ITEM 1. BUSINESS
GENERAL
AMB Property, L.P., a Delaware limited partnership, is one of the leading owners and operators of industrial real estate nationwide. As of December 31, 2000, we owned, managed, and had renovation and development projects totaling 92 million square feet and 1,005 buildings in 27 metropolitan markets. Of this, we owned and operated 862 industrial buildings and eight retail centers, totaling approximately 77.0 million rentable square feet. As of December 31, 2000, these properties were 96.3% leased. As of December 31, 2000, through our subsidiary, AMB Investment Management, Inc., we also managed industrial buildings and retail centers, totaling approximately 4.4 million rentable square feet on behalf of various institutional investors. In addition, we have invested in 36 industrial buildings, totaling approximately 4.0 million rentable square feet, through an unconsolidated joint venture.
We are engaged in the acquisition, ownership, operation, management, renovation, expansion, and development of primarily industrial properties in target markets nationwide. As of December 31, 2000, AMB Property Corporation owned an approximate 93.5% general partnership interest in us, excluding preferred units. As our sole general partner, AMB Property Corporation has the full, exclusive, and complete responsibility and discretion in the day-to-day management and control of us.
We enter into co-investment joint ventures with institutional investors. These co-investment joint ventures provide us with an additional source of capital to fund certain acquisitions and developments and renovation projects and increase our return on invested capital as a result of certain fees paid to us. As of December 31, 2000, we had investments in two co-investment joint ventures, which are consolidated for financial reporting purposes.
We are the managing general partner of AMB Institutional Alliance Fund I, L.P. and, together with one of our other affiliates, own, as of December 31, 2000, approximately 21% of the partnership interests in the Alliance Fund I. The Alliance Fund I is a co-investment partnership between us and AMB Institutional Alliance REIT I, Inc., a limited partner of the Alliance Fund I, which includes 15 institutional investors as stockholders and is engaged in the acquisition, ownership, operation, management, renovation, expansion, and development of primarily industrial buildings in target markets nationwide. As of December 31, 2000, the Alliance Fund I had received equity contributions from third party investors totaling $169.0 million, which, when combined with anticipated debt financings and our investment, creates a total planned capitalization of $410.0 million.
The principal executive office of AMB Property, L.P. and AMB Property Corporation is located at Pier 1, Bay 1, San Francisco, CA 94111, and our telephone number is (415) 394-9000. We also maintain a regional office in Boston, Massachusetts. As of December 31, 2000, we employed 174 individuals, 133 at our San Francisco headquarters and 41 in our Boston office.
Unless the context otherwise requires, the terms "we," "us," and "our" refer to AMB Property, L.P. and our controlled subsidiaries. The following marks are registered trademarks of AMB Property Corporation, our general partner: AMB(R); Customer Alliance Partners(R); Customer Alliance Program(R); Development Alliance Partners(R); Development Alliance Program(R); eSpace(R); Institutional Alliance Partners(R); Institutional Alliance Program(R); Management Alliance Partners(R); Management Alliance Program(R); UPREIT Alliance Partners(R); and UPREIT Alliance Program(R). The following marks are unregistered trademarks of AMB Property Corporation, our general partner: Broker Alliance Partners(TM); Broker Alliance Program(TM); HTD(TM); High Throughput Distribution(TM); iSpace(TM); Strategic Alliance Partners(TM); and Strategic Alliance Programs(TM).
TRANSACTION SUMMARY
During 2000, we invested $730.0 million in operating properties, consisting of 145 industrial buildings aggregating approximately 10.5 million square feet. Of this, $185.6 million in operating properties was acquired by the Alliance Fund I, consisting of 44 industrial buildings aggregating approximately 2.6 million
square feet. In 2000, we disposed of one retail center and 25 industrial buildings and re-invested approximately $175.7 million in 145 industrial buildings, aggregating approximately 10.5 million rentable square feet.
We had 33 industrial buildings and one retail center that were held for divestiture as of December 31, 2000. During 2000, we disposed of 25 industrial buildings and one retail center, aggregating approximately 2.5 million rentable square feet, for an aggregate price of $175.7 million. Over the next few years, we intend to dispose of non-strategic assets and redeploy the resulting capital into properties that better fit our current investment focus.
As of December 31, 2000, we had in our development pipeline 19 industrial projects, which will total approximately 5.5 million square feet and have a total estimated investment of $305.9 million upon completion. We also had three retail projects in our development pipeline, which will total approximately 0.5 million square feet and have a total estimated investment of $76.3 million upon completion. As of December 31, 2000, we had funded an aggregate of $226.5 million and will need to fund an estimated additional $155.7 million in order to complete projects currently under construction.
BUSINESS STRATEGIES
Investment Strategy
Our investment strategy is to become a leading provider of High Throughput Distribution, or HTD, properties located near key passenger and cargo airports, highway systems, and ports in major metropolitan areas, such as Atlanta, Chicago, Dallas/Fort Worth, Northern New Jersey/New York City, the San Francisco Bay Area, Southern California, Miami, and Seattle. Within each of our markets, we focus our investments in in-fill submarkets. In-fill sub-markets are characterized by supply constraints on the availability of land for competing projects.
High Throughput Distribution facilities are designed to serve the high-speed, high-value freight handling needs of today's supply chain, as opposed to functioning as long-term storage facilities. We believe that the rapid growth of the airfreight business and the outsourcing of supply chain management to third party logistics companies are indicative of the changes that are occurring in the supply chain and the manner in which goods are distributed. In addition, we believe that inventory levels as a percentage of final sales are falling and that goods are moving more rapidly through the supply chain. As a result, we intend to focus our investment activities primarily on industrial properties that we believe will benefit from these changes.
Operating Strategy
We are a full-service real estate company with in-house expertise in acquisitions, development and redevelopment, asset management and leasing, finance and accounting, and market research. We have long-standing relationships with many real estate management and development firms across the country, our Strategic Alliance Partners.
We believe that real estate is fundamentally a local business and that the most effective way for us to operate is by forging alliances with service providers in every market. We believe that these collaborations allow us to: 1) leverage our national presence with the local market expertise of brokers, developers, and property managers; 2) improve the operating efficiency and flexibility of our national portfolio; 3) strengthen customer satisfaction and retention; and 4) provide a continuous pipeline of growth.
We believe that our partners give us local market expertise and enormous flexibility allowing us to focus on our core competencies: developing and refining our strategic approach to real estate investment and management and raising private capital to finance growth and enhance returns.
FINANCING STRATEGY
To maintain financial flexibility and facilitate the rapid deployment of capital over market cycles, we intend to operate with a debt-to-total market capitalization ratio of approximately 45% or less, although our organizational documents do not limit the amount of indebtedness that we may incur. Additionally, we intend
to continue to structure our balance sheet to maintain investment-grade ratings. We also intend to keep the majority of our assets unencumbered to facilitate such ratings. As of December 31, 2000, our debt-to-total market capitalization ratio was 37.9% and our debt-to-total book capitalization ratio was 44.6%.
We have a $500 million unsecured revolving credit agreement that currently bears interest at a rate equal to LIBOR plus 75 basis points. We use available borrowings under our unsecured credit facility for property acquisitions, developments, and for general corporate purposes. As of December 31, 2000, the available borrowings under our unsecured credit facility were $284.0 million (excluding potential expansion capacity). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Item 14. Note 6 of Notes to Consolidated Financial Statements" included in this report.
Currently, our principal sources of working capital and funding for acquisitions, development, expansion, and renovation of our properties include: 1) cash flow from operations; 2) borrowings under our unsecured credit facility; 3) other forms of secured or unsecured debt financing; 4) proceeds from debt or limited partnership unit offerings (including issuances of units by our subsidiaries); and 5) proceeds from divestitures of properties. Additionally, our co-investment program will also serve as a significant source of capital for acquisitions and developments.
GROWTH STRATEGIES
AMB Investment Management
AMB Investment Management, Inc. provides real estate investment management services on a fee basis to clients. We hold all of the non-voting preferred stock of AMB Investment Management, which represents a 95% economic interest. All of the common stock of AMB Investment Management, Inc., which represents a 5% economic interest, is owned by our general partner's current or former executive officers and a former executive officer of AMB Investment Management, Inc.. AMB Investment Management, Inc. conducts its operations through AMB Investment Management Limited Partnership, a Maryland limited partnership, of which it is the sole general partner. We intend to grow this business through our co-investment program.
We co-invest with clients of AMB Investment Management, Inc., to the extent such clients newly commit investment capital, through partnerships, limited liability companies, or joint ventures. We currently use a co-investment formula with each client whereby we will own at least a 20% interest in all ventures. We currently have two co-investments. The first is a separate account co-investment venture, in which we own a 50% interest, with total gross book value at December 31, 2000, of $214.1 million. The second is a co-investment fund, AMB Institutional Alliance Fund I, L.P., in which we owned at December 31, 2000, a 21% interest, with total gross book value at December 31, 2000, of $339.5 million. In general, we control all significant operating and investment decisions of our co-investment entities.
Headlands Realty Corporation
Headlands Realty Corporation conducts a variety of businesses that include incremental income programs, such as our Customer Assist Program and, to a limited extent, development projects available for sale to third parties. We hold all of the non-voting preferred stock of Headlands Realty Corporation, which represents a 95% economic interest. All of the common stock of Headlands Realty Corporation, which represents a 5% economic interest, is owned by some of our general partner's current and former executive officers and a director of Headlands Realty Corporation.
Growth Through Operations
We seek to generate internal growth through rent increases on existing space and renewal on re-tenanted space, by maintaining a high occupancy rate of our properties and by controlling expenses by capitalizing on the economies of owning, operating, and growing a large national portfolio. As of December 31, 2000, our industrial properties and retail centers were 96.4% leased and 93.2% leased, respectively. During the 12 months ended December 31, 2000, we increased average base rental rates (on a cash basis) by 26.5% from
the expiring rent for that space, on leases entered into or renewed during such period, representing approximately 12.1 million rentable square feet. Annualized base rent represents the monthly contractual amount under existing leases at the end of the year, multiplied by 12. This amount excludes expense reimbursements, rental abatements, and percentage rents.
Growth Through Acquisitions and Capital Redeployment
We believe that our significant acquisition experience, our alliance-based operating strategy, and our extensive network of property acquisition sources will continue to provide opportunities for external growth. We believe that our relationship with third party local property management firms through our Management Alliance Program also will create acquisition opportunities as such managers market properties on behalf of sellers. Our operating structure also enables us to acquire properties through our UPREIT Alliance Program in exchange for our limited partnership units, thereby enhancing our attractiveness to owners and developers seeking to transfer properties on a tax-deferred basis. In addition to acquisitions, we seek to redeploy capital from non-strategic assets into properties that better fit our current investment focus.
We are generally in various stages of negotiations for a number of acquisitions and dispositions, which may include acquisitions and dispositions of individual properties, acquisitions of large multi-property portfolios, and acquisitions of other real estate companies. There can be no assurance that we will consummate any of these acquisitions. Such transactions, if we consummate them, may be material individually or in the aggregate. Sources of capital for acquisitions may include undistributed cash flow from operations, borrowings under the credit facility, other forms of secured or unsecured debt financing, issuances of debt or limited partnership units (including issuances of limited partnership units by our subsidiaries), proceeds from divestitures of properties, and assumption of debt related to the acquired properties.
Growth Through Development
We believe that renovation and expansion of value-added properties and development of well-located, high-quality industrial properties should continue to provide us with attractive opportunities for increased cash flow and a higher rate of return than we may obtain from the purchase of fully leased, renovated properties. Value-added properties are typically characterized as properties with available space or near-term leasing exposure, undeveloped land acquired in connection with another property that provides an opportunity for development, or properties that are well-located but require redevelopment or renovation. Value-added properties require significant management attention or capital investment to maximize their return. We have developed the in-house expertise to create value through acquiring and managing value-added properties and believe that our national market presence and expertise will enable us to continue to generate and capitalize on these opportunities. Through our Development Alliance Program, we have established strategic alliances with national and regional developers to enhance our development capabilities.
The multidisciplinary backgrounds of our employees provide us with the skills and experience to capitalize on strategic renovation, expansion, and development opportunities. Several of our general partner's officers have extensive experience in real estate development, both with us and with national development firms. We generally pursue development projects in joint ventures with local developers. This way, we leverage the development skill, access to opportunities, and capital of such developers, transferring a significant amount of the development risk to them and eliminating the need and expense of an in-house development staff. Under a typical joint venture agreement with a Development Alliance Partner, we would fund 95% of the construction costs and our partner would fund 5%. Upon completion, we generally would purchase our partner's interest in the joint venture.
As of December 31, 2000, we had committed to invest $278.5 million to develop an estimated 5.9 million rentable square feet. Approximately $243.4 million of this investment is through our Development Alliance Program. See Item 2.
ITEM 2. PROPERTIES
The properties that we owned as of December 31, 2000, are divided into two operating divisions, consisting of 27 identifiable markets. We have provided this breakdown for external reporting purposes only. It reflects the key markets of interest to our investors and does not reflect how we are operationally managed. See "Item 14. Note 14 of Notes to Consolidated Financial Statements" for segment information related to our operations.
INDUSTRIAL PROPERTIES
At December 31, 2000, we owned 862 industrial buildings aggregating approximately 75.8 million rentable square feet, located in 27 markets nationwide. Our industrial properties accounted for $414.3 million, or 96.3%, of our total annualized base rent at December 31, 2000. Our industrial properties were 96.4% leased to over 2,850 customers, the largest of which accounted for no more than 1.3% of our annualized base rent from our industrial properties.
Property Characteristics. Our industrial properties, which consist primarily of warehouse distribution facilities suitable for single or multiple customers, are typically comprised of multiple buildings. The following table identifies characteristics of our typical industrial buildings:
Lease Terms. Our industrial properties are typically subject to lease on a "triple net basis," in which customers pay their proportionate share of real estate taxes, insurance, and operating costs, or subject to leases on a "modified gross basis," in which customers pay expenses over certain threshold levels. Lease terms typically range from three to ten years, with an average of six years, excluding renewal options. The majority of the industrial leases do not include renewal options.
Overview of Major Target Markets. Our industrial properties are located near key passenger and air cargo airports, key interstate highways, and ports in major metropolitan areas, such as Atlanta, Chicago, Dallas/Fort Worth, Northern New Jersey, the San Francisco Bay Area, Southern California, Miami, and Seattle. We believe our industrial properties' strategic location, transportation network and infrastructure, and large consumer and manufacturing bases support strong demand for industrial space. According to statistics published by CB Richard Ellis/Torto Wheaton Research, the national hub markets listed below are six of the nation's eight largest warehouse markets and, as of December 31, 2000, comprised 43.2% of the warehouse inventory of the 47 industrial markets tracked. According to statistics published by Regional Financial Associates, as of December 31, 2000, the combined population of these markets was 45.6 million and the amount of per capita warehouse space was 22.7% above the average for those 47 industrial markets.
