UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2001
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
----------------------
Commission file number 1-12630
CENTERPOINT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 36-3910279
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1808 Swift Road, Oak Brook, Illinois 60523-1501
(Address of principal executive offices)
(630) 586-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
----- -----
Number of Common Shares of Beneficial Interest outstanding as of May 14, 2001:
20,557,598.
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TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets 3
Consolidated Statements of Operation 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 15
Item 3. Qualitative and Quantitative Disclosures about Market Risk 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
(UNAUDITED)
ASSETS
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Assets:
Investment in real estate:
Land and leasehold $ 174,730 $ 163,056
Buildings 772,001 729,103
Building improvements 111,438 109,821
Furniture, fixtures, and equipment 23,925 23,607
Construction in progress 98,337 59,225
---------- ----------
1,180,431 1,084,812
Less accumulated depreciation and amortization (107,701) (98,956)
Real estate held for sale, net of depreciation 918 17,277
---------- ----------
Net investment in real estate 1,073,648 1,003,133
Cash and cash equivalents 1,204 1,060
Restricted cash and cash equivalents 17,468 27,429
Tenant accounts receivable, net 33,603 30,112
Mortgage notes receivable 9,061 3,927
Investment in and advances to affiliates 11,055 62,165
Prepaid expenses and other assets 10,039 8,136
Deferred expenses, net 17,007 19,273
---------- ----------
$1,173,085 $1,155,235
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable and other debt $ 62,190 $ 81,444
Senior unsecured debt 350,000 350,000
Tax-exempt debt 44,100 44,100
Line of credit 113,500 72,200
Preferred dividends payable 1,060 1,060
Accounts payable 8,008 15,348
Accrued expenses 44,620 48,963
Rents received in advance and security deposits 12,119 7,734
---------- ----------
635,597 620,849
---------- ----------
Commitments and contingencies
Shareholders' equity:
Series A preferred shares of beneficial interest, $.001 par value,
10,000,000 shares authorized; 3,000,000 issued and outstanding having a
liquidation preference of $25 per share ($75,000) 3 3
Series B convertible preferred shares of beneficial interest, $.001 par
value; 1,000,000 issued and outstanding having a liquidation preference of
$50 per share ($50,000) 1 1
Common shares of beneficial interest, $.001 par value, 47,727,273 shares
authorized; 22,543,495 and 22,283,930 issued and outstanding, respectively 22 22
Additional paid-in-capital 583,211 573,430
Retained earnings (deficit) (37,042) (36,769)
Unearned compensation - restricted shares (8,707) (2,301)
---------- ----------
Total shareholders' equity 537,488 534,386
---------- ----------
$1,173,085 $1,155,235
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
3
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
2001 2000
---------- ----------
Revenue:
Minimum rents $ 29,204 $ 26,924
Straight-line rents 1,296 1,288
Expense reimbursements 9,721 8,528
Mortgage interest income 120 67
Real estate fee income 482 1,496
Equity in net income of affiliates 150 85
---------- ----------
Total revenue 40,973 38,388
---------- ----------
Expenses:
Real estate taxes 8,335 8,226
Property operating and leasing 5,949 5,124
General and administrative 1,468 1,172
Depreciation and amortization 9,170 7,395
Interest expense:
Interest incurred, net 7,788 6,986
Amortization of deferred financing costs 601 515
---------- ----------
Total expenses 33,311 29,418
---------- ----------
Operating income 7,662 8,970
Other income (expenses)
Gain on sale of real estate 7,605 2,901
---------- ----------
Net Income before income taxes and extraordinary item 15,267 11,871
Provision for income taxes 380 -
---------- ----------
Net Income before extraordinary item 15,647 11,871
Extraordinary item, early extinguishment of debt (1,616) -
---------- ----------
Net income 14,031 11,871
Preferred dividends (2,523) (2,528)
---------- ----------
Net income available to common shareholders $ 11,508 $ 9,343
========== ==========
Per share income before extraordinary item available to common
shareholders:
Basic $ 0.59 $ 0.45
Diluted $ 0.57 $ 0.45
Per share net income available to common shareholders:
Basic $ 0.51 $ 0.45
Diluted $ 0.50 $ 0.45
Distributions per common share $ 0.5250 $ 0.5025
The accompanying notes are an integral part of
these consolidated financial statements.
