================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-13545
AMB PROPERTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 94-3281941
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
505 MONTGOMERY ST, SAN FRANCISCO, CALIFORNIA 94111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(415) 394-9000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
COMMON SHARES, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
(TITLE OF CLASS) (NAME OF EXCHANGE ON WHICH REGISTERED)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common shares held by non-affiliates of the
registrant (based upon the closing sale price on the New York Stock Exchange) on
March 11, 1998 was approximately $2,077,089,783.
As of March 11, 1998, there were 85,874,513 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference the Registrant's Proxy Statement for its
Annual Meeting of Stockholders which the Registrant anticipates will be filed no
later than 120 days after the end of its fiscal year pursuant to Regulation 14A.
================================================================================
PART I
ITEM 1. BUSINESS
GENERAL
AMB Property Corporation, a Maryland corporation (the "Company"), owns and
operates industrial and retail properties totaling 43.5 million square feet
located in 26 markets nationwide, including: Chicago, San Francisco Bay Area,
Dallas/Ft. Worth, Los Angeles, Minneapolis, Atlanta, Seattle, Miami, Boston, and
Northern New Jersey. As of December 31, 1997, the Company owned industrial
properties, aggregating 37.3 million rentable square feet (the "Industrial
Properties"), principally warehouse distribution properties, which were 95.7%
leased, and retail properties, aggregating 6.2 million rentable square feet (the
"Retail Properties"), principally grocer-anchored community shopping centers,
which were 96.1% leased. The Industrial Properties and the Retail Properties
collectively are referred to as the "Properties."
INDUSTRIAL AND RETAIL PROPERTIES BY REGION
AS OF DECEMBER 31, 1997
INDUSTRIAL PROPERTIES RETAIL PROPERTIES TOTAL
------------------------------------------- --------------------------- -------------------------------
NUMBER NUMBER RENTABLE NUMBER RENTABLE NUMBER RENTABLE
OF OF SQUARE % OF OF SQUARE % OF OF SQUARE % OF
REGION PROPERTIES BUILDINGS FEET TOTAL CENTERS FEET TOTAL PROPERTIES FEET TOTAL
------ ---------- --------- ---------- ----- ------- --------- ----- ---------- ---------- -----
Eastern.............. 16 43 5,009,032 13.4% 3 1,184,211 19.1% 19 6,193,243 14.2%
Midwestern........... 23 86 10,733,755 28.8% 4 710,522 11.4% 27 11,444,277 26.3%
Southern............. 24 91 9,490,183 25.4% 10 1,703,523 27.4% 34 11,193,706 25.7%
Western.............. 32 136 12,095,565 32.4% 16 2,618,090 42.1% 48 14,713,655 33.8%
-- --- ---------- ----- -- --------- ----- --- ---------- -----
Total................ 95 356 37,328,535 100.0% 33 6,216,346 100.0% 128 43,544,881 100.0%
== === ========== ===== == ========= ===== === ========== =====
The Company currently employs 119 individuals, 95 of whom are located in
its San Francisco headquarters and 24 in its Boston office, who are committed to
carrying out the Company's business and operating strategies. The Company
actively manages its Properties through its experienced staff of Regional
Managers. See "Business and Operating Strategies -- Property Management."
The Company is self-administered and self-managed and expects that it has
qualified and will continue to qualify as a real estate investment trust
("REIT") for Federal income tax purposes beginning with the year ending December
31, 1997. The principal executive offices of the Company and the Operating
Partnership (as defined below) are located at 505 Montgomery Street, San
Francisco, California 94111, and their telephone number is (415) 394-9000. The
Company also maintains a regional office in Boston, Massachusetts.
FORMATION OF THE COMPANY
The Company commenced operations as a fully integrated real estate company
in connection with the completion of its initial public offering (the
"Offering") on November 26, 1997, and will elect to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code of 1986 (the "Code"), as
amended, with its initial tax return for the year ended December 31, 1997. The
Company, through its controlling sole general partnership interest in its
subsidiary AMB Property, L.P., a Delaware limited partnership, (the "Operating
Partnership") and through certain other direct and indirect subsidiaries is
engaged in the ownership, operation, management, acquisition, renovation,
expansion, and development of industrial properties and community shopping
centers in target markets nationwide. As of December 31, 1997, the Company owned
a 97.1% general partnership interest in the Operating Partnership. Unless the
context otherwise requires, the "Company" shall include AMB Property
Corporation, the Operating Partnership and its controlled subsidiaries.
The Company and the Operating Partnership were formed shortly before
consummation of the Offering. AMB Institutional Realty Advisors, Inc., a
California corporation and registered investment advisor (the
1
"Predecessor") formed AMB Property Corporation and merged with and into the
Company (the "Merger")in exchange for 4,746,616 shares of the Company's Common
Stock. In addition, the Company and the Operating Partnership acquired through a
series of mergers and other transactions 31.8 million rentable square feet of
industrial property and 6.3 million rentable square feet of retail property in
exchange for 65,022,185 shares of the Company's Common Stock, 2,542,163 limited
partnership interests ("LP Units") in the Operating Partnership, the assumption
of debt, and to a limited extent, cash.
On November 26, 1997, the Company completed its Offering of 16,100,000
shares of Common Stock, $0.01 par value per share (the "Common Stock") for
$21.00 per share, resulting in gross offering proceeds of approximately $338.1
million. Net of underwriters' commission and offering costs aggregating $38.1
million, the Company received approximately $300.0 million in proceeds from the
Offering. The net proceeds of the Offering were used to repay indebtedness, to
purchase interests from certain investors who elected not to receive shares or
units in the Company, to fund property acquisitions, and to meet general
corporate working capital requirements.
Upon consummation of the formation transactions and Offering, the Company
owned a 97.1% interest in the Operating Partnership represented by a number of
units of general partnership interest ("GP Units") which are convertible into an
equal number of shares of Common Stock. The investors that elected to receive LP
Units own the remaining 2.9% ownership interest in the Operating Partnership.
For local law purposes, properties in certain states are owned through limited
partnerships and limited liability companies owned 99% by the Operating
Partnership and 1% by a wholly-owned subsidiary of the Company. The ownership of
such Properties through such entities does not materially affect the Company's
overall ownership of the interests in the Properties. As the sole general
partner of the Operating Partnership, the Company has the full, exclusive and
complete responsibility and discretion in the management and control of the
Operating Partnership. The purchase method of accounting was applied to the
acquisition of the properties. Collectively, the Merger and the other formation
transactions described above are referred to as the "Formation Transactions."
In connection with the Formation Transactions, the Operating Partnership
acquired all of the non-voting preferred stock of AMB Investment Management
Corporation, a Maryland corporation ("AMB Investment Management") representing a
95% economic interest therein. AMB Investment Management conducts its operations
through AMB Investment Management Limited Partnership, a Maryland limited
partnership ("AMB Investment Management Partnership"), of which it is the sole
general partner and owns the entire capital interest. AMB Investment Management
was formed to succeed to the Predecessor's investment management business of
providing real estate investment management services on a fee basis to clients
and intends to grow its business through the Company's co-investment program.
All of the common stock of AMB Investment Management, representing a 5% economic
interest therein, is owned by the Company's executive officers.
BUSINESS AND OPERATING STRATEGIES
The Company focuses its investment activities in hub and regional
distribution markets and retail trade areas throughout the U.S. where
opportunities exist to acquire and develop additional properties on an
advantageous basis. The Company is 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. The Company
has long-standing relationships with most of its real estate management firms
across the country, which provide local property management and leasing services
to the Company on a fee basis.
The Company believes that (i) the industrial property sector is
well-positioned to benefit from strong market fundamentals and growth in
international trade (ii) the retail property sector will benefit from limited
new construction in "in-fill" locations and from projected growth in personal
income and retail sales levels in the Company's markets (in-fill locations are
those typified by significant population densities and low availability of land
resulting in limited opportunities for new construction of competitive
properties). The
2
Company seeks to capitalize on these current conditions in the industrial and
retail property sectors by implementing the following business and operating
strategies:
NATIONAL PROPERTY COMPANY
The Company believes that its national strategy enables it to (i) increase
or decrease investments in certain regions to take advantage of the relative
strengths and attractive investment opportunities in different real estate
markets, (ii) retain and accommodate tenants as they consolidate or expand,
particularly in its Industrial Properties, and (iii) build brand awareness as
well as customer loyalty through the delivery of consistent service and quality
product. Through its presence in markets throughout the U.S., the Company has
developed expertise in leasing, expense management, tenant retention strategies
and property design and configuration.
TWO COMPLEMENTARY PROPERTY TYPES
Management believes its strategy of owning and operating both industrial
properties and community shopping centers offers the Company an optimal
combination of growth opportunities, strong current income and stability through
market cycles. The Company has developed the expertise, infrastructure and
management information systems to acquire, reposition, develop and operate these
two property types. Management believes that its dual property strategy provides
significant opportunities to allocate capital and organizational resources
between property types according to changing market conditions and its
investment strategy.
SELECT MARKET FOCUS
The Company intends to continue its strategy of investing in hub and
regional distribution markets and retail trade areas across the country to
capitalize on changes in the relative economic strength of these regions. The
Company focuses on acquiring, redeveloping and operating properties in in-fill
locations. As the strength of these markets continues to grow and the demand for
well-located properties increases, the Company believes that it will benefit
from an upward pressure on rents resulting from the increased demand combined
with the relative lack of new available space.
Industrial Property Selected Hub and Regional Distribution Markets. The
Company focuses its industrial property investment activities in six hub markets
which dominate national warehouse distribution property activities: Atlanta,
Chicago, Dallas/Fort Worth, Los Angeles, Northern New Jersey and San Francisco
Bay Area. The Company also invests in selected regional distribution markets
including Boston, Houston, Miami, Minneapolis, San Diego, Seattle and
Baltimore/Washington, D.C. The Company focuses on these established industrial
markets because management believes they offer large and broadly diversified
tenant bases that provide greater demand for properties over market cycles than
secondary markets. In-fill locations within these markets also typically have
significant barriers to new construction including geographic or regulatory
supply constraints, and benefit from an access to large labor supplies and
well-developed transportation networks.
RESEARCH-DRIVEN MARKET SELECTION
The Company's decisions regarding the deployment of capital are experience-
and research-driven, with investments based on thorough qualitative and
quantitative research and analysis of local markets. The Company employs a
dedicated research department using proprietary methodology and systems.
PROPERTY MANAGEMENT
The Company actively manages its properties through its experienced staff
of 16 Regional Managers, each of whom specializes in the management of
industrial properties or community shopping centers in designated markets. The
Company typically outsources property management through its Management Alliance
Program to a select group of third-party local managers (Alliance Partners) with
whom the Company has developed strong relationships. Regional, market and
property-type focus provides Regional Managers with extensive knowledge of real
estate trends and supply and demand activity in their markets as
3
well as an effective network of local contacts who provide sources for market
data, leads for new tenants and property acquisitions, and opportunities to
enhance the value of the Properties. From January 1, 1994 through December 31,
1997, the weighted average tenant retention rate of the Properties was
approximately 71.5% for the Industrial Properties and approximately 82.8% for
the Retail Properties, based on aggregate square footage. Management believes
that these tenant retention rates reflect the success of the Company's operating
and tenant-service driven property management strategy.
The Company's Regional Managers make all major business decisions regarding
the Properties, and have broad responsibilities that include implementing an
annual business plan for each asset, formulating leasing strategies,
establishing leasing terms and conditions, negotiating leases, approving and
monitoring leases and capital expenditures, planning and implementing
renovation, expansion and development, establishing annual operating and capital
budgets and effecting dispositions. The Company's Regional Managers utilize
local leasing agents to identify prospective tenants and document lease
transactions. Management Alliance Partners (who are third-party local property
service providers) are engaged to oversee custodial property matters such as
rent collection, tenant requests, maintenance and repair, and supervision of
cleaning and security services. The Company monitors the performance of its
properties on a daily basis through the use of the Company's proprietary asset
information system. This management tool enables the Company not only to monitor
the operating performance of a property (and the local property manager), but
also to review and communicate strategic initiatives to the local property
manager on a real-time basis and to compare the property's performance to online
budgets and objectives.
Management believes that its approach to property management and its
Management Alliance Program enable the Company to more effectively manage fixed
operating costs associated with a national portfolio. By forming alliances with
third-party local property managers, which management believes to be the leading
property managers in their respective markets, the Company can enter and exit
markets efficiently without the administrative burden of retaining a large
staff. Since the Company is the customer, rather than the competitor of
third-party management firms, these firms are also a source of new acquisition
opportunities in the respective markets, thus providing the Company with greater
access to transaction flow. Management believes this approach also gives the
Company a competitive advantage in capitalizing on the increasing trend among
corporations to outsource their real estate service requirements to property
management companies.
DISCIPLINED INVESTMENT PROCESS
Over the past 14 years, the Company, including the operations of its
Predecessor, has established a disciplined approach to the investment process
through operating divisions which are subject to the overall policy direction of
the Company's Investment Committee. The stages in the investment process are
highly integrated, with Investment Committee review at critical points in the
process.
Approval of each investment is the responsibility of the Investment
Committee with sponsorship from both the Acquisitions Officer and the Regional
Manager with ultimate responsibility for managing the property. The initial
investment recommendation is thoroughly evaluated, with approval required in
order to proceed to contract and full due diligence. The terms of the
acquisition and its structure are determined as part of the initial approval and
are the responsibility of the Acquisitions Officer. The Regional Manager is
involved in providing and verifying underwriting assumptions and developing the
operating strategy. After the due diligence review and before removing
conditions to the contract, the acquisition and operating team prepares a final
Investment Committee recommendation. The Investment Committee conducts a
complete review of the information developed during the due diligence process
and either rejects or gives final approval. To facilitate the acquisition
process, the Company has proprietary systems and procedures to manage and track
a high volume of acquisition proposals, transactions and important market data.
This includes an on-line open issues database that provides current information
on the status of each transaction, highlighting the issues that must be
addressed prior to closing, and a database that includes and compiles data on
all transaction proposals and markets reviewed by the Company.
4
RENOVATION, EXPANSION, AND DEVELOPMENT EXPERIENCE
The multidisciplinary backgrounds of the Company's employees provide it
with the skills and experience to capitalize on strategic renovation, expansion
and development opportunities. Several of the Company's officers have extensive
experience in real estate development. The Company generally pursues development
projects in joint ventures with local developers. This allows the Company to
leverage development skill, access opportunities and capital of such developers,
transfer a significant amount of the development risk to them, and eliminate the
need and expense of an in-house development staff.
FINANCING STRATEGY
In order to maintain financial flexibility and facilitate the rapid
deployment of capital over market cycles, the Company intends to operate with a
debt-to-total market capitalization ratio of less than 45%. Additionally, the
Company intends to structure its balance sheet in order to obtain and maintain
an investment grade rating on its senior unsecured debt. The Company intends to
keep the majority of its assets unencumbered to facilitate such rating. As of
December 31, 1997, the Company's debt-to-total market capitalization ratio was
approximately 23.6%.
The Company and the Operating Partnership may utilize multiple sources of
equity capital including public or private common stock offerings, convertible
or non-convertible preferred stock offerings and purchases of property with
common stock, convertible shares or LP Units.
The Company has a $500 million unsecured revolving credit agreement (the
"Credit Facility") with Morgan Guaranty Trust Company of New York as agent, and
a syndicate of twelve other banks. Such facility bears interest at a rate equal
to LIBOR plus 110 basis points through August 1998 or until the Company receives
an investment grade debt rating. Thereafter, borrowings under the Credit
Facility will bear interest at a rate equal to LIBOR plus 90 to 120 basis
points, depending upon the Company's then current debt rating. Management
presently plans to use available borrowings under the Credit Facility for
property acquisitions and for general corporate purposes.
AMB INVESTMENT MANAGEMENT
AMB Investment Management was formed to succeed to the Predecessor's
investment management business of providing real estate investment management
services on a fee basis to clients. The purpose of the co-investment program is
to generate incremental revenues for the Company through co-investment with the
Predecessor's clients that chose not to participate in the Formation
Transactions and certain other institutional investors.
AMB Investment Management's co-investments will be consistent with the
Company's acquisition and development strategies. The Company will assume
day-to-day control over operations and management of the investments and will
earn a return on its pro rata share of the investments, plus AMB Investment
Management may earn fee revenue relating to the co-investments.
STRATEGIES FOR GROWTH
The Company intends to achieve its growth objectives of long-term
sustainable growth in Funds from Operations ("FFO") per share and maximization
of long-term stockholder value, principally by growth through its (i) strategic
alliance program, as discussed below, (ii) operations, resulting from improved
operating margins within the portfolio while maintaining above-average
occupancy, (iii) acquisitions, including through the co-investment program of
AMB Investment Management and (iv) property renovation, expansion and selected
development.
