<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 JUNE 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>
<S> <C>
TEXAS 75-6335572
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6210 NORTH BELTLINE ROAD, SUITE 170
IRVING, TEXAS 75063-2656
(Address of principal executive offices) (Zip Code)
</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 shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 20,714,128 shares of
Beneficial Interest were outstanding as of August 10, 1999.
- --------------------------------------------------------------------------------
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<PAGE> 2
AMERICAN INDUSTRIAL PROPERTIES REIT
FORM 10-Q
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 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 six months ended June 30, 1999 and
1998 (unaudited)................................... 3
Consolidated Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998.................. 4
Consolidated Statements of Cash Flows for the six
months ended June 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....................................... 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 22
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................. 23
Item 2. Changes in the Rights of the Company's Security
Holders................................................ 23
Item 6. Exhibits and Reports on Form 8-K.................. 23
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Property Revenues
Rents....................................... $17,701 $ 8,533 $ 34,653 $15,763
Tenant reimbursements....................... 3,677 2,371 6,960 3,640
------- ------- -------- -------
Total Property Revenues............. 21,378 10,904 41,613 19,403
------- ------- -------- -------
Property Expenses
Property taxes.............................. 2,264 1,072 4,279 2,000
Property management fees.................... 304 339 911 598
Utilities................................... 888 539 1,708 857
General operating........................... 916 852 1,830 1,273
Repairs and maintenance..................... 847 348 1,366 593
Other property operating expenses........... 985 391 2,270 718
------- ------- -------- -------
Total Property Expenses............. 6,204 3,541 12,364 6,039
------- ------- -------- -------
Income from Property Operations............... 15,174 7,363 29,249 13,364
Trust administration and overhead............. (1,387) (955) (2,477) (1,749)
Depreciation.................................. (3,010) (1,832) (6,345) (3,354)
Amortization.................................. (140) (105) (278) (199)
Interest income............................... 144 171 231 398
Interest on notes payable..................... -- (48) (111) (208)
Interest on mortgages payable................. (6,564) (3,431) (12,723) (5,934)
------- ------- -------- -------
Income from operations........................ 4,217 1,163 7,546 2,318
Minority interests in consolidated
subsidiaries................................ (91) (62) (171) (119)
Gain on sale of real estate................... 38 -- 38 --
------- ------- -------- -------
NET INCOME.................................... $ 4,164 $ 1,101 $ 7,413 $ 2,199
======= ======= ======== =======
PER SHARE DATA (BASIC AND DILUTED)
Net Income.................................... $ 0.20 $ 0.10 $ 0.37 $ 0.20
======= ======= ======== =======
Dividends paid................................ $ 0.22 $ 0.20 $ 0.42 $ 0.38
======= ======= ======== =======
Weighted average Shares outstanding --Basic... 20,509,613 11,080,452 20,224,411 10,849,035
---------- ---------- ----------- -------
---------- ---------- ----------- -------
Weighted average Shares
outstanding -- Diluted...................... 20,509,613 11,107,452 20,224,411 10,862,535
---------- ---------- ----------- -------
---------- ---------- ----------- -------
</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>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Real Estate:
Held for investment....................................... $590,663 $476,641
Held for sale............................................. 47,561 28,491
-------- --------
Total real estate......................................... 638,224 505,132
Accumulated depreciation.................................. (39,806) (33,449)
-------- --------
Net real estate........................................... 598,418 471,683
Cash and cash equivalents:
Unrestricted.............................................. 6,922 6,145
Restricted................................................ 5,723 5,422
-------- --------
Total cash and cash equivalents........................... 12,645 11,567
Other assets, net........................................... 15,988 17,080
-------- --------
Total Assets................................................ $627,051 $500,330
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................... $345,151 $252,481
Unsecured notes payable to related parties................ -- 14,058
Accrued interest.......................................... 1,538 1,477
Accounts payable, accrued expenses and other
liabilities............................................ 15,775 17,651
Tenant security deposits.................................. 2,750 2,138
-------- --------
Total Liabilities........................................... 365,214 287,805
-------- --------
Minority interests.......................................... 6,939 6,946
Shareholders' Equity:
Shares of beneficial interest, $0.10 par value; authorized
500,000,000 Shares; issued and outstanding 20,689,219
Shares at June 30, 1999 and 17,201,591 shares at
December 31, 1998...................................... 2,069 1,721
Additional paid-in-capital................................ 380,219 330,031
Less 165,886 Shares in treasury, at cost.................. (2,226) (2,226)
Accumulated distributions................................. (77,384) (68,756)
