<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 SEPTEMBER 30, 1999
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9016
------------------
AMERICAN INDUSTRIAL PROPERTIES REIT
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
TEXAS 75-6335572
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
6210 NORTH BELTLINE ROAD, SUITE 170 75063-2656
IRVING, TEXAS (Zip Code)
(Address of principal executive offices)
</TABLE>
(972) 756-6000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of common shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 20,903,212 Common
Shares of Beneficial Interest were outstanding as of November 5, 1999.
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<PAGE> 2
AMERICAN INDUSTRIAL PROPERTIES REIT
FORM 10-Q
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the three
months and nine months ended September 30, 1999 and
1998 (unaudited)...................................... 3
Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998..................... 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998
(unaudited)........................................... 5
Notes to Consolidated Financial Statements
(unaudited)........................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 23
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................. 24
Item 2. Changes in the Rights of the Company's Security
Holders................................................ 24
Item 6. Exhibits and Reports on Form 8-K.................. 24
SIGNATURES.................................................. 25
</TABLE>
2
<PAGE> 3
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Property Revenues
Rents................................... $ 18,143 $ 10,448 $ 52,796 $ 26,211
Tenant reimbursements................... 3,998 1,971 10,958 5,611
----------- ----------- ----------- -----------
Total Property Revenues......... 22,141 12,419 63,754 31,822
----------- ----------- ----------- -----------
Property Expenses
Property taxes.......................... 2,352 1,092 6,631 3,092
Property management fees................ 373 372 1,284 970
Utilities............................... 1,344 897 3,053 1,754
General operating....................... 963 724 2,794 1,997
Repairs and maintenance................. 707 604 2,072 1,197
Other property operating expenses....... 1,164 400 3,433 1,118
----------- ----------- ----------- -----------
Total Property Expenses......... 6,903 4,089 19,267 10,128
----------- ----------- ----------- -----------
Income from Property Operations........... 15,238 8,330 44,487 21,694
Trust administration and overhead......... (921) (847) (3,398) (2,596)
Depreciation.............................. (3,172) (2,152) (9,517) (5,506)
Amortization.............................. (198) (116) (476) (315)
Interest income........................... 188 102 419 500
Interest on notes payable................. -- (99) (111) (307)
Interest on mortgages payable............. (6,884) (3,871) (19,607) (9,805)
----------- ----------- ----------- -----------
Income from operations.................... 4,251 1,347 11,797 3,665
Minority interests in consolidated
subsidiaries............................ (88) (58) (260) (177)
Loss on sale of real estate............... (114) -- (75) --
----------- ----------- ----------- -----------
Income before extraordinary items......... 4,049 1,289 11,462 3,488
Extraordinary loss on extinguishment of
debt.................................... (585) (23) (585) (23)
----------- ----------- ----------- -----------
NET INCOME................................ $ 3,464 $ 1,266 $ 10,877 $ 3,465
=========== =========== =========== ===========
PER SHARE DATA (BASIC AND DILUTED)
Income before extraordinary items......... $ 0.20 $ 0.10 $ 0.56 $ 0.30
Extraordinary loss on extinguishment of
debt.................................... (0.03) (0.00) (0.03) (0.00)
----------- ----------- ----------- -----------
Net Income................................ $ 0.17 $ 0.10 $ 0.53 $ 0.30
=========== =========== =========== ===========
Dividends paid............................ $ 0.22 $ 0.20 $ 0.64 $ 0.58
=========== =========== =========== ===========
Weighted average Shares
outstanding-Basic....................... 20,686,717 12,470,471 20,378,579 11,389,513
=========== =========== =========== ===========
Weighted average Shares
outstanding-Diluted..................... 20,686,717 12,497,471 20,378,579 11,407,513
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
Real estate:
Held for investment....................................... $606,692 $476,641
Held for sale............................................. 38,212 28,491
-------- --------
Total real estate......................................... 644,904 505,132
Accumulated depreciation.................................. (42,862) (33,449)
-------- --------
Net real estate........................................... 602,042 471,683
Cash and cash equivalents:
Unrestricted.............................................. 4,931 6,145
Restricted................................................ 6,578 5,422
-------- --------
Total cash and cash equivalents........................... 11,509 11,567
Other assets, net........................................... 20,093 17,080
-------- --------
Total Assets...................................... $633,644 $500,330
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................... $346,107 $252,481
Unsecured notes payable to related parties................ -- 14,058
Accrued interest.......................................... 2,052 1,477
Accounts payable, accrued expenses and other
liabilities............................................ 16,764 17,651
Tenant security deposits.................................. 2,903 2,138
-------- --------
Total Liabilities................................. 367,826 287,805
-------- --------
Minority interests.......................................... 6,935 6,946
Shareholders' Equity:
Shares of Beneficial Interest, $0.10 par value; authorized
500,000,000 shares; issued and outstanding 21,068,967
common shares at September 30, 1999 and 17,201,591
common shares at December 31,1998...................... 2,107 1,721
Additional paid-in-capital................................ 385,134 330,031
Less 165,755 common shares in treasury, at cost........... (2,226) (2,226)
Accumulated distributions................................. (81,817) (68,756)
Accumulated deficit....................................... (44,315) (55,191)
-------- --------
Total Shareholders' Equity........................ 258,883 205,579
-------- --------
Total Liabilities and Shareholders' Equity........ $633,644 $500,330
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income................................................ $ 10,877 $ 3,465
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary loss..................................... 90 23
Loss on sale of real estate............................ 75 --
Minority interest in consolidated subsidiaries......... 260 177
Depreciation........................................... 9,517 5,506
Amortization of deferred financing costs............... 1,038 328
Other amortization..................................... 106 315
Changes in operating assets and liabilities:
Other assets and restricted cash....................... 1,185 (3,421)
Accounts payable, other liabilities and tenant security
deposits.............................................. (3,075) (2,124)
Accrued interest....................................... 575 877
--------- ---------
Net Cash Provided By Operating Activities......... 20,648 5,146
--------- ---------
Cash Flows from Investing Activities:
Capitalized expenditures.................................. (9,620) (3,598)
Acquisition of real estate and related working capital.... (142,857) (100,025)
Net proceeds from sales of real estate.................... 10,070 --
--------- ---------
Net Cash Used In Investing Activities............. (142,407) (103,623)
--------- ---------
Cash Flows from Financing Activities:
Principal repayments on mortgage notes payable............ (184,361) (48,645)
Proceeds from mortgage financing.......................... 264,304 134,325
Payment of deferred loan costs............................ (2,796) (1,755)
Proceeds from sale of common shares....................... 55,488 16,595
Purchase of treasury shares............................... -- (1,600)
Distributions to Shareholders............................. (11,819) (4,230)
Distributions to limited partnership unit holders......... (271) (257)
--------- ---------
Net Cash Provided By Financing Activities................... 120,545 94,433
--------- ---------
Net Decrease in Cash and Cash Equivalents................... (1,214) (4,044)
Cash and Cash Equivalents at Beginning of Period............ 6,145 11,683
--------- ---------
Cash and Cash Equivalents at End of Period.................. $ 4,931 $ 7,639
--------- ---------
Cash Paid for Interest...................................... $ 18,512 $ 8,907
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property Operations. As a result of the acquisition of 11 properties and an
undeveloped tract of land in the first nine months of 1999, American Industrial
Properties REIT (the "Trust") assumed approximately $1.9 million of accounts
payable and tenant security deposits.
As a result of the acquisition of 18 properties in the first nine months of
1998, the Trust issued $34.2 million in common shares, $0.9 million in limited
partnership units, received approximately $0.6 million in other assets and
restricted shares and assumed approximately $1.1 million of accounts payable and
tenant security deposits.
Real Estate Held for Sale. During the first nine months of 1999, the Trust
reclassified three properties and three tracts of land with a cost basis of
$19.1 million to real estate held for sale. As of September 30, 1999, two of the
industrial properties and one tract of land have been sold.