STRATEGIC ALLIANCE PROGRAMS
The Company has developed five uniquely targeted strategic alliance
programs that are designed to foster growth through mutually beneficial
partnerships with different audiences in the real estate market.
5
The UPREIT Alliance Program is for those property owners and developers
seeking a tax deferred method of disposing of their assets. These knowledgeable
individuals can choose to continue to provide management services.
The Development Alliance Program is designed for leading local and regional
developers with whom the Company can jointly acquire, renovate, and develop
properties with growth potential.
The Customer Alliance Program builds long-term working relationships with
major tenants and leading local and national leasing firms to capitalize on the
Company's national portfolio of properties.
In the Management Alliance Program, the Company forges close ties with
local property managers. This is a key difference between the Company and other
national REITs that attempt to build their own organizations to provide all
local services.
The Institutional Alliance Program is for institutional investors who
prefer a private investment format for their real property holdings and the
alignment of interests offered by co-investment with the Company. At some future
date these investors may choose to contribute their properties for equity
interests in the Company or the Operating Partnership.
The Strategic Alliance Programs are a fundamental element of the Company's
overall growth and investment strategy. Each stresses flexibility, cooperation
and partnership, rather than competition, and management believes they give the
Company a significant advantage in the form of improved access to local market
insight, growth opportunities, and new investments.
GROWTH THROUGH OPERATIONS
As of December 31, 1997, the Industrial Properties were 95.7% leased and
the Retail Properties were 96.1% leased. The Company seeks to improve operating
margins by capitalizing on the economies of owning, operating and growing a
large-scale national portfolio. In 1997, the Company increased average
contractual or base rental rates on the Properties by 12% on 393 new and
renewing leases totaling 7.5 million rentable square feet (representing 17.2% of
the Properties' aggregate rentable square footage). During 1998 leases
encompassing an aggregate of 10.5 million rentable square feet (24.1% of the
Company's aggregate rentable square footage) are subject to contractual rent
increases resulting in an average rent increase per rentable square foot of
$1.31, or 5.7%, for an aggregate increase of $3.5 million. Based on recent
experience and current market trends, management believes it will have an
opportunity to increase the average rental rate on Property leases expiring
during 1998 covering an aggregate of 6.1 million rentable square feet.
The Company will seek to reduce the potential volatility of the portfolio's
FFO by managing lease expirations so that they occur within individual
properties and across the entire portfolio in a staggered fashion, and by
monitoring the credit worthiness and mix of tenants, particularly those in the
Retail Properties.
GROWTH THROUGH ACQUISITIONS
The Company acquired 5.5 million rentable square feet of industrial
property located in 11 markets throughout the United States during December
1997, bringing the year end total industrial square feet of all Industrial
Properties to 37.3 million. In addition, during the period from January 1, 1998
through March 11, 1998, the Company acquired 789,804 rentable square feet of
industrial property and 730,336 rentable square feet of retail property. The
Company believes its significant acquisition experience and its extensive
network of property acquisition sources will continue to provide opportunities
for external growth. Management believes that there is a growing trend among
large private institutional holders of real estate assets to shift a portion of
their direct investment in real estate assets to more liquid securities such as
common stock and units in publicly traded REITs. The Company has relationships
with a number of the nation's leading pension funds and other institutional
investors, many of whom have large portfolios of industrial properties and
community shopping centers. Management believes that the Company's relationship
with third-party local property managers also will create acquisition
opportunities as such managers market properties on behalf of unaffiliated
sellers. The Company also will continue active investment management of a number
of portfolios through AMB Investment Management. The Company believes that
through these relationships it will have
6
opportunities to acquire portfolios in exchange for equity interests in the
Company or the Operating Partnership, and will be well positioned to facilitate
such investors' shift from private to public real estate ownership.
The Company's operating structure also provides sellers the opportunity to
contribute properties to the Operating Partnership on a tax-deferred basis in
exchange for LP Units. The Company believes that its ability to offer
tax-deferred transactions to sellers will enhance its attractiveness to local
owners and developers. In addition, local developers can continue to participate
as partners with the Company in local projects.
GROWTH THROUGH RENOVATION, EXPANSION, AND DEVELOPMENT
Management believes that renovation and expansion of value-added
properties, and development of well-located, high quality industrial properties
and community shopping centers, offer attractive opportunities for increased
cash flow and a higher risk-adjusted rate of return than may be obtained from
the purchase of fully leased, renovated properties. Value-added properties are
typically characterized as properties with available space or near-term leasing
exposure, properties that are well located but require redevelopment or
renovation, and occasionally undeveloped land acquired in connection with
another property that provides an opportunity for development. Such properties
require significant management attention and/or capital to maximize their
return. The Company has developed the in-house expertise to create value through
acquiring and managing value-added properties. As of December 31, 1997, the
Company had six projects in process with a total expected investment of $89.9
million. Because of the Company's expertise with these types of assets,
management believes it has the ability to identify and acquire value-added
properties and develop new properties. The Company will pursue development
either in conjunction with its local network of development partners, including
through investments therein, or through its established in-house development
capability.
Renovation. Renovation of well-located properties offers the Company the
opportunity to increase demand for space in its properties and add value to the
portfolio. Certain properties acquired by the Company have some element of
obsolescence or deferred maintenance, which can be remedied in a cost-effective
manner in order to improve the marketability of the space.
Expansion. Certain properties provide opportunities to acquire adjacent
land for nominal or no cost that can subsequently be used for expansion. When
market conditions are favorable and tenant demand is present, the Company may
expand these facilities to create additional value, without incurring additional
land cost.
Development. The Company creates value through new development when
opportunities arise through either the acquisition of undeveloped land
(typically parcels acquired adjacent to existing properties) or through tenant
relationships.
FOCUS ON INDUSTRIAL PROPERTIES AND COMMUNITY SHOPPING CENTERS
The Company operates industrial properties and community shopping centers
in hub and regional distribution and retail trade areas throughout the United
States. Management believes that its dual property strategy provides greater
opportunities to deploy capital and organizational resources between industrial
properties and community shopping centers, providing the Company greater
flexibility in investing and balancing its property mix.
Management believes that industrial properties and community shopping
centers share the following characteristics:
Fragmented Ownership. Historically, both industrial properties and
community shopping centers have been developed and operated by local real estate
investors and, as a result, are characterized by fragmented ownership, in which
there is a lack of concentration of ownership. The Company believes this
fragmented ownership provides opportunities for consolidation on a national
basis.
Competition for Acquisitions. Management believes that, because of their
relative size and fragmented ownership, industrial properties and community
shopping centers are not as widely marketed and attract less
7
significant buyer interest than larger property types. Accordingly, management
believes that these properties can generally be acquired on a less competitive
basis.
Distribution of Goods and Necessities. Industrial property and community
shopping center tenants distribute goods and necessities, either at the
wholesale or retail level, or both. Management believes that such tenants are
relatively insulated from the adverse effects of an economic downturn, and that
industrial properties located in hub and regional distribution markets and
community shopping centers located in selected trade areas generally have higher
occupancy rates across market cycles.
Construction and Maintenance. Industrial properties and community shopping
centers are typically of single-story construction, and improvements to such
properties are generally limited to moving demising walls and repairing roofs
and parking lots. Such property types also require less maintenance as compared
to most other commercial property types.
Redevelopment Opportunities. As compared to other commercial property
types, industrial properties and community shopping centers generally require
less time and capital to renovate and reposition and, therefore management
believes the corresponding increase in cash yield upon renovation tends to be
higher.
Tenant Improvements. Industrial properties and community shopping centers
generally do not require significant tenant improvements to attract new tenants
as compared to other commercial property types.
Management. Industrial properties and community shopping centers generally
do not require on-site property management.
BUSINESS RISKS
The Company's operations involve various risks which could have adverse
consequences to the Company. Such risks include, among others:
- the ability of the Board of Directors to change the Company's growth and
investment strategy and its financing, distribution and operating
policies without a vote of the Company's stockholders;
- the need to renew leases or re-lease space upon lease expirations and to
pay renovation and re-leasing costs in connection therewith, the effect
of economic and other conditions on property cash flows and values, the
ability of tenants to make lease payments, the ability of a property to
generate revenue sufficient to meet operating expenses (including future
debt service), and the illiquidity of real estate investments which could
have an adverse effect on Funds from Operations and the Company's
financial condition and results of operations;
- the possible failure of investments to perform in accordance with the
Company's expectations, inaccuracy of estimates of costs of improvements
to bring an acquired property up to standards, competition for attractive
investment opportunities and other general risks associated with any real
estate investment which could have an adverse effect on Funds from
Operations and the Company's financial condition and results of
operations;
- possible uninsured losses or losses in excess of insured limits relating
to certain activities, including fire, rental loss and seismic activity
which could have an adverse effect on Funds from Operations and the
Company's financial condition and results of operations;
- in connection with the Company's property ownership through partnerships
and joint ventures, the possibility that a co-venturer or another partner
in a partnership may (i) become bankrupt while the Company and any other
remaining partners or joint venturers remain liable for the liabilities
of such partnerships or joint ventures, (ii) have economic interests
inconsistent with those of the Company or (iii) sell its interest at a
disadvantageous time or on disadvantageous terms, which could adversely
effect the return realized by the Company in such investments;
- the inability to refinance outstanding indebtedness upon maturity or
refinance such indebtedness on favorable terms, the risks of rising
interest rates in connection with the Company's unsecured credit facility
and other variable-rate borrowings and the ability of the Company to
incur more debt without
8
stockholder approval, thereby increasing its debt service obligations,
which could adversely affect the Company's cash flow;
- potential liability of the Company for environmental matters and the
costs of compliance with certain government regulations which could have
an adverse effect on Funds from Operations and the Company's financial
condition and results of operations.
ITEM 2. PROPERTIES
As of December 31, 1997, the Company owned the Industrial Properties,
representing an aggregate of 37.3 million rentable square feet, principally
warehouse distribution properties, which were 95.7% leased, and the Retail
Properties, representing an aggregate of 6.2 million rentable square feet,
principally grocer-anchored community shopping centers, which were 96.1% leased.
During the year ended December 31, 1997, no individual industrial or retail
tenant accounted for greater than 2% of rental revenues or total square feet. As
of December 31, 1997, the largest industrial tenant accounted for only 1.3% and
0.9% of industrial base rent and total base rent, respectively. As of December
31, 1997, the largest retail tenant accounted for only 4.0% and 1.3% of retail
base rent and total base rent, respectively.
INDUSTRIAL PROPERTIES
Property Characteristics. The Industrial Properties, which consist
primarily of warehouse distribution facilities suitable for single or multiple
tenants, typically consist of multiple buildings (an average of five) and
generally range between 300,000 and 600,000 rentable square feet, averaging
475,000 rentable square feet per Property. The following table identifies
characteristics of the Company's typical industrial buildings:
INDUSTRIAL BUILDING PROFILE
TYPICAL BUILDING RANGE
---------------- --------------------
Rentable Square Feet................................. 100,000 70,000 - 150,000
Clear Height......................................... 24 ft. 18 - 32 ft.
Building Depth....................................... 200 ft. 150 - 300 ft.
Truck Court Depth.................................... 110 ft. 90 - 130 ft.
Loading.............................................. Dock & Grade Dock or Dock & Grade
Parking Spaces per 1,000 Square Feet................. 1.0 0.5 - 2.0
Square Footage Per Tenant............................ 35,000 5,000 - 100,000
Office Finish........................................ 8% 3% - 15%
Site Coverage........................................ 40% 35% - 55%
Lease Terms. The Industrial Properties are typically subject to lease on a
"triple net basis," defined as leases in which tenants pay their proportionate
share of real estate taxes, operating costs and utility costs, or subject to
leases on a "modified gross basis," defined as leases in which tenants pay
expenses over certain threshold levels. Lease terms typically range from three
to 10 years, with an average of five years, excluding renewal options. The
majority of the industrial leases do not include renewal options.
9
The table below details the regional diversification of the Industrial
Properties by listing the individual markets in which the Company owns and
operates its Industrial Properties.
INDUSTRIAL PROPERTIES BY MARKET
AS OF DECEMBER 31, 1997
ANNUALIZED
TOTAL BASE RENT
NUMBER NUMBER NUMBER RENTABLE ANNUALIZED PER LEASED
OF OF OF SQUARE PERCENTAGE BASE RENT SQUARE
REGION/MARKET PROPERTIES BUILDINGS LEASES FEET LEASED (000S)(1) FEET(2)
- ------------- ---------- --------- ------ ---------- ---------- ---------- ----------
EASTERN
Baltimore/Washington, D.C. ............ 5 6 16 974,345 71.6% $ 2,945 $4.22
Boston................................. 2 13 18 1,275,634 85.9 5,724 5.22
Cincinnati............................. 4 5 8 728,374 100.0 2,555 3.51
No. New Jersey......................... 3 3 5 984,944 91.0 3,471 3.87
Philadelphia........................... 1 13 25 779,594 95.7 2,476 3.32
Wilmington............................. 1 3 5 266,141 100.0 1,040 3.91
-- --- --- ---------- ----- -------- -----
Total/Weighted Average............... 16 43 77 5,009,032 88.5 18,211 4.11
MIDWESTERN
Chicago................................ 14 58 108 6,774,838 94.2 24,282 3.80
Columbus............................... 2 2 2 468,433 93.2 1,271 2.91
Minneapolis............................ 7 26 117 3,490,484 99.1 12,124 3.50
-- --- --- ---------- ----- -------- -----
Total/Weighted Average............... 23 86 227 10,733,755 95.7 37,677 3.67
SOUTHERN
Atlanta................................ 4 25 97 2,405,149 96.1 9,847 4.26
Austin................................. 1 6 22 735,240 100.0 4,805 6.54
Dallas/Ft. Worth....................... 11 37 102 3,775,840 99.2 12,140 3.24
Houston................................ 1 5 16 464,696 93.4 1,376 3.17
Miami.................................. 3 12 42 1,361,040 93.4 8,272 6.51
Orlando................................ 4 6 16 748,218 82.7 1,883 3.04
-- --- --- ---------- ----- -------- -----
Total/Weighted Average............... 24 91 295 9,490,183 96.1 38,323 4.20
WESTERN
Los Angeles............................ 8 39 47 4,437,256 97.3 17,323 4.01
Orange County.......................... 2 11 33 401,937 98.5 2,368 5.98
Sacramento............................. 1 1 1 182,437 100.0 630 3.45
San Diego.............................. 1 4 15 252,318 100.0 1,365 5.41
San Francisco Bay Area................. 15 64 173 5,085,128 99.0 30,161 5.99
Seattle................................ 5 17 48 1,736,489 100.0 6,094 3.51
-- --- --- ---------- ----- -------- -----
Total/Weighted Average............... 32 136 317 12,095,565 98.5 57,941 4.86
-- --- --- ---------- ----- -------- -----
TOTAL/WEIGHTED AVERAGE................. 95 356 916 37,328,535 95.7% $152,152 $4.26
== === === ========== ===== ======== =====
- ---------------
(1) Annualized Base Rent means the monthly contractual amount under existing
leases as of December 31, 1997, multiplied by 12. This amount excludes
expense reimbursements and rental abatements.
(2) Calculated as total Annualized Base Rent divided by total rentable square
feet actually leased as of December 31, 1997.
10
INDUSTRIAL PROPERTY LEASE EXPIRATIONS
The following table summarizes the lease expirations for the Industrial
Properties for leases in place as of December 31, 1997, without giving effect to
the exercise of renewal options or termination rights, if any, at or prior to
the scheduled expirations.
INDUSTRIAL PROPERTY LEASE EXPIRATIONS(1)
AS OF DECEMBER 31, 1997
ANNUALIZED
RENTABLE PERCENTAGE ANNUALIZED PERCENTAGE OF BASE RENT
SQUARE OF TOTAL BASE RENT OF ANNUALIZED OF EXPIRING
NUMBER OF FOOTAGE OF RENTABLE EXPIRING BASE RENT OF LEASES PER
YEAR OF LEASE LEASES EXPIRING SQUARE LEASES EXPIRING SQUARE
EXPIRATION EXPIRING LEASES FOOTAGE (000S)(2) LEASES FOOT(3)
------------- --------- ---------- ---------- ------------ ------------- -----------
1998........................ 203 5,698,130 15.3% $ 24,161 14.8% $4.24
1999........................ 181 6,112,460 16.4% 26,064 16.0 4.26
2000........................ 195 6,608,476 17.7% 29,677 18.2 4.49
2001........................ 126 4,375,871 11.7% 21,836 13.4 4.99
2002........................ 118 5,078,872 13.6% 23,345 14.3 4.60
2003........................ 35 2,379,619 6.4% 11,147 6.9 4.68
2004........................ 16 1,411,382 3.8% 6,952 4.3 4.93
2005........................ 17 1,803,606 4.8% 7,463 4.6 4.14
2006........................ 12 988,148 2.6% 6,096 3.7 6.17
2007........................ 4 254,017 0.7% 1,399 0.9 5.51
2008........................ 6 331,785 0.9% 1,480 0.9 4.46
Beyond...................... 8 800,948 2.1% 3,215 2.0 4.01
--- ---------- ---- -------- ----- -----
Total/Weighted Average......... 921 35,843,314 96.0% $162,835 100.0% $4.54
=== ========== ==== ======== ===== =====
- ---------------
(1) Includes five leases aggregating 103,363 square feet that were in-place as
of December 31, 1997, but which commenced in 1998.
