<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, 2000
( ) 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 11,
2000: 20,764,736.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 13
Item 3. Qualitative and Quantitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-holders 20
Item 6. Exhibits and Reports on Form 8-K 20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
<S> <C> <C>
Assets:
Investment in real estate:
Land and leasehold $ 159,394 $ 159,233
Buildings 642,204 620,224
Building improvements 119,719 127,306
Furniture, fixtures, and equipment 23,627 22,083
Construction in progress 40,292 43,051
----------- -----------
985,236 971,897
Less accumulated depreciation and amortization (94,497) (85,408)
Real estate held for sale, net 36,366 --
----------- -----------
Net investment in real estate 927,105 886,489
Cash and cash equivalents 28 3,505
Restricted cash and cash equivalents 22,150 31,963
Tenant accounts receivable, net 24,100 18,962
Mortgage notes receivable 13,398 6,270
Investment in and advances to affiliate 127,385 114,083
Prepaid expenses and other assets 3,561 6,909
Deferred expenses, net 16,810 15,246
----------- -----------
$ 1,134,537 $ 1,083,427
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable and other debt $ 82,361 $ 77,648
Senior unsecured debt 350,000 200,000
Tax-exempt debt 55,000 55,000
Line of credit 123,000 221,700
Preferred dividends payable 1,060 1,060
Accounts payable 2,757 16,957
Accrued expenses 45,293 37,864
Rents received in advance and security deposits 8,377 6,594
----------- -----------
667,848 616,823
----------- -----------
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 1
Common shares of beneficial interest, $.001 par value, 47,727,273 shares
authorized; 20,763,661 and 20,649,801 issued and outstanding, respectively 21 21
Additional paid-in-capital 509,903 506,456
Retained earnings (deficit) (40,523) (39,630)
Unearned compensation - restricted shares (2,716) (247)
----------- -----------
Total shareholders' equity 466,689 466,604
----------- -----------
$ 1,134,537 $ 1,083,427
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Operating and investment revenue:
Minimum rents $ 27,498 $ 21,598 $ 54,422 $ 42,941
Straight-line rents 869 1,420 2,157 2,264
Expense reimbursements 9,369 6,229 17,897 12,797
Mortgage interest income 242 364 309 408
-------- -------- -------- --------
Total operating and investment revenue 37,978 29,611 74,785 58,410
-------- -------- -------- --------
Other Revenue:
Real estate fee income 1,615 1,978 3,110 6,367
Equity in net (loss) income of affiliate (172) 465 (87) 873
-------- -------- -------- --------
Total other revenue 1,443 2,443 3,023 7,240
-------- -------- -------- --------
Total revenue 39,421 32,054 77,808 65,650
-------- -------- -------- --------
Expenses:
Real estate taxes 9,113 7,127 17,338 13,692
Property operating and leasing 4,087 3,282 9,219 6,863
General and administrative 1,110 940 2,282 1,846
Depreciation and amortization 9,044 7,223 16,439 13,220
Interest expense:
Interest incurred, net 7,685 5,018 14,671 9,378
Amortization of deferred financing costs 492 505 1,007 961
-------- -------- -------- --------
Total expenses 31,531 24,095 60,956 45,960
-------- -------- -------- --------
Operating income 7,890 7,959 16,852 19,690
Other income (expense):
Gain on sale of real estate 5,217 8,118 448
Other income (expense) 29 (7) 36 (27)
-------- -------- -------- --------
Income before extraordinary item 13,136 7,952 25,006 20,111
Extraordinary item (582) (582)
-------- -------- -------- --------
Net income 13,136 7,370 25,006 19,529
Preferred dividends (2,528) (1,662) (5,055) (3,252)
-------- -------- -------- --------
Net income available to common shareholders $ 10,608 $ 5,708 $ 19,951 $ 16,277
======== ======== ======== ========
Per share income before extraordinary item:
Basic $ 0.51 $ 0.31 $ 0.96 $ 0.84
Diluted $ 0.50 $ 0.31 $ 0.95 $ 0.83
Per share net income available to common shareholders:
Basic $ 0.51 $ 0.28 $ 0.96 $ 0.81
Diluted $ 0.50 $ 0.28 $ 0.95 $ 0.80
Distributions per common share $ 0.5025 $ 0.438 $ 1.005 $ 0.950
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 25,006 $ 19,529
