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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K/A

Amendment No. 2 to Form 10-K


     
(Mark One)
   
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the fiscal year ended December 31, 2003
 
or
 
o
  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
Incorporation or Organization)
  (IRS Employer Identification No.)
Pier 1, Bay 1,
San Francisco, California
(Address of Principal Executive Offices)
  94111
(Zip Code)

(415) 394-9000

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

     
(Title of Each Class) (Name of Each Exchange on Which Registered)


Common Stock, $.01 par value
  New York Stock Exchange
6 1/2% Series L Cumulative Redeemable Preferred Stock
   
6 3/4% Series M Cumulative Redeemable Preferred Stock
   

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 þ          No o

      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.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

      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 June 30, 2003, was $2,196,704,854.

      As of March 1, 2004, there were 81,849,795 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.




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Explanatory Note

      This Amendment No. 2 on Form 10-K/A for AMB Property Corporation for the year ended December 31, 2003 is being filed to amend and restate the items described below contained in our Annual Report on Form 10-K and Amendment No. 1 on Form 10-K/A for such period originally filed with the U.S. Securities and Exchange Commission on March 11, 2004 and March 15, 2004, respectively.

      As part of management’s on-going review of our accounting policies and internal control over financial reporting, management determined that we should have depreciated certain of our investments in buildings that reside on land subject to ground leases over the remaining terms of the ground leases, rather than over 40 years, which is the period used to depreciate buildings that we hold in fee simple. We did not segregate these assets into a separate expected useful life category for depreciation purposes. This error resulted in our failure to reflect additional depreciation expense in our financial statements for the years ended December 31, 2003, 2002 and 2001 filed on Forms 10-K and 10-K/A for the year ended December 31, 2003.

      This Amendment No. 2 amends Part II, Item 6, Selected Financial Data; Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations; Part II, Item 9A, Controls and Procedures; and Part IV, Item 15, Exhibits and Financial Statement Schedules contained in our Form 10-K and Amendment No. 1 on Form 10-K/ A originally filed with the U.S. Securities and Exchange Commission on March 11, 2004 and March 15, 2004, respectively, for the following purposes:

  •  To amend Part II, Item 6, Selected Financial Data and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations to take into account the effects of the restatement;
 
  •  To amend Part II, Item 9A, Controls and Procedures, to reflect the restatement; and
 
  •  To amend Part IV, Item 15, Exhibits and Financial Statement Schedules, to restate our consolidated financial statements, the related notes and financial statement schedules, as more fully described in Note 2 to our restated consolidated financial statements contained in this Amendment No. 2.

      Pursuant to Exchange Act Rule 12b-15, this Amendment No. 2 sets forth the complete text of each item of Form 10-K and Amendment No. 1 on Form 10-K/ A listed above as further amended, and includes as Exhibits 31 and 32 new certifications by our chief executive officer, president and chief financial officer. This Amendment No. 2 does not reflect events occurring after the filing of our original Form 10-K on March 11, 2004 or our Amendment No. 1 to Form 10-K/ A on March 15, 2004, or modify or update the disclosures presented in our original Form 10-K filed on March 11, 2004 or Amendment No. 1 on Form 10-K/A filed on March 15, 2004, except to reflect the restatement as described above. Accordingly, this Amendment No. 2 should be read in conjunction with our filings made subsequent to the filing of our original Form 10-K on March 11, 2004 and Amendment No. 1 on Form 10-K/A on March 15, 2004, including any amendments to those filings. Additional disclosure regarding the restatement is included in Note 2 to the restated consolidated financial statements included in Part IV, Item 15 of this Amendment No. 2 on Form 10-K/A.


TABLE OF CONTENTS

PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
PART III
Items 10, 11, 12, 13 and 14.
PART IV
Item 15. Exhibits and Financial Statement Schedules
SIGNATURES
SCHEDULE III
EXHIBIT INDEX
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 32.1


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PART I

 
Item 1. Business

General

      AMB Property Corporation, a Maryland corporation, acquires, owns, operates, manages, renovates, expands and develops primarily industrial properties in key distribution markets throughout North America, Europe and Asia. We commenced operations as a fully integrated real estate company effective with the completion of our initial public offering on November 26, 1997. Increasingly, our properties are designed for customers who value the efficient movement of goods in the world’s busiest distribution markets: large, supply-constrained locations with close proximity to airports, seaports and major freeway systems. As of December 31, 2003, we owned, managed and had renovation and development projects totaling 101.5 million square feet (9.4 million square meters) and 1,057 buildings in 36 markets within seven countries.

      We operate our business through our subsidiary, AMB Property, L.P., a Delaware limited partnership. We refer to AMB Property, L.P. as the “operating partnership.” As of December 31, 2003, we owned an approximate 94.5% general partnership interest in the operating partnership, excluding preferred units. As the sole general partner of the operating partnership, we have the full, exclusive and complete responsibility for and discretion in its day-to-day management and control.

      Our investment strategy targets customers whose businesses are tied to global trade, which, according to the World Trade Organization, has grown at approximately 2.5 times the world gross domestic product (GDP) growth rate during the last 20 years. To serve the facilities needs of these customers, we invest in major distribution markets, transportation hubs and gateways in both the U.S. and internationally. Our target markets are characterized by large population densities and typically offer substantial consumer bases, proximity to large clusters of distribution-facility users and significant labor pools. When measured by annualized base rents, 67.4% of our assets are concentrated in eight U.S. hub and gateway distribution markets: Atlanta, Chicago, Dallas/ Fort Worth, Los Angeles, Northern New Jersey/ New York City, the San Francisco Bay Area, Miami and Seattle. Our on-tarmac assets account for 8.9% of our annualized base rents.

      By focusing on an investment strategy that targets areas of high customer demand and limited competition from new supply, we believe that over time our net operating income (rental revenues less property operating expenses and real estate taxes) will grow and our property values will increase. Much of our portfolio is comprised of strategically located industrial buildings in in-fill submarkets; in-fill locations are characterized by supply constraints on the availability of land for competing projects as well as physical, political or economic barriers to new development.

      We focus our investment strategy on High Throughput Distribution®, or HTD® facilities, which are buildings designed to quickly distribute our customers’ products, rather than store them. Our investment focus on HTD assets is based on the global trend toward lower inventory levels and expedited supply chains. HTD facilities generally have a variety of characteristics that allow the rapid transport of goods from point-to-point. Examples of these physical characteristics include numerous dock doors, shallower building depths, fewer columns, large truck courts and more space for trailer parking. We believe that these building characteristics represent an important success factor for time-sensitive customers such as air express, logistics and freight forwarding companies and that these facilities function best when located in convenient proximity to transportation infrastructure such as major airports and seaports.

      As of December 31, 2003, we owned and operated (exclusive of properties that we managed for third parties) 948 industrial buildings and six retail and other properties, totaling approximately 87.6 million rentable square feet, located in 34 markets throughout North America and in France, Germany and Japan. As of December 31, 2003, through our subsidiary, AMB Capital Partners, LLC, we also managed, but did not have an ownership interest in, industrial buildings and retail centers, totaling approximately 0.5 million rentable square feet. In addition, as of December 31, 2003, we had investments in operating industrial buildings, totaling approximately 7.9 million rentable square feet, through investments in unconsolidated joint

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ventures. As of December 31, 2003, we also had investments in industrial development projects, some of which are part of our development-for-sale program, totaling approximately 5.5 million square feet.

      As of December 31, 2003, we had one retail land parcel and one industrial building held for divestiture. During 2003, our dispositions and contributions totaled $366.3 million, including assets in markets that no longer fit our investment strategy and properties at valuations that we considered to be at premium levels. While we will continue to sell assets on an opportunistic basis, we believe that we have substantially achieved our near-term strategic disposition goals.

      We are self-administered and self-managed and expect that we have qualified and will continue to qualify as a real estate investment trust for federal income tax purposes beginning with the year ended December 31, 1997. As a self-administered and self-managed real estate investment trust, our own employees perform our corporate administrative and management functions, rather than our relying on an outside manager for these services. Through our Strategic Alliance Program®, we have established relationships with third-party real estate management firms, brokers and developers that provide property-level administrative and management services under our direction.

      Our principal executive office is located at Pier 1, Bay 1, San Francisco, California 94111; our telephone number is (415) 394-9000. We also maintain regional offices in Boston, Massachusetts, Chicago, Illinois, Amsterdam, the Netherlands and Tokyo, Japan. As of December 31, 2003, we employed 175 individuals, 126 at our San Francisco headquarters, 45 in our Boston office and the remainder in our other regional offices. Our website address is www.amb.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on our website free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission. Information contained on our website is not and should not be deemed a part of this annual report.

      Unless the context otherwise requires, the terms “we,” “us” and “our” refer to AMB Property Corporation, AMB Property, L.P. and their other controlled subsidiaries, and the references to AMB Property Corporation include AMB Property, L.P. and their other controlled subsidiaries. The following marks are our registered trademarks: AMB®; Development Alliance Partners®; HTD®; High Throughput Distribution®; Management Alliance Program®; Strategic Alliance Partners®; Strategic Alliance Programs®; and UPREIT Alliance Program®.

Operating Strategy

      We base our operating strategy on extensive operational and service offerings, including in-house acquisitions, development, redevelopment, asset management, leasing, finance, accounting and market research. We leverage our expertise across a large customer base and have long-standing relationships with entrepreneurial real estate management and development firms in our target markets, which we refer to as our Strategic Alliance Partners®.

      We believe that real estate is fundamentally a local business and best operated by forging alliances with service providers in each target market. We believe that this strategy results in a mutually beneficial relationship as these alliance partners provide us with high-quality, local market expertise and intelligence. We believe that we, in turn, contribute value to the alliances through our national and global customer relationships, industry knowledge, perspective and financial strength. We actively manage our portfolio, including the establishment of leasing strategies, negotiation of lease terms, pricing, and level and timing of property improvements.

      We believe our alliances give us both local market benefits and flexibility to focus on our core competencies, which are developing and executing our strategic approach to real estate investment and management and raising private capital to finance growth.

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Growth Strategies

 
Growth Through Operations

      We seek to generate long-term internal growth through rent increases on existing space and renewals on rollover space, by seeking to: maintain a high occupancy rate at our properties; and control expenses by capitalizing on the economies of owning, operating and growing a large, global portfolio. However, during 2003, our average industrial base rental rates decreased by 10.1%, from the expiring rent for that space, on leases entered into or renewed during the period. This amount excludes expense reimbursements, rental abatements, percentage rents and straight-line rents. Since 2001, as the industrial market weakened, we have focused on maintaining occupancy. During 2003, cash-basis same-store net operating income (rental revenues less property operating expenses and real estate taxes) decreased by 5.6% on our industrial properties. Since our initial public offering in November 1997, we have experienced average annual increases in industrial base rental rates of 10.4% and maintained an average occupancy of 95.0%. While we believe that it is important to view real estate as a long-term investment, past results are not necessarily an indication of future performance. See Part IV. Item 15: Note 17 of the “Notes to Consolidated Financial Statements” for detailed segment information, including revenue attributable to each segment, gross investment in each segment and total assets.

 
Growth Through Acquisitions and Capital Redeployment

      We believe that 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 forged relationships with third-party local property management firms through our Management Alliance Program®. We believe that these alliances will create additional acquisition opportunities, as such managers frequently market properties on behalf of sellers. Our operating structure also enables us to acquire properties through our UPREIT Alliance Program® 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. In addition, we seek to redeploy capital from non-strategic assets into properties that better fit our current investment focus.

      We are generally in various stages of negotiations for a number of acquisitions and dispositions that may include acquisitions and dispositions of individual properties, acquisitions of large multi-property portfolios and acquisitions of other real estate companies. There can be no assurance that we will consummate any of these transactions. Such transactions, if we consummate them, may be material individually or in the aggregate. Sources of capital for acquisitions may include retained cash flow from operations, borrowings under our unsecured credit facility, other forms of secured or unsecured debt financing, issuances of debt or preferred or common equity securities by us or the operating partnership (including issuances of units in the operating partnership or its subsidiaries), proceeds from divestitures of properties, assumption of debt related to the acquired properties and private capital from our co-investment partners. See Part II. Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a summary of key transactions in 2003.

 
Growth Through Development

      We believe that development, renovation and expansion of well-located, high-quality industrial properties should continue to provide us with attractive investment opportunities at a higher rate of return than we may obtain from the purchase of existing properties. We believe we have the in-house expertise to create value both through new construction and through acquisition and management of value-added properties. Value-added properties are typically characterized as properties with available space or near-term leasing exposure, undeveloped land acquired in connection with other property that provides an opportunity for development or properties that are well-located but require redevelopment or renovation. Both new development and value-added properties require significant management attention and capital investment to maximize their return. In addition to our in-house development staff, we have established strategic alliances with global and regional developers that we expect to enhance our development capabilities. We believe our global market presence

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and expertise will enable us to continue to generate and capitalize on a diverse range of development opportunities.

      The multidisciplinary backgrounds of our employees should provide us with the skills and experience to capitalize on strategic renovation, expansion and development opportunities. Several of our officers have specific experience in real estate development, both with us and with national development firms, and over the past year we have expanded our development staff. We pursue development projects directly and in joint ventures with our Development Alliance Partners®, which provides us with the flexibility to pursue development projects independently or in partnerships, depending on market conditions, submarkets or building sites. Under a typical joint venture agreement with a Development Alliance Partner, we would fund 95% of the construction costs and our partner would fund 5%; however, in certain cases we may own as little as 50% or as much as 98% of the joint venture. Upon completion, we generally would purchase our partner’s interest in the joint venture. We may also structure developments such that we would own 100% of the asset with an incentive development fee to be paid upon completion to our development partner.

 
Growth Through Developments for Sale

      The operating partnership, through its taxable REIT subsidiaries, conducts a variety of businesses that include incremental income programs, such as our development projects available for sale to third parties. Such development properties include value-added conversion projects and build-to-sell projects.

 
Growth Through Global Expansion

      Over the next three to four years, we expect to have approximately 15% of our portfolio (based on consolidated annualized base rent) invested in international markets. As of December 31, 2003, our international operating properties comprised 3.0% of our total annualized industrial base rent. Our Mexican target markets currently include Mexico City, Guadalajara and Monterrey. Our European target markets currently include Paris, Amsterdam, Frankfurt, Madrid and London. Our Asian target markets currently include Singapore, Hong Kong and Tokyo. There are many factors that could cause our entry into target markets and future capital allocation to differ from our current expectations, which are discussed under the subheading “Our International Growth is Subject to Special Political and Monetary Risks” and elsewhere under the heading “Business Risks” in this report. Further, it is possible that our target markets will change over time to reflect experience, market opportunities, customer needs and changes in global distribution patterns. For a breakout of the amount of our revenues attributable to the United States and to foreign countries in total, please see Part IV. Item 15: Note 17 of the “Notes to Consolidated Financial Statements.”

      We believe that expansion into target international markets represents a natural extension of our strategy to invest in industrial markets with high population densities, close proximity to large customer clusters and available labor pools, and major distribution centers serving global trade. Our international expansion strategy mirrors our domestic focus on supply-constrained submarkets with political, economic or physical constraints to new development. Our international investments will extend our offering of High Throughput Distribution facilities for customers who value speed-to-market over storage. Specifically, we are focused on customers whose business is derived from global trade. In addition, our investments target major consumer distribution markets and customers.

      We believe that our established customer relationships, our contacts in the air cargo and logistics industries, our underwriting of markets and investment considerations and our Strategic Alliance Programs with knowledgeable developers and managers will assist us in competing internationally.

 
Growth Through Co-Investments

      We co-invest in properties with private-capital investors through partnerships, limited liability companies or joint ventures. Our co-investment joint ventures typically operate under the same investment strategy that we apply to our other operations. Typically we will own a 20-50% interest in our co-investment ventures. In general, we control all significant operating and investment decisions of our co-investment entities. We believe that our co-investment program will continue to serve as a source of capital for acquisitions and developments;

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however, there can be no assurance that it will continue to do so. In addition, our co-investment joint ventures are a significant source of revenues as we earn acquisition and development fees, asset management fees and priority distributions as well as promoted interests and incentive fees based on the performance of the co-investment joint ventures.

BUSINESS RISKS

      See Part II. Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Risks” for a complete discussion of the various risks that could adversely affect us, including risks related to our international operations.

 
Item 2. Properties

INDUSTRIAL PROPERTIES

      As of December 31, 2003, we owned 948 industrial buildings aggregating approximately 87.1 million rentable square feet, located in 34 markets throughout North America and in France, Germany and Japan. Our industrial properties accounted for $518.1 million, or 98.9%, of our total annualized base rent as of December 31, 2003. Our industrial properties were 93.1% leased to over 2,500 customers, the largest of which accounted for no more than 3.1% of our annualized base rent from our industrial properties. See Item 15: Note 17 of “Notes to Consolidated Financial Statements” for segment information related to our operations.

      Property Characteristics. Our industrial properties, which consist primarily of warehouse distribution facilities suitable for single or multiple customers, are typically comprised of multiple buildings. The following table identifies type and characteristics of our industrial buildings and each type’s percentage of our total portfolio based on square footage at December 31:

                     
Building Type Description 2003 2002




Warehouse
  15,000-75,000 square feet, single or multi-customer     40.7 %     40.2 %
Bulk Warehouse
  Over 75,000 square feet, single or multi-customer     39.3 %     39.6 %
Flex Industrial
  Includes assembly or research & development, single or multi-customer     7.3 %     7.5 %
Light Industrial
  Smaller customers, 15,000 square feet or less, higher office finish     6.1 %     6.5 %
Trans-Shipment
  Unique configurations for truck terminals and cross-docking     2.2 %     2.3 %
Air Cargo
  On-tarmac or airport land for transfer of air cargo goods     3.1 %     2.6 %
Office
  Single or multi-customer, used strictly for office     1.3 %     1.3 %

      Lease Terms. Our industrial properties are typically subject to lease on a “triple net basis,” in which customers pay their proportionate share of real estate taxes, insurance and operating costs, or are subject to leases on a “modified gross basis,” in which customers pay expenses over certain threshold levels. In addition, most of our leases include fixed rental increases or Consumer Price Index rental increases. Lease terms typically range from three to ten years, with an average of six years, excluding renewal options. However, the majority of our industrial leases do not include renewal options.

      Overview of Major Target Markets. Our industrial properties are typically located near major airports, key interstate highways, and seaports in major domestic metropolitan areas, such as Atlanta, Chicago, Dallas/ Fort Worth, Los Angeles, Northern New Jersey/ New York City, the San Francisco Bay Area, Miami and

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Seattle. Our international industrial facilities are located in major distribution markets, including Mexico City, Guadalajara, Paris, Frankfurt and Tokyo.

      Within these metropolitan areas, our industrial properties are generally concentrated in locations with limited new construction opportunities within established, relatively large submarkets, 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 airports, seaports or convenient to major highways and rail lines, and are proximate to large and diverse labor pools. There is typically broad demand for industrial space in these centrally located submarkets typically 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 constraints to the supply of additional industrial properties.

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Industrial Market Operating Statistics(1)

     As of December 31, 2003, we operated in 34 markets throughout North America and in France, Germany and Japan. The following table represents properties in which we own a 100% interest or a controlling interest (consolidated), and excludes properties in which we only own a non-controlling interest
                                                   
No. New
Dallas/ Los Jersey/ San Francisco
Atlanta Chicago Ft. Worth Angeles(2) New York Bay Area






Number of buildings
    57       94       42       150       92       141  
Rentable square feet
    7,053,878       7,810,008       3,854,932       12,950,949       7,923,272       11,382,570  
 
% of total rentable square feet
    8.1 %     9.0 %     4.4 %     14.9 %     9.1 %     13.1 %
Occupancy percentage
    92.9 %     93.0 %     85.6 %     98.0 %     91.7 %     92.5 %
Annualized base rent (000’s)
  $ 26,970     $ 35,810     $ 13,456     $ 77,450     $ 47,770     $ 81,474  
 
% of total annualized base rent
    5.2 %     6.9 %     2.6 %     14.9 %     9.2 %     15.7 %
Number of leases
    204       187       112       384       291       400  
Annualized base rent per square foot
  $ 4.12     $ 4.93     $ 4.08     $ 6.10     $ 6.57     $ 7.74  
Lease expirations as a % of ABR:(4)
                                               
 
2004
    14.4 %     22.4 %     20.4 %     21.1 %     20.2 %     15.0 %
 
2005
    19.8 %     19.9 %     22.5 %     14.8 %     11.4 %     22.6 %
 
2006
    18.6 %     18.9 %     14.2 %     16.9 %     15.9 %     10.3 %
Weighted average lease terms:
                                               
 
Original
    6.2 years       6.6 years       5.0 years       5.9 years       5.6 years       5.4 years  
 
Remaining
    3.6 years       2.3 years       3.1 years       3.0 years       3.4 years       3.1 years  
Tenant retention:
                                               
 
Quarter
    50.2 %     85.7 %     46.9 %     87.8 %     98.1 %     64.1 %
 
Year-to-date
    68.5 %     63.0 %     50.8 %     70.6 %     83.0 %     66.3 %
Rent increases on renewals and rollovers:
                                               
 
Year-to-date
    (10.4 )%     (4.3 )%     (7.6 )%     0.0 %     (9.9 )%     (27.7 )%
 
Same Space SF leased
    828,797       2,023,590       1,236,952       2,560,211       1,601,083       3,167,662  
Same store cash basis NOI growth:
                                               
 
Year-to-date
    (4.3 )%     (7.9 )%     (23.0 )%     6.1 %     (6.2 )%     (13.9 )%
Sq. feet owned in same store pool(5)
    5,532,840       7,242,118       3,413,679       11,495,700       5,726,021       10,860,049  
Our pro rata share of square feet
    4,415,192       5,782,826       2,765,994       9,247,359       5,002,948       8,653,249  
Total market square footage(6)
    7,586,128       12,062,539       4,595,219       16,716,976       8,578,109       12,014,032  

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                                   
Total
U.S. Hub Total/
On- and Gateway Total Other Weighted
Miami Seattle Tarmac(3) Markets Markets Average






Number of buildings
    46       64       35       721       227       948  
Rentable square feet
    4,802,715       6,854,427       2,733,487       65,366,238       21,735,174       87,101,412  
 
% of total rentable square feet
    5.5 %     7.9 %     3.0 %     75.0 %     25.0 %     100.0 %
Occupancy percentage
    96.1 %     92.5 %     92.6 %     93.5 %     91.9 %     93.1 %
Annualized base rent (000’s)
  $ 32,745     $ 33,737     $ 45,931     $ 395,343       122,747     $ 518,090  
 
% of total annualized base rent
    6.4 %     6.5 %     8.9 %     76.3 %     23.7 %     100.0 %
Number of leases
    230       261       257       2,326       851       3,177  
Annualized base rent per square foot
  $ 7.09     $ 5.32     $ 18.15     $ 6.47     $ 6.15     $ 6.39  
Lease expirations as a % of ABR:(4)
                                               
 
2004
    17.7 %     15.3 %     21.4 %     18.6 %     15.4 %     17.8 %
 
2005
    21.2 %     14.7 %     11.1 %     17.3 %     17.9 %     17.4 %
 
2006
    17.0 %     18.8 %     14.0 %     15.4 %     10.8 %     14.3 %
Weighted average lease terms:
                                               
 
Original
    5.9 years       5.8 years       8.3 years       5.9 years       6.6 years       6.1 years  
 
Remaining
    3.0 years       3.1 years       4.1 years       3.1 years       3.6 years       3.2 years  
Tenant retention:
                                               
 
Quarter
    44.1 %     70.5 %     78.7 %     72.1 %     63.3 %     70.4 %
 
Year-to-date
    71.9 %     56.4 %     79.0 %     66.4 %     61.6 %     65.3 %
Rent increases on renewals and rollovers:
                                               
 
Year-to-date
    (14.3 )%     (5.0 )%     7.9 %     (12.7 )%     1.7 %     (10.1 )%
 
Same Space SF leased
    884,115       1,196,855       136,785       13,636,050       3,636,967       17,273,017  
Same store cash basis NOI growth:
                                               
 
Year-to-date
    (11.7 )%     (7.6 )%     5.0 %     (7.2 )%     0.1 %     (5.6 )%
Sq. feet owned in same store pool(5)
    4,342,301       3,636,191       1,324,738       53,573,637       18,411,938       71,985,575  
Our pro rata share of square feet
    4,175,271       3,596,230       2,344,839       45,983,908       18,592,025       64,575,933  
Total market square footage(6)
    5,639,822       7,030,412        —       74,223,237       27,297,815       101,521,052  


(1)  Includes all industrial consolidated operating properties and excludes industrial developments and renovation projects.
 
