ITEM 1. BUSINESS.
THE COMPANY
CenterPoint Properties Trust ("CenterPoint" or the "Company"), a publicly traded real estate investment trust (REIT), is the first major REIT to focus on the industrial sector. CenterPoint is focused on providing unsurpassed tenant satisfaction, and adds value to its shareholders through customer-driven management, investment, development, and redevelopment of warehouse, light manufacturing, and industrial facilities. The Company believes it is the largest owner and operator of warehouse/industrial property in the 1.25 billion square-foot Greater Chicago Region, the largest and most diverse industrial market in the United States. The Company is a Maryland business trust and is listed on the New York Stock Exchange under the symbol CNT.
A predecessor of CenterPoint began operations in 1984 as Capital and Regional Properties Corporation. It was the sole United States investment vehicle for United Kingdom-based Capital and Regional Properties, plc, whose stock was publicly traded on the London Exchange in 1986. This has provided CenterPoint with the longest public market history of any industrial REIT. CenterPoint completed its initial U.S. public offering in December 1993 after consolidating its operations with, and acquiring the properties controlled by, FCLS Investors Group, a Chicago-based industrial development company with 30 years local experience.
In July, 1998, the Company consolidated its three regional offices into redeveloped warehouse space in suburban Oak Brook, Illinois, centrally located in the Chicago region. Intentionally, all of CenterPoint's assets are located within a two-hour drive of its headquarters. The Company believes that its geographic focus has enabled rapid and entrepreneurial response to market opportunities and has fostered constant interaction among tenants and management in furtherance of the Company's focus on customer satisfaction, which anchors CenterPoint's strategy.
BUSINESS OBJECTIVES AND GROWTH PLANS
The Company's fundamental business objective is to maximize total return to shareholders through increases in per share distributions and increases in the value of the Company's franchise. The Company's goal is to sustain strong growth in per share funds from operations ("FFO"), with accompanying growth in per share distributions and share value. To achieve this objective, the Company pursues complementary operating, investment, disposition and financial strategies:
- PORTFOLIO OPERATIONS. The Company seeks to grow its results from operations by increasing revenues through lease renewals or replacements at increased rental rates and by increasing occupancy where vacancies exist. The Company believes that above average rental growth is primarily achievable because the Company's focus on tenant service generates higher renewal and occupancy rates. Moreover, the Company's size, Chicago focus and market penetration provides superior access to favorable leasing transactions and investments offering below market rents and growth opportunities. The Company's portfolio on December 31, 1999 was 96% leased and occupied.
- INVESTMENT. The Company believes that per share growth is maximized through investment activity concentrating on properties offering immediate cash yields above its long term cost of capital, with the potential for rapid yield growth. The Company seeks to invest exclusively in warehouse/ industrial properties that satisfy its yield and growth objectives through the lease up of vacancy, property expansion, redevelopment, or the development or disposition of surplus land. The Company strictly limits speculative investment.
- DISPOSITIONS. Management strives to maximize the yield on invested capital by aggressively selling properties where growth has been achieved and where future prospects for growth are limited.
These are properties in which the Company has added all the value it is capable of producing. As an allied strategy, the Company undertakes the development of buildings for immediate sale to users or investors. These "merchant" transactions provide attractive fees and profits for reinvestment in the Company's "core" value added business.
- FINANCIAL. The Company maintains conservative financial and leverage policies to provide financial capacity and flexibility. This strategy facilitates opportunistic investment by helping assure substantial in place liquidity. The Company and its affiliates maintain lines of credit of $300 million. The Company's financial strategy also allows it to secure capital in the most favorable markets. CenterPoint benefits from investment grade ratings on its senior unsecured debt and preferred securities, providing substantial execution efficiency and a lower overall cost of capital.
- MANAGEMENT CONTROLS AND SYSTEMS. The Company's strategy also seeks growth by controlling expenses through the implementation of efficient information and governance systems. The Company has invested in state of the art systems, which it seeks to continually improve. The Company also believes that it enjoys operating efficiencies attributable to the scale of its operations and Chicago market focus, generating greater rates of cash flow growth and retention.
BUSINESS FOCUS
As CenterPoint continues to grow, its mission remains to become the industrial landlord of choice in the Greater Chicago region. CenterPoint endeavors to achieve this goal by cultivating and maintaining long-term relationships with its tenants. The Company, highly responsive to the changing needs of its tenants, is always prepared to meet any challenge, and is continually innovating processes and procedures to enhance mutual growth. CenterPoint seeks to provide high-quality, attractive space at competitive rates; unwavering attention to the care and maintenance of its properties; operating charges that reflect economic responsibility; and rapid response to expansion, relocation and other space requirements. In 1999, CenterPoint achieved a 91% tenant retention rate, confirming its commitment to tenant satisfaction, and in turn, increasing both cash flow and the value of the portfolio.
Underpinning the value of CenterPoint's portfolio is the strength of its internal resources. Key among these is management experience. CenterPoint's management staff averages 20 years of experience in the industry. Enabled by strong ties to the real estate development community, an in-depth knowledge of the market sector, and the ability to gauge and anticipate market trends, management can creatively and flexibly accommodate tenant requirements in a manner that is mutually beneficial.
In order to successfully execute its business strategies, CenterPoint adheres to the six following disciplines:
FOCUS ON INDUSTRIAL REAL ESTATE. The Company focuses on warehouse/industrial properties, because management believes this property type, for the following reasons, offers consistently attractive returns and stable cash flow:
- LOW CAPITAL REQUIREMENTS. The cost per square foot of developing warehouse/industrial properties typically ranges between $40-45 per square foot, which is lower than the cost of developing other types of property. From the Company's perspective, this results in less capital committed to any particular property, permitting greater diversification of the Company's risk. In addition, relative to other property types, fewer tenant improvements are required to renew or lease warehouse industrial space, minimizing the level of recurring capital expenditures necessary to sustain rental income.
- HIGH LEVEL OF TENANT INVESTMENT. Unlike office, retail and multi-family buildings, most warehouse/ industrial buildings are occupied by a single tenant. Relocation tends to be costly for tenants of warehouse/industrial properties because of high tenant investment in production set-up expenses,
machinery and other site specific improvements (in many cases higher than the landlord's investment). To avoid these costs, tenants typically lease space that exceeds their immediate needs or space in buildings that are readily expandable. Tenant retention and expansion therefore tend to be higher than for other property types.
- FAVORABLE LEASE TERMS. Warehouse/industrial buildings generally are leased on a "triple net" basis, under which tenants are contractually obligated to pay directly, or reimburse the landlord, for virtually all costs of occupancy, including property taxes, utilities, insurance and maintenance. In addition, the leases generally provide for rent growth through contractual rent increases or increases tied to certain indices such as the Consumer Price Index.
- SUPPLY BUILT ON DEMAND. The comparatively short development period for industrial buildings (typically six to nine months) relative to other property types has resulted in less speculative building and, therefore, a supply of industrial property that more closely corresponds to tenant demand. This has kept vacancy levels on average lower than for other property types and has produced greater rental rate stability.
- LIMITED COMPETITION. Higher overall investment returns are more achievable for warehouse/industrial property than other property types because such assets, typically $3 million to $6 million in purchase price, are too small to justify institutional attention. The Company's typical competitor for assets of this size is a sponsor of a single asset partnership that typically has a higher cost of capital and less financial flexibility than the Company.
FOCUS IN GREATER CHICAGO. CenterPoint's target market, Greater Chicago, is comprised of the region within a 150-mile radius of the City of Chicago, including Milwaukee, Wisconsin and South Bend, Indiana. It lies at the center of one of the nation's principal population and production regions.
With over 1.25 billion square-feet of industrial/warehouse space and 24 diverse submarkets (according to a ranking of markets published by CB Richard Ellis), Greater Chicago has become the largest and most diverse warehouse/industrial market. In addition to its size and geographic location, the Midwest possesses certain critical components such as transportation advantages, business diversity, favorable economic trends, and thriving real estate market conditions. These factors have supported the Company's continued strong leasing, acquisition, and development activity. As a result, Greater Chicago offers significant opportunities for investment in, and ownership of, warehouse/industrial property.
TRANSPORTATION ADVANTAGES. The Midwest's transportation network is integral to its status as a manufacturing and distribution center. The area has achieved its prominence as a result of its central continental location, as well as its extensive roadway, rail, air, and water transportation infrastructure. This infrastructure connects Greater Chicago with a contiguous 13-state region consisting of Illinois, Wisconsin, Michigan, Ohio, Pennsylvania, West Virginia, Tennessee, Kentucky, Indiana, Missouri, Iowa, Nebraska and Minnesota. The State of Illinois enacted a $12 billion infrastructure program in 1999, which will be used to focus on road and rail improvements in the metropolitan Chicago area.
Intermodal, which involves the movement of goods by two or more modes of transportation, is re-emerging as a very attractive distribution channel. A substantial share of the nation's rail freight passes through Chicago, making it a major hub for intermodal freight transportation. Nearly half of all intermodal rail shipments originate, terminate, or connect there. Currently, it is the fastest growing part of the rail industry, and most rail yards have already been converted to handle intermodal traffic.
O'Hare International Airport is one of the country's fastest growing air freight hubs. O'Hare will continue as a driving force in the industrial real estate market by spurring the expansion of airport-related industries in the region. With an average annual increase of 8% in air freight volume over the last 3 years, O'Hare handles approximately 4,600 tons of airfreight per day, along with the 70 million commercial passengers it serves annually.
Lastly, Chicago is also a major gateway for waterborne freight. The Port of Chicago estimates that it ships in excess of 25 million tons of freight annually.
- DIVERSITY OF BUSINESSES. The diversity of businesses in the Midwest provides the Company with the opportunity to capitalize on different trends affecting real estate demand and usage in a wide range of industries. An assorted tenant base also lessens the Company's cyclical risk, reducing its exposure to changes in the fortunes of any single type of business.
Manufacturers, for example, benefit from Chicago's well-developed freight and air transportation system and distribution network. Utility deregulation is also improving its competitiveness. Among the nation's metro areas, Chicago manufacturing base is second only to that of Los Angeles.
Chicago is also the largest financial center for commodities in the Midwest. The Chicago Board of Trade is the world's largest commodity exchange, and the Chicago Mercantile Exchange is the third largest. Financial services will continue to be one of Chicago's primary drivers.
