<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, 2000
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 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 [ ]
The number of Common Shares of Beneficial Interest, par value $0.10 per
share, outstanding as of November 10, 2000 is 21,011,451 shares.
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<PAGE> 2
AMERICAN INDUSTRIAL PROPERTIES REIT
FORM 10-Q
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the three months
and nine months ended September 30, 2000 and 1999
(unaudited)................................................. 3
Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999........................... 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 (unaudited)............... 5
Notes to Consolidated Financial Statements (unaudited)...... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 21
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 22
Item 6. Exhibits and Reports on Form 8-K............................ 22
SIGNATURES........................................................... 23
</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,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Property Revenues
Rents.................................. $ 18,678 $ 18,143 $ 54,608 $ 52,796
Tenant reimbursements.................. 4,096 3,998 12,475 10,958
----------- ----------- ----------- -----------
Total Property Revenues........ 22,774 22,141 67,083 63,754
----------- ----------- ----------- -----------
Property Expenses
Property taxes......................... 2,562 2,352 7,335 6,631
Property management fees............... 588 373 1,763 1,284
Utilities.............................. 1,318 1,344 3,093 3,053
General operating...................... 1,011 963 3,030 2,794
Repairs and maintenance................ 745 707 2,222 2,072
Other property operating expenses...... 591 1,164 2,565 3,433
----------- ----------- ----------- -----------
Total Property Expenses........ 6,815 6,903 20,008 19,267
----------- ----------- ----------- -----------
Income from Property Operations.......... 15,959 15,238 47,075 44,487
Trust administration and overhead........ (961) (921) (3,187) (3,398)
Depreciation............................. (2,937) (3,172) (9,698) (9,517)
Amortization............................. (316) (198) (882) (476)
Interest income.......................... 122 188 320 419
Interest on notes payable................ -- -- -- (111)
Interest on mortgages payable............ (6,434) (6,884) (19,390) (19,607)
----------- ----------- ----------- -----------
Income from operations................... 5,433 4,251 14,238 11,797
Minority interests in consolidated
subsidiaries........................... (190) (88) (385) (260)
Gain (Loss) on sale of real estate....... (104) (114) 2,906 (75)
Income in equity of joint venture........ 50 -- 120 --
----------- ----------- ----------- -----------
Income before extraordinary items........ 5,189 4,049 16,879 11,462
Extraordinary loss on extinguishment of
debt................................... -- (585) (329) (585)
----------- ----------- ----------- -----------
Net income..................... $ 5,189 $ 3,464 $ 16,550 $ 10,877
=========== =========== =========== ===========
PER SHARE DATA (BASIC AND DILUTED)
Income before extraordinary items........ $ 0.25 $ 0.20 $ 0.81 $ 0.56
Extraordinary loss on extinguishment of
debt................................... -- (0.03) (0.02) (0.03)
----------- ----------- ----------- -----------
Net Income............................... $ 0.25 $ 0.17 $ 0.79 $ 0.53
=========== =========== =========== ===========
Dividends paid........................... $ 0.22 $ 0.22 $ 0.66 $ 0.64
=========== =========== =========== ===========
Weighted average Shares outstanding --
Basic and Diluted........................ 20,982,665 20,686,717 20,962,721 20,378,579
=========== =========== =========== ===========
</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)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate:
Held for investment....................................... $601,794 $627,831
Held for sale............................................. 32,297 14,355
-------- --------
Total real estate......................................... 634,091 642,186
Accumulated depreciation.................................. (54,803) (46,931)
-------- --------
Net real estate........................................... 579,288 595,255
Cash and cash equivalents:
Unrestricted.............................................. 2,577 2,504
Restricted................................................ 6,827 5,716
-------- --------
Total cash and cash equivalents........................... 9,404 8,220
Other assets, net......................................... 18,531 17,207
-------- --------
Total Assets...................................... $607,223 $620,682
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................... $320,536 $334,873
Accrued interest.......................................... 1,976 2,229
Accounts payable, accrued expenses and other
liabilities............................................ 15,050 15,587
Tenant security deposits.................................. 3,067 2,954
-------- --------
Total Liabilities................................. 340,629 355,643
-------- --------
Minority interests.......................................... 4,366 6,551
Shareholders' Equity:
Shares of beneficial interest, $0.10 par value; authorized
500,000,000 Shares; issued and outstanding 21,156,098
Shares at September 30, 2000 and 21,091,853 Shares at
December 31, 1999...................................... 2,116 2,109
Additional paid-in-capital................................ 385,684 385,293
Less 165,755 shares in treasury, at cost.................. (2,226) (2,226)
Accumulated distributions................................. (99,310) (86,102)
Accumulated deficit....................................... (24,036) (40,586)
-------- --------
Total Shareholders' Equity........................ 262,228 258,488
-------- --------
Total Liabilities and Shareholders' Equity........ $607,223 $620,682
======== ========
</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,
--------------------
2000 1999
-------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income................................................ $ 16,550 $ 10,877
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Loss on extinguishment of debt......................... 109 90
(Gain) Loss on sale of real estate..................... (3,001) 75
Minority interest in consolidated subsidiaries......... 385 260
Depreciation........................................... 9,698 9,517
Amortization of deferred financing costs............... 934 1,038
Other amortization..................................... 494 106
Issuance of shares to trust managers................... 74 54