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary item 582
Bad debts 200 342
Depreciation 15,140 12,339
Amortization of deferred financing costs 1,007 961
Other amortization 1,299 881
Straight-line rents (2,157) (2,264)
Incentive stock awards 230 24
Interest on converted debentures 49
Equity in net loss (income) of affiliate 87 (873)
Gain on disposal of real estate (8,118) (448)
Net changes in:
Tenant accounts receivable (4,114) (1,768)
Prepaid expenses and other assets (854) (705)
Rents received in advance and security deposits 1,653 (11)
Accounts payable and accrued expenses 4,793 4,086
--------- ---------
Net cash provided by operating activities 34,172 32,724
--------- ---------
Cash flows from investing activities:
Change in restricted cash and cash equivalents 9,880 4,856
Acquisition of real estate (63,357) (106,759)
Additions to construction in progress (20,794) (16,172)
Improvements and additions to properties (13,416) (13,566)
Proceeds from sale of real estate 36,871 22,319
Change in deposits on acquisitions 4,207 (2,221)
Repayment of mortgage notes receivable 72 11
Investment in and advances to affiliate (13,389) (42,241)
Receivables from affiliates and employees (8) 58
Additions to deferred expenses (3,527) (5,939)
--------- ---------
Net cash used in investing activities (63,461) (159,654)
--------- ---------
Cash flows from financing activities:
Proceeds from sale of preferred shares 50,000
Proceeds from sale of common shares 749 613
Offering costs paid (2,023)
Proceeds from issuance of unsecured notes payable 150,000 100,000
Proceeds from issuance of mortgage notes payable 21,605
Proceeds from line of credit 94,700 214,300
Repayment of mortgage notes payable (336) (32,226)
Repayment of revenue bonds (20,540)
Repayment of line of credit (193,400) (180,300)
Distributions (25,901) (22,315)
--------- ---------
Net cash provided by financing activities 25,812 129,114
--------- ---------
Net change in cash and cash equivalents (3,477) 2,184
Cash and cash equivalents, beginning of the year 3,505 475
--------- ---------
Cash and cash equivalents, end of period $ 28 $ 2,659
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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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, 1999 Financial Statements and Notes thereto included in the
Company's annual report on Form 10-K. The following Notes to Consolidated
Financial Statements highlight significant changes from the Notes included in
the December 31, 1999 Audited Financial Statements included in the Company's
annual report on Form 10-K and present interim disclosures as required by the
SEC. The accompanying Consolidated Financial Statements reflect, in the opinion
of management, all normal recurring adjustments necessary for a fair statement
of the interim 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
Under the terms of the Company's Restricted Stock Incentive Plan, adopted in
1995, employees were granted 76,609 restricted shares of the Company on March 8,
2000. Shares were awarded in the name of each of the participants, who have all
rights of other common shareholders, subject to certain restrictions and
forfeiture provisions. Restrictions on the shares expire no more than eight
years after the date of award, or earlier if certain performance targets are
met. Unearned compensation was recorded at the date of award based on the market
value of the shares. The unearned compensation is being amortized over the
eight-year vesting period unless the restriction is sooner lifted.
Under the terms of the 1993 Stock Option Plan, as amended, options for 215,803
common shares were issued on March 8, 2000. The options were granted at $34.9375
per share and vest according to the plan over a period of 5 years.
Under the terms of the 1995 Director Stock Plan, 2,640 common shares were issued
on May 10, 2000. In connection with the issuance of such shares, $0.1 million
was charged against expense in 2000.
2. ACQUISITION AND DISPOSITION OF REAL ESTATE
In the first six months of 2000, the Company purchased fourteen properties from
unrelated third parties for an aggregate cost of approximately $66.2 million.
