribution of $0.22 per Share,
payable on July 14, 1999 to shareholders of record on July 2, 1999. (See Note
12).
Distributions totaling $0.58 per Share were paid in 1998.
NOTE 9 -- TRANSACTIONS WITH RELATED PARTIES:
During the fiscal year 1998, the Trust on occasion entered into unsecured
borrowings with DDR. Such borrowings bear a fixed interest rate of 10.25%,
provide for quarterly payments of interest and are due 30 days after demand. The
Trust repaid all such borrowings, including payment of $111,000 of interest in
the first quarter of 1999. The Trust did not enter into any such borrowings in
the first quarter of 1998.
Certain real estate investments are managed by Quorum Real Estate Services
Corporation ("Quorum"), an affiliate of USAA Real Estate Company, a major
shareholder of the Trust. Quorum is paid competitive rates for services,
including, but not limited to, construction, tenant finish, leasing and
management. The Trust paid Quorum management fees of $171,000 and leasing
commissions of $121,000 for the quarter ended March 31, 1999. Quorum earned
management fees of $110,000 and leasing commissions of $106,000 for the quarter
ended March 31, 1998.
The Trust currently leases space to an individual serving as a Trust
Manager at competitive market rates. For the quarter ended March 31, 1999, this
Trust Manager paid approximately $5,800 in lease payments to the Trust. The
Trust Manager did not lease the space in the first quarter of 1998.
At March 31, 1999, DDR and USAA Real Estate Company owned approximately
45.4% and 8.2% of the Shares outstanding, respectively.
13
14
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- PER SHARE DATA:
The following table sets forth the computation of basic and diluted
earnings per share:
FOR THE QUARTER ENDED
MARCH 31,
-------------------------
1999 1998
----------- -----------
Basic and diluted earnings per share:
Numerator:
Net income............................................... $ 3,249,000 $ 1,098,000
Denominator:
Weighted average shares.................................. 19,939,209 10,617,617
----------- -----------
Basic and diluted earnings per share:
Net income................................................. $ 0.16 $ 0.10
=========== ===========
Options to purchase 716,000 shares at prices ranging from $11.6875 to
$15.00 per Share were outstanding at March 31, 1999. There were no additional
options issued since December 31, 1998. These options 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.
At March 31, 1999, 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.
NOTE 11 -- SEGMENT REPORTING:
The Trust classifies its reportable segments by property type: light
industrial, office, and retail. For the quarter ended March 31, 1999, light
industrial represents 67% of property revenue. Office and retail represent 28%
and 5%, respectively for the same period. For the quarter ended March 31, 1998
light industrial, office and retail represented property revenue of 51%, 36%,
and 13%, respectively.
The Trust's emphasis is in the light industrial sector, which is
characterized as office showroom, service center and flex properties, low rise
offices, and small bay distribution properties. Based on net rentable square
feet, as of March 31, 1999, approximately 76% of the Trust's portfolio is
represented by light industrial properties, 21% of the portfolio is represented
by office properties and 3% of the portfolio is represented by retail
properties. Based on net rentable square feet, as of March 31, 1998,
approximately 68% of the Trust's portfolio was represented by light industrial
properties, 25% by office properties and 7% of by retail properties.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Senior management evaluates
performance based on net operating income from the combined properties in each
segment.
The Trust's reportable segments are a consolidation of related properties
which offer different products. They are managed separately because each segment
requires different operating, pricing and leasing strategies. All of the
properties have been acquired separately and are incorporated into the
applicable segment.
14
15
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the Trust's property revenues by reporting
segment, for each of the three months ended March 31, 1999 and 1998 (in
thousands). Property revenues and expenses include both real estate held for
investment and real estate held for sale.
