<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended: September 30, 1999 Commission File Number: 1-13829
------------------ -------
CABOT INDUSTRIAL TRUST
----------------------
(Exact name of registrant as specified in its charter)
Maryland 04-3397866
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
Two Center Plaza, Suite 200, Boston, Massachusetts 02108
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(617) 723-0900
----------------------------------------------------
(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
----- -----
Indicate the number of shares outstanding of each of the registrant's classes of
Common Stock, as of the latest practicable date: As of November 12, 1999,
40,619,420 Common Shares of Beneficial Interest, $.01 par value, of the
Registrant were outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated condensed financial statements should be
read in conjunction with the 1998 Form 10-K/A of the registrant ("Cabot Trust").
These consolidated condensed statements have been prepared in accordance with
the instructions of the Securities and Exchange Commission for Form 10-Q and do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of Cabot Trust's management, all material adjustments (consisting
solely of items of a normal, recurring nature) considered necessary for a fair
presentation of results of operations for the interim period have been included.
The results of consolidated operations for the period from January 1, 1999
through September 30, 1999 are not necessarily indicative of the results that
may be expected for the period from January 1, 1999 through December 31, 1999.
2
<PAGE>
CABOT INDUSTRIAL TRUST
CONSOLIDATED CONDENSED BALANCE SHEET
As of September 30, 1999 and December 31, 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS:
INVESTMENT IN REAL ESTATE:
Rental Properties $1,389,886 $1,072,675
Less: Accumulated Depreciation (35,352) (17,290)
---------- ----------
Net Rental Properties 1,354,534 1,055,385
Properties under Development 54,466 23,108
---------- ----------
$1,409,000 $1,078,493
---------- ----------
OTHER ASSETS:
Cash and Cash Equivalents $ 13,670 $ 2,301
Rents and Other Receivables,
net of reserve for uncollectible accounts of $439 and $312
at September 30, 1999 and December 31, 1998, respectively 4,306 2,872
Deferred Rent Receivable 4,976 2,638
Deferred Lease Acquisition Costs, Net 21,531 17,362
Deferred Financing Costs, Net 3,664 1,255
Investment in and Advances to Cabot Advisors 1,272 582
Other Assets 4,796 5,067
---------- ----------
TOTAL ASSETS $1,463,215 $1,110,570
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Mortgage Debt $ 160,441 $ 48,206
Unsecured Debt 200,000 -
Line of Credit Borrowings 91,000 200,000
Accounts Payable 728 511
Accrued Real Estate Taxes 11,894 7,309
Distributions Payable--Common 14,835 14,134
Distributions Payable--Preferred 443 -
Tenant Security Deposits and Prepaid Rents 6,342 4,956
Other Liabilities 22,735 18,156
---------- ----------
$ 508,418 $ 293,272
---------- ----------
MINORITY INTEREST:
8.625% Series B Cumulative Redeemable Perpetual Preferred Units $ 63,175 $ -
8.625% Series C Cumulative Redeemable Perpetual Preferred Units 63,175 -
8.375% Series D Cumulative Redeemable Perpetual Preferred Units 9,715 -
Limited Partnership Units 56,557 468,311
---------- ----------
TOTAL MINORITY INTEREST $ 192,622 $ 468,311
---------- ----------
SHAREHOLDERS' EQUITY:
Common Shares, $0.01 par value, 150,000,000 shares authorized;
40,619,420 shares issued and outstanding at September 30, 1999,
and 18,586,764 shares issued and outstanding at December 31, 1998 $ 406 $ 186
Paid in Capital 767,776 348,912
Retained Deficit (6,007) (111)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY $ 762,175 $ 348,987
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,463,215 $1,110,570
========== ==========
</TABLE>
3
<PAGE>
CABOT INDUSTRIAL TRUST
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
For the Three Months ended September 30, 1999 and September 30, 1998
(unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
REVENUES:
Rental Revenues $35,388 $24,914
Tenant Reimbursements 5,452 3,503
------- -------
Total Revenues 40,840 28,417
------- -------
EXPENSES:
Property Operating 3,090 1,563
Property Taxes 4,564 3,240
Depreciation and Amortization 8,041 5,862
General and Administrative 2,254 1,724
Interest 7,090 2,365
------- -------
Total Expenses 25,039 14,754
------- -------
Interest and Other Income 274 392
Loss on Sale of Real Estate (653) -
------- -------
(379) 392
------- -------
Income Before Minority Interest Expense 15,422 14,055
Minority Interest Expense (2,606) (8,054)
------- -------
Net Income $12,816 $ 6,001
======= =======
Earnings per Common Share:
Basic $ 0.31 $ 0.32
