<PAGE>
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
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 01-12846
SECURITY CAPITAL INDUSTRIAL TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 74-2604728
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
14100 EAST 35TH PLACE, AURORA, 80011
COLORADO (ZIP CODE)
(ADDRESS OR PRINCIPAL EXECUTIVE
OFFICES)
(303) 375-9292
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(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 for the past 90 days. Yes X No
The number of shares outstanding of the Registrant's common stock as of
August 6, 1997 was:
Common Shares of Beneficial Interest, $.01 par value--97,760,595 shares
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<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
PART I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets--June 30, 1997 and December 31,
1996...................................................... 3
Consolidated Statements of Operations--Three and six months
ended June 30, 1997 and 1996.............................. 4
Consolidated Statements of Cash Flows--Six months ended
June 30, 1997 and 1996.................................... 5
Notes to Consolidated Financial Statements................. 6
Report of Independent Public Accountants................... 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 13
PART II. Other Information
Item 4. Submission of Matters to a Vote of Securities Holders...... 20
Item 5. Other Information.......................................... 20
Item 6. Exhibits and Reports on Form 8-K........................... 20
</TABLE>
2
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1997 1996
------ ----------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
Real Estate........................................... $2,702,070 $2,508,747
Less accumulated depreciation....................... 139,236 109,147
---------- ----------
2,562,834 2,399,600
Investment in and Advances to Unconsolidated
Subsidiaries......................................... 75,166 --
Cash and Cash Equivalents............................. 9,532 4,770
Accounts Receivable................................... 9,236 5,397
Other Assets.......................................... 57,495 52,539
---------- ----------
Total assets...................................... $2,714,263 $2,462,306
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Line of credit...................................... $ 130,100 $ 38,600
Long-term debt...................................... 624,234 524,191
Mortgage notes payable.............................. 84,274 91,757
Securitized debt.................................... 34,983 36,025
Assessment bonds payable............................ 11,901 12,170
Accounts payable and accrued expenses............... 37,232 35,357
Construction payable................................ 23,127 24,645
Distributions payable............................... -- 25,058
Other liabilities................................... 17,855 18,130
---------- ----------
Total liabilities................................. 963,706 805,933
---------- ----------
Commitments and Contingencies
Minority Interest..................................... 55,973 56,984
Shareholders' Equity:
Series A Preferred Shares; $0.01 par value;
5,400,000 shares issued and outstanding at June 30,
1997 and December 31, 1996; stated liquidation
preference of $25 per share........................ 135,000 135,000
Series B Convertible Preferred Shares; $0.01 par
value; 8,050,000 shares issued and outstanding at
June 30, 1997 and December 31, 1996; stated
liquidation preference of $25 per share............ 201,250 201,250
Series C Preferred Shares; $0.01 par value;
2,000,000 shares issued and outstanding at June 30,
1997 and December 31, 1996; stated liquidation
preference of $50 per share........................ 100,000 100,000
Common shares of beneficial interest, $0.01 par
value; 97,760,595 shares issued and outstanding at
June 30, 1997 and 93,676,546 shares at December 31,
1996............................................... 978 937
Additional paid-in capital.......................... 1,338,965 1,257,347
Distributions in excess of net earnings............. (81,609) (95,145)
---------- ----------
Total shareholders' equity........................ 1,694,584 1,599,389
---------- ----------
Total liabilities and shareholders' equity........ $2,714,263 $2,462,306
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------- -----------------
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Income:
Rental income............................. $69,157 $54,361 $136,543 $104,423
Other real estate income.................. 4,569 1,037 5,690 1,180
Income from unconsolidated subsidiaries... 1,546 -- 1,546 --
Interest income........................... 393 350 1,117 507
------- ------- -------- --------
Total income............................ 75,665 55,748 144,896 106,110
------- ------- -------- --------
Expenses:
Rental expenses, net of recoveries of
$10,663 and $7,171 for the three month
periods in 1997 and 1996, respectively,
and $21,263 and $13,378 for the six month
periods in 1997 and 1996, respectively... 5,235 6,065 9,513 11,211
Property management fees paid to
affiliate, net of recoveries of $1,073
and $793 for the three month periods in
1997 and 1996, respectively, and $2,115
and $1,347 for the six month periods in
1997 and 1996, respectively.............. 1,762 1,182 3,312 2,181
Depreciation and amortization............. 18,976 14,126 37,024 27,215
Interest expense.......................... 13,183 8,851 24,558 17,359
REIT management fee paid to affiliate..... 6,228 5,033 12,834 9,674
General and administrative................ 380 303 687 552
Other..................................... 850 732 1,461 1,200
------- ------- -------- --------
Total expenses.......................... 46,614 36,292 89,389 69,392
------- ------- -------- --------
Net Earnings Before Minority Interest and
Gain/(Loss) on Disposition of Real Estate.. 29,051 19,456 55,507 36,718
Minority interest share in net earnings..... 940 884 1,835 1,640
------- ------- -------- --------
Net Earnings Before Gain/(Loss) on
Disposition of Real Estate................. 28,111 18,572 53,672 35,078
Gain/(loss) on disposition of real estate... 3,773 -- 3,773 (29)
------- ------- -------- --------
Net Earnings................................ 31,884 18,572 57,445 35,049
Less preferred share dividends.............. 8,830 6,695 17,659 11,368
------- ------- -------- --------
Net Earnings Attributable to Common Shares.. $23,054 $11,877 $ 39,786 $ 23,681
======= ======= ======== ========
Weighted Average Common Shares Outstanding.. 97,758 81,445 96,888 81,436
======= ======= ======== ========
Per Share Net Earnings Attributable to
Common Shares.............................. $ 0.24 $ 0.15 $ 0.41 $ 0.29
======= ======= ======== ========
Distributions Per Common Share.............. $0.2675 $0.2525 $ 0.5350 $ 0.5050
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Operating Activities:
Net earnings........................................... $ 57,445 $ 35,049
Minority interest...................................... 1,835 1,640
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization........................ 37,024 27,215
(Gain)/loss on disposition of real estate............ (3,773) 29
Rent leveling........................................ (2,278) (2,518)
Amortization of deferred financing costs............. 1,034 1,303
Increase in accounts receivable and other assets....... (8,622) (4,522)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities........................ 1,600 (936)
--------- ---------
Net cash provided by operating activities.......... 84,265 57,260
--------- ---------
Investing Activities:
Real estate investments................................ (325,609) (317,244)
Tenant improvements and lease commissions.............. (5,794) (7,208)
Recurring capital expenditures......................... (2,046) (556)
Proceeds from disposition of real estate............... 66,029 1,092
--------- ---------
Net cash used in investing activities.............. (267,420) (323,916)
--------- ---------
Financing Activities:
Net proceeds from sale of shares, exercised warrants
and dividend reinvestment and share purchase plan..... 80,659 192,379
Proceeds from long-term debt offering.................. 100,000 199,632
Debt issuance costs.................................... (1,393) (3,440)
Termination of interest rate contracts................. 1,658 (1,923)
Distributions paid to common shareholders.............. (51,308) (41,122)
Distributions paid to minority interest holders........ (2,846) (2,631)
Preferred share dividends.............................. (17,659) (11,368)
Proceeds from line of credit........................... 208,600 211,000
Payments on line of credit............................. (117,100) (278,700)
Regularly scheduled principal payments on mortgage
notes payable......................................... (1,854) (1,960)
Balloon principal payments made upon maturity.......... (10,840) (8,404)
--------- ---------
Net cash provided by financing activities.......... 187,917 253,463
--------- ---------
Net Increase/(Decrease) in Cash and Cash Equivalents..... 4,762 (13,193)
Cash and Cash Equivalents, beginning of period........... 4,770 22,235
--------- ---------
Cash and Cash Equivalents, end of period................. $ 9,532 $ 9,042
========= =========
Supplemental Schedule of Noncash Investing and Financing
Activities:
In conjunction with real estate acquired:
Assumption of existing mortgage notes payable........ $ 3,900 $ 2,770
Issuance of common shares............................ $ 1,000 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. GENERAL:
The consolidated financial statements of Security Capital Industrial Trust
("SCI") as of June 30, 1997 are unaudited, and pursuant to the rules of the
Securities and Exchange Commission, certain information and footnote
disclosures normally included in financial statements have been omitted. The
consolidated financial statements for 1996 have been restated to conform to
the 1997 presentation. While management of SCI believes that the disclosures
presented are adequate, these interim consolidated financial statements should
be read in conjunction with SCI's December 31, 1996 consolidated financial
statements.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of SCI's consolidated financial
position and results of operations for the interim periods. The results of
operations for the three and six month periods ended June 30, 1997 and 1996
are not necessarily indicative of the results to be expected for the entire
year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. RECENT ACCOUNTING PRONOUNCEMENTS:
In March 1997, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). The new statement is effective December 15, 1997 and will
require restatement of prior years' earnings per share; early adoption is not
permitted. The adoption of SFAS No. 128 will have no material effect on SCI's
reported earnings per share.
