<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 March 31, 1998
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
______________________
Commission file number 1-12630
CENTERPOINT PROPERTIES TRUST
Maryland 36-3910279
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 North Michigan Ave., Chicago, Illinois 60611
(312) 346-5600
(Registrant's telephone number, including area code)
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
------- -------
Number of Common Shares of Beneficial Interest outstanding as of May 13, 1998:
17,766,427
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
Assets:
Investment in real estate:
Land and leasehold $ 120,764 $ 123,014
Buildings 412,495 414,314
Building improvements 66,507 64,372
Furniture, fixtures, and equipment 14,854 13,912
Construction in progress 18,849 26,034
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633,469 641,646
Less accumulated depreciation and amortization 46,837 44,352
--------- ----------
Net investment in real estate 586,632 597,294
Cash and cash equivalents 637 1,652
Restricted cash and cash equivalents 57,765 36,509
Tenant accounts receivable, net 15,027 12,416
Mortgage notes receivable 27,887 30,297
Investment in and advances to affiliate 11,513 11,143
Prepaid expenses and other assets 4,789 3,303
Deferred expenses, net 6,878 6,661
--------- ----------
$ 711,128 $ 699,275
--------- ----------
--------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 85,755 $ 85,755
Tax-exempt debt 75,540 75,540
Line of credit 103,500 97,700
Convertible subordinated debentures payable 11,163 11,740
Notes payable 33
Preferred dividends payable 1,060 901
Accounts payable 5,501 10,311
Accrued expenses 23,407 24,410
Rents received in advance and security deposits 5,904 4,759
--------- ----------
311,830 311,149
--------- ----------
Commitments and contingencies
Shareholders' equity:
Preferred shares of beneficial interest, $.001 par
value, 10,000,000 shares authorized; 3,000,000
issued and outstanding having a liquidation
preference of $25 per share ($75,000) 3 3
Common shares of beneficial interest, $.001 par value,
47,727,273 shares authorized; 17,293,936 and 16,891,951
issued and outstanding, respectively 17 17
Class B common shares of beneficial interest, $.001
par value, 2,272,727 shares authorized; 2,272,727
issued and outstanding 2 2
Additional paid-in-capital 433,171 420,743
Retained earnings (deficit) (33,447) (32,142)
Unearned compensation - restricted stock (448) (497)
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Total shareholders' equity 399,298 388,126
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$ 711,128 $ 699,275
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</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Revenue:
Operating and investment revenue:
Minimum rents $17,747 $12,771
Straight-line rents 1,364 654
Expense reimbursements 5,458 4,895
Mortgage interest income 656 655
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Total operating and investment revenue 25,225 18,975
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Other revenue:
Real estate fee income 1,967 802
Equity in net income of affiliate 125 (48)
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Total other revenue 2,092 754
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Total revenue 27,317 19,729
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Expenses:
Real estate taxes 5,948 4,270
Property operating and leasing 3,542 3,023
General and administrative 990 703
Depreciation and amortization 4,696 3,210
Interest expense:
Interest incurred, net 2,928 2,626
Amortization of deferred financing costs 486 192
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Total expenses 18,590 14,024
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Operating income 8,727 5,705
Other expense (16) (34)
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Net Income 8,711 5,671
Preferred dividends (1,590) -
-------- --------
Net income available to common shareholders $7,121 $ 5,671
-------- --------
-------- --------
Per share net income available to common shareholders:
Basic $0.37 $0.33
Diluted $0.37 $0.32
Distributions per common share $0.438 $0.420
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $8,711 $ 5,671
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debts 100
Depreciation 4,427 2,991
Amortization of deferred financing costs 486 192
Other amortization 269 219
Straight-line rents (1,364) (654)
Incentive stock awards 48 49