======= =======
Diluted $ 0.31 $ 0.32
======= =======
Weighted Average Common Shares:
Basic 41,155 18,587
======= =======
Diluted 41,155 18,587
======= =======
</TABLE>
4
<PAGE>
CABOT INDUSTRIAL TRUST
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
For the Nine Months ended September 30, 1999 and September 30, 1998
(unaudited, in thounsands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
Nine Months Ended September 30, 1998
September 30, 1999 (Note 1)
------------------ ------------------
<S> <C> <C>
REVENUES:
Rental Revenues $ 96,613 $ 60,569
Tenant Reimbursements 15,547 8,740
-------- --------
Total Revenues 112,160 69,309
-------- --------
EXPENSES:
Property Operating 8,519 4,079
Property Taxes 12,534 7,982
Depreciation and Amortization 22,204 14,108
General and Administrative 6,575 4,514
Interest 17,227 3,317
Settlement of Treasury Lock 2,492 -
-------- --------
Total Expenses 69,551 34,000
-------- --------
Interest and Other Income 780 1,114
Net Gains on Sale of Real Estate 2,751 -
-------- --------
3,531 1,114
-------- --------
Income Before Minority Interest Expense 46,140 36,423
Minority Interest Expense (10,472) (20,863)
-------- --------
Net Income $ 35,668 $ 15,560
======== ========
Earnings per Common Share:
Basic $ 0.99 $ 0.84
======== ========
Diluted $ 0.99 $ 0.83
======== ========
Weighted Average Common Shares:
Basic 35,892 18,587
======== ========
Diluted 35,892 18,587
======== ========
</TABLE>
5
<PAGE>
CABOT INDUSTRIAL TRUST
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
For the Nine Months ended September 30, 1999 and September 30, 1998
(unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Nine Months Ended September 30, 1998
September 30, 1999 (Note 1)
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 35,668 $ 15,560
Adjustments to reconcile net income to cash
provided by operating activities:
Minority Interest Expense 10,472 20,863
Depreciation and Amortization 22,204 14,108
Straight Line Rent Adjustment (2,365) (1,738)
Amortization of Deferred Financing Costs 725 308
Net Gains on Sale of Real Estate (2,751) -
Increase in Rents and Other Receivables (1,434) (1,159)
Increase in Other Assets (110) (1,692)
Increase in Accounts Payable 209 494
Increase in Accrued Real Estate Taxes 4,585 7,924
Increase in Other Liabilities 8,684 6,812
--------- ---------
Cash Provided by Operating Activities 75,887 61,480
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and Lease Acquisition Costs (345,388) (362,921)
Improvements to Property (1,333) (973)
Increase in Other Assets (496) -
Advances to Cabot Advisors, net (689) -
Net Proceeds from Sale of Real Estate 16,079 -
Other 8 -
--------- ---------
Cash Used in Investing Activities (331,819) (363,894)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Unsecured Debt 200,000 -
Discount related to Unsecured Debt (552) -
Proceeds from Issuance of Secured Debt 93,215 -
Debt Principal Repayments (2,331) (13,790)
Line of Credit (Repayments) Advances, net (109,000) 169,000
Increase in Deferred Financing Costs (2,561) (1,668)
Distributions Paid to Minority Interests (12,550) (13,138)
Distributions Paid to Common Shareholders (33,628) (9,795)
Net Proceeds from Issuance of Common Shares/Payment of
Expenses of Issuance (1,257) 177,885
Proceeds from Issuance of Preferred Units, net 136,484 -
Increase in Other Assets (519) -
Repurchase of Partnership Units - (1,217)
--------- ---------
Cash Provided by Financing Activities 267,301 307,277
--------- ---------
Net Increase in Cash and Cash Equivalents 11,369 4,863
--------- ---------
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 2,301 1
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 13,670 $ 4,864
========= =========
Cash paid for interest and settlement of treasury lock,
net of amounts capitalized $ 13,647 $ 1,242
========= =========
</TABLE>
6
<PAGE>
CABOT INDUSTRIAL TRUST
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
For the Nine Months ended September 30, 1999 and September 30, 1998
(unaudited, in thousands)
DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In conjunction with the Offering and Formation Transactions in 1998, Cabot Trust
assumed $18,413 of indebtedness and issued 33,850 Common Shares and Partnership
Units in exchange for real estate assets and the advisory business of Cabot
Partners valued at $659,072 and $77, respectively.
During the nine months ended September 30, 1999, 22,033 Partnership Units were
exchanged for Common Shares.
In conjunction with real estate acquisitions, Cabot Trust assumed $21,351 of
indebtedness and issued Units valued at $2,743 during the nine months ended
September 30, 1999 and assumed $44,025 of indebtedness and issued Units valued
at $2,268 during the nine months ended September 30, 1998 (Note 1).