 
(2)  We also have a 19.9 acre parking lot with 2,720 parking spaces and 12 billboard signs in the Los Angeles market immediately adjacent to the Los Angeles International Airport.
 
 
(3)  Includes on-tarmac air cargo facilities at 14 airports.
 
 
(4)  Annualized base rent is calculated as monthly base rent (cash basis) per the terms of the lease, as of December 31, 2003, multiplied by 12.
 
 
(5)  Same store pool excludes properties purchased or developments stabilized after December 31, 2001. Stabilized properties are generally defined as properties that are 90% leased or properties for which we have held a certificate of occupancy or where building has been substantially complete for at least 12 months.
 
 
(6)  Total market square footage includes industrial and retail operating properties, development properties, unconsolidated properties (100% of the square footage), properties managed for third parties and reallocation of on-tarmac properties into metro markets.

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Industrial Operating Portfolio Overview

      As of December 31, 2003, our 948 industrial buildings were diversified across 34 markets throughout North America and in France, Germany and Japan. The average age of our industrial properties is 19 years (since the property was built or substantially renovated). 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):

                                                                         
Number Rentable % of Total Annualized % of Total Annualized
of Square Rentable Occupancy Base Rent Annualized Number Base Rent per
Buildings Feet Square Feet Percentage (000’s) Base Rent of Leases Square Foot








Domestic Hub Markets
    721       65,366,238       75.0 %     93.5 %   $ 395,343       76.3 %     2,326     $ 6.47  
Other Markets
                                                               
Domestic Target Markets
                                                               
   
Austin
    9       1,365,873       1.6       91.4       8,988       1.7       29       7.20  
   
Baltimore/Washington DC
    65       4,262,420       4.9       95.3       32,299       6.2       292       7.95  
   
Boston
    36       4,114,945       4.7       97.2       22,667       4.4       61       5.67  
   
Minneapolis
    34       3,819,952       4.4       96.1       16,553       3.2       185       4.51  
     
     
     
     
     
     
     
     
 
   
Subtotal/Weighted Average
    144       13,563,190       15.6       95.7       80,507       15.5       567       6.20  
 
Domestic Non-Target Markets
                                                               
   
Charlotte
    21       1,317,864       1.5       70.2       5,038       1.0       59       5.45  
   
Columbus
    1       240,000       0.3       45.0       306       0.1       3       2.83  
   
Memphis
    17       1,883,845       2.1       82.7       8,016       1.5       46       5.15  
   
New Orleans
    5       411,689       0.5       93.9       1,949       0.4       47       5.04  
   
Newport News
    1       60,215       0.1       76.8       554       0.1       2       11.98  
   
Orlando
    15       1,223,148       1.4       97.7       5,433       1.0       72       4.55  
   
Portland
    5       676,104       0.8       95.4       2,966       0.6       9       4.60  
   
San Diego
    5       276,167       0.3       100.0       2,866       0.5       21       10.38  
     
     
     
     
     
     
     
     
 
   
Subtotal/Weighted Average
    70       6,089,032       7.0       84.4       27,128       5.2       259       5.28  
 
International Target Markets(1)
                                                               
   
Frankfurt, Germany
    1       166,917       0.2       0.0             0.0       0        
   
Guadalajara, Mexico
    5       687,088       0.8       100.0       4,053       0.8       16       5.90  
   
Mexico City, Mexico
    2       345,058       0.4       100.0       1,991       0.4       3       5.77  
   
Paris, France
    3       520,837       0.6       88.5       4,025       0.8       3       8.73  
   
Tokyo, Japan
    2       363,052       0.4       100.0       5,043       1.0       3       13.89  
     
     
     
     
     
     
     
     
 
   
Subtotal/Weighted Average
    13       2,082,952       2.4       89.1       15,112       3.0       25       8.14  
     
     
     
     
     
     
     
     
 
     
Total Other Markets
    227       21,735,174       25.0       91.9       122,747       23.7       851       6.15  
     
     
     
     
     
     
     
     
 
       
Total/Weighted Average
    948       87,101,412       100.0 %     93.1 %   $ 518,090       100.0 %     3,177     $ 6.39  
     
     
     
     
     
     
     
     
 


(1)  Annualized base rent for leases denominated in foreign currencies is translated using the currency exchange rate at December 31, 2003.

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Industrial Lease Expirations

      The following table summarizes the lease expirations for our industrial properties for leases in place as of December 31, 2003, without giving effect to the exercise of renewal options or termination rights, if any, at or prior to the scheduled expirations:

                         
Annualized % of
Square Base Annualized
Feet(1) Rent(2) Base Rent



2004
    15,073,481     $ 97,194       17.8 %
2005
    14,866,366       95,429       17.4 %
2006
    12,384,981       78,363       14.3 %
2007
    10,898,668       72,560       13.3 %
2008
    10,452,586       64,433       11.8 %
2009
    6,880,585       39,045       7.1 %
2010
    2,876,654       27,515       5.0 %
2011
    3,032,522       23,456       4.3 %
2012
    1,900,671       21,816       4.0 %
2013 and beyond
    3,177,618       27,209       5.0 %
     
     
     
 
Total
    81,544,132     $ 547,020       100.0 %
     
     
     
 


(1)  Schedule includes in-place leases and leases with future commencement dates. The schedule also includes month-to-month leases totaling 0.2 million square feet and leases in hold-over status totaling 1.9 million square feet.
 
(2)  Calculated as monthly base rent at expiration multiplied by 12.

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Customer Information

      Largest Property Customers. As of December 31, 2003, our 25 largest industrial property customers by annualized base rent are set forth in the table below:

                                           
Percentage of Percentage of
Aggregate Aggregate
Aggregate Leased Annualized Annualized
Number of Rentable Square Base Base
Customer Name(1) Leases Square Feet Feet(2) Rent(3) Rent(4)






United States Government(5)(6)
    41       866,387       1.0 %   $ 16,007       3.1 %
FedEx Corporation(5)
    31       704,202       0.8 %     9,765       1.9 %
Deutsche Post Global Mail Ltd.(5)
    33       1,021,765       1.2 %     8,159       1.6 %
Harmonic Inc. 
    4       285,480       0.3 %     6,174       1.2 %
International Paper Company
    8       546,893       0.6 %     4,213       0.8 %
BAX Global Inc.(5)
    8       255,135       0.3 %     4,130       0.8 %
County of Los Angeles(7)
    11       213,230       0.2 %     3,123       0.6 %
Ford Motor Company
    1       610,878       0.7 %     3,034       0.6 %
Forward Air Corporation
    9       421,748       0.5 %     2,883       0.6 %
Ahold NV
    7       680,565       0.8 %     2,880       0.6 %
La Poste
    1       353,640       0.4 %     2,676       0.5 %
CNF Inc. 
    12       408,556       0.5 %     2,662       0.5 %
Wells Fargo and Company
    5       213,432       0.2 %     2,585       0.5 %
United Air Lines Inc.(5)
    5       124,700       0.1 %     2,506       0.5 %
United Liquors, Ltd. 
    2       520,325       0.6 %     2,398       0.5 %
Worldwide Flight Services(5)
    15       176,656       0.2 %     2,374       0.5 %
Integrated Airline Services(5)
    6       217,056       0.2 %     2,210       0.4 %
Applied Materials, Inc. 
    1       290,557       0.3 %     2,152       0.4 %
Elmhult Limited Partnership
    4       661,149       0.8 %     2,104       0.4 %
Rite Aid Corporation
    2       526,631       0.6 %     2,088       0.4 %
Expeditors International
    4       232,976       0.3 %     2,087       0.4 %
DJ Air Services, Inc.(5)
    1       51,920       0.1 %     2,054       0.4 %
TJX Companies, Inc. 
    2       532,657       0.6 %     2,051       0.4 %
EGL Eagle Global Logistics, L.P. 
    4       328,445       0.4 %     2,040       0.4 %
Corvis Corporation
    5       151,878       0.2 %     1,958       0.4 %
             
             
         
 
Total
            10,396,861       11.9 %   $ 94,313       18.0 %
             
             
         


(1)  Customer(s) may be a subsidiary of or an entity affiliated with the named customer. We also have a lease at our Park One property adjacent to the Los Angeles International Airport with an annualized base rent of $6.1 million, which is not included.
 
(2)  Computed as aggregate leased square feet divided by the aggregate leased square feet of the industrial and retail properties.
 
(3)  Annualized base rent is calculated as monthly base rent (cash basis) per the lease, as of December 31, 2003, multiplied by 12.
 
(4)  Computed as aggregate annualized base rent divided by the aggregate annualized base rent of the industrial and retail and other properties.
 
(5)  Apron rental amounts (but not square footage) are included.
 
(6)  United States Government includes the United States Postal Service, United States Customs and the United Stated Department of Agriculture.

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(7)  County of Los Angeles includes Child Support Service’s Department, the Fire Department, the District Attorney, the Sheriff’s Department, and the Unified School District.

OPERATING AND LEASING STATISTICS

Industrial Operating and Leasing Statistics

      The following table summarizes key operating and leasing statistics for all of our industrial properties as of and for the years ended December 31, 2003, 2002 and 2001:

                               
Operating Portfolio(1) 2003 2002 2001




Square feet owned(2)
    87,101,412       84,203,022       81,550,880  
Occupancy percentage
    93.1 %     94.6 %     94.5 %
Weighted average lease terms:
                       
 
Original
    6.1 years       6.2 years       6.3 years  
 
Remaining
    3.2 years       3.3 years       3.3 years  
Tenant retention
    65.3 %     74.2 %     66.8 %
Same Space Leasing Activity(3):
                       
 
Rent increases/(decreases) on renewals and rollovers
    (10.1 )%     (1.0 )%     20.4 %
 
Same space square footage commencing (millions)
    17.3       14.7       11.9  
Second Generation Leasing Activity:
                       
 
Tenant improvements and leasing commissions per sq. ft.:
                       
   
Renewals
  $ 1.39     $ 1.30     $ 0.99  
   
Re-tenanted
    2.13       2.45       3.25  
     
     
     
 
     
Weighted average
  $ 1.77     $ 1.90     $ 2.05  
     
     
     
 
 
Square footage commencing (millions)
    22.7       19.0       13.9  


(1)  Includes all consolidated industrial operating properties and excludes industrial development and renovation projects. Excludes retail and other properties’ square footage of 0.5 million with occupancy of 75.2% and annualized base rents of $5.5 million as of December 31, 2003.
 
(2)  In addition to owned square feet as of December 31, 2003, we managed, through our subsidiary, AMB Capital Partners, LLC, 0.5 million additional square feet of industrial, retail and other properties. As of December 31, 2003, we also had investments in 7.9 million square feet of industrial operating properties through our investments in unconsolidated joint ventures.
 
(3)  Consists of second-generation leases renewing or re-tenanting with current and prior lease terms greater than one year.

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Industrial Same Store Operating Statistics

      The following table summarizes key operating and leasing statistics for our same store properties as of and for the years ended December 31, 2003, 2002 and 2001:

                           
2003 2002 2001



Square feet in same store pool(1)
    71,985,575       67,998,585       60,165,437  
 
% of total industrial square feet
    82.6 %     80.8 %     73.8 %
Occupancy percentage at period end
    93.0 %     94.6 %     94.6 %
Tenant retention
    65.1 %     73.3 %     64.5 %
Rent increases/(decreases) on renewals and rollovers
    (10.6 )%     (1.4 )%     23.5 %
 
Square feet leased (millions)
    16.2       13.8       10.0  
Growth % increase/(decrease) (excluding straight-line rents):
                       
 
Revenues
    (3.6 )%     3.9 %     6.4 %
 
Expenses
    2.7 %     5.1 %     6.9 %
 
Net operating income
    (5.6 )%     3.5 %     6.3 %
Growth % increase/(decrease) (including straight-line rents):
                       
 
Revenues
    (3.8 )%     3.6 %     5.9 %
 
Expenses
    2.7 %     5.1 %     6.9 %
 
Net operating income
    (5.7 )%     3.1 %     5.6 %


(1)  Same store properties are those properties that we owned during both the current and prior year reporting periods, excluding development properties prior to being stabilized (generally defined as properties that are 90% leased or properties for which we have held a certificate of occupancy or building has been substantially complete for at least 12 months).

Retail and Other Property Summary

      Our remaining retail and other properties, aggregating approximately 0.5 million square feet, were 75.2% leased and had an annualized base rent of $5.5 million at December 31, 2003.

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DEVELOPMENT PROPERTIES

Development Pipeline

      The following table sets forth the properties owned by us as of December 31, 2003, which were undergoing renovation, expansion or development. No assurance can be given that any of these projects will be completed on schedule or within budgeted amounts.

Industrial Development and Renovation Deliveries

                                                   
Estimated
Square Estimated Our
Development Estimated Feet at Total Ownership
Project Location Alliance Partner® Stabilization Stabilization Investment(1) Percentage







2004 Deliveries
                                               
1. Sunset Distribution Center Building 1(3)
    Brea, CA       None       Q2       246,608     $ 14,800       20 %
2. O’Hare Industrial — 701 Hilltop Drive(3)
    Itasca, IL       Hamilton Partners       Q3       60,810       2,600       100 %
3. Agave Building 3
    Mexico City, Mexico       G Accion       Q3       224,023       11,800       90 %
4. Airport Logistics Park of Singapore Phase I
    Changi, Singapore       Boustead Projects       Q4       233,773       10,600       50 %
5. MIA Logistics Center (IAC)(3)
    Miami, FL       None       Q4       147,182       9,900       100 %
6. JFK Air Cargo —
179 149th Road(3)
    Jamaica, NY       None       Q4       15,000       2,200       100 %
                             
     
         
 
Total 2004 Deliveries
                            927,396       51,900       65 %
                             
     
         
 
Leased/Funded-to-date
                            42 %   $ 36,300 (2)        
 
Weighted Average Estimated Stabilized Cash Yield(4)
                                    8.7 %        
2005 Deliveries
                                               
7. Patriot Distribution Center(3)
    Mansfield, MA       National Development       Q1       423,052       22,800       20 %
8. Sterling Distribution Center 1
    Chino, CA       Majestic Realty       Q1       1,000,000       36,800       50 %
9. Northfield Building 600
    Grapevine, TX       Seefried Properties       Q1       140,160       6,600       20 %
10. Agave Building 1
    Mexico City, Mexico       G Accion       Q1       397,210       18,100       90 %
11. Beacon Lakes 9
    Miami, FL       Codina Development       Q2       194,480       9,800       79 %
12. Chancellor(3)
    Orlando, FL       None       Q2       201,600       8,000       100 %
13. Nicholas Warehouse(3)
    Elk Grove, IL       None       Q3       145,000       11,500       100 %
14. Sterling Distribution Center 2 & 3
    Chino, CA       Majestic Realty       Q3       880,000       31,600       50 %
15. Beacon Lakes 6
    Miami, FL       Codina Development       Q4       194,480       9,800       79 %
                             
     
         
 
Total 2005 Deliveries
                            3,575,982       155,000       59 %
                             
     
         
 
Leased/Funded-to-date
                            36 %   $ 54,200 (2)        
 
Weighted Average Estimated Stabilized Cash Yield(4)
                                    9.2 %        

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Estimated
Square Estimated Our
Development Estimated Feet at Total Ownership
Project Location Alliance Partner® Stabilization Stabilization Investment(1) Percentage







2006 Deliveries
                                               
16. MAD Logistics Center
    Madrid, Spain       Codina Development  &       Q2       454,779       26,100       80 %
                             
     
         
              Torimbia                                  
 
Total 2006 Deliveries
                            454,779       26,100       80 %
                             
     
         
 
Leased/Funded-to-date
                            0 %   $ 800 (2)        
 
Weighted Average Estimated Stabilized Cash Yield(4)
                                    9.0 %        
Total Scheduled Deliveries(1)
                            4,958,157     $ 233,000       63 %
                             
     
         
 
Leased/Funded-to-date
                            34 %   $ 91,200 (2)        
 
Weighted Average Estimated Stabilized Cash Yield(4)
                                    9.0 %        


(1)  Represents total estimated cost of renovation, expansion or development, including initial acquisition costs, Development Alliance Partner earnouts and associated carry costs. The estimates are based on our current estimates and forecasts and are subject to change. Excludes 349 acres of land held for future development (representing a potential 5.9 million square feet) and other acquisition-related costs totaling $49.8 million. Non-U.S. dollar investments are translated to U.S. dollars using the exchange rate at December 31, 2003.
 
(2)  Our share of amounts funded to date for 2004, 2005 and 2006 deliveries was $21.8 million, $29.1 million and $0.7 million, respectively, for a total of $51.6 million.
 
(3)  Represents a renovation project.
 
(4)  The yields on international projects are on an after-tax basis.

      The following table sets forth value-added conversion projects and development projects that we intended to sell as of December 31, 2003:

Development Projects Available for Sale

                                                   
Estimated Estimated Estimated Our
Development Completion Square Feet at Total Ownership
Projects(1) Market Alliance Partner Date(2) Completion Investment(3) Percentage







1. Carson Town Center SW 10
    Los Angeles       Mar Ventures       Completed       92,282     $ 7,000       95%  
2. Wilsonville Phase II
    Portland       Trammell Crow Company       Completed       249,625       11,000       100%  
3. Axygen Headquarters
  San  Francisco Bay Area     Harvest Properties       Q3 04       100,518       8,900       100%  
4. Central Business Park Buildings A-G
  San Francisco Bay Area     Harvest Properties       Q3 04       127,027       11,900       100%  
                             
     
         
Total
                            569,452     $ 38,800       99%  
                             
     
         
 
Funded-to-date
                                  $ 21,000 (4)        

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(1)  Represents build-to-suit and speculative development or redevelopment. Excludes 267 acres of land held for future development or sale and other acquisition-related costs totaling $47.0 million.
 
(2)  We intend to sell these properties within two years of completion.
 
(3)  Represents total estimated cost of renovation, expansion or development, including initial acquisition costs, carry and partner earnouts. The estimates are based on our current estimates and forecasts and are subject to change.
 
(4)  Our share of amounts funded as of December 31, 2003, was $20.8 million.

Properties Held Through Joint Ventures, Limited Liability Companies and Partnerships

 
Consolidated:

      As of December 31, 2003, we held interests in joint ventures, limited liability companies and partnerships with institutional investors and other third parties, which we consolidate in our financial statements. Such investments are consolidated because we owned a majority interest or, as general partner, exercise significant control over major operating decisions such as acquisition or disposition decisions, approval of budgets, selection of property managers and changes in financing. Under the agreements governing the joint ventures, we and the other party to the joint venture 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 other party to the joint venture and typically provide certain rights to us or the other party to the joint venture to sell our or their interest in the joint venture to the joint venture or to the other joint-venture partner on terms specified in the agreement. In addition, under certain circumstances, many of the joint ventures include buy/sell provisions. See Part IV. Item 15: Note 10 of the “Notes to Consolidated Financial Statements” for additional details. The tables that follow summarize our consolidated joint ventures as of December 31, 2003.

