<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[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_
[ ] 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 1-12514_
KEYSTONE PROPERTY TRUST
-------------------------------------------------------------------
(Exact name of registrant as specified in its declaration of trust)
MARYLAND 84-1246585
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
200 FOUR FALLS CORPORATE CENTER, SUITE 208, WEST CONSHOHOCKEN, PA 19428
-----------------------------------------------------------------------
(Address of principal executive offices)
(484) 530-1800
-------------------------------
(Registrant's telephone number)
--------------------------------------------------------------------------------
(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 ___
A total of 9,323,312 Common Shares of the registrant's common equity were
outstanding as of November 13, 2000.
-1-
<PAGE>
KEYSTONE PROPERTY TRUST
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations (unaudited)
for the three and nine months ended September 30, 2000 and
1999 4
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters To a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
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<PAGE>
ITEM 1.
PART I - FINANCIAL INFORMATION
KEYSTONE PROPERTY TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND UNIT DATA)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
INVESTMENTS IN REAL ESTATE:
Land and land improvements ......................................... $ 127,447 $ 106,279
Buildings and improvements ......................................... 686,261 574,466
Assets held for sale, net of valuation reserve of $11,300 in 2000 .. 140,437 160,361
Development and construction-in-progress ........................... 16,561 17,770
Investment in direct financing lease ............................... 1,275 1,460
--------- ---------
971,981 860,336
Less - Accumulated depreciation .................................... (30,240) (16,559)
Accumulated depreciation - assets held for sale ............. (6,252) (5,837)
--------- ---------
Total accumulated depreciation .......................... (36,492) (22,396)
--------- ---------
Total investment in real estate, net .................... 935,489 837,940
--------- ---------
CASH AND CASH EQUIVALENTS ............................................. 1,930 4,144
RESTRICTED CASH AND CASH ESCROWS ...................................... 6,273 3,470
ACCOUNTS RECEIVABLE, including straight-line rent receivable of $5,829
and $3,029 in 2000 and 1999, respectively, net of $250 allowance for
doubtful accounts in 2000 .......................................... 8,483 5,966
DEFERRED FINANCING COSTS, net of accumulated amortization of $3,412 and
$2,078 in 2000 and 1999, respectively .............................. 6,350 6,522
DEFERRED LEASING COSTS, net of accumulated amortization of $1,764 and
$776 in 2000 and 1999, respectively ................................ 7,205 3,672
INVESTMENT IN KEYSTONE REALTY SERVICES, INC., at equity ............... 5,345 4,423
OTHER ASSETS .......................................................... 7,623 8,939
--------- ---------
Total assets ............................................ $ 978,698 $ 875,076
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgage notes payable and revolving credit facility, including
unamortized premium on assumed indebtedness of $3,008
and $3,691 in 2000 and 1999, respectively ....................... $ 633,652 $ 522,112
Accounts payable ................................................... 1,102 2,551
Dividends and distributions payable ................................ 2,299 1,999
Accrued interest payable ........................................... 3,870 2,698
Accrued expenses and other liabilities ............................. 8,365 11,347
Deferred rent revenue .............................................. 3,245 2,708
--------- ---------
Total liabilities ............................................. 652,533 543,415
--------- ---------
MINORITY INTEREST, 7,675,649 and 7,326,853 units outstanding in 2000
and 1999, respectively ............................................. 90,612 91,310
CONVERTIBLE PREFERRED UNITS ........................................... 80,295 54,621
COMMITMENTS AND CONTINGENCIES ......................................... -- --
SHAREHOLDERS' EQUITY:
Convertible Preferred Stock, Series A; $.001 par value; 800,000
shares authorized, issued and outstanding, liquidation
preference of $20,000 ............................................. 1 1
Convertible Preferred Stock, Series B; $.001 par value; 803,871
shares authorized, issued and outstanding; liquidation
preference of $20,097 ............................................. 1 1
Convertible Preferred Stock, Series C; $.001 par value; 800,000
shares authorized, issued and outstanding; liquidation
preference of $20,000 ............................................. 1 1
Common Shares, $.001 par value; 65,000,000 authorized; 9,323,312
and 8,906,943 shares issued and outstanding in 2000 and 1999,
respectively ...................................................... 9 9
Warrants .......................................................... -- 125
Additional paid-in capital ........................................ 169,279 185,079
Loans to executive officers to purchase Common Shares ............. (4,139) (1,536)
Deferred compensation ............................................. (71) (282)
Cumulative net income ............................................. 19,920 20,620
Cumulative distributions .......................................... (29,743) (18,288)
--------- ---------
Total shareholders' equity .................................... 155,258 185,730
--------- ---------
Total liabilities and shareholders' equity .................... $ 978,698 $ 875,076
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
KEYSTONE PROPERTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except for 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>
REVENUE:
Rents .................................................................... $ 28,299 $ 18,305 $ 80,041 $ 51,281
Reimbursement revenue and other income ................................... 3,687 2,149 10,730 5,655
----------- ----------- ----------- -----------
Total revenue ........................................................ 31,986 20,454 90,771 56,936
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Property operating expenses .............................................. 5,566 3,584 15,723 10,084
Management fees paid to affiliate ........................................ 679 789 2,821 1,870
General and administrative ............................................... 1,129 1,095 3,219 2,706
Depreciation and amortization ............................................ 4,887 3,835 15,455 10,714
Interest expense ......................................................... 12,442 7,396 34,516 20,544
Provision for valuation .................................................. 11,300 -- 11,300 --
----------- ----------- ----------- -----------
Total operating expenses ............................................. 36,003 16,699 83,034 45,918
----------- ----------- ----------- -----------
(Loss) income before equity in (losses) income from equity method
investments, (loss) gains on sales of assets, distributions to preferred
unitholders, minority interest of unitholders in Operating Partnership,
and net income allocated to preferred shareholders ....................... (4,017) 3,755 7,737 11,018
Equity in (losses) income from equity method investments ................... (248) 143 416 (347)
(Losses) gains on sales of assets .......................................... (252) -- 372 1,284
----------- ----------- ----------- -----------
(Loss) income before distributions to preferred unitholders, minority
interest of unitholders in Operating Partnership, and net income allocated
to preferred shareholders ................................................ (4,517) 3,898 8,525 11,955
Distributions to preferred unitholders ..................................... (1,924) (406) (4,943) (743)
----------- ----------- ----------- -----------
(Loss) income before minority interest of unitholders in Operating
Partnership, and net income allocated to preferred shareholders .......... (6,441) 3,492 3,582 11,212
Minority interest of unitholders in Operating Partnership .................. 3,542 (1,420) 664 (4,620)
----------- ----------- ----------- -----------
NET (LOSS) INCOME BEFORE NET INCOME ALLOCATED TO
PREFERRED SHAREHOLDERS ................................................... (2,899) 2,072 4,246 6,592