4
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2001 2000
---------- ----------
Cash flows from operating activities:
Net income $ 14,031 $ 11,871
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary item, early extinguishments of debt 1,616
Bad debts 160
Depreciation 8,455 6,792
Amortization of deferred financing costs 601 515
Other amortization 715 603
Straight-line rents (1,296) (1,288)
Incentive stock awards 291 35
Equity in net (income) loss of affiliates (150) (85)
Gain on disposal of real estate (7,605) (2,901)
Net changes in:
Tenant accounts receivable (1,611) (3,289)
Prepaid expenses and other assets (504) (1,863)
Rents received in advance and security deposits 4,599 2,330
Accounts payable and accrued expenses (20,070) (5,188)
---------- ----------
Net cash provided by (used in) operating activities (768) 7,532
---------- ----------
Cash flows from investing activities:
Change in restricted cash and cash equivalents 8,735 13,903
Acquisition of real estate (19,503) (48,445)
Additions to construction in progress (18,089) (8,871)
Improvements and additions to properties (821) (10,404)
Disposition of real estate 6,917 1,425
Change in deposits on acquisitions 140 3,127
Repayment of mortgage notes receivable 55 44
Acquisition of CRS, net of cash 151
Investment in and advances to affiliates (2,072) (13,427)
Receivables from affiliates and employees 43 16
Additions to deferred expenses (428) (1,709)
---------- ----------
Net cash used in investing activities (24,872) (64,341)
---------- ----------
Cash flows from financing activities:
Proceeds from sale of common shares 3,084 547
Proceeds from issuance of unsecured notes payable 150,000
Proceeds from line of credit 54,500 77,700
Repayment of mortgage notes payable (163) (149)
Repayment of line of credit (17,333) (158,000)
Distributions (14,304) (12,904)
---------- ----------
Net cash provided by financing activities 25,784 57,194
---------- ----------
Net change in cash and cash equivalents 144 385
Cash and cash equivalents, beginning of period 1,060 3,505
---------- ----------
Cash and cash equivalents, end of period $ 1,204 $ 3,890
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
5
CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION:
These unaudited Consolidated Financial Statements of CenterPoint Properties
Trust, a Maryland real estate investment trust, and subsidiaries (the
"Company"), have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations and should be read in conjunction with
the December 31, 2000 Financial Statements and Notes thereto included in the
Company's annual report on Form 10-K. The following Notes to Consolidated
Financial Statements highlight significant changes from the Notes included in
the December 31, 2000 Audited Financial Statements included in the Company's
annual report on Form 10-K and present interim disclosures as required by the
SEC. The accompanying Consolidated Financial Statements reflect, in the opinion
of management, all normal recurring adjustments necessary for a fair
presentation of the interim financial statements.
The consolidated statements of operations and statements of cash flows for prior
periods have been reclassified to conform with current classifications with no
effect on results of operations or cash flows.
1. CONSOLIDATION OF CENTERPOINT REALTY SERVICES (CRS)
Effective January 1, 2001, the Company acquired 100% of the common stock of CRS
at book value. In connection with the acquisition, the CRS preferred stock owned
by the Company was cancelled. For the year ended December 31, 2001 and
thereafter, the operations of CRS will be fully consolidated with the Company.
During 2001, the Company has elected for CRS to be treated as a taxable REIT
subsidiary, as permitted by the Tax Relief Extension Act of 1999.
2. PREFERRED SHARES, COMMON SHARES OF BENEFICIAL INTEREST AND RELATED
TRANSACTIONS
Under the terms of the Company's 2000 Omnibus Employee Retention and Incentive
Plan (the Plan), adopted in 2000, employees were granted 147,400 restricted
shares of the Company on February 21, 2001. Shares were awarded in the name of
each of the participants, who have all rights of other common shareholders,
subject to certain restrictions and forfeiture provisions. Restrictions on the
shares expire no more than eight years after the date of award, or earlier if
certain performance targets are met. Unearned compensation was recorded at the
date of award based on the market value of the shares. The unearned compensation
is being amortized over the eight-year vesting period unless the restriction is
sooner lifted.