(2) Based upon the base rent at expiration.
(3) Calculated as Annualized Base Rent divided by the square footage of expiring
leases.
RETAIL PROPERTIES
Property Characteristics. The Retail Properties generally contain between
80,000 and 350,000 rentable square feet. On average, 67% of the rentable square
feet for each of the Retail Properties is leased to one or more Anchor Tenants
(defined as those retail tenants occupying more than 10,000 rentable square feet
and all grocery stores and drugstores). The following table identifies
characteristics of a typical Retail Property.
COMMUNITY SHOPPING CENTER PROFILE
TYPICAL
BUILDING RANGE
-------- ----------------
Rentable Square Feet........................................ 190,000 80,000 - 350,000
Percentage Leased by Anchor Tenants......................... 67% 60% - 85%
Number of Tenants........................................... 25 10 - 50
Parking Spaces per 1,000 Square Feet........................ 5.0 4.0 - 6.0
Square Footage Per Anchor Tenant............................ 25,000 10,000 - 100,000
Average Square Footage Per Non-Anchor Tenant................ 1,500 750 - 5,000
11
Lease Terms. The Retail Properties are typically leased on a triple net
basis, defined as leases in which tenants pay their proportionate share of real
estate taxes, operating costs and utility costs. In addition, some leases,
including some Anchor Tenant leases, require tenants to pay percentage rents
based on gross retail sales above predetermined thresholds. Typical Anchor
Tenant leases also provide for payment of a percentage administrative fee in
lieu of a management fee (calculated as a percentage of common area maintenance)
which ranges between 5% and 15%. Lease terms typical for Anchor Tenants range
from 10 to 20 years, with an average of 19 years, with renewal options for an
additional 10 to 20 years at fixed rents. Tenant improvement allowances are
standard and the amounts vary by submarket. Lease terms typical for Non-Anchor
Tenants range from three to 10 years, with an average of seven years. Non-Anchor
Tenants typically receive options to renew for an additional five-year term at
market rents.
The table below details the regional diversification of the Retail
Properties by listing the individual markets in which the Company owns and
operates its Retail Properties.
RETAIL PROPERTIES BY MARKET
AS OF DECEMBER 31, 1997
AVERAGE
ANCHOR TOTAL BASE RENT
NUMBER NUMBER RENTABLE RENTABLE ANNUALIZED PER SQUARE
OF OF SQUARE SQUARE PERCENTAGE BASE RENT FEET
REGION/MARKET CENTERS LEASES FEET FEET LEASED (000S)(1) LEASED(2)
------------- ------- ------ --------- --------- ---------- ---------- ----------
EASTERN
Albany............................ 1 28 522,694 602,498 99.7% $ 5,990 $ 9.98
Baltimore/Washington, D.C. ....... 1 12 389,669 404,669 99.9 4,639 11.48
Hartford.......................... 1 23 116,960 177,044 98.9 3,111 17.77
-- --- --------- --------- ----- ------- ------
Total/Weighted Average............ 3 63 1,029,323 1,184,211 99.6 13,740 11.65
MIDWESTERN
Chicago........................... 3 46 404,262 504,735 95.8 4,683 9.67
Minneapolis....................... 1 30 151,627 205,787 100.0 2,202 10.70
-- --- --------- --------- ----- ------- ------
Total/Weighted Average............ 4 76 555,889 710,522 97.0 6,885 9.99
SOUTHERN
Atlanta........................... 1 18 68,499 97,899 100.0 1,192 12.18
Houston........................... 5 98 563,677 823,599 94.8 8,288 10.61
Miami(3).......................... 4 106 497,149 782,025 85.2 7,953 11.94
-- --- --------- --------- ----- ------- ------
Total/Weighted Average............ 10 222 1,129,325 1,703,523 90.7 17,433 11.29
WESTERN
Denver............................ 2 66 343,917 512,342 98.1 4,992 9.93
Los Angeles....................... 3 153 408,904 751,132 98.6 10,527 14.21
Reno.............................. 1 14 47,140 76,757 94.3 726 10.03
San Diego......................... 2 79 107,015 276,539 94.8 4,303 16.41
San Francisco Bay Area............ 5 113 419,117 673,031 97.9 8,898 13.50
Santa Barbara..................... 1 25 92,980 144,775 96.9 2,233 15.92
Seattle........................... 2 33 123,688 183,514 100.0 2,269 12.37
-- --- --------- --------- ----- ------- ------
Total/Weighted Average............ 16 483 1,542,761 2,618,090 97.8 33,948 13.26
-- --- --------- --------- ----- ------- ------
TOTAL/WEIGHTED AVERAGE.............. 33 844 4,257,298 6,216,346 96.1% $72,006 $12.05
== === ========= ========= ===== ======= ======
- ---------------
(1) Annualized Base Rent means the monthly contractual amount under existing
leases as of December 31, 1997, multiplied by 12. This amount excludes
expense reimbursements and rental abatements.
(2) Calculated as total Annualized Base Rent divided by total rentable square
feet actually leased as of December 31, 1997.
(3) Percentage leased rate is attributable to the renovation of Palm Aire, which
was 55% leased as of December 31, 1997. See "Renovation, Expansion and
Development Projects in Progress."
12
RETAIL PROPERTY LEASE EXPIRATIONS
The following table sets forth a summary schedule of the Retail Property
lease expirations for leases in place as of December 31, 1997 without giving
effect to the exercise of renewal options or termination rights, if any, at or
prior to the scheduled expirations.
RETAIL PROPERTY LEASE EXPIRATIONS(1)
AS OF DECEMBER 31, 1997
ANNUALIZED PERCENTAGE OF ANNUALIZED
RENTABLE PERCENTAGE BASE ANNUALIZED RENT OF
SQUARE OF TOTAL RENT OF BASE EXPIRING
NUMBER OF FOOTAGE OF RENTABLE EXPIRING RENT OF LEASES PER
YEAR OF LEASE LEASES LEASES SQUARE LEASES EXPIRING SQUARE
EXPIRATIONS EXPIRING EXPIRING FOOTAGE (000S)(2) LEASES FOOT(3)
------------- --------- ---------- ---------- ------------ ------------- ----------
1998......................... 134 436,544 7.0% $ 5,350 6.7% $12.26
1999......................... 117 378,979 6.1 5,427 6.8 14.32
2000......................... 110 422,775 6.8 5,487 6.9 12.98
2001......................... 103 403,393 6.5 6,022 7.6 14.93
2002......................... 119 373,594 6.0 6,985 8.8 18.70
2003......................... 39 232,725 3.7 3,354 4.2 14.41
2004......................... 31 205,520 3.3 3,100 3.9 15.09
2005......................... 36 142,907 2.3 3,358 4.2 23.50
2006......................... 46 295,923 4.8 5,540 7.0 18.72
2007......................... 30 394,022 6.3 4,575 5.8 11.61
2008......................... 11 252,033 4.1 2,205 2.8 8.75
and beyond................... 82 2,467,558 39.7 28,076 35.3 11.38
--- --------- ---- ------- ----- ------
Total/Weighted Average.......... 858 6,005,973 96.6% $79,479 100.0% $13.23
=== ========= ==== ======= ===== ======
- ---------------
(1) Includes 14 leases aggregating 31,207 square feet that were in-place as of
December 31, 1997, but which commenced in 1998.
(2) Based upon base rent at expiration.
(3) Calculated as Annualized Base Rent divided by the square footage of expiring
leases.
LEASE RENEWALS, RETENTION RATES AND RENT INCREASES
The following table sets forth information relating to lease renewals,
retention rates, and rent increases on renewal and re-tenanted space for the
Properties for each of the periods presented.
YEAR ENDED DECEMBER 31, TOTAL/
---------------------------- WEIGHTED
1994 1995 1996 1997 AVERAGE
---- ---- ---- ---- --------
INDUSTRIAL PROPERTIES
Retention rate..................................... 64.0% 67.9% 79.2% 69.5% 71.5%
Rent increases (decreases)......................... (5.9%) 4.8% 4.7% 13.0%
RETAIL PROPERTIES
Retention rate..................................... 82.4% 63.5% 88.4% 87.8% 82.8%
Rent increases..................................... 9.1% 3.2% 5.4% 10.1%
TOTAL PROPERTIES
Retention rate..................................... 65.6% 67.7% 79.8% 70.3% 72.1%
13
RECURRING BUILDING IMPROVEMENTS
The Company considers recurring building improvements to be expenditures
that (i) are incurred subsequent to the first three years of ownership of the
Property, during which the initial capital improvement plan is completed and
(ii) prevent deterioration or maintain the building in an efficient operating
condition. The table below summarizes recurring building improvements for the
years ended December 31, 1994, 1995, 1996, and 1997 for the Industrial
Properties and the Retail Properties. The amounts set forth below are not
necessarily indicative of future levels of building improvements.
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996 1997
----- ----- ----- -----
INDUSTRIAL PROPERTIES
Average improvements per square foot...................... $0.00 $0.01 $0.01 $0.05
RETAIL PROPERTIES
Average improvements per square foot...................... $0.01 $0.03 $0.04 $0.15
RECURRING TENANT IMPROVEMENTS AND LEASING COMMISSIONS
The tables below summarize for Industrial Properties and Retail Properties,
separately, the recurring tenant improvements and leasing commissions per square
feet leased for the years ended December 31, 1994, 1995, 1996, and 1997. The
recurring tenant improvements and leasing commissions represent costs incurred
to lease space after the initial lease term of the initial tenant, excluding
costs incurred to relocate tenants as part of a re-tenanting strategy. The
tenant improvements and leasing commissions set forth below are not necessarily
indicative of future tenant improvements and leasing commissions.
YEAR ENDED DECEMBER 31,
-------------------------------- WEIGHTED
1994 1995 1996 1997 AVERAGE
----- ----- ----- ----- --------
INDUSTRIAL PROPERTIES
Expenditures per renewed square foot leased.... $0.83 $0.91 $0.93 $1.05 $0.96
Expenditures per re-tenanted square foot
leased...................................... $2.14 $1.75 $1.97 $1.62 $1.83
Aggregate weighted average per square foot
leased...................................... $1.61 $1.32 $1.29 $1.30 $1.35
RETAIL PROPERTIES
Expenditures per renewed square foot leased.... $4.95 $5.53 $4.72 $4.25 $4.71
Expenditures per re-tenanted square foot
leased...................................... $6.11 $5.37 $6.53 $7.92 $7.10
Aggregate weighted average per square foot
leased...................................... $5.61 $5.46 $5.61 $6.41 $5.98
OCCUPANCY
The table below sets forth weighted average occupancy rates and average
base rent per square foot, based on square feet leased, of the Industrial
Properties and the Retail Properties as of December 31, 1994, 1995, 1996 and
1997.
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996 1997
------ ------ ------ ------
INDUSTRIAL PROPERTIES
Occupancy rate at period end.......................... 96.9% 97.3% 97.2% 95.7%
Average base rent per square foot(1).................. $ 3.48 $ 3.43 $ 3.81 $ 4.26
RETAIL PROPERTIES
Occupancy rate at period end.......................... 93.7% 92.4% 92.4% 96.1%
Average base rent per square foot(1).................. $ 9.45 $10.46 $11.32 $12.05
- ---------------
(1) Average base rent per square foot represents the total contractual base
rental revenue for the period divided by the average occupied square feet
during the period.
14
RENOVATION, EXPANSION AND DEVELOPMENT PROJECTS IN PROGRESS
The following table sets forth the Properties owned by the Company that are
currently undergoing renovation, expansion, or new development.
DEVELOPMENT ACTIVITY
----------------------------------------------------
INITIAL ESTIMATED TOTAL
ACQUISITION SQUARE SHELL ESTIMATED SQUARE
DATE PRICE FEET AT COMPLETION INVESTMENT FEET AT
LOCATION ACQUIRED (000S)(1) ACQUISITION TYPE(3) DATE(4) (000S)(5) COMPLETION
-------- -------- ----------- ----------- ----------- ---------- ---------- ------------
INDUSTRIAL PROPERTIES
South Brunswick, NJ..... May-96 $21,000 554,521 Expansion July-98 $46,900 1,200,000
San Leandro, CA......... Aug-96 5,400 175,325 Development Jan-98 10,600 255,300
San Leandro, CA(2)...... Aug-97 1,100 -- Development Aug-98 4,800 115,000
Mendota Heights,
MN(2)................. June-97 1,100 -- Development Nov-97 6,900 150,400
------- ------- ------- ---------
28,600 729,846 69,200 1,720,700
RETAIL PROPERTIES
Miami, FL............... May-96 3,100 143,987 Renovation Feb-98 11,500 144,300
Reno, NV................ Sep-90 8,600 76,757 Expansion May-98 9,100 80,800
------- ------- ------- ---------
11,700 220,744 20,600 225,100
------- ------- ------- ---------
Total..................... $40,300 950,590 $89,800 1,945,800
======= ======= ======= =========
- ---------------
(1) Purchase price plus acquisition costs and capital costs.
(2) Represents the development of a building.
(3) Renovation with respect to a Property means capital improvements, which have
totaled 20% or more of the total cost of such Property within a 24-month
period or have resulted in material improvement of physical condition.
Expansion with respect to a Property means construction resulting in an
increase in the rentable square footage of an existing structure or the
development of additional buildings on a Property on which existing
buildings are located. Development with respect to a Property means new
construction on a previously undeveloped location.
(4) Represents expected date of shell completion. Such dates are based upon the
Company's current planning estimates and forecasts and are therefore subject
to change.
(5) Represents total estimated cost of renovation, expansion or development,
including initial acquisition costs. The estimates are based on the
Company's current planning estimates and forecasts and are therefore subject
to change.
PROPERTIES HELD THROUGH JOINT VENTURES, LIMITED LIABILITY COMPANIES AND
PARTNERSHIPS
As of December 31, 1997, the Company held interests in eight joint
ventures, limited liability companies and partnerships (collectively, the "Joint
Ventures") with certain unaffiliated third parties (the "Joint Venture
Participants"). Pursuant to the existing agreements with respect to each Joint
Venture, the Company holds a greater than 50% interest in seven of the Joint
Ventures and a 50% interest in the eighth Joint Venture, but in certain cases
such agreements provide that the Company will be a limited partner or that the
Joint Venture Participant will be principally responsible for day-to-day
management of the Property (though in all such cases, the Company has approval
rights with respect to major decisions involving the underlying Properties).
Under the agreements governing the Joint Ventures, the Company and the Joint
Venture Participant may be required to make additional capital contributions,
and subject to certain limitations, the Joint Ventures may incur additional
debt. Such agreements also impose certain restrictions on the transfer of the
interest in the Joint Venture by the Company or the Joint Venture Participant,
and provide certain rights to the Company or the Joint Venture Participant to
sell its interest to the Joint Venture or to the other participant on terms
specified in the agreement. All Joint Ventures terminate in 2024 or later, but
the Joint Ventures may end earlier if the respective Joint Venture ceases to
hold any interest in or have any obligations relating to the property held by
such Joint Venture.
15
The following table sets forth certain information regarding the Joint
Ventures as of December 31, 1997 (dollars in thousands):
GROSS
BOOK MORTGAGE MINORITY COMPANY'S FORM OF
PROPERTY VALUE DEBT INTEREST EQUITY COMPANY'S INTEREST
-------- -------- -------- -------- --------- -----------------------
INDUSTRIAL PROPERTIES
Chancellor................ $ 6,390 $ (2,987) $ (604) $ 2,799 90% general partnership
interest
Fairway Drive............. 12,956 -- (314) 12,642 70% LLC interest
Nippon Express............ 5,079 -- (446) 4,633 50% limited partnership
interest
Metric Center............. 43,957 -- (5,457) 38,500 87.15% limited
partnership interest
-------- -------- -------- --------
Subtotal............... 68,382 (2,987) (6,821) 58,574
RETAIL PROPERTIES
Kendall Mall.............. 35,703 (25,162) 438 10,979 50.0001% limited
partnership interest
Manhattan Village......... 83,287 -- (7,941) 75,346 90% LLC interest
Palm Aire................. 12,983 (4,505) (1,107) 7,371 50.0001% general
partnership interest
The Plaza at Delray....... 35,021 (23,455) (353) 11,213 50.0001% limited
partnership interest
-------- -------- -------- --------
Subtotal............... 166,994 (53,122) (8,963) 104,909
-------- -------- -------- --------
Total....................... $235,376 $(56,109) $(15,784) $163,483
======== ======== ======== ========
The Company accounts for all of the above investments on a consolidated
basis for financial reporting purposes because of its ability to exercise
control over significant aspects of the investment as well as its significant
economic interest in such investments. See "Item 14, Note 2 of the Notes to
Consolidated Financial Statements."
