1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION 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 (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 505 MONTGOMERY ST., SAN FRANCISCO, CALIFORNIA 94111 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (415) 394-9000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE 8 1/2% SERIES A CUMULATIVE REDEEMABLE (NAME OF EXCHANGE ON WHICH REGISTERED) PREFERRED STOCK (TITLE OF CLASS) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of common shares held by non-affiliates of the registrant (based upon the closing sale price on the New York Stock Exchange) on March 12, 1999 was approximately $1,735,825,938. As of March 12, 1999, there were 86,026,271 shares of the Registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates by reference the Registrant's Proxy Statement for its Annual Meeting of Stockholders which the Registrant anticipates will be filed no later than 120 days after the end of its fiscal year pursuant to Regulation 14A. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS GENERAL AMB Property Corporation, a Maryland corporation ("AMB" or the "Company"), as of December 31, 1998, owned and operated industrial buildings and retail centers totaling 63.6 million square feet located in 30 markets nationwide, including: Chicago, San Francisco Bay Area, Dallas/Ft. Worth, Los Angeles, Minneapolis, Atlanta, Seattle, Miami, Boston, and Northern New Jersey. As of December 31, 1998, the Company owned 582 industrial buildings, aggregating 56.6 million rentable square feet (the "Industrial Properties"), principally warehouse distribution buildings, which were 96.0% leased, and 38 retail centers, aggregating 7.0 million rentable square feet (the "Retail Properties"), principally grocer-anchored community shopping centers, which were 94.6% leased. The Industrial Properties and the Retail Properties collectively are referred to as the "Properties." On March 9, 1999, we signed a series of definitive agreements with BPP Retail, LLC ("BPP Retail"), a co-investment entity between Burnham Pacific Properties ("BPP") and the California Public Employees' Retirement System ("CalPERS"), pursuant to which BPP Retail will acquire 28 of our retail shopping centers, totaling 5.1 million square feet, for an aggregate price of $663.4 million. BPP Retail will acquire the centers in separate transactions, which we currently expect to close on or about April 30, 1999, July 31, 1999 and December 1, 1999. In addition, we have entered into a definitive agreement, subject to a financing confirmation, with BPP, pursuant to which BPP will acquire six additional retail centers, totaling 1.5 million square feet, for $284.4 million. Assuming the receipt of the financing confirmation, we currently expect this transaction to close by December 31, 1999. In connection with these transactions, we have also granted CalPERS an option to purchase up to 2,000,000 original issue shares of AMB's Common Stock for an exercise price of $25 per share that CalPERS may exercise on or before March 31, 2000. There can be no assurance, however, that the transactions will close as scheduled or close at all, and it is possible that the transactions may close with respect to just a portion of the properties currently subject to the agreements. We currently expect that the substantial majority of our acquisition activities going forward will be in industrial properties. See "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations -- Business Risks -- Failure to Consummate the Transactions with BPP Retail and BPP." INDUSTRIAL AND RETAIL PROPERTIES BY REGION AT DECEMBER 31, 1998 INDUSTRIAL PROPERTIES RETAIL PROPERTIES TOTAL --------------------------------- ------------------------------ --------------------------------- NUMBER RENTABLE NUMBER RENTABLE NUMBER RENTABLE OF SQUARE % OF OF SQUARE % OF OF SQUARE % OF REGION BUILDINGS FEET TOTAL CENTERS FEET TOTAL BUILDINGS FEET TOTAL ------ --------- ---------- ------ ------- --------- ------ --------- ---------- ------ Eastern.............. 100 12,181,830 21.5% 4 1,272,968 18.2% 104 13,454,798 21.2% Midwestern........... 108 12,136,083 21.4% 4 710,833 10.2% 112 12,846,916 20.2% Southern............. 192 17,264,646 30.5% 13 2,093,257 30.0% 205 19,357,903 30.4% Western.............. 182 15,028,308 26.6% 17 2,907,986 41.6% 199 17,936,294 28.2% --- ---------- ------ -- --------- ------ --- ---------- ------ Total................ 582 56,610,867 100.0% 38 6,985,044 100.0% 620 63,595,911 100.0% === ========== ====== == ========= ====== === ========== ====== As of December 31, 1998, we employed 138 individuals; 106 in our San Francisco headquarters and 32 in our Boston office. We actively manage our Properties through our experienced staff of regional managers. See "Business and Operating Strategies." We are self-administered and self-managed and expect that we have qualified and will continue to qualify as a real estate investment trust ("REIT") for federal income tax purposes beginning with the year ending December 31, 1997. As a self-administered and self-managed REIT, 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 the Company and AMB Property, L.P., a Delaware limited partnership (the 1 3 "Operating Partnership"), is located at 505 Montgomery Street, San Francisco, California 94111, and our telephone number is (415) 394-9000. We also maintain a regional office in Boston, Massachusetts. Unless the context otherwise requires, the terms "we," "us," "our," "AMB" and the "Company" refer to AMB Property Corporation, the Operating Partnership and the other controlled subsidiaries. FORMATION OF THE COMPANY The Company commenced operations as a fully integrated real estate company in connection with the completion of its initial public offering (the "IPO") on November 26, 1997, and elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), with its initial tax return for the year ended December 31, 1997. The Company, through its controlling sole general partnership interest in the Operating Partnership and through certain other direct and indirect subsidiaries, is engaged in the ownership, operation, management, acquisition, renovation, expansion, and development of industrial buildings and community shopping centers in target markets nationwide. As of December 31, 1998, the Company owned a 95.1% general partnership interest in the Operating Partnership, excluding preferred units. The Company and the Operating Partnership were formed shortly before consummation of the IPO. AMB Institutional Realty Advisors, Inc., a California corporation and registered investment advisor (the "Predecessor"), formed AMB Property Corporation and merged with and into the Company (the "Merger")in exchange for 4,746,616 shares of the Company's Common Stock. In addition, the Company and the Operating Partnership acquired through a series of mergers and other transactions 31.8 million rentable square feet of industrial property and 6.3 million rentable square feet of retail property in exchange for 65,022,185 shares of the Company's Common Stock, 2,542,163 limited partnership units in the Operating Partnership, the assumption of debt, and to a limited extent, cash. On November 26, 1997, the Company completed the IPO of 16,100,000 shares of Common Stock for $21.00 per share, resulting in gross offering proceeds of approximately $338.1 million. Net of underwriters' commission and offering costs aggregating $38.1 million, the Company received approximately $300.0 million in proceeds from the IPO. The Company contributed net proceeds of the IPO to the Operating Partnership in exchange for general partnership units. The Operating Partnership used these proceeds to repay indebtedness, to purchase interests from certain investors who elected not to receive common stock or limited partnership units, to fund property acquisitions, and to meet general corporate working capital requirements. For local law purposes, we own properties in certain states through limited partnerships and limited liability companies owned 99% by the Operating Partnership and 1% by a wholly-owned subsidiary of the Company. The ownership of such Properties through such entities does not materially affect our 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 management and control of the Operating Partnership. The purchase method of accounting was applied to the acquisition of the properties. Collectively, the Merger and the other formation transactions described above are referred to as the "Formation Transactions." In connection with the Formation Transactions, the Operating Partnership acquired all of the non-voting preferred stock of AMB Investment Management Inc., a Maryland corporation ("AMB Investment Management") representing a 95% economic interest therein. AMB Investment Management conducts its operations through AMB Investment Management Limited Partnership, a Maryland limited partnership ("AMB Investment Management Partnership"), of which it is the sole general partner and owns the entire capital interest. AMB Investment Management was formed to succeed to the Predecessor's investment management business of providing real estate investment management services on a fee basis to clients and intends to grow its business through the Company's co-investment program. All of the common stock of AMB Investment Management, representing a 5% economic interest therein, is owned by the Company's current or former executive officers. 2 4 BUSINESS AND OPERATING STRATEGIES We focus on serving the needs of the supply chain through our ownership of industrial and retail properties. As of December 31, 1998, our portfolio consisted of 76% Industrial Properties and 24% Retail Properties, based on annualized base rent for the properties. We believe that the rapid growth in the air freight business, in the outsourcing of supply chain management to logistics companies and of e-commerce are indicators of changes that are occurring in the supply chain and the manner in which goods are distributed. We focus our investment activities on properties which we believe will benefit by these changes, such as high throughput distribution properties located in major hub distribution markets and near major air cargo facilities, seaports or major highway systems throughout the U.S. We are a full-service real estate company with in-house expertise in acquisitions, development and redevelopment, asset management and leasing, finance and accounting and market research. We have long-standing relationships with many real estate management firms across the country, which provide local property management and leasing services to us on a fee basis. We believe that real estate is fundamentally a local business and that the most effective way for a national company such as us to operate is by forging alliances with the best available service providers in our markets. STRATEGIC ALLIANCE PROGRAMS(TM) 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, most importantly, provides us with growth opportunities. Additionally, our strategic alliances with institutional investors enhance our access to private capital and our ability to finance transactions. Our six Strategic Alliance Programs(TM) can be grouped into two categories: - Operating Alliances(TM), which allow us to form relationships with local or regional real estate experts, thereby becoming their ally rather than their competitor; and - Investment Alliances(TM), which allow us to establish relationships with a variety of capital sources. OPERATING ALLIANCES(TM) MANAGEMENT ALLIANCE PROGRAM(TM): Our strategy for the Management Alliance Program(TM) is to develop close relationships with and outsource property management to local property managers that we believe to be among the best in their respective markets. Our alliances with local property managers increase our flexibility, reduce our overhead expenses and improve our customer service. In addition, these alliances provide us with local market information related to tenant activity and acquisition opportunities. CUSTOMER ALLIANCE PROGRAM(TM): Through our Customer Alliance Program(TM), we seek to build long-term working relationships with major tenants. We are committed to working with our tenants, particularly our larger tenants with multi-site requirements, to make their property searches as efficient as possible. BROKER ALLIANCE PROGRAM(TM): Through our Broker Alliance Program(TM), we work closely with top local leasing companies in each of our markets, which brokers provide us with access to high quality tenants and local market knowledge. INVESTMENT ALLIANCES(TM) DEVELOPMENT ALLIANCE PROGRAM(TM): Our strategy for the Development Alliance Program(TM) is to enhance our development capability while reducing our overhead expenses, by forming alliances with development firms with a strong local presence and expertise, who have proven they have the insight to recognize potential in an undervalued asset and the skill to realize that value. UPREIT ALLIANCE PROGRAM(TM): Through our UPREIT Alliance Program(TM), we issue limited partnership units in the Operating Partnership in exchange for properties, thus providing additional growth for the portfolio. 3 5 INSTITUTIONAL ALLIANCE PROGRAM(TM): Our strategy for the Institutional Alliance Program(TM) is to form alliances with institutional investors through the co-investment program of AMB Investment Management. Our alliances with institutional investors provide us with access to private capital, including during those times when the public markets are less attractive, as well as providing us with a source of incremental fee income and investment returns. NATIONAL PROPERTY COMPANY We own properties in 30 markets throughout the U.S. We believe that our national strategy enables us to: - increase or decrease investments in certain regions to take advantage of the relative strengths in different real estate markets, - retain and accommodate tenants as they consolidate or expand and - build brand awareness as well as customer loyalty through the delivery of consistent service and quality product. RESEARCH-DRIVEN, SELECT MARKET FOCUS We focus on acquiring, redeveloping and operating Industrial Properties in "in-fill locations," which are characterized by limited new construction opportunities, near major air cargo facilities, seaports or major highway systems. As the strength of these markets continues to grow and the demand for well-located properties increases, we believe that we will benefit from an upward pressure on rents resulting from the increased demand combined with the relative lack of new available space. Our decisions regarding the deployment of capital are experience- and research-driven, and are based on thorough qualitative and quantitative research and analysis of local markets. We employ a dedicated research department using proprietary analyses, databases and systems. We intend to continue to focus our industrial property investment activities in six hub markets which dominate national warehouse distribution activities -- Atlanta, Chicago, Dallas/Fort Worth, Los Angeles, Northern New Jersey and San Francisco Bay Area -- as well as properties located near major air cargo facilities, seaports or convenient to major highway systems. We also invest in selected regional distribution markets including Boston, Denver, Houston, Miami, Minneapolis, San Diego, Seattle and Baltimore/ Washington, D.C. We focus on these established industrial markets because we believe they offer large and broadly diversified tenant bases which provide greater demand for properties over market cycles than secondary markets. In-fill locations within these markets also typically have significant barriers to new construction, including geographic or regulatory supply constraints, and these markets typically benefit from an access to large labor supplies and well-developed transportation networks. DISCIPLINED INVESTMENT PROCESS Over our 15-year history prior to the consummation of the IPO, we have established a disciplined approach to the investment process through operating divisions that are subject to the overall policy direction of our management's investment committee (the "Investment Committee"). The stages in the investment process are highly integrated, with Investment Committee review at critical points in the process. Approval of each investment is the responsibility of the Investment Committee with sponsorship from both an acquisitions officer and the regional manager who will be responsible for managing the property. The initial investment recommendation is thoroughly evaluated, with approval required in order to proceed to contract and full due diligence. The terms of the acquisition and its structure are determined as part of the initial approval and are the responsibility of the acquisitions officer. The regional manager is involved in providing and verifying underwriting assumptions and developing the operating strategy. After the due diligence review and before removing conditions to the contract, a final Investment Committee recommendation is prepared by the acquisition and asset management team. The Investment Committee conducts a complete review of the information developed during the due diligence process and either rejects or gives final approval. 4 6 We have also established proprietary systems and procedures to manage and track a high volume of acquisition proposals, transactions and important market data. This includes an on-line open issues database that provides us with current information on the status of each transaction, highlighting the issues that must be addressed prior to closing, and a database that includes and compiles data on all transaction proposals and markets reviewed by us. PROPERTY DEVELOPMENT The multidisciplinary backgrounds of our employees provide us with the skills and experience to capitalize on strategic renovation, expansion and development opportunities. Several of our officers have extensive experience in real estate development, both with us and with national development firms. We generally pursue development projects in joint ventures with local developers. In this way, we leverage the development skill, access to opportunities and capital of such developers, transferring a significant amount of the development risk to them and eliminating the need and expense of an in-house development staff. FINANCING STRATEGY In order to maintain financial flexibility and facilitate the rapid deployment of capital over market cycles, we intend to operate with a debt-to-total market capitalization ratio of approximately 45% or less, although our organizational documents do not limit the amount of indebtedness that we may incur. Additionally, we intend to continue to structure our balance sheet in order to maintain investment-grade ratings. We also intend to keep the majority of our assets unencumbered to facilitate such ratings. As of December 31, 1998, our debt-to-total market capitalization ratio was approximately 38%. We calculate our debt-to-total market capitalization ratio by adding our consolidated debt to our share of unconsolidated joint venture debt and dividing by the total market capitalization, including preferred stock and preferred units. We have a $500 million unsecured revolving credit agreement (the "Credit Facility") with Morgan Guaranty Trust Company of New York as agent, and a syndicate of twelve other banks. The Credit Facility bears interest at a rate equal to LIBOR plus 90 to 120 basis points, depending upon our then current debt rating (currently LIBOR plus 90 basis points). We presently plan to use available borrowings under the Credit Facility for property acquisitions and for general corporate purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" and Note 5 to the Company's consolidated financial statements included in this report. We currently expect that our principal sources of working capital and funding for acquisitions, development, expansion and renovation of the Properties will include cash flow from operations, borrowings under the Credit Facility, other forms of secured or unsecured financing, proceeds from equity or debt offerings by the Company or the Operating Partnership (including issuances of units in the Operating Partnership or its subsidiaries), and proceeds from divestitures of Properties. Additionally, our co-investment program will also serve as a source of capital, particularly when more traditional sources of capital may not be available on attractive terms. THE PREFERRED STOCK SUBSIDIARIES AMB Investment Management provides real estate investment management services on a fee basis to certain of its clients which did not participate in the Formation Transactions. We presently intend to co-invest with clients of AMB Investment Management, to the extent such clients newly commit investment capital, through partnerships, limited liability companies or joint ventures. We use a co-investment formula with each client whereby we will own at least a 20% interest in all ventures. As of December 31, 1998, we had consummated five co-investments through one partnership. 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 owns 100% of the non-voting preferred stock of AMB Investment Management and Headlands Realty Corporation (representing approximately 95% of the economic interest in each entity) and certain of our current and former executive officers and an officer of AMB Investment Management and certain of our current and former executive officers and an officer of Headlands Realty 5 7 Corporation own all of the outstanding voting common stock of AMB Investment Management and Headlands Realty Corporation, respectively (representing approximately 5% of the economic interest in each entity). STRATEGIES FOR GROWTH We intend to achieve our objectives of long-term sustainable growth in Funds from Operations ("FFO") and maximization of long-term stockholder value principally by growth through: - operations, resulting from improved operating margins within the portfolio while maintaining above-average occupancy, - continued property acquisitions, including through our Strategic Alliance Programs(TM), and - renovation, expansion and development of selected properties, including through our Development Alliance Program(TM). GROWTH THROUGH OPERATIONS We seek to improve operating margins by maintaining the high occupancy rate of our Properties and by capitalizing on the economies of owning, operating and growing a large national portfolio. As of December 31, 1998, our Industrial Properties and Retail Properties owned as of that date were 96.0% leased and 94.6% leased, respectively. During the 12 months ended December 31, 1998, we increased average base rental rates (on a cash basis) by 14.3% from the expiring rent for that space, on leases entered into or renewed during such period, representing 7.7 million rentable square feet. Annualized base rent represents the monthly contractual amount under existing leases at the end of the year, multiplied by 12. This amount excludes expense reimbursements, rental abatements and percentage rents. During the 12 months ending December 31, 1999, leases encompassing an aggregate of 16.3 million rentable square feet (representing 25.6% of our aggregate rentable square footage as of December 31, 1998) are subject to contractual rent increases resulting in an average increase in the annualized base rent on such leases of approximately 6.3%. Based on recent experience and current market trends, we believe we will have an opportunity to increase the average base rental rate on Property leases expiring during the 12 months ending December 31, 1999 covering an aggregate of 9.3 million rentable square feet. We seek to reduce the potential volatility of our portfolio's FFO by managing lease expirations so that they occur within individual properties and across the entire portfolio in a staggered fashion, and by monitoring the credit and mix of tenants, particularly those in the Retail Properties. GROWTH THROUGH ACQUISITIONS We believe our significant acquisition experience, our alliance-based operating strategy and our extensive network of property acquisition sources will continue to provide opportunities for external growth. We have relationships through our Institutional Alliance Program(TM) with a number of the nation's leading pension funds and other institutional investors, many of whom have large portfolios of industrial properties. We believe that our relationship with third party local property managers through our Management Alliance Program(TM) also will create acquisition opportunities as such managers market properties on behalf of sellers. Our operating structure also enables us to acquire properties through our UPREIT Alliance Program(TM) in exchange for limited partnership units in the Operating Partnership, thereby enhancing our attractiveness to owners and developers seeking to transfer properties on a tax-deferred basis. Between January 1, 1998 and December 31, 1998, we invested approximately $837.5 million (including our share of co-investments) in: - 228 industrial buildings aggregating 18.8 million square feet, - two retail centers aggregating 0.4 million square feet and 6 8 - an unconsolidated limited partnership interest in an existing real estate joint venture which owns 36 industrial buildings aggregating 4.0 million square feet. Of the total investment during such period, we invested approximately $215.8 million through our UPREIT Alliance Program(TM), approximately $139.5 million through our Institutional Alliance Program(TM), and $137.9 million through our Management Alliance Program(TM). We are generally in various stages of negotiations for a number of acquisitions, which may include acquisitions of individual properties, large multi-property portfolios and other real estate companies. There can be no assurance that we will consummate any of these acquisitions. Such acquisitions, if we consummate them, may be material individually or in the aggregate. Sources of capital for acquisitions may include undistributed cash flow from operations, borrowings under the Credit Facility, other forms of secured or unsecured financing, issuances of debt or equity securities by the Company or the Operating Partnership (including issuances of units in the Operating Partnership or its subsidiaries), proceeds from divestitures of certain assets, and assumption of debt related to the acquired assets. GROWTH THROUGH PROPERTY DEVELOPMENT We believe that renovation and expansion of value-added properties and development of well-located, high-quality industrial properties and community shopping centers should continue to provide us with attractive opportunities for increased cash flow and a higher rate of return than we may obtain from the purchase of fully leased, renovated properties. Value-added properties are typically characterized as properties with available space or near-term leasing exposure, properties that are well-located but require redevelopment or renovation, and occasionally undeveloped land acquired in connection with another property that provides an opportunity for development. Such properties require significant management attention and/or capital investment to maximize their return. We have developed the in-house expertise to create value through acquiring and managing value-added properties and believe our national market presence and expertise will enable us to continue to generate and capitalize on such opportunities. Through our Development Alliance Program(TM), we have established certain strategic alliances with national and regional developers to enhance our development capabilities. As of December 31, 1998, we had committed to invest approximately $349.9 million to develop approximately 5.8 million rentable square feet. Approximately $301.5 million of this investment is through our Development Alliance Program(TM). See "Development Projects in Progress." BUSINESS RISKS See: "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations -- Business Risks" for a complete discussion of the various risks which could adversely affect us. ITEM 2. PROPERTIES The Properties that we owned as of December 31, 1998, are divided into two operating divisions. We have broken down these two operating divisions into thirty identifiable markets. We have provided this breakdown for external reporting purposes only. It reflects the key markets of interest to our stockholders and does not reflect how we are operationally managed. Segment information related to our operations can be found in Note 13 of Notes to Consolidated Financial Statements. As of December 31, 1998, we owned 582 industrial buildings, representing an aggregate of 56.6 million rentable square feet, principally warehouse distribution properties, which were 96.0% leased, and the 38 retail centers, representing an aggregate of 7.0 million rentable square feet, principally grocer-anchored community shopping centers, which were 94.6% leased. During the year ended December 31, 1998, no individual industrial or retail tenant accounted for greater than 2% of rental revenues or total square feet. As of December 31, 1998, the largest industrial tenant accounted for only 1.0% and 0.7% of industrial base rent and total base rent, respectively. As of December 31, 1998, the largest retail tenant accounted for only 4.2% and 1.0% of retail base rent and total base rent, respectively. 