In conjunction with a sale of real estate, Cabot Trust received a promissory
note in the amount of $627,000 as a component of total consideration due from
the seller. This note, payable on July 31, 2004, bears interest at the rate of
10% per annum compounded monthly.
At September 30, 1999, accrued capital expenditures (including amounts included
in accounts payable) totaled $8,455, accrued offering costs totaled $579 and
accrued financing costs totaled $182.
At September 30, 1998, accrued capital expenditures (including amounts included
in accounts payable) totaled $11,597 and accrued offering costs totaled $1,224.
7
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
1. General
Organization
Cabot Industrial Trust (Cabot Trust), a Maryland real estate investment trust,
was formed on October 10, 1997. Cabot Trust is the managing general partner of a
limited partnership, Cabot Industrial Properties, L.P. (Cabot L.P.), and
conducts substantially all of its business through Cabot L.P. As the general
partner of Cabot L.P., Cabot Trust has the exclusive power under the agreement
of limited partnership to manage and conduct the business of Cabot L.P., and
therefore Cabot Trust consolidates the assets, liabilities, and results of
operations of Cabot L.P. for financial reporting purposes. Cabot Trust is a
fully integrated, internally managed real estate company formed to continue and
expand the national real estate business of Cabot Partners Limited Partnership
(Cabot Partners). Cabot Trust qualifies as a real estate investment trust (a
REIT) for federal income tax purposes.
Since Cabot Trust was formed on October 10, 1997, and did not begin operations
until February 4, 1998 (see Note 2), the results for the nine months ended
September 30, 1998 represent activity for 239 days, or approximately 8 months.
As of September 30, 1999, Cabot Trust owned 291 industrial properties located in
22 markets throughout the United States and containing approximately 35 million
rentable square feet. These properties were approximately 98% leased to 591
tenants at September 30, 1999.
2. The Formation Transactions, The Offerings and Ownership
Initial Capitalization
The initial capitalization of Cabot Trust consisted of 50 common shares of
beneficial interest (Common Shares), par value $.01 per share, issued for a
total consideration of $1,000. In connection with the Formation Transactions
and Offerings (described below), Cabot Trust issued an additional 18,586,714
Common Shares.
The Formation Transactions
On February 4, 1998, under a Contribution Agreement executed by Cabot Trust,
Cabot L.P., Cabot Partners and various other contributors, 122 real estate
properties, certain real estate advisory contracts and other assets were (i)
contributed to Cabot L.P. in exchange for Units in Cabot L.P. that are
exchangeable, subject to certain restrictions, for Common Shares of Cabot Trust
or (ii) contributed to Cabot Trust in exchange for Common Shares. The
properties contributed to Cabot Trust were each contributed to Cabot L.P. in
exchange for the number of general partnership Units in Cabot L.P. equal to the
number of Common Shares exchanged for the property.
Cabot L.P. contributed the real estate advisory contracts to Cabot Advisors,
Inc. (Cabot Advisors) and received 100% of the non-voting preferred stock of
Cabot Advisors, which entitles it to 95% of Cabot Advisors' net operating cash
flow. All of the common stock of Cabot Advisors is owned by an officer of Cabot
Trust.
8
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
During the nine months ended September 30, 1999, Cabot L.P. issued 143,087 Units
in conjunction with an acquisition and Cabot Trust issued 22,032,656 Common
Shares in exchange for Units of Cabot L.P. As a result, Cabot Trust owned 93.1%
of the common equity of Cabot L.P. as of September 30, 1999. The remaining 6.9%,
which is owned by investors holding Cabot L.P. Units, is considered minority
interest.
The Offerings
On February 4, 1998, Cabot Trust completed an offering of 8,625,000 Common
Shares at an offering price of $20.00 per share. In addition, Cabot Trust
issued 1,000,000 Common Shares to a single investor in a private offering at
$20.00 per share (collectively, the Offerings). Cabot Trust contributed the net
proceeds of the Offerings to Cabot L.P. in exchange for the number of general
partnership interests in Cabot L.P. equal to the number of Common Shares sold in
the Offerings.
Cumulative Redeemable Perpetual Preferred Equity
On April 29, 1999, September 3, 1999 and September 27, 1999, Cabot L.P.
completed the private sales of $65 million of 8.625% Series B Cumulative
Redeemable Perpetual Preferred Units at $50 per unit, $65 million of 8.625%
Series C Cumulative Redeemable Perpetual Preferred Units at $25 per unit and
$10 million of 8.375% Series D Cumulative Redeemable Perpetual Preferred Units
at $50 per unit, respectively. Proceeds of the offerings of $63,175,000,
$63,175,000 and $9,715,000, respectively, were used to repay borrowings under
Cabot Trust's Acquisition Facility. The Preferred Units, which may be called by
Cabot Trust at par on or after the fifth anniversary of issuance in each case,
have no stated maturity or mandatory redemption and are not convertible into any
other securities of Cabot L.P.