SECURED DEBT
As of December 31, 1997, the Operating Partnership had $517.4 million of
indebtedness secured by deeds of trust on 48 of the Properties. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 4 to the Company's
consolidated financial statements included herewith. Management believes that as
of December 31, 1997, the value of the Properties securing the respective
obligations in each case exceeded the principal amount of the outstanding
obligations.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than routine
litigation incidental to its business, to which the Company is a party or of
which any of its properties are the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock began trading on the New York Stock Exchange
("NYSE") on November 21, 1997, under the symbol "AMB." As of March 11, 1998,
there were 121 holders of record of the
16
Company's Common Stock (excluding shares held through The Deposit Trust Company,
as nominee). Set forth below are the high and low sales prices per share of the
Company's Common Stock, as reported on the NYSE composite tape, and the
distribution per share paid by the Company during the period from November 26,
1997 through December 31, 1997.
1997 HIGH LOW DISTRIBUTION
---- ---- --- ------------
4th Quarter (from 11/21/97)............................ $25 1/8 $22 1/4 $0.134
On December 8, 1997, the Company declared a pro rata distribution of $0.134
per common share, payable December 29, 1997 to stockholders of record on
December 18, 1997. The pro rata distribution covered the period from November
26, 1997 through December 31, 1997, and was based upon $0.3425 per common share
for a full quarter. For Federal income tax purposes, 100% of the distribution
was reported to stockholders as ordinary income.
In connection with the Formation Transactions, the Company issued
65,022,185 shares of common stock in consideration for the acquisition of
certain properties. In addition, the Operating Partnership issued 2,542,163 LP
Units in consideration for the acquisition of certain properties. Holders of the
LP Units may redeem part or all of their LP Units for cash, or at the election
of the Company, exchange such LP Units for shares of Common Stock on a
one-for-one basis. This redemption/exchange right may not be exercised prior to
November 25, 1998.
The issuance of the Common Stock and the LP Units in connection with the
Formation Transactions constituted private placements of securities which were
exempt from the registration requirement of the Securities Act of 1933, as
amended, pursuant to Section 4(2) and Rule 506 of Regulation D promulgated
thereunder.
ITEM 6. SELECTED FINANCIAL AND OTHER DATA
SELECTED COMPANY AND PREDECESSOR FINANCIAL AND OTHER DATA
The following table sets forth selected consolidated historical financial
and other data for the Company and its Predecessor on an historical basis for
the years ended December 31, 1993, 1994, 1995, 1996 and 1997, and on a pro forma
basis for the Company for the year ended December 31, 1997 (giving effect to the
completion of the Formation Transactions, the Offering and certain property
acquisitions and dispositions). The historical financial information contained
in the tables should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements and accompanying Notes in "Item 8. Financial
Statements and Supplementary Data" and the financial schedule included elsewhere
in the Form 10-K.
The historical results of the Company for 1997 include the results of
operations of the Company, including property operations for the period from
November 26, 1997 (the commencement of operations as a fully integrated real
estate company) to December 31, 1997 and the results of the Company's
Predecessor, an investment manager, for the period from January 1, 1997 to
November 25, 1997.
SELECTED PROPERTY FINANCIAL AND OTHER DATA
For comparative purposes, the table that follows provides selected
historical financial and other data of the Properties which were owned by the
Company as of December 31, 1997 for periods prior to the Formation Transactions
and excludes the results of the Predecessor. The table provides consolidated
financial and other data on a pro forma basis after giving effect to the
completion of the Formation Transactions, the Offering and certain property
acquisitions (including the acquisition of 5.5 million square feet of industrial
properties) and dispositions. The historical financial information contained in
the tables should be read in conjunction with "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements and accompanying Notes in "Item 8. Financial Statements and
Supplementary Data" and the financial schedule included elsewhere herein.
17
The historical results of the Properties for 1997 include the results
achieved by the Company for the period from November 26, 1997 (acquisition date)
to December 31, 1997 and the results achieved by the prior owners of the
Properties for the period from January 1, 1997 to November 25, 1997. The
historical results of operations of the Properties for periods prior to November
26, 1997 include Properties that were managed by the Predecessor and exclude the
results of four properties that were contributed to the Company in the Formation
Transactions that were not previously managed by the Predecessor. In addition,
the historical results of operations include the results of properties acquired
after November 26, 1997, from the date of acquisition of such properties to
December 31, 1997.
In the opinion of management, the pro forma condensed consolidated
financial information provides for all adjustments necessary to reflect the
effects of the Formation Transactions, the Offering, property acquisitions and
dispositions and certain other transactions. The pro forma information is
unaudited and is not necessarily indicative of the consolidated results that
would have occurred if the transactions and adjustments reflected therein had
been consummated in the period or on the date presented, or on any particular
date in the future, nor does it purport to represent the financial position,
results of operations or changes in cash flows for future periods.
SELECTED COMPANY AND PREDECESSOR FINANCIAL AND OTHER DATA
(IN THOUSANDS EXCEPT SHARE DATA, PERCENTAGES AND NUMBER OF PROPERTIES)
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
COMPANY(2)(3)
-----------------------
PREDECESSOR(1) HISTORICAL PRO FORMA
------------------------------------ ----------- ---------
1993 1994 1995 1996 1997 1997
------ ------- ------- ------- ----------- ---------
OPERATING DATA:
Total revenues....................... $7,155 $12,865 $16,865 $23,991 $ 56,062 $ 284,674
Income from operations before
minority interests................. 798 2,925 3,296 7,140 18,885 103,903
Net income........................... 798 2,925 3,262 7,003 18,228 99,508
Net income per share:
Basic(4)........................... 0.17 0.59 0.64 1.38 1.39 1.16
Diluted(4)......................... 0.17 0.59 0.64 1.38 1.38 1.15
OTHER DATA:
EBITDA(5)............................ $ 195,218
Funds from Operations(6)............. 147,409
Cash flows provided by (used in):
Operating activities............... 131,621
Investing activities............... (607,768)
Financing activities............... 553,199
BALANCE SHEET DATA:
Investments in real estate at cost... $ -- $ -- $ -- $ -- $2,442,999
Total assets......................... 2,739 4,092 4,948 7,085 2,506,255
Secured debt(7)...................... -- -- -- -- 535,652
Unsecured credit facility............ -- -- -- -- 150,000
Stockholders' equity................. 2,480 3,848 4,241 6,300 1,668,030
- ---------------
(1) Represents the Predecessor's historical financial and other data for the
years ended December 31, 1993, 1994, 1995, and 1996. The Predecessor
operated as an investment manager prior to November 26, 1997.
(2) Represents the Predecessor's historical financial and other data for the
period January 1, 1997 through November 25, 1997. The financial and other
data of the Company, and the properties acquired in the Formation
Transactions, have been included subsequent to November 26, 1997, the date
of acquisition.
18
(3) Pro forma financial and other data has been prepared as if the Formation
Transactions, the Offering (as described in "Item 14. Notes to Consolidated
Financial Statements, Note 1") and certain property acquisitions and
dispositions had occurred on January 1, 1997.
(4) Pro forma basic and diluted net income per share equals the pro forma net
income divided by 85,874,513 and 86,156,556 shares, respectively.
(5) EBITDA is computed as income from operations before disposal of properties
and minority interests plus interest expense, income taxes, depreciation and
amortization. Management believes that in addition to cash flows and net
income, EBITDA is a useful financial performance measure for assessing the
operating performance of an equity REIT because, together with net income
and cash flows, EBITDA provides investors with an additional basis to
evaluate the ability of a REIT to incur and service debt and to fund
acquisitions and other capital expenditures.
(6) FFO represents net income (loss) before minority interests and extraordinary
items, adjusted for depreciation on real property and amortization of tenant
improvement costs and lease commissions, gains (losses) from the disposal of
properties and FFO attributable to minority interests in consolidated joint
ventures whose interests are not convertible into shares of Common Stock.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(7) Secured debt as of December 31, 1997 includes unamortized debt premiums of
approximately $18,286. See "Item 14. Notes to Consolidated Financial
Statements, Notes 2 and 4."
19
SELECTED PROPERTY FINANCIAL AND OTHER DATA
(IN THOUSANDS EXCEPT PERCENTAGES AND NUMBER OF PROPERTIES)
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
COMPANY(2)(3)
----------------------
PROPERTIES COMBINED(1) HISTORICAL PRO FORMA
--------------------------------------------- ---------- ---------
1993 1994 1995 1996 1997 1997
-------- -------- ---------- ---------- ---------- ---------
OPERATING DATA:
Rental revenues............... $ 24,243 $ 50,893 $ 106,180 $ 166,415 $ 233,856 $282,665
Other income.................. 155 789 2,069 1,538 1,369 2,009
Total revenues................ 24,398 51,682 108,249 167,953 235,225 284,674
Property operating expenses... 7,991 16,744 36,891 55,321 80,858 81,478
Net operating income.......... 16,407 34,938 71,358 112,632 154,367 203,196
BALANCE SHEET DATA:
Investment in real estate at
cost........................ 323,230 666,672 1,018,681 1,616,091 2,442,999
Secured debt(4)............... 100,496 201,959 254,067 522,634 535,652
PROPERTY DATA:
INDUSTRIAL PROPERTIES
Total rentable square footage
of properties at end of
period...................... 5,638 13,364 21,598 29,609 37,329
Number of properties at end of
period...................... 12 28 44 60 95
Occupancy rate at end of
period...................... 97.4% 96.9% 97.3% 97.2% 95.7%
RETAIL PROPERTIES
Total rentable square footage
of properties at end of
period...................... 1,074 2,422 3,299 5,282 6,216
Number of properties at end of
period...................... 9 14 19 30 33
Occupancy rate at end of
period...................... 96.5% 93.7% 92.4% 92.4% 96.1%
- ---------------
(1) Represents the Properties' combined historical financial and other data for
the years ended December 31, 1993, 1994, 1995, and 1996. The historical
results of operations of the Properties for periods prior to November 26,
1997 include Properties that were managed by the Predecessor and exclude the
results of four properties that were contributed to the Company in the
Formation Transactions that were not previously managed by the Predecessor.
(2) The historical results of the Properties for 1997 include the results of the
Company for the period from November 26, 1997 (acquisition date) to December
31, 1997 and the results achieved by the prior owners of the Properties for
the period from January 1, 1997 to November 25, 1997.
(3) The pro forma financial and other data has been prepared as if the Formation
Transactions, the Offering (as described in "Item 14. Notes to Consolidated
Financial Statements, Note 1"), and certain property acquisitions and
dispositions had occurred on January 1, 1997.
(4) Secured debt as of December 31, 1997 includes unamortized debt premiums of
approximately $18,286. See "Item 14. Notes to Consolidated Financial
Statements, Notes 2 and 4."
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the consolidated financial
condition and results of operations should be read in conjunction with "Item 14.
Notes to Consolidated Financial Statements" and "Item 6. Selected Financial and
Other Data." Statements contained in this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" which are not historical facts
may be forward looking statements. Such statements are subject to certain risks
and uncertainties which could cause actual results to differ materially from
those projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
GENERAL
Because of the significant impact of the Formation Transactions and the
Offering on the Company's results of operations, the discussion below is
presented as follows: (i) results of the Company and its Predecessor for 1997,
1996, and 1995, and (ii) results of the Properties for 1997, 1996, and 1995.
The historical results of the Company for 1997 include its results,
including property operations, for the period from November 26, 1997 (the
commencement of operations as a fully integrated real estate company) to
December 31, 1997 and the results of the Company's Predecessor, an investment
manager, for the period from January 1, 1997 to November 25, 1997, and the years
ended December 31, 1996 and 1995. As an investment manager, the Predecessor's
revenues consisted primarily of fees earned in connection with real estate
management services. Management's discussion and analysis of the Company and
Predecessor for the years ended December 31, 1997, 1996, and 1995 is limited to
investment management and other income and general and administrative expenses,
and excludes a discussion of rental revenues, operating expenses, interest
expense and depreciation and amortization because such analysis is not
comparable or meaningful given the differences in lines of business between the
Company and the Predecessor.
The historical results of the Properties for 1997 include the results
achieved by the Company for the period from November 26, 1997 (acquisition date)
to December 31, 1997 and the results achieved by the prior owners of the
Properties for the period from January 1, 1997 to November 25, 1997. The
discussion below for the years ended December 31, 1997, 1996 and 1995 is limited
to a discussion of rental revenues, property operating expense and real estate
taxes and excludes an analysis of other income, interest expense and
depreciation and amortization because such analysis is not comparable or
meaningful given the differences in capital structures between the Company and
the prior owners of the Properties and the impact of the Formation Transactions
and Offering on the Properties.
COMPANY AND PREDECESSOR RESULTS OF OPERATIONS
COMPANY AND PREDECESSOR -- YEARS ENDED DECEMBER 31, 1997 AND 1996
Investment management and other income. Investment management and other
income for the period from January 1, 1997 to November 25, 1997 was $29.0
million, which on an annualized basis represents a 34.1% increase over the year
ended December 31, 1996. The increase reflects the growth in the portfolio under
management. Investment management and other income for the period from November
26, 1997 to December 31, 1997 was $0.6 million.
General and administrative expenses. General and administrative expenses
for the period from January 1, 1997 to November 25, 1997 were $19.4 million,
which represents a 27.7% increase on an annualized basis over the year ended
December 31, 1996. The increase was attributable to an increase in staffing that
resulted from the growth in the portfolio under management.
PREDECESSOR -- YEARS ENDED DECEMBER 31, 1996 AND 1995
Investment management and other income. Investment management and other
income for the years ended December 31, 1995 and 1996 was $16.9 million and
$24.0 million, respectively, an increase of 42.0%. The increase from 1995 to
1996 was primarily due to management fees associated with a growing portfolio
and increased economies of scale from managing this larger portfolio.
21
General and administrative expenses. General and administrative expenses
for the years ended December 31, 1995 and 1996 were $13.6 million and $16.9
million, respectively, reflecting the increase in size of the portfolio under
management.
PROPERTIES RESULTS OF OPERATIONS
The historical results of operations of the Properties for periods prior to
November 26, 1997 include Properties that were managed by the Predecessor and
exclude the results of four properties that were contributed to the Company in
the Formation Transactions that were not previously managed by the Predecessor.
In addition, the historical results of operations include the results of
properties acquired after November 26, 1997, from the date of acquisition of
such properties to December 31, 1997.
The historical property financial data presented herein show significant
increases in revenues and expenses principally attributable to the substantial
portfolio growth. As a result, the Company does not believe the year-to-year
financial data are comparable to prior periods. Therefore, the analysis below
shows (i) changes resulting from Properties that were held during the entire
period for both years being compared (the "Core Portfolio") and (ii) changes
attributable to acquisition and development activity. For the comparison between
the years ended December 31, 1997 and 1996, the Core Portfolio consists of the
59 Properties acquired prior to January 1, 1996, and for the comparison between
the years ended December 31, 1996 and 1995, the Core Portfolio consists of the
42 Properties acquired prior to January 1, 1995. The Company's future financial
condition and results of operations, including rental revenues, may be impacted
by the acquisition of additional properties. No assurance can be given that the
past trends of revenues, expenses or income of the Company will continue in the
future at their historical rates, and any variation therefrom may be material.
PROPERTIES -- YEARS ENDED DECEMBER 31, 1997 AND 1996
Rental revenues. Rental income, including tenant reimbursements and other
property related income, increased by $67.5 million, or 40.6%, for the year
ended December 31, 1997, to $233.9 million as compared to $166.4 million for the
year ended December 31, 1996. Approximately $8.8 million, or 13.0% of this
increase, was attributable to the Core Portfolio, with the remaining $58.7
million attributable to Properties acquired in 1997 and 1996. The 6.3% growth in
rental income in the Core Portfolio resulted primarily from the incremental
effect of rental rate increases and reimbursement of expenses. In 1997, the
Company increased average contractual or base rental rates on the Properties by
12% on 393 new and renewing leases totaling 7.5 million rentable square feet
(representing 17.2% of the Properties' aggregate rentable square footage).
