<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
COMMISSION FILE NUMBER: 001-13545
AMB PROPERTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MARYLAND 94-3281941
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
505 MONTGOMERY ST., SAN FRANCISCO, CALIFORNIA 94111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(415) 394-9000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
As of May 11, 2000, there were 83,849,040 shares of the Registrant's common
stock, $0.01 par value per share, outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
AMB PROPERTY CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and
March 31, 2000 (unaudited).................................. 1
Consolidated Statements of Operations for the three months
ended March 31, 1999 and 2000 (unaudited)................... 2
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 2000 (unaudited)................... 3
Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 2000 (unaudited)..................... 4
Notes to Consolidated Financial Statements (unaudited)...... 5
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................... 14
Quantitative and Qualitative Disclosures About Market
Item 3. Risks....................................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 24
Item 2. Changes in Securities....................................... 24
Item 3. Defaults Upon Senior Securities............................. 24
Item 4. Submission of Matters to a Vote of Security Holders......... 24
Item 5. Other Information........................................... 24
Item 6. Exhibits and Reports on Form 8-K............................ 40
</TABLE>
i
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
AMB PROPERTY CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND MARCH 31, 2000
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ----------
<S> <C> <C>
Investments in real estate:
Land and improvements..................................... $ 714,916 $ 735,991
Buildings and improvements................................ 2,349,221 2,390,699
Construction in progress.................................. 185,315 161,643
---------- ----------
Total investments in properties................... 3,249,452 3,288,333
Accumulated depreciation and amortization................. (103,558) (120,193)
---------- ----------
Net investments in properties........................ 3,145,894 3,168,140
Investment in unconsolidated joint ventures................. 66,357 67,414
Properties held for divestiture, net........................ 181,201 232,109
---------- ----------
Net investments in real estate....................... 3,393,452 3,467,663
Cash and cash equivalents................................... 33,312 26,662
Restricted cash and cash equivalents........................ 103,707 62,432
Other assets................................................ 91,079 99,870
---------- ----------
Total assets...................................... $3,621,550 $3,656,627
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Secured debt.............................................. $ 707,037 $ 766,211
Alliance Fund I credit facility........................... 80,000 53,000
Unsecured senior debt securities.......................... 400,000 400,000
Unsecured credit facility................................. 83,000 43,000
---------- ----------
Total debt........................................ 1,270,037 1,262,211
Other liabilities........................................... 89,371 128,720
---------- ----------
Total liabilities................................. 1,359,408 1,390,931
Commitments and contingencies (note 11) Minority
interests................................................. 432,883 483,360
Stockholders' equity:
Series A preferred stock, cumulative, redeemable, $0.01
par value, 100,000,000 shares authorized, 4,000,000
shares issued and outstanding, $100,000 liquidation
preference............................................. 96,100 96,100
Common stock, $0.01 par value, 500,000,000 shares
authorized, 85,133,041 and 83,835,290 issued and
outstanding............................................ 851 838
Additional paid-in capital................................ 1,656,226 1,629,612
Retained earnings......................................... 47,089 44,988
Accumulated other comprehensive income.................... 28,993 10,798
---------- ----------
Total stockholders' equity........................ 1,829,259 1,782,336
---------- ----------
Total liabilities and stockholders' equity........ $3,621,550 $3,656,627
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE> 4
AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 2000
----------- -----------
<S> <C> <C>
REVENUES
Rental revenues........................................... $ 107,657 $ 108,266
Equity in earnings of unconsolidated joint ventures....... 1,151 1,242
Investment management and other income.................... 764 815
----------- -----------
Total revenues.................................... 109,572 110,323
OPERATING EXPENSES
Property operating expenses............................... 12,369 11,477
Real estate taxes......................................... 15,035 13,496
General and administrative................................ 6,202 5,351
Interest, including amortization.......................... 22,967 20,342
Depreciation and amortization............................. 18,424 19,192
----------- -----------
Total operating expenses.......................... 74,997 69,858
----------- -----------
Income from operations before minority interests....... 34,575 40,465
Minority interests' share of net income................... (6,561) (9,409)
----------- -----------
Net income before gain/(loss) from divestiture of real
estate................................................ 28,014 31,056
Loss from divestiture of real estate...................... -- (11)
----------- -----------
Net income............................................. 28,014 31,045
Series A preferred stock dividends........................ (2,125) (2,125)
----------- -----------
Net income available to common stockholders............ $ 25,889 $ 28,920
=========== ===========
INCOME PER COMMON SHARE
Basic..................................................... $ 0.30 $ 0.34
=========== ===========
Diluted................................................... $ 0.30 $ 0.34
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic..................................................... 86,001,104 83,849,157
=========== ===========
Diluted................................................... 86,020,680 83,863,198
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 5
AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 2000
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 28,014 $ 31,045
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 18,424 19,192
Straight-line rents....................................... (2,688) (3,160)
Amortization of debt premiums and financing costs......... (727) (1,337)
Minority interests' share of net income................... 6,561 9,409
Loss on divestitures of real estate....................... -- 11
Equity in earnings of AMB Investment Management........... (578) 5
Equity in earnings of unconsolidated joint ventures....... (1,151) (1,242)
Changes in assets and liabilities:
Other assets.............................................. (2,834) (17,487)
Other liabilities......................................... 19,491 8,328
--------- --------
Net cash provided by operating activities.............. 64,512 44,764
CASH FLOWS FROM INVESTING ACTIVITIES
Change in restricted cash and cash equivalents.............. (179) 41,275
Cash paid for property acquisitions......................... (70,100) (34,460)
Additions to land, building, development costs and other
first generation improvements............................. (24,069) (65,660)
Additions to second generation building improvements and
lease costs............................................... (7,139) (6,991)
Additions to interest in unconsolidated joint ventures...... -- (847)
Distributions received from unconsolidated joint ventures... 1,109 1,032
Net proceeds from divestitures of real estate............... -- 12,351
--------- --------
Net cash used in investing activities.................. (100,378) (53,300)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock.................................... 391 269
Borrowings on unsecured credit facility..................... 82,000 22,000
Borrowings on secured debt.................................. 303 60,624
Payments on unsecured credit facility....................... -- (62,000)
Payments on Alliance Fund I credit facility................. -- (27,000)
Payments on secured debt.................................... (8,316) (2,912)
Payment of financing fees................................... (92) --
Net proceeds from issuance of Series F preferred units...... -- 19,581
Contributions from investors of the Alliance Fund I......... -- 1,381
Dividends paid to common and preferred stockholders......... (31,552) (2,125)
Distributions to minority interests, including preferred
units..................................................... (3,019) (7,932)
--------- --------
Net cash provided by financing activities.............. 39,715 1,886
--------- --------
Net increase (decrease) in cash and cash equivalents........ 3,849 (6,650)
Cash and cash equivalents at beginning of period............ 19,911 33,312
--------- --------
Cash and cash equivalents at end of period.................. $ 23,760 $ 26,662
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest...................................... $ 15,312 $ 12,850
========= ========
Non-cash transactions:
Acquisitions of properties................................ $ 113,881 $ 34,460
Assumption of debt........................................ (43,756) --
Minority interest's contribution, including units
issued................................................. (25) --
--------- --------
Net cash paid.......................................... $ 70,100 $ 34,460
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 6
AMB PROPERTY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ACCUMULATED
SERIES A NUMBER ADDITIONAL OTHER
PREFERRED OF PAID-IN RETAINED COMPREHENSIVE
STOCK SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
--------- ---------- ------ ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1999........................ $96,100 85,133,041 $851 $1,656,226 $ 47,089 $ 28,993 $1,829,259
Comprehensive income:
Net income.................. 2,125 -- -- -- 28,920 --
Unrealized loss on
securities................ -- -- -- -- -- (18,195)
Total comprehensive
income............. 12,850
Issuance of restricted stock,
net......................... -- 155,675 2 3,141 -- -- 3,143
Exercise of stock options..... -- 12,500 -- 269 -- -- 269
Cancellation of common
stock....................... -- (1,465,926) (15) (29,304) -- -- (29,319)
Deferred compensation......... -- -- -- (3,143) -- -- (3,143)
Deferred compensation
amortization................ -- -- -- 308 -- -- 308
Reallocation of limited
partners' interests in
Operating Partnership and
other....................... -- -- -- 2,115 -- -- 2,115
Dividends..................... (2,125) -- -- -- (31,021) -- (33,146)
------- ---------- ---- ---------- -------- -------- ----------
BALANCE AT MARCH 31, 2000..... $96,100 83,835,290 $838 $1,629,612 $ 44,988 $ 10,798 $1,782,336
======= ========== ==== ========== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 7
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE, PER SHARE AND UNIT AMOUNTS AND
PROPERTY STATISTICS)
1. ORGANIZATION AND BASIS OF PRESENTATION
AMB Property Corporation, a Maryland corporation (the "Company"), commenced
operations as a fully integrated real estate company effective with the
completion of its initial public offering on November 26, 1997. The Company
elected to be taxed as a real estate investment trust under Sections 856 through
860 of the Internal Revenue Code of 1986, commencing with its taxable year ended
December 31, 1997, and believes its current organization and method of operation
will enable it to maintain its status as a real estate investment trust. The
Company, through its controlling interest in its subsidiary, AMB Property, L.P.,
a Delaware limited partnership (the "Operating Partnership"), is engaged in the
acquisition, ownership, operation, management, renovation, expansion and
development of industrial buildings and community shopping centers in target
markets nationwide. Unless the context otherwise requires, the "Company" means
AMB Property Corporation, the Operating Partnership and its other controlled
subsidiaries.
As of March 31, 2000, the Company owned an approximate 93.4% general
partner interest in the Operating Partnership, excluding preferred units. The
remaining 6.6% limited partner interest is owned by non-affiliated investors and
certain directors and officers of the Company. For local law purposes, certain
properties are owned through limited partnerships and limited liability
companies. The ownership of such properties through such entities does not
materially affect the Company's overall ownership of the interests in the
properties. As the sole general partner of the Operating Partnership, the
Company has the full, exclusive and complete responsibility and discretion in
the day-to-day management and control of the Operating Partnership. Net
operating results of the Operating Partnership are allocated after preferred
unit distributions based on the respective partners' ownership interests.
Prior to the Company's initial public offering in November 1997, the
Company's predecessor provided real estate investment advisory services to
institutional investors. In connection with the initial public offering, AMB
Investment Management, Inc., a Maryland corporation ("AMB Investment
Management"), was formed to continue the investment management business of
providing real estate investment services on a fee basis to clients. The
Operating Partnership purchased 100% of AMB Investment Management's non-voting
preferred stock (representing a 95% economic interest therein). Certain current
and former executive officers of the Company and a former executive officer of
AMB Investment Management collectively purchased 100% of AMB Investment
Management's voting common stock (representing a 5% economic interest therein).
The Operating Partnership also owns 100% of the non-voting preferred stock of
Headlands Realty Corporation, a Maryland corporation, (representing a 95%
economic interest therein). Certain current and former executive officers of the
Company and a director of Headlands Realty Corporation collectively own 100% of
the voting common stock of Headlands Realty Corporation (representing a 5%
economic interest therein). Headlands Realty Corporation invests in properties
and interests in entities that engage in the management, leasing and development
of properties and similar activities. The Operating Partnership accounts for its
investment in AMB Investment Management and Headlands Realty Corporation using
the equity method of accounting.
As of March 31, 2000, the Company owned 725 industrial buildings and nine
retail centers, located in 26 markets throughout the United States. As of March
31, 2000, the industrial buildings, principally warehouse distribution
buildings, encompassed approximately 65.9 million rentable square feet and were
96.5% leased to over 2,200 tenants. As of March 31, 2000, the retail centers,
principally grocer-anchored community shopping centers, encompassed
approximately 1.6 million rentable square feet and were 87.5% leased to over 200
tenants.
2. INTERIM FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and note disclo-
5
<PAGE> 8
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE, PER SHARE AND UNIT AMOUNTS AND
PROPERTY STATISTICS)
sures 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. General and administrative expenses on the Consolidated Statements
of Operations includes internal asset management costs of $2,130 and $2,422 for
the three months ended March 31, 1999 and 2000, respectively. Prior to the third
quarter of 1999, these costs were classified as property operating expenses.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, of a normal recurring nature,
necessary for a fair presentation of the Company's consolidated financial
position and results of operations for the interim periods.
The interim results of the three months ended March 31, 1999 and 2000 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, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. REAL ESTATE ACQUISITION AND DEVELOPMENT ACTIVITY
During the first quarter of 2000, the Company invested $34,460 in operating
properties, consisting of six industrial buildings aggregating approximately 0.6
million square feet. The Company also initiated four new development projects
during the quarter, which will aggregate approximately 1.2 million square feet
and have a total estimated cost of $70,700 upon completion. As of March 31,
2000, the Company had 19 industrial projects, which will aggregate approximately
4.8 million square feet and have an aggregate total estimated investment of
$303,400 upon completion, in its development pipeline and two retail projects
(excluding two development projects held for divestiture), which will aggregate
approximately 0.2 million square feet and have an aggregate estimated investment
of $33,100 upon completion, in its development pipeline. As of March 31, 2000,
approximately $180,200 had been funded and approximately $156,300 was estimated
to be required to complete projects currently under construction or for which we
have committed to complete.
4. PROPERTY DIVESTITURES AND PROPERTIES HELD FOR DIVESTITURE
Property Divestitures. In March 2000, the Company divested itself of four
industrial buildings, aggregating approximately 0.3 million square feet, for an
aggregate price of approximately $12,925. These divestitures resulted in an
aggregate net loss of $11.
Properties Held for Divestiture. The Company has decided to divest itself
of six retail centers and one land parcel, which are not in its core markets
and/or which do not meet its strategic objectives. The divestitures of the
properties are subject to negotiation of acceptable terms and other customary
conditions. As of March 31, 2000, the net carrying value of the properties held
for divestiture was $232,109.
6
<PAGE> 9
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE, PER SHARE AND UNIT AMOUNTS AND
PROPERTY STATISTICS)
The following summarizes the condensed results of operations of the
properties held for divestiture for the quarters ended March 31, 1999 and 2000:
<TABLE>
<CAPTION>
PROPERTIES HELD FOR DIVESTITURE
- -----------------------------------------------------------------------------
1999 2000
------ ------
<S> <C> <C>
Income..................................................... $6,317 $6,224
Property operating expenses................................ 1,811 1,803
------ ------
Net operating income..................................... $4,506 $4,421
====== ======
</TABLE>
5. DEBT
As of December 31, 1999 and March 31, 2000, debt consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ----------
<S> <C> <C>
Secured debt, varying interest rates from 4.0% to 10.4% due
May 2000 to January 2014................................. $ 696,931 $ 754,594
Alliance Fund I credit facility, variable interest at LIBOR
plus 87.5 basis points (weighted average interest rate of
7.0% at March 31, 2000), due April 2001.................. 80,000 53,000
Unsecured senior debt securities, weighted average interest
rate of 7.2%, due June 2008, June 2015 and June 2018..... 400,000 400,000
Unsecured credit facility, variable interest at LIBOR plus
90 to 120 basis points (weighted average interest rate of
7.0% at March 31, 2000), due November 2000............... 83,000 43,000
---------- ----------
Subtotal................................................. 1,259,931 1,250,594
Unamortized premiums..................................... 10,106 11,617
---------- ----------
Total consolidated debt.......................... $1,270,037 $1,262,211
========== ==========
</TABLE>
Secured debt generally requires monthly principal and interest payments.
