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
For the transition period from ______________ to __________________
Commission file number 1-12514
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KEYSTONE PROPERTY TRUST
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(Exact name of registrant as specified in its declaration of trust)
Maryland 84-1246585
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
200 Four Falls Corporate Center, Suite 208, West Conshohocken, PA 19428
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(Address of principal executive offices)
(484) 530-1800
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(Registrant's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
A total of 15,521,540 common shares of beneficial interest of the
registrant were outstanding as of May 10, 2001.
KEYSTONE PROPERTY TRUST
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2001
(unaudited) and December 31, 2000 3
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters To a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES OF REGISTRANT 27
-2-
PART I - FINANCIAL INFORMATION
ITEM 1.
KEYSTONE PROPERTY TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND UNIT DATA)
MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
(UNAUDITED)
ASSETS
INVESTMENT IN REAL ESTATE:
Land and land improvements ...................................... $ 126,466 $ 128,171
Buildings and improvements ...................................... 660,856 685,774
Assets held for sale ............................................ -- 114,073
Development and construction-in-progress ........................ 34,686 28,366
Investment in direct financing lease ............................ 1,125 1,214
--------- ---------
823,133 957,598
Less - Accumulated depreciation ................................. (41,918) (35,508)
Accumulated depreciation - assets held for sale ............ -- (5,050)
--------- ---------
Total accumulated depreciation ................. (41,918) (40,558)
--------- ---------
Total investment in real estate, net ........... 781,215 917,040
--------- ---------
CASH AND CASH EQUIVALENTS ............................................ 37 3,668
RESTRICTED CASH AND CASH ESCROWS ..................................... 11,032 6,597
ACCOUNTS RECEIVABLE, including straight-line rent receivable of
$6,172 and $6,759 in 2001 and 2000, respectively, net of
allowance for bad debts of $375 and $250 in 2001 and
2000, respectively .............................................. 8,652 9,446
DEFERRED FINANCING COSTS, net of accumulated amortization of
$4,190 and $3,814 in 2001 and 2000, respectively ................ 5,416 5,775
DEFERRED LEASING COSTS, net of accumulated amortization of $2,244 and
$2,184 in 2001 and 2000, respectively ........................... 5,642 7,426
EQUITY METHOD INVESTMENTS ............................................ 18,248 6,686
OTHER ASSETS ......................................................... 8,312 6,049
--------- ---------
Total assets ................................... $ 838,554 $ 962,687
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgage notes payable and revolving credit facility, including
unamortized premiums on assumed indebtedness of $2,699
and $2,854 in 2001 and 2000, respectively ................... $ 499,781 $ 616,569
Accounts payable ................................................ 4,052 3,350
Dividends and distributions payable ............................. 2,299 2,299
Accrued interest payable ........................................ 2,359 2,274
Accrued expenses and other liabilities .......................... 10,074 12,312
Deferred rent revenue ........................................... 2,371 1,949
--------- ---------
Total liabilities ........................................... 520,936 638,753
--------- ---------
MINORITY INTEREST, 7,667,649 and 7,675,649 units outstanding in
2001 and 2000, respectively .................................... 73,640 76,710
CONVERTIBLE PREFERRED UNITS .......................................... 80,295 80,295
SHAREHOLDERS' EQUITY:
Convertible Preferred Stock, Series A; $.001 par value; 800,000
shares authorized, issued and outstanding in 2001 and 2000,
liquidation preference of $20,000 ............................... 1 1
Convertible Preferred Stock, Series B; $.001 par value; 4,200,000
shares authorized; 803,871 issued and outstanding in 2001 and
2000; liquidation preference of $20,097 ......................... 1 1
Convertible Preferred Stock, Series C; $.001 par value; 800,000
shares authorized, issued and outstanding in 2001 and 2000,
liquidation preference of $20,000 ............................... 1 1
Common Shares, $.001 par value; 59,200,000 authorized; 9,346,669 and
9,321,296 shares issued and outstanding in 2001 and 2000,
respectively .................................................... 9 9
Additional paid-in capital ...................................... 182,403 182,067
Loans to executives and employees to purchase Common Shares ..... (3,985) (4,033)
Cumulative net income ........................................... 20,802 21,516
Cumulative distributions ........................................ (35,549) (32,633)
--------- ---------
Total shareholders' equity .................................. 163,683 166,929
--------- ---------
Total liabilities and shareholders' equity .................. $ 838,554 $ 962,687
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
-3-
KEYSTONE PROPERTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2001 2000
-------------- ----------------
REVENUE:
Rents ................................................................ $ 26,173 $ 25,075
Reimbursement revenue and other income ............................... 4,511 3,481
------------ ------------
Total revenue .................................................... 30,684 28,556
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OPERATING EXPENSES:
Property operating expenses .......................................... 2,811 2,577
Real estate taxes .................................................... 2,778 2,435
General and administrative ........................................... 2,166 2,073
Depreciation and amortization ........................................ 8,731 4,708
Interest expense ..................................................... 11,364 10,332
------------ ------------
Total operating expenses ......................................... 27,850 22,125
------------ ------------
Income before equity in (losses) income from equity method investments and
gains on sales of assets ............................................. 2,834 6,431
Equity in (losses) income from equity method investments ................. (129) 249
Gains on sales of assets ................................................. 336 140
------------ ------------
Income before distributions to preferred unitholders, minority interest of
unitholders in Operating Partnership, extraordinary item and income
allocated to preferred shareholders .................................. 3,041 6,820
Distributions to preferred unitholders ................................... (1,931) (1,317)
Minority interest of unitholders in Operating Partnership ................ 585 (1,628)
------------ ------------
Income before extraordinary item ......................................... 1,695 3,875
Extraordinary item-loss on early retirement of debt ...................... (982) --
------------ ------------
INCOME BEFORE INCOME ALLOCATED TO PREFERRED SHAREHOLDERS ................. 713 3,875
INCOME ALLOCATED TO PREFERRED SHAREHOLDERS ............................... (1,427) (1,930)
------------ ------------
NET (LOSS) INCOME ALLOCATED TO COMMON SHAREHOLDERS ....................... $ (714) $ 1,945
============ ============
EARNINGS PER COMMON SHARE - BASIC:
Net (loss) income per Common Share before extraordinary item ......... $ (0.02) $ 0.21
Extraordinary item ................................................... (0.06) --
------------ ------------
Net (loss) income per Common Share - Basic ........................... $ (0.08) $ 0.21
============ ============
WEIGHTED AVERAGE COMMON SHARES - BASIC ................................... 9,342,775 9,067,959
============ ============
EARNINGS PER COMMON SHARE - DILUTED:
Net (loss) income per Common Share before extraordinary item ......... $ (0.02) $ 0.21
Extraordinary item ................................................... (0.06) --
------------ ------------
Net (loss) income per Common Share - Diluted ......................... $ (0.08) $ 0.21
============ ============
WEIGHTED AVERAGE COMMON SHARES - DILUTED ................................. 17,016,552 16,682,329
