<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, 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
(Exact name of registrant as specified in its charter)
Maryland 36-3910279
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1808 Swift Drive, Oak Brook, Illinois 60523-1501
(Address of principal executive offices)
(630) 586-8000
(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 November 12,
1998: 18,749,801. Number of Class B Common Shares of Beneficial Interest
outstanding as of November 12, 1998: 1,398,088
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Assets:
Investment in real estate:
Land and leasehold $ 138,298 $ 123,014
Buildings 488,704 414,314
Building improvements 80,082 64,372
Furniture, fixtures, and equipment 17,564 13,912
Construction in progress 13,472 26,034
--------- ---------
738,120 641,646
Less accumulated depreciation and amortization 56,728 44,352
--------- ---------
Net investment in real estate 681,392 597,294
Cash and cash equivalents 4,696 1,652
Restricted cash and cash equivalents 31,545 36,509
Tenant accounts receivable, net 19,062 12,416
Mortgage notes receivable 19,655 30,297
Investment in and advances to affiliate 21,534 11,143
Prepaid expenses and other assets 6,025 3,303
Deferred expenses, net 8,607 6,661
--------- ---------
$ 792,516 $ 699,275
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 106,225 $ 85,755
Senior unsecured debt 100,000
Tax-exempt debt 75,540 75,540
Line of credit 44,000 97,700
Convertible subordinated debentures payable 8,583 11,740
Notes payable 33
Preferred dividends payable 1,060 901
Accounts payable 4,633 10,311
Accrued expenses 34,420 24,410
Rents received in advance and security deposits 5,372 4,759
--------- ---------
379,833 311,149
--------- ---------
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; 17,774,327 and 16,891,951 issued and outstanding, respectively 18 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 448,606 420,743
Retained earnings (deficit) (35,602) (32,142)
Unearned compensation - restricted stock (344) (497)
--------- ---------
Total shareholders' equity 412,683 388,126
--------- ---------
$ 792,516 $ 699,275
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
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CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Operating and investment revenue:
Minimum rents $ 19,479 $ 14,544 $ 55,276 $ 40,856
Straight-line rents 742 566 3,263 1,854
Expense reimbursements 5,737 4,283 17,310 13,658
Mortgage interest income 600 447 1,936 1,626
--------- --------- --------- ---------
Total operating and investment revenue 26,558 19,840 77,785 57,994
--------- --------- --------- ---------
Other Revenue:
Real estate fee income 1,962 455 5,636 2,069
Equity in net income of affiliate 46 1,264 447 1,356
--------- --------- --------- ---------
Total other revenue 2,008 1,719 6,083 3,425
--------- --------- --------- ---------
Total revenue 28,566 21,559 83,868 61,419
--------- --------- --------- ---------
Expenses:
Real estate taxes 5,786 4,187 17,735 12,554
Property operating and leasing 2,674 2,847 9,426 8,294
General and administrative 969 783 2,960 2,225
Depreciation and amortization 5,392 4,179 15,273 10,767
Interest expense:
Interest incurred, net 3,759 2,687 9,743 7,559
Amortization of deferred financing costs 409 193 1,335 589
--------- --------- --------- ---------
Total expenses 18,989 14,876 56,472 41,988
--------- --------- --------- ---------
Operating income 9,577 6,683 27,396 19,431
Other income(expense), net (7) 59 (45) 126
--------- --------- --------- ---------
Net income 9,570 6,742 27,351 19,557
Preferred dividends (1,590) (4,770)
--------- --------- --------- ---------
Net income available to common shareholders $ 7,980 $ 6,742 $ 22,581 $ 19,557
--------- --------- --------- ---------
--------- --------- --------- ---------
Per share net income available to common shareholders:
Basic $0.40 $0.35 $1.14 $1.06
Diluted $0.39 $0.35 $1.13 $1.04
Distributions per common share $0.438 $0.42 $1.313 $1.26
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 27,351 $ 19,557
Adjustments to reconcile net income to net cash provided
by operating activities:
Bad debts 200 175
Depreciation 14,283 10,159
Amortization of deferred financing costs 1,335 589
Other amortization 990 608
Straight-line rents (3,263) (1,854)
Incentive stock awards 152 265
Interest on converted debentures 35 10
Equity in net income of affiliate (447) (1,356)
Gain on sale of fixed assets (140)
Net changes in:
Tenant accounts receivable (2,915) (2,382)
Prepaid expenses and other assets (1,487) 495
Rents received in advance and security deposits 683 276
Accounts payable and accrued expenses 8,490 (2,881)
---------- ----------
Net cash provided by operating activities 45,407 23,521
---------- ----------
Cash flows from investing activities:
Change in restricted cash and cash equivalents 5,256 (39,302)
Acquisition of real estate (63,914) (59,552)
Additions to construction in progress (23,744) (22,952)