Changes in operating assets and liabilities:
Other assets and restricted cash....................... (2,485) 1,185
Accounts payable, other liabilities and tenant security
deposits.............................................. (349) (3,075)
Accrued interest....................................... (231) 575
-------- ---------
Net Cash Provided By Operating Activities......... 22,178 20,702
-------- ---------
Cash Flows from Investing Activities:
Capitalized expenditures.................................. (8,365) (9,620)
Acquisition of real estate and related working capital.... -- (142,857)
Net proceeds from sales of real estate.................... 15,691 10,070
Contribution to joint venture............................. 614 --
-------- ---------
Net Cash Provided By (Used In) Investing
Activities...................................... 7,940 (142,407)
-------- ---------
Cash Flows from Financing Activities:
Principal repayments on mortgage notes payable............ (23,448) (184,361)
Proceeds from mortgage financing.......................... 9,500 264,304
Payment of deferred loan costs............................ (42) (2,796)
Proceeds from sale of common shares....................... (42) 55,434
Distributions to shareholders............................. (13,195) (11,819)
Redemption of limited partnership unit holders............ (2,518) --
Distributions to limited partnership unit holders......... (300) (271)
-------- ---------
Net Cash Provided By (Used In) Financing
Activities...................................... (30,045) 120,491
-------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents........ 73 (1,214)
Cash and Cash Equivalents at Beginning of Period............ 2,504 6,145
-------- ---------
Cash and Cash Equivalents at End of Period.................. $ 2,577 $ 4,931
======== =========
Cash Paid for Interest...................................... $ 18,710 $ 18,512
======== =========
</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 eleven properties
and an undeveloped tract of land in the first nine months of 1999, American
Industrial Properties REIT (the "Trust") received approximately $1.9 million of
accounts payable and tenant security deposits.
Real Estate Held for Sale. As of September 30, 2000, the Trust has one
office building with a cost basis of $32.3 million classified as 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.
6
<PAGE> 7
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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
("GAAP") or those contained in American Industrial Properties REIT's (the
"Trust") Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements of the Trust for the year ended December 31, 1999,
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, 2000, directly or indirectly owns and operates 71 commercial real
estate properties consisting of 55 industrial properties, 14 office buildings
and 2 retail properties.
Use of Estimates. The preparation of financial statements in conformity
with GAAP 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. 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.
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 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 $3,380,000 and
$2,657,000 at September 30, 2000 and December 31, 1999, 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 $150,000 and
$129,000 for the nine months ended September 30, 2000 and 1999, 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.
Concentrations. As of September 30, 2000, the Trust owns 71 real estate
properties in 11 states. The Trust's industrial properties are concentrated in
the Texas market with 23 of 55 properties located in the Dallas, Houston and
Austin areas. The office buildings are primarily located in the West with 7 of
the
7
<PAGE> 8
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14 located in California. The two retail properties are located in Colorado and
Florida. The principal competitive factors in these markets are price, location,
quality of space, and amenities. In each case, the Trust owns a small portion of
the total similar space in the market and competes with owners of other space
for tenants. Each of these markets is highly competitive, and other owners of
property may have competitive advantages not available to the Trust.
Effect of New Accounting Standard. In June 1998, the Financial Accounting
and Standards Board issued Statement of Financial Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended, which is required
to be adopted in years beginning after June 15, 2000. Because of the Trust's
minimal use of derivatives, management does not anticipate that the adoption of
the new Statement will have a significant effect on earnings of the financial
position of the Trust.
Reclassification. Certain amounts in prior year's financial statements
have been reclassified to conform to the current year presentation.
NOTE 2 -- REAL ESTATE AND PROVISIONS FOR POSSIBLE LOSSES ON REAL ESTATE
At September 30, 2000 and December 31, 1999, real estate was comprised of
the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Held for investment:
Land................................................... $150,108,000 $155,264,000
Buildings and improvements............................. 451,686,000 472,567,000
------------ ------------
601,794,000 627,831,000
------------ ------------
Held for sale:
Land................................................... 5,156,000 4,302,000
Buildings and improvements............................. 27,141,000 10,053,000
------------ ------------
32,297,000 14,355,000
------------ ------------
Total.......................................... $634,091,000 $642,186,000
============ ============
</TABLE>
In the third quarter of 2000, the Trust sold one tract of unimproved land.
Total proceeds from the sale were approximately $0.3 million, and resulted in a
net gain of $0.07 million. The asset sold was classified as held for sale at
June 30, 2000. As of September 30, 2000, one office building is classified as
held for sale. The Trust's intent is to sell the office building in the fourth
quarter 2000 (see Note 12).
The Trust did not acquire any real estate assets during the nine months
ended September 30, 2000.
In the second quarter of 2000, the Trust sold one tract of unimproved land.
Total proceeds from the sale were approximately $0.3 million, and resulted in a
net gain of $0.03 million. This asset was previously classified as held for sale
at December 31, 1999.
In the first quarter of 2000, the Trust sold two light industrial
properties, one office property and one tract of unimproved land. Total proceeds
from the sale of these assets were approximately $16.2 million and resulted in a
net gain on sales of real estate of approximately $2.9 million. These assets
were previously classified as held for sale at December 31, 1999.
