- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 MARCH 31, 2001
OR
[ ] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
COMMISSION FILE NUMBER: 001-13545
AMB PROPERTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 94-3281941
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
PIER 1, BAY 1, 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 April 23, 2001, there were 84,978,486 shares of the Registrant's
common stock, $0.01 par value per share, outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AMB PROPERTY CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 2001, and
December 31, 2000........................................... 1
Consolidated Statements of Operations for the three months
ended March 31, 2001 and 2000............................... 2
Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and 2000............................... 3
Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 2001................................. 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 28
Item 2. Changes in Securities and Use of Proceeds................... 28
Item 3. Defaults Upon Senior Securities............................. 28
Item 4. Submission of Matters to a Vote of Security Holders......... 28
Item 5. Other Information........................................... 28
Item 6. Exhibits and Reports on Form 8-K............................ 43
i
PART I
ITEM 1. FINANCIAL STATEMENTS
AMB PROPERTY CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2001 AND DECEMBER 31, 2000
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
MARCH 31, DECEMBER 31,
2001 2000
---------- ------------
Investments in real estate:
Land and improvements..................................... $ 840,691 $ 833,325
Buildings and improvements................................ 2,989,110 2,915,537
Construction in progress.................................. 254,998 277,735
---------- ----------
Total investments in properties................... 4,084,799 4,026,597
Accumulated depreciation and amortization................. (202,188) (177,467)
---------- ----------
Net investments in properties.......................... 3,882,611 3,849,130
Investments in unconsolidated joint ventures................ 85,317 80,432
Properties held for divestiture, net........................ 236,746 197,146
---------- ----------
Net investments in real estate......................... 4,204,674 4,126,708
Cash and cash equivalents................................... 98,627 20,358
Restricted cash and cash equivalents........................ 53,597 22,364
Mortgage receivables........................................ 121,297 115,969
Accounts receivable, net.................................... 67,482 69,874
Investments in affiliated companies......................... 47,285 35,731
Investments in other companies, net......................... 15,343 15,965
Other assets................................................ 29,839 18,657
---------- ----------
Total assets...................................... $4,638,144 $4,425,626
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Secured debt.............................................. $1,014,054 $ 940,276
Unsecured senior debt securities.......................... 755,000 680,000
Unsecured credit facility................................. 94,000 216,000
---------- ----------
Total debt........................................ 1,863,054 1,836,276
Other liabilities........................................... 177,915 147,042
---------- ----------
Total liabilities................................. 2,040,969 1,983,318
Commitments and contingencies (note 12)
Minority interests.......................................... 800,283 674,378
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, 84,978,486 and 84,138,751 issued and
outstanding............................................ 850 841
Additional paid-in capital................................ 1,655,128 1,638,655
Retained earnings......................................... 44,814 36,066
Accumulated other comprehensive income.................... -- (3,732)
---------- ----------
Total stockholders' equity........................ 1,796,892 1,767,930
---------- ----------
Total liabilities and stockholders' equity........ $4,638,144 $4,425,626
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
1
AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2000
----------- -----------
REVENUES
Rental revenues............................................. $ 135,801 $ 108,266
Equity in earnings of unconsolidated joint ventures......... 1,474 1,242
Investment management income................................ 2,420 396
Interest and other income................................... 5,139 419
----------- -----------
Total revenues.................................... 144,834 110,323
OPERATING EXPENSES
Property operating expenses................................. 16,339 11,477
Real estate taxes........................................... 16,581 13,496
Interest, including amortization............................ 31,552 20,342
Depreciation and amortization............................... 26,854 19,192
General and administrative.................................. 8,183 5,351
Loss on investments in other companies...................... 4,655 --
----------- -----------
Total operating expenses.......................... 104,164 69,858
----------- -----------
Income from operations before minority interests.......... 40,670 40,465
Minority interests' share of net income..................... (12,997) (9,409)
----------- -----------
Net income before gain/(loss) from divestiture of real
estate................................................. 27,673 31,056
Gain/(loss) from divestitures of real estate................ 16,767 (11)
----------- -----------
Net income................................................ 44,440 31,045
Series A preferred stock dividends.......................... (2,125) (2,125)
----------- -----------
Net income available to common stockholders............... $ 42,315 $ 28,920
=========== ===========
NET INCOME PER COMMON SHARE
Basic..................................................... $ 0.50 $ 0.34
=========== ===========
Diluted................................................... $ 0.50 $ 0.34
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic..................................................... 83,895,993 83,849,157
=========== ===========
Diluted................................................... 84,720,917 83,863,198
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED, DOLLARS IN THOUSANDS)
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
2001 2000
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 44,440 $ 31,045
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 26,854 19,192
Loss on investments in other companies.................... 4,655 --
Straight-line rents....................................... (1,325) (3,160)
Amortization of debt premiums and financing costs......... 451 (1,337)
Minority interests' share of net income................... 12,997 9,409
(Gain)/loss on divestitures of real estate................ (16,767) 11
Equity in (earnings)/losses of AMB Investment
Management............................................. (149) 5
Equity in earnings of unconsolidated joint ventures....... (1,474) (1,242)
Changes in assets and liabilities:
Other assets.............................................. (24,005) (17,487)
Other liabilities......................................... 30,874 8,328
--------- --------
Net cash provided by operating activities......... 76,551 44,764
CASH FLOWS FROM INVESTING ACTIVITIES
Change in restricted cash and cash equivalents.............. (61,528) 41,275
Cash paid for property acquisitions......................... (93,414) (34,460)
Additions to land, building, development costs and other
first generation improvements............................. (22,873) (65,660)
Additions to second generation building improvements and
lease costs............................................... (7,426) (6,991)
Additions to interest in unconsolidated joint ventures...... (4,584) (847)
Distributions received from unconsolidated joint ventures... 1,173 1,032
Net proceeds from divestitures of real estate............... 30,295 12,351
--------- --------
Net cash used in investing activities............. (158,357) (53,300)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock.................................... 1,020 269
Borrowings on unsecured credit facility..................... 119,000 22,000
Borrowings on secured debt.................................. 81,074 60,624
Payments on unsecured credit facility....................... (241,000) (62,000)
Payments on Alliance Fund I credit facility................. -- (27,000)
Payments on secured debt.................................... (6,092) (2,912)
Payment of financing fees................................... (624) --
Net proceeds from issuance of unsecured senior debt
securities................................................ 74,563 --
Net proceeds from issuance of preferred units............... 24,863 19,581
Contributions from investors in AMB Partners II............. 50,000 --
Contributions from investors in AMB-SGP..................... 75,000 --
Contributions from investors in the Alliance Fund I......... -- 1,381
Dividends paid to common and preferred stockholders......... (2,125) (2,125)
Distributions to minority interests, including preferred
units..................................................... (15,604) (7,932)
--------- --------
Net cash provided by financing activities......... 160,075 1,886
--------- --------
Net increase (decrease) in cash and cash equivalents........ 78,269 (6,650)
Cash and cash equivalents at beginning of period............ 20,358 33,312
--------- --------
Cash and cash equivalents at end of period.................. $ 98,627 $ 26,662
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest, net of capitalized interest......... $ 35,033 $ 12,850
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(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, 2000.... $96,100 84,138,751 $841 $1,638,655 $ 36,066 $(3,732) $1,767,930
Comprehensive income:
Net income.................... 2,125 -- -- -- 42,315 --
Realized loss on securities... -- -- -- -- -- 3,732
Total comprehensive
income............... 48,172
Issuance of restricted stock,
net........................... -- 196,517 2 4,834 -- -- 4,836
Exercise of stock options....... -- 44,921 1 1,019 -- -- 1,020
Conversion of Operating
Partnership units............. -- 598,297 6 14,368 -- -- 14,374
Deferred compensation........... -- -- -- (4,834) -- -- (4,834)
Deferred compensation
amortization.................. -- -- -- 304 -- -- 304
Reallocation of limited
partners' interests in the
Operating Partnership and
other......................... -- -- -- 782 -- -- 782
Dividends....................... (2,125) -- -- -- (33,567) -- (35,692)
------- ---------- ---- ---------- -------- ------- ----------
BALANCE AT MARCH 31, 2001....... $96,100 84,978,486 $850 $1,655,128 $ 44,814 $ $1,796,892
======= ========== ==== ========== ======== ======= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(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 March 31, 2001, the Company owned an approximate 94.2% general
partner interest in the Operating Partnership, excluding preferred units. The
remaining 5.8% 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 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 March 31, 2001, the
Company had investments in four co-investment joint ventures, 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
conducts a variety of businesses that include incremental income programs, such
as the Company's Customer Assist Program and, to a limited extent, development
projects available for sale to third parties. The Operating Partnership accounts
for its investments in AMB Investment Management and Headlands Realty
Corporation using the equity method of accounting.
As of March 31, 2001, the Company owned 859 industrial buildings and eight
retail centers, located in 27 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, Southern California, Miami, and Seattle. As of March 31, 2001, the
industrial buildings, principally warehouse distribution buildings, encompassed
approximately 77.4 million
5
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
rentable square feet and were 96.0% leased to over 2,787 tenants. As of March
31, 2001, the retail centers, principally grocer-anchored community shopping
centers, encompassed approximately 1.3 million rentable square feet and were
86.5% leased to over 170 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 accounting principles
generally accepted in the Unites States 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 months ended March 31, 2001 and 2000, 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, 2000.