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
-4-
KEYSTONE PROPERTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2001 2000
-------- --------
OPERATING ACTIVITIES:
Net (loss) income allocated to common shareholders ............. $ (714) $ 1,945
Adjustments to reconcile net income allocated to common
shareholders to net cash provided by operating activities:
Depreciation and amortization .............................. 9,193 5,118
Amortization of debt premiums .............................. (155) (170)
Amortization of deferred compensation costs and loan
forgiveness on executive stock loans ..................... 48 117
Bad debt provision.......................................... 125 --
Gain on sales of assets .................................... (336) (140)
Extraordinary loss ......................................... 982 --
Increase in straight-line rents ............................ (821) (829)
Decrease in investment in direct financing lease ........... 89 61
Equity in losses (income) from equity method investments ... 129 (249)
Income allocated to preferred shareholders and preferred
unitholders .............................................. 3,358 3,247
Minority interest .......................................... (585) 1,628
Cash provided by (used in)
Accounts receivable ...................................... 82 341
Other assets ............................................. (2,263) (703)
Accrued interest ......................................... 85 (1,102)
Accounts payable, accrued expenses and other
liabilities ............................................ (1,381) (1,748)
Deferred rent revenue .................................... 422 630
-------- --------
Net cash provided by operating activities .............. $ 8,258 $ 8,146
-------- --------
INVESTING ACTIVITIES:
Increase in restricted cash .................................... $ (4,435) $ (372)
Properties acquired ............................................ (16,316) (3,252)
Advances from (to) equity method investments ................... (3,529) (979)
Capital expenditures ........................................... (953) (671)
Development and construction in progress expenditures .......... (6,320) (3,969)
Payment of leasing commissions ................................. (959) (993)
Proceeds from sales of assets, net ............................. 84,791 920
-------- --------
Net cash provided by (used in) investing activities .... $ 52,279 $ (9,316)
-------- --------
FINANCING ACTIVITIES:
Issuances of Common Shares, net of issuance costs ............... $ -- $ 1,487
Dividends paid on Common Shares ................................. (2,916) (2,661)
Distributions paid on Convertible Preferred Stock and Convertible
Preferred Units .............................................. (3,358) (3,219)
Distributions paid on OP Units .................................. (2,378) (2,152)
Proceeds from mortgage notes payable ............................ 6,763 2,690
Repayments of mortgage notes payable ............................ (41,920) (1,060)
Payments of deferred financing and debt early retirement costs .. (1,163) (267)
Net (repayments) borrowings under Credit Facility ............... (19,196) 5,500
-------- --------
Net cash provided by (used in) financing activities ............. $(64,168) $ 318
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ......................... $ (3,631) $ (852)
CASH AND CASH EQUIVALENTS, beginning of period .................... 3,668 4,144
-------- --------
CASH AND CASH EQUIVALENTS, end of period .......................... $ 37 $ 3,292
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ................................... $ 11,487 $ 11,599
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
-5-
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
Keystone Property Trust is a self-administered and self-managed real
estate investment trust ("REIT") which was organized as a Maryland corporation
in 1994 under the name of American Real Estate Investment Corporation (the
"Predecessor"). On October 13, 1999, the Company reorganized as a Maryland REIT
through the merger of the Predecessor with and into Keystone Property Trust (the
"Company"). Simultaneously, the name of its operating partnership, American Real
Estate Investment, L.P., was changed to Keystone Operating Partnership, L.P.
(the "Operating Partnership"), and the name of its management company, American
Real Estate Management, Inc. was changed to Keystone Realty Services, Inc. (the
"Management Company").
As of March 31, 2001, the Company owns interests in 128 industrial and
office properties aggregating approximately 21.0 million square feet which
includes eight industrial properties aggregating 2.9 million square feet
owned through the Company's joint ventures (Note 4) and an investment in a
direct financing lease (the "Properties"). The Properties are located in
Central/Northern New Jersey; Central Pennsylvania; Indianapolis, Indiana;
Ohio; New York State; and Greenville, South Carolina and have an overall
occupancy of 95.0% as of March 31, 2001. The Company conducts all of its
service operations for third parties, including leasing, property management
and other services through the Management Company. The Operating Partnership
owns 100% of the preferred stock of the Management Company, which entitles
the Operating Partnership to receive 95% of the amounts paid as dividends by
the Management Company.
2. GENERAL:
BASIS OF PRESENTATION
The financial statements have been prepared by the Company without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
Accordingly, these financial statements should be read in conjunction with the
Company's consolidated financial statements and footnotes thereto included in
the Annual Report on Form 10-K for the year ended December 31, 2000. In the
opinion of management, all adjustments consisting solely of normal recurring
adjustments necessary to fairly present the financial position of the Company as
of March 31, 2001 and 2000, the results of its operations for the three month
periods ended March 31, 2001 and 2000, and its cash flows for the three month
periods ended March 31, 2001 and 2000 have been included. The results of
operations for such interim periods are not necessarily indicative of the
results for a full year.
-6-
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The Company is the sole general partner of the Operating Partnership with
an ownership interest of approximately 52% at March 31, 2001. The Company is
also the sole stockholder of several other subsidiary entities. The accompanying
consolidated financial statements include the account balances of the Company,
the Operating Partnership and both the Company's and the Operating Partnership's
wholly owned subsidiaries and their operations for the three month periods ended
March 31, 2001 and 2000, respectively, on a consolidated basis. All significant
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those estimates.
ASSETS HELD FOR SALE
In accordance with Financial Accounting Standard No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS No. 121"), the Company assesses its assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset that
the Company expects to hold and use may not be recoverable.
The Company accounts for properties as assets held for sale when a
commitment has been made to a formal plan of disposition and the properties
are being actively marketed for sale. The Company reports its assets to be
disposed of at the lower of carrying value or fair value less the cost to
sell the related asset. At March 31, 2001 the Company did not classify any
assets as held for sale. At December 31, 2000, the Company had classified
approximately $114 million of net assets as assets held for sale. During the
first quarter of 2001, the Company ceased marketing of certain properties
aggregating approximately $79 million in net book value previously accounted
for as assets held for sale and placed these assets back into service as
assets held for investment. The Company had suspended depreciation charges
effective December 31, 1999 on these assets as of the date disposition plans
were adopted for these assets. In the first quarter of 2001, the Company
recorded a cumulative adjustment of approximately $2.7 million to record
depreciation expense on these assets for the period these assets were
classified as held for sale. The remaining assets which were held for sale at
December 31, 2000, which had an aggregate undepreciated book value of
approximately $35 million, were sold in January 2001.