Co-investment Consolidated Joint Ventures

                                                   
Our JV Partners’
Ownership Number of Square Gross Book Property Share of
Joint Ventures Percentage Buildings Feet(1) Value(2) Debt Debt







Co-Investment Operating Joint Ventures:
                                               
 
AMB/Erie, L.P.(3)
    50 %     27       2,585,304     $ 141,924     $ 57,115     $ 28,557  
 
AMB Institutional Alliance Fund I, L.P.(4)
    21 %     104       6,200,772       417,276       214,538       170,140  
 
AMB Partners II, L.P.(5)
    20 %     93       7,306,813       423,015       253,942       203,638  
 
AMB-SGP, L.P.(6)
    50 %     73       8,591,207       408,507       249,861       124,553  
 
AMB Institutional Alliance Fund II, L.P.(4)
    20 %     63       6,621,978       409,050       204,542       163,415  
 
AMB-AMS, L.P.(7)
    39 %                              
             
     
     
     
     
 
 
Total Co-Investment Operating Joint Ventures
    29 %     360       31,306,074       1,799,772       979,998       690,303  

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Our JV Partners’
Ownership Number of Square Gross Book Property Share of
Joint Ventures Percentage Buildings Feet(1) Value(2) Debt Debt







Co-Investment Development Joint Ventures:
                                               
 
AMB/Erie, L.P.(3)
    50 %                 14,250              
 
AMB Institutional Alliance Fund I, L.P.(4)
    21 %                 626              
 
AMB Partners II, L.P.(5)
    20 %                 5,822              
 
AMB Institutional Alliance Fund II, L.P.(4)
    20 %     3       809,820       40,659              
             
     
     
     
     
 
 
Total Co-Investment Development Joint Ventures
    27 %     3       809,820       61,357              
             
     
     
     
     
 
   
Total Co-Investment Consolidated Joint Ventures
    29 %     363       32,115,894     $ 1,861,129     $ 979,998     $ 690,303  
             
     
     
     
     
 


(1)  For development properties, this represents estimated square feet at completion of development for committed phases of development and renovation projects.
 
(2)  Represents the book value of the property (before accumulated depreciation) owned by the joint venture entity and excludes net other assets as of December 31, 2003. Development book values include uncommitted land.
 
(3)  AMB Erie, L.P. is a co-investment partnership formed in 1998 with the Erie Insurance Company and certain related entities.
 
(4)  AMB Institutional Alliance Fund I, L.P. and AMB Institutional Alliance Fund II, L.P. are co-investment partnerships with institutional investors, which invest through private real estate investment trusts.
 
(5)  AMB Partners II, L.P. is a co-investment partnership formed in 2001 with the City and County of San Francisco Employees’ Retirement System.
 
(6)  AMB-SGP, L.P. is a co-investment partnership formed in 2001 with Industrial JV Pte Ltd, a subsidiary of GIC Real Estate Pte. Ltd, the real estate investment subsidiary of the government of Singapore Investment Corporation.
 
(7)  AMB-AMS, L.P. is a commitment to form a co-investment partnership with two Dutch pension funds advised by Mn Services NV.

Other Consolidated Joint Ventures

                                                   
Our Gross JV Partners’
Ownership Square Book Property Share of
Properties Market Percentage Feet Value(1) Debt Debt







Other Industrial Operating Joint Ventures
    Various       92 %     3,801,160     $ 280,528     $ 75,665     $ 6,036  
Other Industrial Development Joint Ventures
    Various       84 %     1,906,133       77,123              
                     
     
     
     
 
 
Total Other Industrial Consolidated Joint Ventures
            90 %     5,707,293     $ 357,651     $ 75,665     $ 6,036  
                     
     
     
     
 
Retail Joint Ventures:
                                               
 
1. Around Lenox
    Atlanta       90 %     125,222     $ 22,184     $ 9,368     $ 937  
 
2. Palm Aire
    Miami       100 %     140,262       19,773              
 
3. Springs Gate Land
    Miami       100 %           6,717              
                     
     
     
     
 
 
Total Retail Consolidated Joint Ventures
            95 %     265,484     $ 48,674     $ 9,368     $ 937  
                     
     
     
     
 

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(1)  Represents the book value of the property (before accumulated depreciation) owned by the joint-venture entity and excludes net other assets as of December 31, 2003. Development book values include uncommitted land.

 
Unconsolidated Joint Ventures, Mortgage Investments and Other Investment:

      As of December 31, 2003, we held interests in six equity investment joint ventures that are not consolidated in our financial statements. The management and control over significant aspects of these investments are held by the third-party joint-venture partners and the investments do not meet the variable-interest entity consolidation criteria under FASB Interpretation No. 46R, Consolidation of Variable Interest Entities. In addition, as of December 31, 2003, we held mortgage investments, from which we receive interest income.

Unconsolidated Joint Ventures,

Mortgage Investments and Other Investment
                                             
Our Net Our
Square Equity Ownership
Unconsolidated Joint Ventures Market Alliance Partner Feet Investment Percentage






Other Industrial Operating Joint Ventures
                                       
 
1. Elk Grove Du Page
    Chicago       Hamilton Partners       4,046,721     $ 31,548       56 %
 
2. Pico Rivera
    Los Angeles       Majestic Realty       855,600       1,091       50 %
 
3. Monte Vista Spectrum
    Los Angeles       Majestic Realty       576,852       487       50 %
 
4. Industrial Fund I, LLC
    Various       Citigroup       2,446,334       4,173       15 %
                     
     
         
 
Total Other Industrial Operating Joint Ventures
                    7,925,507       37,299          
Other Industrial Development Joint Ventures(1)
                                       
 
5. Sterling Distribution Center
    Los Angeles       Majestic Realty       1,880,000       12,643       50 %
 
6. Airport Logistics Park of Singapore Phase I
    Singapore       Boustead Projects       233,773       2,067       50 %
                     
     
         
 
Total Other Industrial Development Joint Ventures
                    2,113,773       14,710          
                     
     
         
   
Total Unconsolidated Joint Ventures
                    10,039,280     $ 52,009       45 %
                     
     
         
                                         
Our
Mortgage Ownership
Mortgage Investments Market Maturity Receivable Rate Percentage(2)






1. Pier 1(3)
    SF Bay Area       May 2026     $ 13,042       13.0 %     100%  
2. Platinum Distribution Center
    No. New Jersey       February 2004       19,500       6.0 %     20%  
3. Platinum Distribution Center
    No. New Jersey       November 2006       1,300       12.0 %     20%  
4. North Bay Distribution Center/BAB
    SF Bay Area       December  2004       7,040       5.5 %     100%  
5. North Bay Distribution Center/Corovan
    SF Bay Area       December  2004       2,263       7.3 %     100%  
                     
                 
                    $ 43,145                  
                     
                 
                                 
Our
Gross Ownership
Other Investment Market Property Type Investment Percentage





1. Park One
    Los Angeles       Parking Lot     $ 75,497       100%  

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(1)  Square feet for development alliance joint ventures represents estimated square feet at completion of development project.
 
(2)  Represents our ownership percentage in the co-investment joint venture that holds the mortgage investment.
 
(3)  We also have a 0.1% unconsolidated equity interest (with a 33% economic interest) in this property and an option to purchase the remaining equity interest that begins January 1, 2007 and expires December 31, 2009.

Secured Debt

      As of December 31, 2003, we had $1.4 billion of secured indebtedness, net of unamortized premiums, secured by deeds of trust on 111 properties. As of December 31, 2003, the total gross consolidated investment value of those properties secured by debt was $2.6 billion. Of the $1.4 billion of secured indebtedness, $1.1 billion was joint venture debt secured by properties with a gross investment value of $1.8 billion. For additional details, see Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and Item 15: Note 7 of “Notes to Consolidated Financial Statements” included in this report. We believe that as of December 31, 2003, the fair value of the properties securing the respective obligations in each case exceeded the principal amount of the outstanding obligations.

 
Item 3. Legal Proceedings

      As of December 31, 2003, there were no pending legal proceedings to which we were a party or of which any of our properties was the subject, the adverse determination of which we anticipate would have a material adverse effect upon our financial condition, results of operations and cash flows.

 
Item 4. Submission of Matters to a Vote of Security Holders

      None.

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PART II

 
Item 5. Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

      Our common stock began trading on the New York Stock Exchange on November 21, 1997, under the symbol “AMB.” As of March 1, 2004, there were approximately 371 holders of record of our common stock (excluding shares held through The Depository Trust Company, as nominee). Set forth below are the high and low sales prices per share of our common stock, as reported on the NYSE composite tape, and the distribution per share paid or payable by us during the period from January 1, 2002, through December 31, 2003:

                           
Year High Low Dividend




2002
                       
 
1st Quarter
  $ 27.60     $ 25.26     $ 0.410  
 
2nd Quarter
    31.00       27.46       0.410  
 
3rd Quarter
    30.83       26.35       0.410  
 
4th Quarter
    28.92       24.99       0.410  
2003
                       
 
1st Quarter
    28.75       26.00       0.415  
 
2nd Quarter
    29.11       26.95       0.415  
 
3rd Quarter
    30.81       26.99       0.415  
 
4th Quarter
    33.45       29.99       0.415  

      In November 2003, AMB Property II, L.P., one of our subsidiaries, also issued 145,548 of its class B common limited partnership units, with an aggregate value of $4.5 million, to four individual investors in connection with the contribution of a property. The class B common limited partnership units, upon redemption, are exchangeable for cash or, at the option of AMB Property II, L.P., for shares of our common stock on a one-for-one basis.

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Item 6. Selected Financial Data

SELECTED COMPANY FINANCIAL AND OTHER DATA(1)

      The selected financial data set forth in this Item 6 has been restated to reflect certain adjustments to our consolidated financial statements contained in our Annual Report on Form 10-K and Amendment No. 1 to our Annual Report on Form 10-K/ A for the year ended December 31, 2003 originally filed with the U.S. Securities and Exchange Commission on March 11, 2004 and March 15, 2004, respectively. See Note 2 to the restated consolidated financial statements included in Part IV, Item 15 of this Amendment No. 2 on Form 10-K/ A.

      The following table sets forth selected consolidated historical financial and other data for AMB Property Corporation on an historical basis as of and for the years ended December 31:

                                           
2003 2002 2001(2) 2000 1999





(Restated) (Restated) (Restated)
(Dollars in thousands, except per share amounts)
Operating Data
                                       
Total revenues
  $ 615,037     $ 589,682     $ 534,266     $ 433,866     $ 412,755  
Income before minority interests and discontinued operations
    148,384       142,169       183,161       151,765       198,126  
Income from continuing operations
    77,696       83,641       118,181       108,312       165,151  
Income from discontinued operations
    51,432       37,478       18,019       13,470       10,952  
Net income available to common stockholders
    116,716       113,035       120,100       113,282       167,603  
Net income from continuing operations per common share:
                                       
 
Basic(3)
    0.81       0.91       1.21       1.19       1.81  
 
Diluted(3)
    0.79       0.89       1.20       1.19       1.81  
Net income from discontinued operations per common share:
                                       
 
Basic(3)
    0.63       0.45       0.22       0.16       0.13  
 
Diluted(3)
    0.62       0.44       0.21       0.16       0.13  
Net income per common share:
                                       
 
Basic(3)
    1.44       1.36       1.43       1.35       1.94  
 
Diluted(3)
    1.41       1.33       1.41       1.35       1.94  
Dividends declared per common share
    1.66       1.64       1.58       1.48       1.40  
Other Data
                                       
Funds from operations(4)
  $ 186,666     $ 215,194     $ 186,707     $ 202,751     $ 190,678  
Funds from operations per common share and unit:
                                       
 
Basic
    2.17       2.44       2.09       2.26       2.10  
 
Diluted
    2.13       2.40       2.07       2.25       2.10  
Cash flows provided by (used in):
                                       
 
Operating activities
    271,536       288,801       288,562       261,175       198,939  
 
Investing activities
    (348,003 )     (244,390 )     (363,152 )     (726,499 )     55,184  
 
Financing activities
    112,022       (28,150 )     127,303       452,370       (240,721 )

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2003 2002 2001(2) 2000 1999





(Restated) (Restated) (Restated)
(Dollars in thousands, except per share amounts)
Balance Sheet Data
                                       
Investments in real estate at cost
  $ 5,491,707     $ 4,922,782     $ 4,527,511     $ 4,026,597     $ 3,249,452  
Total assets
    5,409,559       4,983,629       4,763,614       4,433,207       3,631,175  
Total consolidated debt
    2,574,257       2,235,361       2,143,714       1,843,857       1,279,662  
Our share of total debt(5)
    1,954,314       1,691,737       1,655,386       1,681,161       1,168,218  
Stockholders’ equity
    1,657,137       1,676,079       1,747,389       1,767,930       1,829,259  


(1)  Certain items in the consolidated financial statements for prior periods have been reclassified to conform with current classifications with no effect on net income or stockholders’ equity.
 
(2)  In July 2003, the U.S. Securities and Exchange Commission announced that it had revised its position relating to the application of Emerging Issues Task Force Topic No. D-42, The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock, (“Topic D-42”). As a result of this announcement, original issuance costs related to preferred equity are to be reflected as a reduction of net income available to common stockholders in determining earnings per share for the period in which the preferred equity is redeemed. The announcement requires retroactive application of the revised position in previously issued financial statements. As a result, our financial statements for the year ending December 31, 2001, are restated to reflect a reduction in net income available to common stockholders of $3.2 million, representing the original issuance costs of AMB Property II, L.P.’s series C preferred units, which were redeemed in December 2001. Diluted earnings per share for the year ended December 31, 2001 was $1.41 (restated). The U.S. Securities and Exchange Commission’s revised position on Topic D-42 did not require us to file amendments to previously filed reports and will not impact any other previously reported periods.
 
(3)  Basic and diluted net income per weighted average share equals the net income available to common stockholders divided by 81,096,062 and 82,852,528 shares, respectively, for 2003; 83,310,885 and 84,795,987 shares, respectively, for 2002; 84,174,644 and 85,214,066 shares, respectively, for 2001; 83,697,170 and 84,155,306 shares, respectively, for 2000; and 86,271,862 and 86,347,487 shares, respectively, for 1999.
 
(4)  In 2003, we discontinued our practice of deducting amortization of investments in leasehold interests from funds from operations (“FFO”) as such an adjustment is not provided for in NAREIT’s FFO definition. In 2003, we also modified our FFO reporting to no longer add back impairment losses when computing FFO in accordance with NAREIT’s FFO definition. Additionally, we adopted Topic D-42 and began including preferred stock and unit redemption discounts and issuance cost write-offs in FFO. As a result, FFO for the periods presented has been adjusted to reflect the changes. For an explanation of funds from operations and a discussion of why management believes that FFO is a meaningful supplemental measure of our operating performance, please see Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Supplemental Earnings Measures.”
 
(5)  Our share of total debt is the pro rata portion of the total debt based on our percentage of equity interest in each of the consolidated ventures holding the debt. We believe that our share of total debt is a meaningful supplemental measure, which enables both management and investors to analyze our leverage and to compare our leverage to that of other companies. In addition, it allows for a more meaningful comparison of our debt to that of other companies that do not consolidate their joint ventures. Our share of total debt is not intended to reflect our actual liability should there be a default under any or all of such loans or a liquidation of the joint ventures. For a reconciliation of our share of total debt to total consolidated debt, a GAAP financial measure, please see the table of debt maturities and capitalization in Part II. Item 7. “Liquidity and Capital Resources — Capital Resources.”

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

      The Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in this Item 7 has been restated to reflect certain adjustments to our consolidated financial statements contained in our Annual Report on Form 10-K and Amendment No. 1 to our Annual Report on Form 10-K/ A for the year ended December 31, 2003, originally filed with the U.S. Securities and Exchange Commission on March 11, 2004 and March 15, 2004, respectively. See Note 2 to the restated consolidated financial statements included in Part IV, Item 15 of this Amendment No. 2 on Form 10-K/ A.

      You should read the following discussion and analysis of our consolidated financial condition and results of operations in conjunction with the notes to consolidated financial statements. Statements contained in this discussion that are not historical facts may be forward-looking statements. Such statements relate to our future performance and plans, results of operations, capital expenditures, acquisitions, and operating improvements and costs. 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 occur or be achieved. 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:

  •  changes in general economic conditions or in the real estate sector;
 
  •  non-renewal of leases by customers or renewal at lower than expected rent;
 
  •  difficulties in identifying properties to acquire and in effecting acquisitions on advantageous terms and the failure of acquisitions to perform as we expect;
 
  •  risks and uncertainties affecting property development and renovation (including construction delays, cost overruns, our inability to obtain necessary permits and financing);
 
  •  a downturn in California’s economy or real estate conditions;
 
  •  losses in excess of our insurance coverage;
 
  •  our failure to divest of properties on advantageous terms or to timely reinvest proceeds from any such divestitures;
 
  •  unknown liabilities acquired from our predecessors or in connection with acquired properties;
 
  •  risks of doing business internationally, including unfamiliarity with new markets and currency risks;
 
  •  risks associated with using debt to fund acquisitions and development, including re-financing risks;
 
  •  our failure to obtain necessary financing;
 
  •  changes in local, state and federal regulatory requirements;
 
  •  environmental uncertainties; and
 
  •  our failure to qualify and maintain our status as a real estate investment trust under the Internal Revenue Code of 1986.

      Our success also depends upon economic trends generally, various market conditions and fluctuations and those other risk factors discussed in the section entitled “Business Risks” in this report. We caution you not to place undue reliance on forward-looking statements, which reflect our analysis only and speak as of the date of this report or as of the dates indicated in the statements. We assume no obligation to update or supplement forward-looking statements.

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GENERAL

      We commenced operations as a fully integrated real estate company effective with the completion of our initial public offering on November 26, 1997, and elected to be taxed as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986 with our initial tax return for the year ended December 31, 1997. AMB Property Corporation and AMB Property, L.P. were formed shortly before the consummation of our initial public offering. We refer to AMB Property, L.P. as the “operating partnership.”

Management’s Overview

      We generate revenue and earnings primarily from rent received from customers under long-term (generally three to ten years) operating leases at our properties, including reimbursements from customers for certain operating costs, and from partnership distributions and fees from our private capital business. We also derive earnings from the strategic disposition of assets and from the disposition of projects under our development-for-sale program. Our long-term growth is dependent on our ability to maintain and increase occupancy rates or increase rental rates at our properties and our ability to continue to acquire and develop new properties.

      Although the weak economy over the past three years has decreased customer demand for space and has limited or in most cases lowered rental rates, many types of investors are acquiring industrial real estate. We believe that we have capitalized on this opportunity by accelerating the repositioning of our portfolio through the disposition of properties. While property dispositions result in reinvestment capacity and trigger gain/loss recognition, they also create near-term earnings dilution. However, we believe that, in the long-term, the repositioning of our portfolio will benefit our stockholders.

      The table below summarizes our leasing activity for 2003 and 2002:

                           
U.S. Hub Total Other Total/Weighted
Property Data Markets(1) Markets Average




For the year ended December 31, 2003:
                       
 
% of total rentable square feet
    75.0 %     25.0 %     100.0 %
 
Occupancy percentage at year end
    93.5 %     91.9 %     93.1 %
 
Same space square footage leased
    13,636,050       3,636,967       17,273,017  
 
Rent increases/(decreases) on renewals and rollovers
    (12.7 )%     1.7 %     (10.1 )%
For the year ended December 31, 2002:
                       
 
% of total rentable square feet
    70.0 %     30.0 %     100.0 %
 
Occupancy percentage at year end
    95.5 %     92.5 %     94.6 %
 
Same space square footage leased
    10,303,683       4,396,916       14,700,599  
 
Rent increases/(decreases) on renewals and rollovers
    (1.8 )%     1.0 %     (1.0 )%


(1)  Our U.S. hub and gateway markets include on-tarmac and Atlanta, Chicago, Dallas/ Fort Worth, Los Angeles, Northern New Jersey/ New York City, the San Francisco Bay Area, Miami and Seattle.

      Occupancy levels in our industrial portfolio and rents on lease renewals and rollovers were lower in 2003 as the general contraction in business activity, which began in 2001, reduced demand for industrial warehouse facilities. According to Torto Wheaton Research, the overall industrial market deteriorated rapidly from its peak levels at the end of 2000, when availability was 6.6%, through the second quarter of 2002, when availability reached 10.8%. Subsequently, national industrial availability has deteriorated at a more modest rate, declining an average of 13 basis points per quarter to reach 11.6% at December 31, 2003. As a result of the increase in availability, market rents for industrial properties in most markets decreased between 10% and 20% from their peak levels in 2001. Over the same three-year period, our portfolio vacancy increased from 3.6% at December 31, 2000 to 6.9% at December 31, 2003, which we consider consistent with market trends, but still outperforming the national industrial average. While the level of rental rate reduction varied by

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market, we maintained high occupancy by pricing lease renewals and new leases with sensitivity to local market conditions. In periods of decreasing rental rates, we strive to sign leases with shorter terms to prevent locking-in lower rent levels for long periods and to be prepared to sign new, longer-term leases during periods of growing rental rates. When we sign leases of shorter duration, we attempt to limit overall leasing costs and capital expenditures by offering modest tenant improvement packages, appropriate to the lease term. We generally followed this practice during 2003. Through the first half of 2003, we experienced declining occupancy in our industrial operating portfolio; at June 30, 2003, occupancy in our operating industrial portfolio was 91.5%. However, during the last half of 2003, we have increased occupancy in our operating industrial portfolio by 160 basis points to 93.1% at December 31, 2003, 470 basis points greater than the overall industrial market, according to Torto Wheaton Research. Rents on industrial renewals and rollovers in our portfolio decreased 1.0% during 2002 and 10.1% during 2003.

      During 2003, our dispositions and contributions (to a joint venture in which we retained a 15% ownership interest in exchange for cash) totaled $366.3 million, including assets in markets that no longer fit our investment strategy and properties at valuations that we considered to be at premium levels. Because we did not immediately reinvest sales proceeds into attractively priced industrial assets, these sales and contributions have diluted our near-term operating results. However, we believe they help position us for long-term growth and higher returns on invested capital by increasing the strategic fit of our portfolio with our investment and private capital models. Further, proceeds from these sales, along with our balance sheet and private capital sources, create significant capacity for future deployment. While we will continue to sell assets on an opportunistic basis, we believe that we have substantially achieved our near-term strategic disposition goals.