During 1999, the Trust purchased a portfolio of nine real estate properties
for $127.3 million. The purchase price was primarily funded with $75.2 million
in borrowings under a secured bridge loan with Prudential Securities Credit
Corporation and $51.8 million from the issuance of common shares to Developers
Diversified Realty Corporation ("DDR"). The Trust also acquired two additional
properties in 1999 for
8
<PAGE> 9
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$15.8 million. The purchase price was primarily funded under a secured line of
credit with Bank One, Texas, N.A. and $5.5 million in proceeds from shares
issued to DDR.
During 1999, the Trust reclassified six properties and four tracts of land
from held for investment to held for sale. Three of the industrial properties
and one tract of land were sold in 1999 resulting in a net loss on sales of real
estate of approximately $0.2 million. The remaining three properties and three
tracts of unimproved land were not located in target markets identified by the
Trust for future investment.
During 1999, a joint venture, 50% owned by the Trust, sold a light
industrial property. The Trust's investment in the joint venture was
approximately $2.5 million. The Trust earned approximately $0.6 million from
this joint venture.
NOTE 3 -- MORTGAGE NOTES PAYABLE
At September 30, 2000, 70 of the Trust's 71 properties were subject to
liens securing mortgage notes payable with principal balances totaling
$320,536,000, including $1,073,000 of debt premiums. Of this amount,
approximately $257,444,000 was represented by mortgage notes with stated fixed
interest rates ranging from 7.18% to 9.13%, a stated weighted average interest
rate of 7.74%, and maturity dates from 2001 to 2016. Mortgage notes payable with
variable interest rates total approximately $62,019,000. The variable rate debt
consists of $48,019,000 under the Trust's secured acquisition credit line with
Prudential Securities Credit Corporation as well as $14,000,000 under the Bank
One line of credit. The acquisition credit line bears interest at the 30 day
LIBOR plus 1.55% and matures in April 2001, as extended. The Bank One line of
credit, which provides for a variable rate spread based upon the Trust's overall
debt leverage, currently bears interest at the 30 day LIBOR plus 1.75% and
matures in January 2001. The interest rates on the acquisition credit line and
the line of credit at September 30, 2000 are 8.18% and 8.37%, respectively.
Debt premiums are amortized into interest expense over the terms of the
related mortgages using the effective interest method. As of September 30, 2000
and December 31, 1999, the unamortized debt premiums were $1,073,000 and
$1,463,000, 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 September 30, 2000.
For the nine months ended September 30, 2000, the Trust recognized
extraordinary loss on extinguishment of debt of $329,000 resulting from
prepayment penalties and the write off of deferred financing costs on the early
retirement of mortgage debt resulting from the sale of two industrial properties
(see Note 2). During 1999, the Trust recognized an extraordinary loss on the
extinguishment of debt of $513,000 resulting from prepayment penalties and the
write off of deferred financing costs on the early retirement of $88,000,000 of
mortgage debt.
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%.
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 Colorado retail property. The source of the
9
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AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contamination is apparently related to underground storage tanks 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 underground storage tanks 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
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 underground storage tanks
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.
NOTE 6 -- MINORITY INTEREST
Operating Partnerships. As of September 30, 2000, all limited partnership
units outstanding at December 31, 1999 (excluding limited partnership units held
by the Trust) have been redeemed (see below). The limited partners' interest is
reflected as minority interest in the accompanying consolidated financial
statements.
In January 2000, 89,542 AIP-SWAG Operating L.P. limited partnership units
were redeemed for approximately $1,094,000, resulting in an increase in
shareholders' equity of approximately $127,000. In March 2000, 29,166 AIP
Operating L.P. limited partnership units were redeemed for approximately
$316,000, resulting in an increase in shareholders' equity of approximately
$85,000. In July 2000, the remaining 89,543 AIP-SWAG limited partnership units
were redeemed for approximately $1,109,000, resulting in an increase of
shareholders' equity of approximately $154,000. AIP-SWAG Operating L.P. and AIP
Operating, L.P. had 179,085 and 29,166 limited partnership units outstanding,
respectively, as of December 31, 1999. As of September 30, 2000, all of these
limited partnership units have been redeemed and are owned by the Trust.
Joint Ventures. 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 venture'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 common
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, 2000, 21,156,098 common shares are issued and outstanding. As of
September 30, 2000, the Trust has 165,755 common shares held in Treasury.
The Trust is authorized to issue up to 50,000,000 preferred shares of
beneficial interest in one or more series. The number of shares in each series
and the designation, powers, preferences and rights of each such
10
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AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
series and the qualifications, limitations or restrictions thereof have not been
established. As of September 30, 2000, no preferred shares have been issued.
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 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 exchange for consideration
valued at approximately $34.2 million.
In January 1999, DDR completed the second stage of the investment,
resulting in the purchase of 5,226,589 common shares for $15.50 per share 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 common
stock and the Trust shares, the market capitalization of DDR and whether common
or preferred shares are issued to DDR. As of December 31, 1999, DDR had
purchased 2,222,449 common shares related to the third stage for total
consideration of approximately $33.4 million. In total, DDR has purchased
9,656,656 shares, representing 46.0% of the current outstanding shares of the
Trust, as of September 30, 2000. DDR has not purchased any shares in the nine
months ended September 30, 2000.
During the nine months ended September 30, 2000, the Trust issued 58,217
shares under its Dividend Reinvestment Plan and 6,028 shares to trust managers.
In total, the Trust issued 64,245 shares in the nine months ended September 30,
2000.
