AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1998 REGISTRATION NO. 333-49163 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-11 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AMB PROPERTY, L.P. (EXACT NAME OF ISSUER OF THE NOTES AS SPECIFIED IN ITS CHARTER) DELAWARE 94-3285362 (STATE OR OTHER (I.R.S. EMPLOYER JURISDICTION AND ITS NOTES GUARANTORS IDENTIFICATION NO.) OF INCORPORATION) MARYLAND AMB PROPERTY CORPORATION 94-3281941 DELAWARE AMB PROPERTY II, L.P. 94-3285360 DELAWARE LONG GATE LLC 52-1936207 (STATE OR OTHER (I.R.S. EMPLOYER JURISDICTION IDENTIFICATION NO.) OF INCORPORATION)
505 MONTGOMERY STREET SAN FRANCISCO, CALIFORNIA 94111 (415) 394-9000 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE AND TELEPHONE NUMBER) ------------------------ S. DAVIS CARNIGLIA MANAGING DIRECTOR AND CHIEF FINANCIAL OFFICER AMB PROPERTY CORPORATION 505 MONTGOMERY STREET SAN FRANCISCO, CALIFORNIA 94111 (415) 394-9000 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) ------------------------ COPIES TO: EDWARD SONNENSCHEIN, JR., ESQ. KENNETH M. DORAN, ESQ. J. SCOTT HODGKINS, ESQ. GIBSON, DUNN & CRUTCHER LLP LATHAM & WATKINS 333 SOUTH GRAND AVENUE 633 WEST FIFTH STREET, SUITE 4000 LOS ANGELES, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90071 (213) 229-7000 (213) 485-1234
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement of the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ CROSS REFERENCE SHEET
FORM S-11 ITEM NO. AND HEADING LOCATION OR HEADING IN PROSPECTUS ------------------------------ --------------------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus....................................... Inside Front Cover Page; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................ Prospectus Summary; Risk Factors 4. Determination of Offering Price.................. Underwriters 5. Dilution......................................... Not Applicable 6. Selling Security Holders......................... Not Applicable 7. Plan of Distribution............................. Underwriters 8. Use of Proceeds.................................. Use of Proceeds 9. Selected Financial Data.......................... Selected Financial and Other Data 10. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. Management's Discussion and Analysis of Financial Condition and Results of Operations 11. General Information as to Registrant............. Prospectus Summary; Business and Properties; Management; Principal Stockholders; Description of Certain Provisions of the Partnership Agreement of the Operating Partnership 12. Policy with Respect to Certain Activities........ Policies With Respect to Certain Activities 13. Investment Policies of Registrant................ Policies With Respect to Certain Activities 14. Description of Real Estate....................... Management's Discussion and Analysis of Financial Condition and Results of Operations; Business and Properties 15. Operating Data................................... Business and Properties 16. Tax Treatment of Registrant and Its Security Holders.......................................... Certain Federal Income Tax Considerations Relating to the REPS 17. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters.... Risk Factors; Price Range of Common Stock and Distribution History; Principal Stockholders 18. Description of Registrant's Securities........... Description of Capital Stock; Description of Certain Provisions of the Partnership Agreement of the Operating Partnership 19. Legal Proceedings................................ Business and Properties; Legal Proceedings 20. Security Ownership of Certain Beneficial Owners and Management................................... Principal Stockholders 21. Directors and Executive Officers................. Management
FORM S-11 ITEM NO. AND HEADING LOCATION OR HEADING IN PROSPECTUS ------------------------------ --------------------------------- 22. Executive Compensation........................... Management 23. Certain Relationships and Related Transactions... Risk Factors; Business and Properties; Management; Certain Relationships and Related Transactions; Principal Stockholders 24. Selection, Management and Custody of Registrant's Investments...................................... Risk Factors; Business and Properties; Policies With Respect to Certain Activities 25. Policies with Respect to Certain Transactions.... Risk Factors; Business and Properties; Policies With Respect to Certain Activities; Management; Certain Relationships and Related Transactions; Principal Stockholders 26. Limitations of Liability......................... Management; Description of Certain Provisions of the Partnership Agreement of the Operating Partnership 27. Financial Statements and Information............. Index to Financial Statements 28. Interests of Named Experts and Counsel........... Not Applicable 29. Disclosure of Commission Position on Indemnification for Securities Act Liabilities... Not Applicable 30. Quantitative and Qualitative Disclosures About Market Risk...................................... Risk Factors
This Prospectus and the information contained herein are subject to change, completion or amendment without notice. These securities may not be sold nor may an offer to buy be accepted prior to the time the Prospectus is delivered in final form. Under no circumstances shall this Prospectus constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdictions. PROSPECTUS (Subject to Completion) Issued May , 1998 $350,000,000 AMB Property, L.P. Unconditionally Guaranteed by AMB Property Corporation and Certain Subsidiaries $ % NOTES DUE 2008 $ % NOTES DUE 2018 $ % RESET PUT SECURITIES (REPS(SM)) DUE 2015 -- PUTABLE/CALLABLE 2005* ------------------------ Interest payable and ------------------------ AMB PROPERTY, L.P., A DELAWARE LIMITED PARTNERSHIP (THE "OPERATING PARTNERSHIP") OWNS 159 PROPERTIES ENCOMPASSING APPROXIMATELY 52.1 MILLION SQUARE FEET. AMB PROPERTY CORPORATION, A MARYLAND CORPORATION (THE "COMPANY"), IS THE OPERATING PARTNERSHIP'S SOLE GENERAL PARTNER AND OWNS A 95.9% INTEREST IN THE OPERATING PARTNERSHIP. THE COMPANY EXPECTS THAT IT HAS QUALIFIED AND WILL CONTINUE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST FOR FEDERAL INCOME TAX PURPOSES BEGINNING WITH ITS TAXABLE YEAR ENDED DECEMBER 31, 1997. ------------------------ THE % NOTES DUE 2008 (THE "2008 NOTES"), THE % NOTES DUE 2018 (THE "2018 NOTES") AND THE % RESET PUT SECURITIES (REPS) DUE 2015 -- PUTABLE/CALLABLE 2005 (THE "REPS," AND COLLECTIVELY WITH THE 2008 NOTES AND THE 2018 NOTES, THE "NOTES") WILL MATURE ON , 2008, 2018 AND 2015 RESPECTIVELY. BY PURCHASING THE REPS, EACH PURCHASER AND SUBSEQUENT HOLDER IS DEEMED TO HAVE IRREVOCABLY AGREED THAT THE REPS WILL BE SUBJECT TO MANDATORY REDEMPTION FROM THE THEN EXISTING HOLDERS ON , 2005 EITHER (I) THROUGH THE EXERCISE OF THE CALL OPTION (AS DEFINED HEREIN) BY MORGAN STANLEY & CO. INTERNATIONAL LIMITED (THE "CALLHOLDER") OR (II) IN THE EVENT THE CALLHOLDER DOES NOT EXERCISE THE CALL OPTION, THE AUTOMATIC EXERCISE OF THE MANDATORY PUT (AS DEFINED HEREIN) BY THE TRUSTEE ON BEHALF OF THE HOLDERS WITHOUT THEIR CONSENT. SEE "DESCRIPTION OF THE NOTES -- CALL OPTION AND MANDATORY PUT WITH RESPECT TO THE REPS." THE 2008 NOTES AND THE 2018 NOTES WILL BE REDEEMABLE AS SET FORTH UNDER "DESCRIPTION OF NOTES -- REDEMPTION OF THE 2008 NOTES AND THE 2018 NOTES AT THE OPTION OF THE OPERATING PARTNERSHIP." THE NOTES WILL BE UNCONDITIONALLY GUARANTEED, JOINTLY AND SEVERALLY, ON AN UNSECURED BASIS BY THE COMPANY, AMB PROPERTY II, L.P., LONG GATE LLC AND EACH OTHER SUBSIDIARY OF THE OPERATING PARTNERSHIP THAT GUARANTEES THE OPERATING PARTNERSHIP'S OBLIGATIONS UNDER ANY CREDIT AGREEMENT (AS DEFINED HEREIN). THE NOTES WILL RANK PARI PASSU WITH ALL OUTSTANDING INDEBTEDNESS OF THE OPERATING PARTNERSHIP, AND WILL BE SUBORDINATED TO THE MORTGAGES AND OTHER SECURED INDEBTEDNESS OF THE OPERATING PARTNERSHIP AND ALL OF THE OUTSTANDING LIABILITIES OF ITS SUBSIDIARIES. IN ADDITION, THE GUARANTEES WILL BE SUBORDINATED TO ALL OF THE MORTGAGES AND OTHER SECURED INDEBTEDNESS OF EACH GUARANTOR AND ALL OF THE OUTSTANDING LIABILITIES OF THEIR RESPECTIVE SUBSIDIARIES. THE NOTES WILL BE REPRESENTED BY ONE OR MORE GLOBAL NOTES REGISTERED IN THE NAME OF A NOMINEE OF THE DEPOSITORY TRUST COMPANY, AS DEPOSITARY (THE "DEPOSITARY"). BENEFICIAL INTERESTS IN THE NOTES WILL BE SHOWN ON, AND TRANSFERS THEREOF WILL BE EFFECTED ONLY THROUGH, RECORDS MAINTAINED BY THE PARTICIPANTS OF THE DEPOSITARY. EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THIS PROSPECTUS, NOTES IN CERTIFICATED FORM WILL NOT BE ISSUED IN EXCHANGE FOR THE GLOBAL NOTES. ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 11 HEREIN FOR A DISCUSSION OF MATERIAL FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND OPERATING PUBLIC(1) COMMISSIONS(2) PARTNERSHIP(1)(3)(4) --------- -------------- -------------------- Per 2008 Note............................................... % % % Per 2018 Note............................................... % % % Per 2015 REPS............................................... % % % Total............................................. $ $ $
- --------------- (1) Plus accrued interest, if any, from , 1998. (2) The Operating Partnership and the Company have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriters." (3) Before deducting expenses payable by the Operating Partnership estimated at $ . (4) Represents consideration for the REPS, which includes consideration for the Call Option. ------------------------ * REPS is a service mark of Morgan Stanley Dean Witter & Co. ------------------------ The Notes are offered, subject to prior sale, when, as, and if accepted by the Underwriters, and subject to approval of certain legal matters by Gibson, Dunn & Crutcher LLP, counsel for the Underwriters. It is expected that delivery of the Notes will be made on or about , 1998, through the book-entry facilities of the Depositary, against payment therefor in immediately available funds. ------------------------ MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO. J.P. MORGAN & CO. , 1998 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF NOTES TO COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS." NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED HEREIN BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE OPERATING PARTNERSHIP, THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE NOTES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE OPERATING PARTNERSHIP OR THE COMPANY SINCE THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUMMARY.................................. 1 The Company and the Operating Partnership........... 1 Recent Developments................................. 3 Risk Factors........................................ 3 The Offering........................................ 5 Organization........................................ 6 Business and Operating Strategies................... 7 Summary Financial and Other Data.................... 8 RISK FACTORS........................................ 11 General Real Estate Risks........................... 11 Uncontrollable Factors Affecting Performance and Value............................................ 11 Concentration of Properties in California.......... 11 Concentration of Properties in Industrial and Retail Sectors................................... 11 Illiquidity of Real Estate Investments............. 11 Renewal of Leases and Reletting of Space........... 12 Uninsured Loss..................................... 12 Uninsured Losses from Seismic Activity............. 12 Impact on Control Over and Liabilities With Respect to Properties Owned Through Partnerships and Joint Ventures................................... 12 Possible Inability to Consummate Acquisitions on Advantageous Terms............................... 13 Possible Inability to Complete Renovation and Development on Advantageous Terms................ 13 Limited Restrictions on Total Indebtedness and Changes of Control................................. 14 Debt Financing...................................... 14 Debt Financing and Existing Debt Maturities........ 14 Impact of Rising Interest Rates and Variable Rate Debt............................................. 15 Possible Impact of Defaults on Cross-Collateralized and Cross-Defaulted Debt......................... 15 Ranking of the Notes................................ 15 Optional Redemption of the 2008 Notes or the 2018 Notes.............................................. 16 Contingent or Unknown Liabilities................... 16 Conflicts of Interest............................... 17 Continued Involvement of Executive Officers in Other Real Estate Activities and Investments..... 17 Conflicts of Interest in Connection with Properties Owned or Controlled by Executive Officers and Directors........................................ 17 Conflicts Relating to the Operating Partnership.... 18 Influence of Directors, Executive Officers and Significant Stockholders......................... 18 Failure to Enforce Terms of Certain Agreements..... 19 Conflicts Relating to Use of Proceeds.............. 19 AMB Investment Management........................... 19 Adverse Consequences of Lack of Control Over the Business of AMB Investment Management............ 19 Uncertainty of AMB Investment Management Operations....................................... 19 Government Regulations.............................. 20 Cost of Compliance with Americans with Disabilities Act............................ 20 Environmental Matters.............................. 20 Other Regulations.................................. 21 United States Federal Income Tax Risk............... 21 Absence of Market for the Notes..................... 21 THE COMPANY AND THE OPERATING PARTNERSHIP........... 22 General............................................. 22 Recent Developments................................. 22 BUSINESS AND OPERATING STRATEGIES................... 24 National Property Company........................... 24 Two Complementary Property Types.................... 24 Select Market Focus................................. 24
PAGE ---- Property Management................................. 25 Disciplined Investment Process...................... 25 Renovation, Expansion and Development............... 26 Financing Strategy.................................. 26 AMB Investment Management........................... 27 STRATEGIES FOR GROWTH............................... 28 Growth Through Operations........................... 28 Growth Through Acquisitions......................... 28 Growth Through Renovation, Expansion and Development........................................ 28 USE OF PROCEEDS..................................... 29 PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY............................................ 29 CAPITALIZATION...................................... 30 SELECTED FINANCIAL AND OTHER DATA................... 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 36 General............................................. 36 Company and Predecessor Results of Operations....... 36 Operating Partnership and AMB Contributed Properties Results of Operations.............................. 37 Liquidity and Capital Resources..................... 40 Inflation........................................... 41 Year 2000 Compliance................................ 41 Funds From Operations............................... 41 Property Operating Income........................... 43 BUSINESS AND PROPERTIES............................. 44 Industrial Properties............................... 44 Industrial Property Summary......................... 46 Industrial Property Tenant Information.............. 50 Industrial Property Lease Expirations............... 51 Retail Properties................................... 52 Retail Property Summary............................. 55 Retail Property Tenant Information.................. 58 Retail Property Lease Expirations................... 59 Historical Tenant Retention Rates and Rent Increases.......................................... 60 Recurring Tenant Improvements and Leasing Commissions........................................ 60 Occupancy and Base Rent............................. 60 Renovation, Expansion and Development Projects In Progress........................................... 61 Properties Held Through Joint Ventures, Limited Liability Companies and Partnerships............... 61 Debt Financing...................................... 62 Insurance........................................... 66 Government Regulations.............................. 67 Management and Employees............................ 68 Legal Proceedings................................... 68 POLICIES WITH RESPECT TO CERTAIN ACTIVITIES......... 69 Investment Policies................................. 69 Financing Policies.................................. 70 Lending Policies.................................... 70 Conflict of Interest Policies....................... 70 Policies with Respect to Other Activities........... 71 Policies with Respect to Investment Advisory Services........................................... 71 Other Policies...................................... 71 MANAGEMENT.......................................... 73 Committees of the Board of Directors................ 76 Compensation of the Board of Directors.............. 77 Executive Compensation.............................. 77 Option Grants in Last Fiscal Year................... 78 Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values...................... 78 Employment Agreements............................... 78
i
PAGE ---- Stock Incentive Plan................................ 79 401(k) Plan......................................... 82 Limitation of Directors' and Officers' Liability.... 82 Indemnification Agreements.......................... 82 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...... 84 Formation Transactions.............................. 84 Other Related Transactions.......................... 84 Conflicts of Interest............................... 85 PRINCIPAL STOCKHOLDERS.............................. 87 DESCRIPTION OF NOTES................................ 88 General............................................. 88 Denominations, Maturity, Interest, Registration and Transfer........................................... 89 Guarantees.......................................... 90 Redemption of the 2008 Notes and the 2018 Notes at the Option of the Operating Partnership............ 90 Call Option and Mandatory Put with Respect to the REPS............................................... 92 Coupon Reset Process if REPS are Called............. 93 Merger, Consolidation or Sale....................... 95 Certain Covenants................................... 95 Definitions......................................... 97 Events of Default, Notice and Waiver................ 98 Modification of the Indenture....................... 100 Discharge, Defeasance and Covenant Defeasance....... 101 Global Notes........................................ 103 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS RELATING TO THE REPS........................................ 106 Treatment of REPS................................... 106 Backup Withholding.................................. 107 DESCRIPTION OF CERTAIN PROVISIONS OF THE PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP............. 108 General............................................. 108 Purpose, Business and Management.................... 108 Engaging in Other Businesses; Conflicts of Interest........................................... 109 Reimbursement of the Company; Transactions with the Company and its Affiliates......................... 109
PAGE ---- Exculpation and Indemnification of the Company...... 110 Sales of Assets; Liquidation........................ 110 Capital Contribution................................ 111 Removal of the General Partner; Transferability of the Company's Interests; Treatment of Units in Significant Transactions........................... 111 Redemption/Exchange Rights.......................... 112 Performance Units................................... 112 Registration Rights................................. 113 Duties and Conflicts................................ 113 Meetings; Voting.................................... 113 Amendment of the Partnership Agreement.............. 113 Books and Reports................................... 114 Term................................................ 114 CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS..... 115 Board of Directors.................................. 115 Removal of Directors................................ 115 Opt Out of Business Combinations and Control Share Acquisition Statutes............................... 115 Amendment to the Articles of Incorporation and Bylaws............................................. 115 Meetings of Stockholders............................ 116 Advance Notice of Director Nominations and New Business........................................... 116 Dissolution of the Company.......................... 116 Limitation of Directors' and Officers' Liability.... 116 DESCRIPTION OF CAPITAL STOCK........................ 118 General............................................. 118 Common Stock........................................ 118 Preferred Stock..................................... 119 UNDERWRITERS........................................ 120 LEGAL MATTERS....................................... 121 EXPERTS............................................. 121 AVAILABLE INFORMATION............................... 121 GLOSSARY............................................ 122 INDEX TO FINANCIAL INFORMATION...................... F-1
AMB and its logo are registered service marks of the Company. All other trademarks and service marks appearing in this Prospectus are the property of their respective holders. In addition to historical information, the information included in this Prospectus contains forward-looking statements, such as those pertaining to the Company's (including for purposes of this paragraph, certain of its other subsidiaries') capital resources, portfolio performance and results of operations. Likewise, the pro forma financial statements and other pro forma information included in this Prospectus also contain certain such forward-looking statements. In addition, all statements regarding anticipated growth in the Company's funds from operations and anticipated market conditions, demographics and results of operations are forward-looking statements. Forward-looking statements involve numerous risks and uncertainties and should not be relied upon as predictions of future events, and there can be no assurance that the events or circumstances reflected in such forward-looking statements will be achieved or occur. Certain such forward-looking statements can be identified 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 thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Such forward-looking statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and they may be incapable of being realized. 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, increased interest rates and operating costs, failure to obtain necessary outside financing, difficulties in identifying properties to acquire and in effecting acquisitions, failure to successfully integrate acquired properties and operations, risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities), failure to qualify as a real estate investment trust (a "REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), environmental uncertainties, risks related to natural disasters, financial market fluctuations, changes in real estate and zoning laws and increases in real property tax rates. The success of the Company also depends upon economic trends generally, including interest rates, income tax laws, governmental regulation, legislation, population changes and those risk factors discussed in the section entitled "Risk Factors." Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only. ii PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial data, including the financial statements and notes thereto, set forth elsewhere in this Prospectus. Unless the context otherwise requires, the "Company" shall include its subsidiaries, including the Operating Partnership and with respect to the period prior to the IPO, the AMB Predecessors (as defined). The statements herein regarding the Company's tax status as a REIT are based upon the Company's belief that it has satisfied and continues to satisfy the requirements for qualification as a REIT set forth in the Code (as defined). Capitalized terms shall have the meanings set forth herein and in the Glossary beginning on page 122. THE COMPANY AND THE OPERATING PARTNERSHIP AMB Property, L.P. was organized in November 1997 and commenced operations in connection with the completion of the initial public offering of AMB Property Corporation, its sole general partner (the "IPO") and the consummation of the Formation Transactions (as defined) in November 1997. AMB Property Corporation is one of the largest publicly-traded real estate companies in the United States. The Company owns 159 Properties, comprised of 122 industrial properties (the "Industrial Properties") and 37 retail properties (the "Retail Properties") located in 28 markets throughout the United States (including four Industrial Properties acquired since March 31, 1998). The Industrial Properties (comprising 427 buildings), principally warehouse distribution properties, encompass approximately 45.3 million rentable square feet and, as of March 31, 1998, were 94.6% leased to over 1,000 tenants. The Retail Properties, principally grocer-anchored community shopping centers, encompass approximately 6.8 million rentable square feet and, as of the same date, were 94.6% leased to over 900 tenants. See "Business and Properties." The Operating Partnership conducts substantially all of the Company's activities and owns substantially all of the economic interests in the Properties. As of March 31, 1998, the Company owned an approximate 95.9% general partner interest in the Operating Partnership, with the remaining 4.1% limited partner interest owned by nonaffiliated investors. As the sole general partner of the Operating Partnership, the Company has control over the management of the Operating Partnership and over each of the 116 Properties (comprising approximately 36.9 million rentable square feet) owned directly by the Operating Partnership. The Operating Partnership owns 99% of the economic interests in the remaining 43 Properties (comprising approximately 16.2 million rentable square feet) through AMB Property II, L.P., a Delaware limited partnership, and Long Gate LLC, a Delaware limited liability company, and the Company (through a wholly owned subsidiary) owns a 1% interest. The Company is engaged in the business of acquiring and operating industrial properties and community shopping centers in target markets nationwide. The Company is led by Mr. Hamid R. Moghadam, its Chief Executive Officer and one of the three founders of the Company. Messrs. Douglas D. Abbey and T. Robert Burke, the other two founders, also play active roles in the Company's operations as the Chairman of its Investment Committee and the Chairman of its Board of Directors, respectively. The Company's 10 executive officers have an average of 22 years of experience in the real estate industry and have worked together for an average of eight years building the AMB real estate business. The Company employs 123 individuals, 99 of whom are located in its San Francisco headquarters and 24 in its Boston office. The Company operates as a self-administered and self-managed real estate company and expects that it has qualified and that it will continue to qualify as a REIT for federal and state income tax purposes beginning with the year ended December 31, 1997. The following table sets forth certain summary information with respect to the Properties owned as of March 31, 1998. INDUSTRIAL PROPERTIES
PERCENTAGE OF TOTAL PERCENTAGE NUMBER RENTABLE INDUSTRIAL ANNUALIZED OF OF SQUARE SQUARE PERCENTAGE BASE RENT ANNUALIZED REGION BUILDINGS FEET FEET LEASED (000S)(1) BASE RENT ------ --------- ---------- ---------- ---------- ---------- ---------- Eastern..................................... 68 8,729,347 19.9% 92.7% $ 33,435 18.7% Midwestern.................................. 92 11,199,515 25.5 93.0 39,075 21.9 Southern.................................... 114 11,262,975 25.6 95.2 45,096 25.3 Western..................................... 141 12,772,141 29.0 96.8 60,809 34.1 --- ---------- ----- ---- -------- ----- Total/Weighted Average...................... 415 43,963,978 100.0% 94.6% $178,415 100.0% === ========== ===== ==== ======== =====
1 RETAIL PROPERTIES
PERCENTAGE OF TOTAL PERCENTAGE NUMBER RENTABLE RETAIL ANNUALIZED OF OF SQUARE SQUARE PERCENTAGE BASE RENT ANNUALIZED REGION CENTERS FEET FEET LEASED (000S)(1) BASE RENT ------ ------- --------- ---------- ---------- ---------- ---------- Eastern....................................... 4 1,272,968 18.6% 98.1% $14,381 18.8% Midwestern.................................... 4 710,833 10.4 99.0 7,099 9.3 Southern...................................... 12 1,957,051 28.6 88.8 19,143 25.1 Western....................................... 17 2,907,986 42.4 95.9 35,666 46.8 -- --------- ----- ---- ------- ----- Total/Weighted Average........................ 37 6,848,838 100.0% 94.6% $76,289 100.0% == ========= ===== ==== ======= =====
TOTAL PROPERTIES
PERCENTAGE PERCENTAGE NUMBER RENTABLE OF TOTAL ANNUALIZED OF OF SQUARE SQUARE PERCENTAGE BASE RENT ANNUALIZED REGION BUILDINGS FEET FEET LEASED (000S)(1) BASE RENT ------ --------- ---------- ---------- ---------- ---------- ---------- Eastern..................................... 72 10,002,315 19.7% 93.3% $ 47,816 18.8% Midwestern.................................. 96 11,910,348 23.4 93.4 46,174 18.1 Southern.................................... 126 13,220,026 26.0 94.3 64,239 25.2 Western..................................... 158 15,680,127 30.9 96.7 96,475 37.9 --- ---------- ----- ---- -------- ----- Total/Weighted Average...................... 452 50,812,816 100.0% 94.6% $254,704 100.0% === ========== ===== ==== ======== =====
- --------------- (1) Annualized Base Rent means the monthly contractual amount under existing leases at March 31, 1998, multiplied by 12. This amount excludes expense reimbursements and rental abatements. 2 RECENT DEVELOPMENTS Acquisitions. During the period from April 1, 1998 to May 8, 1998, the Company acquired operating properties with an aggregate purchase price of $56.7 million. The properties acquired are comprised of four Industrial Properties representing 12 buildings and 1.3 million rentable square feet. Quarterly Distributions. On March 6, 1998, the Board of Directors of the Company in its capacity as general partner of the Operating Partnership, declared a distribution of $0.3425 per partnership unit, payable April 3, 1998 to partners of record as of March 18, 1998. In addition, the Company's Board of Directors declared a distribution of $0.3425 per share of the Company's common stock, par value $.01 per share (the "Common Stock"), payable April 3, 1998 to stockholders and unitholders of record as of March 18, 1998. Investment-Grade Credit Ratings. The Company recently received credit ratings for its unsecured debt of Baa1 from Moody's Investors' Service, BBB from Standard & Poor's Corporation and BBB+ from Duff & Phelps Credit Rating Co. As a result of the receipt of the investment-grade credit ratings, the interest rate on the Operating Partnership's $500 million unsecured revolving credit facility ("Credit Facility") was reduced by 20 basis points to LIBOR plus 90 basis points. Alliance with Trammell Crow Company. The Company has formed a strategic alliance with Trammell Crow Company to develop and manage industrial properties in targeted distribution markets nationwide. The alliance will focus on multi-tenant freight forwarding facilities adjacent to major airports and industrial submarkets of targeted metropolitan areas such as Chicago, Seattle and Northern New Jersey. RISK FACTORS An investment in the Notes involves various material risks. Prospective investors should carefully consider the following risk factors, in addition to the other information set forth in this Prospectus, before making an investment decision regarding the Notes offered hereby. Each of these matters could have adverse consequences to the Operating Partnership or the Company. Such risks include, among others: - the need to renew leases or re-lease space upon lease expirations and to pay renovation and re-leasing costs in connection therewith, the effect of economic and other conditions on property cash flows and values, the ability of tenants to make lease payments, the ability of a property to generate revenue sufficient to meet operating expenses (including future debt service), and the illiquidity of real estate investments which could have an adverse effect on the Operating Partnership's and the Company's financial condition, results of operations and cash flow and, consequently, their ability to service debt, including the Notes; - limited indenture provisions limiting the total indebtedness that the Operating Partnership may incur and protecting noteholders in the event of a change in control, reorganization, restructuring, merger or similar transaction involving the Operating Partnership; - the ability of the Board of Directors to change the Operating Partnership's and the Company's growth and investment strategy and their financing, distribution and operating policies without a vote of the Company's stockholders and, with respect to certain matters, the Noteholders; - the possible failure of investments to perform in accordance with the Operating Partnership's and the Company's expectations, inaccuracy of estimates of costs of improvements to bring an acquired property up to standards, competition for attractive investment opportunities and other general risks associated with any real estate investment which could have an adverse effect on the Operating Partnership's and the Company's financial condition, results of operations and cash flow and, consequently, their ability to service debt, including the Notes; - although the Notes will be direct, senior obligations of the Operating Partnership, the Notes will be effectively subordinated to the mortgages and other secured indebtedness of the Operating Partnership and all outstanding liabilities of the Operating Partnership's subsidiaries. In addition, the Guarantees will be subordinated to all of the mortgages and other secured indebtedness of each Guarantor, and all of the outstanding liabilities of its respective subsidiaries; on a pro forma basis giving effect to the Offering and the application of the net proceeds therefrom, the total indebtedness of the Operating Partnership and its subsidiaries as of March 31, 1998 would have been approximately $980.0 million, of which $610.1 million would have been secured. As of March 31, 1998, the Company had no outstanding indebtedness (excluding the Company's guaranty of the Credit Facility) other than indebtedness of the Operating Partnership and its subsidiaries. Subject to certain limitations, the Operating Partnership, the Company and their subsidiaries may incur additional indebtedness, including, but not limited to, mortgage loans, borrowings under the Credit Facility and other secured indebtedness; 3 - the possibility of uninsured losses or losses in excess of insured limits relating to certain occurrences, including fire, rental loss and seismic activity which could have an adverse effect on the Operating Partnership's and the Company's financial condition, results of operations and cash flow and, consequently, their ability to service debt, including the Notes; - in connection with certain of the Operating Partnership's and the Company's partnerships and joint ventures, the possibility that a partner or co-venturer may (i) become bankrupt while the Operating Partnership and the Company and any other remaining partners or joint venturers remain liable for the liabilities of such partnerships or joint ventures, (ii) have economic interests inconsistent with those of the Operating Partnership and the Company or (iii) cause the sale or refinancing of its interest at a disadvantageous time or on disadvantageous terms, which could adversely affect the return realized by the Operating Partnership and the Company on such investments; - the inability to refinance outstanding indebtedness upon maturity or, in the case of the REPS, upon exercise of the Mandatory Put, or refinance such indebtedness on favorable terms, the risks of rising interest rates in connection with the Operating Partnership's unsecured line of credit and other variable-rate borrowings and the ability of the Company to incur more debt without Noteholder approval, thereby increasing its debt service obligations, which could adversely affect the Company's cash flow and consequently its ability to satisfy its obligation under its Guaranty; and - conflicts of interest in connection with the operations of the Operating Partnership and the Company including (i) the influence of certain directors, officers and significant stockholders on the management and operation of the Operating Partnership and the Company, and as stockholders, on the outcome of matters submitted to a vote of the stockholders, (ii) the potential failure to enforce the terms of agreements, including for the indemnification by certain of the Executive Officers and other participants in the Formation Transactions for breaches or representations and warranties relating to the Formation Transactions, each of which could result in the Operating Partnership and the Company taking action which is not in the interest of all holders of the Notes and (iii) the continued involvement of certain of the Executive Officers and directors in other real estate activities and investments, including 11 retail development projects in the U.S., a low income housing apartment, a 75% interest in an office building and less than 1% partnership interests in other office buildings and residential developments, which could divert management's attention from the day-to-day operations of the Operating Partnership and Company; - possible conflicts of interest imposed by the fiduciary obligations of the Company to the limited partners of the Operating Partnership, in its capacity as the general partner of the Operating Partnership, the requirement for the limited partners to approve certain amendments affecting their rights and the ability of the limited partners to approve certain transactions that affect all stockholders of the Company, which could result in the Company taking action which is not in the interest of all holders of the Notes; - the potential liability of the Operating Partnership and the Company for environmental matters and the costs of compliance with certain government regulations which could have an adverse effect on the Operating Partnership's and the Company's financial condition, results of operations and cash flow and, consequently, their ability to service debt, including the Notes; - possible adverse consequences of a lack of control over the business of AMB Investment Management and the uncertainty of AMB Investment Management operations; - the possibility that the Internal Revenue Service could successfully assert a Federal income tax treatment for the REPS different from the manner in which the Operating Partnership intends to treat the REPS; and - the lack of an established trading market for the Notes. 4 THE OFFERING Securities Offered.........$ aggregate principal amount of % Notes due 2008, $ aggregate principal amount of % Notes due 2018 and $ aggregate principal amount of % Reset Put Securities due 2015 -- Putable/Callable 2005.
Maturity................... , 2008 with respect to the 2008 Notes, , 2018 with respect to the 2018 Notes and , 2015 with respect to the REPS. For persons holding the REPS (or an interest therein) on , 2005 (the "Coupon Reset Date") the effect of the operation of the Call Option and the Mandatory Put will be that such holders will be entitled to receive, and will be required to accept, 100% of the principal amount of such REPS (plus accrued interest) on the Coupon Reset Date. Interest Payment Dates.....Interest on the Notes will be payable semiannually on each and , commencing , 1998. Ranking....................The Notes will be senior unsecured obligations of the Operating Partnership and will rank equally with the Operating Partnership's other unsecured and unsubordinated indebtedness. However, the Notes are effectively subordinated to mortgages and other secured indebtedness of the Operating Partnership. See "Risk Factors -- Ranking of the Notes."
Guarantees.................The Notes will be fully and unconditionally guaranteed, jointly and severally (the "Guarantees") on an unsecured basis by the Guarantors (as defined below) except as may be limited to the maximum amount permitted under applicable federal or state law. The obligations of each Guarantor under its Guaranty will rank pari passu with all of its unsecured and unsubordinated indebtedness and will be effectively subordinated to all of its mortgages and other secured indebtedness and all outstanding liabilities of its subsidiaries. In addition, the Guarantees will be effectively subordinated to all of the mortgages and other secured indebtedness of the Guarantors. See "Risk Factors -- Ranking of the Notes."
Guarantors.................AMB Property Corporation, AMB Property II, L.P., Long Gate LLC and each other Subsidiary of the Operating Partnership, including any such future Subsidiary, that guarantees the Operating Partnership's obligations under any Credit Agreement.
Optional Redemption of the 2008 Notes and the 2018 Notes....................The 2008 Notes and the 2018 Notes are redeemable at any time at the option of the Operating Partnership, in whole or in part, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2008 Notes and the 2018 Notes being redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to such redemption date) discounted to such redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined) plus basis points, plus, in either case, accrued and unpaid interest on the principal amount being redeemed to such redemption date. See "Description of Notes -- Redemption of the 2008 Notes and the 2018 Notes at the Option of the Operating Partnership." Call Option................The REPS may be called by the Callholder prior to maturity, as described under "Description of Notes -- Call Option and Mandatory Put with Respect to the REPS."
Mandatory Put..............The REPS will be subject to repayment by the Operating Partnership prior to maturity if the Callholder elects not to purchase the REPS pursuant to the Call Option as described under "Description of Notes -- Call Option and Mandatory Put with Respect to the REPS." Taken together, the effect of the Call Option and the Mandatory Put will be that the holders of the REPS will be repaid 100% of the principal amount of the REPS on the Coupon Reset Date.
5 Callholder.................Morgan Stanley & Co. International Limited.
Use of Proceeds............The net proceeds to the Operating Partnership from the sale of the Notes offered hereby will be used to repay approximately $348.8 million of borrowings outstanding under the Credit Facility incurred to fund property acquisitions and for general purposes.
Covenants..................The Indenture will restrict, among other things, the Operating Partnership's ability to incur additional indebtedness and to merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Operating Partnership. See "Description of Notes -- Certain Covenants."
ORGANIZATION The Company, the Operating Partnership and their subsidiaries were organized in a manner to facilitate the Formation Transactions and the IPO. The Company is the sole general partner of the Operating Partnership. The other holders of Units in the Operating Partnership are limited partners. The following diagram illustrates the structure of the Company, the Operating Partnership and their subsidiaries: [CHART] - --------------- (1) AMB Investment Management conducts its business through the Investment Management Partnership, of which it is the sole general partner and owns the entire capital interest. The executive officers own a profits interest in the Investment Management Partnership relating to the allocation of a portion of the incentive fees with respect to assets managed by AMB prior to the IPO. (2) Includes properties owned on a joint venture basis through certain limited partnerships and limited liability companies in which the Operating Partnership owns at least a 50% interest (none of which are or will be guarantors of the Notes). See "Business and Properties -- Properties Held Through Joint Ventures, Limited Liability Companies and Partnerships" for a list of such entities. (3) Comprised of AMB Property II, L.P. and Long Gate LLC which, for local law purposes, own Properties in certain states. The ownership of such Properties through such entities does not materially affect the Operating Partnership's and the Company's overall ownership of the interests in the Properties. 6 The principal executive offices of the Operating Partnership, AMB Property Corporation, AMB Property II, L.P. and Long Gate LLC are located at 505 Montgomery Street, San Francisco, California 94111, and their telephone number is (415) 394-9000. The Operating Partnership and the Company also maintain a regional office in Boston, Massachusetts. BUSINESS AND OPERATING STRATEGIES The Company focuses its investment activities in industrial hub distribution markets and retail trade areas throughout the U.S. where opportunities exist to acquire and develop additional properties on an advantageous basis. The Company believes that the industrial property sector is well-positioned to benefit from strong market fundamentals and growth in international trade, and further believes that the retail property sector will benefit from limited new construction in "in-fill" locations and from projected growth in personal income and retail sales levels (in-fill locations are those typified by significant population densities and low availability of land resulting in limited opportunities for new construction of competitive properties). The Company seeks to capitalize on these current conditions in the industrial and retail property sectors by implementing the following business and operating strategies: - Financing Strategy. The Company intends to operate with a Debt-to-Total Market Capitalization Ratio generally of less than 45% and plans to continue to structure its balance sheet in order to maintain an investment grade debt rating. Upon consummation of the Offering, the Operating Partnership's Debt-to-Total Market Capitalization Ratio as of March 31, 1998 on a pro forma basis would have been approximately 31.2% (29.9% on an historical basis). - National Property Company. The Company believes that its national strategy enables it to increase or decrease investments in certain regions to take advantage of the relative strengths and attractive investment opportunities in different real estate markets. Through its presence in markets throughout the U.S., the Company has developed expertise in leasing, expense management, tenant retention strategies and property design and configuration. - Two Complementary Property Types. Management believes that its dual property strategy provides significant opportunities to allocate capital and organizational resources and offers the Company an optimal combination of growth, strong current income and stability through market cycles. - Select Market Focus. The Company focuses on acquiring, redeveloping and operating properties in in-fill locations. As the strength of these markets continues to grow and the demand for well-located properties increases, the Company believes that it will benefit from the resulting upward pressure on rents. - Research-Driven Market Selection. The Company's decisions regarding the deployment of capital are experience- and research-driven, with investments based on thorough qualitative and quantitative research and analysis of local markets. The Company employs a dedicated research department using proprietary analyses, databases and systems. - Property Management. The Company actively manages the Properties through its experienced staff of regional managers, each of whom has broad responsibilities for the Properties they manage. The Company typically outsources property management to a select group of third-party local managers with whom the Company has established strong relationships. Management believes that industrial and retail property types do not typically require on-site property managers and that by utilizing third-party property managers, the Company is better able to service its customers and more efficiently manage its costs. - Disciplined Investment Process. The Company has established a disciplined approach to the investment decision-making process through operating divisions that are subject to the overall policy direction of its Investment Committee. The Company has also established efficient and effective proprietary systems and procedures to manage and track a high volume of acquisition proposals and transactions. - Renovation, Expansion and Development. Management believes that value-added renovation and expansion of properties and development of well-located, high-quality industrial properties and community shopping centers should continue to provide the Company with attractive opportunities for increased cash flow and a higher risk-adjusted rate of return than may be obtained from the purchase of stabilized properties. 7 SUMMARY FINANCIAL AND OTHER DATA The following table sets forth summary financial and other data on an historical basis for the Operating Partnership for the period from November 26, 1997 to December 31, 1997 and for the three months ended March 31, 1998 and for the Properties contributed to the Operating Partnership in connection with the Formation Transactions (the "AMB Contributed Properties") for the years ended December 31, 1993, 1994, 1995, 1996, the period from January 1, 1997 to November 25, 1997 and the three months ended March 31, 1997, and on an as adjusted basis for the Operating Partnership for the year ended December 31, 1997 (giving effect to the Formation Transactions (as defined), the IPO and certain property acquisitions and dispositions in 1997). Additionally, the table sets forth summary financial and other data for the Operating Partnership for the year ended December 31, 1997 and for the three months ended March 31, 1998 on a pro forma basis (giving effect to the Formation Transactions, the IPO, certain property acquisitions and dispositions in 1997, the property acquisitions in 1998 and the Offering and the application of the net proceeds therefrom, as if such transactions had occurred on January 1, 1997). The historical financial information contained in the tables should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements and accompanying Notes thereto and the financial schedules included elsewhere in this Prospectus. In the opinion of management, the as adjusted and pro forma condensed financial information provides for all adjustments necessary to reflect the adjustments and transactions described above. The as adjusted and pro forma information is unaudited and is not necessarily indicative of the results that would have occurred if the transactions and adjustments reflected therein had been consummated in the period or on the date presented, or on any particular date in the future, nor does it purport to represent the financial position, results of operations or changes in cash flows for future periods. 8 OPERATING PARTNERSHIP AND AMB CONTRIBUTED PROPERTIES SUMMARY FINANCIAL AND OTHER DATA (IN THOUSANDS EXCEPT UNIT DATA, PERCENTAGES AND NUMBER OF PROPERTIES)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------------------------- OPERATING PARTNERSHIP ------------------------------------ HISTORICAL AS ADJUSTED PRO FORMA AMB CONTRIBUTED PROPERTIES(1) (2) (3) (4) -------------------------------------------------------- ---------- ----------- --------- 1993 1994 1995 1996 1997 1997 1997 1997 -------- -------- ---------- ---------- -------- ---------- ----------- --------- (UNAUDITED) OPERATING DATA: Total revenues........... $ 24,398 $ 51,682 $ 108,249 $ 167,953 $208,608 $ 27,110 $ 284,674 $325,293 Income from operations before minority interests.............. 6,871 13,753 32,519 54,865 58,068 9,291 103,903 107,345 Net income............... 6,871 13,194 32,531 54,400 57,184 9,174 102,606 103,274 Net income per unit(5): Basic.................. $ 0.10 $ 1.16 $ 1.15 Diluted................ 0.10 1.16 1.15 Distributions per unit... 0.13 1.37 1.37 OTHER DATA: EBITDA(6)................ $ 195,218 $225,556 Funds from Operations(7).......... 147,409 153,900 FFO per diluted unit(7)................ $ 1.66 $ 1.71 Cash flows provided by(used in): Operating activities... 131,621 138,112 Investing activities... (607,768) (842,337) Financing activities... 553,199 571,614 Ratio of earnings to fixed charges(8)....... 3.1x 2.5x Book debt service coverage ratio(9)...... 4.3x 3.4x Cash debt service coverage ratio(10)..... 3.8x 3.2x BALANCE SHEET DATA: Investments in real estate at cost......... $323,230 $666,672 $1,018,681 $1,616,091 $2,442,999 Total assets............. 326,586 721,131 1,117,181 1,622,559 2,506,255 Secured debt(11)......... 100,496 201,959 254,067 522,634 535,652 Unsecured notes.......... -- -- -- -- -- Unsecured credit facility............... -- -- -- 25,500 150,000 Partner's capital........ 208,043 490,111 837,199 1,027,601 1,717,398 PROPERTY DATA: INDUSTRIAL PROPERTIES Total rentable square footage of properties at end of period....... 5,638 13,364 21,598 29,609 37,329 Number of properties at end of period.......... 12 28 44 60 95 Occupancy rate at end of period................. 97.4% 96.9% 97.3% 97.2% 95.7% RETAIL PROPERTIES Total rentable square footage of properties at end of period....... 1,074 2,422 3,299 5,282 6,216 Number of properties at end of period.......... 9 14 19 30 33 Occupancy rate at end of period................. 96.5% 93.7% 92.4% 92.4% 96.1% AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, ------------------------------------- AMB OPERATING PARTNERSHIP CONTRIBUTED ----------------------- PROPERTIES PRO FORMA (1) HISTORICAL (4) ----------- ---------- ---------- 1997 1998 1998 ----------- ---------- ---------- OPERATING DATA: Total revenues........... $54,749 $ 75,785 $ 85,099 Income from operations before minority interests.............. 14,217 29,188 29,973 Net income............... 13,997 28,726 28,898 Net income per unit(5): Basic.................. $ 0.32 $ 0.32 Diluted................ 0.32 0.32 Distributions per unit... 0.34 0.34 OTHER DATA: EBITDA(6)................ $ 52,815 $ 60,028 Funds from Operations(7).......... 40,295 42,341 FFO per diluted unit(7)................ $ 0.45 $ 0.47 Cash flows provided by(used in): Operating activities... 34,820 36,906 Investing activities... (199,520) (49,646) Financing activities... 153,316 (9,063) Ratio of earnings to fixed charges(8)....... 3.1x 2.6x Book debt service coverage ratio(9)...... 4.5x 3.7x Cash debt service coverage ratio(10)..... 3.8x 3.3x BALANCE SHEET DATA: Investments in real estate at cost......... $2,755,882 $2,812,612 Total assets............. 2,798,190 2,856,120 Secured debt(11)......... 610,111 610,111 Unsecured notes.......... -- 350,000 Unsecured credit facility............... 312,000 19,930 Partner's capital........ 1,741,601 1,741,601 PROPERTY DATA: INDUSTRIAL PROPERTIES Total rentable square footage of properties at end of period....... 43,964 45,269 Number of properties at end of period.......... 118 122 Occupancy rate at end of period................. 94.6% 94.6% RETAIL PROPERTIES Total rentable square footage of properties at end of period....... 6,849 6,849 Number of properties at end of period.......... 37 37 Occupancy rate at end of period................. 94.6% 94.6%
- --------------- (1) Represents the AMB Contributed Properties historical combined financial and other data for the years ended December 31, 1993, 1994, 1995 and 1996, the period from January 1, 1997 through November 25, 1997 and the three months ended March 31, 1997. (2) For the period from November 26, 1997 to December 31, 1997. (3) As adjusted financial and other data have been prepared as if the Formation Transactions, the IPO and certain property acquisitions and dispositions in 1997 had occurred on January 1, 1997. 9 (4) Pro forma financial and other data have been prepared as if the Formation Transactions, the IPO, certain property acquisitions and dispositions in 1997, the property acquisitions in 1998 and the Offering had occurred on January 1, 1997. (5) Historical, as adjusted and pro forma net income per basic unit for the year ended December 31, 1997 equals the historical, as adjusted and pro forma net income divided by 88,416,676, 88,416,678 and 89,523,120 units, respectively. Historical and pro forma net income per basic unit for the three months ended March 31, 1998 equals the historical and pro forma net income divided by 88,428,969 and 89,523,120 units, respectively. Historical, as adjusted and pro forma net income per diluted unit for the year ended December 31, 1997 equals the historical, as adjusted and pro forma net income divided by 88,698,719, 88,698,719 and 89,805,163 units, respectively. Historical and pro forma net income per diluted unit for the three months ended March 31, 1998 equals the historical and pro forma net income divided by 88,839,192 units and 89,933,343 units, respectively. (6) EBITDA is computed as income from operations before disposal of properties and minority interests plus interest expense, income taxes, depreciation and amortization. Management believes that in addition to cash flows and net income, EBITDA is a useful financial performance measure for assessing the operating performance of an equity REIT because, together with net income and cash flows, EBITDA provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. (7) FFO, as defined by NAREIT, represents net income (loss) before minority interests and extraordinary items, adjusted for depreciation on real property and amortization of tenant improvement costs and lease commissions, gains (losses) from the disposal of properties and FFO attributable to minority interests in consolidated joint ventures whose interests are not convertible into shares of Common Stock. The White Paper on Funds from Operations approved by the Board of Governors of NAREIT in March 1995 defines Funds from Operations as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization. Management considers FFO an appropriate measure of performance of an equity REIT because it is predicated on cash flow analyses. The Operating Partnership computes FFO in accordance with standards established by the White Paper, which may differ from the methodology for calculating FFO utilized by other REITs and, accordingly, may not be comparable to such other REITs. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of liquidity, nor is it indicative of funds available to fund cash needs, including the ability to make distributions.
FOR THE THREE MONTHS FOR THE YEAR ENDED ENDED DECEMBER 31, 1997 MARCH 31, 1998 ------------------------- ------------------------ AS ADJUSTED PRO FORMA HISTORICAL PRO FORMA ----------- ---------- ---------- ---------- Income from operations before minority interests............ $ 103,903 $ 107,345 $ 29,188 $ 29,973 Real estate related depreciation and amortization: Depreciation and amortization........................... 45,886 52,402 11,786 13,812 Furniture, fixtures and equipment depreciation.......... (173) (173) (104) (104) FFO attributable to minority interests...................... (2,207) (5,674) (575) (1,340) ---------- ---------- ---------- ---------- FFO..................................................... $ 147,409 $ 153,900 $ 40,295 $ 42,341 ========== ========== ========== ========== FFO per diluted unit........................................ $ 1.66 $ 1.71 $ 0.45 $ 0.47 ========== ========== ========== ========== Weighted average units outstanding (diluted)................ 88,698,719 89,805,163 88,839,192 89,933,343 ========== ========== ========== ==========
(8) The ratio of earnings to fixed charges is computed as income from operations before minority interests plus fixed charges (excluding capitalized interest) divided by fixed charges. Fixed charges consist of interest costs (including amortization of debt premiums and discounts and financing costs), whether capitalized or expensed, and the interest component of rental expense. (9) The book debt service coverage ratio is calculated as EBITDA divided by book interest expense (including amortization of debt premiums and discounts and financing costs). (10) The cash debt service coverage ratio is calculated as EBITDA divided by cash interest costs. Cash interest costs consist of book interest expense (excluding amortization of debt premiums and discounts and financing costs) plus capitalized interest. (11) Secured debt as of December 31, 1997 and March 31, 1998 includes unamortized debt premiums of approximately $18,286 and $17,542, respectively. See Notes to Consolidated Financial Statements. 10 RISK FACTORS An investment in the Notes involves various material risks. Prospective investors should carefully consider the following risk factors in connection with an investment in the Notes offered hereby. GENERAL REAL ESTATE RISKS Uncontrollable Factors Affecting Performance and Value 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 therewith. If the Properties do not generate income sufficient to meet operating expenses, including debt service and capital expenditures, the ability to make payments of principal of and interest on the Notes could be adversely affected. Income from, and the value of, the 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 in the area, the attractiveness of the Properties to potential tenants, competition from other industrial and retail properties, and the ability of the Company to provide adequate maintenance and insurance and increased operating costs (including insurance premiums, utilities and real estate taxes). In addition, revenues from properties and real estate values are also affected by such factors as the cost of compliance with regulations and the potential for liability under applicable laws, including changes in tax laws, interest rate levels and the availability of financing. The Company's income would be adversely affected if a significant number of tenants were unable to pay rent or if industrial or retail and other space could not be rented 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 investment. Concentration of Properties in California As of March 31, 1998, the Properties located in California represented approximately 24.0% of aggregate square footage and approximately 30.6% of aggregate Annualized Base Rent. The Company's revenue from, and the value of its Properties in, California may be affected by a number of factors, including the local economic climate (which may be adversely impacted by business layoffs or downsizing, industry slowdowns, changing demographics and other factors) and local real estate conditions (such as oversupply of or reduced demand for commercial properties). Therefore, the Company's performance and its ability to make payments of principal of and interest on the Notes will likely be dependent, in part, on economic conditions in California. Such Properties are also subject to possible loss from seismic activity. See "-- Uninsured Losses from Seismic Activity." Concentration of Properties in Industrial and Retail Sectors The Properties are and are likely to continue to be concentrated predominantly in the industrial and retail commercial real estate sectors, which as of March 31, 1998 represent 86.5% and 13.5%, respectively, of the Properties' aggregate rentable square footage. Such concentration may expose the Company to the risk of downturns in these sectors to a greater extent than if its portfolio also included other property types. Illiquidity of Real Estate Investments Because real estate investments are relatively illiquid, the Operating Partnership's ability to vary its portfolio promptly in response to economic or other conditions will be limited. The limitations in the Code and related regulations on a REIT holding property for sale may affect the Operating Partnership's ability to sell properties without adversely affecting the Operating Partnership's ability to make payments of principal of and interest on the Notes. Any of the foregoing factors or events will impede the ability of the Operating Partnership to respond to adverse changes in the performance of its investments and could have an adverse effect on the Operating Partnership's financial condition and results of operations and its ability to make payments of principal of and interest on the Notes. 11 Renewal of Leases and Reletting of Space The Operating Partnership will be 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 42.5% of the leased square footage as of March 31, 1998 in the Properties will expire on or prior to December 31, 2000, with leases on 12.9% of the leased square footage in the Properties expiring during the 12 months ending March 31, 1999. In addition, numerous properties compete with the Properties in attracting tenants to lease space, particularly with respect to retail properties. The number of competitive commercial properties in a particular area could have a material adverse effect on the Operating Partnership's ability to lease space in its Properties or newly-acquired properties and on the rents charged. If the Operating Partnership were unable to promptly relet or renew the leases for all or a substantial portion of this space, if the rental rates upon such renewal or reletting were significantly lower than expected or if its reserves for these purposes proved inadequate, the Operating Partnership's cash flow and ability to make payments of principal of and interest on the Notes could be adversely affected. See "Business and Properties -- Industrial Properties -- Industrial Property Lease Expirations -- Portfolio Total" and "-- Retail Properties -- Retail Property Lease Expirations -- Portfolio Total." Uninsured Loss The Operating Partnership carries comprehensive liability, fire, extended coverage and rental loss insurance covering all of its properties, with policy specifications and insured limits which the Operating Partnership believes are adequate and appropriate under the circumstances given relative risk of loss, the cost of such coverage and industry practice. There are, however, certain types and magnitudes of losses that are not generally insured because it is not economically feasible to insure against such losses, such as losses due to riots or acts of war, or may be insured subject to certain limitations including large deductibles or co-payments, such as losses due to floods or seismic activity. See "-- Uninsured Losses from Seismic Activity." Should an uninsured loss or a loss in excess of insured limits occur with respect to one or more of its properties, the Operating Partnership could lose its capital invested in such properties, as well as the anticipated future revenue from such properties and, in the case of debt which is with recourse to the Operating Partnership, the Operating Partnership would remain obligated for any mortgage debt or other financial obligations related to such properties. Uninsured Losses from Seismic Activity A number of both the Industrial and Retail Properties are located in areas that are known to be subject to earthquake activity, including in California where, as of March 31, 1998, 27 Industrial Properties aggregating 10.4 million rentable square feet representing 20.4% of the Properties based on aggregate square footage, and 11 Retail Properties, aggregating 1.8 million rentable square feet representing 3.6% of the Properties based on aggregate square footage, are located. The Operating Partnership carries replacement cost earthquake insurance on all of its Properties located in areas historically subject to seismic activity, subject to coverage limitations and deductibles which the Operating Partnership believes are commercially reasonable. Such insurance coverage also applies to the properties managed by AMB Investment Management, with a single aggregate policy limit and deductible applicable to such properties and the Operating Partnership's properties. Through an annual analysis prepared by outside consultants, the Operating Partnership evaluates its earthquake insurance coverage in light of current industry practice and determines the appropriate amount of earthquake insurance to carry. No assurance can be given, however, that material losses in excess of insurance proceeds will not occur or that such insurance will continue to be available at commercially reasonable rates. Impact on Control Over and Liabilities With Respect to Properties Owned Through Partnerships and Joint Ventures The Operating Partnership has ownership interests in five industrial and six retail joint ventures, limited liability companies or partnerships. The Operating Partnership may make investments through such ventures in the future and presently plans to do so with clients of AMB Investment Management, with respect to certain investment opportunities, who may share certain approval rights over major decisions. Under the 12 agreements governing the joint ventures, the Operating Partnership and the joint venture participant may be required to make additional capital contributions, and subject to certain limitations, the joint ventures may incur additional indebtedness. Such additional indebtedness would effectively be senior to the Notes. Partnership or joint venture investments may, under certain circumstances, involve risks such as the possibility that the Operating Partnership's partners or co-venturers might become bankrupt (in which event the Operating Partnership and any other remaining general partners or co-venturers would generally remain liable for the liabilities of such partnership or joint venture), that such partners or co-venturers might at any time have economic or other business interests or goals which are inconsistent with the business interests or goals of the Operating Partnership, or that such partners or co-venturers may be in a position to take action contrary to the instructions or the requests of the Operating Partnership or contrary to the policies or objectives of the Operating Partnership or the Company, including the Company's policy with respect to maintaining its qualification as a REIT. In addition, agreements governing joint ventures and partnerships often contain restrictions on the transfer of a joint venturer's or partner's interest or "buy-sell" or similar provisions which may result in a purchase or sale of such an interest at a disadvantageous time or on disadvantageous terms. The Operating Partnership will, however, seek to maintain sufficient control of such partnerships or joint ventures to permit the Operating Partnership's business objectives to be achieved. There is no limitation under the organizational documents of either the Operating Partnership or the Company as to the amount of available funds that may be invested in partnerships or joint ventures. The occurrence of one or more of the events described above could have an adverse effect on the Operating Partnership's financial condition and results of operations, and its ability to make payments of principal of and interest on the Notes. Possible Inability to Consummate Acquisitions on Advantageous Terms The Operating Partnership intends to continue to acquire industrial and 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 to bring an acquired property up to standards established for the market position intended for that property may prove inaccurate. In addition, there are general investment risks associated with any new real estate investment. Further, the Operating Partnership expects that there will be significant competition for attractive investment opportunities from other major real estate investors with significant capital including both publicly traded REITs and private institutional investment funds. The Operating Partnership anticipates that future acquisitions will be financed through a combination of borrowings under the Credit Facility, other forms of secured or unsecured financing and proceeds from equity or debt offerings by the Company or the Operating Partnership. No assurance can be given that the Operating Partnership will be able to acquire additional properties. In addition, no assurance can be given that any such acquisitions will be financed on terms favorable to the Operating Partnership, or that such additional properties, if any, will conform with management's expectations or investment criteria. Any one of the foregoing events could have an adverse effect on the Company's financial condition and results of operations, and its ability to make payments of principal of and interest on the Notes. Possible Inability to Complete Renovation and Development on Advantageous Terms The real estate development business, including the renovation and rehabilitation of existing properties, involves significant risks in addition to those involved in the ownership and operation of established industrial buildings and community shopping centers, including the risks that financing may not be available on favorable terms for development projects and construction may not be completed on schedule or within budget, resulting in increased debt service expense and construction costs and delays in leasing such properties and generating cash flow. Substantial renovation and new development activities are also subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy, and other required governmental permits and authorizations. Once completed, such new or renovated properties may perform below anticipated levels, producing cash flow below budgeted amounts. The occurrence of one or more of the foregoing in connection with the Operating Partnership's renovation and development activities could have an adverse effect on the Operating Partnership's financial condition and results of operations, and its ability to make payments of principal of and interest on the Notes. In addition, substantial renovation as well as new development activities, regardless of whether or not they are ultimately 13 successful, typically require a substantial portion of management's time and attention which could take management's time away from the day-to-day operations of the Operating Partnership. The Operating Partnership anticipates that future acquisitions will be financed through a combination of borrowings under the Credit Facility, other forms of secured or unsecured financing and proceeds from equity or debt offerings by the Company or the Operating Partnership. If such activities are financed through construction loans, there is a risk that, upon completion of construction, permanent financing may not be available or may be available only on disadvantageous terms which could have an adverse effect on the Operating Partnership's financial condition and results of operations, and its ability to make payments of principal of and interest on the Notes. LIMITED RESTRICTIONS ON TOTAL INDEBTEDNESS AND CHANGES OF CONTROL Other than the covenants restricting the ability of the Operating Partnership and its Subsidiaries to incur additional indebtedness discussed under "Description of Notes -- Certain Covenants," the Indenture does not contain provisions which would limit the total indebtedness that the Operating Partnership may incur, or protect the holders of Notes in the event of a change of control, reorganization, restructuring, merger or similar transaction involving the Operating Partnership. Such transactions could adversely affect the financial condition or results of operations of the Operating Partnership and result in a downgrade of the credit rating of the Notes, a loss in value of the Notes or an increase in the risk of default on payments of principal of or interest on the Notes. The Operating Partnership operates with a policy of incurring debt, either directly or through its Subsidiaries, only if upon such incurrence the Company's consolidated Debt-to-Total Market Capitalization Ratio would be approximately 45% or less. In addition, the aggregate amount of Indebtedness that the Operating Partnership and the Company may incur under such policy varies directly with the valuation of the Company's capital stock and the number of shares of capital stock outstanding. Accordingly, the Operating Partnership and the Company would be able to incur additional indebtedness as a result of increases in the market price per share of the Company's common stock or other outstanding classes of capital stock, and future issuance of shares of capital stock. Notwithstanding the foregoing policy, the organizational documents of the Company and the Operating Partnership do not contain any limitation on the amount of indebtedness that may be incurred. Accordingly, the Board of Directors could alter or eliminate this policy and would do so, for example, if it were necessary for the Company to continue to qualify as a REIT. If this policy were changed, the Operating Partnership could become more highly leveraged, resulting in an increase in debt service that could adversely affect the Operating Partnership's FFO and, consequently, the amount of cash available to the Operating Partnership for payments of principal of and interest on the Notes and could increase the risk of default on the Operating Partnership's indebtedness. DEBT FINANCING Debt Financing and Existing Debt Maturities The Operating Partnership will be subject to risks normally associated with debt financing, including the risk that its cash flow will be insufficient to make required payments of principal of and interest on the Notes, the risk that existing indebtedness on the Properties (which in all cases will not have been fully amortized at maturity) will not be able to be refinanced or that the terms of such refinancing will not be as favorable as the terms of existing indebtedness. See "Business and Properties -- Debt Financing." As of March 31, 1998, the Operating Partnership had an aggregate of $610.1 million of secured indebtedness with an average maturity of 7 years and a weighted average interest rate of 8.01%, and $312.0 million of borrowing outstanding under its Credit Facility with a maturity date of November 2000 and a weighted average interest rate of 6.9%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business and Properties -- Debt Financing." If principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, the Operating Partnership expects that its cash flow will not be sufficient in all years to make payments of principal of and interest on the Notes 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 14 estate loans) resulted in higher interest rates upon refinancing, the interest expense relating to such refinanced indebtedness would increase, which would adversely affect the Operating Partnership's cash flow and its ability to make payments of principal of and interest on the Notes. If a Property or Properties are mortgaged to secure payment of indebtedness and the Operating Partnership is unable to meet mortgage payments, the Property could be foreclosed upon or otherwise transferred to the mortgagee with a consequent loss of income and asset value to the Company which could have an adverse affect on the Operating Partnership's financial condition and liquidity and its ability to make payments of principal of and interest on the Notes. Impact of Rising Interest Rates and Variable Rate Debt As of March 31, 1998, the Operating Partnership had $312.0 million outstanding under its $500 million Credit Facility. The Operating Partnership may incur other variable rate indebtedness in the future. Increases in interest rates on such indebtedness could increase the Operating Partnership's interest expense, which would adversely affect its cash flow and ability to make payments of principal of and interest on the Notes. Accordingly, the Operating Partnership may in the future engage in transactions to further limit its exposure to rising interest rates to the extent that is believes such to be appropriate and cost effective. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Possible Impact of Defaults on Cross-Collateralized and Cross-Defaulted Debt As of March 31, 1998, the Operating Partnership had 12 non-recourse secured loans which are cross-collateralized by five pools consisting of 19 Properties. As of March 31, 1998, there was $211.2 million outstanding on such loans. Accordingly, if an event of default were to occur on any such loan, the Operating Partnership would be required to repay the aggregate of all indebtedness, together with applicable prepayment charges, in order to avoid foreclosure on all such Properties within the applicable pool. Foreclosure on such Properties, or the Operating Partnership's inability to refinance any such loan on terms as favorable as existing terms, would negatively impact its financial condition and results of operations. In addition, the Operating Partnership's Credit Facility contains defaults in the event that other material indebtedness of the Operating Partnership (including its non-recourse secured and joint venture debt) is in default. Such cross-default provision may require the Operating Partnership to repay or restructure the Credit Facility in addition to any mortgage or other debt which is in default, which could have an adverse effect on the Operating Partnership's financial condition and liquidity and its ability to make payments of principal of and interest on the Notes. RANKING OF THE NOTES The Notes will be direct, senior unsecured obligations of the Operating Partnership and will rank equally with all of the other unsecured and unsubordinated indebtedness of the Operating Partnership from time to time outstanding. However, the Notes are effectively subordinated to mortgages and other secured indebtedness of the Operating Partnership, which encumber certain assets of the Operating Partnership, and to all of the indebtedness of its subsidiaries (approximately $610.1 million as of March 31, 1998 on a pro forma basis). In addition, the Guarantees will be effectively subordinated to all of the mortgages and other secured indebtedness of the respective Guarantors and all of the outstanding liabilities of the Company's subsidiaries. As of March 31, 1998, on a pro forma basis giving effect to the Offering and the application of the proceeds therefrom, the total outstanding indebtedness of the Operating Partnership and its subsidiaries would have been approximately $980.0 million, of which $610.1 million was secured. As of March 31, 1998, the Company had no outstanding indebtedness (excluding the Company's guaranty of the Credit Facility) other than that of the Operating Partnership and its subsidiaries. Subject to certain limitations, each of the Operating Partnership and the Company may incur additional indebtedness. Although the Board of Directors has adopted a policy of limiting the Company's Debt-to-Total Market Capitalization Ratio to approximately 45%, neither the Operating Partnership's nor the Company's organizational documents limit the amount of indebtedness that each may incur. In addition, the aggregate amount of indebtedness that the Operating Partnership and the Company may incur under such policy varies directly with the valuation of the Company's capital stock and the number of shares of capital stock outstanding. Accordingly, the Operating Partnership 15 and the Company would be able to incur additional indebtedness as a result of increases in the market price per share of the Company's common stock or other outstanding classes of capital stock, and future issuance of shares of capital stock. See "-- No Limitations on Indebtedness," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Description of Notes -- Certain Covenants -- Aggregate Debt Test," "-- Debt Service Test" and "-- Secured Debt Test." The obligation of any Guarantor under its guarantee of the Notes may be subject to review under state or federal transfer laws in the event of a Guarantor's bankruptcy or other financial difficulty. Under those laws, in a lawsuit by an unpaid creditor or representative of creditors of a Guarantor, such as a trustee in bankruptcy, if a court were to find that when the Guarantor entered into its guarantee, it (a) received less than fair consideration or reasonably equivalent value therefor, and (b) either (i) was insolvent, (ii) was rendered insolvent, (iii) was engaged in a business or transaction for which its remaining unencumbered assets constituted unreasonably small capital, or (iv) intended to incur or believed that it would incur debts beyond its ability to pay as such debts matured, the court could void such Guarantor's guarantee and the Guarantor's obligations thereunder, and direct the return of any amounts paid thereunder to the Guarantor or to a fund for the benefit of its creditors. Moreover, regardless of the factors identified in the foregoing clauses (i) through (iv), a court could void a Guarantor's guarantee and direct such repayment if it found that such guarantee was entered into with actual intent to hinder, delay or defraud the Guarantor's creditors. To the extent that a Guarantor's obligation under its guarantee of the Notes exceeds the actual benefit that it receives from the issuance of the Notes, such Guarantor may be deemed not to have received fair consideration or reasonably equivalent value for its guarantee. The measure of insolvency for purposes of the foregoing will vary depending on the law of the jurisdiction being applied. Generally, however, an entity would be considered insolvent if the sum of its debts (including contingent or unliquidated debts) is greater than all of its property at a fair valuation or if the present fair salable value of its assets is less than the amount that will be required to pay its probable liability on its existing debts as they become absolute and matured. OPTIONAL REDEMPTION OF THE 2008 NOTES OR THE 2018 NOTES The 2008 Notes and the 2018 Notes may each be redeemed in whole, or from time to time in part, at the option of the Operating Partnership on any date as provided in "Description of Notes -- Redemption of the 2008 Notes and the 2018 Notes at the Option of the Operating Partnership." The price at which the 2008 Notes and the 2018 Notes may be redeemed includes a redemption premium designed to compensate the holders for loss of interest rate yield caused by such early redemption. However, no assurance can be given that the redemption premium will fully compensate investors for all costs and expenses (including decreased yields on reinvestments) incurred as a result of the Operating Partnership's exercise of its optional redemption of either the 2008 Notes or the 2018 Notes. CONTINGENT OR UNKNOWN LIABILITIES The AMB Predecessors have been in existence for varying lengths of time up to 15 years. In the Formation Transactions, the Company acquired the assets of certain entities previously managed by or affiliated with the AMB Predecessor entities including CIF, VAF, AMB and WPF, and certain assets of the Individual Account Investors, subject to all of the potential existing liabilities of such predecessor entities. There can be no assurances that there are no current liabilities and will not be any future liabilities arising from prior activities that are unknown and therefore not disclosed in this Prospectus. Such liabilities have been assumed by the Company as the surviving entity in the various merger and contribution transactions that comprise the Formation Transactions or as general partner of the Operating Partnership. Existing liabilities for indebtedness generally were taken into account (directly or indirectly) in connection with the allocation of the shares of Common Stock and/or Units in the Formation Transactions, but no other liabilities were taken into account for such purposes. The Company does not have recourse against CIF, VAF, AMB or WPF or any of their respective stockholders or partners or against the Individual Account Investors with respect to any unknown liabilities except to the extent provided by the indemnity escrow entered into in connection with the Formation Transactions. Unknown liabilities might include liabilities for clean-up or remediation of undisclosed environmental conditions, claims of tenants, vendors or other persons dealing with the entities prior to 16 the Formation Transactions (that had not been asserted prior to the Formation Transactions), accrued but unpaid liabilities incurred in the ordinary course of business, and claims for indemnification by the officers and directors of CIF, VAF and AMB and others indemnified by such entities, including clients of AMB. Certain tenants may claim that the Formation Transactions give rise to a right to purchase such premises occupied by such tenants. The Company does not believe any such claims would be material. See "-- Government Regulations -- Environmental Matters" below as to the possibility of undisclosed environmental conditions potentially affecting the value of the Properties. The existence of undisclosed material liabilities which are not covered by the indemnity escrow could have an adverse effect on the Company's financial condition and results of operations, and its ability to make payments of principal of and interest on the Notes. CONFLICTS OF INTEREST Continued Involvement of Executive Officers in Other Real Estate Activities and Investments Certain Executive Officers own interests in certain real estate-related businesses and investments which will continue following the Offering. Such interests include minority ownership of Institutional Housing Partners, a residential housing finance company (through AMB Institutional Housing Partners); and ownership of AMB Development, Inc. and AMB Development L.P., developers which own property that management believes is not suitable for ownership by the Company. Neither AMB Development, Inc. nor AMB Development L.P. has initiated any new development projects since completion of the IPO, nor will they initiate any new development projects following the Offering, nor will they make any further investments in industrial or retail properties following the Offering other than those currently under development. Such persons are also owners of AMB Corporate Real Estate Advisors, Inc. ("AMBCREA"), which is principally a real estate services company for corporate and professional tenants of real estate. AMBCREA is in the process of winding down its business, and it is presently anticipated that AMBCREA will cease operations by June 30, 1998. However, the continued involvement by the Executive Officers and the Company's directors could divert management's attention from the day-to-day operations of the Operating Partnership. Each person who was an Executive Officer upon completion of the IPO entered into a non-competition agreement with the Operating Partnership pursuant to which, among other things, such individuals agreed not to engage in any activities, directly or indirectly, in respect of commercial real estate, and agreed not 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 herein. AMBCREA, AMB Institutional Housing Partners, AMB Development, Inc. and AMB Development, L.P. continue to use the name "AMB" pursuant to royalty-free license arrangements with the Company. In addition, until cessation of its operations, AMBCREA will continue to use office space leased by AMBI, an affiliate of the Executive Officers, for a fee equal to such affiliate's allocated cost thereof. The Operating Partnership may continue to provide certain administrative services to AMBCREA at arm's-length charges. See "Certain Relationships and Related Transactions." Such activities could also, in the future, subject to the unanimous approval of the disinterested directors, involve acquisitions of property from such Executive Officers, additional leases between such Executive Officers and the Operating Partnership, and/or other related activities in which the interests pursued by such Executive Officers may not be in the best interests of the holders of the Notes. Conflicts of Interest in Connection with Properties Owned or Controlled by Executive Officers and Directors AMB Development L.P. owns interests in 11 retail development projects in the U.S., each of which consists of a single free-standing Walgreens drugstore, and, together with other entities controlled by nine of the Executive Officers, a low income housing apartment building located in the San Francisco Bay Area. In addition, Messrs. Abbey, Moghadam and Burke, each a founder, Executive Officer and director of the Company, 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. 17 In addition, several of the Executive Officers individually own: (i) less than 1% interests in the stocks of certain publicly-traded REITs, including mortgage REITs, and residential developers; (ii) certain interests in and rights to developed and undeveloped real property located outside the United States; (iii) interests in single-family homes and residential apartments in the San Francisco Bay Area; (iv) certain passive interests, not believed to be material, in real estate businesses in which such persons were previously employed; and (v) certain other de minimis holdings in equity securities. Thomas W. Tusher, a member of the Company'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 March 31, 1998 at approximately $939,000. Messrs. Abbey, Moghadam and Burke each have an approximately 26.7% interest in the partnership, each valued as of March 31, 1998 at approximately $1,252,000. The Operating Partnership believes that the properties and activities set forth above generally do not directly compete with any of the Properties; however, it is possible that a property in which an Executive Officer or the Company's director, or an affiliate of such person, has an interest may compete with the Operating Partnership in the future if the Operating Partnership were to invest in a property similar and in close proximity to such property. However, the continued involvement by the Operating Partnership's Executive Officers in such properties could divert management's attention from the day-to-day operations of the Operating Partnership. The Operating Partnership is prohibited from acquiring any properties from the Executive Officers or their affiliates without the approval of the Company's disinterested directors. See "Policies With Respect to Certain Activities -- Conflict of Interest Policies." Conflicts Relating to the Operating Partnership The Company, as the general partner of the Operating Partnership, has fiduciary obligations to the limited partners in the Operating Partnership, the discharge of which may conflict with the interests of the Company's stockholders. In addition, those persons holding Units, as limited partners, will have the right to vote as a class on certain amendments to the Partnership Agreement of the Operating Partnership (the "Partnership Agreement") and individually to approve certain amendments that would adversely affect their rights, which voting rights may be exercised in a manner that conflicts with the interests of the Company, its stockholders and the holders of Notes. In addition, under the terms of the Partnership Agreement, the holders of Units (including Performance Units issuable to the Executive Officers) will have certain approval rights with respect to certain transactions that affect all holders of Notes but which may not be exercised in a manner which reflects the interests of all holders of Notes. See "Description of Certain Provisions of the Partnership Agreement of the Operating Partnership -- Removal of General Partner; Transferability of the Company's Interests; Treatment of Units in Significant Transactions." Influence of Directors, Executive Officers and Significant Stockholders The Company's three largest stockholders, Ameritech Pension Trust, the City and County of San Francisco Employees' Retirement System and Southern Company System Master Retirement Trust, beneficially own approximately 29.3% of the outstanding Common Stock (assuming the exchange of all Units into shares of Common Stock). In addition, the Executive Officers and directors own approximately 5.0% of the Common Stock (assuming the exchange of all Units into shares of Common Stock, before issuance of any Performance Units), and will have influence on the management and operation of the Operating Partnership and the Company and, as stockholders, on the outcome of any matters submitted to a vote of the stockholders. Such influence might be exercised in a manner that is inconsistent with the interests of other stockholders and the holders of Notes. Although there is no understanding or arrangement for these directors, officers and stockholders and their affiliates to act in concert, such parties would be in a position to exercise significant influence over the Company's affairs and those of the Operating Partnership should they choose to do so. See "Management" and "Principal Stockholders." 18 Failure to Enforce Terms of Certain Agreements As holders of shares of outstanding Common Stock and, potentially, Performance Units, certain of the Company's directors and certain of the Executive Officers will have a conflict of interest with respect to their obligations as directors and Executive Officers to vigorously enforce the terms of the agreements relating to the Formation Transactions. The potential failure to enforce the material terms of those agreements could result in a monetary loss to the Company and the Operating Partnership, which loss could have a material adverse effect on the Operating Partnership's and the Company's financial condition or results of operations and the Operating Partnership's ability to make payments of principal of and interest on the Notes. Conflicts Relating to Use of Proceeds The Operating Partnership intends to use the net proceeds from the sale of the Notes offered hereby to repay indebtedness outstanding under the Credit Facility and for general corporate purposes. Morgan Guaranty Trust Company of New York, an affiliate of J.P. Morgan Securities Inc., one of the Underwriters, is the agent and a lender under the Credit Facility. As a result of this affiliation, J.P. Morgan Securities Inc. has an indirect interest in the repayment of the amounts outstanding under the Credit Facility in addition to its role as an Underwriter in the Offering. See "Use of Proceeds" and "Underwriters." AMB INVESTMENT MANAGEMENT Adverse Consequences of Lack of Control Over the Business of AMB Investment Management To comply with the REIT asset tests that restrict ownership of shares of other corporations, the Operating Partnership owns 100% of the non-voting preferred stock of AMB Investment Management (representing approximately 95% of its economic interest) and certain of the Company's Executive Officers own all of the outstanding voting common stock of AMB Investment Management (representing approximately 5% of its economic interest). This ownership structure is necessary to permit the Company to share in the income of AMB Investment Management while maintaining its status as a REIT. Although the Company receives substantially all of the economic benefit of the business carried on by AMB Investment Management through the Company's right to receive dividends through the Operating Partnership, the Company is not able to elect directors or officers of AMB Investment Management and, therefore, the Company does not have the ability to influence the operation of AMB Investment Management or require that AMB Investment Management's board of directors declare and pay a cash dividend on the nonvoting stock of AMB Investment Management held by the Operating Partnership. As a result, the board of directors and management of AMB Investment Management might implement business policies or decisions that would not have been implemented by persons controlled by the Company and that are adverse to the interests of the Operating Partnership or that lead to adverse financial results, which could adversely impact the Operating Partnership's net operating income and cash flows and the ability of the Operating Partnership to make payments of principal of and interest on the Notes. In addition, AMB Investment Management will be subject to tax on its income, reducing its cash available for distribution. Uncertainty of AMB Investment Management Operations Fees earned by AMB Investment Management are dependent upon various factors, including factors beyond the control of the Company and the Operating Partnership, affecting the ability to attract and retain investment management clients and the overall returns achieved on managed assets. Failure of AMB Investment Management to attract investment management clients or achieve sufficient overall returns on managed assets would reduce its ability to make distributions on the nonvoting preferred stock owned by the Operating Partnership. Such failure would also limit co-investment opportunities to the Operating Partnership and, as a result, 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. 