-7-
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CAPITALIZATION POLICY
The Company capitalizes all direct and indirect costs, including interest
costs and payroll costs, associated with real estate assets under construction
and land under development by the Company and real estate assets under
construction and land under development which are held in joint ventures. During
the three month periods ended March 31, 2001 and 2000 the Company has
capitalized approximately $513,000 and $407,000, respectively, of interest costs
related to construction and development in progress.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standard No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities" ("SFAS No. 138"), and Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"). In management's opinion, the adoption
of SFAS No. 138 and SFAS No. 133, as of January 1, 2001, did not have a
material impact on the consolidated statements of income or comprehensive
income as the Company does not have any derivative investments related to
interest rate management.
EARNINGS PER SHARE
The Company reports Earnings per Share ("EPS") in accordance with
Statement of Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS
No. 128"), which established simplified standards for computing and presenting
EPS and supercedes the standards in APB Opinion No.15, making them more
comparable to international EPS standards. It requires the dual presentation of
basic and diluted EPS on the income statement and requires a reconciliation of
the numerator and denominator of basic EPS to diluted EPS.
-8-
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of the numerators and denominators of
the basic and diluted EPS computations for the three months ended March 31, 2001
and 2000 (amounts in thousands, except share and per share data):
2001 2000
-------------------------------- ------------------------------
BASIC DILUTED BASIC DILUTED
Net (loss) income $ (714) $ (714) $ 1,945 $ 1,945
Add: Minority interest allocation -- (585) -- 1,628
------------ ------------ ------------ ------------
Total - numerator $ (714) $ (1,299) $ 1,945 $ 3,573
============ ============ ============ ============
Weighted average number of shares outstanding 9,342,775 9,342,775 9,067,959 9,067,959
Stock equivalents (1):
Options and warrants (2) -- 5,150 -- 4,028
Convertible OP Units -- 7,668,627 -- 7,610,342
------------ ------------ ------------ ------------
Total - denominator 9,342,775 17,016,552 9,067,959 16,682,329
============ ============ ============ ============
Earnings Per Share $ (0.08) $ (0.08) $ 0.21 $ 0.21
============ ============ ============ ============
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(1) Excludes Convertible Preferred Stock and Convertible Preferred Units as
these instruments were anti-dilutive at March 31, 2001 and 2000.
(2) Computed in accordance with the treasury stock method.
REVENUE RECOGNITION
Revenue is recognized on the accrual basis of accounting. Rental income
under leases in excess of one year is recognized using the straight-line method
under which contractual rent increases are recognized evenly over the lease
term. Tenant reimbursements are accrued as revenue in the same period the
related expenses are incurred by the Company.
RECLASSIFICATIONS
Certain amounts in the March 31, 2000 financial statements have been
reclassified in order to conform with the March 31, 2001 presentation.
3. ACQUISITIONS AND DISPOSITIONS OF INVESTMENTS IN REAL ESTATE
2001 TRANSACTIONS
During the quarter ended March 31, 2001, the Company acquired three
industrial properties aggregating 782,500 square feet in Central Pennsylvania
for approximately $19.8 million.
In March 2001, the Company sold a 597,100 square foot industrial
property located at 101 Commerce Drive in Mechanicsburg, Pennsylvania for
approximately $27.0 million at a gain of approximately $895,000.
-9-
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In February 2001, the Company signed an agreement to form a joint
venture with CalEast Industrial Investors LLC, a real estate operating
company whose members are the California Public Employees Retirement System
and LaSalle Investment Management, Inc., to acquire up to $300 million of
industrial properties in New Jersey. In March 2001, the Company contributed
seven industrial properties to the joint venture for an aggregate value of
$103.8 million consisting of our 20% ownership interest, the assumption of
approximately $62.3 million of debt related to these properties and
approximately $33.0 million in cash. These seven properties total
approximately 2.1 million square feet. The Company holds a 20% ownership
interest in the joint venture and, with the Management Company, acts as the
joint venture's exclusive acquisitions, leasing and management agent. This
transaction resulted in a loss of $559,000.
In January 2001, the Company sold four office buildings in Pennsylvania
totaling 346,168 square feet for approximately $36 million. These buildings were
classified by the Company as held for sale at December 31, 2000.
2000 TRANSACTIONS
During 2000, the Company acquired seven industrial properties, six
acres of land adjacent to one of the facilities and a joint venture partner's
50% interest in a 500,000 square foot industrial property for an aggregate
purchase price of $131.7 million. These properties contain an aggregate of
approximately 2.7 million square feet and are located in Central and Northern
New Jersey and Indianapolis, Indiana . Consideration for these acquisitions
consisted of cash of approximately $70.5 million, of which $59.0 million was
funded through new mortgage financing, assumed debt of $19.5 million, $25.7
million of Convertible Preferred Units which require a guaranteed payment at
an annual rate of 9.75% and are convertible to Common Shares at $16.00 per
share and units of limited partnership interest ("OP Units") of $5.9 million
(valued at $16.36 per unit). The remaining consideration was funded by
mortgage debt.
In 2000, the Company disposed of 12 industrial properties located in New
Jersey, Pennsylvania and New York totaling approximately 1.0 million square feet
for net gains of $87,000. As of March 31, 2000, the Company had sold a 150,000
square foot industrial facility located in New Jersey which resulted in a gain
of $140,000.
In 2000, the Company began construction of approximately 1.5 million
square feet of distribution facilities on land parcels in New Jersey. It is
anticipated that 1.0 million square feet of these facilities will be completed
in the third and fourth quarters of 2001. The Company also began a 150,000
square foot expansion of an existing 407,100 square foot distribution facility
it owns in Harrisburg, Pennsylvania which is scheduled to be completed in the
second quarter of 2001. At March 31, 2001, approximately $34.7 million is
included in development and construction-in-progress related to these projects.
-10-
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA OPERATING RESULTS
Assuming the completion of acquisitions and dispositions which occurred in
2001 and 2000, as of January 1, 2000, pro forma operating results are presented
as follows (amounts in thousands, except for share data):
FOR THREE MONTHS ENDED FOR THREE MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2000
---------------------- ----------------------
Total revenue $ 26,666 $ 24,218
Operating income 2,075 5,389
Income (loss) from equity method investments 114 6
Minority interest 527 (1,014)
Preferred dividends (3,358) (3,388)
-------- --------
Net (loss) income allocated to common shareholders $ (642) $ 993
======== ========
(Loss) earnings per share
Basic $ (0.07) $ 0.11
======== ========
Diluted $ (0.07) $ 0.11
======== ========
These pro forma amounts are not necessarily indicative of what the actual
results of the Company would have been assuming the above property acquisitions
and dispositions and other transactions had been consummated on January 1, 2000,
nor do they purport to represent the future results of the Company.
