<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 June 30, 1999
( ) 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 Road, 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 August 16,
1999: 20,162,263
Number of Class B Common Shares of Beneficial Interest outstanding as of
August 16, 1999: 76,802.
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1999 1998
-------------- -------------
<S> <C> <C>
Assets:
Investment in real estate:
Land and leasehold $ 152,880 $ 128,045
Buildings 585,638 487,996
Building improvements 107,353 94,474
Furniture, fixtures, and equipment 19,713 18,817
Construction in progress 22,282 18,401
----------- ------------
887,866 747,733
Less accumulated depreciation and amortization 74,533 62,257
----------- ------------
Net investment in real estate 813,333 685,476
Cash and cash equivalents 2,659 475
Restricted cash and cash equivalents 28,200 33,056
Tenant accounts receivable, net 21,733 18,067
Mortgage notes receivable 890 20,353
Investment in and advances to affiliate 90,364 48,564
Prepaid expenses and other assets 6,893 5,264
Deferred expenses, net 14,193 10,681
----------- ------------
$ 978,265 $821,936
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 92,899 $ 103,520
Senior unsecured debt 200,000 100,000
Tax-exempt debt 55,000 75,540
Line of credit 111,600 77,600
Convertible subordinated debentures payable 7,551 8,058
Preferred dividends payable 1,132 1,060
Accounts payable 10,507 7,986
Accrued expenses 38,898 30,810
Rents received in advance and security deposits 5,572 5,323
----------- ------------
523,159 409,897
----------- ------------
Commitments and contingencies
Shareholders' equity:
Series A 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
Series B convertible preferred shares of beneficial interest, $.001 par value;
1,000,000 issued and outstanding having a liquidation preference of
$50 per share ($50,000) 1
Common shares of beneficial interest, $.001 par value, 47,727,273 shares
authorized; 20,129,224 and 18,753,474 issued and outstanding, respectively 20 19
Class B common shares of beneficial interest, $.001 par value, 2,727,727
shares authorized; 76,802 and 1,398,088 issued and outstanding, respectively 1
Additional paid-in-capital 498,371 449,229
Retained earnings (deficit) (43,017) (36,917)
Unearned compensation - restricted stock (272) (296)
----------- ------------
Total shareholders' equity 455,106 412,039
----------- ------------
$ 978,265 $ 821,936
----------- ------------
----------- ------------
</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)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenue:
Operating and investment revenue:
Minimum rents $ 21,598 $ 18,050 $ 42,411 $ 35,797
Straight-line rents 1,420 1,157 2,264 2,521
Expense reimbursements 6,229 6,115 12,797 11,573
Mortgage interest income 364 679 919 1,336
----------- ----------- ---------- -----------
Total operating and investment revenue 29,611 26,002 58,391 51,227
----------- ----------- ---------- -----------
Other Revenue:
Real estate fee income 1,542 1,707 4,243 3,674
Equity in net income of affiliate 465 275 219 401
----------- ----------- ---------- -----------
Total other revenue 2,007 1,982 4,462 4,075
----------- ----------- ---------- -----------
Total revenue 31,618 27,984 62,853 55,302
----------- ----------- ---------- -----------
Expenses:
Real estate taxes 7,127 6,001 13,692 11,949
Property operating and leasing 3,282 3,210 6,863 6,752
General and administrative 940 1,001 1,846 1,992
Depreciation and amortization 7,223 5,186 13,220 9,882
Interest expense:
Interest incurred, net 5,018 3,056 9,378 5,984
Amortization of deferred financing costs 505 439 961 925
----------- ---------- ---------- -----------
Total expenses 24,095 18,894 45,960 37,484
----------- ----------- ---------- -----------
Operating income 7,523 9,090 16,893 17,818
Other income (expense), net (7) (21) (27) (37)
----------- ----------- ---------- -----------
Income before extraordinary item 7,516 9,069 16,866 17,781
Extraordinary item (582) (582)
----------- ----------- ---------- -----------
Net income 6,934 9,069 16,284 17,781
Preferred dividends (1,662) (1,590) (3,252) (3,180)
----------- ----------- ---------- -----------
Net income available to common shareholders $ 5,272 $ 7,479 $ 13,032 $ 14,601