      During 2003, we also expanded our development staff and capabilities, because we believe that development, renovation and expansion of well-located, high-quality industrial properties should generally continue to provide us with attractive investment opportunities at a higher rate of return than we may obtain from the purchase of existing properties. In 2003, Eugene F. Reilly joined us as Executive Vice President of North American Development, adding to our in-house development team. We have increased our development pipeline from a low of $107.0 million at the end of 2002 to $233.0 million at the end of 2003. In addition to our committed development pipeline, we hold over 600 acres of land, which could support approximately 10.0 million square feet of additional development.

      Going forward, we believe that our co-investment program with private-capital investors will continue to serve as a significant source of revenues and capital for acquisitions and developments. Through these co-investment joint ventures we earn acquisition and development fees, asset management fees and priority distributions as well as promoted interests and incentive fees based on the performance of the co-investment joint ventures; however, there can be no assurance that we will continue to do so. As of December 31, 2003, we owned approximately 32.1 million square feet of our properties (34.7% of the total consolidated operating and development portfolio) through our co-investment joint ventures. We may make additional investments through these joint ventures or new joint ventures in the future and presently plan to do so.

      Over the next three-to-four years, we expect to have approximately 15% of our portfolio (based on consolidated annualized base rent) invested in international markets. Our Mexican target markets currently include Mexico City, Guadalajara and Monterrey. Our European target markets currently include Paris, Amsterdam, Frankfurt, Madrid and London. Our Asian target markets currently include Singapore, Hong Kong and Tokyo. It is possible that our target markets will change over time to reflect experience, market opportunities, customer needs and changes in global distribution patterns. As of December 31, 2003, our international operating properties comprised 3.0% of our total annualized base rent.

      To maintain our qualification as a real estate investment trust, we must pay dividends to our stockholders aggregating annually at least 90% of our taxable income. As a result, we cannot rely on retained earnings to fund our on-going operations to the same extent that other corporations that are not real estate investment trusts can. We must continue to raise capital in both the debt and equity markets to fund our working capital needs, acquisitions and developments. See “Liquidity and Capital Resources” for a complete discussion of the sources of our capital.

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Summary of Key Transactions in 2003

      During the year ended December 31, 2003, we completed the following capital deployment transactions:

  •  Acquired 82 buildings in the U.S., Mexico, Europe and Asia, aggregating approximately 6.5 million square feet, for $533.9 million, including $238.3 million invested through two of our co-investment joint ventures;
 
  •  Completed industrial development projects in the U.S., Mexico and Europe, comprising 1.6 million square feet, for a total investment of $105.7 million;
 
  •  Expanded our development pipeline, which at December 31, 2003, included projects in the U.S., Mexico, Singapore and Spain totaling 5.0 million square feet with an expected total investment of $233.0 million, of which $91.2 million was invested as of December 31, 2003 and of which 34% was pre-leased;
 
  •  Divested ourselves of 24 industrial buildings and two retail centers, aggregating approximately 2.8 million square feet, for an aggregate price of $272.3 million; and
 
  •  Contributed $94.0 million in operating properties to our newly formed unconsolidated joint venture, in which we retained a 15% interest.

      See Part IV. Item 15: Notes 4 and 5 of the “Notes to Consolidated Financial Statements” for a more detailed discussion of our acquisition, development and disposition activity.

      During the year ended December 31, 2003, we completed the following capital markets transactions:

  •  Raised $103.4 million, net of costs, from the issuances of $50.0 million of our 6.5% Series L Cumulative Redeemable Preferred Stock and $57.5 million of our 6.75% Series M Cumulative Redeemable Preferred Stock;
 
  •  Raised $125.0 million from the issuance by the operating partnership of $75.0 million of 5.53%, 10-year, unsecured fixed-rate notes and $50.0 million of floating rate unsecured notes at a rate of three month-LIBOR telerate plus 40 basis points;
 
  •  Redeemed all of our outstanding 8.5% Series A Cumulative Redeemable Preferred Stock and all of the operating partnership’s outstanding 8 5/8% Series B Cumulative Redeemable Preferred Units for an aggregate of $165.8 million;
 
  •  Repurchased 812,900 shares of our common stock for $21.2 million;
 
  •  Obtained long-term secured debt financing for our co-investment joint ventures totaling $177.0 million at an average rate of 4.3%; and
 
  •  Repaid the $45.5 million outstanding balance on the AMB Institutional Alliance Fund II, L.P. credit facility with capital contributions and secured debt financing proceeds.

      See Part IV. Item 15: Notes 7, 10 and 12 of the “Notes to Consolidated Financial Statements” for a more detailed discussion of our capital markets transactions.

Critical Accounting Policies

      Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

      Restatement of Depreciation Expense. On October 12, 2004, we announced a restatement of depreciation expense for our prior period results relating to 39 buildings in our portfolio, 38 of which are located on-tarmac, which is land owned by federal, state or local airport authorities. As part of management’s on-going review of our accounting policies and internal control over financial reporting, management determined that we should have depreciated certain of our investments in buildings that reside on land subject to ground leases over the remaining terms of the ground leases, rather than over 40 years, which is the period used to depreciate buildings that we hold in fee simple. We did not segregate these assets into a separate expected useful life category for depreciation purposes. Our management determined that the internal control deficiency that resulted in this restatement represents a material weakness, as defined by the Public Company Accounting Oversight Board’s Auditing Standard No. 2. In connection with correcting this error, management has taken appropriate action to modify our system of internal control over financial reporting to remediate this internal control deficiency. Going forward, these assets will be depreciated over the lesser of 40 years or the contractual term of the underlying ground lease. A description of this weakness and the related remediation measures that have been undertaken by us is set forth in Part II, Item 9A, Controls and Procedures of this Form 10-K/ A.

      Investments in Real Estate. Investments in real estate are stated at cost unless circumstances indicate that cost cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value. We also record at acquisition an intangible asset or liability for the value attributable to above or below-market leases, in-place leases and lease origination costs for all acquisitions subsequent to July 1, 2001. Carrying values for financial reporting purposes are reviewed for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying value 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. The estimation of expected future net cash flows is inherently uncertain and relies on assumptions regarding current and future market conditions and the availability of capital. Examples of certain situations that could affect future cash flows of a property may include, but are not limited to: significant decreases in occupancy; unforeseen bankruptcy, lease termination and move-out of a major customer; or a significant decrease in annual base rents of that property. If impairment analysis assumptions change, then an adjustment to the carrying amount of our long-lived assets could occur in the future period in which the assumptions change. To the extent that a property is impaired, the excess of the carrying amount of the property over its estimated fair value is charged to earnings.

      Revenue Recognition. We record rental revenue from operating leases on a straight-line basis over the term of the leases and maintain an allowance for estimated losses that may result from the inability of our customers to make required payments. If customers fail to make contractual lease payments that are greater than our allowance for doubtful accounts, security deposits and letters of credit, then we may have to recognize additional doubtful account charges in future periods. We monitor the liquidity and creditworthiness of our customers on an on-going basis. Each period we review our outstanding accounts receivable, including straight-line rents, for doubtful accounts and provide allowances as needed. We also record lease termination fees when a customer has executed a definitive termination agreement with us and the payment of the termination fee is not subject to any conditions that must be met or waived before the fee is due to us.

      Property Dispositions. We report real estate dispositions in three separate categories on our consolidated statements of operations. First, when we contribute properties to our joint ventures, we recognize gains representing the portion of the contributed properties acquired by the third-party investors to the extent of cash proceeds received. We also dispose of value-added conversion projects and build-to-suit and speculative development projects that we have held as development projects available for sale. The gain or loss recognized from the disposition of these projects is reported net of estimated taxes, when applicable. Lastly, beginning in 2002, SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, required us to separately report as discontinued operations the historical operating results attributable to operating properties sold and the applicable gain or loss on the disposition of the properties. The consolidated statements of operations for prior periods are also adjusted to conform with this classification. There is no impact on our previously reported consolidated financial position, net income or cash flows.

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      Joint Ventures. We hold interests in both consolidated and unconsolidated joint ventures. Our joint venture investments do not meet the variable interest entity criteria under FASB Interpretation No. 46R, Consolidation of Variable Interest Entities. Therefore, we determine consolidation based on standards set forth in EITF 96-16, Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights, and Statement of Position 78-9, Accounting for Investments in Real Estate Ventures. Based on the guidance set forth in these pronouncements, we consolidate certain joint venture investments because we own a majority interest or exercise significant control over major operating decisions, such as approval of budgets, selection of property managers, asset management, investment activity and changes in financing. For joint ventures where we do not own a majority interest or do not exercise significant control over major operating and management decisions, we use the equity method of accounting and do not consolidate the joint venture for financial reporting purposes.

      Real Estate Investment Trust. As a real estate investment trust, we generally will not be subject to corporate level federal income taxes if minimum distribution, income, asset and shareholder tests are met. However, not all of our underlying entities are qualified REIT subsidiaries and may be subject to federal and state taxes, when applicable. In addition, foreign entities may also be subject to the taxes of the host country. An income tax allocation is required to be estimated on our taxable income arising from our taxable REIT subsidiaries and foreign entities. A deferred tax component could arise based upon the differences in GAAP versus tax income for items such as depreciation and gain recognition. However, deferred tax is an immaterial component of our consolidated balance sheet.

RESULTS OF OPERATIONS

      The analysis below includes changes attributable to same store growth, acquisitions, development activity and divestitures. Same store properties are those that we owned during both the current and prior year reporting periods, excluding development properties prior to being stabilized subsequent to December 31, 2001 (generally defined as properties that are 90% leased or properties for which we have held a certificate of occupancy or where building has been substantially complete for at least 12 months). As of December 31, 2003, same store industrial properties consisted of properties aggregating approximately 72.0 million square feet. The properties acquired during 2003, consisted of 82 buildings, aggregating approximately 6.5 million square feet. The properties acquired during 2002 consisted of 43 buildings, aggregating approximately 5.4 million square feet. During 2003, property divestitures and contributions consisted of 48 industrial buildings and two retail centers, aggregating approximately 5.3 million square feet. In 2002, property divestitures consisted of 58 industrial and two retail buildings, aggregating approximately 5.7 million square feet. Our future financial condition and results of operations, including rental revenues, may be impacted by the acquisition of additional properties and dispositions. Our future revenues and expenses may vary materially from historical results.

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For the Years Ended December 31, 2003 and 2002 (dollars in millions)

                                       
Revenues 2003 2002 $ Change % Change





Rental revenues
                               
 
U.S. industrial:
                               
   
Same store
  $ 509.2     $ 529.2     $ (20.0 )     (3.8 )%
   
2002 acquisitions
    55.0       22.0       33.0       150.0 %
   
2003 acquisitions
    14.6             14.6       %
   
Development
    3.7       2.9       0.8       27.6 %
   
Other industrial
    6.4       15.9       (9.5 )     (59.7 )%
 
International industrial
    6.1       0.7       5.4       771.4 %
 
Retail
    6.7       7.8       (1.1 )     (14.1 )%
     
     
     
     
 
   
Total rental revenues
    601.7       578.5       23.2       4.0 %
Private capital income
    13.3       11.2       2.1       18.8 %
     
     
     
     
 
     
Total revenues
  $ 615.0     $ 589.7     $ 25.3       4.3 %
     
     
     
     
 

      The decrease in U.S. industrial same store rental revenues resulted primarily from lower average occupancies, rental revenue decreases in our San Francisco Bay Area sub-market totaling $14.9 million, increased allowances for doubtful accounts of $3.3 million, and decreased straight-line rents of $1.3 million, partially offset by an increase in lease termination fees and miscellaneous income of $0.9 million and fixed rent increases on existing leases. Industrial same store occupancy was 93.0% at December 31, 2003, and 95.0% at December 31, 2002. For the year ended December 31, 2003, rents in the same store portfolio decreased 10.6% on industrial renewals and rollovers (cash basis) on 16.2 million square feet leased. The properties acquired during 2002 consisted of 43 buildings, aggregating approximately 5.4 million square feet. The properties acquired during 2003 consisted of 82 buildings, aggregating approximately 6.5 million square feet. Other industrial includes rental revenues from divested properties not classified as discontinued operations. In 2003, we acquired properties in Mexico and France, resulting in increased international industrial revenues. The increase in private capital income was primarily due to incentive distributions earned from AMB Partners II, L.P.

                                       
Costs and Expenses 2003 2002 $ Change % Change





(Restated) (Restated) (Restated) (Restated)
Property operating costs:
                               
 
Rental expenses
  $ 88.5     $ 76.4     $ 12.1       15.8 %
 
Real estate taxes
    71.4       67.7       3.7       5.5 %
     
     
     
     
 
   
Total property operating costs
  $ 159.9     $ 144.1     $ 15.8       11.0 %
     
     
     
     
 
Property operating costs U.S. industrial:
                               
   
Same store
  $ 128.6     $ 125.2     $ 3.4       2.7 %
   
2002 acquisitions
    17.6       6.8       10.8       158.8 %
   
2003 acquisitions
    3.6             3.6       %
   
Development
    3.3       3.8       (0.5 )     (13.2 )%
   
Other industrial
    3.9       5.7       (1.8 )     (31.6 )%
 
International industrial
    0.4             0.4       %
 
Retail
    2.5       2.6       (0.1 )     (3.8 )%
     
     
     
     
 
   
Total property operating costs
    159.9       144.1       15.8       11.0 %
Depreciation and amortization
    139.0       126.9       12.1       9.5 %
Impairment losses
    5.3       2.9       2.4       82.8 %
General and administrative
    47.7       47.2       0.5       1.1 %
     
     
     
     
 
     
Total costs and expenses
  $ 351.9     $ 321.1     $ 30.8       9.6 %
     
     
     
     
 

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      The $3.4 million increase in same store properties’ operating expenses was primarily due to increases in common area maintenance expenses of $3.4 million, including snow removal, and real estate taxes of $0.9 million, partially offset by a decrease in insurance expenses of $1.2 million. The 2002 acquisitions consisted of 43 buildings, aggregating approximately 5.4 million square feet. The 2003 acquisitions consist of 82 buildings, aggregating approximately 6.5 million square feet. Other industrial includes expenses from divested properties not classified as discontinued operations. The increase in depreciation and amortization expense was due to the increase in our net investment in real estate and ground lease assets, partially offset by a reduction of $2.1 million for the recovery, through the settlement of a lawsuit, of capital expenditures paid in prior years. The 2003 impairment loss was on investments in real estate and leasehold interests that we continue to hold for long-term investment. The 2002 impairment included losses for lease cost write-offs of $1.7 million and an impairment on a portion of our planned property contributions of $1.2 million. The increase in general and administrative expenses was primarily due to increased stock-based compensation expense of $2.8 million resulting from our decision to expense stock options under SFAS No. 123 prospectively and the issuance of additional restricted stock, partially offset by decreased personnel costs and taxes.

                                   
Other Income and (Expenses) 2003 2002 $ Change % Change





Equity in earnings of unconsolidated joint ventures
  $ 5.5     $ 5.7     $ (0.2 )     (3.5 )%
Interest and other income
    4.7       10.4       (5.7 )     (54.8 )%
Gains from dispositions of real estate
    7.4       2.5       4.9       196.0 %
Development profits, net of taxes
    14.4       1.2       13.2       1,100.0 %
Interest, including amortization
    (146.8 )     (146.2 )     0.6       0.4 %
     
     
     
     
 
 
Total other income and (expenses)
  $ (114.8 )   $ (126.4 )   $ (11.6 )     (9.2 )%
     
     
     
     
 

      The decrease in interest and other income was primarily due to the repayment in full of a $74.0 million 9.5% mortgage note receivable in July 2002. The increase in gains from dispositions of real estate (not classified as discontinued operations) resulted from our contribution of $94.0 million in operating properties to our newly formed co-investment joint venture, Industrial Fund I, LLC, in February 2003. We recognized a gain of $7.4 million on the contribution, representing the portion of the contributed properties acquired by the third-party investors. During 2002, we sold two industrial buildings and one retail center, aggregating approximately 0.8 million square feet, for an aggregate price of $50.6 million, with a resulting loss of $0.8 million. In June 2002, we also contributed $76.9 million in operating properties to our consolidated co-investment joint venture, AMB-SGP, LP. We recognized a gain of $3.3 million on the contribution, representing the portion of the contributed properties acquired by the third-party investors. The property contributions and 2002 divestitures of properties held for disposition at December 31, 2001, were not classified as discontinued operations under the provisions of SFAS No. 144. The increase in development profits, net of taxes, resulted from an increased sales volume of $57.8 million in 2003.

                                   
Discontinued Operations 2003 2002 $ Change % Change





Income attributable to discontinued operations, net of minority interests
  $ 8.5     $ 20.6     $ (12.1 )     (58.7) %
Gains from dispositions of real estate, net of minority interests
    42.9       16.9       26.0       153.8 %
     
     
     
     
 
 
Total discontinued operations
  $ 51.4     $ 37.5     $ (13.9 )     (37.1) %
     
     
     
     
 

      During 2003, we divested ourselves of 24 industrial buildings and two retail centers, aggregating approximately 2.8 million square feet, for an aggregate price of $272.3 million, with a resulting net gain of $42.9 million. During 2002, we divested ourselves of 56 industrial buildings, one retail center and an undeveloped land parcel, aggregating approximately 4.9 million square feet, for an aggregate price of $193.4 million, with a resulting net gain of $10.6 million. In November 2002, our joint venture partner in AMB Partners II, L.P. increased its ownership in AMB Partners II, L.P. from 50% to 80% by acquiring 30%

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of the operating partnership’s interest in AMB Partners II, L.P. We recognized a gain of $6.3 million on the sale of the operating partnership’s 30% interest.
                                   
Preferred Stock 2003 2002 $ Change % Change





Preferred stock dividends
  $ (7.0 )   $ (8.5 )   $ 1.5       17.6 %
Preferred stock and unit redemption discount/(issuance costs or premium)
    (5.4 )     0.4       (5.8 )     (1,450.0 )%
     
     
     
     
 
 
Total preferred stock
  $ (12.4 )   $ (8.1 )   $ (4.3 )     (53.1 )%
     
     
     
     
 

      In July 2003, we redeemed all 3,995,800 outstanding shares of our 8.5% Series A Cumulative Redeemable Preferred Stock and recognized a reduction of income available to common stockholders of $3.7 million for the original issuance costs. In addition, on November 26, 2003, the operating partnership redeemed all 1,300,000 of its outstanding 8 5/8% Series B Cumulative Redeemable Preferred Partnership Units and we recognized a reduction of income available to common stockholders of $1.7 million for the original issuance costs.

For the Years Ended December 31, 2002 and 2001 (dollars in millions)

                                     
Revenues 2002 2001 $ Change % Change





Rental revenues
                               
 
U.S. industrial:
                               
   
Same store
  $ 529.2     $ 484.1     $ 45.1       9.3 %
   
2002 acquisitions
    22.0             22.0       %
   
Development
    2.9       1.9       1.0       52.6 %
   
Other industrial
    15.9       29.6       (13.7 )     (46.3 )%
 
International industrial
    0.7             0.7       %
 
Retail
    7.8       7.7       0.1       1.3 %
     
     
     
     
 
   
Total rental revenues
    578.5       523.3       55.2       10.5 %
Private capital income
    11.2       11.0       0.2       1.8 %
     
     
     
     
 
   
Total revenues
  $ 589.7     $ 534.3     $ 55.4       10.4 %
     
     
     
     
 

      The growth in rental revenues in same store properties resulted primarily from increased lease termination fees and miscellaneous income of $13.8 million, rental revenue growth before lease-termination fees in our Los Angeles and San Francisco Bay Area sub-markets of $11.0 million and $7.6 million, respectively, and increased reimbursement of expenses of $7.7 million, partially offset by lower average occupancies. Industrial same store occupancy was 94.6% at December 31, 2002, and 94.6% at December 31, 2001. In 2002, the same store rent decrease on industrial renewals and rollovers (cash basis) was 1.4% on 13.8 million square feet leased. Other industrial revenues include rental revenues from divested properties not classified as discontinued operations.

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Costs and Expenses 2002 2001 $ Change % Change





(Restated) (Restated) (Restated) (Restated)
Property operating costs:
                               
Rental expenses
  $ 76.4     $ 63.7     $ 12.7       19.9 %
Real estate taxes
    67.7       62.6       5.1       8.1 %
     
     
     
     
 
   
Total property operating costs
  $ 144.1     $ 126.3     $ 17.8       14.1 %
     
     
     
     
 
Property operating costs:
                               
 
U.S. industrial:
                               
   
Same store
  $ 125.2     $ 112.4     $ 12.8       11.4 %
   
2002 acquisitions
    6.9             6.9       %
   
Development
    3.4             3.4       %
   
Other industrial
    6.1       11.1       (5.0 )     (45.0 )%
 
International industrial
    (0.1 )           (0.1 )     %
 
Retail
    2.6       2.8       (0.2 )     (7.1 )%
     
     
     
     
 
   
Total property operating costs
    144.1       126.3       17.8       14.1 %
Depreciation and amortization
    126.9       105.7       21.2       20.1 %
Impairment losses
    2.9       18.6       (15.7 )     (84.4 )%
General and administrative
    47.2       35.8       11.4       31.8 %
     
     
     
     
 
   
Total costs and expenses
  $ 321.1     $ 286.4     $ 34.7       12.1 %
     
     
     
     
 

      The $12.8 million increase in same store properties’ operating expenses primarily relates to increases in real estate taxes of $5.1 million, insurance expenses of $4.3 million and increases in common area maintenance expenses of $2.7 million. Other industrial property operating costs include expenses from sold properties not classified as discontinued operations. The increase in depreciation expense was due to the increase in our net investment in real estate and ground lease assets. The 2002 impairment included losses for lease cost write-offs of $1.7 million and an impairment on a portion of our planned property contributions of $1.2 million. The 2001 impairment loss included losses for investments in retail real estate totaling $13.0 million, leasehold interests that we continue to hold for long-term investment totaling $4.3 million and industrial real estate properties held for disposition totaling $1.3 million. The increase in general and administrative expenses was primarily due to the consolidation of AMB Investment Management, Inc. (predecessor-in-interest to AMB Capital Partners, LLC) and Headlands Realty Corporation on May 31, 2001. Prior to May 31, 2001, general and administrative expenses did not include expenses incurred by these two unconsolidated preferred stock subsidiaries. General and administrative expenses would have been $39.4 million had the subsidiaries been consolidated beginning January 1, 2001. The increase in general and administrative expenses was also due to increased stock-based compensation expense due to our decision to expense stock options under SFAS No. 123 prospectively, additional staffing and expenses for new initiatives, including our international expansion and income taxes for our taxable REIT subsidiaries.

