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| AMB > SEC Filings for AMB > Form 10-Q on 30-Oct-2009 | All Recent SEC Filings |
30-Oct-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 the company's 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 the company may not be able to realize them.
The following factors, among others, apply to the company's business as a whole and could cause its 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 the company's business activities, including re-financing and interest rate risks;
• the company's failure to obtain, renew, or extend necessary financing or access the debt or equity markets;
• the company's failure to maintain its current credit agency ratings or comply with its debt covenants;
• risks related to the company's 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 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 the company's ability to effect such transactions on advantageous terms and to timely reinvest proceeds from any such dispositions;
• the company's failure to contribute properties to its co-investment ventures due to such factors as its inability to acquire, develop, or lease properties that meet the investment criteria of such ventures, or the company's 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 the company expects;
• risks and uncertainties affecting property development, redevelopment and value-added conversion (including construction delays, cost overruns, the company's inability to obtain necessary permits and financing, the company's inability to lease properties at all or at favorable rents and terms, and 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 the company's insurance coverage;
• unknown liabilities acquired in connection with acquired properties or otherwise;
• the company's 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 the company's tax structuring;
• increases in interest rates and operating costs or greater than expected capital expenditures; and
• environmental uncertainties and risks related to natural disasters.
In addition, if the parent company fails to qualify and maintain its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended, then the parent company's actual results and future events could differ materially from those set forth or contemplated in the forward-looking statements.
The company's 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 the Annual Reports on Form 10-K for AMB Property Corporation and AMB Property, L.P. for the year ended December 31, 2008, and any amendments thereto. The company cautions you not to place undue reliance on forward-looking statements, which reflect the company's analysis only and speak as of the date of this report or as of the dates indicated in the statements. All of the company's forward-looking statements, including those in this report, are qualified in their entirety by this statement. The company assumes no obligation to update or supplement forward-looking statements.
The company uses the terms "industrial properties" or "industrial buildings" to describe the various types of industrial properties in its portfolio and uses these terms interchangeably with the following: logistics facilities, centers or warehouses, High Throughput Distribution® (HTD®) facilities; or any combination of these terms. The company uses the term "owned and managed" to describe assets in which it has at least a 10% ownership interest, for which it is the property or asset manager and which it currently intends to hold for the long term. The company uses the term "joint venture" to describe all joint ventures, including co-investment ventures with real estate developers, other real estate operators, or institutional investors where the company may or may not have control, act as the manager and/or developer, earn asset management distributions or fees, or earn incentive distributions or promote interests. In certain cases, the company might provide development, leasing, property management and/or accounting services, for which it may receive compensation. The company uses the term "co-investment venture" to describe joint ventures with institutional investors, managed by the company, from which the company typically receives acquisition fees for acquisitions, portfolio and asset management distributions or fees, as well as incentive distributions or promote interests.
The company's website address is http://www.amb.com. The annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K of the parent company 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 the company's website free of charge as soon as reasonably practicable after the company electronically files such material with, or furnishes 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. The company's Corporate Governance Principles and Code of Business Conduct are also posted on the company's website. Information contained on the company's 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. The operating partnership does not have a separate internet address and its SEC reports are available free of charge upon request to the attention of the company's Investor Relations Department, AMB Property Corporation, Pier 1, Bay 1, San Francisco, CA 94111. The following marks are registered trademarks of AMB Property Corporation: AMB®; and High Throughput Distribution® (HTD®). Unless otherwise indicated, management's discussion and analysis applies to both the operating partnership and the parent company.
The company owns, operates, acquires and develops industrial properties in key distribution markets tied to global trade in the Americas, Europe and Asia.
As of September 30, 2009, the company owned, or had investments in, on a consolidated basis or through unconsolidated co-investment ventures, properties and development projects expected to total approximately 156.1 million square feet (14.5 million square meters) in 47 markets within 14 countries.
Of the approximately 156.1 million square feet as of September 30, 2009:
• on an owned and managed basis, which includes investments held on a consolidated basis or through unconsolidated joint ventures, the company owned or partially owned approximately 131.8 million square feet (principally, warehouse distribution buildings) that were 91.0% leased; the company had investments in 22 development projects, which are expected to total approximately 6.8 million square feet upon completion; and the company owned 35 projects, totaling approximately 10.0 million square feet, which are available for sale or contribution;
• through non-managed unconsolidated joint ventures, the company had investments in 46 industrial operating properties, totaling approximately 7.4 million square feet; and
• the company held approximately 0.1 million square feet through a ground lease, which is the location of its global headquarters.
The company's business is operated primarily through the operating partnership. As of September 30, 2009, the parent company owned an approximate 97.7% general partnership interest in the operating partnership, excluding preferred units. As the sole general partner of the operating partnership, the parent company has the full, exclusive and complete responsibility for and discretion in its day-to-day management and control.
