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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-13545
AMB PROPERTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 94-3281941
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
505 MONTGOMERY ST., SAN FRANCISCO, CALIFORNIA 94111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(415) 394-9000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
As of August 1, 1999, there were 86,521,092 shares of the Registrant's
common stock, $0.01 par value per share, outstanding.
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AMB PROPERTY CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and June
30, 1999 (unaudited)...................................... 1
Consolidated Statements of Operations for the six and three
months ended June 30, 1998 and 1999 (unaudited)........... 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1999 (unaudited).................. 3
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 1999 (unaudited).................... 4
Notes to Consolidated Financial Statements (unaudited)...... 5
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................. 14
Quantitative and Qualitative Disclosures About Market
Item 3. Risks..................................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 24
Item 2. Changes in Securities and Use of Proceeds................... 24
Item 3. Defaults Upon Senior Securities............................. 24
Item 4. Submission of Matters to a Vote of Security Holders......... 24
Item 5. Other Information........................................... 25
Item 6. Exhibits and Reports on Form 8-K............................ 41
- ---------------
The following are trademarks of the Company: Strategic Alliance Programs,
Development Alliance Program, Development Alliance Partners, UPREIT Alliance
Program, Institutional Alliance Program, Institutional Alliance Partners,
Management Alliance Program, Customer Alliance Program and Broker Alliance
Program.
i
PART I
ITEM 1. FINANCIAL STATEMENTS
AMB PROPERTY CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND JUNE 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
DECEMBER 31, JUNE 30,
1998 1999
------------ ----------
Investments in real estate:
Land and improvements..................................... $ 740,680 $ 666,743
Buildings and improvements................................ 2,445,104 2,116,208
Construction in progress.................................. 183,276 189,099
---------- ----------
Total investments in properties................... 3,369,060 2,972,050
Accumulated depreciation and amortization................. (58,404) (70,032)
---------- ----------
Net investments in properties..................... 3,310,656 2,902,018
Investment in unconsolidated joint venture................ 57,655 58,278
Properties held for divestiture, net...................... 115,050 675,892
---------- ----------
Net investments in real estate.................... 3,483,361 3,636,188
Cash and cash equivalents................................... 25,137 40,130
Other assets................................................ 54,387 56,226
---------- ----------
Total assets...................................... $3,562,885 $3,732,544
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Secured debt.............................................. $ 734,196 $ 763,587
Unsecured senior debt securities.......................... 400,000 400,000
Unsecured credit facility................................. 234,000 255,000
---------- ----------
Total debt........................................ 1,368,196 1,418,587
Other liabilities........................................... 104,305 120,686
---------- ----------
Total liabilities................................. 1,472,501 1,539,273
Commitments and contingencies............................... -- --
Minority interests.......................................... 325,024 409,662
Stockholders' equity:
Series A preferred stock, cumulative, redeemable, $0.01
par value, 100,000,000 shares authorized, 4,000,000
shares issued and outstanding, $100,000 liquidation
preference............................................. 96,100 96,100
Common stock, $0.01 par value, 500,000,000 shares
authorized, 85,917,520 and 86,518,592 issued and
outstanding............................................ 859 865
Additional paid-in capital................................ 1,668,401 1,679,954
Retained earnings......................................... -- 6,690
---------- ----------
Total stockholders' equity........................ 1,765,360 1,783,609
---------- ----------
Total liabilities and stockholders' equity........ $3,562,885 $3,732,544
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
1
AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ---------------------------
1998 1999 1998 1999
----------- ----------- ------------ ------------
REVENUES
Rental revenues........................... $ 159,003 $ 221,187 $ 84,401 $ 113,530
Equity in earnings of unconsolidated joint
venture................................ -- 2,328 -- 1,177
Investment management and other income.... 1,796 1,434 613 670
----------- ----------- ----------- -----------
Total revenues.................... 160,799 224,949 85,014 115,377
OPERATING EXPENSES
Property operating expenses............... 21,231 30,616 11,227 16,117
Real estate taxes......................... 21,273 29,802 11,025 14,767
General and administrative................ 5,862 8,350 3,144 4,278
Interest, including amortization.......... 27,561 46,558 15,720 23,591
Depreciation and amortization............. 25,302 33,602 13,516 15,178
----------- ----------- ----------- -----------
Total operating expenses.......... 101,229 148,928 54,632 73,931
----------- ----------- ----------- -----------
Income from operations before
minority Interests.............. 59,570 76,021 30,382 41,446
Minority interests' share of net income... (3,686) (14,706) (2,404) (8,145)
----------- ----------- ----------- -----------
Net income before gain from
divestiture of real estate...... 55,884 61,315 27,978 33,301
Gain from divestiture of real estate...... -- 11,525 -- 11,525
----------- ----------- ----------- -----------
Net income before extraordinary
items........................... 55,884 72,840 27,978 44,826
Extraordinary items....................... -- (1,509) -- (1,509)
----------- ----------- ----------- -----------
Net income........................ 55,884 71,331 27,978 43,317
Series A preferred stock dividends........ -- (4,250) -- (2,125)
----------- ----------- ----------- -----------
Net income available to common
stockholders.................... $ 55,884 $ 67,081 $ 27,978 $ 41,192
=========== =========== =========== ===========
BASIC INCOME PER COMMON SHARE:
Before extraordinary items................ $ 0.65 $ 0.80 $ 0.33 $ 0.50
Extraordinary items....................... -- (0.02) -- (0.02)
----------- ----------- ----------- -----------
Net income available to common
stockholders.................... $ 0.65 $ 0.78 $ 0.33 $ 0.48
=========== =========== =========== ===========
DILUTED INCOME PER COMMON SHARE:
Before extraordinary items................ $ 0.65 $ 0.80 $ 0.32 $ 0.50
Extraordinary items....................... -- (0.02) -- (0.02)
----------- ----------- ----------- -----------
Net income available to common
stockholders.................... $ 0.65 $ 0.78 $ 0.32 $ 0.48
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic..................................... 85,874,513 86,143,859 85,874,513 86,286,613
=========== =========== =========== ===========
Diluted................................... 86,253,456 86,244,750 86,222,175 86,468,820
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED, DOLLARS IN THOUSANDS)
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 55,884 $ 71,331
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 25,302 33,602
Straight-line rents....................................... (5,489) (5,523)
Amortization of debt premiums and financing costs......... (1,274) (1,413)
Minority interests' share of net income................... 3,686 14,706
Gain on divestiture of real estate........................ -- (11,525)
Non-cash portion of extraordinary items................... -- (1,372)
Equity in (earnings) loss of AMB Investment Management.... 95 (720)
Equity in earnings of unconsolidated joint venture........ -- (2,328)
Changes in assets and liabilities:
Other assets.............................................. (6,958) 3,724
Other liabilities......................................... 4,474 16,381
--------- ---------
Net cash provided by operating activities.......... 75,720 116,863
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property acquisitions......................... (246,213) (242,712)
Additions to land, building, development costs, and other
first generation improvements............................. (40,865) (62,009)
Additions to second generation building improvements and
lease costs............................................... (6,341) (12,362)
Acquisition of interest in unconsolidated joint venture..... (67,149) --
Distribution received from unconsolidated joint venture..... -- 1,705
Net proceeds from divestiture of real estate................ -- 214,729
Reduction of payable to affiliates in connection with
Formation Transactions.................................... (38,071) --
--------- ---------
Net cash used in investing activities.............. (398,639) (100,649)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock.................................... -- 549
Borrowings on unsecured credit facility..................... 382,000 236,000
Borrowings on secured debt.................................. 16,914 20,992
Payments on unsecured credit facility....................... (395,000) (215,000)
Payments on secured debt.................................... (59,545) (46,817)
Payments of financing fees.................................. -- (104)
Net proceeds from issuance of senior debt securities........ 399,166 --
Net proceeds from issuance of Series D preferred units...... -- 77,773
Dividends paid to common and preferred stockholders......... (29,413) (63,786)
Distributions to minority interests, including preferred
units..................................................... (2,004) (10,828)
--------- ---------
Net cash provided by financing activities.......... 312,118 (1,221)
--------- ---------
Net increase (decrease) in cash and cash equivalents........ (10,801) 14,993
Cash and cash equivalents at beginning of period............ 39,968 25,137
--------- ---------
Cash and cash equivalents at end of period.................. $ 29,167 $ 40,130
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest...................................... $ 26,583 $ 47,108
========= =========
Non-cash transactions:
Acquisitions of properties................................ $ 434,353 $ 314,726
Assumption of debt........................................ (99,623) (57,480)
Minority interest's contribution, including units
issued.................................................. (88,517) (14,534)
--------- ---------
Net cash paid...................................... $ 246,213 $ 242,712
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS)
COMMON STOCK
SERIES A ---------------------- ADDITIONAL
PREFERRED NUMBER PAID-IN RETAINED
STOCK OF SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------------ ------ ---------- -------- ----------
Balance at December 31, 1998... $96,100 85,917,520 $859 $1,668,401 $ -- $1,765,360
Net income................... 4,250 -- -- -- 67,081 71,331
Issuance of restricted stock,
net....................... -- 99,069 1 2,229 -- 2,230
Exercise of stock options.... -- 16,250 -- 342 -- 342
Conversion of Operating
Partnership units......... -- 485,753 5 10,983 -- 10,988
Deferred compensation........ -- -- -- (2,150) -- (2,150)
Deferred compensation
amortization.............. -- -- -- 215 -- 215
Reallocation of Limited
Partners' interests in
Operating Partnership..... -- -- -- (66) -- (66)
Dividends.................... (4,250) -- -- -- (60,391) (64,641)
------- ---------- ---- ---------- -------- ----------
Balance at June 30, 1999....... $96,100 86,518,592 $865 $1,679,954 $ 6,690 $1,783,609
======= ========== ==== ========== ======== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS,
EXCEPT PROPERTY STATISTICS, SHARE, PER SHARE AND UNIT AMOUNTS)
1. ORGANIZATION AND FORMATION
AMB Property Corporation, a Maryland corporation (the "Company"), commenced
operations as a fully integrated real estate company effective with the
completion of its initial public offering (the "IPO") on November 26, 1997. The
Company elected to be taxed as a real estate investment trust ("REIT") under
Sections 856 through 860 of the Internal Revenue Code of 1986 (the "Code"),
commencing with its taxable year ended December 31, 1997, and believes its
current organization and method of operation will enable it to maintain its
status as a REIT. The Company, through its controlling interest in its
subsidiary, AMB Property, L.P., a Delaware limited partnership (the "Operating
Partnership"), is engaged in the acquisition, ownership, operation, management,
renovation, expansion and development of industrial buildings and community
shopping centers in target markets nationwide. Unless the context otherwise
requires, the "Company" means AMB Property Corporation, the Operating
Partnership and its other controlled subsidiaries.
The Company and the Operating Partnership were formed shortly before
consummation of the IPO. AMB Institutional Realty Advisors, Inc., a California
corporation and registered investment advisor (the "Predecessor"), formed AMB
Property Corporation, a wholly owned subsidiary, and merged with and into the
Company (the "Merger") in exchange for 4,746,616 shares of the Company's Common
Stock (the "Common Stock"). In addition, the Company and the Operating
Partnership acquired, through a series of mergers and other transactions, 31.8
million rentable square feet of industrial property and 6.3 million rentable
square feet of retail property in exchange for 65,022,185 shares of the
Company's Common Stock, 2,542,163 limited partner interests ("LP Units") in the
Operating Partnership, the assumption of debt and, to a limited extent, cash.
The net assets of the Predecessor and the properties acquired with Common Stock
were contributed to the Operating Partnership in exchange for 69,768,801 LP
Units. The purchase method of accounting was applied to the acquisition of the
properties. Collectively, the Merger and the other formation transactions
described above are referred to as the "Formation Transactions."
On November 26, 1997, the Company completed its IPO of 16,100,000 shares of
Common Stock, $0.01 par value per share, for $21.00 per share, resulting in
gross offering proceeds of approximately $338,100. The net proceeds of
approximately $300,032 were used to repay indebtedness, to purchase interests
from certain investors who elected not to receive Common Stock or LP Units in
connection with the Formation Transactions, to fund property acquisitions, and
for general corporate working capital requirements.
As of June 30, 1999, the Company owned an approximate 95.0% general partner
interest in the Operating Partnership, excluding preferred units. The remaining
5.0% limited partner interest is owned by nonaffiliated investors. For local law
purposes, properties in certain states are owned through limited partnerships
and limited liability companies owned 99% by the Operating Partnership and 1% by
a wholly owned subsidiary of the Company. The ownership of such properties
through such entities does not materially affect the Company's overall ownership
of the interests in the properties. As the sole general partner of the Operating
Partnership, the Company has the full, exclusive and complete responsibility and
discretion in the day-to-day management and control of the Operating
Partnership.
In connection with the Formation Transactions, the Operating Partnership
formed AMB Investment Management, Inc., a Maryland corporation ("AMB Investment
Management"). The Operating Partnership purchased 100% of AMB Investment
Management's non-voting preferred stock (representing a 95% economic interest
therein). Certain current and former executive officers of the Company and an
officer of AMB Investment Management collectively purchased 100% of AMB
Investment Management's voting common stock (representing a 5% economic interest
therein). AMB Investment Management was formed to succeed to the Predecessor's
investment management business of providing real estate investment management
services on a fee basis to clients. The Operating Partnership also owns 100% of
the non-voting preferred stock
5
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS,
EXCEPT PROPERTY STATISTICS, SHARE, PER SHARE AND UNIT AMOUNTS)
of Headlands Realty Corporation, a Maryland corporation (representing a 95%
economic interest therein). Certain executive officers of the Company and a
director of Headlands Realty Corporation collectively own 100% of the voting
common stock of Headlands Realty Corporation (representing a 5% economic
interest therein). Headlands Realty Corporation invests in properties and
interests in entities that engage in the management, leasing and development of
properties and similar activities. The Operating Partnership accounts for its
investment in AMB Investment Management and Headlands Realty Corporation using
the equity method of accounting.
As of June 30, 1999, the Company owned 677 industrial buildings (the
"Industrial Properties") and 29 retail centers (the "Retail Properties") located
in 26 markets throughout the United States. The Industrial Properties,
principally warehouse distribution buildings, encompass approximately 61.9
million rentable square feet and, as of June 30, 1999, were 95.8% leased to over
2,100 tenants. The Retail Properties, principally grocer-anchored community
shopping centers, encompass approximately 5.7 million rentable square feet and,
as of June 30, 1999, were 94.2% leased to over 700 tenants. The Industrial
Properties and the Retail Properties collectively are referred to as the
"Properties."
2. INTERIM FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and note disclosures normally included in the
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The consolidated financial
statements for prior periods have been reclassified to conform to current
classifications with no effect on results of operations. In the opinion of
management, the accompanying unaudited consolidated financial statements contain
all adjustments, of a normal recurring nature, necessary for a fair presentation
of the Company's consolidated financial position and results of operations for
the interim periods.
The interim results of the six and three months ended June 30, 1998 and
1999 are not necessarily indicative of the results expected for the entire year.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. REAL ESTATE ACQUISITION AND DEVELOPMENT ACTIVITY
During the second quarter of 1999, the Company acquired $200,845 in
operating properties, consisting of 62 industrial buildings, aggregating 3.1
million square feet. The Company did not initiate any new development projects
during the quarter. Two development projects, aggregating approximately 0.2
million square feet, were completed during the quarter, at a total aggregate
cost of $7,800. As of June 30, 1999, the Company had 14 industrial projects,
aggregating approximately 3.7 million square feet, in its development pipeline,
with a total estimated cost of $180,300 upon completion, and two retail
projects, aggregating approximately 0.3 million square feet, in its development
pipeline, with a total estimated cost of $46,100 upon completion.