Interest on converted debentures 2 9
Equity in net income of affiliate (125) 48
Net changes in:
Tenant accounts receivable (1,738) (1,600)
Prepaid expenses and other assets (353) 4
Rents received in advance and security deposits 1,294 310
Accounts payable and accrued expenses 1,411 (2,604)
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Net cash provided by operating activities 13,167 4,635
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Cash flows from investing activities:
Change in restricted cash and cash equivalents (21,256) 581
Acquisition of real estate (6,706) (6,240)
Construction in progress (7,219) (5,326)
Improvements and additions to properties (9,747) (3,616)
Disposition of real estate 24,118
Change in deposits on acquisitions (1,176) 142
Issuance of mortgage notes receivable (18,837) (1,894)
Repayment of mortgage notes receivable 20,111 4,750
Investment in and advances to affiliate (245) (6,038)
Receivables from affiliates and employees 77 80
Additions to deferred expenses (1,075) (581)
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Net cash used in investing activities (21,956) (18,142)
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Cash flows from financing activities:
Proceeds from sale of common shares 11,875 71,039
Offering costs paid (12) (3,766)
Proceeds from line of credit 35,900 19,600
Repayment of mortgage notes payable (2,533)
Repayment of line of credit (30,100) (58,200)
Repayment of notes payable (33) (67)
Distributions (9,856) (7,050)
Conversion of convertible subordinated debentures
payable (1)
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Net cash provided by financing activities 7,774 19,022
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Net change in cash and cash equivalents (1,015) 5,515
Cash and cash equivalents, beginning of the year 1,652 1,070
------- --------
Cash and cash equivalents, end of period $ 637 $ 6,585
------- --------
------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION:
These unaudited Consolidated Financial Statements of CenterPoint Properties
Trust, a Maryland real estate investment trust, and Subsidiaries (the
"Company"), have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations and should be read in conjunction with
the December 31, 1997, Financial Statements and Notes thereto included in the
Company's Form 10-K. References herein to the "Company" shall mean CenterPoint
Properties Trust and Subsidiaries and, prior to October 15, 1997, CenterPoint
Properties Corporation and Subsidiaries which, pursuant to a reorganization of
CenterPoint Properties Corporation from a Maryland corporation to a Maryland
real estate investment trust, was merged with and into CenterPoint Properties
Trust, with CenterPoint Properties Trust as the surviving entity. The following
Notes to Consolidated Financial Statements highlight significant changes to the
Notes included in the December 31, 1997, Audited Financial Statements and
present interim disclosures as required by the SEC. The accompanying
Consolidated Financial Statements reflect, in the opinion of management, all
adjustments necessary for a fair presentation of the interim financial
statements. All such adjustments are of a normal and recurring nature. The
consolidated balance sheet as of December 31, 1997 has been derived from the
Company's audited Financial Statements.
The consolidated statements of operations and statements of cash flows for prior
periods have been reclassified to conform with current classifications with no
effect on results of operations or cash flows.
1. PREFERRED SHARES, COMMON SHARES OF BENEFICIAL INTEREST AND RELATED
TRANSACTIONS
On March 25, 1998, the Company completed a public offering of 370,371 common
shares of beneficial interest at $32.0625 per share in an underwritten
offering to a unit investment trust. Net proceeds from the offering after
the underwriting discounts were approximately $11.9 million. The proceeds
were used to repay a portion of amounts outstanding under the Company's line
of credit co-led by The First National Bank of Chicago and Lehman Brother
Holdings Inc.
The Company declared a second quarter dividend of $0.4375 per common share of
beneficial interest to be paid May 13, 1998 to shareholders of record on April
30, 1998. The Company also declared a second quarter dividend of $0.53 per
share of Series A Cumulative Redeemable Preferred Shares of Beneficial Interest
to be paid April 30, 1998 to shareholders of record on April 15, 1998.