Accumulated deficit....................................... (47,780) (55,191)
-------- --------
Total Shareholders' Equity.................................. 254,898 205,579
-------- --------
Total Liabilities and Shareholders' Equity.................. $627,051 $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>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 7,413 $ 2,199
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Gain on sale of real estate............................... (38) --
Minority interest in consolidated subsidiaries............ 171 119
Depreciation.............................................. 6,345 3,353
Amortization of deferred financing costs.................. 641 181
Other amortization........................................ 17 617
Changes in operating assets and liabilities:
Other assets and restricted cash.......................... 3,532 (2,686)
Accounts payable, other liabilities and tenant security
deposits............................................... (4,084) (3,255)
Accrued interest.......................................... 61 829
--------- --------
Net Cash Provided By Operating Activities................... 14,058 1,357
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized expenditures.................................. (5,416) (2,905)
Acquisition of real estate and related working capital.... (127,168) (80,565)
Net proceeds from sales of real estate.................... 349 --
--------- --------
Net Cash Used In Investing Activities....................... (132,235) (83,470)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgage notes payable............ (147,947) (47,032)
Proceeds from mortgage financing.......................... 226,804 115,125
Payment of deferred loan costs............................ (2,737) (1,691)
Proceeds from sale of Shares.............................. 50,535 17,568
Purchase of treasury Shares............................... -- (1,262)
Distributions to shareholders............................. (7,522) (2,001)
Distributions to limited partnership unit holders......... (179) (170)
--------- --------
Net Cash Provided By Financing Activities................... 118,954 80,537
--------- --------
Net Increase (Decrease) in Cash and Cash Equivalents........ 777 (1,576)
Cash and Cash Equivalents at Beginning of Period............ 6,145 11,683
--------- --------
Cash and Cash Equivalents at End of Period.................. $ 6,922 $ 10,107
========= ========
Cash Paid for Interest...................................... $ 12,378 $ 5,132
========= ========
</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 nine properties and
an undeveloped tract of land in the first six months of 1999, the Trust incurred
approximately $1.8 million of accounts payable and tenant security deposits.
As a result of the acquisition of three properties in the first six months
of 1998, the Trust issued $0.9 million in limited partnership units and incurred
approximately $0.1 million of accounts payable and tenant security deposits.
Real Estate Held for Sale. During the first six 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.
6
<PAGE> 7
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 American Industrial Properties REIT's (the "Trust") 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 real estate investment
trust which, as of June 30, 1999, directly or indirectly owns and operates 74
commercial real estate properties consisting of 58 industrial properties, 14
office buildings and 2 retail properties. The Trust currently has one industrial
property under development.
Principles of Consolidation. The consolidated financial statements of the
Trust include the accounts of American Industrial Properties REIT 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 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 six months
ended June 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.
7
<PAGE> 8
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 $2,148,000 and
$1,398,000 at June 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 $42,000 and
$87,000 for the six months ended June 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 real estate investment trust
("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 June 30, 1999 and December 31, 1998, real estate was comprised of the
following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Held for investment:
Land................................................... $144,115,000 $102,891,000
Buildings and improvements............................. 446,548,000 373,750,000
------------ ------------
590,663,000 476,641,000
------------ ------------
Held for sale:
Land................................................... 11,438,000 6,000,000
Buildings and improvements............................. 36,123,000 22,491,000
------------ ------------
47,561,000 28,491,000
------------ ------------
Total.......................................... $638,224,000 $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 of
Beneficial Interest ("Shares") issued to Developers Diversified Realty
Corporation ("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 three industrial properties and two tracts of vacant land
are not located in target markets currently identified by the Trust. The Trust's
intent is to sell these properties in 1999. These properties are included in the
"Industrial" operating segment and reported net operating income of $0.4 million
and $0.7 million for the three months and six months ended June 30, 1999 and
$0.3 million and $0.5 million for the three months and six months ended June 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
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 $0.4 million
and $0.8 million for the three months and six months ended June 30, 1999 and
$0.4 million and $0.9 million for the three months and six months ended June 30,
1998.