6
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS,
EXCEPT PROPERTY STATISTICS, SHARE, PER SHARE AND UNIT AMOUNTS)
4. PROPERTY HELD FOR DIVESTITURE AND PROPERTY DIVESTITURE
On March 9, 1999, the Operating Partnership signed three separate
definitive agreements with BPP Retail, LLC ("BPP Retail"), a co-investment
entity between Burnham Pacific ("BPP") and the California Public Employees'
Retirement System ("CalPERS"), pursuant to which, if fully consummated, BPP
Retail would have acquired up to 28 retail shopping centers, totaling
approximately 5.1 million square feet, for an aggregate price of $663,400. The
sale of five of the properties is subject to the consent of the Company's joint
venture partners. One of the Company's joint venture partners who holds an
interest in three of the properties has indicated that it will not consent to
the sale of these properties at this time. The Company has received consents
from its joint venture partners for the sale of the other two properties. As a
result, the price with respect to the 25 remaining properties, totaling
approximately 4.3 million square feet, is approximately $560,400. The Company
intends to dispose of these three properties or its interests in the joint
ventures through which it holds the properties.
Pursuant to the agreements, BPP Retail will acquire the 25 centers in
separate transactions. Under the agreements, the Operating Partnership has the
right to extend the closing dates for a period of up to either 20 or 50 days.
The Operating Partnership has exercised this right with respect to the first and
second transactions, which occurred on June 15, 1999 and August 4, 1999,
respectively. Pursuant to the closing of the first transaction, BPP Retail
acquired nine retail shopping centers, totaling approximately 1.4 million square
feet, for an aggregate price of approximately $207,400. The Company used the
proceeds from the first transaction to repay secured debt related to the
properties divested, to partially repay amounts outstanding under the Company's
unsecured credit facility, to pay transaction expenses, for potential
acquisitions and for general corporate purposes. This divestiture resulted in an
approximate gain of $11,800 and an approximate extraordinary loss of $1,500,
consisting of prepayment penalties with an off-set for debt premium write-off
related to the indebtedness extinguished. On August 4, 1999, the second
transaction with BPP Retail closed. Pursuant to the closing of the second
transaction, BPP Retail acquired 12 of the Company's retail shopping centers,
totaling approximately 2.1 million square feet, for an aggregate price of
$245,800. The Company used the proceeds from the second transaction to repay
secured debt related to the properties divested, to partially repay amounts
outstanding under the Company's unsecured credit facility, to pay transaction
expenses, for potential acquisitions and for general corporate purposes. The
Company currently expects the third transaction to close on or about December 1,
1999.
In addition, the Operating Partnership entered into a definitive agreement,
subject to a financing condition, with BPP, pursuant to which, if fully
consummated, BPP would have acquired up to six additional retail centers,
totaling approximately 1.5 million square feet, for approximately $284,400. On
June 30, 1999, this agreement was terminated pursuant to its terms as a result
of BPP's decision not to waive the financing condition. The Company currently
intends to dispose of the six retail properties, either on an individual or
portfolio basis, or its interests in the joint ventures through which it holds
the properties.
The Company intends to use the proceeds of approximately $107,200 from the
divestiture of the remaining four retail centers to BPP Retail in the third
transaction to pay approximately $26,500 in partial repayment of amounts
outstanding under the Company's unsecured credit facility, to pay transaction
expenses, for potential acquisitions and for general corporate purposes.
In connection with the BPP Retail transactions, the Company has granted
CalPERS an option to purchase up to 2,000,000 shares of the Company's common
stock for an exercise price of $25.00 per share that CalPERS may exercise on or
before March 31, 2000. The Company has registered the 2,000,000 shares of common
stock issuable upon exercise of the option.
7
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS,
EXCEPT PROPERTY STATISTICS, SHARE, PER SHARE AND UNIT AMOUNTS)
Although the remaining transaction with BPP Retail has a discretionary due
diligence period, it is subject to certain customary closing conditions, which
are generally applied on a property-by-property basis. BPP has announced that it
has received and is reviewing a merger proposal. The Company does not believe
that the contractual obligations of BPP Retail with respect to the purchase of
the retail centers will be affected by any resulting merger. BPP Retail has
posted a deposit of $8,375 on the remaining transaction. BPP Retail's liability
in the event of its default under a definitive agreement is limited to its
deposit. Although the Company believes that the remaining transaction with BPP
Retail is probable, the transaction might not close as scheduled or close at
all, and it is possible that the transaction may close with respect to just a
portion of the properties currently subject to the agreement.
As of June 30, 1999, the net carrying value of the properties held for
divestiture, comprised of 25 retail centers and 16 industrial buildings, was
$675,892. Certain of the properties included in these transactions are subject
to indebtedness which totaled $150,520 as of June 30, 1999.
The following summarizes the condensed results of operations of the
properties held for divestiture for the six and three months ended June 30, 1998
and 1999:
PROPERTIES HELD FOR DIVESTITURE
-------------------------------------------------------
INDUSTRIAL RETAIL TOTAL
--------------- ----------------- -----------------
SIX MONTHS ENDED JUNE 30, 1998 1999 1998 1999 1998 1999
------------------------- ------ ------ ------- ------- ------- -------
Income..................................... $2,390 $2,311 $40,154 $43,230 $42,544 $45,541
Property operating expenses................ 481 554 11,988 12,667 12,469 13,221
------ ------ ------- ------- ------- -------
Net operating income..................... $1,909 $1,757 $28,166 $30,563 $30,075 $32,320
====== ====== ======= ======= ======= =======
INDUSTRIAL RETAIL TOTAL
--------------- ----------------- -----------------
THREE MONTHS ENDED JUNE 30, 1998 1999 1998 1999 1998 1999
--------------------------- ------ ------ ------- ------- ------- -------
Income..................................... $1,204 $1,223 $20,017 $21,691 $21,221 $22,914
Property operating expenses................ 223 305 6,163 6,274 6,386 6,579
------ ------ ------- ------- ------- -------
Net operating income..................... $ 981 $ 918 $13,854 $15,417 $14,835 $16,335
====== ====== ======= ======= ======= =======
In June 1999, the Company also divested itself of one industrial building
located in Bolingbrook, Illinois, aggregating 0.3 million square feet. The
building was divested at a gross price of $10,500.
8
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS,
EXCEPT PROPERTY STATISTICS, SHARE, PER SHARE AND UNIT AMOUNTS)
5. DEBT
As of December 31, 1998 and June 30, 1999, debt consisted of the following:
DECEMBER 31, JUNE 30,
1998 1999
------------ ----------
Secured debt, varying interest rates from 4.0% to 10.0% due
May 2000 to April 2014.................................... $ 718,979 $ 750,623
Unsecured senior debt securities, weighted average Interest
rate of 7.2%, due June 2008, June 2015 and June 2018...... 400,000 400,000
Unsecured credit facility, variable interest at LIBOR plus
90 to 120 basis points (6.6% at June 30, 1999, based on
30-day LIBOR of 5.2%), due November 2000.................. 234,000 255,000
---------- ----------
Subtotal.................................................. 1,352,979 1,405,623
Unamortized debt premiums................................. 15,217 12,964
---------- ----------
Total consolidated debt................................. $1,368,196 $1,418,587
========== ==========
Secured debt generally requires monthly principal and interest payments.
The secured debt is secured by deeds of trust on certain Properties. As of June
30, 1999, the total gross investment value of those Properties secured by debt
was $1,435,550. All of the secured debt bears interest at fixed rates, except
for two loans with an aggregate principal amount of $10,491 which bear interest
at a variable rate. The secured debt has various financial and non-financial
covenants. Additionally, certain of the secured debt is cross-collateralized. In
the second quarter of 1999, as part of a property acquisition transaction, the
Company assumed $13,724 of secured debt at a weighted average interest rate of
9.9%, maturing between October 2000 and January 2005.
Interest on the senior debt securities is payable semiannually in each June
and December commencing December 1998. The 2015 notes are putable and callable
in June 2005. The senior debt securities are subject to various financial and
non-financial covenants.
The Company has a $500,000 unsecured revolving credit agreement (the
"Credit Facility") with Morgan Guaranty Trust Company of New York, as agent, and
a syndicate of twelve other banks. The Credit Facility has an original term of
three years and is subject to a fee that accrues on the daily average undrawn
funds, which varies between 15 and 25 basis points of the undrawn funds based on
the Company's credit rating. The Credit Facility has various financial and
non-financial covenants.
Capitalized interest related to construction projects for the six and three
months ended June 30, 1998 and 1999 was $3,098, $5,457, $1,845 and $2,874,
respectively.
The scheduled maturities of the Company's total debt, excluding unamortized
debt premiums, as of June 30, 1999 are as follows:
UNSECURED
SENIOR UNSECURED
SECURED DEBT CREDIT
DEBT SECURITIES FACILITY TOTAL
-------- ---------- ----------- ----------
1999 (six months).............................. $ 7,470 $ -- $ -- $ 7,470
2000........................................... 44,861 -- 255,000 299,861
2001........................................... 43,944 -- -- 43,944
2002........................................... 62,612 -- -- 62,612
2003........................................... 108,790 -- -- 108,790
2004........................................... 92,557 -- -- 92,577
2005........................................... 69,212 100,000 -- 169,212
2006........................................... 145,874 -- -- 145,874
2007........................................... 38,504 -- -- 38,504
2008........................................... 127,742 175,000 -- 302,742
Thereafter..................................... 9,057 125,000 -- 134,057
-------- -------- -------- ----------
Subtotal....................................... $750,623 $400,000 $255,000 $1,405,623
======== ======== ======== ==========
9
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS,
EXCEPT PROPERTY STATISTICS, SHARE, PER SHARE AND UNIT AMOUNTS)
6. MINORITY INTERESTS IN CONSOLIDATED JOINT VENTURE
Minority interests in the Company represent the limited partnership
interests in the Operating Partnership and interests held by certain third
parties (some of which are Institutional Alliance Partners) in 18 joint
ventures, through which 21 properties are held, that are consolidated for
financial reporting purposes. Such investments are consolidated because (i) the
Company owns a majority interest or (ii) 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 changes in financing.
The following table distinguishes the minority interest ownership held by
certain joint venture partners, Institutional Alliance Partners, the limited
partners in the Operating Partnership, the Series B Preferred Unit holders'
interest in the Operating Partnership, the Series C Preferred Unit holders'
interest in an indirect subsidiary of the Company and the Series D Preferred
Unit holders' interest in an indirect subsidiary of the Company, as of the
quarter ended June 30, 1999 and for the six and three months ended June 30,
1999.
MINORITY INTEREST SHARE
OF NET INCOME
------------------------------
MINORITY INTEREST SIX MONTHS THREE MONTHS
LIABILITY AS OF ENDED ENDED
JUNE 30, 1999 JUNE 30, 1999 JUNE 30, 1999
----------------- ------------- -------------
Joint venture partners............................. $ 17,780 $ 910 $ 554
Institutional Alliance Partners.................... 56,023 1,800 741
Limited partners in the Operating Partnership...... 89,900 3,521 2,183
Series B Preferred Units (liquidation preference of
$65,000)......................................... 62,320 2,804 1,402
Series C Preferred Units (liquidation preference of
$110,000)........................................ 105,866 4,812 2,406
Series D Preferred Units (liquidation preference of
$79,767)......................................... 77,773 859 859
-------- ------- ------
$409,662 $14,706 $8,145
======== ======= ======
7. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
The Company has a 56.1% non-controlling limited partnership interest in one
unconsolidated equity investment joint venture which was purchased in June 1998.
The joint venture owns 36 industrial buildings totaling approximately 4.0
million square feet in the Chicago market. For the six and three month periods
ended June 30, 1999, the Company's share of net operating income was $3,992 and
$2,014, respectively, and as of June 30, 1999, the Company's share of the
unconsolidated joint venture debt was $19,472, which had a weighted average
interest rate of 6.49%.
8. STOCKHOLDERS' EQUITY
On June 4, 1999, the Company and the Operating Partnership declared a
quarterly cash distribution of $0.35 per share of common stock and LP Unit, for
the quarter ending June 30, 1999, payable on July 15, 1999, to stockholders and
unitholders of record as of July 6, 1999. On June 4, 1999, the Company declared
a cash dividend of $0.53125 per share on its Series A Preferred Stock, and the
Operating Partnership declared a cash distribution of $0.53125 per unit on its
Series A Preferred Units, for the three month period ending July 14, 1999,
payable on July 15, 1999, to stockholders and unitholders of record as of June
30, 1999.
10
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS,
EXCEPT PROPERTY STATISTICS, SHARE, PER SHARE AND UNIT AMOUNTS)
9. INCOME PER SHARE
The Company's only dilutive securities outstanding for the six and three
months ended June 30, 1998 and 1999 were stock options granted under its stock
incentive plan. The effect of the stock options was to increase weighted average
shares outstanding by 378,943 and 100,891 shares for the six months ended June
30, 1998 and 1999, respectively, and by 347,662 and 182,206 shares for the three
months ended June 30, 1998 and 1999, respectively. Such dilution was computed
using the treasury stock method.
10. SEGMENT INFORMATION
The Company has two reportable segments: Industrial Properties and Retail
Properties. The Industrial Properties consist primarily of warehouse
distribution facilities suitable for single or multiple tenants and are
typically comprised of multiple buildings and are leased to tenants engaged in
various types of businesses. The Retail Properties are generally leased to one
or more anchor tenants, such as grocery and drug stores, and various retail
businesses. The accounting policies of the segments are the same as those
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. The Company evaluates performance based upon property net
operating income and contribution to funds from operations ("FFO") from the
combined properties in each segment. The Company's properties are managed
separately because each segment requires different operating, pricing and
leasing strategies. Significant information used by the Company for the
reportable segments is as follows:
INDUSTRIAL PROPERTIES RETAIL PROPERTIES TOTAL PROPERTIES
------------------------- -------------------------------- -------------------------
SIX MONTHS THREE MONTHS SIX MONTHS THREE MONTHS SIX MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
---------- ------------ ----------------- ------------ ---------- ------------
RENTAL REVENUES:
June 30, 1998......... $106,583 $57,918 $52,420 $26,483 $159,003 $ 84,401
June 30, 1999......... 164,760 87,161 56,427 26,369 221,187 113,530
PROPERTY NET OPERATING
INCOME AND CONTRIBUTION
TO FFO(1):
June 30, 1998......... 79,849 43,793 36,650 18,356 116,499 62,149
June 30, 1999......... 121,049 64,566 39,720 18,080 160,769 82,646
INVESTMENT IN PROPERTIES INDUSTRIAL PROPERTIES RETAIL PROPERTIES TOTAL PROPERTIES
------------------------ --------------------- ----------------- ----------------
As of:
December 31, 1998(2).... $2,574,940 $794,120 $3,369,060
June 30, 1999(3)........ 2,926,321 45,729 2,972,050
- ---------------
(1) Property net operating income (NOI) and contribution to FFO are defined as
rental revenue, including reimbursements and straight-line rents, less
property level operating expenses, including allocated asset management
costs and excluding depreciation, amortization and interest expense.
(2) Excludes net properties held for divestiture of $21,434, $93,616 and
$115,050 for Industrial, Retail and Total Properties, respectively.
(3) Excludes net properties held for divestiture of $38,326, $637,566 and
$675,892 for Industrial, Retail and Total Properties, respectively.
11
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS,
EXCEPT PROPERTY STATISTICS, SHARE, PER SHARE AND UNIT AMOUNTS)
The Company uses property net operating income and FFO as operating
performance measures. The following two tables are reconciliations between total
reportable segment revenue, property net operating income and FFO contribution
to consolidated revenues, net income and FFO.