NET INCOME ALLOCATED TO PREFERRED SHAREHOLDERS ............................. (1,407) (515) (4,946) (1,415)
----------- ----------- ----------- -----------
NET (LOSS) INCOME ALLOCATED TO COMMON SHAREHOLDERS ......................... $ (4,306) $ 1,557 $ (700) $ 5,177
=========== =========== =========== ===========
BASIC (LOSS) EARNINGS PER COMMON SHARE ..................................... $ (.46) $ .21 $ (.08) $ .69
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES - BASIC ..................................... 9,322,119 7,505,764 9,211,700 7,457,079
=========== =========== =========== ===========
DILUTED (LOSS) EARNINGS PER COMMON SHARE ................................... $ (.46) $ .20 $ (.08) $ .67
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES - DILUTED ................................... 17,003,664 14,741,868 16,864,468 14,632,122
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
KEYSTONE PROPERTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income allocated to common shareholders ............ $ (700) $ 5,177
Adjustments to reconcile net (loss) income allocated to common
shareholders to net cash provided by operating activities:
Depreciation and amortization ............................. 16,819 11,785
Amortization of debt premiums ............................. (504) (530)
Amortization of deferred compensation costs and loan
forgiveness on executive stock loans .................... 350 187
Gain on sales of assets ................................... (372) (1,284)
Bad debt provision ........................................ 250 --
Provision for asset revaluation ........................... 11,300 --
Straight-line rental income ............................... (2,846) (1,093)
Decrease in investment in direct financing lease .......... 185 186
Equity in losses (income) from equity method investments .. (416) 347
Income allocated to preferred shareholders and preferred
unitholders ............................................. 9,889 2,158
Minority interest ......................................... (664) 4,620
Cash provided by (used in)
Restricted cash ......................................... (2,803) (825)
Accounts receivable ..................................... 33 (1,534)
Other assets ............................................ 1,316 (1,386)
Accounts payable, accrued expenses and other liabilities (3,386) 22
Deferred rent revenue ................................... 537 1,144
--------- ---------
Net cash provided by operating activities ............. $ 28,988 $ 18,974
--------- ---------
INVESTING ACTIVITIES:
Properties acquired ........................................... $ (78,685) $(142,740)
(Advances to) repayment from Keystone Realty Services, Inc. ... (506) 80
Capital expenditures and tenant improvements .................. (4,588) (2,288)
Development and construction in progress expenditures ......... (9,824) (823)
Payment of leasing commissions ................................ (4,505) (1,707)
Proceeds from sales of assets, net ............................ 21,618 9,538
--------- ---------
Net cash used in investing activities ................. $ (76,490) $(137,940)
--------- ---------
FINANCING ACTIVITIES:
Issuances of Common Shares for stock options exercised ........ $ -- $ 22
Issuances of Common Shares, net of issuance costs ............. 1,487 1,500
Issuances of Series C Convertible Preferred Stock ............. -- 19,175
Dividends paid on Common Shares ............................... (11,455) (6,131)
Distributions paid on Convertible Preferred Stock and
Convertible Preferred Units ................................. (9,589) (1,642)
Distributions paid on OP Units ................................ (6,812) (5,674)
Proceeds from mortgage notes payable .......................... 109,951 98,823
Repayment of mortgage notes payable ........................... (8,431) (2,264)
Redemption of Redeemable Preferred Stock ...................... (19,904) --
Payments of deferred financing costs .......................... (1,162) (1,623)
Net (repayments) borrowings under the Credit Facility ......... (8,797) 16,349
--------- ---------
Net cash provided by financing activities ............. $ 45,288 $ 118,535
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS ........................... (2,214) (431)
CASH AND CASH EQUIVALENTS, beginning of period .................. 4,144 1,003
--------- ---------
CASH AND CASH EQUIVALENTS, end of period ........................ $ 1,930 $ 572
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ................................ $ 34,058 $ 19,277
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
Keystone Property Trust is a self-administered and self-managed real estate
investment trust ("REIT") which was organized as a Maryland corporation in 1994
under the name of American Real Estate Investment Corporation (the
"Predecessor"). On October 13, 1999, the Company reorganized as a Maryland REIT
through the merger of the Predecessor with and into Keystone Property Trust (the
"Company"). Simultaneously, the name of its operating partnership, American Real
Estate Investment, L.P., was changed to Keystone Operating Partnership, L.P.
(the "Operating Partnership"), and the name of its management company, American
Real Estate Management, Inc. was changed to Keystone Realty Services, Inc. (the
"Management Company"). The Company also changed its ticker symbol on the
American Stock Exchange from "REA" to "KTR" effective October 13, 1999.
As of November 1, 2000, the Company owns 132 industrial and office
properties aggregating approximately 20.8 million square feet, and an investment
in a direct financing lease (the "Properties"). The Properties are located in
Central Pennsylvania, New York State, Northern and Central New Jersey, Ohio,
Indianapolis, Indiana and Greenville, South Carolina and have an overall
occupancy of 97.7% as of September 30, 2000. The Company conducts all of its
service operations, including leasing, property management and other services
through the Management Company. The Operating Partnership owns 100% of the
preferred stock of the Management Company, which entitles the Operating
Partnership to receive 95% of the amounts paid as dividends by the Management
Company.
2. GENERAL:
BASIS OF PRESENTATION
The financial statements have been prepared by the Company without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
Accordingly, these financial statements should be read in conjunction with the
Company's consolidated financial statements and footnotes thereto included in
the Annual Report on Form 10-K for the year ended December 31, 1999. In the
opinion of management, all adjustments consisting solely of normal recurring
adjustments necessary to fairly present the financial position of the Company as
of September 30, 2000 and 1999, and the results of its operations for the three
and nine month periods ended September 30, 2000 and 1999, and its cash flows for
the nine month periods ended September 30, 2000 and 1999 have been included. The
results of operations for such interim periods are not necessarily indicative of
the results for a full year.
PRINCIPLES OF CONSOLIDATION
The Company is the sole general partner of the Operating Partnership with
an ownership interest of approximately 52% at September 30, 2000. The Company is
also the sole stockholder of several other subsidiary entities. The accompanying
consolidated financial statements include the account balances of the Company,
the Operating Partnership and both the Company's and the Operating Partnership's
wholly owned subsidiaries and their operations for the three and nine month
periods ended September 30, 2000 and 1999, respectively, on a consolidated
basis. All significant intercompany accounts and transactions have been
eliminated in consolidation.
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<PAGE>
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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 revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
ASSETS HELD FOR SALE
The Company accounts for properties as assets held for sale when a
commitment has been made to a formal plan of disposition. The Company reports
its assets to be disposed of at the lower of carrying value or fair value less
the cost to sell the related asset. At September 30, 2000, the Company has
classified approximately $140.4 million of real estate, net of a reserve for
asset valuation of $11.3 million (see Note 6), as assets held for sale. In
accordance with Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
the Company has suspended depreciation charges on assets held for sale as of the
date disposition plans were adopted.