The parent company is a self-administered and self-managed real estate investment trust and it expects that it has 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, the company's own employees perform its corporate administrative and management functions, rather than the company relying on an outside manager for these services. The company believes that real estate is fundamentally a local business and is best operated by local teams in each of its markets. As a vertically integrated company, the company actively manages its portfolio of properties. In select markets, the company 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 the company's direction.
The company's global headquarters are located at Pier 1, Bay 1, San Francisco, California 94111; the company's telephone number is (415) 394-9000. The company's other principal office locations are in Amsterdam, Boston, Chicago, Los Angeles, Mexico City, Shanghai, Singapore and Tokyo. As of September 30, 2009, the company employed 529 individuals.
Investment Strategy
The company's investment 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. The company's properties are primarily located in the world's busiest distribution markets: large, supply-constrained infill locations with dense populations and proximity to seaports, airports and major highway systems. When measured by annualized base rent, on an owned and managed basis, a substantial majority of the company's portfolio of industrial properties is located in its target markets and much of this is in infill submarkets within its 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.
The company believes that changes in global trade have been a primary driver of demand for industrial real estate for decades, with approximately 80% of the historical variation in net absorption of industrial space explained by variations in U.S. imports and exports. The company has observed that demand for industrial real estate is further influenced by the long-term relationship between trade and GDP. The company believes that trade and GDP are closely correlated as higher levels of investment, production and consumption within a globalized country are consistent with increased levels of imports and exports. As the world produces and consumes more, the company
believes that the volume of global trade will increase. International Monetary Fund forecasts indicate that global trade will fall by 11-12% in 2009, which is substantially steeper than the 1% forecasted decline in global GDP, and, if realized, would represent the steepest drop in modern history. Current consensus estimates for the U.S. and global GDP growth are in excess of 3% for 2010, a level that implies recovery in GDP growth and a significant rebound in trade and industrial real estate demand.
In many of its target markets, the company focuses on HTD® facilities, which are buildings designed to facilitate the rapid distribution of its customers' products rather than the long term storage of goods. The company's investment focus on HTD® assets is based on what it believes 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. The company believes that these building characteristics help its customers to reduce their costs and become more efficient in their delivery systems. The company's customers include logistics, freight forwarding and air-express companies with time-sensitive needs, that value facilities that are proximate to transportation infrastructure, such as major seaports and airports.
Primary Sources of Revenue and Earnings
The primary source of the company's core earnings is revenues received from its real estate operations and private capital business. The principal contributor of its core earnings is rent received from customers under long-term (generally three to ten years) operating leases at its properties, including reimbursements from customers for certain operating costs and asset management fees and distributions from its private capital business. The company may also generate core earnings from its private capital business, which include priority distributions, acquisition and development fees, promote interests and incentive distributions from its co-investment ventures. The company may generate additional earnings from the disposition of assets in its development-for-sale and value-added conversion programs as well as from land sales.
Long-Term Growth Strategies
The company believes that its long-term growth will be driven by its ability to:
• maintain and increase occupancy rates and/or increase rental rates at its properties;
• raise third-party equity in its co-investment ventures and grow its earnings from its private capital business from the acquisition of new properties or through the possible contribution of properties;
• acquire assets that are valued in excess of the company's cost of capital; and
• develop properties profitably and either to hold or to sell these development properties to third parties.
Growth through Operations
The company seeks 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 its properties and to control expenses by capitalizing on the economies of scale inherent in owning, operating and growing a large, global portfolio. The company actively manages its portfolio by establishing leasing strategies and negotiating lease terms, pricing, and level and timing of property improvements. With respect to its leasing strategies, the company takes a long term view to ensure that it maximizes the value of its real estate. As the company continues to work through a challenging operating environment and to provide flexibility to its customers, the company continues to evaluate and adjust its leasing activity for market terms and leasing rates, which may include leasing terms of less than four years in duration. The company believes that its long-standing focus on customer relationships and ability to provide global solutions in 14 countries for a well-diversified customer base in the logistics, shipping, and air cargo industries will enable it to capitalize on opportunities as they arise.
The company believes that the strategic locations within its portfolio, the experience of its cycle-tested operations team and its ability to respond quickly to the needs of its customers allow it to achieve solid operating results. The company believes that its regular maintenance programs, capital expenditure programs, energy management and sustainability programs create cost efficiencies that provide benefit to it and its customers.
Growth through Co-Investments
The company, through AMB Capital Partners, LLC, its private capital group, was one of the pioneers of the real estate investment trust (REIT) industry's co-investment model and has more than 26 years of experience in asset management and fund formation. The company co-invests in properties with private capital investors through partnerships, limited liability companies or other joint ventures. The company has a direct and long-standing relationship with institutional investors. Approximately 60% of the company's owned and managed operating portfolio is owned through its eight co-investment ventures. The company tailors industrial portfolios to investors' specific needs in separate or commingled accounts and deploys capital in both close-ended and open-ended structures, while providing complete portfolio management and financial reporting services. Generally, the company will own a 10-50% interest in its co-investment ventures.