7 9 INDUSTRIAL PROPERTIES At December 31, 1998, we owned 582 industrial buildings aggregating approximately 56.6 million rentable square feet, located in 26 markets nationwide. The Industrial Properties accounted for $247.2 million, or 75.7%, of our annualized base rent derived from the Properties as of December 31, 1998. The Industrial Properties were 96.0% leased to over 1600 tenants as of the same date, the largest of which accounted for no more than 1.0% of our annualized base rent from the Industrial Properties. Property Characteristics. The Industrial Properties, which consist primarily of warehouse distribution facilities suitable for single or multiple tenants, are typically comprised of multiple buildings (an average of five) and generally range between 300,000 and 600,000 rentable square feet, averaging 475,000 rentable square feet per Property. The following table identifies characteristics of our typical industrial buildings: TYPICAL BUILDING RANGE -------------------- ------------------ Rentable square feet...................................... 100,000 70,000 - 150,000 Clear height.............................................. 24 ft. 18 - 32 ft. Building depth............................................ 200 ft. 150 - 300 ft. Truck court depth......................................... 110 ft. 90 - 130 ft. Loading dock & grade...................................... Dock or Dock & Grade Parking spaces per 1,000 square feet...................... 1.0 0.5 - 2.0 Square footage per tenant................................. 35,000 5,000 - 100,000 Office finish............................................. 8% 3% - 15% Site coverage............................................. 40% 35% - 55% Lease Terms. The Industrial Properties are typically subject to lease on a "triple net basis," defined as leases in which tenants pay their proportionate share of real estate taxes, insurance and operating costs, or subject to leases on a "modified gross basis," defined as leases in which tenants pay expenses over certain threshold levels. Lease terms typically range from three to ten years, with an average of seven years, excluding renewal options. The majority of the industrial leases do not include renewal options. Overview of Major Target Markets. The Industrial Properties are concentrated in national hub distribution markets, such as Atlanta, Chicago, Dallas/Fort Worth, Los Angeles, Northern New Jersey, and the San Francisco Bay Area, because we believe their strategic location, transportation network and infrastructure, and large consumer and manufacturing bases support strong demand for industrial space. According to statistics published by CB Commercial/Torto Wheaton Research, the six national hub markets listed above are the nation's largest warehouse markets and, as of December 31, 1998, comprised 38.8% of the warehouse inventory of the 53 industrial markets tracked by them. According to statistics published by CB Commercial/Torto Wheaton Research, as of December 31, 1998, the combined population of these markets was approximately 40.3 million, and the amount of per capita warehouse space was 19.2% above the average for those 53 industrial markets. Within these metropolitan areas, the Industrial Properties are concentrated in in-fill locations (which are characterized by limited new construction opportunities due to high population densities and low levels of available land that could be developed into competitive industrial or retail properties) within established, relatively large submarkets (markets within a metropolitan area in which the competitive environment for one or more property types is largely dependent upon the supply of such property type in such market rather than the supply of such property type in other portions of such metropolitan area) which we believe should provide a higher rate of occupancy and rent growth than properties located elsewhere. These in-fill locations are typically near major air cargo facilities, seaports and convenient to major highways and rail lines, are proximate to a diverse labor pool, and have limited land available for new construction. There is typically broad demand for industrial space in these centrally located submarkets due to a diverse mix of industries and types of industrial uses, including warehouse distribution, light assembly and manufacturing. We generally avoid locations at the periphery of metropolitan areas where there are fewer supply constraints. Small metropolitan areas or cities without a heavy concentration of warehouse activity typically have few, if any, supply-constrained locations (those areas typified by significant population densities, a limited number of 8 10 existing industrial tenants and a low availability of land which could be developed into competitive space for additional industrial tenants). INDUSTRIAL PROPERTY SUMMARY As of December 31, 1998, the 582 industrial buildings were diversified across 26 markets nationwide. The average age of the Industrial Properties is 12 years (since the Property was built or substantially renovated), which we believe should result in lower operating costs over the long term. The following table represents Properties in which we own a fee simple interest or a controlling interest (consolidated), and excludes Properties in which we only own a non-controlling interest (unconsolidated). PERCENTAGE PERCENTAGE TOTAL OF TOTAL ANNUALIZED OF TOTAL INDUSTRIAL PROPERTIES NUMBER OF RENTABLE RENTABLE PERCENTAGE BASE RENT ANNUALIZED NUMBER (MARKET/SUBMARKET) BUILDINGS SQUARE FEET SQUARE FEET LEASED (000'S)(1) BASE RENT OF LEASES --------------------- --------- ----------- ----------- ---------- ---------- ---------- --------- EASTERN Baltimore/Washington, D.C....................... 14 1,997,682 3.5% 87.0% $ 7,732 3.1% 34 Boston...................... 38 4,508,244 7.9% 97.3% 18,651 7.5% 59 Charlotte................... 12 831,974 1.5% 97.7% 3,609 1.5% 31 Cincinnati.................. 6 812,134 1.4% 93.7% 2,566 1.0% 11 No. New Jersey.............. 14 2,986,061 5.3% 98.8% 15,114 6.1% 22 Philadelphia................ 13 779,594 1.4% 98.0% 2,918 1.2% 26 Wilmington.................. 3 266,141 0.5% 100.0% 1,057 0.4% 5 --- ---------- ------ ------ -------- ------ ----- Total/Weighted Average.... 100 12,181,830 21.5% 95.9% 51,647 20.9% 188 MIDWESTERN Chicago..................... 63 7,116,168 12.6% 93.5% 25,937 10.5% 111 Columbus.................... 2 468,433 0.8% 100.0% 1,363 0.6% 2 Minneapolis................. 43 4,551,482 8.0% 95.5% 16,756 6.8% 211 --- ---------- ------ ------ -------- ------ ----- Total/Weighted Average.... 108 12,136,083 21.4% 94.5% 44,056 17.8% 324 SOUTHERN Atlanta..................... 39 3,184,953 5.6% 93.3% $ 13,392 5.4% 138 Austin...................... 6 735,240 1.3% 100.0% 4,964 2.0% 22 Dallas/Ft. Worth............ 58 4,869,424 8.6% 97.7% 16,508 6.7% 172 Houston..................... 22 1,951,787 3.5% 95.0% 6,552 2.7% 109 Memphis..................... 19 2,259,162 4.0% 94.7% 9,107 3.7% 50 Miami....................... 25 2,173,481 3.8% 98.1% 12,746 5.2% 80 New Orleans................. 5 411,689 0.7% 99.3% 1,810 0.7% 49 Orlando..................... 18 1,678,910 3.0% 87.4% 5,709 2.3% 69 --- ---------- ------ ------ -------- ------ ----- Total/Weighted Average.... 192 17,264,646 30.5% 95.4% 70,788 28.6% 689 WESTERN Denver...................... 2 63,080 0.1% 89.9% 279 0.1% 15 Los Angeles................. 50 4,983,228 8.8% 97.4% 20,431 8.3% 97 Orange County............... 12 563,437 1.0% 99.5% 3,476 1.4% 33 Portland.................... 5 676,104 1.2% 97.5% 2,657 1.1% 9 Sacramento.................. 1 182,437 0.3% 100.0% 630 0.3% 1 San Diego................... 5 276,167 0.5% 100.0% 1,918 0.8% 16 San Francisco Bay Area...... 86 6,157,976 10.9% 98.0% 43,453 17.6% 226 Seattle..................... 21 2,125,879 3.8% 98.8% 7,894 3.2% 57 --- ---------- ------ ------ -------- ------ ----- Total/Weighted Average.... 182 15,028,308 26.6% 98.0% 80,738 32.7% 454 TOTAL/WEIGHTED AVERAGE............. 582 56,610,867 100.0% 96.0% $247,229 100.0% 1,655 === ========== ====== ====== ======== ====== ===== ANNUALIZED BASE RENT INDUSTRIAL PROPERTIES PER LEASED (MARKET/SUBMARKET) SQUARE FOOT --------------------- ----------- EASTERN Baltimore/Washington, D.C....................... $4.45 Boston...................... 4.25 Charlotte................... 4.44 Cincinnati.................. 3.37 No. New Jersey.............. 5.12 Philadelphia................ 3.82 Wilmington.................. 3.97 ----- Total/Weighted Average.... 4.42 MIDWESTERN Chicago..................... 3.90 Columbus.................... 2.91 Minneapolis................. 3.85 ----- Total/Weighted Average.... 3.84 SOUTHERN Atlanta..................... $4.51 Austin...................... 6.75 Dallas/Ft. Worth............ 3.47 Houston..................... 3.53 Memphis..................... 4.26 Miami....................... 5.98 New Orleans................. 4.43 Orlando..................... 3.89 ----- Total/Weighted Average.... 4.30 WESTERN Denver...................... 4.92 Los Angeles................. 4.21 Orange County............... 6.20 Portland.................... 4.03 Sacramento.................. 3.45 San Diego................... 6.95 San Francisco Bay Area...... 7.20 Seattle..................... 3.76 ----- Total/Weighted Average.... 5.48 TOTAL/WEIGHTED AVERAGE............. $4.55 ===== - --------------- (1) Annualized base rent represents the monthly contractual amount under existing leases at December 31, 1998, multiplied by 12. This amount excludes expense reimbursements and rental abatements. 9 11 INDUSTRIAL PROPERTY TENANT INFORMATION Largest Industrial Property Tenants. Our 25 largest Industrial Property tenants by annualized base rent are set forth in the table below. PERCENTAGE OF PERCENTAGE OF AGGREGATE AGGREGATE AGGREGATE NUMBER OF RENTABLE LEASED ANNUALIZED ANNUALIZED INDUSTRIAL TENANT NAME(1) PROPERTIES SQUARE FEET SQUARE FEET(2) BASE RENT BASE RENT(3) ------------------------- ---------- ----------- -------------- ---------- ------------- Wakefern Food Corporation......................... 1 419,900 0.8% $ 2,356 1.0% Air Express International......................... 2 284,635 0.5% 2,033 0.8% Exel Logistics.................................... 3 581,246 1.1% 2,029 0.8% Dell USA, L.P..................................... 1 290,400 0.5% 1,724 0.7% Federal Express Corporation....................... 3 189,168 0.3% 1,676 0.7% Sequus Pharmaceuticals............................ 1 140,609 0.3% 1,667 0.7% Sage Enterprises.................................. 3 245,289 0.5% 1,641 0.7% Sanmina Corporation............................... 2 134,989 0.2% 1,639 0.7% Home Depot USA, Inc............................... 3 449,813 0.8% 1,584 0.6% Acer America...................................... 2 271,487 0.5% 1,574 0.6% Office Depot...................................... 3 402,298 0.7% 1,567 0.6% Rite Aid.......................................... 1 516,693 1.0% 1,550 0.6% AM Cosmetics...................................... 1 326,500 0.6% 1,469 0.6% Bradlees Stores, Inc.............................. 1 600,000 1.1% 1,453 0.6% Boise Cascade Corporation......................... 2 400,655 0.7% 1,436 0.6% United States Postal Service...................... 2 433,359 0.8% 1,334 0.5% General Electric Company.......................... 4 318,055 0.6% 1,311 0.5% Cosmair, Inc...................................... 1 303,843 0.6% 1,291 0.5% Fujitsu........................................... 2 179,628 0.3% 1,271 0.5% Schmalbach-Lubeca................................. 2 339,104 0.6% 1,265 0.5% Avery Denison..................................... 1 410,428 0.8% 1,231 0.5% United Liquors, Ltd............................... 1 315,000 0.6% 1,229 0.5% Disney............................................ 1 336,143 0.6% 1,216 0.5% Mylex............................................. 1 133,182 0.2% 1,205 0.5% Rolf C. Hagen (USA) Corp.......................... 1 204,151 0.4% 1,133 0.5% --------- ----- ------- ----- TOTAL/WEIGHTED AVERAGE.................... 8,226,575 15.1% $37,884 15.3% ========= ===== ======= ===== - --------------- (1) Tenant(s) may be a subsidiary of or an entity affiliated with the named tenant. (2) Computed as aggregate rentable square feet divided by the aggregate leased square feet of the Industrial Properties. (3) Computed as annualized base rent divided by the aggregate annualized base rent of the Industrial Properties. 10 12 INDUSTRIAL PROPERTY LEASE EXPIRATIONS The following table summarizes the lease expirations for the Industrial Properties for leases in place as of December 31, 1998, without giving effect to the exercise of renewal options or termination rights, if any, at or prior to the scheduled expirations. RENTABLE PERCENTAGE ANNUALIZED PERCENTAGE OF ANNUALIZED SQUARE OF TOTAL BASE RENT OF ANNUALIZED BASE RENT OF NUMBER OF FOOTAGE OF RENTABLE EXPIRING BASE RENT EXPIRING YEAR OF LEASES EXPIRING SQUARE LEASES OF EXPIRING LEASES LEASE EXPIRATION EXPIRING(1) LEASES(1) FOOTAGE(5) ($000S)(1)(2) LEASES PER SQUARE FOOT(3) ---------------- ----------- ---------- ---------- ------------- ------------- ------------------ 1999(4)........................ 375 8,921,425 16.4% $ 40,370 15.2% $4.53 2000........................... 381 10,253,191 18.9% 44,626 16.9% 4.35 2001........................... 344 8,766,856 16.1% 44,525 16.8% 5.08 2002........................... 225 8,165,045 15.0% 39,341 14.9% 4.82 2003........................... 181 6,701,162 12.3% 34,909 13.2% 5.21 2004........................... 45 3,009,447 5.5% 15,942 6.0% 5.30 2005........................... 39 2,978,049 5.5% 14,031 5.3% 4.71 2006........................... 19 1,214,803 2.2% 7,934 3.0% 6.53 2007........................... 13 1,495,177 2.7% 7,755 2.9% 5.19 2008........................... 21 1,355,779 2.5% 7,565 2.9% 5.58 2009 and beyond................ 11 1,514,097 2.8% 7,806 2.9% 5.16 ----- ---------- ------ -------- ------ ----- TOTAL/WEIGHTED AVERAGE.............. 1,654 54,375,031 100.0% $264,804 100.0% $4.87 ===== ========== ====== ======== ====== ===== - --------------- (1) Schedule includes executed leases that commence after December 31, 1998. Schedule excludes leases expiring prior to January 1, 1999. (2) Calculated as monthly rent at expiration multiplied by 12. (3) Rent per square foot is calculated by dividing the annualized base rent of expiring leases by the square footage expiring in any given year. (4) Includes leases encompassing 606,275 square feet which are on a month-to-month basis. (5) Represents percentage of total square footage of expiring leases. RETAIL PROPERTIES At December 31, 1998, we owned 38 retail centers aggregating approximately 7.0 million rentable square feet, 34 of which are grocer-anchored. The Retail Properties accounted for $79.2 million, or 24.3%, of annualized base rent derived from the Properties as of December 31, 1998. The Retail Properties were 94.6% leased to over 900 tenants, the largest of which accounted for 4.2% of annualized base rent from the Retail Properties as of such date. The Retail Properties have an average age of six years since built, expanded or renovated. On March 9, 1999, we signed a series of definitive agreements with BPP Retail, a co-investment entity between BPP and CalPERS, pursuant to which BPP Retail will acquire 28 of our retail shopping centers, totaling 5.1 million square feet, for an aggregate price of $663.4 million. BPP Retail will acquire the centers in separate transactions, which we currently expect to close on or about April 30, 1999, July 31, 1999 and December 1, 1999. In addition, we have entered into a definitive agreement, subject to a financing confirmation, with BPP, pursuant to which BPP will acquire six additional retail centers, totaling 1.5 million square feet, for $284.4 million. Assuming the receipt of the financing confirmation, we currently expect this transaction to close by December 31, 1999. In connection with these transactions, we have also granted CalPERS an option to purchase up to 2,000,000 original issue shares of AMB's Common Stock for an exercise price of $25 per share that CalPERS may exercise on or before March 31, 2000. There can be no 11 13 assurance, however, that the transactions will close as scheduled or close at all. We currently expect that the substantial majority of our acquisition activities going forward will be in industrial properties. See "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations -- Business Risks -- Failure to Consummate the Transactions with BPP Retail and BPP." The Retail Properties generally are located in supply-constrained trade areas (those trade areas typified by significant population densities, a limited number of existing retailers, such as grocers, and a low availability of land which could be developed into competitive space for additional competitive retailers) of 16 major metropolitan areas. Our national operating strategy for the community shopping center business is based on detailed research regarding target trade areas which typically have high population densities and above- average income levels. We believe that the characteristics of our trade areas tend to result in Retail Properties with above-average retail sales. Property Characteristics. The Retail Properties generally contain between 80,000 and 400,000 rentable square feet. On average, 67% of the rentable square feet for each of the Retail Properties is leased to one or more anchor tenants (such as all grocery stores, drugstores and any other retail tenant occupying more than 10,000 rentable square feet). The following table identifies characteristics of our typical Retail Property. TYPICAL BUILDING RANGE ---------------- ----------------- Rentable square feet........................................ 190,000 80,000 - 400,000 Percentage of square feet leased by anchor tenants.......... 67% 60% - 85% Number of tenants........................................... 25 10 - 50 Parking spaces per 1,000 square feet........................ 5.0 4.0 - 6.0 Square footage per anchor tenant............................ 25,000 10,000 - 100,000 Average square footage per non-anchor tenant................ 1,500 750 - 5,000 Lease Terms. The Retail Properties are typically leased on a triple net basis, defined as leases in which tenants pay their proportionate share of real estate taxes, insurance and operating costs. In addition, some leases, including some anchor tenant leases, require tenants to pay percentage rents based on gross retail sales above predetermined thresholds. Typical anchor tenant leases also provide for payment of a percentage administrative fee in lieu of a management fee (calculated as a percentage of common area maintenance) which ranges between 5% and 15%. Lease terms typical for anchor tenants range from 10 to 20 years, with a weighted average of 19 years, with renewal options for an additional 10 to 20 years at fixed rents. Tenant improvement allowances are standard and the amounts vary by submarket. Typical non-anchor tenants have lease terms ranging from three to ten years with a weighted average of seven years and they typically receive options for an additional five-year term at market rents. RETAIL PROPERTY SUMMARY Rentable square footage occupied by anchor tenants accounted for 67.3% of the aggregate square footage of the Retail Properties as of December 31, 1998. Annualized base rent as of such date for our 25 largest tenants was approximately $31.9 million, representing approximately 40.3% of annualized base rent for all of our Retail Properties. Annualized base rent for the remaining retail tenants was approximately $47.3 million as of the same date, representing approximately 59.7% of the annualized base rent for all of our Retail Properties. 12 14 The following table sets forth, on a market basis, the rentable square footage leased to anchor tenants and non-anchor tenants as of December 31, 1998, and represents Properties in which we own a fee simple interest or a controlling interest (consolidated), and excludes Properties in which we only own a non-controlling interest (unconsolidated). AVERAGE ANCHOR TOTAL ANNUALIZED BASE RENT RETAIL PROPERTIES NUMBER NUMBER RENTABLE RENTABLE PERCENTAGE BASE RENT PER SQUARE (MARKET/SUBMARKET) OF CENTERS OF LEASES SQUARE FEET SQUARE FEET LEASED (000'S)(1) FEET LEASED(2) ------------------ ---------- --------- ----------- ----------- ---------- ---------- -------------- EASTERN Albany.......................... 1 29 513,985 602,477 98.1% $ 6,179 $10.45 Baltimore/Washington, DC........ 1 12 390,288 404,755 100.0% 4,639 11.46 Boston.......................... 1 1 88,420 88,420 100.0% 690 7.80 Hartford........................ 1 24 116,960 177,316 99.9% 3,185 17.98 -- --- --------- --------- ------ ------- ------ Total/Weighted Average...... 4 66 1,109,653 1,272,968 99.1% 14,693 11.65 MIDWESTERN Chicago......................... 3 47 413,883 504,916 96.3% 4,695 9.66 Minneapolis..................... 1 30 151,757 205,917 100.0% 2,216 10.76 -- --- --------- --------- ------ ------- ------ Total/Weighted Average...... 4 77 565,640 710,833 97.4% 6,911 9.99 SOUTHERN Atlanta......................... 2 31 142,754 218,790 93.6% 2,856 13.95 Houston......................... 5 91 563,677 824,744 91.9% 8,053 10.62 Miami........................... 6 145 678,251 1,049,723 86.9% 10,515 11.53 -- --- --------- --------- ------ ------- ------ Total/Weighted Average...... 13 267 1,384,682 2,093,257 89.6% 21,424 11.43 WESTERN Denver.......................... 2 64 351,193 512,460 98.6% 4,697 9.30 Los Angeles..................... 3 151 408,904 751,132 97.0% 10,528 14.45 Reno............................ 1 15 47,140 76,757 97.7% 762 10.16 San Diego....................... 2 78 107,015 276,404 95.9% 4,402 16.61 San Francisco Bay Area.......... 5 110 408,217 673,031 96.5% 8,949 13.78 Santa Barbara................... 1 25 97,189 144,484 100.0% 2,435 16.85 Seattle......................... 3 70 287,411 473,718 87.3% 4,393 10.62 -- --- --------- --------- ------ ------- ------ Total/Weighted Average...... 17 513 1,707,069 2,907,986 95.7% 36,166 13.00 TOTAL/WEIGHTED AVERAGE.... 38 923 4,767,044 6,985,044 94.6% $79,194 $11.98 == === ========= ========= ====== ======= ====== - --------------- (1) Annualized base rent represents the monthly contractual amount under existing leases at December 31, 1998, multiplied by 12. This amount excludes expense reimbursements, rental abatements and percentage rents. (2) Calculated as total annualized base rent divided by total rentable square feet actually leased as of December 31, 1998. 13 15 RETAIL PROPERTY TENANT INFORMATION Largest Retail Property Tenants. Our 25 largest Retail Property tenants by annualized base rent are set forth in the table below. PERCENTAGE OF PERCENTAGE OF NUMBER AGGREGATE AGGREGATE ANNUALIZED AGGREGATE OF RENTABLE LEASED BASE RENT ANNUALIZED RETAIL TENANT NAME(1) CENTERS SQUARE FEET SQUARE FEET(3) (000S) BASE RENT(4) --------------------- ------- ----------- -------------- ---------- ------------- Safeway Stores, Inc.(2)...................... 7 362,563 5.5% $ 3,290 4.2% Wal-Mart Stores, Inc. and Sam's Club......... 2 388,866 5.9% 2,891 3.7% Randall's Food & Drugs, Inc.(2).............. 5 298,549 4.5% 2,369 3.0% Dayton Hudson................................ 3 320,670 4.9% 1,784 2.3% Leonard Green & Partners..................... 5 138,998 2.1% 1,608 2.0% Home Place................................... 2 109,323 1.7% 1,450 1.8% Kroger(2).................................... 4 177,825 2.7% 1,414 1.8% Viacom....................................... 10 58,785 0.9% 1,264 1.6% Toys 'R Us, Inc.............................. 3 135,332 2.0% 1,247 1.6% Publix(2).................................... 5 199,764 3.0% 1,180 1.5% J.C. Penney.................................. 4 74,612 1.1% 1,161 1.5% Comp USA, Inc................................ 4 95,213 1.4% 1,143 1.4% Gap, Inc..................................... 4 57,591 0.9% 1,016 1.3% Home Depot................................... 1 116,095 1.8% 1,015 1.3% Barnes & Noble Super Stores, Inc............. 3 50,600 0.8% 1,004 1.3% Great Atlantic............................... 1 86,889 1.3% 949 1.2% Hallmark..................................... 13 51,643 0.8% 889 1.1% Hannaford Bros. Co.(2)....................... 1 63,664 1.0% 875 1.1% PETSMART, Inc................................ 4 102,100 1.5% 875 1.1% Ross Stores, Inc............................. 2 61,120 0.9% 861 1.1% Albertson's, Inc.(2)......................... 5 145,648 2.2% 854 1.1% TJX, Inc..................................... 4 117,200 1.8% 769 1.0% Randolph Bob's, Inc.......................... 1 88,420 1.3% 690 0.9% Fry's Electronics............................ 1 46,200 0.7% 677 0.9% Rite Aid..................................... 6 124,110 1.9% 644 0.8% --------- ----- ------- ----- TOTAL/WEIGHTED AVERAGE............... 3,471,780 52.5% $31,919 40.3% ========= ===== ======= ===== - --------------- (1) Tenant(s) may be a subsidiary of or an entity affiliated with the named tenant. (2) Of the top 25 Retail Property tenants, six are grocers. Of the 38 Retail Properties, 34 are grocer-anchored. (3) Computed as aggregate rentable square feet divided by the aggregate leased square feet of the Retail Properties. (4) Computed as annualized base rent divided by the aggregate annualized base rent of the Retail Properties. 14 16 RETAIL PROPERTY LEASE EXPIRATIONS The following table sets forth a summary schedule of the Retail Property lease expirations for leases in place as of December 31, 1998 without giving effect to the exercise of renewal options or termination rights, if any, at or prior to the scheduled expirations. RENTABLE PERCENTAGE ANNUALIZED SQUARE OF TOTAL BASE RENT PERCENTAGE OF ANNUALIZED NUMBER OF FOOTAGE OF RENTABLE OF EXPIRING ANNUALIZED RENT YEAR OF LEASES LEASES SQUARE LEASES BASE RENT OF OF EXPIRING LEASES LEASE EXPIRATION EXPIRING(1) EXPIRING(1) FOOTAGE(5) ($000S)(1)(2) EXPIRING LEASES PER SQUARE FOOT(3) - ---------------------------- ----------- ----------- ---------- ------------- --------------- ------------------ 1999(4)..................... 151 357,631 5.4% $ 5,410 6.3% $15.13 2000........................ 126 509,888 7.7% 6,363 7.4% 12.48 2001........................ 128 560,719 8.5% 7,223 8.3% 12.88 2002........................ 128 473,806 7.1% 8,041 9.3% 16.97 2003........................ 109 609,345 9.2% 7,637 8.8% 12.53 2004........................ 55 253,971 3.8% 4,271 4.9% 16.82 2005........................ 37 135,828 2.0% 3,193 3.7% 23.51 2006........................ 46 280,453 4.2% 5,594 6.5% 19.95 2007........................ 36 442,848 6.7% 4,683 5.4% 10.57 2008........................ 22 303,350 4.6% 3,244 3.7% 10.69 2009 and beyond............. 90 2,707,184 40.8% 30,896 35.7% 11.41 --- --------- ------ ------- ------ ------ TOTAL/WEIGHTED AVERAGE........... 928 6,635,023 100.0% $86,555 100% $13.05 === ========= ====== ======= ====== ====== - --------------- (1) Schedule includes executed leases that commence after December 31, 1998. Schedule excludes leases expiring prior to January 1, 1999. (2) Calculated as monthly rent at expiration multiplied by 12. (3) Rent per square foot is calculated by dividing the annualized base rent of expiring leases by the square footage expiring in any given year. (4) Includes leases encompassing 70,346 square feet which are on a month-to-month basis. (5) Represents percentage of total rentable square footage of expiring leases. 