Improvements and additions to properties (17,588) (19,729)
Disposition of real estate 24,118 2,297
Change in deposits on acquisitions (1,279) (1,361)
Issuance of mortgage notes receivable (20,556) (7,237)
Repayment of mortgage notes receivable 29,361 5,669
Investment in and advances to affiliate (9,944) (17,278)
Receivables from affiliates and employees 44 56
Additions to deferred expenses (4,358) (2,768)
---------- ----------
Net cash used in investing activities (82,604) (162,157)
---------- ----------
Cash flows from financing activities:
Proceeds from sale of common shares 25,095 71,325
Offering costs paid (352) (4,050)
Proceeds from issuance of unsecured notes payable 100,000
Proceeds from line of credit 93,900 129,350
Issuance of mortgage notes payable 55,000
Repayment of mortgage notes payable (117) (2,586)
Repayment of line of credit (147,600) (72,200)
Repayment of notes payable (33) (2,335)
Distributions (30,652) (23,071)
Conversion of convertible subordinated debentures payable (1)
---------- ----------
Net cash provided by financing activities 40,241 151,432
---------- ----------
Net change in cash and cash equivalents 3,044 12,796
Cash and cash equivalents, beginning of the year 1,652 1,070
---------- ----------
Cash and cash equivalents, end of period $ 4,696 $ 13,866
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
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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 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.
In July, 1998, the Board of Trustees approved a shareholder protection plan
(the "plan"), declaring a dividend of one right for each share of the
Company's common shares outstanding on or after August 11, 1998. Exercisable
10 days after any person or group
5
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acquires 15 percent or more or commences a tender offer for 15 percent or
more of the Company's common shares, each right entitles the holder to
purchase from the Company one one-thousandth of a Junior Preferred Share of
Beneficial Interest, Series A (a "Rights Preferred Share"), at a price of
$120, subject to adjustment. The Rights Preferred Shares (1) are
non-redeemable, (2) are entitled to a minimum preferential quarterly dividend
payment equal to the greater of $25 per share or 1,000 times the Company's
common share dividend, (3) have a minimum liquidation preference equal to the
greater or $100 per share or 1,000 times the liquidation payment made per
common share and (4) are entitled to vote with the common shares with each
Rights Preferred Share having 1,000 votes. 50,000 of the Company's
authorized preferred shares have been designated for the Plan.
The plan was not adopted in response to any takeover attempt but was intended
to provide the Board with sufficient time to consider any and all
alternatives under such circumstances. Its provisions are designed to protect
the Company's shareholders in the event of an unsolicited attempt to acquire
the Company at a value that is not in the best interest of the Company's
shareholders.
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 statement disclosure.
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 adoption of this EITF has not
6
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had a significant impact on the results of current operations and the Company
this EITF estimates will not have a significant impact on the results of
operations in the future.
In May, 1998, the FASB issued SFAS Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement, effective
for financial statements for fiscal years beginning after June 15, 1999,
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The Company has not yet
determined the impact of this SFAS on its financial statements.
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 disposition 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. All proceeds were used to
acquire qualified replacement property in the second and third quarters.
In April, 1998, the Company purchased two properties. The first property,
located in Chicago, Illinois, was purchased for approximately $5.8 million
from a partnership. It was funded with the Company's working capital and
proceeds from the tax-free exchange account. The second property, located in
Des Plaines, Illinois, was purchased for approximately $5.6 million. The
acquisition was funded from proceeds from the tax-free exchange account.
In May, 1998, the Company purchased two properties. The first property,
located in Wood Dale, Illinois, was purchased from a partnership in which one
of the Company's Senior Officers and a Company Trustee were partners, for
approximately $3.5 million. The transaction satisfied the Company's
investment criteria and was approved by the Company's independent trustees.
The second property, located in Batavia, Illinois, was purchased for
approximately $6.1 million from a partnership. Both acquisitions were funded
with proceeds from the tax-free exchange account.