Share Incentive Plans. The Trust adopted its Employee and Trust Managers
Incentive Share 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. 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 of the Trust or a person
designated by the compensation committee of the Trust's board of trust managers
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. At September 30, 2000, 726,000 options are
outstanding of which 700,000 are fully vested. The remaining 26,000 options vest
annually through February 2003. The terms of these options range from June 2007
through December 2009. As of September 30, 2000, 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. No warrants have
been exercised as of September 30, 2000. The warrants expired on October 3,
2000.
NOTE 8 -- DISTRIBUTIONS
A $0.22 per share distribution was paid on October 13, 2000 to shareholders
of record on October 3, 2000. Additionally, a $0.22 per share distribution was
paid on July 14, 2000, April 14, 2000 and on January 14, 2000. Distributions
totaling $0.84 per share were paid in 1999.
11
<PAGE> 12
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- TRANSACTIONS WITH RELATED PARTIES
Quorum Real Estate Services Corporation, an affiliate of USAA Real Estate
Company, and DDR, both of which are major shareholders of the Trust, manage
certain of the Trust's real estate investments. Quorum and DDR are paid
competitive rates for services, including, but not limited to, construction,
tenant finish, leasing and management. For the nine months ended September 30,
2000, the Trust paid Quorum management fees of $449,000, leasing commissions of
$249,000 and construction management fees of $81,000. 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. The Trust paid DDR management fees of $16,000 for the nine
months ended September 30, 2000. For the nine months ended September 30, 1999,
management fees paid to DDR were $13,000.
The Trust currently leases approximately 2,000 square feet to an individual
serving as a trust manager at competitive market rates. For the nine months
ended September 30, 2000 and September 30, 1999, this trust manager paid $19,100
and $17,600 in lease payments to the Trust, respectively.
At September 30, 2000, DDR and USAA Real Estate Company owned approximately
46.0% and 8.0% of the common shares outstanding, respectively.
In the first quarter of 1999, the Trust repaid $111,000 of interest and the
balance of unsecured borrowings from DDR. The borrowings bore a fixed interest
rate of 10.25%, provided for quarterly payments of interest and were due 30 days
after demand. The Trust did not enter into any such borrowings in the nine
months ended September 30, 2000.
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,
--------------------------- -------------------------
2000 1999 2000 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Basic and diluted earnings per share:
Numerator:
Net income before extraordinary
items............................... $5,189,000 $4,049,000 $16,879,000 $11,462,000
Extraordinary items.................... -- (585,000) (329,000) (585,000)
---------- ---------- ----------- -----------
Net income............................. $5,189,000 $3,464,000 $16,550,000 $10,877,000
========== ========== =========== ===========
Denominator:
Weighted average shares................ 20,982,665 20,686,717 20,962,721 20,378,579
========== ========== =========== ===========
Basic and diluted earnings per share:
Income before extraordinary items........ $ 0.25 $ 0.20 $ 0.81 $ 0.56
Extraordinary items...................... -- (0.03) (0.02) (0.03)
---------- ---------- ----------- -----------
Net income............................... $ 0.25 $ 0.17 $ 0.79 $ 0.53
========== ========== =========== ===========
</TABLE>
Options to purchase 726,000 shares at prices ranging from $11.13 to $15.00
per share were outstanding at September 30, 2000. There were no additional
options issued during the nine months ended September 30, 2000. These options
were not included in a computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
shares and, therefore, the effect would be antidilutive.
At September 30, 2000, warrants to acquire 40,000 common shares were
outstanding. The warrants have an exercise price of $17.50 per share and expired
in October 2000. Because the exercise price was greater than
12
<PAGE> 13
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the average market price of the shares, the effect would be antidilutive and are
therefore excluded from the computation of diluted earnings per share.
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, 2000,
light industrial represents 59% of property revenue. Office and retail represent
37% and 4%, respectively, for the same period. For the three months ended
September 30, 1999, light industrial, office and retail, represented property
revenue of 61%, 34%, and 5%, respectively.
For the nine months ended September 30, 2000, light industrial represents
60% of property revenue. Office and retail represent 36% and 4%, respectively
for the same period. For the nine months ended September 30, 1999 light
industrial, office and retail represented property revenue of 61%, 34%, and 5%,
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, 2000, 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, 1999,
approximately 73% of the Trust's portfolio was represented by light industrial
properties, 24% by office properties and 3% 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.