15 17 OPERATING AND LEASING STATISTICS SUMMARY The following summarizes key operating and leasing statistics for the Industrial and Retail Properties. INDUSTRIAL RETAIL TOTAL ---------- ---------- ----------- Square feet owned at December 31, 1998(1)......................................... 56,610,867 6,985,044 63,595,911 Occupancy percentage at December 31, 1998......................................... 96.0% 94.6% 95.8% Lease expirations as percentage of total sq. ft. (next 12 months)................. 15.8% 5.1% 14.6% Weighted average lease term....................................................... 7 years 15 years 8 years Tenant retention: -- Year................................. 74.8% 84.1% 75.4% -- Trailing average (1/01/95 to 12/31/98)............................... 73.4% 83.4% 73.9% Rent increases on renewals and rollovers: -- Year................................. 14.6% 13.3% 14.3% Same store cash basis NOI growth(2):) -- Year................................. 7.4% 6.5% 7.1% Second generation tenant improvements and leasing commissions per sq. ft.: -- Year: Renewals................................ $0.92 $1.34 $0.95 Re-tenanted............................. 2.08 9.99 2.47 ---------- ---------- ----------- Weighted average........................ $1.10 $2.64 $1.18 ========== ========== =========== -- Trailing average (1/01/95 to 12/31/98)............................... $1.22 $4.75 $1.42 ========== ========== =========== - --------------- (1) In addition to owned square feet, we manage, through its subsidiary, AMB Investment Management, 3.5 million, 0.6 million, and 0.4 million additional square feet of industrial, retail, and other properties, respectively. We also have an investment in 4.0 million square feet of Industrial Properties through our investment in an unconsolidated joint venture. (2) Consists of industrial buildings and retail centers aggregating 25.6 million and 4.8 million square feet, respectively, that have been owned by us since January 1, 1997, and excludes development properties prior to stabilization. See "Item 14: Note 13 of Notes to Consolidated Financial Statements" for total property net operating income by segment. HISTORICAL TENANT RETENTION RATES AND RENT INCREASES The following table sets forth information relating to tenant retention rates and average rent increases (cash basis) on renewal and re-tenanted space for the Industrial Properties and the Retail Properties for the periods presented. YEAR ENDED DECEMBER 31, ------------------------ WEIGHTED 1996 1997 1998 AVERAGE ---- ---- ---- -------- INDUSTRIAL PROPERTIES: Retention rate.......................................... 79.2% 69.5% 74.8% 74.1% Rental increases........................................ 4.7% 13.0% 14.6% RETAIL PROPERTIES: Retention rate.......................................... 88.4% 87.8% 84.1% 86.0% Rental increases........................................ 5.4% 10.1% 13.3% TOTAL PROPERTIES: Retention Rate.......................................... 79.8% 70.3% 75.4% 74.7% Rental increases........................................ 5.0% 11.0% 14.3% 16 18 RECURRING TENANT IMPROVEMENTS AND LEASING COMMISSIONS PER SQUARE FOOT LEASED The table below summarizes for the Industrial Properties and the Retail Properties, separately, the recurring tenant improvements and leasing commissions per square feet leased for the periods presented. The recurring tenant improvements and leasing commissions represent costs incurred to lease space after the initial lease term of the initial tenant, excluding costs incurred to relocate tenants as part of a re-tenanting strategy. The tenant improvements and leasing commissions set forth below are not necessarily indicative of future tenant improvements and leasing commissions. YEAR ENDED DECEMBER 31, --------------------------- WEIGHTED 1996 1997 1998 AVERAGE ----- ----- ----- -------- INDUSTRIAL PROPERTIES: Expenditures per renewed square foot leased............... $0.93 $1.05 $0.92 $0.95 Expenditures per re-tenanted square foot leased........... $1.97 $1.62 $2.08 $1.84 Weighted average.......................................... $1.29 $1.30 $1.10 $1.20 RETAIL PROPERTIES: Expenditures per renewed square foot leased............... $4.72 $4.25 $1.34 $2.63 Expenditures per re-tenanted square foot leased........... $6.53 $7.92 $9.99 $7.93 Weighted average.......................................... $5.61 $6.41 $2.64 $4.66 OCCUPANCY AND AVERAGE BASE RENT The table below sets forth weighted average occupancy rates and average base rent based on square feet leased of the Industrial Properties and the Retail Properties as of and for the periods presented. YEAR ENDED DECEMBER 31, ------------------------------ 1996 1997 1998 ------ ------ ------ INDUSTRIAL PROPERTIES: Occupancy rate at period end.............................. 97.2% 95.7% 96.0% Average base rent per square foot(1)...................... $ 3.81 $ 4.26 $ 4.55 RETAIL PROPERTIES: Occupancy rate at period end.............................. 92.4% 96.1% 94.6% Average base rent per square foot(1)...................... $11.32 $11.98 $11.98 - --------------- (1) Average base rent per square foot represents the total annualized contractual base rental revenue for the period divided by the average occupied square feet leased for the period. 17 19 DEVELOPMENT PIPELINE The following table sets forth the Properties owned by us as of December 31, 1998 which were undergoing renovation, expansion or new development. No assurance can be given that any of such projects will be completed on schedule or within budgeted amounts. ESTIMATED DEVELOPMENT STABILIZATION PROPERTIES LOCATION TYPE ALLIANCE PARTNER(TM) DATE(1) ---------- -------- ---- -------------------- ------------- INDUSTRIAL(3) 1. Fairway Drive Phase III........ San Leandro, CA Development n/a April 1999 2. South Dallas Industrial........ Dallas, TX Expansion n/a May 1999 3. Dock's Corner (Phase II)....... South Brunswick, NJ Expansion n/a July 1999 4. North Great SW Industrial Dallas, TX Development July 1999 Park............................. Trammell Crow Company 5. Pennsy Drive................... Landover, MD Renovation n/a August 1999 6. Hempstead Highway Distribution Houston, TX Development August 1999 Center........................... Cypress Realty 7. Richardson Tech Center......... Richardson, TX Development n/a March 2000 8. Northwest Crossing Distribution Houston, TX Development May 2000 Center........................... Trammell Crow Company 9. Orlando Central Park Orlando, FL Development July 2000 Development...................... Trammell Crow Company 10. LA Media Tech Center.......... Los Angeles, CA Development Legacy Partners February 2001 11. Suwanee Creek Distribution.... Atlanta, GA Development Seefried Properties February 2001 12. South River Park Cranbury, NJ Development March 2001 Development...................... Trammell Crow Company 13. Cabot Business Park Land...... Mansfield, MA Development National Development of NE August 2001 14. Wilsonville................... Wilsonville, OR Development Trammell Crow Company January 2002 Subtotal....................... RETAIL(3) 15. Around Lenox.................. Atlanta, GA Renovation Alpine Partners September 1999 16. Palm Aire..................... Miami, FL Renovation Lefmark December 1999 17. Springs Gate.................. Coral Springs, FL Development Lefmark December 2000 18. Northridge.................... Fort Lauderdale, FL Renovation Lefmark April 2001 Subtotal....................... Total...................... ESTIMATED ESTIMATED SQUARE FEET AT TOTAL PROPERTIES COMPLETION INVESTMENT(2) ---------- -------------- ------------- INDUSTRIAL(3) 1. Fairway Drive Phase III........ 116,000 $ 5,400 2. South Dallas Industrial........ 95,000 2,400 3. Dock's Corner (Phase II)....... 659,000 23,900 4. North Great SW Industrial 215,000 10,500 Park............................. 5. Pennsy Drive................... 359,000 14,800 6. Hempstead Highway Distribution 292,000 11,500 Center........................... 7. Richardson Tech Center......... 26,000 1,900 8. Northwest Crossing Distribution 178,000 6,900 Center........................... 9. Orlando Central Park 443,000 17,700 Development...................... 10. LA Media Tech Center.......... 386,000 39,200 11. Suwanee Creek Distribution.... 1,095,000 34,600 12. South River Park 626,000 27,900 Development...................... 13. Cabot Business Park Land...... 415,000 29,400 14. Wilsonville................... 155,000 7,300 --------- -------- Subtotal....................... 5,060,000(4) 233,400(5) --------- -------- RETAIL(3) 15. Around Lenox.................. 120,000 23,300 16. Palm Aire..................... 143,000 17,700 17. Springs Gate.................. 236,000 38,000 18. Northridge.................... 259,000 37,500 --------- -------- Subtotal....................... 758,000(4) 116,500(5) --------- -------- Total...................... 5,818,000 $349,900 ========= ======== - --------------- (1) Estimated stabilization date means our estimate of when capital improvements for repositioning, development and redevelopment programs will have been completed and in effect for a period of time sufficient to achieve market occupancy. The estimates are based on our current estimates and forecasts and are therefore subject to change. (2) Represents total estimated cost of renovation, expansion or development, including initial acquisition costs, debt and equity carry, and partner earnouts. The estimates are based on our current estimates and forecasts and are therefore subject to change. (3) Excludes approximately 129 acres of land available for expansion of existing industrial buildings or development of new industrial buildings and approximately six acres of land available for expansion of existing retail centers. (4) Construction has begun on approximately 2.7 million square feet of industrial space and 0.5 million of retail space which was 37% and 75% leased, respectively, as of December 31, 1998. (5) As of December 31, 1998, we have spent approximately $94.5 million and $61.5 million for the renovation, expansion or development of Industrial and Retail Properties, respectively. 18 20 PROPERTIES HELD THROUGH JOINT VENTURES, LIMITED LIABILITY COMPANIES AND PARTNERSHIPS As of December 31, 1998, we held interests in 21 joint ventures, limited liability companies and partnerships with certain unaffiliated third parties (the "Joint Venture Participants") that are consolidated in our consolidated financial statements. Pursuant to the existing agreements with respect to each joint venture, we hold a greater than 50% interest in 16 of the joint ventures and a 50% interest in the remaining joint ventures, but in certain cases such agreements provide that we are a limited partner or that the Joint Venture Participant is principally responsible for day-to-day management of the Property (though in all such cases, we have approval rights with respect to significant decisions involving the underlying properties). Under the agreements governing the joint ventures, we and the Joint Venture Participant may be required to make additional capital contributions, and subject to certain limitations, the joint ventures may incur additional debt. Such agreements also impose certain restrictions on the transfer of joint venture interests by us or the Joint Venture Participant, and provide certain rights to us and/or the Joint Venture Participant to sell its interest to the joint venture or to the other venturer on terms specified in the agreement. All of the joint ventures terminate in 2024 or later, but may end earlier if a joint venture ceases to hold any interest in or have any obligations relating to the property held by such joint venture. The following table sets forth certain information regarding the Properties owned through consolidated joint ventures as of December 31, 1998 (dollars in thousands): BOOK VALUE OF BOOK VALUE OF JV PARTNERS' GROSS BOOK MORTGAGE PARTNERS' COMPANY'S SHARE PROPERTIES VALUE(1) DEBT INVESTMENT INVESTMENT OF FFO ---------- ---------- --------- ------------- ------------- ------------ INDUSTRIAL 1. Chancellor.................................... $ 6,451 $ (2,925) $ (569) $ 2,957 10% 2. Nippon Express(2)............................. 6,358 -- (491) 5,867 27% 3. Metric Center................................. 44,357 -- (5,392) 38,965 13% 4. Jamesburg(3).................................. 47,293 (23,500) (11,737) 12,056 50% 5. Corporate Park/Hickory Hill(3)................ 27,390 (16,400) (5,461) 5,529 50% 6. Garland Industrial(3)......................... 33,347 -- (16,976) 16,371 50% 7. Minnetonka Industrial(3)...................... 28,047 (13,025) (7,430) 7,592 50% 8. South Point Business Park(3).................. 21,634 -- (10,776) 10,858 50% 9. Orlando Central Park Development(4)........... 7,026 -- (345) 6,681 5% 10. South River Park Development(4)............... 9,366 -- (343) 9,023 5% 11. Cabot Business Park Land(4)................... 3,991 -- (382) 3,609 10% 12. North Great SW Industrial Park(4)............. 2,333 -- (113) 2,220 5% 13. Northwest Crossing Distribution Center(4)..... 1,520 -- (76) 1,444 5% 14. LA Media Tech Center(4)....................... 25,341 -- (507) 24,834 2% -------- --------- -------- -------- Subtotal....................................... 264,454 (55,850) (60,598) 148,006 -------- --------- -------- -------- RETAIL 15. Kendall Mall(4)............................... 36,078 (24,757) 187 11,508 29% 16. Manhattan Village............................. 83,484 -- (7,759) 75,725 10% 17. Palm Aire(4).................................. 15,708 (5,755) (1,107) 8,846 0% 18. Plaza at Delray(4)............................ 35,579 (23,142) 18 12,455 2% 19. Springs Gate(4)............................... 12,978 -- -- 12,978 0% 20. Northridge(4)................................. 15,718 -- -- 15,718 0% 21. Around Lenox(4)............................... 18,085 (11,114) (683) 6,288 0% -------- --------- -------- -------- Subtotal....................................... 217,630 (64,768) (9,344) 143,518 -------- --------- -------- -------- Total..................................... $482,084 $(120,618) $(69,942) $291,524 ======== ========= ======== ======== 19 21 - --------------- (1) Represents the book value of the property (before accumulated depreciation) owned by the joint venture entity and excludes net other assets. (2) Represents a building which is part of the Lake Michigan Industrial Portfolio. (3) These properties are owned by a joint venture with an Institutional Alliance Partner which is a client of AMB Investment Management. (4) Represents a development, renovation or expansion project with a Development Alliance Partner (TM). We account for all of the above investments on a consolidated basis for financial reporting purposes because of our ability to exercise control over significant aspects of the investment as well as our significant economic interest in such investments. See "Item 14, Note 2 of the Notes to Consolidated Financial Statements." We also have a noncontrolling limited partnership interest in one unconsolidated real estate joint venture with a net investment value of $57.7 million as of December 31, 1998. SECURED DEBT As of December 31, 1998, the Operating Partnership had $719.0 million of indebtedness secured by deeds of trust on certain properties. As of December 31, 1998, the total gross investment value of those properties secured by debt was $1,458,652. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 5 of Notes to Consolidated Financial Statements included in this report. We believe that as of December 31, 1998, the value of the Properties securing the respective obligations in each case exceeded the principal amount of the outstanding obligations. ITEM 3. LEGAL PROCEEDINGS Neither we nor any of the Properties is subject to any material litigation. To our knowledge, there is no material litigation threatened against any of them, other than routine litigation arising in the ordinary course of business, which we generally expect to be covered by liability insurance, or to have an immaterial effect on our financial results. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock began trading on the New York Stock Exchange ("NYSE") on November 21, 1997, under the symbol "AMB." As of March 12, 1999, there were 160 holders of record of the Company's Common Stock (excluding shares held through The Deposit Trust Company, as nominee). Set forth below are the high and low sales prices per share of the Company's Common Stock, as reported on the NYSE composite tape, and the distribution per share paid by the Company during the period from November 26, 1997 through December 31, 1998. YEAR HIGH LOW DISTRIBUTION ---- ---- ---- ------------ 1997 4th Quarter (from 11/21/97)............................... $25 1/8 $22 1/4 $0.134 1998 1st Quarter............................................... 24 15/16 23 3/8 0.3425 2nd Quarter............................................... 25 22 3/8 0.3425 3rd Quarter............................................... 25 13/16 22 11/16 0.3425 4th Quarter............................................... 25 20 15/16 0.3425 20 22 ITEM 6. SELECTED FINANCIAL AND OTHER DATA SELECTED COMPANY AND PREDECESSOR FINANCIAL AND OTHER DATA The following table sets forth selected consolidated historical financial and other data for the Company and its Predecessor on an historical basis for the years ended December 31, 1994, 1995, 1996, 1997, and 1998. Prior to November 26, 1997 (the IPO date), the Company's Predecessor provided real estate investment management services to institutional investors. AS OF AND FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- COMPANY PREDECESSOR(1) ----------------------------------------- --------------------------- HISTORICAL(2) PRO FORMA(3) 1994 1995 1996 1997 1997 1998 ------- ------- ------- ------------- ------------ ---------- (IN THOUSANDS EXCEPT SHARE DATA, PERCENTAGES AND NUMBER OF PROPERTIES) OPERATING DATA: Total revenues.................................. $12,865 $16,865 $23,991 $ 56,062 $284,674 $ 358,887 Income from operations before minority interests..................................... 2,925 3,296 7,140 18,885 103,903 123,750 Net income available to common stockholders..... 2,925 3,262 7,003 18,228 99,508 108,954 Net income common per share: Basic(4)...................................... 0.59 0.64 1.38 1.39 1.16 1.27 Diluted(4).................................... 0.59 0.64 1.38 1.38 1.15 1.26 Dividends per common share...................... 1.37 1.37 Dividends per preferred share(5)................ -- 0.99 OTHER DATA: EBITDA(6)....................................... $195,218 $ 252,353 Funds from Operations(7)........................ 147,409 170,407 Cash flows provided by (used in): Operating activities.......................... 131,621 177,180 Investing activities.......................... (607,768) (796,213) Financing activities.......................... 553,199 604,202 BALANCE SHEET DATA: Investments in real estate at cost.............. $ -- $ -- $ -- $2,442,999 $3,369,060 Total assets.................................... 4,092 4,948 7,085 2,506,255 3,562,885 Total consolidated debt(8)...................... -- -- -- 685,652 1,368,196 Stockholders' equity............................ 3,848 4,241 6,300 1,668,030 1,765,360 - --------------- (1) Represents the Predecessor's historical financial and other data for the years ended December 31, 1994, 1995 and 1996. The Predecessor operated as an investment manager prior to November 26, 1997. (2) The historical 1997 results represent the Predecessor's historical financial and other data for the period January 1, 1997 through November 25, 1997. The financial and other data of the Company, and the Properties acquired in the Formation Transactions, have been included subsequent to November 26, 1997 to December 31, 1997. (3) Pro forma 1997 financial and other data has been prepared as if the Formation Transactions, the IPO (as described in "Item 14. Note 1 of Notes to Consolidated Financial Statements") and certain property acquisitions and divestitures in 1997 had occurred on January 1, 1997. (4) Basic and diluted net income per share equals the pro forma net income divided by 85,874,513 and 86,156,556 shares, respectively, for 1997, and net income available to common stockholders divided by 85,876,383 and 86,235,176 shares, respectively, for 1998. (5) Dividends for the period commencing on July 27, 1998, the date of Series A Preferred Stock issuance. (6) EBITDA is computed as income from operations before divestiture of Properties and minority interests plus interest expense, income taxes, depreciation and amortization. We believe that in addition to cash flows and net income, EBITDA is a useful financial performance measure for assessing the operating performance of an equity REIT because, together with net income and cash flows, EBITDA provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund 21 23 acquisitions and other capital expenditures. Includes an adjustment to reflect the Company's pro rata share of EBITDA in an unconsolidated joint venture. EBITDA is not a measurement of operating performance calculated in accordance with U.S. generally accepted accounting principles and should not be considered as a substitute for operating income, net income, cash flows from operations or other statement of operations or cash flow data prepared in accordance with U.S. generally accepted accounting principles. EBITDA may not be indicative of our historical operating results, nor be predictive of potential future results. While EBITDA is frequently used as a measure of operations and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other REITs. (7) FFO is defined as income from operations before minority interest, gains or losses from sale of real estate and extraordinary losses plus real estate depreciation and adjustment to derive the Company's pro rata share of the FFO of unconsolidated joint ventures, less minority interests' pro rata share of the FFO of consolidated joint ventures and perpetual preferred stock dividends. In accordance with the National Association of Real Estate Investment Trust ("NAREIT") White Paper on FFO, the Company includes the effects of straight-line rents in FFO. We believe that FFO is an appropriate measure of performance for an equity REIT. While FFO is a relevant and widely used measure of operating performance of REITs, 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 these indicators in evaluating liquidity or operating performance. Further, FFO as disclosed by other REITs may not be comparable. (8) Secured debt includes unamortized debt premiums of approximately $18,286, and $15,217 as of December 31, 1997 and 1998, respectively. See "Item 14. Notes 2 and 5 of the Notes to Consolidated Financial Statements." 22 24 SELECTED PROPERTY FINANCIAL AND OTHER DATA For comparative purposes, the table that follows provides selected historical financial and other data of the Properties. The historical results of the Properties for 1997 include the results achieved by the Company for the period from November 26, 1997 to December 31, 1997 and the results achieved by the prior owners of the Properties for the period from January 1, 1997 to November 25, 1997. The historical results of operations of the Properties for periods prior to November 26, 1997 include Properties that were managed by the Predecessor and exclude the results of four Properties that were contributed to the Company in the Formation Transactions that were not previously managed by the Predecessor. In addition, the historical results of operations include the results of Properties acquired after November 26, 1997, from the date of acquisition of such Properties to December 31, 1997. AS OF AND FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------ COMPANY ----------------------------------------- PROPERTIES COMBINED(1) HISTORICAL(2) PRO FORMA(3) ---------------------------------- ------------- ------------ 1994 1995 1996 1997 1997 1998 -------- ---------- ---------- ------------- ------------ ---------- (IN THOUSANDS EXCEPT PERCENTAGES AND NUMBER OF PROPERTIES) OPERATING DATA: Rental revenues.............................. $ 50,893 $ 106,180 $ 166,415 $ 233,856 $282,665 $ 354,658 BALANCE SHEET DATA: Investment in real estate at cost............ 666,672 1,018,681 1,616,091 2,442,999 3,369,060 Secured debt(4).............................. 201,959 254,067 522,634 535,652 734,196 PROPERTY DATA: INDUSTRIAL PROPERTIES Property net operating income(5)........... 137,955 181,832 Total rentable square footage at end of period................................... 13,364 21,598 29,609 37,329 56,611 Occupancy rate at end of period............ 96.9% 97.3% 97.2% 95.7% 96.0% RETAIL PROPERTIES Property net operating income(5)........... 64,716 76,752 Total rentable square footage at end of period................................... 2,422 3,299 5,282 6,216 6,985 Occupancy rate at end of period............ 93.7% 92.4% 92.4% 96.1% 94.6% - --------------- (1) Represents the Properties' combined historical financial and other data for the years ended December 31, 1994, 1995 and 1996. The historical results of operations of the Properties for periods prior to November 26, 1997 include Properties that were managed by the Predecessor and exclude the results of four properties that were contributed to the Company in the Formation Transactions that were not previously managed by the Predecessor. (2) The historical results of the Properties for 1997 include the results of the Company for the period from November 26, 1997 (acquisition date) to December 31, 1997 and the results achieved by the prior owners of the Properties for the period from January 1, 1997 to November 25, 1997. (3) The pro forma financial and other data has been prepared as if the Formation Transactions, the IPO (See "Item 14. Note 1 of Notes to Consolidated Financial Statements"), and certain 1997 property acquisitions and divestitures had occurred on January 1, 1997. (4) Secured debt as of December 31, 1997 and 1998 includes unamortized debt premiums of approximately $18,286 and $15,217, respectively. See "Item 14. Notes 2 and 5 of Notes to Consolidated Financial Statements." (5) Property net operating income (NOI) is defined as rental revenue, including reimbursements and straight-line rents, less operating expenses. See "Item 14, Note 13 of Notes to Consolidated Financial Statements." 23 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of the consolidated financial condition and results of operations in conjunction with the Notes to Consolidated Financial Statements. Statements contained in this discussion which 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 costs, 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, 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, as amended, 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 certain other risk factors discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Business Risk" 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. GENERAL Because of the significant impact of the Formation Transactions and the IPO on our results of operations, the discussion below is presented as follows: - results of the Company and its Predecessor for the years ended December 31, 1998, 1997 and 1996; and - results of the Properties for the years ended December 31, 1998, 1997 and 1996. See "Item 1: Business -- General -- Formation of the Company" and Note 1 of Notes to Consolidated Financial Statements for discussion of the Formation Transactions. COMPANY AND PREDECESSOR RESULTS OF OPERATIONS The year ended December 31, 1998 was the Company's first full year operating as a real estate operating company. The historical results of the Company for 1997 include its results, including property operations, for the period from November 26, 1997 (the commencement of operations as a fully integrated real estate company) to December 31, 1997 and the results of the Company's Predecessor, an investment manager, for the period from January 1, 1997 to November 25, 1997, and the years ended December 31, 1997 and 1996. As an investment manager, the Predecessor's revenues consisted primarily of fees earned in connection with real estate management services. Management's discussion and analysis of the Company and Predecessor for the years ended December 31, 1997 and 1996 is limited to investment management and other income and general and administrative expenses, and excludes a discussion of rental revenues, operating expenses, interest expense and depreciation and amortization because such analysis is not comparable or meaningful given the differences in lines of business between the Company and the Predecessor. 