Under the terms of the Plan, options for 250,000 common shares were issued on
March 8, 2001. The options were granted at $45.90 per shares and are exercisable
per the plan.
3. ACQUISITION AND DISPOSITION OF REAL ESTATE
6
In the first three months of 2001, the Company purchased five properties from
unrelated third parties for an aggregate cost of approximately $22.5 million. In
addition, the Company disposed of two properties for an aggregate sales price of
approximately $22.3 million.
4. INVESTMENT IN AND ADVANCES TO AFFILIATES
As of January 1, 2001, the Company purchased all the remaining interest in CRS,
which has made the election to be treated as a taxable REIT subsidiary.
Since its inception in 1995, CRS and its subsidiaries have engaged in businesses
and services which compliment the Company's business, including the purchase and
sale of warehouse/industrial real estate, the provision of services and
commodities to tenants of the Company, the development of real property and the
management of properties owned by third parties. Income from these activities,
received by REITs and their qualified REIT subsidiaries, is limited under
current REIT tax regulations.
Summarized financial information of CRS for 2000 is shown below. Certain items
in the CRS financial statements have been reclassified to conform with 2001
presentation with no effect on net income.
Balance Sheet:
DECEMBER 31,
2000
--------------
(in thousands)
Assets:
Land $10,560
Buildings 26,497
Construction in progress 22,665
Real estate held for sale 918
Less accumulated depreciation (702)
-------
59,938
Other assets 2,705
Investment in CenterPoint Venture, LLC 8,832
Mortgage notes receivable 3,322
-------
$74,797
=======
Liabilities:
Note payable to affiliate - CenterPoint
Properties Trust $60,514
Construction line of credit 4,133
Participation interest due
CenterPoint Properties Trust 43
Other liabilities 8,559
-------
73,249
7
Stockholders' equity 1,548
-------
$74,797
=======
Statement of Operations:
THREE MONTHS
ENDED MARCH 31,
2000
--------------
(in thousands)
Income:
Property sales $ 8,741
Rental income 1,852
Equity in net (loss) of CenterPoint Venture, LLC (84)
Other income 280
-------
10,789
Operating expenses:
Cost of property sales 6,629
Participation interest 1,137
Other expenses 663
Depreciation and amortization 453
Interest 1,767
-------
10,649
Provision for income taxes 54
-------
Net income $ 86
=======
At March 31, 2001, CRS maintains a 25% investment in CenterPoint Venture, LLC
(the Venture). The Venture was formed on January 21, 2000 with CalEast
Industrial Investors LLC, an investment vehicle between the California Public
Employees Retirement System (CalPERS) and Jones Lang LaSalle.
CRS paid an additional $1.8 million in syndication fees relating to the Venture
and is amortizing this on a straight-line basis over the life of the Venture, 7
years. Amortization of syndication fees of $59 is included in equity in net
income (loss) of affiliates. Unamortized syndication fees of $1,500 are included
in investments in affiliates.
Summarized financial information for the CenterPoint Venture, LLC is shown
below.
Balance Sheet
MARCH 31,
2001
-----------
Assets
Net investment in real estate $ 108,649
Other assets 9,175
-----------
Total assets $ 117,824
===========
8
Liabilities
Secured lines of credit 75,980
Other liabilities 5,606
-----------
Total liabilities 81,586
Members' equity 36,238
-----------
Total liabilities and members' equity $ 117,824
===========
Statement of Operations
THREE MONTHS
ENDED MARCH 31,
2001
--------------
Operating expenses
Property, operating and leasing 998
Depreciation and amortization 672
Interest 1,149
-----------
Total operating expenses 2,819
Operating income 242
Gain (loss) on disposal of assets 550
-----------
Net income (loss) $ 792
===========
CenterPoint Venture, LLC owned 12 warehouse/industrial properties, totaling 2.6
million square feet (unaudited), as of March 31, 2001, which were 93% leased
(unaudited). CenterPoint Venture, LLC also had two and one warehouse/industrial
properties under construction as of March 31, 2001 and December 31, 2000.
5. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Supplemental disclosures of cash flow information for the three months ended
March 31, 2001 and 2000:
2001 2000
----------- -----------
Interest paid, net of interest capitalized $ 10,561 $ 8,896
Interest capitalized 1,622 498
9
In conjunction with the acquisition of real estate, for the three months ended
March 31, 2001 and 2000 the Company acquired the following asset and assumed the
following liability amounts:
2001 2000
---------- ---------
Purchase of real estate $ (22,454) $ (55,048)
Mortgage notes payable 2,241 5,049
Liabilities, net of other assets 710 1,554
---------- ---------
Acquisition of real estate $ (19,503) $ (48,445)
========== ==========
In conjunction with the disposition of real estate, the Company disposed of the
following asset and liability amounts for the three months ended March 31, 2001
and 2000:
2001 2000
---------- ---------
Disposal of real estate $ 22,257 $ 5,777
Mortgage notes receivable (23,200) (7,200)
Liabilities, net of other assets 255 (53)
Gain on sale of properties 7,605 2,901
---------- ---------
Disposition of real estate $ 6,917 $ 1,425
========== =========
In conjunction with the acquisition of the remaining interest in CRS, the
Company acquired the following assets and assumed the following liabilities on
January 1, 2001.
Investment in real estate $ (60,639)
Accumulated Depreciation 702
Mortgage notes receivable (3,322)
Investment in CenterPoint Venture, LLC (8,832)
Line of credit 4,133
Mortgage debt 60,630
Investment in affiliate 1,533
Liabilities, net of other assets 5,946
---------
Acquisition of CRS, net of cash $ 151
=========
Certain items, including the investment in affiliate and mortgage debt are
eliminated upon consolidation in the Company's financial statements.
6. MORTGAGE NOTES PAYABLE AND OTHER DEBT
On January 24, 2001, the Company's residential property, Lake Shore Dunes
apartments, was sold and the $21.3 million mortgage note payable that was
secured by the property was assumed by the new owner.
7. INCOME TAXES
The components of income tax expense (benefit) for the period ended March 31,
2001 are as follows:
10
THREE MONTHS ENDED
MARCH 31, 2001
------------------
Current:
Federal $ 42
State 10
Deferred:
Federal 266
State 62
-----
$ 380
=====
The actual tax expense differs from the statutory income tax expense for the
period ended March 31, 2001 as follows:
THREE MONTHS ENDED
MARCH 31, 2001
------------------
Tax benefit at federal rate $ 309
State tax benefit, net of federal
benefit 71
-----
$ 380
=====
In 2001, CRS, the Company's taxable subsidiary, generated a net operating loss
("NOL") of $132 for income tax purposes. This NOL is expected to be utilized in
future periods.
8. COMMITMENTS AND CONTINGENCIES
In the normal course of business, from time to time, the Company is involved in
legal actions relating to the ownership and operations of its properties. In
management's opinion, the liabilities, if any, that may ultimately result from
such legal actions are not expected to have a materially adverse effect on the
consolidated financial position, results of operations and liquidity of the
Company.
The Company has entered into other contracts for the acquisition and disposition
of properties. Each acquisition transaction is subject to satisfactory
completion of due diligence and, in the case of development projects, completion
and occupancy of the projects.
At March 31, 2001, three of the properties owned by the Company were subject to
purchase options held by certain tenants. The purchase options were exercisable
at various intervals through 2006 for amounts that are greater than the net book
value of the assets.
9. EARNINGS PER COMMON SHARE
The following are the reconciliations of the numerators and denominators of the
basic and diluted earnings per share for the three months ended March 31, 2001
and 2000.
THREE MONTHS ENDED MARCH 31,
------------------------------
2001 2000
----------- -----------
11
(in thousands, except for share data)
Numerators:
Income before extraordinary item $ 15,647 $ 11,871
Dividends on preferred shares (2,523) (2,528)
----------- -----------
Income available to common shareholders before
extraordinary items - for basic and diluted EPS $ 13,124 $ 9,343
=========== ===========
Net income available to common shareholders - for
basic and diluted EPS $ 11,508 $ 9,343
=========== ===========
Denominators:
Weighted average common shares outstanding - for
basic EPS 22,393,915 20,685,376
Effect of share options 617,086 297,221
------------ -----------
Weighted average common shares outstanding - for
diluted EPS 23,011,001 20,982,597
============ ==========
The assumed conversion of the convertible preferred shares into common shares
for purposes of computing diluted earnings per share by adding preferred
distributions to the numerators, and adding the assumed share conversions to the
denominators for the three months ended March 31, 2001 and 2000 would be
anti-dilutive.