The Company also transferred one property at cost from CenterPoint Realty
Services ("CRS"), its unconsolidated subsidiary, for approximately $4.2 million.
In addition, the Company disposed of ten operating properties and one land
parcel for an aggregate sales price of approximately $44.1 million. The land
parcel was
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sold to CRS at cost, approximately $0.7 million. The acquisitions were funded
first with proceeds from the dispositions and then from advances on the
Company's lines of credit.
During the first half of 2000, the Company's unconsolidated affiliate, CRS,
purchased five properties from unrelated third parties for an aggregate cost of
approximately $15.8 million, which includes one land parcel purchased from the
Company. CRS disposed of eight properties for an aggregate sales price of
approximately $16.3 million, which included one property sold to the Company.
These acquisitions were funded first with proceeds from dispositions and then
from advances on the Company's lines of credit.
3. REAL ESTATE HELD FOR SALE
At June 30, 2000, the Company had approximately 0.7 million square feet of
warehouse/industrial properties held for sale. Net income (property revenues
less real estate taxes, property operating and leasing expenses, and
depreciation and amortization) related to the properties held for sale at
June 30, 2000 was approximately $1.0 million and $2.5 million for the six
months ended June 30, 2000 and 1999 respectively. There can be no assurance
that such properties held for sale will be sold.
4. INVESTMENT IN AND ADVANCES TO AFFILIATE
The Company holds approximately 99% of the economic interest in CRS. To
maintain compliance with limitations on income from business activities
received by REITs and their qualified REIT subsidiaries, the Company holds
its interest in CRS in the form of non-voting equity ownership, which
qualifies CRS as an unconsolidated taxable subsidiary.
Since its inception in 1995, CRS and its subsidiaries have engaged in businesses
and services which compliment the Company's business, including the purchase and
sale of warehouse/industrial real estate, 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.
Summarized financial information of CRS is shown below. Certain items in the CRS
financial statements have been reclassified to conform with 2000 presentation
with no effect on net income.
<TABLE>
<CAPTION>
Balance Sheets:
JUNE 30, DECEMBER 31,
2000 1999
---- ----
(in thousands)
<S> <C> <C>
Assets:
Land $ 13,196 $ 17,556
Buildings 57,313 44,832
Construction in progress 48,272 34,375
Real estate held for sale 5,622 2,511
Less accumulated depreciation (1,663) (861)
--------- ---------
122,740 98,413
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<PAGE>
Other assets 9,948 4,730
Investment in CenterPoint Venture, LLC 1,886
Mortgage notes receivable 10,773 17,968
--------- ---------
$ 145,347 $ 121,111
========= =========
Liabilities:
Note payable to affiliate - CenterPoint
Properties Trust $ 122,246 $ 108,584
Construction line of credit 7,439
Participation interest due
CenterPoint Properties Trust 716 989
Other liabilities 10,478 6,983
--------- ---------
140,879 116,556
Stockholders' equity 4,468 4,555
--------- ---------
$ 145,347 $ 121,111
========= =========
</TABLE>
<TABLE>
<CAPTION>
Statements of Operations:
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
Income:
Property sales $ 18,268 $ 18,991
Rental income 3,946 1,805
Equity in net (loss) of CenterPoint Venture LLC (107)
Other income 558 391
-------- --------
22,665 21,187
Operating expenses:
Cost of property sales 13,920 14,786
Participation interest 2,492 1,567
Other expenses 1,493 857
Depreciation and amortization 992 510
Interest 3,911 1,612
-------- --------
22,808 19,332
Provision for income taxes 56 (972)
-------- --------
Net (loss) income $ (87) $ 883
======== ========
</TABLE>
CRS owned 10 warehouse/industrial properties, totaling 1.6 million square feet,
as of June 30, 2000, which were 92% leased. CRS also had three
warehouse/industrial properties under construction as of June 30, 2000 and
December 31, 1999, and owned nine and ten land parcels for future developments
as of June 30, 2000, and December 31, 1999, respectively.