19 GOVERNMENT REGULATIONS Many laws and governmental regulations are applicable to the 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 of 1990 (the "ADA"), all places of public accommodation are required to meet certain Federal requirements related to access and use by disabled persons. Compliance with the ADA might require removal of structural barriers to handicapped access in certain public areas where such removal is "readily achievable." Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. The impact of application of the ADA to the Properties, including the extent and timing of required renovations, is uncertain. If required changes involve a greater amount of expenditures than the Operating Partnership currently anticipates or if the changes must be made on a more accelerated schedule than the Operating Partnership currently anticipates, its ability to make payments of principal of and interest on the Notes could be adversely affected. Environmental Matters Under Federal, state and local laws and regulations relating to the protection of the environment ("Environmental Laws"), a current or previous owner or operator of real estate may be liable for contamination resulting from the presence or discharge of hazardous or toxic substances or petroleum products at such property, and may be required to investigate and clean up such contamination at such property or such contamination which has migrated from such property. Such 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, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. In addition, the owner or operator of a site may be subject to claims by third parties 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 a site. Environmental Laws also govern the presence, maintenance and removal of asbestos-containing building materials ("ACBM"). Such laws require that ACBM be properly managed and maintained, that those who may come into contact with ACBM be adequately apprised or trained and that special precautions, including removal or other abatement, be undertaken in the event ACBM is disturbed during renovation or demolition of a building. Such 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 the Properties may contain ACBM. Some of the 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 the 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 the 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. All of the 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 20 written report, but do not include soil sampling or subsurface investigations and typically do not include an asbestos survey. Some of the Operating Partnership's environmental assessments of the Properties do not contain a comprehensive review of the past uses of the Properties and/or the surrounding properties. None of the Operating Partnership's environmental assessments of the Properties has revealed any environmental liability that the Operating Partnership believes would have a material adverse effect on its financial condition or results of operations taken as a whole, nor is it aware of any such material environmental liability. Nonetheless, it is possible that the Operating Partnership's assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which the Operating Partnership is unaware. In addition, only certain of such assessments were updated for purposes of the IPO, and less than 50% of the Properties have environmental assessments which are more than two years old. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the Properties will not be affected by tenants, by the condition of land or operations in the vicinity of the Properties (such as releases from underground storage tanks), or by third parties unrelated to the Operating Partnership. If the costs of compliance with the various environmental laws and regulations, now existing or hereafter adopted, exceed the Operating Partnership's budgets for such items, the Operating Partnership's ability to make payments of principal of and interest on the Notes could be adversely affected. Other Regulations The Properties are also subject to various Federal, state and local regulatory requirements such as state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. The Operating Partnership believes that the Properties are currently in substantial compliance with all such regulatory requirements. However, there can be no assurance that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by the Operating Partnership, which expenditures could have an adverse effect on the Operating Partnership's financial condition and results of operations and its ability to make payments of principal of and interest on the Notes. UNITED STATES FEDERAL INCOME TAX RISK The Operating Partnership intends to treat the REPS in the manner described under the caption "Certain Federal Income Tax Considerations Relating To The REPS -- Treatment of REPS." It is possible, however, that the Internal Revenue Service (the "Service") could successfully assert an alternate tax treatment for the REPS, in which event holders of REPS may be required (i) to use an accrual method of tax accounting with respect to the REPS (regardless of their usual method of tax accounting), (ii) to include amounts in taxable income in excess of actual cash payments received with respect to the REPS and (iii) to recognize ordinary income or loss rather than capital gain or loss upon the sale or other taxable disposition of the REPS. See "Certain Federal Income Tax Considerations Relating to the REPS -- Treatment of REPS." ABSENCE OF MARKET FOR THE NOTES The Notes will be new securities for which there is currently no market. Although the Underwriters have informed the Operating Partnership that they currently intend to make a market in the Notes, they are not obligated to do so and any such market-making may be discontinued at any time without notice. If an active market does not develop, the market price and liquidity of the Notes may be materially and adversely affected. Neither the Company nor the Operating Partnership intends to apply for listing of the Notes on any securities exchange or to seek approval for quotation through any automated quotation system. There can be no assurance that an active market for these securities will develop and no assurance can be given as to the prices at which such securities might trade. In particular, there can be no assurance that the market price for the Notes will be at or above the purchase price of the Notes. The liquidity of, and trading market for, the Notes may also be materially and adversely affected by declines in the market for debt securities generally. Such a decline may materially and adversely affect such liquidity and trading independent of the financial performance of, and prospects for, the Operating Partnership. 21 THE COMPANY AND THE OPERATING PARTNERSHIP GENERAL AMB Property, L.P. was organized in November 1997 and commenced operations in connection with the completion of the IPO and the consummation of the Formation Transactions in November 1997. AMB Property Corporation is one of the largest publicly-traded real estate companies in the United States. The Company owns 159 Properties, comprised of 122 Industrial Properties and 37 Retail Properties located in 28 markets throughout the United States. The Industrial Properties (comprising 427 buildings), principally warehouse distribution properties, encompass approximately 45.3 million rentable square feet and, as of March 31, 1998, were 94.6% leased to over 1,000 tenants. The Retail Properties, principally grocer-anchored community shopping centers, encompass approximately 6.8 million rentable square feet and, as of the same date, were 94.6% leased to over 900 tenants. See "Business and Properties." The Operating Partnership conducts substantially all of the Company's activities and owns substantially all of the economic interests in the Properties. As of March 31, 1998, the Company owned an approximate 95.9% general partner interest in the Operating Partnership, with the remaining 4.1% limited partner interest owned by nonaffiliated investors. As the sole general partner of the Operating Partnership, the Company has control over the management of the Operating Partnership and over each of the 116 Properties (comprising approximately 36.9 million rentable square feet) owned directly by the Operating Partnership. The Operating Partnership owns 99% of the economic interests in the remaining 43 Properties (comprising approximately 15.2 million rentable square feet) through AMB Property II, L.P., a Delaware limited partnership, and Long Gate LLC, a Delaware limited liability company, and the Company (through a wholly owned subsidiary) owns a 1% interest. The Operating Partnership is engaged in the business of acquiring and operating industrial properties and community shopping centers in target markets nationwide. The Operating Partnership and the Company are led by Mr. Moghadam, its Chief Executive Officer and one of the three founders of the Company. Messrs. Abbey and Burke, the other two founders, also play active roles in the operations of the Operating Partnership and the Company as the Chairman of the Operating Partnership's Investment Committee and the Chairman of the Company's Board of Directors, respectively. The Operating Partnership's ten executive officers have an average of 22 years of experience in the real estate industry and have worked together for an average of eight years building the AMB real estate business. The Operating Partnership and the Company employ 123 individuals, 99 of whom are located in the San Francisco headquarters and 24 in the Boston office. The Company operates as a self-administered and self-managed real estate company and expects that it has qualified and that it will continue to qualify as a REIT for federal and state income tax purposes beginning with the year ended December 31, 1997. RECENT DEVELOPMENTS Acquisitions. From April 1, 1998, to May 8, 1998, the Company acquired operating properties with an aggregate purchase price of $56.7 million. The properties acquired are comprised of four Industrial Properties representing 12 buildings and 1.3 million rentable square feet. Quarterly Distributions. On March 6, 1998, the Board of Directors of the Company, in its capacity as general partner of the Operating Partnership, declared a distribution of $0.3425 per partnership unit, payable April 3, 1998 to partners of record on March 18, 1998. In addition, the Company's Board of Directors declared a distribution of $0.3425 per share of the Common Stock, payable April 3, 1998 to stockholders and unitholders of record on March 18, 1998. 22 Investment-Grade Credit Rating. The Company recently received credit ratings for its unsecured debt of Baa1 from Moody's Investors Service, BBB from Standard & Poors Corporation and BBB+ from Duff & Phelps Credit Rating Co. As a result of the receipt of the investment-grade credit ratings, the interest rate on the Operating Partnership's unsecured revolving Credit Facility was reduced by 20 basis points to LIBOR plus 90 basis points. Each of the Company, the Operating Partnership and AMB Property II, L.P. were formed in connection with the Formation Transactions in November, 1997. Long Gate LLC was formed on July 18, 1995 and acquired by the Company in connection with the Formation Transactions. The principal executive offices of the Company, the Operating Partnership, AMB Property II, L.P. and Long Gate LLC are located at 505 Montgomery Street, San Francisco, California 94111, and their telephone number is (415) 394-9000. The Company also maintains a regional office in Boston, Massachusetts. 23 BUSINESS AND OPERATING STRATEGIES The Operating Partnership focuses its investment activities in industrial hub distribution markets and retail trade areas throughout the U.S. where management believes opportunities exist to acquire and develop additional properties on an advantageous basis. The Operating Partnership's operations are conducted through its 123 employees, 99 of whom are located in its San Francisco headquarters and 24 of whom are located in its Boston office. The Operating Partnership is a full-service real estate company with in-house expertise in acquisitions, development and redevelopment, asset management and leasing, finance and accounting and market research. The Operating Partnership has long-standing relationships with most of the real estate management firms across the country which provide local property management and leasing services to the Operating Partnership on a fee basis. See "-- Property Management." NATIONAL PROPERTY COMPANY The Operating Partnership owns 159 Properties located in 28 markets throughout the U.S. The Operating Partnership believes that its national strategy enables it to (i) increase or decrease investments in certain regions to take advantage of the relative strengths in different real estate markets; (ii) retain and accommodate tenants as they consolidate or expand, particularly in its Industrial Properties; and (iii) build brand awareness as well as customer loyalty through the delivery of consistent service and quality product. Through its presence in markets throughout the U.S., the Operating Partnership has also developed operating expertise in leasing, expense management, tenant retention strategies and property design and configuration. TWO COMPLEMENTARY PROPERTY TYPES Management believes its strategy of owning and operating both industrial properties and community shopping centers offers the Operating Partnership an optimal combination of growth opportunities, strong current income and increased stability through market cycles. The Operating Partnership has developed the expertise, infrastructure and management information systems to acquire, reposition, develop and operate these two property types. Management believes that its dual property strategy enables the Operating Partnership to allocate capital and organizational resources between property types according to changing market conditions and its investment strategy. SELECT MARKET FOCUS The Operating Partnership intends to continue its strategy of investing in industrial hub distribution markets and retail trade areas across the country to capitalize on changes in the relative economic strength of these regions. The Operating Partnership focuses on acquiring, redeveloping and operating properties in in-fill locations which are characterized by limited new construction opportunities. As the strength of these markets continues to grow and the demand for well-located properties increases, the Operating Partnership believes that it will benefit from an upward pressure on rents resulting from the increased demand combined with the relative lack of new available space. The Operating Partnership intends to continue to focus its industrial property investment activities in six hub markets which dominate national warehouse distribution activities: Atlanta, Chicago, Dallas/Fort Worth, Los Angeles, Northern New Jersey and the San Francisco Bay Area. Among the nation's 53 major industrial markets tracked by CB Commercial/Torto Wheaton Research, these six markets accounted for approximately (i) 36% of the warehouse property inventory as of December 31, 1997 and (ii) for the three-year period ended December 31, 1997, an average of 36% of industrial property net absorption. In addition, such hub markets contain approximately 54% of the Industrial Properties based on aggregate square footage. The Operating Partnership also invests in selected regional distribution markets including Boston, Houston, Miami, Minneapolis, San Diego, Seattle and Baltimore/Washington, D.C. The Operating Partnership focuses on these established industrial markets because management believes they offer large and broadly diversified tenant bases which provide greater demand for properties over market cycles than secondary markets. In-fill locations within these markets also typically have significant barriers to new construction, including geographic or regulatory supply constraints, and benefit from access to large labor supplies and well-developed 24 transportation networks. See "Business and Properties -- Industrial Properties -- Overview of Major Target Markets." PROPERTY MANAGEMENT The Operating Partnership actively manages its properties through its experienced staff of 16 regional managers, each of whom specializes in the management of industrial properties or community shopping centers in designated markets. Regional, market and property-type focus provides regional managers with extensive knowledge of real estate trends and supply and demand activity in their markets as well as an effective network of local contacts who provide sources for market data, leads for new tenants and property acquisitions, and opportunities to enhance the value of the Properties. The Operating Partnership typically outsources property management to a select group of third-party local managers with whom the Operating Partnership has developed strong relationships. The Operating Partnership's regional managers have broad responsibilities that include implementing an annual business plan for each property, formulating leasing strategies, establishing leasing terms and conditions, negotiating leases, approving and monitoring leases and capital expenditures, planning and implementing renovation, expansion and development, establishing annual operating and capital budgets and effecting dispositions. The Operating Partnership's regional managers utilize local leasing agents to identify prospective tenants and document lease transactions. Third-party local property service providers are engaged to oversee custodial property matters such as rent collection, tenant requests, maintenance and repair, and supervision of cleaning and security services. The Operating Partnership monitors the performance of its properties on a daily basis through the use of its proprietary asset information system. This management tool enables the Operating Partnership not only to monitor the operating performance of a property (and the local property manager), but also to review and communicate strategic initiatives to the local property manager on a real-time basis and to compare the property's performance to on-line budgets and objectives. The Operating Partnership also monitors the tenant service performance of its service providers in order to ensure high quality and uniform service to its tenants. Management believes that its approach to property management and its relationships with third-party property management companies enable the Operating Partnership to more effectively manage fixed operating costs associated with a national portfolio. By employing third-party local property managers which management believes to be among the best in their respective market, the Operating Partnership can enter and exit markets efficiently without the administrative burden of retaining a large staff. Since the Operating Partnership is the customer, rather than the competitor, of third-party management firms, these firms are also a source of new acquisition opportunities in the respective markets, thus providing the Operating Partnership with greater access to transaction flow. Management believes this approach also gives the Operating Partnership a competitive advantage in capitalizing on the increasing trend among corporations to outsource their real estate service requirements to property management companies. From January 1, 1995 through March 31, 1998, the weighted average tenant retention rate of the Properties managed by AMB, the Company's Predecessor, and owned by the Operating Partnership upon consummation of the Formation Transactions was approximately 72.9% for the Industrial Properties and approximately 83.5% for the Retail Properties, based on aggregate square footage. See "Business and Properties -- Historical Lease Renewals and Retention Rates." Management believes that these tenant retention rates reflect the success of the Operating Partnership's and the Company's operating and tenant service-driven property management strategy. DISCIPLINED INVESTMENT PROCESS During its 14-year history prior to the completion of the Formation Transactions and consummation of the IPO, AMB established a disciplined approach to the investment process through operating divisions that are subject to the overall policy direction of management's investment committee (the "Investment Committee"). The stages in the investment process are highly integrated, with Investment Committee review at critical points in the process. 25 Approval of each investment is the responsibility of the Investment Committee with sponsorship from both the acquisitions officer and regional manager who will be responsible for managing the property. The initial investment recommendation is thoroughly discussed, and approval is required in order to proceed to contract and full due diligence. The approach to offer terms and transaction structure is determined as part of the initial approval and is the responsibility of the acquisitions officer. The regional manager is involved in providing and verifying underwriting assumptions and developing the operating strategy. After the due diligence review and before removing conditions to the contract, a final Investment Committee recommendation is prepared by the acquisition and asset management team. The Investment Committee conducts a complete review of the information developed during the due diligence process and either rejects or gives final approval. AMB also established proprietary systems and procedures to manage and track a high volume of acquisition proposals, transactions and important market data. This includes an on-line open issues database that provides the Operating Partnership with current information on the status of each transaction, highlighting the issues that must be addressed prior to closing, and a database that includes and compiles data on all transaction proposals and markets reviewed by the Operating Partnership. RENOVATION, EXPANSION AND DEVELOPMENT The multidisciplinary background of the Operating Partnership's employees provides it with the skills and experience to capitalize on strategic renovation, expansion and development opportunities. Several of the Operating Partnership's officers have extensive experience in real estate development, both at AMB and with national development firms. The Operating Partnership generally pursues development projects in joint ventures with local developers. In this way, the Operating Partnership leverages the development skill, access to opportunities and capital of such developers, transferring a significant amount of the development risk to them and eliminating the need and expense of an in-house development staff. See "Strategies for Growth -- Growth Through Renovation, Expansion and Development." FINANCING STRATEGY In order to maintain financial flexibility and facilitate the rapid deployment of capital over market cycles, the Operating Partnership intends to operate with a Debt-to-Total Market Capitalization Ratio of less than 45%. Additionally, the Operating Partnership intends to continue to structure its balance sheet in order to maintain an investment grade rating on its senior unsecured debt. The Operating Partnership also intends to keep the majority of its assets unencumbered to help facilitate such rating. Upon consummation of the Offering, the Company's consolidated Debt-to-Total Market Capitalization Ratio as of March 31, 1998 on a pro forma basis would have been approximately 31.2% (approximately 29.9% on an historical basis). See "Policies with Respect to Certain Activities -- Financing Policies." The Operating Partnership anticipates that future acquisitions will be financed through a combination of borrowings under the Credit Facility, other forms of secured or unsecured financing and proceeds from equity or debt offerings by the Company or the Operating Partnership. Additionally, the Operating Partnership's co-investment program will also serve as a source of capital, particularly when more traditional sources of capital may not be available on attractive terms. See "-- AMB Investment Management." Borrowings under the Credit Facility bear interest at a rate equal to LIBOR plus 90 to 120 basis points (currently LIBOR plus 90 basis points), depending upon the Operating Partnership's debt rating at the time of such borrowings. The Operating Partnership expects to continue to use the Credit Facility for acquisitions and for general corporate purposes. As of March 31, 1998, $312.0 million was outstanding under the Credit Facility with $148.0 million of availability. Of the $312.0 million outstanding at March 31, 1998, substantially all of such borrowings were used to finance property acquisitions. See "Management's Discussion of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business and Properties -- Debt Financing." 26 AMB INVESTMENT MANAGEMENT AMB Investment Management provides real estate investment management services on a fee basis to certain clients of AMB, the Company's predecessor, which did not participate in the Formation Transactions. The Operating Partnership presently intends to co-invest with clients of AMB Investment Management, to the extent such clients newly commit investment capital, through partnerships, limited liability companies and joint ventures. The Operating Partnership uses a co-investment formula with each client whereby the Operating Partnership will own at least a 20% interest in all ventures. As of March 31, 1998, the Operating Partnership had consummated one co-investment transaction. See "Business and Properties -- Properties Held Through Joint Ventures, Limited Liability Companies and Partnerships." AMB Investment Management is owned by the Operating Partnership, which owns 100% of the non-voting preferred stock (representing a 95% economic interest therein), and certain officers of AMB Investment Management and the executive officers of the Company, who collectively own 100% of the voting common stock (representing a 5% economic interest therein). 27 STRATEGIES FOR GROWTH The Company intends to achieve its growth objectives of long-term sustainable growth in FFO per share and maximization of long-term stockholder value, principally by growth through (i) operations, resulting from improved operating margins within the portfolio while maintaining above-average occupancy, (ii) continued property acquisitions, including through the co-investment program of AMB Investment Management and (iii) renovation, expansion and development of selected properties. GROWTH THROUGH OPERATIONS As of March 31, 1998, the Industrial Properties owned as of such date were 94.6% leased and the Retail Properties owned as of such date were 94.6% leased. The Operating Partnership will seek to improve operating margins by taking advantage of the economies of owning, operating and growing a large-scale national portfolio. During the 12 months ended March 31, 1998, the Operating Partnership increased average rental rates by 12.3% from the expiring rent for such space, on 263 leases entered into or renewed during the 12 months ended March 31, 1998, representing 5.5 million rentable square feet or 10.9% of the aggregate rentable square footage of the Properties. During the 12 months ended March 31, 1999, leases encompassing an aggregate of 10.3 million rentable square feet (representing 20.3% of the Operating Partnership's aggregate rentable square footage as of March 31, 1998) are subject to contractual rent increases resulting in an average rent increase per rentable square foot of $1.28, or 5.9%. Based on recent experience and current market trends, management believes it will have an opportunity to increase the average rental rate on Property leases expiring during the nine months ended December 31, 1998 covering an aggregate of 5.2 million rentable square feet. The Operating Partnership will seek to reduce the potential volatility of the portfolio's FFO by managing lease expirations so that they occur within individual properties and across the entire portfolio in a staggered fashion, and by monitoring the credit and mix of tenants, particularly those in the Retail Properties. GROWTH THROUGH ACQUISITIONS Since December 31, 1997, the Company has acquired 27 properties comprising 8.6 million square feet. The Operating Partnership believes its significant acquisition experience and its extensive network of property acquisition sources will continue to provide opportunities for external growth. Management believes that there is a growing trend among large private institutional holders of real estate assets to shift a portion of their direct investment in real estate assets to more liquid securities such as common stock and units in publicly-traded REITs. The Operating Partnership has relationships with a number of the nation's leading pension funds and other institutional investors, many of whom have large portfolios of industrial properties and community shopping centers. Management believes that the Operating Partnership's relationship with third-party local property managers also will create acquisition opportunities as such managers market properties on behalf of unaffiliated sellers. The Operating Partnership also will maintain relationships with institutional owners of property portfolios managed by AMB Investment Management. The Operating Partnership believes that through these relationships it will have opportunities to acquire portfolios in exchange for equity interests in the Operating Partnership, and will be well-positioned to facilitate such investors' shift from private to public real estate ownership. See "Business and Operating Strategies -- AMB Investment Management." The structure of the Operating Partnership also provides sellers the opportunity to contribute properties to the Operating Partnership on a tax-deferred basis in exchange for Units. The Operating Partnership believes that its ability to offer tax-deferred transactions to sellers will enhance its attractiveness to owners and developers seeking to transfer properties on a tax-deferred basis. GROWTH THROUGH RENOVATION, EXPANSION AND DEVELOPMENT Management believes that renovation and expansion of value-added properties and development of well-located, high quality industrial properties and community shopping centers will continue to provide the Operating Partnership with attractive opportunities for increased cash flow and a higher rate of return than may be obtained from the purchase of fully leased, renovated properties. Value-added properties are typically 28 characterized as properties with available space or near-term leasing exposure, properties which are well-located but require redevelopment or renovation, and occasionally undeveloped land acquired in connection with another property that provides an opportunity for development. Such properties require significant management attention and/or capital investment to maximize their return. USE OF PROCEEDS The net proceeds from the Offering are expected to be approximately $348.8 million, after deducting net Underwriters' discounts and commissions and estimated offering expenses of approximately $1.2 million. The Operating Partnership intends to use the net proceeds to repay approximately $348.8 million of borrowings outstanding under the Credit Facility, which was incurred to fund property acquisitions. Pending application of the net proceeds, the Operating Partnership may invest such portion of the net proceeds in interest-bearing accounts and short-term, interest-bearing securities which are consistent with the Company's qualification for taxation as a REIT. As of March 31, 1998, the weighted average interest rate on such borrowings expected to be repaid with the net proceeds of the Offering was approximately 6.9% and the maturity was approximately 2.6 years. All of such indebtedness was incurred within the 12-month period ended March 31, 1998. PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY The Common Stock began trading on the New York Stock Exchange (the "NYSE") on November 21, 1997 under the symbol "AMB." On May 14, 1998, the last reported sales price per share of the Common Stock on the NYSE was $23 1/2. As of May 14, 1998, there were approximately 171 holders of record of the Common Stock (excluding beneficial owners whose shares are held in the name of Cede & Co.). The following table sets forth the high and low closing sales prices per share of the Common Stock reported on the NYSE for the period from November 21, 1997 to May 14, 1998 and the distributions paid by the Company with respect to such period.
YEAR HIGH LOW DISTRIBUTION ---- ---- --- ------------ 1997 Fourth Quarter (from November 21, 1997)............ $25 1/8 $22 1/4 $0.1340 1998 First Quarter...................................... $24 15/16 $23 3/8 $0.3425 Second Quarter (through May 14, 1998).............. $25 $22 9/16 --
There is no market established for the trading of the Operating Partnership's Units. As of May 14, 1998, there were 89,523,120 Units outstanding, which were held by 23 holders of record. Subject to certain conditions, holders of Units will have the right to require the Operating Partnership to redeem part or all of their Units for cash, or the Company may elect to exchange such Units for shares of Common Stock (on a one-for-one basis). See "Description of Certain Provisions of the Partnership Agreement of the Operating Partnerships -- Redemption/Exchange Rights." On December 8, 1997, the Board of Directors of the Company, in its capacity as sole general partner of the Operating Partnership, declared distributions of $0.134 per Unit, payable December 29, 1997 to partners of record as of December 18, 1997. In addition, the Company's Board of Directors declared a pro rata distribution of $0.134 per share of Common Stock, payable December 29, 1997 to stockholders of record as of December 18, 1997. The distribution covered the period from November 26, 1997 through December 31, 1997, and was based upon $0.3425 per unit and per share of Common Stock, as applicable, for a full quarter. On March 6, 1998, the Board of Directors of the Company, in its capacity as general partner of the Operating Partnership, declared a distribution of $0.3425 per Unit, payable April 3, 1998 to partners of record as of March 18, 1998. In addition, the Company's Board of Directors declared a distribution of $0.3425 per share of the Common Stock, payable April 3, 1998 to stockholders of record as of March 18, 1998. 29 CAPITALIZATION The following table sets forth the capitalization of the Operating Partnership as of March 31, 1998 on an historical, a pre-Offering pro forma and a pro forma basis. The pre-Offering pro forma information gives effect to the property acquisitions occurring after March 31, 1998 and the pro forma information gives effect to such acquisitions and the application of the net proceeds from the Offering as described under the caption "Use of Proceeds." The information set forth in the following table should be read in conjunction with the historical consolidated financial statements and notes thereto, the condensed consolidated pro forma financial information and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" included elsewhere in this Prospectus.
PRE-OFFERING HISTORICAL PRO FORMA PRO FORMA ---------- ------------ ----------- (DOLLARS IN THOUSANDS) Debt: Credit facility...................................... $ 312,000 $ 368,730 $ 19,930 % Notes due 2008................................ -- -- 100,000 % Notes due 2018................................ -- -- 150,000 % REPS due 2015................................. -- -- 100,000 Secured debt(1)...................................... 610,111 610,111 610,111 ---------- ---------- ---------- Total debt................................... 922,111 978,841 980,041 Minority interests..................................... 52,867 52,867 52,867 Partners' capital: General partner(2)................................... 1,670,705 1,670,705 1,670,705 Limited partner(2)................................... 70,896 70,896 70,896 ---------- ---------- ---------- Total partners' capital...................... 1,741,601 1,741,601 1,741,601 ---------- ---------- ---------- Total capitalization......................... $2,716,579 $2,773,309 $2,774,509 ========== ========== ==========
- --------------- (1) Includes unamortized debt premiums of $17,542. (2) Does not give effect to 4,237,750 Performance Units which may be issued subject to certain performance criteria. See "Description of Certain Provisions of the Partnership Agreement of the Operating Partnership -- Performance Units." 30 SELECTED FINANCIAL AND OTHER DATA OPERATING PARTNERSHIP AND AMB CONTRIBUTED PROPERTIES The following table sets forth selected financial and other data on an historical basis for the Operating Partnership for the period from November 26, 1997 to December 31, 1997 and for the three months ended March 31, 1998 and for the AMB Contributed Properties for the years ended December 31, 1993, 1994, 1995 and 1996, the period from January 1, 1997 to November 25, 1997 and the three months ended March 31, 1997, and on an as adjusted basis for the Operating Partnership for the year ended December 31, 1997. Additionally, the table sets forth selected financial and other data for the Operating Partnership for the year ended December 31, 1997 and for the three months ended March 31, 1998 on a pro forma basis (giving effect to the Formation Transactions (as defined) the IPO, certain property acquisitions and dispositions in 1997, the 1998 property acquisitions and the Offering and the application of the net proceeds therefrom, as if such transactions had occurred on January 1, 1997). The historical financial information contained in the tables should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements and accompanying Notes thereto and the financial schedules included elsewhere in this Prospectus. COMPANY AND PREDECESSOR The following table sets forth selected financial and other data on an historical basis for the Company and its Predecessor, AMB Institutional Realty Advisors, Inc., a California corporation, for the years ended December 31, 1993, 1994, 1995, 1996 and 1997, and for the three months ended March 31, 1997 and 1998 and on an as adjusted basis for the Company for the year ended December 31, 1997 (giving effect to the Formation Transactions, the IPO and certain property acquisitions and dispositions in 1997). Additionally, the table sets forth selected financial and other data for the Company for the year ended December 31, 1997 and for the three months ended March 31, 1998 on a pro forma basis (giving effect to the Formation Transactions, the IPO, certain property acquisitions and dispositions in 1997, the property acquisitions in 1998 and the Offering and the application of the net proceeds therefrom, as if such transactions had occurred on January 1, 1997). For the four-year period ended December 31, 1996 and the period from January 1, 1997 through November 25, 1997, the Predecessor operated as an investment manager with revenues that consisted primarily of fees earned in connection with real estate management services. The historical financial information contained in the tables should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements and accompanying Notes thereto and the financial schedules included elsewhere in this Prospectus. The historical results of the Company for 1997 include the results of operations of the Company, including property operations for the period from November 26, 1997 to December 31, 1997 and the results of the Company's Predecessor, an investment manager, for the period from January 1, 1997 to November 25, 1997. In the opinion of management, the as adjusted and pro forma condensed financial information provides for all adjustments necessary to reflect the adjustments and transactions described above. The as adjusted and pro forma information is unaudited and is not necessarily indicative of the results that would have occurred if the transactions and adjustments reflected therein had been consummated in the period or on the date presented, or on any particular date in the future, nor does it purport to represent the financial position, results of operations or changes in cash flows for future periods. 31 OPERATING PARTNERSHIP AND AMB CONTRIBUTED PROPERTIES SELECTED FINANCIAL AND OTHER DATA (IN THOUSANDS EXCEPT UNIT DATA, PERCENTAGES AND NUMBER OF PROPERTIES)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------------------------- OPERATING PARTNERSHIP ------------------------------------ HISTORICAL AS ADJUSTED PRO FORMA AMB CONTRIBUTED PROPERTIES(1) (2) (3) (4) -------------------------------------------------------- ---------- ----------- --------- 1993 1994 1995 1996 1997 1997 1997 1997 -------- -------- ---------- ---------- -------- ---------- ----------- --------- (UNAUDITED) OPERATING DATA: Total revenues.......... $ 24,398 $ 51,682 $ 108,249 $ 167,953 $208,608 $ 27,110 $ 284,674 $ 325,293 Income from operations before minority interests............. 6,871 13,753 32,519 54,865 58,068 9,291 103,903 107,345 Net income.............. 6,871 13,194 32,531 54,400 57,184 9,174 102,606 103,274 Net income per unit:(5) Basic................. $ 0.10 $ 1.16 $ 1.15 Diluted............... 0.10 1.16 1.15 Distributions per unit.................. 0.13 1.37 1.37 OTHER DATA: EBITDA(6)............... $ 195,218 $ 225,556 Funds from Operations(7)......... 147,409 153,900 FFO per diluted unit(7)............... $ 1.66 $ 1.71 Cash flows provided by(used in): Operating activities.......... 131,621 138,112 Investing activities.......... (607,768) (842,337) Financing activities.......... 553,199 571,614 Ratio of earnings to fixed charges(8)...... 3.1x 2.5x Book debt service coverage ratio(9)..... 4.3x 3.4x Cash debt service coverage ratio(10).... 3.8x 3.1x BALANCE SHEET DATA: Investments in real estate at cost........ $323,230 $666,672 $1,018,681 $1,616,091 $2,442,999 Total assets............ 326,586 721,131 1,117,181 1,622,559 2,506,255 Secured debt(11)........ 100,496 201,959 254,067 522,634 535,652 Unsecured notes......... -- -- -- -- -- Unsecured credit facility.............. -- -- -- 25,500 150,000 Partner's capital....... 208,043 490,111 837,199 1,027,601 1,717,398 PROPERTY DATA: INDUSTRIAL PROPERTIES Total rentable square footage of properties at end of period...... 5,638 13,364 21,598 29,609 37,329 Number of properties at end of period......... 12 28 44 60 95 Occupancy rate at end of period................ 97.4% 96.9% 97.3% 97.2% 95.7% RETAIL PROPERTIES Total rentable square footage of properties at end of period...... 1,074 2,422 3,299 5,282 6,216 Number of properties at end of period......... 9 14 19 30 33 Occupancy rate at end of period................ 96.5% 93.7% 92.4% 92.4% 96.1% AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, ------------------------------------- AMB OPERATING PARTNERSHIP CONTRIBUTED ----------------------- PROPERTIES PRO FORMA (1) HISTORICAL (4) ----------- ---------- ---------- 1997 1998 1998 ----------- ---------- ---------- OPERATING DATA: Total revenues.......... $ 54,749 $ 75,785 $ 85,099 Income from operations before minority interests............. 14,217 29,188 29,973 Net income.............. 13,997 28,726 28,898 Net income per unit:(5) Basic................. $ 0.32 $ 0.32 Diluted............... 0.32 0.32 Distributions per unit.................. 0.34 0.34 OTHER DATA: EBITDA(6)............... $ 52,815 $ 60,028 Funds from Operations(7)......... 40,295 42,341 FFO per diluted unit(7)............... $ 0.45 $ 0.47 Cash flows provided by(used in): Operating activities.......... 34,820 36,906 Investing activities.......... (199,520) (49,646) Financing activities.......... 153,316 (9,063) Ratio of earnings to fixed charges(8)...... 3.1x 2.6x Book debt service coverage ratio(9)..... 4.5x 3.7x Cash debt service coverage ratio(10).... 3.8x 3.3x BALANCE SHEET DATA: Investments in real estate at cost........ $2,755,882 $2,812,612 Total assets............ 2,798,190 2,856,120 Secured debt(11)........ 610,111 610,111 Unsecured notes......... -- 350,000 Unsecured credit facility.............. 312,000 19,930 Partner's capital....... 1,741,601 1,741,601 PROPERTY DATA: INDUSTRIAL PROPERTIES Total rentable square footage of properties at end of period...... 43,964 45,269 Number of properties at end of period......... 118 122 Occupancy rate at end of period................ 94.6% 94.6% RETAIL PROPERTIES Total rentable square footage of properties at end of period...... 6,849 6,849 Number of properties at end of period......... 37 37 Occupancy rate at end of period................ 94.6% 94.6%
- --------------- (1) Represents the AMB Contributed Properties historical combined financial and other data for the years ended December 31, 1993, 1994, 1995 and 1996, the period from January 1, 1997 through November 25, 1997 and for the three months ended March 31, 1997. (2) For the period from November 26, 1997 to December 31, 1997. 32 (3) As adjusted financial and other data have been prepared as if the Formation Transactions, the IPO and certain property acquisitions and dispositions in 1997 had occurred on January 1, 1997. (4) Pro forma financial and other data have been prepared as if the Formation Transactions, the IPO, certain property acquisitions and dispositions in 1997, the property acquisitions in 1998 and the Offering had occurred on January 1, 1997. (5) Historical, as adjusted and pro forma net income per basic unit for the year ended December 31, 1997 equals the historical, as adjusted and pro forma net income divided by 88,416,676, 88,416,678 and 89,523,120 units, respectively. Historical and pro forma net income per basic unit for the three months ended March 31, 1998 equals the historical and pro forma net income divided by 88,428,969 and 89,523,120 units respectively. Historical, as adjusted and pro forma net income per diluted unit for the year ended December 31, 1997 equal the historical, as adjusted and pro forma net income divided by 88,698,719, 88,698,719 and 89,805,163 units, respectively. Historical and pro forma net income per diluted unit for the three months ended March 31, 1998 equals the historical and pro forma net income divided by 88,839,192 units and 89,933,343 units, respectively. (6) EBITDA is computed as income from operations before disposal of properties and minority interests plus interest expense, income taxes, depreciation and amortization. Management believes that in addition to cash flows and net income, EBITDA is a useful financial performance measure for assessing the operating performance of an equity REIT because, together with net income and cash flows, EBITDA provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. (7) FFO, as defined by NAREIT, represents net income (loss) before minority interests and extraordinary items, adjusted for depreciation on real property and amortization of tenant improvement costs and lease commissions, gains (losses) from the disposal of properties and FFO attributable to minority interests in consolidated joint ventures whose interests are not convertible into shares of Common Stock. The White Paper on Funds from Operations approved by the Board of Governors of NAREIT in March 1995 defines Funds from Operations as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization. Management considers FFO an appropriate measure of performance of an equity REIT because it is predicated on cash flow analyses. The Operating Partnership computes FFO in accordance with standards established by the White Paper, which may differ from the methodology for calculating FFO utilized by other REITs and, accordingly, may not be comparable to such other REITs. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of liquidity, nor is it indicative of funds available to fund cash needs, including the ability to make distributions.
FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 MARCH 31, 1998 -------------------------- -------------------------- AS ADJUSTED PRO FORMA HISTORICAL PRO FORMA ----------- ----------- ----------- ----------- Income from operations before minority interests............ $ 103,903 $ 107,345 $ 29,188 $ 29,973 Real estate related depreciation and amortization: Depreciation and amortization........................... 45,886 52,402 11,786 13,812 Furniture, fixtures and equipment depreciation.......... (173) (173) (104) (104) FFO attributable to minority interests...................... (2,207) (5,674) (575) (1,340) ----------- ----------- ----------- ----------- FFO..................................................... $ 147,409 $ 153,900 $ 40,295 $ 42,341 =========== =========== =========== =========== FFO per diluted unit........................................ $ 1.66 $ 1.71 $ 0.45 $ 0.47 =========== =========== =========== =========== Weighted average units outstanding (diluted)................ 88,698,719 89,805,163 88,839,192 89,933,343 =========== =========== =========== ===========
(8) The ratio of earnings to fixed charges is computed as income from operations before minority interests plus fixed charges (excluding capitalized interest) divided by fixed charges. Fixed charges consist of interest costs (including amortization of debt premiums and financing costs), whether capitalized or expensed, and the interest component of rental expense. (9) The book debt service coverage ratio is calculated as EBITDA divided by book interest expense (including amortization of debt premiums and discounts and financing costs). (10) The cash debt service coverage ratio is calculated as EBITDA divided by cash interest costs. Cash interest costs consist of book interest expense (excluding amortization of debt premiums and discounts and financing costs) plus capitalized interest. (11) Secured debt as of December 31, 1997 and March 31, 1998 includes unamortized debt premiums and discounts of approximately $18,286 and $17,452, respectively. See Notes to Consolidated Financial Statements. 33 COMPANY AND PREDECESSOR SELECTED FINANCIAL AND OTHER DATA (IN THOUSANDS EXCEPT SHARE DATA, PERCENTAGES AND NUMBER OF PROPERTIES)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------- COMPANY ------------------------------------- PREDECESSOR HISTORICAL AS ADJUSTED PRO FORMA (1) (2) (3) (4) ------------------------------------ ---------- ----------- ---------- 1993 1994 1995 1996 1997 1997 1997 ------ ------- ------- ------- ---------- ----------- ---------- OPERATING DATA: Total revenues.............. $7,155 $12,865 $16,865 $23,991 $ 56,062 $ 284,674 $ 325,293 Income from operations before minority interests................. 798 2,925 3,296 7,140 18,885 103,903 107,345 Net income.................. 798 2,925 3,262 7,003 18,228 99,508 99,040 Net income per share(5): Basic..................... $ 0.17 $ 0.59 $ 0.64 $ 1.38 $ 1.39 $ 1.15 $ 1.15 Diluted................... 0.17 0.59 0.64 1.38 1.38 1.15 1.15 Distributions per share:.... 0.13 1.37 1.37 OTHER DATA: EBITDA(6)................... $ 195,218 $ 225,556 Funds from Operations(7).... 147,409 153,900 FFO per diluted share(7).... $ 1.66 $ 1.71 Cash flows provided by(used in): Operating activities...... 131,621 138,112 Investing activities...... (607,768) (842,337) Financing activities...... 553,199 571,614 Ratio of earnings to fixed charges(8)................ 3.1x 2.5x Book debt service coverage ratio(9).................. 4.3x 3.4x Cash debt service coverage ratio(10)................. 3.8x 3.1x BALANCE SHEET DATA: Investments in real estate at cost................... $ -- $ -- $ -- $ -- $2,442,999 Total assets................ 2,739 4,092 4,948 7,085 2,506,255 Secured debt(11)............ -- -- -- -- 535,652 Unsecured notes............. -- -- -- -- -- Unsecured credit facility... -- -- -- -- 150,000 Stockholders' equity........ 2,480 3,848 4,241 6,300 1,668,030 AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, ---------------------------------------- COMPANY ----------------------- PREDECESSOR PRO FORMA (1) HISTORICAL (4) -------------- ---------- ---------- 1997 1998 1998 -------------- ---------- ---------- OPERATING DATA: Total revenues.............. $5,112 $ 75,785 $ 85,099 Income from operations before minority interests................. 1,239 29,188 29,973 Net income.................. 1,239 27,906 27,713 Net income per share(5): Basic..................... $ 0.24 $ 0.32 $ 0.32 Diluted................... 0.24 0.32 0.32 Distributions per share:.... 0.34 0.34 OTHER DATA: EBITDA(6)................... $ 52,815 $ 60,028 Funds from Operations(7).... 40,295 42,341 FFO per diluted share(7).... $ 0.45 $ 0.47 Cash flows provided by(used in): Operating activities...... 34,820 36,906 Investing activities...... (199,520) (49,646) Financing activities...... 153,316 (9,063) Ratio of earnings to fixed charges(8)................ 3.1x 2.6x Book debt service coverage ratio(9).................. 4.5x 3.7x Cash debt service coverage ratio(10)................. 3.8x 3.3x BALANCE SHEET DATA: Investments in real estate at cost................... $2,755,882 $2,812,612 Total assets................ 2,798,190 2,856,120 Secured debt(11)............ 610,111 610,111 Unsecured notes............. -- 350,000 Unsecured credit facility... 312,000 19,930 Stockholders' equity........ 1,670,705 1,670,705
- --------------- (1) Represents the Predecessor's historical financial and other data for the years ended December 31, 1993, 1994, 1995, 1996 and the three months ended March 31, 1997. The Predecessor operated as an investment manager prior to November 26, 1997. (2) Represents the Predecessor's historical financial and other data for the period January 1, 1997 through November 25, 1997 and the Company's historical and other data for the period from November 26, 1997 to December 31, 1997. (3) As adjusted financial and other data have been prepared as if the Formation Transactions, the IPO and certain property acquisitions and dispositions in 1997 had occurred on January 1, 1997. (4) Pro forma financial and other data have been prepared as if the Formation Transactions, the IPO, certain property acquisitions and dispositions in 1997, the property acquisitions in 1998 and the Offering had occurred on January 1, 1997. (5) Historical, as adjusted and pro forma net income per basic share for the year ended December 31, 1997 equals the historical, as adjusted and pro forma net income divided by 13,140,218, 85,874,513 and 85,874,513 shares, respectively. Historical and pro forma net income per basic share for the three months ended March 31, 1998 equals the historical and pro forma net income divided by 85,874,513 and 85,874,513 shares, respectively. Historical, as adjusted and pro forma diluted net income per share for the year ended December 31, 1997 equals the historical, as adjusted and pro forma net income divided by 13,168,036, 86,156,556 and 86,156,556, respectively. Historical and pro forma diluted net income per share for the three months ended March 31, 1998 equals the historical and pro forma net income divided by 88,284,736 and 86,284,736 shares, respectively. (6) EBITDA is computed as income from operations before disposal of properties and minority interests plus interest expense, income taxes, depreciation and amortization. Management believes that in addition to cash flows and net income, EBITDA is a useful financial performance measure for assessing the operating performance of an equity REIT because, together with net income and cash flows, EBITDA provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. (7) FFO, as defined by NAREIT, represents net income (loss) before minority interests and extraordinary items, adjusted for depreciation on real property and amortization of tenant improvement costs and lease commissions, gains (losses) from the disposal of properties and FFO attributable to minority interests in consolidated joint ventures whose interests are not convertible into shares of Common Stock. The White Paper on Funds from Operations approved by the Board of Governors of NAREIT in March 1995 defines Funds from Operations as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization. Management considers FFO an appropriate measure of performance of an equity REIT because it is predicated on cash flow analyses. The Company computes FFO in accordance with standards established by the White Paper, which may differ from the methodology for calculating FFO utilized by other REITs and, accordingly, may not be comparable to such other REITs. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Properties' financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Properties' liquidity, nor is it indicative of funds available to fund the Properties' cash needs, including its ability to make distributions. 34
FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 MARCH 31, 1998 -------------------------- -------------------------- AS ADJUSTED PRO FORMA HISTORICAL PRO FORMA ----------- ----------- ----------- ----------- Income from operations before minority interests............ $ 103,903 $ 107,345 $ 29,188 $ 29,973 Real estate related depreciation and amortization: Depreciation and amortization........................... 45,886 52,402 11,786 13,812 Furniture, fixtures and equipment depreciation.......... (173) (173) (104) (104) FFO attributable to minority interests...................... (2,207) (5,674) (575) (1,340) ----------- ----------- ----------- ----------- FFO................................................. $ 147,409 $ 153,900 $ 40,295 $ 42,341 =========== =========== =========== =========== FFO per diluted share and unit.............................. $ 1.66 $ 1.71 $ 0.45 $ 0.47 =========== =========== =========== =========== Withheld average shares and units outstanding............... 88,698,719 89,805,163 88,839,192 89,933,343 =========== =========== =========== ===========
(8) The ratio of earnings to fixed charges is computed as income from operations before minority interests plus fixed charges (excluding capitalized interest) divided by fixed charges. Fixed charges consist of interest costs (including amortization of debt premiums and financing costs), whether capitalized or expensed, and the interest component of rental expense. (9) The book debt service coverage ratio is calculated as EBITDA divided by book interest expense (including amortization of debt premiums and discounts and financing costs). (10) The cash debt service coverage ratio is calculated as EBITDA divided by cash interest costs. Cash interest costs consist of book interest expense (excluding amortization of debt premiums and discounts and financing costs) plus capitalized interest. (11) Secured debt as of December 31, 1997 and March 31, 1998 includes unamortized debt premiums and discounts of approximately $18,286 and $17,452, respectively. See Notes to Consolidated Financial Statements. 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the "Notes to Consolidated Financial Statements" and "Selected Financial and Other Data" of the Operating Partnership and the Company. Statements contained herein which are not historical facts may be forward looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. GENERAL The discussion below is presented as follows: (i) results of the Company and its Predecessor for the years ended December 31, 1995, 1996 and 1997 and for the three months ended March 31, 1997 and 1998, and (ii) results of the Operating Partnership and the AMB Contributed Properties for the years ended December 31, 1995, 1996 and 1997 and for the three months ended March 31, 1997 and 1998. Because the Operating Partnership commenced its operations in connection with the consummation of the IPO on November 26, 1997 and had no predecessor, the discussion of the Operating Partnership provides a comparison to the AMB Contributed Properties in lieu of a discussion of the historical operations of the Operating Partnership. The historical results of the Company for the year ended December 31, 1997 include its results, including property operations, for the period from November 26, 1997 to December 31, 1997 and the results of the Company's Predecessor, an investment manager, for the period from January 1, 1997 to November 25, 1997. As an investment manager, the Predecessor's revenues consisted primarily of fees earned in connection with real estate management services. Management's discussion and analysis of the Company and Predecessor for the years ended December 31, 1995, 1996 and 1997 and for the three months ended March 31, 1997 and 1998 is limited to investment management and other income and general and administrative expenses, and excludes a discussion of rental revenues, operating expenses, interest expense and depreciation and amortization because such analysis is not comparable or meaningful given the differences in lines of business between the Company's and the Predecessor's. The historical results of the Operating Partnership for the year ended December 31, 1997 include the results achieved by the Operating Partnership for the period from November 26, 1997 (date of completion of Formation Transaction) to December 31, 1997 and the results achieved by the AMB Contributed Properties for the period from January 1, 1997 to November 25, 1997. COMPANY AND PREDECESSOR RESULTS OF OPERATIONS COMPANY AND PREDECESSOR -- THREE MONTHS ENDED MARCH 31, 1998 AND 1997 Rental revenues. Rental revenues, including straight-line rents, tenant reimbursements and other property related income, totaled $74.6 million for the three months ended March 31, 1998. The Predecessor's revenues consisted primarily of fees earned in connection with real estate management services. As such, no such rental revenues existed for the Predecessor for the three months ended March 31, 1997. Property operating expenses and real estate taxes. Property operating expenses, including asset management costs and real estate taxes, totaled $20.3 million for the three months ended March 31, 1998. The Predecessor's expenses consisted primarily of salaries and other general and administrative costs. As such, no such property operating expenses existed during the three months ended March 31, 1997. General and administrative expenses. The Company's general and administrative expenses were $2.7 million for the three months ended March 31, 1998, as compared to the Predecessor's investment management expenses of $3.9 million for the three months ended March 31, 1997. Investment management expenses of the Predecessor consisted primarily of salaries and other general and administrative expenses. The $1.2 million, or 31%, decrease in general and administrative expenses is attributable to the change in the operations of the Company, from an investment manager to a fully integrated real estate company, and the 36 formation of AMB Investment Management. In connection with the Formation Transactions, AMB Investment Management assumed employment and other related costs of certain employees who transferred from the Predecessor to AMB Investment Management for the purpose of carrying on the investment management business. COMPANY AND PREDECESSOR -- YEARS ENDED DECEMBER 31, 1997 AND 1996 Investment management and other income. Investment management and other income for the period from January 1, 1997 to November 25, 1997 was $29.0 million, which on an annualized basis represents a 34.1% increase over the year ended December 31, 1996. The increase reflects the growth in the portfolio under management. Investment management and other income for the period from November 26, 1997 to December 31, 1997 was $0.6 million. General and administrative expenses. General and administrative expenses for the period from January 1, 1997 to November 25, 1997 were $19.4 million, which represents a 27.7% increase on an annualized basis over the year ended December 31, 1996. The increase was attributable to an increase in staffing that resulted from the growth in the portfolio under management. PREDECESSOR -- YEARS ENDED DECEMBER 31, 1996 AND 1995 Investment management and other income. Investment management and other income for the years ended December 31, 1996 and 1995 was $24.0 million and $16.9 million, respectively, an increase of 42.0%. The increase from 1995 to 1996 was primarily due to management fees associated with a growing portfolio and increased economies of scale from managing this larger portfolio. General and administrative expenses. General and administrative expenses for the years ended December 31, 1996 and 1995 were $16.9 million and $13.6 million, respectively, reflecting the increase in size of the portfolio under management. OPERATING PARTNERSHIP AND AMB CONTRIBUTED PROPERTIES RESULTS OF OPERATIONS The historical results of operations of the Operating Partnerships and AMB Contributed Properties for periods prior to November 26, 1997 include Properties that were managed by the Predecessor and exclude the results of four properties that were contributed to the Operating Partnership in the Formation Transactions that were not previously managed by the Predecessor. In addition, the historical results of operations include the results of Properties acquired after November 26, 1997, from the date of acquisition of such Properties to December 31, 1997. The historical property financial data presented herein show significant increases in revenues and expenses principally attributable to substantial portfolio growth. As a result, the Operating Partnership does not believe the year-to-year financial data are comparable. Therefore, the analysis below shows (i) changes resulting from Properties that were held during the entire period for both years being compared (the "Core Portfolio") and (ii) changes attributable to acquisition and development activity. For comparison between the three months ended March 31, 1997 and 1998, the Core Portfolio consists of 77 properties acquired prior to January 1, 1997, and for the comparison between the years ended December 31, 1997 and 1996, the Core Portfolio consists of the 59 Properties acquired prior to January 1, 1996, and for the comparison between the years ended December 31, 1996 and 1995, the Core Portfolio consists of the 42 Properties acquired prior to January 1, 1995. The Operating Partnership's future financial condition and results of operations, including rental revenues, may be impacted by the acquisition of additional properties. No assurance can be given that the past trends of revenues, expenses or income of the Operating Partnership will continue in the future at their historical rates, and any variation therefrom may be material. OPERATING PARTNERSHIP AND AMB CONTRIBUTED PROPERTIES -- THREE MONTHS ENDED MARCH 31, 1998 AND 1997 Rental revenues. Rental revenues, including straight-line rents, tenant reimbursement and other property related income, increased by $19.7 million, or 36%, for the three months ended March 31, 1998, to 37 $74.6 million as compared to $54.9 million for the three months ended March 31, 1997. Approximately $3.1 million, or 16% of this increase, was attributable to the Core Portfolio, with the remaining $16.6 million attributable to Properties acquired in 1997 and 1998. The 6% growth in rental revenues in the Core Portfolio resulted primarily from the incremental effect of rental rate increases, changes in occupancy and reimbursement of expenses. In 1998, the Company increased average contractual or base rental rates on the Properties by 16.4% on 52 new and renewing leases totaling 1.3 million rentable square feet (representing 2.6% of the Properties' aggregate rentable square footage). Property operating expenses and real estate taxes. Property operating expenses, including asset management costs and real estate taxes, increased by $0.9 million, or 4%, for the three months ended March 31, 1998, to $20.3 million as compared to $19.4 million for the three months ended March 31, 1997. Core Portfolio operating expenses decreased by approximately $3.1 million, while operating expenses attributable to Properties acquired in 1998 and 1997 increased by $4.0 million. The change in Core Portfolio operating expenses and real estate taxes relates to: (i) Core Portfolio real estate taxes and insurance expense increased by approximately $0.2 million from 1997 to 1998, while (ii) Core Portfolio other property operating expenses (excluding real estate taxes and insurance) decreased by approximately $3.3 million from 1997 to 1998. The large decrease in other property operating expenses is attributable to lower asset management costs in 1998 as compared to 1997 that resulted from the change in ownership structure. Interest expense. Interest expense for the three months ended March 31, 1998 of $11.8 million remained flat as compared to $11.8 million interest expense for the three months ended March 31, 1997. This was the result of an increase in interest expense resulting from debt incurred to fund property acquisition being offset by a decrease in interest expense resulting from the amortization of debt premiums of $0.7 million in the three months ended March 31, 1998 and an increase in capitalized interest related to developments in-process. Depreciation and amortization expense. Depreciation and amortization expense increased by $2.9 million, or 33%, for the three months ended March 31, 1998, to $11.8 million as compared to $8.9 million for the three months ended March 31, 1997. This increase was attributable to substantial growth in the number of properties owned by the Operating Partnership. General, administrative and other expenses. General, administrative and other expenses increased by $2.5 million for the three months ended March 31, 1998, to $2.7 million as compared to $0.2 million for the three months ended March 31, 1997. This increase was attributable to the changes in operations resulting primarily from the change in the character of the Operating Partnership's business. OPERATING PARTNERSHIP AND AMB CONTRIBUTED PROPERTIES -- YEARS ENDED DECEMBER 31, 1997 AND 1996 Rental revenues. Rental revenues, including tenant reimbursements and other property related income, increased by $67.5 million, or 40.6%, for the year ended December 31, 1997, to $233.9 million as compared to $166.4 million for the year ended December 31, 1996. Approximately $8.8 million, or 13.0% of this increase, was attributable to the Core Portfolio, with the remaining $58.7 million attributable to Properties acquired in 1996 and 1997. The 6.3% growth in rental revenues in the Core Portfolio resulted primarily from the incremental effect of rental rate increases and reimbursement of expenses. In 1997, the Operating Partnerships increased average contractual or base rental rates on the Properties by 12% on 393 new and renewing leases totaling 7.5 million rentable square feet (representing 17.2% of the Properties' aggregate rentable square footage). Property operating expenses and real estate taxes. Property operating expenses and real estate taxes increased by $25.6 million, or 46.3%, for the year ended December 31, 1997, to $80.9 million as compared to $55.3 million for the year ended December 31, 1996. Approximately $3.4 million of this increase was attributable to the Core Portfolio, with the remaining $22.2 million attributable to Properties acquired in 1997 and 1996. Core Portfolio real estate taxes and insurance expense increased by approximately $1.4 million from 1996 to 1997. Core Portfolio other property operating expenses (excluding real estate taxes and insurance) increased by $2.0 million from 1996 to 1997. The increases in expenses are primarily due to increases in property tax assessment values and incentive management fees expense. 38 Interest expense. Interest expense increased by $21.6 million, or 80.3%, for the year ended December 31, 1997, to $48.5 million as compared to $26.9 million for the year ended December 31, 1996. Interest expense related to the Core Portfolio increased by $11.6 million due to the placement of debt on certain properties, while financing related to properties acquired in 1997 and 1996 added $10.0 million to interest expense. Depreciation and amortization expense. Depreciation and amortization expense increased by $8.2 million, or 28.7%, for the year ended December 31, 1997, to $36.8 million as compared to $28.6 million for the year ended December 31, 1996. The increase was attributable to substantial growth in the number of properties owned by the Operating Partnership. Depreciation and amortization includes depreciation of capital and tenant improvements and amortization of leasing commissions. General, administrative and other expenses. General, administrative and other expenses increased by $1.2 million or 150%, for the year ended December 31, 1997, to $2.0 million as compared to $0.8 million for the year ended December 31, 1996. The increase was attributable to the changes in operations resulting primarily from the change in the character of the Operating Partnership's business. Interest and other income. Interest and other income decreased by $0.1 million, or 7%, for the year ended December 31, 1997, to $1.4 million as compared to $1.5 million for the year ended December 31, 1996. This decrease was primarily due to lower average cash balances. AMB CONTRIBUTED PROPERTIES -- YEARS ENDED DECEMBER 31, 1996 AND 1995 Rental revenues. Rental revenues, including tenant reimbursements and other property related income, increased by $60.2 million, or 56.7%, for the year ended December 31, 1996, to $166.4 million as compared to $106.2 million for the year ended 1995. Approximately $7.5 million, or 12.5% of this increase, was attributable to the Core Portfolio, with the remaining $52.7 million attributable to Properties acquired in 1996 and 1995. The 8.6% growth in rental income in the Core Portfolio resulted primarily from rental rate increases. Property operating expenses and real estate taxes. Property operating expenses and real estate taxes increased by $18.4 million, or 49.9%, for the year ended December 31, 1996, to $55.3 million as compared to $36.9 million for the year ended December 31, 1995. Approximately $1.6 million of this increase was attributable to the Core Portfolio, with the remaining $16.8 million attributable to Properties acquired in 1996 and 1995. The Core Portfolio had an increase of approximately $1.0 million in real estate tax and insurance expense. The other property operating expenses (excluding real estate taxes and insurance) for the Core Portfolio increased by $0.6 million from 1995 to 1996. The increases in expenses are primarily due to increases in property tax assessment values and miscellaneous expenses. Interest expense. Interest expense increased by $6.4 million, or 31.2%, for the year ended December 31, 1996, to $26.9 million as compared to $20.5 million for the year ended December 31, 1995. Interest expense related to the Core Portfolio increased by $3.2 million, while financing related to Properties acquired in 1996 and 1995 added $3.2 million to interest expense. Depreciation and amortization expense. Depreciation and amortization expense increased by $11.1 million, or 63.4%, for the year ended December 31, 1996, to $28.6 million as compared to $17.5 million for the year ended December 31, 1995. The increase was attributable to substantial growth in the number of properties owned by the Company. Depreciation and amortization includes depreciation of capital and tenant improvements and amortization of leasing commissions. General, administrative and other expenses. General, administrative and other expenses remained unchanged at $0.8 million for the years ended December 31, 1996 and December 31, 1995. General, administrative and other expenses as a percentage of total revenues was 0.5% for the year ended December 31, 1996 and 0.7% for the year ended December 31, 1995. Interest and other income. Interest income decreased by $0.6 million, or 28.6%, for the year ended December 31, 1996, to $1.5 million as compared to $2.1 million for the year ended December 31, 1995. This decrease was primarily due to lower average cash balances. 39 LIQUIDITY AND CAPITAL RESOURCES The Company and the Operating Partnership expect that their principal sources of working capital and funding for acquisitions, development, expansion and renovation of the Properties will include their unsecured credit facility, permanent secured debt financing, proceeds from public and private unsecured debt offerings, proceeds from public and private equity offerings (including issuances of Units) and cash flows provided by operations. Management believes that its sources of working capital and its ability to access private and public debt and equity capital are adequate to continue to meet liquidity requirements for the foreseeable future. Capital Resources The Operating Partnership has a $500.0 million unsecured revolving credit agreement with Morgan Guaranty Trust Company of New York as agent, and a syndicate of 12 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 of the undrawn funds based on the Operating Partnership's credit rating. The Operating Partnership uses 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, depending on the Company's debt rating at the time of such borrowings. As of March 31, 1998, the outstanding balance on the Credit Facility was $312.0 million and bore interest at LIBOR plus 110 basis points (6.79% as of such date). Monthly debt service payments on the Credit Facility are interest only. The Credit Facility matures in November 2000. See Notes to Consolidated Financial Statements. The total amount available under the Credit Facility fluctuates based upon the borrowing base, as defined in the agreement governing the Credit Facility. Currently, the maximum amount available is approximately $460 million. The Operating Partnership has received a senior unsecured debt ratings of Baa1 from Moody's Investors Service, BBB from Standard & Poor's Corporation and BBB+ from Duff & Phelps Credit Rating Co. As a result of these ratings, the Operating Partnership's interest rate on borrowings under the Credit Facility was reduced to LIBOR plus 90 basis points. In connection with the recent property acquisitions and the Formation Transactions, the Operating Partnership has assumed various mortgages and other secured debt. As of March 31, 1998, the aggregate principal amount of such secured debt was $592.6 million, excluding unamortized debt premiums of $17.5 million. The secured debt bears interest at rates varying from 7.01% to 10.39% per annum (with a weighted average of 8.01%) and final maturity dates ranging from 1998 to 2014. As of March 31, 1998, the Operating Partnership's total outstanding debt was approximately $922.1 million, including unamortized debt premiums of approximately $17.5 million. See Notes to Consolidated Financial Statements. The total amount of debt to be repaid in 1998 is approximately $53.7 million, including normal principal amortization of approximately $5.6 million and $35.0 million of assumed secured debt, which was repaid in full subsequent to March 31, 1998. In order to maintain financial flexibility and facilitate the rapid deployment of capital through market cycles, the Company presently intends to operate with a debt-to-total market capitalization ratio of less than 45%. Additionally, the Operating Partnership intends to structure its balance sheet in order to maintain an investment grade rating on its senior unsecured debt. The Operating Partnership intends to keep the majority of its assets unencumbered to facilitate such rating. As of March 31, 1998, the Operating Partnership's debt-to-total market capitalization ratio was approximately 29.9%. Liquidity As of March 31, 1998, the Operating Partnership had approximately $28.6 million in cash and cash equivalents and $148.0 million of additional available borrowings under the Credit Facility. The Operating Partnership intends to use cash from operations, available borrowings under its Credit Facility and net proceeds from the anticipated issuance of the Notes to fund acquisitions and capital expenditures and to provide for general working capital requirements. 40 On March 9, 1998, the Company and the Operating Partnership declared a quarterly cash distribution of $0.3425 per common share and unit, payable April 3, 1998 to stockholders and unitholders of record on March 18, 1998. The anticipated size of the Company and the Operating Partnership's distributions, using only cash from operations, will not allow them to retire all of their debt as it comes due. Therefore, the Company and the Operating Partnership intends to also repay maturing debt with net proceeds from future debt and/or equity financings. No assurance can be given, however, that future financings will be available to the Company and the Operating Partnership or that the terms of any such financings will be favorable from the Company's perspective. Capital Commitments In addition to recurring capital expenditures and costs to renew or re-tenant space, the Operating Partnership is currently in the process of renovating, expanding or developing 10 projects at a total estimated cost of $211.0 million. The Operating Partnership presently expects to fund these expenditures with cash from operations, borrowings under the Credit Facility or debt or equity issuances. Other than these capital items, the Company has no material capital commitments. During the period from January 1, 1998 to March 31, 1998, the Operating Partnership acquired 56 industrial buildings and two retail centers, aggregating 6.9 million rentable square feet for a total cost of $272.1 million. The acquisitions were funded through borrowings under the Credit Facility, cash, debt assumption of approximately $83.5 million, an investment from a co-investment partner of approximately $37.0 million and the issuance of Units with a value of approximately $25.8 million at the date of issuance. The Operating Partnership expects that its funds from operations and availability under its Credit Facility will be sufficient to meet expected capital commitments for the next 12 months. INFLATION Substantially all of the industrial and retail leases require the tenant to pay, as additional rent, a portion of any increases in real estate taxes and operating expenses over a base amount. In addition, many of the industrial and retail leases provide for fixed increases in base rent or indexed escalations (based on the Consumer Price Index or other measures). Management believes that inflationary increases in operating expenses will be offset, in part, by the expense reimbursements and contractual rent increases described above. Leases representing approximately 5.9% of the Operating Partnership's total rentable square feet provide for rent increases based upon changes in the Consumer Price Index. The remainder of the Operating Partnership's leases provide for fixed rental payments, of which a majority include predetermined rent increases at various points in time during the lease term. YEAR 2000 COMPLIANCE The Company's and the Operating Partnership's current financial systems adequately provide for a four-digit year and management believes the year 2000 issue will not materially affect its business operations or financial condition. Additionally, the Company and the Operating Partnership currently do not expect that the year 2000 issue will materially affect their operations due to problems encountered by their suppliers, customers and lenders. FUNDS FROM OPERATIONS Management believes 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. The following table reflects the calculation of the Operating Partnership's FFO on an historical basis for the three months ended March 31, 1998, on an as adjusted basis (giving effect to the completion of the Formation Transactions, the IPO and certain 1997 property acquisitions and dispositions) for the year ended 41 December 31, 1997 and on a pro forma basis (giving effect to Formation Transactions, the IPO, certain 1997 property acquisitions and dispositions, the property acquisitions in 1998 and the Offering and the application of the net proceeds therefrom, as if such transactions had occurred on January 1, 1997) for the year ended December 31, 1997 and the three months ended March 31, 1998. FFO is not presented for the Operating Partnership and the AMB Contributed Properties on an historical basis for the year ended December 31, 1997 because it is not comparable or meaningful due to the significant differences in capital structures between the Operating Partnership and the prior owners of the AMB contributed Properties.
FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 MARCH 31, 1998 -------------------------- -------------------------- AS ADJUSTED PRO FORMA HISTORICAL PRO FORMA ----------- ----------- ----------- ----------- Income from operations before minority interests........................... $ 103,903 $ 107,345 $ 29,188 $ 29,973 Real estate related depreciation and amortization: Depreciation and amortization.... 45,886 52,402 11,786 13,812 Furniture, fixtures and equipment depreciation................... (173) (173) (104) (104) FFO attributable to minority interests(1)(2)..................... (2,207) (5,674) (575) (1,340) ----------- ----------- ----------- ----------- FFO(1)................................ $ 147,409 $ 153,900 $ 40,295 $ 42,341 =========== =========== =========== =========== FFO per diluted unit.................. $ 1.66 $ 1.71 $ 0.45 $ 0.47 =========== =========== =========== =========== Weighted average units outstanding (diluted)........................... 88,698,719 89,805,163 88,839,192 89,933,343 =========== =========== =========== =========== Cash flows provided by (used in): Operating activities............. 131,621 138,112 34,820 36,906 Investing activities............. (607,768) (842,337) (199,520) (49,646) Financing activities............. 553,199 571,614 153,316 (9,063)
- --------------- (1) The White Paper defines Funds from Operations as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization. Management considers FFO an appropriate measure of performance of an equity REIT because it is predicated on cash flow analyses. The Company computes FFO in accordance with standards established by the White Paper, which may differ from the methodology for calculating FFO utilized by other REITs and, accordingly, may not be comparable to such other REITs. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Properties' financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Properties' liquidity, nor is it indicative of funds available to fund the Properties' cash needs, including its ability to make distributions. (2) Represents FFO attributable to minority interests in consolidated joint ventures for the period presented, which has been computed as minority interests' share of net income before disposal of properties plus minority interests' share of real estate-related depreciation and amortization of the consolidated joint ventures for such period. Such minority interests are not convertible into shares of Common Stock. 42 PROPERTY OPERATING INCOME The following table sets forth property operating income for the Operating Partnership's Industrial and Retail Properties for the year ended December 31, 1997 (giving effect to the Formation Transactions, the IPO and certain property acquisitions and dispositions in 1997 as if such transactions occurred on January 1, 1997) and on an historical basis for the three months ended March 31, 1998. Property operating income is computed as rental revenues less property operating expenses, excluding depreciation and amortization, interest expense and general and administrative expenses. Property operating income does not represent net income or cash flow from operations determined in accordance with GAAP.
AS ADJUSTED FOR THE YEAR ENDED HISTORICAL FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 MARCH 31, 1998 ------------------------------------ --------------------------------------- INDUSTRIAL RETAIL TOTAL INDUSTRIAL RETAIL TOTAL PROPERTIES PROPERTIES PROPERTIES PROPERTIES PROPERTIES PROPERTIES ---------- ---------- ---------- ----------- ----------- ----------- (IN THOUSANDS) Rental revenues.............. $ 187,793 $ 94,872 $ 282,665 $ 48,665 $ 25,937 $ 74,602 Property operating expenses................... (51,150) (30,328) (81,478) (12,609) (7,643) (20,252) ---------- -------- ---------- ---------- -------- ---------- Property operating income................ $ 136,643 $ 64,544 $ 201,187 $ 36,056 $ 18,294 $ 54,350 ========== ======== ========== ========== ======== ==========
43 BUSINESS AND PROPERTIES As of March 31, 1998, the Operating Partnership owned 155 properties aggregating 50.8 million rentable square feet and located in 28 markets nationwide. The following table summarizes the diversification by region of the Industrial and Retail Properties owned as of March 31, 1998: INDUSTRIAL AND RETAIL PROPERTIES BY REGION
INDUSTRIAL PROPERTIES RETAIL PROPERTIES TOTAL ------------------------------------------- ------------------------------ ---------- NUMBER NUMBER RENTABLE NUMBER RENTABLE NUMBER OF OF SQUARE % OF OF SQUARE % OF OF REGION PROPERTIES BUILDINGS FEET TOTAL PROPERTIES FEET TOTAL PROPERTIES ------ ---------- --------- ---------- ----- ---------- --------- ----- ---------- Eastern.............. 27 68 8,729,347 19.9% 4 1,272,968 18.6% 31 Midwestern........... 28 92 11,199,515 25.5 4 710,833 10.4 32 Southern............. 30 114 11,262,975 25.6 12 1,957,051 28.6 42 Western.............. 33 141 12,772,141 29.0 17 2,907,986 42.4 50 --- --- ---------- ----- --- --------- ----- --- Total................ 118 415 43,963,978 100.0% 37 6,848,838 100.0% 155 === === ========== ===== === ========= ===== === TOTAL ------------------ RENTABLE SQUARE % OF REGION FEET TOTAL ------ ---------- ----- Eastern.............. 10,002,315 19.7% Midwestern........... 11,910,348 23.4 Southern............. 13,220,026 26.0 Western.............. 15,680,127 30.9 ---------- ----- Total................ 50,812,816 100.0% ========== =====
INDUSTRIAL PROPERTIES At March 31, 1998, the Operating Partnership owned 118 Industrial Properties (comprising 415 buildings) aggregating approximately 44.0 million rentable square feet, located in 23 markets nationwide. The Industrial Properties accounted for $178.4 million of Annualized Base Rent, or 70% of the Company's Annualized Base Rent for the Properties as of March 31, 1998. The Industrial Properties were 94.6% leased to over 1,000 tenants as of the same date, the largest of which accounted for no more than 1.3% of Annualized Base Rent from the Industrial Properties. The historical weighted average tenant retention rate for the Industrial Properties for the period beginning January 1, 1995 through March 31, 1998 was approximately 72.9%. Property Characteristics. The Industrial Properties, which consist primarily of warehouse distribution facilities suitable for single or multiple tenants, are typically comprised of multiple buildings (an average of five) and generally range between 300,000 and 600,000 rentable square feet, averaging 475,000 rentable square feet per Property. The following table identifies characteristics of the typical industrial buildings: INDUSTRIAL BUILDING PROFILE
TYPICAL BUILDING RANGE ---------------- ----- Rentable square feet................... 100,000 70,000 - 150,000 Clear height........................... 24 ft. 18 - 32 ft. Building depth......................... 200 ft. 150 - 300 ft. Truck court depth...................... 110 ft. 90 - 130 ft. Loading................................ Dock & Grade Dock or Dock & Grade Parking spaces per 1,000 square feet... 1.0 0.5 - 2.0 Square footage per tenant.............. 35,000 5,000 - 100,000 Office finish.......................... 8% 3% - 15% Site coverage.......................... 40% 35% - 55%
Lease Terms. The Industrial Properties are typically subject to lease on a "triple net basis," defined as leases in which tenants pay their proportionate share of real estate taxes, insurance and operating costs, or subject to leases on a "modified gross basis," defined as leases in which tenants pay expenses over certain threshold levels. Lease terms typically range from three to ten years, with an average of six years, excluding renewal options. The majority of the industrial leases do not include renewal options. Overview of Major Target Markets. The Properties are concentrated in national hub distribution markets such as Atlanta, Chicago, Dallas/Fort Worth, Los Angeles, Northern New Jersey and the San Francisco Bay Area because management believes their strategic location, transportation network and infrastructure, and 44 large consumer and manufacturing base support strong demand for industrial space. The six national hub markets listed above are the nation's largest warehouse markets and, as of December 31, 1997, comprised 36% of the warehouse inventory of the 53 industrial markets tracked by CB Commercial/Torto Wheaton Research. As of December 31, 1997, the combined population of these markets was approximately 37.2 million, and the amount of per capita warehouse space was 19% above the average for such 53 industrial markets. As set forth in the table below, these six markets contained five of the ten busiest cargo airports and three of the ten busiest container ports. 10 LARGEST WAREHOUSE MARKETS SQ. FT. MARKET (000S)(1) - ------------------------------------ *NORTHERN NEW JERSEY.....................................................371,087 *LOS ANGELES.............................................................360,561 *CHICAGO.................................................................344,968 *ATLANTA.................................................................286,206 *DALLAS/FORT WORTH.......................................................265,769 *SAN FRANCISCO BAY AREA..................................................258,578 PHILADELPHIA............................................................191,625 GREATER MIAMI...........................................................188,824 ORANGE COUNTY...........................................................186,793 St. Louis...............................................................156,666 10 BUSIEST AIR CARGO MARKETS ANNUAL MARKET TONNAGE(2) - ------------------------------------ MEMPHIS...............................................................2,233,490 *LOS ANGELES...........................................................1,872,528 MIAMI.................................................................1,765,827 New York..............................................................1,661,400 *CHICAGO...............................................................1,407,589 Louisville............................................................1,345,318 *NEWARK................................................................1,048,954 *ATLANTA.................................................................864,474 Dayton..................................................................812,440 *DALLAS/FORT WORTH.......................................................810,621 10 BUSIEST PORTS BY CONTAINERIZED CARGO ANNUAL MARKET TONNAGE(3) - ------------------------------------ *LONG BEACH/LOS ANGELES...............................................31,411,023 *NEW YORK/NEW JERSEY..................................................13,407,276 SEATTLE/TACOMA.......................................................11,941,371 Charleston............................................................6,858,062 *OAKLAND...............................................................6,767,463 HOUSTON...............................................................6,458,136 Hampton Roads.........................................................6,189,183 Savannah..............................................................5,505,551 MIAMI/PORT EVERGLADES.................................................5,356,102 New Orleans...........................................................5,009,960 Markets in which the Operating Partnership owns Industrial Properties are in bold. "*" denotes each of the six national hub markets as characterized by the Company. - --------------- (1) Table derived from data, as of December 31, 1997, obtained from CB Commercial/Torto Wheaton Research. (2) Table derived from preliminary data, as of December 1997, published by the Airports Council International. (3) Table derived from data, as of December 31, 1996, obtained from the U.S. Bureau of the Census -- United States Foreign Trade. Within these metropolitan areas, the Industrial Properties are concentrated in in-fill locations (areas which are typified by high population densities and low levels of available land that could be developed into competitive industrial or retail properties) within established, relatively large submarkets (markets within a metropolitan area in which the competitive environment for one or more property types is largely dependent upon the supply of such property type in such market rather than the supply of such property type in other portions of such metropolitan area) which the Operating Partnership believes will provide a higher rate of occupancy and rent growth. These in-fill locations are typically near major ports or airports, have good access to freeways and rail lines, are proximate to a diverse labor pool, and have limited land available for new construction. There is broad demand for industrial space in these centrally located submarkets due to a diverse mix of industries and types of industrial uses, including warehouse distribution, light assembly and manufacturing. The Operating Partnership generally avoids locations at the periphery of metropolitan areas where there are fewer supply constraints. Similarly, small metropolitan areas or cities without a heavy concentration of warehouse activity typically have few, if any, supply-constrained locations. 45 INDUSTRIAL PROPERTY SUMMARY As of March 31, 1998, the 415 buildings comprising the Industrial Properties were diversified across 23 markets nationwide. Only two of the Industrial Properties represent individually more than 3.5% of the Annualized Base Rent of the Industrial Properties as of such date. The average age of the Industrial Properties is 12 years (since the time the property was built or substantially renovated), which the Operating Partnership believes should result in lower operating costs over the long term. Ownership of each Property is in fee simple unless otherwise noted.