The secured debt is secured by deeds of trust on certain Properties. As of March
31, 2000, the total gross investment value of those properties secured by debt
was $1,511,318. All of the secured debt bears interest at fixed rates, except
for two loans with an aggregate principal amount of $10,419, which bear interest
at variable rates. The secured debt has various financial and non-financial
covenants. Additionally, certain of the secured debt is cross-collateralized.
The Alliance Fund I has a $80,000 unsecured credit facility. The debt is
secured by the unfunded capital commitments of the third party investors in the
Alliance REIT, a limited partner in the Alliance Fund I. The debt bears interest
at LIBOR plus 87.5 basis points and matures in April 2001. See Note 6 for a
discussion of the Alliance REIT and the Alliance Fund I.
Interest on the senior debt securities is payable semiannually in each June
and December commencing December 1998. The 2015 notes are putable and callable
in June 2005. The senior debt securities are subject to various financial and
non-financial covenants.
The Company has a $500,000 unsecured revolving credit agreement with Morgan
Guaranty Trust Company of New York, as agent, and a syndicate of twelve other
banks. The credit facility matures in November 2000 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.
7
<PAGE> 10
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE, PER SHARE AND UNIT AMOUNTS AND
PROPERTY STATISTICS)
Capitalized interest related to construction projects for the three months
ended March 31, 1999 and 2000 was $2,583 and $3,015, respectively.
The scheduled maturities of the Company's total debt, excluding unamortized
debt premiums, as of March 31, 2000, are as follows:
<TABLE>
<CAPTION>
UNSECURED ALLIANCE
SENIOR UNSECURED FUND I
SECURED DEBT CREDIT CREDIT
DEBT SECURITIES FACILITY FACILITY TOTAL
-------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
2000 (nine months).......... $ 42,465 $ -- $43,000 $ -- $ 85,465
2001........................ 38,298 -- -- 53,000 91,298
2002........................ 63,480 -- -- -- 63,480
2003........................ 75,488 -- -- -- 75,488
2004........................ 90,923 -- -- -- 90,923
2005........................ 70,196 100,000 -- -- 170,196
2006........................ 134,599 -- -- -- 134,599
2007........................ 48,246 -- -- -- 48,246
2008........................ 131,001 175,000 -- -- 306,001
2009........................ 1,811 -- -- -- 1,811
2010........................ 53,467 -- -- -- 53,467
Thereafter.................. 4,620 125,000 -- -- 129,620
-------- -------- ------- ------- ----------
$754,594 $400,000 $43,000 $53,000 $1,250,594
======== ======== ======= ======= ==========
</TABLE>
6. MINORITY INTERESTS IN CONSOLIDATED JOINT VENTURES
Minority interests in the Company represent the limited partnership
interests in the Operating Partnership and interests held by certain third
parties (some of which are separate account co-investors that are Institutional
Alliance Partners) in 23 real estate joint ventures, through which 32 properties
are held, that are consolidated for financial reporting purposes. Such
investments are consolidated because (i) the Company owns a majority interest or
(ii) the Company exercises significant control of major operating decisions such
as approval of budgets, selection of property managers and changes in financing.
On September 24, 1999, December 22, 1999 and March 23, 2000, AMB
Institutional Alliance REIT I, Inc. (the "Alliance REIT") issued and sold shares
of its capital stock to 15 third party investors. The Alliance REIT has elected
to be taxed as a real estate investment trust under the Internal Revenue Code,
commencing with its tax year ending December 31, 1999. The Alliance REIT
acquired a limited partnership interest in AMB Institutional Alliance Fund I,
L.P. (the "Alliance Fund I"), which is engaged in the acquisition, ownership,
operation, management, renovation, expansion and development of primarily
industrial buildings in target industrial markets nationwide. In March 2000, the
Operating Partnership contributed seven industrial buildings, aggregating
approximately 0.4 million square feet, to the Alliance Fund I at a cost basis of
approximately $29,400. These contributions resulted in no gain. The Operating
Partnership is the managing general partner of the Alliance Fund I and, together
with an affiliate of the Company, owns, as of March 31, 2000, 38.8% of the
partnership interests in the Alliance Fund I. It is currently expected that the
Operating Partnership, together with an affiliate of the Company, will own 20.0%
of the Alliance Fund I by the end of the second quarter of 2000. The Company
consolidates the Alliance Fund I for financial reporting purposes because the
Operating Partnership is the sole managing general partner of the Alliance Fund
I and, as a result, controls all of its major operating decisions. As of March
31, 2000, the Alliance Fund I had a total equity
8
<PAGE> 11
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE, PER SHARE AND UNIT AMOUNTS AND
PROPERTY STATISTICS)
commitment from third party investors totaling $167.0 million, which, when
combined with anticipated debt financings and the Company's investment, creates
a total committed capitalization of approximately $410.0 million.
The following table distinguishes the minority interest ownership held by
certain joint venture partners, separate account co-investors, the Alliance Fund
I, the limited partners in the Operating Partnership, the Series B Preferred
Unit holders' interest in the Operating Partnership, and the Series C, Series D,
Series E and Series F Preferred Unit holders' interest in a subsidiary of the
Operating Partnership as of and for the quarter ended March 31, 2000.
<TABLE>
<CAPTION>
MINORITY MINORITY
INTEREST INTEREST SHARE
LIABILITY OF NET INCOME
--------- ---------------
<S> <C> <C>
Joint venture partners...................................... $ 19,499 $ 629
Separate account co-investors............................... 51,084 859
Alliance Fund I............................................. 15,341 369
Limited Partners in the Operating Partnership............... 121,214 1,942
Series B preferred units (liquidation preference of
$65,000).................................................. 62,318 1,402
Series C preferred units (liquidation preference of
$110,000)................................................. 105,847 2,406
Series D preferred units (liquidation preference of
$79,767).................................................. 77,688 1,545
Series E preferred units (liquidation preference of
$11,022).................................................. 10,788 214
Series F preferred units (liquidation preference of
$19,872).................................................. 19,581 43
-------- ------
Total............................................. $483,360 $9,409
======== ======
</TABLE>
7. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The Company has a 56.1% and a 50.0% non-controlling limited partnership
interest in two separate unconsolidated equity investment joint ventures, which
were purchased in June 1998 and September 1999, respectively. One of the joint
ventures owns an aggregate of 36 industrial buildings totaling approximately 4.0
million square feet. The other joint venture is a development project. For the
three months ended March 31, 2000, the Company's share of net operating income
was $2,008 and the Company's share of the unconsolidated joint ventures' debt
was $20,772, with a weighted average interest rate of 6.9% and a weighted
average maturity of 6.2 years.
8. STOCKHOLDERS' EQUITY
At the time of the Company's initial public offering, 4,237,750 shares of
Common Stock, known as Performance Shares, were placed in escrow by certain
investors of the Company, which were subject to advisory agreements with the
Company's predecessor that included incentive fee provisions. On January 7,
2000, 2,771,824 shares of Common Stock were released from escrow to these
investors and 1,465,926 shares of Common Stock were returned to the Company and
cancelled. The cancelled shares of Common Stock represent indirect interests in
the Operating Partnership that were reallocated from the Company (thereby
decreasing the number of shares of Common Stock outstanding) to other
unitholders who had an ownership interest in the Company's predecessor,
including certain executive officers of the Company, (thereby increasing the
number of limited partnership units owned by partners other than the Company).
The total number of outstanding partnership units did not change as a result of
this reallocation. This reallocation did not change the amount of fully diluted
shares of Common Stock and limited partnership units outstanding.
9
<PAGE> 12
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE, PER SHARE AND UNIT AMOUNTS AND
PROPERTY STATISTICS)
The following table sets forth the dividend payments and distributions that
were declared on February 29, 2000 and that were paid in connection with the
Series F Preferred Units, which were issued and sold on March 22, 2000:
<TABLE>
<CAPTION>
DIVIDEND
RECORD PAYMENT
SECURITY PAYING ENTITY DATE PAYMENT PERIOD DATE AMOUNT
- ------------------------- -------------------- ------- ----------------------- -------- -------
<S> <C> <C> <C> <C> <C>
Common Stock Company 4/05/00 Quarter ended 3/31/00 4/17/00 $0.3700
Operating
OP Units Partnership 4/05/00 Quarter ended 3/31/00 4/17/00 $0.3700
Series A Preferred Stock Company 4/05/00 3 months ended 4/14/00 4/17/00 $0.5313
Operating
Series A Preferred Units Partnership 4/05/00 3 months ended 4/14/00 4/17/00 $0.5313
Operating
Series B Preferred Units Partnership 4/05/00 3 months ended 4/14/00 4/17/00 $1.0781
Series C Preferred Units AMB Property II, L.P 4/05/00 3 months ended 4/14/00 4/17/00 $1.0938
Series D Preferred Units AMB Property II, L.P 3/15/00 3 months ended 3/24/00 3/25/00 $0.9688
Series E Preferred Units AMB Property II, L.P 4/05/00 3 months ended 4/14/00 4/17/00 $0.9688
Series F Preferred Units AMB Property II, L.P 4/05/00 3/22/00 through 4/14/00 4/17/00 $0.1092
</TABLE>
On March 22, 2000, AMB Property II, L.P., one of the Company's
subsidiaries, issued and sold 397,439 7.95% Series F Cumulative Redeemable
Preferred Limited Partnership Units at a price of $50.00 per unit in a private
placement. Distributions are cumulative from the date of issuance and payable
quarterly in arrears at a rate per unit equal to $3.975 per annum. The Series F
Preferred Units are redeemable by AMB Property II, L.P. on or after March 22,
2005, subject to certain conditions, for cash at a redemption price equal to
$50.00 per unit, plus accumulated and unpaid distributions thereon, if any, to
the redemption date. The Series F Preferred Units are exchangeable, at specified
times and subject to certain conditions, on a one-for-one basis, for shares of
the Company's Series F Preferred Stock. AMB Property II, L.P. used the gross
proceeds of $19.8 million to pay transaction expenses, including a placement
fee, to make a loan to the Operating Partnership in the amount of $19.6 million
and for general corporate purposes. The Operating Partnership used the funds to
partially repay borrowings under the Company's unsecured credit facility and for
general corporate purposes. The loan bears interest at a rate of 7.0% per annum
and is payable upon demand.
On March 31, 2000, an option granted to the California Public Employees'
Retirement System for the purchase of up to 2,000,000 shares of the Company's
Common Stock expired without being exercised by the holder.
9. INCOME PER SHARE
The Company's only dilutive securities outstanding for the three months
ended March 31, 1999 and 2000 were stock options granted under its stock
incentive plan. The effect of the stock options was to increase weighted average
shares outstanding by 19,576 and 14,041 shares for the three months ended March
31, 1999 and 2000, respectively. Such dilution was computed using the treasury
stock method.
10. SEGMENT INFORMATION
The Company has two reportable segments: industrial properties and retail
properties. The industrial properties consist primarily of warehouse
distribution facilities suitable for single or multiple tenants and are
typically comprised of multiple buildings that are leased to tenants engaged in
various types of businesses. The retail properties are generally leased to one
or more anchor tenants, such as grocery and drug stores, and various retail
businesses. The accounting policies of the segments are the same as those
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. The Company evaluates performance based upon property net
operating income of the combined properties in each segment. The
10
<PAGE> 13
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE, PER SHARE AND UNIT AMOUNTS AND
PROPERTY STATISTICS)
Company's properties are managed separately because each segment requires
different operating, pricing and leasing strategies. Significant information
used by the Company for the reportable segments is as follows:
<TABLE>
<CAPTION>
INDUSTRIAL RETAIL TOTAL
PROPERTIES PROPERTIES PROPERTIES
---------- ---------- ----------
<S> <C> <C> <C>
Rental revenues(1):
For the three months ended:
March 31, 1999.............................. $ 79,686 $27,971 $ 107,657
March 31, 2000.............................. 101,034 7,232 108,266
Property net operating income(2):
For the three months ended:
March 31, 1999.............................. 59,633 20,620 80,253
March 31, 2000.............................. 78,093 5,200 83,293
Gross additions to investment in properties(3):
For the three months ended:
March 31, 1999.............................. 143,039 9,307 152,346
March 31, 2000.............................. 84,018 6,092 90,110
Investment in properties(4):
As of:
December 31, 1999........................... 3,177,283 72,169 3,249,452
March 31, 2000.............................. 3,261,705 26,628 3,288,333
</TABLE>
- ---------------
(1) Includes straight-line rents of $2,688 and $3,160 for the quarters ended
March 31, 1999 and 2000, respectively.
(2) Property net operating income is defined as rental revenue, including
reimbursements and straight-line rents, less property level operating
expenses, including allocated asset management costs and excluding
depreciation, amortization, general and administrative expenses and interest
expense.
(3) Represents cost incurred during the period for land, building, building
improvements, tenant improvements, leasing costs and other related real
estate costs. Amounts are before divestitures of properties.
(4) Excludes net properties held for divestiture of $181,201 and $232,109 as of
December 31, 1999 and March 31, 2000, respectively.
11
<PAGE> 14
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE, PER SHARE AND UNIT AMOUNTS AND
PROPERTY STATISTICS)
The Company uses property net operating income as an operating performance
measure. The following is a reconciliation between total reportable segment
revenue and property net operating income to consolidated revenues and net
income.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1999 2000
-------- --------
<S> <C> <C>
REVENUES
Total rental revenues for reportable segments............... $107,657 $108,266
Investment management and other income...................... 1,915 2,057
-------- --------
Total consolidated revenues................................. $109,572 $110,323
======== ========
NET INCOME
Property net operating income for reportable segments....... $ 80,253 $ 83,293
Equity in earnings of unconsolidated joint ventures......... 1,151 1,242
Investment management and other income...................... 764 815
Less:
General and administrative................................ (6,202) (5,351)
Interest expense.......................................... (22,967) (20,342)
Depreciation and amortization............................. (18,424) (19,192)
Minority interests........................................ (6,561) (9,409)
-------- --------
Net income before gain/(loss) from divestitures of real
estate.................................................... 28,014 31,056
Loss from divestiture of real estate........................ -- (11)
-------- --------
Net income.................................................. $ 28,014 $ 31,045
======== ========
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of business, from time to time, the Company is
involved in legal actions relating to the ownership and operations of its
properties. In management's opinion, the liabilities, if any, that may
ultimately result from such legal actions are not expected to have a materially
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company.
Environmental Matters
The Company follows the policy of monitoring its properties for the
presence of hazardous or toxic substances. The Company is not aware of any
environmental liability with respect to the properties that would have a
material adverse effect on the Company's business, assets or results of
operations; however, there can be no assurance that such a material
environmental liability does not exist. The existence of any such material
environmental liability would have an adverse effect on the Company's results of
operations and cash flow.
12
<PAGE> 15
AMB PROPERTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE, PER SHARE AND UNIT AMOUNTS AND
PROPERTY STATISTICS)
General Uninsured Losses
The Company carries comprehensive liability, fire, flood, environmental,
extended coverage and rental loss insurance with policy specifications, limits
and deductibles that the Company believes are adequate and appropriate under the
circumstances given the relative risk of loss, the cost of such coverage and
industry practice. There are, however, certain types of extraordinary losses
that may be either uninsurable or not economically insurable. Certain of the
properties are located in areas that are subject to earthquake activity;
therefore, the Company has obtained limited earthquake insurance on those
properties. Should an uninsured loss occur, the Company could lose its
investment in, and anticipated profits and cash flows from, a property.