CRS had an outstanding balance due to the Company of $122,246 as of June 30,
2000, under a series of demand loans with interest rates ranging from 8.0% to
11.1%. The proceeds of the loans were required for development projects and
property purchases.
5. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS (IN THOUSANDS)
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<PAGE>
Supplemental disclosures of cash flow information for the six months ended June
30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Interest paid $ 3,332 $ 4,007
Interest capitalized 498 656
</TABLE>
In conjunction with the acquisition of real estate, for the six months ended
June 30, 2000 and 1999 the Company acquired the following assets and assumed the
following liability amounts:
<TABLE>
<CAPTION>
2000 1999
----------- --------
<S> <C> <C>
Purchase of real estate $ 70,371 $109,999
Mortgage notes payable (5,049)
Liabilities, net of other assets (1,965) (3,240)
----------- --------
Acquisition of real estate $ 63,357 $106,759
=========== ========
</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, 2000 and
1999:
<TABLE>
<CAPTION>
2000 1999
----------- ---------
<S> <C> <C>
Net basis of real estate sold $ 35,941 $ 22,598
Mortgage notes receivable (7,200)
Liabilities, net of other assets 12 (727)
Gain on sale of properties 8,118 448
----------- ---------
Proceeds from real estate sold $ 36,871 $ 22,319
=========== =========
</TABLE>
There were no remaining convertible subordinated debentures as of the end of
1999, and therefore, there were no conversions in 2000. For the first six months
of 1999, the conversions of convertible subordinated debentures payable are
summarized below:
<TABLE>
<CAPTION>
1999
------------
<S> <C>
Convertible subordinated debentures converted $ 507
Common shares issued at $18.25 per share,
27,778 507
------------
Cash disbursed for fractional shares $ -
============
</TABLE>
6. SENIOR UNSECURED DEBT
On January 12, 2000 the Company issued $150 million 7.9% senior unsecured
notes due January 15, 2003. The notes were underwritten by Lehman Brothers
Holdings, with A.G. Edwards & Sons, Inc., Banc of America Securities LLC,
Bank One Capital Markets, Inc., and First Union Securities acting as
co-managers. The net proceeds of issuance of approximately $149.1 million
were used to pay down the Company's lines of credit.
7. COMMITMENTS AND CONTINGENCIES
In the normal course of business, from time to time the Company is involved in
legal actions relating to the ownership and operations of its properties. In
management's opinion, the liabilities, if any, that may ultimately result from
such legal actions are not expected to have a
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materially adverse effect on the consolidated financial position, results of
operations and liquidity of the Company.
The Company has entered into contracts for the acquisition and disposition
of properties. Each acquisition transaction is subject to satisfactory
completion of due diligence and, in the case of development projects, completion
and occupancy of the projects.
At June 30, 2000, three of the properties owned by the Company were subject to
purchase options held by certain tenants. The purchase options were exercisable
at various intervals through 2006 for amounts that are greater than the net book
value of each property.
8 SUBSEQUENT EVENTS
On August 10, 2000, the United States Army transferred ownership of a portion of
the former Joliet Arsenal, an Army munitions manufacturing facility closed in
1976, to the Company for redevelopment. The 2,242 acres project will be one the
nation's largest private developments. Over the next 12 years, the Company plans
to build as much as 17 million square feet of distribution and manufacturing
space in an industrial park adjacent to a major multi-modal rail facility to be
operated by the Burlington Northern and Santa Fe Railway Company (BNSF). BNSF
has agreed to lease 560 acres and has additionally agreed to acquire 56 acres
for development of the multi-modal facility.