The FASB has also released Statement of Financial Accounting Standard No.
129, "Disclosure of Information about Capital Structure" ("SFAS No. 129"). SCI
already complies with the requirements of the standard which is effective for
periods ending after December 15, 1997.
3. REAL ESTATE:
The following summarizes real estate investments as of June 30, 1997 and
December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
Land held for development........................ $ 118,523 $ 109,316
Land under development........................... 47,283 40,465
Improved land.................................... 384,467 356,428
Buildings and improvements....................... 2,084,247 1,918,256
Construction in progress......................... 48,064 77,506
Capitalized preacquisition costs................. 19,486 6,776
---------- ----------
Total real estate............................ 2,702,070 2,508,747
Less accumulated depreciation.................... 139,236 109,147
---------- ----------
Net real estate.............................. $2,562,834 $2,399,600
========== ==========
</TABLE>
6
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Capitalized preacquisition costs include $14,642,000 and $1,634,000 of funds
on deposit with title companies as of June 30, 1997 and December 31, 1996,
respectively, for property acquisitions.
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES:
On April 24, 1997, SCI Logistics Services Incorporated ("SCI Logistics"), a
newly formed corporation, acquired a 60% interest in a refrigerated warehouse
company, renamed CS Integrated LLC ("CSI"), for $73.4 million. CSI owns 16
refrigerated warehouses totaling 43.4 million cubic feet and two dry storage
facilities. SCI Logistics will account for its investment in CSI on the equity
method because the minority shareholder of CSI has significant rights
involving day-to-day operations as well as the right to approve certain
significant transactions. SCI owns 100% of the nonvoting preferred stock of
SCI Logistics. An unrelated third party owns 100% of the common stock of SCI
Logistics. SCI will recognize 95% of the economic benefits from SCI Logistics'
cash flow (as defined) through its cumulative preferred stock dividends. SCI
will account for its investment in SCI Logistics on the cost method due to the
approval rights of the common shareholder.
As of June 30, 1997 Investment in and Advances to Unconsolidated
Subsidiaries consists of the following items (in thousands):
<TABLE>
<S> <C>
Investment in preferred stock of SCI Logistics................... $ 2,138
Note receivable from SCI Logistics............................... 12,863
Short-term note receivable from CSI.............................. 58,419
Accrued interest and other receivables........................... 1,746
-------
Total........................................................ $75,166
=======
</TABLE>
The note receivable from SCI Logistics is an unsecured loan which bears
interest at 13% per annum payable annually on the 24th of April of each year,
and matures on April 24, 2002. The short term note receivable from CSI is a
bridge loan expected to be replaced by third party financing in the third
quarter of 1997. The loan bears interest payable quarterly at a rate equal to
the lesser of (a) the higher of the prime rate plus 1% or the federal funds
rate and (b) the highest lawful rate.
5. BORROWINGS:
Line of Credit
SCI has a $350.0 million unsecured revolving line of credit agreement with
NationsBank of Texas, N.A. (as agent for a bank group). Borrowings bear
interest at SCI's option, at either an annual rate equal to the lesser of (a)
the greater of the federal funds rate plus 0.5%, and the prime rate, or (b)
LIBOR plus .95%, based upon SCI's current senior debt ratings. Additionally,
there is a commitment fee ranging from .125% to .20% per annum of the unused
line of credit balance. The line is scheduled to mature in May 1999 and may be
extended annually for an additional year with the approval of NationsBank and
the other participating lenders (the "Bank Group"); if not extended, at SCI's
election, the facility will either (a) convert to a three year term note, or
(b) continue on a revolving basis with the remaining one year maturity. All
debt incurrences are subject to a covenant that SCI maintain a debt to
tangible net worth ratio of not greater than 1 to 1. Additionally, SCI is
required to maintain an adjusted net worth (as defined) of at least $1.25
billion, to maintain interest payment coverage of not less than 2 to 1, and to
maintain a fixed charge coverage ratio (as defined) of not less than 1.75 to
1. As of June 30, 1997, SCI was in compliance with all covenants contained in
the line of credit, and as of August 11, 1997, $64.1 million of borrowings
were outstanding on the line of credit.
On March 19, 1997, SCI executed a promissory note (the "Note") with
NationsBank for a short term unsecured borrowing agreement of $15.0 million
which matures October 1, 1997. The rate of interest on each
7
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
advance (a "Loan") and the maturity date of each Loan will be determined by
agreement between SCI and NationsBank at the time of such Loan. The purpose of
this Note is to provide a lower cost option for same day borrowings since
there is a three day notice period required on the revolving line of credit.