Within these metropolitan areas, our industrial properties are concentrated in locations with limited new construction opportunities within established, relatively large submarkets, which we believe should provide a higher rate of occupancy and rent growth than properties located elsewhere. These in-fill locations are typically near major passenger and air cargo facilities, seaports or convenient to major highways and rail lines, and are proximate to a diverse labor pool. There is typically broad demand for industrial space in these centrally located submarkets due to a diverse mix of industries and types of industrial uses, including warehouse distribution, light assembly and manufacturing. We generally avoid locations at the periphery of metropolitan areas where there are fewer supply constraints. Small metropolitan areas or cities without a heavy concentration of warehouse activity typically have few, if any, supply-constrained locations (those areas typified by significant population densities, a limited number of existing industrial customers and a low availability of land which could be developed into competitive space for additional industrial customers).
INDUSTRIAL MARKET OPERATING STATISTICS
As of December 31, 2000, we operated in six hub markets, in addition to 21 other markets nationwide. The following table represents properties in which we own a fee simple interest or a controlling interest (consolidated), and excludes properties in which we only own a non-controlling interest (unconsolidated) and properties under development.
- --------------- (1) We also have a majority ownership interest in 36 industrial buildings totaling an aggregate of approximately 4.0 million square feet in the Chicago market through its investment in an unconsolidated joint venture.
(2) Excludes properties purchased or developed after December 31, 1998.
INDUSTRIAL PROPERTY SUMMARY
As of December 31, 2000, our 862 industrial buildings were diversified across 27 markets nationwide. The average age of our industrial properties is 17 years (since the property was built or substantially renovated), which we believe should result in lower operating costs over the long term. The following table represents properties in which we own a fee simple interest or a controlling interest (consolidated), and excludes properties in which we only own a non-controlling interest (unconsolidated).
- --------------- (1) Annualized base rent represents the monthly contractual amount under existing leases at December 31, 2000, multiplied by 12. This amount excludes expense reimbursements and rental abatements.
INDUSTRIAL PROPERTY LEASE EXPIRATIONS
The following table summarizes the lease expirations for our industrial properties for leases in place as of December 31, 2000, without giving effect to the exercise of renewal options or termination rights, if any, at or prior to the scheduled expirations.
- --------------- (1) Schedule includes executed leases that commence after December 31, 2000. Schedule excludes leases expiring December 31, 2000.
(2) Calculated as monthly rent at expiration multiplied by 12.
(3) Includes 1,640,579 square feet of month-to-month leases.
(4) Includes leases expiring January 1, 2001, through December 31, 2001.
CUSTOMER INFORMATION
Largest Property Customers. Our 25 largest property customers by annualized base rent are set forth in the table below.
- --------------- (1) Tenant(s) may be a subsidiary of or an entity affiliated with the named customer.
(2) Computed as aggregate rentable square feet divided by the aggregate leased square feet of our industrial and retail properties.
(3) Computed as annualized base rent divided by the aggregate annualized base rent of our industrial and retail properties.
RETAIL PROPERTIES
At December 31, 2000, we owned eight retail centers aggregating approximately 1.2 million rentable square feet. Our retail properties accounted for $15.9 million, or 3.7%, of annualized base rent at December 31, 2000. Our retail properties were 93.2% leased to over 170 customers. Our retail properties have an average age of two years since built, expanded, or renovated.
During 2000, we sold one retail center, totaling approximately 0.4 million rentable square feet. As of December 31, 2000, we had one retail center, aggregating approximately 0.3 million rentable square feet, which we held for divestiture.
RETAIL PROPERTY SUMMARY
The following table sets forth the rentable square footage of our retail centers as of December 31, 2000, and represents properties in which we own a fee simple interest or a controlling interest (consolidated), and excludes properties in which we only own a non-controlling interest (unconsolidated).
- --------------- (1) Annualized base rent means the monthly contractual amount under existing leases at December 31, 2000, multiplied by 12. This amount excludes expense reimbursements, rental abatements, and percentage rents.
(2) Calculated as total Annualized Base Rent divided by total rentable square feet actually leased as of December 31, 2000.
(3) We hold an interest in this property through a joint venture interest in a limited partnership.
(4) This property is being redeveloped. All calculations are based on rentable square feet existing as of December 31, 2000.
(5) This property consists of land held for future development.
(6) This property is being held for divestiture as of December 31, 2000.
OPERATING AND LEASING STATISTICS
TOTAL PORTFOLIO SUMMARY
The following table summarizes key operating and leasing statistics for all of our properties as of and for the year ended December 31, 2000.
OPERATING AND LEASING STATISTICS(1)
- --------------- (1) Includes all consolidated operating properties and excludes industrial development and renovation projects.
(2) In addition to owned square feet as of December 31, 2000, we manage, through our subsidiary, AMB Investment Management, Inc., 3.7 million, 0.6 million, and 0.1 million additional square feet of industrial, retail, and other properties, respectively. We also have an investment in 4.0 million square feet of industrial properties through our investment in an unconsolidated joint venture.
(3) Consists of all leases renewing or re-tenanting with lease terms greater than one year.
SAME STORE SUMMARY
The following table summarizes key operating and leasing statistics for our same store properties as of and for the year ended December 31, 2000. For an explanation of our same store properties, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations."
- --------------- (1) Net operating income, or NOI, consists of rental revenues, including reimbursements and excluding straight-line rents, less property level operating expenses.
HISTORICAL OCCUPANCY RATES, AVERAGE BASE RENTS, RENT INCREASES, AND TENANT RETENTION RATES
The following table sets forth weighted average occupancy rates and average base rents based on square feet leased of our industrial properties and retail centers as of and for the periods presented. The following table also sets forth information relating to tenant retention rates and average rent increases (cash basis) on renewal and re-tenanted space for our industrial properties and retail properties for the periods presented.
- --------------- (1) Annualized base rent per square foot represents the total annualized contractual base rental revenue for the period divided by the average occupied square feet leased at December 31.
RECURRING TENANT IMPROVEMENTS AND LEASING COMMISSIONS PER SQUARE FOOT LEASED
The table below summarizes for our industrial properties and retail properties, separately, the recurring tenant improvements and leasing commissions per square feet leased for the years ended December 31. The recurring tenant improvements and leasing commissions represent costs incurred to lease space after the initial lease term of the initial customer, excluding costs incurred to relocate customers as part of a re-tenanting strategy. The tenant improvements and leasing commissions set forth below are not necessarily indicative of future tenant improvements and leasing commissions.
DEVELOPMENT PIPELINE
The following table sets forth the properties owned by us as of December 31, 2000, which were undergoing renovation, expansion, or new development. No assurance can be given that any of such projects will be completed on schedule or within budgeted amounts.
INDUSTRIAL DEVELOPMENT AND RENOVATION DELIVERIES (DOLLARS IN THOUSANDS)
- --------------- (1) Represents a renovation project.
(2) As of December 31, 2000, our share of such amounts funded to date was $76.5 million, $29.0 million, and $5.9 million, respectively, for a total of $111.4 million funded to date.
(3) Excludes 250 acres of land and other acquisition-related costs totaling approximately $23.1 million.
RETAIL REDEVELOPMENT DELIVERIES (DOLLARS IN THOUSANDS)
- --------------- (1) Excludes 39 acres of land and other acquisition costs totaling $13.2 million, which represents future phases of current projects which have not been committed to, or for which final project planning has not been completed, and other land inventory.
(2) As of December 31, 2000, our share of amounts funded to date was $61.5 million.
HEADLANDS REALTY CORPORATION(1) DEVELOPMENT PROJECTS HELD FOR SALE (DOLLARS IN THOUSANDS)
- --------------- (1) Headlands Realty Corporation is one of our subsidiaries, in which we own a 95% economic interest.
(2) Headlands Realty Corporation currently intends to sell these properties within two years of completion.
(3) Includes land at market value and development fees and cost reimbursements that will be paid to us.
PROPERTIES HELD THROUGH JOINT VENTURES, LIMITED LIABILITY COMPANIES AND PARTNERSHIPS
Consolidated:
As of December 31, 2000, we held interests in joint ventures, limited liability companies, and partnerships with certain unaffiliated third parties through, which are consolidated in our consolidated financial statements. In certain cases such agreements provide that we are a limited partner or that the other party to the joint venture is principally responsible for day-to-day management of the property (although in all such cases, we have approval rights with respect to significant decisions involving the underlying properties). Under the agreements governing the joint ventures, we and the other party to the joint venture may be required to make additional capital contributions, and subject to certain limitations, the joint ventures may incur additional debt. Such agreements also impose certain restrictions on the transfer of joint venture interests by us or the other party to the joint venture and provide certain rights to us or the other party to the joint venture to sell its interest to the joint venture or to the other joint venture partner on terms specified in the agreement. All of the joint ventures terminate in 2024 or later, but may end earlier if a joint venture ceases to hold any interest in or have any obligations relating to the property held by the joint venture.
INDUSTRIAL CONSOLIDATED JOINT VENTURES (DOLLARS IN THOUSANDS)
- --------------- (1) For development properties, this represents estimated square feet at completion of development for committed phases of development and renovation projects.
(2) Represents the book value of the property (before accumulated depreciation) owned by the joint venture entity and excludes net other assets.
(3) These properties are owned by a single co-investment partnership between an institutional investor (50%) and us (50%). The institutional investor is a client of AMB Investment Management.
(4) Represents properties held by the Alliance Fund I, which is a co-investment partnership between the Alliance REIT I (79%) and us (21%). The Alliance REIT I is a client of AMB Investment Management.
(5) Excludes investments in 86.2 acres of land and other pre-development costs related to future phases of current projects, which have not been committed to, or for which final planning has not been completed.
(6) Represents a partnership between a Development Alliance Partner (5%) and the Alliance Fund I (95%), in which we have a 21% interest.
RETAIL CONSOLIDATED JOINT VENTURES (DOLLARS IN THOUSANDS)
- --------------- (1) For development properties, this represents estimated square feet at completion of development project.
(2) Represents the book value of the property (before accumulated depreciation) owned by the joint venture entity and excludes net other assets.
(3) Included as part of retail properties held for divestiture.
(4) Represents 39 acres of land for future phases of current projects which have not been committed to, or for which final project planning has not been completed.
We account for all of the above investments on a consolidated basis for financial reporting purposes because of our ability to exercise control over significant aspects of the investment, as well as our significant economic interest in the investments. See "Item 14. Note 2 of the Notes to Consolidated Financial Statements."
Unconsolidated:
As of December 31, 2000, we held interests in three equity investment joint ventures that are unconsolidated in our financial statements. The management and control over significant aspects of these investments are with the third party joint venture partner. In addition, as of December 31, 2000, we held two mortgage investments from which we receive interest income.
UNCONSOLIDATED JOINT VENTURES AND MORTGAGE INVESTMENTS (DOLLARS IN THOUSANDS)
- --------------- (1) Represents estimated square feet at completion of development project.
SECURED DEBT
As of December 31, 2000, we had $930.4 million of indebtedness, net of unamortized premiums, secured by deeds of trust on 77 properties. As of December 31, 2000, the total gross investment value of those properties secured by debt was $2.0 billion. Of the $930.4 million of secured indebtedness, $361.8 was joint venture debt. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Item 14. Note 6 of Notes to Consolidated Financial Statements" included in this report. We believe that as of December 31, 2000, the value of the properties securing the respective obligations in each case exceeded the principal amount of the outstanding obligations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, we are involved in legal actions relating to the ownership and operations of our properties. We do not expect the liabilities, if any, that may ultimately result from such legal actions to have a materially adverse effect on our consolidated financial position, results of operations, or cash flows.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
There is no established public trading market for our partnership units. As of December 31, 2000, we had outstanding 95,037,257 partnership units, consisting of 87,909,340 general partnership units (consisting of 83,909,340 common units and 4,000,000 8 1/2% Series A Cumulative Redeemable Preferred Units) held by AMB Property Corporation and 7,127,917 limited partnership units (consisting of 5,827,917 common units and 1,300,000 8 5/8% Series B Cumulative Redeemable Preferred Units). Subject to certain terms and conditions, the limited partnership units are redeemable by the holders or, at the option of AMB Property Corporation, exchangeable on a one-for-one basis for shares of the common stock of AMB Property Corporation. As of December 31, 2000, there were 87 holders of our common partnership units (including AMB Property Corporation's general partnership interest). As of the same date, AMB Property Corporation was the only holder of the 8 1/2% Series A Cumulative Redeemable Preferred Units and there was one holder of the 8 5/8% Series B Cumulative Redeemable Units.
In November 2000, we issued an aggregate of 94,771 limited partnership common units with an aggregate value of approximately $2.2 million to three limited partnerships. The issuance of limited partnership units in connection with the acquisitions discussed above constituted private placements of securities which were exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) and Rule 506 of Regulation D. During 2000, 34,046 limited partnership units were redeemed for cash and 206,423 limited partnership units were redeemed for shares of AMB Property Corporation's common stock.
Set forth below are the distributions per limited partnership unit paid by us during the years ended December 31, 2000, 1999 and 1998:
ITEM 6.
ITEM 6. SELECTED FINANCIAL AND OTHER DATA
SELECTED OPERATING PARTNERSHIP FINANCIAL AND OTHER DATA
The following table sets forth selected consolidated historical financial and other data for AMB Property, L.P. on an historical basis for the years ended December 31, 2000, 1999, 1998, and 1997.
- --------------- (1) Pro forma 1997 financial and other data has been prepared as if our formation transactions, our general partner's initial public offering, and certain property acquisitions and divestitures in 1997 had occurred on January 1, 1997.
(2) The historical 1997 results represent our predecessor's historical financial and other data for the period January 1, 1997, through November 25, 1997. The financial and other data of AMB Property Corporation and the properties acquired in our formation transactions have been included from November 26, 1997 to December 31, 1997.
(3) Basic and diluted net income per unit equals the net income divided by 89,566,375 and 90,624,511 units, respectively, for 2000; 90,792,310 and 90,867,934 units, respectively, for 1999; 89,493,394 and 89,852,187 units, respectively, for 1998; and pro forma net income divided by 88,416,676 and 88,698,719 units, respectively, for 1997.
(4) Adjusted net income per share represents net income before gain on property dispositions, extraordinary items, and other one-time items. One-time items related to depreciation expense on assets held for sale.
(5) EBITDA is computed as income from operations before divestiture of properties and minority interests plus interest expense, income taxes, and depreciation and amortization. We believe that in addition to cash flows and net income, EBITDA is a useful financial performance measure for assessing the operating performance of an equity real estate investment trust, such as our general partner, because, together with net income and cash flows, EBITDA provides investors with an additional basis to evaluate the ability of a real estate investment trust to incur and service debt and to fund acquisitions and other capital expenditures. Includes an adjustment to reflect our pro rata share of EBITDA in an unconsolidated joint venture. EBITDA is not a measurement of operating performance calculated in accordance with accounting principles generally accepted in the United States and should not be considered as a substitute for operating income, net income, cash flows from operations, or other statement of operations or cash flow data prepared in accordance with accounting principles generally accepted in the United States. EBITDA may not be indicative of our historical operating results, nor be predictive of potential future results. While EBITDA is frequently used as a measure of operations and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other real estate investment trusts.