9. 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, 2000
and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(in thousands, except for share data)
<S> <C> <C> <C> <C>
Numerators:
Income before extraordinary item $ 13,136 $ 7,952 $ 25,006 $ 20,111
Dividends on preferred shares (2,528) (1,662) (5,055) (3,252)
------------ ------------ ------------ ------------
Income before extraordinary item - for basic and
diluted EPS $ 10,608 $ 6,290 $ 19,951 $ 16,859
============ ============ ============ ============
Net income $ 13,136 $ 7,370 $ 25,006 $ 19,529
Dividends on preferred shares (2,528) (1,662) (5,055) (3,252)
------------ ------------ ------------ ------------
Net income available to common shareholders - for
basic and diluted EPS $ 10,608 $ 5,708 $ 19,951 $ 16,277
============ ============ ============ ============
Denominators:
Weighted average common shares outstanding - for
basic EPS 20,759,055 20,185,921 20,722,217 20,173,928
Effect of share options 346,246 297,824 320,853 238,445
------------ ------------ ------------ ------------
Weighted average common shares outstanding - for
diluted EPS 21,105,301 20,483,745 21,043,070 20,412,373
============ ============ ============ ============
</TABLE>
The assumed conversion of the convertible preferred shares and convertible
subordinated debentures into common shares for purposes of computing diluted
earnings per share by adding preferred distributions and interest expense,
respectively, to the numerators, and adding the
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<PAGE>
assumed share conversions to the denominators for the three and six months ended
June 30, 2000 and 1999 would be anti-dilutive.
10. PRO FORMA FINANCIAL INFORMATION
Due to the effect of a securities offering in June, 1999 and acquisitions
(related to properties with operating history) and dispositions of properties
in 2000 and 1999, 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, 2000 and 1999 is presented as if the 1999 and 2000
acquisitions (with operating history) and dispositions, the 1999 securities
offering, and the corresponding repayment of certain debt had all occurred on
January 1, 1999 (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, 1999, or to project results for any future period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,,
--------------------------
2000 1999
------------ ------------
(in thousands, except for share and per share data)
<S> <C> <C>
Total revenues $ 76,540 $ 66,509
Total expenses 51,858 45,475
------------ ------------
Net income 24,682 21,034
Preferred dividends (5,055) (5,052)
------------ ------------
Net income available to common shareholders $ 19,627 $ 15,982
============ ============
Per share net income available to
common shareholders:
Basic $ 0.95 $ 0.79
Diluted $ 0.93 $ 0.78
Weighted average common shares
outstanding - basic 20,722,217 20,173,928
Weighted average common shares
outstanding - diluted 21,043,070 20,412,373
</TABLE>
11. RECENT PRONOUNCEMENTS
In June, 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 has no derivative positions as
of June 30, 2000.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), Revenue Recognition, which outlines basic criteria that must be
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met to recognize revenue and provides guidance for presentation of revenue and
for disclosure related to revenue recognition policies in financial statements
filed with the SEC. We believe that adopting SAB 101 will not have a material
impact on our financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, "Accounting
for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principles Board Opinion No. 25. This
interpretation clarifies:
- the definition of employee for purposes of applying Opinion
25, which deals with stock compensation issues;
- the criteria for determining whether a plan qualifies as a
noncompensatory plan;
- the accounting consequence of various modifications to the
terms of a previously fixed stock option or award; and
- the accounting for an exchange of stock compensation awards in
a business combination.
This interpretation is effective July 1, 2000, but certain conclusions in this
interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. The
adoption of FIN 44 does not have a material impact on our financial statements.
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<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 Company's Form
10-K filed for the fiscal year ended December 31, 1999 and the unaudited
financial statements presented with this Form 10-Q.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 TO THREE MONTHS ENDED JUNE 30,
1999.
REVENUES
Total revenues increased by $7.4 million or 23.0% over the same period last
year.
In the second quarter of 2000, 96.3% 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 $8.4 million in the second
quarter of 2000. A portion of the increase from the prior year is due to income
from 15 acquired operating properties in the first six months of 2000, totaling
2.3 million square feet, net of ten Company-owned property dispositions as of
June 30, 2000. The remainder of the increase was attributable to a full period
of income from the 1999 acquisitions and completion of development of 64
properties, totaling 5.1 million square feet, net of nine property dispositions.
Other revenues decreased $1.0 million partly due to the structuring of 2000's
merchant transactions as gains on the sale of properties rather than real estate
fee income.