NOTE 3 -- MORTGAGE NOTES PAYABLE:
At June 30, 1999, all of the Trust's 74 properties were subject to liens
securing mortgage notes payable with principal balances totaling $345,151,000,
including $1,714,000 of debt premiums (see Note 2). Of this amount,
approximately $273,398,000 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 $71,753,000. The variable rate debt
consists of $68,753,000 under the Trust's PSCC secured acquisition credit line
as well as $3,000,000 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, as extended. 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 June
30, 1999 are 6.493% and 6.964%, respectively.
Debt premiums are amortized into interest expense over the terms of the
related mortgages using the effective interest method. As of June 30, 1999 and
December 31, 1998, the unamortized debt premiums were $1,714,000 and $1,958,000,
respectively.
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
9
<PAGE> 10
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 1999. The unused commitment under the acquisition credit line at June
30, 1999 is $6,247,000, subject to certain restrictions and provisions.
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 a corrective
Action Plan to the Colorado Department of Public Health and Environment.
Implementation of the plan is ongoing. The responsible party is negotiating to
obtain access agreements from impacted landowners, including the Trust.
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 letter
of credit and standby trust agreement as financial assurance for remediation of
the site.
The Trust has been informed of the existence of underlying soil and
groundwater contamination at the Alfred property acquired in January 1999. This
contamination is the apparent result of semiconductor manufacturers located at
the property until 1995. During the manufacturing process, the underlying soil
and groundwater was contaminated with chlorinated solvents and heavy metals. The
former tenants have been identified as the primary responsible parties of record
and are conducting remediation through a pump and treat system. Prudential
Insurance Company, a former owner of the property has been identified as the
secondary responsible party of record.
With the exception of the matters noted above, 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 ("Madison").
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
10
<PAGE> 11
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
found in favor of the Trust, denying Plaintiff's motion for class certification
in relation to the Madison lawsuit filed on behalf of all the limited partners
in USAA III.
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 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.
The Trust was a defendant in a lawsuit over claims of breach of contract
and civil conspiracy allegedly injuring a commercial tenant in a building sold
by the Trust to Dallas Area Rapid Transit ("DART") under threat of eminent
domain. DART has agreed to indemnify, defend and hold harmless the Trust from
any and all losses and liabilities arising from obligations under this lease. On
May 19, 1999, the Court granted Summary Judgement in favor of the Trust on all
of Plaintiff's claims and causes of action against the Trust. The Trust
presently maintains a counterclaim for its attorney fees.
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 June 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 Share (or, at
the Trust's election, the Trust may purchase each limited partnership unit
offered for redemption for one 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 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 June 30, 1999, 20,689,219 Common Shares are issued and
outstanding.
The Preferred Shares may be issued in one or more series. The number of
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 June 30, 1999, no Preferred Shares of
Beneficial Interest 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 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
Shares in the open market, for an aggregate cost of $1,598,000. These Shares are
held in treasury. As a result of the
11
<PAGE> 12
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
one-for-five reverse Share split and the odd lot redemption program, effective
on October 15, 1997, the Trust repurchased 42,103 shares which are held in
treasury. As of June 30, 1999, the Trust holds 165,886 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 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 3,683,578 Shares related
to the second stage of the Agreement at a price of $15.50 per Share to fund
property acquisitions. The Shares issued in the first and second stages are of
the same class as the Trust's existing Shares and are entitled to the same
voting and distribution rights as all Shares, subject to certain restrictions on
the resale of the Shares. The remainder of the second stage, 1,543,005 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 six months ended June 30, 1999, the Trust issued 3,410,615
Shares to DDR in connection with the purchase of nine properties (see Note 2),
72,018 Shares were issued in connection with the Dividend Reinvestment Plan and
4,995 Shares were issued to Trust Managers that elected base fee compensation in
Shares. In total the Trust issued 3,487,628 Shares in the six months ended June
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 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 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 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 options
were granted.