(6) Funds from Operations, or FFO, is defined as income from operations before minority interest, gains or losses from sale of real estate, and extraordinary losses plus real estate depreciation and adjustment to derive our pro rata share of the FFO of unconsolidated joint ventures, less minority interests' pro rata share of the FFO of consolidated joint ventures and perpetual preferred unit distributions. In accordance with the National Association of Real Estate Investment Trust White Paper on funds from operations, we include the effects of straight-line rents in funds from operations. We believe that funds from operations is an appropriate measure of performance for an equity real estate investment trust, such as our general partner. While funds from operations is a relevant and widely used measure of operating performance of real estate investment trusts, it does not represent cash flow from operations or net income as defined by accounting principles generally accepted in the United States and it should not be considered as an alternative to these indicators in evaluating liquidity or operating performance. Further, funds from operations as disclosed by other real estate investment trusts may not be comparable.
(7) Secured debt includes unamortized debt premiums of approximately $9.9 million, $10.1 million, $15.2 million, and $18.3 million as of December 31, 2000, 1999, 1998, and 1997, respectively. See Notes 2 and 6 of the Notes to Consolidated Financial Statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our consolidated financial condition and results of operations in conjunction with the Notes to Consolidated Financial Statements. Statements contained in this discussion that are not historical facts may be forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "pro forma," "estimates", or "anticipates' or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans, or intentions. Forward-looking statements involve numerous risks and uncertainties and you should not rely upon them as predictions of future events. There is no assurance that the events or circumstances reflected in forward-looking statements will be achieved or occur. Forward-looking statements are necessarily dependent on assumptions, data, or methods that may be incorrect or imprecise and we may not be able to realize them.
The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
- defaults or non-renewal of leases by tenants;
- increased interest rates and operating costs;
- our failure to obtain necessary outside financing;
- difficulties in identifying properties to acquire and in effecting acquisitions;
- our failure to successfully integrate acquired properties and operations;
- our failure to divest of properties that we have contracted to sell or to timely reinvest proceeds from any such divestitures;
- risks and uncertainties affecting property development and construction (including construction delays, cost overruns, our inability to obtain necessary permits, and public opposition to these activities);
- environmental uncertainties;
- risks related to natural disasters;
- financial market fluctuations;
- risks arising from the California energy shortage;
- changes in real estate and zoning laws; and
- increases in real property tax rates.
Our success also depends upon economic trends generally, including interest rates, income tax laws, governmental regulation, legislation, population changes, and those risk factors discussed in the section entitled "Business Risks" in this report. We caution you not to place undue reliance on forward-looking statements, which reflect our analysis only and speak as of the date of this report or as of the dates indicated in the statements.
GENERAL
We commenced operations in November 1997, shortly before the consummation of AMB Property Corporation's initial public offering.
RESULTS OF OPERATIONS
The analysis below includes changes attributable to acquisitions, development activity, and divestitures and the changes resulting from properties that we owned during both the current and prior year reporting periods, excluding development properties prior to being stabilized (defined as the earlier of 90% leased or
12 months after receipt of the certificate of occupancy). We refer to these properties as the same store properties. For the comparison between 2000 and 1999, the same store properties consisted of properties aggregating approximately 52.5 million square feet. The properties acquired in 1999 consisted of 154 buildings, aggregating approximately 8.4 million square feet, and the properties acquired during 2000 consisted of 145 buildings, aggregating approximately 10.5 million square feet. In 1999, property divestitures consisted of 30 retail centers and 15 industrial buildings, aggregating approximately 6.6 million square feet, and property divestitures during 2000 consisted of 25 industrial buildings and one retail center, aggregating approximately 2.5 million square feet. Our future financial condition and results of operations, including rental revenues, may be impacted by the acquisition of additional properties and dispositions. Our future revenues and expenses may vary materially from their historical rates.
YEARS ENDED DECEMBER 31, 2000 AND 1999 (DOLLARS IN MILLIONS)
The growth in rental revenues in same store properties resulted primarily from the incremental effect of cash rental rate increases, fixed rent increases on existing leases, increases in occupancy and reimbursement of expenses, partially offset by a decrease in straight-line rents. During 2000, the same store base rents increase on renewals and rollovers (cash basis) was 28.0% on 9.8 million square feet leased.
The $4.5 million increase in investment management and other income was due primarily to increased Alliance Fund I acquisition fees, interest income, and development fees, partially offset by the write-down of one of our investments in other companies.
The change in same store properties' operating expenses primarily relates to increases in real estate taxes of $2.0 million for 2000, partially offset by decreases in insurance of $0.6 million.
The increase in interest expense was due primarily to the increase in the outstanding balance under our unsecured credit facility. The increase in depreciation expense was primarily due to lower than normal depreciation expense in 1999 and increases in our investments in real estate. Under the required accounting for assets held for sale, we discontinued depreciation of a substantial portion of our retail portfolio after we committed to dispose of a portion of the portfolio in March 1999. The decrease in general and administrative expenses was due to increased allocations to our investment management group, partially offset by increased personnel costs.
YEARS ENDED DECEMBER 31, 1999 AND 1998 (DOLLARS IN MILLIONS)
The growth in rental revenues in same store properties resulted primarily from the incremental effect of cash rental rate increases, changes in occupancy rates, and reimbursement of expenses, partially offset by a decrease in straight-line rents. During 1999, the increase in base rents (cash basis) for same store properties was 12.7% on 6.8 million square feet leased.
The $4.3 million increase in investment management and other income was due primarily to earnings from our equity investment in our unconsolidated joint ventures, Alliance Fund I acquisition fees, and an increase in interest income as a result of higher cash balances.
The change in same store properties' operating expenses primarily relates to increases in real estate taxes of $1.0 million for 1999, partially offset by decreases in insurance of $0.9 million. Internal asset management costs of $7.7 million for 1998 were reclassified from property operating expenses to general and administrative expenses to conform with the 1999 presentation.
The increase in interest expense was primarily due to higher interest rates and a full year of interest expense in 1999 attributable to our $400.0 million unsecured senior debt securities. The increase in depreciation expense was primarily due to our real estate acquisitions in 1998 and 1999, partially offset by the discontinuation of depreciation on held-for-sale retail assets. Internal management costs of $7.7 million for 1998 were reclassified from property operating expenses to general and administrative expenses to conform with the 1999 presentation. The increase in general and administrative expenses was primarily attributable to additional staffing that resulted from growth in our portfolio and the change in our accounting policy for capitalizing internal acquisition costs. Effective during the second quarter of 1998, we changed our policy to expense all internal acquisition costs in accordance with EITF 97-11.
LIQUIDITY AND CAPITAL RESOURCES
We currently expect that our principal sources of working capital and funding for acquisitions, development, expansion, and renovation of properties will include cash flow from operations, borrowings under our unsecured credit facility, other forms of secured or unsecured financing, proceeds from debt or limited partnership unit offerings (including issuances of limited partnership units by our subsidiaries), and net proceeds from divestitures of properties. Additionally, our co-investment program will also serve as a source of capital for acquisitions and developments. We believe that our sources of working capital and our ability to access equity and private and public debt are adequate for us to meet our liquidity requirements for the foreseeable future.
Capital Resources
Property Divestitures. In 2000, we sold 25 industrial buildings and one retail center for an aggregate price of $175.7 million. These divestitures resulted in an aggregate net gain of $7.0 million. The joint venture that sold the retail center carries an 8.75% interest only mortgage note receivable in the principal amount of $79.0 million. This mortgage note has a one-year term and has a one-year extension option.
Properties Held for Divestiture. We have decided to divest ourselves of 33 industrial buildings and one retail center, which are not in our core markets or which do not meet our strategic objectives. The divestitures of the properties are subject to negotiation of acceptable terms and other customary conditions. As of December 31, 2000, the net carrying value of the properties held for divestiture was $197.1 million.
Credit Facilities. In May 2000, we entered into a new $500.0 million unsecured revolving credit agreement, which replaced our previous $500.0 million credit facility, which matured in November 2000. AMB Property Corporation guarantees our obligations under the credit facility. Our credit facility is with Morgan Guaranty Trust Company of New York, as administrative agent, and a syndicate of 12 other banks. The new credit facility matures in May 2003, has a one-year extension option, and is subject to a 15 basis point annual facility fee. We have the ability to increase available borrowings up to $700.0 million by adding additional banks to the facility or obtaining the agreement of existing banks to increase their commitments. We use our unsecured credit facility principally for acquisitions and for general working capital requirements. Borrowings under our credit facility currently bear interest at LIBOR plus 75 basis points. At December 31, 2000, the outstanding balance on our unsecured credit facility was $216.0 million and it bore interest at a
weighted average rate of 7.5%. Monthly debt service payments on our credit facility are interest only. The total amount available under our credit facility fluctuates based upon the borrowing base, as defined in the agreement governing the credit facility. At December 31, 2000, the remaining amount available under our unsecured credit facility was $284.0 million (excluding the additional $200.0 million of potential additional capacity).
In addition, we had an $80.0 million unsecured credit facility held through our investment in the Alliance Fund I. The debt was secured by the unfunded capital commitments of the third party investors in the Alliance REIT I, a limited partner of the Alliance Fund I. Since there are no remaining unfunded capital commitments, the Alliance Fund I paid off the outstanding balance and closed this credit facility in the third quarter.
Partners' Capital. On September 1, 2000, AMB Property II, L.P., one of our subsidiaries, issued and sold 840,000 8.125% Series H Cumulative Redeemable Preferred Limited Partnership Units at a price of $50.00 per unit in a private placement. Distributions are cumulative from the date of issuance and payable quarterly in arrears at a rate per unit equal to $4.0625 per annum. The Series H Preferred Units are redeemable by AMB Property II, L.P. on or after September 1, 2005, subject to certain conditions, for cash at a redemption price equal to $50.00 per unit, plus accumulated and unpaid distributions thereon, if any, to the redemption date. The Series H Preferred Units are exchangeable, at specified times and subject to certain conditions, on a one-for-one basis, for shares of AMB Property Corporation's Series H Preferred Stock. AMB Property II, L.P. used the net proceeds of $41.0 million to repay advances from us and to make a loan to us. We used the funds to partially repay borrowings under our unsecured credit facility and for general corporate purposes. The loan bears interest at 8.0% per annum and is payable on demand.
On August 29, 2000, AMB Property II, L.P. issued and sold 20,000 7.95% Series G Cumulative Redeemable Preferred Limited Partnership Units at a price of $50.00 per unit in a private placement. Distributions are cumulative from the date of issuance and payable quarterly in arrears at a rate per unit equal to $3.975 per annum. The Series G Preferred Units are redeemable by AMB Property II, L.P. on or after August 29, 2005, subject to certain conditions, for cash at a redemption price equal to $50.00 per unit, plus accumulated and unpaid distributions thereon, if any, to the redemption date. The Series G Preferred Units are exchangeable, at specified times and subject to certain conditions, on a one-for-one basis, for shares of AMB Property Corporation's Series G Preferred Stock. AMB Property II, L.P. used the net proceeds of $1.0 million to repay advances from us. We used the funds for general corporate purposes.
On March 22, 2000, AMB Property II, L.P. issued and sold 397,439 7.95% Series F Cumulative Redeemable Preferred Limited Partnership Units at a price of $50.00 per unit in a private placement. Distributions are cumulative from the date of issuance and payable quarterly in arrears at a rate per unit equal to $3.975 per annum. The Series F Preferred Units are redeemable by AMB Property II, L.P. on or after March 22, 2005, subject to certain conditions, for cash at a redemption price equal to $50.00 per unit, plus accumulated and unpaid distributions thereon, if any, to the redemption date. The Series F Preferred Units are exchangeable, at specified times and subject to certain conditions, on a one-for-one basis, for shares of AMB Property Corporation's Series F Preferred Stock. AMB Property II, L.P. loaned the net proceeds of $19.6 million to us. We used the funds to partially repay borrowings under our unsecured credit facility and for general corporate purposes. The loan bears interest at 7.0% per annum and is payable upon demand.
At the time of AMB Property Corporation's initial public offering, 4,237,750 shares of common stock, known as performance shares, were placed in escrow by certain of AMB Property Corporation's investors, which were subject to advisory agreements with our general partner's predecessor that included incentive fee provisions. On January 7, 2000, 2,771,824 shares of common stock were released from escrow to these investors and 1,465,926 shares of common stock were returned to AMB Property Corporation and cancelled. The cancelled shares of common stock represent indirect interests in us that were reallocated from AMB Property Corporation (thereby decreasing the number of shares of common stock outstanding) to other unitholders who had an ownership interest in our general partner's predecessor, including certain of AMB Property Corporation's executive officers (thereby increasing the number of limited partnership units owned by partners other than AMB Property Corporation). The total number of outstanding partnership units did not
change as a result of this reallocation. This reallocation did not change the amount of fully diluted shares of common stock and limited partnership units outstanding.
In November 2000, we issued an aggregate of 94,771 limited partnership units with an aggregate value of approximately $2.2 million to three limited partnerships. These limited partnership units were issued in partial consideration for the acquisition of properties. Holders of the limited partnership units may redeem part or all of their limited partnership units for cash or, at our election, exchange their limited partnership units for shares of our common stock on a one-for-one basis. During 2000, 34,046 limited partnership units were redeemed for cash and 206,423 limited partnership units were redeemed for shares of AMB Property Corporation's common stock.
Our general partner's board of directors has approved a stock repurchase program for the repurchase of up to $100.0 million worth of AMB Property Corporation's common stock. During 2000, AMB Property Corporation did not repurchase any shares of its common stock. Its stock repurchase program expires in December 2001.
Debt. At December 31, 2000, the aggregate principal amount of our secured debt was $930.4 million, excluding unamortized debt premiums of $9.9 million. The secured debt bears interest at rates varying from 4.0% to 10.4% per annum (with a weighted average rate of 7.9%) and final maturity dates ranging from April 2001 to June 2023. All of the secured debt bears interest at fixed rates, except for two loans with an aggregate principal amount of $29.8 million as of December 31, 2000, which bear interest at variable rates. As of December 31, 2000, the estimated fair value of the secured debt was $956.1 million.
In 2000, we commenced a medium-term note program for the issuance of up to $400.0 million in principal amount of medium-term notes, which will be guaranteed by AMB Property Corporation. As of December 31, 2000, we had issued $280.0 million of medium-term notes under this program and in January 2001, we issued an additional $25.0 million of medium term notes, leaving $95.0 million available for issuance under this program. In December 2000, we issued and sold $150.0 million of the notes under this program to Morgan Stanley Dean Witter and J. P. Morgan as principals. AMB Property Corporation has guaranteed the notes, which mature on December 15, 2005, and bear interest at 7.2% per annum. We used the net proceeds of $148.9 million for general corporate purposes, to partially repay indebtedness, and for the acquisition and development of properties. In October 2000, we issued and sold $75.0 million of the notes under this program to Morgan Stanley Dean Witter and J. P. Morgan as principals. AMB Property Corporation has guaranteed the notes, which mature on November 1, 2010, and bear interest at 8.0% per annum. We used the net proceeds of $74.5 million for general corporate purposes, to partially repay indebtedness, and for the acquisition and development of properties. In August and September 2000, we issued and sold $55.0 million of the notes under this program to Morgan Stanley Dean Witter as principal. AMB Property Corporation has guaranteed the notes, which mature on August 20, 2007, and bear interest at 7.925% per annum. We used the net proceeds of $54.8 million for general corporate purposes, to partially repay indebtedness, and for the acquisition and development of properties.