The growth of high-tech industries also holds promise for the metro area. The concentration of high-tech employment ranks Chicago fourth in the nation. These encompass every aspect of digitally based products and services, including software, electronic commerce, computer hardware, telecom services, and web-based services.
The key to Chicago's long-term outlook lies in its transportation and distribution network, its strong export-oriented industries, as well as its status as the financial commodity trading and services center of the Midwest. The diversity of the Chicago economy is one of the most important assets of the metro area.
- FAVORABLE ECONOMIC TRENDS AND CHARACTERISTICS. As the nation's third most populous metro area with 7.8 million residents, Chicago has the largest employment base of any metro area in the nation, resulting in a diverse industrial structure. As in other large industrial metro areas, Chicago's diversity has been increasing due to its transformation from a manufacturing to a service-based economy. Chicago is the financial, distribution, and business center of the Midwest. The diversification has accelerated during the current expansion as growth has been driven by service industries.
Within the diverse service industry, business services have expanded strongly throughout the metro area due to the concentration of headquarters operations, as well as the growth of the computer software industry. Employment in business services has ballooned 80% during the current expansion and accounts for 27% of new jobs created (compared to 19% nationally).
In addition to corporate operations, rising tourism activity is also an indicator of the strength of Chicago's economy. Last year, 27.8 million tourists visited the city, generating $8.4 billion for the area.
- REAL ESTATE MARKET CONDITIONS/WAREHOUSE SUPPLY & DEMAND. Favorable trends in growth, business investment, utilization, and employment in the Midwest have resulted in increased space demand and increasing rents. Although the Company believes it is the largest owner and operator of warehouse/industrial property in Greater Chicago, its portfolio represented less than 2.4% of the market (based on square footage) as of December 31, 1999. In a 1.25 billion square-foot industrial market, this allows substantial opportunities for future growth.
Geographic concentration provides significant business efficiencies for the Company. As a primary owner of warehouse/industrial property located in most major Greater Chicago submarkets, the Company is able to market multiple locations and buildings, and consequently has a competitive advantage in securing leasing opportunities. Operating economies of scale resulting from geographic concentration enhances the Company's ability to offer lower occupancy costs to its tenants. The Company's focus on warehouse/industrial properties in Greater Chicago also enables the expansion of its portfolio without a corresponding increase in general and administrative expense.
According to CB Richard Ellis, during 1999 Chicago's industrial property market added 33.2 million square feet, the sixth consecutive year of 30.0 million square feet or greater gross absorption. In 1999, the overall nominal industrial vacancy rate in Chicago was 7.5 percent.
FOCUS ON TENANT SATISFACTION. To become the landlord of choice in the Greater Chicago Region, the Company strives to provide the highest possible service to its tenants by addressing its tenants' occupancy needs and meeting their evolving space requirements. Management believes tenant satisfaction, resulting from the Company's "hands on" management approach, fuels rental revenues by increasing tenant retention, minimizing re-letting expense and facilitating rental increases. Management also believes that tenant satisfaction creates profitable expansion and build-to-suit opportunities from existing tenants.
The Company views tenant service as a key factor in its business and has established tenant satisfaction as one of its primary corporate goals. To develop its tenant franchise, the Company provides a variety of tenant services: high quality, attractive space; promptly and fairly attending to tenant building or billing concerns; obtaining the lowest possible utility, insurance and real estate tax charges; and responding rapidly to expansion or space reconfiguration requests.
The Company's tenant service strategy benefits from the size and concentration of the Company's real estate holdings in Greater Chicago. As a large owner of warehouse/industrial properties in a single geographic market, the Company believes it can obtain for its tenants the benefits of bulk purchase of goods and services. Management believes that minimizing tenants' occupancy costs builds tenant loyalty and provides the Company with a significant marketing advantage. In 1998, the Company formed CenterPoint Capital Funding, LLC ("CenterPoint Capital") to offer its tenants funding for non-real estate requirements, principally equipment, related to the occupancy and use of the Company's properties. Funding originated by CenterPoint Capital is brokered in the marketplace or fully funded by non-recourse debt. The Company believes making available to its tenants and prospects a "turn-key" facility enhances tenant satisfaction and ultimately the strength of the Company's franchise.
To motivate employees to provide the highest level of tenant service, the Company has established a pay-for-performance compensation plan under which the incentive pay of each participating employee depends in part on the results of an annual tenant satisfaction survey, independently administered by CEL & Associates and the Company's independent trustees. Employee incentive pay is also dependent on the achievement of targeted per share funds from operations and the results of a company-wide audit pertaining to the implementation of internal processes and procedures, all of which the Company believes enhances tenant service.
FOCUS ON VALUE-ADDED INVESTMENTS. The Company seeks to acquire warehouse/industrial properties that have an initial cash yield greater than the Company's long term cost of capital (currently estimated to be 9.5% to 10.5%), that offer the best opportunity for cash flow growth, and that meet the Company's investment criteria. Management has established strategies for responding to every stage of the economic cycle, altering its investment emphasis through the recovery, strong economy, and recession phases. This ensures that when conditions change, the Company is well prepared to meet the needs of its clients with minimal reaction time. All investment activities are focused on creating value for its tenants by providing high quality and efficient facilities at attractive rental rates.
- RECOVERY . ACQUISITIONS. During a recovering economy, CenterPoint acquires existing leased generic industrial buildings that are suitable for a wide variety of tenant uses. Traditionally, the seller is a company that is growing rapidly and can better invest its capital in its own business rather than in owning bricks and mortar. CenterPoint takes on that responsibility and enhances the facility through professional management.
- STRONG ECONOMY . BUILD-TO-SUITS. During a strong economy, many tenants want to expand their space. As a result of the comfort level achieved through CenterPoint's long-term relationships with
their tenants, as well as constant communication, the Company can ascertain the specific requirements of the tenant's future home. It can then be designed and built in the right location, on time, and within budget.
- RECESSION . REDEVELOPMENTS. During a weaker economy, companies, on average, want to shrink capacity. Therefore, CenterPoint has developed a number of refinements within older, economically viable properties, completely rebuilding an existing facility within a tenant's time frame. By understanding their tenant's business needs, the Company can envision the potential of a building and match it to the market.
In September, 1998, the Company developed an Airport Investments and Development division to facilitate the expansion of its CenterPoint Airport Centers(TM), which consist of air cargo facilities and other area airport related investments. CenterPoint believes it is the pre-eminent private sector provider, owner, and manager of air freight and airport-related facilities in the Chicago region.
CenterPoint's land inventory consists of 521 acres in various submarkets throughout the Chicago Market upon which 11 million square feet could be developed. In addition, 1,800 acres of land at the former Joliet Arsenal is under contract. Currently, this project is undergoing extensive economic, environmental and property due diligence, including a determination of whether government agencies will provide the necessary infrastructure to support the industrial development of the property.
In addition to revenues from value-added investments, the Company earns fees from the development of assets for purchase by tenants and institutions. Typically, these transactions have yields below the Company's investment return hurdle, but offer substantial profit opportunities relative to the level of required capital and management time. The Company believes it is afforded these opportunities as a consequence of the size of its existing portfolio and its market penetration. The Company's fee development business has been, and is expected to continue to be, a recurring source of revenue.
FOCUS ON OPERATIONS. The Company is a full service real estate company with an entire staff responsible for managing its entire real estate portfolio. Six regions, each serving a particular segment of Greater Chicago, are operated by a team consisting of a regional manager, a property manager, administrative assistant, maintenance, and accounting support personnel who are required to visit each tenant, on site, at least once every 90 days.
The Company believes it derives its competitive advantage from its market penetration, local expertise, tenant relationships and quality reputation with the Greater Chicago area. Another competitive advantage is its "state of the art" information system that fully integrates corporate, property management and accounting systems, enabling the Company to monitor and project each asset and its financial performance. The Company believes this long-term platform is capable of supporting its operating and financial objectives as well as its continued strong growth.
FOCUS ON CONSERVING CAPITAL. The Company seeks to create and maintain substantial balance sheet capacity, which provides the Company flexibility to opportunistically tap favorably priced capital to support accretive investments. The Company believes it can maximize internal capital formation by (i) investing at yields above its long term cost of capital; (ii) pursuing current and future long-term debt financings and refinancings on an unsecured basis; and (iii) redeploying its capital through asset sales. The Company will seek, where possible, to sell properties in transactions intended to qualify as tax-free exchanges under applicable provisions of the Internal Revenue Code and re-deploy the proceeds of such sales in properties with higher yielding opportunities where the Company believes significant value can be added. Disposition activity is integral to the Company's funding strategy and gains on sale are a regular and recurring component of the Company's revenues. However, the rate of dispositions is correlated with market conditions and the timing of gains depends on the progress of individual disposition negotiations, which could lead to variability in the Company's results.
TRANSACTIONS DURING 1999
During 1999, the Company accomplished the following:
1999 ACQUISITIONS AND DISPOSITIONS. During 1999, the Company acquired or completed development of 64 warehouse/industrial properties totaling 5.1 million square feet and approximately $170 million in total investment in owned properties. Also in 1999, the Company disposed of nine warehouse/industrial properties totaling approximately 2.1 million square feet for approximately $56.0 million from the owned portfolio. Two of the properties purchased in 1999, totaling 0.3 million square feet, were also disposed of in 1999. In addition, during 1999 the Company demolished a building on a property, totaling 1.7 million square feet, for future development on the land.
In 1999, the Company acquired 375 acres and contracted to acquire an adjacent approximate 1800 acres on land at the former Joliet Arsenal for the proposed development of a high speed distribution park, anchored by a major intermodal rail facility. The park could include up to 17 million square feet of industrial space and ancillary commercial and hotel development. The transaction is contingent upon the successful conclusion of (i) transfer negotiations with the Department of the Army, which operated the site as a munitions manufacturing facility; (ii) an appropriate environmental remediation adequately protecting the Company from liability and regulatory action related to for pre-existing conditions; and (iii) sufficient public entitlements, including state and federal infrastructure grants and tax increment financing, to ensure the financial viability of the Company.
1999 SECURITIES ACTIVITIES:
- In January, February and August, 1999, 536,981, 784,305 and 76,802 of the Company's Class B common shares, respectively, were converted by the holder of the Class B common shares into 536,981, 784,305 and 76,802 common shares.