FOR THE SIX MONTHS FOR THE THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- ---------------------
1998 1999 1998 1999
-------- -------- --------- ---------
REVENUES
Total rental revenues for reportable segments............... $159,003 $221,187 $ 84,401 $113,530
Investment management and other income...................... 1,796 3,762 613 1,847
-------- -------- -------- --------
Total consolidated revenues................................. $160,799 $224,949 $ 85,014 $115,377
======== ======== ======== ========
NET INCOME
Property net operating income and contribution to FFO for
reportable segments....................................... $116,499 $160,769 $ 62,149 $ 82,646
Equity in earnings of unconsolidated joint venture.......... -- 2,328 -- 1,177
Investment management and other income...................... 1,796 1,434 613 670
Less:
General and administrative................................ (5,862) (8,350) (3,144) (4,278)
Interest expense.......................................... (27,561) (46,558) (15,720) (23,591)
Depreciation and amortization............................. (25,302) (33,602) (13,516) (15,178)
Minority interests........................................ (3,686) (14,706) (2,404) (8,145)
-------- -------- -------- --------
Net income before gain from divestiture of real estate...... $ 55,884 $ 61,315 $ 27,978 $ 33,301
Gain from divestiture of real estate........................ -- 11,525 -- 11,525
Extraordinary items......................................... -- (1,509) -- (1,509)
-------- -------- -------- --------
Net income.................................................. $ 55,884 $ 71,331 $ 27,978 $ 43,317
======== ======== ======== ========
FFO(1)
Net income.................................................. $ 55,884 $ 71,331 $ 27,978 $ 43,317
Minority interests' share of net income..................... 3,686 14,706 2,404 8,145
Gain from divestiture of real estate........................ -- (11,525) -- (11,525)
Extraordinary items......................................... -- 1,509 -- 1,509
Real estate depreciation and amortization:
Total depreciation and amortization....................... 25,302 33,602 13,516 15,178
Furniture, fixtures, and equipment depreciation........... (215) (364) (111) (250)
FFO attributable to minority interests(2):
Institutional Alliance Partners........................... (1,129) (2,635) (1,003) (1,161)
Other joint venture partners.............................. (959) (1,109) (510) (558)
Adjustment to derive FFO in unconsolidated joint venture(3):
Company's share of net income............................. -- (2,328) -- (1,177)
Company's share of FFO.................................... -- 3,316 -- 1,671
Series A preferred stock dividends.......................... -- (4,250) -- (2,125)
Series B, C & D preferred unit distributions................ -- (8,475) -- (4,667)
-------- -------- -------- --------
FFO......................................................... $ 82,569 $ 93,778 $ 42,274 $ 48,357
======== ======== ======== ========
- ---------------
(1) FFO is defined as income from operations before minority interest, gains or
losses from sale of real estate and extraordinary losses plus real estate
depreciation and adjustment to derive the Company's pro rata share of the
FFO of unconsolidated joint ventures, less minority interests' pro rata
share of the FFO of consolidated joint ventures and perpetual preferred
stock dividends. In accordance with NAREIT White Paper on FFO, the Company
includes the effects of straight-line rents in FFO. Further, the Company
does not adjust FFO to eliminate the effects of non-recurring charges.
(2) Represents FFO attributable to minority interests in consolidated joint
ventures for the periods presented, which has been computed as minority
interests' share of net income before disposal of properties plus minority
interests' share of real estate-related depreciation and amortization of the
consolidated joint ventures for such periods. Such minority interests are
not exchangeable into shares of Common Stock.
(3) Represents the Company's pro rata share of FFO in unconsolidated joint
ventures for the periods presented, which has been computed as the Company's
share of net income plus the Company's share of real estate-related
depreciation and amortization of the unconsolidated joint venture for such
periods.
12
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS,
EXCEPT PROPERTY STATISTICS, SHARE, PER SHARE AND UNIT AMOUNTS)
11. COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of business, from time to time, the Company is
involved in legal actions relating to the ownership and operations of its
Properties. In management's opinion, the liabilities, if any, that may
ultimately result from such legal actions are not expected to have a materially
adverse effect on the consolidated financial position, results of operations, or
cash flows of the Company.
Environmental Matters
The Company follows the policy of monitoring its properties for the
presence of hazardous or toxic substances. The Company is not aware of any
environmental liability with respect to the Properties that would have a
material adverse effect on the Company's business, assets or results of
operations. There can be no assurance that such a material environmental
liability does not exist. The existence of any such material environmental
liability would have an adverse effect on the Company's results of operations
and cash flow.
General Uninsured Losses
The Company carries comprehensive liability, fire, flood, environmental,
extended coverage and rental loss insurance with policy specifications, limits
and deductibles which the Company believes are adequate and appropriate under
the circumstances given the relative risk of loss, the cost of such coverage and
industry practice. There are, however, certain types of extraordinary losses
that may be either uninsurable, or not economically insurable. Certain of the
Properties are located in areas that are subject to earthquake activity; the
Company has therefore obtained limited earthquake insurance. Should an uninsured
loss occur, the Company could lose its investment in, and anticipated profits
and cash flows, from a Property.
13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis of the consolidated
financial condition and results of operations in conjunction with the Notes to
Consolidated Financial Statements. Statements contained in this discussion which
are not historical facts may be forward looking statements. You can identify
forward-looking statements by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "pro forma," "estimates" or "anticipates" or the negative of
these words and phrases or similar words or phrases. You can also identify
forward-looking statements by discussions of strategy, plans or intentions.
Forward-looking statements involve numerous risks and uncertainties and you
should not rely upon them as predictions of future events. There is no assurance
that the events or circumstances reflected in forward-looking statements will be
achieved or occur. Forward-looking statements are necessarily dependent on
assumptions, data or methods that may be incorrect or imprecise and we may not
be able to realize them. The following factors, among others, could cause actual
results and future events to differ materially from those set forth or
contemplated in the forward-looking statements: defaults or non-renewal of
leases by tenants, increased interest rates and operating costs, failure to
obtain necessary outside financing, difficulties in identifying properties to
acquire and in effecting acquisitions, our failure to successfully integrate
acquired properties and operations, our failure to divest of properties we have
contracted to sell or to timely reinvest proceeds from any such divestitures,
risks and uncertainties affecting property development and construction
(including, construction delays, cost overruns, our inability to obtain
necessary permits and public opposition to these activities), our failure to
qualify and maintain our status as a real estate investment trust under the
Internal Revenue Code of 1986, as amended, environmental uncertainties, risks
related to natural disasters, financial market fluctuations, changes in real
estate and zoning laws and increases in real property tax rates. Our success
also depends upon economic trends generally, including interest rates, income
tax laws, governmental regulation, legislation, population changes and those
risk factors discussed in Item 5 of this report. We caution you not to place
undue reliance on forward-looking statements, which reflect our analysis only
and speak only as of the date of this report or the dates indicated in the
statements.
Unless we indicate otherwise or unless the context requires otherwise, all
references in this report to "AMB" and the "Company" mean AMB Property
Corporation and all references to the "operating partnership" mean AMB Property,
L.P. Unless we indicate otherwise or unless the context requires otherwise, all
references in this report to "we," "us," or "our" mean AMB and its subsidiaries,
including the operating partnership and its subsidiaries.
THE COMPANY
As of June 30, 1999, we owned and operated industrial buildings and retail
centers totaling 67.6 million square feet located in 26 markets nationwide. As
of June 30, 1999, we owned 677 industrial buildings, principally warehouse
distribution buildings, aggregating 61.9 million rentable square feet, which
were 95.8% leased, and 29 retail centers, principally grocer-anchored community
shopping centers, aggregating 5.7 million rentable square feet, which were 94.2%
leased. In addition, as of the same date we had an interest in an unconsolidated
joint venture that owns 36 industrial buildings aggregating 4.0 million square
feet and we operated properties aggregating 3.8 million, 0.4 million, and 0.1
million square feet of industrial, retail, and other properties, respectively,
on behalf of investment management clients.
On March 9, 1999, we signed three separate definitive agreements with BPP
Retail, LLC, a co-investment entity between Burnham Pacific and the California
Public Employees' Retirement System, pursuant to which, if fully consummated,
BPP Retail would have acquired up to 28 of our retail shopping centers, totaling
approximately 5.1 million square feet, for an aggregate price of $663.4 million.
The sale of five of the properties is subject to the consent of our joint
venture partners. One of our joint venture partners who holds an interest in
three of the properties has indicated that it will not consent to the sale of
these properties at this time. We have received consents from our joint venture
partners for the sale of the other two properties. As a result, the price with
respect to the 25 remaining properties, totaling approximately 4.3 million
square
14
feet, is approximately $560.4 million. We intend to dispose of these three
properties or our interests in the joint ventures through which we hold the
properties.
Pursuant to the agreements, BPP Retail will acquire the 25 centers in
separate transactions. Under the agreements, we have the right to extend the
closing dates for a period of up to either 20 or 50 days. We have exercised this
right with respect to the first and second transactions, which closed on June
15, 1999 and August 4, 1999, respectively. Pursuant to the closings of the first
and second transactions, BPP Retail acquired 21 retail shopping centers,
totaling approximately 3.5 million square feet, for an aggregate price of
approximately $453.2 million. We used the proceeds from the first and second
transactions to repay secured debt related to the properties divested of
approximately $55.5 million, to pay approximately $210.0 million in partial
repayment of amounts outstanding under our unsecured credit facility, to pay
transaction expenses, for potential acquisitions and for general corporate
purposes. We currently expect the third transaction to close on or about
December 1, 1999.
In addition, we entered into a definitive agreement, subject to a financing
condition, with Burnham Pacific, pursuant to which, if fully consummated,
Burnham Pacific would have acquired up to six additional retail centers,
totaling approximately 1.5 million square feet, for approximately $284.4
million. On June 30, 1999, this agreement was terminated pursuant to its terms
as a result of Burnham Pacific's decision not to waive the financing condition.
We currently intend to dispose of the six retail properties, either on an
individual or portfolio basis, or our interests in the joint ventures through
which we hold the properties.
We intend to use the proceeds of approximately $107.2 million from the
divestiture of the remaining four retail centers to BPP Retail in the third
transaction to pay approximately $26.5 million in partial repayment of amounts
outstanding under our unsecured credit facility, to pay transaction expenses,
for potential acquisitions and for general corporate purposes.
In connection with the BPP Retail transactions, AMB has granted the
California Public Employee's Retirement System an option to purchase up to
2,000,000 shares of AMB's common stock for an exercise price of $25.00 per share
that the California Public Employees' Retirement system may exercise on or
before March 31, 2000. AMB had registered the 2,000,000 shares of common stock
issuable upon exercise of the option.
Although the remaining transaction with BPP Retail has a discretionary due
diligence period, it is subject to certain customary closing conditions, which
are generally applied on a property-by-property basis. Burnham Pacific has
announced that it has received and is reviewing a merger proposal. We do not
believe that the remaining contractual obligations of BPP Retail with respect to
the purchase of the retail centers will be affected by any resulting merger. BPP
Retail has posted a deposit of $8.4 million on the remaining transaction. BPP
Retail's liability in the event of its default under a definitive agreement is
limited to its deposit. Although we believe that the remaining transaction with
BPP Retail is probable, the transaction might not close as scheduled or close at
all, and it is possible that the transaction may close with respect to just a
portion of the properties currently subject to the agreement.
ACQUISITION AND DEVELOPMENT ACTIVITY
During the second quarter, we acquired $200.8 million in operating
properties, consisting of 62 industrial buildings, aggregating 3.1 million
square feet. We also completed two development projects, aggregating
approximately 0.2 million square feet, during the quarter, with an aggregate
total cost of $7.8 million. As of June 30, 1999, we had 14 industrial projects,
aggregating approximately 3.7 million square feet, in our development pipeline,
with an aggregate total estimated cost of $180.3 million upon completion, and
two retail projects, aggregating approximately 0.3 million square feet, in our
development pipeline, with an aggregate estimated cost of $46.1 million upon
completion.
15
STRATEGIC ALLIANCE PROGRAMS
We believe that our strategy of forming strategic alliances with local and
regional real estate experts improves our operating efficiency and flexibility,
strengthens our customer satisfaction and retention and provides us with
attractive growth opportunities. Additionally, our strategic alliances with
institutional investors enhance our access to private capital and our ability to
finance transactions.
Our six Strategic Alliance Programs can be grouped into two categories:
- Operating Alliances, which allow us to form relationships with local or
regional real estate experts, thereby becoming their ally rather than
their competitor; and
- Investment Alliances, which allow us to establish relationships with a
variety of capital sources.
OPERATING ALLIANCES
MANAGEMENT ALLIANCE PROGRAM: Our strategy for the Management Alliance
Program is to develop close relationships with, and outsource property
management to, local property managers that we believe to be among the best in
their respective markets. Our alliances with local property managers increase
our flexibility, reduce our overhead expenses and improve our customer service.
In addition, these alliances provide us with local market information related to
tenant activity and acquisition opportunities. During the quarter ended June 30,
1999, we acquired four industrial buildings, aggregating 0.4 million square
feet, sourced through our Management Alliance Program.
DEVELOPMENT ALLIANCE PROGRAM: Our strategy for our Development Alliance
Program is to form alliances with development firms with a strong local presence
and expertise. As of June 30, 1999, over 80% of our development projects were
being developed by our Development Alliance Partners.
CUSTOMER ALLIANCE PROGRAM: Through our Customer Alliance Program, we seek
to build long-term working relationships with major tenants. We are committed to
working with our tenants, particularly our larger tenants with multi-site
requirements, to make their property searches as efficient as possible.
BROKER ALLIANCE PROGRAM: Through our Broker Alliance Program, we work
closely with top local leasing companies in each of our markets, which brokers
provide us with access to high quality tenants and local market knowledge.
INVESTMENT ALLIANCES
UPREIT ALLIANCE PROGRAM: Through our UPREIT Alliance Program, we issue
limited partnership units in the operating partnership to certain property
owners in exchange for properties, thus providing additional growth for our
portfolio. During the quarter ended June 30, 1999, we acquired 51 industrial
buildings, aggregating 1.7 million square feet, sourced through our UPREIT
Alliance Program.
INSTITUTIONAL ALLIANCE PROGRAM: Our strategy for our Institutional Alliance
Program is to form alliances with institutional investors. Our alliances with
institutional investors provide us with access to private capital, including
during those times when the public markets are less attractive, as well as
providing us with a source of incremental fee income and investment returns.
RESULTS OF OPERATIONS
The analysis below shows changes in our results of operations for the six
and three months ended June 30, 1999 and 1998 which includes changes
attributable to acquisitions and development activity, and the changes resulting
from properties that we owned during both the current and prior year reporting
periods, excluding development properties prior to being stabilized (generally
defined as 95.0% leased) for both the current and prior periods (the "same store
properties"). For the comparison between the six and three month periods ended
June 30, 1999 and 1998, the same store properties consist of properties
aggregating 40.4 million square feet. Our future financial condition and results
of operations, including rental revenues, may be impacted by
16
the acquisition of additional properties. Our future revenues and expenses may
vary materially from their historical rates.
SIX AND THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Rental revenues. Rental revenues, including straight-line rents, tenant
reimbursements and other property related income, increased by $62.2 and $29.1
million, or 39% and 35%, for the six and three months ended June 30, 1999, to
$221.2 and $113.5 million, respectively, as compared with the same periods in
1998. Approximately $4.8 and $2.8 million, or 8% and 10% of this increase, was
attributable to same store properties, with the remaining $58.2 and $26.3
million attributable to properties acquired between January 1, 1998 and June 30,
1999. The growth in rental revenues in same store properties resulted primarily
from the incremental effect of cash rental rate increases and changes in
occupancy and reimbursement of expenses, offset by a decrease in straight-line
rents. During the quarter ended June 30, 1999, the same store properties
increase in base rents (cash basis) was 16.6% on 1.0 million square feet leased.
Other revenues. Other revenues, including equity in earnings of
unconsolidated joint venture, investment management income, and interest income,
totaled $3.8 and $1.8 million for the six and three months ended June 30, 1999,
respectively, as compared to $1.8 and $0.6 million for the six and three months
ended June 30, 1998, respectively. The $2.0 and $1.2 million increase in other
revenues between the six and three months ended June 30, 1999 and June 30, 1998,
respectively, was primarily attributable to the earnings from our equity
investment in our unconsolidated joint venture which was purchased in June 1998.
Property operating expenses and real estate taxes. Property operating
expenses, including asset management costs and real estate taxes, increased by
$17.9 and $8.6 million, or 42% and 39%, for the six and three months ended June
30, 1999, to $60.4 and $30.9 million, respectively, as compared with the same
periods in 1998. Same store properties operating expenses increased by
approximately $1.1 and $0.4 million for the six and three months ended June 30,
1999, respectively, while operating expenses attributable to properties acquired
between January 1, 1998 through June 30, 1999 added $16.8 and $8.2 million. The
change in same store properties operating expenses primarily relates to
increases in same store properties real estate taxes of approximately $1.1 and
$0.3 million for the six and three months ended June 30, 1999, respectively.
General and administrative expenses. General and administrative expenses
were $8.4 and $4.3 million for the six and three months ended June 30, 1999,
respectively. The $2.5 and $1.1 million, or 42% and 36%, increases from the six
and three months ended June 30, 1998 to June 30, 1999 are primarily attributable
to additional staffing that resulted from the growth in our portfolio. The
remainder of the increase is due to the change in our accounting policy for
capitalizing internal acquisition costs. Effective during the second quarter of
1998, we changed our policy to expense all internal costs.