CAPITALIZATION POLICY
The Company capitalizes all direct and indirect costs, including interest
costs and payroll costs, associated with real estate assets under construction
and land under development by the Company and real estate assets under
construction and land under development, which are held in joint ventures.
During the nine month periods ended September 30, 2000, and 1999 the Company has
capitalized approximately $1.6 million and $1.0 million respectively, of
interest costs related to construction and development in progress for some of
these assets.
EQUITY METHOD INVESTMENTS
The equity method of accounting is used to account for the Company's
non-controlling interest in 100% of the non-voting preferred stock of the
Management Company and the Company's 50% non-controlling interest in a joint
venture to develop 457 acres of land in Indianapolis, Indiana. Additionally, in
June 2000, the Company acquired a 50% interest in a joint venture, 3 Points
Associates, L.L.C., which was formed to develop and own an 800,000 square foot
distribution facility in Indianapolis, Indiana which is currently under
construction. At September 30, 2000, the Company has investments aggregating
approximately $2.9 million in these joint ventures which are included in other
assets in the accompanying balance sheet.
IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Statement of Financial Accounting Standard No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" ("SFAS No.
138") is effective for fiscal years beginning after June 15, 2000. SFAS No.
138, which amended Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activity" expands the
definition and the accounting and reporting of derivatives and requires every
derivative to be recorded on the balance sheet as either an asset or
liability measured at its fair value. It requires that companies must
formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 138 requires that changes in the fair
value of derivatives be recognized in the applicable financial reporting
period in earnings unless
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<PAGE>
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
specific hedge criteria are met. The Company is currently in the process of
identifying all of its investments in derivative products and is planning to
adopt SFAS No. 138 beginning January 1, 2001. In management's opinion, the
adoption of SFAS No. 138 and SFAS No. 133, as of January 1, 2001 will not
have a material impact on the consolidate statements of income or
comprehensive income.
EARNINGS PER SHARE
The Company reports Earnings per Share ("EPS") in accordance with Statement
of Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS No. 128"),
which established simplified standards for computing and presenting EPS and
supercedes the standards in APB Opinion No. 15, making them more comparable to
international EPS standards. It requires the dual presentation of basic and
diluted EPS on the income statement and requires a reconciliation of the
numerator and denominator of basic EPS to diluted EPS.
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the three and nine-month periods ended
September 30, 2000 and 1999 (amounts in thousands, except share and per share
data):
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2000 1999
------------------------- -------------------------
BASIC DILUTED BASIC DILUTED
----- ------- ----- -------
<S> <C> <C> <C> <C>
Net (loss) income $ (4,306) $ (4,306) $ 1,557 $ 1,557
Add: Minority interest allocation --- (3,542) --- 1,420
---------- ----------- ---------- -----------
$ (4,306) $ (7,848) $ 1,557 $ 2,977
========== =========== ========== ===========
Weighted average number of shares outstanding 9,322,119 9,322,119 7,505,764 7,505,764
Stock equivalents (1)(2):
Options and warrants --- 3,885 --- 203,055
Convertible OP Units --- 7,677,660 --- 7,033,049
---------- ----------- ---------- -----------
9,322,119 17,003,664 7,505,764 14,741,868
========== =========== ========== ===========
EARNINGS PER SHARE $ (.46) $ (.46) $ .21 $ .20
========== =========== ========== ===========
<CAPTION>
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000 1999
------------------------- -------------------------
BASIC DILUTED BASIC DILUTED
----- ------- ----- -------
<S> <C> <C> <C> <C>
Net (loss) income $ (700) $ (700) $ 5,177 $ 5,177
Add: Minority interest allocation --- (664) --- 4,620
---------- ----------- ---------- -----------
$ (700) $ (1,364) $ 5,177 $ 9,797
========== =========== ========== ===========
Weighted average number of shares outstanding 9,211,700 9,211,700 7,457,079 7,457,079
Stock equivalents (1)(2):
Options and warrants --- 5,347 --- 164,981
Convertible OP Units --- 7,647,421 --- 7,010,062
---------- ----------- ---------- -----------
9,211,700 16,864,468 7,457,079 14,632,122
========== =========== ========== ===========
EARNINGS PER SHARE $ (.08) $ (.08) $ .69 $ .67
========== =========== ========== ===========
</TABLE>
(1) Excludes Convertible Preferred Stock and Convertible Preferred Units as
these instruments were anti-dilutive at September 30, 2000 and 1999.
(2) Computed in accordance with the treasury stock method.
-8-
<PAGE>
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
RECLASSIFICATIONS
Certain amounts in the September 30, 1999 financial statements have been
reclassified in order to conform with the September 30, 2000 presentation.
3. ACQUISITIONS AND DISPOSITIONS OF INVESTMENTS IN REAL ESTATE
2000 TRANSACTIONS
On July 26, 2000, the Company announced that it has entered into an
agreement to sell a portfolio in New Jersey for approximately $82.1 million.
This portfolio is comprised of nine office and three office/flex properties
which total 918,807 square feet and are located in Fair Lawn, Oakland, and
Wayne, New Jersey. The Company expects that this transaction will be closed in
the fourth quarter of 2000.
On July 19, 2000, the Company sold a 90,000 square foot warehouse located
at 1305 Goshen Parkway in West Chester, Pennsylvania for approximately
$4,700,000. This sale resulted in a loss of approximately $168,000.
On May 5, 2000, the Company acquired a portfolio of five warehouse and
distribution facilities in New Jersey which aggregate approximately 1.8 million
square feet and six acres of land adjacent to one of the facilities for
approximately $91 million as part of the second phase of the Reckson Morris
Industrial Trust ("RMIT") transaction. These buildings are currently 100%
occupied under leases which expire between 2001 and 2014. This acquisition was
funded by $59.0 million of mortgage debt with a 5.5 year term and an interest
rate of 8.12%, $25.7 million of Convertible Preferred Units ("Convertible
Preferred Units") which require a guaranteed payment at an annual rate of 9.75%
and are convertible to Common Shares at $16.00 per share, and the remaining
consideration was funded by a secured term loan.
In May 2000, the Company substantially completed construction of an
80,000 square foot office building in Allentown, Pennsylvania, of which
approximately 66,000 square feet will be occupied by Aetna, Inc. The
remaining square footage is leased to tenants who occupied this space in the
fourth quarter of this year.
On May 2, 2000, the Company sold distribution facilities aggregating
148,000 square feet located in New Jersey for approximately $8.1 million. This
sale resulted in a loss of approximately $300,000.
In April 2000, the Company acquired a 214,600 square foot industrial
facility in East Brunswick, New Jersey, which was also part of the second phase
of the RMIT transaction, for $8.5 million in cash, including closing costs, and
simultaneously sold it for $9.2 million which resulted in a gain of
approximately $700,000.