- In June, 1999, the Company completed a public offering of 1,000,000 shares of 7.50% Series B Convertible Cumulative Redeemable Preferred Shares at $50.00 per share. The shares have no maturity date, but may be redeemed by the Company for $50.00 per share after June 30, 2004. The shares are convertible into common shares at a conversion price of $43.50 per common share, equivalent to a conversion rate of 1.1494 to 1. The net proceeds of the offering, approximately $48.0 million, were used to refund outstanding balances under the Company's unsecured line of credit.
- During the first nine months of 1999, $8.1 million of the Company's 8.22% Convertible Subordinated Debentures were converted into 441,511 shares, which constituted all of the debentures outstanding.
1999 FINANCINGS:
- On March 15, 1999 the Company issued $100 million, 7.142% senior unsecured notes due March 15, 2004. The net proceeds of $99.3 million were used to repay substantially all amounts then outstanding under the Company's unsecured line of credit.
- On June 29, 1999, the Company refinanced the $20.5 million tax-exempt debt secured by Lake Shore Dunes Apartments with a 35 year assumable, HUD non-recourse tax-exempt and taxable debt for approximately the same amount with a fixed interest rate of 6.195%. This refinancing resulted in the write-off of $0.6 million in unamortized financing fees which are reflected as an extraordinary item in the consolidated statements of operations.
SUBSEQUENT TRANSACTION
On January 12, 2000 the Company issued $150 million in senior unsecured notes, due January 15, 2003 and bearing interest at 7.9%. The notes are lead by Lehman Brothers Holdings, with A.G. Edwards & Sons, Inc., Banc of America Securities LLC, Bank One Capital Markets, Inc., and First Union Securities acting as co-managers. The net proceeds of the issuance of approximately $149.1 million were used to pay down the Company's line of credit.
On January 21, 2000, the Company formed CenterPoint Venture LLC, a co-investment entity between the Company's taxable affiliate and CalEast, an investment vehicle between the California Public Employees Retirement System (CalPERS) and Jones Lang LaSalle (JLL:NYSE). The $200 million fund has been capitalized with equity commitments of $60 million by CalEast and $20 million by CenterPoint, supported by a $120 million credit facility led by Bank One. CenterPoint formed the venture to position, package and sell stabilized industrial property investment opportunities routinely passed over by the Company due to its more "value-added" investment focus. The venture intends to offer these fully leased "institutional quality" assets to more fixed income oriented investors, who lack the staff and/or day-to-day market penetration to efficiently invest in Midwest industrial property. Unlike typical REIT joint ventures, the partnership does not intend to hold assets for the long term.
EMPLOYEES
At February 24, 2000, the Company had 115 full-time employees. Of the full-time employees, 98 are involved with property management, operations, leasing and acquisition activities, nine are involved with general financial administration, financing activities, reporting and acquisition analysis, and eight are clerical workers.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, a current or previous owner, developer or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, under or in its property. The costs of removal or remediation of such substances can be substantial. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of such hazardous substances. The presence of such substances may adversely affect the owner's ability to sell such real estate or to borrow using such real estate as collateral. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of the properties owned or being acquired as of December 31, 1999, and the Company is not aware of any environmental condition with respect to any of its properties that is likely to have a material adverse effect on the Company. The Company has subjected each of its properties to a Phase I environmental assessment (which does not involve invasive procedures such as soil sampling or ground water analysis) by independent consultants. While some of these assessments have led to further investigation and sampling, none of the environmental assessments has revealed, nor is the Company aware of, any environmental liability (including asbestos-related liability) that the Company believes would have a material adverse effect on its business, financial condition or results of operations. No assurance can be given, however, that these assessments and investigations reveal all potential environmental liabilities, or that no prior owner or operator created any material environmental condition not known to the Company or the independent consultants or that future uses or conditions (including, without limitation, customer actions or changes in applicable environmental laws and regulations) will not result in unreimbursed costs relating to environmental liabilities.
COMPETITION
All of the Company's existing properties are, and all of the properties that it may acquire in the future are expected to be, located in areas that include numerous other warehouse/industrial properties, many of which may be deemed to be more suitable to a potential tenant than the Company's properties. The resulting competition could have a material adverse effect on the Company's ability to lease its properties and to increase the rentals charged on existing leases.
INVESTMENT IN AND ADVANCES TO AFFILIATE
The Company holds approximately 99% of the economic interest in CenterPoint Realty Services Corporation, an Illinois corporation ("CRS"). To maintain compliance with limitations on income from business activities received by REITs and their qualified REIT subsidiaries, the Company holds its interest in CRS in the form of non-voting equity ownership, which qualifies CRS as an unconsolidated taxable subsidiary.
As of December 31, 1999, the Company had advanced to CRS approximately $98.9 million under a demand loan with interest rates ranging from 8% to 11.1%. The proceeds of the loan were required for development projects. Principal and interest are due upon demand. For further financial information relating the CRS, see footnote 5 of the attached financial statements.
ITEM 2.
ITEM 2. PROPERTIES.
THE COMPANY'S WAREHOUSE/INDUSTRIAL PROPERTIES
At December 31, 1999, the Company's investment portfolio of warehouse/industrial properties consisted of 175 properties totaling approximately 25.7 million square feet, with a diverse base of more than 300 tenants engaged in a wide variety of businesses.
The Company's current properties are well located, with convenient access to area interstate highway, rail, and air transportation. All of the properties, both free standing and those located in CenterPoint Business Centers(TM), are typically designed for warehousing and distribution. The properties have an average project size of 112,535 square feet, and, on average, a tenant at an industrial property occupies 81,292 rentable square feet. Although a number of the industrial properties are single-tenant facilities, all are designed to be divisible and to be leased by multiple tenants.
The leases for the warehouse/industrial properties currently owned by the Company have terms between one and 15 years, with a weighted average original lease term, weighted on current rent, of approximately 4.2 years as of December 31, 1999. In addition, rent from no single tenant comprised more than 5% of the Company's total revenues as of December 31, 1999.
The Company's present warehousing and distribution properties, as well as warehousing and distribution properties under contract, are designed for bulk storage of materials and manufactured goods in buildings with interior heights typically of 22 feet or more. All of the warehousing and distribution properties have dock facilities for trucks as well as grade level loading for lighter vehicles and vans. Typically, the distribution buildings are used for storage and contain a minimal amount of office space.
CENTERPOINT PROPERTIES TRUST
PROPERTY SUMMARY
AS OF 12/31/1999
CENTERPOINT PROPERTIES TRUST
PROPERTY SUMMARY
AS OF 12/31/1999
CENTERPOINT PROPERTIES TRUST
PROPERTY SUMMARY
AS OF 12/31/1999
CENTERPOINT PROPERTIES TRUST
PROPERTY SUMMARY
AS OF 12/31/1999
- ------------------------------ (1) The first year is the year of original construction. The second date, where applicable, is the year of last redevelopment and/or expansion. (2) Determined by dividing annualized base rent revenue by GLA. (3) "GLA" means gross leasable area. (4) Determined as a percent of the total GLA for the warehouse/industrial properties. (5) ACQ refers to an existing leased property acquired by the Company, BTS refers to a build-to-suit property and RDV refers to a redevelopment property. (6) Properties purchased through a sale-leaseback to the previous owner have no operating history relevant to third party usage. (7) Properties purchased from an owner occupant have no prior operating history relevant to third party usage. (8) The seller of this property holds a note payable by the Company in the principal amount of $575,000 and secured by this property. (9) Average size equals total GLA divided by the number of warehouse/industrial properties.
LEASE EXPIRATIONS
The following table shows as of December 31, 1999 scheduled lease expirations for the Company's warehouse/industrial properties commencing January 1, 2000 and for the next ten years, assuming that no tenants exercise renewal options:
OPTIONS TO PURCHASE GRANTED TO CERTAIN TENANTS
The following warehouse/industrial properties of the Company are subject to purchase options granted to certain tenants as follows:
- 8901 102nd Street, Pleasant Prairie, Wisconsin is subject to an option to purchase exercisable on February 28, 2006 at a purchase price equal to 95% of "fair market value," determined by the average of three independent appraisals.
- 1700 West Hawthorne, West Chicago, Illinois is subject to a purchase option exercisable between December 1, 2002, and December 1, 2003 (with the closing to occur during December, 2004 regardless of when the option is exercised) at a price of $15,033,636. If the property is expanded, at tenant's option, the purchase price will be $15,233,636, plus the cost of construction.
- 2600 Elmhurst Road, Elk Grove Village, Illinois is subject to an option exercisable on or before July 31, 2000 to purchase the premises during January of 2001 for a purchase price of $5,265,000.
- 21399 Torrence Avenue, Sauk Village, Illinois is subject to an option exercisable on or between December 1, 1998 and May 31, 2000 and again between December 31, 2000 and May 31, 2002 to purchase the property on November 30, 2000 for $8,941,920 or November 30, 2002 for $9,314,500.
In each case, the option price exceeds the Company's current net book value for each such property. The Company believes that even if all of the purchase options are exercised, such exercise will not have an adverse effect upon the operations of the Company or its ability to maintain its distribution policy. In addition, if any purchase option is exercised, the Company intends to either distribute the cash proceeds to stockholders or reinvest the cash proceeds in additional properties. However, no assurance can be given that such distribution or reinvestment will occur.
In addition to purchase options, the Company has granted to tenants of certain properties a right of first refusal (in the event the Company has received an unsolicited offer from a third party to purchase the property which the Company desires to accept) or a right of first offer (in the event the Company has not received an unsolicited third party offer for the property but desires to entertain an offer). One Wildlife
Way, Long Grove, Illinois, 8901 102nd Street, Pleasant Prairie, Wisconsin, 825 Tollgate Road, Elgin, Illinois, 1651 Frontenac Road, Naperville, Illinois, 7001 Adams Street, Willowbrook, Illinois, 6312 W. 74th Street, Bedford Park, Illinois, 11440 W. Addison, Franklin Park, Illinois and 7633 S. Sayre, Bedford Park, Illinois. The properties subject to one or both of these rights include the existence of those rights will not compel the Company to sell a property for a price less than the price the Company desires to accept.