LIQUIDITY AND CAPITAL RESOURCES
We currently expect that our principal sources of working capital and
funding for acquisitions, development, expansion and renovation of properties
will include cash flow from operations, borrowings under our unsecured credit
facility, other forms of secured or unsecured financing, proceeds from equity or
debt offerings by AMB or the operating partnership (including issuances of
limited partnership units in the operating partnership) and net proceeds from
divestitures of properties. We presently believe that our sources of working
capital and our ability to access private and public debt and equity capital are
adequate for us to continue to meet our liquidity requirements for the
foreseeable future.
CAPITAL RESOURCES
Property divestitures. On March 9, 1999, we signed three separate
definitive agreements with BPP Retail, LLC pursuant to which, if fully
consummated, BPP Retail would have acquired up to 28 of our retail shopping
centers, totaling approximately 5.1 million square feet, for an aggregate price
of $663.4 million. The sale of five of the properties is subject to the consent
of our joint venture partners. One of our joint venture partners who holds an
interest in three of the properties has indicated that it will not consent to
the sale of
17
these properties at this time. We have received consents from our joint venture
partners for the sale of the other two properties. As a result, the sale price
with respect to the 25 remaining properties, totaling approximately 4.3 million
square feet, is approximately $560.4 million. We intend to dispose of these
three properties or our interests in the joint ventures through which we hold
the properties.
Pursuant to the agreements, BPP Retail will acquire the 25 centers in
separate transactions. Under the agreements, we have the right to extend the
closing dates for a period of up to either 20 or 50 days. We have exercised this
right with respect to the first and second transactions, which closed on June
15, 1999 and August 4, 1999, respectively. Pursuant to the closings of the first
and second transactions, BPP Retail acquired 21 retail shopping centers,
totaling approximately 3.5 million square feet, for an aggregate price of
approximately $453.2 million. We used the proceeds from the first and second
transactions to repay secured debt related to the properties divested of
approximately $55.5 million, to pay approximately $210.0 million in partial
repayment of amounts outstanding under our unsecured credit facility, to pay
transaction expenses, for potential acquisitions and for general corporate
purposes. We currently expect the third transactions to close on or about
December 1, 1999.
In addition, we entered into a definitive agreement, subject to a financing
condition, with Burnham Pacific, pursuant to which, if fully consummated,
Burnham Pacific would have acquired up to six additional retail centers,
totaling approximately 1.5 million square feet, for approximately $284.4
million. On June 30, 1999, this agreement was terminated pursuant to its terms
as a result of Burnham Pacific's decision not to waive the financing condition.
We currently intend to dispose of the six retail properties, either on an
individual or portfolio basis, or our interests in the joint ventures through
which we hold the properties.
As of June 30, 1999, the net carrying value of the properties held for
divestiture was $675.9 million. Certain of the properties included in these
transactions are subject to indebtedness totaling $150.5 million as of June 30,
1999. We intend to use the proceeds of $519.7 million from these transactions to
pay expenses incurred in connection with the divestitures, to repay the secured
debt related to the properties divested, to partially pay down our unsecured
credit facility, for potential acquisitions and for general corporate purposes.
On June 10, 1999, we divested one industrial building located in
Bolingbrook, Illinois, aggregating 0.3 million square feet. The building was
disposed of at a gross price of $10.5 million. We used the net proceeds of $10.2
million to partially fund a property acquisition and for general corporate
purposes.
Credit facility. We have a $500 million unsecured revolving credit
agreement with Morgan Guaranty Trust Company of New York, as agent, and a
syndicate of twelve other banks. The credit facility has a term of three years
and is subject to a fee that accrues on the daily average undrawn funds, which
varies between 15 and 25 basis points (currently 15 basis points) of the undrawn
funds based on our credit rating. We use the credit facility principally for
acquisitions and for general working capital requirements. Borrowings under the
credit facility bear interest at LIBOR plus 90 to 120 basis points (currently
LIBOR plus 90 basis points), depending our debt rating at the time of the
borrowings. As of June 30, 1999, the outstanding balance on the credit facility
was $255.0 million, with a weighted average interest rate of 6.6% (based on
30-day LIBOR of 5.2%). Monthly debt service payments on the credit facility are
interest only. The credit facility matures in November 2000. The total amount
available under the credit facility fluctuates based upon the borrowing base, as
defined in the agreement governing the credit facility. At June 30, 1999, the
remaining amount available under the credit facility was approximately $245.0
million.
Debt and equity financing. On May 5, 1999, AMB Property II, L.P. issued and
sold 1,595,337 7.75% Series D Cumulative Redeemable Preferred Limited
Partnership Units at a price of $50.00 per unit in a private placement.
Distributions are cumulative from the date of original issuance and are payable
quarterly in arrears at a rate per unit equal to $3.875 per annum. The Series D
Preferred Units are redeemable by AMB Property II, L.P. on or after May 5, 2004,
subject to certain conditions, for cash at a redemption price equal to $50.00
per unit, plus accumulated and unpaid distributions thereon, if any, to the
redemption date. The Series D Preferred Units are exchangeable, at specified
times and subject to certain conditions, on a one-for-one basis, for shares of
AMB's Series D Preferred Stock. AMB Property II, L.P. used the net proceeds of
approximately $77.8 million to make a loan to the operating partnership in the
amount of approximately $20.1 million and to purchase an unconsolidated joint
venture interest for a price of approximately
18
$57.7 million from the operating partnership. The loan bears interest at a rate
of 7.0% per annum and is payable upon demand. The operating partnership used the
funds to repay borrowings under the credit facility and for general corporate
purposes.
Market capitalization. As of June 30, 1999, the aggregate principal amount
of this secured debt was $750.6 million, excluding unamortized debt premiums of
$13.0 million. The secured debt bears interest at rates varying from 4.0% to
10.0% per annum (with a weighted average of 7.8%) and final maturity dates
ranging from May 2000 to April 2014. We believe the carrying value of the debt
approximates its fair value on June 30, 1999.
As of June 30, 1999, our total outstanding debt was approximately $1.4
billion, including unamortized debt premiums of approximately $13.0 million. See
Note 5 to our Consolidated Financial Statements. The total amount of debt that
we must repay during the remainder of 1999 is approximately $7.5 million, which
represents scheduled principal amortization.
In order to maintain financial flexibility and facilitate the rapid
deployment of capital through market cycles, we presently intend to operate with
a debt-to-total market capitalization ratio of approximately 45% or less.
Additionally, we presently intend to continue to structure our balance sheet in
order to maintain an investment grade rating on our senior unsecured debt.
The tables below summarize our debt maturities and capitalization as of
June 30, 1999 (in thousands, except share amounts and percentages).
DEBT
- --------------------------------------------------------------------------------
UNSECURED
INDUSTRIAL RETAIL SENIOR UNSECURED
SECURED SECURED DEBT CREDIT
DEBT DEBT SECURITIES FACILITY TOTAL
---------- -------- ---------- --------- ----------
1999 (six months)...................... $ 5,131 $ 2,339 $ -- $ -- $ 7,470
2000................................... 36,161 8,700 -- 255,000 299,861
2001................................... 13,399 30,545 -- -- 43,944
2002................................... 28,434 34,178 -- -- 62,612
2003................................... 57,933 50,857 -- -- 108,790
2004................................... 91,625 932 -- -- 92,557
2005................................... 68,204 1,008 100,000 -- 169,212
2006................................... 134,045 11,829 -- -- 145,874
2007................................... 37,777 727 -- -- 38,504
2008................................... 119,984 7,758 175,000 -- 302,742
Thereafter............................. 7,131 1,926 125,000 -- 134,057
-------- -------- -------- -------- ----------
Subtotal............................. 599,824 150,799 400,000 255,000 1,405,623
Unamortized premiums................. 9,588 3,376 -- -- 12,964
-------- -------- -------- -------- ----------
Total consolidated debt...... 609,412 154,175 400,000 255,000 1,418,587
Our share of unconsolidated JV debt.... 19,472 -- -- -- 19,472
-------- -------- -------- -------- ----------
Total debt................... $628,884 $154,175 $400,000 $255,000 $1,438,059
======== ======== ======== ======== ==========
JV partners' share of consolidated JV
debt................................. (49,691)
----------
Our share of total debt........... $1,388,368
----------
Weighted average interest
rate......................... 7.8%(1) 7.9% 7.2% 6.6% 7.4%
Weighted average maturity (in
years)....................... 6.7(1) 4.2 11.4 1.4 6.8
- ---------------
(1) Does not include unconsolidated joint venture debt, which bears interest at
6.5% per annum and matures in 2007.
19
MARKET EQUITY
- --------------------------------------------------------------------------------
SHARES
SECURITY OUTSTANDING MARKET PRICE MARKET VALUE
-------- ----------- ------------ ------------
Common stock.......................................... 86,518,592 $23.50 $2,033,187
Common limited partnership units...................... 4,578,942 23.50 107,605
---------- ----------
Total....................................... 91,097,534 $2,140,792
========== ==========
PREFERRED STOCK AND UNITS
- --------------------------------------------------------------------------------
DIVIDEND LIQUIDATION REDEMPTION
SECURITY RATE PREFERENCE PROVISIONS
-------- -------- ----------- -------------
Series A preferred stock.............................. 8.50% $100,000 July 2003
Series B preferred units.............................. 8.63% 65,000 November 2003
Series C preferred units.............................. 8.75% 110,000 November 2003
Series D preferred units.............................. 7.75% 79,767 May 2004
--------
Weighted Average/Total.............................. 8.43% $354,767
--------
CAPITALIZATION RATIOS
- --------------------------------------------------------------------------------
Total debt-to-total market capitalization................... 36.6%
Our share of total debt-to-total market capitalization...... 35.7%
Total debt plus preferred-to-total market capitalization.... 45.6%
Our share of total debt plus preferred-to-total market
capitalization............................................ 44.9%
LIQUIDITY
As of June 30, 1999, we had approximately $40.1 million in cash and cash
equivalents and $245.0 million of additional available borrowings under the
credit facility. We intend to use cash from operations, borrowings under the
credit facility, other forms of secured and unsecured financing, proceeds from
any future debt or equity offerings by AMB or the operating partnership
(including issuances of limited partnership units in the operating partnership
or its subsidiaries), and proceeds from divestitures of properties to fund
acquisitions, development activities and capital expenditures and to provide for
general working capital requirements.
On June 4, 1999, we declared a quarterly cash distribution of $0.35 per
share of common stock and the operating partnership declared a quarterly cash
distribution of $0.35 per operating partnership unit, for the quarter ending
June 30, 1999, payable on July 15, 1999, to stockholders and unitholders of
record as of July 6, 1999. On June 4, 1999, we declared a cash dividend of
$0.53125 per share on our Series A Preferred Stock, and the operating
partnership declared a cash distribution of $0.53125 per unit on its Series A
Preferred Units, for the three month period ending July 14, 1999, payable on
July 15, 1999, to stockholders and unitholders of record as of June 30, 1999.
The anticipated size of our distributions, using only cash from operations,
will not allow us to retire all of our debt as it comes due. Therefore, we
intend to also repay maturing debt with net proceeds from future debt and/or
equity financings. However, we may not be able to obtain future financings on
favorable terms or at all.
CAPITAL COMMITMENTS
In addition to recurring capital expenditures and costs to renew or
re-tenant space, as of June 30, 1999, our development pipeline included 16
projects representing a total estimated investment of $226.4 million upon
completion. Of this total, approximately $132.0 million had been funded as of
June 30, 1999 and approximately $94.4 million is estimated to be required to
complete projects currently under construction or for which we have committed to
complete. We presently expect to fund these expenditures with cash from
20
operations, borrowings under the credit facility, debt or equity issuances and
net proceeds from property divestitures. Other than these capital items, we have
no material capital commitments.
During the period from April 1, 1999 to June 30, 1999, we invested $200.8
million in 62 industrial buildings, aggregating 3.1 million rentable square
feet. We funded these acquisitions and initiated development projects through
borrowings under the credit facility, cash, debt assumption, and the issuance of
limited partnership units in the operating partnership.
YEAR 2000 COMPLIANCE
Our state of readiness. We utilize a number of computer software programs
and operating systems across our entire organization, including applications
used in financial business systems and various administrative functions. To the
extent that our software applications contain source code that is unable to
appropriately interpret the upcoming calendar year 2000 and beyond, some level
of modification or replacement of such applications will be necessary.
We are currently conducting a company-wide test of our financial and
non-financial systems to ensure that our systems will adequately handle the year
2000 issue. Our financial system is fully year 2000 compliant. We have conducted
a survey of our property managers to determine if our non-financial systems
(HVAC, security, lighting, and other building systems) at our properties are
year 2000 compliant and to determine the state of readiness of our tenants
regarding their year 2000 compliance. A majority of our property managers have
responded to the survey and, based upon such responses, we believe that the
non-financial systems with respect to those properties are year 2000 compliant.
In addition, we are currently surveying our other third party vendors to
determine if their systems are year 2000 compliant and to determine the state of
readiness regarding their year 2000 compliance. The compliance efforts of our
third-party vendors, including utility and telecommunication companies, are not
within our control and any failure on the part of our third-party vendors to
become year 2000 compliant could result in disruptions in our business
operations and at our properties.
Costs of addressing our year 2000 issues. Given the information known at
this time about our systems, coupled with our ongoing, normal course-of-business
efforts to upgrade or replace critical systems, as necessary, we do not expect
year 2000 compliance costs to have any material adverse impact on our liquidity
or ongoing results of operations. The costs of such assessment will be included
in our general and administrative expenses. Although we can make no assurance,
we currently do not expect that the year 2000 issue will materially affect our
operations due to problems encountered by our suppliers, customers and lenders.
Risks of our year 2000 issues. In light of our assessment and remediation
efforts to date, we believe that any residual year 2000 risk is limited to
non-critical business applications and support hardware. No assurance can be
given, however, that all of our systems will be year 2000 compliant or that
compliance will not have a material adverse effect on our future liquidity,
results of operations or ability to service debt.
Our contingency plans. We are currently developing our contingency plan for
all operations to address the most reasonably likely worst case scenarios
regarding year 2000 compliance. We expect such contingency plans to be completed
before the end of the year.
21
FUNDS FROM OPERATIONS
We believe that 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. Further, FFO as disclosed by other REITs may not be comparable.
The following table reflects the calculation of our FFO for six and three
months ended June 30, 1998 and 1999 (dollars in thousands).
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ---------------------------
1998 1999 1998 1999
----------- ----------- ------------ ------------
Income from operations before minority
interests............................... $ 59,570 $ 76,021 $ 30,382 $ 41,446
Real estate related depreciation and
amortization:
Total depreciation and amortization..... 25,302 33,602 13,516 15,178
FF&E depreciation and ground lease
amortization......................... (215) (364) (111) (250)
FFO attributable to minority
interests(1)(2):
Institutional Alliance Partners......... (1,129) (2,635) (1,003) (1,161)
Other joint venture partners............ (959) (1,109) (510) (558)
Adjustments to derive FFO in
unconsolidated joint Venture(3):
Our share of net income................. -- (2,328) -- (1,177)
Our share of FFO........................ -- 3,316 -- 1,671
Series A preferred stock dividends........ -- (4,250) -- (2,125)
Series B, C & D preferred unit
distributions........................... -- (8,475) -- (4,667)
----------- ----------- ----------- -----------
FFO(1).................................... $ 82,569 $ 93,778 $ 42,274 $ 48,357
=========== =========== =========== ===========
FFO per common share and unit:
Basic................................... $ 0.93 $ 1.03 $ 0.47 $ 0.53
=========== =========== =========== ===========
Diluted................................. $ 0.92 $ 1.03 $ 0.47 $ 0.53
=========== =========== =========== ===========
Weighted average common shares and units:
Basic................................... 88,983,990 90,655,675 89,539,010 90,861,822
=========== =========== =========== ===========
Diluted(4).............................. 89,362,932 90,756,567 89,886,673 91,044,028
=========== =========== =========== ===========
- ---------------
(1) FFO is defined as income from operations before minority interest, gains or
losses from sale of real estate and extraordinary losses plus real estate
depreciation and adjustment to derive our pro rata share of the FFO of
unconsolidated joint ventures, less minority interests' pro rata share of
the FFO of consolidated joint ventures and perpetual preferred stock
dividends. In accordance with NAREIT White Paper on FFO, we include the
effects of straight-line rents in FFO. Further, we do not adjust FFO to
eliminate the effects of non-recurring changes.