10. PRO FORMA FINANCIAL INFORMATION
Due to the effect of securities offering in November, 2000 and 2001 and 2000
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 three months ended March 31, 2001 and 2000 is
presented as if the 2000 and 2001 acquisitions and dispositions, the 2000
securities offering, and the corresponding repayment of certain debt had all
occurred on January 1, 2000 (or the date the property first commenced operations
with a third party tenant, if later). The pro forma information is based upon
historical information and does not purport to present what actual results would
have been had the offerings and related transactions, in fact, occurred at
January 1, 2000, or to project results for any future period.
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2001 2000
----------- ----------
(in thousands, except for share and per share data)
Total revenues $ 40,927 $ 35,076
Total expenses 25,642 22,001
----------- ----------
Net income 15,285 13,075
Provision for income tax 380
Preferred dividends (2,523) (2,528)
----------- ----------
Income before extraordinary items available
to common shareholders $ 13,142 $ 10,547
=========== ==========
12
Per share income before extraordinary item available to common shareholders:
Basic $ 0.59 $ 0.48
Diluted $ 0.57 $ 0.47
Weighted average common shares
outstanding - basic 22,393,915 22,185,376
Weighted average common shares
outstanding - diluted 23,011,001 22,482,597
11. RECENT PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement, effective for
financial statements for fiscal years beginning after June 15, 2000, provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The Company has no derivative positions as
of March 31, 2001
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"),
Revenue Recognition, which outlines basic criteria that must be met to recognize
revenue and provides guidance for presentation of revenue and for disclosure
related to revenue recognition policies in financial statements filed with the
SEC. The Company adopted SAB 101 in the fourth quarter of 2000 with no impact on
the Company.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, "Accounting
for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principles Board Opinion No. 25. This
interpretation clarifies:
o the definition of employee for purposes of applying Opinion 25, which
deals with stock compensation issues;
o the criteria for determining whether a plan qualifies as a
noncompensatory plan;
o the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and
o the accounting for an exchange of stock compensation awards in a
business combination.
o this interpretation is effective July 1, 2000, but certain conclusions
in this interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this
interpretation covers events occurring during the period after December
15, 1998, or January 12, 2000, but before the effective date of July 1,
2000, the effects of applying this interpretation are recognized on a
prospective basis from July 1, 2000. The adoption of FIN 44 had no
impact on the Company.
13
The Tax Relief Extension Act of 1999, or the REIT Modernization Act, which took
effect on January 1, 2001, modifies certain provisions of the Internal Revenue
Code of 1986, as amended, with respect to the taxation of REITs. Two key
provisions of this tax law change will impact future Company operations: the
availability of a taxable REIT subsidiary which may be wholly-owned directly by
a REIT and a reduction in the required level of distribution by a REIT to 90% of
ordinary taxable income. The Company acquired 100% of the common stock of CRS
and canceled its preferred stock on January 1, 2001.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The following is a discussion of the historical operating results of the
Company. The discussion should be read in conjunction with the Company's Form
10-K filed for the fiscal year ended December 31, 2000 and the unaudited
financial statements presented with this Form 10-Q.
CONSOLIDATION OF CENTERPOINT REALTY SERVICES (CRS)
Effective January 1, 2001, the Company acquired 100% of the common stock of CRS
at book value. In connection with the acquisition, the CRS preferred stock owned
by the Company was cancelled. For the year ended December 31, 2001 and
thereafter, the operations of CRS will be fully consolidated with the Company.
In January 2001, the Company elected for CRS to be treated as a taxable REIT
subsidiary, as permitted by the Tax Relief Extension Act of 1999.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2001 TO THREE MONTHS ENDED MARCH 31,
2000.
REVENUES
Total revenues increased by $2.6 million or 6.7% over the same period last year.
In the first quarter of 2001, 98.5% 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 held for space at the warehouse/industrial
properties.
Operating and investment revenues, which includes minimum rents, straight-line
rents, expense reimbursements and mortgage interest income, increased by $3.5
million in the first quarter of 2001. A portion of the increase from the prior
year is due to income from five acquired properties in the first three months of
2001, totaling 0.8 million square feet, net of two Company-owned property
dispositions as of March 31, 2001. The remainder of the increase was
attributable to a full period of income from the 2000 acquisitions and
completion of development of 22 properties, totaling 4.0 million square feet,
net of 37 property dispositions.