OPERATING AND NONOPERATING EXPENSES
Real estate tax expense and property operating and leasing expense increased by
$2.8 million from period to period. The majority of the increase, $2.0 million,
resulted from a full period of real estate taxes on 1999 acquisitions and a
partial period of real estate taxes on 2000 acquisitions, net of dispositions.
Property operating and leasing costs also increased. When comparing the second
quarter of 1999 to the second quarter of 2000, property operating and leasing
costs as a percentage of total revenues increased from 10.2% to 10.4% due to
current and future growth of the Company's operating team and operating activity
on 2000 and 1999 acquisitions and developments.
General and administrative expenses increased 18.1% when comparing periods, but
as a percentage of total revenues, these expenses decreased from 2.9% to 2.8%
when comparing the second quarter of 1999 to the second quarter of 2000 due to
company growth.
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<PAGE>
Depreciation and amortization increased by $1.8 million due to a full period of
depreciation on 1999 acquisitions and partial period depreciation on 2000
acquisitions.
Interest incurred increased by approximately $2.7 million over the same period
last year due to higher average balances outstanding in the second quarter of
2000 compared to 1999 from increased investments in real estate.
Gains on the sale of real estate increased in the second quarter of 2000 due to
the sale of eight properties and one land parcel, while the Company sold no
properties in the second quarter of 1999. The Company continues its focus on
property dispositions in order to recycle capital.
In the second quarter of 1999, the Company refinanced the debt for Lake Shore
Dunes Apartments, writing off unamortized financing costs related to the early
extinguishment of the original debt of $0.6 million. There were no corresponding
debt refinancings in 2000.
NET INCOME AND OTHER MEASURES OF OPERATIONS
Net income increased $5.8 million or 78.2% due to a full period of 1999 and a
partial period of 2000 warehouse/industrial investments, coupled with increased
merchant activities.
Funds from operations (FFO) increased 28.8% from $13.9 million to $17.9 million
when comparing the second quarter of 1999 to the second quarter of 2000. The
National Association of Real Estate Investment Trusts ("NAREIT") defines funds
from operations as net income before extraordinary items plus depreciation and
non-financing amortization, less gains (losses) on the sale of real estate. The
Company includes in its calculation of FFO the gains (or losses) realized from
its disposition activity, measured as the sale price, net of selling costs, less
book value after adding back accumulated depreciation. The disposition of
stabilized properties, and the recycling of capital and profits to new "value
added" investments, is fundamental to the Company's business focus and funding
strategy. In the Company's view, FFO is appropriately adjusted by results of
this core, regular and recurring activity, although period to period variability
is possible because of changing market conditions and the progress of individual
disposition negotiations. Funds from Operations does not represent cash flow
from operations as defined by generally accepted accounting principles ("GAAP"),
should not be considered by the reader as an alternative to net income as an
indicator of the Company's operating performance or to cash flows as a measure
of liquidity, and is not indicative of cash available to fund all cash flow
needs.
When comparing the second quarter results of operations of properties owned at
January 1, 1999 with the results of operations of the same properties for the
second quarter 2000 (the "same store" portfolio), the Company recognized an
increase of approximately 8.4% 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
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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 2000 was 89.9% compared with 86.0% for the same period
last year, increasing mainly to transitional vacancy experienced in 1999.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 TO SIX MONTHS ENDED JUNE 30, 1999.
REVENUES
Total revenues increased by $12.2 million or 18.5% over the same period last
year.
In the first half of 2000, 96.1% 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 $16.4 million in the first half
of 2000. A portion of the increase from the prior year is due to income from 15
acquired operating properties in the first six months of 2000, totaling 2.3
million square feet, net of ten Company-owned property dispositions as of June
30, 2000. The remainder of the increase was attributable to a full period of
income from the 1999 acquisition and completion of development of 64 properties,
totaling 5.1 million square feet, net of nine property dispositions.
Other revenues decreased $4.2 million due to decreased merchant activity
structured as fees in 2000 when compared to 1999. In 2000, the Company has
structured many of its transactions as straight sales with corresponding gains.