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Per share income before extraordinary item:
Basic $ 0.29 $ 0.37 $ 0.67 $ 0.74
Diluted $ 0.29 $ 0.37 $ 0.67 $ 0.74
Per share net income available to common
shareholders:
Basic $ 0.26 $ 0.37 $ 0.65 $ 0.74
Diluted $ 0.26 $ 0.37 $ 0.64 $ 0.74
Distributions per common share $ 0.475 $ 0.438 $ 0.950 $ 0.875
</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>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,284 $ 17,781
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary item 582
Bad debts 342 100
Depreciation 12,339 9,277
Amortization of deferred financing costs 961 925
Other amortization 881 605
Straight-line rents (2,264) (2,522)
Incentive stock awards 24 104
Interest on converted debentures 49 36
Equity in net income of affiliate (219) (401)
Net changes in:
Tenant accounts receivable (1,768) (2,872)
Prepaid expenses and other assets 529 (1,195)
Rents received in advance and security deposits (11) (75)
Accounts payable and accrued expenses 4,335 4,655
----------- ----------
Net cash provided by operating activities 32,064 26,418
----------- ----------
Cash flows from investing activities:
Change in restricted cash and cash equivalents 4,856 2,681
Acquisition of real estate (106,759) (31,738)
Additions to construction in progress (16,172) (15,050)
Improvements and additions to properties (13,566) (11,983)
Disposition of real estate 2,867 24,118
Change in deposits on acquisitions (2,221) (3,416)
Issuance of mortgage notes receivable (20,453)
Repayment of mortgage notes receivable 19,463 20,111
Investment in and advances to affiliate (41,581) (6,342)
Receivables from affiliates and employees 58 27
Additions to deferred expenses (5,939) (3,009)
----------- ----------
Net cash used in investing activities (158,994) (45,054)
----------- ----------
Cash flows from financing activities:
Proceeds from sale of preferred shares 50,000 24,785
Proceeds from sale of common shares 613
Offering costs paid (2,023) (289)
Proceeds from issuance of unsecured notes payable 100,000 100,000
Proceeds from issuance of mortgage notes payable 21,605
Proceeds from line of credit 214,300 48,400
Repayment of mortgage notes payable (32,226)
Repayment of revenue bonds (20,540)
Repayment of line of credit (180,300) (133,600)
Repayment of notes payable (33)
Distributions (22,315) (20,240)
----------- ----------
Net cash provided by financing activities 129,114 19,023
----------- ----------
Net change in cash and cash equivalents 2,184 387
Cash and cash equivalents, beginning of the year 475 1,652
----------- ----------
<PAGE>
Cash and cash equivalents, end of period $ 2,659 $ 2,039
----------- ----------
----------- ----------
</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, 1998, Financial Statements and Notes thereto included in the
Company's Form 10-K. The following Notes to Consolidated Financial Statements
highlight significant changes from the Notes included in the December 31, 1998,
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, 1998 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
In January and February, 1999, 536,981 and 784,305 of the Company's Class B
common shares, respectively, were converted by the holder of the Class B common
shares into 536,981 and 784,305 common shares.
In June, 1999, the Company completed a public offering of 1,000,000 shares of
7.50% Series B Convertible Cumulative Redeemable Preferred Shares at $50.00 per
share. The shares have no maturity date but may be redeemed by the Company for
$50.00 per share by June 30, 2004. The shares are convertible into common shares
at a conversion price of $43.50 per common share, equivalent to a conversion
rate of 1.1494 to 1. The net proceeds of the offering, approximately $48.0
million, were used to refund outstanding balances under the Company's unsecured
line of credit.
2. RECENT PRONOUNCEMENTS
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, 2000, provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The Company currently has no derivatives
outstanding.
<PAGE>
3. ACQUISITION AND DISPOSITION OF REAL ESTATE
In February, 1999, the Company disposed of a property, located in Chicago,
Illinois, for approximately $3.7 million. The disposition of the property
qualified for treatment as a tax-free exchange under the Internal Revenue Code.