13
<PAGE> 14
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the Trust's operations by reporting segment,
for the three months ended September 30, 2000 and 1999 (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, 2000
-----------------------------------------------------------
CORPORATE
LIGHT OFFICE AND
INDUSTRIAL BUILDINGS RETAIL OTHER CONSOLIDATED
---------- --------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Property revenues............................ $13,526 $8,290 $ 958 $ -- $22,774
Property expenses............................ 3,484 2,899 432 -- 6,815
------- ------ ------- -------- -------
Income from property operations.............. 10,042 5,391 526 -- 15,959
Administrative expenses...................... -- -- -- (961) (961)
Depreciation and amortization................ -- -- -- (3,253) (3,253)
Other income................................. -- -- -- 122 122
Interest expense............................. -- -- -- (6,434) (6,434)
------- ------ ------- -------- -------
Income (loss) from operations................ 10,042 5,391 526 (10,526) 5,433
Minority interests in consolidated
subsidiaries............................... -- -- -- (190) (190)
Loss on sale of real estate.................. (104) -- -- -- (104)
Income in equity of joint venture............ -- -- -- 50 50
Extraordinary loss on debt................... -- -- -- -- --
------- ------ ------- -------- -------
Net income (loss)............................ $ 9,938 $5,391 $ 526 $(10,666) $ 5,189
======= ====== ======= ======== =======
<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)
Income in equity of joint venture............ -- -- -- -- --
Extraordinary loss on debt................... (585) -- -- -- (585)
------- ------ ------- -------- -------
Net income (loss)............................ $ 9,077 $4,965 $ 497 $(11,075) $ 3,464
======= ====== ======= ======== =======
</TABLE>
The following table sets forth the Trust's operations by reporting segment,
for the nine months ended September 30, 2000 and 1999 (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, 2000
-----------------------------------------------------------
CORPORATE
LIGHT OFFICE AND
INDUSTRIAL BUILDINGS RETAIL OTHER CONSOLIDATED
---------- --------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Property revenues............................ $ 40,108 $ 24,132 $ 2,843 $ -- $ 67,083
Property expenses............................ 10,697 8,145 1,166 -- 20,008
-------- -------- ------- -------- --------
Income from property operations.............. 29,411 15,987 1,677 -- 47,075
Administrative expenses...................... -- -- -- (3,187) (3,187)
Depreciation and amortization................ -- -- -- (10,580) (10,580)
Other income................................. -- -- -- 320 320
Interest expense............................. -- -- -- (19,390) (19,390)
-------- -------- ------- -------- --------
Income (loss) from operations................ 29,411 15,987 1,677 (32,837) 14,238
Minority interests in consolidated
subsidiaries............................... -- -- -- (385) (385)
Gain (Loss) on sale of real estate........... 2,906 -- -- -- 2,906
Income in equity of joint venture............ -- -- -- 120 120
Extraordinary loss on debt................... (329) -- -- -- (329)
-------- -------- ------- -------- --------
Net income (loss)............................ $ 31,988 $ 15,987 $ 1,677 $(33,102) $ 16,550
======== ======== ======= ======== ========
Total real estate.................... $388,674 $206,347 $36,831 $ 2,239 $634,091
======== ======== ======= ======== ========
<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)
Gain (Loss) on sale of real estate........... (75) -- -- -- (75)
Income in equity of joint venture............ -- -- -- -- --
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
======== ======== ======= ======== ========
</TABLE>
14
<PAGE> 15
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- SUBSEQUENT EVENTS
On November 1, 2000, the Trust, DDR Corporation, an Ohio corporation, and
DDR Transitory Sub Inc. ("DDR Sub"), a Texas corporation, entered into an
agreement and plan of merger.
Pursuant to the merger agreement, DDR Sub will be merged with and into the
Trust. Each of the Trust's common shares of beneficial interest, $0.10 par value
per share (other than shares owned in treasury, by DDR, DDR Sub or dissenting
shareholders), will be converted into the right to receive not less than $13.74.
A number of factors may slightly increase the final amount distributed to Trust
shareholders, including Trust operations prior to closing, transaction expenses,
and certain closing adjustments. Each share of DDR Sub stock will be converted
into Trust common shares in connection with the merger, resulting in DDR being
the sole shareholder of the Trust.
The Trust cannot pay dividends to its shareholders before the scheduled
closing without DDR's consent, unless the dividend is necessary for the Trust to
maintain its status as a REIT or to avoid having taxable income for federal tax
purposes. The $13.74 would be reduced by the amount of any such dividend.
On November 1, 2000, the Trust also entered into an agreement of purchase
and sale with Value Enhancement Fund IV, L.P., an affiliate of Lend Lease Real
Estate Investments, Inc. ("Lend Lease"), to sell 31 of the Trust's properties to
client accounts managed by Lend Lease. The gross purchase price, including
assumed debt, is approximately $292.2 million.
A majority of the Trust's trust managers not designated by DDR approved the
DDR and Lend Lease transactions following the recommendation of the special
committee formed to evaluate the DDR and Lend Lease transactions. The board will
recommend that the Trust's shareholders approve the merger and the sale of
properties. The approval of the holders of 66 2/3% of the Trust's outstanding
common shares is required to approve the transactions.
The Trust anticipates that the sale of properties to the Lend Lease
affiliate and the merger will close in the first quarter of 2001. The closings
of these transactions are subject to customary conditions in addition to the
shareholder approval referred to above.
In conjunction with the merger agreement and the sale of properties, the
Trust, Lend Lease and DDR took several steps to facilitate the completion of the
merger and sale of properties, including entering into voting agreements with
certain shareholders of the Trust pursuant to which each such person agreed to
vote all common shares of the Trust beneficially owned by such person or over
which they exercise voting power, together with any shares subsequently acquired
by such person, in favor of the merger agreement and the agreement of purchase
and sale and the transactions contemplated thereby.
On November 3, 2000 a purported class action and derivative lawsuit was
filed by a shareholder of the Trust seeking, among other things, to enjoin the
consummation of the announced merger between a subsidiary of DDR and the Trust.
DDR and the Trust's trust managers have been named as defendants in the lawsuit,
and the Trust has been named as a nominal defendant. The plaintiff alleges that
the defendants have breached fiduciary duties, abused their control of the Trust
and committed waste by agreeing to the terms of the announced merger and that
the defendants will be unjustly enriched if the proposed merger is consummated.
The plaintiff has also sued for unspecified damages, punitive damages and
attorneys' fees. The Trust and its affiliated defendants deny the plaintiff's
allegations of wrongdoing and intend to vigorously defend themselves.
