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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-13545
AMB PROPERTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 94-3281941
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
505 MONTGOMERY ST., SAN FRANCISCO, CALIFORNIA 94111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(415) 394-9000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 30, 2000, there were 84,149,059 shares of the Registrant's
common stock, $0.01 par value per share, outstanding.
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AMB PROPERTY CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 2000, and
December 31, 1999......................................... 1
Consolidated Statements of Operations for the three and nine
months ended September 30, 2000 and 1999.................. 2
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999......................... 3
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 2000........................... 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 30
Item 2. Changes in Securities and Use of Proceeds................... 30
Item 3. Defaults Upon Senior Securities............................. 30
Item 4. Submission of Matters to a Vote of Security Holders......... 30
Item 5. Other Information........................................... 30
Item 6. Exhibits and Reports on Form 8-K............................ 45
i
PART I
ITEM 1. FINANCIAL STATEMENTS
AMB PROPERTY CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
Investments in real estate:
Land and improvements..................................... $ 805,428 $ 714,916
Buildings and improvements................................ 2,723,499 2,349,221
Construction in progress.................................. 258,524 185,315
---------- ----------
Total investments in properties................... 3,787,451 3,249,452
Accumulated depreciation and amortization................. (160,880) (103,558)
---------- ----------
Net investments in properties..................... 3,626,571 3,145,894
Investment in unconsolidated joint ventures................. 77,981 66,357
Properties held for divestiture, net........................ 149,842 181,201
---------- ----------
Net investments in real estate.................... 3,854,394 3,393,452
Cash and cash equivalents................................... 18,804 33,312
Restricted cash and cash equivalents........................ 19,036 103,707
Other assets................................................ 210,808 91,079
---------- ----------
Total assets...................................... $4,103,042 $3,621,550
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Secured debt.............................................. $ 825,477 $ 707,037
Alliance Fund I credit facility........................... -- 80,000
Unsecured senior debt securities.......................... 455,000 400,000
Unsecured credit facility................................. 233,000 83,000
---------- ----------
Total debt........................................ 1,513,477 1,270,037
Other liabilities........................................... 144,104 89,371
---------- ----------
Total liabilities................................. 1,657,581 1,359,408
Commitments and contingencies (note 11)
Minority interests.......................................... 672,450 432,883
Stockholders' equity:
Series A preferred stock, cumulative, redeemable, $0.01
par value, 100,000,000 shares authorized, 4,000,000
shares issued and outstanding, $100,000 liquidation
preference............................................. 96,100 96,100
Common stock, $0.01 par value, 500,000,000 shares
authorized, 84,112,438 and 85,133,041 issued and
outstanding............................................ 841 851
Additional paid-in capital................................ 1,632,655 1,656,226
Retained earnings......................................... 43,438 47,089
Accumulated other comprehensive income.................... (23) 28,993
---------- ----------
Total stockholders' equity........................ 1,773,011 1,829,259
---------- ----------
Total liabilities and stockholders' equity........ $4,103,042 $3,621,550
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
1
AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
REVENUES
Rental revenues..................... $ 118,493 $ 109,708 $ 337,356 $ 330,895
Equity in earnings of unconsolidated
joint ventures................... 1,447 1,251 4,006 3,580
Investment management and other
income........................... 1,431 825 3,811 2,258
----------- ----------- ----------- -----------
Total revenues.............. 121,371 111,784 345,173 336,733
OPERATING EXPENSES
Property operating expenses......... 13,400 13,153 36,463 39,110
Real estate taxes................... 13,994 13,629 40,992 43,431
Interest, including amortization.... 22,562 21,147 62,906 67,705
Depreciation and amortization....... 23,312 15,693 65,135 49,295
General and administrative.......... 5,987 6,107 17,322 19,116
----------- ----------- ----------- -----------
Total operating expenses.... 79,255 69,729 222,818 218,657
----------- ----------- ----------- -----------
Income from operations before
minority interests............. 42,116 42,055 122,355 118,076
Minority interests' share of net
income........................... (13,085) (9,661) (32,677) (24,367)
----------- ----------- ----------- -----------
Net income before gain from
divestiture of real estate..... 29,031 32,394 89,678 93,709
Gain from divestiture of real
estate........................... 5,815 21,532 6,220 33,057
----------- ----------- ----------- -----------
Net income before extraordinary
items.......................... 34,846 53,926 95,898 126,766
Extraordinary items................. -- (1,347) -- (2,856)
----------- ----------- ----------- -----------
Net income....................... 34,846 52,579 95,898 123,910
Series A preferred stock
dividends........................ (2,125) (2,125) (6,375) (6,375)
----------- ----------- ----------- -----------
Net income available to common
stockholders................... $ 32,721 $ 50,454 $ 89,523 $ 117,535
=========== =========== =========== ===========
BASIC INCOME PER COMMON SHARE
Before extraordinary items.......... $ 0.39 $ 0.60 $ 1.07 $ 1.39
Extraordinary items................. -- (0.02) -- (0.03)
----------- ----------- ----------- -----------
Net income available to common
stockholders................... $ 0.39 $ 0.58 $ 1.07 $ 1.36
=========== =========== =========== ===========
DILUTED INCOME PER COMMON SHARE
Before extraordinary items.......... $ 0.39 $ 0.60 $ 1.06 $ 1.39
Extraordinary items................. -- (0.02) -- (0.03)
----------- ----------- ----------- -----------
Net income available to common
stockholders................... $ 0.39 $ 0.58 $ 1.06 $ 1.36
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic............................... 84,115,613 86,536,918 83,937,884 86,274,878
=========== =========== =========== ===========
Diluted............................. 84,725,109 86,637,633 84,237,861 86,375,711
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED, DOLLARS IN THOUSANDS)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 95,898 $123,910
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 65,135 49,295
Straight-line rents....................................... (7,158) (7,523)
Amortization of debt premiums and financing costs......... (5,530) (2,156)
Minority interests' share of net income................... 32,677 24,367
Gain on divestitures of real estate....................... (6,220) (33,057)
Non-cash portion of extraordinary items................... -- (1,884)
Equity in losses of AMB Investment Management............. 2,162 411
Equity in earnings of unconsolidated joint ventures....... (4,006) (3,580)
Changes in assets and liabilities:
Other assets.............................................. (34,924) 1,758
Other liabilities......................................... 23,612 34,056
--------- --------
Net cash provided by operating activities............... 161,646 185,597
CASH FLOWS FROM INVESTING ACTIVITIES
Change in restricted cash and cash equivalents.............. 57,838 --
Cash paid for property acquisitions......................... (331,346) (309,699)
Additions to land, building, development costs and other
first generation improvements............................. (155,787) (108,027)
Additions to second generation building improvements and
lease costs............................................... (25,828) (20,046)
Additions to interest in unconsolidated joint ventures...... (10,562) --
Distributions received from unconsolidated joint ventures... 2,944 2,550
Net proceeds from divestitures of real estate............... 26,833 460,132
--------- --------
Net cash provided (used) by investing activities........ (435,908) 24,910
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock.................................... 1,741 732
Borrowings on unsecured credit facility..................... 307,000 265,000
Borrowings on Alliance Fund I credit facility............... 25,000 80,000
Borrowings on secured debt.................................. 57,646 35,253
Payments on unsecured credit facility....................... (157,000) (450,000)
Payments on Alliance Fund I credit facility................. (105,000) --
Payments on secured debt.................................... (14,599) (73,860)
Payment of financing fees................................... (4,149) (320)
Net proceeds from issuance of unsecured senior debt
securities................................................ 54,808 --
Net proceeds from issuance of preferred units............... 61,533 88,547
Contributions from investors in the Alliance Fund I......... 129,699 11,600
Dividends paid to common and preferred stockholders......... (68,427) (98,318)
Distributions to minority interests, including preferred
units..................................................... (28,498) (23,457)
--------- --------
Net cash provided (used) by financing activities........ 259,754 (164,823)
--------- --------
Net increase (decrease) in cash and cash equivalents........ (14,508) 45,684
Cash and cash equivalents at beginning of period............ 33,312 25,137
--------- --------
Cash and cash equivalents at end of period.................. $ 18,804 $ 70,821
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest...................................... $ 66,005 $ 61,267
========= ========
Non-cash transactions:
Acquisitions of properties................................ $ 407,889 $381,713
Assumption of debt........................................ (76,543) (57,480)
Minority interest's contribution, including units
issued.................................................. -- (14,534)
--------- --------
Net cash paid........................................... $ 331,346 $309,699
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED, DOLLARS IN THOUSANDS)
COMMON STOCK
------------------- ACCUMULATED
SERIES A NUMBER ADDITIONAL OTHER
PREFERRED OF PAID-IN RETAINED COMPREHENSIVE
STOCK SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
--------- ---------- ------ ---------- -------- ------------- ----------
BALANCE AT DECEMBER 31,
1999....................... $96,100 85,133,041 $851 $1,656,226 $ 47,089 $ 28,993 $1,829,259
Comprehensive income:
Net income................. 6,375 -- -- -- 89,523 --
Unrealized loss on
securities............... -- -- -- -- -- (29,016)
Total comprehensive
income............ 66,882
Issuance of restricted stock,
net........................ -- 156,675 2 3,164 -- -- 3,166
Exercise of stock options.... -- 82,225 1 1,727 -- -- 1,728
Conversion of Operating
Partnership units.......... -- 206,423 2 4,151 -- -- 4,153
Cancellation of common
stock...................... -- (1,465,926) (15) (29,303) -- -- (29,318)
Deferred compensation........ -- -- -- (3,166) -- -- (3,166)
Deferred compensation
amortization............... -- -- -- 895 -- -- 895
Reallocation of limited
partners' Interests in the
Operating Partnership and
other...................... -- -- -- (1,039) -- -- (1,039)
Dividends.................... (6,375) -- -- -- (93,174) -- (99,549)
------- ---------- ---- ---------- -------- -------- ----------
BALANCE AT SEPTEMBER 30,
2000....................... $96,100 84,112,438 $841 $1,632,655 $ 43,438 $ (23) $1,773,011
======= ========== ==== ========== ======== ======== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
AMB Property Corporation, a Maryland corporation (the "Company"), commenced
operations as a fully integrated real estate company effective with the
completion of its initial public offering on November 26, 1997. The Company
elected to be taxed as a real estate investment trust under Sections 856 through
860 of the Internal Revenue Code of 1986, commencing with its taxable year ended
December 31, 1997, and believes its current organization and method of operation
will enable it to maintain its status as a real estate investment trust. The
Company, through its controlling interest in its subsidiary, AMB Property, L.P.,
a Delaware limited partnership (the "Operating Partnership"), is engaged in the
acquisition, ownership, operation, management, renovation, expansion, and
development of primarily industrial buildings in target markets nationwide.
Unless the context otherwise requires, the "Company" means AMB Property
Corporation, the Operating Partnership and its other controlled subsidiaries.
As of September 30, 2000, the Company owned an approximate 93.6% general
partner interest in the Operating Partnership, excluding preferred units. The
remaining 6.4% limited partner interest is owned by non-affiliated investors and
certain current and former directors and officers of the Company. For local law
purposes, certain properties are owned through limited partnerships and limited
liability companies. The ownership of such properties through such entities does
not materially affect the Company's overall ownership of the interests in the
properties. As the sole general partner of the Operating Partnership, the
Company has the full, exclusive, and complete responsibility and discretion in
the day-to-day management and control of the Operating Partnership. Net
operating results of the Operating Partnership are allocated after preferred
unit distributions based on the respective partners' ownership interests.
Through the Operating Partnership, the Company enters into co-investment
joint ventures with institutional investors. These co-investment joint ventures
provide the Company with an additional source of capital to fund certain
acquisitions and development and renovation projects. As of September 30, 2000,
the Company had investments in two co-investment joint ventures, including AMB
Institutional Alliance Fund I, L.P. ("Alliance Fund I"), which are consolidated
for financial reporting purposes.
AMB Investment Management, Inc., a Maryland corporation ("AMB Investment
Management"), provides real estate investment services on a fee basis to
clients. The Operating Partnership purchased 100% of AMB Investment Management's
non-voting preferred stock (representing a 95% economic interest therein).
Certain current and former executive officers of the Company and a former
executive officer of AMB Investment Management collectively purchased 100% of
AMB Investment Management's voting common stock (representing a 5% economic
interest therein). The Operating Partnership also owns 100% of the non-voting
preferred stock of Headlands Realty Corporation, a Maryland corporation,
(representing a 95% economic interest therein). Certain current and former
executive officers of the Company and a director of Headlands Realty Corporation
collectively own 100% of the voting common stock of Headlands Realty Corporation
(representing a 5% economic interest therein). Headlands Realty Corporation
invests in properties and interests in entities that engage in the management,
leasing, and development of properties and similar activities. The Operating
Partnership accounts for its investment in AMB Investment Management and
Headlands Realty Corporation using the equity method of accounting.
As of September 30, 2000, the Company owned 813 industrial buildings and
eight retail centers, located in 25 markets throughout the United States. The
Company's strategy is to become a leading provider of High Throughput
Distribution, or HTD, properties located near key passenger and cargo airports,
highway systems and ports in major metropolitan areas, such as Atlanta, Chicago,
Dallas/Fort Worth, Northern New Jersey/ New York City, the San Francisco Bay
Area, and Southern California. As of September 30, 2000, the industrial
buildings, principally warehouse distribution buildings, encompassed
approximately 71.4 million rentable square feet and were 96.8% leased to 2,667
tenants. As of September 30, 2000, the retail centers,
5
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
principally grocer-anchored community shopping centers, encompassed
approximately 1.2 million rentable square feet and were 85.9% leased to over 160
tenants.
2. INTERIM FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and note disclosures normally included in the
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, of a normal recurring nature,
necessary for a fair presentation of the Company's consolidated financial
position and results of operations for the interim periods.
The interim results of the three and nine months ended September 30, 2000
and 1999, are not necessarily indicative of future results. These financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. REAL ESTATE ACQUISITION AND DEVELOPMENT ACTIVITY
During the third quarter of 2000, the Company invested $179.8 million in
operating properties, consisting of 30 industrial buildings aggregating
approximately 2.6 million square feet, including the investment of $38.5 million
in operating properties, consisting of six industrial buildings aggregating
approximately 0.6 million square feet, by the Alliance Fund I. Year to date, the
Company has invested $407.9 million in operating properties, consisting of 88
industrial buildings aggregating approximately 5.6 million square feet.
The Company also initiated two new development projects during the third
quarter, which will aggregate approximately 0.7 million square feet and have a
total estimated cost of $38.6 million upon completion. As of September 30, 2000,
the Company had 25 industrial projects, which will total approximately 6.4
million square feet and have an aggregate estimated investment of $380.2 million
upon completion, in its development pipeline. It also had two retail projects
(excluding two development projects held for divestiture), which will total
approximately 0.2 million square feet and have an aggregate estimated investment
of $34.2 million upon completion, in its development pipeline. As of September
30, 2000, the Company and its Development Alliance Partners have funded an
aggregate of $250.2 million and will need to fund an estimated additional $164.2
million in order to complete projects currently under construction.
4. PROPERTY DIVESTITURES AND PROPERTIES HELD FOR DIVESTITURE
Property Divestitures. During the third quarter of 2000, the Company
divested itself of three industrial buildings located in Atlanta, Georgia and
Hayward, California, aggregating approximately 0.1 million square feet, for an
aggregate price of $3.2 million. The Company also sold a retail center located
in Los Angeles, California, aggregating approximately 0.4 million square feet,
for $89.0 million. The Company carries an 8.75% mortgage note in the principal
amount of $79.0 million with a term of one year on the retail center sale. The
divestitures during the third quarter resulted in an aggregate net gain of $5.8
million. Year to date, the
6
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
Company has divested itself of nine industrial buildings and one retail center,
aggregating approximately 0.9 million square feet, for an aggregate price of
$107.9 million, with a resulting net gain of $6.2 million.
Properties Held for Divestiture. The Company has decided to divest itself
of five retail centers, one industrial building, and one land parcel, which are
not in its core markets or which do not meet its strategic objectives. The
divestitures of the properties are subject to negotiation of acceptable terms
and other customary conditions. In connection with the divestiture of the
industrial building, the Company reduced its basis by taking an additional $1.9
million in depreciation expense. As of September 30, 2000, the net carrying
value of the properties held for divestiture was $149.8 million.