                                   
Other Income and (Expenses) 2002 2001 $ Change % Change





Equity in earnings of unconsolidated joint ventures
  $ 5.7     $ 5.5     $ 0.2       3.6 %
Interest and other income
    10.4       16.3       (5.9 )     (36.2 )%
Gains from dispositions of real estate
    2.5       41.9       (39.4 )     (94.0 )%
Development profits, net of taxes
    1.2       17.3       (16.1 )     (93.1 )%
Loss on investments in other companies
          (20.8 )     20.8       %
Interest, including amortization
    (146.2 )     (124.8 )     21.4       17.1 %
     
     
     
     
 
 
Total other income and (expenses)
  $ (126.4 )   $ (64.6 )   $ 61.8       95.7 %
     
     
     
     
 

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      The decrease in interest and other income was primarily due to the repayment in full of the $74.0 million 9.5% mortgage note receivable in July 2002. In 2001, we recognized $20.8 million of losses on investments in other companies, including our investment in Webvan Group, Inc. and other technology-related companies. The loss reflects a 100% write-down of the investments. No gains or losses were recognized in 2002. The increase in interest expense was primarily due to the issuance of additional unsecured senior debt securities and an increase in secured debt balances, partially offset by decreased borrowings on our unsecured credit facility. The secured debt issuances were primarily for our co-investment joint ventures’ properties.

                                   
Discontinued Operations 2002 2001 $ Change % Change





Income attributable to discontinued operations, net of minority interests
  $ 20.6     $ 18.0     $ 2.6       14.4 %
Gains from dispositions of real estate, net of minority interests
    16.9             16.9       %
     
     
     
     
 
 
Total discontinued operations
  $ 37.5     $ 18.0     $ 19.5       108.3 %
     
     
     
     
 

      During 2002, we divested ourselves of 56 industrial buildings, one retail center and an undeveloped land parcel, aggregating approximately 4.9 million square feet, for an aggregate price of $193.4 million, with a resulting net gain of $10.6 million. In November 2002, our joint venture partner in AMB Partners II, L.P. increased its ownership in AMB Partners II, L.P. from 50% to 80% by acquiring 30% of the operating partnership’s interest in AMB Partners II, L.P. We recognized a gain of $6.3 million on the sale of the operating partnership’s 30% interest.

                                   
Preferred Stock 2002 2001 $ Change % Change





Preferred stock dividends
  $ (8.5 )   $ (8.5 )   $       %
Preferred stock and unit redemption discount/(issuance costs or premium)
    0.4       (7.6 )     8.0       105.3 %
     
     
     
     
 
 
Total preferred stock
  $ (8.1 )   $ (16.1 )   $ 8.0       49.7 %
     
     
     
     
 

      On December 5, 2001, AMB Property II, L.P. redeemed all 2,200,000 of its outstanding 8.75% Series C Cumulative Redeemable Preferred Limited Partnership Units at a premium of $4.4 million and we recognized a reduction of income available to common stockholders of $3.2 million for the original issuance costs. In July 2003, the U.S. Securities and Exchange Commission announced that it had revised its position relating to the application of Emerging Issues Task Force Topic No. D-42, The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock, (“Topic D-42”). As a result of this announcement, original issuance costs related to preferred equity are to be reflected as a reduction of income available to common stockholders in determining earnings per share for the period in which the preferred equity is redeemed. The announcement requires retroactive application of the revised position in previously issued financial statements. As a result, our financial statements for the year ending December 31, 2001, have been restated to reflect a reduction in income available to common stockholders of $3.2 million, representing the original issuance costs of AMB Property II, L.P.’s series C preferred units. Diluted earnings per share for the year ended December 31, 2001, was $1.41 (restated). The U.S. Securities and Exchange Commission’s revised position on Topic D-42 did not require us to file amendments to previously filed reports and will not impact any other previously reported periods.

LIQUIDITY AND CAPITAL RESOURCES

      Balance Sheet Strategy. In general, we use unsecured lines of credit, unsecured notes, preferred stock and common equity to capitalize our 100%-owned assets. Over time, we plan to retire non-recourse, secured debt encumbering our 100%-owned assets and replace that debt with unsecured notes. In managing our co-investment joint ventures, in general, we use non-recourse, secured debt to capitalize our co-investment joint ventures.

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      We currently expect that our principal sources of working capital and funding for acquisitions, development, expansion and renovation of properties will include:

  •  retained earnings and cash flow from operations;
 
  •  borrowings under our unsecured credit facility;
 
  •  other forms of secured or unsecured financing;
 
  •  proceeds from equity or debt offerings by us or the operating partnership (including issuances of limited partnership units in the operating partnership or its subsidiaries);
 
  •  net proceeds from divestitures of properties; and
 
  •  private capital from co-investment partners.

      We currently expect that our principal funding requirements will include:

  •  working capital;
 
  •  development, expansion and renovation of properties;
 
  •  acquisitions, including our global expansion;
 
  •  debt service; and
 
  •  dividends and distributions on outstanding common and preferred stock and limited partnership units.

      We believe that our sources of working capital, specifically our cash flow from operations, borrowings available under our unsecured credit facility and our ability to access private and public debt and equity capital, are adequate for us to meet our liquidity requirements for the foreseeable future. The unavailability of capital could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock.

Capital Resources

      Property Contributions. In February 2003, we contributed $94.0 million in operating properties, consisting of 24 industrial buildings, aggregating approximately 2.4 million square feet, to our newly formed unconsolidated joint venture, Industrial Fund I, LLC, with Citigroup Global Investments Real Estate LP, LLC, a Delaware limited liability company, and recognized a gain of $7.4 million on the contribution representing the portion of the contributed properties acquired by the third-party co-investors in exchange for cash.

      Developments-for-Sale. During 2003, we sold seven development-for-sale and other projects, for an aggregate price of $74.8 million, with a resulting gain of $14.4 million, net of taxes.

      Property Divestitures. During 2003, we divested ourselves of 24 industrial buildings and two retail centers, for an aggregate price of $272.3 million, with a resulting net gain of $42.9 million.

      Properties Held for Divestiture. As of December 31, 2003, we had decided to divest ourselves of one retail land parcel and one industrial building, which are not in our core markets or which do not meet our current strategic objectives. The divestitures of the properties are subject to negotiation of acceptable terms and other customary conditions. As of December 31, 2003, the net carrying value of the properties held for divestiture was $11.8 million.

      Co-investment Joint Ventures. Through the operating partnership, we enter into co-investment joint ventures with institutional investors. These co-investment joint ventures provide us with an additional source of capital to fund certain acquisitions, development projects and renovation projects, as well as private capital income. We consolidate these joint ventures for financial reporting purposes because we are the sole managing general partner and control all major operating decisions.

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      Third-party equity interests in the joint ventures are reflected as minority interests in the consolidated financial statements. As of December 31, 2003, we owned approximately 32.1 million square feet of our properties (34.7% of the total consolidated operating and development portfolio) through our co-investment joint ventures and 6.0 million square feet of our properties through our other consolidated joint ventures. We may make additional investments through these joint ventures or new joint ventures in the future and presently plan to do so.

      Our co-investment joint ventures at December 31, 2003 (dollars in thousands):

                     
Our
Approximate
Ownership Original Planned
Co-investment Joint Venture Joint Venture Partner Percentage Capitalization(1)




AMB/ Erie, L.P. 
  Erie Insurance Company and affiliates     50 %   $ 200,000  
AMB Institutional Alliance
Fund I, L.P. 
  AMB Institutional Alliance REIT I, Inc.(2)     21 %   $ 420,000  
AMB Partners II, L.P. 
  City and County of San Francisco Employees’ Retirement System     20 %   $ 500,000  
AMB-SGP, L.P. 
  Industrial JV Pte Ltd(3)     50 %   $ 425,000  
AMB Institutional Alliance Fund II, L.P. 
  AMB Institutional Alliance
REIT II, Inc.(4)
    20 %   $ 489,000  
AMB-AMS, L.P.(5)
  BPMT and TNO(6)     39 %   $ 200,000  


(1)  Planned capitalization includes anticipated debt and both partners’ expected equity contributions.
 
(2)  Included 15 institutional investors as stockholders as of December 31, 2003.
 
(3)  A subsidiary of the real estate investment subsidiary of the Government of Singapore Investment Corporation.
 
(4)  Included 13 institutional investors as stockholders as of December 31, 2003.
 
(5)  AMB-AMS, L.P. is a commitment to form a co-investment partnership with two Dutch pension funds advised by Mn Services NV.
 
(6)  BPMT is Stichting Bedrijfspensioenfonds voor de Metaal en Technische Bedrijfstakken and TNO is Stichting Pensioenfonds TNO.

      Common and Preferred Equity. We have authorized for issuance 100,000,000 shares of preferred stock, of which the following series were designated as of December 31, 2003: 1,595,337 shares of series D preferred stock; 220,440 shares of series E preferred stock; 267,439 shares of series F preferred stock; 840,000 shares of series H preferred stock; 510,000 shares of series I preferred stock; 800,000 shares of series J preferred stock; 800,000 shares of series K preferred stock; 2,300,000 shares of series L preferred stock; and 2,300,000 shares of series M preferred stock.

      On June 23, 2003, we issued and sold 2,000,000 shares of 6.5% Series L Cumulative Redeemable Preferred Stock at a price of $25.00 per share. Dividends are cumulative from the date of issuance and payable quarterly in arrears at a rate per share equal to $1.625 per annum. The series L preferred stock is redeemable by us on or after June 23, 2008, subject to certain conditions, for cash at a redemption price equal to $25.00 per share, plus accumulated and unpaid dividends thereon, if any, to the redemption date. We contributed the net proceeds of $48.0 million to the operating partnership, and in exchange, the operating partnership issued to us 2,000,000 6.5% Series L Cumulative Redeemable Preferred Units. The operating partnership used the proceeds, in addition to proceeds previously contributed to the operating partnership from other equity issuances, to redeem all 3,995,800 of its 8.5% Series A Cumulative Redeemable Preferred Units from us on July 28, 2003. We, in turn, used those proceeds to redeem all 3,995,800 of our 8.5% Series A

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Cumulative Redeemable Preferred Stock for $100.2 million, including all accumulated and unpaid dividends thereon, to the redemption date.

      On July 14, 2003, AMB Property II, L.P. repurchased, from an unrelated third party, 66,300 of its series F preferred units for $3.3 million, including accrued and unpaid dividends.

      On November 25, 2003, we issued and sold 2,300,000 shares of 6.75% Series M Cumulative Redeemable Preferred Stock at $25.00 per share. Dividends are cumulative from the date of issuance and payable quarterly in arrears at a rate per share equal to $1.6875 per annum. The series M preferred stock is redeemable by us on or after November 25, 2008, subject to certain conditions, for cash at a redemption price equal to $25.00 per share, plus accumulated and unpaid dividends thereon, if any, to the redemption date. We contributed the net proceeds of $55.4 million to the operating partnership, and in exchange, the operating partnership issued to us 2,300,000 6.75% Series M Cumulative Redeemable Preferred Units.

      On November 26, 2003, the operating partnership redeemed all 1,300,000 of its outstanding 8 5/8% Series B Cumulative Redeemable Preferred Partnership Units, for an aggregate redemption price of $65.6 million, including accrued and unpaid dividends.

      In December 2003, our board of directors approved a new two-year common stock repurchase program for the repurchase of up to $200.0 million of our common stock. During 2003, we repurchased 812,900 shares of our common stock for $21.2 million, including commissions.

      In December 2001, our board of directors approved a stock repurchase program for the repurchase of up to $100.0 million worth of our common and preferred stock. In December 2002, our board of directors increased the 2001 repurchase program to $200.0 million. The 2001 stock repurchase program expired in December 2003. During 2002, we repurchased 2,651,600 shares of our common stock for $69.4 million, including commissions. In July 2002, we also repurchased 4,200 shares of our series A preferred stock for an aggregate cost of $0.1 million, including accrued and unpaid dividends.

      During 2003, the operating partnership redeemed 226,145 of its common limited partnership units for cash and 2,000 of its common limited partnership units for shares of our common stock. In November 2003, AMB Property II, L.P., one of our subsidiaries, also issued 145,548 of its class B common limited partnership units in connection with a property acquisition. During 2002, the operating partnership redeemed 122,640 of its common limited partnership units for shares of our common stock.

      Debt. In order to maintain financial flexibility and facilitate the deployment of capital through market cycles, we presently intend to operate with a debt-to-total market capitalization ratio (our share) of approximately 45% or less. As of December 31, 2003, our share of total debt-to-total market capitalization ratio was 37.9%. However, we typically finance our co-investment joint ventures with secured debt at a loan-to-value ratio of 50-65%, per our joint venture partnership agreements. Additionally, we currently intend to manage our capitalization in order to maintain an investment grade rating on our senior unsecured debt. Regardless of these policies, our organizational documents do not limit the amount of indebtedness that we may incur. Accordingly, our management could alter or eliminate these policies without stockholder approval or circumstances could arise that could render us unable to comply with these policies.

      As of December 31, 2003, the aggregate principal amount of our secured debt was $1.4 billion, excluding unamortized debt premiums of $10.8 million. Of the $1.4 billion of secured debt, $1.1 billion is secured by properties in our joint ventures. The secured debt is generally non-recourse and bears interest at rates varying from 2.6% to 10.6% per annum (with a weighted average rate of 7.0%) and final maturity dates ranging from June 2004 to June 2023. All of the secured debt bears interest at fixed rates, except for five loans with an aggregate principal amount of $52.3 million as of December 31, 2003, which bear interest at variable rates (with a weighted average interest rate of 3.2% as of December 31, 2003).

      In June 1998, the operating partnership issued $400.0 million of unsecured senior debt securities. Interest on the unsecured senior debt securities is payable semi-annually. The 2015 notes are putable and callable in September 2005. In August 2000, the operating partnership commenced a medium-term note program and

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subsequently issued $400.0 million of medium-term notes with a weighted average interest rate of 7.3%. The notes mature between December 2005 and September 2011 and are guaranteed by us.

      In May 2002, the operating partnership commenced a new medium-term note program for the issuance of up to $400.0 million in principal amount of medium-term notes, which will be guaranteed by us. On November 10, 2003, the operating partnership issued $75.0 million aggregate principal amount of senior unsecured notes to Teachers Insurance and Annuity Association of America. We guaranteed the principal amount and interest on the notes, which mature on November 1, 2013, and bear interest at 5.53% per annum. Teachers has agreed that until November 10, 2005, the operating partnership can require Teachers to return the notes to it for cancellation for an obligation of equal dollar amount under a first mortgage loan to be secured by properties determined by the operating partnership, except that in the event the ratings on operating partnership’s senior unsecured debt are downgraded by two ratings agencies to BBB-, the operating partnership will only have ten days after the last of these downgrades to exercise this right. During the period when the operating partnership can exercise its cancellation right and until any mortgage loans close, Teachers has agreed not to sell, contract to sell, pledge, transfer or otherwise dispose of, any portion of the notes. On November 21, 2003, the operating partnership issued $50.0 million aggregate principal amount of floating rate senior unsecured notes. We guaranteed the principal amount and interest on the notes, which mature on November 21, 2006, and bear interest at a floating rate of 3-month LIBOR telerate plus 40 basis points. The operating partnership intends to continue to issue medium-term notes, guaranteed by us, under the program from time to time as market conditions permit. As of December 31, 2003, $275.0 million of capacity remained under the May 2002 medium-term note program.

      We guarantee the operating partnership’s obligations with respect to its senior debt securities. If we are unable to refinance or extend principal payments due at maturity or pay them with proceeds from other capital transactions, then our cash flow may be insufficient to pay dividends to our stockholders in all years and to repay debt upon maturity. 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, then the interest expense relating to that refinanced indebtedness would increase. This increased interest expense would adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock.

      Credit Facilities. In December 2002, the operating partnership renewed its $500.0 million unsecured revolving line of credit. We guarantee the operating partnership’s obligations under the credit facility. The credit facility matures in December 2005, has a one-year extension option and is subject to a 20 basis point annual facility fee. The credit facility includes a multi-currency component, which was amended effective July 10, 2003, to increase from $150.0 million to $250.0 million the amount that may be drawn in either British pounds sterling, Euros or Yen (provided that such currency is readily available and freely transferable and convertible to U.S. dollars, the Reuters Monitor Money Rates Service reports LIBOR for such currency in interest periods of 1, 2, 3 or 6 months and the operating partnership has an investment grade credit rating). U.S. dollar borrowings under the credit facility currently bear interest at LIBOR plus 60 basis points. Euro borrowings under the credit facility currently bear interest at EURIBOR plus 60 basis points. Yen borrowings under the credit facility currently bear interest at the Japanese Yen TIBOR rate plus 60 basis points. Both the facility fee and the interest rate are based on the operating partnership’s credit rating, which is currently investment grade. However, depending on the operating partnership’s credit rating, the facility fee and interest rate may increase. The operating partnership has the ability to increase available borrowings to $700.0 million by adding additional banks to the facility or obtaining the agreement of existing banks to increase their commitments. We use the unsecured credit facility principally for acquisitions, funding our development activity and for general working capital requirements. Monthly debt service payments on the credit facility are interest only. The total amount available under the credit facility fluctuates based upon the borrowing base, as defined in the agreement governing the credit facility, generally the value of our unencumbered properties. As of December 31, 2003, the outstanding balance on our unsecured credit facility was $275.7 million and the remaining amount available was $171.6 million, net of outstanding letters of credit of $52.7 million (excluding the $200.0 million of potential additional capacity). The outstanding balance included borrowings denomi-

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nated in Euros and Yen and translated to U.S. dollars at December 31, 2003, of $83.1 million and $47.6 million, respectively.

      In August 2001, AMB Institutional Alliance Fund II, L.P. obtained a $150.0 million credit facility secured by the unfunded capital commitments of the investors in AMB Institutional Alliance REIT II, Inc. and AMB Institutional Alliance Fund II, L.P. In April 2003, AMB Institutional Alliance Fund II, L.P. repaid the credit facility with capital contributions and secured debt financing proceeds and terminated the credit facility.

      Mortgages Receivable. Through a wholly-owned subsidiary, we hold a mortgage loan receivable on AMB Pier One, LLC, an unconsolidated joint venture. The note bears interest at 13.0% and matures in May 2026. As of December 31, 2003, the outstanding balance on the note was $13.0 million. We also hold short-term mortgages on sold properties totaling $30.1 million with a weighted average interest rate of 6.2%. The mortgages mature between February 2004 and November 2006.

      The tables below summarize our debt maturities and capitalization as of December 31, 2003 (dollars in thousands):

                                                     
Debt

Our Joint Unsecured
Secured Venture Senior Debt Unsecured Credit
Debt Debt Securities Debt Facilities Total Debt






2004
  $ 57,735     $ 40,135     $     $ 600     $     $ 98,470  
2005
    44,567       62,951       250,000       647       275,739 (2)     633,904  
2006
    82,857       62,304       75,000       698             220,859  
2007
    14,661       53,158       75,000       752             143,571  
2008
    32,940       162,383       175,000       810             371,133  
2009
    4,246       107,187             873             112,306  
2010
    51,054       128,639       75,000       941             255,634  
2011
    524       275,618       75,000       1,014             352,156  
2012
    2,451       146,946             1,093             150,490  
2013
    442       2,045       75,000       920             78,407  
Thereafter
    39       20,219       125,000       1,280             146,538  
     
     
     
     
     
     
 
 
Subtotal
    291,516       1,061,585       925,000       9,628       275,739       2,563,468  
 
Unamortized premiums
    7,343       3,446                         10,789  
     
     
     
     
     
     
 
   
Total consolidated debt
    298,859       1,065,031       925,000       9,628       275,739       2,574,257  
Our share of unconsolidated joint venture debt(1)
          77,333                         77,333  
     
     
     
     
     
     
 
   
Total debt
    298,859       1,142,364       925,000       9,628       275,739       2,651,590  
Joint venture partners’ share of consolidated joint venture debt
          (697,276 )                       (697,276 )
     
     
     
     
     
     
 
 
Our share of total debt(3)
  $ 298,859     $ 445,088     $ 925,000     $ 9,628     $ 275,739     $ 1,954,314  
     
     
     
     
     
     
 
Weighed average interest rate
    8.1 %     6.7 %     6.8 %     7.5 %     1.9 %     6.4 %
Weighed average maturity (in years)
    3.5       6.5       5.7       10.8       1.9       5.4  


(1)  The weighted average interest and maturity for the unconsolidated joint venture debt were 6.1% and 5.8 years, respectively.
 
(2)  Includes Euro and Yen based borrowings translated to U.S. dollars using the foreign exchange rates at December 31, 2003.

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(3)  Our share of total debt is the pro rata portion of the total debt based on our percentage of equity interest in each of the consolidated ventures holding the debt. We believe that our share of total debt is a meaningful supplemental measure, which enables both management and investors to analyze our leverage and to compare our leverage to that of other companies. In addition, it allows for a more meaningful comparison of our debt to that of other companies that do not consolidate their joint ventures. Our share of total debt is not intended to reflect our actual liability should there be a default under any or all of such loans or a liquidation of the joint ventures. The above table reconciles our share of total debt to total consolidated debt, a GAAP financial measure. For the calculation of the joint venture partners’ share of consolidated joint venture debt used in the above table, please see Part 1. Item 2. “Properties Held Through Joint Ventures, Limited Liability Companies and Partnerships — Co-investment Joint Ventures.”