Also in February, 1999, the Company purchased a property for approximately $4.3
million with borrowings from the Company's unsecured line of credit.
In March, 1999, the Company purchased three properties. The first property,
located in Yorkville, Wisconsin, was purchased for approximately $3.8 million
with proceeds from the tax-free exchange account. The second property, located
in Willowbrook, Illinois, was purchased for approximately $4.2 million with
proceeds from the tax-free exchange account. The third property, located in
Munster, Indiana, was purchased for approximately $9.6 million with borrowings
from the Company's unsecured line of credit.
In May, 1999, the Company purchased 42 properties. The first property, a 368,215
square foot facility, located in Carol Stream, Illinois was purchased for
approximately $8.3 million. The next 10 properties, totaling 121,408 square
feet, were purchased as a portfolio for approximately $10.0 million. The
portfolio consists of 10 industrial land parcels, used as bus terminals. All of
the properties are located in Illinois, throughout the Chicago Region. The next
31 properties, totaling 1,245,494 square feet, were purchased as a portfolio for
approximately $44.0 million with borrowings from the Company's unsecured line of
credit. The portfolio properties are located in Illinois, throughout the Chicago
region.
In June, 1999, the Company purchased three properties. The first property,
located in Elk Grove Village, Illinois, was purchased for approximately $2.3
million. The second property, located in Milwaukee, Wisconsin was purchased
for approximately $2.7 million. The third property, located in Elk Grove,
Illinois, was purchased for approximately $3.4 million.
All of the above mentioned purchases of properties were funded with proceeds
from the company's unsecured line of credit.
4. MORTGAGE NOTES RECEIVABLE
In May, 1999, the Company received proceeds from the repayment of mortgage notes
receivable totaling $19.5 million. These proceeds were used to repay borrowings
from the Company's unsecured line of credit.
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
<PAGE>
by REITs and their qualified REIT subsidiaries, is limited under current REIT
tax regulations.
As of June 30, 1999, the Company had advanced to CRS approximately $84.1
million under a series of demand loans with interest rates ranging from 8.0%
to 11.1%. CRS used the proceeds of the loans towards development projects
currently under construction and the purchase of land held for future
development. Principal and interest are due upon demand.
The Company either purchases development projects from CRS or CRS sells
development projects to independent third parties. Projects undertaken by CRS
are developed 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 the six months ended June
30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Interest paid $ 4,007 $ 4,686
Interest capitalized 656 1,116
Construction costs paid by the Company
through mortgage notes receivable 1,837
</TABLE>
In conjunction with the acquisition of real estate, for the six months ended
June 30, 1999 and 1998 the Company acquired the following asset and assumed the
following liability amounts:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Purchase of real estate $ 109,999 $ 32,569
Liabilities, net of other assets (3,240) (831)
----------- ----------
Acquisition of real estate $ 106,759 $ 31,738
----------- ----------
----------- ----------
</TABLE>
In conjunction with the disposition of real estate, the Company disposed of the
following asset and liability amounts for the six months ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Disposal of real estate $ 3,146 $ 24,589
Liabilities, net of other assets (279) (471)
---------- ---------
Disposition of real estate $ 2,867 $ 24,118
---------- ---------
---------- ---------
</TABLE>
Conversion of convertible subordinated debentures payable for the six months
ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Convertible subordinated debentures converted $ 507 $ 2,127
Common shares issued at $18.25 per share
<PAGE>
27,778 and 116,544, respectively 507 2,127
------------- -----------
Cash disbursed for fractional shares $ - $ -
------------- -----------
------------- -----------
</TABLE>
7. SENIOR UNSECURED DEBT
On March 15, 1999 the Company issued $100 million, 7.142% senior unsecured notes
due March 15, 2004. The net proceeds of $99.3 million were used to repay
substantially all amounts then outstanding under the Company's unsecured line of
credit.
