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| AMB > SEC Filings for AMB > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
Some of the information included in this quarterly report on Form 10-Q contains forward-looking statements, which are made pursuant to the safe-harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Because these forward-looking statements involve numerous risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements, and you should not rely on the forward-looking statements as predictions of future events. The events or circumstances reflected in the forward-looking statements might not occur. You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "forecasting," "pro forma," "estimates" or "anticipates," or the negative of these words and phrases, or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Forward-looking statements should not be read as guarantees of future performance or results, and will not necessarily be accurate indicators of whether, or the time at which, such performance or results will be achieved. There is no assurance that the events or circumstances reflected in forward-looking statements will occur or be achieved. Forward-looking statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and we may not be able to realize them.
The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
• changes in general economic conditions, global trade or in the real estate sector (including risks relating to decreasing real estate valuations and impairment charges);
• risks associated with using debt to fund our business activities, including re-financing and interest rate risks;
• our failure to obtain, renew, or extend necessary financing or access the debt or equity markets;
• our failure to maintain our current credit agency ratings or comply with our debt covenants;
• risks related to our obligations in the event of certain defaults under co-investment venture and other debt;
• risks associated with equity and debt securities financings and issuances (including the risk of dilution);
• a continued or prolonged downturn in the California, U.S., or the global economy, world trade or real estate conditions and other financial market fluctuations;
• defaults on or non-renewal of leases by customers or renewal at lower than expected rent;
• risks and uncertainties relating to the disposition of properties to third parties and our ability to effect such transactions on advantageous terms and to timely reinvest proceeds from any such dispositions;
• our failure to contribute properties to our co-investment ventures due to such factors as our inability to acquire, develop, or lease properties that meet the investment criteria of such ventures, or our co-investment ventures' inability to access debt and equity capital to pay for property contributions or their allocation of available capital to cover other capital requirements such as future redemptions;
• difficulties in identifying properties to acquire and in effecting acquisitions on advantageous terms and the failure of acquisitions to perform as we expect;
• risks and uncertainties affecting property development, redevelopment and value-added conversion (including construction delays, cost overruns, our inability to obtain necessary permits and financing, our inability to lease properties at all or at favorable rents and terms, public opposition to these activities);
• risks of doing business internationally and global expansion, including unfamiliarity with new markets and currency risks;
• risks of changing personnel and roles;
• losses in excess of our insurance coverage;
• unknown liabilities acquired in connection with acquired properties or otherwise;
• our failure to successfully integrate acquired properties and operations;
• changes in local, state and federal regulatory requirements, including changes in real estate and zoning laws;
• increases in real property tax rates;
• risks associated with our tax structuring;
• increases in interest rates and operating costs or greater than expected capital expenditures;
• environmental uncertainties and risks related to natural disasters; and
• our failure to qualify and maintain our status as a real estate investment trust under the Internal Revenue Code of 1986, as amended.
Our success also depends upon economic trends generally, various market conditions and fluctuations and those other risk factors discussed under the heading "Risk Factors" and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2008, and any amendments thereto. We caution you not to place undue reliance on forward-looking statements, which reflect our analysis only and speak as of the date of this report or as of the dates indicated in the statements. All of our forward-looking statements, including those in this report, are qualified in their entirety by this statement. We assume no obligation to update or supplement forward-looking statements.
Unless the context otherwise requires, the terms "AMB," the "Company," "we," "us" and "our" refer to AMB Property Corporation, AMB Property, L.P. and their other controlled subsidiaries, and the references to AMB Property Corporation include AMB Property, L.P. and its controlled subsidiaries. We refer to AMB Property, L.P. as the "operating partnership." The following marks are our registered trademarks: AMB®; and High Throughput Distribution® (HTD®).
Our website address is http://www.amb.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on our website free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission, or SEC. The public may read and copy these materials at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains such reports, proxy and information statements and other information, and the Internet address is http://www.sec.gov. Our Corporate Governance Principles and Code of Business Conduct are also posted on our website. Information contained on our website is not and should not be deemed a part of this report or any other report or filing filed with or furnished to the SEC.