13
<PAGE> 16
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis of our consolidated
financial condition and results of operations in conjunction with the Notes to
Consolidated Financial Statements. Statements contained in this discussion which
are not historical facts may be forward-looking statements. You can identify
forward-looking statements by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "pro forma," "estimates" or "anticipates' or the negative of
these words and phrases or similar words or phrases. You can also identify
forward-looking statements by discussions of strategy, plans or intentions.
Forward-looking statements involve numerous risks and uncertainties and you
should not rely upon them as predictions of future events. There is no assurance
that the events or circumstances reflected in forward-looking statements will be
achieved or occur. Forward-looking statements are necessarily dependent on
assumptions, data or methods that may be incorrect or imprecise and we may not
be able to realize them. The following factors, among others, could cause actual
results and future events to differ materially from those set forth or
contemplated in the forward-looking statements: defaults or non-renewal of
leases by tenants, increased interest rates and operating costs, our failure to
obtain necessary outside financing, difficulties in identifying properties to
acquire and in effecting acquisitions, our failure to successfully integrate
acquired properties and operations, our failure to divest of properties we have
contracted to sell or to timely reinvest proceeds from any such divestitures,
risks and uncertainties affecting property development and construction
(including construction delays, cost overruns, our inability to obtain necessary
permits and public opposition to these activities), our failure to qualify and
maintain our status as a real estate investment trust under the Internal Revenue
Code of 1986, environmental uncertainties, risks related to natural disasters,
financial market fluctuations, changes in real estate and zoning laws and
increases in real property tax rates. Our success also depends upon economic
trends generally, including interest rates, income tax laws, governmental
regulation, legislation, population changes and those risk factors discussed in
the section entitled "Business Risks" in this report. We caution you not to
place undue reliance on forward-looking statements, which reflect our analysis
only and speak only as of the date of this report or the dates indicated in the
statements.
Unless the context otherwise requires, the terms "we," "us" and "our" refer
to AMB Property Corporation, the operating partnership and the other controlled
subsidiaries and the references to AMB Property Corporation include the
operating partnership and the other controlled subsidiaries. The following marks
are our registered trademarks: AMB(R); Customer Alliance Program(R); Development
Alliance Partners(R); Development Alliance Program(R); Institutional Alliance
Partners(R); Management Alliance Partners(R); Management Alliance Program(R);
UPREIT Alliance Partners(R); and UPREIT Alliance Program(R). The following are
our unregistered trademarks: Broker Alliance Partners(TM); Broker Alliance
Program(TM); Customer Alliance Partners(TM); eSpace(TM); HTD(TM); High
Throughput Distribution(TM); Institutional Alliance Program(TM); iSpace(TM);
Strategic Alliance Partners(TM); and Strategic Alliance Programs(TM).
THE COMPANY
AMB Property Corporation, a Maryland corporation, is one of the leading
owners and operators of industrial real estate nationwide. Our investment
strategy is to become a leading provider of High Throughput Distribution, or
HTD, properties located near key passenger and cargo airports, interstate
highways and ports in major metropolitan areas, such as Atlanta, Chicago,
Dallas/Fort Worth, northern New Jersey, the San Francisco Bay Area and Southern
California. Within each of our markets, we focus our investments in in-fill
submarkets. In-fill submarkets are characterized by supply constraints on the
availability of land for competing projects. High Throughput Distribution
facilities are designed to serve the high-speed, high-value freight handling
needs of today's supply chain, as opposed to functioning as long-term storage
facilities. We believe that the rapid growth of the air-freight business, the
outsourcing of supply chain management to third party logistics companies and
e-commerce are indicative of the changes that are occurring in the supply chain
and the manner in which goods are distributed. We intend to focus our investment
activities primarily on industrial properties that we believe will benefit from
these changes.
14
<PAGE> 17
As of March 31, 2000, we owned and operated 725 industrial buildings and
nine retail centers, totaling approximately 67.5 million rentable square feet,
located in 26 markets nationwide. As of March 31, 2000, these properties were
96.3% leased. As of March 31, 2000, through our subsidiary, AMB Investment
Management, we also managed 43 industrial buildings and retail centers,
aggregating approximately 4.4 million rentable square feet, which were 97.8%
leased, on behalf of various institutional investors. In addition, we have
invested in 36 industrial buildings, totaling approximately 4.0 million rentable
square feet, through an unconsolidated joint venture.
As of March 31, 2000, we had six retail centers, aggregating approximately
1.3 million rentable square feet, and one land parcel, which were held for
divestiture. In addition, during the first quarter of 2000, we disposed of four
industrial buildings, aggregating approximately 0.3 million rentable square
feet, for an aggregate price of approximately $12.9 million. Over the next few
years, we currently intend to dispose of non-strategic assets and redeploy the
resulting capital into High Throughput Distribution properties that better fit
our current investment focus.
On September 24, 1999, December 22, 1999 and March 23, 2000, AMB
Institutional Alliance REIT I, Inc. (the "Alliance REIT") issued and sold shares
of its capital stock to 15 third party investors. The Alliance REIT has elected
to be taxed as a real estate investment trust under the Internal Revenue Code,
commencing with its tax year ending December 31, 1999. The Alliance REIT
acquired a limited partnership interest in AMB Institutional Alliance Fund I,
L.P. (the "Alliance Fund I"), which is engaged in the acquisition, ownership,
operation, management, renovation, expansion and development of primarily
industrial buildings in target industrial markets nationwide. In March 2000, the
operating partnership contributed seven industrial buildings, aggregating
approximately 0.4 million square feet, to the Alliance Fund I at a cost basis of
approximately $29.4 million. These contributions resulted in no gain. The
operating partnership is the managing general partner of the Alliance Fund I
and, together with one of our other affiliates, owns, as of March 31, 2000,
approximately 38.8% of the partnership interests in the Alliance Fund I. It is
currently expected that the Operating Partnership, together with an affiliate of
the Company, will own 20.0% of the Alliance Fund I by the end of the second
quarter of 2000. As of March 31, 2000, the Alliance Fund I had a total equity
commitment from third party investors totaling $167.0 million, which, when
combined with anticipated debt financings and our investment, creates a total
committed capitalization of approximately $410.0 million.
Through our subsidiary, AMB Property, L.P., a Delaware limited partnership,
we are engaged in the acquisition, ownership, operation, management, renovation,
expansion and development of primarily industrial properties in target
industrial markets nationwide. We refer to AMB Property, L.P. as the operating
partnership. As of March 31, 2000, we owned an approximate 93.4% general
partnership interest in the operating partnership, excluding preferred units. As
the sole general partner of the operating partnership, we have the full,
exclusive and complete responsibility and discretion in the day-to-day
management and control of the operating partnership.
We are self-administered and self-managed and expect that we have qualified
and will continue to qualify as a real estate investment trust for federal
income tax purposes beginning with the year ending December 31, 1997. As a
self-administered and self-managed real estate investment trust, our own
employees perform our administrative and management functions, rather than our
relying on an outside manager for these services. The principal executive office
of AMB Property Corporation and the operating partnership is located at 505
Montgomery Street, San Francisco, California 94111, and our telephone number is
(415) 394-9000. We also maintain a regional office in Boston, Massachusetts.
ACQUISITION AND DEVELOPMENT ACTIVITY
During the first quarter of 2000, we invested $34.5 million in operating
properties, consisting of six industrial buildings aggregating approximately 0.6
million square feet. We also initiated four new development projects during the
quarter, which will aggregate approximately 1.2 million square feet and have a
total estimated cost of $70.7 million upon completion. As of March 31, 2000, we
had 19 industrial projects, which will aggregate approximately 4.8 million
square feet and have an aggregate total estimated investment of $303.4 million
upon completion, in our development pipeline and two retail projects (excluding
two development projects held for divestiture), which will aggregate
approximately 0.2 million square feet and
15
<PAGE> 18
have an aggregate estimated investment of $33.1 million upon completion, in our
development pipeline. As of March 31, 2000, approximately $180.2 million had
been funded and approximately $156.3 million was estimated to be required to
complete projects currently under construction or for which we have committed to
complete.
STRATEGIC ALLIANCE PROGRAMS
Our Strategic Alliance Programs are designed to build value by creating
mutually beneficial relationships. We believe that our strategy of forming
strategic alliances with local and regional real estate experts improves our
operating efficiency and flexibility, strengthens customer satisfaction and
retention and provides us with growth opportunities. Additionally, our strategic
alliances with institutional investors enhance our access to private capital and
our ability to finance transactions.
Our six Strategic Alliance Programs can be grouped into two categories:
- Operating Alliances, which allow us to form relationships with local or
regional real estate experts, thereby becoming their ally rather than
their competitor; and
- Investment Alliances, which allow us to establish relationships with a
variety of capital sources.
OPERATING ALLIANCES
Broker Alliance Program: Through our Broker Alliance Program, we work
closely with top local leasing companies in each of our markets, whose brokers
provide us with access to high quality customers and local market knowledge.
Customer Alliance Program: Through our Customer Alliance Program, we seek
to build long-term working relationships with major customers. We are committed
to working with our customers, particularly our larger customers with multi-site
requirements, to make their property searches as efficient as possible.
Development Alliance Program: Our strategy for the Development Alliance
Program is to form alliances with local development firms to jointly acquire,
renovate and develop properties to serve our customers' needs.
Management Alliance Program: Our strategy for the Management Alliance
Program is to develop close relationships with, and outsource property
management to, local property management firms that we believe to be among the
best in each of our markets. Our alliances with local property management firms
increase our flexibility, reduce our overhead expenses and improve our customer
service. In addition, these alliances provide us with local market information
related to customer activity and investment opportunities.
INVESTMENT ALLIANCES
Institutional Alliance Program: Our strategy for the Institutional Alliance
Program is to form alliances with institutional investors, which provide us with
access to private capital, including during those times when the public markets
are less attractive, and also provide us with a source of incremental fee income
and investment returns. This program allows our Institutional Alliance Partners
the opportunity to co-invest with us and to receive professional investment
management of their real estate assets.
UPREIT Alliance Program: Through our UPREIT Alliance Program, we issue
limited partnership units in the operating partnership to certain property
owners in exchange for properties, thus providing additional growth for the
portfolio.
RESULTS OF OPERATIONS
The analysis below shows changes in our results of operations for the three
months ended March 31, 2000 and 1999 which includes changes attributable to
acquisitions and development activity, and the changes resulting from properties
that we owned during both the current and prior year reporting periods,
excluding development properties prior to being stabilized (90% leased). We
refer to these properties as the same store properties. For the comparison
between the three-month periods ended March 31, 2000 and 1999, the same
16
<PAGE> 19
store properties consist of properties aggregating 54.6 million square feet. The
properties acquired in 1999 consisted of 154 buildings, aggregating
approximately 8.4 million square feet, and the properties acquired during the
first quarter of 2000 consisted of six buildings, aggregating approximately 0.6
million square feet. In 1999, property divestitures consisted of 30 retail
centers and 15 industrial buildings, aggregating approximately 6.6 million
square feet, and property divestitures during the first quarter of 2000
consisted of four industrial buildings, aggregating approximately 0.3 million
square feet. Our future financial condition and results of operations, including
rental revenues, may be impacted by the acquisition of additional properties.
Our future revenues and expenses may vary materially from their historical
rates.
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
RENTAL REVENUES 2000 1999 $ CHANGE % CHANGE
--------------- ------ ------ -------- --------
<S> <C> <C> <C> <C>
Same store................................... $ 81.0 $ 77.1 $ 3.9 5.1%
1999 acquisitions............................ 22.5 3.3 19.2 581.8%
2000 acquisitions............................ 0.4 -- 0.4 --
Developments................................. 1.8 1.0 0.8 80.0%
Divestitures................................. 2.6 26.3 (23.7) (90.1)%
------ ------ ------ -----
Total.............................. $108.3 $107.7 $ 0.6 0.6%
====== ====== ====== =====
</TABLE>
Rental revenues, including straight-line rents, tenant reimbursements and
other property related income, increased by $0.6 million, or 0.6%, for the three
months ended March 31, 2000, to $108.3 million, as compared with the same period
in 1999. Approximately $3.9 million and $19.2 million of this increase was
attributable to same store properties and properties acquired in 1999,
respectively, with an offsetting decrease in revenues of approximately $23.7
million due to properties divested between January 1, 1999 and March 31, 2000.
The growth in rental revenues in same store properties resulted primarily from
the incremental effect of cash rental rate increases and changes in occupancy
and reimbursement of expenses, offset by straight-line rents. During the three
months ended March 31, 2000, the same store properties increase in base rents
(cash basis) was 13.6% on 2.5 million square feet leased.
<TABLE>
<CAPTION>
INVESTMENT MANAGEMENT AND OTHER INCOME 2000 1999 $ CHANGE % CHANGE
-------------------------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Equity earnings in unconsolidated joint
ventures....................................... $1.2 $1.1 $0.1 9.1%
Investment management income and other........... 0.8 0.8 -- --
---- ---- ---- ---
Total.................................. $2.0 $1.9 $0.1 5.3%
==== ==== ==== ===
</TABLE>
Other revenues, including equity in earnings of unconsolidated joint
ventures, investment management income, and interest income, totaled $2.0 and
$1.9 million for the three months ended March 31, 2000 and 1999, respectively.
The $0.1 million, or 5.3%, increase was primarily attributable to the earnings
from our equity investment in our unconsolidated joint ventures.
<TABLE>
<CAPTION>
PROPERTY OPERATING EXPENSES AND REAL ESTATE TAXES 2000 1999 $ CHANGE % CHANGE
- ------------------------------------------------- ----- ----- -------- --------
<S> <C> <C> <C> <C>
Rental expenses................................. $11.5 $12.4 $(0.9) (7.3)%
Real estate taxes............................... 13.5 15.0 (1.5) (10.0)%
----- ----- ----- -----
Property operating expenses................... $25.0 $27.4 $(2.4) (8.8)%
===== ===== ===== =====
Same store...................................... $18.9 $19.0 $(0.1) (0.3)%
1999 acquisitions............................... 5.2 1.0 4.2 420.0%
2000 acquisitions............................... 0.1 -- 0.1 --
Developments.................................... 0.6 0.3 0.3 100.0%
Divestitures.................................... 0.2 7.1 (6.9) (97.2)%
----- ----- ----- -----
Total................................. $25.0 $27.4 $(2.4) (8.8)%
===== ===== ===== =====
</TABLE>
Property operating expenses, including asset management costs and real
estate taxes, decreased by $2.4 million, or 8.8%, for the three months ended
March 31, 2000, to $25.0 million as compared with the same period in 1999.
Internal asset management costs of $2.1 million for the three months ended March
31, 1999
17
<PAGE> 20
have been reclassified to general and administrative expenses to conform with
current year presentation. Same store properties and properties divested between
January 1, 1999 and March 31, 2000 decreased operating expenses by approximately
$0.1 million and $6.9 million, respectively, for the three months ended March
31, 2000, while operating expenses attributable to development properties and
properties acquired between January 1, 1999 through March 31, 2000 added $4.6
million. The change in same store properties operating expenses primarily
relates to increases in same store properties' real estate taxes of
approximately $0.2 million for the three months ended March 31, 2000, offset by
decreases in same store properties' insurance of $0.5 million.