(2) Represents FFO attributable to minority interest in consolidated joint
ventures for the period presented, which has been computed as minority
interests' share of net income plus minority interests' share of real
estate-related depreciation and amortization of the consolidated joint
ventures for such period. These minority interests are not convertible into
shares of common stock.
(3) Represents our pro rata share of FFO in unconsolidated joint ventures for
the period presented, which has been computed as our share of net income
plus our share of real estate-related depreciation and amortization of the
unconsolidated joint venture for such period.
(4) Includes the dilutive effect of stock options.
22
OPERATING AND LEASING STATISTICS SUMMARY
The following summarizes key operating and leasing statistics for all of
our industrial properties and retail properties as of and for the period ended
June 30, 1999.
INDUSTRIAL RETAIL TOTAL
----------- ---------- -----------
Square feet owned(1)........................................ 61,901,637 5,652,580 67,554,217
Occupancy percentage........................................ 95.8% 94.2% 95.6%
Lease expirations as percentage of total square feet (next
12 months)................................................ 15.5% 8.4% 14.9%
Weighted average lease term................................. 7 years 15 years 7 years
Tenant retention:
Quarter................................................... 58.3% 88.4% 59.6%
Trailing average (1/01/96 to 6/30/99)..................... 72.4% 85.7% 73.1%
Rent increases on renewals and rollovers:
Quarter................................................... 14.1% 6.5% 13.1%
Trailing 12 months........................................ 10.1% 7.4% 9.8%
Same store cash basis NOI growth(2):
Quarter................................................... 5.1% 6.8% 5.5%
Year-to-date.............................................. 5.9% 4.8% 5.4%
Second generation tenant improvements and leasing
commissions per sq. ft.:(3)
Quarter:
Renewals................................................ $ 0.83 $ 0.84 $ 0.83
Re-tenanted............................................. 2.57 1.27 2.57
----------- ---------- -----------
Weighted average.................................... $ 1.82 $ 0.94 $ 1.81
=========== ========== ===========
Year-to-date:
Renewals................................................ $ 1.43 $ 1.43 $ 1.43
Re-tenanted............................................. 2.52 4.36 2.54
----------- ---------- -----------
Weighted average.................................... $ 1.67 $ 1.58 $ 1.67
=========== ========== ===========
Trailing average (1/01/96 to 6/30/99)..................... $ 1.32 $ 4.13 $ 1.46
=========== ========== ===========
- ---------------
(1) In addition to owned square feet as of June 30, 1999, AMB Investment
Management managed 3.8 million, 0.4 million, and 0.1 million additional
square feet of industrial, retail, and other properties, respectively. We
also have an investment in 4.0 million square feet of industrial properties
through our investment in an unconsolidated joint venture.
(2) Consists of industrial buildings and retail centers aggregating 36.0 million
and 4.4 million square feet, respectively, that have been owned by us prior
to January 1, 1998, and excludes development properties prior to
stabilization.
(3) Consists of all leases renewing or re-tenanting with lease terms greater
than one year.
The following summarizes key same store properties' operating statistics
for our industrial properties and retail properties as of and for the period
ending June 30, 1999.
INDUSTRIAL RETAIL TOTAL
---------- --------- ----------
Square feet in same store pool(1)........................... 36,025,231 4,411,219 40,436,450
Occupancy percentage:
6/30/98................................................... 95.6% 97.4% 95.8%
6/30/99................................................... 96.9% 96.4% 96.8%
Tenant retention:
Quarter................................................... 67.2% 88.5% 68.5%
Trailing 12 months........................................ 66.2% 76.8% 66.7%
Rent increases on renewals and rollovers:
Quarter................................................... 18.9% 6.5% 16.6%
Trailing 12 months........................................ 9.2% 7.4% 8.9%
Cash basis NOI growth % increase:
Quarter:
Revenues................................................ 4.6% 4.8% 4.7%
Expenses................................................ 3.0% 0.5% 2.2%
NOI..................................................... 5.1% 6.8% 5.5%
Year-to-date:
Revenues................................................ 5.4% 4.1% 5.0%
Expenses................................................ 3.8% 2.3% 3.4%
NOI..................................................... 5.9% 4.8% 5.4%
- ---------------
(1) Same store properties include all properties that were owned during both the
current and prior year reporting periods and excludes development properties
prior to being stabilized for both the current and prior reporting period.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Our exposure to market risk includes the rising interest rates in
connection with our unsecured credit facility and other variable rate
borrowings, and our ability to incur more debt without stockholder approval,
thereby increasing our debt service obligations, which could adversely affect
our cash flows. See "Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Capital Resources -- Market Capitalization."
PART II
ITEM 1. LEGAL PROCEEDINGS
As of June 30, 1999, there were no pending legal proceedings to which we
are a party or of which any of our properties is the subject, the adverse
determination of which we anticipate would have a material adverse effect upon
our financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 30, 1999, the operating partnership issued an aggregate of 390,633
limited partnership units with an aggregate value of approximately $9.4 million
to two corporations and twelve individuals in partial consideration for the
acquisition of properties. On May 21, 1999, the operating partnership issued
18,638 limited partnership units with a value of approximately $0.5 million to a
limited liability company in partial consideration for the acquisition of
properties. On May 26, 1999, the operating partnership issued 212,766 limited
partnership units with a value of approximately $5.0 million to a limited
liability company in partial consideration for the acquisition of properties.
Holders of the limited partnership units may redeem part or all of their limited
partnership units for cash, or at the election of AMB, exchange their limited
partnership units for shares of AMB's common stock on a one-for-one basis.
The issuance of limited partnership units in connection with the
acquisitions discussed above constituted private placements of securities which
were exempt from the registration requirement of the Securities Act pursuant to
Section 4(2) of the Securities Act and Rule 506 of Regulation D.
On May 5, 1999, AMB Property II, L.P. issued and sold 1,595,337 7.75%
Series D Cumulative Redeemable Preferred Limited Partnership Units at a price of
$50.00 per unit, for a gross price of $79.8 million, to a limited liability
company. The issuance and sale of the Series D Preferred Units constituted a
private placement of securities which was exempt from the registration
requirement of the Securities Act pursuant to Section 4(2) of the Securities Act
and Rule 506 of Regulation D. The Series D Preferred Units are exchangeable, at
specified times and subject to certain conditions, on a one-for-one basis, for
shares of AMB's Series D Preferred Stock. The Articles Supplementary
establishing the rights and preferences of the holders of the Series D Preferred
Stock were filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 7, 1999. The
stockholders voted to (1) elect nine directors to the Company's Board of
Directors to serve until the next annual meeting of stockholders and until their
successors are duly elected and qualified and (2) ratify and approve an
amendment to the Company's First Amended and Restated 1997 Stock Option and
Incentive Plan, increasing the number of shares authorized for issuance
thereunder by 3,200,000 shares.
24
The stockholders' votes with respect to the election of directors were as
follows:
VOTES
--------------------------------------------------
AGAINST OR VOTES BROKER
FOR WITHHELD ABSTAINED NON-VOTES
---------- ---------- --------- ---------
Douglas D. Abbey....................... 61,574,242 125,676 -- --
Hamid R. Moghadam...................... 61,574,242 125,676 -- --
T. Robert Burke........................ 61,574,242 125,676 -- --
Daniel H. Case III..................... 61,574,242 125,676 -- --
Robert H. Edelstein, Ph.D. ............ 61,574,242 125,676 -- --
Lynn M. Sedway......................... 61,574,242 125,676 -- --
Jeffrey L. Skelton, Ph.D. ............. 61,574,242 125,676 -- --
Thomas W. Tusher....................... 61,574,242 125,676 -- --
Caryl B. Welborn, Esq. ................ 61,574,242 125,676 -- --
The stockholders' votes with respect to the ratification and approval of
the increase in number of shares authorized for issuance under the Company's
1997 Stock Option and Incentive Plan were as follows:
VOTES
- ----------------------------------------------
AGAINST OR VOTES BROKER
FOR WITHHELD ABSTAINED NON-VOTES
- ---------- ---------- --------- ---------
52,936,753 8,621,421 141,744 --
ITEM 5. OTHER INFORMATION
BUSINESS RISKS
Our operations involve various risks that could have adverse consequences
to us. Such risks include, among others:
GENERAL REAL ESTATE RISKS
THERE ARE FACTORS OUTSIDE OF OUR CONTROL THAT AFFECT THE PERFORMANCE AND
VALUE OF OUR PROPERTIES
Real property investments are subject to varying degrees of risk. The
yields available from equity investments in real estate depend on the amount of
income earned and capital appreciation generated by the related properties as
well as the expenses incurred in connection with the properties. If our
properties do not generate income sufficient to meet operating expenses,
including debt service and capital expenditures, AMB's ability to pay
distributions to holders of its common stock could be adversely affected. Income
from, and the value of, our properties may be adversely affected by the general
economic climate, local conditions such as oversupply of industrial or retail
space or a reduction in demand for industrial or retail space, the
attractiveness of our properties to potential tenants, competition from other
properties, our ability to provide adequate maintenance and insurance and an
increase in operating costs. In addition, revenues from properties and real
estate values are also affected by factors such as the cost of compliance with
regulations, the potential for liability under applicable laws (including
changes in tax laws), interest rate levels and the availability of financing.
Our income would be adversely affected if a significant number of tenants were
unable to pay rent or if we were unable to rent our industrial or retail space
on favorable terms. Certain significant expenditures associated with an
investment in real estate (such as mortgage payments, real estate taxes and
maintenance costs) generally do not decline when circumstances cause a reduction
in income from the property.
WE MAY BE UNABLE TO RENEW LEASES OR RELET SPACE AS LEASES EXPIRE
We are subject to the risks that leases may not be renewed, space may not
be relet, or the terms of renewal or reletting (including the cost of required
renovations) may be less favorable than current lease terms. Leases on a total
of approximately 24.7% of the leased square footage of our properties as of June
30, 1999 will expire on or prior to December 31, 2000, with leases on 7.3% of
the leased square footage of our
25
properties as of June 30, 1999 expiring during the six months ending December
31, 1999. In addition, numerous properties compete with our properties in
attracting tenants to lease space, particularly with respect to retail centers.
The number of competitive commercial properties in a particular area could have
a material adverse effect on our ability to lease space in our properties and on
the rents that we are able to charge. Our financial condition, results of
operations, cash flow and AMB's ability to pay distributions on, and the market
price of, its common stock could be adversely affected if we are unable to
promptly relet or renew the leases for all or a substantial portion of expiring
leases, if the rental rates upon renewal or reletting is significantly lower
than expected, or if our reserves for these purposes prove inadequate.
REAL ESTATE INVESTMENTS ARE ILLIQUID
Because real estate investments are relatively illiquid, our ability to
vary our portfolio promptly in response to economic or other conditions is
limited. The limitations in the Internal Revenue Code and related regulations on
a real estate investment trust holding property for sale may affect our ability
to sell properties without adversely affecting distributions to AMB's
stockholders. The relative illiquidity of our holdings, Internal Revenue Code
prohibitions and related regulations could impede our ability to respond to
adverse changes in the performance of our investments and could adversely affect
our financial condition, results of operations and cash flow and AMB's ability
to pay distributions on, and the market price of, its common stock.
A SIGNIFICANT NUMBER OF OUR PROPERTIES ARE LOCATED IN CALIFORNIA
Our properties located in California as of June 30, 1999 represented
approximately 21.5% of the aggregate square footage of our properties as of June
30, 1999 and approximately 28.6% of our annualized base rent. Annualized base
rent means the monthly contractual amount under existing leases at June 30,
1999, multiplied by 12. This amount excludes expense reimbursements and rental
abatements. Our revenue from, and the value of, our properties located in
California may be affected by a number of factors, including local real estate
conditions (such as oversupply of or reduced demand for commercial properties)
and the local economic climate. Business layoffs, downsizing, industry
slowdowns, changing demographics and other factors may adversely impact the
local economic climate. A downturn in either the California economy or in
California real estate conditions could adversely affect our financial
condition, results of operations and cash flow and AMB's ability to pay
distributions on, and the market price of, its common stock. Certain of our
properties are also subject to possible loss from seismic activity. On June 15,
1999 and August 4, 1999, we sold an aggregate of seven of our properties located
in California to BPP Retail. In the event that the remaining transaction with
BPP Retail, LLC is fully consummated, we will dispose of all but three of our
retail centers located in California and, thereafter (based on property
statistics as of June 30, 1999), 22.1% of our properties based on aggregate
square footage and 29.3% of our properties based on annualized base rent will be
located in California.
OUR PROPERTIES ARE CURRENTLY CONCENTRATED IN THE INDUSTRIAL AND RETAIL
SECTORS
Our properties are currently concentrated predominantly in the industrial
and retail commercial real estate sectors. However, in the event that the
transactions with BPP Retail are fully consummated, our properties will be
concentrated predominately in the industrial real estate sector. Our
concentration in certain property types may expose us to the risk of economic
downturns in these sectors to a greater extent than if our portfolio also
included other property types. In the event that the transactions referred to
above are consummated, our exposure to the risk of economic downturns in the
industrial real estate sector will be greater. As a result of such
concentration, economic downturns in these sectors could have an adverse effect
on our financial condition, results of operations and cash flow and AMB's
ability to pay distributions on, and the market price of, its common stock.
SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE
We carry comprehensive liability, fire, extended coverage and rental loss
insurance covering all of our properties, with policy specifications and insured
limits which we believe are adequate and appropriate under the circumstances
given relative risk of loss, the cost of such coverage and industry practice.
There are,
26
however, certain losses that are not generally insured because it is not
economically feasible to insure against them, including losses due to riots or
acts of war. Certain losses such as losses due to floods or seismic activity may
be insured subject to certain limitations including large deductibles or
co-payments and policy limits. If an uninsured loss or a loss in excess of
insured limits occurs with respect to one or more of our properties, we could
lose the capital we invested in the properties, as well as the anticipated
future revenue from the properties and, in the case of debt which is with
recourse to us, we would remain obligated for any mortgage debt or other
financial obligations related to the properties. Moreover, as the general
partner of the operating partnership, AMB will generally be liable for all of
the operating partnership's unsatisfied obligations other than non-recourse
obligations. Any such liability could adversely affect our financial condition,
results of operations and cash flow and AMB's ability to pay distributions on,
and the market price of, its common stock.
A number of our properties are located in areas that are known to be
subject to earthquake activity, including California where, as of June 30, 1999,
181 industrial buildings aggregating 13.3 million rentable square feet
(representing 21.9% of our properties based on aggregate square footage and
28.1% based on annualized base rent) and six retail centers aggregating 1.3
million rentable square feet (representing 22.2% of our properties based on
aggregate square footage and 30.7% based on annualized base rent) are located.
In the event that the remaining transaction with BPP Retail is fully
consummated, we will dispose of all but three of our retail centers located in
California and, thereafter (based on property statistics as of June 30, 1999),
22.1% of our properties based on aggregate square footage and 29.3% of our
properties based on annualized base rent will be located in California. We carry
replacement cost earthquake insurance on all of our properties located in areas
historically subject to seismic activity, subject to coverage limitations and
deductibles which we believe are commercially reasonable. This insurance
coverage also applies to the properties managed by AMB Investment Management,
Inc., with a single aggregate policy limit and deductible applicable to those
properties and our properties. The operating partnership owns 100% of the
non-voting preferred stock of AMB Investment Management, Inc. See "-- AMB
Investment Management, Inc. and Headlands Realty Corporation." Through an annual
analysis prepared by outside consultants, we evaluate our earthquake insurance
coverage in light of current industry practice and determine the appropriate
amount of earthquake insurance to carry. We may incur material losses in excess
of insurance proceeds and we may not be able to continue to obtain insurance at
commercially reasonable rates.