4. EQUITY METHOD INVESTMENTS
KEYSTONE REALTY SERVICES, INC.
The Company accounts for its investment in 100% of the non-voting
preferred stock of the Management Company in accordance with the equity
method of accounting. The Company is entitled to receive 95% of the amounts
paid as dividends by the Management Company. The Management Company is
responsible for various activities related to the management, leasing and
development of properties owned by third parties (including Keystone New
Jersey Associates, LLC), as well as providing other real estate related
services for third parties. Prior to January 1, 2001, the Management Company
also managed the Company's properties. Effective January 1, 2001, the Company
is managing its properties through the Operating Partnership and has elected
taxable REIT subsidiary for the Management Company.
-11-
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INDIANAPOLIS JOINT VENTURES
In December 1998, the Company entered into an agreement to develop 491
acres of land located in Airtech Park outside Indianapolis, Indiana. The terms
of the agreement give the Company an option until December 31, 2003, and a right
of first offer until December 31, 2008, to develop distinct land parcels through
joint ventures in which the Company will have a 50% interest.
In June 2000, the Company acquired a 50% interest in 3 Points Associates,
LLC ("3 Points"), an entity formed to develop and construct an 800,000 square
foot distribution facility in Airtech Park at a cost of approximately $19.5
million. As consideration for this acquisition, the Company issued 41,582 OP
Units at $17.50 per OP Unit, and contributed approximately $1.0 million in cash.
3 Points has obtained a $15.7 million construction loan at a rate equal to LIBOR
+2.0% which matures in June 2003. In January 2001, the joint venture signed a
ten-year lease with a tenant for the entire facility which requires annual
average rental payments of approximately $2.4 million plus reimbursement of all
operating expenses.
KEYSTONE NEW JERSEY ASSOCIATES, LLC
In March 2001 the Company sold six industrial properties and
contributed another industrial property located in northern New Jersey which
aggregated 2.1 million square feet to this joint venture for approximately
$103.8 million. The Company holds a 20% ownership interest in the joint
venture and, with the Management Company, acts as the joint venture's
exclusive acquisition, management and leasing agent. The joint venture
assumed a $62.3 million mortgage loan on these properties. This mortgage is
collateralized by these properties, matures in April 2007 and bears a fixed
interest rate of 7.91%.
-12-
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the equity method investments of the
Company as of March 31, 2001 and December 31, 2000 (amounts in thousands).
MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
Keystone Realty Services, Inc. $ 5,493 $ 4,372
3 Points Associates, LLC 2,554 2,314
Keystone New Jersey Associates, LLC 10,201 --
------- -------
Total $18,248 $ 6,686
======= =======
5. INDEBTEDNESS
VARIABLE RATE INDEBTEDNESS
The Company had $130.9 million of variable rate debt outstanding at March
31, 2001, which included $105.7 million under a senior secured revolving credit
facility which is discussed below. The other variable rate debt requires monthly
interest payments at rates which range from LIBOR +1.85% to LIBOR +2.25% and
maturities ranging from December 2002 to May 2003.
On April 30, 1998 the Company obtained a three year $150 million senior
secured revolving credit facility ("Credit Facility"). Borrowings under the
Credit Facility enable the Company to fund acquisitions and development of
real estate, as well as provide working capital and funds for capital
improvements. On June 30, 1999, the terms of the Credit Facility were amended
and restated. As a result, the maturity of the Credit Facility was extended
to April 29, 2002 and several financial covenants were modified. The
Eurodollar interest rate was modified to a sliding scale based on the
Company's leverage. The scale ranges from LIBOR +1.625% to LIBOR +2.25%.
Based on the Company's leverage, the rate at March 31, 2001 is LIBOR +2.25%
(7.52%). This rate was subsequently reduced to LIBOR +1.75%
after the completion of the Company's secondary public share offering on
April 30, 2001 (Note 9). In addition, a fee ranging from .25% to .375% per
annum, depending on the level of outstanding borrowings, on the unused amount
of the Credit Facility is payable quarterly. The Company is also able to
elect to increase the amount available under the Credit Facility to $250
million, subject to the syndication of the additional $100 million. The
Credit Facility is recourse to the Company and the Operating Partnership and
is secured by cross-collateralized and cross-defaulted first mortgage loans
on 54 properties. The weighted average balance outstanding and weighted
average interest rate for the three months ended March 31, 2001 and 2000 for
borrowings under the Credit Facility were $121.7 million and $145.6 million
and 8.11% and 8.14%, respectively. The Credit Facility requires the Company
to meet certain financial covenants on a quarterly, annual and ongoing basis.
The Company is in compliance with these debt covenants at March 31, 2001.
-13-
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIXED RATE INDEBTEDNESS
Mortgage notes of approximately $366.2 million, excluding debt premiums,
encumbered 60 properties at March 31, 2001. At March 31, 2001, fixed interest
rates on the mortgage loans ranged from 6.88% to 9.75%. These mortgage notes had
weighted average interest rates of 7.8% and 7.6% at March 31, 2001 and 2000,
respectively. The maturities for these notes range from November 2001 through
October 2022. The weighted average maturity was 8.0 years at March 31, 2001.
6. TENANT AND OTHER MATTERS
In April 2000, Neuman Distributors, Inc. ("Neuman"), a tenant which leases
a distribution facility of approximately 332,000 square feet in Teterboro, New
Jersey (the "Neuman Property"), notified the Company that it filed for
protection under Chapter 11 of the Bankruptcy Code. Annual rent under this lease
(the "Original Lease") is approximately $2.2 million, which is approximately 2%
of the Company's current aggregate annualized in-place base rents from all of
its existing tenants. In December 2000, the Bankruptcy Court approved an
arrangement pursuant to which a third party (the "Optionee") was granted an
option (the "Option") by the Company (a) to lease the Neuman Property pursuant
to an amendment and restatement of the Original Lease (the "Restated Lease") to
be entered into upon exercise of the Option, and (b) to purchase the Neuman
Property, at certain specified times during the term of the Restated Lease,
pursuant to a purchase option agreement to be entered into upon exercise of the
Option. As consideration for the Option, the Optionee paid to the Company
monthly non-refundable lease option payments of $279,000 (the "Option Payments")
during the period from December 2000 through and including March 2001. The
Option lapsed in January 2001, and in March 2001 the lease was surrendered by
the Trustee under an agreement whereby the former tenant is able to occupy the
building until May 15, 2001. No rent is payable to the Company unless the tenant
elects to remain in the building after this time and in any event the tenant is
required to exit the premises by May 31, 2001. The Company is currently
marketing this space for occupancy. The Company believes that it will be able to
re-lease this building within a reasonable period of time at a rental rate which
exceeds the rate under the surrendered lease given the current market conditions
in the Northern New Jersey industrial market and the quality and location of the
building.