Other revenues, consisting of real estate fee income and equity in net income of
affiliates, decreased $0.9 million partly due to the consolidation of CRS.
OPERATING AND NONOPERATING EXPENSES
Real estate tax expense and property operating and leasing expense increased by
$0.9 million from period to period. The majority of the increase, $0.8 million,
resulted from increased common area snow removal and utilities on properties,
due to large snow falls and increased utility costs. Also, a portion of the
increase was due to full consolidation of CRS costs. When
15
comparing the first quarter of 2001 to the first quarter of 2000, property
operating and leasing costs as a percentage of total revenues increased from
13.3% to 14.5% due to increases described above and the growth of the Company's
operating team and operating activity on 2001 and 2000 acquisitions and
developments.
General and administrative expenses increased when comparing periods. As a
percentage of total revenues, general and administrative expenses increased from
3.1% to 3.6% when comparing the first quarter of 2000 to the first quarter of
2001 due mainly to the full consolidation of CRS costs.
Depreciation and amortization increased by $1.8 million due to a full period of
depreciation on 2000 acquisitions and partial period depreciation on 2001
acquisitions.
Interest incurred increased by approximately $0.8 million over the same period
last year due to higher average balances outstanding in the first quarter of
2001 compared to 2000.
Gains on the sale of real estate increased in the first quarter of 2001 due to
the sale of two properties at a higher margin than the two sold in the first
quarter of 2000. Also, the Company recognized $3.9 million of gain upon the
elimination of remaining risks relating to a property sale in 2000.
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS AND OTHER MEASURES OF OPERATIONS
Net income available to common shareholders increased $2.2 million or 23.2% due
to an increase in gains that resulted from capital recycling activities.
Funds from operations (FFO) increased 21.5% from $17.2 million to $20.9 million
when comparing the first quarter of 2000 to the first quarter of 2001. The
National Association of Real Estate Investment Trusts ("NAREIT") defines funds
from operations as net income before extraordinary items plus depreciation and
non-financing amortization, less gains (losses) on the sale of real estate.
CenterPoint calculates FFO as net income to common shareholders, plus real
estate depreciation and non-financing amortization, inclusive of results from
merchant activities of the Company and its unconsolidated joint ventures, which
includes fee income, and cash gains and losses on disposition of stabilized
Company assets (measured as the sale price, net of selling costs, less book
value after adding back accumulated depreciation). The Company believes that FFO
inclusive of cash gains better reflects recurring funds because the disposition
of stabilized properties, and the recycling of capital and profits to new "value
added" investments, is fundamental to the Company's business strategy. FFO does
not represent cash flow from operations as defined by generally accepted
accounting principles ("GAAP"), should not be considered by the reader as an
alternative to net income as an indicator of the Company's operating performance
or to cash flows as a measure of liquidity, and is not indicative of cash
available to fund all cash flow needs.
When comparing the first quarter results of operations of properties owned at
January 1, 2000 with the results of operations of the same properties for the
first quarter 2001 (the "same store" portfolio), the Company recognized an
increase of approximately 1.4% in net operating income
16
adjusted for certain non-cash transactions. This same store increase was due to
the timely lease up of vacant space, rental increases on renewed leases and
contractual increases in minimum rent under leases in place.
The Company assesses its operating results, in part, by comparing the Net
Revenue Margin between periods. Net Revenue Margin is calculated for the "in
service" portfolio by dividing net revenue (total operating and investment
revenue less real estate taxes and property operating and leasing expense) by
adjusted operating and investment revenue (operating and investment revenue less
expense reimbursements, adjusted for leases containing expense stops). This
margin indicates the percentage of revenue actually retained by the Company or,
alternatively, the amount of property related expenses not recovered by tenant
reimbursements. The margin for the first quarter of 2001 was 87.4% compared with
86.1% for the same period last year, increasing due mainly to transitional
vacancy in the prior year.