FOR THE THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------------------------------
LIGHT OFFICE CORPORATE
INDUSTRIAL BUILDINGS RETAIL AND OTHER CONSOLIDATED
---------- --------- ------- --------- ------------
Property revenues......... $ 13,581 $ 5,566 $ 1,088 $ -- $ 20,235
Property expenses......... 3,734 1,998 429 -- 6,161
-------- -------- ------- -------- --------
Income from property
operations.............. 9,847 3,568 659 -- 14,074
Administrative expenses... -- -- -- (1,090) (1,090)
Depreciation and
amortization............ -- -- -- (3,473) (3,473)
Other income.............. -- -- -- 88 88
Interest expense.......... -- -- -- (6,270) (6,270)
-------- -------- ------- -------- --------
Income (loss) from
operations.............. 9,847 3,568 659 (10,745) 3,329
Minority interests in
consolidated
subsidiaries............ -- -- -- (80) (80)
-------- -------- ------- -------- --------
Net income (loss)......... $ 9,847 $ 3,568 $ 659 $(10,825) $ 3,249
-------- -------- ------- -------- --------
Total real estate......... $444,368 $155,034 $35,799 $ 1,345 $636,546
-------- -------- ------- -------- --------
FOR THE THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------------------------------
LIGHT OFFICE CORPORATE
INDUSTRIAL BUILDINGS RETAIL AND OTHER CONSOLIDATED
---------- --------- ------- --------- ------------
Property revenues......... $ 4,324 $ 3,086 $ 1,089 $ -- $ 8,499
Property expenses......... 1,217 911 370 -- 2,498
-------- ------- ------- ------- --------
Income from property
operations.............. 3,107 2,175 719 -- 6,001
Administrative expenses... -- -- -- (794) (794)
Depreciation and
amortization............ -- -- -- (1,616) (1,616)
Other income.............. -- -- -- 227 227
Interest expense.......... -- -- -- (2,663) (2,663)
-------- ------- ------- ------- --------
Income (loss) from
operations.............. 3,107 2,175 719 (4,846) 1,155
Minority interests in
consolidated
subsidiaries............ -- -- -- (57) (57)
-------- ------- ------- ------- --------
Net income (loss)......... $ 3,107 $ 2,175 $ 719 $(4,903) $ 1,098
-------- ------- ------- ------- --------
Total real estate......... $144,480 $91,722 $45,605 $ 340 $282,147
-------- ------- ------- ------- --------
15
16
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The breakdown of the Trust's property revenues, geographically and by
reporting segment, for each of the three months ended March 31, 1999 and 1998 is
as follows (in thousands):
THREE MONTHS
ENDED MARCH 31,
----------------
1999 1998
------- ------
WESTERN REGION
Industrial................................................ $ 7,952 $2,618
Office.................................................... 4,394 2,219
Retail.................................................... 773 796
EASTERN REGION
Industrial................................................ 5,629 1,705
Office.................................................... 1,172 868
Retail.................................................... 315 293
------- ------
Total property revenues........................... $20,235 $8,499
======= ======
NOTE 12 -- SUBSEQUENT EVENTS:
On May 13, 1999, the Trust declared a distribution of $0.22 per Share
payable on July 14, 1999 to shareholders of record on July 2, 1999.
16
17
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 1998 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 March 31, 1999 to March 31, 1998
The weighted average property square footage owned by the Trust increased
to 8,198,000 during the three months ended March 31, 1999 from 4,248,000 for the
same period in 1998, an increase of 93.0%. Property revenues increased 138% to
$20,235,000 in 1999 from $8,499,000 in 1998, and income from property operations
(which is defined as property revenues less property operating expenses,
excluding depreciation and amortization, interest expense, and Trust
administration and overhead expenses) increased 135% to $14,074,000 in 1999 from
$6,001,000 in 1998. On a same property basis, for properties owned as of January
1, 1998, property revenues increased to $8,653,000 in 1999 from $8,274,000, an
increase of 4.6%, comprised of a 7.7% increase in revenue related to industrial
properties, a 2.0% increase in revenue related to office properties and a 0.8%
decrease in revenue at the Trust's retail properties. The increases in revenue
stemmed principally from an increase in rental rates and/or an increase in
overall occupancy at a number of the properties. The decrease in revenues at the
retail properties relates primarily to a reduction in percentage rents collected
at one of the retail properties. Overall leased occupancy of the Trust's
portfolio was 93.5% at March 31, 1999 compared to 92.6% at March 31, 1998.
On a same property basis, income from property operations decreased to
$5,865,000 in the first quarter of 1999 from $5,876,000 in the first quarter of
1998, a decrease of 0.2%, and is comprised of a 3.6% increase related to
industrial properties, a 4.0% decrease related to office properties and a 6.0%
decrease related to the Trust's retail properties. This overall decrease is the
net result of the revenue activity explained above offset by additional
operating expense activity related to the increases in occupancy and higher
property taxes at various properties. A significant portion of the increase in
expense activity will be recovered from tenants.