<PAGE>
2. RECENT PRONOUNCEMENTS
In June, 1997, the FASB issued SFAS Statement No. 130, "Reporting
Comprehensive Income." This statement, effective for periods beginning after
December 15, 1997, requires the Company to report components of comprehensive
income in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income is defined by Concepts
Statement No. 6, "Elements of Financial Statements" as the change in equity
of a business enterprise during a period from transactions and other events
and circumstances from nonowner sources. It includes all changes in equity
during the period except those resulting from investment by owners and
distributions to owners. As required by this statement, the Company adopted
the new standard for reporting comprehensive income. The Company's net
income is equal to comprehensive income.
In June, 1997, the FASB issued SFAS Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement, effective
for financial statements for fiscal years beginning after December 15, 1997,
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. The Company has not yet determined the impact of this SFAS on its
financial statements.
In March, 1998, the FASB's Emerging Issues Task Force ("EITF") issued EITF Issue
No. 97-11, "Accounting for Internal Costs Related to Real Estate Acquisitions."
This statement, effective as of March 19, 1998, requires that internal costs of
identifying and acquiring operating properties should be expensed as incurred.
Prior to March 19, 1998, the Company capitalized internal preacquisition costs.
The Company estimates the adoption of this EITF will not have a significant
impact on the results of operations in the future.
3. ACQUISITION AND DISPOSITION OF REAL ESTATE
In February, 1998, the Company disposed of an industrial property located in
Elk Grove Village for a sales price of $10.4 million. The dispositions of
the property qualified for treatment as a tax-free exchange under the
Internal Revenue Code. With a portion of the proceeds, the Company purchased
two industrial properties located in Elk Grove Village for an aggregate
purchase price of $6.9 million. The remaining amount was used to acquire
qualified replacement property in the second quarter.
In March, 1998, two industrial properties located in Libertyville and Buffalo
Grove, Illinois were disposed of for an aggregate sales price of $17.8 million.
The disposition of the properties qualified for treatment as a tax-free exchange
under the Internal Revenue Code. A portion of the proceeds was used to acquire
qualified replacement property in the second quarter, and the remaining proceeds
will be used to acquire other qualified replacement property in the near future.
<PAGE>
At March 31, 1998, the balance of the proceeds from the qualified tax-free
exchange transactions described above was held as restricted cash.
4. MORTGAGE NOTES RECEIVABLE
In March 1998, the Company received proceeds from the repayment of two mortgages
outstanding totaling $20.1 million.
5. INVESTMENT IN AND ADVANCES TO AFFILIATE
The Company holds approximately 99% of the economic interest in CenterPoint
Realty Services Corporation ("CRS"). To maintain compliance with limitations on
income from business activities received by REITs and their qualified REIT
subsidiaries, the Company holds its interest in CRS in the form of non-voting
equity ownership, which qualifies CRS as an unconsolidated taxable subsidiary.
As of March 31, 1998, the Company had advanced to CRS approximately $8.1
million under a demand loan with an interest rate of 8.125%. The proceeds of
the loan were applied towards development projects currently under construction
and the purchase of land held for future development. Principal and interest
are due upon demand.
The Company typically purchases development projects upon completion of
construction on a turnkey basis or develops the property under guaranteed
maximum price contracts, substantially eliminating any construction risk.
6. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Supplemental disclosures of cash flow information for three months ended
March 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Interest paid $3,761 $ 3,266
Interest capitalized 594 96
Construction costs paid by the Company
through mortgage notes receivable 1,136
</TABLE>
In conjunction with the acquisition of real estate, for the three months ended
March 31, 1998 and 1997 the Company acquired the following asset and assumed the
following liability amounts:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Purchase of real estate $ 6,909 $ 6,350
Liabilities, net of other assets (203) (110)
-------- --------
Acquisition of real estate $ 6,706 $ 6,240
-------- --------
-------- --------
</TABLE>
<PAGE>
In conjunction with the disposition of real estate, the Company disposed of the
following asset and liability amounts:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Disposal of real estate $ 24,589 $ -
Liabilities, net of other assets (471)
-------- --------
Disposition of real estate $ 24,118 $ -
-------- --------
-------- --------
</TABLE>
Conversion of convertible subordinated debentures payable:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Convertible subordinated debentures converted $ 577 $ 2,245
Common shares issued at $18.25 per share;
31,614 and 122,998, respectively 577 2,244
-------- --------
Cash disbursed for fractional shares $ -- $ 1
-------- --------
-------- --------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
In the normal course of business, from time to time, the Company is involved in
legal actions relating to the ownership and operations of its properties. In
management's opinion, the liabilities, if any that may ultimately result from
such legal actions are not expected to have a materially adverse effect on the
consolidated financial position, results of operations and liquidity of the
Company.