6
<PAGE> 7
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all of the disclosures required by generally accepted accounting principles or
those contained in the Trust's Annual Report on Form 10-K. Accordingly, these
financial statements should be read in conjunction with the audited financial
statements of the Trust for the year ended December 31, 1998, included in the
Trust's Annual Report on Form 10-K.
The financial information included herein has been prepared in accordance
with the Trust's customary accounting practices and has not been audited. In the
opinion of management, the information presented reflects all adjustments
necessary for a fair presentation of interim results. All such adjustments are
of a normal and recurring nature.
General. The Trust is a self-administered Texas REIT which, as of September
30, 1999, directly or indirectly owns and operates 75 commercial real estate
properties consisting of 58 industrial properties, 15 office buildings and 2
retail properties. The Trust currently has one industrial property, which is
owned through a joint venture, under development.
Principles of Consolidation. The consolidated financial statements of the
Trust include the accounts of the Trust and its wholly-owned subsidiaries and
controlled subsidiaries. Significant intercompany balances and transactions have
been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ significantly from
such estimates and assumptions.
Real Estate. The Trust carries its real estate held for investment at
depreciated cost unless the asset is determined to be impaired. Real estate
classified as held for sale is carried on an individual basis at lower of
depreciated cost or fair value less costs to sell. The Trust records impairment
losses on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the expected undiscounted cash
flows estimated to be generated by those assets are less than the related
carrying amounts. If an asset held for investment is determined to be impaired,
the impairment would be measured based upon the excess of the asset's carrying
value over the fair value. In addition, the Trust records impairment losses on
assets held for sale when the estimated sales proceeds, after estimated selling
costs, are less than the carrying value of the related asset.
Property improvements which extend the useful life are capitalized while
maintenance and repairs are expensed as incurred. Depreciation of buildings and
capital improvements is computed using the straight-line method over forty
years. Depreciation of tenant improvements is computed using the straight-line
method over the lease term, but not to exceed ten years.
Interest is capitalized during the period in which real estate assets are
undergoing construction or major renovation. During the three and nine months
ended September 30, 1999 and 1998, the Trust has not capitalized interest.
Cash and Cash Equivalents. Cash equivalents include demand deposits and all
highly liquid instruments purchased with an original maturity of three months or
less. Restricted cash amounts reflect escrow deposits held by third parties for
the payment of taxes and insurance and reserves held by third parties for
property repairs or tenant improvements.
Other Assets. Other assets primarily consist of direct costs related to
potential property acquisitions, deferred rents receivable, deferred commissions
and loan fees. Potential property acquisition costs are
7
<PAGE> 8
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capitalized and depreciated on a straight-line basis over the life of the asset
when the asset is acquired. Leasing commissions are capitalized and amortized on
a straight-line basis over the life of the lease. Loan fees are capitalized and
amortized to interest expense on a level yield basis over the term of the
related loan.
Rents and Tenant Reimbursements. Rental income, including contractual rent
increases or delayed rent starts, is recognized on a straight-line basis over
the lease term. The Trust has recorded deferred rent receivable (representing
the excess of rental revenue recognized on a straight-line basis over actual
rents received under the applicable lease provisions) of $2,561,000 and
$1,398,000 at September 30, 1999 and December 31, 1998, respectively.
Several tenants in the Trust's retail properties are also required to pay
as rent a percentage of their gross sales volume, to the extent such percentage
rent exceeds their base rents. Such percentage rents amounted to $129,000 and
$147,000 for the nine months ended September 30, 1999 and 1998, respectively. In
addition to paying base and percentage rents, most tenants are required to
reimburse the Trust for operating expenses in excess of a negotiated base
amount.
Income Tax Matters. The Trust operates as a REIT for federal income tax
purposes. Under the REIT provisions, the Trust is required to distribute 95% of
REIT taxable income and is allowed a deduction for distributions paid during the
year. Earnings and profits, which will determine the taxability of distributions
to shareholders, will differ from that reported for financial reporting purposes
due primarily to differences in the basis of the assets and the estimated useful
lives used to compute depreciation.
Earnings Per Share. Basic earnings per share excludes any dilutive effects
of options, warrants and convertible securities. The computation of diluted
earnings per share does not include common share equivalents where the inclusion
of such does not result in dilution (based upon application of the "treasury
stock" method) or, in periods where there is a net loss from operations, is
anti-dilutive.
Share Compensation. The Trust accounts for its share compensation
arrangements using the intrinsic value method.
Segment Reporting. The Trust classifies its reportable segments by property
type. See Note 11 for the Trust's segment disclosures.
Reclassification. Certain amounts in prior years financial statements have
been reclassified to conform with the current year presentation.
NOTE 2 -- REAL ESTATE AND PROVISIONS FOR POSSIBLE LOSSES ON REAL ESTATE:
At September 30, 1999 and December 31, 1998, real estate was comprised of
the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Held for investment:
Land........................................... $151,977,000 $102,891,000
Buildings and improvements..................... 454,715,000 373,750,000
------------ ------------
606,692,000 476,641,000
------------ ------------
Held for sale:
Land........................................... 9,939,000 6,000,000
Buildings and improvements..................... 28,273,000 22,491,000
------------ ------------
38,212,000 28,491,000
------------ ------------
Total.................................. $644,904,000 $505,132,000
============ ============
</TABLE>
8
<PAGE> 9
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the first quarter of 1999, the Trust purchased a portfolio of nine
properties for $127.3 million. The purchase price was primarily funded with
$75.2 million in borrowings secured under a secured bridge loan with Prudential
Securities Credit Corporation ("PSCC") and $51.8 million in common shares issued
to Developers Diversified Realty Corporation ("DDR"). In the third quarter of
1999, the Trust acquired a portfolio of two properties for $15.8 million. The
purchase price was primarily funded under the secured line of credit with Bank
One and $5.5 million in common shares issued to DDR.
During the first quarter of 1999, the Trust reclassified two industrial
properties and one tract of land from held for investment to held for sale. The
tract of land was sold in the second quarter of 1999 for $350,000 resulting in a
$38,000 gain. In the second quarter of 1999, the Trust also reclassified one
additional industrial property and two tracts of land from held for investment
to held for sale. The Trust sold two industrial properties in the third quarter
of 1999 resulting in a net loss of approximately $114,000. The remaining
industrial property and two tracts of vacant land are not located in target
markets currently identified by the Trust. The Trust currently has a contract
pending to sell the remaining industrial property and anticipates consummating
the sale in the first quarter of 2000. The Trust's intent is to sell the two
tracts of vacant land in 1999. These properties are included in the "Industrial"
operating segment and reported net operating income of $0.2 million and $0.5
million for the three months and nine months ended September 30, 1999 and $0.2
million and $0.5 million for the three months and nine months ended September
30, 1998.
During 1998, the Trust acquired 29 real estate properties for approximately
$237 million. To fund these acquisitions, the Trust paid approximately $37.8
million in cash, obtained $28.3 million and $42.7 million of financing under its
acquisition line of credit and secured bridge loan, respectively, assumed
approximately $32.7 million in mortgage debt with a fair value of $34.9 million,
obtained $47.2 million of financing through unsecured borrowings with DDR,
issued $0.9 million of limited partnership units and issued $47.7 million in
common shares to DDR. The difference between the assumed amount and the fair
value of the mortgage debt assumed was recorded as debt premium.
In 1998, the Trust reclassified its retail property in Denver, Colorado
from held for investment to held for sale. The Trust's current intent is to sell
this property in 1999, thereby allowing the Trust to continue its focus on the
light industrial sector of the real estate market. This property is included in
the "Retail" operating segment and reported net operating income of $0.3 million
and $1.2 million for the three months and nine months ended September 30, 1999
and $0.5 million and $1.4 million for the three months and nine months ended
September 30, 1998.