Investments in other companies are accounted for on a cost basis and
realized gains and losses are included in current earnings. For its investments
in public companies, the Company calculates the fair market value using the
closing price on the balance sheet date and any unrealized gains or losses due
to temporary impairment are included in equity, not in current earnings. For its
investments in private companies, the Company periodically reviews its
investments and management determines if the value of such investments have been
permanently impaired. Permanent impairment losses for investments in public and
private companies are included in current earnings. During the first quarter of
2001, the Company recognized a realized loss on its investment in Webvan Group,
Inc. The Company had previously recognized gains and losses on its investment in
Webvan Group, Inc. as a component of other comprehensive income.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 first quarter of 2001, the Company invested $93.4 million in
operating properties, consisting of 14 industrial buildings aggregating
approximately 1.8 million square feet, which included the investment of $42.5
million in operating properties, consisting of eight industrial buildings
aggregating approximately 0.9 million square feet for two of the Company's joint
ventures.
During the first quarter of 2001, the Company also contributed $427.3
million in operating properties, consisting of 94 industrial buildings
aggregating approximately 8.8 million square feet, to two of its co-investment
joint ventures. The Company recognized a gain of $16.8 million on the
contributions.
The Company also initiated one new development project during the first
quarter, which will aggregate approximately 0.1 million square feet and have a
total estimated cost of $4.9 million upon completion. As of March 31, 2001, the
Company had 19 industrial projects, which will total approximately 5.2 million
square feet and have an aggregate estimated investment of $290.8 million upon
completion, in its development pipeline. It also had three retail projects,
which will total approximately 0.5 million square feet and have an
6
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
aggregate estimated investment of $77.6 million upon completion, in its
development pipeline. As of March 31, 2001, the Company and its Development
Alliance Partners have funded an aggregate of $222.0 million and will need to
fund an estimated additional $146.4 million in order to complete projects
currently under construction.
As of March 31, 2001, the Company also had two industrial projects, which
will total approximately 1.1 million square feet upon completion, in its
development pipeline. These two development projects are recorded under the
equity method for financial reporting purposes.
4. PROPERTY DIVESTITURES AND PROPERTIES HELD FOR DIVESTITURE
Property Divestitures. During the quarter, the Company divested itself of
six industrial buildings located in Illinois and Maryland, aggregating
approximately 0.6 million square feet, for an aggregate price of $31.5 million,
with a resulting net loss of $0.1 million.
Properties Held for Divestiture. The Company has decided to divest itself
of two retail centers and 27 industrial buildings, which are not in its core
markets or which do not meet its strategic objectives. The divestitures of the
properties are subject to negotiation of acceptable terms and other customary
conditions. As of March 31, 2001, the net carrying value of the properties held
for divestiture was $236.7 million.
The following summarizes the condensed results of operations of the
properties held for divestiture (dollars in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
------- -------
PROPERTIES HELD FOR DIVESTITURE
Income...................................................... $7,133 $6,485
Property operating expenses................................. 1,791 1,503
------ ------
Net operating income................................... $5,342 $4,982
====== ======
5. MORTGAGE RECEIVABLES
In September 2000, the Company sold a retail center located in Los Angeles,
California. The Company carries an 8.75% mortgage note in the principal amount
of $79.0 million on the retail center. The mortgage note matures in September
2001 and has a one-year extension option.
The Company also holds a mortgage loan receivable on AMB Pier One, LLC, an
unconsolidated joint venture. The note bears interest at 11.0% and matures in
November 2001. As of March 31, 2001, the outstanding balance on the note was
$42.3 million.
7
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
6. DEBT
As of March 31, 2001, and December 31, 2000, debt consisted of the
following (dollars in thousands):
MARCH 31, DECEMBER 31,
2001 2000
---------- ------------
Secured debt, varying interest rates from 4.0% to 10.4% due
November 2001 to June 2023............................... $1,004,798 $ 930,418
Unsecured senior debt securities, weighted average interest
rate of 7.3% due June 2005 to June 2018.................. 755,000 680,000
Unsecured credit facility, variable interest at LIBOR plus
75 basis points (weighted average interest rate of 6.0%
at March 31, 2001) due May 2003.......................... 94,000 216,000
---------- ----------
Subtotal................................................. 1,853,798 1,826,418
Unamortized premiums..................................... 9,256 9,858
---------- ----------
Total consolidated debt.......................... $1,863,054 $1,836,276
========== ==========
Secured debt generally requires monthly principal and interest payments.
The secured debt is secured by deeds of trust on certain properties. As of March
31, 2001, 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 $30.8 million, which
bear interest at variable rates (with a weighted average interest rate of 6.7%
at March 31, 2001). The secured debt has various financial and non-financial
covenants. Management believes that the Company was in material compliance with
these covenants at March 31, 2001. Additionally, certain secured debt is
cross-collateralized.
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 March 31,
2001.
In August 2000, the Operating Partnership commenced a medium-term note
program for the possible issuance of up to $400.0 million in principal amount of
medium-term notes, which will be guaranteed by the Company. In January 2001, the
Operating Partnership issued and sold $25.0 million of the notes under this
program to A.G. Edwards & Sons, Inc., as principal. The Company has guaranteed
the notes, which mature on January 30, 2006, and bear interest at 6.90% per
annum. The Operating Partnership used the net proceeds of $24.9 million for
general corporate purposes, to partially repay indebtedness, and for the
acquisition and development of additional properties. In March 2001, the
Operating Partnership issued and sold $50.0 million of the notes under this
program to First Union Securities, Inc., as principal. The Company has
guaranteed the notes, which mature on March 7, 2011, and bear interest at 7.00%
per annum. The Operating Partnership used the net proceeds of $49.7 million for
general corporate purposes, to partially repay indebtedness, and for the
acquisition and development of additional properties.
In May 2000, the Operating Partnership entered into a $500.0 million
unsecured revolving credit agreement. The Company is a guarantor of the
Operating Partnership's obligations under the credit facility. The 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 March
31, 2001. The Operating Partnership has the ability to increase available
borrowings up to $700.0 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
8
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
governing the credit facility. At March 31, 2001, the remaining amount available
under the credit facility was $406.0 million (excluding the additional $200.0
million of potential additional capacity).
Capitalized interest related to construction projects for the three months
ended March 31, 2001 and 2000, was $3.6 million and $3.0 million, respectively.
The scheduled maturities of the Company's total debt, excluding unamortized
debt premiums, as of March 31, 2001, were (dollars in thousands):
UNSECURED
JOINT SENIOR UNSECURED
SECURED VENTURE DEBT CREDIT
DEBT DEBT SECURITIES FACILITY TOTAL
-------- -------- ---------- --------- ----------
2001............................... $ 9,451 $ 34,116 $ -- $ -- $ 43,567
2002............................... 29,148 47,590 -- -- 76,738
2003............................... 72,638 8,380 -- 94,000 175,018
2004............................... 71,106 21,925 -- -- 93,031
2005............................... 64,250 31,698 250,000 -- 345,948
2006............................... 114,803 35,385 25,000 -- 175,188
2007............................... 32,181 21,567 55,000 -- 108,748
2008............................... 33,604 111,013 175,000 -- 319,617
2009............................... 5,176 28,182 -- -- 33,358
2010............................... 52,780 67,818 75,000 -- 195,598
2011............................... 1,311 83,751 50,000 -- 135,062
Thereafter......................... 3,307 23,618 125,000 -- 151,925
-------- -------- -------- ------- ----------
$489,755 $515,043 $755,000 $94,000 $1,853,798
======== ======== ======== ======= ==========
7. 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 in several real estate joint ventures, aggregating approximately 25.3
million square feet, which 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 March 31, 2001, approximately 21% of the partnership
interests in AMB Institutional Alliance Fund I, L.P. ("Alliance Fund I"). The
Alliance Fund I is a co-investment partnership between the Operating Partnership
and AMB Institutional Alliance REIT I, Inc. ("Alliance REIT 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 March 31,
2001, 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.
On February 14, 2001, the Company formed a partnership, AMB Partners II,
L.P. ("Partners II") with the City and County of San Francisco Employees'
Retirement System ("CCSFERS") to acquire, manage, develop, and redevelop
distribution facilities nationwide. As of March 31, 2001, AMB Partners II had
received
9
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
an equity contribution from CCSFERS of $50.0 million, which, when combined with
anticipated debt financings and the Company's investment, created a total
planned capitalization of $250.0 million.
On March 26, 2001, the Company formed a joint venture, AMB-SGP, L.P.
("AMB-SGP"), with a subsidiary of GIC Real Estate Pte Ltd., the real estate
investment subsidiary of the Government of Singapore Investment Corporation
("GIC"), to own and operate, through a private REIT, distribution facilities
nationwide. As of March 31, 2001, AMB-SGP had received an equity contribution
from GIC of $75.0 million, which, when combined with anticipated debt financings
and the Company's investment, created a total planned capitalization of $335.0
million.
