ITEM 1. BUSINESS.
THE COMPANY
CenterPoint Properties Trust (the "Company") is a fully integrated real estate investment trust focused on the acquisition, development, redevelopment, management and ownership of warehouse/industrial property located in Greater Chicago (defined as the area within a 150-mile radius of Chicago, including Milwaukee, Wisconsin and South Bend, Indiana), which, according to a ranking of markets published by Torto Wheaton Research and information published by CB Commercial, totals approximately 1.2 billion square feet, making it the largest warehouse/industrial market in the United States. The Company's investment and management portfolio currently consists of 95 warehouse/industrial properties containing approximately 22.1 million square feet (see the table of warehouse/industrial properties beginning on p. 14). The Company also owns and manages three retail properties, one parking lot and one apartment property, holds mortgages on two warehouse/industrial properties, and is developing eight build-to-suit projects. The Company's total investment and management portfolio, including the non-industrial properties, mortgage investments and build-to-suit projects, is approximately 25 million square feet. Based on published statistics regarding square feet of space owned and managed by other firms and publicly available information filed with the Securities and Exchange Commission, as well as its knowledge and experience in the market, the Company believes it is the largest owner and operator of warehouse/industrial property in Greater Chicago. As of December 31, 1997, the Company's properties were 97% leased, excluding properties which are currently being redeveloped and not leasable. The warehouse/industrial properties are occupied by 178 tenants in diverse industries. No tenant accounts for the lease of more than 5% of the Company's total revenues. Substantially all of the Company's properties have been constructed or renovated during the past ten years.
INVESTMENT OBJECTIVES AND BUSINESS POLICIES
The Company's objective is to maximize shareholder value by pursuing a business strategy focused on investment and ownership of warehouse/industrial properties in Greater Chicago and a growth strategy consisting of (i) intensive management of its existing properties and (ii) the acquisition of existing leased warehouse/industrial properties, build-to-suit projects and properties suitable for redevelopment; and (iii) development of buildings for purchase by tenants or institutions generating fee income for the Company.
BUSINESS STRATEGIES
WAREHOUSE/INDUSTRIAL PROPERTY. The Company believes that for the following reasons investment in warehouse/industrial property provides the opportunity for attractive returns and stable cash flow:
- LOW CAPITAL REQUIREMENTS. The cost per square foot of developing warehouse/industrial properties typically ranges between $40-45 per square foot, which is lower than the cost of developing other types of property. From the Company's perspective, this results in less capital committed to any particular property, permitting greater diversification of the Company's risk. In addition, relative to other property types, fewer tenant improvements are required to renew or lease warehouse industrial space, minimizing the level of recurring capital expenditures necessary to sustain rental income.
- HIGH TENANT RETENTION. Unlike office, retail and multi-family buildings, most warehouse/industrial buildings are occupied by a single tenant. Relocation tends to be costly for tenants of warehouse/industrial properties because of high tenant investment in production set up expenses, machinery and other site specific improvements (in many cases higher than the landlord's investment). To avoid these costs, tenants typically lease space that exceeds their immediate needs or space in buildings that are readily expandable. Tenant retention and expansion therefore tend to be higher than for other property types.
- FAVORABLE LEASE TERMS. Warehouse/industrial buildings generally are leased on a "triple net" basis, under which tenants are contractually obligated to pay directly, or reimburse the landlord, for virtually all costs of occupancy, including property taxes, utilities, insurance and maintenance. In addition, the leases generally provide for rent growth through contractual rent increases or increases tied to certain indices such as the Consumer Price Index.
- SHORT CONSTRUCTION PERIODS. The Company believes that the comparatively short development period for industrial buildings (typically six to nine months) relative to other property types has resulted in less speculative building and, therefore, a supply of industrial property that more closely corresponds to tenant demand. This has kept vacancy levels on average lower than for other property types and has produced greater rental rate stability.
- LOW COST OF MANAGEMENT. The Company believes that the cost of managing warehouse/industrial property tends to be less than for other property types, because of large average tenant spaces, more limited building and tenant improvements to maintain, and relatively long lease terms.
- LIMITED INSTITUTIONAL COMPETITION. The Company believes that higher overall investment returns are achievable for warehouse/industrial property than other property types because such assets, typically $3 to $6 million in purchase price, are too small to justify institutional attention. The Company's typical competitor for assets of this size is a sponsor of a single asset partnership that typically has a higher cost of capital and less financial flexibility than the Company.
GREATER CHICAGO. The Company believes that Greater Chicago offers significant opportunities for investment in and ownership of warehouse/industrial property for the following reasons:
- ECONOMIC CHARACTERISTICS AND GROWTH. Greater Chicago is the nation's largest
warehouse/industrial market, with a diverse tenant base that lessens cyclical risk and a central continental location and transportation infrastructure that support continued growth. Greater Chicago is currently enjoying very favorable trends in growth, business investment, utilization and employment, which have resulted in increased space demand and increasing rents. Although the Company believes it is the largest owner and operator of warehouse/industrial property in Greater Chicago, its properties represented less than 2% of the market (based on square footage) as of December 31, 1997, allowing substantial opportunities for future growth through acquisitions.
- MANAGEMENT EXPERIENCE. The Company's executive officers and the vice chairman together have over 100 years of combined real estate experience, primarily in warehouse/industrial properties located in Greater Chicago. Since 1977, they have completed approximately 300 industrial or commercial real estate projects aggregating over approximately 30 million square feet. This experience creates numerous opportunities for acquisitions, redevelopments and build-to-suits because of management's long-standing relationships with tenants and brokers within Greater Chicago. Management's market knowledge enables the Company to rapidly evaluate and respond to investment and leasing transactions and to actively create such opportunities.
- BUSINESS EFFICIENCIES. The Company believes that geographic concentration provides significant business efficiencies. As a large owner of warehouse/industrial property located in most major Greater Chicago submarkets, the Company is able to market multiple locations and buildings and consequently has a competitive advantage in securing leasing opportunities. The Company also believes that operating economies of scale resulting from geographic concentration enhance its ability to offer lower occupancy costs to its tenants. The Company believes that its focus on warehouse/industrial properties in Greater Chicago also enables the expansion of its portfolio without a corresponding increase in general and administrative expense.
GROWTH STRATEGIES
INTENSIVE PROPERTY MANAGEMENT. The Company strives to provide the highest possible service to its tenants by addressing its tenants' occupancy needs and meeting their evolving space requirements. The Company seeks to become the "industrial landlord of choice" in the markets it operates. Management believes tenant satisfaction resulting from the Company's "hands on" management approach increases rental revenues by increasing tenant retention, minimizing reletting expense and facilitating rental increases. Management also believes that tenant satisfaction creates profitable expansion and build-to-suit opportunities from existing tenants.
To develop its tenant franchise, the Company provides a variety of tenant services, including providing high quality, attractive space; promptly and fairly attending to tenant building or billing concerns; obtaining the lowest possible utility, insurance and real estate tax charges; responding rapidly to expansion or space reconfiguration requests; and assisting tenants in meeting their capital equipment needs. The Company views tenant service as a key factor in its business and has established tenant satisfaction as one of its primary corporate goals and a principal measure in the Company's incentive pay program for employees.
The Company's tenant service strategy benefits from the size and concentration of the Company's real estate holdings in Greater Chicago. As a large owner of warehouse/industrial properties in a single
geographic market, the Company believes it can obtain for its tenants the benefits of bulk purchase of goods and services. Management believes that minimizing tenants' occupancy costs builds tenant loyalty and provides the Company with a significant marketing advantage.
The Company's own staff is responsible for managing the Company's entire real estate portfolio. The Company currently staffs eight management regions, each serving a particular segment of Greater Chicago, and each staffed with a team consisting of a regional manager, an assistant manager and accounting support personnel. Each team is responsible for all aspects of the management and leasing of its assigned properties. The Company intends to establish additional regional offices as the size of its portfolio increases.
To motivate employees to provide the highest level of tenant service, the Company has established a pay-for-performance compensation plan under which the incentive pay of each participating employee depends in part on the results of an annual tenant satisfaction survey administered by the Company's independent directors. Employee incentive pay is also dependent on the achievement of targeted portfolio occupancy and targeted per share funds from operations, each of which the Company believes is enhanced by tenant service.
VALUE-ADDED INVESTMENTS. The Company seeks to acquire warehouse/industrial properties that have an initial cash yield greater than the Company's cost of capital (currently estimated to be less than 10.0%), that offer the best opportunity for cash flow growth and that meet the Company's investment criteria. The Company focuses on three types of transactions to which it can add value through the application of its development, management, construction, marketing and financial expertise. These transactions include the acquisition of: (i) existing leased properties, (ii) build-to-suit projects and (iii) older, economically viable properties that can be redeveloped. A table of the Company's warehouse/industrial properties with a description of each investment type is set forth beginning on page 14 hereof.
- EXISTING LEASED PROPERTIES. The Company focuses primarily on warehouse/industrial properties and build-to-suits with purchase prices ranging between $3 million and $6 million, which management believes are too small to be efficiently acquired on an individual basis by most institutions. As a public company with significant access to capital, including its lines of credit, the Company believes that it will continue to be able to take advantage of numerous acquisition opportunities in this price range.
- BUILD-TO-SUIT PROPERTIES. In a build-to-suit transaction, the Company typically enters into a fixed-price forward purchase commitment for a property that has been substantially preleased to a single tenant, thereby eliminating the construction and leasing risk generally associated with speculative building. Although tenants are involved in site selection and design decisions, it is management's policy to acquire buildings readily adaptable to a variety of tenants and alternative uses. The Company has achieved and expects to continue to achieve favorable yields from build-to-suit transactions because of the Company's active involvement in the creation and financing of these projects.
- REDEVELOPMENT PROPERTIES. The Company seeks to acquire certain warehouse/industrial properties for redevelopment, subdivision and re-leasing. Such properties are generally larger than the leased properties and build-to-suits acquired by the Company and typically involve significant reconfiguration and redevelopment expense prior to re-leasing. Competition for these properties is limited because, in management's experience, institutional investors generally lack redevelopment capability and prefer to invest in new leased product and because
smaller privately held firms typically lack the capital necessary to engage in redevelopments. Management intends to acquire for redevelopment only properties with sufficient existing cash flow or expected cash flow from pre-leasing to cover the capital cost of the Company's initial investment. Redevelopment projects will be acquired only if the Company determines that underlying tenant demand exists to complete the leasing of any vacant space at favorable rates, that a substantial rent advantage can be secured through lower property acquisition cost and that the anticipated increase in Company cash flow justifies associated project risks.