PERCENTAGE OF TOTAL NUMBER RENTABLE OF YEAR BUILT/ RENTABLE SQUARE PERCENTAGE REGION/MARKET/PROPERTY LOCATION BUILDINGS RENOVATED(1) SQUARE FEET FEET LEASED ---------------------- ----------------- --------- ------------ ----------- ---------- ---------- EASTERN Baltimore/Washington, D.C. Brightseat Road............... Landover 1 1990 121,785 0.3% 100.0% Patuxent...................... Jessup 2 1981 147,383 0.3 100.0 Pennsy Drive.................. Landover 1 1998R 359,477 0.8 23.1 Preston Court................. Jessup 1 1988 178,880 0.4 100.0 Santa Barbara Court........... Elkridge 1 1978 166,820 0.4 100.0 Boston Arsenal Street................ Watertown 1 1978 191,850 0.4 100.0 Bedford Street................ Middleborough 1 1982 40,018 0.1 100.0 Braintree Industrial.......... Braintree 8 1969 976,634 2.2 100.0 Bradlee Circle Office......... Braintree 1 1987 120,000 0.3 100.0 Brockton Industrial........... Brockton 1 1967 300,114 0.7 100.0 Cabot Business Park........... Mansfield 13 1970 1,102,429 2.5 83.7 Collins Street................ Attleboro 1 1979 152,730 0.3 100.0 Hampden Road.................. Mansfield 1 1977 204,117 0.5 100.0 Hartwell Avenue............... Lexington 1 1970 40,800 0.1 100.0 Locke Building................ Marlborough 1 1982 97,870 0.2 100.0 Stoughton Industrial.......... Stoughton 5 1984 632,675 1.4 100.0 United Drive.................. West Bridgewater 1 1986 315,000 0.7 100.0 Cincinnati (5) Dixie Highway................. Florence 2 1990 209,680 0.5 100.0 Empire Drive.................. Florence 1 1989 199,440 0.5 100.0 Holton Drive.................. Florence 1 1994 268,525 0.6 100.0 Production Drive.............. Florence 1 1975 50,729 0.1 0.0 Northern New Jersey Dock's Corner................. South Brunswick 1 1996 554,521 1.3 84.1 Dock's Corner II.............. South Brunswick 1 1981 212,335 0.5 100.0 Jamesburg..................... Dayton 3 1989 821,712 1.9 95.7 Two South Middlesex........... Monroe 1 1995 218,088 0.5 100.0 Philadelphia Mid-Atlantic Business West Deptford 13 1979R 779,594 1.8 98.7 Center...................... Wilmington Boulden....................... Wilmington 3 1986 266,141 0.6 100.0 --- ---------- ----- Eastern Region Total/Weighted 68 8,729,347 19.9% 92.7% Average....................... --- ---------- ----- ANNUALIZED PERCENTAGE BASE RENT PER ANNUALIZED OF NUMBER LEASED BASE RENT(2) ANNUALIZED OF SQUARE REGION/MARKET/PROPERTY (000S) BASE RENT LEASES FOOT(3) ---------------------- ------------ ---------- ------ ------------- EASTERN Baltimore/Washington, D.C. Brightseat Road............... $ 581 0.3% 2 $4.77 Patuxent...................... 654 0.4 8 4.44 Pennsy Drive.................. 353 0.2 1 4.25 Preston Court................. 748 0.4 3 4.18 Santa Barbara Court........... 616 0.3 2 3.69 Boston Arsenal Street................ 1,438 0.8 1 7.50 Bedford Street................ 593 0.3 1 14.82 Braintree Industrial.......... 2,031 1.1 10 2.08 Bradlee Circle Office......... 1,148 0.6 1 9.57 Brockton Industrial........... 1,123 0.6 2 3.74 Cabot Business Park........... 4,863 2.7 18 5.27 Collins Street................ 468 0.3 1 3.06 Hampden Road.................. 816 0.5 1 4.00 Hartwell Avenue............... 204 0.1 1 5.00 Locke Building................ 333 0.2 1 3.40 Stoughton Industrial.......... 1,895 1.1 7 3.00 United Drive.................. 1,228 0.7 1 3.90 Cincinnati (5) Dixie Highway................. 636 0.4 3 3.03 Empire Drive.................. 622 0.3 3 3.12 Holton Drive.................. 1,034 0.6 1 3.85 Production Drive.............. 0.0 0.0 0 0.0 Northern New Jersey Dock's Corner................. 1,819 1.0 2 3.90 Dock's Corner II.............. 839 0.5 1 3.95 Jamesburg..................... 4,758 2.7 4 6.05 Two South Middlesex........... 856 0.5 2 3.93 Philadelphia Mid-Atlantic Business 2,717 1.5 27 3.53 Center...................... Wilmington Boulden....................... 1,062 0.6 5 3.99 -------- ----- --- Eastern Region Total/Weighted $ 33,435 18.7% 109 $4.13 Average....................... -------- ----- ---
46
PERCENTAGE OF TOTAL NUMBER RENTABLE OF YEAR BUILT/ RENTABLE SQUARE PERCENTAGE REGION/MARKET/PROPERTY LOCATION BUILDINGS RENOVATED(1) SQUARE FEET FEET LEASED ---------------------- ----------------- --------- ------------ ----------- ---------- ---------- MIDWESTERN Chicago Belden Avenue................. Addison 3 1991 346,233 0.8% 100.0% Bensenville................... Bensenville 13 1994R 2,137,370 4.9 96.1 Chicago Industrial............ Bensenville 2 1974 184,360 0.4 59.3 Crossroads Industrial......... Bollingbrook 1 1990 260,890 0.6 100.0 Elk Grove Village Elk Grove Village 10 1980 693,459 1.6 81.5 Industrial.................. Executive Drive............... Addison 1 1987 75,020 0.2 89.0 Greenleaf..................... Elk Grove Village 1 1973 50,695 0.1 100.0 Itasca Industrial Portfolio... Itasca, Wood Dale 6 1996R 769,070 1.7 77.0 Lake Michigan Industrial Itasca, 2 1994 310,681 0.8 100.0 Portfolio(4)................ Bridgeview Linder Skokie................. Skokie 1 1991R 484,370 1.1 60.3 Lisle Industrial.............. Lisle 1 1985R 360,000 0.8 100.0 Melrose Park.................. Melrose Park 1 1982 346,538 0.8 100.0 O'Hare Industrial Portfolio... Itasca, 15 1975 699,512 1.6 100.0 Naperville Windsor Court................. Addison 1 1990 56,640 0.1 100.0 Columbus Industrial Drive.............. Columbus 1 1991 228,433 0.5 100.0 Janitrol...................... Columbus 1 1989 240,000 0.5 86.7 Minneapolis Braemar Business Center....... Minneapolis 2 1982 108,091 0.2 100.0 Corporate Square.............. Eagan 6 1992R 526,490 1.3 92.6 Edenvale Business Center...... Eden Prairie 1 1982 85,818 0.2 98.1 Mendota Heights (6)........... Mendota Heights 1 1998D 150,394 0.3 72.8 Minneapolis Distribution Minneapolis, 5 1997R 1,032,994 2.3 99.5 Portfolio................... Edina Minneapolis Industrial Plymouth 4 1985R 514,546 1.2 100.0 Portfolio IV................ Minneapolis Industrial Brooklyn Center 6 1997 499,673 1.1 100.0 Portfolio V................. Parkway Business Center....... New Hope 1 1982 43,660 0.1 100.0 Penn James Office/Warehouse... Bloomington 2 1974 215,606 0.5 100.0 Round Lake Business Center.... Arden Hills 1 1982 74,265 0.2 93.2 Shady Oak..................... Eden Prairie 1 1980R 104,243 0.2 100.0 Twin Cities................... New Hope, Mendota 2 1980 600,464 1.4 100.0 --- ---------- ----- ------ Midwestern Region Total/Weighted 92 11,199,515 25.5% 93.0% Average......................... --- ---------- ----- ------ SOUTHERN Atlanta Amwiler-Gwinnett Industrial Gwinnett County 9 1996 792,686 1.8% 100.0% Portfolio................... Atlanta South................. Clayton County 9 1994 624,135 1.4 96.2 Norcross/Brookhollow Gwinnett County 4 1996 322,399 0.7 96.7 Portfolio................... Southfield.................... Gwinnett County 8 1990 780,623 1.8 85.1 Suwanee Creek Distribution Atlanta n/a 1998D n/a n/a n/a Center(7)................... Austin Metric Center(4).............. Austin 6 1996 735,240 1.7 100.0 ANNUALIZED PERCENTAGE BASE RENT PER ANNUALIZED OF NUMBER LEASED BASE RENT(2) ANNUALIZED OF SQUARE REGION/MARKET/PROPERTY (000S) BASE RENT LEASES FOOT(3) ---------------------- ------------ ---------- ------ ------------- MIDWESTERN Chicago Belden Avenue................. $ 1,904 1.1% 7 $5.50 Bensenville................... 7,821 4.3 31 3.81 Chicago Industrial............ 475 0.3 3 4.35 Crossroads Industrial......... 1,043 0.5 4 4.00 Elk Grove Village 2,422 1.4 13 4.29 Industrial.................. Executive Drive............... 490 0.3 5 7.34 Greenleaf..................... 266 0.1 1 5.25 Itasca Industrial Portfolio... 1,941 1.1 10 3.28 Lake Michigan Industrial 1,090 0.6 3 3.51 Portfolio(4)................ Linder Skokie................. 807 0.5 6 2.76 Lisle Industrial.............. 756 0.4 1 2.10 Melrose Park.................. 1,057 0.6 1 3.05 O'Hare Industrial Portfolio... 3,154 1.7 16 4.51 Windsor Court................. 276 0.2 1 4.87 Columbus Industrial Drive.............. 678 0.4 1 2.97 Janitrol...................... 684 0.4 1 3.29 Minneapolis Braemar Business Center....... 623 0.3 18 5.76 Corporate Square.............. 1,765 1.0 21 3.62 Edenvale Business Center...... 340 0.2 11 4.04 Mendota Heights (6)........... 455 0.3 7 4.16 Minneapolis Distribution 3,798 2.1 25 3.70 Portfolio................... Minneapolis Industrial 1,876 1.1 16 3.65 Portfolio IV................ Minneapolis Industrial 1,594 0.9 16 3.19 Portfolio V................. Parkway Business Center....... 245 0.1 7 5.61 Penn James Office/Warehouse... 815 0.5 23 3.78 Round Lake Business Center.... 379 0.2 10 5.48 Shady Oak..................... 377 0.2 3 3.62 Twin Cities................... 1,944 1.1 8 3.24 ----- --- ----- Midwestern Region Total/Weighted $ 39,075 21.9% 269 $3.75 Average......................... ----- --- ----- SOUTHERN Atlanta Amwiler-Gwinnett Industrial $ 2,974 1.7% 26 $3.75 Portfolio................... Atlanta South................. 3,037 1.7 26 5.06 Norcross/Brookhollow 1,663 0.9 20 5.34 Portfolio................... Southfield.................... 2,762 1.5 32 4.16 Suwanee Creek Distribution n/a n/a n/a n/a Center(7)................... Austin Metric Center(4).............. 4,809 2.7 22 6.54
47
PERCENTAGE OF TOTAL NUMBER RENTABLE OF YEAR BUILT/ RENTABLE SQUARE PERCENTAGE REGION/MARKET/PROPERTY LOCATION BUILDINGS RENOVATED(1) SQUARE FEET FEET LEASED ---------------------- ----------------- --------- ------------ ----------- ---------- ---------- Dallas/Fort Worth DFW Air Cargo Facility(7)..... Dallas n/a 1998D n/a n/a n/a Dallas Industrial Portfolio... Dallas, Arlington 18 1986 1,066,098 2.4 95.1 Lincoln Industrial Center..... Carrollton 1 1980 93,718 0.2 100.0 Lonestar...................... Dallas, Irving, 7 1993 911,375 2.1 96.7 Grand Prairie McDaniel Drive................ Carrollton 1 1981 157,500 0.4 100.0 N. Glenville Avenue........... Richardson 1 1981 109,000 0.2 100.0 Pagemill & Dillworth.......... Dallas 2 1981 217,782 0.5 100.0 Shiloh Road................... Garland 1 1979 192,720 0.4 100.0 Valwood....................... Carrollton 2 1984 275,994 0.6 100.0 Valwood Parkway II............ Carrollton 2 1984 254,219 0.6 100.0 West Kiest.................... Dallas 1 1981 248,698 0.6 100.0 West North Carrier............ Grand Prairie 1 1993R 248,736 0.6 100.0 Houston Houston Industrial Houston 5 1986 464,696 1.1 95.1 Portfolio................... Memphis Corporate Park................ Memphis 6 1987 658,322 1.4 100.0 Hickory Hill.................. Memphis 1 1979 200,000 0.5 100.0 Miami Beacon Industrial Park........ Miami 8 1995 785,251 1.8 98.1 Blue Lagoon................... Miami 2 1994 325,611 0.6 100.0 Brittania Business Park....... Riviera Beach 2 1988 258,578 0.6 97.1 Orlando Chancellor(4)................. Orlando 1 1996R 201,600 0.5 100.0 Chancellor Square............. Orlando 3 1982 141,778 0.3 67.3 Presidents Drive.............. Orlando 3 1979 378,379 0.9 62.9 Presidents Drive II........... Orlando 3 1984 302,400 0.7 100.0 Sand Lake Service Center...... Orlando 6 1972 400,591 0.9 82.2 Viscount...................... Orlando 1 1972 114,846 0.3 100.0 --- ---------- ----- Southern Region Total/Weighted 114 11,262,975 25.6% 95.2% Average......................... --- ---------- ----- ------ WESTERN Los Angeles Anaheim Industrial............ Anaheim 1 1980 161,500 0.4% 100.0% Artesia Industrial Compton 27 1984 2,496,465 5.7 100.0 Portfolio................... Commerce...................... Fontana 1 1990 254,414 0.6 0.0 East Walnut Drive............. City of Industry 1 1990 85,871 0.2 100.0 International Multifoods...... La Mirada 1 1995R 144,000 0.3 100.0 Jasmine Avenue................ Fontana 1 1990 410,428 0.9 100.0 L.A. County Industrial Carson, Norwalk 6 1980 818,191 1.9 100.0 Portfolio................... Systematics................... Walnut 1 1981 66,387 0.2 100.0 Orange County Northpointe Commerce.......... Fullerton 2 1992 119,445 0.3 100.0 Stadium Business Park......... Anaheim 9 1995R 282,492 0.6 97.3 ANNUALIZED PERCENTAGE BASE RENT PER ANNUALIZED OF NUMBER LEASED BASE RENT(2) ANNUALIZED OF SQUARE REGION/MARKET/PROPERTY (000S) BASE RENT LEASES FOOT(3) ---------------------- ------------ ---------- ------ ------------- Dallas/Fort Worth DFW Air Cargo Facility(7)..... n/a n/a n/a n/a Dallas Industrial Portfolio... 3,149 1.8 67 3.11 Lincoln Industrial Center..... 340 0.2 3 3.63 Lonestar...................... 3,049 1.7 11 3.46 McDaniel Drive................ 601 0.3 1 3.82 N. Glenville Avenue........... 414 0.2 1 3.80 Pagemill & Dillworth.......... 817 0.6 3 3.75 Shiloh Road................... 530 0.3 1 2.75 Valwood....................... 862 0.5 7 3.12 Valwood Parkway II............ 888 0.5 5 3.49 West Kiest.................... 601 0.3 1 2.42 West North Carrier............ 567 0.3 2 2.28 Houston Houston Industrial 1,408 0.8 17 3.18 Portfolio................... Memphis Corporate Park................ 2,348 1.3 10 3.57 Hickory Hill.................. 561 0.3 1 2.81 Miami Beacon Industrial Park........ 5,145 2.9 21 6.68 Blue Lagoon................... 2,311 1.4 14 7.10 Brittania Business Park....... 1,302 0.7 8 5.19 Orlando Chancellor(4)................. 579 0.3 1 2.87 Chancellor Square............. 559 0.3 7 5.86 Presidents Drive.............. 921 0.5 9 3.87 Presidents Drive II........... 958 0.5 7 3.17 Sand Lake Service Center...... 1,576 0.9 36 4.78 Viscount...................... 365 0.2 8 3.17 -------- ----- --- Southern Region Total/Weighted $ 45,096 25.3% 367 $4.20 Average......................... -------- ----- --- ----- WESTERN Los Angeles Anaheim Industrial............ $ 588 0.3% 2 $3.64 Artesia Industrial 9,694 5.4 30 3.88 Portfolio................... Commerce...................... 0 0.0 0 0.00 East Walnut Drive............. 343 0.2 1 3.99 International Multifoods...... 810 0.5 1 5.63 Jasmine Avenue................ 1,231 0.7 1 3.00 L.A. County Industrial 3,797 2.1 11 4.64 Portfolio................... Systematics................... 489 0.3 1 7.37 Orange County Northpointe Commerce.......... 801 0.4 2 6.71 Stadium Business Park......... 1,546 0.9 30 5.62
48
PERCENTAGE OF TOTAL NUMBER RENTABLE OF YEAR BUILT/ RENTABLE SQUARE PERCENTAGE REGION/MARKET/PROPERTY LOCATION BUILDINGS RENOVATED(1) SQUARE FEET FEET LEASED ---------------------- ----------------- --------- ------------ ----------- ---------- ---------- Portland Cascade Business Park......... Tigard 4 1995 159,411 0.4 89.4 Wilsonville................... Portland 1 1979 516,693 1.2 100.0 Sacramento Hewlett Packard Roseville 1 1994 182,437 0.4 100.0 Distribution................ San Diego Activity Distribution San Diego 4 1991 252,318 0.6 100.0 Center...................... San Francisco Bay Area Acer Distribution Center...... San Jose 1 1974 196,643 0.4 100.0 Alvarado Business Center...... San Leandro 10 1986 695,070 1.5 98.3 Ardenwood Corporate Park...... Fremont 4 1986 295,657 0.7 100.0 Dowe Industrial............... Union City 2 1985R 326,080 0.7 100.0 Fairway Drive San Leandro 2 1997D 175,324 0.4 100.0 Industrial(4)(6)............ Laurelwood.................... Santa Clara 2 1981 155,500 0.4 66.6 Milmont Page.................. Fremont 3 1982 199,862 0.5 100.0 Moffett Business Center....... Sunnyvale 4 1994R 285,480 0.6 100.0 Moffett Park R&D Portfolio.... Sunnyvale 14 1994R 462,245 1.0 99.1 Pacific Business Center....... Fremont 2 1991 375,912 0.9 95.4 Silicon Valley R&D San Jose, 5 1978 287,228 0.7 100.0 Portfolio................... Sunnyvale, Milpitas South Bay Industrial.......... Fremont 8 1990 1,011,781 2.3 100.0 Weigman Road.................. Hayward 1 1990 148,559 0.3 100.0 Yosemite Drive................ Milpitas 1 1983 169,195 0.4 100.0 Zanker/Charcot Industrial..... San Jose 5 1993R 301,064 0.7 97.2 Seattle Harvest Business Park......... Kent 3 1986 191,841 0.4 100.0 Kent Centre................... Kent 4 1993 267,967 0.6 100.0 Kingsport Industrial Park..... Kent 7 1994R 951,056 2.2 99.9 Northwest Distribution Kent 3 1980 325,625 0.6 88.5 Center...................... --- ---------- ----- Western Region Total/Weighted 141 12,772,141 29.0 96.8 Average......................... --- ---------- ----- TOTAL/WEIGHTED AVERAGE............ 415 43,963,978 100.0% 94.6% === ========== ===== ANNUALIZED PERCENTAGE BASE RENT PER ANNUALIZED OF NUMBER LEASED BASE RENT(2) ANNUALIZED OF SQUARE REGION/MARKET/PROPERTY (000S) BASE RENT LEASES FOOT(3) ---------------------- ------------ ---------- ------ ------------- Portland Cascade Business Park......... 1,065 0.6 8 7.47 Wilsonville................... 1,550 0.9 1 3.00 Sacramento Hewlett Packard 630 0.4 1 3.45 Distribution................ San Diego Activity Distribution 1,366 0.8 15 5.41 Center...................... San Francisco Bay Area Acer Distribution Center...... 1,038 0.6 2 5.28 Alvarado Business Center...... 3,673 2.1 33 5.38 Ardenwood Corporate Park...... 2,300 1.3 9 7.78 Dowe Industrial............... 1,132 0.6 4 3.47 Fairway Drive 797 0.4 2 4.55 Industrial(4)(6)............ Laurelwood.................... 487 0.3 1 4.71 Milmont Page.................. 1,157 0.6 10 5.79 Moffett Business Center....... 2,187 1.2 5 7.66 Moffett Park R&D Portfolio.... 4,990 2.8 33 10.89 Pacific Business Center....... 1,989 1.1 10 5.55 Silicon Valley R&D 2,376 1.3 9 8.27 Portfolio................... South Bay Industrial.......... 5,376 3.0 30 5.31 Weigman Road.................. 581 0.3 2 3.91 Yosemite Drive................ 748 0.4 1 4.42 Zanker/Charcot Industrial..... 1,905 1.1 17 6.51 Seattle Harvest Business Park......... 857 0.5 11 4.47 Kent Centre................... 1,179 0.7 16 4.40 Kingsport Industrial Park..... 3,042 1.7 18 3.20 Northwest Distribution 1,085 0.6 3 3.77 Center...................... -------- ----- --- Western Region Total/Weighted 60,809 34.1 320 4.92 Average......................... -------- ----- --- TOTAL/WEIGHTED AVERAGE............ $178,415 100.0% 1,065 $4.29 ======== ===== ===
- --------------- (1) Industrial Properties denoted with an "R," "E" or "D" indicate the date of most recent renovation, expansion or development, respectively. All other dates reference the year such Property was developed. (2) Annualized Base Rent means the monthly contractual amount under existing leases at March 31, 1998, multiplied by 12. This amount excludes expense reimbursements and rental abatements. (3) Calculated as total Annualized Base Rent divided by rentable square feet leased as of March 31, 1998. (4) The Company holds interests in these Properties through a joint venture interest in a limited partnership or limited liability company. See "-- Properties Held Through Joint Ventures, Limited Liability Companies and Partnerships." (5) The Properties included in the Cincinnati Consolidated Metropolitan Statistical Area are located in Florence, Kentucky, and, accordingly, are reflected in the Eastern region. (6) This Property is being redeveloped. All calculations are based on rentable square feet existing as of March 31, 1998. (7) This Property consists of land held for future development. 49 INDUSTRIAL PROPERTY TENANT INFORMATION Largest Industrial Property Tenants. The following table lists tenants with Annualized Base Rent representing at least 0.5% of total Annualized Base Rent as of March 31, 1998 of the Industrial Properties owned as of such date. Eleven of such tenants lease space in more than one of the Industrial Properties.
PERCENTAGE OF PERCENTAGE OF AGGREGATE NUMBER AGGREGATE AGGREGATE ANNUALIZED ANNUALIZED OF RENTABLE LEASED BASE RENT BASE TENANT NAME(1) PROPERTIES SQUARE FEET SQUARE FEET(2) (000S) RENT(3) -------------- ---------- ----------- -------------- ---------- ------------- Wakefern Food Corporation............. 1 419,900 1.0% $ 2,314 1.3% Bradlees Stores, Inc.................. 2 716,239 1.7 1,998 1.1 United States Postal Service.......... 2 433,359 1.0 1,969 1.1 Air Express International, Inc........ 2 272,235 0.7 1,896 1.1 Dell USA.............................. 1 290,400 0.7 1,724 1.0 Rite Aid.............................. 1 516,693 1.2 1,550 0.9 Sage Enterprises Inc.................. 2 199,877 0.5 1,459 0.8 Boston Edison Company................. 1 191,850 0.5 1,439 0.8 Home Depot USA Inc.................... 2 374,813 0.9 1,367 0.8 Acer America.......................... 2 241,643 0.6 1,318 0.7 General Electric Company.............. 4 318,055 0.8 1,311 0.7 Cosmair Inc........................... 1 303,843 0.7 1,291 0.7 Schmelbach-Lubeca AG.................. 2 339,104 0.8 1,265 0.7 Avery Dennison Corporation............ 1 410,428 1.0 1,231 0.7 United Liquors Ltd.................... 1 315,000 0.8 1,229 0.7 Unisource Worldwide, Inc.............. 4 279,167 0.7 1,178 0.7 Mylex Corporation..................... 1 133,182 0.3 1,173 0.7 Rolf C. Hagen (USA) Corp.............. 1 204,151 0.5 1,133 0.6 Harmonic Lightwaves................... 1 110,160 0.3 1,124 0.6 C & S Wholesale Grocers, Inc.......... 1 113,680 0.3 1,108 0.6 Ciba Vision Corporation............... 1 245,616 0.6 1,067 0.6 Dry Storage Corporation............... 1 346,538 0.8 1,057 0.6 Hexcel Corporation.................... 1 285,634 0.7 1,051 0.6 The Discovery Channel Store/Nature Company............................. 1 268,525 0.6 1,034 0.6 Holman Distribution................... 1 371,440 0.9 1,011 0.6 Mitsubishi Warehouse Corporation...... 1 253,584 0.6 1,004 0.6 Hit or Miss........................... 1 328,540 0.8 946 0.5 ADAP, Inc............................. 1 249,851 0.6 927 0.5 Superior Coffee & Foods............... 1 201,011 0.5 926 0.5 Advo Systems, Inc..................... 1 173,660 0.4 905 0.5 Emery Air Freight Corporation......... 2 143,726 0.3 905 0.5 Pragmatech Inc........................ 1 102,157 0.2 873 0.5 Rollerblade, Inc...................... 1 278,840 0.7 872 0.5 Boise Cascade Corporation............. 1 260,143 0.6 864 0.5 Arrow Electronics..................... 1 227,500 0.5 860 0.5 Best Buy Company...................... 1 244,733 0.6 842 0.5 Logitech, Inc......................... 1 95,632 0.2 827 0.5 Sears, Roebuck and Co................. 2 169,653 0.4 821 0.5 Bridgestone/Firestone, Inc............ 1 296,800 0.7 819 0.5 Vidco International................... 1 146,460 0.4 817 0.5 HomeGoods Inc......................... 1 204,117 0.5 816 0.5 Belkin Components..................... 1 219,028 0.5 815 0.5 International Multifoods.............. 1 144,000 0.3 810 0.5 ---------- ---- ------- ---- Total/Weighted Average (Industrial Properties)......................... 11,440,967 27.4% $49,946 28.4% ========== ==== ======= ====
- --------------- (1) Tenant(s) may be a subsidiary of or an entity affiliated with the named tenant. (2) Computed as Aggregate Rentable Square Feet divided by the Aggregate Leased Square Feet of the Industrial Properties. (3) Computed as Annualized Base Rent divided by the Aggregate Annualized Base Rent of the Industrial Properties. (4) Computed as Aggregate Rentable Square Feet of such tenants divided by Aggregate Leased Square Feet of the Properties or Annualized Base Rent of such tenants divided by Aggregate Annualized Base Rent of the Properties, as applicable. 50 The 43 largest industrial tenants represent 27.4% of the Industrial Properties' Annualized Base Rent as of March 31, 1998. Other companies that are tenants in the Industrial Properties include International Business Machines, Inc., Hewlett Packard Company, Federal Express Corporation, Lucent Technologies, Inc. and a wide variety of other national, regional and local industrial tenants. Leases of less than 25,000 rentable square feet represent 57% of the Industrial Properties' total number of leases and 18.8% of the Industrial Properties' Annualized Base Rent. Following is a list of certain tenants which lease less than 25,000 rentable square feet of industrial space: Alabama Metal Industries, Type A Snowboard, Inc. W.R. Grace & Co. Inc. Buckeye International, Inc. Creative Solutions Argosy Industries, Inc. Creative Education Supplies Genuine Parts Company City of San Leandro Farmer's Insurance Litho Technical Services Custom Walls & Windows Inc. Le Gourmet Kitchens Plastek USA Inc. Golden West Games New Golf Holding Co. Santa Cruz Motors National Tree Corporation Quality Video Tokyo World Transport (USA) Inc. Plummer's, Inc. The Sportsman's Guide Zebra Express Inc. Supergraphics Inc.
INDUSTRIAL PROPERTY LEASE EXPIRATIONS The following table summarizes the lease expirations for the Industrial Properties for leases in place as of March 31, 1998, without giving effect to the exercise of renewal options or termination rights, if any, at or prior to the scheduled expirations.
ANNUALIZED PERCENTAGE PERCENTAGE ANNUALIZED BASE RENT OF OF TOTAL BASE RENT OF OF EXPIRING ANNUALIZED NUMBER RENTABLE SQUARE RENTABLE EXPIRING LEASES PER BASE RENT OF LEASES FOOTAGE OF SQUARE LEASES SQUARE OF EXPIRING YEAR OF LEASE EXPIRATION EXPIRING(1) EXPIRING LEASES(1) FOOTAGE (000S)(1)(2) FOOT(3) LEASES ------------------------ ----------- ------------------ ---------- ------------ ----------- ----------- 1998(4)................. 190 4,771,454 11.5% $ 21,239 $4.45 11.5% 1999.................... 205 7,043,996 16.9 27,486 3.90 14.9 2000.................... 228 7,320,405 17.6 32,604 4.45 17.7 2001.................... 156 5,096,560 12.3 24,399 4.79 13.2 2002.................... 150 6,715,250 16.1 29,596 4.41 16.1 2003.................... 54 3,576,187 8.6 15,347 4.29 8.3 2004.................... 23 1,880,574 4.5 8,473 4.51 4.6 2005.................... 20 2,122,015 5.1 8,078 3.81 4.4 2006.................... 14 1,042,523 2.5 6,466 6.20 3.5 2007.................... 5 503,868 1.2 2,418 4.80 1.3 2008 and beyond......... 16 1,538,479 3.7 8,266 5.37 4.5 ----- ---------- ----- -------- ------ Total/Weighted Average.... 1,061 41,611,311 100.0% $184,372 $4.43 100.0% ===== ========== ===== ======== ======
- --------------- (1) Includes executed leases that commence after March 31, 1998 and excludes leases expiring prior to April 1, 1998. (2) Based on rent at expiration. (3) Calculated as Annualized Base Rent divided by the square footage of expiring leases. (4) Includes leases encompassing 318,985 square feet which are on a month-to-month basis. 51 RETAIL PROPERTIES At March 31, 1998, the Operating Partnership owned 37 Retail Properties aggregating approximately 6.8 million rentable square feet, 33 of which are grocer-anchored. As of March 31, 1998, the Retail Properties were 94.6% leased to over 900 tenants, the largest of which accounted for approximately 3.0% of Annualized Base Rent from the Retail Properties as of such date. The Retail Properties have an average age of five years since built, expanded or renovated. The historical weighted average tenant retention rate for the Retail Properties for the period beginning January 1, 1995 through March 31, 1998 was approximately 83.5%, based on 0.8 million rentable square feet of expiring leases. The Retail Properties generally are located in supply-constrained trade areas (those trade areas typified by significant population densities, a limited number of existing retailers, such as grocers, and a low availability of land which could be developed into competitive space for additional competitive retailers) of 16 major metropolitan areas. The Operating Partnership's national operating strategy for the community shopping center business is based on detailed research regarding these target trade areas which typically have high population densities and above-average income levels. The two graphs below compare the population density and income levels surrounding the Operating Partnership's retail centers to the national averages. 1997 MEDIAN HOUSEHOLD INCOME AMB CENTERS VS. U.S.(1) Within 3 miles of|AMB Retail Center 50000 All MSAs 42000 Total U.S. 37000
(1) Weighted by number of households. (2) Derived from information compiled by Claritas Inc. The Operating Partnership has been advised that the information comes from various government and industry sources, but the Operating Partnership has not independently verified the information. (3) Derived from forecasted data obtained from Regional Financial Associates. 1997 AVERAGE POPULATION WITHIN THREE-MILE RADIUS OF SHOPPING CENTER(1)
Measurement Period (Fiscal Year Covered) Population AMB Retail|Centers 110000 U.S. Shopping|Centers 71000
(1) Derived from information compiled by Claritas Inc. The Operating Partnership has been advised that the information comes from various government and industry sources, but the Operating Partnership has not independently verified the information. (2) For all shopping centers greater than or equal to 50,000 square feet and less than or equal to 400,000 square feet. 52 Management believes that the characteristics of its trade areas tend to result in centers with above-average retail sales. The graph below compares the average sales of the Retail Properties' grocer anchors to the national average for grocers. AVERAGE 1997 GROCER ANCHOR SALES FOR RETAIL PROPERTIES AVERAGE 1996 RETAIL SALES CHART (1) Includes sales per square foot for grocer anchors reporting a full year of sales. Thirty-one of 37 centers are represented above. Of the six centers not represented, (i) four do not have grocer anchors, (ii) one center is currently under construction and (iii) the grocer-anchor store at one center is not owned by the Operating Partnership and does not report sales. (2) All but nine of the 31 centers included report sales on a calendar year basis. (3) Derived from data published in the Progressive Grocer Annual Report, April 1998. 53 Property Characteristics. The Retail Properties generally contain between 80,000 and 350,000 rentable square feet. On average, 67% of the rentable square feet for each of the Retail Properties is leased to one or more Anchor Tenants (defined as all grocery stores, drugstores and any other retail tenant occupying more than 10,000 rentable square feet). The following table identifies characteristics of a typical Retail Property. RETAIL PROPERTY PROFILE
TYPICAL PROPERTY TYPICAL RANGE ---------------- ----------------- Rentable square feet......................... 190,000 80,000 - 350,000 Percentage leased by Anchor Tenants.......... 67% 60% - 85% Number of tenants............................ 25 10 - 50 Parking spaces per 1,000 square feet......... 5.0 4.0 - 6.0 Square footage per Anchor Tenant............. 25,000 10,000 - 100,000 Average square footage per Non-Anchor Tenant..................................... 1,500 750 - 5,000
Lease Terms. The Retail Properties are typically leased on a triple net basis, defined as leases in which tenants pay their proportionate share of real estate taxes, insurance and operating costs. In addition, some leases, including some Anchor Tenant leases, require tenants to pay percentage rents based on gross retail sales above predetermined thresholds. Typical Anchor Tenant leases also provide for payment of a percentage administrative fee in lieu of a management fee (calculated as a percentage of common area maintenance) which ranges between 5% and 15%. Lease terms typical for Anchor Tenants range from 10 to 20 years, with an average of 19 years, with renewal options for an additional 10 to 20 years at fixed rents. Tenant improvement allowances are standard and the amounts vary by submarket. Typical Non-Anchor Tenants have lease terms ranging between three and 10 years with an average of eight years and they typically receive options for an additional five-year term at market rents. 54 RETAIL PROPERTY SUMMARY Anchor Tenants accounted for 67.4% of the aggregate square footage of the Retail Properties as of March 31, 1998. Annualized Base Rent as of such date for the Company's largest tenants was approximately $29.9 million, representing approximately 39.3% of Annualized Base Rent for all Retail Properties. Annualized Base Rent for the remaining retail tenants was approximately $46.3 million as of the same date, representing approximately 60.7% of the Annualized Base Rent for all Retail Properties. The following table sets forth, on a property-by-property basis, the rentable square footage leased to Anchor Tenants and Non-Anchor Tenants as of March 31, 1998. Ownership of each Property is in fee simple unless otherwise noted.
LEASED LEASED NON- ANCHOR ANCHOR RENTABLE RENTABLE AVAILABLE TOTAL YEAR BUILT/ SQUARE SQUARE RENTABLE RENTABLE REGION/MARKET/PROPERTY LOCATION RENOVATED(1) FEET FEET SQUARE FEET SQUARE FEET ---------------------- ---------------- ------------ ----------- ----------- ----------- ----------- EASTERN Albany Latham Farms.................... Albany 1993 502,444 77,733 22,300 602,477 Baltimore Long Gate Shopping Center....... Ellicott City 1996 390,288 14,467 0 404,755 Boston Mazzeo Drive.................... Randolph 1993 88,420 0 0 88,420 Hartford Corbins Corner Shopping Center........................ Hartford 1988R 116,960 58,067 2,289 177,316 --------- --------- --------- --------- Eastern Total/Weighted Average...................................... 1,098,112 150,267 24,589 1,272,968 MIDWESTERN Chicago Brentwood Commons............... Bensenville 1990R 61,621 40,508 0 102,129 Civic Center Plaza.............. Niles 1989 238,655 17,554 7,306 263,515 Riverview Plaza Shopping Center........................ Chicago 1981 113,607 25,665 0 139,272 Minneapolis Rockford Road Plaza............. Plymouth 1991 151,757 54,160 0 205,917 --------- --------- --------- --------- Midwestern Total/Weighted Average................................... 565,640 137,887 7,306 710,833 SOUTHERN Atlanta Woodlawn Point Shopping Center........................ Cobb County 1993 68,499 29,400 0 97,899 AVERAGE ANNUALIZED NUMBER BASE RENT PERCENTAGE BASE RENT OF PER SQUARE REGION/MARKET/PROPERTY LEASED (000S)(2) LEASES FOOT(3) PRIMARY TENANTS(4) ---------------------- ---------- ---------- ------ ---------- ------------------ EASTERN Albany Latham Farms.................... 96.3% $ 5,941 27 $10.24 Sam's Club Wal-Mart Stores Baltimore Long Gate Shopping Center....... 100.0 4,639 12 11.46 Kohl's Target Boston Mazzeo Drive.................... 100.0 690 1 7.80 Bob's Inc. Hartford Corbins Corner Shopping Center........................ 98.7 3,111 23 17.77 Filene's Basement Toys 'R Us ------- ----- Eastern Total/Weighted Average...... 98.1 14,381 63 11.52 MIDWESTERN Chicago Brentwood Commons............... 100.0 1,047 21 10.25 Dominick's Super Trak Civic Center Plaza.............. 97.2 2,471 13 9.64 Dominick's Home Depot Riverview Plaza Shopping Center........................ 100.0 1,379 14 9.90 Dominick's Toys 'R Us Minneapolis Rockford Road Plaza............. 100.0 2,202 30 10.69 PetsMart Rainbow Foods ------- ----- Midwestern Total/Weighted Average... 99.0 7,099 78 10.09 SOUTHERN Atlanta Woodlawn Point Shopping Center........................ 100.0 1,194 18 12.20 Publix Zany Brainy
55
LEASED LEASED NON- ANCHOR ANCHOR RENTABLE RENTABLE AVAILABLE TOTAL YEAR BUILT/ SQUARE SQUARE RENTABLE RENTABLE REGION/MARKET/PROPERTY LOCATION RENOVATED(1) FEET FEET SQUARE FEET SQUARE FEET ---------------------- ---------------- ------------ ----------- ----------- ----------- ----------- Houston Randall's Austin Parkway........ Sugarland 1993 90,650 21,025 0 111,675 Randall's Commons Memorial...... Houston 1993 75,689 31,002 3,504 110,195 Randall's Dairy Ashford......... Houston 1993 115,360 20,575 0 135,935 Randall's Woodway Collection.... Houston 1993 65,108 27,507 18,074 110,689 Wesleyan Plaza.................. Houston 1986R 216,870 116,521 22,859 356,250 Miami Kendall Mall(6)................. Miami 1995R 194,550 89,505 15,527 299,582 Northridge Plaza(6)(7).......... Ft. Lauderdale 1998R 124,650 51,064 15,493 191,207 Palm Aire(6)(7)................. Pompano Beach 1997R 33,100 25,748 101,054 159,902 Shoppes at Lago Mar............. Miami 1995 42,323 31,693 9,092 83,108 Springs Gate(8)................. Coral Springs n/a n/a n/a n/a n/a The Plaza at Delray(6).......... Delray Beach 1996R 216,883 50,438 33,288 300,609 --------- --------- --------- --------- Southern Total/Weighted Average..................................... 1,243,682 494,478 218,891 1,957,051 WESTERN Denver Applewood Village Shopping Center........................ Wheat Ridge 1994R 265,663 85,013 2,547 353,223 Arapahoe Village Shopping Center........................ Boulder 1989R 85,530 73,707 0 159,237 Los Angeles Granada Village................. Granada Hills 1996R 124,638 88,328 11,817 224,783 Manhattan Village Shopping Center ....................... Manhattan Beach 1992R 225,791 188,467 9,692 423,950 Twin Oaks Shopping Center....... Agoura Hills 1996R 58,475 43,924 0 102,399 AVERAGE ANNUALIZED NUMBER BASE RENT PERCENTAGE BASE RENT OF PER SQUARE REGION/MARKET/PROPERTY LEASED (000S)(2) LEASES FOOT(3) PRIMARY TENANTS(4) ---------------------- ---------- ---------- ------ ---------- ------------------ Houston Randall's Austin Parkway........ 100.0% $ 1,093 12 $ 9.79 Randall's Sears Hardware Randall's Commons Memorial...... 96.8 947 15 8.88 Randall's Walgreen's Randall's Dairy Ashford......... 100.0 1,283 12 9.44 Randall's PetSmart Randall's Woodway Collection.... 83.7 1,206 12 13.02 Randall's Eckerd Wesleyan Plaza.................. 93.6 3,760 46 11.28 Randall's Bering's Home Center Miami Kendall Mall(6)................. 94.8 3,734 46 13.15 J.C. Penney Home Store Upton's Northridge Plaza(6)(7).......... 91.9 1,362 21 7.75 Target Publix Palm Aire(6)(7)................. 36.8 436 15 7.41 Eckerd Winn-Dixie Shoppes at Lago Mar............. 89.1 879 17 11.88 Publix Springs Gate(8)................. n/a n/a n/a n/a n/a The Plaza at Delray(6).......... 88.9 3,249 35 12.15 Home Place ------- ----- Regal Cinema Southern Total/Weighted Average..... 88.8 19,143 249 11.01 WESTERN Denver Applewood Village Shopping Center........................ 99.3 2,865 41 8.17 Wal-Mart Stores King Soopers Arapahoe Village Shopping Center........................ 100.0 1,840 25 11.56 Safeway So-Fro Fabrics Los Angeles Granada Village................. 94.7 2,820 38 13.24 Hughes Market TJ Maxx Manhattan Village Shopping Center ....................... 97.7 6,492 88 15.67 Macy's Fry's Electronics Twin Oaks Shopping Center....... 100.0 1,100 24 10.74 Ralph's Rite Aid
56
LEASED LEASED NON- ANCHOR ANCHOR RENTABLE RENTABLE AVAILABLE TOTAL YEAR BUILT/ SQUARE SQUARE RENTABLE RENTABLE REGION/MARKET/PROPERTY LOCATION RENOVATED(1) FEET FEET SQUARE FEET SQUARE FEET ---------------------- ---------------- ------------ ----------- ----------- ----------- ----------- Reno Southwest Pavilion(7)........... Reno 1997E 47,140 25,206 4,411 76,757 San Diego La Jolla Village S.C............ La Jolla 1989R 67,238 95,142 2,572 164,952 Rancho San Diego Village S.C.... La Mesa 1994R 39,777 58,282 13,393 111,452 Santa Barbara Five Points Shopping Center..... Santa Barbara 1996 97,189 47,295 0 144,484 San Francisco Bay Area Bayhill Shopping Center......... San Bruno 1997R 59,221 57,775 5,045 122,041 Lakeshore Plaza Shopping Center........................ San Francisco 1993 38,836 81,975 2,050 122,861 Pleasant Hill Shopping Center... Pleasant Hill 1990R 210,614 23,063 0 233,677 Silverado Plaza Shopping Center........................ Napa 1994R 58,238 25,843 942 85,023 Ygnacio Plaza................... Walnut Creek 1990R 52,118 50,118 7,193 109,429 Seattle Aurora Marketplace.............. Edmonds 1991 74,113 32,837 0 106,950 Eastgate Plaza.................. Bellevue 1995R 49,575 26,989 0 76,564 Totem Lake Malls................ Kirkland 1989R 154,223 75,629 60,352 290,204 --------- --------- --------- --------- Western Region Total/Weighted Average............................... 1,708,379 1,079,593 120,014 2,907,986 --------- --------- --------- --------- Total/Weighted Average.............................................. 4,615,813 1,862,225 370,800 6,848,838 ========= ========= ========= ========= AVERAGE ANNUALIZED NUMBER BASE RENT PERCENTAGE BASE RENT OF PER SQUARE REGION/MARKET/PROPERTY LEASED (000S)(2) LEASES FOOT(3) PRIMARY TENANTS(4) ---------------------- ---------- ---------- ------ ---------- ------------------ Reno Southwest Pavilion(7)........... 94.3% $ 731 14 $10.10 Scolari's Market San Diego La Jolla Village S.C............ 98.4 3,016 37 18.57 Whole Foods Market Sav-on Drugs Rancho San Diego Village S.C.... 88.0 1,247 41 12.72 Safeway Santa Barbara Five Points Shopping Center..... 100.0% 2,241 25 15.51 Lucky Ross Stores San Francisco Bay Area Bayhill Shopping Center......... 95.9 1,282 27 10.96 Longs Drugs Mollie Stone's Markets Lakeshore Plaza Shopping Center........................ 98.3 3,281 33 27.16 Ross Stores UCSF Pleasant Hill Shopping Center... 100.0 2,374 12 10.16 Toys 'R Us Target Silverado Plaza Shopping Center........................ 98.9 823 17 9.79 Nob Hill Foods Rite Aid Ygnacio Plaza................... 93.4 1,352 24 13.22 Lucky Rite Aid Seattle Aurora Marketplace.............. 100.0 1,495 18 13.98 Drug Emporium Safeway Eastgate Plaza.................. 100.0 944 15 12.33 Rite Aid Albertson's Totem Lake Malls................ 79.2% 1,763 36 7.67 Lamonts Apparel Computer City ------- ----- Western Region Total/Weighted Averag 95.9 35,666 515 12.79 ------- ----- Total/Weighted Average.............. 94.6% $76,289 905 $11.78 ======= =====
- --------------- (1) Retail Properties denoted with an "R," "E" or "D" indicate the date of most recent renovation, expansion or development, respectively. All other dates reference the year such Property was developed. (2) Annualized Base Rent means the monthly contractual amount under existing leases at March 31, 1998, multiplied by 12. This amount excludes expense reimbursements, rental abatements and percentage rents. (3) Calculated as total Annualized Base Rent divided by rentable square feet actually leased as of March 31, 1998. (4) Primary tenants are defined as the two largest Anchor Tenants as measured by rentable square footage. (5) This Property includes 33 apartment units which were acquired as part of the acquisition of the Property. (6) The Operating Partnership holds interests in these Properties through a joint venture interest in a limited partnership. See "-- Properties Held Though Joint Ventures, Limited Liability Companies and Partnerships." (7) This Property is being redeveloped. All calculations are based on rentable square feet existing as of March 31, 1998. (8) This Property consists of land held for future development. 57 RETAIL PROPERTY TENANT INFORMATION Largest Retail Property Tenants. The Company's 25 largest Retail Property tenants by Annualized Base Rent are set forth in the table below. These tenants have an average of approximately 15 years remaining on their lease terms, which the Company believes should provide a balance to the typically shorter remaining lease terms of the Industrial Property tenants.
PERCENTAGE OF PERCENTAGE OF AGGREGATE AGGREGATE NUMBER AGGREGATE LEASED ANNUALIZED ANNUALIZED OF RENTABLE SQUARE BASE RENT BASE TENANT NAME(1)(2) CENTERS SQUARE FEET FEET(3) (000S) RENT(4) ----------------- ------- ----------- ------------- ---------- ------------- Wal-Mart Stores, Inc. and Sam's Club...... 2 388,866 6.0% $ 2,891 3.8% Randall's Food & Drugs, Inc............... 5 298,549 4.6 2,369 3.1 Safeway Stores, Inc....................... 4 187,334 2.9 1,860 2.5 Target Stores Corporation Dayton.......... 3 320,670 4.9 1,784 2.4 Home Place................................ 2 109,323 1.7 1,450 1.9 Omni ..................................... 3 175,229 2.7 1,430 1.9 Blockbuster Video, Inc. Viacom............ 10 58,785 0.9 1,247 1.7 Toys 'R Us, Inc........................... 3 135,332 2.1 1,247 1.7 Publix.................................... 5 199,764 3.1 1,180 1.5 Home Quarters............................. 1 101,783 1.6 1,167 1.5 J.C. Penney............................... 4 74,612 1.1 1,113 1.5 Tandy Corporation......................... 15 81,910 1.3 1,044 1.4 Dart...................................... 6 64,390 1.0 1,030 1.3 Gap, Inc.................................. 4 57,591 0.9 1,016 1.3 Home Depot................................ 1 116,095 1.8 1,015 1.3 Barnes & Noble Super Stores, Inc.......... 3 50,600 0.8 1,004 1.3 Great Atlantic............................ 1 86,889 1.3 949 1.2 PetsMart, Inc............................. 4 102,100 1.6 875 1.1 Hallmark.................................. 13 49,693 0.8 852 1.1 Hannaford Bros. Co........................ 1 63,664 1.0 828 1.1 TJX, Inc.................................. 4 117,200 1.8 769 1.0 Ross Stores, Inc.......................... 2 61,120 0.9 769 1.0 Randolph Bob's, Inc....................... 1 88,420 1.4 690 0.9 American Stores........................... 4 116,873 1.8 689 0.9 Fry's Electronics......................... 1 46,200 0.7 677 0.9 --------- ---- ------- ---- Total/Weighted Average............... 3,152,992 48.7% $29,945 39.3% ========= ==== ======= ====
- --------------- (1) Tenant(s) may be a subsidiary of or an entity affiliated with the named tenant. (2) Of the top 25 Retail Property tenants, six are grocers. Of the 37 Retail Properties, 33 are grocer-anchored. (3) Computed as Aggregate Rentable Square Feet divided by the Aggregate Leased Square Feet of the Retail Properties. (4) Computed as Annual Base Rent divided by the Aggregate Annualized Base Rent of the Retail Properties. (5) Computed as Aggregate Rentable Square Feet of such tenants divided by Aggregate Leased Square Feet of the Properties or Annualized Base Rent of such tenants divided by Aggregate Annualized Base Rent of the Properties, as applicable. 58 With over 900 tenants, the Retail Properties include other national retailers as well as regional and local tenants, many of which are privately held. Leases of less than 2,500 rentable square feet represent 58% of the Retail Property leases and 20.5% of the Retail Properties' Annualized Base Rent. Following is a list of certain tenants which lease less than 2,500 rentable square feet of retail space: Agoura Beauty Supply Flower Basket Islands Restaurants King Dragon Star of India TCBY Baskin Robbins, Inc. Great Escapes Travel Let Us Mail Pavilion Cleaners Santa Barbara Travel State Farm Insurance The Bowling Store Domino's Pizza Imagination Toys Nail Xpress Prestige Jewelers Sears Driving School Subway Yum-Yum Donuts RETAIL PROPERTY LEASE EXPIRATIONS The following table sets forth a summary schedule of the Retail Property lease expirations for leases in place as of March 31, 1998 without giving effect to the exercise of renewal options or termination rights, if any, at or prior to the scheduled expirations.
ANNUALIZED PERCENTAGE OF ANNUALIZED RENTABLE BASE RENT OF ANNUALIZED RENT OF NUMBER OF SQUARE FOOTAGE PERCENTAGE OF EXPIRING BASE RENT OF EXPIRING YEAR OF LEASE LEASES OF LEASES TOTAL RENTABLE LEASES(1)(2) EXPIRING LEASES PER EXPIRATIONS EXPIRING(1) EXPIRING(1) Square Footage (000S) LEASES SQUARE FOOT(3) - ---------------------- ----------- -------------- -------------- ------------ ------------- -------------- 1998(4)............... 121 438,950 6.7% $ 4,759 5.7% $10.84 1999.................. 123 392,463 6.0 5,536 6.6 14.11 2000.................. 123 467,638 7.2 5,961 7.2 12.75 2001.................. 113 511,783 7.9 6,670 8.0 13.03 2002.................. 132 426,945 6.6 7,740 9.3 18.13 2003.................. 59 321,251 4.9 4,559 5.5 14.19 2004.................. 30 179,045 2.8 2,702 3.2 15.09 2005.................. 36 134,228 2.1 3,103 3.7 23.12 2006.................. 46 303,150 4.7 5,712 6.9 18.84 2007.................. 34 406,543 6.3 4,291 5.2 10.55 2008 and beyond....... 102 2,921,111 44.8 32,248 38.7 11.04 --- --------- ----- ------- ----- ------ Total/Weighted Average............. 919 6,503,107 100.0% $83,281 100% $12.81 === ========= ===== ======= ===== ======
- --------------- (1) Schedule includes executed leases that commence after March 31, 1998. Schedule ignores leases expiring March 31, 1998. (2) Calculated as monthly rent at expiration multiplied by 12. (3) Rent per square foot is calculated by dividing the Annualized Base Rent of expiring leases by the square footage expiring in any given year. (4) Includes 43,699 square feet of month-to-month leases. 59 HISTORICAL TENANT RETENTION RATES AND RENT INCREASES The following table sets forth information relating to retention rates and rent increases on renewal and re-tenanted space for the Properties for the periods presented.
YEARS ENDED DECEMBER 31, -------------------------- THREE MONTHS ENDED TOTAL/WEIGHTED 1995 1996 1997 MARCH 31, 1998 AVERAGE ------ ------ ------ ------------------ -------------- INDUSTRIAL PROPERTIES: Retention rate................. 67.9% 79.2% 69.5% 77.3% 72.9% Rental rate increases.......... 4.8% 4.7% 13.0% 14.8% RETAIL PROPERTIES: Retention rate................. 63.5% 88.4% 87.8% 87.2% 83.5% Rental rate increases.......... 3.2% 5.4% 10.1% 22.0% TOTAL PROPERTIES: Retention rate................. 67.7% 79.8% 70.3% 78.1% 73.5% Rental rate increases.......... 4.3% 5.0% 12.0% 16.4%
RECURRING TENANT IMPROVEMENTS AND LEASING COMMISSIONS The tables below summarize for Industrial Properties and Retail Properties, separately, the recurring tenant improvements and leasing commissions for the periods presented. The recurring tenant improvements and leasing commissions represent costs incurred to lease space after the initial lease term of the initial tenant, excluding costs incurred to relocate tenants as part of a re-tenanting strategy. The tenant improvements and leasing commissions set forth below are not necessarily indicative of future tenant improvements and leasing commissions. See "Risk Factors -- General Real Estate Risks -- Possibility Inability to Complete Renovation and Development on Advantageous Terms."
YEARS ENDED DECEMBER 31, --------------------- THREE MONTHS ENDED WEIGHTED 1995 1996 1997 MARCH 31, 1998 AVERAGE ----- ----- ----- ------------------ -------- INDUSTRIAL PROPERTIES: Expenditures per renewed square foot leased.................................... $0.91 $0.93 $1.05 $ 0.76 $0.93 Expenditures per re-tenanted square foot leased.................................... 1.75 1.97 1.62 1.98 1.77 Aggregate weighted average per square foot leased.................................... 1.32 1.29 1.30 0.98 1.26 RETAIL PROPERTIES: Expenditures per renewed square foot leased.................................... 5.53 4.72 4.25 1.82 3.96 Expenditures per re-tenanted square foot leased.................................... 5.37 6.53 7.92 13.85 7.47 Aggregate weighted average per square foot leased.................................... 5.46 5.61 6.41 3.25 5.59
OCCUPANCY AND BASE RENT The table below sets forth weighted average occupancy rates and base rent based on square feet leased of the Industrial Properties and the Retail Properties as of and for the periods presented.
YEARS ENDED DECEMBER 31, -------------------------- THREE MONTHS ENDED 1995 1996 1997 MARCH 31, 1998 ------ ------ ------ ------------------ INDUSTRIAL PROPERTIES: Occupancy rate at period end................ 97.3% 97.2% 95.7% 94.6% Average base rent per square foot(1)........ $ 3.43 $ 3.81 $ 4.26 $ 4.29 RETAIL PROPERTIES: Occupancy rate at period end................ 92.4% 92.4% 96.1% 94.6% Average base rent per square foot(1)........ $10.46 $11.32 $11.98 $11.78
- --------------- (1) Average base rent per square foot represents the total contractual base rental revenue for the period divided by the average square feet leased for the period. 60 RENOVATION, EXPANSION AND DEVELOPMENT PROJECTS IN PROGRESS The following table sets forth the Properties owned by the Operating Partnership which are currently undergoing renovation, expansion or new development. No assurance can be given that any of such Properties will be completed on schedule or within budgeted amounts. See "Risk Factors -- General Real Estate Risks -- Possible Inability to Complete Renovation and Development on Advantageous Terms."
ESTIMATED ESTIMATED ESTIMATED TOTAL SQUARE FEET STABILIZATION INVESTMENT AT PROPERTY NAME TYPE(1) DATE(2) (000S)(3) COMPLETION ------------- ----------- ------------- ---------- ----------- Industrial Properties: Dock's Corner............................... Expansion Jul-98 $ 46,900 1,200,000 Fairway Drive Phase II...................... Development May-98 10,600 255,300 Fairway Drive Phase III..................... Development Sept-99 4,800 115,000 Mendota Heights............................. Development Dec-98 6,900 150,400 Pennsy Drive................................ Renovation Jan-99 10,000 359,500 DFW Air Cargo Facility...................... Development Dec-99 18,300 205,000 Suwanee Creek Distribution Center........... Development Feb-01 32,000 1,086,000 -------- --------- Subtotal............................ 129,500 3,371,200 Retail Properties: Palm Aire................................... Renovation Feb-99 11,500 144,300 Springs Gate................................ Development May-98 34,600 248,900 Northridge Plaza............................ Renovation Sept-00 35,400 259,400 -------- --------- Subtotal............................ 81,500 652,600 -------- --------- Total............................... $211,000 4,023,800 ======== =========
- --------------- (1) Renovation with respect to a Property means capital improvements which have totaled 20% or more of the total cost of such Property within a 24-month period or which have resulted in material improvement of physical condition. Expansion with respect to a Property means construction resulting in an increase in the rentable square footage of an existing structure or the development of additional buildings on a property on which existing buildings are located. Development with respect to a Property means new construction on a previously undeveloped location. (2) Estimated stabilization date means management's estimate of when capital improvements for repositioning, development and redevelopment programs will have been completed and in effect for a sufficient period of time (but in no case more than 12 months after shell completion) to achieve market occupancy of at least 95%. (3) Represents total estimated cost of renovation, expansion or development, including initial acquisition costs. The estimates are based on the Operating Partnership's current planning estimates and forecasts and therefore subject to change. PROPERTIES HELD THROUGH JOINT VENTURES, LIMITED LIABILITY COMPANIES AND PARTNERSHIPS As of March 31, 1998, the Operating Partnership held interests in 11 joint ventures, limited liability companies and partnerships (collectively, the "Joint Ventures") with certain unaffiliated third parties (the "Joint Venture Participants"). Pursuant to the existing agreements with respect to each Joint Venture, the Operating Partnership holds a greater than 50% interest in 10 of the Joint Ventures and a 50% interest in the eleventh Joint Venture, but in certain cases such agreements provide that the Operating Partnership is a limited partner or that the Joint Venture Participant is principally responsible for day-to-day management control of the Property (though in all such cases, the Operating Partnership has approval rights with respect to significant decisions involving the underlying properties). Under the agreements governing the Joint Ventures, the Operating Partnership and the Joint Venture Participant may be required to make additional capital contributions, and subject to certain limitations, the Joint Ventures may incur additional debt. Such additional indebtedness would effectively be senior to the Notes. See "Risk Factors -- Ranking of the Notes." Such agreements also impose certain restrictions on the transfer of the interest in the Joint Venture by the Operating Partnership or the Joint Venture Participant, and provide certain rights to the Operating Partnership and/or the Joint Venture Participant to sell its interest to the Joint Venture or to the other venturer on terms specified in the agreement. All of the Joint Ventures terminate in the year 2024 or later, but 61 may end earlier if a Joint Venture ceases to hold any interest in or have any obligations relating to the property held by such Joint Venture. See "Risk Factors -- Impact on Control Over and Liabilities with Respect to Properties Owned Through Partnerships and Joint Ventures. The following table sets forth certain information regarding the Joint Ventures as of March 31, 1998:
PERCENTAGE AND FORM OF BOOK VALUE OF COMPANY'S GROSS BOOK CO-VENTURER'S COMPANY'S OWNERSHIP PROPERTY VALUE(1) MORTGAGE DEBT INVESTMENT(2) INVESTMENT(3) INTEREST -------- ---------- ------------- ------------- ------------- -------------- INDUSTRIAL PROPERTIES: Chancellor........... $ 6,390 $ (2,972) $ (613) $ 2,805 90% general partnership interest Fairway Drive........ 12,119 -- (313) 11,806 70% LLC interest Nippon Express(4).... 6,257 -- (412) 5,845 50% limited partnership interest Metric Center........ 43,965 -- (5,421) 38,544 87.15% limited partnership interest Jamesburg/Corporate Park/Hickory Hill.............. 74,465 -- (37,119) 37,346 50.0005% general partnership interest -------- -------- -------- -------- Subtotal.......... 143,196 (2,972) (43,878) 96,346 RETAIL PROPERTIES: Kendall Mall......... 35,794 (25,063) 358 11,089 50.0001% limited partnership interest Manhattan Village.... 83,307 -- (7,884) 75,423 90% LLC interest Palm Aire............ 14,035 (5,623) (1,108) 7,304 50.0001% general partnership interest The Plaza at Delray............ 35,127 (23,378) (355) 11,394 50.0001% limited partnership interest Springs Gate......... 11,693 -- -- 11,693 50.0001% limited partnership interest Northridge Plaza..... 11,011 -- -- 11,011 50.0001% limited partnership interest -------- -------- -------- -------- Subtotal.......... 190,967 (54,064) (8,989) 127,914 -------- -------- -------- -------- Total........ $334,163 $(57,036) $(52,867) $224,260 ======== ======== ======== ========
- --------------- (1) Represents the book value of the Property owned by the respective joint venture entity before accumulated depreciation. (2) Represents the co-venturer's aggregate investment on a book value basis in the respective joint venture property. (3) Represents the Company's aggregate investment on a book value basis in the respective joint venture property. (4) Represents a building which is part of the Lake Michigan Industrial Portfolio. The Company accounts for all of the above investments on a consolidated basis for financial reporting purposes because of its ability to exercise control over significant aspects of the investment as well as its significant economic interest in such investments. See Notes to the Consolidated Financial Statements of the Company. DEBT FINANCING The Operating Partnership's financing policies and objectives are determined by the Company's Board of Directors and may be altered without the consent of the Company's stockholders. The organizational documents of the Operating Partnership and the Company do not limit the amount of indebtedness that either may incur. The Company presently intends to limit the Debt-to-Total Market Capitalization Ratio to approximately 45%. As of March 31, 1998, on a pro forma basis after giving effect to the Offering and the 62 application of the net proceeds therefrom as described in "Use of Proceeds," the Company's consolidated Debt-to-Total Market Capitalization Ratio as of March 31, 1998 on a pro forma basis would have been approximately 31.2% (29.9% on an historical basis). The Operating Partnership believes that the Debt-to-Total Market Capitalization Ratio is a useful indicator of a company's ability to incur indebtedness and has gained acceptance as an indicator of leverage for real estate companies. The Operating Partnership intends to utilize one or more sources of capital for future acquisitions, including development and capital improvements, which may include undistributed cash flow, borrowings under the Credit Facility, issuance of debt or equity securities of either the Operating Partnership or the Company, funds from its co-investment partners and other bank and/or institutional borrowings. There can be no assurance, however, that the Operating Partnership will be able to obtain capital for any such acquisitions, developments or improvements on terms favorable to the Operating Partnership. See "Strategies for Growth -- Growth Through Acquisition." Unsecured Debt. The Operating Partnership is party to the Credit Facility with aggregate availability of $500 million (subject to borrowing base limitations). The Operating Partnership intends to use the Credit Facility principally for acquisitions and for working capital purposes. Borrowings under the Credit Facility bear interest at a floating rate equal to LIBOR plus 90 to 120 basis points (currently LIBOR plus 90 basis points), depending upon the Operating Partnership's debt rating at the time of such borrowings. As of March 31, 1998, $312.0 million was outstanding under the Credit Facility, with $148.0 million of availability. Of the $312.0 million outstanding as of March 31, 1998, substantially all of such borrowings were used to finance property acquisitions. The Company's ability to borrow under the Credit Facility is subject to the Operating Partnership's ongoing compliance with a number of financial and other covenants. The Credit Facility requires that: (i) the Operating Partnership maintain a ratio of unencumbered property value to unsecured indebtedness of at least 2 to 1; (ii) the unencumbered properties generate sufficient net operating income to maintain a debt service coverage ratio of at least 2 to 1; (iii) the Operating Partnership maintain a total indebtedness to total asset value ratio of not more than 0.5 to 1; (iv) the ratio of net operating cash flow to debt service plus estimated capital expenditures and preferred dividends be at least 2 to 1; and (v) certain other customary covenants and performance requirements. The Credit Facility, except under certain circumstances, limits the Operating Partnership's ability to make distributions to no more than 95% of its annual FFO. Secured Debt. As of March 31, 1998, $73 million was outstanding under the Secured Facility. Payments of interest only are due monthly at a fixed annual interest rate of 7.53% with the principal due on December 12, 2008. The Secured Facility, which is secured by six of the Properties, became an obligation of the Company upon consummation of the Formation Transactions. Under the Secured Facility, the Operating Partnership may substitute collateral, subject to certain requirements with respect to the property offered as replacement collateral. In addition to the Secured Facility, 53 of the Properties secure mortgage indebtedness. The aggregate principal amount of such mortgage indebtedness was $514 million, $444 million, $403 million and $254 million at March 31, 1998 and December 31, 1997, 1996 and 1995, respectively. All secured indebtedness bears interest at rates varying from 7.01% to 10.39% per annum (with a weighted average of 8.01%) with final maturity dates ranging from 1998 to 2014. 63 The following table sets forth scheduled principal payments of the Operating Partnership's secured debt (excluding construction debt of $5.6 million as of March 31, 1998) for the Properties on an historical basis as of March 31, 1998 for each of the years beginning with the year ending December 31, 1998. All of the Operating Partnership's mortgage debt is fixed-rate and has generally been arranged by the Operating Partnership or its predecessors directly with lenders such as Principal Financial Group, Northwestern Mutual Life, Prudential Insurance and Nationwide Insurance.
WEIGHTED SCHEDULED PRINCIPAL TOTAL AVERAGE PRINCIPAL DUE AT PRINCIPAL YEAR-END AMORTIZATION MATURITY PAYMENTS INTEREST RATE ------------ --------- --------- ------------- YEAR (IN THOUSANDS) ---- 1998....................................... $ 5,648 48,055 53,703 7.96% 1999....................................... 7,398 3,567 10,965 7.94 2000....................................... 8,804 -- 8,804 7.93 2001....................................... 9,392 29,190 38,582 7.93 2002....................................... 9,260 54,415 63,675 7.88 2003....................................... 8,219 114,982 123,201 7.82 2004....................................... 6,435 36,085 42,520 7.71 2005....................................... 5,911 33,416 39,327 7.61 2006....................................... 4,441 103,922 108,363 7.70 2007....................................... 2,038 14,339 16,377 7.66 2008....................................... 1,603 77,783 79,386 8.25 2009....................................... 426 -- 426 8.25 2010....................................... 345 -- 345 8.25 2011....................................... 375 -- 375 8.25 2012....................................... 407 -- 407 8.25 2013....................................... 442 -- 442 8.25 2014....................................... 39 -- 39 0.00 ------- -------- -------- ---- Total/Weighted Average.................. $71,183 $515,754 $586,937 6.71% ======= ======== ======== ====
The following table sets forth scheduled maturities of the Operating Partnership's secured debt (excluding construction debt of $5.6 million as of March 31, 1998) on a property-by-property basis.