NOTE 3 -- MORTGAGE NOTES PAYABLE:
At September 30, 1999, all of the Trust's 75 properties were subject to
liens securing mortgage notes payable with principal balances totaling
$346,107,000, including $1,589,000 of debt premiums (see Note 2). Of this
amount, approximately $264,899,000 was represented by mortgage notes with stated
fixed interest rates ranging from 7.18% to 9.13%, a stated weighted average
interest rate of 7.40%, and maturity dates in 2001 to 2016. Mortgage notes
payable with variable interest rates total approximately $79,619,000. The
variable rate debt consists of $50,119,000 under the Trust's PSCC secured
acquisition credit line as well as $29,500,000 under its Bank One secured line
of credit. The acquisition credit line bears interest at the 30 day LIBOR rate
plus 1.55% and matures in April 2000. The Bank One line of credit, which
provides for a variable rate spread based upon the company's overall debt
leverage, currently bears interest at the 30 day LIBOR rate plus 2.00% and
matures in January 2001. The interest rates on the acquisition credit line and
the line of credit at September 30, 1999 are 6.925% and 7.38125%, respectively.
Debt premiums are amortized into interest expense over the terms of the
related mortgages using the effective interest method. As of September 30, 1999
and December 31, 1998, the unamortized debt premiums were $1,589,000 and
$1,958,000, respectively.
9
<PAGE> 10
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain of the mortgage notes payable contain cross default and cross
collateralization provisions whereby a default under one note can trigger a
default under other notes. Certain of the mortgage notes payable, including the
acquisition credit line and line of credit, also contain various borrowing
restrictions and operating performance covenants. The Trust is in compliance
with all such restrictions and covenants as of September 30, 1999.
NOTE 4 -- UNSECURED NOTES PAYABLE -- RELATED PARTY:
In January 1999, the Trust repaid in full three unsecured loans from DDR
used to finance acquisitions. The Trust paid interest of $111,000 to DDR at the
time of repayment. The interest rate on these demand notes was 10.25%. At
December 31, 1998, the Trust had three unsecured notes outstanding totaling
$14,058,000. The Trust paid interest of $660,850 to DDR for the year ended
December 31, 1998.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES:
Environmental Matters
The Trust has been notified of the existence of limited underground
petroleum based contamination at a portion of Tamarac Square, the Trust's Denver
retail property. The source of the contamination is apparently related to
underground storage tanks ("USTs") located on an adjacent property. The owner of
the adjacent property has agreed to remediate the property to comply with state
standards and has indemnified the Trust against costs related to its sampling
activity. The responsible party for the adjacent USTs has submitted an amended
corrective Action Plan to the Colorado Department of Public Health and
Environment and awaits permission to upgrade its remediation system to address
the contamination.
The Trust has been notified of the existence of limited cleaning solvents
("mineral spirits") contamination at Tech Center 29 Phase I. The contamination
is the apparent result of a service center operated on the property until 1996.
The tenant's primary operations consisted of the distribution of parts, cleaning
equipment and cleaning solvents to industrial customers. Two USTs used in the
operation were removed in 1996. The former tenant has been working with the
Maryland Department of the Environment since the onset and has issued a standby
letter of credit as financial assurance for remediation of the site. The
Maryland Department of the Environment is beneficiary under the standby letter
of credit.
With the exception of Tamarac Square and Tech 29 Phase I, the Trust has not
been notified, and is not otherwise aware, of any material non-compliance,
liability or claim relating to hazardous or toxic substances in connection with
any of its properties.
Litigation
The Trust is currently named as a defendant in a lawsuit related to the
Trust's merger with four real estate limited partnerships. The lawsuit purports
to be both a class action and a derivative lawsuit against the defendants. The
plaintiffs have asserted various claims, including breach of fiduciary duty and
various securities law violations, against the parties to the merger and certain
individuals and are seeking monetary damages. On April 13, 1998, the Trust was
named as a defendant in an additional purported class action lawsuit related to
the Trust's merger with the four real estate limited partnerships. The
plaintiffs have asserted various claims, including breach of fiduciary and
contractual duties and various securities law violations, against the parties to
the merger and are seeking monetary damages. On July 16, 1999, the Court found
in favor of the Trust, denying Plaintiff's motion for class certification in
relation to the April 13, 1998 lawsuit filed on behalf of the limited partners
in one of the real estate limited partnerships. The plaintiffs are currently
seeking reconsideration of the July 16, 1999 order.
The Trust intends to vigorously defend against these claims. The lawsuits
described above are on-going, therefore, management cannot predict the outcome
of such litigation, however, management believes the
10
<PAGE> 11
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liabilities, if any, that may ultimately result from such legal actions are not
expected to have a material adverse effect on the consolidated financial
position or results of operations of the Trust.
NOTE 6 -- MINORITY INTEREST:
Operating Partnerships. AIP-SWAG Operating L.P. and AIP Operating, L.P.
have 179,085 and 58,333 limited partnership units outstanding, respectively, as
of September 30, 1999 (excluding limited partnership units held by the Trust).
Pursuant to the limited partnership agreement for each partnership, the limited
partners received rights (the "Redemption Rights") that enable them to cause the
partnership to redeem each limited partnership unit for cash equal to the value,
as determined in accordance with the partnership agreement, of a common share
(or, at the Trust's election, the Trust may purchase each limited partnership
unit offered for redemption for one common share). The Redemption Rights
generally may be exercised at any time after one year following the issuance of
the limited partnership units. The number of common shares issuable upon
exercise of the Redemption Rights will be adjusted for share splits, mergers,
consolidations or similar pro rata transactions, which would have the effect of
diluting the ownership interests of the limited partners or the shareholders of
the Trust. The limited partners' interest in each partnership is reflected as
minority interest in the accompanying consolidated financial statements.
Other Partnerships. In connection with the merger of four real estate
limited partnerships, effective December 31, 1997, the Trust acquired a 55.84%
interest in Chelmsford Associates LLC, formerly Chelmsford Associates Joint
Venture, a joint venture owning one office property. The remaining 44.16%
interest is owned by a significant shareholder of the Trust. The financial
position and results of operations of the joint venture is included in the
consolidated financial statements of the Trust. The other venturer's interest in
the partnership is reflected as minority interest in the accompanying
consolidated financial statements.
NOTE 7 -- SHAREHOLDERS' EQUITY:
Capital Stock. The Trust is authorized to issue up to 500,000,000 shares,
of which 450,000,000 are designated as Common Shares of Beneficial Interest and
50,000,000 Preferred Shares of Beneficial Interest. The Shares have dividend,
distribution, liquidation and other rights as disclosed in the Declaration of
the Trust. As of September 30, 1999, 21,068,967 common shares are issued and
outstanding.
The preferred shares may be issued in one or more series. The number of
preferred shares in each series and the designation, powers, preferences and
rights of each such series and the qualifications, limitations or restrictions
thereof have not been established. As of September 30, 1999, no preferred shares
were issued and outstanding.
On March 9, 1998, the Board of Trust Managers authorized a share repurchase
program allowing the Trust to purchase up to 1,000,000 common shares from time
to time in open market transactions, as price and market conditions allow, over
the following six months. This program resulted in the Trust purchasing 123,783
common shares in the open market, for an aggregate cost of $1,598,000. These
common shares are held in Treasury. As a result of the one-for-five reverse
share split and the odd lot redemption program, effective on October 15, 1997,
the Trust repurchased 41,972 common shares, which are held in treasury. As of
September 30, 1999, the Trust holds 165,755 common shares in treasury.
Private Placement. On August 3, 1998, the Trust entered into a definitive
agreement providing for a strategic investment by DDR in the Trust. Under the
terms of the Share Purchase Agreement (the "Agreement"), the transaction has
three stages. The first stage of equity investment, effective as of July 30,
1998, resulted in DDR acquiring 2,207,618 common shares at a price of $15.50 per
share in exchange for consideration valued at approximately $34.2 million. As of
December 31, 1998, the Trust had issued an additional 3,683,584 common shares
related to the second stage of the Agreement at a price of $15.50 per share to
fund property acquisitions. The common shares issued in the first and second
stages are of the same
11
<PAGE> 12
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
class as the Trust's existing common shares and are entitled to the same voting
and distribution rights as all common shares, subject to certain restrictions on
the resale of the common shares. The remainder of the second stage, 1,543,005
common shares at $15.50 per share, and the entire third stage, $200 million of
equity investment, had not occurred as of December 31, 1998.