We own, acquire, develop and operate industrial properties in key distribution markets tied to global trade in the Americas, Europe and Asia. We use the terms "industrial properties" or "industrial buildings" to describe the various types of industrial properties in our portfolio and use these terms interchangeably with the following: logistics facilities, centers or warehouses; distribution facilities, centers or warehouses; High Throughput Distribution® (HTD®) facilities; or any combination of these terms. We use the term "owned and managed" to describe assets in which we have at least a 10% ownership interest, for which we are the property or asset manager and which we currently intend to hold for the long term. We use the term "joint venture" to describe all joint ventures, which include co-investment ventures, as well as ventures with third parties. We typically earn asset management distributions or fees, or earn incentive distributions or promote interests from the joint ventures. In certain cases, we might provide development, leasing, property management and/or accounting services, for which we may receive compensation. We use the term "co-investment venture" to describe joint ventures with institutional investors that are managed by us, from which we receive acquisition fees for acquisitions, portfolio and asset management distributions or fees, as well as incentive distributions or promote interests.
We operate our business primarily through our subsidiary, AMB Property, L.P., a Delaware limited partnership, which we refer to as the "operating partnership." As of March 31, 2009, we owned an approximate 97.7% general partnership interest in the operating partnership, excluding preferred units. As the sole general partner of the
operating partnership, we have the full, exclusive and complete responsibility for and discretion in its day-to-day management and control.
We are a self-administered and self-managed real estate investment trust and expect that we have qualified, and will continue to qualify, as a real estate investment trust for federal income tax purposes beginning with the year ended December 31, 1997. As a self-administered and self-managed real estate investment trust, our own employees perform our corporate administrative and management functions, rather than our relying on an outside manager for these services. We manage our portfolio of properties generally through direct property management performed by our own employees. Additionally, within our flexible operating model, we may from time to time establish relationships with third-party real estate management firms, brokers and developers that provide some property-level administrative and management services under our direction.
Our global headquarters are located at Pier 1, Bay 1, San Francisco, California 94111; our telephone number is (415) 394-9000. Our other principal office locations are in Amsterdam, Boston, Chicago, Los Angeles, Mexico City, Shanghai, Singapore and Tokyo. As of March 31, 2009, we employed 597 individuals: 166 in our San Francisco headquarters, 45 in our Boston office, 54 in our Tokyo office, 56 in our Amsterdam office, 61 in our Mexico City office and the remainder in our other offices.
Near Term Priorities
The global financial markets have been undergoing pervasive and fundamental disruptions, which began late in the third quarter of 2008. To maintain our competitive advantage during these difficult times, we are focused on three important near-term priorities for the company:
• strengthening our balance sheet and liquidity position;
• reducing and controlling expenses; and
• positioning our company for growth in the long term.
We believe our near-term priorities, coupled with our long-term business strategies, have prepared us to weather a difficult operating environment and will position us to emerge from this downturn in an even stronger competitive position. We can accomplish our priorities only with the right leadership and talent to drive our business forward. To preserve our long-term growth potential, we have made the decision to retain our key investment and development personnel in our most productive platforms around the globe. We have deployed these team members in leasing, operations and customer service, as we complete the build-out of our current development pipeline. The most crucial of our long-term strategies is preserving the strength of our personnel upon the stabilization of the global financial markets.
Investment Strategy
Our strategy focuses on providing distribution space to customers whose businesses are tied to global trade and who value the efficient movement of goods through the global supply chain. Our properties are primarily located in the world's busiest distribution markets: large, supply-constrained infill locations with dense populations and proximity to airports, seaports and major highway systems. When measured by annualized base rent, on an owned and managed basis, a substantial majority of our portfolio of industrial properties is located in our target markets and much of this is in infill submarkets within our target markets. Infill locations are characterized by supply constraints on the availability of land for competing projects as well as physical, political or economic barriers to new development.
In many of our target markets, we focus on HTD® facilities, which are buildings designed to facilitate the rapid distribution of our customers' products rather than the long term storage of goods. Our investment focus on HTD® assets is based on what we believe to be a global trend toward lower inventory levels and expedited supply chains. HTD® facilities generally have a variety of physical characteristics that allow for the rapid transport of goods from point-to-point. These physical characteristics could include numerous dock doors, shallower building depths, fewer columns, large truck courts and more space for trailer parking. We believe that these building characteristics help our customers to reduce their costs and become more efficient in their delivery systems. Our customers include air
express, logistics and freight forwarding companies that have time-sensitive needs, and that value facilities located in convenient proximity to transportation infrastructure, such as major airports and seaports.
As of March 31, 2009, we owned, or had investments in, on a consolidated basis or through unconsolidated co-investment ventures, properties and development projects expected to total approximately 159.0 million square feet (14.8 million square meters) in 48 markets within 14 countries.