<TABLE>
<CAPTION>
OTHER EXPENSES 2000 1999 $ CHANGE % CHANGE
-------------- ----- ----- -------- --------
<S> <C> <C> <C> <C>
General and administrative expense............. $ 5.4 $ 6.2 $(0.8) (12.9)%
Interest expense............................... 20.3 23.0 (2.7) (11.7)%
Depreciation expense........................... 19.2 18.4 0.8 4.4%
----- ----- ----- -----
Total................................ $44.9 $47.6 $(2.7) (5.7)%
===== ===== ===== =====
</TABLE>
General and administrative expenses decreased by $0.8 million, or 12.9%,
for the three months ended March 31, 2000, as compared to the same period in
1999. Internal asset management costs of $2.1 million for the three months ended
March 31, 1999 have been reclassified from property operating expenses to
general and administrative expenses to conform with current year presentation.
The decrease in general and administrative expenses was primarily attributable
to timing differences in incurring corporate expenses from quarter to quarter.
The decrease in interest expense of $2.7 million was primarily due to the
decrease in our unsecured credit facility balance from the prior year to this
year.
LIQUIDITY AND CAPITAL RESOURCES
We currently expect that our principal sources of working capital and
funding for acquisitions, development, expansion and renovation of properties
will include cash flow from operations, borrowings under our unsecured credit
facility, other forms of secured or unsecured financing, proceeds from equity or
debt offerings by us or the operating partnership (including issuances of
limited partnership units in the operating partnership or its subsidiaries) and
net proceeds from divestitures of properties. We presently believe that our
sources of working capital and our ability to access private and public debt and
equity capital are adequate for us to continue to meet our liquidity
requirements for the foreseeable future.
CAPITAL RESOURCES
Property Divestitures. In March 2000, we divested four industrial
buildings, aggregating approximately 0.3 million square feet, for an aggregate
price of approximately $12.9 million. These divestitures resulted in an
aggregate net loss of $0.01 million.
Credit Facilities. We have a $500.0 million unsecured revolving credit
agreement with Morgan Guaranty Trust Company of New York, as agent, and a
syndicate of twelve other banks. Our unsecured credit facility has a term of
three years and is subject to a fee that accrues on the daily average undrawn
funds, which varies between 15 and 25 basis points (currently 15 basis points)
of the undrawn funds based on our credit rating. We use our unsecured credit
facility principally for acquisitions and for general working capital
requirements. Borrowings under our credit facility bear interest at LIBOR plus
90 to 120 basis points (currently LIBOR plus 90 basis points), depending our
debt rating at the time of the borrowings. As of March 31, 2000, the outstanding
balance on our unsecured credit facility was $43.0 million and it bore interest
at a weighted average rate of 7.0%. Monthly debt service payments on our credit
facility are interest only. Our credit facility matures in November 2000. The
total amount available under our credit facility fluctuates based upon the
borrowing base, as defined in the agreement governing the credit facility. At
March 31, 2000, the remaining amount available under our unsecured credit
facility was approximately $457.0 million.
In addition, we have an $80.0 million unsecured credit facility held
through our investment in the Alliance Fund I. The debt is secured by the
unfunded capital commitments of the third party investors in the
18
<PAGE> 21
Alliance REIT I, a limited partner of the Alliance Fund I. The debt bears
interest at LIBOR plus 87.5 basis points and matures in April 2001. As of March
31, 2000, the outstanding balance on this credit facility was $53.0 million and
bore interest at a weighted average rate of 7.0%. At March 31, 2000, the
remaining amount available under this credit facility was approximately $27.0
million.
Debt and Equity Activities. At the time of our initial public offering,
4,237,750 shares of common stock, known as performance shares, were placed in
escrow by certain of our investors, which were subject to advisory agreements
with our predecessor that included incentive fee provisions. On January 7, 2000,
2,771,824 shares of common stock were released from escrow to these investors
and 1,465,926 shares of common stock were returned to us and cancelled. The
cancelled shares of common stock represent indirect interests in the operating
partnership that were reallocated from us (thereby decreasing the number of
shares of common stock outstanding) to other unitholders who had an ownership
interest in our predecessor, including certain of our executive officers,
(thereby increasing the number of limited partnership units owned by partners
other than us). The total number of outstanding partnership units did not change
as a result of this reallocation. This reallocation did not change the amount of
fully diluted shares of common stock and limited partnership units outstanding.
On March 22, 2000, AMB Property II, L.P., one of our subsidiaries, issued
and sold 397,439 7.95% Series F Cumulative Redeemable Preferred Limited
Partnership Units at a price of $50.00 per unit in a private placement.
Distributions are cumulative from the date of issuance and payable quarterly in
arrears at a rate per unit equal to $3.975 per annum. The Series F Preferred
Units are redeemable by AMB Property II, L.P. on or after March 22, 2005,
subject to certain conditions, for cash at a redemption price equal to $50.00
per unit, plus accumulated and unpaid distributions thereon, if any, to the
redemption date. The Series F Preferred Units are exchangeable, at specified
times and subject to certain conditions, on a one-for-one basis, for shares of
our Series F Preferred Stock. AMB Property II, L.P. used the gross proceeds of
$19.8 million to pay transaction expenses, including a placement fee, to make a
loan to the operating partnership in the amount of $19.6 million and for general
corporate purposes. The operating partnership used the funds to partially repay
borrowings under our unsecured credit facility and for general corporate
purposes. The loan bears interest at a rate of 7.0% per annum and is payable
upon demand.
Market Capitalization. As of March 31, 2000, the aggregate principal amount
of our secured debt was $754.6 million, excluding unamortized debt premiums of
$11.6 million. The secured debt bears interest at rates varying from 4.0% to
10.4% per annum (with a weighted average rate of 7.9%) and final maturity dates
ranging from May 2000 to January 2014. All of the secured debt bears interest at
fixed rates, except for two loans with an aggregate principal amount of $10.4
million as of March 31, 2000, which bear interest at variable rates.
In order to maintain financial flexibility and facilitate the rapid
deployment of capital through market cycles, we presently intend to operate with
a debt-to-total market capitalization ratio of approximately 45% or less.
Additionally, we presently intend to continue to structure our balance sheet in
order to maintain an investment grade rating on our senior unsecured debt. In
spite of these policies, our organizational documents do not contain any
limitation on the amount of indebtedness that we may incur. Accordingly, our
board of directors could alter or eliminate these policies.
19
<PAGE> 22
The tables below summarize our debt maturities and capitalization as of
March 31, 2000 (in thousands, except share amounts and percentages).
<TABLE>
<CAPTION>
DEBT
- -------------------------------------------------------------------------------------------------------------------
INDUSTRIAL RETAIL UNSECURED UNSECURED ALLIANCE
SECURED SECURED SENIOR DEBT CREDIT FUND I CREDIT TOTAL
DEBT DEBT SECURITIES FACILITY FACILITY DEBT
---------- -------- ----------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
2000 (9 months).................... $ 34,578 $ 7,887 $ -- $43,000 $ -- $ 85,465
2001............................... 13,817 24,481 -- -- 53,000 91,298
2002............................... 40,967 22,513 -- -- -- 63,480
2003............................... 74,962 526 -- -- -- 75,488
2004............................... 90,353 570 -- -- -- 90,923
2005............................... 69,578 618 100,000 -- -- 170,196
2006............................... 133,929 670 -- -- -- 134,599
2007............................... 47,519 727 -- -- -- 48,246
2008............................... 123,243 7,758 175,000 -- -- 306,001
2009............................... 1,493 318 -- -- -- 1,811
2010............................... 53,122 345 -- -- -- 53,467
Thereafter......................... 3,356 1,264 125,000 -- -- 129,620
-------- -------- -------- ------- -------- ----------
Subtotal......................... 686,917 67,677 400,000 43,000 53,000 1,250,594
Unamortized premiums............. 10,834 783 -- -- -- 11,617
-------- -------- -------- ------- -------- ----------
Total consolidated debt... 697,751 68,460 400,000 43,000 53,000 1,262,211
Our share of unconsolidated joint
venture debt..................... 20,772 -- -- -- -- 20,772
-------- -------- -------- ------- -------- ----------
Total debt................ 718,523 68,460 400,000 43,000 53,000 1,282,983
Joint venture partners' share of
consolidated joint venture
debt............................. (88,369) (16,579) -- -- (42,400) (147,348)
-------- -------- -------- ------- -------- ----------
Our share of total debt........ $630,154 $ 51,881 $400,000 $43,000 $ 10,600 $1,135,635
======== ======== ======== ======= ======== ==========
Weighed average interest rate...... 7.9%(1) 7.8% 7.2% 7.0% 7.0% 7.6%
Weighed average maturity (in
years)........................... 6.1(1) 3.3 10.6 0.7 1.1 7.3
</TABLE>
- ---------------
(1) Does not include unconsolidated joint venture debt. The weighted average
interest and weighted average maturity for the two unconsolidated joint
venture debts were 6.9% and 6.2 years, respectively.
<TABLE>
<CAPTION>
MARKET EQUITY
- ------------------------------------------------------------------------------------------------------
SHARES/UNITS
SECURITY OUTSTANDING MARKET PRICE MARKET VALUE
-------- ------------ ------------ ------------
<S> <C> <C> <C>
Common stock.............................................. 83,835,290 $21.50 $1,802,459
Common limited partnership units.......................... 5,973,615 21.50 128,432
----------
Total........................................... 89,808,905 $1,930,891
==========
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCK AND UNITS
- --------------------------------------------------------------------------------------------------
DIVIDEND LIQUIDATION REDEMPTION
SECURITY RATE PREFERENCE PROVISIONS
-------- -------- ----------- -------------
<S> <C> <C> <C>
Series A preferred stock.................................. 8.50% $100,000 July 2003
Series B preferred units.................................. 8.63% 65,000 November 2003
Series C preferred units.................................. 8.75% 110,000 November 2003
Series D preferred units.................................. 7.75% 79,767 May 2004
Series E preferred units.................................. 7.75% 11,022 August 2004
Series F preferred units.................................. 7.95% 19,872 March 2005
---- --------
Weighted Average/Total.................................. 8.40% $385,661
==== ========
</TABLE>
<TABLE>
<CAPTION>
CAPITALIZATION RATIOS
- ------------------------------------------------------------------
<S> <C>
Total debt-to-total market capitalization................... 35.6%
Our share of total debt-to-total market capitalization...... 32.9%
Total debt plus preferred-to-total market capitalization.... 46.4%
Our share of total debt plus preferred-to-total market
capitalization............................................ 44.1%
Our share of total debt-to-total book capitalization........ 35.6%
</TABLE>
20
<PAGE> 23
LIQUIDITY
As of March 31, 2000, we had approximately $89.1 million in cash,
restricted cash and cash equivalents and $484.0 million of additional available
borrowings under our credit facilities. We intend to use cash from operations,
borrowings under our credit facilities, other forms of secured and unsecured
financing, proceeds from any future debt or equity offerings by us or the
operating partnership (including issuances of limited partnership units in the
operating partnership or its subsidiaries), and proceeds from divestitures of
properties to fund acquisitions, development activities and capital expenditures
and to provide for general working capital requirements.
The following table sets forth the dividend payments and distributions that
were declared on February 29, 2000 and that were paid in connection with the
Series F Preferred Units, which were issued and sold on March 22, 2000:
<TABLE>
<CAPTION>
DIVIDEND
RECORD PAYMENT
SECURITY PAYING ENTITY DATE PAYMENT PERIOD DATE AMOUNT
- ------------------------ --------------------- ------- ------------------------ -------- -------
<S> <C> <C> <C> <C> <C>
Common Stock Company 4/05/00 Quarter ended 3/31/00 4/17/00 $0.3700
OP Units Operating Partnership 4/05/00 Quarter ended 3/31/00 4/17/00 $0.3700
Series A Preferred Stock Company 4/05/00 3 months ended 4/14/00 4/17/00 $0.5313
Series A Preferred Units Operating Partnership 4/05/00 3 months ended 4/14/00 4/17/00 $0.5313
Series B Preferred Units Operating Partnership 4/05/00 3 months ended 4/14/00 4/17/00 $1.0781
Series C Preferred Units AMB Property II, L.P. 4/05/00 3 months ended 4/14/00 4/17/00 $1.0938
Series D Preferred Units AMB Property II, L.P. 3/15/00 3 months ended 3/24/00 3/25/00 $0.9688
Series E Preferred Units AMB Property II, L.P. 4/05/00 3 months ended 4/14/00 4/17/00 $0.9688
Series F Preferred Units AMB Property II, L.P. 4/05/00 3/22/00 through 4/14/00 4/17/00 $0.1092
</TABLE>
The anticipated size of our distributions, using only cash from operations,
will not allow us to retire all of our debt as it comes due. Therefore, we
intend to also repay maturing debt with net proceeds from future debt and/or
equity financings. However, we may not be able to obtain future financings on
favorable terms or at all.
CAPITAL COMMITMENTS
In addition to recurring capital expenditures and costs to renew or
re-tenant space, as of March 31, 2000, our development pipeline included 21
projects representing a total estimated investment of $336.5 million upon
completion. Of this total, approximately $180.2 million had been funded as of
March 31, 2000 and approximately $156.3 million is estimated to be required to
complete projects currently under construction or for which we have committed to
complete. We presently expect to fund these expenditures with cash from
operations, borrowings under our credit facilities, debt or equity issuances and
net proceeds from property divestitures. Other than these capital items, we have
no material capital commitments.
During the period from January 1, 2000 to March 31, 2000, we invested:
- $34.5 million in six operating industrial buildings, aggregating
approximately 0.6 million rentable square feet, and
- $19.5 million in four new development projects (with a total cost upon
completion estimated to be $70.7 million), aggregating approximately 1.2
million square feet upon completion.
We funded these acquisitions and initiated development projects through
borrowings under our credit facilities, cash, debt and equity issuances, and net
proceeds from property divestitures.
YEAR 2000 COMPLIANCE
As a result of our year 2000 efforts, we have experienced no significant
problems with any of our financial or non-financial systems, nor did any of the
systems at our properties malfunction, as a result of year 2000 issues. In
addition, we have not experienced any significant year 2000 issues with respect
to our third party
21
<PAGE> 24
suppliers. The costs incurred by us in connection with our year 2000 compliance
program have been, and are expected to remain, immaterial to our financial
position, results of operations and cash flows.
FUNDS FROM OPERATIONS
We believe that funds from operations, or FFO, as defined by the National
Association of Real Estate Investment Trusts, is an appropriate measure of
performance for an equity real estate investment trust. While funds from
operations is a relevant and widely used measure of operating performance of
real estate investment trusts, it does not represent cash flow from operations
or net income as defined by U.S. generally accepted accounting principles, and
it should not be considered as an alternative to those indicators in evaluating
liquidity or operating performance. Further, funds from operations as disclosed
by other real estate investment trusts may not be comparable.
The following table reflects the calculation of our funds from operations
for three months ended March 31, 1999 and 2000 (dollars in thousands, except
share and per share data).