In June, 1998, the Company purchased two properties. The first property,
located in Chicago, Illinois, was purchased from a partnership for
approximately $3.4 million. The second property, located in University Park,
Illinois, was purchased from a partnership for approximately $1.9 million.
Both acquisitions were funded with proceeds from the tax-free exchange
account.
In July, 1998, the Company acquired sixteen properties for an aggregate total
of $43.0 million located as follows: one in Des Plaines, Illinois, six in
Franklin Park, Illinois, four
7
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in Bedford Park, Illinois, one in Melrose Park, Illinois, three in Lake
Forest, Illinois and one in Elgin, Illinois. The purchase was funded with a
portion of the proceeds from the tax-free exchange account, the assumption of
$15.6 million in mortgage debt, and the remainder with a draw on the
Company's line of credit.
In September, 1998, the Company purchased two properties. The first
property, located in Alsip, Illinois, was purchased from a partnership for
approximately $8.0 million. The second property, located in Elgin, Illinois,
was purchased for approximately $3.9 million. Both acquisitions were funded
with draws from the Company's line of credit.
At September 30, 1998, there were no remaining proceeds from the qualified
tax-free exchanges.
4. MORTGAGE NOTES RECEIVABLE
In March 1998, the Company received proceeds from the repayment of two
mortgages outstanding totaling $20.1 million.
In July 1998, the Company received proceeds for the repayment of a mortgage
outstanding totaling $9.3 million.
5. INVESTMENT IN AND ADVANCES TO AFFILIATE
The Company holds approximately 99% of the economic interest in CenterPoint
Realty Services Corporation ("CRS"), an unconsolidated taxable subsidiary, in
the form of non-voting common equity. CRS and its subsidiaries engage in
businesses and services which compliment the Company's business, including
the provision of services and commodities to tenants of the Company, the
development of real property and the management of properties owned by third
parties. Income from these activities, received by REITs and their qualified
REIT subsidiaries, is limited under current REIT tax regulations.
As of September 30, 1998, the Company had advanced to CRS approximately $16.1
million under a demand loan with interest rates ranging from 8.125% to 11%.
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 nine months ended
September 30, 1998 and 1997:
8
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<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Interest paid $8,396 $8,308
Interest capitalized 1,611 383
Construction costs paid by the Company
through mortgage notes receivable 1,837
</TABLE>
In conjunction with the acquisition of real estate, for the nine months ended
September 30, 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 $ 87,228 $61,415
Mortgage notes assumed (20,586)
Liabilities, net of other assets (2,728) (1,863)
-------- -------
Acquisition of real estate $ 63,914 $59,552
-------- -------
-------- -------
</TABLE>
In conjunction with the disposition of real estate, the Company disposed of the
following asset and liability amounts for the nine months ended September 30,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Disposal of real estate $24,589 $2,276
Liabilities, net of other assets (471) 21
------- ------
Disposition of real estate $24,118 $2,297
------- ------
------- ------
</TABLE>
Conversion of convertible subordinated debentures payable for the nine months
ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Convertible subordinated debentures converted $3,157 $2,590
Common shares issued at $18.25 per share
172,982 and 141,901, respectively 3,157 2,589
------ ------
Cash disbursed for fractional shares $ - $ 1
------ ------
------ ------
</TABLE>
SENIOR UNSECURED DEBT
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 then outstanding under the Company's line
of credit co-led by The First National Bank of Chicago and Lehman Brothers
Holdings Inc.
8. 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.
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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.
In September, 1998, the Company entered into an interest rate lock
arrangement to fix the interest rate on $25 million of anticipated borrowings
at 4.835% plus the market spread to the 7 year Treasury on the date of
issuance of the debt. The arrangement expires in May, 1999.
At September 30, 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.
9. SUBSEQUENT EVENTS
In October 1998, the Company purchased a property, located in Chicago,
Illinois, for $0.8 million with proceeds from a draw on the Company's line of
credit.
Also in October, the Company disposed of two properties located in Schaumburg
and Chicago, Illinois for an aggregate price of $3.2 million. The
disposition of the properties qualified for treatment as a tax-free exchange
under the Internal Revenue Code. The Company expects to use the proceeds to
acquire qualified replacement property.