The following summarizes the condensed results of operations of the
properties held for divestiture (dollars in thousands):
PROPERTIES HELD FOR DIVESTITURE
THREE MONTHS ENDED SEPTEMBER 30, 2000 1999
-------------------------------- ------- -------
Income...................................................... $ 4,249 $ 4,091
Property operating expenses................................. 1,107 1,075
------- -------
Net operating income...................................... $ 3,142 $ 3,016
======= =======
NINE MONTHS ENDED SEPTEMBER 30, 2000 1999
------------------------------- ------- -------
Income...................................................... $12,179 $12,079
Property operating expenses................................. 3,266 3,210
------- -------
Net operating income...................................... $ 8,913 $ 8,869
======= =======
5. DEBT
As of September 30, 2000, and December 31, 1999, debt consisted of the
following (dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
Secured debt, varying interest rates from 4.0% to
10.4% due May 2000 to January 2014............... $ 815,073 $ 696,931
Alliance Fund I credit facility, variable interest
at LIBOR plus 87.5 basis points (weighted average
interest rate of 7.5% at September 30, 2000), due
April 2001....................................... -- 80,000
Unsecured senior debt securities, weighted average
interest rate of 7.3%, due August 2007, June
2008, June 2015, and June 2018................... 455,000 400,000
Unsecured credit facility, variable interest at
LIBOR plus 75 basis points (weighted average
interest rate of 7.5% at September 30, 2000), due
May 2003......................................... 233,000 83,000
---------- ----------
Subtotal......................................... 1,503,073 1,259,931
Unamortized premiums............................. 10,404 10,106
---------- ----------
Total consolidated debt.................. $1,513,477 $1,270,037
========== ==========
Secured debt generally requires monthly principal and interest payments.
The secured debt is secured by deeds of trust on certain properties. As of
September 30, 2000, the total gross investment book value of those properties
secured by debt was $1.6 billion. All of the secured debt bears interest at
fixed rates, except for two loans with an aggregate principal amount of $33.0
million, which bear interest at variable rates (weighted
7
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
average interest rate of 8.4% at September 30, 2000). The secured debt has
various financial and non-financial covenants. Management believes that the
Company was in compliance with these covenants at September 30, 2000.
Additionally, certain secured debt is cross-collateralized.
In addition, the Alliance Fund I had an $80.0 million unsecured credit
facility. The debt was secured by the unfunded capital commitments of the third
party investors in AMB Institutional Alliance REIT I, Inc. (the "Alliance REIT
I"), a limited partner of the Alliance Fund I. Currently, there are no remaining
unfunded capital commitments. As a result, the Alliance Fund I paid off the
outstanding balance and closed this credit facility in the third quarter. See
Note 6 for a discussion of the Alliance Fund I and the Alliance REIT I.
Interest on the senior debt securities is payable semiannually. The 2015
notes are putable and callable in June 2005. The senior debt securities are
subject to various financial and non-financial covenants. Management believes
that the Company was in material compliance with these covenants at September
30, 2000.
In August 2000, the Operating Partnership commenced a medium-term note
program for the possible issuance of up to $400 million in principal amount of
medium-term notes, which will be guaranteed by the Company. In August and
September 2000, the Operating Partnership issued and sold $55 million of the
notes under this program to Morgan Stanley Dean Witter as principal. The Company
has guaranteed the notes, which mature on August 20, 2007, and bear interest at
7.925% per annum. The Operating Partnership used the net proceeds of $54.8
million for general corporate purposes, to repay indebtedness, and for the
acquisition and development of additional properties.
In May 2000, the Operating Partnership entered into a new $500 million
unsecured revolving credit agreement, which replaced its previous $500 million
credit facility that was to mature in November 2000. The Company is a guarantor
of the Operating Partnership's obligations under the credit facility. The new
credit facility matures in May 2003, has a one-year extension option, and is
subject to a 15 basis point annual facility fee. The credit facility has various
financial and non-financial covenants. Management believes that the Company and
the Operating Partnership were in material compliance with these covenants at
September 30, 2000. The Operating Partnership has the ability to increase
available borrowings up to $700 million by adding additional banks to the
facility or obtaining the agreement of existing banks to increase their
commitments. 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.
At September 30, 2000, the remaining amount available under the credit facility
was $267.0 million (excluding the additional $200.0 million of potential
additional capacity).
Capitalized interest related to construction projects for the three months
ended September 30, 2000 and 1999, was $4.3 million, $2.8 million, respectively,
and for the nine months ended September 30, 2000 and 1999, was $11.5 million,
and $8.3 million, respectively.
8
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
The scheduled maturities of the Company's total debt, excluding unamortized
debt premiums, as of September 30, 2000, were (dollars in thousands):
UNSECURED
INDUSTRIAL RETAIL SENIOR UNSECURED
SECURED SECURED DEBT CREDIT
DEBT DEBT SECURITIES FACILITY TOTAL
---------- ------- ---------- --------- ----------
2000 (three months)......... $ 3,285 $ 7,400 $ -- $ -- $ 10,685
2001........................ 15,183 24,481 -- -- 39,664
2002........................ 50,156 22,513 -- -- 72,669
2003........................ 76,667 526 -- 233,000 310,193
2004........................ 88,096 570 -- -- 88,666
2005........................ 72,304 618 100,000 -- 172,922
2006........................ 137,911 670 -- -- 138,581
2007........................ 50,746 727 55,000 -- 106,473
2008........................ 126,761 7,758 175,000 -- 309,519
2009........................ 5,316 318 -- -- 5,634
2010........................ 103,830 345 -- -- 104,175
Thereafter.................. 17,629 1,263 125,000 -- 143,892
-------- ------- -------- -------- ----------
$747,884 $67,189 $455,000 $233,000 $1,503,073
======== ======= ======== ======== ==========
6. MINORITY INTERESTS IN CONSOLIDATED JOINT VENTURES
Minority interests in the Company represent the limited partnership
interests in the Operating Partnership and interests held by certain third
parties (some of which are separate account co-investors that are Institutional
Alliance Partners) in 26 real estate joint ventures, through which 41 properties
are held, that are consolidated for financial reporting purposes. Such
investments are consolidated because: (1) the Company owns a majority interest;
or (2) the Company exercises significant control over major operating decisions
such as approval of budgets, selection of property managers, and changes in
financing.
The Operating Partnership, together with one of the Company's other
affiliates, owns, as of September 30, 2000, approximately 21% of the partnership
interests in the Alliance Fund I. The Alliance Fund I is a co-investment
partnership between the Operating Partnership and the Alliance REIT I, which
includes 15 institutional investors stockholders, and is engaged in the
acquisition, ownership, operation, management, renovation, expansion, and
development of primarily industrial buildings in target markets nationwide. As
of September 30, 2000, the Alliance Fund I had received equity contributions
from third party investors totaling $169.0 million, which, when combined with
anticipated debt financings and the Company's investment, created a total
planned capitalization of $410.0 million.
9
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
The following table distinguishes the minority interest liability and the
minority interests' share of net income (dollars in thousands):
MINORITY INTEREST SHARE
OF NET INCOME
------------------------------
MINORITY INTEREST THREE MONTHS NINE MONTHS
LIABILITY AS OF ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 2000 2000
----------------- ------------- -------------
Joint venture partners............................. $ 21,090 $ 1,009 $ 2,359
Separate account co-investors...................... 50,094 656 2,252
Alliance REIT I's interest in Alliance Fund I...... 169,045 2,739 3,956
Limited Partners in the Operating Partnership...... 114,045 2,475 6,332
Series B preferred units (liquidation preference of
$65,000)......................................... 62,319 1,402 4,206
Series C preferred units (liquidation preference of
$110,000)........................................ 105,847 2,406 7,218
Series D preferred units (liquidation preference of
$79,767)......................................... 77,688 1,545 4,635
Series E preferred units (liquidation preference of
$11,022)......................................... 10,789 214 642
Series F preferred units (liquidation preference of
$19,872)......................................... 19,590 395 833
Series G preferred units (liquidation preference of
$1,000).......................................... 994 7 7
Series H preferred units (liquidation preference of
$42,000)......................................... 40,949 237 237
-------- ------- -------
Total.................................... $672,450 $13,085 $32,677
======== ======= =======
7. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The Company has non-controlling limited partnership interests in three
separate unconsolidated equity investment joint ventures. The Company has a
56.1% interest in a joint venture, which was purchased in June 1998, and that
owns an aggregate of 36 industrial buildings totaling approximately 4.0 million
square feet. The Company also has a 50% interest in each of the two other
development alliance joint ventures, which were purchased in September 1999 and
September 2000, respectively. For the three and nine months ended September 30,
2000, the Company's share of net operating income was $2.2 million and $6.3
million, respectively, and, as of September 30, 2000, the Company's share of the
unconsolidated joint ventures' debt was $30.1 million, with a weighted average
interest rate of 7.3% and a weighted average maturity of 4.8 years.
8. STOCKHOLDERS' EQUITY
On September 1, 2000, AMB Property II, L.P., one of the Company's
subsidiaries, issued and sold 840,000 8.125% Series H Cumulative Redeemable
Preferred Limited Partnership Units at a price of $50.00 per unit in a private
placement. Distributions are cumulative from the date of issuance and payable
quarterly in arrears at a rate per unit equal to $4.0625 per annum. The Series H
Preferred Units are redeemable by AMB Property II, L.P. on or after September 1,
2005, subject to certain conditions, for cash at a redemption price equal to
$50.00 per unit, plus accumulated and unpaid distributions thereon, if any, to
the redemption date. The Series H Preferred Units are exchangeable, at specified
times and subject to certain conditions, on a one-for-one basis, for shares of
the Company's Series H Preferred Stock. AMB Property II, L.P. used the net
proceeds of $41.0 million to repay advances from the Operating Partnership and
to make a loan to the
10
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
Operating Partnership. The Operating Partnership used the funds to partially
repay borrowings under its unsecured credit facility and for general corporate
purposes. The loan bears interest at 8.0% per annum and is payable on demand.
On August 29, 2000, AMB Property II, L.P. issued and sold 20,000 7.95%
Series G Cumulative Redeemable Preferred Limited Partnership Units at a price of
$50.00 per unit in a private placement. Distributions are cumulative from the
date of issuance and payable quarterly in arrears at a rate per unit equal to
$3.975 per annum. The Series G Preferred Units are redeemable by AMB Property
II, L.P. on or after August 29, 2005, subject to certain conditions, for cash at
a redemption price equal to $50.00 per unit, plus accumulated and unpaid
distributions thereon, if any, to the redemption date. The Series G Preferred
Units are exchangeable, at specified times and subject to certain conditions, on
a one-for-one basis, for shares of the Company's Series G Preferred Stock. AMB
Property II, L.P. used the net proceeds of $1.0 million to repay advances from
the Operating Partnership. The Operating Partnership used the funds for general
corporate purposes.
In July 2000, 206,423 limited partnership units were redeemed for shares of
the Company's common stock.
On March 22, 2000, AMB Property II, L.P. issued and sold 397,439 7.95%
Series F Cumulative Redeemable Preferred Limited Partnership Units at a price of
$50.00 per unit in a private placement. Distributions are cumulative from the
date of issuance and payable quarterly in arrears at a rate per unit equal to
$3.975 per annum. The Series F Preferred Units are redeemable by AMB Property
II, L.P. on or after March 22, 2005, subject to certain conditions, for cash at
a redemption price equal to $50.00 per unit, plus accumulated and unpaid
distributions thereon, if any, to the redemption date. The Series F Preferred
Units are exchangeable, at specified times and subject to certain conditions, on
a one-for-one basis, for shares of the Company's Series F Preferred Stock. AMB
Property II, L.P. loaned the net proceeds of $19.6 million to the Operating
Partnership. The Operating Partnership used the funds to partially repay
borrowings under its unsecured credit facility and for general corporate
purposes. The loan bears interest at 7.0% per annum and is payable upon demand.
At the time of the Company's initial public offering, 4,237,750 shares of
common stock, known as performance shares, were placed in escrow by certain of
the Company's investors, which were subject to advisory agreements with the
Company's predecessor that included incentive fee provisions. On January 7,
2000, 2,771,824 shares of common stock were released from escrow to these
investors and 1,465,926 shares of common stock were returned to the Company and
cancelled. The cancelled shares of common stock represent indirect interests in
the Operating Partnership that were reallocated from the Company (thereby
decreasing the number of shares of common stock outstanding) to other
unitholders who had an ownership interest in our predecessor, including certain
of the Company's executive officers, (thereby increasing the number of limited
partnership units owned by partners other than the Company). The total number of
outstanding partnership units did not change as a result of this reallocation.
This reallocation did not change the amount of fully diluted shares of common
stock and limited partnership units outstanding.
11
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
The following table sets forth the dividend payments and distributions for
the three and nine months ended September 30, 2000:
DIVIDEND THIRD YEAR-TO-
RECORD PAYMENT QUARTER DATE
SECURITY PAYING ENTITY DATE PAYMENT PERIOD DATE AMOUNT AMOUNT
-------- --------------------- -------- ------------------------ -------- ------- --------
Common Stock.............. Company 10/04/00 Quarter ended 9/30/00 10/16/00 $0.370 $1.1100
OP units.................. Operating Partnership 10/04/00 Quarter ended 9/30/00 10/16/00 $0.370 $1.1100
Series A preferred Company 10/04/00 3 months ended 10/15/00 10/16/00 $0.531 $1.5939
stock...................
Series A preferred Operating Partnership 10/04/00 3 months ended 10/15/00 10/16/00 $0.531 $1.5939
units...................
Series B preferred Operating Partnership 10/04/00 3 months ended 10/15/00 10/16/00 $1.078 $3.2343
units...................
Series C preferred AMB Property II, L.P. 10/04/00 3 months ended 10/15/00 10/16/00 $1.094 $3.2814
units...................
Series D preferred AMB Property II, L.P. 9/15/00 3 months ended 9/25/00 9/26/00 $0.969 $2.9064
units...................
Series E preferred AMB Property II, L.P. 10/04/00 3 months ended 10/15/00 10/16/00 $0.969 $2.9064
units...................
Series F preferred AMB Property II, L.P. 10/04/00 3 months ended 10/15/00 10/16/00 $0.994 $2.0968
units...................
Series G preferred AMB Property II, L.P. 10/04/00 From 8/29/00 to 10/15/00 10/16/00 $0.357 $0.3565
units...................
Series H preferred AMB Property II, L.P. 9/15/00 From 9/1/00 to 9/25/00 9/26/00 $0.282 $0.2821
units...................
9. INCOME PER SHARE
The Company's only dilutive securities outstanding for the three and nine
months ended September 30, 2000 and 1999, were stock options granted under its
stock incentive plan. The effect of the stock options was to increase weighted
average shares outstanding by 609,496 and 100,715 shares for the three months
ended September 30, 2000 and 1999, respectively, and 299,977 shares and 100,833
shares for the nine months ended September 30, 2000 and 1999, respectively. Such
dilution was computed using the treasury stock method.
10. SEGMENT INFORMATION
The Company has two reportable segments, industrial and retail. Industrial
properties consist primarily of warehouse distribution facilities suitable for
single or multiple tenants and are typically comprised of multiple buildings
that are leased to tenants engaged in various types of businesses. Retail
properties are generally leased to one or more anchor tenants, such as grocery
and drug stores, and various retail businesses. The accounting policies of the
segments are the same as those described in the Company's Annual Report on Form
10-K for the year ended December 31, 1999. The Company evaluates performance
based upon property net operating income of the combined properties in each
segment. The Company's properties are managed
12
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
separately because each segment requires different operating, pricing, and
leasing strategies. Summary information for the reportable segments is as
follows (dollars in thousands):
INDUSTRIAL RETAIL TOTAL
PROPERTIES PROPERTIES PROPERTIES
---------- ---------- ----------
FOR THE THREE MONTHS ENDED SEPTEMBER 30:
Rental revenues(1):
2000................................................... $ 110,000 $ 8,493 $ 118,493
1999................................................... 91,395 18,313 109,708
Property net operating income(1,2):
2000................................................... 84,982 6,117 91,099
1999................................................... 69,620 13,306 82,926
FOR THE NINE MONTHS ENDED SEPTEMBER 30:
Rental revenues(1):
2000................................................... $ 314,769 $22,587 $ 337,356
1999................................................... 257,199 73,696 330,895
Property net operating income(1,2):
2000................................................... 243,841 16,060 259,901
1999................................................... 195,224 53,130 248,354
Total investment in properties(3):
At September 30, 2000.................................. 3,751,906 35,545 3,787,451
At December 31, 1999................................... 3,177,283 72,169 3,249,452
- ---------------
(1) Includes straight-line rents of $1.8 million and $2.0 million for the three
months ended September 30, 2000 and 1999, respectively, and $7.2 million and
$7.5 million for the nine months ended September 30, 2000 and 1999,
respectively.