-14-
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SEGMENTS
The Company considers its reportable segments to be industrial, office,
and other. The other properties segment consists of an investment in a direct
financing lease. Summarized financial information concerning the Company's
reportable segments is shown in the following table at March 31, 2001 and 2000,
unless otherwise noted (amounts in thousands).
REVENUE PROPERTY LEVEL NET OPERATING INCOME(2)
THREE MONTHS ENDED MARCH 31, THREE MONTHS ENDED MARCH 31,
------------------------------ ----------------------------------
2001 2000 2001 2000
------------------------------ ----------------------------------
New Jersey $ 8,931 $ 6,352 $ 7,424 $ 5,225
Pennsylvania 4,875 4,434 4,413 3,880
Indiana 1,855 1,760 1,854 1,735
Ohio 1,269 1,368 1,162 1,287
New York 1,694 1,874 1,408 1,635
South Carolina 2,292 2,662 2,090 2,455
------------------------------ ----------------------------------
INDUSTRIAL $ 20,916 $18,450 $ 18,351 $ 16,217
============================== ==================================
New Jersey $ 1,920 $ 1,863 $ 1,624 $ 1,592
Pennsylvania 885 1,596 489 1,079
New York 6,516 6,486 4,185 4,499
------------------------------ ----------------------------------
OFFICE $ 9,321 $ 9,945 $ 6,298 $ 7,170
============================== ==================================
Other $ 42 $ 70 $ 41 $ 66
============================== ==================================
Other Income(1) $ 405 $ 91
==============================
Total $ 30,684 $28,556 $ 24,690 $ 23,453
============================== ==================================
INVESTMENT IN REAL ESTATE, DEPRECIATION AND AMORTIZATION EXPENSE
AT COST (3) THREE MONTHS ENDED MARCH 31,
------------------------------ ----------------------------------
2001 2000 2001 2000
------------------------------ ----------------------------------
New Jersey $211,214 $310,460 $ 3,336 $ 1,100
Pennsylvania 169,619 173,612 961 926
Indiana 67,933 67,920 407 390
Ohio 41,775 41,754 250 255
New York 44,435 44,371 262 287
South Carolina 66,059 66,020 578 615
------------------------------ ----------------------------------
INDUSTRIAL $601,035 $704,137 $ 5,794 $ 3,573
============================== ==================================
New Jersey $ 59,721 $59,688 $ 1,807 $ 52
Pennsylvania 11,340 43,087 47 42
New York 149,912 149,472 1,083 1,041
------------------------------ ----------------------------------
OFFICE $220,973 $252,247 $ 2,937 $ 1,135
============================== ==================================
Other $ 1,125 $ 1,214 $ --- $ ---
============================== ==================================
Total $823,133 $957,598 $ 8,731 $ 4,708
============================== ==================================
-15-
CAPITAL EXPENDITURES
THREE MONTHS ENDED MARCH 31,
------------------------------
2001 2000
------------------------------
New Jersey $ 216 $ 77
Pennsylvania 6 31
Indiana -- --
Ohio 3 --
New York 58 62
South Carolina 27 32
------------------------------
Industrial $ 310 $ 202
==============================
New Jersey $ 22 $ 6
Pennsylvania 190 --
New York 437 463
------------------------------
Office $ 649 $ 469
==============================
------------------------------
Other $ --- $ ---
==============================
------------------------------
Total $ 959 $ 671
==============================
The following is a reconciliation of segment property operating income as
shown above to the accompanying consolidated statement of operations for each of
the three month periods ended March 31, 2001 and 2000 (amounts in thousands):
----------------------------------
2001 2000
----------------------------------
Segment property operating income as shown above $ 24,690 $ 23,453
Depreciation and amortization expense (8,731) (4,708)
General and administrative expense (2,166) (2,073)
Interest expense (11,364) (10,332)
Other income (1) 405 91
--------- ----------
Income before equity in (losses) earnings from
equity method investments, and gains on
sales of assets $ 2,834 $ 6,431
========= ==========
----------
(1) Amount consists of interest income not allocated to a specific business
segment.
(2) Property level net operating income excludes depreciation, amortization
and management fee expenses.
(3) Amounts for 2000 are as of December 31, 2000.
8. DIVIDENDS
In April 2001, the Company declared a dividend of $.31 per Common
Share for the first quarter of 2001, which was paid on April 30, 2001 to
shareholders of record on April 20, 2001.
In January 2001, the Company declared a dividend of $.31 per Common
Share for the fourth quarter of 2000 which was paid on January 31, 2001 to
shareholders of record on January 18, 2001.
The Company and the Operating Partnership paid distributions to holders of
Convertible Preferred Stock and Convertible Preferred Units which are each
entitled to a preferred dividend or a guaranteed payment ranging from 9.0% to
9.75%. These distributions are paid on a quarterly basis. Distributions paid to
holders of Convertible Preferred Stock and Convertible Preferred Units were
approximately $3.4 million and $3.2 million, respectively, during the three
months ended March 31, 2001 and 2000. In April 2001, the Company and the
Operating Partnership paid distributions to the holders of the Convertible
Preferred Stock, and Convertible Preferred Units which aggregated $3.4 million.
-16-
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS
On April 16, 2001, the Company entered into an agreement to acquire
from Crescent Real Estate Equities Limited Partnership ("Crescent") 1,693,471
Common Shares of the Company and 765,807 OP Units of the Operating
Partnership for an aggregate price of $30.1 million subject to adjustment for
distributions payable on these Common Shares and OP Units in April 2001 which
reduced the aggregate price to $29.4 million. The Company acquired the
Common Shares and OP Units of Cresent in two stages on April 27, 2001 and
May 1, 2001.
On April 25, 2001, the Company announced that it had priced a public
offering of 7,500,000 Common Shares of Beneficial Interest at $12.20 per share.
The offering (the "April Common Share Offering") subsequently closed on April
30, 2001. Merrill Lynch & Co., Inc., was the lead manager of the offering and
Credit Suisse First Boston and First Union Securities, Inc. were co-managers of
the offering. Of the $86.1 million net proceeds from the sale of the shares,
approximately $29.4 million were used to repurchase the Common Shares and OP
Units owned by Crescent and $56.7 million of the net proceeds were used to repay
outstanding debt.
In May 2001, the Company was approved for listing on the New York Stock
Exchange ("NYSE"). The Company began trading on the NYSE on May 9, 2001
under the ticker symbol "KTR".