In October 1998, 874,639 of the Company's Class B common shares were
converted by the holder of the Class B common shares into 874,639 common
shares which constituted 4.9% of the then total outstanding shares of the
Company.
Since September 30, 1998, $0.5 million worth of convertible subordinated
debentures have been converted to 27,397 common shares.
10
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10. 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 September 30, 1998 and 1997 and
the nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---------- ---------- --------- ---------
(in thousands, except for share data)
<S> <C> <C> <C> <C>
Numerators:
Net income $ 9,571 $ 6,742 $ 27,351 $ 19,557
Dividends on preferred shares (1,590) (4,770)
---------- ---------- --------- ---------
Net income available to common shareholders - for
basic and diluted EPS $ 7,981 $ 6,742 $ 22,581 $ 19,557
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Denominators:
Weighted average common shares outstanding - for
basic EPS 20,103,160 19,027,709 19,771,256 18,472,253
Effect of dilutive securities - options 227,618 349,628 235,890 346,616
---------- ---------- ---------- ----------
Weighted average common shares outstanding - for
diluted EPS 20,330,778 19,377,337 20,007,146 18,818,869
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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 September 30, 1998 and 1997 and the
nine months ended September 30, 1998 and 1997 would be anti-dilutive.
11
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11. PRO FORMA FINANCIAL INFORMATION
Due to the effect of securities offerings in March, 1997, November, 1997,
March, 1998, and April 1998, 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 nine months ended September 30, 1998 and 1997 is presented as if the
1997 acquisitions and dispositions, the 1998 acquisitions and dispositions,
the 1997 and 1998 securities offerings, and the corresponding repayment of
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>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
-------- --------
(in thousands, except for per share data)
<S> <C> <C>
Total revenues $ 87,790 $ 70,640
Total expenses 60,202 45,512
-------- --------
Net income 27,588 25,128
Preferred dividends (4,770) (4,770)
-------- --------
Net income available to common
shareholders $ 22,818 $ 20,358
-------- --------
-------- --------
Per share income available to common
shareholders:
Basic $ 1.14 $ 1.03
Diluted $ 1.13 $ 1.01
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
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 SEPTEMBER 30, 1998 TO THREE MONTHS ENDED
SEPTEMBER 30, 1997.
REVENUES
Total revenues increased by $7.0 million or 32.5% over the same period last
year.
In the third quarter of 1998, 93.0% of total revenues of the Company were
derived primarily from base rents, straight-line rents, expense
reimbursements and mortgage income (operating and investment revenue),
pursuant to the terms of tenant leases and mortgages held for space at the
warehouse/industrial properties.
Operating and investment revenues increased by $6.7 million in the third
quarter of 1998. A portion of the increase from the prior year is due to
income from twenty-seven properties acquired in the first nine months of 1998
and two build-to-suit properties coming on line totaling 3.4 million square
feet, net of three dispositions as of September 30, 1998. The remainder of
the increase was attributable to a full period of income from the 1997
acquisition of twenty-one properties, totaling 7.1 million square feet and
six build-to-suit properties totaling 1.5 million square feet coming on-line
in 1997, net of three property dispositions.
Other revenues increased $0.3 million due to increased fees earned by the
Company in connection with build-to-suit, development and leasing activities
which was partially offset by decreased property and build-to suit sales by
the Company's unconsolidated affiliate.
OPERATING AND NONOPERATING EXPENSES
Real estate tax expense and property operating and leasing expense increased
by $1.4 million from period to period. The majority of the increase, $1.6
million, resulted from a full period of real estate taxes on 1997
acquisitions and a partial period of real estate taxes on 1998 acquisitions,
net of dispositions. Property operating and leasing costs decreased in part
due to lower insurance, utilities and repairs and maintenance. Property
operating and leasing costs as a percentage of total revenues decreased from
13.2% to 9.4% when comparing the third quarter of 1997 to the third quarter
of 1998 due mainly to "economies of scale" realized by the Company.
13
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General and administrative expenses increased by $0.2 million for the period
due primarily to the growth of the Company, but as a percentage of total
revenues decreased from 3.6% to 3.4% when comparing the third quarter of 1997
to the third quarter of 1998.
Depreciation and amortization increased by $1.2 million due to a full period
of depreciation on 1997 acquisitions and partial period depreciation on 1998
acquisitions.
Interest incurred increased by approximately $1.1 million over the same
period last year due to the Company holding higher average balances
outstanding in the third quarter of 1998 compared to 1997.