Distributions
On March 10, 1999, Cabot Trust and Cabot L.P. declared distributions of $.34 per
Common Share/Unit payable on April 30, 1999, to Shareholders or Unitholders of
record as of April 9, 1999; on June 9, 1999, Cabot Trust and Cabot L.P. declared
distributions of $.34 per Common Share/Unit payable on July 29, 1999, to
Shareholders or Unitholders of record as of July 9, 1999; and on September 15,
1999, Cabot Trust and Cabot L.P. declared distributions of $.34 per Common
Share/Unit payable on October 27, 1999, to Shareholders or Unitholders of record
as of October 8, 1999.
On June 9, 1999, Cabot L.P. declared distributions of $.75468 per 8.625% Series
B Preferred Unit, payable on June 30, 1999, to Series B Preferred Unitholders of
record on June 17, 1999, and on September 15, 1999, Cabot L.P. declared
distributions of $1.0781 per 8.625% Series B Preferred Unit, payable on
September 30, 1999, to Series B Unitholders of record on September 17, 1999.
In addition, on September 15, 1999, Cabot L.P. declared distributions of $0.5331
per 8.625% Series C Preferred Unit, payable on December 1, 1999, to Series C
Unitholders of record on November 17, 1999. These preferred distributions are
classified as minority interest expense in the accompanying consolidated
condensed statements of operations.
9
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
3. Property Acquisitions
During the period from April 1, 1999 through September 30, 1999, Cabot Trust
acquired the following industrial properties:
<TABLE>
<CAPTION>
Acquisition
Property Location Property Type Square Feet Cost
- ----------------------------------------- -------------------------- -------------- ----------------
(000'S)
<S> <C> <C> <C>
Vista Bella Way, Rancho Dominguez, CA Multitenant Distribution 100,000 $ 9,452
Manville Street, Compton, CA Multitenant Distribution 100,000
Westinghouse Boulevard, Charlotte, NC Bulk Distribution 183,551 $ 20,178
Westinghouse Boulevard, Charlotte, NC Multitenant Distribution 159,085
Westinghouse Boulevard, Charlotte, NC Multitenant Distribution 121,900
Westinghouse Boulevard, Charlotte, NC Multitenant Distribution 104,000
Avenue F, Plano, TX Workspace 73,086 $ 5,014
N.W. 70th Avenue, Miami, FL Multitenant Distribution 215,019 $ 11,285
Alondra Boulevard, La Mirada, CA Multitenant Distribution 237,089 $ 9,880
South 78th Avenue, Hickory Hills, IL Multitenant Distribution 83,170 $ 3,180
Nokes Boulevard, Loudoun County, VA Workspace 78,671 $ 6,295
Dahlia Street, Fontana, CA Bulk Distribution 278,560 $ 23,317
East Easy Street, Simi Valley, CA Bulk Distribution 235,080
McLaughlin Avenue, San Jose, CA Multitenant Distribution 134,483 $ 8,235
Laussen Avenue, Chatsworth, CA Workspace 124,518 $ 7,122
West 82nd Street, Bloomington, MN Workspace 101,465 $ 4,585
Crossroads Parkway, Bolingbrook, IL Bulk Distribution 299,520 $ 11,445
Cordage Street, Charlotte, NC Multitenant Distribution 112,000 $ 3,260
Newton Drive, Carlsbad, CA Bulk Distribution 179,721 $ 12,980
Goldentop Road, San Diego, CA Workspace 66,448 $ 5,435
Greenleaf Avenue, Elk Grove Village, IL Multitenant Distribution 150,000 $ 6,455
</TABLE>
10
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
<TABLE>
<CAPTION>
Acquisition
Property Location Property Type Square Feet Cost
- ----------------------------------------- -------------------------- -------------- ----------------
(000'S)
<S> <C> <C> <C>
Hillguard Road, Dallas, TX Multitenant Distribution 122,798 $ 8,165
Hillguard Road, Dallas, TX Multitenant Distribution 71,565
Hillguard Road, Dallas, TX Multitenant Distribution 53,647
--------- --------
TOTALS 3,385,376 $156,283
========= ========
</TABLE>
4. Debt Activity
On May 4, 1999, Cabot L.P. completed a $200.0 million unsecured debt offering.
The debt has a maturity of five years, a coupon rate of 7.125% and was priced at
99.724%, resulting in a yield to maturity of 7.192%. The net proceeds of the
offering were $197.4 million and were used in part to repay borrowings under
Cabot Trust's Acquisition Facility.