Property operating expenses and real estate taxes. Property operating
expenses and real estate taxes increased by $25.6 million, or 46.3%, for the
year ended December 31, 1997, to $80.9 million as compared to $55.3 million for
the year ended December 31, 1996. Approximately $3.4 million of this increase
was attributable to the Core Portfolio, with the remaining $22.2 million
attributable to Properties acquired in 1997 and 1996. Core Portfolio real estate
taxes and insurance expense increased by approximately $1.4 million from 1996 to
1997. Core Portfolio other property operating expenses (excluding real estate
taxes and insurance) increased by $2.0 million from 1996 to 1997. The increases
in expenses are primarily due to increases in property tax assessment values and
incentive management fees expense.
PROPERTIES -- YEARS ENDED DECEMBER 31, 1996 AND 1995
Rental revenues. Rental income, including tenant reimbursements and other
property related income, increased by $60.2 million, or 56.7%, for the year
ended December 31, 1996, to $166.4 million as compared to $106.2 million for the
year ended 1995. Approximately $7.5 million, or 12.5% of this increase, was
attributable to the Core Portfolio, with the remaining $52.7 million
attributable to Properties acquired in 1996 and 1995. The 8.6% growth in rental
income in the Core Portfolio resulted primarily from rental rate increases.
Property operating expenses and real estate taxes. Property operating
expenses and real estate taxes increased by $18.4 million, or 49.9%, for the
year ended December 31, 1996, to $55.3 million as compared to $36.9 million for
the year ended December 31, 1995. Approximately $1.6 million of this increase
was
22
attributable to the Core Portfolio, with the remaining $16.8 million
attributable to Properties acquired in 1996 and 1995. The Core Portfolio had an
increase of approximately $1.0 million in real estate tax and insurance expense.
The other property operating expenses (excluding real estate taxes and
insurance) for the Core Portfolio increased by $0.6 million from 1995 to 1996.
The increases in expenses are primarily due to increases in property tax
assessment values and miscellaneous expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects that its principal sources of funding for acquisitions,
development, expansion and renovation of the Properties will include the
unsecured credit facility, permanent secured debt financing, proceeds from
public and private unsecured debt offerings, proceeds from public and private
equity offerings and cash flows provided by operations. Management believes that
its liquidity and its ability to access private and public debt and equity
capital are adequate to continue to meet liquidity requirements for the
foreseeable future.
CAPITAL RESOURCES
The Company has a $500 million unsecured revolving credit agreement (the
"Credit Facility") with Morgan Guaranty Trust Company of New York as agent, and
a syndicate of twelve other banks. The Credit Facility has a term of three
years, and is subject to a fee that accrues on the daily average undrawn funds,
which varies between 0.15% to 0.25% based on the Company's credit rating. The
Company is using the Credit Facility principally for acquisitions and for
general working capital requirements. Borrowings under the Credit Facility bear
interest at LIBOR plus 110 basis points through August 1998 or until the Company
receives an investment grade debt rating. Thereafter, borrowings under the
Credit Facility will bear interest at a rate equal to LIBOR plus 90 to 120 basis
points, depending on the Company's then current debt rating. As of December 31,
1997, the outstanding balance on the Credit Facility was $150 million and bore
interest at LIBOR plus 1.10%, resulting in an interest rate on most recent
borrowings of 7.10%. Monthly debt service payments on the Credit Facility are
interest only. The Credit Facility matures in November 2000. See "Note 4 of
Notes to Consolidated Financial Statements." The total amount available under
the Credit Facility fluctuates based upon the borrowing base, as defined in the
agreement governing the Credit Facility. Currently, the total amount available
is approximately $460 million.
In connection with the Formation Transactions, the Company assumed a
12-year non-recourse financing facility, which is secured by six of the
Properties. As of December 31, 1997, $73 million was outstanding. Payments of
interest only are due monthly at a fixed annual interest rate of 7.53%. The
payment of principal is due December 12, 2008. Under the secured facility, the
Company may substitute collateral, subject to certain requirements with respect
to the property offered as replacement collateral.
In connection with the Formation Transactions, the Company also assumed
mortgage indebtedness associated with 42 of the Properties. The aggregate
principal amount of such mortgage indebtedness was $444.4 million as of December
31, 1997. The mortgage indebtedness bears interest at rates varying from 7.01%
to 10.38% per annum (with a weighted average of 7.87%) and final maturity dates
ranging from 1998 to 2008.
As of December 31, 1997, the Company's total outstanding debt was
approximately $685.7 million, including unamortized debt premiums of
approximately $18.3 million, which were recorded in connection with the
Formation Transactions. See "Note 4 of Notes to Consolidated Financial
Statements." The total amount of debt principal to be paid in 1998 is
approximately $19.4 million, including normal principal amortization of
approximately $5.6 million.
In order to maintain financial flexibility and facilitate the rapid
deployment of capital through market cycles, the Company presently intends to
operate with a debt-to-total market capitalization ratio of less than 45%.
Additionally, the Company intends to continue to structure its balance sheet in
order to obtain an investment grade rating on its senior unsecured debt. The
Company intends to keep the majority of its assets unencumbered to facilitate
such rating. As of December 31, 1997, the Company's debt-to-total market
capitalization ratio was approximately 23.6%.
23
LIQUIDITY
As of December 31, 1997, the Company had approximately $39.9 million in
cash and cash equivalents and $150 million of outstanding borrowings drawn from
the Credit Facility. The Company intends to use cash from operations and
available borrowings under its Credit Facility to fund acquisitions and capital
expenditures and to provide for general working capital requirements.
On December 8, 1997, the Company declared a pro rata distribution of $0.134
per common share, payable December 29, 1997 to stockholders of record on
December 18, 1997. The pro rata distribution covered the period from November
26, 1997 through December 31, 1997, and was based upon $0.3425 per common share
for a full quarter. For Federal income tax purposes, 100% of the distribution
was reported to stockholders as ordinary income.
The anticipated size of the Company's distributions, using only cash from
operations, will not allow it to retire all of its debt as it comes due.
Therefore, the Company intends to repay maturing debt with net proceeds from
future debt and/or equity financings. No assurance can be given, however, that
future financings will be available on terms favorable to the Company.
LEASING ACTIVITY
During the year ending December 31, 1998, leases relating to approximately
5.7 million rentable square feet of the Industrial Properties, 13.1% of total
rentable square feet, and 0.4 million rentable square feet of the Retail
Properties, 1.0% of total rentable square feet, will expire. Although no
assurances can be given, the Company expects that it will be able to renew or
re-tenant the expiring square feet at then-prevailing market rates. In
connection with the renewal and re-tenanting of space, the Company will likely
incur tenant improvement and leasing costs. See "Properties -- Retail
Properties -- Recurring Tenant Improvements and Leasing Commissions."
CAPITAL COMMITMENTS
In addition to recurring capital expenditures and costs to renew or
re-tenant space, the Company is currently in the process of renovating,
expanding or developing six projects at a total estimated cost of $89.9 million.
Further, the Company has acquired or is in the process of acquiring additional
properties. The Company presently expects to fund these expenditures with cash
from operations and borrowings under the Credit Facility. Other than these
capital items, the Company has no material capital commitments. The Company
expects that its funds from operations and availability under its Credit
Facility will be sufficient to meet expected capital commitments for the next 12
months.
INFLATION
Substantially all of the industrial and retail leases require the tenant to
pay, as additional rent, a portion of any increases in real estate taxes and
operating expenses over a base amount. In addition, many of the industrial and
retail leases provide for fixed increases in base rent or indexed escalations
(based on the Consumer Price Index or other measures). Management believes that
inflationary increases in operating expenses will be offset, in part, by the
expense reimbursements and contractual rent increases described above.
YEAR 2000 COMPLIANCE
The Company's current financial systems adequately provide for a four-digit
year and management does not believe that the year 2000 issue will materially
affect its operations. Additionally, the Company currently does not expect that
the year 2000 issue will materially affect its operations due to problems
encountered by its suppliers, customers and lenders.
FUNDS FROM OPERATIONS
Management believes that Funds from Operations ("FFO"), as defined by
NAREIT, is an appropriate measure of performance for an equity REIT. While FFO
is a relevant and widely used measure of operating performance of REITs, it does
not represent cash flow from operations or net income as defined by GAAP, and it
should not be considered as an alternative to those indicators in evaluating
liquidity or operating performance.
24
The following table reflects the calculation of the Company's FFO on a pro
forma basis after giving effect to the completion of the Offering, the Formation
Transactions, property acquisitions and dispositions, and certain other
transactions as if they had occurred on January 1, 1997. FFO is not presented
for the Properties and the Company on an historical basis because it is not
comparable or meaningful due to the significant differences in capital
structures between the Company and the prior owners of the Properties.
1997
--------------
(IN THOUSANDS,
EXCEPT SHARES)
Income from operations before minority interests............ $ 103,903
Real estate depreciation and amortization................... 45,886
Furniture, fixtures and equipment depreciation.............. (173)
FFO attributable to minority interests(1)(2)................ (2,207)
-----------
FFO(1)...................................................... $ 147,409
===========
Weighted average shares and units outstanding (diluted)..... 88,698,719
Cash flows provided by (used in):
Operating activities................................... 131,621
Investing activities................................... (607,768)
Financing activities................................... 553,199
- ---------------
(1) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 (the "White Paper") defines Funds from Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of properties, plus real estate related
depreciation and amortization. Management considers FFO an appropriate
measure of performance of an equity REIT because it is predicated on cash
flow analyses. The Company computes FFO in accordance with standards
established by the White Paper, which may differ from the methodology for
calculating FFO utilized by other REITs and, accordingly, may not be
comparable to such other REITs. FFO should not be considered as an
alternative to net income (determined in accordance with GAAP) as an
indicator of the Properties' financial performance or to cash flow from
operating activities (determined in accordance with GAAP) as a measure of
the Properties' liquidity, nor is it indicative of funds available to fund
the Properties' cash needs, including its ability to make distributions.
(2) Represents FFO attributable to minority interests in consolidated joint
ventures for the period presented, which has been computed as minority
interests' share of net income before disposal of properties plus minority
interests' share of real estate-related depreciation and amortization of the
consolidated joint ventures for such period. Such minority interests are not
convertible into shares of Common Stock.
25
SELECTED PRO FORMA PROPERTY FINANCIAL DATA
The following table provides selected pro forma property financial data on
the Company's Industrial and Retail Properties for the year ended December 31,
1997 (giving effect to the completion of the Formation Transactions, the
Offering and property acquisitions and dispositions).
SELECTED PRO FORMA PROPERTY FINANCIAL DATA
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1997
(IN THOUSANDS)
--------------------------------------------
INDUSTRIAL RETAIL TOTAL
PROPERTIES PROPERTIES PROPERTIES
------------ ------------ ------------
Rental revenues......................................... $ 187,793 $ 94,872 $ 282,665
Property operating expenses............................. 51,150 30,328 81,478
Net operating income.................................... 136,643 64,544 201,187
Real estate investments at cost(1)...................... 1,644,028 798,971 2,442,999
- ---------------
(1) Historical cost basis as of December 31, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Item 14. Exhibits, Financial Statement Schedules, and Reports of Form
8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12, AND 13.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE COMPENSATION,
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 10, Item 11, Item 12, and Item 13 will be
contained in a definitive proxy statement for its Annual Meeting of Stockholders
which the Registrant anticipates will be filed no later than 120 days after the
end of its fiscal year pursuant to Regulation 14A and accordingly these items
have been omitted in accordance with General Instruction G(3) to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) Financial Statements and Schedules:
The following consolidated financial information is included as a separate
section of this report on Form 10-K.
PAGE
----
Report of Independent Public Accountants.................... F-1
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-2
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997.............. F-5
Notes to Consolidated Financial Statements.................. F-6
Schedule III -- Real Estate and Accumulated Depreciation.... S-1
26
All other schedules are omitted since the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the financial statements and notes
thereto.
(3) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1* Articles of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
3.3* Form of Certificate for Common Stock of the Registrant.
10.1* Amended and Restated Agreement of Limited Partnership of AMB
Property, L.P.
10.2* Form of Registration Rights Agreement among the Registrant
and the persons named therein.
10.3* Amended and Restated Credit Agreement, dated August 8, 1997.
10.4* Form of Employment Agreement between the Registrant and
Executive Officers.
10.5* The 1997 Stock Option and Incentive Plan of the Registrant.
23.1** Consent of Arthur Andersen LLP.
24.1** Powers of Attorney (included in Part IV of this Form 10-K).
27.1** Financial Data Schedule -- AMB Property Corporation.
- ---------------
* Previously filed as an exhibit to Registration Statement on Form S-11 (No.
333-35915) and incorporated herein by reference.
** Filed herewith.
(b) Reports on Form 8-K:
Form 8-K dated December 31, 1997, was filed January 13, 1998.
(c) Exhibits:
See Item 14(a)(3) above.
(d) Financial Statement Schedules:
See Item 14(a)(1) and (2) above.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 30, 1998.
AMB PROPERTY CORPORATION
By: /s/ HAMID R. MOGHADAM
------------------------------------
Hamid R. Moghadam
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of AMB Property Corporation, hereby severally constitute Hamid R.
Moghadam, S. Davis Carniglia, John T. Roberts, Jr., and Michael A. Coke, and
each of them singly, our true and lawful attorneys with full power to them, and
each of them singly, to sign for us and in our names in the capacities indicated
below, the Form 10-K filed herewith and any and all amendments to said Form
10-K, and generally to do all such things in our names and in our capacities as
officers and directors to enable AMB Property Corporation to comply with the
provisions of the Securities Exchange Act of 1934, and all requirements of the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys, or any of them, to said
Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ HAMID R. MOGHADAM President and Chief Executive March 30, 1998
- --------------------------------------------------- Officer, Director (Principal
Hamid R. Moghadam Executive Officer)
/s/ S. DAVIS CARNIGLIA Managing Director, Chief March 30, 1998
- --------------------------------------------------- Financial Officer and General
S. Davis Carniglia Counsel (Principal Financial
Officer)
/s/ MICHAEL A. COKE Director of Financial Management March 30, 1998
- --------------------------------------------------- and Reporting, Chief Accounting
Michael A. Coke Officer (Principal Accounting
Officer)
/s/ T. ROBERT BURKE Chairman of the Board, Director March 30, 1998
- ---------------------------------------------------
T. Robert Burke
/s/ DOUGLAS D. ABBEY Chairman of the Investment March 30, 1998
- --------------------------------------------------- Committee, Director
Douglas D. Abbey
/s/ DANIEL H. CASE, III Director March 30, 1998
- ---------------------------------------------------
Daniel H. Case, III
/s/ ROBERT H. EDELSTEIN, PH.D Director March 30, 1998
- ---------------------------------------------------
Robert H. Edelstein, Ph.D
28
NAME TITLE DATE
---- ----- ----
/s/ LYNN M. SEDWAY Director March 30, 1998
- ---------------------------------------------------
Lynn M. Sedway
/s/ JEFFREY L. SKELTON, PH.D Director March 30, 1998
- ---------------------------------------------------
Jeffrey L. Skelton, Ph.D
/s/ THOMAS W. TUSHER Director March 30, 1998
- ---------------------------------------------------
Thomas W. Tusher
/s/ CARYL B. WELBORN, ESQ. Director March 30, 1998
- ---------------------------------------------------
Caryl B. Welborn, Esq.