Long-Term Debt
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
8.72% Senior Unsecured Notes, issued on March 2, 1995 in
an original principal amount of $150,000,000. Interest
is payable March 1 and September 1 of each year. The
Notes are payable in eight consecutive annual
installments of $18,750,000 commencing March 1, 2002 and
mature on March 1, 2009................................. $150,000 $150,000
9.34% Senior Unsecured Notes, issued on March 2, 1995 in
an original principal amount of $50,000,000. Interest is
payable March 1 and September 1 of each year. The Notes
are payable in six consecutive annual installments
ranging from $5,000,000 to $12,500,000 commencing on
March 1, 2010 and mature on March 1, 2015............... 50,000 50,000
7.13% Senior Unsecured Notes due 1998, issued on May 16,
1995 in an original principal amount of $15,000,000, net
of original issue discount. Interest is payable May 15
and November 15 of each year............................ 14,995 14,993
7.25% Senior Unsecured Notes due 2000, issued on May 16,
1995 in an original principal amount of $17,500,000, net
of original issue discount. Interest is payable May 15
and November 15 of each year............................ 17,455 17,448
7.30% Senior Unsecured Notes due 2001, issued on May 16,
1995 in an original principal amount of $17,500,000, net
of original issue discount. Interest is payable May 15
and November 15 of each year............................ 17,441 17,435
7.88% Senior Unsecured Notes, issued on May 16, 1995 in
an original principal amount of $75,000,000, net of
original issue discount. Interest is payable May 15 and
November 15 of each year. The Notes are payable in eight
annual installments of $9,375,000 commencing May 15,
2002 and mature on May 15, 2009......................... 74,682 74,668
7.25% Senior Unsecured Notes, issued on May 17, 1996 in
an original principal amount of $50,000,000, net of
original issue discount. Interest is payable May 15 and
November 15 of each year. The Notes are payable in four
annual installments of $12,500,000 commencing May 15,
1999 and mature on May 15, 2002......................... 49,957 49,951
7.95% Senior Unsecured Notes, issued on May 17, 1996 in
an original principal amount of $100,000,000, net of
original issue discount. Interest is payable May 15 and
November 15 of each year. The Notes are payable in four
annual installments of $25,000,000 commencing May 15,
2005 and mature on May 15, 2008......................... 99,846 99,840
8.65% Senior Unsecured Notes, issued on May 17, 1996 in
an original principal amount of $50,000,000, net of
original issue discount. Interest is payable May 15 and
November 15 of each year. The Notes are payable in seven
annual installments ranging from $5,000,000 to
$12,500,000 commencing May 15, 2010 and mature on May
15, 2016................................................ 49,858 49,856
7.81% Medium-Term Notes, issued on February 4, 1997 in an
original principal amount of $100,000,000. Interest is
payable February 1 and August 1 of each year. The Notes
are payable in six annual installments ranging from
$10,000,000 to $20,000,000 commencing February 1, 2010
and mature on February 1, 2015.......................... 100,000 --
-------- --------
Total long-term debt, net of original issue discount. $624,234 $524,191
======== ========
</TABLE>
8
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All of the foregoing notes are redeemable at any time at the option of SCI,
in whole or in part, at a redemption price equal to the sum of the principal
amount of the notes being redeemed plus accrued interest thereon to the
redemption date plus an adjustment, if any, based on the yield to maturity
relative to market yields available at redemption. Such notes are governed by
the terms and provisions of an indenture (the "Indenture") between SCI and
State Street Bank and Trust Company, as trustee.
Under the terms of the Indenture, SCI can incur additional debt only if,
after giving effect to the debt being incurred and application of proceeds
therefrom, (i) the ratio of debt to total assets, as defined in the Indenture,
does not exceed 60%, (ii) the ratio of secured debt to total assets, as
defined in the Indenture, does not exceed 40%, and (iii) SCI's pro forma
interest coverage ratio, as defined in the Indenture, for the four preceding
fiscal quarters is not less than 1.5:1. In addition, SCI may not at any time
own Total Unencumbered Assets, as defined in the Indenture, equal to less than
150% of the aggregate outstanding principal amount of SCI's unsecured debt. At
June 30, 1997, SCI was in compliance with all debt covenants contained in the
Indenture.
Mortgage Notes Payable, Assessment Bonds Payable and Securitized Debt
Mortgage notes payable of $84.3 million were secured by real estate with an
aggregate undepreciated cost of $147.1 million at June 30, 1997. Assessment
bonds payable of $11.9 million were secured by real estate with an aggregate
undepreciated cost of $222.6 million at June 30, 1997. Securitized debt of
$35.0 million was collateralized by real estate with an aggregate
undepreciated cost of $68.0 million at June 30, 1997.
Approximate principal payments due on long-term debt, mortgage notes
payable, assessment bonds payable and securitized debt during each of the
years in the five-year period ending December 31, 2002, and thereafter are as
follows (in thousands):
<TABLE>
<S> <C>
Remainder of 1997............................................... $ 10,032
1998............................................................ 19,763
1999............................................................ 25,668
2000............................................................ 38,407
2001............................................................ 40,662
2002............................................................ 44,592
2003 and thereafter............................................. 577,034
--------
Total principal due............................................. 756,158
Less: original issue discount................................... (766)
--------
Total carrying value........................................ $755,392
========
</TABLE>
For the six month periods ended June 30, 1997 and 1996, interest expense on
all borrowings was $24,558,000 and $17,359,000, respectively, which was net of
capitalized interest of $8,505,000 and $6,898,000, respectively. The total
interest paid in cash was $28,470,000 and $22,999,000 for the six month
periods ended June 30, 1997 and 1996, respectively.
6. MINORITY INTEREST:
Minority interest represents limited partners' interests in five real estate
partnerships controlled by SCI (Red Mountain Joint Venture, SCI Limited
Partnership-I, SCI Limited Partnership-II, SCI Limited Partnership-III, and
SCI Limited Partnership-IV). As of June 30, 1997, a total of 5,194,258 limited
partnership units were held by minority interest limited partners in the
various real estate partnerships. Limited partners are entitled to exchange
each partnership unit for one common share of SCI.
9
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In October 1994, SCI IV, Inc., a wholly-owned subsidiary of SCI, made a
$27.5 million cash contribution to SCI Limited Partnership-IV, a Delaware
limited partnership (Partnership-IV), in exchange for a 96.36% general
partnership interest in Partnership-IV, and third party investors that were
not affiliated with SCI contributed an aggregate of $1.0 million in assets to
Partnership-IV in exchange for limited partner interests totaling 3.64% in
Partnership-IV. SCI has contributed additional funds to the partnership in
1996 and 1997 in conjunction with tax deferred exchanges of real estate which
increased SCI's interest from 96.36% to 96.62%. SCI IV, Inc., as general
partner, manages the activities of Partnership-IV and has fiduciary
responsibilities to Partnership-IV and its other partners.
Both Partnership-IV and SCI IV, Inc. are legal entities that are separate
and distinct from SCI, its affiliates and each other, and each has separate
assets, liabilities, business functions and operations. The assets owned by
Partnership-IV consist of income producing, improved real property primarily
located in Florida, Ohio and Oklahoma. The sole assets owned by SCI IV, Inc.
are its general partner advances to and interest in Partnership-IV. SCI and
its affiliates had no borrowings from SCI IV, Inc. at June 30, 1997.
Partnership-IV had $1.1 million of borrowings from SCI IV, Inc. at June 30,
1997. SCI IV, Inc. had $1.1 million of borrowings from SCI and its affiliates
at June 30, 1997. For financial reporting purposes, the assets, liabilities,
results of operations and cash flows of each of Partnership-IV and SCI IV,
Inc. are included in SCI's consolidated financial statements and the third
party investors' interests in Partnership-IV are reflected as minority
interest. Limited partners are entitled to exchange each partnership unit for
one common share of beneficial interest in SCI and are entitled to receive
preferential cumulative quarterly distributions per unit equal to the
quarterly distribution in respect of common shares. At June 30, 1997, there
were 68,612 limited partnership units outstanding in Partnership-IV.
