1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2000
OR
[ ] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
COMMISSION FILE NUMBER: 001-13545
AMB PROPERTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 94-3281941
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
505 MONTGOMERY ST., SAN FRANCISCO, CALIFORNIA 94111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(415) 394-9000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of July 25, 2000, there were 84,088,688 shares of the Registrant's
common stock, $0.01 par value per share, outstanding.
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AMB PROPERTY CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 2000 and December
31, 1999.................................................... 1
Consolidated Statements of Operations for the three and six
months ended June 30, 2000 and 1999......................... 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999................................ 3
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 2000.................................. 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market
Risks....................................................... 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 28
Item 2. Changes in Securities and Use of Proceeds................... 28
Item 3. Defaults Upon Senior Securities............................. 28
Item 4. Submission of Matters to a Vote of Security Holders......... 28
Item 5. Other Information........................................... 28
Item 6. Exhibits and Reports on Form 8-K............................ 43
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PART I
ITEM 1. FINANCIAL STATEMENTS
AMB PROPERTY CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
Investments in real estate:
Land and improvements..................................... $ 778,043 $ 714,916
Buildings and improvements................................ 2,578,648 2,349,221
Construction in progress.................................. 208,053 185,315
---------- ----------
Total investments in properties................... 3,564,744 3,249,452
Accumulated depreciation and amortization................. (142,037) (103,558)
---------- ----------
Net investments in properties..................... 3,422,707 3,145,894
Investment in unconsolidated joint ventures................. 77,959 66,357
Properties held for divestiture, net........................ 235,359 181,201
---------- ----------
Net investments in real estate.................... 3,736,025 3,393,452
Cash and cash equivalents................................... 14,743 33,312
Restricted cash and cash equivalents........................ 6,931 103,707
Other assets................................................ 95,322 91,079
---------- ----------
Total assets...................................... $3,853,021 $3,621,550
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Secured debt.............................................. $ 751,091 $ 707,037
Alliance Fund I credit facility........................... 51,000 80,000
Unsecured senior debt securities.......................... 400,000 400,000
Unsecured credit facility................................. 176,000 83,000
---------- ----------
Total debt........................................ 1,378,091 1,270,037
Other liabilities........................................... 136,168 89,371
---------- ----------
Total liabilities................................. 1,514,259 1,359,408
Commitments and contingencies (note 11)
Minority interests.......................................... 559,962 432,883
Stockholders' equity:
Series A preferred stock, cumulative, redeemable, $0.01
par value, 100,000,000 shares authorized, 4,000,000
shares issued and outstanding, $100,000 liquidation
preference............................................. 96,100 96,100
Common stock, $0.01 par value, 500,000,000 shares
authorized, 83,868,693 and 85,133,041 issued and
outstanding............................................ 839 851
Additional paid-in capital................................ 1,630,060 1,656,226
Retained earnings......................................... 41,840 47,089
Accumulated other comprehensive income.................... 9,961 28,993
---------- ----------
Total stockholders' equity........................ 1,778,800 1,829,259
---------- ----------
Total liabilities and stockholders' equity........ $3,853,021 $3,621,550
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
REVENUES
Rental revenues..................... $ 110,597 $ 113,530 $ 218,863 $ 221,187
Equity in earnings of unconsolidated
joint ventures................... 1,317 1,177 2,559 2,328
Investment management and other
income........................... 1,565 670 2,380 1,434
----------- ----------- ----------- -----------
Total revenues.............. 113,479 115,377 223,802 224,949
OPERATING EXPENSES
Property operating expenses......... 11,586 13,588 23,063 25,957
Real estate taxes................... 13,502 14,767 26,998 29,802
Interest, including amortization.... 20,002 23,591 40,344 46,558
Depreciation and amortization....... 22,631 15,178 41,823 33,602
General and administrative.......... 5,984 6,807 11,335 13,009
----------- ----------- ----------- -----------
Total operating expenses.... 73,705 73,931 143,563 148,928
----------- ----------- ----------- -----------
Income from operations before
minority interests............. 39,774 41,446 80,239 76,021
Minority interests' share of net
income........................... (10,183) (8,145) (19,593) (14,706)
----------- ----------- ----------- -----------
Net income before gain from
divestiture of real
estate.................... 29,591 33,301 60,646 61,315
Gain from divestiture of real
estate........................... 416 11,525 405 11,525
----------- ----------- ----------- -----------
Net income before
extraordinary items....... 30,007 44,826 61,051 72,840
Extraordinary items................. -- (1,509) -- (1,509)
----------- ----------- ----------- -----------
Net income.................. 30,007 43,317 61,051 71,331
Series A preferred stock
dividends........................ (2,125) (2,125) (4,250) (4,250)
----------- ----------- ----------- -----------
Net income available to
common stockholders....... $ 27,882 $ 41,192 $ 56,801 $ 67,081
=========== =========== =========== ===========
BASIC INCOME PER COMMON SHARE
Before extraordinary items.......... $ 0.33 $ 0.50 $ 0.68 $ 0.80
Extraordinary items................. -- (0.02) -- (0.02)
----------- ----------- ----------- -----------
Net income available to
common stockholders....... $ 0.33 $ 0.48 $ 0.68 $ 0.78
=========== =========== =========== ===========
DILUTED INCOME PER COMMON SHARE
Before extraordinary items.......... $ 0.33 $ 0.50 $ 0.68 $ 0.80
Extraordinary items................. -- (0.02) -- (0.02)
----------- ----------- ----------- -----------
Net income available to
common stockholders....... $ 0.33 $ 0.48 $ 0.68 $ 0.78
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic............................... 83,848,883 86,286,613 83,849,020 86,143,859
=========== =========== =========== ===========
Diluted............................. 84,125,277 86,468,820 83,994,238 86,244,750
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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5
AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED, DOLLARS IN THOUSANDS)
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 61,051 $ 71,331
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 41,823 33,602
Straight-line rents....................................... (5,343) (5,523)
Amortization of debt premiums and financing costs......... (2,781) (1,413)
Minority interests' share of net income................... 19,593 14,706
Gain on divestitures of real estate....................... (405) (11,525)
Non-cash portion of extraordinary items................... -- (1,372)
Equity in (earnings)/loss of AMB Investment Management.... 1,292 (720)
Equity in (earnings) of unconsolidated joint ventures..... (2,559) (2,328)
Changes in assets and liabilities:
Other assets.............................................. (8,068) 3,724
Other liabilities......................................... 15,766 16,381
--------- ---------
Net cash provided by operating activities.......... 120,369 116,863
CASH FLOWS FROM INVESTING ACTIVITIES
Change in restricted cash and cash equivalents.............. 81,693 --
Cash paid for property acquisitions......................... (224,210) (242,712)
Additions to land, building, development costs and other
first generation improvements............................. (129,616) (62,009)
Additions to second generation building improvements and
lease costs............................................... (15,986) (12,362)
Additions to interest in unconsolidated joint ventures...... (4,733) --
Distributions received from unconsolidated joint ventures... (4,310) 1,705
Net proceeds from divestitures of real estate............... 15,083 214,729
--------- ---------
Net cash used in investing activities.............. (282,079) (100,649)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock.................................... 269 549
Borrowings on unsecured credit facility..................... 160,000 236,000
Borrowings on Alliance Fund I credit facility............... 25,000 --
Borrowings on secured debt.................................. 45,109 20,992
Payments on unsecured credit facility....................... (67,000) (215,000)
Payments on Alliance Fund I credit facility................. (54,000) --
Payments on secured debt.................................... (136) (46,817)
Payment of financing fees................................... (3,893) (104)
Net proceeds from issuance of Series D preferred units...... -- 77,773
Net proceeds from issuance of Series F preferred units...... 19,590 --
Contributions from investors in the Alliance Fund I......... 73,282 --
Dividends paid to common and preferred stockholders......... (35,270) (63,786)
Distributions to minority interests, including preferred
units..................................................... (19,810) (10,828)
--------- ---------
Net cash provided (used) by financing activities... 143,141 (1,221)
--------- ---------
Net increase (decrease) in cash and cash equivalents........ (18,569) 14,993
Cash and cash equivalents at beginning of period............ 33,312 25,137
--------- ---------
Cash and cash equivalents at end of period.................. $ 14,743 $ 40,130
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest...................................... $ 45,536 $ 47,108
========= =========
Non-cash transactions:
Acquisitions of properties................................ $ 228,103 $ 314,726
Assumption of debt........................................ (3,893) (57,480)
Minority interest's contribution, including units
issued.................................................. -- (14,534)
--------- ---------
Net cash paid...................................... $ 224,210 $ 242,712
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED, DOLLARS IN THOUSANDS)
COMMON STOCK
--------------------- ACCUMULATED
SERIES A NUMBER ADDITIONAL OTHER
PREFERRED OF PAID-IN RETAINED COMPREHENSIVE
STOCK SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
--------- ------------ ------ ---------- -------- ------------- ----------
BALANCE AT DECEMBER 31,
1999........................ $96,100 85,133,041 $851 $1,656,226 $ 47,089 $ 28,993 $1,829,259
Comprehensive income:
Net income.................. 4,250 -- -- -- 56,801 --
Unrealized loss on
securities................ -- -- -- -- -- (19,032)
Total comprehensive
income............. 42,019
Issuance of restricted stock,
net......................... -- 156,675 2 3,164 -- -- 3,166
Exercise of stock options..... -- 44,903 -- 950 -- -- 950
Cancellation of common
stock....................... -- (1,465,926) (14) (29,304) -- -- (29,318)
Deferred compensation......... -- -- -- (3,166) -- -- (3,166)
Deferred compensation
amortization................ -- -- -- 596 -- -- 596
Reallocation of limited
partners' interests in
Operating Partnership and
other....................... -- -- -- 1,594 -- -- 1,594
Dividends..................... (4,250) -- -- -- (62,050) -- (66,300)
------- ---------- ---- ---------- -------- -------- ----------
BALANCE AT JUNE 30, 2000...... $96,100 83,868,693 $839 $1,630,060 $ 41,840 $ 9,961 $1,778,800
======= ========== ==== ========== ======== ======== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
AMB Property Corporation, a Maryland corporation (the "Company"), commenced
operations as a fully integrated real estate company effective with the
completion of its initial public offering on November 26, 1997. The Company
elected to be taxed as a real estate investment trust under Sections 856 through
860 of the Internal Revenue Code of 1986, commencing with its taxable year ended
December 31, 1997, and believes its current organization and method of operation
will enable it to maintain its status as a real estate investment trust. The
Company, through its controlling interest in its subsidiary, AMB Property, L.P.,
a Delaware limited partnership (the "Operating Partnership"), is engaged in the
acquisition, ownership, operation, management, renovation, expansion and
development of industrial buildings in target markets nationwide. Unless the
context otherwise requires, the "Company" means AMB Property Corporation, the
Operating Partnership and its other controlled subsidiaries.
As of June 30, 2000, the Company owned an approximate 93.4% general partner
interest in the Operating Partnership, excluding preferred units. The remaining
approximate 6.6% limited partner interest is owned by non-affiliated investors
and certain current and former directors and officers of the Company. For local
law purposes, certain properties are owned through limited partnerships and
limited liability companies. The ownership of such properties through such
entities does not materially affect the Company's overall ownership of the
interests in the properties. As the sole general partner of the Operating
Partnership, the Company has the full, exclusive and complete responsibility and
discretion in the day-to-day management and control of the Operating
Partnership. Net operating results of the Operating Partnership are allocated
after preferred unit distributions based on the respective partners' ownership
interests.
Through the Operating Partnership, the Company enters into co-investment
joint ventures with institutional investors. These co-investment joint ventures
provide the Company with an additional source of capital to fund certain
acquisitions and development and renovation projects. As of June 30, 2000, the
Company had investments in two co-investment joint ventures, including AMB
Institutional Alliance Fund I, L.P. ("Alliance Fund I"), which are consolidated
for financial reporting purposes. The Company generally owns 20 - 50% of the
equity interests in these joint ventures and maintains control over the joint
ventures' operations, financing and investment decisions.
Prior to the Company's initial public offering in November 1997, the
Company's predecessor provided real estate investment advisory services to
institutional investors. In connection with the initial public offering, AMB
Investment Management, Inc., a Maryland corporation ("AMB Investment
Management"), was formed to continue the investment management business of
providing real estate investment services on a fee basis to clients. The
Operating Partnership purchased 100% of AMB Investment Management's non-voting
preferred stock (representing a 95% economic interest therein). Certain current
and former executive officers of the Company and a former executive officer of
AMB Investment Management collectively purchased 100% of AMB Investment
Management's voting common stock (representing a 5% economic interest therein).
The Operating Partnership also owns 100% of the non-voting preferred stock of
Headlands Realty Corporation, a Maryland corporation, (representing a 95%
economic interest therein). Certain current and former executive officers of the
Company and a director of Headlands Realty Corporation collectively own 100% of
the voting common stock of Headlands Realty Corporation (representing a 5%
economic interest therein). Headlands Realty Corporation invests in properties
and interests in entities that engage in the management, leasing and development
of properties and similar activities. The Operating Partnership accounts for its
investment in AMB Investment Management and Headlands Realty Corporation using
the equity method of accounting.
As of June 30, 2000, the Company owned 780 industrial buildings and nine
retail centers, located in 25 markets throughout the United States. The
Company's strategy is to become a leading provider of High Throughput
Distribution, or HTD, properties located near key passenger and cargo airports,
highway systems
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AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
and ports in major metropolitan areas, such as Atlanta, Chicago, Dallas/Fort
Worth, Northern New Jersey/ New York City, the San Francisco Bay Area and
Southern California. As of June 30, 2000, the industrial buildings, principally
warehouse distribution buildings, encompassed approximately 69.2 million
rentable square feet and were 97.0% leased to over 2,400 tenants. As of June 30,
2000, the retail centers, principally grocer-anchored community shopping
centers, encompassed approximately 1.6 million rentable square feet and were
90.2% leased to over 200 tenants.
2. INTERIM FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and note disclosures normally included in the
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted.
The consolidated financial statements for prior periods have been
reclassified to conform to current classifications with no effect on results of
operations. General and administrative expenses on the Consolidated Statements
of Operations includes internal asset management costs of $2.1 million and $2.5
million for the three months ended June 30, 2000 and 1999, respectively, and
$4.5 million and $4.6 million for the six months ended June 30, 2000 and 1999,
respectively. Prior to the third quarter of 1999, these costs were classified as
property operating expenses.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, of a normal recurring nature,
necessary for a fair presentation of the Company's consolidated financial
position and results of operations for the interim periods.
The interim results of the three and six months ended June 30, 2000 and
1999, are not necessarily indicative of the future results. These financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. REAL ESTATE ACQUISITION AND DEVELOPMENT ACTIVITY
During the second quarter of 2000, the Company invested $193.6 million in
operating properties, consisting of 52 industrial buildings aggregating
approximately 2.4 million square feet, including the investment of $75.9 million
in operating properties, consisting of 25 industrial buildings aggregating
approximately 0.9 million square feet, by the Alliance Fund I. Year to date, the
Company has invested $228.1 million in operating properties, consisting of 58
industrial buildings aggregating approximately 3.0 million square feet.
The Company also initiated five new development projects and three new
renovation projects during the second quarter, which will aggregate
approximately 1.8 million square feet and have a total estimated cost of $74.3
million upon completion. Five development projects and one renovation project,
aggregating approximately 1.4 million square feet, were completed during the
quarter, at a total cost of $66.2 million. As of June 30, 2000, the Company had
23 industrial projects, which will total approximately 5.7 million square feet
and have an aggregate estimated investment of $341.9 million upon completion, in
its development pipeline
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9
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
and two retail projects (excluding two development projects held for
divestiture), which will total approximately 0.2 million square feet and have an
aggregate estimated investment of $34.8 million upon completion, in its
development pipeline. As of June 30, 2000, $218.5 million had been funded and
approximately $158.2 million was estimated to be required to complete projects
currently under construction or for which the Company has committed to complete.