The company believes that its co-investment program with private-capital investors will continue to serve as a source of revenues and capital for new investments. Through these co-investment ventures, the company typically earns acquisition fees, asset management fees and priority distributions, as well as promoted interests and incentive distributions based on the performance of the co-investment ventures; however, the company cannot provide assurance that it will continue to do so. In anticipation of the formation of future co-investment ventures, the company may also hold acquired and newly developed properties for contribution to such future co-investment ventures. The company may make additional investments through its existing co-investment ventures or new co-investment ventures in the future and presently plans to do so. The company is in various stages of discussions with prospective investors to attract new capital to take advantage of potential future opportunities and these capital raising activities may include the formation of new joint ventures. Such transactions, if the company completes them, may be material individually or in aggregate.
Growth through Acquisitions and Capital Redeployment
The company's acquisition experience and its network of property management, leasing and acquisition resources should continue to provide opportunities for growth. In addition to its internal resources, the company has long-term relationships with leasing and investment sales brokers, as well as third-party local property management firms, which may give it access to additional acquisition opportunities because such managers frequently market properties on behalf of sellers. The company is actively monitoring its target markets and may seek opportunities to selectively acquire high-quality real estate. The company strives to enhance the quality of its portfolio through acquisitions that are accretive to the company's earnings and its net asset value. In addition, the company seeks to redeploy capital from the sale of non-strategic assets into properties that better fit its current investment focus.
The company is 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.
Growth through Development
The company's development business consists of conventional development, build-to-suit development, redevelopment, value-added conversions and land sales. Despite the cyclical downturn in the U.S. and global economy, the company believes that, over the long term, customer demand for new industrial space in strategic markets tied to global trade will continue to outpace supply, most notably in major gateway markets in Asia and Europe. The company believes that the development, redevelopment and expansion of well-located, high-quality industrial properties provide 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 its in-house development and redevelopment expertise, the company seeks to create value both through new construction and the acquisition and management of redevelopment opportunities. New developments, redevelopments and value-added conversions require significant management attention, and development and redevelopment may require significant capital investment, to maximize their returns. The company pursues development projects directly and in co-investment ventures and development joint ventures, providing it with the flexibility to pursue development projects independently or in partnerships, depending on market conditions, submarkets or building sites and availability of capital. Completed development and redevelopment properties are generally held in its owned and managed portfolio or sold to third parties.
The company believes that its long-standing focus on infill locations creates a unique opportunity to enhance value through the conversion of select industrial properties to higher and better uses. Value-added conversion projects generally involve a significant enhancement or a change in use of the property from an industrial facility to a higher and better use, including use as office, residential, retail, research & development or manufacturing properties. Activities required to prepare the property for conversion to a higher and better use may include rezoning, redesigning, reconstructing and retenanting. The sales price of a value-added conversion project is generally based on the underlying land value, reflecting its ultimate higher and better use and, as such, little to no residual value is ascribed to the industrial building. Generally, the company expects to sell to third parties these value-added conversion projects at some point in the re-entitlement and conversion process, thus recognizing the enhanced value of the underlying land that supports the property's repurposed use.
The company believes that its global market presence and expertise will enable it to generate and capitalize on a diverse range of development opportunities over the long term. At this time, the company will limit this activity to commencing build-to-suit projects for specific customers until the financial and real estate markets stabilize.
The company believes its development team has experience in real estate development, both with the company and with local, national or international development firms. Although the company has reduced its development staff in correlation to reduced levels of development activity, the company has retained certain key investment and development personnel in its most productive platforms around the globe to preserve its long-term growth potential. This core development team possesses multidisciplinary backgrounds that allows for the completion of the build-out of the company's development pipeline, as well as the temporary deployment of some of the team members in leasing, operations and customer service, as it completes the build-out and lease-up of its current development pipeline.
Management's Overview
Current Global Market and Economic Conditions
The financial and real estate markets have been undergoing pervasive and fundamental disruptions, including significantly tighter credit and declining economic conditions, which began to impact the company in the fourth quarter of 2008. To maintain its competitive advantage during these difficult times, the company focused on three important near-term priorities. These priorities include:
• strengthening the balance sheet and liquidity position;
• realigning its cost structure; and
• positioning itself for future opportunities.
Management believes that it has addressed its near-term priorities, which enabled the company to navigate through a challenging environment. Management also believes that it is now positioned to pursue growth opportunities. As such, the company established three key growth initiatives, which include realizing the potential from its low-yielding assets; acquiring assets that are accretive to the company's value; and forming new private capital ventures. The first growth initiative includes stabilizing its owned and managed operating portfolio at its historical occupancy average of 95%; completing the build-out and leasing of its development platform; and realizing value from its land bank through new ventures, sales and future build-to-suit projects. The second growth initiative includes acquiring industrial real estate at a value above the company's cost of capital. The company's third growth initiative includes forming new private capital ventures and funds.
The Company's Liquidity and Balance Sheet
During the first nine months of 2009, the company increased the availability under its lines of credit by approximately $431 million while reducing its share of outstanding debt by approximately $750 million. As of September 30, 2009, the company had $1.1 billion available for future borrowings under its three . . .
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