Of the approximately 159.0 million square feet as of March 31, 2009:
• on an owned and managed basis, which includes investments held on a consolidated basis or through unconsolidated joint ventures, we owned or partially owned approximately 133.1 million square feet (principally, warehouse distribution buildings) that were 92.2% leased; we had investments in 43 development projects, which are expected to total approximately 11.8 million square feet upon completion; and we owned 20 development projects, totaling approximately 6.6 million square feet, which are available for sale or contribution;
• through non-managed unconsolidated joint ventures, we had investments in 46 industrial operating properties, totaling approximately 7.4 million square feet; and
• we held approximately 0.1 million square feet through a ground lease, which is the location of our global headquarters.
Operating Strategy
We believe that real estate is fundamentally a local business and is best operated by local teams in each of our markets. As a vertically integrated company, we actively manage our portfolio of properties. In select markets, we may, from time to time, establish relationships with third-party real estate management firms, brokers and developers that provide some property-level administrative and management services under our direction. We offer a broad array of service offerings, including access to multiple locations worldwide and build-to-suit developments.
Long Term Growth Strategies
Growth through Operations
We seek to generate long-term internal growth through rent increases on existing space and renewals on rollover space, striving to maintain a high occupancy rate at our properties and to control expenses by capitalizing on the economies of scale inherent in owning, operating and growing a large, global portfolio. We actively manage our portfolio, whether directly or with an alliance partner, by establishing leasing strategies and negotiating lease terms, pricing, and level and timing of property improvements. We believe that our long-standing focus on customer relationships and ability to provide global solutions in 14 countries for a well-diversified customer base in the shipping, air cargo and logistics industries will enable us to capitalize on opportunities as they arise.
We believe that the strategic locations within our portfolio, the experience of our cycle-tested operations team and our ability to respond quickly to the needs of our customers allow us to achieve solid operating results. We believe that our regular maintenance programs, capital expenditure programs, energy management and sustainability programs create cost efficiencies that provide benefit to our customers as well as to AMB.
Growth through Development
We think that the development, redevelopment and expansion of well-located, high-quality industrial properties provide us with attractive investment opportunities at higher rates of return, although with greater risk, than may be obtained from the purchase of existing properties. Through the deployment of our in-house development and redevelopment expertise, we seek to create value both through new construction and the acquisition and management of redevelopment opportunities. Additionally, we believe that our longstanding focus on infill locations creates a unique opportunity to enhance value through the select conversion of industrial properties to higher and better uses, within our value-added conversion business. Value-added conversion projects generally involve a significant enhancement or a change in use of the property from industrial distribution warehouse to a higher and better use, such as office, retail or residential. New developments, redevelopments and value-added
conversions require significant management attention, and development and redevelopment require significant capital investment, to maximize their returns. Completed development and redevelopment properties are generally contributed to our co-investment ventures and held in our owned and managed portfolio or sold to third parties. Value-added conversion properties are generally sold to third parties at some point in the re-entitlement/conversion process, thus recognizing the enhanced value of the underlying land that supports the property's repurposed use. We think our global market presence and expertise will enable us to generate and capitalize on a diverse range of development opportunities in the long term. At this time, however, while development, redevelopment and value-added conversions will continue to be a fundamental part of our long-term growth strategy, we will limit this activity to situations where we are fulfilling prior commitments or commencing build-to-suits for specific customers until the financial and real estate markets stabilize.
Although we have reduced our development staff in correlation to reduced levels of development activity, our core team possesses multidisciplinary backgrounds, which positions us to complete the build out of our development pipeline and for future development or redevelopment opportunities when stability returns to the financial and real estate markets. We believe our development team has extensive experience in real estate development, both with us and with local, national or international development firms. We pursue development projects directly and in co-investment ventures and development joint ventures, providing us with the flexibility to pursue development projects independently or in partnerships, depending on market conditions, submarkets or building sites and availability of capital.
Growth through Acquisitions and Capital Redeployment
Our acquisition experience and our network of property management, leasing and acquisition resources should continue to provide opportunities for growth. In addition to our internal resources, we have long-term relationships with leasing and investment sales brokers, as well as third-party local property management firms, which may give us access to additional acquisition opportunities because such managers frequently market properties on behalf of sellers. In addition, we seek to redeploy capital from non-strategic assets into properties that better fit our current investment focus. See "Summary of Key Transactions." At this time, while acquisitions will continue to be a fundamental part of our long-term growth strategy, we will limit this activity to situations where we are fulfilling prior commitments until the financial and real estate markets stabilize.
We are generally engaged in various stages of negotiations for a number of acquisitions and other transactions, some of which may be significant, that may include, but are not limited to, individual properties, large multi-property portfolios or property owning or real estate-related entities. We cannot assure you that we will consummate any of these transactions. Such transactions, if we consummate them, may be material individually or in the aggregate.