THE COMPANY'S OTHER PROPERTIES AND INVESTMENTS
In addition to its warehouse/industrial properties, the Company owns three retail properties having approximately 61,000 square feet of GLA, one office building having approximately 94,000 square feet of GLA in which the offices of the management company use approximately 48,000 square feet and the remaining portion is leased, one 682-unit apartment complex located at 440 North Lake Street, Miller, Indiana and known as Lakeshore Dunes Apartments, and two fully leased parking lots. The Company does not intend to acquire properties other than warehouse/industrial properties in the future. The Company believes, however, that these properties are favorable investments for the Company, adding to distributable cash flow per share. The Company also has investments in 3 uncompleted build-to-suit properties totaling approximately 0.7 million square feet, and has investments in 3 land parcels totaling 18.02 acres.
The following table sets forth certain information regarding the Company's retail properties:
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(1) First date is year of acquisition; second date is year of most recent redevelopment or expansion. If only one date appears, it is the acquisition date; the property has not been redeveloped or expanded.
(2) "GLA" means gross leasable area.
(3) Determined as a percent of the total GLA for the retail properties.
(4) Determined by dividing annualized base rent revenue by GLA.
The tenants of the Company's retail properties are typical of tenants in smaller retail centers in Greater Chicago. Generally, the leases require tenants to pay a fixed base, or "minimum" rent, subject to scheduled increases. Tenants generally are required to pay their proportionate share of common area maintenance charges, insurance expenses, operating expenses and real estate taxes or their portion of these expenses is included in their base rent.
The following table shows as of December 31, 1999 scheduled lease expirations for the retail properties commencing January 1, 2000, and for the next ten years, assuming no tenants exercise renewal options.
Lakeshore Dunes Apartments, which was completed in 1971 and renovated between 1991 and September, 1993 is comprised of 682 units in 15 contiguous buildings located on an approximately 20.12 acre site in Miller, Indiana, a suburb of Gary, Indiana, located on Lake Michigan. The property is bordered by the Indiana Dunes National Park and by the Calumet Lagoon and is less than one-half mile from public beaches. Amenities of the complex include redesigned units with updated kitchens and appliances, carpeting, lighting, windows and mini-blinds, bathrooms and fixtures, elevators, laundry rooms, play lots, tennis courts, picnic areas, a new outdoor pool, roads, parking areas, landscaping and a 24-hour safety patrol and card access system. The community center also serves as the management and leasing office. The Company maintains a complete management, leasing and maintenance team at the property.
As of December 31, 1999, 636 of the units, or 93%, were leased, providing for a monthly base rent of approximately $312,000 or an annualized base rent of $3,744,000. Current leases provide for customary one year terms and require that tenants pay a fixed rent based on the type of apartment and square footage. Tenants are responsible for utilities. The following table sets forth the apartment mix at this property as of December 31, 1999:
As of the end of 1999, the Company owned two parking lots within industrial parks. The first parking lot, purchased in 1996, is leased through January 2006 for an annual minimum rent of $26,400. The second parking lot, purchased in 1999, is leased through 2002 for a current annual minimum rent of $41,605.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not subject to or involved in, nor is the Company aware of, any pending or threatened litigation which could be material to the financial position or results of operations of the Company. For a description of remediation activities currently underway at certain of the Company's properties, see "Environmental Matters" under Item 1 above.
ITEM 4.
ITEM 4. SUBMISSION OF CERTAIN ITEMS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
(a) The Company's common shares are listed and traded on the New York Stock Exchange under the symbol "CNT." The following table sets forth, for the periods indicated, the high and low sale prices of the common shares and the cash distributions paid per common share in such periods.
(b) As of March 15, 2000, there were approximately 151 holders of record of the Company's common shares.
(c) During 1999, the Company paid dividends on the Class B shares in 1999 and 1998 of $1.46 per share and $1.80 per share, respectively. Also, all class B common shares were converted into common shares in 1999.
The following factors, among others, will affect the future availability of funds for distribution: (i) scheduled increases in base rents under existing leases, (ii) changes in minimum base rents attributable to replacement of existing leases with new or replacement leases and (iii) restrictions under certain covenants of the Company's unsecured credit facility co-led by Bank One and Lehman Brothers Holdings, Inc.
ITEM 6.
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth, on a historical basis, Selected Financial Data for the Company. The following table should be read in conjunction with the historical financial statements of the Company and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION," both included elsewhere in this Form 10-K.
The Selected Financial Data for the Company is not necessarily indicative of the actual financial position of the Company or results of operations at any future date or for a future period.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES SELECTED HISTORICAL FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA, RATIOS AND NUMBER OF PROPERTIES)
- ------------------------------
(1) Operating expenses include real estate taxes, repairs and maintenance, insurance and utilities and exclude interest, depreciation and amortization and general and administrative expenses.
(2) Other income (expense) includes gains and losses on property dispositions in 1997 and 1996, and other miscellaneous operating and non-operating items.
(3) The National Association of Real Estate Investment Trusts ("NAREIT") defines funds from operations as net income before extraordinary items plus depreciation and amortization less the amortization of deferred financing costs and gains on the sale of real estate. The Company includes in its calculation of FFO the gains (or losses) realized from its disposition activity, measured as the sale price, net of selling costs, less book value and adding back accumulated depreciation. The disposition of stabilized
properties, and the recycling of capital and profits to new "value added" investments, is fundamental to the Company's business focus and funding strategy.
Management of the Company believes that Funds from Operations is helpful to investors as a measure of the performance of equity REIT shares because, along with cash flows from operating activities, financing activities and investing activities, it provides investors an understanding of the ability of the Company to incur and service debt and to make capital expenditures. Funds from Operations does not represent cash flow from operations as defined by generally accepted accounting principles ("GAAP"), should not be considered by the reader as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity, and is not indicative of cash available to fund all cash flow needs. Investors are cautioned that Funds from Operations, as calculated by the Company, may not be comparable to similarly titled but differently calculated measurers for other REITs.
(4) Earnings before interest, income taxes, depreciation and amortization. Management believes that EBITDA is helpful to investors as an indication of property operations, because it excludes costs of financing and non-cash depreciation and amortization amounts. EBITDA does not represent cash flows from operations as defined by GAAP, should not be considered by the reader as an alternative to net income as an indicator of the Company's operating performance, and is not indicative of cash available to fund all cash flow needs. Investors are cautioned that EBITDA, as calculated by the Company, may not be comparable to similarly titled but differently calculated measurers for other REITs.
(5) The increase in number of properties reflects the acquisition of 16 properties throughout 1995. The increase in number of properties in 1996 reflects the acquisition of 15 properties and the disposition of eight properties throughout 1996. The increase in number of properties in 1997 reflects the acquisition of 21 properties, the completion of seven developments, and the disposition of three properties throughout 1997. The increase in number of properties in 1998 reflects the acquisition of 30 properties, the completion of two developments, and the disposition of six properties throughout 1998. The increase in number of properties in 1999 reflects the acquisition of 61 properties, the completion of three developments, and the disposition of nine properties throughout 1999. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL BACKGROUND
The following is a discussion of the historical operating results of the Company. This discussion should be read in conjunction with the Financial Statements and the information set forth under "SELECTED HISTORICAL FINANCIAL DATA."
The results of the Company reflect cumulative significant acquisitions, build-to-suit and redevelopment activities. Since 1989, the Company has grown its portfolio of owned properties from 6 properties, with approximately 1.9 million square feet, to 182 properties with approximately 26.3 million square feet as of December 31, 1999. This total excludes properties under development and mortgage investments. Including build-to-suit projects under development, the Company has a total of 185 property investments, excluding the 2 parking lots, representing approximately 27.0 million square feet.
The Company grew its total property investments by 2% in 1999, which includes build-to-suits in progress and mortgage investments. In addition, the Company grew its portfolio of owned properties during the year by concluding 61 warehouse/industrial property acquisitions and three warehouse/industrial developments, net of the disposition of nine warehouse/industrial properties. The Company's total increase in owned warehouse/industrial area, net of disposals, was 3.0 million square feet or 13.2%.
The Company's Consolidated Financial Statements for the years ended December 31, 1999, 1998 and 1997 reflect partial period results for acquisitions, dispositions and expansions made during each respective year. These statements also include the lease-up of previously vacant space, related to the properties owned by the Company as of January 1, 1999, 1998 and 1997, respectively. Certain executive officers of the Company had an interest in entities which were purchased by the Company (one property in 1998 and one property in 1997). These transactions satisfied the Company's investment criteria and were approved by the Company's independent trustees.
Finally, the historical results of the Company reflect the Company's significant property development and redevelopment activities in which substantial capital costs and related expenses were incurred in advance of receipt of rental income. At December 31, 1999, the Company and its subsidiaries had 934,012 square feet of developments under construction with an estimated total cost of $95.5 million that were 70% pre-leased. $43.0 million of these developments were funded by the Company and its subsidiaries as of December 31, 1999 and were not producing income. In addition, the Company and its subsidiaries owned 521 acres of land in inventory, as of December 31, 1999, for the future development of approximately 11.0 million square feet of warehouse/industrial facilities.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
Revenues
Total revenues increased by $31.7 million or 29.6% over the same period last year.
In the twelve months of 1999, 88.5% of total revenues of the Company were derived primarily from base rents, straight-line rents, expense reimbursements and mortgage income (operating and investment revenue), pursuant to the terms of tenant leases and mortgages for occupied space at the warehouse/ industrial properties.
Operating and investment revenues increased by $18.5 million in 1999. A portion of the increase from the prior year is due to income from 61 properties acquired in 1999 and three build-to-suit property coming on line totaling 5.1 million square feet, net of nine dispositions as of the end of the year. The remainder of the increase was attributable to a full period of income from the 1998 acquisition of 30
properties and two build-to-suit properties coming on line, totaling 4.0 million square feet, net of six property dispositions.
Other revenues increased $13.2 million due to increased fees earned and profits realized by the Company and the Company's unconsolidated affiliate in connection with increased volume and simultaneous closings of build-to-suit, development, and leasing activities.