Other income (expenses) decreased due to the non-recurring disposal of fixed
assets for a gain which occurred in the third quarter of 1997.
NET INCOME AND OTHER MEASURES OF OPERATIONS
Net income increased $2.8 million or 42.0% due to the growth of the Company
through the net acquisition of warehouse/industrial real estate.
Funds from operations (FFO) increased 21.4% from 11.2 million to $13.6 from
the third quarter of 1997 to the third quarter of 1998. The National
Association of Real Estate Investment Trusts (NAREIT) defines funds from
operations as net income before extraordinary items plus depreciation and
amortization less the amortization of deferred financing costs. The Company
considers FFO and FFO growth to be one relevant measure of financial
performance of equity REITs that provides a relevant basis for comparison
among REITs, and it is presented to assist investors in analyzing the
performance of the Company.
When comparing the third quarter results of operations of properties owned at
July 1, 1997 with the results of operations of the same properties for the
third quarter 1998 (the "same property" portfolio), the Company recognized an
increase of approximately 4.64% in net operating income. This same property
increase was due to the timely lease up of vacant space, rental increases on
renewed leases and contractual increases in minimum rent under leases in
place.
The Company assesses its operating results, in part, by comparing the Net
Revenue Margin between periods. Net Revenue Margin is calculated for the "in
service" portfolio 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 property related expenses not recovered by tenant
reimbursements. The margin for the third quarter of 1998 was 93.77% compared
with 89.06% for the same period last year. The third quarter margin was in line
with the Company's expectations.
14
<PAGE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO NINE MONTHS ENDED
SEPTEMBER 30, 1997.
REVENUES
Total revenues increased by $22.4 million or 36.6% over the same period last
year.
In the nine months of 1998, 92.8% of total revenues of the Company were
derived primarily from base rents, straight-line rents, expense
reimbursements and mortgage income (operating and investment revenue),
pursuant to the terms of tenant leases and mortgages for occupied space at
the warehouse/industrial properties.
Operating and investment revenues increased by $19.8 million in the first
nine months of 1998. A portion of the increase from the prior year is due to
income from twenty-seven properties acquired in the first nine months of 1998
and two build-to-suit property coming on line totaling 3.4 million square
feet, net of three dispositions as of September 30, 1998. The remainder of
the increase was attributable to a full period of income from the 1997
acquisition of twenty-one properties, totaling 7.1 million square feet and
six build-to-suit properties totaling 1.5 million square feet coming on-line
in 1997, net of three property dispositions.
Other revenues increased $2.7 million due to increased fees earned and
profits realized by the Company and the Company's unconsolidated affiliate in
connection with increase build-to-suit, development and leasing activities.
OPERATING AND NONOPERATING EXPENSES
Real estate tax expense and property operating and leasing expense increased
by $6.3 million from period to period. The majority of the increase, $5.2
million, resulted from a full period of real estate taxes on 1997
acquisitions and a partial period of real estate taxes on 1998 acquisitions,
net of dispositions. The balance of the increase was due to increased leasing
expenses, insurance, utilities, repairs and maintenance and property
management costs which increased proportionate to the level of acquisitions.
However, property operating and leasing costs as a percentage of total
revenues decreased from 13.5% to 11.2% when comparing the first nine months
of 1997 to the same period in 1998 due to "economies of scale" realized by
the Company.
General and administrative expenses increased by $0.7 million for the period
due primarily to the growth of the Company, but as a percentage of total
revenues decreased from 3.6% to 3.5% comparing periods.
Depreciation and amortization increased by $4.5 million due to a full period
of depreciation on 1997 acquisitions and depreciation on 1998 acquisitions.
15
<PAGE>
Interest incurred increased by approximately $2.2 million over the same
period last year due to the Company holding higher average balances
outstanding in the second quarter of 1998 compared to 1997.
Other income (expenses) decreased due to the non-recurring disposal of fixed
assets for a gain which occurred in the second quarter of 1997.
NET INCOME AND OTHER MEASURES OF OPERATIONS
Net income increased $7.8 million or 39.9% due to the growth of the Company
through the net acquisition of Warehouse/Industrial real estate.