OPERATING AND NONOPERATING EXPENSES
Real estate tax expense and property operating and leasing expense increased by
$6.0 million from period to period. The majority of the increase, $3.6 million,
resulted from a full period of real estate taxes on 1999 acquisitions and a
partial period of real estate taxes on 2000 acquisitions, net of dispositions.
Property operating and leasing costs increased by $2.4 million and as a
percentage of total revenues increased from 10.5% to 11.8% when comparing the
first half of 1999 to the first half of 2000. Growth of the Company's operations
team and operating activity on 2000 and 1999 acquisition and developments
accounted for the increase.
General and administrative expenses increased by $0.4 million when comparing
periods, but as a percentage of total revenues, were relatively unchanged
increasing from 2.8% to 2.9% when comparing the first half of 1999 to the first
half of 2000.
Depreciation and amortization increased by $3.2 million due to a full period of
depreciation on 1999 acquisitions and partial period depreciation on 2000
acquisitions.
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Interest incurred increased by approximately $5.3 million over the same period
last year due to higher average balances outstanding in the first half of 2000
compared to 1999 due to real estate investment activity.
With the Company's focus on recycling capital through property dispositions,
gains on the sale of real estate increased in the first half of 2000 from the
sale of ten properties and one land parcel, while the Company sold only one
property in the first half of 1999.
NET INCOME AND OTHER MEASURES OF OPERATIONS
Net income increased $5.5 million or 28.0% due to income from operations of net
new investments in warehouse/industrial real estate and the increased income
from property sales, leasing and other merchant activity.
FFO increased 15.1% from $30.5 million to $35.1 million from the first half
of 1999 to the first half of 2000.
When comparing the first half results of operations of properties owned at
January 1, 1999 with the results of operations of the same properties for the
first half of 2000 (the "same store" portfolio), the Company recognized an
increase of approximately 6.2% 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 2000 was 88.0% compared with 87.1%
for the same period last year. The 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 stabilized asset
dispositions, supplemented by unsecured financings and periodic capital raises,
have been used to fund, on a long term basis, acquisitions and other capital
costs. Cash flow from operations during the first six months of 2000 was $34.2
million, providing $8.3 million of retained capital after distributions of $25.9
million. The Company expects retained capital to fund a portion of future
investment activities.
For the first six months of 2000, the Company's investment activities include
acquisitions of $63.4 million, advances for construction in progress of $20.8
million, and improvements and additions to properties of $13.4 million. These
activities were funded with dispositions of real estate of $36.9 million,
advances on the Company's lines of credit and a portion of the Company's
retained capital. Advances on the Company's lines of credit also funded
advances to CRS of $13.4 million for construction in progress at the
subsidiary level.
EQUITY AND SHARE ACTIVITY
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During the first six months of 2000, the Company paid distributions on common
shares of $20.8 million or $1.005 per share. Also, in 2000, the Company paid
dividends on Series A Preferred Shares of $3.2 million or $1.06 per share and
$1.9 million for dividends on Series B Convertible Preferred Shares or $1.875
per share. The following factors, among others, will affect the future
availability of funds for distribution: (i) scheduled increases in base rents
under existing leases, (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 led by Bank One. As of
August 11, 2000, the Company had outstanding borrowings of approximately $157
million under the Company's unsecured line of credit (approximately 38.4% of the
Company's fully diluted total market capitalization), and the Company had
remaining availability of approximately $93 million under its unsecured line of
credit.
On January 12, 2000 the Company issued $150 million 7.9% senior unsecured
notes due January 15, 2003. The notes were underwritten by Lehman Brothers
Holdings, with A.G. Edwards & Sons, Inc., Banc of America Securities LLC,
Bank One Capital Markets, Inc., and First Union Securities acting as
co-managers. The net proceeds of issuance of approximately $149.1 million
were used to pay down the Company's lines of credit.
At June 30, 2000, the Company's debt constituted approximately 39.2% of its
fully diluted total market capitalization. Also, the Company's six-month debt
service coverage ratio decreased from the prior year, but remained high at 3.9
to 1, and the Company's fixed charge coverage ratio was 2.9 to 1 due to
preferred dividends. The Company's fully diluted common equity market
capitalization was approximately $830.1 million, and its fully diluted total
market capitalization of approximately $1.6 billion.