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
AMB Property Corporation:
We have audited the accompanying consolidated balance sheets of AMB
Property Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AMB Property Corporation,
and subsidiaries as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
financial statements is presented for purposes of complying with the Securities
and Exchange Commissions rules and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
[ANDERSEN SIG]
San Francisco, California
January 27, 1998
F-1
AMB PROPERTY CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1996 1997
------ ----------
ASSETS
Investments in real estate:
Land and improvements..................................... $ -- $ 550,635
Buildings and improvements................................ -- 1,822,516
Construction in progress.................................. -- 69,848
------ ----------
Total investments in real estate....................... -- 2,442,999
Accumulated depreciation and amortization................. -- (4,153)
------ ----------
Net investments in real estate......................... -- 2,438,846
Cash and cash equivalents................................... 3,093 39,968
Other assets................................................ 3,992 27,441
------ ----------
Total assets........................................... $7,085 $2,506,255
====== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Secured debt.............................................. $ -- $ 535,652
Unsecured credit facility................................. -- 150,000
------ ----------
Total debt............................................. -- 685,652
Other liabilities........................................... 648 49,350
Payable to affiliates....................................... -- 38,071
------ ----------
Total liabilities...................................... 648 773,073
------ ----------
Commitments and contingencies
Minority interests.......................................... 137 65,152
Stockholders' equity:
Preferred stock of AMB Property Corporation, $.01 par
value, 100,000,000 shares authorized, none issued or
outstanding............................................ -- --
Common stock of AMB Property Corporation, $.01 par value,
500,000,000 shares authorized, 85,874,513 issued and
outstanding............................................ -- 859
Additional paid-in capital of AMB Property Corporation.... -- 1,667,171
Common stock of Predecessor, no par value, 500,000,000
shares authorized, 5,181,450 issued and outstanding.... 1,349 --
Additional paid-in capital of Predecessor................. 1,298 --
Notes receivable from stockholders of Predecessor......... (869) --
Retained earnings......................................... 4,522 --
------ ----------
Total stockholders' equity............................. 6,300 1,668,030
------ ----------
Total liabilities and stockholders' equity............. $7,085 $2,506,255
====== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1995 1996 1997
---------- ---------- -----------
REVENUES
Rental income....................................... $ -- $ -- $ 26,465
Investment management and other income.............. 16,865 23,991 29,597
---------- ---------- -----------
Total revenues.............................. 16,865 23,991 56,062
OPERATING EXPENSES
Property operating expenses......................... -- -- 5,312
Real estate taxes................................... -- -- 3,587
General and administrative.......................... -- -- 1,197
Interest, including amortization.................... -- -- 3,528
Depreciation and amortization....................... -- -- 4,195
Investment management expenses...................... 13,569 16,851 19,358
---------- ---------- -----------
Total operating expenses.................... 13,569 16,851 37,177
---------- ---------- -----------
Income from operations before minority
interests................................. 3,296 7,140 18,885
Minority interests' share of net income............... (34) (137) (657)
---------- ---------- -----------
Net income available to common
stockholders.............................. $ 3,262 $ 7,003 $ 18,228
========== ========== ===========
INCOME PER SHARE OF COMMON STOCK
Basic............................................... $ 0.64 $ 1.38 $ 1.39
========== ========== ===========
Diluted............................................. $ 0.64 $ 1.38 $ 1.38
========== ========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic............................................... 5,079,855 5,079,855 13,140,218
========== ========== ===========
Diluted............................................. 5,079,855 5,079,855 13,168,036
========== ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
1995 1996 1997
------- ------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.................................................. $ 3,262 $ 7,003 $ 18,228
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. -- -- 4,195
Straight-line rents....................................... -- -- (901)
Amortization of debt premiums and financing costs......... -- -- (266)
Minority interests' share of net income................... 34 137 657
Equity in income of AMB Investment Management............. -- -- (61)
Changes in assets and liabilities:
Other assets.............................................. (1,538) (249) (11,873)
Other liabilities......................................... 429 (25) 2,301
------- ------- ---------
Net cash provided by operating activities................... 2,187 6,866 12,280
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to properties..................................... -- -- (222,497)
Additions to buildings improvements and leasing costs....... -- -- (1,769)
Additions to construction in progress....................... -- -- (2,606)
Cash paid for property in Formation Transactions, net of
cash acquired............................................. -- -- (5,935)
------- ------- ---------
Net cash used for investing activities...................... -- -- (232,807)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock (net of $21,091 commission)........ -- -- 317,009
Borrowings on Credit Facility............................... 750 -- 150,000
Borrowings on Secured debt.................................. -- -- 850
Repayment of Credit Facility................................ (750) -- (182,000)
Payments on Secured debt.................................... -- -- (516)
Payment of financing fees................................... -- -- (900)
Dividends paid to Predecessor stockholders.................. (2,925) (5,262) (16,404)
Distributions paid to AMB Property Corporation
stockholders.............................................. -- -- (11,506)
Distributions to minority interests of Predecessor.......... -- (34) --
Principal payment of notes receivable from stockholders of
Predecessor............................................... 56 318 869
------- ------- ---------
Net cash provided by (used in) financing activities......... (2,869) (4,978) 257,402
------- ------- ---------
Net increase (decrease) in cash and cash equivalents........ (682) 1,888 36,875
Cash and cash equivalents at beginning of period............ 1,887 1,205 3,093
------- ------- ---------
Cash and cash equivalents at end of period.................. $ 1,205 $ 3,093 $ 39,968
======= ======= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARES)
COMMON STOCK NOTES
------------------- ADDITIONAL RECEIVABLE
NUMBER OF PAID-IN RETAINED FROM
SHARES AMOUNT CAPITAL EARNINGS STOCKHOLDERS TOTAL
---------- ------ ---------- -------- ------------ ----------
PREDECESSOR
Balance at December 31, 1994... 4,978,260 $ 699 $ 1,298 $ 2,444 $(593) $ 3,848
Net Income................... -- -- -- 3,262 -- 3,262
Dividends declared and
paid...................... -- -- -- (2,925) -- (2,925)
Principal payment of notes
receivable from
stockholders.............. -- -- -- -- 56 56
Issuance of common stock for
notes..................... 101,595 343 -- -- (343) --
---------- ------ ---------- -------- ----- ----------
Balance at December 31, 1995... 5,079,855 1,042 1,298 2,781 (880) 4,241
Net Income................... -- -- -- 7,003 -- 7,003
Dividends declared and
paid...................... -- -- -- (5,262) -- (5,262)
Principal payment of notes
receivable from
stockholders.............. -- -- -- -- 318 318
Issuance of common stock for
notes..................... 101,595 307 -- -- (307) --
---------- ------ ---------- -------- ----- ----------
Balance at December 31, 1996... 5,181,450 1,349 1,298 4,522 (869) 6,300
AMB PROPERTY CORPORATION
Net Income................... -- -- -- 18,228 -- 18,228
Dividends declared and paid
to Predecessor
stockholders.............. -- (990) (1,298) (14,116) -- (16,404)
Principal payment of notes
receivable from
stockholders.............. -- -- -- -- 869 869
Exchange of Predecessor
shares for shares of AMB
Property Corporation,
net....................... (434,834) (312) 312 -- -- --
Issuance of common stock for
Properties................ 65,022,185 651 1,369,740 -- -- 1,370,391
Issuance of common stock, net
of Offering costs of
$38,068................... 16,100,000 161 299,871 -- -- 300,032
Issuance of restricted
stock..................... 5,712 -- 120 -- -- 120
Distributions paid to AMB
Property Corporation
stockholders.............. -- -- (2,872) (8,634) -- (11,506)
---------- ------ ---------- -------- ----- ----------
Balance at December 31, 1997... 85,874,513 $ 859 $1,667,171 $ -- $ -- $1,668,030
========== ====== ========== ======== ===== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND SQUARE FEET DATA)
1. ORGANIZATION AND FORMATION OF COMPANY
AMB Property Corporation, a Maryland corporation, (the "Company") commenced
operations as a fully integrated real estate company effective with the
completion of its initial public offering (the "Offering") on November 26, 1997.
The Company has elected to be taxed as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Internal Revenue Code of 1986 (the
"Code"), as amended. The Company, through its controlling interest in its
subsidiary AMB Property, L.P., a Delaware limited partnership (the "Operating
Partnership"), is engaged in the ownership, operation, management, acquisition,
renovation, expansion, and development of industrial properties and community
shopping centers in target markets nationwide. Unless the context otherwise
requires, the "Company" shall include AMB Property Corporation, the Operating
Partnership and its controlled subsidiaries.
The Company and the Operating Partnership were formed shortly before
consummation of the Offering. AMB Institutional Realty Advisor, Inc., a
California corporation and registered investment advisor (the "Predecessor")
formed AMB Property Corporation, a wholly owned Maryland subsidiary, and merged
with and into the Company (the "Merger") in exchange for 4,746,616 shares of the
Company's Common Stock. In addition, the Company and the Operating Partnership
acquired, through a series of mergers and other transactions, 31.8 million
rentable square feet of industrial property and 6.3 million rentable square feet
of retail property in exchange for 65,022,185 shares of the Company's Common
Stock, 2,542,163 limited partnership interests ("LP Units") in the Operating
Partnership, the assumption of debt, and to a limited extent, cash. The purchase
method of accounting was applied to the acquisition of the properties.
Collectively, the Merger and the other formation transactions described above
are referred to as the "Formation Transactions."
On November 26, 1997, the Company completed its Offering of 16,100,000
shares of Common Stock, $0.01 par value per share (the "Common Stock") for
$21.00 per share, resulting in gross offering proceeds of approximately
$338,100. Net of underwriters' commission and offering costs aggregating
$38,068, the Company received approximately $300,032 in proceeds from the
Offering. The net proceeds of the Offering were used to repay indebtedness, to
purchase interests from certain investors who elected not to receive shares or
units in the Company, to fund property acquisitions, and to meet general
corporate working capital requirements.
As of December 31, 1997, the Company owns a 97.1% interest in the Operating
Partnership represented by a number of units of general partnership interest
("GP Units") which are convertible into an equal number of shares of Common
Stock. The investors that elected to receive LP Units own the remaining 2.9%
ownership interest in the Operating Partnership. For local law purposes,
properties in certain states are owned through limited partnerships and limited
liability companies owned 99% by the Operating Partnership and 1% by a wholly
owned subsidiary of the Company. The ownership of such Properties through such
entities does not materially affect the Company's overall ownership of the
interests in the Properties. As the sole general partner of the Operating
Partnership, the Company has the full, exclusive and complete responsibility and
discretion in the management and control of the Operating Partnership.
In connection with the Formation Transactions, the Operating Partnership
formed AMB Investment Management Corporation, a Maryland corporation ("AMB
Investment Management"). AMB Investment Management conducts its operations
through AMB Investment Management Limited Partnership, a Maryland limited
partnership ("AMB Investment Management Partnership"), of which it is the sole
general partner and owns the entire capital interest. AMB Investment Management
was formed to succeed to the Predecessor's investment management business of
providing real estate investment management services on a fee basis to clients.
The Operating Partnership purchased 100% of AMB Investment Management's
nonvoting preferred stock (representing a 95% economic interest). The executive
officers of the Company collectively purchased
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
100% of the Investment Management Subsidiary's voting common stock (representing
a 5% economic interest therein).
As of December 31, 1997, the Company owned 37.3 million rentable square
feet of industrial properties (the "Industrial Properties"), principally
warehouse distribution properties, that were 95.7% leased and 6.2 million
rentable square feet of retail properties (the "Retail Properties"), principally
grocer-anchored community shopping centers, that were 96.1% leased.
Collectively, the Industrial Properties and the Retail Properties are referred
to as the "Properties."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Generally Accepted Accounting Principles
These financial statements have been prepared in accordance with generally
accepted accounting principles using the accrual method of accounting. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the financial
position, results of operations and cash flows of the Company, its wholly owned
qualified REIT subsidiaries, the Operating Partnership, and eight joint ventures
(the "Joint Ventures") in which the Company has a controlling interest.
Third-party equity interests in the Operating Partnership and the Joint Ventures
are reflected as minority interests in the consolidated financial statements.
All significant intercompany amounts have been eliminated.
Basis of Presentation
The consolidated financial statements of the Company for 1997 include the
results of operations of the Company, including property operations for the
period from November 26, 1997 (the commencement of operations as a fully
integrated real estate company) to December 31, 1997 and the results of the
Company's Predecessor, an investment manager, for the period from January 1,
1997 to November 25, 1997.
Investments in Real Estate
Investments in real estate are stated at the lower of depreciated cost or
net realizable value. Net realizable value for financial reporting purposes is
reviewed for impairment on a property-by-property basis whenever events or
changes in circumstances indicate that the carrying amount of a property may not
be recoverable. Impairment is recognized when estimated expected future cash
flows (undiscounted and without interest charges)are less than the carrying
amount of the property. To the extent an impairment has occurred, the excess of
the carrying amount of the property over its estimated fair value will be
charged to income. As of December 31, 1997, there were no impairments of the
carrying values of the Properties.
Depreciation and amortization are calculated using the straight-line method
over the estimated useful lives of the investments. The estimated lives are as
follows:
Land improvements........................................... 5 to 40 years
Buildings and improvements.................................. 5 to 40 years
Tenant improvements and leasing costs....................... Term of the related lease
The cost of buildings and improvements includes the purchase price of the
property or interest in property, legal fees and acquisition costs, and
interest, property taxes, and other costs incurred during the period of
construction.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Expenditures for maintenance and repairs are charged to operations as
incurred. Significant renovations or betterments that extend the economic useful
life of assets are capitalized.
Project costs directly associated with the development and construction of
a real estate project are capitalized as construction in progress. In addition,
interest, real estate taxes and other costs are capitalized during the
construction period.
Cash and Cash Equivalents
Cash and cash equivalents include cash held in financial institutions and
other highly liquid short-term investments with original maturities of three
months or less. Cash and cash equivalents as of December 31, 1997 include
restricted cash of $8,074, which represents amounts held in escrow in connection
with property purchases and capital improvements.
Deferred Financing
Costs incurred in connection with financing are capitalized and amortized
to interest expense on a straight-line basis (which approximates the effective
interest method) over the term of the related loan. As of December 31, 1997,
deferred financing fees were $871, net of accumulated amortization of $29. Such
amounts are included in Other Assets on the consolidated balance sheet.
Fair Value of Financial Instruments
The Company's financial instruments include short-term investments,
accounts receivable, accounts payable, accrued expenses, construction loans
payable, mortgage debt, secured debt, unsecured notes payable, and an unsecured
credit facility. The fair value of these instruments approximates its carrying
or contract values.
Debt Premiums
In connection with the Formation Transactions, the Company assumed certain
secured debt with an aggregate principal value of $517,031 and a fair value of
$535,613. The difference between the principal value and the fair value was
recorded as a debt premium. The debt premium is being amortized into interest
expense over the term of the related debt instrument using the effective
interest method. As of December 31, 1997, the unamortized debt premium was
$18,286.
Minority Interests
Minority interests in the Company represent the limited partnership
interests in the Operating Partnership and interests held by certain third
parties in eight real estate joint ventures that are consolidated for financial
reporting purposes. Such investments are consolidated because 1) the Company
owns a majority owner interest, or 2) the Company holds significant control over
the entity through a 50% or greater ownership interest combined with the ability
to control major operating decisions such as approval of budgets, selection of
property managers and change in financing.
The following table distinguishes the minority interest ownership held by
certain joint ventures ("Minority Interest -- Joint Ventures") and the limited
partnership interests' in the Operating Partnership ("Minority
Interest -- Limited Partners") as of December 31, 1997.
Minority Interest -- Joint Ventures......................... $15,784
Minority Interest -- Limited Partners....................... 49,368
-------
$65,152
=======
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues
The Company, as a lessor, retains substantially all of the benefits and
risks of ownership of the Properties and accounts for its leases as operating
leases. Rental income is recognized on a straight-line basis over the term of
the leases.
Reimbursements from tenants for real estate taxes and other recoverable
operating expenses are recognized as revenue in the period the applicable
expenses are incurred.
Investment Management and Other Income
Investment management income consists primarily of professional fees
generated from the Predecessors' real estate investment management services for
periods prior to the Formation Transactions and the Company's equity in the
earnings of AMB Investment Management for periods subsequent to the Formation
Transactions. Other income consists primarily of interest income on cash and
cash equivalents.
Investment Management Expense
Investment management expense represents the operating expenses of the
Predecessor for periods prior to November 26, 1997 and consists of salaries and
benefits and other management related expenses.
Reclassifications
The consolidated financial statements for prior periods have been
reclassified to conform with current classifications with no effect on results
of operations.
Future Accounting Pronouncements
In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement, effective for
financial statements for periods beginning after December 15, 1997, requires
that a public business enterprise report financial and descriptive information
about its reportable operating segments. Generally, information is required to
be reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The Company
expects to adopt this SFAS in 1998 to the extent applicable.
3. TRANSACTIONS WITH AFFILIATES
As discussed in "Organization and Formation of the Company," the Operating
Partnership formed AMB Investment Management (which conducts its operations
through the Investment Management Partnership) for the purpose of carrying on
the operations of the Predecessor. The Company and the Investment Management
Partnership have an agreement that allows for the sharing of certain costs and
employees. Additionally, the Company provides the Investment Management
Partnership with certain acquisition-related services.
As part of the Formation Transactions, the Operating Partnership was
required to pay an amount equal to the net working capital balances at November
25, 1997 of the Predecessor and the acquired properties to the owners of said
entities. As of December 31, 1997, the Company owed approximately $37,808 to
owners related to these working capital distributions. Such amount is included
in Payable to affiliates on the consolidated balance sheet and was paid
subsequent to year-end.
The Company and the Investment Management Partnership share common office
space under lease obligations of an affiliate of the Predecessor. Such lease
obligations are charged to the Company and the Investment Management Partnership
at cost. For the period ended December 31, 1995, 1996 and 1997, the Company paid
approximately $435, $510 and $700, respectively for occupancy costs related to
the lease obligations of the affiliate.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. DEBT
As of December 31, 1997, debt, excluding unamortized debt premiums,
consists of the following:
Secured debt, varying coupon interest rates from 7.01% to
10.38%, due November 1998 to December 2008................ $517,366
Unsecured credit facility, variable interest at LIBOR plus
1.10% (7.10% at December 31, 1997) due November 2000...... 150,000
--------
Total Debt........................................ $667,366
========
Secured debt generally requires monthly principal and interest payments.