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
LIABILITY AS OF ENDED
MARCH 31, 2001 MARCH 31, 2001
----------------- -------------------
Joint venture partners............................... $ 21,965 $ 922
Separate account co-investors........................ 158,804 1,440
Alliance REIT I's interest in Alliance Fund I........ 172,550 2,002
Limited Partners in the Operating Partnership........ 104,053 1,775
Series B preferred units (liquidation preference of
$65,000)........................................... 62,319 1,402
Series C preferred units (liquidation preference of
$110,000).......................................... 105,844 2,406
Series D preferred units (liquidation preference of
$79,767)........................................... 77,686 1,545
Series E preferred units (liquidation preference of
$11,022)........................................... 10,790 214
Series F preferred units (liquidation preference of
$19,872)........................................... 19,534 395
Series G preferred units (liquidation preference of
$1,000)............................................ 952 20
Series H preferred units (liquidation preference of
$42,000)........................................... 40,923 853
Series I preferred units (liquidation preference of
$25,500)........................................... 24,863 23
-------- -------
Total...................................... $800,283 $12,997
======== =======
8. INVESTMENTS 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 owns an aggregate of 36 industrial
buildings totaling approximately 4.0 million square feet. The Company also has a
50% interest in each of two other operating and development alliance joint
ventures. For the three months ended March 31, 2001 and 2000, the Company's
share of net operating income was $2.3 million and $2.0 million, respectively,
and, as of March 31, 2001, the Company's share of the unconsolidated joint
ventures' debt was $30.1 million, with a weighted average interest rate of 6.6%
and a weighted average maturity of 4.1 years.
9. STOCKHOLDERS' EQUITY
On March 21, 2001, AMB Property II, L.P., one of the Company's
subsidiaries, issued and sold 510,000 8.00% Series I 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 $4.00 per annum. The Series I
Preferred Units are redeemable by AMB Property II, L.P. on or after March 21,
2006, subject to certain conditions, for cash at a redemption price equal to
$50.00
10
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
per unit, plus accumulated and unpaid distributions thereon, if any, to the
redemption date. The Series I 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 I Preferred Stock. AMB Property II, L.P. used the net
proceeds of $24.9 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.
During the first quarter of 2001, the Company redeemed 598,297 limited
partnership units of the Operating Partnership for shares of its common stock.
The Company's board of directors has approved a stock repurchase program
for the repurchase of up to $100.0 million worth of common stock. During the
quarter ended March 31, 2001, the Company did not repurchase any shares of its
common stock under this program. The Company's stock repurchase program expires
in December 2001.
The following table sets forth the dividend payments and distributions for
the three months ended March 31, 2001 and 2000:
SECURITY PAYING ENTITY 2001 2000
-------- ------------- ------ ------
Common stock Company................................ $0.395 $0.370
Operating Partnership units Operating Partnership.................. $0.395 $0.370
Series A preferred stock Company................................ $0.531 $0.531
Series A preferred units Operating Partnership.................. $0.531 $0.531
Series B preferred units Operating Partnership.................. $1.078 $1.078
Series C preferred units AMB Property II, L.P. ................. $1.094 $1.094
Series D preferred units AMB Property II, L.P. ................. $0.969 $0.969
Series E preferred units AMB Property II, L.P. ................. $0.969 $0.969
Series F preferred units AMB Property II, L.P. ................. $0.994 $0.109
Series G preferred units AMB Property II, L.P. ................. $0.994 n/a
Series H preferred units AMB Property II, L.P. ................. $1.016 n/a
Series I preferred units AMB Property II, L.P. ................. $0.044 n/a
10. INCOME PER SHARE
The Company's only dilutive securities outstanding for the three months
ended March 31, 2001 and 2000, were stock options granted under its stock
incentive plan. The effect of the stock options was to increase weighted average
shares outstanding by 824,924 and 14,041 shares for the three months ended March
31, 2001 and 2000, respectively. Such dilution was computed using the treasury
stock method.
11
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
11. SEGMENT INFORMATION
The Company operates industrial and retail properties nationwide and
manages its business by market. 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. As of March 31, 2001, the Company operated in
eight hub and gateway markets in addition to 19 other markets nationwide. 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, 2000. The Company evaluates performance
based upon property net operating income of the combined properties in each
segment. The Company's properties are managed separately because each segment
requires different operating, pricing, and leasing strategies.
During the first quarter of 2001, the Company split its industrial market
into hub and gateway markets and other markets. Within the hub and gateway
market categorization, the Company operates in eight major U.S. markets. The
other industrial market category captures all of the Company's other smaller
markets nationwide. The 2000 rental revenue and net operating income disclosure
below has been restated to reflect these markets. Summary information for the
reportable segments is as follows (dollars in thousands):
RENTAL REVENUES(1) PROPERTY NOI(1)(2)
--------------------- --------------------
FOR THE THREE MONTHS FOR THE THREE MONTHS TOTAL INVESTMENT(3)
ENDED MARCH 31, ENDED MARCH 31, ------------------------------
--------------------- -------------------- AT MARCH 31, AT DECEMBER 31,
2001 2000 2001 2000 2001 2000
--------- --------- --------- -------- ------------ ---------------
Industrial Hub & Gateway
Markets:
Atlanta..................... $ 9,008 $ 5,195 $ 7,634 $ 4,238 $ 261,632 $ 225,352
Chicago..................... 11,592 10,897 8,234 7,832 309,040 303,489
Dallas/Ft. Worth............ 8,185 6,457 5,513 4,672 243,437 240,933
No. New Jersey/New York..... 10,965 6,057 7,702 4,927 407,401 382,285
San Francisco Bay Area...... 24,111 17,731 20,380 14,378 656,191 641,137
Southern California......... 15,055 8,530 12,247 6,970 574,197 552,055
Miami....................... 8,727 4,633 6,636 3,538 282,797 281,710
Seattle..................... 6,345 5,393 5,023 4,460 210,590 203,786
-------- -------- -------- ------- ---------- ----------
Total hub & gateway
markets........... 93,988 64,893 73,369 51,015 2,945,285 2,830,747
Total other industrial
markets..................... 33,452 32,990 22,736 23,932 982,952 1,045,455
Total retail markets.......... 7,036 7,223 5,451 5,186 156,562 150,395
-------- -------- -------- ------- ---------- ----------
Total properties.............. $134,476 $105,106 $101,556 $80,133 $4,084,799 $4,026,597
======== ======== ======== ======= ========== ==========
- ---------------
(1) Excludes straight-line rents of $1.3 million and $3.2 million for the three
months ended March 31, 2001 and 2000, 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 $236.7 million, which is
comprised of $176.4 million in industrial and $60.3 million in retail
properties, as of March 31, 2001, and $197.1 million, which is comprised of
$158.7 million in industrial and $38.4 million in retail properties, as of
December 31, 2000.
12
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
(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 ENDED
MARCH 31,
--------------------------
2001 2000
----------- -----------
REVENUES
Total rental revenues for reportable segments............... $134,476 $105,106
Straight-line rents......................................... 1,325 3,160
Investment management and other income...................... 9,033 2,057
-------- --------
Total consolidated revenues....................... $144,834 $110,323
======== ========
NET INCOME
Property net operating income for reportable segments....... $101,556 $ 80,133
Straight-line rents......................................... 1,325 3,160
Equity in earnings of unconsolidated joint ventures......... 1,474 1,242
Investment management and other income...................... 7,559 815
Less:
General and administrative................................ (8,183) (5,351)
Interest expense.......................................... (31,552) (20,342)
Depreciation and amortization............................. (26,854) (19,192)
Minority interests........................................ (12,997) (9,409)
Loss on investments in other companies.................... (4,655) --
-------- --------
Net income before gain from divestitures of real estate..... 27,673 31,056
Gain/(loss) from divestiture of real estate................. 16,767 (11)
-------- --------
Net income........................................ $ 44,440 $ 31,045
======== ========
12. COMMITMENTS AND CONTINGENCIES
Litigation. In the normal course of business, from time to time, the
Company is involved in legal actions relating to the ownership and operations of
its properties. In management's opinion, the liabilities, if any, that may
ultimately result from such legal actions are not expected to have a material
adverse effect on the consolidated financial position, results of operations, or
cash flows of the Company.
Environmental Matters. The Company monitors its properties for the presence
of hazardous or toxic substances. The Company is not aware of any environmental
liability with respect to the properties that would have a material adverse
effect on the Company's business, assets, or results of operations. 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.
General Uninsured Losses. The Company carries property and rental loss,
liability, flood, and environmental insurance. The Company believes that the
policy terms and conditions, limits, and deductibles are adequate and
appropriate under the circumstances, given the relative risk of loss, the cost
of such coverage, and industry practice. In addition, certain of the Company's
properties are located in areas that are subject to earthquake activity;
therefore, the Company has obtained limited earthquake insurance on those
properties. There are, however, certain types of extraordinary losses that may
be either uninsurable or not economically
13
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
insurable. Should an uninsured loss occur, the Company could lose its investment
in, and anticipated profits and cash flows from, a property.