WE ARE SUBJECT TO RISKS AND LIABILITIES IN CONNECTION WITH PROPERTIES OWNED
THROUGH JOINT VENTURES, LIMITED LIABILITY COMPANIES AND PARTNERSHIPS
As of June 30, 1999, we had ownership interests in 18 joint ventures,
limited liability companies or partnerships with third parties, as well as an
interest in one unconsolidated entity. As of June 30, 1999, we owned 21 of our
properties through these entities. We may make additional investments through
these ventures in the future and presently plan to do so with clients of AMB
Investment Management, Inc. and certain Development Alliance Partners, who share
certain approval rights over major decisions. Partnership, limited liability
company or joint venture investments may involve risks such as the following:
- our partners, co-members or joint venturers might become bankrupt (in
which event we and any other remaining general partners, members or joint
venturers would generally remain liable for the liabilities of the
partnership, limited liability company or joint venture);
- our partners, co-members or joint venturers might at any time have
economic or other business interests or goals which are inconsistent with
our business interests or goals;
- our partners, co-members or joint venturers may be in a position to take
action contrary to our instructions, requests, policies or objectives,
including our policy with respect to maintaining AMB's qualification as a
real estate investment trust; and
- agreements governing joint ventures, limited liability companies and
partnerships often contain restrictions on the transfer of a joint
venturer's, member's or partner's interest or "buy-sell" or other
provisions which may result in a purchase or sale of the interest at a
disadvantageous time or on disadvantageous terms.
27
We will, however, generally seek to maintain sufficient control of our
partnerships, limited liability companies and joint ventures to permit us to
achieve our business objectives. Our organizational documents do not limit the
amount of available funds that we may invest in partnerships, limited liability
companies or joint ventures. The occurrence of one or more of the events
described above could have an adverse effect on our financial condition, results
of operations and cash flow and AMB's ability to pay distributions on, and the
market price of, its common stock.
WE MAY BE UNABLE TO CONSUMMATE ACQUISITIONS ON ADVANTAGEOUS TERMS
We intend to continue to acquire industrial and, to a lesser extent,
certain value-added retail properties. Acquisitions of industrial and retail
properties entail risks that investments will fail to perform in accordance with
expectations. Estimates of the costs of improvements necessary for us to bring
an acquired property up to market standards may prove inaccurate. In addition,
there are general investment risks associated with any new real estate
investment. Further, we anticipate significant competition for attractive
investment opportunities from other major real estate investors with significant
capital including both publicly traded real estate investment trusts and private
institutional investment funds. We expect that future acquisitions will be
financed through a combination of borrowings under our credit facility, proceeds
from equity or debt offerings by AMB or the operating partnership (including
issuances of limited partnership units), and proceeds from the transactions with
BPP Retail, which could have an adverse effect on our cash flow. We may not be
able to acquire additional properties. Our inability to finance any future
acquisitions on favorable terms or the failure of acquisitions to conform with
our expectations or investment criteria, or our failure to timely reinvest the
proceeds from the transactions with BPP Retail could adversely affect our
financial condition, results of operations and cash flow and AMB's ability to
pay distributions on, and the market price of, its common stock.
WE MAY BE UNABLE TO COMPLETE RENOVATION AND DEVELOPMENT ON ADVANTAGEOUS
TERMS
The real estate development business, including the renovation and
rehabilitation of existing properties, involves significant risks. These risks
include the following:
- we may not be able to obtain financing on favorable terms for development
projects and we may not complete construction on schedule or within
budget, resulting in increased debt service expense and construction
costs and delays in leasing such properties and generating cash flow;
- we may not be able to obtain, or we may experience delays in obtaining,
all necessary zoning, land-use, building, occupancy and other required
governmental permits and authorizations;
- new or renovated properties may perform below anticipated levels,
producing cash flow below budgeted amounts;
- substantial renovation as well as new development activities, regardless
of whether or not they are ultimately successful, typically require a
substantial portion of management's time and attention which could divert
management's time from our day-to-day operations; and
- activities that we finance through construction loans involve the risk
that, upon completion of construction, we may not be able to obtain
permanent financing or we may not be able to obtain permanent financing
on advantageous terms.
These risks could have an adverse effect on our financial condition,
results of operations and cash flow and AMB's ability to pay distributions on,
and the market price of, its common stock.
DEBT FINANCING
WE COULD INCUR MORE DEBT
We operate with a policy of incurring debt, either directly or through our
subsidiaries, only if upon such incurrence our debt-to-total market
capitalization ratio would be approximately 45% or less. The aggregate amount of
indebtedness that we may incur under our policy varies directly with the
valuation of AMB's capital stock and the number of shares of capital stock
outstanding. Accordingly, we would be able to incur additional indebtedness
under our policy as a result of increases in the market price per share of AMB's
common stock or
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other outstanding classes of capital stock, and future issuance of shares of
AMB's capital stock. In spite of this policy, our organizational documents do
not contain any limitation on the amount of indebtedness that we may incur.
Accordingly, AMB's board of directors could alter or eliminate this policy and
would do so, for example, if it were necessary for AMB to continue to qualify as
a real estate investment trust. If we change this policy, we could become more
highly leveraged, resulting in an increase in debt service that could adversely
affect our financial condition, results of operations and cash flow and AMB's
ability to pay distributions on, and the market price of, its common stock.
SCHEDULED DEBT PAYMENTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
We are subject to risks normally associated with debt financing, including
the risks that cash flow will be insufficient to make distributions to AMB's
stockholders, that we will be unable to refinance existing indebtedness on our
properties (which in all cases will not have been fully amortized at maturity)
and that the terms of refinancing will not be as favorable as the terms of
existing indebtedness.
As of June 30, 1999, we had total debt outstanding of approximately $1.4
billion including:
- approximately $783.1 million of secured indebtedness (not including
unamortized debt premiums) with an average maturity of seven years and a
weighted average interest rate of 7.8%;
- approximately $255.0 million outstanding under our unsecured $500 million
credit facility with a maturity date of November 2000 and a weighted
average interest rate of 6.6%; and
- $400.0 million aggregate principal amount of unsecured senior debt
securities with maturities in June 2008, 2015 and 2018 and a weighted
average interest rate of 7.18%.
With the proceeds from the first and second transactions with BPP Retail,
we repaid approximately $55.5 million of secured indebtedness relating to the
properties divested and made payments under our unsecured credit facility in the
amount of approximately $210.0 million. We currently intend to use the proceeds
from the third transaction with BPP Retail to repay approximately $26.5 million
of amounts outstanding under our secured credit facility.
AMB is a guarantor of the operating partnership's obligations with respect
to the senior debt securities referenced above. If we are unable to refinance or
extend principal payments due at maturity or pay them with proceeds of other
capital transactions, we expect that our cash flow will not be sufficient in all
years to pay distributions to AMB's stockholders and to repay all such maturing
debt. Furthermore, if prevailing interest rates or other factors at the time of
refinancing (such as the reluctance of lenders to make commercial real estate
loans) result in higher interest rates upon refinancing, the interest expense
relating to that refinanced indebtedness would increase. This increased interest
expense would adversely affect our financial condition, results of operations
and cash flow and AMB's ability to pay distributions on, and the market price
of, its common stock. In addition, if we mortgage one or more of our properties
to secure payment of indebtedness and we are unable to meet mortgage payments,
the property could be foreclosed upon or transferred to the mortgagee with a
consequent loss of income and asset value. A foreclosure on one or more of our
properties could adversely affect our financial condition, results of operations
and cash flow and AMB's ability to pay distributions on, and the market price
of, its common stock.
RISING INTEREST RATES COULD ADVERSELY AFFECT OUR CASH FLOW
As of June 30, 1999, we had $255.0 million outstanding under our credit
facility. In addition, we may incur other variable rate indebtedness in the
future. Increases in interest rates on this indebtedness could increase our
interest expense, which would adversely affect our financial condition, results
of operations and cash flow and AMB's ability to pay distributions on, and the
market price of, its common stock. Accordingly, we may in the future engage in
transactions to limit our exposure to rising interest rates.
29
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL
In order to qualify as a real estate investment trust under the Internal
Revenue Code, AMB is required each year to distribute to its stockholders at
least 95% of its real estate investment trust taxable income (determined without
regard to the dividends-paid deduction and by excluding any net capital gain).
Because of this distribution requirement, we may not be able to fund all future
capital needs, including capital needs in connection with acquisitions, from
cash retained from operations. As a result, to fund capital needs, we rely on
third-party sources of capital, which we may not be able to obtain on favorable
terms or at all. Our access to third-party sources of capital depends upon a
number of factors, including general market conditions and the market's
perception of our growth potential and our current and potential future earnings
and cash distributions and the market price of the shares of AMB's capital
stock. Additional debt financing may substantially increase our leverage.
WE COULD DEFAULT ON CROSS-COLLATERALIZED AND CROSS-DEFAULTED DEBT
As of June 30, 1999, we had 16 non-recourse secured loans which are
cross-collateralized by 18 properties. As of June 30, 1999, we had $216.3
million (not including unamortized debt premium) outstanding on these loans.
With the proceeds from the second transaction with BPP Retail, we repaid two
loans aggregating approximately $23.7 million, which were secured by two
properties. If we default on any of these loans, we will be required to repay
the aggregate of all indebtedness, together with applicable prepayment charges,
to avoid foreclosure on all the cross-collateralized properties within the
applicable pool. Foreclosure on our properties, or our inability to refinance
our loans on favorable terms, could adversely impact our financial condition,
results of operations and cash flow and AMB's ability to pay distributions on,
and the market price of, its common stock. In addition, our credit facilities
and the senior debt securities of the operating partnership contain certain
cross-default provisions which are triggered in the event that our other
material indebtedness is in default. These cross-default provisions may require
us to repay or restructure the credit facilities and the senior debt securities
in addition to any mortgage or other debt which is in default, which could
adversely affect our financial condition, results of operations and cash flow
and AMB's ability to pay distributions on, and the market price of, its common
stock.
CONTINGENT OR UNKNOWN LIABILITIES COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION
Our predecessors have been in existence for varying lengths of time up to
15 years. At the time of our formation we acquired the assets of these entities
subject to all of their potential existing liabilities. There may be current
liabilities or future liabilities arising from prior activities that we are not
aware of and therefore are not disclosed in this report. We assumed these
liabilities as the surviving entity in the various merger and contribution
transactions that occurred at the time of our formation. Existing liabilities
for indebtedness generally were taken into account in connection with the
allocation of the operating partnership's limited partnership units and/or
shares of AMB's common stock in the formation transactions, but no other
liabilities were taken into account for these purposes. We do not have recourse
against our predecessors or any of their respective stockholders or partners or
against any individual account investors with respect to any unknown
liabilities. Unknown liabilities might include the following:
- liabilities for clean-up or remediation of undisclosed environmental
conditions;
- claims of tenants, vendors or other persons dealing with our predecessors
prior to the formation transactions that had not been asserted prior to
the formation transactions;
- accrued but unpaid liabilities incurred in the ordinary course of
business;
- tax liabilities; and
- claims for indemnification by the officers and directors of our
predecessors and others indemnified by these entities.
Certain tenants may claim that the formation transactions gave rise to a
right to purchase the premises that they occupy. We do not believe any such
claims would be material. See "-- Government Regulations --
30
We Could Encounter Costly Environmental Problems" below regarding the
possibility of undisclosed environmental conditions potentially affecting the
value of our properties. Undisclosed material liabilities in connection with the
acquisition of properties, entities and interests in properties or entities
could adversely affect our financial condition, results of operations and cash
flow and AMB's ability to pay distributions on, and the market price of, its
common stock.
FAILURE TO CONSUMMATE THE REMAINING TRANSACTION WITH BPP RETAIL
On March 9, 1999, the operating partnership signed three separate
definitive agreements with BPP Retail, pursuant to which, if fully consummated,
BPP Retail would have acquired up to 28 of our retail shopping centers, totaling
approximately 5.1 million square feet, for an aggregate price of $663.4 million.
The sale of five of the properties is subject to the consent of our joint
venture partners. One of our joint venture partners who holds an interest in
three of the properties has indicated that it will not consent to the sale of
these properties at this time. We have received consents from our joint venture
partners for the sale of the other two properties. As a result, the price with
respect to the 25 remaining properties, totaling approximately 4.3 million
square feet, is approximately $560.4 million. We intend to dispose of these
three properties or our interests in the joint ventures through which we hold
the properties.
Pursuant to the agreements, BPP Retail will acquire the 25 centers in
separate transactions. Under the agreements, the operating partnership has the
right to extend the closing dates for a period of up to either 20 or 50 days.
The operating partnership has exercised this right with respect to the first and
second transactions, which occurred on June 15, 1999 and August 4, 1999,
respectively. Pursuant to the closings of the first and second transactions, BPP
Retail acquired 21 retail shopping centers, totaling approximately 3.5 million
square feet, for an aggregate price of approximately $453.2 million. We used the
proceeds from the first and second transactions to repay secured debt related to
the properties divested of approximately $55.5 million, to pay approximately
$210.0 million in partial repayment of amounts outstanding under our unsecured
credit facility, to pay transaction expenses, for potential acquisitions and for
general corporate purposes. We currently expect the third transaction to close
on or about December 1, 1999.
In addition, the operating partnership entered into a definitive agreement,
subject to a financing condition, with Burnham Pacific, pursuant to which, if
fully consummated, Burnham Pacific would have acquired up to six additional
retail centers, totaling approximately 1.5 million square feet, for
approximately $284.4 million. On June 30, 1999, this agreement was terminated
pursuant to its terms as a result of Burnham Pacific's decision not to waive the
financing condition. We currently intend to dispose of these six properties,
either on an individual or portfolio basis, or our interests in the joint
ventures through which we hold the properties.
We intend to use the proceeds of approximately $107.2 million from the
divestiture of the remaining four retail centers to BPP Retail in the third
transaction to pay approximately $26.5 million in partial repayment of amounts
outstanding under our unsecured credit facility, to pay transaction expenses,
for potential acquisitions and for general corporate purposes.
Although the remaining transaction with BPP Retail has a discretionary due
diligence period, it is subject to certain customary closing conditions, which
are generally applied on a property-by-property basis. Burnham Pacific has
announced that it has received and is reviewing a merger proposal. We do not
believe that the contractual obligations of BPP Retail with respect to the
purchase of the retail centers will be affected by any resulting merger. BPP
Retail has posted a deposit of $8.4 million on the remaining transaction. BPP
Retail's liability in the event of its default under a definitive agreement is
limited to its deposit. Although we believe that the remaining transaction with
BPP Retail is probable, it might not close as scheduled or close at all, and it
is possible that the transaction may close with respect to just a portion of the
properties currently subject to the agreement. In the event that the remaining
transaction fails to close, or its closing is significantly delayed, net
proceeds from divestitures of properties will not be available to the same
extent to fund our acquisitions and developments. Any failure or delay in such
closing may also make us unable to repay certain of our indebtedness with the
net
31
proceeds as we currently intend and could require us to borrow additional funds
or seek other forms of financing.
CONFLICTS OF INTEREST
SOME OF OUR EXECUTIVE OFFICERS ARE INVOLVED IN OTHER REAL ESTATE ACTIVITIES
AND INVESTMENTS
Some of our executive officers own interests in real estate-related
businesses and investments. These interests include minority ownership of
Institutional Housing Partners, a residential housing finance company, and
ownership of AMB Development, Inc. and AMB Development, L.P., developers which
own property that we believe is not suitable for ownership by us. AMB
Development, Inc. and AMB Development, L.P. have agreed not to initiate any new
development projects following AMB's initial public offering in November 1997.
These entities have also agreed that they will not make any further investments
in industrial or retail properties other than those currently under development
at the time of AMB's initial public offering. AMB Institutional Housing
Partners, AMB Development, Inc. and AMB Development, L.P. continue to use the
name "AMB" pursuant to royalty-free license arrangements. The continued
involvement in other real estate-related activities by some of our executive
officers and directors could divert management's attention from our day-to-day
operations. Most of our executive officers have entered into non-competition
agreements with us pursuant to which they have agreed not to engage in any
activities, directly or indirectly, in respect of commercial real estate, and
not to make any investment in respect of industrial or retail real estate, other
than through ownership of not more than 5% of the outstanding shares of a public
company engaged in such activities or through the existing investments referred
to in this report. State law may limit our ability to enforce these agreements.
We could also, in the future, subject to the unanimous approval of the
disinterested members of the board of directors with respect to such
transaction, acquire property from executive officers, enter into leases with
executive officers, and/or engage in other related activities in which the
interests pursued by the executive officers may not be in the best interests of
AMB's stockholders.