NOTE BALANCE AT ANNUAL DEBT INTEREST RATE AT MARCH 31, 1998 SERVICE PROPERTY MARCH 31, 1998 (000S) (000S) MATURITY DATE -------- ---------------- ---------------- ----------- ------------- INDUSTRIAL PROPERTIES: Arsenal Street.......................... 10.20% $ 10,598 $ 1,438 04/01/98 Bedford Street.......................... 8.50 1,841 219 04/01/98 Braintree Industrial.................... 7.75 5,234 542 04/01/98 Braintree Office........................ 8.34 6,157 659 04/01/98 Collins Street.......................... 9.50 2,141 57 04/01/98 Collins Street.......................... 10.25 431 315 04/01/98 Hartwell Avenue/Braintree Industrial/ Stoughton Industrial(1).............. 7.87 6,305 849 04/01/98 Stoughton Industrial.................... 10.39 708 122 04/01/98 Stoughton Industrial.................... 8.25 610 81 04/01/98 United Drive............................ 9.50 953 113 04/01/98 Harvest Business Park................... 10.38 3,631 438 04/01/99 Edenvale Business Center................ 9.38 1,540 183 11/01/01 United Drive............................ 8.50 7,911 844 06/30/02
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NOTE BALANCE AT ANNUAL DEBT INTEREST RATE AT MARCH 31, 1998 SERVICE PROPERTY MARCH 31, 1998 (000S) (000S) MATURITY DATE -------- ---------------- ---------------- ----------- ------------- OCP Portfolio(2)........................ 9.13 12,532 1,373 11/15/02 Chancellor.............................. 7.45 2,940 273 01/15/03 Blue Lagoon............................. 7.15 11,805 1,032 02/01/03 Kingsport Industrial Park............... 7.81 17,477 1,582 08/01/03 Moffett Business Center................. 7.20 12,757 1,123 12/15/03 Bensenville............................. 8.53 19,986 2,034 08/01/04 Bensenville............................. 8.53 6,680 678 08/01/04 Bensenville............................. 8.35 2,701 267 08/01/04 Bensenville............................. 8.35 7,061 691 08/01/04 Bensenville............................. 8.35 5,107 499 08/01/04 South Bay Industrial(3)................. 8.31 19,404 1,843 04/05/05 Lonestar................................ 8.23 17,000 1,399 08/01/05 Activity Distribution Center............ 7.27 5,317 478 01/01/06 Stadium Business Park................... 7.27 4,834 434 01/01/06 Hewlett Packard Distribution............ 7.27 3,384 304 01/01/06 Minneapolis Industrial Portfolio IV..... 7.27 8,218 739 01/01/06 Amwiler-Gwinnett Industrial Portfolio... 7.01 8,577 838 04/01/06 Pacific Business Center................. 8.59 9,820 1,003 08/01/06 Chicago Industrial...................... 8.59 3,242 331 08/01/06 Valwood................................. 8.59 4,004 409 08/01/06 West North Carrier...................... 8.59 3,242 331 08/01/06 Artesia Industrial Portfolio............ 7.29 54,100 3,944 11/15/06 Stoughton Industrial.................... 10.38 4,305 746 12/31/06 Amwiler-Gwinnett Industrial Portfolio... 7.68 5,608 514 01/01/07 Mendota Heights......................... 8.50 668 57 06/18/07 Ardenwood Corporate Park................ 7.84 9,950 883 09/01/07 Stoughton Industrial.................... 8.13 1,207 142 09/30/07 Brockton Industrial..................... 9.00 6,680 723 12/31/07 Minneapolis Industrial Portfolio V...... 8.88 7,279 1,053 12/01/08 Secured Facility-Industrial(4).......... 7.53 47,450 3,573 12/01/08 Stoughton Industrial.................... 8.25 2,384 329 03/31/09 Mazzeo.................................. 8.25 4,105 465 01/01/14 -------- ------- Subtotal/Weighted Average (rate/number of years)............. 8.04 377,884 35,950 7.08 RETAIL PROPERTIES: Lakeshore Plaza Shopping Center......... 7.68 13,567 1,867 11/10/98 Woodlawn Shopping Center................ 8.50 4,620 474 01/01/01 Kendall Mall............................ 7.65 24,641 2,169 11/15/01 Silverado Plaza Shopping Center......... 9.02 4,860 534 04/10/02 Arapahoe Village Shopping Center........ 7.81 10,760 1,002 08/01/02 The Plaza at Delray..................... 7.78 22,902 1,983 09/01/02 Brentwood Commons....................... 8.74 5,081 502 06/01/03 Granada Village......................... 8.74 14,588 1,441 06/01/03 Ygnacio Plaza........................... 8.74 7,783 769 06/01/03 La Jolla Village........................ 8.74 17,907 1,768 06/01/03 Latham Farms............................ 7.88 37,409 3,665 12/01/03
65
NOTE BALANCE AT ANNUAL DEBT INTEREST RATE AT MARCH 31, 1998 SERVICE PROPERTY MARCH 31, 1998 (000S) (000S) MATURITY DATE -------- ---------------- ---------------- ----------- ------------- Civic Center Plaza...................... 7.27 13,555 1,216 02/01/06 Shoppes at Lago Mar..................... 7.50 5,831 532 04/01/06 Secured Facility-Retail(4).............. 7.53 25,550 1,924 12/12/08 Subtotal/Weighted Average (rate/number of years)............. 7.96 209,054 19,846 5.5 -------- ------- Total/Weighted Average (rate/number of years)....................... 8.01% $586,938 $55,796 6.5 ======== =======
- --------------- (1) One loan is secured by three properties. These properties are Hartwell Avenue, Braintree Industrial and Stoughton Industrial. (2) OCP Portfolio has one loan secured by three properties. These properties are Chancellor Square, Presidents Drive and Sand Lake Service Center. (3) Comprised of three loans with identical terms that are not cross-collateralized. (4) The Secured Facility is cross-collateralized with the following Industrial and Retail Properties: L.A. County Industrial Portfolio, Southfield, Corbins Corner Shopping Center, Elk Grove Village Industrial, Pleasant Hill Shopping Center and Milmont Page. Construction Debt. The Operating Partnership also has a construction loan agreement in the amount of $8 million to fund building improvements. The loan matures three years from the date of the first loan draw, which occurred in July 1997. Borrowings under the construction loan bear interest at LIBOR plus 275 basis points, or the greater of the prime rate or the federal funds rate plus 50 basis points, at the borrower's option. The balance of the construction loan outstanding at March 31, 1998 was $5.6 million. INSURANCE The Company and AMB Investment Management carry joint blanket coverage for Properties owned by the Company (including the Operating Partnership) and Properties managed by AMB Investment Management, with a single aggregate policy limit and deductible. Management believes that its Properties are covered adequately by commercial general liability insurance, including excess liability coverage, and commercial "all risks" property insurance, including loss of rents coverage, with commercially reasonable deductibles, limits and policy terms and conditions customarily carried for similar properties. There are, however, certain types of losses which may be uninsurable or not economically insurable, such as losses due to loss of rents caused by strikes, nuclear events or acts of war. Should an uninsured loss occur, the Company could lose both its invested capital in and anticipated profits from the property. The Company insures its properties for earthquake or earth movement. A number of both the Industrial and Retail Properties are located in areas that are known to be subject to earthquake activity. This is focused in California where as of March 31, 1998, there are 27 Industrial Properties aggregating 10.4 million rentable square feet and 11 Retail Properties aggregating 1.8 million square feet. Through an annual analysis prepared by outside consultants, the Company determines appropriate limits of earthquake coverage to secure. Coverage is on a replacement cost basis, subject to the maximum limit purchased which the Company believes is adequate and appropriate given both exposure and cost considerations. Therefore, no assurance can be given that material losses in excess of insurance proceeds will not occur in the future. See "Risk Factors -- General Real Estate Risks -- Uninsured Losses from Seismic Activity." The Company has insurance for loss in the event of damage to its properties for earthquake activity, which consists of a sublimit of $10,000,000 per occurrence for earthquake coverage provided as part of the "All Risk Property Policy" with a primary insurer, with $90,000,000 per occurrence for losses in excess of the $10,000,000 sublimit. The per occurrence deductible for this coverage in California is 5% of the values applied separately to each building subject to a minimum deductible of $100,000 (to the extent that such amount is 66 greater than 5% of the values at each location), and the deductible for Properties outside of California is $25,000. GOVERNMENT REGULATIONS Many laws and governmental regulations are applicable to the 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 ADA, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. Compliance with the ADA might require removal of structural barriers to handicapped access in certain public areas where such removal is "readily achievable." Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. Environmental Matters. Under Environmental Laws, a current or previous owner or operator of real estate may be liable for contamination resulting from the presence or discharge of hazardous or toxic substances or petroleum products at such property, and may be required to investigate and clean-up such contamination at such property or such contamination which has migrated from such property. Such 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, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. In addition, the owner or operator of a site may be subject to claims by third parties 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 a site. Environmental Laws also govern the presence, maintenance and removal of ACBM. Such laws require that ACBM be properly managed and maintained, that those who may come into contact with ACBM be adequately apprised or trained and that special precautions, including removal or other abatement, be undertaken in the event ACBM is disturbed during renovation or demolition of a building. Such 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 the Properties may contain ACBM. Some of the 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 the 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 the 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. All of the 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. Some of the Company's environmental assessments of the 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 the Properties has revealed any environmental liability that the Operating Partnership believes would have a material adverse effect on the Operating Partnership's or the 67 Company's financial condition or results of operations taken as a whole, nor is the Company aware of any such material environmental liability. Nonetheless, it is possible that the Company's assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. In addition, less than 50% of the Properties have environmental assessments which are more than two years old. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the Properties will not be affected by tenants, by the condition of land or operations in the vicinity of the Properties (such as releases from underground storage tanks), or by third parties unrelated to the Company. If the costs of compliance with the various environmental laws and regulations, now existing or hereafter adopted, exceed the Company's budgets for such items, the Company's ability to make payments of principal of and interest on the Notes could be adversely affected. Other Regulations. The Properties are also subject to various Federal, state and local regulatory requirements such as state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. The Company believes that the Properties are currently in substantial compliance with all such regulatory requirements. However, there can be no assurance that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by the Company, which expenditure could have an adverse effect on the Company's results of operations and financial condition. Risk of Property Tax Reassessment. Certain local real property tax assessors may seek to reassess certain of the Properties as a result of the Formation Transactions and the transfer of interests that occurred in connection therewith. In jurisdictions such as California, where Proposition 13 limits the assessor's ability to reassess real property so long as there is no change in ownership, the assessed value could increase by as much as the full value of any appreciation that has occurred during the AMB Predecessors' period of ownership. Where appropriate, the Company would contest vigorously any such reassessment. Subject to market conditions, current leases may permit the Company to pass through to tenants a portion of the effect of any increases in real estate taxes resulting from any such reassessment. Except as described in this Prospectus, there are no other laws or regulations which have a material effect on the Company's operations, other than typical state and local laws affecting the development and operation of real property, such as zoning laws. See "Description of Certain Provisions of the Partnership Agreement of the Operating Partnership." MANAGEMENT AND EMPLOYEES The Company conducts substantially all of its operations through the Operating Partnership. AMB Investment Management independently conducts third party portfolio management activities and related operations. The Company generally has full, exclusive and complete responsibility and discretion in the management and control of the Operating Partnership. The Company (primarily through the Operating Partnership and AMB Investment Management) employs 123 persons, 99 of whom are located at the Company's headquarters in San Francisco and 24 of whom are located in the Company's Boston office. LEGAL PROCEEDINGS Neither the Company nor any of the Properties is subject to any material litigation nor, to the Company's knowledge, is any material litigation threatened against any of them, other than routine litigation arising in the ordinary course of business, which is generally expected to be covered by liability insurance, or to have an immaterial effect on financial results. 68 POLICIES WITH RESPECT TO CERTAIN ACTIVITIES The following is a discussion of the policies with respect to investments, financing and certain other activities of the Operating Partnership and the Company. These policies and those set forth under "Certain Relationships and Related Transactions -- Conflicts of Interest" have been determined by the Board of Directors of the Company and may be amended or revised from time to time at the discretion of the Board of Directors without notice to or a vote of the stockholders of the Company or the limited partners of the Operating Partnership, except that changes in certain policies with respect to conflicts of interest must be consistent with legal requirements. Such legal requirements include those arising from fiduciary principles under the Maryland General Corporation Law ("MGCL"), including Section 2-419 thereof (which provides procedures for approval of interested director transactions), and the Delaware Revised Uniform Limited Partnership Act, and the judicial decisions under each of such statutes. All references in the following discussion to the "Company" include the Operating Partnership unless otherwise indicated. INVESTMENT POLICIES Investments in Real Estate or Interests in Real Estate. The Company currently plans to continue to conduct substantially all of its investment activities through the Operating Partnership. The Company's investment objectives are to increase FFO per share and the value of the Properties, and to acquire established income-producing industrial properties and community shopping centers with FFO growth potential. Additionally, where prudent and possible, the Company may develop new properties and seek to renovate or reposition the existing Properties and any newly-acquired properties. The Company's business is focused on industrial properties and community shopping centers, but the Company may invest in other types of properties which represent investment opportunities at the discretion of management. In addition, the Company may invest in other property types in connection with industrial and retail acquisition and development opportunities. Where appropriate, and subject to REIT qualification rules, the Operating Partnership may sell or otherwise dispose of certain of the Properties. The Company expects to pursue its investment objectives through the direct and indirect ownership of properties and ownership interests in other entities. The Company focuses on properties in those markets where the Company currently has operations and in new markets selectively targeted by management. However, future investments, including the activities described below, will not be limited to any geographic area or to a specified percentage of the Company's assets. The Company also may participate with other entities in property ownership through joint ventures or other types of co-ownership. Equity investments may be subject to existing mortgage financing and other indebtedness or such financing or indebtedness may be incurred in connection with acquiring investments. Any such financing or indebtedness will have priority over the Company's equity interest in such property. See "Business and Operating Strategies -- AMB Investment Management." Investments in Real Estate Mortgages. While the Company emphasizes equity real estate investments, it may, in its discretion, invest in mortgages, deeds of trust and other similar interests. The Company does not presently intend to invest significantly in mortgages or deeds of trust, but may acquire such interests as a strategy for acquiring ownership of a property or the economic equivalent thereof, subject to the investment restrictions applicable to REITs. In addition, the Company may invest in mortgage-related securities and/or may seek to issue securities representing interests in such mortgage-related securities as a method of raising additional funds. Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers. Subject to the gross income and asset tests necessary for REIT qualification, the Company also may invest in securities of entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities. To date, neither the Operating Partnership nor the Company has invested in any such securities. In selecting such investments in the future, if any, the Operating Partnership and the Company expect to consider the same factors used to identify individual properties for investment -- companies with properties located in in-fill locations -- as well as other factors which the Operating Partnership and the Company may consider to be relevant, including, among others, historical performance, 69 financial condition and management. The Company may acquire all or substantially all of the securities or assets of other REITs or similar entities where such investments would be consistent with the Company's investment policies. In any event, the Company does not intend that its investments in securities will require it or the Operating Partnership to register as an "investment company" under the Investment Company Act of 1940, as amended. FINANCING POLICIES In addition to the limitations on indebtedness under the Credit Facility, since the IPO, the Company has maintained and presently intends to continue to maintain a Debt-to-Total Market Capitalization Ratio of approximately 45% or less. This policy differs from conventional mortgage debt-to-equity ratios which are asset-based ratios. The Company, however, may from time to time re-evaluate this policy and decrease or increase such ratio in light of then current economic conditions, relative costs to the Company of debt and equity capital, market values of its properties, growth and acquisition opportunities and other factors. There is no limit on the Debt-to-Total Market Capitalization Ratio imposed by either the Articles of Incorporation or Bylaws or the Partnership Agreement. To the extent the Board of Directors of the Company determines to obtain additional capital, the Company may issue equity securities, or cause the Operating Partnership to issue additional Units or debt securities, or retain earnings (subject to provisions in the Code requiring distributions of taxable income to maintain REIT status), or a combination of these methods. Pursuant to the Partnership Agreement the net proceeds of all equity capital raised by the Company will be contributed to the Operating Partnership in exchange for additional general partner interests therein. To the extent that the Board of Directors determines to obtain debt financing in addition to the existing mortgage indebtedness and the Notes, the Company intends to do so generally through mortgages on its properties and the Credit Facility; however, the Company may also issue or cause the Operating Partnership to issue additional debt securities in the future, including debt which is pari passu with the Notes. Such indebtedness may be recourse, non-recourse or cross-collateralized and may contain cross-default provisions. The net proceeds of any debt securities issued by the Company will be lent to the Operating Partnership on substantially the same terms and conditions as are incurred by the Company. The Operating Partnership and Company do not have policies limiting the number or amount of mortgages that may be placed on any particular property, but mortgage financing instruments usually limit additional indebtedness on such properties. The Operating Partnership is currently negotiating for an increase in the aggregate amount available under the Credit Facility, and may in the future seek to extend, expand, reduce or renew the Credit Facility, or obtain new credit facilities or lines of credit, subject to its general policy on debt capitalization, for the purpose of making acquisitions or capital improvements or providing working capital or meeting the taxable income distribution requirements for REITs under the Code. LENDING POLICIES The Company may consider offering purchase money financing in connection with the sale of Properties where the provision of such financing will increase the value received by the Company for the property sold. The Operating Partnership also may make loans to joint ventures in which it may participate in the future. The Company may also make loans to the Operating Partnership, AMB Investment Management, and joint ventures and other entities in which it or the Operating Partnership has an equity interest. CONFLICT OF INTEREST POLICIES Officers and Directors of the Company. Without the unanimous approval of the disinterested directors, the Company and its subsidiaries will not (i) acquire from or sell to any director, officer or employee of the Company, or any entity in which a director, officer or employee of the Company owns more than a 1% interest, or acquire from or sell to any affiliate of any of the foregoing, any assets or other property, (ii) make any loan to or borrow from any of the foregoing persons or (iii) engage in any other material transaction with any of the foregoing persons. Each transaction of the type described above will be in all respects on such terms as are, at the time of the transaction and under the circumstances then prevailing, fair and reasonable to the Company 70 and its subsidiaries in the opinion of the disinterested directors. For purposes of this paragraph, "disinterested directors" means those Independent Directors who do not have an interest in the transaction in question. Policies Applicable to All Directors. Under Maryland law, each director is obligated to offer to the Company any opportunity (with certain limited exceptions) which comes to such director and which the Company could reasonably be expected to have an interest in developing or acquiring. The Company has adopted certain policies relating to such matters applicable to Independent Directors actively engaged in industrial and retail real estate which generally limit directly competitive activities by such directors. In addition, under Maryland law, any contract or other transaction between a corporation and any director or any other corporation, firm or other entity in which the director is a director or has a material financial interest may be void or voidable. However, the MGCL provides that any such contract or transaction will not be void or voidable if (i) it is authorized, approved or ratified, after disclosure of, or with knowledge of, the common directorship or interest, by the affirmative vote of a majority of disinterested directors (even if the disinterested directors constitute less than a quorum) or by the affirmative vote of a majority of the votes cast by disinterested stockholders or (ii) it is fair and reasonable to the corporation. POLICIES WITH RESPECT TO OTHER ACTIVITIES The Company may, but does not presently intend to, make investments other than as previously described. The Company makes real property investments only through the Company and the Operating Partnership, except to the extent necessary to establish financing partnerships or similar vehicles established substantially for the benefit of the Company or the Operating Partnership. The Company has authority to offer its shares of Common Stock or other equity or debt securities of the Operating Partnership in exchange for property and to repurchase or otherwise reacquire its shares of Common Stock or any other securities and may engage in such activities in the future. Similarly, the Operating Partnership may offer additional Units or other equity interests in the Operating Partnership that are exchangeable for shares of Common Stock or Preferred Stock in exchange for property. The Operating Partnership also may make loans to joint ventures in which it may participate in the future. Neither the Company nor the Operating Partnership will engage in trading, underwriting or the agency distribution or sale of securities of other issuers. POLICIES WITH RESPECT TO INVESTMENT ADVISORY SERVICES Uninvested commitments of clients of AMB Investment Management existing upon consummation of the IPO and any additional amounts committed by these clients and any amounts committed by investors which become clients of AMB Investment Management will be invested only in properties in which the Company also invests, on a co-investment basis. See "Business and Operating Strategies -- AMB Investment Management." AMB Investment Management may also take over management of assets already owned by existing or new clients and manage such assets on a separate account basis. To the extent that transactions arise between the Company and a client of AMB Investment Management, it is anticipated that AMB Investment Management generally will not exercise decision-making authority on behalf of the client, and the client will act through its own representatives. Similarly, it is expected that the terms of co-investment arrangements between the Company and clients of AMB Investment Management will be negotiated on an arm's-length basis at the time the applicable investment management agreement is entered into, with any subsequent modifications thereto to be likewise entered into on the basis of arm's-length negotiations with the client or another representative designated thereby at the time of such negotiation. OTHER POLICIES The Company operates in a manner that does not subject it to regulation under the Investment Company Act of 1940. The Board of Directors has the authority, without stockholder approval, to issue additional shares of Common Stock or other securities and to repurchase or otherwise reacquire shares of Common Stock or any other securities in the open market or otherwise and may engage in such activities in the future. The Company may, under certain circumstances, purchase shares of Common Stock in the open market, if such purchases are approved by the Board of Directors. The Board of Directors has no present intention of causing the Company to repurchase any of the shares of Common Stock, and any such action would be taken only in 71 conformity with applicable Federal and state laws and the requirements for qualifying as a REIT under the Code and the Treasury Regulations. The Company expects to issue shares of Common Stock to holders of Units upon exercise of their exchange rights set forth in the Partnership Agreement. The Company may in the future make loans to joint ventures in which it participates in order to meet working capital or other capital needs. The Company has not engaged in trading, underwriting or agency distribution or sale of securities of other issuers other than the Operating Partnership, nor has the Company invested in the securities of other issuers other than the Operating Partnership and AMB Investment Management for the purposes of exercising control, and does not intend to do so. At all times, the Company intends to make investments in such a manner as to be consistent with the requirements of the Code for the Company to qualify as a REIT unless, because of changing circumstances or changes in the Code (or in Treasury Regulations), the Board of Directors determines that it is no longer in the best interests of the Company to qualify as a REIT and such determination is approved by the affirmative vote of holders owning at least two-thirds of the shares of the Company's capital stock outstanding and entitled to vote thereon. 72 MANAGEMENT The Company's Board of Directors is comprised currently of the nine directors named below. Directors of the Company are elected on an annual basis. The collective background and experience of the directors provide the Company with advice and guidance in a number of areas, including corporate governance, strategic planning, capital markets and property acquisition and management. The Company believes that an independent Board of Directors, whose interests are aligned with those of the stockholders, is essential to the creation of long-term stockholder value. Therefore, six of nine of the Company's directors are not employed by, or otherwise affiliated with, the Company ("Independent Directors"). To demonstrate the alignment of their interests with those of stockholders, the Independent Directors waived cash retainers and instead received options to purchase shares of Common Stock at the initial public offering price. The following table lists the Executive Officers and directors of the Company:
NAME AGE POSITION ---- --- -------- T. Robert Burke 55 Chairman of the Board of Directors Hamid R. Moghadam 41 President, Chief Executive Officer and Director Douglas D. Abbey 48 Chairman of the Investment Committee and Director Daniel H. Case, III 40 Director Robert H. Edelstein, Ph.D. 54 Director Lynn M. Sedway 56 Director Jeffrey L. Skelton, Ph.D. 48 Director Thomas W. Tusher 57 Director Caryl B. Welborn 47 Director Luis A. Belmonte 57 Managing Director, Industrial Division S. Davis Carniglia 47 Managing Director and Chief Financial Officer John H. Diserens 44 Managing Director, Retail Division Bruce H. Freedman 49 Managing Director, Industrial Division David S. Fries 34 Managing Director and General Counsel Jean Collier Hurley 58 Managing Director, Investor Relations and Corporate Communications Craig A. Severance 46 Managing Director, Acquisitions
Set forth below are the biographies of such persons in the table above. T. Robert Burke, one of the founders of AMB, is a Director of the Company and has been the Chairman of the Board of AMB since 1994. He has 29 years of experience in real estate and is a member of the Investment Committee. Mr. Burke was on the board of directors of CIF and of VAF. He was formerly a senior real estate partner with Morrison & Foerster LLP and, for two years, served as that firm's Managing Partner for Operations. Mr. Burke graduated from Stanford University and holds a J.D. degree from Stanford Law School. He is a member of the Board of Directors of NAREIT, is on the Board of the Stanford Management Company and is a Trustee of Stanford University. He is also a member of the Urban Land Institute and is the former Chairman of the Board of Directors of the Pension Real Estate Association. Hamid R. Moghadam, one of the founders of AMB, is a Director of the Company and is the President and Chief Executive Officer of the Company. Mr. Moghadam has 16 years of experience in real estate acquisitions, dispositions, investment analysis, finance and development, and is a member of the Investment Committee. He was on the board of directors of CIF and of VAF. Mr. Moghadam holds bachelor's and master's degrees in civil engineering and construction management, respectively, from the Massachusetts Institute of Technology and an M.B.A. degree from the Graduate School of Business at Stanford University. He is a member of the board of directors of the National Realty Committee, a member of the Young Presidents' Organization, has served on the Advisory Committee of the Massachusetts Institute of Technology Center for Real Estate and is a Trustee of the Bay Area Discovery Museum. 73 Douglas D. Abbey, one of the founders of AMB, is a Director of the Company and is Chairman of the Investment Committee and is responsible for directing the economic research used to determine the Company's investment strategy, as well as the market research for property acquisitions. Mr. Abbey has 23 years of experience in asset management, acquisitions and real estate research. He is a graduate of Amherst College and has a master's degree in city planning from the University of California at Berkeley. He is the chair of the Urban Land Institute's Commercial Retail Council and Research Committee, serves on the Policy Advisory Board for the Center for Real Estate and Urban Economics at the University of California at Berkeley, is on the Editorial Board for the Journal of Real Estate Investment Trusts and is a Trustee of Golden Gate University. Daniel H. Case, III is a Director of the Company and is President and Chief Executive Officer of the Hambrecht & Quist Group. After joining Hambrecht & Quist in 1981, he co-founded the business which became Hambrecht & Quist Guaranty Finance in 1983. Mr. Case was named co-director of mergers and acquisitions of Corporate Finance in 1986, and became a managing director and head of Investment Banking in December 1987. In October 1991, he was elected to the board of directors of Hambrecht & Quist. In April 1992, he was elected President and Co-Chief Executive Officer. He became Chief Executive Officer in October 1994. Mr. Case also serves as a director of Rational Software Corporation, Electronic Arts, the Securities Industry Association, and the Bay Area Council. Mr. Case was named as one of the "100 Global Leaders for Tomorrow" by the World Economics Forum and one of the "Top 50 Innovators in Technology" by Time Magazine. He has a bachelor's degree in economics and public policy from Princeton University and studied management at the University of Oxford as a Rhodes Scholar. Robert H. Edelstein, Ph.D. is a Director of the Company and was an independent director of CIF. He has been a director of TIS Mortgage Investment Company, a NYSE-listed mortgage REIT, since 1988, and has been the Chairholder of Professorship of Real Estate Development and Co-Chairman of the Fisher Center for Real Estate and Urban Economics at the Haas School of Business, University of California at Berkeley since 1985. Prior to joining the faculty at Berkeley in 1985, Dr. Edelstein was a Professor of Finance at The Wharton School and Director of the Real Estate Center for 15 years. He is active in research and consulting in urban real estate economics, real estate finance, real estate property taxation, environmental economics, energy economics, public finance and urban financial problems. Dr. Edelstein received his bachelor's, master's and Ph.D. degrees in economics, with specialization fields in statistics and econometrics, from Harvard University. He is President of The American Real Estate and Urban Economics Association, an ex officio member of Lambda Alpha (honorary real estate association), the Urban Land Institute and The Society for Real Estate Finance. Lynn M. Sedway is a Director of the Company and was an independent director of CIF. She is principal and founder of the Sedway Group, a 20-year old real estate economics firm headquartered in San Francisco. Ms. Sedway is recognized throughout the real estate investment industry as an expert in urban and real estate economics. She currently directs and has ultimate responsibility for the activities of her firm, including market analysis, property valuation, development and redevelopment analysis, acquisition and disposition strategies, and public policy issues. Ms. Sedway received her bachelor's degree in economics at the University of Michigan and an M.B.A. degree from the University of California at Berkeley, Graduate School of Business, where she is also a guest lecturer. She is a trustee of the Urban Land Institute, the Policy Advisory Board of the Fisher Center for Real Estate and Urban Economics, and the San Francisco Chamber of Commerce. Ms. Sedway is a member of The International Council of Shopping Centers and the American Society of Real Estate Counselors. Jeffrey L. Skelton, Ph.D. is a Director of the Company and was an independent director of VAF. He is President and Chief Executive Officer of Symphony Asset Management, the asset management subsidiary of BARRA, Inc., a financial software company. Prior to joining BARRA, Inc. in 1994, he was with Wells Fargo Nikko Investment Advisors from January 1991 to December 1993, where he served in a variety of capacities, including Chief Research Officer, Vice Chairman, Co-Chief Investment Officer and Chief Executive of Wells Fargo Nikko Investment Advisors Limited in London. Dr. Skelton has a Ph.D. in Mathematical Economics and Finance and an M.B.A. degree from the University of Chicago, and was an Assistant Professor of Finance 74 at the University of California at Berkeley, Graduate School of Business. He is a frequent speaker in professional forums and is the author of a number of works published in academic and professional journals. Thomas W. Tusher is a Director of the Company and was an independent director of VAF. He was President and Chief Operating Officer of Levi Strauss & Co. from 1984 through 1996. Previously, he was President of Levi Strauss International from 1976 to 1984. Mr. Tusher began his career at Levi Strauss in 1969. He was a director of the publicly-held Levi Strauss & Co. from 1978 to 1985, and was named a director of the privately-controlled Levi Strauss & Co. in 1989. Prior to joining Levi Strauss & Co., Mr. Tusher was with Colgate Palmolive from 1965 to 1969. Mr. Tusher has a bachelor's degree from the University of California at Berkeley and an M.B.A. degree from the Graduate School of Business at Stanford University. He is a director of Cakebread Cellars, Dash America and Pearl Izumi. He is a former director of Great Western Financial Corporation and the San Francisco Chamber of Commerce. He is also Chairman Emeritus and a member of the advisory board of the Walter A. Haas School of Business at the University of California at Berkeley. Caryl B. Welborn is a Director of the Company and was an independent director of VAF. She is a commercial real estate attorney in San Francisco, and prior to starting her own firm in 1995, she was a partner with Morrison & Foerster LLP for 13 years. Ms. Welborn has a bachelor's degree from Stanford University and a J.D. degree from the Law School at the University of California at Los Angeles. She is a program chair and frequent lecturer on real estate issues nationally, and has published numerous articles in professional publications. Ms. Welborn is an officer and board member of the American College of Real Estate Lawyers. She has held leadership positions in the American Bar Association's Real Property, Probate and Trust Section. In addition, Ms. Welborn has acted as an American Bar Association advisor regarding revision of the Uniform Partnership Act. Luis A. Belmonte is a Managing Director of the Company and co-head of the Industrial Division. He specializes in industrial property development and redevelopment, and is a member of the Investment Committee. He joined AMB in 1990 and has over 30 years of experience in development, redevelopment, finance, construction, and management of commercial and industrial projects. He was a partner with Lincoln Property Company, where he built a portfolio of 18 million square feet of buildings. Mr. Belmonte received his bachelor's degree from the University of Santa Clara. He is a member of the Urban Land Institute, an associate member of the Society of Industrial Realtors, former President of the San Francisco chapter of NAIOP, The Association for Commercial Real Estate, and serves as Chairman of the California Commercial Council. S. Davis Carniglia is a Managing Director and Chief Financial Officer of the Company and is the Vice Chairman of the Investment Committee. He joined AMB in 1992 and has 23 years of experience in real estate accounting, taxation, forecasting and financing. Mr. Carniglia was formerly a tax and real estate consulting partner with KPMG/Peat Marwick, where he was responsible for that firm's San Francisco Bay Area real estate practice, and was an appraisal/valuation partner. Mr. Carniglia has a bachelor's degree in economics from Pomona College and a J.D. degree from Hastings College of Law. He is a Certified Public Accountant, and a member of the State Bar of California, Financial Executives Institute, Urban Land Institute, NAREIT and Bay Area Mortgage Association. John H. Diserens is a Managing Director and head of the Retail Division of the Company and is a member of the Investment Committee. He has over 21 years of experience in asset and property management for institutional investors. In his eight years at AMB, he has been responsible for the asset management of all properties, including over 40 community shopping centers. Prior to joining AMB, Mr. Diserens was a Vice President and a divisional manager with Property Management Systems, one of the nation's largest asset and property management firms, responsible for a diversified portfolio in excess of 10 million square feet. Mr. Diserens holds a bachelor's degree in economics and accounting from Macquarie University of Sydney, Australia, and has completed the Executive Program at the Graduate School of Business of Stanford University. He is a member of the International Council of Shopping Centers, Association of Foreign Investors in U.S. Real Estate, National Association of Real Estate Investment Managers ("NAREIM"), Institute of Real Estate Management, and is on the board of NAREIM. 75 Bruce H. Freedman is a Managing Director and co-head of the Industrial Division of the Company and is a member of the Investment Committee. He joined AMB in 1995 and has over 28 years of experience in real estate finance and investment. Before joining the Company, he served as a Principal and President of Allmerica Realty Advisors from 1993 to 1995 and as Principal for Aldrich, Eastman & Waltch (AEW) from 1986 to 1992. At Allmerica, he was responsible for business operation and management of a $250 million equity real estate portfolio, and at AEW he managed a team of 20 people which invested, managed and accounted for over $1 billion of institutional client assets. Mr. Freedman is a cum laude graduate of Babson College. He is a member of the Urban Land Institute, Real Estate Finance Association and NAREIM, and holds the CRE designation from the American Society of Real Estate Counselors. David S. Fries is a Managing Director and General Counsel of the Company and joined AMB in 1998. Prior to joining AMB, he was a real estate partner with the international law firms of Orrick, Herrington & Sutcliffe LLP and Morrison & Forester LLP, where he focused on the real estate, securities and financing issues affecting REITs, the acquisition of large real estate portfolios and the negotiation of complex joint venture arrangements. Mr. Fries holds a bachelor's degree in political science from the University of Pennsylvania and a J.D. degree from Stanford Law School. He is a member of the State Bar of California and NAREIT and a past President of The Belden Club. Jean Collier Hurley is a Managing Director responsible for Investor Relations and Corporate Communications. Prior to joining AMB in 1990, Ms. Hurley was a Vice President with Crocker National Bank where she provided financing for major national and international corporations. Ms. Hurley holds a bachelor's degree in business management and a master of science in marketing and design from San Diego State University, and holds an M.B.A. degree in Finance from the University of California at Berkeley, Graduate School of Business. Ms. Hurley serves on the Editorial Board of the Pension Real Estate Association Quarterly, and is a member of NAREIT and the National Investor Relations Institute. Craig A. Severance is a Managing Director and a member of the Investment Committee, and is responsible for property acquisitions and information technology. He has managed the screening of all property submissions and has developed the Company's proprietary property submissions database. Before joining AMB in 1986, he was a Vice President with the investment real estate group at Bank of America, where he represented domestic and foreign institutional investors in major commercial property acquisitions. Mr. Severance has a bachelor's degree in economics from Middlebury College, and holds an M.B.A. degree from the Graduate School of Business at Stanford University. He is a member of the International Council of Shopping Centers. COMMITTEES OF THE BOARD OF DIRECTORS Audit Committee. The Audit Committee consists of two Independent Directors, Ms. Welborn, the Chairman, and Mr. Edelstein. The Audit Committee makes recommendations concerning the engagement of independent public accountants, reviews with the independent public accountants the plans and results of the audit engagement, approves professional services provided by the independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of the Company's internal accounting controls. Executive Committee. The Executive Committee consists of Mr. Case, the Chairman, Messrs. Skelton, Moghadam and Burke and Ms. Sedway. The Executive Committee has the authority within certain parameters to acquire, dispose of and finance investments for the Company (including the issuance by the Operating Partnership of additional Units or other equity interests) and approve the execution of contracts and agreements, including those related to the borrowing of money by the Company, and generally exercises all other powers of the Board of Directors except as prohibited by law. Compensation Committee. The Compensation Committee consists of three Independent Directors, Mr. Tusher, the Chairman, Mr. Skelton and Ms. Sedway. The Compensation Committee determines compensation for the Company's executive officers, and reviews and makes recommendations concerning proposals by management with respect to compensation, bonus, employment agreements and other benefits and policies respecting such matters for the executive officers of the Company. 76 The Board of Directors does not have a nominating committee; rather, the entire Board of Directors performs the function of such a committee. COMPENSATION OF THE BOARD OF DIRECTORS In lieu of cash compensation, each Independent Director receives, upon initial election to the Board of Directors and upon each election thereafter, options to purchase Common Stock, at an exercise price equal to the fair market value at the date of grant (in the case of options granted upon consummation of the IPO, at the price to the public in the IPO). All of such options will vest immediately upon grant. The initial grant of such options upon initial election will cover 20,000 shares of Common Stock, and each subsequent grant will cover 15,000 shares of Common Stock for each Independent Director. The initial grant for each Independent Director appointed to serve immediately following the consummation of the IPO covered 26,250 shares of Common Stock representing the grant to each Independent Director with respect to their initial election to the Board of Directors (expected to occur in 1998) plus an additional grant of options to purchase 6,250 shares of Common Stock with respect to the period from the date of the IPO through the date of their initial election, but such Independent Directors will not be granted options upon re-election in 1998. In addition, Independent Directors are paid $1,250 for each meeting in excess of six meetings of the Board of Directors attended during each annual term and are reimbursed for reasonable expenses incurred to attend director and committee meetings. Officers of the Company who are directors are not paid any compensation in respect of their service as directors. EXECUTIVE COMPENSATION The following table sets forth the estimated annual base salaries and other compensation paid for the period of November 26, 1997 through December 31, 1997 to the Chief Executive Officer and certain of the Company's other executive officers who, on an annualized basis, have a total annual salary and bonus in excess of $100,000 (collectively, the "Named Executive Officers"). The Company has entered into employment agreements with certain of its Executive Officers as described below. See "Employment Agreements."
LONG-TERM COMPENSATION ------------------------ ANNUAL COMPENSATION SECURITIES ------------------------------------------- UNDERLYING OTHER ANNUAL RESTRICTED OPTIONS 1997 SALARY 1997 COMPENSATION STOCK GRANTED IN STOCK BONUS NAME AND PRINCIPAL POSITION ($)(1) BONUS($)(2) ($) AWARD(S)(2) 1997(#)(4) (#)(2) --------------------------- -------------- ----------- ------------ ----------- ---------- ----------- T. Robert Burke Chairman of the Board.............. 16,645 0 2,800 0 225,000 0 Hamid R. Moghadam President and Chief Executive Officer............................ 40,362 0 (3) 0 500,000 0 Douglas D. Abbey Chairman of Investment Committee... 21,389 0 2,800 0 250,000 0 S. Davis Carniglia Chief Financial Officer............ 21,389 0 2,800 0 130,000 0 Craig A. Severance Managing Director, Acquisitions.... 21,389 0 2,800 0 130,000 0 John H. Diserens Managing Director, Retail Division........................... 21,389 0 2,800 0 130,000 0
- --------------- (1) Represents the actual amount of compensation paid from November 26, 1997 through December 31, 1997. (2) The amount of any such bonus has been determined by the Compensation Committee of the Board of Directors. Pursuant to the executive's employment agreement, at the executive's option such executive may receive restricted shares of common stock, or options to purchase common stock, in lieu of any cash bonus, the number of such shares or options to be determined as set forth in such employee's employment agreement. See "-- Employment Agreements." (3) The aggregate amount of the perquisites and other personal benefits, securities or property for Mr. Moghadam is less than the lesser of either $50,000 or 10% of his total salary and bonus paid in 1997. (4) Options to purchase an aggregate of 3,111,250 shares of Common Stock (net of forfeitures) have been granted to directors, executive officers and other employees of the Company as of December 31, 1997. Such options vest pro rata in annual installments over a four-year period. An additional 2,638,750 shares of Common Stock are reserved for issuance under the Stock Incentive Plan. 77 OPTION GRANTS IN LAST FISCAL YEAR The following table shows certain information relating to options to purchase shares of Common Stock granted to the Named Executive Officers during 1997.
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE VALUE ---------------------------------------------- AT ASSUMED ANNUAL RATES PERCENT OF OF COMMON SHARE NUMBER OF SHARES OF TOTAL OPTIONS PRICE APPRECIATION FOR COMMON STOCK GRANTED TO OPTION TERM(2)(000S) UNDERLYING OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ------------------------------- NAME GRANTED(#) FISCAL YEAR(3) PRICE PER SHARE DATE 5% 10% ---- ------------------- --------------- --------------- ---------- -------------- -------------- T. Robert Burke...... 225,000 7.2% $21.00 11/25/07 $2,972 $ 7,531 Hamid R. Moghadam.... 500,000 16.0% 21.00 11/25/07 6,605 16,735 Douglas D. Abbey..... 250,000 8.0% 21.00 11/25/07 3,303 8,368 S. Davis Carniglia... 130,000 4.2% 21.00 11/25/07 1,717 4,351 Craig A. Severance... 130,000 4.2% 21.00 11/25/07 1,717 4,351 John H. Diserens..... 130,000 4.2% 21.00 11/25/07 1,717 4,351
- --------------- (1) All options granted in 1997 become exercisable in four equal installments (rounded to the nearest whole share of Common Stock) beginning on the first anniversary of the date of grant and have a term of not more than ten years. The option exercise price is equal to the fair market value of the Common Stock on the date of grant. (2) In accordance with the rules of the SEC, these amounts are the hypothetical gains or "option spreads" that would exist for the respective options based on assumed rates or annual compound share price appreciation of 5% and 10% from the date the options were granted over the full option term. No gain to the optionee is possible without an increase in the price of Common Stock, which would benefit all stockholders. (3) The total number of shares of Common Stock underlying such options used in such calculation are net of forfeitures. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth certain information concerning exercised and unexercised options held by the Named Executive Officers at December 31, 1997.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS AT OPTIONS AT DECEMBER 31, 1997 DECEMBER 31, 1997 SHARES ACQUIRED ON VALUE --------------------------- ------------------------------ NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(1) ---- ------------------ ----------- ----------- ------------- ----------- ---------------- T. Robert Burke....... N/A N/A 0 225,000 0 $ 928,125 Hamid R. Moghadam..... N/A N/A 0 500,000 0 2,062,500 Douglas D. Abbey...... N/A N/A 0 250,000 0 1,031,250 S. Davis Carniglia.... N/A N/A 0 130,000 0 536,250 Craig A. Severance.... N/A N/A 0 130,000 0 536,250 John H. Diserens...... N/A N/A 0 130,000 0 536,250
- --------------- (1) Based on a price per share of Common Stock of $25.125, the last reported sales price per share on the New York Stock Exchange on December 31, 1997. EMPLOYMENT AGREEMENTS Each of the persons who served as an Executive Officer at the time of the IPO has entered into an employment agreement with the Company pursuant to which each has agreed to devote their entire business time to the Company. The employment agreements have an initial term of one year (three years in the case of Mr. Moghadam) and are subject to automatic one-year extensions following the expiration of the initial term. The employment agreements provide for annual base compensation (in the amounts set forth in the Executive Compensation table with respect to the Named Executive Officers identified therein) with the amount of any bonus to be determined by the Compensation Committee, based on certain performance targets, up to 150% of the applicable annual base compensation in the case of Messrs. Burke, Abbey and Moghadam, and 100% of the applicable annual base compensation in the case of Messrs. Carniglia, Diserens and Severance. The performance targets to be used to determine executive bonuses for the calendar year ending December 31, 1998 have not been finalized by the Compensation Committee. However, such performance targets are 78 expected to include operating results and acquisition activity. The employ agreements provide that the executive has the right to elect to receive restricted stock or stock options in lieu of such executive's bonus. The number of shares of restricted stock to be so issued will equal 125% of the amount of the bonus, divided by the then current market price of the stock. The number of options to purchase shares of Common Stock so granted will be determined based on 150% of the amount of the bonus and the current market price of the Common Stock, using the "Black-Scholes" option-pricing methodology. Such restricted stock and options to purchase Common Stock will vest ratably over a three-year period. The employment agreements also provide that the executive will receive certain insurance benefits and be able to participate in the Company's employee benefit plans, including the Stock Incentive Plan (as defined below), and that, in the event of the executive's death, the executive's estate will receive certain compensation payments. The executive also is entitled to receive severance during the term of the employment agreement and for one year thereafter in the event of a termination of the executive's employment resulting from a disability, by the Company without "cause" or by the executive for "good reason." "Cause" means (i) gross negligence or willful misconduct, (ii) an uncured breach of any of the employee's material duties under the employment agreement, (iii) fraud or other conduct against the material best interests of the Company or (iv) a conviction of a felony if such conviction has a material adverse effect on the Company. "Good reason" means (a) a substantial adverse change in the nature or scope of the employee's responsibilities and authority under the employment agreement or (b) an uncured breach by the Company of any of its material obligations under the employment agreement. Severance benefits include base compensation at the amounts provided in the employment agreement and bonus based on the most recent amount paid, as well as certain continuing insurance and other benefits. Such employment agreements also contain a non-competition agreement pursuant to which each executive agrees that he or she will not engage in any activities, directly or indirectly, in respect of commercial real estate, and will not 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 and through existing investments as described under the caption "Certain Relationships and Related Transactions." Such restrictions apply during the term of the employment agreements and for a one-year period thereafter. STOCK INCENTIVE PLAN The Company adopted the Stock Option and Incentive Plan (the "Stock Incentive Plan") to (i) enable executive officers, employees and directors of the Company, the Operating Partnership and the Investment Management Subsidiary to participate in the ownership of the Company, (ii) attract and retain executive officers, other key employees (those employees which from time-to-time are recognized for exceptional contributions to the Company and its subsidiaries, including the Operating Partnership) and directors of the Company, the Operating Partnership and the Investment Management Subsidiary and (iii) provide incentives to such persons to maximize the Company's performance and its cash flow available for distribution. The Stock Incentive Plan provides for the award to such officers and key employees (subject to the Ownership Limit, or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors) of a broad variety of stock-based compensation alternatives such as non-qualified stock options, incentive stock options, restricted stock and stock appreciation rights, and provides for the grant to Independent Directors and directors of the Investment Management Subsidiary of non-qualified stock options. The Compensation Committee, which is comprised solely of Independent Directors, has the authority to determine the terms of options and restricted shares of common stock granted under the Stock Incentive Plan, including, among other things, the individuals who shall receive such grants, the times when they shall receive them, whether an incentive stock option or non-qualified option shall be granted and the number of shares to be subject to each grant. The Company has reserved 5,750,000 shares of Common Stock for issuance under the Stock Incentive Plan and, as of April 30, 1998, had granted to certain directors, officers and employees options to purchase 3,071,250 of such shares of Common Stock (net of forfeitures). Such options will have a ten-year term and vest pro rata in annual installments over a four-year period with respect to initial grants. There is no limit on 79 the number of awards that may be granted to any one individual so long as the (i) aggregate fair market value (determined at the time of grant) of shares with respect to which an incentive stock option is first exercisable by an optionee during any calendar year cannot exceed $100,000, (ii) grant does not violate the Ownership Limit or cause the Company to fail to qualify as a REIT for Federal income tax purposes and (iii) maximum number of shares of Common Stock for which stock options and stock appreciation rights may be issued during any fiscal year to any participant in the Stock Incentive Plan shall not exceed 1,000,000. See "Description of Capital Stock -- Restrictions on Ownership and Transfer." The Company plans to limit future grants under the Stock incentive Plan to the Company's directors and officers and a limited number of other employees. Restricted Stock. Restricted stock may be sold to participants at various prices (but not below par value) and is subject to such restrictions as may be determined by the Compensation Committee. Restricted stock typically may be repurchased by the Company at the original price if certain conditions or restrictions are removed or expire. Purchasers of restricted stock will have voting rights and receive distributions prior to the time when the restrictions lapse. To date the Company has granted 5,712 restricted shares of Common Stock. The Company has no present plans to grant restricted shares of Common Stock other than with respect to additional shares which may be issued to, and at the option of, certain employees in lieu of annual cash bonus compensation. Administration of the Stock Incentive Plan. The Stock Incentive Plan will be administered by the Board of Directors and/or the Compensation Committee. No person is eligible to serve on the Compensation Committee unless such person is an independent Director. The Committee has complete discretion to determine (subject to (i) the Ownership Limit contained in the Articles of Incorporation of the Company and (ii) a limit against granting options or stock appreciation rights for more than 1,000,000 shares to any person in any year) which eligible individuals are to receive option or other stock grants, the number of shares subject to each such grant, the status of any granted option as either an incentive option or a non-qualified stock option under the Federal tax laws, the exercise schedule to be in effect for the grant, the maximum term for which any granted option is to remain outstanding and, subject to the specific terms of the Stock Incentive Plan, any other terms of the grant. Eligibility. All employees of the Company may, at the discretion of the Compensation Committee, be granted incentive and non-qualified stock options to purchase shares of Common Stock at an exercise price not less than 100% of the fair market value of such shares on the grant date. Directors of the Company, employees of the Operating Partnership, employees and directors of the Investment Management Subsidiary, consultants and other persons who are not regular salaried employees of the Company are not eligible to receive incentive stock options, but are eligible to receive non-qualified stock options. In addition, all employees and consultants of the Company, the Operating Partnership and the Investment Management Subsidiary are eligible for awards of restricted stock and grants of stock appreciation rights. Purchase Price of Shares Subject to Options. The Price of the shares of Common Stock subject to each option shall be set by the Compensation Committee; provided, however, that the price per share of an option shall be not less than 100% of the fair market value of such shares on the date such option is granted; provided, further, that, in the case of an incentive stock option, the price pre share shall not be less than 110% of the fair market value of such shares on the date such option is granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company, any subsidiary or any parent corporation ("greater than 10% stockholders"). Non-Assignability. Options may be transferred only by will or by the laws of descent and distribution. During a participant's lifetime, options are exercisable only by the participant. Terms and Exercisability of Options. Unless otherwise determined by the Board of Directors or the Compensation Committee, all options granted under the Stock Incentive Plan are subject to the following conditions: (i) options will be exercisable in installments, on a cumulative basis, at the rate of thirty-three and one-third percent (33 1/3%) each year beginning on the first anniversary of the date of the grant of the option, until the options expire or are terminated (other than options granted at the time of the IPO, which vest 80 ratably over four years) and (ii) following an optionee's termination of employment, the optionee shall have the right to exercise any outstanding vested options for a specified period. To the extent the aggregate fair market value of stock with respect to which "incentive stock options" (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code) are exercisable for the first time by an optionee during any calendar year exceeds $100,000, such options shall be taxed as non-qualified stock options. The rule set forth in the preceding sentence shall be applied by taking options into account in the order in which they were granted. For this purpose, the fair market value of stock shall be determined as of the time that the option with respect to such stock is granted. Options are exercisable in whole or in part by written notice to the Company, specifying the number of shares being purchased and accompanied by payment of the purchase price for such shares. The option price may be paid: (i) in cash or by certified or cashier's check payable to the order of the Company, (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the optionee or (iii) if authorized by the Board of Directors or the Compensation Committee or if specified in the option agreement for the option being exercised, by a recourse promissory note made by the optionee in favor of the Company or through installment payments to the Company. On the date the option price is to be paid, the optionee must make full payment to the Company of all amounts that must be withheld by the Company for Federal, state or local tax purposes. Termination of Employment; Death or Permanent Disability. If an option holder ceases to be employed by the Company for any reason other than the optionee's death or permanent disability, such optionee's stock option shall expire three months after the date of such cessation of employment unless by its terms it expires sooner; provided, however, that during such period after cessation of employment, such stock option may be exercised only to the extent it was exercisable according to such option's terms on the date of cessation of employment. If an optionee dies or becomes permanently disabled while the optionee is employed by the Company, such optionee's option shall expire twelve months after the date of such optionee's death or permanent disability unless by its terms it expires sooner. During such period after death, such stock option may, to the extent it remain unexercised upon the date of such death, be exercised by the person or persons to whom the optionee's rights under such stock option are transferred under the laws of descent an distribution. Acceleration of Exercisability. In the event the Company is acquired by merger, consolidation or asset sale, each outstanding option which is not to be assumed by the successor corporation or replaced with a comparable option to purchase shares of the capital stock of the successor corporation will, at the election of the Board of Directors (or if so provided in an option or other agreement with an optionee), automatically accelerate in full. Adjustments. In the event any change is made to the Common Stock issuable under the Stock Incentive Plan by reason of any recapitalization, stock dividend, stock split, combination of shares, exchange of shares or other change in corporate structure effected without the Company's receipt of consideration, appropriate adjustment will be made to (i) the maximum number and class of shares issuable under the Stock Incentive Plan and (ii) the number and/or class of shares and price per share in effect under each outstanding option. Amendments to the Stock Incentive Plan. The Board of Directors may at any time suspend or terminate the Stock Incentive Plan. The Board of Directors or Compensation Committee may also at any time amend or revise the terms of the Stock Incentive Plan; provided that no such amendment or revision shall, unless appropriate stockholder approval of such amendment or revision is obtained, (i) increase the maximum number of shares which may be acquired pursuant to options granted under the Stock Incentive Plan (except for adjustments as described in the foregoing paragraph) or (ii) change the minimum purchase price required under the Stock Incentive Plan. Termination. The Stock Incentive Plan will terminate on December 31, 2007, unless sooner terminated by the Board of Directors. 81 Registration Statement on Form S-8. The shares of Common Stock underlying options granted under the Stock Incentive Plan and restricted shares of Common Stock are subject to an effective Registration Statement on Form S-8. 401(k) PLAN Effective November 26, 1997, the Company established its Section 401(k) Savings/Retirement Plan (the "401(k) Plan") to cover eligible employees of the Company, the Operating Partnership and any designated affiliate. The 401(k) Plan permits eligible employees of the Company to defer up to 10% of their annual compensation, subject to certain limitations imposed by the Code. The employees' elective deferrals are immediately vested and non-forfeitable upon contributions to the 401(k) Plan. The Company currently makes matching contributions to the 401(k) Plan in an amount equal to 50% of the first 3.5% of annual compensation deferred by each employee; however, it has reserved the right to make greater matching contributions or discretionary profit sharing contributions in the future. Participants vest immediately in the matching contributions by the Company. Discretionary contributions are subject to three-year vesting whereby 100% vests after the third year. Employees of the Company are eligible to participate in the 401(k) Plan if they meet certain requirements concerning minimum period of credited service. The Company's contribution to the 401(k) Plan for the period ended December 31, 1997 was $144,971. The 401(k) Plan qualifies under Section 401 of the Code so that contributions by employees to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan. LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY The Operating Partnership's officers and the Company's directors are indemnified under Maryland law, the Company's Articles of Incorporation and the Partnership Agreement against certain liabilities. The Articles of Incorporation and Bylaws require the Company to indemnify its directors and officers to the fullest extent permitted from time to time by the MGCL. INDEMNIFICATION AGREEMENTS The Company has entered into indemnification agreements with each of its executive officers and directors. The indemnification agreements require, among other matters, that the Company indemnify its executive officers and directors to the fullest extent permitted by law and reimburse the executive officers and directors for all related expenses as incurred, subject to return if it is subsequently determined that indemnification is not permitted. Under the agreements, the Company must also indemnify and reimburse all expenses as incurred by executive officers and directors seeking to enforce their rights under the indemnification agreements and may cover executive officers and directors under the Company's directors' and officers' liability insurance. Although the form of indemnification agreement offers substantially the same scope of coverage afforded by law, it provides greater assurance to directors and executive officers that indemnification will be available, because, as a contract, it cannot be modified unilaterally in the future by the Board of Directors or the stockholders to eliminate the rights it provides. The Company's officers and directors are indemnified under the Maryland General Corporation Law (the "MGCL"), the Articles of Incorporation and the Partnership Agreement against certain liabilities. The Articles of Incorporation and Bylaws require the Company to indemnify its directors and officers to the fullest extent permitted from time to time by the MGCL. The MGCL permits a corporation to indemnify its directors and officers and certain other parties against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that (i) the act or omission of the director of officer was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty, (ii) the director or officer actually received an improper personal benefit in money, property or services or (iii) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. Indemnification may be made against judgments, penalties, fines, settlements and reasonable 82 expenses actually incurred by the director or officer in connection with the proceeding; provided, however, that if the proceeding is one by or in the right of the corporation, indemnification may not be made with respect to any proceeding in which the director or officer has been adjudged to be liable to the corporation. In addition, a director or officer may not be indemnified with respect to any proceeding charging improper personal benefit to the director or officer in which the director or officer was adjudged to be liable on the basis that personal benefit was received. The termination of any proceeding by conviction, or upon a plea of nolo contendere or its equivalent, or an entry of any order of probation prior to judgment, creates a rebuttable presumption that the director or officer did not meet the requisite standard of conduct required for indemnification to be permitted. The MGCL permits the articles of incorporation of a Maryland corporation to include a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages, subject to specified restrictions, and the Articles of Incorporation of the Company contain this provision. The MGCL does not, however, permit the liability of directors and officers to the corporation or its stockholders to be limited to the extent that (i) it is proved that the person actually received an improper personal benefit in money, property or services, (ii) a judgment or other final adjudication is entered in a proceeding based on a finding that the person's action, or failure to act, was committed in bad faith or was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding or (iii) in the case of any criminal proceeding, the director had reasonable cause to believe that the act or failure to act was unlawful. This provision does not limit the ability of the Company or its stockholders to obtain other relief, such as an injunction or recission. The Partnership Agreement also provides for indemnification of the Company, as general partner, and its officers and directors to the same extent indemnification is provided to officers and directors of the Company in its Articles of Incorporation, and limits the liability of the Company and its officers and directors to the Operating Partnership and the partners of the Operating Partnership to the same extent liability of officers and directors of the Company to the Company and its stockholders is limited under the Articles of Incorporation. See "Description of Certain Provisions of the Partnership Agreement of the Operating Partnership -- Exculpation and Indemnification of the Company." Insofar as indemnification for liability arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. 83 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company and the Operating Partnership have engaged in the following transactions and relationships with certain of the Executive Officers, directors and persons who hold more than 5% of the outstanding shares of Common Stock. FORMATION TRANSACTIONS In connection with the Formation Transactions, CIF, VAF and the Company's predecessor, AMB, effected a series of mergers pursuant to which such entities merged into the Company with the institutional stockholders of CIF and VAF and the Company's executive officers (the former stockholders of AMB), receiving an aggregate of 4,746,624 shares of Common Stock, with a total value at the time of the IPO of $99.7 million, and the right to receive in the Company's second year of operation up to 4,241,803 limited partnership Units (the "Performance Units"). The issuance of such Units is dependent upon the future trading price of and dividends on the shares of Common Stock. See "Description of Certain Provisions of the Partnership Agreement of the Operating Partnership -- Performance Units." In addition, such executive officers received the right to receive certain investment management fees earned by AMB Investment Management, subject to certain limitations. Through March 31, 1998, no payments have been made to the Company's executive officers in respect of the right to receive such investment management fees. In addition, certain Individual Account Investors, former investment management clients of AMB including Ameritech Pension Trust, City and County of San Francisco Employees' Retirement System and Southern Company System Master Retirement Trust, contributed certain real property interests to the Company. In exchange for such contribution of properties, Ameritech Pension Trust, City and County of San Francisco Employees' Retirement System and Southern Company System Master Retirement Trust received 12,441,580 shares of Common Stock, 6,772,640 shares of Common Stock and 8,032,415 shares of Common Stock, respectively, with a total value at the time of the IPO of $626.7 million. See "Principal Stockholders." In connection with consummation of the Formation Transactions, the Company assumed the $4.0 million revolving credit facility of AMB, of which approximately $1.1 million was outstanding upon completion of the Formation Transactions, relieving three of the Company's Executive Officers, Messrs. Abbey, Moghadam and Burke, of their respective obligations with respect to the partial guaranty of such indebtedness. The proceeds of such indebtedness were used by AMB to acquire certain assets historically used in AMB's operations from AMB Investment, Inc. ("AMBI"), an entity owned equally by Messrs. Abbey, Moghadam and Burke. The Company also assumed a $791,925 note payable of AMBI to WPF as consideration for the transfer to the Company of AMBI's general partner interest in WPF (which the Company believed had a value equal to or greater than the face amount of such note at the time such note payable was assumed). OTHER RELATED TRANSACTIONS During 1990, 1991, 1994, 1995 and 1996, Craig A. Severance, John H. Diserens, S. Davis Carniglia, Jean C. Hurley and Bruce H. Freedman issued notes to AMB in consideration of the acquisition of shares of AMB common stock in the principal amounts of $189,472, $243,866, $132,237, $342,806 and $307,071, respectively. The notes bore interest at an annual rate of prime plus 1.0%. The principal amount of the notes and accrued interest thereon were repaid in full by all stockholders prior to the IPO. In January 1993, AMBI, AMB, AMB Corporate Real Estate Advisors, Inc. ("AMBCREA"), AMB Development L.P., AMB Development, Inc. and AMB Institutional Housing Partners entered into an agreement for the purpose of the parties thereto to work together to accomplish separate business purposes while sharing certain support and other resources. Under the Intercompany Agreement, each party to the agreement (each, an "AMB Intercompany Party") is permitted to use the term "AMB" as a part of its name. Each AMB Intercompany Party also agreed, among other things, to do business in a specified aspect of real estate and finance; to use its best efforts to refer business opportunities outside of its own line of business to other AMB Intercompany Parties; to provide intercompany loans; and to utilize personnel of another AMB Intercompany Party for a fee. In addition, under the Intercompany Agreement, AMBI agreed to: (i) provide common business services, resources and support, including employees, benefits, services contracts and 84 financial management and reporting to each AMB Intercompany Party; (ii) purchase all fixed assets and rent them to the AMB Intercompany Parties for a fee; (iii) act as lessee for office space for each AMB Intercompany Party; (iv) employ all employees of each AMB Intercompany Party, fix such employees' salaries, bonuses and benefits, and charge such costs to the appropriate AMB Intercompany Party; and (v) pay for the direct and indirect costs of operation of each AMB Intercompany Party and charge each AMB Intercompany Party its allocated share. The total amount paid to AMBI by AMB during the years ended December 31, 1994, 1995, 1996 and 1997 was $9,940,762, $13,564,178, $16,842,615 and $18,159,000, respectively, which equaled the expenses incurred by AMBI allocable to AMB for each such year. As part of the Formation Transactions, the Company acquired AMBI's assets (other than its leasehold interest for office space and certain office equipment) and employed the employees utilized in its business, and all other AMBI employees were transferred to AMBCREA. Accordingly, upon consummation of the IPO, the Intercompany Agreement was modified so that it applies only to the office space and certain office equipment leased by AMBI, which is used by the Company, the Operating Partnership and AMB Investment Management, respectively, for fees equal to an allocation of AMBI's cost thereof. AMBCREA, AMB Institutional Housing Partners, AMB Development, Inc. and AMB Development L.P. are continuing to use the name "AMB" pursuant to royalty-free license arrangements with the Company. In addition, it is presently anticipated that AMBCREA, which is in the process of winding down operations, will cease operations by June 30, 1998. See "-- Conflicts of Interest." CONFLICTS OF INTEREST The Executive Officers and directors of the Company may be subject to a number of conflicts of interest. Such potential conflicts, and the Company's proposed methods of dealing with them, are described below. See also "Policies with Respect to Certain Activities -- Conflict of Interest Policies." Stockholders of AMB who became Executive Officers of the Company upon consummation of the IPO own interests in certain real estate-related businesses and investments. Such interests include minority ownership of Institutional Housing Partners, a residential housing finance company (through AMB Institutional Housing Partners); and ownership of AMB Development, Inc. and AMB Development L.P., developers which own property that management believes is not suitable for ownership by the Company. Neither AMB Development, Inc. nor AMB Development L.P. will initiate any new development projects, nor will they make any further investments in industrial or retail properties other than those under development at November 26, 1997. Such persons are also owners of AMBCREA which is principally a real estate services company for corporate and professional tenants of real estate. AMBCREA is in the process of winding down its business, and it is presently anticipated that AMBCREA will cease operations by June 30, 1998. However, the continued involvement by the Company's Executive Officers could divert management's attention from the day-to-day operations of the Company. Each of the persons serving as an Executive Officer at the time of the IPO has entered into a non-competition agreement with the Company pursuant to which, among other things, they agreed not to engage in any activities, directly or indirectly, in respect of commercial real estate, and agreed not 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 herein. AMB Development L.P. owns interests in 11 retail development projects in the U.S., each of which consists of a single free-standing Walgreens drugstore, and, together with other entities controlled by nine of the executive officers, a low income housing apartment building located in the San Francisco Bay Area. In addition, Messrs. Abbey, Moghadam and Burke, each a founder, Executive Officer and director of the Company, 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 of the Company, 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. David S. Fries, an Executive Officer of the Company, owns an approximate 1% interest in a limited partnership that owns an apartment complex in Orange County, California. 85 In addition, several of the executive officers individually own: (i) less than 1% interests in the stocks of certain publicly-traded REITs, including mortgage REITs, and residential developers; (ii) certain interests in and rights to developed and undeveloped real property located outside the United States; (iii) interests in single-family homes and residential apartments in the San Francisco Bay Area; (iv) certain passive interests, not believed to be material, in real estate businesses in which such persons were previously employed; and (v) certain other de minimis holdings in equity securities. Thomas W. Tusher, a member of the Company'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 March 31, 1998 at approximately $939,000. Messrs. Abbey, Moghadam and Burke each have an approximately 26.7% interest in the partnership, each valued as of March 31, 1998 at approximately $1,252,000. 86 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of shares of Common Stock as of April 30, 1998 by (i) each director, (ii) each Named Executive Officer, (iii) all directors and Named Executive Officers of the Company as a group and (iv) each person or entity which is the beneficial owner of 5% or more of the outstanding shares of Common Stock. Except as indicated below, all of such shares of Common Stock are owned directly, and the indicated person or entity has sole voting and investment power. As of April 30, 1998, none of the Company's executive officers and directors or its 5% stockholders owned any Units of the Operating Partnership.