(2) Property net operating income is defined as rental revenue, including
reimbursements and straight-line rents, less property level operating
expenses, excluding depreciation, amortization, general and administrative
expenses, and interest expense.
(3) Excludes net properties held for divestiture of $149.8 million, which is
comprised of $138.4 million in retail and $11.4 million in industrial
properties, as of September 30, 2000, and $181.2 million as of December 31,
1999.
13
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
The Company uses property net operating income as an operating performance
measure. The following is a reconciliation between total reportable segment
revenue and property net operating income to consolidated revenues and net
income (dollars in thousands):
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
REVENUES
Total rental revenues for reportable
segments.................................... $118,493 $109,708 $337,356 $330,895
Investment management and other income........ 2,878 2,076 7,817 5,838
-------- -------- -------- --------
Total consolidated revenues................... $121,371 $111,784 $345,173 $336,733
======== ======== ======== ========
NET INCOME
Property net operating income for reportable
segments.................................... $ 91,099 $ 82,926 $259,901 $248,354
Equity in earnings of unconsolidated joint
ventures.................................... 1,447 1,251 4,006 3,579
Investment management and other income........ 1,431 825 3,811 2,259
Less:
General and administrative.................. (5,987) (6,107) (17,322) (19,116)
Interest expense............................ (22,562) (21,147) (62,906) (67,705)
Depreciation and amortization............... (23,312) (15,693) (65,135) (49,295)
Minority interests.......................... (13,085) (9,661) (32,677) (24,367)
-------- -------- -------- --------
Net income before gain from divestitures of
real estate................................. 29,031 32,394 89,678 93,709
Gain from divestiture of real estate.......... 5,815 21,532 6,220 33,057
-------- -------- -------- --------
Net income before extraordinary items......... 34,846 53,926 95,898 126,766
Extraordinary items........................... -- (1,347) -- (2,856)
-------- -------- -------- --------
Net income.................................... $ 34,846 $ 52,579 $ 95,898 $123,910
======== ======== ======== ========
11. COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of business, the Company is involved in legal actions
relating to the ownership and operations of its properties. In management's
opinion, the liabilities, if any, that may ultimately result from such legal
actions are not expected to have a materially adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
Environmental Matters
The Company follows the policy of monitoring its properties for the
presence of hazardous or toxic substances. The Company is not aware of any
environmental liability that would have a material adverse effect on the
Company's business, assets, or results of operations; however, there can be no
assurance that such a material environmental liability does not exist. The
existence of any such material environmental liability would have an adverse
effect on the Company's results of operations and cash flow.
14
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
General Uninsured Losses
The Company carries comprehensive liability, fire, flood, environmental,
extended coverage, and rental loss insurance with policy specifications, limits,
and deductibles that the Company believes are adequate and appropriate under the
circumstances given the relative risk of loss, the cost of such coverage, and
industry practice. There are, however, certain types of extraordinary losses
that may be either uninsurable or not economically insurable. Certain of the
properties are located in areas that are subject to earthquake activity;
therefore, the Company has obtained limited earthquake insurance on those
properties. Should an uninsured loss occur, the Company could lose its
investment in, and anticipated profits and cash flows from, a property.
15
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis of our consolidated
financial condition and results of operations in conjunction with the Notes to
Consolidated Financial Statements. Statements contained in this discussion that
are not historical facts may be forward-looking statements. You can identify
forward-looking statements by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "pro forma," "estimates," or "anticipates" or the negative
of these words and phrases or similar words or phrases. You can also identify
forward-looking statements by discussions of strategy, plans, or intentions.
Forward-looking statements involve numerous risks and uncertainties and you
should not rely upon them as predictions of future events. There is no assurance
that the events or circumstances reflected in forward-looking statements will be
achieved or occur. Forward-looking statements are necessarily dependent on
assumptions, data, or methods that may be incorrect or imprecise and we may not
be able to realize them.
The following factors, among others, could cause actual results and future
events to differ materially from those set forth or contemplated in the
forward-looking statements:
- defaults or non-renewal of leases by tenants;
- increased interest rates and operating cost;
- our failure to obtain necessary outside financing;
- difficulties in identifying properties to acquire and in effecting
acquisitions;
- our failure to successfully integrate acquired properties and operations;
- our failure to divest of properties that we have contracted to sell or to
timely reinvest proceeds from any such divestitures;
- risks and uncertainties affecting property development and construction
(including construction delays, cost overruns, our inability to obtain
necessary permits, and public opposition to these activities);
- our failure to qualify and maintain our status as a real estate
investment trust under the Internal Revenue Code of 1986;
- environmental uncertainties;
- risks related to natural disasters;
- financial market fluctuations;
- changes in real estate and zoning laws; and
- increases in real property tax rates.
Our success also depends upon economic trends generally, including interest
rates, income tax laws, governmental regulation, legislation, population
changes, and those risk factors discussed in the section entitled "Business
Risks" in this report. We caution you not to place undue reliance on
forward-looking statements, which reflect our analysis only and speak only as of
the date of this report or the dates indicated in the statements.
Unless the context otherwise requires, the terms "we," "us" and "our" refer
to AMB Property Corporation, the operating partnership and the other controlled
subsidiaries and the references to AMB Property Corporation include the
operating partnership and the other controlled subsidiaries. The following marks
are our registered trademarks: AMB(R); Customer Alliance Partners(R); Customer
Alliance Program(R); Development Alliance Partners(R); Development Alliance
Program(R); Institutional Alliance Partners(R); Management Alliance Partners(R);
Management Alliance Program(R); UPREIT Alliance Partners(R); and UPREIT Alliance
Program(R). The following are our unregistered trademarks: Broker Alliance
Partners(TM); Broker Alliance Program(TM); eSpace(TM); HTD(TM); High Throughput
Distribution(TM); Institutional Alliance Program(TM); iSpace(TM); Strategic
Alliance Partners(TM); and Strategic Alliance Programs(TM).
16
THE COMPANY
AMB Property Corporation, a Maryland corporation, is one of the leading
owners and operators of industrial real estate nationwide. Our investment
strategy is to become a leading provider of High Throughput Distribution, or
HTD, properties located near key passenger and cargo airports, highway systems
and ports in major metropolitan areas, such as Atlanta, Chicago, Dallas/Fort
Worth, Northern New Jersey/New York City, the San Francisco Bay Area, and
Southern California. Within each of our markets, we focus our investments in
in-fill submarkets. In-fill sub-markets are characterized by supply constraints
on the availability of land for competing projects. High Throughput Distribution
facilities are designed to serve the high-speed, high-value freight handling
needs of today's supply chain, as opposed to functioning as long-term storage
facilities. We believe that the rapid growth of the airfreight business, the
outsourcing of supply chain management to third party logistics companies and
e-commerce are indicative of the changes that are occurring in the supply chain
and the manner in which goods are distributed. In addition, we believe that
inventory levels as a percentage of final sales are falling and that goods are
moving more rapidly through the supply chain. As a result, we intend to focus
our investment activities primarily on industrial properties that we believe
will benefit from these changes.
As of September 30, 2000, we owned and operated 813 industrial buildings
and eight retail centers, totaling approximately 72.6 million rentable square
feet, located in 25 markets nationwide. As of September 30, 2000, these
properties were 96.6% leased. As of September 30, 2000, through our subsidiary,
AMB Investment Management, we also managed industrial buildings and retail
centers, totaling approximately 4.4 million rentable square feet on behalf of
various institutional investors. In addition, we have invested in 36 industrial
buildings, totaling approximately 4.0 million rentable square feet, through an
unconsolidated joint venture.
As of September 30, 2000, we had five retail centers, one industrial
building, and one land parcel, which were held for divestiture. In addition,
during the third quarter of 2000, we disposed of three industrial buildings and
one retail center, aggregating approximately 0.5 million rentable square feet,
for an aggregate price of $92.2 million. Over the next few years, we intend to
dispose of non-strategic assets and redeploy the resulting capital into High
Throughput Distribution properties that better fit our current investment focus.
Through our subsidiary, AMB Property, L.P., a Delaware limited partnership,
we are engaged in the acquisition, ownership, operation, management, renovation,
expansion, and development of primarily industrial properties in target markets
nationwide. We refer to AMB Property, L.P. as the operating partnership. As of
September 30, 2000, we owned an approximate 93.6% general partnership interest
in the operating partnership, excluding preferred units. As the sole general
partner of the operating partnership, we have the full, exclusive, and complete
responsibility and discretion in the day-to-day management and control of the
operating partnership.
Through the operating partnership, we enter into co-investment joint
ventures with institutional investors. These co-investment joint ventures
provide us with an additional source of capital to fund certain acquisitions and
developments and renovation projects. As of September 30, 2000, we had
investments in two co-investment joint ventures, including Alliance Fund I,
which are consolidated for financial reporting purposes.
The operating partnership is the managing general partner of AMB
Institutional Alliance Fund I, L.P. and, together with one of our other
affiliates, owns, as of September 30, 2000, approximately 21% of the partnership
interests in the Alliance Fund I. The Alliance Fund I is a co-investment
partnership between us and AMB Institutional Alliance REIT I, Inc., a limited
partner of the Alliance Fund I, which includes 15 institutional investors as
stockholders and is engaged in the acquisition, ownership, operation,
management, renovation, expansion, and development of primarily industrial
buildings in target markets nationwide. As of September 30, 2000, the Alliance
Fund I had received equity contributions from third party investors totaling
$169.0 million, which, when combined with anticipated debt financings and the
Company's investment, creates a total planned capitalization of $410.0 million.
17
We are self-administered and self-managed and expect that we have qualified
and will continue to qualify as a real estate investment trust for federal
income tax purposes beginning with the year ending December 31, 1997. As a
self-administered and self-managed real estate investment trust, our own
employees perform our administrative and management functions, rather than our
relying on an outside manager for these services. The principal executive office
of AMB Property Corporation and the operating partnership is located at 505
Montgomery St., San Francisco, CA 94111, and our telephone number is (415)
394-9000. We also maintain a regional office in Boston, Massachusetts.
ACQUISITION AND DEVELOPMENT ACTIVITY
During the third quarter of 2000, we invested $179.8 million in operating
properties, consisting of 30 industrial buildings aggregating approximately 2.6
million square feet, including the investment of $38.5 million in operating
properties, consisting of six industrial buildings aggregating approximately 0.6
million square feet, by the Alliance Fund I. Year to date, we have invested
$407.9 million in operating properties, consisting of 88 industrial buildings
aggregating approximately 5.6 million square feet.
We also initiated two new development projects during the third quarter,
which will aggregate approximately 0.7 million square feet and have a total
estimated cost of $38.6 million upon completion. As of September 30, 2000, we
had 25 industrial projects, which will total approximately 6.4 million square
feet and have a total estimated investment of $380.2 million upon completion, in
our development pipeline. We also had two retail projects (excluding two
development projects held for divestiture), which will total approximately 0.2
million square feet and have a total estimated investment of $34.2 million upon
completion, in our development pipeline. As of September 30, 2000, the Company
and its Development Alliance Partners have funded an aggregate of $250.2 million
and will need to fund an estimated additional $164.2 million in order to
complete projects currently under construction.
STRATEGIC ALLIANCE PROGRAMS
Real estate is fundamentally a local business and we believe that the most
effective way to operate is by forging alliances with the best available service
providers in every market. We believe that these collaborations allow us to: 1)
leverage our national presence with the local market expertise of brokers,
developers, and property managers; 2) improve the operating efficiency and
flexibility of our national portfolio; 3) strengthen customer satisfaction; and
4) provide a continuous pipeline of growth.
Our Operating Alliances allow us to form relationships with local or
regional real estate experts, thereby becoming their ally rather than their
competitor and our Investment Alliances allow us to establish relationships with
a variety of capital sources.
OPERATING ALLIANCES
Through our Broker Alliance Program, we work closely with top local leasing
and investment brokers in each of our markets. We believe that there is no
better way to attract fast-growing small- and mid-sized firms in each region.
Through the program, we believe that: 1) top brokers become our local sales
force and information source; 2) we improve the flexibility and operating
efficiency of our national portfolio; 3) we strengthen customer satisfaction and
retention; and 4) we have a continuous pipeline of opportunities.
Through our Customer Alliance Program, we are building long-term working
relationships with major customers. We are committed to working with our
customers, particularly our larger customers with multi-site requirements, to
satisfy their real estate needs as efficiently as possible.
Through our Development Alliance Program, we work with leading local
developers who have the insight to recognize the potential of an undervalued
asset and the skill to realize that potential. Our partners are successful
entrepreneurs with the ability to execute a renovation or building project
quickly and efficiently. We believe that development collaboration allows us to
select the best opportunities from a national platform and generate higher
returns.
18
Through our Management Alliance Program, we develop close relationships
with, and outsource property management to, local property management firms that
we believe to be among the best in each of our markets. We outsource day-to-day
custodial management of our properties to leading local firms, working closely
with each to ensure optimum flexibility, decrease overhead, and improve customer
service. Our strategy provides us with highly influential allies at the
grassroots level who can help us retain our existing customers and develop new
relationships.
INVESTMENT ALLIANCES
Our strategy for the Institutional Alliance Program is to form alliances
with institutional investors that provide us with access to private capital and
a source of incremental fee income and investment returns. This program allows
our Institutional Alliance Partners the opportunity to co-invest with us and to
receive professional investment management of their real estate assets.
Through our UPREIT Alliance Program, we issue from time to time limited
partnership units in the operating partnership to certain property owners in
exchange for properties, thus providing additional growth for the portfolio.
RESULTS OF OPERATIONS
The analysis below includes changes attributable to acquisitions,
development activity and divestitures and the changes resulting from properties
that we owned during both the current and prior year reporting periods,
excluding development properties prior to being stabilized (90% leased). We
refer to these properties as the same store properties. For the comparison
between the three and nine months ended September 30, 2000 and 1999, the same
store properties consisted of properties aggregating approximately 54.1 million
square feet. The properties acquired in 1999 consisted of 154 buildings,
aggregating approximately 8.4 million square feet, and the properties acquired
during the first nine months of 2000 consisted of 88 buildings, aggregating 5.6
million square feet. In 1999, property divestitures consisted of 30 retail
centers and 15 industrial buildings, aggregating approximately 6.6 million
square feet, and property divestitures during the first nine months of 2000
consisted of nine industrial buildings and one retail center, aggregating
approximately 0.9 million square feet. Our future financial condition and
results of operations, including rental revenues, may be impacted by the
acquisition of additional properties and dispositions. Our future revenues and
expenses may vary materially from their historical rates.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 (DOLLARS IN MILLIONS):
RENTAL REVENUES 2000 1999 $ CHANGE % CHANGE
--------------- ------ ------ -------- --------
Same store..................................... $ 81.4 $ 76.5 $ 4.9 6.4%
1999 acquisitions.............................. 22.1 15.9 6.2 39.0%
2000 acquisitions.............................. 7.1 -- 7.1 --
Developments................................... 3.0 1.3 1.7 130.8%
Divestitures................................... 3.1 14.0 (10.9) (77.9)%
Straight-line rents............................ 1.8 2.0 (0.2) (10.0)%
------ ------ ------ -----
Total................................ $118.5 $109.7 $ 8.8 8.0%
====== ====== ====== =====
19
The growth in rental revenues in same store properties resulted primarily
from the incremental effect of cash rental rate increases, fixed rent increases
on existing leases, and changes in occupancy and reimbursement of expenses.
During the three months ended September 30, 2000, the same store rent increases
on renewals and rollovers (cash basis) was 41.5% on 2.5 million square feet
leased.
INVESTMENT MANAGEMENT AND OTHER INCOME 2000 1999 $ CHANGE % CHANGE
-------------------------------------- ------ ------ -------- --------
Equity earnings in unconsolidated joint
ventures................................... $ 1.5 $ 1.3 $ 0.2 15.4%
Investment management and other income....... 1.4 0.8 0.6 75.0%
------ ------ ------ -----
Total.............................. $ 2.9 $ 2.1 $ 0.8 38.1%
====== ====== ====== =====
The $0.6 million increase in investment management and other income was due
primarily to increased Alliance Fund I acquisition fees and interest income.