                           
Market Equity

Shares/Units Market Market
Security Outstanding Price Value




Common stock
    81,792,913     $ 32.88     $ 2,689,351  
Common limited partnership units(1)
    4,763,790     $ 32.88       156,633  
     
             
 
 
Total
    86,556,703             $ 2,845,984  
     
             
 


(1)  Includes 145,548 class B common limited partnership units issued by AMB Property II, L.P. in November 2003.

                           
Preferred Stock and Units

Dividend Liquidation
Security Rate Preference Redemption Date




Series D preferred units
    7.75 %   $ 79,767       May 2004  
Series E preferred units
    7.75 %     11,022       August 2004  
Series F preferred units
    7.95 %     10,057       March 2005  
Series H preferred units
    8.13 %     42,000       September 2005  
Series I preferred units
    8.00 %     25,500       March 2006  
Series J preferred units
    7.95 %     40,000       September 2006  
Series K preferred units
    7.95 %     40,000       April 2007  
Series L preferred stock
    6.50 %     50,000       June 2008  
Series M preferred stock
    6.75 %     57,500       November 2008  
     
     
         
 
Weighted average/total
    7.53 %   $ 355,846          
     
     
         
         
Capitalization Ratios

Total debt-to-total market capitalization
    45.3 %
Our share of total debt-to-total market capitalization(1)
    37.9 %
Total debt plus preferred-to-total market capitalization
    51.4 %
Our share of total debt plus preferred-to-total market capitalization(1)
    44.8 %
Our share of total debt-to-total book capitalization(1)
    49.4 %


(1)  Our share of total debt is the pro rata portion of the total debt based on our percentage of equity interest in each of the consolidated ventures holding the debt. We believe that our share of total debt is a meaningful supplemental measure, which enables both management and investors to analyze our leverage and to compare our leverage to that of other companies. In addition, it allows for a more meaningful comparison of our debt to that of other companies that do not consolidate their joint ventures. Our share of total debt is not intended to reflect our actual liability should there be a default under any or all of such

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loans or a liquidation of the joint ventures. For a reconciliation of our share of total debt to total consolidated debt, a GAAP financial measure, please see the table of debt maturities and capitalization on the preceding page in Part II. Item 7. “Liquidity and Capital Resources — Capital Resources.”

Liquidity

      As of December 31, 2003, we had $127.7 million in cash (of which $81.1 million was held by our consolidated co-investment joint ventures) and cash equivalents, and $171.6 million of additional available borrowings under our credit facility.

      Our board of directors declared a regular cash dividend for the quarter ended December 31, 2003, of $0.415 per share of common stock and the operating partnership announced its intention to pay a regular cash distribution for the quarter ended December 31, 2003, of $0.415 per common unit. The dividends and distributions were payable on January 5, 2004, to stockholders and unitholders of record on December 22, 2003. The series L and M preferred stock dividends were payable on January 15, 2004, to stockholders of record on January 5, 2004. The series E, F, J and K preferred unit distributions were payable on January 15, 2004 in respect of the period commencing on and including October 15, 2003 and ending on and including January 14, 2004. The series D, H and I preferred unit distributions were payable on December 26, 2003 in respect of the period commencing on and including October 15, 2003 and ending on and including January 14, 2004. The following table sets forth the dividends and distributions paid or payable per share or unit for the years ended December 31, 2003, 2002 and 2001:

                 
Paying Entity Security 2003 2002 2001





AMB Property Corporation
  Common stock   $1.66   $1.64   $1.58
AMB Property Corporation
  Series A preferred stock   $1.15   $2.13   $2.13
AMB Property Corporation
  Series L preferred stock   $0.85   n/a   n/a
AMB Property Corporation
  Series M preferred stock   $0.17   n/a   n/a
 
Operating Partnership
  Common limited partnership units   $1.66   $1.64   $1.58
Operating Partnership
  Series B preferred units   $3.71   $4.31   $4.31
Operating Partnership
  Series J preferred units   $3.98   $3.98   $1.24
Operating Partnership
  Series K preferred units   $3.98   $2.96   n/a
 
AMB Property II, L.P.
  Class B common limited partnership units   $0.22   n/a   n/a
AMB Property II, L.P.
  Series C preferred units   n/a   n/a   $3.88
AMB Property II, L.P.
  Series D preferred units   $3.88   $3.88   $3.88
AMB Property II, L.P.
  Series E preferred units   $3.88   $3.88   $3.88
AMB Property II, L.P.
  Series F preferred units   $3.98   $3.98   $3.98
AMB Property II, L.P.
  Series G preferred units   n/a   $2.14   $3.98
AMB Property II, L.P.
  Series H preferred units   $4.06   $4.06   $4.06
AMB Property II, L.P.
  Series I preferred units   $4.00   $4.00   $3.04

      The anticipated size of our distributions, using only cash from operations, will not allow us to retire all of our debt as it comes due. Therefore, we intend to also repay maturing debt with net proceeds from future debt or equity financings, as well as property divestitures. However, we may not be able to obtain future financings on favorable terms or at all. Our inability to obtain future financings on favorable terms or at all would adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock.

Capital Commitments

      Developments. In addition to recurring capital expenditures, which consist of building improvements and leasing costs incurred to renew or re-tenant space, during 2003, we initiated 13 new industrial

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development projects with a total estimated investment of $226.4 million at completion, aggregating an estimated 4.9 million square feet, including 438 acres of land for development in Miami’s Airport West submarket for $29.7 million. The master planned park, called Beacon Lakes, is entitled for 6.8 million square feet of properties for lease or sale. We began development of the first two buildings at Beacon Lakes, which will aggregate approximately 0.4 million square feet and have an estimated investment of $19.2 million. As of December 31, 2003, we had 16 projects in our development pipeline representing a total estimated investment of $233.0 million upon completion and four development projects available for sale representing a total estimated investment of $38.8 million upon completion. Of this total, $112.2 million had been funded as of December 31, 2003, and an estimated $159.6 million was required to complete current and planned projects. We expect to fund these expenditures with cash from operations, borrowings under our credit facility, debt or equity issuances, net proceeds from property divestitures, and private capital from co-investment partners, which could have an adverse effect on our cash flow.

      Acquisitions. During 2003, we invested $533.9 million in 82 operating industrial buildings, aggregating approximately 6.5 million rentable square feet, of which we invested $238.3 million in 43 operating properties, aggregating approximately 3.7 million square feet, through two of our co-investment joint ventures. We generally fund our acquisitions through private capital contributions, borrowings under our credit facility, cash, debt issuances and net proceeds from property divestitures. In addition, in October 2003, we entered into an Agreement of Sale with privately-held International Airport Centers L.L.C. and certain of its affiliated entities, pursuant to which, if fully consummated, we will acquire a 3.4 million square foot portfolio consisting of 37 airfreight buildings located adjacent to seven international airports in the U.S. for approximately $481.0 million, including $119.0 million of assumed debt. Pursuant to the Agreement of Sale, we will acquire the buildings in separate tranches, as construction is completed and certain other customary closing conditions, including acquiring the necessary consents, are met. The first closings occurred in October and December 2003, and we currently expect the balance of the portfolio to close by the third quarter of 2004. Some of the properties in this portfolio have been allocated to one or more of our co-investment joint ventures. We financed the first tranche, and expect to finance the remainder of the purchase price, through additional debt financings and proceeds from property dispositions.

      Lease Commitments. We have entered into operating ground leases on certain land parcels, primarily on-tarmac facilities and office space with remaining lease terms from one to 37 years. Future minimum rental payments required under non-cancelable operating leases in effect as of December 31, 2003, were as follows (dollars in thousands):

           
2004
  $ 20,149  
2005
    20,272  
2006
    20,922  
2007
    21,120  
2008
    21,340  
Thereafter
    283,965  
     
 
 
Total
  $ 387,768  
     
 

      These operating lease payments are amortized ratably over the terms of the related leases.

      Co-investment Joint Ventures. Through the operating partnership, we enter into co-investment joint ventures with institutional investors. These co-investment joint ventures provide us with an additional source of capital to fund certain acquisitions, development projects and renovation projects, as well as private capital income. As of December 31, 2003, we had investments in co-investment joint ventures with a gross book value of $1.9 billion, which are consolidated for financial reporting purposes. As of December 31, 2003, we may make additional capital contributions to current and planned co-investment joint ventures of up to $27.9 million. We expect to fund these contributions with cash from operations, borrowings under our credit facility, debt or equity issuances or net proceeds from property divestitures, which could adversely effect our cash flow.

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      Captive Insurance Company. In December 2001, we formed a wholly-owned captive insurance company, Arcata National Insurance Ltd., which provides insurance coverage for all or a portion of losses below the deductible under our third-party policies. We capitalized Arcata National Insurance Ltd. in accordance with the applicable regulatory requirements. Arcata National Insurance Ltd. established annual premiums based on projections derived from the past loss experience of our properties. Annually, we engage an independent third party to perform an actuarial estimate of future projected claims, related deductibles and projected expenses necessary to fund associated risk management programs. Premiums paid to Arcata National Insurance Ltd. may be adjusted based on this estimate. Premiums paid to Arcata National Insurance Ltd. have a retrospective component, so that if expenses, including losses and deductibles, are less than premiums collected, the excess may be returned to the property owners (and, in turn, as appropriate, to the customers) and conversely, subject to certain limitations, if expenses, including losses, are greater than premiums collected, an additional premium will be charged. As with all recoverable expenses, differences between estimated and actual insurance premiums will be recognized in the subsequent year. Through this structure, we believe that we have more comprehensive insurance coverage at an overall lower cost than would otherwise be available in the market.

      Potential Unknown Liabilities. Unknown liabilities may include the following:

  •  liabilities for clean-up or remediation of undisclosed environmental conditions;
 
  •  claims of customers, vendors or other persons dealing with our predecessors prior to our formation transactions that had not been asserted prior to our 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.

Overview of Contractual Obligations

      The following table summarizes our debt, interest and lease payments due by period as of December 31, 2003 (dollars in thousands):

                                           
Less than More than
Contractual Obligations 1 Year 1-3 Years 3-5 Years 5 Years Total






Debt
  $ 98,470     $ 854,763     $ 514,704     $ 1,095,531     $ 2,563,468  
Debt interest payments
    157,424       271,085       205,978       72,533       707,020  
Operating lease commitments
    20,149       41,194       42,460       283,965       387,768  
     
     
     
     
     
 
 
Total
  $ 276,043     $ 1,167,042     $ 763,142     $ 1,452,029     $ 3,658,256  
     
     
     
     
     
 

OFF-BALANCE SHEET ARRANGEMENTS

      Standby Letters of Credit. As of December 31, 2003, we had provided approximately $64.1 million in letters of credit, of which $52.7 million was provided under the operating partnership’s $500.0 million unsecured credit facility. The letters of credit were required to be issued under certain ground lease provisions, bank guarantees and other commitments.

      Guarantees. Other than disclosed elsewhere in this report, as of December 31, 2003, we had outstanding guarantees in the aggregate amount of $50.2 million in connection with certain acquisitions, which are currently expected to close in 2004.

      Performance and Surety Bonds. As of December 31, 2003, we had outstanding performance and surety bonds in an aggregate amount of $0.9 million. These bonds were issued in connection with certain of our development projects and were posted to guarantee certain tax obligations and the construction of certain real property improvements and infrastructure, such as grading, sewers and streets. Performance and surety bonds

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are commonly required by public agencies from real estate developers. Performance and surety bonds are renewable and expire upon the payment of the taxes due or the completion of the improvements and infrastructure.

      Promoted Interests and Other Contractual Obligations. Upon the achievement of certain return thresholds and the occurrence of certain events, we may be obligated to make payments to certain of joint venture partners pursuant to the terms and provisions of their contractual agreements with us. From time to time in the normal course of our business, we enter into various contracts with third parties that may obligate us to make payments or perform other obligations upon the occurrence of certain events.

SUPPLEMENTAL EARNINGS MEASURES

      FFO. We believe that net income, as defined by GAAP, is the most appropriate earnings measure. However, we consider funds from operations, or FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), to be a useful supplemental measure of our operating performance. FFO is defined as net income, calculated in accordance with GAAP, less gains (or losses) from dispositions of real estate held for investment purposes and real estate-related depreciation, and adjustments to derive our pro rata share of FFO of consolidated and unconsolidated joint ventures. Further, we do not adjust FFO to eliminate the effects of non-recurring charges. We believe that FFO, as defined by NAREIT, is a meaningful supplemental measure of our operating performance because historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time, as reflected through depreciation and amortization expenses. However, since real estate values have historically risen or fallen with market and other conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient. Thus, NAREIT created FFO as a supplemental measure of operating performance for real estate investment trusts that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. We believe that the use of FFO, combined with the required GAAP presentations, has been beneficial in improving the understanding of operating results of real estate investment trusts among the investing public and making comparisons of operating results among such companies more meaningful. We consider FFO to be a useful measure for reviewing our comparative operating and financial performance because, by excluding gains or losses related to sales of previously depreciated operating real estate assets and real estate depreciation and amortization, FFO can help the investing public compare the operating performance of a company’s real estate between periods or as compared to other companies.

      While FFO is a relevant and widely used measure of operating performance of real estate investment trusts, it does not represent cash flow from operations or net income as defined by GAAP and should not be considered as an alternative to those measures in evaluating our liquidity or operating performance. FFO also does not consider the costs associated with capital expenditures related to our real estate assets nor is FFO necessarily indicative of cash available to fund our future cash requirements. Further, our computation of FFO may not be comparable to FFO reported by other real estate investment trusts that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do.

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      The following table reflects the calculation of FFO reconciled from net income for the years ended December 31, (dollars in thousands):

                                           
2003(1) 2002(2) 2001(2) 2000(2) 1999(2)





(Restated) (Restated) (Restated) (Restated) (Restated)
Net income
  $ 129,128     $ 121,119     $ 136,200     $ 121,782     $ 176,103  
Gains from dispositions of real estate
    (50,325 )     (19,383 )     (41,859 )     (7,044 )     (51,262 )
Real estate related depreciation and amortization:
                                       
 
Total depreciation and amortization
    138,956       126,916       105,694       84,752       62,896  
 
Discontinued operations’ depreciation
    3,381       9,587       7,849       5,606       4,139  
 
Furniture, fixtures and equipment depreciation
    (720 )     (712 )     (731 )     (380 )     (654 )
 
Ground lease amortization
          (2,301 )     (1,232 )     (734 )     (348 )
Adjustments to derive FFO from consolidated joint ventures:
                                       
 
Joint venture partners’ minority interests(NI)
    34,146       28,706       25,709       11,750       5,261  
 
Limited partnership unitholders’ minority interests(NI)
    3,493       4,477       5,718       7,090       8,213  
 
Limited partnership unitholders’ minority interests (Development profits)
    344       57       764              
 
Discontinued operations’ minority interests(NI)
    1,968       3,246       2,292       1,508       1,036  
 
FFO attributable to minority interests
    (65,603 )     (52,051 )     (40,144 )     (15,055 )     (8,182 )
Adjustments to derive FFO from unconsolidated joint ventures:
                                       
 
Our share of net income
    (5,445 )     (5,674 )     (5,467 )     (5,212 )     (4,701 )
 
Our share of FFO
    9,755       9,291       8,014       7,188       6,677  
Preferred stock dividends
    (6,999 )     (8,496 )     (8,500 )     (8,500 )     (8,500 )
Preferred stock and unit redemption discount/(issuance costs)
    (5,413 )     412       (7,600 )            
     
     
     
     
     
 
 
Funds from operations
  $ 186,666     $ 215,194     $ 186,707     $ 202,751     $ 190,678  
     
     
     
     
     
 
Basic FFO per common share and unit
  $ 2.17     $ 2.44     $ 2.09     $ 2.26     $ 2.10  
     
     
     
     
     
 
Diluted FFO per common share and unit
  $ 2.13     $ 2.40     $ 2.07     $ 2.25     $ 2.10  
     
     
     
     
     
 
Weighted average common shares and units:
                                       
 
Basic
    85,859,899       88,204,208       89,286,379       89,566,375       90,792,310  
     
     
     
     
     
 
 
Diluted
    87,616,365       89,689,310       90,325,801       90,024,511       90,867,934  
     
     
     
     
     
 


(1)  In the quarter ended June 30, 2003, and effective January 1, 2003, we discontinued our practice of deducting amortization of investments in leasehold interests from FFO as such an adjustment is not

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provided for in NAREIT’s FFO definition. Basic FFO per share would have been $2.47, $2.10, $2.27 and $2.10 for the years ended December 31, 2002, 2001, 2000 and 1999, respectively, had we discontinued our practice of deducting amortization of investments in leasehold interests from FFO retroactively. Diluted FFO per share would have been $2.42, $2.08, $2.26 and $2.10 for the years ended December 31, 2002, 2001, 2000 and 1999, respectively, had we discontinued our practice of deducting amortization of investments in leasehold interests from FFO retroactively.
 
(2)  In the quarter ended September 30, 2003, we modified our FFO reporting to no longer add back impairment losses when computing FFO in accordance with NAREIT’s FFO definition. Additionally, we adopted Topic D-42 and began including preferred stock and unit redemption discounts and issuance cost write-offs in FFO. As a result, FFO for the periods presented has been restated to reflect these changes.

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BUSINESS RISKS

      Our operations involve various risks that could have adverse consequences to us. These risks include, among others:

General Real Estate Risks

 
Our performance and value are subject to general economic conditions and risks associated with our real estate assets.

      The investment returns available from equity investments in real estate depend on the amount of income earned and capital appreciation generated by the 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, then our ability to pay dividends to our stockholders could be adversely affected. In addition, there are significant expenditures associated with an investment in real estate (such as mortgage payments, real estate taxes and maintenance costs) that generally do not decline when circumstances reduce the income from the property. Income from, and the value of, our properties may be adversely affected by:

  •  changes in the general economic climate;
 
  •  local conditions, such as oversupply of or a reduction in demand for industrial space;
 
  •  the attractiveness of our properties to potential customers;
 
  •  competition from other properties;
 
  •  our ability to provide adequate maintenance and insurance;
 
  •  increased operating costs;
 
  •  increased cost of compliance with regulations; and
 
  •  the potential for liability under applicable laws (including changes in tax laws).

      In addition, periods of economic slowdown or recession in the United States and in other countries, rising interest rates or declining demand for real estate, or public perception that any of these events may occur, would result in a general decrease in rents or an increased occurrence of defaults under existing leases, which would adversely affect our financial condition and results of operations. Future terrorist attacks may result in declining economic activity, which could reduce the demand for and the value of our properties. To the extent that future attacks impact our customers, their businesses similarly could be adversely affected, including their ability to continue to honor their existing leases.

      Our properties are concentrated predominantly in the industrial real estate sector. As a result of this concentration, we would feel the impact of an economic downturn in this sector more acutely than if our portfolio included other property types.

 
We may be unable to renew leases or relet space as leases expire.

      As of December 31, 2003, leases on a total of 17.8% of our industrial properties (based on annualized base rent) will expire on or prior to December 31, 2004. We derive most of our income from rent received from our customers. Accordingly, our financial condition, results of operations, cash flow and our ability to pay dividends on, and the market price of, our stock could be adversely affected if we are unable to promptly relet or renew these expiring leases, if the rental rates upon renewal or reletting are significantly lower than expected. If a tenant experiences a downturn in its business or other type of financial distress, then it may be unable to make timely rental payments or renew its lease. Further, our ability to rent space and the rents that we can charge are impacted, not only by customer demand, but by the number of other properties we have to compete with to appeal to customers.

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Real estate investments are relatively illiquid, making it difficult for us to respond promptly to changing conditions.

      Real estate assets are not as liquid as certain other types of assets. Further, as a real estate investment trust, the Internal Revenue Code regulates the number of properties that we can dispose of in a year, their tax bases and the cost of improvements that we make to the properties. These limitations may affect our ability to sell properties. This lack of liquidity and the Internal Revenue Code restrictions may limit our ability to vary our portfolio promptly in response to changes in economic or other conditions and, as a result, could adversely affect our financial condition, results of operations, cash flow and our ability to pay dividends on, and the market price of, our stock.

 
We may be unable to consummate acquisitions on advantageous terms or acquisitions may not perform as we expect.

      We acquire and intend to continue to acquire primarily industrial properties. The acquisition of properties entails various risks, including the risks that our investments may not perform as we expect, that we may be unable to quickly and efficiently integrate our new acquisitions into our existing operations and that our cost estimates for bringing an acquired property up to market standards may prove inaccurate. Further, we face significant competition for attractive investment opportunities from other well-capitalized real estate investors, including both publicly-traded real estate investment trusts and private institutional investment funds. This competition increases as investments in real estate become increasingly attractive relative to other forms of investment. As a result of competition, we may be unable to acquire additional properties as we desire or the purchase price may be significantly elevated. In addition, we expect to finance future acquisitions through a combination of borrowings under our unsecured credit facility, proceeds from equity or debt offerings by us or the operating partnership or its subsidiaries and proceeds from property divestitures, which may not be available and which could adversely affect our cash flow. Any of the above risks could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock.

 
We may be unable to complete renovation and development projects on advantageous terms.

      As part of our business, we develop new and renovate existing properties. The real estate development and renovation business involves significant risks that could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock, which include:

  •  we may not be able to obtain financing for development projects on favorable terms and complete construction on schedule or within budget, resulting in increased debt service expense and construction costs and delays in leasing the properties and generating cash flow;
 
  •  we may not be able to obtain, or may experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other governmental permits and authorizations;
 
  •  the properties may perform below anticipated levels, producing cash flow below budgeted amounts;
 
  •  substantial renovation and new development activities, regardless of their ultimate success, typically require a significant amount of management’s time and attention, diverting their attention from our day-to-day operations; and
 
  •  upon completion of construction, we may not be able to obtain, or obtain on advantageous terms, permanent financing for activities that we have financed through construction loans.