During 1998, pursuant to the Plan, the Trust Managers granted share options
to purchase 460,000 Shares to 12 members of management. The exercise price of
the options granted is $13.625. The option to purchase shares vest annually over
a period of five years, beginning April 1, 1998. In 1999, 10,000 share options
were
12
<PAGE> 13
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
granted to a new member of management and 5,000 share options, originally issued
in 1998, were forfeited. The 10,000 options vest annually over a five year
period, beginning February 23, 1999. 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. 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.
At June 30, 1999, 721,000 options are outstanding of which 668,000 are
fully vested. The remaining 53,000 options vest annually through February 2003.
The term of these options range from June 2007 through February 2009. As of June
30, 1999, no options had been exercised.
The limited partners of AIP-SWAG Operating Partnership L.P. received
warrants to purchase 40,000 shares at $17.50 per Share. The warrants expire on
October 3, 2000.
NOTE 8 -- DISTRIBUTIONS:
The $0.22 per Share distribution declared on May 13, 1999 was paid on July
14, 1999. Additionally, a $0.20 per Share distribution was paid on April 15,
1999 and on January 20, 1999. On August 4, 1999, the Trust declared a
distribution of $0.22 per Share, payable on October 14, 1999 to shareholders of
record on October 5, 1999. (See Note 12). Distributions totaling $0.58 per Share
were paid in 1998.
NOTE 9 -- TRANSACTIONS WITH RELATED PARTIES:
During the fiscal year 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 six months ended June 30, 1998.
Certain real estate investments are managed by Quorum Real Estate Services
Corporation ("Quorum"), an affiliate of USAA Real Estate Company ("Realco"), a
major shareholder of the Trust. Quorum is paid competitive rates for services,
including, but not limited to construction, tenant finish, leasing and
management. The Trust paid Quorum management fees of $370,000, leasing
commissions of $102,000, brokerage fees of $92,000, and construction management
fees of $27,000, for the six months ended June 30, 1999. For the six months
ended June 30, 1998, management fees and leasing commissions paid by the Trust
to Quorum were $249,000 and $125,000, respectively.
The Trust currently leases space to an individual serving as a Trust
Manager at competitive market rates. For the three and six months ended March
31, 1999 and June 30, 1999, this Trust Manager paid approximately $5,800 and
$11,600 in lease payments to the Trust, respectively. The Trust Manager did not
lease the space in the six months ended June 30, 1998.
At June 30, 1999, DDR and Realco owned approximately 45.3% and 8.2% of the
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Basic and diluted earnings per share:
Numerator:
Net income............................. $ 4,164,000 $ 1,101,000 $ 7,413,000 $ 2,199,000
Denominator:
Weighted average shares................ 20,509,613 11,080,452 20,224,411 10,849,035
Plus restricted shares................. -- 27,000 -- 13,500
----------- ----------- ----------- -----------
Adjusted weighted average shares....... 20,509,613 11,107,452 20,224,411 10,862,535
Basic and diluted earnings per share:
Net income............................. $0.20 $0.10 $0.37 $0.20
</TABLE>
Options to purchase 721,000 shares at prices ranging from $11.125 to $15.00
per Share were outstanding at June 30, 1999. 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 Shares and, therefore, the
effect would be antidilutive.
At June 30, 1999, 40,000 warrants were outstanding. The warrants have an
exercise price of $17.50 per Share and expire in October 2000. Because the
warrants exercise price was greater than the average market price of the 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 June 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 June 30,
1998 light industrial, office and retail represented property revenue of 51%,
40%, and 9%, respectively.
For the six months ended June 30, 1999, light industrial represents 61% of
property revenue. Office and retail represent 34% and 5%, respectively for the
same period. For the six months ended June 30, 1998 light industrial, office and
retail represented property revenue of 51%, 38%, and 11%, 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 June 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 June 30, 1998,
approximately 67% of the Trust's portfolio was represented by light industrial
properties, 28% 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.