PROPERTY OPERATING EXPENSES AND REAL ESTATE TAXES 2000 1999 $ CHANGE % CHANGE
- ------------------------------------------------- ------ ------ -------- --------
Rental expenses................................ $ 13.4 $ 13.2 $ 0.2 1.5%
Real estate taxes.............................. 14.0 13.6 0.4 2.9%
------ ------ ------ -----
Property operating expenses.................. $ 27.4 $ 26.8 $ 0.6 2.2%
====== ====== ====== =====
Same store..................................... $ 19.2 $ 18.0 $ 1.2 6.5%
1999 acquisitions.............................. 4.6 4.3 0.3 7.0%
2000 acquisitions.............................. 1.8 -- 1.8 --
Developments................................... 0.9 0.5 0.4 80.0%
Divestitures................................... 0.9 4.0 (3.1) (77.5)%
------ ------ ------ -----
Total................................ $ 27.4 $ 26.8 $ 0.6 2.2%
====== ====== ====== =====
OTHER EXPENSES 2000 1999 $ CHANGE % CHANGE
-------------- ------ ------ -------- --------
Interest expense............................. $ 22.6 $ 21.1 $ 1.5 7.1%
Depreciation expense......................... 23.3 15.7 7.6 48.4%
General and administrative expense........... 6.0 6.1 (0.1) (1.6)%
------ ------ ------ -----
Total.............................. $ 51.9 $ 42.9 $ 9.0 21.0%
====== ====== ====== =====
The increase in interest expense was primarily due to the increase in our
unsecured credit facility balance offset by the increase in capitalized
interest. The increase in depreciation expense was due to lower than normal
depreciation expense in 1999 and increases in our investments in real estate.
Under the required accounting for assets held for sale, we discontinued
depreciation of a substantial portion of our retail portfolio after we committed
to dispose of a portion of the portfolio in March 1999. The decrease in general
and administrative expenses was due to timing differences.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999 (DOLLARS IN MILLIONS):
RENTAL REVENUES 2000 1999 $ CHANGE % CHANGE
--------------- ------ ------ -------- --------
Same store................................... $238.9 $225.4 $ 13.5 6.0%
1999 acquisitions............................ 64.1 29.2 34.9 119.5%
2000 acquisitions............................ 11.3 -- 11.3 --
Developments................................. 6.9 4.3 2.6 60.5%
Divestitures................................. 9.0 64.5 (55.5) (86.0)%
Straight-line rents.......................... 7.2 7.5 (0.3) (4.0)%
------ ------ ------ -----
Total.............................. $337.4 $330.9 $ 6.5 2.0%
====== ====== ====== =====
20
The growth in rental revenues in same store properties resulted primarily
from the incremental effect of cash rental rate increases, fixed rent increases
on existing leases, and changes in occupancy and reimbursement of expenses.
During the nine months ended September 30, 2000, the same store rent increases
on renewals and rollovers (cash basis) was 25.7% on 7.5 million square feet
leased.
INVESTMENT MANAGEMENT AND OTHER INCOME 2000 1999 $ CHANGE % CHANGE
-------------------------------------- ------ ------ -------- --------
Equity earnings in unconsolidated joint
ventures................................... $ 4.0 $ 3.6 $ 0.4 11.1%
Investment management and other income....... 3.8 2.2 1.6 72.7%
------ ------ ------ -----
Total.............................. $ 7.8 $ 5.8 $ 2.0 34.5%
====== ====== ====== =====
The $1.6 million increase in investment management and other income was due
primarily to increased Alliance Fund I acquisition fees and interest income.
PROPERTY OPERATING EXPENSES AND REAL ESTATE TAXES 2000 1999 $ CHANGE % CHANGE
- ------------------------------------------------- ------ ------ -------- --------
Rental expenses................................ $ 36.5 $ 39.1 $ (2.6) (6.6)%
Real estate taxes.............................. 41.0 43.4 (2.4) (5.5)%
------ ------ ------ -----
Property operating expenses.................. $ 77.5 $ 82.5 $ (5.0) (6.1)%
====== ====== ====== =====
Same store..................................... $ 54.4 $ 53.5 $ 0.9 1.7%
1999 acquisitions.............................. 15.3 9.4 5.9 62.8%
2000 acquisitions.............................. 2.9 -- 2.9 --
Developments................................... 2.2 1.6 0.6 37.5%
Divestitures................................... 2.7 18.0 (15.3) (85.0)%
------ ------ ------ -----
Total................................ $ 77.5 $ 82.5 $ (5.0) (6.1)%
====== ====== ====== =====
OTHER EXPENSES 2000 1999 $ CHANGE % CHANGE
-------------- ------ ------ -------- --------
Interest expense............................. $ 62.9 $ 67.7 $ (4.8) (7.1)%
Depreciation expense......................... 65.1 49.3 15.8 32.0%
General and administrative expense........... 17.3 19.1 (1.8) (9.4)%
------ ------ ------ -----
Total.............................. $145.3 $136.1 $ 9.2 6.8%
====== ====== ====== =====
The decrease in interest expense was primarily due to the decrease in our
unsecured credit facility balance and the increase in capitalized interest. The
increase in depreciation expense was primarily due to lower than normal
depreciation expense in 1999 and increases in our investments in real estate.
Under the required accounting for assets held for sale, we discontinued
depreciation of a substantial portion of our retail portfolio after we committed
to dispose of a portion of the portfolio in March 1999. The decrease in general
and administrative expenses was due to timing differences.
LIQUIDITY AND CAPITAL RESOURCES
We currently expect that our principal sources of working capital and
funding for acquisitions, development, expansion, and renovation of properties
will include: 1) cash flow from operations; 2) borrowings under our unsecured
credit facility; 3) other forms of secured or unsecured financing; 4) proceeds
from equity or debt offerings by us or the operating partnership (including
issuances of limited partnership units in the operating partnership or its
subsidiaries); and 5) net proceeds from divestitures of properties. We believe
that our sources of working capital and our ability to access private and public
debt and equity capital are adequate for us to meet our liquidity requirements
for the foreseeable future.
CAPITAL RESOURCES
Property Divestitures. In the third quarter of 2000, we divested ourselves
of three industrial buildings and one retail center for an aggregate price of
$92.2 million. These divestitures during the third quarter resulted in an
aggregate net gain of $5.8 million. The joint venture that sold the retail
center carries an 8.75% interest only mortgage note in the principal amount of
$79.0 million with a term of one year. Year to date, we
21
have sold nine industrial buildings and one retail center for an aggregate price
of $107.9 million, with a resulting net gain of $6.2 million.
Credit Facilities. In May 2000, the operating partnership entered into a
new $500 million unsecured revolving credit agreement, which replaced its
previous $500 million credit facility that was to mature in November 2000. We
guarantee the operating partnership's obligations under the credit facility. The
new credit facility matures in May 2003, has a one-year extension option, and is
subject to a 15 basis point annual facility fee. The operating partnership has
the ability to increase available borrowings up to $700 million by adding
additional banks to the facility or obtaining the agreement of existing banks to
increase its commitments. We use our unsecured credit facility principally for
acquisitions and for general working capital requirements. Borrowing under our
credit facility bear interest at LIBOR plus 75 basis points. As of September 30,
2000, the outstanding balance on our unsecured credit facility was $233.0
million and it bore interest at a weighted average rate of 7.5%. Monthly debt
service payments on our credit facility are interest only. The total amount
available under our credit facility fluctuates based upon the borrowing base, as
defined in the agreement governing the credit facility. At September 30, 2000,
the remaining amount available under our unsecured credit facility was $267.0
million (excluding the additional $200.0 million of potential additional
capacity).
In addition, the Alliance Fund I had an $80.0 million unsecured credit
facility. The debt was secured by the unfunded capital commitments of the third
party investors in the Alliance REIT I. Currently, there are no remaining
unfunded capital commitments. As a result, the Alliance Fund I paid off the
outstanding balance and closed this credit facility in the third quarter.
Equity. On September 1, 2000, AMB Property II, L.P., one of our
subsidiaries, issued and sold 840,000 8.125% Series H Cumulative Redeemable
Preferred Limited Partnership Units at a price of $50.00 per unit in a private
placement. Distributions are cumulative from the date of issuance and payable
quarterly in arrears at a rate per unit equal to $4.0625 per annum. The Series H
Preferred Units are redeemable by AMB Property II, L.P. on or after September 1,
2005, subject to certain conditions, for cash at a redemption price equal to
$50.00 per unit, plus accumulated and unpaid distributions thereon, if any, to
the redemption date. The Series H Preferred Units are exchangeable, at specified
times and subject to certain conditions, on a one-for-one basis, for shares of
our Series H Preferred Stock. AMB Property II, L.P. used the net proceeds of
$41.0 million to repay advances from the operating partnership and to make a
loan to the operating partnership. The operating partnership used the funds to
partially repay borrowings under its unsecured credit facility and for general
corporate purposes. The loan bears interest at 8.0% per annum and is payable on
demand.
In July 2000, 206,423 limited partnership units were redeemed for shares of
the Company's common stock.
On August 29, 2000, AMB Property II, L.P. issued and sold 20,000 7.95%
Series G Cumulative Redeemable Preferred Limited Partnership Units at a price of
$50.00 per unit in a private placement. Distributions are cumulative from the
date of issuance and payable quarterly in arrears at a rate per unit equal to
$3.975 per annum. The Series G Preferred Units are redeemable by AMB Property
II, L.P. on or after August 29, 2005, subject to certain conditions, for cash at
a redemption price equal to $50.00 per unit, plus accumulated and unpaid
distributions thereon, if any, to the redemption date. The Series G Preferred
Units are exchangeable, at specified times and subject to certain conditions, on
a one-for-one basis, for shares of our Series G Preferred Stock. AMB Property
II, L.P. used the net proceeds of $1.0 million to repay advances from the
operating partnership. The operating partnership used the funds for general
corporate purposes.
On March 22, 2000, AMB Property II, L.P. issued and sold 397,439 7.95%
Series F Cumulative Redeemable Preferred Limited Partnership Units at a price of
$50.00 per unit in a private placement. Distributions are cumulative from the
date of issuance and payable quarterly in arrears at a rate per unit equal to
$3.975 per annum. The Series F Preferred Units are redeemable by AMB Property
II, L.P. on or after March 22, 2005, subject to certain conditions, for cash at
a redemption price equal to $50.00 per unit, plus accumulated and unpaid
distributions thereon, if any, to the redemption date. The Series F Preferred
Units are exchangeable, at specified times and subject to certain conditions, on
a one-for-one basis, for shares of our Series F Preferred Stock. AMB Property
II, L.P. loaned the net proceeds of $19.6 million to the operating
22
partnership. The operating partnership used the funds to partially repay
borrowings under its unsecured credit facility and for general corporate
purposes. The loan bears interest at 7.0% per annum and is payable upon demand.
At the time of our initial public offering, 4,237,750 shares of common
stock, known as performance shares, were placed in escrow by certain of our
investors, which were subject to advisory agreements with our predecessor that
included incentive fee provisions. On January 7, 2000, 2,771,824 shares of
common stock were released from escrow to these investors and 1,465,926 shares
of common stock were returned to us and cancelled. The cancelled shares of
common stock represent indirect interests in the operating partnership that were
reallocated from us (thereby decreasing the number of shares of common stock
outstanding) to other unitholders who had an ownership interest in our
predecessor, including certain of our executive officers (thereby increasing the
number of limited partnership units owned by partners other than us). The total
number of outstanding partnership units did not change as a result of this
reallocation. This reallocation did not change the amount of fully diluted
shares of common stock and limited partnership units outstanding.
Debt. As of September 30, 2000, the aggregate principal amount of our
secured debt was $815.1 million, excluding unamortized debt premiums of $10.4
million. The secured debt bears interest at rates varying from 4.0% to 10.4% per
annum (with a weighted average rate of 7.9%) and final maturity dates ranging
from May 2000 to January 2014. All of the secured debt bears interest at fixed
rates, except for two loans with an aggregate principal amount of $33.0 million
as of September 30, 2000, which bear interest at variable rates.
In August 2000, the operating partnership commenced a medium-term note
program for the possible issuance of up to $400 million in principal amount of
medium-term notes, which will be guaranteed by us. In August and September 2000,
the operating partnership issued and sold $55 million of the notes under this
program to Morgan Stanley Dean Witter as principal. We have guaranteed the
notes, which mature on August 20, 2007, and bear interest at 7.925% per annum.
The operating partnership used the net proceeds of $54.8 million for general
corporate purposes, to repay indebtedness, and for the acquisition and
development of additional properties.
In order to maintain financial flexibility and facilitate the rapid
deployment of capital through market cycles, we presently intend to operate with
a debt-to-total market capitalization ratio of approximately 45% or less.
Additionally, we presently manage our capitalization in order to maintain an
investment grade rating on our senior unsecured debt. In spite of these
policies, our organizational documents do not contain any limitation on the
amount of indebtedness that we may incur. Accordingly, our board of directors
could alter or eliminate these policies.
23
The tables below summarize our debt maturities and capitalization as of
September 30, 2000 (dollars in thousands):
DEBT
- ----------------------------------------------------------------------------------------------------
INDUSTRIAL RETAIL UNSECURED UNSECURED
SECURED SECURED SENIOR DEBT CREDIT TOTAL
DEBT(2) DEBT(2) SECURITIES FACILITY DEBT
---------- -------- ----------- --------- ----------
2000 (three months)............. $ 3,285 $ 7,400 $ -- $ -- $ 10,685
2001............................ 15,183 24,481 -- -- 39,664
2002............................ 50,156 22,513 -- -- 72,669
2003............................ 76,667 526 -- 233,000 310,193
2004............................ 88,096 570 -- -- 88,666
2005............................ 72,304 618 100,000 -- 172,922
2006............................ 137,911 670 -- -- 138,581
2007............................ 50,746 727 55,000 -- 106,473
2008............................ 126,761 7,758 175,000 -- 309,519
2009............................ 5,316 318 -- -- 5,634
2010............................ 103,830 345 -- 104,175
Thereafter...................... 17,629 1,263 125,000 -- 143,892
--------- -------- -------- -------- ----------
Subtotal...................... 747,884 67,189 455,000 233,000 1,503,073
Unamortized premiums.......... 9,660 744 -- 10,404
--------- -------- -------- -------- ----------
Total consolidated
debt................ 757,544 67,933 455,000 233,000 1,513,477
Our share of unconsolidated
joint venture debt............ 30,078 -- -- -- 30,078
--------- -------- -------- -------- ----------
Total debt............ 787,622 67,933 455,000 233,000 1,543,555
Joint venture partners' share of
consolidated joint venture
debt.......................... (106,261) (16,472) -- -- (122,733)
--------- -------- -------- -------- ----------
Our share of total debt.... $ 681,361 $ 51,461 $455,000 $233,000 $1,420,822
========= ======== ======== ======== ==========
Weighed average interest rate... 7.9%(1) 7.8% 7.3% 7.5% 7.6%
Weighed average maturity (in
years)........................ 6.3(1) 2.9 9.7 2.6 6.6
- ---------------
(1) Does not include unconsolidated joint venture debt. The weighted average
interest and weighted average maturity for the two unconsolidated joint
venture debts were 7.3% and 4.8 years, respectively.
(2) All of the secured debt bears interest at fixed rates, except for two loans
with an aggregate principal amount of $33.0 million, which bear interest at
variable rates.
MARKET EQUITY
- ----------------------------------------------------------------------------------------------------
SHARES/UNITS
SECURITY OUTSTANDING MARKET PRICE MARKET VALUE
-------- ------------ ------------ ------------
Common stock.......................................... 84,112,438 $24.56 $2,066,012
Common limited partnership units...................... 5,767,192 24.56 141,657
---------- ----------
Total....................................... 89,879,630 $2,207,669
========== ==========
24
PREFERRED STOCK AND UNITS
- -------------------------------------------------------------------------------------------------
DIVIDEND LIQUIDATION REDEMPTION
SECURITY RATE PREFERENCE PROVISIONS
-------- -------- ----------- --------------
Series A preferred stock.............................. 8.50% $100,000 July 2003
Series B preferred units.............................. 8.63% 65,000 November 2003
Series C preferred units.............................. 8.75% 110,000 November 2003
Series D preferred units.............................. 7.75% 79,767 May 2004
Series E preferred units.............................. 7.75% 11,022 August 2004
Series F preferred units.............................. 7.95% 19,872 March 2005
Series G preferred units.............................. 7.95% 1,000 August 2005
Series H preferred units.............................. 8.13% 42,000 September 2005
---- --------
Weighted Average/Total...................... 8.36% $428,661
==== ========
CAPITALIZATION RATIOS
- -------------------------------------------------------------------
Total debt-to-total market capitalization................... 36.9%
Our share of total debt-to-total market capitalization...... 35.0%
Total debt plus preferred-to-total market capitalization.... 47.2%
Our share of total debt plus preferred-to-total market
capitalization............................................ 45.6%
Our share of total debt-to-total book capitalization........ 40.3%
LIQUIDITY
As of September 30, 2000, we had approximately $37.8 million in cash,
restricted cash, and cash equivalents, and $267.0 million of additional
available borrowings under our credit facilities. We intend to use: 1) cash from
operations; 2) borrowings under our credit facilities; 3) other forms of secured
and unsecured financing; 4) proceeds from any future debt or equity offerings by
us or the operating partnership (including issuances of limited partnership
units in the operating partnership or its subsidiaries); and 5) proceeds from
divestitures of properties to fund acquisitions, development activities, and
capital expenditures and to provide for general working capital requirements.