During the nine months ended September 30, 1999, the Trust issued 3,765,454
common shares to DDR in connection with the purchase of 11 properties (see Note
2), 92,938 common shares were issued in connection with the Dividend
Reinvestment Plan and 9,115 common shares were issued to Trust Managers that
elected to receive base fee compensation in common shares. In total the Trust
issued 3,867,507 common shares in the nine months ended September 30, 1999.
Share Incentive Plans. The Trust adopted the Employee and Trust Managers
Incentive Share Plan (the "Plan") for the purpose of (i) attracting and
retaining employees, directors and others, (ii) providing incentives to those
deemed important to the success of the Trust, and (iii) associating the
interests of these individuals with the interests of the Trust and its
shareholders through opportunities for increased share ownership.
All awards under the Plan are determined by the Compensation Committee of
the Board of Trust Managers and a maximum limit of 10% of the total number of
Shares outstanding at any time on a fully-diluted basis may be issued under the
Plan.
Under the terms of the Plan, any person who is a full-time employee or a
Trust Manager of the Trust or of an affiliate (as defined in the Plan) of the
Trust or a person designated by the Compensation Committee as eligible because
such person performs bona fide consulting or advisory services for the Trust or
an affiliate of the Trust (other than services in connection with the offer or
sale of securities in a capital-raising transaction) and has a direct and
significant effect on the financial development of the Trust or an affiliate of
the Trust, shall be eligible to receive awards under the Plan.
Share Option Awards. In connection with the Agreement with DDR, on July 29,
1998, the Trust granted share options to purchase 100,000 common shares to the
Chairman of the Board of Trust Managers, who, in accordance with DDR's request,
transferred the options to his employer, DDR. The exercise price of the options
was $12.625 (the market price of the Trust's common shares on the date of the
grant) and the fair value of the options was $221,000. The options vested on
November 20, 1998.
On an annual basis, each non-employee Trust Manager shall receive a
non-qualified share option to purchase 1,000 common shares. Each of these
non-employee Trust Manager options is fully exercisable upon the date of grant
and generally terminates (unless sooner terminated under the terms of the Plan)
ten years after the date of grant. The exercise price is determined by the
Compensation Committee and must have an exercise price equal to not less than
100% of the fair market value of a share on the date of grant. During 1998,
10,000 common shares were granted.
During 1998, pursuant to the plan, the Trust Managers granted share options
to purchase 460,000 common shares to 12 members of management. The exercise
price of the options granted is $13.625. In addition, the Board approved the
award of 27,000 restricted shares to the Trust's senior officers. The restricted
shares vest annually beginning on the first anniversary date of the date of
grant.
In 1999, 10,000 share options were granted to a new member of management
and 10,000 share options, originally issued in 1998, were canceled. All options
vest annually over a five year period, beginning on the date of grant.
Pursuant to agreements between the Trust and four senior officers, a
"change in control" occurred on December 10, 1998 when DDR's ownership position
exceeded 33% of the Trust's voting shares. As a result, all options held by
these officers became fully vested and the restrictions on 27,000 restricted
shares held by these officers were lifted. A total of 395,000 previously
unvested options became vested on this date.
12
<PAGE> 13
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 1999, 716,000 options are outstanding of which 678,000 are
fully vested. The remaining 38,000 options vest annually through February 2003.
The term of these options range from June 2007 through February 2009. As of
September 30, 1999, no options had been exercised.
The limited partners of AIP-SWAG Operating Partnership L.P. received
warrants to purchase 40,000 common shares at $17.50 per share. The warrants
expire on October 3, 2000.
NOTE 8 -- DISTRIBUTIONS:
The $0.22 per share distribution declared on August 4, 1999 was paid on
October 14, 1999. Additionally, a $0.22 per share distribution was paid on July
14, 1999 and a $0.20 per share distribution was paid on April 15, 1999 and on
January 20, 1999. On November 4, 1999, the Trust declared a distribution of
$0.22 per share, payable on January 14, 2000 to shareholders of record on
January 6, 2000. (See Note 12). Distributions totaling $0.58 per share were paid
in 1998.
NOTE 9 -- TRANSACTIONS WITH RELATED PARTIES:
During 1998, the Trust on occasion entered into unsecured borrowings with
DDR. Such borrowings bear a fixed interest rate of 10.25%, provide for quarterly
payments of interest and are due thirty days after demand. The Trust repaid all
such borrowings, including payment of $111,000 of interest in the first quarter
of 1999. The Trust did not enter into any such borrowings in the nine months
ended September 30, 1999.
Certain real estate investments are managed by Quorum Real Estate Services
Corporation ("Quorum"), an affiliate of USAA Real Estate Company ("Realco"), and
DDR, major shareholders of the Trust. Quorum and DDR are paid competitive rates
for services, including, but not limited to construction, tenant finish, leasing
and management. The Trust paid Quorum management fees of $531,000, leasing
commissions of $173,000, brokerage fees of $92,000, and construction management
fees of $36,000, for the nine months ended September 30, 1999. For the nine
months ended September 30, 1998, management fees and leasing commissions paid by
the Trust to Quorum were $390,000 and $27,000, respectively. The Trust paid DDR
management fees of $13,000 for the nine months ended September 30, 1999. No such
fees were paid to DDR for the nine months ended September 30, 1998.
The Trust currently leases space to an individual serving as a Trust
Manager at competitive market rates. For the three and nine months ended and
September 30, 1999, this Trust Manager paid approximately $5,800 and $17,600 in
lease payments to the Trust, respectively and approximately $3,900 for the three
and nine months ended September 30, 1998.
At September 30, 1999, DDR and Realco owned approximately 46.2% and 8.0% of
the common shares outstanding, respectively.
13
<PAGE> 14
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- PER SHARE DATA:
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Basic and diluted earnings per
share:
Numerator:
Net income before extraordinary
items........................ $ 4,049,000 $ 1,289,000 $11,462,000 $ 3,488,000
Extraordinary items............. (585,000) (23,000) (585,000) (23,000)
----------- ----------- ----------- -----------
Net income...................... 3,464,000 1,266,000 10,877,000 3,465,000
=========== =========== =========== ===========
Denominator:
Weighted average shares......... 20,686,717 12,470,471 20,378,579 11,389,513
Plus restricted shares.......... -- 27,000 -- 18,000
----------- ----------- ----------- -----------
Adjusted weighted average
shares....................... 20,686,717 12,497,471 20,378,579 11,407,513
=========== =========== =========== ===========
Basic and diluted earnings per
share:
Net income before extraordinary
items........................ $ 0.20 $ 0.10 $ 0.56 $ 0.30
Extraordinary items............. (0.03) (0.00) (0.03) (0.00)
----------- ----------- ----------- -----------
Net income...................... $ 0.17 $ 0.10 $ 0.53 $ 0.30
=========== =========== =========== ===========
</TABLE>
Options to purchase 716,000 common shares at prices ranging from $11.125 to
$15.00 per share were outstanding at September 30, 1999. In 1999, 10,000 share
options were granted to a new member of management and 10,000 share options,
originally issued in 1998, were canceled. These options were not included in a
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares and, therefore,
the effect would be antidilutive.
At September 30, 1999, 40,000 warrants were outstanding. The warrants have
an exercise price of $17.50 per common share and expire in October 2000. Because
the warrants exercise price was greater than the average market price of the
common shares the effect would be antidilutive.
NOTE 11 -- SEGMENT REPORTING
The Trust classifies its reportable segments by property type: light
industrial, office, and retail. For the three months ended September 30, 1999,
light industrial represents 61% of property revenue. Office and retail represent
34% and 5%, respectively for the same period. For the three months ended
September 30, 1998 light industrial, office and retail represented property
revenue of 54%, 37%, and 9%, respectively.