In conjunction with acquisitions made during the nine months ended September 30,
1999, Cabot Trust assumed debt of $21.4 million, with coupon interest rates
ranging from 7.375% to 9.375%, secured by properties with a net book value of
approximately $37.4 million. In addition, Cabot L.P. borrowed $87.6 million in
February 1999 and borrowed an additional $5.6 million under the same agreement
in April 1999, all secured by specific properties. At September 30, 1999, these
properties had a net book value of $136.7 million. This borrowing has a fixed
interest rate of 7.25% per annum and a 10-year term. Monthly installments of
principal and interest are due based on a 25-year amortization rate, and the
remaining balance outstanding is due at the end of the 10-year term. This
borrowing is subject to various customary covenants. The proceeds from the
borrowing were used to repay a portion of the balance outstanding under Cabot
Trust's Acquisition Facility.
During 1998 Cabot Trust entered into an interest rate hedge transaction
(referred to as a Treasury Lock) involving the future sale of $100.0 million of
Treasury securities based on a rate of approximately 5.54% for such securities
in anticipation of a future debt issuance of at least $100.0 million with a
maturity of 10 years. At the March 31, 1999 contractual settlement date for
this transaction, Cabot Trust paid $2.5 million to its counter party in the
transaction, reflecting the decrease in Treasury security yields since the July
1998 commencement of the transaction. Because an offering of the size and
maturity contemplated when the interest rate hedge transaction was executed was
not completed by the time of, or shortly after, the March 31, 1999 settlement
date of the transaction, Cabot Trust recorded a loss of $2.5 million in the
quarter ended March 31, 1999.
Cabot Trust entered into an interest rate cap arrangement relating to its LIBOR-
based Acquisition Facility for a notional amount of $124 million for the period
March 19, 1999 through June 19, 1999. The arrangement was intended to result in
limiting the LIBOR component of Cabot Trust's interest rate on an equivalent
amount of borrowings to 5.35% per annum.
11
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
5. Earnings per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share", basic earnings per share have been computed by dividing
net income by the weighted average number of shares outstanding during the
period subsequent to Cabot Trust's commencement of operations (see Note 1).
Diluted earnings per share have been computed considering the dilutive effect of
the exercise of Unit and Common Share options granted by Cabot Trust. Basic and
diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
Nine Months Ended
Nine Months Ended September 30, 1998
September 30, 1999 (see Note 1)
---------------------- ---------------------
<S> <C> <C>
Basic:
Net Income $ 35,668,000 $ 15,560,000
------------- -------------
Weighted Average Common Shares 35,892,000 18,587,000
------------- -------------
Basic Earnings per Common Share $ .99 $ .84
============= =============
Diluted:
Net Income $ 35,668,000 $ 15,560,000
Effect of Unit Options (15,000) (70,000)
------------- -------------
Income available to Common Shareholders, as adjusted $ 35,653,000 $ 15,490,000
------------- -------------
Weighted Average Common Shares 35,892,000 18,587,000
------------- -------------
Diluted Earnings per Common Share $ .99 $ .83
============= =============
</TABLE>
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this discussion and elsewhere in this report that
are not historical facts are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are based on current
expectations, estimates and projections about the industry and markets in which
Cabot Trust operates, management's beliefs and assumptions made by management.
Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks",
"estimates", and variations of such words and similar expressions are intended
to identify such forward-looking statements. Such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties.
Therefore, actual outcomes and results may differ materially from what is
expressed or suggested by such forward-looking statements. Cabot Trust
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. Cabot
Trust's operating results depend primarily on income from industrial properties,
which may be affected by various factors, including changes in national and
local economic conditions, competitive market conditions, uncertainties and
costs related to and the imposition of conditions on receipt of governmental
approvals and costs of material and labor, all of which may cause actual results
to differ materially from what is expressed herein. Capital and credit market
conditions which affect Cabot Trust's cost of capital also influence operating
results.
Introduction
Cabot Trust is an internally managed, fully integrated real estate company,
focused on serving a variety of industrial space users in the country's
principal commercial markets. Cabot Trust owns and operates a diversified
portfolio of bulk distribution, multitenant distribution and "workspace" (light
industrial, R&D and similar facilities) properties throughout the United States.
At September 30, 1999, Cabot Trust owned 291 industrial properties, 84 of which
properties were acquired during the period from January 1, 1999 through
September 30, 1999. In addition, Cabot Trust sold two properties during the
period January 1, 1999 through September 30, 1999. These properties were sold on
June 22, 1999 and August 3, 1999. Cabot Trust was formed on October 10, 1997,
but did not begin operations as a fully integrated real estate company until the
completion of its Formation Transactions and Offerings on February 4, 1998, the
date of Cabot Trust's initial public offering.
Results of Operations
Since Cabot Trust did not begin operations until February 4, 1998, the results
for the nine months ended September 30, 1998 represent activity for only 239
days.