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 2000
----------- -----------
<S> <C> <C>
Income from operations before minority interests.......... $ 34,575 $ 40,465
Real estate related depreciation and amortization:
Total depreciation and amortization............. 18,424 19,192
Furniture, fixtures, and equipment depreciation and
ground lease amortization............................ (114) (403)
FFO attributable to minority interests(1)(2):
Separate account co-investors........................... (1,474) (1,264)
Alliance Fund I......................................... -- (756)
Other joint venture partners............................ (551) (606)
Adjustments to derive FFO in unconsolidated joint
venture(3):
Our share of net income................................. (1,151) (1,242)
Our share of FFO........................................ 1,645 1,736
Series A preferred stock dividends........................ (2,125) (2,125)
Series B, C, D, E & F preferred unit distributions........ (3,808) (5,610)
----------- -----------
FFO(1).................................................... $ 45,421 $ 49,387
=========== ===========
FFO per common share and unit:
Basic................................................... $ 0.50 $ 0.55
=========== ===========
Diluted................................................. $ 0.50 $ 0.55
=========== ===========
Weighted average common shares and units:
Basic................................................... 90,449,529 89,693,900
=========== ===========
Diluted(4).............................................. 90,469,105 89,707,941
=========== ===========
</TABLE>
- ---------------
(1) Funds from operations, or FFO, is defined as income from operations before
minority interest, gains or losses from sale of real estate and
extraordinary items plus real estate depreciation and adjustment to derive
our pro rata share of the funds from operations of unconsolidated joint
ventures, less minority interests' pro rata share of the funds from
operations of consolidated joint ventures and perpetual preferred stock
dividends. In accordance with NAREIT White Paper on funds from operations,
we include the effects of straight-line rents in funds from operations.
Further, we do not adjust funds from operations to eliminate the effects of
non-recurring charges.
(2) Represents funds from operations attributable to minority interest in
consolidated joint ventures for the period presented, which has been
computed as minority interests' share of net income plus minority interests'
share of real estate-related depreciation and amortization of the
consolidated joint ventures for such period. These minority interests are
not convertible into shares of common stock.
(3) Represents our pro rata share of funds from operations in unconsolidated
joint ventures for the period presented, which has been computed as our
share of net income plus our share of real estate-related depreciation and
amortization of the unconsolidated joint ventures for such period.
(4) Includes the dilutive effect of stock options.
22
<PAGE> 25
OPERATING AND LEASING STATISTICS SUMMARY
The following summarizes key operating and leasing statistics for the all
of our industrial and retail properties as of and for the period ended March 31,
2000.
<TABLE>
<CAPTION>
INDUSTRIAL RETAIL TOTAL
----------- ---------- -----------
<S> <C> <C> <C>
Square feet owned(1)......................... 65,906,481 1,607,135 67,513,616
Occupancy percentage......................... 96.5% 87.5% 96.3%
Lease expirations as percentage of total
square feet (next 12 months)............... 15.9% 9.5% 15.7%
Weighted average lease term.................. 6 years 12 years 6 years
Tenant retention:
Quarter (2.4 million sq. ft. expired)...... 65.5% 17.4% 64.6%
Cash basis rent increases on renewals and
rollovers:
Quarter (2.8 million sq. ft. leased)....... 13.9% (4.0)% 13.6%
Same store cash basis NOI growth(2):
Quarter.................................... 6.9% 5.0% 6.8%
Second generation tenant improvements and
leasing commissions per sq. ft.(3):
Quarter:
Renewals................................ $ 0.75 $ 0.00 $ 0.75
Re-tenanted............................. 1.79 0.00 1.79
----------- ---------- -----------
Weighted average...................... $ 1.35 $ 0.00 $ 1.35
=========== ========== ===========
Recurring capital expenditures(4)............ $ 6,986 $ 5 $ 6,991
=========== ========== ===========
</TABLE>
- ---------------
(1) In addition to owned square feet as of March 31, 2000, we managed, through
our subsidiary, AMB Investment Management, 3.7 million, 0.6 million, and 0.1
million additional square feet of industrial, retail and other properties,
respectively. We also have an investment in 4.0 million square feet of
industrial properties through our investments in the unconsolidated joint
ventures.
(2) Consists of industrial buildings and retail centers aggregating 53.8 million
and 0.8 million square feet, respectively, that have been owned by us prior
to January 1, 1999, and excludes development properties prior to
stabilization.
(3) Consists of all second generation leases renewing or re-tenanting with lease
terms greater than one year.
(4) Includes second generation leasing costs and building improvements.
The following summarizes key same store properties' operating statistics
for our industrial and retail properties as of and for the period ending March
31, 2000.
<TABLE>
<CAPTION>
INDUSTRIAL RETAIL TOTAL
---------- ------- ----------
<S> <C> <C> <C>
Square feet in same store pool(1)................ 53,785,523 791,291 54,576,814
Occupancy percentage............................. 97.4% 97.8% 97.4%
Tenant retention:
Quarter........................................ 76.6% 17.4% 75.1%
Cash basis rent increases on renewals and
rollovers:
Quarter........................................ 13.9% (4.0)% 13.6%
Cash basis NOI growth % increase (decrease):
Quarter:
Revenues.................................... 5.2% 2.0% 5.1%
Expenses.................................... (0.1)% (5.5)% (0.3)%
Net operating income........................ 6.9% 5.0% 6.8%
</TABLE>
- ---------------
(1) Consists of industrial buildings and retail centers aggregating 53.8 million
and 0.8 million square feet, respectively, that have been owned by us prior
to January 1, 1999, and excludes development properties prior to
stabilization.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Our exposure to market risk includes the rising interest rates in
connection with our unsecured credit facilities and other variable rate
borrowings, and our ability to incur more debt without stockholder approval,
thereby increasing our debt service obligations, which could adversely affect
our cash flows. See "Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Capital Resources -- Market Capitalization."
23
<PAGE> 26
PART II
ITEM 1. LEGAL PROCEEDINGS
As of March 31, 2000, there were no pending legal proceedings to which we
are a party or of which any of our properties is the subject, the adverse
determination of which we anticipate would have a material adverse effect upon
our financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES
At the time of our initial public offering, 4,237,750 shares of common
stock, known as performance shares, were placed in escrow by certain of our
investors, which were subject to advisory agreements with our predecessor that
included incentive fee provisions. On January 7, 2000, 2,771,824 shares of
common stock were released from escrow to these investors and 1,465,926 shares
of common stock were returned to us and cancelled. The cancelled shares of
common stock represent indirect interests in the operating partnership that were
reallocated from us (thereby decreasing the number of shares of common stock
outstanding) to other unitholders who had an ownership interest in our
predecessor, including certain of our executive officers, (thereby increasing
the number of limited partnership units owned by partners other than us). The
total number of outstanding partnership units did not change as a result of this
reallocation. This reallocation did not change the amount of fully diluted
shares of common stock and limited partnership units outstanding.
On March 22, 2000, AMB Property II, L.P. issued and sold 397,439 7.95%
Series F Cumulative Redeemable Preferred Limited Partnership Units at a price of
$50.00 per unit, for a gross sales price of approximately $19.9 million, to a
limited liability company. The issuance and sale of the Series F Preferred Units
constituted a private placement of securities that was exempt from the
registration requirement of the Securities Act pursuant to Section 4(2) of the
Securities Act and Rule 506 of Regulation D. The Series F Preferred Units are
exchangeable, at specified times and subject to certain conditions, on a
one-for-one basis, for shares of our Series F Preferred Stock. The Articles
Supplementary establishing the rights and preferences of the holders of the
Series F Preferred Stock were filed as Exhibit 3.1 to our Current Report on Form
8-K filed on April 14, 2000.
On March 31, 2000, an option granted to the California Public Employees'
Retirement System for the purchase of up to 2,000,000 shares of our common stock
expired without being exercised by the holder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
BUSINESS RISKS
Our operations involve various risks that could have adverse consequences
to us. These risks include, among others:
GENERAL REAL ESTATE RISKS
THERE ARE FACTORS OUTSIDE OF OUR CONTROL THAT AFFECT THE PERFORMANCE AND
VALUE OF OUR PROPERTIES
Real property investments are subject to varying degrees of risk. The
yields available from equity investments in real estate depend on the amount of
income earned and capital appreciation generated by the related properties as
well as the expenses incurred in connection with the properties. If our
properties do not generate income sufficient to meet operating expenses,
including debt service and capital expenditures, our
24
<PAGE> 27
ability to pay distributions to our stockholders could be adversely affected.
Income from, and the value of, our properties may be adversely affected by the
general economic climate, local conditions such as oversupply of industrial
space or a reduction in demand for industrial space, the attractiveness of our
properties to potential customers, competition from other properties, our
ability to provide adequate maintenance and insurance and an increase in
operating costs. In addition, revenues from properties and real estate values
are also affected by factors such as the cost of compliance with regulations,
the potential for liability under applicable laws (including changes in tax
laws), interest rate levels and the availability of financing. Our income would
be adversely affected if a significant number of customers were unable to pay
rent or if we were unable to rent our industrial space on favorable terms.
Certain significant expenditures associated with an investment in real estate
(such as mortgage payments, real estate taxes and maintenance costs) generally
do not decline when circumstances cause a reduction in income from the property.
WE MAY BE UNABLE TO RENEW LEASES OR RELET SPACE AS LEASES EXPIRE
We are subject to the risks that leases may not be renewed, space may not
be relet, or the terms of renewal or reletting (including the cost of required
renovations) may be less favorable than current lease terms. Leases on a total
of approximately 28.2% of the leased square footage of our properties as of
March 31, 2000 will expire on or prior to December 31, 2001, with leases on
12.3% of the leased square footage of our properties as of March 31, 2000
expiring during the 9 months ending December 31, 2000. In addition, numerous
properties compete with our properties in attracting customers to lease space,
particularly with respect to retail centers. The number of competitive
commercial properties in a particular area could have a material adverse effect
on our ability to lease space in our properties and on the rents that we are
able to charge. Our financial condition, results of operations, cash flow and
our ability to pay distributions on, and the market price of, our stock could be
adversely affected if we are unable to promptly relet or renew the leases for
all or a substantial portion of expiring leases, if the rental rates upon
renewal or reletting is significantly lower than expected, or if our reserves
for these purposes prove inadequate.
REAL ESTATE INVESTMENTS ARE ILLIQUID
Because real estate investments are relatively illiquid, our ability to
vary our portfolio promptly in response to economic or other conditions is
limited. The limitations in the Internal Revenue Code and related regulations on
a real estate investment trust holding property for sale may affect our ability
to sell properties without adversely affecting distributions to our
stockholders. The relative illiquidity of our holdings, Internal Revenue Code
prohibitions and related regulations could impede our ability to respond to
adverse changes in the performance of our investments and could adversely affect
our financial condition, results of operations, cash flow and our ability to pay
distributions on, and the market price of, our stock.
A SIGNIFICANT NUMBER OF OUR PROPERTIES ARE LOCATED IN CALIFORNIA
Our properties located in California as of March 31, 2000 represented
approximately 23.1% of the aggregate square footage of our properties as of
March 31, 2000 and approximately 28.8% of our annualized base rent. Annualized
base rent means the monthly contractual amount under existing leases at March
31, 2000, multiplied by 12. This amount excludes expense reimbursements and
rental abatements. Our revenue from, and the value of, our properties located in
California may be affected by a number of factors, including local real estate
conditions (such as oversupply of or reduced demand for industrial properties)
and the local economic climate. Business layoffs, downsizing, industry
slowdowns, changing demographics and other factors may adversely impact the
local economic climate. A downturn in either the California economy or in
California real estate conditions could adversely affect our financial
condition, results of operations, cash flow and our ability to pay distributions
on, and the market price of, our stock. Certain of our properties are also
subject to possible loss from seismic activity.
OUR PROPERTIES ARE CURRENTLY CONCENTRATED IN THE INDUSTRIAL SECTOR
Our properties are currently concentrated predominantly in the industrial
real estate sector. Our concentration in a certain property type may expose us
to the risk of economic downturns in this sector to a
25
<PAGE> 28
greater extent than if our portfolio also included other property types. As a
result of such concentration, economic downturns in the industrial real estate
sector could have an adverse effect on our financial condition, results of
operations, cash flow and ability to pay distributions on, and the market price
of, our stock.
SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE
We carry comprehensive liability, fire, extended coverage and rental loss
insurance covering all of our properties, with policy specifications and insured
limits which we believe are adequate and appropriate under the circumstances
given relative risk of loss, the cost of such coverage and industry practice.
There are, however, certain losses that are not generally insured because it is
not economically feasible to insure against them, including losses due to riots
or acts of war. Certain losses such as losses due to floods or seismic activity
may be insured subject to certain limitations including large deductibles or
co-payments and policy limits. If an uninsured loss or a loss in excess of
insured limits occurs with respect to one or more of our properties, we could
lose the capital we invested in the properties, as well as the anticipated
future revenue from the properties and, in the case of debt which is with
recourse to us, we would remain obligated for any mortgage debt or other
financial obligations related to the properties. Moreover, as the general
partner of the operating partnership, we will generally be liable for all of the
operating partnership's unsatisfied obligations other than non-recourse
obligations. Any such liability could adversely affect our financial condition,
results of operations, cash flow and ability to pay distributions on, and the
market price of, our stock.
A number of our properties are located in areas that are known to be
subject to earthquake activity, including California where, as of March 31,
2000, 212 industrial buildings aggregating approximately 15.2 million rentable
square feet (representing 22.5% of our properties based on aggregate square
footage and 26.8% based on annualized base rent) and one retail center
aggregating approximately 0.4 million rentable square feet (representing 0.6% of
our properties based on aggregate square footage and 2.0% based on annualized
base rent) are located. We carry replacement cost earthquake insurance on all of
our properties located in areas historically subject to seismic activity,
subject to coverage limitations and deductibles which we believe are
commercially reasonable. This insurance coverage also applies to the properties
managed by AMB Investment Management, with a single aggregate policy limit and
deductible applicable to those properties and our properties. The operating
partnership owns 100% of the non-voting preferred stock of AMB Investment
Management, Inc. Through an annual analysis prepared by outside consultants, we
evaluate our earthquake insurance coverage in light of current industry practice
and determine the appropriate amount of earthquake insurance to carry. We may
incur material losses in excess of insurance proceeds and we may not be able to
continue to obtain insurance at commercially reasonable rates.
WE ARE SUBJECT TO RISKS AND LIABILITIES IN CONNECTION WITH PROPERTIES OWNED
THROUGH JOINT VENTURES, LIMITED LIABILITY COMPANIES AND PARTNERSHIPS
As of March 31, 2000, we had ownership interests in 23 joint ventures,
limited liability companies or partnerships with third parties, as well as
interests in two unconsolidated entities. As of March 31, 2000, we owned 32
(excluding the two unconsolidated joint ventures) of our properties through
these entities. We may make additional investments through these ventures in the
future and presently plan to do so with clients of AMB Investment Management and
certain Development Alliance Partners, who share certain approval rights over
major decisions. Partnership, limited liability company or joint venture
investments may involve risks such as the following:
- our partners, co-members or joint venturers might become bankrupt (in
which event we and any other remaining general partners, members or joint
venturers would generally remain liable for the liabilities of the
partnership, limited liability company or joint venture);
- our partners, co-members or joint venturers might at any time have
economic or other business interests or goals which are inconsistent with
our business interests or goals;
- our partners, co-members or joint venturers may be in a position to take
action contrary to our instructions, requests, policies or objectives,
including our current policy with respect to maintaining our
qualification as a real estate investment trust; and
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- agreements governing joint ventures, limited liability companies and
partnerships often contain restrictions on the transfer of a joint
venturer's, member's or partner's interest or "buy-sell" or other
provisions which may result in a purchase or sale of the interest at a
disadvantageous time or on disadvantageous terms.