In order to maintain financial flexibility and facilitate the rapid deployment of capital through market cycles, we presently intend to operate with a debt-to-total market capitalization ratio of approximately 45% or less. Additionally, we presently manage our capitalization in order to maintain an investment grade rating on our senior unsecured debt. In spite of these policies, our general partner's organizational documents do not contain any limitation on the amount of indebtedness that we may incur. Accordingly, our general partner's board of directors could alter or eliminate these policies.
The tables below summarize our debt maturities and capitalization as of December 31, 2000 (dollars in thousands, except for unit and per unit amounts):
- --------------- (1) All of the secured debt bears interest at fixed rates, except for two loans with an aggregate principal amount of $29.8 million, which bear interest at variable rates (weighted average interest rate of 8.2% at December 31, 2000).
(2) The weighted average interest rate and weighted average maturity for the two unconsolidated joint venture debts were 7.3% and 4.4 years, respectively.
Liquidity
As of December 31, 2000, we had approximately $20.4 million in cash and cash equivalents and $284.0 million of additional available borrowings under our credit facility. We intend to use: 1) cash from operations; 2) borrowings under our credit facility; 3) other forms of secured and unsecured financing; 4) proceeds from any future debt or limited partnership offerings (including issuances of limited partnership units by our subsidiaries); 5) proceeds from divestitures of properties, and 6) private capital to fund acquisitions, development activities, and capital expenditures and provide for general working capital requirements.
The following table sets forth the distribution payments that were declared in 2000 and in 1999:
The anticipated size of our distributions, using only cash from operations, will not allow us to retire all of our debt as it comes due. Therefore, we intend to also repay maturing debt with net proceeds from future debt or equity financings or property divestitures. However, we may not be able to obtain future financings on favorable terms or at all.
Capital Commitments
In addition to recurring capital expenditures and costs to renew or re-tenant space, as of December 31, 2000, we are developing and renovating 19 industrial projects representing a total estimated investment of $305.9 million upon completion and three retail projects representing a total estimated investment of $76.3 million upon completion. Of this total, $162.9 million had been funded as of December 31, 2000, and
approximately $143.0 million is estimated to be required to complete current and planned projects. We expect to fund these expenditures with cash from operations, borrowings under our credit facility, debt or equity issuances, and net proceeds from property divestitures. We have no other material capital commitments.
During the year ended December 31, 2000, we invested $730.0 million in 145 operating industrial buildings, aggregating approximately 10.5 million rentable square feet. We funded these acquisitions and initiated development and renovation projects through borrowings under our credit facility, cash, debt and equity issuances, and net proceeds from property divestitures.
FUNDS FROM OPERATIONS
In addition to net income and adjusted net income, we believe that funds from operations, or FFO, as defined by the National Association of Real Estate Investment Trusts, is an appropriate supplemental measure of performance for an equity real estate investment trust. While funds from operations is a relevant and widely used measure of operating performance of real estate investment trusts, such as our general partner, it does not represent cash flow from operations or net income as defined by accounting principles generally accepted in the United States and it should not be considered as an alternative to those indicators in evaluating liquidity or operating performance. Further, funds from operations as disclosed by other real estate investment trusts may not be comparable.
The following table reflects the calculation of funds from operations for the fiscal years ended December 31 (dollars in thousands, except unit data):
- --------------- (1) Funds from operations, or FFO, is defined as income from operations before minority interest, gains or losses from sale of real estate, and extraordinary items plus real estate depreciation and adjustment to derive our pro rata share of the funds from operations of unconsolidated joint ventures, less minority interests' pro rata share of the funds from operations of consolidated joint ventures and perpetual preferred unit distributions. In accordance with the NAREIT White Paper on funds from operations, we include the effects of straight-line rents in funds from operations. Further, we do not adjust funds from operations to eliminate the effects of non-recurring charges.
(2) Represents FFO attributable to minority interest in consolidated joint ventures for the period presented, which has been computed as minority interests' share of net income plus minority interests' share of real estate-related depreciation and amortization of the consolidated joint ventures for such period. These minority interests are not convertible into shares of AMB Property Corporation's common stock. In addition, the amount includes minority interests held by the Series C, D, E, F, G, and H preferred unitholders.
(3) Represents our pro rata share of FFO in unconsolidated joint ventures for the period presented, which has been computed as our share of net income plus our share of real estate-related depreciation and amortization of the unconsolidated joint ventures for such period.
(4) Includes the dilutive effect of stock options for the purchase of shares of AMB Property Corporation's common stock, which has the effect of increasing weighted average general limited partnership units outstanding.
BUSINESS RISKS
Our operations involve various risks that could have adverse consequences to us. These risks include, among others:
GENERAL REAL ESTATE RISKS
THERE ARE FACTORS OUTSIDE OF OUR CONTROL THAT AFFECT THE PERFORMANCE AND VALUE OF OUR PROPERTIES
Real property investments are subject to varying degrees of risk. The yields available from equity investments in real estate depend on the amount of income earned and capital appreciation generated by the related properties as well as the expenses incurred in connection with the properties. If our properties do not generate income sufficient to meet operating expenses, including debt service and capital expenditures, then our ability to make distributions to our unitholders and payments to our noteholders could be adversely affected. Income from, and the value of, our properties may be adversely affected by the general economic climate, local conditions such as oversupply of industrial space, or a reduction in demand for industrial space, the attractiveness of our properties to potential customers, competition from other properties, our ability to provide adequate maintenance and insurance, and an increase in operating costs. In addition, revenues from properties and real estate values are also affected by factors such as the cost of compliance with regulations, the potential for liability under applicable laws (including changes in tax laws), interest rate levels, and the availability of financing. Our income would be adversely affected if a significant number of customers were unable to pay rent or if we were unable to rent our industrial space on favorable terms. Certain significant expenditures associated with an investment in real estate (such as mortgage payments, real estate taxes, and maintenance costs) generally do not decline when circumstances cause a reduction in income from the property.
WE MAY BE UNABLE TO RENEW LEASES OR RELET SPACE AS LEASES EXPIRE
We are subject to the risks that leases may not be renewed, space may not be relet, or the terms of renewal or reletting (including the cost of required renovations) may be less favorable than current lease terms. Leases on a total of 15.6% of our properties (based on annualized base rent) as of December 31, 2000, will expire on or prior to December 31, 2001. In addition, numerous properties compete with our properties in attracting customers to lease space, particularly with respect to retail centers. The number of competitive commercial properties in a particular area could have a material adverse effect on our ability to lease space in our properties and on the rents that we are able to charge. Our financial condition, results of operations, cash flow, and our ability to make distributions to our unitholders and payments to our noteholders could be adversely affected if we are unable to promptly relet or renew the leases for all or a substantial portion of expiring leases, if the rental rates upon renewal or reletting is significantly lower than expected, or if our reserves for these purposes prove inadequate.
REAL ESTATE INVESTMENTS ARE ILLIQUID
Because real estate investments are relatively illiquid, our ability to vary our portfolio promptly in response to economic or other conditions is limited. The limitations in the Internal Revenue Code and related regulations on a real estate investment trust holding property for sale, which limitations are applicable to us as a subsidiary of AMB Property Corporation, may affect our ability to sell properties without adversely affecting distributions to our unitholders or payments to our noteholders. The relative illiquidity of our holdings and Internal Revenue Code prohibitions and related regulations could impede our ability to respond to adverse changes in the performance of our investments and could adversely affect our financial condition, results of operations, cash flow, and our ability to make distributions to our unitholders and payments to our noteholders.
A SIGNIFICANT NUMBER OF OUR PROPERTIES ARE LOCATED IN CALIFORNIA
Our properties located in California as of December 31, 2000, represented approximately 24.2% of the aggregate square footage of our properties as of December 31, 2000, and 29.6% of our annualized base rent. Annualized base rent means the monthly contractual amount under existing leases at December 31, 2000,
multiplied by 12. This amount excludes expense reimbursements and rental abatements. Our revenue from, and the value of, our properties located in California may be affected by a number of factors, including local real estate conditions (such as oversupply of or reduced demand for industrial properties) and the local economic climate. Business layoffs, downsizing, industry slowdowns, changing demographics, and other factors may adversely impact the local economic climate. A downturn in either the California economy or in California real estate conditions could adversely affect our financial condition, results of operations, cash flow, and our ability to make distributions to our unitholders and payments to our noteholders. Certain of our properties are also subject to possible loss from seismic activity.
RISING ENERGY COSTS AND POWER OUTAGES IN CALIFORNIA MAY HAVE AN ADVERSE EFFECT ON OUR OPERATIONS AND REVENUE
Problems associated with deregulation of the electricity industry in California have resulted in intermittent service interruptions and significantly higher costs in some areas. Properties located within municipalities that either do not produce their own power or have not entered into long-term, fixed-price contracts may be subject to intermittent service interruptions or significant rate increases from their utility providers. Most of our properties located in California are subject to leases that require our tenants to pay all utility costs. The remainder of our California leases provide that tenants will reimburse us for utility costs in excess of a base year amount. Although we have not experienced any material losses resulting from electric deregulation, it is possible that some of our tenants will not fulfill their lease obligations and reimburse us for their share of any significant rate increases and that we will not be able to retain or replace our tenants if energy problems in California continue.
OUR PROPERTIES ARE CURRENTLY CONCENTRATED IN THE INDUSTRIAL SECTOR
Our properties are currently concentrated predominantly in the industrial real estate sector. Our concentration in a certain property type may expose us to the risk of economic downturns in this sector to a greater extent than if our portfolio also included other property types. As a result of such concentration, economic downturns in the industrial real estate sector could have an adverse effect on our financial condition, results of operations, cash flow, and ability to make distributions to our unitholders and payments to our noteholders.
SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE
We carry comprehensive liability, fire, extended coverage, and rental loss insurance covering all of our properties, with policy specifications and insured limits that we believe are adequate and appropriate under the circumstances given relative risk of loss, the cost of such coverage, and industry practice. There are, however, certain losses that are not generally insured because it is not economically feasible to insure against them, including losses due to riots or acts of war. Certain losses such as losses due to floods or seismic activity may be insured subject to certain limitations including large deductibles or co-payments and policy limits. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, then we could lose the capital we invested in the properties, as well as the anticipated future revenue from the properties and, in the case of debt, which is with recourse to us, we would remain obligated for any mortgage debt or other financial obligations related to the properties. Any such liability could adversely affect our financial condition, results of operations, cash flow, and ability to make distributions to our unitholders and payments to our noteholders.
A number of our properties are located in areas that are known to be subject to earthquake activity, including California where, as of December 31, 2000, 247 industrial buildings aggregating approximately 18.6 million rentable square feet (representing 24.2% of our properties based on aggregate square footage and 29.6% based on annualized base rent) are located. We carry replacement cost earthquake insurance on all of our properties located in areas historically subject to seismic activity, subject to coverage limitations and deductibles that we believe are commercially reasonable. This insurance coverage also applies to the properties managed by AMB Investment Management, with a single aggregate policy limit and deductible applicable to those properties and our properties. We own 100% of the non-voting preferred stock of AMB Investment
Management. Through an annual analysis prepared by outside consultants, we evaluate our earthquake insurance coverage in light of current industry practice and determine the appropriate amount of earthquake insurance to carry. We may incur material losses in excess of insurance proceeds and we may not be able to continue to obtain insurance at commercially reasonable rates.
WE ARE SUBJECT TO RISKS AND LIABILITIES IN CONNECTION WITH PROPERTIES OWNED THROUGH JOINT VENTURES, LIMITED LIABILITY COMPANIES, AND PARTNERSHIPS
As of December 31, 2000, we had ownership interests in 30 joint ventures, limited liability companies, or partnerships with third parties, as well as interests in three unconsolidated entities. As of December 31, 2000, we owned approximately 15.5 million square feet (excluding the three unconsolidated joint ventures) of our properties through these entities. We may make additional investments through these ventures in the future and presently plan to do so with clients of AMB Investment Management, Inc. and certain Development Alliance Partners, who share certain approval rights over major decisions. Partnership, limited liability company, or joint venture investments may involve risks such as the following:
- our partners, co-members, or joint venturers might become bankrupt (in which event we and any other remaining general partners, members, or joint venturers would generally remain liable for the liabilities of the partnership, limited liability company, or joint venture);
- our partners, co-members, or joint venturers might at any time have economic or other business interests or goals that are inconsistent with our business interests or goals;
- our partners, co-members, or joint venturers may be in a position to take action contrary to our instructions, requests, policies, or objectives; and
- agreements governing joint ventures, limited liability companies, and partnerships often contain restrictions on the transfer of a joint venturer's, member's, or partner's interest or "buy-sell" or other provisions, which may result in a purchase or sale of the interest at a disadvantageous time or on disadvantageous terms.
We will, however, generally seek to maintain sufficient control of our partnerships, limited liability companies, and joint ventures to permit us to achieve our business objectives. Our organizational documents do not limit the amount of available funds that we may invest in partnerships, limited liability companies, or joint ventures. The occurrence of one or more of the events described above could have an adverse effect on our financial condition, results of operations, cash flow, and ability to make distributions to our unitholders and payments to our noteholders.
WE MAY BE UNABLE TO CONSUMMATE ACQUISITIONS ON ADVANTAGEOUS TERMS
We intend to continue to acquire primarily industrial properties. Acquisitions of properties entail risks that investments will fail to perform in accordance with expectations. Estimates of the costs of improvements necessary for us to bring an acquired property up to market standards may prove inaccurate. In addition, there are general investment risks associated with any new real estate investment. Further, we anticipate significant competition for attractive investment opportunities from other major real estate investors with significant capital including both publicly traded real estate investment trusts and private institutional investment funds. We expect that future acquisitions will be financed through a combination of borrowings under our unsecured credit facility, proceeds from debt or limited partnership unit offerings (including issuances of limited partnership units by our subsidiaries), and proceeds from property divestitures, which could have an adverse effect on our cash flow. We may not be able to acquire additional properties. Our inability to finance any future acquisitions on favorable terms or the failure of acquisitions to conform with our expectations or investment criteria, or our failure to timely reinvest the proceeds from property divestitures could adversely affect our financial condition, results of operations, cash flow, and ability to make distributions to our unitholders and payments to our noteholders.
WE MAY BE UNABLE TO COMPLETE RENOVATION AND DEVELOPMENT ON ADVANTAGEOUS TERMS
The real estate development business, including the renovation and rehabilitation of existing properties, involves significant risks. These risks include the following:
- we may not be able to obtain financing on favorable terms for development projects and we may not complete construction on schedule or within budget, resulting in increased debt service expense and construction costs and delays in leasing such properties and generating cash flow;
- we may not be able to obtain, or we may experience delays in obtaining, all necessary zoning, land-use, building, occupancy, and other required governmental permits and authorizations;
- new or renovated properties may perform below anticipated levels, producing cash flow below budgeted amounts;
- substantial renovation as well as new development activities, regardless of whether or not they are ultimately successful, typically require a substantial portion of management's time and attention that could divert management's time from our day-to-day operations; and
- activities that we finance through construction loans involve the risk that, upon completion of construction, we may not be able to obtain permanent financing or we may not be able to obtain permanent financing on advantageous terms.