The secured debt is secured by deeds of trust on 48 Properties. The carrying
value of real estate investments pledged as collateral under deeds of trust for
the secured debt is $1,049,003 as of December 31, 1997. All of the secured debt
bears interest at fixed rates, except for one loan which bears a variable
interest rate at LIBOR plus 2.75%, 8.75% at December 31, 1997, or prime plus 5%
at the borrower's option. The secured debt has various financial and
non-financial covenants. Additionally, certain of the secured debt is
cross-collateralized.
The Company has a $500,000 unsecured revolving credit agreement (the
"Credit Facility") with Morgan Guaranty Trust Company of New York as agent, and
a syndicate of twelve other banks. The Credit Facility has a term of three
years, and is subject to a fee that accrues on the daily average undrawn funds,
which varies between 0.15% to 0.25% based on the Company's credit rating. The
Credit Facility has various financial and non-financial covenants.
The weighted-average fixed interest rate on secured debt at December 31,
1997, was 7.82%. Interest capitalized related to construction projects for the
period from November 26, 1997 to December 31, 1997, was $448. There was no
capitalized interest for periods prior to the Formation Transactions.
The scheduled maturities of the secured debt as of December 31, 1997 are as
follows:
1998.............................................. $ 19,390
1999.............................................. 9,666
2000.............................................. 11,862
2001.............................................. 35,654
2002.............................................. 43,967
Thereafter........................................ 396,827
--------
$517,366
========
5. LEASING ACTIVITY
Future minimum rental income due under noncancelable leases in effect at
December 31, 1997, with tenants is as follows:
1998............................................. $ 214,400
1999............................................. 188,926
2000............................................. 160,592
2001............................................. 128,241
2002............................................. 101,733
Thereafter....................................... 459,070
----------
$1,252,962
==========
In addition to minimum rental payments, certain tenants pay reimbursements
for their pro rata share of specified operating expenses, which amounted to
$5,267 for the period from November 26, 1997 to December 31, 1997. These amounts
are included as rental income and operating expenses in the accompany-
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ing consolidated statements of operations. Certain of the leases also provide
for the payment of additional rent based on a percentage of the tenant's
revenues. Some leases contain options to renew. No individual tenant accounts
for greater than 2% of rental revenues.
6. INCOME TAXES
The Company intends to be taxed as a REIT under the Code for the fiscal
year ended December 31, 1997. To qualify as a REIT, the Company must meet a
number of organizational and operational requirements, including a requirement
that it currently distribute at least 95% of its taxable income. It is
management's intention to adhere to these requirements and maintain the
Company's REIT status. As a REIT, the Company generally will not be subject to
corporate level federal income tax on net income it distributes currently to its
stockholders. As such, no provision for federal income taxes has been included
in the accompanying consolidated financial statements. If the Company fails to
qualify as a REIT in any taxable year, it will be subject to federal income
taxes at regular corporate rates (including any applicable alternative minimum
tax) and may not be able to qualify as a REIT for four subsequent taxable years.
Even if the Company qualifies for taxation as a REIT, the Company may be subject
to certain state and local taxes on its income and property and to federal
income and excise taxes on its undistributed taxable income.
For federal income tax purposes, cash distributions paid to stockholders
may be characterized as ordinary income, return of capital (generally
non-taxable) or capital gains. On December 8, 1997, the Company declared a
distribution of $0.134 per common share, payable on December 29, 1997 to
stockholders of record on December 18, 1997. The distribution covered the period
from November 26, 1997 through December 31, 1997. For Federal income tax
purposes, 100% of the distribution was ordinary income.
Prior to the Merger, the Predecessor conducted its business as an S
corporation, and therefore was exempt from federal income taxes under Subchapter
S of the Internal Revenue Code. Under this election federal income taxes were
paid by the stockholders of the Predecessor.
7. STOCK INCENTIVE PLAN AND 401(K) PLAN
STOCK INCENTIVE PLAN
In November 1997, the Company established a Stock Option and Incentive Plan
(the "Stock Incentive Plan") for the purpose of attracting and retaining
eligible officers, directors and employees. The Company has reserved for
issuance 5,750,000 shares of Common Stock under the Stock Incentive Plan. In
November 1997, the Company granted 3,153,750 non-qualified options, to certain
directors, officers and employees. Each option is exchangeable for one share of
the Company's Common Stock and has an exercise price equal to $21.00, the
Company's market price at the date of grant. The options have a ten-year term
and vest pro rata in annual installments over a four-year period from the date
of grant.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its Stock Incentive
Plan. Opinion 25 measures compensation cost using the intrinsic value based
method of accounting. Under this method, compensation cost is the excess, if
any, of the quoted market price of the stock at the date of grant over the
amount an employee must pay to acquire the stock. Accordingly, no compensation
cost has been recognized for the Company's Stock Incentive Plan, as the option
price at the date of grant was equal to the market price. However, if the
Company had measured compensation cost using the fair value base method
prescribed in SFAS 123, "Accounting for Stock-Based Compensation," the impact on
pro forma net income and earnings per share would not have been material.
The fair value of each option grant was estimated at the date of grant
using the Black-Scholes option-pricing model with the following assumptions used
for grants in 1997: dividend yield of 6.52%, expected volatility of 18.75%,
risk-free interest rate of 5.86%, and expected lives of 10 years.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the option activity for the year ended December
31, 1997:
REMAINING
SHARES UNDER EXERCISE CONTRACTUAL
OPTION (000) PRICE LIFE
------------ -------- -----------
Outstanding, 11/25/97............................. -- -- --
Granted........................................... 3,154 $21.0 10 years
Exercised......................................... -- -- --
Forfeited......................................... (10) -- --
----- ----- --------
Outstanding, 12/31/97............................. 3,144 $21.0 10 years
===== ===== ========
Options exercisable at year-end................... 184 $21.0
===== =====
Fair value of options granted during the year..... $2.28
=====
RESTRICTED STOCK
In 1997, the Company sold 5,712 restricted shares of its Common Stock to
certain independent directors for $0.01 per share in cash.
401(k) PLAN
In November 1997, the Company established a Section 401(k)
Savings/Retirement Plan (the "Section 401(k) Plan"), which is a continuation of
the Section 401(k) plan of the Predecessor, to cover eligible employees of the
Company and any designated affiliate. The Section 401(k) Plan, permits eligible
employees of the Company to defer up to 10% of their annual compensation,
subject to certain limitations imposed by the Code. The employees' elective
deferrals are immediately vested and non-forfeitable upon contribution to the
Section 401(k) Plan. The Company matches the employee contributions to the
Section 401(k)Plan in an amount equal to 50% of the first 3.5% of annual
compensation deferred by each employee and may also make discretionary
contributions to the plan. As of December 31, 1997, the Company's accrual for
401(k) match was $140. Such amount was included in Other liabilities on the
consolidated balance sheet.
Except for the Section 401(k) Plan, the Company offers no other
post-retirement or post-employment benefits to its employees.
8. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
Cash paid for interest.............................. $ -- $ -- $ 2,509
=========== =========== ===========
Non-cash transactions:
Acquisitions of properties in Formation
Transactions................................... $ -- $ -- $ 2,216,137
Assumption of debt................................ -- -- (717,613)
Cash acquired..................................... -- -- (43,978)
Other assumed assets and liabilities.............. -- -- (13,862)
Minority interest................................. -- -- (64,358)
Shares issued..................................... -- -- (1,370,391)
----------- ----------- -----------
Net cash paid, net of cash acquired................. $ -- $ -- $ 5,935
=========== =========== ===========
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma condensed consolidated statement of
operations has been prepared as if the Formation Transactions, the Offering (as
described in Note 1) and property acquisitions and dispositions had occurred on
January 1, 1996. In the opinion of management, the pro forma condensed
consolidated statement of operations does not purport to present the
consolidated results that would have occurred if the aforementioned transactions
had been consummated on January 1, 1996, nor does it purport to present the
consolidated results of operations for future periods.
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Total revenues.............................................. $ 265,550 $ 284,674
Income from operations before minority interests............ 90,694 103,903
Net income available to common stockholders................. 87,313 99,508
INCOME PER SHARE OF COMMON STOCK
Basic..................................................... $ 1.02 $ 1.16
=========== ===========
Diluted................................................... $ 1.01 $ 1.15
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic..................................................... 85,874,513 85,874,513
=========== ===========
Diluted................................................... 86,156,556 86,156,556
=========== ===========
10. COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of business, from time to time, the Company is
involved in legal actions relating to the ownership and operations of its
Properties. In management's opinion, the liabilities, if any, that may
ultimately result from such legal actions are not expected to have a materially
adverse effect on the consolidated financial position, results of operations, or
cash flows of the Company.
Environmental Matters
The Company follows the policy of monitoring its properties for the
presence of hazardous or toxic substances. The Company is not aware of any
environmental liability with respect to the Properties that would have a
material adverse effect on the Company's business, assets or results of
operations. There can be no assurance that such a material environmental
liability does not exist. The existence of any such material environmental
liability would have an adverse effect on the Company's results of operations
and cash flow.
General Uninsured Losses
The Company carries comprehensive liability, fire, flood, environmental,
extended coverage and rental loss insurance with policy specifications, limits
and deductibles customarily carried for similar properties. There are, however,
certain types of extraordinary losses that may be either uninsurable, or not
economically insurable. Should an uninsured loss occur, the Company could lose
its investment in, and anticipated profits and cash flows, from a property.
Certain of the Properties are located in areas that are subject to
earthquake activity; the Company has therefore obtained limited earthquake
insurance.
F-13
AMB PROPERTY CORPORATION
SCHEDULE III
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1997
COSTS
CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
ENCUMBRANCES ----------------------- ---------------
PROPERTY LOCATION TYPE (1) LAND BUILDING LAND BUILDING
-------- -------- ---- ------------ --------- ----------- ---- --------
72nd Avenue.................... WA IND $ -- $ 1,298 $ 4,008 $-- $ --
Acer Distribution Center....... CA IND -- 3,146 9,479 -- --
Activity Distribution Center... CA IND 5,400 3,736 11,248 -- --
Alvarado Business Center....... CA IND -- 7,906 23,757 -- 75
Amwiler-Gwinnett Industrial
Portfolio.................... GA IND 14,360 6,641 19,964 -- 4
Ardenwood Corporate Park....... CA IND 10,339 7,321 22,002 -- --
Artesia Industrial Portfolio... CA IND 54,742 23,860 71,620 -- 907
Atlanta South.................. GA IND -- 6,550 19,691 -- --
Beacon Industrial Park......... FL IND -- 10,466 31,437 -- --
Belden Avenue.................. IL IND -- 5,019 15,186 -- --
Bensenville.................... IL IND 44,593 20,799 62,438 -- 19
Blue Lagoon.................... FL IND 11,916 4,945 14,875 -- 23
Boulden........................ DE IND -- 2,807 8,462 -- 36
Brightseat Road................ MD IND -- 1,557 4,841 -- --
Britannia Business Park........ FL IND -- 3,199 9,637 -- 37
Cabot Business Park............ MA IND -- 16,017 48,091 -- 7
Chancellor..................... FL IND 2,987 1,587 4,802 -- --
Chicago Industrial............. IL IND 3,522 1,574 4,761 -- --
Commerce....................... CA IND -- 2,197 6,653 -- --
Corporate Square............... MN IND -- 4,024 12,113 -- 16
Crossroads Industrial.......... IL IND -- 2,583 7,789 -- --
Dixie Highway.................. KY IND -- 1,700 5,149 -- --
Dock's Corner.................. NJ IND -- 2,050 6,190 -- --
Dock's Corner II............... NJ IND -- 2,272 6,917 -- --
Dowe Industrial................ CA IND -- 2,665 8,034 -- --
East Walnut Drive.............. CA IND -- 964 2,918 -- --
Elk Grove Village Industrial... IL IND -- 7,713 23,179 -- 8
Empire Drive................... KY IND -- 1,590 4,815 -- --
Executive Drive................ IL IND -- 1,399 4,236 -- --
Fairway Drive Industrial....... CA IND -- 1,954 5,479 -- --
Hampden Road................... MA IND -- 2,200 6,678 -- --
Harvest Business Park.......... WA IND 3,826 2,371 7,153 -- 51
Hewlett Packard Distribution... CA IND 3,437 1,668 5,043 -- --
Holton Drive................... KY IND -- 2,633 7,972 -- --
GROSS AMOUNT CARRIED AT 12/31/97
----------------------------------
YEAR OF DEPRECIABLE
TOTAL ACCUMULATED CONSTRUCTION LIFE
PROPERTY LAND BUILDING COSTS(2) DEPRECIATION OR ACQUISITION (YEARS)
-------- -------- ---------- ---------- ------------ -------------- -----------
72nd Avenue.................... $ 1,298 $ 4,008 $ 5,306 $ 9 1997 5-40
Acer Distribution Center....... 3,146 9,479 12,625 22 1997 5-40
Activity Distribution Center... 3,736 11,248 14,984 26 1997 5-40
Alvarado Business Center....... 7,906 23,832 31,738 54 1997 5-40
Amwiler-Gwinnett Industrial
Portfolio.................... 6,641 19,968 26,609 46 1997 5-40
Ardenwood Corporate Park....... 7,321 22,002 29,323 50 1997 5-40
Artesia Industrial Portfolio... 23,860 72,527 96,387 165 1997 5-40
Atlanta South.................. 6,550 19,691 26,241 45 1997 5-40
Beacon Industrial Park......... 10,466 31,437 41,903 72 1997 5-40
Belden Avenue.................. 5,019 15,186 20,205 35 1997 5-40
Bensenville.................... 20,799 62,457 83,256 143 1997 5-40
Blue Lagoon.................... 4,945 14,898 19,843 34 1997 5-40
Boulden........................ 2,807 8,498 11,305 19 1997 5-40
Brightseat Road................ 1,557 4,841 6,398 11 1997 5-40
Britannia Business Park........ 3,199 9,674 12,873 22 1997 5-40
Cabot Business Park............ 16,017 48,098 64,115 110 1997 5-40
Chancellor..................... 1,587 4,802 6,389 11 1997 5-40
Chicago Industrial............. 1,574 4,761 6,335 11 1997 5-40
Commerce....................... 2,197 6,653 8,850 15 1997 5-40
Corporate Square............... 4,024 12,129 16,153 28 1997 5-40
Crossroads Industrial.......... 2,583 7,789 10,372 18 1997 5-40
Dixie Highway.................. 1,700 5,149 6,849 12 1997 5-40