 
Our performance and value are impacted by the local economic conditions of and the risks associated with doing business in California.

      As of December 31, 2003, our industrial properties located in California represented 28.4% of the aggregate square footage of our industrial operating properties and 31.5% of our industrial annualized base rent. Our revenue from, and the value of, our properties located in California may be affected by local real

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estate conditions (such as an oversupply of or reduced demand for industrial properties) and the local economic climate. Business layoffs, downsizing, industry slowdowns, changing demographics, and other factors may adversely impact California’s economic climate. Because of the number of properties we have located in California, a downturn in California’s economy or real estate conditions could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock. In addition, certain of our properties are subject to possible loss from seismic activity.
 
We may experience losses that our insurance does not cover.

      We carry commercial liability, property and rental loss insurance covering all the properties that we own and manage in types and amounts that we believe are adequate and appropriate given the relative risks applicable to the property, the cost of coverage and industry practice. Certain losses, such as those due to terrorism, windstorms, floods or seismic activity, may be insured subject to certain limitations, including large deductibles or co-payments and policy limits. Although we have obtained coverage for certain acts of terrorism, with policy specifications and insured limits that we consider commercially reasonable given the cost and availability of such coverage, we cannot be certain that we will be able to renew coverage on comparable terms or collect under such policies. In addition, there are other types of losses, such as those from riots, bio-terrorism, or acts of war, that are not generally insured in our industry because it is not economically feasible to do so. 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. If we experience a loss that is uninsured or that exceeds our insured limits with respect to one or more of our properties, then we could lose the capital invested in the damaged properties, as well as the anticipated future revenue from those properties and, if there is recourse debt, then 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 generally will be liable for all of the operating partnership’s unsatisfied recourse obligations, including any obligations incurred by the operating partnership as the general partner of co-investment joint ventures. Any such losses could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock.

      A number of our properties are located in areas that are known to be subject to earthquake activity, including California where, as of December 31, 2003, we had 299 industrial buildings, aggregating approximately 24.7 million square feet and representing 28.4% of our industrial operating properties based on aggregate square footage and 31.5% based on industrial annualized base rent. 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 that we believe are commercially reasonable. We evaluate our earthquake insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants.

 
We are subject to risks and liabilities in connection with properties owned through joint ventures, limited liability companies and partnerships.

      As of December 31, 2003, we owned approximately 48.1 million square feet of our properties through several joint ventures, limited liability companies or partnerships with third parties. Our organizational documents do not limit the amount of available funds that we may invest in partnerships, limited liability companies or joint ventures and we intend to continue to develop and acquire properties through joint ventures, limited liability companies and partnerships with other persons or entities when warranted by the circumstances. Such partners may share certain approval rights over major decisions. Partnership, limited liability company or joint venture investments involve certain risks, including:

  •  if our partners, co-members or joint venturers go bankrupt, then we and any other remaining general partners, members, or joint venturers would generally remain liable for the partnership’s, limited liability company’s, or joint venture’s liabilities;

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  •  our partners, co-members or joint venturers might have economic or other business interests or goals that are inconsistent with our business interests or goals that would affect our ability to operate the property;
 
  •  our partners, co-members or joint venturers may have the power to act contrary to our instructions, requests, policies, or objectives, including our current policy with respect to maintaining our qualification as a real estate investment trust; and
 
  •  the joint venture, limited liability and partnership agreements often restrict the transfer of a joint venturer’s, member’s or partner’s interest or “buy-sell” or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms.

      We generally seek to maintain sufficient control of our partnerships, limited liability companies, and joint ventures to permit us to achieve our business objectives, however, we may not be able to do so, and the occurrence of one or more of the events described above could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock.

 
We may be unable to complete divestitures on advantageous terms or contribute properties.

      We intend to continue to divest ourselves of retail centers and industrial properties that do not meet our strategic objectives, provided that we can negotiate acceptable terms and conditions. Our ability to dispose of properties on advantageous terms depends on factors beyond our control, including competition from other sellers and the availability of attractive financing for potential buyers of our properties. If we are unable to dispose of properties on favorable terms or redeploy the proceeds of property divestitures in accordance with our investment strategy, then our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock could be adversely affected.

      We also anticipate contributing or selling properties to funds and joint ventures. If we do not have sufficient properties available that meet the investment criteria of current or future property funds, or if the funds have reduced or no access to capital on favorable terms, then such contributions or sales could be delayed or prevented, adversely affecting our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock.

 
Contingent or unknown liabilities could adversely affect our financial condition.

      At the time of our formation we acquired assets from our predecessor entities subject to all of their potential existing liabilities, without recourse. In addition, we have and may in the future acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against us based upon ownership of any of these entities or properties, then we might have to pay substantial sums to settle it, which could adversely affect our cash flow. Unknown liabilities with respect to entities or properties acquired might include:

  •  liabilities for clean-up or remediation of undisclosed environmental conditions;
 
  •  claims of customers, vendors or other persons dealing with our predecessors prior to the formation transactions or the former owners of the properties;
 
  •  accrued but unpaid liabilities incurred in the ordinary course of business;
 
  •  tax liabilities; and
 
  •  claims for indemnification by the general partners, officers and directors and others indemnified by our predecessors or the former owners of the properties.

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Risks Associated with our International Business

 
Our international growth is subject to special risks and we may not be able to effectively manage our international growth.

      We have acquired and developed, and expect to continue to acquire and develop, properties in foreign countries. Because local markets affect our operations, our international investments are subject to economic fluctuations in the foreign locations in which we invest. In addition, our international operations are subject to the usual risks of doing business abroad such as revisions in tax treaties or other laws governing the taxation of our foreign revenues, restrictions on the transfer of funds, and, in certain parts of the world, property rights uncertainty and political instability. We cannot predict the likelihood that any of these developments may occur. Further, we have entered, and may in the future enter, into agreements with non-U.S. entities that are governed by the laws of, and are subject to dispute resolution in the courts of, another country or region. We cannot accurately predict whether such a forum would provide us with an effective and efficient means of resolving disputes that may arise. And even if we are able to obtain a satisfactory decision through arbitration or a court proceeding, we could have difficulty enforcing any award or judgment on a timely basis or at all.

      Further, our business has grown rapidly and continues to grow through international property acquisitions and developments. If we fail to effectively manage our international growth, then our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock could be adversely affected.

 
Acquired properties may be located in new markets, where we may face risks associated with investing in an unfamiliar market.

      We have acquired and may continue to acquire properties in international markets that are new to us. When we acquire properties located in these markets, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures. We work to mitigate such risks through extensive diligence and research and associations with experienced partners, however there can be no guarantee that all such risks will be eliminated.

 
We are subject to risks from potential fluctuations in exchange rates between the U.S. dollar and the currencies of the foreign countries in which we invest.

      We are pursuing, and intend to continue to pursue, growth opportunities in international markets. As we invest in countries where the U.S. dollar is not the national currency, we are subject to foreign currency risks from the potential fluctuations in exchange rates between the U.S. dollar and the currencies of those foreign countries. A significant depreciation in the value of the currency of one or more foreign countries where we have a significant investment may materially affect our results of operations. We attempt to mitigate any such effects by borrowing under our multi-currency credit facility in the currency of the country we are investing in and, under certain circumstances, by putting in place foreign currency put option contracts hedging exchange rate fluctuations. For leases denominated in foreign currencies, we may use derivative financial instruments to manage the foreign exchange risk. We cannot, however, assure you that our efforts will successfully neutralize all foreign currency risks.

Debt Financing Risks

 
We could incur more debt, increasing our debt service.

      It is our policy to incur debt, either directly or through our subsidiaries, only if it will not cause our share of total debt-to-total market capitalization ratio to exceed approximately 45%. The aggregate amount of indebtedness that we may incur under our policy increases directly with an increase in the market price per share of our capital stock. Further, our management could alter or eliminate this policy without stockholder approval. If we change this policy, then we could become more highly leveraged, resulting in an increase in debt service that could adversely affect the cash available for distribution to our stockholders.

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We face risks associated with the use of debt to fund acquisitions and developments, including refinancing risk.

      As of December 31, 2003, we had total debt outstanding of $2.6 billion. We guarantee the operating partnership’s obligations with respect to the senior debt securities referenced in our financial statements. We are subject to risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. We anticipate that we will repay only a small portion of the principal of our debt prior to maturity. Accordingly, we will likely need to refinance at least a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of our existing debt. If we are unable to refinance or extend principal payments due at maturity or pay them with proceeds of other capital transactions, then we expect that our cash flow will not be sufficient in all years to pay dividends 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, then the interest expense relating to that refinanced indebtedness would increase.

      In addition, if we mortgage one or more of our properties to secure payment of indebtedness and we are unable to meet mortgage payments, then 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 dividends on, and the market price of, our stock.

 
We are dependent on external sources of capital.

      In order to qualify as a real estate investment trust, we are required each year to distribute to our stockholders at least 90% of our real estate investment trust taxable income (determined without regard to the dividends-paid deduction and by excluding any net capital gain) and are taxed on our income to the extent it is not fully distributed. Consequently, we may not be able to fund all future capital needs, including acquisition and development activities, from cash retained from operations and must rely on third-party sources of capital. Our ability to access private debt and equity capital on favorable terms or at all is dependent upon a number of factors, including, general market conditions, the market’s perception of our growth potential, our current and potential future earnings and cash distributions and the market price of our capital stock.

 
Covenants in our debt agreements could adversely affect our financial condition.

      The terms of our credit agreements and other indebtedness require that we comply with a number of customary financial and other covenants, such as maintaining debt service coverage and leverage ratios and maintaining insurance coverage. These covenants may limit flexibility in our operations, and our failure to comply with these covenants could cause a default under the applicable debt agreement even if we have satisfied our payment obligations. Further, as of December 31, 2003, we had 42 non-recourse secured loans that are cross-collateralized by 86 properties, totaling $920.6 million (not including unamortized debt premium). If we default on any of these loans, we may then be required to repay such 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 dividends on, and the market price of, our stock. In addition, our credit facility and senior debt securities 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 facility and the senior debt securities in addition to any mortgage or other debt that is in default, which could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock.

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Conflicts of Interest Risks

 
Some of our directors and executive officers are involved in other real estate activities and investments.

      Prior to the consummation our initial public offering in 1997, some of our executive officers and directors acquired interests in real estate-related businesses and investments, which they still own. Our executive officers’ continued involvement in other real estate-related activities could divert their attention from our day-to-day operations. 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 any 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 report. State law may limit our ability to enforce these agreements.

 
Certain of our executive officers and directors may have conflicts of interest with us in connection with other properties that they own or control.

      In October 1986, our predecessor-in-interest entered into a property and asset management agreement with Inglewood Corporate Center Associates to manage an office building, in which Messrs. Moghadam and Burke and Thomas W. Tusher, also a director, held, directly and indirectly, 26.7%, 26.7% and 20% interests, respectively. During 2003, Inglewood transferred to a third party such property and asset management services. Until such time, Inglewood had been paying us property and asset management fees, which totaled approximately $11,500 for the period from January 1, 2003 through the date on which such management was transferred during the second quarter of 2003. Also, during 2003, Mr. Tusher’s direct and indirect interests in Inglewood were redeemed for an amount equal to the estimated liquidation value of such venture’s assets. As a result, each of Messrs. Moghadam and Burke now holds, directly and indirectly, a 33.3% interest in Inglewood.

      Certain of our executive officers and directors own interests in other real-estate related businesses and investments, including retail development projects, office buildings and de minimus holdings of the equity securities of public and private real estate companies. We believe that these properties and activities generally do not directly compete with any of our properties. However, it is possible that a property in which an executive officer or director, or an affiliate of an executive officer or director, has an interest may compete with us in the future if we were to invest in a property similar in type and in close proximity to that property. In addition, our executive officers’ and directors’ continued involvement in these properties could divert management’s attention from our day-to-day operations. We will not acquire any properties from our executive officers, directors or their affiliates unless the transaction is approved by a majority of the disinterested and independent (as defined by the rules of the New York Stock Exchange) members of our board of directors with respect to that transaction.

 
Our role as general partner of the operating partnership may conflict with the interests of 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 addition, those persons holding limited partnership units will have the right to vote as a class on certain amendments to the operating partnership’s 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 operating partnership’s partnership agreement, holders of limited partnership units will have certain approval rights with respect to certain transactions that affect all stockholders but which they may not exercise in a manner that reflects the interests of all stockholders.

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Risks Associated with Government Regulations

 
Compliance or failure to comply with the Americans with Disabilities Act and other similar regulations could result in substantial costs.

      Under the Americans with Disabilities Act, places of public accommodation must meet certain federal requirements related to access and use by disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. If we are required to make unanticipated expenditures to comply with the Americans with Disabilities Act, including removing access barriers, then our cash flow and the amounts available for dividends to our stockholders may be adversely affected. Our properties are also subject to various federal, state and local regulatory requirements, such as state and local fire and life-safety requirements. We could incur fines or private damage awards if we fail to comply with these requirements. While we believe that our properties are currently in material compliance with these regulatory requirements, the requirements may change or new requirements may be imposed that could require significant unanticipated expenditures by us that will affect our cash flow and results of operations.

 
The costs of compliance with environmental laws and regulations could exceed our budgets for these items.

      Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the costs of investigation, removal or remediation of certain hazardous or toxic substances or petroleum products at, on, under or in its property. The costs of removal or remediation of such substances could be substantial. 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, or other costs, including investigation and clean-up costs, resulting from the environmental contamination.

      Environmental laws also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail 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. Some of our properties may contain asbestos-containing building materials.

      In addition, some of our properties are leased or have been leased, in part, to owners and operators of businesses that use, store, or otherwise handle petroleum products or other hazardous or toxic substances, creating a potential for the release of such hazardous or toxic substances. Further, certain of our properties are on, adjacent to or near other properties that have contained or currently contain petroleum products or other hazardous or toxic substances, or upon which others have engaged, are engaged or may engage in activities that may release such hazardous or toxic substances. From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions where we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield a superior risk-adjusted return. In such an instance, we underwrite the costs of environmental investigation, clean-up and monitoring into the acquisition cost and obtain appropriate environmental insurance for the property. Further, in connection with certain divested properties, we have agreed to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties.

      At the time of acquisition, we subject all of our properties to a Phase I or similar environmental assessments by independent environmental consultants and we may have additional Phase II testing performed upon consultant’s recommendation. These environmental assessments have not revealed, and we are not aware of, any environmental liability that we believe would have a material adverse effect on our financial condition or results of operations taken as a whole. Nonetheless, it is possible that the assessments

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did not reveal all environmental liabilities and that there are material environmental liabilities unknown to us, or that known environmental conditions may give rise to liabilities that are greater than we anticipated. Further, our properties’ current environmental condition may be affected by customers, the condition of land, operations in the vicinity of the properties (such as releases from underground storage tanks), or by unrelated third parties. If the costs of compliance with existing or future environmental laws and regulations exceed our budgets for these items, then our financial condition, results of operations, cash flow, and ability to pay dividends on, and the market price of, our stock could be adversely affected.

Federal Income Tax Risks

 
Our failure to qualify as a real estate investment trust would have serious adverse consequences to our stockholders.

      We elected to be taxed as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code commencing with our taxable year ended December 31, 1997. We currently intend to operate so as to qualify as a real estate investment trust under the Internal Revenue Code and believe that our current organization and method of operation comply with the rules and regulations promulgated under the Internal Revenue Code to enable us to continue to qualify as a real estate investment trust. However, it is possible that we have been organized or have operated in a manner that would not allow us to qualify as a real estate investment trust, or that our future operations could cause us to fail to qualify. Qualification as a real estate investment trust requires us to satisfy numerous requirements (some on an annual and others on a quarterly basis) established under highly technical and complex Internal Revenue Code provisions for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. For example, in order to qualify as a real estate investment trust, we must derive at least 95% of our gross income in any year from qualifying sources. In addition, we must pay dividends to stockholders aggregating annually at least 90% of our real estate investment trust taxable income (determined without regard to the dividends paid deduction and by excluding capital gains) and must satisfy specified asset tests on a quarterly basis. These provisions and the applicable treasury regulations are more complicated in our case because we hold our assets through the operating partnership. Legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualification as a real estate investment trust or the federal income tax consequences of such qualification. However, we are not aware of any pending tax legislation that would adversely affect our ability to qualify as a real estate investment trust.

      If we fail to qualify as a real estate investment trust in any taxable year, then we will be required to pay federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless we are entitled to relief under certain statutory provisions, we would be disqualified from treatment as a real estate investment trust for the four taxable years following the year in which we lost qualification. If we lose our real estate investment trust status, then 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 our stockholders.

 
Certain property transfers may generate prohibited transaction income, resulting in a penalty tax on gain attributable to the transaction.

      From time to time, we may transfer or otherwise dispose of some of our properties. Under the Internal Revenue Code, any gain resulting from transfers of properties that we hold as inventory or primarily for sale to customers in the ordinary course of business would be treated as income from a prohibited transaction subject to a 100% penalty tax. Since we acquire properties for investment purposes, we do not believe that our occasional transfers or disposals of property are treated as prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The Internal Revenue Service may contend that certain transfers or disposals of properties by us are prohibited transactions. While we believe that the Internal Revenue Service would not prevail in any such dispute, if the IRS were to argue successfully that a transfer or disposition of property constituted a prohibited transaction, then we would be required to pay a 100% penalty tax on any gain

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allocable to us from the prohibited transaction. In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a real estate investment trust for federal income tax purposes.

Risks Associated with our Dependence on Key Personnel

      We depend on the efforts of our executive officers. While we believe that we could find suitable replacements for these key personnel, the loss of their services or the limitation of their availability could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock. We do not have employment agreements with any of our executive officers.

Risks Associated with our Restatement of Depreciation Expense

 
There was a material weakness in our internal control over financial reporting, and our business could have been adversely impacted if we had failed to remedy the deficiencies in our controls.

      The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. As part of management’s on-going review of our accounting policies and internal control over financial reporting, on October 12, 2004, management determined that there was a material weakness in our internal control over financial reporting related to ground lease depreciation. This weakness resulted in an understatement of depreciation expense and resulted in a restatement of depreciation expense for our results in previously issued financial statements for the years ended December 31, 2003, 2002 and 2001 filed on Forms 10-K and 10-K/ A for the year ended December 31, 2003, and for the quarters ended March 31, 2004 and June 30, 2004 filed on Forms 10-Q for the quarters then ended. In connection with correcting this error, management has taken appropriate action to modify our system of internal control over financial reporting to remediate the material weakness. While management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Other deficiencies, particularly a material weakness, in internal control over financial reporting which may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, a decline in our stock price, or otherwise materially adversely affect our business, reputation, results of operation, financial condition or liquidity.

Risks Associated with Ownership of our Stock

 
Limitations in our charter and bylaws could prevent a change in control.

      Certain provisions of our charter and bylaws may delay, defer, or prevent a change in control or other transaction that could provide the holders of our common stock with the opportunity to realize a premium over the then-prevailing market price for the common stock. To maintain our qualification as a real estate investment trust for federal income tax purposes, not more than 50% in value of our outstanding stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) during the last half of a taxable year after the first taxable year for which a real estate investment trust election is made. Furthermore, 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 customers (or a tenant of any partnership in which we are a partner), then the rent received by us (either directly or through any such partnership) from that tenant will not be qualifying income for purposes of the real estate investment trust gross income tests of the Internal Revenue Code. To help us maintain our qualification as a real estate investment trust for federal income tax purposes, we prohibit the ownership, actually or by virtue of the constructive ownership provisions of the Internal Revenue Code, by any single person, of more than 9.8% (by value or number of shares, whichever is more restrictive) of the issued and outstanding shares of each of our common stock, series L preferred stock and series M preferred stock. We also prohibit the ownership, actually or constructively, of any shares of our series D, E, F, H, I, J and K preferred stock by any single

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person so that no such person, taking into account all of our stock so owned by such person, including any common stock or other series of preferred stock, may own in excess of 9.8% of our issued and outstanding capital stock. We refer to this limitation as the “ownership limit.” Shares acquired or held in violation of the ownership limit will be transferred to a trust for the benefit of a designated charitable beneficiary. Any person who acquires shares in violation of the ownership limit will not be entitled to any dividends on the shares or be entitled to vote the shares or receive any proceeds from the subsequent sale of the shares in excess of the lesser of the price paid for the shares or the amount realized from the sale. A transfer of shares in violation of the above limits may be void under certain circumstances. The ownership limit may have the effect of delaying, deferring, or preventing a change in control and, therefore, could adversely affect our stockholders’ ability to realize a premium over the then-prevailing market price for the shares of our common stock in connection with such transaction.

      Our charter authorizes us to issue additional shares of common and preferred stock and to establish the preferences, rights and other terms of any series or class of preferred stock that we issue. Although our board of directors has no intention to do so at the present time, it could establish a series or class of preferred stock that could have the effect of delaying, deferring, or preventing a transaction, including a change in control, that might involve a premium price for the common stock or otherwise be in the best interests of our stockholders.

      Our charter and bylaws and Maryland law also contain other provisions that may impede various actions by stockholders without approval of our board of directors, which in turn may delay, defer, or prevent a transaction, including a change in control. Those provisions in our charter and bylaws include:

  •  directors may be removed only for cause and only upon a two-thirds vote of stockholders;
 
  •  our board can fix the number of directors within set limits (which limits are subject to change by our board), and fill vacant directorships upon the vote of a majority of the remaining directors, even though less than a quorum, or in the case of a vacancy resulting from an increase in the size of the board, a majority of the entire board;
 
  •  stockholders must give advance notice to nominate directors or propose business for consideration at a stockholders’ meeting; and
 
  •  the request of the holders of 50% or more of our common stock is necessary for stockholders to call a special meeting.

      Those provisions provided for under Maryland law include:

  •  a two-thirds vote of stockholders is required to amend our charter; and
 
  •  stockholders may only act by written consent with the unanimous approval of all stockholders entitled to vote on the matter in question.