PERCENTAGE OF OUTSTANDING SHARES NUMBER OF SHARES OF OF COMMON NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) STOCK(2) --------------------------------------- --------------------- ------------------ T. Robert Burke.................................. 877,289 1.0% Hamid R. Moghadam................................ 1,396,477 1.6% Douglas D. Abbey................................. 1,125,245 1.3% S. Davis Carniglia............................... 224,377 * Craig A. Severance............................... 327,964 * John H. Diserens................................. 284,182 * Daniel H. Case, III.............................. 0 0 Robert H. Edelstein, Ph.D........................ 952 * Lynn M. Sedway................................... 3,152 * Jeffrey L. Skelton, Ph.D......................... 952 * Thomas W. Tusher................................. 25,952 * Caryl B. Welborn................................. 7,952 * Ameritech Pension Trust(3)....................... 12,441,580 14.5% City and County of San Francisco Employees' Retirement System(4)........................... 6,722,640 7.8% Southern Company System Master Retirement Trust(5)....................................... 6,032,415 7.0% All directors and Named Executive Officers as a group (12 persons)............................. 4,274,494 5.0%
- --------------- * Represents less than 1.0% of outstanding shares of Common Stock. (1) Unless otherwise indicated, the address for each of the persons listed is c/o AMB Property Corporation, 505 Montgomery Street, San Francisco, California 94111. (2) Excludes (i) options to purchase 1,522,500 shares of Common Stock granted to Named Executive Officers and directors on November 26, 1997 and (ii) 3,781,459 Performance Units which are not exercisable or were not earned within 60 days of the date of this filing. See "Description of Certain Provisions of the Partnership Agreement of the Operating Partnership -- Performance Units." (3) Reflects shares held by State Street Bank and Trust Company, as trustee, the voting and investment power with respect to which are held by Ameritech Pension Trust. The address of Ameritech Pension Trust for this purpose is 225 W. Randolph, HQ13A, Chicago, Illinois 60606, Attn.: Director-Real Estate. (4) The address of the City and County of San Francisco Employees' Retirement System is 1155 Market Street, San Francisco, California 94103. (5) The address of Southern Company System Master Retirement Trust is 270 Peachtree Street N.W., Suite 1900 BIN 924, Atlanta, Georgia 30303. 87 DESCRIPTION OF NOTES The Notes will be direct senior unsecured obligations of the Operating Partnership unconditionally guaranteed on an unsecured basis by the Guarantors. The % Notes due 2008 (the "2008 Notes"), the % Notes due 2018 (the "2018 Notes") and the % Reset Put Securities (REPS(SM)) due 2015 -- Putable/Callable 2005 (the "REPS") each constitute a separate series of notes and will be issued under an indenture (the "Indenture") among the Operating Partnership, AMB Property Corporation, AMB Property II, L.P., Long Gate LLC and State Street Bank and Trust Company of California, N.A., as Trustee (the "Trustee"). The Indenture, as amended or supplemented from time to time, will be subject to and governed by the Trust Indenture Act of 1939, as amended (the "TIA"). The statements made under this heading relating to the Notes and the Indenture are summaries of certain anticipated provisions thereof, do not purport to be complete and are qualified in their entirety by reference to the forms of Indenture and the Notes, which have been or will be included or incorporated by reference as exhibits to the Registration Statement of which this Prospectus is a part and are or will be available as described above under "Available Information." Capitalized terms used herein and not defined shall have the meanings assigned to them in the Indenture. As used in this "Description of Notes," all references to the "Operating Partnership" shall mean AMB Property, L.P., excluding, unless otherwise expressly stated or the context shall otherwise require, its subsidiaries. GENERAL The 2008 Notes will be limited in aggregate principal amount to $ , the 2018 Notes will be limited in aggregate principal amount to $ and the REPS will be limited in aggregate principal amount to $ . The Notes will be unsecured and unsubordinated obligations of the Operating Partnership and will rank on a parity in right of payment with all other unsecured and unsubordinated indebtedness of the Operating Partnership outstanding from time to time. The Indenture will not contain any provision that would limit the ability of the Operating Partnership to incur indebtedness or that will afford Holders of Notes protection in a highly leveraged or similar action involving the Operating Partnership or in the event of a change of control of the Operating Partnership, including a change in control of the Company, except as hereinafter set forth under the captions "Certain Covenants -- Aggregate Debt Test," "-- Maintenance of Total Unencumbered Assets," "-- Debt Service Test" and "-- Secured Debt Test." See "Risk Factors -- Incurrence of Indebtedness." However, certain restrictions on ownership and transfers of the Company's Common Stock and the Company's other equity securities designed to preserve its status as a REIT may act to prevent or hinder a change of control. Although the Operating Partnership owns a majority of its consolidated assets itself, rather than through subsidiaries, a substantial portion of its consolidated assets (amounting to approximately 27.1% of its total consolidated assets at March 31, 1998) are held by AMB Property II, L.P., Long Gate LLC and other subsidiaries. Accordingly, the cash flow of the Operating Partnership and the consequent ability to service its debt, including the Notes, are partially dependent on the earnings of such subsidiaries and the Notes will be effectively subordinated to all existing and future indebtedness, guarantees and other liabilities of such subsidiaries. On a pro forma basis as of March 31, 1998, after giving effect to the offering of the Notes made hereby and the application of the estimated net proceeds therefrom as if such transactions had occurred on that date, the Operating Partnership's subsidiaries (including AMB Property II, L.P. and Long Gate LLC) would have had total long-term liabilities (excluding intercompany liabilities) of approximately $92.5 million (consisting entirely of mortgage and secured indebtedness). See "Business and Properties -- Debt Financing -- Secured and Mortgage Debt." The Notes will be effectively subordinated to any secured indebtedness of the Operating Partnership and its subsidiaries to the extent of any collateral pledged as security therefor. As of March 31, 1998, after giving effect to the offering of the Notes made hereby and the application of the estimated net proceeds therefrom as if such transaction had occurred on that date, the Operating Partnership (excluding its subsidiaries) would have had unsecured senior indebtedness (including the Notes) aggregating approximately $369.9 million and 88 mortgage and other secured indebtedness aggregating approximately $517.7 million. See "Use of Proceeds," "Risk Factors -- Ranking of the Notes" and "-- Debt Financing" and "Capitalization." Although the covenants described herein under the caption "-- Certain Covenants" will impose certain limitations on the incurrence of additional indebtedness, the Operating Partnership and its Subsidiaries will retain the ability to incur substantial additional secured and unsecured indebtedness in the future. DENOMINATIONS, MATURITY, INTEREST, REGISTRATION AND TRANSFER 2008 Notes and 2018 Notes The 2008 Notes and the 2018 Notes will be issued only in fully registered book-entry form without coupons, in denominations of $1,000 and integral multiples thereof. The 2008 Notes will mature on , 2008 (the "2008 Maturity Date") and the 2018 Notes will mature on , 2018 (the "2018 Maturity Date"). The 2008 Notes and the 2018 Notes may be redeemed, in whole or in part, at the option of the Operating Partnership at any time. See "-- Redemption of the 2008 Notes and the 2018 Notes at the Option of the Operating Partnership." The 2008 Notes and the 2018 Notes are not subject to any sinking fund provisions. Interest on the 2008 Notes will accrue at a rate of % per annum and interest on the 2018 Notes will accrue at a rate of % per annum and, in each case, will be payable semi-annually on and commencing , 1998. Interest will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Principal of (and premium, if any) and interest on the 2008 Notes and the 2018 Notes will be payable at the office or agency maintained by the Operating Partnership for such purpose within the City and State of New York; or at the option of the Operating Partnership, payment of interest may be made by check mailed to the address of the Person entitled thereto as it appears in the Note Register or by transfer of funds to such Person at an account maintained within the United States. (See Sections 301, 302, 305, 306, 307 and 1002 of the form of Indenture.) The REPS The REPS will be issued only in fully registered book-entry form without coupons, in denominations of $1,000 and integral multiples thereof. The REPS will mature on , 2015 (the "Final REPS Maturity Date" and together with the 2008 Maturity Date and the 2018 Maturity Date, the "Maturity Dates"). However, holders of the REPS will be entitled to receive, and will be required to accept, 100% of the principal amount thereof on the Coupon Reset Date (as defined below) from either (i) the Callholder, if the Callholder purchases the REPS pursuant to the Call Option, or (ii) the Operating Partnership, by exercise of the Mandatory Put (as defined below) by the Trustee for and on behalf of the holders of the REPS, if the Callholder does not purchase the REPS pursuant to the Call Option. See "-- Call Option and Mandatory Put with Respect to the REPS" below. FOR PERSONS HOLDING THE REPS (OR AN INTEREST THEREIN) ON THE COUPON RESET DATE, THE EFFECT OF THE OPERATION OF THE CALL OPTION OR THE MANDATORY PUT WILL BE THAT SUCH HOLDERS WILL BE ENTITLED TO RECEIVE, AND WILL BE REQUIRED TO ACCEPT, 100% OF THE PRINCIPAL AMOUNT OF SUCH REPS (PLUS ACCRUED INTEREST) ON THE COUPON RESET DATE IN SATISFACTION OF THE OPERATING PARTNERSHIP'S OBLIGATIONS TO THE HOLDERS OF THE REPS. INTEREST ACCRUED TO BUT EXCLUDING THE COUPON RESET DATE WILL BE PAID BY THE OPERATING PARTNERSHIP ON SUCH DATE TO THE HOLDERS OF THE REPS ON THE MOST RECENT RECORD DATE. THE REPS MAY BE REDEEMED ONLY IN CONNECTION WITH A CALL OPTION OR A MANDATORY PUT. SEE "-- CALL OPTION AND MANDATORY PUT WITH RESPECT TO THE REPS". THE REPS ARE NOT SUBJECT TO ANY SINKING FUND PROVISIONS. Interest on the REPS will accrue at the rate of % from and including to but excluding , 2005 (the "Coupon Reset Date") and will be payable semi-annually on and , commencing , 1998. Interest will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Principal of (and premium, if any) and 89 interest on the REPS will be payable at the office or agency maintained by the Operating Partnership for such purpose within the City and State of New York; or at the option of the Operating Partnership, payment of interest may be made by check mailed to the address of the Person entitled thereto as it appears in the Note Register or by transfer of funds to such Person at an account maintained within the United States. (See Sections 301, 302, 305, 306, 307 and 1002 of the form of Indenture.) If the Callholder (as defined below) elects to purchase the REPS pursuant to the Call Option (as defined below), the Calculation Agent (as defined below) will reset the interest rate for the REPS effective on the Coupon Reset Date, pursuant to the Coupon Reset Process described below. In such circumstance, (i) the REPS will be purchased by the Callholder at 100% of the principal amount thereof on the Coupon Reset Date, on the terms and subject to the conditions described herein (interest accrued to but excluding the Coupon Reset Date will be paid by the Operating Partnership on such date to the holders of the REPS on the most recent Record Date), and (ii) from and including the Coupon Reset Date, the REPS will bear interest at the rate determined by the Calculation Agent in accordance with the procedure set forth under "-- Coupon Reset Process if REPS are Called" below. The Trustee will exercise the Mandatory Put without the consent of, or notice to, the holders of the REPS. Neither the Operating Partnership nor the Trustee will be required (i) to issue, register the transfer of or exchange Notes if such Notes may be among those selected for redemption during a period beginning at the opening of business 15 days before selection of Notes to be redeemed and ending at the close of business on the day of the mailing of the relevant notice of redemption; or (ii) to register the transfer of or exchange any Note, or portion thereof, called for redemption, except the unredeemed portion of any Note being redeemed in part. (See Section 305 of the form of Indenture.) GUARANTEES The Operating Partnership's obligations under the Notes will be jointly and severally guaranteed (each, a "Guarantee" and collectively, the "Guarantees") by the Company, AMB Property II, L.P., Long Gate LLC and each other Subsidiary of the Operating Partnership that guarantees the Operating Partnership's obligations under any Credit Agreement (each a "Guarantor" and collectively, the "Guarantors"). The obligations of each Guarantor under its Guarantee will be limited to the maximum amount permitted under applicable federal or state law. For the purposes hereof, "Credit Agreement" shall mean the Credit Facility or any similar revolving credit agreement entered into from time to time by the Operating Partnership. The Indenture provides that no Guarantor may consolidate with or merge with or into (whether or not such Guarantor is the surviving person) another corporation, person or entity whether or not affiliated with such Guarantor unless (i) the person formed by or surviving any such consolidation or merger (if other than such Guarantor) shall be a corporation, partnership, limited liability company or other legal entity organized and existing under the laws of the United States of America, any state thereof or the District of Columbia and shall expressly assume all the obligations of such Guarantor pursuant to a supplemental indenture in form and substance reasonably satisfactory to the Trustee under the Notes and the Indenture, (ii) immediately after giving effect to such transaction, no Default or Event of Default would exist and (iii) an officers' certificate and legal opinion concerning such conditions shall be delivered to the Trustee. REDEMPTION OF THE 2008 NOTES AND THE 2018 NOTES AT THE OPTION OF THE OPERATING PARTNERSHIP The 2008 Notes and the 2018 Notes will be redeemable, in whole or from time to time in part, at the option of the Operating Partnership on any date (a "Redemption Date"), at a redemption price equal to the greater of (i) 100% of the principal amount of the 2008 Notes and the 2018 Notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to such Redemption Date) discounted to such Redemption Date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus basis points, plus, in either case, accrued and unpaid interest on the principal amount being redeemed to such Redemption Date; provided that installments of interest on 2008 Notes and the 2018 Notes which are due and payable on an Interest Payment Date falling on or prior to the relevant Redemption Date shall be payable to 90 the holders of such of the 2008 Notes and the 2018 Notes registered as such at the close of business on the relevant record date according to their terms and the provisions of the Indenture. "Treasury Rate" means, with respect to any Redemption Date, (i) the yield, under the heading which represents the average for the immediately preceding week, appearing in the most recently published statistical release designated "H.15(519)" or any successor publication which is published weekly by the Board of Governors of the Federal Reserve System and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities," for the maturity corresponding to the Comparable Treasury Issue (if no maturity is within three months before or after the applicable Maturity Date, yields for the two published maturities most closely corresponding to the Comparable Treasury Issue shall be determined and the Treasury Rate shall be interpolated or extrapolated from such yields on a straight line basis, rounding to the nearest month) or (ii) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date. The Treasury Rate shall be calculated on the third business day preceding the Redemption Date. "Comparable Treasury Issue" means the United States Treasury security selected by the Independent Investment Banker as having a maturity comparable to the remaining term of the 2008 Notes and the 2018 Notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the 2008 Notes and the 2018 Notes. "Independent Investment Banker" means Morgan Stanley & Co. Incorporated or, if such firm is unwilling or unable to select the Comparable Treasury Issue, an independent investment banking institution of national standing appointed by the Trustee after consultation with the Operating Partnership. "Comparable Treasury Price" means with respect to any Redemption Date (i) the average of the two remaining Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations from the four selected, or (ii) if the Trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations. "Reference Treasury Dealer" means Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., J.P. Morgan Securities Inc. and an additional Reference Treasury Dealer appointed by the Trustee after consultation with the Operating Partnership and their successors; provided, however, that if Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., J.P. Morgan Securities Inc. or such additional Reference Treasury Dealer and their successors shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), the Operating Partnership will substitute therefor another Primary Treasury Dealer. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m., New York time, on the third business day preceding such Redemption Date. Notice of any redemption by the Operating Partnership will be mailed at least 30 days but not more than 60 days before any Redemption Date to each holder of 2008 Notes and the 2018 Notes to be redeemed. If less than all the 2008 Notes and the 2018 Notes are to be redeemed at the option of the Operating Partnership, the Trustee shall select, in such manner as it shall deem fair and appropriate, the 2008 Notes and the 2018 Notes to be redeemed in whole or in part. Unless the Operating Partnership defaults in payment of the redemption price, on and after any Redemption Date interest will cease to accrue on the Notes or portions thereof called for redemption. 91 CALL OPTION AND MANDATORY PUT WITH RESPECT TO THE REPS Call Option. Pursuant to the terms of the REPS, the Callholder, by giving notice to the Trustee (the "Call Notice"), has the right to purchase the aggregate principal amount of REPS, in whole but not in part (the "Call Option"), on the Coupon Reset Date, at a price equal to 100% of the principal amount thereof (the "Call Price") (interest accrued to but excluding the Coupon Reset Date will be paid by the Operating Partnership on such date to the holders of the REPS on the most recent Record Date). In order for the Callholder to exercise the Call Option, the Call Notice is required to be given to the Trustee, in writing, prior to 4:00 p.m., New York time, no later than 15 calendar days prior to the Coupon Reset Date for the REPS. The Call Notice may be revoked by the Callholder at any time prior to 2:00 p.m., New York time, on the Business Day prior to the Coupon Reset Date. If the Callholder exercises its rights under the Call Option, unless terminated in accordance with its terms, (i) not later than 2:00 p.m., New York time, on the Business Day prior to the Coupon Reset Date, the Callholder will deliver the Call Price in immediately available funds to the Trustee for payment of the Call Price on the Coupon Reset Date, and (ii) the holders of REPS will be required to deliver and will be deemed to have delivered the REPS to the Callholder against payment therefor on the Coupon Reset Date through the facilities of The Depository Trust Company, New York, New York ("DTC"). No holder of any REPS or any interest therein will have any right or claim against the Callholder as a result of the Callholder's decision whether or not to exercise the Call Option or performance or nonperformance of its obligations with respect thereto. The Call Option provides for certain circumstances under which such Call Option may be terminated. If the Call Option terminates or if the Callholder fails to pay the Call Price to the Trustee at or prior to the required time, the Trustee shall exercise the Mandatory Put described below. The Trustee shall notify the holders that it is exercising the Put Option as required by the terms of the Indenture, as supplemented. Immediately following the original issuance of the REPS, the Callholder will be Morgan Stanley & Co. International Limited. Thereafter, the Callholder may, from time to time, assign all of (but not less than all) its rights under the Call Option to a substitute Callholder, in each case without notice to or consent of the holders of the REPS. Mandatory Put. If the Call Option is not exercised or if the Call Option otherwise terminates, the Trustee will be obligated to exercise the right of the holders of the REPS to require the Operating Partnership to purchase the aggregate principal amount of REPS in whole but not in part (the "Mandatory Put"), on the Coupon Reset Date at a price equal to 100% of the principal amount thereof (the "Put Price"), plus accrued but unpaid interest to but excluding such Coupon Reset Date, in each case, to be paid by the Operating Partnership to the holders on the Coupon Reset Date. If the Trustee exercises the Mandatory Put, then the Operating Partnership shall deliver the Put Price in immediately available funds to the Trustee by no later than 10:00 a.m., New York time, on the Coupon Reset Date, and the holders of the REPS will be required to deliver and will be deemed to have delivered the REPS to the Operating Partnership against payment therefor on the Coupon Reset Date through the facilities of DTC. By its purchase of REPS, each holder irrevocably agrees that the Trustee shall exercise the Mandatory Put relating to such REPS for or on behalf of such REPS as provided herein. No holder of any REPS or any interest therein has the right to consent or object to the exercise of the Trustee's duties under the Mandatory Put. The transactions described above will be executed on the Coupon Reset Date through DTC in accordance with the procedures of DTC, and the accounts of participants will be debited and credited and the REPS delivered by book-entry as necessary to effect the purchases and sales thereof. For further information with respect to transfers and settlement through DTC, see "Global Notes." Notice to Holders by Trustee. In anticipation of the exercise of the Call Option or the Mandatory Put on the Coupon Reset Date, the Trustee will notify the Holders of the REPS, not less than 30 days nor more than 60 days prior to the Coupon Reset Date, that all REPS shall be delivered on the Coupon Reset Date through the facilities of DTC against payment of the Call Price by the Callholder under the Call Option or payment of 92 the Put Price by the Operating Partnership under the Mandatory Put. The Trustee will notify the holders of the REPS once it is determined whether the Call Price or the Put Price shall be delivered. COUPON RESET PROCESS IF REPS ARE CALLED The following discussion describes the steps to be taken in order to determine the interest rate to be paid on the REPS on and after the Coupon Reset Date in the event the Call Option has been exercised with respect to the REPS. Under the REPS and pursuant to a Calculation Agency Agreement, Morgan Stanley & Co. Incorporated has been appointed the calculation agent for the REPS (in such capacity as calculation agent, the "Calculation Agent"). If the Callholder exercises the Call Option, then the following steps (the "Coupon Reset Process") will be taken in order to determine the interest rate to be paid on the REPS from and including such Coupon Reset Date to but excluding the Final REPS Maturity Date. The Operating Partnership and the Calculation Agent will use reasonable efforts to cause the actions contemplated below to be completed in as timely a manner as possible. (a) No later than five Business Days prior to the Coupon Reset Date, the Operating Partnership will provide the Calculation Agent with (i) a list (the "Dealer List"), containing the names and addresses of three dealers, one of whom shall be Morgan Stanley & Co. Incorporated, from whom the Operating Partnership desires the Calculation Agent to obtain Bids (as defined below) for the purchase of the REPS and (ii) such other material as may reasonably be requested by the Calculation Agent to facilitate a successful Coupon Reset Process. (b) Within one Business Day following receipt by the Calculation Agent of the Dealer List, the Calculation Agent will provide to each dealer ("Dealer") on the Dealer List (i) a copy of this Prospectus, (ii) a copy of the form of REPS and (iii) a written request that each Dealer submit a Bid to the Calculation Agent by 12:00 noon, New York time, on the third Business Day prior to the Coupon Reset Date (the "Bid Date"). The time on the Bid Date upon which Bids will be requested may be changed by the Calculation Agent to as late as 3:00 p.m., New York time. "Bid" means an irrevocable written offer given by a Dealer for the purchase of all of the REPS, settling on the Coupon Reset Date, and shall be quoted by such Dealer as a stated yield to maturity on the REPS ("Yield to Maturity"). Each Dealer shall also be provided with (i) the name of the Operating Partnership, (ii) an estimate of the Purchase Price (which shall be stated as a U.S. dollar amount and be calculated by the Calculation Agent in accordance with paragraph (c) below), (iii) the principal amount and maturity of the REPS and (iv) the method by which interest will be calculated on the REPS. (c) The purchase price to be paid by any Dealer for the REPS in connection with the Coupon Reset Process after the exercise of the Call Option (the "Purchase Price") shall be equal to (i) the principal amount of the REPS, plus (ii) a premium (the "Notes Premium") which shall be equal to the excess, if any, on the Coupon Reset Date of (A) the discounted present value to the Coupon Reset Date of a bond with a maturity of 2015 which has an interest rate of %, semi-annual interest payments on each and , commencing 2005, and a principal amount equal to the principal amount of the REPS, and assuming a discount rate equal to the Call Option Treasury Rate over (B) such principal amount of REPS. The "Call Option Treasury Rate" means the per annum rate equal to the offer side yield to maturity of the current on-the-run 10-year United States Treasury Security per Telerate page 500, or any successor page, at 11:00 a.m., New York time, on the Bid Date (or such other time or date that may be agreed upon by the Operating Partnership and the Calculation Agent) or, if such rate does not appear on Telerate page 500, or any successor page, at such time, the rates on GovPX End-of-Day Pricing at 3:00 p.m., New York time, on the Bid Date (or such other date that may be agreed upon by the Operating Partnership and the Calculation Agent). (d) The Calculation Agent will provide written notice to the Operating Partnership by 12:30 p.m., New York time (or within 30 minutes of such later time at which the last Bid is received by the Calculation Agent, but in no event later than 3:30 p.m.), on the Bid Date, setting forth (i) the names of each of the Dealers from whom the Calculation Agent received Bids on the Bid Date, (ii) the Bid 93 submitted by each such Dealer and (iii) the Purchase Price as determined pursuant to paragraph (c) above. Except as provided below, the Calculation Agent will thereafter select from the Bids received the Bid with the lowest Yield to Maturity (the "Selected Bid"); provided, however, that (i) if the Calculation Agent has not received a timely Bid from a Dealer on or before the Bid Date, the Selected Bid shall be the lowest of all Bids received by such time, (ii) if any two or more of the lowest Bids submitted are equivalent, the Operating Partnership shall in its sole discretion select any of such equivalent Bids (and such selected Bid shall be the Selected Bid) and (iii) Morgan Stanley & Co. Incorporated will have the right to match the Bid with the lowest Yield to Maturity, in which case Morgan Stanley & Co. Incorporated's Bid shall be the Selected Bid. The Calculation Agent will set the Coupon Reset Rate equal to the interest rate that will amortize the Notes Premium fully over the term of the REPS at the Yield to Maturity indicated by the Selected Bid. The Calculation Agent will notify the Dealer that submitted the Selected Bid by 4:00 p.m., New York time, on the Bid Date. (e) Immediately after calculating the Coupon Reset Rate for the REPS, the Calculation Agent will provide written notice to the Operating Partnership and the Trustee, setting forth the Coupon Reset Rate. At the request of the holders of the REPS, the Calculation Agent will provide such holders the Coupon Reset Rate. The Operating Partnership shall thereafter establish the Coupon Reset Rate as the new interest rate on the REPS, effective from and including the Coupon Reset Date by delivery to the Trustee on or before the Coupon Reset Date of an officers' certificate. (f) The Callholder will sell the REPS to the Dealer that made the Selected Bid at the Purchase Price, such sale to be settled on the Coupon Reset Date in immediately available funds. If the Calculation Agent determines that (i) at any time prior to the sale of the REPS on the Bid Date, an Event of Default has occurred and is continuing under Sections 501 (1),(2),(3),(4) or (5) of the Indenture (in such event termination is at the Callholder's option) or under Sections 501 (6) or (7) of the Indenture (in such event, termination is automatic), (ii) a Market Disruption Event (as defined below) has occurred and is continuing following the exercise of the Call Option, (iii) the Callholder fails to deliver the Call Notice to the Trustee prior to 4:00 p.m., New York time, on the fifteenth calendar day prior to the Coupon Reset Date or revokes the Call Notice, (iv) the Callholder fails to pay the Call Price by 2:00 p.m., New York time, on the Business Day prior to the Coupon Reset Date, (v) a defeasance (as defined below) or a covenant defeasance (as defined below) has occurred and (vi) two or more of the Dealers have failed to provide Bids in a timely manner substantially as provided above, such Call Option will be automatically revoked, and the Trustee will exercise the Put Option on behalf of the holders. "Market Disruption Event" shall mean any of the following if such events occur and are continuing on any day from and including the date of the Call Notice to and including the Bid Date in the judgment of the Calculation Agent: (i) a suspension or material limitation in trading in securities generally on the NYSE or the establishment of minimum prices on such exchange; (ii) a general moratorium on commercial banking activities declared by either federal or New York State authorities; (iii) any material adverse change in the existing financial, political or economic conditions in the United States of America; (iv) an outbreak or escalation of major hostilities involving the United States of America or the declaration of a national emergency or war by the United States; or (v) any material disruption of the U.S. government securities market, U.S. corporate bond market or U.S. federal wire system; provided, in each case that in the judgment of the Calculation Agent the effect of the foregoing makes it impractical to conduct the Coupon Reset Process. If the Call Option is revoked, the Operating Partnership will reacquire the Call Option from the Callholder. The Calculation Agency Agreement provides that the Calculation Agent may resign at any time, such resignation to be effective ten Business Days after the delivery to the Operating Partnership and the Trustee of notice of such resignation. In such case, the Operating Partnership may appoint a successor Calculation Agent for the REPS. The Calculation Agent, in its individual capacity, may buy, sell, hold and deal in the REPS and may exercise any vote or join in any action which any holder of the REPS may be entitled to exercise or take as if it were not the Calculation Agent. The Calculation Agent, in its individual capacity, may also engage in any transaction with the Operating Partnership as if it were not the Calculation Agent. 94 MERGER, CONSOLIDATION OR SALE The Indenture provides that the Operating Partnership will not, in any transaction or series of related transactions, consolidate with, or sell, lease, assign, transfer or otherwise convey all or substantially all of its assets to, or merge with or into, any other Person unless (i) either the Operating Partnership shall be the continuing person, or the successor (if other than the Operating Partnership) formed by or resulting from any such consolidation or merger or which shall have received the transfer of such assets shall be a corporation, partnership, limited liability company or other legal entity organized and existing under the laws of the United States of America, any state thereof or the District of Columbia and shall expressly assume, by supplemental indenture delivered to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest on all of the outstanding Notes issued under the Indenture and the due and punctual performance and observance of all of the other covenants and conditions contained in the Notes and the Indenture; (ii) immediately after giving effect to such transaction and treating any Debt (including Acquired Debt) which becomes an obligation of the Operating Partnership or any of its Affiliates as a result thereof as having been incurred by the Operating Partnership or such Affiliate at the time of such transaction, no Event of Default under the Indenture, and no event which, after notice or the lapse of time or both, would become such an Event of Default, shall have occurred and be continuing; and (iii) an officers' certificate and legal opinion concerning such conditions shall be delivered to the Trustee. If the Operating Partnership is not the surviving legal entity, then, for purposes of clause (ii) of the preceding sentence, the successor shall be deemed to be the "Operating Partnership" referred to in such clause (ii). (See Sections 801 and 803 of the form of Indenture). Upon any such merger, consolidation, sale, assignment, transfer, lease or conveyance in which the Operating Partnership is not the continuing legal entity, the successor entity formed by such consolidation or into which the Operating Partnership is merged or to which such sale, assignment, transfer, lease or other conveyance is made shall succeed to, and be substituted for, and may exercise every right and power of, the Operating Partnership under the Indenture with the same effect as if such successor entity had been named as the Operating Partnership therein and thereafter the Operating Partnership shall be released (except in the case of a lease) from its obligations under the Indenture and the Notes. CERTAIN COVENANTS The Indenture contains the following covenants: Aggregate Debt Test. The Operating Partnership will not, and will not permit any of its Subsidiaries to, incur any Debt (including, without limitation, Acquired Debt) if, immediately after giving effect to the incurrence of such Debt and the application of the proceeds therefrom on a pro forma basis, the aggregate principal amount of all outstanding Debt of the Operating Partnership and its Subsidiaries (determined on a consolidated basis in accordance with generally accepted accounting principles) is greater than 60% of the sum of (without duplication) (i) the Total Assets of the Operating Partnership and its Subsidiaries as of the last day of the then most recently ended fiscal quarter and (ii) the aggregate purchase price of any real estate assets or mortgages receivable acquired, and the aggregate amount of any securities offering proceeds received (to the extent such proceeds were not used to acquire real estate assets or mortgages receivable or used to reduce Debt), by the Operating Partnership or any of its Subsidiaries since the end of such fiscal quarter, including the proceeds obtained from the incurrence of such additional Debt, determined on a consolidated basis in accordance with generally accepted accounting principles. Debt Service Test. The Operating Partnership will not, and will not permit any of its Subsidiaries to, incur any Debt (including, without limitation, Acquired Debt) if the ratio of Consolidated Income Available for Debt Service to the Annual Debt Service Charge for the period consisting of the four consecutive fiscal quarters most recently ended prior to the date on which such additional Debt is to be incurred shall have been less than 1.5:1 on a pro forma basis after giving effect to the incurrence of such Debt and the application of the proceeds therefrom, and calculated on the assumption that (i) such Debt and any other Debt (including, without limitation, Acquired Debt) incurred by the Operating Partnership or any of its Subsidiaries since the first day of such four-quarter period had been incurred, and the application of the proceeds therefrom (including to repay or retire other Debt) had occurred, on the first day of such period, (ii) the repayment or 95 retirement of any other Debt of the Operating Partnership or any of its Subsidiaries since the first day of such four-quarter period had occurred on the first day of such period (except that, in making such computation, the amount of Debt under any revolving credit facility, line of credit or similar facility shall be computed based upon the average daily balance of such Debt during such period) and (iii) in the case of any acquisition or disposition by the Operating Partnership or any of its Subsidiaries of any asset or group of assets, in any such case with a fair market value (determined in good faith by the Operating Partnership's General Partner's Board of Directors) in excess of $1 million, since the first day of such four-quarter period, whether by merger, stock purchase or sale or asset purchase or sale or otherwise, such acquisition or disposition had occurred as of the first day of such period with the appropriate adjustments with respect to such acquisition or disposition being included in such pro forma calculation. If the Debt giving rise to the need to make the foregoing calculation or any other Debt incurred after the first day of the relevant four-quarter period bears interest at a floating rate then, for purposes of calculating the Annual Debt Service Charge, the interest rate on such Debt shall be computed on a pro forma basis by applying the average daily rate which would have been in effect during the entire such four-quarter period to the greater of the amount of such Debt outstanding at the end of such period or the average amount of such Debt outstanding during such period. Secured Debt Test. The Operating Partnership will not, and will not permit any of its Subsidiaries to, incur any Debt (including, without limitation, Acquired Debt) secured by any Lien on any property or assets of the Operating Partnership or any of its Subsidiaries, whether owned on the date of the Indenture or thereafter acquired, if, immediately after giving effect to the incurrence of such Debt and the application of the proceeds therefrom on a pro forma basis, the aggregate principal amount (determined on a consolidated basis in accordance with generally accepted accounting principles) of all outstanding Debt of the Operating Partnership and its Subsidiaries which is secured by any Lien on any property or assets of the Operating Partnership or any of its Subsidiaries is greater than 40% of the sum of (without duplication) (i) the Total Assets of the Operating Partnership and its Subsidiaries as of the last day of the then most recently ended fiscal quarter and (ii) the aggregate purchase price of any real estate assets or mortgages receivable acquired, and the aggregate amount of any securities offering proceeds received (to the extent such proceeds were not used to acquire real estate assets or mortgages receivable or used to reduce Debt), by the Operating Partnership or any of its Subsidiaries since the end of such fiscal quarter, including the proceeds obtained from the incurrence of such additional Debt, determined on a consolidated basis in accordance with generally accepted accounting principles. For purposes of the foregoing provisions regarding the limitation on the incurrence of Debt, Debt shall be deemed to be "incurred" by the Operating Partnership or a Subsidiary whenever the Operating Partnership or a Subsidiary shall create, assume, guarantee or otherwise become liable in respect thereof. Maintenance of Total Unencumbered Assets. The Operating Partnership will not have at any time Total Unencumbered Assets of less than 150% of the aggregate principal amount of all outstanding Unsecured Debt of the Operating Partnership and its Subsidiaries, determined on a consolidated basis in accordance with generally accepted accounting principles. Existence. Except as permitted under the provisions of the Indenture described under the caption in "-- Merger, Consolidation or Sale" the Operating Partnership will do or cause to be done all things necessary to preserve and keep in full force and effect its existence as a Delaware limited partnership, rights (charter and statutory) and franchises; provided, however, that the Operating Partnership will not be required to preserve any right or franchise if its General Partner's Board of Directors determines that the preservation thereof is no longer desirable in the conduct of its business and that the loss thereof is not disadvantageous in any material respect to the Holders of the Notes outstanding under the Indenture. Maintenance of Properties. The Operating Partnership will cause all of its properties used or useful in the conduct of its business or the business of any Subsidiaries to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Operating Partnership may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times. 96 Insurance. The Indenture requires the Operating Partnership to, and to cause each of its Subsidiaries to, keep in force upon all of its properties and operations policies of insurance carried with responsible companies in such amounts and covering all such risks as shall be customary in the industry in accordance with prevailing market conditions and availability. Payment of Taxes and Other Claims. The Operating Partnership will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all taxes, assessments and governmental charges levied or imposed upon it or any Subsidiary or upon the income, profits or property of the Operating Partnership or any Subsidiary, and (ii) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Operating Partnership or any Subsidiary, provided, however, that the Operating Partnership will not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. Additional Guarantees. The Indenture provides that (i) the Operating Partnership will not permit any of its Subsidiaries that is not a Guarantor to guarantee or secure through the granting of Liens, the payment of any Debt of the Operating Partnership or any Guarantor and (ii) the Operating Partnership will not and will not permit any of its Subsidiaries to pledge any intercompany notes representing obligations of any of its Subsidiaries, to secure the payment of any debt of the Operating Partnership or any Guarantor, in each case unless such Subsidiary, the Operating Partnership and the Trustee execute and deliver a supplemental indenture evidencing such Subsidiary's Guarantee (providing for the unconditional Guarantee by such Subsidiary, on a senior basis, of the Notes). Provision of Financial Information. The Operating Partnership will file with the Trustee copies of annual reports, quarterly reports and other documents (the "Financial Reports") which the Operating Partnership files with the Commission or would be required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Operating Partnership were subject to such Sections; provided, however, that if the Operating Partnership is not subject to such Sections, it may in lieu of filing Financial Reports of the Operating Partnership with the Trustee, file Financial Reports of the Company if they would be materially the same as those that would have been filed by the Operating Partnership with the Commission pursuant to Sections 13 or 15(d) of the Exchange Act. DEFINITIONS As used herein, "Acquired Debt" means Debt of a Person (i) existing at the time such Person is merged or consolidated with or into, or becomes a Subsidiary of, the Operating Partnership or (ii) assumed by the Operating Partnership or any of its Subsidiaries in connection with the acquisition of assets from such Person. Acquired Debt shall be deemed to be incurred on the date the acquired Person is merged or consolidated with or into, or becomes a Subsidiary of, the Operating Partnership or the date of the related acquisition, as the case may be. "Annual Debt Service Charge" means, for any period, the interest expense of the Operating Partnership and its Subsidiaries for such period (including, without duplication, (i) all amortization of debt discount and premiums, (ii) all accrued interest, (iii) all capitalized interest, and (iv) the interest component of capitalized lease obligations), determined on a consolidated basis in accordance with generally accepted accounting principles. "Consolidated Income Available for Debt Service" for any period means Consolidated Net Income of the Operating Partnership and its Subsidiaries for such period, plus amounts which have been deducted and minus amounts which have been added for (without duplication) (i) interest expense on Debt, (ii) provision for taxes based on income, (iii) amortization of debt discount, premium and deferred financing costs, (iv) provisions for gains and losses on sales or other dispositions of properties and other investments, (v) property depreciation and amortization, (vi) the effect of any non-cash items, and (vii) amortization of deferred charges, all determined on a consolidated basis in accordance with generally accepted accounting principles. 97 "Consolidated Net Income" for any period means the amount of net income (or loss) of the Operating Partnership and its Subsidiaries for such period, excluding (without duplication) (i) extraordinary items and (ii) the portion of net income (but not losses) of the Operating Partnership and its Subsidiaries allocable to minority interests in unconsolidated Persons to the extent that cash dividends or distributions have not actually been received by the Operating Partnership or one of Subsidiaries, all determined on a consolidated basis in accordance with generally accepted accounting principles. "Debt" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of (i) borrowed money or evidenced by bonds, notes, debentures or similar instruments, (ii) indebtedness secured by any Lien on any property or asset owned by such Person, but only to the extent of the lesser of (x) the amount of indebtedness so secured and (y) the fair market value (determined in good faith by the board of directors of such Person or, in the case of the Operating Partnership or a Subsidiary, by the Operating Partnership's General Partner's Board of Directors) of the property subject to such Lien, (iii) reimbursement obligations, contingent or otherwise, in connection with any letters of credit actually issued or amounts representing the balance deferred and unpaid of the purchase price of any property except any such balance that constitutes an accrued expense or trade payable, or (iv) any lease of property by such Person as lessee which is required to be reflected on such Person's balance sheet as a capitalized lease in accordance with generally accepted accounting principles, and also includes, to the extent not otherwise included, any obligation of such Person to be liable for, or to pay, as obligor, guarantor or otherwise (other than for purposes of collection in the ordinary course of business), Debt of the types referred to above of another Person (it being understood that Debt shall be deemed to be incurred by such Person whenever such person shall create, assume, guarantee or otherwise become liable in respect thereof). "Lien" means any mortgage, deed of trust, lien, charge, pledge, security interest, security agreement, or other encumbrance of any kind. "Subsidiary" means (i) a corporation, partnership, joint venture, limited liability company or other Person the majority of the shares, if any, of the non-voting capital stock or other equivalent ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by the Operating Partnership and/or any other Subsidiary or Subsidiaries, and the majority of the shares of the voting capital stock or other equivalent ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by the Operating Partnership, any other Subsidiary or Subsidiaries, and (ii) any other Person the accounts of which are consolidated with the accounts of the Operating Partnership. "Total Assets" means the sum of (without duplication) (i) Undepreciated Real Estate Assets and (ii) all other assets (excluding accounts receivable and intangibles) of the Operating Partnership and its Subsidiaries, all determined on a consolidated basis in accordance with generally accepted accounting principles. "Total Unencumbered Assets" means the sum of (without duplication) (i) those Undepreciated Real Estate Assets which are not subject to a Lien securing Debt and (ii) all other assets (excluding accounts receivable and intangibles) of the Operating Partnership and its Subsidiaries not subject to a Lien securing Debt, all determined on a consolidated basis in accordance with generally accepted accounting principles. "Undepreciated Real Estate Assets" means, as of any date, the cost (original cost plus capital improvements) of real estate assets of the Operating Partnership and its Subsidiaries on such date, before depreciation and amortization, all determined on a consolidated basis in accordance with generally accepted accounting principles. "Unsecured Debt" means Debt of the Operating Partnership or any of its Subsidiaries which is not secured by a Lien on any property or assets of the Operating Partnership or any of its Subsidiaries. EVENTS OF DEFAULT, NOTICE AND WAIVER The Indenture provides that the following events are "Events of Default" with respect to any series of the Notes issued thereunder: (i) default for 30 days in the payment of any interest on any Note of such series; (ii) default in the payment of any principal of (or premium, if any, on) any Note of such series at its Maturity 98 Date; (iii) default in the performance or breach of any other covenant or warranty of the Operating Partnership contained in the Indenture, continued for 60 days after written notice as provided in the Indenture; (iv) (a) default by the Operating Partnership or any Subsidiary of the Operating Partnership in the payment (whether at stated maturity, upon acceleration, upon required prepayment or otherwise), beyond any period of grace provided therefor, of any principal of or interest on any bond, note, debenture or other evidence of indebtedness, or (b) any other breach or default (or other event or condition) shall occur under any agreement, indenture or instrument relating to any such bond, note, debenture or other evidence of indebtedness beyond any cure period provided therefor, if as a result thereof the holder or holders of any such bond, note, debenture or other evidence of indebtedness (or a person on behalf of such holder or holders) has the immediate right to cause (upon the giving of notice if required) any such bond, note, debenture or other evidence of indebtedness to become or be declared due and payable, or required to be prepaid, redeemed, purchased or defeased (or an offer of prepayment, redemption, purchase or defeasance be made), prior to its stated maturity (other than by a scheduled mandatory prepayment), which in the aggregate under (a) and (b) have a principal amount equal or greater than $20,000,000; (v) the entry by a court of competent jurisdiction of one or more judgments, orders or decrees against the Operating Partnership or any Significant Subsidiary (as defined below) in an aggregate amount (excluding amounts fully covered by insurance) in excess of $20,000,000 and such judgments, orders or decrees remain undischarged, unstayed or unsatisfied in an aggregate amount (excluding amounts fully covered by insurance) in excess of $20,000,000 for a period of 30 consecutive days; and (vi) certain events of bankruptcy, insolvency or reorganization with respect to the Operating Partnership or of any General Partner or any Significant Subsidiary. (See Section 501 of the form of Indenture.) The term "Significant Subsidiary" means any Subsidiary which is a significant subsidiary (as defined in Regulation S-X promulgated under the Securities Act as in effect on January 1, 1998) of the Operating Partnership. If an Event of Default under the Indenture with respect to a series of Notes occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the outstanding Notes of such series may declare the principal amount of all of the Notes of such series to be due and payable immediately by written notice thereof to the Operating Partnership (and to the Trustee if given by the Holders). However, at any time after such a declaration of acceleration with respect to the Notes of such series has been made, the Holders of not less than a majority in principal amount of outstanding Notes of such series may rescind and annul such declaration and its consequences if (i) the Operating Partnership shall have deposited with the Trustee all required payments of the principal of (and premium, if any) and interest, if any, on the Notes of such series (other than amounts which have become due and payable as a result of such acceleration), plus certain fees, expenses, disbursements and advances of the Trustee and (ii) all Events of Default (other than the nonpayment of accelerated principal (or specified portion thereof), premium, if any, and interest) with respect to the Notes of such series have been cured or waived as provided in the Indenture. (See Section 502 of the form of Indenture.) The Indenture will also provide that the Holders of not less than a majority in principal amount of the outstanding Notes of a series may waive any past default with respect to such Notes and its consequences, except a default (x) in the payment of the principal of (or premium, if any) or interest, if any, on any Note of such series or (y) in respect of a covenant or provision contained in the Indenture that cannot be modified or amended without the consent of the Holder of each Outstanding Note of such series affected thereby. (See Section 513 of the form of Indenture.) The Indenture requires the Trustee to give notice to the Holders of Notes of a series issued thereunder within 90 days of a default with respect to such Notes under the Indenture known to the Trustee, unless such default shall have been cured or waived; provided, however, that the Trustee may withhold notice to the Holders of any Notes of such series of any default (except a default in the payment of the principal of (or premium, if any) or interest, if any, on any Note of such series) if a Responsible Officer of such Trustee determines such withholding to be in the interest of such Holders. (See Section 601 of the form of Indenture.) The Indenture provides that no Holder of Notes of any series may institute any proceeding, judicial or otherwise, with respect to the Indenture or for any remedy thereunder, except in the case of the failure of the Trustee, for 60 days, to act after it has received a written request to institute proceedings in respect of an Event of Default from the Holders of not less than 25% in principal amount of the Outstanding Notes of such series, 99 as well as an offer of reasonable indemnity. (See Section 507 of the form of Indenture.) This provision will not prevent, however, any Holder of Notes from instituting suit for the enforcement of payment of the principal of (and premium, if any) and interest, if any, on such Notes held by that Holder at the respective due dates thereof. (See Section 508 of the form of Indenture.) The Indenture provides that, subject to provisions of the Indenture relating to its duties in case of default, the Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of any Holders of any Notes of any series then Outstanding under the Indenture, unless the Holders of Notes of any such series shall have offered to the Trustee thereunder reasonable security or indemnity. (See Section 602 of the form of Indenture.) The Holders of not less than a majority in principal amount of the Outstanding Notes of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or of exercising any trust or power conferred upon the Trustee with respect to such series. However, the Trustee may refuse to follow any direction which is in conflict with any law or the Indenture, which may involve the Trustee in personal liability or which may be unduly prejudicial to the Holders of Notes of such series not joining therein. (See Section 512 of the form of Indenture.) Within 120 days after the close of each fiscal year, the Operating Partnership must deliver to the Trustee a certificate, signed by one of several specified officers of the General Partner of the Operating Partnership, stating whether or not such officer has knowledge of any noncompliance under the Indenture and, if so, specifying such noncompliance and the nature and status thereof. (See Section 1014 of the form of Indenture.) Further, upon any request by the Operating Partnership to take any action under the Indenture, the Operating Partnership will furnish to the Trustee (a) an Officers' Certificate stating that all conditions precedent, if any, provided for in the Indenture relating to the proposed action have been complied with, and (b) an opinion of counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with. MODIFICATION OF THE INDENTURE Modifications and amendments of the Indenture may be made only with the consent of the Holders of not less than a majority in principal amount of all Outstanding Notes which are affected by such modification or amendment; provided, however, that no such modification or amendment may, without the consent of the Holder of each such Note affected thereby, (i) change the Maturity Date of the principal (or premium, if any) of, or any installment of interest, if any, any such Note, (ii) reduce the principal amount of, or the rate or amount of interest on, or any amount of premium payable on any such Note that would be due and payable upon declaration of acceleration of the maturity thereof or would be provable in bankruptcy, or adversely affect any right of the Holder of any such Note to repayment of such Note at such Holder's option, (iii) change the Place of Payment, or the coin or currency, for payment of principal of (or premium, if any) or interest, if any, on any such Note, (iv) impair the right to institute suit for the enforcement of any payment on or with respect to any such Note, (v) reduce the percentage in principal amount of Outstanding Notes necessary to modify or amend the Indenture, to waive compliance with certain provisions thereof or certain defaults and consequences thereunder or to reduce the quorum or voting requirements set forth in the Indenture, or (vi) modify any of the foregoing provisions or any of the provisions relating to the waiver of certain past defaults or certain covenants, except to increase the required percentage to effect such action or to provide that certain other provisions may not be modified or waived without the consent of the Holder of such Note. (See Section 902 of the form of Indenture.) The Indenture provides that the Holders of not less than a majority in principal amount of Outstanding Notes have the right to waive compliance by the Operating Partnership with certain covenants in the Indenture, including those described in the section of this Prospectus captioned "Description of Notes -- Certain Covenants." (See Section 1013 of the form of Indenture.) Modifications and amendments of the Indenture may be made by the Operating Partnership and the Trustee without the consent of any Holder of Notes issued thereunder for any of the following purposes: (i) to evidence the succession of another Person to the Operating Partnership as obligor under the Indenture; (ii) to add to the covenants of the Operating Partnership for the benefit of the Holders of the Notes or to surrender any right or power conferred upon the Operating Partnership in the Indenture; (iii) to add Events of Default 100 for the benefit of the Holders of the Notes; (iv) to add or change any provisions of the Indenture to facilitate the issuance of the Notes in uncertificated form, provided that such action shall not adversely affect the interests of the Holders of Notes in any material respect; (v) to secure the Notes; (vi) to provide for the acceptance of appointment by a successor Trustee or to facilitate the administration of the trusts under the Indenture by more than one Trustee; (vii) to cure any ambiguity, defect or inconsistency in the Indenture or to add or change any other provisions with respect to matters or questions arising thereunder, provided that such action shall not adversely affect the interests of Holders of Outstanding Notes in any material respect; or (viii) to supplement any of the provisions of the Indenture to the extent necessary to permit or facilitate defeasance, covenant defeasance and discharge of any Notes, provided that such action shall not adversely affect the interests of the Holders of the Notes in any material respect. (See Section 901 of the form of Indenture.) The Indenture provides that in determining whether the Holders of the requisite principal amount of Outstanding Notes of a series have given any request, demand, authorization, direction, notice, consent or waiver thereunder or whether a quorum is present at a meeting of Holders of the Notes of a series, Notes of each series owned by the Operating Partnership or any other obligor upon such Notes or any Affiliate of the Operating Partnership or of such other obligor shall be disregarded. (See Section 101 of the form of Indenture.) The Indenture contains provisions for convening meetings of the Holders of Notes of a series. (See Section 1301 of the form of Indenture.) A meeting may be called at any time by the Trustee and also, upon request, by the Operating Partnership or the Holders of at least 25% in principal amount of the Outstanding Notes of such series, in any such case upon notice given as provided in the Indenture. (See Section 1302 of the form of Indenture.) Except for any consent that must be given by the Holder of each Note affected by certain modifications and amendments of the Indenture, any resolution presented at a meeting or adjourned meeting duly reconvened at which a quorum is present may be adopted by the affirmative vote of the Holders of a majority in principal amount of the Outstanding Notes of such series; provided, however, that, except as referred to above, any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other action that may be made, given or taken by the Holders of a specified percentage, which is less or more than a majority, in principal amount of the Outstanding Notes of such series may be adopted at a meeting or adjourned meeting duly reconvened at which a quorum is present by the affirmative vote of the Holders of such specified percentage in principal amount of the Outstanding Notes of such series. Any resolution passed or decision taken at any meeting of Holders of Notes of any series duly held in accordance with the Indenture will be binding on all Holders of Notes of such series. The quorum at any meeting called to adopt a resolution, and at any reconvened meeting, will be Persons holding or representing a majority in principal amount of the Outstanding Notes of any series; provided, however, that if any action is to be taken at such meeting with respect to a consent or waiver which may be given by the Holders of not less than a specified percentage, which is less or more than a majority, in principal amount of the Outstanding Notes of such series, the Persons holding or representing such specified percentage in principal amount of the Outstanding Notes of such series will constitute a quorum. (See Section 1304 of the form of Indenture.) Notwithstanding the provisions described above, the Indenture provides that if any action is to be taken at a meeting of Holders of Notes of any series with respect to any request, demand, authorization, direction, notice, consent, waiver or other action that the Indenture expressly provides may be made, given or taken by the Holders of a specified percentage in principal amount of all Outstanding Notes of such series affected thereby: (i) there shall be no minimum quorum requirement for such meeting and (ii) the principal amount of the Outstanding Notes of such series that are entitled to vote in favor of such request, demand, authorization, direction, notice, consent, waiver or other action shall be taken into account in determining whether such request, demand, authorization, direction, notice, consent, waiver or other action has been made, given or taken under the Indenture. (See Section 1304 of the form of Indenture.) DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE Upon request of the Operating Partnership the Indenture shall cease to be of further effect with respect to the Notes of a series (except as to certain limited provisions of the Indenture which shall survive) when either 101 (i) all Notes of such series have been delivered to the Trustee for cancellation (subject to certain exceptions) or (ii) all Notes of such series have become due and payable or will become due and payable within one year (or, if redeemable, are scheduled for redemption within one year) and the Operating Partnership has irrevocably deposited with the Trustee, in trust, funds in an amount sufficient to pay the entire indebtedness on the Notes of such series in respect of principal (and premium, if any) and interest to the date of such deposit (if such Notes have become due and payable) or to the stated maturity or redemption date, as the case may be. The Indenture provides that the Operating Partnership may elect either (i) to defease and be discharged from any and all obligations with respect to a series of Notes (except, among other things, for the obligations to register the transfer or exchange of such Notes, to replace temporary or mutilated, destroyed, lost or stolen Notes of such series, to maintain an office or agency in respect of the Notes of such series and to hold moneys for payment in trust) ("defeasance") (see Section 1202 of the form of Indenture) or (ii) to be released from its obligations with respect to the Notes of such series under the applicable covenants described above under the caption "Certain Covenants" (except that the Operating Partnership shall remain subject to the covenant to preserve and keep in full force and effect its existence, except as permitted under the provisions described under "Merger, Consolidation or Sale") and its obligations with respect to any other covenants applicable to the Notes of such series, and any omission to comply with such obligations shall not constitute a default or an Event of Default with respect to the Notes ("covenant defeasance") (see Section 1203 of the form of Indenture), in either case upon the irrevocable deposit by the Operating Partnership with the Trustee, in trust, of the amount payable at the applicable Maturity Date or, if applicable, upon redemption, or Government Obligations (as defined below), or both, applicable to the Notes of such series which through the scheduled payment of principal and interest in accordance with their terms will provide money in an amount sufficient to pay the principal of (and premium, if any) and interest on such Notes, on the scheduled due dates therefor or the applicable redemption date, as the case may be. Such a trust may only be established if, among other things, (i) the Operating Partnership has delivered to the Trustee a legal opinion to the effect that the Holders of the Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such defeasance or covenant defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance or covenant defeasance had not occurred, and such legal opinion, in the case of defeasance, must refer to and be based upon a ruling of the Internal Revenue Service or a change in applicable United States federal income tax law occurring after the date of the Indenture; (ii) if the cash and Government Obligations deposited are sufficient to pay the outstanding Notes of such series, provided such Notes are redeemed on a particular redemption date, the Operating Partnership shall have given the Trustee irrevocable instructions to redeem the Notes of such series on such date; and (iii) no Event of Default or event which with notice or lapse of time or both would become an Event of Default with respect to the Notes shall have occurred and shall be continuing on the date of, or, solely in the case of Events of Default described in clause (vi) of the first paragraph under the caption "-- Events of Default, Notice and Waiver" above, during the period ending on the 91st day after the date of, such deposit into trust. (See Section 1204 of the form of Indenture.) "Government Obligations" means securities which are (i) direct obligations of the United States of America, for the payment of which its full faith and credit is pledged, or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America, the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such Government Obligation or a specific payment of interest on or principal of any such Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of interest on or principal of the Government Obligation evidenced by such depository receipt. (See Section 101 of the form of Indenture.) 102 In the event the Operating Partnership effects covenant defeasance with respect to the Notes of any series and such Notes are declared due and payable because of the occurrence of any Event of Default (other than an Event of Default with respect to any covenant as to which there has been covenant defeasance), the amount of monies and Government Obligations deposited with the Trustee to effect such covenant defeasance may not be sufficient to pay amounts due on such Notes at the time of their Maturity Date or at the time of the acceleration resulting from such Event of Default. In any such event, the Operating Partnership would remain liable to make payment of such amounts due at the time of acceleration. GLOBAL NOTES The Notes of each series will be issued in the form of one or more fully registered book-entry Notes of such series (each, a "Global Note") that will be deposited with, or on behalf of DTC. Global Notes will be issued in fully registered form. The Operating Partnership anticipates that the Global Notes will be deposited with, or on behalf of DTC, and that such Global Note will be registered in the name of Cede & Co., DTC's nominee. The Operating Partnership further anticipates that the following provisions will apply to the depository arrangements with respect to the Global Notes. So long as DTC or its nominee is the registered owner of the Global Notes, DTC or its nominee, as the case may be, will be considered the sole Holder of the Notes represented by such Global Note for all purposes under the Indenture. Except as described below, owners of beneficial interests in the Global Notes will not be entitled to have Notes represented by such Global Note registered in their names, will not receive or be entitled to receive physical delivery of Notes in certificated form and will not be considered the owners or Holders thereof under the Indenture. The laws of some states require that certain purchasers of securities take physical delivery of such securities in certificated form; accordingly, such laws may limit the transferability of beneficial interests in the Global Notes. The Global Notes will be exchangeable for certificated Notes only if (i) DTC notifies the Operating Partnership that it is unwilling or unable to continue as depository or DTC ceases to be a clearing agency registered under the Exchange Act (if so required by applicable law or regulation) and, in either case, a successor depository is not appointed by the Operating Partnership within 90 days after the Operating Partnership receives such notice or becomes aware of such ineligibility, (ii) the Operating Partnership in its sole discretion determines that the Global Notes shall be exchangeable for certificated Notes or (iii) there shall have occurred and be continuing an Event of Default with respect to Notes of any series under the Indenture and beneficial owners representing a majority in aggregate principal amount of the Notes of such series represented by a Global Note advise DTC to cease acting as depository. Upon any such exchange, owners of a beneficial interest in such Global Note will be entitled to physical delivery of individual Notes of such series in certificated form of like tenor, terms and rank, equal in principal amount to such beneficial interest, and to have such Notes in certificated form registered in the names of the beneficial owners, which names are expected to be provided by DTC's relevant Participants (as identified by DTC) to the Trustee. Notes so issued in certificated form will be issued in denominations of $1,000 or any integral multiple thereof, and will be issued in registered form only, without coupons. The following is based on information furnished to the Operating Partnership by DTC: DTC will act as securities depository for the Notes. The Notes will be issued as fully registered securities registered in the name of Cede & Co. (DTC's partnership nominee). One fully registered Note certificate will be issued with respect to each $200 million (or such other amount as shall be permitted by DTC from time to time) of principal amount of the Notes, and an additional certificate will be issued with respect to any remaining principal amount. DTC is a limited purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities that 103 its participants ("Participants") deposit with DTC. DTC also facilitates the settlement among Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations ("Direct Participants"). DTC is owned by a number of its Direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others, such as securities brokers and dealers, and banks and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). The rules applicable to DTC and its Participants are on file with the Commission. Purchases of Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the Notes on DTC's records. The ownership interest of each actual purchaser of each Note ("Beneficial Owner") is in turn recorded on the Direct and Indirect Participants' records. A Beneficial Owner does not receive written confirmation from DTC of its purchase, but is expected to receive a written confirmation providing details of the transaction, as well as periodic statements of its holdings, from the Direct or Indirect Participant through which such Beneficial Owner entered into the transaction. Transfers of ownership interests in Notes are accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners do not receive certificates representing their ownership interests in Notes, except under the circumstances described above. To facilitate subsequent transfers, the Notes are registered in the name of DTC's nominee, Cede & Co. The deposit of the Notes with DTC and their registration in the name of Cede & Co. will effect no change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Notes; DTC records reflect only the identity of the Direct Participants to whose accounts Notes are credited, which may or may not be the Beneficial Owners. The Participants remain responsible for keeping account of their holdings on behalf of their customers. Delivery of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners are governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Neither DTC nor Cede & Co. consents or votes with respect to the Notes. Under its usual procedures, DTC mails a proxy (an "Omnibus Proxy") to the issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Notes are credited on the record date (identified on a list attached to the Omnibus Proxy). Principal payments, premium payments, if any, and interest payments, if any, on the Notes will be made to DTC. DTC's practice is to credit Direct Participants' accounts on the payment date in accordance with their respective holdings as shown on DTC's records unless DTC has reason to believe that it will not receive payment on the payment date. Payments by Direct and Indirect Participants to Beneficial Owners are governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name" and are the responsibility of such Direct and Indirect Participants and not of DTC, the Trustee or the Operating Partnership, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal (and premium, if any) and interest, if any, to DTC is the responsibility of the Operating Partnership or the Trustee, disbursement of such payments to Direct Participants is the responsibility of DTC, and disbursement of such payments to the Beneficial Owners is the responsibility of Direct and Indirect Participants. If applicable, redemption notices shall be sent to Cede & Co. If less than all of the Notes of any series represented by the Global Notes are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. DTC may discontinue providing its services as securities depository with respect to the Notes of any series at any time by giving reasonable notice to the Operating Partnership or the Trustee. Under such 104 circumstances, in the event that a successor securities depository is not appointed, Note certificates are required to be printed and delivered as described above. The Operating Partnership may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Note certificates will be printed and delivered as described above. None of the Operating Partnership, the Underwriters, the Trustee or any applicable paying agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial interests in the Global Notes, or for maintaining, supervising or reviewing any records relating to such beneficial interest. Notices or demands to or upon the Operating Partnership in respect of the Notes and the Indenture may be served and, in the event that Notes are issued in definitive certificated form, Notes may be surrendered for payment, registration of transfer or exchange, at the office or agency of the Operating Partnership maintained for such purpose in the Borough of Manhattan, The City of New York, which shall initially be the office of State Street Bank and Trust Company, an affiliate of the Trustee, which on the date of this Prospectus is located at 61 Broadway, 15th Floor, New York, New York. 105 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS RELATING TO THE REPS The following is a summary of certain United States Federal income tax considerations relating to the purchase, ownership and disposition of the REPS by an initial holder of the REPS who purchases the REPS on the date of original issuance. This summary is based upon current provisions of the Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury regulations promulgated thereunder and current administrative rulings and court decisions currently in effect, all of which are subject to change, possibly with retroactive effect. The discussion does not deal with all Federal tax considerations applicable to all categories of investors (including insurance companies, tax-exempt organizations, financial institutions or broker-dealers, foreign corporations, foreign partnerships and persons who are not citizens or residents of the United States), some of which may be subject to special rules. In addition, this summary is limited to holders who will hold the REPS as "capital assets" (generally, property held for investment) within the meaning of Section 1221 of the Code. This summary only addresses the United States Federal income tax considerations of the REPS until the Coupon Reset Date. Investors are urged to consult their own tax advisors to determine the Federal, state, local, foreign, and other tax consequences relating to the purchase, ownership and disposition of the REPS. Prospective investors should note that no rulings have been or are expected to be sought from the IRS with respect to any of the Federal income tax considerations discussed below, and no assurance can be given that the IRS will not take contrary positions. TREATMENT OF REPS The United States Federal income tax treatment of debt obligations such as the REPS is not entirely certain. Because the REPS are subject to a mandatory put or call on the Coupon Reset Date, the Operating Partnership intends to treat the REPS as maturing on the Coupon Reset Date for United States Federal income tax purposes and as being reissued on the Coupon Reset Date should the Callholder sell the REPS pursuant to the Coupon Reset Process. Based on such treatment, stated interest on the REPS generally will be taxable to a holder as ordinary income at the time it is paid or accrued in accordance with the holder's regular method of tax accounting. Under the foregoing treatment, upon the sale, exchange, redemption, or other disposition of the REPS, a holder will generally recognize taxable gain or loss equal to the difference between the amount realized by such holder on such sale, exchange, redemption, or other disposition (except to the extent that such amount realized represents accrued and unpaid interest that such holder has not included in gross income previously) and such holder's adjusted tax basis in the REPS. Pursuant to the Taxpayer Relief Act of 1997, in the case of an individual holder, any capital gain recognized on the sale, exchange, redemption, or other disposition of the REPS will generally be subject to United States Federal income tax at a stated maximum rate of (i) 20%, if the holder's holding period in the REPS was more than 18 months at the time of such sale, exchange, redemption, or other disposition; (ii) 28%, if the holder's holding period in the REPS was more than one year, but not more than 18 months, at the time of such sale, exchange, redemption, or other disposition; and (iii) 39.6%, if the holder's holding period in the REPS was not more than one year at the time of such sale, exchange, redemption, or other disposition. Any capital loss recognized by a holder on the sale, exchange, redemption, or other disposition of the REPS will generally be long-term capital loss or short-term capital loss depending on whether the holder held the REPS for more than one year. The deductibility of capital losses is subject to limitations. There can be no assurance, however, that the IRS will agree with the Operating Partnership's treatment of the REPS, and it is possible that the Service could assert another treatment. For instance, it is possible that the IRS could seek to treat the REPS as maturing on the Final REPS Maturity Date and to treat the issue price of the REPS as including the value of the Call Option. Because of the Coupon Reset Process, if the REPS were treated as maturing on the Final REPS Maturity Date, Treasury regulations relating to contingent payment debt obligations would appear to be applicable. The effect of such Treasury regulations would be to (i) require holders, regardless of their usual method of accounting, to use an accrual method with respect to the REPS; (ii) result in the possibility that holders would be required to accrue income in excess of actual 106 cash payments received; and (iii) generally result in ordinary rather than capital treatment of any gain or loss on the sale, exchange, redemption, or other disposition of the REPS. BACKUP WITHHOLDING The Operating Partnership will report to holders of REPS and the IRS the amount of interest paid during each calendar year and the amount of tax withheld, if any. Under the backup withholding rules, a holder of REPS may be subject to backup withholding at the rate of 31% with respect to payments made on the REPS as well as proceeds from the disposition of REPS unless such holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or (ii) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. A holder that does not provide the Operating Partnership with his correct taxpayer identification number may also be subject to penalties imposed by the IRS. Any amount paid as backup withholding will be creditable against the holder's income tax liability. 107 DESCRIPTION OF CERTAIN PROVISIONS OF THE PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP Substantially all of the Company's assets are held, and all of its operations are conducted, by or through the Operating Partnership. The Company is the sole general partner of the Operating Partnership and owns a 95.9% interest therein. The right and power to manage the Operating Partnership is vested exclusively in the Company, as sole general partner. The interest in the Operating Partnership allocated to the Company is designated as a general partner interest. Except with respect to distributions of cash and allocations of income and loss, and except as otherwise noted herein and elsewhere in this Prospectus, the description herein of Units is applicable also to Performance Units, and holders of Performance Units are treated as limited partners. The following summary of the Amended and Restated Agreement of Limited Partnership of the Operating Partnership (the "Partnership Agreement") and the descriptions of certain provisions set forth elsewhere in this Prospectus are qualified in their entirety by reference to the Partnership Agreement, which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. GENERAL Holders of Units hold limited partnership interests in the Operating Partnership, and all holders of partnership interests (including the Company in its capacity as general partner) are entitled to share in cash distributions from, and in the profits and losses of, the Operating Partnership. The number of GP Units held by the Company is equal to the total number of shares of Common Stock outstanding. Accordingly, the distributions paid by the Company per share outstanding are expected to be equal to the distributions per Unit paid on the outstanding Units. The Units have not been registered pursuant to Federal or state securities laws, and they will not be listed on the NYSE or any other exchange or quoted on any national market system. However, the shares of Common Stock that may be issued by the Company upon redemption of the Units may be sold in registered transactions, or transactions exempt from registration under the Securities Act. The limited partners of the Operating Partnership have the rights to which limited partners are entitled under the Partnership Agreement and the Partnership Act. The Partnership Agreement imposes certain restrictions on the transfer of Units, as described below. PURPOSE, BUSINESS AND MANAGEMENT The Operating Partnership is organized as a Delaware limited partnership pursuant to the terms of the Partnership Agreement. The Company is the sole general partner of the Operating Partnership and conducts substantially all of its business through the Operating Partnership, except for investment advisory services (which are conducted through AMB Investment Management). The Operating Partnership owns 100% of the non-voting preferred stock of AMB Investment Management (representing 95% of its economic interest) and certain of the Company's Executive Officers own all of the outstanding voting common stock of AMB Investment Management (representing 5% of its economic interest). The primary purpose of the Operating Partnership is, in general, to acquire, purchase, own, operate, manage, develop, redevelop, invest in, finance, refinance, sell, lease and otherwise deal with industrial and retail properties and assets related thereto, and interests therein. The Operating Partnership is authorized to conduct any business that may be lawfully conducted by a limited partnership formed under the Partnership Act, except that the Partnership Agreement requires the business of the Operating Partnership to be conducted in such a manner that will permit the Company to be classified as a REIT under Section 856 of the Code, unless the Company ceases to qualify as a REIT for reasons other than the conduct of the business of the Operating Partnership. Subject to the foregoing limitation, the Operating Partnership may enter into partnerships, joint ventures or similar arrangements and may own interests directly or indirectly in any other entity. The Company, as the general partner of the Operating Partnership, has the exclusive power and authority to conduct the business of the Operating Partnership, subject to the consent of the limited partners in certain limited circumstances (as discussed below) and except as expressly limited in the Partnership Agreement. 108 The Company has the right to make all decisions and take all actions with respect to the Operating Partnership's acquisition and operation of the Properties and all other assets and businesses of or related to the Partnership. No limited partner may take part in the conduct or control of the business or affairs of the Operating Partnership by virtue of being a holder of Units. In particular, each limited partner expressly acknowledged in the Partnership Agreement that the Company, as general partner, is acting on behalf of the Operating Partnership's limited partners and the Company's stockholders collectively, and is under no obligation to consider the tax consequences to limited partners when making decisions for the benefit of the Operating Partnership. The Company intends to make decisions in its capacity as general partner of the Operating Partnership so as to maximize the profitability of the Company and the Operating Partnership as a whole, independent of the tax effects on the limited partners. The Company and the Operating Partnership have no liability to a limited partner as a result of any liabilities or damages incurred or suffered by, or benefits not derived by, a limited partner as a result of an action or inaction of the Company as general partner of the Operating Partnership as long as the Company acted in good faith. Limited partners have no right or authority to act for or to bind the Operating Partnership. Investors who received Units in connection with the Formation Transactions, as limited partners of the Operating Partnership, have no authority to transact business for, or participate in the management activities or decisions of, the Operating Partnership, except as provided in the Partnership Agreement or as required by applicable law. ENGAGING IN OTHER BUSINESSES; CONFLICTS OF INTEREST The Company may not conduct any business other than in connection with the ownership, acquisition and disposition of Operating Partnership interests as a general partner and the management of the business of the Operating Partnership, its operation as a public reporting company with a class (or classes) of securities registered under the Exchange Act, its operation as a REIT and such activities as are incidental to such activities (including, without limitation, ownership of any interest in AMB Property Holding Corporation, AMB Investment Management or a title holding, management or finance subsidiary organized as a partnership, limited liability company or corporation) title holding, without the consent of the holders of a majority of the limited partnership interests. Except as may otherwise be agreed to in writing, each limited partner, and its affiliates, is free to engage in any business or activity, even if such business or activity competes with or is enhanced by the business of the Operating Partnership. The Partnership Agreement does not prevent another person or entity that acquires control of the Company in the future from conducting other businesses or owning other assets, even though such businesses or assets may be ones that it would be in the best interests of the limited partners for the Operating Partnership to own. The Company, in the exercise of its power and authority under the Partnership Agreement, may contract and otherwise deal with or otherwise obligate the Operating Partnership to entities in which the Company or any one or more of the officers, directors or stockholders of the Company may have an ownership or other financial interest, whether direct or indirect. REIMBURSEMENT OF THE COMPANY; TRANSACTIONS WITH THE COMPANY AND ITS AFFILIATES The Company does not receive any compensation for its services as general partner of the Operating Partnership. The Company, however, as a partner in the Operating Partnership, has the same right to allocations and distributions as other partners of the Operating Partnership. In addition, the Operating Partnership reimburses the Company for all expenses it incurs relating to its activities as general partner, its continued existence and qualification as a REIT and all other liabilities incurred by the Company in connection with the pursuit of its business and affairs. The Company may retain such persons or entities as it shall determine (including itself, any entity in which the Company has an interest, or any entity with which it is affiliated) to provide services to or on behalf of the Operating Partnership. The Company is entitled to reimbursement from the Operating Partnership for its out of pocket expenses (other than amounts paid or payable to the Company or any entity in which the Company has an interest or with which it is affiliated) incurred in connection with Operating Partnership business. Such expenses include those incurred in connection with the administration and activities of the Operating Partnership, such as the maintenance of the 109 Operating Partnership books and records, management of the Operating Partnership property and assets, and preparation of information regarding the Operating Partnership provided to the partners in the preparation of their individual tax returns. Except as expressly permitted by the Partnership Agreement, however, affiliates of the Company will not engage in any transactions with the Operating Partnership except on terms that are fair and reasonable and no less favorable to the Operating Partnership than would be obtained from an unaffiliated third party. EXCULPATION AND INDEMNIFICATION OF THE COMPANY The Partnership Agreement generally provides that the Company, as general partner of the Operating Partnership, will incur no liability to the Operating Partnership or any limited partner for losses sustained, liabilities incurred, or benefits not derived as a result of errors in judgment or for any mistakes of fact or law or for anything which it may do or refrain from doing in connection with the business and affairs of the Operating Partnership if the Company carried out its duties in good faith. The Company's liability in any event is limited to its interest in the Operating Partnership. Without limiting the foregoing, the Company has no liability for the loss of any limited partner's capital. In addition, the Company is not responsible for any misconduct, negligent act or omission of any consultant, contractor or agent of the Operating Partnership or of the Company and has no obligation other than to use good faith in the selection of all such contractors, consultants and agents. The Company may consult with counsel, accountants, appraisers, management consultants, investment bankers, and other consultants and advisors selected by it. An opinion by any such consultant on a matter which the Company believes to be within such consultant's professional or expert competence is deemed to be complete protection as to any action taken or omitted to be taken by the Company based on such opinion and in good faith. The Partnership Agreement also requires the Operating Partnership to indemnify the Company, the directors and officers of the Company, and such other persons as the Company may from time to time designate against any loss or damage, including reasonable legal fees and court costs incurred by such person by reason of anything it may do or refrain from doing for or on behalf of the Operating Partnership or in connection with its business or affairs unless it is established that: (i) the act or omission of the indemnified person was material to the matter giving rise to the proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty; (ii) the indemnified person actually received an improper personal benefit in money, property or services; or (iii) in the case of any criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful. Any such indemnification claims must be satisfied solely out of the assets of the Operating Partnership. SALES OF ASSETS; LIQUIDATION Under the Partnership Agreement, the Company, as general partner, generally has the exclusive authority to determine whether, when and on what terms the assets of the Operating Partnership (including the Properties) will be sold. However, the Company has agreed, in connection with the contribution of Properties from taxable Investors in the Formation Transactions (with an estimated aggregate value of approximately $54.2 million), not to dispose of such assets in a taxable sale or exchange prior to November 26, 2001 (the fourth anniversary of the consummation of the Formation Transactions) and, thereafter, to use commercially reasonable efforts to minimize the adverse tax consequences of any such sale. The Company may enter into similar or other agreements in connection with other acquisitions of properties for Units. A merger of the Operating Partnership with another entity generally requires an affirmative vote of the holders of a majority of the outstanding percentage interest (including that held directly or indirectly by the Company), subject to certain consent rights of holders of Units as described below under "Amendment of the Partnership Agreement." A dissolution or liquidation of the Operating Partnership, including a sale or disposition of all or substantially all of the Operating Partnership's assets and properties, also requires the consent of a majority of all Units held by limited partners, including Performance Units. 