- REDEPLOYMENT OF CAPITAL. The Company seeks, where possible, to sell properties in transactions intended to qualify as tax-free exchanges under applicable provisions of the Internal Revenue Code and redeploy the proceeds of such sales in properties with higher yielding opportunities where the Company believes significant value can be added.
The Company has developed the following investment criteria which it has determined are important to maximize its return on investment:
- ADAPTABLE STRUCTURE AND CONFIGURATION. To maximize occupancy and minimize reletting expense and portfolio vacancy, the Company seeks "generic" properties or properties that have flexible floor plans amenable to inexpensive subdivision and adaptable to a wide variety of industrial or warehouse uses. A building should typically be single-story, with a ceiling height of at least 18 feet (measured from the floor to the lowest point of the horizontal roof supports). The building must be structurally sound, capable of bearing heavy floor loads and readily divisible for use by multiple tenants. Generally, less than 10% of the building's gross leasable area should be devoted to office or similar uses. The Company generally does not intend to invest in tenant-specific improvements not usable by other potential tenants, and it generally does not intend to acquire limited or special use properties, such as those devoted to research and development, heavy manufacturing processes or retail warehouse outlets.
- LOCATION AND TRANSPORTATION ACCESS. To be acceptable to diverse tenants, a property should be located in a well-maintained industrial park or area zoned for industrial uses and be in close proximity to easily accessible interstate highway interchanges. The building itself should have adequate loading docks and be sited to permit truck access and circulation. Rail service is also desirable.
- ENVIRONMENTAL AND ZONING COMPLIANCE. A property must be in compliance with applicable environmental regulations, must not present material financial risk to the Company due to potential remediation costs associated with prior or ongoing practices or environmental conditions at the property, and must not be likely to be threatened by ascertainable material environmental hazards emanating from surrounding properties. The intended use of the property must also be in compliance with all applicable zoning, fire and business ordinances.
- EXPANSION POTENTIAL. A property should have available additional land to permit expansion by existing tenants.
- TENANT CREDIT. A property should be leased to one or more well-managed, creditworthy tenants that are capable of meeting their rent and other lease obligations. A tenant's operations must be environmentally sound and must not damage the property or impair reletting. The tenant's business should also be consistent with the Company's tenant diversification goals.
- LEASE CHARACTERISTICS. Existing or anticipated leases should provide for (i) rents consistent with the rents paid by comparable tenants in similar facilities in the same submarkets; (ii) the pass through to tenants of all operating, maintenance, tax and administrative costs and increases in such costs; (iii) rent indexation or fixed rental increases that equal or exceed management's expectation for inflation; and (iv) a term consistent with the amount of the Company's investment in the property and compatible with the Company's overall lease expiration schedule.
OTHER TENANT SERVICES. The Company, through its unconsolidated subsidiary, CenterPoint Realty Services, also seeks to provide value-added services by the development of assets for purchase and by making various commodities and services available to tenants.
The Company develops assets for purchase by tenants and institutions for which the Company earns fees. Typically, these transactions have yields below the Company's investment return hurdle, but offer substantial profit opportunities relative to the level of required capital and management time. The Company is afforded these opportunities as a consequence of the size of its existing portfolio and its market penetration. The Company's fee development business has been, and is expected to continue to be, a recurring source of revenue.
In addition, the Company continues to explore various avenues to provide tenants with additional services, including providing equipment leasing services through joint ventures with capital equipment providers, obtaining cooperative energy purchases for tenants and making other commodities and services available to tenants. By providing value-added services to its tenants, the Company enhances its brand name and further develops its franchise.
THE COMPANY'S MARKET AREA: GREATER CHICAGO
The Company's target market is Greater Chicago (the region within a 150-mile radius of the City of Chicago, including Milwaukee, Wisconsin and South Bend, Indiana), although the Company may in certain instances consider the development of warehouse/industrial properties in other areas (for example, a readily salable building, fully-leased to a creditworthy tenant). Greater Chicago lies at the center of one of the nation's principal population and production regions and, as a consequence, has become a major warehouse/industrial market. Management believes that the size, location, transportation and demographic advantages, tenant diversity, favorable growth trends and real estate market conditions of its target market will support continued leasing and acquisition activity, enhancing the Company's growth in per share distributable cash flow.
Besides market activity from in-migration and firm expansion, a consistently high level of industrial real estate activity results from the changing space needs of individual industries and because different industries move in different cycles. The Greater Chicago region's continuous activity enables the Company to produce consistently high cash flow because the Company invests in and operates "generic" real estate, suitable for multiple industries, and the Company is highly skilled in "value-added" investing, acquiring and re-adapting space for disparate uses.
LOCATION, TRANSPORTATION AND DEMOGRAPHIC ADVANTAGES
Greater Chicago encompasses over 1.2 billion square feet of warehouse/industrial property, making the area the largest warehouse/industrial market in the United States. The Greater Chicago market is comprised of 19 discreet geographic submarkets, many of which would independently rank among the nation's largest (Source: Torto Wheaton Research) and in most of which the Company owns warehouse/industrial properties. The area has achieved its prominence as a manufacturing and distribution center as a result of its central continental location and extensive air, roadway, rail and water transportation infrastructure connecting the Greater Chicago area with a contiguous 13-state region consisting of Illinois, Wisconsin, Michigan, Ohio, Pennsylvania, West Virginia, Tennessee, Kentucky, Indiana, Missouri, Iowa, Nebraska and Minnesota.
The latest census report issued by the United States Department of Commerce reported that this 13-state region accounted for $1.6 trillion in gross product (representing approximately one-third of the nation's economic activity), produced by 1.8 million industrial and commercial firms serving a residential population of approximately 78 million residents. Published census data indicate that Greater Chicago is the dominant economic, work and population center of this region as the home to over eight million residents and over 59,000 diverse industrial and commercial firms. The diversity of Greater Chicago business provides the Company the opportunity to capitalize on different trends affecting real estate demand and usage by different manufacturers and wholesalers. The diversity of business also reduces the Company's exposure to changes in the fortunes of any single type of business.
ECONOMIC AND EMPLOYMENT TRENDS
Current manufacturing, productivity, business investment, capacity utilization, and employment trends in the Midwest region of the U.S. and in Greater Chicago are positive. The Midwest Manufacturing Index for the Midwest region, as published by the Federal Reserve Bank of Chicago, has been steadily expanding since 1991. The Midwest region has also recorded increases in manufacturing and wholesale employment and has exceeded the rates of growth of the United States as a whole. Management believes that these trends are favorable indicators of growth in the warehouse/industrial property market. The Greater Chicago area is the largest job market in the nation.
WAREHOUSE/INDUSTRIAL DEMAND AND SUPPLY
Historically, occupancy rates in Greater Chicago have demonstrated a high degree of stability. Over the last seventeen years, occupancy rates for the Greater Chicago region have exceeded the national average by 1.45%, with an average occupancy rate of nearly 94% (Source: CBC/Torto Wheaton Research). The region's annual absorption from 1994 to 1997 averaged approximately 40 million square feet (Source: CB Commercial).
During 1997, Greater Chicago's industrial property market added 13.1 million square feet, and gross regional absorption was approximately 45 million square feet. According to CB Commercial, in the fourth quarter of 1997 the overall nominal industrial vacancy rate in the Greater Chicago area was 6.9%, an increase of 30 basis points from the third quarter. However, the effective vacancy rate (net of obsolete and environmentally tainted properties) remained less than 5% overall. This increase in vacancy was primarily due to speculative construction in two Illinois submarkets which the Company has consistently avoided based on its prediction of a demand/supply imbalance in those submarkets.
TRANSACTIONS DURING 1997
During 1997, the Company accomplished the following:
1997 ACQUISITIONS AND DISPOSITIONS
During 1997, the Company acquired or completed development of 27 warehouse/industrial properties totaling 8.7 million square feet at a total cost of approximately $190.6 million, including the acquisition of a 1.75 million square foot facility in McCook, Illinois from General Motors, the largest single acquisition in the history of the Chicago industrial property market, a 1.1 million square foot facility in Aurora, Illinois, an 888,335 square foot facility in Elk Grove, Village, Illinois and an 812,000 square foot build-to-suit warehouse in Granite City, Illinois for the Dial Corporation, the largest development of any type begun in the State of Illinois in 1997. Also in 1997, the Company disposed of two warehouse/industrial properties and one office building totaling approximately 201,318 square feet for approximately $12.6 million.
1997 Securities Offerings
- On March 6, 1997, the Company completed a public offering of 2,250,000 common shares at $31.50 per share under a shelf registration statement. Net proceeds from the offering after the underwriting discounts and other offering costs were approximately $66.8 million. The proceeds of the offering were used to repay approximately $58.2 million outstanding under the Company's unsecured revolving line of credit co-led by The First National Bank of Chicago and Lehman Brothers Holdings Inc. with the balance of $8.6 million to fund investments.
- On November 10, 1997, the Company completed a public offering of 3,000,000 8.48% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, Liquidation Preference $25.00 per share, at $25.00 per share, under the Company's shelf registration statement, as amended, which was declared effective on October 23, 1997. Net proceeds from the offering after underwriting discounts were approximately $72.7 million. All of the proceeds from the offering were used to repay amounts outstanding under the Company's unsecured revolving credit facility co-led by The First National Bank of Chicago and Lehman Brothers Holdings Inc.
1997 FINANCINGS
- On September 18, 1997, the Company completed a $55 million tax-exempt bond financing for the development of the Company's O'Hare Express air freight center. The complex is a 825,000 square foot air freight forwarding and warehouse facility, anticipated to be constructed in three phases over a three-year period by CenterPoint O'Hare L.L.C., a subsidiary of the Company. The unsecured bonds were issued at par, bearing an initial interest rate of 4%.
- On November 13, 1997, the Company amended its existing unsecured revolving credit facility co-led by The First National Bank of Chicago and Lehman Brothers Holdings Inc. to, among other things, increase the principal amount available under the line from $135 million to $150 million and provide the Company with a competitive bid option under the line. The interest rate on borrowings under the unsecured credit facility adjusts based on the Company's senior debt ratings. The current interest rate is LIBOR plus 80 basis points for LIBOR borrowings and prime rate for other borrowings.
REORGANIZATION
On October 15, 1997, the Company completed a reorganization pursuant to which it converted from a Maryland corporation to a Maryland real estate investment trust by means of a merger of CenterPoint Properties Corporation (the "Corporation") with and into the Company, which prior to the merger was a wholly-owned subsidiary of the Corporation, with the Company as the surviving entity. Pursuant to a Plan of Reorganization, which was approved by the stockholders of the Corporation at a Special Meeting of Stockholders held on October 1, 1997, each issued and outstanding share of common stock of the corporation, par value $.001 per share (the "Common Stock"), was converted into one common share of beneficial interest in the Company, par value $.001 per share (the "Common Shares"), each outstanding share of Class B common stock of the Corporation was converted into one Class B common share of beneficial interest in the Company; and the outstanding principal amount of the Corporation's 8.22% Convertible Subordinated Debentures due 2004 was assumed by the Company and converted into the same principal amount of 8.22% Convertible Subordinated Debentures due 2004 of the Company (the "Company Debentures"). The Common Shares and the Company Debentures currently trade on the NYSE in the same manner as the Common Stock and debentures of the Corporation, respectively, traded on the NYSE prior to consummation of the merger.