Minority Interest Put Option. Pursuant to the Company's partnership
agreement with one of its separate account co-investors, commencing March 31,
1999, and each year thereafter, the Company is required to provide this
co-investor with a notice that sets forth the valuation of the partnership as of
the date of valuation. The co-investor then has the right to require the Company
to purchase all of its partnership interest based upon the valuation in the form
of cash and shares of the Company or partnership units in the Operating
Partnership. The put option was not exercised by the co-investor in 1999 nor
2000 and the Company does not anticipate that the put option will be exercised
in 2001.
14
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 costs;
- our failure to obtain necessary outside financing;
- difficulties in identifying properties to acquire and in effecting
acquisitions;
- our failure to successfully integrate acquired properties and operations;
- 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;
- risks arising from the California energy shortage;
- 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 as of the
date of this report or as of 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); eSpace(R); Institutional Alliance Partners(R);
Institutional Alliance Program(R); Management Alliance Partners(R); Management
Alliance Program(R); UPREIT Alliance Partners(R); and UPREIT Alliance
Program(R). The following marks are our unregistered
15
trademarks: Broker Alliance Partners(TM); Broker Alliance Program(TM); HTD(TM);
High Throughput Distribution(TM); Strategic Alliance Partners(TM); and Strategic
Alliance Programs(TM).
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, Southern
California, Miami, and Seattle. 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 March 31, 2001, we owned and operated 859 industrial buildings and
eight retail centers, totaling approximately 77.4 million rentable square feet,
located in 27 markets nationwide. As of March 31, 2001, these properties were
96.0% leased. As of March 31, 2001, 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 industrial buildings,
totaling approximately 4.4 million rentable square feet, through unconsolidated
joint ventures.
As of March 31, 2001, we had two retail centers and 27 industrial
buildings, which were held for divestiture. In addition, during the quarter, we
disposed of three industrial buildings, aggregating approximately 0.6 million
rentable square feet, for an aggregate price of $31.5 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
March 31, 2001, we owned an approximate 94.2% 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,
development projects, and renovation projects. As of March 31, 2001, we had
investments in four co-investment joint ventures, 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 March 31, 2001, 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 March 31, 2001, the Alliance Fund
I had received equity contributions from third party investors totaling $169.0
million, which, when combined with anticipated debt financings and our
investment, creates a total planned capitalization of $410.0 million.
16
On February 14, 2001, we formed AMB Partners II, L.P. with the City and
County of San Francisco Employees' Retirement System to acquire, develop, and
redevelop distribution facilities nationwide. As of March 31, 2001, AMB Partners
II had received an equity contribution from City and County of $50.0 million,
which, when combined with anticipated debt financings and our investment,
created a total planned capitalization of $250.0 million. The operating
partnership is the managing general partner of AMB Partners II, L.P. and owns,
as of March 31, 2001, 50% of AMB Partners II, L.P.
On March 26, 2001, we formed a joint venture, AMB-SGP, L.P., with a
subsidiary of GIC Real Estate Pte Ltd., the real estate investment subsidiary of
the Government of Singapore Investment Corporation, to own and operate, through
a private REIT, distribution facilities nationwide. As of March 31, 2001,
AMB-SGP, L.P. had received an equity contribution from GIC of $75.0 million,
which, when combined with anticipated debt financings and our investment,
created a total planned capitalization of $335.0 million. The operating
partnership is the managing general partner of AMB-SGP, L.P. and owns, as of
March 31, 2001, 50.3% of AMB-SGP, L.P.
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 Pier 1,
Bay 1, 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 quarter, we invested $93.4 million in operating properties,
consisting of 14 industrial buildings aggregating approximately 1.8 million
square feet, including the investment of $42.5 million in operating properties,
consisting of eight industrial buildings, aggregating approximately 0.9 million
square feet, for two of our joint ventures.
During the first quarter of 2001, we also contributed $427.3 million in
operating properties, consisting of 94 industrial buildings aggregating
approximately 8.8 million square feet, to two of our co-investment joint
ventures.
We also initiated one new development project during the first quarter,
which will aggregate approximately 0.1 million square feet and has a total
estimated cost of $4.9 million upon completion. As of March 31, 2001, we had 19
industrial projects, which will total approximately 5.2 million square feet and
have a total estimated investment of $290.8 million upon completion, in our
development pipeline. We also had three retail projects, which will total
approximately 0.5 million square feet and have a total estimated investment of
$77.6 million upon completion, in our development pipeline. As of March 31,
2001, we and our Development Alliance Partners have funded an aggregate of
$222.0 million and will need to fund an estimated additional $146.4 million in
order to complete projects currently under construction.
As of March 31, 2001, we also had two industrial projects, which will total
approximately 1.1 million square feet upon completion, in our development
pipeline. These two development projects are recorded under the equity method
for financial reporting purposes.
OPERATING STRATEGY
We are a full-service real estate company with in-house expertise in
acquisitions, development and redevelopment, asset management and leasing,
finance and accounting, and market research. We have long-standing relationships
with many real estate management and development firms across the country, our
Strategic Alliance Partners.
We believe that real estate is fundamentally a local business and that the
most effective way for us to operate is by forging alliances with 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
17
property managers; 2) improve the operating efficiency and flexibility of our
national portfolio; 3) strengthen customer satisfaction and retention; and 4)
provide a continuous pipeline of growth.
We believe that our partners give us local market expertise and flexibility
allowing us to focus on our core competencies: developing and refining our
strategic approach to real estate investment and management and raising private
capital to finance growth and enhance returns to stockholders.
GROWTH STRATEGIES
AMB Investment Management
AMB Investment Management, Inc. provides real estate investment management
services on a fee basis to clients. The operating partnership holds all of the
non-voting preferred stock of AMB Investment Management, which represents a 95%
economic interest. All of the common stock of AMB Investment Management, Inc.,
which represents a 5% economic interest, is owned by our current or former
executive officers and a former executive officer of AMB Investment Management,
Inc. AMB Investment Management, Inc. conducts its operations through AMB
Investment Management Limited Partnership, a Maryland limited partnership, of
which it is the sole general partner. We intend to expand this business through
our co-investment program.
We co-invest with clients of AMB Investment Management, Inc., to the extent
such clients newly commit investment capital, through partnerships, limited
liability companies, or joint ventures. We currently use a co-investment formula
with each client whereby we will own at least a 20% interest in all ventures. We
currently have four co-investments. In general, we control all significant
operating and investment decisions of our co-investment entities.
Headlands Realty Corporation
Headlands Realty Corporation conducts a variety of businesses that include
incremental income programs, such as our Customer Assist Program and, to a
limited extent, development projects available for sale to third parties. The
operating partnership holds all of the non-voting preferred stock of Headlands
Realty Corporation, which represents a 95% economic interest. All of the common
stock of Headlands Realty Corporation, which represents a 5% economic interest,
is owned by some of our current and former executive officers and a director of
Headlands Realty Corporation.
Growth Through Operations
We seek to generate internal growth through rent increases on existing
space and renewal on re-tenanted space, by maintaining a high occupancy rate of
our properties and by controlling expenses by capitalizing on the economies of
owning, operating, and growing a large national portfolio. As of March 31, 2001,
our industrial properties and retail centers were 96.0% leased and 86.5% leased,
respectively. During the three months ended March 31, 2001, we increased average
base rental rates (on a cash basis) by 25.8% from the expiring rent for that
space, on leases entered into or renewed during such period, representing
approximately 2.8 million rentable square feet. This amount excludes expense
reimbursements, rental abatements, and percentage rents.
Growth Through Acquisitions and Capital Redeployment
We believe that our significant acquisition experience, our alliance-based
operating strategy, and our extensive network of property acquisition sources
will continue to provide opportunities for external growth. We believe that our
relationships with third party local property management firms through our
Management Alliance Program also will create acquisition opportunities as such
managers market properties on behalf of sellers. Our operating structure also
enables us to acquire properties through our UPREIT Alliance Program in exchange
for limited partnership units in the operating partnership, thereby enhancing
our attractiveness to owners and developers seeking to transfer properties on a
tax-deferred basis. In addition to acquisitions, we seek to redeploy capital
from non-strategic assets into properties that better fit our current investment
focus.
18
We are generally in various stages of negotiations for a number of
acquisitions and dispositions, which may include acquisitions and dispositions
of individual properties, acquisitions of large multi-property portfolios, and
acquisitions of other real estate companies. There can be no assurance that we
will consummate any of these acquisitions. Such transactions, if we consummate
them, may be material individually or in the aggregate. Sources of capital for
acquisitions may include undistributed cash flow from operations, borrowings
under the credit facility, other forms of secured or unsecured debt financing,
issuances of debt or equity securities by us or the operating partnership
(including issuances of units in the operating partnership or its subsidiaries),
proceeds from divestitures of properties, and assumption of debt related to the
acquired properties.
Growth Through Development
We believe that renovation and expansion of value-added properties and
development of well-located, high-quality industrial properties should continue
to provide us with attractive opportunities for increased cash flow and a higher
rate of return than we may obtain from the purchase of fully leased, renovated
properties. Value-added properties are typically characterized as properties
with available space or near-term leasing exposure, undeveloped land acquired in
connection with another property that provides an opportunity for development,
or properties that are well-located but require redevelopment or renovation.