110 CAPITAL CONTRIBUTION The Partnership Agreement provides that if the Operating Partnership requires additional funds at any time or from time to time in excess of funds available to the Operating Partnership from borrowings or capital contributions, the Company may borrow such funds from a financial institution or other lender or through public or private debt offerings and lend such funds to the Operating Partnership on the same terms and conditions as are applicable to the Company's borrowing of such funds. As an alternative to borrowing funds required by the Operating Partnership, the Company may contribute the amount of such required funds as an additional capital contribution to the Operating Partnership. If the Company so contributes additional capital to the Operating Partnership, the Company's partnership interest in the Operating Partnership will be increased on a proportionate basis. Conversely, the partnership interests of the limited partners will be decreased on a proportionate basis in the event of additional capital contributions by the Company. See "Policies With Respect to Certain Activities -- Financing Policies." REMOVAL OF THE GENERAL PARTNER; TRANSFERABILITY OF THE COMPANY'S INTERESTS; TREATMENT OF UNITS IN SIGNIFICANT TRANSACTIONS The general partner may not be removed by the limited partners, with or without cause, other than with the consent of the general partner. The Partnership Agreement provides that the Company may not voluntarily withdraw from the Operating Partnership, without the consent of the limited partners. However, except as set forth below, the Company may transfer or assign its general partner interest in connection with a merger, consolidation or sale of substantially all the assets of the Company without limited partner consent. Neither the Company nor the Operating Partnership may engage in any merger, consolidation or other combination with or into another person, or effect any reclassification, recapitalization or change of its outstanding equity interests, and the Company may not sell all or substantially all of its assets (each a "Termination Transaction") unless in connection with the Termination Transaction all holders of Units either will receive, or will have the right to elect to receive, for each Unit an amount of cash, securities or other property equal to the product of the number of shares of Common Stock into which each Unit is then exchangeable and the greatest amount of cash, securities or other property paid to the holder of one Share in consideration of one Share pursuant to the Termination Transaction. If, in connection with the Termination Transaction, a purchase, tender or exchange offer shall have been made to and accepted by the holders of the outstanding shares of Common Stock, each holder of Units will receive, or will have the right to elect to receive, the greatest amount of cash, securities or other property which such holder would have received had it exercised its right to redemption and received shares of Common Stock in exchange for its Units immediately prior to the expiration of such purchase, tender or exchange offer and had thereupon accepted such purchase, tender or exchange offer. Performance Units issued or to be issued will also have the benefit of such provisions, irrespective of the capital account then applicable thereto. A Termination Transaction may also occur if the following conditions are met: (i) substantially all of the assets directly or indirectly owned by the surviving entity are held directly or indirectly by the Operating Partnership or another limited partnership or limited liability company which is the survivor of a merger, consolidation or combination of assets with the Operating Partnership (in each case, the "Surviving Partnership"); (ii) the holders of Units, including the holders of Performance Units issued or to be issued, own a percentage interest of the Surviving Partnership based on the relative fair market value of the net assets of the Operating Partnership and the other net assets of the Surviving Partnership immediately prior to the consummation of such transaction; (iii) the rights, preferences and privileges of such holders in the Surviving Partnership, including the holders of Performance Units issued or to be issued, are at least as favorable as those in effect immediately prior to the consummation of such transaction and as those applicable to any other limited partners or non-managing members of the Surviving Partnership (except, as to Performance Units, for such differences with Units regarding liquidation, redemption or exchange as are described herein); and (iv) such rights of the limited partners, including the holders of Performance Units issued or to be issued, include at least one of the following: (a) the right to redeem their interests in the Surviving Partnership for the consideration available to such persons pursuant to the preceding paragraph; or (b) the right to redeem their Units for cash on terms equivalent to those in effect immediately prior to the consummation of such 111 transaction, or, if the ultimate controlling person of the Surviving Partnership has publicly traded common equity securities, such common equity securities, with an exchange ratio based on the relative fair market value of such securities and the Common Stock. For purposes of this paragraph, the determination of relative fair market values and rights, preferences and privileges of the limited partners shall be reasonably determined by the Company's Board of Directors as of the time of the Termination Transaction and, to the extent applicable, the values shall be no less favorable to the holders of Units than the relative values reflected in the terms of the Termination Transaction. In addition, in the event of a Termination Transaction, the arrangements with respect to Performance Units and Performance Shares will be equitably adjusted to reflect the terms of the transaction, including, to the extent that the shares are exchanged for consideration other than publicly traded common equity, the transfer or release of remaining Performance Shares, and resulting issuance of any Performance Units, as of the consummation of the Termination Transaction or set forth in the applicable Supplement. REDEMPTION/EXCHANGE RIGHTS Holders of Units will have the right, commencing on the first anniversary of becoming a limited partner of the Operating Partnership, to require the Operating Partnership to redeem part or all of their Units for cash (based upon the fair market value of an equivalent number of shares of Common Stock at the time of such redemption) or the Company may elect to exchange such Units for shares of Common Stock (on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of certain rights, certain extraordinary distributions and similar events). The Company presently anticipates that it will elect to issue shares of Common Stock in exchange for Units in connection with each such redemption request, rather than having the Operating Partnership pay cash. With each such redemption or exchange, the Company's percentage ownership interest in the Operating Partnership will increase. This redemption/exchange right may be exercised by limited partners from time to time, in whole or in part, subject to the limitations that such right may not be exercised at any time to the extent such exercise would result in any person actually or constructively owning shares of Common Stock in excess of the Ownership Limit or such other amount as permitted by the Board of Directors, as applicable, assuming common stock was issued in such exchange. Holders of Performance Units also have limited redemption/exchange rights, as discussed under the caption "-- Performance Units" below. PERFORMANCE UNITS Notwithstanding the foregoing discussion of distributions and allocations of income or loss of the Operating Partnership, depending on the trading price of the Common Stock after November 26, 1998 (the first anniversary of the IPO), certain of the Executive Officers, in their capacity as limited partners of the Operating Partnership, may receive Performance Units on each of February 26, May 26, August 26 and November 26, 1999. The Performance Units are similar to Units in many respects, including (i) the right to share in operating distributions, and allocations of operating income and loss, of the Operating Partnership on a pro rata basis with Units; and (ii) certain redemption and exchange rights, including limited rights to cause the Operating Partnership to redeem such Performance Units for cash or, at the Company's option, to exchange such units for shares of Common Stock. Any such redemption rights, however, will be dependent upon an increase in the value of the assets of the Operating Partnership (in some cases measured by reference to the trading price of the shares of Common Stock) subsequent to the issuance of such Performance Units. Without such an increase, the holders of Performance Units will not be entitled to receive any proceeds upon the liquidation of the Operating Partnership or the redemption of their Performance Units. If any Performance Units are issued to such Executive Officers, in their capacity as limited partners of the Operating Partnership, an equal number of GP Units allocable to the Company and Units allocable to Performance Investors who are limited partners in the Operating Partnership will be transferred to the Operating Partnership. In addition, if any of the Company's GP Units are transferred to the Operating Partnership as a result of the issuance of Performance Units, an equal number of Performance Shares will be transferred by Company stockholders to the Company from the applicable Performance Investors. Accordingly, no Company stockholder or limited partner in the Operating Partnership (other than Performance 112 Investors, to the extent of their obligations to transfer Performance Shares to the Company or the Operating Partnership, as applicable) will be diluted as a result of the issuance of Performance Units to the executive officers. REGISTRATION RIGHTS The Company granted to investors receiving Units in connection with the Formation Transactions certain registration rights (collectively, the "Registration Rights") with respect to the shares of Common Stock issuable upon exchange of Units or otherwise (the "Registrable Shares"). The Company has agreed to file and generally keep continuously effective beginning one year after the completion of the IPO a registration statement covering the issuance of shares of Common Stock upon exchange of Units and the resale thereof. Pursuant to the terms and conditions of such Registration Rights, prior to the date upon which shares of Common Stock issued as of the date of the consummation of the IPO would be eligible for resale under Rule 144(k) under the Securities Act, as such rule may be amended from time to time (or any similar rule or regulation hereafter adopted by the SEC), each Investor will be limited to resales of Registrable Shares to the number of Registrable Shares which otherwise would be eligible for resale by such Investor pursuant to Rule 144, assuming such Registrable Shares were issued as of the date of the consummation of the IPO. The shelf registration statement will also cover Shares issuable upon exchange of Performance Units. The Company may also agree to provide the Registration Rights or other registration rights to any other person who may become an owner of Units, provided such person provides the Company with satisfactory undertakings. The Company will bear expenses incident to its registration obligations upon exercise of the Registration Rights, including the payment of Federal securities law and state Blue Sky registration fees, except that it will not bear any underwriting discounts or commissions or transfer taxes relating to registration of Registrable Shares. DUTIES AND CONFLICTS Except as otherwise set forth in "Policies with Respect to Certain Activities -- Conflicts of Interest Policies" and "Management -- Employment Agreements," any limited partner of the Operating Partnership may engage in other business activities outside the Operating Partnership, including business activities that directly compete with the Operating Partnership. MEETINGS; VOTING Meetings of the limited partners may be called by the Company, on its own motion, or upon written request of limited partners owning at least 25% of the then outstanding Units. Limited partners may vote either in person or by proxy at meetings. Any action that is required or permitted to be taken by the limited partners may be taken either at a meeting of the limited partners or without a meeting if consents in writing setting forth the action so taken are signed by limited partners owning not less than the minimum number of Units that would be necessary to authorize or take such action at a meeting of the limited partners at which all limited partners entitled to vote on such action were present. On matters for which limited partners are entitled to vote, each limited partner has a vote equal to the number of Units the limited partner holds. A transferee of Units who has not been admitted as a substituted limited partner with respect to such Units will have no voting rights with respect to such Units, even if such transferee holds other Units as to which it has been admitted as a limited partner. The Partnership Agreement does not provide for annual meetings of the limited partners, and the Company does not anticipate calling such meetings. AMENDMENT OF THE PARTNERSHIP AGREEMENT Amendments to the Partnership Agreement may be proposed by the Company or by limited partners owning at least 25% of the then outstanding Units. Generally, the Partnership Agreement may be amended with the approval of the Company, as general partner, and partners (including the Company) holding a majority of the percentage interest of the partnership. Certain provisions regarding, among other things, the rights and duties of the Company as general partner (e.g., restrictions on the Company's power to conduct businesses other than as denoted herein) or the dissolution of the Operating Partnership, may not be amended 113 without the approval of a majority of the percentage interests of the partnership. Notwithstanding the foregoing, the Company, as general partner, has the power, without the consent of the limited partners, to amend the Partnership Agreement as may be required to, among other things, (i) add to the obligations of the Company as general partner or surrender any right or power granted to the Company as general partner, (ii) reflect the admission, substitution, termination or withdrawal of partners in accordance with the terms of the Partnership Agreement, (iii) establish the rights, powers, duties and preferences of any additional partnership interests issued in accordance with the terms of the Partnership Agreement, (iv) reflect a change of an inconsequential nature that does not materially adversely affect any limited partner, or cure any ambiguity, correct or supplement any provisions of the Partnership Agreement not inconsistent with law or with other provisions of the Partnership Agreement, or make other changes concerning matters under the Partnership Agreement that are not otherwise inconsistent with the Partnership Agreement or applicable law or (v) satisfy any requirements of Federal, state or local law. Certain amendments, including amendments effected directly or indirectly through a merger or sale of assets of the Operating Partnership or otherwise, that would, among other things, (i) convert a limited partner's interest into a general partner's interest, (ii) modify the limited liability of a limited partner, (iii) alter the interest of a partner in profits or losses, or the rights to receive any distributions (except as permitted under the Partnership Agreement with respect to the admission of new partners or the issuance of additional Units, either of which actions will have the effect of changing the percentage interests of the partners and thus altering their interests in profits, losses and distributions) or (iv) alter the limited partner's redemption right, must be approved by the Company and each limited partner that would be adversely affected by such amendment. Such protections apply to both holders of Units and holders of Performance Units. In addition, no amendment may be effected, directly or indirectly, through a merger or sale of assets of the Operating Partnership or otherwise, which would adversely affect the rights of former stockholders of AMBIRA to receive Performance Units as described herein. BOOKS AND REPORTS The Operating Partnership's books and records are maintained at the principal office of the Operating Partnership, which is located at 505 Montgomery Street, San Francisco, California 94111. All elections and options available to the Operating Partnership for Federal or state income tax purposes may be taken or rejected by the Operating Partnership in the sole discretion of the Company. The limited partners have the right, subject to certain limitations, to receive copies of the most recent SEC filings by the Company, the Operating Partnership's Federal, state and local income tax returns, a list of limited partners, the Partnership Agreement, the partnership certificate and all amendments thereto and certain information about the capital contributions of the partners. The Company may keep confidential from the limited partners any information that the Company believes to be in the nature of trade secrets or other information the disclosure of which the Company in good faith believes is not in the best interests of the Operating Partnership or which the Operating Partnership is required by law or by agreements with unaffiliated third parties to keep confidential. The Company will use reasonable efforts to furnish to each limited partner, within 90 days after the close of each taxable year, the tax information reasonably required by the limited partners for Federal and state income tax reporting purposes. TERM The Operating Partnership will continue in full force and effect for approximately 99 years or until sooner dissolved pursuant to the terms of the Partnership Agreement. 114 CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS The following paragraphs summarize certain provisions of the MGCL and the Company's Articles of Incorporation and Bylaws. Such paragraphs do not, however, purport to be complete and are subject to and qualified in their entirety by reference to the MGCL and the Articles of Incorporation and Bylaws. BOARD OF DIRECTORS The Articles of Incorporation provide that the number of directors of the Company shall be established by the Bylaws but shall not be less than the minimum number required by the MGCL, which in the case of the Company is three. The Bylaws currently provide that the Board of Directors consist of not fewer than five nor more than 13 members which are elected to a one-year term at each annual meeting of the Company's stockholders. Any vacancy (except for a vacancy caused by removal) will be filled by a majority of the entire Board of Directors. The Bylaws provide that a majority of the Board must be "Independent Directors." An "Independent Director" is a director who is not an employee, officer or affiliate of the Company or a subsidiary or division thereof, or a relative of a principal executive officer, or who is not an individual member of an organization acting as advisor, consultant or legal counsel, receiving compensation on a continuing basis from the Company in addition to director's fees. REMOVAL OF DIRECTORS While the Articles of Incorporation and the MGCL empower the stockholders to fill vacancies in the Board of Directors that are caused by the removal of a director, the Articles of Incorporation preclude stockholders from removing incumbent directors except upon a substantial affirmative vote. Specifically, the Articles of Incorporation provide that a director may be removed only for cause and only by the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of directors. Under the MGCL, the term "cause" is not defined and is, therefore, subject to Maryland common law and to judicial interpretation and review in the context of the unique facts and circumstances of any particular situation. This provision, when coupled with the provision in the Bylaws authorizing the Board of Directors to fill vacant directorships, precludes stockholders from removing incumbent directors except upon a substantial affirmative vote and filling the vacancies created by such removal with their own nominees. OPT OUT OF BUSINESS COMBINATIONS AND CONTROL SHARE ACQUISITION STATUTES The Company has elected in its Bylaws not to be governed by the "control share acquisition" provisions of the MGCL (Sections 3-701 through 3-709), and the Board of Directors has adopted, by irrevocable resolution of the Board of Directors, not to be governed by the "business combination" provision of the MGCL (Section 3-602), each of which could have the effect of delaying or preventing a change of control of the Company. The Bylaws provide that the Company cannot at a future date determine to be governed by either such provision without the approval of a majority of the outstanding shares entitled to vote. In addition, such irrevocable resolution adopted by the Board of Directors may only be changed by the approval of a majority of the outstanding shares entitled to vote. AMENDMENT TO THE ARTICLES OF INCORPORATION AND BYLAWS The Articles of Incorporation may not be amended without the affirmative vote of at least two-thirds of the shares of capital stock outstanding and entitled to vote thereon voting together as a single class. Other than provisions of the Bylaws (i) opting out of the control share acquisition statute, (ii) requiring approval by the Independent Directors of transactions involving executive officers, directors or any limited partners of the Operating Partnership and their affiliates and (iii) those governing amendment of the Bylaws, each of which may be amended only with the approval of a majority of the shares of capital stock entitled to vote, the Bylaws may be amended by the vote of a majority of the Board of Directors or the shares of the Company's capital stock entitled to vote thereon. 115 MEETINGS OF STOCKHOLDERS The Bylaws provide for annual meetings of stockholders to elect the Board of Directors and transact such other business as may properly be brought before the meeting. Special meetings of stockholders may be called by the President, the Board of Directors, the Chairman of the Board and/or at the request in writing of the holders of 50% or more of the outstanding stock of the Company entitled to vote. The MGCL provides that any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting by unanimous written consent, if such consent sets forth such action and is signed by each stockholder entitled to vote on the matter and a written waiver of any right to dissent is signed by each stockholder entitled to notice of the meeting but not entitled to vote at it. ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS The Bylaws provide that (i) with respect to an annual meeting of stockholders, nominations of persons for election to the Board of Directors and the proposal of business to be considered by stockholders may be made only (a) pursuant to the Company's notice of the meeting, (b) by or at the direction of the Board of Directors or (c) by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in the Bylaws, and (ii) with respect to special meetings of stockholders, only the business specified in the Company's notice of meeting may be brought before the meeting of stockholders. The provisions in the Articles of Incorporation on amendments to the Articles of Incorporation and the advance notice provisions of the Bylaws could have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of the shares of Common Stock might receive a premium for their shares of Common Stock over the then prevailing market price or which such holders might believe to be otherwise in their best interests. DISSOLUTION OF THE COMPANY Under the MGCL, the Company may be dissolved by (i) the affirmative vote of a majority of the entire Board of Directors declaring such dissolution to be advisable and directing that the proposed dissolution be submitted for consideration at any annual or special meeting of stockholders and (ii) upon proper notice, stockholder approval by the affirmative vote of the holders of two-thirds of the total number of shares of capital stock outstanding and entitled to vote thereon voting as a single class. LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY The Company's officers and directors are indemnified under the MGCL, the Articles of Incorporation and the Partnership Agreement against certain liabilities. The Articles of Incorporation and Bylaws require the Company to indemnify its directors and officers to the fullest extent permitted from time to time by the MGCL. The MGCL permits a corporation to indemnify its directors and officers and certain other parties against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that (i) the act or omission of the director or officer was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty, (ii) the director or officer actually received an improper personal benefit in money, property or services or (iii) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. Indemnification may be made against judgments, penalties, fines, settlements and reasonable expenses actually incurred by the director or officer in connection with the proceeding; provided, however, that if the proceeding is one by or in the right of the corporation, indemnification may not be made with respect to any proceeding in which the director or officer has been adjudged to be liable to the corporation. In addition, a director or officer may not be indemnified with respect to any proceeding charging improper personal benefit to the director or officer in which the director or officer was adjudged to be liable on the basis that personal benefit was received. The termination of any proceeding by conviction, or upon a plea of nolo contendere or its 116 equivalent, or an entry of any order of probation prior to judgment, creates a rebuttable presumption that the director or officer did not meet the requisite standard of conduct required for indemnification to be permitted. The MGCL permits the articles of incorporation of a Maryland corporation to include a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages, subject to specified restrictions, and the Articles of Incorporation of the Company contain this provision. The MGCL does not, however, permit the liability of directors and officers to the corporation or its stockholders to be limited to the extent that (i) it is proved that the person actually received an improper personal benefit in money, property or services, (ii) a judgment or other final adjudication is entered in a proceeding based on a finding that the person's action, or failure to act, was committed in bad faith or was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding or (iii) in the case of any criminal proceeding, the director had reasonable cause to believe that the act or failure to act was unlawful. This provision does not limit the ability of the Company or its stockholders to obtain other relief, such as an injunction or rescission. The Partnership Agreement also provides for indemnification of the Company, as general partner, and its officers and directors to the same extent indemnification is provided to officers and directors of the Company in its Articles of Incorporation, and limits the liability of the Company and its officers and directors to the Operating Partnership and the partners of the Operating Partnership to the same extent liability of officers and directors of the Company to the Company and its stockholders is limited under the Articles of Incorporation. See "Description of Certain Provisions of the Partnership Agreement of the Operating Partnership -- Exculpation and Indemnification of the Company." Insofar as indemnification for liability arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. 117 DESCRIPTION OF CAPITAL STOCK The following summary of the terms of the Company's capital stock does not purport to be complete and is subject to and qualified in its entirety by reference to the Articles of Incorporation and Bylaws, copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part. See "Additional Information." GENERAL Under the Articles of Incorporation, as amended (the "Articles of Incorporation"), the authorized capital stock of the Company consists of 500,000,000 shares of common stock, par value $.01 per share ("Common Stock"), and 100,000,000 shares of preferred stock, par value $.01 per share ("Preferred Stock"). As of December 31, 1997, no shares of Preferred Stock and 85,874,513 shares of Common Stock were issued and outstanding. COMMON STOCK Each outstanding share of Common Stock entitles the holder to one vote on all matters presented to stockholders for a vote, including the election of directors, and, except as otherwise required by law and except as provided in any resolution adopted by the Board of Directors with respect to any other class or series of stock establishing the designation, powers, preferences and relative, participating, optional or other special rights and powers of such series, the holders of such shares possess the exclusive voting power, subject to the provisions of the Company's Articles of Incorporation regarding the ownership of shares of Common Stock in excess of the Ownership Limit or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors. Holders of shares of Common Stock do not have any conversion, exchange, sinking fund, redemption or appraisal rights or any preemptive rights to subscribe for any securities of the Company or cumulative voting rights in the election of directors. All shares of Common Stock that are issued and outstanding are duly authorized, fully paid and nonassessable. Subject to the preferential rights of any other shares or series of stock and to the provisions of the Articles of Incorporation regarding ownership of shares of Common Stock in excess of the Ownership Limit, or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors, distributions may be paid to the holders of shares of Common Stock if and when authorized and declared by the Board of Directors of the Company out of funds legally available therefor. The Company intends to continue to make quarterly distributions on outstanding shares of Common Stock. Under the MGCL, stockholders are generally not liable for the Company's debts or obligations. If the Company is liquidated, subject to the right of any holders of Preferred Stock to receive preferential distributions, each outstanding share of Common Stock will be entitled to participate pro rata in the assets remaining after payment of, or adequate provision for, all known debts and liabilities of the Company, including debts and liabilities arising out of its status as general partner of the Operating Partnership. Subject to the provisions of the Articles of Incorporation regarding the ownership of shares of Common Stock in excess of the Ownership Limit, or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors described below, all shares of Common Stock have equal distribution, liquidation and voting rights, and have no preference or exchange rights. Under the MGCL, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business unless approved by the affirmative vote of stockholders holding at least two-thirds of the shares entitled to vote on the matter unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is set forth in the corporation's charter. Under the MGCL, the term "substantially all of the Company's assets" is not defined and is, therefore, subject to Maryland common law and to judicial interpretation and review in the context of the unique facts and circumstances of any particular transaction. The Articles of Incorporation do not provide for a lesser percentage in any such situation. 118 The Articles of Incorporation authorize the Board of Directors to reclassify any unissued shares of Common Stock into other classes or series of classes of stock and to establish the number of shares in each class or series and to set the preferences, conversion and other rights, voting powers, restrictions, limitations and restrictions on ownership, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each such class or series. PREFERRED STOCK Preferred Stock may be issued from time to time, in one or more classes or series, as authorized by the Board of Directors. No Preferred Stock is currently issued or outstanding. Prior to the issuance of shares of each class or series, the Board of Directors is required by the MGCL and the Company's Articles of Incorporation to fix for each class or series the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption, as permitted by Maryland law. Because the Board of Directors has the power to establish the preferences, powers and rights of each class or series of Preferred Stock, it may afford the holders of any class or series of Preferred Stock preferences, powers and rights, voting or otherwise, senior to the rights of holders of shares of Common Stock. The issuance of Preferred Stock could have the effect of delaying or preventing a change of control of the Company that might involve a premium price for holders of shares of Common Stock or otherwise be in their best interest. 119 UNDERWRITERS Under the terms and subject to the conditions in the Underwriting Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters named below have severally agreed to purchase, and the Operating Partnership has agreed to sell to them, severally, the respective principal amount of Notes set forth opposite their respective names below:
PRINCIPAL PRINCIPAL PRINCIPAL AMOUNT AMOUNT AMOUNT OF 2008 NOTES OF 2018 NOTES OF REPS NAME ------------- ------------- ------------ Morgan Stanley & Co. Incorporated.... Goldman, Sachs & Co.................. J.P. Morgan Securities Inc........... ------------ ------------ ------------ Total...................... $ $ $ ============ ============ ============
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the Notes are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the Notes offered hereby if any are taken. The Underwriters propose to offer part of the Notes directly to the public at the public offering price set forth on the cover page of this Prospectus and part to certain dealers at a price that represents a concession not in excess of % of the principal amount in the case of the 2008 Notes, % of the principal amount in the case of the 2018 Notes and % of the principal amount in the case of the REPS. Any Underwriter may allow, and any such dealer may reallow, a concession to certain other dealers not in excess of % of the principal amount in the case of the 2008 Notes, % of the principal amount in the case of the 2018 Notes and % of the principal amount in the case of the REPS. After the initial offering of the Notes, the offering price and other selling terms may from time to time be varied by the Underwriters. The Operating Partnership and the Company have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect of such liabilities. Neither the Operating Partnership nor the Company intends to apply for listing of the Notes on a national securities exchange, but have been advised by the Underwriters that they presently intend to make a market in the Notes as permitted by applicable laws and regulations. The Underwriters are not obligated, however, to make a market in the Notes and any such market making may be discontinued at any time at the sole discretion of the any Underwriter. Accordingly, no assurance can be given as the liquidity of, or trading market for, the Notes. In order to facilitate the Offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Notes. Specifically, the Underwriters may stabilize the price of the Notes and the Underwriters may bid for, and purchase, the Notes in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an Underwriter or a dealer for distributing the Notes in the Offering, if the syndicate repurchases previously distributed Notes in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Notes above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Operating Partnership intends to use the net proceeds from the sale of the Notes offered hereby to repay indebtedness outstanding under the Credit Facility and for general purposes. Morgan Guaranty Trust Company of New York, an affiliate of J.P. Morgan Securities Inc., one of the Underwriters, is the agent and a lender under the Credit Facility. As the Company expects that in excess of 10% of the net proceeds will be used to repay indebtedness under the Credit Facility, the Offering is being made in compliance with the requirements of Rule 2710(c)(8) of the Conduct Rules of the National Association of Securities Dealers, Inc. See "Use of Proceeds." 120 LEGAL MATTERS Certain legal matters in connection with the Offering will be passed upon for the Operating Partnership by Latham & Watkins, Los Angeles, California. Certain legal matters will be passed upon for the Underwriters by Gibson, Dunn & Crutcher LLP, Los Angeles, California. Certain legal matters relating to Maryland law, including the validity of the issuance of the Notes offered hereby, will be passed upon for the Company, as general partner of the Operating Partnership, by Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland. In addition, the description of Federal income tax consequences contained in this Prospectus under the caption "Certain Federal Income Tax Considerations Relating To The REPS" is, to the extent that it constitutes matters of law, summaries of legal matters or legal conclusions, the opinion of Latham & Watkins, tax counsel to the Operating Partnership. EXPERTS The financial statements and schedules included in this Prospectus, to the extent and for the periods indicated in their reports thereto, have been audited by Arthur Andersen LLP, independent public accountants, and are included herein in reliance upon the authority of said firm as experts in auditing and accounting in giving said reports. AVAILABLE INFORMATION The Company is, and upon consummation of the Offering the Operating Partnership and each of the other Guarantors will be, subject to the informational requirements of the Exchange Act and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials can be obtained by mail from the Public Reference Section of the Commission, at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the Commission. In addition, reports, proxy statements and other information concerning the Company can be inspected at the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. This Prospectus constitutes a part of a Registration Statement on Form S-11 (together with amendments and exhibits thereto, the "Registration Statement") filed by the Registrants with the Commission under the Securities Act. The Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement for further information with respect to the Registrants and the securities offered hereby. Any statements contained herein concerning the provisions of any document filed as an exhibit to the Registration Statement or otherwise filed with the Commission are not necessarily complete, and in each instance reference is made to the copy of such document so filed. Each such statement is qualified in its entirety by such reference. 121 GLOSSARY "ACBM" means asbestos-containing building materials. "ADA" means the Americans with Disabilities Act of 1990. "affiliate" has the meaning given to it in the Securities Act. "AMB" means AMB Institutional Realty Advisors, Inc., a California corporation. "AMB Intercompany Party" means a party to the Intercompany Agreement. "AMB Predecessors" means collectively, AMB and certain real estate investment funds, trusts, corporations and partnerships that prior to the IPO owned the Properties, as identified in Note 1, Organization and Basis of Presentation to the historical financial statements of the AMB Contributed Properties, including CIF, VAF, WPF and the Individual Account Investors. "AMB Property Corporation" means AMB Property Corporation, a Maryland corporation with its principal office at 505 Montgomery Street, San Francisco, California 94111. "AMBCREA" means AMB Corporate Real Estate Advisors, Inc., a California corporation. "AMBI" means AMB Investments, Inc., a California corporation. "AMB Investment Management" means AMB Investment Management Corporation, a Maryland corporation, of which the Company owns 100% of the non-voting preferred stock (representing 95% of its economic value) and the executive officers owns 100% of the outstanding voting common stock (representing 5% of its economic value) with its operations conducted through the Investment Management Partnership and which, through the Investment Management Partnership, provides the real estate advisory services to the Company and to certain of AMB's clients which did not participate in the Formation Transactions. "Anchor Tenants" means retail tenants occupying more than 10,000 rentable square feet and all grocery stores and drugstores. "Annualized Base Rent" means the monthly contractual rent under existing leases at March 31, 1998, multiplied by 12. This amount excludes expense reimbursements and rental abatements for industrial and retail properties as well as percentage rents for retail properties. "Articles of Incorporation" means the Articles of Incorporation of the Company. "Bylaws" means the bylaws of the Company. "CIF" means AMB Current Income Fund, Inc., a Maryland corporation. "Code" means the Internal Revenue Code of 1986. "Common Stock" means shares of common stock of the Company. "Company" means AMB Property Corporation and its subsidiaries, including AMB Property, L.P., and with respect to the period prior to the IPO, the AMB Predecessors. "Credit Agreement" means the Credit Facility, any successor agreement thereto, and any other credit agreement under which the Operating Partnership is an obligor. "Credit Facility" means the Operating Partnership's unsecured $500 million credit facility among the Operating Partnership, MGT and a syndicate of 12 other banks. "Debt-to-Total Market Capitalization Ratio" means the ratio calculated based on the Company's total consolidated debt and its pro rata share of unconsolidated debt as a percentage of the market value of outstanding shares of Common Stock and Units (not owned by the Company) plus the Company's total consolidated debt and its pro rata share of unconsolidated debt. "Eastern region" means the Eastern region of the United States as defined by the National Council of Real Estate Investment Fiduciaries which includes the states of Connecticut, Delaware, Kentucky, Maine, 122 Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Vermont, West Virginia and the District of Columbia. "Environmental Laws" means the Federal, state and local laws and regulations relating to the protection of the environment. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Executive Officer" means officers of the Operating Partnership and the Company named in the table under the caption "Management." "expense reimbursements" means each tenant's share of taxes, insurance and operating expenses to be reimbursed to the Company. "FASB" means the Financial Accounting Standards Board. "Formation Transactions" means certain transactions in which the Company, the Operating Partnership and AMB Investment Management engaged in to enable the Company to continue and grow the real estate operations of the AMB Predecessors, to facilitate the IPO, to enable the Company to qualify as a REIT for Federal income tax purposes commencing with its taxable year ended December 31, 1997 and to preserve certain tax advantages for the existing owners of the Properties. "forward-looking statements" means statements relating to, without limitation, future economic performance, plans and objectives of management for future operations and projections of revenue and other financial items, which can be identified by the use of forward-looking terminology such as "may," "will," "should," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. "Funds from Operations" or "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 FFO attributable to minority interests in consolidated joint ventures which are not convertible into shares of Common Stock. "GAAP" means generally accepted accounting principles. "GP Units" means units of the Operating Partnership representing the general partnership interest therein, with generally identical rights to distributions as the Units. "Holders" means holders of the Notes. "Independent Director" means a director who is not an employee, officer or affiliate of the Company or a subsidiary or division thereof, or a relative of an Executive Officer, or who is not an individual member of an organization acting as advisor, consultant or legal counsel, receiving compensation on a continuing basis from the Company in addition to director's fees. "Individual Account Investors" means certain individual account investors, each of which has assets under management with AMB pursuant to an investment advisory agreement. "Industrial Properties" means the industrial properties comprised principally of warehouse distribution facilities which are owned by the Company. "in-fill" means those markets which are typified by significant population densities and low availability of land which could be developed into competitive industrial or retail properties, as applicable. Such properties allow for a more precise analysis of their trade areas and competition than properties located in areas which are undergoing substantial real estate development. "Intercompany Agreement" means that certain agreement dated January 1, 1993, as amended, entered into by and among AMBI, AMB, AMBCREA, AMB Properties, AMB Development, Inc., AMB Institutional Housing Partners and other related or commonly controlled business entities as may become parties thereto from to time. 123 "Investment Committee" means that certain management committee which reviews and approves each investment of the Company and the Operating Partnership. "Investment Management Partnership" means AMB Investment Management Limited Partnership, a Maryland limited partnership, of which AMB Investment Management is the sole general partner and owns the entire capital interests, and through which the operations of AMB Investment Management are conducted. "IPO" means the initial public offering of the Company's common stock. "IRS" means the United States Internal Revenue Service. "Joint Ventures" means the joint ventures, limited liability companies and partnerships with certain third parties. "MGCL" means Maryland General Corporation Law. "MGT" means Morgan Guaranty Trust Company of New York. "Midwestern region," means the Midwestern region of the United States as defined by the National Council of Real Estate Investment Fiduciaries which includes the states of Illinois, Iowa, Indiana, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin. "Named Executive Officers" means the Company's Chief Executive Officer and the four other most highly compensated executive officers. "NAIOP" means the National Association of Industrial and Office Parks. "NAREIM" means the National Association of Real Estate Investment Managers. "NAREIT" means the National Association of Real Estate Investment Trusts. "Noteholder" means the Person in whose name a Note is registered. "NYSE" means the New York Stock Exchange. "Offering" means the offering of the Notes made hereby. "Operating Partnership" means AMB Property, L.P., a Delaware limited partnership of which the Company is the general partner. "Ownership Limit" means the Company generally will prohibit ownership, directly or by virtue of the constructive ownership provisions of the Code, by any single stockholder of more than 9.8% of the issued and outstanding shares of Common Stock (subject to certain exceptions) and generally will prohibit ownership, directly or by virtue of the constructive ownership provisions of the Code, by any single stockholder of more than 9.8% of the issued and outstanding shares of any class or series of the Company's Preferred Stock. "Partnership Act" means the Delaware Uniform Limited Partnership Act. "Partnership Agreement" means the partnership agreement of the Operating Partnership. "percentage rents" means the rents calculated as a percentage of a tenant's gross sales above predetermined thresholds. Performance Investors" means those investors which, immediately prior to the IPO, owned assets (either directly or through CIF, VAF or WPF) which were subject to advisory agreements with AMB and included an incentive fee provision or, in the case of WPF, a "catch up adjustment." "Performance Shares" means the specified portion of the Shares issuable in the Formation Transactions to Performance Investors. "Performance Units" means units of the Operating Partnership issued to certain officers and employees of the Operating Partnership. 124 "Preferred Stock" means preferred shares of beneficial interest, $0.01 par value per share, which the Articles of Incorporation of the Company authorize the Board of Directors to cause the Company to issue, in series, and to establish the preferences, rights and other terms of any series so issued. "Properties" means the Industrial Properties and the Retail Properties. "Prospectus" means the prospectus to be used in connection with the Offering of the Notes. "Registrable Shares" means the Shares issuable upon exchange of Units or otherwise, the holder of which has certain registration rights with respect to those Shares. "Registration Rights" means certain registration rights with respect to the Shares issuable upon exchange of Units or otherwise granted to investors who received Units in connection with the Formation Transactions. "REIT" means a real estate investment trust under the Code. "REPS" means the % Reset Put Securities (REPS(SM)) due 2015 -- Putable/Callable 2005. "restricted securities" has the meaning given to it in Rule 144 under the Securities Act. "Retail Properties" means the retail properties comprised principally of community shopping centers which are owned by the Company. "Rule 144" means the rule adopted by the SEC that permits holders of restricted securities as well as affiliates of an issuer of the securities, pursuant to certain conditions and subject to certain restrictions, to sell their securities publicly without registration under the Securities Act. "San Francisco Bay Area" means the area comprised of the nine counties in immediate proximity to the San Francisco Bay. "SEC" or "Commission" means the Securities and Exchange Commission. "Section 401(k) Plan" means the Company's Section 401(k) savings/retirement plan. "Secured Facility" means a 12-year non-recourse secured financing facility due December 12, 2008 which is secured by six Properties. "Securities Act" means the Securities Act of 1933, as amended. "Southern region" means the Southern region of the United States as defined by the National Council of Real Estate Investment Fiduciaries which includes the states of Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Oklahoma, Tennessee and Texas. "stabilization" means when capital improvements for repositioning, development and redevelopment programs have been completed and in effect for a sufficient period of time (but in no case more than 12 months after shell completion) to achieve market occupancy of at least 95%. "Stock Incentive Plan" means the Stock Option and Incentive Plan established by the Company. "Subsidiaries" means the subsidiaries of AMB Property Corporation and AMB Property, L.P. "Termination Transaction" means, with respect to the Company, any merger, consolidation or other combination with or into another person, a sale of all or substantially all of its assets or any reclassification, recapitalization or change of its outstanding equity interests, unless in connection with such transaction, all holders of Units either will receive, or will have the right to elect to receive, for each Unit an amount of cash, securities or other property equal to the product of the number of Shares into which each Unit is then exchangeable and the greatest amount of cash, securities or other property paid to the holder of one Share in consideration of one Share pursuant to such transaction. "Transferee" means an assignee, legatee, distributee or other transferee of all or any portion of a partner's interest in the Operating Partnership. 125 "Treasury Regulations" means the IRS regulations. "Underwriters" means those underwriters named herein for whom Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co. and J.P. Morgan Securities Inc. are acting as representatives. "Underwriting Agreement" means that certain underwriting agreement pursuant to which the Underwriters have severally agreed to purchase, and the Company has agreed to sell to them, severally, the aggregate principal amount of the Notes as set forth on the table under the caption "Underwriters" herein. "Units" means units of the Operating Partnership. "VAF" means AMB Value Added Fund, Inc., a Maryland corporation. "Western region" means the Western region of the United States as defined by the National Council of Real Estate Investment Fiduciaries which includes the states of Alaska, Arizona, California, Colorado, Hawaii, Montana, Nevada, New Mexico, Oregon, Utah, Washington and Wyoming. "White Paper" means the White Paper on Funds from Operations approved by the Board of Governors of the NAREIT in March 1995. "WPF" means AMB Western Properties Fund-I, a California limited partnership. 126 INDEX TO FINANCIAL INFORMATION
PAGE ---- PRO FORMA FINANCIAL INFORMATION (UNAUDITED) AMB PROPERTY, L.P. -- Pro forma condensed consolidated balance sheet as of March 31, 1998......................................... F-5 -- Notes to pro forma condensed consolidated balance sheet.................................................. F-6 -- Pro forma condensed consolidated statement of operations for the three months ended March 31, 1998... F-7 -- Notes to pro forma condensed consolidated statement of operations............................................. F-8 -- Pro forma condensed consolidated statement of operations for the year ended December 31, 1997........ F-10 -- Notes to pro forma condensed consolidated statement of operations............................................. F-11 HISTORICAL FINANCIAL INFORMATION AMB PROPERTY, L.P. -- March 31, 1998 -- Consolidated balance sheets as of December 31, 1997 and March 31, 1998 (unaudited)............................. F-16 -- Consolidated statements of operations for the three months ended March 31, 1998 (unaudited)................ F-17 -- Consolidated statements of cash flows for the three months ended March 31, 1998 (unaudited)................ F-18 -- Consolidated statements of partners' capital for the three months ended March 31, 1998 (unaudited).......... F-19 -- Notes to consolidated financial statements (unaudited)............................................ F-20 AMB PROPERTY, L.P. -- December 31, 1997 -- Report of independent public accountants............... F-23 -- Consolidated balance sheet as of December 31, 1997..... F-24 -- Consolidated statement of operations for the period from inception (November 26, 1997) to December 31, 1997................................................... F-25 -- Consolidated statement of cash flows for the period from inception (November 26, 1997) to December 31, 1997................................................... F-26 -- Consolidated statement of partners' capital for the period from inception (November 26, 1997) to December 31, 1997............................................... F-27 -- Notes to consolidated financial statements............. F-28 AMB PROPERTY CORPORATION -- March 31, 1998 -- Consolidated balance sheets as of December 31, 1997 and March 31, 1998......................................... F-42 -- Consolidated statements of operations for the three months ended March 31, 1997 and 1998 (unaudited)....... F-43 -- Consolidated statements of cash flows for the three months ended March 31, 1997 and 1998 (unaudited)....... F-44 -- Consolidated statements of stockholders' equity for the three months ended March 31, 1998 (unaudited).......... F-45 -- Notes to consolidated financial statements (unaudited)............................................ F-46
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PAGE ---- AMB PROPERTY CORPORATION -- December 31, 1996 and 1997 -- Report of independent public accountants............... F-51 -- Consolidated balance sheets as of December 31, 1996 and 1997................................................... F-52 -- Consolidated statements of operations for the years ended December 31, 1995, 1996 and 1997................. F-53 -- Consolidated statements of cash flows for the years ended December 31, 1995, 1996 and 1997................. F-54 -- Consolidated statements of stockholders' equity for the years ended December 31, 1995, 1996 and 1997........... F-55 -- Notes to consolidated financial statements............. F-56 AMB PROPERTY CORPORATION -- December 31, 1995, 1996 and 1997 -- Report of independent public accountants............... F-71 -- Combined balance sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited)................ F-72 -- Combined statements of operations for the years ended December 31, 1994, 1995 and 1996, the nine months ended September 30, 1996 (unaudited) and the period from January 1, 1997 to November 25, 1997(unaudited)........ F-73 -- Combined statements of owners' equity for the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1997 (unaudited)............ F-74 -- Combined statements of cash flows for the years ended December 31, 1994, 1995 and 1996, the nine months ended September 30, 1996 (unaudited) and the period from January 1, 1997 to November 25, 1997(unaudited)........ F-75 -- Notes to combined financial statements................. F-76 Boston Industrial Portfolio -- Report of independent public accountants............... F-82 -- Statements of revenues and certain expenses for the year ended December 31, 1997 and for the period from January 1, 1998 to March 27, 1998 (unaudited).......... F-83 -- Notes to combined statement of revenues and certain expenses............................................... F-84 The Jamesburg Property -- Report of independent public accountants............... F-86 -- Statements of revenues and certain expenses for the year ended December 31, 1997 and for the period from January 1, 1998 to March 20, 1998 (unaudited).......... F-87 -- Notes to statement of revenues and certain expenses.... F-88 Orlando Central Park -- Report of independent public accountants............... F-89 -- Statements of revenues and certain expenses for the year ended December 31, 1997 and for the period from January 1, 1998 to March 24, 1998 (unaudited).......... F-90 -- Notes to statement of revenues and certain expenses.... F-91
F-2
PAGE ---- Totem Lake Malls -- Report of independent public accountants............... F-92 -- Statements of revenues and certain expenses for the year ended December 31, 1997 and for the period from January 1, 1998 to March 6, 1998 (unaudited)........... F-93 -- Notes to statements of revenues and certain expenses... F-94 Cabot Industrial Portfolio -- Report of independent public accountants............... F-95 -- Combined statements of revenues and certain expenses for the year ended December 31, 1996 and the period from January 1, 1997 to December 30, 1997 (unaudited)............................................ F-96 -- Notes to combined statements of revenue and certain expenses............................................... F-97 Cabot Business Park -- Report of independent public accountants............... F-99 -- Statements of revenues and certain expenses for the year ended December 31, 1996 and the period from January 1, 1997 to September 15, 1997 (unaudited)...... F-100 -- Notes to statements of revenues and certain expenses... F-101 Manhattan Village Shopping Center -- Report of independent public accountants............... F-102 -- Statements of revenues and certain expenses for the year ended December 31, 1996 and for the period from January 1, 1997 to August 19, 1997 (unaudited)......... F-103 -- Notes to statement of revenues and certain expenses.... F-104 Weslayan Plaza -- Report of independent public accountants............... F-105 -- Statements of revenues and certain expenses for the year ended December 31, 1996 and for the period from January 1, 1997 to September 30, 1997 (unaudited)...... F-106 -- Notes to statement of revenues and certain expenses.... F-107 Silicon Valley R&D Portfolio -- Report of independent public accountants............... F-108 -- Statements of revenues and certain expenses for the year ended December 31, 1996 and for the period from January 1, 1997 to November 25, 1997 (unaudited)....... F-109 -- Notes to statements of revenues and certain expenses... F-110
F-3 AMB PROPERTY, L.P. PRO FORMA FINANCIAL INFORMATION (UNAUDITED) BACKGROUND The accompanying unaudited pro forma condensed consolidated balance sheet as of March 31, 1998 has been prepared to reflect: (i) the acquisition of properties subsequent to March 31, 1998, (ii) the Offering and (iii) certain other adjustments as if such transactions and adjustments had occurred on March 31, 1998. The accompanying unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 1997 and the three months ended March 31, 1998 have been prepared to reflect: (i) the incremental effect of the acquisition of properties during 1998 and 1997, (ii) the incremental effect of the disposition or partial disposition of properties during 1997, (iii) the IPO and Formation Transactions, (iv) pro forma debt adjustments resulting from the Offering and (v) certain other adjustments as if such transactions and adjustments had occurred on January 1, 1997. These unaudited pro forma condensed consolidated statements should be read in connection with the historical combined financial statements and notes thereto of the AMB Contributed Properties and the consolidated financial statements and notes thereto of AMB Property, L.P. included elsewhere in this Prospectus. In the opinion of management, the pro forma condensed consolidated financial information provides for all adjustments necessary to reflect the effects of the IPO and Formation Transactions, the Offering, property acquisitions and dispositions and certain other transactions. The pro forma information is unaudited and is not necessarily indicative of the consolidated results that would have occurred if the transactions and adjustments reflected therein had been consummated in the period or on the date presented, or on any particular date in the future, nor does it purport to represent the financial position, results of operations or changes in cash flows for future periods. F-4 AMB PROPERTY, L.P. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 (UNAUDITED, IN THOUSANDS)
OPERATING PROPERTY PRE-OFFERING PARTNERSHIP(1) ACQUISITIONS(2) PRO FORMA OFFERING(3) PRO FORMA -------------- ---------------- ------------ ------------ ----------- ASSETS Investments in real estate, net............................ $2,740,048 $ 56,730 $2,796,778 $ -- $2,796,778 Cash and cash equivalents........ 28,584 -- 28,584 -- 28,584 Other assets..................... 29,558 -- 29,558 1,200 30,758 ---------- -------- ---------- --------- ---------- Total assets........... $2,798,190 $ 56,730 $2,854,920 $ 1,200 $2,856,120 ========== ======== ========== ========= ========== LIABILITIES AND PARTNERS' CAPITAL Secured debt..................... $ 610,111 $ -- $ 610,111 $ -- $ 610,111 Credit facility.................. 312,000 56,730 368,730 (348,800) 19,930 Unsecured notes.................. -- -- -- 350,000 350,000 Other liabilities................ 81,611 -- 81,611 -- 81,611 ---------- -------- ---------- --------- ---------- Total liabilities...... 1,003,722 56,730 1,060,452 1,200 1,061,652 ---------- -------- ---------- --------- ---------- Minority interests............... 52,867 -- 52,867 -- 52,867 ---------- -------- ---------- --------- ---------- Partners' capital Limited partners............... 70,896 -- 70,896 -- 70,896 General partner................ 1,670,705 -- 1,670,705 -- 1,670,705 ---------- -------- ---------- --------- ---------- Total capital.......... 1,741,601 -- 1,741,601 -- 1,741,601 ---------- -------- ---------- --------- ---------- Total liabilities and partners' capital.... $2,798,190 $ 56,730 $2,854,920 $ 1,200 $2,856,120 ========== ======== ========== ========= ==========
F-5 AMB PROPERTY, L.P. NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 (UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT UNIT DATA) 1. Reflects the historical consolidated balance sheet of AMB Property, L.P. as of March 31, 1998. See the historical consolidated financial statements and notes thereto of AMB Property, L.P. included elsewhere in this Prospectus. 2. Reflects property acquisitions subsequent to March 31, 1998 for an estimated total purchase price of approximately $56,730, including estimated acquisition costs. The Operating Partnership has funded these acquisitions through borrowings under its Credit Facility. The 1998 property acquisitions include the following properties:
PROPERTY NAME ACQUISITION PRICE ------------- ----------------- Houston Service Center........................ $ 15,620 Meadowridge/Greenwood......................... 33,050 Northwest Business Center..................... 8,060 ----------- $ 56,730 ===========
For purposes of property disclosures included elsewhere in this Prospectus, Meadowridge/Greenwood is comprised of Meadowridge Business Park and Greenwood Place. 3. Reflects the effect of the Offering, including (i) the issuance of Unsecured Notes in the amount of $350,000, resulting in net proceeds of approximately $348,800 after payment of approximately $3,650 of financing costs and receipt of $2,450 of call option premium and (ii) the repayment of borrowings under the Credit Facility of approximately $348,800 using the net proceeds of the Offering. F-6 AMB PROPERTY, L.P. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
OPERATING 1998 PROPERTY PARTNERSHIP(1) ACQUISITIONS(2) OFFERING(3) PRO FORMA -------------- --------------- -------------- ----------- REVENUES Rental revenue........................... $ 74,602 $ 9,314 $ -- $ 83,916 Interest and other income................ 1,183 -- -- 1,183 ----------- ------- ------- ----------- Total revenues................. 75,785 9,314 -- 85,099 ----------- ------- ------- ----------- OPERATING EXPENSES Real estate taxes and property operating expenses............................... 20,252 2,101 -- 22,353 Interest expense......................... 11,841 -- 4,402 16,243 Depreciation and amortization............ 11,786 2,026 -- 13,812 General, administrative and other........ 2,718 -- -- 2,718 ----------- ------- ------- ----------- Total operating expenses....... 46,597 4,127 4,402 55,126 ----------- ------- ------- ----------- Income from operations before minority interests.............................. 29,188 5,187 (4,402) 29,973 Minority interests' share of net income................................. (462) (613) -- (1,075) ----------- ------- ------- ----------- Net income..................... $ 28,726 $ 4,574 $(4,402) $ 28,898 =========== ======= ======= =========== Net income per unit Basic.................................. $ 0.32 $ 0.32 =========== =========== Diluted................................ $ 0.32 $ 0.32 =========== =========== Weighted average units outstanding Basic.................................. 88,428,969 89,523,120 =========== =========== Diluted................................ 88,839,192 89,933,343 =========== ===========
F-7 AMB PROPERTY, L.P. NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT UNIT DATA) 1. Reflects the historical consolidated operations of AMB Property, L.P. for the three months ended March 31, 1998. See the historical consolidated financial statements and notes thereto of AMB Property, L.P. included elsewhere in this Prospectus. 2. Reflects the incremental effects of properties acquired subsequent to December 31, 1997 based on the operations of such properties for periods prior to acquisition by the Operating Partnership. Below is a summary of the incremental effect of such properties:
BOSTON ORLANDO TOTEM INDUSTRIAL JAMESBURG CENTRAL LAKE OTHER PORTFOLIO PROPERTY PARK MALLS PROPERTIES TOTAL ---------- --------- ------- ----- ---------- ------- Rental and other revenues............. $2,853 $1,466 $ 804 $ 758 $3,433 $ 9,314 Real estate taxes and property operating expenses.................. (108) (543) (260) (277) (913) (2,101) ------ ------ ----- ----- ------ ------- Pro forma effect...................... $2,745 $ 923 $ 544 $ 481 $2,520 $ 7,213 ====== ====== ===== ===== ====== =======
Two of the acquisitions described above, Jamesburg Property and Corporate Park Industrial, which is included in Other Properties, represent a joint venture with a client of AMB Investment Management in which the Operating Partnership owns a controlling 50.0005% interest. The joint venture acquisitions are accounted for on a consolidated basis and, accordingly, a minority interest of $612 has been reflected relative to these acquisitions. See the statements of revenues and certain expenses of Boston Industrial Portfolio, Jamesburg Property, Orlando Central Park and Totem Lake Malls included elsewhere in this Prospectus. The following table sets forth the incremental revenues and certain expenses for periods prior to acquisition for the "Other Properties" acquired in 1998, but not included in the statements of revenues and certain expenses of the Boston Industrial Portfolio, Jamesburg Property, Orlando Central Park and Totem Lake Malls included elsewhere in this Prospectus.
REAL ESTATE TAXES AND PROPERTY REVENUES IN RENTAL OPERATING EXCESS OF PROPERTY ACQUIRED REVENUES EXPENSES CERTAIN EXPENSES ----------------- -------- ----------- ---------------- Wilsonville....................... $ 167 $ (41) $ 126 Atlanta South Phase III........... 116 (30) 86 Mansfield Industrial Portfolio.... 71 (2) 69 Corporate Park Industrial......... 757 (130) 627 Cascade........................... 44 (11) 33 Northridge........................ 108 (43) 65 Minneapolis Industrial Portfolio....................... 592 (230) 362 Houston Service Center............ 534 (188) 346 Meadowridge Business Park......... 800 (180) 620 Northwest Business Center......... 244 (58) 186 ------- ------- ------ $ 3,433 $ (913) $2,520 ======= ======= ======
Also reflects estimated depreciation and amortization of the 1998 property acquisitions based on estimated useful lives of 40 years. F-8 AMB PROPERTY, L.P. NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT UNIT DATA) 3. Reflects an adjustment to derive pro forma interest expense, which has been based upon the pro forma debt balances as of March 31, 1998. The calculation of pro forma interest expense is as follows: Secured debt, pro forma balance of $592,569 (before premium of $17,542), assumed interest rate of 7.8%................ $11,485 Credit Facility, pro forma balance of $19,930, assumed interest rate of 6.55%.................................... 326 Unsecured Notes, pro forma balance of $350,000, assumed weighted average interest rate of 6.98%................... 6,108 Amortization of debt premium, actual amounts amortized during the period......................................... (744) Amortization of deferred financing costs, $4,175 balance, 3 to 15 year terms.......................................... 169 Amortization of call option premium, pro forma balance of $2,450, 7 year term....................................... (88) Unused Credit Facility fees, unused pro forma balance of $480,070, fee of 0.20%.................................... 240 Capitalized interest, actual amounts capitalized during the period.................................................... (1,253) ------- Pro forma interest expense.................................. $16,243 =======
The net change in interest expense is the result of the repayment of borrowings on the Credit Facility of approximately $348,800 with the net proceeds from the Offering and the assumption of approximately $48,600 in secured debt in connection with the 1998 property acquisitions. 4. The pro forma taxable income of the Operating Partnership for the twelve months ended March 31, 1998 is approximately $106,975 which is based upon pro forma income from operations before minority interest of approximately $109,011 plus book depreciation and amortization of approximately $52,408 less other book/tax differences of approximately $6.935 and less tax depreciation and amortization of approximately $47,509. The pro forma net income of AMB Property Corporation for the three months ended March 31, 1998 is $27,713 which is equal to the pro forma net income of the Operating Partnership of $28,898 less income allocable to the limited partners in the Operating Partnership of $1,185. F-9 AMB PROPERTY, L.P. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
AMB IPO AND OPERATING CONTRIBUTED 1997 PROPERTY 1997 PROPERTY FORMATION 1997 AS PARTNERSHIP(1) PROPERTIES(2) ACQUISITIONS(3) DISPOSITIONS(4) TRANSACTIONS(5) ADJUSTED -------------- ------------- --------------- --------------- --------------- ----------- REVENUES Rental revenue............ $ 26,465 $207,391 $47,554 ($1,200) $ 2,455 $ 282,665 Interest and other income.................. 645 1,217 176 -- (29) 2,009 ----------- -------- ------- ------- -------- ----------- Total revenues.... 27,110 208,608 47,730 (1,200) 2,426 284,674 ----------- -------- ------- ------- -------- ----------- OPERATING EXPENSES Real estate taxes and property operating expenses................ 8,899 72,452 10,815 (363) (10,325) 81,478 Interest expense.......... 3,528 45,009 -- (75) (3,033) 45,429 Depreciation and amortization............ 4,195 32,616 -- (157) 9,232 45,886 General, administrative and other............... 1,197 823 -- -- 5,958 7,978 ----------- -------- ------- ------- -------- ----------- Total operating expenses........ 17,819 150,900 10,815 (595) 1,832 180,771 ----------- -------- ------- ------- -------- ----------- Income from operations before disposal of real estate and minority interests............... 9,291 57,708 36,915 (605) 594 103,903 Gain on disposal of real estate.................. -- 360 -- (360) -- -- ----------- -------- ------- ------- -------- ----------- Income from operations before minority interests............... 9,291 58,068 36,915 (965) 594 103,903 Minority interests' share of net income........... (117) (884) (296) -- -- (1,297) ----------- -------- ------- ------- -------- ----------- Net income................ $ 9,174 $ 57,184 $36,619 ($ 965) $ 594 $ 102,606 =========== ======== ======= ======= ======== =========== Net income per unit Basic................... $ 0.10 $ 1.16 =========== =========== Diluted................. $ 0.10 $ 1.16 =========== =========== Weighted average units outstanding Basic................... 88,416,676 88,416,676 =========== =========== Diluted................. 88,698,719 88,698,719 =========== =========== 1998 PROPERTY OFFERING ACQUISITIONS(6) (7) PRO FORMA --------------- ----------- ----------- REVENUES Rental revenue............ $40,619 $ -- $ 323,284 Interest and other income.................. -- -- 2,009 ------- -------- ----------- Total revenues.... 40,619 -- 325,293 ------- -------- ----------- OPERATING EXPENSES Real estate taxes and property operating expenses................ 10,281 -- 91,759 Interest expense.......... -- 20,380 65,809 Depreciation and amortization............ 6,516 -- 52,402 General, administrative and other............... -- -- 7,978 ------- -------- ----------- Total operating expenses........ 16,797 20,380 217,948 ------- -------- ----------- Income from operations before disposal of real estate and minority interests............... 23,822 (20,380) 107,345 Gain on disposal of real estate.................. -- -- -- ------- -------- ----------- Income from operations before minority interests............... 23,822 (20,380) 107,345 Minority interests' share of net income........... (2,774) -- (4,071) ------- -------- ----------- Net income................ $21,048 ($20,380) $ 103,274(8) ======= ======== =========== Net income per unit Basic................... $ 1.15 =========== Diluted................. $ 1.15 =========== Weighted average units outstanding Basic................... 89,523,120 =========== Diluted................. 89,805,163 ===========
F-10 AMB PROPERTY, L.P. NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT UNIT DATA) 1. Reflects the historical consolidated operations of AMB Property, L.P. for the period from November 26, 1997 to December 31, 1997. See the historical consolidated financial statements and notes thereto of AMB Property, L.P. included elsewhere in this Prospectus. 2. Reflects the historical combined operations of the AMB Contributed Properties for the period from January 1, 1997 to November 25, 1997. See the historical combined financial statements and notes thereto of the AMB Contributed Properties included elsewhere in this Prospectus. 3. Reflects the incremental effects of properties acquired during the year ended December 31, 1997 based on the historical operations of such properties for periods prior to acquisition by the Operating Partnership or the owners of the AMB Contributed Properties. Below is a summary of the incremental effect of such properties:
SILICON VALLEY CABOT INDUSTRIAL CABOT MANHATTAN WESLAYAN R&D OTHER PORTFOLIO BUSINESS PARK VILLAGE PLAZA PORTFOLIO PROPERTIES TOTAL ---------------- ------------- --------- -------- -------------- ---------- -------- Rental revenues.......... $22,995 $4,734 $ 5,467 $3,259 $2,958 $ 8,317 $ 47,730 Real estate taxes and property operating expenses............... (4,775) (895) (1,928) (990) (311) (1,916) (10,815) ------- ------ ------- ------ ------ ------- -------- Pro forma effect......... $18,220 $3,839 $ 3,539 $2,269 $2,647 $ 6,401 $ 36,915 ======= ====== ======= ====== ====== ======= ========
One of the acquisitions included in Other Properties above, Manhattan Village, represents the acquisition of a property and the formation of several joint ventures that own the property, in which the Operating Partnership owns a 90% interest. The joint venture is accounted for on a consolidated basis, and accordingly, a 10% minority interest has been reflected relative to this acquisition. See the statements of revenues and certain expenses of Cabot Industrial Portfolio, Cabot Business Park, Manhattan Village, Weslayan Plaza and Silicon Valley R&D Portfolio included elsewhere in this Prospectus. F-11 AMB PROPERTY, L.P. NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT UNIT DATA) The following table sets forth the incremental revenues and certain expenses for periods prior to acquisition for the "Other Properties" acquired in 1997. See "Business and Properties."
REAL ESTATE TAXES AND PROPERTY REVENUES IN RENTAL OPERATING EXCESS OF PROPERTY ACQUIRED REVENUES EXPENSES CERTAIN EXPENSES ----------------- -------- ----------- ---------------- Shady Oak.............................. $ 326 $ (70) $ 256 Metric Center.......................... 635 (50) 585 Southfield............................. 171 (40) 131 Atlanta South Phase II................. 109 (57) 52 O'Hare Industrial Portfolio (Ardmore)............................ 265 (74) 191 Windsor Court.......................... 151 (53) 98 Beacon Building 8...................... 765 (180) 585 Greenleaf.............................. 177 (74) 103 Boulden................................ 1,070 (269) 801 Mid-Atlantic Business Center........... 1,713 (414) 1,299 Brittania Business Park................ 1,058 (212) 846 Rockford Road.......................... 64 (6) 58 Patuxent............................... 509 (113) 396 Executive.............................. 588 (175) 413 Acer Distribution...................... 716 (129) 587 ------- ------- ------- $ 8,317 $ 1,916 $ 6,401 ======= ======= =======
4. Reflects the incremental effects of the disposition or partial disposition of properties during 1997, based upon the historical operations of such properties. See Note 7 to the historical combined financial statements of the AMB Contributed Properties included elsewhere in this Prospectus. 5. Reflects the effects of the application of purchase accounting as a result of the IPO and Formation Transactions, resulting in pro forma expense adjustments as follows: (i) an increase in depreciation expense of $9,232, (ii) the reclassification of certain property-related expenses from general and administrative expense to property operating expense (due to the internalization of management) of approximately $5,196 and (iii) a net increase in general, administrative and other expenses of $5,958, after reclassification of property-related expenses. Such changes are based upon actual expenses incurred during 1997 adjusted for (a) the estimated changes in costs due to operating as a public entity including investor relations, accounting and legal fees and other costs related to the internalization of management and (b) certain reclassifications to reflect the Company's new organizational structure as a result of the IPO. Estimated depreciation and amortization has been based upon asset lives of 5 to 40 years. Also reflects the elimination of advisory fees charged by AMB to the owners of the AMB Contributed Properties of $15,521 (excluding approximately $2,027 in real estate acquisition fees paid to AMB which have been accounted for as acquisition costs by the owners of the AMB Contributed Properties and accordingly capitalized as investments in real estate). F-12 AMB PROPERTY, L.P. NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT UNIT DATA) Also reflects an adjustment to historical interest expense to derive 1997 as adjusted interest expense, which has been based upon the Operating Partnership's debt balances as of December 31, 1997. The calculation of 1997 as adjusted interest expense is as follows: Secured debt, balance of $517,366 (before premium of $18,286), assumed interest rate of 7.82%............................ $40,458 Credit Facility, balance of $150,000, assumed interest rate of 6.90%.................................................. 10,350 Amortization of debt premium, $18,286 balance, 8 year term...................................................... (2,924) Amortization of financing costs, $900 balance, 3 year term...................................................... 300 Unused Credit Facility fees, unused balance of $350,000, fee of 0.20%.................................................. 700 Capitalized interest, average historical construction in process of $48,303, overall weighted average interest rate of 7.5%................................................... (3,455) ------- 1997 as adjusted interest expense........................... $45,429 =======
Also reflects an adjustment to record rental revenues on a straight-line basis for the Properties from January 1, 1997, the assumed date of acquisition by the Operating Partnership. Rental income has not been included for any properties for periods prior to completion of their construction and availability for occupancy. The pro forma straight-line rent adjustment for the year ended December 31, 1997 is calculated as the difference between (i) pro forma straight-line rental revenues of $5,447 and (ii) historical straight-line rental revenues of $2,992. Also reflects an adjustment to (i) eliminate excess interest income of the properties of $1,304 and (ii) reflect the incremental effect of establishing the Operating Partnership's investment in AMB Investment Management, the income from which is included in interest and other income. The pro forma operations of AMB Investment Management and the Operating Partnership's share of AMB Investment Management's net income based upon its 95% economic interest are as follows: Advisory revenues........................................... $ 5,487 General and administrative expenses......................... (4,465) Depreciation and amortization............................... (72) ------- Income before income taxes.................................. 950 Income taxes (at assumed effective tax rate of 40%)......... (380) ------- Income before minority interest............................. 570 Minority interest........................................... (17) ------- Net income.................................................. $ 553 ------- Operating Partnership's share of net income................. $ 525 =======
Advisory revenues consist of actual fees earned by AMB for the period from January 1, 1997 to November 25, 1997 from the assets that are managed by AMB Investment Management and the actual results of AMB Investment Management for the period from November 26, 1997 to December 31, 1997. General and administrative expenses consist of direct costs and indirect costs allocated to AMB Investment Management by the Operating Partnership. Such indirect costs have been allocated based upon the percentage of total assets managed by AMB Investment Management. In addition to its share of AMB Investment Management's net income, the Operating Partnership received an acquisition fee for acquisition services provided to AMB Investment Management in 1997. The pro forma fee for 1997 amounts to $750. F-13 AMB PROPERTY, L.P. NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT UNIT DATA) 6. Reflects the incremental effects of properties acquired subsequent to December 31, 1997 based on the operations of such properties for periods prior to acquisition by the Operating Partnership. Below is a summary of the incremental effect of such properties:
BOSTON ORLANDO INDUSTRIAL JAMESBURG CENTRAL TOTEM LAKE OTHER PORTFOLIO PROPERTY PARK MALLS PROPERTIES TOTAL ---------- --------- ------- ---------- ---------- ------- Rental and other revenues............ $10,403 $ 6,774 $ 3,249 $ 2,822 $17,371 $40,619 Real estate taxes and property operating expenses................. (802) (2,510) (1,069) (1,293) (4,607) (10,281) ------- ------- ------- ------- ------- ------- Pro forma effect..................... $ 9,601 $ 4,264 $ 2,180 $ 1,529 $12,764 $30,338 ======= ======= ======= ======= ======= =======
Two of the acquisitions described above, Jamesburg Property and Corporate Park Industrial (which is included in Other Properties), represent joint ventures with a client of AMB Investment Management in which the Operating Partnership owns a controlling 50.0005% interest. The joint venture acquisitions are accounted for on a consolidated basis and, accordingly, a minority interest of $2,747 has been reflected relative to these acquisitions. See the statements of revenues and certain expenses of Boston Industrial Portfolio, Jamesburg Property, Orlando Central Park and Totem Lake Malls included elsewhere in this Prospectus. The following table sets forth the incremental revenues and certain expenses for periods prior to acquisition for the "Other Properties" acquired in 1998.
REAL ESTATE TAXES AND PROPERTY REVENUES IN RENTAL OPERATING EXCESS OF PROPERTY ACQUIRED REVENUES EXPENSES CERTAIN EXPENSES ----------------- -------- ----------- ---------------- Wilsonville....................... $ 2,026 $ (500) $ 1,526 Atlanta South Phase III........... 773 (200) 573 Mansfield Industrial Portfolio.... 343 (12) 331 Corporate Park Industrial......... 3,241 (572) 2,669 Cascade........................... 1,065 (259) 806 Northridge........................ 1,332 (534) 798 Minneapolis Industrial Portfolio....................... 2,468 (881) 1,587 Houston Service Center............ 2,072 (729) 1,343 Meadowridge Business Park......... 3,104 (699) 2,405 Northwest Business Center......... 947 (221) 726 ------- ------- ------- $17,371 $(4,607) $12,764 ======= ======= =======
Also reflects estimated depreciation and amortization of the 1998 property acquisitions based on estimated useful lives of 40 years. F-14 AMB PROPERTY, L.P. NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT UNIT DATA) 7. Reflects an adjustment to derive pro forma interest expense, which has been based upon the pro forma debt balances as of March 31, 1998. The calculation of pro forma interest expense is as follows: Secured debt, pro forma balance of $592,569 (before premium of $17,542), assumed interest rate of 7.8%................ $45,940 Credit Facility, pro forma balance of $19,930, assumed interest rate of 6.55%.................................... 1,305 Unsecured Notes, pro forma balance of $350,000, assumed weighted average interest rate of 6.98%................... 24,430 Amortization of deferred financing costs, $4,175 balance, 3 to 15 year terms.......................................... 636 Amortization of debt premium, $17,542 balance, 8 year term...................................................... (2,924) Amortization of call option premium, pro forma balance of $2,450, 7 year term....................................... (350) Unused Credit Facility fees, unused pro forma balance of $480,070, fee of 0.20%.................................... 960 Capitalized interest, average historical construction in process of $54,803, overall weighted average assumed interest rate of 7.5%..................................... (4,188) ------- Pro forma interest expense.................................. $65,809 =======
The net change in interest expense is the result of the repayment of borrowings on the Credit Facility of approximately $348,800 with the net proceeds from the Offering and the assumption of approximately $48,600 in secured debt in connection with the property acquisitions in 1998. 8. The pro forma taxable income of the Operating Partnership for the year ended December 31, 1997 is approximately $103,160 which is based upon pro forma income from operations before minority interest of approximately $105,918 plus book depreciation and amortization of approximately $51,705 less other book/tax differences of approximately $6,954 and less tax depreciation and amortization of approximately $47,509. The pro forma net income of AMB Property Corporation for the year ended December 31, 1997 is $99,040, which equals to the Operating Partnership pro forma net income of $103,274 less income allocable to the limited partners in the Operating Partnership of $4,234. F-15 AMB PROPERTY, L.P. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED, IN THOUSANDS, EXCEPT UNIT AMOUNTS) ASSETS
DECEMBER 31, MARCH 31, 1997 1998 ------------ ---------- Investments in real estate: Land and improvements..................................... $ 550,635 $ 618,956 Buildings and improvements................................ 1,822,516 2,045,834 Construction in progress.................................. 69,848 91,092 ---------- ---------- Total investments in real estate.................. 2,442,999 2,755,882 Accumulated depreciation and amortization................. (4,153) (15,834) ---------- ---------- Net investments in real estate.................... 2,438,846 2,740,048 Cash and cash equivalents................................... 39,968 28,584 Other assets................................................ 27,441 29,558 ---------- ---------- Total assets...................................... $2,506,255 $2,798,190 ========== ========== LIABILITIES AND PARTNERS' CAPITAL Debt: Secured debt.............................................. 535,652 610,111 Unsecured credit facility................................. 150,000 312,000 ---------- ---------- Total debt........................................ 685,652 922,111 Other liabilities........................................... 49,350 81,611 Payable to affiliates....................................... 38,071 -- ---------- ---------- Total liabilities................................. 773,073 1,003,722 Commitments and contingencies............................... -- -- Minority interests.......................................... 15,784 52,867 Partners' capital: General Partner, 85,874,513 units outstanding............. 1,668,030 1,670,705 Limited partners, 2,542,163 and 3,648,607 units outstanding, respectively.............................. 49,368 70,896 ---------- ---------- Total partners' capital........................... 1,717,398 1,741,601 ---------- ---------- Total liabilities and partners' capital........... $2,506,255 $2,798,190 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-16 AMB PROPERTY, L.P. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED, IN THOUSANDS, EXCEPT UNIT AMOUNTS) REVENUES Rental revenues........................................... $ 74,602 Other income.............................................. 1,183 ----------- Total revenues.................................... 75,785 ----------- OPERATING EXPENSES Property operating expenses............................... 10,004 Real estate taxes......................................... 10,248 Interest.................................................. 11,841 Depreciation and amortization............................. 11,786 General and administrative................................ 2,718 ----------- Total operating expenses.......................... 46,597 ----------- Income from operations before minority interests......................................... 29,188 ----------- Minority interests' share of net income................... (462) ----------- Net income........................................ $ 28,726 =========== Income Available to Unitholders Attributable to: General Partner........................................... $ 27,906 Limited Partners.......................................... 820 ----------- $ 28,726 =========== INCOME PER UNIT Basic..................................................... $ 0.32 =========== Diluted................................................... $ 0.32 =========== WEIGHTED AVERAGE UNITS OUTSTANDING Basic..................................................... 88,428,969 =========== Diluted................................................... 88,839,192 =========== DISTRIBUTIONS DECLARED PER UNIT............................. $ 0.34 ===========
The accompanying notes are an integral part of these consolidated financial statements. F-17 AMB PROPERTY, L.P. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED, IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 28,726 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 11,786 Straight-line rents....................................... (2,825) Amortization of debt premiums and financing costs......... (669) Minority interests' share of net income................... 462 Equity in income of AMB Investment Management............. (126) Changes in assets and liabilities: Other assets.............................................. (4,512) Other liabilities......................................... 1,978 --------- Net cash provided by operating activities......... 34,820 CASH FLOWS FROM INVESTING ACTIVITIES Cash paid for property acquisitions......................... (149,874) Additions to land and building improvements................. (3,648) Additions to tenant improvements and leasing costs.......... (2,862) Additions to construction in progress....................... (5,065) Reduction of payable to affiliates in connection with Formation Transactions.................................... (38,071) --------- Net cash used in investing activities............. (199,520) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on unsecured credit facility..................... 162,000 Borrowings on secured debt.................................. 1,118 Payments on secured debt.................................... (9,429) Distributions to minority interests......................... (373) --------- Net cash provided by (used in) financing activities........................................ 153,316 Net decrease in cash and cash equivalents................... (11,384) Cash and cash equivalents at beginning of period............ 39,968 --------- Cash and cash equivalents at end of period.................. $ 28,584 ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest.................................................. $ 13,457 Property acquisitions: Acquisitions of properties................................ $ 296,143 Assumption of secured debt................................ (83,515) Minority interests contribution........................... (36,993) Limited partner units issued.............................. (25,761) --------- Cash paid for property acquisitions....................... $ 149,874 =========
The accompanying notes are an integral part of these consolidated financial statements. F-18 AMB PROPERTY, L.P. CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED, IN THOUSANDS, EXCEPT UNIT AMOUNTS)
GENERAL PARTNER LIMITED PARTNERS ------------------------ -------------------- UNITS AMOUNT UNITS AMOUNT TOTAL ---------- ---------- --------- ------- ---------- DECEMBER 31, 1997............... 85,874,513 $1,668,030 2,542,163 $49,368 $1,717,398 Contributions................. -- -- 1,106,444 25,760 25,760 Net income.................... -- 27,906 -- 820 28,726 Reallocation.................. -- 4,181 -- (4,181) -- Distributions................. -- (29,412) -- (871) (30,283) ---------- ---------- --------- ------- ---------- MARCH 31, 1998.................. 85,874,513 $1,670,705 3,648,607 $70,896 $1,741,601 ========== ========== ========= ======= ==========
The accompanying notes are an integral part of these consolidated financial statements. F-19 AMB PROPERTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS, EXCEPT SHARE, UNIT, SQUARE FEET AND PERCENTAGE DATA) 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 will elect to be taxed as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986 (the "Code"), as amended. The Company, through its controlling interest in its subsidiary AMB Property, L.P., a Delaware limited partnership (the "Operating Partnership"), is engaged in the ownership, operation, management, acquisition, renovation, expansion and development of industrial properties and community shopping centers in target markets nationwide. 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. In addition, the Company and the Operating Partnership acquired, through a series of mergers and other transactions, 31.8 million rentable square feet of industrial property and 6.3 million rentable square feet of retail property in exchange for 65,022,185 shares of the Company's Common Stock, 2,542,163 limited partnership interests ("LP Units") in the Operating Partnership, the assumption of debt and, to a limited extent, cash. The net assets of the Predecessor and the properties acquired with Common Stock were contributed to the Operating Partnership for 69,768,801 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 (the "Common Stock") for $21.00 per share, resulting in gross offering proceeds of approximately $338,100. Net of underwriters' commission and offering costs aggregating $38,068, the Company received approximately $300,032 in proceeds from the IPO. The net proceeds of the IPO were contributed to the Operating Partnership for 16,100,000 units and were used by the Operating Partnership to repay indebtedness, to purchase interests from certain investors who elected not to receive shares or units in connection with the Formation Transactions, to fund property acquisitions, and for general corporate working capital requirements. As of March 31, 1998, the Company owned an approximate 95.9% general partner interest in the Operating Partnership. The remaining 4.1% 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 Corporation, 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 executive officers of the Company collectively purchased 100% of the AMB Investment Management's voting common stock (representing a 5% economic interest therein). The Operating Partnership accounts for its investment in AMB Investment Management using the equity method of accounting. 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. F-20 AMB PROPERTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED, IN THOUSANDS, EXCEPT SHARE, UNIT, SQUARE FEET AND PERCENTAGE DATA) As of March 31, 1998, the Operating Partnership owned 155 Properties, consisting of 118 industrial properties (the "Industrial Properties") and 37 retail properties (the "Retail Properties") located in 28 markets throughout the United States. The Industrial Properties (comprising 415 buildings), principally warehouse distribution properties, encompass approximately 44.0 million rentable square feet and, as of March 31, 1998, were 94.6% leased to over 1,000 tenants. The Retail Properties (comprising 37 centers), principally grocer-anchored community shopping centers, encompass approximately 6.8 million rentable square feet and, as of the same date, were 94.6% leased to over 900 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 for the three months ended March 31, 1998 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 of AMB Property, L.P. included elsewhere in this Prospectus. 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. DEBT In connection with the Formation Transactions, the Operating Partnership assumed certain secured debt with an aggregate principal value of $517,031 and a fair value of $535,613. The difference between the principal value and the fair value was recorded as a debt premium. The debt premium is being amortized into interest expense over the term of the related debt instruments using the effective interest method. As of March 31, 1998, the unamortized debt premium was $17,542. As of March 31, 1998, debt, excluding unamortized debt premiums, consists of the following: Secured debt, varying interest rates from 7.01% to 10.39%, due November 1998 to January 2014......................... $592,569 Unsecured credit facility, variable interest at LIBOR plus 110 basis points, (6.79% at March 31, 1998) due November 2000...................................................... 312,000 -------- Total Debt........................................ $904,569 ========
Secured debt generally requires monthly principal and interest payments. The secured debt is secured by deeds of trust on certain Properties. All of the secured debt bears interest at fixed rates, except for one loan of $5,623 which bears a variable interest rate at LIBOR plus 275 basis points, or 8.44% at March 31, 1998, or prime plus 50 basis points at the borrower's option. The secured debt has various financial and non-financial covenants. Additionally, certain of the secured debt is cross-collateralized. The weighted-average fixed interest rate on secured debt at March 31, 1998, was 8.01%. F-21 AMB PROPERTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED, IN THOUSANDS, EXCEPT SHARE, UNIT, SQUARE FEET AND PERCENTAGE DATA) The Operating Partnership has a $500,000 unsecured revolving credit agreement (the "Credit Facility") with Morgan Guaranty Trust Company of New York as agent, and a syndicate of twelve other banks. The Credit Facility has a term of three years, and is subject to a fee that accrues on the daily average undrawn funds, which varies between 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. Interest capitalized related to construction projects for the three months ended March 31, 1998, was $1,253. The scheduled maturities of the secured debt as of March 31, 1998 are as follows: 1998...................................................... $ 53,712 1999...................................................... 10,965 2000...................................................... 14,427 2001...................................................... 38,582 2002...................................................... 63,675 Thereafter................................................ 411,208 -------- $592,569 ========
The 1998 maturities included $35,000 of secured debt that was assumed in connection with certain property acquisitions, and which was repaid in full subsequent to March 31, 1998. 4. MINORITY INTERESTS Minority interests represent interests held by certain third parties in 11 real estate joint ventures that are consolidated for financial reporting purposes. Such investments are consolidated because (i) the Operating Partnership owns a majority interest, or (ii) the Operating Partnership holds significant control over the entity through a 50% or greater ownership interest combined with the ability to control all major operating decisions such as approval of budgets, selection of property managers and changes in financing. 5. PARTNERS' CAPITAL On March 9, 1998, the Operating Partnership declared a quarterly cash distribution of $0.3425 per unit, payable on April 3, 1998, to unitholders of record as of March 18, 1998. 6. INCOME PER UNIT For purposes of calculating diluted income per unit for the three months ended March 31, 1998, no adjustment to net income was necessary, as the Operating Partnership's only dilutive securities outstanding for such period were stock options issued under its stock incentive plan. The effect of the stock options was to increase weighted average units outstanding by 410,223 units for the three months ended March 31, 1998. Such dilution was computed using the treasury stock method. 7. SUBSEQUENT EVENTS In April 1998, the Operating Partnership repaid approximately $35,000 in assumed debt related to properties acquired during the quarter ended March 31, 1998. F-22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of AMB Property Corporation: We have audited the accompanying consolidated balance sheet of AMB Property, L.P. and its subsidiaries as of December 31, 1997, and the related consolidated statements of income, partners' capital, and cash flows for period from inception (November 26, 1997) to December 31, 1997. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AMB Property, L.P. and its subsidiaries as of December 31, 1997, and the results of its operations and cash flows for the period from inception (November 26, 1997) to December 31, 1997, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to the financial statements is presented for purposes of complying with the Securities and Exchange Commission rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP San Francisco, California January 27, 1998 F-23 AMB PROPERTY, L.P. CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT UNIT AMOUNTS)