In January 2000, the Company acquired its 50% joint venture partner's
ownership interest in a limited partnership which constructed a 500,000 square
foot industrial building in Indianapolis, Indiana, for $8.9 million. The
consideration for this acquisition was $5.9 million of units of limited
partnership interest ("OP Units") (valued at $16.36 per unit) in the Operating
Partnership and $3.0 million in cash.
In January 2000, the Company sold a 15,000 square foot industrial building
located at 245 Nicholas Avenue in South Plainfield, New Jersey for net proceeds
of approximately $920,000. This sale resulted in a gain of approximately
$140,000.
-9-
<PAGE>
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1999 TRANSACTIONS
During 1999, the Company acquired 35 properties (34 industrial properties
and one office property) and 112 acres of land, including the RMIT acquisition
discussed in detail below, for an aggregate purchase price of approximately
$322.1 million. These properties contained an aggregate of approximately 6.8
million square feet consisting of 6.5 million square feet of industrial space
and 290,000 square feet of office space. Consideration for these acquisitions
consisted of cash of approximately $198.5 million, future cash payments of $5.2
million, $27.6 million of debt assumed (including debt premiums of $850,000),
$40.0 million of Convertible Preferred Stock with a conversion price of $16.00,
$47.1 million of Convertible Preferred Units issued with conversion prices
ranging from $16.00 to $16.50 per unit, $2.2 million OP Units in the Operating
Partnership issued at prices ranging from $15.26 to $17.50 per unit, and the
issuance of $1.5 million of Common Shares at a price of $14.44 per share. The
Convertible Preferred Stock and OP Units issued as part of these transactions
require a quarterly dividend or guaranteed payment at an annual rate ranging
from 9% to 9.75%.
In August 1999, the Company agreed, as part of a phased transaction, to
acquire certain industrial properties from Reckson Morris Operating
Partnership, L.P. ("RMOP") and RMIT. The first phase of this transaction was
consummated on September 27, 1999 and involved the acquisition of RMOP from
RMIT. The second phase of this transaction closed in the second quarter of
2000. Additionally, as part of the RMIT transaction, the Company acquired
options to purchase 259 acres of land in New Jersey on which the Company can
develop 2.8 million square feet of industrial properties.
In March 1999, the Company sold Urban Farms Shopping Center in Franklin
Lakes, New Jersey for $10.0 million, which resulted in a gain of approximately
$1.3 million. The net proceeds from this asset sale were reinvested in the
acquisition of an industrial property in 1999.
-10-
<PAGE>
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
PRO FORMA OPERATING RESULTS
Assuming the completion of acquisitions and dispositions which occurred in
the nine months ended September 30, 2000 and the fiscal year 1999, and the
completion of private placement offerings in 2000 and 1999, as of January 1,
1999, pro forma operating results are presented as follows (amounts in thousands
except for share data):
<TABLE>
<CAPTION>
FOR NINE MONTHS ENDED FOR YEAR ENDED
SEPTEMBER 30, 2000 DECEMBER 31, 1999
--------------------- -----------------
<S> <C> <C>
TOTAL REVENUE $ 91,372 $ 111,300
OPERATING INCOME (1) 7,903 10,091
INCOME (LOSS) FROM EQUITY METHOD INVESTMENTS 416 (62)
MINORITY INTEREST 611 1,553
PREFERRED DIVIDENDS (9,672) (13,468)
--------- ---------
NET (LOSS) INCOME ALLOCATED TO COMMON SHAREHOLDERS $ (742) $ (1,886)
========= =========
(LOSS) EARNINGS PER SHARE
BASIC $ (.08) $ (.20)
====== ======
DILUTED $ (.08) $ (.20)
====== ======
</TABLE>
(1) Net of $15,621 and $22,188 in depreciation expense for the nine month
period ended September 30, 2000 and the year end December 31, 1999,
respectively. Additionally, operating income is shown net of an $11,300
provision for asset valuation for both periods.
The pro forma operating results combine the Company's historical operating
results with the incremental rental income and operating expenses of the
properties acquired in 2000 and 1999, including adjustments for depreciation
(based upon the acquisition prices associated with the property acquisitions),
and interest, costs assuming the borrowings to finance the property acquisitions
had occurred at the beginning of the period.
These pro forma amounts are not necessarily indicative of what the actual
results of the Company would have been assuming the above property acquisitions
and dispositions and other transactions had been consummated on January 1, 1999,
nor do they purport to represent the future results of the Company.
4. INDEBTEDNESS
VARIABLE RATE INDEBTEDNESS
On April 30, 1998 the Company obtained a three year $150 million senior
secured revolving credit facility ("Credit Facility"). Borrowings under the
Credit Facility enable the Company to fund acquisitions and development of real
estate, as well as provide working capital and funds for capital improvements.
On June 30, 1999, the terms of the Credit Facility were amended and restated. As
a result, the maturity of the Credit Facility was extended to April 29, 2002 and
several financial covenants were modified. The Eurodollar interest rate was
modified to a sliding scale based on the Company's leverage. The scale ranges
from LIBOR + 1.625% to LIBOR + 2.25%. Based on the Company's leverage, the rate
currently in effect is LIBOR + 2.25% (8.88% at September 30, 2000). In addition,
a fee ranging from .25% to .375% per annum, depending on the level of
outstanding borrowings, on the unused amount of the Credit Facility is payable
quarterly. The Company is also able to elect to increase the amount available
under the Credit Facility to $250 million, subject to the syndication of the
additional $100 million.
-11-
<PAGE>
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At September 30, 2000, the Company had $133.2 million outstanding related
to the Credit Facility. The Credit Facility is recourse to the Company and the
Operating Partnership and is secured by cross-collateralized and cross-defaulted
first mortgage loans on 55 properties. The weighted average balance outstanding
and weighted average interest rate for the nine months ended September 30, 2000
and 1999 for borrowings under the Credit Facility were $137.5 million and $134.3
million and 8.57% and 6.86%, respectively. The Credit Facility requires the
Company to meet certain financial covenants on a quarterly, annual and ongoing
basis. The Company is in compliance with these debt covenants at September 30,
2000.
In May 2000, the Company obtained a three year recourse term facility which
allows the Company to borrow up to $27.8 million ("the First Union Facility").
This facility is collateralized by mortgages on 7 properties and a lease
assignment on another property, and requires interest at a sliding scale based
on the amount of borrowings outstanding on the facility. The scale ranges from
LIBOR + 1.80% to LIBOR + 2.25%. At September 30, 2000, the Company had borrowed
$27.8 million under this facility and the rate was LIBOR + 2.25% (8.88% at
September 30, 2000). This facility requires the Company to meet the same
financial covenants as the Credit Facility.