On November 9, 2000, the Trust sold one office property previously
categorized as held for sale, for total consideration of $55.3 million. This
sale is expected to produce a gain on sale of approximately $24.0 million.
15
<PAGE> 16
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 1999 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, 2000 to September 30, 1999
Property revenues increased 2.9% to $22,774,000 for the three months ended
September 30, 2000 from $22,141,000 for the same period in 1999, 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 4.7% to $15,959,000
for the three months ended September 30, 2000 from $15,238,000 for the same
period in 1999. On a same property basis, for properties owned as of July 1,
1999 and September 30, 2000, property revenues increased to $21,987,000 in 2000
from $20,726,000 in 1999, an increase of 6.1%, comprised of a 4.8% increase in
revenue related to industrial properties, a 10.5% increase in revenue related to
office properties and a 9.1% decrease in revenue at the Trust's retail
properties. The increases in revenue related to industrial and office properties
stemmed principally from an increase in rental rates and/or an increase in
overall occupancy at a number of the properties. The decrease in revenues at the
retail properties relates primarily to a reduction in occupancy at the Colorado
retail property. Overall leased occupancy of the Trust's portfolio was 92.3% at
September 30, 2000 compared to 94.2% at September 30, 1999.
On a same property basis, income from property operations increased to
$15,512,000 for the three months ended September 30, 2000 from $14,093,000 for
the same period in 1999, an increase of 10.1%, and is comprised of a 9.2%
increase related to industrial properties, a 12.0% increase related to office
properties and a 6.6% increase related to the Trust's retail properties. This
overall increase is the net result of the revenue activity explained above and a
reduction in operating expenses related to the industrial and retail properties.
Income from operations increased to $5,433,000 during the three months
ended September 30, 2000 from $4,251,000 for the same period in 1999 as a result
of the increase in income from property operations explained above offset by the
sale of four properties since the third quarter of 1999. In addition, total
interest expense decreased $450,000 due to a $25,600,000 reduction in mortgage
debt since September 30, 1999 offset by an increase in variable rate interest.
Trust administration and overhead expenses increased $40,000 due to incentive
compensation costs accrued in the third quarter of 2000. Depreciation decreased
$235,000 due to the sale of four properties since the third quarter of 1999.
Comparison of Nine Months Ended September 30, 2000 to September 30, 1999
Property revenues increased 5.2% to $67,083,000 for the nine months ended
September 30, 2000 from $63,754,000 for the same period in 1999, and income from
property operations increased 5.8% to $47,075,000 in 2000 from $44,487,000 in
1999. On a same property basis, for properties owned as of January 1, 1999 and
September 30, 2000, property revenues increased to $51,055,000 in 2000 from
$48,126,000 for the same period in 1999, an increase of 6.1%, comprised of a
5.1% increase in revenue related to industrial properties, a 11.5% increase in
revenue related to office properties and a 10.0% decrease in revenue at the
Trust's retail properties. The increases in revenue stemmed principally from an
increase in rental rates and/or an increase in overall occupancy at a number of
the properties. The decrease in revenues at the retail properties relates
primarily to a reduction in occupancy at the Colorado retail property. Overall
leased occupancy of the Trust's portfolio was 92.3% at September 30, 2000
compared to 94.2% at September 30, 1999.
16
<PAGE> 17
On a same property basis, income from property operations increased to
$34,430,000 for the nine months ended September 30, 2000 from $32,806,000 for
the same period in 1999, an increase of 5.0%, and is comprised of a 4.5%
increase related to industrial properties, a 7.7% increase related to office
properties and a 3.6% decrease related to the Trust's retail properties. This
overall increase is the net result of the revenue activity explained above
offset by additional operating expense activity related to increases in
occupancy and higher property taxes at various properties.
Income from operations increased to $14,238,000 during the nine months
ended September 30, 2000 from $11,797,000 for the same period in 1999 as a
result of the acquisition of 11 properties since December 31, 1998 and the
increase in income from property operations explained above offset by the sale
of six properties since the second quarter of 1999. Total interest expense
decreased $328,000 due to a $25,600,000 net decrease in mortgage debt since the
third quarter of 1999 offset by an increase in variable rate interest since
September 30, 1999 and Trust administration and overhead expenses decreased
$211,000 due to a reduction in annual report costs and costs associated with
prospective acquisitions. Depreciation increased $181,000 due to the acquisition
of 11 properties since December 1998 offset by the sale of six properties since
the first quarter of 1999.
Analysis of Cash Flows -- Comparison of Nine Months Ended September 30, 2000
to September 30, 1999
Cash flow provided by operating activities in the nine months ended
September 30, 2000 was $22,178,000. This resulted from the Trust's net income of
$16,550,000 increased by non-cash charges totaling $8,693,000 related to
minority interests, depreciation and amortization, extraordinary loss of the
extinguishment of debt, gains on the sale of real estate and issuance of common
shares to trust managers. Restricted cash increased $1,111,000 while other
assets, accrued interest and accounts payable, accrued expenses and other
liabilities decreased $3,596,000, $231,000, and $349,000, respectively.
Cash flow provided by investing activities in the nine months ended
September 30, 2000 was $7,940,000 representing net proceeds for the sales of
real estate of $15,691,000 and contributions to joint venture of $614,000 offset
by capitalized expenditures of $8,365,000.