1997 ---------- ASSETS Investments in real estate: Land and improvements..................................... $ 550,635 Buildings and improvements................................ 1,822,516 Construction in progress.................................. 69,848 ---------- Total investments in real estate.................. 2,442,999 Accumulated depreciation and amortization................. (4,153) ---------- Net investments in real estate.................... 2,438,846 Cash and cash equivalents................................... 39,968 Other assets................................................ 27,441 ---------- Total assets...................................... $2,506,255 ========== LIABILITIES AND PARTNERS' CAPITAL Debt: Secured debt.............................................. $ 535,652 Unsecured credit facility................................. 150,000 ---------- Total debt........................................ 685,652 Other liabilities........................................... 49,350 Payable to affiliates....................................... 38,071 ---------- Total liabilities................................. 773,073 ---------- Commitments and contingencies............................... -- Minority interests.......................................... 15,784 Partners' Capital: General Partner, 85,874,513 units outstanding............. 1,668,030 Limited Partners, 2,542,163 units outstanding............. 49,368 ---------- Total partners' capital........................... 1,717,398 ---------- Total liabilities and partners' capital........... $2,506,255 ==========
The accompanying notes are an integral part of this consolidated financial statement. F-24 AMB PROPERTY, L.P. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE PERIOD FROM INCEPTION (NOVEMBER 26, 1997) TO DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT UNIT AMOUNTS) REVENUES Rental revenues........................................... $ 26,465 Other income.............................................. 645 ----------- Total revenues.................................... 27,110 OPERATING EXPENSES Property operating expenses............................... 5,312 Real estate taxes......................................... 3,587 Interest.................................................. 3,528 Depreciation and amortization............................. 4,195 General and administrative................................ 1,197 ----------- Total operating expenses.......................... 17,819 ----------- Income from operations before minority interests........................................ 9,291 Minority interests' share of net income..................... (117) ----------- Net income available to common stockholders....... $ 9,174 =========== Income Available to Unitholders Attributable to: General Partner........................................ $ 8,634 Limited Partners....................................... 540 ----------- $ 9,174 =========== INCOME PER UNIT Basic.................................................. $ 0.10 =========== Diluted................................................ $ 0.10 =========== WEIGHTED AVERAGE UNITS OUTSTANDING Basic.................................................. 88,416,676 =========== Diluted................................................ 88,698,719 ===========
The accompanying notes are an integral part of this consolidated financial statement. F-25 AMB PROPERTY, L.P. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD FROM INCEPTION (NOVEMBER 26, 1997) TO DECEMBER 31, 1997 (IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 9,291 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 4,195 Straight-line rents....................................... (901) Amortization of debt premiums and financing costs......... (266) Minority interests' share of net income................... 117 Equity in income of AMB Investment Management............. (61) Changes in assets and liabilities: Other assets.............................................. (10,089) Other liabilities......................................... (2,106) -------- Net cash provided by operating activities................... 180 CASH FLOWS FROM INVESTING ACTIVITIES Additions to properties..................................... (222,497) Additions to buildings improvements and leasing costs....... (1,769) Additions to construction in progress....................... (2,606) Cash paid for property in Formation Transactions, net of cash acquired............................................. (5,935) -------- Net cash used for investing activities...................... (232,807) CASH FLOWS FROM FINANCING ACTIVITIES Partnership Contributions................................. 317,009 Borrowings on Credit Facility............................. 150,000 Borrowings on secured debt................................ 850 Repayment of Credit Facility.............................. (182,000) Payments on secured debt.................................. (516) Payment of financing fees................................. (900) Partnership Distributions................................. (11,848) -------- Net cash provided by (used in) financing activities......... 272,595 -------- Net increase (decrease) in cash and cash equivalents........ 39,968 Cash and cash equivalents at beginning of period............ -- -------- Cash and cash equivalents at end of period.................. $ 39,968 ========
The accompanying notes are an integral part of this consolidated financial statement. F-26 AMB PROPERTY, L.P. CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL FOR THE PERIOD FROM INCEPTION (NOVEMBER 26, 1997) TO DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARES)
GENERAL PARTNER LIMITED PARTNERS ------------------------ -------------------- UNITS AMOUNT UNITS AMOUNT TOTAL ---------- ---------- --------- ------- ---------- INCEPTION (NOVEMBER 25, 1997)... -- $ -- -- $ -- $ -- Contributions................. 85,874,513 1,670,902 2,542,163 49,169 1,720,071 Net income.................... -- 8,634 -- 540 9,174 Distributions................. -- (11,506) -- (341) (11,847) ---------- ---------- --------- ------- ---------- DECEMBER 31, 1997............... 85,874,513 $1,668,030 2,542,163 $49,368 $1,717,398 ========== ========== ========= ======= ==========
The accompanying notes are an integral part of this consolidated financial statement. F-27 AMB PROPERTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT UNIT AND SQUARE FEET DATA) 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 "Offering") on November 26, 1997. The Company will elect to be taxed as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). The Company, through its controlling interest in its subsidiary AMB Property, L.P., a Delaware limited partnership (the "Operating Partnership"), is engaged in the ownership, operation, management, acquisition, renovation, expansion and development of industrial properties and community shopping centers in target markets nationwide. The Company and the Operating Partnership were formed shortly before consummation of the Offering. AMB Institutional Realty Advisors, Inc., a California corporation and registered investment advisor (the "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. 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 units representing limited partnership interests 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 for 69,768,801 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 Offering of 16,100,000 shares of Common Stock, $0.01 par value per share (the "Common Stock") for $21.00 per share, resulting in gross offering proceeds of approximately $338,100. Net of underwriters' commission and offering costs aggregating $38,068, the Company received approximately $300,032 in proceeds from the Offering. The net proceeds of the Offering were contributed to the Operating Partnership for 16,100,000 units and were used by the Operating Partnership to repay indebtedness, to purchase interests from certain investors who elected not to receive shares or units in connection with the Formation Transactions, to fund property acquisitions, and for general corporate purposes, including working capital. As of December 31, 1997, the Company owned an approximate 97.1% general partner interest in the Operating Partnership. The remaining 2.9% 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 management and control of the Operating Partnership. In connection with the Formation Transactions, the Operating Partnership formed AMB Investment Management Corporation, a Maryland corporation ("AMB Investment Management"). The Operating Partnership purchased 100% of AMB Investment Management's non-voting preferred stock (representing a 95% economic interest). Certain executive officers of the Company collectively purchased 100% of the Investment Management Subsidiary's voting common stock (representing a 5% economic interest therein). The Operating Partnership accounts for its investment in AMB Investment Management using the equity method of accounting. 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. F-28 AMB PROPERTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT UNIT AND SQUARE FEET DATA) As of December 31, 1997, the Operating Partnership owned 37.3 million rentable square feet of industrial properties (the "Industrial Properties"), principally warehouse distribution properties, that were 95.7% leased and 6.2 million rentable square feet of retail properties (the "Retail Properties"), principally grocer-anchored community shopping centers, that were 96.1% leased. The Industrial Properties and the Retail Properties collectively are referred to as the "Properties." 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES These financial statements have been prepared in accordance with generally accepted accounting principles using the accrual method of accounting. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the financial position, results of operations and cash flows of the Operating Partnership and subsidiaries, and eight joint ventures (the "Joint Ventures") in which the Operating Partnership has a controlling interest. Third-party equity interests in the Joint Ventures are reflected as minority interests in the consolidated financial statements. All significant intercompany amounts have been eliminated. BASIS OF PRESENTATION The consolidated financial statements of the Operating Partnership include the results of operations for the period from November 26, 1997 (the commencement of operations) to December 31, 1997. INVESTMENTS IN REAL ESTATE Investments in real estate are stated at depreciated cost and are reviewed for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying amount of a property may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges)are less than the carrying amount of the property. To the extent an impairment has occurred, the excess of the carrying amount of the property over its estimated fair value will be charged to income. As of December 31, 1997, there were no impairments of the carrying values of the Properties. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the investments. The estimated lives are as follows: Land improvements................................... 5 to 40 years Buildings and improvements.......................... 5 to 40 years Tenant improvements and leasing costs............... Term of the related lease
The cost of buildings and improvements includes the purchase price of the property or interest in property, legal fees and acquisition costs and interest, property taxes, and other costs incurred during the period of construction. Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations or betterments that extend the economic useful life of assets are capitalized. F-29 AMB PROPERTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT UNIT AND SQUARE FEET DATA) Project costs directly associated with the development and construction of a real estate project are capitalized as construction in progress. In addition, interest, real estate taxes and other costs are capitalized during the construction period. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash held in financial institutions and other highly liquid short-term investments with original maturities of three months or less. Cash and cash equivalents as of December 31, 1997 include restricted cash of $8,074, which represents amounts held in escrow in connection with property purchases and capital improvements. DEFERRED FINANCING Costs incurred in connection with financing are capitalized and amortized to interest expense on a straight-line basis (which approximates the effective interest method) over the term of the related loan. As of December 31, 1997, deferred financing fees were $871, net of accumulated amortization of $29. Such amounts are included in Other Assets on the consolidated balance sheet. FAIR VALUE OF FINANCIAL INSTRUMENTS The Operating Partnership's financial instruments include short-term investments, accounts receivable, accounts payable, accrued expenses, construction loans payable, mortgage debt, secured debt, unsecured notes payable, and an unsecured credit facility. The fair value of these instruments approximates its carrying or contract values. DEBT PREMIUMS In connection with the Formation Transactions, the Operating Partnership assumed certain secured debt with an aggregate principal value of $517,031 and a fair value of $535,613. The difference between the principal value and the fair value was recorded as a debt premium. The debt premium is being amortized into interest expense over the term of the related debt instrument using the effective interest method. As of December 31, 1997, the unamortized debt premium was $18,286. MINORITY INTERESTS Minority interests represent the interests held by certain third parties in eight real estate joint ventures that are consolidated for financial reporting purposes. Such investments are consolidated because (i) the Operating Partnership owns a majority interest, or (ii) the Operating Partnership has significant control over the entity through a 50% or greater ownership interest combined with the ability to control major operating decisions such as approval of budgets, selection of property managers and change in financing. REVENUES The Operating Partnership, as a lessor, retains substantially all of the benefits and risks of ownership of the Properties and accounts for its leases as operating leases. Rental revenues are recognized on a straight-line basis over the term of the leases. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenue in the period the applicable expenses are incurred. F-30 AMB PROPERTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT UNIT AND SQUARE FEET DATA) OTHER INCOME Other income consists of the Operating Partnership's equity in the earnings of AMB Investment Management and of interest income on cash and cash equivalents. INCOME PER UNIT For purposes of calculating diluted income per unit for the year ended December 31, 1997, no adjustment to net income available to unitholders was necessary. While the Operating Partnership had no dilutive securities outstanding as of such date, the Operating Partnership is obligated to issue units to the Company in respect of the contribution of proceeds by the Company from the exercise of options to purchase common stock under the Company's Stock Incentive Plan. The effect of the units issuable upon exercise of stock options outstanding as of December 31, 1997 was to increase weighted average units outstanding by 282,043 units for the year ended December 31, 1997. Such dilution was computed using the treasury stock method. FUTURE ACCOUNTING PRONOUNCEMENTS In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement, effective for financial statements for periods beginning after December 15, 1997, requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Generally, information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Operating Partnership expects to adopt SFAS No. 131 in 1998 to the extent applicable. 3. TRANSACTIONS WITH AFFILIATES As discussed in "Organization and Formation of the Company," the Operating Partnership formed AMB Investment Management (which conducts its operations through the Investment Management Partnership) for the purpose of carrying on the operations of the Predecessor. The Operating Partnership and the Investment Management Partnership have an agreement that allows for the sharing of certain costs and employees. Additionally, the Operating Partnership provides the Investment Management Partnership with certain acquisition-related services. As part of the Formation Transactions, the Operating Partnership was required to pay an amount equal to the net working capital balances at November 25, 1997 of the Predecessor and the acquired properties to the owners of said entities. As of December 31, 1997, the Operating Partnership owed approximately $37,808 to owners related to these working capital distributions. Such amount is included in Payable to affiliates on the consolidated balance sheet and was paid subsequent to year-end. The Operating Partnership and the Investment Management Partnership share common office space under lease obligations of an affiliate of the Predecessor. Such lease obligations are charged to the Operating Partnership and the Investment Management Partnership at cost. For the period ended December 31, 1997, the Operating Partnership paid approximately $70 for occupancy costs related to the lease obligations of the affiliate. F-31 AMB PROPERTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT UNIT AND SQUARE FEET DATA) 4. DEBT As of December 31, 1997, debt, excluding unamortized debt premiums, consists of the following: Secured debt, varying coupon interest rates from 7.01% to 10.38%, due November 1998 to December 2008............................ $ 517,366 Unsecured credit facility, variable interest at LIBOR plus 110 basis points (7.10% at December 31, 1997) due November 2000...................... 150,000 ---------- Total Debt........................................ $ 667,366 ==========
Secured debt generally requires monthly principal and interest payments. The secured debt is secured by deeds of trust or mortgages on 48 Properties. The carrying value of real estate investments pledged as collateral under deeds of trust or mortgages for the secured debt is $1,049,003 as of December 31, 1997. All of the secured debt bears interest at fixed rates, except for one loan which bears interest at either LIBOR plus 275 basis point (8.75% at December 31, 1997) or prime plus 50 basis points, at the borrower's option. The secured debt has various financial and non-financial covenants. Additionally, certain of the secured debt is cross-collateralized. The Operating Partnership 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 12 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 of the undrawn funds based on the Operating Partnership's credit rating. The Credit Facility has various financial and non-financial covenants. The weighted-average fixed interest rate on secured debt at December 31, 1997 was 7.82%. Interest capitalized related to construction projects for the period from November 26, 1997 to December 31, 1997 was $448. The scheduled maturities of the secured debt as of December 31, 1997 are as follows: 1998...................................................... $ 19,390 1999...................................................... 9,666 2000...................................................... 11,862 2001...................................................... 35,654 2002...................................................... 43,967 Thereafter................................................ 396,827 -------- $517,366 ========
F-32 AMB PROPERTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT UNIT AND SQUARE FEET DATA) 5. LEASING ACTIVITY Future minimum rental income due under noncancelable leases in effect at December 31, 1997 with tenants is as follows: 1998..................................................... $ 214,400 1999..................................................... 188,926 2000..................................................... 160,592 2001..................................................... 128,241 2002..................................................... 101,733 Thereafter............................................... 459,070 ---------- $1,252,962 ==========
In addition to minimum rental payments, certain tenants pay reimbursements for their pro rata share of specified operating expenses, which amounted to $5,267 for the period from November 26, 1997 to December 31, 1997. These amounts are included as rental income and operating expenses in the accompanying consolidated statements of operations. Certain of the leases also provide for the payment of additional rent based on a percentage of the tenant's revenues. Some leases contain options to renew. No individual tenant accounts for greater than 2% of rental revenues. 6. INCOME TAXES As a partnership, the allocated share of income of the Operating Partnership is included in the income tax returns of the partners. Accordingly, no accounting for income taxes is required in the accompanying consolidated financial statements. State and local taxes are not material. Taxable income of the Operating Partnership for the period from inception (November 26, 1997) to December 31, 1997 is estimated to be $12,007. Reconciling differences between book income and tax income primarily result from timing differences consisting of (i) depreciation expense, (ii) prepaid rental income and (iii) straight-line rent. Furthermore, the Operating Partnership's share of income or loss from AMB Investment Management is excluded from the tax return of the Operating Partnership. The Operating Partnership declared distributions per Unit of $0.13 for the period from inception (November 26, 1997) to December 31, 1997. The following is a summary of distributions per Unit which represent a return of capital measured using generally accepted accounting principles:
DISTRIBUTION PER UNIT From book net income........................................ $0.10 Representing return of capital.............................. 0.03 ----- Total Distributions......................................... $0.13 =====
On a federal income tax basis, none of the distributions represented return of capital. 7. STOCK INCENTIVE PLAN AND 401(k) PLAN STOCK INCENTIVE PLAN In November 1997, the Company established a Stock Option and Incentive Plan (the "Stock Incentive Plan") for the purpose of attracting and retaining eligible officers, directors and employees. The Company has reserved for issuance 5,750,000 shares of Common Stock under the Stock Incentive Plan. In November 1997, the Company granted 3,153,750 non-qualified options to certain directors, officers and employees. Each option is exchangeable for one share of the Company's Common Stock and has an exercise price equal to $21.00, the F-33 AMB PROPERTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT UNIT AND SQUARE FEET DATA) Company's market price at the date of grant. The options have a 10-year term and vest pro rata in annual installments over a four-year period from the date of grant. Upon the exercise of stock options, the Company will contribute the proceeds to the Operating Partnership in exchange for an equal number of general partnership units. The Operating Partnership applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its Stock Incentive Plan. Opinion 25 measures compensation cost using the intrinsic value based method of accounting. Under this method, compensation cost is the excess, if any, of the quoted market price of the stock at the date of grant over the amount an employee must pay to acquire the stock. Accordingly, no compensation cost has been recognized for the Stock Incentive Plan, as the option price for all option grants in 1997 was equal to the market price at the date of grant. However, if the Operating Partnership had measured compensation cost using the fair value base method prescribed in SFAS 123, "Accounting for Stock-Based Compensation," the impact on pro forma net income and earnings per share would not have been material. The fair value of each option grant was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1997: dividend yield of 6.52%, expected volatility of 18.75%, risk-free interest rate of 5.86%, and expected lives of 10 years. Following is a summary of the option activity for the year ended December 31, 1997:
SHARES UNDER REMAINING OPTION EXERCISE CONTRACTUAL (000) PRICE LIFE -------- -------- ----------- Outstanding, 11/25/97................................. -- -- -- Granted............................................... 3,154 $21.0 10 years Exercised............................................. -- -- -- Forfeited............................................. (10) -- -- ------ ----- -------- Outstanding, 12/31/97................................. 3,144 $21.0 10 years ====== ===== ======== Options exercisable at year-end....................... 184 $21.0 ====== ===== Fair value of options granted during the year......... $ 2.28 ======
RESTRICTED STOCK In 1997, the Company sold 5,712 restricted shares of its Common Stock to certain independent directors for $0.01 per share in cash. The Company contributed the proceeds from the issuance of restricted shares to the Operating Partnership in exchange for an equal number of GP units. 401(k) PLAN In November 1997, the Operating Partnership established a Section 401(k) Savings/Retirement Plan (the "Section 401(k) Plan"), which is a continuation of the Section 401(k) plan of the Predecessor, to cover eligible employees of the Operating Partnership and any designated affiliate. The Section 401(k) Plan permits eligible employees of the Operating Partnership to defer up to 10% of their annual compensation, subject to certain limitations imposed by the Code. The employees' elective deferrals are immediately vested and non-forfeitable upon contribution to the Section 401(k) Plan. The Operating Partnership matches the employee contributions to the Section 401(k)Plan in an amount equal to 50% of the first 3.5% of annual compensation deferred by each employee and may also make discretionary contributions to the plan. As of December 31, F-34 AMB PROPERTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT UNIT AND SQUARE FEET DATA) 1997, the Operating Partnership's accrual for 401(k) match was $140. Such amount was included in Other liabilities on the consolidated balance sheet. Except for the Section 401(k) Plan, the Operating Partnership offers no other post-retirement or post-employment benefits to its employees. 8. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------- 1995 1996 1997 ---- ---- ---------- Cash paid for interest................................... $-- $-- $ 2,509 === === ========== Non-cash transactions: Acquisitions of properties in Formation Transactions... $-- $-- $2,216,137 Assumption of debt..................................... -- -- (717,613) Cash acquired.......................................... -- -- (43,978) Other assumed assets and liabilities................... -- -- (13,862) Units issued........................................... -- -- (1,434,749) --- --- ---------- Net cash paid, net of cash acquired...................... $-- $-- $ 5,935 === === ==========
9. PRO FORMA INFORMATION (UNAUDITED) The following unaudited pro forma condensed consolidated statement of operations has been prepared as if the Formation Transactions, the Offering (as described in Note 1) and certain property acquisitions and dispositions in 1997 had occurred on January 1, 1997. In the opinion of management, the pro forma condensed consolidated statement of operations does not purport to present the consolidated results that would have occurred if the aforementioned transactions had been consummated on January 1, 1997, nor does it purport to present the consolidated results of operations for future periods. Total revenues............................................ $ 284,674 Income from operations before minority interests.......... 103,903 Net income................................................ 102,606 INCOME PER UNIT Basic................................................... $ 1.16 =========== Diluted................................................. $ 1.16 =========== WEIGHTED AVERAGE UNITS OUTSTANDING Basic................................................... 88,416,676 =========== Diluted................................................. 88,698,719 ===========
10. COMMITMENTS AND CONTINGENCIES LITIGATION In the normal course of business, from time to time, the Operating Partnership 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 Operating Partnership. F-35 AMB PROPERTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT UNIT AND SQUARE FEET DATA) ENVIRONMENTAL MATTERS The Operating Partnership follows the policy of monitoring its Properties for the presence of hazardous or toxic substances. The Operating Partnership is not aware of any environmental liability with respect to the Properties that would have a material adverse effect on the Operating Partnership'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 could have a material adverse effect on the Operating Partnership's results of operations and cash flow. GENERAL UNINSURED LOSSES The Operating Partnership carries comprehensive liability, fire, flood, environmental, extended coverage and rental loss insurance with policy specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of extraordinary losses that may be either uninsurable or not economically insurable. Should an uninsured loss occur, the Operating Partnership could lose its investment in, and anticipated profits and cash flows from, a property. Certain of the Properties are located in areas that are subject to earthquake activity; the Operating Partnership has therefore obtained limited earthquake insurance. F-36 AMB PROPERTY, L.P. SCHEDULE III CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1997
COSTS CAPITALIZED INITIAL COST TO SUBSEQUENT TO OPERATING PARTNERSHIP ACQUISITION --------------------- --------------- PROPERTY LOCATION TYPE ENCUMBRANCES(1) LAND BUILDING LAND BUILDING -------- -------- ---- --------------- -------- ---------- ---- -------- 72nd Avenue................ WA IND $ -- $ 1,298 $ 4,008 $ -- $ -- Acer Distribution Center... CA IND -- 3,146 9,479 -- -- Activity Distribution Center................... CA IND 5,400 3,736 11,248 -- -- Alvarado Business Center... CA IND -- 7,906 23,757 -- 75 Amwiler-Gwinnett Industrial Portfolio................ GA IND 14,360 6,641 19,964 -- 4 Ardenwood Corporate Park... CA IND 10,339 7,321 22,002 -- -- Artesia Industrial Portfolio................ CA IND 54,742 23,860 71,620 -- 907 Atlanta South.............. GA IND -- 6,550 19,691 -- -- Beacon Industrial Park..... FL IND -- 10,466 31,437 -- -- Belden Avenue.............. IL IND -- 5,019 15,186 -- -- Bensenville................ IL IND 44,593 20,799 62,438 -- 19 Blue Lagoon................ FL IND 11,916 4,945 14,875 -- 23 Boulden.................... DE IND -- 2,807 8,462 -- 36 Brightseat Road............ MD IND -- 1,557 4,841 -- -- Britannia Business Park.... FL IND -- 3,199 9,637 -- 37 Cabot Business Park........ MA IND -- 16,017 48,091 -- 7 Chancellor................. FL IND 2,987 1,587 4,802 -- -- Chicago Industrial......... IL IND 3,522 1,574 4,761 -- -- Commerce................... CA IND -- 2,197 6,653 -- -- Corporate Square........... MN IND -- 4,024 12,113 -- 16 Crossroads Industrial...... IL IND -- 2,583 7,789 -- -- Dixie Highway.............. KY IND -- 1,700 5,149 -- -- Dock's Corner.............. NJ IND -- 2,050 6,190 -- -- Dock's Corner II........... NJ IND -- 2,272 6,917 -- -- Dowe Industrial............ CA IND -- 2,665 8,034 -- -- East Walnut Drive.......... CA IND -- 964 2,918 -- -- Elk Grove Village Industrial............... IL IND -- 7,713 23,179 -- 8 Empire Drive............... KY IND -- 1,590 4,815 -- -- Executive Drive............ IL IND -- 1,399 4,236 -- -- Fairway Drive Industrial... CA IND -- 1,954 5,479 -- -- GROSS AMOUNT CARRIED AT 12/31/97 ---------------------------------- YEAR OF DEPRECIABLE TOTAL ACCUMULATED CONSTRUCTION OR LIFE PROPERTY LAND BUILDING COSTS(2) DEPRECIATION ACQUISITION (YEARS) -------- -------- ---------- ---------- ------------ --------------- ----------- 72nd Avenue................ $ 1,298 $ 4,008 $ 5,306 $ 9 1997 5-40 Acer Distribution Center... 3,146 9,479 12,625 22 1997 5-40 Activity Distribution Center................... 3,736 11,248 14,984 26 1997 5-40 Alvarado Business Center... 7,906 23,832 31,738 54 1997 5-40 Amwiler-Gwinnett Industrial Portfolio................ 6,641 19,968 26,609 46 1997 5-40 Ardenwood Corporate Park... 7,321 22,002 29,323 50 1997 5-40 Artesia Industrial Portfolio................ 23,860 72,527 96,387 165 1997 5-40 Atlanta South.............. 6,550 19,691 26,241 45 1997 5-40 Beacon Industrial Park..... 10,466 31,437 41,903 72 1997 5-40 Belden Avenue.............. 5,019 15,186 20,205 35 1997 5-40 Bensenville................ 20,799 62,457 83,256 143 1997 5-40 Blue Lagoon................ 4,945 14,898 19,843 34 1997 5-40 Boulden.................... 2,807 8,498 11,305 19 1997 5-40 Brightseat Road............ 1,557 4,841 6,398 11 1997 5-40 Britannia Business Park.... 3,199 9,674 12,873 22 1997 5-40 Cabot Business Park........ 16,017 48,098 64,115 110 1997 5-40 Chancellor................. 1,587 4,802 6,389 11 1997 5-40 Chicago Industrial......... 1,574 4,761 6,335 11 1997 5-40 Commerce................... 2,197 6,653 8,850 15 1997 5-40 Corporate Square........... 4,024 12,129 16,153 28 1997 5-40 Crossroads Industrial...... 2,583 7,789 10,372 18 1997 5-40 Dixie Highway.............. 1,700 5,149 6,849 12 1997 5-40 Dock's Corner.............. 2,050 6,190 8,240 14 1997 5-40 Dock's Corner II........... 2,272 6,917 9,189 16 1997 5-40 Dowe Industrial............ 2,665 8,034 10,699 18 1997 5-40 East Walnut Drive.......... 964 2,918 3,882 7 1997 5-40 Elk Grove Village Industrial............... 7,713 23,187 30,900 53 1997 5-40 Empire Drive............... 1,590 4,815 6,405 11 1997 5-40 Executive Drive............ 1,399 4,236 5,635 10 1997 5-40 Fairway Drive Industrial... 1,954 5,479 7,433 13 1997 5-40
F-37
COSTS CAPITALIZED INITIAL COST TO SUBSEQUENT TO OPERATING PARTNERSHIP ACQUISITION --------------------- --------------- PROPERTY LOCATION TYPE ENCUMBRANCES(1) LAND BUILDING LAND BUILDING -------- -------- ---- --------------- -------- ---------- ---- -------- Hampden Road............... MA IND -- 2,200 6,678 -- -- Harvest Business Park...... WA IND 3,826 2,371 7,153 -- 51 Hewlett Packard Distribution............. CA IND 3,437 1,668 5,043 -- -- Holton Drive............... KY IND -- 2,633 7,972 -- -- Industrial Drive........... OH IND -- 1,743 5,410 -- -- International Multifoods... CA IND -- 1,613 4,879 -- -- Itasca Industrial Portfolio................ IL IND -- 6,416 19,289 -- 213 Janitrol................... OH IND -- 1,797 5,576 -- -- Jasmine Avenue............. CA IND -- 3,157 9,562 -- -- Kent Centre................ WA IND -- 3,042 9,165 -- 23 Kingsport Industrial Park..................... WA IND 18,161 7,919 23,798 -- 96 L.A. County Industrial Portfolio (3)............ CA IND -- 11,128 33,423 -- 17 Lake Michigan Industrial Portfolio................ IL IND -- 2,886 8,699 -- -- Laurelwood................. CA IND -- 2,750 8,538 -- -- Lincoln Industrial Center................... TX IND -- 671 2,052 -- -- Linder Skokie.............. IL IND -- 2,938 8,854 -- -- Lisle Industrial........... IL IND -- 2,290 6,911 -- -- Lonestar................... TX IND 17,773 7,129 21,428 -- -- McDaniel Drive............. TX IND -- 1,537 4,659 -- -- Melrose Park............... IL IND -- 2,936 9,190 -- -- Metric Center.............. TX IND -- 10,968 32,944 -- 45 Mid-Atlantic Business Center................... PA IND -- 6,581 19,783 -- 36 Milmont Page............... CA IND -- 3,201 9,642 -- 94 Minneapolis Distribution Portfolio................ MN IND -- 7,018 21,093 -- 95 Minneapolis Industrial IV....................... MN IND 8,346 4,938 14,854 -- 42 Minneapolis Industrial V... MN IND 7,952 4,426 13,317 -- 46 Moffett Business Center.... CA IND 12,883 5,892 17,716 -- -- Moffett Park R&D Portfolio................ CA IND -- 14,807 44,462 -- 598 N. Glenville Avenue........ TX IND -- 1,094 3,316 -- -- Norcross/ Brookhollow Portfolio................ GA IND -- 3,721 11,180 -- -- Northpointe Commerce....... CA IND -- 1,773 5,358 -- -- Northwest Distribution Center................... WA IND -- 2,234 6,743 -- 7 O'Hare Industrial Portfolio................ IL IND -- 7,357 22,112 -- 156 Pacific Business Center.... CA IND 10,679 5,417 16,291 -- 16 GROSS AMOUNT CARRIED AT 12/31/97 ---------------------------------- YEAR OF DEPRECIABLE TOTAL ACCUMULATED CONSTRUCTION OR LIFE PROPERTY LAND BUILDING COSTS(2) DEPRECIATION ACQUISITION (YEARS) -------- -------- ---------- ---------- ------------ --------------- ----------- Hampden Road............... 2,200 6,678 8,878 15 1997 5-40 Harvest Business Park...... 2,371 7,204 9,575 16 1997 5-40 Hewlett Packard Distribution............. 1,668 5,043 6,711 12 1997 5-40 Holton Drive............... 2,633 7,972 10,605 18 1997 5-40 Industrial Drive........... 1,743 5,410 7,153 12 1997 5-40 International Multifoods... 1,613 4,879 6,492 11 1997 5-40 Itasca Industrial Portfolio................ 6,416 19,502 25,918 44 1997 5-40 Janitrol................... 1,797 5,576 7,373 13 1997 5-40 Jasmine Avenue............. 3,157 9,562 12,719 22 1997 5-40 Kent Centre................ 3,042 9,188 12,230 21 1997 5-40 Kingsport Industrial Park..................... 7,919 23,894 31,813 54 1997 5-40 L.A. County Industrial Portfolio (3)............ 11,128 33,440 44,568 76 1997 5-40 Lake Michigan Industrial Portfolio................ 2,886 8,699 11,585 20 1997 5-40 Laurelwood................. 2,750 8,538 11,288 19 1997 5-40 Lincoln Industrial Center................... 671 2,052 2,723 5 1997 5-40 Linder Skokie.............. 2,938 8,854 11,792 20 1997 5-40 Lisle Industrial........... 2,290 6,911 9,201 16 1997 5-40 Lonestar................... 7,129 21,428 28,557 49 1997 5-40 McDaniel Drive............. 1,537 4,659 6,196 11 1997 5-40 Melrose Park............... 2,936 9,190 12,126 21 1997 5-40 Metric Center.............. 10,968 32,989 43,957 75 1997 5-40 Mid-Atlantic Business Center................... 6,581 19,819 26,400 45 1997 5-40 Milmont Page............... 3,201 9,736 12,937 22 1997 5-40 Minneapolis Distribution Portfolio................ 7,018 21,188 28,206 48 1997 5-40 Minneapolis Industrial IV....................... 4,938 14,896 19,834 34 1997 5-40 Minneapolis Industrial V... 4,426 13,363 17,789 30 1997 5-40 Moffett Business Center.... 5,892 17,716 23,608 40 1997 5-40 Moffett Park R&D Portfolio................ 14,807 45,060 59,867 101 1997 5-40 N. Glenville Avenue........ 1,094 3,316 4,410 8 1997 5-40 Norcross/ Brookhollow Portfolio................ 3,721 11,180 14,901 26 1997 5-40 Northpointe Commerce....... 1,773 5,358 7,131 12 1997 5-40 Northwest Distribution Center................... 2,234 6,750 8,984 15 1997 5-40 O'Hare Industrial Portfolio................ 7,357 22,268 29,625 51 1997 5-40 Pacific Business Center.... 5,417 16,307 21,724 37 1997 5-40
F-38
COSTS CAPITALIZED INITIAL COST TO SUBSEQUENT TO OPERATING PARTNERSHIP ACQUISITION --------------------- --------------- PROPERTY LOCATION TYPE ENCUMBRANCES(1) LAND BUILDING LAND BUILDING -------- -------- ---- --------------- -------- ---------- ---- -------- Pagemill & Dillworth....... TX IND -- 1,877 5,690 -- -- Patuxent................... MD IND -- 1,696 5,127 -- -- Penn James Office/Warehouse......... MN IND -- 1,991 6,013 -- 103 Pennsy Drive............... MD IND -- 657 2,011 -- 203 Presidents Drive........... FL IND -- 1,124 3,446 -- -- Presidents Drive II........ FL IND -- 2,563 7,861 -- -- Preston Court.............. MD IND -- 2,313 7,192 -- -- Production Drive........... KY IND -- 425 1,286 -- -- Santa Barbara Court........ MD IND -- 1,617 5,029 -- -- Shiloh Road................ TX IND -- 1,813 5,495 -- -- Silicon Valley R&D Portfolio................ CA IND -- 8,024 24,205 -- -- South Bay Industrial....... CA IND 20,791 14,992 45,016 -- 465 Southfield................. GA IND -- 7,073 21,259 -- 106 Stadium Business Park...... CA IND 4,909 3,768 11,345 -- 48 Systematics................ CA IND -- 911 2,773 -- -- Texas Industrial Portfolio (4)...................... TX IND -- 10,806 32,499 -- 218 Twin Cities................ MN IND -- 4,873 14,638 -- -- Two South Middlesex........ NJ IND -- 2,247 6,781 -- -- Valwood.................... TX IND 4,351 1,983 5,989 -- 12 Valwood Parkway II......... TX IND -- 2,219 6,729 -- -- Viscount................... FL IND -- 984 3,016 -- -- Weigman Road............... CA IND -- 1,563 4,852 -- -- West Kiest................. TX IND -- 1,395 4,231 -- -- West North Carrier......... TX IND 3,522 1,375 4,165 -- 85 Windsor Court.............. IL IND -- 766 2,338 -- -- Yosemite Drive............. CA IND -- 2,350 7,297 -- -- Zanker/Charcot Industrial............... CA IND -- 5,282 15,887 -- 202 Applewood Village Shopping Center................... CO RET -- 6,716 26,903 -- -- Arapahoe Village Shopping Center................... CO RET 11,083 3,795 15,220 -- -- Aurora Marketplace......... WA RET -- 3,243 13,013 -- 4 BayHill Shopping Center.... CA RET -- 2,844 11,417 -- 64 Brentwood Commons.......... IL RET 5,460 1,810 7,280 -- 1 Civic Center Plaza......... IL RET 13,689 5,113 20,492 -- 42 Corbins Corner Shopping Center................... CT RET -- 6,438 25,791 -- 3 GROSS AMOUNT CARRIED AT 12/31/97 ---------------------------------- YEAR OF DEPRECIABLE TOTAL ACCUMULATED CONSTRUCTION OR LIFE PROPERTY LAND BUILDING COSTS(2) DEPRECIATION ACQUISITION (YEARS) -------- -------- ---------- ---------- ------------ --------------- ----------- Pagemill & Dillworth....... 1,877 5,690 7,567 13 1997 5-40 Patuxent................... 1,696 5,127 6,823 12 1997 5-40 Penn James Office/Warehouse......... 1,991 6,116 8,107 14 1997 5-40 Pennsy Drive............... 657 2,214 2,871 5 1997 5-40 Presidents Drive........... 1,124 3,446 4,570 8 1997 5-40 Presidents Drive II........ 2,563 7,861 10,424 18 1997 5-40 Preston Court.............. 2,313 7,192 9,505 16 1997 5-40 Production Drive........... 425 1,286 1,711 3 1997 5-40 Santa Barbara Court........ 1,617 5,029 6,646 11 1997 5-40 Shiloh Road................ 1,813 5,495 7,308 13 1997 5-40 Silicon Valley R&D Portfolio................ 8,024 24,205 32,229 55 1997 5-40 South Bay Industrial....... 14,992 45,481 60,473 103 1997 5-40 Southfield................. 7,073 21,365 28,438 49 1997 5-40 Stadium Business Park...... 3,768 11,393 15,161 26 1997 5-40 Systematics................ 911 2,773 3,684 6 1997 5-40 Texas Industrial Portfolio (4)...................... 10,806 32,717 43,523 74 1997 5-40 Twin Cities................ 4,873 14,638 19,511 33 1997 5-40 Two South Middlesex........ 2,247 6,781 9,028 15 1997 5-40 Valwood.................... 1,983 6,001 7,984 14 1997 5-40 Valwood Parkway II......... 2,219 6,729 8,948 15 1997 5-40 Viscount................... 984 3,016 4,000 7 1997 5-40 Weigman Road............... 1,563 4,852 6,415 11 1997 5-40 West Kiest................. 1,395 4,231 5,626 10 1997 5-40 West North Carrier......... 1,375 4,250 5,625 10 1997 5-40 Windsor Court.............. 766 2,338 3,104 5 1997 5-40 Yosemite Drive............. 2,350 7,297 9,647 17 1997 5-40 Zanker/Charcot Industrial............... 5,282 16,089 21,371 36 1997 5-40 Applewood Village Shopping Center................... 6,716 26,903 33,619 61 1997 5-40 Arapahoe Village Shopping Center................... 3,795 15,220 19,015 35 1997 5-40 Aurora Marketplace......... 3,243 13,017 16,260 30 1997 5-40 BayHill Shopping Center.... 2,844 11,481 14,325 26 1997 5-40 Brentwood Commons.......... 1,810 7,281 9,091 17 1997 5-40 Civic Center Plaza......... 5,113 20,534 25,647 47 1997 5-40 Corbins Corner Shopping Center................... 6,438 25,794 32,232 59 1997 5-40
F-39
COSTS CAPITALIZED INITIAL COST TO SUBSEQUENT TO OPERATING PARTNERSHIP ACQUISITION --------------------- --------------- PROPERTY LOCATION TYPE ENCUMBRANCES(1) LAND BUILDING LAND BUILDING -------- -------- ---- --------------- -------- ---------- ---- -------- Eastgate Plaza............. WA RET -- 2,122 8,529 -- 59 Five Points Shopping Center................... CA RET -- 5,412 21,687 -- 96 Granada Village............ CA RET 15,678 6,533 26,172 -- 251 Kendall Mall............... FL RET 25,162 7,069 28,316 -- 16 La Jolla Village........... CA RET 19,245 6,936 27,785 -- 16 Lakeshore Plaza Shopping Center................... CA RET 13,839 6,706 26,865 -- 74 Latham Farms............... NY RET 38,833 12,327 49,350 -- 23 Long Gate Shopping Center................... MD RET -- 9,662 38,677 -- -- Manhattan Village Shopping Center................... CA RET -- 16,484 66,578 -- 230 Pleasant Hill Shopping Center................... CA RET -- 5,403 21,654 -- 13 Rancho San Diego Village Shopping Center.......... CA RET -- 2,645 10,621 -- 2 Randall's Dairy Ashford.... TX RET -- 2,542 10,179 -- -- Randall's Austin Parkway... TX RET -- 2,139 8,563 -- -- Randall's Commons Memorial................. TX RET -- 2,053 8,221 -- 1 Randall's Woodway.......... TX RET -- 3,075 12,313 -- -- Riverview Plaza Shopping Center................... IL RET -- 2,656 10,663 -- -- Rockford Road Plaza........ MN RET -- 4,333 17,371 -- 35 Shoppes at Lago Mar........ FL RET 5,932 2,051 8,246 -- 66 Silverado Plaza Shopping Center................... CA RET 5,203 1,928 7,753 -- -- Southwest Pavilion......... NV RET -- 1,575 8,140 -- 30 The Plaza at Delray........ FL RET 23,455 6,968 27,914 -- 4 Twin Oaks Shopping Center................... CA RET -- 2,399 9,637 -- 47 Weslayan Plaza............. TX RET -- 7,842 31,409 -- 76 Woodlawn Point Shopping Center................... GA RET 4,823 2,318 9,312 -- -- Ygnacio Plaza.............. CA RET 8,365 3,021 12,114 -- 38 -------- -------- ---------- ---- ------ $455,256 $550,635 $1,817,216 $ -- $5,300 ======== ======== ========== ==== ====== GROSS AMOUNT CARRIED AT 12/31/97 ---------------------------------- YEAR OF DEPRECIABLE TOTAL ACCUMULATED CONSTRUCTION OR LIFE PROPERTY LAND BUILDING COSTS(2) DEPRECIATION ACQUISITION (YEARS) -------- -------- ---------- ---------- ------------ --------------- ----------- Eastgate Plaza............. 2,122 8,588 10,710 20 1997 5-40 Five Points Shopping Center................... 5,412 21,783 27,195 50 1997 5-40 Granada Village............ 6,533 26,423 32,956 60 1997 5-40 Kendall Mall............... 7,069 28,332 35,401 65 1997 5-40 La Jolla Village........... 6,936 27,801 34,737 63 1997 5-40 Lakeshore Plaza Shopping Center................... 6,706 26,939 33,645 61 1997 5-40 Latham Farms............... 12,327 49,373 61,700 113 1997 5-40 Long Gate Shopping Center................... 9,662 38,677 48,339 88 1997 5-40 Manhattan Village Shopping Center................... 16,484 66,808 83,292 152 1997 5-40 Pleasant Hill Shopping Center................... 5,403 21,667 27,070 49 1997 5-40 Rancho San Diego Village Shopping Center.......... 2,645 10,623 13,268 24 1997 5-40 Randall's Dairy Ashford.... 2,542 10,179 12,721 23 1997 5-40 Randall's Austin Parkway... 2,139 8,563 10,702 20 1997 5-40 Randall's Commons Memorial................. 2,053 8,222 10,275 19 1997 5-40 Randall's Woodway.......... 3,075 12,313 15,388 28 1997 5-40 Riverview Plaza Shopping Center................... 2,656 10,663 13,319 24 1997 5-40 Rockford Road Plaza........ 4,333 17,406 21,739 40 1997 5-40 Shoppes at Lago Mar........ 2,051 8,312 10,363 19 1997 5-40 Silverado Plaza Shopping Center................... 1,928 7,753 9,681 18 1997 5-40 Southwest Pavilion......... 1,575 8,170 9,745 19 1997 5-40 The Plaza at Delray........ 6,968 27,918 34,886 64 1997 5-40 Twin Oaks Shopping Center................... 2,399 9,684 12,083 22 1997 5-40 Weslayan Plaza............. 7,842 31,485 39,327 72 1997 5-40 Woodlawn Point Shopping Center................... 2,318 9,312 11,630 21 1997 5-40 Ygnacio Plaza.............. 3,021 12,152 15,173 26 1997 5-40 -------- ---------- ---------- ------ $550,635 $1,822,516 $2,373,151 $4,153 ======== ========== ========== ======
F-40 AMB PROPERTY, L.P. SCHEDULE III (CONTINUED) CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1997 (IN THOUSANDS) A summary of activity for real estate and accumulated depreciation for the year ended December 31, 1997 is as follows:
1997 ---------- INVESTMENTS IN REAL ESTATE: Balance at beginning of year.............................. $ -- Acquisition of Properties(5)........................... 2,367,851 Improvements........................................... 5,300 ---------- Balance at end of year.................................... $2,373,151 ========== ACCUMULATED DEPRECIATION: Balance at beginning of year.............................. $ -- Depreciation expense................................... 4,153 ---------- Balance at end of year.................................... $ 4,153 ==========
- --------------- (1) As of December 31, 1997, Properties with a net book value of $170,979 serve as collateral for outstanding indebtedness under a $73,000 secured debt facility. (2) As of December 31, 1997, the aggregate cost for federal income tax purposes of investments in real estate was approximately $2,231,504. (3) Consists of two properties with seven buildings in Los Angeles and one building in Anaheim. (4) Consists of two properties with five buildings in Houston and 18 buildings in Dallas. (5) As discussed in the "Notes to Consolidated Financial Statements -- Organization and Formation of the Company," the Company acquired Properties with a value of $2,216,137 in exchange for common stock units. F-41 AMB PROPERTY CORPORATION CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS
DECEMBER 31, MARCH 31, 1997 1998 ------------ ---------- Investments in real estate: Land and improvements..................................... $ 550,635 $ 618,956 Buildings and improvements................................ 1,822,516 2,045,834 Construction in progress.................................. 69,848 91,092 ---------- ---------- Total investments in real estate.................. 2,442,999 2,755,882 Accumulated depreciation and amortization................. (4,153) (15,834) ---------- ---------- Net investments in real estate.................... 2,438,846 2,740,048 Cash and cash equivalents................................... 39,968 28,584 Other assets................................................ 27,441 29,558 ---------- ---------- Total assets...................................... $2,506,255 $2,798,190 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Debt: Secured debt.............................................. 535,652 610,111 Unsecured credit facility................................. 150,000 312,000 ---------- ---------- Total debt........................................ 685,652 922,111 Other liabilities........................................... 49,350 81,611 Payable to affiliates....................................... 38,071 -- ---------- ---------- Total liabilities................................. 773,073 1,003,722 Commitments and contingencies............................... -- -- Minority interests.......................................... 65,152 123,763 Stockholders' equity: Preferred stock, $.01 par value, 100,000,000 shares authorized, none issued or outstanding................. -- -- Common stock, $.01 par value, 500,000,000 shares authorized, 85,874,513 issued and outstanding.......... 859 859 Additional paid-in capital................................ 1,667,171 1,669,846 Retained earnings......................................... -- -- ---------- ---------- Total stockholders' equity........................ 1,668,030 1,670,705 ---------- ---------- Total liabilities and stockholders' equity........ $2,506,255 $2,798,190 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-42 AMB PROPERTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED MARCH 31, --------------------------- 1997 1998 ----------- ------------ REVENUES Rental revenues........................................... $ -- $ 74,602 Investment management and other income.................... 5,112 1,183 ---------- ----------- Total revenues.................................... 5,112 75,785 ---------- ----------- OPERATING EXPENSES Property operating expenses............................... -- 10,004 Real estate taxes......................................... -- 10,248 Interest.................................................. -- 11,841 Depreciation and amortization............................. -- 11,786 General and administrative................................ -- 2,718 Investment management expenses............................ 3,873 -- ---------- ----------- Total operating expenses.......................... 3,873 46,597 ---------- ----------- Income from operations before minority interests....................................... 1,239 29,188 ---------- ----------- Minority interests' share of net income................... -- (1,282) ---------- ----------- Net income available to common stockholders....... $ 1,239 $ 27,906 ========== =========== INCOME PER SHARE OF COMMON STOCK Basic..................................................... $ 0.24 $ 0.32 ========== =========== Diluted................................................... $ 0.24 $ 0.32 ========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic..................................................... 5,079,855 85,874,513 ========== =========== Diluted................................................... 5,079,855 86,284,736 ========== =========== DISTRIBUTIONS DECLARED PER SHARE OF COMMON STOCK............ $ 0.17 $ 0.34 ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-43 AMB PROPERTY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED, IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31, --------------------- 1997 1998 ------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $1,239 $ 27,906 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. -- 11,786 Straight-line rents....................................... -- (2,825) Amortization of debt premiums and financing costs......... -- (669) Minority interests' share of net income................... -- 1,282 Equity in income of AMB Investment Management............. -- (126) Changes in assets and liabilities: Other assets.............................................. 101 (4,512) Other liabilities......................................... 219 1,978 ------ --------- Net cash provided by operating activities......... 1,559 34,820 CASH FLOWS FROM INVESTING ACTIVITIES Cash paid for property acquisitions......................... -- (149,874) Additions to land and building improvements................. -- (3,648) Additions to tenant improvements and leasing costs.......... -- (2,862) Additions to construction in progress....................... -- (5,065) Reduction of payable to affiliates in connection with Formation Transactions.................................... -- (38,071) ------ --------- Net cash used in investing activities............. -- (199,520) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on unsecured credit facility..................... -- 162,000 Borrowings on secured debt.................................. -- 1,118 Payments on secured debt.................................... -- (9,429) Distributions to minority interests......................... -- (373) Distributions to minority interests of Predecessor.......... (137) -- Distributions to stockholders of Predecessor................ (4,003) -- Principal payment of notes receivable from stockholders of Predecessor............................................... 328 -- ------ --------- Net cash provided by (used in) financing activities....................................... (3,812) 153,316 Net decrease in cash and cash equivalents................... (2,253) (11,384) Cash and cash equivalents at beginning of period............ 3,093 39,968 ------ --------- Cash and cash equivalents at end of period.................. $ 840 $ 28,584 ====== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest.................................................. $ -- $ 13,457 Property acquisitions: Acquisitions of properties................................ $ -- $ 296,143 Assumption of secured debt................................ -- (83,515) Minority interests contribution........................... -- (62,754) ------ --------- Cash paid for property acquisitions....................... $ -- $ 149,874 ====== =========
The accompanying notes are an integral part of these consolidated financial statements. F-44 AMB PROPERTY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK -------------------- ADDITIONAL NUMBER PAID-IN RETAINED OF SHARES AMOUNT CAPITAL EARNINGS TOTAL ---------- ------ ---------- -------- ---------- BALANCE AT DECEMBER 31, 1997...... 85,874,513 $859 $1,667,171 $ -- $1,668,030 Net income...................... -- -- -- 27,906 27,906 Reallocation of Limited Partners' interests in Operating Partnership........ -- -- 4,181 -- 4,181 Distributions declared to AMB Property Corporation stockholders................. -- -- (1,506) (27,906) (29,412) ---------- ---- ---------- -------- ---------- BALANCE AT MARCH 31, 1998......... 85,874,513 $859 $1,669,846 $ -- $1,670,705 ========== ==== ========== ======== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-45 AMB PROPERTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS, EXCEPT SHARE, UNIT, SQUARE FEET AND PERCENTAGE DATA) 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 expects to be taxed as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). The Company, through its controlling interest in its subsidiary AMB Property, L.P., a Delaware limited partnership (the "Operating Partnership"), is engaged in the ownership, operation, management, acquisition, renovation, expansion and development of industrial properties and community shopping centers in target markets nationwide. Unless the context otherwise requires, the "Company" 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. 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 units representing limited partnership interests 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 for 69,768,801 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 (the "Common Stock") for $21.00 per share, resulting in gross offering proceeds of approximately $338,100. Net of underwriters' commission and offering costs aggregating $38,068, the Company received approximately $300,032 in proceeds from the IPO. The net proceeds of the IPO were used to repay indebtedness, to purchase interests from certain investors who elected not to receive shares or units in connection with the Formation Transactions, to fund property acquisitions, and for general corporate purposes, including working capital. As of March 31, 1998, the Company owned an approximate 95.9% general partner interest in the Operating Partnership. The remaining 4.1% 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 Corporation, 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 executive officers of the Company collectively purchased 100% of the Investment Management Subsidiary's voting common stock (representing a 5% economic interest therein). The Operating Partnership accounts for its investment in AMB Investment Management using the equity method of accounting. 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. F-46 AMB PROPERTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED, IN THOUSANDS, EXCEPT SHARE, UNIT, SQUARE FEET AND PERCENTAGE DATA) As of March 31, 1998, the Company owned 155 Properties, consisting of 118 industrial properties (the "Industrial Properties") and 37 retail properties (the "Retail Properties") located in 28 markets throughout the United States. The Industrial Properties (comprising 415 buildings), principally warehouse distribution properties, encompass approximately 44.0 million rentable square feet and, as of March 31, 1998, were 94.6% leased to over 1,000 tenants. The Retail Properties (comprising 37 centers), principally grocer-anchored community shopping centers, encompass approximately 6.8 million rentable square feet and, as of the same date, were 94.6% leased to over 900 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 financial information for the three months ended March 31, 1997, represents the results of the Predecessor, an investment manager. The Predecessor's revenues consisted primarily of fees earned in connection with real estate investment management services. As such, information presented for the three months ended March 31, 1997 and 1998 is not comparable given the differences in lines of business between the Company and the Predecessor. The interim results of the three months ended March 31, 1997 and 1998 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, 1997. 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. DEBT In connection with the Formation Transactions, the Company assumed certain secured debt with an aggregate principal value of $517,031 and a fair value of $535,613. The difference between the principal value and the fair value was recorded as a debt premium. The debt premium is being amortized into interest expense over the term of the related debt instruments using the effective interest method. As of March 31, 1998, the unamortized debt premium was $17,542. As of March 31, 1998, debt, excluding unamortized debt premiums, consists of the following: Secured debt, varying interest rates from 7.01% to 10.39%, due November 1998 to January 2014......................... $592,569 Unsecured credit facility, variable interest at LIBOR plus 110 basis points, (6.79% at March 31, 1998) due November 2000...................................................... 312,000 -------- Total Debt........................................ $904,569 ========
F-47 AMB PROPERTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED, IN THOUSANDS, EXCEPT SHARE, UNIT, SQUARE FEET AND PERCENTAGE DATA) Secured debt generally requires monthly principal and interest payments. The secured debt is secured by deeds of trust or mortgages on certain Properties. All of the secured debt bears interest at fixed rates, except for one loan of $5,623 which bears interest at either LIBOR plus 275 basis points (8.44% at March 31, 1998) or prime plus 50 basis points, at the borrower's option. The secured debt has various financial and non-financial covenants. Additionally, certain of the secured debt is cross-collateralized. The weighted-average fixed interest rate on secured debt at March 31, 1998, was 8.01%. 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 12 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 of the undrawn funds based on the Company's credit rating. The Credit Facility has various financial and non-financial covenants. Interest capitalized related to construction projects for the three months ended March 31, 1998, was $1,253. There was no capitalized interest for periods prior to the Formation Transactions. The scheduled maturities of the secured debt as of March 31, 1998 are as follows: 1998...................................................... $ 53,712 1999...................................................... 10,965 2000...................................................... 14,427 2001...................................................... 38,582 2002...................................................... 63,675 Thereafter................................................ 411,208 -------- $592,569 ========
The 1998 maturities included $35,000 of secured debt that was assumed in connection with certain property acquisitions, and which was repaid in full subsequent to March 31, 1998. 4. MINORITY INTERESTS Minority interests in the Company represent the limited partnership interests in the Operating Partnership and interests held by certain third parties in 11 real estate joint ventures 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 all major operating decisions such as approval of budgets, selection of property managers and changes in financing. The following table sets forth the minority interest ownership held by certain joint ventures ("Minority Interest -- Joint Ventures") and the limited partnership interests' in the Operating Partnership ("Minority Interest -- Limited Partners") as of March 31, 1998. Minority Interest -- Joint Ventures....................... $ 52,867 Minority Interest -- Limited Partners..................... 70,896 -------- $123,763 ========
5. STOCKHOLDERS' EQUITY On March 9, 1998, the Company and the Operating Partnership declared a quarterly cash distribution of $0.3425 per share of common stock, payable on April 3, 1998, to stockholders and unitholders of record as of March 18, 1998. F-48 AMB PROPERTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED, IN THOUSANDS, EXCEPT SHARE, UNIT, SQUARE FEET AND PERCENTAGE DATA) 6. EARNINGS PER SHARE For purposes of calculating diluted earnings per share for the three months ended March 31, 1998, no adjustment to net income available to common stockholders was necessary, as the Company's only dilutive securities outstanding for such period were stock options issued under its stock incentive plan. The effect of the stock options was to increase weighted average shares outstanding by 410,223 for the three months ended March 31, 1998. Such dilution was computed using the treasury stock method. The Predecessor had no dilutive securities outstanding during the three months ended March 31, 1997. 7. PRO FORMA INFORMATION The following summary unaudited pro forma financial information for the three months ended March 31, 1997 has been prepared as if the Formation Transactions, the IPO (as described in Note 1) and property acquisitions and dispositions during the year ended December 31, 1997 had occurred on January 1, 1997. In the opinion of management, the pro forma financial information does not purport to present the consolidated results that would have occurred if the aforementioned transactions had been consummated on January 1, 1997, nor does it purport to present the consolidated results of operations for future periods.
FOR THE THREE MONTHS ENDED MARCH 31, 1997 -------------- Total revenues......................................... $ 68,622 Income from operations before minority interests....... 24,327 Net income available to common stockholders............ 23,342 Income Per Share of Common Stock Basic................................................ $ 0.27 ----------- Diluted.............................................. $ 0.27 ----------- Weighted Average Common Shares Outstanding Basic................................................ 85,874,513 =========== Diluted.............................................. 86,284,736 ===========
F-49 AMB PROPERTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED, IN THOUSANDS, EXCEPT SHARE, UNIT, SQUARE FEET AND PERCENTAGE DATA) 8. OPERATING PARTNERSHIP As of March 31, 1998, the Company owned a 95.9% general partner interest in the Operating Partnership. Therefore, the Company consolidates the Operating Partnership and records the remaining 4.1% limited partner interests as minority interests in the consolidated financial statements. The Operating Partnership commenced operations as a fully integrated real estate company in connection with the Formation Transactions. The following table sets forth summary financial information of the Operating Partnership as of and for the period from December 31, 1997 to March 31, 1998: Investments in real estate, net......................... $ 2,740,048 Total assets............................................ 2,798,190 Debt.................................................... 922,111 Partners' capital....................................... 1,741,601 Revenues................................................ 75,785 Income from operations before minority interest......... 29,188 Net income.............................................. 28,726 Net income per unit: Basic................................................. $ 0.32 Diluted............................................... $ 0.32 Weighted average units outstanding: Basic................................................. 88,428,969 Diluted............................................... 88,839,192
Following is a statement of partners' capital of the Operating Partnership for the three months ended March 31, 1998:
GENERAL PARTNER LIMITED PARTNERS ------------------------ -------------------- UNITS AMOUNT UNITS AMOUNT TOTAL ---------- ---------- --------- ------- ---------- December 31, 1997............... 85,874,513 $1,668,030 2,542,163 $49,368 $1,717,398 Contributions................... -- -- 1,106,444 25,760 25,760 Net income...................... -- 27,906 -- 820 28,726 Reallocation.................... -- 4,181 -- (4,181) -- Distributions................... -- (29,412) -- (871) (30,283) ---------- ---------- --------- ------- ---------- March 31, 1998.................. 85,874,513 $1,670,705 3,648,607 $70,896 $1,741,601 ========== ========== ========= ======= ==========
9. SUBSEQUENT EVENTS On April 2, 1998, the Operating Partnership filed a registration statement with the Securities and Exchange Commission for the issuance of senior unsecured notes with an aggregate principal amount of $350,000. If such transaction is consummated, the Company anticipates that it will use the net proceeds from the issuance to repay borrowings on the Credit Facility and for general working capital requirements. In April 1998, the Company repaid approximately $35,000 in assumed debt related to properties acquired during the quarter ended March 31, 1998. F-50 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of AMB Property Corporation: We have audited the accompanying consolidated balance sheets of AMB Property Corporation and subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AMB Property Corporation and subsidiaries as of December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to the financial statements is presented for purposes of complying with the Securities and Exchange Commission rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Francisco, California January 27, 1998 F-51 AMB PROPERTY CORPORATION CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1997 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1996 1997 ------ ---------- ASSETS Investments in real estate: Land and improvements..................................... $ -- $ 550,635 Buildings and improvements................................ -- 1,822,516 Construction in progress.................................. -- 69,848 ------ ---------- Total investments in real estate.................. -- 2,442,999 Accumulated depreciation and amortization................. -- (4,153) ------ ---------- Net investments in real estate.................... -- 2,438,846 Cash and cash equivalents................................... 3,093 39,968 Other assets................................................ 3,992 27,441 ------ ---------- Total assets...................................... $7,085 $2,506,255 ====== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Debt: Secured debt.............................................. $ -- $ 535,652 Unsecured credit facility................................. -- 150,000 ------ ---------- Total debt........................................ -- 685,652 Other liabilities........................................... 648 49,350 Payable to affiliates....................................... -- 38,071 ------ ---------- Total liabilities................................. 648 773,073 ------ ---------- Commitments and contingencies............................... -- -- Minority interests.......................................... 137 65,152 Stockholders' equity: Preferred stock of AMB Property Corporation, $.01 par value, 100,000,000 shares authorized, none issued or outstanding............................................ -- -- Common stock of AMB Property Corporation, $.01 par value, 500,000,000 shares authorized, 85,874,513 issued and outstanding............................................ -- 859 Additional paid-in capital of AMB Property Corporation.... -- 1,667,171 Common stock of Predecessor, no par value, 500,000,000 shares authorized, 5,181,450 issued and outstanding.... 1,349 -- Additional paid-in capital of Predecessor................. 1,298 -- Notes receivable from stockholders of Predecessor......... (869) -- Retained earnings......................................... 4,522 -- ------ ---------- Total stockholders' equity........................ 6,300 1,668,030 ------ ---------- Total liabilities and stockholders' equity........ $7,085 $2,506,255 ====== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-52 AMB PROPERTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1995 1996 1997 ---------- ---------- ----------- REVENUES Rental revenues..................................... $ -- $ -- $ 26,465 Investment management and other income.............. 16,865 23,991 29,597 ---------- ---------- ----------- Total revenues.............................. 16,865 23,991 56,062 OPERATING EXPENSES Property operating expenses......................... -- -- 5,312 Real estate taxes................................... -- -- 3,587 Interest............................................ -- -- 3,528 Depreciation and amortization....................... -- -- 4,195 General and administrative.......................... -- -- 1,197 Investment management expenses...................... 13,569 16,851 19,358 ---------- ---------- ----------- Total operating expenses.................... 13,569 16,851 37,177 ---------- ---------- ----------- Income from operations before minority interests................................. 3,296 7,140 18,885 Minority interests' share of net income............... (34) (137) (657) ---------- ---------- ----------- Net income available to common stockholders.............................. $ 3,262 $ 7,003 $ 18,228 ========== ========== =========== INCOME PER SHARE OF COMMON STOCK Basic............................................ $ 0.64 $ 1.38 $ 1.39 ========== ========== =========== Diluted.......................................... $ 0.64 $ 1.38 $ 1.38 ========== ========== =========== Weighted Average Common Shares Outstanding Basic............................................ 5,079,855 5,079,855 13,140,218 ========== ========== =========== Diluted.......................................... 5,079,855 5,079,855 13,168,036 ========== ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-53 AMB PROPERTY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (IN THOUSANDS)
1995 1996 1997 ------- ------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 3,262 $ 7,003 $ 18,228 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. -- -- 4,195 Straight-line rents....................................... -- -- (901) Amortization of debt premiums and financing costs......... -- -- (266) Minority interests' share of net income................... 34 137 657 Equity in income of AMB Investment Management............. -- -- (61) Changes in assets and liabilities: Other assets.............................................. (1,538) (249) (11,873) Other liabilities......................................... 429 (25) 2,301 ------- ------- --------- Net cash provided by operating activities......... 2,187 6,866 12,280 CASH FLOWS FROM INVESTING ACTIVITIES Additions to properties..................................... -- -- (222,497) Additions to buildings improvements and leasing costs....... -- -- (1,769) Additions to construction in progress....................... -- -- (2,606) Cash paid for property in Formation Transactions, net of cash acquired............................................. -- -- (5,935) ------- ------- --------- Net cash used for investing activities............ -- -- (232,807) CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock (net of $21,091 commission)........ -- -- 317,009 Borrowings on Credit Facility............................... 750 -- 150,000 Borrowings on secured debt.................................. -- -- 850 Repayment of Credit Facility................................ (750) -- (182,000) Payments on secured debt.................................... -- -- (516) Payment of financing fees................................... -- -- (900) Dividends paid to Predecessor stockholders.................. (2,925) (5,262) (16,404) Distributions paid to AMB Property Corporation stockholders.............................................. -- -- (11,506) Distributions to minority interests of Predecessor.......... -- (34) -- Principal payment of notes receivable from stockholders of Predecessor............................................... 56 318 869 ------- ------- --------- Net cash provided by (used in) financing activities...................................... (2,869) (4,978) 257,402 ------- ------- --------- Net increase (decrease) in cash and cash equivalents........ (682) 1,888 36,875 Cash and cash equivalents at beginning of period............ 1,887 1,205 3,093 ------- ------- --------- Cash and cash equivalents at end of period.................. $ 1,205 $ 3,093 $ 39,968 ======= ======= =========
The accompanying notes are an integral part of these consolidated financial statements. F-54 AMB PROPERTY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (IN THOUSANDS, EXCEPT SHARES)
COMMON STOCK NOTES ------------------- ADDITIONAL RECEIVABLE NUMBER OF PAID-IN RETAINED FROM SHARES AMOUNT CAPITAL EARNINGS STOCKHOLDERS TOTAL ---------- ------ ---------- -------- ------------ ---------- PREDECESSOR Balance at December 31, 1994........... 4,978,260 $ 699 $ 1,298 $ 2,444 $(593) $ 3,848 Net income........................... -- -- -- 3,262 -- 3,262 Dividends declared and paid.......... -- -- -- (2,925) -- (2,925) Principal payment of notes receivable from stockholders.................. -- -- -- -- 56 56 Issuance of common stock for notes... 101,595 343 -- -- (343) -- ---------- ------ ---------- -------- ----- ---------- Balance at December 31, 1995........... 5,079,855 1,042 1,298 2,781 (880) 4,241 Net income........................... -- -- -- 7,003 -- 7,003 Dividends declared and paid.......... -- -- -- (5,262) -- (5,262) Principal payment of notes receivable from stockholders.................. -- -- -- -- 318 318 Issuance of common stock for notes... 101,595 307 -- -- (307) -- ---------- ------ ---------- -------- ----- ---------- Balance at December 31, 1996........... 5,181,450 1,349 1,298 4,522 (869) 6,300 AMB PROPERTY CORPORATION Net income........................... -- -- -- 18,228 -- 18,228 Dividends declared and paid to Predecessor stockholders........... -- (990) (1,298) (14,116) -- (16,404) Principal payment of notes receivable from stockholders.................. -- -- -- -- 869 869 Exchange of Predecessor shares for shares of AMB Property Corporation, net................................ (434,834) (312) 312 -- -- -- Issuance of common stock for Properties......................... 65,022,185 651 1,369,740 -- -- 1,370,391 Issuance of common stock, net of Offering costs of $38,068.......... 16,100,000 161 299,871 -- -- 300,032 Issuance of restricted stock......... 5,712 -- 120 -- -- 120 ---------- ------ ---------- -------- ----- ---------- Distributions paid to AMB Property Corporation stockholders........... -- -- (2,872) (8,634) -- (11,506) ---------- ------ ---------- -------- ----- ---------- Balance at December 31, 1997........... 85,874,513 $ 859 $1,667,171 $ -- $ -- $1,668,030 ========== ====== ========== ======== ===== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-55 AMB PROPERTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND SQUARE FEET DATA) 1. ORGANIZATION AND FORMATION OF COMPANY AMB Property Corporation, a Maryland corporation (the "Company"), commenced operations as a fully integrated real estate company effective with the completion of its initial public offering (the "Offering") on November 26, 1997. The Company will elect to be taxed as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). The Company, through its controlling interest in its subsidiary AMB Property, L.P., a Delaware limited partnership (the "Operating Partnership"), is engaged in the ownership, operation, management, acquisition, renovation, expansion, and development of industrial properties and community shopping centers in target markets nationwide. Unless the context otherwise requires, the "Company" shall include AMB Property Corporation, the Operating Partnership and its controlled subsidiaries. The Company and the Operating Partnership were formed shortly before consummation of the Offering. AMB Institutional Realty 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. 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 units representing limited partnership interests 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 for 69,768,801 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 Offering of 16,100,000 shares of Common Stock, $0.01 par value per share (the "Common Stock") for $21.00 per share, resulting in gross offering proceeds of approximately $338,100. Net of underwriters' commission and offering costs aggregating $38,068, the Company received approximately $300,032 in proceeds from the Offering. The net proceeds of the Offering were used to repay indebtedness, to purchase interests from certain investors who elected not to receive shares or units in connection with the Formation Transactions, to fund property acquisitions, and for general corporate purposes, including working capital. As of December 31, 1997, the Company owned an approximate 97.1% general partner interest in the Operating Partnership. The remaining 2.9% limited partner interest is owned by unaffiliated 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 management and control of the Operating Partnership. In connection with the Formation Transactions, the Operating Partnership formed AMB Investment Management Corporation, a Maryland corporation ("AMB Investment Management"). The Operating Partnership purchased 100% of AMB Investment Management's non-voting preferred stock (representing a 95% economic interest). Certain executive officers of the Company collectively purchased 100% of the Investment Management Subsidiary's voting common stock (representing a 5% economic interest therein). The Operating Partnership accounts for its investment in AMB Investment Management using the equity method of accounting. 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. F-56 AMB PROPERTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND SQUARE FEET DATA) As of December 31, 1997, the Company owned 37.3 million rentable square feet of industrial properties (the "Industrial Properties"), principally warehouse distribution properties, that were 95.7% leased and 6.2 million rentable square feet of retail properties (the "Retail Properties"), principally grocer-anchored community shopping centers, that were 96.1% leased. The Industrial Properties and the Retail Properties collectively are referred to as the "Properties." 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES These financial statements have been prepared in accordance with generally accepted accounting principles using the accrual method of accounting. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the financial position, results of operations and cash flows of the Company, its wholly owned qualified REIT subsidiaries, the Operating Partnership, and eight joint ventures (the "Joint Ventures") in which the Company has a controlling interest. Third-party equity interests in the Operating Partnership and the Joint Ventures are reflected as minority interests in the consolidated financial statements. All significant intercompany amounts have been eliminated. BASIS OF PRESENTATION The consolidated financial statements of the Company for 1997 include the results of operations of the Company, including property operations for the period from November 26, 1997 (the commencement of operations as a fully integrated real estate company) to December 31, 1997 and the results of the Company's Predecessor, an investment manager, for the period from January 1, 1997 to November 25, 1997. INVESTMENTS IN REAL ESTATE Investments in real estate are stated at depreciated cost and are reviewed for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying amount of a property may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges)are less than the carrying amount of the property. To the extent an impairment has occurred, the excess of the carrying amount of the property over its estimated fair value will be charged to income. As of December 31, 1997, there were no impairments of the carrying values of the Properties. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the investments. The estimated lives are as follows: Land improvements................................... 5 to 40 years Buildings and improvements.......................... 5 to 40 years Tenant improvements and leasing costs............... Term of the related lease
The cost of buildings and improvements includes the purchase price of the property or interest in property, legal fees and acquisition costs and interest, property taxes, and other costs incurred during the period of construction. F-57 AMB PROPERTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND SQUARE FEET DATA) Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations or betterments that extend the economic useful life of assets are capitalized. Project costs directly associated with the development and construction of a real estate project are capitalized as construction in progress. In addition, interest, real estate taxes and other costs are capitalized during the construction period. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash held in financial institutions and other highly liquid short-term investments with original maturities of three months or less. Cash and cash equivalents as of December 31, 1997 include restricted cash of $8,074, which represents amounts held in escrow in connection with property purchases and capital improvements. DEFERRED FINANCING Costs incurred in connection with financing are capitalized and amortized to interest expense on a straight-line basis (which approximates the effective interest method) over the term of the related loan. As of December 31, 1997, deferred financing fees were $871, net of accumulated amortization of $29. Such amounts are included in Other Assets on the consolidated balance sheet. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments include short-term investments, accounts receivable, accounts payable, accrued expenses, construction loans payable, mortgage debt, secured debt, unsecured notes payable and an unsecured credit facility. The fair value of these instruments approximates its carrying or contract values. DEBT PREMIUMS In connection with the Formation Transactions, the Company assumed certain secured debt with an aggregate principal value of $517,031 and a fair value of $535,613. The difference between the principal value and the fair value was recorded as a debt premium. The debt premium is being amortized into interest expense over the term of the related debt instrument using the effective interest method. As of December 31, 1997, the unamortized debt premium was $18,286. MINORITY INTERESTS Minority interests in the Company represent the limited partnership interests in the Operating Partnership and interests held by certain third parties in eight real estate joint ventures that are consolidated for financial reporting purposes. Such investments are consolidated because (i) the Company owns a majority owner interest, or (ii) the Company has significant control over the entity through a 50% or greater ownership interest combined with the ability to control major operating decisions such as approval of budgets, selection of property managers and change in financing. F-58 AMB PROPERTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND SQUARE FEET DATA) The following table sets forth the minority interest ownership held by certain joint ventures ("Minority Interest -- Joint Ventures") and the limited partnership interests in the Operating Partnership ("Minority Interest -- Limited Partners") as of December 31, 1997. Minority Interest -- Joint Ventures................ $15,784 Minority Interest -- Limited Partners.............. 49,368 ------- $65,152 =======
REVENUES The Company, as a lessor, retains substantially all of the benefits and risks of ownership of the Properties and accounts for its leases as operating leases. Rental revenues are recognized on a straight-line basis over the term of the leases. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenue in the period the applicable expenses are incurred. INVESTMENT MANAGEMENT AND OTHER INCOME Investment management income consists primarily of professional fees generated from the Predecessors' real estate investment management services for periods prior to the Formation Transactions and the Company's equity in the earnings of AMB Investment Management for periods subsequent to the Formation Transactions. Other income consists primarily of interest income on cash and cash equivalents. INVESTMENT MANAGEMENT EXPENSE Investment management expense represents the operating expenses of the Predecessor for periods prior to November 26, 1997 and consists of salaries and benefits and other management related expenses. EARNINGS PER SHARE For purposes of calculating diluted earnings per share for the year ended December 31, 1997, no adjustment to net income available to common stockholders was necessary, as the Company's only dilutive securities outstanding for such period were stock options issued under its stock incentive plan. The effect of the stock options was to increase weighted average shares outstanding by 27,818 shares for the year ended December 31, 1997. Such dilution was computed using the treasury stock method. The Predecessor had no dilutive securities outstanding during the years ended December 31, 1995 and 1996. RECLASSIFICATIONS The consolidated financial statements for prior periods have been reclassified to conform with current classifications with no effect on results of operations. FUTURE ACCOUNTING PRONOUNCEMENTS In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement, effective for financial statements for periods beginning after December 15, 1997, requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Generally, information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Company expects to adopt this SFAS in 1998 to the extent applicable. F-59 AMB PROPERTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND SQUARE FEET DATA) 3. TRANSACTIONS WITH AFFILIATES As discussed in "Organization and Formation of the Company," the Operating Partnership formed AMB Investment Management (which conducts its operations through the Investment Management Partnership) for the purpose of carrying on the operations of the Predecessor. The Company and the Investment Management Partnership have an agreement that allows for the sharing of certain costs and employees. Additionally, the Company provides the Investment Management Partnership with certain acquisition-related services. As part of the Formation Transactions, the Operating Partnership was required to pay an amount equal to the net working capital balances at November 25, 1997 of the Predecessor and the acquired properties to the owners of said entities. As of December 31, 1997, the Company owed approximately $37,808 to owners related to these working capital distributions. Such amount is included in Payable to affiliates on the consolidated balance sheet and was paid subsequent to year-end. The Company and the Investment Management Partnership share common office space under lease obligations of an affiliate of the Predecessor. Such lease obligations are charged to the Company and the Investment Management Partnership at cost. For the period ended December 31, 1995, 1996 and 1997, the Company paid approximately $435, $510 and $700, respectively for occupancy costs related to the lease obligations of the affiliate. 4. DEBT As of December 31, 1997, debt, excluding unamortized debt premiums, consists of the following: Secured debt, varying coupon interest rates from 7.01% to 10.38%, due November 1998 to December 2008............................ $ 517,366 Unsecured credit facility, variable interest at LIBOR plus 110 basis points (7.10% at December 31, 1997) due November 2000...................... 150,000 ---------- Total Debt........................................ $ 667,366 ==========
Secured debt generally requires monthly principal and interest payments. The secured debt is secured by deeds of trust and mortgages on 48 Properties. The carrying value of real estate investments pledged as collateral under deeds of trust and mortgages for the secured debt is $1,049,003 as of December 31, 1997. All of the secured debt bears interest at fixed rates, except for one loan which bears interest at either LIBOR plus 275 basis points (8.75% at December 31, 1997) or prime plus 50 basis points, at the borrower's option. The secured debt has various financial and non-financial covenants. Additionally, certain of the secured debt is cross-collateralized. The Company has a $500,000 unsecured revolving credit agreement (the "Credit Facility") with Morgan Guaranty Trust Company of New York as agent, and a syndicate of 12 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 of the undrawn funds based on the Company's credit rating. The Credit Facility has various financial and non-financial covenants. The weighted-average fixed interest rate on secured debt at December 31, 1997 was 7.82%. Interest capitalized related to construction projects for the period from November 26, 1997 to December 31, 1997 was $448. There was no capitalized interest for periods prior to the Formation Transactions. F-60 AMB PROPERTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND SQUARE FEET DATA) The scheduled maturities of the secured debt as of December 31, 1997 are as follows: 1998...................................................... $ 19,390 1999...................................................... 9,666 2000...................................................... 11,862 2001...................................................... 35,654 2002...................................................... 43,967 Thereafter................................................ 396,827 -------- $517,366 ========
5. LEASING ACTIVITY Future minimum rental income due under noncancelable leases in effect at December 31, 1997 with tenants is as follows: 1998..................................................... $ 214,400 1999..................................................... 188,926 2000..................................................... 160,592 2001..................................................... 128,241 2002..................................................... 101,733 Thereafter............................................... 459,070 ---------- $1,252,962 ==========
In addition to minimum rental payments, certain tenants pay reimbursements for their pro rata share of specified operating expenses, which amounted to $5,267 for the period from November 26, 1997 to December 31, 1997. These amounts are included as rental income and operating expenses in the accompanying consolidated statements of operations. Certain of the leases also provide for the payment of additional rent based on a percentage of the tenant's revenues. Some leases contain options to renew. No individual tenant accounts for greater than 2% of rental revenues. 6. INCOME TAXES The Company intends to be taxed as a REIT under the Code for the fiscal year ended December 31, 1997. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 95% of its taxable income. It is management's intention to adhere to these requirements and maintain the Company's REIT status. As a REIT, the Company generally will not be subject to corporate level federal income tax on net income it distributes currently to its stockholders. As such, no provision for federal income taxes has been included in the accompanying consolidated financial statements. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income. For federal income tax purposes, cash distributions paid to stockholders may be characterized as ordinary income, return of capital (generally non-taxable) or capital gains. On December 8, 1997, the Company declared a distribution of $0.134 per common share, payable on December 29, 1997 to stockholders of record on December 18, 1997. The distribution covered the period from November 26, 1997 through December 31, 1997. For Federal income tax purposes, 100% of the distribution was ordinary income. F-61 AMB PROPERTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND SQUARE FEET DATA) Prior to the Merger, the Predecessor conducted its business as an S corporation, and therefore was exempt from federal income taxes under Subchapter S of the Code. Under this election federal income taxes were paid by the stockholders of the Predecessor. 7. STOCK INCENTIVE PLAN AND 401(K) PLAN STOCK INCENTIVE PLAN In November 1997, the Company established a Stock Option and Incentive Plan (the "Stock Incentive Plan") for the purpose of attracting and retaining eligible officers, directors and employees. The Company has reserved for issuance 5,750,000 shares of Common Stock under the Stock Incentive Plan. In November 1997, the Company granted 3,153,750 non-qualified options to certain directors, officers and employees. Each option is exchangeable for one share of the Common Stock and has an exercise price equal to $21.00, the market price at the date of grant. The options have a 10-year term and vest pro rata in annual installments over a four-year period from the date of grant. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its Stock Incentive Plan. Opinion 25 measures compensation cost using the intrinsic value based method of accounting. Under this method, compensation cost is the excess, if any, of the quoted market price of the stock at the date of grant over the amount an employee must pay to acquire the stock. Accordingly, no compensation cost has been recognized for the Stock Incentive Plan, as the option price for all option grants in 1997 was equal to the market price as of the date of grant. However, if the Company had measured compensation cost using the fair value based method prescribed in SFAS 123, "Accounting for Stock-Based Compensation," the impact on pro forma net income and earnings per share would not have been material. The fair value of each option grant was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1997: dividend yield of 6.52%, expected volatility of 18.75%, risk-free interest rate of 5.86%, and expected lives of 10 years. Following is a summary of the option activity for the year ended December 31, 1997:
SHARES UNDER REMAINING OPTION EXERCISE CONTRACTUAL (000) PRICE LIFE -------- -------- ----------- Outstanding, 11/25/97................................. -- -- -- Granted............................................... 3,154 $21.0 10 years Exercised............................................. -- -- -- Forfeited............................................. (10) -- -- ------ ----- -------- Outstanding, 12/31/97................................. 3,144 $21.0 10 years ====== ===== ======== Options exercisable at year-end....................... 184 $21.0 ====== ===== Fair value of options granted during the year......... $ 2.28 ======
RESTRICTED STOCK In 1997, the Company sold 5,712 restricted shares of its Common Stock to certain independent directors for $0.01 per share in cash. 401(K) PLAN In November 1997, the Company established a Section 401(k) Savings/Retirement Plan (the "Section 401(k) Plan"), which is a continuation of the Section 401(k) plan of the Predecessor, to cover eligible employees of the Company and any designated affiliate. The Section 401(k) Plan permits eligible employees F-62 AMB PROPERTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND SQUARE FEET DATA) of the Company to defer up to 10% of their annual compensation, subject to certain limitations imposed by the Code. The employees' elective deferrals are immediately vested and non-forfeitable upon contribution to the Section 401(k) Plan. The Company matches the employee contributions to the Section 401(k)Plan in an amount equal to 50% of the first 3.5% of annual compensation deferred by each employee and may also make discretionary contributions to the plan. As of December 31, 1997, the Company's accrual for 401(k) match was $140. Such amount was included in Other liabilities on the consolidated balance sheet. Except for the Section 401(k) Plan, the Company offers no other post-retirement or post-employment benefits to its employees. 8. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------- 1995 1996 1997 ---- ---- ---------- Cash paid for interest................................... $-- $-- $ 2,509 === === ========== Non-cash transactions: Acquisitions of properties in Formation Transactions... $-- $-- $2,216,137 Assumption of debt..................................... -- -- (717,613) Cash acquired.......................................... -- -- (43,978) Other assumed assets and liabilities................... -- -- (13,862) Minority interest...................................... -- -- (64,358) Shares issued.......................................... -- -- (1,370,391) --- --- ---------- Net cash paid, net of cash acquired...................... $-- $-- $ 5,935 === === ==========
9. PRO FORMA INFORMATION (UNAUDITED) The following unaudited pro forma condensed consolidated statement of operations has been prepared as if the Formation Transactions, the Offering (as described in Note 1) and certain property acquisitions and dispositions in 1997 had occurred on January 1, 1996. In the opinion of management, the pro forma condensed consolidated statement of operations does not purport to present the consolidated results that would have occurred if the aforementioned transactions had been consummated on January 1, 1996, nor does it purport to present the consolidated results of operations for future periods.