Operating and Nonoperating Expenses
Real estate tax expense and property operating and leasing expense increased by $5.5 million from year to year. $3.5 million of the increase, resulted from a full period of real estate taxes on 1998 acquisitions and a partial period of real estate taxes on 1999 acquisitions, net of dispositions. The balance of the increase was due to increased leasing expenses, insurance, utilities, repairs and maintenance and property management costs, which increased proportionate to the level of acquisitions. However, property operating and leasing costs as a percentage of total revenues decreased from 12.6% to 11.1% when comparing 1998 to 1999 due to efficiencies realized by the Company, increased real estate fee income and equity in the affiliate.
General and administrative expenses increased by $0.2 million for the period due primarily to the growth of the Company. As a percentage of total revenues, general and administrative expenses decreased slightly from 3.8% to 3.1% when comparing years.
Depreciation and amortization increased by $5.9 million due to a full period of depreciation on 1998 acquisitions and depreciation on 1999 acquisitions.
Interest incurred increased by approximately $6.4 million over the same period last year due to the Company holding higher average balances outstanding and higher interest rates for variable rate debt in 1999 compared to 1998.
Other income (expenses) increased due to gains earned upon the disposition of nine properties in 1999. In 1998, the Company disposed of six properties with lower gains earned.
Net Income and Other Measures of Operations
Net income increased $16.5 million or 51.2% due to the growth of the Company through the net acquisition of warehouse/industrial real estate and merchant income.
Funds from operations ("FFO") increased 47.4% from $46.8 million to $69.0 million. The National Association of Real Estate Investment Trusts ("NAREIT") defines funds from operations as net income before extraordinary items plus depreciation and amortization less the amortization of deferred financing costs and gains on the sale of real estate. The Company includes in its calculation of FFO the gains (or losses) realized from its disposition activity, measured as the sale price, net of selling costs, less book value and adding back accumulated depreciation. The disposition of stabilized properties, and the recycling of capital and profits to new "value added" investments, is fundamental to the Company's business focus and funding strategy. In the Company's view, FFO is appropriately adjusted by results of this core, regular and recurring activity, although period to period variability is possible because of changing market conditions and the progress of individual disposition negotiations.
On a cash basis, when comparing the 1998 results of operations of properties owned January 1, 1998 with the results of operations of the same properties for 1999 (the "same store" portfolio), the Company recognized an increase of approximately 7.1% in net operating income. This same store increase was due to the timely lease up of vacant space, rental increases on renewed leases and contractual increases in minimum rent under leases in place.
The Company assesses its operating results, in part, by comparing the Net Revenue Margin between periods. Net Revenue Margin is calculated for the "in service" portfolio by dividing net revenue (total operating and investment revenue less real estate taxes and property operating and leasing expense) by
adjusted operating and investment revenue (operating and investment revenue less expense reimbursements, adjusted for leases containing expense stops). This margin indicates the percentage of revenue actually retained by the Company or, alternatively, the amount of property related expenses not recovered by tenant reimbursements. The margin for 1999 was 88.2% compared with 88.5% for 1998.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
Revenues
Total revenues increased by $21.6 million or 25.3% over the same period last year.
In the twelve months of 1998, 97.4% of total revenues of the Company were derived primarily from base rents, straight-line rents, expense reimbursements and mortgage income (operating and investment revenue), pursuant to the terms of tenant leases and mortgages for occupied space at the warehouse/ industrial properties.
Operating and investment revenues increased by $23.5 million in 1998. A portion of the increase from the prior year is due to income from thirty properties acquired in 1998 and two build-to-suit property coming on line totaling 4.0 million square feet, net of six dispositions as of the end of the year. The remainder of the increase was attributable to a full period of income from the 1997 acquisition of twenty-one properties, totaling 7.1 million square feet and seven build-to-suit properties totaling 1.6 million square feet coming on-line in 1997, net of three property dispositions.
Other revenues decreased $1.9 million due to decreased fees earned and profits realized by the Company and the Company's unconsolidated affiliate in connection with increased build-to-suit, development and leasing activities.
Operating and Nonoperating Expenses
Real estate tax expense and property operating and leasing expense increased by $6.5 million from year to year. The majority of the increase, $5.1 million, resulted from a full period of real estate taxes on 1997 acquisitions and a partial period of real estate taxes on 1998 acquisitions, net of dispositions. The balance of the increase was due to increased leasing expenses, insurance, utilities, repairs and maintenance and property management costs, which increased proportionate to the level of acquisitions. However, property operating and leasing costs as a percentage of total revenues decreased from 14.1% to 12.6% when comparing 1997 to 1998 due to efficiencies realized by the Company.
General and administrative expenses increased by $0.9 million for the period due primarily to the growth of the Company, but as a percentage of total revenues increased only slightly from 3.6% to 3.8% when comparing years.
Depreciation and amortization increased by $6.1 million due to a full period of depreciation on 1997 acquisitions and depreciation on 1998 acquisitions.
Interest incurred increased by approximately $3.6 million over the same period last year due to the Company holding higher average balances outstanding in the second quarter of 1998 compared to 1997.
Other income (expenses) increased due to gains earned upon the disposition of six properties in 1998. In 1997, the Company disposed of three properties with much lower gains earned.
Net Income and Other Measures of Operations
Net income increased $5.0 million or 18.3% due to the growth of the Company through the net acquisition of warehouse/industrial real estate and merchant income.
FFO increased 9.6% from $42.7 million to $46.8 million.
The Company recognized an increase of approximately 2.0% in net operating income on a same store basis. This was due to the timely lease up of vacant space, rental increases on renewed leases and contractual increases in minimum rent under leases in place.
The margin for 1998 was 88.7% compared with 88.1% for 1997.
LIQUIDITY AND CAPITAL RESOURCES
Operating and Investment Cash Flow
Cash flow generated from Company operations has historically been utilized for working capital purposes and distributions, while proceeds from stabilized asset dispositions, supplemented by unsecured financings and periodic capital raises, have been used to fund, on a long term basis, acquisitions and other capital costs. However, cash flow from operations during 1999 of $75.4 million net of $46.9 million of 1999 distributions provided $28.5 million of retained capital. The Company expects retained capital to fund a portion of future investment activities.
In 1999, the Company's investment activities included acquisitions of $150.2 million, advances for construction in progress of $50.4 million, advances on mortgage notes receivable of $4.3 million, advances to affiliate to fund construction activities of $68.2 million and improvements and additions to properties of $43.2 million. These activities were funded with dispositions of real estate of $52.2 million, a portion of the Company's advances on the company's line of credit on an interim basis and a portion of the Company's retained capital. The Company also repaid $47.5 million of mortgage notes payable with further advances on the Company's line of credit. These interim balances were substantially refinanced with the proceeds of debt and preferred stock offerings described below.
Equity and Share Activity
In June, 1999, the Company completed a public offering of 1,000,000 shares of 7.50% Series B Convertible Cumulative Redeemable Preferred Shares at $50.00 per share. The shares have no maturity date, but may be redeemed by the Company for $50.00 per share after June 30, 2004. The shares are convertible into common shares at a conversion price of $43.50 per common share, equivalent to a conversion rate of 1.1494 to 1. The net proceeds of the offering, approximately $48.0 million, were used to refund outstanding balances under the Company's unsecured line of credit.
In January, February, and August of 1999, the Company's class B common shares were converted into 536,981, 784,305 and 76,802 common shares, respectively. There were no class B common shares outstanding at the end of 1999.
During 1999, the Company paid distributions on common shares of $38.1 million or $1.90 per share and on class B common shares of $0.5 million or $1.46 per share. Also, the Company paid dividends on preferred shares, series A, of $6.4 million or $2.12 per share and paid dividends on convertible preferred shares, series B, of $2.0 million or $1.96 per share.
The following factors, among others, will affect the future availability of funds for distribution: (i) scheduled increases in base rents under existing leases, (ii) changes in minimum base rents attributable to replacement of existing leases with new or replacement leases and (iii) restrictions under certain covenants of the Company's unsecured credit facility co-led by Bank One and Lehman Brothers Holdings, Inc.
Debt Capacity
In November, 1998, the Company increased to $250 million its unsecured credit facility led by Bank One. As of March 15, 2000, the Company had outstanding borrowings of approximately $118,400 million under the unsecured revolving line of credit (approximately 8.2% of the Company's fully diluted total market capitalization), and the Company had remaining availability of approximately $131.6 million under
its unsecured line of credit. The Company's development affiliate, CenterPoint Realty Services, Inc. maintains a $50 million line co-led by LaSalle Bank and US Bank for funding of developments for purchase by the Company or by third parties. As of March 15, 2000, approximately $4.5 million was outstanding.
At December 31, 1999, the Company's debt constituted approximately 39.5% of its fully diluted total market capitalization. Also, the Company's EBITDA to debt service coverage ratio remained high at 5.1 to 1, and the Company's EBITDA to fixed charge coverage ratio decreased to 3.5 to 1 due to preferred dividends. The Company's fully diluted common equity market capitalization was approximately $751.1 million, and its fully diluted total market capitalization exceeded $1.4 billion. The Company's leverage ratios benefited during 1999 from the conversion of the remaining balance of approximately $8.1 million of its 8.22% Convertible Subordinated Debentures to 441,511 common shares.
In February, 1998, Duff & Phelps Credit Rating Co. joined Moody's Investors Service's January, 1997 evaluation by assigning investment grade rating to the Company's senior unsecured debt and preferred stock issuable under the Company's shelf registration statement and convertible subordinated notes. Also in 1997, Standard and Poors assigned an investment grade rating to the Company's senior unsecured debt. These investment grade ratings further enhance the Company's financial flexibility.
In January, 2000, the Company issued $150 million in senior unsecured notes due January 15, 2003 and bearing interest at 7.9%. The offering was lead by Lehman Brothers Holdings, with A.G. Edwards & Sons, Inc., Banc of America Securities LLC, Bank One Capital Markets, Inc., and First Union Securities acting as co-managers. The net proceeds of the issuance of approximately $149.1 million were used to pay down the Company's line of credit.
The Company has considered its short-term (one year or less) capital needs, in conjunction with its estimated future cash flow from operations and other expected sources. The Company believes that its ability to fund operating expenses, building improvements, debt service requirements and the minimum distribution required to maintain the Company's REIT qualification under the Internal Revenue Code, will be met by recurring operating and investment revenue and other real estate income.