14
<PAGE> 15
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the of the Trust's property revenues by
reporting segment, for each of the three months ended June 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 JUNE 30, 1999
-----------------------------------------------------------
LIGHT OFFICE CORPORATE
INDUSTRIAL BUILDINGS RETAIL AND OTHER CONSOLIDATED
---------- --------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Property revenues........................... $ 12,991 $ 7,365 $ 1,022 $ -- $ 21,378
Property expenses........................... 3,693 2,061 450 -- 6,204
-------- -------- ------- -------- --------
Income from property operations............. 9,298 5,304 572 -- 15,174
Administrative expenses..................... -- -- -- (1,387) (1,387)
Depreciation and amortization............... -- -- -- (3,150) (3,150)
Other income................................ -- -- -- 144 144
Interest expense............................ -- -- -- (6,564) (6,564)
-------- -------- ------- -------- --------
Income (loss) from operations............... 9,298 5,304 572 (10,957) 4,217
Minority interests in consolidated
subsidiaries.............................. -- -- -- (91) (91)
Gain on sale of real estate................. 38 -- -- -- 38
-------- -------- ------- -------- --------
Net income (loss)........................... $ 9,336 $ 5,304 $ 572 $(11,048) $ 4,164
Total real estate........................... $401,884 $198,651 $36,061 $ 1,628 $638,224
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 1998
-----------------------------------------------------------
LIGHT OFFICE CORPORATE
INDUSTRIAL BUILDINGS RETAIL AND OTHER CONSOLIDATED
---------- --------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Property revenues........................... $ 5,565 $ 4,329 $ 1,010 $ -- $ 10,904
Property expenses........................... 1,564 1,551 426 -- 3,541
-------- -------- ------- -------- --------
Income from property operations............. 4,001 2,778 584 -- 7,363
Administrative expenses..................... -- -- -- (955) (955)
Depreciation and amortization............... -- -- -- (1,937) (1,937)
Other income................................ -- -- -- 171 171
Interest expense............................ -- -- -- (3,479) (3,479)
-------- -------- ------- -------- --------
Income (loss) from operations............... 4,001 2,778 584 (6,200) 1,163
Minority interests in consolidated
subsidiaries.............................. -- -- -- (62) (62)
Gain on sale of real estate................. -- -- -- -- --
-------- -------- ------- -------- --------
Net income (loss)........................... $ 4,001 $ 2,778 $ 584 $ (6,262) $ 1,101
Total real estate........................... $179,862 $123,376 $45,683 $ 409 $349,330
</TABLE>
The following table sets forth the of the Trust's property revenues by
reporting segment, for each of the six months ended June 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 SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------------------------------
LIGHT OFFICE CORPORATE
INDUSTRIAL BUILDINGS RETAIL AND OTHER CONSOLIDATED
---------- --------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Property revenues........................... $ 25,471 $ 14,030 $ 2,112 $ -- $ 41,613
Property expenses........................... 7,218 4,261 885 -- 12,364
-------- -------- ------- -------- --------
Income from property operations............. 18,253 9,769 1,227 -- 29,249
Administrative expenses..................... -- -- -- (2,477) (2,477)
Depreciation and amortization............... -- -- -- (6,623) (6,623)
Other income................................ -- -- -- 231 231
Interest expense............................ -- -- -- (12,834) (12,834)
-------- -------- ------- -------- --------
Income (loss) from operations............... 18,253 9,769 1,227 (21,703) 7,546
Minority interests in consolidated
subsidiaries.............................. -- -- -- (171) (171)
Gain on sale of real estate................. 38 -- -- -- 38
-------- -------- ------- -------- --------
Net income (loss)........................... $ 18,291 $ 9,769 $ 1,227 $(21,874) $ 7,413
Total real estate........................... $401,884 $198,651 $36,061 $ 1,628 $638,224
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998
-----------------------------------------------------------
LIGHT OFFICE CORPORATE
INDUSTRIAL BUILDINGS RETAIL AND OTHER CONSOLIDATED
---------- --------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Property revenues........................... $ 9,888 $ 7,416 $ 2,099 $ -- $ 19,403
Property expenses........................... 2,780 2,462 797 -- 6,039
-------- -------- ------- -------- --------
Income from property operations............. 7,108 4,954 1,302 -- 13,364
Administrative expenses..................... -- -- -- (1,749) (1,749)
Depreciation and amortization............... -- -- -- (3,553) (3,553)
Other income................................ -- -- -- 398 398
Interest expense............................ -- -- -- (6,142) (6,142)
-------- -------- ------- -------- --------
Income (loss) from operations............... 7,108 4,954 1,302 (11,046) 2,318
Minority interests in consolidated
subsidiaries.............................. -- -- -- (119) (119)
Gain on sale of real estate................. -- -- -- -- --
-------- -------- ------- -------- --------
Net income (loss)........................... $ 7,108 $ 4,954 $ 1,302 $(11,165) $ 2,199
Total real estate........................... $179,862 $123,376 $45,683 $ 409 $349,330
</TABLE>
15
<PAGE> 16
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- SUBSEQUENT EVENTS:
On August 4, 1999 the Trust declared a distribution of $0.22 per Share
payable on October 14, 1999 to shareholders of record on October 5, 1999.