For the nine months ended September 30, 1999, light industrial represents
61% of property revenue. Office and retail represent 34% and 5%, respectively
for the same period. For the nine months ended September 30, 1998 light
industrial, office and retail represented property revenue of 52%, 38%, and 10%,
respectively.
The Trust's emphasis is in the light industrial sector, which is
characterized as office showroom, service center and flex properties, low rise
offices, and small bay distribution properties. Based on net rentable square
feet, as of September 30, 1999, approximately 73% of the Trust's portfolio is
represented by light industrial properties, 24% of the portfolio is represented
by office properties and 3% of the portfolio is represented by retail
properties. Based on net rentable square feet, as of September 30, 1998,
approximately 70% of the
14
<PAGE> 15
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Trust's portfolio was represented by light industrial properties, 25% by office
properties and 5% by retail properties.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Senior management evaluates
performance based on net operating income from the combined properties in each
segment.
The Trust's reportable segments are a consolidation of related properties
which offer different products. They are managed separately because each segment
requires different operating, pricing and leasing strategies. All of the
properties have been acquired separately and are incorporated into the
applicable segment.
15
<PAGE> 16
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the Trust's operations by reporting segment,
for each of the three months ended September 30, 1999 and 1998 (in thousands).
Property revenues and expenses include both real estate held for investment and
real estate held for sale.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
-----------------------------------------------------------
CORPORATE
LIGHT OFFICE AND
INDUSTRIAL BUILDINGS RETAIL OTHER CONSOLIDATED
---------- --------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Property revenues............................ $ 13,505 $ 7,582 $ 1,054 $ -- $ 22,141
Property expenses............................ 3,729 2,617 557 -- 6,903
-------- -------- ------- -------- --------
Income from property operations.............. 9,776 4,965 497 -- 15,238
Administrative expenses...................... -- -- -- (921) (921)
Depreciation and amortization................ -- -- -- (3,370) (3,370)
Other income................................. -- -- -- 188 188
Interest expense............................. -- -- -- (6,884) (6,884)
-------- -------- ------- -------- --------
Income (loss) from operations................ 9,776 4,965 497 (10,987) 4,251
Minority interests in consolidated
subsidiaries............................... -- -- -- (88) (88)
Loss on sale of real estate.................. (114) -- -- -- (114)
Extraordinary loss on debt................... (585) -- -- -- (585)
-------- -------- ------- -------- --------
Net income (loss)............................ $ 9,077 $ 4,965 $ 497 $(11,075) $ 3,464
======== ======== ======= ======== ========
Total real estate.................... $400,595 $205,915 $36,429 $ 1,965 $644,904
======== ======== ======= ======== ========
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------------------
CORPORATE
LIGHT OFFICE AND
INDUSTRIAL BUILDINGS RETAIL OTHER CONSOLIDATED
---------- --------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Property revenues............................ $ 6,646 $ 4,650 $ 1,123 $ -- $ 12,419
Property expenses............................ 1,809 1,864 416 -- 4,089
-------- -------- ------- ------- --------
Income from property operations.............. 4,837 2,786 707 -- 8,330
Administrative expenses...................... -- -- -- (847) (847)
Depreciation and amortization................ -- -- -- (2,268) (2,268)
Other income................................. -- -- -- 102 102
Interest expense............................. -- -- -- (3,970) (3,970)
-------- -------- ------- ------- --------
Income (loss) from operations................ 4,837 2,786 707 (6,983) 1,347
Minority interests in consolidated
subsidiaries............................... -- -- -- (58) (58)
Loss on sale of real estate.................. -- -- -- -- --
Extraordinary loss on debt................... (23) -- -- -- (23)
-------- -------- ------- ------- --------
Net income (loss)............................ $ 4,814 $ 2,786 $ 707 $(7,041) $ 1,266
======== ======== ======= ======= ========
Total real estate.................... $233,953 $123,708 $45,699 $ 489 $403,849
======== ======== ======= ======= ========
</TABLE>
The following table sets forth the Trust's operations by reporting segment,
for each of the nine months ended September 30, 1999 and 1998 (in thousands).
Property revenues and expenses include both real estate held for investment and
real estate held for sale.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
-----------------------------------------------------------
CORPORATE
LIGHT OFFICE AND
INDUSTRIAL BUILDINGS RETAIL OTHER CONSOLIDATED
---------- --------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Property revenues............................ $ 38,975 $ 21,612 $ 3,167 $ -- $ 63,754
Property expenses............................ 10,948 6,877 1,442 -- 19,267
-------- -------- ------- -------- --------
Income from property operations.............. 28,027 14,735 1,725 -- 44,487
Administrative expenses...................... -- -- -- (3,398) (3,398)
Depreciation and amortization................ -- -- -- (9,993) (9,993)
Other income................................. -- -- -- 419 419
Interest expense............................. -- -- -- (19,718) (19,718)
-------- -------- ------- -------- --------
Income (loss) from operations................ 28,027 14,735 1,725 (32,690) 11,797
Minority interests in consolidated
subsidiaries............................... -- -- -- (260) (260)
Loss on sale of real estate.................. (75) -- -- -- (75)
Extraordinary loss on debt................... (585) -- -- -- (585)
-------- -------- ------- -------- --------
Net income (loss)............................ $ 27,367 $ 14,735 $ 1,725 $(32,950) $ 10,877
======== ======== ======= ======== ========
Total real estate............................ $400,595 $205,915 $36,429 $ 1,965 $644,904
======== ======== ======= ======== ========
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------------------
CORPORATE
LIGHT OFFICE AND
INDUSTRIAL BUILDINGS RETAIL OTHER CONSOLIDATED
---------- --------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Property revenues............................ $ 16,533 $ 12,066 $ 3,223 $ -- $ 31,822
Property expenses............................ 4,590 4,326 1,212 -- 10,128
-------- -------- ------- -------- --------
Income from property operations.............. 11,943 7,740 2,011 -- 21,694
Administrative expenses...................... -- -- -- (2,596) (2,596)
Depreciation and amortization................ -- -- -- (5,821) (5,821)
Other income................................. -- -- -- 500 500
Interest expense............................. -- -- -- (10,112) (10,112)
-------- -------- ------- -------- --------
Income (loss) from operations................ 11,943 7,740 2,011 (18,029) 3,665
Minority interests in consolidated
subsidiaries............................... -- -- -- (177) (177)
Loss on sale of real estate.................. -- -- -- -- --
Extraordinary loss on debt................... (23) -- -- -- (23)
-------- -------- ------- -------- --------
Net income (loss)............................ $ 11,920 $ 7,740 $ 2,011 $(18,206) $ 3,465
======== ======== ======= ======== ========
Total real estate............................ $233,953 $123,708 $45,699 $ 489 $403,849
======== ======== ======= ======== ========
</TABLE>
16
<PAGE> 17
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- SUBSEQUENT EVENTS:
On November 4, 1999 the Trust declared a distribution of $0.22 per share
payable on January 14, 2000 to shareholders of record on January 6, 2000.
The Trust currently has contracts pending to sell one light industrial
property currently classified as held for sale and one office property
classified as held for investment. Sales prices for each of the two properties
is $7,700,000. Although the contacts are terminable by the buyers, the Trust
expects the office property to be sold during December 1999 and the light
industrial property to be sold in the first quarter of 2000. If sold for these
prices, the Trust anticipates recognizing a gain on sale.
The Trust has entered into letters of intent to purchase two light
industrial properties located in California for $49 million. The Trust has also
entered into a letter of intent to purchase a light industrial property in
Austin, Texas for $22 million. Consummation of each transaction is subject to
customary due diligence, negotiation of mutually acceptable definitive
agreements and other contingencies and legal matters. Accordingly, there is no
assurance the properties will ultimately be acquired by the Trust.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Trust and accompanying Notes included
elsewhere in this report as well as the audited financial statements appearing
in the Trust's 1998 Annual Report to Shareholders. The statements contained in
this report that are not historical facts are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
may differ materially from those included in the forward-looking statements.