Long-term (greater than one year) capital needs for property acquisitions, scheduled debt maturities, major redevelopment projects, expansions, and construction of build-to-suit properties will be supported, initially, by draws on the Company's unsecured line of credit, followed by the issuance of long-term unsecured indebtedness and the issuance of equity securities. Management expects that a significant portion of the Company's investment funds will be supplied by the proceeds of dispositions of stabilized assets, which is dependent on market conditions which presently remain favorable.
INFLATION
Inflation has not had a significant impact on the Company because of the relatively low inflation rates in the Company's markets of operation. Most of the Company's leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. In addition, many of the leases are for remaining terms less than five years which may enable the Company to replace existing leases with new leases at higher base rental rates if rents of existing leases are below the then-existing market rate.
YEAR 2000 COMPLIANCE
The year 2000 problem resulted from the use of a two digit year date in programs that operate computers and other devices with computer components instead of a four digit date. The programs with a year 2000 problem assumed "19" in front of every two digit date. For all dates beginning in the year 2000, this two digit year assumption could incorrectly process critical financial and operational information or
fail all together. If not addressed, the year 2000 problem was expected to affect almost all companies, governmental agencies and organizations.
In response to the year 2000 problem, the Company initiated a project in early 1997 to identify, evaluate and implement a new computerized real estate management system. The Company implemented a combination of modifications to existing programs and conversion to year 2000 compliant software. In addition, the Company discussed with its tenants, vendors, and other service providers the possibility of any interface difficulties relating to the Year 2000 problem that could have affected the Company.
As of the date of this report, the Company and those it conducts business with did make modifications or conversions in a timely manner, and the year 2000 problem had no material adverse effect on the Company's business, financial condition, and results of operations. The total cost associated with the required modifications was not material to the Company's consolidated results of operations, liquidity and financial position, and was expensed as incurred.
RECENT PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement, effective for financial statements for fiscal years beginning after June 15, 2000, provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. The Company has disclosed its only derivative position within the Debt footnote to the financial statements.
FORWARD LOOKING STATEMENTS
This Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company's actual results could differ materially from those set forth in the forward looking statements as a result of various factors, including, but not limited to, uncertainties affecting real estate businesses generally (such as entry into new leases, renewals of leases and dependence on tenants' business operations), risks relating to acquisition, construction and development activities, possible environmental liabilities, risks relating to leverage, debt service and obligations with respect to the payment of dividends (including availability of financing terms acceptable to the Company and sensitivity of the Company's operations to fluctuations in interest rates), the potential for the need to use borrowings to make distributions necessary for the Company to qualify as a REIT, dependence on the primary market in which the Company's properties are located, the existence of complex regulations relating to the Company's status as a REIT, environmental risk, our lack of control of the voting stock in our unconcolidated subsidiary (which is required for us to derive income from it without jeopardizing our REIT status) and the potential adverse impact of the market interest rates on the cost of borrowings by the Company and on the market price for the Company's securities.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with changes in interest rates as follows:
As of December 31, 1999 the Company's long term debt included tax exempt debt and borrowings under a line of credit totaling $276.7 million, all of which bear interest at variable rates that float with the market. A 25 basis point movement in the interest rates underlying these debt agreements would result in an approximate $1.9 million annualized increase or decrease in interest expense and cash flows. The remaining debt is fixed rate debt.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Statements on Page of this Annual Report on Form 10-K for the financial statements and financial statement schedules.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Item 10 is incorporated herein pursuant to General Instruction G to Form 10-K by referencing the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the fiscal year.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Item 11 is incorporated herein pursuant to General Instruction G to Form 10-K by referencing the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the fiscal year.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12 is incorporated herein pursuant to General Instruction G to Form 10-K by referencing the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the fiscal year.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Item 13 is incorporated herein pursuant to General Instruction G to Form 10-K by referencing the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the fiscal year.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. The consolidated financial statements indicated in Part II, Item 8 "Financial Statements and Supplementary Data." See Index to Financial Statements on Page of this Annual Report on Form 10-K.
2. The financial statement schedules indicated in Part II, Item 8 "Financial Statements and Supplementary Data." See Index to Financial Statements on Page of this Annual Report on Form 10-K.
3. The exhibits listed in part (c) of this Item 14.
(b) Reports on Form 8-K.
(c) Exhibits
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.
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
CENTERPOINT PROPERTIES TRUST
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of CenterPoint Properties Trust
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of CenterPoint Properties Trust and its subsidiaries (the "Company") at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois February 11, 2000
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
The accompanying notes are an integral part of these consolidated financial statements.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
The accompanying notes are an integral part of these consolidated financial statements.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
The accompanying notes are an integral part of these consolidated financial statements.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
1. ORGANIZATION
CenterPoint Properties Trust (the "Company"), a Maryland trust, and its subsidiaries, owns and operates primarily warehouse/industrial properties in the metropolitan Chicago area and operates as a real estate investment trust.
On October 15, 1997, the Company completed a reorganization pursuant to which it converted from a Maryland corporation to a Maryland real estate investment trust by means of a merger of CenterPoint Properties Corporation (the "Corporation") with and into the Company, which prior to the merger was a wholly-owned subsidiary of the Corporation, with the Company as the surviving entity. Pursuant to a Plan of Reorganization, which was approved by the stockholders of the Corporation at a Special Meeting of Stockholders held on October 1, 1997, each issued and outstanding share of common stock of the corporation, par value $.001 per share (the "Common Stock"), was converted into one common share of beneficial interest in the Company, par value $.001 per share (the "Common Shares"), each outstanding share of Class B common stock of the Corporation was converted into one Class B common share of beneficial interest (the "Class B Common Shares") in the Company; and the outstanding principal amount of the Corporation's 8.22% Convertible Subordinated Debentures due 2004 was assumed by the Company and converted into the same principal amount of 8.22% Convertible Subordinated Debentures due 2004 of the Company.
In June, 1997, the FASB issued SFAS Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement, effective for financial statements for fiscal years beginning after December 15, 1997, requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. Based on this criteria, the Company has determined that it operates in one business segment, that being the development, management and ownership of warehouse/ industrial property located in Greater Chicago. Thus, all information required by SFAS No. 131 is included in the Company's financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Minimum rents are recognized on a straight-line basis over the terms of the respective leases. Unbilled rents receivable represents the amount that straight-line rental revenue exceeds rents due under the lease agreements. Unbilled rents receivable, included in tenants accounts receivable, at December 31, 1999 and 1998 were $12,765 and $8,530, respectively. Recoveries from tenants for taxes, insurance and other property operating expenses are recognized in the period the applicable costs are incurred.
Real estate fee income includes revenues recognized for consulting services provided by the Company, participation interest, merchant related transactions and tenant lease termination fees of $2,584 in 1999, $1,770 in 1998 and $1,894 in 1997.
The Company provides an allowance for doubtful accounts against the portion of accounts receivable and notes receivable which is estimated to be uncollectible. Accounts receivable and prepaid expenses and other assets in the consolidated balance sheets are shown net of an allowance for doubtful accounts of $731 and $575 as of December 31, 1999 and 1998, respectively.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED EXPENSES
Deferred expenses consist principally of financing fees and leasing commissions. Leasing commissions are amortized on a straight-line basis over the terms of the respective lease agreements. Financing costs are amortized over the terms of the respective loan agreements. Deferred expenses relating to debenture conversions of $136 and $82 were charged to paid-in capital in 1999 and 1998, respectively, and fully amortized deferred expenses of $2,436 and $1,562 were written off in 1999 and 1998, respectively. In connection with property dispositions, the Company also wrote off deferred leasing and other costs of $350 and $94 in 1999 and 1998, respectively.
The balances are as follows:
PROPERTIES
Real estate assets are stated at cost. Interest and real estate taxes and other directly related costs incurred during construction periods are capitalized and amortized on the same basis as the related assets. Depreciation expense is computed using the straight-line method based upon the following estimated useful lives:
Construction allowances for tenant improvements are capitalized and amortized over the terms of each specific lease. Repairs and maintenance are charged to expense when incurred. Expenditures for improvements are capitalized. When assets are sold or retired, their cost and related accumulated depreciation are removed from the accounts. The resulting gains or losses from dispositions of properties are reflected in operations.
In accordance with the requirements of Statements of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company reviews the recoverability of the carrying value of its investments in real estate by estimating the fair value of its properties. Management performs this review both annually during the budgeting process and upon the occurrence of a triggering event; natural disaster, major rehabilitation project or significant vacancy period. If management determines that an impairment of property has occurred, the carrying value of such property will be reduced to its fair value.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, the Company considers all investments purchased with original maturities of three months or less to be cash equivalents.
INVESTMENT IN AND ADVANCES TO AFFILIATE
The Company accounts for its investment in affiliate using the equity method whereby its cost of the investment is adjusted for its share of equity in net income or loss from the date of acquisition and reduced by distributions received.
ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INCOME TAXES
The Company qualifies as a real estate investment trust ("REIT") under sections 856-860 of the Internal Revenue Code beginning January 1, 1994. In order to qualify as a REIT, the Company is required to distribute at least 95% of its taxable income to shareholders and to meet certain asset and income tests as well as certain other requirements. As a REIT, the Company will generally not be liable for Federal income taxes, provided it satisfies the necessary distribution requirements. The distributions declared and paid for the years ended December 31, 1999, 1998 and 1997 include a return of capital of approximately 21%, 9% and 12%, respectively.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS PER COMMON SHARE
Following are the reconciliations of the numerators and denominators for computing basic and diluted earnings per share ("EPS") data:
The assumed conversion of convertible preferred stock into common shares for purposes of computing diluted EPS by adding convertible preferred dividends to the numerator and adding assumed share conversions to the denominator for 1999 would be anti-dilutive. Also, the assumed conversion of the convertible subordinated debentures into common shares for purposes of computing diluted EPS by adding interest expense for the debentures to the numerators and adding assumed share conversions to the denominators for 1998 and 1997 would be anti-dilutive.
The Company's financial instruments include cash equivalents, tenant accounts receivable, mortgage and other notes receivable, accounts payable, other accrued expenses, notes payable, and mortgage loans payable. The fair value of the cash equivalents, tenant accounts receivable, accounts payable and other accrued expenses was not materially different from their carrying or contract valaues.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECLASSIFICATIONS
Certain items presented in the consolidated statements of operations for prior periods have been reclassified to conform with current classifications with no effect on results of operations.