Dock's Corner.................. 2,050 6,190 8,240 14 1997 5-40
Dock's Corner II............... 2,272 6,917 9,189 16 1997 5-40
Dowe Industrial................ 2,665 8,034 10,699 18 1997 5-40
East Walnut Drive.............. 964 2,918 3,882 7 1997 5-40
Elk Grove Village Industrial... 7,713 23,187 30,900 53 1997 5-40
Empire Drive................... 1,590 4,815 6,405 11 1997 5-40
Executive Drive................ 1,399 4,236 5,635 10 1997 5-40
Fairway Drive Industrial....... 1,954 5,479 7,433 13 1997 5-40
Hampden Road................... 2,200 6,678 8,878 15 1997 5-40
Harvest Business Park.......... 2,371 7,204 9,575 16 1997 5-40
Hewlett Packard Distribution... 1,668 5,043 6,711 12 1997 5-40
Holton Drive................... 2,633 7,972 10,605 18 1997 5-40
S-1
AMB PROPERTY CORPORATION
SCHEDULE III
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
COSTS
CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
ENCUMBRANCES ----------------------- ---------------
PROPERTY LOCATION TYPE (1) LAND BUILDING LAND BUILDING
-------- -------- ---- ------------ --------- ----------- ---- --------
Industrial Drive............... OHIO IND $ -- $ 1,743 $ 5,410 $-- $ --
International Multifoods....... CA IND -- 1,613 4,879 -- --
Itasca Industrial Portfolio.... IL IND -- 6,416 19,289 -- 213
Janitrol....................... OHIO IND -- 1,797 5,576 -- --
Jasmine Avenue................. CA IND -- 3,157 9,562 -- --
Kent Centre.................... WA IND -- 3,042 9,165 -- 23
Kingsport Industrial Park...... WA IND 18,161 7,919 23,798 -- 96
L.A. County Industrial
Portfolio(3)................. CA IND -- 11,128 33,423 -- 17
Lake Michigan Industrial
Portfolio.................... IL IND -- 2,886 8,699 -- --
Laurelwood..................... CA IND -- 2,750 8,538 -- --
Lincoln Industrial Center...... TX IND -- 671 2,052 -- --
Linder Skokie.................. IL IND -- 2,938 8,854 -- --
Lisle Industrial............... IL IND -- 2,290 6,911 -- --
Lonestar....................... TX IND 17,773 7,129 21,428 -- --
McDaniel Drive................. TX IND -- 1,537 4,659 -- --
Melrose Park................... IL IND -- 2,936 9,190 -- --
Metric Center.................. TX IND -- 10,968 32,944 -- 45
Mid-Atlantic Business Center... PA IND -- 6,581 19,783 -- 36
Milmont Page................... CA IND -- 3,201 9,642 -- 94
Minneapolis Distribution
Portfolio.................... MN IND -- 7,018 21,093 -- 95
Minneapolis Industrial IV...... MN IND 8,346 4,938 14,854 -- 42
Minneapolis Industrial V....... MN IND 7,952 4,426 13,317 -- 46
Moffett Business Center........ CA IND 12,883 5,892 17,716 -- --
Moffett Park R&D Portfolio..... CA IND -- 14,807 44,462 -- 598
N. Glenville Ave............... TX IND -- 1,094 3,316 -- --
Norcross/Brookhollow
Portfolio.................... GA IND -- 3,721 11,180 -- --
Northpointe Commerce........... CA IND -- 1,773 5,358 -- --
Northwest Distribution
Center....................... WA IND -- 2,234 6,743 -- 7
O'Hare Industrial Portfolio.... IL IND -- 7,357 22,112 -- 156
Pacific Business Center........ CA IND 10,679 5,417 16,291 -- 16
Pagemill & Dillworth........... TX IND -- 1,877 5,690 -- --
Patuxent....................... MD IND -- 1,696 5,127 -- --
GROSS AMOUNT CARRIED AT 12/31/97
----------------------------------
YEAR OF DEPRECIABLE
TOTAL ACCUMULATED CONSTRUCTION LIFE
PROPERTY LAND BUILDING COSTS(2) DEPRECIATION OR ACQUISITION (YEARS)
-------- -------- ---------- ---------- ------------ -------------- -----------
Industrial Drive............... $ 1,743 $ 5,410 $ 7,153 $ 12 1997 5-40
International Multifoods....... 1,613 4,879 6,492 11 1997 5-40
Itasca Industrial Portfolio.... 6,416 19,502 25,918 44 1997 5-40
Janitrol....................... 1,797 5,576 7,373 13 1997 5-40
Jasmine Avenue................. 3,157 9,562 12,719 22 1997 5-40
Kent Centre.................... 3,042 9,188 12,230 21 1997 5-40
Kingsport Industrial Park...... 7,919 23,894 31,813 54 1997 5-40
L.A. County Industrial
Portfolio(3)................. 11,128 33,440 44,568 76 1997 5-40
Lake Michigan Industrial
Portfolio.................... 2,886 8,699 11,585 20 1997 5-40
Laurelwood..................... 2,750 8,538 11,288 19 1997 5-40
Lincoln Industrial Center...... 671 2,052 2,723 5 1997 5-40
Linder Skokie.................. 2,938 8,854 11,792 20 1997 5-40
Lisle Industrial............... 2,290 6,911 9,201 16 1997 5-40
Lonestar....................... 7,129 21,428 28,557 49 1997 5-40
McDaniel Drive................. 1,537 4,659 6,196 11 1997 5-40
Melrose Park................... 2,936 9,190 12,126 21 1997 5-40
Metric Center.................. 10,968 32,989 43,957 75 1997 5-40
Mid-Atlantic Business Center... 6,581 19,819 26,400 45 1997 5-40
Milmont Page................... 3,201 9,736 12,937 22 1997 5-40
Minneapolis Distribution
Portfolio.................... 7,018 21,188 28,206 48 1997 5-40
Minneapolis Industrial IV...... 4,938 14,896 19,834 34 1997 5-40
Minneapolis Industrial V....... 4,426 13,363 17,789 30 1997 5-40
Moffett Business Center........ 5,892 17,716 23,608 40 1997 5-40
Moffett Park R&D Portfolio..... 14,807 45,060 59,867 101 1997 5-40
N. Glenville Ave............... 1,094 3,316 4,410 8 1997 5-40
Norcross/Brookhollow
Portfolio.................... 3,721 11,180 14,901 26 1997 5-40
Northpointe Commerce........... 1,773 5,358 7,131 12 1997 5-40
Northwest Distribution
Center....................... 2,234 6,750 8,984 15 1997 5-40
O'Hare Industrial Portfolio.... 7,357 22,268 29,625 51 1997 5-40
Pacific Business Center........ 5,417 16,307 21,724 37 1997 5-40
Pagemill & Dillworth........... 1,877 5,690 7,567 13 1997 5-40
Patuxent....................... 1,696 5,127 6,823 12 1997 5-40
S-2
AMB PROPERTY CORPORATION
SCHEDULE III
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
COSTS
CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
ENCUMBRANCES ----------------------- ---------------
PROPERTY LOCATION TYPE (1) LAND BUILDING LAND BUILDING
-------- -------- ---- ------------ --------- ----------- ---- --------
Penn James Office Warehouse.... MN IND $ -- $ 1,991 $ 6,013 $-- $ 103
Pennsy Drive................... MD IND -- 657 2,011 -- 203
Presidents Drive............... FL IND -- 1,124 3,446 -- --
Presidents Drive II............ FL IND 2,563 7,861 -- --
Preston Court.................. MD IND -- 2,313 7,192 -- --
Production Drive............... KY IND -- 425 1,286 -- --
Santa Barbara Court............ MD IND -- 1,617 5,029 -- --
Shiloh Road.................... TX IND -- 1,813 5,495 -- --
Silicon Valley R&D Portfolio... CA IND -- 8,024 24,205 -- --
South Bay Industrial........... CA IND 20,791 14,992 45,016 -- 465
Southfield..................... GA IND -- 7,073 21,259 -- 106
Stadium Business Park.......... CA IND 4,909 3,768 11,345 -- 48
Systematics.................... CA IND -- 911 2,773 -- --
Texas Industrial
Portfolio(4)................. TX IND -- 10,806 32,499 -- 218
Twin Cities.................... MN IND -- 4,873 14,638 -- --
Two South Middlesex............ NJ IND -- 2,247 6,781 -- --
Valwood........................ TX IND 4,351 1,983 5,989 -- 12
Valwood Parkway II............. TX IND -- 2,219 6,729 -- --
Viscount....................... FL IND -- 984 3,016 -- --
Weigman Road................... CA IND -- 1,563 4,852 -- --
West Kiest..................... TX IND -- 1,395 4,231 -- --
West North Carrier............. TX IND 3,522 1,375 4,165 -- 85
Windsor Court.................. IL IND -- 766 2,338 -- --
Yosemite Drive................. CA IND -- 2,350 7,297 -- --
Zanker/Charcot Industrial...... CA IND -- 5,282 15,887 -- 202
Applewood Village Shopping
Center....................... CO RET -- 6,716 26,903 -- --
Arapahoe Village Shopping
Center....................... CO RET 11,083 3,795 15,220 -- --
Aurora Marketplace............. WA RET -- 3,243 13,013 -- 4
BayHill Shopping Center........ CA RET -- 2,844 11,417 -- 64
Brentwood Commons.............. IL RET 5,460 1,810 7,280 -- 1
Civic Center Plaza............. IL RET 13,689 5,113 20,492 -- 42
Corbins Corner Shopping
Center....................... CT RET -- 6,438 25,791 -- 3
Eastgate Plaza................. WA RET -- 2,122 8,529 -- 59
Five Points Shopping Center.... CA RET -- 5,412 21,687 -- 96
GROSS AMOUNT CARRIED AT 12/31/97
----------------------------------
YEAR OF DEPRECIABLE
TOTAL ACCUMULATED CONSTRUCTION LIFE
PROPERTY LAND BUILDING COSTS(2) DEPRECIATION OR ACQUISITION (YEARS)
-------- -------- ---------- ---------- ------------ -------------- -----------
Penn James Office Warehouse.... $ 1,991 $ 6,116 $ 8,107 $ 14 1997 5-40
Pennsy Drive................... 657 2,214 2,871 5 1997 5-40
Presidents Drive............... 1,124 3,446 4,570 8 1997 5-40
Presidents Drive II............ 2,563 7,861 10,424 18 1997 5-40
Preston Court.................. 2,313 7,192 9,505 16 1997 5-40
Production Drive............... 425 1,286 1,711 3 1997 5-40
Santa Barbara Court............ 1,617 5,029 6,646 11 1997 5-40
Shiloh Road.................... 1,813 5,495 7,308 13 1997 5-40
Silicon Valley R&D Portfolio... 8,024 24,205 32,229 55 1997 5-40
South Bay Industrial........... 14,992 45,481 60,473 103 1997 5-40
Southfield..................... 7,073 21,365 28,438 49 1997 5-40
Stadium Business Park.......... 3,768 11,393 15,161 26 1997 5-40
Systematics.................... 911 2,773 3,684 6 1997 5-40
Texas Industrial
Portfolio(4)................. 10,806 32,717 43,523 74 1997 5-40
Twin Cities.................... 4,873 14,638 19,511 33 1997 5-40
Two South Middlesex............ 2,247 6,781 9,028 15 1997 5-40
Valwood........................ 1,983 6,001 7,984 14 1997 5-40
Valwood Parkway II............. 2,219 6,729 8,948 15 1997 5-40
Viscount....................... 984 3,016 4,000 7 1997 5-40
Weigman Road................... 1,563 4,852 6,415 11 1997 5-40
West Kiest..................... 1,395 4,231 5,626 10 1997 5-40
West North Carrier............. 1,375 4,250 5,625 10 1997 5-40
Windsor Court.................. 766 2,338 3,104 5 1997 5-40
Yosemite Drive................. 2,350 7,297 9,647 17 1997 5-40
Zanker/Charcot Industrial...... 5,282 16,089 21,371 36 1997 5-40
Applewood Village Shopping
Center....................... 6,716 26,903 33,619 61 1997 5-40
Arapahoe Village Shopping
Center....................... 3,795 15,220 19,015 35 1997 5-40
Aurora Marketplace............. 3,243 13,017 16,260 30 1997 5-40
BayHill Shopping Center........ 2,844 11,481 14,325 26 1997 5-40
Brentwood Commons.............. 1,810 7,281 9,091 17 1997 5-40
Civic Center Plaza............. 5,113 20,534 25,647 47 1997 5-40
Corbins Corner Shopping
Center....................... 6,438 25,794 32,232 59 1997 5-40
Eastgate Plaza................. 2,122 8,588 10,710 20 1997 5-40
Five Points Shopping Center.... 5,412 21,783 27,195 50 1997 5-40
S-3
AMB PROPERTY CORPORATION
SCHEDULE III
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
COSTS
CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
ENCUMBRANCES ----------------------- ---------------
PROPERTY LOCATION TYPE (1) LAND BUILDING LAND BUILDING
-------- -------- ---- ------------ --------- ----------- ---- --------
Granada Village................ CA RET $ 15,678 $ 6,533 $ 26,172 $-- $ 251
Kendall Mall................... FL RET 25,162 7,069 28,316 -- 16
La Jolla Village............... CA RET 19,245 6,936 27,785 -- 16
Lakeshore Plaza Shopping
Center....................... CA RET 13,839 6,706 26,865 -- 74
Latham Farms................... NY RET 38,833 12,327 49,350 -- 23
Long Gate Shopping Center...... MD RET -- 9,662 38,677 -- --
Manhattan Village Shopping
Center....................... CA RET -- 16,484 66,578 -- 230
Pleasant Hill Shopping
Center....................... CA RET -- 5,403 21,654 -- 13
Rancho San Diego Village
Shopping Center.............. CA RET -- 2,645 10,621 -- 2
Randall's Dairy Ashford........ TX RET -- 2,542 10,179 -- --
Randall's First Colony......... TX RET -- 2,139 8,563 -- --
Randall's Memorial Commons..... TX RET -- 2,053 8,221 -- 1
Randall's Woodway.............. TX RET -- 3,075 12,313 -- --
Riverview Plaza Shopping
Center....................... IL RET -- 2,656 10,663 -- --
Rockford Road Plaza............ MN RET -- 4,333 17,371 -- 35
Shoppes at Lago Mar............ FL RET 5,932 2,051 8,246 -- 66
Silverado Plaza Shopping
Center....................... CA RET 5,203 1,928 7,753 -- --
Southwest Pavilion............. NV RET -- 1,575 8,140 -- 30
The Plaza at Delray............ FL RET 23,455 6,968 27,914 -- 4
Twin Oaks Shopping Center...... CA RET -- 2,399 9,637 -- 47
Weslayan Plaza................. TX RET -- 7,842 31,409 -- 76
Woodlawn Point Shopping
Center....................... GA RET 4,823 2,318 9,312 -- --
Ygnacio Plaza.................. CA RET 8,365 3,021 12,114 -- 38
-------- -------- ---------- -- ------
$455,256 $550,635 $1,817,216 $-- $5,300
======== ======== ========== == ======
GROSS AMOUNT CARRIED AT 12/31/97
----------------------------------
YEAR OF DEPRECIABLE
TOTAL ACCUMULATED CONSTRUCTION LIFE
PROPERTY LAND BUILDING COSTS(2) DEPRECIATION OR ACQUISITION (YEARS)
-------- -------- ---------- ---------- ------------ -------------- -----------
Granada Village................ $ 6,533 $ 26,423 $ 32,956 $ 60 1997 5-40
Kendall Mall................... 7,069 28,332 35,401 65 1997 5-40
La Jolla Village............... 6,936 27,801 34,737 63 1997 5-40
Lakeshore Plaza Shopping
Center....................... 6,706 26,939 33,645 61 1997 5-40
Latham Farms................... 12,327 49,373 61,700 113 1997 5-40
Long Gate Shopping Center...... 9,662 38,677 48,339 88 1997 5-40
Manhattan Village Shopping
Center....................... 16,484 66,808 83,292 152 1997 5-40
Pleasant Hill Shopping
Center....................... 5,403 21,667 27,070 49 1997 5-40
Rancho San Diego Village
Shopping Center.............. 2,645 10,623 13,268 24 1997 5-40
Randall's Dairy Ashford........ 2,542 10,179 12,721 23 1997 5-40
Randall's First Colony......... 2,139 8,563 10,702 20 1997 5-40
Randall's Memorial Commons..... 2,053 8,222 10,275 19 1997 5-40
Randall's Woodway.............. 3,075 12,313 15,388 28 1997 5-40
Riverview Plaza Shopping
Center....................... 2,656 10,663 13,319 24 1997 5-40
Rockford Road Plaza............ 4,333 17,406 21,739 40 1997 5-40
Shoppes at Lago Mar............ 2,051 8,312 10,363 19 1997 5-40
Silverado Plaza Shopping
Center....................... 1,928 7,753 9,681 18 1997 5-40
Southwest Pavilion............. 1,575 8,170 9,745 19 1997 5-40
The Plaza at Delray............ 6,968 27,918 34,886 64 1997 5-40
Twin Oaks Shopping Center...... 2,399 9,684 12,083 22 1997 5-40
Weslayan Plaza................. 7,842 31,485 39,327 72 1997 5-40
Woodlawn Point Shopping
Center....................... 2,318 9,312 11,630 21 1997 5-40
Ygnacio Plaza.................. 3,021 12,152 15,173 26 1997 5-40
-------- ---------- ---------- ------
$550,635 $1,822,516 $2,373,151 $4,153
======== ========== ========== ======
S-4
AMB PROPERTY CORPORATION
SCHEDULE III
CONSOLIDATED REAL ESTATE AND
ACCUMULATED DEPRECIATION -- (CONTINUED)
A summary of activity for real estate and accumulated depreciation for the
year ended December 31, 1997 is as follows:
1997(5)
----------
INVESTMENTS IN REAL ESTATE:
Balance at beginning of year.............................. $ --
Acquisition of Properties(6)........................... 2,367,851
Improvements........................................... 5,300
----------
Balance at end of year.................................... $2,373,151
==========
ACCUMULATED DEPRECIATION:
Balance at beginning of year.............................. --
Depreciation expense................................... 4,153
----------
Balance at end of year.................................... $ 4,153
==========
- ---------------
(1) As of December 31, 1997, Properties with a net book value of $170,979 serve
as collateral for outstanding indebtedness under a secured debt facility of
$73,000.
(2) As of December 31, 1997, the aggregate cost for federal income tax purposes
of investments in real estate was approximately $2,231,504.
(3) Consists of two properties with seven buildings in Los Angeles and one
building in Anaheim.
(4) Consists of two properties with five buildings in Houston and 18 buildings
in Dallas.
(5) The Company was formed in November 1997. Since the Company did not own real
estate prior to the Formation Transaction, a reconciliation of activity for
real estate and accumulated depreciation is not provided for the years ended
December 31, 1996 and 1995.
(6) As discussed in the "Notes to Consolidated Financial Statements -- Formation
and Organization of the Company," the Company acquired Properties with a
value of $2,216,137 in exchange for shares of the Company's stock and LP
units in the Operating Partnership.
S-5