Value-added properties require significant management attention or capital
investment to maximize their return. We have developed the in-house expertise to
create value through acquiring and managing value-added properties and believe
that our national market presence and expertise will enable us to continue to
generate and capitalize on these opportunities. Through our Development Alliance
Program, we have established strategic alliances with national and regional
developers to enhance our development capabilities.
The multidisciplinary backgrounds of our employees provide us with the
skills and experience to capitalize on strategic renovation, expansion, and
development opportunities. Several of our officers have extensive experience in
real estate development, both with us and with national development firms. We
generally pursue development projects in joint ventures with local developers.
This way, we leverage the development skill, access to opportunities, and
capital of such developers, transferring a significant amount of the development
risk to them and eliminating the need and expense of an in-house development
staff. Under a typical joint venture agreement with a Development Alliance
Partner, we would fund 95% of the construction costs and our partner would fund
5%. Upon completion, we generally would purchase our partner's interest in the
joint venture.
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 (generally 90%
leased). We refer to these properties as the same store properties. For the
comparison between the three months ended March 31, 2001 and 2000, the same
store properties consisted of properties aggregating approximately 63.1 million
square feet. The properties acquired in 2000 consisted of 145 buildings,
aggregating approximately 10.5 million square feet, and the properties acquired
during the first three months of 2001 consisted of 14 buildings, aggregating 1.8
million square feet. In 2000, property divestitures consisted of one retail
center and 25 industrial buildings, aggregating approximately 2.5 million square
feet, and property divestitures during the first three months of 2001 consisted
of six industrial buildings, aggregating approximately 0.6 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.
19
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 2000 (DOLLARS IN MILLIONS):
RENTAL REVENUES 2001 2000 $ CHANGE % CHANGE
--------------- ------ ------ -------- --------
Same store................................... $102.7 $ 95.2 $ 7.5 7.9%
2000 acquisitions............................ 22.7 1.5 21.2 1,413.3%
2001 acquisitions............................ 1.6 -- 1.6 --
Developments................................. 4.8 2.2 2.6 118.2%
Divestitures................................. 2.7 6.2 (3.5) (56.5)%
Straight-line rents.......................... 1.3 3.2 (1.9) (59.4)%
------ ------ ----- -------
Total.............................. $135.8 $108.3 $27.5 25.4%
====== ====== ===== =======
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 reimbursement of expenses. During the three months ended
March 31, 2001, the same store rent increases on renewals and rollovers (cash
basis) was 27.7% on 2.6 million square feet leased.
INVESTMENT MANAGEMENT AND OTHER INCOME 2001 2000 $ CHANGE % CHANGE
-------------------------------------- ---- ---- -------- --------
Equity in earnings of unconsolidated JVs......... $1.5 $1.2 $0.3 25.0%
Investment management income..................... 2.4 0.4 2.0 500.0%
Interest and other income........................ 5.1 0.4 4.7 1,175.0%
---- ---- ---- -------
Total.................................. $9.0 $2.0 $7.0 350.0%
==== ==== ==== =======
The $2.0 million increase in investment management income was due primarily
to increased acquisition fees. The $4.7 million increase in interest and other
income was primarily due to interest income from our mortgage note on the retail
center that we sold in 2000 and from our construction loan to one of our
unconsolidated joint ventures. Interest income also increased resulting from
increased cash balances and bridge loans to our joint ventures.
PROPERTY OPERATING EXPENSES AND REAL ESTATE TAXES 2001 2000 $ CHANGE % CHANGE
- ------------------------------------------------- ----- ----- -------- --------
Rental expenses................................. $16.3 $11.5 $4.8 41.7%
Real estate taxes............................... 16.6 13.5 3.1 23.0%
----- ----- ---- -----
Property operating expenses................... $32.9 $25.0 $7.9 31.6%
===== ===== ==== =====
Same store...................................... $24.0 $22.3 $1.7 7.6%
2000 acquisitions............................... 7.3 0.7 6.6 942.9%
2001 acquisitions............................... 0.2 -- 0.2 --
Developments.................................... 1.0 0.4 0.6 150.0%
Divestitures.................................... 0.4 1.6 (1.2) (75.0)%
----- ----- ---- -----
Total................................. $32.9 $25.0 $7.9 31.6%
===== ===== ==== =====
The increase in same store properties' operating expenses primarily relates
to increases in common area maintenance expenses of $1.0 million and real estate
taxes of $0.6 million.
OTHER EXPENSES 2001 2000 $ CHANGE % CHANGE
-------------- ----- ----- -------- --------
Interest, including amortization............... $31.6 $20.3 $11.3 55.7%
Depreciation and amortization.................. 26.9 19.2 7.7 40.1%
General and administrative..................... 8.2 5.4 2.8 51.9%
----- ----- ----- ----
Total................................ $66.7 $44.9 $21.8 48.6%
===== ===== ===== ====
The increase in interest expense was primarily due to the issuance of
additional unsecured senior debt securities and to an increase in secured debt
balances, partially offset by the increase in capitalized interest. The increase
in depreciation expense was due to increases in our investments in real estate.
The increase in general and administrative expenses was primarily due to
increased personnel costs and timing differences.
20
The loss on investments in other companies during the quarter related to
our investment in Webvan Group, Inc. The loss reflects a 93% loss in value on
the investment.
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.
Additionally, our co-investment program will also continue to serve as a source
of capital for acquisitions and developments. 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 first quarter, we divested ourselves of six
industrial buildings for an aggregate price of $31.5 million. These divestitures
resulted in an aggregate net loss of $0.1 million.
Properties Held for Divestiture. We have decided to divest ourselves of 27
industrial buildings and two retail centers, which are not in our core markets
or which do not meet our strategic objectives. The divestitures of the
properties are subject to negotiation of acceptable terms and other customary
conditions. As of March 31, 2001, the net carrying value of the properties held
for divestiture was $236.7 million.
Co-investment Program. During the first quarter of 2001, we contributed
$427.3 million in operating properties, consisting of 94 industrial buildings
aggregating approximately 8.8 million square feet to two of our co-investment
joint ventures. On February 14, 2001, we formed AMB Partners II, LP., with the
City and County of San Francisco Employees' Retirement System to acquire,
develop, and redevelop distribution facilities nationwide. As of March 31, 2001,
AMB Partners II had received an equity contribution from City and County of
$50.0 million, which, when combined with anticipated debt financings and our
investment, created a total planned capitalization of $250.0 million. On March
26, 2001, we formed a joint venture, AMB-SGP, L.P., with a subsidiary of GIC
Real Estate Pte., Ltd., the real estate investment subsidiary of the Government
of Singapore Investment Corporation, to own and operate, through a private REIT,
distribution facilities nationwide. As of March 31, 2001, AMB-SGP, L.P. had
received an equity contribution from GIC of $75.0 million, which, when combined
with anticipated debt financings and our investment, created a total planned
capitalization of $335.0 million.
Credit Facility. In May 2000, the operating partnership entered into a $500.0
million unsecured revolving credit agreement. We guarantee the operating
partnership's obligations under the credit facility. The 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 $700.0 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. Borrowings under our credit
facility currently bear interest at LIBOR plus 75 basis points. As of March 31,
2001, the outstanding balance on our unsecured credit facility was $94.0 million
and it bore interest at a weighted average rate of 6.0%. 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 March 31, 2001, the remaining
amount available under our unsecured credit facility was $406.0 million
(excluding the additional $200.0 million of potential additional capacity).
Equity. In March 2000, AMB Property II, L.P., one of our subsidiaries,
issued and sold 510,000 8.00% Series I 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 $4.00 per annum. The Series I Preferred
Units are redeemable by AMB Property II, L.P. on
21
or after March 21, 2006, 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 I Preferred Units are
exchangeable, at specified times and subject to certain conditions, on a
one-for-one basis, for shares of our Series I Preferred Stock. AMB Property II,
L.P. used the net proceeds of $24.9 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.
During the first quarter of 2001, we redeemed 598,297 limited partnership
units of the operating partnership for shares of our common stock.
Our board of directors has approved a stock repurchase program for the
repurchase of up to $100.0 million worth of our common stock. During the quarter
ended March 31, 2001, we did not repurchase any shares of our common stock under
the program. Our stock repurchase program expires in December 2001.
Debt. As of March 31, 2001, the aggregate principal amount of our secured
debt was $1.0 billion, excluding unamortized debt premiums of $9.3 million. The
secured debt bears interest at rates varying from 4.0% to 10.4% per annum (with
a weighted average rate of 7.8%) and final maturity dates ranging from November
2001 to June 2023. All of the secured debt bears interest at fixed rates, except
for two loans with an aggregate principal amount of $30.8 million as of March
31, 2001, which bear interest at variable rates (with a weighted average
interest rate of 6.7% at March 31, 2001).