7. SHAREHOLDERS' EQUITY:
On March 24, 1997, SCI issued 48,809 common shares in conjunction with an
acquisition of property. On February 7, 1997, SCI completed a public offering
of 4,025,000 common shares; net proceeds to SCI after underwriting discounts
and offering costs were $80.4 million.
On June 30, 1997, SCI paid a quarterly dividend of $0.5875 per cumulative
redeemable Series A preferred share, $0.4375 per cumulative convertible Series
B preferred share ("Series B Preferred Share") and $1.0675 per cumulative
redeemable Series C preferred share to preferred shareholders of record on
June 16, 1997. On July 16, 1997, SCI declared a distribution of $0.2675 per
common share, payable on August 19, 1997, to common shareholders of record as
of August 5, 1997.
8. EARNINGS PER SHARE:
Earnings per share is computed based on the weighted average number of
common shares outstanding during the period. Exercise of outstanding warrants
and options to acquire 37,764 SCI common shares would not have a material
dilutive effect on earnings per share. The conversion of the limited
partnership units (as discussed in Note 6) and the Series B Cumulative
Convertible Redeemable Preferred Shares into common shares is not assumed
since the effect would not be dilutive.
9. SUBSEQUENT EVENTS:
Proposed Merger Transaction
On August 5, 1997, the Securities and Exchange Commission declared effective
a registration statement filed by Security Capital Group Incorporated
("Security Capital") relating to warrants to purchase Class B common stock of
Security Capital and containing SCI's proxy statement relating to a proposed
merger
10
<PAGE>
SECURITY CAPITAL INDUSTRIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
transaction whereby SCI would acquire the operations and businesses of its
REIT manager and property manager valued at approximately $81.9 million in
exchange for SCI common shares. The $81.9 million value was based on a three-
year discounted analysis of net operating income prepared by Security Capital
and revised after negotiation with a special committee comprised of
independent Trustees (the "Special Committee"). The number of SCI common
shares issuable to Security Capital (3,692,023) is based on the average market
price of the common shares ($22.175) over the five-day period prior to the
August 6, 1997 record date for determining SCI's shareholders entitled to vote
on the merger. As a result of the transaction, SCI would become an internally
managed REIT and Security Capital would remain SCI's largest shareholder
(44.1% as of June 30, 1997). SCI's Board of Trustees approved the proposed
merger transaction based on the recommendation of the Special Committee. The
proposed merger transaction requires the approval of a majority of the
outstanding common shares. SCI's proxy statement was mailed to SCI's common
shareholders and a meeting of SCI's shareholders to vote on the proposed
merger is scheduled to be held on September 8, 1997. Assuming that the market
value of the common shares issued to Security Capital on the transaction date
is $81.9 million, approximately $5.7 million will be allocated to the net
tangible assets acquired and the $76.2 million difference will be accounted
for as costs incurred in acquiring the management companies from a related
party since the management companies do not qualify as "businesses" for
purposes of applying APB Opinion No. 16, "Business Combinations".
In addition, subject to and after the closing of the proposed merger and
after the closing of the rights offering described below, Security Capital
will issue warrants pro rata to holders of SCI's common shares, Series B
Preferred Shares and limited partnership units (other than Security Capital),
to acquire shares of Class B common stock of Security Capital having an
aggregate subscription price at the time of issuance of approximately $101
million. The number of shares of Class B common stock subject to the warrants
will be based on the closing price of such shares on the date the warrants are
issued to a warrant distribution agent for subsequent distribution to holders
of common shares, Series B Preferred Shares and limited partnership units. The
warrants will have a term of one year. Security Capital is issuing the
warrants to induce SCI common shareholders to vote in favor of the proposed
merger and to raise additional equity capital at a relatively low cost, in
addition to other benefits.
The Rights Offering
On August 6, 1997, SCI commenced a rights offering to subscribe for and
purchase 4,970,352 common shares of beneficial interest at a price of $21 per
share (the "Subscription Price"). SCI's common shareholders of record on
August 6, 1997 will receive a dividend of one right for each common share
held. Eleven rights entitle the holder to purchase one common share at the
Subscription Price. The rights are transferable and will expire on September
9, 1997. The offering is designed to allow SCI's shareholders (other than
Security Capital) the opportunity to maintain their relative ownership in SCI
by purchasing additional common shares at a price which is below the price at
which Security Capital is receiving common shares in the proposed merger. The
funds from the rights offering will be used to repay borrowings under SCI's
unsecured line of credit, for the acquisition and development of additional
distribution properties and for general corporate business purposes.
Debt Issuance
On July 11, 1997, SCI issued $100 million of Senior Notes due 2017 (the
"July 1997 Notes"). The July 1997 Notes bear interest at 7.625% per annum
payable semi-annually on January 1 and July 1 of each year. The principal will
mature on July 1, 2017. The average effective interest cost is 7.73%,
including all costs associated with the offering plus $235,759 combined
proceeds from a forward treasury lock agreement and a swap agreement entered
into in November 1996 in anticipation of the July debt offering. The forward
treasury lock agreement was on a notional amount of $26 million of U.S.
Treasury bonds maturing August 15, 2016 with a base price of 103.453% and
effectively fixed the 30-year Treasury bond used to price the July 1997 Notes
at a rate of 6.56%. The termination of the forward treasury lock resulted in a
gain of $174,319. The swap was on a notional amount of $33.0 million and
required SCI to pay a fixed rate of 6.61% on the notional amount in exchange
for a floating rate equal to the three-month LIBOR rate. The termination of
the swap on July 8, 1997 resulted in a gain of $61,440.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees and Shareholders of
Security Capital Industrial Trust
We have reviewed the accompanying consolidated balance sheet of Security
Capital Industrial Trust and subsidiaries as of June 30, 1997, and the related
consolidated statements of operations for the three and six months ended June
30, 1997 and 1996, and the consolidated statements of cash flows for the six
months ended June 30, 1997 and 1996. These financial statements are the
responsibility of the Trust's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Security Capital Industrial Trust
and subsidiaries as of December 31, 1996, and in our report dated February 10,
1997, we expressed an unqualified opinion on that statement. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 1996, is fairly stated in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
Arthur Andersen LLP
Chicago, Illinois
August 11, 1997
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this discussion that are not historical facts
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are based on current expectations, estimates
and projections about the industry and markets in which SCI operates,
management's beliefs, and assumptions made by management. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees
of future performance and involve certain risks, uncertainties and assumptions
("Future Factors") which are difficult to predict. Therefore, actual outcomes
and results may differ materially from what is expressed or forecasted in such
forward-looking statements. Future Factors include: (i) changes in general
economic conditions in its target markets that could adversely affect demand
for SCI's properties and the creditworthiness of SCI's customers, (ii) changes
in financial markets and interest rates that could adversely affect SCI's cost
of capital and its ability to meet its financial needs and obligations, and
(iii) those factors discussed below. These are representative of the Future
Factors that could affect the outcome of the forward-looking statements.