These forward-looking statements involve risks and uncertainties including, but
not limited to, changes in general economic conditions in the markets that could
impact demand for the Trust's properties and changes in financial markets and
interest rates impacting the Trust's ability to meet its financing needs and
obligations.
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1999 to September 30, 1998
The weighted average amount of net rentable square feet owned by the Trust
increased to 8,340,000 square feet during the three months ended September 30,
1999 from 5,721,000 square feet for the same period in 1998, an increase of 46%.
Property revenues increased 78% to $22,141,000 in 1999 from $12,419,000 in 1998,
and income from property operations (which is defined as property revenues less
property operating expenses, excluding depreciation and amortization, interest
expense, and Trust administration and overhead expenses) increased 83% to
$15,238,000 in 1999 from $8,330,000 in 1998. The increases in revenue stemmed
principally from the increase in properties owned by the Trust as well as an
increase in rental rates and/or an increase in overall occupancy at a number of
properties. The properties acquired by the Trust since September 30, 1998 have
included a number of properties with higher base rents including office
properties and light industrial properties located in California.
During the three months ending September 30, 1999, the Trust sold two light
industrial properties resulting in losses of $114,000.
On a same property basis, excluding the two retail properties, net
operating income (which is defined as property revenue, excluding straight line
rents, less property operating expenses and which does not include depreciation
and amortization, interest expense, or Trust administration and overhead
expenses) increased to $6,969,000 for the three months ended September 30, 1999
from $6,497,000 for the same period in 1998, an increase of 7.3%. This overall
increase is comprised of a 6.0% increase related to 32 industrial properties and
a 9.0% increase related to nine office properties. For the three months ended
September 30, 1999, same store property revenues increased 7.4% and property
operating expenses increased 7.5% when compared to the same three month period
in 1998.
Comparison of Nine Months Ended September 30, 1999 to September 30, 1998
The weighted average amount of net rentable square feet owned by the Trust
during the nine months ended September 30, 1999 increased to 8,284,000 square
feet from 4,953,000 square feet for the same period in 1998, an increase of 67%.
Property revenues increased 100% to $63,754,000 for the nine months ended
September 30, 1999 from $31,822,000 for the same period in 1998, and income from
property operations increased 105% to $44,487,000 in 1999 from $21,694,000 in
1998. The increases in revenue stemmed principally from the increase in
properties owned by the Trust as well as an increase in rental rates and/or an
increase in overall occupancy at a number of properties. The properties acquired
by the Trust since September 30, 1998 have included a number of properties with
higher base rents including office properties and light industrial properties
located in California.
For the nine months ending September 30, 1999, the Trust has sold two light
industrial properties and a parcel of undeveloped land resulting in losses of
$75,000.
On a same property basis, excluding the two retail properties, net
operating income (which is defined as property revenue, excluding straight line
rents, less property operating expenses and which does not include depreciation
and amortization, interest expense, or Trust administration and overhead
expenses) increased to
18
<PAGE> 19
$15,596,000 for the nine months ended September 30, 1999 from $15,041,000 for
the same period in 1998, an increase of 3.7%. This overall increase is comprised
of a 4.4% increase related to 27 industrial properties and a 2.5% increase
related to six office properties. For the nine months ended September 30, 1999,
same store property revenues increased 4.7% and property operating expenses
increased 7.1% when compared to the same nine month period in 1998.
During the nine months ended September 30, 1999, the Trust leased 936,000
of net rentable square footage, including 561,000 square feet by existing
tenants, a 70.6% retention rate. During the same nine month period in 1998, the
Trust leased 322,000 of net rentable square feet, including 372,000 square feet
with existing tenants, a 45.9% retention rate.
As of September 30, 1999 the average base rent of the Trust's portfolio
increased to $9.06 per square foot from $7.61 per square foot at September 30,
1998, a 19.1% increase. The average base rent of new leases signed during the
nine months ended September 30, 1999, compared to the average base rent of the
expiring leases was $7.11 compared to $6.53 for light industrial properties, an
increase of 8.9%, and $21.54 compared to $13.52 for office properties, a 59.4%
increase.
Analysis of Cash Flows -- Comparison of Nine Months Ended September 30, 1999
to September 30, 1998
Cash flow provided by operating activities in the nine months ended
September 30, 1999 was $20,648,000. This results from the Trust's net income of
$10,877,000 increased by non-cash charges totaling $11,086,000 related to
minority interests, depreciation and amortization, extraordinary loss of the
extinguishment of debt, losses on the sale of real estate, and an increase in
other assets and restricted cash of $330,000 and $855,000, respectively. In
addition, accrued interest increased $575,000, accounts payable, accrued
expenses and other liabilities decreased $3,075,000.
Cash flow used in investing activities in the nine months ended September
30, 1999 was $142,407,000, representing amounts expended on the acquisition of
real estate and related working capital totaling $142,857,000 and capitalized
expenditures of $9,620,000 offset by proceeds from the sale of real estate
totaling $10,070,000.
Cash flow provided by financing activities in the nine months ended
September 30, 1999 was $120,545,000. This amount reflects proceeds from the
mortgage financing on the properties acquired in 1999 and refinancing existing
properties of $264,304,000, net proceeds from the private placement of common
shares of $55,488,000, principal repayments on mortgage and notes payable
(including refinancings) totaling approximately $184,361,000, payments of loan
costs of $2,796,000, and distributions to shareholders and limited partnership
unit holders totaling $12,090,000.
Cash flow provided by operating activities in the nine months ended
September 30, 1998 was $5,146,000. This results from the Trust's net income of
$3,465,000 increased by non-cash charges totaling $6,349,000 related to minority
interests, depreciation and amortization, extraordinary loss of the
extinguishment of debt, and a decrease in other assets of $3,886,000 and an
increase in restricted cash of $465,000. In addition, accrued interest increased
$877,000, accounts payable, accrued expenses and other liabilities decreased
$2,124,000.
Cash flow used in investing activities in the nine months ended September
30, 1998 was $103,623,000, representing amounts expended on the acquisition of
real estate and related working capital totaling $100,025,000, and capitalized
expenditures of $3,598,000.
Cash flow provided by financing activities in the nine months ended
September 30, 1998 was $94,433,000. This amount reflects proceeds from the
mortgage financing on the properties acquired in 1998 and refinancing existing
properties of $134,325,000, net proceeds from the private placement of common
shares of $16,595,000, principal repayments on mortgage and notes payable
(including refinancings) totaling approximately $48,645,000, repurchase of
common shares totaling $1,600,000, payments of loan costs of $1,755,000, and
distributions to shareholders and limited partnership unit holders totaling
$4,487,000.
19
<PAGE> 20
Funds from Operations
The Board of Governors of the National Association of Real Estate
Investment Trusts, Inc. ("NAREIT") defines Funds from Operations ("FFO") as net
income (loss) computed in accordance with generally accepted accounting
principles ("GAAP"), excluding gains or losses from debt restructuring and sales
of property, plus real estate related depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures. The Trust
calculates FFO in a manner consistent with the NAREIT definition. In addition,
NAREIT recommends that extraordinary items or significant non-recurring items
that distort comparability should not be considered in arriving at FFO.
Accordingly, the Trust does not include extraordinary items or provision for
possible losses on real estate in its calculation of FFO.
Effective January 1, 2000 NAREIT has revised the calculation of FFO to
include all operating results, both recurring and non-recurring -- except those
results defined as "extraordinary items" under GAAP and gains and losses from
sales of depreciable operating properties. The Trust does not anticipate a
significant impact on current FFO calculations as a result in this change.
The Trust believes FFO is an appropriate measure of its performance
relative to other REITs. FFO provides investors with an understanding of the
ability of the Trust to incur and service debt and make capital expenditures.