      In addition, our board could elect to adopt, without stockholder approval, certain other provisions under Maryland law that may impede a change in control.

 
Various market conditions affect the price of our stock.

      As with other publicly-traded equity securities, the market price of our stock will depend upon various market conditions that are not within our control and may change from time to time, including:

  •  the extent of investor interest in us;
 
  •  the general reputation of real estate investment trusts and the attractiveness of their equity securities in comparison to other equity securities (including securities issued by other real estate-based companies);
 
  •  general stock and bond market conditions, including changes in interest rates on fixed income securities, that may lead prospective purchasers of our stock to demand a higher annual yield from future dividends; and

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  •  terrorist activity may adversely affect the markets in which our securities trade, possibly increasing market volatility and causing the further erosion of business and consumer confidence and spending.

      Other factors such as governmental regulatory action and changes in tax laws could also have a significant impact on the future market price of our stock.

 
Earnings and cash dividends, asset value and market interest rates affect the price of our stock.

      As a real estate investment trust the market value of our equity securities, in general, is based primarily upon the market’s perception of our growth potential and our current and potential future earnings and cash dividends. Our equity securities’ market value is based secondarily upon the market value of our underlying real estate assets. For this reason, shares of our stock may trade at prices that are higher or lower than our net asset value per share. To the extent that we retain operating cash flow for investment purposes, working capital reserves, or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our stock. Our failure to meet the market’s expectations with regard to future earnings and cash dividends likely would adversely affect the market price of our stock. Further, the distribution yield on the stock (as a percentage of the price of the stock) relative to market interest rates may also influence the price of our stock. An increase in market interest rates might lead prospective purchasers of our stock to expect a higher distribution yield, which would adversely affect our stock’s market price. Additionally, if the market price of our stock declines significantly, then we might breach certain covenants with respect to our debt obligations, which could adversely affect our liquidity and ability to make future acquisitions and our ability to pay dividends to our stockholders.

 
If we issue additional securities, then the investment of existing stockholders will be diluted.

      We have authority to issue shares of common stock or other equity or debt securities, and to cause the operating partnership to issue limited partnership units, in exchange for property or otherwise. Existing stockholders have no preemptive right to acquire any additional securities issued by the operating partnership or us and any issuance of additional equity securities could result in dilution of an existing stockholder’s investment.

 
We could change our investment and financing policies without a vote of stockholders.

      Subject to our current investment policy to maintain our qualification as a real estate investment trust (unless a change is approved by our board of directors under certain circumstances), our board of directors determines our investment and financing policies, our growth strategy and our debt, capitalization, distribution and operating policies. Although our board of directors does not presently intend to revise or amend these strategies and policies, they may do so at any time without a vote of stockholders. 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 pay dividends to our stockholders.

 
Shares available for future sale could adversely affect the market price of our common stock.

      The operating partnership and AMB Property II, L.P. had 4,763,790 common limited partnership units issued and outstanding as of December 31, 2003, which may be exchanged generally one year after their issuance on a one-for-one basis into shares of our common stock. In the future, the operating partnership or AMB Property II, L.P. may issue additional limited partnership units, and we may issue shares of common stock, in connection with the acquisition of properties or in private placements. These shares of common stock and the shares of common stock issuable upon exchange of limited partnership units may be sold in the public securities markets over time, pursuant to registration rights that we have granted, or may grant in connection with future issuances, or pursuant to Rule 144. In addition, common stock issued under our stock option and incentive plans may also be sold in the market pursuant to registration statements that we have filed or pursuant to Rule 144. As of December 31, 2003, under our stock option and incentive plans, we had reserved 16,761,873 shares of common stock for issuance (not including shares that we have already issued), had outstanding options to purchase 10,286,057 shares of common stock (net of forfeitures and 1,213,905 shares

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that we have issued upon the exercise of options) and had 974,222 restricted shares of common stock outstanding (net of 52,209 shares that have been forfeited). Future sales of a substantial number of shares of our common stock in the market or the perception that such sales might occur could adversely affect the market price of our common stock. Further, the existence of the operating partnership’s limited partnership units and the shares of our common stock reserved for issuance upon exchange of limited partnership units and the exercise of options, and registration rights referred to above, may adversely affect the terms upon which we are able to obtain additional capital through the sale of equity securities.
 
Item 7A. Quantitative and Qualitative Disclosures about Market Risk

      Market risk is the risk of loss from adverse changes in market prices, interest rates and foreign exchange rates. Our future earnings and cash flows are dependent upon prevailing market rates. Accordingly, we manage our market risk by matching projected cash inflows from operating, investing and financing activities with projected cash outflows for debt service, acquisitions, capital expenditures, distributions to stockholders and unitholders, and other cash requirements. The majority of our outstanding debt has fixed interest rates, which minimizes the risk of fluctuating interest rates. Our exposure to market risk includes interest rate fluctuations in connection with our credit facility and other variable rate borrowings and our ability to incur more debt without stockholder approval, thereby increasing our debt service obligations, which could adversely affect our cash flows. As of December 31, 2003, we had no interest rate caps or swaps. See Item 2: “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital Resources — Market Capitalization.”

      The table below summarizes the market risks associated with our fixed and variable rate debt outstanding before unamortized debt premiums of $10.8 million as of December 31, 2003 (dollars in thousands):

                                                         
2004 2005 2006 2007 2008 Thereafter Total







Fixed rate debt(1)
  $ 96,425     $ 354,372     $ 168,961     $ 138,067     $ 365,496     $ 1,062,154     $ 2,185,475  
Average interest rate
    7.0 %     7.0 %     6.9 %     7.1 %     6.9 %     6.7 %     6.9 %
Variable rate debt(2)
  $ 2,045     $ 279,532     $ 51,898     $ 5,504     $ 5,637     $ 33,377     $ 377,993  
Average interest rate
    3.6 %     1.9 %     1.6 %     3.8 %     4.1 %     4.1 %     2.1 %


(1)  Represents 85.3% of all outstanding debt.
 
(2)  Represents 14.7% of all outstanding debt.

      If market rates of interest on our variable rate debt increased by 10% (or approximately 20 basis points), then the increase in interest expense on the variable rate debt would be $0.8 million annually. As of December 31, 2003, the estimated fair value of our fixed rate debt was $2,472.2 million based on our estimate of current market interest rates.

      As of December 31, 2003 and 2002, variable rate debt comprised 14.7% and 9.3%, respectively, of all our outstanding debt. Variable rate debt was $378.0 million and $206.1 million, respectively, as of December 31, 2003 and 2002. The increase is due to a higher outstanding balance on our credit facility. This increase in our outstanding variable rate debt increases our risk associated with unfavorable interest rate fluctuations.

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      Financial Instruments. We record all derivatives on the balance sheet at fair value as an asset or liability, with an offset to accumulated other comprehensive income or income. For revenues or expenses denominated in non-functional currencies, we may use derivative financial instruments to manage foreign currency exchange rate risk. Our derivative financial instruments in effect at December 31, 2003, were a forward contract hedging against adverse foreign exchange fluctuations in the Mexican peso against the U.S. dollar and a put option hedging against adverse equity fluctuations affecting the value of stock warrants obtained from customers. The following table summarizes our financial instruments as of December 31, 2003:

                   
Carrying Fair
Related Derivatives Amount Value



(In thousands)
MXN/ USD Forward Contract (USD short):
               
 
Expected Maturity March 30, 2004
               
 
Contract Amount (MXN pesos)
    37,201          
 
Forward Exchange Rate
    10.86          
 
Contract Amount (USD Dollars)
  $ 3,426          
 
Fair Value at December 31, 2003
          $ 3,273  
Put Option:
               
 
Contract Amount
  $ 188          
 
Fair Value at December 31, 2003
          $ 57  

      Foreign Operations. Our exposure to market risk also includes foreign currency exchange rate risk. The U.S. dollar is the functional currency for our subsidiaries operating in the United States and Mexico. The functional currency for our subsidiaries operating outside North America is generally the local currency of the country in which the entity is located, mitigating the effect of foreign exchange gains and losses. Our subsidiaries whose functional currency is not the U.S. dollar translate their financial statements into U.S. dollars. Assets and liabilities are translated at the exchange rate in effect as of the financial statement date. We translate income statement accounts using the average exchange rate for the period and significant nonrecurring transactions using the rate on the transaction date. Gains resulting from the translation are included in accumulated other comprehensive income as a separate component of stockholders’ equity and totaled $0.7 million for the year ended December 31, 2003.

      Our foreign subsidiaries may have transactions denominated in currencies other than their functional currency. In these instances, non-monetary assets and liabilities are reflected at the historical exchange rate, monetary assets and liabilities are remeasured at the exchange rate in effect at the end of the period and income statement accounts are remeasured at the average exchange rate for the period. For the year ended December 31, 2003, losses from remeasurement included in our results of operations were less than $0.1 million.

      We also record gains or losses in the income statement when a transaction with a third party, denominated in a currency other than the entity’s functional currency, is settled and the functional currency cash flows realized are more or less than expected based upon the exchange rate in effect when the transaction was initiated.

 
Item 8. Financial Statements and Supplementary Data

      See Item 15: “Exhibits, Financial Statement Schedules, and Reports of Form 8-K.”

 
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      None.

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Item 9A. Controls and Procedures

      On October 12, 2004, we announced a restatement of depreciation expense for our prior period results relating to 39 buildings in our portfolio, 38 of which are located on-tarmac, which is land owned by federal, state or local airport authorities. As part of management’s on-going review of our accounting policies and internal control over financial reporting, management determined that we should have depreciated certain of our investments in buildings that reside on land subject to ground leases over the remaining terms of the ground leases, rather than over 40 years, which is the period used to depreciate buildings that we hold in fee simple. Management determined that the cause for this depreciation error was that there was no mechanism in place to segregate and apply appropriate depreciable lives to assets subject to ground leases. Our general ledger did not have a separate account designation for assets subject to ground leases so these assets were not segregated into a separate expected useful life category for depreciation purposes.

      Management also determined that the internal control deficiency that resulted in this restatement represents a material weakness, as defined by the Public Company Accounting Oversight Board’s Auditing Standard No. 2. The Public Company Accounting Oversight Board has defined material weakness as “a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.” Our conclusion that the control issues surrounding ground lease depreciation constituted a material weakness means that, absent remediation of these issues, there would exist a reasonable possibility of a material misstatement in our financial statements for future periods.

      Going forward, these assets will be depreciated over the lesser of 40 years or the contractual term of the underlying ground lease. In connection with correcting this error, management has taken appropriate action to modify our system of internal control over financial reporting to remediate this internal control deficiency. Specifically, we have implemented the following remediation measures with respect to this material weakness:

  •  Management modified our existing property acquisition accounting checklist system to identify ground leases to the appropriate accounting and finance personnel who create journal entries in the general ledger and to communicate certain information regarding such ground leases, including lease commencement and termination dates and any contractual extension options.
 
  •  Management created new general ledger accounts to segregate ground lease assets from fee simple assets and reclassified all investments in buildings that reside on land subject to ground leases into the new general ledger accounts.
 
  •  Management modified our existing property depreciation accounting policy to include a separate category for buildings residing on land subject to ground leases, which under the policy will be depreciated over the lesser of 40 years or the contractual term of the underlying ground lease.
 
  •  Management designated certain finance personnel to review our quarterly depreciation calculations, which will include a review for the correct depreciable lives of ground lease assets.

      To reflect additional depreciation expense in this Form 10-K/ A, management has restated our consolidated financial statements contained in our Annual Report on Form 10-K and Amendment No. 1 on our Annual Report on Form 10-K/ A for the year ended December 31, 2003 originally filed with the U.S. Securities and Exchange Commission on March 11, 2004 and March 15, 2004, respectively. Management and the audit committee of our board of directors discussed with our independent auditors, PricewaterhouseCoopers LLP, and determined that this was the proper approach. On October 12, 2004, management and the audit committee of our board of directors concluded that our consolidated financial statements contained in our Annual Report on Form 10-K and Amendment No. 1 on our Annual Report on Form 10-K/ A for the year ended December 31, 2003 originally filed with the U.S. Securities and Exchange Commission on March 11, 2004 and March 15, 2004 respectively, should no longer be relied upon because of this error in such financial statements as addressed in Accounting Principles Board Opinion No. 20.

      As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive

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officer, president and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures that were in effect as of the end of the year covered by this report. Based on the material weakness described above, our chief executive officer, president and chief financial officer each concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2003. However, in light of the implementation of the new remediation measures described above, our chief executive officer, president and chief financial officer believe, as of the date of this report, management has taken appropriate action to modify our internal control over financial reporting relating to ground lease depreciation and remediate this material weakness. The changes in our internal control over financial reporting discussed above materially affected our internal control over financial reporting.

      Except as stated above, there have been no other changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART III

Items 10, 11, 12, 13 and 14.

      The information required by Items 10 through 14 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.

PART IV

 
Item 15. Exhibits and Financial Statement Schedules

      (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 Registered Public Accounting Firm     F-1  
Consolidated Balance Sheets as of December 31, 2003 (Restated) and 2002 (Restated)     F-2  
Consolidated Statements of Operations for the years ended December 31, 2003 (Restated), 2002 (Restated) and 2001 (Restated)     F-3  
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2003 (Restated), 2002 (Restated) and 2001 (Restated)     F-4  
Consolidated Statements of Cash Flows for the years ended December 31, 2003 (Restated), 2002 (Restated) and 2001 (Restated)     F-5  
Notes to Consolidated Financial Statements (Restated)     F-6  
Report of Independent Registered Public Accounting Firm on Financial Statement Schedules     S-1  
Schedule III — Real Estate and Accumulated Depreciation (Restated)     S-2  

      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.

      (a)(3) Exhibits:

         
Exhibit
Number Description


  3 .1   Articles of Incorporation of AMB Property Corporation (incorporated by reference to Exhibit 3.1 of AMB Property Corporation’s Registration Statement on Form S-11 (No. 333-35915)).
  3 .2   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 AMB Property Corporation’s Current Report on Form 8-K filed on January 7, 1999).
  3 .3   Articles 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 AMB Property Corporation’s Current Report on Form 8-K filed on January 7, 1999).
  3 .4   Articles Supplementary establishing and fixing the rights and preferences of the 7.75% Series D Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.1 of AMB Property Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999).
  3 .5   Articles Supplementary establishing and fixing the rights and preferences of the 7.75% Series E Cumulative Preferred Stock (incorporated by reference to Exhibit 3.1 of AMB Property Corporation’s Current Report on Form 8-K filed on September 14, 1999).

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Exhibit
Number Description


  3 .6   Articles Supplementary establishing and fixing the rights and preferences of the 7.95% Series F Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.1 of AMB Property Corporation’s Current Report on Form 8-K filed on April 14, 2000).
  3 .7   Articles Supplementary establishing and fixing the rights and preferences of the 7.95% Series G Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.1 of AMB Property Corporation’s Current Report on Form 8-K filed on September 29, 2000).
  3 .8   Articles Supplementary establishing and fixing the rights and preferences of the 8.125% Series H Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.3 of AMB Property Corporation’s Current Report on Form 8-K filed on September 29, 2000).
  3 .9   Articles Supplementary establishing and fixing the rights and preferences of the 8.00% Series I Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.1 of AMB Property Corporation’s Current Report on Form 8-K filed on March 23, 2001).
  3 .10   Articles Supplementary establishing and fixing the rights and preferences of the 7.95% Series J Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.1 of AMB Property Corporation’s Current Report on Form 8-K filed on October 3, 2001).
  3 .11   Articles Supplementary redesignating and reclassifying all 2,200,000 Shares of the 8.75% Series C Cumulative Redeemable Preferred Stock as Preferred Stock (incorporated by reference to Exhibit 3.1 of AMB Property Corporation’s Current Report on Form 8-K filed on December 7, 2001).
  3 .12   Articles Supplementary establishing and fixing the rights and preferences of the 7.95% Series K Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.1 of AMB Property Corporation’s Current Report on Form 8-K filed on April 23, 2002).
  3 .13   Articles Supplementary Redesignating and Reclassifying 130,000 Shares of 7.95% Series F Cumulative Redeemable Preferred Stock as Preferred Stock (incorporated by reference to Exhibit 3.2 of AMB Property Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
  3 .14   Articles Supplementary Redesignating and Reclassifying all 20,000 Shares of 7.95% Series G Cumulative Redeemable Preferred Stock as Preferred Stock (incorporated by reference to Exhibit 3.3 of AMB Property Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
  3 .16   Articles Supplementary establishing and fixing the rights and preferences of the 6 1/2% Series L Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.16 of AMB Property Corporation’s Current Report on Form 8-A filed on June 20, 2003).
  3 .17   Articles Supplementary establishing and fixing the rights and preferences of the 6 3/4% Series M Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.17 of AMB Property Corporation’s Form 8-K filed on November 26, 2003).
  3 .18   Third Amended and Restated Bylaws of AMB Property Corporation (incorporated by reference to Exhibit 3.17 of AMB Property Corporation’s 8-A filed on June 20, 2003).
  4 .1   Form of Certificate for Common Stock of AMB Property Corporation (incorporated by reference to Exhibit 3.3 of AMB Property Corporation’s Registration Statement on Form S-11 (No. 333-35915)).
  4 .2   Form of Certificate for 6 1/2% Series L Cumulative Redeemable Preferred Stock of AMB Property Corporation (incorporated by reference to Exhibit 4.3 of AMB Property Corporation’s Form 8-A filed on June 20, 2003).
  4 .3   Form of Certificate for 6 3/4% Series M Cumulative Redeemable Preferred Stock of AMB Property Corporation (incorporated by reference to Exhibit 4.3 of AMB Property Corporation’s Form 8-A filed on November 12, 2003).
  4 .4   $30,000,000 7.925% Fixed Rate Note No. 1 dated August 18, 2000, attaching the Parent Guarantee dated August 18, 2000 (incorporated by reference to Exhibit 4.5 of AMB Property Corporation’s Annual Report on Form 10-K for the year ended December 31, 2000).

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Exhibit
Number Description


  4 .5   $25,000,000,000 7.925% Fixed Rate Note No. 2 dated September 12, 2000, attaching the Parent Guarantee dated September 12, 2000 (incorporated by reference to Exhibit 4.6 of AMB Property Corporation’s Annual Report on Form 10-K for the year ended December 31, 2000).
  4 .6   $50,000,000 8.00% Fixed Rate Note No. 3 dated October 26, 2000, attaching the Parent Guarantee dated October 26, 2000 (incorporated by reference to Exhibit 4.7 of AMB Property Corporation’s Annual Report on Form 10-K for the year ended December 31, 2000).
  4 .7   $25,000,000 8.000% Fixed Rate Note No. 4 dated October 26, 2000, attaching the Parent Guarantee dated October 26, 2000 (incorporated by reference to Exhibit 4.8 of AMB Property Corporation’s Annual Report on Form 10-K for the year ended December 31, 2000).
  4 .8   $50,000,000 7.20% Fixed Rate Note No. 5 dated December 19, 2000, attaching the Parent Guarantee dated December 19, 2000 (incorporated herein by reference to Exhibit 4.1 of AMB Property Corporation’s Current Report on Form 8-K filed on January 8, 2001).
  4 .9   $50,000,000 7.20% Fixed Rate Note No. 6 dated December 19, 2000, attaching the Parent Guarantee dated December 19, 2000 (incorporated herein by reference to Exhibit 4.2 of AMB Property Corporation’s Current Report on Form 8-K filed on January 8, 2001).
  4 .10   $50,000,000 7.20% Fixed Rate Note No. 7 dated December 19, 2000, attaching the Parent Guarantee dated December 19, 2000 (incorporated herein by reference to Exhibit 4.3 of AMB Property Corporation’s Current Report on Form 8-K filed on January 8, 2001).
  4 .11   Indenture dated as of June 30, 1998, by and among AMB Property, L.P., AMB Property Corporation and State Street Bank and Trust Company of California, N.A., as trustee (incorporated by reference to Exhibit 4.1 of AMB Property Corporation’s Registration Statement on Form S-11 (No. 333-49163)).
  4 .12   First Supplemental Indenture dated as of June 30, 1998 by and among AMB Property, L.P., AMB Property Corporation and State Street Bank and Trust Company of California, N.A., as trustee (incorporated by reference to Exhibit 4.2 of AMB Property Corporation’s Registration Statement on Form S-11 (No. 333-49163)).
  4 .13   Second Supplemental Indenture dated as of June 30, 1998, by and among AMB Property, L.P., AMB Property Corporation and State Street Bank and Trust Company of California, N.A., as trustee (incorporated by reference to Exhibit 4.3 of AMB Property Corporation’s Registration Statement on Form S-11 (No. 333-49163)).
  4 .14   Third Supplemental Indenture dated as of June 30, 1998, by and among AMB Property, L.P., AMB Property Corporation and State Street Bank and Trust Company of California, N.A., as trustee (incorporated by reference to Exhibit 4.4 of AMB Property Corporation’s Registration Statement on Form S-11 (No. 333-49163)).
  4 .15   Fourth Supplemental Indenture, by and among AMB Property, L.P., AMB Property Corporation and State Street Bank and Trust Company of California, N.A., as trustee (incorporated by reference to Exhibit 4.1 of AMB Property Corporation’s Current Report on Form 8-K/ A filed on November 9, 2000).
  4 .16   Fifth Supplemental Indenture dated as of May 7, 2002, by and among AMB Property, L.P., AMB Property Corporation and State Street Bank and Trust Company of California, N.A., as trustee (incorporated by reference to Exhibit 4.15 of AMB Property Corporation’s Annual Report on Form 10-K for the year ended December 31, 2002).
  4 .17   Specimen of 7.10% Notes due 2008 (included in the First Supplemental Indenture incorporated by reference as Exhibit 4.2 of AMB Property Corporation’s Registration Statement on Form S-11 (No. 333-49163)).
  4 .18   Specimen of 7.50% Notes due 2018 (included in the Second Supplemental Indenture incorporated by reference as Exhibit 4.3 of AMB Property Corporation’s Registration Statement on Form S-11 (No. 333-49163)).
  4 .