In August 2000, the operating partnership commenced a medium-term note
program for the possible issuance of up to $400.0 million in principal amount of
medium-term notes, which will be guaranteed by us. As of March 31, 2001, the
operating partnership had issued $355.0 million of medium-term notes under this
program, leaving $45.0 million available for issuance. In January 2001, the
operating partnership issued and sold $25.0 million of the notes under this
program to A.G. Edwards & Sons, Inc., as principal. We have guaranteed the
notes, which mature on January 30, 2006, and bear interest at 6.90% per annum.
The operating partnership used the net proceeds of $24.9 million for general
corporate purposes, to partially repay indebtedness, and for the acquisition and
development of additional properties. In March 2001, the operating partnership
issued and sold $50.0 million of the notes under this program to First Union
Securities, Inc., as principal. We have guaranteed the notes, which mature on
March 7, 2011, and bear interest at 7.00% per annum. The operating partnership
used the net proceeds of $49.7 million for general corporate purposes, to
partially repay indebtedness, and for the acquisition and development of
additional properties.
Mortgage Receivables. In September 2000, we sold our retail center located
in Los Angeles, California. We carry an 8.75% mortgage note in the principal
amount of $79.0 million on the retail center. The mortgage note matures in
September 2001 and has a one-year extension option. We also hold a mortgage loan
receivable on AMB Pier One, LLC, an unconsolidated joint venture. The note bears
interest at 11.0% and matures in November 2001. As of March 31, 2001, the
outstanding balance on the note was $42.3 million.
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.
22
The tables below summarize our debt maturities and capitalization as of
March 31, 2001 (dollars in thousands):
DEBT
- --------------------------------------------------------------------------------------------------
OUR JOINT UNSECURED UNSECURED
SECURED VENTURE SENIOR DEBT CREDIT TOTAL
DEBT DEBT SECURITIES FACILITY DEBT
-------- --------- ----------- --------- ----------
2001............................. $ 9,451 $ 34,116 $ -- $ -- $ 43,567
2002............................. 29,148 47,590 -- -- 76,738
2003............................. 72,638 8,380 -- 94,000 175,018
2004............................. 71,106 21,925 -- -- 93,031
2005............................. 64,250 31,698 250,000 -- 345,948
2006............................. 114,803 35,385 25,000 -- 175,188
2007............................. 32,181 21,567 55,000 -- 108,748
2008............................. 33,604 111,013 175,000 -- 319,617
2009............................. 5,176 28,182 -- -- 33,358
2010............................. 52,780 67,818 75,000 -- 195,598
2011............................. 1,311 83,751 50,000 -- 135,062
Thereafter....................... 3,307 23,618 125,000 -- 151,925
-------- --------- -------- ------- ----------
Subtotal....................... 489,755 515,043 755,000 94,000 1,853,798
Unamortized premiums........... 9,256 -- -- -- 9,256
-------- --------- -------- ------- ----------
Total consolidated
debt................. 499,011 515,043 755,000 94,000 1,863,054
Our share of unconsolidated joint
venture debt(1)................ -- 30,081 -- -- 30,081
-------- --------- -------- ------- ----------
Total debt............. 499,011 545,124 755,000 94,000 1,893,135
Joint venture partners' share of
consolidated joint venture
debt........................... -- (261,740) -- -- (261,740)
-------- --------- -------- ------- ----------
Our share of total debt........ $499,011 $ 283,384 $755,000 $94,000 $1,631,395
======== ========= ======== ======= ==========
Weighed average interest rate.... 7.8% 7.6% 7.3% 6.0% 7.4%
Weighed average maturity (in
years)......................... 5.5 7.7 8.3 2.1 7.0
- ---------------
(1) The weighted average interest and weighted average maturity for the
unconsolidated joint venture debt were 6.6% and 4.1 years, respectively.
MARKET EQUITY
- ----------------------------------------------------------------------------------------------------
SHARES/UNITS
SECURITY OUTSTANDING MARKET PRICE MARKET VALUE
-------- ------------ ------------ ------------
Common stock.......................................... 84,978,486 $24.60 $2,090,471
Common limited partnership units...................... 5,229,620 24.60 128,649
---------- ----------
Total....................................... 90,208,106 $2,219,120
========== ==========
23
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
Series I preferred units.............................. 8.00% 25,500 March 2006
---- --------
Weighted Average/Total.............................. 8.34% $454,161
==== ========
CAPITALIZATION RATIOS
- ------------------------------------------------------------------
Total debt-to-total market capitalization................... 41.5%
Our share of total debt-to-total market capitalization...... 37.9%
Total debt plus preferred-to-total market capitalization.... 51.4%
Our share of total debt plus preferred-to-total market
capitalization............................................ 48.4%
Our share of total debt-to-total book capitalization........ 43.3%
Liquidity
As of March 31, 2001, we had approximately $152.2 million in cash,
restricted cash, and cash equivalents, and $406.0 million of additional
available borrowings under our credit facility. We intend to use: 1) cash from
operations; 2) borrowings under our credit facility; 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); 5) proceeds from
divestitures of properties; and 6) private capital 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 months ended March 31, 2001 and 2000:
SECURITY PAYING ENTITY 2001 2000
-------- ------------- ------ ------
Common stock Company................................ $0.395 $0.370
Operating Partnership units Operating Partnership.................. $0.395 $0.370
Series A preferred stock Company................................ $0.531 $0.531
Series A preferred units Operating Partnership.................. $0.531 $0.531
Series B preferred units Operating Partnership.................. $1.078 $1.078
Series C preferred units AMB Property II, L.P................... $1.094 $1.094
Series D preferred units AMB Property II, L.P................... $0.969 $0.969
Series E preferred units AMB Property II, L.P................... $0.969 $0.969
Series F preferred units AMB Property II, L.P................... $0.994 $0.109
Series G preferred units AMB Property II, L.P................... $0.994 n/a
Series H preferred units AMB Property II, L.P................... $1.016 n/a
Series I preferred units AMB Property II, L.P................... $0.044 n/a
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.
24
Capital Commitments
In addition to recurring capital expenditures and costs to renew or
re-tenant space, as of March 31, 2001, we are developing 22 projects
representing a total estimated investment of $368.4 million upon completion. Of
this total, $222.0 million had been funded as of March 31, 2001, and
approximately $146.4 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 facility, debt or equity issuances, and
net proceeds from property divestitures. We have no other material capital
commitments.
During the period from January 1, 2001, to March 31, 2001, we invested
$93.4 million in 14 operating industrial buildings, aggregating approximately
1.8 million rentable square feet. We funded these acquisitions and initiated
development and renovation projects through borrowings under our credit
facility, cash, debt and equity issuances, and net proceeds from property
divestitures.
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 months ended March 31, 2001 and 2000 (dollars in thousands, except
share and per share data):
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2000
----------- -----------
Income from operations.................................... $ 40,670 $ 40,465
Real estate related depreciation and amortization:
Total depreciation and amortization..................... 26,854 19,192
FF & E depreciation and ground lease amortization....... (481) (403)
FFO attributable to minority interests(1)(2):
Separate account co-investors........................... (2,503) (1,264)
Alliance Fund I......................................... (4,046) (756)
Other joint venture partners............................ (638) (606)
Adjustments to derive FFO in unconsolidated joint
venture(3):
Our share of net income................................. (1,474) (1,242)
Our share of FFO........................................ 2,120 1,736
Preferred stock dividends................................. (2,125) (2,125)
Preferred unit distributions.............................. (6,858) (5,610)
----------- -----------
Funds from operations(1).................................. $ 51,519 $ 49,387
=========== ===========
Weighted average common shares and units:
Basic................................................... 89,669,950 89,693,900
=========== ===========
Diluted................................................. 90,494,874 89,707,941
=========== ===========
- ---------------
(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
25
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.
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 March 31,
2001 (dollars in thousands):
INDUSTRIAL RETAIL TOTAL
----------- ---------- -----------
Square feet owned(1)......................... 77,407,039 1,275,837 78,682,876
Occupancy percentage......................... 96.0% 86.5% 95.9%
Weighted average lease terms:
Original................................... 6.3 years 14.9 years 6.5 years
Remaining.................................. 3.6 years 10.8 years 3.8 years
Tenant retention:
Quarter (3.3 million sq. ft. expired)...... 62.7% 100.0% 62.8%
Rent increases on lease commencements:
Quarter (2.8 million sq. ft. leased)....... 24.7% 106.5% 25.8%
Second generation tenant improvements and
leasing commissions per sq. ft.(2):
Quarter:
Renewals................................ $ 0.66 $ -- $ 0.66
Re-tenanted............................. 2.37 -- 2.37
----------- ---------- -----------
Weighted average...................... $ 1.53 $ -- $ 1.53
=========== ========== ===========
Recurring capital expenditures(3)
Quarter
Tenant improvements..................... $ 1,916 $ -- $ 1,916
Lease commissions....................... 3,324 -- 3,324
Building improvements................... 2,098 88 2,186
----------- ---------- -----------
Sub-total............................. 7,338 88 7,426
JV Partner's share of capital
expenditures.......................... (863) -- (863)
----------- ---------- -----------
Total.............................. $ 6,475 $ 88 $ 6,563
=========== ========== ===========
- ---------------
(1) In addition to owned square feet as of March 31, 2001, 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
4.38 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.