We will, however, generally seek to maintain sufficient control of our
partnerships, limited liability companies and joint ventures to permit us to
achieve our business objectives. Our organizational documents do not limit the
amount of available funds that we may invest in partnerships, limited liability
companies or joint ventures. The occurrence of one or more of the events
described above could have an adverse effect on our financial condition, results
of operations, cash flow and ability to pay distributions on, and the market
price of, our stock.
WE MAY BE UNABLE TO CONSUMMATE ACQUISITIONS ON ADVANTAGEOUS TERMS
We intend to continue to acquire primarily industrial properties.
Acquisitions of properties entail risks that investments will fail to perform in
accordance with expectations. Estimates of the costs of improvements necessary
for us to bring an acquired property up to market standards may prove
inaccurate. In addition, there are general investment risks associated with any
new real estate investment. Further, we anticipate significant competition for
attractive investment opportunities from other major real estate investors with
significant capital including both publicly traded real estate investment trusts
and private institutional investment funds. We expect that future acquisitions
will be financed through a combination of borrowings under our unsecured credit
facility, proceeds from equity or debt offerings by us or the operating
partnership (including issuances of limited partnership units by the operating
partnership or its subsidiaries), and proceeds from property divestitures, which
could have an adverse effect on our cash flow. We may not be able to acquire
additional properties. Our inability to finance any future acquisitions on
favorable terms or the failure of acquisitions to conform with our expectations
or investment criteria, or our failure to timely reinvest the proceeds from
property divestitures could adversely affect our financial condition, results of
operations, cash flow and ability to pay distributions on, and the market price
of, our stock.
WE MAY BE UNABLE TO COMPLETE RENOVATION AND DEVELOPMENT ON ADVANTAGEOUS TERMS
The real estate development business, including the renovation and
rehabilitation of existing properties, involves significant risks. These risks
include the following:
- we may not be able to obtain financing on favorable terms for development
projects and we may not complete construction on schedule or within
budget, resulting in increased debt service expense and construction
costs and delays in leasing such properties and generating cash flow;
- we may not be able to obtain, or we may experience delays in obtaining,
all necessary zoning, land-use, building, occupancy and other required
governmental permits and authorizations;
- new or renovated properties may perform below anticipated levels,
producing cash flow below budgeted amounts;
- substantial renovation as well as new development activities, regardless
of whether or not they are ultimately successful, typically require a
substantial portion of management's time and attention which could divert
management's time from our day-to-day operations; and
- activities that we finance through construction loans involve the risk
that, upon completion of construction, we may not be able to obtain
permanent financing or we may not be able to obtain permanent financing
on advantageous terms.
These risks could have an adverse effect on our financial condition,
results of operations, cash flow and ability to pay distributions on, and the
market price of, our stock.
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WE MAY BE UNABLE TO COMPLETE DIVESTITURES ON ADVANTAGEOUS TERMS
We intend to dispose of properties from time to time that do not conform
with our current investment strategy or that we have otherwise determined should
be divested, including, as of March 31, 2000, six retail centers, aggregating
approximately 1.3 million square feet, and one land parcel, which are held for
divestiture. Our ability to dispose of properties on advantageous terms is
dependent upon factors beyond our control, including competition from other
owners (including other real estate investment trusts) that are attempting to
dispose of industrial and retail properties and the availability of financing on
attractive terms for potential buyers of our properties. Our inability to
dispose of properties on favorable terms and/or our inability to redeploy the
proceeds of property divestitures in accordance with our investment strategy
could adversely our financial condition, results of operations, cash flow and
ability to pay distributions on, and the market price of, our stock.
DEBT FINANCING
WE COULD INCUR MORE DEBT
We operate with a policy of incurring debt, either directly or through our
subsidiaries, only if upon such incurrence our debt-to-total market
capitalization ratio would be approximately 45% or less. The aggregate amount of
indebtedness that we may incur under our policy varies directly with the
valuation of our capital stock and the number of shares of capital stock
outstanding. Accordingly, we would be able to incur additional indebtedness
under our policy as a result of increases in the market price per share of our
common stock or other outstanding classes of capital stock, and future issuance
of shares of our capital stock. In spite of this policy, our organizational
documents do not contain any limitation on the amount of indebtedness that we
may incur. Accordingly, our board of directors could alter or eliminate this
policy. If we change this policy, we could become more highly leveraged,
resulting in an increase in debt service that could adversely affect our
financial condition, results of operations, cash flow and ability to pay
distributions on, and the market price of, our stock.
SCHEDULED DEBT PAYMENTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
We are subject to risks normally associated with debt financing, including
the risks that cash flow will be insufficient to make distributions to our
stockholders, that we will be unable to refinance existing indebtedness on our
properties (which in all cases will not have been fully amortized at maturity)
and that the terms of refinancing will not be as favorable as the terms of
existing indebtedness.
As of March 31, 2000, we had total debt outstanding of approximately $1.3
billion including:
- approximately $754.6 million of secured indebtedness (excluding
unamortized debt premiums) with an average maturity of six years and a
weighted average interest rate of 7.9%;
- approximately $53.0 million outstanding under the unsecured credit
facility related to the Alliance Fund I, with a maturity date of April
2001 and a weighted average interest rate of 7.0%;
- approximately $43.0 million outstanding under our unsecured $500.0
million credit facility with a maturity date of November 2000 and a
weighted average interest rate of 7.0%; and
- $400.0 million aggregate principal amount of unsecured senior debt
securities with maturities in June 2008, 2015 and 2018 and a weighted
average interest rate of 7.2%.
We are a guarantor of the operating partnership's obligations with respect
to the senior debt securities referenced above. If we are unable to refinance or
extend principal payments due at maturity or pay them with proceeds of other
capital transactions, we expect that our cash flow will not be sufficient in all
years to pay distributions to our stockholders and to repay all such maturing
debt. Furthermore, if prevailing interest rates or other factors at the time of
refinancing (such as the reluctance of lenders to make commercial real estate
loans) result in higher interest rates upon refinancing, the interest expense
relating to that refinanced indebtedness would increase. This increased interest
expense would adversely affect our financial condition, results of operations,
cash flow and ability to pay distributions on, and the market price of, our
stock. In
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addition, if we mortgage one or more of our properties to secure payment of
indebtedness and we are unable to meet mortgage payments, the property could be
foreclosed upon or transferred to the mortgagee with a consequent loss of income
and asset value. A foreclosure on one or more of our properties could adversely
affect our financial condition, results of operations, cash flow and ability to
pay distributions on, and the market price of, our stock.
RISING INTEREST RATES COULD ADVERSELY AFFECT OUR CASH FLOW
As of March 31, 2000, we had $43.0 million and $53.0 million outstanding
under our unsecured credit facility and the unsecured credit facility related to
the Alliance Fund I, respectively. In addition, we may incur other variable rate
indebtedness in the future. Increases in interest rates on this indebtedness
could increase our interest expense, which would adversely affect our financial
condition, results of operations, cash flow and ability to pay distributions on,
and the market price of, our stock. Accordingly, we may in the future engage in
transactions to limit our exposure to rising interest rates.
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL
In order to qualify as a real estate investment trust under the Internal
Revenue Code, we are required each year to distribute to our stockholders at
least 95% of our real estate investment trust taxable income (determined without
regard to the dividends-paid deduction and by excluding any net capital gain).
Because of this distribution requirement, we may not be able to fund all future
capital needs, including capital needs in connection with acquisitions, from
cash retained from operations. As a result, to fund capital needs, we rely on
third party sources of capital, which we may not be able to obtain on favorable
terms or at all. Our access to third party sources of capital depends upon a
number of factors, including general market conditions and the market's
perception of our growth potential and our current and potential future earnings
and cash distributions and the market price of the shares of our capital stock.
Additional debt financing may substantially increase our leverage.
WE COULD DEFAULT ON CROSS-COLLATERALIZED AND CROSS-DEFAULTED DEBT
As of March 31, 2000, we had 19 non-recourse secured loans, which are
cross-collateralized by 20 properties. As of March 31, 2000, we had $246.6
million (not including unamortized debt premium) outstanding on these loans. If
we default on any of these loans, we will be required to repay the aggregate of
all indebtedness, together with applicable prepayment charges, to avoid
foreclosure on all the cross-collateralized properties within the applicable
pool. Foreclosure on our properties, or our inability to refinance our loans on
favorable terms, could adversely impact our financial condition, results of
operations, cash flow and ability to pay distributions on, and the market price
of, our stock. In addition, our credit facilities and the senior debt securities
of the operating partnership contain certain cross-default provisions which are
triggered in the event that our other material indebtedness is in default. These
cross-default provisions may require us to repay or restructure the credit
facilities and the senior debt securities in addition to any mortgage or other
debt which is in default, which could adversely affect our financial condition,
results of operations, cash flow and ability to pay distributions on, and the
market price of, our stock.
CONTINGENT OR UNKNOWN LIABILITIES COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
Our predecessors have been in existence for varying lengths of time up to
17 years. At the time of our formation we acquired the assets of these entities
subject to all of their potential existing liabilities. There may be current
liabilities or future liabilities arising from prior activities that we are not
aware of and therefore are not disclosed in this report. We assumed these
liabilities as the surviving entity in the various merger and contribution
transactions that occurred at the time of our formation. Existing liabilities
for indebtedness generally were taken into account in connection with the
allocation of the operating partnership's limited partnership units and/or
shares of our common stock in the formation transactions, but no other
liabilities were taken into account for these purposes. We do not have recourse
against our predecessors or any of their
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respective stockholders or partners or against any individual account investors
with respect to any unknown liabilities. Unknown liabilities might include the
following:
- liabilities for clean-up or remediation of undisclosed environmental
conditions;
- claims of customers, vendors or other persons dealing with our
predecessors prior to the formation transactions that had not been
asserted prior to the formation transactions;
- accrued but unpaid liabilities incurred in the ordinary course of
business;
- tax liabilities; and
- claims for indemnification by the officers and directors of our
predecessors and others indemnified by these entities.
Certain customers may claim that the formation transactions gave rise to a
right to purchase the premises that they occupy. We do not believe any such
claims would be material and, to date, no such claims have been filed. See "--
Government Regulations -- We Could Encounter Costly Environmental Problems"
below regarding the possibility of undisclosed environmental conditions
potentially affecting the value of our properties. Undisclosed material
liabilities in connection with the acquisition of properties, entities and
interests in properties or entities could adversely affect our financial
condition, results of operations, cash flow and ability to pay distributions on,
and the market price of, our stock.
CONFLICTS OF INTEREST
SOME OF OUR EXECUTIVE OFFICERS ARE INVOLVED IN OTHER REAL ESTATE ACTIVITIES
AND INVESTMENTS
Some of our executive officers own interests in real estate-related
businesses and investments. These interests include minority ownership of AMB
Institutional Housing Partners, a residential housing finance company, and
ownership of AMB Development, Inc. and AMB Development, L.P., developers which
own property that we believe is not suitable for ownership by us. AMB
Development, Inc. and AMB Development, L.P. have agreed not to initiate any new
development projects following our initial public offering in November 1997.
These entities have also agreed that they will not make any further investments
in industrial properties other than those currently under development at the
time of our initial public offering. AMB Institutional Housing Partners, AMB
Development, Inc. and AMB Development, L.P. continue to use the name "AMB"
pursuant to royalty-free license arrangements. The continued involvement in
other real estate-related activities by some of our executive officers and
directors could divert management's attention from our day-to-day operations.
Most of our executive officers have entered into non-competition agreements with
us pursuant to which they have agreed not to engage in any activities, directly
or indirectly, in respect of commercial real estate, and not to make any
investment in respect of industrial real estate, other than through ownership of
not more than 5% of the outstanding shares of a public company engaged in such
activities or through the existing investments referred to in this report. State
law may limit our ability to enforce these agreements.
We could also, in the future, subject to the unanimous approval of the
disinterested members of the board of directors with respect to such
transaction, acquire property from executive officers, enter into leases with
executive officers, and/or engage in other related activities in which the
interests pursued by the executive officers may not be in the best interests of
our stockholders.
CERTAIN OF OUR EXECUTIVE OFFICERS AND DIRECTORS MAY HAVE CONFLICTS OF
INTEREST WITH US IN CONNECTION WITH OTHER PROPERTIES THAT THEY OWN OR
CONTROL
As of March 31, 2000, AMB Development, L.P. owns interests in 11 retail
development projects in the U.S., 10 of which consist of a single free-standing
Walgreens drugstore and one of which consists of a free-standing Walgreens
drugstore, a ground lease to McDonald's and a 14,000 square foot retail center.
In addition, Messrs. Abbey, Moghadam and Burke, each a founder and director, own
less than 1% interests in two partnerships which own office buildings in various
markets; these interests have negligible value. Luis A.
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Belmonte, an executive officer, owns less than a 10% interest, representing an
estimated value of $75,000, in a limited partnership which owns an office
building located in Oakland, California.
In addition, several of our executive officers individually own:
- less than 1% interests in the stocks of certain publicly-traded real
estate investment trusts;
- certain interests in and rights to developed and undeveloped real
property located outside the United States; and
- certain other de minimis holdings in equity securities of real estate
companies.
Thomas W. Tusher, a member of our board of directors, is a limited partner
in a partnership in which Messrs. Abbey, Moghadam and Burke are general partners
and which owns a 75% interest in an office building. Mr. Tusher owns a 20%
interest in the partnership, valued as of March 31, 2000 at approximately $1.2
million. Messrs. Abbey, Moghadam and Burke each have an approximately 26.7%
interest in the partnership, each valued as of March 31, 2000 at approximately
$1.6 million.
We believe that the properties and activities set forth above generally do
not directly compete with any of our properties. However, it is possible that a
property in which an executive officer or director, or an affiliate of an
executive officer or director, has an interest may compete with us in the future
if we were to invest in a property similar in type and in close proximity to
that property. In addition, the continued involvement by our executive officers
and directors in these properties could divert management's attention from our
day-to-day operations. Our policy prohibits us from acquiring any properties
from our executive officers or their affiliates without the approval of the
disinterested members of our board of directors with respect to that
transaction.
OUR ROLE AS GENERAL PARTNER OF THE OPERATING PARTNERSHIP MAY CONFLICT WITH
THE INTERESTS OF STOCKHOLDERS
As the general partner of the operating partnership, we have fiduciary
obligations to the operating partnership's limited partners, the discharge of
which may conflict with the interests of our stockholders. In addition, those
persons holding limited partnership units will have the right to vote as a class
on certain amendments to the partnership agreement of the operating partnership
and individually to approve certain amendments that would adversely affect their
rights. The limited partners may exercise these voting rights in a manner that
conflicts with the interests of our stockholders. In addition, under the terms
of the operating partnership's partnership agreement, holders of limited
partnership units will have certain approval rights with respect to certain
transactions that affect all stockholders but which they may not exercise in a
manner which reflects the interests of all stockholders.