OVERVIEW
SCI's operating results depend primarily upon net operating income from
distribution properties, which is substantially influenced by (i) the demand
for and supply of distribution properties in SCI's target market cities, (ii)
the pace and economic returns at which SCI can acquire and develop additional
distribution properties, and (iii) the extent to which SCI can sustain
improved market performance as measured by lease rates and occupancy. SCI's
target market cities and submarkets have benefitted substantially in recent
periods from demographic trends (including population and job growth) which
influence the demand for distribution properties. SCI believes its ability to
compete is significantly enhanced relative to other companies because of the
REIT Manager's depth of management, including the SCI International Operating
System(TM), which includes acquisition and development personnel, and presence
in local markets. The REIT Manager is currently a subsidiary of Security
Capital, SCI's largest shareholder (see "--Item 1: Financial Statements,
footnote 9"). SCI expanded its operations into Mexico and Europe in the first
half of 1997 to meet the needs of its targeted national and international
customers as they expand and reconfigure their distribution facility
requirements globally. With six target market cities identified in Mexico and
15 identified in Europe, SCI believes that there are significant growth
opportunities internationally. As a result of acquisitions and developments
for the last six months of 1996 and the first six months of 1997, SCI's
rentable square footage increased by 15.2 million square feet or 21.7% to 85.3
million square feet as of June 30, 1997. As of June 30, 1997, the portfolio
was 92.29% leased. REIT management expects that SCI's ability to acquire and
develop distribution properties at favorable economic returns will continue
through the remainder of 1997. Over the longer term, SCI expects master-
planned, full service distribution park developments to constitute an
increasing percentage of SCI's growth. Additionally, SCI Development Services
Incorporated (see "--Other Real Estate Income") and SCI Logistics (see "--Item
1: Financial Statements, Footnote 4") are expected to contribute recurring
income in subsequent periods.
SCI frequently acquires properties which are underleased and develops
properties which are not fully leased at the start of construction, which
reduces SCI's overall occupancy rate below its stabilized level but provides
opportunities to increase revenues. The term "stabilized" means that capital
improvements, repositioning, new management and new marketing programs (or
development and marketing, in the case of newly developed properties) have
been completed and in effect for a sufficient period of time (but in no case
longer than 12 months for properties acquired by SCI and 12 months after shell
completion for properties developed by SCI) to achieve stabilized occupancy
(typically 93%, but ranging from 90% to 95%, depending on the submarket and
product type) at market rents. SCI has been successful in increasing
occupancies on acquired and developed properties during their initial months
of operations resulting in an occupancy rate of 94.34% for stabilized
properties owned as of June 30, 1997. The average increase in rental rates for
new and renewed leases on previously leased space during the first six months
of 1997 was 19.5%. As leases are renewed or new leases are acquired, SCI
expects most lease rates on renewals or new leases to increase in the
remainder of 1997. These factors should improve
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SCI's results of operations. Capital and credit market conditions which affect
SCI's cost of equity and debt capital may influence future growth in operating
results.
No assurance can be given that expected trends for the remainder of 1997 in
leasing rates, occupancy rates and economic returns on acquired and developed
properties will be realized. There are risks associated with SCI's development
and acquisition activities which include Future Factors such as: development
and acquisition opportunities explored by SCI may be abandoned; construction
costs of a project may exceed original estimates due to increased materials,
labor or other expenses; and construction and lease-up may not be completed on
schedule, resulting in increased debt service expense and construction costs.
Acquisition activities entail risks that investments will fail to perform in
accordance with expectations and that analysis with respect to the cost of
improvements to bring an acquired project up to standards will prove
inaccurate, as well as general investment risks associated with any new real
estate investment. Although SCI undertakes a thorough evaluation of the
physical condition of each new project before it is acquired, certain defects
or necessary repairs may not be detected until after the project is acquired,
which could increase SCI's total acquisition cost. The occurrence of any of
the events described above could adversely affect SCI's ability to achieve its
projected returns on acquisitions and projects under development and could
hinder SCI's ability to make expected distributions.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Net earnings attributable to common shares increased by $16.1 million or
67.9% to $39.8 million for the first six months of 1997 from $23.7 million for
the same period in 1996. The increase in net earnings is principally due to
increased distribution properties in operation, resulting from 1996 and 1997
acquisition and development activity. Net earnings are expected to increase in
subsequent periods due to the acquisition and development of additional
operating properties and the continued increase in the stabilized portfolio
rental rates and the prestabilized portfolio rental rates and occupancy.
Historically, the primary components of revenue and earnings growth have
been SCI's acquisition and development activity. SCI owns 976 operating
properties totaling 85.3 million square feet as of June 30, 1997 with a
historical cost of $2.5 billion.
Rental Revenues
Rental revenues for the first six months of 1997 increased by $32.1 million
or 30.7% to $136.5 million, as compared to $104.4 million for the same period
in 1996. Of this increase, $12.6 million was generated by the 111 properties
acquired in 1996, $14.9 million was generated by the 86 developments completed
in 1996, $716,000 was generated by the 24 properties acquired in 1997, and
$1.9 million was generated by the 36 developments completed in 1997. The
remaining $2.0 million increase was attributable to revenue increases in the
745 properties owned at January 1, 1996.
Other Real Estate Income
Other real estate income consists primarily of gains on disposition of
undepreciated property and fees and other income from build-to-suit customers
generated by SCI Development Services Incorporated ("SCI Development
Services"). SCI Development Services develops build-to-suit distribution space
facilities or works on a fee basis for customers whose space needs do not meet
SCI's strict investment criteria for long-term ownership. SCI Development
Services is expected to generate recurring income in subsequent periods.
Through its preferred stock ownership, SCI will realize substantially all
economic benefits of SCI Development Services' activities. The activities of
SCI Development Services are consolidated with SCI. SCI Development Services
pays federal and state taxes at the applicable corporate rate.
Income from Unconsolidated Subsidiaries
Income from unconsolidated subsidiaries relates to SCI's April 24, 1997 $2.1
million investment in the preferred stock of SCI Logistics Services
Incorporated ("SCI Logistics"), and $71.3 million of notes receivable
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from SCI Logistics and CS Integrated LLC ("CSI") (see "--Item 1: Financial
Statements, Footnote 4"). As of June 30, 1997, income from unconsolidated
subsidiaries is comprised of the following: $1,033,000 of interest income on a
note receivable from CSI, $171,000 of management fee income from CSI, $314,000
of interest income on a note receivable from SCI Logistics, and $28,000 of
dividend income from SCI Logistics.
Interest Income
Interest income for the first six months of 1997 increased $610,000 from the
same period in 1996. The increase in interest income was a result of higher
interest rates and higher cash balances in interest bearing accounts in the
first six months of 1997 compared to the same period in 1996.
Rental Expenses
Rental expenses, including property management fees paid to affiliates, net
of recoveries, decreased by $567,000 or 4.2% to $12.8 million for the first
six months of 1997 from $13.4 million for the same period in 1996. The
decrease in net rental expenses is primarily attributable to a larger
percentage increase in recoverable expenses relative to the total percentage
increase in gross rental expenses. Total expenses, including recoveries were
26.5% of rental income for the first six months of 1997 compared to 26.9% of
rental income for the same period in 1996.
Interest Expense
Interest expense increased by $7.2 million or 41.4% to $24.6 million for the
first six months of 1997 from $17.4 million for the same period in 1996. Total
interest capitalized increased by $1.6 million or 23.2% to $8.5 million for
the first six months of 1997 from $6.9 million for the same period in 1996.