Income from operations increased to $3,329,000 in 1999 from $1,155,000 in
1998 as a result of the acquisition of properties since the first quarter of
1998 and the increase in income from property operations explained above, an
increase in total interest expense of $3,607,000 due to an additional
$213,500,000 in property financing since March 31, 1998. In addition, Trust
administration and overhead expenses increased $296,000 due to a 140% increase
in the number of full time employees, expensing internal acquisition department
costs, terminated deal costs and higher general costs due to the increased
activity of the Trust. Depreciation increased $1,813,000 due to the acquisition
of properties since the first quarter of 1998.
Analysis of Cash Flows -- Comparison of Three Months Ended March 31, 1999 to
March 31, 1998
Cash flow provided by operating activity in the first quarter of 1999 was
$10,078,000. This results from the Trust's net income of $3,249,000 increased by
non-cash charges totaling $3,740,000 related to minority interests, depreciation
and amortization and issuance of Shares to Trust Managers and a reduction in
other assets and restricted cash of $5,391,000 and $925,000, respectively. In
addition, accrued interest increased $534,000, while accounts payable, accrued
expenses and other liabilities decreased $3,761,000.
Cash flow used in investing activities in the first quarter of 1999 was
$130,114,000, representing amounts expended on the acquisition of real estate
and related working capital totaling $127,168,000, and capitalized expenditures
of $2,946,000.
17
18
Cash flow provided by financing activities in the first quarter of 1999 was
$123,139,000. This amount reflects proceeds from the mortgage financing on the
properties acquired in the first quarter of 1999 and refinancings existing
properties of $136,985,000, net proceeds from the private placement of Shares of
$50,095,000, principal repayments on mortgage and notes payable (including
refinancings) totaling approximately $59,056,000, payments of loan costs of
$1,387,000, and distributions to shareholders and limited partnership unit
holders totaling $3,498,000.
Cash flow used in operating activities in the first quarter of 1998 was
$945,000. This results from the Trust's net income of $1,098,000 increased by
non-cash charges totaling $1,732,000 related to minority interests, depreciation
and amortization, a decrease in restricted cash of $720,000 offset by an
increase in other assets of $1,268,000. In addition, accounts payable, accrued
expenses and other liabilities decreased $3,227,000.
Cash flow used in investing activities in the first quarter of 1998 was
$16,014,000, representing amounts expended on the acquisition of real estate and
related working capital totaling $14,892,000, and capitalized expenditures of
$1,122,000.
Cash flow provided by financing activities in the first quarter of 1998 was
$24,120,000. This amount reflects proceeds from the mortgage financing on three
properties of $7,891,000, net proceeds from the private placement of Shares of
$17,646,000, principal repayments on mortgage and notes payable totaling
approximately $272,000, repurchase of Shares totaling $393,000, payments of loan
costs of $712,000, and distributions to limited partnership unit holders of
$40,000.
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.
The Trust believes FFO is an appropriate measure of its 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 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 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
MARCH 31,
--------------------
1999 1998
--------- --------
(IN THOUSANDS)
Net cash provided by (used in) operating activities......... $ 10,078 $ (945)
Net cash used in investing activities....................... (130,114) (16,014)
Net cash provided by financing activities................... 123,139 24,120
18
19
The following table shows the Trust's calculation of FFO:
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
------------- -------------
(IN THOUSANDS, EXCEPT NUMBER
OF SHARES)
Net Income................................................. $ 3,249 $ 1,098
Exclude effects of:
Real estate depreciation and amortization, net of
minority interest share............................. 3,384 1,556
Minority interest in operating partnerships........... 38 43
----------- -----------
Funds from Operations...................................... $ 6,671 $ 2,697
=========== ===========
Weighted average Shares and operating partnership units
outstanding.............................................. 20,176,627 10,836,887
=========== ===========
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 programming 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, create tenant statements,
or engage in similar normal business activities.
The Trust's plan to resolve Year 2000 issues involves the following four
phases: assessment, remediation, testing and implementation. To date, the Trust
has assessed all existing internally used hardware and systems (both information
technology and non-information technology) that could be significantly affected
by the Year 2000 issue. Based on these assessments, management believes that
existing hardware and systems used by the Trust are Year 2000 compliant.
Additionally, by December 31, 1998, the Trust had successfully upgraded the
existing network and property operations/accounting systems. These upgrades were
instituted to meet current and future needs of the Trust, not as a result of our
initial Year 2000 assessment. The Trust has taken precautions, including testing
these systems prior to implementation, to ensure that all upgrades and
modifications are Year 2000 compliant.