There can be no assurance that FFO presented by the Trust is comparable to
similarly titled measures of other REITs. While other REITs may not always use a
similar definition, this information does add comparability to those which have
adopted the NAREIT definition. FFO should not be considered as an alternative to
net income or other measurements under generally accepted accounting principles
as an indicator of the Trust's operating performance or to cash flows from
operating, investing, or financing activities as a measure of liquidity. FFO
does not reflect working capital changes, cash expenditures for capital
improvements, or principal payments on indebtedness.
The following table shows the Trust's cash flows from its operating,
investing and financing activities prepared in accordance with generally
accepted accounting principles:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1999 1998 1999 1998
-------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by operating
activities............................... $ 6,590 $ 3,789 $ 20,648 $ 5,146
Net cash used in investing activities.... (10,172) (20,153) (142,407) (103,623)
Net cash provided by (used in) financing
activities............................. 1,591 13,896 120,545 94,433
</TABLE>
The following table shows the Trust's calculation of FFO:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<S> <C> <C> <C> <C>
Net Income....................... $ 3,464 $ 1,266 $ 10,877 $ 3,465
Exclude effects of:
Real estate depreciation and
amortization, net of
minority interest share... 3,250 2,205 9,674 5,635
Minority interest in
operating partnerships.... 43 47 129 137
Loss on sale of real
state..................... 114 -- 75 --
Extraordinary loss on
extinguishment of debt.... 585 23 585 23
----------- ----------- ----------- -----------
Funds from Operations............ $ 7,456 $ 3,541 $ 21,340 $ 9,260
=========== =========== =========== ===========
Weighted average Shares and
operating partnership units
outstanding.................... 20,924,135 12,707,889 20,615,997 11,620,882
</TABLE>
20
<PAGE> 21
YEAR 2000 ISSUES
Some older computer software was written using two digits rather than four
to define the applicable year. As a result, those computer programs have
time-sensitive programming software that recognize a date using "00" as the year
1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, create tenant statements,
or engage in similar normal business activities.
The Trust's plan to resolve Year 2000 issues involves the following four
phases: assessment, remediation, testing and implementation. To date, the Trust
has assessed all existing internally used hardware and systems (both information
technology and non-information technology) that could be significantly affected
by the Year 2000 issue. Based on these assessments, management believes that
existing hardware and systems used by the Trust are Year 2000 compliant.
Additionally, as of December 31, 1998, the Trust successfully upgraded the
existing network and property operations/accounting systems. These upgrades were
instituted to meet current and future needs of the Trust, not as a result of our
initial Year 2000 assessment. The Trust has taken precautions, including testing
these systems prior to implementation, to insure that all upgrades and
modifications are Year 2000 compliant.
The Trust has queried and/or received disclosure statements from
significant external service providers. To date, the Trust is not aware of any
Year 2000 problems with these third parties that would materially impact the
Trust's results of operations, liquidity or capital resources. However, the
Trust has no means of ensuring that external service providers will be Year 2000
compliant. The inability of these service providers to complete their Year 2000
resolution processes in a timely manner could impact the Trust. The effect of
non-compliance by service providers is not determinable. The Trust is also
reviewing all properties which may use date sensitive software in elevators,
heating and cooling equipment and security systems to confirm no problem exists.
Although a potential area of significant exposure to the Trust is the
contracting to third parties of property management and leasing services, the
Trust generally utilizes thirty-day cancelable contracts and, should a material
risk arise with respect to the Year 2000 problem, anticipates terminating the
contract and hiring a new vendor. In addition, the Trust has initiated the
transition to internalize property management, accounting and leasing of its
properties, thereby significantly reducing the use of third parties in these
areas. To date the Trust has internalized 43% of the property management and
100% of the property accounting.
As noted above, the Trust has completed the initial assessment and believes
the existing internal systems and upgrades are Year 2000 compliant. The Trust
does not expect historical and future costs related to the Year 2000 issue to
have a material effect on the consolidated financial position or results of
operations of the Trust. Although management does not currently believe that the
effect of the Year 2000 problem will have a material impact on the Trust, there
is no guarantee that unforeseen circumstances will not arise which could cause a
material adverse effect upon the Trust's operations.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of funds for the Trust's liquidity requirements are
funds generated from operation of the Trust's real estate assets, equity
offerings, debt financings and/or refinancings, and unrestricted cash reserves.
In addition, the Trust may from time to time sell properties that do not
compliment the Trust's property emphasis or geographic target markets. Proceeds
from such sales could be used for working capital purposes, debt reduction or
reinvested into other properties. As of September 30, 1999, the Trust had $4.9
million in unrestricted cash.
In August 1998, the Trust entered into a definitive agreement providing for
a strategic investment by DDR in the Trust. Under the terms of the agreement,
DDR was obligated to purchase $115 million of common shares and up to $200
million in additional equity, subject to certain conditions, to fund property
acquisitions approved by the Trust's Board. As of September 30, 1999, DDR
purchased 9.7 million common shares for $148.6 million. Proceeds related to this
agreement were used to fund property acquisitions in 1998 as well as the
purchase of $143.1 million in properties in 1999.
21
<PAGE> 22
In addition to the equity raised, the Trust utilized both long term and
short term secured financing to fund property acquisitions. The Trust completed
approximately $48.6 million in permanent fixed rate financings during the first
quarter of 1999. In January 1999, the Trust initiated a secured acquisition
credit facility with Bank One Texas, N.A. The agreement contemplates a
$150,000,000 credit line of which Bank One and Wells Fargo Bank have each
committed $25,000,000. The remainder of the credit line will be syndicated on a
"best efforts" basis by Bank One. The credit line, which is secured by mortgage
liens on properties, provides for a graduated variable interest rate (depending
on the Trust's overall leverage) of LIBOR plus 1.4% to LIBOR plus 2.0%, a
maximum loan to value of 60%, and a maturity in January 2001. As of September
30, 1999, the Trust has $29.5 million outstanding under this credit line, which
bears interest at LIBOR plus 2.00%, currently 7.38125%.
The Trust also has approximately $50.1 million outstanding under a $75
million PSCC secured acquisition line bearing interest at a variable rate based
on the 30 day LIBOR rate plus 1.55%, currently 6.925%. The Trust anticipates
transitioning certain assets currently financed under this secured acquisition
line to the Bank One secured line of credit in the future.
Including the Bank One credit line and the PSCC secured acquisition credit
line at September 30, 1999, the Trust had $346.1 million in mortgage debt
outstanding, of which approximately $264.9 million was represented by fixed rate
debt, including $1.6 million in unamortized debt premium with a weighted average
interest rate of 7.40%, and $79.6 million was represented by variable rate debt
with a weighted average interest rate of 7.12%. These weighted average interest
rates represent an average of the applicable stated interest rate and do not
include the amortization of deferred loan costs (or debt premiums) which will
produce a higher (or lower) weighted average interest rate.
At September 30, 1999, the Trust's total market capitalization (based upon
a September 30, 1999 closing share price of $13.3125 per share) was
approximately $621.0 million. Based upon this amount, the Trust's debt to total
market capitalization at September 30, 1999 was 54.7%. The Trust is currently
operating at higher levels of leverage than it would foresee on a longer term
basis. The Trust believes that the use of leverage is justified given existing
acquisition prospects and the benefits of the Trust's transition to a larger
entity. Although there is no assurance of ultimate availability, the Trust
anticipates that equity will be raised in the future to deleverage the Trust.
On a long term basis, the Trust expects to meet liquidity requirements
generated by property operating expenses, debt service, and future distributions
with funds generated by the operations of its real properties. Should such funds
not cover these needs, the possibility of future distributions may be reduced or
eliminated. Although the Trust believes that its current leverage is justified,
the risk of financial default could rise substantially if the Trust is unable to
complete future equity offerings or if property operating results decline.
The nature of the Trust's operating properties, which generally provide for
leases with a term of between three and five years, results in an approximate
annual turnover rate of 20% to 25% of the Trust's tenants and related revenue.