EMPLOYEES
At March 1, 1998, the Company had 125 full-time and 30 part-time employees. Of the full-time employees, 107 are involved with property management, operations, leasing and acquisition activities, 8 are involved with general financial administration, financing services, reporting and acquisition analysis, and 10 are clerical workers. All property management activities are currently provided by the Company's employees. The Company does not intend to enter into any agreement with any entity or person relating to such services. However, the Company's Declaration of Trust does not contain any prohibition on the use of third parties to perform such services, and such services may therefore be performed by third parties in the future.
ENVIRONMENTAL MATTERS
Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), as well as similar state and local laws, owners and operators of property, both past and present, may be held financially responsible for the investigation and, if appropriate, the remediation of releases or threatened releases of hazardous substances into the environment. Other parties who arranged for the disposal of hazardous substances or transported hazardous substances for disposal at a property also may be held liable. Liability under CERCLA and similar laws is strict, joint and several unless a legally and factually sufficient basis for apportionment is demonstrated and in most instances, liability may be imposed without regard to the party's culpability concerning the presence of hazardous substances at the property. Potentially responsible parties may be liable to one another, the government and under some circumstances, third parties.
To the extent the Company in the future may incur hazardous substance response costs in connection with any of its properties, the Company may seek to recover such costs from responsible parties under CERCLA. Costs recoverable under CERCLA must be incurred in a manner consistent with the National Contingency Plan. The National Contingency Plan establishes a procedure whereby contaminated properties may be identified and, if necessary, remediated. If remediation is conducted in the appropriate manner, the costs that may be recovered include but may not be limited to funds expended to investigate and to remediate hazardous substance releases. Costs associated with any such environmental activity may be substantial.
All of the Company's existing properties have been, and all properties the Company may acquire in the future will be, subjected to an ASTM Phase I and or similar environmental assessment. The purpose of a Phase I environmental assessment is to determine if past and present uses of a property indicate the potential for soil or groundwater contamination or if other environmental conditions might affect the value of or future uses of the property. Phase I environmental assessments generally include the following: visual inspection of environmental conditions at and around the property; review of available land use records; interviews with the property representatives; examination of publicly available information from environmental agencies; and a walk through survey for suspected asbestos containing or other toxic materials. Where a Phase I environmental assessment of a property indicates a need for further investigation, the Company commissions a more detailed Phase II environmental assessment.
Apart from certain conditions currently being remedied, as described below, the Phase I and Phase II environmental assessment reports have not revealed any environmental condition affecting any of the Company's existing properties or any properties under binding contract that the Company believes requires remediation that would have a material adverse effect on the Company's business or assets, nor is the Company aware of any such environmental condition. The Company believes that either the properties are in compliance or the remediation activities are in compliance in all material respects with applicable Federal, state and local laws, ordinances and regulations concerning the presence of hazardous substances. The Company has not been notified by any governmental authority, and is not otherwise aware, of any material noncompliance, liability or claim relating to hazardous substances in connection with any of its properties. Based on its current knowledge and currently applicable laws and regulations, the Company is aware of the following environmental issues, none of which the Company believes are material to its financial condition:
1. Certain remediation activities are currently being conducted at Great Lakes Industrial Center by Neo Industries, a previous tenant, which is investigating chromium releases from its plating operations and is currently remediating the chromium contamination in the soil
and the groundwater. The Company does not expect to incur any remediation costs with respect to this property.
2. The former owner/operator of one property, 1700 West Hawthorne Lane, West Chicago, Illinois, has removed various underground and above-ground storage tanks and performed remediation of releases from these tanks where necessary. Closure reports have been or are being submitted by the former owner/operator for each tank removal. The Company expects to receive Illinois Environmental Protection Agency ("IEPA") closure certification for each tank from the former owner/operator in due course.
3. The former owner/operator of one property, the Allsteel facility in Montgomery, Illinois, has closed seven underground storage tanks associated with former operations and is currently remediating solvent-contaminated soil and groundwater. The IEPA is supervising the remedial activities, and the Company expects to receive a No Further Remediation letter from the IEPA once the remediation is complete. The Company does not expect to incur any remediation costs in connection with this property because both the former owner/operator and the former owner/operator's parent company have agreed to (1) perform the remediation, and (2) indemnify the Company against any losses.
4. The Company is currently remediating one property located at 5700 West Touhy in Niles, Illinois. This property has limited petroleum and metals contamination associated with the manufacturing and storage activities of the prior owner. The IEPA is supervising the remedial activities, and the Company expects to receive a No Further Remediation letter from the IEPA once the remediation is complete.
5. Certain of the properties are in the vicinity of properties that contain or have contained storage tanks or on which hazardous substances or petroleum products have been or may in the future be used or stored. Based on the Phase I and, in some cases, additional environmental assessments conducted with respect to its properties, the Company is not aware that these conditions have had, and believes it unlikely that these conditions will have, any adverse effect on its properties. Should there be any adverse effect requiring response by the Company, the Company believes that it may be able to recover its response costs from the responsible parties.
6. Limited quantities of asbestos containing materials ("ACM") are present in various building materials at many of the Company's properties. The ACM present at the properties generally is in good condition and for the most part is non-friable. The Company has implemented an operation and maintenance plan for ACM, including periodic inspections. This plan includes removal and abatement activity whenever damaged ACM is discovered in areas where human exposure may occur. It also includes an annual ACM abatement program and ACM abatement during property renovation or reconstruction.
It is possible that the environmental assessments of the Company's properties do not reveal all environmental liability concerns or that there are material environmental liabilities of which the Company is unaware. Given the nature of the properties that are now owned by the Company or that may be acquired in the future, no assurances can be given that (i) future laws, ordinances or regulations will not require or impose any material expenditures or liabilities in connection with environmental conditions by or on the Company or its properties; (ii) the current environmental condition of the Company's properties will not be affected by tenants and occupants of such properties, by the condition of properties in the vicinity of such properties or by third parties unrelated to the Company; and (iii) prior owners of any of the Company's
properties did not create environmental problems of which the Company is not aware.
COMPETITION
All of the Company's existing properties are, and all of the properties that it may acquire in the future are expected to be, located in areas that include numerous other warehouse/industrial properties, many of which may be deemed to be more suitable to a potential tenant than the Company's properties. The resulting competition could have a material adverse effect on the Company's ability to lease its properties and to increase the rentals charged on existing leases.
INVESTMENT IN AND ADVANCES TO AFFILIATE
The Company holds approximately 99% of the economic interest in CenterPoint Realty Services Corporation, an Illinois corporation ("CRS"). To maintain compliance with limitations on income from business activities received by REITs and their qualified REIT subsidiaries, the Company holds its interest in CRS in the form of non-voting equity ownership which qualifies CRS as an unconsolidated taxable subsidiary.
As of December 31, 1997, the Company had advanced to CRS approximately $7.9 million under a demand loan with an interest rate of 8.125%. The proceeds of the loan were used for development projects. Principal and interest are due upon demand.
ITEM 2.
ITEM 2. PROPERTIES.
THE COMPANY'S WAREHOUSE/INDUSTRIAL PROPERTIES
The Company's investment portfolio of warehouse/industrial properties consists of 95 properties totaling approximately 22.1 million square feet. During 1997, the Company acquired 21 fully-leased warehouse/industrial properties and completed the construction of 6 fully leased warehouse/industrial build-to-suit properties with a total area of approximately 8.7 million square feet, and the Company disposed of 2 warehouse/industrial properties with a total area of approximately 43,500 square feet.
LOCATION. The Company's current properties are well located, with convenient access to area interstate highway, rail, and air transportation. The properties are in good physical condition, most of them having been built or substantially renovated within the last 10 years.
BUILDING CHARACTERISTICS. Most of the space in the warehouse/industrial properties currently owned by the Company or under contract has been designed for warehousing and distribution. The remainder of the space is comprised of light manufacturing space. A number of the industrial properties include both distribution and light manufacturing space so as to provide tenants with increased flexibility. The Company's largest industrial property contains approximately 1,700,000 rentable square feet in a single-tenant warehousing and manufacturing property, available for redevelopment into a multi-tenant warehouse/industrial complex. The Company's present warehouse/industrial properties have an average project size of approximately 232,123 square feet, and, on average, a tenant at an industrial property occupies approximately 319,000 rentable square feet. Although a number of the industrial properties are single-tenant build-to-suit facilities, all are designed to be divisible and to be leased by multiple tenants. The Company has had substantial experience in subdividing older space for new tenants.
The Company's present warehousing and distribution properties, as well as warehousing and
distribution properties under contract, are designed for bulk storage of materials and manufactured goods in buildings with interior heights typically of 22 feet or more. All of the warehousing and distribution properties have dock facilities for trucks as well as grade level loading for lighter vehicles and vans. Typically, the distribution buildings are used for storage and contain a minimal amount of office space.
LEASE CHARACTERISTICS. The Company believes that the lease agreements for its warehouse/industrial properties, which in most cases provide for scheduled or indexed increases in rent, as well as the strengthening economy, will provide opportunities for rental growth. The Company, in substantially all cases, passes operating expenses and real estate tax increases on to tenants. The leases for the warehouse/industrial properties currently owned by the Company have terms between one and 5 years, with a weighted average remaining term, based on square footage, of approximately 4.14 years as of December 31, 1997.
TENANT DIVERSITY. The composition of tenants in the warehouse/industrial properties currently owned by the Company reflects the commercial diversity of businesses operating in Greater Chicago. At December 31, 1997, no single industry, other than Wholesale Trade-Durable Goods and Trucking/Warehousing, accounted for more than 10.8% of the leased space in the warehouse/industrial properties currently owned by the Company. Wholesale Trade-Durable Goods and Trucking/Warehousing, which encompass a wide variety of industries, accounted for 27.2% of the leased space in the warehouse/industrial properties currently owned by the Company at December 31, 1997, and the five largest industries, other than Wholesale Trade-Durable Goods and Trucking/Warehousing, represented by tenants accounted collectively for only 35.6% of such space. In addition, no single tenant comprised more than 5% of the Company's total revenues as of December 31, 1997.