The Trust has entered into a contract to acquire a 96,258 square foot light
industrial property in Sunnyvale, California for $15,775,000. The Trust
anticipates closing on this property, which includes three buildings and two
tenants leasing 100% of the space, during August 1999.
The Trust currently has contracts pending to sell two light industrial
properties currently classified as held for sale. Sales prices for the two
properties are $5,750,000 and $4,500,000. Although the contacts are terminable
by the buyers, the Trust expects both properties to be sold during September
1999. If sold for these prices, the Trust anticipates recognizing a gain on
sale.
The Trust recently received bids for the sale of its Denver retail property
currently classified as held for sale. The Trust is currently soliciting best
and final offers from four prospective buyers. It is possible that the net sales
proceeds will not exceed the carrying value of this property, thereby
necessitating a loss on sale. Such loss, if any, cannot be quantified at this
time.
16
<PAGE> 17
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 June 30, 1999 to June 30, 1998
The weighted average amount of net rentable square feet owned by the Trust
increased to 8,314,000 square feet during the three months ended June 30, 1999
from 4,889,000 square feet for the same period in 1998, an increase of 70%.
Property revenues increased 96% to $21,378,000 in 1999 from $10,904,000 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 106% to
$15,174,000 in 1999 from $7,363,000 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 June 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 June 30, 1999, the Trust sold a parcel of
undeveloped land resulting in a gain on sale of real estate totaling $38,000.
Comparison of Six Months Ended June 30, 1999 to June 30, 1998
The weighted average amount of net rentable square feet owned by the Trust
during the six months ended June 30, 1999 increased to 8,256,000 square feet
from 4,569,000 square feet for the same period in 1998, an increase of 81%.
Property revenues increased 115% to $41,613,000 for the six months ended June
30, 1999 from $19,403,000 for the same period in 1998, and income from property
operations increased 119% to $29,249,000 in 1999 from $13,364,000 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 June 30, 1998 have included a number of properties with higher base
rents including office properties and light industrial properties located in
California.
On a same property basis, 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 $11,656,000
for the six months ended June 30, 1999 from $11,079,000 for the same period in
1998, an increase of 5.2%. This overall increase is comprised of a 4.2% increase
related to 27 industrial properties, an 11.0% increase related to seven office
properties and a 5.3% decrease related to the Trust's two retail properties. For
the six months ended June 30, 1999, same store property revenues increased 2.8%
and property operating expenses decreased 1.7% when compared to the same six
month period in 1998.
During the six months ended June 30, 1999, the Trust leased 599,000 of net
rentable square footage, including 430,000 square feet by existing tenants, a
64.7% retention rate. During the same six month period in 1998, the Trust leased
181,000 of net rentable square feet, including 177,000 square feet with existing
tenants, a 48.5% retention rate.
17
<PAGE> 18
As of June 30, 1999 the average base rent of the Trust's portfolio
increased to $8.85 per square foot from $7.77 per square foot at June 30, 1998,
a 13.9% increase. The average base rent of new leases signed during the six
months ended June 30, 1999, compared to the average base rent of the expiring
leases was $5.69 compared to $4.81 for light industrial properties, an increase
of 18.3%, and $17.45 compared to $14.79 for office properties, an 18.0%
increase.