OUR DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT STOCKHOLDERS COULD ACT IN
A MANNER THAT IS NOT IN THE BEST INTEREST OF ALL STOCKHOLDERS
As of May 11, 2000, our two largest stockholders, Cohen & Steers Capital
Management, Inc. (with respect to various client accounts for which Cohen &
Steers Capital Management, Inc. serves as investment advisor), and Capital
Research and Management Company (with respect to various client accounts for
which Capital Research and Management Company serves as investment advisor)
beneficially owned approximately 10.9% of our outstanding common stock. In
addition, our executive officers and directors beneficially owned approximately
5.6% of our outstanding common stock as of May 11, 2000, and will have influence
on our management and operation and, as stockholders, will have influence on the
outcome of any matters submitted to a vote of our stockholders. This influence
might be exercised in a manner that is inconsistent with the interests of other
stockholders. Although there is no understanding or arrangement for these
directors, officers and stockholders and their affiliates to act in concert,
these parties would be in a position to exercise significant influence over our
affairs if they choose to do so.
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WE COULD INVEST IN REAL ESTATE MORTGAGES
We may invest in mortgages, and may do so as a strategy for ultimately
acquiring the underlying property. In general, investments in mortgages include
the risks that borrowers may not be able to make debt service payments or pay
principal when due, that the value of the mortgaged property may be less than
the principal amount of the mortgage note secured by the property and that
interest rates payable on the mortgages may be lower than our cost of funds to
acquire these mortgages. In any of these events, our funds from operations and
our ability to make distributions on, and the market price of, our stock could
be adversely affected. Funds from operations means income (loss) from operations
before disposal of real estate properties, minority interests and extraordinary
items plus our pro rata share of the funds from operations of the unconsolidated
joint ventures, depreciation and amortization, excluding depreciation of
furniture, fixtures and equipment less funds from operations attributable to
minority interests in consolidated joint ventures which are not convertible into
shares of common stock.
GOVERNMENT REGULATIONS
Many laws and governmental regulations are applicable to our properties and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
Under the Americans with Disabilities Act, places of public accommodation
must meet certain federal requirements related to access and use by disabled
persons. Compliance with the Americans with Disabilities Act might require us to
remove structural barriers to handicapped access in certain public areas where
such removal is "readily achievable." If we fail to comply with the Americans
with Disabilities Act, we might be required to pay fines to the government or
damages to private litigants. The impact of application of the Americans with
Disabilities Act to our properties, including the extent and timing of required
renovations, is uncertain. If we are required to make unanticipated expenditures
to comply with the Americans with Disabilities Act, our cash flow and the
amounts available for distributions to our stockholders may be adversely
affected.
WE COULD ENCOUNTER COSTLY ENVIRONMENTAL PROBLEMS
Federal, state and local laws and regulations relating to the protection of
the environment impose liability on a current or previous owner or operator of
real estate for contamination resulting from the presence or discharge of
hazardous or toxic substances or petroleum products at the property. A current
or previous owner may be required to investigate and clean up contamination at
or migrating from a site. These laws typically impose liability and clean-up
responsibility without regard to whether the owner or operator knew of or caused
the presence of the contaminants. Even if more than one person may have been
responsible for the contamination, each person covered by the environmental laws
may be held responsible for all of the clean-up costs incurred. In addition,
third parties may sue the owner or operator of a site for damages based on
personal injury, property damage and/or other costs, including investigation and
clean-up costs, resulting from environmental contamination present at or
emanating from that site.
Environmental laws also govern the presence, maintenance and removal of
asbestos. These laws require that owners or operators of buildings containing
asbestos properly manage and maintain the asbestos, that they adequately inform
or train those who may come into contact with asbestos and that they undertake
special precautions, including removal or other abatement in the event that
asbestos is disturbed during renovation or demolition of a building. These laws
may impose fines and penalties on building owners or operators for failure to
comply with these requirements and may allow third parties to seek recovery from
owners or operators for personal injury associated with exposure to asbestos
fibers. Some of our properties may contain asbestos-containing building
materials.
Some of our properties are leased or have been leased, in part, to owners
and operators of dry cleaners that operate on-site dry cleaning plants, to
owners and operators of gas stations or to owners or operators of other
businesses that use, store or otherwise handle petroleum products or other
hazardous or toxic substances.
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Some of these properties contain, or may have contained, underground storage
tanks for the storage of petroleum products and other hazardous or toxic
substances. These operations create a potential for the release of petroleum
products or other hazardous or toxic substances. Some of our properties are
adjacent to or near other properties that have contained or currently contain
underground storage tanks used to store petroleum products or other hazardous or
toxic substances. In addition, certain of our properties are on, or are adjacent
to or near other properties upon which others, including former owners or
tenants of the properties, have engaged or may in the future engage in
activities that may release petroleum products or other hazardous or toxic
substances. From time to time, we may acquire properties, or interests in
properties, with known adverse environmental conditions where we believe that
the environmental liabilities associated with these conditions are quantifiable
and the acquisition will yield a superior risk-adjusted return. In connection
with certain of the divested properties, we have agreed to remain responsible
for, and to bear the cost of, remediating or monitoring certain environmental
conditions on the properties.
All of our properties were subject to a Phase I or similar environmental
assessments by independent environmental consultants at the time of acquisition
or shortly after acquisition. Phase I assessments are intended to discover and
evaluate information regarding the environmental condition of the surveyed
property and surrounding properties. Phase I assessments generally include an
historical review, a public records review, an investigation of the surveyed
site and surrounding properties, and preparation and issuance of a written
report, but do not include soil sampling or subsurface investigations and
typically do not include an asbestos survey. We may perform additional Phase II
testing if recommended by the independent environmental consultant. Phase II
testing may include the collection and laboratory analysis of soil and
groundwater samples, completion of surveys for asbestos-containing building
materials, and any other testing that the consultant considers prudent in order
to test for the presence of hazardous materials.
We have formed a limited liability company with AIG Global Real Estate
Investment Corp. to acquire, develop, manage and operate environmentally
impaired properties in target markets nationwide. The operating partnership is
the managing member of this venture. Each of AIG and the operating partnership
has committed $50 million to this venture. This venture currently intends to
invest primarily in industrial properties located near major airports, ports and
in-fill areas with known and quantifiable environmental issues, as well as, to a
more limited extent, well-located, value-added retail properties. Environmental
issues for each property are evaluated and quantified prior to acquisition.
Phase I environmental assessments are performed on the property; Phase II
testing is completed, if necessary, to supplement existing environmental data on
the property; and detailed remedial cost estimates are prepared by independent
third party engineers. Our and AIG Global Real Estate Investment Corp.'s risk
management teams then review the various environmental reports and determine
whether the property is appropriate for acquisition. The costs of environmental
investigation, clean-up and monitoring are underwritten into the cost of the
acquisition and appropriate environmental insurance is obtained for the
property.
None of the environmental assessments of our properties has revealed any
environmental liability that we believe would have a material adverse effect on
our financial condition or results of operations taken as a whole, and we are
not aware of any such material environmental liability. Nonetheless, it is
possible that the assessments do not reveal all environmental liabilities and
that there are material environmental liabilities of which we are unaware or
that known environmental conditions may give rise to liabilities that are
materially greater than anticipated. Moreover, future laws, ordinances or
regulations may impose material environmental liability and the current
environmental condition of our properties may be affected by tenants, by the
condition of land, by operations in the vicinity of the properties (such as
releases from underground storage tanks), or by third parties unrelated to us.
If the costs of compliance with environmental laws and regulations now existing
or adopted in the future exceed our budgets for these items, our financial
condition, results of operations, cash flow and ability to pay distributions on,
and the market price of, our stock could be adversely affected.
OUR FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED IF WE FAIL TO COMPLY
WITH OTHER REGULATIONS
Our properties are also subject to various federal, state and local
regulatory requirements such as state and local fire and life safety
requirements. If we fail to comply with these requirements, we might incur fines
by governmental authorities or be required to pay awards of damages to private
litigants. We believe that our
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properties are currently in substantial compliance with all such regulatory
requirements. However, these requirements may change or new requirements may be
imposed which could require significant unanticipated expenditures by us. Any
such unanticipated expenditures could have an adverse effect on our financial
condition, results of operations, cash flow and ability to pay distributions on,
and the market price of, our stock.
FEDERAL INCOME TAX RISKS
OUR FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST WOULD HAVE SERIOUS
ADVERSE CONSEQUENCES TO STOCKHOLDERS
We elected to be taxed as a real estate investment trust under Sections 856
through 860 of the Internal Revenue Code commencing with our taxable year ended
December 31, 1997. We currently intend to operate so as to qualify as a real
estate investment trust under the Internal Revenue Code and believe that our
current organization and method of operation comply with the rules and
regulations promulgated under the Internal Revenue Code to enable us to continue
to qualify as a real estate investment trust. However, it is possible that we
have been organized or have operated in a manner which would not allow us to
qualify as a real estate investment trust, or that our future operations could
cause us to fail to qualify. Qualification as a real estate investment trust
requires us to satisfy numerous requirements (some on an annual and quarterly
basis) established under highly technical and complex Internal Revenue Code
provisions for which there are only limited judicial and administrative
interpretations, and involves the determination of various factual matters and
circumstances not entirely within our control. For example, in order to qualify
as a real estate investment trust, we must derive at least 95% of our gross
income in any year from qualifying sources. In addition, we must pay dividends
to stockholders aggregating annually at least 95% of our real estate investment
trust taxable income (determined without regard to the dividends paid deduction
and by excluding capital gains) and must satisfy specified asset tests on a
quarterly basis. These provisions and the applicable treasury regulations are
more complicated in our case because we hold our assets in partnership form.
Legislation, new regulations, administrative interpretations or court decisions
could significantly change the tax laws with respect to qualification as a real
estate investment trust or the federal income tax consequences of such
qualification. However, we are not aware of any pending tax legislation that
would adversely affect our ability to operate as a real estate investment trust.
In connection with certain property acquisitions, we acquired partnership
interests and may have inadvertently acquired the voting securities of shell
corporations in violation of the 10% asset test at March 31, 1999. However,
while no assurance can be given, based on the advice of counsel in the relevant
jurisdiction and other factors, we do not believe that we have in fact violated
this test or that we would lose our status as a real estate investment trust as
a result of this matter.
If we fail to qualify as a real estate investment trust in any taxable
year, we will be required to pay federal income tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate rates.
Unless we are entitled to relief under certain statutory provisions, we would be
disqualified from treatment as a real estate investment trust for the four
taxable years following the year during which we lost qualification. If we lose
our real estate investment trust status, our net earnings available for
investment or distribution to stockholders would be significantly reduced for
each of the years involved. In addition, we would no longer be required to make
distributions to stockholders.
WE MAY INVEST IN HIGHLY SPECULATIVE EARLY-STAGE COMPANIES WHICH MAY
JEOPARDIZE OUR STATUS AS A REAL ESTATE INVESTMENT TRUST
We believe that our investments in highly speculative early-stage companies
have been structured so that we currently qualify as a real estate investment
trust under the Internal Revenue Code. However, if the value of these
investments, either individually or in the aggregate, appreciates significantly,
these investments may adversely affect our ability to continue to qualify as a
real estate investment trust, unless we are able to restructure or dispose of
our holdings on a timely basis. To date, we have invested approximately $14.0
million in early-stage companies. One of these investments, in an initial amount
of $5.0 million, has appreciated to a market value in excess of $16.5 million at
March 31, 2000, if it were freely tradable. See "-- Our Failure to
34
<PAGE> 37
Qualify as a Real Estate Investment Trust Would Have Serious Adverse
Consequences to Stockholders" and "-- We May Invest in Highly Speculative
Early-Stage Companies in which We May Lose Our Entire Investment."
WE PAY SOME TAXES
Even if we qualify as a real estate investment trust, we will be required
to pay certain state and local taxes on our income and property. In addition, we
will be required to pay federal and state income tax on the net taxable income,
if any, from the activities conducted through AMB Investment Management, Inc.
and Headlands Realty Corporation (which we discuss below under "-- AMB
Investment Management, Inc. and Headlands Realty Corporation").
CERTAIN PROPERTY TRANSFERS MAY GENERATE PROHIBITED TRANSACTION INCOME
From time to time, we may transfer or otherwise dispose of some of our
properties. Under the Internal Revenue Code, any gain resulting from transfers
of properties we hold as inventory or primarily for sale to customers in the
ordinary course of business would be treated as income from a prohibited
transaction. We would be required to pay a 100% penalty tax on that income.
Since we acquire properties for investment purposes, we believe that any
transfer or disposal of property by us would not be deemed by the Internal
Revenue Service to be a prohibited transaction with any resulting gain allocable
to us being subject to a 100% penalty tax. However, whether property is held for
investment purposes is a question of fact that depends on all the facts and
circumstances surrounding the particular transaction. The Internal Revenue
Service may contend that certain transfers or disposals of properties by us are
prohibited transactions. While we believe that the Internal Revenue Service
would not prevail in any such dispute, if the Internal Revenue Service
successfully argued that a transfer or disposition of property constituted a
prohibited transaction we would be required to pay a 100% penalty tax on any
gain allocable to us from the prohibited transaction. In addition, any income
from a prohibited transaction may adversely affect our ability to satisfy the
income tests for qualifications as a real estate investment trust for federal
income tax purposes.
WE ARE DEPENDENT ON OUR KEY PERSONNEL
We depend on the efforts of our executive officers. While we believe that
we could find suitable replacements for these key personnel, the loss of their
services or the limitation of their availability could adversely affect our
financial condition, results of operations, cash flow and ability to pay
distributions on, and the market price of, our stock. We do not have employment
agreements with any of our executive officers.
WE MAY BE UNABLE TO MANAGE OUR GROWTH
Our business has grown rapidly and continues to grow through property
acquisitions and developments. If we fail to effectively manage our growth, our
financial condition, results of operations, cash flow and ability to pay
distributions on, and the market price of, our stock could be adversely
affected.
WE MAY INVEST IN HIGHLY SPECULATIVE EARLY-STAGE COMPANIES IN WHICH WE MAY LOSE
OUR ENTIRE INVESTMENT
From time to time, we may invest in highly speculative early-stage
companies that we believe will enhance our understanding of changes occurring in
the movement of goods, which may, in turn, sharpen our real estate investment
focus, create real estate provider relationships with growth companies and
provide the potential for significant returns on invested capital. We currently
expect that each of these investments will generally be in the amount of $10.0
million or less. As a result, we believe that the amounts of our investments in
early-stage companies are immaterial, both individually and in the aggregate.
However, these investments are highly speculative and it is possible that we may
lose our entire investment in an early-stage company.