In August 1999, the Company obtained an $8.2 million construction loan to
build an 80,000 square foot office building in Allentown, Pennsylvania. This
loan is collateralized by this property. The interest rate is based on LIBOR +
2.0% (8.63% at September 30, 2000). The Company had approximately $7.3 million
outstanding on this loan at September 30, 2000.
FIXED RATE INDEBTEDNESS
Mortgage notes of approximately $462.3 million, excluding debt premiums,
encumbered 69 properties at September 30, 2000. At September 30, 2000, fixed
interest rates on the mortgage loans ranged from 6.88% to 9.75%. These mortgage
notes had weighted average interest rates of 7.7% at September 30, 2000 and
1999. The maturities for these notes range from March 2001 through October 2022.
The weighted average maturity was 7.6 years at September 30, 2000.
5. COMMITMENTS AND CONTINGENCIES
In accordance with the terms of the Contribution and Exchange Agreement
for the RMIT transaction, the Company has guaranteed $5 million of a $15
million revolving loan that Joseph Morris, a trustee of the Company, Robert
Morris and Morris Realty, L.P. (the "Morris Principals") have obtained from a
commercial lender. The Company has deposited $3 million with the lender as
collateral for this guarantee. Joseph and Robert Morris have pledged Series C
Preferred Units with a liquidation value of approximately $37 million as
collateral for this loan. The loan matures, and the Company's guarantee
expires in September 2001. This revolving loan replaced and repaid the $12.5
million loan the Morris Principals had with Reckson Associates Realty Corp.
("Reckson"). As a result, the Company's guarantee of this obligation with
Reckson was released in May 2000.
-12-
<PAGE>
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. ASSET WRITEDOWN
The Company recorded a $11.3 million writedown for certain properties in
the third quarter of 2000. These properties are shown as assets held for sale
in the accompanying balance sheet. The Company has been marketing these
properties for sale since the first quarter of this year. As part of this
marketing process, the Company determined the previous carrying amount of
these assets was in excess of their net realizable value by $11.3 million.
7. TENANT AND OTHER MATTERS
In April 2000, Neuman Distributors, Inc. ("Neuman"), a tenant which
leases a distribution facility of approximately 332,000 square feet in
Teterboro, New Jersey, notified the Company that it filed for protection
under Chapter 11 of the Bankruptcy Code. Annual rent under this lease (the
"Original Lease") is approximately $2.2 million, which is approximately 2% of
the Company's current aggregate annualized in-place base rents from all of
its existing tenants. Neuman has continued to pay and is current on its
post-petition rent through and including October 2000. In October 2000, the
Bankruptcy Court approved an arrangement pursuant to which The Morris
Companies ("Morris"), an affiliate of Joseph Morris, a Trustee of the
Company, obtained the right to deliver to the Company, on or before November
30, 2000, a lease modification for the facility (the "Modified Lease") at a
net monthly rental which exceeds the net monthly rental under the Original
Lease and upon such other terms and conditions as are reasonably acceptable
to the Company, signed by a third party tenant agreed to by the Company.
Pursuant to this arrangement, Morris has paid the Company rent under the
Original Lease for November 2000. Morris will be entitled to a commission in
connection with obtaining the Modified Lease.
The transaction between the Company and Morris is subject to the approval
of the Company's Board of Trustees and the Modified Lease is subject to the
approval of the lender for the property. No certainty exists that these
approvals will be obtained or that the Modified Lease will be executed. The
Company believes that if the Original Lease is terminated and the Modified Lease
is not executed, it will be able to re-lease the space within a reasonable
period of time at a rental rate which exceeds the current rate of $6.62 per
square foot, given the current market conditions in the Northern New Jersey
industrial market and the quality and location of the building.
-13-
<PAGE>
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In July 2000, the Company paid Morgan Stanley Asset Management, Inc., and
certain of its affiliates, and various other shareholders, a special cash
distribution of approximately $3.2 million in accordance with the terms of the
subscription agreement for the private placement which was consummated in July
1998. Under the terms of this agreement, the Company was to pay this amount in
cash in the event the Company failed to consummate a qualifying offering, as
defined in the agreement. The Company has accounted for this payment as a return
of capital distribution to these shareholders.
-14-
<PAGE>
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. SEGMENTS
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," in 1999.
The Company considers its reportable segments to be office, industrial, and
other. The other properties segment consists of an investment in a direct
financing lease and, for 1999, Urban Farms Shopping Center which was sold in
March 1999. Summarized financial information concerning the Company's reportable
segments is shown in the following table at September 30, 2000 and 1999, unless
otherwise noted (amounts in thousands).
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
BUSINESS SEGMENTS 2000 1999 2000 1999
----------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Industrial properties $ 21,083 $ 10,617 $ 59,582 $ 30,015
Office properties 10,717 9,747 30,653 26,236
Other properties 71 68 210 556
Other (1) 115 22 326 129
-------- -------- -------- --------
$ 31,986 $ 20,454 $ 90,771 $ 56,936
======== ======== ======== ========
PROPERTY OPERATING INCOME (4)
Industrial properties $ 13,849 $ 7,167 $ 38,828 $ 20,059
Office properties 6,825 5,013 17,420 13,694
Other properties 65 44 198 386
-------- -------- -------- --------
$ 20,739 $ 12,224 $ 56,446 $ 34,139
======== ======== ======== ========
CAPITAL EXPENDITURES
Industrial properties $ 1,930 $ 246 $ 2,376 $ 562
Office properties 1,178 866 2,212 1,726
Other properties -- -- -- --
-------- -------- -------- --------
$ 3,108 $ 1,112 $ 4,588 $ 2,288
======== ======== ======== ========
DEPRECIATION AND AMORTIZATION EXPENSE (2)
Industrial properties $ 4,201 $ 2,181 $ 11,994 $ 6,209
Office properties 686 1,654 3,461 4,505
Other properties -- -- -- --
-------- -------- -------- --------
$ 4,887 $ 3,835 $ 15,455 $ 10,714
======== ======== ======== ========
INVESTMENT IN REAL ESTATE, AT COST (3)(4)
Industrial properties $719,834 $604,710
Office properties 262,172 254,166
Other properties 1,275 1,460
-------- --------
$983,281 $860,336
======== ========
</TABLE>
-15-
<PAGE>
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a reconciliation of segment property operating income as
shown above to the accompanying consolidated statement of operations for each of
the three and nine month periods ended September 30, 2000 and 1999 (amounts in
thousands):
<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>
Segment property operating income as shown above $ 20,739 $ 12,224 $ 56,446 $ 34,139
Provision for asset valuation (11,300) -- (11,300) --
General and administrative expense (1,129) (1,095) (3,219) (2,706)
Interest expense (12,442) (7,396) (34,516) (20,544)
Other income (1) 115 22 326 129
-------- -------- -------- --------
(Loss) Income before equity in losses from equity method
investments, (loss) gains on sales of assets,
distributions to preferred unitholders and net
income allocated to preferred shareholders, and
minority interest of unitholders in Operating
Partnership $ (4,017) $ 3,755 $ 7,737 $ 11,018
========= ======= ======= =======
</TABLE>
(1) Amount consists of interest and other income not allocated to a specific
business segment.