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. In the first three months of 2001, cash flow from operations provided
negative cash flow, which was largely caused by the ($20.1 million) net change
in accounts payable and accrued expenses. This large change was caused by the
payment of interest expense accrued at year end on senior debt issuances, year
2000 bonus payments in early 2001, and a cash overdraft at the end of 2000,
which was classified as accounts payable at December 31, 2000. Although these
unusual items did not provide enough working capital to fund first quarter 2001
distributions, the Company's ongoing cash flow should be sufficient to fund all
distributions and a portion of future investment activities.
For the first three months of 2001, the Company's investment activities include
acquisitions of $19.5 million, advances for construction in progress of $18.1
million, and improvements and additions to properties of $0.8 million. These
activities were funded with dispositions of real estate of $6.9 million,
advances on the company's line of credit and a portion of the Company's retained
capital. Advances on the Company's line of credit also funded advances to
affiliate of $2.1 million for acquisitions and construction in progress at the
subsidiary level.
EQUITY AND SHARE ACTIVITY
During the first three months of 2001, the Company paid distributions on common
shares of $11.8 million or $0.5250 per share. Also, in 2001, the Company paid
dividends on Series A Preferred Shares of $1.6 million or $0.53 per share and
$0.9 million for dividends on Series B Convertible Preferred Shares or $0.9375
per share. The following factors, among others, will affect the future
availability of funds for distribution: (i) scheduled increases in base rents
under existing leases, (ii) changes in minimum base rents attributable to
replacement of existing leases with new or replacement leases and (iii)
restrictions under certain covenants of the Company's unsecured line of credit.
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DEBT CAPACITY
The Company has a $350 million unsecured credit facility led by Bank One. As of
May 11, 2001, the Company had outstanding borrowings of approximately $144.5
million under the Company's unsecured line of credit (approximately 8.2% of the
Company's fully diluted total market capitalization), and the Company had
remaining availability of approximately $205.5 million under its unsecured line
of credit. The Company also has available a $50 million secured credit facility,
led by LaSalle national Bank with $0 outstanding as of May 11, 2001
At March 31, 2001, the Company's debt constituted approximately 32.6% of its
fully diluted total market capitalization. Also, the Company's debt service
coverage ratio remained high at 4.2 to 1, and the Company's fixed charge
coverage ratio was 3.2 to 1 due to preferred dividends. The Company's fully
diluted common equity market capitalization was approximately $1.1 billion, and
its fully diluted total market capitalization was approximately $1.7 billion.
Standard and Poors, Duff & Phelps Credit Rating Co. and Moody's Investors
Service's have assigned investment grade ratings to the Company's senior
unsecured debt and preferred stock issuable under the Company's shelf
registration statement.
The Company has considered it's short-term (one year or less) capital needs, in
conjunction with its estimated future cash flow from operations and other
expected sources. The Company believes that it is able to fund operating
expenses, building improvements, debt service requirements and the minimum
distribution required to maintain the Company's REIT qualification under the
Internal Revenue Code.
Long-term (greater than one year) capital needs for property acquisitions,
scheduled debt maturities, major redevelopment projects, expansions, and
construction of build-to-suit properties will be supported, initially, by draws
on the Company's unsecured line of credit, followed by the issuance of long-term
unsecured indebtedness and the issuance of equity securities. Management expects
that a significant portion of the Company's investment funds will be supplied by
the proceeds of property and investment dispositions.
RECENT PRONOUNCEMENTS
In June 1998, the FASB issued SFAS Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement, effective for financial
statements for fiscal years beginning after June 15, 2000, provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The Company has no derivative positions as
of March 31, 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"),
Revenue Recognition, which outlines basic criteria that must be met to recognize
revenue and provides guidance for presentation of revenue and for disclosure
related to revenue recognition policies in financial statements filed with the
SEC. The Company adopted SAB 101 in the fourth quarter of 2000 with no impact on
the Company.
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In March 2000, the FASB issued Interpretation No. 44, or FIN 44, "Accounting for
Certain Transactions Involving Stock Compensation," which is an interpretation
of Accounting Principles Board Opinion No. 25. This interpretation clarifies:
o the definition of employee for purposes of applying Opinion 25, which
deals with stock compensation issues;
o the criteria for determining whether a plan qualifies as a
noncompensatory plan;
o the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and
o the accounting for an exchange of stock compensation awards in a
business combination.
o this interpretation is effective July 1, 2000, but certain conclusions
in this interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this
interpretation covers events occurring during the period after December
15, 1998, or January 12, 2000, but before the effective date of July 1,
2000, the effects of applying this interpretation are recognized on a
prospective basis from July 1, 2000. The adoption of FIN 44 had no
impact on the Company.