35
<PAGE> 38
AMB INVESTMENT MANAGEMENT, INC. AND HEADLANDS REALTY CORPORATION
WE DO NOT CONTROL THE ACTIVITIES OF AMB INVESTMENT MANAGEMENT, INC. AND
HEADLANDS REALTY CORPORATION
The operating partnership owns 100% of the non-voting preferred stock of
AMB Investment Management, Inc. and Headlands Realty Corporation (representing
approximately 95% of the economic interest in each entity). Some of our current
and former executive officers and a former executive officer of AMB Investment
Management, Inc. own all of the outstanding voting common stock of AMB
Investment Management, Inc. (representing approximately 5% of the economic
interest in AMB Investment Management, Inc.). Some of our current and former
executive officers and a director of Headlands Realty Corporation own all of the
outstanding voting common stock of Headlands Realty Corporation (representing
approximately 5% of the economic interest in Headlands Realty Corporation). The
ownership structure of AMB Investment Management, Inc. and Headlands Realty
Corporation permits us to share in the income of those corporations while
allowing us to maintain our status as a real estate investment trust. We receive
substantially all of the economic benefit of the businesses carried on by AMB
Investment Management, Inc. and Headlands Realty Corporation through the
operating partnership's right to receive dividends. However, we are not able to
elect the directors or officers of AMB Investment Management, Inc. and Headlands
Realty Corporation and, as a result, we do not have the ability to influence
their operation or to require that their boards of directors declare and pay
cash dividends on the non-voting stock of AMB Investment Management, Inc. and
Headlands Realty Corporation held by the operating partnership. The boards of
directors and management of AMB Investment Management, Inc. and Headlands Realty
Corporation might implement business policies or decisions that would not have
been implemented by persons controlled by us and that may be adverse to the
interests of our stockholders or that may adversely impact our financial
condition, results of operations, cash flow and ability to pay distributions on,
and the market price of, our stock. In addition, AMB Investment Management, Inc.
and Headlands Realty Corporation are subject to tax on their income, reducing
their cash available for distribution to the operating partnership.
AMB INVESTMENT MANAGEMENT, INC. MAY NOT BE ABLE TO GENERATE SUFFICIENT FEES
Fees earned by AMB Investment Management, Inc. depend on various factors
affecting the ability to attract and retain investment management clients and
the overall returns achieved on managed assets. These factors are beyond our
control. AMB Investment Management, Inc.'s failure to attract investment
management clients or achieve sufficient overall returns on managed assets could
reduce its ability to make distributions on the stock owned by the operating
partnership and could also limit co-investment opportunities to the operating
partnership. This would limit the operating partnership's ability to generate
rental revenues from such co-investments and use the co-investment program as a
source to finance property acquisitions and leverage acquisition opportunities.
OWNERSHIP OF OUR STOCK
LIMITATIONS IN OUR CHARTER AND BYLAWS COULD PREVENT A CHANGE IN CONTROL
Certain provisions of our charter and bylaws may delay, defer or prevent a
change in control or other transaction that could provide the holders of our
common stock with the opportunity to realize a premium over the then-prevailing
market price for the common stock. To maintain our qualification as a real
estate investment trust for federal income tax purposes, not more than 50% in
value of our outstanding stock may be owned, actually or constructively, by five
or fewer individuals (as defined in the Internal Revenue Code to include certain
entities) during the last half of a taxable year after the first taxable year
for which a real estate investment trust election is made. Furthermore, after
the first taxable year for which a real estate investment trust election is
made, our common stock must be held by a minimum of 100 persons for at least 335
days of a 12-month taxable year (or a proportionate part of a short tax year).
In addition, if we, or an owner of 10% or more of our stock, actually or
constructively owns 10% or more of one of our tenants (or a tenant of any
partnership in which we are a partner), the rent received by us (either directly
or through any such partnership) from that tenant will not be qualifying income
for purposes of the real estate investment trust
36
<PAGE> 39
gross income tests of the Internal Revenue Code. To facilitate maintenance of
our qualification as a real estate investment trust for federal income tax
purposes, we will prohibit the ownership, actually or by virtue of the
constructive ownership provisions of the Internal Revenue Code, by any single
person of more than 9.8% (by value or number of shares, whichever is more
restrictive) of the issued and outstanding shares of our common stock and more
than 9.8% (by value or number of shares, whichever is more restrictive) of the
issued and outstanding shares of our Series A Preferred Stock, and we will also
prohibit the ownership, actually or constructively, of any shares of our Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock by any single person so that no
such person, taking into account all of our stock so owned by such person, may
own in excess of 9.8% of our issued and outstanding capital stock. We refer to
this limitation as the "ownership limit." Shares acquired or held in violation
of the ownership limit will be transferred to a trust for the benefit of a
designated charitable beneficiary. Any person who acquires shares in violation
of the ownership limit will not be entitled to any distributions on the shares
or be entitled to vote the shares or receive any proceeds from the subsequent
sale of the shares in excess of the lesser of the price paid for the shares or
the amount realized from the sale. A transfer of shares in violation of the
above limits may be void under certain circumstances. The ownership limit may
have the effect of delaying, deferring or preventing a change in control and,
therefore, could adversely affect our stockholders' ability to realize a premium
over the then-prevailing market price for the shares of our common stock in
connection with such transaction.
Our charter authorizes us to issue additional shares of common stock and
Series A Preferred Stock and to issue Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock and one or more other series or classes of preferred stock and
to establish the preferences, rights and other terms of any series or class of
preferred stock that we issue. Although our board of directors has no intention
to do so at the present time, it could establish a series or class of preferred
stock that could delay, defer or prevent a transaction or a change in control
that might involve a premium price for the common stock or otherwise be in the
best interests of our stockholders.
Our charter and bylaws and Maryland law also contain other provisions that
may delay, defer or prevent a transaction, including a change in control, that
might involve payment of a premium price for the common stock or otherwise be in
the best interests of our stockholders. Those provisions include the following:
- the provision in the charter that directors may be removed only for cause
and only upon a two-thirds vote of stockholders, together with bylaw
provisions authorizing the board of directors to fill vacant
directorships;
- the provision in the charter requiring a two-thirds vote of stockholders
for any amendment of the charter;
- the requirement in the bylaws that the request of the holders of 50% or
more of our common stock is necessary for stockholders to call a special
meeting;
- the requirement of Maryland law that stockholders may only take action by
written consent with the unanimous approval of all stockholders entitled
to vote on the matter in question; and
- the requirement in the bylaws of advance notice by stockholders for the
nomination of directors or proposal of business to be considered at a
meeting of stockholders.
These provisions may impede various actions by stockholders without
approval of our board of directors, which in turn may delay, defer or prevent a
transaction involving a change of control.
WE COULD CHANGE OUR INVESTMENT AND FINANCING POLICIES WITHOUT A VOTE OF
STOCKHOLDERS
Subject to our current investment policy to maintain our qualification as a
real estate investment trust (unless a change is approved by our board of
directors under certain circumstances), our board of directors will determine
our investment and financing policies, our growth strategy and our debt,
capitalization, distribution and operating policies. Although the board of
directors has no present intention to revise or amend these strategies and
policies, the board of directors may do so at any time without a vote of
stockholders. Accordingly, stockholders will have no control over changes in our
strategies and policies (other than through
37
<PAGE> 40
the election of directors), and any such changes may not serve the interests of
all stockholders and could adversely affect our financial condition or results
of operations, including our ability to distribute cash to stockholders.
IF WE ISSUE ADDITIONAL SECURITIES, THE INVESTMENT OF EXISTING STOCKHOLDERS
WILL BE DILUTED
We have authority to issue shares of common stock or other equity or debt
securities in exchange for property or otherwise. Similarly, we may cause the
operating partnership to issue additional limited partnership units in exchange
for property or otherwise. Existing stockholders will have no preemptive right
to acquire any additional securities issued by us or the operating partnership
and any issuance of additional equity securities could result in dilution of an
existing stockholder's investment.
THE LARGE NUMBER OF SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY AFFECT
THE MARKET PRICE OF OUR COMMON STOCK
We cannot predict the effect, if any, that future sales of shares of our
common stock, or the availability of shares of our common stock for future sale,
will have on its market price. Sales of a substantial number of shares of our
common stock in the public market (or upon exchange of limited partnership units
in the operating partnership) or the perception that such sales (or exchanges)
might occur could adversely affect the market price of our common stock.
All shares of common stock issuable upon the redemption of limited
partnership units in the operating partnership will be deemed to be "restricted
securities" within the meaning of Rule 144 under the Securities Act and may not
be transferred unless registered under the Securities Act or an exemption from
registration is available, including any exemption from registration provided
under Rule 144. In general, upon satisfaction of certain conditions, Rule 144
permits the holder to sell certain amounts of restricted securities one year
following the date of acquisition of the restricted securities from us and,
after two years, permits unlimited sales by persons unaffiliated with us. On
November 26, 1999, 74,710,153 shares of common stock issued in our formation
transactions became eligible for sale pursuant to Rule 144(k). Commencing
generally on the first anniversary of the date of acquisition of common limited
partnership units (or such other date agreed to by the operating partnership and
the holders of the units), the operating partnership may redeem common limited
partnership units at the request of the holders for cash (based on the fair
market value of an equivalent number of shares of common stock at the time of
redemption) or, at our option, exchange the common limited partnership units for
an equal number of shares of our common stock, subject to certain antidilution
adjustments. The operating partnership had issued and outstanding 5,973,615
common limited partnership units as of March 31, 2000. As of March 31, 2000, we
had reserved 8,608,225 shares of common stock for issuance under our Stock
Option and Incentive Plan (not including shares that we have already issued)
and, as of March 31, 2000, we had granted to certain directors, officers and
employees options to purchase 5,609,023 shares of common stock (excluding
forfeitures and 37,500 shares that we have issued pursuant to the exercise of
options). As of March 31, 2000, we had granted 304,275 restricted shares of
common stock, 1,633 of which have been forfeited. In addition, we may issue
additional shares of common stock and the operating partnership may issue
additional limited partnership units in connection with the acquisition of
properties. In connection with the issuance of common limited partnership units
to other transferors of properties, and in connection with the issuance of the
performance units, we have agreed to file registration statements covering the
issuance of shares of common stock upon the exchange of the common limited
partnership units. We have also filed a registration statement with respect to
the shares of common stock issuable under our Stock Option and Incentive Plan.
These registration statements and registration rights generally allow shares of
common stock covered thereby, including shares of common stock issuable upon
exchange of limited partnership units, including performance units, or the
exercise of options or restricted shares of common stock, to be transferred or
resold without restriction under the Securities Act. We may also agree to
provide registration rights to any other person who may become an owner of the
operating partnership's limited partnership units.
Future sales of the shares of common stock described above could adversely
affect the market price of our common stock. The existence of the operating
partnership's limited partnership units, options and shares of
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<PAGE> 41
common stock reserved for issuance upon exchange of limited partnership units,
and the exercise of options and registration rights referred to above, also may
adversely affect the terms upon which we are able to obtain additional capital
through the sale of equity securities.
VARIOUS MARKET CONDITIONS AFFECT THE PRICE OF OUR STOCK
As with other publicly-traded equity securities, the market price of our
stock will depend upon various market conditions, which may change from time to
time. Among the market conditions that may affect the market price of our stock
are the following:
- the extent of investor interest in us;
- the general reputation of real estate investment trusts and the
attractiveness of their equity securities in comparison to other equity
securities (including securities issued by other real estate-based
companies);
- our financial performance; and
- general stock and bond market conditions, including changes in interest
rates on fixed income securities which may lead prospective purchasers of
our stock to demand a higher annual yield from future distributions. Such
an increase in the required yield from distributions may adversely affect
the market price of our stock.
Other factors such as governmental regulatory action and changes in tax
laws could also have a significant impact on the future market price of our
stock.
EARNINGS AND CASH DISTRIBUTIONS, ASSET VALUE AND MARKET INTEREST RATES
AFFECT THE PRICE OF OUR STOCK
The market value of the equity securities of a real estate investment trust
generally is based primarily upon the market's perception of the real estate
investment trust's growth potential and its current and potential future
earnings and cash distributions, and is based secondarily upon the real estate
market value of the underlying assets. For that reason, shares of our stock may
trade at prices that are higher or lower than the net asset value per share. To
the extent we retain operating cash flow for investment purposes, working
capital reserves or other purposes, these retained funds, while increasing the
value of our underlying assets, may not correspondingly increase the market
price of our stock. Our failure to meet the market's expectation with regard to
future earnings and cash distributions likely would adversely affect the market
price of our stock. Another factor that may influence the price of our stock
will be the distribution yield on the stock (as a percentage of the price of the
stock) relative to market interest rates. An increase in market interest rates
might lead prospective purchasers of our stock to expect a higher distribution
yield, which would adversely affect the market price of the stock. If the market
price of our stock declines significantly, we might breach certain covenants
with respect to debt obligations, which might adversely affect our liquidity and
ability to make future acquisitions and our ability to pay distributions to our
stockholders.
39
<PAGE> 42
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Articles Supplementary establishing and fixing the rights
and preferences of the 7.95% Series F Cumulative Redeemable
Preferred Stock (incorporated by reference to Exhibit 3.1 of
the Registrant's Current Report on Form 8-K filed on April
14, 2000).
10.1 Sixth Amended and Restated Agreement of Limited Partnership
of AMB Property II, L.P., dated as of March 22, 2000
(incorporated by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K filed on April 14,
2000).
10.2 Registration Rights Agreement, dated as of March 22, 2000
(incorporated by reference to Exhibit 3.2 of the
Registrant's Current Report on Form 8-K filed on April 14,
2000).
27.1 Financial Data Schedule -- AMB Property Corporation.
</TABLE>
(b) Reports on Form 8-K:
- The Registrant filed a Current Report on Form 8-K on April 14, 2000, in
connection with the filing by the Registrant of the Articles
Supplementary establishing and fixing the rights and preferences of the
7.95% Series F Cumulative Redeemable Preferred Stock.
40
<PAGE> 43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMB PROPERTY CORPORATION
Registrant
Date: May 11, 2000 By: /s/ MICHAEL A. COKE
------------------------------------
Michael A. Coke
Chief Financial Officer and
Managing Director
(Duly Authorized Officer and
Principal Financial Officer)
By: /s/ NINA A. TRAN
------------------------------------
Nina A. Tran
Vice President
(Duly Authorized Officer and
Principal Accounting Officer)
41
<PAGE> 44
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3.1 Articles Supplementary establishing and fixing the rights
and preferences of the 7.95% Series F Cumulative Redeemable
Preferred Stock (incorporated by reference to Exhibit 3.1 of
the Registrant's Current Report on Form 8-K filed on April
14, 2000).
10.1 Sixth Amended and Restated Agreement of Limited Partnership
of AMB Property
10.2 Registration Rights Agreement, dated as of March 22, 2000
(incorporated by reference to Exhibit 3.2 of the
Registrant's Current Report on Form 8-K filed on April 14,
2000).
27.1 Financial Data Schedule -- AMB Property Corporation.
</TABLE>
42
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMB PROPERTY
CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31,
2000 (UNAUDITED), AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 89,094
<SECURITIES> 0
<RECEIVABLES> 99,870
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 188,964
<PP&E> 3,288,333
<DEPRECIATION> 120,193
<TOTAL-ASSETS> 3,656,627
<CURRENT-LIABILITIES> 128,720
<BONDS> 1,262,211
0
96,100
<COMMON> 1,630,450
<OTHER-SE> 55,786
<TOTAL-LIABILITY-AND-EQUITY> 3,656,627
<SALES> 0
<TOTAL-REVENUES> 110,323
<CGS> 0
<TOTAL-COSTS> 69,858
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,342
<INCOME-PRETAX> 40,465
<INCOME-TAX> 0
<INCOME-CONTINUING> 31,056
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,920
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.34
</TABLE>