Funds from operations (FFO) increased 24.2% from $31.0 million to $38.5
million the nine months ended September 30, 1997 to the nine months ended
September 30, 1998. The National Association of Real Estate Investment Trusts
(NAREIT) defines funds from operations as net income before extraordinary
items plus depreciation and amortization less the amortization of deferred
financing costs. The Company considers FFO and FFO growth to be one relevant
measure of financial performance of equity REITs that provides a relevant
basis for comparison among REITs, and it is presented to assist investors in
analyzing the performance of the Company.
When comparing the first nine month's results of operations of properties
owned at January 1, 1997 with the results of operations of the same
properties for the first nine months of 1998 (the "same property" portfolio),
the Company recognized an increase of approximately 1.6% in net operating
income. This same property increase was due to the timely lease up of vacant
space, rental increases on renewed leases and contractual increases in
minimum rent under leases in place.
The Company assesses its operating results, in part, by comparing the Net
Revenue Margin between periods. Net Revenue Margin is calculated for the "in
service" portfolio 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 property related expenses not
recovered by tenant reimbursements. The margin for the first nine months of
1998 was 89.02% compared with 89.23% for the same period last year. The
decrease was primarily attributable to transitional vacancy.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING AND INVESTMENT CASH FLOW
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 nine months of 1998 of $45.4
million net of $30.7 million of
16
<PAGE>
1998 distributions provided $14.7 million of retained capital. The Company
expects retained capital to fund a portion of future investment activities.
For the first nine months of 1998, the Company's investment activities
include acquisitions of $63.9 million, advances for construction in progress
of $23.7 million, advances on mortgage notes receivable of $20.6 million, and
improvements and additions to properties of $17.6 million. These activities
were funded with dispositions of real estate of $24.1 million, advances on
the company's line of credit of $93.9 million and a portion of the Company's
retained capital.
EQUITY AND SHARE ACTIVITY
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.
On April 8, 1998 the Company completed the private placement of 370,000
common shares of beneficial interest at $33.375 per share to an institutional
investor. The net proceeds of the offering of approximately $12.3 million
were used to fund working capital requirements.
During the first nine months of 1998, the Company paid distributions on
common shares of $23.0 million or $1.313 per share and on class B common
shares of $3.1 million or $1.348 per share. Also, in January of 1998, the
Company paid dividends on preferred shares of $1.43 million or $0.477 per
share, and in July and October of 1998, paid dividends of $1.59 million or
$0.53 per share each time. 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.
DEBT CAPACITY
As of November 12, 1998, 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 November 15, 1998, the Company had outstanding
borrowings of approximately $60.1 million under the unsecured revolving line
of credit (approximately 5.5% of the Company's fully diluted total market
capitalization), and the Company had remaining availability of approximately
$89.9 million under its unsecured line of credit.
At September 30, 1998, the Company's debt constituted approximately 28.5% of
its fully diluted total market capitalization. Also, the Company's debt
service coverage ratio remained high at 5.9 to 1, and the Company's fixed
charge coverage ratio decreased to 3.9 to 1 due to preferred dividends. The
Company's fully diluted common equity market capitalization was approximately
$746.4 million, and its fully diluted total market
17
<PAGE>
capitalization exceeded $1.1 billion. The Company's leverage ratios
benefited during the first nine months of 1998 from the conversion of
approximately $3.2 million of its 8.22% Convertible Subordinated Debentures,
due 2004, to 172,982 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.
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.
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, initially, by
draws on the Company's unsecured line of credit, followed by the issuance of
long-term unsecured indebtedness and the issuance of equity securities.
Management expects that a significant portion of the Company's investment
funds will be supplied by the proceeds of property dispositions.
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
18
<PAGE>
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.
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 statement disclosures.
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 adoption of this EITF has not had a
significant impact on the results of current operations and estimates will
not have a significant impact on the results of operations in the future.
In May, 1998, the FASB issued SFAS Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement, effective
for financial statements for fiscal years beginning after June 15, 1999,
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The Company has not yet
determined the impact of this SFAS on its financial statements.
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
19
<PAGE>
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 leases 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.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) The Company filed a Report on Form 8-K on August 3, 1998 to report the
adoption by the Board of Trustees of a Shareholder Rights Plan.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CENTERPOINT PROPERTIES TRUST
a Maryland Company
By: /s/ Paul S. Fisher
-----------------------------------
Paul S. Fisher
Executive Vice President and
Chief Financial Officer
November 13, 1998 (Principal Accounting Officer)
22
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