(2) Included as an expense in net operating income above.
(3) Amounts for 1999 are as of December 31, 1999.
(4) Before $11.3 million provision for asset valuation in 2000.
9. DIVIDENDS
On October 3, 2000, the Company declared a dividend of $.31 per share for
the third quarter of 2000 which was paid on October 30, 2000 to shareholders of
record on October 16, 2000.
On July 5, 2000 the Company declared a dividend of $.31 per share for the
second quarter of 2000 which was paid on July 31, 2000 to shareholders of record
on July 17, 2000.
On April 7, 2000, the Company declared a dividend of $.295 per share for
the first quarter of 2000 which was paid on April 28, 2000 to shareholders of
record on April 19, 2000.
On January 4, 2000, the Company declared a dividend of $.295 per share for
the fourth quarter of 1999 which was paid on January 31, 2000 to shareholders of
record on January 18, 2000.
The Company and the Operating Partnership paid distributions to holders of
Convertible Preferred Stock and Convertible Preferred Units which are each
entitled to a preferred dividend or a guaranteed payment which range from 9.0%
to 9.75%. These distributions are paid on a quarterly basis. Distributions paid
to holders of Convertible Preferred Stock and Convertible Preferred Units were
approximately $5.7 million and $4.3 million, respectively, during the nine
months ended September 30, 2000 and 1999. In October 2000, the Company and the
Operating Partnership paid distributions to the holders of the Convertible
Preferred Stock, the Redeemable Preferred Stock and Convertible Preferred Units
which aggregated $3.4 million.
-16-
<PAGE>
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. SUBSEQUENT EVENTS
On October 30, 2000 the Company sold four industrial assets aggregating
397,000 square feet located in Northern New Jersey for approximately $15.8
million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains 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. The words "believe", "expect", "anticipate", "intend",
"estimate" and other expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters identify
forward-looking statements. The Company's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference include but are not limited to the following: real
estate investment considerations, such as the effect on the Company's cash flows
and property values of economic and other conditions in the market areas in
which the Company owns and develops properties; the need to obtain leases for
properties currently under development and to renew leases or relet space upon
the expiration of current leases for properties, and the ability of the
properties to generate revenues sufficient to meet debt service payments and
other operating expenses; and risks associated with borrowings, such as the
possibility that the Company will not have sufficient funds available to make
principal payments on outstanding debt, outstanding debt may be refinanced at
higher interest rates or otherwise on terms less favorable to the Company and
interest rates under the Credit Facility and the Company's other variable rate
debt may increase.
The following discussion compares the operations and activities of the
Company for the three and nine-month periods ended September 30, 2000 and 1999
and should be read in conjunction with the accompanying financial statements and
notes thereto.
-17-
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net loss for the three month period ended September 30, 2000 was $4.3
million, or $.46 per diluted share, as compared with net income of $1.6 million,
or $.20 per diluted share, for the same period ended September 30, 1999. During
the third quarter of 2000, the Company recorded a $11.3 million provision for
asset revaluation related to certain of its assets which are held for sale.
Excluding the impact of asset sales and this non-recurring provision for asset
revaluation, in both periods net income would have been $2.0 million or $.22 per
diluted share, as compared to $1.6 million, or $.20 per diluted share, for the
same period in 1999.
Revenues for the three month period ended September 30, 2000 increased to
$31.9 million as compared with $20.4 million for the same period in 1999,
respectively, primarily as a result of the acquisition of the first and second
phases of the RMIT portfolio in September 1999 and May 2000.
Operating expenses increased to $36.0 million from $16.7 million in the
three-month period ended September 30, 2000 as compared to the same period in
1999. This overall increase of $19.3 million is a result of the $11.3 million
provision for asset valuation and the increase in depreciation expense and
interest as a result of property acquisitions. The Company's investments in
real estate assets and mortgage debt increased from $804.5 million and $488.5
million at September 30, 1999, respectively, to $971.9 million and $633.7
million, respectively, at September 30, 2000.
Earnings from equity method investments decreased by $391,000, from
$143,000 in the three-month period ended September 30, 1999 to a loss of
$248,000 in the same period in 2000. This decrease is primarily the result of a
decrease in management fees charged to the Operating Partnership by the
Management Company.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net loss for the nine-month period ended September 30, 2000 was $700,000,
or $.08 per diluted share, as compared with net income of $5.2 million, or $.67
per diluted share, for the same period ended September 30, 1999. Net loss for
the nine-month period ended September 30, 2000 included an aggregate gain on a
sales of seven industrial facilities of $372,000 or $.02 per diluted share and
the impact of the $11.3 million provision for asset valuation. Net income for
the same period in 1999 included a gain on the sale of a retail shopping center
of $1.3 million or $.08 per diluted share. Excluding the impact of the asset
revaluation provision and asset sales in both periods, net income for the
nine-month period ended September 30, 2000 and the comparable prior period would
have been $5.3 million and $4.5 million or $.57 and $.58 per diluted share,
respectively.
Revenues for the nine-month period ended September 30, 2000 increased to
$90.8 million as compared with $56.9 million for the same period in 1999,
respectively, primarily as a result of the acquisition of the RMIT portfolio in
September 1999.
-18-
<PAGE>
Operating expenses increased to $83.0 million from $45.9 million,
respectively, in the nine-month period ended September 30, 2000 over the same
period in 1999. This overall increase of $37.1 million is a result of the
$11.3 million asset valuation recorded in 2000 and the increase in
depreciation expense and interest expense as a result of property
acquisitions and the Company's investment in real estate assets and mortgage
debt increased from $804.5 million and $488.5 million at September 30, 1999,
respectively, to $971.9 million and $633.7 million, respectively, at
September 30, 2000. General and administrative expenses increased for the
nine-month period ended September 30, 2000 to $3.2 million in comparison to
$2.7 million for the same period in 1999. This increase was primarily the
result of increases in certain professional fees and payroll expenses which
resulted from the growth of the Company.
Equity in earnings from equity method investments increased by $763,000
from a loss of $347,000 in the nine-month period ended September 30,1999 to
income of $416,000 in the same period in 2000. This is primarily the result of
increases in third party fee income generated by the Management Company due to
increases in transaction activity.