8. TAX-EXEMPT DEBT
The Company refinanced the $20.5 million tax-exempt debt secured by Lake Shore
Dunes Apartments, with a 35 year assumable, HUD non-recourse tax-exempt and
taxable debt for approximately the same amount with a fixed interest rate of
6.195%. This refinancing resulted in the write-off of $0.6 million in
unamortized financing fees which are reflected as an extraordinary item in the
consolidated statements of operations.
9. 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 June 30, 1999, six 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 for amounts that are greater than the net book
value of the assets. 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.
10. SUBSEQUENT EVENTS
On August 12, 1999, the Company announced the redemption of all of its
outstanding 8.22% Convertible Subordinate Debentures due 2004 ($6,948,000
principle amount of Debentures is currently outstanding). The redemption will
occur on September 24, 1999 and will be at par with interest accrued to the
redemption date.
<PAGE>
11. EARNINGS PER COMMON SHARE
The following are the reconciliations of the numerators and denominators of the
basic and diluted earnings per share for the three months ended June 30, 1999
and 1998 and the six months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(in thousands, except for share data)
<S> <C> <C> <C> <C>
Numerators:
Income before extraordinary item $ 7,516 $ 9,069 $ 16,866 $ 17,781
Dividends on preferred shares (1,662) (1,590) (3,252) (3,180)
------------ ------------ ------------ ------------
Income before extraordinary item - for basic EPS 5,854 7,479 13,614 14,601
Dividends on convertible preferred shares 72 72
------------ ------------ ------------ ------------
Income before extraordinary item - for diluted EPS $ 5,926 $ 7,479 $ 13,686 $ 14,601
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income $ 6,934 $ 9,069 $ 16,284 $ 17,781
Dividends on preferred shares (1,662) (1,590) (3,252) (3,180)
------------ ------------ ------------ ------------
Net income available to common shareholders - for
basic EPS 5,272 7,479 13,032 14,601
Dividends on convertible preferred shares 72 72
------------ ------------ ------------ ------------
Net income available to common shareholders - for
diluted EPS $ 5,344 $ 7,479 $ 13,104 $ 14,601
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Denominators:
Weighted average common shares outstanding - for
basic EPS 20,185,921 19,985,422 20,173,928 19,602,554
Effect of convertible preferred shares 101,048 50,803
Effect of share options 297,824 236,912 238,445 240,688
------------ ------------ ------------ ------------
Weighted average common shares outstanding - for
diluted EPS 20,584,793 20,222,334 20,463,176 19,843,242
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The assumed conversion of the convertible subordinated debentures into common
shares for purposes of computing diluted earnings per share by adding interest
expense for the debentures to the numerators, and adding assumed share
conversions to the denominators for the three months ended June 30, 1999 and
1998 and the six months ended June 30, 1999 and 1998 would be anti-dilutive.
12. PRO FORMA FINANCIAL INFORMATION
Due to the effect of securities offerings in June, 1999, March, 1998, and April
1998, and the 1998 and 1999 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 six months ended June 30, 1999
and 1998 is presented as if the 1998 and 1999 acquisitions and dispositions, the
1998 and 1999 securities offerings, and the corresponding repayment of certain
debt had all occurred on January 1, 1998 (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,
<PAGE>
occurred at January 1, 1998, or to project results for any future
period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1999 1998
---------- ------------
(in thousands, except for share and per share data)
<S> <C> <C>
Total revenues $ 66,821 $ 64,571
Total expenses 47,912 43,762
----------- -----------
Income before extraordinary item 18,909 20,809
Preferred dividends (5,055) (5,055)
----------- -----------
Income before extraordinary item
available to common shareholders $ 13,854 $ 15,754
----------- -----------
----------- -----------
Per share income before extraordinary
available to common shareholders:
Basic $ 0.69 $ 0.79
Diluted $ 0.73 $ 0.83
Weighted average common shares
outstanding - basic 20,173,078 19,972,724
Weighted average common shares
outstanding - diluted 21,560,952 21,363,837
</TABLE>
<PAGE>
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, 1998 and the unaudited financial
statements presented with this Form 10-Q.