CERTAIN OF OUR EXECUTIVE OFFICERS AND DIRECTORS MAY HAVE CONFLICTS OF
INTEREST WITH US IN CONNECTION WITH OTHER PROPERTIES THAT THEY OWN OR
CONTROL
As of May 31, 1999, AMB Development, L.P. owns interests in 11 retail
development projects in the U.S., 10 of which consist of a single free-standing
Walgreens drugstore and one of which consists of a free-standing Walgreens
drugstore, a ground lease to McDonald's and a 14,000 square foot retail center.
In addition, Messrs. Abbey, Moghadam and Burke, each a founder and director, own
less than 1% interests in two partnerships which own office buildings in various
markets; these interests have negligible value. Luis A. Belmonte, an executive
officer, owns less than a 10% interest, representing an estimated value of
$75,000, in a limited partnership which owns an office building located in
Oakland, California.
In addition, several of our executive officers individually own:
- less than 1% interests in the stocks of certain publicly-traded real
estate investment trusts;
- certain interests in and rights to developed and undeveloped real
property located outside the United States;
- certain passive interests, that we do not believe are material, in real
estate businesses in which such persons were previously employed; and
- certain other de minimis holdings in equity securities of real estate
companies.
Thomas W. Tusher, a member of AMB's board of directors, is a limited
partner in a partnership in which Messrs. Abbey, Moghadam and Burke are general
partners and which owns a 75% interest in an office building. Mr. Tusher owns a
20% interest in the partnership, valued as of May 31, 1999 at approximately $1.2
million. Messrs. Abbey, Moghadam and Burke each have an approximately 26.7%
interest in the partnership, each valued as of May 31, 1999 at approximately
$1.6 million.
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We believe that the properties and activities set forth above generally do
not directly compete with any of our properties. However, it is possible that a
property in which an executive officer or director, or an affiliate of an
executive officer or director, has an interest may compete with us in the future
if we were to invest in a property similar in type and in close proximity to
that property. In addition, the continued involvement by our executive officers
and directors in these properties could divert management's attention from our
day-to-day operations. Our policy prohibits us from acquiring any properties
from our executive officers or their affiliates without the approval of the
disinterested members of AMB's board of directors with respect to that
transaction.
AMB'S ROLE AS GENERAL PARTNER OF THE OPERATING PARTNERSHIP MAY CONFLICT WITH
THE INTERESTS OF STOCKHOLDERS
As the general partner of the operating partnership, AMB has fiduciary
obligations to the operating partnership's limited partners, the discharge of
which may conflict with the interests of AMB's stockholders. In addition, those
persons holding limited partnership units will have the right to vote as a class
on certain amendments to the partnership agreement of the operating partnership
and individually to approve certain amendments that would adversely affect their
rights. The limited partners may exercise these voting rights in a manner that
conflicts with the interests of AMB's stockholders. In addition, under the terms
of the operating partnership's partnership agreement, holders of limited
partnership units will have certain approval rights with respect to certain
transactions that affect all stockholders but which they may not exercise in a
manner which reflects the interests of all stockholders.
AMB'S DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT STOCKHOLDERS COULD ACT
IN A MANNER THAT IS NOT IN THE BEST INTEREST OF ALL STOCKHOLDERS
As of July 21, 1999, AMB's three largest stockholders, Cohen & Steers
Capital Management, Inc. (with respect to various client accounts for which
Cohen & Steers Capital Management, Inc. serves as investment advisor), Southern
Company Services, Inc. and Capital Research and Management Company (with respect
to various client accounts for which Capital Research and Management Company
serves as investment advisor) beneficially owned approximately 21.4% of AMB's
outstanding common stock. In addition, our executive officers and directors
beneficially owned approximately 5.5% of AMB's outstanding common stock as of
August 1, 1999, and will have influence on our management and operation and, as
stockholders, will have influence on the outcome of any matters submitted to a
vote of AMB's stockholders. This influence might be exercised in a manner that
is inconsistent with the interests of other stockholders. Although there is no
understanding or arrangement for these directors, officers and stockholders and
their affiliates to act in concert, these parties would be in a position to
exercise significant influence over our affairs if they choose to do so.
WE COULD SUFFER LOSSES IF WE FAIL TO ENFORCE THE TERMS OF CERTAIN
AGREEMENTS
As holders of shares of AMB's common stock and, potentially, performance
units, certain of AMB's directors and officers could have a conflict of interest
with respect to their obligations as directors and officers to vigorously
enforce the terms of certain of the agreements relating to our formation
transactions. The potential failure to enforce the material terms of those
agreements could result in a monetary loss to us, which loss could have a
material adverse effect on our financial condition, results of operations and
cash flow and AMB's ability to pay distributions on, and the market price of,
its common stock.
OWNERSHIP OF COMMON STOCK
LIMITATIONS IN AMB'S CHARTER AND BYLAWS COULD PREVENT A CHANGE IN CONTROL
Certain provisions of AMB's charter and bylaws may delay, defer or prevent
a change in control or other transaction that could provide the holders of AMB's
common stock with the opportunity to realize a premium over the then-prevailing
market price for the common stock. To maintain AMB's qualification as a real
estate investment trust for federal income tax purposes, not more than 50% in
value of AMB's outstanding stock may be owned, actually or constructively, by
five or fewer individuals (as defined in the Internal Revenue Code to
33
include certain entities) during the last half of a taxable year after the first
taxable year for which a real estate investment trust election is made.
Furthermore, after the first taxable year for which a real estate investment
trust election is made, AMB's common stock must be held by a minimum of 100
persons for at least 335 days of a 12-month taxable year (or a proportionate
part of a short tax year). In addition, if AMB, or an owner of 10% or more of
AMB's stock, actually or constructively owns 10% or more of one of AMB's tenants
(or a tenant of any partnership in which AMB is a partner), the rent received by
AMB (either directly or through any such partnership) from that tenant will not
be qualifying income for purposes of the real estate investment trust gross
income tests of the Internal Revenue Code. To facilitate maintenance of AMB's
qualification as a real estate investment trust for federal income tax purposes,
AMB will prohibit the ownership, actually or by virtue of the constructive
ownership provisions of the Internal Revenue Code, by any single person of more
than 9.8% (by value or number of shares, whichever is more restrictive) of the
issued and outstanding shares of AMB's common stock and more than 9.8% (by value
or number of shares, whichever is more restrictive) of the issued and
outstanding shares of AMB's Series A Preferred Stock, and AMB will also prohibit
the ownership, actually or constructively, of any shares of AMB's Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock by any
single person so that no such person, taking into account all of AMB's stock so
owned by such person, may own in excess of 9.8% of AMB's issued and outstanding
capital stock. We refer to this limitation as the "ownership limit." Shares
acquired or held in violation of the ownership limit will be transferred to a
trust for the benefit of a designated charitable beneficiary. Any person who
acquires shares in violation of the ownership limit will not be entitled to any
distributions on the shares or be entitled to vote the shares or receive any
proceeds from the subsequent sale of the shares in excess of the lesser of the
price paid for the shares or the amount realized from the sale. A transfer of
shares in violation of the above limits may be void under certain circumstances.
The ownership limit may have the effect of delaying, deferring or preventing a
change in control and, therefore, could adversely affect AMB's stockholders'
ability to realize a premium over the then-prevailing market price for the
shares of AMB's common stock in connection with such transaction. The board of
directors has waived the ownership limit applicable to AMB's common stock with
respect to Ameritech Pension Trust, allowing it to own up to 14.9% of AMB's
common stock and, under some circumstances, allowing it to own up to 19.6%.
However, AMB conditioned this waiver upon the receipt of undertakings and
representations from Ameritech Pension Trust which AMB believed were reasonably
necessary in order to conclude that the waiver would not cause AMB to fail to
qualify as a real estate investment trust.
AMB's charter authorizes AMB to issue additional shares of common stock and
Series A Preferred Stock and to issue Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and one or more other series or
classes of preferred stock and to establish the preferences, rights and other
terms of any series or class of preferred stock that AMB issues. Although AMB's
board of directors has no intention to do so at the present time, it could
establish a series or class of preferred stock that could delay, defer or
prevent a transaction or a change in control that might involve a premium price
for the common stock or otherwise be in the best interests of AMB's
stockholders.
AMB's charter and bylaws and Maryland law also contain other provisions
that may delay, defer or prevent a transaction, including a change in control,
that might involve payment of a premium price for the common stock or otherwise
be in the best interests of AMB's stockholders. Those provisions include the
following:
- the provision in the charter that directors may be removed only for cause
and only upon a two-thirds vote of stockholders, together with bylaw
provisions authorizing the board of directors to fill vacant
directorships;
- the provision in the charter requiring a two-thirds vote of stockholders
for any amendment of the charter;
- the requirement in the bylaws that the request of the holders of 50% or
more of AMB's common stock is necessary for stockholders to call a
special meeting;
- the requirement of Maryland law that stockholders may only take action by
written consent with the unanimous approval of all stockholders entitled
to vote on the matter in question; and
34
- the requirement in the bylaws of advance notice by stockholders for the
nomination of directors or proposal of business to be considered at a
meeting of stockholders.
These provisions may impede various actions by stockholders without
approval of AMB's board of directors, which in turn may delay, defer or prevent
a transaction involving a change of control.
WE COULD CHANGE OUR INVESTMENT AND FINANCING POLICIES WITHOUT A VOTE OF
STOCKHOLDERS
Subject to our fundamental investment policy to maintain AMB's
qualification as a real estate investment trust (unless a change is approved by
AMB's board of directors under certain circumstances), AMB's board of directors
will determine our investment and financing policies, our growth strategy and
our debt, capitalization, distribution and operating policies. Although the
board of directors has no present intention to revise or amend these strategies
and policies, the board of directors may do so at any time without a vote of
stockholders. Accordingly, stockholders will have no control over changes in our
strategies and policies (other than through the election of directors), and any
such changes may not serve the interests of all stockholders and could adversely
affect our financial condition or results of operations, including our ability
to distribute cash to stockholders.
IF WE ISSUE ADDITIONAL SECURITIES, THE INVESTMENT OF EXISTING STOCKHOLDERS
WILL BE DILUTED
We have authority to issue shares of common stock or other equity or debt
securities in exchange for property or otherwise. Similarly, we may cause the
operating partnership to issue additional limited partnership units in exchange
for property or otherwise. Existing stockholders will have no preemptive right
to acquire any additional securities issued by us or the operating partnership
and any issuance of additional equity securities could result in dilution of an
existing stockholder's investment.
THE LARGE NUMBER OF SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY AFFECT
THE MARKET PRICE OF AMB'S COMMON STOCK
We cannot predict the effect, if any, that future sales of shares of AMB's
common stock, or the availability of shares of AMB's common stock for future
sale, will have on its market price. Sales of a substantial number of shares of
AMB's common stock in the public market (or upon exchange of limited partnership
units in the operating partnership) or the perception that such sales (or
exchanges) might occur could adversely affect the market price of AMB's common
stock.
All shares of common stock issuable upon the redemption of limited
partnership units in the operating partnership will be deemed to be "restricted
securities" within the meaning of Rule 144 under the Securities Act and may not
be transferred unless registered under the Securities Act or an exemption from
registration is available, including any exemption from registration provided
under Rule 144. In general, upon satisfaction of certain conditions, Rule 144
permits the holder to sell certain amounts of restricted securities one year
following the date of acquisition of the restricted securities from us and,
after two years, permits unlimited sales by persons unaffiliated with us. On
November 26, 1998, 74,710,153 shares of common stock issued in our formation
transactions became eligible for sale pursuant to Rule 144, subject to the
volume limitations and other conditions imposed by Rule 144. Commencing
generally on the first anniversary of the date of acquisition of common limited
partnership units (or such other date agreed to by the operating partnership and
the holders of the units), the operating partnership may redeem common limited
partnership units at the request of the holders for cash (based on the fair
market value of an equivalent number of shares of common stock at the time of
redemption) or, at AMB's option, exchange the common limited partnership units
for an equal number of shares of common stock of AMB, subject to certain
antidilution adjustments. The operating partnership has issued and outstanding
4,568,942 common limited partnership units to date. As of June 30, 1999, AMB has
reserved 8,785,030 shares of common stock for issuance under its Stock Option
and Incentive Plan (not including shares that AMB has already issued) and, as of
June 30, 1999, has granted to certain directors, officers and employees options
to purchase 4,572,990 shares of common stock (not including forfeitures and
16,250 shares that AMB has issued pursuant to the exercise of options). To date,
AMB has granted 148,720 restricted shares of common stock, 932 of which have
been forfeited. In addition, AMB may
35
issue additional shares of common stock and the operating partnership may issue
additional limited partnership units in connection with the acquisition of
properties. In connection with the issuance of common limited partnership units
to other transferors of properties, and in connection with the issuance of any
performance units, AMB has agreed to file registration statements covering the
issuance of shares of common stock upon the exchange of the common limited
partnership units. AMB has also filed a registration statement with respect to
the shares of common stock issuable under its Stock Option and Incentive Plan.
These registration statements and registration rights generally allow shares of
common stock covered thereby, including shares of common stock issuable upon
exchange of limited partnership units, including performance units, or the
exercise of options or restricted shares of common stock, to be transferred or
resold without restriction under the Securities Act. AMB may also agree to
provide registration rights to any other person who may become an owner of the
operating partnership's limited partnership units.
Future sales of the shares of common stock described above could adversely
affect the market price of AMB's common stock. The existence of the operating
partnership's limited partnership units, options and shares of common stock
reserved for issuance upon exchange of limited partnership units, and the
exercise of options and registration rights referred to above, also may
adversely affect the terms upon which we are able to obtain additional capital
through the sale of equity securities.
VARIOUS MARKET CONDITIONS AFFECT THE PRICE OF AMB'S COMMON STOCK
As with other publicly-traded equity securities, the market price of AMB's
common stock will depend upon various market conditions, which may change from
time to time. Among the market conditions that may affect the market price of
AMB's common stock are the following:
- the extent of investor interest in us;
- the general reputation of real estate investment trusts and the
attractiveness of their equity securities in comparison to other equity
securities (including securities issued by other real estate-based
companies);
- our financial performance; and
- general stock and bond market conditions, including changes in interest
rates on fixed income securities which may lead prospective purchasers of
AMB's common stock to demand a higher annual yield from future
distributions. Such an increase in the required yield from distributions
may adversely affect the market price of AMB's common stock.
Other factors such as governmental regulatory action and changes in tax
laws could also have a significant impact on the future market price of AMB's
common stock.
EARNINGS AND CASH DISTRIBUTIONS, ASSET VALUE AND MARKET INTEREST RATES
AFFECT THE PRICE OF AMB'S COMMON STOCK
The market value of the equity securities of a real estate investment trust
generally is based primarily upon the market's perception of the real estate
investment trust's growth potential and its current and potential future
earnings and cash distributions, and is based secondarily upon the real estate
market value of the underlying assets. For that reason, shares of AMB's common
stock may trade at prices that are higher or lower than the net asset value per
share. To the extent AMB retains operating cash flow for investment purposes,
working capital reserves or other purposes, these retained funds, while
increasing the value of our underlying assets, may not correspondingly increase
the market price of AMB's common stock. AMB's failure to meet the market's
expectation with regard to future earnings and cash distributions likely would
adversely affect the market price of AMB's common stock. Another factor that may
influence the price of AMB's common stock will be the distribution yield on the
common stock (as a percentage of the price of the common stock) relative to
market interest rates. An increase in market interest rates might lead
prospective purchasers of AMB's common stock to expect a higher distribution
yield, which would adversely affect the market price of the common stock. If the
market price of AMB's common stock declines significantly, we might breach
certain
36
covenants with respect to debt obligations, which might adversely affect our
liquidity and ability to make future acquisitions and AMB's ability to pay
distributions to its stockholders.