4. PROPERTY DIVESTITURES AND PROPERTIES HELD FOR DIVESTITURE
Property Divestitures. In June 2000, the Company divested itself of two
industrial buildings located in Denver, Colorado, aggregating approximately 0.1
million square feet, for an aggregate price of $2.8 million. The divestitures
during the second quarter resulted in an aggregate net gain of $0.4 million. To
date, the Company has divested itself of six industrial buildings, aggregating
approximately 0.4 million square feet, for an aggregate price of $15.7 million,
with a resulting net gain of $0.4 million.
Properties Held for Divestiture. The Company has decided to divest itself
of six retail centers, two industrial buildings, and one land parcel, which are
not in its core markets or which do not meet its strategic objectives. The
divestitures of the properties are subject to negotiation of acceptable terms
and other customary conditions. As of June 30, 2000, the net carrying value of
the properties held for divestiture was $235.4 million.
The following summarizes the condensed results of operations of the
properties held for divestiture at June 30, 2000 for the three and six months
ended June 30, 2000 and 1999 (dollars in thousands):
PROPERTIES HELD FOR DIVESTITURE
THREE MONTHS ENDED
JUNE 30,
------------------
2000 1999
------- -------
Income................................................... $ 6,054 $ 6,438
Property operating expenses.............................. 1,864 2,035
------- -------
Net operating income................................... $ 4,190 $ 4,403
======= =======
SIX MONTHS ENDED
JUNE 30,
------------------
2000 1999
------- -------
Income................................................... $12,494 $12,844
Property operating expenses.............................. 3,680 3,874
------- -------
Net operating income................................... $ 8,814 $ 8,970
======= =======
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10
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
5. DEBT
As of June 30, 2000 and December 31, 1999, debt consisted of the following
(dollars in thousands):
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
Secured debt, varying interest rates from 4.0% to
10.4% due May 2000 to January 2014............... $ 740,141 $ 696,931
Alliance Fund I credit facility, variable interest
at LIBOR plus 87.5 basis points (weighted average
interest rate of 7.5% at June 30, 2000), due
April 2001....................................... 51,000 80,000
Unsecured senior debt securities, weighted average
interest rate of 7.2%, due June 2008, June 2015
and June 2018.................................... 400,000 400,000
Unsecured credit facility, variable interest at
LIBOR plus 75 basis points (weighted average
interest rate of 7.5% at June 30, 2000), due May
2003............................................. 176,000 83,000
---------- ----------
Subtotal......................................... 1,367,141 1,259,931
Unamortized premiums............................. 10,950 10,106
---------- ----------
Total consolidated debt.................. $1,378,091 $1,270,037
========== ==========
Secured debt generally requires monthly principal and interest payments.
The secured debt is secured by deeds of trust on certain properties. As of June
30, 2000, the total gross investment book value of those properties secured by
debt was $1.6 billion. All of the secured debt bears interest at fixed rates,
except for two loans with an aggregate principal amount of $18.4 million, which
bear interest at variable rates. The secured debt has various financial and
non-financial covenants. Management believes that the Company was in material
compliance with these covenants at June 30, 2000. Additionally, certain of the
secured debt is cross-collateralized.
The Alliance Fund I has a $80.0 million unsecured credit facility. The debt
is secured by the unfunded capital commitments of the third party investors in
AMB Institutional Alliance REIT I, Inc. (the "Alliance REIT"), a limited partner
in the Alliance Fund I. Alliance REIT is also the guarantor. The debt bears
interest at LIBOR plus 87.5 basis points and matures in April 2001. See Note 6
for a discussion of the Alliance REIT and the Alliance Fund I.
Interest on the senior debt securities is payable semiannually in each June
and December commencing December 1998. The 2015 notes are putable and callable
in June 2005. The senior debt securities are subject to various financial and
non-financial covenants. Management believes that the Company was in material
compliance with these covenants at June 30, 2000.
On May 24, 2000, the Operating Partnership entered into a new $500 million
unsecured revolving credit agreement which replaced its previous $500 million
credit facility that was to mature in November 2000. The Company is a guarantor
of the Operating Partnership's obligations under the credit facility. The new
credit facility is with Morgan Guaranty Trust Company of New York, as
administrative agent, Bank of America, N.A., as syndication agent, The Chase
Manhattan Bank, as document agent, J.P. Morgan Securities Inc. and Banc of
America Securities, LLC, as joint lead arrangers and joint bookmanagers, and a
syndicate of 12 other banks. The new credit facility matures in May 2003, has a
one-year extension option and is subject to a 15 basis point fee annual facility
fee. The credit facility has various financial and non-financial covenants.
Management believes that the Company and the Operating Partnership were in
material compliance with these covenants at June 30, 2000. The Operating
Partnership has the ability to increase available borrowings up to $700 million
by adding additional banks to the facility or obtaining the agreement of
existing banks to
8
11
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
increase their commitments. The rate on the borrowings will generally be LIBOR
plus, based on the current credit rating of the Operating Partnership's
long-term debt, 75 basis points.
Capitalized interest related to construction projects for the three and six
months ended June 30, 2000 and 1999 was $4.2 million, $2.9 million, $7.2 million
and $5.5 million, respectively.
The scheduled maturities of the Company's total debt, excluding unamortized
debt premiums, as of June 30, 2000, were (dollars in thousands):
UNSECURED ALLIANCE
SENIOR UNSECURED FUND I
SECURED DEBT CREDIT CREDIT
DEBT SECURITIES FACILITY FACILITY TOTAL
-------- ---------- --------- -------- ----------
2000 (six months)........... $ 23,810 $ -- $ -- $ -- $ 23,810
2001........................ 38,116 -- -- 51,000 89,116
2002........................ 67,382 -- -- -- 67,382
2003........................ 75,442 -- 176,000 -- 251,442
2004........................ 90,528 -- -- -- 90,528
2005........................ 70,114 100,000 -- -- 170,114
2006........................ 135,616 -- -- -- 135,616
2007........................ 48,246 -- -- -- 48,246
2008........................ 130,990 175,000 -- -- 305,990
2009........................ 1,811 -- -- -- 1,811
2010........................ 53,467 -- -- -- 53,467
Thereafter.................. 4,619 125,000 -- -- 129,619
-------- -------- -------- ------- ----------
$740,141 $400,000 $176,000 $51,000 $1,367,141
======== ======== ======== ======= ==========
6. MINORITY INTERESTS IN CONSOLIDATED JOINT VENTURES
Minority interests in the Company represent the limited partnership
interests in the Operating Partnership and interests held by certain third
parties (some of which are separate account co-investors that are Institutional
Alliance Partners) in 26 real estate joint ventures, through which 38 properties
are held, that are consolidated for financial reporting purposes. Such
investments are consolidated because (i) the Company owns a majority interest or
(ii) the Company exercises significant control over major operating decisions
such as approval of budgets, selection of property managers and changes in
financing.
The Operating Partnership, together with one of the Company's other
affiliates, owns, as of June 30, 2000, approximately 22% of the partnership
interests in the Alliance Fund I. The Alliance Fund I is a co-investment
partnership between the Company and the Alliance REIT, which has 15
institutional investors and stockholders, and is engaged in the acquisition,
ownership, operation, management, renovation, expansion and development of
primarily industrial buildings in target markets nationwide. As of June 30,
2000, the Alliance Fund I had equity commitments from third party investors
totaling $169.0 million, which, when combined with anticipated debt financings
and the Company's investment, creates a total committed capitalization of
approximately $410.0 million.
9
12
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
The following table distinguishes the minority interest liability as of the
quarter ended June 30, 2000 and minority interests' share of net income and for
the three and six months ended June 30, 2000 (dollars in thousands):
MINORITY INTEREST SHARE
OF NET INCOME
------------------------------
MINORITY INTEREST THREE MONTHS SIX MONTHS
LIABILITY AS OF ENDED ENDED
JUNE 30, 2000 JUNE 30, 2000 JUNE 30, 2000
----------------- ------------- -------------
Joint venture partners..................... $ 20,131 $ 721 $ 1,350
Separate account co-investors.............. 51,124 737 1,596
Alliance REIT's interest in Alliance Fund
I........................................ 91,053 848 1,217
Limited Partners in the Operating
Partnership.............................. 121,421 1,915 3,858
Series B preferred units (liquidation
preference of $65,000)................... 62,319 1,402 2,804
Series C preferred units (liquidation
preference of $110,000).................. 105,847 2,406 4,812
Series D preferred units (liquidation
preference of $79,767)................... 77,688 1,545 3,090
Series E preferred units (liquidation
preference of $11,022)................... 10,789 214 428
Series F preferred units (liquidation
preference of $19,872)................... 19,590 395 438
-------- ------- -------
Total............................ $559,962 $10,183 $19,593
======== ======= =======
7. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The Company has a 56.1% and a 50.0% non-controlling limited partnership
interest in two separate unconsolidated equity investment joint ventures, which
were purchased in June 1998 and September 1999, respectively. One of the joint
ventures owns an aggregate of 36 industrial buildings totaling approximately 4.0
million square feet. The other joint venture is a development project. For the
three and six months ended June 30, 2000, the Company's share of net operating
income was $2.1 million and $4.1 million, respectively, and, as of June 30,
2000, the Company's share of the unconsolidated joint ventures' debt was $24.2
million, with a weighted average interest rate of 6.9% and a weighted average
maturity of 6.2 years.
8. STOCKHOLDERS' EQUITY
At the time of the Company's initial public offering, 4,237,750 shares of
common stock, known as performance shares, were placed in escrow by certain of
the Company's investors, which were subject to advisory agreements with the
Company's predecessor that included incentive fee provisions. On January 7,
2000, 2,771,824 shares of common stock were released from escrow to these
investors and 1,465,926 shares of common stock were returned to the Company and
cancelled. The cancelled shares of common stock represent indirect interests in
the Operating Partnership that were reallocated from the Company (thereby
decreasing the number of shares of common stock outstanding) to other
unitholders who had an ownership interest in our predecessor, including certain
of the Company's executive officers, (thereby increasing the number of limited
partnership units owned by partners other than the Company). The total number of
outstanding partnership units did not change as a result of this reallocation.
This reallocation did not change the amount of fully diluted shares of common
stock and limited partnership units outstanding.
10
13
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
On March 22, 2000, AMB Property II, L.P., one of the Company's
subsidiaries, issued and sold 397,439 7.95% Series F Cumulative Redeemable
Preferred Limited Partnership Units at a price of $50.00 per unit in a private
placement. Distributions are cumulative from the date of issuance and payable
quarterly in arrears at a rate per unit equal to $3.975 per annum. The Series F
Preferred Units are redeemable by AMB Property II, L.P. on or after March 22,
2005, subject to certain conditions, for cash at a redemption price equal to
$50.00 per unit, plus accumulated and unpaid distributions thereon, if any, to
the redemption date. The Series F Preferred Units are exchangeable, at specified
times and subject to certain conditions, on a one-for-one basis, for shares of
the Company's Series F Preferred Stock. AMB Property II, L.P. loaned the net
proceeds of $19.6 million to the Operating Partnership. The Operating
Partnership used the funds to partially repay borrowings under the Company's
unsecured credit facility and for general corporate purposes. The loan bears
interest at a rate of 7.0% per annum and is payable upon demand.
The following table sets forth the dividend payments and distributions that
were declared on May 24, 2000:
DIVIDEND SECOND YEAR-TO-
RECORD PAYMENT QUARTER DATE
SECURITY PAYING ENTITY DATE PAYMENT PERIOD DATE AMOUNT AMOUNT
-------- ------------- ------- -------------- -------- ------- --------
Common Stock................ Company 7/05/00 Quarter ended 6/30/00 7/17/00 $0.3700 $0.7400
OP units.................... Operating Partnership 7/05/00 Quarter ended 6/30/00 7/17/00 $0.3700 $0.7400
Series A preferred stock.... Company 7/05/00 3 months ended 7/14/00 7/17/00 $0.5313 $1.0626
Series A preferred units.... Operating Partnership 7/05/00 3 months ended 7/14/00 7/17/00 $0.5313 $1.0626
Series B preferred units.... Operating Partnership 7/05/00 3 months ended 7/14/00 7/17/00 $1.0781 $2.1562
Series C preferred units.... AMB Property II, L.P. 7/05/00 3 months ended 7/14/00 7/17/00 $1.0938 $2.1876
Series D preferred units.... AMB Property II, L.P. 6/15/00 3 months ended 6/24/00 6/26/00 $0.9688 $1.9376
Series E preferred units.... AMB Property II, L.P. 7/05/00 3 months ended 7/14/00 7/17/00 $0.9688 $1.9376
Series F preferred units.... AMB Property II, L.P. 7/05/00 3 months ended 7/14/00 7/17/00 $0.9938 $1.1030
9. INCOME PER SHARE
The Company's only dilutive securities outstanding for the three and six
months ended June 30, 2000 and 1999 were stock options granted under its stock
incentive plan. The effect of the stock options was to increase weighted average
shares outstanding by 276,394 and 182,207 shares for the three months ended June
30, 2000 and 1999, respectively, and 145,218 shares and 100,891 shares for the
six months ended June 30, 2000 and 1999, respectively. Such dilution was
computed using the treasury stock method.
11
14
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
10. SEGMENT INFORMATION
The Company has two reportable segments: industrial properties and retail
properties. The industrial properties consist primarily of warehouse
distribution facilities suitable for single or multiple tenants and are
typically comprised of multiple buildings that are leased to tenants engaged in
various types of businesses. The retail properties are generally leased to one
or more anchor tenants, such as grocery and drug stores, and various retail
businesses. The accounting policies of the segments are the same as those
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. The Company evaluates performance based upon property net
operating income of the combined properties in each segment. The Company's
properties are managed separately because each segment requires different
operating, pricing and leasing strategies. Significant information used by the
Company for the reportable segments is as follows (dollars in thousands):
INDUSTRIAL RETAIL TOTAL
PROPERTIES PROPERTIES PROPERTIES
---------- ---------- ----------
FOR THE THREE MONTHS ENDED JUNE 30:
Rental revenues(1):
2000................................................... $ 103,735 $ 6,862 $ 110,597
1999................................................... 87,161 26,369 113,530
Property net operating income(1, 2):
2000................................................... 80,766 4,743 85,509
1999................................................... 65,524 19,651 85,175
FOR THE SIX MONTHS ENDED JUNE 30:
Rental revenues(1):
2000................................................... $ 204,769 $14,094 $ 218,863
1999................................................... 164,760 56,427 221,187
Property net operating income(1, 2):
2000................................................... 158,859 9,943 168,802
1999................................................... 125,157 40,271 165,428
Investment in properties(3):
As of:
June 30, 2000....................................... 3,530,417 34,327 3,564,744
December 31, 1999................................... 3,177,283 72,169 3,249,452
- ---------------
(1) Includes straight-line rents of $2.2 million and $2.8 million for the three
months ended June 30, 2000 and 1999, respectively, and $5.3 million and $5.5
million for the six months ended June 30, 2000 and 1999, respectively.
(2) Property net operating income is defined as rental revenue, including
reimbursements and straight-line rents, less property level operating
expenses, excluding depreciation, amortization, general and administrative
expenses and interest expense.
(3) Excludes net properties held for divestiture of $235.4 million and $181.2
million as of June 30, 2000 and December 31, 1999, respectively.