26
The following summarizes key same store properties' operating statistics
for our industrial and retail properties as of and for the period ending March
31, 2001:
INDUSTRIAL RETAIL TOTAL
---------- ------- ----------
Square feet in same store pool(1)................ 62,390,926 696,322 63,087,248
% of total square feet......................... 80.6% 54.6% 80.2%
Occupancy percentage at period end
March 31, 2001................................. 96.4% 97.8% 96.4%
March 31, 2000................................. 96.9% 96.2% 96.9%
Tenant retention:
Quarter (2.8 million SF expired)............... 61.9% 100.0% 61.9%
Rent increases on lease commencements:
Quarter (2.6 million SF leased)................ 26.6% 106.5% 27.7%
Cash basis NOI growth % increase:
Quarter:
Revenues.................................... 7.9% 8.3% 7.9%
Expenses.................................... 7.4% 16.1% 7.6%
Net operating income........................ 8.1% 5.8% 8.0%
- ---------------
(1) Consists of industrial buildings and retail centers owned prior to January
1, 2000, 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 facility and other variable rate
borrowings; and 2) our ability to incur more debt without stockholder approval,
thereby increasing our debt service obligations, which could adversely affect
our cash flows. See "Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Capital Resources -- Market Capitalization."
27
PART II
ITEM 1. LEGAL PROCEEDINGS
As of March 31, 2001, 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 March 21, 2001, AMB Property II, L.P. issued and sold 510,000 8.00%
Series I Cumulative Redeemable Preferred Limited Partnership Units at a price of
$50.00 per unit, for an aggregate offering price of $25.5 million less a sales
commission of $0.6 million, to J.P. Morgan Chase Mosaic Fund V, LLC. The
issuance and sale of the Series I 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 I Preferred Units are exchangeable, at specified times
and subject to certain conditions, on a one-for-one basis, for shares of our
Series I Preferred Stock. The Articles Supplementary establishing the rights and
preferences of the holders of the Series I Preferred Stock were filed as Exhibit
3.1 to our Current Report on Form 8-K filed on March 23, 2001.
In February and March 2001, we redeemed an aggregate of 598,297 limited
partnership units of the operating partnership for shares of our 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
dividends to our stockholders could be adversely affected. Income from, and the
value of, our properties may be adversely affected by the general economic
climate, local conditions such as oversupply of industrial space, or a reduction
in demand for industrial space, the attractiveness of our properties to
potential customers, competition from other properties, our ability to provide
adequate maintenance and insurance, and an increase in operating costs. In
addition, revenues from properties and real estate values are also affected by
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
28
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 12.3% of our properties (based on annualized base rent) as of March 31, 2001,
will expire on or prior to December 31, 2001. 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
dividends 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 dividends 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 dividends
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 March 31, 2001, represented
approximately 24.8% of the aggregate square footage of our properties as of
March 31, 2001, and 31.4% of our annualized base rent. Annualized base rent
means the monthly contractual amount under existing leases at March 31, 2001,
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 dividends
on, and the market price of, our stock. Certain of our properties are also
subject to possible loss from seismic activity.
Rising Energy Costs and Power Outages in California May Have an Adverse Effect
on Our Operations and Revenue
Problems associated with deregulation of the electricity industry in
California have resulted in intermittent service interruptions and significantly
higher costs in some areas. Properties located within municipalities that either
do not produce their own power or have not entered into long-term, fixed-price
contracts may be subject to intermittent service interruptions or significant
rate increases from their utility providers. Most of our properties located in
California are subject to leases that require our tenants to pay all utility
costs. The remainder of our California leases provide that tenants will
reimburse us for utility costs in excess of a base year amount. Although we have
not experienced any material losses resulting from electric deregulation, it is
possible that some of our tenants will not fulfill their lease obligations and
reimburse us for their share of any significant rate increases and that we will
not be able to retain or replace our tenants if energy problems in California
continue.
29
Our Properties are Currently Concentrated in the Industrial Sector
Our properties are currently concentrated predominantly in the industrial
real estate sector. Our concentration in a certain property type may expose us
to the risk of economic downturns in this sector to a greater extent than if our
portfolio also included other property types. As a result of such concentration,
economic downturns in the industrial real estate sector could adversely affect
our financial condition, results of operations, cash flow, and ability to pay
dividends 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 dividends on, and the
market price of, our stock.
A number of our properties are located in areas that are known to be
subject to earthquake activity, including California where, as of March 31,
2001, 246 industrial buildings aggregating approximately 19.2 million square
feet (representing 24.8% of our properties based on aggregate square footage and
31.4% 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 March 31, 2001, we had ownership interests in several joint ventures,
limited liability companies, or partnerships with third parties, as well as
interests in three unconsolidated entities. As of March 31, 2001, we owned
approximately 25.3 million square feet (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 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;
30
- 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
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 adversely affect our financial condition, results of
operations, cash flow, and ability to pay dividends on, and the market price of,
our stock.
WE MAY BE UNABLE TO 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 dividends 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 adversely affect our financial condition, results of
operations, cash flow, and ability to pay dividends on, and the market price of,
our stock.
31
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 March 31, 2001, 27 industrial buildings and two
retail centers, which are held for divestiture. Our ability to dispose 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 affect our financial condition, results
of operations, cash flow, and ability to pay dividends 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
dividends 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 pay dividends 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 March 31, 2001, we had total debt outstanding of approximately $1.9
billion including:
- $1,004.8 million of secured indebtedness (excluding unamortized debt
premiums) with an average maturity of 6.6 years and a weighted average
interest rate of 7.7%;
- $755.0 million aggregate principal amount of unsecured senior debt
securities with maturities between 2005 and 2018 and a weighted average
interest rate of 7.3%.
- $94.0 million outstanding under our unsecured $500.0 million credit
facility with a maturity date of May 2003 and a current interest rate of
LIBOR plus 75 basis points (with a weighted average interest rate of 6.0%
as of March 31, 2001); and
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 dividends to our stockholders and to repay all such maturing debt.
Furthermore, if prevailing interest rates or other factors at the time of
refinancing (such as the reluctance of lenders to make commercial real estate
loans) result in higher interest rates upon refinancing, then the interest
expense relating to that refinanced indebtedness would increase. This increased
interest expense would adversely affect our financial condition, results of
operations, cash flow, and ability to pay dividends on, and the market price of,
our stock. 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
32
consequent loss of income and asset value. A foreclosure on one or more of our
properties could adversely affect our financial condition, results of
operations, cash flow, and ability to pay dividends on, and the market price of,
our stock.
Rising Interest Rates Could Adversely Affect Our Cash Flow
As of March 31, 2001, we had approximately $94.0 million outstanding under
our unsecured credit facility and we had two secured loans with an aggregate
principal amount of $30.8 million, which bear interest at variable rates (with
weighted average interest rate of 6.7% at March 31, 2001). 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 dividends 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 90% of our real estate investment trust taxable income (determined without
regard to the dividends-paid deduction and by excluding any net capital gain)
and we are subject to tax on our income to the extent it is not distributed.
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 March 31, 2001, we had 19 non-recourse secured loans, which are
cross-collateralized by 30 properties. As of March 31, 2001, we had $318.8
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 dividends on, and the
market price of, our stock. In addition, our credit facility 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 facility and the senior debt securities in
addition to any mortgage or other debt that is in default, which could adversely
affect our financial condition, results of operations, cash flow, and ability to
pay dividends on, and the market price of, our stock.
33
CONTINGENT OR UNKNOWN LIABILITIES COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
Our predecessors have been in existence for varying lengths of time up to
18 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
- 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 dividends 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
Institutional Housing Partners, L.P., 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 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.
34
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 March 31, 2001, AMB Development, L.P. owns interests in 5 retail
development projects in the U.S., three of which are single free-standing
Walgreens drugstores and two of which 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 minimus holdings in equity securities of real estate
companies.
Thomas W. Tusher, a member of our board of directors, is a limited partner
in a partnership in which Messrs. Abbey, Moghadam, and Burke are general
partners and which owns a 75% interest in an office building. Mr. Tusher owns a
20% interest in the partnership, valued 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 April 23, 2001, our two largest stockholders, Cohen & Steers Capital
Management, Inc. (with respect to various client accounts for which Cohen &
Steers Capital Management, Inc. serves as investment advisor) and European
Investors Inc. (with respect to various client accounts for which European
Investors Inc. serves as investment advisor) beneficially owned approximately
12.9% of our outstanding common stock. In addition, our executive officers and
directors beneficially owned approximately 5.2% of our outstanding common stock
as of April 23, 2001, 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
35
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 Have Invested in Real Estate Mortgages
We have invested in mortgages, and may do so in the future. 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. In any of these events, our funds from operations
and our ability to pay dividends 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.
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 dividends 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
36
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.
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.