These risks could have an adverse effect on our financial condition, results of operations, cash flow, and ability to make distributions to our unitholders and payments to our noteholders.
WE MAY BE UNABLE TO COMPLETE DIVESTITURES ON ADVANTAGEOUS TERMS
We intend to dispose of properties from time to time that do not conform with our current investment strategy or that we have otherwise determined should be divested, including, as of December 31, 2000, 33 industrial buildings and one retail center, which are held for divestiture. Our ability to dispose of properties on advantageous terms is dependent upon factors beyond our control, including competition from other owners (including other real estate investment trusts) that are attempting to dispose of industrial and retail properties and the availability of financing on attractive terms for potential buyers of our properties. Our inability to dispose of properties on favorable terms or our inability to redeploy the proceeds of property divestitures in accordance with our investment strategy could adversely our financial condition, results of operations, cash flow, and ability to make distributions to our unitholders and payments to our noteholders.
DEBT FINANCING
WE COULD INCUR MORE DEBT
We and AMB Property Corporation operate with a policy of incurring debt, either directly or through our subsidiaries, only if upon such incurrence our debt-to-total market capitalization ratio would be approximately 45% or less. The aggregate amount of indebtedness that we may incur under our policy varies directly with the valuation of AMB Property Corporation's capital stock and the number of shares of capital stock outstanding. Accordingly, we would be able to incur additional indebtedness under our policy as a result of increases in the market price per share of AMB Property Corporation's common stock or other outstanding classes of capital stock, and future issuance of shares of our capital stock. In spite of this policy, neither our nor AMB Property Corporation's organizational documents do not contain any limitation on the amount of indebtedness that they may incur. Accordingly, AMB Property Corporation's board of directors could alter or eliminate this policy. If this policy changes, then we could become more highly leveraged, resulting in an increase in debt service that could adversely affect our financial condition, results of operations, cash flow, and ability to make distributions to our unitholders and payments to our noteholders.
SCHEDULED DEBT PAYMENTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
We are subject to risks normally associated with debt financing, including the risks that cash flow will be insufficient to make distributions to our unitholders and payments to our noteholders, that we will be unable to refinance existing indebtedness on our properties (which in all cases will not have been fully amortized at maturity) and that the terms of refinancing will not be as favorable as the terms of existing indebtedness.
As of December 31, 2000, we had total debt outstanding of approximately $1.8 billion including:
- $930.4 million of secured indebtedness (excluding unamortized debt premiums) with an average maturity of 5.4 years and a weighted average interest rate of 7.9%;
- $216.0 million outstanding under our unsecured $500.0 million credit facility with a maturity date of May 2003 and an interest rate of LIBOR plus 75 basis points (a weighted average interest rate of 7.5% as of December 31, 2000); and
- $680.0 million aggregate principal amount of unsecured senior debt securities with maturities between 2005 and 2018 and a weighted average interest rate of 7.3%.
If we are unable to refinance or extend principal payments due at maturity or pay them with proceeds of other capital transactions, then we expect that our cash flow will not be sufficient in all years to make distributions to our unitholders and payments to our noteholders and to repay all such maturing debt. Furthermore, if prevailing interest rates or other factors at the time of refinancing (such as the reluctance of lenders to make commercial real estate loans) result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase. This increased interest expense would adversely affect our financial condition, results of operations, cash flow, and ability to make distributions to our unitholders and payments to our noteholders. In addition, if we mortgage one or more of our properties to secure payment of indebtedness and we are unable to meet mortgage payments, then the property could be foreclosed upon or transferred to the mortgagee with a consequent loss of income and asset value. A foreclosure on one or more of our properties could adversely affect our financial condition, results of operations, cash flow, and ability to make distributions to our unitholders and payments to our noteholders.
RISING INTEREST RATES COULD ADVERSELY AFFECT OUR CASH FLOW
As of December 31, 2000, we had approximately $216.0 million outstanding under our unsecured credit facility. In addition, we may incur other variable rate indebtedness in the future. Increases in interest rates on this indebtedness could increase our interest expense, which would adversely affect our financial condition, results of operations, cash flow, and ability to make distributions to our unitholders and payments to our noteholders. Accordingly, we may in the future engage in transactions to limit our exposure to rising interest rates.
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL
To fund capital needs, we rely on third party sources of capital, which we may not be able to obtain on favorable terms or at all. Our access to third party sources of capital depends upon a number of factors, including: 1) general market conditions; 2) the market's perception of our growth potential; 3) our current and potential future earnings and cash distributions; and 4) the market price of AMB Property Corporation's capital stock. Additional debt financing may substantially increase our leverage.
WE COULD DEFAULT ON CROSS-COLLATERALIZED AND CROSS-DEFAULTED DEBT
As of December 31, 2000, we had 18 non-recourse secured loans, which are cross-collateralized by 20 properties. As of December 31, 2000, we had approximately $240.9 million (not including unamortized debt premium) outstanding on these loans. If we default on any of these loans, then we will be required to repay the aggregate of all indebtedness, together with applicable prepayment charges, to avoid foreclosure on all the cross-collateralized properties within the applicable pool. Foreclosure on our properties, or our inability to refinance our loans on favorable terms, could adversely impact our financial condition, results of operations,
cash flow, and ability to make distributions to our unitholders and payments to our noteholders. In addition, our credit facility and our senior debt securities contain certain cross-default provisions, which are triggered in the event that our other material indebtedness is in default. These cross-default provisions may require us to repay or restructure the credit facility and the senior debt securities in addition to any mortgage or other debt that is in default, which could adversely affect our financial condition, results of operations, cash flow, and ability to make distributions to our unitholders and payments to our noteholders.
CONTINGENT OR UNKNOWN LIABILITIES COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
Our predecessors have been in existence for varying lengths of time up to 18 years. At the time of our formation we acquired the assets of these entities subject to all of their potential existing liabilities. There may be current liabilities or future liabilities arising from prior activities that we are not aware of and therefore have not disclosed in this report. AMB Property Corporation assumed these liabilities as the surviving entity in the various merger and contribution transactions that occurred at the time of our formation. Existing liabilities for indebtedness generally were taken into account in connection with the allocation of our limited partnership units or shares of AMB Property Corporation's common stock in the formation transactions, but no other liabilities were taken into account for these purposes. We do not have recourse against AMB Property Corporation's predecessors or any of their respective stockholders or partners or against any individual account investors with respect to any unknown liabilities. Unknown liabilities might include the following:
- liabilities for clean-up or remediation of undisclosed environmental conditions;
- claims of customers, vendors, or other persons dealing with AMB Property Corporation's predecessors prior to the formation transactions that had not been asserted prior to the formation transactions;
- accrued but unpaid liabilities incurred in the ordinary course of business;
- tax liabilities; and
- claims for indemnification by the officers and directors of AMB Property Corporation's predecessors and others indemnified by these entities.
Certain customers may claim that the formation transactions gave rise to a right to purchase the premises that they occupy. We do not believe any such claims would be material and, to date, no such claims have been filed. See "-- Government Regulations -- We Could Encounter Costly Environmental Problems" below regarding the possibility of undisclosed environmental conditions potentially affecting the value of our properties. Undisclosed material liabilities in connection with the acquisition of properties, entities and interests in properties, or entities could adversely affect our financial condition, results of operations, cash flow, and ability to make distributions our unitholders and payments to our noteholders.
CONFLICTS OF INTEREST
SOME OF AMB PROPERTY CORPORATION'S EXECUTIVE OFFICERS ARE INVOLVED IN OTHER REAL ESTATE ACTIVITIES AND INVESTMENTS
Some of AMB Property Corporation's executive officers own interests in real estate-related businesses and investments. These interests include minority ownership of Institutional Housing Partners, L.P., a residential housing finance company, and ownership of AMB Development, Inc. and AMB Development, L.P., developers that own property not suitable for ownership by us. AMB Development, Inc. and AMB Development, L.P. have agreed not to initiate any new development projects following AMB Property Corporation's initial public offering in November 1997. These entities have also agreed that they will not make any further investments in industrial properties other than those currently under development at the time of AMB Property Corporation's initial public offering. AMB Development, Inc. and AMB Development, L.P. continue to use the name "AMB" pursuant to royalty-free license arrangements. The continued involvement in other real estate-related activities by some of AMB Property Corporation's executive officers and directors could divert management's attention from our day-to-day operations. Most of AMB Property Corporation's executive officers have entered into non-competition agreements with AMB Property Corporation pursuant to
which they have agreed not to engage in any activities, directly or indirectly, in respect of commercial real estate, and not to make any investment in respect of industrial real estate, other than through ownership of not more than 5% of the outstanding shares of a public company engaged in such activities or through the existing investments referred to in this report. State law may limit our ability to enforce these agreements.
We could also, in the future, subject to the unanimous approval of the disinterested members of AMB Property Corporation's board of directors with respect to such transaction, acquire property from executive officers, enter into leases with executive officers, or engage in other related activities in which the interests pursued by AMB Property Corporation's executive officers may not be in the best interests of our unitholders or noteholders.
CERTAIN OF AMB PROPERTY CORPORATION'S EXECUTIVE OFFICERS AND DIRECTORS MAY HAVE CONFLICTS OF INTEREST WITH US IN CONNECTION WITH OTHER PROPERTIES THAT THEY OWN OR CONTROL
As of December 31, 2000, AMB Development, L.P. owns interests in 10 retail development projects in the U.S., eight of which are single free-standing Walgreens drugstores and two are Walgreens drugstores plus shop buildings, which are less than 10,000 feet. In addition, Messrs. Abbey, Moghadam, and Burke, each a founder and director of AMB Property Corporation, own less than 1% interests in two partnerships that own office buildings in various markets; these interests have negligible value. Luis A. Belmonte, an executive officer of AMB Property Corporation, owns less than a 10% interest, representing an estimated value of $150,000, in a limited partnership, which owns an office building located in Oakland, California.
In addition, several of AMB Property Corporation's executive officers individually own:
- less than 1% interests in the stocks of certain publicly-traded real estate investment trusts;
- certain interests in and rights to developed and undeveloped real property located outside the United States; and
- certain other de minimus holdings in equity securities of real estate companies.
Thomas W. Tusher, a member of AMB Property Corporation's board of directors, is a limited partner in a partnership in which Messrs. Abbey, Moghadam, and Burke are general partners and which owns a 75% interest in an office building. Mr. Tusher owns a 20% interest in the partnership, valued at approximately $1.2 million. Messrs. Abbey, Moghadam, and Burke each have a 26.7% interest in the partnership, each valued at approximately $1.6 million.
We believe that the properties and activities set forth above generally do not directly compete with any of our properties. However, it is possible that a property in which an executive officer or director of AMB Property Corporation, or an affiliate of an executive officer or director of AMB Property Corporation, has an interest may compete with us in the future if we were to invest in a property similar in type and in close proximity to that property. In addition, the continued involvement of AMB Property Corporation's executive officers and directors in these properties could divert management's attention from our day-to-day operations. Our policy prohibits us from acquiring any properties from AMB Property Corporation's executive officers or their affiliates without the approval of the disinterested members of AMB Property Corporation's board of directors with respect to that transaction.
AMB PROPERTY CORPORATION'S DIRECTORS, EXECUTIVE OFFICERS, AND SIGNIFICANT STOCKHOLDERS COULD ACT IN A MANNER THAT IS NOT IN THE BEST INTEREST OF OUR LIMITED PARTNERS OR NOTEHOLDERS
As of March 20, 2001, AMB Property Corporation's three largest stockholders, Cohen & Steers Capital Management, Inc. (with respect to various client accounts for which Cohen & Steers Capital Management, Inc. serves as investment advisor), European Investors Inc. (with respect to various client accounts for which European Investors Inc. serves as investment advisor), and Capital Research and Management Company (with respect to various client accounts for which Capital Research and Management Company serves as investment advisor) beneficially owned approximately 18.3% of AMB Property Corporation's outstanding common stock. In addition, AMB Property Corporation's executive officers and directors beneficially owned
approximately 5.1% of AMB Property Corporation's outstanding common stock as of March 20, 2001, and will have influence on AMB Property Corporation's and our management and operation and, as stockholders of AMB Property Corporation, will have influence on the outcome of any matters submitted to a vote of AMB Property Corporation's stockholders. This influence might be exercised in a manner that is inconsistent with the interests of our limited partners and our noteholders. Although there is no understanding or arrangement for these directors, officers, and stockholders and their affiliates to act in concert, these parties would be in a position to exercise significant influence over our affairs if they choose to do so.
WE COULD INVEST IN REAL ESTATE MORTGAGES
We may invest in mortgages, and may do so as a strategy for ultimately acquiring the underlying property. In general, investments in mortgages include the risks that borrowers may not be able to make debt service payments or pay principal when due, that the value of the mortgaged property may be less than the principal amount of the mortgage note secured by the property and that interest rates payable on the mortgages may be lower than our cost of funds to acquire these mortgages. In any of these events, our funds from operations and our ability to make distributions to our unitholders and payments to our noteholders could be adversely affected.
GOVERNMENT REGULATIONS
Many laws and governmental regulations are applicable to our properties and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently.
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
Under the Americans with Disabilities Act, places of public accommodation must meet certain federal requirements related to access and use by disabled persons. Compliance with the Americans with Disabilities Act might require us to remove structural barriers to handicapped access in certain public areas where such removal is "readily achievable." If we fail to comply with the Americans with Disabilities Act, then we might be required to pay fines to the government or damages to private litigants. The impact of application of the Americans with Disabilities Act to our properties, including the extent and timing of required renovations, is uncertain. If we are required to make unanticipated expenditures to comply with the Americans with Disabilities Act, then our cash flow and the amounts available for distributions to our unitholders and payments to our noteholders may be adversely affected.
WE COULD ENCOUNTER ENVIRONMENTAL PROBLEMS
Federal, state, and local laws and regulations relating to the protection of the environment impose liability on a current or previous owner or operator of real estate for contamination resulting from the presence or discharge of hazardous or toxic substances or petroleum products at the property. A current or previous owner may be required to investigate and clean up contamination at or migrating from a site. These laws typically impose liability and clean-up responsibility without regard to whether the owner or operator knew of or caused the presence of the contaminants. Even if more than one person may have been responsible for the contamination, each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages based on personal injury, property damage, or other costs, including investigation and clean-up costs, resulting from environmental contamination present at or emanating from that site.
Environmental laws also govern the presence, maintenance, and removal of asbestos. These laws require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, that they adequately inform or train those who may come into contact with asbestos, and that they undertake special precautions, including removal or other abatement in the event that asbestos is disturbed during renovation or demolition of a building. These laws may impose fines and penalties on building owners or operators for failure to comply with these requirements and may allow third parties to seek recovery from owners or operators for
personal injury associated with exposure to asbestos fibers. Some of our properties may contain asbestos-containing building materials.