12
15
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
The Company uses property net operating income as an operating performance
measure. The following is a reconciliation between total reportable segment
revenue and property net operating income to consolidated revenues and net
income (dollars in thousands):
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- -------------------
2000 1999 2000 1999
--------- --------- -------- --------
REVENUES
Total rental revenues for reportable segments......... $110,597 $113,530 $218,863 $221,187
Investment management and other income................ 2,882 1,847 4,939 3,762
-------- -------- -------- --------
Total consolidated revenues........................... $113,479 $115,377 $223,802 $224,949
======== ======== ======== ========
NET INCOME
Property net operating income for reportable
segments............................................ $ 85,509 $ 85,175 $168,802 $165,428
Equity in earnings of unconsolidated joint ventures... 1,317 1,177 2,559 2,328
Investment management and other income................ 1,565 670 2,380 1,434
Less:
General and administrative.......................... (5,984) (6,807) (11,335) (13,009)
Interest expense.................................... (20,002) (23,591) (40,344) (46,558)
Depreciation and amortization....................... (22,631) (15,178) (41,823) (33,602)
Minority interests.................................. (10,183) (8,145) (19,593) (14,706)
-------- -------- -------- --------
Net income before gain from divestitures of real
estate.............................................. 29,591 33,301 60,646 61,315
Gain from divestiture of real estate.................. 416 11,525 405 11,525
-------- -------- -------- --------
Net income before extraordinary items................. 30,007 44,826 61,051 72,840
Extraordinary items................................... -- (1,509) -- (1,509)
-------- -------- -------- --------
Net income............................................ $ 30,007 $ 43,317 $ 61,051 $ 71,331
======== ======== ======== ========
11. COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of business, the Company is 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 materially adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
Environmental Matters
The Company follows the policy of monitoring its properties for the
presence of hazardous or toxic substances. The Company is not aware of any
environmental liability that would have a material adverse effect on the
Company's business, assets or results of operations; however, there can be no
assurance that such a material environmental liability does not exist. The
existence of any such material environmental liability would have an adverse
effect on the Company's results of operations and cash flow.
13
16
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
General Uninsured Losses
The Company carries comprehensive liability, fire, flood, environmental,
extended coverage and rental loss insurance with policy specifications, limits
and deductibles that the Company believes are adequate and appropriate under the
circumstances given the relative risk of loss, the cost of such coverage and
industry practice. There are, however, certain types of extraordinary losses
that may be either uninsurable or not economically insurable. Certain of the
properties are located in areas that are subject to earthquake activity;
therefore, the Company has obtained limited earthquake insurance on those
properties. Should an uninsured loss occur, the Company could lose its
investment in, and anticipated profits and cash flows from, a property.
14
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis of our consolidated
financial condition and results of operations in conjunction with the Notes to
Consolidated Financial Statements. Statements contained in this discussion that
are not historical facts may be forward-looking statements. You can identify
forward-looking statements by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "pro forma," "estimates, or "anticipates" or the negative of
these words and phrases or similar words or phrases. You can also identify
forward-looking statements by discussions of strategy, plans, or intentions.
Forward-looking statements involve numerous risks and uncertainties and you
should not rely upon them as predictions of future events. There is no assurance
that the events or circumstances reflected in forward-looking statements will be
achieved or occur. Forward-looking statements are necessarily dependent on
assumptions, data, or methods that may be incorrect or imprecise and we may not
be able to realize them.
The following factors, among others, could cause actual results and future
events to differ materially from those set forth or contemplated in the
forward-looking statements:
- defaults or non-renewal of leases by tenants;
- increased interest rates and operating cost;
- our failure to obtain necessary outside financing;
- difficulties in identifying properties to acquire and in effecting
acquisitions;
- our failure to successfully integrate acquired properties and operations;
- our failure to divest of properties that we have contracted to sell or to
timely reinvest proceeds from any such divestitures;
- risks and uncertainties affecting property development and construction
(including construction delays, cost overruns, our inability to obtain
necessary permits, and public opposition to these activities);
- our failure to qualify and maintain our status as a real estate
investment trust under the Internal Revenue Code of 1986;
- environmental uncertainties;
- risks related to natural disasters;
- financial market fluctuations;
- changes in real estate and zoning laws; and
- increases in real property tax rates.
Our success also depends upon economic trends generally, including interest
rates, income tax laws, governmental regulation, legislation, population
changes, and those risk factors discussed in the section entitled "Business
Risks" in this report. We caution you not to place undue reliance on
forward-looking statements, which reflect our analysis only and speak only as of
the date of this report or the dates indicated in the statements.
Unless the context otherwise requires, the terms "we," "us" and "our" refer
to AMB Property Corporation, the operating partnership and the other controlled
subsidiaries and the references to AMB Property Corporation include the
operating partnership and the other controlled subsidiaries. The following marks
are our registered trademarks: AMB(R); Customer Alliance Partners(R); Customer
Alliance Program(R); Development Alliance Partners(R); Development Alliance
Program(R); Institutional Alliance Partners(R); Management Alliance Partners(R);
Management Alliance Program(R); UPREIT Alliance Partners(R); and UPREIT Alliance
Program(R). The following are our unregistered trademarks: Broker Alliance
Partners(TM); Broker Alliance Program(TM); eSpace(TM); HTD(TM); High Throughput
Distribution(TM); Institutional Alliance Program(TM); iSpace(TM); Strategic
Alliance Partners(TM); and Strategic Alliance Programs(TM).
15
18
THE COMPANY
AMB Property Corporation, a Maryland corporation, is one of the leading
owners and operators of industrial real estate nationwide. Our investment
strategy is to become a leading provider of High Throughput Distribution, or
HTD, properties located near key passenger and cargo airports, highway systems
and ports in major metropolitan areas, such as Atlanta, Chicago, Dallas/Fort
Worth, Northern New Jersey/New York City, the San Francisco Bay Area and
Southern California. Within each of our markets, we focus our investments in
in-fill submarkets. In-fill submarkets are characterized by supply constraints
on the availability of land for competing projects. High Throughput Distribution
facilities are designed to serve the high-speed, high-value freight handling
needs of today's supply chain, as opposed to functioning as long-term storage
facilities. We believe that the rapid growth of the air-freight business, the
outsourcing of supply chain management to third party logistics companies and
e-commerce are indicative of the changes that are occurring in the supply chain
and the manner in which goods are distributed. In addition, we believe that
inventory levels as a percentage of final sales are falling and that goods are
moving more rapidly through the supply chain. As a result, we intend to focus
our investment activities primarily on industrial properties that we believe
will benefit from these changes.
As of June 30, 2000, we owned and operated 780 industrial buildings and
nine retail centers, totaling approximately 70.8 million rentable square feet,
located in 25 markets nationwide. As of June 30, 2000, these properties were
97.0% leased. As of June 30, 2000, through our subsidiary, AMB Investment
Management, we also managed 43 industrial buildings and retail centers, totaling
approximately 4.4 million rentable square feet, which were 98.3% leased, on
behalf of various institutional investors. In addition, we have invested in 36
industrial buildings, totaling approximately 4.0 million rentable square feet,
through an unconsolidated joint venture.
As of June 30, 2000, we had six retail centers, two industrial buildings
and one land parcel, which were held for divestiture. In addition, during the
second quarter of 2000, we disposed of two industrial buildings, aggregating
approximately 0.4 million rentable square feet, for an aggregate price of $2.8
million. Over the next few years, we intend to dispose of non-strategic assets
and redeploy the resulting capital into High Throughput Distribution properties
that better fit our current investment focus.
Through our subsidiary, AMB Property, L.P., a Delaware limited partnership,
we are engaged in the acquisition, ownership, operation, management, renovation,
expansion and development of primarily industrial properties in target markets
nationwide. We refer to AMB Property, L.P. as the operating partnership. As of
June 30, 2000, we owned an approximate 93.4% general partnership interest in the
operating partnership, excluding preferred units. As the sole general partner of
the operating partnership, we have the full, exclusive and complete
responsibility and discretion in the day-to-day management and control of the
operating partnership.
Through the operating partnership, we enter into co-investment joint
ventures with institutional investors. These co-investment joint ventures
provide us with an additional source of capital to fund certain acquisitions and
developments and renovation projects. As of June 30, 2000, we had investments in
two co-investment joint ventures, including Alliance Fund I., which are
consolidated for financial reporting purposes. We generally own 20 - 50% of the
equity interests in these joint ventures and maintains control over the joint
ventures' operations, financing and investment decisions.
The operating partnership is the managing general partner of the Alliance
Fund I and, together with one of our other affiliates, owns, as of June 30,
2000, approximately 22% of the partnership interests in the Alliance Fund I. The
Alliance Fund I is a co-investment partnership between us and the Alliance REIT,
which has 15 institutional investors as stockholders and is engaged in the
acquisition, ownership, operation, management, renovation, expansion and
development of primarily industrial buildings in target markets nationwide. As
of June 30, 2000, the Alliance Fund I had equity commitments from third party
investors totaling $169.0 million, which, when combined with anticipated debt
financings and our investment, creates a total committed capitalization of
approximately $410.0 million.
16
19
We are self-administered and self-managed and expect that we have qualified
and will continue to qualify as a real estate investment trust for federal
income tax purposes beginning with the year ending December 31, 1997. As a
self-administered and self-managed real estate investment trust, our own
employees perform our administrative and management functions, rather than our
relying on an outside manager for these services. The principal executive office
of AMB Property Corporation and the operating partnership is located at 505
Montgomery St., San Francisco, CA 94111, and our telephone number is (415)
394-9000. We also maintain a regional office in Boston, Massachusetts.
ACQUISITION AND DEVELOPMENT ACTIVITY
During the second quarter of 2000, we invested $193.6 million in operating
properties, consisting of 52 industrial buildings aggregating approximately 2.4
million square feet, including the investment of $75.9 million in operating
properties, consisting of 25 industrial buildings aggregating approximately 0.9
million square feet, by the Alliance Fund I. Year to date, we have invested
$228.1 million in operating properties, consisting of 58 industrial buildings
aggregating approximately 3.0 million square feet.
We also initiated five new development projects and three new renovation
projects during the second quarter, which will aggregate approximately 1.8
million square feet and have a total estimated cost of $74.3 million upon
completion. Five development projects and one renovation project, aggregating
approximately 1.4 million square feet, were completed during the quarter, at a
total cost of $66.2 million. As of June 30, 2000, we had 23 industrial projects,
which will total approximately 5.7 million square feet and have a total
estimated investment of $341.9 million upon completion, in our development
pipeline and two retail projects (excluding two development projects held for
divestiture), which will total approximately 0.2 million square feet and have a
total estimated investment of $34.8 million upon completion, in its development
pipeline. As of June 30, 2000, $218.5 million had been funded and approximately
$158.2 million was estimated to be required to complete projects currently under
construction or for which we have committed to complete.
STRATEGIC ALLIANCE PROGRAMS
Our Strategic Alliance Programs are designed to build value by creating
mutually beneficial relationships. We believe that our strategy of forming
strategic alliances with local and regional real estate experts improves our
operating efficiency and flexibility, strengthens customer satisfaction and
retention and provides us with growth opportunities. Additionally, our strategic
alliances with institutional investors enhance our access to private capital and
our ability to finance transactions with a goal of increasing our return on
invested capital.
Our six Strategic Alliance Programs can be grouped into two categories:
- Operating Alliances, which allow us to form relationships with local or
regional real estate experts, thereby becoming their ally rather than
their competitor; and
- Investment Alliances, which allow us to establish relationships with a
variety of capital sources.
OPERATING ALLIANCES
Broker Alliance Program: Through our Broker Alliance Program, we work
closely with top local leasing companies in each of our markets, whose brokers
provide us with access to high quality customers and local market knowledge.
Customer Alliance Program: Through our Customer Alliance Program, we are
building long-term working relationships with major customers. We are committed
to working with our customers, particularly our larger customers with multi-site
requirements, to satisfy their real estate needs as efficiently as possible.
Development Alliance Program: Our strategy for the Development Alliance
Program is to form alliances with local development firms to jointly acquire,
renovate and develop properties to serve our customers' needs.
Management Alliance Program: Our strategy for the Management Alliance
Program is to develop close relationships with, and outsource property
management to, local property management firms that we believe to
17
20
be among the best in each of our markets. Our alliances with local property
management firms increase our flexibility, reduce our overhead expenses and
improve our customer service. In addition, these alliances provide us with local
market information related to customer activity and investment opportunities.
INVESTMENT ALLIANCES
Institutional Alliance Program: Our strategy for the Institutional Alliance
Program is to form alliances with institutional investors, which provide us with
access to private capital and a source of incremental fee income and investment
returns. This program allows our Institutional Alliance Partners the opportunity
to co-invest with us and to receive professional investment management of their
real estate assets.
UPREIT Alliance Program: Through our UPREIT Alliance Program, we issue from
time to time limited partnership units in the operating partnership to certain
property owners in exchange for properties, thus providing additional growth for
the portfolio.
RESULTS OF OPERATIONS
The analysis below includes changes attributable to acquisitions,
development activity and divestitures and the changes resulting from properties
that we owned during both the current and prior year reporting periods,
excluding development properties prior to being stabilized (90% leased). We
refer to these properties as the same store properties. For the comparison
between the three and six months ended June 30, 2000 and 1999, the same store
properties consisted of properties aggregating approximately 54.5 million square
feet. The properties acquired in 1999 consisted of 154 buildings, aggregating
approximately 8.4 million square feet, and the properties acquired during the
first half of 2000 consisted of 58 buildings, aggregating 3.0 million square
feet. In 1999, property divestitures consisted of 30 retail centers and 15
industrial buildings, aggregating approximately 6.6 million square feet, and
property divestitures during the first half of 2000 consisted of six industrial
buildings, aggregating approximately 0.4 million square feet. Our future
financial condition and results of operations, including rental revenues, may be
impacted by the acquisition of additional properties and dispositions. Our
future revenues and expenses may vary materially from their historical rates.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999 (DOLLARS IN MILLIONS):
RENTAL REVENUES 2000 1999 $ CHANGE % CHANGE
--------------- ------ ------ -------- --------
Same store................................... $ 82.5 $ 78.0 $ 4.5 5.8%
1999 acquisitions............................ 20.1 11.1 9.0 81.1%
2000 acquisitions............................ 3.8 -- 3.8 --
Developments................................. 1.8 0.8 1.0 125.0%
Divestitures................................. 0.2 20.8 (20.6) (99.0)%
Straight-line rents.......................... 2.2 2.8 (0.6) (21.4)%
------ ------ ------ -----
Total.............................. $110.6 $113.5 $ (2.9) (2.6)%
====== ====== ====== =====
The growth in rental revenues in same store properties resulted primarily
from the incremental effect of cash rental rate increases and changes in
occupancy and reimbursement of expenses. During the three months ended June 30,
2000, the same store properties increase in base rents (cash basis) was 22.2% on
3.3 million square feet leased.
INVESTMENT MANAGEMENT AND OTHER INCOME 2000 1999 $ CHANGE % CHANGE
-------------------------------------- ---- ---- -------- --------
Equity earnings in unconsolidated joint
ventures....................................... $1.3 $1.2 $0.1 8.3%
Investment management and other income........... 1.6 0.6 1.0 166.7%
---- ---- ---- -----
Total.................................. $2.9 $1.8 $1.1 61.1%
==== ==== ==== =====
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21
The $1.0 million increase in investment management and other income was due
to increased acquisition fees and interest income.
PROPERTY OPERATING EXPENSES AND REAL ESTATE TAXES 2000 1999 $ CHANGE % CHANGE
- ------------------------------------------------- ----- ----- -------- --------
Rental expenses................................. $11.6 $13.5 $(1.9) (14.1)%
Real estate taxes............................... 13.5 14.8 (1.3) (8.8)%
----- ----- ----- -----
Property operating expenses................... $25.1 $28.3 $(3.2) (11.3)%
===== ===== ===== =====
Same store...................................... $18.3 $18.6 $(0.3) (1.6)%
1999 acquisitions............................... 5.3 2.8 2.5 89.3%
2000 acquisitions............................... 1.0 -- 1.0 --
Developments.................................... 0.4 0.3 0.1 33.3%
Divestitures.................................... 0.1 6.6 (6.5) (98.5)%
----- ----- ----- -----
Total................................. $25.1 $28.3 $(3.2) (11.3)%
===== ===== ===== =====
Internal asset management costs of $2.5 million for the three months ended
June 30, 1999, have been reclassified from property operating expenses to
general and administrative expenses to conform with current year presentation.