Quarter Ended September 30, 1999 compared with Quarter Ended September 30, 1998
Net income allocable to common shareholders for the quarter ended September 30,
1999 totaled $12.8 million or $.31 per share, compared with $6.0 million or $.32
per share for the quarter ended September 30, 1998. The increase in net income
allocable to common shareholders is due to the conversion of Units to Common
Shares discussed in Note 2 to the financial statements, which resulted in a
decrease in the allocation of income to minority interest, but has no effect on
net income per share. The decrease in net income per share was primarily due to
the loss on sale on August 3, 1999, offset by the income realized from increased
investment in real estate assets, as well as increased earnings from Quarterly
Baseline Properties (defined below).
13
<PAGE>
Rental revenues were $40.8 million, including tenant reimbursements of $5.5
million, for the quarter ended September 30, 1999, compared with $28.4 million,
including tenant reimbursements of $3.5 million, for the quarter ended September
30, 1998. Total rental revenue of $28.5 million and $26.8 million was generated
in 1999 and 1998, respectively, by the properties owned as of June 30, 1998, and
still owned at September 30, 1999, (the Quarterly Baseline Properties) and total
rental revenue of $12.2 million and $980,000 in 1999 and 1998, respectively, was
generated by the properties acquired or developed subsequent to June 30, 1998.
The growth in rental revenue for Quarterly Baseline Properties is primarily
attributable to rental increases for new leases, extensions and renewals. The
remainder of total rental revenue relates to properties sold in 1998 and 1999.
The operating margin (the ratio of total revenues minus property operating and
property tax expenses to total revenues) decreased slightly to approximately 81%
for the quarter ended September 30, 1999 compared with 83% for the quarter ended
September 30, 1998. The decrease is primarily due to a change in the
composition of leases, primarily as a result of acquisitions, to include more
leases which provide the company pay expenses up to a specified amount.
Depreciation and amortization related to real estate assets totaled $8.0 million
and $5.9 million for the quarters ended September 30, 1999 and 1998,
respectively. The increase reflects the acquisition of real estate assets and
additional deferred lease acquisition costs for Quarterly Baseline Properties.
General and administrative expense increased by $530,000, to $2.3 million for
the quarter ended September 30, 1999. The increase is primarily due to an
increase in personnel to service the increase in the number of Cabot Trust's
properties from 202 to 291 at the end of each period.
Interest expense grew from $2.4 million for the quarter ended September 30, 1998
to $7.1 million for the quarter ended September 30, 1999. The increase is the
result of increased debt outstanding which was used primarily to fund real
estate acquisitions. For the quarter ended September 30, 1998, Cabot Trust had
$169.0 million of debt outstanding under its Acquisition Facility and $48.6
million of outstanding mortgage debt. For the quarter ended September 30, 1999,
Cabot Trust had $91.0 million of debt outstanding under its Acquisition
Facility, $160.4 million of outstanding mortgage debt and $200.0 million of
unsecured debt outstanding, that was issued on May 4, 1999.
Interest and other income, which consists primarily of interest earned on Cabot
Trust's invested cash balances and earnings of Cabot Advisors, decreased to
$274,000 from $392,000 for the quarter ended September 30, 1999, compared to the
quarter ended September 30, 1998.
On August 3, 1999, Cabot Trust sold a property located in New Jersey containing
approximately 225,000 square feet for an aggregate sales price of approximately
$6.6 million, which resulted in a loss of approximately $653,000.
Minority interest expense represents net income allocable to holders of Cabot
L.P. Units and holders of Cumulative Redeemable Perpetual Preferred Units. As
of September 30, 1999, Cabot Trust owned 93.1% of the common equity of Cabot
L.P.; minority interest ownership at that date was 6.9%. As of September 30,
1998, minority interest ownership was 57.3%. As discussed in Note 2 to the
financial statements, a significant number of Units were converted to Common
Shares, resulting in a decreased minority interest expense, which was offset by
$1.8 million of minority interest expense related to the Cumulative Redeemable
Perpetual Preferred Units.
14
<PAGE>
Nine Months Ended September 30, 1999 compared with Nine Months Ended September
30, 1998
Net income allocable to common shareholders for the nine months ended September
30, 1999 totaled $35.7 million or $.99 per diluted share, compared with $15.6
million or $.83 per diluted share for the nine months ended September 30, 1998.
The increase in net income allocable to common shareholders is due to the
conversion of Units to Common Shares discussed in Note 2 to the financial
statements, which resulted in a decrease in the allocation of income to minority
interest, but has no effect on net income per share. The increase is also the
result of the full nine months of operations in 1999 compared with 239 days in
1998 and increased earnings due primarily to increased investment in real estate
assets, as well as increased earnings from Baseline Properties (defined below).