ACCOUNTING PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement, effective for financial statements for fiscal years beginning after June 15, 2000, provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. The Company has disclosed its only derivative position within the Long Term Debt note.
3. PROPERTY ACQUISITIONS AND DISPOSITIONS
During each of the years ended December 31, 1999, 1998 and 1997, the Company acquired sixty-four, thirty and twenty-one properties, respectively, consisting principally of single-tenant buildings for an aggregate amount of approximately $153,903, $91,692 and $124,923, respectively. In 1999, ten and thirty-one of the properties were acquired as two portfolios, respectively, from unrelated third parties. Fifteen of the properties in 1998 were acquired as a portfolio from an unrelated third party. All of the remaining property acquisitions were purchased individually and include one acquisitions in 1998 and one acquisitions in 1997 which were acquired from related parties. The properties were funded with borrowings under the Company's lines of credit, proceeds from properties sold during 1999, 1998, and 1997, proceeds of public offerings of the Company's common shares completed in 1998 and 1997, and proceeds of public offerings of the Company's preferred shares completed in 1999 and 1997. The acquisitions have been accounted for utilizing the purchase method of accounting, and accordingly, the results of operations of the acquired properties are included in the consolidated statements of operations from the dates of acquisition.
The Company disposed of nine properties during 1999, six properties during 1998, and three properties during 1997.
Due to the effect of securities offerings in June, 1999, March, 1998, April, 1998, March, 1997, and November, 1997 and the 1997, 1998 and 1999 acquisitions and dispositions of properties, the historical results are not indicative of the future results of operations. The following unaudited pro forma information for the twelve months ended December 31, 1999 and 1998 is presented as if the 1998 and 1999 acquisitions and dispositions, the 1998 and 1999 securities offerings, and the corresponding repayment of certain debt had all occurred on January 1, 1998 (or the date the property first commenced operations with a third party tenant, if later). The 1997 unaudited proforma information is presented as if the 1998 and 1997 offerings, the corresponding repayment of certain debt, and the 1998 and 1997 acquisitions and dispositions had all occurred on January 1, 1997. The pro forma information is based upon historical information and does not purport to present what actual results would have been had the offerings and
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
3. PROPERTY ACQUISITIONS AND DISPOSITIONS (CONTINUED) related transactions, in fact, occurred at the beginning of 1998 or 1997, or to project results for any future period.
4. MORTGAGE NOTES RECEIVABLE
As of December 31, 1999, the Company had mortgage notes receivable outstanding of $6,270. The notes bear interest at rates ranging from 7.15% to 10.5% and mature at dates ranging from December, 2000 to December, 2010. As of December 31, 1998, the Company had a mortgage loan receivable outstanding of $901, bearing interest at a rate of 10.50% and maturing in June, 2010. Certain notes require payment of interest and principle monthly. As of December 31, 1999, the mortgage notes mature as follows:
Land and buildings have been pledged as collateral for the above notes receivable.
5. INVESTMENT IN AND ADVANCES TO AFFILIATE
The Company holds approximately 99% of the economic interest in CenterPoint Realty Services Corporation ("CRS"). To maintain compliance with limitations on income from business activities received by REITs and their qualified REIT subsidiaries, the Company holds its interest in CRS in the form of non-voting equity ownership, which qualifies as an unconsolidated taxable subsidiary.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
5. INVESTMENT IN AND ADVANCES TO AFFILIATE (CONTINUED) Since its inception in 1995, CRS has been engaged in the development, purchase and sale of warehouse/industrial real estate, and has provided third party consulting services in conjunction with other merchant activities.
Summarized financial information of CRS is shown below. Certain items in the CRS financial statements have been reclassified to conform with 1999 presentation with no effect on net income.
Balance Sheets:
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
5. INVESTMENT IN AND ADVANCES TO AFFILIATE (CONTINUED) Statement of Operations:
CRS owned nine warehouse/industrial properties, totaling 1.4 million square feet, as of December 31, 1999, which were fully occupied and placed in service. CRS also had three and six warehouse/industrial properties under construction as of December 31, 1999 and 1998, respectively, and owned ten and five land parcels for future developments as of December 31, 1999 and 1998, respectively.
As of December 31, 1999 and 1998, the Company had an outstanding balance due from CRS of $108,584 and $41,379, respectively, under a series of demand loans with interest rates ranging from 8.0% to 11.1%.The proceeds of the loans were required for development projects.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
6. LONG TERM DEBT
The long-term debt as of December 31, 1999 and 1998 consists of the following:
- ------------------------ (a) The note requires monthly payments of interest only.
(b) The note requires quarterly payments of interest only.
(c) Amount represents the monthly payment of principal and interest.
(d) In May, 1999, the Company repaid the outstanding amount upon maturity.
(e) As of December 31, 1998, these revenue bonds consist of two series ($1,680 taxable and $20,540 tax-exempt) of Economic Development Revenue Bonds issued in April, 1996 by the City of Gary, Indiana. $1,680 of the bonds are collateralized by a letter of credit which contains certain financial covenants pertaining to the tangible net worth and liabilities in relation to portfolio value of the Company. The bonds bear interest based on the Weekly Adjustable Interest Rate Mode at a rate determined by the Remarketing Agent (5.15% on the taxable bonds and 4.1% on the tax exempt bonds at December 31, 1998).
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
6. LONG TERM DEBT (CONTINUED) (f) The note requires semi-annual payments of interest only.
(g) These Variable/Fixed Rate Demand Special Facilities Airport Revenue Bonds issued by the City of Chicago, Illinois are enhanced by a letter of credit. The letter of credit contains certain financial covenants pertaining to consolidated net worth. The tax-exempt bonds bear initial interest at a Weekly Adjustable Interest Rate, which from time to time may be changed by the Company, at a rate determined by the Remarketing Agent (5.5% and 4.2% at December 31, 1999 and 1998, respectively). The bonds require monthly payments of interest only and mature in September, 2032. Of the original proceeds, the Company holds $16,852 and $30,447 in escrow at December 31, 1999 and 1998, respectively, for future construction costs.
(h) In November, 1998, the Company increased its unsecured line of credit facility, which originated in October, 1996, to $250 million. The interest rate at December 31, 1999 is 7.5% (LIBOR plus 1.0%) for LIBOR borrowings and Prime Rate (8.5%) for other borrowings. The interest rate at December 31, 1998 is 6.1125% (LIBOR plus 1.0%) for LIBOR borrowings and Prime Rate (7.75%) for other borrowings. The line requires payments of interest only when LIBOR contracts mature and monthly on borrowings under Prime Rate. There is a commitment fee of $500 per year. At December 31, 1999 and 1998, the Company had $28,300 and $172,400, respectively, available under the line.
(i) In June, 1999 the Company refinanced the Economic Development Revenue Bonds issued in April, 1996 by the City of Gary, Indiana described in note (e). The Company refinanced the debt with a 35 year assumable, HUD non-recourse mortgage debt.
As of December 31, 1999 mortgage notes, other debt, senior unsecured debt, tax exempt debt and line of credit mature as follows:
Based on borrowing rates available to the Company at the end of 1999 and 1998 for mortgage loans with similar terms and maturities, the fair value of the mortgage notes payable approximates the carrying values.
On September 10, 1998, the Company entered into an interest rate protection agreement to lock into a fixed interest rate on an anticipated refinancing of mortgage notes payable with a notional amount of $25,000. The agreement provided that the Company receive or pay an amount equal to the spread between a locked in treasury rate (4.835%) and the interest rate on treasury securities underlying the agreement as of March 31, 1999, the settlement date. The amount received at the settlement of the agreement, $617, is reflected as an adjustment to interest expense on the related refinancing over the term of the loan.
Land, buildings and equipment related to such mortgages with an aggregate net book value of approximately $123,960 at December 31, 1999 have been pledged as collateral for the above debt.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
7. EXTRAORDINARY ITEM
In 1999, the Company incurred a loss of $582 (per share--basic $0.03; diluted $0.03), representing a write off of unamortized deferred financing costs as a result of early extinguishment of certain debt obligations.
8. CONVERTIBLE SUBORDINATED DEBENTURES PAYABLE
Concurrent with the initial public offering in December, 1993, the Company issued $58,500 of convertible subordinated debentures ("Debentures") due 2004. At December 31, 1998, $8,058 of debentures were outstanding. There were no debentures outstanding as of December 31, 1999. The Company notified the bondholders of a complete debenture redemption and all outstanding debentures were converted to Common Shares as of September 24, 1999 at a conversion price of $18.25 per share, subject to certain adjustments. The Debentures were unsecured general obligations of the Company and subordinate to all existing and subsequently incurred indebtedness of the Company. The Debentures bore interest at 8.22% per annum, payable semiannually on January 15 and July 15 of each year, commencing July 15, 1994. During 1999, 1998 and 1997 debentures totaling $8,058, $3,682 and $2,640, respectively, were converted into shares of common stock. Based principally on the conversion feature and share price of common stock at the end of 1998, the fair value of the outstanding Debentures approximated $14,929.
9. RELATED PARTY TRANSACTIONS
In May, 1998, the Company purchased a fully leased building, located in Wood Dale, Illinois, from a partnership, in which one of the Company's Senior Officers and a Company Director were limited partners. The property was purchased for approximately $3.3 million. This transaction satisfied the Company's investment criteria and was approved by the Company's independent directors.
10. SHAREHOLDERS' EQUITY
COMMON SHARES OF BENEFICIAL INTEREST
As of December 31, 1999 the Company has reserved 1,902,955 Common Shares for future issuance under the 1993 Stock Option Plan, 119,596 Common Shares for future issuance under the 1995 Restricted Stock Incentive Plan, 62,351 Common Shares for future issuance under the 1995 Director Stock Plan and 1,000,000 Common Shares for future issuance under the dividend reinvestment and stock purchase plan.