WE COULD INVEST IN REAL ESTATE MORTGAGES
We may invest in mortgages, and may do so as a strategy for ultimately
acquiring the underlying property. In general, investments in mortgages include
the risks that borrowers may not be able to make debt service payments or pay
principal when due, that the value of the mortgaged property may be less than
the principal amount of the mortgage note secured by the property and that
interest rates payable on the mortgages may be lower than our cost of funds to
acquire these mortgages. In any of these events, our FFO and AMB's ability to
make distributions on, and the market price of, its common stock could be
adversely affected. FFO means income (loss) from operations before disposal of
real estate properties, minority interests and extraordinary items plus
depreciation and amortization, excluding depreciation of furniture, fixtures and
equipment less funds from operations attributable to minority interests in
consolidated joint ventures which are not convertible into shares of common
stock.
GOVERNMENT REGULATIONS
Many laws and governmental regulations are applicable to our properties and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
Under the Americans with Disabilities Act, places of public accommodation
must meet certain federal requirements related to access and use by disabled
persons. Compliance with the Americans with Disabilities Act might require us to
remove structural barriers to handicapped access in certain public areas where
such removal is "readily achievable." If we fail to comply with the Americans
with Disabilities Act, we might be required to pay fines to the government or
damages to private litigants. The impact of application of the Americans with
Disabilities Act to our properties, including the extent and timing of required
renovations, is uncertain. If we are required to make unanticipated expenditures
to comply with the Americans with Disabilities Act, our cash flow and the
amounts available for distributions to AMB's stockholders may be adversely
affected.
WE COULD ENCOUNTER COSTLY ENVIRONMENTAL PROBLEMS
Federal, state and local laws and regulations relating to the protection of
the environment impose liability on a current or previous owner or operator of
real estate for contamination resulting from the presence or discharge of
hazardous or toxic substances or petroleum products at the property. A current
or previous owner may be required to investigate and clean up contamination at
or migrating from a site. These laws typically impose liability and clean-up
responsibility without regard to whether the owner or operator knew of or caused
the presence of the contaminants. Even if more than one person may have been
responsible for the contamination, each person covered by the environmental laws
may be held responsible for all of the clean-up costs incurred. In addition,
third parties may sue the owner or operator of a site for damages based on
personal injury, property damage and/or other costs, including investigation and
clean-up costs, resulting from environmental contamination present at or
emanating from that site.
Environmental laws also govern the presence, maintenance and removal of
asbestos. These laws require that owners or operators of buildings containing
asbestos properly manage and maintain the asbestos, that they adequately inform
or train those who may come into contact with asbestos and that they undertake
special precautions, including removal or other abatement in the event that
asbestos is disturbed during renovation or demolition of a building. These laws
may impose fines and penalties on building owners or operators for failure to
comply with these requirements and may allow third parties to seek recovery from
owners or operators for personal injury associated with exposure to asbestos
fibers. Some of our properties may contain asbestos-containing building
materials.
37
Some of our properties are leased or have been leased, in part, to owners
and operators of dry cleaners that operate on-site dry cleaning plants, to
owners and operators of gas stations or to owners or operators of other
businesses that use, store or otherwise handle petroleum products or other
hazardous or toxic substances. Some of these properties contain, or may have
contained, underground storage tanks for the storage of petroleum products and
other hazardous or toxic substances. These operations create a potential for the
release of petroleum products or other hazardous or toxic substances. Some of
our properties are adjacent to or near other properties that have contained or
currently contain underground storage tanks used to store petroleum products or
other hazardous or toxic substances. In addition, certain of our properties are
on, or are adjacent to or near other properties upon which others, including
former owners or tenants of the properties, have engaged or may in the future
engage in activities that may release petroleum products or other hazardous or
toxic substances. From time to time, we may acquire properties, or interests in
properties, with known adverse environmental conditions where we believe that
the environmental liabilities associated with these conditions are quantifiable
and the acquisition will yield a superior risk-adjusted return. In connection
with certain of the properties under contract for disposition to BPP Retail, we
have agreed to remain responsible for, and to bear the cost of, remediating or
monitoring certain environmental conditions on the properties following the
applicable closing dates of the transactions.
All of our properties were subject to a Phase I or similar environmental
assessments by independent environmental consultants at the time of acquisition
or shortly after acquisition. Phase I assessments are intended to discover and
evaluate information regarding the environmental condition of the surveyed
property and surrounding properties. Phase I assessments generally include an
historical review, a public records review, an investigation of the surveyed
site and surrounding properties, and preparation and issuance of a written
report, but do not include soil sampling or subsurface investigations and
typically do not include an asbestos survey. We may perform additional Phase II
testing if recommended by the independent environmental consultant. Phase II
testing may include the collection and laboratory analysis of soil and
groundwater samples, completion of surveys for asbestos-containing building
materials, and any other testing that the consultant considers prudent in order
to test for the presence of hazardous materials. Some of the environmental
assessments of our properties do not contain a comprehensive review of the past
uses of the properties and/or the surrounding properties.
None of the environmental assessments of our properties has revealed any
environmental liability that we believe would have a material adverse effect on
our financial condition or results of operations taken as a whole, and we are
not aware of any such material environmental liability. Nonetheless, it is
possible that the assessments do not reveal all environmental liabilities and
that there are material environmental liabilities of which we are unaware or
that known environmental conditions may give rise to liabilities that are
materially greater than anticipated. Moreover, future laws, ordinances or
regulations may impose material environmental liability and the current
environmental condition of our properties may be affected by tenants, by the
condition of land, by operations in the vicinity of the properties (such as
releases from underground storage tanks), or by third parties unrelated to us.
If the costs of compliance with environmental laws and regulations now existing
or adopted in the future exceed our budgets for these items, our financial
condition, results of operations and cash flow and AMB's ability to pay
distributions on, and the market price of, its common stock could be adversely
affected.
OUR FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED IF WE FAIL TO COMPLY
WITH OTHER REGULATIONS
Our properties are also subject to various federal, state and local
regulatory requirements such as state and local fire and life safety
requirements. If we fail to comply with these requirements, we might incur fines
by governmental authorities or be required to pay awards of damages to private
litigants. We believe that our properties are currently in substantial
compliance with all such regulatory requirements. However, these requirements
may change or new requirements may be imposed which could require significant
unanticipated expenditures by us. Any such unanticipated expenditures could have
an adverse effect on our financial condition, results of operations and cash
flow and AMB's ability to pay distributions on, and the market price of, its
common stock.
38
FEDERAL INCOME TAX RISKS
AMB'S FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST WOULD HAVE
SERIOUS ADVERSE CONSEQUENCES TO STOCKHOLDERS
AMB intends to operate so as to qualify as a real estate investment trust
under the Internal Revenue Code. AMB believes that it has been organized and has
operated in a manner which would allow it to qualify as a real estate investment
trust under the Internal Revenue Code beginning with its taxable year ended
December 31, 1997. However, it is possible that AMB has been organized or has
operated in a manner which would not allow it to qualify as a real estate
investment trust, or that AMB's future operations could cause it to fail to
qualify. Qualification as a real estate investment trust requires AMB to satisfy
numerous requirements (some on an annual and quarterly basis) established under
highly technical and complex Internal Revenue Code provisions for which there
are only limited judicial and administrative interpretations, and involves the
determination of various factual matters and circumstances not entirely within
AMB's control. For example, in order to qualify as a real estate investment
trust, at least 95% of AMB's gross income in any year must be derived from
qualifying sources, AMB must pay dividends to stockholders aggregating annually
at least 95% of its real estate investment trust taxable income (determined
without regard to the dividends paid deduction and by excluding capital gains)
and AMB must satisfy specified asset tests on a quarterly basis. These
provisions and the applicable treasury regulations are more complicated in our
case because AMB holds its assets in partnership form. Legislation, new
regulations, administrative interpretations or court decisions could
significantly change the tax laws with respect to qualification as a real estate
investment trust or the federal income tax consequences of such qualification.
However, AMB is not aware of any pending tax legislation that would adversely
affect its ability to operate as a real estate investment trust.
If AMB fails to qualify as a real estate investment trust in any taxable
year, it will be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates.
Unless AMB is entitled to relief under certain statutory provisions, it would be
disqualified from treatment as a real estate investment trust for the four
taxable years following the year during which it lost qualification. If AMB
loses its real estate investment trust status, its net earnings available for
investment or distribution to stockholders would be significantly reduced for
each of the years involved. In addition, AMB would no longer be required to make
distributions to stockholders.
AMB PAYS SOME TAXES
Even if AMB qualifies as a real estate investment trust, it will be subject
to certain federal, state and local taxes on its income and property. In
addition, the net taxable income, if any, from the activities conducted through
AMB Investment Management, Inc. and Headlands Realty Corporation (which we
discuss below under "-- AMB Investment Management, Inc. and Headlands Realty
Corporation") will be subject to federal and state income tax.
CERTAIN PROPERTY TRANSFERS MAY GENERATE PROHIBITED TRANSACTION INCOME
From time to time, we may transfer or otherwise dispose of some of our
properties. Under the Internal Revenue Code, any gain resulting from transfers
of properties that are held as inventory or primarily for sale to customers in
the ordinary course of business is treated as income from a prohibited
transaction that is subject to a 100% penalty tax. Since we acquire properties
for investment purposes, we believe that any transfer or disposal of property by
us would not be deemed by the Internal Revenue Service to be a prohibited
transaction with any resulting gain allocable to AMB being subject to a 100%
penalty tax. However, whether property is held for investment purposes is a
question of fact that depends on all the facts and circumstances surrounding the
particular transaction and the Internal Revenue Service may contend that certain
transfers or disposals of properties by us (including possibly some or all of
the properties that are subject to the agreements with BPP Retail) are
prohibited transactions. While we believe that the Internal Revenue Service
would not prevail in any such dispute, any adverse finding by the Internal
Revenue Service that a transfer or disposition of property constituted a
prohibited transaction would subject AMB to a 100% penalty tax on any gain
allocable to AMB from the prohibited transaction. In addition, any income from a
prohibited transaction may adversely affect
39
AMB's ability to satisfy the income tests for qualifications as a real estate
investment trust for federal income tax purposes.
WE ARE DEPENDENT ON OUR KEY PERSONNEL
We depend on the efforts of AMB's executive officers. While we believe that
we could find suitable replacements for these key personnel, the loss of their
services or the limitation of their availability could adversely affect our
financial condition, results of operations and cash flow and AMB's ability to
pay distributions on, and the market price of, its common stock. We do not have
employment agreements with any of our executive officers.
WE MAY BE UNABLE TO MANAGE OUR GROWTH
Our business has grown rapidly and continues to grow through property
acquisitions. If we fail to effectively manage our growth, our financial
condition, results of operations and cash flow and AMB's ability to pay
distributions on, and the market price of, its common stock could be adversely
affected.
AMB INVESTMENT MANAGEMENT, INC. AND HEADLANDS REALTY CORPORATION
WE DO NOT CONTROL THE ACTIVITIES OF AMB INVESTMENT MANAGEMENT, INC. AND
HEADLANDS REALTY CORPORATION
The operating partnership owns 100% of the non-voting preferred stock of
AMB Investment Management, Inc. and Headlands Realty Corporation (representing
approximately 95% of the economic interest in each entity). Certain of AMB's
current and former executive officers and an officer of AMB Investment
Management, Inc. own all of the outstanding voting common stock of AMB
Investment Management, Inc. (representing approximately 5% of the economic
interest in AMB Investment Management, Inc.). Certain of AMB's executive
officers and a director of Headlands Realty Corporation own all of the
outstanding voting common stock of Headlands Realty Corporation (representing
approximately 5% of the economic interest in Headlands Realty Corporation). The
ownership structure of AMB Investment Management, Inc. and Headlands Realty
Corporation permits us to share in the income of those corporations while
allowing AMB to maintain its status as a real estate investment trust. We
receive substantially all of the economic benefit of the businesses carried on
by AMB Investment Management, Inc. and Headlands Realty Corporation through the
operating partnership's right to receive dividends. However, we are not able to
elect the directors or officers of AMB Investment Management, Inc. and Headlands
Realty Corporation and, as a result, we do not have the ability to influence
their operation or to require that their boards of directors declare and pay
cash dividends on the non-voting stock of AMB Investment Management, Inc. and
Headlands Realty Corporation held by the operating partnership. The boards of
directors and management of AMB Investment Management, Inc. and Headlands Realty
Corporation might implement business policies or decisions that would not have
been implemented by persons controlled by us and that may be adverse to the
interests of AMB's stockholders or that may adversely impact our financial
condition, results of operations and cash flow and AMB's ability to pay
distributions on, and the market price of, its common stock. In addition, AMB
Investment Management, Inc. and Headlands Realty Corporation are subject to tax
on their income, reducing their cash available for distribution to the operating
partnership.
AMB INVESTMENT MANAGEMENT, INC. MAY NOT BE ABLE TO GENERATE SUFFICIENT FEES
Fees earned by AMB Investment Management, Inc. depend on various factors
affecting the ability to attract and retain investment management clients and
the overall returns achieved on managed assets. These factors are beyond our
control. AMB Investment Management, Inc.'s failure to attract investment
management clients or achieve sufficient overall returns on managed assets could
reduce its ability to make distributions on the stock owned by the operating
partnership and could also limit co-investment opportunities to the operating
partnership. This would limit the operating partnership's ability to generate
rental revenues from such co-investments and use the co-investment program as a
source to finance property acquisitions and leverage acquisition opportunities.
40
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Agreement for Purchase and Exchange entered into as of March
9, 1999 by and among AMB Property, L.P., AMB Property II,
L.P., Long Gate, L.L.C. and BPP Retail, LLC, regarding the
transaction which closed on June 15, 1999.
10.2 Agreement for Purchase and Exchange entered into as of March
9, 1999 by and among AMB Property, L.P., AMB Property II,
L.P., Long Gate, L.L.C. and BPP Retail, LLC, regarding the
transaction which closed on August 4, 1999.
10.3 Agreement for Purchase and Exchange entered into as of March
9, 1999 by and among AMB Property, L.P., AMB Property II,
L.P., Long Gate, L.L.C. and BPP Retail, LLC, regarding the
transaction which is currently scheduled to close on or
about December 1, 1999.
10.4 Dividend Reinvestment and Direct Purchase Plan, dated July
9, 1999.
10.5 Second Amended and Restated 1997 Stock Option and Incentive
Plan.
27.1 Financial Data Schedule -- AMB Property Corporation.
(b) Reports on Form 8-K:
- AMB filed a Current Report on Form 8-K on April 8, 1999, which contained
pro forma financial statements as of and at December 31, 1998, relating
to the transactions with BPP Retail, LLC and Burnham Pacific Properties.
- AMB filed Amendment No. 1 to Current Report on Form 8-K on June 9, 1999,
which contained information relating to the transactions with BPP Retail,
LLC and Burnham Pacific Properties and pro forma financial statements as
of and at March 31, 1999, relating to the transactions with BPP Retail,
LLC and Burnham Pacific Properties.
- AMB filed a Current Report on Form 8-K on June 15, 1999, regarding the
closing of the first transaction with BPP Retail, LLC.
- AMB filed a Current Report on Form 8-K on July 1, 1999, regarding the
termination of the transaction with Burnham Pacific Properties and
containing updated pro forma financial statements as of and at March 31,
1999, relating to the transactions with BPP Retail, LLC.
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMB PROPERTY CORPORATION
Registrant
Date: August 13, 1999 By: /s/ MICHAEL A. COKE
------------------------------------
Michael A. Coke
Chief Financial Officer and
Senior Vice President
(Duly Authorized Officer and
Principal Financial and Accounting
Officer)
42
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Agreement for Purchase and Exchange entered into as of March
9, 1999 by and among AMB Property, L.P., AMB Property II,
L.P., Long Gate, L.L.C. and BPP Retail, LLC, regarding the
transaction which closed on June 15, 1999.
10.2 Agreement for Purchase and Exchange entered into as of March
9, 1999 by and among AMB Property, L.P., AMB Property II,
L.P., Long Gate, L.L.C. and BPP Retail, LLC, regarding the
transaction which closed on August 4, 1999.
10.3 Agreement for Purchase and Exchange entered into as of March
9, 1999 by and among AMB Property, L.P., AMB Property II,
L.P., Long Gate, L.L.C. and BPP Retail, LLC, regarding the
transaction which is currently scheduled to close on or
about December 1, 1999.
10.4 Dividend Reinvestment and Direct Purchase Plan, dated July
9, 1999.
10.5 Second Amended and Restated 1997 Stock Option and Incentive
Plan.
27.1 Financial Data Schedule -- AMB Property Corporation.