The Company has entered into other contracts for the acquisition of properties.
Each acquisition is subject to satisfactory completion of due diligence and, in
the case of development projects, completion and occupancy of the projects.
At March 31, 1998, seven of the properties owned by the Company are subject to
purchase options held by certain tenants. The purchase options are exercisable
at various intervals through 2006, each for an amount greater than the net book
value of the asset. Management is not currently aware of planned exercises of
options and believes that any potential exercises would not materially affect
the results or prospects of the Company.
8. SUBSEQUENT EVENTS
On April 5, 1998 the Company issued $100 million, 6.75 percent senior unsecured
notes due April 1, 2005. The net proceeds of $99 million were used to repay
substantially all amounts outstanding under the Company's line of credit co-led
by The First National Bank of Chicago and Lehman Brothers Holdings Inc.
On April 8, 1998 the Company completed a private placement to an institutional
investor of 370,000 common shares of beneficial interest at $33.375 per share.
The net proceeds of the offering of approximately $12.3 million were used to
fund working capital requirements.
<PAGE>
Since March 31, 1998, two warehouses/industrial properties have been purchased.
A facility located in Chicago, Illinois was purchased from a partnership on
April 20, 1998. The purchase price of approximately $5.8 million was funded
with the Company's working capital and proceeds from the tax-free exchange
account. On April 20, 1998, a fully leased building, located in Des Plaines,
Illinois was purchased from Juno Manufacturing, Inc. for approximately $5.6
million. The acquisition was funded from proceeds from the tax-free exchange
account.
84,930 convertible subordinated debentures have been converted since March 31,
1998.
EARNINGS PER COMMON SHARE
The following are the reconciliations of the numerators and denominators of the
basic and diluted EPS for the three months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands, except for share data)
<S> <C> <C>
Numerators:
Net income $ 8,711 $ 5,671
Dividends on preferred shares (1,590) -
---------- ----------
Net income available to common shareholders - for
basic and diluted EPS $ 7,121 $ 5,671
---------- ----------
---------- ----------
Denominators:
Weighted average common shares outstanding - for
basic EPS 19,215,431 17,364,564
Effect of dilutive securities - options 243,223 259,288
---------- ----------
Weighted average common shares outstanding - for
diluted EPS 19,458,654 17,623,852
---------- ----------
---------- ----------
</TABLE>
The assumed conversion of the convertible subordinated debentures into common
shares for purposes of computing diluted EPS by adding interest expense for the
debentures to the numerators and adding assumed share conversions to the
denominators for the three months ended March 31, 1998 and 1997 would be anti
dilutive.