The decrease in same store properties' operating expenses primarily relates to
decreases in insurance of $0.3 million.
OTHER EXPENSES 2000 1999 $ CHANGE % CHANGE
-------------- ----- ----- -------- --------
Interest expense............................... $20.0 $23.6 $(3.6) (15.3)%
Depreciation expense........................... 22.6 15.2 7.4 48.7%
General and administrative expense............. 6.0 6.8 (0.8) (11.8)%
----- ----- ----- -----
Total................................ $48.6 $45.6 $ 3.0 6.6%
===== ===== ===== =====
Internal asset management costs of $2.5 million for the three months ended
June 30, 1999, have been reclassified from property operating expenses to
general and administrative expenses to conform with current year presentation.
The decrease in interest expense was primarily due to the decrease in our
unsecured credit facility balance and the increase in interest capitalized. The
increase in depreciation expense was primarily due to lower than normal
depreciation expense in 1999. Under the required accounting for assets held for
sale, we discontinued depreciation of a substantial portion of our retail
portfolio after we committed to dispose of a portion of the portfolio in March
1999. The decrease in general and administrative expenses was due to timing
differences.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
(DOLLARS IN MILLIONS):
RENTAL REVENUES 2000 1999 $ CHANGE % CHANGE
--------------- ------ ------ -------- --------
Same store................................... $163.5 $155.1 $ 8.4 5.4%
1999 acquisitions............................ 39.5 14.4 25.1 174.3%
2000 acquisitions............................ 4.2 -- 4.2 --
Developments................................. 3.6 1.8 1.8 100.0%
Divestitures................................. 2.8 44.4 (41.6) (93.7)%
Straight-line rents.......................... 5.3 5.5 (0.2) (3.6)%
------ ------ ------ -----
Total.............................. $218.9 $221.2 $ (2.3) (1.0)%
====== ====== ====== =====
19
22
The growth in rental revenues in same store properties resulted primarily
from the incremental effect of cash rental rate increases and changes in
occupancy and reimbursement of expenses. During the six months ended June 30,
2000, the same store properties increase in base rents (cash basis) was 18.1% on
6.1 million square feet leased.
INVESTMENT MANAGEMENT AND OTHER INCOME 2000 1999 $ CHANGE % CHANGE
-------------------------------------- ---- ---- -------- --------
Equity earnings in unconsolidated joint
ventures....................................... $2.5 $2.3 $0.2 8.7%
Investment management and other income........... 2.4 1.5 0.9 60.0%
---- ---- ---- ----
Total.................................. $4.9 $3.8 $1.1 28.9%
==== ==== ==== ====
The $0.9 million increase in investment management and other income was due
to increased acquisition fees and interest income.
PROPERTY OPERATING EXPENSES AND REAL ESTATE TAXES 2000 1999 $ CHANGE % CHANGE
- ------------------------------------------------- ----- ----- -------- --------
Rental expenses................................. $23.1 $26.0 $ (2.9) (11.2)%
Real estate taxes............................... 27.0 29.8 (2.8) (9.4)%
----- ----- ------ -----
Property operating expenses................... $50.1 $55.8 $ (5.7) (10.2)%
===== ===== ====== =====
Same store...................................... $37.2 $37.6 $ (0.4) (1.1)%
1999 acquisitions............................... 10.5 3.8 6.7 176.3%
2000 acquisitions............................... 1.1 -- 1.1 --
Developments.................................... 1.0 0.6 0.4 66.7%
Divestitures.................................... 0.3 13.8 (13.5) (97.8)%
----- ----- ------ -----
Total................................. $50.1 $55.8 $ (5.7) (10.2)%
===== ===== ====== =====
Internal asset management costs of $4.6 million for the six months ended
June 30, 1999, have been reclassified from property operating expenses to
general and administrative expenses to conform with current year presentation.
The decrease in same store properties operating expenses primarily relates to
decreases in insurance costs of $0.8 million.
OTHER EXPENSES 2000 1999 $ CHANGE % CHANGE
-------------- ----- ----- -------- --------
Interest expense............................... $40.4 $46.6 $(6.2) (13.3)%
Depreciation expense........................... 41.8 33.6 8.2 24.4%
General and administrative expense............. 11.3 13.0 (1.7) (13.1)%
----- ----- ----- -----
Total................................ $93.5 $93.2 $ 0.3 0.3%
===== ===== ===== =====
Internal asset management costs of $4.6 million for the six months ended
June 30, 1999, have been reclassified from property operating expenses to
general and administrative expenses to conform with current year presentation.
The decrease in interest expense was primarily due to the decrease in our
unsecured credit facility balance and the increase in interest capitalized. The
increase in depreciation expense was primarily due to lower than normal
depreciation expense in 1999. Under the required accounting for assets held for
sale, we discontinued depreciation of a substantial portion of our retail
portfolio after we committed to dispose of a portion of the portfolio in March
1999. The decrease in general and administrative expenses was due to timing
differences.
LIQUIDITY AND CAPITAL RESOURCES
We currently expect that our principal sources of working capital and
funding for acquisitions, development, expansion, and renovation of properties
will include cash flow from operations, borrowings under our unsecured credit
facility, other forms of secured or unsecured financing, proceeds from equity or
debt offerings by us or the operating partnership (including issuances of
limited partnership units in the operating partnership or its subsidiaries) and
net proceeds from divestitures of properties. We believe that our sources of
working capital and our ability to access private and public debt and equity
capital are adequate for us to meet our liquidity requirements for the
foreseeable future.
20
23
CAPITAL RESOURCES
Property Divestitures. In June 2000, we divested ourselves of two
industrial buildings, located in Denver, Colorado aggregating approximately 0.1
million square feet, for an aggregate price of $2.8 million. This divestiture
during the second quarter resulted in an aggregate net gain of $0.4 million. To
date, we have divested ourselves of six industrial buildings, aggregating
approximately 0.4 million square feet, for an aggregate price of $15.7 million,
with a resulting net gain of $0.4 million.
Credit Facilities. On May 24, 2000, the operating partnership, entered into
a new $500 million unsecured revolving credit agreement, which replaced its
previous $500 million credit facility that was to mature in November 2000. We
are a guarantor of the operating partnership's obligations under the credit
facility. The new credit facility is with Morgan Guaranty Trust Company of New
York, as administrative agent, Bank of America, N.A., as syndication agent, The
Chase Manhattan Bank, as document agent, J.P. Morgan Securities Inc. and Banc of
America Securities, LLC, as joint lead arrangers and joint bookmanagers, and a
syndicate of 12 other banks. The new credit facility matures in May 2003 and has
a one-year extension option. The operating partnership has the ability to
increase available borrowings up to $700 million by adding additional banks to
the facility or obtaining the agreement of existing banks to increase its
commitments. The rate on the borrowings will generally be LIBOR plus, based on
the current credit rating of the operating partnership's long-term debt, 75
basis points. In addition, there is a 15 basis point annual facility fee. We use
our unsecured credit facility principally for acquisitions and for general
working capital requirements. Borrowing under our credit facility bear interest
at LIBOR plus 75 basis points. As of June 30, 2000, the outstanding balance on
our unsecured credit facility was $176.0 million and it bore interest at a
weighted average rate of 7.5%. Monthly debt service payments on our credit
facility are interest only. The total amount available under our credit facility
fluctuates based upon the borrowing base, as defined in the agreement governing
the credit facility. At June 30, 2000, the remaining amount available under our
unsecured credit facility was $324.0 million.
In addition, we have an $80.0 million unsecured credit facility held
through our investment in the Alliance Fund I. The debt is secured by the
unfunded capital commitments of the third party investors in the Alliance REIT
I, a limited partner of the Alliance Fund I. The debt bears interest at LIBOR
plus 87.5 basis points and matures in April 2001. As of June 30, 2000, the
outstanding balance on this credit facility was $51.0 million which bore
interest at a weighted average rate of 7.5%. At June 30, 2000, the remaining
amount available under this credit facility was $29.0 million.
Debt and Equity Activities. At the time of our initial public offering,
4,237,750 shares of common stock, known as performance shares, were placed in
escrow by certain of our investors, which were subject to advisory agreements
with our predecessor that included incentive fee provisions. On January 7, 2000,
2,771,824 shares of common stock were released from escrow to these investors
and 1,465,926 shares of common stock were returned to us and cancelled. The
cancelled shares of common stock represent indirect interests in the operating
partnership that were reallocated from us (thereby decreasing the number of
shares of common stock outstanding) to other unitholders who had an ownership
interest in our predecessor, including certain of our executive officers,
(thereby increasing the number of limited partnership units owned by partners
other than us). The total number of outstanding partnership units did not change
as a result of this reallocation. This reallocation did not change the amount of
fully diluted shares of common stock and limited partnership units outstanding.
On March 22, 2000, AMB Property II, L.P., one of our subsidiaries, issued
and sold 397,439 7.95% Series F Cumulative Redeemable Preferred Limited
Partnership Units at a price of $50.00 per unit in a private placement.
Distributions are cumulative from the date of issuance and payable quarterly in
arrears at a rate per unit equal to $3.975 per annum. The Series F Preferred
Units are redeemable by AMB Property II, L.P. on or after March 22, 2005,
subject to certain conditions, for cash at a redemption price equal to $50.00
per unit, plus accumulated and unpaid distributions thereon, if any, to the
redemption date. The Series F Preferred Units are exchangeable, at specified
times and subject to certain conditions, on a one-for-one basis, for shares of
our Series F Preferred Stock. AMB Property II, L.P. loaned the net proceeds of
$19.6 million to the operating partnership. The operating partnership used the
funds to partially repay
21
24
borrowings under our unsecured credit facility and for general corporate
purposes. The loan bears interest at a rate of 7.0% per annum and is payable
upon demand.
Market Capitalization. As of June 30, 2000, the aggregate principal amount
of our secured debt was $740.1 million, excluding unamortized debt premiums of
$11.0 million. The secured debt bears interest at rates varying from 4.0% to
10.4% per annum (with a weighted average rate of 7.9%) and final maturity dates
ranging from May 2000 to January 2014. All of the secured debt bears interest at
fixed rates, except for two loans with an aggregate principal amount of $18.4
million as of June 30, 2000, which bear interest at variable rates.
In order to maintain financial flexibility and facilitate the rapid
deployment of capital through market cycles, we presently intend to operate with
a debt-to-total market capitalization ratio of approximately 45% or less.
Additionally, we presently manage our capitalization in order to maintain an
investment grade rating on our senior unsecured debt. In spite of these
policies, our organizational documents do not contain any limitation on the
amount of indebtedness that we may incur. Accordingly, our board of directors
could alter or eliminate these policies.
The tables below summarize our debt maturities and capitalization as of
June 30, 2000 (dollars in thousands, except for share and per share amounts):
DEBT
- --------------------------------------------------------------------------------
INDUSTRIAL RETAIL UNSECURED UNSECURED ALLIANCE
SECURED SECURED SENIOR DEBT CREDIT FUND I CREDIT TOTAL
DEBT(2) DEBT(2) SECURITIES FACILITY FACILITY DEBT
---------- -------- ----------- --------- ------------- ----------
2000 (6 months)............ $ 16,161 $ 7,649 $ -- $ -- $ -- $ 23,810
2001....................... 13,635 24,481 -- -- 51,000 89,116
2002....................... 44,869 22,513 -- -- -- 67,382
2003....................... 74,916 526 -- 176,000 -- 251,442
2004....................... 89,958 570 -- -- -- 90,528
2005....................... 69,496 618 100,000 -- -- 170,114
2006....................... 134,946 670 -- -- -- 135,616
2007....................... 47,519 727 -- -- -- 48,246
2008....................... 123,231 7,759 175,000 -- -- 305,990
2009....................... 1,493 318 -- -- -- 1,811
2010....................... 53,122 345 -- -- -- 53,467
Thereafter................. 3,356 1,263 125,000 -- -- 129,619
-------- -------- -------- -------- -------- ----------
Subtotal................. 672,702 67,439 400,000 176,000 51,000 1,367,141
Unamortized premiums..... 10,206 744 -- -- -- 10,950
-------- -------- -------- -------- -------- ----------
Total consolidated
debt............ 682,908 68,183 400,000 176,000 51,000 1,378,091
Our share of unconsolidated
joint venture debt....... 24,249 -- -- -- -- 24,249
-------- -------- -------- -------- -------- ----------
Total debt........ 707,157 68,183 400,000 176,000 51,000 1,402,340
Joint venture partners'
share of consolidated
joint venture debt....... (90,376) (16,526) -- -- (39,780) (146,682)
-------- -------- -------- -------- -------- ----------
Our share of total
debt................. $616,781 $ 51,657 $400,000 $176,000 $ 11,220 $1,255,658
======== ======== ======== ======== ======== ==========
Weighed average interest
rate..................... 7.9%(1) 7.8% 7.2% 7.5% 7.5% 7.6%
Weighed average maturity
(in years)............... 6.0(1) 3.1 10.4 2.9 0.8 6.8
- ---------------
(1) Does not include unconsolidated joint venture debt. The weighted average
interest and weighted average maturity for the two unconsolidated joint
venture debts were 6.9% and 6.2 years, respectively.
(2) All of the secured debt bears interest at fixed rates, except for two loans
with an aggregate principal amount of $18.4 million, which bear interest at
variable rates.
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MARKET EQUITY
----------------------------------------------------------------------
SHARES/UNITS
SECURITY OUTSTANDING MARKET PRICE MARKET VALUE
-------- ------------ ------------ ------------
Common stock.................................. 83,868,693 $22.81 $1,913,255
Common limited partnership units.............. 5,973,615 22.81 136,273
---------- ----------
Total............................... 89,842,308 $2,049,528
========== ==========
PREFERRED STOCK AND UNITS
----------------------------------------------------------------------
DIVIDEND LIQUIDATION REDEMPTION
SECURITY RATE PREFERENCE PROVISIONS
-------- -------- ----------- ----------
Series A preferred stock...................... 8.50% $100,000 July 2003
Series B preferred units...................... 8.63% 65,000 November 2003
Series C preferred units...................... 8.75% 110,000 November 2003
Series D preferred units...................... 7.75% 79,767 May 2004
Series E preferred units...................... 7.75% 11,022 August 2004
Series F preferred units...................... 7.95% 19,872 March 2005
---- --------
Weighted Average/Total.............. 8.40% $385,661
==== ========
CAPITALIZATION RATIOS
----------------------------------------------------------------------
Total debt-to-total market capitalization................... 36.5%
Our share of total debt-to-total market capitalization...... 34.0%
Total debt plus preferred-to-total market capitalization.... 46.6%
Our share of total debt plus preferred-to-total market
capitalization............................................ 44.5%
Our share of total debt-to-total book capitalization........ 37.8%
LIQUIDITY
As of June 30, 2000, we had approximately $21.7 million in cash, restricted
cash and cash equivalents and $353.0 million of additional available borrowings
under our credit facilities. We intend to use cash from operations, borrowings
under our credit facilities, other forms of secured and unsecured financing,
proceeds from any future debt or equity offerings by us or the operating
partnership (including issuances of limited partnership units in the operating
partnership or its subsidiaries), and proceeds from divestitures of properties
to fund acquisitions, development activities and capital expenditures and to
provide for general working capital requirements.