Some of our properties are leased or have been leased, in part, to owners and operators of businesses that use, store, or otherwise handle petroleum products or other hazardous or toxic substances. These operations create a potential for the release of petroleum products or other hazardous or toxic substances. Some of our properties are adjacent to or near other properties that have contained or currently contain petroleum products or other hazardous or toxic substances. In addition, certain of our properties are on, are adjacent to, or are near other properties upon which others, including former owners or tenants of the properties, have engaged or may in the future engage in activities that may release petroleum products or other hazardous or toxic substances. From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions where we believe that the environmental liabilities associated with these conditions are quantifiable and the acquisition will yield a superior risk-adjusted return. Environmental issues for each property are evaluated and quantified prior to acquisition. The costs of environmental investigation, clean-up, and monitoring are underwritten into the cost of the acquisition and appropriate environmental insurance is obtained for the property. In connection with certain divested properties, we have agreed to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties.
All of our properties were subject to a Phase I or similar environmental assessments by independent environmental consultants at the time of acquisition. Phase I assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties and include an historical review, a public records review, an investigation of the surveyed site and surrounding properties, and preparation and issuance of a written report. We may perform additional Phase II testing if recommended by the independent environmental consultant. Phase II testing may include the collection and laboratory analysis of soil and groundwater samples, completion of surveys for asbestos-containing building materials, and any other testing that the consultant considers prudent in order to test for the presence of hazardous materials.
None of the environmental assessments of our properties has revealed any environmental liability that we believe would have a material adverse effect on our financial condition or results of operations taken as a whole. Furthermore, we are not aware of any such material environmental liability. Nonetheless, it is possible that the assessments do not reveal all environmental liabilities and that there are material environmental liabilities of which we are unaware or that known environmental conditions may give rise to liabilities that are materially greater than anticipated. Moreover, the current environmental condition of our properties may be affected by tenants, the condition of land, operations in the vicinity of the properties (such as releases from underground storage tanks), or by third parties unrelated to us. If the costs of compliance with existing or future environmental laws and regulations exceed our budgets for these items, then our financial condition, results of operations, cash flow, and ability to make distributions to our unitholders and payments to our noteholders could be adversely affected.
OUR FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED IF WE FAIL TO COMPLY WITH OTHER REGULATIONS
Our properties are also subject to various federal, state, and local regulatory requirements such as state and local fire and life safety requirements. If we fail to comply with these requirements, then we might incur fines by governmental authorities or be required to pay awards of damages to private litigants. We believe that our properties are currently in substantial compliance with all such regulatory requirements. However, these requirements may change or new requirements may be imposed, which could require significant unanticipated expenditures by us. Any such unanticipated expenditures could have an adverse effect on our financial condition, results of operations, cash flow, and ability to make distributions to our unitholders and payments to our noteholders.
FEDERAL INCOME TAX RISKS
CERTAIN PROPERTY TRANSFERS MAY GENERATE PROHIBITED TRANSACTION INCOME
From time to time, we may transfer or otherwise dispose of some of our properties. Under the Internal Revenue Code, any gain resulting from transfers of properties that we hold as inventory or primarily for sale to customers in the ordinary course of business would be treated as income from a prohibited transaction. We would be required to pay a 100% penalty tax on that income. Since we acquire properties for investment purposes, we believe that any transfer or disposal of property by us would not be deemed by the Internal Revenue Service to be a prohibited transaction with any resulting gain allocable to us being subject to a 100% penalty tax. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The IRS may contend that certain transfers or disposals of properties by us are prohibited transactions. While we believe that the IRS would not prevail in any such dispute, if the IRS successfully argued that a transfer or disposition of property constituted a prohibited transaction, then we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction.
WE ARE DEPENDENT ON OUR KEY PERSONNEL
We depend on the efforts of the executive officers of our general partner. While we believe that AMB Property Corporation could find suitable replacements for these key personnel, the loss of their services or the limitation of their availability could adversely affect our financial condition, results of operations, cash flow, and ability to make distributions to our unitholders and payments to our noteholders. AMB Property Corporation does not have employment agreements with any of its executive officers.
WE MAY BE UNABLE TO MANAGE OUR GROWTH
Our business has grown rapidly and continues to grow through property acquisitions and developments. If we fail to effectively manage our growth, then our financial condition, results of operations, cash flow, and ability to make distributions to our unitholders and payments to our noteholders could be adversely affected.
WE MAY INVEST IN HIGHLY SPECULATIVE EARLY-STAGE COMPANIES IN WHICH WE MAY LOSE OUR ENTIRE INVESTMENT
From time to time, we may invest in highly speculative early-stage companies that we believe will enhance our understanding of changes occurring in the movement of goods, which may, in turn, sharpen our real estate investment focus, create real estate provider relationships with growth companies, and provide the potential for significant returns on invested capital. We believe that the amounts of our investments in early-stage companies are immaterial, both individually and in the aggregate. However, these investments are highly speculative and it is possible that we may lose our entire investment in an early-stage company.
AMB INVESTMENT MANAGEMENT, INC. AND HEADLANDS REALTY CORPORATION
WE DO NOT CONTROL THE ACTIVITIES OF AMB INVESTMENT MANAGEMENT, INC. AND HEADLANDS REALTY CORPORATION
We own 100% of the non-voting preferred stock of AMB Investment Management, Inc. and Headlands Realty Corporation (representing approximately 95% of the economic interest in each entity). Some of AMB Property Corporation's current and former executive officers and a former executive officer of AMB Investment Management, Inc. own all of the outstanding voting common stock of AMB Investment Management, Inc. (representing approximately 5% of the economic interest in AMB Investment Management, Inc.). Some of AMB Property Corporation's current and former executive officers and a director of Headlands Realty Corporation own all of the outstanding voting common stock of Headlands Realty Corporation (representing approximately 5% of the economic interest in Headlands Realty Corporation). The ownership structure of AMB Investment Management, Inc. and Headlands Realty Corporation permits us to share in the income of those corporations while allowing AMB Property Corporation to maintain its status as a real estate investment trust. We receive substantially all of the economic benefit of the businesses carried on by AMB Investment Management and Headlands Realty Corporation through our right to receive dividends. However, we are not
able to elect the directors or officers of AMB Investment Management, Inc. and Headlands Realty Corporation and, as a result, we do not have the ability to influence their operation or to require that their boards of directors declare and pay cash dividends on the non-voting stock of AMB Investment Management, Inc. and Headlands Realty Corporation held by us. The boards of directors and management of AMB Investment Management, Inc. and Headlands Realty Corporation might implement business policies or decisions that would not have been implemented by persons controlled by us and that may be adverse to the interests of our unitholders and noteholders or that may adversely impact our financial condition, results of operations, cash flow, and ability to make distributions to our unitholders and payments to our noteholders. In addition, AMB Investment Management, Inc. and Headlands Realty Corporation, as taxable REIT subsidiaries, are subject to tax on their income, reducing their cash available for distribution to us.
AMB INVESTMENT MANAGEMENT, INC. MAY NOT BE ABLE TO GENERATE SUFFICIENT FEES
Fees earned by AMB Investment Management, Inc. depend on various factors affecting the ability to attract and retain investment management clients and the overall returns achieved on managed assets. These factors are beyond our control. AMB Investment Management, Inc.'s failure to attract investment management clients or achieve sufficient overall returns on managed assets could reduce its ability to pay dividends on the stock owned by us and could also limit co-investment opportunities to us. This would limit our ability to generate rental revenues from such co-investments and use the co-investment program as a source to finance property acquisitions and leverage acquisition opportunities.
ITEM 7a.
ITEM 7a. QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk includes: 1) the rising interest rates in connection with our unsecured credit facility and other variable rate borrowings; and 2) our ability to incur more debt without unitholder or noteholder approval, thereby increasing our debt service obligations, which could adversely affect our cash flows. See "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Capital Resources -- Market Capitalization."
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Item 14. Exhibits, Financial Statement Schedules, and Reports of Form 8-K."
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 10, Item 11, Item 12, and Item 13
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) FINANCIAL STATEMENTS AND SCHEDULES:
The following consolidated financial information is included as a separate section of this report on Form 10-K.
All other schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto.
(a)(3) EXHIBITS:
(b) REPORTS ON FORM 8-K:
- The Registrant filed a Current Report on Form 8-K on November 2, 2000, in connection with the issuance of $75 million of senior unsecured notes by it under its medium-term note program.
- The Registrant filed a Current Report on Form 8-K/A on November 9, 2000, in connection with the commencement of its medium term note program.
- The Registrant filed a Current Report on Form 8-K/A on November 16, 2000, in connection with the commencement of its medium term note program.
- The Registrant filed a Current Report on Form 8-K on November 30, 2000, in connection with its 2000 acquisitions.
- The Registrant filed a Current Report on Form 8-K/A on December 14, 2000, in connection with its 2000 acquisitions.
- The Registrant filed a Current Report on Form 8-K/A on December 19, 2000, in connection with its 2000 acquisitions.
- The Registrant filed a Current Report on Form 8-K on January 8, 2001, in connection with the issuance of $150 million of senior unsecured notes by it under its medium-term note program.
- The Registrant filed a Current Report on Form 8-K on January 31, 2001, in connection with the issuance of $25 million of senior unsecured notes by it under its medium-term note program.
- The Registrant filed a Current Report on Form 8-K on March 16, 2001, in connection with the issuance of $50 million of senior unsecured notes by it under its medium-term note program.
- The Registrant filed a Current Report on Form 8-K on March 23, 2001, in connection with the filing by AMB Property Corporation of Articles Supplementary establishing and fixing the rights and preferences of the 8.00% Series I Cumulative Redeemable Preferred Stock.
(c) EXHIBITS:
See Item 14(a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES:
See Item 14(a)(1) and (2) above.
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 on March 30, 2001.
AMB PROPERTY, L.P. By AMB Property Corporation, its General Partner
By: /s/ HAMID R. MOGHADAM ------------------------------------ Hamid R. Moghadam Chairman of the Board and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors of AMB Property Corporation, the general partner of AMB Property, L.P., hereby severally constitute Hamid R. Moghadam, W. Blake Baird, David S. Fries, and Michael A. Coke, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, the Form 10-K filed herewith and any and all amendments to said Form 10-K, and generally to do all such things in our names and in our capacities as officers and directors of the general partner of AMB Property, L.P. to enable AMB Property, L.P. to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities as officers or directors of its general partner and on the dates indicated.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the General Partner of AMB Property, L.P.:
We have audited the accompanying consolidated balance sheets of AMB Property, L.P. (a Delaware limited partnership) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, partners' capital, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules, based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial position of AMB Property, L.P. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental Schedules III, Real Estate and Accumulated Depreciation and IV, Mortgage Loans on Real Estate, are presented for purposes of complying with the Securities and Exchange Commission's rules and are not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California January 22, 2001
AMB PROPERTY, L.P.
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND 1999 (IN THOUSANDS, EXCEPT UNIT AMOUNTS)
ASSETS
The accompanying notes are an integral part of these consolidated financial statements.
AMB PROPERTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS, EXCEPT UNIT AND PER UNIT AMOUNTS)
The accompanying notes are an integral part of these consolidated financial statements.
AMB PROPERTY, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS, EXCEPT UNIT AMOUNTS)
The accompanying notes are an integral part of these consolidated financial statements.
AMB PROPERTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999
1. ORGANIZATION AND FORMATION OF THE COMPANY
AMB Property Corporation, a Maryland corporation (the "Company"), commenced operations as a fully integrated real estate company effective with the completion of its initial public offering on November 26, 1997. The Company elected to be taxed as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, commencing with its taxable year ended December 31, 1997, and believes its current organization and method of operation will enable it to maintain its status as a real estate investment trust. The Company, through its controlling interest in its subsidiary, AMB Property, L.P., a Delaware limited partnership (the "Operating Partnership"), is engaged in the acquisition, ownership, operation, management, renovation, expansion, and development of primarily industrial buildings in target markets nationwide. Unless the context otherwise requires, the "Company" means AMB Property Corporation, the Operating Partnership, and its other controlled subsidiaries and the "Operating Partnership" means AMB Property, L.P. and its other controlled subsidiaries.
As of December 31, 2000, the Company owned an approximate 93.5% general partner interest in the Operating Partnership, excluding preferred units. The remaining 6.5% limited partner interest is owned by non-affiliated investors and certain current and former directors and officers of the Company. For local law purposes, certain properties are owned through limited partnerships and limited liability companies. The ownership of such properties through such entities does not materially affect the Company's overall ownership of the interests in the properties. As the sole general partner of the Operating Partnership, the Company has full, exclusive, and complete responsibility and discretion in the day-to-day management and control of the Operating Partnership. Net operating results of the Operating Partnership are allocated after preferred unit distributions based on the respective partners' ownership interests.
The Operating Partnership enters into co-investment joint ventures with institutional investors. These co-investment joint ventures provide the Operating Partnership with an additional source of capital to fund certain acquisitions and development and renovation projects. As of December 31, 2000, the Operating Partnership had investments in two co-investment joint ventures, including AMB Institutional Alliance Fund I, L.P. ("Alliance Fund I"), which are consolidated for financial reporting purposes.
AMB Investment Management, Inc., a Maryland corporation ("AMB Investment Management"), provides real estate investment services on a fee basis to clients. The Operating Partnership purchased 100% of AMB Investment Management's non-voting preferred stock (representing a 95% economic interest therein). Certain current and former executive officers of the Company and a former executive officer of AMB Investment Management collectively purchased 100% of AMB Investment Management's voting common stock (representing a 5% economic interest therein). The Operating Partnership also owns 100% of the non-voting preferred stock of Headlands Realty Corporation, a Maryland corporation, (representing a 95% economic interest therein). Certain current and former executive officers of the Company and a director of Headlands Realty Corporation collectively own 100% of the voting common stock of Headlands Realty Corporation (representing a 5% economic interest therein). Headlands Realty Corporation primarily invests in properties that do not meet the Company's normal investment strategy, as well as build-to-sell development projects, which are part of the Company's investment strategy. In addition, it invests in properties and interests in entities that engage in the management, leasing, and development of properties and similar activities. The Operating Partnership accounts for its investments in AMB Investment Management and Headlands Realty Corporation using the equity method of accounting.
As of December 31, 2000, the Operating Partnership owned 862 industrial buildings and eight retail centers, located in 27 markets throughout the United States (unaudited). The Operating Partnership's strategy is to become a leading provider of High Throughput Distribution, or HTD, properties located near key passenger and cargo airports, highway systems and ports in major metropolitan areas, such as Atlanta, Chicago, Dallas/Fort Worth, Northern New Jersey/New York City, the San Francisco Bay Area, Southern
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
California, Miami, and Seattle. As of December 31, 2000, the industrial buildings, principally warehouse distribution buildings, encompassed approximately 75.8 million rentable square feet and were 96.4% leased to over 2,850 tenants (unaudited). As of December 31, 2000, the retail centers, principally grocer-anchored community shopping centers, encompassed approximately 1.2 million rentable square feet and were 93.2% leased to over 170 tenants (unaudited).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Generally Accepted Accounting Principles. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States using the accrual method of accounting. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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.
Principles of Consolidation. The accompanying consolidated financial statements include the financial position, results of operations and cash flows of the Operating Partnership, its subsidiaries, and joint ventures (the "Joint Ventures"), in which it has a controlling interest. Third-party equity interests in the Operating Partnership and the Joint Ventures are reflected as minority interests in the consolidated financial statements. The Operating Partnership also has three non-controlling limited partnership interests in three separate unconsolidated real estate joint ventures, which are accounted for under the equity method. All significant intercompany amounts have been eliminated.