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This 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 words "believe",
"expect", "anticipate", "intend", "estimate" and other expressions which are
predictions of or indicate future events and trends and which do not relate
to historical matters identify forward-looking statements. The Company's
actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a
difference include but are not limited to the following: real estate
investment considerations, such as the effect on the Company's cash flows and
property values of economic and other conditions in the market areas in which
the Company owns and develops properties; the need to obtain leases for
properties currently under development and to renew leases or relet space
upon the expiration of current leases for properties, and the ability of the
properties to generate revenues sufficient to meet debt service payments and
other operating expenses; and risks associated with borrowings, such as the
possibility that the Company will not have sufficient funds available to make
principal payments on outstanding debt, outstanding debt may be refinanced at
higher interest rates or otherwise on terms less favorable to the Company and
interest rates under the Credit Facility and the Company's other variable
rate debt may increase.
The following discussion compares the operations and activities of the
Company for the three -month periods ended March 31, 2001 and 2000 and should be
read in conjunction with the accompanying financial statements and notes
thereto.
-17-
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
The Company incurred a net loss of $714,000 or $.08 per diluted share,
after the extraordinary item of $982,000 or $.06 per diluted share, for the
three month period ended March 31, 2001, as compared with net income of $1.9
million, or $.21 per diluted share, for the same period ended March 31, 2000.
Excluding the impact of the extraordinary item, the net loss would have been
$173,000 or $.01 per diluted share, as compared to net income of $1.9
million, or $.21 per diluted share, for the same period in 2000. The net loss
in the quarter ended March 31, 2001 is primarily the result of a $2.7 million
cumulative catch-up adjustment to record depreciation expense on certain
assets which were previously accounted for as held for sale. Depreciation
charges were suspended on these assets while they were held for sale. In the
first quarter of 2001 the Company ceased actively marketing these assets and
recorded the $2.7 million cumulative catch-up adjustment to record
depreciation expense for the period these assets were held for sale.
Revenues for the three month period ended March 31, 2001 increased to
$30.7 million as compared with $28.6 million for the same period in 2000,
respectively, an increase of 7.3% primarily as a result of the closing of the
last phase of the Reckson-Morris transaction in May 2000. The increase
associated with the closing of the last phase of this transaction was offset
by: (i) increased vacancy in the portfolio as economic occupancy declined in
the Same Store Properties, as defined below, from 97.5% in 2000 to 95.3% in
2001 which resulted in a decrease in rental income of approximately $500,000;
and (ii) decreases in revenue associated with industrial properties which
were sold during 2000. Reimbursements and other income increased by
approximately $1.0 million over the same period last year as a result of
increases in interest income and other income, increases in reimbursement
revenue related to properties acquired in 2000, and increases in
reimbursement revenue as a result of increases in operating expenses.
Operating expenses increased by $5.8 million, or 26.2%, in the three-month
period ended March 31, 2001 to $27.9 million from $22.1 million as compared to
the same period in 2000. Approximately $4.0 million of this increase is a result
of increased depreciation expense from property acquisitions in 2000 and the
cumulative catch-up depreciation adjustment of $2.7 million, discussed above,
related to depreciation on assets previously held for sale. Approximately $1.0
million of the increase in operating expenses related to an increase in interest
expense which also resulted from property acquisitions in 2000. The remaining
increase resulted from increases in operating expenses related to property
operations, such as snow removal and other repair and maintenance costs in
addition to increases in costs resulting from property acquisitions in 2000.
These cost increases were slightly offset by decreases as a result of properties
which were sold in 2000.
Effective January 1, 2001, the majority of the employees of the
Management Company were transferred to the Operating Partnership and the
Company began to manage its properties through the Operating Partnership. As
a result, the Management Company no longer charges the Operating Partnership
a management fee for management of the Company's properties. Accordingly, in
the accompanying statement of operations for 2000 the Company has
reclassified management fee expenses of $1.0 million which were incurred in
2000 into general and administrative expense in order to make the financial
statement presentation of these costs comparable.
-18-
Earnings from equity method investments decreased by $378,000, from
$249,000 in the three-month period ended March 31, 2000 to a loss of $129,000 in
the same period in 2001. This decrease is primarily the result of decreases in
third party fee income in 2001 as compared to the same period in 2000.
SAME STORE RESULTS
Property level net operating income for the three month periods ended
March 31, 2001 and 2000 for the Properties owned since January 1, 2000 (the
"Same Store Properties") decreased to approximately $19.5 million from $19.8
million, respectively. This overall decrease of approximately 1.9% is
primarily due to an increase in rental revenue of approximately 1.0% in the
Same Store Properties, which were net of a 2.2% decrease in overall economic
occupancy which resulted in a $500,000 decrease in rent revenue. This
decrease in economic occupancy is primarily related to the South Carolina
industrial properties where the Company is incurring vacancy as a result of
market conditions. Reimbursement revenue increased by 10.4% as a result of
increases in operating expenses. Operating expenses for the Same Store
Properties increased by approximately $620,000 or 14.7%. These increases were
primarily related to increases in repair and maintenance expenses as the
result of certain one-time projects, increased snow removal costs and
utilities due to the expiration of certain incentives. These increases in
operating expenses were completely reimbursed by the respective industrial
tenants and only partially reimbursed by office tenants as a result of
certain tenants whose operating expense base years were re-set upon renewals.
The Same Store Properties consist of 86 industrial and 31 office properties
aggregating approximately 16.9 million square feet. The property level
operating income from the Same Store Properties represented approximately 78%
of the Company's overall property level net operating income for the three
month period ended March 31, 2001.
Set forth below is a schedule comparing the property level operating
income for the Same Store Properties for the three month periods ended March 31,
2001 and 2000 (amounts in thousands).