The increase in interest expense was principally caused by the issuance of
$200 million in Senior Notes on May 17, 1996 and the issuance of $100 million
of Medium Term Notes--Series A issued on February 4, 1997. (See "--Liquidity
and Capital Resources"). The capitalized interest increase is attributable to
increased development activity in the first six months of 1997.
REIT Management Fee
The REIT management fee paid by SCI varies with the level of SCI's pre-REIT
management fee cash flow, as defined in the REIT management agreement, and
increased by $3.2 million (approximately 33%) during the six months ended June
30, 1997, as compared to the same period in 1996 because pre-REIT management
fee cash flow increased substantially. Due to the issuance in May 1996 of $200
million and in February 1997 of $100 million of long-term debt as more fully
described under "--Liquidity and Capital Resources," the REIT management fee
did not increase in proportion to SCI's cash flow increases, because accrued
or assumed regularly scheduled principal and interest payments, associated
with the unsecured long-term debt are deducted from the cash flow amount on
which the REIT management fee is based pursuant to the REIT management
agreement. In addition, the REIT management agreement provides that
distributions paid in respect of non-convertible preferred shares, such as the
Series A Cumulative Redeemable Preferred Shares issued in June 1995 and the
Series C Cumulative Redeemable Preferred Shares issued in November 1996, are
deducted from the cash flow amount on which the REIT management fee is based.
See "Liquidity and Capital Resources--Proposed Merger Transaction and Related
Rights Offering," for information regarding a proposal which would result in
SCI becoming an internally managed REIT.
Other Expense
Other expense increased by $261,000 or 21.8% to $1.5 million for the first
six months of 1997 from $1.2 million for the same period in 1996. Other
expenses consist of land holding costs and acquisition and build-to-suit
pursuit cost write-offs. Land holding costs were $1.0 million for the first
six months of 1997 compared to $820,000 for the same period in 1996, and
acquisition and build-to-suit pursuit cost write-offs were $445,000 for the
first six months of 1997 compared to $380,000 for the same period in 1996.
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Preferred Share Dividends
In June 1995, SCI issued $135 million of Series A Cumulative Redeemable
Preferred Shares ("Series A Preferred Shares") that are entitled to receive an
annual dividend of $2.35 per share (9.4% annual dividend rate), which amounted
to $6.4 million for the first six months of 1997 and 1996. In February 1996,
SCI issued $201.3 million of Series B Cumulative Convertible Redeemable
Preferred Shares ("Series B Preferred Shares") that are entitled to receive an
annual dividend of $1.75 per share (7% annual dividend rate) which amounted to
$7.0 million for the six months ended June 30, 1997 compared to $5.0 million
for the period from the February 21, 1996 issue date through June 30, 1996. In
November 1996, SCI issued $100 million of Series C Cumulative Redeemable
Preferred Shares ("Series C Preferred Shares") that are entitled to receive an
annual dividend of $4.27 per share (8.54% annual dividend rate) which amounted
to $4.3 million for the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased from $57.3 million in the
first six months of 1996 to approximately $84.3 million in the first six months
of 1997. Cash used in investing activities decreased from $323.9 million in the
first six months of 1996 to $267.4 million in the first six months of 1997.
Cash provided by financing activities was $187.9 million in the first six
months of 1997 compared to $253.5 million in the first six months of 1996. Cash
provided by financing activities for the first six months of 1997 consisted
primarily of $80.4 million of net proceeds from the sale of common shares,
$98.8 million of net proceeds from the February debt offering, $1.7 million
received upon settlement of hedges related to the February debt offering and
net borrowings on the line of credit of $91.5 million. Cash provided by
financing activities in the first six months of 1996 consisted primarily of
$192 million of net proceeds from the sale of Series B Preferred Shares, $199.6
million net proceeds from the May 1996 debt offering, and a $67.7 million net
repayment on the line of credit. Additionally, distributions paid to common and
preferred shareholders and to minority interests were $71.8 million in the
first six months of 1997 compared to $55.1 million in the first six months of
1996, and mortgage payments were $12.7 million in the first six months of 1997
compared to $10.4 million for the first six months of 1996.
On July 11, 1997, SCI issued $100 million of Senior Notes due 2017 (the "July
1997 Notes"). The July 1997 Notes bear interest at 7.625% per annum payable
semi-annually on January 1 and July 1 of each year. The principal will mature
on July 1, 2017. The average effective interest cost is 7.73%, including all
costs associated with the offering plus $235,759 combined proceeds from a
forward treasury lock agreement and a swap agreement entered into in November
1996 in anticipation of the July debt offering. The forward treasury lock
agreement was on a notional amount of $26 million of U.S. Treasury bonds
maturing August 15, 2026 with a base price of 103.453% and effectively fixed
the 30-year Treasury bond used to price the July 1997 Notes at a rate of 6.56%.
The termination of the forward treasury lock resulted in a gain of $174,319.
The swap was on a notional amount of $33.0 million and required SCI to pay a
fixed rate of 6.61% on the notional amount in exchange for a floating rate
equal to the three-month LIBOR rate. The termination of the swap on July 8,
1997 resulted in a gain of $61,440.
On February 7, 1997, SCI completed a public offering of 4,025,000 common
shares. Net proceeds to SCI after underwriting discounts and offering costs
were $80.4 million.
On February 4, 1997, SCI issued $100.0 million of Series A 2015 Notes under
its Medium-Term Note program established in November 1996. The Series A 2015
Notes bear interest at 7.81%, payable semi-annually on February 1 and August 1,
commencing August 1, 1997. Installments of principal will be paid annually on
each February 1, commencing February 1, 2010, in the following amounts: $20
million in 2010, $15 million in 2011, $15 million in 2012, $20 million in 2013,
$20 million in 2014 and $10 million in 2015. The Series A 2015 Notes have a
weighted average life to maturity of 15.35 years and a final maturity extending
to 2015. The average effective interest cost is 7.73%, including all costs
associated with the offering plus $1.7 million in
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proceeds received on January 31, 1997 in connection with two interest rate
protection agreements entered into in August and November 1996 in anticipation
of the debt offering. The August agreement included a notional principal
amount of $30.0 million and a reference price of 99.653 on the 30 year
Treasury bond. The November agreement included a notional principal amount of
$50.0 million and a reference price of 101 29/32 on the ten year Treasury
Note. The settlement date on both contracts was January 31, 1997.
After the July 11, 1997 $100 million debt offering described above, SCI had
$725 million of long-term unsecured notes outstanding subject to the Indenture
between SCI and State Street Bank and Trust Company, as trustee. Under the
terms of the Indenture, SCI can incur additional debt only if, after giving
effect to the debt being incurred and application of proceeds therefrom, (i)
the ratio of debt to total assets, as defined in the Indenture, does not
exceed 60%, (ii) the ratio of secured debt to total assets, as defined in the
Indenture, does not exceed 40%, and (iii) SCI's pro forma interest coverage
ratio, as defined in the Indenture, for the four preceding fiscal quarters is
not less than 1.5:1. In addition, SCI may not at any time own Total
Unencumbered Assets, as defined in the Indenture, equal to less than 150% of
the aggregate outstanding principal amount of SCI's unsecured debt. As of June
30, 1997, SCI was in compliance with all debt covenants contained in the
Indenture.