Such turnover requires capital expenditures related to tenant improvements and
leasing commissions, capital repairs and replacements, initial capital
expenditures and expansions and renovations related to properties acquired in
order to maintain or improve the Trust's occupancy levels. These costs were
$4,204,000 in the quarter ended September 30, 1999, compared to $693,000 in the
quarter ended September 30, 1998. For the nine months ended September 30, 1999
these costs were $9,620,000 compared to $3,598,000 over the same nine month
period in 1998. These costs have historically been funded out of the Trust's
operating cash flow and cash reserves. The Trust has made no commitments for
additional capital expenditures beyond those related to normal leasing and
releasing activities, related escrows and initial capital expenditures, which
are costs necessary to bring acquired properties to intended leasable condition
at the time of acquisition.
A distribution of $0.22 per share was paid on October 14, 1999 and July 14,
1999 and a $0.20 per share distribution was paid on April 15, 1999 and January
20, 1999. On November 4, 1999, the Trust declared a distribution of $0.22 per
share, payable on January 14, 2000 to shareholders of record on January 6, 2000.
The Trust's distribution policy is to conserve capital by, over time, lowering
its FFO payout ratio. The Trust believes that the minimum FFO payout ratio in
order to comply with the requirement to distribute 95% of
22
<PAGE> 23
taxable income, is approximately 50-55% based on the Trust's current capital
structure. Future distributions will be at the discretion of the Board of Trust
Managers. The Trust has approximately $34.3 million in net operating loss
carryforwards, a portion of which could be utilized to reduce the payout of 95%
taxable income required by the Internal Revenue Code.
On February 18, 1998, the Trust filed a Form S-3 shelf registration with
the Securities and Exchange Commission which would provide for the issuance of
up to $500 million in Common Shares of Beneficial Interest, Preferred Shares of
Beneficial Interest, unsecured senior debt securities and/or warrants to
purchase such securities in amounts, at prices and on terms to be determined by
market conditions at the time of future offerings. The Trust anticipates
utilization of this shelf registration in the future to fund acquisitions and
growth of the Company.
RECENT DEVELOPMENTS
On November 4, 1999 the Trust declared a distribution of $0.22 per share
payable on January 14, 2000 to shareholders of record on January 6, 2000.
The Trust currently has contracts pending to sell one light industrial
property currently classified as held for sale and one office property
classified as held for investment. Sales prices for each of the two properties
is $7,700,000. Although the contacts are terminable by the buyers, the Trust
expects the office property to be sold during December 1999 and the light
industrial property to be sold in the first quarter of 2000. If sold for these
prices, the Trust anticipates recognizing a gain on sale.
The Trust has entered into letters of intent to purchase two light
industrial properties located in California for $49 million. The Trust has also
entered into a letter of intent to purchase a light industrial property in
Austin, Texas for $22 million. Consummation of each transaction is subject to
customary due diligence, negotiation of mutually acceptable definitive
agreements and other contingencies and legal matters. Accordingly, there is no
assurance the properties will ultimately be acquired by the Trust.
Effective January 1, 2000 NAREIT has revised the calculation of FFO to
include all operating results, both recurring and non-recurring -- except those
results defined as "extraordinary items" under GAAP and gains and losses from
sales of depreciable operating properties. The Trust does not anticipate a
significant impact on current FFO calculations as a result in this change.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Trust's risk management includes
forward-looking statements that involve risks and uncertainties. Actual results
could differ materially from the results discussed in the forward-looking
statements.
The Trust's primary market risk exposure is to changes in interest rates.
The Trust is exposed to market risk related to its secured acquisition line and
credit line as discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity and Capital Resources." The
interest on the acquisition line and credit line are subject to fluctuations in
the market.
The Trust also uses long-term and medium-term debt as a source of capital.
These debt instruments are typically issued at fixed interest rates. When these
debt instruments mature, the Trust typically refinances such debt at
then-existing market interest rates which may be more or less than the interest
rates on the maturing debt.
If the interest rate for variable rate debt was 100 basis points higher or
lower during 1999, the Trust's interest expense would have been increased or
decreased by approximately $164,000 for the three months ended September 30,
1999 and $789,000 for the nine months ended September 30, 1999. There is no
fixed rate debt maturing in 1999.
The Trust historically has not hedged its exposure to fluctuations in
interest rates and currently has no plans to do so in the future.
23
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Trust is currently named as a defendant in a lawsuit related to the
Trust's merger with four real estate limited partnerships. The lawsuit purports
to be both a class action and a derivative lawsuit against the defendants. The
plaintiffs have asserted various claims, including breach of fiduciary duty and
various securities law violations, against the parties to the merger and certain
individuals and are seeking monetary damages. On April 13, 1998, the Trust was
named as a defendant in an additional purported class action lawsuit related to
the Trust's merger with the four real estate limited partnerships. The
plaintiffs have asserted various claims, including breach of fiduciary and
contractual duties and various securities law violations, against the parties to
the merger and are seeking monetary damages. On July 16, 1999, the Court found
in favor of the Trust, denying Plaintiff's motion for class certification in
relation to the April 13, 1998 lawsuit filed on behalf of the limited partners
in one of the real estate limited partnerships. The plaintiffs are currently
seeking reconsideration of the July 16, 1999 order.
The Trust intends to vigorously defend against these claims. In
management's opinion, the liabilities, if any, that may ultimately result from
such legal actions are not expected to have a material adverse effect on the
consolidated financial position or results of operations of the Trust.
ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS
On August 3, 1998, the Trust entered into a definitive agreement providing
for a strategic investment by DDR in the Trust. Under the terms of the
Agreement, the transaction has three stages. The first stage, effective as of
July 30, 1998, resulted in DDR acquiring 2,207,618 common shares at a price of
$15.50 per share.
In January 1999, DDR completed the second stage of the Agreement, resulting
in the purchase of 5,226,583 common shares for $15.50 per share (for total
consideration of approximately $81.0 million) to fund property acquisitions in
1998 and 1999.
In the third stage, the Trust has the option to require DDR, under certain
circumstances, to purchase additional shares with a total purchase price not to
exceed $200 million to fund property acquisitions. DDR's obligation to purchase
shares, the price of the shares and the amount to be invested in the third stage
are contingent upon several factors, including the trading prices of DDR and
Trust shares, the market capitalization of DDR and whether common or preferred
shares are issued to DDR. As of September 30, 1999, DDR had purchased 2,222,455
common shares (for total consideration of approximately $33.4 million). In
total, DDR has purchased 9,656,656 common shares, representing 46.2% of the
outstanding common shares of the Trust.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
27.1* -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith
(b) Reports on Form 8-K
There were no events reported on Form 8-K during the quarter ended
September 30, 1999:
24
<PAGE> 25
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.
AMERICAN INDUSTRIAL PROPERTIES REIT
(Registrant)
/s/ MARC A. SIMPSON
-------------------------------------
Marc A. Simpson
Senior Vice President and Chief
Financial Officer
(principal financial officer)
Date: November 12, 1999
/s/ GARY A. WILLIAMS
-------------------------------------
Gary A. Williams
Vice President and Chief Accounting
Officer
(principal accounting officer)
Date: November 12, 1999
25
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,509
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 644,904
<DEPRECIATION> (42,862)
<TOTAL-ASSETS> 633,644
<CURRENT-LIABILITIES> 367,826
<BONDS> 0
0
0
<COMMON> 2,107
<OTHER-SE> 256,776
<TOTAL-LIABILITY-AND-EQUITY> 633,644
<SALES> 0
<TOTAL-REVENUES> 64,173
<CGS> 0
<TOTAL-COSTS> 32,658
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,718
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,797
<DISCONTINUED> 0
<EXTRAORDINARY> (585)
<CHANGES> 0
<NET-INCOME> 10,877
<EPS-BASIC> .53
<EPS-DILUTED> .53
</TABLE>