Following announcement of its results for the quarter ended June 30, 1999, the
Company was advised by its auditors that documentation for an April 14, 1999
property sale did not permit second quarter earnings recognition in light of
recent interpretations of the relevant accounting standards. The parties have
re-executed conforming documentation pursuant to their original intent, which
now permits recognition of the income in the third quarter. The second quarter
financial statements included in this report reflect this adjustment. To assure
consistent reporting, the Company has agreed that prior, similar transactions be
reviewed by its auditors. Based on discussions with its auditors, management
expects resulting prior period changes - if any - could cause solely a shift in
income between periods and possibly an increase in reported earnings in 1999 and
earlier periods. In any event, there will be no cash effect, tax effect or
decrease in cumulative retained earnings.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 TO THREE MONTHS ENDED JUNE 30,
1998.
REVENUES
Total revenues increased by $3.6 million or 13.0% over the same period last
year.
In the second quarter of 1999, 93.7% 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 $3.6 million in the second
quarter of 1999. A portion of the increase from the prior year is due to income
from fifty-one properties acquired and one completed build-to-suit in the first
six months of 1999, totaling 3.3 million square feet, net of one owned property
disposition as of June 30, 1999. The remainder of the increase was attributable
to a full period of income from the 1998 acquisition of thirty properties and
one completed build-to-suit property, totaling 3.2 million square feet, net of
five property dispositions.
Other revenues increased $0.03 million due to increased real estate fee income
earned by the Company in connection with build-to-suit, development and leasing
activities which
<PAGE>
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
$1.2 million from period to period. The majority of the increase, $1.1 million,
resulted from a full period of real estate taxes on 1998 acquisitions and a
partial period of real estate taxes on 1999 acquisitions, net of dispositions.
Property operating and leasing costs increased slightly. However, property
operating and leasing costs as a percentage of total revenues decreased from
11.5% to 10.4% when comparing the second quarter of 1998 to the second quarter
of 1999 due mainly to efficiencies realized by the Company.
General and administrative expenses decreased slightly when comparing periods
despite the growth of the Company. As a percentage of total revenues, general
and administrative expenses decreased from 3.6% to 3.0% when comparing the
second quarter of 1998 to the second quarter of 1999 due to efficiencies
realized by the Company.
Depreciation and amortization increased by $2.0 million due to a full period of
depreciation on 1998 acquisitions and partial period depreciation on 1999
acquisitions.
Interest incurred increased by approximately $2.0 million over the same period
last year due to higher average balances outstanding in the second quarter of
1999 compared to 1998.
Other income (expenses) remained consistent when comparing periods.
Due to the refinancing of debt for the Lake Shore Dunes Apartments, the Company
wrote off unamortized financing costs related to the early extinguishment of the
original debt of $0.6 million.
NET INCOME AND OTHER MEASURES OF OPERATIONS
Net income decreased $2.1 million or 23.5% largely due to the increase in real
estate taxes, depreciation and interest expense from the net acquisition of
warehouse/industrial real estate and the early extinguishment of debt.
Funds from operations (FFO) increased 16.3% from $12.9 million to $15.0 from the
second quarter of 1998 to the second quarter of 1999. On advice of the Company's
independent auditors, $1.5 million of earnings from the second quarter was
shifted to the third quarter. This income remains in second quarter FFO and has
been treated as an accounting adjustment. The National Association of Real
Estate Investment Trusts (NAREIT) defines funds from operations as net income
before extraordinary items plus
<PAGE>
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 second quarter results of operations of properties owned at
April 1, 1998 with the results of operations of the same properties for the
second quarter 1999 (the "same property" portfolio), the Company recognized an
increase of approximately 1.5% in net operating income. This same store 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 second quarter of 1999 was 86.0% compared
with 90.1% for the same period last year, decreasing due mainly to transitional
vacancy. The second quarter margin was in line with the Company's expectations.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 TO SIX MONTHS ENDED JUNE 30, 1998.
REVENUES
Total revenues increased by $7.5 million or 13.7% over the same period last
year.