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 dividends 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
adversely affect our financial condition, results of operations, cash flow, and
ability to pay dividends 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
37
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 90% of our real
estate investment trust taxable income (determined without regard to the
dividends paid deduction and by excluding capital gains) and must satisfy
specified asset tests on a quarterly basis. These provisions and the applicable
treasury regulations are more complicated in our case because we hold our assets
in partnership form. Legislation, new regulations, administrative
interpretations, or court decisions could significantly change the tax laws with
respect to qualification as a real estate investment trust or the federal income
tax consequences of such qualification. However, we are not aware of any pending
tax legislation that would adversely affect our ability to operate as a real
estate investment trust.
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 our stockholders.
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 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 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. See "-- Our Failure to Qualify as a Real
Estate
38
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 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
dividends on, and the market price of, our stock. We do not have employment
agreements with any of our executive officers.
WE MAY BE UNABLE TO MANAGE OUR GROWTH
Our business has grown rapidly and continues to grow through property
acquisitions and developments. If we fail to effectively manage our growth, then
our financial condition, results of operations, cash flow, and ability to pay
dividends on, and the market price of, our stock could be adversely affected.
WE MAY INVEST IN HIGHLY SPECULATIVE EARLY-STAGE COMPANIES IN WHICH WE MAY LOSE
OUR ENTIRE INVESTMENT
From time to time, we may invest in highly speculative early-stage
companies that we believe will enhance our understanding of changes occurring in
the movement of goods, which may, in turn, sharpen our real estate investment
focus, create real estate provider relationships with growth companies, and
provide the potential for significant returns on invested capital. We 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 dividends on,
and the market price of, our stock. In addition, AMB Investment Management, Inc.
and Headlands Realty Corporation, as taxable REIT subsidiaries, 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
39
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 pay dividends on the stock owned by
the operating partnership and could also limit co-investment opportunities to
the operating partnership. This would limit the operating partnership's ability
to generate rental revenues from such co-investments and use the co-investment
program as a source to finance property acquisitions and leverage acquisition
opportunities.
OWNERSHIP OF OUR STOCK
Limitations in Our Charter and Bylaws Could Prevent a Change in Control
Certain provisions of our charter and bylaws may delay, defer, or prevent a
change in control or other transaction that could provide the holders of our
common stock with the opportunity to realize a premium over the then-prevailing
market price for the common stock. To maintain our qualification as a real
estate investment trust for federal income tax purposes, not more than 50% in
value of our outstanding stock may be owned, actually or constructively, by five
or fewer individuals (as defined in the Internal Revenue Code to include certain
entities) during the last half of a taxable year after the first taxable year
for which a real estate investment trust election is made. Furthermore, after
the first taxable year for which a real estate investment trust election is
made, our common stock must be held by a minimum of 100 persons for at least 335
days of a 12-month taxable year (or a proportionate part of a short tax year).
In addition, if we, or an owner of 10% or more of our stock, actually or
constructively owns 10% or more of one of our tenants (or a tenant of any
partnership in which we are a partner), 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 dividends on the shares or be entitled to vote the shares or receive any
proceeds from the subsequent sale of the shares in excess of the lesser of the
price paid for the shares or the amount realized from the sale. A transfer of
shares in violation of the above limits may be void under certain circumstances.
The ownership limit may have the effect of delaying, deferring, or preventing a
change in control and, therefore, could adversely affect our stockholders'
ability to realize a premium over the then-prevailing market price for the
shares of our common stock in connection with such transaction.
Our charter authorizes us to issue additional shares of common 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, Series I
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.
40
Our charter and bylaws and Maryland law also contain other provisions that
may delay, defer, or prevent a transaction, including a change in control, that
might involve payment of a premium price for the common stock or otherwise be in
the best interests of our stockholders. Those provisions include the following:
- the provision in the charter that directors may be removed only for cause
and only upon a two-thirds vote of stockholders, together with bylaw
provisions authorizing the board of directors to fill vacant
directorships;
- the provision in the charter requiring a two-thirds vote of stockholders
for any amendment of the charter;
- the requirement in the bylaws that the request of the holders of 50% or
more of our common stock is necessary for stockholders to call a special
meeting;
- the requirement of Maryland law that stockholders may only take action by
written consent with the unanimous approval of all stockholders entitled
to vote on the matter in question; and
- the requirement in the bylaws of advance notice by stockholders for the
nomination of directors or proposal of business to be considered at a
meeting of stockholders.
These provisions may impede various actions by stockholders without
approval of our board of directors, which in turn may delay, defer or prevent a
transaction involving a change of control.
We Could Change Our Investment and Financing Policies without a Vote of
Stockholders
Subject to our current investment policy to maintain our qualification as a
real estate investment trust (unless a change is approved by our board of
directors under certain circumstances), our board of directors will determine
our investment and financing policies, our growth strategy and our debt,
capitalization, distribution, and operating policies. Although the board of
directors has no present intention to revise or amend these strategies and
policies, the board of directors may do so at any time without a vote of
stockholders. Accordingly, stockholders will have no control over changes in our
strategies and policies (other than through the election of directors), and any
such changes may not serve the interests of all stockholders and could adversely
affect our financial condition or results of operations, including our ability
to pay dividends to our stockholders.
If We Issue Additional Securities, then the Investment of Existing
Stockholders Will Be Diluted
We have authority to issue shares of common stock or other equity or debt
securities 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
41
sales by persons unaffiliated with us. 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 5,229,620 common limited
partnership units as of March 31, 2001. As of March 31, 2001, 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
March 31, 2001, we had granted to certain directors, officers and employees
options to purchase 6,931,663 shares of common stock (excluding forfeitures and
173,137 shares that we have issued pursuant to the exercise of options). As of
March 31, 2001, we had granted 507,535 restricted shares of common stock, 1,931
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 dividends. Such an
increase in the required yield from dividends 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 Dividends, 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 dividends. It is based secondarily upon the real estate market
value of the underlying
42
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
dividends 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 dividends to our stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Terms Agreement dated as of December 14, 2000, by and
between Morgan Stanley & Co. Incorporated, J.P. Morgan
Securities Inc., and AMB Property, L.P. (incorporated by
reference to Exhibit 1.1 of the Registrant's Current Report
on Form 8-K filed on January 8, 2001)
10.2 Terms Agreement dated as of January 4, 2001, by and between
A.G. Edwards & Sons, Inc. and AMB Property, L.P.
(incorporated by reference to Exhibit 1.1 of the
Registrant's Current Report on Form 8-K filed on January 31,
2001)
10.3 Terms Agreement by and between First Union Securities, Inc.
and AMB Property, L.P. and Registrant (incorporated by
reference to Exhibit 1.1 of the Registrant's Current Report
on Form 8-K filed on March 16, 2001)
3.2 Articles Supplementary establishing and fixing the rights
and preferences of the 8.00% Series I Cumulative Redeemable
Preferred Stock (incorporated by reference to Exhibit 3.3 of
the Registrant's Current Report on Form 8-K filed on March
23, 2001)
4.4 $25,000,000 6.90% Fixed Rate Note No. 8 dated January 9,
2001, attaching the Parent Guarantee dated January 9, 2001
(incorporated be reference to Exhibit 4.1 of the
Registrant's Current Report on Form 8-K filed on January 31,
2001)
4.5 $50,000,000 7.00% Fixed Rate Note No. 9 dated March 7, 2001,
attaching the Parent Guarantee dated March 7, 2001
(incorporated be reference to Exhibit 4.1 of the
Registrant's Current Report on Form 8-K filed on March 16,
2001)
10.4 Ninth Amended and Restated Agreement of Limited Partnership
of AMB Property II, L.P., dated March 21, 2001 (incorporated
by reference to Exhibit 10.1 of the Registrant's Current
Report on Form 8-K filed on March 23, 2001)
10.5 Registration Rights Agreement among Registrant, AMB Property
II, L.P., and the unitholders signatory thereto dated March
21, 2001 (incorporated by reference to Exhibit 3.2 of the
Registrant's Current Report on Form 8-K filed on March 23,
2001)
(b) Reports on Form 8-K:
- The Registrant filed a Current Report on Form 8-K on January 8, 2001, in
connection with the issuance of $150.0 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 January 29, 2001, in
connection with its 2000 earnings release.
43
- The Registrant filed a Current Report on Form 8-K on January 31, 2001, in
connection with the issuance of $25.0 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 March 16, 2001, in
connection with the issuance of $50.0 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 March 23, 2001, in
connection with the issuance and sale by AMB Property II, L.P. of 510,000
8.00% Series I Cumulative Redeemable Preferred Limited Partnership Units
and the filing by the Registrant of Articles Supplementary establishing
and fixing the rights and preferences of the 8.00% Series I Cumulative
Redeemable Preferred Stock.
- The Registrant filed a Current Report on Form 8-K on April 5, 2001, in
connection with the formation of joint ventures with the City and County
of San Francisco Employees' Retirement System and with a subsidiary of
GIC Real Estate Pte Ltd., the real estate investment subsidiary of the
Government of Singapore Investment Corporation.
- The Registrant filed a Current Report on Form 8-K on April 11, 2001, in
connection with its first quarter 2001 earnings release.
44
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
By: /s/ MICHAEL A. COKE
------------------------------------
Michael A. Coke
Chief Financial Officer and
Executive Vice President
(Duly Authorized Officer and
Principal
Financial and Accounting Officer)
Date: May 8, 2001
45