The following table sets forth the dividend payments and distributions for
the three and nine months ended September 30, 2000:
DIVIDEND THIRD YEAR-TO-
RECORD PAYMENT QUARTER DATE
SECURITY PAYING ENTITY DATE PAYMENT PERIOD DATE AMOUNT AMOUNT
-------- --------------------- -------- ------------------------ -------- ------- --------
Common Stock............. Company 10/04/00 Quarter ended 9/30/00 10/16/00 $0.370 $1.1100
OP units................. Operating Partnership 10/04/00 Quarter ended 9/30/00 10/16/00 $0.370 $1.1100
Series A preferred Company 10/04/00 3 months ended 10/15/00 10/16/00 $0.531 $1.5939
stock..................
Series A preferred Operating Partnership 10/04/00 3 months ended 10/15/00 10/16/00 $0.531 $1.5939
units..................
Series B preferred Operating 10/04/00 3 months ended 10/15/00 10/16/00 $1.078 $3.2343
units..................
Series C preferred AMB Property II, L.P. 10/04/00 3 months ended 10/15/00 10/16/00 $1.094 $3.2814
units..................
Series D preferred AMB Property II, L.P. 9/15/00 3 months ended 9/25/00 9/26/00 $0.969 $2.9064
units..................
Series E preferred AMB Property II, L.P. 10/04/00 3 months ended 10/15/00 10/16/00 $0.969 $2.9064
units..................
Series F preferred AMB Property II, L.P. 10/04/00 3 months ended 10/15/00 10/16/00 $0.994 $2.0968
units..................
Series G preferred AMB Property II, L.P. 10/04/00 From 8/29/00 to 10/15/00 10/16/00 $0.357 $0.3565
units..................
Series H preferred AMB Property II, L.P. 9/15/00 From 9/1/00 to 9/25/00 9/26/00 $0.282 $0.2821
units..................
The anticipated size of our distributions, using only cash from operations,
will not allow us to retire all of our debt as it comes due. Therefore, we
intend to also repay maturing debt with net proceeds from future debt or equity
financings. However, we may not be able to obtain future financings on favorable
terms or at all.
25
CAPITAL COMMITMENTS
In addition to recurring capital expenditures and costs to renew or
re-tenant space, as of September 30, 2000, we are developing 27 projects
representing a total estimated investment of $414.4 million upon completion. Of
this total, $250.2 million had been funded as of September 30, 2000, and
approximately $164.2 million is estimated to be required to complete current and
planned projects. We expect to fund these expenditures with cash from
operations, borrowings under our credit facilities, debt or equity issuances,
and net proceeds from property divestitures. We have no other material capital
commitments.
During the period from January 1, 2000, to September 30, 2000, we invested:
- $407.9 million in 88 operating industrial buildings, aggregating
approximately 5.6 million rentable square feet, and
- $73.9 million in 14 new development and renovation projects (with a total
cost upon completion estimated to be $184.1 million), aggregating
approximately 3.7 million square feet upon completion.
We funded these acquisitions and initiated development and renovation
projects through borrowings under our credit facilities, cash, debt and equity
issuances, and net proceeds from property divestitures.
26
FUNDS FROM OPERATIONS
We believe that funds from operations, or FFO, as defined by the National
Association of Real Estate Investment Trusts, is an appropriate measure of
performance for an equity real estate investment trust. While funds from
operations is a relevant and widely used measure of operating performance of
real estate investment trusts, it does not represent cash flow from operations
or net income as defined by U.S. generally accepted accounting principles and it
should not be considered as an alternative to those indicators in evaluating
liquidity or operating performance. Further, funds from operations as disclosed
by other real estate investment trusts may not be comparable.
The following table reflects the calculation of funds from operations for
the three and nine months ended September 30, 2000 and 1999 (dollars in
thousands, except share and per share data):
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
2000 1999 2000 1999
------------ ------------ ----------- -----------
Income from operations before minority
interests................................. $ 42,116 $ 42,055 $ 122,355 $ 118,076
Real estate related depreciation and
amortization:
Total depreciation and
amortization.................... 23,312 15,693 65,135 49,295
Furniture, fixtures, and equipment
depreciation and ground lease
amortization........................... (223) (285) (857) (649)
FFO attributable to minority
interests(1)(2):
Separate account co-investors............. (1,130) (1,366) (3,677) (4,001)
Alliance Fund I........................... (2,664) (127) (3,898) (127)
Other joint venture partners.............. (468) (582) (1,994) (1,691)
Adjustments to derive FFO in unconsolidated
joint venture(3):
Our share of net income................... (1,447) (1,251) (4,006) (3,579)
Our share of FFO.......................... 1,941 1,745 5,488 5,061
Series A preferred stock dividends.......... (2,125) (2,125) (6,375) (6,375)
Series B, C, D, E & F preferred unit
distributions............................. (6,206) (5,425) (17,778) (13,900)
----------- ----------- ----------- -----------
FFO(1)...................................... $ 53,106 $ 48,332 $ 154,393 $ 142,110
=========== =========== =========== ===========
FFO per common share and unit:
Basic..................................... $ 0.59 $ 0.53 $ 1.72 $ 1.56
=========== =========== =========== ===========
Diluted................................... $ 0.59 $ 0.53 $ 1.71 $ 1.56
=========== =========== =========== ===========
Weighted average common shares and units:
Basic..................................... 89,898,511 91,078,726 89,804,970 90,796,692
=========== =========== =========== ===========
Diluted(4)................................ 90,508,007 91,179,441 90,104,947 90,897,525
=========== =========== =========== ===========
- ---------------
(1) Funds from operations, or FFO, is defined as income from operations before
minority interest, gains or losses from sale of real estate and
extraordinary items plus real estate depreciation and adjustment to derive
our pro rata share of the funds from operations of unconsolidated joint
ventures, less minority interests' pro rata share of the funds from
operations of consolidated joint ventures and perpetual preferred stock
dividends. In accordance with NAREIT White Paper on funds from operations,
we include the effects of straight-line rents in funds from operations.
Further, we do not adjust funds from operations to eliminate the effects of
non-recurring charges.
(2) Represents FFO attributable to minority interest in consolidated joint
ventures for the period presented, which has been computed as minority
interests' share of net income plus minority interests' share of real
estate-related depreciation and amortization of the consolidated joint
ventures for such period. These minority interests are not convertible into
shares of common stock.
(3) Represents our pro rata share of FFO in unconsolidated joint ventures for
the period presented, which has been computed as our share of net income
plus our share of real estate-related depreciation and amortization of the
unconsolidated joint ventures for such period.
(4) Includes the dilutive effect of stock options.
27
OPERATING AND LEASING STATISTICS SUMMARY
The following summarizes key operating and leasing statistics for the all
of our industrial and retail properties as of and for the period ended September
30, 2000 (dollars in thousands):
INDUSTRIAL RETAIL TOTAL
----------- ---------- -----------
Square feet owned(1)................................. 71,423,608 1,183,023 72,606,631
Occupancy percentage................................. 96.8% 85.9% 96.6%
Lease expirations as percentage of total square feet
(next 12 months)................................... 15.8% 7.9% 15.7%
Weighted average lease term.......................... 6 years 11 years 6 years
Tenant retention:
Quarter (4.4 million sq. ft. expired).............. 62.1% 0.0% 62.0%
Year-to-date (10.3 million sq. ft. expired)........ 61.1% 8.8% 60.7%
Rent increases on lease commencements................
Quarter (2.9 million sq. ft. leased)............... 36.4% n/a 36.4%
Year-to-date (9.0 million sq. ft. leased).......... 24.3% 10.3% 24.3%
Second generation tenant improvements and leasing
commissions per sq. ft.(2):
Quarter:
Renewals........................................ $ 0.63 $ -- $ 0.63
Re-tenanted..................................... 3.11 -- 3.09
----------- ---------- -----------
Weighted average.............................. $ 2.00 $ -- $ 1.99
=========== ========== ===========
Year-to-date:
Renewals........................................ $ 1.00 $ -- $ 1.00
Re-tenanted..................................... 2.29 -- 2.25
----------- ---------- -----------
Weighted average.............................. $ 1.74 $ -- $ 1.71
=========== ========== ===========
Recurring capital expenditures(3)
Quarter
Tenant improvements............................. $ 1,822 $ -- $ 1,822
Lease commissions............................... 4,870 -- 4,870
Building improvements........................... 3,148 -- 3,148
----------- ---------- -----------
Total......................................... $ 9,840 $ -- $ 9,840
=========== ========== ===========
Year-to-date
Tenant improvements............................. $ 5,983 $ -- $ 5,983
Lease commissions............................... 11,583 -- 11,583
Building improvements........................... 8,246 16 8,262
----------- ---------- -----------
Total......................................... $ 25,812 $ 16 $ 25,828
=========== ========== ===========
- ---------------
(1) In addition to owned square feet as of September 30, 2000, we managed,
through our subsidiary, AMB Investment Management, approximately 3.7
million, 0.6 million, and 0.1 million additional square feet of industrial,
retail and other properties, respectively. We also have an investment in
approximately 4.0 million square feet of industrial properties through our
investments in the unconsolidated joint ventures.
(2) Consists of all second generation leases renewing or re-tenanting with lease
terms greater than one year.
(3) Includes second generation leasing costs and building improvements.
28
The following summarizes key same store properties' operating statistics
for our industrial and retail properties as of and for the period ending
September 30, 2000:
INDUSTRIAL RETAIL TOTAL
---------- ------- ----------
Square feet in same store pool(1)................ 53,715,850 367,179 54,083,029
% of total square feet......................... 75.2% 31.0% 74.5%
Occupancy percentage at period end
September 30, 2000............................. 97.2% 87.4% 97.1%
September 30, 1999............................. 97.0% 97.0% 97.0%
Tenant retention:
Quarter (3.5 million SF expired)............... 62.4% 0.0% 62.3%
Year-to-date (8.5 million SF expired).......... 61.7% 9.1% 61.3%
Rent increases on lease commencements:
Quarter (2.5 million SF leased)................ 41.5% n/a 41.5%
Year-to-date (7.5 million SF leased)........... 25.7% 0.0% 25.7%
Cash basis NOI growth % increase (decrease):
Quarter:
Revenues.................................... 6.8% (16.6)% 6.4%
Expenses.................................... 6.6% (3.2)% 6.5%
Net operating income........................ 6.9% (20.6)% 6.4%
Year-to-date:
Revenues.................................... 6.2% (5.6)% 6.0%
Expenses.................................... 1.9% (6.0)% 1.7%
Net operating income........................ 7.5% (5.5)% 7.3%
- ---------------
(1) Consists of industrial buildings and retail centers owned prior to January
1, 1999 and excludes development properties prior to stabilization.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk includes: 1) the rising interest rates in
connection with our unsecured credit facilities and other variable rate
borrowings; and 2) our ability to incur more debt without stockholder approval,
thereby increasing our debt service obligations, which could adversely affect
our cash flows. See "Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Capital Resources -- Market Capitalization."
29
PART II
ITEM 1. LEGAL PROCEEDINGS
As of September 30, 2000, there were no pending legal proceedings to which
we are a party or of which any of our properties is the subject, the adverse
determination of which we anticipate would have a material adverse effect upon
our financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 1, 2000, AMB Property II, L.P. issued and sold 840,000 8.125%
Series H Cumulative Redeemable Preferred Limited partnership Units at a price of
$50.00 per unit, for a gross sales price of $42.0 million, to a limited
liability company. The issuance and sale of the Series H Preferred Units
constituted a private placement of securities that was exempt from the
registration requirement of the Securities Act pursuant to Section 4(2) of the
Securities Act and Rule 506 of Regulation D. The Series H Preferred Units are
exchangeable, at specified times and subject to certain conditions, on a
one-for-one basis, for shares of our Series H Preferred Stock. The Articles
Supplementary establishing the rights and preferences of the holders of the
Series H Preferred Stock were filed as Exhibit 3.3 to our Current Report on Form
8-K filed on September 29, 2000.
On August 29, 2000, AMB Property II, L.P. issued and sold 20,000 7.95%
Series G Cumulative Redeemable Preferred Limited partnership Units at a price of
$50.00 per unit, for a gross sales price of $1.0 million, to a limited liability
company. The issuance and sale of the Series G Preferred Units constituted a
private placement of securities that was exempt from the registration
requirement of the Securities Act pursuant to Section 4(2) of the Securities Act
and Rule 506 of Regulation D. The Series G Preferred Units are exchangeable, at
specified times and subject to certain conditions, on a one-for-one basis, for
shares of our Series G Preferred Stock. The Articles Supplementary establishing
the rights and preferences of the holders of the Series G Preferred Stock were
filed as Exhibit 3.1 to our Current Report on Form 8-K filed on September 29,
2000.
In July 2000, 206,423 limited partnership units were redeemed for shares of
the Company's common stock. The redemption of limited partnership units for
shares of the Company's common stock was exempt from the registration
requirement of the Securities Act pursuant to Section 4(2) of the Securities Act
and Rule 506 of Regulation D.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
BUSINESS RISKS
Our operations involve various risks that could have adverse consequences
to us. These risks include, among others:
GENERAL REAL ESTATE RISKS
THERE ARE FACTORS OUTSIDE OF OUR CONTROL THAT AFFECT THE PERFORMANCE AND VALUE
OF OUR PROPERTIES
Real property investments are subject to varying degrees of risk. The
yields available from equity investments in real estate depend on the amount of
income earned and capital appreciation generated by the related properties as
well as the expenses incurred in connection with the properties. If our
properties do not generate income sufficient to meet operating expenses,
including debt service and capital expenditures, then our ability to pay
distributions to our stockholders could be adversely affected. Income from, and
the value of,
30
our properties may be adversely affected by the general economic climate, local
conditions such as oversupply of industrial space, or a reduction in demand for
industrial space, the attractiveness of our properties to potential customers,
competition from other properties, our ability to provide adequate maintenance
and insurance, and an increase in operating costs. In addition, revenues from
properties and real estate values are also affected by factors such as the cost
of compliance with regulations, the potential for liability under applicable
laws (including changes in tax laws), interest rate levels, and the availability
of financing. Our income would be adversely affected if a significant number of
customers were unable to pay rent or if we were unable to rent our industrial
space on favorable terms. Certain significant expenditures associated with an
investment in real estate (such as mortgage payments, real estate taxes, and
maintenance costs) generally do not decline when circumstances cause a reduction
in income from the property.
WE MAY BE UNABLE TO RENEW LEASES OR RELET SPACE AS LEASES EXPIRE
We are subject to the risks that leases may not be renewed, space may not
be relet, or the terms of renewal or reletting (including the cost of required
renovations) may be less favorable than current lease terms. Leases on a total
of 19.1% of our properties (based on annualized base rent) as of September 30,
2000, will expire on or prior to December 31, 2001, with leases on 4.8% of our
properties as of September 30, 2000, expiring during the three months ending
December 31, 2000. In addition, numerous properties compete with our properties
in attracting customers to lease space, particularly with respect to retail
centers. The number of competitive commercial properties in a particular area
could have a material adverse effect on our ability to lease space in our
properties and on the rents that we are able to charge. Our financial condition,
results of operations, cash flow, and our ability to pay distributions on, and
the market price of, our stock could be adversely affected if we are unable to
promptly relet or renew the leases for all or a substantial portion of expiring
leases, if the rental rates upon renewal or reletting is significantly lower
than expected, or if our reserves for these purposes prove inadequate.
REAL ESTATE INVESTMENTS ARE ILLIQUID
Because real estate investments are relatively illiquid, our ability to
vary our portfolio promptly in response to economic or other conditions is
limited. The limitations in the Internal Revenue Code and related regulations on
a real estate investment trust holding property for sale may affect our ability
to sell properties without adversely affecting distributions to our
stockholders. The relative illiquidity of our holdings and Internal Revenue Code
prohibitions and related regulations could impede our ability to respond to
adverse changes in the performance of our investments and could adversely affect
our financial condition, results of operations, cash flow, and our ability to
pay distributions on, and the market price of, our stock.