In the first half of 1999, 92.9% 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 $7.2 million in the first half of
1999. A portion of the increase from the prior year is due to income from
fifty-one properties acquired and one completed build-to-suit in the six months
of 1999, totaling 3.3 million square feet, net of one disposition as of June 30,
1999. The remainder of the increase was attributable to a full period of income
from the 1998 acquisition of thirty properties and one completed build-to-suit
property, totaling 3.2 million square feet, net of five property dispositions.
Other revenues increased $0.4 million due to increased real estate fee income
earned by the Company in connection with build-to-suit, development and leasing
activities which
<PAGE>
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
$1.9 million from period to period. The majority of the increase, $1.7 million,
resulted from a full period of real estate taxes on 1998 acquisitions and a
partial period of real estate taxes on 1999 acquisitions, net of dispositions.
Property operating and leasing costs increased slightly. However, property
operating and leasing costs as a percentage of total revenues decreased from
10.9% to 12.2% when comparing the second quarter of 1998 to the second quarter
of 1999 due mainly to efficiencies realized by the Company.
General and administrative expenses decreased slightly when comparing periods
despite the growth of the Company. As a percentage of total revenues, general
and administrative expenses decreased from 3.6% to 2.9% when comparing the first
half of 1998 to the first half of 1999 due to efficiencies realized by the
Company.
Depreciation and amortization increased by $3.3 million due to a full period of
depreciation on 1998 acquisitions and partial period depreciation on 1999
acquisitions.
Interest incurred increased by approximately $3.4 million over the same period
last year due to higher average balances outstanding in the second quarter of
1999 compared to 1998.
Other income (expenses) remained consistent when comparing periods.
Due to the refinancing of debt for the Lake Shore Dunes Apartments, the Company
wrote off unamortized financing costs related to the early extinguishment of the
original debt of $0.6 million.
NET INCOME AND OTHER MEASURES OF OPERATIONS
Net income decreased $1.5 million or 8.4% due to the increase in real estate
taxes, depreciation and interest expense from the net acquisition of
warehouse/industrial real estate and the early extinguishment of debt.
Funds from operations (FFO) increased 16.1% from $24.9 million to $28.9 from the
first half of 1998 to the first half of 1999. On advice of the Company's
independent auditors, $1.5 million of earnings from the second quarter was
shifted to the third quarter. This income remains in second quarter FFO and has
been treated as an accounting adjustment.
When comparing the first half results of operations of properties owned at
January 1,
<PAGE>
1998 with the results of operations of the same properties for the first half
of 1999 (the "same property" portfolio), the Company recognized an increase
of approximately 4.8% in net operating income. This same store 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 net revenue margin for the first half of 1999 was 87.1% compared with 87.1%
for the same period last year. The first half margin was in line with the
Company's expectations.
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 six months of 1999 of $32.1
million net of $22.3 million of 1999 distributions provided $9.8 million of
retained capital. The Company expects retained capital to fund a portion of
future investment activities.
For the first six months of 1999, the Company's investment activities include
acquisitions of $106.8 million, advances for construction in progress of $16.2
million, and improvements and additions to properties of $13.6 million. These
activities were funded with dispositions of real estate of $2.9 million,
repayment of mortgage notes receivable of $19.5 million, advances on the
company's line of credit and a portion of the Company's retained capital.
Advances on the Company's line of credit also funded advances to affiliates of
$41.6 million for construction in progress.
EQUITY AND SHARE ACTIVITY
During the first six months of 1999, the Company paid distributions on common
shares of $18.7 million or $0.95 per share and on class B common shares of $0.4
million or $0.974 per share. Also, in 1999, the Company paid dividends on Series
A Preferred Shares of $3.2 million or $1.06 per share and accrued $0.1 million
for dividends on Series B Convertible Preferred Shares. The following factors,
among others, will affect the future availability of funds for distribution: (i)
scheduled increases in base rents under existing leases, (ii) changes in minimum
base rents attributable to replacement of existing leases with new or
replacement leases and (iii) restrictions under certain covenants of the
Company's unsecured line of credit.
DEBT CAPACITY
The Company has a $250 million unsecured credit facility co-led by Bank One and
Bank of America. As of August 12, 1999, the Company had outstanding borrowings
of approximately $138 million under the Company's unsecured line of credit
<PAGE>
(approximately 10.4% of the Company's fully diluted total market
capitalization), and the Company had remaining availability of approximately
$112 million under its unsecured line of credit.