24 26 COMPANY AND PREDECESSOR -- YEARS ENDED DECEMBER 31, 1998 AND 1997 Total revenues. Total revenues, including straight-line rents, tenant reimbursements and other income, totaled $358.9 million for the year ended December 31, 1998. The Predecessor's revenues consisted primarily of fees earned in connection with real estate management services. As such, no such rental revenues existed for the Predecessor for the years ended December 31, 1997 Property operating expenses and real estate taxes. Property operating expenses, including asset management costs and real estate taxes, totaled $96.1 million for the year ended December 31, 1998. The Predecessor's expenses consisted primarily of salaries and other general administrative costs. As such, no such property operating expenses existed for the year ended December 31, 1997. General and administrative expenses. Our general and administrative expenses were $11.9 million for the year ended December 31, 1998, as compared to the Predecessor's investment management expenses of $19.4 million for the period from January 1, 1997 to November 25, 1997. Investment management expenses of the Predecessor consisted primarily of salaries and other general and administrative expenses. The 46.1% decrease on an annualized basis in general and administrative expenses is attributable to the change in our operations from an investment manager to a fully integrated real estate company, and the formation of AMB Investment Management. In connection with the Formation Transactions, AMB Investment Management assumed employment and other related costs of certain employees who transferred from the Predecessor to AMB Investment Management for the purpose of carrying on the investment management business. COMPANY AND PREDECESSOR -- YEARS ENDED DECEMBER 31, 1997 AND 1996 Investment management and other income. Investment management and other income for the period from January 1, 1997 to November 25, 1997 was $29.0 million, which on an annualized basis represents a 34.1% increase over the year ended December 31, 1996. The increase reflects the growth in the portfolio under management. Investment management and other income for the period from November 26, 1997 to December 31, 1997 was $0.6 million. General and administrative expenses. General and administrative expenses for the period from January 1, 1997 to November 25, 1997 were $19.4 million, which represents a 27.7% increase on an annualized basis over the year ended December 31, 1996. The increase was attributable to an increase in staffing that resulted from the growth in the portfolio under management. PROPERTIES RESULTS OF OPERATIONS The historical results of operations of the Properties for periods prior to November 26, 1997 include Properties that were managed by the Predecessor and exclude the results of four properties that were contributed to the Company in the Formation Transactions that the Predecessor did not previously manage. The discussion below for the years ended December 31, 1997 and 1996 is limited to a discussion of rental revenues, property operating expense and real estate taxes and excludes an analysis of other income, interest expense and depreciation and amortization because such analysis is not comparable or meaningful given the differences in capital structures between the Company and the prior owners of the Properties and the impact of the Formation Transactions and the IPO on the Properties. The historical property financial data presented in this report show significant increases in revenues and expenses principally attributable to the substantial portfolio growth. As a result, we do not believe the year-to-year financial data are comparable. Therefore, the analysis below shows changes resulting from Properties that the Predecessor owned as of January 1, 1997, excluding development projects (the "Same Store Properties"), and changes attributable to acquisition and development activity during 1997 and 1998. For the comparison between the years ended December 31, 1998 and 1997, the Same Store Properties consist of properties aggregating 31.1 million square feet. For the comparison between the years ended December 31, 1997 and 1996, the Same Store Properties consist of the 59 Properties acquired prior to January 1, 1996. Our future financial condition and results of operations, including rental revenues, may be impacted by the acquisition and divestiture of properties. Our future revenues and expenses may vary materially from their historical rates. 25 27 PROPERTIES -- YEARS ENDED DECEMBER 31, 1998 AND 1997 Rental revenues. Rental revenues, including straight-line rents, tenant reimbursements and other property related income, increased by $72.0 million, or 25.5%, for the year ended December 31, 1998, to $354.7 million, as compared with the same period in 1997. Approximately $9.6 million, or 13.3%, of this increase was attributable to Same Store Properties, with the remaining $62.4 million attributable to Properties acquired in 1998. The growth in rental revenues in Same Store Properties resulted primarily from the incremental effect of rental rate increases and changes in occupancy and reimbursement of expenses. During the year ended December 31, 1998, the increase in average base rents (cash basis) was 14.3% on 7.7 million square feet leased. Property operating expenses and real estate taxes. Property operating expenses, including asset management costs, increased by $14.6 million, or 17.9%, for the year ended December 31, 1998, to $96.1 million, as compared with the same period in 1997. Same Store Properties operating expenses decreased by approximately $0.7 million for the year ended December 31, 1998, while operating expenses attributable to Properties acquired in 1998 amounted to $15.3 million. The change in Same Store Properties operating expenses and real estate taxes relates to increases in Same Store Properties real estate taxes of approximately $1.0 million, offset by decreases in Same Store Properties other property operating expenses, including insurance expenses and property management fees of approximately $1.7 million. The remaining decrease in property operating expenses is primarily attributable to lower asset management costs in 1998 as compared to 1997 resulting from the change in ownership structure. PROPERTIES -- YEARS ENDED DECEMBER 31, 1997 AND 1996 Rental revenues. Rental income, including tenant reimbursements and other property related income, increased by $67.5 million, or 40.6%, for the year ended December 31, 1997, to $233.9 million as compared to $166.4 million for the year ended December 31, 1996. Approximately $8.8 million, or 13.0% of this increase was attributable to the Same Store Properties, with the remaining $58.7 million attributable to Properties acquired in 1997 and 1996. The 6.3% growth in rental income in the Same Store Properties resulted primarily from the incremental effect of rental rate increases and reimbursement of expenses. In 1997, we increased average contractual or base rental rates on the Properties by 12% on 393 new and renewing leases totaling 7.5 million rentable square feet (representing 17.2% of the Properties' aggregate rentable square footage). Property operating expenses and real estate taxes. Property operating expenses and real estate taxes increased by $25.6 million, or 46.3%, for the year ended December 31, 1997, to $80.9 million as compared to $55.3 million for the year ended December 31, 1996. Approximately $3.4 million of this increase was attributable to the Same Store Properties, with the remaining $22.2 million attributable to Properties acquired in 1997 and 1996. Same Store Properties real estate taxes and insurance expense increased by approximately $1.4 million from 1996 to 1997. Same Store Properties other property operating expenses (excluding real estate taxes and insurance) increased by $2.0 million from 1996 to 1997. The increases in expenses are primarily due to increases in property tax assessment values and incentive management fees expense. LIQUIDITY AND CAPITAL RESOURCES We currently expect that our principal sources of working capital and funding for acquisitions, development, expansion and renovation of the Properties will include cash flow from operations, borrowings under the Credit Facility, other forms of secured and unsecured financing, proceeds from equity or debt offerings by the Company or the Operating Partnership (including issuances of units in the Operating Partnership or its subsidiaries) and net proceeds from divestiture of properties. We presently believe that our sources of working capital and our ability to access private and public debt and equity capital are adequate for us to continue to meet liquidity requirements for the foreseeable future. CAPITAL RESOURCES Property divestitures. On March 9, 1999, we signed a series of definitive agreements with BPP Retail, a co-investment entity between BPP and CalPERS, pursuant to which BPP Retail will acquire 28 of our retail 26 28 shopping centers, totaling 5.1 million square feet, for an aggregate price of $663.4 million. BPP Retail will acquire the centers in separate transactions, which we currently expect to close on or about April 30, 1999, July 31, 1999 and December 1, 1999. In addition, we have entered into a definitive agreement, subject to a financing confirmation, with BPP, pursuant to which BPP will acquire six additional retail centers, totaling 1.5 million square feet, for $284.4 million. Assuming satisfaction or waiver of this condition, we currently expect this transaction to close by December 31, 1999. Assuming that the transactions with BPP Retail close as scheduled, the Company currently expects to reinvest approximately $520 million in industrial properties and to reduce our secured indebtedness by approximately $100 million. There can be no assurance, however, that the transactions will close as scheduled or close at all, and it is possible that the transactions may not close with respect to just one or more properties. In the event that one or more transactions fail to close, or a closing is significantly delayed, net proceeds from divestitures of properties will not be available to the same extent to fund our acquisitions and developments. Any such failure or delay in any of the closings may also make us unable to repay certain of our indebtedness with the net proceeds as we currently intend, and could require us to borrow additional funds or seek other forms of financing. Credit facility. We have a $500 million unsecured revolving credit agreement with Morgan Guaranty Trust Company of New York, as agent, and a syndicate of twelve other banks. The Credit Facility has a term of three years and is subject to a fee that accrues on the daily average undrawn funds, which varies between 15 and 25 basis points (currently 15 basis points) of the undrawn funds based on our credit rating. We use the Credit Facility principally for acquisitions and for general working capital requirements. Borrowings under the Credit Facility bear interest at LIBOR plus 90 to 120 basis points (currently LIBOR plus 90 basis points), depending on our debt rating at the time of the borrowings. As of December 31, 1998, the outstanding balance on the Credit Facility was $234 million and bore interest at 6.10%. Monthly debt service payments on the Credit Facility are interest only. The Credit Facility matures in November 2000. The total amount available under the Credit Facility fluctuates based upon the borrowing base, as defined in the agreement governing the Credit Facility. At December 31, 1998, the remaining amount available under the Credit Facility was approximately $266 million. We currently expect that the property divestitures will not materially affect the terms and conditions of the Credit Facility. Debt and equity financing. In June 1998, the Operating Partnership issued $400,000 aggregate principal amount of unsecured notes ("Senior Debt Securities") in an underwritten public offering, the net proceeds of which the Operating Partnership used to repay amounts outstanding under the Credit Facility. The Senior Debt Securities mature in June 2008, June 2015 and June 2018 and bear interest at a weighted average rate of 7.18%, which is payable in June and December of each year, commencing in December 1998. The 2015 notes are putable and callable in June 2005. We received credit ratings for the Senior Debt Securities of Baa1 from Moody's Investors Service, BBB from Standard & Poor's Corporation and BBB+ from Duff & Phelps Credit Rating Co. As a result of the receipt of these investment-grade credit ratings, the interest rate on the Credit Facility was reduced by 20 basis points to the current rate of LIBOR plus 90 basis points. In July 1998, the Company sold 4,000,000 shares of 8 1/2% Series A Cumulative Redeemable Preferred Stock at a price of $25.00 per share in an underwritten public offering. These shares are redeemable solely at the option of the Company on or after July 27, 2003, subject to certain conditions. The Company contributed the net proceeds of $96.1 million to the Operating Partnership in exchange for 4,000,000 Series A Preferred Units with terms identical to the Series A Preferred Stock. The Operating Partnership used the proceeds to repay borrowings under the Credit Facility incurred in connection with property acquisitions and for general purposes. In November 1998, the Operating Partnership issued and sold 1,300,000 8.625% Series B Cumulative Redeemable Preferred Units at a price of $50.00 per unit in a private placement. Distributions are cumulative from the date of original issuance and are payable quarterly in arrears at a rate per unit equal to $4.3125 per annum. The Series B Preferred Units are redeemable by the Operating Partnership on or after November 12, 2003, 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 B Preferred Units are exchangeable, at specified times and subject to certain conditions, on a one-for-one basis, for shares of the 27 29 Company's Series B Preferred Stock. The Operating Partnership used the proceeds to repay borrowings under the Credit Facility, for property acquisitions and for general purposes. In November 1998, a subsidiary of the Operating Partnership issued and sold 2,200,000 units of 8.75% Series C Cumulative Redeemable Preferred Units at a price of $50.00 per unit in a private placement. Distributions are cumulative from the date of original issuance and are payable quarterly in arrears at a rate per unit equal to $4.375 per annum. The Series C Preferred Units are redeemable by the subsidiary of the Operating Partnership on or after November 24, 2003, 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 C 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 C Preferred Stock. The subsidiary of the Operating Partnership used the proceeds to make a loan to the Operating Partnership, which used the funds to repay borrowings under the Credit Facility. Market capitalization. In connection with the Formation Transactions and property acquisitions consummated after the Formation Transactions, we have assumed various mortgages and other secured debt. As of December 31, 1998, the aggregate principal amount of this secured debt was $719 million, excluding unamortized debt premiums of $15.2 million. The secured debt bears interest at rates varying from 4.0% to 10.4% per annum (with a weighted average of 7.9%) and final maturity dates ranging from April 1999 to April 2014. We believe that the carrying value of the debt approximates its fair value on December 31, 1998. 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 intend to continue to structure our balance sheet in order to maintain an investment grade rating on our senior unsecured debt. The tables below summarizes our debt maturities and capitalization as of December 31, 1998. DEBT -------------------------------------------------- UNSECURED UNSECURED SECURED SENIOR DEBT CREDIT TOTAL YEAR DEBT SECURITIES FACILITY DEBT ---- -------- ----------- --------- ---------- (IN THOUSANDS) 1999..................................... $ 14,061 $ -- $ -- $ 14,061 2000..................................... 19,833 -- 234,000 253,833 2001..................................... 42,560 -- -- 42,560 2002..................................... 68,849 -- -- 68,849 2003..................................... 136,798 -- -- 136,798 2004..................................... 67,396 -- -- 67,396 2005..................................... 67,446 100,000 -- 167,446 2006..................................... 131,759 -- -- 131,759 2007..................................... 35,320 -- -- 35,320 2008..................................... 114,425 175,000 -- 289,425 Thereafter............................... 20,532 125,000 -- 145,532 -------- -------- -------- ---------- Sub-total.............................. 718,979 400,000 234,000 1,352,979 Unamortized premiums................... 15,217 -- -- 15,217 -------- -------- -------- ---------- Total consolidated debt.............. $734,196 $400,000 $234,000 1,368,196 ======== ======== ======== Our share of unconsolidated JV debt...... 20,186 ---------- Total debt........................... 1,388,382 JV Partner's share of consolidated JV debt................................... (40,275) ---------- Our share of total debt.............. $1,348,107 ========== 28 30 MARKET EQUITY AT 12/31/98 --------------------------------------------- SECURITY OUTSTANDING MARKET PRICE MARKET VALUE -------- ----------- ------------- ------------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Common Stock................................. 85,917,520 $22.00 $1,890,185 LP Units..................................... 4,447,839 22.00 97,853 ----------- ------------- Total................................ 90,365,359 $1,988,038 =========== ============= PREFERRED STOCK AND UNITS --------------------------------------------- DIVIDEND LIQUIDATION REDEMPTION SECURITY RATE PREFERENCE PROVISIONS -------- ----------- ------------- ------------- (IN THOUSANDS, EXCEPT PERCENTAGES) 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 ----------- ------------- Total/Weighted Average............... 8.66% $275,000 =========== ============= CAPITALIZATION RATIOS Consolidated debt plus our share of unconsolidated JV debt-to-total market capitalization....................... 38.0% Consolidated debt plus our share of unconsolidated debt less JV partners' share of consolidated debt-to-total market capitalization............................................ 36.9% Consolidated debt plus our share of unconsolidated JV debt plus preferred-to-total market capitalization............. 45.6% LIQUIDITY As of December 31, 1998, we had approximately $25.1 million in cash and cash equivalents and $266 million of additional available borrowings under the Credit Facility. We intend to use cash flow from operations, borrowings under the Credit Facility, other forms of secured and unsecured financing, proceeds from equity or debt offerings by the Company or the Operating Partnership (including issuances of Units in the Operating Partnership or its subsidiaries), and proceeds from divestiture of properties to fund acquisitions, development activities and capital expenditures and to provide for general working capital requirements. On December 4, 1998, the Company and the Operating Partnership declared a quarterly cash distribution of $0.3425 per common share and operating partnership unit, payable January 15, 1999 to stockholders and unitholders of record on December 31, 1998. The annual distribution per common share and unit for 1998 was $1.37. On December 4, 1998, the Company declared a cash dividend of $0.53125 per share on its Series A Preferred Stock, and the Operating Partnership declared a cash distribution of $0.53125 per unit on its Series A Preferred Units, for the three month period ended January 14, 1999, payable on January 15, 1999 to stockholders and unitholders of record as of December 31, 1998. The 1998 dividend for Series A Preferred Stock and Units was $0.9917, for the partial year commencing on July 27, 1998, which was the issuance date. On March 5, 1999, the Company and the Operating Partnership declared a quarterly cash distribution of $0.35 per common share and operating partnership unit, for the quarter ending March 31, 1999, payable April 15, 1999 to stockholders and unitholders of record as of March 31, 1999. This dividend (with an annualized rate of $1.40 per share) represents a 2.2% increase from the dividend for the fourth quarter and is consistent with our philosophy of retaining as much cash flow as allowed under the REIT tax rules while providing stockholders with dividend growth. On March 5, 1999, the Company declared a cash dividend of $0.53125 per share on its Series A Preferred Stock, and the Operating Partnership declared a cash distribution of $0.53125 per unit on its Series A Preferred Units, for the three month period ending April 14, 1999, payable on April 15, 1999 to stockholders and unitholders of record as of March 31, 1999. 29 31 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 and/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 December 31, 1998, our development pipeline included 18 projects representing a total estimated investment of $349.9 million upon completion. Of this total, approximately $156.0 million had been funded as of December 31, 1998, approximately $66.2 million is estimated to be required to complete projects under construction as of December 31, 1998, and the remainder represents estimated investments in either projects where construction has not yet begun or future phases of projects under construction. We presently expect to fund these expenditures with cash flow from operations, borrowings under the Credit Facility, debt or equity issuances, and net proceeds from property divestiture. Other than these capital items, we have no material capital commitments. During the period from January 1, 1998 to December 31, 1998, we invested: - $738.6 million in 228 industrial buildings, aggregating 18.8 million rentable square feet, - $31.8 million in 2 retail centers, aggregating 0.4 million rentable square feet, - $67.1 million in an unconsolidated limited partnership interest in an existing joint venture that owns 36 industrial buildings aggregating 4.0 million square feet. We funded these acquisitions through borrowings under the Credit Facility, cash, debt assumption and the issuance of units in the Operating Partnership. YEAR 2000 COMPLIANCE Our state of readiness. We utilize a number of computer software programs and operating systems across our entire organization, including applications used in financial business systems and various administrative functions. To the extent that our software applications contain source code that is unable to appropriately interpret the upcoming calendar year "2000" and beyond, some level of modification or replacement of such applications will be necessary. We are currently conducting a company-wide test of our financial and non-financial systems to ensure that our systems will adequately handle the year 2000 issue. Our current financial system generally provides for a four-digit year; however, the current system is not fully year 2000 compliant. We expect that our financial system will be fully year 2000 compliant once we complete a software upgrade in 1999. We are also currently surveying our property managers to determine if our non-financial systems (HVAC, security, lighting, and other building systems) at our Properties are year 2000 compliant and to determine the state of readiness of our tenants regarding their year 2000 compliance. Costs of addressing our year 2000 issues. Given the information known at this time about our systems, coupled with our ongoing, normal course-of-business efforts to upgrade or replace critical systems, as necessary, we do not expect year 2000 compliance costs to have any material adverse impact on our liquidity or ongoing results of operations. The costs of such assessment and remediation will be included in our general and administrative expenses. Although we can make no assurance, we currently do not expect that the year 2000 issue will materially affect our operations due to problems encountered by our suppliers, customers and lenders. Risks of our year 2000 issues. In light of our assessment and remediation efforts to date, we believe that any residual year 2000 risk is limited to non-critical business applications and support hardware. No assurance can be given, however, that all of our systems will be year 2000 compliant or that compliance will not have a material adverse effect on our future liquidity, results of operations or ability to service debt. 30 32 Our contingency plans. We are currently developing our contingency plan for all operations to address the most reasonably likely worst case scenarios regarding year 2000 compliance. We expect such contingency plan to be completed by the end of the year. FUNDS FROM OPERATIONS We believe that Funds from Operations ("FFO"), as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), is an appropriate measure of performance for an equity REIT. While FFO is a relevant and widely used measure of operating performance of REITs, it does not represent cash flow from operations or net income as defined by GAAP, and it should not be considered as an alternative to those indicators in evaluating liquidity or operating performance. Further, FFO as disclosed by other REITs may not be comparable. The following table reflects the calculation of our FFO for the fiscal years ended December 31, 1997 and 1998. The 1997 FFO was prepared on a pro forma basis (giving effect to the completion of the Formation Transactions, the IPO and certain 1997 property acquisitions and divestitures) as if they had occurred on January 1, 1997. 1997 1998 ------------ ------------ (IN THOUSANDS, EXCEPT SHARES) Income from operations before minority interests............ $ 103,903 $ 123,750 Real estate depreciation and amortization: Total depreciation and amortization....................... 45,886 57,464 Furniture, fixtures and equipment depreciation............ (173) (463) FFO attributable to minority interests(1)(2)................ (2,207) (5,899) Adjustments to derive FFO in unconsolidated joint venture(3): Company's share of net income............................. -- (1,750) Company's share of FFO.................................... -- 2,739 Series A preferred stock dividends.......................... -- (3,639) Series B & C preferred unit distributions................... -- (1,795) ----------- ----------- FFO(1)...................................................... $ 147,409 $ 170,407 =========== =========== Weighted average shares and units outstanding (diluted)..... 