OTHER INFORMATION REGARDING WAREHOUSE/INDUSTRIAL PROPERTIES. The following table sets forth certain information regarding the Company's portfolio of warehouse/industrial properties, separately identifying 1997 investments of the Company:
CENTERPOINT PROPERTIES TRUST PROPERTY SUMMARY AS OF DECEMBER 31, 1997
- ------------------ (1) First date of original construction; second date is year of last redevelopment and/or expansion. If only one date appears, it is the acquisition date; the property has not been redeveloped or expanded. (2) Determined by dividing annualized base rent revenue by GLA. (3) "GLA" means gross leasable area. (4) Determined as a percent of the total GLA for the warehouse/industrial properties. (5) ACQ refers to an existing leased property acquired by the Company, BTS refers to a build-to-suit property and RDV refers to a redevelopment property. Two of the redevelopment properties, 5700 Touhy Avenue, Niles, Illinois and 10601 Seymour Avenue, Elk Grove Village, Illinois, were under redevelopment construction and not leasable as of December 31, 1997. (6) Properties purchased through a sale-leaseback to the previous owner have no operating history relevant to third party usage. (7) Properties purchased from an owner occupant have no prior operating history relevant to third party usage. (8) The seller of this property holds a note payable by the Company in the principal amount of $575,000 and secured by this property. (9) Average Rent per square foot equals annualized base rental revenue divided by GLA leased as of December 31, 1997. (10) Average size equals total GLA divided by the number of properties.
LEASE EXPIRATIONS
The following table shows as of December 31, 1997 scheduled lease expirations for the Company's warehouse/industrial properties commencing January 1, 1998 and for the next ten years, assuming that no tenants exercise renewal options:
OPTIONS TO PURCHASE GRANTED TO CERTAIN TENANTS
The following warehouse/industrial properties of the Company are subject to purchase options granted to certain tenants as follows:
- A portion of the building complex at 4501 Augusta Boulevard is subject to an option to purchase at fixed prices ranging from $2,779,320 to $3,447,970 exercisable between September 1 and October 31 of each year until 2003.
- One Waterfowl Way is subject to an option to purchase at any time through October 31, 1999, exercisable on or before February 1, 1999. The purchase price is equal to the annualized monthly rent being paid as of the closing of the purchase, capitalized at 10%.
- 8901 102nd Street is subject to an option to purchase exercisable on February 28, 2006 at a purchase price equal to 95% of "fair market value," equal to the average of three independent appraisals.
- 1700 West Hawthorne is subject to a purchase option exercisable at any time prior to December 1, 1998 (with the closing to occur during December, 1999 regardless of when the option exercised) at a price of $12,809,333 and again between December 1, 2002, and December 1, 2003 (with the closing to occur during December, 2004 regardless of when the option is exercised) at a price of $15,033,636. If the property is expanded, at tenant's option, the purchase price will be increased to $12,909,333 for the first exercise period, and $15,233,636 for the second exercise period, plus the construction cost of the expansion.
- 850 Arthur Avenue is subject to an option exercisable during March 1999 to purchase the premises on August 31, 1999 for a purchase price equal to the fair market value of the premises as determined by the Company or by an appraisal process.
- 2600 Elmhurst Road is subject to an option exercisable on or before July 31, 2000 to purchase the premises during January 2001 for a purchase price of $5,000,000.
- 21399 Torrence Avenue is subject to an option exercisable between December 1, 1998 and May 31, 2000 and again between December 31, 2000 and May 31, 2002 to purchase the property on November 30, 2000 for $8,941,920 and November 30, 2002 for $9,314,500.
In each case, the option price exceeds the Company's current net book value. The Company believes that even if all of the purchase options are exercised, such exercises will not have an adverse effect upon the operations of the Company or its ability to maintain its dividend distribution policy. If any purchase option is exercised, the Company intends to either distribute the cash proceeds to shareholders or reinvest the cash proceeds in additional properties. No assurance can be given that such distribution or reinvestment will occur.
In addition to purchase options, the Company has granted to tenants of certain properties a right of first refusal (in the event the Company has received an unsolicited offer from a third party to purchase the property which the Company desires to accept) or a right of first offer (in the event the Company has not received an unsolicited third party offer for the property but desires to entertain an offer). The properties subject to one or both of these rights include One Waterfowl Way, 8901 102nd Street, 825 Tollgate Road, 1400 Busse Road, 1651 Frontenac Road, 7001 Adams Street, 950 Tower Road and
6312 W. 74th Street. The existence of those rights will not compel the Company to sell a property for a price less than the price the Company desires to accept.
THE COMPANY'S OTHER PROPERTIES
In addition to its warehouse/industrial properties, the Company owns three retail properties having approximately 61,000 square feet of GLA, one 682-unit apartment complex located at 440 North Lake Street, Miller, Indiana and known as Lakeshore Dunes Apartments and a fully leased parking lot. The Company does not intend to acquire properties other than warehouse/industrial properties in the future. The Company believes, however, that these properties are favorable investments for the Company, adding to distributable cash flow per share. Furthermore, the Lakeshore Dunes Apartments were financed through the issuance of tax-exempt revenue bonds on favorable terms, benefiting the Company by reducing its overall borrowing costs. The Company has no present plans to sell those properties but would entertain a sale if the price were sufficiently high, given other investment opportunities that would be available to the Company, and the enhanced operating performance expected to result, from redeployment of the sales proceeds.
The following table sets forth certain information regarding the Company's retail properties:
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(1) First date is year of acquisition; second date is year of most recent redevelopment or expansion. If only one date appears, it is the acquisition date; the property has not been redeveloped or expanded. (2) "GLA" means gross leasable area. (3) Determined as a percent of the total GLA for the retail properties. (4) Determined by dividing annualized base rent revenue by GLA.
The tenants of the Company's retail properties are typical of tenants in smaller retail centers in Greater Chicago. Generally, the leases require tenants to pay a fixed base, or "minimum" rent, subject to scheduled increases. Tenants generally are required to pay their proportionate share of common area maintenance charges, insurance expenses, operating expenses and real estate taxes or their portion of these expenses is included in their base rent.
The following table shows as of December 31, 1997 scheduled lease expirations for the retail properties commencing January 1, 1998, and for the next ten years, assuming no tenants exercise renewal options.
Lakeshore Dunes Apartments, which was constructed in 1971 and renovated between 1991 and September, 1993, is comprised of 682 units in 15 contiguous buildings located on an approximately 20.12 acre site in Miller, Indiana, a suburb of Gary, Indiana, located on Lake Michigan. The property is bordered by the Indiana Dunes National Park and by the Calumet Lagoon and is less than one-half mile from public beaches. Amenities of the complex include redesigned units with updated kitchens and appliances, carpeting, lighting, windows and mini-blinds, bathrooms and fixtures, elevators, laundry rooms, play lots, tennis courts, picnic areas, a new outdoor pool, roads, parking areas, landscaping and a 24-hour safety patrol and card access system. The community center also serves as the management and leasing office. The Company maintains a complete management, leasing and maintenance team at the property.
As of December 31, 1997, 630 of the units, or 92%, were leased, providing for a monthly base rent of approximately $287,000 or $7.72 per square foot per annum (determined by dividing annualized base rent by total leased square footage of the apartment units), or an annualized base rent of $3,444,000. Current leases provide for customary one year terms and require that tenants pay a fixed rent based on the type of apartment and square footage. Tenants are responsible for utilities. The following table sets forth the apartment mix at this property as of December 31, 1997:
In 1996, a parking lot within an industrial park was purchased. The parking lot is leased for ten years through January 2006 for an annual minimum rent of $26,400. In 1997, the Company sold a 118,000 square foot office building.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not subject to or involved in, nor is the Company aware of, any pending or threatened litigation which could be material to the financial position or results of operations of the Company. For a description of remediation activities currently underway at certain of the Company's properties, see "Environmental Matters" under Item 1 above.
ITEM 4.
ITEM 4. SUBMISSION OF CERTAIN ITEMS TO A VOTE OF SECURITY HOLDERS.
The Company held a Special Meeting of Stockholders on October 1, 1997 to approve the reorganization of the Company from a Maryland corporation to a Maryland real estate investment trust, pursuant to a Plan of Reorganization. At the Special Meeting of Stockholders, the Plan of Reorganization was approved as follows: 12,620,549 shares were voted in person or by proxy at the Special Meeting of Stockholders; 12,593,693 shares were voted in favor of the Plan of Reorganization; 5,427 shares were voted against the Plan of Reorganization; and 21,429 shares abstained from voting.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS.
(a) The Company's Common Shares are listed and traded on the New York Stock Exchange under the symbol "CNT." The following table sets forth, for the periods indicated, the high and low sale prices of the Common Shares (as reported by the AMEX prior to June 12, 1996 and as reported by the NYSE on and after June 12, 1996) and the cash distributions paid in such periods.
(b) As of March 17, 1998, there were approximately 142 holders of record of the Company's Common Shares.
(c) Cash distributions paid on the Company's Class B Common Shares, which are non-voting and are not publicly traded, were $0.4167 per share per quarter for the last three quarters of 1996, and $0.4325 per share per quarter in 1997.
ITEM 6.
ITEM 6.
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth, on a historical basis, Selected Financial Data for the Company. The following table should be read in conjunction with the historical financial statements of the Company and "MANAGEMENT DISCUSSION AND ANALYSIS STATEMENTS OF THE COMPANY AND RESULTS OF OPERATION," both included elsewhere in this Form 10-K.
The Selected Financial Data for the Company is not necessarily indicative of the actual financial position of the Company or results of operations at any future date or for a future period.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES SELECTED HISTORICAL FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA, RATIOS AND NUMBER OF PROPERTIES)
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(1) Operating expenses include real estate taxes, repairs and maintenance, insurance and utilities and exclude interest, depreciation and amortization and general and administrative expenses.
(2) Other income (expense) includes gains and losses on property dispositions in 1997 and 1996, and other miscellaneous operating and non-operating items.
(3) Funds from Operations represents net income (loss), excluding extraordinary items, sales of (or adjustments to basis of) properties plus depreciation and amortization, convertible subordinated debenture interest and amortization of deferred financing costs on convertible subordinated debentures. Dividends on Convertible Preferred Shares for 1996 and 1995 are not excluded from net income as such shares were automatically converted to Class B Common Shares in 1996. Funds from operations is computed as follows:
Management of the Company believes that Funds from Operations is helpful to investors as a measure of the performance of equity REIT shares because, along with cash flows from operating activities, financing activities and investing activities, it provides investors an understanding of the ability of the Company to incur and service debt and to make capital expenditures. 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. Investors are cautioned that Funds from Operations, as calculated by the Company, may not be comparable to similarly titled but differently calculated measures for other REITs.