The following table sets forth the dividend payments and distributions that
were declared on May 24, 2000:
DIVIDEND SECOND YEAR TO
RECORD PAYMENT QUARTER DATE
SECURITY PAYING ENTITY DATE PAYMENT PERIOD DATE AMOUNT AMOUNT
-------- --------------------- ------- ---------------------- -------- ------- -------
Common Stock................ Company 7/05/00 Quarter ended 6/30/00 7/17/00 $0.3700 $0.7400
OP Units.................... Operating Partnership 7/05/00 Quarter ended 6/30/00 7/17/00 $0.3700 $0.7400
Series A Preferred Stock.... Company 7/05/00 3 months ended 7/14/00 7/17/00 $0.5313 $1.0626
Series A Preferred Units.... Operating Partnership 7/05/00 3 months ended 7/14/00 7/17/00 $0.5313 $1.0626
Series B Preferred Units.... Operating Partnership 7/05/00 3 months ended 7/14/00 7/17/00 $1.0781 $2.1562
Series C Preferred Units.... AMB Property II, L.P. 7/05/00 3 months ended 7/14/00 7/17/00 $1.0938 2.1876
Series D Preferred Units.... AMB Property II, L.P. 6/15/00 3 months ended 6/24/00 6/25/00 $0.9688 $1.9376
Series E Preferred Units.... AMB Property II, L.P. 7/05/00 3 months ended 7/14/00 7/17/00 $0.9688 $1.9376
Series F Preferred Units.... AMB Property II, L.P. 7/05/00 3 months ended 7/14/00 7/17/00 $0.9938 $1.1030
23
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The anticipated size of our distributions, using only cash from operations,
will not allow us to retire all of our debt as it comes due. Therefore, we
intend to also repay maturing debt with net proceeds from future debt or equity
financings. However, we may not be able to obtain future financings on favorable
terms or at all.
CAPITAL COMMITMENTS
In addition to recurring capital expenditures and costs to renew or
re-tenant space, as of June 30, 2000, we are developing 23 projects representing
a total estimated investment of $341.9 million upon completion. Of this total,
$218.5 million had been funded as of June 30, 2000, and approximately $158.2
million is estimated to be required to complete current and planned projects. We
expect to fund these expenditures with cash from operations, borrowings under
our credit facilities, debt or equity issuances, and net proceeds from property
divestitures. We have no other material capital commitments.
During the period from January 1, 2000 to June 30, 2000, we invested:
- $228.1 million in 58 operating industrial buildings, aggregating
approximately 3.0 million rentable square feet, and
- $63.6 million in 12 new development and renovation projects (with a total
cost upon completion estimated to be $145.0 million), aggregating
approximately 3.0 million square feet upon completion.
We funded these acquisitions and initiated development and renovation
projects through borrowings under our credit facilities, cash, debt and equity
issuances, and net proceeds from property divestitures.
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FUNDS FROM OPERATIONS
We believe that funds from operations, or FFO, as defined by the National
Association of Real Estate Investment Trusts, is an appropriate measure of
performance for an equity real estate investment trust. While funds from
operations is a relevant and widely used measure of operating performance of
real estate investment trusts, it does not represent cash flow from operations
or net income as defined by U.S. generally accepted accounting principles and it
should not be considered as an alternative to those indicators in evaluating
liquidity or operating performance. Further, funds from operations as disclosed
by other real estate investment trusts may not be comparable.
The following table reflects the calculation of funds from operations for
the three and six months ended June 30, 2000 and 1999 (dollars in thousands,
except share and per share data):
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
------------ ------------ ----------- -----------
Income from operations before minority
interests.................................. $ 39,774 $ 41,446 $ 80,239 $ 76,021
Real estate related depreciation and
amortization:
Total depreciation and
amortization..................... 22,631 15,178 41,823 33,602
Furniture, fixtures, and equipment
depreciation and ground lease
amortization............................ (231) (250) (634) (364)
FFO attributable to minority interests(1)(2):
Separate account co-investors.............. (1,283) (1,161) (2,547) (2,635)
Alliance Fund I............................ (478) -- (1,234) --
Other joint venture partners............... (920) (558) (1,526) (1,109)
Adjustments to derive FFO in unconsolidated
joint venture(3):
Our share of net income.................... (1,317) (1,177) (2,559) (2,328)
Our share of FFO........................... 1,811 1,671 3,547 3,316
Series A preferred stock dividends........... (2,125) (2,125) (4,250) (4,250)
Series B, C, D, E & F preferred unit
distributions.............................. (5,962) (4,667) (11,572) (8,475)
----------- ----------- ----------- -----------
FFO(1)....................................... $ 51,900 $ 48,357 $ 101,287 $ 93,778
=========== =========== =========== ===========
FFO per common share and unit:
Basic...................................... $ 0.58 $ 0.53 $ 1.13 $ 1.03
=========== =========== =========== ===========
Diluted.................................... $ 0.58 $ 0.53 $ 1.13 $ 1.03
=========== =========== =========== ===========
Weighted average common shares and units:
Basic...................................... 89,822,498 90,861,822 89,758,199 90,655,675
=========== =========== =========== ===========
Diluted(4)................................. 90,098,892 91,044,028 89,903,417 90,756,567
=========== =========== =========== ===========
- ---------------
(1) Funds from operations, or FFO, is defined as income from operations before
minority interest, gains or losses from sale of real estate and
extraordinary items plus real estate depreciation and adjustment to derive
our pro rata share of the funds from operations of unconsolidated joint
ventures, less minority interests' pro rata share of the funds from
operations of consolidated joint ventures and perpetual preferred stock
dividends. In accordance with NAREIT White Paper on funds from operations,
we include the effects of straight-line rents in funds from operations.
Further, we do not adjust funds from operations to eliminate the effects of
non-recurring charges.
(2) Represents FFO attributable to minority interest in consolidated joint
ventures for the period presented, which has been computed as minority
interests' share of net income plus minority interests' share of real
estate-related depreciation and amortization of the consolidated joint
ventures for such period. These minority interests are not convertible into
shares of common stock.
(3) Represents our pro rata share of FFO in unconsolidated joint ventures for
the period presented, which has been computed as our share of net income
plus our share of real estate-related depreciation and amortization of the
unconsolidated joint ventures for such period.
(4) Includes the dilutive effect of stock options.
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OPERATING AND LEASING STATISTICS SUMMARY
The following summarizes key operating and leasing statistics for the all
of our industrial and retail properties as of and for the period ended June 30,
2000.
INDUSTRIAL RETAIL TOTAL
----------- ---------- -----------
Square feet owned(1)................................. 69,159,884 1,607,135 70,767,019
Occupancy percentage................................. 97.0% 90.2% 96.8%
Lease expirations as percentage of total square feet
(next 12 months)................................... 15.8% 9.1% 15.6%
Weighted average lease term.......................... 6 years 14 years 6 years
Tenant retention:
Quarter (3.5 million sq. ft. expired).............. 58.3% 100.0% 58.4%
Year-to-date (5.9 million SF expired).............. 59.4% 35.3% 59.1%
Rent increases on lease commencements:
Quarter (3.3 million sq. ft. leased)............... 22.1% 25.6% 22.2%
Year-to-date (6.1 million sq. ft. leased).......... 18.5% 12.5% 18.1%
Same store cash basis NOI growth(2):
Quarter............................................ 8.8% (2.4)% 8.2%
Year-to-date....................................... 7.9% 1.3% 7.5%
Second generation tenant improvements and leasing
commissions per sq. ft.(3):
Quarter:
Renewals........................................ $ 1.79 $ 0.00 $ 1.73
Re-tenanted..................................... 2.05 0.00 1.98
----------- ---------- -----------
Weighted average.............................. $ 1.94 $ 0.00 $ 1.88
=========== ========== ===========
Year-to-date:
Renewals........................................ $ 1.19 $ 0.00 $ 1.18
Re-tenanted..................................... 1.90 0.00 1.87
----------- ---------- -----------
Weighted average.............................. $ 1.61 $ 0.00 $ 1.58
=========== ========== ===========
Recurring capital expenditures(4)
Quarter............................................ $ 8,986 $ 11 $ 8,997
=========== ========== ===========
Year-to-date....................................... $ 15,972 $ 16 $ 15,988
=========== ========== ===========
- ---------------
(1) In addition to owned square feet as of June 30, 2000, we managed, through
our subsidiary, AMB Investment Management, approximately 3.7 million, 0.6
million, and 0.1 million additional square feet of industrial, retail and
other properties, respectively. We also have an investment in approximately
4.0 million square feet of industrial properties through our investments in
the unconsolidated joint ventures.
(2) Consists of industrial buildings and retail centers aggregating
approximately 53.7 million and approximately 0.8 million square feet,
respectively, that have been owned by us prior to January 1, 1999 and
excludes development properties prior to stabilization.
(3) Consists of all second generation leases renewing or re-tenanting with lease
terms greater than one year.
(4) Includes second generation leasing costs and building improvements.
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29
The following summarizes key same store properties' operating statistics
for our industrial and retail properties as of and for the period ending June
30, 2000:
INDUSTRIAL RETAIL TOTAL
---------- ------- ----------
Square feet in same store pool(1)................ 53,722,443 791,291 54,513,734
% of total square feet......................... 77.7% 49.2% 77.0%
Occupancy percentage at period end:
June 30, 2000.................................. 97.6% 94.5% 97.6%
June 30, 1999.................................. 96.2% 97.4% 96.2%
Tenant retention:
Quarter (3.0 million SF expired)............... 50.2% 100.0% 50.4%
Year-to-date (5.0 million SF expired).......... 57.7% 35.3% 57.4%
Rent increases on lease commencements:
Quarter (2.5 million SF leased)................ 21.2% 25.6% 21.3%
Year-to-date (5.0 million SF leased)........... 17.4% 12.5% 17.2%
Cash basis NOI growth % increase (decrease):
Quarter:
Revenues.................................... 6.5% (5.8)% 5.8%
Expenses.................................... (1.1)% (13.7)% (2.1)%
Net operating income........................ 8.8% (2.4)% 8.2%
Year-to-date:
Revenues.................................... 5.9% (2.0)% 5.4%
Expenses.................................... (0.5)% (9.8)% (1.2)%
Net operating income........................ 7.9% 1.3% 7.5%
- ---------------
(1) Consists of industrial buildings and retail centers owned prior to January
1, 1999 and excludes development properties prior to stabilization.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk includes: 1) the rising interest rates in
connection with our unsecured credit facilities and other variable rate
borrowings; and 2) our ability to incur more debt without stockholder approval,
thereby increasing our debt service obligations, which could adversely affect
our cash flows. See "Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Capital Resources -- Market Capitalization."
27
30
PART II
ITEM 1. LEGAL PROCEEDINGS
As of June 30, 2000, there were no pending legal proceedings to which we
are a party or of which any of our properties is the subject, the adverse
determination of which we anticipate would have a material adverse effect upon
our financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 5, 2000. The
stockholders voted to elect nine directors to the Company's Board of Directors
to serve until the next annual meeting of stockholders and until their
successors are duly elected and qualified.
The stockholders' votes with respect to the election of directors were as
follows:
VOTES
--------------------------------------------------
AGAINST OR VOTES BROKER
FOR WITHHELD ABSTAINED NON-VOTES
---------- ---------- --------- ---------
Douglas D. Abbey............................... 62,932,780 986,422 -- --
Hamid R. Moghadam.............................. 62,932,080 987,122 -- --
T. Robert Burke................................ 62,932,780 986,422 -- --
Daniel H. Case, III............................ 62,499,980 1,419,222 -- --
David A. Cole.................................. 62,467,080 1,452,122 -- --
Lynn M. Sedway................................. 62,498,280 1,420,922 -- --
Jeffrey L. Skelton, Ph.D....................... 62,932,780 986,422 -- --
Thomas W. Tusher............................... 62,931,920 987,912 -- --
Caryl B. Welborn, Esq.......................... 62,932,480 986,722 -- --
ITEM 5. OTHER INFORMATION
BUSINESS RISKS
Our operations involve various risks that could have adverse consequences
to us. These risks include, among others:
GENERAL REAL ESTATE RISKS
THERE ARE FACTORS OUTSIDE OF OUR CONTROL THAT AFFECT THE PERFORMANCE AND VALUE
OF OUR PROPERTIES
Real property investments are subject to varying degrees of risk. The
yields available from equity investments in real estate depend on the amount of
income earned and capital appreciation generated by the related properties as
well as the expenses incurred in connection with the properties. If our
properties do not generate income sufficient to meet operating expenses,
including debt service and capital expenditures, our ability to pay
distributions to our stockholders could be adversely affected. Income from, and
the value of, our properties may be adversely affected by the general economic
climate, local conditions such as oversupply of industrial space or a reduction
in demand for industrial space, the attractiveness of our properties to
potential customers, competition from other properties, our ability to provide
adequate maintenance and insurance and an increase in operating costs. In
addition, revenues from properties and real estate values are also affected by
28
31
factors such as the cost of compliance with regulations, the potential for
liability under applicable laws (including changes in tax laws), interest rate
levels and the availability of financing. Our income would be adversely affected
if a significant number of customers were unable to pay rent or if we were
unable to rent our industrial space on favorable terms. Certain significant
expenditures associated with an investment in real estate (such as mortgage
payments, real estate taxes and maintenance costs) generally do not decline when
circumstances cause a reduction in income from the property.
WE MAY BE UNABLE TO RENEW LEASES OR RELET SPACE AS LEASES EXPIRE
We are subject to the risks that leases may not be renewed, space may not
be relet, or the terms of renewal or reletting (including the cost of required
renovations) may be less favorable than current lease terms. Leases on a total
of 24.0% of the leased square footage of our properties as of June 30, 2000 will
expire on or prior to December 31, 2001, with leases on 8.2% of the leased
square footage of our properties as of June 30, 2000 expiring during the six
months ending December 31, 2000. In addition, numerous properties compete with
our properties in attracting customers to lease space, particularly with respect
to retail centers. The number of competitive commercial properties in a
particular area could have a material adverse effect on our ability to lease
space in our properties and on the rents that we are able to charge. Our
financial condition, results of operations, cash flow and our ability to pay
distributions on, and the market price of, our stock could be adversely affected
if we are unable to promptly relet or renew the leases for all or a substantial
portion of expiring leases, if the rental rates upon renewal or reletting is
significantly lower than expected, or if our reserves for these purposes prove
inadequate.
REAL ESTATE INVESTMENTS ARE ILLIQUID
Because real estate investments are relatively illiquid, our ability to
vary our portfolio promptly in response to economic or other conditions is
limited. The limitations in the Internal Revenue Code and related regulations on
a real estate investment trust holding property for sale may affect our ability
to sell properties without adversely affecting distributions to our
stockholders. The relative illiquidity of our holdings, Internal Revenue Code
prohibitions and related regulations could impede our ability to respond to
adverse changes in the performance of our investments and could adversely affect
our financial condition, results of operations, cash flow and our ability to pay
distributions on, and the market price of, our stock.
A SIGNIFICANT NUMBER OF OUR PROPERTIES ARE LOCATED IN CALIFORNIA
Our properties located in California as of June 30, 2000 represented
approximately 22.4% of the aggregate square footage of our properties as of June
30, 2000 and 28.4% of our annualized base rent. Annualized base rent means the
monthly contractual amount under existing leases at June 30, 2000 multiplied by
12. This amount excludes expense reimbursements and rental abatements. Our
revenue from, and the value of, our properties located in California may be
affected by a number of factors, including local real estate conditions (such as
oversupply of or reduced demand for industrial properties) and the local
economic climate. Business layoffs, downsizing, industry slowdowns, changing
demographics and other factors may adversely impact the local economic climate.
A downturn in either the California economy or in California real estate
conditions could adversely affect our financial condition, results of
operations, cash flow and our ability to pay distributions on, and the market
price of, our stock. Certain of our properties are also subject to possible loss
from seismic activity.
OUR PROPERTIES ARE CURRENTLY CONCENTRATED IN THE INDUSTRIAL SECTOR
Our properties are currently concentrated predominantly in the industrial
real estate sector. Our concentration in a certain property type may expose us
to the risk of economic downturns in this sector to a greater extent than if our
portfolio also included other property types. As a result of such concentration,
economic downturns in the industrial real estate sector could have an adverse
effect on our financial condition, results of operations, cash flow and ability
to pay distributions on, and the market price of, our stock.
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SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE
We carry comprehensive liability, fire, extended coverage and rental loss
insurance covering all of our properties, with policy specifications and insured
limits which we believe are adequate and appropriate under the circumstances
given relative risk of loss, the cost of such coverage and industry practice.