88,698,719 89,852,187 - --------------- (1) Funds from Operations ("FFO") is defined as income from operations before minority interest, gains or losses from sale of real estate and extraordinary losses plus real estate depreciation and adjustment to derive our pro rata share of the FFO of unconsolidated joint ventures, less minority interests' pro rata share of the FFO of consolidated joint ventures and perpetual preferred stock dividends. In accordance with NAREIT White Paper on FFO, we include the effects of straight-line rents in FFO. (2) Represents FFO attributable to minority interests in consolidated joint ventures for the periods presented, which has been computed as minority interests' share of net income before disposal of properties plus minority interests' share of real estate-related depreciation and amortization of the consolidated joint ventures for such periods. Such minority interests are not exchangeable into shares of Common Stock. (3) Represents our pro rata share of FFO in unconsolidated joint ventures for the periods 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 venture for such periods. BUSINESS RISKS Our operations involve various risks which could have adverse consequences to the Company. Such 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 31 33 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 holders of our common stock 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 or retail space or a reduction in demand for industrial or retail space, the attractiveness of our properties to potential tenants, 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 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 tenants were unable to pay rent or if we were unable to rent our industrial or retail 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 approximately 32.9% of the leased square footage of our properties as of December 31, 1998 will expire on or prior to December 31, 2000, with leases on 13.0% of the leased square footage of our properties as of December 31, 1998 expiring during the 12 months ending December 31, 1999. In addition, numerous properties compete with our properties in attracting tenants 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 ability to pay distributions on, and the market price of, our common 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 Code and related regulations on a REIT holding property for sale may affect our ability to sell properties without adversely affecting distributions to our stockholders. The relative illiquidity of our holdings, 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 ability to pay distributions on, and the market price of, our common stock. A SIGNIFICANT NUMBER OF OUR PROPERTIES ARE LOCATED IN CALIFORNIA Our properties located in California as of December 31, 1998 represented approximately 22.0% of the aggregate square footage of our properties as of December 31, 1998 and approximately 29.5% of our Annualized Base Rent. Annualized Base Rent means the monthly contractual amount under existing leases at December 31, 1998, 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 commercial 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 ability to pay distributions on, and the market price of, our common stock. Certain of our properties are also subject to possible loss from seismic activity. In the event that the transactions with BPP Retail and BPP are consummated, we will dispose of all our retail centers located in California. 32 34 OUR PROPERTIES ARE CURRENTLY CONCENTRATED IN THE INDUSTRIAL AND RETAIL SECTORS Our properties currently are concentrated predominantly in the industrial and retail commercial real estate sectors. However, in the event that the transactions with BPP Retail and BPP are consummated as planned, our properties will be concentrated predominately in the industrial real estate sector. Our concentration in certain property types may expose us to the risk of economic downturns in these sectors to a greater extent than if our portfolio also included other property types. In the event that the transactions with BPP Retail and BPP are consummated, our exposure to the risk of economic downturns in the industrial real estate sector will be greater. As a result of such concentration, economic downturns in these sectors 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 common stock. 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 common stock. A number of our properties are located in areas that are known to be subject to earthquake activity, including California where, as of December 31, 1998, 154 industrial buildings aggregating 12.2 million rentable square feet (representing 19.1% of our properties based on aggregate square footage) and 11 retail centers aggregating 1.8 million rentable square feet (representing 2.9% of our properties based on aggregate square footage) are located. In the event that the transactions with BPP Retail and BPP are consummated, we will dispose of all our retail centers located in California. 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. See "Business -- Business and Operating Strategies -- The Preferred Stock Subsidiaries." 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 December 31, 1998, we have ownership interests in 21 joint ventures, limited liability companies or partnerships with third parties, as well as an interest in one unconsolidated entity. Assuming that the transactions currently contemplated with BPP Retail and BPP are consummated, we will have ownership interests in 16 joint ventures, limited liability companies or partnerships with third parties. We may make additional investments through these ventures in the future and presently plan to do so with clients of AMB Investment Management and certain Development Alliance Partners, who share certain approval rights over 33 35 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 policy with respect to maintaining our qualification as a REIT; 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 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 common stock. WE MAY BE UNABLE TO CONSUMMATE ACQUISITIONS ON ADVANTAGEOUS TERMS We intend to continue to acquire industrial and, to a lesser extent, certain value-added retail properties. Acquisitions of industrial and retail 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 REITs and private institutional investment funds. We expect that future acquisitions will be financed through a combination of borrowings under the Credit Facility, proceeds from equity or debt offerings by us or the Operating Partnership (including issuances of limited partnership units) and proceeds from the transactions pending with BPP Retail and BPP, 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, the failure of acquisitions to conform with our expectations or investment criteria, or our failure to timely reinvest the proceeds from the transactions with BPP Retail and BPP could adversely affect our financial condition, results of operations, cash flow and ability to pay distributions on, and the market price of, our common 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; 34 36 - 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 common 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 capital stock. In spite of the foregoing 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 and would do so, for example, if it were necessary for us to continue to qualify as a REIT. 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 common stock. SCHEDULED DEBT PAYMENTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION We are subject to risks normally associated with debt financing, including the risks that our 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 December 31, 1998, we had total debt outstanding of approximately $1.4 billion including: - approximately $734.2 million of secured indebtedness (including unamortized debt premiums of approximately $15.2 million) with an average maturity of seven years and a weighted average interest rate of 7.9%; - approximately $234.0 million outstanding under our unsecured $500.0 million credit facility (the "Credit Facility") with a maturity date of November 2000 and a weighted average interest rate of 6.53%; and - $400 million aggregate principal amount of unsecured senior debt securities with maturities in June 2008, 2015 and 2018 and a weighted average interest rate of 7.18%. In the event that the transactions with BPP Retail and BPP are consummated, we currently anticipate the repayment of approximately $240.0 million of debt, including $178.7 million of secured indebtedness (including premiums of $5.9 million). 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 35 37 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 common 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 common stock. RISING INTEREST RATES COULD ADVERSELY AFFECT OUR CASH FLOW As of December 31, 1998, we had $234.0 million outstanding under the Credit Facility. 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 common 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 REIT under the Code, we are required each year to distribute to our stockholders at least 95% of our REIT 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 December 31, 1998, we had 19 non-recourse secured loans which are cross-collateralized by 22 properties. As of December 31, 1998, we had $249.8 million outstanding on these loans. In the event that all the transactions with BPP Retail and BPP are consummated, we currently anticipate the repayment of 10 loans aggregating $178.7 million, which are secured by 13 properties. 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 common 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 common stock. CONTINGENT OR UNKNOWN LIABILITIES COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION Our predecessors have been in existence for varying lengths of time up to 15 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 prospectus. 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 (directly or indirectly) in connection with the allocation of the Units and/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 36 38 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 tenants, 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; - tax liabilities; and - claims for indemnification by the officers and directors of our predecessors and others indemnified by these entities. Certain tenants 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. 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 which are not covered by the indemnity escrow agreement that we entered into with our predecessors in connection with the formation transactions or 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 common stock. FAILURE TO CONSUMMATE THE TRANSACTIONS WITH BPP RETAIL AND BPP On March 9, 1999, we signed a series of definitive agreements with BPP Retail, a co-investment entity between BPP and CalPERS, pursuant to which BPP Retail will acquire 28 of our retail shopping centers, totaling 5.1 million square feet, for an aggregate price of $663.4 million. BPP Retail will acquire the centers in separate transactions, which we currently expect to close on or about April 30, 1999, July 31, 1999 and December 1, 1999. In addition, we have entered into a definitive agreement, subject to a financing condition, with BPP, pursuant to which BPP will acquire six additional retail centers, totaling 1.5 million square feet, for $284.4 million. Assuming satisfaction or waiver of this condition we currently expect this transaction to close by December 31, 1999. Although none of the transactions has a discretionary due diligence period (other than the transaction with BPP to the extent of the financing condition), all of the transactions are subject to certain customary closing conditions, which are generally applied on a property-by-property basis. Additionally, while BPP Retail has posted certain initial deposits aggregating $25 million on the transactions, BPP Retail's liability in the event of its default under a definitive agreement is limited to its deposit. Accordingly, there can be no assurance that the transactions will close as scheduled or close at all, and it is possible that the transactions may close with respect to just a portion of the properties currently subject to the agreements. In the event that one or more of the transactions fail to close, or a closing is significantly delayed, net proceeds from divestitures of properties will not be available to the same extent to fund our acquisitions and developments. Any such failure or delay in any of the closings may also make us unable to repay certain of our indebtedness with the net proceeds as we currently intend and could require us to borrow additional funds or seek other forms of financing. 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 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. 37 39 These entities have also agreed that they will not make any further investments in industrial or retail 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 with us. 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 or retail 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 prospectus. 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 AMB Development, L.P. owns interests in 11 retail development projects in the U.S., each of which consists of a single free-standing Walgreens drugstore. In addition, Messrs. Abbey, Moghadam and Burke, each a founder and director, own less than 1% interests in two partnerships which 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 REITs; - certain interests in and rights to developed and undeveloped real property located outside the United States; - certain passive interests, that we do not believe are material, in real estate businesses in which such persons were previously employed; and - certain other de minimis holdings in equity securities of real estate companies. 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 as of December 31, 1998 at approximately $1.2 million. Messrs. Abbey, Moghadam and Burke each have an approximately 26.7% interest in the partnership, each valued as of December 31, 1998 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 such person, 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 such 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 the Board of Directors with respect to that transaction. OUR ROLE AS GENERAL PARTNER OF THE OPERATING PARTNERSHIP MAY CONFLICT WITH THE INTERESTS OF OUR 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 38 40 addition, those persons holding limited partnership Units will have the right to vote as a class on certain amendments to the Third Amended and Restated Agreement of Limited Partnership of the Operating Partnership (as amended, the "Partnership Agreement") 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 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 March 12, 1999, our three largest stockholders, Ameritech Pension Trust, the City and County of San Francisco Employees' Retirement System and Southern Company Services, Inc., beneficially owned approximately 31.1% of our outstanding common stock. In addition, our executive officers and directors beneficially owned 5.6% of our outstanding common stock as of the same date, 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 the 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 SUFFER LOSSES IF WE FAIL TO ENFORCE THE TERMS OF CERTAIN AGREEMENTS As holders of shares of our common stock and, potentially, Performance Units, certain of our directors and officers could have a conflict of interest with respect to their obligations as directors and officers to vigorously enforce the terms of certain of the agreements relating to our formation transactions. The potential failure to enforce the material terms of those agreements could result in a monetary loss to us, which loss could have a material adverse effect on our financial condition, results of operations, cash flow and ability to pay distributions on, and the market price of, our common stock. OWNERSHIP OF COMMON 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 our common stock. To maintain our qualification as a REIT 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 Code to include certain entities) during the last half of a taxable year after the first taxable year for which a REIT election is made. Furthermore, after the first taxable year for which a REIT 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 REIT gross income tests of the Code. To facilitate maintenance of our qualification as a REIT for federal income tax purposes, we will prohibit the ownership, actually or by virtue of the constructive ownership provisions of the 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 and any shares of our Series C 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 39 41 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. The Board of Directors has waived the ownership limit applicable to our common stock with respect to Ameritech Pension Trust, allowing it to own up to 14.9% of our common stock and, under some circumstances, allowing it to own up to 19.6%. However, we conditioned this waiver upon the receipt of undertakings and representations from Ameritech Pension Trust which we believed were reasonably necessary in order for us to conclude that the waiver would not cause us to fail to qualify as a REIT. 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 and one or more other series of preferred stock and to establish the preferences, rights and other terms of any series 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 of preferred stock that could delay, defer or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders. Our Charter, our 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 our 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 fundamental investment policy to maintain our qualification as a REIT (unless a change is approved by the Board of Directors under certain circumstances), the 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. 40 42 VARIOUS MARKET CONDITIONS AFFECT THE PRICE OF OUR COMMON STOCK As with other publicly-traded equity securities, the market price of our common 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 common stock are the following: - the extent of investor interest in us; - the general reputation of REITs 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 common 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 common 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 common stock. EARNINGS AND CASH DISTRIBUTIONS, ASSET VALUE AND MARKET INTEREST RATES AFFECT THE PRICE OF OUR COMMON STOCK The market value of the equity securities of a REIT generally is based primarily upon the market's perception of the REIT'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 common 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 common 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 common stock. Another factor that may influence the price of our common stock will be the distribution yield on our common stock (as a percentage of the price of our common stock) relative to market interest rates. An increase in market interest rates might lead prospective purchasers of our common stock to expect a higher distribution yield, which would adversely affect the market price of our common stock. If the market price of our common stock declines significantly, we might breach certain covenants with respect to debt obligations, which might adversely affect our liquidity and our ability to make future acquisitions and pay distributions to our stockholders. 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 common 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 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. 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. 41 43 COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT Under the Americans with Disabilities Act of 1990 (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 COSTLY 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 dry cleaners that operate on-site dry cleaning plants, to owners and operators of gas stations or to owners or operators of other businesses that use, store or otherwise handle petroleum products or other hazardous or toxic substances. Some of these properties contain, or may have contained, underground storage tanks for the storage of petroleum products and 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 underground storage tanks used to store 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 therein, 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. In connection with certain of the properties to be acquired by BPP Retail and BPP, we have agreed to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on such properties following the applicable closing dates. All of our properties were subject to a Phase I or similar environmental assessments by independent environmental consultants at the time of acquisition or shortly after acquisition. Phase I assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. Phase I assessments generally include an historical review, a public records review, an investigation of the surveyed site and surrounding properties, and preparation and issuance of a 42 44 written report, but do not include soil sampling or subsurface investigations and typically do not include an asbestos survey. 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. Some of the environmental assessments of our properties do not contain a comprehensive review of the past uses of the properties and/or the surrounding properties. 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 common 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 common stock. FEDERAL INCOME TAX RISKS OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE SERIOUS ADVERSE CONSEQUENCES TO OUR STOCKHOLDERS We intend to operate so as to qualify as a REIT under the Code. We believe that we have been organized and have operated in a manner which would allow us to qualify as a REIT under the Code beginning with our taxable year ended December 31, 1997. However, it is possible that we have been organized or have operated in a manner which would not allow us to qualify as a REIT, or that our future operations could cause us to fail to qualify. Qualification as a REIT requires us to satisfy numerous requirements (some on an annual and quarterly basis) established under highly technical and complex 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 REIT, at least 95% of our gross income in any year must be derived from qualifying sources, and we must pay dividends to stockholders aggregating annually at least 95% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding capital gains). 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 REIT 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 REIT. If we fail to qualify as a REIT in any taxable year, we will be subject to 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 REIT for the four 43 45 taxable years following the year during which we lost qualification. If we lose our REIT 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 PAY SOME TAXES Even if we qualify as a REIT, we will be subject to certain federal, state and local taxes on our income and property. In addition, the net taxable income, if any, from the activities conducted through the Preferred Stock Subsidiaries will be subject to federal and state income tax. 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 Code, any gain resulting from transfers of properties that are held as inventory or primarily for sale to customers in the ordinary course of business is treated as income from a prohibited transaction that is subject to a 100% penalty tax. 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 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 and the Internal Revenue Service may contend that certain transfers or disposals of properties by us (including, possibly, some or all of the properties that are subject to the agreements with BPP Retail and BPP) are prohibited transactions. While we believe that the Internal Revenue Service would not prevail in any such dispute, any adverse finding by the Internal Revenue Service that a transfer or disposition of property constituted a prohibited transaction would subject us to a 100% penalty tax on any gain from such prohibited transaction. In addition, any income from a prohibited transaction may adversely affect our ability to satisfy the income tests for qualification as a REIT for federal income tax purposes. WE ARE DEPENDENT ON OUR KEY PERSONNEL We depend on the efforts of our executive officers, particularly Messrs. Abbey, Moghadam and Burke, the Chairman of our Investment Committee, our Chief Executive Officer and the Chairman of our Board of Directors, respectively. 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 common 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. 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 common stock could be adversely affected. THE PREFERRED STOCK SUBSIDIARIES WE DO NOT CONTROL THE ACTIVITIES OF THE PREFERRED STOCK SUBSIDIARIES The Operating Partnership owns 100% of the non-voting preferred stock of AMB Investment Management and Headlands Realty Corporation (representing approximately 95% of the economic interest in each entity). We refer to these entities as the "Preferred Stock Subsidiaries." Certain of our current and former executive officers and an officer of AMB Investment Management own all of the outstanding voting common stock of AMB Investment Management (representing approximately 5% of the economic interest in AMB Investment Management). Certain of our current and former executive officers and an officer 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 the Preferred Stock Subsidiaries permits us to share in the income of the Preferred Stock Subsidiaries while maintaining our status as a REIT. We receive substantially all of the economic benefit of 44 46 the businesses carried on by the Preferred Stock Subsidiaries through our right to receive dividends through the Operating Partnership. However, we are not able to elect the Preferred Stock Subsidiaries' directors or officers and, as a result, we do not have the ability to influence the operation of the Preferred Stock Subsidiaries or to require that the Preferred Stock Subsidiaries' boards of directors declare and pay cash dividends on the non-voting stock of the Preferred Stock Subsidiaries held by the Operating Partnership. The boards of directors and management of the Preferred Stock Subsidiaries 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 common stock. In addition, the Preferred Stock Subsidiaries are subject to tax on their income, reducing their cash available for distribution to the Operating Partnership. AMB INVESTMENT MANAGEMENT MAY NOT BE ABLE TO GENERATE SUFFICIENT FEES Fees earned by AMB Investment Management 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'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. ITEM 7A. QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk includes the rising interest rates in connection with the Company's unsecured credit facility and other variable rate borrowings and the ability of the Company to incur more debt without stockholder approval, thereby increasing our debt service obligations, which could adversely affect the Company's cash flows. See "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Capital Resources -- Market Capitalization." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See "Item 14: Exhibits, Financial Statement Schedules, and Reports of Form 8-K." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEMS 10, 11, 12, AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 10, Item 11, Item 12 and Item 13 will be contained in a definitive proxy statement for our Annual Meeting of Stockholders which we anticipate will be filed no later than 120 days after the end of our fiscal year pursuant to Regulation 14A and accordingly these items have been omitted in accordance with General Instruction G(3) to Form 10-K. 45 47 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) and (2) FINANCIAL STATEMENTS AND SCHEDULES: The following consolidated financial information is included as a separate section of this report on Form 10-K. PAGE ---- Report of Independent Public Accountants.................... F-1 Consolidated Balance Sheets as of December 31, 1997 and 1998...................................................... F-2 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998.......................... F-3 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998.......................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998.............. F-5 Notes to Consolidated Financial Statements.................. F-6 Schedule III -- Real Estate and Accumulated Depreciation.... S-1 All other schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto. (3) EXHIBITS: EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant's Statement on Form S-11 (No. 333-35915)). 3.2 Certificate of Correction of the Registrant's Articles Supplementary establishing and fixing the rights and preferences of the 8 1/2% Series A Cumulative Redeemable Preferred Stock. 3.3 Articles Supplementary establishing and fixing the rights and preferences of the 8 5/8% Series B Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on January 7, 1999). 3.4 Articles of Supplementary establishing and fixing the rights and preferences of the 8.75% Series C Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.2 of the Registrant's Current Report on Form 8-K filed on January 7, 1999). 