SAME STORE RESULTS
Property level operating income for the nine month periods ended September
30, 2000 and 1999 for the Properties owned since January 1, 1999 (the "Same
Store Properties") increased to approximately $43.1 million from $42.1 million,
respectively. This overall increase of approximately 2.4% is primarily due to
increases in rental revenue of approximately 2.4% in the Same Store Properties,
which was net of a 1.0% decrease in overall economic occupancy. This decrease in
economic occupancy is primarily related to the South Carolina industrial
properties where the Company is incurring transitional vacancy as a result of a
decision to aggressively increase rental rates. Operating expenses for the Same
Store Properties increased by approximately $256,000 or 2.7%. These increases
were primarily related to increases in real estate taxes and utilities due to
the expiration of certain incentives and abatements in addition to increases in
certain tax assessments. These increases in operating expenses were largely
reimbursed by the respective tenants. The Same Store Properties consist of 63
industrial and 33 office properties and one other property which aggregate
approximately 11.7 million square feet. The property level operating income from
the Same Store Properties represented approximately 58% of the Company's overall
property level net operating income, before management fee expenses, for the
nine month period ended September 30, 2000.
Set forth below is a schedule comparing the property level operating income
for the Same Store Properties for the three and nine month periods ended
September 30, 2000 and 1999 (amounts in thousands).
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ---------------------------------------
2000 1999 % CHANGE 2000 1999 % CHANGE
------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Rental revenue $15,945 $15,688 1.6% $47,520 $46,925 1.3%
Tenant reimbursement and other 1,656 1,506 10.0% 5,300 4,633 14.4%
------- ------- ---- ------- ------- ----
Total revenue $17,601 $17,194 2.4% $52,820 $51,588 2.4%
======= ======= ==== ======= ======= ====
Operating Expenses
Property operating expenses 1,934 1,962 (1.4%) 5,675 5,662 0.2%
Real estate taxes 1,361 1,311 3.8% 3,991 3,748 6.5%
------- ------- ---- ------- ------- ----
Total operating expenses 3,295 3,273 0.7% 9,666 9,410 2.7%
------- ------- ---- ------- ------- ----
Property Net Operating Income $14,306 $13,921 2.8% $43,154 $42,148 2.4%
======= ======= ==== ======= ======= ====
Economic occupancy for the period 95.8% 96.8% 96.5% 97.5%
======= ======= ======= =======
Physical occupancy at September 30 96.3% 98.6%
======= =======
</TABLE>
-19-
<PAGE>
SEGMENTS
INDUSTRIAL SEGMENT
Revenue and property net operating income in the industrial property
segment increased over 90% in the both the three and nine month periods ended
September 30, 2000, primarily as a result of the RMIT acquisition which closed
in two phases in September 1999 and May 2000. Depreciation expense also
increased significantly in both the three and nine month periods ended September
30, 2000, as a result of the RMIT acquisition.
OFFICE SEGMENT
Revenues increased by over 9% in the three and nine month periods ended
September 30, 2000 as a result of the acquisition of One Park Place, a
293,400 square foot building located in Syracuse, New York, in July 1999, the
completion of construction on a 80,000 square feet office building in
Allentown, PA in May 2000, and increases in rental income of approximately
$360,000 and $900,000 in the Same Store office properties in the three and
nine month periods ended September 30, 2000, respectively. Property net
operating income increased by 36% and 27% in the three and nine month periods
ended September 30, 2000 over the same periods in 1999 as a result of the One
Park Place acquisition, the completion of the office building in Allentown,
PA and the increased Same Store Property net operating income. Depreciation
expense for the three and nine month periods ended September 30, 2000 was
less than the previous periods in 1999 as certain office properties were
designated as held for sale at December 31, 1999, therefore, depreciation
expense has not been taken on these assets in 2000.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
During the nine months ended September 30, 2000, the Company generated
$28.9 million in cash flow from operating activities as compared to cash flow of
$18.9 million during the same period in 1999. This increase in operating cash
flow is a result of the cash flow generated from the various acquisitions
consummated by the Company during 1999 and 2000.
Cash used in investing activities in the nine months ended September 30,
2000 was $76.5 million as compared to $137.9 million of cash used during the
same period in 1999. The decrease in cash used was primarily a result of the
closing of the first phase of the RMIT acquisition in September 1999. Cash
provided by financing activities decreased to $45.3 million in 2000 as compared
to $118.5 million in the same period in 1999. This decrease in cash provided by
financing activities in 2000 was the result of increases in distributions to
preferred and common shareholders, the July 2000 redemption of $19.9 million of
Series B Convertible preferred stock, and the Series C preferred stock offering
in 1999.
-20-
<PAGE>
CAPITALIZATION
As of September 30, 2000, the Company had $630.6 million of mortgage debt
outstanding, excluding unamortized debt premiums, at a weighted average interest
rate of 8.0% and a weighted average maturity of 6 years. The Company has a $150
million Credit Facility with a group of commercial lenders led by Fleet Boston,
N.A. which expires on April 29, 2002. The Credit Facility bears interest at a
LIBOR interest rate on a sliding scale based on the Company's leverage. The
scale ranges from LIBOR + 1.625% to LIBOR + 2.25%. Based on the Company's
current leverage, the rate is LIBOR + 2.25%. At September 30, 2000, the
Company's outstanding borrowings under this Credit Facility are $133.2 million
at an interest rate of 8.88%. The Company is able to elect to increase the
amount available under the Credit Facility to $250 million, subject to the
syndication of the additional $100 million. The Company has other variable rate
debt which is approximately $35.1 million at September 30, 2000. At September
30, 2000, the Company's variable rate debt is approximately 26.6% of total debt
and is 17.1% of its total market capitalization.
The Company's market capitalization and debt-to-market capitalization
ratios, were $987 million and 64.2%, respectively, at September 30, 2000 based
upon the closing price of the Company's common stock of $12.50 per share as of
that date.
SHORT AND LONG TERM LIQUIDITY
Cash flow from operating activities is the Company's principal source of
funds to fund debt service, common and preferred distributions, recurring
capital expenditures and certain upfront costs associated with the Company's
development activities. The Company expects to meet its short-term (one year or
less) liquidity requirements generally through working capital and net cash
provided by operating activities along with borrowings from the Credit Facility.
Further, the Company anticipates that it will selectively dispose of certain
office and non-core industrial assets in 2000 and 2001. The Company believes all
of these sources will be available in order to fund short-term liquidity needs.
Our long-term liquidity needs generally include the funding of existing and
future development activity, selective asset acquisitions and the retirement of
mortgage debt and amounts outstanding under the Credit Facility. The Company
expects to meet its long-term liquidity needs through a combination of the
following: (i) the issuance of equity securities by the Company and its
Operating Partnership, (ii) the selective disposition of certain office and
certain industrial assets, and (iii) the sale or contribution of certain of our
properties to strategic joint ventures to be formed, which could allow the
Company to generate additional capital. Finally, the Company expects that
certain of the sources described above in short-term liquidity will be an
additional source of capital for long-term liquidity. In July 1998, the Company
filed with the Securities and Exchange Commission a Form S-3 Shelf Registration
Statement under which the Company from time to time may issue Common Shares or
preferred stock and depository shares representing preferred stock with an
aggregate value of up to $500 million. As of September 30, 2000, the Company has
issued approximately $20.0 million under this Registration Statement.