SCI has a $350.0 million unsecured revolving line of credit agreement with
NationsBank of Texas, N.A. (as agent for a bank group). Borrowings bear
interest at an annual rate equal to the lesser of either (a) the greater of
the federal funds rate plus 0.5% and the prime rate, or (b) LIBOR plus .95%,
based upon SCI's current senior debt ratings. Additionally, there is a
commitment fee ranging from .125% to .20% per annum of the unused line of
credit balance. The line is scheduled to mature in May 1999 and may be
extended annually for an additional year with the approval of NationsBank and
the other participating lenders; if not extended, at SCI's election, the
facility will either (a) convert to a three year term note, or (b) continue on
a revolving basis with the remaining one year maturity. All debt incurrences
are subject to a covenant that SCI maintain a debt to tangible net worth ratio
of not greater than 1 to 1. Additionally, SCI is required to maintain an
adjusted net worth (as defined) of at least $1.25 billion, to maintain
interest payment coverage of not less than 2 to 1, and to maintain a fixed
charge coverage ratio (as defined) of not less than 1.75 to 1. As of June 30,
1997, SCI was in compliance with all covenants contained in the line of
credit. As of August 11, 1997, $64.1 million of borrowings were outstanding on
the line of credit.
As of June 30, 1997, SCI had invested $2.5 billion for the acquisition and
development of 976 operating distribution properties. These acquisitions and
developments were financed with cash on hand, the issuance of limited
partnership units, the assumption of existing mortgage debt and borrowings
under SCI's line of credit which were repaid with the proceeds from SCI's
equity and debt offerings.
On June 30, 1997, SCI had $270.0 million of budgeted development cost for
developments in process, of which $162.0 million was unfunded. SCI expects to
finance construction, development and acquisitions primarily with cash on
hand, borrowings under its line of credit and cash from future securities
offerings. When issuing debt, SCI intends primarily to arrange fully
amortizing, fixed rate, 10-year to 20-year debt to finance additional
acquisitions and developments, or to arrange for fixed rate debt with
different maturities to create a debt maturity schedule that is similar to an
amortizing schedule.
SCI considers its liquidity and ability to generate cash from operations and
financing to be adequate and expects it to continue to be adequate to meet
SCI's acquisition, development, operating, debt services, and shareholder
distribution requirements.
SCI's current distribution policy is to pay quarterly distributions to
shareholders based upon what it considers to be a reasonable percentage of
cash flow. Because depreciation is a non-cash expense, cash flow typically
will be greater than earnings from operations and net earnings. Therefore,
quarterly distributions will consistently be higher than quarterly earnings.
Pursuant to the terms of the Series A Preferred Shares, the Series B
Preferred Shares and the Series C Preferred Shares (the "Preferred Shares"),
SCI is restricted from declaring or paying any distribution with
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respect to the common shares unless all cumulative distributions with respect
to the Preferred Shares have been paid and sufficient funds have been set
aside for distributions that have been declared for the then current
distribution period with respect to the Preferred Shares. The Preferred Share
dividends do not reduce the amount SCI has budgeted for common share
distributions, but do increase the percentage of the common share distribution
that constitutes a non-taxable return of capital.
Proposed Merger Transaction and Related Rights Offering
On August 5, 1997, the Securities and Exchange Commission declared effective
a registration statement filed by Security Capital Group Incorporated
("Security Capital") relating to warrants to purchase Class B common stock of
Security Capital and containing SCI's proxy statement relating to a proposed
merger transaction whereby SCI would acquire the operations and businesses of
its REIT manager and property manager valued at approximately $81.9 million in
exchange for SCI common shares. The $81.9 million value was based on a three-
year discounted analysis of net operating income prepared by Security Capital
and revised after negotiation with a special committee comprised of
independent Trustees (the "Special Committee"). The number of SCI common
shares issuable to Security Capital (3,692,023) is based on the average market
price of common shares ($22.175) over the five-day period prior to the August
6, 1997 record date for determining SCI's shareholders entitled to vote on the
merger. As a result of the transaction, SCI would become an internally managed
REIT and Security Capital would remain SCI's largest shareholder (44.1% as of
June 30, 1997). SCI's Board of Trustees approved the proposed merger
transaction based on the recommendation of the Special Committee. The proposed
merger transaction requires the approval of a majority of the outstanding
common shares. SCI's proxy statement was mailed to SCI's common shareholders
and a meeting of SCI's shareholders to vote on the proposed merger is
scheduled to be held on September 8, 1997. Assuming that the market value of
the common shares issued to Security Capital on the transaction date is $81.9
million, approximately $5.7 million will be allocated to the net tangible
assets acquired and the $76.2 million difference will be accounted for as
costs incurred in acquiring the management companies from a related party
since the management companies do not qualify as "businesses" for purposes of
applying APB Opinion No. 16, "Business Combinations".
In addition, subject to and after the closing of the proposed merger and
after the closing of the rights offering described below, Security Capital
will issue warrants pro rata to holders of SCI's common shares, Series B
Preferred Shares and limited partnership units (other than Security Capital),
to acquire shares of Class B common stock of Security Capital having an
aggregate subscription price at the time of issuance of approximately $101
million. The number of shares of Class B common stock subject to the warrants
will be based on the closing price of such shares on the date the warrants are
issued to a warrant distribution agent for subsequent distribution to holders
of common shares, Series B Preferred Shares and limited partnership units. The
warrants will have a term of one year. Security Capital is issuing the
warrants to induce SCI common shareholders to vote in favor of the proposed
merger and to raise additional equity capital at a relatively low cost, in
addition to other benefits.
On August 6, 1997, SCI commenced a rights offering to subscribe for and
purchase 4,970,352 common shares of beneficial interest at a price of $21 per
share (the "Subscription Price"). SCI's common shareholders of record on
August 6, 1997 will receive a dividend of one right for each common share
held. Eleven rights entitle the holder to purchase one common share at the
Subscription Price. The rights are transferable and will expire on September
9, 1997. The offering is designed to allow SCI's shareholders (other than
Security Capital) the opportunity to maintain their relative ownership in SCI
by purchasing additional common shares at a price which is below the price at
which Security Capital is receiving common shares in the proposed merger. The
funds from the rights offering will be used to repay borrowings under SCI's
unsecured line of credit, for the acquisition and development of additional
distribution properties and for general corporate business purposes.
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Funds from Operations
Funds from operations attributable to common shares increased $22.3 million
or 42.4% from $52.6 million for the first six months of 1996 to $74.9 million
for the same period in 1997. Funds from operations represent SCI's net earnings
(computed in accordance with generally accepted accounting principles ("GAAP"))
before minority interest and before gains/losses on disposition of depreciated
property, plus depreciation and amortization. SCI believes that funds from
operations is helpful to a reader as a measure of the performance of an equity
REIT because along with cash flows from operating activities, financing
activities, and investing activities, it provides a reader with an indication
of the ability of SCI to incur and service debt, to make capital expenditures
and to fund other cash needs. Funds from operations should not be considered as
an alternative to net earnings or any other GAAP measurement of performance as
an indicator of SCI's operating performance or as an alternative to cash flows
from operating, investing or financing activities as a measure of liquidity.
The funds from operations measure presented by SCI will not be comparable to
similarly titled measures of other REITs which do not compute funds from
operations in a manner consistent with SCI.