The National Association of Real Estate Investment Trusts (NAREIT) defines funds from operations as net income before extraordinary items plus depreciation and amortization less the amortization of deferred financing costs.
(4) Earnings before interest, income taxes, depreciation and amortization. Management believes
that EBITDA is helpful to investors as an indication of property operations, because it excludes costs of financing and non-cash depreciation and amortization amounts. EBITDA does not represent cash flows from operations as defined by GAAP, should not be considered by the reader as an alternative to net income as an indicator of the Company's operating performance, and is not indicative of cash available to fund all cash flow needs.
(5) Increase in number of properties in 1994 reflects the acquisition of 15 properties throughout 1994. Increase in number of properties in 1995 reflects acquisition of 16 properties throughout 1995. Increase in number of properties in 1996 reflects acquisition of 15 properties and the disposition of 8 properties throughout 1996. Increase in number of properties in 1997 reflects the acquisition of 21 properties, the completion of 6 developments, and the disposition of 3 properties throughout 1997. See "MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
(6) The ratio of earnings to fixed charges for the year ended December 31, 1993, was less than one to one. The approximate dollar amount (in thousands) necessary to cover the deficiency in that period was $5,400.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL BACKGROUND
The following is a discussion of the historical operating results of the Company. This discussion should be read in conjunction with the Financial Statements and the information set forth under "SELECTED HISTORICAL FINANCIAL DATA."
The results of the Company reflect cumulative significant acquisition, build-to-suit and redevelopment activities. Since 1989, the Company has grown its portfolio of owned properties from 6 properties, with approximately 1.9 million square feet, to 100 properties with approximately 22.6 million square feet as of December 31, 1997. This total excludes properties under development and mortgage investments. Through the issuance of mortgages on properties and build-to-suit projects under development, the Company has a total of 109 property investments, excluding the parking lot, representing approximately 25 million square feet.
The Company grew its total property investments by 52% in 1997, which includes build-to-suits in progress and mortgage investments. In addition, the Company grew its portfolio of owned properties by 60.3% during the year by concluding twenty-one warehouse/industrial property acquisitions and six warehouse/industrial build-to-suit properties. The Company disposed of two warehouse/industrial properties and one office property in 1997. The Company's total increase in owned warehouse/industrial area, net of dispositions, was 8.5 million square feet.
Despite its growth in property investments and Funds from Operations during 1997, the Company improved its EBITDA/ Debt Service Coverage to 6 to 1. Also, as of December 31, 1997, the Company maintained a conservative Debt to Total Market Capitalization of 25.1%.
The Company's Consolidated Financial Statements for the year ended December 31, 1997, 1996 and 1995 reflect partial period results for acquisitions, dispositions and expansions made during each respective year. These statements also include the lease-up of previously vacant space, related to the properties owned by the Company as of January 1, 1997, 1996 and 1995, respectively. The Company's
1996 acquisitions included three additional properties and 1997 acquisitions include one additional property previously owned by entities in which certain executive officers of the Company had an interest. These transactions satisfied the Company's investment criteria and were approved by the Company's independent trustees.
Finally, the historical results of the Company reflect the Company's significant property redevelopment and development activities in which substantial capital costs and related expenses were incurred in advance of receipt of rental income. At December 31, 1997, the Company and its subsidiaries had $26 million invested in build-to-suit projects under development which were not producing income as of the end of the year. Four of the Company's properties preceding the Company's initial public offering in 1993, with a total area of approximately 1.9 million square feet, were property redevelopments. The Company has added nine properties totaling 4.5 million square feet that the Company has redeveloped or is currently holding the property to redevelop. Redevelopments are typically larger properties that are acquired, subdivided and released. During construction, certain costs are capitalized; however, in certain circumstances, such costs are expended after completion but prior to leasing, resulting in a decline in net income.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
Total revenues increased by $22.6 million or 35.7% over the same period last year. The revenues of the Company are derived primarily from base rents and additional rents from expense reimbursements, pursuant to the terms of tenant leases for occupied space at the warehouse/industrial properties. Warehouse/industrial properties represented approximately 98% of the gross leasable area of the Company's portfolio as of December 31, 1997.
Rental revenues increased by $15.4 million in 1997. This was due in part to a full period of income from thirteen warehouse/industrial properties totaling 3.3 million square feet acquired in 1996 net of seven property dispositions. Also, this increase was attributable to twenty-one properties acquired totaling 7.1 million square feet and six build-to-suit properties coming on-line totaling 1.5 million square feet in 1997, net of three property dispositions. The initial annualized minimum net rental income from the 1997 acquisition and completed build-to-suit properties is approximately $25 million.
In addition, mortgage interest income contributed approximately $632,000 to the increase in revenue. Real estate fee income primarily consisting of fees earned by the Company in connection with its build-to-suit and development activities and third party management fees decreased by $2.0 million. The Company's equity in net income of affiliate increased by $1.1 million due to the affiliate's increase in property and build-to-suit sales. The Company's unconsolidated affiliate, CenterPoint Realty Services, began operations during the third quarter of 1995 and did not recognize income from development activities until 1996.
On a "same-store" basis (comparing the results of operations, on a cash basis, of the properties owned at December 31, 1996, with the results of operations of the same properties at December 31, 1997), the Company recognized an increase of approximately 6% in net operating income primarily due to lease up of vacant space, rental increases on renewed leases and contractual increases in minimum rent under leases in place.
Real estate tax expense and property operating and leasing expense increased by $8.4 million,
from $20.8 million in 1996 to $29.2 million in 1997. $5.2 million of the increase is due to real estate taxes. The majority of the real estate tax increase, $5.0 million, resulted from 1995 and 1996 acquisitions and the balance, $0.2 million, from net tax increases throughout the portfolio with the largest increase in Cook County, Illinois. Property operating and leasing expenses, including insurance, utilities, repairs and maintenance and property management costs increased at levels comparable to the level of acquisitions. Also, property operating and leasing costs as a percentage of total revenues remained consistent when comparing 1997 to 1996 at approximately 14%.
Depreciation and other amortization increased by $4.7 million, from $10.6 million in 1996 to $15.3 million in 1997. The increase is due primarily to full period depreciation on acquisitions completed during 1996 and depreciation from dates of acquisition for the 1997 acquisitions and fixed asset additions. General and administrative expenses increased by $0.5 million, from $2.6 million in 1996 to $3.1 million in 1997, due primarily to the growth of the Company.
Interest incurred increased by approximately $206,000 over last year. Although the acquisition level was higher during 1997, interest expense was held to approximately the same level as 1996 due to the repayment of debt from public offerings of common equity in March and preferred equity in November, 1997, and reduced borrowing rates. Other income (expenses) increased by approximately $208,000 from the same period last year due in part to the gain on disposition of one property totaling approximately $140,000 in 1997. The remaining net increase was the result of losses recorded on the disposition of three properties in 1996.
As a result of the factors described above, income before extraordinary item increased by $9.3 million from $18.3 million in 1996 to $27.6 million in 1997, an increase of 50.8%. Earnings before interest, income taxes, depreciation and amortization increased by $13.9 million, from $39.9 million in 1996 to $53.8 million in 1997.
In 1996, the Company incurred an extraordinary loss of $3.3 million representing a write off of unamortized deferred financing costs as a result of the re-financing of its outstanding revenue bonds. In addition, the Company replaced its $92 million secured lines of credit with a $135 million unsecured credit facility at a significant savings in interest. No debt was re-financed in 1997, and the unsecured credit facility was increased to $150 million.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Total revenues in 1996 increased by $16.3 million or 34.9% over 1995. Tenants occupied approximately 95% of the gross leasable area of the Company's portfolio as of December 31, 1996.
Rental revenues increased by $8.0 million in 1996 primarily because of full period income from sixteen warehouse/industrial properties acquired totaling 2.7 million square feet in 1995 and thirteen warehouse/industrial properties acquired totaling 3.3 million square feet in 1996 net of seven property disposals. Initial minimum net rental income from the 1996 acquisition properties is approximately $13.1 million. In addition, mortgage interest income from mortgage financing activities, which originated in December, 1995, contributed $1.4 million to the increase in revenue. Real estate fee income primarily consisting of fees earned by the Company in connection with its build-to-suit and development activities and third party management fees increased by $3.7 million. Also, equity in net income of affiliate increased by $1.0 million due to their increased activity in build-to-suit activity. The Company's unconsolidated affiliate, CenterPoint Realty Services, began operations during the third quarter of 1995 and did not recognize income from development activities until 1996.
On a "same-store" basis (comparing the results of operations, on a cash basis, of the properties owned at December 31, 1995, with the results of operations of the same properties at December 31, 1996), the Company recognized an increase of approximately 4% in net operating income primarily due to lease up of vacant space, rental increases on renewed leases and contractual increases in minimum rent under leases in place.
Total operating expenses, excluding general and administrative expenses, interest, depreciation and amortization, increased by $6.0 million, from $14.8 million in 1995 to $20.8 million in 1996. $4.1 million of the increase was due to real estate taxes. The majority of the real estate tax increase, $3.3 million, resulted from 1995 and 1996 acquisitions and the balance, $0.8 million, from tax increases throughout the portfolio, with the largest increase in Cook County, Illinois. Property operating and leasing expenses increased at levels comparable to the level of acquisitions.
Depreciation and other amortization increased by $2.1 million, from $8.5 million in 1995 to $10.6 million in 1996. The increase is due primarily to full period depreciation on acquisitions completed during 1995 and depreciation from dates of acquisition for the 1996 additions. General and administrative expenses increased by $0.4 million, from $2.1 million in 1995 to $2.5 million in 1996, due primarily to the growth of the Company.
Interest incurred decreased by $1.7 million over the same period in 1995 due in part to the conversion to common stock of $8.9 million of convertible subordinated debentures. Although the acquisition level was higher during 1996, interest expense was held to approximately the same level as 1995 due to the repayment of debt from a public offering that closed in July, 1996, and reduced borrowing rates. Other expenses increased by approximately $84,000 from the same period last year due to the loss on disposition of three properties totaling approximately $72,000.
As a result of the factors described above, income before extraordinary item increased by $9.5 million from $8.8 million in 1995 to $18.3 million in 1996, an increase of 108.0%. Earnings before interest, income taxes, depreciation and amortization increased by $9.9 million, from $30.0 million in 1995 to $39.9 million in 1996.
In 1996 and 1995, the Company incurred an extraordinary loss of approximately $3.3 million and approximately $0.6 million, respectively, representing the write-off of unamortized deferred financing costs as a result of the early extinguishment of certain debt obligations resulting from the Company's debt transactions.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from Company operations has historically been utilized for working capital purposes and distributions, while proceeds from financings and capital raises have been used to fund acquisitions and other capital costs. However, cash flow from operations during 1997 of $39.4 million net of $31.1 million of current year distributions provided $8.3 million of retained capital to fund investment activities. The Company expects retained capital to fund future investment activities.