The Trust has queried and/or received disclosure statements from
significant external service providers. To date, the Trust is not aware of any
Year 2000 problems with these third parties that would materially impact the
Trust's results of operations, liquidity or capital resources. However, the
Trust has no means of ensuring that external service providers will be Year 2000
compliant. The inability of these service providers to complete their Year 2000
resolution processes in a timely manner could impact the Trust. The effect of
non-compliance by service providers is not determinable. The Trust is also
reviewing all properties which may use date sensitive software in elevators,
heating and cooling equipment and security systems to confirm no problem exists.
Although a potential area of significant exposure to the Trust is the
contracting to third parties of property management, accounting, and leasing
services, the Trust generally 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 has
initiated the transition to internalize property management, accounting and
leasing of its properties, thereby significantly reducing the use of third
parties in these areas.
As noted above, the Trust has completed the initial assessment and believes
the existing internal systems and upgrades are Year 2000 compliant. The Trust
does not expect historical and future costs related to the Year 2000 issue to
have a material effect on the consolidated financial position or results of
operations of the Trust. 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 have a
material adverse effect upon the Trust's operations.
19
20
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.
In addition, the Trust may from time to time sell properties that do not
compliment the Trust's property emphasis or geographic target markets. Proceeds
from such sales could be used for working capital purposes, debt reduction or
reinvested into other properties. As of March 31, 1999, the Trust had $9.2
million in unrestricted cash.
In August 1998, the Trust entered into a definitive agreement providing for
a strategic investment by DDR in the Trust. Under the terms of the agreement,
DDR was obligated to purchase $115 million of equity securities (Common Shares
up to 49.9% ownership and Preferred Shares thereafter) and up to $200 million in
additional equity securities, subject to certain conditions, to fund property
acquisitions approved by the Trust's Board. As of March 31, 1999, DDR has
purchased 9.3 million Common Shares for $143 million. Proceeds related to this
agreement were used to fund property acquisitions in 1998, as well as the
purchase of a $127.3 million portfolio in January 1999.
In addition to the equity raised, the Trust utilized both long term and
short term secured financing to fund property acquisitions. The Trust completed
approximately $48.6 million in permanent fixed rate financings during the first
quarter of 1999. In January 1999, the Trust initiated a secured acquisition
credit facility with Bank One. The agreement contemplates a $150,000,000 credit
line of which Bank One has committed to $25,000,000. The remainder of the credit
line will be syndicated on a "best efforts" basis by Bank One. The credit line,
which will be secured by mortgage liens on properties, provides for a graduated
variable interest rate (depending on the Trust's overall leverage) of LIBOR plus
1.4% to LIBOR plus 2.0%, a maximum loan to value of 60%, and a maturity in
January 2001. As of March 31, 1999, the Trust has $13.0 million outstanding
under this credit line, which bears interest at LIBOR plus 1.75%, currently
6.715%.
The Trust also has approximately $68.8 million outstanding under a $75
million secured acquisition line and $75.2 million outstanding under a secured
bridge loan with PSCC. The acquisition line and the bridge loan bear interest at
a variable rate based on the 30 day LIBOR rate plus 1.75%, currently 6.715%. In
connection with extending the maturity of the secured acquisition line to April
2000, the interest rate was reduced effective April 27, 1999 to LIBOR plus
1.55%. The Trust anticipates repayment of the bridge loan with proceeds from a
fixed rate permanent financing in June 1999. The Trust is currently negotiating
the terms and conditions of this permanent financing. There can be no assurance
that the negotiations or refinancing efforts will be successful.
At March 31, 1999, the Trust had $344.3 million in mortgage debt
outstanding, of which approximately $187.4 million was represented by fixed rate
debt with a weighted average interest rate of 7.84%, and $157.0 million was
represented by variable rate debt with a weighted average interest rate of
7.02%. These weighted average interest rates represent an average of the
applicable stated interest rate and do not include the amortization of deferred
loan costs (or debt premiums) which will produce a higher (or lower) weighted
average interest rate.
At March 31, 1999, the Trust's total market capitalization (based upon a
March 31, 1999 closing Share price of $11.625 per Share) was approximately
$578.9 million. Based upon this amount, the Trust's debt to total market
capitalization at March 31, 1999 was 58.4%. The Trust is currently operating at
higher levels of leverage than it would foresee on a longer term basis. The
Trust believes that the use of leverage is justified given existing acquisition
prospects and the benefits of the Trust's transition to a larger entity.
Although there is no assurance of ultimate availability, the Trust anticipates
that equity will be raised in the future and will serve to deleverage the Trust.