STATEMENT OF FUNDS FROM OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------
1997 1996
------- -------
<S> <C> <C>
Net earnings attributable to common shares..................... $39,786 $23,681
Add (deduct):
Depreciation and amortization.............................. 37,024 27,215
Minority interest.......................................... 1,835 1,640
(Gain)/loss on disposition of depreciated real estate...... (3,773) 29
------- -------
Funds from operations attributable to common shares............ $74,872 $52,565
======= =======
</TABLE>
19
<PAGE>
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the annual meeting of shareholders held on June 24, 1997, shareholders
elected the following Trustees to office: 83,674,383 shares were voted for the
election of Irving F. Lyons, III as a Class I Trustee, 277,067 shares withheld;
83,673,436 shares were voted for the election of William G. Myers as a Class I
Trustee, 278,014 shares withheld; and 83,764,874 shares were voted for the
election of John E. Robson, Class I Trustee, 186,576 shares withheld. Trustees
continuing in office are K. Dane Brooksher, Stephen L. Feinberg, Donald P.
Jacobs and Thomas G. Wattles.
Also, at the annual meeting, 77,845,711 outstanding common shares voted to
approve the amendment to the Trust's Amended and Restated Declaration of Trust
to increase the authorized capitalization from 150 million to 180 million
shares, 6,105,739 shares withheld. There were 13,804,068 shares absent at the
annual meeting of shareholders.
ITEM 5. OTHER INFORMATION
On October 18, 1996, SCI's shelf registration statement was declared
effective by the Securities and Exchange Commission ("SEC") regarding the
offering from time to time of $678 million in one or more series of its debt
securities, preferred shares of beneficial interest and common shares of
beneficial interest. After giving effect to the rights offering (see "--Item 1.
Financial Statements, Footnote 9"), assuming such offering is fully subscribed,
approximately $189.1 million in securities will be available to be issued under
SCI's shelf registration statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBITS DOCUMENT DESCRIPTION PAGE NUMBER
-------- -------------------- -----------
<C> <S> <C>
12.1 Statement re: Computation of Ratio of Earnings to Fixed
Charges
12.2 Statement re: Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred Share Dividends
15 Letter from Arthur Andersen LLP regarding unaudited
financial information
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
None
20
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Security Capital Industrial Trust
/s/ M. Gordon Keiser
-------------------------------------
M. Gordon Keiser,
Senior Vice President
(Principal Financial Officer)
/s/ Edward F. Long
-------------------------------------
Edward F. Long,
Vice President and Controller
(Principal Accounting Officer)
Date: August 13, 1997
21
<PAGE>
EXHIBIT 12.1
SECURITY CAPITAL INDUSTRIAL TRUST
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------- -------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- -------- ------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Earnings (Loss) from
Operations............. $53,672 $35,078 $ 79,384 $47,660 $25,066 $4,412 $(187)
Add:
Interest Expense....... 24,558 17,359 38,819 32,005 7,568 321 504
------- ------- -------- ------- ------- ------ -----
Earnings as Adjusted.... $78,230 $52,437 $118,203 $79,665 $32,634 $4,733 $ 317
======= ======= ======== ======= ======= ====== =====
Fixed Charges:
Interest Expense....... $24,558 $17,359 $ 38,819 $32,005 $ 7,568 $ 321 $ 504
Capitalized Interest... 8,505 6,898 16,138 8,599 2,208 98 124
------- ------- -------- ------- ------- ------ -----
Total Fixed Charges.. $33,063 $24,257 $ 54,957 $40,604 $ 9,776 $ 419 $ 628
======= ======= ======== ======= ======= ====== =====
Ratio of Earnings (Loss)
to Fixed Charges....... 2.4 2.2 2.2 2.0 3.3 11.3 (a)
======= ======= ======== ======= ======= ====== =====
</TABLE>
- --------
(a) While SCI was researching markets and assembling its initial assets,
earnings were insufficient to cover fixed charges for the year ended
December 31, 1992 by $311,000.
<PAGE>
EXHIBIT 12.2
SECURITY CAPITAL INDUSTRIAL TRUST
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED SHARE DIVIDENDS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------- -------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- -------- ------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Earnings (Loss) from
Operations............. $53,672 $35,078 $ 79,384 $47,660 $25,066 $4,412 $(187)
Add:
Interest Expense....... 24,558 17,359 38,819 32,005 7,568 321 504
------- ------- -------- ------- ------- ------ -----
Earnings as Adjusted.... $78,230 $52,437 $118,203 $79,665 $32,634 $4,733 $ 317
======= ======= ======== ======= ======= ====== =====
Combined Fixed Charges
and
Preferred Share
Dividends:
Interest Expense....... $24,558 $17,359 $ 38,819 $32,005 $ 7,568 $ 321 $ 504
Capitalized Interest... 8,505 6,898 16,138 8,599 2,208 98 124
------- ------- -------- ------- ------- ------ -----
Total Fixed Charges.. 33,063 24,257 54,957 40,604 9,776 419 628
Preferred Share
Dividends (a)......... 17,659 11,368 25,895 6,698 -- -- --
------- ------- -------- ------- ------- ------ -----
Combined Fixed Charges
and Preferred Share
Dividends.............. $50,722 $35,625 $ 80,852 $47,302 $ 9,776 $ 419 $ 628
------- ------- -------- ------- ------- ------ -----
Ratio of Earnings (Loss)
to Combined Fixed
Charges and Preferred
Share Dividends........ 1.5 1.5 1.5 1.7 3.3 11.3 (b)
======= ======= ======== ======= ======= ====== =====
</TABLE>
- --------
(a) SCI had no preferred shares prior to 1995.
(b) While SCI was researching markets and assembling its initial assets,
earnings were insufficient to cover combined fixed charges and preferred
dividends for the year ended December 31, 1992 by $311,000.
<PAGE>
EXHIBIT 15
August 11, 1997
Board of Trustees and Shareholders
Security Capital Industrial Trust:
We are aware that Security Capital Industrial Trust has incorporated by
reference in its Registration Statement Nos. 33-91366, 33-92490, 333-4961,
333-13909, 333-26597, 333-31421 and 333-26259 its Form 10-Q for the quarter
ended June 30, 1997, which includes our report dated August 11, 1997 covering
the unaudited interim financial information contained therein. Pursuant to
Regulation C of the Securities Act of 1933 (the "Act"), that report is not
considered a part of the registration statements prepared or certified by our
firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen LLP
- ---------------------------
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
Form 10-Q for the six months ended June 30, 1997, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 9,532
<SECURITIES> 0
<RECEIVABLES> 84,402
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,702,070
<DEPRECIATION> 139,236
<TOTAL-ASSETS> 2,714,263
<CURRENT-LIABILITIES> 0
<BONDS> 755,392
0
436,250
<COMMON> 978
<OTHER-SE> 1,257,356
<TOTAL-LIABILITY-AND-EQUITY> 2,714,263
<SALES> 136,543
<TOTAL-REVENUES> 144,896
<CGS> 0
<TOTAL-COSTS> 12,825
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,558
<INCOME-PRETAX> 39,786
<INCOME-TAX> 0
<INCOME-CONTINUING> 39,786
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,786
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0
</TABLE>