Investments in Real Estate. Investments in real estate are stated at cost unless circumstances indicate that cost cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value. Net realizable value for financial reporting purposes is reviewed for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying amount of a property may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges) are less than the carrying amount of the property. The estimation of expected future net cash flows is inherently uncertain and relies on assumptions regarding current and future economics and market conditions and the availability of capital. If impairment analysis assumptions change, then an adjustment to the carrying amount of the Operating Partnership's long-lived assets could occur. To the extent that a property is impaired, the excess of the carrying amount of the property over its estimated fair value is charged to income. The management of the Operating Partnership believed that there was no impairment of the carrying value of its investments in real estate at December 31, 2000.
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the real estate investments. The estimated lives are as follows:
The cost of buildings and improvements includes the purchase price of the property or interest in property including legal fees and acquisition costs. Project costs directly associated with the development and construction of a real estate project, which include interest and property taxes, are capitalized as construction in progress.
Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations or betterments that extend the economic useful life of assets are capitalized.
Reverse Exchanges. Reverse exchanges represent loan agreements with third parties, whereby the Operating Partnership loans substantially all funds to the third party to acquire a real estate investment. The loan is secured by the real estate investment and title is held by the third party. The Operating Partnership records the asset as an investment in real estate and is entitled to record the rental income associated with the property as the Operating Partnership retains the risk of loss and the benefits of the asset.
Concentration of Credit Risk. Other real estate companies compete with the Operating Partnership in its real estate markets. This results in competition for tenants to occupy space. The existence of competing properties could have a material impact on the Operating Partnership's ability to lease space and on the amount of rent received. As of December 31, 2000, the Operating Partnership did not have any single tenant that accounted for greater than 1.3% of rental revenues.
Cash and Cash Equivalents. Cash and cash equivalents include cash held in financial institutions and other highly liquid short-term investments with original maturities of three months or less.
Restricted Cash and Cash Equivalents. Restricted cash and cash equivalents include cash held in escrow in connection with property purchases, Section 1031 exchange funds, and capital improvements.
Deferred Financing Costs. Costs incurred in connection with financings are capitalized and amortized to interest expense on the effective-interest method over the term of the related loan. As of December 31, 2000 and 1999, deferred financing fees were $10.7 million and $6.7 million, respectively, net of accumulated amortization of $4.7 million and $2.2 million, respectively. Such amounts are included in Other assets on the Consolidated Balance Sheets.
Investments in Other Companies. Certain of the Operating Partnership's marketable equity securities are considered available-for-sale investments and are carried at market value on the Consolidated Balance
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
Sheets. The difference between cost and market value is recorded as a component of Accumulated other comprehensive income in Partners' Capital. For its investments in private companies, the Operating Partnership periodically reviews its investments and management determines if the value of such investments have been permanently impaired. Such impairment losses are included in current earnings.
Debt Premiums. Debt premiums represent the excess of the fair value of debt over the principal value of debt assumed in connection with AMB Property Corporation's initial public offering and subsequent acquisitions. The debt premiums are being amortized into interest expense over the term of the related debt instrument using the effective interest method. As of December 31, 2000 and 1999, the unamortized debt premium was $9.9 million and $10.1 million, respectively.
Minority Interests. Minority interests in the Operating Partnership represent the limited partnership interests in a subsidiary of the Operating Partnership and interests held by certain third parties in 30 joint ventures aggregating approximately 15.5 million square feet, which are consolidated for financial reporting purposes. Such investments are consolidated because: 1) the Operating Partnership owns a majority interest; or 2) the Operating Partnership exercises significant control through the ability to control major operating decisions such as approval of budgets, selection of property managers, and changes in financing.
In 1999 and 2000, AMB Institutional Alliance REIT I, Inc. (the "Alliance REIT") issued and sold shares of its capital stock to 15 third-party investors. The Alliance REIT has elected to be taxed as a REIT under the Code, commencing with its tax year ending December 31, 1999. The Alliance REIT acquired a limited partnership interest in the Alliance Fund I, which is engaged in the acquisition, ownership, operation, management, renovation, and expansion and development of industrial buildings in target markets nationwide. The Operating Partnership is the managing general partner of the Alliance Fund I and, together with an affiliate of the Operating Partnership, owns approximately 21% of the partnership interests in the Alliance Fund I at December 31, 2000. The Operating Partnership consolidates the Alliance Fund I for financial reporting purposes because it is the sole managing general partner of the Alliance Fund I and, as a result, controls all of its major operating decisions.
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
The following table distinguishes the components of minority interest as of and for the year ended December 31, 2000:
Rental Revenues. The Operating Partnership, as a lessor, retains substantially all of the benefits and risks of ownership of the properties and accounts for its leases as operating leases. Rental income is recognized on a straight-line basis over the term of the leases. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenue in the period the applicable expenses are incurred. Differences between estimated and actual amounts are recognized in the subsequent year.
Investment Management and Other Income. Investment management income consists primarily of professional fees generated from the Operating Partnership's equity in the earnings of AMB Investment Management. Other income consists primarily of interest income on cash and cash equivalents.
Comprehensive Income. Comprehensive income consists of net income and unrealized gains and losses on certain investments in equity securities and is presented in the Consolidated Statement of Partners' Capital.
Derivatives. Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities as amended by Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement, as amended, requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Operating Partnership will adopt FASB Statement No. 133 in 2001 and believes that it will not materially impact its financial position or results of operations as the Operating Partnership does not utilize derivative instruments in its operations.
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
3. TRANSACTIONS WITH AFFILIATES
The Operating Partnership and AMB Investment Management have an agreement that allows for the sharing of certain costs and employees. Additionally, the Operating Partnership provides AMB Investment Management with certain acquisition-related services. For the years ended December 31, 2000, 1999, and 1998, the Operating Partnership allocated $2.8 million, $2.7 million, and $1.8 million, respectively, for shared costs to AMB Investment Management.
The Operating Partnership and AMB Investment Management share common office space under lease obligations. Such lease obligations are charged to the Operating Partnership and AMB Investment Management at cost. For the years ended December 31, 2000, 1999, and 1998, the Operating Partnership paid $1.4 million, $1.3 million, and $1.2 million, respectively, for occupancy costs related to the lease obligations of the affiliate.
4. REAL ESTATE ACQUISITION AND DEVELOPMENT ACTIVITY
During 2000, the Operating Partnership invested $730.0 million in operating properties, consisting of 145 industrial buildings aggregating approximately 10.5 million square feet. Of this, $185.6 million was acquired by the Alliance Fund I, consisting of 44 industrial buildings, aggregating approximately 2.6 million square feet. The Operating Partnership also initiated 17 new development projects, aggregating approximately 4.5 million square feet, with a total estimated cost of $224.0 million upon completion. In 2000, the Operating Partnership also completed 12 development projects, aggregating approximately 3.1 million square feet, at a total aggregate cost of $144.3 million. As of December 31, 2000, the Operating Partnership had in its development pipeline 19 industrial projects, which will total approximately 5.5 million square feet and have an aggregate estimated investment of $305.9 million upon completion. It also had three retail projects in its development pipeline, which will total approximately 0.5 million square feet and have an aggregate estimated investment of $76.3 million upon completion. As of December 31, 2000, the Operating Partnership and its Development Alliance Partners have funded an aggregate of $226.5 million and will need to fund an estimated additional $155.7 million in order to complete projects currently under construction.
During 1999, the Operating Partnership invested $471.9 million in operating properties, consisting of 154 industrial buildings, aggregating approximately 8.4 million square feet. The Operating Partnership also initiated eight new development projects, aggregating approximately 1.7 million square feet, with a total estimated cost of $130.9 million upon completion. In 1999, the Operating Partnership also completed seven development projects, aggregating approximately 1.7 million square feet, at a total aggregate cost of $68.9 million. As of December 31, 1999, the Operating Partnership had 18 projects, aggregating approximately 4.3 million square feet, in its development pipeline, with a total estimated cost of $306.4 million upon completion. The Operating Partnership funded these acquisitions and development projects through proceeds from divestitures of properties, borrowings under its unsecured credit facility, debt and equity financings, and debt assumption.
5. PROPERTY DIVESTITURES AND PROPERTIES HELD FOR DIVESTITURE
Property Divestitures. During 2000, the Operating Partnership divested itself of 25 industrial buildings and one retail center, aggregating approximately 2.5 million square feet, for an aggregate price of $175.7 million, with a resulting net gain of $7.0 million. The retail center was located in Los Angeles, California, aggregated approximately 0.4 million square feet, and sold for $89.0 million. The Operating Partnership carries an 8.75% mortgage note in the principal amount of $79.0 million on the retail center sale. The mortgage note matures in September 2001 and has a one-year extension option.
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
During 1999, the Operating Partnership divested itself of 15 industrial buildings and 30 retail centers, aggregating approximately 6.6 million square feet, for an aggregate price of $764.1 million, with a resulting net gain of $53.8 million and extraordinary losses consisting of prepayment penalties, partially offset by the related debt premiums, of $2.9 million.
Properties Held for Divestiture. The Operating Partnership has decided to divest itself of 33 industrial buildings and one retail center, which are not in its core markets or which do not meet its strategic objectives. The divestitures of the properties are subject to negotiation of acceptable terms and other customary conditions. In connection with the Operating Partnership's planned divestitures, the Operating Partnership evaluated its held-for-sale assets for impairment and reduced their carrying value by recording an additional $3.5 million in depreciation expense. As of December 31, 2000, the net carrying value of the properties held for divestiture was $197.1 million.
The following summarizes the condensed results of operations of the properties held for divestiture for the years ended December 31:
6. DEBT
As of December 31, 2000 and 1999, debt consisted of the following:
Secured debt generally requires monthly principal and interest payments. The secured debt is secured by deeds of trust on certain properties. As of December 31, 2000 and 1999, the total gross investment book value of those properties secured by debt was $2.0 billion and $1.4 billion, respectively. All of the secured debt bears interest at fixed rates, except for two loans with an aggregate principal amount of $29.8 million and $10.4 million at December 31, 2000 and 1999, respectively, which bear interest at variable rates (weighted average interest rate of 8.2% at December 31, 2000). The secured debt has various financial and non-financial covenants. Management believes that the Operating Partnership was in material compliance with these covenants at December 31, 2000. Additionally, $240.9 million of the secured debt was cross-collateralized at December 31, 2000. As of December 31, 2000 and 1999, the estimated fair value of the secured debt was
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
$956.1 million and $684.0 million, respectively. As of December 31, 2000, the estimated fair value of the unsecured senior debt was $689.4 million.
In addition, the Alliance Fund I had an $80.0 million unsecured credit facility. The debt was secured by the unfunded capital commitments of the third party investors in the Alliance REIT I, a limited partner of the Alliance Fund I. Since there are no remaining unfunded capital commitments, the Alliance Fund I paid off the outstanding balance and closed this credit facility during the third quarter of 2000. See Note 2 for a discussion of the Alliance Fund I and the Alliance REIT I.
Interest on the unsecured senior debt securities is payable semi-annually. The 2015 notes are putable and callable in June 2005. The senior debt securities are subject to various financial and non-financial covenants. Management believes that the Operating Partnership was in material compliance with these covenants at December 31, 2000.
In 2000, the Operating Partnership commenced a medium-term note program for the issuance of up to $400.0 million in principal amount of medium-term notes, which will be guaranteed by AMB Property Corporation. As of December 31, 2000, the Operating Partnership had issued $280.0 million of medium-term notes under the program. In December 2000, the Operating Partnership issued and sold $150.0 million of the notes under this program to Morgan Stanley Dean Witter and J.P. Morgan as principals. AMB Property Corporation has guaranteed the notes, which mature on December 15, 2005, and bear interest at 7.2% per annum. The Operating Partnership used the net proceeds of $148.9 million for general corporate purposes, to partially repay indebtedness, and for the acquisition and development of properties. In October 2000, the Operating Partnership issued and sold $75.0 million of the notes under this program to Morgan Stanley Dean Witter and J.P. Morgan as principals. AMB Property Corporation has guaranteed the notes, which mature on November 1, 2010, and bear interest at 8.0% per annum. The Operating Partnership used the net proceeds of $74.5 million for general corporate purposes, to partially repay indebtedness, and for the acquisition and development of properties. In August and September 2000, the Operating Partnership issued and sold $55.0 million of the notes under this program to Morgan Stanley Dean Witter as principal. AMB Property Corporation has guaranteed the notes, which mature on August 20, 2007, and bear interest at 7.925% per annum. The Operating Partnership used the net proceeds of $54.8 million for general corporate purposes, to partially repay indebtedness, and for the acquisition and development of properties.
In May 2000, the Operating Partnership entered into a new $500.0 million unsecured revolving credit agreement, which replaced its previous $500.0 million credit facility, which matured in November 2000. AMB Property Corporation is the guarantor of the Operating Partnership's obligations under the credit facility. The new credit facility matures in May 2003, has a one-year extension option, and is subject to a 15 basis point annual facility fee. The credit facility has various financial and non-financial covenants. Management believes that the Operating Partnership was in material compliance with these covenants at December 31, 2000. The Operating Partnership has the ability to increase available borrowings up to $700.0 million by adding additional banks to the facility or obtaining the agreement of existing banks to increase their commitments. Monthly debt service payments on the credit facility are interest only. The total amount available under the credit facility fluctuates based upon the borrowing base, as defined in the agreement governing the credit facility. At December 31, 2000, the remaining amount available under the credit facility was $284.0 million (excluding the additional $200.0 million of potential additional capacity).
Capitalized interest related to construction projects for the years ended December 31, 2000, 1999, and 1998, was $15.5 million, $10.9 million, and $7.2 million, respectively.
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
As of December 31, 2000, the scheduled maturities of the Operating Partnership's total debt, excluding unamortized debt premiums, were as follows:
7. LEASING ACTIVITY
Future minimum rental income due under noncancelable leases with tenants in effect at December 31, 2000, is as follows:
In addition to minimum rental payments, certain tenants pay reimbursements for their pro rata share of specified operating expenses, which amounted to $77.9 million, $81.1 million, and $68.1 million for the years ended December 31, 2000, 1999, and 1998, respectively. These amounts are included as rental income and operating expenses in the accompanying consolidated statements of operations. Certain of the leases also provide for the payment of additional rent based on a percentage of the tenant's revenues. For the years ended December 31, 2000, 1999, and 1998, the Operating Partnership recognized percentage rent revenues of $0.8 million, $2.0 million, and $1.9 million, respectively. Some leases contain options to renew.
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
8. INCOME TAXES
As a partnership, the allocated share of income of the Operating Partnership is included in the income tax returns of the partners. Accordingly, no accounting for income taxes is required in the accompanying consolidated financial statements. State and local taxes are not material.
The following reconciles net income available to common unitholders to taxable income available to common unitholders for the years ended December 31:
- --------------- (1) Primarily due to rent and debt premium amortization timing differences.
9. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The Operating Partnership has non-controlling limited partnership interests in three separate unconsolidated equity investment joint ventures. The Operating Partnership has a 56.1% interest in a joint venture that owns an aggregate of 36 industrial buildings totaling approximately 4.0 million square feet. The Operating Partnership also has a 50.0% interest in two other development alliance joint ventures, which it purchased in September 1999 and September 2000. For the years ended December 31, 2000, 1999, and 1998, the Operating Partnership's share of net operating income was $8.3 million, $8.0 million, and $1.8 million, respectively, and as of December 31, 2000 and 1999, the Operating Partnership's share of the unconsolidated joint venture debt was $28.8 million and $22.7 million, respectively, with a weighted average interest rate of 7.3% and weighted average maturity of 4.4 years.
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
10. PARTNERS' CAPITAL
On September 1, 2000, AMB Property II, L.P., one of the Operating Partnership's subsidiaries, issued and sold 840,000 8.125% Series H Cumulative Redeemable Preferred Limited Partnership Units at a price of $50.00 per unit in a private placement. Distributions are cumulative from the date of issuance and payable quarterly in arrears at a rate per unit equal to $4.0625 per annum. The Series H Preferred Units are redeemable by AMB Property II, L.P. on or after September 1, 2005, subject to certain conditions, for cash at a redemption price equal to $50.00 per unit, plus accumulated and unpaid distributions thereon, if any, to the redemption date. The Series H Preferred Units are exchangeable, at specified times and subject to certain conditions, on a one-for-one basis, for shares of the Company's Series H Preferred Stock. AMB Property II, L.P. used the net proceeds of $41.0 million to repay advances from the Operating Partnership and to make a loan to the Operating Partnership. The Operating Partnership used the funds to partially repay borrowings under its unsecured credit facility and for general corporate purposes. The loan bears interest at 8.0% per annum and is payable on demand.
On August 29, 2000, AMB Property II, L.P. issued and sold 20,000 7.95% Series G Cumulative Redeemable Preferred Limited Partnership Units at a price of $50.00 per unit in a private placement. Distributions are cumulative from the date of issuance and payable quarterly in arrears at a rate per unit equal to $3.975 per annum. The Series G Preferred Units are redeemable by AMB Property II, L.P. on or after August 29, 2005, subject to certain conditions, for cash at a redemption price equal to $50.00 per unit, plus accumulated and unpaid distributions thereon, if any, to the redemption date. The Series G Preferred Units are exchangeable, at specified times and subject to certain conditions, on a one-for-one basis, for shares of the Company's Series G Preferred Stock. AMB Property II, L.P. used the net proceeds of $1.0 million to repay advances from the Operating Partnership. The Operating Partnership used the funds for general corporate purposes.
On March 22, 2000, AMB Property II, L.P. issued and sold 397,439 7.95% Series F Cumulative Redeemable Preferred Limited Partnership Units at a price of $50.00 per unit in a private placement. Distributions are cumulative from the date of issuance and payable quarterly in arrears at a rate per unit equal to $3.975 per annum. The Series F Preferred Units are redeemable by AMB Property II, L.P. on or after March 22, 2005, subject to certain conditions, for cash at a redemption price equal to $50.00 per unit, plus accumulated and unpaid distributions thereon, if any, to the redemption date. The Series F Preferred Units are exchangeable, at specified times and subject to certain conditions, on a one-for-one basis, for shares of the Company's Series F Preferred Stock. AMB Property II, L.P. loaned the net proceeds of $19.6 million to the Operating Partnership. The Operating Partnership used the funds to partially repay borrowings under its unsecured credit facility and for general corporate purposes. The loan bears interest at 7.0% per annum and is payable upon demand.
At the time of the Company's initial public offering, 4,237,750 shares of common stock, known as performance shares, were placed in escrow by certain of the Company's investors, which were subject to advisory agreements with the Company's predecessor that included incentive fee provisions. On January 7, 2000, 2,771,824 shares of common stock were released from escrow to these investors and 1,465,926 shares of common stock were returned to the Company and cancelled. The cancelled shares of common stock represent indirect interests in the Operating Partnership that were reallocated from the Company (thereby decreasing the number of shares of common stock outstanding) to other unitholders who had an ownership interest in our predecessor, including certain of the Company's executive officers, (thereby increasing the number of limited partnership units owned by partners other than the Company). The total number of outstanding partnership units did not change as a result of this reallocation. This reallocation did not change the amount of fully diluted shares of common stock and limited partnership units outstanding.
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
In November 2000, the Operating Partnership issued an aggregate of 94,771 limited partnership units with an aggregate value of approximately $2.2 million to three limited partnerships. These limited partnership units were issued in partial consideration for the acquisition of properties. Holders of the limited partnership units may redeem part or all of their limited partnership units for cash or, at AMB Property Corporation's election, exchange their limited partnership units for shares of the AMB Property Corporation's common stock on a one-for-one basis. During 2000, 34,046 limited partnership units were redeemed for cash and 206,423 limited partnership units were redeemed for shares of the AMB Property Corporation's common stock.
The Company's board of directors has approved a stock repurchase program for the repurchase of up to $100.0 million worth of its common stock. During 2000, the Company did not repurchase any shares of its common stock. The stock repurchase program expires in December 2001.
The following table sets forth the distributions per unit for the years ended December 31, 2000 and 1999:
11. STOCK INCENTIVE PLAN AND 401(K) PLAN
Stock Incentive Plan. In November 1997, the Company established a Stock Option and Incentive Plan (the "Stock Incentive Plan") for the purpose of attracting and retaining eligible officers, directors, and employees. The Company has reserved for issuance 8,950,000 shares of Common Stock under the Stock Incentive Plan. As of December 31, 2000, the Company had granted approximately 5,895,000 non-qualified options outstanding granted to certain directors, officers, and employees. Each option is exchangeable for one share of the Company's Common Stock. The options have a weighted average exercise price of $20.83 and the exercise prices range from $18.13 to $26.06. Each option's exercise price is equal to the Company's market price on the date of grant. The options had an original ten-year term and generally vest pro rata in annual installments over a three- or four-year period from the date of grant.
The Operating Partnership applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its Stock Incentive Plan. Opinion 25 measures compensation cost using the intrinsic value based method of accounting. Under this method, compensation cost is the excess, if any, of the quoted market price of the stock at the date of grant over the amount an employee must pay to acquire the stock. Accordingly, no compensation cost has been recognized for the Company's Stock Incentive Plan as of December 31, 2000.
As permitted by SFAS No. 123, "Accounting Stock-based Compensation," the Operating Partnership has not changed the method of accounting for stock options but has provided the additional required disclosures. Had compensation cost for the Operating Partnership's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Operating Partnership's pro forma net income available to common unitholders would
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
have been reduced by $6.3 million, $3.2 million, and $1.8 million and pro forma basic and diluted earnings per unit would have been reduced to $1.28 and $1.27, and $1.92 and $1.92, and $1.25 and $1.24, respectively, for the years ended December 31, 2000, 1999, and 1998.
The fair value of each option grant was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2000, 1999, and 1998, respectively: dividend yields of 6.5%, 7.2%, and 6.3%; expected volatility of 13.3%, 18.5%, and 23.1%; risk-free interest rates of 6.1%, 5.4%, and 4.9%; and expected lives of 10 years for each year.
Following is a summary of the option activity for the years ended December 31:
In 2000, 1999, and 1998, under the Stock Incentive Plan, the Company issued 162,299, 100,000, and 43,007 restricted shares, respectively, to certain officers of the Company as part of the performance pay program and in connection with employment with the Company. As of December 31, 2000, 1,931 shares of restricted stock have been forfeited. The 309,087 outstanding restricted shares are subject to repurchase rights, which generally lapse over a period from three to five years.
401(k) Plan. In November 1997, the Operating Partnership established a Section 401(k) Savings/ Retirement Plan (the "401(k) Plan"), which is a continuation of the 401(k) Plan of the predecessor, to cover eligible employees of the Operating Partnership and any designated affiliates. During 2000 and 1999, the 401(k) Plan permitted eligible employees of the Operating Partnership to defer up to 20% and 10%, respectively, of their annual compensation, subject to certain limitations imposed by the Code. The employees' elective deferrals are immediately vested and non-forfeitable upon contribution to the 401(k) Plan. During 2000 and 1999, the Operating Partnership matched the employee contributions to the 401(k) Plan in an amount equal to 50% of the first 5.5% and 3.5%, respectively, of annual compensation deferred by each employee. The Operating Partnership may also make discretionary contributions to the 401(k) Plan. In 2000 and 1999, the Operating Partnership accrued $0.3 million and $0.2 million, respectively, for its 401(k) match. Such amounts were included in Other liabilities on the Consolidated Balance Sheets.
Deferred Compensation Plan. Effective September 1, 1999, the Operating Partnership established a non-qualified deferred compensation plan for officers of the Company and certain of its affiliates. The plan
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
enables participants to defer income up to 25% of annual base pay and up to 100% of annual bonuses on a pre-tax basis. The Operating Partnership may make discretionary matching contributions to participant accounts at any time. The Operating Partnership made no such discretionary matching contributions in 2000 or 1999. The participant's elective deferrals and any matching contributions are immediately 100% vested. As of December 31, 2000 and 1999, the total amount of compensation deferred was $1.0 million and $0.2 million, respectively.
12. COMMITMENTS AND CONTINGENCIES
Commitments
Lease Commitments. The Operating Partnership has entered into operating ground leases on certain land parcels and a building with periods up to 50 years. Future minimum rental payments required under non-cancelable operating leases in effect at December 31, 2000, were as follows:
These operating lease payments are being amortized ratably over the terms of the related leases.
Contingencies
Litigation. In the normal course of business, from time to time, the Operating Partnership 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 material adverse effect on the consolidated financial position, results of operations, or cash flows of the Operating Partnership.
Environmental Matters. The Operating Partnership monitors its properties for the presence of hazardous or toxic substances. The Operating Partnership is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Operating Partnership's business, assets, or results of operations. However, there can be no assurance that such a material environmental liability does not exist. The existence of any such material environmental liability would have an adverse effect on the Operating Partnership's results of operations and cash flow.
General Uninsured Losses. The Operating Partnership carries property and rental loss, liability, flood, and environmental insurance. The Operating Partnership believes that the policy terms and conditions, limits, and deductibles are adequate and appropriate under the circumstances, given the relative risk of loss, the cost of such coverage, and industry practice. In addition, certain of the Operating Partnership's properties are located in areas that are subject to earthquake activity; therefore, the Operating Partnership has obtained limited earthquake insurance on those properties. There are, however, certain types of extraordinary losses that may be either uninsurable or not economically insurable. Should an uninsured loss occur, the Operating Partnership could lose its investment in, and anticipated profits and cash flows from, a property.
Minority Interest Put Option. Pursuant to the Operating Partnership's partnership agreement with one of its separate account co-investors, commencing March 31, 1999, and each year thereafter, the Operating
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
Partnership is required to provide this co-investor a notice that sets forth the valuation of the partnership as of the date of valuation. The co-investor then has the right to require the Operating Partnership to purchase all of its partnership interest based upon the valuation in the form of cash, shares of AMB Property Corporation, or partnership units in the Operating Partnership. The put option was not exercised by the co-investor in 1999 nor 2000 and the Operating Partnership does not anticipate that the put option will be exercised in the coming year.
13. QUARTERLY FINANCIAL DATA
Selected quarterly financial data for 2000 and 1999 is as follows:
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
- --------------- (1) The sum of quarterly financial data may vary from the annual data due to rounding.
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
14. SEGMENT INFORMATION
The Operating Partnership has two reportable property segments: industrial and retail. The industrial properties consist primarily of warehouse distribution facilities suitable for single or multiple tenants and are typically comprised of multiple buildings, which are leased to tenants engaged in various types of businesses. The retail properties are generally leased to one or more anchor tenants, such as grocery and drug stores, and various retail businesses. The Operating Partnership evaluates performance based upon property net operating income of the combined properties in each segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Operating Partnership manages these properties separately because each segment requires different operating, pricing, and leasing strategies. Summary information for the reportable segments is as follows:
- --------------- (1) Includes straight-line rents of $10.2 million, $10.8 million, and $10.9 million for the years ended December 31, 2000, 1999, and 1998, respectively.
(2) Property net operating income (NOI) is defined as rental revenue, including reimbursements and straight-line rents, less property level operating expenses and excluding depreciation, amortization and interest expense.
(3) Represents costs incurred during the year for land, buildings, building improvements, tenant improvements, leasing costs, and other related real estate costs. Amounts are before divestitures of $162.5 million and $814.8 million for the years ended December 31, 2000 and 1999, respectively. There were no property divestitures in 1998.
(4) Excludes net properties held for divestiture of $197.1 million, $181.2 million, and $115.1 million as of December 31, 2000, 1999, and 1998, respectively. The $197.1 million net properties held for divestiture at December 31, 2000, included $158.7 million and $38.4 million of industrial and retail properties, respectively. At December 31, 1999, the Operating Partnership held three retail properties for divestiture that it didn't sell in 2000; the Operating Partnership held only one of these retail properties for divestiture at December 31, 2000, and classified the remaining two as investments in real estate.
AMB PROPERTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999
The Operating Partnership uses property net operating income as an operating performance measure. The following is a reconciliation between total reportable segment revenue and property net operating income to consolidated revenues and net income:
15. NEW ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The Operating Partnership has adopted SAB 101 as required and believes that SAB 101 does not have a material impact on these consolidated financial statements.
AMB PROPERTY, L.P.
SCHEDULE III
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2000 (IN THOUSANDS, EXCEPT NUMBER OF BUILDINGS/CENTERS)
S-1
AMB PROPERTY, L.P.
SCHEDULE III
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
S-2
AMB PROPERTY, L.P.
SCHEDULE III
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
S-3
AMB PROPERTY, L.P.
SCHEDULE III
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
S-4
AMB PROPERTY, L.P.
SCHEDULE III
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
S-5
AMB PROPERTY, L.P.
SCHEDULE III
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
S-6
AMB PROPERTY, L.P.
SCHEDULE III CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) DECEMBER 31, 2000 AND 1999
- --------------- (1) As of December 31, 2000, properties with a gross book value of $173.1 million, serves as collateral for outstanding indebtedness under a secured debt facility of $73.0 million.
(2) Reconciliation of total cost to Consolidated Balance Sheet caption at December 31, 2000:
(3) As of December 31, 2000, the aggregate cost for federal income tax purposes of investments in real estate was $3,567,229.
(4) A summary of activity for real estate and accumulated depreciation for the year ended December 31, 2000, is as follows:
(5) Includes $226.5 million of fundings for projects under development at December 31, 2000.
(6) Excludes investment of $13.2 million in unconsolidated joint ventures.
S-7
AMB PROPERTY, L.P.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE AS OF DECEMBER 31, 2000 (IN THOUSANDS, EXCEPT PERCENTAGES)
- ---------------
(1) The Operating Partnership financed the development of office space in an historical San Francisco landmark that it holds in an unconsolidated joint venture. The loan is to be replaced with permanent financing in 2001.
(2) During 2000, the Operating Partnership sold a retail center in California for $89.0 million. The Operating Partnership carries a mortgage on this retail center sale. This mortgage has a one-year extension option.
S-8
EXHIBIT INDEX
S-9
S-10
S-11