Cash flow used in financing activities in the nine months ended September
30, 2000 was $30,045,000. This amount reflects principal repayments on mortgage
notes payable of $23,448,000, distributions to shareholders and limited
partnership unit holders of $13,495,000, redemption of limited partnership units
totaling $2,518,000, an increase in deferred loan costs of $42,000 offset by
proceeds from the mortgage financing totaling $9,500,000 and the net costs
related to the private placement of common shares in prior years of $42,000.
Cash flow provided by operating activities in the nine months ended
September 30, 1999 was $20,702,000. This resulted from the Trust's net income of
$10,877,000 increased by non-cash charges totaling $11,140,000 related to
minority interests, depreciation and amortization, extraordinary loss of the
extinguishment of debt, losses on the sale of real estate and issuance of common
shares to trust managers. In addition, other assets, restricted cash and accrued
interest increased $330,000, $855,000, and $575,000, respectively while 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 $120,491,000. This amount reflected 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 $55,434,000, 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.
17
<PAGE> 18
Funds from Operations
The Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") defines funds from operations ("FFO") as net income
(loss) computed in accordance with 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 should not
be considered in arriving at FFO. Accordingly, the Trust does not include
extraordinary items in the calculation of FFO.
Effective January 1, 2000, NAREIT clarified 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 the
sales of depreciable operating properties. The Trust's FFO calculation for the
three and nine months ended September 30, 2000 was not affected by the revised
FFO calculation. Although the Trust does not anticipate a significant impact on
current FFO calculations as a result of this change, the Trust has deferred
costs totaling approximately $4.2 million at September 30, 2000 related to an
on-going strategic review of alternatives for the Trust (see Recent
Developments). Under the FFO guidelines promulgated by NAREIT, expenses related
to these costs cannot be excluded from the calculation of FFO. Should a
strategic transaction not result from this review, the Trust will expense all
such deferred costs.
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 GAAP 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 GAAP:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
2000 1999 2000 1999
------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by operating
activities............................... $ 8,889 $ 6,590 $ 22,178 $ 20,702
Net cash provided by (used in) investing
activities............................... (2,011) (10,172) 7,940 (142,407)
Net cash provided by (used in) financing
activities............................... (6,993) 1,591 (30,045) 120,491
</TABLE>
18
<PAGE> 19
The following table shows the Trust's calculation of FFO:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<S> <C> <C> <C> <C>
Net Income/(Loss)................. $ 5,189 $ 3,464 $ 16,550 $ 10,877
Exclude effects of:
Extraordinary items:
Loss on extinguishment of
debt....................... -- 585 329 585
(Gain)/loss on sales of real
estate....................... 104 114 (2,906) 75
Real estate depreciation and
amortization................. 3,039 3,250 10,093 9,674
Income in equity of joint
venture...................... (50) -- (120) --
Minority interest in operating
partnerships................. 1 43 64 129
----------- ----------- ----------- -----------
Funds from Operations............. $ 8,283 $ 7,456 $ 24,010 $ 21,340
=========== =========== =========== ===========
Weighted average shares and
operating partnership units
outstanding..................... 20,987,531 20,924,135 21,038,389 20,615,997
=========== =========== =========== ===========
</TABLE>
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, 2000, the Trust had $2.6
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 equity and up to $200 million in
additional equity (common shares up to 49.9% ownership and preferred shares
thereafter), subject to certain conditions, to fund property acquisitions. As of
September 30, 2000, DDR has purchased 9.7 million common shares for $148.6
million. Proceeds related to these share purchases were used to fund property
acquisitions in 1998 and 1999.
In addition to the equity raised, the Trust utilized both long term and
short term secured financing to fund property acquisitions. In January 1999, the
Trust initiated a secured acquisition credit facility with Bank One. The
agreement contemplated a $150 million credit line of which Bank One and Wells
Fargo have each committed $25 million. 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. The Trust
is currently negotiating an extension of this line. As of September 30, 2000,
the Trust has $14.0 million outstanding under this credit line, which bears
interest at LIBOR plus 1.75%, currently 8.37%.
The Trust also has approximately $48.0 million outstanding under a $75
million secured acquisition line with Prudential Securities Credit Corporation
which bears interest at a variable rate based on the 30 day LIBOR plus 1.55%,
currently 8.18%, and a maturity date of April 27, 2001, as extended. The Trust
anticipates retirement of this debt through sales of properties or through
refinancing.
Including the Bank One credit line and the Prudential Securities Credit
Corporation secured acquisition credit line at September 30, 2000, the Trust had
$320.5 million in mortgage debt outstanding, of which approximately $257.4
million was represented by fixed rate debt, including $1.1 million in
unamortized debt premiums, with a weighted average interest rate of 7.62%.
Approximately $62.0 million was represented by variable rate debt with a
weighted average interest rate of 8.22%. These weighted average interest rates
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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, 2000, the Trust's total market capitalization (based upon
a September 30, 2000 closing share price of $14.250 per share) was approximately
$613.1 million. Based upon this amount, the Trust's debt to total market
capitalization at September 30, 2000 was 51.2%.
On a long term basis, the Trust expects to meet liquidity requirements
generated by property operating expenses, debt service, and future distributions
to shareholders with funds generated by the operations of its real properties.