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ Total revenues............................................ $ 265,550 $ 284,674 Income from operations before minority interests.......... 90,694 103,903 Net income available to common stockholders............... 87,313 99,508 INCOME PER SHARE OF COMMON STOCK Basic................................................... $ 1.02 $ 1.16 =========== =========== Diluted................................................. $ 1.01 $ 1.15 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic................................................... 85,874,513 85,874,513 =========== =========== Diluted................................................. 86,156,556 86,156,556 =========== ===========
F-63 AMB PROPERTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND SQUARE FEET DATA) 10. COMMITMENTS AND CONTINGENCIES LITIGATION In the normal course of business, from time to time, the Company is involved in legal actions relating to the ownership and operations of its Properties. In management's opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a materially adverse effect on the consolidated financial position, results of operations, or cash flows of the Company. ENVIRONMENTAL MATTERS The Company follows the policy of monitoring its Properties for the presence of hazardous or toxic substances. The Company is not aware of any environmental liability with respect to the Properties that would have a material adverse effect on the Company's business, assets or results of operations. There can be no assurance that such a material environmental liability does not exist. The existence of any such material environmental liability could have a material adverse effect on the Company's results of operations and cash flow. GENERAL UNINSURED LOSSES The Company carries comprehensive liability, fire, flood, environmental, extended coverage and rental loss insurance with policy specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of extraordinary losses that may be either uninsurable or not economically insurable. Should an uninsured loss occur, the Company could lose its investment in, and anticipated profits and cash flows from, a property. Certain of the Properties are located in areas that are subject to earthquake activity; the Company has therefore obtained limited earthquake insurance. 11. OPERATING PARTNERSHIP As of December 31, 1997 the Company owned a 97.1% general partner interest in the Operating Partnership. Therefore, the Company consolidates the Operating Partnership and records the remaining 2.9% limited partner interests as minority interest in the consolidated financial statements. The Operating Partnership commenced operations as a fully intergrated real estate company on November 26, 1997 upon completion of the Formation Transactions. For financial reporting purposes, AMB Institutional Realty Advisors, Inc. is not considered to be the predecessor of the Operating Partnership. The following table sets forth summary financial information of the Operating Partnership as of and for the period from November 26, 1997 to December 31, 1997 (in thousands, except unit data): Investments in real estate, net............................. $2,438,846 Total assets................................................ 2,506,255 Debt........................................................ 685,652 Partners' capital........................................... 1,717,398 Revenues.................................................... 27,110 Income from operations before minority interest............. 9,291 Net income.................................................. 9,174 Total units................................................. 88,416,676 Net income per unit......................................... $0.10
F-64 AMB PROPERTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND SQUARE FEET DATA) Following is a statement of partners' capital of the Operating Partnership from November 26, 1997 (inception) to December 31, 1997 (in thousands, except unit data):
GENERAL PARTNER LIMITED PARTNERS ----------------------- ------------------- UNITS AMOUNT UNITS AMOUNT TOTAL ---------- ---------- --------- ------- ---------- November 25, 1997.... -- $ -- -- $ -- $ -- Contributions...... 85,874,513 1,670,902 2,542,163 49,169 1,720,071 Net income......... -- 8,634 -- 540 9,174 Distributions...... -- (11,506) -- (341) (11,847) ---------- ---------- --------- ------- ---------- December 31, 1997.... 85,874,513 $1,668,030 2,542,163 $49,368 $1,717,398 ========== ========== ========= ======= ==========
F-65 AMB PROPERTY CORPORATION SCHEDULE III CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1997
COSTS CAPITALIZED SUBSEQUENT TO INITIAL COST TO COMPANY ACQUISITION ----------------------- --------------- PROPERTY LOCATION TYPE ENCUMBRANCES(1) LAND BUILDING LAND BUILDING -------- -------- ---- --------------- --------- ----------- ---- -------- 72nd Avenue................ WA IND $ -- $ 1,298 $ 4,008 $ -- $ -- Acer Distribution Center... CA IND -- 3,146 9,479 -- -- Activity Distribution Center................... CA IND 5,400 3,736 11,248 -- -- Alvarado Business Center... CA IND -- 7,906 23,757 -- 75 Amwiler-Gwinnett Industrial Portfolio................ GA IND 14,360 6,641 19,964 -- 4 Ardenwood Corporate Park... CA IND 10,339 7,321 22,002 -- -- Artesia Industrial Portfolio................ CA IND 54,742 23,860 71,620 -- 907 Atlanta South.............. GA IND -- 6,550 19,691 -- -- Beacon Industrial Park..... FL IND -- 10,466 31,437 -- -- Belden Avenue.............. IL IND -- 5,019 15,186 -- -- Bensenville................ IL IND 44,593 20,799 62,438 -- 19 Blue Lagoon................ FL IND 11,916 4,945 14,875 -- 23 Boulden.................... DE IND -- 2,807 8,462 -- 36 Brightseat Road............ MD IND -- 1,557 4,841 -- -- Britannia Business Park.... FL IND -- 3,199 9,637 -- 37 Cabot Business Park........ MA IND -- 16,017 48,091 -- 7 Chancellor................. FL IND 2,987 1,587 4,802 -- -- Chicago Industrial......... IL IND 3,522 1,574 4,761 -- -- Commerce................... CA IND -- 2,197 6,653 -- -- Corporate Square........... MN IND -- 4,024 12,113 -- 16 Crossroads Industrial...... IL IND -- 2,583 7,789 -- -- Dixie Highway.............. KY IND -- 1,700 5,149 -- -- Dock's Corner.............. NJ IND -- 2,050 6,190 -- -- Dock's Corner II........... NJ IND -- 2,272 6,917 -- -- Dowe Industrial............ CA IND -- 2,665 8,034 -- -- East Walnut Drive.......... CA IND -- 964 2,918 -- -- Elk Grove Village Industrial............... IL IND -- 7,713 23,179 -- 8 Empire Drive............... KY IND -- 1,590 4,815 -- -- Executive Drive............ IL IND -- 1,399 4,236 -- -- Fairway Drive Industrial... CA IND -- 1,954 5,479 -- -- GROSS AMOUNT CARRIED AT 12/31/97 ---------------------------------- YEAR OF DEPRECIABLE TOTAL ACCUMULATED CONSTRUCTION OR LIFE PROPERTY LAND BUILDING COSTS(2) DEPRECIATION ACQUISITION (YEARS) -------- -------- ---------- ---------- ------------ --------------- ----------- 72nd Avenue................ $ 1,298 $ 4,008 $ 5,306 $ 9 1997 5-40 Acer Distribution Center... 3,146 9,479 12,625 22 1997 5-40 Activity Distribution Center................... 3,736 11,248 14,984 26 1997 5-40 Alvarado Business Center... 7,906 23,832 31,738 54 1997 5-40 Amwiler-Gwinnett Industrial Portfolio................ 6,641 19,968 26,609 46 1997 5-40 Ardenwood Corporate Park... 7,321 22,002 29,323 50 1997 5-40 Artesia Industrial Portfolio................ 23,860 72,527 96,387 165 1997 5-40 Atlanta South.............. 6,550 19,691 26,241 45 1997 5-40 Beacon Industrial Park..... 10,466 31,437 41,903 72 1997 5-40 Belden Avenue.............. 5,019 15,186 20,205 35 1997 5-40 Bensenville................ 20,799 62,457 83,256 143 1997 5-40 Blue Lagoon................ 4,945 14,898 19,843 34 1997 5-40 Boulden.................... 2,807 8,498 11,305 19 1997 5-40 Brightseat Road............ 1,557 4,841 6,398 11 1997 5-40 Britannia Business Park.... 3,199 9,674 12,873 22 1997 5-40 Cabot Business Park........ 16,017 48,098 64,115 110 1997 5-40 Chancellor................. 1,587 4,802 6,389 11 1997 5-40 Chicago Industrial......... 1,574 4,761 6,335 11 1997 5-40 Commerce................... 2,197 6,653 8,850 15 1997 5-40 Corporate Square........... 4,024 12,129 16,153 28 1997 5-40 Crossroads Industrial...... 2,583 7,789 10,372 18 1997 5-40 Dixie Highway.............. 1,700 5,149 6,849 12 1997 5-40 Dock's Corner.............. 2,050 6,190 8,240 14 1997 5-40 Dock's Corner II........... 2,272 6,917 9,189 16 1997 5-40 Dowe Industrial............ 2,665 8,034 10,699 18 1997 5-40 East Walnut Drive.......... 964 2,918 3,882 7 1997 5-40 Elk Grove Village Industrial............... 7,713 23,187 30,900 53 1997 5-40 Empire Drive............... 1,590 4,815 6,405 11 1997 5-40 Executive Drive............ 1,399 4,236 5,635 10 1997 5-40 Fairway Drive Industrial... 1,954 5,479 7,433 13 1997 5-40
F-66
COSTS CAPITALIZED SUBSEQUENT TO INITIAL COST TO COMPANY ACQUISITION ----------------------- --------------- PROPERTY LOCATION TYPE ENCUMBRANCES(1) LAND BUILDING LAND BUILDING -------- -------- ---- --------------- --------- ----------- ---- -------- Hampden Road............... MA IND -- 2,200 6,678 -- -- Harvest Business Park...... WA IND 3,826 2,371 7,153 -- 51 Hewlett Packard Distribution............. CA IND 3,437 1,668 5,043 -- -- Holton Drive............... KY IND -- 2,633 7,972 -- -- Industrial Drive........... OH IND -- 1,743 5,410 -- -- International Multifoods... CA IND -- 1,613 4,879 -- -- Itasca Industrial Portfolio................ IL IND -- 6,416 19,289 -- 213 Janitrol................... OH IND -- 1,797 5,576 -- -- Jasmine Avenue............. CA IND -- 3,157 9,562 -- -- Kent Centre................ WA IND -- 3,042 9,165 -- 23 Kingsport Industrial Park..................... WA IND 18,161 7,919 23,798 -- 96 L.A. County Industrial Portfolio (3)............ CA IND -- 11,128 33,423 -- 17 Lake Michigan Industrial Portfolio................ IL IND -- 2,886 8,699 -- -- Laurelwood................. CA IND -- 2,750 8,538 -- -- Lincoln Industrial Center................... TX IND -- 671 2,052 -- -- Linder Skokie.............. IL IND -- 2,938 8,854 -- -- Lisle Industrial........... IL IND -- 2,290 6,911 -- -- Lonestar................... TX IND 17,773 7,129 21,428 -- -- McDaniel Drive............. TX IND -- 1,537 4,659 -- -- Melrose Park............... IL IND -- 2,936 9,190 -- -- Metric Center.............. TX IND -- 10,968 32,944 -- 45 Mid-Atlantic Business Center................... PA IND -- 6,581 19,783 -- 36 Milmont Page............... CA IND -- 3,201 9,642 -- 94 Minneapolis Distribution Portfolio................ MN IND -- 7,018 21,093 -- 95 Minneapolis Industrial IV....................... MN IND 8,346 4,938 14,854 -- 42 Minneapolis Industrial V... MN IND 7,952 4,426 13,317 -- 46 Moffett Business Center.... CA IND 12,883 5,892 17,716 -- -- Moffett Park R&D Portfolio................ CA IND -- 14,807 44,462 -- 598 N. Glenville Avenue........ TX IND -- 1,094 3,316 -- -- Norcross/ Brookhollow Portfolio................ GA IND -- 3,721 11,180 -- -- Northpointe Commerce....... CA IND -- 1,773 5,358 -- -- Northwest Distribution Center................... WA IND -- 2,234 6,743 -- 7 O'Hare Industrial Portfolio................ IL IND -- 7,357 22,112 -- 156 Pacific Business Center.... CA IND 10,679 5,417 16,291 -- 16 GROSS AMOUNT CARRIED AT 12/31/97 ---------------------------------- YEAR OF DEPRECIABLE TOTAL ACCUMULATED CONSTRUCTION OR LIFE PROPERTY LAND BUILDING COSTS(2) DEPRECIATION ACQUISITION (YEARS) -------- -------- ---------- ---------- ------------ --------------- ----------- Hampden Road............... 2,200 6,678 8,878 15 1997 5-40 Harvest Business Park...... 2,371 7,204 9,575 16 1997 5-40 Hewlett Packard Distribution............. 1,668 5,043 6,711 12 1997 5-40 Holton Drive............... 2,633 7,972 10,605 18 1997 5-40 Industrial Drive........... 1,743 5,410 7,153 12 1997 5-40 International Multifoods... 1,613 4,879 6,492 11 1997 5-40 Itasca Industrial Portfolio................ 6,416 19,502 25,918 44 1997 5-40 Janitrol................... 1,797 5,576 7,373 13 1997 5-40 Jasmine Avenue............. 3,157 9,562 12,719 22 1997 5-40 Kent Centre................ 3,042 9,188 12,230 21 1997 5-40 Kingsport Industrial Park..................... 7,919 23,894 31,813 54 1997 5-40 L.A. County Industrial Portfolio (3)............ 11,128 33,440 44,568 76 1997 5-40 Lake Michigan Industrial Portfolio................ 2,886 8,699 11,585 20 1997 5-40 Laurelwood................. 2,750 8,538 11,288 19 1997 5-40 Lincoln Industrial Center................... 671 2,052 2,723 5 1997 5-40 Linder Skokie.............. 2,938 8,854 11,792 20 1997 5-40 Lisle Industrial........... 2,290 6,911 9,201 16 1997 5-40 Lonestar................... 7,129 21,428 28,557 49 1997 5-40 McDaniel Drive............. 1,537 4,659 6,196 11 1997 5-40 Melrose Park............... 2,936 9,190 12,126 21 1997 5-40 Metric Center.............. 10,968 32,989 43,957 75 1997 5-40 Mid-Atlantic Business Center................... 6,581 19,819 26,400 45 1997 5-40 Milmont Page............... 3,201 9,736 12,937 22 1997 5-40 Minneapolis Distribution Portfolio................ 7,018 21,188 28,206 48 1997 5-40 Minneapolis Industrial IV....................... 4,938 14,896 19,834 34 1997 5-40 Minneapolis Industrial V... 4,426 13,363 17,789 30 1997 5-40 Moffett Business Center.... 5,892 17,716 23,608 40 1997 5-40 Moffett Park R&D Portfolio................ 14,807 45,060 59,867 101 1997 5-40 N. Glenville Avenue........ 1,094 3,316 4,410 8 1997 5-40 Norcross/ Brookhollow Portfolio................ 3,721 11,180 14,901 26 1997 5-40 Northpointe Commerce....... 1,773 5,358 7,131 12 1997 5-40 Northwest Distribution Center................... 2,234 6,750 8,984 15 1997 5-40 O'Hare Industrial Portfolio................ 7,357 22,268 29,625 51 1997 5-40 Pacific Business Center.... 5,417 16,307 21,724 37 1997 5-40
F-67
COSTS CAPITALIZED SUBSEQUENT TO INITIAL COST TO COMPANY ACQUISITION ----------------------- --------------- PROPERTY LOCATION TYPE ENCUMBRANCES(1) LAND BUILDING LAND BUILDING -------- -------- ---- --------------- --------- ----------- ---- -------- Pagemill & Dillworth....... TX IND -- 1,877 5,690 -- -- Patuxent................... MD IND -- 1,696 5,127 -- -- Penn James Office/Warehouse......... MN IND -- 1,991 6,013 -- 103 Pennsy Drive............... MD IND -- 657 2,011 -- 203 Presidents Drive........... FL IND -- 1,124 3,446 -- -- Presidents Drive II........ FL IND -- 2,563 7,861 -- -- Preston Court.............. MD IND -- 2,313 7,192 -- -- Production Drive........... KY IND -- 425 1,286 -- -- Santa Barbara Court........ MD IND -- 1,617 5,029 -- -- Shiloh Road................ TX IND -- 1,813 5,495 -- -- Silicon Valley R&D Portfolio................ CA IND -- 8,024 24,205 -- -- South Bay Industrial....... CA IND 20,791 14,992 45,016 -- 465 Southfield................. GA IND -- 7,073 21,259 -- 106 Stadium Business Park...... CA IND 4,909 3,768 11,345 -- 48 Systematics................ CA IND -- 911 2,773 -- -- Texas Industrial Portfolio (4)...................... TX IND -- 10,806 32,499 -- 218 Twin Cities................ MN IND -- 4,873 14,638 -- -- Two South Middlesex........ NJ IND -- 2,247 6,781 -- -- Valwood.................... TX IND 4,351 1,983 5,989 -- 12 Valwood Parkway II......... TX IND -- 2,219 6,729 -- -- Viscount................... FL IND -- 984 3,016 -- -- Weigman Road............... CA IND -- 1,563 4,852 -- -- West Kiest................. TX IND -- 1,395 4,231 -- -- West North Carrier......... TX IND 3,522 1,375 4,165 -- 85 Windsor Court.............. IL IND -- 766 2,338 -- -- Yosemite Drive............. CA IND -- 2,350 7,297 -- -- Zanker/Charcot Industrial............... CA IND -- 5,282 15,887 -- 202 Applewood Village Shopping Center................... CO RET -- 6,716 26,903 -- -- Arapahoe Village Shopping Center................... CO RET 11,083 3,795 15,220 -- -- Aurora Marketplace......... WA RET -- 3,243 13,013 -- 4 BayHill Shopping Center.... CA RET -- 2,844 11,417 -- 64 Brentwood Commons.......... IL RET 5,460 1,810 7,280 -- 1 Civic Center Plaza......... IL RET 13,689 5,113 20,492 -- 42 Corbins Corner Shopping Center................... CT RET -- 6,438 25,791 -- 3 GROSS AMOUNT CARRIED AT 12/31/97 ---------------------------------- YEAR OF DEPRECIABLE TOTAL ACCUMULATED CONSTRUCTION OR LIFE PROPERTY LAND BUILDING COSTS(2) DEPRECIATION ACQUISITION (YEARS) -------- -------- ---------- ---------- ------------ --------------- ----------- Pagemill & Dillworth....... 1,877 5,690 7,567 13 1997 5-40 Patuxent................... 1,696 5,127 6,823 12 1997 5-40 Penn James Office/Warehouse......... 1,991 6,116 8,107 14 1997 5-40 Pennsy Drive............... 657 2,214 2,871 5 1997 5-40 Presidents Drive........... 1,124 3,446 4,570 8 1997 5-40 Presidents Drive II........ 2,563 7,861 10,424 18 1997 5-40 Preston Court.............. 2,313 7,192 9,505 16 1997 5-40 Production Drive........... 425 1,286 1,711 3 1997 5-40 Santa Barbara Court........ 1,617 5,029 6,646 11 1997 5-40 Shiloh Road................ 1,813 5,495 7,308 13 1997 5-40 Silicon Valley R&D Portfolio................ 8,024 24,205 32,229 55 1997 5-40 South Bay Industrial....... 14,992 45,481 60,473 103 1997 5-40 Southfield................. 7,073 21,365 28,438 49 1997 5-40 Stadium Business Park...... 3,768 11,393 15,161 26 1997 5-40 Systematics................ 911 2,773 3,684 6 1997 5-40 Texas Industrial Portfolio (4)...................... 10,806 32,717 43,523 74 1997 5-40 Twin Cities................ 4,873 14,638 19,511 33 1997 5-40 Two South Middlesex........ 2,247 6,781 9,028 15 1997 5-40 Valwood.................... 1,983 6,001 7,984 14 1997 5-40 Valwood Parkway II......... 2,219 6,729 8,948 15 1997 5-40 Viscount................... 984 3,016 4,000 7 1997 5-40 Weigman Road............... 1,563 4,852 6,415 11 1997 5-40 West Kiest................. 1,395 4,231 5,626 10 1997 5-40 West North Carrier......... 1,375 4,250 5,625 10 1997 5-40 Windsor Court.............. 766 2,338 3,104 5 1997 5-40 Yosemite Drive............. 2,350 7,297 9,647 17 1997 5-40 Zanker/Charcot Industrial............... 5,282 16,089 21,371 36 1997 5-40 Applewood Village Shopping Center................... 6,716 26,903 33,619 61 1997 5-40 Arapahoe Village Shopping Center................... 3,795 15,220 19,015 35 1997 5-40 Aurora Marketplace......... 3,243 13,017 16,260 30 1997 5-40 BayHill Shopping Center.... 2,844 11,481 14,325 26 1997 5-40 Brentwood Commons.......... 1,810 7,281 9,091 17 1997 5-40 Civic Center Plaza......... 5,113 20,534 25,647 47 1997 5-40 Corbins Corner Shopping Center................... 6,438 25,794 32,232 59 1997 5-40
F-68
COSTS CAPITALIZED SUBSEQUENT TO INITIAL COST TO COMPANY ACQUISITION ----------------------- --------------- PROPERTY LOCATION TYPE ENCUMBRANCES(1) LAND BUILDING LAND BUILDING -------- -------- ---- --------------- --------- ----------- ---- -------- Eastgate Plaza............. WA RET -- 2,122 8,529 -- 59 Five Points Shopping Center................... CA RET -- 5,412 21,687 -- 96 Granada Village............ CA RET 15,678 6,533 26,172 -- 251 Kendall Mall............... FL RET 25,162 7,069 28,316 -- 16 La Jolla Village........... CA RET 19,245 6,936 27,785 -- 16 Lakeshore Plaza Shopping Center................... CA RET 13,839 6,706 26,865 -- 74 Latham Farms............... NY RET 38,833 12,327 49,350 -- 23 Long Gate Shopping Center................... MD RET -- 9,662 38,677 -- -- Manhattan Village Shopping Center................... CA RET -- 16,484 66,578 -- 230 Pleasant Hill Shopping Center................... CA RET -- 5,403 21,654 -- 13 Rancho San Diego Village Shopping Center.......... CA RET -- 2,645 10,621 -- 2 Randall's Dairy Ashford.... TX RET -- 2,542 10,179 -- -- Randall's Austin Parkway... TX RET -- 2,139 8,563 -- -- Randall's Commons Memorial................. TX RET -- 2,053 8,221 -- 1 Randall's Woodway.......... TX RET -- 3,075 12,313 -- -- Riverview Plaza Shopping Center................... IL RET -- 2,656 10,663 -- -- Rockford Road Plaza........ MN RET -- 4,333 17,371 -- 35 Shoppes at Lago Mar........ FL RET 5,932 2,051 8,246 -- 66 Silverado Plaza Shopping Center................... CA RET 5,203 1,928 7,753 -- -- Southwest Pavilion......... NV RET -- 1,575 8,140 -- 30 The Plaza at Delray........ FL RET 23,455 6,968 27,914 -- 4 Twin Oaks Shopping Center................... CA RET -- 2,399 9,637 -- 47 Weslayan Plaza............. TX RET -- 7,842 31,409 -- 76 Woodlawn Point Shopping Center................... GA RET 4,823 2,318 9,312 -- -- Ygnacio Plaza.............. CA RET 8,365 3,021 12,114 -- 38 -------- -------- ---------- ---- ------ $455,256 $550,635 $1,817,216 $ -- $5,300 ======== ======== ========== ==== ====== GROSS AMOUNT CARRIED AT 12/31/97 ---------------------------------- YEAR OF DEPRECIABLE TOTAL ACCUMULATED CONSTRUCTION OR LIFE PROPERTY LAND BUILDING COSTS(2) DEPRECIATION ACQUISITION (YEARS) -------- -------- ---------- ---------- ------------ --------------- ----------- Eastgate Plaza............. 2,122 8,588 10,710 20 1997 5-40 Five Points Shopping Center................... 5,412 21,783 27,195 50 1997 5-40 Granada Village............ 6,533 26,423 32,956 60 1997 5-40 Kendall Mall............... 7,069 28,332 35,401 65 1997 5-40 La Jolla Village........... 6,936 27,801 34,737 63 1997 5-40 Lakeshore Plaza Shopping Center................... 6,706 26,939 33,645 61 1997 5-40 Latham Farms............... 12,327 49,373 61,700 113 1997 5-40 Long Gate Shopping Center................... 9,662 38,677 48,339 88 1997 5-40 Manhattan Village Shopping Center................... 16,484 66,808 83,292 152 1997 5-40 Pleasant Hill Shopping Center................... 5,403 21,667 27,070 49 1997 5-40 Rancho San Diego Village Shopping Center.......... 2,645 10,623 13,268 24 1997 5-40 Randall's Dairy Ashford.... 2,542 10,179 12,721 23 1997 5-40 Randall's Austin Parkway... 2,139 8,563 10,702 20 1997 5-40 Randall's Commons Memorial................. 2,053 8,222 10,275 19 1997 5-40 Randall's Woodway.......... 3,075 12,313 15,388 28 1997 5-40 Riverview Plaza Shopping Center................... 2,656 10,663 13,319 24 1997 5-40 Rockford Road Plaza........ 4,333 17,406 21,739 40 1997 5-40 Shoppes at Lago Mar........ 2,051 8,312 10,363 19 1997 5-40 Silverado Plaza Shopping Center................... 1,928 7,753 9,681 18 1997 5-40 Southwest Pavilion......... 1,575 8,170 9,745 19 1997 5-40 The Plaza at Delray........ 6,968 27,918 34,886 64 1997 5-40 Twin Oaks Shopping Center................... 2,399 9,684 12,083 22 1997 5-40 Weslayan Plaza............. 7,842 31,485 39,327 72 1997 5-40 Woodlawn Point Shopping Center................... 2,318 9,312 11,630 21 1997 5-40 Ygnacio Plaza.............. 3,021 12,152 15,173 26 1997 5-40 -------- ---------- ---------- ------ $550,635 $1,822,516 $2,373,151 $4,153 ======== ========== ========== ======
F-69 AMB PROPERTY CORPORATION SCHEDULE III (CONTINUED) CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1997 (IN THOUSANDS) A summary of activity for real estate and accumulated depreciation for the year ended December 31, 1997 is as follows:
1997(5) ---------- INVESTMENTS IN REAL ESTATE: Balance at beginning of year.............................. $ -- Acquisition of Properties(6)........................... 2,367,851 Improvements........................................... 5,300 ---------- Balance at end of year.................................... $2,373,151 ========== ACCUMULATED DEPRECIATION: Balance at beginning of year.............................. $ -- Depreciation expense................................... 4,153 ---------- Balance at end of year.................................... $ 4,153 ==========
- --------------- (1) As of December 31, 1997, Properties with a net book value of $170,979 serve as collateral for outstanding indebtedness under a secured debt facility of $73,000. (2) As of December 31, 1997, the aggregate cost for federal income tax purposes of investments in real estate was approximately $2,231,504. (3) Consists of two properties with seven buildings in Los Angeles and one building in Anaheim. (4) Consists of two properties with five buildings in Houston and 18 buildings in Dallas. (5) The Company was formed in November 1997. Since the Company did not own real estate prior to the Formation Transaction, a reconciliation of activity for real estate and accumulated depreciation is not provided for the years ended December 31, 1996 and 1995. (6) As discussed in the "Notes to Consolidated Financial Statements -- Organization and Formation of the Company," the Company acquired Properties with a value of $2,216,137 in exchange for shares of the Company's common stock and units in the Operating Partnership. F-70 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To AMB Property Corporation: We have audited the accompanying combined balance sheets of the AMB Contributed Properties as of December 31, 1995 and 1996, and the related combined statements of operations, owners' equity and cash flows for the years ended December 31, 1994, 1995 and 1996. These combined financial statements are the responsibility of the management of the AMB Contributed Properties. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, the evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the AMB Contributed Properties as of December 31, 1995 and 1996, and the results of their operations and their cash flows for the years ended December 31, 1994, 1995 and 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Francisco, California March 27, 1998 F-71 AMB CONTRIBUTED PROPERTIES COMBINED BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997 (UNAUDITED) (DOLLARS IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30, 1997 ------------------------ -------------------------- 1995 1996 HISTORICAL AS ADJUSTED ---------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) ASSETS Investments in real estate: Land and land improvements................ $ 252,627 $ 431,869 $ 502,385 $ 502,385 Buildings and improvements................ 754,623 1,157,464 1,367,162 1,367,162 Construction in progress.................. 11,431 26,758 31,615 31,615 ---------- ---------- ---------- ---------- Total investments in real estate..... 1,018,681 1,616,091 1,901,162 1,901,162 Less -- accumulated depreciation..... (33,726) (61,704) (87,836) (87,836) ---------- ---------- ---------- ---------- Net investments in real estate....... 984,955 1,554,387 1,813,326 1,813,326 Cash and cash equivalents................. 110,474 33,120 46,055 13,168 Accounts receivable, net.................. 9,646 13,842 17,112 17,112 Deferred rent receivable.................. 3,465 5,899 8,347 8,347 Deferred financing and leasing costs, net..................................... 6,281 13,840 15,130 15,130 Prepaid expenses and other assets......... 2,360 1,471 4,905 4,905 ---------- ---------- ---------- ---------- Total assets.................... $1,117,181 $1,622,559 $1,904,875 $1,871,988 ========== ========== ========== ========== LIABILITIES AND OWNERS' EQUITY Debt: Mortgage loans.......................... $ 254,067 $ 403,321 $ 443,324 $ 443,324 Secured debt facility................... -- 73,000 73,000 73,000 Secured line of credit.................. -- 46,313 43,613 43,613 Unsecured line of credit................ -- 25,500 181,300 181,300 ---------- ---------- ---------- ---------- Total debt...................... 254,067 548,134 741,237 741,237 Accounts payable and other liabilities.... 11,395 14,298 19,662 19,662 Accounts payable to affiliates............ 529 2,713 3,117 3,117 Accrued real estate taxes................. 7,240 8,465 16,278 16,278 Security deposits payable................. 2,141 6,714 8,202 8,202 Unearned rental income.................... 896 1,703 2,354 2,354 ---------- ---------- ---------- ---------- Total liabilities............... 276,268 582,027 790,850 790,850 Commitments and contingencies............. -- -- -- -- Minority interests........................ 3,714 12,931 16,224 16,224 Owners' equity............................ 838,007 1,028,377 1,098,526 1,065,639 Note receivable from owner................ (808) (776) (725) (725) ---------- ---------- ---------- ---------- Total owners' equity............ 837,199 1,027,601 1,097,801 1,064,914 ---------- ---------- ---------- ---------- Total liabilities and owners' equity........................ $1,117,181 $1,622,559 $1,904,875 $1,871,988 ========== ========== ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-72 AMB CONTRIBUTED PROPERTIES COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996, THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM JANUARY 1, 1997 TO NOVEMBER 25, 1997 (UNAUDITED) (DOLLARS IN THOUSANDS)
NINE MONTHS JANUARY 1, FOR THE YEARS ENDED DECEMBER 31, ENDED 1997 TO ---------------------------------- SEPTEMBER 30, NOVEMBER 25, 1994 1995 1996 1996 1997 -------- --------- --------- ------------- ------------ (UNAUDITED) (UNAUDITED) REVENUES Rental revenues.................. $50,893 $106,180 $166,415 $120,146 $207,391 Interest and other income........ 789 2,069 1,538 1,066 1,217 ------- -------- -------- -------- -------- Total revenues......... 51,682 108,249 167,953 121,212 208,608 OPERATING EXPENSES Rental expenses.................. 7,216 15,210 22,646 16,013 28,057 Real estate taxes................ 6,361 15,431 23,167 17,460 29,749 Interest expense................. 12,023 20,533 26,867 18,927 45,009 Depreciation and amortization.... 8,812 17,524 28,591 20,549 32,616 Asset management fees to affiliate...................... 3,167 6,250 9,508 6,593 14,646 General, administrative and other.......................... 350 782 838 586 823 ------- -------- -------- -------- -------- Total operating expenses............. 37,929 75,730 111,617 80,128 150,900 Income from operations before disposal of properties and minority interests............. 13,753 32,519 56,336 41,084 57,708 Gain (loss) on disposition of properties..................... -- -- (1,471) 43 360 ------- -------- -------- -------- -------- Income from operations before minority interests............. 13,753 32,519 54,865 41,127 58,068 Minority interests' share of (income) loss.................. (559) 12 (465) (678) (884) ------- -------- -------- -------- -------- Net income....................... $13,194 $ 32,531 $ 54,400 $ 40,449 $ 57,184 ======= ======== ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. F-73 AMB CONTRIBUTED PROPERTIES COMBINED STATEMENTS OF OWNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) (DOLLARS IN THOUSANDS)
NOTE OWNERS' RECEIVABLE EQUITY FROM OWNER TOTAL ---------- ---------- ---------- Balance at December 31, 1993............................ $ 208,810 $(767) $ 208,043 Contributions......................................... 312,241 -- 312,241 Distributions......................................... (43,367) -- (43,367) Net income............................................ 13,194 -- 13,194 ---------- ----- ---------- Balance at December 31, 1994............................ 490,878 (767) 490,111 Contributions......................................... 392,662 -- 392,662 Distributions......................................... (78,064) -- (78,064) Increase in note receivable from owner................ -- (41) (41) Net income............................................ 32,531 -- 32,531 ---------- ----- ---------- Balance at December 31, 1995............................ 838,007 (808) 837,199 Contributions......................................... 253,322 -- 253,322 Distributions......................................... (117,352) -- (117,352) Principal reduction on note receivable from owner..... -- 32 32 Net income............................................ 54,400 -- 54,400 ---------- ----- ---------- Balance at December 31, 1996............................ 1,028,377 (776) 1,027,601 Contributions......................................... 112,912 -- 112,912 Distributions......................................... (89,598) -- (89,598) Principal reduction on note receivable from owner..... -- 51 51 Net income............................................ 46,835 -- 46,835 ---------- ----- ---------- Balance at September 30, 1997........................... $1,098,526 $(725) $1,097,801 ========== ===== ==========
The accompanying notes are an integral part of these combined financial statements. F-74 AMB CONTRIBUTED PROPERTIES COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996, THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM JANUARY 1, 1997 TO NOVEMBER 25, 1997 (UNAUDITED) (DOLLARS IN THOUSANDS)
NINE MONTHS JANUARY 1, FOR THE YEARS ENDED DECEMBER 31, ENDED 1997 TO --------------------------------- SEPTEMBER 30, NOVEMBER 25, 1994 1995 1996 1996 1997 --------- --------- --------- ------------- ------------ (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................... $ 13,194 $ 32,531 $ 54,400 $ 40,449 $ 57,184 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization...... 8,812 17,524 28,591 20,549 32,616 Amortization of deferred financing costs........................... 138 217 479 360 1,088 Straight-line rents................ (1,404) (2,061) (2,434) (1,826) (2,965) Minority interests' share of net income (loss)................... 559 (12) 465 678 884 (Gain) loss on disposition of properties...................... -- -- 1,471 (43) (360) Increase in accounts receivable and other assets.................... (776) (5,603) (3,307) (1,116) (14,166) Increase (decrease) in payable to affiliates...................... 1,001 (472) 2,184 (1,413) 615 Increase in accounts payable and other liabilities............... 6,998 10,284 9,069 8,405 16,890 --------- --------- --------- --------- --------- Net cash provided by operating activities.................... 28,522 52,408 90,918 66,043 91,786 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to properties.............. (345,042) (352,984) (566,278) (220,685) (315,303) Additions to leasing costs........... (1,898) (2,741) (6,002) (3,732) (4,548) --------- --------- --------- --------- --------- Net cash used for investing activities...................... (346,940) (355,725) (572,280) (224,417) (319,851) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on debt................... 125,527 59,852 331,023 121,342 188,886 Payments on debt..................... (20,534) (7,744) (36,956) (29,054) (52,004) Additions to financing fees.......... (836) (816) (3,248) (3,077) (244) Capital distributions................ (43,367) (78,064) (117,352) (85,437) (90,107) Capital contributions................ 312,241 384,596 231,491 -- 187,192 Contributions by minority interests.......................... 150 457 556 78,824 7,980 Distributions to minority interests.......................... (368) (2,994) (1,538) (1,463) (2,528) Decrease (increase) in note receivable from owner.............. (767) (41) 32 83 (17) --------- --------- --------- --------- --------- Net cash provided by financing activities......................... 372,046 355,246 404,008 81,218 239,158 Net increase (decrease) in cash and equivalents........................ 53,628 51,929 (77,354) (77,156) 11,093 Cash and cash equivalents at beginning of period................ 4,917 58,545 110,474 110,474 33,120 --------- --------- --------- --------- --------- Cash and cash equivalents at end of period............................. $ 58,545 $ 110,474 $ 33,120 $ 33,318 $ 44,213 ========= ========= ========= ========= =========
The accompanying notes are an integral part of these combined financial statements. F-75 AMB CONTRIBUTED PROPERTIES NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND BASIS OF PRESENTATION The accompanying combined financial statements represent a combination of the assets, liabilities and operations of 96 properties (the "Properties") located throughout the United States, which are owned by certain real estate investment funds, trusts and partnerships. Collectively, the combination of the operations of the investments in the Properties is referred to as the "AMB Contributed Properties." During the periods presented, the AMB Contributed Properties were all managed by AMB Institutional Realty Advisors, Inc. ("AMB"), the investment manager, under separate investment management agreements (the "Agreements"). The AMB Contributed Properties is not a legal entity. A summary of the various entities that own the Properties, the number of properties and square footage as of November 25, 1997 is as follows:
NUMBER OF PROPERTY OWNER PROPERTIES SQUARE FOOTAGE -------------- ---------- -------------- AMB Current Income Fund, Inc.(1)............................ 34 14,866,408 AMB Value Added Fund, Inc................................... 5 1,740,103 AMB Western Properties Fund-I............................... 8 1,118,907 Ameritech Pension Trust..................................... 11 4,398,878 City and County of San Francisco Employees' Retirement System.................................................... 12 3,933,608 First Allmerica Financial Life Insurance Company............ 1 484,370 Milwaukee Employes' Retirement System(1).................... 1 285,480 Southern Company System Master Retirement Trust............. 20 8,427,537 SPP Investment Management................................... 1 699,512 Various Family Trusts....................................... 3 510,298 -- ---------- Total............................................. 96 36,465,101 == ==========
- --------------- (1) AMB Current Income Fund, Inc. and Milwaukee Employes' Retirement System own respective interests in a limited liability company of 66.7% and 33.3%. The principal asset of the limited liability company is a 2,512,465 square foot property. The property is included in AMB Current Income Fund, Inc.'s number of properties and square footage above. On November 25, 1997, the owners of the AMB Contributed Properties and AMB completed a business combination plan whereby the owners of the Properties contributed their property to AMB Property Corporation, a public real estate company, in exchange for shares in AMB Property Corporation, or units in a subsidiary partnership, AMB Property, L.P. (the "Operating Partnership") or, in certain limited circumstances, cash (the "Formation Transaction"). The allocation of ownership interests among the owners of the AMB Contributed Properties and AMB was based on the agreed-upon relative values of net assets contributed. The initial allocation among these entities may change pending the resolution of certain future performance criteria of AMB Property Corporation. F-76 AMB CONTRIBUTED PROPERTIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES These financial statements have been prepared in accordance with generally accepted accounting principles using the accrual method of accounting. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENTS IN REAL ESTATE Investments in real estate are stated at depreciated cost and are reviewed for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying amount of a property may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges)are less than the carrying amount of the property. To the extent an impairment has occurred, the excess of the carrying amount of the property over its estimated fair value will be charged to income. As of December 31, 1997, there were no impairments of the carrying values of the Properties. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the investments. The estimated lives are as follows: Land improvements................................... 5 to 40 years Buildings and improvements.......................... 5 to 40 years Tenant improvements and leasing costs............... Term of the related lease
The cost of buildings and improvements includes the purchase price of the property or interest in property, legal fees and acquisition costs and interest, property taxes, and other costs incurred during the period of construction. Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations or betterments that extend the economic useful life of assets are capitalized. Project costs directly associated with the development and construction of a real estate project are capitalized as construction in progress. In addition, interest, real estate taxes and other costs are capitalized during the construction period. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash held in financial institutions and other highly liquid short-term investments with original maturities of three months or less. Cash and cash equivalents as of December 31, 1995 and 1996 and September 30, 1997 (unaudited) include restricted cash of $77,593, $11,042, and $1,740, respectively, which represent amounts held in escrow in connection with property purchases and capital improvements. DEFERRED FINANCING AND LEASING COSTS Costs incurred in connection with financing or leasing are capitalized and amortized to interest expense and depreciation and amortization, respectively, on a straight-line basis (which approximates the effective interest method in the case of financing costs) over the term of the related loan or lease for periods generally ranging from six months to 10 years. Unamortized costs are charged to expense upon the early repayment of F-77 AMB CONTRIBUTED PROPERTIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) the related debt or upon the early termination of the lease. Accumulated amortization as of December 31, 1995 and 1996 and, September 30, 1997 (unaudited) was $1,239, $2,930 and $5,487, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS Based on the borrowing rates currently available to the Properties, the fair value of its debt at September 30, 1997 (unaudited) (with a carrying amount of $741,237) was approximately $760,000. Such valuation is based on the current rates offered to the AMB Contributed Properties for debt of the same remaining maturities. The carrying amount of cash and cash equivalents approximates fair value. MINORITY INTERESTS Minority interests in the AMB Contributed Properties represent interests held by certain entities in eight real estate limited partnerships and limited liability companies that are consolidated for financial reporting purposes. Such investments are consolidated because 1) the Company owns a controlling general partner's interest or holds a majority member interest, or 2) the Company as limited partner holds significant control over the entity through a 50% or greater ownership interest combined with the ability to control major operating decisions such as approval of budgets, selection of property managers and change in financing. Further, in all cases, the Company has the ability to preclude a sale or refinancing proposed by any other partner. REVENUES All leases are classified as operating leases. Rental revenues are recognized on a straight-line basis over the term of the leases. Deferred rent receivable represents the excess of rental revenue recognized on a straight-line basis over cash received under the applicable lease provisions. INTEREST AND OTHER INCOME Interest and other income primarily represents interest income on cash and cash equivalents. NEW ACCOUNTING PRONOUNCEMENTS In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement, effective for financial statements for periods beginning after December 15, 1997, requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Generally, information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. This statement is not applicable to the AMB Contributed Properties, as they are not public business enterprises. 3. NOTE RECEIVABLE FROM OWNER An affiliate of AMB held a 1% general partnership interest in AMB Western Properties Fund-I. The general partner's capital contribution was made through a note payable to AMB Western Properties Fund-I. The note accrues interest at 9.29%, payable from the general partner's quarterly cash distributions. At December 31, 1995 and 1996 and September 30, 1997 (unaudited), outstanding principal and interest on the note totaled $808, $776 and $725, respectively. 4. TRANSACTIONS WITH INVESTMENT MANAGER The owners of the AMB Contributed Properties are obligated to pay AMB acquisition fees and asset management fees, as defined in the agreements. For the years ended December 31, 1994, 1995 and 1996, the F-78 AMB CONTRIBUTED PROPERTIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) nine months ended September 30, 1996 (unaudited) and the period from January 1, 1997 to November 25, 1997 (unaudited), the AMB Contributed Properties incurred expenses of $3,167, $6,250, $9,508, $6,593 and $14,646, respectively, related to asset management of the Properties. In addition, acquisition fees paid to AMB of $3,521, $3,884, $4,849, $2,053 and $2,989 were capitalized to investments in real estate in the accompanying combined balance sheets for the years ended December 31, 1994, 1995 and 1996, for the nine months ended September 30, 1996 (unaudited) and the period from January 1, 1997 to November 25, 1997 (unaudited), respectively. At December 31, 1995 and 1996 and September 30, 1997 (unaudited), total acquisition and asset management fees payable to AMB were $529, $2,713 and $3,024, respectively. Certain owners of the AMB Contributed Properties are also obligated to pay incentive management fees to AMB during ownership and upon disposition of the Properties to the extent that operations of the Properties and their fair values meet certain criteria. In connection with the Formation Transaction the owners of the AMB Contributed Properties agreed to terminate their respective existing incentive management fee agreements with AMB. One of the owners of the AMB Contributed Properties agreed to and paid a final incentive management fee of $3,011. 5. DEBT As of December 31, 1995 and 1996 and September 30, 1997 (unaudited), debt consisted of the following:
DECEMBER 31, -------------------- SEPTEMBER 30, 1995 1996 1997 -------- -------- ------------- (UNAUDITED) ------------- Mortgage loans, varying interest rates from 7.0% to 10.4%, due November 1998 to December 2008... $254,067 $403,321 $443,324 Secured debt facility, fixed interest at 7.53%, due December 2008.............................. -- 73,000 73,000 Secured line of credit, variable interest at LIBOR plus 50 basis points (6.2% at September 30, 1997), due October 1998.................... -- 46,313 43,613 Unsecured line of credit, variable interest at LIBOR plus 150 basis points (7.2% at September 30, 1997), due August 1999..................... -- 25,500 181,300 -------- -------- -------- Total debt............................. $254,067 $548,134 $741,237 ======== ======== ========
The unsecured line of credit had total availability of $200,000 as of September 30, 1997 (unaudited). The unsecured line includes a one-year option to extend and a fee on average unused funds of 25 basis points. The secured debt facility and secured line of credit in aggregate had total availability of $116,613 as of September 30, 1997. Mortgage loans generally require monthly principal and interest payments. The mortgage loans are secured by deeds of trust or mortgages on 42 Properties. The net book value of real estate investments pledged as collateral under deeds of trust or mortgages for mortgage loans and the secured debt facility at December 31, 1995 and 1996 and September 30, 1997 (unaudited) is $475,783, $934,233 and $935,074, respectively. In addition, Properties with a net book value of $129,192, $147,452 and $146,853 as of December 31, 1995 and 1996 and September 30, 1997 (unaudited), respectively, are part of a collateral pool for cross-collateralized mortgage debt of one of the Property owners. As such mortgage is deemed to be debt of the real estate investment fund rather than of the Properties and as such Properties were contributed to AMB Property Corporation free of debt, the debt is not reflected in the accompanying combined financial statements. F-79 AMB CONTRIBUTED PROPERTIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) Also included in mortgage loans is a construction loan with a balance of $1,928 as of September 30, 1997 (unaudited). Such loan matures in 2000, has total availability of $8,000 and bears interest at LIBOR plus 275 basis points or prime plus 50 basis points at the borrower's option. The secured line is collateralized by capital subscriptions receivable of $149,436 at September 30, 1997 (unaudited) from the owners of AMB Value Added Fund, Inc. which have been netted against owners' equity in the accompanying combined financial statements. The weighted-average fixed interest rate on debt at September 30, 1997 (unaudited) was 7.87%. Interest capitalized related to construction projects for the years ended December 31, 1994, 1995 and 1996, for the nine months ended September 30, 1996 (unaudited) and for the period from January 1, 1997 to November 25, 1997 (unaudited) was $132, $105, $1,134, $537 and $1,092, respectively. The scheduled maturities of all debt outstanding as of September 30, 1997 are as follows: 1997 (three months)......................................... $ 1,536 1998........................................................ 63,002 1999........................................................ 190,966 2000........................................................ 9,285 2001........................................................ 35,654 Thereafter.................................................. 440,794 -------- $741,237 ========
6. LEASING ACTIVITY Future minimum rentals due under noncancelable operating leases with tenants in effect at September 30, 1997 (unaudited) are as follows: 1997 (three months)......................................... $ 43,059 1998........................................................ 178,488 1999........................................................ 158,878 2000........................................................ 138,977 2001........................................................ 117,644 Thereafter.................................................. 509,810 ---------- $1,146,856 ==========
In addition to minimum rental payments, certain tenants pay reimbursements for their pro rata share of specified operating expenses, which reimbursements amounted to $9,077, $21,008, $33,805, $26,176 and $44,574 for the years ended December 31, 1994, 1995 and 1996, for the nine months ended September 30, 1996 (unaudited) and for the period from January 1, 1997 to November 25, 1997 (unaudited), respectively. These amounts are included as rental income and operating expenses in the accompanying combined statements of operations. Certain of the leases also provide for the payment of additional rent based on a percentage of the tenant's revenues. Some leases contain options to renew. No individual tenant accounts for greater than 10% of rental revenues. 7. PROPERTY DISPOSITIONS During the year ended December 31, 1996 and period from January 1, 1997 to November 25, 1997 (unaudited), the AMB Contributed Properties disposed of certain Properties. The accompanying combined financial statements include the operations of such Properties for periods prior to their disposition. The following table sets forth the revenues and expenses of the disposed Properties included in the accompanying F-80 AMB CONTRIBUTED PROPERTIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) combined financial statements for the years ended December 31, 1994, 1995 and 1996, the nine months ended September 30, 1996 (unaudited) and the period from January 1, 1997 to November 25, 1997 (unaudited).
NINE MONTHS JANUARY 1, YEARS ENDED DECEMBER 31, ENDED 1997 TO ---------------------------- SEPTEMBER 30, NOVEMBER 25, 1994 1995 1996 1996 1997 ------ ------- ------- ------------- ------------ Revenues........................ $1,248 $ 2,170 $ 2,624 $ 1,909 $1,200 Expenses........................ (489) (1,005) (1,475) (1,075) (595) ------ ------- ------- ------- ------ Net Income.................... $ 759 $ 1,165 $ 1,149 $ 834 $ 605 ====== ======= ======= ======= ======
8. INCOME TAXES The Properties are owned by entities that are generally not subject to federal income taxes, including tax-exempt master trusts, real estate investment trusts and partnerships. Accordingly, no provision for income taxes has been made in the accompanying combined financial statements. 9. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL MATTERS The owners of the AMB Contributed Properties follow the policy of monitoring its properties for the presence of hazardous or toxic substances. The owners of the AMB Contributed Properties are not aware of any environmental liability with respect to the Properties that would have a material adverse effect on the AMB Contributed Properties' business, assets or results of operations; however, there can be no assurance that a material environmental liability does not exist. The existence of any such material environmental liability could have a material adverse effect on the AMB Contributed Properties' results of operations and cash flow. GENERAL UNINSURED LOSSES The AMB Contributed Properties generally carry comprehensive liability, fire, flood, extended coverage and rental loss insurance with policy specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of extraordinary losses that may be either uninsurable, or not economically insurable. Should an uninsured loss occur, the AMB Contributed Properties could lose its investment in, and anticipated profits and cash flows from, a property. Certain of the AMB Contributed Properties are located in areas that are subject to earthquake activity; the AMB Contributed Properties have therefore obtained limited earthquake insurance. 10. AS ADJUSTED BALANCE SHEET (UNAUDITED) The as adjusted balance sheet as of September 30, 1997 reflects a cash distribution of approximately $32,887 to the owners of the AMB Contributed Properties. Such distribution was made in connection with the formation of AMB Property Corporation and was paid subsequent to December 31, 1997. The distribution was determined based upon the net working capital position of the Properties as of November 25, 1997. F-81 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To AMB Property Corporation: We have audited the accompanying combined statement of revenues and certain expenses of the Boston Industrial Portfolio for the year ended December 31, 1997. This combined financial statement is the responsibility of the management of the Company. Our responsibility is to express an opinion on this combined financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying combined statement of revenues and certain expenses has been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission, as described in Note 1, and is not intended to be a complete presentation of the revenues and expenses of the Boston Industrial Portfolio. In our opinion, the combined financial statement referred to above presents fairly, in all material respects, the revenues and certain expenses of the Boston Industrial Portfolio for the year ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Francisco, California March 27, 1998 F-82 BOSTON INDUSTRIAL PORTFOLIO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 27, 1998 (UNAUDITED) (IN THOUSANDS)
1997 1998 ------- ----------- (UNAUDITED) REVENUES: Rental revenues........................................ $10,395 $2,847 Other income........................................... 8 6 ------- ------ 10,403 2,853 CERTAIN EXPENSES: Property operating expenses............................... 306 30 Real estate taxes......................................... 496 78 ------- ------ 802 108 ------- ------ REVENUES IN EXCESS OF CERTAIN EXPENSES...................... $ 9,601 $2,745 ======= ======
The accompanying notes are an integral part of these combined financial statements. F-83 BOSTON INDUSTRIAL PORTFOLIO NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES (UNAUDITED, DOLLARS IN THOUSANDS) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. PROPERTIES ACQUIRED The accompanying combined statements of revenues and certain expenses include the combined operations of the Boston Industrial Portfolio (the "Portfolio"). AMB Property Corporation (the "Company") acquired the following properties from an unrelated party on March 27, 1998 for an aggregate purchase price of $85,356 and one building with a value of $2,444, which is to be acquired.
PROPERTY NAME LOCATION RENTABLE SQUARE FEET ------------- -------- -------------------- Braintree Industrial Braintree, MA 976,634 Braintree Office Braintree, MA 120,000 Stoughton Industrial Stoughton, MA 632,675 Arsenal Street Watertown, MA 191,850 Bedford Street Middleborough, MA 40,018 Brockton Industrial Brockton, MA 300,114 Collins Street Attleboro, MA 152,730 Hartwell Avenue Lexington, MA 40,800 United Drive West Bridgewater, MA 315,000 Mazzeo Randolph, MA 88,420 --------- 2,858,241 =========
BASIS OF PRESENTATION The accompanying combined statements of revenues and certain expenses are not representative of the actual operations of the Portfolio for the period presented. Certain expenses may not be comparable to the expenses expected to be incurred by the Company in the proposed future operations of the Portfolio; however, the Company is not aware of any material factors relating to the Portfolio that would cause the reported financial information not to be indicative of future operating results. Excluded expenses consist of interest, depreciation and amortization and other costs not directly related to the future operations of the Portfolio. REVENUE RECOGNITION All leases are classified as operating leases. Rental revenues are recognized on a straight-line basis over the terms of the leases. No individual tenant accounted for greater than 10% of revenues. USE OF ESTIMATES The preparation of the combined statements of revenues and certain expenses in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-84 BOSTON INDUSTRIAL PORTFOLIO NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES (CONTINUED) (UNAUDITED, DOLLARS IN THOUSANDS) 2. LEASING ACTIVITY The following is a schedule of future minimum rental revenues for 1998 and annually thereafter on non-cancelable operating leases in effect as of December 31, 1997. 1998........................................................ $ 10,746 1999........................................................ 10,283 2000........................................................ 9,284 2001........................................................ 8,864 2002........................................................ 6,381 Thereafter.................................................. 28,196 -------- Total............................................. $ 73,754 ========
In addition to minimum rental payments, tenants pay reimbursements for their pro rata share of specified operating expenses, which amounted to $610 and $153 for the year ended December 31, 1997 and for the period from January 1, 1998 to March 27, 1998 (unaudited), respectively. These amounts are included in rental revenues in the accompanying combined statements of revenues and certain expenses. Certain leases contain options to renew. F-85 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To AMB Property, L.P.: We have audited the accompanying statement of revenues and certain expenses of the Jamesburg Property, for the year ended December 31, 1997. This financial statement is the responsibility of the management of the Company. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement of revenues and certain expenses has been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission, as described in Note 1, and is not intended to be a complete presentation of the revenues and expenses of the Jamesburg Property. In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenues and certain expenses of the Jamesburg Property for the year ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Francisco, California March 27, 1998 F-86 THE JAMESBURG PROPERTY STATEMENTS OF REVENUES AND CERTAIN EXPENSES FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 20, 1998 (UNAUDITED) (IN THOUSANDS)
1997 1998 ------ ----------- (UNAUDITED) REVENUES Rental revenues........................................... $6,774 $1,466 Other income.............................................. -- -- ------ ------ 6,774 1,466 CERTAIN EXPENSES Property operating expenses............................... 1,720 372 Real estate taxes......................................... 790 171 ------ ------ 2,510 543 ------ ------ REVENUES IN EXCESS OF CERTAIN EXPENSES...................... $4,264 $ 923 ====== ======
The accompanying notes are an integral part of these financial statements. F-87 THE JAMESBURG PROPERTY NOTES TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES (DOLLARS IN THOUSANDS) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. PROPERTIES ACQUIRED The accompanying statements of revenues and certain expenses include the operations of the Jamesburg Property (the "Property") acquired by AMB Property, L.P. (the "Company") from an unrelated party on March 20, 1998 for an initial purchase price of $46,802. The Property is located in Dayton, New Jersey and includes 821,712 rentable square feet. BASIS OF PRESENTATION The accompanying statements of revenues and certain expenses are not representative of the actual operations of the Property for the period presented. Certain expenses may not be comparable to the expenses expected to be incurred by the Company in the proposed future operations of the Property; however, the Company is not aware of any material factors relating to the Property that would cause the reported financial information not to be indicative of future operating results. Excluded expenses consist of interest, depreciation and amortization and other costs not directly related to the future operations of the Property. REVENUE RECOGNITION All leases are classified as operating leases. Rental revenues are recognized on a straight-line basis over the terms of the leases. No individual tenant accounted for greater than 10% of revenues. USE OF ESTIMATES The preparation of the statements of revenues and certain expenses in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. LEASING ACTIVITY The following is a schedule of future minimum rental revenues for 1998 and annually thereafter on non-cancelable operating leases in effect as of December 31, 1997. 1998........................................................ $ 4,783 1999........................................................ 4,404 2000........................................................ 2,480 2001........................................................ 2,085 2002........................................................ 1,080 Thereafter.................................................. 1,712 ------- Total............................................. $16,544 =======
In addition to minimum rental payments, tenants pay reimbursements for their pro rata share of specified operating expenses, which amounted to $2,143 and $536 for the year ended December 31, 1997 and for the period from January 1, 1998 to March 20, 1998 (unaudited), respectively. These amounts are included in rental revenues in the accompanying statements of revenues and certain expenses. Certain leases contain options to renew. F-88 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To AMB Property, L.P.: We have audited the accompanying statement of revenues and certain expenses of Orlando Central Park, for the year ended December 31, 1997. This financial statement is the responsibility of the management of the Company. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement of revenues and certain expenses has been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission, as described in Note 1, and is not intended to be a complete presentation of the revenues and expenses of Orlando Central Park. In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenues and certain expenses of Orlando Central Park for the year ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Francisco, California March 27, 1998 F-89 ORLANDO CENTRAL PARK STATEMENTS OF REVENUES AND CERTAIN EXPENSES FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 24, 1998 (UNAUDITED) (IN THOUSANDS)
1997 1998 ------- ----------- (UNAUDITED) REVENUES Rental revenues........................................... $ 3,194 $ 792 Other income.............................................. 55 12 ------- ------ 3,249 804 CERTAIN EXPENSES Property operating expenses............................... 693 166 Real estate taxes......................................... 376 94 ------- ------ 1,069 260 ------- ------ REVENUES IN EXCESS OF CERTAIN EXPENSES...................... $ 2,180 $ 544 ======= ======
The accompanying notes are an integral part of these financial statements. F-90 ORLANDO CENTRAL PARK NOTES TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES (UNAUDITED, DOLLARS IN THOUSANDS) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. PROPERTIES ACQUIRED The accompanying statements of revenues and certain expenses include the operations of Orlando Central Park (the "Property") acquired by AMB Property, L.P. (the "Company") from an unrelated party on March 24, 1998 for an initial purchase price of $30,300. The Property is located in Orlando, Florida and includes 791,386 rentable square feet. BASIS OF PRESENTATION The accompanying statements of revenues and certain expenses are not representative of the actual operations of the Property for the period presented. Certain expenses may not be comparable to the expenses expected to be incurred by the Company in the proposed future operations of the Property; however, the Company is not aware of any material factors relating to the Property that would cause the reported financial information not to be indicative of future operating results. Excluded expenses consist of interest, depreciation and amortization and other costs not directly related to the future operations of the Property. REVENUE RECOGNITION All leases are classified as operating leases. Rental revenues are recognized on a straight-line basis over the terms of the leases. No individual tenant accounted for greater than 10% of revenues. USE OF ESTIMATES The preparation of the statements of revenues and certain expenses in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. LEASING ACTIVITY The following is a schedule of future minimum rental revenues for 1998 and annually thereafter on non-cancelable operating leases in effect as of December 31, 1997. 1998........................................................ $1,981 1999........................................................ 1,475 2000........................................................ 1,014 2001........................................................ 412 2002........................................................ 294 Thereafter.................................................. -- ------ Total............................................. $5,176 ======
In addition to minimum rental payments, tenants pay reimbursements for their pro rata share of specified operating expenses, which amounted to $140 and $35 for the year ended December 31, 1997 and for the period from January 1, 1998 to March 24, 1998 (unaudited), respectively. These amounts are included in rental revenues in the accompanying statements of revenues and certain expenses. Certain leases contain options to renew. F-91 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To AMB Property, L.P.: We have audited the accompanying statement of revenues and certain expenses of Totem Lake Malls, for the year ended December 31, 1997. This financial statement is the responsibility of the management of the Company. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement of revenues and certain expenses has been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission, as described in Note 1, and is not intended to be a complete presentation of the revenues and expenses of Totem Lake Malls. In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenues and certain expenses of Totem Lake Malls for the year ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Francisco, California March 27, 1998 F-92 TOTEM LAKE MALLS STATEMENTS OF REVENUES AND CERTAIN EXPENSES FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 6, 1998 (UNAUDITED) (IN THOUSANDS)
1997 1998 ------ ----------- (UNAUDITED) REVENUES Rental revenues........................................... $2,749 $742 Other income.............................................. 73 16 ------ ---- 2,822 758 CERTAIN EXPENSES Property operating expenses............................... 1,041 235 Real estate taxes......................................... 252 42 ------ ---- 1,293 277 ------ ---- REVENUES IN EXCESS OF CERTAIN EXPENSES...................... $1,529 $481 ====== ====
The accompanying notes are an integral part of these financial statements. F-93 TOTEM LAKE MALLS NOTES TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES (DOLLARS IN THOUSANDS) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. PROPERTIES ACQUIRED The accompanying statements of revenues and certain expenses include the operations of Totem Lake Malls (the "Property") acquired by AMB Property, L.P. (the "Company") from an unrelated party on March 6, 1998 for an initial purchase price of $26,000. The Property is located in Seattle, Washington and includes 290,204 rentable square feet. BASIS OF PRESENTATION The accompanying statements of revenues and certain expenses are not representative of the actual operations of the Property for the period presented. Certain expenses may not be comparable to the expenses expected to be incurred by the Company in the proposed future operations of the Property; however, the Company is not aware of any material factors relating to the Property that would cause the reported financial information not to be indicative of future operating results. Excluded expenses consist of interest, depreciation and amortization and other costs not directly related to the future operations of the Property. REVENUE RECOGNITION All leases are classified as operating leases. Rental revenues are recognized on a straight-line basis over the terms of the leases. No individual tenant accounted for greater than 10% of revenues. USE OF ESTIMATES The preparation of the statements of revenues and certain expenses in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. LEASING ACTIVITY The following is a schedule of future minimum rental revenues for 1998 and annually thereafter on non-cancelable operating leases in effect as of December 31, 1997. 1998........................................................ $ 1,739 1999........................................................ 1,620 2000........................................................ 1,633 2001........................................................ 1,549 2002........................................................ 929 Thereafter.................................................. 4,515 -------- Total............................................. $ 11,985 ========
In addition to minimum rental payments, tenants pay reimbursements for their pro rata share of specified operating expenses, which amounted to $457 and $114 for the year ended December 31, 1997 and for the period from January 1, 1998 to March 6, 1998 (unaudited), respectively. These amounts are included in rental revenues in the accompanying statements of revenues and certain expenses. Certain leases contain options to renew. F-94 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Owners of the AMB Contributed Properties: We have audited the accompanying combined statement of revenues and certain expenses of the Cabot Industrial Portfolio (as defined in Note 1) for the year ended December 31, 1996. This financial statement is the responsibility of the management of the AMB Contributed Properties. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying combined statement of revenues and certain expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the Registration Statement on Form S-11 of AMB Property Corporation as described in Note 1 and is not intended to be a complete presentation of the revenues and expenses of the Cabot Industrial Portfolio. In our opinion, the combined financial statement referred to above presents fairly, in all material respects, the revenues and certain expenses of the Cabot Industrial Portfolio for the year ended December 31, 1996, in conformity with generally accounting principles. ARTHUR ANDERSEN LLP San Francisco, California, October 29, 1997 F-95 CABOT INDUSTRIAL PORTFOLIO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES FOR THE YEAR ENDED DECEMBER 31, 1996 AND FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 30, 1997 (UNAUDITED) (IN THOUSANDS)
1996 1997 ------- ----------- (UNAUDITED) REVENUES Rental revenues........................................... $21,821 $22,843 Other income.............................................. 197 152 ------- ------- 22,018 22,995 CERTAIN EXPENSES Property operating expenses............................... 1,418 1,476 Real estate taxes......................................... 2,391 3,299 ------- ------- 3,809 4,775 ------- ------- REVENUES IN EXCESS OF CERTAIN EXPENSES...................... $18,209 $18,220 ======= =======
The accompanying notes are an integral part of these combined financial statements. F-96 CABOT INDUSTRIAL PORTFOLIO NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES (DOLLARS IN THOUSANDS) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Properties Acquired The accompanying combined statements of revenues and certain expenses include the combined operations (see "Basis of Presentation" below) of the Cabot Industrial Portfolio (the "Portfolio"). AMB Property, L.P. (the "Company") acquired the following 28 properties from an unrelated party on December 30, 1997 for an aggregate purchase price of $216.7 million.
PROPERTY NAME LOCATION RENTABLE SQUARE FEET ------------- -------- -------------------- Hampden Road Mansfield, MA 204,117 Dock's Corner II South Brunswick, NJ 212,335 Santa Barbara Court Elkridge, MD 166,820 Preston Court Jessup, MD 178,880 Brightseat Road Landover, MD 121,785 President's Drive Orlando, FL 129,372 President's Drive II Orlando, FL 302,400 Viscount Orlando, FL 114,846 Dixie Highway Florence, KY 209,680 Production Drive Florence, KY 50,729 Empire Drive Florence, KY 199,440 Industrial Drive Columbus, OH 225,433 Holton Drive Florence, KY 268,525 Janitrol Columbus, OH 240,000 Belden Avenue Addison, IL 346,233 Pagemill & Dillworth Dallas, TX 217,803 McDaniel Drive Carrollton, TX 157,500 Shiloh Road Garland, TX 192,720 N. Glenville Avenue Richardson, TX 109,000 West Kiest Dallas, TX 248,698 Valwood Parkway II Carrollton, TX 254,209 72nd Avenue Kent, WA 125,654 Wiegman Road Hayward, CA 148,559 Yosemite Drive Milpitas, CA 169,195 Laurelwood Santa Clara, CA 155,500 Commerce Fontana, CA 254,414 East Walnut Drive City of Industry, CA 85,871 Jasmine Avenue Fontana, CA 410,208 --------- 5,499,926 =========
Basis of Presentation The accompanying combined statements of revenues and certain expenses are not representative of the actual operations of the Portfolio for the periods presented. Certain expenses may not be comparable to the expenses expected to be incurred by the Company in the proposed future operations of the Portfolio; however, the Company is not aware of any material factors relating to these Portfolio that would cause the reported F-97 CABOT INDUSTRIAL PORTFOLIO NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES (CONTINUED) (DOLLARS IN THOUSANDS) financial information not to be indicative of future operating results. Excluded expenses consist of interest, depreciation and amortization and other costs not directly related to the future operations of the Portfolio. Revenue Recognition All leases are classified as operating leases, and rental revenue is recognized on a straight-line basis over the terms of the leases. Uses of Estimates 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. LEASING ACTIVITY The following is a schedule of future minimum rental revenues for 1997 and annually thereafter on non-cancelable operating leases in effect as of December 31, 1997.
YEAR AMOUNT ---- ------- 1998........................................................ $16,476 1999........................................................ 14,502 2000........................................................ 11,336 2001........................................................ 7,335 2002........................................................ 5,514 Thereafter.................................................. 14,353 ------- Total............................................. $69,516 =======
In addition to minimum rental payments, tenants pay reimbursements for their pro rata share of specified operating expenses, which amounted to $2,641 and $2,688 for the year ended December 31, 1996 and for the period from January 1, 1997 to December 30, 1997 (unaudited). Certain leases contain options to renew. F-98 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Owners of the AMB Contributed Properties: We have audited the accompanying statement of revenues and certain expenses of Cabot Business Park for the year ended December 31, 1996. This financial statement is the responsibility of the management of the AMB Contributed Properties. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement of revenues and certain expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the Registration Statement on Form S-11 of AMB Property Corporation as described in Note 1 and is not intended to be a complete presentation of the revenues and expenses of Cabot Business Park. In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenues and certain expenses of Cabot Business Park for the year ended December 31, 1996, in conformity with generally accounting principles. ARTHUR ANDERSEN LLP San Francisco, California, October 29, 1997 F-99 CABOT BUSINESS PARK STATEMENTS OF REVENUES AND CERTAIN EXPENSES FOR THE YEAR ENDED DECEMBER 31, 1996 AND FOR THE PERIOD FROM JANUARY 1, 1997 TO SEPTEMBER 15, 1997 (UNAUDITED) (IN THOUSANDS)
1996 1997 ------- ----------- (UNAUDITED) REVENUES Rental revenues........................................... $ 6,399 $ 4,730 Other income.............................................. 2 4 ------- ------- 6,401 4,734 CERTAIN EXPENSES Property operating expenses............................... 500 342 Real estate taxes......................................... 783 553 ------- ------- 1,283 895 ------- ------- REVENUES IN EXCESS OF CERTAIN EXPENSES...................... $ 5,118 $ 3,839 ======= =======
The accompanying notes are an integral part of these financial statements. F-100 CABOT BUSINESS PARK NOTES TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES (DOLLARS IN THOUSANDS) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Properties Acquired The accompanying statements of revenues and certain expenses include the operations (see "Basis of Presentation" below) of Cabot Business Park (the "Property") acquired by the Owners of the AMB Contributed Properties (the "Company") from an unrelated party on September 15, 1997 for an initial purchase price of $64,108. The property is located in Mansfield, Massachusetts and includes 1,071,517 rentable square feet. Basis of Presentation The accompanying statements of revenues and certain expenses are not representative of the actual operations of the Property for the periods presented. Certain expenses may not be comparable to the expenses expected to be incurred by the Company in the proposed future operations of the Property; however, the Company is not aware of any material factors relating to the Property that would cause the reported financial information not to be indicative of future operating results. Excluded expenses consist of interest, depreciation and amortization and other costs not directly related to the future operations of the Property. Revenue Recognition All leases are classified as operating leases, and rental revenue is recognized on a straight-line basis over the terms of the leases. Use of Estimates 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. LEASING ACTIVITY The following is a schedule of future minimum rental revenues for 1997 and annually thereafter on non-cancelable operating leases in effect as of December 31, 1996.
YEAR AMOUNT ---- ------- 1997........................................................ $ 6,373 1998........................................................ 5,608 1999........................................................ 6,055 2000........................................................ 6,165 2001........................................................ 6,307 Thereafter.................................................. 6,673 ------- Total............................................. $37,181 =======
In addition to minimum rental payments, tenants pay reimbursements for their pro rata share of specified operating expenses, which amounted to $1,042 and $774 for the year ended December 31, 1996 and for the period from January 1, 1997 to September 15, 1997 (unaudited). Certain leases contain options to renew. F-101 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Owners of the AMB Contributed Properties: We have audited the accompanying statement of revenues and certain expenses of the Manhattan Village Shopping Center for the year ended December 31, 1996. This financial statement is the responsibility of the management of the AMB Contributed Properties. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement of revenues and certain expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the Registration Statement on Form S-11 of AMB Property Corporation as described in Note 1 and is not intended to be a complete presentation of the revenues and expenses of Manhattan Village Shopping Center. In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenues and certain expenses of the Manhattan Village Shopping Center for the year ended December 31, 1996, in conformity with generally accounting principles. ARTHUR ANDERSEN LLP San Francisco, California, October 17, 1997 F-102 MANHATTAN VILLAGE SHOPPING CENTER STATEMENTS OF REVENUES AND CERTAIN EXPENSES FOR THE YEAR ENDED DECEMBER 31, 1996 AND FOR THE PERIOD FROM JANUARY 1, 1997 TO AUGUST 19, 1997 (UNAUDITED) (IN THOUSANDS)
1996 1997 ------ ----------- (UNAUDITED) REVENUES Rental revenues........................................... $8,197 $5,467 Other income.............................................. 19 -- ------ ------ 8,216 5,467 CERTAIN EXPENSES Property operating expenses............................... 2,119 1,485 Real estate taxes......................................... 978 443 ------ ------ 3,097 1,928 ------ ------ REVENUES IN EXCESS OF CERTAIN EXPENSES...................... $5,119 $3,539 ====== ======
The accompanying notes are an integral part of these financial statements. F-103 MANHATTAN VILLAGE SHOPPING CENTER NOTES TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES (DOLLARS IN THOUSANDS) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Properties Acquired The accompanying statements of revenues and certain expenses include the operations of the Manhattan Village Shopping Center (the "Property"). AMB Property Corporation (the "Company") acquired the Property from an unrelated party on August 19, 1998 for an initial purchase price of $79,300. The Portfolio is located in Manhattan Beach, California and includes 423,950 rentable square feet. Basis of Presentation The accompanying statements of revenues and certain expenses are not representative of the actual operations of the Property for the periods presented. Certain expenses may not be comparable to the expenses expected to be incurred by the Company in the proposed future operations of the Property; however, the Company is not aware of any material factors relating to the Property that would cause the reported financial information not to be indicative of future operating results. Excluded expenses consist of interest, depreciation and amortization and other costs not directly related to the future operations of the Property. Revenue Recognition All leases are classified as operating leases, and rental revenue is recognized on a straight-line basis over the terms of the leases. Uses of Estimates 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. LEASING ACTIVITY The following is a schedule of future minimum rental revenues for 1997 and annually thereafter on non-cancelable operating leases in effect as of December 31, 1996.
YEAR AMOUNT ---- ------- 1997........................................................ $ 6,546 1998........................................................ 7,287 1999........................................................ 8,566 2000........................................................ 8,756 2001........................................................ 9,005 Thereafter.................................................. 20,473 ------- Total............................................. $60,633 =======
In addition to minimum rental payments, tenants pay reimbursements for their pro rata share of specified operating expenses, which amounted to $2,502 and $1,995 for the year ended December 31, 1996 and for the nine months ended August 19, 1997 (unaudited). Certain leases contain options to renew. F-104 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Owners of the AMB Contributed Properties: We have audited the accompanying statement of revenues and certain expenses of the Weslayan Plaza (as defined in Note 1) for the year ended December 31, 1996. This financial statement is the responsibility of management of the AMB Contributed Properties. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement of revenues and certain expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the Registration Statement on Form S-11 of AMB Property Corporation as described in Note 1 and is not intended to be a complete presentation of the revenues and expenses of Weslayan Plaza. In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenues and certain expenses of the Weslayan Plaza for the year ended December 31, 1996, in conformity with generally accounting principles. ARTHUR ANDERSEN LLP San Francisco, California, October 17, 1997 F-105 WESLAYAN PLAZA STATEMENTS OF REVENUES AND CERTAIN EXPENSES FOR THE YEAR ENDED DECEMBER 31, 1996 AND FOR THE PERIOD FROM JANUARY 1, 1997 TO SEPTEMBER 30, 1997 (UNAUDITED) (IN THOUSANDS)
1996 1997 ------ ----------- (UNAUDITED) REVENUES Rental revenues........................................... $4,619 $3,259 Other income.............................................. 19 -- ------ ------ 4,638 3,259 CERTAIN EXPENSES Property operating expenses............................... 539 496 Real estate taxes......................................... 659 494 ------ ------ 1,198 990 ------ ------ REVENUES IN EXCESS OF CERTAIN EXPENSES...................... $3,440 $2,269 ====== ======
The accompanying notes are an integral part of these financial statements. F-106 WESLAYAN PLAZA NOTES TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES (DOLLARS IN THOUSANDS) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Properties Acquired The accompanying statements of revenues and certain expenses include the operations of Weslayan Plaza (the "Property"). AMB Property Corporation (the "Company") acquired the Property from an unrelated party, on September 30, 1997 for an initial purchase price of $37,393. The Property is located in Houston, Texas, and includes 216,870 rentable square feet. Basis of Presentation The accompanying statements of revenues and certain expenses are not representative of the actual operations of the Property for the periods presented. Certain expenses may not be comparable to the expenses expected to be incurred by the Company in the proposed future operations of the Property; however, the Company is not aware of any material factors relating to the Property that would cause the reported financial information not to be indicative of future operating results. Excluded expenses consist of interest, depreciation and amortization and other costs not directly related to the future operations of the Property. Revenue Recognition All leases are classified as operating leases, and rental revenue is recognized on a straight-line basis over the terms of the leases. Uses of Estimates 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. LEASING ACTIVITY The following is a schedule of future minimum rental revenues for 1997 and annually thereafter on non-cancelable operating leases in effect as of December 31, 1996.
YEAR AMOUNT ---- ------- 1997........................................................ $ 3,576 1998........................................................ 3,171 1999........................................................ 2,168 2000........................................................ 1,715 2001........................................................ 1,213 Thereafter.................................................. 5,956 ------- Total............................................. $17,799 =======
In addition to minimum rental payments, tenants pay reimbursements for their pro rata share of specified operating expenses, which amounted to $864,584 and $449,425 for the year ended December 31, 1996 and for the period from January 1, 1997 to December 30, 1997 (unaudited). Certain leases contain options to renew. F-107 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Owners of the AMB Contributed Properties: We have audited the accompanying statement of revenues and certain expenses of the Silicon Valley R&D Portfolio (as defined in Note 1) for the year ended December 31, 1996. This financial statement is the responsibility of the management of the AMB Contributed Properties. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement of revenues and certain expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the Registration Statement on Form S-11 of AMB Property Corporation as described in Note 1 and is not intended to be a complete presentation of the revenues and expenses of the Silicon Valley R&D Portfolio. In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenues and certain expenses of the Silicon Valley R&D Portfolio for the year ended December 31, 1996, in conformity with generally accounting principles. ARTHUR ANDERSEN LLP San Francisco, California, October 17, 1997 F-108 SILICON VALLEY R&D PORTFOLIO STATEMENTS OF REVENUES AND CERTAIN EXPENSES FOR THE YEAR ENDED DECEMBER 31, 1996 AND FOR THE PERIOD FROM JANUARY 1, 1997 TO NOVEMBER 25, 1997 (UNAUDITED) (IN THOUSANDS)
1996 1997 ------ ----------- (UNAUDITED) REVENUES Rental revenues........................................... $2,546 $2,958 Other income.............................................. 2 -- ------ ------ 2,548 2,958 CERTAIN EXPENSES Property operating expenses............................... 306 190 Real estate taxes......................................... 199 121 ------ ------ 505 311 ------ ------ REVENUES IN EXCESS OF CERTAIN EXPENSES...................... $2,043 $2,647 ====== ======
The accompanying notes are an integral part of these financial statements. F-109 SILICON VALLEY R&D PORTFOLIO NOTES TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES (DOLLARS IN THOUSANDS) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PROPERTIES ACQUIRED The accompanying statements of revenues and certain expenses include the operations of the Silicon Valley R&D Portfolio (the "Portfolio"). AMB Property Corporation (the "Company") acquired the Portfolio from an unrelated party on November 25, 1997 for an initial purchase price of $29,850. The Portfolio is located throughout the greater San Jose, California area and includes 5 buildings comprising 287,228 rentable square feet. Basis of Presentation The accompanying statements of revenues and certain expenses are not representative of the actual operations of the Portfolio for the periods presented. Certain expenses may not be comparable to the expenses expected to be incurred by the Company in the proposed future operations of the Portfolio; however, the Company is not aware of any material factors relating to these Portfolio that would cause the reported financial information not to be indicative of future operating results. Excluded expenses consist of interest, depreciation and amortization and other costs not directly related to the future operations of the Portfolio. Revenue Recognition All leases are classified as operating leases, and rental revenue is recognized on a straight-line basis over the terms of the leases. Uses of Estimates 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. LEASING ACTIVITY The following is a schedule of future minimum rental revenues for 1997 and annually thereafter on non-cancelable operating leases in effect as of November 25, 1997.
YEAR AMOUNT ---- ------- 1997........................................................ $ 2,175 1998........................................................ 1,507 1999........................................................ 1,404 2000........................................................ 1,289 2001........................................................ 629 Thereafter.................................................. 156 ------- Total............................................. $ 7,160 =======
In addition to minimum rental payments, tenants pay reimbursements for their pro rata share of specified operating expenses, which amounted to $430 and $501 for the year ended December 31, 1996 and for the nine months ended November 25, 1997 (unaudited). Certain leases contain options to renew. F-110 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the fees and expenses in connection with the issuance and distribution of the securities being registered hereunder. Except for the SEC registration fee, all amounts are estimates. SEC Registration Fee........................................ $ 121,725 Rating Agencies Fees........................................ 450,000 Printing and Engraving Expenses............................. 95,000 Legal Fees and Expenses..................................... 250,000 Accounting Fees and Expenses................................ 75,000 Trustee Fees and Expenses................................... 100,000 Blue Sky Fees and Expenses.................................. 15,000 Miscellaneous Expenses...................................... 18,275 ---------- Total............................................. $1,125,000 ==========
All of the costs identified above will be paid by the Operating Partnership. ITEM 32. SALES TO SPECIAL PARTIES See Item 33. ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES In connection with its formation, the Company issued 4,746,624 unregistered shares of Common Stock to AMB for a purchase price of $21.00 per share. In connection with the Formation Transactions, the Company issued an aggregate of 69,963,529 shares of Common Stock in connection with the mergers of certain corporations, and the Operating Partnership issued 2,386,910 limited partnership Units in consideration for the contribution of certain Properties. In January 1995, AMB issued 101,595 shares of its common stock to one of its officers, for total consideration of $342,806, and in December 1996, it issued 101,595 shares of common stock to one of its officers, for total consideration of $307,071. All of the above sales were made to "accredited investors" as defined in Regulation D under the Securities Act in transactions not involving a public offering pursuant to Regulation D. ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 2-418 of the MGCL permits a corporation to indemnify its directors and officers and certain other parties against judgments, penalties, fines, settlements, and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that (i) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty; (ii) the director or officer actually received an improper personal benefit in money, property or services; or (iii) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. Indemnification may be made against judgments, penalties, fines, settlements and reasonable expenses actually incurred by the director or officer in connection with the proceeding; provided, however, that if the proceeding is one by or in the right of the corporation, indemnification may not be made with respect to any proceeding in which the director or officer has been adjudged to be liable to the corporation. In addition, a director or officer may not be indemnified with respect to any proceeding charging improper personal benefit to the director or officer, whether or not involving action in the director's or officer's official capacity, in which the director or officer was adjudged to be liable on the II-1 basis that personal benefit was received. The termination of any proceeding by conviction, or upon a plea of nolo contendere or its equivalent, or an entry of any order of probation prior to judgment, creates a rebuttable presumption that the director or officer did not meet the requisite standard of conduct required for indemnification to be permitted. In addition, Section 2-418 of the MGCL requires that, unless prohibited by its charter, a corporation indemnify any director or officer who is made a party to any proceeding by reason of service in that capacity against reasonable expenses incurred by the director or officer in connection with the proceeding, in the event that the director or officer is successful, on the merits or otherwise, in the defense of the proceeding. The Company's Charter and Bylaws provide in effect for the indemnification by the Company of the directors and officers of the Company to the fullest extent permitted by applicable law. The Company has purchased directors' and officers' liability insurance for the benefit of its directors and officers. The Company has entered into indemnification agreements with each of its executive officers and directors. The indemnification agreements require, among other matters, that the Company indemnify its executive officers and directors to the fullest extent permitted by law and reimburse the executive officers and directors for all related expenses as incurred, subject to return if it is subsequently determined that indemnification is not permitted. The Partnership Agreement of the Operating Partnership requires the Operating Partnership to indemnify the Company, the directors and officers of the Company, and such other persons as the Company may from time to time designate against any loss or damage, including reasonable legal fees and court costs incurred by such person by reason of anything it may do or refrain from doing for or on behalf of the Operating Partnership or in connection with its business or affairs unless it is established that: (i) the act or omission of the indemnified person was material to the matter giving rise to the proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty; (ii) the indemnified person actually received an improper personal benefit in money, property or services; or (iii) in the case of any criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful. ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED Not applicable. ITEM 36. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES AND EXHIBITS (a)(1) FINANCIAL STATEMENTS Pro Forma Financial Information (Unaudited) AMB Property, L.P. Pro forma condensed consolidated balance sheet as of March 31, 1998 Notes to pro forma condensed consolidated balance sheet Pro forma condensed consolidated statement of operations for the three months ended March 31, 1998 Notes to pro forma condensed consolidated statement of operations Pro forma condensed consolidated statement of operations for the year ended December 31, 1997 Notes to pro forma condensed consolidated statement of operations Historical Financial Information AMB Property, L.P. -- March 31, 1998 Consolidated balance sheets as of December 31, 1997 and March 31, 1998 (unaudited) Consolidated statements of operations for the three months ended March 31, 1998 (unaudited) II-2 Consolidated statements of cash flows for the three months ended March 31, 1998 (unaudited) Consolidated statements of partners' capital for the three months ended March 31, 1998 (unaudited) Notes to consolidated financial statements (unaudited) AMB Property, L.P. -- December 31, 1997 Report of independent public accountants Consolidated balance sheets as of December 31, 1997 Consolidated statement of operations for the period from inception (November 26, 1997) to December 31, 1997 Consolidated statement of cash flows for the period from inception (November 26, 1997) to December 31, 1997 Consolidated statement of partners' capital for the period from inception (November 26, 1997) to December 31, 1997 Notes to consolidated financial statements AMB Property Corporation -- March 31, 1998 Consolidated balance sheets as of December 31, 1997 and March 31, 1998 Consolidated statements of operations for the three months ended March 31, 1997 and 1998 (unaudited) Consolidated statements of cash flows for the three months ended March 31, 1997 and 1998 (unaudited) Consolidated statement of stockholders' equity for the three months ended March 31, 1998 (unaudited) Notes to consolidated financial statements (unaudited) AMB Property Corporation -- December 31, 1995, 1996 and 1997 Report of independent public accountants Combined balance sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited) Combined statements of operations for the years ended December 31, 1994, 1995 and 1996, the nine months ended September 30, 1996 (unaudited) and the period from January 1, 1997 to November 25, 1997 (unaudited) Combined statements of owners' equity for the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1997 (unaudited) Combined statements of cash flows for the years ended December 31, 1994, 1995 and 1996, the nine months ended September 30, 1996 (unaudited) and the period from January 1, 1997 to November 25, 1997 (unaudited) Notes to combined financial statements AMB Contributed Properties -- December 31, 1995, 1996 and 1997 Report of independent public accountants Combined balance sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited) Combined statements of operations for the years ended December 31, 1994, 1995 and 1996, the nine months ended September 30, 1996 (unaudited) and the period from January 1, 1997 to November 25, 1997 (unaudited) Combined statements of owners' equity for the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1997 (unaudited) II-3 Combined statements of cash flows for the years ended December 31, 1994, 1995 and 1996, the nine months ended September 30, 1996 (unaudited) and the period from January 1, 1997 to November 25, 1997 (unaudited) Notes to combined financial statements The 1997 and 1998 Acquired Properties Boston Industrial Portfolio Report of independent public accountants Statements of revenues and certain expenses for the year ended December 31, 1997 and for the period from January 1, 1998 to March 27, 1998 (unaudited) Notes to combined statement of revenues and certain expenses Jamesburg Report of independent public accountants Statements of revenues and certain expenses for the year ended December 31, 1997 and for the period from January 1, 1998 to March 20, 1998 (unaudited) Notes to statements of revenues and certain expenses Orlando Central Park Report of independent public accountants Statements of revenues and certain expenses for the year ended December 31, 1997 and for the period from January 1, 1998 to March 24, 1998 (unaudited) Notes to statements of revenues and certain expenses Totem Lake Malls Report of independent public accountants Statements of revenues and certain expenses for the year ended December 31, 1997 and for the period from January 1, 1998 to March 6, 1998 (unaudited) Notes to statements of revenues and certain expenses Cabot Industrial Portfolio Report of independent public accountants Statements of revenues and certain expenses for the year ended December 31, 1996 and the for period from January 1, 1997 to December 30, 1997 (unaudited) Notes to statements of revenue and certain expenses Cabot Business Park Report of independent public accountants Statements of revenues and certain expenses for the year ended December 31, 1996 and for the period from January 1, 1997 to September 15, 1997 (unaudited) Notes to statements of revenue and certain expenses II-4 Manhattan Village Shopping Center Report of independent public accountants Statements of revenues and certain expenses for the year ended December 31, 1997 and for the period from January 1, 1997 to August 19, 1997 (unaudited) Notes to statements of revenues and certain expenses Weslayan Plaza Report of independent public accountants Statements of revenues and certain expenses for the year ended December 31, 1997 and for the period from January 1, 1997 to September 30, 1997 (unaudited) Notes to statement of revenues and certain expenses Silicon Valley R&D Portfolio Report of independent public accountants Statements of revenues and certain expenses for the year ended December 31, 1996 and the period from January 1, 1997 to November 25, 1997 (unaudited) Notes to statements of revenue and certain expenses (a)(2) FINANCIAL STATEMENT SCHEDULE Historical Financial Information -- AMB Property Corporation Schedule III -- Historical Consolidated Real Estate and Accumulated Depreciation. (b) Exhibits
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement. 3.1 Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-11 (No. 333-35915)). 3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-11 (No. 333-35915)). 4.1 Indenture (the "Indenture") by and among the Operating Partnership, the Guarantors and State Street Bank and Trust Company of California, N.A., as trustee. 4.2 First Supplemental Indenture, by and among the Operating Partnership, the Guarantors and State Street Bank and Trust Company of California, N.A., as trustee. 4.3 Second Supplemental Indenture, by and among the Operating Partnership, the Guarantors and State Street Bank and Trust Company of California, N.A., as trustee. 4.4 Third Supplemental Indenture, by and among the Operating Partnership, the Guarantors and State Street Bank and Trust Company of California, N.A., as trustee. 4.5 Specimen of % Notes due 2008 (included in the First Supplemental Indenture incorporated by reference as Exhibit 4.2). 4.6 Specimen of % Notes due 2018 (included in the Second Supplemental Indenture incorporated by reference as Exhibit 4.3). 4.7 Specimen of % Reset Put Securities due 2015 (included in the Third Supplemental Indenture incorporated by reference as Exhibit 4.4). 8.1 Opinion of Latham & Watkins.
II-5
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.1 Amended and Restated Agreement of Limited Partnership of AMB Property, L.P. (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-11 (No. 333-35915)). 10.2 Form of Registration Rights Agreement among the Registrant and the persons named therein. (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-11 (No. 333-35915)) 10.3 Amended and Restated Credit Agreement, dated August 8, 1997 (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-11 (No. 333 -35915)). 10.4 Form of Employment Agreement between AMB Property Corporation and certain of its executive officers (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-11 (No. 333-35915)). 10.5 The 1997 Stock Option and Incentive Plan of the Registrant (incorporated by reference to Exhibit 10.5 of the Company's Registration Statement on Form S-11 (No. 333-35915)). 10.6 Calculation Agency Agreement between the Operating Partnership and Morgan Stanley & Co. Incorporated. 12.1 Statement regarding computation of ratios. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Latham & Watkins (included in Exhibit 8.1 above). 23.2 Consent of Arthur Andersen LLP. **24.1 Power of Attorney. *25.1 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of , as Trustee. **27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. ** Previously filed. ITEM 37. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the provisions described under Item 34 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes: (1) For purposes of determining any liability under the Act, the information omitted from the form of Prospectus filed as part of the Registration Statement in reliance upon Rule 430A and contained in the form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of the Registration Statement as of the time it was declared effective. II-6 (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, each of the Registrants certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized in the City of San Francisco, State of California, on the 13th day of May, 1998. AMB PROPERTY CORPORATION By: * --------------------------------------- Hamid R. Moghadam President and Chief Executive Officer AMB PROPERTY, L.P. By AMB PROPERTY CORPORATION, its general partner By: * --------------------------------------- Hamid R. Moghadam President and Chief Executive Officer AMB PROPERTY II, L.P. By AMB PROPERTY HOLDING CORPORATION, its general partner By: * --------------------------------------- Hamid R. Moghadam President and Chief Executive Officer LONG GATE LLC By AMB PROPERTY HOLDING CORPORATION, its managing member By: * --------------------------------------- Hamid R. Moghadam President and Chief Executive Officer II-8 Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons on behalf of each of the Registrants and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- * Chairman of the Board and May 14, 1998 - ----------------------------------------------------- Director T. Robert Burke * President, Chief Executive May 14, 1998 - ----------------------------------------------------- Officer and Director Hamid R. Moghadam (Principal Executive Officer) * Chairman of Investment May 14, 1998 - ----------------------------------------------------- Committee and Director Douglas D. Abbey * Chief Financial Officer May 14, 1998 - ----------------------------------------------------- (Principal Financial S. Davis Carniglia Officer) /s/ MICHAEL A. COKE Vice President and Director May 14, 1998 - ----------------------------------------------------- of Financial Management Michael A. Coke Reporting (Principal Accounting Officer) * Director May 14, 1998 - ----------------------------------------------------- Daniel H. Case, III Director May , 1998 - ----------------------------------------------------- Robert H. Edelstein, Ph.D. * Director May 14, 1998 - ----------------------------------------------------- Lynn M. Sedway Director May , 1998 - ----------------------------------------------------- Jeffrey L. Skelton, Ph.D. Director May , 1998 - ----------------------------------------------------- Thomas W. Tusher * Director May 14, 1998 - ----------------------------------------------------- Caryl B. Welborn *By: /s/ MICHAEL A. COKE --------------------------------------------------- Michael A. Coke Attorney-in-Fact
II-9 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement. 3.1 Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-11 (No. 333-35915)). 3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-11 (No. 333-35915)). 4.1 Indenture (the "Indenture") by and among the Operating Partnership, the Guarantors and State Street Bank and Trust Company of California, N.A., as trustee. 4.2 First Supplemental Indenture, by and among the Operating Partnership, the Guarantors and State Street Bank and Trust Company of California, N.A., as trustee. 4.3 Second Supplemental Indenture, by and among the Operating Partnership, the Guarantors and State Street Bank and Trust Company of California, N.A., as trustee. 4.4 Third Supplemental Indenture, by and among the Operating Partnership, the Guarantors and State Street Bank and Trust Company of California, N.A., as trustee. 4.5 Specimen of % Notes due 2008 (included in the First Supplemental Indenture incorporated by reference as Exhibit 4.2). 4.6 Specimen of % Notes due 2018 (included in the Second Supplemental Indenture incorporated by reference as Exhibit 4.3). 4.7 Specimen of % Reset Put Securities due 2015 (included in the Third Supplemental Indenture incorporated by reference as Exhibit 4.4). 8.1 Opinion of Latham & Watkins. 10.1 Amended and Restated Agreement of Limited Partnership of AMB Property, L.P. (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-11 (No. 333-35915)). 10.2 Form of Registration Rights Agreement among the Registrant and the persons named therein. (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-11 (No. 333-35915)) 10.3 Amended and Restated Credit Agreement, dated August 8, 1997 (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-11 (No. 333 -35915)). 10.4 Form of Employment Agreement between AMB Property Corporation and certain of its executive officers (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-11 (No. 333-35915)). 10.5 The 1997 Stock Option and Incentive Plan of the Registrant (incorporated by reference to Exhibit 10.5 of the Company's Registration Statement on Form S-11 (No. 333-35915)). 10.6 Calculation Agency Agreement between the Operating Partnership and Morgan Stanley & Co. Incorporated. 12.1 Statement regarding computation of ratios. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Latham & Watkins (included in Exhibit 8.1 above). 23.2 Consent of Arthur Andersen LLP. **24.1 Power of Attorney.
EXHIBIT NUMBER DESCRIPTION ------- ----------- *25.1 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of , as Trustee. **27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. ** Previously filed.