Analysis of Cash Flows -- Comparison of Six Months Ended June 30, 1999 to June
30, 1998
Cash flow provided by operating activities in the six months ended June 30,
1999 was $14,058,000. This results from the Trust's net income of $7,413,000
increased by non-cash charges totaling $7,174,000 related to minority interests,
depreciation and amortization, a reduction in other assets of $3,833,000 and an
increase in restricted cash of $301,000. In addition, accrued interest increased
$61,000, accounts payable, accrued expenses and other liabilities decreased
$4,084,000 and the Trust recognized a gain on the sale of real estate totaling
$38,000.
Cash flow used in investing activities in the six months ended June 30,
1999 was $132,235,000, representing amounts expended on the acquisition of real
estate and related working capital totaling $127,168,000 and capitalized
expenditures of $5,416,000 offset by proceeds from the sale of real estate
totaling $349,000.
Cash flow provided by financing activities in the six months ended June 30,
1999 was $118,954,000. This amount reflects proceeds from the mortgage financing
on the properties acquired in 1999 and refinancing existing properties of
$226,804,000, net proceeds from the private placement of Shares of $50,535,000,
principal repayments on mortgage and notes payable (including refinancings)
totaling approximately $147,947,000, payments of loan costs of $2,737,000, and
distributions to shareholders and limited partnership unit holders totaling
$7,701,000.
Cash flow provided by operating activities in the six months ended June 30,
1998 was $1,357,000. This results from the Trust's net income of $2,199,000
increased by non-cash charges totaling $4,270,000 related to minority interests,
depreciation and amortization, and an increase in other assets and restricted
cash of $881,000 and $1,805,000, respectively. In addition, accrued interest
increased $829,000, while accounts payable, accrued expenses and other
liabilities decreased $3,255,000.
Cash flow used in investing activities in the six months ended June 30,
1998 was $83,470,000, representing amounts expended on the acquisition of real
estate and related working capital totaling $80,565,000, and capitalized
expenditures of $2,905,000.
Cash flow provided by financing activities in the six months ended June 30,
1998 was $80,537,000. This amount reflects proceeds from the mortgage financing
on the properties acquired in 1998 and refinancing existing properties of
$115,125,000, net proceeds from the private placement of Shares of $17,568,000,
principal repayments on mortgage and notes payable (including refinancings)
totaling approximately $47,032,000, payments of loan costs of $1,691,000,
repurchase of Shares totaling $1,262,000 and distributions to shareholders and
limited partnership unit holders totaling $2,171,000.
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, 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.
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
18
<PAGE> 19
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
1999 1998 1999 1998
------- -------- --------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by operating
activities............................... $ 3,980 $ 2,302 $ 14,058 $ 1,357
Net cash used in investing activities...... (2,121) (67,456) (132,235) (83,470)
Net cash provided by (used in) financing
activities............................... (4,185) 56,417 118,954 80,537
</TABLE>
The following table shows the Trust's calculation of FFO:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
1999 1998 1999 1998
-------- -------- --------- --------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
NUMBER OF SHARES) NUMBER OF SHARES)
<S> <C> <C> <C> <C>
Net Income................................ $4,164 $1,101 $ 7,413 $2,199
Exclude effects of:
Real estate depreciation and
amortization, net of minority
interest share..................... 3,040 1,874 6,424 3,430
Minority interest in operating
partnerships....................... 48 47 86 90
Gain on sale of real state........... (38) -- (38) --
------ ------ ------- ------
Funds from Operations..................... $7,214 $3,022 $13,885 $5,719
====== ====== ======= ======
Weighted average Shares and operating
partnership units outstanding........... 20,747,031 11,317,870 20,461,829 11,086,453
</TABLE>
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
19
<PAGE> 20
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, accounting, 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.
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 June 30, 1999, the Trust had $6.9
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 June 30, 1999, DDR purchased
9.3 million Shares for $143 million. Proceeds related to this agreement were
used to fund property acquisitions in 1998 as well as the purchase of a $127
million portfolio in January 1999.
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 June 30,
1999, the Trust has $3.0 million outstanding under this credit line, which bears
interest at LIBOR plus 2.00%, currently 6.964%.
The Trust also has approximately $68.8 million outstanding under a $75
million secured acquisition line bearing interest at a variable rate based on
the 30 day LIBOR rate plus 1.55%, currently 6.493%. The Trust anticipates
transitioning certain assets currently financed under this secured acquisition
line to the Bank One secured line of credit in the future. On June 18, 1999, the
Trust repaid a $75.2 million short term bridge loan with proceeds from a
permanent fixed rate financing.