Standard and Poors, Duff & Phelps Credit Rating Co. and Moody's Investors
Service's have assigned investment grade ratings to the Company's 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 it is able 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.
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 dispositions of stabilized assets, which is dependent on market
conditions which presently remain favorable.
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RECENT PRONOUNCEMENTS
In June, 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 has no derivative positions as
of June 30, 2000.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), Revenue Recognition, which outlines basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements
filed with the SEC. We believe that adopting SAB 101 will not have a material
impact on our financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, "Accounting
for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principles Board Opinion No. 25. This
interpretation clarifies:
- the definition of employee for purposes of applying Opinion
25, which deals with stock compensation issues;
- the criteria for determining whether a plan qualifies as a
noncompensatory plan;
- the accounting consequence of various modifications to the
terms of a previously fixed stock option or award; and
- the accounting for an exchange of stock compensation awards in
a business combination.
This interpretation is effective July 1, 2000, but certain conclusions in this
interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. The
adoption of FIN 44 does not have a material impact on our 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 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
and the potential adverse impact of the market interest rates on the cost of
borrowings by the Company and on the market price for the Company's securities.
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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 condition
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
from these projections discussed below.
At June 30, 2000, $178 million or 29.2% of the Company's debt was variable
rate debt (inclusive of tax exempt debt at an interest rate of 4.8% as of
June 30, 2000) and $432.4 million or 70.8% of the debt was fixed rate debt.
Based on the amount of variable debt outstanding as of June 30, 2000, 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 $1.2 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.
- Inability to keep high levels of occupancy.
- Tenant defaults.
- Unfavorable changes in governmental rules and fiscal policies
(including rent control legislation).
- Ability to sell properties.
- Acts of God and other factors that are beyond the Company's
control.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company held its annual meeting of shareholders on May 10, 2000. The
submissions and voting results were as follows:
1. 17,225,536 shares were voted in the election of trustees and the following
persons received the number of votes indicated:
For Trustee VOTED IN FAVOR VOTE WITHHELD
Nicholas C. Babson 12,701,913 4,523,623
Martin Barber 17,011,207 214,329
Norman R. Bobins 17,007,807 217,729
Alan D. Feld 17,010,767 214,769
Paul S. Fisher 17,011,007 214,529
John S. Gates, Jr. 15,163,843 2,061,693
John J. Kinsella 12,564,905 4,660,631
Michael M. Mullen 17,011,007 214,529
Thomas E. Robinson 17,011,007 214,529
Robert L. Stovall 17,009,107 216,429
2. On the approval of the 2000 Omnibus Employee Retention and Incentive Plan:
VOTED IN FAVOR VOTED AGAINST ABSTAINED NON-VOTE
13,272,833 1,088,481 28,950 2,835,272
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
10.1 Stock Grant Agreement between the Company and John S. Gates,
Jr.
10.2 Stock Grant Agreement between the Company and Michael M.
Mullen.
10.3 Stock Grant Agreement between the Company and Paul T. Ahern.
10.4 Stock Grant Agreement between the Company and Rockford O.
Kottka.
10.5 Stock Option Agreement between the Company and John S. Gates,
Jr.
10.6 Stock Option Agreement between the Company and Michael M.
Mullen.
10.7 Stock Option Agreement between the Company and Paul S. Fisher.
10.8 Stock Option Agreement between the Company and Rockford O.
Kottka.
10.9 Stock Option Agreement between the Company and Alan D. Feld
10.10 Stock Option Agreement between the Company and John J.
Kinsella
10.11 Stock Option Agreement between the Company and Martin Barber.
10.12 Stock Option Agreement between the Company and Nicholas Babson
10.13 Stock Option Agreement between the Company and Norman Bobins.
10.14 Stock Option Agreement between the Company and Thomas E.
Robinson.
10.15 Stock Option Agreement between the Company and Robert L.
Stovall.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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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 11, 2000 (Principal Accounting Officer)
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