Acquisitions, construction in progress on development projects, advances to affiliate, advances on mortgage notes receivable, and improvements and additions to properties of approximately $226.5 million for 1997 were funded with borrowings under the Company's unsecured line of credit totaling $211.7 million, a portion of proceeds from the disposition of real estate of $13.5 million, repayment of
mortgage notes receivable of $5.7 million and a portion of the net proceeds from the March 6, 1997 public offering of common shares.
At December 31, 1997, the Company's debt constituted approximately 25.1% of its fully diluted market capitalization. Also, the Company's coverage ratio remained high at 6 to 1. The Company's fully diluted equity market capitalization was approximately $774 million, and its fully diluted total market capitalization exceeded $1.0 billion. The Company's leverage ratios benefited during 1997 from the conversion of approximately $2.6 million of its 8.22% Convertible Subordinated Debentures, due 2004, to 144,640 common shares.
At December 31, 1997, the Company had a $150 million unsecured credit facility co-led by First Chicago NBD and Lehman Brothers with participating banks. As of December 31, 1997, the Company had outstanding borrowings of approximately $97.7 million under the unsecured revolving line of credit (approximately 9.5% of the Company's fully diluted market capitalization), and the Company had remaining availability of approximately $52.3 million under its unsecured line of credit.
On September 18, 1997, the Company issued $55 million unsecured tax-exempt bonds for the development costs of the Company's O'Hare Express air freight center. With the completion of this issue, 34% of the Company's senior debt (excluding line of credit) was tax exempt as of December 31, 1997, saving approximately 200 basis points on average from comparable taxable financing.
On March 6, 1997, the Company completed a public offering of 2,250,000 common shares at $31.50 per share under a shelf registration statement. Net proceeds from the offering after the underwriting discounts and other offering costs were approximately $66.8 million. The proceeds of the offering were used to refund approximately $58.2 million outstanding under the Company's line of credit with the balance of $8.6 million to fund investments.
On November 10, 1997, the Company completed a public offering of 3,000,000 shares of 8.48% preferred at $25 per share under a shelf registration statement. Net proceeds from the offering after underwriting discounts and other offering costs were approximately $71.9 million. The proceeds of the offering were used to refund amounts outstanding under the Company's line of credit.
In February, 1998, Duff & Phelps Credit Rating Co. joined Moody's Investors Service's January, 1997 evaluation by assigning investment grade rating to the Company's senior unsecured debt and preferred stock issuable under the Company's shelf registration and convertible subordinated notes. Also in 1997, Standard and Poors assigned an investment grade rating to the Company's senior unsecured debt. These investment grade ratings further enhance the Company's financial flexibility.
As of December 31, 1997, the Company had approximately $36.5 million in restricted cash, $34.6 million of which was held in a construction escrow for the Company's build-to-suit development at O'Hare Express Center. Most of the remainder of the restricted cash is made up of real estate tax escrows for tenants requiring such escrows under the terms of their leases.
During 1997, the Company declared and paid distributions on common shares of $27.2 million or $1.68 per share and on class B common shares of $3.9 million or $1.73 per share. Also, in 1997, the Company declared dividends on preferred shares of $1.43 million or $0.477 per share, payable in January 1998. The dividends on preferred shares attributable to 1997 income, which appear on the Company's Consolidated Statements of Operations and Shareholders' Equity were $901 thousand or $0.30 per share. The following factors, among others, will affect the future availability of funds for
distribution: (i) scheduled increases in base rents under existing leases and (ii) changes in minimum base rents attributable to replacement of existing leases with new or replacement leases.
The Company has considered its short-term (one year or less) capital needs, in conjunction with its estimated future cash flow from operations and other expected sources. The Company believes that its ability to fund operating expenses, building improvements, debt service requirements and the minimum distribution required to maintain the Company's REIT qualification under the Internal Revenue Code, will be met by recurring operating and investment revenue and other real estate income.
Long-term (greater than one year) capital needs for property acquisitions, scheduled debt maturities, major redevelopment projects, expansions, and construction of build-to-suit properties will be supported through draws on the Company's unsecured line of credit, the issuance of long-term unsecured indebtedness and the issuance of equity securities. - - INFLATION
Inflation has not had a significant impact on the Company because of the relatively low inflation rates in the Company's markets of operation. Most of the Company's leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. In addition, many of the leases are for remaining terms less than five years which may enable the Company to replace existing leases with new leases at higher base rental rates if rents of existing leases are below the then-existing market rate.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." Both SFAS No. 130 and SFAS No. 131 are effective for financial statements for years beginning after December 15, 1997. SFAS No. 130 requires the reporting of comprehensive income beginning 1998 and SFAS No. 131 establishes standards for publicly-held business enterprises to report information about operating segments in annual financial statements and requires that these enterprises report selected information about operating segments in interim financial reports issued to shareholders. The Company plans to adopt SFAS No. 130 and No. 131 in 1998.
YEAR 2000 COMPLIANCE
In response to the Year 2000 issue, the Company initiated a project in early 1997 to identify, evaluate and implement a new computerized real estate management system. The Company is addressing the issue through a combination of modifications to existing programs and conversion to Year 2000 compliant software. In addition, the Company is discussing with its tenants, vendors, and other service providers the possibility of any interface difficulties relating to the Year 2000 issue which may effect 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 affect 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 and financial position, and is being expensed as incurred.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Statements on Page of this Annual Report on Form 10-K for the financial statements and financial statement schedules.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Item 10 is incorporated herein pursuant to General Instruction G to Form 10-K by referencing the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the fiscal year.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Item 11 is incorporated herein pursuant to General Instruction G to Form 10-K by referencing the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the fiscal year.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12 is incorporated herein pursuant to General Instruction G to Form 10-K by referencing the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the fiscal year.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Item 13 is incorporated herein pursuant to General Instruction G to Form 10-K by referencing the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the fiscal year.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) (2) The consolidated financial statements and related schedules indicated in Part II, Item 8, "Financial Statements and Supplementary Data."
(3) Exhibit 10.51 - Amended and Restated Unsecured Revolving Credit Agreement among the Company, The First National Bank of Chicago, Lehman Brothers Holdings and the other lenders named therein
(4) Exhibit 10.52 - Third Amendment to Stock Option Plan
(5) Exhibit 10.53 - First Amendment to Credit Agreement
(6) Exhibit 12 - Computation of Ratio of Combined Earnings to Fixed Charges and Preferred Dividends
(7) Exhibit 13 - Annual Report to Security Holders
(8) Exhibit 23 - Consent of Independent Accountants
(9) Exhibit 27 - Financial Data Schedule
The following exhibits are incorporated by reference from the Registrant's Registration Statement on Form S-11 (File No. 33-69710), referencing the exhibit numbers used in such Registration Statement:
The following exhibits are incorporated by reference from Pre-Effective Amendment No. 2 to the Registrant's Registration Statement on Form S-11 (File No. 33-69710), referencing the exhibit numbers used in such Amendment No. 2:
The following exhibits are incorporated by reference from the Registrant's Registration Statement on Form S-11 (File No. 33-85440), referencing the numbers used in such Registration Statement:
The following exhibits are incorporated by reference from the Registrant's Form 10-Q for the fiscal quarter ended September 30, 1995, referencing the numbers used in such Form 10-Q:
Advisors Limited Partnership
The following exhibits are incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 1995, referencing the numbers used in such Form 10-K:
The following exhibit is incorporated by reference from the Registrant's Form 10-Q for the fiscal quarter ended September 30, 1996, referencing the number used in such Form 10-Q:
The following exhibits are incorporated by reference from the Registrant's Registration Statement on Form S-3 (File No. 333-18235), referencing the exhibit numbers used in such Form S-3:
The following exhibits are incorporated by reference from the Registrant's Form 10-K for the fiscal year ended December 31, 1996, referencing the numbers used in such Form 10-K:
The following exhibits are incorporated by reference from the Registrant's Registration Statement on Form S-4 (File No. 333-33515), referencing the numbers used in such Form S-4:
The following exhibits are incorporated by reference from the Registrant's Pre-Effective Amendment No. 1 to Form S-4 (File No. 333-33515), referencing the numbers used in such Pre-Effective Amendment No. 1:
The following exhibits are incorporated by reference from the Registrant's Form 8-A filed on November 5, 1997, referencing the numbers used in such Form 8-A:
The following exhibits are incorporated by reference from the Registrant's Form 10-Q for the fiscal quarter ended September 30, 1997, referencing the numbers used in such Form 10-Q:
(b) During the fourth quarter of 1997, the Company filed a Current Report on Form 8-K on December 30, 1997 to report the acquisition by the Company of properties which constituted more than 10% of the total assets of the Company and its consolidated subsidiaries.
(c) An annual report will be sent to Stockholders subsequent to this filing, and the Company will furnish copies of such report to the Securities and Exchange Commission.
(d) Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 corporation
By: /s/ John S. Gates, Jr. --------------------------------------------- John S. Gates, Jr., President and Chief Executive Officer (Principal Executive Officer)
By: /s/ Paul S. Fisher --------------------------------------------- Paul S. Fisher, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capaciies and on the dates indicated.
SIGNATURE NAME AND TITLE DATE - --------- ---------------------- ---------------
/s/ Martin Barber Martin Barber, Chairman March 16, 1998 - ---------------------- and Trustee
/s/ John S. Gates, Jr. John S. Gates, Jr., President March 16, 1998 - ---------------------- Chief Executive Officer and Trustee
/s/ Robert L. Stovall Robert L. Stovall, Vice March 16, 1998 - ---------------------- Chairman and Trustee
/s/ Nicholas C. Babson Nicholas C. Babson, Trustee March 16, 1998 - ----------------------
/s/ Alan D. Feld Alan D. Feld, Trustee March 16, 1998 - ----------------------
/s/ John J. Kinsella John J. Kinsella, Trustee March 16, 1998 - ----------------------
/s/ Thomas E. Robinson Thomas E. Robinson, March 16, 1998 - ---------------------- Trustee
CENTERPOINT PROPERTIES TRUST INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders CenterPoint Properties Trust
We have audited the accompanying consolidated balance sheets of CenterPoint Properties Trust and Subsidiaries (formerly CenterPoint Properties Corporation) as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CenterPoint Properties Trust and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P. Chicago, Illinois February 10, 1998
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
The accompanying notes are an integral part of these consolidated financial statements.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
The accompanying notes are an integral part of these consolidated financial statements.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
1. ORGANIZATION
CenterPoint Properties Trust (the "Company"), a Maryland trust, and its subsidiaries, owns and operates primarily warehouse/industrial properties in the metropolitan Chicago area and operates as a real estate investment trust.