A SIGNIFICANT NUMBER OF OUR PROPERTIES ARE LOCATED IN CALIFORNIA
Our properties located in California as of September 30, 2000, represented
approximately 21.5% of the aggregate square footage of our properties as of
September 30, 2000, and 26.8% of our annualized base rent. Annualized base rent
means the monthly contractual amount under existing leases at September 30,
2000, multiplied by 12. This amount excludes expense reimbursements and rental
abatements. Our revenue from, and the value of, our properties located in
California may be affected by a number of factors, including local real estate
conditions (such as oversupply of or reduced demand for industrial properties)
and the local economic climate. Business layoffs, downsizing, industry
slowdowns, changing demographics, and other factors may adversely impact the
local economic climate. A downturn in either the California economy or in
California real estate conditions could adversely affect our financial
condition, results of operations, cash flow, and our ability to pay
distributions on, and the market price of, our stock. Certain of our properties
are also subject to possible loss from seismic activity.
OUR PROPERTIES ARE CURRENTLY CONCENTRATED IN THE INDUSTRIAL SECTOR
Our properties are currently concentrated predominantly in the industrial
real estate sector. Our concentration in a certain property type may expose us
to the risk of economic downturns in this sector to a greater extent than if our
portfolio also included other property types. As a result of such concentration,
31
economic downturns in the industrial real estate sector could have an adverse
effect on our financial condition, results of operations, cash flow, and ability
to pay distributions on, and the market price of, our stock.
SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE
We carry comprehensive liability, fire, extended coverage, and rental loss
insurance covering all of our properties, with policy specifications and insured
limits that we believe are adequate and appropriate under the circumstances
given relative risk of loss, the cost of such coverage, and industry practice.
There are, however, certain losses that are not generally insured because it is
not economically feasible to insure against them, including losses due to riots
or acts of war. Certain losses such as losses due to floods or seismic activity
may be insured subject to certain limitations including large deductibles or
co-payments and policy limits. If an uninsured loss or a loss in excess of
insured limits occurs with respect to one or more of our properties, then we
could lose the capital we invested in the properties, as well as the anticipated
future revenue from the properties and, in the case of debt, which is with
recourse to us, we would remain obligated for any mortgage debt or other
financial obligations related to the properties. Moreover, as the general
partner of the operating partnership, we will generally be liable for all of the
operating partnership's unsatisfied obligations other than non-recourse
obligations. Any such liability could adversely affect our financial condition,
results of operations, cash flow, and ability to pay distributions on, and the
market price of, our stock.
A number of our properties are located in areas that are known to be
subject to earthquake activity, including California where, as of September 30,
2000, 211 industrial buildings aggregating approximately 15.6 million rentable
square feet (representing 21.5% of our properties based on aggregate square
footage and 26.8% based on annualized base rent) are located. We carry
replacement cost earthquake insurance on all of our properties located in areas
historically subject to seismic activity, subject to coverage limitations and
deductibles that we believe are commercially reasonable. This insurance coverage
also applies to the properties managed by AMB Investment Management, with a
single aggregate policy limit and deductible applicable to those properties and
our properties. The operating partnership owns 100% of the non-voting preferred
stock of AMB Investment Management. Through an annual analysis prepared by
outside consultants, we evaluate our earthquake insurance coverage in light of
current industry practice and determine the appropriate amount of earthquake
insurance to carry. We may incur material losses in excess of insurance proceeds
and we may not be able to continue to obtain insurance at commercially
reasonable rates.
WE ARE SUBJECT TO RISKS AND LIABILITIES IN CONNECTION WITH PROPERTIES OWNED
THROUGH JOINT VENTURES, LIMITED LIABILITY COMPANIES, AND PARTNERSHIPS
As of September 30, 2000, we had ownership interests in 24 joint ventures,
limited liability companies, or partnerships with third parties, as well as
interests in three unconsolidated entities. As of September 30, 2000, we owned
41 (excluding the three unconsolidated joint ventures) of our properties through
these entities. We may make additional investments through these ventures in the
future and presently plan to do so with clients of AMB Investment Management,
Inc. and certain Development Alliance Partners, who share certain approval
rights over major decisions. Partnership, limited liability company, or joint
venture investments may involve risks such as the following:
- our partners, co-members, or joint venturers might become bankrupt (in
which event we and any other remaining general partners, members, or
joint venturers would generally remain liable for the liabilities of the
partnership, limited liability company, or joint venture);
- our partners, co-members, or joint venturers might at any time have
economic or other business interests or goals that are inconsistent with
our business interests or goals;
- our partners, co-members, or joint venturers may be in a position to take
action contrary to our instructions, requests, policies, or objectives,
including our current policy with respect to maintaining our
qualification as a real estate investment trust; and
- agreements governing joint ventures, limited liability companies, and
partnerships often contain restrictions on the transfer of a joint
venturer's, member's, or partner's interest or "buy-sell" or other
32
provisions, which may result in a purchase or sale of the interest at a
disadvantageous time or on disadvantageous terms.
We will, however, generally seek to maintain sufficient control of our
partnerships, limited liability companies, and joint ventures to permit us to
achieve our business objectives. Our organizational documents do not limit the
amount of available funds that we may invest in partnerships, limited liability
companies, or joint ventures. The occurrence of one or more of the events
described above could have an adverse effect on our financial condition, results
of operations, cash flow, and ability to pay distributions on, and the market
price of, our stock.
WE MAY BE UNABLE TO CONSUMMATE ACQUISITIONS ON ADVANTAGEOUS TERMS
We intend to continue to acquire primarily industrial properties.
Acquisitions of properties entail risks that investments will fail to perform in
accordance with expectations. Estimates of the costs of improvements necessary
for us to bring an acquired property up to market standards may prove
inaccurate. In addition, there are general investment risks associated with any
new real estate investment. Further, we anticipate significant competition for
attractive investment opportunities from other major real estate investors with
significant capital including both publicly traded real estate investment trusts
and private institutional investment funds. We expect that future acquisitions
will be financed through a combination of borrowings under our unsecured credit
facility, proceeds from equity or debt offerings by us or the operating
partnership (including issuances of limited partnership units by the operating
partnership or its subsidiaries), and proceeds from property divestitures, which
could have an adverse effect on our cash flow. We may not be able to acquire
additional properties. Our inability to finance any future acquisitions on
favorable terms or the failure of acquisitions to conform with our expectations
or investment criteria, or our failure to timely reinvest the proceeds from
property divestitures could adversely affect our financial condition, results of
operations, cash flow, and ability to pay distributions on, and the market price
of, our stock.
WE MAY BE UNABLE TO COMPLETE RENOVATION AND DEVELOPMENT ON ADVANTAGEOUS TERMS
The real estate development business, including the renovation and
rehabilitation of existing properties, involves significant risks. These risks
include the following:
- we may not be able to obtain financing on favorable terms for development
projects and we may not complete construction on schedule or within
budget, resulting in increased debt service expense and construction
costs and delays in leasing such properties and generating cash flow;
- we may not be able to obtain, or we may experience delays in obtaining,
all necessary zoning, land-use, building, occupancy, and other required
governmental permits and authorizations;
- new or renovated properties may perform below anticipated levels,
producing cash flow below budgeted amounts;
- substantial renovation as well as new development activities, regardless
of whether or not they are ultimately successful, typically require a
substantial portion of management's time and attention that could divert
management's time from our day-to-day operations; and
- activities that we finance through construction loans involve the risk
that, upon completion of construction, we may not be able to obtain
permanent financing or we may not be able to obtain permanent financing
on advantageous terms.
These risks could have an adverse effect on our financial condition,
results of operations, cash flow, and ability to pay distributions on, and the
market price of, our stock.
WE MAY BE UNABLE TO COMPLETE DIVESTITURES ON ADVANTAGEOUS TERMS
We intend to dispose of properties from time to time that do not conform
with our current investment strategy or that we have otherwise determined should
be divested, including, as of September 30, 2000, five retail centers, one
industrial property, and one land parcel, which are held for divestiture. Our
ability to dispose
33
of properties on advantageous terms is dependent upon factors beyond our
control, including competition from other owners (including other real estate
investment trusts) that are attempting to dispose of industrial and retail
properties and the availability of financing on attractive terms for potential
buyers of our properties. Our inability to dispose of properties on favorable
terms or our inability to redeploy the proceeds of property divestitures in
accordance with our investment strategy could adversely our financial condition,
results of operations, cash flow, and ability to pay distributions on, and the
market price of, our stock.
DEBT FINANCING
WE COULD INCUR MORE DEBT
We operate with a policy of incurring debt, either directly or through our
subsidiaries, only if upon such incurrence our debt-to-total market
capitalization ratio would be approximately 45% or less. The aggregate amount of
indebtedness that we may incur under our policy varies directly with the
valuation of our capital stock and the number of shares of capital stock
outstanding. Accordingly, we would be able to incur additional indebtedness
under our policy as a result of increases in the market price per share of our
common stock or other outstanding classes of capital stock, and future issuance
of shares of our capital stock. In spite of this policy, our organizational
documents do not contain any limitation on the amount of indebtedness that we
may incur. Accordingly, our board of directors could alter or eliminate this
policy. If we change this policy, then we could become more highly leveraged,
resulting in an increase in debt service that could adversely affect our
financial condition, results of operations, cash flow, and ability to pay
distributions on, and the market price of, our stock.
SCHEDULED DEBT PAYMENTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
We are subject to risks normally associated with debt financing, including
the risks that cash flow will be insufficient to make distributions to our
stockholders, that we will be unable to refinance existing indebtedness on our
properties (which in all cases will not have been fully amortized at maturity)
and that the terms of refinancing will not be as favorable as the terms of
existing indebtedness.
As of September 30, 2000, we had total debt outstanding of approximately
$1.5 billion including:
- $815.1 million of secured indebtedness (excluding unamortized debt
premiums) with an average maturity of six years and a weighted average
interest rate of 7.9%;
- $233.0 million outstanding under our unsecured $500.0 million credit
facility with a maturity date of May 2003 and an interest rate of LIBOR
plus 75 basis points (a weighted average interest rate of 7.5% as of
September 30, 2000); and
- $455.0 million aggregate principal amount of unsecured senior debt
securities with maturities in 2007, 2008, 2015, and 2018 and a weighted
average interest rate of 7.3%.
We guarantee the operating partnership's obligations with respect to the
senior debt securities referenced above. If we are unable to refinance or extend
principal payments due at maturity or pay them with proceeds of other capital
transactions, then we expect that our cash flow will not be sufficient in all
years to pay distributions to our stockholders and to repay all such maturing
debt. Furthermore, if prevailing interest rates or other factors at the time of
refinancing (such as the reluctance of lenders to make commercial real estate
loans) result in higher interest rates upon refinancing, 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 distributions on, and the market price
of, our stock. In addition, if we mortgage one or more of our properties to
secure payment of indebtedness and we are unable to meet mortgage payments, 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 distributions on, and the market price
of, our stock.
34
RISING INTEREST RATES COULD ADVERSELY AFFECT OUR CASH FLOW
As of September 30, 2000, we had approximately $233.0 million outstanding
under our unsecured credit facility. In addition, we may incur other variable
rate indebtedness in the future. Increases in interest rates on this
indebtedness could increase our interest expense, which would adversely affect
our financial condition, results of operations, cash flow, and ability to pay
distributions on, and the market price of, our stock. Accordingly, we may in the
future engage in transactions to limit our exposure to rising interest rates.
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL
In order to qualify as a real estate investment trust under the Internal
Revenue Code, we are required each year to distribute to our stockholders at
least 95% of our real estate investment trust taxable income (determined without
regard to the dividends-paid deduction and by excluding any net capital gain).
Because of this distribution requirement, we may not be able to fund all future
capital needs, including capital needs in connection with acquisitions, from
cash retained from operations. As a result, to fund capital needs, we rely on
third party sources of capital, which we may not be able to obtain on favorable
terms or at all. Our access to third party sources of capital depends upon a
number of factors, including: 1) general market conditions; 2) the market's
perception of our growth potential; 3) our current and potential future earnings
and cash distributions; and 4) the market price of our capital stock. Additional
debt financing may substantially increase our leverage.
WE COULD DEFAULT ON CROSS-COLLATERALIZED AND CROSS-DEFAULTED DEBT
As of September 30, 2000, we had 19 non-recourse secured loans, which are
cross-collateralized by 21 properties. As of September 30, 2000, we had
approximately $244.7 million (not including unamortized debt premium)
outstanding on these loans. If we default on any of these loans, then we will be
required to repay the aggregate of all indebtedness, together with applicable
prepayment charges, to avoid foreclosure on all the cross-collateralized
properties within the applicable pool. Foreclosure on our properties, or our
inability to refinance our loans on favorable terms, could adversely impact our
financial condition, results of operations, cash flow, and ability to pay
distributions on, and the market price of, our stock. In addition, our credit
facilities and the senior debt securities of the operating partnership contain
certain cross-default provisions, which are triggered in the event that our
other material indebtedness is in default. These cross-default provisions may
require us to repay or restructure the credit facilities and the senior debt
securities in addition to any mortgage or other debt that is in default, which
could adversely affect our financial condition, results of operations, cash
flow, and ability to pay distributions on, and the market price of, our stock.
CONTINGENT OR UNKNOWN LIABILITIES COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
Our predecessors have been in existence for varying lengths of time up to
17 years. At the time of our formation we acquired the assets of these entities
subject to all of their potential existing liabilities. There may be current
liabilities or future liabilities arising from prior activities that we are not
aware of and therefore have not disclosed in this report. We assumed these
liabilities as the surviving entity in the various merger and contribution
transactions that occurred at the time of our formation. Existing liabilities
for indebtedness generally were taken into account in connection with the
allocation of the operating partnership's limited partnership units or shares of
our common stock in the formation transactions, but no other liabilities were
taken into account for these purposes. We do not have recourse against our
predecessors or any of their respective stockholders or partners or against any
individual account investors with respect to any unknown liabilities. Unknown
liabilities might include the following:
- liabilities for clean-up or remediation of undisclosed environmental
conditions;
- claims of customers, vendors, or other persons dealing with our
predecessors prior to the formation transactions that had not been
asserted prior to the formation transactions;
- accrued but unpaid liabilities incurred in the ordinary course of
business;
- tax liabilities; and
35
- claims for indemnification by the officers and directors of our
predecessors and others indemnified by these entities.
Certain customers may claim that the formation transactions gave rise to a
right to purchase the premises that they occupy. We do not believe any such
claims would be material and, to date, no such claims have been filed. See
"-- Government Regulations -- We Could Encounter Costly Environmental Problems"
below regarding the possibility of undisclosed environmental conditions
potentially affecting the value of our properties. Undisclosed material
liabilities in connection with the acquisition of properties, entities and
interests in properties, or entities could adversely affect our financial
condition, results of operations, cash flow, and ability to pay distributions
on, and the market price of, our stock.
CONFLICTS OF INTEREST
SOME OF OUR EXECUTIVE OFFICERS ARE INVOLVED IN OTHER REAL ESTATE ACTIVITIES AND
INVESTMENTS
Some of our executive officers own interests in real estate-related
businesses and investments. These interests include minority ownership of AMB
Institutional Housing Partners, a residential housing finance company, and
ownership of AMB Development, Inc. and AMB Development, L.P., developers that
own property not suitable for ownership by us. AMB Development, Inc. and AMB
Development, L.P. have agreed not to initiate any new development projects
following our initial public offering in November 1997. These entities have also
agreed that they will not make any further investments in industrial properties
other than those currently under development at the time of our initial public
offering. AMB Institutional Housing Partners, AMB Development, Inc., and AMB
Development, L.P. continue to use the name "AMB" pursuant to royalty-free
license arrangements. The continued involvement in other real estate-related
activities by some of our executive officers and directors could divert
management's attention from our day-to-day operations. Most of our executive
officers have entered into non-competition agreements with us pursuant to which
they have agreed not to engage in any activities, directly or indirectly, in
respect of commercial real estate, and not to make any investment in respect of
industrial real estate, other than through ownership of not more than 5% of the
outstanding shares of a public company engaged in such activities or through the
existing investments referred to in this report. State law may limit our ability
to enforce these agreements.
We could also, in the future, subject to the unanimous approval of the
disinterested members of the board of directors with respect to such
transaction, acquire property from executive officers, enter into leases with
executive officers, or engage in other related activities in which the interests
pursued by the executive officers may not be in the best interests of our
stockholders.