Rental revenues were $112.2 million, including tenant reimbursements of $15.5
million, for the nine months ended September 30, 1999, compared with $69.3
million, including tenant reimbursements of $8.7 million, for the nine months
ended September 30, 1998. Total rental revenue of $62.2 million and $52.0
million was generated in 1999 and 1998, respectively, by the 119 properties
owned as of February 4, 1998, and still owned at September 30, 1999, (the
Baseline Properties) and total rental revenue of $49.1 million and $15.7 million
in 1999 and 1998, respectively, was generated by the 172 properties acquired or
developed subsequent to February 4, 1998. The remainder of total rental revenue
relates to properties sold in 1998 and 1999. The increase in rental revenue
related to the Baseline Properties is primarily the result of 273 compared with
239 days of activity, as well as rental increases achieved on new leases
(including extensions and renewals).
Depreciation and amortization related to real estate assets totaled $22.2
million and $14.1 million for the nine months ended September 30, 1999 and 1998,
respectively. The increase reflects the acquisition of real estate assets and
273 days of operations in 1999 compared with 239 days in 1998.
General and administrative expense increased by $2.1 million, to $6.6 million
for the nine months ended September 30, 1999. The increase is primarily due to
a full nine months of operations in the nine months ended September 30, 1999,
and also reflects an increase in personnel to service the increase in the number
of Cabot Trust's properties from 202 to 291 at the end of each period.
Interest expense for the nine months ended September 30, 1999 of $17.2 million
represents interest incurred on the $200.0 million of unsecured debt and the
$160.4 million of mortgage indebtedness outstanding at September 30, 1999, and
interest on outstanding borrowings under Cabot Trust's Acquisition Facility, net
of $2.1 million of interest capitalized to development projects. Interest
expense of $3.3 million for 1998 was incurred for only 239 days, and was
incurred on $169.0 million of indebtedness under the Acquisition Facility and
$48.6 million of mortgage indebtedness outstanding on September 30, 1998.
During 1998 Cabot Trust entered into an interest rate hedge transaction
(referred to as a Treasury Lock) involving the future sale of $100.0 million of
Treasury securities based on a rate of approximately 5.54% for such securities
in anticipation of a future debt issuance of at least $100.0 million with a
maturity of 10 years. At the March 31, 1999 contractual settlement date for
this transaction, Cabot Trust paid $2.5 million to its counter party in the
transaction, reflecting the decrease in Treasury security yields since the July
1998 commencement of the transaction. Because an offering of the size and
maturity contemplated when the interest rate hedge transaction was executed was
not completed by the time of, or shortly after, the March 31, 1999 settlement
date of the transaction, Cabot Trust recorded a loss of $2.5 million in the
quarter ended March 31, 1999, which is reflected in the nine months ended
September 30, 1999.
15
<PAGE>
Interest and other income, which consists primarily of interest earned on Cabot
Trust's invested cash balances and earnings of Cabot Advisors, decreased
$334,000 from $1.1 million for the nine months ended September 30, 1998 to
$780,000 for the nine months ended September 30, 1999, due primarily to lower
average invested cash balances.
Minority interest expense represents net income allocable to holders of Cabot
L.P. Units and holders of Cumulative Redeemable Perpetual Preferred Units. At
September 30, 1999, Cabot Trust owned 93.1% of the common equity of Cabot L.P.;
minority interest ownership at that date was 6.9%. For the nine months ended
September 30, 1998, minority interest ownership was 57.3%. As discussed in Note
2 to the financial statements, during the nine months ended September 30, 1999 a
significant number of Units were converted to Common Shares, resulting in a
decreased minority interest expense, which was offset by $2.8 million of
minority interest expense related to the Cumulative Redeemable Perpetual
Preferred Units.
Capital Resources and Liquidity
Cabot Trust intends to rely on cash provided by operations, unsecured and
secured borrowings from institutional sources, and public debt as its primary
sources of funding for acquisition, development, expansion and renovation of
properties. Cabot Trust may also consider equity financing when such financing
is available on attractive terms.
In March 1998 Cabot Trust established a $325 million unsecured revolving line of
credit facility (the Acquisition Facility) with Morgan Guaranty Trust Company of
New York as lead agent for a syndicate of banks. The Acquisition Facility is
used to fund property acquisitions, development activities, building expansions,
tenant leasing costs and other general corporate purposes. The Acquisition
Facility contains certain limits and requirements for debt to asset ratios, debt
service coverage minimums, and other limitations. Cabot Trust believes cash
flow from operations not distributed to Shareholders and Unitholders will be
sufficient to cover tenant allowances and costs associated with renewal or
replacement of current tenants as their leases expire and recurring non-
incremental revenue generating capital expenditures.