The Company believes that available cash and cash equivalents and cash
flows from operating activities, together with cash available from borrowings
and other sources, will be adequate to meet its capital and liquidity needs in
both the short-term and the long-term.
-21-
<PAGE>
IMPACT OF RECENT ACCOUNTING STANDARDS
See Note 2 to the September 30, 2000 consolidated financial statements.
FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION
Funds From Operations ("FFO"), which is a commonly used measurement of the
performance of an equity REIT, as defined by the National Association of Real
Estate Investment Trusts, Inc. ("NAREIT"), is net income (computed in accordance
with generally accepted accounting principles), excluding gains (or losses) from
debt restructurings, asset revaluation provisions and sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated partnerships and
joint ventures will be calculated to reflect FFO on the same basis. Management
believes the presentation of FFO is a useful disclosure as a general measurement
of its performance in the real estate industry, although the Company's FFO may
not necessarily be comparable to similarly titled measures of other REITs which
do not follow the NAREIT definition. Effective January 1, 2000, the Company
adopted NAREIT's recent clarifications related to the presentation of FFO, and
in accordance with these clarifications, re-stated FFO for all periods presented
to reflect FFO in accordance with these clarifications. Accordingly, the
Company's FFO presentation is in accordance with NAREIT's FFO definition. FFO
does not represent cash generated from operating activities in accordance with
generally accepted accounting principles and is not necessarily indicative of
cash available to fund cash needs and should not be considered as an alternative
to net income as an indicator of the Company's operating performance or as an
alternative to cash flow as a measure of liquidity. Funds Available for
Distribution ("FAD") is defined as FFO reduced by straight-line rent adjustments
and non-revenue enhancing capital expenditures for building and tenant
improvements and leasing commissions; and increased by amortization of deferred
financing costs and amortization of restricted stock awards.
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<PAGE>
FFO, FAD and cash flows for the three and nine-month periods ended
September 30, 2000 and 1999 are summarized in the following table (in thousands,
except share data):
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
(Loss) income before distributions to preferred
unitholders, minority interest of unitholders
in Operating Partnership, and income allocated to
preferred shareholders $ (4,517) $ 3,898 $ 8,525 $ 11,955
(Less) Plus:
Provision for asset revaluation 11,300 -- 11,300 --
Loss (gains) on sales of assets 252 -- (372) (1,284)
Depreciation and amortization related to real estate 4,887 3,835 15,455 10,714
Equity in loss from equity method investments 248 (143) (416) 347
FFO contribution from equity investments (206) 186 543 (219)
------------ ------------ ------------ ------------
Funds from Operations $ 11,964 $ 7,776 $ 35,035 $ 21,513
============ ============ ============ ============
(Less) Plus:
Rental income from straight-line rents $ (1,027) $ (423) $ (2,846) (1,093)
Amortization of deferred financing costs 485 396 1,364 1,071
Amortization of restricted stock awards 68 69 204 205
Building improvements (227) (232) (661) (547)
Tenant improvements (1,056) (850) (2,102) (1,510)
Leasing commissions (1,256) (941) (2,866) (1,632)
------------ ------------ ------------ ------------
Funds Available for Distribution 8,951 5,795 28,128 18,007
============ ============ ============ ============
Cash flow from operating activities 28,988 18,974
Cash flow from investing activities (76,490) (137,940)
Cash flow from financing activities 45,288 118,535
------------ ------------
Net decrease in cash and cash equivalents $ (2,214) $ (431)
============ ============
Weighted average number of common and convertible
preferred shares and units-diluted (1) 25,724,558 16,387,768 25,419,506 17,196,873
============ ============ ============ ============
</TABLE>
(1) Includes the shares of Convertible Preferred Stock and Convertible
Preferred Units issuable assuming conversion at conversion prices which
range from $15.75 to $16.50 per share and unit.
INFLATION
The Company's leases for commercial office and industrial properties
generally require tenants to pay either their share of operating expenses,
including common area maintenance, real estate taxes and insurance or pay 100%
of these costs directly (for triple net leases). As a result, the Company's
exposure to increases in costs and operating expenses is reduced. The Company
does not anticipate that inflation will have a significant impact on its
operating results in the near future.
-23-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary exposure to market risk is to changes in interest
rates. The Company is exposed to market risk related to the Credit Facility, the
First Union Facility and other debt as interest on these obligations is subject
to fluctuations in the market. Currently, the Company does not have any interest
rate hedge contracts in place to protect against interest rate increases on
these facilities. The amount of variable rate debt outstanding represents
approximately 17% of the Company's total market capitalization and 26.6% of
total debt as of September 30, 2000. The Company also utilizes mortgage debt
with fixed rates as a source of capital. The weighted average maturity and
interest rate for fixed rate debt, excluding the Credit Facility and other
variable rate debt, was 7.6 years and 7.7% at September 30, 2000. As these debt
instruments mature, the Company typically refinances such debt at then existing
market interest rates which may be more or less than the interest rates on the
maturing debt. Within the next twelve months, approximately $10.6 of fixed rate
debt will mature.
If the interest rate for the Credit Facility and the Company's other
variable rate debt was 100 basis points higher or lower during the nine months
ended September 30, 2000, the Company's interest expense for this nine month
period would have been increased or decreased by approximately $1.3 million.
Due to the uncertainty of fluctuations in interest rates and the specific
actions that might be taken by management to mitigate the impact of such
fluctuations and their possible effects, this sensitivity analysis assumes no
changes in the Company's financial structure.
-24-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Properties are presently subject to any litigation
which the Company believes will result in any liability that will be material to
the Company, other than routine litigation arising in the ordinary course of
business, substantially all of which is expected to be covered by liability
insurance.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
During the three month period ended September 30, 2000, and through November 10,
2000, the Company filed the following:
(i) A Current Report on Form 8-K, dated October 31, 2000, was furnished on
October 31, 2000 (reporting Items 7 and 9) regarding the Company's third quarter
supplemental financial information.
-25-
<PAGE>
SIGNATURES OF REGISTRANT
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.
KEYSTONE PROPERTY TRUST
Date: November 13, 2000 By: /s/ Jeffrey E. Kelter
---------------------
Jeffrey E. Kelter
President and Chief Executive Officer
Date: November 13, 2000 By: /s/ Timothy A. Peterson
-----------------------
Timothy A. Peterson
Executive Vice President and
Chief Financial Officer
Date: November 13, 2000 By: /s/ Timothy E. McKenna
----------------------
Timothy E. McKenna
Senior Vice President - Finance
and Corporate Controller
(Principal Accounting Officer)
-26-