3.5 First Amended and Restated Bylaws of the Registrant. 4.1 Form of Certificate for Common Stock of the Registrant (incorporated by reference to Exhibit 3.3 of the Registrant's Registration Statement on Form S-11 (No. 333-35915)). 4.2 Form of Certificate for the Registrant's 8 1/2% Series A Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.4 of the Registrant's Registration Statement on Form S-11 (No. 333-58107)). 4.3 Indenture dated as of June 30, 1998 by and among the Operating Partnership, the Company and State Street Bank and Trust Company of California, N.A., as trustee (incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form S-11 (No. 333-49163)). 4.4 First Supplemental Indenture dated as of June 30, 1998 by and among the Operating Partnership, the Company and State Street Bank and Trust Company of California, N.A., as trustee (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement Form S-11 (No. 333-49163)). 4.5 Second Supplemental Indenture dated as of June 30, 1998 by and among the Operating Partnership, the Company and State Street Bank and Trust Company of California, N.A., as trustee (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-11 (No. 333-49163)). 46 48 EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.6 Third Supplemental Indenture dated as of June 30, 1998 by and among the Operating Partnership, the Company and State Street Bank and Trust Company of California, N.A., as trustee (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-11 (No. 333-49163)). 4.7 Specimen of 7.10% Notes due 2008 (included in the First Supplemental Indenture incorporated by reference as Exhibit 4.2 to the Company's Registration Statement on Form S-11 (No. 333-49163)). 4.8 Specimen of 7.50% Notes due 2018 (included in the Second Supplemental Indenture incorporated by reference as Exhibit 4.3 to the Company's Registration Statement on Form S-11 (No. 333-49163)). 4.9 Specimen of 6.90% Reset Put Securities due 2015 (included in the Third Supplemental Indenture incorporated by reference as Exhibit 4.4 to the Company's Registration Statement on Form S-11 (No. 333-49163)). 10.1 Third Amended and Restated Agreement of Limited Partnership of AMB Property, L.P. (incorporated by reference to Exhibit 99.1 of the Registrant's Registration Statement of Form S-3 (No. 333-68291)). 10.2 Form of Registration Rights Agreement among the Registrant and the persons named therein (incorporated by reference to Exhibit 10.2 of the Registrant's Registration Statement on Form S-11 (No. 333-35915)). 10.3 Second Amended and Restated Credit Agreement, dated November 26, 1997. 10.4 Amendment to Second Amended and Restated Revolving Credit Agreement made as of May 29, 1998. 10.5 Second Amendment to Second Amended and Restated Revolving Credit Agreement made as of September 30, 1998. 10.6 Form of Change in Control and Noncompetition Agreement between the Registrant and Executive Officers. 10.7 The First Amended and Restated 1997 Stock Option and Incentive Plan of the Registrant. 10.8 The First Amendment to the First Amended Restated Stock Option and Incentive Plan of the Registrant. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Arthur Andersen LLP. 24.1 Powers of Attorney (included in Part IV of this Form 10-K). 27.1 Financial Data Schedule -- AMB Property Corporation. (b) REPORTS ON FORM 8-K: On December 2, 1998 the Registrant filed a Form 8-K, dated December 2, 1998, filing financial statements with respect to property acquisitions. On January 7, 1999 the Registrant filed a Form 8-K, dated November 12, 1998, reporting the private placement of the Series B Units and the Series C Units. (c) EXHIBITS: See Item 14(a)(3) above. (d) FINANCIAL STATEMENT SCHEDULES: See Item 14(a)(1) and (2) above. 47 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on March 23, 1999. AMB PROPERTY CORPORATION By: /s/ HAMID R. MOGHADAM ------------------------------------ Hamid R. Moghadam President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors of AMB Property Corporation, hereby severally constitute Hamid R. Moghadam, David S. Fries, John T. Roberts, Jr., and Michael A. Coke, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, the Form 10-K filed herewith and any and all amendments to said Form 10-K, and generally to do all such things in our names and in our capacities as officers and directors to enable AMB Property Corporation to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Form 10-K and any and all amendments thereto. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. NAME TITLE DATE ---- ----- ---- /s/ HAMID R. MOGHADAM President and Chief Executive March 23, 1999 - --------------------------------------------------- Officer, Director (Principal Hamid R. Moghadam Executive Officer) /s/ T. ROBERT BURKE Chairman of the Board March 23, 1999 - --------------------------------------------------- T. Robert Burke /s/ DOUGLAS D. ABBEY Chairman of the Investment March 23, 1999 - --------------------------------------------------- Committee, Director Douglas D. Abbey Director - --------------------------------------------------- Daniel H. Case, III /s/ ROBERT H. EDELSTEIN, PH.D Director March 23, 1999 - --------------------------------------------------- Robert H. Edelstein, Ph.D /s/ LYNN M. SEDWAY Director March 23, 1999 - --------------------------------------------------- Lynn M. Sedway /s/ JEFFREY L. SKELTON, PH.D Director March 23, 1999 - --------------------------------------------------- Jeffrey L. Skelton, Ph.D Director - --------------------------------------------------- Thomas W. Tusher /s/ CARYL B. WELBORN, ESQ. Director March 23, 1999 - --------------------------------------------------- Caryl B. Welborn, Esq. /s/ MICHAEL A. COKE Chief Financial Officer and March 23, 1999 - --------------------------------------------------- Senior Vice President (Principal Michael A. Coke Financial Officer and Principal Accounting Officer) 48 50 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of AMB Property Corporation: We have audited the accompanying consolidated balance sheets of AMB Property Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AMB Property Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to the financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Francisco, California February 2, 1999 F-1 51 AMB PROPERTY CORPORATION CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1998 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS 1997 1998 ---------- ---------- Investments in real estate: Land and improvements..................................... $ 550,635 $ 740,680 Buildings and improvements................................ 1,822,516 2,445,104 Construction in progress.................................. 69,848 183,276 ---------- ---------- Total investments in properties......................... 2,442,999 3,369,060 Accumulated depreciation and amortization................. (4,153) (58,404) ---------- ---------- Net investments in properties........................... 2,438,846 3,310,656 Investment in unconsolidated joint venture.................. -- 57,655 Properties held for divestiture, net........................ -- 115,050 ---------- ---------- Net investments in real estate.......................... 2,438,846 3,483,361 Cash and cash equivalents................................... 39,968 25,137 Other assets................................................ 27,441 54,387 ---------- ---------- Total assets............................................ $2,506,255 $3,562,885 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Debt: Secured debt.............................................. $ 535,652 $ 734,196 Unsecured senior debt securities.......................... -- 400,000 Unsecured credit facility................................. 150,000 234,000 ---------- ---------- Total debt.............................................. 685,652 1,368,196 Other liabilities........................................... 49,350 104,305 Payable to affiliates....................................... 38,071 -- ---------- ---------- Total liabilities....................................... 773,073 1,472,501 Commitments and contingencies (note 11)..................... -- -- Minority interests.......................................... 65,152 325,024 Stockholders' equity: Series A preferred stock, cumulative, redeemable, $.01 par value, 100,000,000 shares authorized, 4,000,000 issued and outstanding, $100,000 liquidation preference........ -- 96,100 Common stock $.01 par value, 500,000,000 shares authorized, 85,917,520 issued and outstanding........... 859 859 Additional paid-in capital................................ 1,667,171 1,668,401 Retained earnings......................................... -- -- ---------- ---------- Total stockholders' equity.............................. 1,668,030 1,765,360 ---------- ---------- Total liabilities and stockholders' equity.............. $2,506,255 $3,562,885 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. F-2 52 AMB PROPERTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1996 1997 1998 ---------- ----------- ----------- REVENUES Rental revenues........................................... $ -- $ 26,465 $ 354,658 Investment management and other income.................... 23,991 29,597 4,229 ---------- ----------- ----------- Total revenues...................................... 23,991 56,062 358,887 OPERATING EXPENSES Property operating expenses............................... -- 5,312 47,856 Real estate taxes......................................... -- 3,587 48,218 General and administrative................................ -- 1,197 11,929 Interest, including amortization.......................... -- 3,528 69,670 Depreciation and amortization............................. -- 4,195 57,464 Investment management expenses............................ 16,851 19,358 -- ---------- ----------- ----------- Total operating expenses............................ 16,851 37,177 235,137 ---------- ----------- ----------- Income from operations before minority interests.... 7,140 18,885 123,750 Minority interests' share of net income................... (137) (657) (11,157) ---------- ----------- ----------- Net income.......................................... $ 7,003 $ 18,228 $ 112,593 Series A preferred stock dividends........................ -- -- (3,639) ---------- ----------- ----------- Net income available to common stockholders......... $ 7,003 $ 18,228 $ 108,954 ========== =========== =========== INCOME PER SHARE OF COMMON STOCK Basic..................................................... $ 1.38 $ 1.39 $ 1.27 ========== =========== =========== Diluted................................................... $ 1.38 $ 1.38 $ 1.26 ========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic..................................................... 5,079,855 13,140,218 85,876,383 ========== =========== =========== Diluted................................................... 5,079,855 13,168,036 86,235,176 ========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-3 53 AMB PROPERTY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) 1996 1997 1998 ------ --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income.................................................. $7,003 $ 18,228 $112,593 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. -- 4,195 57,464 Straight-line rents....................................... -- (901) (10,921) Amortization of debt premiums and financing costs......... -- (266) (2,730) Minority interests' share of net income................... 137 657 11,157 Equity in (income) loss of AMB Investment Management...... -- (61) 313 Equity earnings of unconsolidated joint venture........... -- -- (1,730) Changes in assets and liabilities: Other assets............................................ (249) (11,873) (9,377) Other liabilities....................................... (25) 2,301 20,411 ------ --------- -------- Net cash provided by operating activities........... 6,866 12,280 177,180 CASH FLOWS FROM INVESTING ACTIVITIES Cash paid for property acquisitions......................... -- -- (564,304) Additions to properties..................................... -- (228,432) -- Additions to buildings, development costs, and improvements.............................................. -- (4,375) (137,913) Acquisition of interest in unconsolidated joint venture..... -- -- (67,376) Distribution received from unconsolidated joint venture..... -- -- 11,451 Reduction of payable to affiliates in connection with Formation Transactions.................................... -- -- (38,071) ------ --------- -------- Net cash used for investing activities.............. -- (232,807) (796,213) CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock.................................... -- 317,009 -- Borrowings on unsecured credit facility..................... -- 150,000 745,000 Borrowings on secured debt.................................. -- 850 58,725 Payment of unsecured credit facility........................ -- (182,000) (661,000) Payments on secured debt.................................... -- (516) (79,380) Payment of financing fees................................... -- (900) (7,704) Net proceeds from issuance of senior debt securities........ -- -- 399,166 Net proceeds from issuance of Series A preferred stock...... -- -- 96,100 Net proceeds from issuance of Series B & C preferred units..................................................... -- -- 167,993 Dividends paid to common stockholders and preferred stockholders.............................................. -- (11,506) (88,236) Dividends paid to Predecessor stockholders.................. (5,262) (16,404) -- Distributions to minority interests......................... (34) -- (26,462) Principal payment of notes receivable from stockholders of Predecessor............................................... 318 869 -- ------ --------- -------- Net cash provided by (used in) financing activities.......................................... (4,978) 257,402 604,202 ------ --------- -------- Net increase (decrease) in cash and cash equivalents........ 1,888 36,875 (14,831) Cash and cash equivalents at beginning of period............ 1,205 3,093 39,968 ------ --------- -------- Cash and cash equivalents at end of period.................. $3,093 $ 39,968 $ 25,137 ====== ========= ======== The accompanying notes are an integral part of these consolidated financial statements. F-4 54 AMB PROPERTY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) COMMON STOCK NOTES SERIES A ---------------------- ADDITIONAL RECEIVABLE PREFERRED NUMBER PAID-IN RETAINED FROM STOCK OF SHARES AMOUNT CAPITAL EARNINGS STOCKHOLDERS TOTAL --------- ---------- --------- ---------- --------- ------------ ---------- PREDECESSOR Balance at December 31, 1995.... $ -- 5,079,855 $1,042 $ 1,298 $ 2,781 $(880) $ 4,241 Net Income.................... -- -- -- -- 7,003 -- 7,003 Dividends declared and paid... -- -- -- -- (5,262) -- (5,262) Principal payment of notes Receivable from stockholders................ -- -- -- -- -- 318 318 Issuance of common stock for notes....................... -- 101,595 307 -- -- (307) -- ------- ---------- ------ ---------- --------- ----- ---------- Balance at December 31, 1996.... -- 5,181,450 1,349 1,298 4,522 (869) 6,300 AMB PROPERTY CORPORATION Net Income.................... -- -- -- -- 18,228 -- 18,228 Dividends declared and paid to Predecessor stockholders.... -- -- (990) (1,298) (14,116) -- (16,404) Principal payment of notes Receivable from stockholders................ -- -- -- -- -- 869 869 Exchange of Predecessor Shares for shares of AMB Property Corporation, net............ -- (434,834) (312) 312 -- -- -- Issuance of common stock for Properties.................. -- 65,022,185 651 1,369,740 -- -- 1,370,391 Issuance of common stock, net of Offering costs of $38,068..................... -- 16,100,000 161 299,871 -- -- 300,032 Issuance of restricted stock....................... -- 5,712 -- 120 -- -- 120 Distributions paid to AMB Property Corporation stockholders................ -- -- -- (2,872) (8,634) -- (11,506) ------- ---------- ------ ---------- --------- ----- ---------- Balance at December 31, 1997.... -- 85,874,513 859 1,667,171 -- -- 1,668,030 Net Income.................... 3,639 -- -- -- 108,954 -- 112,593 Issuance of preferred stock, net of offering costs....... 96,100 -- -- -- -- -- 96,100 Issuance of restricted stock....................... -- 43,007 -- 930 -- -- 930 Reallocation of Limited Partners' interests in Operating Partnership....... -- -- -- 7,215 -- -- 7,215 Dividends declared............ (3,639) -- -- (6,915) (108,954) -- (119,508) ------- ---------- ------ ---------- --------- ----- ---------- Balance at December 31, 1998.... $96,100 85,917,520 $ 859 $1,668,401 $ -- $ -- $1,765,360 ======= ========== ====== ========== ========= ===== ========== The accompanying notes are an integral part of these consolidated financial statements. F-5 55 AMB PROPERTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND SQUARE FEET DATA) 1. ORGANIZATION AND FORMATION OF COMPANY 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 (the "IPO") on November 26, 1997. The Company elected to be taxed as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986 (the "Code"), 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 REIT. 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 and community shopping centers in target markets nationwide. Unless the context otherwise requires, the "Company" means AMB Property Corporation, the Operating Partnership and its other controlled subsidiaries. The Company and the Operating Partnership were formed shortly before consummation of the IPO. AMB Institutional Realty Advisors, Inc., a California corporation and registered investment advisor (the "Predecessor") formed AMB Property Corporation, a wholly owned subsidiary, and merged with and into the Company (the "Merger") in exchange for 4,746,616 shares of the Company's Common Stock. In addition, the Company and the Operating Partnership acquired, through a series of mergers and other transactions, 31.8 million rentable square feet of industrial property and 6.3 million rentable square feet of retail property in exchange for 65,022,185 shares of the Company's Common Stock, 2,542,163 limited partner interests ("LP Units") in the Operating Partnership, the assumption of debt and, to a limited extent, cash. The net assets of the Predecessor and the properties acquired with Common Stock were contributed to the Operating Partnership in exchange for 69,768,801 LP Units. The purchase method of accounting was applied to the acquisition of the properties. Collectively, the Merger and the other formation transactions described above are referred to as the "Formation Transactions." On November 26, 1997, the Company completed its IPO of 16,100,000 shares of Common Stock, $0.01 par value per share (the "Common Stock"), for $21.00 per share, resulting in gross offering proceeds of approximately $338,100. The net proceeds of approximately $300,032 were used to repay indebtedness, to purchase interests from certain investors who elected not to receive shares or units in connection with the Formation Transactions, to fund property acquisitions, and for general corporate working capital requirements. As of December 31, 1998, the Company owned an approximate 95.1% general partner interest in the Operating Partnership. The remaining 4.9% limited partner interest is owned by nonaffiliated investors. For local law purposes, properties in certain states are owned through limited partnerships and limited liability companies owned 99% by the Operating Partnership and 1% by a wholly owned subsidiary of the Company. 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. In connection with the Formation Transactions, the Operating Partnership formed AMB Investment Management, Inc., a Maryland corporation ("AMB Investment Management"). 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 an officer of AMB Investment Management collectively purchased 100% of the Investment Management Subsidiary's voting common stock (representing a 5% economic interest therein). The Operating Partnership accounts for its investment in AMB Investment Management using the equity method of accounting. AMB Investment Management was formed to succeed to the Predecessor's investment management business of providing real estate investment management services on a fee basis to clients. The Operating Partnership also owns 100% of the non-voting preferred stock of Headlands Realty Corporation, a Maryland corporation (representing a 95% F-6 56 economic interest therein). Certain current and former executive officers of the company and an officer 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. As of December 31, 1998, the Company owned 582 industrial buildings (the "Industrial Properties") and 38 retail centers (the "Retail Properties") located in 30 markets throughout the United States. The Industrial Properties, principally warehouse distribution buildings, encompass approximately 56.6 million rentable square feet and, as of December 31, 1998, were 96.0% leased to over 1,600 tenants. The Retail Properties, principally grocer-anchored community shopping centers, encompass approximately 7.0 million rentable square feet and, as of the same date, were 94.6% leased to over 900 tenants. The Industrial Properties and the Retail Properties collectively are referred to as the "Properties." 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Generally Accepted Accounting Principles These consolidated financial statements have been prepared in accordance with generally accepted accounting principles using the accrual method of accounting. 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. Principles of Consolidation The accompanying consolidated financial statements include the financial position, results of operations and cash flows of the Company, its wholly owned qualified REIT subsidiaries, the Operating Partnership, and twenty-one joint ventures (the "Joint Ventures") in which the Company has a controlling interest. The Company also has a 56.1% non-controlling limited partnership interest in one unconsolidated real estate joint venture which is accounted for under the equity method. Third-party equity interests in the Operating Partnership and the Joint Ventures are reflected as minority interests in the consolidated financial statements. All significant intercompany amounts have been eliminated. Basis of Presentation The consolidated financial statements of the Company for 1997 include the results of operations of the Company, including property operations for the period from November 26, 1997 (the commencement of operations as a fully integrated real estate company) to December 31, 1997 and the results of the Company's Predecessor, an investment manager, for the period from January 1, 1997 to November 25, 1997. The consolidated financial statements for 1998 represent the results of operations of the Company for the year ended December 31, 1998. Investments in Real Estate Investments in real estate are stated at the lower of depreciated cost or net realizable value. Net realizable value for financial reporting purposes is reviewed for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying amount of a property may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges) are less than the carrying amount of the property. To the extent an impairment has occurred, the excess of the carrying amount of the property over its estimated fair value will be charged to income. As of December 31, 1998, we believe that there were no impairments of the carrying values of the Properties. F-7 57 Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the investments. The estimated lives are as follows: Land improvements........................................... 5 to 40 years Buildings and improvements.................................. 5 to 40 years Tenant improvements and leasing costs....................... Term of the related lease The cost of buildings and improvements includes the purchase price of the property or interest in property, legal fees and acquisition costs, and interest, property taxes, and other costs incurred during the period of construction. Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations or betterments that extend the economic useful life of assets are capitalized. Project costs directly associated with the development and construction of a real estate project are capitalized as construction in progress. In addition, interest, real estate taxes and other costs are capitalized during the construction period. Cash and Cash Equivalents Cash and cash equivalents include cash held in financial institutions and other highly liquid short-term investments with original maturities of three months or less. Cash and cash equivalents as of December 31, 1997 and 1998 include restricted cash of $8,074 and $5,227, respectively, which represents amounts held in escrow in connection with property purchases and capital improvements. Deferred Financing Costs incurred in connection with financing are capitalized and amortized to interest expense on a straight-line basis (which approximates the effective interest method) over the term of the related loan. As of December 31, 1997 and 1998, deferred financing fees were $871 and $7,318, respectively, net of accumulated amortization of $29 and $772, respectively. Such amounts are included in Other Assets on the consolidated balance sheet. Fair Value of Financial Instruments The Company's financial instruments include short-term investments, accounts receivable, accounts payable, accrued expenses, construction loans payable, mortgage debt, secured debt, senior debt securities, unsecured notes payable, and an unsecured credit facility. The fair value of these instruments approximates its carrying or contract values. Debt Premiums In connection with the Formation Transactions, the Company assumed certain secured debt with an aggregate principal value of $517,031 and a fair value of $535,613. The difference between the principal value and the fair value was recorded as a debt premium. The debt premium is being amortized into interest expense over the term of the related debt instrument using the effective interest method. As of December 31, 1997 and 1998, the unamortized debt premium was $18,286 and $15,217, respectively. Minority Interests Minority interests in the Company represent the limited partnership interests in the Operating Partnership and interests held by certain third parties in twenty-one real estate joint ventures that are consolidated for financial reporting purposes. Such investments are consolidated because 1) the Company owns a majority interest, or 2) the Company holds significant control over the entity through a 50% or greater ownership interest combined with the ability to control major operating decisions, such as approval of budgets, selection of property managers and change in financing. F-8 58 The following table distinguishes the minority interest ownership held by certain Joint Venture Partners, Institutional Alliance Partners(TM), the limited partners in the Operating Partnership, the Series B Preferred Unit holders' interest in the Operating Partnership, and the Series C Preferred Unit holders' interest in a subsidiary of the Operating Partnership, as of and for the year ended December 31, 1998. MINORITY INTEREST MINORITY INTEREST SHARE OF LIABILITY NET INCOME ----------------- ---------- Minority Interest -- Joint Venture Partners................. $ 18,012 $ 1,491 Minority Interest -- Institutional Alliance Partners(TM).... 52,381 2,987 Minority Interest -- Limited Partners in the Operating Partnership............................................... 86,638 4,884 Minority Interest -- Series B Preferred Units (liquidation preference of $65,000).................................... 62,259 779 Minority Interest -- Series C Preferred Units (liquidation preference of $110,000)................................... 105,734 1,016 -------- ------- $325,024 $11,157 ======== ======= Revenues The Company, as a lessor, retains substantially all of the benefits and risks of ownership of the Properties and accounts for its leases as operating leases. Rental income is recognized on a straight-line basis over the term of the leases. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenue in the period the applicable expenses are incurred. Investment Management and Other Income Investment management income consists primarily of professional fees generated from the Predecessors' real estate investment management services for periods prior to the Formation Transactions and the Company's equity in the earnings of AMB Investment Management for periods subsequent to the Formation Transactions. Other income consists primarily of interest income on cash and cash equivalents. Investment Management Expenses Investment management expenses represent the operating expenses of the Predecessor for periods prior to November 26, 1997 and consist of salaries and benefits and other management related expenses. Reclassifications Certain items in the consolidated financial statements for prior periods have been reclassified to conform with current classifications with no effect on results of operations. 3. TRANSACTIONS WITH AFFILIATES As discussed in Note 1, the Operating Partnership formed AMB Investment Management for the purpose of carrying on the operations of the Predecessor. The Company and AMB Investment Management have an agreement that allows for the sharing of certain costs and employees. Additionally, the Company provides AMB Investment Management with certain acquisition-related services. As part of the Formation Transactions, the Operating Partnership was required to pay an amount equal to the net working capital balances at November 25, 1997 of the Predecessor and the acquired Properties to the owners of said entities. As of December 31, 1997, the Company owed approximately $37,808 to owners related to these working capital distributions. Such amount was repaid in full in early 1998. The Company and AMB Investment Management share common office space under lease obligations of an affiliate of the Predecessor. Such lease obligations are charged to the Company and AMB Investment F-9 59 Management at cost. For the years ended December 31, 1997 and 1998, the Company paid approximately $700 and $1,160, respectively, for occupancy costs related to the lease obligations of the affiliate. 4. PROPERTY HELD FOR DIVESTITURE The Company has determined to focus exclusively on properties that meet its strategic objectives. Therefore, as of December 31, 1998, the Company had decided to divest itself of four industrial buildings and four retail centers. As of December 31, 1998, the divestiture of the properties is subject to negotiation of acceptable terms and other customary conditions. The following summarizes the condensed results of operations of the properties held for divestiture for the period from November 26, 1997 to December 31, 1997 and for the year ended December 31, 1998: 1997 1998 ------ ------- Income.................................................. $1,406 $14,851 Property Operating Expenses............................. 370 3,626 ------ ------- Net Operating Income.................................... $1,036 $11,225 ====== ======= As of December 31,1998, the net carrying value of the properties held for divestiture was $115,050, and two of the retail centers were encumbered by secured debt of $42,615. The net proceeds will be used to acquire additional properties and pay down certain debts. 5. DEBT As of December 31, 1997 and 1998, debt, excluding unamortized debt premiums, consists of the following: 1997 1998 -------- ---------- Secured debt, varying coupon interest rates from 4.00% to 10.38%, due April 1999 to April 2014...................... $517,366 $ 718,979 Unsecured senior debt securities, weighted average interest rate of 7.18%, due June 2008, 2015, and 2018.............. -- 400,000 Unsecured credit facility, variable interest at LIBOR plus 90 to 120 basis points (6.10% at December 31, 1998), due November 2000............................................. 150,000 234,000 -------- ---------- Total Debt.......................................... $667,366 $1,352,979 ======== ========== Secured debt generally requires monthly principal and interest payments. The secured debt is secured by deeds of trust on certain Properties. As of December 31, 1998, the total gross investment value of those Properties secured by debt was $1,458,652. All of the secured debt bear interest at fixed rates, except for two loans with an aggregate principal amount of $9,155, which bear interest at a variable rate. The secured debt has various financial and non-financial covenants. Additionally, certain of the secured debt is cross- collateralized. 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. The Company has a $500,000 unsecured revolving credit agreement (the "Credit Facility") with Morgan Guaranty Trust Company of New York, as agent, and a syndicate of twelve other banks. The Credit Facility has an original term of three years and is subject to a fee that accrues on the daily average undrawn funds, which varies between 15 and 25 basis points of the undrawn funds based on the Company's credit rating. The Credit Facility has various financial and non-financial covenants. Capitalized interest related to construction projects for the period from November 26, 1997 to December 31, 1997, was $448 and for the year ended December 31, 1998 was $7,192. There was no capitalized interest for periods prior to the Formation Transactions. F-10 60 The scheduled maturities of the Company's total debt, excluding unamortized debt premiums, as of December 31, 1998 are as follows: SECURED UNSECURED SENIOR UNSECURED CREDIT DEBT DEBT SECURITIES FACILITY TOTAL -------- ---------------- ---------------- ---------- 1999.......................... $ 14,061 $ -- $ -- $ 14,061 2000.......................... 19,833 -- 234,000 253,833 2001.......................... 42,560 -- -- 42,560 2002.......................... 68,849 -- -- 68,849 2003.......................... 136,798 -- -- 136,798 Thereafter.................... 436,878 400,000 -- 836,878 -------- -------- -------- ---------- $718,979 $400,000 $234,000 $1,352,979 ======== ======== ======== ========== 6. LEASING ACTIVITY Future minimum rental income due under noncancelable leases with tenants in effect at December 31, 1998, is as follows: 1999........................................................ $ 329,322 2000........................................................ 287,771 2001........................................................ 239,178 2002........................................................ 189,259 2003........................................................ 142,411 Thereafter.................................................. 536,573 ---------- $1,724,514 ========== In addition to minimum rental payments, certain tenants pay reimbursements for their pro rata share of specified operating expenses, which amounted to $5,267 and $68,071 for the period from November 26, 1997 to December 31, 1997 and for the year ended December 31, 1998, respectively. These amounts are included as rental income and operating expenses in the accompanying consolidated statements of operations. Certain of the leases also provide for the payment of additional rent based on a percentage of the tenant's revenues. For the period from November 26, 1997 to December 31, 1997 and for the year ended December 31, 1998, the Company recognized percentage rent revenues of $185 and $1,870, respectively. Some leases contain options to renew. No individual tenant accounts for greater than 2% of rental revenues. 7. INCOME TAXES The Company elected to be taxed as a REIT under the Code commencing with its taxable year ended December 31, 1997. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 95% of its taxable income to its stockholders. It is management's intention to adhere to these requirements and maintain the Company's REIT status. As a REIT, the Company generally will not be subject to corporate level federal income tax on net income it distributes currently to its stockholders. As such, no provision for federal income taxes has been included in the accompanying consolidated financial statements. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income. For the years ended December 31, 1997 and 1998, 0% of the dividends paid to common stockholders represented a return of capital for income tax purposes. F-11 61 Prior to the Merger, the Predecessor conducted its business as an S corporation, and was not subject to federal income taxes under Subchapter S of the Internal Revenue Code. Under this election federal income taxes were paid by the stockholders of the Predecessor. 8. STOCKHOLDERS' EQUITY On July 27, 1998, the Company sold 4,000,000 shares of 8.5% Series A Cumulative Redeemable Preferred Stock at $25.00 per share for $100,000 in an underwritten public offering. These shares are redeemable solely at the option of the Company on or after July 27, 2003. The net proceeds of $96,100 (after deducting underwriters' discounts and commissions and offering costs) from the offering were contributed to the Operating Partnership in exchange for 4,000,000 Series A preferred units with terms identical to the Series A Preferred Stock. The Operating Partnership used these proceeds to repay borrowings under the Credit Facility. On December 4, 1998, the Company and the Operating Partnership declared a quarterly cash distribution of $0.3425 per common share and operating partnership unit, payable on January 15, 1999 to stockholders of record on December 31, 1998. On December 4, 1998, the Company declared a cash dividend of $0.53125 per share on its Series A Preferred Stock, and the Operating Partnership declared a cash distribution of $0.53125 per unit of its Series A Preferred Units, payable on January 15, 1999 to stockholders and unit holders of record as of December 31, 1998. 9. STOCK INCENTIVE PLAN AND 401(k) PLAN Stock Incentive Plan In November 1997, the Company established a Stock Option and Incentive Plan (the "Stock Incentive Plan") for the purpose of attracting and retaining eligible officers, directors and employees. The Company has reserved for issuance 5,750,000 shares of Common Stock under the Stock Incentive Plan. As of December 31, 1998, the Company had granted 4,384,037 non-qualified options, to certain directors, officers and employees. Each option is exchangeable for one share of the Company's Common Stock and has a weighted average exercise price equal to $21.22. Each option's exercise price is equal to the Company's market price at the date of grant. The options had an original ten-year term and vest pro rata in annual installments over a three or four-year period from the date of grant. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its Stock Incentive Plan. Opinion 25 measures compensation cost using the intrinsic value based method of accounting. Under this method, compensation cost is the excess, if any, of the quoted market price of the stock at the date of grant over the amount an employee must pay to acquire the stock. Accordingly, no compensation cost has been recognized for the Company's Stock Incentive Plan as of December 31, 1998. As permitted by SFAS 123, "Accounting Stock-based Compensation," the Company has not changed our method of accounting for stock options but has provided the additional required disclosures. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's pro forma net income available to common stockholders would have been reduced by $1,767 and pro forma basic and diluted earnings per share would have been reduced to $1.25 and $1.24, respectively, for the year ended December 31, 1998. The fair value of each option grant was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1997 and 1998, respectively: dividend yield of 6.52% and 6.31%, expected volatility of 18.75% and 23.10%, risk-free interest rate of 5.86% and 4.94%, and expected lives of 10 years for both years. F-12 62 Following is a summary of the option activity for the years ended December 31, 1997 and 1998: WEIGHTED REMAINING SHARES UNDER AVERAGE CONTRACTUAL OPTION (000) EXERCISE PRICE LIFE ------------ -------------- ----------- Outstanding, 11/25/97..................................... -- -- -- Granted................................................... 3,154 $21.00 10 years Exercised................................................. -- -- -- Forfeited................................................. (10) -- -- ------ ------ --------- Outstanding, 12/31/97..................................... 3,144 21.00 10 years Granted................................................... 1,508 21.69 10 years Exercised................................................. -- -- -- Forfeited................................................. (268) -- -- ------ ------ --------- Outstanding, 12/31/98..................................... 4,384 21.40 9.4 years ====== ====== ========= Options exercisable at year-end........................... 622 $21.00 ====== ====== Fair value of options granted during the year............. $ 2.43 ====== In 1997, under the Stock Incentive Plan, the Company sold 5,712 restricted shares of its Common Stock to certain independent directors for $0.01 per share in cash. In 1998, under the Stock Incentive Plan the Company issued 43,007 restricted shares to certain officers of the Company as part of the Performance Pay Program. The restricted shares are subject to a repurchase right held by the Company, which lapses one-third of such shares annually. The repurchase right lapses fully on January 1, 2002. 401(k) Plan In November 1997, the Company established a Section 401(k) Savings/Retirement Plan (the "Section 401(k) Plan"), which is a continuation of the Section 401(k) plan of the Predecessor, to cover eligible employees of the Company and any designated affiliate. The Section 401(k) Plan permits eligible employees of the Company to defer up to 10% of their annual compensation, subject to certain limitations imposed by the Code. The employees' elective deferrals are immediately vested and non-forfeitable upon contribution to the Section 401(k) Plan. The Company matches the employee contributions to the Section 401(k)Plan in an amount equal to 50% of the first 3.5% of annual compensation deferred by each employee and may also make discretionary contributions to the plan. As of December 31, 1997 and 1998, the Company's accrual for 401(k) match was $140 and $153, respectively. Such amounts were included in Other liabilities on the consolidated balance sheets. Except for the Section 401(k) Plan, the Company offers no other post-retirement or post-employment benefits to its employees. F-13 63 10. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, -------------------------------------- 1996 1997 1998 ---------- ----------- --------- Cash paid for interest...................................... $ -- $ 2,509 $ 68,209 Non-cash transactions: Acquisitions of properties................................ $ -- $ 2,438,634 $ 901,284 Assumption of debt........................................ -- (717,613) (221,017) Cash acquired............................................. -- (43,978) -- Other assumed assets and liabilities...................... -- (13,862) -- Minority interest's contribution, including units issued.................................................. -- (64,358) (115,963) Shares issued............................................. -- (1,370,391) -- ---------- ----------- --------- Net cash paid, net of cash acquired......................... $ -- $ 228,432 $ 564,304 ========== =========== ========= 11. COMMITMENTS AND CONTINGENCIES Litigation In the normal course of business, from time to time, 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 with respect to the Properties that would have a material adverse effect on the Company's business, assets or results of operations. 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. General Uninsured Losses The Company carries comprehensive liability, fire, flood, environmental, extended coverage and rental loss insurance with policy specifications, limits and deductibles customarily carried for similar properties. 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; the Company F-14 64 has therefore obtained limited earthquake insurance. Should an uninsured loss occur, the Company could lose its investment in, and anticipated profits and cash flows, from a property. 12. QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for 1998 is as follows: QUARTER ------------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR ----------- ----------- ------------ ----------- ----------- Revenues................................. $ 75,785 $ 85,014 $ 94,061 $ 104,027 $ 358,887 Income from operations before minority interest............................... 29,188 30,382 31,802 32,378 123,750 Minority interests' share of net income................................. (1,282) (2,404) (2,930) (4,541) (11,157) ----------- ----------- ----------- ----------- ----------- Net income............................... $ 27,906 $ 27,978 $ 28,872 $ 27,837 $ 112,593 Preferred stock dividends................ -- -- (1,514) (2,125) (3,639) ----------- ----------- ----------- ----------- ----------- Net income available to common stockholders........................... $ 27,906 $ 27,978 $ 27,358 $ 25,712 $ 108,954 =========== =========== =========== =========== =========== Net income per common share: Basic(1)............................... $ 0.33 $ 0.33 $ 0.32 $ 0.30 $ 1.27 =========== =========== =========== =========== =========== Diluted................................ $ 0.32 $ 0.32 $ 0.32 $ 0.30 $ 1.26 =========== =========== =========== =========== =========== Weighted average common shares outstanding: Basic.................................. 85,874,513 85,874,513 85,874,513 85,881,992 85,876,383 =========== =========== =========== =========== =========== Diluted................................ 86,284,736 86,222,175 86,251,857 86,181,937 86,235,176 =========== =========== =========== =========== =========== - --------------- (1) The sum of quarterly financial data varies from the annual data due to rounding. 13. SEGMENT INFORMATION The Company has two reportable segments: Industrial Properties and Retail Properties. The Company believes that the most relevant information about the way that its business is managed is through disclosure of certain data at the operating division level. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Significant information used by the Company for the reportable segments is as follows: INDUSTRIAL RETAIL TOTAL PROPERTIES PROPERTIES PROPERTIES ---------- ---------- ---------- Rental revenues: 1996............................ $ -- $ -- $ -- 1997............................ 16,898 9,567 26,465 1998............................ 248,134 106,524 354,658 Property net operating income and contribution to FFO(1): 1996............................ -- -- -- 1997............................ 11,056 6,510 17,566 1998............................ 181,832 76,752 258,584 Investment in properties: 1996............................ -- -- -- 1997............................ 1,639,321 803,678 2,442,999 1998(2)......................... 2,574,940 794,120 3,369,060 - --------------- (1) Property net operating income (NOI) is defined as rental revenue, including reimbursements and straight-line rents, less property level operating expenses. (2) Excludes net properties held for divestiture of $115,050. See Note 4. F-15 65 The Company uses property net operating income and FFO as operating performance measures. The following are reconciliations between total reportable segment revenue, property net operating income and funds from operations ("FFO") contribution to consolidated revenues, net income and FFO: 1996 1997 1998 ------- ------- -------- REVENUES Total rental revenues for reportable segments............... $ -- $26,465 $354,658 Investment management and other income...................... 23,991 29,597 4,229 ------- ------- -------- Total consolidated revenues................................. $23,991 $56,062 $358,887 ======= ======= ======== NET INCOME Property net operating income for reportable segments....... $ -- $17,566 $258,584 Investment management and other income...................... 23,991 29,597 4,229 Less: General and administrative................................ -- 1,197 11,929 Interest expense.......................................... -- 3,528 69,670 Depreciation and amortization............................. -- 4,195 57,464 Investment management expenses............................ 16,851 19,358 -- Minority interests........................................ 137 657 11,157 ------- ------- -------- Net income.................................................. $ 7,003 $18,228 $112,593 ======= ======= ======== FFO(1) Net income.................................................. $ 7,003 $18,228 $112,593 Minority interests' share of net income..................... 137 657 11,157 Real estate depreciation and amortization: Total depreciation and amortization....................... -- 4,195 57,464 Furniture, fixtures and equipment depreciation............ -- (37) (463) FFO attributable to minority interests(2): Institutional Alliance Partners........................... -- -- (3,828) Other joint venture partners.............................. -- (218) (2,071) Adjustments to derive FFO in unconsolidated joint venture(3): Company's share of net income............................. -- -- (1,750) Company's share of FFO.................................... -- -- 2,739 Preferred stock dividends................................... -- -- (3,639) Series B & C preferred unit distributions................... -- -- (1,795) ------- ------- -------- FFO......................................................... $ 7,140 $22,825 $170,407 ======= ======= ======== - --------------- (1) Funds from Operations ("FFO") is defined as income from operations before minority interest, gains or losses from sale of real estate and extraordinary losses plus real estate depreciation and adjustment to derive our pro rata share of the FFO of unconsolidated joint ventures, less minority interests' pro rata share of the FFO of consolidated joint ventures and perpetual preferred stock dividends. In accordance with NAREIT White Paper on FFO, we include the effects of straight-line rents in FFO. (2) Represents FFO attributable to minority interests in consolidated joint ventures for the periods presented, which has been computed as minority interests' share of net income before disposal of properties plus minority interests' share of real estate-related depreciation and amortization of the consolidated joint ventures for such periods. Such minority interests are not exchangeable into shares of Common Stock. (3) Represents our pro rata shares of FFO in unconsolidated joint ventures for the periods 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 venture for such periods. F-16 66 14. SUBSEQUENT EVENTS (UNAUDITED) On March 5, 1999, the Company and the Operating Partnership declared a quarterly cash distribution of $0.35 per common share and operating partnership unit, for the quarter ending March 31, 1999, payable April 15, 1999 to stockholders and unitholders of record as of March 31, 1999. On March 5, 1999, the Company declared a cash dividend of $0.53125 per share on its Series A Preferred Stock, and the Operating Partnership declared a cash distribution of $0.53125 per unit on its Series A Preferred Units, for the three month period ending April 14, 1999, payable on April 15, 1999 to stockholders and unitholders of record as of March 31, 1999. On March 9, 1999, the Company signed a series of definitive agreements with BPP Retail, LLC ("BPP Retail"), a co-investment entity between Burnham Pacific Properties ("BPP") and the California Public Employees' Retirement System ("CalPERS"), pursuant to which BPP Retail will acquire 28 retail shopping centers of the Company, totaling 5.1 million square feet, for an aggregate price of $663.4 million. BPP Retail will acquire the centers in separate transactions, which are currently expected to close on or about April 30, 1999, July 31, 1999 and December 1, 1999. In addition, the Company has entered into a definitive agreement, subject to a financing confirmation, with BPP, pursuant to which BPP will acquire six additional retail centers, totaling 1.5 million square feet, for $284.4 million. Assuming satisfaction or waiver of this condition, this transaction is currently expected to close by December 31, 1999. In connection with these transactions, the Company has also granted CalPERS an option to purchase up to 2,000,000 original issue shares of AMB's Common Stock for an exercise price of $25 per share that may be exercised on or before March 31, 2000. F-17 67 AMB PROPERTY CORPORATION SCHEDULE III CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT NUMBER OF BUILDINGS/CENTERS) INITIAL COST TO COMPANY COSTS NO. OF -------------------------------------- CAPITALIZED BLDGS./CTRS. ENCUMBRANCES BUILDING & SUBSEQUENT TO PROPERTY (1) LOCATION TYPE (2) LAND IMPROVEMENTS ACQUISITION -------- ------------ -------- ---- ------------ -------- ------------ ------------- Acer Distribution Center........ 1 CA IND $ -- $ 3,146 $ 9,479 $ 384 Activity Distribution Center.... 4 CA IND 5,247 3,736 11,248 85 Addison Technology Center....... 1 TX IND -- 899 2,696 158 Alsip Industrial................ 1 IL IND -- 1,200 3,600 236 Alvarado Business Center........ 10 CA IND -- 7,906 23,757 358 Amwiler-Gwinnett Industrial Portfolio..................... 9 GA IND 13,939 6,641 19,964 349 Anaheim Industrial.............. 1 CA IND -- 1,457 4,341 59 Ardenwood Corporate Park........ 4 CA IND 9,870 7,321 22,002 262 Artesia Industrial Portfolio.... 27 CA IND 54,100 23,860 71,620 1,429 Atlanta South................... 9 GA IND -- 8,047 24,231 313 Beacon Industrial Park.......... 8 FL IND -- 10,466 31,437 4,784 Belden Avenue................... 3 IL IND -- 5,019 15,186 106 Bensenville..................... 13 IL IND 41,031 20,799 62,438 1,102 Blue Lagoon..................... 2 FL IND 11,661 4,945 14,875 62 Boston Industrial Portfolio..... 20 MA IND 21,893 20,351 59,170 3,583 Braemar Business Center......... 2 MA IND -- 1,422 4,613 233 Brightseat Road................. 1 MD IND -- 1,557 4,841 26 Britannia Business Park......... 2 FL IND -- 3,199 9,637 219 Broward Business Park........... 5 FL IND -- 1,886 5,659 103 Broward Turnpike Center......... 1 FL IND -- 682 2,073 -- Burnsville Business Center...... 1 MN IND -- 932 2,796 56 Cabot Business Park............. 17 MA IND -- 22,240 66,548 1,608 Cascade......................... 4 OR IND -- 2,825 8,477 339 Chancellor...................... 1 FL IND 2,898 1,587 4,802 61 Chancellor Square............... 3 FL IND 16,379 13,921 16,379 367 Chemway Industrial Portfolio.... 5 NC IND -- 2,875 8,858 (40) Chicago Industrial.............. 2 IL IND 3,201 1,574 4,761 179 GROSS AMOUNT CARRIED AT 12/31/98 ------------------------------------- YEAR OF DEPRECIABLE BUILDING & TOTAL COSTS ACCUMULATED CONSTRUCTION/ LIFE PROPERTY LAND IMPROVEMENTS (3)(4) DEPRECIATION ACQUISITION (YEARS) -------- -------- ------------ ----------- ------------ ------------- ----------- Acer Distribution Center........ $ 3,146 $ 9,863 $ 13,009 $ 278 1997 5-40 Activity Distribution Center.... 3,736 11,333 15,069 312 1997 5-40 Addison Technology Center....... 899 2,854 3,753 36 1998 5-40 Alsip Industrial................ 1,200 3,836 5,036 52 1998 5-40 Alvarado Business Center........ 7,906 24,115 32,021 669 1997 5-40 Amwiler-Gwinnett Industrial Portfolio..................... 6,641 20,313 26,954 564 1997 5-40 Anaheim Industrial.............. 1,457 4,400 5,857 122 1997 5-40 Ardenwood Corporate Park........ 7,321 22,264 29,584 616 1997 5-40 Artesia Industrial Portfolio.... 23,860 73,049 96,909 2,137 1997 5-40 Atlanta South................... 8,047 24,544 32,591 652 1998 5-40 Beacon Industrial Park.......... 10,466 36,222 46,687 1,055 1997 5-40 Belden Avenue................... 5,019 15,291 20,311 393 1997 5-40 Bensenville..................... 20,799 63,540 84,339 1,856 1997 5-40 Blue Lagoon..................... 4,945 14,937 19,882 411 1997 5-40 Boston Industrial Portfolio..... 20,352 62,753 83,104 1,245 1998 5-40 Braemar Business Center......... 1,422 4,846 6,268 97 1998 5-40 Brightseat Road................. 1,557 4,867 6,423 131 1997 5-40 Britannia Business Park......... 3,199 9,856 13,055 276 1997 5-40 Broward Business Park........... 1,886 5,761 7,648 65 1998 5-40 Broward Turnpike Center......... 682 2,073 2,755 10 1998 5-40 Burnsville Business Center...... 