CERTAIN OF OUR EXECUTIVE OFFICERS AND DIRECTORS MAY HAVE CONFLICTS OF INTEREST
WITH US IN CONNECTION WITH OTHER PROPERTIES THAT THEY OWN OR CONTROL
As of September 30, 2000, AMB Development, L.P. owns interests in 10 retail
development projects in the U.S., eight of which are single free-standing
Walgreens drugstores and two are Walgreens drugstores plus shop buildings, which
are less than 10,000 feet. In addition, Messrs. Abbey, Moghadam, and Burke, each
a founder and director, own less than 1% interests in two partnerships that own
office buildings in various markets; these interests have negligible value. Luis
A. Belmonte, an executive officer, owns less than a 10% interest, representing
an estimated value of $150,000, in a limited partnership, which owns an office
building located in Oakland, California.
In addition, several of our executive officers individually own:
- less than 1% interests in the stocks of certain publicly-traded real
estate investment trusts;
- certain interests in and rights to developed and undeveloped real
property located outside the United States; and
- certain other de minimis holdings in equity securities of real estate
companies.
Thomas W. Tusher, a member of our board of directors, is a limited partner
in a partnership in which Messrs. Abbey, Moghadam, and Burke are general
partners and which owns a 75% interest in an office
36
building. Mr. Tusher owns a 20% interest in the partnership, valued at
approximately $1.2 million. Messrs. Abbey, Moghadam, and Burke each have a 26.7%
interest in the partnership, each valued at approximately $1.6 million.
We believe that the properties and activities set forth above generally do
not directly compete with any of our properties. However, it is possible that a
property in which an executive officer or director, or an affiliate of an
executive officer or director, has an interest may compete with us in the future
if we were to invest in a property similar in type and in close proximity to
that property. In addition, the continued involvement by our executive officers
and directors in these properties could divert management's attention from our
day-to-day operations. Our policy prohibits us from acquiring any properties
from our executive officers or their affiliates without the approval of the
disinterested members of our board of directors with respect to that
transaction.
OUR ROLE AS GENERAL PARTNER OF THE OPERATING PARTNERSHIP MAY CONFLICT WITH THE
INTERESTS OF STOCKHOLDERS
As the general partner of the operating partnership, we have fiduciary
obligations to the operating partnership's limited partners, the discharge of
which may conflict with the interests of our stockholders. In addition, those
persons holding limited partnership units will have the right to vote as a class
on certain amendments to the partnership agreement of the operating partnership
and individually to approve certain amendments that would adversely affect their
rights. The limited partners may exercise these voting rights in a manner that
conflicts with the interests of our stockholders. In addition, under the terms
of the operating partnership's partnership agreement, holders of limited
partnership units will have certain approval rights with respect to certain
transactions that affect all stockholders but which they may not exercise in a
manner that reflects the interests of all stockholders.
OUR DIRECTORS, EXECUTIVE OFFICERS, AND SIGNIFICANT STOCKHOLDERS COULD ACT IN A
MANNER THAT IS NOT IN THE BEST INTEREST OF ALL STOCKHOLDERS
As of October 24, 2000, our three largest stockholders, Cohen & Steers
Capital Management, Inc. (with respect to various client accounts for which
Cohen & Steers Capital Management, Inc. serves as investment advisor), Capital
Research and Management Company (with respect to various client accounts for
which Capital Research and Management Company serves as investment advisor), and
RREEF Real Estate Securities Advisors L.P. (with respect to various accounts for
which RREEF serves as investors advisor) beneficially owned approximately 15.2%
of our outstanding common stock. In addition, our executive officers and
directors beneficially owned approximately 5.4% of our outstanding common stock
as of October 24, 2000, and will have influence on our management and operation
and, as stockholders, will have influence on the outcome of any matters
submitted to a vote of our stockholders. This influence might be exercised in a
manner that is inconsistent with the interests of other stockholders. Although
there is no understanding or arrangement for these directors, officers, and
stockholders and their affiliates to act in concert, these parties would be in a
position to exercise significant influence over our affairs if they choose to do
so.
WE COULD INVEST IN REAL ESTATE MORTGAGES
We may invest in mortgages, and may do so as a strategy for ultimately
acquiring the underlying property. In general, investments in mortgages include
the risks that borrowers may not be able to make debt service payments or pay
principal when due, that the value of the mortgaged property may be less than
the principal amount of the mortgage note secured by the property and that
interest rates payable on the mortgages may be lower than our cost of funds to
acquire these mortgages. In any of these events, our funds from operations and
our ability to make distributions on, and the market price of, our stock could
be adversely affected.
GOVERNMENT REGULATIONS
Many laws and governmental regulations are applicable to our properties and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
37
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
Under the Americans with Disabilities Act, places of public accommodation
must meet certain federal requirements related to access and use by disabled
persons. Compliance with the Americans with Disabilities Act might require us to
remove structural barriers to handicapped access in certain public areas where
such removal is "readily achievable." If we fail to comply with the Americans
with Disabilities Act, then we might be required to pay fines to the government
or damages to private litigants. The impact of application of the Americans with
Disabilities Act to our properties, including the extent and timing of required
renovations, is uncertain. If we are required to make unanticipated expenditures
to comply with the Americans with Disabilities Act, then our cash flow and the
amounts available for distributions to our stockholders may be adversely
affected.
WE COULD ENCOUNTER ENVIRONMENTAL PROBLEMS
Federal, state, and local laws and regulations relating to the protection
of the environment impose liability on a current or previous owner or operator
of real estate for contamination resulting from the presence or discharge of
hazardous or toxic substances or petroleum products at the property. A current
or previous owner may be required to investigate and clean up contamination at
or migrating from a site. These laws typically impose liability and clean-up
responsibility without regard to whether the owner or operator knew of or caused
the presence of the contaminants. Even if more than one person may have been
responsible for the contamination, each person covered by the environmental laws
may be held responsible for all of the clean-up costs incurred. In addition,
third parties may sue the owner or operator of a site for damages based on
personal injury, property damage, or other costs, including investigation and
clean-up costs, resulting from environmental contamination present at or
emanating from that site.
Environmental laws also govern the presence, maintenance, and removal of
asbestos. These laws require that owners or operators of buildings containing
asbestos properly manage and maintain the asbestos, that they adequately inform
or train those who may come into contact with asbestos, and that they undertake
special precautions, including removal or other abatement in the event that
asbestos is disturbed during renovation or demolition of a building. These laws
may impose fines and penalties on building owners or operators for failure to
comply with these requirements and may allow third parties to seek recovery from
owners or operators for personal injury associated with exposure to asbestos
fibers. Some of our properties may contain asbestos-containing building
materials.
Some of our properties are leased or have been leased, in part, to owners
and operators of businesses that use, store, or otherwise handle petroleum
products or other hazardous or toxic substances. These operations create a
potential for the release of petroleum products or other hazardous or toxic
substances. Some of our properties are adjacent to or near other properties that
have contained or currently contain petroleum products or other hazardous or
toxic substances. In addition, certain of our properties are on, are adjacent
to, or are near other properties upon which others, including former owners or
tenants of the properties, have engaged or may in the future engage in
activities that may release petroleum products or other hazardous or toxic
substances. From time to time, we may acquire properties, or interests in
properties, with known adverse environmental conditions where we believe that
the environmental liabilities associated with these conditions are quantifiable
and the acquisition will yield a superior risk-adjusted return. We have formed a
limited liability company with AIG Global Real Estate Investment Corp. to
acquire, develop, manage, and operate environmentally impaired properties in
target markets nationwide. The operating partnership is the managing member of
this venture. AIG and the operating partnership each have committed $50 million
to this venture. This venture currently intends to invest primarily in
industrial properties located near major airports, ports, and in-fill areas with
known and quantifiable environmental issues, as well as, to a more limited
extent, other well-located, value-added properties. Environmental issues for
each property are evaluated and quantified prior to acquisition. The costs of
environmental investigation, clean-up, and monitoring are underwritten into the
cost of the acquisition and appropriate environmental insurance is obtained for
the property. In connection with certain divested properties, we have agreed to
remain responsible for, and to bear the cost of, remediating or monitoring
certain environmental conditions on the properties.
38
All of our properties were subject to a Phase I or similar environmental
assessments by independent environmental consultants at the time of acquisition.
Phase I assessments are intended to discover and evaluate information regarding
the environmental condition of the surveyed property and surrounding properties
and include an historical review, a public records review, an investigation of
the surveyed site and surrounding properties, and preparation and issuance of a
written report. We may perform additional Phase II testing if recommended by the
independent environmental consultant. Phase II testing may include the
collection and laboratory analysis of soil and groundwater samples, completion
of surveys for asbestos-containing building materials, and any other testing
that the consultant considers prudent in order to test for the presence of
hazardous materials.
None of the environmental assessments of our properties has revealed any
environmental liability that we believe would have a material adverse effect on
our financial condition or results of operations taken as a whole. Furthermore,
we are not aware of any such material environmental liability. Nonetheless, it
is possible that the assessments do not reveal all environmental liabilities and
that there are material environmental liabilities of which we are unaware or
that known environmental conditions may give rise to liabilities that are
materially greater than anticipated. Moreover, the current environmental
condition of our properties may be affected by tenants, the condition of land,
operations in the vicinity of the properties (such as releases from underground
storage tanks), or by third parties unrelated to us. If the costs of compliance
with 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 distributions on, and the market price of, our stock could be
adversely affected.
OUR FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED IF WE FAIL TO COMPLY WITH
OTHER REGULATIONS
Our properties are also subject to various federal, state, and local
regulatory requirements such as state and local fire and life safety
requirements. If we fail to comply with these requirements, then we might incur
fines by governmental authorities or be required to pay awards of damages to
private litigants. We believe that our properties are currently in substantial
compliance with all such regulatory requirements. However, these requirements
may change or new requirements may be imposed, which could require significant
unanticipated expenditures by us. Any such unanticipated expenditures could have
an adverse effect on our financial condition, results of operations, cash flow,
and ability to pay distributions on, and the market price of, our stock.
FEDERAL INCOME TAX RISKS
OUR FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST WOULD HAVE SERIOUS
ADVERSE CONSEQUENCES TO STOCKHOLDERS
We elected to be taxed as a real estate investment trust under Sections 856
through 860 of the Internal Revenue Code commencing with our taxable year ended
December 31, 1997. We currently intend to operate so as to qualify as a real
estate investment trust under the Internal Revenue Code and believe that our
current organization and method of operation comply with the rules and
regulations promulgated under the Internal Revenue Code to enable us to continue
to qualify as a real estate investment trust. However, it is possible that we
have been organized or have operated in a manner 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 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 95% of our real estate investment
trust taxable income (determined without regard to the dividends paid deduction
and by excluding capital gains) and must satisfy specified asset tests on a
quarterly basis. These provisions and the applicable treasury regulations are
more complicated in our case because we hold our assets in partnership form.
Legislation, new regulations, administrative interpretations, or court decisions
could significantly change the tax laws with
39
respect to qualification as a real estate investment trust or the federal income
tax consequences of such qualification. However, we are not aware of any pending
tax legislation that would adversely affect our ability to operate as a real
estate investment trust.
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 during 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 stockholders.
WE MAY INVEST IN HIGHLY SPECULATIVE EARLY-STAGE COMPANIES THAT MAY JEOPARDIZE
OUR STATUS AS A REAL ESTATE INVESTMENT TRUST
We believe that our investments in highly speculative early-stage companies
have been structured so that we currently qualify as a real estate investment
trust under the Internal Revenue Code. However, if the value of these
investments, either individually or in the aggregate, appreciates significantly,
then these investments may adversely affect our ability to continue to qualify
as a real estate investment trust, unless we are able to restructure or dispose
of our holdings on a timely basis. As of September 30, 2000, we had invested
approximately $24.0 million in early-stage companies. See "-- Our Failure to
Qualify as a Real Estate Investment Trust Would Have Serious Adverse
Consequences to Stockholders" and "-- We May Invest in Highly Speculative
Early-Stage Companies in which We May Lose Our Entire Investment."
WE PAY SOME TAXES
Even if we qualify as a real estate investment trust, we will be required
to pay certain state and local taxes on our income and property. In addition, we
will be required to pay federal and state income tax on the net taxable income,
if any, from the activities conducted through AMB Investment Management and
Headlands Realty Corporation (which we discuss below under "-- AMB Investment
Management and Headlands Realty Corporation").
CERTAIN PROPERTY TRANSFERS MAY GENERATE PROHIBITED TRANSACTION INCOME
From time to time, we may transfer or otherwise dispose of some of our
properties. Under the Internal Revenue Code, any gain resulting from transfers
of properties 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. We would be required to pay a 100% penalty tax on that income.
Since we acquire properties for investment purposes, we believe that any
transfer or disposal of property by us would not be deemed by the Internal
Revenue Service ("IRS") to be a prohibited transaction with any resulting gain
allocable to us being subject to a 100% penalty tax. However, whether property
is held for investment purposes is a question of fact that depends on all the
facts and circumstances surrounding the particular transaction. The IRS may
contend that certain transfers or disposals of properties by us are prohibited
transactions. While we believe that the IRS would not prevail in any such
dispute, if the IRS successfully argued 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 allocable to us from the prohibited transaction.
In addition, any income from a prohibited transaction may adversely affect our
ability to satisfy the income tests for qualifications as a real estate
investment trust for federal income tax purposes.
WE ARE DEPENDENT ON OUR KEY PERSONNEL
We depend on the efforts of our executive officers. While we believe that
we could find suitable replacements for these key personnel, the loss of their
services or the limitation of their availability could adversely affect our
financial condition, results of operations, cash flow, and ability to pay
distributions on, and the market price of, our stock. We do not have employment
agreements with any of our executive officers.
40
WE MAY BE UNABLE TO MANAGE OUR GROWTH
Our business has grown rapidly and continues to grow through property
acquisitions and developments. If we fail to effectively manage our growth, then
our financial condition, results of operations, cash flow, and ability to pay
distributions on, and the market price of, our stock could be adversely
affected.
WE MAY INVEST IN HIGHLY SPECULATIVE EARLY-STAGE COMPANIES IN WHICH WE MAY LOSE
OUR ENTIRE INVESTMENT
From time to time, we may invest in highly speculative early-stage
companies that we believe will enhance our understanding of changes occurring in
the movement of goods, which may, in turn, sharpen our real estate investment
focus, create real estate provider relationships with growth companies, and
provide the potential for significant returns on invested capital. Each of these
investments generally will be $10.0 million or less. As a result, we believe
that the amounts of our investments in early-stage companies are immaterial,
both individually and in the aggregate. However, these investments are highly
speculative and it is possible that we may lose our entire investment in an
early-stage company.
AMB INVESTMENT MANAGEMENT, INC. AND HEADLANDS REALTY CORPORATION
WE DO NOT CONTROL THE ACTIVITIES OF AMB INVESTMENT MANAGEMENT, INC. AND
HEADLANDS REALTY CORPORATION
The operating partnership owns 100% of the non-voting preferred stock of
AMB Investment Management, Inc. and Headlands Realty Corporation (representing
approximately 95% of the economic interest in each entity). Some of our current
and former executive officers and a former executive officer of AMB Investment
Management, Inc. own all of the outstanding voting common stock of AMB
Investment Management, Inc. (representing approximately 5% of the economic
interest in AMB Investment Management, Inc.). Some of our current and former
executive officers and a director of Headlands Realty Corporation own all of the
outstanding voting common stock of Headlands Realty Corporation (representing
approximately 5% of the economic interest in Headlands Realty Corporation). The
ownership structure of AMB Investment Management, Inc. and Headlands Realty
Corporation permits us to share in the income of those corporations while
allowing us to maintain our status as a real estate investment trust. We receive
substantially all of the economic benefit of the businesses carried on by AMB
Investment Management and Headlands Realty Corporation through the operating
partnership's right to receive dividends. However, we are not able to elect the
directors or officers of AMB Investment Management, Inc. and Headlands Realty
Corporation and, as a result, we do not have the ability to influence their
operation or to require that their boards of directors declare and pay cash
dividends on the non-voting stock of AMB Investment Management, Inc. and
Headlands Realty Corporation held by the operating partnership. The boards of
directors and management of AMB Investment Management, Inc. and Headlands Realty
Corporation might implement business policies or decisions that would not have
been implemented by persons controlled by us and that may be adverse to the
interests of our stockholders or that may adversely impact our financial
condition, results of operations, cash flow, and ability to pay distributions
on, and the market price of, our stock. In addition, AMB Investment Management,
Inc. and Headlands Realty Corporation are subject to tax on their income,
reducing their cash available for distribution to the operating partnership.