There are, however, certain losses that are not generally insured because it is
not economically feasible to insure against them, including losses due to riots
or acts of war. Certain losses such as losses due to floods or seismic activity
may be insured subject to certain limitations including large deductibles or
co-payments and policy limits. If an uninsured loss or a loss in excess of
insured limits occurs with respect to one or more of our properties, we could
lose the capital we invested in the properties, as well as the anticipated
future revenue from the properties and, in the case of debt which is with
recourse to us, we would remain obligated for any mortgage debt or other
financial obligations related to the properties. Moreover, as the general
partner of the operating partnership, we will generally be liable for all of the
operating partnership's unsatisfied obligations other than non-recourse
obligations. Any such liability could adversely affect our financial condition,
results of operations, cash flow and ability to pay distributions on, and the
market price of, our stock.
A number of our properties are located in areas that are known to be
subject to earthquake activity, including California where, as of June 30, 2000,
212 industrial buildings aggregating approximately 15.5 million rentable square
feet (representing 21.8% of our properties based on aggregate square footage and
26.6% based on annualized base rent) and one retail center aggregating
approximately 0.4 million rentable square feet (representing 0.6% of our
properties based on aggregate square footage and 1.9% based on annualized base
rent) are located. We carry replacement cost earthquake insurance on all of our
properties located in areas historically subject to seismic activity, subject to
coverage limitations and deductibles which we believe are commercially
reasonable. This insurance coverage also applies to the properties managed by
AMB Investment Management, with a single aggregate policy limit and deductible
applicable to those properties and our properties. The operating partnership
owns 100% of the non-voting preferred stock of AMB Investment Management.
Through an annual analysis prepared by outside consultants, we evaluate our
earthquake insurance coverage in light of current industry practice and
determine the appropriate amount of earthquake insurance to carry. We may incur
material losses in excess of insurance proceeds and we may not be able to
continue to obtain insurance at commercially reasonable rates.
WE ARE SUBJECT TO RISKS AND LIABILITIES IN CONNECTION WITH PROPERTIES OWNED
THROUGH JOINT VENTURES, LIMITED LIABILITY COMPANIES AND PARTNERSHIPS
As of June 30, 2000 we had ownership interests in 26 joint ventures,
limited liability companies or partnerships with third parties, as well as
interests in two unconsolidated entities. As of June 30, 2000 we owned 38
(excluding the two unconsolidated joint ventures) of our properties through
these entities. We may make additional investments through these ventures in the
future and presently plan to do so with clients of AMB Investment Management,
Inc. and certain Development Alliance Partners, who share certain approval
rights over major decisions. Partnership, limited liability company or joint
venture investments may involve risks such as the following:
- our partners, co-members or joint venturers might become bankrupt (in
which event we and any other remaining general partners, members or joint
venturers would generally remain liable for the liabilities of the
partnership, limited liability company or joint venture);
- our partners, co-members or joint venturers might at any time have
economic or other business interests or goals which are inconsistent with
our business interests or goals;
- our partners, co-members or joint venturers may be in a position to take
action contrary to our instructions, requests, policies or objectives,
including our current policy with respect to maintaining our
qualification as a real estate investment trust; and
- agreements governing joint ventures, limited liability companies and
partnerships often contain restrictions on the transfer of a joint
venturer's, member's or partner's interest or "buy-sell" or other
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provisions, which may result in a purchase or sale of the interest at a
disadvantageous time or on disadvantageous terms.
We will, however, generally seek to maintain sufficient control of our
partnerships, limited liability companies and joint ventures to permit us to
achieve our business objectives. Our organizational documents do not limit the
amount of available funds that we may invest in partnerships, limited liability
companies or joint ventures. The occurrence of one or more of the events
described above could have an adverse effect on our financial condition, results
of operations, cash flow and ability to pay distributions on, and the market
price of, our stock.
WE MAY BE UNABLE TO CONSUMMATE ACQUISITIONS ON ADVANTAGEOUS TERMS
We intend to continue to acquire primarily industrial properties.
Acquisitions of properties entail risks that investments will fail to perform in
accordance with expectations. Estimates of the costs of improvements necessary
for us to bring an acquired property up to market standards may prove
inaccurate. In addition, there are general investment risks associated with any
new real estate investment. Further, we anticipate significant competition for
attractive investment opportunities from other major real estate investors with
significant capital including both publicly traded real estate investment trusts
and private institutional investment funds. We expect that future acquisitions
will be financed through a combination of borrowings under our unsecured credit
facility, proceeds from equity or debt offerings by us or the operating
partnership (including issuances of limited partnership units by the operating
partnership or its subsidiaries), and proceeds from property divestitures, which
could have an adverse effect on our cash flow. We may not be able to acquire
additional properties. Our inability to finance any future acquisitions on
favorable terms or the failure of acquisitions to conform with our expectations
or investment criteria, or our failure to timely reinvest the proceeds from
property divestitures could adversely affect our financial condition, results of
operations, cash flow and ability to pay distributions on, and the market price
of, our stock.
WE MAY BE UNABLE TO COMPLETE RENOVATION AND DEVELOPMENT ON ADVANTAGEOUS TERMS
The real estate development business, including the renovation and
rehabilitation of existing properties, involves significant risks. These risks
include the following:
- we may not be able to obtain financing on favorable terms for development
projects and we may not complete construction on schedule or within
budget, resulting in increased debt service expense and construction
costs and delays in leasing such properties and generating cash flow;
- we may not be able to obtain, or we may experience delays in obtaining,
all necessary zoning, land-use, building, occupancy and other required
governmental permits and authorizations;
- new or renovated properties may perform below anticipated levels,
producing cash flow below budgeted amounts;
- substantial renovation as well as new development activities, regardless
of whether or not they are ultimately successful, typically require a
substantial portion of management's time and attention which could divert
management's time from our day-to-day operations; and
- activities that we finance through construction loans involve the risk
that, upon completion of construction, we may not be able to obtain
permanent financing or we may not be able to obtain permanent financing
on advantageous terms.
These risks could have an adverse effect on our financial condition,
results of operations, cash flow and ability to pay distributions on, and the
market price of, our stock.
WE MAY BE UNABLE TO COMPLETE DIVESTITURES ON ADVANTAGEOUS TERMS
We intend to dispose of properties from time to time that do not conform
with our current investment strategy or that we have otherwise determined should
be divested, including, as of June 30, 2000 six retail centers, two industrial
properties, and one land parcel, which are held for divestiture. Our ability to
dispose of
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properties on advantageous terms is dependent upon factors beyond our control,
including competition from other owners (including other real estate investment
trusts) that are attempting to dispose of industrial and retail properties and
the availability of financing on attractive terms for potential buyers of our
properties. Our inability to dispose of properties on favorable terms or our
inability to redeploy the proceeds of property divestitures in accordance with
our investment strategy could adversely our financial condition, results of
operations, cash flow and ability to pay distributions on, and the market price
of, our stock.
DEBT FINANCING
WE COULD INCUR MORE DEBT
We operate with a policy of incurring debt, either directly or through our
subsidiaries, only if upon such incurrence our debt-to-total market
capitalization ratio would be approximately 45% or less. The aggregate amount of
indebtedness that we may incur under our policy varies directly with the
valuation of our capital stock and the number of shares of capital stock
outstanding. Accordingly, we would be able to incur additional indebtedness
under our policy as a result of increases in the market price per share of our
common stock or other outstanding classes of capital stock, and future issuance
of shares of our capital stock. In spite of this policy, our organizational
documents do not contain any limitation on the amount of indebtedness that we
may incur. Accordingly, our board of directors could alter or eliminate this
policy. If we change this policy, we could become more highly leveraged,
resulting in an increase in debt service that could adversely affect our
financial condition, results of operations, cash flow and ability to pay
distributions on, and the market price of, our stock.
SCHEDULED DEBT PAYMENTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
We are subject to risks normally associated with debt financing, including
the risks that cash flow will be insufficient to make distributions to our
stockholders, that we will be unable to refinance existing indebtedness on our
properties (which in all cases will not have been fully amortized at maturity)
and that the terms of refinancing will not be as favorable as the terms of
existing indebtedness.
As of June 30, 2000 we had total debt outstanding of approximately $1.4
billion including:
- $740.1 million of secured indebtedness (excluding unamortized debt
premiums) with an average maturity of six years and a weighted average
interest rate of 7.9%;
- $51.0 million outstanding under the unsecured credit facility related to
the Alliance Fund I, with a maturity date of April 2001 and a weighted
average interest rate of 7.5%;
- $176.0 million outstanding under our unsecured $500.0 million credit
facility with a maturity date of May 2003 and a weighted average interest
rate of 7.5%; and
- $400.0 million aggregate principal amount of unsecured senior debt
securities with maturities in 2005, 2008, and 2018 and a weighted average
interest rate of 7.2%.
We are a guarantor of the operating partnership's obligations with respect
to the senior debt securities referenced above. If we are unable to refinance or
extend principal payments due at maturity or pay them with proceeds of other
capital transactions, we expect that our cash flow will not be sufficient in all
years to pay distributions to our stockholders and to repay all such maturing
debt. Furthermore, if prevailing interest rates or other factors at the time of
refinancing (such as the reluctance of lenders to make commercial real estate
loans) result in higher interest rates upon refinancing, the interest expense
relating to that refinanced indebtedness would increase. This increased interest
expense would adversely affect our financial condition, results of operations,
cash flow and ability to pay distributions on, and the market price of, our
stock. In addition, if we mortgage one or more of our properties to secure
payment of indebtedness and we are unable to meet mortgage payments, the
property could be foreclosed upon or transferred to the mortgagee with a
consequent loss of income and asset value. A foreclosure on one or more of our
properties could adversely affect our financial condition, results of
operations, cash flow and ability to pay distributions on, and the market price
of, our stock.
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RISING INTEREST RATES COULD ADVERSELY AFFECT OUR CASH FLOW
As of June 30, 2000 we had approximately $176.0 million and $51.0 million
outstanding under our unsecured credit facility and the unsecured credit
facility related to the Alliance Fund I, respectively. In addition, we may incur
other variable rate indebtedness in the future. Increases in interest rates on
this indebtedness could increase our interest expense, which would adversely
affect our financial condition, results of operations, cash flow and ability to
pay distributions on, and the market price of, our stock. Accordingly, we may in
the future engage in transactions to limit our exposure to rising interest
rates.
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL
In order to qualify as a real estate investment trust under the Internal
Revenue Code, we are required each year to distribute to our stockholders at
least 95% of our real estate investment trust taxable income (determined without
regard to the dividends-paid deduction and by excluding any net capital gain).
Because of this distribution requirement, we may not be able to fund all future
capital needs, including capital needs in connection with acquisitions, from
cash retained from operations. As a result, to fund capital needs, we rely on
third party sources of capital, which we may not be able to obtain on favorable
terms or at all. Our access to third party sources of capital depends upon a
number of factors, including general market conditions and the market's
perception of our growth potential and our current and potential future earnings
and cash distributions and the market price of the shares of our capital stock.
Additional debt financing may substantially increase our leverage.
WE COULD DEFAULT ON CROSS-COLLATERALIZED AND CROSS-DEFAULTED DEBT
As of June 30, 2000 we had 19 non-recourse secured loans, which are
cross-collateralized by 21 properties. As of June 30, 2000 we had approximately
$245.8 million (not including unamortized debt premium) outstanding on these
loans. If we default on any of these loans, we will be required to repay the
aggregate of all indebtedness, together with applicable prepayment charges, to
avoid foreclosure on all the cross-collateralized properties within the
applicable pool. Foreclosure on our properties, or our inability to refinance
our loans on favorable terms, could adversely impact our financial condition,
results of operations, cash flow and ability to pay distributions on, and the
market price of, our stock. In addition, our credit facilities and the senior
debt securities of the operating partnership contain certain cross-default
provisions which are triggered in the event that our other material indebtedness
is in default. These cross-default provisions may require us to repay or
restructure the credit facilities and the senior debt securities in addition to
any mortgage or other debt which is in default, which could adversely affect our
financial condition, results of operations, cash flow and ability to pay
distributions on, and the market price of, our stock.
CONTINGENT OR UNKNOWN LIABILITIES COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
Our predecessors have been in existence for varying lengths of time up to
17 years. At the time of our formation we acquired the assets of these entities
subject to all of their potential existing liabilities. There may be current
liabilities or future liabilities arising from prior activities that we are not
aware of and therefore are not disclosed in this report. We assumed these
liabilities as the surviving entity in the various merger and contribution
transactions that occurred at the time of our formation. Existing liabilities
for indebtedness generally were taken into account in connection with the
allocation of the operating partnership's limited partnership units or shares of
our common stock in the formation transactions, but no other liabilities were
taken into account for these purposes. We do not have recourse against our
predecessors or any of their respective stockholders or partners or against any
individual account investors with respect to any unknown liabilities. Unknown
liabilities might include the following:
- liabilities for clean-up or remediation of undisclosed environmental
conditions;
- claims of customers, vendors or other persons dealing with our
predecessors prior to the formation transactions that had not been
asserted prior to the formation transactions;
- accrued but unpaid liabilities incurred in the ordinary course of
business;
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- tax liabilities; and
- claims for indemnification by the officers and directors of our
predecessors and others indemnified by these entities.
Certain customers may claim that the formation transactions gave rise to a
right to purchase the premises that they occupy. We do not believe any such
claims would be material and, to date, no such claims have been filed. See "--
Government Regulations -- We Could Encounter Costly Environmental Problems"
below regarding the possibility of undisclosed environmental conditions
potentially affecting the value of our properties. Undisclosed material
liabilities in connection with the acquisition of properties, entities and
interests in properties or entities could adversely affect our financial
condition, results of operations, cash flow and ability to pay distributions on,
and the market price of, our stock.
CONFLICTS OF INTEREST
SOME OF OUR EXECUTIVE OFFICERS ARE INVOLVED IN OTHER REAL ESTATE ACTIVITIES AND
INVESTMENTS
Some of our executive officers own interests in real estate-related
businesses and investments. These interests include minority ownership of AMB
Institutional Housing Partners, a residential housing finance company, and
ownership of AMB Development, Inc. and AMB Development, L.P., developers which
own property that we believe is not suitable for ownership by us. AMB
Development, Inc. and AMB Development, L.P. have agreed not to initiate any new
development projects following our initial public offering in November 1997.
These entities have also agreed that they will not make any further investments
in industrial properties other than those currently under development at the
time of our initial public offering. AMB Institutional Housing Partners, AMB
Development, Inc. and AMB Development, L.P. continue to use the name "AMB"
pursuant to royalty-free license arrangements. The continued involvement in
other real estate-related activities by some of our executive officers and
directors could divert management's attention from our day-to-day operations.
Most of our executive officers have entered into non-competition agreements with
us pursuant to which they have agreed not to engage in any activities, directly
or indirectly, in respect of commercial real estate, and not to make any
investment in respect of industrial real estate, other than through ownership of
not more than 5% of the outstanding shares of a public company engaged in such
activities or through the existing investments referred to in this report. State
law may limit our ability to enforce these agreements.
We could also, in the future, subject to the unanimous approval of the
disinterested members of the board of directors with respect to such
transaction, acquire property from executive officers, enter into leases with
executive officers, and/or engage in other related activities in which the
interests pursued by the executive officers may not be in the best interests of
our stockholders.
CERTAIN OF OUR EXECUTIVE OFFICERS AND DIRECTORS MAY HAVE CONFLICTS OF INTEREST
WITH US IN CONNECTION WITH OTHER PROPERTIES THAT THEY OWN OR CONTROL
As of June 30, 2000 AMB Development, L.P. owns interests in 11 retail
development projects in the U.S., 10 of which consist of a single free-standing
Walgreens drugstore and one of which consists of a free-standing Walgreens
drugstore, a ground lease to McDonald's, and a 14,000 square foot retail center.