932 2,852 3,784 32 1998 5-40 Cabot Business Park............. 22,240 68,156 90,395 1,757 1997 5-40 Cascade......................... 2,825 8,816 11,641 266 1998 5-40 Chancellor...................... 1,587 4,864 6,451 134 1997 5-40 Chancellor Square............... 7,575 23,092 30,667 450 1998 5-40 Chemway Industrial Portfolio.... 2,875 8,818 11,693 101 1998 5-40 Chicago Industrial.............. 1,574 4,939 6,513 139 1997 5-40 S-1 68 AMB PROPERTY CORPORATION SCHEDULE III CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED) INITIAL COST TO COMPANY COSTS NO. OF -------------------------------------- CAPITALIZED BLDGS./CTRS. ENCUMBRANCES BUILDING & SUBSEQUENT TO PROPERTY (1) LOCATION TYPE (2) LAND IMPROVEMENTS ACQUISITION -------- ------------ -------- ---- ------------ -------- ------------ ------------- Circle Freeway.................. 1 OH IND -- 530 1,591 22 Corporate Park/Hickory Hill..... 7 TN IND 16,400 6,789 6,787 13,747 Corporate Square................ 6 MN IND -- 4,024 12,113 172 Crysen Industrial............... 1 DC IND 3,400 1,425 4,275 197 Dallas Industrial Portfolio..... 18 TX IND -- 7,797 23,433 658 Deerfield Commerce Center....... 3 FL IND -- 711 2,160 -- Dixie Highway................... 2 KY IND -- 1,700 5,149 2 Dock's Corner................... 1 NJ IND -- 2,050 6,190 2,326 Dock's Corner II................ 1 NJ IND -- 2,272 6,917 324 Dowe Industrial Center.......... 2 CA IND -- 2,665 8,034 50 East Walnut Drive............... 1 CA IND -- 964 2,918 -- Edenvale Business Center........ 1 MN IND 1,510 919 2,411 197 Elk Grove Village Industrial.... 11 IL IND -- 7,713 23,179 272 Elmwood Business Park........... 5 LA IND -- 4,163 12,635 13 Empire Drive.................... 1 KY IND -- 1,590 4,815 -- Executive Drive................. 1 IL IND -- 1,399 4,236 319 Fairway Drive Industrial........ 3 CA IND -- 1,954 5,479 5,551 Fontana Industrial (Commerce)... 2 CA IND -- 5,354 16,215 1,959 Garland Industrial.............. 20 TX IND -- 8,161 8,162 16,984 Glen Ellyn Road................. 1 IL IND -- 850 2,588 -- Greater Dallas Industrial Portfolio..................... 8 TX IND -- 9,934 30,120 (177) Greater Houston Industrial Portfolio..................... 14 TX IND -- 6,197 19,261 (195) Greenwood Industrial............ 3 MD IND -- 4,729 14,188 363 Harvest Business Park........... 3 WA IND 3,584 2,371 7,153 153 Hewlett Packard Distribution.... 1 CA IND 3,339 1,668 5,043 39 Hintz Road...................... 1 IL IND -- 420 1,259 22 Holton Drive.................... 1 KY IND -- 2,633 7,899 73 Houston Industrial Portfolio.... 5 TX IND -- 3,009 9,066 351 Houston Service Center.......... 3 TX IND -- 3,800 11,401 217 Industrial Drive................ 1 OH IND -- 1,743 5,230 181 Interchange City Portfolio...... 2 TN IND -- 3,523 12,683 (2,079) International Multifoods........ 1 CA IND -- 1,613 4,879 122 Itasca Industrial Portfolio..... 6 IL IND -- 6,416 19,289 1,145 Jamesburg Road Corporate Park... 3 NJ IND 23,500 11,700 11,701 23,765 Janitrol........................ 1 OH IND -- 1,797 5,390 186 GROSS AMOUNT CARRIED AT 12/31/98 ------------------------------------- YEAR OF DEPRECIABLE BUILDING & TOTAL COSTS ACCUMULATED CONSTRUCTION/ LIFE PROPERTY LAND IMPROVEMENTS (3)(4) DEPRECIATION ACQUISITION (YEARS) -------- -------- ------------ ----------- ------------ ------------- ----------- Circle Freeway.................. 530 1,614 2,144 18 1998 5-40 Corporate Park/Hickory Hill..... 6,789 20,534 27,323 392 1998 5-40 Corporate Square................ 4,024 12,285 16,309 340 1997 5-40 Crysen Industrial............... 1,425 4,472 5,897 64 1998 5-40 Dallas Industrial Portfolio..... 7,797 24,091 31,888 676 1997 5-40 Deerfield Commerce Center....... 711 2,160 2,871 10 1998 5-40 Dixie Highway................... 1,700 5,151 6,851 132 1997 5-40 Dock's Corner................... 2,050 8,516 10,566 280 1997 5-40 Dock's Corner II................ 2,272 7,241 9,513 194 1997 5-40 Dowe Industrial Center.......... 2,665 8,084 10,748 222 1997 5-40 East Walnut Drive............... 964 2,918 3,882 75 1997 5-40 Edenvale Business Center........ 919 2,608 3,527 56 1998 5-40 Elk Grove Village Industrial.... 7,713 23,452 31,165 649 1997 5-40 Elmwood Business Park........... 4,163 12,648 16,810 60 1998 5-40 Empire Drive.................... 1,590 4,815 6,405 123 1997 5-40 Executive Drive................. 1,399 4,555 5,954 129 1997 5-40 Fairway Drive Industrial........ 1,954 11,030 12,983 191 1997 5-40 Fontana Industrial (Commerce)... 5,354 18,174 23,528 509 1997 5-40 Garland Industrial.............. 8,161 25,146 33,308 340 1998 5-40 Glen Ellyn Road................. 850 2,588 3,438 13 1998 5-40 Greater Dallas Industrial Portfolio..................... 9,406 30,472 39,877 789 1997 5-40 Greater Houston Industrial Portfolio..................... 6,197 19,066 25,263 218 1998 5-40 Greenwood Industrial............ 4,729 14,551 19,280 257 1998 5-40 Harvest Business Park........... 2,371 7,307 9,678 203 1997 5-40 Hewlett Packard Distribution.... 1,668 5,082 6,750 140 1997 5-40 Hintz Road...................... 420 1,280 1,700 14 1998 5-40 Holton Drive.................... 2,633 7,972 10,605 204 1997 5-40 Houston Industrial Portfolio.... 3,009 9,417 12,426 263 1997 5-40 Houston Service Center.......... 3,800 11,618 15,418 201 1998 5-40 Industrial Drive................ 1,743 5,410 7,153 145 1997 5-40 Interchange City Portfolio...... 3,523 10,604 14,127 90 1998 5-40 International Multifoods........ 1,613 5,001 6,614 139 1997 5-40 Itasca Industrial Portfolio..... 6,416 20,434 26,851 584 1997 5-40 Jamesburg Road Corporate Park... 11,700 35,466 47,166 679 1998 5-40 Janitrol........................ 1,797 5,576 7,372 149 1997 5-40 S-2 69 AMB PROPERTY CORPORATION SCHEDULE III CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED) INITIAL COST TO COMPANY COSTS NO. OF -------------------------------------- CAPITALIZED BLDGS./CTRS. ENCUMBRANCES BUILDING & SUBSEQUENT TO PROPERTY (1) LOCATION TYPE (2) LAND IMPROVEMENTS ACQUISITION -------- ------------ -------- ---- ------------ -------- ------------ ------------- Kent Centre..................... 4 WA IND -- 3,042 9,165 294 Kingsport Industrial Park....... 7 WA IND 17,310 7,919 23,798 359 L.A. County Industrial Portfolio..................... 6 CA IND -- 9,671 29,082 352 Lake Michigan Industrial Portfolio..................... 2 IL IND -- 2,886 8,699 101 Laurelwood Drive................ 2 CA IND -- 2,750 8,538 110 Lincoln Industrial Center....... 1 TX IND -- 671 2,052 48 Linder Skokie................... 1 IL IND -- 2,938 8,854 394 Lisle Industrial................ 1 IL IND -- 2,290 6,911 39 Locke Drive..................... 1 MA IND -- 1,074 3,614 (326) Lonestar Portfolio.............. 7 TX IND 17,000 7,129 21,428 220 Mahwah Corporate Center......... 7 NJ IND -- 10,421 31,909 10 Marietta Industrial............. 3 GA IND -- 1,830 5,489 33 MBC Industrial.................. 4 CA IND 12,600 5,892 17,716 62 Meadowridge Industrial.......... 3 MD IND -- 3,716 11,147 20 Melrose Park.................... 1 IL IND -- 2,936 9,190 39 Mendota Heights................. 1 IL IND 668 1,367 4,565 1,621 Metric Center................... 6 TX IND -- 10,968 31,362 2,013 Mid-Atlantic Corporate Center... 13 NJ IND -- 6,581 19,783 1,180 Milmont Page Business Center.... 3 CA IND -- 3,201 9,642 162 Minneapolis Distribution Portfolio..................... 5 MN IND -- 7,018 21,093 751 Minneapolis Industrial Portfolio IV............................ 4 MN IND 8,109 4,938 14,854 556 Minneapolis Industrial Portfolio V............................. 7 MN IND 6,965 4,426 13,317 240 Minnetonka Industrial........... 10 MN IND 12,635 6,794 6,586 14,629 Mittel Drive.................... 2 IL IND -- 646 1,970 (2) Moffett Park R&D Portfolio...... 14 CA IND -- 14,807 44,462 1,181 NDP -- Los Angeles.............. 6 CA IND 10,902 5,875 19,139 (1,070) NDP -- Seattle.................. 4 WA IND -- 3,888 11,893 -- Norcross/Brookhollow Portfolio..................... 4 GA IND -- 3,721 11,180 329 Northpointe Commerce............ 2 CA IND -- 1,773 5,358 83 Northwest Distribution Center... 3 WA IND -- 3,533 10,751 555 O'Hare Industrial Portfolio..... 15 IL IND -- 7,357 22,112 306 Pacific Business Center......... 2 CA IND 9,697 5,417 16,291 165 GROSS AMOUNT CARRIED AT 12/31/98 ------------------------------------- YEAR OF DEPRECIABLE BUILDING & TOTAL COSTS ACCUMULATED CONSTRUCTION/ LIFE PROPERTY LAND IMPROVEMENTS (3)(4) DEPRECIATION ACQUISITION (YEARS) -------- -------- ------------ ----------- ------------ ------------- ----------- Kent Centre..................... 3,042 9,459 12,501 265 1997 5-40 Kingsport Industrial Park....... 7,919 24,158 32,077 670 1997 5-40 L.A. County Industrial Portfolio..................... 9,671 29,435 39,106 815 1997 5-40 Lake Michigan Industrial Portfolio..................... 2,886 8,799 11,686 243 1997 5-40 Laurelwood Drive................ 2,750 8,648 11,398 234 1997 5-40 Lincoln Industrial Center....... 671 2,099 2,770 58 1997 5-40 Linder Skokie................... 2,938 9,248 12,186 261 1997 5-40 Lisle Industrial................ 2,290 6,950 9,240 191 1997 5-40 Locke Drive..................... 1,074 3,288 4,361 65 1998 5-40 Lonestar Portfolio.............. 7,129 21,648 28,777 598 1997 5-40 Mahwah Corporate Center......... 10,421 31,919 42,340 231 1998 5-40 Marietta Industrial............. 1,830 5,522 7,352 93 1998 5-40 MBC Industrial.................. 5,892 17,778 23,670 489 1997 5-40 Meadowridge Industrial.......... 3,716 11,168 14,884 187 1998 5-40 Melrose Park.................... 2,936 9,229 12,165 253 1997 5-40 Mendota Heights................. 1,367 6,186 7,553 186 1998 5-40 Metric Center................... 10,968 33,375 44,343 919 1997 5-40 Mid-Atlantic Corporate Center... 6,581 20,963 27,544 603 1997 5-40 Milmont Page Business Center.... 3,201 9,804 13,005 272 1997 5-40 Minneapolis Distribution Portfolio..................... 7,018 21,845 28,863 615 1997 5-40 Minneapolis Industrial Portfolio IV............................ 4,938 15,409 20,347 434 1997 5-40 Minneapolis Industrial Portfolio V............................. 4,426 13,557 17,982 376 1997 5-40 Minnetonka Industrial........... 6,794 21,216 28,009 297 1998 5-40 Mittel Drive.................... 646 1,968 2,614 10 1998 5-40 Moffett Park R&D Portfolio...... 14,805 45,646 60,450 1,345 1997 5-40 NDP -- Los Angeles.............. 5,948 17,996 23,944 79 1998 5-40 NDP -- Seattle.................. 3,888 11,893 15,780 61 1998 5-40 Norcross/Brookhollow Portfolio..................... 3,721 11,509 15,230 322 1997 5-40 Northpointe Commerce............ 1,773 5,442 7,215 150 1997 5-40 Northwest Distribution Center... 3,533 11,306 14,838 317 1997 5-40 O'Hare Industrial Portfolio..... 7,357 22,418 29,776 620 1997 5-40 Pacific Business Center......... 5,417 16,457 21,874 454 1997 5-40 S-3 70 AMB PROPERTY CORPORATION SCHEDULE III CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED) INITIAL COST TO COMPANY COSTS NO. OF -------------------------------------- CAPITALIZED BLDGS./CTRS. ENCUMBRANCES BUILDING & SUBSEQUENT TO PROPERTY (1) LOCATION TYPE (2) LAND IMPROVEMENTS ACQUISITION -------- ------------ -------- ---- ------------ -------- ------------ ------------- Pacific Service Center.......... 1 GA IND -- 504 1,511 13 Parkway Business Center......... 1 MN IND -- 475 1,425 86 Patuxent Range Road............. 2 MD IND -- 1,696 5,127 77 Peachtree NE Business Center.... 3 GA IND -- 2,197 6,592 146 Peninsula Business Center III... 1 VA IND -- 992 2,976 41 Penn James Office/Warehouse..... 2 MN IND -- 1,991 6,013 403 Pennsy Drive.................... 1 MD IND -- 657 2,011 1,793 Porete Avenue Warehouse......... 1 NJ IND 9,928 4,067 12,509 -- Presidents Drive Distribution Center........................ 6 FL IND -- 3,687 11,314 271 Preston Court................... 1 MD IND -- 2,313 7,192 7 Production Drive................ 1 KY IND -- 425 1,286 135 Round Lake Business Center...... 1 MN IND -- 875 2,860 72 Sabal III....................... 1 FL IND -- 1,211 3,634 67 Sand Lake Service Center........ 6 FL IND -- -- -- 248 Santa Barbara Court............. 1 MD IND -- 1,617 5,029 118 Scripps Sorrento................ 1 CA IND -- 1,110 3,330 30 Silicon Valley R&D Portfolio.... 5 CA IND -- 8,024 24,205 219 South Bay Industrial............ 8 CA IND 19,226 14,992 45,016 929 South Point Business Park....... 7 NC IND -- 5,371 5,446 10,817 Southfield/KDRC Industrial Portfolio..................... 10 GA IND -- 9,629 28,928 620 Stadium Business Park........... 9 CA IND 4,770 3,768 11,345 255 Stapleton Square................ 2 CO IND -- 526 1,577 98 Sunrise Industrial.............. 4 FL IND 17,514 5,982 18,174 1,136 Systematics..................... 1 CA IND -- 911 2,773 39 Torrance Commerce Center........ 6 CA IND -- 2,046 6,136 91 Twin Cities..................... 2 MN IND -- 4,873 14,638 82 Two South Middlesex............. 1 NJ IND -- 2,247 6,781 39 Valwood Industrial.............. 2 TX IND 3,954 1,983 5,989 258 Viscount........................ 1 FL IND -- 984 3,016 7 Weigman Road.................... 1 CA IND -- 1,563 4,688 164 West North Carrier Parkway...... 1 TX IND 3,201 1,375 4,165 124 Willow Lake Industrial Park..... 10 TN IND 37,928 11,997 32,286 3,875 Willow Park Industrial Portfolio..................... 21 CA IND 33,271 25,623 74,800 3,488 GROSS AMOUNT CARRIED AT 12/31/98 ------------------------------------- YEAR OF DEPRECIABLE BUILDING & TOTAL COSTS ACCUMULATED CONSTRUCTION/ LIFE PROPERTY LAND IMPROVEMENTS (3)(4) DEPRECIATION ACQUISITION (YEARS) -------- -------- ------------ ----------- ------------ ------------- ----------- Pacific Service Center.......... 504 1,525 2,028 17 1998 5-40 Parkway Business Center......... 475 1,511 1,986 31 1998 5-40 Patuxent Range Road............. 1,696 5,204 6,900 144 1997 5-40 Peachtree NE Business Center.... 2,197 6,737 8,935 77 1998 5-40 Peninsula Business Center III... 992 3,017 4,009 33 1998 5-40 Penn James Office/Warehouse..... 1,991 6,416 8,407 184 1997 5-40 Pennsy Drive.................... 657 3,804 4,461 141 1997 5-40 Porete Avenue Warehouse......... 4,067 12,509 16,576 93 1998 5-40 Presidents Drive Distribution Center........................ 3,687 11,585 15,272 310 1997 5-40 Preston Court................... 2,313 7,199 9,512 193 1997 5-40 Production Drive................ 425 1,421 1,846 39 1997 5-40 Round Lake Business Center...... 875 2,932 3,807 67 1998 5-40 Sabal III....................... 1,211 3,701 4,913 42 1998 5-40 Sand Lake Service Center........ -- 248 248 16 1998 5-40 Santa Barbara Court............. 1,617 5,147 6,764 141 1997 5-40 Scripps Sorrento................ 1,110 3,360 4,471 36 1998 5-40 Silicon Valley R&D Portfolio.... 8,024 24,424 32,448 679 1997 5-40 South Bay Industrial............ 14,992 45,945 60,937 1,347 1997 5-40 South Point Business Park....... 5,371 16,263 21,634 37 1998 5-40 Southfield/KDRC Industrial Portfolio..................... 9,629 29,548 39,177 730 1997 5-40 Stadium Business Park........... 3,768 11,600 15,368 323 1997 5-40 Stapleton Square................ 526 1,675 2,201 21 1998 5-40 Sunrise Industrial.............. 6,266 19,026 25,292 90 1998 5-40 Systematics..................... 911 2,812 3,723 77 1997 5-40 Torrance Commerce Center........ 2,046 6,228 8,273 69 1998 5-40 Twin Cities..................... 4,873 14,720 19,592 405 1997 5-40 Two South Middlesex............. 2,247 6,821 9,068 187 1997 5-40 Valwood Industrial.............. 1,983 6,247 8,230 176 1997 5-40 Viscount........................ 984 3,023 4,007 79 1997 5-40 Weigman Road.................... 1,563 4,852 6,415 130 1997 5-40 West North Carrier Parkway...... 1,375 4,289 5,664 120 1997 5-40 Willow Lake Industrial Park..... 11,997 36,161 48,158 311 1998 5-40 Willow Park Industrial Portfolio..................... 25,623 78,288 103,911 531 1998 5-40 S-4 71 AMB PROPERTY CORPORATION SCHEDULE III CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED) INITIAL COST TO COMPANY COSTS NO. OF -------------------------------------- CAPITALIZED BLDGS./CTRS. ENCUMBRANCES BUILDING & SUBSEQUENT TO PROPERTY (1) LOCATION TYPE (2) LAND IMPROVEMENTS ACQUISITION -------- ------------ -------- ---- ------------ -------- ------------ ------------- Wilsonville..................... 1 OR IND -- 3,407 14,584 (1,043) Windsor Court................... 1 IL IND -- 766 2,338 39 Yosemite Drive.................. 1 CA IND -- 2,350 7,051 246 Zanker/Charcot Industrial....... 5 CA IND -- 5,282 15,887 405 Applewood Village Shopping Center........................ 1 CO RET -- 6,716 26,903 326 Arapahoe Village Shopping Center........................ 1 CO RET 10,635 3,795 15,220 318 Around Lenox.................... 1 GA RET 10,514 3,462 13,848 775 Aurora Marketplace.............. 1 WA RET -- 3,243 13,013 44 Bayhill Shopping Center......... 1 CA RET -- 2,844 11,417 1,482 Brentwood Commons............... 1 IL RET 5,036 1,810 7,280 109 Civic Center Plaza.............. 1 IL RET 13,377 5,113 20,492 (393) Corbins Corner Shopping Center........................ 1 CT RET -- 6,438 25,791 537 Eastgate Plaza.................. 1 WA RET -- 2,122 8,529 256 Five Points Shopping Center..... 1 CA RET -- 5,412 21,687 228 Granada Village................. 1 CA RET 14,460 6,533 26,172 396 Kendall Mall.................... 1 FL RET 24,423 7,069 28,316 692 La Jolla Village Shopping Center........................ 1 CA RET 17,750 6,936 27,785 127 Lakeshore Plaza Shopping Center........................ 1 CA RET -- 6,706 26,865 163 Long Gate Shopping Center....... 1 MD RET -- 9,662 38,677 39 Manhattan Village Shopping Center........................ 1 CA RET -- 16,484 66,578 667 Mazzeo Drive.................... 1 MA RET 4,007 1,477 4,358 105 Pleasant Hill Shopping Center... 1 CA RET -- 5,403 21,654 309 Randall's Dairy Ashford......... 1 TX RET -- 2,542 10,179 56 Randall's First Colony.......... 1 TX RET -- 2,139 8,563 42 Randall's Memorial Commons...... 1 TX RET -- 2,053 8,221 45 Randall's Woodway............... 1 TX RET -- 3,075 12,313 845 Riverview Plaza Shopping Center........................ 1 IL RET -- 2,656 10,663 228 Rockford Road Plaza............. 1 MN RET -- 4,333 17,371 112 Silverado Plaza Shopping Center........................ 1 CA RET 4,786 1,928 7,753 165 The Plaza at Delray............. 1 FL RET 22,747 6,968 27,914 121 GROSS AMOUNT CARRIED AT 12/31/98 ------------------------------------- YEAR OF DEPRECIABLE BUILDING & TOTAL COSTS ACCUMULATED CONSTRUCTION/ LIFE PROPERTY LAND IMPROVEMENTS (3)(4) DEPRECIATION ACQUISITION (YEARS) -------- -------- ------------ ----------- ------------ ------------- ----------- Wilsonville..................... 3,407 13,541 16,948 313 1998 5-40 Windsor Court................... 766 2,377 3,143 65 1997 5-40 Yosemite Drive.................. 2,350 7,297 9,647 195 1997 5-40 Zanker/Charcot Industrial....... 5,282 16,292 21,575 455 1997 5-40 Applewood Village Shopping Center........................ 6,716 27,228 33,944 752 1997 5-40 Arapahoe Village Shopping Center........................ 3,795 15,538 19,333 432 1997 5-40 Around Lenox.................... 3,462 14,623 18,085 98 1998 5-40 Aurora Marketplace.............. 3,243 13,057 16,300 359 1997 5-40 Bayhill Shopping Center......... 2,844 12,898 15,743 384 1997 5-40 Brentwood Commons............... 1,810 7,390 9,200 204 1997 5-40 Civic Center Plaza.............. 4,550 20,662 25,212 570 1997 5-40 Corbins Corner Shopping Center........................ 6,438 26,328 32,765 733 1997 5-40 Eastgate Plaza.................. 2,122 8,785 10,907 246 1997 5-40 Five Points Shopping Center..... 5,412 21,915 27,327 606 1997 5-40 Granada Village................. 6,533 26,568 33,101 737 1997 5-40 Kendall Mall.................... 7,069 29,009 36,078 810 1997 5-40 La Jolla Village Shopping Center........................ 6,936 27,912 34,848 768 1997 5-40 Lakeshore Plaza Shopping Center........................ 6,706 27,028 33,734 745 1997 5-40 Long Gate Shopping Center....... 9,662 38,716 48,378 1,117 1997 5-40 Manhattan Village Shopping Center........................ 16,484 67,245 83,729 1,975 1997 5-40 Mazzeo Drive.................... 1,477 4,463 5,941 85 1998 5-40 Pleasant Hill Shopping Center... 5,403 21,963 27,366 609 1997 5-40 Randall's Dairy Ashford......... 2,542 10,235 12,777 281 1997 5-40 Randall's First Colony.......... 2,139 8,605 10,743 236 1997 5-40 Randall's Memorial Commons...... 2,053 8,267 10,320 227 1997 5-40 Randall's Woodway............... 3,075 13,158 16,233 378 1997 5-40 Riverview Plaza Shopping Center........................ 2,656 10,892 13,547 303 1997 5-40 Rockford Road Plaza............. 4,333 17,482 21,815 482 1997 5-40 Silverado Plaza Shopping Center........................ 1,928 7,918 9,846 220 1997 5-40 The Plaza at Delray............. 6,968 28,035 35,004 773 1997 5-40 S-5 72 AMB PROPERTY CORPORATION SCHEDULE III CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED) INITIAL COST TO COMPANY COSTS NO. OF -------------------------------------- CAPITALIZED BLDGS./CTRS. ENCUMBRANCES BUILDING & SUBSEQUENT TO PROPERTY (1) LOCATION TYPE (2) LAND IMPROVEMENTS ACQUISITION -------- ------------ -------- ---- ------------ -------- ------------ ------------- Totem Lake Malls................ 1 WA RET -- 5,200 20,800 327 Twin Oaks Shopping Center....... 1 CA RET -- 2,399 9,637 320 Weslayan Plaza.................. 1 TX RET -- 7,842 31,409 879 Woodlawn Point Shopping Center........................ 1 GA RET 4,557 2,318 9,312 89 Ygnacio Plaza................... 1 CA RET 7,715 3,017 12,108 628 --- -------- -------- ---------- -------- 609 $597,637 $747,764 $2,294,752 $143,268 === ======== ======== ========== ======== GROSS AMOUNT CARRIED AT 12/31/98 ------------------------------------- YEAR OF DEPRECIABLE BUILDING & TOTAL COSTS ACCUMULATED CONSTRUCTION/ LIFE PROPERTY LAND IMPROVEMENTS (3)(4) DEPRECIATION ACQUISITION (YEARS) -------- -------- ------------ ----------- ------------ ------------- ----------- Totem Lake Malls................ 5,200 21,127 26,327 454 1998 5-40 Twin Oaks Shopping Center....... 2,399 9,957 12,356 279 1997 5-40 Weslayan Plaza.................. 7,842 32,288 40,131 903 1997 5-40 Woodlawn Point Shopping Center........................ 2,318 9,401 11,719 259 1997 5-40 Ygnacio Plaza................... 3,017 12,737 15,754 362 1997 5-40 -------- ---------- ---------- ------- $740,680 $2,445,104 $3,185,784 $58,404 ======== ========== ========== ======= S-6 73 AMB PROPERTY CORPORATION SCHEDULE III CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED) (IN THOUSANDS, EXCEPT NUMBER OF BUILDINGS/CENTERS) (1) Reconciliation of total number of industrial buildings and retail centers to Selected Property Financial and Other Data as of December 31, 1998: Total per Schedule III(5) 609 Bldgs./ctrs. under development(6) 3 Bldgs./ctrs. held for divestiture 8 --- Total number of bldgs./ctrs. at end of period 620 === (2) As of December 31, 1998, Properties with a net book value of $188,442, served as collateral for outstanding indebtedness under a secured debt facility of $73,000. (3) Reconciliation of total cost to Consolidated Balance Sheet caption at December 31, 1998: Total per Schedule III(7) $3,185,784 Construction in process(8) 183,276 ---------- Total investments in properties 3,369,060 ========== (4) As of December 31, 1998, the aggregate cost for federal income tax purposes of investments in real estate was approximately $2,953,704. (5) Includes three industrial buildings and one retail center that are currently in operation, but are undergoing redevelopment, expansion, and/or renovations. (6) Includes three retail centers currently under development that have not reached stabilization and excludes land parcels under development or land held for future development. (7) A summary of activity for real estate and accumulated depreciation for the year ended December 31, 1998, is as follows: Investment in Real Estate: Balance at beginning of year $2,373,151 Acquisition of properties(9) 770,444 Improvements 143,268 Acquisition of properties under redevelopment 15,673 Adjustment for properties held for divestiture (116,753) ---------- Balance at end of year 3,185,783 ========== Accumulated Depreciation: Balance at beginning of year $ 4,153 Depreciation expense 54,463 Adjustment for properties held for divestiture (212) ---------- Balance at end of year 58,404 ========== (8) Includes $154.0 million of fundings for projects under development and $29.3 million of leasing and other costs related to leases starting subsequent to December 31, 1998. (9) Excludes $67.1 million investment in unconsolidated joint venture. S-7 74 (THIS PAGE INTENTIONALLY LEFT BLANK) 75 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant's Statement on Form S-11 (No. 333-35915)). 3.2 Certificate of Correction of the Registrant's Articles Supplementary establishing and fixing the rights and preferences of the 8 1/2% Series A Cumulative Redeemable Preferred Stock. 3.3 Articles Supplementary establishing and fixing the rights and preferences of the 8 5/8% Series B Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on January 7, 1999). 3.4 Articles of Supplementary establishing and fixing the rights and preferences of the 8.75% Series C Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.2 of the Registrant's Current Report on Form 8-K filed on January 7, 1999). 3.5 First Amended and Restated Bylaws of the Registrant. 4.1 Form of Certificate for Common Stock of the Registrant (incorporated by reference to Exhibit 3.3 of the Registrant's Registration Statement on Form S-11 (No. 333-35915)). 4.2 Form of Certificate for the Registrant's 8 1/2% Series A Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.4 of the Registrant's Registration Statement on Form S-11 (No. 333-58107)). 4.3 Indenture dated as of June 30, 1998 by and among the Operating Partnership, the Company and State Street Bank and Trust Company of California, N.A., as trustee (incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form S-11 (No. 333-49163)). 4.4 First Supplemental Indenture dated as of June 30, 1998 by and among the Operating Partnership, the Company and State Street Bank and Trust Company of California, N.A., as trustee (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement Form S-11 (No. 333-49163)). 4.5 Second Supplemental Indenture dated as of June 30, 1998 by and among the Operating Partnership, the Company and State Street Bank and Trust Company of California, N.A., as trustee (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-11 (No. 333-49163)). 4.6 Third Supplemental Indenture dated as of June 30, 1998 by and among the Operating Partnership, the Company and State Street Bank and Trust Company of California, N.A., as trustee (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-11 (No. 333-49163)). 4.7 Specimen of 7.10% Notes due 2008 (included in the First Supplemental Indenture incorporated by reference as Exhibit 4.2 to the Company's Registration Statement on Form S-11 (No. 333-49163)). 4.8 Specimen of 7.50% Notes due 2018 (included in the Second Supplemental Indenture incorporated by reference as Exhibit 4.3 to the Company's Registration Statement on Form S-11 (No. 333-49163)). 4.9 Specimen of 6.90% Reset Put Securities due 2015 (included in the Third Supplemental Indenture incorporated by reference as Exhibit 4.4 to the Company's Registration Statement on Form S-11 (No. 333-49163)). 10.1 Third Amended and Restated Agreement of Limited Partnership of AMB Property, L.P. (incorporated by reference to Exhibit 99.1 of the Registrant's Registration Statement of Form S-3 (No. 333-68291)). 10.2 Form of Registration Rights Agreement among the Registrant and the persons named therein (incorporated by reference to Exhibit 10.2 of the Registrant's Registration Statement on Form S-11 (No. 333-35915)). 10.3 Second Amended and Restated Credit Agreement, dated November 26, 1997. 10.4 Amendment to Second Amended and Restated Revolving Credit Agreement made as of May 29, 1998. 76 EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.5 Second Amendment to Second Amended and Restated Revolving Credit Agreement made as of September 30, 1998. 10.6 Form of Change in Control and Noncompetition Agreement between the Registrant and Executive Officers. 10.7 The First Amended and Restated 1997 Stock Option and Incentive Plan of the Registrant. 10.8 The First Amendment to the First Amended Restated Stock Option and Incentive Plan of the Registrant. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Arthur Andersen LLP. 24.1 Powers of Attorney (included in Part IV of this Form 10-K). 27.1 Financial Data Schedule -- AMB Property Corporation.