The Tax Relief Extension Act of 1999, or the REIT Modernization Act, which took
effect on January 1, 2001, modifies certain provisions of the Internal Revenue
Code of 1986, as amended, with respect to the taxation of REITs. Two key
provisions of this tax law change will impact future Company operations: the
availability of a taxable REIT subsidiary which may be wholly-owned directly by
a REIT and a reduction in the required level of distribution by a REIT to 90% of
ordinary taxable income. The Company acquired 100% of the common stock of CRS
and canceled its preferred stock on January 1, 2001.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The Company's
actual results could differ materially from those set forth in the forward
looking statements as a result of various factors, including, but not limited
to, uncertainties affecting real estate businesses generally (such as entry into
new leases, renewals of leases and dependence on tenants' business operations),
risks relating to acquisition, construction and development activities, possible
environmental liabilities, risks relating to leverage, debt service and
obligations with respect to the payment of dividends (including availability of
financing terms acceptable to the Company and sensitivity of the Company's
operations to fluctuations in interest rates), the potential for the need to use
borrowings to make distributions necessary for the Company to qualify as a REIT,
dependence on the primary market in which the Company's properties are located,
the existence of complex regulations relating to the Company's status as a REIT
and the potential adverse impact of the market interest rates on the cost of
borrowings by the Company and on the market price for the Company's securities.
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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company assesses its risk in relation to market conditions, and a discussion
about the Company's exposure to possible changes in market conditions follows.
This discussion involves the effect on earnings, cash flows and the value of the
Company's financial instruments as a result of possible future market condition
changes. The discussions below include "forward looking statements" regarding
market risk, but management is not forecasting the occurrence of these market
changes. The actual earnings and cash flows of the Company may differ materially
these projections discussed below.
At March 31, 2001, $157.6 million or 27.7% of the Company's debt was variable
rate debt and $412.2 million or 72.3% of the debt was fixed rate debt. Based on
the amount of variable debt outstanding as of March 31, 2001, a 10% increase or
decrease in the Company's interest rate on the Company's variable rate debt
would decrease or increase, respectively, future earnings and cash flows by
approximately $0.8 million per year. A similar change in interest rates on the
Company's fixed rate debt would not increase or decrease the future earnings of
the Company during the term of the debt, but would effect the fair value of the
debt. An increase in interest rates would decrease the fair value of the
Company's fixed rate debt.
The Company is subject to other non-quantifiable market risks due to the nature
of its business. The business of owning and investing in real estate is highly
competitive. Sever factors may adversely affect the economic performance and
value or our properties and the Company. These factors include:
o Adverse changes in general or local economic conditions affecting real
estate values, rental rates, interest rates, real estate tax rates and
other operating expenses.
o Competitive overbuilding.
o Our inability to keep high levels of occupancy in our properties.
o Tenant defaults.
o Unfavorable changes in governmental rules and fiscal policies
(including rent control legislation).
o Our ability to sell properties.
o Acts of God and other factors that are beyond our control.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
10.1 Stock Grant Agreement between the Company and John S. Gates, Jr.
10.2 Stock Grant Agreement between the Company and Michael M. Mullen.
10.3 Stock Grant Agreement between the Company and Paul S. Fisher.
10.4 Stock Grant Agreement between the Company and Paul T. Ahern.
10.5 Stock Grant Agreement between the Company and Rockford O. Kottka.
10.6 Stock Option Agreement between the Company and John S. Gates, Jr.
10.7 Stock Option Agreement between the Company and Michael M. Mullen.
10.8 Stock Option Agreement between the Company and Paul S. Fisher.
10.9 Stock Option Agreement between the Company and Rockford O. Kottka.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CENTERPOINT PROPERTIES TRUST
a Maryland Company
By: /s/ PAUL S. FISHER
----------------------------------------
Paul S. Fisher
Executive Vice President and
Chief Financial Officer
May 14, 2001 (Principal Accounting Officer)
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