CLASS B COMMON SHARES OF BENEFICIAL INTEREST
On September 22, 1995, the Company completed a $50 million private equity placement of non-voting preferred shares of beneficial interest. In May, 1996, the preferred shares of beneficial interest automatically converted, on a share for share basis, to non-voting Class B Common Shares, upon shareholder approval of an amendment to the Company's charter permitting non-voting Class B Common Shares at the Company's annual meeting. The distribution on the non-voting shares is equal to the distribution paid on the voting shares of the Company plus an additional $.0468 per share. In October, 1998, 874,639 non-voting Class B Shares converted to voting shares. In January, 1999, February, 1999, and August, 1999, 536,981, 784,305 and 76,802, respectively, of non-voting Class B Shares converted to voting shares. There were no Class B Shares outstanding after the August conversion. As the shares converted to voting common, the distribution paid was the same as all other voting common shares.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
10. SHAREHOLDERS' EQUITY (CONTINUED) SERIES A CUMULATIVE REDEEMABLE PREFERRED SHARES OF BENEFICIAL INTEREST
On November 10, 1997, the Company issued 3 million shares of 8.48% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest ("Series A Preferred Shares") at a purchase price of $25 per share. Dividends on the Preferred Shares are cumulative from the date of issuance and payable quarterly commencing on January 30, 1998. The payment of dividends and amounts upon liquidation will rank senior to the Common Shares and Series B Convertible Cumulative Redeemable Preferred Shares, which are the only other shares of the Company outstanding. The Preferred Shares are not redeemable prior to October 30, 2002. On or after October 30, 2002 the Preferred Shares will be redeemable for cash at the option of the Company, in whole or part, at the redemption price of $25 per share, plus dividends accrued and unpaid to the redemption date. The Preferred Shares are not convertible into or exchangeable for any other property or securities of the Company.
SERIES B CONVERTIBLE CUMULATIVE REDEEMABLE PREFERRED SHARES OF BENEFICIAL INTEREST
On June 23, 1999, the Company completed a public offering of 1,000,000 shares of 7.50% Series B Convertible Cumulative Redeemable Preferred Shares ("Series B Preferred Shares") at a purchase price of $50.00 per share. Dividends on the Series B Preferred Shares are cumulative from the date of issuance and payable quarterly commencing on September 30, 1999. The payment of dividends and amounts upon liquidation will follow the Series A Preferred Shares, but rank senior to the Common Shares. The shares have no maturity date, but may be redeemed by the Company for $50.00 per share after June 30, 2004. The shares are convertible into common shares at a conversion price of $43.50 per common share, equivalent to a conversion rate of 1.1494 to 1. The net proceeds of the offering, approximately $48.0 million, were used to refund outstanding balances under the Company's unsecured line of credit.
RESTRICTED STOCK INCENTIVE PLAN
Under the terms of the 1995 Restricted Stock Incentive Plan, adopted in 1995, the Company initially reserved 150,000 common shares for future grants. In 1997 certain key employees were granted 12,444 restricted shares. Shares were awarded in the name of each of the participants, who have all the rights of other common shareholders, subject to certain restrictions and forfeiture provisions. Restrictions on the shares expire no more than eight years after the date of award, or earlier if certain performance targets are met.
Unearned compensation is recorded at the date of awards based on the market value of shares. Unearned compensation, which is shown as a separate component of shareholders' equity, is being amortized to expense over the eight year vesting period. The amount amortized to expense during 1999, 1998 and 1997 was $49, $201, and $214, respectively.
DIRECTOR STOCK PLAN
The 1995 Director Stock Plan is for an aggregate of 75,000 common shares and provides that each independent director, upon election or re-election to the Board, may elect to receive 50% of his annual retainer fee in Common Shares at the market price on such date. In 1999, 1998, and 1997, 3,058, 2,304, and 1,921 Common Shares were issued under this plan, respectively. In connection with the issuance of such shares, $110, $80 and $57 was charged to expense in 1999, 1998 and 1997, respectively.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
10. SHAREHOLDERS' EQUITY (CONTINUED) SHAREHOLDER RIGHTS PLAN
In July, 1998, the Board of Trustees approved a shareholder protection plan (the "plan"), declaring a dividend of one right for each share of the Company's common shares outstanding on or after August 11, 1998. Exercisable 10 days after any person or group acquires 15 percent or more or commences a tender offer for 15 percent or more of the Company's common shares, each right entitles the holder to purchase from the Company one one-thousandth of a Junior Preferred Share of Beneficial Interest, Series A (a "Rights Preferred Share"), at a price of $120, subject to adjustment. The Rights Preferred Shares (1) are non-redeemable, (2) are entitled to a minimum preferential quarterly dividend payment equal to the greater of $25 per share or 1,000 times the Company's common share dividend, (3) have a minimum liquidation preference equal to the greater of $100 per share or 1,000 times the liquidation payment made per common share and (4) are entitled to vote with the common shares with each Rights Preferred Share having 1,000 votes. 50,000 of the Company's authorized preferred shares have been designated for the plan.
The plan was not adopted in response to any takeover attempt but was intended to provide the Board with sufficient time to consider any and all alternatives under such circumstances. Its provisions are designed to protect the Company's shareholders in the event of an unsolicited attempt to acquire the Company at a value that is not in the best interest of the Company's shareholders.
11. STOCK OPTION PLAN
The Company has adopted the 1993 Stock Option Plan (the "Plan"). In May, 1998, the Plan was amended to increase the maximum number of shares to 10% of the total number of common shares outstanding as of the most recent year end (2,179,923 as of December 31, 1999). The May, 1998, Plan amendment also provides that the maximum number of options granted under the plan be the total of 10% of the number of common shares outstanding on the last day of the preceding calendar year, commencing January 1, 1999, minus the number of options previously granted under the Plan before the end of the preceding calendar year plus the number of options which have expired. The Company adopted the Plan to provide additional incentives to attract and retain directors, officers and key employees. The Plan was amended in 1995 to provide that each independent director receive an option for 3,000 common shares of beneficial interest at fair market value at the time of being elected or re-elected to the Board. Options are to be granted by the Compensation Committee of the Board of Directors. The term of the option shall be fixed by the Compensation Committee, but no option shall be exercisable more than 10 years after the date of grant.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
11. STOCK OPTION PLAN (CONTINUED) The options granted are at fair market value on the date of grant, are for 10-year or 5-year terms and become exercisable in 20% or 33% annual increments, respectively, after one year from date of grant. Option activity for the three years ended December 31, 1999 is as follows:
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
11. STOCK OPTION PLAN (CONTINUED) The following table summarizes information about stock options at December 31, 1999:
The Company has applied Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its Plan, accordingly, no compensation costs have been recognized. Had compensation costs for the Company's Plan been determined based on the fair value at the grant date for options granted in 1999, 1998 and 1997 in accordance with the method required by Statement of Financial Accounting Standards No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts as follows:
12. FUTURE RENTAL REVENUES
Under existing noncancelable operating lease agreements as of December 31, 1999, tenants of the warehouse/industrial properties are committed to pay in aggregate the following minimum rentals:
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
12. FUTURE RENTAL REVENUES (CONTINUED) At December 31, 1999 and 1998, 636 and 621, respectively, of the total 682 apartments available for rental at the Lakeshore Dunes property were leased. Lease terms are generally for one year.
13. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
14. COMMITMENTS AND CONTINGENCIES
In the normal course of business, from time to time, the Company is involved in legal actions relating to the ownership and operations of its properties. In management's opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a materially adverse effect on the consolidated financial position, results of operations, or liquidity of the Company.
The Company has entered into several contracts for the acquisition of properties. Each acquisition is subject to satisfactory completion of due diligence and, in the case of developments, completion and occupancy of the project.
At December 31, 1999, four of the properties owned are subject to purchase options held by certain tenants. The purchase options are exercisable at various intervals through 2006 for amounts that are greater than the net book value of the assets. The tenant for a property at 655 Wheat Lane, Wood Dale, Illinois exercised its option and purchase the building in May, 1997.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
15. SUBSEQUENT TRANSACTIONS
On January 12, 2000 the Company issued $150 million in senior unsecured notes, due January 15, 2003 and bearing interest at 7.9%. The notes are lead by Lehman Brothers Holdings, with A.G. Edwards & Sons, Inc., Banc of America Securities LLC, Bank One Capital Markets, Inc., and First Union Securities acting as co-managers. The net proceeds of the issuance of approximately $149.1 million were used to pay down the Company's line of credit.
On January 21, 2000, the Company formed CenterPoint Venture LLC, a co-investment entity between the Company's taxable affiliate and CalEast, an investment vehicle between the California Public Employees Retirement System (CalPERS) and Jones Lang LaSalle (JLL:NYSE). The $200 million fund has been capitalized with equity commitments of $60 million by CalEast and $20 million by CenterPoint, supported by a $120 million credit facility led by Bank One. CenterPoint formed the venture to position, package and sell stabilized industrial property investment opportunities routinely passed over by the Company due to its more "value-added" investment focus. The venture intends to offer these fully leased "institutional quality" assets to more fixed income oriented investors, who lack the staff and/or day-to-day market penetration to efficiently invest in Midwest industrial property. Unlike typical REIT joint ventures, the partnership does not intend to hold assets for the long term.
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
16. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
The following table reflects the results of operations for the Company during the four quarters of 1999 and 1998(dollars in thousands, except unit and per share data).
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Trustees and Shareholders of CenterPoint Properties Trust
Our audits of the consolidated financial statements referred to in our report dated February 11, 2000 appearing in the 1999 Annual Report to Shareholders of CenterPoint Properties Trust and Subsidiaries (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 14(a)(2) of this Form 10-K). In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois February 11, 2000
SCHEDULE II
CENTERPOINT PROPERTIES TRUST
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
- ------------------------
NOTE: (a) Deductions represent write-off of accounts receivable against the allowance for doubtful accounts.
SCHEDULE III
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1999 (DOLLARS IN THOUSANDS)
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
SCHEDULE III (CONTINUED)
(DOLLARS IN THOUSANDS)
Notes to Schedule III:
(a) Initial cost for each respective property is the total acquisition costs associated with its purchase.
(b) Carrying costs consist of capitalized construction period interest, taxes and insurance.
(c) At December 31, 1999, the aggregate cost of land and buildings and equipment for Federal income tax purposes was approximately $978,572.
(d) Reconciliation of real estate and accumulated depreciation:
RECONCILIATION OF REAL ESTATE
RECONCILIATION OF ACCUMULATED DEPRECIATION AND AMORTIZATION
(e) See description of encumbrances in Note 6 to Consolidated Financial Statements.
(f) Depreciation is computed based upon the following estimated lives:
(g) These 20 properties collateralize $50,000 of mortgage bonds payable.