In the normal course of operations, Cabot Trust has purchased approximately $32
million of real estate assets subsequent to September 30, 1999, and as of
October 31, 1999, has commitments to purchase approximately $17 million of
additional real estate assets. Because a number of conditions must be met prior
to the closing, it is uncertain as to whether all these assets will actually be
purchased.
As of September 30, 1999, Cabot Trust had $160.4 million of fixed rate debt
secured by properties, $91.0 million of unsecured borrowings under its
Acquisition Facility, $200.0 million of unsecured debt, and a 32% debt-to-total
market capitalization ratio. The debt-to-total market capitalization ratio is
calculated based on Cabot Trust's total consolidated debt as a percentage of the
market value of its outstanding Common Shares and Units (excluding those held by
Cabot Trust) and the liquidation value of Perpetual Preferred Units plus total
debt.
Cabot Trust entered into an interest rate cap arrangement relating to its LIBOR-
based Acquisition Facility for a notional amount of $100 million for the period
October 1, 1999 through April 1, 2000. This arrangement is intended to result
in limiting the LIBOR component of Cabot Trust's interest rate on an equivalent
amount of borrowings to 6.5% per annum.
16
<PAGE>
Cash and cash equivalents totaled $13.7 million at September 30, 1999. Cash
provided by operating activities for the nine months ended September 30, 1999,
was $75.9 million.
Cabot Trust has assessed its Year 2000 readiness with respect to its internal
accounting and information systems. Cabot Trust also has contacted its
significant vendors, including banks and software providers, to determine
whether those vendors are satisfactorily addressing the Year 2000 problem with
respect to the products and services they provide to Cabot Trust. No
significant issues or costs of remediation have been identified with respect to
such systems or vendors. Cabot Trust has also completed its review of its other
internal systems (consisting primarily of property-related systems, such as
elevators and heating, ventilation and air conditioning systems) and has
developed a Year 2000 remedial plan to address issues identified in that review,
none of which are considered by Cabot Trust to be material. Remediation costs
to date have not been material and Cabot Trust does not expect any significant
issues or remediation costs as a result of completion of its remedial plan due
to the relatively uncomplicated nature of its industrial real estate assets and
the general nature of its leases, which in many instances provide for the
reimbursement of costs from its tenants. Cabot Trust believes that there will
be no direct material effects on its operating performance or results of
operations from the Year 2000 problem as it relates to Cabot Trust's internal
systems and significant vendors. Cabot Trust further believes that adequate
alternative service providers will be available to it if any of its vendors
experience unexpected difficulties as a result of Year 2000 systems failures
and, accordingly, has not established any specific contingency plans in this
regard. It is not possible to quantify any potential indirect effects that may
result from the lack of Year 2000 readiness on the part of third parties,
including tenants, with whom Cabot Trust conducts its business.
17
<PAGE>
ITEM 3. QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Cabot Trust's exposure to market risk has not changed materially from its
exposure at December 31, 1998.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K.
On July 30, 1999, Cabot Trust filed a Form 8-K dated July 28,
1999, to report information under Item 5 of Form 8-K, including a
press release related to Cabot Trust's earnings and financial
position for the second quarter of 1999.
On September 10, 1999, Cabot Trust filed a Form 8-K dated
September 3, 1999, to report information under Item 5 of Form 8-
K, including a press release related to Cabot Trust's issuance of
8.625% Series C Cumulative Redeemable Perpetual Preferred Units.
19
<PAGE>
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 as of the 12th day of November 1999.
CABOT INDUSTRIAL TRUST
----------------------
Registrant
11/12/99 /s/ Neil E. Waisnor
- ------------------ ------------------------------------
Date Neil E. Waisnor
Senior Vice President-Finance,
Treasurer, Secretary
11/12/99 /s/ Robert E. Patterson
- ------------------ ------------------------------------
Date Robert E. Patterson
President
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN SUCH
REPORT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,670
<SECURITIES> 0
<RECEIVABLES> 9,721
<ALLOWANCES> 439
<INVENTORY> 0
<CURRENT-ASSETS> 22,952
<PP&E> 1,472,751
<DEPRECIATION> 42,220
<TOTAL-ASSETS> 1,463,215
<CURRENT-LIABILITIES> 34,242
<BONDS> 451,411
0
0
<COMMON> 406
<OTHER-SE> 761,769
<TOTAL-LIABILITY-AND-EQUITY> 1,463,215
<SALES> 0
<TOTAL-REVENUES> 112,160
<CGS> 0
<TOTAL-COSTS> 21,053
<OTHER-EXPENSES> 28,779
<LOSS-PROVISION> 2,492
<INTEREST-EXPENSE> 17,227
<INCOME-PRETAX> 35,668
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<INCOME-CONTINUING> 35,668
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<NET-INCOME> 35,668
<EPS-BASIC> .99
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