AMB INVESTMENT MANAGEMENT, INC. MAY NOT BE ABLE TO GENERATE SUFFICIENT FEES
Fees earned by AMB Investment Management, Inc. depend on various factors
affecting the ability to attract and retain investment management clients and
the overall returns achieved on managed assets. These factors are beyond our
control. AMB Investment Management, Inc.'s failure to attract investment
management clients or achieve sufficient overall returns on managed assets could
reduce its ability to make distributions on the stock owned by the operating
partnership and could also limit co-investment opportunities to the operating
partnership. This would limit the operating partnership's ability to generate
rental revenues from such co-investments and use the co-investment program as a
source to finance property acquisitions and leverage acquisition opportunities.
41
OWNERSHIP OF OUR STOCK
LIMITATIONS IN OUR CHARTER AND BYLAWS COULD PREVENT A CHANGE IN CONTROL
Certain provisions of our charter and bylaws may delay, defer, or prevent a
change in control or other transaction that could provide the holders of our
common stock with the opportunity to realize a premium over the then-prevailing
market price for the common stock. To maintain our qualification as a real
estate investment trust for federal income tax purposes, not more than 50% in
value of our outstanding stock may be owned, actually or constructively, by five
or fewer individuals (as defined in the Internal Revenue Code to include certain
entities) during the last half of a taxable year after the first taxable year
for which a real estate investment trust election is made. Furthermore, after
the first taxable year for which a real estate investment trust election is
made, our common stock must be held by a minimum of 100 persons for at least 335
days of a 12-month taxable year (or a proportionate part of a short tax year).
In addition, if we, or an owner of 10% or more of our stock, actually or
constructively owns 10% or more of one of our tenants (or a tenant of any
partnership in which we are a partner), 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 facilitate maintenance of our
qualification as a real estate investment trust for federal income tax purposes,
we will prohibit the ownership, actually or by virtue of the constructive
ownership provisions of the Internal Revenue Code, by any single person of more
than 9.8% (by value or number of shares, whichever is more restrictive) of the
issued and outstanding shares of our common stock and more than 9.8% (by value
or number of shares, whichever is more restrictive) of the issued and
outstanding shares of our Series A Preferred Stock, and we will also prohibit
the ownership, actually or constructively, of any shares of our other preferred
stock by any single person so that no such person, taking into account all of
our stock so owned by such person, may own in excess of 9.8% of our issued and
outstanding capital stock. We refer to this limitation as the "ownership limit."
Shares acquired or held in violation of the ownership limit will be transferred
to a trust for the benefit of a designated charitable beneficiary. Any person
who acquires shares in violation of the ownership limit will not be entitled to
any distributions on the shares or be entitled to vote the shares or receive any
proceeds from the subsequent sale of the shares in excess of the lesser of the
price paid for the shares or the amount realized from the sale. A transfer of
shares in violation of the above limits may be void under certain circumstances.
The ownership limit may have the effect of delaying, deferring, or preventing a
change in control and, therefore, could adversely affect our stockholders'
ability to realize a premium over the then-prevailing market price for the
shares of our common stock in connection with such transaction.
Our charter authorizes us to issue additional shares of common stock and
Series A Preferred Stock and to issue Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock, Series H Preferred Stock, and one or
more other series or classes of preferred stock and to establish the
preferences, rights, and other terms of any series or class of preferred stock
that we issue. Although our board of directors has no intention to do so at the
present time, it could establish a series or class of preferred stock that could
delay, defer, or prevent a transaction or a change in control that might involve
a premium price for the common stock or otherwise be in the best interests of
our stockholders.
Our charter and bylaws and Maryland law also contain other provisions that
may delay, defer, or prevent a transaction, including a change in control, that
might involve payment of a premium price for the common stock or otherwise be in
the best interests of our stockholders. Those provisions include the following:
- the provision in the charter that directors may be removed only for cause
and only upon a two-thirds vote of stockholders, together with bylaw
provisions authorizing the board of directors to fill vacant
directorships;
- the provision in the charter requiring a two-thirds vote of stockholders
for any amendment of the charter;
- the requirement in the bylaws that the request of the holders of 50% or
more of our common stock is necessary for stockholders to call a special
meeting;
42
- the requirement of Maryland law that stockholders may only take action by
written consent with the unanimous approval of all stockholders entitled
to vote on the matter in question; and
- the requirement in the bylaws of advance notice by stockholders for the
nomination of directors or proposal of business to be considered at a
meeting of stockholders.
These provisions may impede various actions by stockholders without
approval of our board of directors, which in turn may delay, defer or prevent a
transaction involving a change of control.
WE COULD CHANGE OUR INVESTMENT AND FINANCING POLICIES WITHOUT A VOTE OF
STOCKHOLDERS
Subject to our current investment policy to maintain our qualification as a
real estate investment trust (unless a change is approved by our board of
directors under certain circumstances), our board of directors will determine
our investment and financing policies, our growth strategy and our debt,
capitalization, distribution, and operating policies. Although the board of
directors has no present intention to revise or amend these strategies and
policies, the board of directors may do so at any time without a vote of
stockholders. Accordingly, stockholders will have no control over changes in our
strategies and policies (other than through the election of directors), and any
such changes may not serve the interests of all stockholders and could adversely
affect our financial condition or results of operations, including our ability
to distribute cash to stockholders.
IF WE ISSUE ADDITIONAL SECURITIES, THEN THE INVESTMENT OF EXISTING STOCKHOLDERS
WILL BE DILUTED
We have authority to issue shares of common stock or other equity or debt
securities in exchange for property or otherwise. Similarly, we may cause the
operating partnership to issue additional limited partnership units in exchange
for property or otherwise. Existing stockholders will have no preemptive right
to acquire any additional securities issued by us or the operating partnership
and any issuance of additional equity securities could result in dilution of an
existing stockholder's investment.
THE LARGE NUMBER OF SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK
We cannot predict the effect, if any, that future sales of shares of our
common stock, or the availability of shares of our common stock for future sale,
will have on its market price. Sales of a substantial number of shares of our
common stock in the public market (or upon exchange of limited partnership units
in the operating partnership) or the perception that such sales (or exchanges)
might occur could adversely affect the market price of our common stock.
All shares of common stock issuable upon the redemption of limited
partnership units in the operating partnership will be deemed to be "restricted
securities" within the meaning of Rule 144 under the Securities Act and may not
be transferred unless registered under the Securities Act or an exemption from
registration is available, including any exemption from registration provided
under Rule 144. In general, upon satisfaction of certain conditions, Rule 144
permits the holder to sell certain amounts of restricted securities one year
following the date of acquisition of the restricted securities from us and,
after two years, permits unlimited sales by persons unaffiliated with us. On
November 26, 1999, 74,710,153 shares of common stock issued in our formation
transactions became eligible for sale pursuant to Rule 144(k). Commencing
generally on the first anniversary of the date of acquisition of common limited
partnership units (or such other date agreed to by the operating partnership and
the holders of the units), the operating partnership may redeem common limited
partnership units at the request of the holders for cash (based on the fair
market value of an equivalent number of shares of common stock at the time of
redemption) or, at our option, exchange the common limited partnership units for
an equal number of shares of our common stock, subject to certain antidilution
adjustments. The operating partnership had issued and outstanding 5,767,192
common limited partnership units as of September 30, 2000. As of September 30,
2000, we had reserved 8,537,368 shares of common stock for issuance under our
Stock Option and Incentive Plan (not including shares that we have already
issued) and, as of September 30, 2000, we had granted to certain directors,
officers and employees options to purchase 5,655,552 shares of common stock
(excluding forfeitures and 107,227 shares that we have issued pursuant to
43
the exercise of options). As of September 30, 2000, we had granted 305,395
restricted shares of common stock, 1,633 of which have been forfeited. In
addition, we may issue additional shares of common stock and the operating
partnership may issue additional limited partnership units in connection with
the acquisition of properties. In connection with the issuance of common limited
partnership units to other transferors of properties, and in connection with the
issuance of the performance units, we have agreed to file registration
statements covering the issuance of shares of common stock upon the exchange of
the common limited partnership units. We have also filed a registration
statement with respect to the shares of common stock issuable under our Stock
Option and Incentive Plan. These registration statements and registration rights
generally allow shares of common stock covered thereby, including shares of
common stock issuable upon exchange of limited partnership units, including
performance units, or the exercise of options or restricted shares of common
stock, to be transferred or resold without restriction under the Securities Act.
We may also agree to provide registration rights to any other person who may
become an owner of the operating partnership's limited partnership units.
Future sales of the shares of common stock described above could adversely
affect the market price of our common stock. The existence of the operating
partnership's limited partnership units, options, and shares of common stock
reserved for issuance upon exchange of limited partnership units, and the
exercise of options and registration rights referred to above, also may
adversely affect the terms upon which we are able to obtain additional capital
through the sale of equity securities.
VARIOUS MARKET CONDITIONS AFFECT THE PRICE OF OUR STOCK
As with other publicly-traded equity securities, the market price of our
stock will depend upon various market conditions, which may change from time to
time. Among the market conditions that may affect the market price of our stock
are the following:
- the extent of investor interest in us;
- the general reputation of real estate investment trusts and the
attractiveness of their equity securities in comparison to other equity
securities (including securities issued by other real estate-based
companies);
- our financial performance; and
- general stock and bond market conditions, including changes in interest
rates on fixed income securities, that may lead prospective purchasers of
our stock to demand a higher annual yield from future distributions. Such
an increase in the required yield from distributions may adversely affect
the market price of our stock.
Other factors such as governmental regulatory action and changes in tax
laws could also have a significant impact on the future market price of our
stock.
EARNINGS AND CASH DISTRIBUTIONS, ASSET VALUE, AND MARKET INTEREST RATES AFFECT
THE PRICE OF OUR STOCK
The market value of the equity securities of a real estate investment trust
generally is based primarily upon the market's perception of the real estate
investment trust's growth potential and its current and potential future
earnings and cash distributions. It is based secondarily upon the real estate
market value of the underlying assets. For that reason, shares of our stock may
trade at prices that are higher or lower than the net asset value per share. To
the extent 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 expectation with regard to
future earnings and cash distributions likely would adversely affect the market
price of our stock. Another factor that may influence the price of our stock
will be the distribution yield on the stock (as a percentage of the price of the
stock) relative to market interest rates. An increase in market interest rates
might lead prospective purchasers of our stock to expect a higher distribution
yield, which would adversely affect the market price of the stock. If the market
price of our stock declines significantly, then we might breach certain
covenants with respect to debt obligations, which might adversely affect our
liquidity and ability to make future acquisitions and our ability to pay
distributions to our stockholders.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1 Distribution Agreement dated August 15, 2000, by and among
AMB Property, L.P., AMB Property Corporation, Morgan Stanley
& Co. Incorporated, Banc of America Securities LLC, Banc One
Capital Markets, Inc., Chase Securities Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities
Inc., and Salomon Smith Barney Inc. (incorporated by
reference to Exhibit 1.1 of the Registrant's Current Report
on Form 8-K filed on August 16, 2000)
3.1 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 the Registrant's Current Report on Form 8-K filed on
September 29, 2000)
3.2 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 the Registrant's Current Report on Form 8-K filed on
September 29, 2000)
4.1 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 the Registrant's Current
Report on Form 8-K filed on August 16, 2000)
4.2 Form of Fixed Rate Medium-Term Note, attaching the Form of
Parent Guarantee. (incorporated by reference to Exhibit 4.2
of the Registrant's Current Report on Form 8-K filed on
August 16, 2000)
4.3 Form of Floating Rate Medium-Term Note, attaching the Form
of Parent Guarantee. (incorporated by reference to Exhibit
4.3 of the Registrant's Current Report on Form 8-K filed on
August 16, 2000)
10.1 Fourth Amended and Restated Agreement of Limited Partnership
of AMB Property, L.P. (incorporated by reference to Exhibit
10.1 of the Registrant's Current Report on Form 8-K filed on
August 15, 2000)
10.2 Eighth Amended and Restated Agreement of Limited Partnership
of AMB Property II, L.P., dated September 1, 2000.
(incorporated by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K filed on September
29, 2000)
10.3 Registration Rights Agreement among AMB Property
Corporation, AMB Property II, L.P., and the unit holders
signatory thereto dated August 29, 2000. (incorporated by
reference to Exhibit 3.2 of the Registrant's Current Report
on Form 8-K filed on September 29, 2000)
10.4 Registration Rights Agreement among AMB Property
Corporation, AMB Property II, L.P., and the unit holders
signatory thereto dated September 1, 2000. (incorporated by
reference to Exhibit 3.4 of the Registrant's Current Report
on Form 8-K filed on September 29, 2000)
27.1 Financial Data Schedule -- AMB Property Corporation.
(b) Reports on Form 8-K:
- The Registrant filed a Current Report on Form 8-K on August 15, 2000, in
connection with the Fourth Amended and Restated Agreement of Limited
Partnership of AMB Property, L.P.
- The Registrant filed a Current Report on Form 8-K on August 16, 2000, in
connection with the commencement of AMB Property, L.P.'s medium term note
program.
45
- The Registrant filed a Current Report on Form 8-K on August 23, 2000, in
connection with the pricing by AMB Property, L.P. of $30 million of
senior unsecured notes under its medium-term note program that it
commenced on August 15, 2000.
- The Registrant filed a Current Report on Form 8-K on August 23, 2000, in
connection with its prospectus for AMB Property, L.P.'s $400 million
medium-term note program.
- The Registrant filed a Current Report on Form 8-K on September 15, 2000,
in connection with its issuance of $25 million of senior unsecured notes
by AMB Property L.P. under its medium-term note program.
- The Registrant filed a Current Report on Form 8-K on September 29, 2000,
in connection with the Series G and Series H Cumulative Redeemable
Preferred Limited Partnership Unit issuances by AMB Property II, L.P.
- The Registrant filed a Current Report on Form 8-K on November 2, 2000, in
connection with its issuance of $75 million of senior unsecured notes by
AMB Property L.P. under its medium-term note program.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMB PROPERTY CORPORATION
Registrant
Date: November 7, 2000
By: /s/ MICHAEL A. COKE
------------------------------------
Michael A. Coke
Chief Financial Officer and
Executive Vice President
(Duly Authorized Officer and
Principal
Financial and Accounting Officer)
47
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1 Distribution Agreement dated August 15, 2000, by and among
AMB Property, L.P., AMB Property Corporation, Morgan Stanley
& Co. Incorporated, Banc of America Securities LLC, Banc One
Capital Markets, Inc., Chase Securities Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities
Inc., and Salomon Smith Barney Inc. (incorporated by
reference to Exhibit 1.1 of the Registrant's Current Report
on Form 8-K filed on August 16, 2000)
3.1 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 the Registrant's Current Report on Form 8-K filed on
September 29, 2000)
3.2 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 the Registrant's Current Report on Form 8-K filed on
September 29, 2000)
4.1 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 the Registrant's Current
Report on Form 8-K filed on August 16, 2000)
4.2 Form of Fixed Rate Medium-Term Note, attaching the Form of
Parent Guarantee. (incorporated by reference to Exhibit 4.2
of the Registrant's Current Report on Form 8-K filed on
August 16, 2000)
4.3 Form of Floating Rate Medium-Term Note, attaching the Form
of Parent Guarantee. (incorporated by reference to Exhibit
4.3 of the Registrant's Current Report on Form 8-K filed on
August 16, 2000)
10.1 Fourth Amended and Restated Agreement of Limited Partnership
of AMB Property, L.P. (incorporated by reference to Exhibit
10.1 of the Registrant's Current Report on Form 8-K filed on
August 15, 2000)
10.2 Eighth Amended and Restated Agreement of Limited Partnership
of AMB Property II, L.P., dated September 1, 2000.
(incorporated by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K filed on September
29, 2000)
10.3 Registration Rights Agreement among AMB Property
Corporation, AMB Property II, L.P., and the unit holders
signatory thereto dated August 29, 2000. (incorporated by
reference to Exhibit 3.2 of the Registrant's Current Report
on Form 8-K filed on September 29, 2000)
10.4 Registration Rights Agreement among AMB Property
Corporation, AMB Property II, L.P., and the unit holders
signatory thereto dated September 1, 2000. (incorporated by
reference to Exhibit 3.4 of the Registrant's Current Report
on Form 8-K filed on September 29, 2000)
27.1 Financial Data Schedule -- AMB Property Corporation.