Growth through Global Expansion
Expansion into target markets outside the United States represents a natural extension of our strategy to invest in industrial property markets with high population densities, proximity to large customer clusters and available labor pools, and major distribution centers serving global trade. Our international expansion strategy mirrors our focus in the United States on supply-constrained submarkets with political, economic or physical constraints to new development. Our international investments extend our offering of HTD® facilities to customers who value speed-to-market over storage. We think that our established customer relationships, our contacts in the air cargo, shipping and logistics industries, our underwriting of markets and investments, our in-house expertise and our strategic alliances with knowledgeable developers and managers will assist us in competing internationally. For a discussion of the amount of our revenues attributable to the United States and international markets, please see
Growth through Co-Investments
We, through AMB Capital Partners, LLC, our private capital group, were one of the pioneers of the real estate investment trust (REIT) industry's co-investment model and have more than 25 years of experience in this business. We co-invest in properties with private capital investors through partnerships, limited liability companies or other joint ventures. We have a direct and long-standing relationship with institutional investors. Approximately 60% of
our owned and managed operating portfolio is owned through our eight co-investment ventures. We tailor industrial portfolios to investors' specific needs - in separate or commingled accounts - deploying capital in both close-ended and open-ended structures and providing complete portfolio management and financial reporting services. Generally, we will own a 10-50% interest in our co-investment ventures. Our co-investment ventures typically allow us to earn acquisition and development fees, asset management fees or priority distributions, as well as promote interests or incentive distributions based on the performance of the co-investment ventures.
Management's Overview
Current Global Market and Economic Conditions
Recent global market and economic conditions have been unprecedented, challenging and unpredictable with significantly tighter credit and declining economic conditions through the first quarter of 2009. Continued concerns about the availability and cost of credit, declining real estate market and geopolitical issues have contributed to increased market volatility and decreased expectations for the global economy. In the fourth quarter of 2008, added concerns fueled by the failure of several large financial institutions and government interventions in the U.S. financial system led to increased market uncertainty and instability in the global capital and credit markets. These conditions, combined with declining business activity levels and consumer confidence and increased unemployment, have contributed to unprecedented levels of volatility.
In light of this economic downturn, we are increasing our focus on our operations with an emphasis on tenant retention and occupancy. Until the financial and real estate markets stabilize, we are limiting our acquisition and development activities to fulfilling prior commitments. We are realigning and streamlining internal resources, as well as our overhead structure, to meet the needs of the business and have taken further steps to strengthen our capital and liquidity position. Our near-term priorities are further strengthening the balance sheet and liquidity position, reducing and controlling expenses and retaining and motivating our key people thereby positioning the company for long-term growth. Our goal is to do what we consider best for long-term value creation and enhancement of our net asset value. As we look forward, our objective is to emerge from this downturn in a competitive position to take advantage of opportunities as they arise, with our long-term earnings capacity enhanced.
Primary Sources of Revenue and Earnings
The primary source of our revenue and earnings is rent received from customers under long-term (generally three to ten years) operating leases at our properties, including reimbursements from customers for certain operating costs. We may also generate earnings from our private capital business, which consists of asset management fees and priority distributions, acquisition and development fees, and promote interests and incentive distributions from our co-investment ventures. Additionally, we may generate earnings from the disposition of projects in our development-for-sale and value-added conversion programs, from land sales and from the contributions of development properties to our co-investment ventures. We believe that our long-term growth will be driven by our ability to:
• maintain and increase occupancy rates and/or increase rental rates at our properties;
• raise third-party equity in our co-investment ventures and grow our earnings from our private capital business from the acquisition of new properties or through the possible contribution of properties; and
• develop properties profitably and sell to third parties or contribute to our co-investment ventures such development properties.
Focus on our Balance Sheet and Cost Structure
Maintaining a strong balance sheet and ample liquidity are our top priorities. As such, we successfully completed the issuance and sale of 47.4 million shares of our common stock at a price of $12.15 per share for proceeds of approximately $552.6 million, net of discounts, commissions and estimated transaction expenses of approximately $23.8 million. The proceeds from the offering were used to repay borrowings under the operating partnership's unsecured credit facilities, which enhanced our liquidity position. As a result, borrowings under our
three lines of credit were reduced by 60% to $381 million, and we lowered our line utilization to 25% as of March 31, 2009.
On April 28, 2009, we commenced a cash tender offer to purchase any and all of the operating partnership's outstanding 8.00% medium-term notes due 2010, which had $75.0 million aggregate principal outstanding, and any and all of the operating partnership's outstanding 5.45% medium-term notes due 2010, which had $175.0 million aggregate principal outstanding. The tender offer expired on . . .
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