10. PRO FORMA FINANCIAL INFORMATION
Due to the effect of the March, 1997 public offering, November, 1997 public
offering, the March, 1998 public offering, and the 1997 and 1998 acquisitions
and dispositions of properties, the historical results are not indicative of the
future results of operations. The following unaudited pro forma information for
the three months ended March 31, 1998 and 1997 is presented as if the 1997
acquisitions and dispositions, the 1998 acquisitions and dispositions, the
March, 1997 public offering, November 1997 public offering, the March, 1998
private placement and the corresponding repayment of
<PAGE>
certain debt had all occurred on January 1, 1997 (or the date the property
first commenced operations with a third party tenant, if later). The pro
forma information is based upon historical information and does not purport
to present what actual results would have been had the offerings and related
transactions, in fact, occurred at January 1, 1997, or to project results for
any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------- --------
(in thousands, except for per share data)
<S> <C> <C>
Total revenues $ 26,697 $ 21,310
Total expenses 18,183 13,835
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Income before extraordinary item 8,514 7,475
Preferred dividends (1,590) (1,590)
------- --------
Income available to common shareholders
Before extraordinary item $ 6,924 $ 5,885
------- --------
------- --------
Per share income available to common
Shareholders before extraordinary item:
Basic $ 0.35 $ 0.31
Diluted $ 0.35 $ 0.30
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
GENERAL BACKGROUND
The following is a discussion of the historical operating results of the
Company. The discussion should be read in conjunction with the Form 10-K
filed for the fiscal year ended December 31, 1997 and the unaudited Financial
Statements presented with this Form 10-Q.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 TO THREE MONTHS ENDED MARCH
31, 1997.
Total revenues increased by $7.6 million or 38.5% over the same period last
year. The revenues of the Company are derived primarily from base rents and
additional rents from expense reimbursements, pursuant to the terms of tenant
leases for occupied space at the warehouse/industrial properties.
Warehouse/industrial properties represented approximately 98% of the gross
leasable area of the Company's portfolio as of March 31, 1998.
Rental revenues increased by $6.2 million in the first quarter 1998. This
increase was attributable in part to a full period of income from twenty-one
properties acquired totaling 7.1 million square feet and six build-to-suit
properties totaling 1.5 million square feet in 1997 coming on-line, net of three
property dispositions. In addition, the increase was caused by income from two
properties acquired in the first quarter of 1998 totaling 0.2 million square
feet, net of one disposition.
In addition, real estate fee income primarily consisting of fees earned by the
Company in connection with its build-to-suit and development activities and
third party management fees increased by $1.2 million. The Company's equity in
net income of affiliate increased by $0.2 million due to the affiliate's
increase in property and build-to-suit sales. Mortgage interest income remained
unchanged.
On a "same-store" basis (comparing the results of operations, on a cash basis,
of the properties owned at January 1, 1997, with the results of operations of
the same properties at March 31, 1998), the Company recognized an increase of
approximately 1.7% in net operating income primarily due to lease up of vacant
space, rental increases on renewed leases and contractual increases in minimum
rent under leases in place.
Real estate tax expense and property operating and leasing expense increased by
$2.2 million, from $7.3 million in the first quarter of 1997 to $9.5 million for
the same period in 1998. $1.7 million of the increase is due to real estate
taxes. The majority of the real estate tax increase, $1.4 million, resulted
from a full period of 1997 acquisitions and the balance, $0.3 million, from net
tax increases throughout the portfolio. Property operating
<PAGE>
and leasing expenses, including insurance, utilities, repairs and maintenance
and property management costs increased at levels comparable to the level of
acquisitions. However, property operating and leasing costs as a percentage
of total revenues decreased consistently when comparing the first quarter of
1997 to the first quarter of 1998 due to "economies of scale" realized by the
Company.
Depreciation and other amortization increased by $1.5 million, from $3.2 million
in the first quarter of 1997 to $4.7 million in the first quarter of 1998. The
increase is due primarily to full period depreciation on acquisitions completed
during 1997 and depreciation from dates of acquisition for the 1998 acquisitions
and fixed asset additions. General and administrative expenses increased by $0.3
million, from $0.7 million in the first quarter of 1997 to $1.0 million in the
first quarter of 1998, due primarily to the growth of the Company.
Interest incurred increased by approximately $0.3 million over last year due
to the effect of a common equity offering in March, 1997 and the subsequent
pay-down of a portion of the Company's debt. Other income (expenses)
remained almost unchanged from quarter to quarter.