In addition, Messrs. Abbey, Moghadam and Burke, each a founder and director, own
less than 1% interests in two partnerships that own office buildings in various
markets; these interests have negligible value. Luis A. Belmonte, an executive
officer, owns less than a 10% interest, representing an estimated value of
$75,000, in a limited partnership which owns an office building located in
Oakland, California.
In addition, several of our executive officers individually own:
- less than 1% interests in the stocks of certain publicly-traded real
estate investment trusts;
- certain interests in and rights to developed and undeveloped real
property located outside the United States; and
- certain other de minimis holdings in equity securities of real estate
companies.
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Thomas W. Tusher, a member of our board of directors, is a limited partner
in a partnership in which Messrs. Abbey, Moghadam and Burke are general partners
and which owns a 75% interest in an office building. Mr. Tusher owns a 20%
interest in the partnership, valued at approximately $1.2 million. Messrs.
Abbey, Moghadam and Burke each have a 26.7% interest in the partnership, each
valued at approximately $1.6 million.
We believe that the properties and activities set forth above generally do
not directly compete with any of our properties. However, it is possible that a
property in which an executive officer or director, or an affiliate of an
executive officer or director, has an interest may compete with us in the future
if we were to invest in a property similar in type and in close proximity to
that property. In addition, the continued involvement by our executive officers
and directors in these properties could divert management's attention from our
day-to-day operations. Our policy prohibits us from acquiring any properties
from our executive officers or their affiliates without the approval of the
disinterested members of our board of directors with respect to that
transaction.
OUR ROLE AS GENERAL PARTNER OF THE OPERATING PARTNERSHIP MAY CONFLICT WITH THE
INTERESTS OF STOCKHOLDERS
As the general partner of the operating partnership, we have fiduciary
obligations to the operating partnership's limited partners, the discharge of
which may conflict with the interests of our stockholders. In addition, those
persons holding limited partnership units will have the right to vote as a class
on certain amendments to the partnership agreement of the operating partnership
and individually to approve certain amendments that would adversely affect their
rights. The limited partners may exercise these voting rights in a manner that
conflicts with the interests of our stockholders. In addition, under the terms
of the operating partnership's partnership agreement, holders of limited
partnership units will have certain approval rights with respect to certain
transactions that affect all stockholders but which they may not exercise in a
manner which reflects the interests of all stockholders.
OUR DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT STOCKHOLDERS COULD ACT IN A
MANNER THAT IS NOT IN THE BEST INTEREST OF ALL STOCKHOLDERS
As of July 25, 2000, our two largest stockholders, Cohen & Steers Capital
Management, Inc. (with respect to various client accounts for which Cohen &
Steers Capital Management, Inc. serves as investment advisor), and Capital
Research and Management Company (with respect to various client accounts for
which Capital Research and Management Company serves as investment advisor)
beneficially owned approximately 10.3% of our outstanding common stock. In
addition, our executive officers and directors beneficially owned approximately
5.4% of our outstanding common stock as of July 25, 2000 and will have influence
on our management and operation and, as stockholders, will have influence on the
outcome of any matters submitted to a vote of our stockholders. This influence
might be exercised in a manner that is inconsistent with the interests of other
stockholders. Although there is no understanding or arrangement for these
directors, officers and stockholders and their affiliates to act in concert,
these parties would be in a position to exercise significant influence over our
affairs if they choose to do so.
WE COULD INVEST IN REAL ESTATE MORTGAGES
We may invest in mortgages, and may do so as a strategy for ultimately
acquiring the underlying property. In general, investments in mortgages include
the risks that borrowers may not be able to make debt service payments or pay
principal when due, that the value of the mortgaged property may be less than
the principal amount of the mortgage note secured by the property and that
interest rates payable on the mortgages may be lower than our cost of funds to
acquire these mortgages. In any of these events, our funds from operations and
our ability to make distributions on, and the market price of, our stock could
be adversely affected. Funds from operations means income (loss) from operations
before disposal of real estate properties, minority interests and extraordinary
items plus our pro rata share of the funds from operations of the unconsolidated
joint ventures, depreciation and amortization, excluding depreciation of
furniture, fixtures and equipment less funds from operations attributable to
minority interests in consolidated joint ventures which are not convertible into
shares of common stock.
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GOVERNMENT REGULATIONS
Many laws and governmental regulations are applicable to our properties and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
Under the Americans with Disabilities Act, places of public accommodation
must meet certain federal requirements related to access and use by disabled
persons. Compliance with the Americans with Disabilities Act might require us to
remove structural barriers to handicapped access in certain public areas where
such removal is "readily achievable." If we fail to comply with the Americans
with Disabilities Act, we might be required to pay fines to the government or
damages to private litigants. The impact of application of the Americans with
Disabilities Act to our properties, including the extent and timing of required
renovations, is uncertain. If we are required to make unanticipated expenditures
to comply with the Americans with Disabilities Act, our cash flow and the
amounts available for distributions to our stockholders may be adversely
affected.
WE COULD ENCOUNTER ENVIRONMENTAL PROBLEMS
Federal, state and local laws and regulations relating to the protection of
the environment impose liability on a current or previous owner or operator of
real estate for contamination resulting from the presence or discharge of
hazardous or toxic substances or petroleum products at the property. A current
or previous owner may be required to investigate and clean up contamination at
or migrating from a site. These laws typically impose liability and clean-up
responsibility without regard to whether the owner or operator knew of or caused
the presence of the contaminants. Even if more than one person may have been
responsible for the contamination, each person covered by the environmental laws
may be held responsible for all of the clean-up costs incurred. In addition,
third parties may sue the owner or operator of a site for damages based on
personal injury, property damage and/or other costs, including investigation and
clean-up costs, resulting from environmental contamination present at or
emanating from that site.
Environmental laws also govern the presence, maintenance and removal of
asbestos. These laws require that owners or operators of buildings containing
asbestos properly manage and maintain the asbestos, that they adequately inform
or train those who may come into contact with asbestos and that they undertake
special precautions, including removal or other abatement in the event that
asbestos is disturbed during renovation or demolition of a building. These laws
may impose fines and penalties on building owners or operators for failure to
comply with these requirements and may allow third parties to seek recovery from
owners or operators for personal injury associated with exposure to asbestos
fibers. Some of our properties may contain asbestos-containing building
materials.
Some of our properties are leased or have been leased, in part, to owners
and operators of businesses that use, store or otherwise handle petroleum
products or other hazardous or toxic substances. These operations create a
potential for the release of petroleum products or other hazardous or toxic
substances. Some of our properties are adjacent to or near other properties that
have contained or currently contain petroleum products or other hazardous or
toxic substances. In addition, certain of our properties are on, or are adjacent
to or near other properties upon which others, including former owners or
tenants of the properties, have engaged or may in the future engage in
activities that may release petroleum products or other hazardous or toxic
substances. From time to time, we may acquire properties, or interests in
properties, with known adverse environmental conditions where we believe that
the environmental liabilities associated with these conditions are quantifiable
and the acquisition will yield a superior risk-adjusted return. We have formed a
limited liability company with AIG Global Real Estate Investment Corp. to
acquire, develop, manage and operate environmentally impaired properties in
target markets nationwide. The operating partnership is the managing member of
this venture. Each of AIG and the operating partnership has committed $50
million to this venture. This venture currently intends to invest primarily in
industrial properties located near major airports, ports and in-fill areas with
known and quantifiable environmental issues, as well as, to a more limited
extent, well-located, value-added retail properties. Environmental issues for
each property are evaluated and quantified prior to acquisition. The
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costs of environmental investigation, clean-up and monitoring are underwritten
into the cost of the acquisition and appropriate environmental insurance is
obtained for the property. In connection with certain divested properties, we
have agreed to remain responsible for, and to bear the cost of, remediating or
monitoring certain environmental conditions on the properties.
All of our properties were subject to a Phase I or similar environmental
assessments by independent environmental consultants at the time of acquisition.
Phase I assessments are intended to discover and evaluate information regarding
the environmental condition of the surveyed property and surrounding properties
and include an historical review, a public records review, an investigation of
the surveyed site and surrounding properties, and preparation and issuance of a
written report. We may perform additional Phase II testing if recommended by the
independent environmental consultant. Phase II testing may include the
collection and laboratory analysis of soil and groundwater samples, completion
of surveys for asbestos-containing building materials, and any other testing
that the consultant considers prudent in order to test for the presence of
hazardous materials.
None of the environmental assessments of our properties has revealed any
environmental liability that we believe would have a material adverse effect on
our financial condition or results of operations taken as a whole, and we are
not aware of any such material environmental liability. Nonetheless, it is
possible that the assessments do not reveal all environmental liabilities and
that there are material environmental liabilities of which we are unaware or
that known environmental conditions may give rise to liabilities that are
materially greater than anticipated. Moreover, future laws, ordinances or
regulations may impose material environmental liability and the current
environmental condition of our properties may be affected by tenants, by the
condition of land, by operations in the vicinity of the properties (such as
releases from underground storage tanks), or by third parties unrelated to us.
If the costs of compliance with environmental laws and regulations now existing
or adopted in the future exceed our budgets for these items, our financial
condition, results of operations, cash flow and ability to pay distributions on,
and the market price of, our stock could be adversely affected.
OUR FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED IF WE FAIL TO COMPLY WITH
OTHER REGULATIONS
Our properties are also subject to various federal, state and local
regulatory requirements such as state and local fire and life safety
requirements. If we fail to comply with these requirements, we might incur fines
by governmental authorities or be required to pay awards of damages to private
litigants. We believe that our properties are currently in substantial
compliance with all such regulatory requirements. However, these requirements
may change or new requirements may be imposed which could require significant
unanticipated expenditures by us. Any such unanticipated expenditures could have
an adverse effect on our financial condition, results of operations, cash flow
and ability to pay distributions on, and the market price of, our stock.
FEDERAL INCOME TAX RISKS
OUR FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST WOULD HAVE SERIOUS
ADVERSE CONSEQUENCES TO STOCKHOLDERS
We elected to be taxed as a real estate investment trust under Sections 856
through 860 of the Internal Revenue Code commencing with our taxable year ended
December 31, 1997. We currently intend to operate so as to qualify as a real
estate investment trust under the Internal Revenue Code and believe that our
current organization and method of operation comply with the rules and
regulations promulgated under the Internal Revenue Code to enable us to continue
to qualify as a real estate investment trust. However, it is possible that we
have been organized or have operated in a manner which would not allow us to
qualify as a real estate investment trust, or that our future operations could
cause us to fail to qualify. Qualification as a real estate investment trust
requires us to satisfy numerous requirements (some on an annual and quarterly
basis) established under highly technical and complex Internal Revenue Code
provisions for which there are only limited judicial and administrative
interpretations, and involves the determination of various factual matters and
circumstances not entirely within our control. For example, in order to qualify
as a real estate investment trust, we must derive at least 95% of our gross
income in any year from qualifying sources. In addition, we
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must pay dividends to stockholders aggregating annually at least 95% of our real
estate investment trust taxable income (determined without regard to the
dividends paid deduction and by excluding capital gains) and must satisfy
specified asset tests on a quarterly basis. These provisions and the applicable
treasury regulations are more complicated in our case because we hold our assets
in partnership form. Legislation, new regulations, administrative
interpretations or court decisions could significantly change the tax laws with
respect to qualification as a real estate investment trust or the federal income
tax consequences of such qualification. However, we are not aware of any pending
tax legislation that would adversely affect our ability to operate as a real
estate investment trust. In connection with certain property acquisitions, we
acquired partnership interests and may have inadvertently acquired the voting
securities of shell corporations in violation of the 10% asset test at March 31,
1999. However, while no assurance can be given, based on the advice of counsel
in the relevant jurisdiction and other factors, we do not believe that we have
in fact violated this test or that we would lose our status as a real estate
investment trust as a result of this matter.
If we fail to qualify as a real estate investment trust in any taxable
year, we will be required to pay federal income tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate rates.
Unless we are entitled to relief under certain statutory provisions, we would be
disqualified from treatment as a real estate investment trust for the four
taxable years following the year during which we lost qualification. If we lose
our real estate investment trust status, our net earnings available for
investment or distribution to stockholders would be significantly reduced for
each of the years involved. In addition, we would no longer be required to make
distributions to stockholders.
WE MAY INVEST IN HIGHLY SPECULATIVE EARLY-STAGE COMPANIES WHICH MAY JEOPARDIZE
OUR STATUS AS A REAL ESTATE INVESTMENT TRUST
We believe that our investments in highly speculative early-stage companies
have been structured so that we currently qualify as a real estate investment
trust under the Internal Revenue Code. However, if the value of these
investments, either individually or in the aggregate, appreciates significantly,
these investments may adversely affect our ability to continue to qualify as a
real estate investment trust, unless we are able to restructure or dispose of
our holdings on a timely basis. As of June 30, 2000, we had invested
approximately $14.0 million in early-stage companies. One of these investments,
in an initial amount of $5.0 million, has appreciated to a market value in
excess of $15.6 million at June 30, 2000, if it were freely tradable. See
"-- Our Failure to Qualify as a Real Estate Investment Trust Would Have Serious
Adverse Consequences to Stockholders" and "-- We May Invest in Highly
Speculative Early-Stage Companies in which We May Lose Our Entire Investment."
WE PAY SOME TAXES
Even if we qualify as a real estate investment trust, we will be required
to pay certain state and local taxes on our income and property. In addition, we
will be required to pay federal and state income tax on the net taxable income,
if any, from the activities conducted through AMB Investment Management and
Headlands Realty Corporation (which we discuss below under "-- AMB Investment
Management and Headlands Realty Corporation").
CERTAIN PROPERTY TRANSFERS MAY GENERATE PROHIBITED TRANSACTION INCOME
From time to time, we may transfer or otherwise dispose of some of our
properties. Under the Internal Revenue Code, any gain resulting from transfers
of properties we hold as inventory or primarily for sale to customers in the
ordinary course of business would be treated as income from a prohibited
transaction. We would be required to pay a 100% penalty tax on that income.
Since we acquire properties for investment purposes, we believe that any
transfer or disposal of property by us would not be deemed by the Internal
Revenue Service to be a prohibited transaction with any resulting gain allocable
to us being subject to a 100% penalty tax. However, whether property is held for
investment purposes is a question of fact that depends on all the facts and
circumstances surrounding the particular transaction. The Internal Revenue
Service may contend that certain transfers or disposals of properties by us are
prohibited transactions. While we believe that the Internal Revenue Service
would not prevail in any such dispute, if the Internal Revenue Service
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successfully argued that a transfer or disposition of property constituted a
prohibited transaction we would be required to pay a 100% penalty tax on any
gain allocable to us from the prohibited transaction. In addition, any income
from a prohibited transaction may adversely affect our ability to satisfy the
income tests for qualifications as a real estate investment trust for federal
income tax purposes.
WE ARE DEPENDENT ON OUR KEY PERSONNEL
We depend on the efforts of our executive officers. While we believe that
we could find suitable replacements for these key personnel, the loss of their
services or the limitation of their availability could adversely affect our
financial condition, results of operations, cash flow and ability to pay
distributions on, and the market price of, our stock. We do not have employment
agreements with any of our executive officers.
WE MAY BE UNABLE TO MANAGE OUR GROWTH
Our business has grown rapidly and continues to grow through property
acquisitions and developments. If we fail to effectively manage our growth, our
financial condition, results of operations, cash flow and ability to pay
distributions on, and the market price of, our stock could be adversely
affected.
WE MAY INVEST IN HIGHLY SPECULATIVE EARLY-STAGE COMPANIES IN WHICH WE MAY LOSE
OUR ENTIRE INVESTMENT
From time to time, we may invest in highly speculative early-stage
companies that we believe will enhance our understanding of changes occurring in
the movement of goods, which may, in turn, sharpen our real estate investment
focus, create real estate provider relationships with growth companies and
provide the potential for significant returns on invested capital. We currently
expect that each of these investments will generally be in the amount of $10.0
million or less. As a result, we believe that the amounts of our investments in
early-stage companies are immaterial, both individually and in the aggregate.