On October 15, 1997, the Company completed a reorganization pursuant to which it converted from a Maryland corporation to a Maryland real estate investment trust by means of a merger of CenterPoint Properties Corporation (the "Corporation") with and into the Company, which prior to the merger was a wholly-owned subsidiary of the Corporation, with the Company as the surviving entity. Pursuant to a Plan of Reorganization, which was approved by the stockholders of the Corporation at a Special Meeting of Stockholders held on October 1, 1997, each issued and outstanding share of common stock of the corporation, par value $.001 per share (the "Common Stock"), was converted into one common share of beneficial interest in the Company, par value $.001 per share (the "Common Shares"), each outstanding share of Class B common stock of the Corporation was converted into one Class B common share of beneficial interest (the "Class B Common Shares") in the Company; and the outstanding principal amount of the Corporation's 8.22% Convertible Subordinated Debentures due 2004 was assumed by the Company and converted into the same principal amount of 8.22% Convertible Subordinated Debentures due 2004 of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Minimum rents are recognized on a straight-line basis over the terms of the respective leases. Unbilled rents receivable represents the amount that straight-line rental revenue exceeds rents due under the lease agreements. Unbilled rents receivable, included in tenants accounts receivable, at December 31, 1997 and 1996 were $5,075 and $4,099, respectively. Recoveries from tenants for taxes, insurance and other property operating expenses are recognized in the period the applicable costs are incurred.
Real estate fee income includes tenant lease termination fees of $1,894 in 1997 and $1,200 in 1995.
The Company provides an allowance for doubtful accounts against the portion of accounts receivable which is estimated to be uncollectible. Accounts receivable in the consolidated balance sheets are shown net of an allowance for doubtful accounts of $272 and $748 as of December 31, 1997 and 1996, respectively.
DEFERRED EXPENSES
Deferred expenses consist principally of financing fees and leasing commissions. Leasing commissions are amortized on a straight-line basis over the terms of the respective lease agreements ranging from 1 to 8 years. Financing costs are amortized over the terms of the respective loan agreements. Deferred expenses relating to debenture conversions of $86 and $257 were charged to paid-in capital in 1997 and 1996, respectively, and fully amortized deferred expenses of $1,207 and $57 were written off in 1997 and 1996, respectively. The balances are as follows:
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
PROPERTIES
Real estate assets are stated at cost. Interest and real estate taxes and other directly related expenses incurred during construction periods are capitalized and amortized on the same basis as the related assets. Depreciation expense is computed using the straight-line method based upon the following estimated useful lives:
Construction allowances for tenant improvements are capitalized and amortized over the terms of each specific lease. Repairs and maintenance are charged to expense when incurred. Expenditures for improvements are capitalized. When assets are sold or retired, their cost and related accumulated depreciation are removed from the accounts with the resulting gains or losses reflected in operations.
The Company annually reviews the recoverability of the carrying value of its investment in real estate. The reviews are conducted by estimating the fair value of its properties generally by analysis and comparison of the capitalized values of the expected net operating cash flows of the properties. If management determines that an impairment of property has occurred, the carrying value of such property will be reduced to its fair value.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, the Company considers all liquid investments purchased with original maturities of three months or less to be cash equivalents.
INVESTMENT IN AND ADVANCES TO AFFILIATE
The Company accounts for its investment in affiliate using the equity method whereby its cost of the investment is adjusted for its share of equity in net income or loss from the date of acquisition and reduced by distributions received.
ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INCOME TAXES
The Company qualifies as a real estate investment trust ("REIT") under sections 856-860 of the Internal Revenue Code beginning January 1, 1994. In order to qualify as a REIT, the Company is required to distribute at
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
least 95% of its taxable income to shareholders and to meet certain asset and income tests as well as certain other requirements. As a REIT, the Company will generally not be liable for Federal income taxes, provided it satisfies the necessary distribution requirements. The distributions declared and paid for the years ended December 31, 1997, 1996 and 1995 represent a return of capital of approximately 12%, 51% and 54%, respectively.
EARNINGS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which became effective for both interim and annual financial statement periods ending after December 15, 1997. As required by this statement, the Company adopted the new standards for computing and presenting earnings per share ("EPS") for 1997, and for all prior period earnings per share data presented. Following are the reconciliations of the numerators and denominators of the basic and diluted EPS.
The assumed conversion of the convertible subordinated debentures into common shares for purposes of computing diluted EPS by adding interest expense for the debentures to the numerators and adding assumed share conversions to the denominators for 1997, 1996 and 1995 would be anti dilutive. The assumed conversion of the convertible preferred stock in 1996 and 1995 would also be anti dilutive.
RECLASSIFICATIONS
Certain items presented in the consolidated statements of operations for prior periods have been reclassified to conform with current classifications with no effect on results of operations.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." Both SFAS No. 130 and SFAS No. 131 are effective for
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
financial statements for years beginning after December 15, 1997. SFAS No. 130 requires the reporting of comprehensive income beginning 1998 and SFAS No. 131 establishes standards for publicly-held business enterprises to report information about operating segments in annual financial statements and requires that these enterprises report selected information about operating segments in interim financial reports issued to shareholders. The Company plans to adopt SFAS No. 130 and No. 131 in 1998.
3. PROPERTY ACQUISITIONS AND DISPOSITIONS
During each of the years ended December 31, 1997 and 1996, the Company acquired twenty-one and fifteen properties, respectively, consisting principally of single-tenant buildings for an aggregate amount of approximately $124,923 and $103,532, respectively. Substantially all properties were acquired in singular transactions, and except for one transaction in 1997 and three transactions in 1996, were acquired from unrelated third parties. The properties were funded with borrowings under the Company's lines of credit, proceeds from properties sold during 1997 and 1996, from proceeds of public offerings of the Company's common shares completed on July 2, 1996 and March 6, 1997, and from proceeds of a public offering of the Company's preferred shares completed on November 10, 1997. The acquisitions have been accounted for utilizing the purchase method of accounting, and accordingly, the results of operations of the acquired properties are included in the consolidated statements of operations from the dates of acquisition.
The Company disposed of three properties during the year ended December 31, 1997 and eight properties during the year ended December 31, 1996. In 1997 and 1996, one and five of the properties, respectively, were disposed of in transactions that qualify as a tax-free exchange under applicable provisions of the Internal Revenue Code.
Due to the effect of the July, 1996 public offering, the March, 1997 public offering, the November, 1997 public offering and the acquisitions and dispositions of properties, the historical results are not indicative of the future results of operations. The following unaudited pro forma information is presented as if the 1995 and 1996 acquisitions and dispositions of properties, the July, 1996 public offering, and the corresponding repayment of certain debt had occurred on January 1, 1995, and as if the March, 1997 public offering, the November 1997 public offering, the corresponding repayment of certain debt, and the 1997 acquisitions and dispositions had all occurred on January 1, 1996 (or on the date the property first commenced operations with a third party tenant, if later). The unaudited pro forma information is based upon the historical consolidated statements of operations before any extraordinary items and does not purport to present what actual results would have been had the transactions, in fact, occurred at the beginning of 1996 or 1995, or to project results for any future period.
4. MORTGAGE NOTES RECEIVABLE
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
As of December 31, 1997 and 1996, the Company had notes receivable outstanding of $30,297 and $22,665, respectively, consisting of mortgage loans and construction loans. The notes bear interest from 8.25% to 11.25% and mature from March, 1998 to June, 2010.
As of December 31, 1997 mortgage notes receivable mature as follows:
Based on borrowing rates available at the end of 1997 and 1996 for mortgage loans with similar terms and maturities, the fair value of the mortgage notes receivable approximates the carrying values.
Land and buildings have been pledged as collateral for the above notes receivable.
5. INVESTMENT IN AND ADVANCES TO AFFILIATE
The Company holds approximately 99% of the economic interest in CenterPoint Realty Services Corporation ("CRS"). To maintain compliance with limitations on income from business activities received by REITs and their qualified REIT subsidiaries, the Company holds its interest in CRS in the form of non-voting equity ownership which qualifies as an unconsolidated taxable subsidiary.
As of December 31, 1997 and 1996, the Company had an outstanding balance due from CRS of $7,868 and $6,333, respectively, under a demand loan with an interest rate of 8.125%. The proceeds of the loans were required for development projects.
Summarized financial information of CRS is shown below.
Balance Sheets:
Statements of Operations:
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
6. MORTGAGE NOTES PAYABLE
MORTGAGE NOTES PAYABLE
As of December 31, 1997 and 1996, the Company had mortgage notes payable outstanding of $84,075 and $92,231, respectively. The mortgage notes are collateralized by two designated pools of properties in both 1997 and 1996 and two and three other individual properties, at December 31, 1997 and 1996, respectively.
One of the designated pool of properties consists of 20 properties collateralizing $50,000 bonds at December 31, 1997 and 1996, bearing interest of 7.62% and maturing in November, 2002. The second designated pool of properties consists of 18 properties collateralizing $30,000 of debt at December 31, 1997 and 1996, bearing interest of 6.91% and maturing in May, 1999.
The other mortgage notes payable aggregate $4,075 and $12,231 at December 31, 1997 and 1996, respectively, and bear interest ranging from 6.9% to 8.0%. In October, 1997, $8,156 of mortgage notes were repaid. The mortgage notes outstanding as of December 31, 1997, mature from November, 1998 to October, 2000.
Revenue Bonds
As of December 31, 1997 and 1996, the Company had revenue bonds, consisting of Economic Development Revenue Bonds issued by the City of Gary, Indiana ($22,220 outstanding at December 31, 1997 and 1996) and Variable/Fixed Rate Demand Special Facilities Airport Revenue Bonds issued by the City of Chicago, Illinois ($55,000 outstanding at December 31, 1997).
The Economic Development Revenue Bonds issued by the City of Gary, Indiana are collateralized by a letter of credit. The letter of credit contains certain financial covenants pertaining to the tangible net worth and liabilities in relation to portfolio value of the Company. In April 1996, the bonds outstanding at December 31, 1995 were refunded. The new bonds were issued in two series; $20,540,000 tax exempt and $1,680,000 taxable, bearing interest in the Weekly Adjustable Interest Rate Mode at a rate determined by the Remarketing Agent (4.20% on the tax exempt bonds and 6.10% on the taxable bonds at December 31, 1997). The new bonds require monthly payments of interest only and mature in March, 2031.