At June 30, 1999, the Trust had $345.2 million in mortgage debt
outstanding, of which approximately $273.4 million was represented by fixed rate
debt, including $1.7 million in unamortized debt premium, and $71.8 million was
represented by variable rate debt.
20
<PAGE> 21
At June 30, 1999, the Trust's total market capitalization (based upon a
June 30, 1999 closing Share price of $14.125 per Share) was approximately $631.9
million. Based upon this amount, the Trust's debt to total market capitalization
at June 30, 1999 was 53.6%. 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
$2,470,000 in the quarter ended June 30, 1999, compared to $1,783,000 in the
quarter ended June 30, 1998. For the six months ended June 30, 1999 these costs
were $5,416,000 compared to $2,905,000 over the same six 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 July 14, 1999 and a $0.20 per
Share distribution was paid on April 15, 1999 and on January 20, 1999. On August
4, 1999, the Trust declared a distribution of $0.22 per Share, payable on
October 14, 1999 to shareholders of record on October 5, 1999. 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 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 Shares, 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 August 4, 1999 the Trust declared a distribution of $0.22 per Share
payable on October 14, 1999 to shareholders of record on October 5, 1999.
The Trust has entered into a contract to acquire a 96,258 square foot light
industrial property in Sunnyvale, California for $15,775,000. The Trust
anticipates closing on this property, which includes three buildings and two
tenants leasing 100% of the space, during August 1999.
The Trust currently has contracts pending to sell two light industrial
properties currently classified as held for sale. Sales prices for the two
properties are $5,750,000 and $4,500,000. Although the contacts are terminable
by the buyers, the Trust expects both properties to be sold during September
1999. If sold for these prices, the Trust anticipates recognizing a gain on
sale.
21
<PAGE> 22
The Trust recently received bids for the sale of its Denver retail property
currently classified as held for sale. The Trust is currently soliciting best
and final offers from four prospective buyers. It is possible that the net sales
proceeds will not exceed the carrying value of this property, thereby
necessitating a loss on sale. Such loss, if any, cannot be quantified at this
time.
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 $326,000 for the three months ended June 30, 1999 and
$718,000 for the six months ended June 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.
22
<PAGE> 23
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 ("Madison").
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 Madison lawsuit filed on behalf of all the limited partners in
USAA III.
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.
The Trust was a defendant in a lawsuit over claims of breach of contract
and civil conspiracy allegedly injuring a commercial tenant in a building sold
by the Trust to DART under threat of eminent domain. DART has agreed to
indemnify, defend and hold harmless the Trust from any and all losses and
liabilities arising from obligations under this lease. On May 19, 1999 the Court
granted Summary Judgment in favor of the Trust on all of Plaintiff's claims and
causes of action against the Trust. The Trust presently maintains a counterclaim
for its attorney fees.
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 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 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 June 30, 1999, DDR had purchased 1,867,616
Shares (for total consideration of approximately $27.9 million). In total, DDR
has purchased 9,301,817 Shares, representing 45.3% of the outstanding 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
23
<PAGE> 24
(b) Reports on Form 8-K
The following information summarizes the events reported on Form
8-K during the quarter ended June 30, 1999:
(1) Current Report on Form 8-K filed with the Commission on June 4,
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: August 16, 1999
/s/ GARY A. WILLIAMS
--------------------------------------
Gary A. Williams
Vice President and Chief Accounting
Officer
(principal accounting officer)
Date: August 16, 1999
25
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
27.1* -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 12,645
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 638,224
<DEPRECIATION> (39,806)
<TOTAL-ASSETS> 627,051
<CURRENT-LIABILITIES> 365,214
<BONDS> 0
0
0
<COMMON> 2,069
<OTHER-SE> 252,829
<TOTAL-LIABILITY-AND-EQUITY> 627,051
<SALES> 0
<TOTAL-REVENUES> 41,844
<CGS> 0
<TOTAL-COSTS> 21,464
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,834
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,413
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,413
<EPS-BASIC> .37
<EPS-DILUTED> .37
</TABLE>