As a result of the factors described above, operating income increased by $3.0
million from $5.7 million in the first quarter of 1997 to $8.7 million in the
first quarter of 1998, an increase of 52.6%. Earnings before interest, income
taxes, depreciation and amortization increased by $5.1 million, from $11.7
million in the first quarter of 1997 to $16.8 million in the first quarter of
1998.
The Company reviews its operating results by comparing Net Revenue Margin
between periods. Net Revenue Margin is calculated by dividing net revenue
(total operating and investment revenue less real estate taxes and property
operating and leasing expense) by adjusted operating and investment revenue
(operating and investment revenue less expense reimbursements, adjusted for
leases containing expense stops). This margin indicates the percentage of
revenue actually retained by the Company or, alternatively, the amount of
operating expenses not recovered by tenant reimbursements. The margin for the
first three months of 1998 was 87.9% compared with 88.8% for the same period
last year.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from Company operations has historically been utilized for
working capital purposes and distributions, while proceeds from financings and
capital raises have been used to fund acquisitions and other capital costs.
However, cash flow from operations during the first quarter of 1998 of $13.2
million net of $9.9 million of first quarter distributions provided $3.3 million
of retained capital. The Company expects retained capital to fund a portion of
future investment activities.
Advances for construction in progress on development projects, advances on
mortgage notes receivable, and improvements and additions to properties of
approximately $35.8 million for the first quarter of 1998 were funded with
borrowings under the Company's
<PAGE>
unsecured line of credit totaling $35.9 million. Acquisitions of $6.7 million
were funded with a portion of the proceeds from the disposition of real
estate of $24.1 million.
In addition, on March 25, 1998, the Company completed a public offering of
370,371 common shares of beneficial interest at $32.0625 per share in an
underwritten offering to a unit investment trust. Net proceeds of $11.9 million
from the public offering, proceeds from the repayment of mortgage notes
receivable, and working capital were used to repay amounts outstanding under the
Company's line of credit of $30.1 million.
The Company has a $150 million unsecured credit facility co-led by The First
National Bank of Chicago and Lehman Brothers Holdings Inc. As of March 31,
1998, the Company had outstanding borrowings of approximately $103.5 million
under the unsecured revolving line of credit (approximately 9.9% of the
Company's fully diluted total market capitalization), and the Company had
remaining availability of approximately $46.5 million under its unsecured line
of credit.
At March 31, 1998, the Company's debt constituted approximately 25.5% of its
fully diluted total market capitalization. Also, the Company's debt service
coverage ratio remained high at 6.2 to 1. The Company's fully diluted equity
market capitalization was approximately $776 million, and its fully diluted
total market capitalization exceeded $1.0 billion. The Company's leverage
ratios benefited during the first quarter of 1998 from the conversion of
approximately $0.6 million of its 8.22% Convertible Subordinated Debentures,
due 2004, to 31,614 common shares.
In February, 1998, Duff & Phelps Credit Rating Co. joined Moody's Investors
Service's January, 1997 evaluation by assigning investment grade rating to
the Company's senior unsecured debt and preferred stock issuable under the
Company's shelf registration statement and convertible subordinated notes.
Also in 1997, Standard and Poors assigned an investment grade rating to the
Company's senior unsecured debt. These investment grade ratings further
enhance the Company's financial flexibility.
During the first quarter of 1998, the Company paid distributions on common
shares of $7.4 million or $0.4375 per share and on class B common shares of
$1.0 million or $0.4492 per share. Also, in January of 1998, the Company
paid dividends on preferred shares of $1.43 million or $0.477 per share, and
declared dividends of $1.59 million or $0.53 per share. The following
factors, among others, will affect the future availability of funds for
distribution: (i) scheduled increases in base rents under existing leases
and (ii) changes in minimum base rents attributable to replacement of
existing leases with new or replacement leases.