The Variable/Fixed Rate Demand Special Facilities Airport Revenue Bonds issued by the City of Chicago, Illinois are enhanced by a letter of credit. The letter of credit contains certain financial convenants pertaining to consolidated net worth. The tax-exempt bonds bear initial interest at a Weekly Adjustable Interest Rate, which from time to time may be changed by the Company, at a rate determined by the Remarketing Agent (3.95% at December 31, 1997). The bonds require monthly payments of interest only and mature in September, 2032. Of the original proceeds, the Company holds $34,593 in escrow at December 31, 1997 for future construction costs.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
As of December 31, 1997 mortgage notes mature as follows:
Based on borrowing rates available to the Company at the end of 1997 and 1996 for mortgage loans with similar terms and maturities, the fair value of the mortgage notes payable approximates the carrying values.
Land, buildings and equipment related to such mortgages with an aggregate net book value of approximately $199,000 at December 31, 1997 have been pledged as collateral for the above debt.
7. LINE OF CREDIT
In October, 1996, the Company obtained a $135 million unsecured line of credit, and subsequently increased the line to $150 million in November 1997. The current interest rate is LIBOR plus .80% for LIBOR borrowings (a range of 6.8% to 6.863% at December 31, 1997) and Prime Rate (8.5% at December 31, 1997) for other borrowings. The Company may receive competitive bids for up to half its commitment (a range of 6.60% to 6.75% at December 31, 1997). The line requires payments of interest only when LIBOR contracts mature and monthly on borrowings under Prime Rate. The line matures on October 24, 1999. There is a fee of 1/5% per year on the total line commitment. At December 31, 1997 and 1996, the Company had $52,300 and $88,900, respectively, available under the line. As the line of credit is at a variable rate, the carrying value approximates fair value.
8. EXTRAORDINARY ITEM
In 1996 and 1995, the Company incurred losses of $3,331 (per share - basic $0.24; diluted $0.23) and $632 (per share - basic $0.07; diluted $0.07), respectively, representing a write off of unamortized deferred financing costs as a result of early extinguishment of certain debt obligations.
9. CONVERTIBLE SUBORDINATED DEBENTURES PAYABLE
Concurrent with the initial public offering in December, 1993, the Company issued $58,500 of convertible subordinated debentures ("Debentures") due 2004. At December 31, 1997 and 1996, $11,740 and $14,380 of debentures were outstanding, respectively. The Debentures are unsecured general obligations of the Company and are subordinate to all existing and subsequently incurred indebtedness of the Company. The Debentures are optionally redeemable by the Company, at par, commencing December 4, 1998. Holders may convert the Debentures at any time, without premium, to Common Shares of the Company at a conversion price of $18.25 per share, subject to certain adjustments. The Debentures bear interest at 8.22% per annum, payable semiannually on January 15 and July 15 of each year, commencing July 15, 1994. During 1997, 1996 and 1995 debentures totaling $2,640, $8,864 and $20,754, respectively, were converted into shares of common stock. Based principally on the conversion feature and share price of common stock at the end of 1997 and 1996, the fair value of the outstanding Debentures approximates $22,595 and $25,805, respectively.
10. RELATED PARTY TRANSACTIONS
In December 1997, the Company purchased a fully leased building, located in Des Plaines, Illinois, from a partnership, in which one of the Company's Senior Officers and a Company Director were limited partners, for
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
approximately $4.7 million. In June, 1996, the Company acquired three properties in which the Company's Chief Operations Officer and Director, and the Company's Executive Vice President of Acquisitions during 1996 had an interest and, in which they, continue to own an insignificant interest in two of the properties. The three properties were purchased for an aggregate amount of approximately $24.6 million. The above transactions satisfied the Company's investment criteria and were approved by the Company's independent directors.
Notes payable at December 31, 1997 and 1996 includes amounts payable to related parties as a consequence of properties acquired and settlement of tax reimbursement obligations of the Company during 1996 totaling $33 and $483, respectively.
11. SHAREHOLDERS' EQUITY
COMMON SHARES OF BENEFICIAL INTEREST
As of December 31, 1997 the Company has reserved 584,229 Common Shares for future issuance under the 1993 Stock Option Plan, 119,596 Common Shares for future issuance under the 1995 Restricted Stock Incentive Plan, 67,713 Common Shares for future issuance under the 1995 Director Stock Plan, 643,288 Common Shares for issuance upon the conversion of the Debentures and 1,000,000 Common Shares for future issuance under the dividend reinvestment and stock purchase plan.
CLASS B COMMON SHARES OF BENEFICIAL INTEREST
On September 22, 1995, the Company completed a $50 million private equity placement of non-voting preferred shares of beneficial interest. In May, 1996, the preferred shares of beneficial interest automatically converted, on a share for share basis, to non-voting Class B Common Shares, upon shareholder approval of an amendment to the Company's charter permitting non-voting Class B Common Shares at the Company's annual meeting. The distribution on the non-voting shares is equal to the distribution paid on the voting shares of the Company plus an additional $.0468 per share. Unless previously converted, after three years, the shares will be converted to voting common shares on a share for share basis up to 4.9 percent of the Company's then outstanding voting shares with all shares to fully convert within ten years. As the shares convert to voting common, the distribution paid shall be the same as all other voting common shares.
PREFERRED SHARES OF BENEFICIAL INTEREST
On November 10, 1997, the Company issued 3 million shares of 8.48% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest ("Preferred Shares") at a purchase price of $25 per share. Dividends on the Preferred Shares are cumulative from the date of issuance and payable quarterly commencing on January 30, 1998. The payment of dividends and amounts upon liquidation will rank senior to the Common Shares and Class B Common Shares, which are the only other shares of the Company currently outstanding. The Preferred Shares are not redeemable prior to October 30, 2002. On or after October 30, 2002 the Preferred Shares will be redeemable for cash at the option of the Company, in whole or part, at the redemption price of $25 per share, plus dividends accrued and unpaid to the redemption date. The Preferred Shares are not convertible into or exchangeable for any other property or securities of the Company.
RESTRICTED STOCK INCENTIVE PLAN
Under the terms of the 1995 Restricted Stock Incentive Plan, adopted in 1995 the Company initially reserved 150,000 common shares for future grants. In 1997, 1996 and 1995 certain key employees were granted 12,444, 8,290 and 9,670 restricted shares, respectively. Shares were awarded in the name of each of the participants, who have all the 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.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Under the terms of the Company's Restricted Stock Grant Agreements, certain key employees were granted 7,829 restricted shares of the Company's common shares in 1995. Shares were awarded in the name of each of the employees, who have all the rights of other common shareholders, subject to certain restrictions and for future provisions. Restrictions on the shares expired one year after the date of the award.
Unearned compensation is recorded at the date of awards based on the market value of shares. Unearned compensation, which is shown as a separate component of shareholders' equity, is being amortized to expense over the eight year vesting period. The amount amortized to expense during 1997, 1996 and 1995 was $214, $118 and $90, respectively.
DIRECTOR STOCK PLAN
The 1995 Director Stock Plan is for an aggregate of 75,000 common shares and provides that each independent director, upon election or re-election to the Board, may elect to receive 50% of his annual retainer fee in Common Shares at the market price on such date. In 1997, 1996 and 1995, 1,921, 2,516 and 2,850 Common Shares were issued under this plan, respectively. In connection with the issuance of such shares, $57, $57 and $57 was charged to expense in 1997, 1996 and 1995, respectively.
12. STOCK OPTION PLAN
The Company has adopted the 1993 Stock Option Plan (the "Plan") and in May, 1996, increased the maximum number of shares from 750,000 to 1,500,000 common shares of beneficial interest which may be granted for qualified and non-qualified options. The Company adopted the Plan to provide additional incentives to attract and retain directors, officers and key employees. The Plan was amended in 1995 to provide that each independent director receive an option for 3,000 common shares of beneficial interest at fair market value at the time of being elected or re-elected to the Board. Options are to be granted by the Compensation Committee of the Board of Directors. The term of the option shall be fixed by the Compensation Committee, but no option shall be exercisable more than 10 years after the date of grant.
The options granted are at fair market value on the date of grant, are for 10 year terms and become exercisable in 20% annual increments after one year from date of grant. Option activity for the three years ended December 31, 1997 is as follows:
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
The following table summarized information about stock options at December 31, 1997:
The Company has applied Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its Plan, accordingly, no compensation costs have been recognized. Had compensation costs for the Company's Plan been determined based on the fair value at the grant date for options granted in 1997, 1996 and 1995 in accordance with the method required by Statement of Financial Accounting Standards No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts as follows:
13. FUTURE RENTAL REVENUES
Under existing noncancelable operating lease agreements as of December 31, 1997, tenants of the warehouse/industrial properties are committed to pay in aggregate the following minimum rentals:
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
At December 31, 1997, 630 of the total 682 apartments available for rental at the Lakeshore Dunes property were leased. Lease terms are generally for one year.
No single tenant represented more than 10% of consolidated minimum rents in 1997, 1996 and 1995.
14. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
15. 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, or liquidity of the Company.
The Company has entered into several contracts for the acquisition of properties. Each acquisition is subject to satisfactory completion of due diligence and, in the case of developments, completion and occupancy of the project.
At December 31, 1997, seven of the properties owned are subject to purchase options held by certain tenants. The purchase options are exercisable at various intervals through 2006 for amounts which are greater than the net book value of the assets. The tenant at a property in Woodale, IL exercised its option to purchase the building in May, 1997.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders CenterPoint Properties Trust
Our report on the consolidated financial statements of CenterPoint Properties Trust and Subsidiaries is included as page of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the Index to Consolidated Financial Statements on page of this Form 10-K.
In our opinion, these financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
Chicago, Illinois COOPERS & LYBRAND L.L.P. February 10, 1998
CENTERPOINT PROPERTIES TRUST VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II (DOLLARS IN THOUSANDS)
- --------------------------- NOTE: (a) Deductions represent write-off of accounts receivable against the allowance for doubtful accounts.
SCHEDULE III
CENTERPOINT PROPERTIES CORPORATION AND SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION As of December 31, 1997
CENTERPOINT PROPERTIES CORPORATION AND SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION As of December 31, 1997
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES SCHEDULE III (CONTINUED) (DOLLARS IN THOUSANDS)
Notes to Schedule III:
(a) Initial cost for each respective property is the total acquisition costs associated with its purchase. (b) Carrying costs consist of capitalized construction period interest, taxes and insurance. (c) At December 31, 1997, the aggregate cost of land and buildings and equipment for Federal income tax purposes was approximately $681 million. (d) Reconciliation of real estate and accumulated depreciation:
RECONCILIATION OF REAL ESTATE
RECONCILIATION OF ACCUMULATED DEPRECIATION
(e) See description of encumbrances in Note 6 to Consolidated Financial Statements. (f) Depreciation is computed based upon the following estimated lives:
(g) These 18 properties collateralize a $30,000 mortgage loan payable. (h) These 20 properties collateralize $50,000 of mortgage bonds payable.