However, these investments are highly speculative and it is possible that we may
lose our entire investment in an early-stage company.
AMB INVESTMENT MANAGEMENT, INC. AND HEADLANDS REALTY CORPORATION
WE DO NOT CONTROL THE ACTIVITIES OF AMB INVESTMENT MANAGEMENT, INC. AND
HEADLANDS REALTY CORPORATION
The operating partnership owns 100% of the non-voting preferred stock of
AMB Investment Management, Inc. and Headlands Realty Corporation (representing
approximately 95% of the economic interest in each entity). Some of our current
and former executive officers and a former executive officer of AMB Investment
Management, Inc. own all of the outstanding voting common stock of AMB
Investment Management, Inc. (representing approximately 5% of the economic
interest in AMB Investment Management, Inc.). Some of our current and former
executive officers and a director of Headlands Realty Corporation own all of the
outstanding voting common stock of Headlands Realty Corporation (representing
approximately 5% of the economic interest in Headlands Realty Corporation). The
ownership structure of AMB Investment Management, Inc. and Headlands Realty
Corporation permits us to share in the income of those corporations while
allowing us to maintain our status as a real estate investment trust. We receive
substantially all of the economic benefit of the businesses carried on by AMB
Investment Management, Inc. and Headlands Realty Corporation through the
operating partnership's right to receive dividends. However, we are not able to
elect the directors or officers of AMB Investment Management, Inc. and Headlands
Realty Corporation and, as a result, we do not have the ability to influence
their operation or to require that their boards of directors declare and pay
cash dividends on the non-voting stock of AMB Investment Management, Inc. and
Headlands Realty Corporation held by the operating partnership. The boards of
directors and management of AMB Investment Management, Inc. and Headlands Realty
Corporation might implement business policies or decisions that would not have
been implemented by persons controlled by us and that may be adverse to the
interests of our stockholders or that may adversely impact our financial
condition, results of operations, cash flow and ability to pay distributions on,
and the market price of, our stock. In addition, AMB Investment Management, Inc.
and Headlands Realty Corporation are subject to tax on their income, reducing
their cash available for distribution to the operating partnership.
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AMB INVESTMENT MANAGEMENT, INC. MAY NOT BE ABLE TO GENERATE SUFFICIENT FEES
Fees earned by AMB Investment Management, Inc. depend on various factors
affecting the ability to attract and retain investment management clients and
the overall returns achieved on managed assets. These factors are beyond our
control. AMB Investment Management, Inc.'s failure to attract investment
management clients or achieve sufficient overall returns on managed assets could
reduce its ability to make distributions on the stock owned by the operating
partnership and could also limit co-investment opportunities to the operating
partnership. This would limit the operating partnership's ability to generate
rental revenues from such co-investments and use the co-investment program as a
source to finance property acquisitions and leverage acquisition opportunities.
OWNERSHIP OF OUR STOCK
LIMITATIONS IN OUR CHARTER AND BYLAWS COULD PREVENT A CHANGE IN CONTROL
Certain provisions of our charter and bylaws may delay, defer or prevent a
change in control or other transaction that could provide the holders of our
common stock with the opportunity to realize a premium over the then-prevailing
market price for the common stock. To maintain our qualification as a real
estate investment trust for federal income tax purposes, not more than 50% in
value of our outstanding stock may be owned, actually or constructively, by five
or fewer individuals (as defined in the Internal Revenue Code to include certain
entities) during the last half of a taxable year after the first taxable year
for which a real estate investment trust election is made. Furthermore, after
the first taxable year for which a real estate investment trust election is
made, our common stock must be held by a minimum of 100 persons for at least 335
days of a 12-month taxable year (or a proportionate part of a short tax year).
In addition, if we, or an owner of 10% or more of our stock, actually or
constructively owns 10% or more of one of our tenants (or a tenant of any
partnership in which we are a partner), the rent received by us (either directly
or through any such partnership) from that tenant will not be qualifying income
for purposes of the real estate investment trust gross income tests of the
Internal Revenue Code. To facilitate maintenance of our qualification as a real
estate investment trust for federal income tax purposes, we will prohibit the
ownership, actually or by virtue of the constructive ownership provisions of the
Internal Revenue Code, by any single person of more than 9.8% (by value or
number of shares, whichever is more restrictive) of the issued and outstanding
shares of our common stock and more than 9.8% (by value or number of shares,
whichever is more restrictive) of the issued and outstanding shares of our
Series A Preferred Stock, and we will also prohibit the ownership, actually or
constructively, of any shares of our Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock by any single person so that no such person, taking into account
all of our stock so owned by such person, may own in excess of 9.8% of our
issued and outstanding capital stock. We refer to this limitation as the
"ownership limit." Shares acquired or held in violation of the ownership limit
will be transferred to a trust for the benefit of a designated charitable
beneficiary. Any person who acquires shares in violation of the ownership limit
will not be entitled to any distributions on the shares or be entitled to vote
the shares or receive any proceeds from the subsequent sale of the shares in
excess of the lesser of the price paid for the shares or the amount realized
from the sale. A transfer of shares in violation of the above limits may be void
under certain circumstances. The ownership limit may have the effect of
delaying, deferring or preventing a change in control and, therefore, could
adversely affect our stockholders' ability to realize a premium over the
then-prevailing market price for the shares of our common stock in connection
with such transaction.
Our charter authorizes us to issue additional shares of common stock and
Series A Preferred Stock and to issue Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock and one or more other series or classes of preferred stock and
to establish the preferences, rights and other terms of any series or class of
preferred stock that we issue. Although our board of directors has no intention
to do so at the present time, it could establish a series or class of preferred
stock that could delay, defer or prevent a transaction or a change in control
that might involve a premium price for the common stock or otherwise be in the
best interests of our stockholders.
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Our charter and bylaws and Maryland law also contain other provisions that
may delay, defer or prevent a transaction, including a change in control, that
might involve payment of a premium price for the common stock or otherwise be in
the best interests of our stockholders. Those provisions include the following:
- the provision in the charter that directors may be removed only for cause
and only upon a two-thirds vote of stockholders, together with bylaw
provisions authorizing the board of directors to fill vacant
directorships;
- the provision in the charter requiring a two-thirds vote of stockholders
for any amendment of the charter;
- the requirement in the bylaws that the request of the holders of 50% or
more of our common stock is necessary for stockholders to call a special
meeting;
- the requirement of Maryland law that stockholders may only take action by
written consent with the unanimous approval of all stockholders entitled
to vote on the matter in question; and
- the requirement in the bylaws of advance notice by stockholders for the
nomination of directors or proposal of business to be considered at a
meeting of stockholders.
These provisions may impede various actions by stockholders without
approval of our board of directors, which in turn may delay, defer or prevent a
transaction involving a change of control.
WE COULD CHANGE OUR INVESTMENT AND FINANCING POLICIES WITHOUT A VOTE OF
STOCKHOLDERS
Subject to our current investment policy to maintain our qualification as a
real estate investment trust (unless a change is approved by our board of
directors under certain circumstances), our board of directors will determine
our investment and financing policies, our growth strategy and our debt,
capitalization, distribution and operating policies. Although the board of
directors has no present intention to revise or amend these strategies and
policies, the board of directors may do so at any time without a vote of
stockholders. Accordingly, stockholders will have no control over changes in our
strategies and policies (other than through the election of directors), and any
such changes may not serve the interests of all stockholders and could adversely
affect our financial condition or results of operations, including our ability
to distribute cash to stockholders.
IF WE ISSUE ADDITIONAL SECURITIES, THE INVESTMENT OF EXISTING STOCKHOLDERS WILL
BE DILUTED
We have authority to issue shares of common stock or other equity or debt
securities in exchange for property or otherwise. Similarly, we may cause the
operating partnership to issue additional limited partnership units in exchange
for property or otherwise. Existing stockholders will have no preemptive right
to acquire any additional securities issued by us or the operating partnership
and any issuance of additional equity securities could result in dilution of an
existing stockholder's investment.
THE LARGE NUMBER OF SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK
We cannot predict the effect, if any, that future sales of shares of our
common stock, or the availability of shares of our common stock for future sale,
will have on its market price. Sales of a substantial number of shares of our
common stock in the public market (or upon exchange of limited partnership units
in the operating partnership) or the perception that such sales (or exchanges)
might occur could adversely affect the market price of our common stock.
All shares of common stock issuable upon the redemption of limited
partnership units in the operating partnership will be deemed to be "restricted
securities" within the meaning of Rule 144 under the Securities Act and may not
be transferred unless registered under the Securities Act or an exemption from
registration is available, including any exemption from registration provided
under Rule 144. In general, upon satisfaction of certain conditions, Rule 144
permits the holder to sell certain amounts of restricted securities one year
following the date of acquisition of the restricted securities from us and,
after two years, permits unlimited
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sales by persons unaffiliated with us. On November 26, 1999, 74,710,153 shares
of common stock issued in our formation transactions became eligible for sale
pursuant to Rule 144(k). Commencing generally on the first anniversary of the
date of acquisition of common limited partnership units (or such other date
agreed to by the operating partnership and the holders of the units), the
operating partnership may redeem common limited partnership units at the request
of the holders for cash (based on the fair market value of an equivalent number
of shares of common stock at the time of redemption) or, at our option, exchange
the common limited partnership units for an equal number of shares of our common
stock, subject to certain antidilution adjustments. The operating partnership
had issued and outstanding 5,973,615 common limited partnership units as of June
30, 2000. As of June 30, 2000, we had reserved 8,574,690 shares of common stock
for issuance under our Stock Option and Incentive Plan (not including shares
that we have already issued) and, as of June 30, 2000, we had granted to certain
directors, officers and employees options to purchase 5,717,416 shares of common
stock (excluding forfeitures and 69,915 shares that we have issued pursuant to
the exercise of options). As of June 30, 2000, we had granted 305,395 restricted
shares of common stock, 1,633 of which have been forfeited. In addition, we may
issue additional shares of common stock and the operating partnership may issue
additional limited partnership units in connection with the acquisition of
properties. In connection with the issuance of common limited partnership units
to other transferors of properties, and in connection with the issuance of the
performance units, we have agreed to file registration statements covering the
issuance of shares of common stock upon the exchange of the common limited
partnership units. We have also filed a registration statement with respect to
the shares of common stock issuable under our Stock Option and Incentive Plan.
These registration statements and registration rights generally allow shares of
common stock covered thereby, including shares of common stock issuable upon
exchange of limited partnership units, including performance units, or the
exercise of options or restricted shares of common stock, to be transferred or
resold without restriction under the Securities Act. We may also agree to
provide registration rights to any other person who may become an owner of the
operating partnership's limited partnership units.
Future sales of the shares of common stock described above could adversely
affect the market price of our common stock. The existence of the operating
partnership's limited partnership units, options and shares of common stock
reserved for issuance upon exchange of limited partnership units, and the
exercise of options and registration rights referred to above, also may
adversely affect the terms upon which we are able to obtain additional capital
through the sale of equity securities.
VARIOUS MARKET CONDITIONS AFFECT THE PRICE OF OUR STOCK
As with other publicly-traded equity securities, the market price of our
stock will depend upon various market conditions, which may change from time to
time. Among the market conditions that may affect the market price of our stock
are the following:
- the extent of investor interest in us;
- the general reputation of real estate investment trusts and the
attractiveness of their equity securities in comparison to other equity
securities (including securities issued by other real estate-based
companies);
- our financial performance; and
- general stock and bond market conditions, including changes in interest
rates on fixed income securities which may lead prospective purchasers of
our stock to demand a higher annual yield from future distributions. Such
an increase in the required yield from distributions may adversely affect
the market price of our stock.
Other factors such as governmental regulatory action and changes in tax
laws could also have a significant impact on the future market price of our
stock.
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EARNINGS AND CASH DISTRIBUTIONS, ASSET VALUE AND MARKET INTEREST RATES AFFECT
THE PRICE OF OUR STOCK
The market value of the equity securities of a real estate investment trust
generally is based primarily upon the market's perception of the real estate
investment trust's growth potential and its current and potential future
earnings and cash distributions, and is based secondarily upon the real estate
market value of the underlying assets. For that reason, shares of our stock may
trade at prices that are higher or lower than the net asset value per share. To
the extent we retain operating cash flow for investment purposes, working
capital reserves or other purposes, these retained funds, while increasing the
value of our underlying assets, may not correspondingly increase the market
price of our stock. Our failure to meet the market's expectation with regard to
future earnings and cash distributions likely would adversely affect the market
price of our stock. Another factor that may influence the price of our stock
will be the distribution yield on the stock (as a percentage of the price of the
stock) relative to market interest rates. An increase in market interest rates
might lead prospective purchasers of our stock to expect a higher distribution
yield, which would adversely affect the market price of the stock. If the market
price of our stock declines significantly, we might breach certain covenants
with respect to debt obligations, which might adversely affect our liquidity and
ability to make future acquisitions and our ability to pay distributions to our
stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Revolving Credit Agreement dated as of May 24, 2000 among
AMB Property, L.P., the banks listed therein, Morgan
Guaranty Trust Company of New York, as Administrative Agent,
Bank of America, N.A., as Syndication Agent, the Chase
Manhattan Bank, as Documentation Agent, J.P. Morgan
Securities Inc. and Banc of America Securities LLC, as Joint
Lead Arrangers and Joint Bookmanagers, Bank One, NA,
Commerzbank Aktiengesellschaft, PNCBank National Association
and Wachovia Bank, N.A., as Managing Agents and Bankers
Trust Company and Dresdner Bank AG, New York and Grand
Cayman Branches, as Co-Agents. (incorporated by reference to
Exhibit 10.1 of the Registrant's Current Report on Form 8-K
filed on June 16, 2000)
10.2 Guaranty of Payment made as of May 24, 2000 between AMB
Property Corporation and Morgan Guaranty Trust Company of
New York, as administrative agent for the banks listed on
the signature page of the Revolving Credit Agreement
(incorporated by reference to Exhibit 10.2 of the
Registrant's Current report on Form 8-K filed on June 16,
2000)
27.1 Financial Data Schedule -- AMB Property Corporation.
(b) Reports on Form 8-K:
- The Registrant filed a Current Report on Form 8-K on June 16, 2000, in
connection with the renewal of its Revolving Credit Agreement.
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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.
AMB PROPERTY CORPORATION
Registrant
Date: August 3, 2000 By: /s/ MICHAEL A. COKE
------------------------------------
Michael A. Coke
Chief Financial Officer and
Executive Vice President
(Duly Authorized Officer and
Principal Financial Officer)
By: /s/ NINA A. TRAN
------------------------------------
Nina A. Tran
Vice President
(Duly Authorized Officer and
Principal Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Revolving Credit Agreement dated as of May 24, 2000 among
AMB Property, L.P., the banks listed therein, Morgan
Guaranty Trust Company of New York, as Administrative Agent,
Bank of America, N.A., as Syndication Agent, the Chase
Manhattan Bank, as Documentation Agent, J.P. Morgan
Securities Inc. and Banc of America Securities LLC, as Joint
Lead Arrangers and Joint Bookmanagers, Bank One, NA,
Commerzbank Aktiengesellschaft, PNCBank National Association
and Wachovia Bank, N.A., as Managing Agents and Bankers
Trust Company and Dresdner Bank AG, New York and Grand
Cayman Branches, as Co-Agents. (incorporated by reference to
Exhibit 10.1 of the Registrant's Current Report on Form 8-K
filed on June 16, 2000)
10.2 Guaranty of Payment made as of May 24, 2000 between AMB
Property Corporation and Morgan Guaranty Trust Company of
New York, as administrative agent for the banks listed on
the signature page of the Revolving Credit Agreement
(incorporated by reference to Exhibit 10.2 of the
Registrant's Current report on Form 8-K filed on June 16,
2000)
27.1 Financial Data Schedule -- AMB Property Corporation.