FOR THE THREE MONTHS
--------------------
ENDED MARCH 31,
---------------
INDUSTRIAL PROPERTIES 2001 2000 % CHANGE
---- ---- --------
Revenue
Rental revenue $ 13,694 $ 13,751 (0.4%)
Tenant reimbursement and other 1,847 1,659 11.3%
----------- -----------
Total revenue $ 15,541 $ 15,410 0.9%
=========== ===========
Operating Expenses
Property operating expenses $ 642 $ 495 29.7%
Real estate taxes 1,388 1,350 2.8%
----------- -----------
Total operating expenses $ 2,030 $ 1,845 10.0%
---------- ----------
Property net operating income $ 13,511 $ 13,565 (0.4%)
=========== ===========
Economic occupancy for the period 95.4% 98.1%
============ ============
Physical occupancy at March 31 95.8% 97.7%
============ ============
-19-
FOR THE THREE MONTHS
--------------------
ENDED MARCH 31,
---------------
OFFICE PROPERTIES 2001 2000 % CHANGE
---- ---- --------
Revenue
Rental revenue $ 7,252 $ 7,274 (0.3%)
Tenant reimbursement and other 1,501 1,374 9.2%
----------- -----------
Total revenue $ 8,753 $ 8,648 1.2%
=========== ===========
Operating Expenses
Property operating expenses $ 1,923 $ 1,523 26.3%
Real estate taxes 885 851 4.0%
----------- -----------
Total operating expenses $ 2,808 $ 2,374 18.3%
----------- -----------
Property net operating income $ 5,945 $ 6,274 (5.2%)
=========== ===========
Economic occupancy for the period 95.2% 96.4%
============ ============
Physical occupancy at March 31 95.0% 97.3%
============ ============
FOR THE THREE MONTHS
--------------------
ENDED MARCH 31,
---------------
TOTAL SAME STORE PROPERTIES 2001 2000 % CHANGE
---- ---- --------
Revenue
Rental revenue $ 20,946 $ 21,026 (0.4%)
Tenant reimbursement and other 3,348 3,033 10.4%
----------- -----------
Total revenue $ 24,294 $ 24,059 1.0%
=========== ===========
Operating Expenses
Property operating expenses 2,565 2,018 27.1%
Real estate taxes 2,273 2,200 3.3%
----------- -----------
Total operating expenses $ 4,838 $ 4,218 14.7%
----------- -----------
Property net operating income $ 19,456 $ 19,841 (1.9%)
=========== ===========
Economic occupancy for the period 95.3% 97.5%
============ ============
Physical occupancy at March 31 95.1% 97.3%
============ ============
SEGMENTS
INDUSTRIAL SEGMENT
Revenue and net operating income in the industrial property segment
increased over 13% in the three month period ended March 31, 2001 as compared
to the same period in 2000, primarily as a result of the last phase of the
Reckson-Morris transaction which closed in May 2000. Revenue and net
operating income in South Carolina decreased over $350,000 as a result of
additional vacancy in this market in 2001 as physical occupancy declined from
95.1% at March 31, 2000 to 79.1% at March 31, 2001. Revenue and net operating
income declined in the New York segment as a result of a property which was
sold in December 2000. Depreciation expense also increased significantly in
2001, as a result of the last phase of the Reckson-Morris transaction in
addition to the cumulative catch-up adjustment in the quarter for certain
properties which were reclassified from the held for sale category to assets
held for investment during the quarter.
-20-
OFFICE SEGMENT
Revenues in this segment decreased by over $600,000 in the three-month
period ended March 31, 2001, as compared to the same period for 2000, primarily
as a result of the sale of four properties in the Pennsylvania office segment in
January 2001. Property net operating income decreased by $872,000 (or 12%) in
the three month period ended March 31, 2001 as compared to same period in 2000
as a result of the sale of four Pennsylvania office properties and additional
vacancy in the New York office segment. Depreciation expense increased in the
three month period ended March 31, 2001 as a result of the cumulative catch-up
adjustment recorded for certain properties which were reclassified from the held
for sale category to assets held for investment during the quarter.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
During the three months ended March 31, 2001, the Company generated $8.3
million in cash flow from operating activities as compared to cash flow of $8.1
million during the same period in 2000.
Cash provided by investing activities in the three months ended March 31,
2001 was $52.3 million as compared to $9.3 million of cash used in investing
activities in the same period in 2000. The significant increase in cash provided
was primarily a result of the asset sales during the first quarter of 2001. Cash
used in financing activities increased to $64.2 million in 2001 as compared to
$318,000 of cash provided by financing activities the same period in 2000. This
increase in cash used in financing activities in 2001 was the result of
increases in repayments of mortgage notes resulting from asset sales.
CAPITALIZATION
As of March 31, 2001, the Company had $497.1 million of mortgage debt
outstanding, excluding unamortized debt premiums, at a weighted average interest
rate of 7.7% and a weighted average maturity of 6.2 years. The Company has a
$150 million Credit Facility with a group of commercial lenders led by Fleet
National Bank, N.A. which expires on April 29, 2002. The Credit Facility bears
interest at a LIBOR interest rate on a sliding scale based on the Company's
leverage. The scale ranges from LIBOR + 1.625% to LIBOR + 2.25%. Based on the
Company's current leverage after the April Common Share Offering, the rate is
LIBOR + 1.75%. At March 31, 2000, the Company's outstanding borrowings under
this Credit Facility were $105.7 million at an interest rate of 7.52%. The
Credit Facility's balance was reduced to approximately $61 million after the
April Common Share Offering. The Company has other variable rate debt, which
aggregates $25.2 million at March 31, 2001. At March 31, 2001, the Company's
variable rate debt is approximately 26% of total debt. The Company's ratio of
total debt to undepreciated total assets was 57% at March 31, 2001. After the
completion of the April 2001 Common Share Offering, on a proforma basis, the
Company's variable rate debt is approximately 17% of total debt and its ratio of
total debt to undepreciated total assets is approximately 50%.
-21-
SHORT AND LONG TERM LIQUIDITY
Cash flow from operating activities is the Company's principal source of
funds to fund debt service, common and preferred distributions, recurring
capital expenditures and certain upfront costs associated with the Company's
development activities. The Company expects to meet its short-term (one year or
less) liquidity requirements generally through working capital and net cash
provided by operating activities along with borrowings from the Credit Facility.
Further, the Company anticipates that it will continue to selectively dispose of
certain office and non-core industrial assets. The Company believes all of these
sources will be available in order to fund short-term liquidity needs.
Our long-term liquidity needs generally include the funding of existing
and future development activity, selective asset acquisitions and the retirement
of mortgage debt and amounts outstanding under the Credit Facility. The Company
expects to meet its long-term liquidity needs through a combination of the
following: (i) the issuance of equity securities by the Company and its
Operating Partnership, (ii) the selective disposition of certain office and
certain industrial assets, and (iii) the sale or contribution of certain of our
properties to strategic joint ventures to be formed, which could allow the
Company to generate additional capital. Finally, the Company expects that
certain of the sources described above in short-term liquidity will be an
additional source of capital for long-term liquidity. In July 1998, the Company
filed with the Securities and Exchange Commission a Form S-3 Shelf Registration
Statement under which the Company from time to time may issue Common Shares or
preferred stock and depositary shares representing preferred stock with an
aggregate value of up to $500 million. In April 2001 the Company closed on an
offering of 7,500,000 Common Shares at a price before underwriting discounts and
expenses of $12.20 per Common Share or $91.5 million in the aggregate. As of May
1, 2001, the Company has issued approximately $111.5 million in aggregate of
Common Shares under this Registration Statement.
The Company believes that available cash and cash equivalents and cash
flows from operating activities, together with cash available from borrowings
and other sources, will be adequate to meet its capital and liquidity needs in
both the short-term and the long-term.
IMPACT OF RECENT ACCOUNTING STANDARDS
See Note 2 to the March 31, 2001 consolidated financial statements.
FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION
Funds From Operations ("FFO"), which is a commonly used measurement of the
performance of an equity REIT, as defined by the National Association of Real
Estate Investment Trusts, Inc. ("NAREIT"), is net income (computed in accordance
with generally accepted accounting principles), excluding gains (or losses) from
debt restructurings, asset valuation provisions and sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated partnerships and
joint ventures will be calculated to reflect FFO on the same basis. Management
believes the presentation of FFO is a useful disclosure as a general measurement
of its performance in the real estate industry, although the Company's FFO may
not necessarily be comparable to similarly titled measures of other REITs which
do not follow the NAREIT definition. Effective January 1, 2000, the Company
adopted NAREIT's recent clarifications related to the presentation of FFO, and
in accordance with these clarifications, re-stated FFO for all periods presented
to reflect FFO in accordance with these clarifications. Accordingly, the
Company's FFO presentation is in accordance with NAREIT's FFO definition. FFO
does not represent cash generated from operating
-22-
activities in accordance with generally accepted accounting principles and is
not necessarily indicative of cash available to fund cash needs and should not
be considered as an alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flow as a measure of
liquidity. Funds Available for Distribution ("FAD") is defined as FFO reduced by
straight-line rent adjustments and non-revenue enhancing capital expenditures
for building and tenant improvements and leasing commissions, and increased by
amortization of deferred financing costs and amortization of restricted stock
awards.
FFO, FAD and cash flows for the three-month periods ended March 31, 2001
and 2000 are summarized in the following table (in thousands, except share
data):
FOR THREE MONTHS ENDED MARCH 31,
--------------------------------
2001 2000
---- ----
(unaudited) (unaudited)
Income before distributions to preferred
unitholders, minority interest of
unitholders in Operating Partnership,
extraordinary item, and income
allocated to preferred shareholders $ 3,041 $ 6,820
(Less) Plus:
(Gains) on sales of assets (336) (140)
Depreciation and amortization
related to real estate 8,731 4,708
Depreciation and amortization
related to equity method
investments 58 43
------------ ------------
Funds from Operations $ 11,494 $ 11,431
============ ============
(Less) Plus:
Rental income from straight-line rents (821) (829)
Amortization of deferred financing costs 462 410
Amortization of restricted stock awards -- 68
Building improvements (166) (223)
Tenant improvements (787) (448)
Leasing commissions (959) (895)
------------ ------------
Funds Available for Distribution $ 9,223 $ 9,514
============ ============
Cash flow from operating activities $ 8,258 $ 8,146
Cash flow from investing activities 52,279 (9,316)
Cash flow from financing activities (64,168) 318
------------ ------------
Net decrease in cash and cash equivalents $ (3,631) $ (852)
------------ ------------
Weighted average number of common and
convertible preferred shares and
units-diluted (1) 25,737,446 25,042,553
============ ============
----------
(1) Includes the shares of Convertible Preferred Stock and Convertible
Preferred Units issuable assuming conversion at conversion prices which
range from $15.75 to $16.50 per share and unit.
-23-
INFLATION
The Company's leases for commercial office and industrial properties
generally require tenants to pay either their share of operating expenses,
including common area maintenance, real estate taxes and insurance or pay 100%
of these costs directly (for triple net leases). As a result, the Company's
exposure to increases in costs and operating expenses is reduced. The Company
does not anticipate that inflation will have a significant impact on its
operating results in the near future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company's primary exposure to market risk is to changes in interest
rates. The Company is exposed to market risk related to the Credit Facility, and
other variable rate debt as interest on these obligations is subject to
fluctuations in the market. Currently, the Company does not have any interest
rate hedge contracts in place to protect against interest rate increases on
these facilities. The amount of variable rate debt outstanding represents
approximately 26% of total debt as of March 31, 2001. After the April Common
Share Offering in April 2001 variable rate debt represented approximately 17% of
total debt at March 31, 2001, on a proforma basis. The Company also utilizes
mortgage debt with fixed rates as a source of capital. The weighted average
maturity and interest rate for fixed rate debt, excluding the Credit Facility
and other variable rate debt, was 8.0 years and 7.8% at March 31, 2001. As these
debt instruments mature, the Company typically refinances such debt at then
existing market interest rates, which may be more or less than the interest
rates on the maturing debt. Within the next twelve months, approximately $1.6
million of fixed rate debt will mature.
If the interest rate for the Credit Facility and the Company's other
variable rate debt was 100 basis points higher or lower during the first quarter
of 2001, the Company's interest expense for this three month period would have
been increased or decreased by approximately $300,000.
Due to the uncertainty of fluctuations in interest rates and the specific
actions that might be taken by management to mitigate the impact of such
fluctuations and their possible effects, this sensitivity analysis assumes no
changes in the Company's financial structure.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Properties are presently subject to any litigation
which the Company believes will result in any liability that will be material to
the Company, other than routine litigation arising in the ordinary course of
business, substantially all of which is expected to be covered by liability
insurance.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement dated July 1, 2000 between Keystone Property
Trust and John B. Begier
10.2 Keystone Property Trust 1994 Non-Employee Stock Option Plan
(b) Reports on Form 8-K:
During the three month period ended March 31, 2001 and through May 10, 2001, the
Company filed the following:
(i) A Current Report on Form 8-K dated February 6, 2001, was furnished
on February 6, 2000 (reporting Items 7 and 9) regarding the
Company's fourth quarter supplemental financial information and
press release.
(ii) A Current Report on Form 8-K, dated March 21, 2001, was filed on
April 5, 2001 (reporting Items 2 and 9) regarding the sale of seven
properties to Keystone New Jersey Associates, LLC on March 21, 2001.
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(iii) A Current Report on Form 8-K dated April 18, 2001, was filed on
April 19, 2001 (reporting Items 2 and 7) regarding the Execution of
a Stock Purchase Agreement with Crescent Real Estate Equities
Limited Partnership on April 16, 2001.
(iv) A Current Report on Form 8-K dated May 1, 2001 was furnished on May
1, 2001 (reporting Items 7 and 9) regarding the Company's first
quarter supplemental financial information.
(v) A Current Report on Form 8-K dated April 24, 2001 was filed on May
9, 2001 (reporting Items 5 and 7) regarding a Purchase Agreement to
underwrite a public offering by the Company of up to 7,500,000
Common Shares of Beneficial Interest.
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SIGNATURES OF REGISTRANT
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.
KEYSTONE PROPERTY TRUST
Date: May 15, 2001 By: /s/ Jeffrey E. Kelter
----------------------
Jeffrey E. Kelter
President and Chief Executive Officer
Date: May 15, 2001 By: /s/ Timothy A. Peterson
------------------------
Timothy A. Peterson
Executive Vice President and
Chief Financial Officer
Date: May 15, 2001 By: /s/ Timothy E. McKenna
-----------------------
Timothy E. McKenna
Senior Vice President - Finance
and Chief Accounting Officer
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