The Company has considered its short-term (one year or less) capital needs,
in conjunction with its estimated future cash flow from operations and other
expected sources. The Company believes that its ability to fund operating
expenses, building improvements, debt service requirements and the minimum
distribution required to maintain the Company's REIT qualification under the
Internal Revenue Code, will be met by recurring operating and investment
revenue and other real estate income.
<PAGE>
Long-term (greater than one year) capital needs for property acquisitions,
scheduled debt maturities, major redevelopment projects, expansions, and
construction of build-to-suit properties will be supported through draws on the
Company's unsecured line of credit, the issuance of long-term unsecured
indebtedness and the issuance of equity securities.
INFLATION
Inflation has not had a significant impact on the Company because of the
relatively low inflation rates in the Company's markets of operation. Most of
the Company's leases require the tenants to pay their share of operating
expenses, including common area maintenance, real estate taxes and insurance,
thereby reducing the Company's exposure to increases in costs and operating
expenses resulting from inflation. In addition, many of the leases are for
remaining terms less than five years which may enable the Company to replace
existing leases with new leases at higher base rental rates if rents of existing
leases are below the then-existing market rate.
YEAR 2000 COMPLIANCE
In response to the Year 2000 issue, the Company initiated a project in early
1997 to identify, evaluate and implement a new computerized real estate
management system. The Company is addressing the issue through a combination of
modifications to existing programs and conversion to Year 2000 compliant
software. In addition, the Company is discussing with its tenants, vendors, and
other service providers the possibility of any interface difficulties relating
to the Year 2000 issue which may affect the Company. If the Company and those
it conducts business with do not make modifications or conversions in a timely
manner, the Year 2000 issue may have a material adverse effect on the Company's
business, financial condition, and results of operations. The total cost
associated with the required modifications is not expected to be material to the
Company's consolidated results of operations, liquidity and financial position,
and is being expensed as incurred.
RECENT PRONOUNCEMENTS
In June, 1997, the FASB issued SFAS Statement No. 130, "Reporting Comprehensive
Income." This statement, effective for periods beginning after December 15,
1997, would require the Company to report components of comprehensive income in
a financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined by Concepts Statement No.
6, "Elements of Financial Statements" as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. It includes all changes in equity during the period
except those resulting from investment by owners and distributions to owners.
As required by this statement, the Company adopted the new standard for
reporting comprehensive income. The Company's net income is equal to
comprehensive income.
<PAGE>
In June, 1997, the FASB issued SFAS Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement, effective
for financial statements for fiscal years beginning after December 15, 1997,
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. The Company has not yet determined the impact of this SFAS on its
financial statements.
In March, 1998, the FASB's Emerging Issues Task Force ("EITF") issued EITF Issue
No. 97-11, "Accounting for Internal Costs Related to Real Estate Acquisitions."
This statement, effective as of March 19, 1998, requires that internal costs of
identifying and acquiring operating properties should be expensed as incurred.
Prior to March 19, 1998, the Company capitalized internal preacquisition costs.
The Company estimates the adoption of this EITF will not have a significant
impact on the results of operations in the future.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The Company's
actual results could differ materially from those set forth in the forward
looking statements as a result of various factors, including, but not limited
to, uncertainties affecting real estate businesses generally (such as entry into
new leases, renewals of lease and dependence on tenants' business operations),
risks relating to acquisition, construction and development activities, possible
environmental liabilities, risks relating to leverage, debt service and
obligations with respect to the payment of dividends (including availability of
financing terms acceptable to the Company and sensitivity of the Company's
operations to fluctuations in interest rates), the potential for the need to use
borrowings to make distributions necessary for the Company to qualify as a REIT,
dependence on the primary market in which the Company's properties are located,
the existence of complex regulations relating to the Company's status as a REIT,
the failure of the Company and entities the Company does business with to make
necessary modifications and conversions to Year 2000 compliant software in a
timely manner and the potential adverse impact of the market interest rates on
the cost of borrowings by the Company and on the market price for the Company's
securities.
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