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 properties. Should such funds
not cover these needs, the possibility of future distributions may be reduced or
eliminated. Although the Trust believes that its current leverage is justified,
the risk of financial default could rise substantially if the Trust is unable to
complete future equity offerings or if property operating results decline.
20
21
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
annual turnover rate of 20% to 25% of the Trust's tenants and related revenue.
Such turnover requires capital expenditures related to tenant improvements and
leasing commissions, 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 were
$2,946,000 in the quarter ended March 31, 1999, compared to $1,122,000 in the
quarter ended March 31, 1998. 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, which are costs necessary to bring acquired properties to intended
leasable condition at the time of acquisition.
A distribution of $0.20 per Share was payable on April 15, 1999 to
shareholders of record on April 5, 1999. The Trust's distribution policy is to
conserve capital by, over time, lowering its FFO payout ratio. The Trust
believes that the minimum FFO payout ratio in order to comply with the
requirement to distribute 95% of taxable income, is approximately 50-55% based
on the Trust's current capital structure. Future distributions will be at the
discretion of the Board of Trust Managers. At December 31, 1998, the Trust had
approximately $34.3 million in net operating loss carryforwards, a portion of
which could be utilized to reduce the payout of 95% taxable income required by
the Internal Revenue Code.
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 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 Company.
RECENT DEVELOPMENTS
On May 13, 1999, the Trust declared a distribution of $0.22 per Share
payable on July 14, 1999 to shareholders of record on July 2, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Trust's risk management includes
forward-looking statements that involve risks and uncertainties. Actual results
could differ materially from the results discussed in the forward-looking
statements.
The Trust's primary market risk exposure is to changes in interest rates.
The Trust is exposed to market risk related to its secured acquisition line and
secured bridge loan with PSCC and the Bank One credit line as discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operation Liquidity and Capital Resources." The interest on the acquisition
line, bridge loan and credit line are subject to fluctuations in the market.
The Trust also uses long-term and medium-term debt as a source of capital.
These debt instruments are typically issued at fixed interest rates. When these
debt instruments mature, the Trust typically refinances such debt at
then-existing market interest rates which may be more or less than the interest
rates on the maturing debt.
If the interest rate for variable rate debt was 100 basis points higher or
lower during the first quarter of 1999, the Trust's interest expense would have
been increased or decreased by approximately $392,000. There is no fixed rate
debt maturing in 1999.
The Trust historically has not hedged its exposure to fluctuations in
interest rates and currently has no plans to do so in the future.
21
22
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. 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.
ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS
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 Agreement (the "Agreement"), the transaction has three stages. The
first stage, effective as of July 30, 1998, resulted in DDR acquiring 2,207,618
Shares at a price of $15.50 per Share.
In January 1999, DDR completed the second stage of its investment in the
Trust. The second stage resulted in DDR purchasing 5,226,583 Shares for $15.50
per Share (for total consideration of approximately $81.0 million) to fund
property acquisitions in 1998 and 1999.
In the third stage, the Trust has the right to require DDR, under certain
circumstances, to purchase additional Shares with a total purchase price not to
exceed $200 million to fund property acquisitions. DDR's obligation to purchase
Shares, the price of the Shares and the amount to be invested in the third stage
are contingent upon several factors, including the trading prices of DDR and
Trust Shares, the market capitalization of DDR and whether common or preferred
shares are issued to DDR. As of March 31, 1999, DDR had purchased 1,867,616
Shares (for total consideration of approximately $27.9 million). In total, DDR
has purchased 9,301,817 Shares, representing 45.4% of the outstanding Shares of
the Trust.
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
The following information summarizes the events reported on Form 8-K during
the quarter ended March 31, 1999:
(1) Current Report on Form 8-K filed with the Commission on January
29, 1999;
(2) Current Report on Form 8-K filed with the Commission on February
3, 1999;
(3) Current Report on Form 8-K/A filed with the Commission on March
31, 1999 amending Form 8-K filed with the Commission on January 29, 1999.
22
23
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)
SIGNATURE DATE
--------- ----
/s/ MARC A. SIMPSON May 17, 1999
- -----------------------------------------------------
Marc A. Simpson
Senior Vice President and Chief Financial Officer
(principal financial officer)
/s/ GARY A. WILLIAMS May 17, 1999
- -----------------------------------------------------
Gary A. Williams
Vice President and Chief Accounting Officer
(principal accounting officer)
23
24
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
27.1 -- Financial Data Schedule