At June 30, 1999, the Company's debt constituted approximately 34.34% of its
fully diluted total market capitalization. Also, the Company's debt service
coverage ratio remained high at 4.6 to 1, and the Company's fixed charge
coverage ratio was 3.4 to 1 due to preferred dividends. The Company's fully
diluted common equity market capitalization was approximately $755 million, and
its fully diluted total market capitalization exceeded $1.3 billion. The
Company's leverage ratios benefited during the first three months of 1999 from
the conversion of approximately $0.5 million of its 8.22% Convertible
Subordinated Debentures, due 2004, to 27,778 common shares.
Standard and Poors, Duff & Phelps Credit Rating Co. and Moody's Investors
Service's have assigned investment grade ratings to the Company's convertible
subordinated notes and senior unsecured debt and preferred stock issuable under
the Company's shelf registration statement.
The Company has considered it's 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 and investment dispositions.
YEAR 2000 COMPLIANCE
<PAGE>
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.
SUBSEQUENT EVENTS
On August 12, 2000, the Company announced the redemption of all of its
outstanding 8.22% Convertible Subordinate Debentures due 2004 ($6,948,000
principle amount of Debentures is currently outstanding). The redemption will
occur on September 24, 1999 and will be at par with interest accrued to the
redemption date. The Paying Agent will be The First National Bank of Chicago.
RECENT PRONOUNCEMENTS
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, 2000, provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The Company currently has no derivatives
outstanding.
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 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
<PAGE>
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.
<PAGE>
ITEM 3 QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company assesses its risk in relation to market conditions, and a discussion
about the Company's exposure to possible changes in market conditions follows.
This discussion involves the effect on earnings, cash flows and the value of the
Company's financial instruments as a result of possible future market conditions
changes. The discussions below include "forward looking statements" regarding
market risk, but management is not forecasting the occurrence of these market
changes. The actual earnings and cash flows of the Company may differ materially
these projections discussed below.
At June 30, 1999, $166.6 million or 35.7% of the Company's debt was variable
rate debt and $300.5 million or 64.3% of the debt was fixed rate debt. Based
on the amount of variable debt outstanding as of June 30, 1999, a 10% increase
or decrease in the Company's interest rate on the Company's variable rate debt
would decrease or increase, respectively, future earnings and cash flows by
approximately $0.9 million per year. A similar change in interest rates on the
Company's fixed rate debt would not increase or decrease the future earnings of
the Company during the term of the debt, but would effect the fair value of the
debt. An increase in interest rates would decrease the fair value of the
Company's fixed rate debt.
The Company is subject to other non-quantifiable market risks due to the nature
of its business. The business of owning and investing in real estate is highly
competitive. Several factors may adversely affect the economic performance and
value or our properties and the Company. These factors include:
- Adverse changes in general or local economic conditions affecting real
estate values, rental rates, interest rates, real estate tax rates and
other operating expenses.
- Competitive overbuilding.
- Our inability to keep high levels of occupancy in our properties.
- Tenant defaults.
- Unfavorable changes in governmental rules and fiscal policies (including
rent control legislation).
- Our ability to sell properties.
- Acts of God and other factors that are beyond our control.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On August 16, 1999, the Company filed with the Commission a current report on
Form 8-K/A No. 1 to report proforma financial information and financial
statements which were not reported on the Form 8-K filed on June 15, 1999,
which reported the acquisition by the company and its subsidiaries of
properties between between March 11, 1999 and June 15, 1999.
On June 21, 1999, the Company filed with the Commission a current report on Form
8-K relating to the issuance and sale of up to 1,000,000 shares of the Company's
7.5% Series B Convertible Cumulative Redeemable Preferred Shares pursuant to a
Regulation S-K, Item 601 (b) in lieu of filing the otherwise required exhibits
to the registration statement on Form S-3 of the Registrant, file no. 333-49359.
<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
August 16, 1999 (Principal Accounting Officer)
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