Should such funds not cover these needs, it is possible distributions may be
reduced or eliminated in the future. Although the Trust believes that its
current level of leverage is justified, the risk of financial default could rise
substantially 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
$2,238,000 in the quarter ended September 30, 2000, compared to $4,204,000 in
the quarter ended September 30, 1999. For the nine months ended September 30,
2000 these costs were $8,365,000 compared to $9,620,000 over the same nine month
period in 1999. 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 13, 2000, July 14,
2000 and April 14, 2000 to shareholders. 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. Effective January 1, 2001, the distribution requirement will be
reduced from 95% to 90% of taxable income.
On February 18, 1998, the Trust filed a Form S-3 registration statement
with the SEC which would provide for the issuance of up to $500 million in
common shares, preferred shares, 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. To date, this
registration statement has not been utilized.
RECENT DEVELOPMENTS
On November 1, 2000, the Trust, DDR Corporation, an Ohio corporation, and
DDR Sub, a Texas corporation, entered into an agreement and plan of merger.
Pursuant to the merger agreement, DDR Sub will be merged with and into the
Trust. Each of the Trust's common shares of beneficial interest, $0.10 par value
per share (other than shares owned in treasury, by DDR, DDR Sub or dissenting
shareholders), will be converted into the right to receive not less than $13.74.
A number of factors may slightly increase the final amount distributed to Trust
shareholders, including Trust operations prior to closing, transaction expenses,
and certain closing adjustments. Each share of DDR Sub stock will be converted
into Trust common shares in connection with the merger, resulting in DDR being
the sole shareholder of the Trust.
The Trust cannot pay dividends to its shareholders before the scheduled
closing without DDR's consent, unless the dividend is necessary for the Trust to
maintain its status as a REIT or to avoid having taxable income for federal tax
purposes. The $13.74 would be reduced by the amount of any such dividend.
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On November 1, 2000, the Trust also entered into an agreement of purchase
and sale with Value Enhancement Fund IV, L.P., an affiliate of Lend Lease, to
sell 31 of the Trust's properties to client accounts managed by Lend Lease. The
gross purchase price, including assumed debt, is approximately $292.2 million.
A majority of the Trust's trust managers not designated by DDR approved the
DDR and Lend Lease transactions following the recommendation of the special
committee formed to evaluate the DDR and Lend Lease transactions. The board will
recommend that the Trust's shareholders approve the merger and the sale of
properties. The approval of the holders of 66 2/3% of the Trust's outstanding
common shares is required to approve the transactions.
The Trust anticipates that the sale of properties to the Lend Lease
affiliate and the merger will close in the first quarter of 2001. The closings
of these transactions are subject to customary conditions in addition to the
shareholder approval referred to above.
In conjunction with the merger agreement and the sale of properties, the
Trust, Lend Lease and DDR took several steps to facilitate the completion of the
merger and sale of properties, including entering into voting agreements with
certain shareholders of the Trust pursuant to which each such person agreed to
vote all common shares of the Trust beneficially owned by such person or over
which they exercise voting power, together with any shares subsequently acquired
by such person, in favor of the merger agreement and the agreement of purchase
and sale and the transactions contemplated thereby.
On November 3, 2000 a purported class action and derivative lawsuit was
filed by a shareholder of the Trust seeking, among other things, to enjoin the
consummation of the announced merger between a subsidiary of DDR and the Trust.
DDR and the Trust's trust managers have been named as defendants in the lawsuit,
and the Trust has been named as a nominal defendant. The plaintiff alleges that
the defendants have breached fiduciary duties, abused their control of the Trust
and committed waste by agreeing to the terms of the announced merger and that
the defendants will be unjustly enriched if the proposed merger is consummated.
The plaintiff has also sued for unspecified damages, punitive damages and
attorneys' fees. The Trust and its affiliated defendants deny the plaintiff's
allegations of wrongdoing and intend to vigorously defend themselves.
On November 9, 2000, the Trust sold one office property previously
categorized as held for sale, for total consideration of $55.3 million. This
sale is expected to produce a gain on sale of approximately $24.0 million.
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 2000, the Trust's interest expense would have been increased or
decreased by approximately $160,000 for the three months ended September 30,
2000 and $488,000 for the nine months ended September 30, 2000. There is no
fixed rate debt maturing in 2000.
The Trust historically has not hedged its exposure to fluctuations in
interest rates and currently has no plans to do so in the future.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 3, 2000 a purported class action and derivative lawsuit was
filed by a shareholder of the Trust seeking, among other things, to enjoin the
consummation of the announced merger between a subsidiary of DDR and the Trust.
DDR and the Trust's trust managers have been named as defendants in the lawsuit,
and the Trust has been named as a nominal defendant. The plaintiff alleges that
the defendants have breached fiduciary duties, abused their control of the Trust
and committed waste by agreeing to the terms of the announced merger and that
the defendants will be unjustly enriched if the proposed merger is consummated.
The plaintiff has also sued for unspecified damages, punitive damages and
attorneys' fees. The Trust and its affiliated defendants deny the plaintiff's
allegations of wrongdoing and intend to vigorously defend themselves.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER 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, 2000.
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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)
Date: November 14, 2000 /s/ MARC A. SIMPSON
--------------------------------------
Marc A. Simpson
Senior Vice President and Chief
Financial Officer
(principal financial officer)
Date: November 14, 2000 /s/ GARY A. WILLIAMS
--------------------------------------
Gary A. Williams
Vice President and Chief Accounting
Officer
(principal accounting officer)
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
27.1 -- Financial Data Schedule
</TABLE>
